View:
1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K IN ACCORDANCE WITH RULE 201 OF REGULATIONS S-T, THIS FORM 10K IS BEING FILED IN PAPER PURSUANT TO A TEMPORARY HARDSHIP EXEMPTION [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE 000-18911 GLACIER BANCORP, INC. DELAWARE 81-0519541 49 Commons Loop, Kalispell, MT 59901 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: NONE Common Stock, $.01 par value Indicate by check mark whether the registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days. [X] Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 15, 2000, there were issued and outstanding 10,397,541 shares of the Registrant's common stock. No preferred shares are issued or outstanding. The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the closing price of such stock as of the close of trading on March 15, 2000, was $144,265,881. DOCUMENT INCORPORATED BY REFERENCE Portions of the 2000 Annual Meeting Proxy Statement dated March 31, 2000 are incorporated by reference into Part III of this form 10-K. 1
2 GLACIER BANCORP, INC. FORM 10-K ANNUAL REPORT For the year ended December 31, 1999 TABLE OF CONTENTS Page ---- PART I. Item 1. Business 3 Item 2. Properties 19 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 and Related Stockholder Matters 20 Item 6. Selected Financial Data 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 23 Item 8. Financial Statements and Supplementary Data 29 PART III. Item 9. Changes in and Disagreements with Accountants in Accounting and Financial Disclosures 58 Item 10. Directors and Executive Officers of the Registrant 58 Item 11. Executive Compensation 58 Item 12. Security Ownership of Certain Beneficial Owners and Management 58 Item 13. Certain relationships and Related Transactions 58 PART IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 58 2
3 PART I. ITEM 1. BUSINESS GENERAL Glacier Bancorp, Inc. Kalispell, Montana (the "Company") a Delaware corporation incorporated in 1998, is the successor corporation in a merger with the original Glacier Bancorp, Inc., a Delaware corporation incorporated in 1990, pursuant to the reorganization of Glacier Bank, FSB into a bank holding company. The formation of the new corporation, and subsequent merger, was effected to resolve technical deficiencies in the May 9, 1997 stock split. On February 1, 1998, Glacier Bank FSB was converted from a savings bank to a State of Montana chartered commercial bank known as Glacier Bank ("Glacier"). SUBSIDIARIES In addition to Glacier, at December 31, 1999, the Company was also the parent holding company of Glacier Bank of Eureka ("Eureka"), Glacier Bank of Whitefish ("Whitefish"), First Security Bank of Missoula ("First Security"), Valley Bank of Helena ("Valley"), and Big Sky Western Bank ("Big Sky"). The Company owns approximately 98%, and 94% , respectively, of the outstanding stock of Eureka and Whitefish, and 100% of Glacier, First Security, Valley and Big Sky. Whitefish and Eureka were converted from national bank charters to State of Montana charters in December 1997. Valley was acquired on August 31, 1998 through an exchange of stock with HUB Financial Corporation ("Hub"), the parent company of Valley, and with the minority shareholders of Valley. The pooling of interest accounting method was used for the merger with HUB. Under this method, financial information for each of the periods presented include the combined companies as though the merger had occurred prior to the earliest date presented. The acquisition of the minority interest in Valley was accounted for as a purchase transaction. Financial information from August 31, 1998 forward includes the results of operation previously attributable to the minority interest. Big Sky was acquired on January 20, 1999 through an exchange of stock with Big Sky shareholders. The pooling of interest accounting method was also used for this merger transaction. RECENT ACQUISITIONS On February 4, 2000, the Company completed the acquisition of Mountain West Bank ("Mountain West"). Under the terms of the acquisition agreement, Mountain West became a wholly owned subsidiary of the Company, whereby shareholders of Mountain West received shares of the Company in exchange for their shares of Mountain West. Mountain West operates in Coeur d' Alene, Hayden, Post Falls, and Boise, Idaho. At December 31, 1999, Mountain West had assets of approximately $90 million. The financial information presented does not include Mountain West. 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 ad all subsidiaries, except Mountain West are members of the Federal Reserve Bank of Minneapolis. ("FRB") BANK LOCATIONS Glacier's main office is located at 202 Main Street, Kalispell, MT 59901 and its telephone number is (406) 756-4299. See "Item 2. Properties." Whitefish's address is 319 2nd Street, Whitefish, MT 59937 (406) 863-6300, Eureka's address is 222 Dewey Ave., Eureka, MT 59917 (406) 296-2521, First Security's address is 1704 Dearborn, Missoula, MT 599801 (406) 728-3115, Valley Bank's address is 3030 North Montana Avenue, Helena, MT 59601 (406) 443-7440, Big Sky's address is 135 Big Sky Road, Big Sky, MT, 59716 (406) 995-2321, and Mountain West's address is 125 Ironwood Drive, Coeur d' Alene, Idaho 83814 (208) 765-0284. 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, and repurchase agreements, as well as general and administrative expenses. The Company provides full service brokerage services through Raymond James Financial Services, an unrelated brokerage firm, through Community First, Inc., a wholly owned subsidiary, maintained for this purpose. 3
4 The following abbreviated organizational chart illustrates the various existing parent/subsidiary relationships at December 31, 1999: Glacier Bancorp, Inc. (Parent Holding Company) Glacier Bank First Security Bank Glacier Bank Glacier Bank (Commercial bank) of Missoula of Whitefish of Eureka (Commercial bank) (Commercial bank) (Commercial bank) Big Sky Valley Bank Community First, Inc. Western Bank of Helena (Brokerage services) (Commercial bank) (Commercial bank) BUSINESS SEGMENT RESULTS The Company evaluates segment performance internally based on individual bank charter, 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, Community First Inc., and inter-company eliminations. 4
5 Operating Segments information (Dollars in thousands) ------------------------------------------------------------------------------------------------------ Glacier Whitefish Eureka First Security 1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997 ------------------------------------------------------------------------------------------------------ Condensed Income Statements Net interest income $ 15,266 14,572 14,121 2,044 1,820 1,786 1,290 1,247 1,232 8,804 7,784 6,654 Noninterest income 5,539 5,723 4,540 675 686 570 313 372 350 2,260 2,801 2,818 ------------------------------------------------------------------------------------------------------ Total revenues 20,805 20,295 18,661 2,719 2,506 2,356 1,603 1,619 1,582 11,064 10,585 9,472 Provision for loan losses 470 670 345 66 78 0 24 12 42 600 645 360 Goodwill and merger expense 78 0 0 0 0 0 0 0 0 0 0 0 Other noninterest expense 10,750 10,523 10,145 1,502 1,347 1,399 986 971 947 4,567 4,151 4,050 Minority interest 0 0 0 0 0 0 0 0 0 0 0 0 ------------------------------------------------------------------------------------------------------ Pretax earnings 9,507 9,102 8,171 1,151 1,081 957 593 636 593 5,897 5,789 5,062 Income tax expense (benefit) 3,303 3,238 2,958 348 343 312 191 217 202 2,132 2,138 1,896 ------------------------------------------------------------------------------------------------------ Net income $ 6,204 5,864 5,213 803 738 645 402 419 391 3,765 3,651 3,166 ====================================================================================================== Average Balance Sheet Data Total assets $407,950 366,522 354,418 45,827 41,328 40,141 26,407 25,122 25,177 177,690 161,281 141,134 Total loans 270,650 275,765 266,616 29,443 23,281 22,188 17,589 16,806 16,170 146,958 130,595 102,539 Total deposits 214,552 188,565 171,295 32,980 32,587 30,313 17,998 17,527 17,562 136,968 131,273 112,745 Shareholders' equity 37,893 37,519 37,315 4,734 4,428 4,445 3,279 3,292 3,249 15,750 14,305 11,432 End of Year Balance Sheet Data Total assets $460,257 370,686 365,921 52,203 42,643 41,276 28,879 24,471 25,565 193,548 164,546 144,382 Net loans 272,060 272,399 266,670 35,485 22,022 22,746 18,178 16,322 16,290 161,781 134,646 111,867 Total deposits 276,880 201,211 173,371 34,261 34,179 30,918 18,514 17,797 16,385 143,645 139,348 127,801 Performance Ratios Return on average assets 1.52% 1.60% 1.47% 1.75% 1.79% 1.61% 1.52% 1.67% 1.55% 2.12% 2.26% 2.24% Return on average equity 16.37% 15.63% 13.97% 16.96% 16.67% 14.51% 12.26% 12.73% 12.03% 23.90% 25.52% 27.69% Efficiency ratio 51.67% 51.85% 54.36% 55.24% 53.75% 59.38% 61.51% 59.98% 59.86% 41.28% 39.22% 42.76% Regulatory Capital Ratios Tier I risk-based capital ratio 13.58% 18.05% 17.97% 13.49% 19.22% 15.53% 19.45% 22.47% 18.79% 9.73% 10.26% 10.61% Tier II risk-based capital ratio 14.48% 18.98% 18.75% 14.53% 20.47% 16.78% 20.70% 23.73% 20.05% 10.97% 11.46% 11.76% Leverage capital ratio 7.58% 10.56% 9.80% 9.86% 11.11% 9.92% 12.03% 13.32% 12.10% 8.62% 8.53% 8.77% Full time equivalent employees 167 161 143 15 14 13 11 11 11 76 73 51 Locations 15 13 13 1 1 1 1 1 1 3 3 3 ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ Valley Helena Big Sky Other Consolidated 1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997 ------------------------------------------------------------------------------------------------------ Condensed Income Statements Net interest income $ 3,614 3,312 3,142 2,077 1,251 1,143 234 185 312 33,329 30,171 28,390 Noninterest income 1,494 1,553 1,275 881 743 520 (98) 81 62 11,064 11,959 10,135 ------------------------------------------------------------------------------------------------------ Total revenues 5,108 4,865 4,417 2,958 1,994 1,663 136 266 374 44,393 42,130 38,525 Provision for loan losses 155 85 60 191 42 82 0 0 0 1,506 1,532 889 Goodwill and merger expense 0 0 0 0 0 0 361 931 155 439 931 155 Other noninterest expense 2,977 3,010 2,709 2,096 1,680 1,334 658 382 272 23,587 22,209 21,064 Minority interest 0 0 0 0 0 0 51 145 208 51 145 208 ------------------------------------------------------------------------------------------------------ Pretax earnings 1,976 1,770 1,648 671 272 247 (934) (1,192) (261) 18,810 17,313 16,209 Income tax expense (benefit) 731 659 614 231 103 65 (305) (300) (74) 6,631 6,398 5,973 ------------------------------------------------------------------------------------------------------ Net income $ 1,245 1,111 1,034 440 169 182 (629) (892) (187) 12,179 10,915 10,236 ====================================================================================================== Average Balance Sheet Data Total assets $77,370 69,335 65,699 53,392 36,110 30,152 613,621 536,572 518,783 791,311 697,853 659,917 Total loans 53,622 48,204 45,361 34,414 20,796 18,433 -- -- 368,768 552,676 515,447 471,307 Total deposits 61,515 57,205 53,587 36,287 28,183 24,214 357,684 326,039 298,820 494,652 457,312 411,565 Shareholders' equity 6,940 6,323 5,620 5,197 2,692 1,909 62,562 58,451 51,532 78,312 72,756 62,964 End of Year Balance Sheet Data Total assets $82,587 69,924 69,875 66,255 39,376 32,724 388 (5,680) 1,648 884,117 705,966 681,391 Total net loans 58,924 48,860 49,344 43,850 23,959 19,303 0 0 0 590,278 518,208 486,220 Total deposits 65,095 57,807 57,687 41,034 31,385 25,449 (3,147) (5,883) (1,813) 576,282 475,844 429,798 Performance Ratios Return on average assets 1.61% 1.60% 1.57% 0.82% 0.47% 0.60% 1.54% 1.56% 1.55% Return on average equity 17.94% 17.57% 18.40% 8.47% 6.28% 9.53% 15.55% 15.00% 16.26% Efficiency ratio 58.28% 61.87% 61.33% 70.86% 84.25% 80.22% 53.13% 52.72% 54.68% Regulatory Capital Ratios Tier I risk-based capital ratio 12.59% 13.49% #VALUE! 13.58% 18.05% 17.97% 13.54% 15.96% 15.76% Tier II risk-based capital ratio 13.57% 14.55% #VALUE! 14.48% 18.98% 18.75% 14.61% 17.07% 16.80% Leverage capital ratio 8.95% 9.34% #VALUE! 7.58% 10.56% 9.80% 9.74% 10.61% 10.02% Full time equivalent employees 42 43 43 24 24 24 28 25 22 363 351 307 Locations 3 3 3 3 2 2 26 23 23 ------------------------------------------------------------------------------------------------------ 5
6 Glacier Bank On October 10, 1999, Glacier Bank acquired the two Butte, Montana offices of Washington Mutual with approximately $73 million in deposits. Total assets increased $90 million, or 24 percent, over the prior year-end. Total net loans ended the year at $272 million which was also the ending balance at December 31, 1998; however, a substantial change in the mix of loans, in accordance with management's plans, occurred during the year. Real estate loans declined $21 million and commercial and consumer loans increased $12 million and $9 million, respectively. Non-performing loans were .06 percent of total loans. With the Butte deposit acquisition additional investment securities were acquired, with total investments increasing by $84 million. Total deposits increased $76 million, including the acquired deposits. Net income increased $340 thousand, or 6 percent, over the prior year. Net interest income increased $694 thousand, or 5 percent over 1998. Non-interest income declined by $184 thousand mostly from a reduction in mortgage loan originations and sales as a result of higher mortgage loan rates. Other fee income increased over the prior year. 1998 non-interest income also included $559 thousand from one-time gains on the sale of credit card loans, and the Trust business. Non-interest expenses increased with the addition of the two additional offices. The efficiency ratio of 51.67 percent is an improvement from the 1998 ratio of 51.85 and 1997 ratio of 54.36, each of which are below the peer group average. Glacier Bank operates from 14 locations with the 2 additions during 1999. Glacier Bank of Whitefish Total assets increased $9 million, or 22 percent, over the prior year-end. Net loans increased $13 million, or 61 percent, from December 31, 1998. All loan classifications increased with real estate loans up $2 million, commercial loans up $5 million and consumer loans up $6 million. The addition of a senior lender from a competing bank, and an attractive home equity loan promotion, were the primary reasons for the loan growth. Non-performing loans as a percentage of loans was .74 percent and the allowance for loan losses was at 1.4 times non-performing loans. Total deposits only increased slightly which resulted in an increase in borrowed funds to support the loan growth. Net income increased $65 thousand, or 9 percent, over 1998. Net interest income increased $224 thousand, or 12 percent, reflecting the significant loan growth. Non-interest income decreased slightly, the result of reduced mortgage loan originations and sales due to higher mortgage rates. Other fee income increased over the prior year. Non-interest expense increased primarily from the increased volume of activity. The efficiency ratio increased slightly from 53.75 in 1998 to 55.24 in 1999 with both years an improvement over 59.38 in 1997. Glacier Bank of Eureka Total assets increased $4 million, or 18 percent, over the prior year end with $2 million of the increase occurring in investment securities. Net loans increased $2 million, or 11 percent, from December 31, 1998. All loan classifications increased with consumer loans increasing by $1 million. Non-performing loans as a percentage of loans were .45 percent, and the allowance for loan losses was at 3.5 times non-performing loans. Total deposits increased $717 thousand, or 4 percent, with borrowed funds used to support the additional asset growth. Net income decreased $17 thousand, or 4 percent, from 1998. Net interest income increased $43 thousand, or 3 percent, reflecting the asset growth. Non-interest income decreased $59 thousand, the result of reduced mortgage loan originations and sales due to higher mortgage rates, and a one-time gain in 1998 from the sale of credit card loans. Non-interest expense increased primarily from the increased volume of activity. The efficiency ratio increased from 59.98 in 1998 to 61.51 in 1999 with both years higher than the 59.86 in 1997. The small asset base of this bank makes it difficult to achieve operating efficiencies. First Security Bank of Missoula Total assets increased $29 million, or 18 percent, over the prior year-end. Net loans increased $27 million, or 20 percent, from December 31, 1998. Real estate loans declined $3 million, and commercial and consumer loans increased $22 million and $8 million, respectively. Non- performing loans as a percentage of loans was .61 percent and the allowance for loan losses was at 2.1 times non-performing loans. Total deposits increased $4 million, or 3 percent, with borrowed funds used to support the additional asset growth. Net income increased $114 thousand, or 3 percent from 1998. First Security is a high performing bank with return on average assets of 2.12 percent, and return on average equity of 23.90 percent in 1999. Net interest income increased $1 million, or 13 percent, reflecting the asset growth. Non-interest income decreased $541 thousand, primarily resulting from reduced mortgage loan originations and sales due to higher mortgage rates. Non-interest expense increased primarily from the increased volume of activity. The efficiency ratio increased from 39.22 in 1998 to 41.28 in 1999 with both years lower than the 42.76 in 1997. The efficiency ratios are substantially better than peer group averages. Valley Bank of Helena Valley Bank was acquired by the Company in August 1998. Total assets at December 31, 1999 increased $13 million, or 18 percent, over the prior year end. Net loans increased $10 million, or 20 percent, from December 31, 1998. Real estate loans declined $.5 million, and commercial and consumer loans increased $8 million and $2 million, respectively. Non-performing loans as a percentage of loans was .89 percent, and the allowance for loan losses was at 1.1 times non-performing loans. Total deposits increased $7 million, or 13 percent, with borrowed funds used to support the additional asset growth. Net income increased $134 thousand, or 12 percent, from 1998. Net interest income increased $302 thousand, or 9 percent, reflecting the asset growth. Non-interest income decreased $59 thousand, primarily resulting from reduced mortgage loan originations and sales due to higher mortgage rates, and other loan origination and servicing fees. Non-interest expense increased $33 thousand. The efficiency ratio decreased from 61.87 in 1998 6
7 to 58.28 in 1999 which was also lower than the 61.33 in 1997. The efficiency ratios have improved with the increased net interest income, and control of non-interest expense. Big Sky Western Bank Big Sky Western Bank was acquired by the Company in January 1999. Total assets at December 31, 1999 increased $27 million, or 68 percent, over the prior year-end. Net loans increased $20 million, or 83 percent, from December 31, 1998, with the remaining asset growth in investment securities. Real estate loans increased $4 million, and commercial loans increased $16 million. Non-performing loans as a percentage of loans was .49 percent and the allowance for loan losses was at 2.2 times non-performing loans. Total deposits increased $10 million, or 31 percent, with borrowed funds used to support the additional asset growth. Net income increased $271 thousand, or 160 percent, from 1998. Net interest income increased $826 thousand, or 66 percent, reflecting the asset growth. Non-interest income increased $138 thousand, and non-interest expense increased $416 thousand, resulting from increased activity levels. The efficiency ratio decreased from 84.25 in 1998 to 70.86 in 1999 which was also lower than the 80.22 in 1997. The efficiency ratios have improved significantly with the increased net interest income, and non-interest income. MARKET AREA The Company's primary market area includes the four northwest Montana counties of Flathead, Lake, Lincoln and Glacier; the west central Montana counties of Missoula, Ravalli and Lewis & Clark, Gallatin County, and the community of Billings in south central Montana. 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 branch offices in Kalispell, Columbia Falls, Evergreen, Bigfork, and Polson (the county seat of Lake County), Libby (the county seat of Lincoln County), Cut Bank (the county seat of Glacier County), Hamilton (the county seat of Ravalli County), Billings (the county seat of Yellowstone County), and Butte (the county seat of Silver Bow County). First Security's main office and two branch locations are in Missoula (the county seat of Missoula County). Valley's main office and two branch locations are in Helena (the state capital and the county seat of Lewis & Clark County), and Whitefish and Eureka are located in Whitefish, Montana and Eureka, Montana, respectively. Big Sky's main office is in Big Sky, with branches in Bozeman (the county seat of Gallatin County), and the four corners area west of Bozeman. Mountain West has three offices in Kootenai County, Idaho: Coeur d'Alene, Post Falls, and Hayden Lake, an office in Boise, and a loan production office in the Sun Valley area. Northwest Montana has a diversified economic base, primarily comprised of wood products, primary metal manufacturing, mining, energy exploration and production, 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 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. Coeur d'Alene, located in northern Idaho, is one of the fastest growing areas in the United States. Boise, the state capital, is also growing rapidly, with much of the growth related to high-tech manufacturing. COMPETITION Glacier, Whitefish and Eureka comprise the largest financial institution group in terms of total deposits in the three county area of northwest Montana, and have approximately 23% of the total deposits in this area. Glacier's two Butte, Montana offices have approximately 20% of the deposits in Silver Bow County. First Security has approximately 14% of the total deposits in Missoula County. Valley has approximately 12% of Lewis and Clark County's total deposits, and Big Sky has approximately 5% of Gallatin County's deposits. Mountain West has approximately 8% of the deposits in Kootenai 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
8 DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY Average Balance Sheet The following three-year schedule provides (i) the total dollar amount of interest and dividend income of the Company for earning assets and the resultant average yield; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rate; (iii) net interest and dividend income; (iv) interest rate spread; and (v) net interest margin. ---------------------------------------------------------------------------------------------- AVERAGE BALANCE SHEET For the year ended 12-31-99 For the year ended 12-31-98 For the year ended 12-31-97 ---------------------------------------------------------------------------------------------- (Dollars in Thousands) Interest Average Interest Average Interest Average Average and Yield/ Average and Yield/ Average and Yield/ ASSETS Balance Dividends Rate Balance Dividends Rate Balance Dividends Rate ---------------------------------------------------------------------------------------------- Real Estate Loans $200,575 15,925 7.94% $217,930 17,769 8.15% $222,773 18,260 8.20% Commercial Loans 226,108 19,684 8.71% 181,712 16,613 9.14% 136,673 13,158 9.63% Consumer and Other Loans 125,993 11,483 9.11% 115,805 11,055 9.55% 111,861 10,994 9.83% -------- ------- ---- -------- ------- ---- -------- ------- ---- Total Loans 552,676 47,092 8.52% 515,447 45,437 8.82% 471,307 42,412 9.00% Investment Securities 183,730 11,829 6.44% 136,268 8,284 6.08% 141,387 9,274 6.56% -------- ------- ----- -------- ------- ----- -------- ------- ----- Total Earning Assets 736,406 58,921 8.00% 651,715 53,721 8.24% 612,694 51,686 8.44% ------- ----- ------- ----- ------- ----- Non-Earning Assets 54,905 46,138 47,223 -------- -------- -------- TOTAL ASSETS $791,311 $697,853 $659,917 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY NOW Accounts $ 79,545 875 1.10% $ 76,284 1,274 1.67% $ 71,987 1,324 1.84% Savings Accounts 42,456 726 1.71% 48,438 1,065 2.20% 48,087 1,415 2.94% Money Market Accounts 113,167 4,538 4.01% 95,524 4,365 4.57% 74,484 3,245 4.36% Certificates of Deposit 156,204 8,435 5.40% 137,964 8,006 5.80% 135,856 7,927 5.83% FHLB Advances 170,383 9,337 5.48% 139,877 7,876 5.63% 142,886 8,028 5.62% Repurchase Agreements and Other Borrowed Funds 31,362 1,681 5.36% 20,023 964 4.81% 29,294 1,357 4.63% -------- ------- ----- -------- ------- ----- -------- ------- ----- Total Interest Bearing Liabilities 593,117 25,592 4.31% 518,110 23,550 4.55% 502,594 23,296 4.64% ------- ----- ------- ----- ------- ----- Non-interest Bearing Deposits 103,280 99,102 81,151 Other Liabilities 16,602 7,885 13,209 -------- -------- -------- Total Liabilities 712,999 625,097 596,954 -------- -------- -------- Common Stock 91 81 64 -------- -------- -------- Paid-In Capital 70,649 48,662 36,315 Retained Earnings 9,523 22,808 25,981 Accumulated Other Comprehensive Earnings (1,951) 1,205 605 -------- -------- -------- Total Stockholders' Equity 78,312 72,756 62,964 -------- -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $791,311 $697,853 $659,917 ======== ======== ======== NET INTEREST INCOME $33,329 $30,171 $28,390 ======= ======= ======= NET INTEREST SPREAD 3.69% 3.69% 3.80% NET INTEREST MARGIN ON AVERAGE EARNING ASSETS(1) 4.53% 4.63% 4.63% RETURN ON AVERAGE ASSETS(2) 1.54% 1.56% 1.55% RETURN ON AVERAGE EQUITY(3) 15.55% 15.00% 16.26% DIVIDEND PAYOUT RATIO(4) 50.00% 44.44% 38.39% AVERAGE EQUITY TO AVERAGE ASSETS RATIO(5) 9.90% 10.43% 9.54% ---------------------------------------------------------------------------------------------- (1) Without tax effect on non-taxable securities income (2) Net income divided by average total assets (3) Net income divided by average equity (4) Dividends declared per share divided by income per share (5) Average equity divided by average total assets 8
9 RATE/VOLUME ANALYSIS Net interest income can be evaluated from the perspective of relative dollars of change in each period. Interest income and interest expense, which are the components of net interest income, are shown in the following table on the basis of the amount of any increases (or decreases) attributable to changes in the dollar levels of the Company's interest-earning assets and interest-bearing liabilities ("Volume") and the yields earned and rates paid on such assets and liabilities ("Rate"). The change in interest income and interest expense attributable to changes in both volume and rates has been allocated proportionately to the change due to volume and the change due to rate. ------------------------------------------------------------------------- Years Ended December 31, Years Ended December 31, (Dollars in Thousands) 1999 vs. 1998 1998 vs. 1997 ------------------------------------------------------------------------- Increase (Decrease) due to: Increase (Decrease) due to: ------------------------------------------------------------------------- INTEREST INCOME Volume Rate Net Volume Rate Net ------------------------------------------------------------------------- Real Estate Loans $(1,415) $ (429) $(1,844) $ (397) $ (94) $ (491) Commercial Loans 4,059 (988) 3,071 4,336 (881) 3,455 Consumer and Other Loans 973 (545) 428 388 (327) 61 Investment Securities 2,885 660 3,545 (336) (654) (990) ------------------------------------------------------------------------- Total Interest Income 6,502 (1,302) 5,200 3,991 (1,956) 2,035 ------------------------------------------------------------------------- NOW Accounts 54 (453) (399) 79 (129) (50) Savings Accounts (132) (207) (339) 10 (360) (350) Money Market Accounts 806 (633) 173 917 203 1,120 Certificates of Deposit 1,058 (629) 429 123 (44) 79 FHLB Advances 1,718 (257) 1,461 (169) 17 (152) Other Borrowings and Repurchase Agreements 546 171 717 (429) 36 (393) ------------------------------------------------------------------------- Total Interest Expense 4,050 (2,008) 2,042 531 (277) 254 ------------------------------------------------------------------------- NET INTEREST INCOME $ 2,452 $ 706 $ 3,158 $ 3,460 $(1,679) $ 1,781 ========================================================================= Net interest income increased $3.2 million in 1999 over 1998. The increase was due to increases in volumes. Market interest rates increased during 1999. The two-year treasury note was at 6.1% at December 31, 1999 which is a 161 basis point increase from year-end 1998. The 30-year treasury bond was at 6.46%, up 135 basis points from the prior year. The spread between the 2-year rates and 30-year rates has declined from 53 basis points to 27 basis points. The decrease in spread may result in a smaller interest margin as short-term funding costs may increase at a faster pace than the income on earning assets. For additional information see section "Management's Discussion and Analysis". INVESTMENT ACTIVITIES It has generally been the Company's policy to maintain a liquidity portfolio only slightly above requirements 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 judgement 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. There was no active trading in the Company's investment portfolios during 1999. 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. During 1999, there was a small net realized gain from the sale of securities, resulting from the disposition of less desirable investments and acquiring investments with better total return probabilities. The Company uses an effective tax rate of 31.28% in calculating the tax equivalent yield. Approximately $50 million of the investment portfolio is comprised of tax exempt investments. 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 Note 3 to the Consolidated Financial Statements for the year ended December 31, 1999. 9
10 LENDING ACTIVITY GENERAL The Banks focus their lending activity primarily on several types of loans: 1) first-mortgage, conventional loans secured by residential properties, particularly single-family, 2) installment lending for consumer purposes (e.g., auto, home equity, etc.), and 3) commercial lending that concentrates on targeted businesses. Management's Discussion & Analysis and footnote 4 of the Consolidated Financial Statements, contain more information about the lending portfolio. LOAN PORTFOLIO COMPOSITION The following table summarizes the Company's loan portfolio: ----------------------------------------------------------------------------------------------- (Dollars in Thousands) At At At At At TYPE OF LOAN 12/31/99 12/31/98 12/31/97 12/31/96 12/31/95 ----------------------------------------------------------------------------------------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent --------- ------ --------- ------ -------- ------ -------- ------ -------- ------ REAL ESTATE LOANS: Residential first mortgage loans $ 192,804 32.66% $ 201,898 38.96% $216,863 44.60% $215,747 48.25% $202,535 50.88% Loans held for sale 3,326 0.56% 13,692 2.64% 7,778 1.60% 3,900 0.87% 5,951 1.49% --------- ------ --------- ------ -------- ------ -------- ------ -------- ------ Total $ 196,130 33.22% $ 215,590 41.60% $224,641 46.20% $219,647 49.12% $208,486 52.37% --------- ------ --------- ------ -------- ------ -------- ------ -------- ------ COMMERCIAL LOANS: Real estate $ 152,504 25.84% $ 105,339 20.33% $ 68,340 14.06% $ 60,222 13.47% $ 50,762 12.75% Other commercial loans 105,613 17.89% 89,067 17.19% 81,271 16.71% 65,126 14.56% 52,622 13.22% --------- ------ --------- ------ -------- ------ -------- ------ -------- ------ Total $ 258,117 43.73% $ 194,406 37.52% $149,611 30.77% $125,348 28.03% $103,384 25.97% --------- ------ --------- ------ -------- ------ -------- ------ -------- ------ INSTALLMENT AND OTHER LOANS: Consumer loans $ 80,039 13.56% $ 64,069 12.36% $112,296 23.10% $102,336 22.89% $ 86,727 21.79% Home equity loans(1) 62,577 10.60% 49,796 9.61% Outstanding balances on credit cards 0 0.00% 18 0.00% 3,951 0.81% 3,725 0.83% 3,139 0.79% --------- ------ --------- ------ -------- ------ -------- ------ -------- ------ Total $ 142,616 24.16% $ 113,883 21.97% $116,247 23.91% $106,061 23.72% $ 89,866 22.58% --------- ------ --------- ------ -------- ------ -------- ------ -------- ------ Net deferred loan fees, premiums and discounts(2) $ (517) -0.08% $ (538) -0.10% Allowance for Losses (6,068) -1.03% (5,133) -0.99% (4,279) -0.88% (3,887) -0.87% (3,652) -0.92% --------- ------ --------- ------ -------- ------ -------- ------ -------- ------ NET LOANS $ 590,278 100.00% $ 518,208 100.00% $486,220 100.00% $447,169 100.00% $398,084 100.00% --------- ------ --------- ------ -------- ------ -------- ------ -------- ------ (1) For periods prior to 1998, included with consumer loans. (2) For periods prior to 1998, included with other loans amounts. LOAN PORTFOLIO MATURITIES OR REPRICING TERM The stated maturities or first repricing term (if applicable) for the loan portfolio at December 31, 1999 was as follows: (Dollars in Thousands) Real Estate Commercial Consumer Totals ---------------------- ----------- ---------- -------- ------ Variable Rate $ 76,596 148,971 31,890 257,457 Fixed Rate Maturing or Repricing in: One year or less 13,665 32,981 40,384 87,030 One to five years 39,986 39,086 57,695 136,767 Thereafter 65,883 37,079 12,647 115,609 -------- ------- ------- ------- Totals $196,130 258,117 142,616 596,863 ======== ======= ======= ======= 10
11 LOAN PORTFOLIO SCHEDULED CONTRACTUAL PRINCIPAL REPAYMENTS The following table sets forth certain information at December 31, 1999 regarding the dollar amount of scheduled loan contractual repayments (demand loans, loans having no stated scheduled repayments and no stated maturity, and overdrafts are reported as due in one year or less) After One Year One Year through After Five (Dollars in Thousands) or Less Five Years Years Totals - ---------------------- ------- -------------- ---------- ------- Real estate loans $ 21,067 105,853 69,210 196,130 Commercial loans 56,367 111,230 90,520 258,117 Consumer loans 61,323 59,481 21,812 142,616 -------- ------- ------- ------- Totals $138,757 276,564 181,542 596,863 ======== ======= ======= ======= Neither scheduled maturities nor scheduled contractual amortization of loans are expected to reflect the actual term of the Banks' loan portfolio. Based on historical information, the average life of loans is substantially less than their contractual terms because of prepayments and, in the case of conventional mortgage loans (i.e., those loans which are neither insured nor partially guaranteed by the Federal Housing Administration or the Veterans Administration), due-on-sale clauses, which give the Company the right to declare a loan immediately due and payable in the event, among other things, the borrower sells the real property subject to the mortgage and the loan is not repaid. 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 mortgage loan applications from real estate brokers, contractors, existing customers, customer 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 up to 90% of the loan if insured by a private mortgage insurance company. The Banks also provide interim construction financing for single-family dwellings, and make land acquisition and development loans on properties intended for residential use. CONSUMER LENDING The majority of all consumer loans are secured by either real estate, automobiles, or other assets. Presently 22% of the interest rates on the Banks' consumer portfolio is variable. 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 75% of the current appraised value of the property. COMMERCIAL LOANS The Banks make commercial loans of various types including commercial real estate, operating loans secured by various collateral, 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 experience and technical skills of the individual. Limits for fully secured loans range from $30,000 to $100,000, and unsecured limits range from $5,000 to $25,000. An officers' loan committee, consisting of senior lenders and members of senior management, has approval authority up to $500,000. Loans over $500,000 go to the Company's Board of Directors for approval. First Security Bank's internal loan committee can approve loans up to $400,000. Loans over $400,000 must be approved by the executive loan committee which includes First Security's executive officers, the Chairman and an additional director. Under Montana banking laws, banks generally may not make loans to one borrower and related entities in an amount, which exceeds 20% of its unimpaired capital and surplus. Those limits at December 31, 1999 are approximately $4.0 million in Glacier, $2.9 million for First Security, $1.2 million for Valley, $1.0 million for Big Sky, $650,000 for Whitefish, and $400,000 for Eureka. Each of the Banks is in compliance with these limits. 11
12 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, 1999, loans serviced for others aggregated approximately $130 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 for originating the loan, 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 of $50 to $75 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, in the opinion of management, the collection of additional interest is doubtful. 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 collectibility of the loan. 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 ("REO") 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 REO is charged to the allowance for loan losses. Any subsequent write-downs are a charge to current expenses. The following table sets forth information regarding the Banks' non-performing assets at the dates indicated: ---------------------------------------------------- At At At At At 12/31/99 12/31/98 12/31/97 12/31/96 12/31/95 ---------------------------------------------------- NON-ACCRUAL LOANS: Mortgage loans $ 549 $ 438 $ 93 $ 157 $ 0 Commercial loans 776 1,068 288 262 474 Consumer loans 58 64 156 45 16 ---------------------------------------------------- TOTAL $1,383 $1,570 $ 537 $ 464 $ 490 ---------------------------------------------------- ACCRUING LOANS 90 DAYS OR MORE OVERDUE: Mortgage loans $ 62 $ 632 $ 416 $ 290 $ 8 Commercial loans 99 385 268 222 364 Consumer loans 104 124 251 431 179 ---------------------------------------------------- TOTAL $ 265 $1,141 $ 935 $ 943 $ 551 ---------------------------------------------------- Troubled debt restructuring: $ 0 $ 0 $ 27 $ 0 $ 0 Real estate and other assets owned, net 550 151 121 506 52 TOTAL NON-PERFORMING LOANS, TROUBLED DEBT RESTRUCTURINGS, AND REAL ESTATE AND OTHER ---------------------------------------------------- ASSETS OWNED, NET $2,198 $2,862 $1,620 $1,913 $1,093 ---------------------------------------------------- AS A PERCENTAGE OF TOTAL ASSETS 0.25% 0.43% 0.25% 0.31% 0.20% ---------------------------------------------------- Interest Income(1) $ 13 $ 103 $ 84 $ 94 $ 55 ---------------------------------------------------- (1) This is the amount of interest that would have been recorded on loans accounted for on a non-performing basis as of the end of each period if such loans had been current for the entire period. 12
13 ALLOWANCE FOR LOAN LOSSES The Company maintains an allowance for loan losses to absorb inherent losses in the loan portfolio. The Company is committed to the early recognition of possible problems and to a strong, conservative allowance. The allowance consists of three elements: (i) allowances established on specific loans, (ii) allowances based on historical loan loss experience, and (iii) allowances based on general economic conditions and other factors in the Company's individual markets. The specific allowance element is based on a regular analysis of all loans and commitments where credit ratings have fallen below standards. The historical loan loss element is determined by examining loss experience and the related internal gradings of loans charged off. The general economic conditions element is determined by management at the individual subsidiary banks and is based on knowledge of specific economic factors in their markets that might affect the collectibility of loans. It inherently involves a higher degree of uncertainty and considers factors unique to the markets in which the Company operates. Generally these other risk factors have not manifested themselves in the Company's historical losses/experience to the extent they might currently. Other risk factors take into consideration such factors as recent loss experience in specific portfolio segments, loan quality trends and loans volumes including concentration, economic, and administrative risk. The Banks' charge-off policy is generally consistent with regulatory standards. 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, or if the loan is in the legal process of collection. Once a loan has been classified as non-accrual, previously accrued unpaid interest is reversed. The following table illustrates the loan loss experience: (Dollars in Thousands) Years ended December 31, ------------------------------------------------------- 1999 1998 1997 1996 1995 ------- ------ ------ ------ ------ BALANCE AT BEGINNING OF PERIOD $ 5,133 4,279 3,887 3,652 3,338 CHARGE OFFS: Residential real estate (44) (50) 0 (122) 0 Commercial loans (409) (514) (162) (229) (238) Consumer loans (335) (474) (610) (540) (221) ------- ------ ------ ------ ------ Total charge offs $ (788) (1,038) (772) (891) (459) ------- ------ ------ ------ ------ RECOVERIES: Residential real estate 1 0 0 1 0 Commercial Loans 110 250 155 69 56 Consumer loans 106 110 120 107 106 ------- ------ ------ ------ ------ Total recoveries $ 217 360 275 177 162 ------- ------ ------ ------ ------ NET (CHARGE OFFS) RECOVERIES (571) (678) (497) (714) (297) PROVISION 1,506 1,532 889 949 611 ------- ------ ------ ------ ------ BALANCE AT END OF PERIOD $ 6,068 5,133 4,279 3,887 3,652 ======= ====== ====== ====== ====== RATIO OF NET CHARGE OFFS TO AVERAGE LOANS OUTSTANDING DURING THE PERIOD 0.10% 0.13% 0.11% 0.18% 0.08% ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES 1999 1998 1997 1996 1995 -------------------- -------------------- -------------------- -------------------- -------------------- Percent of Percent of Percent of Percent of Percent of loans in loans in loans in loans in loans in (Dollars in thousands) Allowance category Allowance category Allowance category Allowance category Allowance category - ---------------------- --------- ---------- --------- ---------- --------- ---------- --------- ---------- --------- ---------- Residential real estate $1,000 0.51% 1,099 0.51% 1,146 0.51% 1,120 0.51% 1,063 0.51% Commercial real estate 1,526 1.00% 1,060 1.00% 513 0.75% 452 0.75% 381 0.75% Other commercial 2,107 2.00% 1,717 1.93% 1,276 1.57% 1,022 1.57% 826 1.57% Consumer 1,435 1.01% 1,257 1.10% 1,344 1.16% 1,293 1.22% 1,382 1.54% ------ ----- ----- ----- ----- Totals $6,068 5,133 4,279 3,887 3,652 ====== ===== ===== ===== ===== 13
14 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. Management's Discussion and Analysis section contains information relating to changes in the overall deposit portfolio. Deposits are obtained primarily from individual and business residents of the Banks' market area. The Banks issue negotiated-rate certificates of deposit with balances of $100,000, or more, and have paid a limited amount of fees to brokers to obtain deposits. The following table illustrates the amounts outstanding for deposits greater than $100,000, according to the time remaining to maturity: (Dollars in thousands) Certificates Demand of Deposit Deposits Totals ------------ -------- ------- Within three months $27,506 130,068 157,574 Three months to six months 6,264 6,264 Seven months to twelve months 11,753 11,753 Over twelve months 4,842 4,842 ------- ------- ------- Totals $50,365 130,068 180,433 ======= ======= ======= For additional information, see Note 6 to the Consolidated Financial Statements for the year ended December 31, 1999. ADVANCES AND OTHER BORROWINGS As a member of the Federal Home Loan Bank ("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, Glacier has made use of repurchase agreements with various securities dealers. This process involves the "selling" of one or more of the securities in the Glacier's portfolio and by entering into an agreement to "repurchase" that same security at an agreed upon later date. A rate of interest is paid to the dealer for the subject period of time. In addition, although Glacier has offered retail repurchase agreements to its retail customers, the Government Securities Act of 1986 imposed confirmation and other requirements which generally made it impractical for financial institutions to offer such investments on a broad basis. Through policies adopted by the Board of Directors, Glacier and Valley enter into repurchase agreements with local municipalities, and large balance customers, and have adopted procedures designed to ensure proper transfer of title and safekeeping of the underlying securities. The other banks have not utilized repurchase agreements for liquidity purposes. The following chart illustrates the average balances and the maximum outstanding month-end balances for FHLB advances and repurchase agreements: 14
15 (Dollars in thousands) For the year ended December 31, --------------------------------- 1999 1998 1997 ------- ------- ------- FHLB Advances Amount outstanding at end of period.................. $194,650 124,886 145,660 Average balance...................................... $170,383 139,877 142,886 Maximum outstanding at any month-end................. $218,238 151,165 148,476 Weighted average interest rate....................... 5.48% 5.63% 5.62% Repurchase Agreements: Amount outstanding at end of period.................. $19,766 17,239 21,673 Average balance...................................... $28,605 16,652 20,107 Maximum outstanding at any month-end................. $53,791 19,300 25,292 Weighted average interest rate....................... 4.51% 4.70% 4.70% For additional information concerning the Company's advances and repurchase agreements, see Notes 7 and 8 to the Consolidated Financial Statements for the year ended December 31, 1999. SUBSIDIARIES The Company has seven direct subsidiaries, Glacier Bank (wholly owned), First Security (wholly owned), Valley (wholly owned), Big Sky (wholly owned), Whitefish (majority owned), Eureka (majority owned) and Community First, Inc. ("CFI") (wholly owned). For information regarding the holding company, as separate from the subsidiaries, see Note 15 to the Consolidated Financial Statements for the year ended December 31, 1999. Brokerage services (selling products such as stocks, bonds, mutual funds, limited partnerships, annuities and other insurance products), are available through Raymond James Financial Services, a non-affiliated company. CFI shares in the commissions generated, without devoting significant management and staff time to this portion of the business. See Item I "Business - Background" on pages 3 and 4 for a detailed discussion and visual representation of the various existing parent/subsidiary relationships. EMPLOYEES As of December 31, 1999, the Company employed 434 persons, 303 of who were full time, none of whom were represented by a collective bargaining group. The Company provides its employees with a comprehensive benefit program, including medical insurance, dental plan, life and accident insurance, long-term disability coverage, sick leave, and both a defined contribution pension plan and a 401(k) savings plan. The Company considers its employee relations to be excellent. See Note 12 in the Consolidated Financial Statements for the year ended December 31, 1999 for detailed information regarding pension/savings plan costs and eligibility. SUPERVISION AND REGULATION INTRODUCTION The following generally refers to certain statutes and regulations affecting the banking industry. These references provide brief summaries only and are not intended to be complete. They are qualified in their entirety by the referenced statutes and regulations. In addition, some statutes and regulations may exist which apply to and regulate the banking industry, but are not referenced below. CHANGES IN BANKING LAWS AND REGULATIONS The laws and regulations that affect banks and bank holding companies have recently undergone significant changes. On November 12, 1999, the President signed into law the Financial Services Modernization Act of 1999 (the "Act") Generally, the Act (i) repeals the historical restrictions on preventing banks from affiliating with securities firms, (ii) provides a uniform framework for the activities of banks, savings institutions and their holding companies, (iii) broadens the activities that may be conducted by national banks and banking subsidiaries of bank holding companies, (iv) provides an enhanced framework for protecting the privacy of consumers' information and (v) addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions. 15
16 Bank holding companies are permitted to engage in a wider variety of financial activities than permitted under previous law, particularly with respect to insurance and securities 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 such 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. The Company does not believe that the Act will negatively affect the operations of it or the Banks. 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 the Company currently offers and that can aggressively compete in the markets currently served by the Company and the Banks. BANK HOLDING COMPANY REGULATION The Company is a bank holding company, due to its ownership of Glacier, Whitefish, Eureka, Valley Bank, First Security, Big Sky Western and Mountain West, all of which are Montana-state chartered commercial banks (with the exception of Mountain West Bank, and Idaho state-chartered bank), and all of which are members of the FRB (with the exception of Mountain West Bank, a non-Fed member FDIC-insured bank). In general, the Bank Holding Company Act of 1956, as amended ("BHCA") limits bank holding company business to owning or controlling banks and engaging in other banking-related activities. Bank holding companies must obtain the FRB's approval before they: (1) acquire direct or indirect ownership or control of any voting shares of any bank that results in total ownership or control, directly or indirectly, of more than 5% of the voting shares of such bank; (2) merge or consolidate with another bank holding company; or (3) acquire substantially all of the assets of any additional banks. Subject to certain state laws, such as age and contingency laws, a bank holding company that is adequately capitalized and adequately managed may acquire the assets of both in-state and out-of-state bank. Control of Nonbanks With certain exceptions, the BHCA prohibits bank holding companies from acquiring direct or indirect ownership or control of voting shares in any company that is not a bank or a bank holding company unless the FRB determines that the activities of such company are incidental or closely related to the business of banking. If a bank holding company is well capitalized and meets certain criteria specified by the FRB, it may engage de novo in certain permissible nonbanking activities without prior FRB approval. Control Transactions The Change in Bank Control Act of 1978, as amended, requires a person (or group of persons acting in concert) acquiring "control" of a bank holding company to provide the FRB with 60 days' prior written notice of the proposed acquisition. Following receipt of this notice, the FRB has 60 days within which to issue a notice disapproving the proposed acquisition, but the FRB may extend this time period for up to another 30 days. An acquisition may be completed before expiration of the disapproval period if the FRB issues written notice of its intent not to disapprove the transaction. In addition, any "company" must obtain the FRB's approval before acquiring 25% (5% if the "company" is a bank holding company) or more of the outstanding shares or otherwise obtaining control over the Company. TRANSACTIONS WITH AFFILIATES The Company and its subsidiaries are deemed affiliates within the meaning of the Federal Reserve Act, and transactions between affiliates are subject to certain restrictions. Accordingly, the Company and its subsidiaries must comply with Sections 23A and 23B of the Federal Reserve Act. Generally, Sections 23A and 23B: (1) limit the extent to which the financial institution or its subsidiaries may engage in "covered transactions" with an affiliate, as defined, to an amount equal to 10% of such institution's capital and surplus and an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital and surplus, and (2) require all transactions with an affiliate, whether or not "covered transactions", to be on terms substantially the same, or at least as favorable to the institution or subsidiary, as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and other similar types of transactions. REGULATION OF MANAGEMENT Federal law: (1) sets forth the circumstances under which officers or directors of a financial institution may be removed by the institution's federal supervisory agency; (2) places restraints on lending by an institution to its executive officers, directors, principal stockholders, and their related interests; and (3) prohibits management personnel from serving as a director or in other management positions with another financial institution which has assets exceeding a specified amount or which has an office within a specified geographic area. TIE-IN ARRANGEMENTS The Company and its subsidiaries cannot engage 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 16
17 condition an extension of credit on either (1) a requirement that the customer obtain additional services proved by it or (2) an agreement by the customer to refrain from obtaining other services from a competitor. The FRB has adopted significant amendments to its anti-typing rules: (1) remove FRB-imposed anti-tying restrictions on bank holding companies and their non-bank subsidiaries; (2) allow banks greater flexibility to package products with their affiliates; and (3) establish a safe harbor from the trying restrictions for certain foreign transactions. These amendments were designed to enhance competition in banking and nonbanking products and to allow banks and their affiliates to provide more efficient, lower cost service to their customers. However, impact of the amendments on the Company and its subsidiaries is unclear at this time. THE SUBSIDIARIES General 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 by the Idaho Department of Finance and by the FDIC as a state non-member commercial bank. 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. The laws and regulations governing the Banks generally have been promulgated to protect depositors and not to protect stockholders of such institutions or their holding companies. CRA. The Community Reinvestment Act (the "CRA") requires that, in connection with examinations of financial institutions within their jurisdiction, the FRB or the FDIC evaluates the record of the 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 imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders, or any related interests of such persons. Extensions of credit (I) 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 persons not covered above and who are not employees; and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to such persons. FDICIA. Under the Federal Deposit Insurance Corporation Improvement Act (the "FDICIA"), each federal banking agency has prescribed, by regulation, noncapital safety and soundness standards for institutions under its authority. These standards cover internal controls, information systems, and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines to be appropriate, and standards for asset quality, earnings and stock valuation. 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. Under recent FDIC regulations, banks are prohibited from using their interstate branches primarily for deposit production. The FDIC has accordingly implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition. With regard to interstate bank mergers, Montana has "opted-out" of the Interstate Act and prohibits in-state banks from merging with out-of-state banks if the merger would be effective on or before September 30, 2001. Montana law generally authorizes the acquisition of an in-state bank by an out-of-state bank holding company through the acquisition of a financial institution if the in-state bank being acquired has been in existence for at least 5 years prior to the acquisition. 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 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 17
18 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. 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 required to pay semi-annual deposit insurance premium assessments to the FDIC. The FDICIA included provisions to reform the Federal Deposit Insurance System, including the implementation of risk-based deposit insurance premiums. The FDICIA also permits the FDIC to make special assessments on insured depository institutions in amounts determined by the FDIC to be necessary to give it adequate assessment income to repay amounts borrowed from the U.S. Treasury and other sources, or for any other purpose the FDIC deems necessary. 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 BIF. 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. DIVIDENDS The principal source of the Company's cash revenues is dividends received from its 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. Other than the laws and regulations noted above, which apply to all banks and bank holding companies, neither the Company nor the Banks are currently subject to any regulatory restrictions on their dividends. CAPITAL ADEQUACY Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of bank holding companies and banks. If capital falls below minimum guideline levels, the holding company or bank may be denied approval to acquire or establish additional banks or nonbank businesses or to open new facilities. The FDIC and FRB use risk-based capital guidelines for banks and bank holding companies. These are designed to make such capital requirements more sensitive to differences in risk profile among banks and bank holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. The guidelines are minimums, and the FRB has noted that bank holding companies contemplating significant expansion programs should not allow expansion to diminish their capital ratios and should maintain ratios well in excess of the minimum. The current guidelines require all bank holding companies and federally regulated banks to maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier I capital. Tier I capital for bank holding companies includes common shareholders' equity, qualifying perpetual preferred stock (up to 25% of total Tier I capital, if cumulative, although under an FRB rule, redeemable perpetual preferred stock may not be counted as Tier I capital unless the redemption is subject to the prior approval of the FRB), and minority interests in equity accounts of consolidated subsidiaries, less intangibles, except as described above. The FRB also employs a leverage ratio, which is Tier I capital as a percentage of total assets less intangibles, to be used as a supplement to risk-based guidelines. 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 FRB requires a minimum leverage ratio of 3%. However, for all but the most highly rated bank holding companies, and for bank holding companies seeking to expand, the FRB expects an additional cushion of at least 1% to 2%. EFFECTS OF GOVERNMENT MONETARY POLICY The earnings and growth of the Company and the Banks are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the FRB. The FRB can and does implement 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 borrowing from the FRB, 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 nature and impact of future changes in monetary policies and their impact on the Company and the Banks cannot be predicted with certainty. 18
19 TAXATION FEDERAL TAXATION The Company files consolidated federal and Montana income tax returns, using the accrual method of account. 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 11 in the Consolidated Financial Statements for additional information. STATE TAXATION Under Montana law, savings institutions are subject to a corporation license tax, which incorporates or is substantially similar to applicable provision of the Code. The corporation license tax is imposed on federal taxable income, subject to certain adjustments. State taxes are incurred at the rat of 6.75%. ITEM 2. PROPERTIES At December 31, 1999, Glacier Bank owned 11 of its 15 offices, including its headquarters and other property having an aggregate book value of approximately $6.2 million, and lease the remaining branches. Glacier Bank believes that all of its facilities are well maintained, adequate and suitable for the current operations of its business, as well as fully utilized. The following table sets forth certain information regarding Glacier Bank's offices at December 31, 1999: Office City Services Offered Ownership - ------ ---- ---------------- --------- Main Kalispell, MT Full Services Owned Administration Branch Libby, MT Full Services Owned Branch Polson, MT Full Services Owned Branch Columbia Falls, MT Full Services Owned Branch Cut Bank, MT Full Services Owned Branch Bigfork, MT Full Services Leased Branch Evergreen area Full Services Owned of Kalispell, MT Branch Billings, MT Full Services Owned Branch Thompson Falls, MT Full Services Owned Branch Buffalo Hill area Full Services Owned of Kalispell, MT Branch Billings, MT Full Services Leased Heights area Supermarket Branch Branch Hamilton, MT Full Services Leased Supermarket Branch Branch Helena, MT Full Services Leased Supermarket Branch Branch Butte, MT Full Services Owned Branch Butte, MT Full Services Owned First Security conducts banking activities from three locations in Missoula, Montana. The main office has undergone extensive remodeling, and the Great Northern Way office was new in 1996. The East Broadway facility was completed in 1992. Management believes that each facility is in excellent condition. The net book value of the below listed facilities is $2.5 million: Office Services Offered Ownership - ------ ---------------- --------- Main Full Services Owned Branch Full Services Owned Branch Full Services Owned 19
20 Valley conducts banking activities from three locations in Helena, MT. The main office has undergone extensive remodeling in 1998. Management believes that each facility is in excellent condition. The net book value of the below listed facilities is $1.6 million: Office Services Offered Ownership - ------ ---------------- --------- Main Full Services Owned Branch Full Services Owned Branch Full Services Leased Supermarket Branch Whitefish and Eureka each conduct their banking activities out of one office as listed below. Both institutions have undergone a major remodeling and have net book values of $659,000 and $571,000 respectively. Management believes that both facilities are currently in excellent condition: Office City Services Offered Ownership - ------ ---- ---------------- --------- Main Eureka, MT Full Services Owned Administration Main Whitefish, MT Full Services Owned Administration Big Sky conducts banking activities from three locations. Construction is underway for a new office in Bozeman which will replace the current 2405 West Main leased office. Net book value of facilities and leasehold improvements is $2.5 million. Office City Services Offered Ownership - ------ ---- ---------------- --------- Main Big Sky, MT Full Services Leased Administration Branch Four Corners area of Bozeman, MT Full Services Leased Branch Bozeman, MT Full Services Leased 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 consolidate 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 1999. PART II ITEM 5. MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY & RELATED STOCKHOLDER MATTERS The Company's stock trades on the NASDAQ Stock Market, Inc., under the symbol: GBCI. The primary market makers are: D.A. Davidson & Company, Inc.; Piper Jaffray Companies, Inc.; Herzog, Heine, Geduld, Inc.; McDonald and Company, Sec. Inc.; and Freedman, Billings, Ramsay & Company. 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, 1999, there were approximately 3,200 shareholders of Company common stock. Following is a schedule of quarterly common stock price ranges: 1999 1998 --------------- --------------- Quarter High Low High Low ------ ------ ------ ------ First ...... $21.82 $17.05 $24.38 $19.21 Second ..... $24.38 $17.27 $23.55 $21.90 Third ...... $23.88 $15.25 $23.97 $20.71 Fourth ..... $18.75 $14.88 $20.57 $17.16 The Company paid cash dividends on its common stock of $.64 and $.52 per share for the years ended December 31, 1999 and 1998, respectively. 20
21 ITEM 6. SELECTED FINANCIAL DATA The following financial data of the Company are derived from the Company's historical audited financial statements and related footnotes. The information set forth below should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and related footnotes contained elsewhere in this Registration Statement. 21
22 SUMMARY OF OPERATIONS AND SELECTED FINANCIAL DATA At December 31, ---------------------------------------------------------------- (dollars in thousands, except per share data) 1999 1998 1997 1996 1995 -------- ------- ------- ------- ------- SUMMARY OF FINANCIAL CONDITION: Total assets .............................. $884,117 705,966 681,391 631,710 566,082 Investment securities ..................... 53,587 58,890 58,417 75,627 70,217 Mortgage-backed securities ................ 137,798 46,596 63,737 47,579 39,368 Loans receivable .......................... 596,346 523,341 490,751 451,228 401,886 Allowance for loan losses ................. (6,068) (5,133) (4,279) (3,887) (3,652) Deposits .................................. 576,282 475,844 429,798 395,611 350,939 Advances .................................. 194,650 124,886 145,660 150,116 125,265 Other borrowed funds and repurchase agreements .............. 26,614 18,707 29,960 17,871 23,839 Stockholders' equity ...................... 78,813 77,810 67,702 58,225 52,503 Equity per common share* .................. 8.25 8.22 7.38 6.52 5.85 Equity as a percentage of total assets .... 8.91% 11.02% 9.94% 9.22% 9.27% Years ended December 31, ---------------------------------------------------------------- (dollars in thousands, except per share data) 1999 1998 1997 1996 1995 -------- ------- ------- ------- ------- SUMMARY OF OPERATIONS: Interest income ........................... $ 58,921 53,721 51,686 47,697 42,358 Interest expense .......................... 25,592 23,550 23,296 21,426 18,346 -------- ------- ------- ------- ------- Net interest income ..................... 33,329 30,171 28,390 26,271 24,012 Provision for loan losses ................. 1,506 1,532 889 949 611 Non-interest income ....................... 11,064 11,959 10,135 9,825 8,860 Non-interest expense ...................... 24,077 23,285 21,427 21,158 17,733 -------- ------- ------- ------- ------- Earnings before income taxes ............ 18,810 17,313 16,209 13,989 14,528 Income taxes .............................. 6,631 6,398 5,973 5,662 5,688 -------- ------- ------- ------- ------- Net earnings ............................ 12,179 10,915 10,236 8,327 8,840 ======== ======= ======= ======= ======= Basic earnings per common share* ........ 1.28 1.17 1.12 0.94 0.98 Diluted earnings per common share* ...... 1.27 1.15 1.10 0.92 0.98 Dividends declared per share* ........... 0.64 0.52 0.43 0.35 0.31 Years ended and at December 31, ---------------------------------------------------------------- 1999 1998 1997 1996 1995 -------- ------- ------- ------- ------- RATIOS: Net earnings as a percent of average assets ............................ 1.54% 1.56% 1.55% 1.38% 1.69% average stockholders' equity .............. 15.55% 15.00% 16.26% 15.04% 18.35% Net interest margin on average earning assets (tax equivalent) ........................ 4.58% 4.79% 4.72% 4.76% 4.97% Allowance for loan losses as a percent of loans ... 1.02% 0.98% 0.87% 0.86% 0.91% Allowance for loan losses as a percent of nonperforming assets ...................... 269% 184% 264% 181% 334% Years ended and at December 31, ---------------------------------------------------------------- (dollars in thousands) 1999 1998 1997 1996 1995 -------- ------- ------- ------- ------- OTHER DATA: Loans originated and purchased ............ $490,404 394,799 265,759 314,213 254,950 Loans serviced for others ................. $129,666 123,741 128,250 124,619 112,024 Number of full time equivalent employees .. 363 351 307 327 301 Number of offices ......................... 26 23 23 21 18 Number of shareholders of record .......... 1,212 929 772 758 739 *revised for stock splits and dividends All amounts have been restated to include mergers using the pooling of interests accounting method and includes the impact of purchasing minority interest in Valley Bank in 1998 and two Butte, Montana branches in 1999. 22
23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company is a Delaware corporation and at December 31, 1999 had six commercial banks as subsidiaries: Glacier Bank, Glacier Bank of Whitefish, Glacier Bank of Eureka, First Security Bank of Missoula, Valley Bank of Helena, and Big Sky Western Bank. The following discussion and analysis includes the effect of the pooling-of-interests merger with HUB Financial Corporation (parent company of Valley Bank of Helena) and Big Sky Western Bank, and the purchase accounting treatment of the minority shares of Valley Bank of Helena. Prior period information has been restated to include amounts from the HUB Financial Corporation merger and the Big Sky merger. The Company reported earnings of $12,179,000 for the year ended December 31, 1999, or $1.28 basic earnings per share, and $1.27 diluted earnings per share, compared to $10,915,000, or $1.17 basic earnings per share and $1.15 diluted earnings per share, for the year ended December 31, 1998, and $10,236,000, or $1.12 basic and $1.10 diluted earnings per share for the year ended December 31, 1997. The continued improvement in net income can be attributed to an increase in earning assets, management of net interest margin, and strong non-interest income. The following narrative and tables focus on the significant financial changes which have taken place over the past years and include a discussion of the Company's financial condition, results of operations, and capital resources. The objective of liquidity management is to maintain cash flows adequate to meet current and future needs for credit demand, deposit withdrawals, maturing liabilities and corporate operating expenses. This source of funds is generated by deposits, principal and interest payments on loans, sale of loans and securities, short and long term borrowings, and net income. In addition, all six subsidiaries are members of the Federal Home Loan Bank of Seattle. This membership provides for established lines of credit in the form of advances that are a supplemental source of funds for lending and other general business purposes. During 1999, all six financial institutions maintained liquidity levels in excess of regulatory requirements and deemed sufficient to meet operating cash needs. Retention of a portion of Glacier Bancorp, Inc.'s earnings resulted in stockholders' equity at December 31, 1999 of $78,813,000, or 8.9% of assets, which compares with $77,810,000, or 11.0% of assets at December 31, 1998. The increase in assets of $178,151,000, or 25.2% during 1999 has outpaced earnings retention and increases resulting from the exercise of stock options. The stockholders' equity ratio remains well above required regulatory levels, and above the average of the Company's peers, providing flexibility in the management of assets. FINANCIAL CONDITION For the year ended December 31, 1999, consolidated assets increased $178,151,000, or 25.2% over the prior year. The following table summarizes the Company's major asset and liability components as a percentage of total assets at December 31, 1999, 1998, and 1997. MAJOR BALANCE SHEET COMPONENTS AS A PERCENTAGE OF TOTAL ASSETS December 31, -------------------------------- 1999 1998 1997 ------ ------ ------ ASSETS: Cash, and Cash Equivalents, Investment Securities, FHLB and Federal Reserve Stock 28.8% 22.8% 25.2% Real Estate Loans and loans Held for Sale 22.2% 30.5% 32.8% Commercial Loans 29.2% 27.5% 21.8% Consumer Loans 16.1% 16.1% 17.0% Other Assets 3.6% 3.0% 3.3% ------ ----- ----- 100.0% 100.0% 100.0% ====== ===== ===== LIABILITIES AND STOCKHOLDER'S EQUITY: Deposit Accounts 65.2% 67.4% 62.7% FHLB Advances 22.0% 17.7% 21.2% Other Borrowings and Repurchase Agreements 3.0% 2.6% 4.4% Other Liabilities 0.9% 1.2% 1.8% Stockholders' Equity 8.9% 11.0% 9.9% ------ ----- ----- 100.0% 100.0% 100.0% ====== ===== ===== EFFECT OF INFLATION AND CHANGING PRICES Generally accepted accounting principles require the measurement of financial position and operating results in terms of historical dollars, without consideration for change in relative purchasing over time due to inflation. Virtually all assets of a financial institution are monetary in nature, therefore, interest rates generally have a more significant impact on a company's performance than does the effect of inflation. 23
24 GAP ANALYSIS The following table gives a description of our GAP position for various time periods. As of December 31, 1999, we had a negative GAP position at six and twelve months. The cumulative GAP as a percentage of total assets for six months is a negative 17.65% which compares to a positive 2.51% at December 31, 1998 and .95% at December 31, 1997. The table also shows the GAP earnings sensitivity, and earnings sensitivity ratio, along with a brief description as to how they are calculated. The traditional one dimensional view of GAP is not sufficient to show a bank's ability to withstand interest rate changes. Superior earnings power is also a key factor in reducing exposure to higher interest rates. Using this analysis to join GAP information with earnings data produces a better picture of our strength and ability to handle interest rate change. The methodology used to compile this GAP information is based on our mix of assets and liabilities and the historical experience accumulated regarding their rate sensitivity. Projected maturity or repricing ----------------------------------------------------------------------------- 0-6 6-12 1 - 5 More than Non-rate (dollars in thousands) Months Months years 5 years Sensitive Total --------- -------- ------- -------- --------- ------- ASSETS: Interest bearing deposits ............ $ 1,500 -- -- -- -- 1,500 Investment securities ................ 16,700 865 2,231 33,791 -- 53,587 Mortgage-backed securities ........... 5,052 4,110 28,146 100,490 -- 137,798 Floating rate loans .................. 157,755 7,668 89,690 8,441 -- 263,554 Fixed rate loans ..................... 61,159 41,855 156,101 67,609 -- 326,724 Other earning assets ................. 15,928 -- -- -- -- 15,928 Non-earning assets ................... 12,527 -- -- -- 72,499 85,026 --------- -------- ------- -------- ------- ------- TOTAL ASSETS ................................ $ 270,621 54,498 276,168 210,331 72,499 884,117 ========= ======== ======= ======== ======= ======= LIABILITIES AND EQUITY: Deposits ............................. 241,365 54,250 38,059 242,608 -- 576,282 FHLB advances ........................ 158,659 878 12,598 22,515 -- 194,650 Other borrowed funds and repurchase agreements ......................... 26,614 -- -- -- -- 26,614 Other liabilities .................... -- -- -- -- 7,758 7,758 Equity ............................... -- -- -- -- 78,813 78,813 --------- --------- ------- -------- ------- ------- TOTAL LIABILITIES AND EQUITY ................ $ 426,638 55,128 50,657 265,123 86,571 884,117 ========= ========= ======= ======== ======= ======= Repricing gap ............................... $(156,017) (630) 225,511 (54,792) (14,072) Cumulative repricing gap .................... (156,017) (156,647) 68,864 14,072 Cumulative gap as a % of total assets ....... -17.65% -17.72% 7.79% 1.59% Gap Earnings Sensitivity(1)............................... $ (956) Gap Earnings Sensitivity Ratio(2)......................... $ -7.85% (1) Gap Earnings Sensitivity is the estimated effect on income, after taxes of 39%, of a 1% increase or decrease in interest rates .01(-$156,646 + $61,092) (2) Gap Earnings Sensitivity Ratio is Gap Earnings Sensitivity divided by the estimated yearly earnings of $12,179. A 1% increase in interest rates has this estimated percentage decrease effect on annual income. This table estimates the repricing maturities of the Company's assets and liabilities, based upon the Company's assessment of the repricing characteristics of the various instruments. Non-contractual deposit liabilities are allocated among the various maturity categories as follows: non-interest bearing checking and interest-bearing checking are included in the more than 5 years category. Regular savings are included in the 1 - 5 years category. Money market balances are included in the less than 6 months category. Mortgage-backed securities are at the anticipated principal payments based on the weighted-average-life. 24
25 INTEREST RATE SPREAD One way to protect against interest rate volatility is to maintain a comfortable interest spread between yields on assets and the rates paid on interest bearing liabilities. The interest spread for 1999 was the same as the prior year. The net interest margin decreased slightly in 1999 from 4.79% to 4.58%, primarily the result of an increase in interest earning assets at lower rates. Increased asset levels, and increased interest-free funding resulted in significantly higher net interest income. December 31, [1] ------------------------ 1999 1998 1997 - ---- ---- ---- Combined weighted average yield on loans and investments[2]..... 8.00% 8.24% 8.44% Combined weighted average rate paid on savings deposits and borrowings.............................................. 4.31% 4.55% 4.64% Net interest spread............................................. 3.69% 3.69% 3.80% Net interest margin[3].......................................... 4.58% 4.79% 4.72% (1) Weighted averages are computed without the effect of compounding daily interest. (2) Includes dividends received on capital stock of the Federal Home Loan Bank and Federal Reserve Bank. (3) The net interest margin (net yield on average interest earning assets) is interest income from loans and investments (tax free income adjusted for tax effect) less interest expense from deposits, FHLB advances, and other borrowings, divided by the total amount of earning assets. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1999 COMPARED TO DECEMBER 31, 1998 FINANCIAL CONDITION The Company acquired two Butte, Montana offices of Washington Mutual, with approximately $73,000,000 in deposits, on October 8, 1999. Those branches have been fully integrated into Glacier Bank, the largest subsidiary of the Company. The following information includes the impact of that acquisition which was accounted for as a purchase. Total assets increased $178,151,000, or 25.2% over the December 31, 1998 asset level. Total loans outstanding increased 13.9%, or $72,984,000 with the largest increase occurring in the commercial classification which increased $63,711,000, or 32.8%. Consumer loans increased $28,733,000, or 25.2%. Residential real estate loans and loans held for sale declined $19,460,000 or 9.0%, in accordance with management's plan to reduce the balances on real estate loans which generally have lower interest rates than other loan types. Investment securities increased $85,899,000, or 81.4%. Higher investment yields, a steeper yield curve, and the Butte branch acquisition from Washington Mutual provided an opportunity to increase the investment portfolio. Total liabilities increased $177,148,000, or 28.2%, with non-interest bearing deposits up $13,183,000, or 13.2%, and interest bearing deposits up $87,255,000, or 23.2%. Federal Home Loan Bank advances increased $69,764,000, or 55.9%. Securities sold under repurchase agreements and other borrowed funds were up $7,907,000, or 42.3%. Total stockholders' equity increased $1,003,000, or 1.3%, the result of earnings retention, offset by a $6,294,000 net change in the unrealized loss on the securities available-for-sale. RESULTS OF OPERATIONS INTEREST INCOME - Interest income was $58,921,000 compared to $53,721,000 for the years ended December 31, 1999 and 1998, respectively, a $5,200,000, or 9.7% increase. The weighted average yield on the loan and investment portfolios decreased from 8.2% to 8.0%. This decrease in yield was offset by increased volumes in loans, and the change in loan mix from real estate loans to higher yielding commercial and consumer loans, increasing interest income. INTEREST EXPENSE - Interest expense was $25,592,000 for the year ended December 31, 1999, up from $23,550,000 in 1998, a $2,042,000, or 8.7%, increase. The increase is due to higher balances in interest bearing deposits, Federal Home Loan Bank advances, repurchase agreements and other borrowed funds during 1999. The increased interest expense resulting from the higher balances in interest bearing liabilities was partially offset by reduced rates and by the increase in non-interest bearing deposits. The yield on interest bearing liabilities declined from 4.6% in 1998 to 4.3% in 1999. 25
26 NET INTEREST INCOME - Net interest income was $33,329,000 compared to $30,171,000 in 1998, an increase of $3,158,000, or 10.5%, the net result of the items discussed in the above paragraphs. PROVISION FOR LOAN LOSSES - The provision for loan losses was $1,506,000 for 1999, down slightly from $1,532,000 for 1998. Total loans charged off, net of recoveries, were $571,000 in 1999, down from the $678,000 experienced in 1998. The allowance for loan losses balance was $6,068,000 at year end 1999, up from $5,133,000 at year end 1998, an increase of $935,000. At December 31, 1999, the non-performing assets (non-accrual loans, accruing loans 90 days or more overdue, real estate acquired by foreclosure or deed-in-lieu thereof, and repossessed personal property) totaled $2,254,000 or .26% of total assets; compared to $2,795,000 or .40% of total assets at December 31, 1998. The allowance for loan losses was 269% of non-performing assets at December 31, 1999, up from 184% the prior year end. The allowance for loan losses as a percentage of loans increased to 1.02% from .98% at the 1999 and 1998 year ends. The allowance for losses has increased primarily because of the changing mix of loans from residential real estate to more commercial and consumer loans which historically have greater credit risk along with higher loan rates. NON-INTEREST INCOME - Total non-interest income of $11,064,000 was down $895,000, or 7.5% from 1998 which included one time gains on the sale of the credit card portfolio of $457,000, and $102,000 from the sale of the trust business. Loan fees and charges were $992,000 below the prior year, due mostly to a slow down in real estate loan origination and sale activity resulting from higher mortgage rates in 1999. Increased volumes in deposit accounts resulted in an increase in fee income of $754,000 from service charges and other fees. Other income was down $618,000 most of which was the gain on sale of credit card and trust business in 1998. The gain on sale of investments was $6,000 in 1999, down from $45,000 in 1998. NON-INTEREST EXPENSE - Total non-interest expense increased from $23,285,000 to $24,077,000 an increase of $792,000, or 3.4%. Compensation, employee benefits, and related expenses increased $899,000, or 7.7% from 1998, with the new branches and expanded data processing staff included. Occupancy and equipment expense increased $381,000, or 13.3% from 1998, the result of bringing more data processing functions in-house, the substantial investment in enhanced technology for transaction imaging and internet banking, and additional expenses from the new branch offices. Data processing and other expenses were down $394,000, or 4.6%, however, after adjusting for the 1998 merger and reorganization expenses there was an increase of $237,000, primarily the result of increased volumes and $78,000 in amortization of the premium paid for the Butte acquisition. The other category of expense is the minority interest in subsidiaries which decreased $94,000, resulting from the acquisition of minority shares in 1998. The efficiency ratio (non-interest expense)/(net interest income + non-interest income), was 53.1% in 1999, up from 52.7% in 1998, as compared with similar sized bank holding companies nationally which average approximately 63.5%. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 COMPARED TO DECEMBER 31, 1997 FINANCIAL CONDITION Total assets increased $24,575,000, or 3.6% over the December 31, 1997 asset level. Total loans outstanding increased 6.6%, or $31,988,000 with the largest increase occurring in the commercial classification which increased $44,744,000, or 29.9%. Real estate loans decreased $9,541,000 or 4.2% the result of management's decision to not retain long-term mortgages in the portfolio in this low interest rate environment. Consumer loans decreased $2,482,000, or 2.1%, the result of selling the credit card portfolio. Investment securities decreased $16,668,000, or 13.6%. With the flat yield curve during 1998 there were limited attractive investment opportunities. Total liabilities increased $14,467,000, or 2.4%, with interest bearing deposits up $36,672,000, or 10.8%, and non-interest bearing deposits up $9,374,000, or 10.3%. Federal Home Loan Bank advances decreased $20,774,000, or 14.3%. Securities sold under repurchase agreements and other borrowed funds were down $11,253,000, or 37.6%. Total stockholders' equity increased $10,108,000, or 14.9%, the result of earnings retention, and a $18,000 increase in the net unrealized gains on securities available-for-sale. RESULTS OF OPERATIONS INTEREST INCOME - Interest income was $53,721,000 compared to $51,686,000 for the years ended December 31, 1998 and 1997, respectively, a $2,035,000, or 3.9% increase. The weighted average yield on the loan and investment portfolios decreased from 8.44% to 8.24%. This decrease in yield was offset by increased volumes in loans, and the change in loan mix from real estate loans to higher yielding commercial loans, increasing interest income. INTEREST EXPENSE - Interest expense was $23,550,000 for the year ended December 31, 1998, up slightly from $23,296,000 in 1997, a $254,000 increase. The increase is due to higher balances in interest bearing deposits, which was largely offset by lower amounts 26
27 outstanding in Federal Home Loan Bank advances, repurchase agreements and other borrowed funds during 1998. Increased balances in non-interest bearing deposits also reduced the need for interest bearing funding. NET INTEREST INCOME - Net interest income was $30,171,000 compared to $28,390,000 in 1997, an increase of $1,781,000, or 6.3%, the net result of the items discussed in the above paragraphs. PROVISION FOR LOAN LOSSES - The provision for loan losses was $1,532,000 for 1998, up from $889,000 for 1997. Total loans charged off, net of recoveries, were $678,000 in 1998, up from the $497,000 experienced in 1997. The allowance for loan losses balance was $5,133,000 at year end 1998, up from $4,279,000 at year end 1997, an increase of $854,000. At December 31, 1998, the non-performing assets (non-accrual loans, accruing loans 90 days or more overdue, real estate acquired by foreclosure or deed-in-lieu thereof, and repossessed personal property) totaled $2,795,000 or .40% of total assets; compared to $1,620,000 or .24% of total assets at December 31, 1997. The reserve for loan losses as a percentage of loans increased to .98% from .87% at the 1998 and 1997 year ends. The reserve for losses has increased primarily because of the changing mix of loans from residential real estate to more commercial loans which historically carry additional credit risk along with higher loan rates. NON-INTEREST INCOME - Total non-interest income of $11,959,000 was up $1,824,000, or 18.0% from 1997. Loan fees and charges were $1,105,000 greater than the prior year. Most of this increase came from the large volume of real estate loan origination and sale activity resulting from low mortgage rates. Increased volumes in deposit accounts was the reason for the $138,000 increase in service charges and other fees. Other income, which includes a gain on the sale of the credit card portfolio of $457,000, and $102,000 from the sale of the trust business, was up $732,000. NON-INTEREST EXPENSE - Total non-interest expense increased from $21,427,000 to $23,285,000 an increase of $1,858,000, or 8.7%. Of this increase $852,000 was from merger and reorganization expenses, leaving an increase from operations of $1,006,000, or 4.7%. Compensation, employee benefits, and related expenses increased $507,000, or 4.5% from 1997. Occupancy expense increased $388,000, or 15.6% from 1997. The change to an in-house data center, a new branch of Valley Bank of Helena, and a new branch and corporate office building in Kalispell were the main reasons for the increase. Data processing expense decreased $83,000, the result of bringing more data processing services in-house during 1998. The efficiency ratio (non-interest expense)/(net interest income + non-interest income), was 52.7% in 1998, down from 54.7% in 1997, as compared with similar sized bank holding companies nationally which average about 62%. FUTURE ACCOUNTING PRONOUNCEMENTS None YEAR 2000 The Year 2000 or Y2K problem is a result of the inability of computer software programs to recognize the year 2000, as most programs and systems were designed to store calendar years in the 1900s by assuming the "19" and storing only the last two digits of the year. As the Company has reported in the past, it has spent considerable effort in preparing for Y2K in the period leading up to January 1, 2000. The Company has not experienced any significant Y2K problems and has not been informed of any material Y2K problems by its customers or vendors. However, although January 1, 2000 is past, it is possible that some problems have gone undetected, or that other dates in the future may further affect computer software and systems, or equipment with embedded chip technology. The Company will continue to monitor the Y2K compliance of its own computer systems and equipment with embedded technology, as well as any Y2K related problems that may be reported to it by third parties with whom it does business. As discussed in the Company's Form 10-Q for the fiscal quarter ended September 30, 1999, the Company estimated that the total costs of remediation associated with the Y2K issue would not have a material effect on the operations or financial condition of the Company. The Company believes, based on its review of such costs to March 15, 2000, that this statement continues to be true. However, as noted above, it is possible that additional costs will be incurred in connection with Y2K problems that may still occur in the future. FORWARD LOOKING STATEMENTS The discussion above regarding the Company's Y2K status includes certain "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "PLSRA"). The Company desires to take advantage of the "safe harbor" provisions of the PLSRA as they apply to forward looking statements. The Company's ability to predict the results of future plans is inherently uncertain, and is subject to factors that may cause actual results to differ materially from those projected. Factors that could affect the actual results include the possibility that systems modifications will not operate as intended, and that the Company or its significant customers or vendors have not yet detected Y2K problems that have arisen or will arise in the future. 27
28 ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices such as interest rates, foreign currency exchange rates, commodity prices, and equity prices. The Company" primary market risk exposure is interest rate risk. The ongoing monitoring and management of this risk is an important component of the Company's asset/liability management process which is governed by policies established by its Board of Directors that are reviewed and approved annually. The Board of Directors delegates responsibility for carrying out the asset/liability management policies to the Asset/liability committee (ALCO). In this capacity ALCO develops guidelines and strategies impacting the Company's asset/liability management related activities based upon estimated market risk sensitivity, policy limits and overall market interest rate levels/trends. INTEREST RATE RISK Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with the Company's financial instruments also change thereby impacting net interest income (NII), the primary component of the Company's earnings. ALCO utilizes the results of a detailed and dynamic simulation model to quantify the estimated exposure of NII to sustained interest rate changes. While ALCO routinely monitors simulated NII sensitivity over a rolling two-year horizon, it also utilizes additional tools to monitor potential loner-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 lever for NII exposure over a one year horizon, assuming no balance sheet growth, given a 200 basis point (bp) upward and downward shift in interest rates. A parallel and pro rata shift in rates over a 12-month period is assumed. The following reflects the Company's NII sensitivity analysis as of December 31, 1999 and 1998 as compared to the 10% Board approved policy limit. +200 bp 1999 1998 ------- ----- Estimated sensitivity...................................... -3.66% -1.99% Estimated increase (decrease) in net interest income....... $(1,220) (600) -200 bp Estimated sensitivity...................................... 2.68% 1.44% Estimated increase (decrease) in net interest income....... $ 893 434 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. FORWARD-LOOKING INFORMATION The discussion above may include certain "forward looking statements" concerning the future operations of the Company. The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 as they apply to forward looking statements. This statement is for the express purpose of availing the Company of the protections of such safe harbor with respect to all "forward looking statements." Management's ability to predict results of the effect of future plans in inherently uncertain, and is subject to factors that may cause actual results to differ materially from those projected. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 28
29 The following audited consolidated financial statements and related documents are set forth in the Annual Report on Form 10-K on the pages indicated. Page ---- Independent Auditors' Report 30 Consolidated Statements of Financial Condition 31 Consolidated Statements of Operations 32 Consolidated Statements of Stockholders' Equity and Comprehensive Income 33 Consolidated Statements of Cash Flows 34 Notes to Consolidated Financial Statements 35-57 29
30 [KPMG LETTERHEAD] Independent Auditors' Report 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, 1999 and 1998 and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ KPMG LLP ------------ Billings, Montana January 28, 2000 30
31 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, ---------------------- (dollars in thousands) 1999 1998 - ---------------------- --------- ------- ASSETS: Cash on hand and in banks ........................................... $ 46,277 33,806 Federal funds sold .................................................. 64 5,883 Interest bearing cash deposits ...................................... 1,436 2,494 --------- ------- Cash and cash equivalents ...................................... 47,777 42,183 Investment securities, available-for-sale ........................... 191,385 97,214 Investment securities, held-to-maturity (market value of $8,560) .... 0 8,272 Loans receivable, net ............................................... 590,278 518,208 Premises and equipment, net ......................................... 21,394 17,382 Real estate and other assets owned, net ............................. 550 151 Federal Home Loan Bank of Seattle stock, at cost .................... 14,397 12,366 Federal Reserve Bank stock, at cost ................................. 1,467 1,219 Accrued interest receivable ......................................... 5,112 4,348 Goodwill and other intangibles, net of accumulated amortization of $1,012 and $707 at December 31, 1999, and 1998, respectively ... 7,035 2,601 Deferred tax asset .................................................. 2,642 0 Other assets ........................................................ 2,080 2,022 --------- ------- $ 884,117 705,966 ========= ======= LIABILITIES: Deposits - non-interest bearing ..................................... $ 113,360 100,177 Deposits - interest bearing ......................................... 462,922 375,667 Advances from Federal Home Loan Bank of Seattle ..................... 194,650 124,886 Securities sold under agreements to repurchase ...................... 19,766 17,239 Other borrowed funds ................................................ 6,848 1,468 Accrued interest payable ............................................ 2,646 2,278 Current income taxes ................................................ 46 0 Deferred income taxes ............................................... 0 1,540 Minority interest ................................................... 308 313 Other liabilities ................................................... 4,758 4,588 --------- ------- Total liabilities .............................................. 805,304 628,156 STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value per share. Authorized 1,000,000 shares; none issued ............................................... 0 0 Common stock, $.01 par value per share. 9,550,444 and 8,595,623 shares outstanding at December 31, 1999 and 1998, respectively .... 96 86 Paid-in capital ..................................................... 81,193 60,104 Retained earnings - substantially restricted ........................ 2,622 16,424 Accumulated other comprehensive income .............................. (5,098) 1,196 --------- ------- Total stockholders' equity ..................................... 78,813 77,810 --------- ------- $ 884,117 705,966 ========= ======= See accompanying notes to consolidated financial statements. 31
32 CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, ----------------------------- (dollars in thousands except per share data) 1999 1998 1997 - -------------------------------------------- ------- ------ ------ INTEREST INCOME: Real estate loans ..................................... $15,925 17,769 18,260 Commercial loans ...................................... 19,684 16,613 13,158 Consumer and other loans .............................. 11,483 11,055 10,994 Investment securities and other ....................... 11,829 8,284 9,274 ------- ------ ------ TOTAL INTEREST INCOME ............................... 58,921 53,721 51,686 ------- ------ ------ INTEREST EXPENSE: Deposits .............................................. 14,574 14,710 13,911 Advances .............................................. 9,337 7,876 8,028 Securities sold under agreements to repurchase ........ 1,318 772 1,072 Other borrowed funds .................................. 363 192 285 ------- ------ ------ TOTAL INTEREST EXPENSE .............................. 25,592 23,550 23,296 ------- ------ ------ NET INTEREST INCOME ................................. 33,329 30,171 28,390 Provision for loan losses ............................. 1,506 1,532 889 ------- ------ ------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ................................... 31,823 28,639 27,501 NON-INTEREST INCOME: Service charges and other fees ........................ 6,154 5,400 5,262 Miscellaneous loan fees and charges ................... 3,774 4,766 3,661 Gain on sale of investments, net ...................... 6 45 196 Other income .......................................... 1,130 1,748 1,016 ------- ------ ------ TOTAL NON-INTEREST INCOME ........................... 11,064 11,959 10,135 ------- ------ ------ NON-INTEREST EXPENSE: Compensation, employee benefits and related expenses .. 12,639 11,740 11,233 Occupancy expense ..................................... 3,251 2,870 2,482 Data processing expense ............................... 769 995 1,078 Other expense ......................................... 7,367 7,535 6,426 Minority interest ..................................... 51 145 208 ------- ------ ------ TOTAL NON-INTEREST EXPENSE .......................... 24,077 23,285 21,427 ------- ------ ------ Earnings before income taxes ................................ 18,810 17,313 16,209 Federal and state income tax expense ..................... 6,631 6,398 5,973 ------- ------ ------ NET EARNINGS ................................................ $12,179 10,915 10,236 ======= ====== ====== BASIC EARNINGS PER SHARE .............................. $ 1.28 1.17 1.12 DILUTED EARNINGS PER SHARE ............................ $ 1.27 1.15 1.10 See accompanying notes to consolidated financial statements. 32
33 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 Accumulated Retained other com- Total Common Stock earnings prehensive stock- ------------------ Paid-in substantially income holders' ($ in thousands except per share data) Shares Amount capital restricted (loss) equity - -------------------------------------- --------- ------ ------- ------------- ----------- ------- Balance at December 31, 1996 ...................... 4,974,211 50 35,410 22,769 (4) 58,225 Comprehensive income: Net earnings .................................... -- -- -- 10,236 -- 10,236 Unrealized gain on securities, net of reclassification adjustment ................... -- -- -- -- 1,218 1,218 ------- Total comprehensive income ........................ -- -- -- -- -- 11,454 ------- Cash dividends declared ($.47 per share) .......... -- -- -- (3,808) -- (3,808) Stock options exercised ........................... 52,160 1 557 -- -- 558 Tax benefit from stock related compensation ....... -- -- 257 -- -- 257 Increase in stock grant earned .................... -- -- 20 -- -- 20 Three for two stock split ......................... 2,493,651 24 (24) (5) -- (5) Additional shares issued .......................... 70,961 1 1,000 0 -- 1,001 --------- --- ------- ------- ------ ------- Balance at December 31, 1997 ...................... 7,590,983 $76 37,220 29,192 1,214 67,702 Comprehensive income: Net earnings .................................... -- -- -- 10,915 -- 10,915 Unrealized loss on securities, net of reclassification adjustment ................... -- -- -- -- (18) (18) ------- Total comprehensive income ........................ -- -- -- -- -- 10,897 ------- Transfer from retained earnings to additional paid in capital ................................. -- -- 100 (100) -- 0 Cash dividends declared ($.57 per share) .......... -- -- -- (4,922) -- (4,922) Stock options exercised ........................... 149,076 1 1,531 -- -- 1,532 Tax benefit from stock related compensation ....... -- -- 386 -- -- 386 Increase in stock grant earned .................... -- -- 15 -- -- 15 10% stock dividend ................................ 771,803 8 18,654 (18,661) -- 1 Additional shares issued .......................... 83,761 1 2,198 -- -- 2,199 --------- --- ------- ------- ------ ------- Balance at December 31, 1998 ...................... 8,595,623 $86 60,104 16,424 1,196 77,810 Comprehensive income: Net earnings .................................... -- -- -- 12,179 -- 12,179 Unrealized loss on securities, net of reclassification adjustment ................... -- -- -- (6,294) (6,294) ------- Total comprehensive income ........................ -- -- -- -- -- 5,885 ------- Cash dividends declared ($.64 per share) .......... -- -- -- (6,076) -- (6,076) Stock options exercised ........................... 90,233 1 972 -- -- 973 Tax benefit from stock related compensation ....... -- -- 240 -- -- 240 10% stock dividend ................................ 864,588 9 19,877 (19,905) -- (19) --------- --- ------- ------- ------ ------- Balance at December 31, 1999 ...................... 9,550,444 $96 81,193 2,622 (5,098) 78,813 ========= === ======= ======= ====== ======= Year ended December 31, --------------------------------- 1999 1998 1997 -------- ---- ------ Disclosure of reclassification amount: Unrealized and realized holding gains (losses) arising during the period ...... $(10,423) 24 2,044 Transfer from held to maturity ................................................ 288 -- -- Tax expense ................................................................... 3,845 (12) (697) -------- --- ------ Net after tax ............................................................ (6,290) 12 1,347 -------- --- ------ Less reclassification adjustment for gains (losses) included in net income ...... 6 45 196 Tax expense ................................................................... (2) (15) (67) -------- --- ------ Net after tax ............................................................ 4 30 129 -------- --- ------ Net change in unrealized gain (loss) on available-for-sale securities .. $ (6,294) (18) 1,218 ======== === ====== See accompanying notes to consolidated financial statements. 33
34 CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, ------------------------------------- (dollars in thousands) 1999 1998 1997 - ---------------------- --------- -------- -------- OPERATING ACTIVITIES : Net earnings .............................................................. $ 12,179 10,915 10,236 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Mortgage loans held for sale originated or acquired ..................... (104,247) (156,058) (77,414) Proceeds from sales of mortgage loans held for sale ..................... 114,211 150,273 73,566 Proceeds from sales of commercial loans ................................. 5,125 8,756 16,193 Provision for loan losses ............................................... 1,506 1,532 889 Depreciation of premises and equipment .................................. 1,535 1,299 1,172 Amortization of goodwill ................................................ 305 165 155 Gain on sale of investments ............................................. (6) (45) (196) Amortization of investment securities premiums and discounts, net ....... 205 (214) 34 Net (decrease) increase in deferred income taxes ........................ (123) (68) (317) Net (increase) decrease in accrued interest receivable .................. (764) 128 (326) Net increase in accrued interest payable ................................ 368 462 621 Net increase (decrease) in current income taxes ......................... 531 (635) 738 Net increase in other assets ............................................ (233) (229) (137) Net increase (decrease) in other liabilities and minority interest ...... 12 1,439 (8,326) FHLB stock dividends .................................................... (982) (929) (808) --------- -------- -------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .................. 29,622 16,791 16,080 --------- -------- -------- INVESTING ACTIVITIES: Proceeds from sales, maturities and prepayments of investment securities available-for-sale ......................................... 33,601 33,341 32,651 Purchases of investment securities available-for-sale ..................... (130,122) (24,171) (39,342) Proceeds from maturities and prepayments of investment securities held-to-maturity ........................................... 0 8,947 9,950 Purchases of investment securities held-to-maturity ....................... 0 (1,130) (369) Principal collected on installment and commercial loans ................... 186,834 156,955 89,264 Installment and commercial loans originated or acquired ................... (284,335) (208,601) (132,613) Principal collections on mortgage loans ................................... 95,009 87,622 62,692 Mortgage loans originated or acquired ..................................... (86,359) (72,497) (71,687) Net proceeds from sales (acquisition) of real estate owned ................ 0 0 385 Net purchase of FHLB and FRB stock ........................................ (1,297) (879) (1,233) Net addition of premises and equipment .................................... (5,760) (3,959) (2,135) Acquisition of minority interest .......................................... 0 (236) (14) Acquisition of branch deposits ............................................ (4,739) 0 0 --------- -------- -------- NET CASH USED IN INVESTING ACTIVITIES ................................ (197,168) (24,608) (52,451) --------- -------- -------- FINANCING ACTIVITIES: Net increase in deposits .................................................. 100,438 46,046 33,200 Net increase (decrease) in FHLB advances and other borrowed funds ......... 75,144 (27,593) (1,798) Net increase (decrease) in securities sold under repurchase agreements .... 2,527 (4,434) 9,354 Cash dividends paid to stockholders ....................................... (5,923) (4,237) (3,369) Proceeds from exercise of stock options and other stock issued ............ 954 1,533 1,554 --------- -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES ............................. 173,140 11,315 38,941 --------- -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS ................................. 5,594 3,498 2,570 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .......................... 42,183 38,685 36,115 --------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ $ 47,777 42,183 38,685 ========= ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Non-cash investing activity: transfer of held-to-maturity securities to available-for-sale ...................................................... $ 8,272 0 0 Cash paid during the period for interest .................................. $ 25,224 23,088 22,675 Cash paid during the period for income taxes .............................. $ 6,224 7,046 5,511 See accompanying notes to consolidated financial statements. 34
35 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) GENERAL Glacier Bancorp, Inc. (the "Company"), a Delaware corporation organized in 1990, is a multi-bank holding company which provides a full range of banking services to individual and corporate customers in Montana through its subsidiary banks. The subsidiary banks are subject to competition from other financial service providers. The subsidiary banks are also subject to the regulations of certain government agencies and undergo periodic examinations by those regulatory authorities. The accounting and consolidated financial statement reporting policies of the Company conform with generally accepted accounting principles and prevailing practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported and disclosed amounts of assets and liabilities as of the date of the statement of financial condition and income and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the subsidiary banks' allowance for loan losses. Such agencies may require the subsidiary banks to recognize additions to the allowance based on their judgements about information available to them at the time of their examination. (b) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its seven subsidiaries, Glacier Bank ("Glacier"), First Security Bank of Missoula ("First Security"), Glacier Bank of Whitefish ("Whitefish"), Glacier Bank of Eureka ("Eureka"), Valley Bank of Helena ("Valley), Big Sky Western Bank, ("Big Sky"), and Community First, Inc. ("CFI"). All significant inter-company transactions have been eliminated in consolidation. The Company owns 94% of the outstanding stock of Whitefish, 98% of Eureka, and 100% of Glacier, First Security, Valley, Big Sky, and CFI. Valley was acquired on August 31, 1998 through an exchange of stock with HUB Financial Corp. (HUB), formerly the parent company of Valley and the minority shareholders of Valley. The transaction with the minority shareholders was accounted for as a purchase. Financial information from August 31, 1998 forward includes the results of operations previously attributable to the minority interest. Big Sky was acquired on January 20, 1999. The pooling method of interests accounting method was used for the merger transaction with HUB and the merger transaction with Big Sky. 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. (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. Premiums and discounts on investment securities are amortized or accreted into income using a 35
36 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES . . . CONTINUED method that approximates the level-yield interest method. The cost of any investment, if sold, is determined by specific identification. Declines in the fair value of securities below carrying value that are other than temporary are charged to expense as realized losses and the related carrying value is reduced to fair value. Effective January 1, 1999, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133 establishes accounting and reporting standards that derivative instruments (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivatives' fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The adoption of SFAS 133 had no impact on the financial statements of the Company except that it allowed for a one-time reclassification of the investment portfolio from held-to-maturity to either trading or available-for-sale. The net effect on the consolidated statement of financial condition of this reclassification of all the Company's held-to-maturity securities, with an amortized cost of approximately $8,272,000, was an increase in total assets of $288,000, deferred tax liabilities of $98,000 and unrealized gains on securities available-for-sale of $190,000. (e) LOANS RECEIVABLE Loans that are intended to be held to maturity are reported at their unpaid principal balance less chargeoffs, specific valuation accounts, and any deferred fees or costs on originated loans. Purchased loans are reported net of unamortized premiums or discounts. Discounts and premiums on purchased loans and net loan fees on originated loans are amortized over the expected life of loans using methods that approximate the interest method. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full, timely collection of interest or principal or when a loan becomes contractually past due by ninety days or more with respect to interest or principal unless such past due loan is well secured and in the process of collection. When a loan is placed on nonaccrual status, interest previously accrued but not collected is reversed against current period interest income. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgement of management, the loans are estimated to be fully collectible as to both principal and interest. (f) LOANS HELD FOR SALE Mortgage and commercial loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized by charges to income. A sale is recognized when the Company surrenders control of the loan and consideration, other than beneficial interest in the loan, is received in exchange. A gain is recognized to the extent the selling price exceeds the carrying value. (g) ALLOWANCE FOR LOAN LOSSES Management's periodic evaluation of the adequacy of the allowance is based on factors such as the Company's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, current economic conditions, and independent appraisals. The Company also provides an allowance for losses 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 36
37 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES . . . CONTINUED effective interest rate, except when it is determined that the sole source of repayment for the loan is the operations or liquidation of the underlying collateral. In such cases, impairment is measured by determining the current value of the collateral, reduced by anticipated selling costs. The Company recognizes interest income on impaired loans only to the extent the cash payments are received. During 1999 and 1998 the amount of impaired loans was not material. (h) PREMISES AND EQUIPMENT Premises and equipment are stated at cost less depreciation. Depreciation is computed on a straight-line method over the estimated useful lives or the term of the related lease. (i) REAL ESTATE OWNED Property acquired by foreclosure or deed in lieu of foreclosure is carried at the lower of cost or estimated fair value, less selling costs. Costs, excluding interest, relating to the improvement of property are capitalized, whereas those relating to holding the property are charged to expense. Fair value is determined as the amount that could be reasonably expected in a current sale (other than a forced or liquidation sale) between a willing buyer and a willing seller. If the fair value of the asset minus the estimated cost to sell is less than the cost of the property, a loss is recognized and the asset carrying value is reduced. (j) RESTRICTED STOCK INVESTMENTS The Company holds stock in the Federal Home Loan Bank (FHLB) and the Federal Reserve Bank (FRB). FHLB and FRB stocks are restricted because they may only be sold to another member institution or the FHLB or FRB at their par values. Due to restrictive terms, and the lack of a readily determinable market value, FHLB and FRB stocks are carried at cost. (k) GOODWILL AND OTHER INTANGIBLES The excess of purchase price over the fair value of net assets from acquisitions ("Goodwill") is being amortized using the straight-line method over periods of primarily 5 to 25 years. The Company assesses the recoverability of Goodwill by determining whether the unamortized balance related to an acquisition can be recovered through undiscounted future cash flows over the remaining amortization period. Core deposit intangibles represent the intangible value of depositor relationships resulting from deposit liabilities assumed in acquisitions and are amortized using an accelerated method based on an estimated runoff of the related deposits, not exceeding 10 years. (l) INCOME TAXES Deferred tax assets and liabilities are recognized for estimated future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (m) STOCK-BASED COMPENSATION Compensation cost for stock-based compensation to employees is measured at the grant date using the intrinsic value method. Under the intrinsic value method, compensation cost is the excess of the market price of the stock at the grant date over the amount an employee must pay to ultimately acquire the stock and is recognized over any related service period. (n) LONG-LIVED ASSETS Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An asset is deemed impaired if the sum of the expected future cash flows is less than the carrying amount of the asset. If impaired, an impairment loss is recognized to reduce the carrying value of the asset to fair value. At December 31, 1999 and 1998 there were no assets that were considered impaired. 37
38 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES . . . CONTINUED (o) MORTGAGE SERVICING RIGHTS The Company recognizes mortgage servicing rights on loans originated and subsequently sold as an asset regardless of whether the servicing rights are acquired or retained on loans originated and subsequently sold. The mortgage servicing rights are assessed for impairment based on the fair value of the mortgage servicing rights. As of December 31, 1999 and 1998 the carrying value of servicing rights was approximately $665,000 and $689,000, respectively. There was no impairment of carrying value at December 31, 1999 or 1998. (p) EARNINGS PER SHARE Basic earnings per share is computed by dividing net earnings available to common stockholders by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share is computed by dividing such net earnings by the weighted average number of common shares used to compute basic EPS plus the incremental amount of potential common stock determined by the treasury stock method. Previous period amounts are restated for the effect of stock dividends and splits. (q) COMPREHENSIVE INCOME Comprehensive income includes net income, as well as other changes in stockholders' equity that result from transactions and economic events other than those with stockholders. The Company's only significant element of other comprehensive income is unrealized gains and losses on available-for-sale securities. (r) RECLASSIFICATIONS Certain reclassifications have been made to the 1998 and 1997 financial statements to conform to the 1999 presentation. 2. CASH ON HAND AND IN BANKS The subsidiary banks are required to maintain an average reserve balance with either the Federal Reserve Bank or in the form of cash on hand. The amount of this required reserve balance at December 31, 1999 was $6,397,000. 3. INVESTMENT SECURITIES A comparison of the amortized cost and estimated fair value of the Company's investment securities is as follows at: DECEMBER 31, 1999 Gross Unrealized Estimated Dollars in thousands Weighted Amortized ---------------- Fair Yield Cost Gains Losses Value -------- ------- ----- ------ --------- AVAILABLE-FOR-SALE U.S. GOVERNMENT AND FEDERAL AGENCIES maturing within one year ..................... 5.98% 1,998 3 (4) 1,997 maturing one year through five years ......... 7.39% 1,007 16 0 1,023 maturing after ten years ..................... 6.57% 1,043 1 (11) 1,033 ---- ------- --- ------ ------- 6.48% 4,048 20 (15) 4,053 ---- ------- --- ------ ------- STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES: maturing within one year ..................... 6.78% 285 0 (49) 236 maturing one year through five years ......... 4.99% 1,411 15 (5) 1,421 maturing five years through ten years ........ 6.88% 4,120 25 (20) 4,125 maturing after ten years ..................... 5.16% 46,698 39 (2,985) 43,752 ---- ------- --- ------ ------- 5.30% 52,514 79 (3,059) 49,534 ---- ------- --- ------ ------- MORTGAGE-BACKED SECURITIES ..................... 7.09% 34,847 161 (1,080) 33,928 REAL ESTATE MORTGAGE INVESTMENT CONDUITS ....... 6.94% 108,374 126 (4,630) 103,870 ---- ------- --- ------ ------- TOTAL SECURITIES ........................ 6.53% 199,783 386 (8,784) 191,385 ==== ======= === ====== ======= 38
39 3. INVESTMENT SECURITIES . . . CONTINUED DECEMBER 31, 1998 Dollars in thousands Gross Unrealized Estimated HELD-TO-MATURITY Weighted Amortized ---------------- Fair U.S. Government and Federal Agencies: Yield Cost Gains Losses Value -------- --------- ----- ------ --------- maturing within one year ................. 7.90% $ 3,010 63 0 3,073 maturing one year through five years ..... 7.10% 1,237 66 0 1,303 ---- ------- ----- ---- ------ 7.67% 4,247 129 0 4,376 ---- ------- ----- ---- ------ State and Local Governments and other issues: maturing within one year ................. 5.50% 552 5 0 557 maturing one year through five years ..... 5.56% 811 24 0 835 maturing five years through ten years .... 5.01% 1,222 44 0 1,266 maturing after ten years ................. 5.67% 1,440 86 0 1,526 ---- ------- ----- ---- ------ 5.42% 4,025 159 0 4,184 ---- ------- ----- ---- ------ Total Held-to-Maturity Securities .... 6.58% $ 8,272 288 0 8,560 ==== ======= ====== ===== ====== AVAILABLE-FOR-SALE U.S. Government and Federal Agencies: maturing within one year ................. 5.87% $ 2,676 9 (1) 2,684 maturing one year through five years ..... 5.90% 5,993 79 0 6,072 maturing after ten years ................. 6.66% 1,816 10 (1) 1,825 ---- ------- ----- ---- ------ 6.02% 10,485 98 (2) 10,581 ---- ------- ----- ---- ------ State and Local Governments and other issues: maturing within one year ................. 6.88% $ 250 0 0 250 maturing one year through five years ..... 6.00% 100 7 0 107 maturing five years through ten years .... 5.30% 1,167 69 0 1,236 maturing after ten years ................. 5.21% 37,173 1,590 (319) 38,444 ---- ------- ----- ---- ------ 5.23% 38,690 1,666 (319) 40,037 ---- ------- ----- ---- ------ MORTGAGE-BACKED SECURITIES ..................... 7.42% 18,299 546 (63) 18,782 REAL ESTATE MORTGAGE INVESTMENT CONDUITS ....... 6.58% 27,715 184 (85) 27,814 ---- ------- ----- ---- ------ TOTAL AVAILABLE-FOR-SALE SECURITIES .. 6.16% $95,189 2,494 (469) 97,214 ==== ======= ===== ==== ====== The book value of investment securities is as follows at (in thousands): December 31, 1997 ----------------------------------------------- Held-to-Maturity Available-for-Sale Totals ---------------- ------------------ ------- U.S. Government and Federal Agencies ............. $ 9,539 23,819 33,358 State and Local Governments and Other Issues ..... 4,382 26,941 31,323 Mortgage-Backed Securities ....................... 3,100 21,535 24,635 Real Estate Mortgage Investment Conduits ......... -- 32,838 32,838 ------- ------- ------- $17,021 105,133 122,154 ======= ======= ======= Maturities of securities do not reflect repricing opportunities present in adjustable rate securities, nor do they reflect expected shorter maturities based upon early prepayment of principal. The Company has not entered into any interest rate swaps, options or futures contracts. Gross proceeds from sales of investment securities for the years ended December 31, 1999, 1998, and 1997 were approximately $9,270,000, $7,009,000 and $10,181,000 respectively, resulting in gross gains 39
40 3. INVESTMENT SECURITIES . . . CONTINUED of approximately $55,000, $48,000 and $204,000 and gross losses of approximately $49,000, $3,000 and $8,000, respectively. At December 31, 1999, the Company had investment securities with par values of approximately $75,261,000 pledged as security for deposits of several local government units, securities sold under agreements to repurchase, and as collateral for treasury tax and loan borrowings. The Real Estate Mortgage Investment Conduits are backed by the FNMA, GNMA, or FHLMC. At December 31, 1999 and 1998, the minority interest share of the unrealized loss was approximately $22,000 and $7,000, respectively. 4. LOANS RECEIVABLE The following is a summary of loans receivable at: December 31, ----------------------- (dollars in thousands) 1999 1998 --------- -------- Residential first mortgage ..................... $ 192,804 201,898 Loans held for sale ............................ 3,326 13,692 Commercial real estate ......................... 152,504 105,339 Commercial ..................................... 105,613 89,067 Consumer ....................................... 80,039 64,069 Home equity .................................... 62,577 49,795 Outstanding balances on credit cards ........... 0 18 --------- -------- 596,863 523,879 Net deferred loan fees, premiums and discounts .. (517) (538) Allowance for losses ............................ (6,068) (5,133) --------- -------- $ 590,278 518,208 ========= ======== The following is a summary of activity in allowance for losses on loans: December 31, ----------------------------- (dollars in thousands) 1999 1998 1997 ------- ------ ------ Balance, beginning of period ..... $ 5,133 4,279 3,887 Net charge offs .................. (571) (678) (497) Provision ........................ 1,506 1,532 889 ------- ------ ------ Balance, end of period ........... $ 6,068 5,133 4,279 ======= ====== ====== 40
41 4. LOANS RECEIVABLE . . . CONTINUED The following is the allocation of allowance for loan losses at: DECEMBER 31, 1999 DECEMBER 31, 1998 ---------------------- ---------------------- PERCENT OF PERCENT OF OF LOANS IN OF LOANS IN AMOUNT CATEGORY AMOUNT CATEGORY ------ ----------- ------ ----------- (dollars in thousands) Real estate loans and contracts .. $1,000 0.51% $1,099 0.51% Commercial real estate ........... 1,526 1.00% 1,060 1.00% Other commercial ................. 2,107 2.00% 1,717 1.94% Consumer loans and credit cards .. 966 1.21% 885 1.38% Home equity ...................... 469 0.75% 372 0.75% ------ ---- ------ ---- $6,068 1.02% $5,133 0.98% ====== ==== ====== ==== Substantially all of the Company's loans receivable are with customers within the Company's market area. Although the Company has a diversified loan portfolio, a substantial portion of its customers' ability to honor their contracts is dependent upon the economic performance in the Company's market areas. The weighted average interest rate on loans was 8.52% and 8.82% at December 31, 1999 and 1998, respectively. At December 31, 1999 ,1998 and 1997 serviced loans sold to others were $129,666,000, $123,741,000, and $128,250,000, respectively The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extent credit and letters of credit, and involve, to varying degrees, elements of credit risk. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The Company had outstanding commitments as follows (in thousands): December 31, ------------------ 1999 1998 ------- ------ Letters of credit ................ $ 6,133 3,892 Loans and loans in process ....... 61,318 52,247 Unused consumer lines of credit .. 16,583 9,570 ------- ------ $84,034 65,709 ======= ====== The following is a summary of accrued interest receivable (in thousands): December 31, ---------------- 1998 1998 ------ ----- Investment securities ....... $1,517 1,158 Mortgage-backed securities .. 191 75 Loans receivable ............ 3,404 3,115 ------ ----- $5,112 4,348 ====== ===== 41
42 4. LOANS RECEIVABLE . . . CONTINUED The Company has entered into transactions with its executive officers, directors, significant shareholders, and their affiliates. The aggregate amount of loans to such related parties at December 31, 1999 was approximately $10,603,000. During 1999, new loans to such related parties were approximately $17,108,000 and repayments were approximately $13,534,000. 5. PREMISES AND EQUIPMENT Premises and equipment consist of the following at: December 31, --------------------- (dollars in thousands) 1999 1998 -------- ------- Land ........................................... $ 3,553 3,360 Office buildings and construction in progress .. 15,603 12,563 Furniture, fixtures and equipment .............. 10,589 8,523 Leasehold improvements ......................... 1,162 1,481 Accumulated depreciation ....................... (9,513) (8,545) -------- ------- $ 21,394 17,382 ======== ======= 42
43 6. DEPOSITS Deposits consist of the following at: DECEMBER 31, 1999 DECEMBER 31, 1998 --------------------------------- ------------------- WEIGHTED (Dollars In Thousands) AVERAGE RATE AMOUNT PERCENT AMOUNT PERCENT ------------ -------- ------- -------- ------- Demand accounts ................................... 0.0% $113,360 19.7% $100,177 21.1% -------- ----- -------- ----- NOW accounts ...................................... 1.1% 89,937 15.6% 83,414 17.5% Savings accounts .................................. 1.7% 42,645 7.4% 45,053 9.5% Money market demand accounts ...................... 4.0% 138,140 24.0% 100,537 21.1% Certificate accounts: 4.00% and lower .............................. 1,715 0.3% 542 0.1% 4.01% to 5.00% ............................... 57,830 10.0% 28,121 5.9% 5.01% to 6.00% ............................... 105,372 18.3% 86,746 18.2% 6.01% to 7.00% ............................... 26,711 4.6% 24,186 5.1% 7.01% to 8.00% ............................... 412 0.1% 6,340 1.3% 8.01% and higher ............................. 160 0.0% 728 0.2% -------- ----- -------- ----- Total certificate accounts ............ 5.4% 192,200 33.3% 146,663 30.8% -------- ----- -------- ----- Total interest bearing deposits ................... 3.6% 462,922 80.3% 375,667 78.9% -------- ----- -------- ----- Total deposits .................................... 2.9% $576,282 100.0% 475,844 100.0% ======== ===== ======== ===== Deposits with a balance in excess of $100,000 ..... $180,433 $147,247 ======== ======== At December 31, 1999, scheduled maturities of certificates of deposit are as follows: Years ending December 31, ---------------------------------------------------------------- (dollars in thousands) TOTAL 2000 2001 2002 2003 Thereafter -------- ------- ------ ----- ----- ---------- 4.00% and lower ... $ 1,715 1,702 12 1 0 0 4.01% to 5.00% .... 57,830 49,946 5,746 1,102 287 749 5.01% to 6.00% .... 105,372 85,937 11,229 6,127 976 1,103 6.01% to 7.00% .... 26,711 15,666 7,941 2,051 1,031 22 7.01% to 8.00% .... 412 288 108 16 0 0 8.01% and higher .. $ 160 100 54 6 0 0 -------- ------- ------ ----- ----- ----- 192,200 153,639 25,090 9,303 2,294 1,874 ======== ======= ====== ===== ===== ===== Interest expense on deposits is summarized as follows: Years ended December 31, --------------------------- (dollars in thousands) 1999 1998 1997 ------- ------ ------ NOW accounts .................. $ 875 1,274 1,324 Money market demand accounts .. 4,538 4,365 3,245 Certificate accounts .......... 8,435 8,006 7,927 Savings accounts .............. 726 1,065 1,415 ------- ------ ------ $14,574 14,710 13,911 ======= ====== ====== 43
44 7. ADVANCES FROM FEDERAL HOME LOAN BANK OF SEATTLE Advances from the Federal Home Loan Bank of Seattle consist of the following: Maturing in years ending December 31, -------------------------------------------------------------------------------------------- (dollars in thousands) Total 2000 2001 2002 2003 2004 2005-2010 - ------------------------------ -------- -------- -------- -------- -------- -------- --------- 4.00% to 5.00% ............... $ 84,018 83,870 148 -- -- -- -- 5.01% to 6.00% ............... 98,726 77,358 4,361 742 15,552 152 561 6.01% to 7.00% ............... 9,996 6,856 296 354 237 189 2,064 7.01% to 8.00% ............... 1,710 40 140 40 240 140 1,110 8.01% to 9.00% ............... 200 -- -- -- 100 100 -- -------- -------- -------- -------- -------- -------- -------- $194,650 168,124 4,945 1,136 16,129 581 3,735 ======== ======== ======== ======== ======== ======== ======== These advances were collateralized by the Federal Home Loan Bank of Seattle stock held by the Company, and qualifying real estate loans and investments totaling approximately $305,150,000 and $234,846,000 at December 31, 1999 and 1998, respectively. The weighted average interest rate on these advances was 5.25% and 5.49% at December 31, 1999 and 1998, respectively. The Federal Home Loan Bank of Seattle holds callable options which may be exercised after a predetermined time, and quarterly thereafter on the following advances: Contractual Year Total Weighted Maturity of Advance Average Date Initial Call Amount Interest Rate ---------- ------------ -------- ------------- 2003 2000 $16,000 5.23% 2008 2001 3,000 5.37% 2008 2003 15,000 5.52% -------- ---- $34,000 5.37% ======== ==== 8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWED FUNDS Securities sold under agreements to repurchase consist of the following at: (dollars in thousands) Book Market - -------------------------------- Weighted value of value of December 31, 1999 Repurchase average underlying underlying amount rate assets assets - -------------------------------- ------- ------- ------- ------- Securities sold under agreements to repurchase within: 1-30 days ............... $13,765 4.38% $19,601 20,295 31-90 days ............... 6,001 4.81% 6,757 6,866 Greater than 90 days ...... -- -- -- -- ------- ------- ------- ------- $19,766 4.51% $26,358 27,161 ======= ======= ======= ======= December 31, 1998: - -------------------------------- Securities sold under agreements to repurchase within: 1-30 days ............... $11,000 4.05% $14,706 15,099 31-90 days ............... 6,126 5.18% 6,797 7,174 Greater than 90 days ...... 113 5.31% 120 120 ------- ------- ------- ------- $17,239 4.70% $21,623 22,393 ======= ======= ======= ======= The securities underlying agreements to repurchase entered into by the Company are for the same securities originally sold, and are held in a custody account by a third party. For the year ended December 31, 1999, securities sold under agreements to repurchase averaged approximately 44
45 8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWED FUNDS . . . CONTINUED $28,605,000 and the maximum outstanding at any month end during the year was approximately $53,791,000. In 1996 the Company entered into the treasury tax and loan account note option program, which provides short term funding with no fixed maturity date up to $12,000,000 at federal funds rate minus 25 basis points. At December 31, 1999 and 1998 the outstanding balance under this program was approximately $5,778,000 and $1,100,000. The borrowings are secured with investment securities with a par value of approximately $8,620,000 and a market value of approximately $8,382,000. For the year ended December 31, 1999, the maximum outstanding at any month end was approximately $7,357,000 and the average balance was approximately $3,047,000. Other borrowed funds also includes federal funds purchased of $720,000 and $38,000 at December 31, 1999 and 1998, respectively. 9. SUBORDINATED DEBENTURES During 1999, the Company assumed Big Sky's subordinated convertible debentures as part of the merger transaction. The outstanding balance at December 31, 1999 was $350,000, and is due December 31, 2001. The interest rate is 7.5 percent, payable quarterly. The debentures may be prepaid at any time by the Company, subject to approval by the FDIC and the Company's primary regulator, and are convertible at the rate of one share of Company stock for each $12.83 of principal value, or an equivalent of 27,293 shares. 10. STOCKHOLDERS' EQUITY The Federal Reserve Board has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in supervising a bank holding company. The following table illustrates the Federal Reserve Board's adequacy guidelines and the Company's compliance with those guidelines as of December 31, 1999: Tier 1 (Core) Tier 2 (Total) Leverage (dollars in thousands) Capital Capital Capital - ------------------------------------------ --------- --------- --------- GAAP Capital ............................. $ 78,813 78,813 $ 78,813 Less: Goodwill ........................... (7,035) (7,035) (7,035) Plus: Net unrealized losses on securities available for sale ...... 5,098 5,098 5,098 Allowance for loan losses ......... -- 6,068 -- Minority Interest ................. 308 308 308 Other regulatory adjustments ............. (82) (82) (82) --------- --------- --------- Regulatory capital computed .............. $ 77,102 $ 83,170 $ 77,102 ========= ========= ========= Risk weighted assets ..................... $ 569,370 $ 569,370 ========= ========= Total average assets ..................... $ 791,311 ========= 1999 ----------------------------- Capital as % of defined assets ............. 13.54% 14.61% 9.74% Regulatory "well capitalized" requirement ... 6.00% 10.00% 5.00% ----- ----- ----- Excess over "well capitalized" requirement .. 7.54% 4.61% 4.74% ===== ===== ===== 45
46 10. STOCKHOLDERS' EQUITY . . . CONTINUED 1998 ----------------------------- Capital as % of defined assets ............... 15.96% 17.07% 10.61% Regulatory "well capitalized" requirement .... 6.00% 10.00% 5.00% ----- ----- ----- Excess over "well capitalized" requirement ... 9.96% 7.07% 5.61% ===== ===== ===== The Federal Deposit Insurance Corporation Improvement Act generally restricts a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding Company if the institution would thereafter be capitalized at less than 8% of total risk-based capital, 4% of Tier I capital, or a 4% leverage ratio. At December 31, 1999, the subsidiary banks' capital measures exceed the highest supervisory threshold, which requires total Tier II capital of at least 10%, Tier I capital of at least 6%, and a leverage ratio of at least 5%. Each of the subsidiaries was considered well capitalized by the respective regulator as of December 31, 1999. During 1997, an additional 70,961 shares of stock were issued to increase the capital of Big Sky. 11. FEDERAL AND STATE INCOME TAXES: The following is a summary of consolidated income tax expense for: Years ended December 31, - ----------------------------------------------- ----------------------------------- (dollars in thousands) 1999 1998 1997 - ----------------------------------------------- ------- ------- ------- Current: Federal .................................. $ 5,517 5,267 5,212 State .................................... 1,237 1,199 1,078 ------- ------- ------- Total current tax expense 6,754 6,466 6,290 Deferred: Federal .................................. (86) (102) (363) State .................................... (37) 34 46 ------- ------- ------- Total deferred tax expense (benefit) (123) (68) (317) ------- ------- ------- Total income tax expense $ 6,631 6,398 5,973 ======= ======= ======= Federal and state income tax expense differs from that computed at the federal statutory corporate tax rate as follows for: Years ended December 31, -------------------------- 1999 1998 1997 ---- ---- ---- Federal statutory rate ........................... 35.0% 35.0% 35.0% State taxes, net of federal income tax benefit ... 4.2% 4.6% 4.5% Non-deductible merger expenses ................... 0.0% 0.1% 0.2% Other, net ....................................... -3.9% -2.8% -2.9% ---- ---- ---- 35.3% 36.9% 36.8% ==== ==== ==== Tax exempt interest for the years ended December 31, 1999, 1998 and 1997 was approximately $2,301,000, $1,604,000, and $1,227,000, respectively. 46
47 The tax effect of temporary differences which give rise to a significant portion of deferred tax assets and deferred tax liabilities are as follows at: December 31, - ------------------------------------------------------- --------------------- (dollars in thousands) 1999 1998 - ------------------------------------------------------- ------- ------- Deferred tax assets: Allowance for losses on loans ...................... $ 2,530 2,138 Available-for-sale securities fair value adjustment . 3,278 0 Other .............................................. 540 513 ------- ------- Total gross deferred tax assets ............. 6,348 2,651 ------- ------- Deferred tax liabilities: Federal Home Loan Bank stock dividends ............. (2,196) (1,765) Fixed assets, due to differences in depreciation ... (571) (450) Tax bad debt reserve in excess of base-year reserve (418) (617) Available-for-sale securities fair value adjustment 0 (822) Basis difference from acquisitions ................. (186) (192) Other .............................................. (335) (345) ------- ------- Total gross deferred tax liabilities ....... (3,706) (4,191) ------- ------- Net deferred tax liability ................. $ 2,642 (1,540) ======= ======= There is no valuation allowance at December 31, 1999 and 1998 because management believes that it is more likely than not that the Company's deferred tax assets will be realized by offsetting future taxable income from reversing taxable temporary differences and anticipated future taxable income. The current tax receivable (payable) was approximately ($46,000) and $485,000 at December 31, 1999 and 1998. Retained earnings at December 31, 1999 includes approximately $3,600,000 for which no provision for Federal income tax has been made. This amount represents the base year bad debt reserve which is essentially an allocation of earnings to pre-1988 bad debt deductions for income tax purposes only. This amount is treated as a permanent difference and deferred taxes are not recognized unless it appears that this reserve will be reduced and thereby result in taxable income in the foreseeable future. The Company is not currently contemplating any changes in its business or operations which would result in a recapture of this federal bad debt reserve into taxable income. 12. EMPLOYEE BENEFIT PLANS The Company has a noncontributory defined contribution retirement plan covering substantially all employees. The Company follows the policy of funding retirement plan contributions as accrued. The total retirement plan expense for the years ended December 31, 1999, 1998, and 1997 was approximately $791,000, $552,000 and $620,000 respectively. The Company also has an employees' savings plan. The plan allows eligible employees to contribute up to 10% of their monthly salaries. The Company matches an amount equal to 50% of the employee's contribution, up to 6% of the employee's total pay. Participants are at all times fully vested in all contributions. The Company's contribution to the savings plan for the years ended December 31, 1999, 1998 and 1997 was approximately $246,000, $216,000, and $173,000, respectively. The Company has a Supplemental Executive Retirement Plan (SERP) which provides retirement benefits at the savings and retirement plan levels, for amounts that are limited by IRS regulations under those plans. The Company's contribution to the SERP for the years ended December 31, 1999, 1998 and 1997 was approximately $10,000, $26,000, and $46,000, respectively. 47
48 The Company has a non-funded deferred compensation plan for directors and senior officers. The plan provides for the deferral of cash payments of up to 25% of a participants' salary, and for 100% of bonuses and directors fees, at the election of the participant. The total amount deferred was approximately $43,000, $52,000, $156,000, for the years ending December 31, 1999, 1998, and 1997, respectively. The participant receives an earnings credit at a one year certificate of deposit rate, or at the total return rate on Company stock, on the amount deferred, as elected by the participant at the time of the deferral election. The total earnings (losses) for the years ended 1999, 1998, and 1997 were approximately ($33,000), $12,000, and $66,000, respectively. The Company has entered into employment contracts with nine senior officers that provide benefits under certain conditions following a change in control of the Company. 13. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: For the Years Ended December 31, ------------------------------------------- 1999 1998 1997 ----------- ---------- ---------- Net earnings available to common stockholders, basic and diluted $12,179,000 10,915,000 10,236,000 =========== ========== ========== Average outstanding shares - basic . 9,520,348 9,304,101 9,130,762 Add: dilutive stock options ....... 91,803 150,026 154,447 ----------- ---------- ---------- Average outstanding shares - diluted 9,612,151 9,454,127 9,285,209 =========== ========== ========== Basic earnings per share ........... $ 1.28 1.17 1.12 =========== ========== ========== Diluted earnings per share ......... $ 1.27 1.15 1.10 =========== ========== ========== 14. STOCK OPTION PLANS During fiscal 1984, an Incentive Stock Option Plan was approved which provided for the grant of options limited to 168,750 shares to certain full time employees of the Company. In the year ended June 30, 1990, additional Stock Option Plans were approved which provided for the grant of options limited to 29,445 shares to outside Directors and 166,860 shares to certain full time employees of the Company. In the year ended December 31, 1994 a Stock Option Plan was approved which provided for the grant of options to outside Directors of the Company, limited to 50,000 shares. In the year ended December 31, 1995 a Stock Option Plan was approved which provided for the grant of options limited to 279,768 shares to certain full-time employees of the Company. In April 1999 the Directors 1994 Stock Option Plan, and the Employees 1995 Stock Option Plan, were amended to provide 100,000 and 600,000 additional shares for the Directors and Employees Plans, respectively. The option price at which the Company's common stock may be purchased upon exercise of options granted under the plan must be at least equal to the per share market value of such stock at the date the option is granted. The 1984 plan also contains provisions permitting the optionee, with the approval of the Company, to surrender his or her options for cancellation and receive cash or common stock equal to the difference between the exercise price and the then fair market value of the shares on the date of surrender (cash-less exercise). The fiscal 1990 and 1995 plans also contain provisions authorizing the grant of limited stock rights, which permit the optionee, upon a change in control of the Company, to surrender his or her options for cancellation and receive cash or common stock equal to the difference between the exercise price and 48
49 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. At December 31, 1999, total shares available for option grants to employees and directors are 773,432. Changes in shares granted for stock options for the years ended December 31, 1999, 1998, and 1997, are summarized as follows: Options outstanding Options exercisable -------------------------- -------------------------- Weighted Weighted average average Shares exercise price Shares exercise price -------- -------------- -------- -------------- Balance, December 31, 1996 219,327 $ 16.59 116,631 $ 15.65 Canceled ................. (9,715) (15.65) Granted .................. 115,418 23.45 Became exercisable ....... 11,338 17.15 Three for two stock split 160,937 57,577 Exercised ................ (51,993) (10.73) (51,993) (10.73) -------- -------- -------- -------- Balance, December 31, 1997 433,974 $ 12.98 133,553 $ 10.94 Canceled ................. (8,950) (15.68) (600) (10.37) Granted .................. 134,377 24.37 Became exercisable ....... 132,885 11.31 Stock dividend ........... 46,574 28,620 Exercised ................ (149,076) (10.27) (149,076) (10.27) -------- -------- -------- -------- Balance, December 31, 1998 456,899 $ 15.83 145,382 $ 11.00 Canceled ................. (43,439) (18.57) (2,631) (11.74) Granted .................. 206,953 22.53 Became exercisable ....... 195,959 16.02 Stock dividend ........... 55,913 32,042 Exercised ................ (100,427) (11.86) (100,427) (11.86) -------- -------- -------- -------- Balance, December 31, 1999 575,899 $ 17.20 270,325 $ 13.58 ======== ======== ======== ======== During the year ended December 31, 1999, there were 10,019 options exercised through cash-less exercises at a weighted average market price of $21.77. The range of exercise prices on options outstanding at December 31, 1999 is as follows: Options exercisable -------------------------- Weighted Weighted Weighted average average average Price range Shares exercise price life of options Shares exercise price - ------------------------------ --------- -------------- --------------- --------- -------------- $8.32 - $10.52 .............. 75,997 $ 10.04 2.9 years 74,796 $ 10.06 $12.53 - $13.56 .............. 161,529 13.19 3.1 years 161,529 13.19 $17.87 - $21.00 .............. 302,373 20.43 3.0 years - - $23.19 - $24.00 .............. 36,000 23.21 4.4 years 34,000 23.19 --------- --------- --------- --------- --------- 575,899 $ 17.20 3.4 years 270,325 $ 13.58 ========= ========= ========= ========= ========= The options exercised during the year ended December 31, 1999 were at prices from $8.99 to $20.15. 49
50 The per share weighted-average fair value of stock options granted during 1999, 1998 and 1997 was $5.07, $5.09, and $5.05, respectively, on the date of grant using the Black-Scholes option-pricing model with the following assumptions: 1999 - expected dividend yield of 3.3%, risk-free interest rate of 6.2%, volatility ratio of .23, and expected life of 4.8 years: 1998 - expected dividend yield of 2.5%, risk-free interest rate of 4.6%, volatility ratio of .22, and expected life of 4.8 years: 1997 - expected dividend yield of 2.9%, risk-free interest rate 5.8%, volatility ratio .22, 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 No. 123, the Company's net income would have been reduced to the pro forma amounts indicated below: Years ended December 31, ----------------------------------- 1999 1998 1997 ---------- --------- --------- Net earnings: As reported $ 12,179 10,915 10,236 (in thousands) Pro forma 11,302 10,297 9,788 Basic earnings per share: As reported 1.28 1.17 1.12 Pro forma 1.19 1.11 1.07 Diluted earnings per share: As reported 1.27 1.15 1.10 Pro forma 1.18 1.09 1.05 50
51 15. PARENT COMPANY INFORMATION (CONDENSED) The following condensed financial information is the unconsolidated (parent company only) information for Glacier Bancorp, Inc., combined with Big Sky Western Bank: STATEMENTS OF FINANCIAL CONDITION December 31, - ------------------------------------------------------------------ ----------------------- (dollars in thousands) 1999 1998 - ------------------------------------------------------------------ -------- -------- Assets: Cash .......................................................... $ 2,561 598 Interest bearing cash deposits ................................ 16 2,487 -------- -------- Cash and cash equivalents ............................... 2,577 3,085 Investments securities, available-for-sale, at market value ... 1,755 1,691 Investments securities, held-to-maturity, at cost ............. 0 91 Other assets .................................................. 2,640 1,332 Goodwill, net ................................................. 2,376 2,601 Investment in subsidiaries .................................... 71,977 71,395 -------- -------- $ 81,325 80,195 ======== ======== Liabilities and Stockholders' Equity: Dividends payable ............................................. $ 1,910 1,757 Notes payable ................................................. 0 0 Other liabilities ............................................. 602 628 -------- -------- Total liabilities ..................................... 2,512 2,385 Common stock .................................................. 96 86 Paid-in capital ............................................... 81,193 60,104 Retained earnings ............................................. 2,622 16,424 Net unrealized gains (losses) on securities available-for-sale (5,098) 1,196 Total stockholders' equity ........................... 78,813 77,810 -------- -------- $ 81,325 80,195 ======== ======== STATEMENTS OF OPERATIONS Years ended December 31, - ----------------------------------------------------------------- -------------------------------------- (dollars in thousands) 1999 1998 1997 - ----------------------------------------------------------------- -------- -------- -------- Revenues Dividends from subsidiaries .................................. $ 8,420 5,377 3,779 Other income ................................................. 161 168 344 Intercompany charges for services ............................ 1,617 1,971 1,803 -------- -------- -------- Total revenues .......................................... 10,198 7,516 5,926 Expenses Employee compensation and benefits ........................... 1,519 1,880 1,974 Goodwill amortization ........................................ 243 165 155 Other operating expenses ..................................... 1,027 1,239 323 -------- -------- -------- Total expenses .......................................... 2,789 3,284 2,452 Earnings before income tax benefit and equity in undistributed earnings of subsidiaries ............................... 7,409 4,232 3,474 Income tax benefit ........................................... (328) (198) (88) Income before equity in undistributed earnings of subsidiaries 7,737 4,430 3,562 Equity in undistributed earnings of subsidiaries ............. 4,442 6,485 6,674 -------- -------- -------- Net earnings .................................................... $ 12,179 10,915 10,236 ======== ======== ======== 51
52 STATEMENTS OF CASH FLOWS Years ended December 31, - ----------------------------------------------------------------- -------------------------------------- (dollars in thousands) 1999 1998 1997 - ----------------------------------------------------------------- -------- -------- -------- Operating Activities Net earnings ................................................. $ 12,179 10,915 10,236 Adjustments to reconcile net earnings to net cash provided by operating activities: Goodwill amortization ........................................ 242 165 155 Gain on sale of investments available-for-sale ............... 0 (8) (184) Equity in undistributed earnings of subsidiaries ............. (4,442) (6,485) (6,674) Net increase (decrease) in other assets and other liabilities (988) 205 (1,732) -------- -------- -------- Net cash provided by operating activities ....................... 6,991 4,792 1,801 Investing activities Purchases of investment securities available-for-sale ........ (103) (198) (176) Proceeds from sales, maturities and prepayments of securities available-for-sale ..................................... 3 59 484 Proceeds from maturities of securities held-to-maturity ...... 0 3 3 Payment for land purchase .................................... 0 0 (160) Equity contribution to subsidiary ............................ (2,500) 0 0 Acquisition of minority interest ............................. 0 (236) (14) -------- -------- -------- Net cash provided (used) by investing activities ................ (2,600) (372) 137 Financing activities Proceeds from exercise of stock options and other stock issued 954 1,532 1,554 Principal reductions on notes payable ........................ 0 (216) (82) Proceeds from new bank loan .................................. 0 0 222 Cash dividends paid to stockholders .......................... (5,853) (4,327) (3,369) -------- -------- -------- Net cash used by financing activities ........................... (4,899) (3,011) (1,675) Net increase (decrease) in cash and cash equivalents ............ (508) 1,409 263 Cash and cash equivalents at beginning of period ................ 3,085 1,676 1,413 -------- -------- -------- Cash and cash equivalents at end of period ...................... $ 2,577 3,085 1,676 ======== ======== ======== 16. UNAUDITED QUARTERLY FINANCIAL DATA Summarized unaudited quarterly financial data is as follows (in thousands except per share amounts): QUARTERS ENDED ----------------------------------------------------------- March 31, 1999 June 30, 1999 Sept. 30, 1999 Dec. 31, 1999 -------------- ------------ ------------ ------------ Interest income ................... $ 13,061 14,090 15,348 16,422 Interest expense .................. 5,487 5,999 6,762 7,344 Net interest income ............... 7,574 8,091 8,586 9,078 Provision for loan loss ........... 322 350 418 416 Net income before income taxes .... 4,435 4,604 4,931 4,840 Net earnings ...................... 2,894 3,003 3,163 3,119 Basic earnings per share[1] ....... 0.30 0.32 0.33 0.33 Diluted earnings per share[1] ..... 0.30 0.31 0.33 0.33 Dividends per share[1] ............ 0.14 0.15 0.15 0.20[2] Market range high-low[1] .......... $21.82-$17.05 $24.38-$17.27 $23.88-$15.25 $18.75-$14.88 52
53 Quarters Ended -------------------------------------------------------------------- March 31, 1998 June 30, 1998 Sept. 30, 1998 Dec. 31, 1998 -------------- ------------- -------------- -------------- Interest income ................. $13,240 13,464 13,597 13,420 Interest expense ................ 5,936 6,008 5,937 5,669 Net interest income ............. 7,304 7,456 7,660 7,751 Provision for loan loss ......... 235 551 308 438 Net income before income taxes .. 4,260 4,350 4,413 4,290 Net earnings .................... 2,694 2,715 2,735 2,771 Basic earnings per share[1] ..... 0.29 0.29 0.29 0.30 Diluted earnings per share[1] ... 0.28 0.29 0.29 0.29 Dividends per share[1] .......... 0.11 0.12 0.13 0.21[3] Market range high-low[1] ........ $ 24.38-$19.21 $ 23.55-$21.90 $ 23.97-$20.71 $ 20.57-$17.16 Quarters Ended -------------------------------------------------------------------- March 31, 1997 June 30, 1997 Sept. 30, 1997 Dec. 31, 1997 -------------- ------------- -------------- ------------- Interest income ................. $12,304 12,858 13,199 13,325 Interest expense ................ 5,646 5,808 5,939 5,903 Net interest income ............. 6,658 7,050 7,260 7,422 Provision for loan loss ......... 197 248 228 216 Net income before income taxes .. 3,499 4,055 4,229 4,426 Net earnings .................... 2,202 2,558 2,672 2,804 Basic earnings per share[1] ..... 0.24 0.28 0.29 0.31 Diluted earnings per share[1] ... 0.24 0.28 0.28 0.30 Dividends per share[1] .......... 0.09 0.10 0.10 0.14[2] Market range high-low[1] ........ $ 13.64-$12.81 $ 17.36-$12.60 $ 16.12-$14.46 $ 20.66-$15.39 [1] Per share amounts adjusted to reflect effect of 10% stock dividend [2] Special dividend was paid at $.05 per share. [3] Special dividend was paid at $.07 per share. 53
54 17. FAIR VALUE OF FINANCIAL INSTRUMENTS Financial instruments have been defined to generally mean cash or a contract that implies an obligation to deliver cash or another financial instrument to another entity. For purposes of the Company's Consolidated Statement of Financial Condition, this includes the following items: 1999 1998 - ---------------------------------------------- ---------------------------- ---------------------------- (dollars in thousands) AMOUNT FAIR VALUE Amount Fair Value - ---------------------------------------------- -------- ---------- -------- ---------- Financial Assets: Cash ......................................... $ 46,277 46,277 33,806 33,806 Federal funds sold ........................... 64 64 5,883 5,883 Interest bearing cash deposits ............... 1,436 1,436 2,494 2,494 Investment securities ........................ 53,587 53,587 58,890 59,178 Mortgage-backed securities ................... 137,798 137,798 46,576 46,596 Loans ........................................ 590,278 580,452 518,208 525,465 FHLB and Federal Reserve Bank stock .......... 15,864 15,864 13,585 13,585 Financial Liabilities: Deposits ..................................... $576,282 578,979 475,844 476,892 Advances from the FHLB of Seattle ............ 194,650 190,681 124,886 125,311 Repurchase agreements and other borrowed funds 26,614 26,614 18,707 18,707 Financial assets and financial liabilities other than securities are not traded in active markets. The above estimates of fair value require subjective judgments and are approximate. Changes in the following methodologies and assumptions could significantly affect the estimates. These estimates may also vary significantly from the amounts that could be realized in actual transactions. Financial Assets - The estimated fair value approximates the book value of cash, federal funds sold and interest bearing cash deposits. For investment and mortgage-backed securities, the fair value is based on quoted market prices. The fair value of loans is estimated by discounting future cash flows using current rates at which similar loans would be made. The fair value of FHLB and Federal Reserve Bank stock approximates the book value. Financial Liabilities - The estimated fair value of demand and savings deposits approximates the book value since rates are periodically adjusted to market rates. Certificates of deposit fair value is estimated by discounting the future cash flows using current rates for similar deposits. Advances from the FHLB of Seattle fair value is estimated by discounting future cash flows using current rates for advances with similar weighted average maturities. Repurchase agreements and other borrowed funds have variable interest rates, or are short term, so fair value approximates book value. Off-balance sheet financial instruments - Commitments to extend credit and letters of credit represent the principal categories of off-balance sheet financial instruments. Rates for these commitments are set at time of loan closing, so no adjustment is necessary to reflect these commitments at market value. See Note 4 to consolidated financial statements. 18. CONTINGENCIES AND COMMITMENTS The Company is a defendant in legal proceedings arising in the normal course of business. In the opinion of management, the disposition of pending litigation will not have a material effect on the Company's consolidated financial position or results of operations. 19. BUSINESS COMBINATIONS On August 31, 1998, the Company issued 536,154 shares of common stock in exchange for all of the outstanding stock of HUB Financial Corporation (HUB), parent company of Valley Bank of Helena (Valley). As a result of this transaction, the Company acquired the majority interest, 86.5%, of Valley. This business combination has been accounted for as a pooling-of interests combination, and, 54
55 accordingly, the consolidated financial statements for periods prior to the combination have been restated to include the accounts and results of operations of HUB. The results of operations previously reported by the separate companies and the combined amounts presented in the accompanying consolidated financial statements are summarized below (in thousands): Six months ended Years ended June 30, 1998 December 31, (unaudited) 1997 1996 ------------- ------ ------ Net earnings of: Glacier Bancorp, Inc ......... $4,892 9,180 7,425 HUB Financial Corporation .... 408 874 782 ------ ------ ------ Combined ............. $5,300 10,054 8,207 ====== ====== ====== Also on August 31, 1998, the Company issued 83,761 shares of common stock in exchange for the minority interest of 13.5% of Valley. This business combination has been accounted for as a purchase and, accordingly, the consolidated statement of operations for the year ended December 31, 1998 includes the results of operations related to this minority interest commencing August 31, 1998 and the proportional interest of the net assets acquired have been restated to estimated fair value. On January 18, 1999, the Company issued 227,707 shares of common stock in exchange for all of the outstanding stock of Big Sky Western Bank. This business combination has been accounted for as a pooling-of-interests combination and, accordingly, the consolidated financial statements for periods prior to the combination have been restated to include the accounts and results of operations of Big Sky Western Bank. The results of operations previously reported by the separate companies and the combined amounts presented in the accompanying consolidated financial statements are summarized below (in thousands): Years Ended December 31, ------------------------- 1998 1997 ------- ------- Net earnings of: Glacier Bancorp, Inc. ......... $10,744 10,054 Big Sky Western Bank .......... 171 182 ------- ------- Combined ............... $10,915 10,236 ======= ======= 20. BRANCH ACQUISITIONS On October 8, 1999, the Company, through its largest subsidiary Glacier Bank, acquired the two Butte, Montana offices of Washington Mutual Bank with approximately $73,000,000 in deposits. This acquisition was accounted for as a purchase. The premium paid of $4,767,000 included a core deposit intangible of approximately $1,797,000 and goodwill of approximately $2,970,000. 21. AGREEMENT TO MERGE On September 9, 1999, the Company entered into a definitive agreement to acquire, through an exchange of stock, Mountain West Bank of Couer d'Alene, Idaho (Mountain West). It is expected that on February 4, 2000, the transaction will be completed with 844,257 shares of Company stock issued for 100 percent of the outstanding stock of Mountain West. Mountain West will operate as an independent, wholly-owned subsidiary of the Company. The acquisition is being accounted for using the pooling-of-interests method. Transactions accounted for as a pooling-of-interests reflect the assets, liabilities, stockholders' equity, and results of operations of the separate entities as though the entities had been combined as of the earliest date reported. 55
56 The following unaudited pro forma data summarizes the combined results of operations of the Company and Mountain West as if the combination had been consummated on December 31, 1999: Years ended December 31, - ----------------------------------- ---------------------------------------------- (dollars in thousands) 1999 1998 1997 - ----------------------------------- -------- -------- -------- Interest income ................... $ 64,736 58,529 55,324 Interest expense .................. 27,635 25,415 24,817 -------- -------- -------- Net interest income ............. 37,101 33,114 30,507 ======== ======== ======== Net earnings ...................... $ 12,353 11,444 10,552 ======== ======== ======== Basic earnings per share .......... $ 1.19 1.14 1.09 ======== ======== ======== Diluted earnings per share ........ $ 1.18 1.11 1.07 ======== ======== ======== Total assets ...................... $974,001 785,135 740,891 Total deposits .................... $645,522 544,110 481,121 22. OPERATING SEGMENT INFORMATION As of December 31, 1998, the company adopted FASB Statement 131, Financial Reporting for Segments of a Business Enterprise. This statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments. According to the statement, operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company evaluates segment performance internally based on individual bank charter, and thus the operating segments are so defined. All segments, except for the segment defined as "other," are based on commercial banking operations. The operating segment defined as "other" includes the Parent company, smaller nonbank operating units, and eliminations of transactions between segments. The accounting policies of the individual operating segments are the same as those of the Company described in note 1. Transactions between operating segments are primarily conducted at fair value, resulting in profits that are eliminated for reporting consolidated results of operations. Expenses for centrally provided services are allocated based on the estimated usage of those services. 56
57 The following is a summary of selected operating segment information for the years ended and as of December 31, 1999, 1998, and 1997 (in thousands): First Valley Big Sky 1999 Glacier Whitefish Eureka Security Helena Western Other Consolidated -------- --------- -------- -------- -------- -------- -------- ------------ Net interest income ............... $ 15,266 2,044 1,290 8,804 3,614 2,077 234 33,329 Provision for loan losses ......... 470 66 24 600 155 191 0 1,506 -------- -------- -------- -------- -------- -------- -------- -------- Net interest income after provision for loan losses ....... 14,796 1,978 1,266 8,204 3,459 1,886 234 31,823 Noninterest income ................ 5,539 675 313 2,260 1,494 881 (98) 11,064 Merger expense and amortization of goodwill and core deposit intangibles ..................... 78 0 0 0 0 0 361 439 Other noninterest expense ......... 10,750 1,502 986 4,567 2,977 2,096 709 23,587 -------- -------- -------- -------- -------- -------- -------- -------- Income before income taxes and minority interest ........... 9,507 1,151 593 5,897 1,976 671 (934) 18,861 Minority interest ................. 51 51 Income taxes expense (benefit) .... 3,303 348 191 2,132 731 231 (305) 6,631 -------- -------- -------- -------- -------- -------- -------- -------- Net income ........................ $ 6,204 803 402 3,765 1,245 440 (680) 12,179 ======== ======== ======== ======== ======== ======== ======== ======== Assets ............................ $460,257 52,203 28,879 193,548 82,587 66,255 388 884,117 Net loans ......................... 272,060 35,485 18,178 161,781 58,924 43,850 0 590,278 Deposits .......................... 276,880 34,261 18,514 143,645 65,095 41,034 (3,147) 576,282 Shareholders' equity .............. 36,040 4,605 3,137 15,640 7,073 5,281 7,037 78,813 1998 Net interest income ............... $ 14,572 1,820 1,247 7,784 3,312 1,251 185 30,171 Provision for loan losses ......... 670 78 12 645 85 42 0 1,532 -------- -------- -------- -------- -------- -------- -------- -------- Net interest income after provision for loan losses ....... 13,902 1,742 1,235 7,139 3,227 1,209 185 28,639 Noninterest income ................ 5,723 686 372 2,801 1,553 743 81 11,959 Merger expense and amortization of goodwill and core deposit intangibles ..................... 0 0 0 0 0 0 931 931 Other noninterest expense ......... 10,523 1,347 971 4,151 3,010 1,680 527 22,209 -------- -------- -------- -------- -------- -------- -------- -------- Income before income taxes and minority interest ........... 9,102 1,081 636 5,789 1,770 272 (1,192) 17,458 Minority interest ................. 145 145 Income taxes expense (benefit) .... 3,238 343 217 2,138 659 103 (300) 6,398 -------- -------- -------- -------- -------- -------- -------- -------- Net income ........................ $ 5,864 738 419 3,651 1,111 169 (1,037) 10,915 ======== ======== ======== ======== ======== ======== ======== ======== Assets ............................ $370,686 42,643 24,471 164,546 69,924 39,376 (5,680) 705,966 Net loans ......................... 272,399 22,022 16,322 134,646 48,860 23,959 0 518,208 Deposits .......................... 201,211 34,179 17,797 139,348 57,807 31,385 (5,883) 475,844 Shareholders' equity .............. 39,058 4,642 3,309 14,668 6,628 2,873 6,632 77,810 1997 Net interest income ............... $ 14,121 1,786 1,232 6,654 3,142 1,143 312 28,390 Provision for loan losses ......... 345 0 42 360 60 82 0 889 -------- -------- -------- -------- -------- -------- -------- -------- Net interest income after provision for loan losses ....... 13,776 1,786 1,190 6,294 3,082 1,061 312 27,501 Noninterest income ................ 4,540 570 350 2,818 1,275 520 62 10,135 Merger expense and amortization of goodwill and core deposit intangibles ..................... 0 0 0 0 0 0 155 155 Other noninterest expense ......... 10,145 1,399 947 4,050 2,709 1,334 480 21,064 -------- -------- -------- -------- -------- -------- -------- -------- Income before income taxes and minority interest ........... 8,171 957 593 5,062 1,648 247 (106) 16,417 Minority interest ................. 208 208 Income taxes expense (benefit) .... 2,958 312 202 1,896 614 65 (74) 5,973 -------- -------- -------- -------- -------- -------- -------- -------- Net income ........................ $ 5,213 645 391 3,166 1,034 182 (395) 10,236 ======== ======== ======== ======== ======== ======== ======== ======== Assets ............................ $365,921 41,276 25,565 144,382 69,875 32,724 1,648 681,391 Net loans ......................... 266,670 22,746 16,290 111,867 49,344 19,303 0 486,220 Deposits .......................... 173,371 30,918 16,385 127,801 57,687 25,449 (1,813) 429,798 Shareholders' equity .............. 35,572 4,247 3,188 12,586 6,647 2,927 2,535 67,702 57
58 PART III 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 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding "Directors and Executive Officers of the Registrant" is set forth under the headings "Proposal No. 1 - Election of Directors - Information with Respect to Nominees for Director and Continuing Directors" - "Background of Directors" and "Security Ownership of Certain Beneficial Owners and Management - Executive Officers who are not Directors" of the Company's 2000 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. ITEM 11. EXECUTIVE COMPENSATION Information regarding "Executive Compensation" is set forth under the headings "Proposal No. 1 - Election 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 "Proposal No. 1 - Election of Directors - Information with Respect to Nominees for Director and Continuing 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. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (a) (1) and (2) 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. 58
59 (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 August 31, 1996 between the Company, Glacier Bank and Michael J. Blodnick(4) 10(c) Employment Agreement dated August 31, 1996 between the Company, Glacier Bank and Stephen J. Van Helden(4) 10(d) Employment Agreement dated August 31, 1996 between the Company, Glacier Bank and James H. Strosahl(4) 10(f) Employment Agreement dated August 9, 1996 between First Security Bank and William L. Bouchee(5) 10(g) Employment Agreement dated December 30, 1997 between Valley Bank of Helena and Fred J. Flanders(1) 10(h) 1994 Director Stock Option Plan(6) 10(I) 1995 Employee Stock Option Plan(7) 10(j) Amendment to 1995 Stock Option Plan approved April 28, 1999 10(k) Deferred Compensation Plan(6) 10(l) Supplemental Executive Retirement Agreement(6) 21 Subsidiaries of the Company (See item 1, "Subsidiaries") 23 Consent of KPMG LLP 27 Financial Data Schedule - -------------- (1) Incorporated by reference to exhibit 3.1 included in the Company's Registration Statement on Form S-4 (333-58503) declared effective July 16, 1998 (2) Incorporated by reference to Exhibit 3(b) included in the Company's Form 10-K for the fiscal year ended December 31, 1999 (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 exhibits 10(c), 10(d) and 10(f) included in the Company's Form 10-K for the fiscal year ended December 31, 1996. (5) Incorporated by reference to Exhibit 10.2 of the Company's Registration Statement on Form S-4 (No. 333-13595) declared effective on October 16, 1996. (6) Incorporated by reference to Exhibits 10(I), 10(k) and 10(h), included in the Company's Form 10-K for the fiscal year ended December 31, 1995. (7) Incorporated by reference to Exhibit 99.1 of the Company's S-8 Registration Statement (No. 33-94648). 59
60 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 29, 2000. GLACIER BANCORP, INC. By: /s/ Michael J. Blodnick --------------------------------------- Michael J. Blodnick President/CEO PURSUANT to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 29, 2000, by the following persons in the capacities indicated. /s/Michael J. Blodnick President and Chief Executive Officer - ---------------------------------- (Principal Executive Officer) Michael J. Blodnick /s/James H. Strosahl Executive Vice President and CFO - ---------------------------------- (Principal Financial/Accounting Officer) James H. Strosahl Majority of the Board of Directors /s/ John S. MacMillan Chairman - ---------------------------------- John S. MacMillan /s/ William L. Bouchee Director - ---------------------------------- William L. Bouchee /s/ Allen J. 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/ F. Charles Mercord Director - ---------------------------------- F. Charles Mercord /s/ Everit A. Sliter Director - ---------------------------------- Everit A. Sliter /s/ Harold A. Tutvedt Director - ---------------------------------- Harold A. Tutvedt xxx 60
1 EXHIBIT 23 Independent Accountants' Consent The Board of Directors Glacier Bancorp, Inc.: We consent to incorporation by reference in the registration statement on Form S-8 (No. 33-94648) of our report dated January 28, 2000 relating to the consolidated statements of financial condition of Glacier Bancorp, Inc. and subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1999, which report appears in the December 31, 1999 annual report on Form 10-K of Glacier Bancorp, Inc. /s/ KPMG LLP - ----------------------------------- Billings, Montana March 27, 2000
9 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 46,277 1,435 65 0 191,385 0 0 596,346 6,068 884,117 576,282 194,738 7,758 26,526 0 0 96 78,813 884,117 47,092 11,829 0 58,921 14,574 25,592 33,329 1,506 6 24,077 18,810 0 0 0 12,179 1.28 1.27 4.53 1,383 265 0 0 5,133 788 217 6,068 6,068 0 0