1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20522 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 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: 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 16, 2001, there were issued and outstanding 16,061,104 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 16, 2001, was $225,819,122. DOCUMENT INCORPORATED BY REFERENCE Portions of the 2001 Annual Meeting Proxy Statement dated March 27, 2001 are incorporated by reference into Part III of this form 10-K.
2 GLACIER BANCORP, INC. FORM 10-K ANNUAL REPORT For the year ended December 31, 2000 TABLE OF CONTENTS Page ---- PART I. Item 1. Business 3 Item 2. Properties 18 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 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 21 Item 7a. Quantitative and Qualitative Disclosure about Market Risk 28 Item 8. Financial Statements and Supplementary Data 29 PART III. Item 9. Changes in and Disagreements with Accountants in Accounting and Financial Disclosures 60 Item 10. Directors and Executive Officers of the Registrant 60 Item 11. Executive Compensation 60 Item 12. Security Ownership of Certain Beneficial Owners and Management 60 Item 13. Certain relationships and Related Transactions 60 PART IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 60 2
3 PART I. ITEM 1. BUSINESS GENERAL Glacier Bancorp, Inc. headquartered in 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, 2000, 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"), Big Sky Western Bank ("Big Sky"), Mountain West Bank in Idaho ("Mountain West"), and Community First, Inc. ("CFI"). The Company owns approximately 98%, and 94% , respectively, of the outstanding stock of Eureka and Whitefish, and 100% of Glacier, First Security, Valley, Big Sky, Mountain West, and CFI. 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. 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. Mountain West was acquired on February 4, 2000 through an exchange of stock with Mountain West shareholders. The pooling of interest accounting method was also used for this merger transaction. The Company formed Glacier Capital Trust I (Glacier Trust) as a financing subsidiary on December 18, 2000. On January 25, 2001, Glacier Trust offered 1,400,000 preferred securities at $25 per preferred security. The purchase of the securities entitles the shareholder to receive cumulative cash distributions at an annual interest rate of 9.40% from payments on the junior subordinated debentures of Glacier Bancorp, Inc. The subordinated debentures will mature and the preferred securities must be redeemed by February 1, 2031. In exchange for the Company's capital contribution, the Company will own all of the outstanding common securities of the trust. RECENT ACQUISITIONS On September 14, 2000 the Company announced the acquisition of seven branches of Wells Fargo & Company and First Security Corporation subsidiary banks located in Idaho and Utah, the respective transactions were completed by March 15, 2001. In total, as of the closing, the branches had approximately $187,000,000 in deposits and $38,000,000 in loans. The purchase price of approximately $18,500,000 was based on the total deposits, cash-equivalent assets and loans at the branches immediately prior to the respective closing. The locations become branch offices of Mountain West Bank of Coeur d'Alene. On September 20, 2000, the Company entered into a merger agreement to acquire WesterFed Financial Corporation (WesterFed). The merger was closed on February 28, 2001. Under the terms of the agreement, the Company issued 4,530,462 shares and paid $37,274,000 cash for total consideration of $96,669,000, based on a $13.11 per share price of the Company's common stock. The merger is being accounted for using the purchase method of accounting. Accordingly, the assets and liabilities of WesterFed are recorded by the Company at their respective fair values at the time of the completion of the merger. The excess of the Company's purchase price over the net fair value of the assets acquired and liabilities assumed, including identifiable intangible assets, were recorded as goodwill and will be amortized over a useful life of 20 years. 3
4 The Federal Deposit Insurance Corporation ("FDIC") insures each subsidiary bank's deposit accounts. Each subsidiary bank is a member of the Federal Home Loan Bank of Seattle ("FHLB"), which is one of twelve banks which comprise the Federal Home Loan Bank System and all subsidiaries, except Mountain West are members of the Federal Reserve Bank of Minneapolis. ("FRB") BANK LOCATIONS Glacier's main office is located at 49 Commons Loop, Kalispell, MT 59901 and its telephone number is (406) 756-4200. 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) 297-2521, First Security's address is 1704 Dearborn, Missoula, MT 599801 (406) 728-3115, Valley's address is 3030 North Montana Avenue, Helena, MT 59601 (406) 443-7440, Big Sky's address is 47995 Gallatin Road, Big Sky, MT, 59716 (406) 995-2321, and Mountain West's address is 125 Ironwood Drive, Coeur d' Alene, Idaho 83816 (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. Through its subsidiary CFI, the Company provides full service brokerage services through Raymond James Financial Services, an unrelated brokerage firm. The following abbreviated organizational chart illustrates the various existing parent/subsidiary relationships at December 31, 2000: __________________________ | 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 | | | Mountain West Bank | | Community First, Inc. | | Western Bank | | of Helena | | | of Coeur d'Alene | | (Brokerage services) | | (Commercial bank) | | (Commercial bank) | | | (Commercial bank) | | | |___________________| |_____________________| | |____________________| |_______________________| | | __________________________ | Glacier Bancorp, Inc. | | Trust 1 | | (Parent Holding Company) | |__________________________| 4
5 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. Operating Segments information (Dollars in thousands) Glacier Whitefish ---------------------------------------------------------------------------- 2000 1999 1998 2000 1999 1998 ---------------------------------------------------------------------------- Condensed Income Statements Net interest income $ 16,361 15,266 14,572 2,406 2,044 1,820 Noninterest income 5,913 5,539 5,723 704 675 686 ---------------------------------------------------------------------------- Total revenues 22,274 20,805 20,295 3,110 2,719 2,506 Provision for loan losses 460 470 670 225 66 78 Goodwill and merger expense 317 78 -- -- -- -- Other noninterest expense 11,440 10,750 10,523 1,522 1,502 1,347 Minority interest -- -- -- -- -- -- ---------------------------------------------------------------------------- Pretax earnings 10,057 9,507 9,102 1,363 1,151 1,081 Income tax expense (benefit) 3,456 3,303 3,238 423 348 343 ---------------------------------------------------------------------------- Net income 6,601 6,204 5,864 940 803 738 ============================================================================ Average Balance Sheet Data Total assets $464,565 407,950 366,522 54,997 45,827 41,328 Total loans 285,398 270,650 275,765 39,106 29,443 23,281 Total deposits 279,973 214,552 188,565 38,813 32,980 32,587 Stockholders' equity 38,547 37,893 37,519 4,851 4,734 4,428 End of Year Balance Sheet Data Total assets $469,351 460,257 370,686 56,563 52,203 42,643 Net loans 282,467 272,060 272,399 40,146 35,485 22,022 Total deposits 288,556 276,880 201,211 41,475 34,261 34,179 Performance Ratios Return on average assets 1.42% 1.52% 1.60% 1.71% 1.75% 1.79% Return on average equity 17.12% 16.37% 15.63% 19.38% 16.96% 16.67% Efficiency ratio 51.36% 51.67% 51.85% 48.94% 55.24% 53.75% Regulatory Capital Ratios & Other Tier I risk-based capital ratio 13.45% 13.58% 18.05% 11.97% 13.49% 19.22% Tier II risk-based capital ratio 14.38% 14.48% 18.98% 13.18% 14.53% 20.47% Leverage capital ratio 8.08% 7.58% 10.56% 8.90% 9.86% 11.11% Full time equivalent employees 152 167 161 16 15 14 Locations 13 15 13 1 1 1 ---------------------------------------------------------------------------- Eureka First Security -------------------------------------------------------------------------- 2000 1999 1998 2000 1999 1998 -------------------------------------------------------------------------- Condensed Income Statements Net interest income 1,335 1,290 1,247 9,324 8,804 7,784 Noninterest income 332 313 372 2,000 2,260 2,801 -------------------------------------------------------------------------- Total revenues 1,667 1,603 1,619 11,324 11,064 10,585 Provision for loan losses 24 24 12 360 600 645 Goodwill and merger expense -- -- -- -- -- -- Other noninterest expense 933 986 971 4,771 4,567 4,151 Minority interest -- -- -- -- -- -- -------------------------------------------------------------------------- Pretax earnings 710 593 636 6,193 5,897 5,789 Income tax expense (benefit) 199 191 217 2,251 2,132 2,138 -------------------------------------------------------------------------- Net income 511 402 419 3,942 3,765 3,651 ========================================================================== Average Balance Sheet Data Total assets 29,307 26,407 25,122 199,697 177,690 161,281 Total loans 19,485 17,589 16,806 171,462 146,958 130,595 Total deposits 19,223 17,998 17,527 146,439 136,968 131,273 Stockholders' equity 3,151 3,279 3,292 17,164 15,750 14,305 End of Year Balance Sheet Data Total assets 30,562 28,879 24,471 214,231 193,548 164,546 Net loans 20,291 18,178 16,322 180,041 161,781 134,646 Total deposits 19,285 18,514 17,797 164,168 143,645 139,348 Performance Ratios Return on average assets 1.74% 1.52% 1.67% 1.97% 2.12% 2.26% Return on average equity 16.22% 12.26% 12.73% 22.97% 23.90% 25.52% Efficiency ratio 55.97% 61.51% 59.98% 42.13% 41.28% 39.22% Regulatory Capital Ratios & Other Tier I risk-based capital ratio 16.42% 19.45% 22.47% 9.98% 9.73% 10.26% Tier II risk-based capital ratio 17.67% 20.70% 23.73% 11.15% 10.97% 11.46% Leverage capital ratio 10.84% 12.03% 13.32% 8.64% 8.62% 8.53% Full time equivalent employees 10 11 11 73 76 73 Locations 1 1 1 4 3 3 -------------------------------------------------------------------------- Valley Big Sky ----------------------------------------------------------------------------------- 2000 1999 1998 2000 1999 1998 ----------------------------------------------------------------------------------- Condensed Income Statements Net interest income $ 4,171 3,614 3,312 2,721 2,077 1,251 Noninterest income 1,411 1,494 1,553 750 881 743 ----------------------------------------------------------------------------------- Total revenues 5,582 5,108 4,865 3,471 2,958 1,994 Provision for loan losses 205 155 85 180 191 42 Goodwill and merger expense -- -- -- -- -- -- Other noninterest expense 3,498 2,977 3,010 2,527 2,096 1,680 Minority interest -- -- -- -- -- -- ----------------------------------------------------------------------------------- Pretax earnings 1,879 1,976 1,770 764 671 272 Income tax expense (benefit) 657 731 659 258 231 103 ----------------------------------------------------------------------------------- Net income 1,222 1,245 1,111 506 440 169 =================================================================================== Average Balance Sheet Data Total assets $ 86,305 $ 77,370 69,335 70,806 53,392 36,110 Total loans 62,813 53,622 48,204 50,491 34,414 20,796 Total deposits 69,864 61,515 57,205 46,981 36,287 28,183 Stockholders' equity 5,254 6,940 6,323 5,584 5,197 2,692 End of Year Balance Sheet Data Total assets $ 87,791 $ 82,587 69,924 77,111 66,255 39,376 Net loans 62,645 58,924 48,860 57,050 43,850 23,959 Total deposits 76,508 65,095 57,807 49,616 41,034 31,385 Performance Ratios Return on average assets 1.42% 1.61% 1.60% 0.71% 0.82% 0.47% Return on average equity 23.26% 17.94% 17.57% 9.06% 8.47% 6.28% Efficiency ratio 62.67% 58.28% 61.87% 72.80% 70.86% 84.25% Regulatory Capital Ratios & Other Tier I risk-based capital ratio 12.41% 12.59% 13.49% 9.68% 11.35% 10.40% Tier II risk-based capital ratio 13.55% 13.57% 14.55% 10.81% 12.58% 11.95% Leverage capital ratio 8.66% 8.95% 9.34% 8.28% 9.15% 7.30% Full time equivalent employees 34 42 43 30 24 24 Locations 3 3 3 3 3 2 ----------------------------------------------------------------------------------- Mountain West Other ---------------------------------------------------------------------------------- 2000 1999 1998 2000 1999 1998 ---------------------------------------------------------------------------------- Condensed Income Statements Net interest income 5,037 3,755 3,187 125 234 185 Noninterest income 2,206 1,745 1,637 (22) (98) 81 ---------------------------------------------------------------------------------- Total revenues 7,243 5,500 4,824 103 136 266 Provision for loan losses 410 217 203 -- -- -- Goodwill and merger expense -- 78 -- 242 361 931 Other noninterest expense 5,153 4,941 3,885 863 709 527 Minority interest -- -- -- 61 51 145 ---------------------------------------------------------------------------------- Pretax earnings 1,680 264 736 (1,063) (985) (1,337) Income tax expense (benefit) 657 91 276 (321) (305) (300) ---------------------------------------------------------------------------------- Net income 1,023 173 460 (742) (680) (1,037) ================================================================================== Average Balance Sheet Data Total assets 106,445 81,011 74,001 (4,327) 2,675 (1,845) Total loans 78,602 56,865 48,231 -- -- -- Total deposits 77,334 71,060 63,409 (3,497) (5,658) 1,972 Stockholders' equity 7,650 6,555 6,142 6,267 4,519 4,197 End of Year Balance Sheet Data Total assets 126,518 89,884 80,867 (5,415) 388 (5,711) Net loans 90,922 61,930 52,980 -- -- -- Total deposits 86,632 67,824 70,659 (5,670) (3,147) (5,883) Performance Ratios Return on average assets 0.96% 0.21% 0.62% Return on average equity 13.37% 2.65% 7.49% Efficiency ratio 71.14% 89.84% 80.53% Regulatory Capital Ratios & Other Tier I risk-based capital ratio 11.12% 10.40% 12.59% Tier II risk-based capital ratio 12.19% 11.44% 11.61% Leverage capital ratio 8.11% 7.60% 7.86% Full time equivalent employees 74 71 61 34 28 25 Locations 5 5 4 ---------------------------------------------------------------------------------- Consolidated ---------------------------------------- 2000 1999 1998 ---------------------------------------- Condensed Income Statements Net interest income 41,480 37,084 33,358 Noninterest income 13,294 12,809 13,596 ---------------------------------------- Total revenues 54,774 49,893 46,954 Provision for loan losses 1,864 1,723 1,735 Goodwill and merger expense 559 517 931 Other noninterest expense 30,707 28,528 26,094 Minority interest 61 51 145 ---------------------------------------- Pretax earnings 21,583 19,074 18,049 Income tax expense (benefit) 7,580 6,722 6,674 ---------------------------------------- Net income 14,003 12,352 11,375 ======================================== Average Balance Sheet Data Total assets 1,007,795 872,322 771,854 Total loans 707,357 609,541 563,678 Total deposits 675,130 565,702 520,721 Stockholders' equity 88,468 84,867 78,898 End of Year Balance Sheet Data Total assets 1,056,712 974,001 786,802 Net loans 733,561 652,208 571,188 Total deposits 720,570 644,106 546,503 Performance Ratios Return on average assets 1.39% 1.41% 1.47% Return on average equity 15.83% 14.60% 14.43% Efficiency ratio 57.20% 58.30% 57.90% Regulatory Capital Ratios & Other Tier I risk-based capital ratio 12.31% 13.23% 15.50% Tier II risk-based capital ratio 13.36% 14.30% 16.59% Leverage capital ratio 8.72% 9.59% 10.41% Full time equivalent employees 423 434 412 Locations 30 31 27 ---------------------------------------- 5
6 Glacier Bank Total assets increased $9 million, or 2 percent, over the prior year-end. Total net loans ended the year at $282 million. Real estate loans declined $11 million and commercial and consumer loans increased $20 million and $1 million, respectively. Non-performing loans were .06 percent of total loans. Total investments increased by $632 thousand. Total deposits increased $12 million, or 4 percent. Net income increased $397 thousand, or 6 percent, over the prior year. Net interest income increased $1 million, or 7 percent over 1999. Non-interest income increased by $374 thousand, the majority of the increase is from the sale of two small branches in 2000. Other fee income increased over the prior year. The efficiency ratio of 51.36 percent is an improvement from the 1999 ratio of 51.67 and 1998 ratio of 51.85, each of which are below the peer group average. Glacier Bank operates from 13 locations. Glacier Bank of Whitefish Total assets increased $4 million, or 8 percent, over the prior year-end. Net loans increased $5 million, or 13 percent, from December 31, 1999. All loan classifications increased with real estate loans up $3 million, commercial loans up $1 million and consumer loans up $1 million. Non-performing loans as a percentage of loans was .29 percent and the allowance for loan losses was at 4.3 times non-performing loans. Total deposits increased $7 million, or 21 percent. Net income increased $137 thousand, or 17 percent, over 1999. Net interest income increased $362 thousand, or 18 percent, reflecting the significant loan growth. Non-interest income and other fee income increased over the prior year. Non-interest expense increased from prior year. The efficiency ratio of 48.94 percent is an improvement from the 1999 ratio of 55.24 and 1998 ratio of 53.75. Glacier Bank of Eureka Total assets increased $2 million, or 6 percent, over the prior year end. Investment securities increased $543 thousand, or 7 percent. Net loans increased $2 million, or 12 percent, from December 31, 1999. Real estate loans declined $272 thousand and commercial and consumer loans increased $826 thousand and $2 million, respectively. Non-performing loans as a percentage of loans were .45 percent, and the allowance for loan losses was at 3.3 times non-performing loans. Total deposits increased $771 thousand, or 4 percent. Net income increased $109 thousand, or 27 percent, from 1999. Net interest income increased $45 thousand, or 3 percent, reflecting the asset growth. Non-interest income increased $19 thousand, or 6 percent. Non-interest expense decreased from the prior year. The efficiency ratio of 55.97 percent is an improvement from the 1999 ratio of 61.51 and 1998 ratio of 59.98. First Security Bank of Missoula Total assets increased $21 million, or 11 percent, over the prior year-end. Net loans increased $18 million, or 11 percent, from December 31, 1999. Real estate loans declined $532 thousand, and commercial and consumer loans increased $12 million and $7 million, respectively. Non-performing loans as a percentage of loans was .50 percent and the allowance for loan losses was at 2.4 times non-performing loans. Total deposits increased $21 million, or 14 percent, with borrowed funds used to support the additional asset growth. Net income increased $177 thousand, or 5 percent from 1999. First Security is a high performing bank with return on average assets of 1.97 percent, and return on average equity of 22.97 percent in 2000. Net interest income increased $520 thousand, or 6 percent, reflecting the asset growth. Non-interest income decreased $260 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 transaction activity. The efficiency ratio increased from 41.28 in 1999 to 42.13 in 2000 with both years higher than the 39.22 in 1998. 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, 2000 increased $5 million, or 6 percent, over the prior year end. Net loans increased $4 million, or 6 percent, from December 31, 1999. Real estate loans declined $1 million, and commercial and consumer loans increased $3 million and $2 million, respectively. Non-performing loans as a percentage of loans was .50 percent, and the allowance for loan losses was at 2.2 times non-performing loans. Total deposits increased $11 million, or 18 percent. Net income decreased $23 thousand, or 2 percent, from 1999. Net interest income increased $557 thousand, or 15 percent, reflecting the asset growth. Non-interest income decreased $83 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 $521 thousand, which includes $260 thousand from a one-time data processing contract cancellation fee. The efficiency ratio increased from 58.28 in 1999 to 62.67 in 2000 which was also higher than the 61.87 in 1998. Big Sky Western Bank Big Sky Western Bank was acquired by the Company in January 1999. Total assets at December 31, 2000 increased $11 million, or 16 percent, over the prior year-end. Net loans increased $13 million, or 30 percent, from December 31, 1999, with the remaining asset growth in investment securities. Real estate loans decreased $3 million, and commercial and consumer loans increased $14 and $2 million, respectively. Non-performing loans as a percentage of loans was .28 percent and the allowance for loan losses was at 4.1 times non-performing loans. Total deposits increased $9 million, or 21 percent, with borrowed funds used to support the additional asset growth. Net income increased $66 thousand, or 15 percent, from 1999. Net interest income increased $644 thousand, or 31 percent, reflecting the asset growth. Non-interest income decreased $131 thousand, and non-interest expense increased $431 6
7 thousand, resulting from increased activity levels. The efficiency ratio increased from 70.86 in 1999 to 72.80 in 2000 which was lower than the 84.25 in 1998. The efficiency ratios have improved significantly from 1998 with the increased net interest income. Mountain West Bank Total assets increased $37 million, or 41 percent, over the prior year-end. Total net loans increased $29 million, or 47 percent, over the prior year end. Real estate loans increased $18 million and commercial and consumer loans increased $10 million and $416 thousand, respectively. Non-performing loans were .05 percent of total loans and the allowance for loan losses was at 18.8 times non-performing loans. Total investments increased by $2 million, or 12 percent. Total deposits increased $19 million, or 28 percent. Net income increased $850 thousand, or 491 percent, over the prior year. Net interest income increased $1.3 million, or 34 percent over 1999. Non-interest income increased by $461 thousand. The efficiency ratio of 71.14 percent is an improvement from the 1999 ratio of 89.84 and 1998 ratio of 80.53. 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 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 a branch office in Kalispell, with branches in 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), Billings (the county seat of Yellowstone County), and Butte (the county seat of Silver Bow County). First Security's main office and three 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 five offices in 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 17% of the deposits in Silver Bow County. First Security has approximately 14% of the total deposits in Missoula County. Valley has approximately 13% of Lewis and Clark County's total deposits, and Big Sky has approximately 7% 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 (Dollars in Thousands) For the year ended 12-31-00 For the year ended 12-31-99 -------------------------------------- -------------------------------------- Interest Average Interest Average Average and Yield/ Average and Yield/ ASSETS Balance Dividends Rate Balance Dividends Rate ----------- ----------- ----------- ----------- ----------- ----------- Real Estate Loans $ 230,661 19,557 8.48% $ 226,246 17,875 7.90% Commercial Loans 312,434 28,784 9.21% 246,810 21,499 8.71% Consumer and Other Loans 164,262 14,856 9.04% 136,484 12,367 9.06% ----------- ----------- ----------- ----------- Total Loans 707,357 63,197 8.93% 609,540 51,741 8.49% Investment Securities 236,287 15,640 6.62% 202,016 12,978 6.42% ----------- ----------- ----------- ----------- Total Earning Assets 943,644 78,837 8.35% 811,556 64,719 7.97% ----------- ----------- ----------- Non-Earning Assets 64,151 60,766 ----------- ----------- TOTAL ASSETS $ 1,007,795 $ 872,322 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY NOW Accounts $ 96,737 1,068 1.10% $ 91,380 1,064 1.16% Savings Accounts 44,996 806 1.79% 47,272 843 1.78% Money Market Accounts 167,533 7,447 4.45% 134,364 5,304 3.95% Certificates of Deposit 230,024 13,353 5.81% 174,368 9,283 5.32% FHLB Advances 211,217 13,454 6.37% 173,289 9,460 5.46% Repurchase Agreements and Other Borrowed Funds 31,799 1,229 3.86% 31,362 1,681 5.36% ----------- ----------- ----------- ----------- Total Interest Bearing Liabilities 782,306 37,357 4.78% 652,035 27,635 4.24% ----------- ----------- Non-interest Bearing Deposits 135,840 118,318 Other Liabilities 1,181 17,102 ----------- ----------- Total Liabilities 919,327 787,455 ----------- ----------- Common Stock 110 99 Paid-In Capital 95,554 76,696 Retained Earnings (2,250) 10,212 Accumulated Other Comprehensive Earnings (Loss) (4,946) (2,140) ----------- ----------- Total Stockholders' Equity 88,468 84,867 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,007,795 $ 872,322 =========== =========== NET INTEREST INCOME $ 41,480 $ 37,084 =========== =========== NET INTEREST SPREAD 3.57% 3.73% NET INTEREST MARGIN ON AVERAGE EARNING ASSETS(1) 4.40% 4.57% RETURN ON AVERAGE ASSETS(2) 1.39% 1.41% RETURN ON AVERAGE EQUITY(3) 15.83% 14.60% For the year ended 12-31-98 ------------------------------------------ Interest Average Average and Yield/ ASSETS Balance Dividends Rate ----------- ----------- ----------- Real Estate Loans $ 237,034 19,404 8.19% Commercial Loans 202,119 18,250 9.03% Consumer and Other Loans 124,525 11,907 9.56% ------------ ----------- Total Loans 563,678 49,561 8.79% Investment Securities 153,225 9,267 6.05% ------------ ----------- Total Earning Assets 716,903 58,828 8.21% ----------- Non-Earning Assets 54,945 ------------ TOTAL ASSETS $ 771,848 ============ LIABILITIES AND STOCKHOLDERS' EQUITY NOW Accounts $ 85,965 1,428 1.66% Savings Accounts 48,438 1,065 2.20% Money Market Accounts 118,215 5,175 4.38% Certificates of Deposit 155,760 8,899 5.71% FHLB Advances 140,877 7,939 5.64% Repurchase Agreements and Other Borrowed Funds 20,023 964 4.81% ----------- ----------- Total Interest Bearing Liabilities 569,278 25,470 4.47% ----------- Non-interest Bearing Deposits 112,343 Other Liabilities 11,337 ------------ Total Liabilities 692,958 ------------ Common Stock 81 Paid-In Capital 54,524 Retained Earnings 23,102 Accumulated Other Comprehensive Earnings (Loss) 1,183 ------------ Total Stockholders' Equity 78,890 ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 771,848 =========== NET INTEREST INCOME $ 33,358 =========== NET INTEREST SPREAD 3.74% NET INTEREST MARGIN ON AVERAGE EARNING ASSETS (1) 4.65% RETURN ON AVERAGE ASSETS (2) 1.47% RETURN ON AVERAGE EQUITY (3) 14.43% (1) Without tax effect on non-taxable securities income (2) Net income divided by average total assets (3) Net income divided by average equity 8
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) 2000 vs. 1999 1999 vs. 1998 ------------------------------------------------------------------------- Increase (Decrease) due to: Increase (Decrease) due to: ------------------------------------------------------------------------- INTEREST INCOME Volume Rate Net Volume Rate Net ------------------------------------------------------------------------- Real Estate Loans $ 349 $ 1,333 $ 1,682 $ (883) $ (646) $ (1,529) Commercial Loans 5,716 1,569 7,285 4,035 (786) 3,249 Consumer and Other Loans 2,517 (28) 2,489 1,143 (683) 460 Investment Securities 2,202 460 2,662 2,951 760 3,711 ------------------------------------------------------------------------- Total Interest Income 10,784 3,334 14,118 7,246 (1,355) 5,891 ------------------------------------------------------------------------- NOW Accounts 62 (58) 4 90 (454) (364) Savings Accounts (41) 4 (37) (26) (196) (222) Money Market Accounts 1,309 834 2,143 707 (578) 129 Certificates of Deposit 2,963 1,107 4,070 1,064 (680) 384 FHLB Advances 2,071 1,923 3,994 1,826 (305) 1,521 Other Borrowings and Repurchase Agreements 23 (475) (452) 546 171 717 ------------------------------------------------------------------------- Total Interest Expense 6,387 3,335 9,722 4,207 (2,042) 2,165 ------------------------------------------------------------------------- NET INTEREST INCOME $ 4,397 $ (1) $ 4,396 $ 3,039 $ 687 $ 3,726 ========================================================================= Net interest income increased $4.4 million in 2000 over 1999. The increase was due to increases in volumes. 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 an insignificant amount of trading in the Company's investment portfolios during 2000. 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 2000, 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 34.69% in calculating the tax equivalent yield. Approximately $62 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, 2000. 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 12/31/00 12/31/99 12/31/98 ---------------------------------------------------------------------------------- TYPE OF LOAN - ----------------------------------------------------------------------------------------------------------------------------------- Amount Percent Amount Percent Amount Percent ---------------------------------------------------------------------------------- REAL ESTATE LOANS: Residential first mortgage loans $ 224,631 30.62% $ 219,482 33.65% $ 222,018 38.87% Loans held for sale $ 7,058 0.96% $ 5,896 0.90% $ 16,474 2.88% ---------------------------------------------------------------------------------- Total $ 231,689 31.58% $ 225,378 34.55% $ 238,492 41.75% - ----------------------------------------------------------------------------------------------------------------------------------- COMMERCIAL LOANS: Real estate $ 198,414 27.05% $ 154,155 23.64% $ 118,434 20.73% Other commercial loans $ 142,519 19.43% $ 125,462 19.24% $ 97,463 17.06% ---------------------------------------------------------------------------------- Total $ 340,933 46.48% $ 279,617 42.88% $ 215,897 37.79% - ----------------------------------------------------------------------------------------------------------------------------------- INSTALLMENT AND OTHER LOANS: Consumer loans $ 86,336 11.77% $ 87,967 13.49% $ 69,726 12.21% Home equity loans(1) $ 83,539 11.39% $ 66,566 10.21% $ 53,325 9.34% Outstanding balances on credit cards -- -- -- -- $ 18 -- ---------------------------------------------------------------------------------- Total $ 169,875 23.16% $ 154,533 23.70% $ 123,069 21.55% - ----------------------------------------------------------------------------------------------------------------------------------- Net deferred loan fees, premiums and discounts(2) $( 1,137) -0.16% $( 598) -0.10% $( 602) -0.10% Allowance for Losses $( 7,799) -1.06% $( 6,722) -1.03% $( 5,668) -0.99% ---------------------------------------------------------------------------------- NET LOANS $ 733,561 100.00% $ 652,208 100.00% $ 571,188 100.00% - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) At At 12/31/97 12/31/96 ---------------------------------------------------- TYPE OF LOAN - --------------------------------------------------------------------------------------------------- Amount Percent Amount Percent ---------------------------------------------------- REAL ESTATE LOANS: Residential first mortgage loans $ 237,906 45.23% $ 233,948 48.87% Loans held for sale $ 9,716 1.85% $ 6,672 1.39% ---------------------------------------------------- Total $ 247,622 47.08% $ 240,620 50.26% - --------------------------------------------------------------------------------------------------- COMMERCIAL LOANS: Real estate $ 73,212 13.92% $ 62,479 13.05% Other commercial loans $ 85,693 16.29% $ 67,795 14.16% ---------------------------------------------------- Total $ 158,905 30.21% $ 130,274 27.21% - --------------------------------------------------------------------------------------------------- INSTALLMENT AND OTHER LOANS: Consumer loans $ 120,158 22.84% $ 108,183 22.60% Home equity loans(1) -- -- -- -- Outstanding balances on credit cards $ 3,951 0.75% $ 3,725 0.78% ---------------------------------------------------- Total $ 124,109 23.59% $ 111,908 23.38% - --------------------------------------------------------------------------------------------------- Net deferred loan fees, premiums and discounts(2) -- -- -- -- Allowance for Losses $( 4,654) -0.88% $( 4,106) -0.85% ---------------------------------------------------- NET LOANS $ 525,982 100.00% $ 478,696 100.00% - --------------------------------------------------------------------------------------------------- (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, 2000 was as follows: (Dollars in Thousands) Real Estate Commercial Consumer Totals ----------- ---------- -------- -------- Variable Rate Maturing or Repricing in: One year or less $ 69,675 114,933 38,062 222,670 One to five years 36,719 78,208 2,122 117,049 Thereafter -- 2,334 2 2,336 Fixed Rate Maturing or Repricing in: One year or less 32,377 54,382 43,356 130,115 One to five years 59,166 54,474 73,545 187,185 Thereafter 33,752 36,602 12,788 83,142 -------- -------- -------- -------- Totals $231,689 340,933 169,875 742,497 ======== ======== ======== ======== 10
11 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 24% of the Banks' consumer portfolio consists of variable interest rate loans. The Banks intend to continue lending for such loans because of their short-term nature, generally between three months and five years, with an average term of approximately two years. Moreover, interest rates on consumer loans are generally higher than on mortgage loans. The Banks also originate second mortgage and home equity loans, especially to its existing customers in instances where the first and second mortgage loans are less than 80% of the current appraised value of the property. COMMERCIAL 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 $15,000 to $250,000, and unsecured limits range from $2,000 to $100,000. An officers' loan committee, consisting of senior lenders and members of senior management, has approval authority up to $500,000. Loans between $500,000 and $2,000,000 go to the individual Bank's Board of Directors for approval. Loans over $2,000,000 go to the Company's Board of Directors for approval. 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, 2000 are approximately $8.4 million for Glacier, $3.6 million for First Security, $1.5 million for Valley, $1.2 million for Big Sky, $2.0 million for Mountain West, $1 million for Whitefish, and $.7 million for Eureka. Each of the Banks is in compliance with these limits. 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, 2000, loans serviced for others aggregated approximately $147 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 11
12 ("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: NONPERFORMING ASSETS (Dollars in Thousands) ------------------------------------------------------------ At At At At At 12/31/00 12/31/99 12/31/98 12/31/97 12/31/96 -------- -------- -------- -------- -------- NON-ACCRUAL LOANS: Mortgage loans $ 687 $ 613 $ 438 $ 176 $ 157 Commercial loans 442 776 1,068 288 262 Consumer loans 25 74 64 156 45 ---------------------------------------------------------- TOTAL 1,154 1,463 1,570 620 464 ---------------------------------------------------------- ACCRUING LOANS 90 DAYS OR MORE OVERDUE: Mortgage loans 576 62 632 416 290 Commercial loans 91 99 385 268 222 Consumer loans 83 104 124 251 431 ---------------------------------------------------------- TOTAL 750 265 1,141 935 943 ---------------------------------------------------------- Troubled debt restructuring: -- -- 205 249 -- Real estate and other assets owned, net 291 550 151 228 506 TOTAL NON-PERFORMING LOANS, TROUBLED DEBT RESTRUCTURINGS, AND REAL ESTATE AND OTHER ---------------------------------------------------------- ASSETS OWNED, NET $2,195 $2,278 $3,067 $2,032 $1,913 ---------------------------------------------------------- AS A PERCENTAGE OF TOTAL ASSETS 0.21% 0.23% 0.39% 0.27% 0.28% ---------------------------------------------------------- Interest Income(1) $ 101 $ 132 $ 103 $ 84 $ 94 ---------------------------------------------------------- (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. Interest income recognized on non-performing loans for each of the above periods was not significant. 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. 12
13 The following table illustrates the loan loss experience: (Dollars in Thousands) Years ended December 31, ------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------- ------- ------- ------- ------- BALANCE AT BEGINNING OF PERIOD $ 6,722 5,668 4,654 4,106 3,803 CHARGE OFFS: Residential real estate (98) (44) (50) -- (122) Commercial loans (450) (409) (514) (162) (229) Consumer loans (424) (433) (517) (617) (540) ------- ------- ------- ------- ------- Total charge offs $ (972) (886) (1,081) (779) (891) ------- ------- ------- ------- ------- RECOVERIES: Residential real estate 5 1 -- -- 1 Commercial loans 43 110 250 155 69 Consumer loans 137 106 110 120 107 ------- ------- ------- ------- ------- Total recoveries $ 185 217 360 275 177 ------- ------- ------- ------- ------- CHARGEOFFS, NET OF RECOVERIES (787) (669) (721) (504) (714) PROVISION 1,864 1,723 1,735 1,052 1,017 ------- ------- ------- ------- ------- BALANCE AT END OF PERIOD $ 7,799 6,722 5,668 4,654 4,106 ======= ======= ======= ======= ======= RATIO OF NET CHARGE OFFS TO AVERAGE LOANS OUTSTANDING DURING THE PERIOD 0.11% 0.11% 0.13% 0.10% 0.16% ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES 2000 1999 1998 ---------------------- ---------------------- ---------------------- Percent Percent Percent of loans in of loans in of loans in (Dollars in thousands) Allowance category Allowance category Allowance category - ---------------------- --------- ----------- --------- ----------- --------- ----------- Residential first mortgage and loans held for sale $1,227 31.2% 1,174 34.2% 1,221 41.3% Commercial real estate 2,300 26.7% 1,526 23.4% 1,095 20.5% Other commercial 2,586 19.2% 2,466 19.0% 1,992 16.9% Consumer 1,686 22.9% 1,556 23.4% 1,360 21.3% ------ ------ ------ ------ ------ ------ Totals $7,799 100.0% 6,722 100.0% 5,668 100.0% ====== ====== ====== ====== ====== ====== 1997 1996 ---------------------- ---------------------- Percent Percent of loans in of loans in (Dollars in thousands) Allowance category Allowance category - ---------------------- --------- ----------- --------- ----------- Residential first mortgage and loans held for sale 1,263 46.7% 1,227 49.9% Commercial real estate 549 13.8% 469 12.9% Other commercial 1,345 16.1% 1,064 14.0% Consumer 1,497 23.4% 1,346 23.2% ------ ------ ------ ----- Totals 4,654 100.0% 4,106 100.0% ====== ====== ====== ===== SOURCES OF FUNDS GENERAL Deposits are the most important source of the Banks' funds for lending and other business purposes. In addition, the Banks derive funds from loan repayments, advances from the FHLB of Seattle, repurchase agreements, and loan sales. Loan repayments are a relatively stable source of funds, while interest bearing deposit inflows and outflows are significantly influenced by general interest rate levels and money market conditions. Borrowings and advances may be used on a short-term basis to compensate for reductions in normal sources of funds such as deposit inflows at less than projected levels. They also may be used on a long-term basis to support expanded activities and to match maturities of longer-term assets. Deposits obtained through the Banks have traditionally been the principal source of funds for use in lending and other business purposes. Currently, the Banks have a number of different deposit programs designed to attract both short-term and long-term deposits from the general public by providing a wide selection of accounts and rates. These programs include regular statement savings, interest-bearing checking, money market deposit accounts, fixed rate certificates of deposit with maturities ranging form three months to five years, negotiated-rate jumbo certificates, non-interest demand accounts, and individual retirement accounts. Management's Discussion and Analysis section contains information relating to changes in the overall deposit portfolio. 13
14 Deposits are obtained primarily from individual and business residents of the Banks' market area. The Banks issue negotiated-rate certificates of deposit with balances of $100,000, or more, and have paid a limited amount of fees to brokers to obtain deposits. The following table illustrates the amounts outstanding for deposits greater than $100,000, according to the time remaining to maturity: Certificates Demand (Dollars in thousands) of Deposit Deposits Totals ------------ -------- ------- Within three months $40,130 160,805 200,935 Three months to six months 26,450 -- 26,450 Seven months to twelve months 10,329 -- 10,329 Over twelve months 3,556 -- 3,556 ------- ------- ------- Totals $80,465 160,805 241,270 ======= ======= ======= For additional information, see Note 6 to the Consolidated Financial Statements for the year ended December 31, 2000. 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, the Banks have made use of repurchase agreements with various securities dealers. This process involves the "selling" of one or more of the securities in the Banks' portfolio and by entering into an agreement to "repurchase" that same security at an agreed upon later date. A rate of interest is paid to the dealer for the subject period of time. In addition, although the Banks have offered retail repurchase agreements to its retail customers, the Government Securities Act of 1986 imposed confirmation and other requirements which generally made it impractical for financial institutions to offer such investments on a broad basis. Through policies adopted by the Board of Directors, the Banks enter into repurchase agreements with local municipalities, and large balance customers, and have adopted procedures designed to ensure proper transfer of title and safekeeping of the underlying securities. The following chart illustrates the average balances and the maximum outstanding month-end balances for FHLB advances and repurchase agreements: (Dollars in thousands) For the year ended December 31, -------------------------------------- 2000 1999 1998 -------- -------- -------- FHLB Advances Amount outstanding at end of period ....... $196,791 208,650 125,886 Average balance ........................... $211,217 173,289 140,877 Maximum outstanding at any month-end ...... $234,688 232,238 152,165 Weighted average interest rate ............ 6.35% 5.45% 5.63% Repurchase Agreements: Amount outstanding at end of period ....... $ 24,877 19,766 17,239 Average balance ........................... $ 19,052 28,605 16,652 Maximum outstanding at any month-end ...... $ 24,877 53,791 19,300 Weighted average interest rate ............ 5.39% 4.51% 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, 2000. 14
15 SUBSIDIARIES The Company has eight direct subsidiaries, Glacier Bank (wholly owned), First Security (wholly owned), Valley (wholly owned), Big Sky (wholly owned), Mountain West (wholly owned), Whitefish (majority owned), Eureka (majority owned) and 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, 2000. 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, 2000, the Company employed 423 persons, 358 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, 2000 for detailed information regarding pension/savings plan costs and eligibility. SUPERVISION AND REGULATION INTRODUCTION Banking is a highly regulated industry. Banking laws and regulations are primarily intended to protect depositors, not shareholders. The following discussion identifies some of the more significant state and federal laws and regulations affecting the banking industry. It is intended to provide a brief summary of these laws and regulations and, therefore, is not complete and is qualified by the statutes and regulations referenced. BANK HOLDING COMPANY REGULATION We are a bank holding company because of our ownership of Glacier Bank, Glacier Bank of Whitefish, Glacier Bank of Eureka, Valley Bank of Helena, First Security Bank of Missoula, Big Sky Western Bank and Mountain West Bank, all of which are Montana-state chartered commercial banks (with the exception of Mountain West Bank, an Idaho state-chartered bank), and all of which are members of the Federal Reserve (with the exception of Mountain West Bank, a non-Fed member FDIC-insured bank). As a bank holding company, we are subject to the Bank Holding Company Act of 1956, as amended, which places us under the supervision of the Board of Governors of the Federal Reserve. We are required to file annual reports and additional information with the Federal Reserve, and we are periodically examined by the Federal Reserve. In general, the Bank Holding Company Act limits bank holding company business to owning or controlling banks and engaging in other banking-related activities. Bank holding companies must obtain the Federal Reserve Board's approval before they: (1) acquire control (i.e., 5% or more) of the voting shares of a bank; (2) merge or consolidate with another bank holding company; or (3) acquire substantially all of the assets of any additional banks. Under the Financial Services Modernization Act of 1999, a bank holding company may apply to the Federal Reserve Board to become a financial holding company, and thereby engage (directly or through a subsidiary) in certain activities deemed financial in nature, such as securities brokerage and insurance underwriting. Control of Nonbanks With certain exceptions, the Bank Holding Company Act 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 Federal Reserve Board determines that the activities of such company are incidental or closely related to the business of banking. 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 Federal Reserve Board with 60 days' prior written notice of the proposed acquisition. Following receipt of this notice, the Federal Reserve Board has 60 days (or up to 90 days if extended) within which to issue a notice disapproving the proposed acquisition. In addition, any "company" must obtain the Federal Reserve Board's approval before 15
16 acquiring 25% (5% if the "company" is a bank holding company) or more of our outstanding shares or otherwise obtaining control over us. TRANSACTIONS WITH AFFILIATES We and our subsidiaries are affiliates within the meaning of the Federal Reserve Act, and transactions between affiliates are subject to certain restrictions. Generally, the Federal Reserve Act limits the extent to which a financial institution or its subsidiaries may engage in "covered transactions" with an affiliate. It also requires 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 We and our 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 we nor our subsidiaries may condition an extension of credit on either (1) a requirement that the customer obtain additional services provided by it or (2) an agreement by the customer to refrain from obtaining other services from a competitor. THE SUBSIDIARIES General With the exception of Mountain West Bank, our 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. In addition, the two Utah branches Mountain West Bank will acquire from Wells Fargo West, N.A. will be regulated to a limited extent by the Utah Department of Financial Institutions. 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. Community Reinvestment. The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their jurisdiction, the FDIC and the Director must evaluate the record of financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those banks. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Insider Credit Transactions. Banks are also subject to certain restrictions on extensions of credit to insiders--executive officers, directors, principal shareholders, and their related interests. Extensions of credit to insiders must be made on substantially the same terms, including interest rates and collateral, and follow credit underwriting procedures that are not less stringent than those prevailing at the time for comparable transactions with non-insiders. Also, extensions of credit to insiders must not involve more than the normal risk of repayment or present other unfavorable features. Safety and Soundness Standards. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, each federal banking agency has prescribed 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. 16
17 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 in accordance with the Interstate Act provisions allowing banks to engage in interstate merger transactions subject to certain "aging" requirements. Branches may not be acquired or opened separately in Idaho by an out-of-state bank, but once an out-of-state bank has acquired a bank within Idaho, either through merger or acquisition of all or substantially all of the bank's assets, the out-of-state bank may open additional branches within Idaho. Utah has enacted "opting in" legislation similar in certain respects to that enacted by Idaho, allowing banks to engage in interstate merger transactions subject to a five year aging requirement. De novo branching by an out of state bank is prohibited; however, once an out of state bank has acquired a Utah branch, that bank may establish additional branches in Utah. DEPOSIT INSURANCE The deposits of the Banks are currently insured to a maximum of $100,000 per depositor through the Bank Insurance Fund ("BIF") administered by the FDIC. All insured banks are subject to semi-annual deposit insurance premium assessments by the FDIC. The FDIC has implemented a risk-based insurance premium system under which banks are assessed insurance premiums based on how much risk they present to the Bank Insurance Fund. Banks with higher levels of capital and a low degree of supervisory concern are assessed lower premiums than banks with lower levels of capital or a higher degree of supervisory concern. DIVIDENDS The principal source of our cash revenues is dividends received from our 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. 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 Federal Reserve 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 profiles 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 Federal Reserve 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 a Federal Reserve Rule, redeemable perpetual preferred stock may not be counted as Tier I capital unless the redemption is subject to the prior approval of the Federal Reserve), and minority interests in equity accounts of consolidated subsidiaries, less intangibles, except as described above. The Federal Reserve 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. Except for the most highly rated banks, the minimum leverage ratio is 4%. 17
18 Banks are assigned to one of five capital categories depending on their total risk-based capital ratio, Tier I risk-based capital ratio, and leverage ratio, together with certain subjective factors. Banks which are deemed to be "undercapitalized" are subject to certain mandatory supervisory corrective actions. FINANCIAL SERVICES MODERNIZATION The laws and regulations that affect banks and bank holding companies recently underwent significant changes as a result of the Financial Services Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act of 1999. Generally, the act (i) repealed the historical restrictions on preventing banks from affiliating with securities firms, (ii) provided a uniform framework for the activities of banks, savings institutions and their holding companies, (iii) broadened the activities that may be conducted by national banks and banking subsidiaries of bank holding companies, (iv) provided an enhanced framework for protecting the privacy of consumers' information and (v) addressed a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions. Bank holding companies may now engage in a wider variety of financial activities than permitted under previous law, particularly insurance and securities activities. In addition, in a change from previous law, a bank holding company may 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 certain state banks), either directly or through operating subsidiaries, to engage in certain non-banking financial activities. We do not believe that the act will negatively affect our operations. However, to the extent the act permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation. This consolidation could result in a growing number of larger financial institutions that offer a wider variety of financial services than we currently offer and that can aggressively compete in the markets we currently serve. EFFECTS OF GOVERNMENT MONETARY POLICY Our earnings and growth are affected by general economic conditions, and by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The Federal Reserve implements a national monetary policy for such purposes as curbing inflation and combating recession, but its open market operations in U.S. government securities, control of the discount rate applicable to borrowings from the Federal Reserve, and establishment of reserve requirements against certain deposits, influence the growth of bank loans, investments and deposits, and also affect interest rates charged on loans or paid on deposits. We cannot predict with certainty the nature and impact of future changes in monetary policies and their impact on us or our subsidiary Banks. TAXATION FEDERAL TAXATION The Company files consolidated federal, Montana, and Idaho 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 rate of 6.75% in Montana. Idaho imposes an 8% tax. ITEM 2. PROPERTIES At December 31, 2000, Glacier Bank owned 10 of its 13 offices, including its headquarters and other property having an aggregate book value of approximately $7.4 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. 18
19 The following table sets forth certain information regarding Glacier Bank's offices at December 31, 2000: 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 Buffalo Hill area Full Services Owned of Kalispell, MT Branch Billings, MT Full Services Leased Heights area 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 four 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 $2.4 million: Office Services Offered Ownership - ------ ---------------- --------- Main Full Services Owned Branch Full Services Owned Branch Full Services Owned Branch Full Services Leased 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 $1.9 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 $639,000 and $532,000 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. Net book value of facilities and leasehold improvements is $3.4 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 Owned 19
20 Mountain Bank conducts banking activities from five locations. Net book value of facilities and leasehold improvements is $2.2 million. Office City Services Offered Ownership - ------ ---- ---------------- --------- Main Coeur d'Alene, ID Full Services Owned Branch Hayden, ID Full Services Lease Land Own Bldg. Branch Post Falls, ID Full Services Owned Branch Boise, ID Full Services Leased Branch Ketchum, ID Lending 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 2000. 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.; Sherwood Securities Corporation, Dain Rauscher, Inc.; McDonald and Company; 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, 2000, there were approximately 4,900 shareholders of Company common stock. Following is a schedule of quarterly common stock price ranges: 2000 1999 ------------------ ------------------ Quarter High Low High Low ------ ------ ------ ------ First ......... $14.82 $11.25 $19.84 $15.50 Second ........ $14.44 $11.00 $22.17 $15.70 Third ......... $13.38 $11.00 $21.71 $13.87 Fourth ........ $13.31 $11.00 $17.05 $13.53 The Company paid cash dividends on its common stock of $.59 and $.58 per share for the years ended December 31, 2000 and 1999, respectively. 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. 20
21 SUMMARY OF OPERATIONS AND SELECTED FINANCIAL DATA At December 31, ------------------------------------------------------------------------------- (dollars in thousands, except per share data) 2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- SUMMARY OF FINANCIAL CONDITION: Total assets ............................... $ 1,056,712 974,001 786,802 748,526 675,580 Investment securities ...................... 211,888 209,312 119,087 128,638 126,689 Loans receivable, net ...................... 733,561 652,208 571,188 526,234 478,868 Allowance for loan losses .................. (7,799) (6,722) (5,668) (4,654) (4,106) Deposits ................................... 720,570 644,106 546,503 487,539 433,434 Advances ................................... 196,791 208,650 125,886 147,660 152,116 Other borrowed funds and repurchase agreements ............... 29,529 26,614 18,707 29,960 17,871 Stockholders' equity ....................... 98,113 85,056 84,146 73,537 61,620 Equity per common share* ................... 8.57 7.44 7.85 5.75 5.20 Equity as a percentage of total assets ..... 9.28% 8.73% 10.69% 9.82% 9.12% Years ended December 31, ------------------------------------------------------------------------------- (dollars in thousands, except per share data) 2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- SUMMARY OF OPERATIONS: Interest income ............................ $ 78,837 64,719 58,828 55,612 50,481 Interest expense ........................... 37,357 27,635 25,470 24,925 22,639 ----------- ----------- ----------- ----------- ----------- Net interest income ...................... 41,480 37,084 33,358 30,687 27,842 Provision for loan losses .................. 1,864 1,723 1,735 1,052 1,017 Non-interest income ........................ 13,294 12,809 13,596 11,057 10,421 Non-interest expense ....................... 31,327 29,096 27,170 23,709 23,027 ----------- ----------- ----------- ----------- ----------- Earnings before income taxes ............. 21,583 19,074 18,049 16,983 14,219 Income taxes ............................... 7,580 6,722 6,674 6,246 5,740 ----------- ----------- ----------- ----------- ----------- Net earnings ............................. 14,003 12,352 11,375 10,737 8,479 =========== =========== =========== =========== =========== Basic earnings per common share* ......... 1.22 1.08 1.02 1.00 0.81 Diluted earnings per common share* ....... 1.21 1.07 1.00 0.98 0.80 Dividends declared per share* ........... 0.59 0.58 0.47 0.39 0.32 At or for the years ended December 31, ------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- RATIOS: Net earnings as a percent of average assets ........................ 1.39% 1.41% 1.47% 1.50% 1.32% average stockholders' equity .......... 15.83% 14.60% 14.43% 15.89% 14.45% Dividend payout ratio ............................ 48.36% 53.70% 46.08% 39.00% 39.51% Average equity to average asset ratio ............ 8.78% 9.73% 10.22% 9.37% 9.13% Net interest margin on average earning assets (tax equivalent) .................... 4.48% 4.67% 4.80% 4.74% 4.75% Allowance for loan losses as a percent of loans... 1.05% 1.02% 0.98% 0.88% 0.85% Allowance for loan losses as a percent of nonperforming assets ..................... 372% 295% 185% 230% 215% At or for the years ended December 31, ------------------------------------------------------------------------------- (dollars in thousands) 2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- OTHER DATA: Loans originated and purchased ............. $ 570,652 528,325 516,497 341,766 363,891 Loans serviced for others .................. $ 203,836 159,451 169,378 156,288 142,878 Number of full time equivalent employees ... 423 434 412 368 361 Number of offices .......................... 30 31 27 26 24 Number of shareholders of record ........... 1,228 1,212 929 772 758 * 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. 21
22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company is a Delaware corporation and at December 31, 2000 had six commercial banks located in Montana 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. Mountain West Bank of Coeur d'Alene, Idaho is its seventh banking subsidiary. The following discussion and analysis includes the effect of the pooling-of-interests merger with Big Sky Western Bank and Mountain West Bank. Prior period information has been restated to include amounts from the Mountain West and Big Sky mergers. The Company reported earnings of $14,003,000 for the year ended December 31, 2000, or $1.22 basic earnings per share, and $1.21 diluted earnings per share, compared to $12,352,000, or $1.08 basic earnings per share and $1.07 diluted earnings per share, for the year ended December 31, 1999, and $11,375,000, or $1.02 basic and $1.00 diluted earnings per share for the year ended December 31, 1998. 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 seven 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 2000, all seven 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, 2000 of $98,113,000, or 9.3% of assets, which compares with $85,056,000, or 8.7% of assets at December 31, 1999. Earnings retention and an increase in accumulated other comprehensive income of 15.4%, has exceeded the 8.5% growth in total assets. The stockholders' equity ratio remains well above required regulatory levels, and above the average of the Company's peers, providing flexibility in the management of assets. FINANCIAL CONDITION The following table summarizes the Company's major asset and liability components as a percentage of total assets at December 31, 2000, 1999, and 1998. December 31, ------------------------- 2000 1999 1998 ----- ----- ----- ASSETS: Cash, and Cash Equivalents, Investment Securities, FHLB and Federal Reserve Stock .................................. 26.7% 28.6% 23.5% Real Estate Loans and Loans Held for Sale .................... 21.8% 23.1% 30.3% Commercial Loans ............................................. 31.8% 28.7% 27.4% Consumer Loans ............................................... 15.9% 15.9% 15.6% Other Assets ................................................. 3.8% 3.7% 3.2% ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== ===== LIABILITIES AND STOCKHOLDER'S EQUITY: Deposit Accounts ............................................. 68.2% 66.1% 69.5% FHLB Advances ................................................ 18.6% 21.4% 16.0% Other Borrowings and Repurchase Agreements ................... 2.8% 2.7% 2.4% Other Liabilities ............................................ 1.1% 1.1% 1.4% Stockholders' Equity ......................................... 9.3% 8.7% 10.7% ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== ===== 22
23 EFFECT OF INFLATION AND CHANGING PRICES Generally accepted accounting principles require the measurement of financial position and operating results in terms of historical dollars, without consideration for change in relative purchasing power over time due to inflation. Virtually all assets of a financial institution are monetary in nature, therefore, interest rates generally have a more significant impact on a company's performance than does the effect of inflation. GAP ANALYSIS The following table gives a description of our GAP position for various time periods. As of December 31, 2000, 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 19.01% which compares to a negative 24.22% at December 31, 1999 and a positive 2.51% at December 31, 1998. 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 (dollars in thousands) Months Months years 5 years Total --------- --------- --------- --------- --------- ASSETS: Interest bearing deposits ........... $ 10,330 - - - 10,330 Investment securities ............... 740 339 6,630 63,706 71,415 Mortgage-backed securities .......... 8,626 10,194 51,204 70,449 140,473 Floating rate loans ................. 191,600 27,155 113,303 2,365 334,423 Fixed rate loans .................... 75,182 55,849 187,698 80,409 399,138 Other earning assets ................ 16,435 - - 1,663 18,098 --------- --------- --------- --------- --------- TOTAL INTEREST BEARING ASSETS ................ $ 302,913 93,537 358,835 218,592 973,877 ========= ========= ========= ========= ========= LIABILITIES: Interest-bearing deposits ........... 354,617 49,209 25,824 149,713 579,363 FHLB advances ....................... 104,001 69,570 16,490 6,730 196,791 Other borrowed funds and repurchase agreements ........................ 29,382 147 - - 29,529 --------- --------- --------- --------- --------- TOTAL INTEREST BEARING LIABILITIES ........... $ 488,000 118,926 42,314 156,443 805,683 ========= ========= ========= ========= ========= Repricing gap ................................ $(185,087) (25,389) 316,521 62,149 168,194 Cumulative repricing gap ..................... (185,087) (210,476) 106,045 168,194 Cumulative gap as a % of total assets ........ -19.01% -21.61% 10.89% 17.27% Gap Earnings Sensitivity (1) ................. $ (1,284) Gap Earnings Sensitivity Ratio (2) ........... $ -9.17% (1) Gap Earnings Sensitivity is the estimated effect on income, after taxes of 39%, of a 1% increase or decrease in interest rates (1% of (-$210,476 + $82,086)) (2) Gap Earnings Sensitivity Ratio is Gap Earnings Sensitivity divided by the estimated yearly earnings of $14,003. 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. Interest-bearing checking and regular savings are included in the more than 5 years category. Money market balances are included in the less than 6 months category. Mortgage-backed securities are at the anticipated principal payments based on the weighted-average-life. 23
24 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 2000 was slightly lower than the prior year. The net interest margin decreased slightly in 2000 from 4.67% to 4.48%, primarily the result of an increase in rates on deposits and borrowings. Increased asset levels, and increased interest-free funding resulted in significantly higher net interest income. December 31,(1) ---------------------- 2000 1999 1998 ---- ---- ---- Combined weighted average yield on loans and investments(2) ..... 8.51% 7.97% 8.21% Combined weighted average rate paid on savings deposits and borrowings ............................................ 4.89% 4.24% 4.47% Net interest spread ............................................. 3.62% 3.73% 3.74% Net interest margin(3) .......................................... 4.48% 4.67% 4.80% (1) Weighted averages are computed without the effect of compounding daily interest. (2) Includes dividends received on capital stock of the FHLB and Federal Reserve Bank. (3) The net interest margin (net yield on average interest earning assets) is interest income from loans and investments (tax free income adjusted for tax effect) less interest expense from deposits, FHLB advances, and other borrowings, divided by the total amount of earning assets. YEAR ENDED DECEMBER 31, 2000 COMPARED TO DECEMBER 31, 1999 FINANCIAL CONDITION Total assets increased $82,711,000, or 8.5% over the December 31, 1999 asset level. Total loans outstanding increased 12.6%, or $82,969,000 with the largest increase occurring in the commercial classification which increased $61,316,000, or 21.9%. Consumer loans increased $15,342,000, or 9.9%. Residential real estate loans and loans held for sale increased $6,311,000 or 2.8%. Investment securities increased $2,576,000, or 1.2%. Total liabilities increased $69,654,000, or 7.8%, with non-interest bearing deposits up $14,280,000, or 11.3%, and interest bearing deposits up $62,184,000, or 12.0%. Federal Home Loan Bank advances decreased $11,859,000, or 5.7%. Securities sold under repurchase agreements and other borrowed funds were up $2,915,000, or 11.0%. Total stockholders' equity increased $13,057,000, or 15.4%, the result of earnings retention, and $5,689,000 net increase from the unrealized gain (loss) on the securities available-for-sale. RESULTS OF OPERATIONS INTEREST INCOME - Interest income was $78,837,000 compared to $64,719,000 for the years ended December 31, 2000 and 1999, respectively, a $14,118,000, or 21.8% increase. The weighted average yield on the loan and investment portfolios increased from 7.97% to 8.51%, the results of higher interest rates, increased volumes in loans, and the continued change in loan mix from real estate loans to higher yielding commercial and consumer loans. INTEREST EXPENSE - Interest expense was $37,357,000 for the year ended December 31, 2000, up from $27,635,000 in 1999, a $9,722,000, or 35.2%, increase. The increase is due to higher interest rates and larger balances during the year in interest bearing deposits and FHLB advances. Repurchase agreements and other borrowed funds and related interest expense increased during 2000. The increased interest expense resulting from the higher balances, and rates, in interest bearing liabilities was partially offset by the increase in non-interest bearing deposits. The cost of interest bearing liabilities increased from 4.2% in 1999 to 4.9% in 2000. NET INTEREST INCOME - Net interest income was $41,480,000 compared to $37,084,000 in 1999, an increase of $4,396,000, or 11.9%, the net result of the items discussed in the above paragraphs. 24
25 PROVISION FOR LOAN LOSSES - The provision for loan losses was $1,864,000 for 2000, up slightly from $1,723,000 for 1999. Total loans charged off, net of recoveries, were $787,000 in 2000, up from the $669,000 experienced in 1999. The allowance for loan losses balance was $7,799,000 at year end 2000, up from $6,722,000 at year end 1999, an increase of $1,077,000. At December 31, 2000, 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 $2,097,000 or .20% of total assets; compared to $2,278,000 or .23% of total assets at December 31, 1999. The allowance for loan losses was 372% of non-performing assets at December 31, 2000, up from 295% the prior year end. The allowance for loan losses as a percentage of loans increased to 1.06% from 1.02 % at the 2000 and 1999 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 $13,294,000 was up $485,000, or 3.8% from 1999. Loan fees and charges were $164,000 below the prior year, due mostly to a slowdown in real estate loan origination and sale activity resulting from higher mortgage rates in 2000. Increased volumes in deposit accounts resulted in an increase in fee income of $1,423,000 from service charges and other fees. Other income was up $257,000, most of which was from the sale of two small branches in 2000. The gain on sale of investments was $51,000 in 2000, up from $23,000 in 1999. NON-INTEREST EXPENSE - Total non-interest expense increased from $29,096,000 to $31,327,000 an increase of $2,231,000, or 7.7%. Compensation, employee benefits, and related expenses increased $1,657,000, or 11.4% from 1999 resulting from additional branch and data center staffing, increased activity volumes, and other normal increases. Occupancy and equipment expense increased $658,000, or 15.8% from 1999, the result of bringing more data processing functions in-house, the substantial investment in enhanced technology for transaction imaging and internet banking, and additional expenses from the new branch offices. Data processing and other expenses were up $98,000, or 8.1%,. The other category of expense is the minority interest in subsidiaries which increased $10,000. The efficiency ratio (non-interest expense)/(net interest income + non-interest income), was 57.2% in 2000, down from 58.3% in 1999, which compares favorably with similar sized bank holding companies nationally which average approximately 63.5%. 25
26 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 $187,199,000 or 23.8% over the December 31, 1998 asset level. Total loans outstanding increased 14.2%, or $81,020,000 with the largest increase occurring in the commercial classification which increased $63,720,000, or 29.5%. Consumer loans increased $31,464,000 or 25.6%. Residential real estate loans and loans held for sale declined $13,114,000 or 5.5%, in accordance with management's plan to reduce the balances on real estate loans which generally have lower interest rates than other loan types. Investment securities increased $90,225,000, or 75.8%. Higher investment yields, a steeper yield curve, and the Butte branch acquisition from Washington Mutual provided an opportunity to increase the investment portfolio. Total liabilities increased $186,289,000, or 26.5%, with non-interest bearing deposits up $10,973,000, or 9.5%, and interest bearing deposits up $86,630,000 or 20.1%. Federal Home Loan Bank advances increased $82,764,000, or 65.7%. Securities sold under repurchase agreements and other borrowed funds were up $7,907,000, or 42.3%. Total stockholders' equity increased $910,000 or 1.1%, the result of earnings retention, offset by a $6,604,000 net change in accumulated other comprehensive income (loss), the result of unrealized losses on securities available-for-sale. RESULTS OF OPERATIONS INTEREST INCOME - Interest income was $64,719,000 compared to $58,828,000 for the years ended December 31, 1999 and 1998, respectively, a $5,891,000 or 10% increase. The weighted average yield on the loan and investment portfolios decreased from 8.2% to 8.0%. This decrease in yield was offset by increased volumes in loans, and the change in loan mix from real estate loans to higher yielding commercial and consumer loans, increasing interest income. INTEREST EXPENSE - Interest expense was $27,635,000 for the year ended December 31, 1999, up from $25,470,000 in 1998, a $2,165,000, or 8.5%, increase. The increase is due to higher balances in interest bearing deposits, Federal Home Loan Bank advances, repurchase agreements and other borrowed funds during 1999. The increased interest expense resulting from the higher balances in interest bearing liabilities was partially offset by reduced rates and by the increase in non-interest bearing deposits. The yield on interest bearing liabilities declined from 4.5% in 1998 to 4.2% in 1999. NET INTEREST INCOME - Net interest income was $37,084,000 compared to $33,358,000 in 1998, an increase of $3,726,000, or 11.2%, the net result of the items discussed in the above paragraphs. PROVISION FOR LOAN LOSSES - The provision for loan losses was $1,723,000 for 1999, down slightly from $1,735,000 for 1998. Total loans charged off, net of recoveries, were $669,000 in 1999, down from the $721,000 experienced in 1998. The allowance for loan losses balance was $6,722,000 at year end 1999, up from $5,668,000 at year end 1998, an increase of $1,054,000. At December 31, 1999, the non-performing assets (non-accrual loans, accruing loans 90 days or more overdue, real estate acquired by foreclosure or deed-in-lieu thereof, and repossessed personal property) totaled $2,278,000 or .23% of total assets; compared to $3,067,000 or .39% of total assets at December 31, 1998. The allowance for loan losses was 295% of non-performing assets at December 31, 1999, up from 185% the prior year end. The allowance for loan losses as a percentage of loans increased to 1.02% from .98% at the 1999 and 1998 year ends. The allowance for losses has increased primarily because of the changing mix of loans from residential real estate to more commercial and consumer loans which historically have greater credit risk along with higher loan rates. NON-INTEREST INCOME - Total non-interest income of $12,809,000 was down $787,000, or 5.8% from 1998 which included one time gains on the sale of the credit card portfolio of $457,000, and $102,000 from the sale of the trust business. Loan fees and charges were approximately the same as the prior year. Increased volumes in deposit accounts 26
27 resulted in an increase in fee income of $499,000 from service charges and other fees. Other income was down $485,000 most of which was the gain on sale of credit card and trust business in 1998. The gain on sale of investments was $23,000 in 1999, down from $62,000 in 1998. Real estate loans sold totaled $158,204,000 in 1999 down from $205,783,000 in 1998. Commercial loan sales totaled $10,796,000 and $8,756,000 for 1999 and 1998, respectively. NON-INTEREST EXPENSE - Total non-interest expense increased from $27,170,000 to $29,096,000 an increase of $1,926,000, or 7.1%. Compensation, employee benefits, and related expenses increased $1,166,000, or 8.7% from 1998, with the new branches and expanded data processing staff included. Occupancy and equipment expense increased $585,000, or 16.3% from 1998, the result of bringing more data processing functions in-house, the substantial investment in enhanced technology for transaction imaging and internet banking, and additional expenses from the new branch offices. Data processing and other expenses were up $269,000, or 2.7%, primarily the result of increased volumes and $78,000 in amortization of the premium paid for the Butte acquisition. The other category of expense is the minority interest in subsidiaries which decreased $94,000, resulting from the acquisition of minority shares in 1998. The efficiency ratio (non-interest expense)/(net interest income + non-interest income), was 58.3% in 1999, up from 57.9% in 1998, as compared with similar sized bank holding companies nationally which average approximately 61.28%. 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's primary market risk exposure is interest rate risk. The ongoing monitoring and management of this risk is an important component of the Company's asset/liability management process which is governed by policies established by its Board of Directors that are reviewed and approved annually. The Board of Directors delegates responsibility for carrying out the asset/liability management policies to the Asset/liability committee (ALCO). In this capacity ALCO develops guidelines and strategies impacting the Company's asset/liability management related activities based upon estimated market risk sensitivity, policy limits and overall market interest rate levels/trends. INTEREST RATE RISK Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with the Company's financial instruments also change thereby impacting net interest income (NII), the primary component of the Company's earnings. ALCO utilizes the results of a detailed and dynamic simulation model to quantify the estimated exposure of NII to sustained interest rate changes. While ALCO routinely monitors simulated NII sensitivity over a rolling two-year horizon, it also utilizes additional tools to monitor potential 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, 2000 and 1999 as compared to the 10% Board approved policy limit. +200 bp 2000 1999 - ------- ---- ---- Estimated sensitivity ....................... -2.75% -3.66% Estimated decrease in net interest income ... $(1,141) (1,357) - -200 bp - ------- Estimated sensitivity ....................... 1.73% 2.68% Estimated increase in net interest income ... $ 718 994 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 In addition to historical information, this report contains certain "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (PSLRA). This statement is included for the express purpose of availing the Company, of the protections of the safe harbor provisions of the PSLRA. The forward-looking statements contained in this report are subject to factors, risks, and uncertainties that might cause actual results to differ materially form those projected. Important factors that might cause such a material difference include, but are not limited to, those discussed in this section of the report. In addition, the following items are among the factors that could cause actual results to differ materially from the forward looking statements in this report: general economic conditions, including their impact on capital expenditures; business conditions in the banking industry; the regulatory environment; new legislation; vendor quality and efficiency; employee retention factors; rapidly changing technology and evolving banking industry standards; competitive standards; competitive factors, including increased competition with community, regional and national financial institutions; fluctuating interest rate environments; and similar matters. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date of the statement. The Company undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report. Readers should carefully review the risk factors described in this and other documents we file from time to time with the Securities and Exchange Commission. 28
29 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 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 32 Consolidated Statements of Operations 33 Consolidated Statements of Stockholders' Equity and Comprehensive Income 34 Consolidated Statements of Cash Flows 35 Notes to Consolidated Financial Statements 36-59 29
30 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, 2000 and 1999 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, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the 1998 financial statements of Mountain West Bank, acquired by Glacier Bancorp, Inc. on February 4, 2000 in a pooling of interests, which financial statements reflect net interest income and net income constituting 9.6% and 4.0%, respectively, of the related 1998 consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Mountain West Bank, is based solely on the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, 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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Billings, Montana February 2, 2001 30
31 Report of Independent Accountants The Board of Directors and Stockholders Mountain West Bank In our opinion, the statements of income, comprehensive income, changes in stockholders' equity and of cash flows for the year ended March 31, 1999 of Mountain West Bank (not presented separately herein) present fairly, in all material respects, the results of operations and cash flows of Mountain West Bank for the year ended March 31, 1999, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. We have not audited the financial statements of Mountain West Bank for any period subsequent to March 31, 1999. /s/ PricewaterhouseCoopers LLP Spokane, Washington May 19, 1999 31
32 GLACIER BANCORP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, ----------------------------- (dollars in thousands except per share data) 2000 1999 ----------- ----------- ASSETS: Cash on hand and in banks ........................................................... $ 41,456 50,590 Federal funds sold .................................................................. -- 64 Interest bearing cash deposits ...................................................... 10,330 1,711 ----------- ----------- Cash and cash equivalents ...................................................... 51,786 52,365 Investment securities, available-for-sale ........................................... 211,888 209,312 Loans receivable, net ............................................................... 726,503 646,312 Loans held for sale ................................................................. 7,058 5,896 Premises and equipment, net ......................................................... 25,016 24,670 Real estate and other assets owned, net ............................................. 291 550 Federal Home Loan Bank of Seattle stock, at cost .................................... 16,436 15,134 Federal Reserve Bank stock, at cost ................................................. 1,662 1,467 Accrued interest receivable ......................................................... 6,637 5,611 Goodwill and other intangibles, net of accumulated amortization of $1,556 and $1,012 at December 31, 2000, and 1999, respectively .......................... 6,493 7,035 Deferred tax asset .................................................................. -- 2,959 Other assets ........................................................................ 2,942 2,690 ----------- ----------- $ 1,056,712 974,001 =========== =========== LIABILITIES: Deposits - non-interest bearing ..................................................... $ 141,207 126,927 Deposits - interest bearing ......................................................... 579,363 517,179 Advances from Federal Home Loan Bank of Seattle ..................................... 196,791 208,650 Securities sold under agreements to repurchase ...................................... 24,877 19,766 Other borrowed funds ................................................................ 4,652 6,848 Accrued interest payable ............................................................ 4,591 2,717 Current income taxes ................................................................ 17 108 Deferred income taxes ............................................................... 578 -- Minority interest ................................................................... 338 308 Other liabilities ................................................................... 6,185 6,442 ----------- ----------- Total liabilities .............................................................. 958,599 888,945 STOCKHOLDERS' EQUITY: Preferred shares, 1,000,000 shares authorized. None outstanding at December 31, 2000 and 1999 .................................................... -- -- Common stock, $.01 par value per share. 50,000,000 shares authorized, 11,447,150 and 10,394,041 outstanding at December 31, 2000 and 1999, respectively .......... 114 104 Paid-in capital ..................................................................... 101,828 87,387 Retained earnings (accumulated deficit) - substantially restricted .................. (4,087) 2,996 Accumulated other comprehensive income (loss) ....................................... 258 (5,431) ----------- ----------- Total stockholders' equity ..................................................... 98,113 85,056 ----------- ----------- $ 1,056,712 974,001 =========== =========== See accompanying notes to consolidated financial statements 32
33 GLACIER BANCORP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, --------------------------------- (dollars in thousands except per share data) 2000 1999 1998 ------- ------- ------- INTEREST INCOME: Real estate loans .................................... $19,557 17,875 19,404 Commercial loans ..................................... 28,784 21,499 18,250 Consumer and other loans ............................. 14,856 12,367 11,907 Investment securities and other ...................... 15,640 12,978 9,267 ------- ------- ------- TOTAL INTEREST INCOME .............................. 78,837 64,719 58,828 ------- ------- ------- INTEREST EXPENSE: Deposits ............................................. 22,674 16,494 16,567 Advances ............................................. 13,454 9,460 7,939 Securities sold under agreements to repurchase ....... 949 1,318 772 Other borrowed funds ................................. 280 363 192 ------- ------- ------- TOTAL INTEREST EXPENSE ............................. 37,357 27,635 25,470 ------- ------- ------- NET INTEREST INCOME ................................ 41,480 37,084 33,358 Provision for loan losses ............................ 1,864 1,723 1,735 ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ................................... 39,616 35,361 31,623 NON-INTEREST INCOME: Service charges and other fees ....................... 7,839 6,416 5,917 Miscellaneous loan fees and charges .................. 1,917 2,081 2,089 Gain on sale loans ................................... 2,049 3,108 3,862 Gain on sale of investments, net ..................... 51 23 62 Other income ......................................... 1,438 1,181 1,666 ------- ------- ------- TOTAL NON-INTEREST INCOME .......................... 13,294 12,809 13,596 ------- ------- ------- NON-INTEREST EXPENSE: Compensation, employee benefits and related expenses . 16,214 14,557 13,391 Occupancy expense .................................... 4,830 4,172 3,587 Data processing expense .............................. 1,313 1,215 1,347 Other expense ........................................ 8,909 9,101 8,700 Minority interest .................................... 61 51 145 ------- ------- ------- TOTAL NON-INTEREST EXPENSE ......................... 31,327 29,096 27,170 ------- ------- ------- Earnings before income taxes ................................. 21,583 19,074 18,049 Federal and state income tax expense ...................... 7,580 6,722 6,674 ------- ------- ------- NET EARNINGS ................................................. $14,003 12,352 11,375 ======= ======= ======= BASIC EARNINGS PER SHARE ............................. $ 1.22 1.08 1.02 DILUTED EARNINGS PER SHARE ........................... $ 1.21 1.07 1.00 See accompanying notes to consolidated financial statements. 33
34 GLACIER BANCORP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME Years ended December 31, 2000, 1999, and 1998 Common Stock ----------------------------- Paid-in (Dollars in thousands except per share data) Shares Amount capital ----------- ----------- ----------- Balance at December 31, 1997 ............................................. 8,259,742 $ 83 42,760 Comprehensive income: Net earnings ........................................................ -- -- -- Unrealized loss on securities, net of reclassification adjustment ... -- -- -- Total comprehensive income ............................................... -- -- -- Transfer from retained earnings to additional paid in capital ............ -- -- 100 Cash dividends declared ($.57 per share) ................................. -- -- -- Stock options exercised .................................................. 153,459 1 1,572 Tax benefit from stock related compensation .............................. -- -- 386 Increase in stock grant earned ........................................... -- -- 15 10% stock dividend ....................................................... 847,131 8 19,149 Additional shares issued ................................................. 83,761 1 2,198 ----------- ----------- ----------- Balance at December 31, 1998 ............................................. 9,344,093 $ 93 66,180 Comprehensive income: Net earnings ........................................................ -- -- -- Unrealized loss on securities, net of reclassification adjustment ... -- -- -- Total comprehensive income ............................................... -- -- -- Cash dividends declared ($.64 per share) ................................. -- -- -- Stock options exercised .................................................. 113,049 1 1,091 Tax benefit from stock related compensation .............................. -- -- 240 10% stock dividend ....................................................... 936,899 10 19,876 Fiscal year conforming adjustment ........................................ -- -- -- ----------- ----------- ----------- Balance at December 31, 1999 ............................................. 10,394,041 $ 104 87,387 Comprehensive income: Net earnings ........................................................ -- -- -- Unrealized gain on securities, net of reclassification adjustment ... -- -- -- Total comprehensive income ............................................... -- -- -- Cash dividends declared ($.59 per share) ................................. -- -- -- Stock options exercised .................................................. 14,161 -- 134 Tax benefit from stock related compensation .............................. -- -- 16 10% stock dividend ....................................................... 1,039,608 10 14,302 Dissenting Mountain West shareholders .................................... (660) -- (11) ----------- ----------- ----------- Balance at December 31, 2000 ............................................. 11,447,150 $ 114 101,828 =========== =========== =========== Retained earnings Accumulated (accumulated other comp- Total deficit) rehensive stock- substantially income holders' (Dollars in thousands except per share data) restricted (loss) equity ------------- ----------- ----------- Balance at December 31, 1997 ............................................. 29,504 1,191 73,538 Comprehensive income: Net earnings ........................................................ 11,375 -- 11,375 Unrealized loss on securities, net of reclassification adjustment ... -- (18) (18) ----------- Total comprehensive income ............................................... -- -- 11,357 ----------- Transfer from retained earnings to additional paid in capital ............ (100) -- -- Cash dividends declared ($.57 per share) ................................. (4,922) -- (4,922) Stock options exercised .................................................. -- -- 1,573 Tax benefit from stock related compensation .............................. -- -- 386 Increase in stock grant earned ........................................... -- -- 15 10% stock dividend ....................................................... (19,157) -- -- Additional shares issued ................................................. -- -- 2,199 ----------- ----------- ----------- Balance at December 31, 1998 ............................................. 16,700 1,173 84,146 Comprehensive income: Net earnings ........................................................ 12,352 -- 12,352 Unrealized loss on securities, net of reclassification adjustment ... -- (6,604) (6,604) ----------- Total comprehensive income ............................................... -- -- 5,748 ----------- Cash dividends declared ($.64 per share) ................................. (6,076) -- (6,076) Stock options exercised .................................................. -- -- 1,092 Tax benefit from stock related compensation .............................. -- -- 240 10% stock dividend ....................................................... (19,905) -- (19) Fiscal year conforming adjustment ........................................ (75) -- (75) ----------- ----------- ----------- Balance at December 31, 1999 ............................................. 2,996 (5,431) 85,056 Comprehensive income: Net earnings ........................................................ 14,003 -- 14,003 Unrealized gain on securities, net of reclassification adjustment ... -- 5,689 5,689 ----------- Total comprehensive income ............................................... -- -- 19,692 ----------- Cash dividends declared ($.59 per share) ................................. (6,752) -- (6,752) Stock options exercised .................................................. -- -- 134 Tax benefit from stock related compensation .............................. -- -- 16 10% stock dividend ....................................................... (14,334) (22) Dissenting Mountain West shareholders .................................... -- -- (11) ----------- ----------- ----------- Balance at December 31, 2000 ............................................. (4,087) 258 98,113 =========== =========== =========== Year ended December 31, ----------------------------------- Disclosure of reclassification amount: 2000 1999 1998 ------- ------- ------- Unrealized and realized holding gains (losses) arising during the year ......... $ 9,347 (10,929) (98) Transfer from held to maturity ................................................. -- 288 -- Tax (expense) benefit .......................................................... (3,693) 4,021 39 ------- ------- ------- Net after tax ............................................................. 5,654 (6,620) (59) ------- ------- ------- Reclassification adjustment for gains included in net income ..................... 51 23 62 Tax expense .................................................................... (16) (7) (21) ------- ------- ------- Net after tax ............................................................. 35 16 41 ------- ------- ------- Net change in unrealized gain (loss) on available-for-sale securities ... $ 5,689 (6,604) (18) ======= ======= ======= See accompanying notes to consolidated financial statements. 34
35 GLACIER BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, ----------------------------------------- (dollars in thousands) 2000 1999 1998 --------- --------- --------- OPERATING ACTIVITIES : Net earnings ........................................................... $ 14,003 12,352 11,375 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Mortgage loans held for sale originated or acquired .................. (103,284) (143,313) (207,622) Proceeds from sales of mortgage loans held for sale .................. 102,122 158,204 205,783 Proceeds from sales of commercial loans .............................. 23,314 10,796 8,756 Provision for loan losses ............................................ 1,864 1,723 1,735 Depreciation of premises and equipment ............................... 2,315 1,883 1,596 Amortization of goodwill and deposit premium ......................... 542 305 165 Gain on sale of investments .......................................... (51) (23) (62) Gain on sale of loans ................................................ (2,049) (3,108) (3,862) Amortization of investment securities premiums and discounts, net .... 162 196 (196) FHLB stock dividends ................................................. (1,022) (1,038) (973) Gain on sale of branches ............................................. (198) -- -- Deferred tax benefit ................................................. (139) (207) (99) Net (increase) decrease in accrued interest receivable ............... (1,026) (867) 15 Net increase in accrued interest payable ............................. 1,874 394 1,155 Net increase (decrease) in current income taxes ...................... (75) 475 (632) Net (increase) decrease in other assets .............................. 2 (320) (77) Net increase (decrease) in other liabilities and minority interest ... (108) (683) 1,439 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES ......................... 38,246 36,769 18,496 --------- --------- --------- INVESTING ACTIVITIES: Proceeds from sales, maturities and prepayments of investment securities available-for-sale ...................................... 34,042 38,279 38,142 Purchases of investment securities available-for-sale .................. (27,335) (142,852) (36,916) Proceeds from maturities and prepayments of investment securities held-to-maturity ........................................ -- 841 9,775 Purchases of investment securities held-to-maturity .................... -- 12,057 (1,130) Principal collected on installment and commercial loans ................ 231,674 169,429 162,626 Installment and commercial loans originated or acquired ................ (334,904) (290,174) (236,378) Principal collections on mortgage loans ................................ 128,714 98,397 95,945 Mortgage loans originated or acquired .................................. (132,464) (94,838) (72,497) Net purchase of FHLB and FRB stock ..................................... (475) (1,788) (879) Net payments for sale of branches ...................................... (901) -- -- Net addition of premises and equipment ................................. (3,307) (5,799) (4,791) Acquisition of minority interest ....................................... -- -- (236) Acquisition of branch deposits ......................................... -- (4,739) -- --------- --------- --------- NET CASH USED IN INVESTING ACTIVITIES ............................. (104,956) (221,187) (46,339) --------- --------- --------- FINANCING ACTIVITIES: Net increase in deposits ............................................... 81,878 99,263 59,586 Net increase (decrease) in FHLB advances and other borrowed funds ...... (14,055) 87,971 (28,593) Net increase (decrease) in securities sold under repurchase agreements . 5,111 2,527 (4,434) Cash dividends paid to stockholders .................................... (6,904) (5,923) (4,237) Proceeds from exercise of stock options and other stock issued ......... 101 1,073 1,573 --------- --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES .......................... 66,131 184,911 23,895 --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................... (579) 493 (3,948) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ....................... 52,365 51,872 55,252 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................. $ 51,786 52,365 51,304 ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for interest ................................. $ 35,483 27,241 24,315 Cash paid during the year for income taxes ............................. $ 7,794 6,247 7,348 NON-CASH INVESTING AND FINANCING ACTIVITY During the year ended December 31, 2000, the Company sold branches with net loans of $3,660 and deposits of $5,414. At December 31, 2000 and 1999, the Company had dividends payable of $1,758 and $1,910, respectively. Dividends payable are included in other liabilities. See accompanying notes to consolidated financial statements. 35
36 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 and Idaho through its subsidiary banks. The subsidiary banks are subject to competition from other financial service providers. The subsidiary banks are also subject to the regulations of certain government agencies and undergo periodic examinations by those regulatory authorities. The accounting and consolidated financial statement reporting policies of the Company conform with accounting principles generally accepted in the United States of America 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"), Mountain West Bank in Idaho, ("Mountain West"), and Community First, Inc. ("CFI"). All significant inter-company transactions have been eliminated in consolidation. The Company owns 94% of the outstanding stock of Whitefish, 98% of Eureka, and 100% of Glacier, First Security, Valley, Big Sky, Mountain West and CFI. Valley was acquired on August 31, 1998 through an exchange of stock with HUB Financial Corp. (HUB), formerly the parent company of Valley and the minority shareholders of Valley. The transaction with the minority shareholders was accounted for as a purchase. Financial information from August 31, 1998 forward includes the results of operations previously attributable to the minority interest. Big Sky was acquired on January 20, 1999 and Mountain West was acquired February 4, 2000. The pooling of interests method of accounting was used for the merger transaction with HUB, Big Sky, and Mountain West. Under this method, financial information for each of the periods presented includes the combined companies as though the merger had occurred 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. 36
37 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES . . . CONTINUED Premiums and discounts on investment securities are amortized or accreted into income using a method that approximates the level-yield interest method. The cost of any investment, if sold, is determined by specific identification. Declines in the fair value of securities below carrying value that are other than temporary are charged to expense as realized losses and the related carrying value is reduced to fair value. Effective January 1, 1999, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133 establishes accounting and reporting standards that derivative instruments (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivatives' fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The adoption of SFAS 133 had no impact on the financial statements of the Company except that it allowed for a one-time reclassification of the investment portfolio from held-to-maturity to either trading or available-for-sale. The net effect on the January 1, 1999 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 interests in the loan, is received in exchange. A gain is recognized to the extent the selling price exceeds the carrying value. (g) ALLOWANCE FOR LOAN LOSSES Management's periodic evaluation of the adequacy of the allowance is based on factors such as the Company's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, current economic conditions, and independent appraisals. The Company also provides an allowance for losses on impaired loans. Groups of small balance homogeneous loans (generally consumer and residential real estate loans) are evaluated for impairment collectively. A loan is considered impaired when, based upon current information and events, it is probable that the Company will be unable to collect, on a timely basis, all principal and interest according to the contractual terms of the loan's original agreement. When a specific loan is determined to be 37
38 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES . . . CONTINUED impaired, the allowance for loan losses is increased through a charge to expense for the amount of the impairment. The amount of the impairment is measured using cash flows discounted at the loan's effective interest rate, except when it is determined that the sole source of repayment for the loan is the operations or liquidation of the underlying collateral. In such cases, impairment is measured by determining the current value of the collateral, reduced by anticipated selling costs. The Company recognizes interest income on impaired loans only to the extent the cash payments are received. (h) PREMISES AND EQUIPMENT Premises and equipment are stated at cost less depreciation. Depreciation is computed on a straight-line method over the estimated useful lives or the term of the related lease. (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. As of December 31, 2000 and 1999, the carrying value of goodwill was $4,946,000 and $5,289,000, respectively. 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. As of December 31, 2000 and 1999, the carrying value of core deposit intangibles was $1,547,000 and $1,746,000, respectively (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. 38
39 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES . . . CONTINUED (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, 2000 and 1999 there were no assets that were considered impaired. (o) MORTGAGE SERVICING RIGHTS The Company recognizes mortgage servicing rights when rights are acquired through purchase or through sale of financial assets. The mortgage servicing rights are assessed for impairment based on the fair value of the mortgage servicing rights. Fair value is determined using prices for similar assets with similar characteristics when available, based upon discounted cash flows using market-based assumptions. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. As of December 31, 2000 and 1999 the carrying value of servicing rights was approximately $984,000 and $1,007,000, respectively. Amortization expense of $85,000, $175,000, and $145,000 was recognized in the years ended December 31, 2000, 1999, and 1998, respectively. The servicing rights are included in other assets on the balance sheet and are amortized over the life of the loan. There was no impairment of carrying value at December 31, 2000 or 1999. At December 31, 2000, the fair value of mortgage servicing rights was approximately $1,358,000. (p) EARNINGS PER SHARE Basic earnings per share is computed by dividing net earnings available to common stockholders by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share is computed by dividing such net earnings by the weighted average number of common shares used to compute basic EPS plus the incremental amount of potential common stock determined by the treasury stock method. Previous period amounts are restated for the effect of stock dividends and splits. (q) 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 1999 and 1998 financial statements to conform to the 2000 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, 2000 was $4,560,000 39
40 3. INVESTMENT SECURITIES, AVAILABLE FOR SALE A comparison of the amortized cost and estimated fair value of the Company's investment securities is as follows at: DECEMBER 31, 2000 Dollars in thousands Gross Unrealized Estimated Weighted Amortized --------------------- Fair Yield Cost Gains Losses Value -------- --------- ------- ------- --------- AVAILABLE-FOR-SALE U.S. GOVERNMENT AND FEDERAL AGENCIES maturing within one year ..................... 5.05% 500 -- (3) 497 maturing one year through five years ......... 6.33% 4,975 5 (25) 4,955 maturing five years through ten years ........ 6.92% 3,050 24 (11) 3,063 maturing after ten years ..................... 7.20% 1,070 -- (12) 1,058 ------- ------- ------- ------- 6.55% 9,595 29 (51) 9,573 ------- ------- ------- ------- STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES: maturing within one year ..................... 5.47% 600 1 (19) 582 maturing one year through five years ......... 5.17% 1,635 41 (1) 1,675 maturing five years through ten years ........ 7.53% 4,047 34 (99) 3,982 maturing after ten years ..................... 5.50% 54,561 1,612 (570) 55,603 ------- ------- ------- ------- 5.63% 60,843 1,688 (689) 61,842 ------- ------- ------- ------- MORTGAGE-BACKED SECURITIES ..................... 6.79% 39,374 268 (157) 39,485 REAL ESTATE MORTGAGE INVESTMENT CONDUITS ....... 6.94% 101,635 396 (1,043) 100,988 ------- ------- ------- ------- TOTAL AVAILABLE FOR SALE SECURITIES ..... 6.52% 211,447 2,381 (1,940) 211,888 ======= ======= ======= ======= DECEMBER 31, 1999 Dollars in thousands Gross Unrealized Estimated 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 ........ 6.37% 4,980 15 (105) 4,891 maturing five years though ten years ........ 6.76% 4,546 -- (221) 4,325 maturing after ten years .................... 5.20% 1,322 2 (13) 1,310 ------- ------- ------- ------- 6.33% 12,846 20 (343) 12,523 ------- ------- ------- ------- STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES: maturing within one year .................... 6.50% 397 1 (49) 349 maturing one year through five years ........ 4.92% 1,302 14 (5) 1,311 maturing five years through ten years ....... 6.88% 4,120 25 (20) 4,125 maturing after ten years .................... 5.21% 46,698 39 (2,985) 43,752 ------- ------- ------- ------- 5.34% 52,517 79 (3,059) 49,537 ------- ------- ------- ------- MORTGAGE-BACKED SECURITIES .................... 6.96% 44,528 164 (1,310) 43,382 REAL ESTATE MORTGAGE INVESTMENT CONDUITS ...... 6.94% 108,374 126 (4,630) 103,870 ------- ------- ------- ------- TOTAL AVAILABLE FOR SALE SECURITIES ........... 6.52% 218,265 389 (9,342) 209,312 ======= ======= ======= ======= 40
41 3. INVESTMENT SECURITIES . . . CONTINUED The book value of investment securities is as follows at: December 31, 1998 -------------------------------------------------- (dollars in thousands) Held-to-Maturity Available-for-Sale Totals ---------------- ------------------ ------ U.S. Government and Federal Agencies ......... $ 4,876 16,447 21,323 State and Local Governments and Other Issues . 4,184 40,037 44,221 Mortgage-Backed Securities ................... 280 25,738 26,018 Real Estate Mortgage Investment Conduits ..... - 27,813 27,813 -------- -------- -------- $ 9,340 110,035 119,375 ======== ======== ======== 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, 2000, 1999, and 1998 were approximately $19,253,000, $10,770,000 and $10,476,000 respectively, resulting in gross gains of approximately $127,000, $72,000 and $65,000 and gross losses of approximately $76,000, $49,000 and $3,000, respectively. At December 31, 2000, the Company had investment securities with carrying values of approximately $73,616,000 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, 2000 and 1999, the minority interest share of the unrealized gain (loss) was approximately $6,000 and ($22,000), respectively. 4. LOANS RECEIVABLE The following is a summary of loans receivable at: December 31, ------------------------- (dollars in thousands) 2000 1999 --------- --------- Residential first mortgage ...................... $ 224,631 219,482 Loans held for sale ............................. 7,058 5,896 Commercial real estate .......................... 198,414 154,155 Commercial ...................................... 142,519 125,462 Consumer ........................................ 86,336 87,967 Home equity ..................................... 83,539 66,566 --------- --------- 742,497 659,528 Net deferred loan fees, premiums and discounts ... (1,137) (598) Allowance for loan losses ........................ (7,799) (6,722) --------- --------- $ 733,561 652,208 ========= ========= The following is a summary of activity in allowance for losses on loans: Years ended December 31, ----------------------------------- (dollars in thousands) 2000 1999 1998 ------- ------- ------- Balance, beginning of period ...... $ 6,722 5,668 4,654 Net charge offs ................... (787) (669) (721) Provision ......................... 1,864 1,723 1,735 ------- ------- ------- Balance, end of period ............ $ 7,799 6,722 5,668 ======= ======= ======= 41
42 4. LOANS RECEIVABLE . . . CONTINUED The following is the allocation of allowance for loan losses and percentage of loans in each category at: DECEMBER 31, 2000 December 31, 1999 ---------------------- ---------------------- PERCENT OF Percent of OF LOANS IN of loans in AMOUNT CATEGORY Amount category ------ ----------- ------ ----------- (dollars in thousands) Residential first mortgage and loans held for sale . $1,227 31.2% $1,174 34.2% Commercial real estate ............................. 2,300 26.7% 1,526 23.4% Other commercial ................................... 2,586 19.2% 2,466 19.0% Consumer loans ..................................... 983 11.6% 1,087 13.3% Home equity ........................................ 703 11.3% 469 10.1% ------ ----- ------ ----- $7,799 100.0% $6,722 100.0% ====== ===== ====== ===== 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. Impaired loans for the years ended December 31, 2000, 1999, and 1998 were approximately $1,154,000, $1,463,000, and $1,570,000, respectively, of which no impairment allowance was deemed necessary. The average recorded investment in impaired loans for the years ended December 31, 2000, 1999, and 1998 was approximately $1,309,000, $1,517,000, and $1,095,000, respectively. Interest income that would have been recorded on impaired loans if such loans had been current for the entire period would have been approximately $101,000, $132,000, and $103,000 for the years ended December 31, 2000, 1999, and 1998, respectively. Interest income recognized on impaired loans for the years ended December 31, 2000, 1999, and 1998 was not significant. The weighted average interest rate on loans was 8.91% and 8.53% at December 31, 2000 and 1999, respectively. At December 31, 2000, 1999 and 1998 loans sold and serviced for others were $146,534,000, $159,451,000, and $169,378,000, 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 extend credit and letters of credit, and involve, to varying degrees, elements of credit risk. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The Company had outstanding commitments as follows (in thousands): December 31, ---------------------- 2000 1999 -------- -------- Loans and loans in process ........ $111,141 74,315 Unused consumer lines of credit ... 27,270 26,464 Letters of credit ................. 6,342 6,918 -------- -------- $144,753 107,697 ======== ======== 42
43 4. LOANS RECEIVABLE . . . CONTINUED The following is a summary of accrued interest receivable (in thousands): December 31, ------------------ 2000 1999 ------ ------ Investment securities ... $1,953 1,896 Loans receivable ........ 4,684 3,715 ------ ------ $6,637 5,611 ====== ====== 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, 2000 was approximately $13,372,000. During 2000, new loans to such related parties were approximately $7,292,000 and repayments were approximately $4,665,000. 5. PREMISES AND EQUIPMENT Premises and equipment consist of the following at: December 31, ----------------------- (dollars in thousands) 2000 1999 -------- -------- Land ................................................... $ 3,968 4,118 Office buildings and construction in progress........... 18,401 17,435 Furniture, fixtures and equipment ...................... 13,590 12,291 Leasehold improvements ................................. 1,498 1,341 Accumulated depreciation ............................... (12,441) (10,515) -------- -------- $ 25,016 24,670 ======== ======== 6. DEPOSITS Deposits consist of the following at: DECEMBER 31, 2000 December 31, 1999 --------------------------------------- ------------------------- Weighted (dollars in thousands) Average Rate AMOUNT PERCENT Amount Percent ------------ -------- ---------- -------- ---------- Demand accounts ................................ 0.0% $141,207 19.6% $126,927 19.7% -------- ---------- -------- ---------- NOW accounts ................................... 1.1% 105,616 14.7% 102,917 16.0% Savings accounts ............................... 1.8% 44,171 6.1% 47,312 7.3% Money market demand accounts ................... 4.5% 164,917 22.9% 156,692 24.3% Certificate accounts: 4.00% and lower ........................... 584 0.1% 1,715 0.3% 4.01% to 5.00% ............................ 14,742 2.0% 70,153 10.9% 5.01% to 6.00% ............................ 57,997 8.0% 110,490 17.2% 6.01% to 7.00% ............................ 183,896 25.6% 27,328 4.2% 7.01% to 8.00% ............................ 7,416 1.0% 412 0.1% 8.01% and higher .......................... 24 0.0% 160 0.0% -------- ---------- -------- ---------- Total certificate accounts ......... 5.8% 264,659 36.7% 210,258 32.7% -------- ---------- -------- ---------- Total interest bearing deposits ................ 4.2% 579,363 80.4% 517,179 80.3% -------- ---------- -------- ---------- Total deposits ................................. 3.3% $720,570 100.0% 644,106 100.0% ======== ========== ======== ========== Deposits with a balance in excess of $100,000 .. $241,270 $188,813 ======== ======== 43
44 6. DEPOSITS...CONTINUED At December 31, 2000, scheduled maturities of certificates of deposit are as follows: Years ending December 31, ------------------------------------------------------------------------------- (dollars in thousands) TOTAL 2001 2002 2003 2004 Thereafter -------- -------- -------- -------- -------- ---------- 4.00% and lower .... $ 584 583 1 -- -- -- 4.01% to 5.00% ..... 14,742 11,548 1,572 415 918 289 5.01% to 6.00% ..... 57,997 47,272 7,766 1,838 564 557 6.01% to 7.00% ..... 183,896 173,416 6,115 2,833 749 783 7.01% to 8.00% ..... 7,416 6,285 120 613 -- 398 8.01% and higher ... $ 24 17 7 -- -- -- -------- -------- -------- -------- -------- -------- 264,659 239,121 15,581 5,699 2,231 2,027 ======== ======== ======== ======== ======== ======== Interest expense on deposits is summarized as follows: Years ended December 31, --------------------------------- (dollars in thousands) 2000 1999 1998 ------- ------- ------- NOW accounts .................... $ 1,068 1,064 1,428 Money market demand accounts .... 7,447 5,304 4,458 Certificate accounts ............ 13,353 9,283 8,723 Savings accounts ................ 806 843 1,958 ------- ------- ------- $22,674 16,494 16,567 ======= ======= ======= 7. ADVANCES FROM FEDERAL HOME LOAN BANK OF SEATTLE Advances from the Federal Home Loan Bank of Seattle consist of the following: Totals as of Totals as of Maturing in years ending December 31, December 31, December 31, ------------------------------------------------------------------------------ ------------ ------------ (dollars in thousands) 2001 2002 2003 2004 2005 2006-2011 2000 1999 -------- -------- -------- -------- -------- -------- ------------ ------------ 4.00% to 5.00% ..... 25 -- -- -- -- -- 25 84,018 5.01% to 6.00% ..... 4,430 3,204 3,014 2,612 2604 6,116 21,980 112,726 6.01% to 7.00% ..... 168,602 2,570 508 401 366 470 172,917 9,996 7.01% to 8.00% ..... 451 351 302 248 173 144 1,669 1,710 8.01% to 8.15% ..... 63 63 54 20 -- -- 200 200 -------- -------- -------- -------- -------- -------- -------- -------- $173,571 6,188 3,878 3,281 3,143 6,730 196,791 208,650 ======== ======== ======== ======== ======== ======== ======== ======== These advances were collateralized by the Federal Home Loan Bank of Seattle stock held by the Company totaling approximately $16,436,000 and $15,134,000 at December 31, 2000 and 1999, respectively, and a blanket assignment of the Bank's unpledged qualifying real estate loans and investments. The total amount of advances available as of December 31, 2000 was approximately $135,751,000. The weighted average interest rate on these advances was 6.35% and 5.25% at December 31, 2000 and 1999, respectively. The Federal Home Loan Bank of Seattle holds callable options which may be exercised after a predetermined time, and quarterly thereafter. At December 31, 2000 advances totaling $18,000,000 with contractual maturity of 2008 and initial call dates of 2001 on $3,000,000 and 2003 on $15,000,000 were outstanding. 44
45 8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWED FUNDS Securities sold under agreements to repurchase consist of the following at: BOOK MARKET WEIGHTED VALUE OF VALUE OF (dollars in thousands) REPURCHASE AVERAGE UNDERLYING UNDERLYING December 31, 2000 AMOUNT RATE ASSETS ASSETS ---------- -------- ---------- ---------- SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE WITHIN: 1-30 DAYS ................. $12,650 4.32% $17,995 18,139 31-90 days .................. 9,100 6.48% 12,945 13,049 Greater than 90 days ......... 3,127 6.57% 4,448 4,484 ------- ------- ------- $24,877 5.39% $35,388 35,672 ======= ======= ======= December 31, 1999: Securities sold under agreements to repurchase within: 1-30 days ................. $13,765 4.38% $19,601 20,295 31-90 days .................. 6,001 4.81% 6,757 6,866 ------- ------- ------- $19,766 4.51% $26,358 27,161 ======= ======= ======= 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, 2000 and 1999 securities sold under agreements to repurchase averaged approximately $19,052,000 and $28,605,000, respectively, and the maximum outstanding at any month end during the year was approximately $24,877,000 and $53,791,000, respectively 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 $12,850,000 at federal funds rates minus 25 basis points. At December 31, 2000 and 1999 the outstanding balance under this program was approximately $4,302,000 and $5,778,000. The borrowings are secured with investment securities with a par value of approximately $20,363,000 and a market value of approximately $20,487,000. For the year ended December 31, 2000, the maximum outstanding at any month end was approximately $9,426,000 and the average balance was approximately $3,236,000. Other borrowed funds also includes federal funds purchased of $0 and $720,000 at December 31, 2000 and 1999, 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, 2000 and 1999 was $350,000. The debentures are 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 $10.60 of principal value, or an equivalent of 33,025 shares. 45
46 10. REGULATORY CAPITAL The Federal Reserve Board has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in supervising a bank holding company. The following table illustrates the Federal Reserve Board's adequacy guidelines and the Company's compliance with those guidelines as of December 31, 2000: Minimum capital Well capitalized Actual requirement requirement ----------------- ------------------ ------------------ Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- Tier 1 (core) capital to risk weighted assets Consolidated ................................ 91,263 12.31% 29,659 4.00% 44,489 6.00% Glacier ..................................... 37,328 13.45% 11,099 4.00% 16,648 6.00% Whitefish ................................... 4,974 11.97% 1,663 4.00% 2,494 6.00% Eureka ...................................... 3,350 16.42% 816 4.00% 1,224 6.00% First Security .............................. 18,099 9.98% 7,254 4.00% 10,881 6.00% Big Sky ..................................... 6,223 9.68% 2,572 4.00% 3,858 6.00% Valley ...................................... 7,598 12.41% 2,448 4.00% 3,673 6.00% Mountain West ............................... 9,797 11.12% 3,523 4.00% 5,285 6.00% Tier 2 (total) capital to risk weighted assets Consolidated ................................ 99,062 13.36% 59,319 8.00% 74,149 10.00% Glacier ..................................... 39,897 14.38% 22,198 8.00% 27,747 10.00% Whitefish ................................... 5,477 13.18% 3,325 8.00% 4,157 10.00% Eureka ...................................... 3,606 17.67% 1,632 8.00% 2,041 10.00% First Security .............................. 20,229 11.15% 14,508 8.00% 18,135 10.00% Big Sky ..................................... 6,951 10.81% 5,144 8.00% 6,430 10.00% Valley ...................................... 8,293 13.55% 4,897 8.00% 6,121 10.00% Mountain West ............................... 10,737 12.19% 7,046 8.00% 8,808 10.00% Leverage capital to total average assets Consolidated ................................ 91,263 8.72% 41,853 4.00% 52,317 5.00% Glacier ..................................... 37,328 8.08% 18,471 4.00% 23,088 5.00% Whitefish ................................... 4,974 8.90% 2,235 4.00% 2,794 5.00% Eureka ...................................... 3,350 10.84% 1,236 4.00% 1,545 5.00% First Security .............................. 18,099 8.64% 8,376 4.00% 10,470 5.00% Big Sky ..................................... 6,223 8.28% 3,005 4.00% 3,756 5.00% Valley ...................................... 7,598 8.66% 3,509 4.00% 4,387 5.00% Mountain West ............................... 9,797 8.11% 4,832 4.00% 6,040 5.00% 46
47 10. REGULATORY CAPITAL. . . CONTINUED The following table illustrates the Federal Reserve Board's adequacy guidelines and the Company's compliance with those guidelines as of December 31, 1999: Minimum capital Well capitalized Actual requirement requirement ----------------- ------------------ ------------------ Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- Tier 1 (core) capital to risk weighted assets Consolidated ................................ 83,678 13.23% 25,290 4.00% 37,935 6.00% Glacier ..................................... 33,645 13.58% 9,913 4.00% 14,870 6.00% Whitefish ................................... 4,934 13.49% 1,462 4.00% 2,194 6.00% Eureka ...................................... 3,339 19.45% 687 4.00% 1,030 6.00% First Security .............................. 16,456 9.73% 6,764 4.00% 10,146 6.00% Big Sky ..................................... 5,716 11.35% 2,015 4.00% 3,023 6.00% Valley ...................................... 7,376 12.59% 2,344 4.00% 3,516 6.00% Mountain West ............................... 6,542 10.40% 2,515 4.00% 3,773 6.00% Tier 2 (total) capital to risk weighted assets Consolidated ................................ 90,400 14.30% 50,581 8.00% 63,226 10.00% Glacier ..................................... 35,898 14.48% 19,827 8.00% 24,784 10.00% Whitefish ................................... 5,313 14.53% 2,925 8.00% 3,656 10.00% Eureka ...................................... 3,555 20.70% 1,374 8.00% 1,717 10.00% First Security .............................. 18,549 10.97% 13,527 8.00% 16,909 10.00% Big Sky ..................................... 6,335 12.58% 4,030 8.00% 5,038 10.00% Valley ...................................... 7,953 13.57% 4,688 8.00% 5,860 10.00% Mountain West ............................... 7,196 11.44% 5,031 8.00% 6,289 10.00% Leverage capital to total average assets Consolidated ................................ 83,678 9.59% 34,893 4.00% 43,616 5.00% Glacier ..................................... 33,645 7.58% 17,758 4.00% 22,198 5.00% Whitefish ................................... 4,934 9.86% 2,001 4.00% 2,501 5.00% Eureka ...................................... 3,339 12.03% 1,110 4.00% 1,388 5.00% First Security .............................. 16,456 8.62% 7,640 4.00% 9,550 5.00% Big Sky ..................................... 5,716 9.15% 2,498 4.00% 3,123 5.00% Valley ...................................... 7,376 8.95% 3,295 4.00% 4,119 5.00% Mountain West ............................... 6,542 7.60% 3,443 4.00% 4,304 5.00% The Federal Deposit Insurance Corporation Improvement Act generally restricts a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding Company if the institution would thereafter be capitalized at less than 8% of total risk-based capital, 4% of Tier I capital, or a 4% leverage ratio. At December 31, 2000, 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, 2000. 47
48 11. FEDERAL AND STATE INCOME TAXES The following is a summary of consolidated income tax expense for: Years ended December 31, ----------------------------------- (dollars in thousands) 2000 1999 1998 ------- ------- ------- Current: Federal ..................................... $ 6,259 5,675 5,546 State ....................................... 1,460 1,254 1,227 ------- ------- ------- Total current tax expense ............. 7,719 6,929 6,773 ------- ------- ------- Deferred: Federal ..................................... (74) (164) (127) State ....................................... (65) (43) 28 ------- ------- ------- Total deferred tax benefit ............ (139) (207) (99) ------- ------- ------- Total income tax expense ... $ 7,580 6,722 6,674 ======= ======= ======= Federal and state income tax expense differs from that computed at the federal statutory corporate tax rate as follows for: Years ended December 31, -------------------------------- 2000 1999 1998 ------ ------ ------ Federal statutory rate ............................ 35.0% 35.0% 35.0% State taxes, net of federal income tax benefit .... 4.2% 4.1% 4.5% Other, net ........................................ -4.1% -3.9% -2.5% ------ ------ ------ 35.1% 35.2% 37.0% ====== ====== ====== Tax exempt interest for the years ended December 31, 2000, 1999 and 1998 was approximately $2,816,000, $2,301,000, and $1,604,000, respectively. The tax effect of temporary differences which give rise to a significant portion of deferred tax assets and deferred tax liabilities are as follows: December 31, --------------------- (dollars in thousands) 2000 1999 ------- ------- Deferred tax assets: Allowance for losses on loans ......................... $ 3,270 2,826 Available-for-sale securities fair value adjustment ... -- 3,501 Other ................................................. 440 540 ------- ------- Total gross deferred tax assets ................ 3,710 6,867 ------- ------- Deferred tax liabilities: Federal Home Loan Bank stock dividends ................ (2,678) (2,247) Fixed assets, due to differences in depreciation ...... (823) (665) Tax bad debt reserve in excess of base-year reserve ... (200) (418) Available-for-sale securities fair value adjustment ... (175) -- Basis difference from acquisitions .................... (181) (186) Other ................................................. (231) (392) ------- ------- Total gross deferred tax liabilities .......... (4,288) (3,908) ------- ------- Net deferred tax asset (liability) ............ $ (578) 2,959 ======= ======= 48
49 11. FEDERAL AND STATE INCOME TAXES . . . CONTINUED There is no valuation allowance at December 31, 2000 and 1999 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. Retained earnings at December 31, 2000 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, 2000, 1999, and 1998 was approximately $1,058,000, $791,000 and $552,000 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, 2000, 1999 and 1998 was approximately $331,000, $288,000, and $256,000, 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, 2000, 1999 and 1998 was approximately $18,000, $10,000, and $26,000, respectively. The Company has a non-funded deferred compensation plan for directors and senior officers. The plan provides for the deferral of cash payments of up to 25% of a participants' salary, and for 100% of bonuses and directors fees, at the election of the participant. The total amount deferred was approximately $34,000, $43,000, $52,000, for the years ending December 31, 2000, 1999, and 1998, 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 2000, 1999, and 1998 were approximately ($24,000), ($33,000), and $12,000, 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. 49
50 13. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: For the Years Ended December 31, --------------------------------------------- 2000 1999 1998 ----------- ----------- ----------- Net earnings available to common stockholders, basic ...................... $14,003,000 12,352,000 11,375,000 After tax effect of interest on convertible subordinated debentures ... 16,000 16,000 16,000 ----------- ----------- ----------- Net earnings available to common stockholders, diluted .................... $14,019,000 12,368,000 11,391,000 =========== =========== =========== Average outstanding shares - basic .......... 11,440,391 11,392,861 11,146,948 Add: Dilutive stock options ................. 70,730 174,183 219,551 Convertible subordinated debentures ... 33,025 33,025 33,025 ----------- ----------- ----------- Average outstanding shares - diluted ........ 11,544,146 11,600,069 11,399,524 =========== =========== =========== Basic earnings per share .................... $ 1.22 1.08 1.02 =========== =========== =========== Diluted earnings per share .................. $ 1.21 1.07 1.00 =========== =========== =========== There were approximately 510,000 and 351,000 option shares in 2000 and 1999, respectively, that were not included because the option exercise price exceeded the market value. All option shares were included as dilutive stock options in 1998. 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 plans must be at least equal to the per share market value of such stock at the date the option is granted. The 1984 plan also contains provisions permitting the optionee, with the approval of the Company, to surrender his or her options for cancellation and receive cash or common stock equal to the difference between the exercise price and the then fair market value of the shares on the date of surrender (cash-less exercise). The fiscal 1990 and 1995 plans also contain provisions authorizing the grant of limited stock rights, which permit the optionee, upon a change in control of the Company, to surrender his or her options for cancellation and receive cash or common stock equal to the difference between the exercise price and the fair market value of the shares on the date of the grant. All option shares are adjusted for stock splits and stock dividends. The term of the options may not exceed five years from the date the options are 50
51 14. STOCK OPTION PLANS . . . CONTINUED 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, 2000, total shares available for option grants to employees and directors are 736,634. Changes in shares granted for stock options for the years ended December 31, 2000, 1999, and 1998, are summarized as follows: Options outstanding Options exercisable --------------------------- ---------------------------- Weighted Weighted average average Shares exercise price Shares exercise price -------- -------------- -------- -------------- Balance, December 31, 1997 ..... 534,759 $ 12.33 234,338 $ 10.32 Canceled ....................... (16,738) (13.51) (8,388) (10.97) Granted ........................ 170,957 22.10 31,860 13.75 Became exercisable ............. 132,885 11.31 Three for two stock split ...... 58,939 40,985 Exercised ...................... (153,459) (10.26) (153,459) (10.26) -------- ---------- -------- Balance, December 31, 1998 ..... 594,458 $ 14.40 278,221 10.36 Canceled ....................... (43,439) (18.57) (2,631) (11.74) Granted ........................ 217,573 22.27 10,620 16.95 Became exercisable ............. 197,139 16.01 Stock dividend ................. 55,913 32,042 Exercised ...................... (113,049) (11.58) (113,049) (11.58) -------- ---------- -------- Balance, December 31, 1999 ..... 711,456 $ 15.85 402,342 12.41 Canceled ....................... (12,687) (15.42) (28,889) (16.77) Granted ........................ 145,818 15.27 Became exercisable ............. 161,852 17.81 Stock dividend ................. 54,887 60,210 Exercised ...................... (14,161) (9.47) (14,161) (9.47) -------- ---------- -------- Balance, December 31, 2000 ..... 885,313 $ 14.34 581,354 13.13 ======== ========== ======== The range of exercise prices on options outstanding at December 31, 2000 is as follows: Options exercisable ------------------------- Weighted Weighted Weighted average average average Price range Shares exercise price life of options Shares exercise price - ----------------- ------- -------------- --------------- ---------- -------------- $5.65 - $8.12 44,017 $ 6.22 3.8 years 44,017 $ 6.22 $8.75 - $9.57 131,295 9.11 3.1 years 131,295 9.11 $11.21 - $13.09 203,302 11.92 2.1 years 202,302 11.92 $13.63 - $16.95 150,551 13.86 5.8 years 23,584 14.74 $18.28 - $21.82 356,148 18.86 3.2 years 180,156 18.89 --------- ------- 885,313 14.34 3.8 years 581,354 13.13 ========= ======= 51
52 14. STOCK OPTION PLANS . . . CONTINUED The options exercised during the year ended December 31, 2000 were at prices from $7.00 to $13.24. The per share weighted-average fair value of stock options granted during 2000, 1999 and 1998 was $2.47, $5.04, and $4.76, respectively, on the date of grant using the Black Scholes option-pricing model with the following assumptions: 2000 - expected dividend yield of 4.6%, risk-free interest rate of 4.98%, volatility ratio of 25%, and expected life of 4.8 years: 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 4.6%, 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: --------------------------------------------- 2000 1999 1998 ----------- ----------- ----------- Net earnings (in thousands): As reported $ 14,003 12,352 11,375 Pro forma 13,379 11,463 10,724 Basic earnings per share: As reported 1.22 1.08 1.02 Pro forma 1.17 1.00 0.96 Diluted earnings per share: As reported 1.21 1.07 1.00 Pro forma 1.16 0.99 0.94 52
53 15. PARENT COMPANY INFORMATION (CONDENSED) The following condensed financial information is the unconsolidated (parent company only) information for Glacier Bancorp, Inc.: STATEMENTS OF FINANCIAL CONDITION December 31, (dollars in thousands) ------------------------- 2000 1999 --------- --------- Assets: Cash ............................................... $ 1,674 2,561 Interest bearing cash deposits ..................... 586 16 --------- --------- Cash and cash equivalents .................... 2,260 2,577 Investment securities, available-for-sale .......... 1,075 1,755 Other assets ....................................... 3,022 2,640 Goodwill, net ...................................... 2,150 2,376 Investment in subsidiaries ......................... 92,235 78,220 --------- --------- $ 100,742 87,568 ========= ========= Liabilities and Stockholders' Equity: Dividends payable .................................. $ 1,758 1,910 Other liabilities .................................. 871 602 --------- --------- Total liabilities .......................... 2,629 2,512 Common stock ....................................... 114 104 Paid-in capital .................................... 101,828 87,387 Retained earnings (accumulated deficit) ............ (4,087) 2,996 Accumulated other comprehensive income (loss) ...... 258 (5,431) --------- --------- Total stockholders' equity ................ 98,113 85,056 --------- --------- $ 100,742 87,568 ========= ========= STATEMENTS OF OPERATIONS Years ended December 31, (dollars in thousands) -------------------------------------- 2000 1999 1998 -------- -------- -------- Revenues Dividends from subsidiaries ...................................... $ 8,650 8,518 5,761 Other income ..................................................... 163 161 168 Intercompany charges for services ................................ 2,469 1,617 1,971 -------- -------- -------- Total revenues .............................................. 11,282 10,296 7,900 Expenses Employee compensation and benefits ............................... 1,852 1,519 1,880 Goodwill amortization ............................................ 243 243 165 Other operating expenses ......................................... 1,635 1,027 1,239 -------- -------- -------- Total expenses .............................................. 3,730 2,789 3,284 Earnings before income tax benefit and equity in undistributed earnings of subsidiaries ................................... 7,552 7,507 4,616 Income tax benefit ............................................... (359) (328) (198) -------- -------- -------- Income before equity in undistributed earnings of subsidiaries ... 7,911 7,835 4,814 Equity in undistributed earnings of subsidiaries ................. 6,092 4,517 6,561 -------- -------- -------- Net earnings ........................................................ $ 14,003 12,352 11,375 ======== ======== ======== 53
54 15. PARENT COMPANY INFORMATION (CONDENSED) . . . CONTINUED Years ended December 31, STATEMENTS OF CASH FLOWS -------------------------------------- (dollars in thousands) 2000 1999 1998 -------- -------- -------- Operating Activities Net earnings ..................................................... $ 14,003 12,352 11,375 Adjustments to reconcile net earnings to net cash provided by operating activities: Goodwill amortization ............................................ 243 242 165 Gain on sale of investments available-for-sale ................... (11) -- (8) Equity in undistributed earnings of subsidiaries ................. (6,092) (4,517) (6,561) Net increase in other assets and other liabilities ............... 321 375 1,179 -------- -------- -------- Net cash provided by operating activities ........................... 8,464 8,452 6,150 -------- -------- -------- Investing activities Purchases of investment securities available-for-sale ............ -- (103) (198) Proceeds from sales, maturities and prepayments of securities available-for-sale ......................................... 702 3 59 Proceeds from maturities of securities held-to-maturity .......... -- -- 3 Equity contribution to subsidiary ................................ (2,200) (2,500) -- Net addition of premises and equipment ........................... (480) (1,510) (1,399) Acquisition of minority interest ................................. -- -- (236) -------- -------- -------- Net cash used by investing activities ............................... (1,978) (4,110) (1,771) -------- -------- -------- Financing activities Proceeds from exercise of stock options and other stock issued ... 101 1,073 1,573 Principal reductions on notes payable ............................ -- -- (216) Cash dividends paid to stockholders .............................. (6,904) (5,923) (4,327) -------- -------- -------- Net cash used by financing activities ............................... (6,803) (4,850) (2,970) -------- -------- -------- Net increase (decrease) in cash and cash equivalents ................ (317) (508) 1,409 Cash and cash equivalents at beginning of year ...................... 2,577 3,085 1,676 -------- -------- -------- Cash and cash equivalents at end of year ............................ $ 2,260 2,577 3,085 ======== ======== ======== 16. UNAUDITED QUARTERLY FINANCIAL DATA Summarized unaudited quarterly financial data is as follows (in thousands except per share amounts): QUARTERS ENDED ------------------------------------------------------------------------------------ MARCH 31, 2000 JUNE 30, 2000 SEPT. 30, 2000 DEC. 31, 2000 --------------- --------------- --------------- --------------- Interest income ................... $ 18,246 19,293 20,400 20,898 Interest expense .................. 8,345 9,134 9,881 9,997 Net interest income ............... 9,901 10,159 10,519 10,901 Provision for loan loss ........... 487 505 491 381 Net income before income taxes .... 4,979 4,983 6,137 5,485 Net earnings ...................... 3,228 3,192 3,853 3,730 Basic earnings per share [1] ...... 0.28 0.28 0.34 0.32 Diluted earnings per share [1] .... 0.28 0.28 0.33 0.32 Dividends per share [1] ........... 0.14 0.15 0.15 0.15 Market range high-low [1] ......... $14.82-$11.25 $14.44-$11.00 $13.38-$11.00 $13.31-$11.00 54
55 16. UNAUDITED QUARTERLY FINANCIAL DATA . . . CONTINUED Quarters Ended ------------------------------------------------------------------------------------ March 31, 1999 June 30, 1999 Sept. 30, 1999 Dec. 31, 1999 --------------- --------------- --------------- --------------- Interest income ................... $ 14,398 15,476 16,849 17,996 Interest expense .................. 5,973 6,470 7,260 7,932 Net interest income ............... 8,425 9,006 9,589 10,064 Provision for loan loss ........... 359 410 478 476 Net income before income taxes .... 4,540 4,742 5,099 4,693 Net earnings ...................... 2,969 3,088 3,266 3,029 Basic earnings per share[1] ....... 0.26 0.27 0.28 0.26 Diluted earnings per share[1] ..... 0.25 0.26 0.28 0.26 Dividends per share[1] ............ 0.13 0.14 0.14 0.18[2] Market range high-low[1] .......... $19.84-$15.50 $22.17-$15.70 $21.71-$13.87 $17.05-$13.53 [1] Per share amounts adjusted to reflect effect of 10% stock dividend. [2] Special dividend was paid at $0.5 per share. 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: 2000 1999 ------------------------- ------------------------- (dollars in thousands) AMOUNT FAIR VALUE Amount Fair Value -------- ---------- -------- ---------- Financial Assets: Cash ............................................. $ 41,456 41,456 50,590 50,590 Federal funds sold ............................... -- -- 64 64 Interest bearing cash deposits ................... 10,330 10,330 1,711 1,711 Investment securities ............................ 71,415 71,415 62,060 62,060 Mortgage-backed securities ....................... 140,473 140,473 147,252 147,252 Loans ............................................ 733,561 728,511 652,208 641,499 FHLB and Federal Reserve Bank stock .............. 18,098 18,098 16,601 16,601 Financial Liabilities: Deposits ......................................... $720,570 721,217 644,106 646,778 Advances from the FHLB of Seattle ................ 196,791 198,195 208,650 204,681 Repurchase agreements and other borrowed funds ... 29,529 29,529 26,614 26,614 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. 55
56 17. FAIR VALUE OF FINANCIAL INSTRUMENTS...CONTINUED 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 leases certain land, premises and equipment from third parties under operating leases. Total rent expense for the year ended December 31, 2000, 1999, and 1998 was approximately $462,000, $352,000, and $306,000, respectively. The total future minimum rental commitments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year at December 31, 2000 are as follows: Years ended December 31, Amount ------------------------ ------ 2001 $ 529 2002 427 2003 257 2004 188 2005 124 Thereafter 445 ------ Total minimum future rental expense $1,970 ====== The Company is a defendant in legal proceedings arising in the normal course of business. In the opinion of management, the disposition of pending litigation will not have a material effect on the Company's consolidated financial position, results of operations or liquidity. 19. BUSINESS COMBINATIONS On August 31, 1998, the Company issued 536,154 shares of common stock in exchange for all of the outstanding stock of HUB Financial Corporation (HUB), parent company of Valley Bank of Helena (Valley). As a result of this transaction, the Company acquired the majority interest, 86.5%, of Valley. This business combination has been accounted for as a pooling-of interests combination, and, accordingly, the consolidated financial statements for periods prior to the combination have been restated to include the accounts and results of operations of HUB. Also on August 31, 1998, the Company issued 83,761 shares of common stock valued at $2,199 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 56
57 19. BUSINESS COMBINATIONS...CONTINUED to the combination have been restated to include the accounts and results of operations of Big Sky Western Bank. On February 4, 2000, the Company issued 844,257 shares of common stock in exchange for all of the outstanding stock of Mountain West Bank. This business combination has been accounted for as a pooling-of-interests combination, and accordingly, the consolidated financial statements for the periods prior to the combination have been restated to include the accounts and results of operations of Mountain West Bank. Prior to the combination Mountain West Bank's fiscal year ended on March 31. In recording the pooling-of-interests combination, Mountain West Bank's financial statements for the twelve months ended December 31, 1999, were combined with the Company's financial statements for the same period. For the December 31, 1998 financial statements Mountain West Bank's March 31, 1999 financial statements were combined with the Company's December 31, 1998 financial statements. An adjustment of $75,000 has been made to stockholders' equity as of December 31, 1999, to eliminate the effect of including Mountain West Bank's results of operation for the three months ended March 31, 1999, in both the years ended December 31, 1999 and 1998. The results of operations previously reported by the separate companies and the combined amounts presented in the accompanying consolidated financial statements are summarized below (in thousands): Years ended December 31 1999 1998 ----------- ------- Revenue of: Glacier Bancorp, Inc. .. $69,985 65,680 Mountain West Bank ..... 7,543 6,744 ------- ------- Combined ....... $77,528 72,424 ======= ======= Net earnings of: Glacier Bancorp, Inc. .. $12,179 10,915 Mountain West Bank ..... 173 460 ------- ------- Combined ....... $12,352 11,375 ======= ======= 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 and accordingly, the consolidated statement of operations for the year ended December 31, 1999 includes the results of these branch operations from the date of 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. OPERATING SEGMENT INFORMATION FASB Statement 131, Financial Reporting for Segments of a Business Enterprise, requires that a public business enterprise report financial and descriptive information about its reportable operating segments. According to the statement, operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company evaluates segment performance internally based on individual bank charter, and thus the operating segments are so defined. All segments, except for the segment defined as "other," are based 57
58 21. OPERATING SEGMENT INFORMATION . . . CONTINUED 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. The following is a summary of selected operating segment information for the years ended and as of December 31, 2000, 1999, and 1998 (in thousands): Operating Segments information (Dollars in thousands) First 2000 Glacier Whitefish Eureka Security Valley --------- --------- --------- --------- --------- Net interest income ............. $ 16,361 2,406 1,335 9,324 4,171 Provision for loan losses ....... 460 225 24 360 205 --------- --------- --------- --------- --------- Net interest income after provision for loan losses ..... 15,901 2,181 1,311 8,964 3,966 Noninterest income .............. 5,913 704 332 2,000 1,411 Merger expense and amortization of goodwill and core deposit intangibles ................... 317 0 0 0 0 Other noninterest expense ....... 11,440 1,522 933 4,771 3,498 --------- --------- --------- --------- --------- Income before income taxes and minority interest ......... 10,057 1,363 710 6,193 1,879 Minority interest ............... Income tax expense (benefit) .... 3,456 423 199 2,251 657 --------- --------- --------- --------- --------- Net income ...................... $ 6,601 940 511 3,942 1,222 ========= ========= ========= ========= ========= Assets .......................... $ 469,351 56,563 30,562 214,231 87,791 Net loans ....................... 282,467 40,146 20,291 180,041 62,645 Deposits ........................ 288,556 41,475 19,285 164,168 76,508 Stockholders' equity ............ 42,049 5,060 3,402 18,027 7,649 1999 Net interest income ............. $ 15,266 2,044 1,290 8,804 3,614 Provision for loan losses ....... 470 66 24 600 155 --------- --------- --------- --------- --------- Net interest income after provision for loan losses ..... 14,796 1,978 1,266 8,204 3,459 Noninterest income .............. 5,539 675 313 2,260 1,494 Merger expense and amortization of goodwill and core deposit intangibles ................... 78 0 0 0 0 Other noninterest expense ....... 10,750 1,502 986 4,567 2,977 --------- --------- --------- --------- --------- Income before income taxes and minority interest ......... 9,507 1,151 593 5,897 1,976 Minority interest ............... Income tax expense (benefit) .... 3,303 348 191 2,132 731 --------- --------- --------- --------- --------- Net income ...................... $ 6,204 803 402 3,765 1,245 ========= ========= ========= ========= ========= Assets .......................... $ 460,257 52,203 28,879 193,548 82,587 Net loans ....................... 272,060 35,485 18,178 161,781 58,924 Deposits ........................ 276,880 34,261 18,514 143,645 65,095 Stockholders' equity ............ 36,040 4,605 3,137 15,640 7,073 Mountain 2000 Big Sky West Other Consolidated --------- --------- --------- ------------ Net interest income ............. 2,721 5,037 125 41,480 Provision for loan losses ....... 180 410 0 1,864 --------- --------- --------- --------- Net interest income after provision for loan losses ..... 2,541 4,627 125 39,616 Noninterest income .............. 750 2,206 (22) 13,294 Merger expense and amortization of goodwill and core deposit intangibles ................... 0 0 242 559 Other noninterest expense ....... 2,527 5,153 863 30,707 --------- --------- --------- --------- Income before income taxes and minority interest ......... 764 1,680 (1,002) 21,644 Minority interest ............... 61 61 Income tax expense (benefit) .... 258 657 (321) 7,580 --------- --------- --------- --------- Net income ...................... 506 1,023 (742) 14,003 ========= ========= ========= ========= Assets .......................... 77,111 126,518 (5,415) 1,056,712 Net loans ....................... 57,050 90,921 0 733,561 Deposits ........................ 49,616 86,632 (5,670) 720,570 Stockholders' equity ............ 6,090 9,780 6,056 98,113 1999 Net interest income ............. 2,077 3,755 234 37,084 Provision for loan losses ....... 191 217 -- 1,723 --------- --------- --------- --------- Net interest income after provision for loan losses ..... 1,886 3,538 234 35,361 Noninterest income .............. 881 1,745 (98) 12,809 Merger expense and amortization of goodwill and core deposit intangibles ................... 0 78 361 517 Other noninterest expense ....... 2,096 4,941 709 28,528 --------- --------- --------- --------- Income before income taxes and minority interest ......... 671 264 (934) 19,125 Minority interest ............... 51 51 Income tax expense (benefit) .... 231 91 (305) 6,722 --------- --------- --------- --------- Net income ...................... 440 173 (680) 12,352 ========= ========= ========= ========= Assets .......................... 66,255 89,884 388 974,001 Net loans ....................... 43,850 61,930 -- 652,208 Deposits ........................ 41,034 67,824 (3,147) 644,106 Stockholders' equity ............ 5,281 6,243 7,037 85,056 58
59 21. OPERATING SEGMENT INFORMATION . . . CONTINUED Operating Segments information (Dollars in thousands) First 1998 Glacier Whitefish Eureka Security Valley -------- --------- -------- -------- -------- Net interest income ............... $ 14,572 1,820 1,247 7,784 3,312 Provision for loan losses ......... 670 78 12 645 85 -------- -------- -------- -------- -------- Net interest income after provision for loan losses ....... 13,902 1,742 1,235 7,139 3,227 Noninterest income ................ 5,723 686 372 2,801 1,553 Merger expense and amortization of goodwill and core deposit intangibles ..................... -- -- -- -- -- Other noninterest expense ......... 10,523 1,347 971 4,151 3,010 -------- -------- -------- -------- -------- Income before income taxes and minority interest ........... 9,102 1,081 636 5,789 1,770 Minority interest ................. Income tax expense (benefit) ...... 3,238 343 217 2,138 659 -------- -------- -------- -------- -------- Net income ........................ $ 5,864 738 419 3,651 1,111 ======== ======== ======== ======== ======== Assets ............................ $370,686 42,643 24,471 164,546 69,924 Net loans ......................... 272,399 22,022 16,322 134,646 48,860 Deposits .......................... 201,211 34,179 17,797 139,348 57,807 Stockholders' equity .............. 39,058 4,642 3,309 14,668 6,628 Mountain 1998 Big Sky West Other Consolidated -------- -------- -------- ------------ Net interest income ............... 1,251 3,187 185 33,358 Provision for loan losses ......... 42 203 -- 1,735 -------- -------- -------- -------- Net interest income after provision for loan losses ....... 1,209 2,984 185 31,623 Noninterest income ................ 743 1,637 81 13,596 Merger expense and amortization of goodwill and core deposit intangibles ..................... -- -- 931 931 Other noninterest expense ......... 1,680 3,885 527 26,094 -------- -------- -------- -------- Income before income taxes and minority interest ........... 272 736 (1,192) 18,194 Minority interest ................. 145 145 Income tax expense (benefit) ...... 103 276 (300) 6,674 -------- -------- -------- -------- Net income ........................ 169 460 (1,037) 11,375 ======== ======== ======== ======== Assets ............................ 39,376 80,867 (5,711) 786,802 Net loans ......................... 23,959 52,980 -- 571,188 Deposits .......................... 31,385 70,659 (5,883) 546,503 Stockholders' equity .............. 2,873 6,336 6,632 84,146 22. ACQUISITIONS On September 20, 2000, the Company entered into a merger agreement to acquire WesterFed Financial Corporation (WesterFed). The merger was closed on February 28, 2001. Under the terms of the agreement, the Company issued 4,530,462 shares and $37,274,000 cash for total consideration of $96,669,000, based on a $13.11 per share price. The merger is being accounted for using the purchase method of accounting. Accordingly, the assets and liabilities of WesterFed are recorded by the Company at their respective fair values at the time of the completion of the merger. The excess of the Company's purchase price over the net fair value of the assets acquired and liabilities assumed, including identifiable intangible assets, is recorded as goodwill and will be amortized over a useful life of 20 years. On September 14, 2000 the Company announced the acquisition of seven branches of Wells Fargo & Company and First Security Corporation subsidiary banks located in Idaho and Utah. The transaction was completed on March 15, 2001. In total, as of the closing, the branches had approximately $187,000,000 in deposits and $38,000,000 in loans. The purchase price of approximately $18,500,000 was based on the total deposits, cash-equivalent assets and loans at the branches immediately prior to closing. The locations became branch offices of Mountain West Bank of Coeur d'Alene. 23. SUBSEQUENT EVENTS The Company formed Glacier Capital Trust I (Glacier Trust) as a financing subsidiary on December 18, 2000. On January 25, 2001, Glacier Trust offered 1,400,000 preferred securities at $25 per preferred securities. The purchase of the securities entitles the shareholder to receive cumulative cash distributions at an annual interest rate of 9.40% from payments on the junior subordinated debentures of Glacier Bancorp, Inc. The subordinated debentures will mature and the preferred securities must be redeemed by February 1, 2031. In exchange for the Company's capital contribution, the Company will own all of the outstanding common securities of the trust. 59
60 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 "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 "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 "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 Statements and Financial Statement Schedules The financial statements and related documents listed in the index set forth in Item 8 of this report are filed as part of this report. All other schedules to the consolidated financial statements required by Regulation S-X are omitted because they are not applicable, not material or because the information is included in the consolidated financial statements or related notes. 60
61 (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) Deferred Compensation Plan (6) 10(k) Supplemental Executive Retirement Agreement (6) 10(l) Employment agreement dated September 14, 1999, between Mountain West Bank and Jon W. Hippler (8) 10(m) Employment agreement dated September 20, 2000 between Western Security Bank and Ralph R. Holliday (9) 21 Subsidiaries of the Company (See item 1, "Subsidiaries") 23 Consent of KPMG LLP (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). (8) Incorporated by reference to exhibit 10.3 of the Company's Registration Statement on S-4 (No. 333-90701), declared effective on December 17, 1999. (9) Incorporated by reference to exhibit 10.4 of the Company's Registration Statement on S-4 (No. 333-52498), declared effective as of February 28, 2001. 61
62 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 February 26, 2001. GLACIER BANCORP, INC. By: /s/ Michael J. Blodnick -------------------------- Michael J. Blodnick President/CEO/Director PURSUANT to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 26, 2001, by the following persons in the capacities indicated. /s/Michael J. Blodnick President, CEO, and Director - ------------------------------- (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/ L. Peter Larson Director - ------------------------------- L. Peter Larson /s/ Allen Fetscher Director - ------------------------------- Allen J. Fetscher /s/ Jon W. Hippler Director - ------------------------------- Jon W. Hippler /s/ Everit A. Sliter Director - ------------------------------- Everit A. Sliter /s / Harold A. Tutvedt Director - ------------------------------- Harold A. Tutvedt /s/ William L. Bouchee Director - ------------------------------- William L. Bouchee /s/ Fred J. Flanders Director - ------------------------------- Fred J. Flanders /s/ F. Charles Mercord Director - ------------------------------- F. Charles Mercord 62
1 EXHIBIT 23 The Board of Directors Glacier Bancorp, Inc.: We consent to incorporation by reference in the registration statements on Form S-8 (No. 33-94648 and No. 333-36514) of our report dated February 2, 2001 relating to the consolidated statements of financial condition of Glacier Bancorp, Inc. and subsidiaries as of December 31, 2000 and 1999 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, 2000, which report appears in the December 31, 2000 annual report on Form 10-K of Glacier Bancorp, Inc. Our report, dated February 2, 2001, contains explanatory paragraphs indicating that we did not audit the 1998 financial statements of Mountain West Bank acquired by Glacier Bancorp, Inc. on February 4, 2000 in a pooling of interests; those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Mountain West Bank in the 1998 consolidated financial statements of Glacier Bancorp, Inc., is based solely on the report of the other auditors. /s/ KPMG LLP Billings, Montana March 28, 2001