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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20552
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, 1997 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE 000-18911
GLACIER BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 81-0468393
(State or other jurisdiction of incorporation or organization) (IRS employer Identification No.)
P.O. Box 27; 202 Main Street, Kalispell, Montana 59903-0027
(Address of principal executive offices) (Zip Code)
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. Yes
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 23, 1998, there were issued and outstanding 6,876,263 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 23, 1998, was $146,485,773.
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GLACIER BANCORP, INC.
FORM 10-K ANNUAL REPORT
For the year ended December 31, 1997
TABLE OF CONTENTS
Page
PART 1.
Item 1. Business 3
Item 2. Properties 27
Item 3. Legal Proceedings 29
Item 4. Submission of Matter to a Vote of Security Holders 29
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matter 29
Item 6. Selected Financial Data 30
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 31
Item 7A. Quantatative and Qualitative Disclosures about
Market Risk 38
Item 8. Financial Statements and Supplementary Data 39
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 68
PART III
Item 10. Directors and Executive Officers of the Registrant 68
Item 11. Executive Compensation 73
Item 12. Security Ownership of Certain Beneficial Owners
And Management 78
Item 13. Certain Relationships and Related Transactions 79
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 80
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PART I
Item 1. Business
BACKGROUND
Glacier Bancorp, Inc. Kalispell, Montana (the "Company") is a Delaware
corporation incorporated in 1990, pursuant to the reorganization of Glacier
Bank, FSB into a bank holding company. Effective 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").
In addition to Glacier the Company is also the parent holding company of Glacier
Bank of Eureka ("Eureka"), formerly First National Bank of Eureka, Glacier Bank
of Whitefish ("Whitefish"), formerly Glacier National Bank of Whitefish, and
First Security Bank of Missoula ("First Security"). The Company owns
approximately 93%, and 94%, respectively, of the outstanding stock of Eureka
and Whitefish, and 100% of Glacier and First Security. Whitefish and Eureka
were converted from national bank charters to State of Montana charters in late
December 1997.
First Security was acquired on December 31, 1996 through an exchange of stock
with Missoula Bancshares, Inc., formerly the parent company of First Security.
The pooling of interest accounting method was used for this merger transaction.
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.
As of December 31, 1997, Glacier, First Security, Whitefish and Eureka had
assets of $365 million, $144 million, $41 million and $26 million, respectively.
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 are members of the Federal Reserve Bank of
Minneapolis.
Glacier's main office is located at 202 Main Street, 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) 296-2521, and First
Security's address is 1704 Dearborn, Missoula, MT 59801 (406) 728-3115.
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 residential, installment and other loans. The Bank's
principal sources of income are interest on loans, loan origination fees, fees
on deposit accounts and interest and dividends on investment securities. Its
principal expenses are interest on deposits, FHLB advances, and repurchase
agreements, as well as general and administrative expenses.
The Company provides full service brokerage services through Robert Thomas
Securities, an unrelated brokerage firm, through Community First Inc., a wholly
owned subsidiary, maintained for this purpose.
The following abbreviated organizational chart illustrates the various existing
parent/subsidiary relationships:
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[GLACIER BANCORP, INC. BRANCH DIAGRAM]
MARKET AREA
The Company historically has specialized in serving the savings and mortgage
loan needs of the retail financial services market. Since 1981 the Company has
emphasized transaction accounts, including non-interest bearing checking
accounts and consumer lending. In recent years commercial loans and related
deposits have received increased attention, rounding out the mix of products
offered.
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 Ravalli, 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 home office and branch offices in Kalispell, Columbia Falls,
Evergreen, Bigfork, and Polson (the county seat of Lake County), Libby (the
county seat of Lincoln County), Cut Bank (the county seat of Glacier County),
Hamilton (the county seat of Ravalli County), Billings (the county seat of
Yellowstone County), Helena (the state capital and county seat of Lewis and
Clark county), and Thompson Falls (the county seat of Sanders county). First
Security's main office and two branch locations are in Missoula (the county seat
of Missoula County). Whitefish and Eureka are located in Whitefish, Montana and
Eureka, Montana, respectively; each has one office.
This northwest Montana area 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,
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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.
COMPETITION
Glacier, Whitefish and Eureka comprise the largest financial institution group
in terms of total assets in the four county area of northwest Montana, and have
approximately 20% of the total deposits in this area. The Billings branches are
located in both the most populous city and county of Montana. One of the
Billings branches was converted from a mortgage origination office to a
full-service branch in April 1995. The supermarket branch opened in July 1996.
First Security has approximately 11% of the total deposits in Missoula County.
Interstate banking is allowed in Montana with certain restrictions. Out-of-state
bank holding companies, headquartered in the Ninth Federal Reserve District, or
in neighboring states, can purchase (not branch) Montana banks. Montana banks
can also purchase banks in neighboring states. President Clinton signed, and
made effective September 29, 1994, the Interstate Banking and Branching
Efficiency Act of 1994 which allows bank holding companies to acquire banks in
any state. States may chose not to allow Interstate branching under this act,
which was effective June 1, 1997. As of March 20, 1997, Montana has "opted out"
of the Interstate Act and prohibited in-state banks from merging with
out-of-state banks if the merger would be effective on or before September 30,
2001. For further information see "Regulation of the Company".
There are 31 depository institutions including savings banks, commercial banks
and credit unions with offices in the area. There are 13 credit unions and 18
banks in the area.
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. On the other hand, removal of
regulatory restrictions has enabled the Savings Bank to enter the highly
competitive consumer lending business as well as the specialized commercial loan
market.
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.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
AVERAGE BALANCE SHEET
The following table sets forth for the periods indicated, information regarding
(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.
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AVERAGE BALANCE SHEET For the year ended 12-31-97 For the year ended 12-31-96
-----------------------------------------------------------------------
(Dollars in Thousands) Interest Average Interest Average
Average and Yield/ Average and Yield/
ASSETS: Balance Dividends Rate Balance Dividends Rate
-----------------------------------------------------------------------
Real Estate Loans $201,388 16,353 8.12% $195,215 15,962 8.18%
Commercial Loans 107,470 10,500 9.77% 89,266 9,008 10.09%
Installment and Other Loans 93,924 9,379 9.99% 84,719 8,374 9.88%
-------- -------- -------- -------- -------- --------
Total Loans 402,782 36,232 9.00% 369,200 33,344 9.03%
-------- -------- -------- --------
Mortgage-Backed Securities 51,443 3,617 7.03% 44,260 3,236 7.31%
Investment Securities 66,056 4,155 6.29% 68,433 4,568 6.68%
-------- -------- -------- -------- -------- --------
Total Earning Assets 520,281 44,004 8.46% 481,893 41,148 8.54%
Non-Earning Assets 43,787 -------- -------- 38,418 -------- --------
-------- --------
TOTAL ASSETS $564,068 $520,311
======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
NOW Accounts 62,669 1,164 1.86% 58,860 1,184 2.01%
Savings Accounts 39,322 1,371 3.49% 38,797 1,328 3.42%
Money Market Demand Accounts 62,375 2,765 4.43% 50,701 2,159 4.26%
Certificates of Deposit 103,226 5,792 5.61% 101,559 5,601 5.51%
FHLB Advances 136,419 7,599 5.57% 127,300 7,302 5.74%
Other Borrowings and Repurchase Agreements 26,245 1,187 4.52% 23,197 982 4.23%
-------- -------- -------- -------- -------- --------
Total Interest Bearing Liabilities 430,256 19,878 4.62% 400,414 18,556 4.63%
-------- -------- -------- --------
Non-interest Bearing Deposits 66,173 58,289
Other Liabilities 12,242 12,603
-------- --------
Total Liabilities 508,671 471,306
-------- --------
Common Stock 60 43
Paid-in Capital 34,776 32,469
Retained Earnings 21,212 17,569
Treasury stock (1,066) (1,006)
Net unrealized gains and losses on AFS securities 415 (70)
-------- --------
Total Stockholders' Equity 55,397 49,005
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $564,068 $520,311
======== ========
NET INTEREST INCOME $ 24,126 $ 22,592
======== ========
NET INTEREST SPREAD 3.84% 3.90%
NET INTEREST MARGIN ON AVERAGE EARNING ASSETS 4.64% 4.69%
RETURN ON AVERAGE ASSETS (1) 1.63% 1.43%
RETURN ON AVERAGE EQUITY (2) 16.57% 15.15%
DIVIDEND PAYOUT RATIO (3) 38.52% 38.18%
EQUITY TO ASSETS RATIO (4) 9.82% 9.42%
AVERAGE BALANCE SHEET For the year ended 12-31-95
--------------------------------
(Dollars in Thousands) Interest Average
Average and Yield/
ASSETS: Balance Dividends Rate
--------------------------------
Real Estate Loans $188,461 16,095 8.54%
Commercial Loans 76,183 8,284 10.87%
Installment and Other Loans 72,145 6,436 8.92%
-------- -------- --------
Total Loans 336,789 30,815 9.15%
-------- --------
Mortgage-Backed Securities 30,769 2,310 7.51%
Investment Securities 55,556 3,727 6.71%
-------- -------- --------
Total Earning Assets 423,114 36,852 8.71%
Non-Earning Assets 32,959 -------- --------
--------
TOTAL ASSETS $456,073
========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
NOW Accounts 55,000 1,074 1.95%
Savings Accounts 41,051 1,197 2.92%
Money Market Demand Accounts 41,419 1,667 4.02%
Certificates of Deposit 85,368 4,681 5.48%
FHLB Advances 102,986 6,041 5.87%
Other Borrowings and Repurchase Agreements 26,182 1,409 5.38%
-------- -------- --------
Total Interest Bearing Liabilities 352,006 16,069 4.56%
-------- --------
Non-interest Bearing Deposits 50,815
Other Liabilities 10,088
--------
Total Liabilities 412,909
--------
Common Stock 42
Paid-in Capital 24,710
Retained Earnings 18,928
Treasury stock (531)
Net unrealized gains and losses on AFS securities 15
--------
Total Stockholders' Equity 43,164
--------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $456,073
========
NET INTEREST INCOME $ 20,783
========
NET INTEREST SPREAD 4.14%
NET INTEREST MARGIN ON AVERAGE EARNING ASSETS 4.56%
RETURN ON AVERAGE ASSETS (1) 1.74%
RETURN ON AVERAGE EQUITY (2) 18.48%
DIVIDEND PAYOUT RATIO (3) 31.64%
EQUITY TO ASSETS RATIO (4) 9.46%
(1) Net Income divided by Average Total Assets
(2) Net Income divided by Average Equity
(3) Dividends Declared per Share divided by Net Income per Share
(4) Average Equity divided by Average Total Assets
Note: Averages are based on quarter-end balances, using 5 quarters.
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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").
Years ended December 31, Years ended December 31, Years ended December 31,
RATE/VOLUME ANALYSIS 1997 vs 1996 1996 vs 1995 1995 vs 1994
(Dollars in Thousands) ----------------------------- ----------------------------- -----------------------------
Increase due to: Increase due to: Increase (Decrease) due to:
----------------------------- ----------------------------- -----------------------------
INTEREST INCOME: Volume Rate Net Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- ------- ------- ------- -------
Real Estate Loans $ 509 ($ 118) $ 391 $ 755 ($ 888) ($ 133) $ 1,282 $ 1,192 $ 2,474
Commercial Loans 1,767 (275) 1,492 1,244 (520) 724 822 1,551 2,373
Consumer and Other Loans 912 93 1,005 1,198 740 1,938 1,967 (517) 1,450
Mortgage-backed Securities 499 (118) 381 986 (60) 926 338 (46) 292
Investment Securities (154) (259) (413) 858 (17) 841 305 597 902
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Interest Income $ 3,533 ($ 677) $ 2,856 $ 5,041 ($ 745) $ 4,296 $ 4,714 $ 2,777 $ 7,491
------- ------- ------- ------- ------- ------- ------- ------- -------
INTEREST EXPENSE:
NOW Accounts $ 137 ($ 158) ($ 21) $ 77 $ 34 $ 111 $ 47 ($ 12) $ 35
Savings Accounts 84 128 212 (66) 28 (38) (116) 66 (50)
Money Market Demand Accounts 518 90 608 386 103 489 38 370 408
Certificates of Deposit 10 11 21 1,060 31 1,091 641 738 1,379
FHLB Advances 506 (209) 297 1,392 (131) 1,261 2,077 153 2,230
Other Borrowings and
Repurchase Agreements 135 70 205 (149) (278) (427) 81 490 571
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Interest Expense $ 1,390 ($ 68) $ 1,322 $ 2,700 ($ 213) $ 2,487 $ 2,768 $ 1,805 $ 4,573
------- ------- ------- ------- ------- ------- ------- ------- -------
NET INTEREST INCOME $ 2,143 ($ 609) $ 1,534 $ 2,341 ($ 532) $ 1,809 $ 1,946 $ 972 $ 2,918
======= ======= ======= ======= ======= ======= ======= ======= =======
The change in interest income and interest expense attributable to changes in
both volume and rate has been allocated proportionately to the change due to
volume and the change due to rate.
Net interest income increased $1.534 million in 1997 over 1996. The increase was
due to increases in volumes.
Interest rates have decreased during 1997, with long term rates slightly higher
than short term rate levels. Short-term rates are at approximately the same
levels as at December 31, 1996. Long terms rates have decreased with the spread
in basis points of approximately 28, at December 31, 1997, between the 30 year
bond and the 2 year treasury note. This relatively small spread, and low rates,
may result in a reduction in interest income as assets mature or reprice at
lower rate levels. MANAGEMENT'S DISCUSSION AND ANALYSIS section for the year
ended December 31, 1997 contains more information concerning interest rate
spreads.
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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 the yields on
investment alternatives and upon management's judgment as to the attractiveness
of the yields then available in relation to other opportunities and its
expectation of the level of yield that will be available in the future.
There has been no active trading in the Company's investment portfolios during
1997. Investment securities are generally held to maturity and carried at cost
plus or minus any unamortized premium or discount. Those securities classified
as available for sale are carried at estimated fair value with unrealized gains
or losses reflected as an adjustment to stockholders' equity. During 1997, there
was a small net realized gain from the sale of securities, resulting from the
disposition of less desirable investments and acquiring investments with better
total return probabilities.
The Company uses an effective tax rate of 31.28% in calculating the tax
equivalent yield. Approximately $26 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, 1997.
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, credit card, 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 sets forth information summarizing the composition of the
Company's loan portfolio by type of loan:
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LOAN PORTFOLIO COMPOSITION
(Dollars in Thousands)
At At At
TYPE OF LOAN 12/31/97 12/31/96 12/31/95
------------------------- ------------------------- -------------------------
Amount Percent Amount Percent Amount Percent
--------- --------- --------- --------- --------- ---------
REAL ESTATE LOANS:
Residential first mortgage loans $ 170,960 40.60% $ 160,116 41.41% $ 145,058 41.06%
Construction 11,579 2.75% 16,651 4.31% 18,425 5.22%
FHA and VA loans 14,953 3.55% 17,940 4.64% 23,426 6.63%
Loans held for sale 6,727 1.60% 3,900 1.01% 5,951 1.68%
--------- ------ --------- ------ --------- ------
Total $ 204,219 48.50% $ 198,607 51.37% $ 192,860 54.59%
--------- ------ --------- ------ --------- ------
COMMERCIAL LOANS:
Real estate $ 55,656 13.22% $ 49,130 12.71% $ 43,059 12.19%
Other commercial loans 65,391 15.53% 50,940 13.18% 42,557 12.05%
--------- ------ --------- ------ --------- ------
Total $ 121,047 28.75% $ 100,070 25.88% $ 85,616 24.24%
--------- ------ --------- ------ --------- ------
INSTALLMENT AND OTHER LOANS:
Consumer loans $ 95,375 22.65% $ 87,523 22.64% $ 74,725 21.15%
Outstanding balances on credit cards 3,951 0.94% 3,725 0.96% 3,139 0.89%
--------- ------ --------- ------ --------- ------
Total $ 99,326 23.59% $ 91,248 23.60% $ 77,864 22.04%
--------- ------ --------- ------ --------- ------
Allowance for Losses (3,544) -0.84% (3,284) -0.85% (3,077) -0.87%
--------- ------ --------- ------ --------- ------
NET LOANS $ 421,048 100.00% $ 386,641 100.00% $ 353,263 100.00%
========= ====== ========= ====== ========= ======
At At
TYPE OF LOAN 12/31/94 12/31/93
------------------------- -------------------------
Amount Percent Amount Percent
--------- --------- --------- ---------
REAL ESTATE LOANS:
Residential first mortgage loans $ 144,753 45.54% $ 119,843 44.99%
Construction 15,184 4.78% 18,526 6.96%
FHA and VA loans 26,130 8.22% 20,150 7.57%
Loans held for sale 3,119 0.98% 4,743 1.78%
--------- ------ --------- ------
Total $ 189,186 59.51% $ 163,262 61.29%
--------- ------ --------- ------
COMMERCIAL LOANS:
Real estate $ 38,595 12.13% $ 30,176 11.34%
Other commercial loans 33,880 10.66% 32,711 12.28%
--------- ------ --------- ------
Total $ 72,475 22.80% $ 62,887 23.61%
--------- ------ --------- ------
INSTALLMENT AND OTHER LOANS:
Consumer loans $ 56,053 17.63% $ 39,813 14.95%
Outstanding balances on credit cards 2,835 0.89% 2,725 1.02%
--------- ------ --------- ------
Total $ 58,888 18.52% $ 42,538 15.97%
--------- ------ --------- ------
Allowance for Losses (2,647) -0.83% (2,330) -0.87%
--------- ------ --------- ------
NET LOANS $ 317,902 100.00% $ 266,357 100.00%
========= ====== ========= ======
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Loan Portfolio Maturities or Repricing Term
The stated maturities or first repricing term (if applicable) for the loan
portfolio at December 31, 1997 was as follows:
LOAN MATURITIES OR REPRICING TERM
(Dollars in Thousands)
Real Estate Commercial Consumer Total
----------- ----------- ----------- -----------
Variable rate $ 43,536 69,191 35,832 148,559
Maturing or Repricing in:
6 Months or Less 25,450 10,577 21,056 57,083
6 Months to 1 Year 23,417 7,390 6,583 37,390
1 Year to 3 Years 50,843 15,799 18,911 85,553
3 Years to 5 Years 25,780 7,037 12,401 45,218
5 Years to 10 Years 16,634 8,627 3,802 29,063
10 Years to 20 Years 16,551 2,413 346 19,310
Thereafter 2,008 13 395 2,416
----------- ----------- ----------- -----------
Totals $ 204,219 121,047 99,326 424,592
=========== =========== =========== ===========
Loan Portfolio Scheduled Contractual Principal Repayments
The following table sets forth certain information at December 31, 1997
regarding the dollar amount of scheduled loan contractual repayments (demand
loans, loans having no stated scheduled repayments and no stated maturity, and
overdrafts are reported as due in one year or less):
SCHEDULED CONTRACTUAL LOAN PRINCIPAL REPAYMENTS
(Dollars in Thousands)
After 1 year
Amounts due within: 1 year through After
or less 5 years 5 years Totals
------------ ------------ ------------ ------------
Real estate loans 16,117 47,516 140,586 204,219
Commercial loans 34,444 46,485 40,118 121,047
Consumer loans 27,369 42,201 29,755 99,326
------------ ------------ ------------ ------------
Totals 77,931 136,202 210,459 424,592
============ ============ ============ ============
Neither scheduled maturities nor scheduled contractual amortization of loans are
expected to reflect the actual term of the Banks' loan portfolio. Based on
historical information, the average life of loans is substantially less than
their contractual terms because of prepayments and, in the case of conventional
mortgage loans (i.e., those loans which are neither insured nor partially
guaranteed by the Federal Housing Administration or the Veterans
Administration), due-on-sale clauses, which give the Company the right to
declare a loan immediately due and payable in the event, among other things, the
borrower sells the real property subject to the mortgage and the loan is not
repaid.
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Real Estate Lending
The Banks' principal lending activities have generally consisted of the
origination of both construction and permanent loans on residential and
commercial real estate. With respect to residential loans, the Banks make both
conventional mortgage loans and loans insured by the Federal Housing Authority
("FHA") or partially guaranteed by the Veterans Administration ("VA"). Newly
originated FHA, VA and conventional fixed-rate term loans are sometimes sold in
the secondary market, as discussed below,
Under Montana banking law banks generally may not make loans to one borrower and
related entities in an amount which exceeds 20% of its unimpaired capital and
surplus (approximately $4.0 million for the Glacier, $2.0 million for First
Security and $650 thousand for Whitefish, and $400,000 for Eureka). As of
December 31, 1997, loans to Glacier's seven largest borrowers and related
entities amounted to $3,155,551 (7 loans); two borrowers with $2,982,953 each (5
loans); $2,665,875 (8 loans); $1,959,180 (13 loans); $1,881,546 (4 loans); and 4
borrowers with $1,864,963 each (3 loans). First Security has one borrower with
13 loans totaling $3,256,000.
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. At December 31, 1997, the Banks had $11.6 million,
or 2.7% of total loans outstanding, in construction loans.
All improved real estate which serves as security for a loan must be insured
against fire, extended coverage, vandalism, malicious mischief and other
hazards. Such insurance must be maintained through the entire term of the loan
and in an amount not less than that amount necessary to pay the indebtedness to
the Bank in full.
Loan Solicitation and Processing
The Banks actively solicit mortgage loan applications from real estate brokers,
contractors, existing customers, customer referrals, and walk-ins to their
offices. Residential mortgage loan originators take applications from borrowers,
process the credit information, obtain property appraisals, and then submit the
loan to the loan committee for approval.
Upon receipt of a loan application from a prospective borrower, a credit report
and verifications are ordered to verify specific information relating to the
loan applicant's employment, income, and credit standing. An appraisal of the
real estate intended to secure the proposed loan is requested.
In connection with the loan approval process, the Banks' loan personnel analyze
the loan applications and the property involved.
Loan applicants are promptly notified of the loan committee decision. If
approved, the terms and conditions include the amount of the loan, interest
rate, amortization term, a brief description of the real estate to be mortgaged,
and the notice of requirement of fire and casualty insurance coverage to be
maintained to protect the lender's interest.
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Consumer Lending
The majority of all consumer loans are secured by either real estate,
automobiles, or other assets. Presently 36.2% of the Banks' consumer portfolio
is variable. The Banks intend to continue lending for such loans because of
their short-term nature, generally between three months and five years, with an
average term of approximately two years. Moreover, interest rates on consumer
loans are generally higher than on mortgage loans.
The Banks also originate second mortgage and home equity loans, especially to
its existing customers in instances where the first and second mortgage loans
are less than 75% of the current appraised value of the property.
Commercial Loans
The Banks make commercial loans of three types: Commercial Real Estate,
Commercial Non-Real Estate secured by other assets, and a relatively small
amount of unsecured loans.
The Banks' policy has historically been conservative in commercial lending and,
applies strict underwriting standards. Commercial lending has been a much bigger
percentage of the respective loan portfolios at Whitefish, Eureka, and First
Security than at Glacier. The following table shows the breakdown of the
Company's net commercial loans outstanding by institution:
Commercial Real Estate Other Commercial Loans
---------------------- ----------------------
Glacier Bank $31,603 $18,277
Whitefish 2,065 4,372
Eureka 2,483 3,422
First Security 19,505 39,320
------- -------
$55,656 $65,391
These amounts are well within limitations contained in Federal laws and
regulations.
Approximately 13% of the commercial loans are guaranteed by The Small Business
Association ("SBA"). Of these SBA loans, the percentage of the loan's principal
balance that is guaranteed is usually between 70% and 90%.
Loan Approval Limits
Individual loan approval limits have been established for each lender based on
the experience and technical skills of the individual. Limits for fully secured
loans range from $30,000 to $100,000, and unsecured limits range from $5,000 to
$25,000. An officers loan committee, consisting of senior lenders and members of
senior management, has approval authority up to $300,000. Loans over $300,000 go
to the Company's Board of Directors for approval. First Security Bank's internal
loan committee can approve loans up to $400,000. Loans over $400,000 must be
approved by the executive loan committee which includes the bank's executive
officers, the Chairman and an additional Director.
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Loan Purchases and Sales
At times, fixed-rate, long-term mortgage loans are 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 while 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, Glacier typically retains
the servicing of the loans (i.e., collection of principal and interest
payments), for which it generally receives a fee payable monthly of
approximately .375% per annum of the unpaid balance of each loan. Whitefish and
Eureka sell nearly all their residential real estate originations. First
Security sells a majority of mortgage loans originated, retaining servicing only
on loans sold to certain lenders. First Security has 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, 1997, loans serviced for
others aggregated approximately $120 million.
Loan Origination Fees 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 collectability of the loan.
Consumer loans generally are charged off when the loan becomes over 120 days
delinquent.
Real estate acquired as a result of foreclosure or by deed-in-lieu of
foreclosure is classified as real estate owned ("REO") until such time as it is
sold. When such property is acquired, it is recorded at the lower of the unpaid
principal balance or estimated fair value, not to exceed estimated net
realizable value. Any write-down at the time of recording REO is charged to the
allowance for loan losses. Any subsequent write-downs are a charge to current
expenses.
The following table sets forth information regarding the Banks' non-performing
assets at the dates indicated:
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NONPERFORMING ASSETS
(Dollars in Thousands)
At At At At At
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
-------- -------- -------- -------- --------
NON-ACCRUAL LOANS:
Mortgage loans $ 93 $ 157 $ 0 $ 0 $ 0
Commercial loans 99 172 249 110 318
Consumer loans 156 45 15 28 0
-------- -------- -------- -------- --------
TOTAL $ 348 $ 374 $ 264 $ 138 $ 318
-------- -------- -------- -------- --------
ACCRUING LOANS 90 DAYS OR MORE OVERDUE:
Mortgage loans $ 416 $ 290 $ 2 $ 29 $ 32
Commercial loans 201 157 66 108 108
Consumer loans 251 431 179 159 123
-------- -------- -------- -------- --------
TOTAL $ 868 $ 878 $ 247 $ 296 $ 263
-------- -------- -------- -------- --------
Troubled Debt Restructuring: $ 0 $ 0 $ 0 $ 0 $ 0
Real estate and other assets owned, net 121 410 52 93 31
TOTAL NON-PERFORMING LOANS, TROUBLED DEBT
RESTRUCTURINGS, AND REAL ESTATE AND OTHER
ASSETS OWNED, NET -------- -------- -------- -------- --------
$ 1,337 $ 1,662 $ 563 $ 527 $ 612
-------- -------- -------- -------- --------
AS A PERCENTAGE OF TOTAL ASSETS 0.23% 0.30% 0.15% 0.16% 0.21%
-------- -------- -------- -------- --------
Interest Income (1) $ 35 $ 37 $ 26 $ 14 $ 32
-------- -------- -------- -------- --------
(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.
Reserves for Loan Losses
Glaciers' Board of Directors establishes reserves for loan losses on
recommendations of senior management. Management evaluates each loan with
delinquent payments to consider whether to continue this relationship or
liquidate the account.
The Board of Directors has established the minimum level of the allowance for
loan losses to be maintained, by using the following calculations:
.5% of Conventional Real Estate and Home Equity loans that are government
guaranteed or government insured
.75% of Commercial Real Estate and direct Consumer loans
2.0% of Credit Card Balances
1.0% of Other loans
The Board of Directors believes that this method of providing for losses closely
matches the risk nature of the individual types of loans. At December 31, 1997,
Glacier met the reserve goals set above.
First Security calculates its reserve using regulatory guideline percentages for
special mention and classified assets, the bank's historic five-year loss level
for all other loans, and a .5% contingency reserve on the non-classified
portfolio.
Whitefish and Eureka review and evaluate loan losses monthly from three separate
perspectives: 1) payment experience with that particular borrower, 2) percentage
loss calculation as performed by bank regulators, and 3) management's assessment
of the individual situation. The Banks' consider a "worst case" basis which is a
combination of the three methods above and establish a loan loss reserve
accordingly.
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The following table illustrates the loan loss experience:
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES:
(dollars in thousands)
Years ended December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
BALANCE AT BEGINNING OF PERIOD $ 3,284 3,077 2,647 2,330 2,267
CHARGE OFFS:
Residential real estate 0 (122) 0 (4) 0
Commercial Loans (101) (191) (77) (57) (148)
Installment loans to individuals (533) (503) (201) (141) (139)
------- ------- ------- ------- -------
Total charge offs (634) (816) (278) (202) (287)
------- ------- ------- ------- -------
RECOVERIES:
Residential real estate 0 1 0 0 0
Commercial Loans 38 51 37 123 31
Installment loans to individuals 109 91 90 75 80
------- ------- ------- ------- -------
Total recoveries 147 143 127 198 111
------- ------- ------- ------- -------
NET CHARGE OFFS (487) (673) (151) (4) (176)
------- ------- ------- ------- -------
PROVISION ACQUIRED 0 0 0 0 0
PROVISION EXPENSE 747 880 581 321 239
------- ------- ------- ------- -------
BALANCE AT END OF PERIOD 3,544 3,284 3,077 2,647 2,330
======= ======= ======= ======= =======
RATIO OF NET CHARGE OFFS TO AVERAGE
LOANS OUTSTANDING DURING THE PERIOD 0.12% 0.18% 0.04% 0.00% 0.07%
======= ======= ======= ======= =======
In analyzing the chargeoffs and recoveries over the past three reporting
periods, management anticipates the level of chargeoffs to remain relatively
constant, or to decrease slightly, during the next full year of operations. This
assumption is based on the fact that 1) Glacier has continued to upgrade
underwriting standards, particularly for consumer installment loans, and 2) the
local/regional economy although still growing, is showing signs of slowing.
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 Glacier's and First Security's
branch offices, and Whitefish and Eureka, have traditionally been the principal
source of funds for use in lending and other business purposes. Currently, the
Banks have a number of different deposit programs designed to attract both
short-term and long-term deposits from the general public by providing a wide
selection of accounts and rates. These programs include regular statement
savings, interest-bearing checking, money market deposit accounts, fixed rate
certificates of deposit with maturities ranging from three months to five years,
negotiated-rate jumbo certificates, non-interest demand accounts, and individual
retirement accounts.
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MANAGEMENT'S DISCUSSION AND ANALYSIS section contains information relating to
changes in the overall deposit portfolio.
Deposits are obtained primarily from individual and business residents of
western Montana. 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:
DEPOSITS GREATER THAN $100,000 at DECEMBER 31, 1997
(dollars in thousands)
Certificates of Deposit Savings and Checking Totals
------------------------ ------------------------ --------------------
MATURING: Amount Number Amount Number Amount Number
------- ------- ------- ------- ------- -------
Within three months $ 4,544 21 $69,036 308 $73,580 329
Greater than three months through six months $ 1,519 13 0 0 1,519 13
Greater than six months through twelve months $ 3,471 24 0 0 3,471 24
Greater than twelve months $ 2,129 16 0 0 2,129 16
------- -- ------- --- ------- ---
Totals $11,663 74 $69,036 308 $80,699 382
======= == ======= === ======= ===
For additional information, see Note 6 to the Consolidated Financial Statements
for the year ended December 31, 1997.
Advances and Other Borrowings
As a member of the 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 creditworthiness. 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 four banks are members in the
FHLB.
From time to time, primarily as a short-term financing arrangement for
investment or liquidity purposes, Glacier has made use of reverse repurchase
agreements with various securities dealers. This process involves the "selling"
of one or more of the securities in the bank's portfolio and by entering into an
agreement to "repurchase" that same security at an agreed upon later date. A
rate of interest is paid to the dealer for the subject period of time. In
addition, although Glacier has offered retail repurchase agreements to its
retail customers, the Government Securities Act of 1986 imposed confirmation and
other requirements which generally made it impractical for financial
institutions to offer such investments on a broad basis. Through polices adopted
by the Board of Directors, Glacier usually enters into reverse repurchase
agreements with major
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investment brokerage firms, local municipalities, and large balance customers,
and has adopted procedures designed to ensure proper transfer of title and
safe-keeping of the underlying securities. The other banks have not utilized
repurchase agreements for liquidity purposes.
The following chart illustrates the average balances and the maximum outstanding
month end balances for FHLB Advances and Repurchase Agreements:
ADVANCES AND REPURCHASE AGREEMENTS For the For the
(dollars in thousands) year ended year ended
12/31/97 12/31/96
---------- ----------
FHLB ADVANCES:
Average balance $136,920 $128,842
Maximum oustanding at any month-end $142,324 $143,289
REPURCHASE AGREEMENTS:
Average balance $ 17,400 $ 17,189
Maximum oustanding at any month-end $ 21,300 $ 22,102
For additional information concerning the Company's advances and reverse
repurchase agreements, see Notes 7 and 8 to the Consolidated Financial
Statements for the year ended December 31, 1997.
SUBSIDIARIES
The Company has five direct subsidiaries, Glacier Bank (wholly owned), First
Security (wholly owned), Whitefish (majority owned), Eureka (majority owned) and
Community First, Inc. ("CFI") (wholly owned). For information regarding the
holding company, as separate from the subsidiaries, see Note 14 to the
Consolidated Financial Statements for the year ended December 31, 1997.
Brokerage services (selling products such as stocks, bonds, mutual funds,
limited partnerships, annuities, and other insurance products), are available
through Robert Thomas Securities, 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.
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EMPLOYEES
As of December 31, 1997, the Company employed 291 persons, 190 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 11 in the Consolidated Financial Statements for the
year ended December 31, 1997 for detailed information regarding pension/savings
plan costs and eligibility.
SUPERVISION AND REGULATION
INTRODUCTION
The following generally refers to certain statutes and regulations
affecting banking industry. These references provide brief summaries only and
are not intended to be complete. They are qualified in their entirety by the
referenced statutes and regulations. In addition, some statutes and regulations
may exist which apply to and regulate the banking industry, but are not
referenced below.
THE COMPANY
General
The Company is a bank holding company, due to its ownership of Glacier
Bank, Glacier Bank of Whitefish, Glacier Bank of Eureka, and First Security Bank
of Missoula, all of which are Montana-state chartered commercial banks, and all
of which are members of the Federal Reserve (collectively, the "State Banks").
Until recently, the Company was also a savings and loan holding company within
the meaning of the Home Owners' Loan Act ("HOLA") prior to Glacier Bank's
conversion from a federal savings bank to a state-chartered commercial bank and,
as such, was registered with and subject to examination and supervision by the
OTS. With the enactment of the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 ("Economic Growth Act"), the OTS no longer supervises a
holding company like the Company that is registered as a bank holding company.
Accordingly, the BHCA subjects the Company and its subsidiaries to supervision
and examination by the FRB, and the bank holding company files annual reports of
its operations with the FRB.
BANK HOLDING COMPANY STRUCTURE
In general, the BHCA limits bank holding company business to owning or
controlling banks and engaging in other banking-related activities. Certain
recent legislation designed to expand interstate branching and relax federal
restrictions on interstate banking may expand opportunities for bank holding
companies (see "Regulation of Banking Subsidiaries - Recent Federal Legislation
- - Interstate Banking and Branching" below). The Economic Growth Act has relaxed
certain BHCA restrictions on bank holding companies' engagement in permissible
nonbanking activities. However, the impact that this legislation may have on the
Company and its subsidiaries is unclear at this time.
Bank holding companies must obtain the FRB's approval before they: (1)
acquire direct or indirect ownership or control of any voting shares of any bank
that results in total ownership or control, directly or indirectly, of more than
5% of the voting shares of such bank; (2) merge or consolidate with another bank
holding company; or (3) acquire substantially all of the assets of any
additional banks. Until late September of 1995, the BHCA also prohibited bank
holding companies from acquiring any such interest in any bank or bank
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holding company located in a state other than the state in which bank holding
company was located, unless the laws of both states expressly authorized the
acquisition. Now, subject to certain state laws, such as age and contingency
laws, a bank holding company that is adequately capitalized and adequately
managed may acquire the assets of an out-of-state bank.
Control of Nonbanks. With certain exceptions, the BHCA also prohibits bank
holding companies from acquiring direct or indirect ownership or control of
voting shares in any company that is not a bank or a bank holding company unless
the FRB determines that the activities of such company are incidental to the
business of banking. When making this determinations, the FRB weighs the
expected benefit to the public, such as greater convenience, increased
competition or gains in efficiency, against the possible adverse effects, such
as undue concentration of resources, decreased or unfair competition, conflicts
of interest or unsound banking practices. The Economic Growth Act amended the
BHCA to eliminate the requirement that a bank holding company seek FRB approval
before engaging de novo in permissible nonbanking activities if the holding
company is well-capitalized and meets other criteria specified in the statute.
Control Transactions. The Change in Bank Control Act of 1978, as amended,
requires a person (or group of persons acting in concert) acquiring "control" of
a bank holding company to provide the FRB with 60 days' prior written notice of
the proposed acquisition. Following receipt of this notice, the FRB has 60 days
within which to issue a notice disapproving the proposed acquisition, but the
FRB may extend this time period for up to another 30 days. An acquisition may be
completed before expiration of the disapproval period if the FRB issues written
notice of its intent not to disapprove the transaction. In addition, any
"company" must obtain the FRB's approval before acquiring 25% (5% if the
"company" is a bank holding company) or more of the outstanding shares or
otherwise obtaining control over the Company.
TRANSACTIONS WITH AFFILIATES
The Company and its subsidiaries, are deemed affiliates within the meaning
of the Federal Reserve Act, and transactions between affiliates are subject to
certain restrictions. Accordingly, The Company and its subsidiaries must comply
with Sections 23A and 23B of the Federal Reserve Act. Generally, Sections 23A
and 23B: (1) limit the extent to which the financial institution or its
subsidiaries may engage in "covered transactions" with an affiliate, as defined,
to an amount equal to 10% of such institution's capital and surplus and an
aggregate limit on all such transactions with all affiliates to an amount equal
to 20% of such capital and surplus, and (2) require all transactions with an
affiliate, whether or not "covered transactions," to be on terms substantially
the same, or at least as favorable to the institution or subsidiary, as those
provided to a non-affiliate. The term "covered transaction" includes the making
of loans, purchase of assets, issuance of a guarantee and other similar types of
transactions.
REGULATION OF MANAGEMENT
Federal law: (1) sets forth the circumstances under which officers or
directors of a financial institution may be removed by the institution's federal
supervisory agency; (2) places restraints on lending by an institution to its
executive officers, directors, principal stockholders, and their related
interests; and (3) prohibits management personnel from serving as a director or
in other management positions with another financial institution which has
assets exceeding a specified amount or which has an office within a specified
geographic area.
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FIRREA
The Financial Institution Reform, Recovery and Enforcement Act of 1989
("FIRREA") became effective on August 9, 1989. Among other things, this
far-reaching legislation (1) phased in significant increases in the FDIC
insurance premiums paid by commercial banks; (2) created two deposit insurance
pools within the FDIC, one to insure commercial bank and savings bank deposits
and the other to insure savings association deposits; (3) for the first time,
permitted bank holding companies to acquire healthy savings associations; (4)
permitted commercial banks that meet certain housing-related asset requirements
to secure advances and other federal services from their local Federal Home Loan
Banks; and (5) greatly enhanced the regulators' enforcement powers by removing
procedural barriers and sharply increasing the civil and criminal penalties for
violating statutes and regulations.
TIE-IN ARRANGEMENTS
The Company and its subsidiaries cannot engage in certain tie-in
arrangements in connection with any extension of credit, sale or lease of
property or furnishing of services. For example, with certain exceptions, the
Company, nor its 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.
In 1997, the FRB adopted significant amendments to its anti-tying rules
that: (1) removed FRB-imposed anti-tying restrictions on bank holding companies
and their non-bank subsidiaries; (2) allowed banks greater flexibility to
package products with their affiliates; and (3) established a safe harbor from
the trying restrictions for certain foreign transactions. These amendments were
designed to enhance competition in banking and nonbanking products and to allow
banks and their affiliates to provide more efficient, lower cost service to
their customers. However, the impact of the amendments on the Company and its
respective subsidiaries is unclear at this time.
STATE LAW RESTRICTIONS
As a Delaware corporation, the Company may be subject to certain
limitations and restrictions as provided under applicable Delaware corporate
law. Each of the State Banks, as Montana state-chartered commercial banks, are
subject to supervision and regulation by the Montana Department of Commerce's
Banking and Financial Institutions Division.
SECURITIES REGISTRATION AND REPORTING
The common stock of the Company is registered as a class with the SEC
under the Securities Exchange Act of 1934 and thus is subject to the periodic
reporting and proxy solicitation requirements and the insider-trading
restrictions of that Act. The periodic reports, proxy statements, and other
information filed by the Company under that Act can be inspected and copied at
or obtained from the Washington, D.C., office of the SEC. In addition, the
securities issued by the Company are subject to the registration requirements of
the Securities Act of 1933 and applicable state securities laws unless
exemptions are available.
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THE SUBSIDIARIES
General
Applicable federal and state statutes and regulations governing a bank's
operations relate, among other matters, to capital requirements, required
reserves against deposits, investments, loans, legal lending limits, certain
interest rates payable, mergers and consolidations, borrowings, issuance of
securities, payment of dividends (see below), establishment of branches, and
dealings with affiliated persons. The FRB and the FDIC have authority to
prohibit banks under their supervision from engaging in what they consider to be
an unsafe and unsound practice in conducting their business.
Until December 18, 1997, two of the Company's subsidiaries -- Glacier Bank
of Eureka and Glacier Bank of Whitefish -- were organized as national banking
associations and as such, were subject to primary regulation by the Office of
the Comptroller of the Currency ("OCC"). Additionally, until February 1, 1998,
Glacier Bank was organized as a federal savings bank, and as such was subject to
primary regulation by the Office of Thrift Supervision. All of these Company
subsidiaries have been converted to Montana state-charters and are members in
the Federal Reserve System. Accordingly, the Company's subsidiaries are subject
to extensive regulation and supervision by the Montana Department of Commerce's
Banking and Financial Institutions Division, and they are also subject to
regulation and examination by the FRB as a result of their membership in the
Federal Reserve System. The federal laws that apply to the Company's banking
subsidiaries regulate, among other things, the scope of their business, their
investments, their reserves against deposits, the timing of the availability of
deposited funds and the nature and amount of and collateral for loans. The laws
and regulations governing the Company's banking subsidiaries generally have been
promulgated to protect depositors and not to protect stockholders of such
institutions or their holding companies.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires federal banking regulators to adopt regulations in a number
of areas to ensure bank safety and soundness, including: internal controls;
credit underwriting; asset growth; management compensation; ratios of classified
assets to capital; and earnings. FDICIA also contains provisions which are
intended to change independent auditing requirements; restrict the activities of
state-chartered insured banks; amend various consumer banking laws; limit the
ability of "undercapitalized banks" to borrow from the FRB's discount window;
and require regulators to perform annual on-site bank examinations and set
standards for real estate lending. FDICIA recapitalized the Bank Insurance Fund
("BIF") and required the FDIC to maintain the BIF and the Savings Association
Fund ("SAIF") at 1.25% of insured deposits by increasing the deposit insurance
premiums as necessary to maintain such ratio. (See "FDIC Insurance" below).
LOANS-TO-ONE BORROWER
Each of the Company's banking subsidiaries is subject to limitations on
the aggregate amount of loans that it can make to any one borrower, including
related entities. Applicable regulations generally limit loans-to-one borrower
to 15 to 20% of unimpaired capital and surplus. As of December 31, 1997, each of
the Company's banking subsidiaries was in compliance with applicable
loans-to-one borrower requirements.
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FDIC INSURANCE
Generally, customer deposit accounts in banks are insured by the FDIC for
up to a maximum amount of $100,000. The FDIC has adopted a risk-based insurance
assessment system under which depository institutions contribute funds to the
BIF and the SAIF based on their risk classification. The FDIC assigns
institutions a risk classification based on three capital groups and three
supervisory groups.
With the enactment of the Deposit Insurance Funds Act of 1996 ("Funds
Act"), a one-time assessment was imposed on institutions holding SAIF deposits
on March 31, 1995, in an amount necessary for SAIF to reach its 1.25 designated
reserve ratio. Because the deposits of Glacier Bank were insured by the SAIF
Glacier Bank paid that assessment. In addition to the one-time SAIF assessment,
for the three year period beginning in 1997, the Funds Act subjects BIF-insured
deposits to a Financing Corporation ("FICO") premium assessment on domestic
deposits at one-fifth the premium rate (approximately 1.3 basis points) imposed
on SAIF-insured deposits (approximately 6.5 basis points). In the year 2000,
BIF-insured institutions will be required to share in the payment of the FICO
obligations on a pro-rata basis with all thrift institutions, with annual
assessments expected to equal approximately 2.4 basis points until the year
2017, and to be phased out completely by 2019.
Currently, institutions in the lowest risk category will continue to pay no BIF
premiums, and other institutions will be assessed based on a range of rates,
with those in the highest risk category paying 27 cents for every $ 100 of
BIF-insured deposits. Rates in the SAIF assessment schedule, previously ranging
from 4 to 31 basis points, have been adjusted by 4 basis points to a range of 1
to 27 basis points. The Funds Act provides for the merger of the BIF and SAIF on
January 1, 1999, only if no thrift institutions exist on that date.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law. The insurance may be
terminated permanently, if the institution has no tangible capital. If deposit
insurance is terminated, the accounts at the institution at the time of the
termination, less subsequent withdrawals, will continue to be insured for a
period of six months to two years, as determined by the FDIC.
CAPITAL REQUIREMENTS
Banks and Bank Holding Companies. The FRB, the FDIC, and the OCC
(collectively, the "Agencies") have established uniform capital requirements for
all commercial banks. Bank holding companies are also subject to certain minimum
capital requirements. A bank that does not achieve and maintain required capital
levels may be subject to supervisory action through the issuance of a capital
directive. In addition, banks must meet certain guidelines concerning the
maintenance of an adequate allowance for loan and lease losses.
The Agencies' "risk-based" capital guidelines make regulatory capital
requirements more sensitive to differences in risk profiles among banking
organizations, take off-balance sheet exposures into explicit account in
assessing capital adequacy, and minimize disincentives to holding liquid,
low-risk assets. The current guidelines require banks to achieve a minimum total
risk-based capital ratio of 8% and a minimum Tier 1 risk-based capital ratio of
4%. Tier 1 capital includes common stockholders' equity, qualifying perpetual
preferred stock, and minority interests in equity accounts of consolidated
subsidiaries, but excludes goodwill and most other intangibles. Tier 2 capital
includes the excess of any preferred stock not included in the Tier 1 capital,
mandatory convertible securities, subordinated debt and general reserves for
loan and lease losses up to 1.25% of risk-weighted assets.
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The Agencies also have adopted leverage ratio standards that require
commercial banks to maintain a minimum ratio of core capital to total assets
("Leverage Ratio") of 3%. Any institution operating at or near this level should
have well-diversified risk, and in general, be a strong banking organization
without any supervisory, financial or operational weaknesses or deficiencies.
Institutions experiencing or anticipating significant growth would be expected
to maintain capital ratios, including tangible capital positions, well above the
minimum levels (e.g., an additional cushion of at least 100 to 200 basis points,
depending upon the particular circumstances and risk profile).
The minimum ratio of total capital to risk-adjusted assets required by the
FRB for bank holding companies is 8%. At least one-half of the total capital
must be Tier 1 capital; the remainder may consist of Tier 2 capital. Bank
holding companies are also subject to minimum Leverage Ratio guidelines. These
guidelines provide for a minimum Leverage Ratio of 3% for bank holding companies
meeting certain specified criteria, including achievement of the highest
supervisory rating. All other bank holding companies are required to maintain a
Leverage Ratio which is at least 100 to 200 basis points higher (4 to 5 %).
These guidelines provide that banking organizations experiencing internal growth
or making acquisitions are expected to maintain strong capital positions
substantially above the minimum supervisory levels, without significant reliance
on intangible assets.
Interest-Rate-Risk ("IRR") Component. FDICIA requires the Agencies to
revise their respective risk-based capital standards to ensure that they take
adequate account of interest-rate risk ("IRR"), concentration of credit risk and
the risks of nontraditional activities, as well as reflect the actual
performance and expected risk of loss on multi-family residential loans.
When evaluating the capital adequacy of a bank, examiners from the
Agencies consider exposure to declines in the economic value of a bank's capital
due to changes in interest rates. A bank may be required to hold additional
capital for IRR if it has significant exposure or a weak interest rate risk
management process. In addition, the Agencies have amended their respective
risk-based capital standards to incorporate a measure for market risk to cover
all positions located in an institution's trading account and foreign exchange
and commodity positions wherever located. The rule effectively requires banks
and bank holding companies with significant exposure to market risk to measure
that risk using their own internal value-at-risk model, subject to the
parameters of the rule, and to hold a sufficient amount of capital to support
the institution's risk exposure. Institutions subject to this rule must have
been in compliance with it by January 1, 1998. The rule applies to any bank or
bank holding company, regardless of size, whose trading activity equals 10% or
more of its total assets, or whose trading activity equals $1 billion or more.
The Agencies may require an institution not otherwise subject to the rule to
comply with it for safety and soundness reasons and also may exempt an
institution otherwise subject to the rule from compliance under certain
circumstances.
Prompt Corrective Action. Under FDICIA, each federal banking agency must
implement a system of prompt corrective action for institutions that it
regulates. In September 1992, the Agencies adopted substantially similar
regulations, which became effective on December 19, 1992, intended to implement
this prompt corrective action system. Under the regulations, an institution is
deemed to be (1) "well capitalized" if it has a total risk-based capital ratio
of 10% or more, a Tier 1 risk-based capital ratio of 6% or more, a Tier 1
leverage capital ratio of 5% or more and is not subject to specified
requirements to meet and maintain a specific capital level for any capital
measure; (2) "adequately capitalized" if it has a total risk-based capital ratio
of 8% or more, a Tier 1 risk-based capital ratio of 4% or more, a Tier 1
leverage capital ratio of 4% or more (3% under certain circumstances) and does
not meet the definition of "well capitalized;" (3) "undercapitalized" if it has
a total risk-based capital ratio of under 8%, a Tier 1 risk-based capital ratio
of under 4% and a Tier 1 leverage
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capital ratio of under 4% (3% under certain circumstances); (4) "significantly
undercapitalized" if it has a total risk-based capital ratio of under 6%, a Tier
1 risk-based capital ratio of under 3%, a Tier 1 leverage capital ratio of under
3%; and (5) "critically undercapitalized" if it has a ratio of tangible equity
to total assets of 2% or less.
Increasingly severe restrictions are imposed on the payment of dividends
and management fees, asset growth and other aspects of the operations of
institutions that fall below the category of "adequately capitalized."
Undercapitalized institutions must develop and implement capital plans
acceptable to the appropriate federal regulatory agency. Such plans must require
any company that controls an undercapitalized institution to provide certain
guarantees that the institution will comply with the plan until it is
"adequately capitalized". As of December 31, 1997, none of the State Banks were
subject to any regulatory order, agreement, or directive to meet and maintain a
specific capital level for any capital measure.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS
Dividends paid to the Company by its banking subsidiaries are a material
source of the Company's cash flow. Various federal and state statutory
provisions limit the amount of dividends the Company's banking subsidiaries are
permitted to pay to the Company, respectively, without regulatory approval. FRB
policy further limits the circumstances under which bank holding companies may
declare dividends.
If, in the opinion of the applicable federal banking agency, a depository
institution under its jurisdiction is engaged in or is about to engage in an
unsafe or unsound practice (which, depending on the financial condition of the
institution, may include the payment of dividends), the agency may require,
after notice and hearing, that such institution cease and desist from such
practice. In addition, the FRB and the FDIC have issued policy statements which
provide that insured banks and bank holding companies should generally pay
dividends only out of current operating earnings.
The State Banks. Montana law imposes the following limitations on the
payment of dividends by Montana state banks: (1) until the bank's surplus fund
is equal to 50% of its paid-up capital stock, no dividends may be declared
unless at least 25% of bank's net earnings for the dividend period have been
carried to the surplus account, and (2) a bank must give notice to the Banking
and Financial Institutions Division before declaring a dividend larger than the
previous two years' net earnings.
FEDERAL HOME LOAN BANK SYSTEM
All of the Company's banking subsidiaries are members of the FHLB of
Seattle, which is one of the 13 regional FHLBs that administer the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB.
As members, the respective banking subsidiaries of the Company must
purchase and maintain stock in the FHLB of Seattle in an amount equal to at
least 1% of its aggregate unpaid residential mortgage loans, home purchase
contracts or similar obligations at the beginning of each year. On December 31,
1997, the Company's banking subsidiaries had $10.3 million in FHLB stock, which
was sufficient to comply with this requirement.
The FHLBs must provide funds for the resolution of troubled savings
associations and contribute to affordable housing programs through direct loans
or interest subsidies on advances targeted for community investment in low- and
moderate-income housing projects. These contributions have adversely affected
the
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level of FHLB dividends paid and could continue to do so in the future. These
contributions also could have an adverse effect on the value of FHLB stock in
the future. Dividends paid by the FHLB of Seattle to the Company's banking
subsidiaries for the years ended December 31, 1997, 1996, and 1995 totaled
$739,000, $620,000, and $425,000 respectively.
FEDERAL RESERVE SYSTEM
The FRB requires all depository institutions to maintain reserves against
their transaction accounts (primarily checking accounts) and non-personal time
deposits. Currently, reserves of 3% must be maintained against total transaction
accounts of $44.9 million or less (after a $4.4 million exemption), and an
initial reserve of 10% (subject to adjustment by the FRB to a level between 8%
and 14%) must be maintained against that portion of total transaction accounts
in excess of such amount. On December 31, 1997, each of the Company's banking
subsidiaries was in compliance with applicable requirements.
The balances maintained to meet the reserve requirements imposed by the
FRB may be used to satisfy applicable liquidity requirements. Because required
reserves must be maintained in the form of vault cash or a non-interest-bearing
account at a Federal Reserve Bank, the effect of this reserve requirement is to
reduce the earning assets of the Company's banking subsidiaries.
RECENT FEDERAL LEGISLATION
Interstate Banking and Branching. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("Interstate Act") permits nationwide
interstate banking and branching. This legislation generally authorizes
interstate branching and relaxes federal law restrictions on interstate banking.
These new interstate banking and branching powers have been phased in and
individual states may "opt out" of certain of these provisions. Accordingly,
states have been able to enact "opting-in" legislation that (1) permits
interstate mergers within their own borders before June 1, 1997, and (2) permits
out-of-state banks to establish de novo branches within the state. Subject to
certain state laws, such as age and contingency laws, bank holding companies may
purchase banks in any state. Additionally, subject to such state laws, beginning
June 1, 1997, banks have been permitted to merge with banks in any other state
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.
As of March 20, 1997, Montana has "opted-out" of the Interstate Act and
prohibited in-state banks from merging with out-of-state banks if the merger
would be effective on or before September 30, 200 1. 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.
At this time, the full impact that the Interstate Act might have on the
Company and its subsidiaries is impossible to predict.
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TAXATION
Federal Taxation
The Company files a consolidated federal income tax return and, effective in
1997, a consolidated Montana income tax return, using the accrual method of
accounting. The Company and its subsidiaries have filed all required income tax
returns.
Savings institutions are subject to the provisions of the Internal Revenue Code
of 1986, as amended ("Code"), in the same general manner as other corporations.
An exception to this generally similar situation is the treatment of bad debts,
for which non-banking corporations may generally take deductions only where
specific debts are written down or off. Banking corporations may establish
reserves for bad debts (as other corporations were allowed to do under prior
law), and deduct the annual increase in the bad debt reserves.
These reserves are generally based upon prior bad debt experience (the
"experience method," as is used by the Banks). Prior to 1997, savings
institutions that met certain definitional tests relating to the composition of
their assets and other matters (such as Glacier Bank) could annually elect to
base the addition to their reserves for "qualifying real property loans"
(generally loans secured by improved real property) under either the experience
method or upon a statutory formula potentially resulting in an even greater
deduction (the "percentage of taxable income method").
The percentage of specially computed taxable income that was used to compute a
savings institutions's bad debt reserve deduction under the percentage of
taxable income method (the "percentage bad debt deduction") was 8%. The
percentage bad debt deduction thus computed was reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permitted qualifying
savings institutions to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally. The effective maximum federal
income tax rate applicable to a qualifying thrift institution (exclusive of any
alternative minimum tax or environmental tax), assuming the maximum percentage
bad debt deduction, was approximately 31.3%, as compared to a 34% statutory rate
for general corporations.
The 1996 Small Business Job Protection Act eliminated the percentage of taxable
income method of accounting for bad debts that was previously available only to
savings institutions. Under this provision, savings institutions now use the
same method of accounting for tax bad debts as banks. As a result, savings
institutions now have to recapture into taxable income over a six-year period
their post-1987 additions to their bad debt tax reserves. At December 31, 1997,
Glacier Bank's post-1987 tax bad debt reserves were approximately $1.8 million.
Under the experience method, the bad debt deduction is equal to the greater of
two alternatives. Under the first alternative, a financial institution computes
the ratio of (i) total bad debts, net of recoveries, sustained during the
taxable year and during the five preceding taxable years to (ii) the sum of
"loans outstanding" at the close of each of those six years. This ratio is then
applied to "loans outstanding" at the close of the taxable year, and the result
of this calculation constitutes the maximum reserve balance. The maximum
addition for the taxable year under this first alternative is the amount
required to bring the reserve to this balance.
The second alternative under the experience method allows a financial
institution to claim a bad debt deduction necessary to maintain its reserves at
a minimum reserve level. This alternative authorizes an institution to add
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to the reserves at least the amount required to maintain the reserve as it
existed at the end of the "base year." In effect, this allows a bad debt
deduction equal to the net bad debt chargeoffs for a taxable year. This option
is limited, however, if loans outstanding decrease below the amount of loans
outstanding at the close of the "base year." If that occurs, the minimum reserve
level that may be maintained is equal to the amount that bears the same ratio of
reserves to loans at the end of the taxable year as the ratio of reserves to
loans at the close of the "base year." For taxable years beginning after 1987,
the "base year" is the last taxable year beginning before 1988 (i.e., fiscal
year ended June 30, 1988).
If the Company's accumulated bad debt reserves are deemed to have been used for
any purpose other than to absorb bad debt losses, such as for the payment of
dividends in excess of its current and accumulated earnings and profits (as
calculated for federal income tax purposes) or the redemption of the Company's
common stock, all or a portion of the amount used and the tax attributable
thereto may both be subject to federal income tax. As a result, distributions to
stockholders which are treated as having been made from the Company's bad debt
reserves could result in a federal recapture tax to the Company, up to
approximately 5 1 % of the amount of such distributions. For additional
information, see Note 10 to the Consolidated Financial Statements for the year
ended December 31, 1997.
In addition to the regular corporate income tax, corporations, including
qualifying savings institutions, are subject to an alternative minimum tax if it
exceeds the Company's regular tax liability. The Company or its subsidiaries did
not incur a minimum tax liability for its fiscal years 1988 through December 31,
1997 and are not expected to incur such a liability in the foreseeable future.
State Taxation
Under Montana law, savings institutions are subject to a corporation license
tax, which incorporates or is substantially similar to applicable provisions 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%.
Item 2. Properties
At December 31, 1997, Glacier Bank owned eight of its thirteen offices,
including its headquarters and other property having an aggregate book value of
approximately $4.5 million, and leased the remaining branches.
Glacier Bank believes that all of its facilities are well-maintained, adequate
and suitable for the current operations of its business, as well as fully
utilized.
The following table sets forth certain information regarding Glacier Bank's
offices at December 31, 1997:
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
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Branch Cut Bank, MT Full Services Owned
Branch Bigfork, MT Full Services Leased
Branch Evergreen area Full Services Owned
Of Kalispell, MT
Branch Billings, MT Full Services Owned
Branch Thompson Falls, MT Full Services Owned
Branch Buffalo Hill area Deposit Branch Leased
Of Kalispell, MT
Branch Billings, MT Full Services Leased
Heights area Supermarket Branch
Branch Hamilton, MT Full Services Leased
Supermarket Branch
Branch Helena, MT Full Services Leased
Supermarket Branch
First Security conducts banking activities from three locations in Missoula, MT.
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 $2.6 million:
Office Services Offered Ownership
- ------ ---------------- ---------
1704 Dearborn Full Services Owned
Main Office
541 East Broadway Full Services Branch Owned
3220 Great Northern Way Full Services Branch Owned
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 $714,000 and $607,000 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
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Item 3. Legal Proceedings
The Company and its subsidiaries are parties to various claims, legal
actions and complaints in the ordinary course of their businesses. In the
Company's opinion, all such matters are adequately covered by insurance, are
without merit or are of such kind, or involve such amounts, that unfavorable
disposition would not have a material adverse effect on the consolidated
financial position or results of operations of the Company.
Item 4. Submission of Matter To A Vote of Security Holders
No matters were submitted to a vote of securities holders in the fourth
quarter of 1997.
PART II
Item 5. Market Price of and Dividends on Registrant's Common Equity and 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. and B.J. Wolfe and
Company.
The 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, 1997, there were approximately 2500 shareholders of Company
common stock.
QUARTERLY COMMON STOCK PRICE RANGES
1997 1996
-------------------- -----------------
Quarter High Low High Low
----- ----- ----- -----
1st 16.50 15.50 13.63 11.82
2nd 21.00 15.25 14.92 12.73
3rd 19.50 17.50 16.83 13.50
4th 25.00 18.63 16.83 15.50
The Company paid cash dividends on its Common Stock of $.42 and $.52 per share,
respectively, for the fiscal years 1996 and 1997.
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 for the 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.
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SUMMARY OF OPERATIONS AND SELECTED FINANCIAL DATA
At December 31,
- ------------------------------------------------------ --------------------------------------------------------------------
(dollars in thousands, except per share data) 1997 1996 1995 1994 1993
- ------------------------------------------------------- -------- -------- -------- -------- --------
SUMMARY OF FINANCIAL CONDITION:
Total assets ................................... $580,398 545,992 493,064 425,667 363,032
Investment securities .......................... 48,141 59,399 52,987 38,407 36,040
Mortgage-backed securities ..................... 56,125 46,106 37,868 30,424 22,789
Loans receivable ............................... 424,592 389,925 356,340 320,549 268,687
Allowance for loan losses ...................... 3,544 3,284 3,077 2,647 2,330
Deposits ....................................... 346,784 321,739 291,585 258,722 247,615
Advances ....................................... 139,257 143,289 120,714 82,541 54,732
Other borrowed money/repurchase
agreements ................................ 26,976 14,993 22,305 35,452 17,988
Stockholders' equity ........................... 59,609 51,948 46,819 39,858 34,772
Equity per common share* ....................... 8.70 7.65 6.93 5.87 5.17
Equity as a percentage of total assets ......... 10.27% 9.51% 9.50% 9.36% 9.58%
======== ======== ======== ======== ========
Years ended December 31,
- ------------------------------------------------------ --------------------------------------------------------------------
(dollars in thousands, except per share data) 1997 1996 1995 1994 1993
- ------------------------------------------------------- -------- -------- -------- -------- --------
SUMMARY OF OPERATIONS:
Interest income ................................ $ 44,004 41,148 36,852 29,361 26,434
Interest expense ............................... 19,878 18,556 16,069 11,496 10,713
-------- -------- -------- -------- --------
Net interest income .......................... 24,126 22,592 20,783 17,865 15,721
Provision for loan losses ...................... 747 880 581 321 239
Non-interest income ............................ 8,339 8,339 7,592 6,734 7,416
Non-interest expense ........................... 17,219 17,536 14,680 12,922 11,826
-------- -------- -------- -------- --------
Earnings before income taxes ................. 14,499 12,515 13,114 11,356 11,072
Income taxes ................................... 5,319 5,090 5,139 4,467 4,249
-------- -------- -------- -------- --------
Net earnings ................................. 9,180 7,425 7,975 6,889 6,823
======== ======== ======== ======== ========
Basic earnings per common share* ............. 1.35 1.11 1.18 1.03 1.02
Diluted earnings per common share* ........... 1.32 1.09 1.18 1.03 1.01
Dividends declared per share* ................ 0.52 0.42 0.37 0.33 0.28
======== ======== ======== ======== ========
Years ended December 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
RATIOS:
Net earnings as a percent of:
Average assets ................................. 1.63% 1.43% 1.74% 1.75% 1.96%
Beginning stockholders' equity ................. 17.67% 15.86% 20.01% 19.81% 22.61%
Net interest margin at end of period ........... 4.68% 4.67% 4.90% 4.88% 4.88%
Allowance for loan losses as a percent of loans ... 0.83% 0.84% 0.86% 0.83% 0.87%
Allowance for loan losses as a percent of
nonperforming assets .......................... 265% 198% 547% 502% 381%
======== ======== ======== ======== ========
At and for the years ended December 31,
- ------------------------------------------------------ --------------------------------------------------------------------
(dollars in thousands) 1997 1996 1995 1994 1993
- ------------------------------------------------------- -------- -------- -------- -------- --------
OTHER DATA:
Loans originated and purchased ................. $220,238 266,044 224,064 225,003 226,418
Loans serviced for others ...................... 120,052 115,437 103,756 84,080 79,823
Number of full time equivalent employees ....... 241 249 227 206 207
Number of offices .............................. 18 17 14 14 14
Number of shareholders of record ............... 772 758 739 792 826
======== ======== ======== ======== ========
* revised for stock splits and dividends
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
Glacier Bancorp, Inc. (the "Company") is a Delaware corporation with four
commercial banks as subsidiaries, Glacier Bank, Glacier Bank of Whitefish
(formerly First National Bank of Whitefish), Glacier Bank of Eureka
(formerly First National Bank of Eureka), and First Security Bank of
Missoula. The Company reported earnings of $9,180,000 for the year ended
December 31, 1997, or $1.35 basic earnings per share, and $1.32 diluted
earnings per share, compared to $7,425,000, or $ 1.11 basic earnings per
share, and $1.09 diluted earnings per share, for the year ended December
31, 1996, and $7,975,000, or $1.18 basic and diluted earnings per share
for the year ended December 31, 1995. During 1996 the FDIC SAIF fund was
recapitalized through one-time payments from thrift institutions. Glacier
Bank's after tax cost of this payment was $583,000, or $.09 basic earnings
per share. In addition, expenses related to the merger of First Security
Bank were $563,000, or $.08 basic earnings per share. Operating earnings
without the SAIF and merger expenses were $8,571,000, or $1.28 basic
earnings per share. This 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 charts
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.
LIQUIDITY AND CAPITAL RESOURCES
The objective of liquidity management is to maintain cash flows adequate
to meet current and future needs for credit demand, deposit withdrawals,
maturing liabilities and corporate operating expenses. This source of
funds is generated by deposits, principal and interest payments on loans,
sales of loans and securities, short and long term borrowings, and net
income. In addition, all four subsidiaries are members of the Federal Home
Loan Bank of Seattle. This membership provides for established lines of
credit in the form of advances which serve as a supplemental source of
funds for lending and other general business purposes, During 1997, all
four financial institutions maintained liquidity at a level deemed
sufficient to meet operating cash needs. The liquidity was in excess of
regulatory requirements.
Retention of a portion of Glacier Bancorp, Inc.'s earnings results in
stockholders' equity at December 31, 1997 of $59,609,000, or 10.3% of
assets, which compares with $51,948,000, or 9.5% of assets at December 31,
1996. Earnings retention has kept pace with the increase in assets of
$34,406,000, or 6.3%, during 1997. 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.
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FINANCIAL CONDITION
For the year ended December 31, 1997, consolidated assets increased $34,406,000,
or 6.3%, over the prior year. The following table summarizes the Company's major
asset and liability components in percentage terms at December 31, 1997, 1996,
and 1995.
MAJOR BALANCE SHEET COMPONENTS AS A
PERCENTAGE OF TOTAL ASSETS
December 31,
----------------------------------
1997 1996 1995
-------- -------- --------
ASSETS:
Cash, Investment securities, FHLB and Federal Reserve stock .. 24.4% 25.9% 25.1%
Real Estate Loans ............................................ 35.0% 36.2% 38.9%
Commercial Loans ............................................. 20.6% 18.1% 17.1%
Installment & Other Loans .................................... 16.9% 16.5% 15.6%
Other Assets ................................................. 3.1% 3.3% 3.3%
-------- -------- --------
100.0% 100.0% 100.0%
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposit Accounts ............................................. 59.7% 59.0% 59.1%
FHLB Advances ................................................ 24.0% 26.2% 24.5%
Other Borrowings and Repurchase Agreements ................... 4.7% 2.7% 4.5%
Other Liabilities ............................................ 1.3% 2.6% 2.4%
Stockholders' Equity ......................................... 10.3% 9.5% 9.5%
-------- -------- --------
100.0% 100.0% 100.0%
======== ======== ========
Real estate loans continue to be the largest component of the Company's assets,
although the percentage is decreasing, and commercial loans are increasing as a
result of the Company's strategy. Deposit accounts, with comparatively short
terms to maturity, represent the majority of the liabilities.
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, 1997, we had a positive GAP position at six months,
and a negative GAP position at twelve months. The cumulative GAP as a percentage
of total assets for six months is a positive .95% which compares to a positive
1.7% at December 31, 1996, and a negative GAP of .7% at December 31, 1995.
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 no longer 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. For example, our GAP
earnings sensitivity ratio shows that a 1% change in interest rates would only
change income by .87%. Because of our GAP position, the table illustrates how a
1% increase in rates would decrease the Company's income by approximately
$80,000. Using this analysis to join GAP information with earnings data, it
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.
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ESTIMATE OF RATE SENSITIVE ASSETS TO RATE SENSITIVE LIABILITIES GAP AND GAP
COVERAGE RATIOS AT DECEMBER 31, 1997:
Projected maturity (in months) as of December 31, 1997
----------------------------------------------------------
0-6 6-12 Over
(dollars in thousands) Months Months 12 Months Total
- ---------------------- --------- --------- --------- ---------
RATE SENSITIVE ASSETS:
Interest Bearing Deposits .................... $ 0 0 0 0
Investments and mortgage backed securities ... 4,929 1,071 98,266 104,266
Loans (1):
Floating Rate ........................... 107,070 12,984 28,505 148,559
Fixed Rate .............................. 57,083 37,390 181,560 276,033
--------- --------- --------- ---------
Total Rate Sensitive Assets .................. $ 169,082 51,445 308,331 528,858
========= ========= ========= =========
RATE SENSITIVE LIABILITIES:
Deposit Accounts ........................... 107,595 57,379 181,810 346,784
FHLB Advances .............................. 29,318 12,570 97,369 139,257
Other Borrowings/Repurchase Agreements ..... 26,667 309 0 26,976
--------- --------- --------- ---------
TOTAL RATE SENSITIVE LIABILITIES ............. $ 163,580 70,258 279,179 513,017
========= ========= ========= =========
Cumulative GAP ............................... $ 5,502 (13,311)
========= =========
Cumulative GAP as a percentage of
total assets of $580,398,000 ............. 0.95% (2.29)%
========= =========
GAP Earnings Sensitivity (2) ................................. $ (80)
=========
GAP Earnings Sensitivity Ratio (3) ........................... (0.87)%
=========
(1) Based on scheduled maturity or time before the loan can be repriced. Loans
also reflect estimated amortization and prepayments.
(2) GAP Earnings Sensitivity is the estimated effect on income after taxes at
40.00% of a 1% increase or decrease in interest rates (1% x ($13,311 less
tax of $5,324)).
(3) GAP Earnings Sensitivity Ratio is GAP Earnings Sensitivity divided by the
estimated yearly earnings of $9,180,000. A 1% increase in interest rates
has this estimated percentage increase (decrease) effect on annual income.
33
34
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. As shown below the net interest spread decreased in 1997 from 3.91%
to 3.84%, primarily the result of lower rates on interest earning assets. The
net interest margin decreased slightly in 1997 from 4.69% to 4.64%, also the
result of a decrease in rates on interest earning assets. Although the interest
spread is down from 1996 the increased asset levels, and the increased
interest-free funding resulted in significantly higher net interest income.
December 31, [1]
--------------------------
FOR THE YEAR ENDED: 1997 1996 1995
----- ----- -----
Combined weighted average yield on loans and investments [2]............... 8.46% 8.54% 8.71%
Combined weighted average rate paid on savings deposits and borrowings..... 4.62% 4.63% 4.56%
Net interest spread........................................................ 3.84% 3.91% 4.15%
Net interest margin [3].................................................... 4.64% 4.69% 4.56%
[1] Weighted averages are computed without the effect of compounding daily
interest.
[2] Includes dividends received on capital stock of the Federal Home Loan
Bank.
[3] The net interest margin (net yield on average interest earning assets) is
interest income from loans and investments less interest expense from
deposits, FHLB advances, and other borrowings, divided by the total amount
of earning assets.
34
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996
FINANCIAL CONDITION
Total assets increased $34,406,000, or 6.3% over the December 31, 1996 asset
level. Total net loans outstanding increased 8.9%, or $34,407,000 with the
largest increase occurring in the commercial classification which increased
$20,977,000, or 21%, followed by installment loans which increased $8,078,000,
or 8.9%. Real estate loans increased $5,612,000 or 2.8% a result of a
significant portion of the loan production being sold. Investment securities
decreased $1,239,000, or 1.2%. The flat yield curve has provided little
opportunity to achieve reasonable spreads in the investment portfolio so funds
have been used to grow the loan portfolio rather than investments.
Total liabilities increased $26,745,000, or 5.4%, with interest bearing deposits
up $15,736,000, or 6.1%, and non-interest bearing deposits up $9,309,000, or
14.5%. Federal Home Loan Bank advances decreased $4,032,000, or 2.8%. Securities
sold under repurchase agreements and other borrowed funds were up $11,983,000,
or 79.9%. Funding sources are utilized based on the lowest cost available, which
results in changes from one accounting period to the next.
Total stockholders' equity increased $7,661,000, or 14.8%, primarily the result
of earnings retention, and by an increase in the net unrealized gains on
securities available-for-sale of $1,176,000.
RESULTS OF OPERATIONS
INTEREST Income - Interest income was $44,004,000 compared to $41,148,000 for
the years ended December 31, 1997 and 1996, respectively, a $2,856,000, or 6.9%
increase. The weighted average yield on the loan and investment portfolios
decreased slightly from 8.54% to 8.46%. This decrease in yield was offset by
increased volumes in loans, resulting in the increased interest income. Interest
rates were lower at the end of 1997 than early in the year, with little slope
in the yield curve. A continued decline in interest rates could result in lower
interest income resulting from the refinance of existing loans.
INTEREST EXPENSE - Interest expense was $19,878,000 for the year ended December
31, 1 997, up from $18,556,000 in 1996, a $1,322,000, or 7.1% increase, The
increase is due to higher balances in interest bearing deposits, increases in
amounts outstanding in repurchase agreements and other borrowed funds during
1997. This increase was partially offset by reduced Federal Home Loan Bank
borrowings.
NET INTEREST INCOME - Net interest income was $24,126,000 compared to
$22,592,000 in 1996, an increase of $1,534,000, or 6.8%, the net result of the
items discussed in the above paragraphs.
PROVISION FOR LOAN LOSSES - The provision for loan losses was $747,000 for 1997,
down from $880,000 for 1996. Total loans charged off, net of recoveries, were
$487,000 in 1997, lower than the $673,000 experienced in 1996. The allowance for
loan losses balance was $3,544,000 at year end 1997, up from $3,284,000 at year
end 1996, an increase of $260,000. At December 31, 1997, 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) totalled $1,337,000 or .23% of total assets; compared to $1,662,000 or
.30% of total assets at December 31, 1996.
NON-INTEREST INCOME - Total non-interest income of $8,339,000 remained at the
same level as 1996. Increases in service charges and other fees which were
$364,000 greater than the prior year were mostly offset by a reduction in other
income of $352,000, primarily from a reduction in commissions on insurance
sales, and non-recurring recoveries of charged off interest in 1996.
35
36
NON-INTEREST EXPENSE - Total non-interest expense decreased from $17,536,000 to
$17,219,000 a decrease of $317,000, or 1.8%. Of this decrease $947,000 was from
the FDIC SAIF insurance assessment expensed in 1996, and $531,000 was from
merger expenses, leaving an increase from operations of $1,161,000.
Compensation, employee benefits, and related expenses increased $577,000, or
6.7% from 1996 the result of staffing of four new branches and other growth
related staffing additions, plus other normal cost increases. Occupancy expense
increased $228,000, or 13.5% from 1996 primarily the result of adding the new
branches. Data processing expense was up $102,000, or 15.3%, from volume
increases. Following the one-time FDIC assessment in 1996 the rates on FDIC
insurance were reduced in 1997 which resulted in a reduction in expense of
$226,000, or 64.4%. Other expense increased $476,000, or 10.2% from 1996,
primarily from increased marketing costs, and other expenses related to the new
branches. The efficiency ratio (non-interest expense)/(net interest income +
non-interest income), excluding the merger and the FDIC assessment, was 53% in
1997, up from 52% in 1996, as compared with similar sized bank holding companies
nationally which average about 62%.
YEAR 2000 ISSUES - The year 2000 creates challenges with respect to the
automated systems used by financial institutions and other companies. Many
computer programs are not able to distinguish the year 1900 from the year 2000,
due to the practice of using only two digits to represent years in the 1900's
(e.g. 1/21/98 represents January 31, 1998). Thus, most current automated systems
will interpret 1/31/00 as January 31, 1900. This challenge is especially
problematic for financial institutions, since many transactions, such as
interest accruals and payments, are date sensitive. In addition, the problem is
not limited to computer systems. Year 2000 issues will potentially affect every
system that has an embedded microchip, such as automated teller machines,
elevators, and vaults. It may also affect the operations of third parties with
whom the Company and banks do business.
The Company and the banks are committed to addressing these year 2000 challenges
in a prompt and responsible manner, and they have dedicated resources to do so.
Management has completed an assessment of its automated systems and has
implemented a program to complete all necessary steps to resolve these issues,
including purchasing appropriate computer technology. As part of this program,
Management will monitor the efforts and success of its suppliers, service
providers, and large corporate customers, in meeting their year 2000 challenges.
Updating and testing of the Company's and the banks automated systems is
currently underway and will be substantially complete well before the
millennium.
The financial effect of these year 2000 challenges on the Company is impossible
to predict with certainty at this time. However, management does not believe
that expenses related to year 2000 challenges will have a material effect on the
operations or financial performance of the Company.
FORWARD LOOKING STATEMENTS - This document contains certain forward looking
statements, all of which are based on current expectations. Actual results may
differ materially, and therefore readers are cautioned not to place undue
reliance on these forward looking statements.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995
FINANCIAL CONDITION
Total assets increased $52,928,000, or 10.7% over the December 31, 1995 asset
level. Total net loans outstanding increased 9.4%, or $33,378,000 with the
largest increase occurring in the commercial classification which increased
$14,454,000, 16.9%, followed by installment loans which increased $13,384,000,
or 17.2%. Real estate loans increased $5,747,000 or 3% a result of a significant
portion of the loan production being sold. Investment securities increased
$14,650,000, or 16.1%, the result of a strategy to better utilize capital in
excess of loan growth requirements.
36
37
Total liabilities increased $47,799,000, or 10.7%, with interest bearing
deposits up $19,579,000, or 8.2%, and non-interest bearing deposits up
$10,575,000, or 19.7%. The largest increase in funding was from Federal Home
Loan Bank advances which increased $22,575,000, or 18.7%. Securities sold under
repurchase agreements and other borrowed funds were down $7,312,000, or 32.8%.
Funding sources are utilized based on the lowest cost available, which results
in changes from one accounting period to the next.
Total stockholders' equity increased $5,129,000, or 10.9%, primarily the result
of earnings retention, reduced by the change in the net unrealized gains on
securities available-for-sale of $739,000.
RESULTS OF OPERATIONS
INTEREST INCOME - Interest income was $41,148,000 compared to $36,852,000 for
the years ended December 31, 1996 and 1995, respectively, a $4,296,000, or 11.7%
increase. The weighted average yield on the loan and investment portfolios
decreased from 8.7% to 8.5%. This decrease in yield was offset by increased
volumes in loans and investments, resulting in the increased interest income.
Interest rates were higher at the end of 1996 than early in the year, with the
yield curve substantially steeper.
INTEREST EXPENSE - Interest expense was $18,556,000 for the year ended December
31, 1996, up from $16,069,000 in 1995, a $2,487,000, or 15.5% increase. The
increase is due to higher balances in interest bearing deposits and increased
rates over 1995, increased funding from the Federal Home Loan Bank; partially
offset by decreases in amounts outstanding in repurchase agreements and other
borrowed funds during 1996.
NET INTEREST INCOME - Net interest income was $22,592,000 compared to
$20,783,000 in 1995, an increase of $1,809,000, or 8.7%, the net result of the
items discussed in the above paragraphs.
PROVISION FOR LOAN LOSSES - The provision for loan losses was $880,000 for 1996,
up from $581,000 for 1995, the result of higher loan balances outstanding and
an increase in loans charged off, net of recoveries, of $522,000. The allowance
for loan losses reserve balance is $3,284,000 at year end 1996, up from
$3,077,000 at year end 1995, an increase of $207,000. At December 31, 1996, 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) totalled $1,662,000 or .30% of total assets;
compared to $563,000 or .11% of total assets at December 31, 1995.
NON-INTEREST INCOME - Total non-interest income increased $747,000 from
$7,592,000 to $8,339,000, or 9.8%. The largest portion of the increase occurred
in service charges and other fees which were $589,000 over the prior year. The
number of customer accounts increased substantially which resulted in the
increased fee income.
NON-INTEREST EXPENSE - Total non-interest expense increased from $14,680,000 to
$17,536,000 an increase of $2,856,000, or 19.5%. Of this increase $947,000 was
for the FDIC SAIF insurance assessment, and $563,000 was for merger expenses,
leaving an increase from operations of $1,346,000. Compensation, employee
benefits, and related expenses increased $1,094,000, or 14.6% from 1995 the
result of the expansion of the Billings loan production office into a full
service branch, staffing of two new supermarket branches, expansion of banking
services to include Saturdays and some holidays, staffing of the new office by
First Security in Missoula, other growth related staffing additions, plus other
normal cost increases. Occupancy expense increased $159,000, or 10.4% from 1995
the result of adding the new branches, and other cost increases. Other expense
increased only 2% from 1995. The efficiency ratio (non-interest expense)/(net
interest income + non-interest income) was 57% in 1996, up from and 52% in 1995,
as compared with similar sized bank holding companies nationally which average
about 64%. Without the one-time charges for the SAIF assessment and merger
expenses, the efficiency ratio for 1996 would have remained at 52%.
37
38
Item 7a. Quantitative and Qualitative Disclosure About Market Risk
MARKET RISK
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market rates/prices such as interest rates, foreign currency exchange
rates, commodity prices, and equity prices. The Company's primary market risk
exposure is interest rate risk. The ongoing monitoring and management of this
risk is an important component of the Company's asset/liability management
process which is governed by policies established by its Board of Directors that
are reviewed and approved annually. The Board of Directors delegates
responsibility for carrying out the asset/liability management policies to the
Asset/liability committee (ALCO). In this capacity ALCO develops guidelines and
strategies impacting the Company's asset/liability management related activities
based upon estimated market risk sensitivity, policy limits and overall market
interest rate levels/trends.
INTEREST RATE RISK
Interest rate risk represents the sensitivity of earnings to changes in market
interest rates. As interest rates change the interest income and expense streams
associated with the Company's financial instruments also change thereby
impacting net interest income (NII), the primary component of the Company's
earnings. ALCO utilizes the results of a detailed and dynamic simulation model
to quantify the estimated exposure of NII to sustained interest rate changes.
While ALCO routinely monitors simulated NII sensitivity over a rolling two-year
horizon, it also utilizes additional tools to monitor potential longer-term
interest rate risk.
The simulation model captures the impact of changing interest rates on the
interest income received and interest expense paid on all assets and liabilities
reflected on the Company's balance sheet. This sensitivity analysis is compared
to ALCO policy limits which specify a maximum tolerance level for NII exposure
over a one year horizon, assuming no balance sheet growth, given a 200 basis
point (bp) upward and downward shift in interest rates. A parallel and pro rata
shift in rates over a 12 month period is assumed. The following reflects the
Company's NII sensitivity analysis as of December 31, 1997 as compared to the
10% Board approved policy limit.
Estimated
Rate change NII Sensitivity
----------- ---------------
+200 bp -0.85%
-200 bp 0.48%
The preceding sensitivity analysis does not represent a Company 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 cashflows,
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.
38
39
Item 8. Financial Statements and Supplementary Data
The following audited consolidated financial statements and related
documents are set forth in this Annual Report on Form 1O-K on the pages
indicated:
Page
Report of Independent Auditors 40
Consolidated Statements of Financial Condition 41
Consolidated Statements of Operations 42
Consolidated Statements of Stockholders' Equity 43
Consolidated Statements of Cash Flows 44
Notes to Consolidated Financial Statements 45 -67
39
40
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, 1997 and 1996 and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion. the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Glacier Bancorp,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK, LLP
Billings, Montana
January 30, 1998
40
41
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
-------------------------
(dollars in thousands) 1997 1996
--------- ---------
ASSETS:
Cash on hand and in banks .......................................... $ 26,463 24,666
Federal funds sold ................................................. 0 1,483
Interest bearing cash deposits ..................................... 0 1,000
--------- ---------
Cash and cash equivalents ..................................... 26,463 27,149
Investment securities, available-for-sale .......................... 93,254 85,050
Investment securities, held-to-maturity (market value of $11,145 and
$20,436 at December 31, 1997 and 1996, respectively) ........... 11,012 20,455
Loans receivable, net .............................................. 421,048 386,641
Premises and equipment, net ........................................ 11,743 11,292
Real estate and other assets owned, net ............................ 121 410
Federal Home Loan Bank of Seattle stock, at cost ................... 10,330 8,586
Federal Reserve stock, at cost ..................................... 340 340
Accrued interest receivable ........................................ 3,759 3,473
Goodwill, net ...................................................... 1,371 1,526
Other assets ....................................................... 957 1,070
--------- ---------
$ 580,398 545,992
========= =========
LIABILITIES:
Deposits - non-interest bearing .................................... 73,639 64,330
Deposits - interest bearing ........................................ 273,145 257,409
Advances from Federal Home Loan Bank of Seattle .................... 139,257 143,289
Securities sold under agreements to repurchase ..................... 19,255 9,791
Other borrowed funds ............................................... 7,721 5,202
Accrued interest payable ........................................... 1,388 799
Advance payments by borrowers for taxes and insurance .............. 1,307 940
Current income taxes ............................................... 306 0
Deferred income taxes .............................................. 1,912 1,446
Minority interest .................................................. 480 429
Other liabilities .................................................. 2,379 10,409
--------- ---------
Total liabilities ............................................. 520,789 494,044
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value per share. Authorized 1,000,000
shares; none issued ............................................... 0 0
Common stock, $.01 par value per share. 6,847,485 and 6,793,663
shares outstanding at December 31, 1997 and 1996, respectively .... 69 46
Paid-in capital .................................................... 35,383 34,571
Retained earnings - substantially restricted ....................... 24,042 18,392
Treasury stock at cost, 85,890 shares at December 31, 1997 and 1996 (1,066) (1,066)
Net unrealized gains on securities available-for-sale .............. 1,181 5
--------- ---------
Total stockholders' equity .................................... 59,609 51,948
--------- ---------
$ 580,398 545,992
========= =========
See accompanying notes to consolidated financial statements
41
42
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
-----------------------------------
(dollars in thousands except per share data) 1997 1996 1995
--------- --------- ---------
INTEREST INCOME:
Real estate loans .................................. $ 16,353 15,962 16,095
Commercial loans ................................... 10,500 9,008 8,284
Consumer and other loans ........................... 9,379 8,374 6,436
Mortgage-backed securities ......................... 3,617 3,236 2,310
Investment securities and other .................... 4,155 4,568 3,727
--------- --------- ---------
TOTAL INTEREST INCOME ............................ 44,004 41,148 36,852
========= ========= =========
INTEREST EXPENSE:
Deposits ........................................... 11,092 10,272 8,619
Advances ........................................... 7,599 7,302 6,041
Securities sold under agreements to repurchase ..... 951 772 1,199
Other borrowed funds ............................... 236 210 210
--------- --------- ---------
TOTAL INTEREST EXPENSE ........................... 19,878 18,556 16,069
--------- --------- ---------
NET INTEREST INCOME .............................. 24,126 22,592 20,783
Provision for loan losses .......................... 747 880 581
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES ................................. 23,379 21,712 20,202
NON-INTEREST INCOME:
Service charges and other fees ..................... 4,724 4,360 3,725
Miscellaneous loan fees and charges ................ 2,764 2,852 2,898
Gain (Loss) on sale of investments, net ............ 197 121 (6)
Other income ....................................... 654 1,006 975
--------- --------- ---------
TOTAL NON-INTEREST INCOME ........................ 8,339 8,339 7,592
NON-INTEREST EXPENSE:
Compensation, employee benefits and related expenses 9,185 8,608 7,514
Occupancy expense .................................. 1,916 1,688 1,529
Data processing expense ............................ 768 666 499
FDIC insurance expense ............................. 125 351 467
FDIC/SAIF assessment ............................... 0 947 0
Merger expense ..................................... 32 563 0
Other expense ...................................... 5,125 4,649 4,559
Minority interest .................................. 68 64 112
--------- --------- ---------
TOTAL NON-INTEREST EXPENSE ....................... 17,219 17,536 14,680
--------- --------- ---------
Earnings before income taxes ....................... 14,499 12,515 13,114
Federal and state income tax expense ............... 5,319 5,090 5,139
--------- --------- ---------
NET EARNINGS ..................................... $ 9,180 7,425 7,975
========= ========= =========
Basic earnings per share ........................... $ 1.35 1.10 1.18
========= ========= =========
Diluted earnings per share ......................... $ 1.32 1.09 1.18
========= ========= =========
See accompanying notes to consolidated financial statements.
42
43
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1996, and 1995
Retained
Common Stock earnings
--------------------------- Paid-in substantially Treasury
($ in thousands except per share data) Shares capital capital restricted stock
---------- ---------- ---------- ------------- ----------
Balance at December 31, 1994 .............. 3,701,839 $ 39 21,427 19,070 (160)
Cash dividends declared ($.37 per share) .. -- -- -- (1,824) --
Stock options exercised ................... 20,278 0 221 -- --
Increase in stock grant earned ............ -- -- 46 -- --
10% stock dividend ........................ 368,946 3 5,244 (5,252) --
Treasury stock acquired ................... (38,760) -- -- -- (714)
Increase in net unrealized gains
on available-for-sale securities ..... -- -- -- -- --
Net earnings .............................. -- -- -- 7,975 --
---------- ---------- ---------- ------------- ----------
Balance at December 31, 1995 .............. 4,052,303 42 26,938 19,969 (874)
Cash dividends declared ($.43 per share) .. -- -- -- (2,291) --
Stock options exercised ................... 36,697 1 548 -- --
Tax benefit from stock related
compensation ........................ -- -- 81 -- --
Increase in stock grant earned ............ -- -- 21 -- --
Acquisition of minority interest .......... 12,951 -- 85 -- --
10% stock dividend ........................ 404,852 1 6,701 (6,711) --
Treasury stock acquired ................... (9,000) -- -- -- (192)
Decrease in net unrealized gains
on available-for-sale securities ..... -- -- -- -- --
---------- ---------- ---------- ------------- ----------
Additional shares issued .................. 31,306 2 197 -- --
Net earnings .............................. -- -- -- 7,425 --
Balance at December 31, 1996 .............. 4,529,109 46 34,571 18,392 (1,066)
Cash dividends declared ($.52 per share) .. -- -- -- (3,525) --
Stock options exercised ................... 51,993 1 557 -- --
Tax benefit from stock related
compensation ........................ -- -- 257 -- --
Increase in stock grant earned ............ -- -- 20 -- --
Three for two stock split ................. 2,266,383 22 (22) (5) --
Increase in net unrealized gains
on available-for-sale securities ..... -- -- -- -- --
Net earnings .............................. -- -- -- 9,180 --
---------- ---------- ---------- ------------- ----------
Balance at December 31, 1997 .............. 6,847,485 $ 69 35,383 24,042 (1,066)
========== ========== ========== ============= ==========
Net
unrealized Total
gains(losses) stockholders'
($ in thousands except per share data) on securities equity
------------- -------------
Balance at December 31, 1994 .............. (518) 39,858
Cash dividends declared ($.37 per share) .. -- (1,824)
Stock options exercised ................... -- 221
Increase in stock grant earned ............ -- 46
10% stock dividend ........................ -- (5)
Treasury stock acquired ................... -- (714)
Increase in net unrealized gains
on available-for-sale securities ..... 1,262 1,262
Net earnings .............................. -- 7,975
------------- -------------
Balance at December 31, 1995 .............. 744 46,819
Cash dividends declared ($.43 per share) .. -- (2,291)
Stock options exercised ................... -- 549
Tax benefit from stock related
compensation ........................ -- 81
Increase in stock grant earned ............ -- 21
Acquisition of minority interest .......... -- 85
10% stock dividend ........................ -- (9)
Treasury stock acquired ................... -- (192)
Decrease in net unrealized gains
on available-for-sale securities ..... (739) (739)
------------- -------------
Additional shares issued .................. -- 199
Net earnings .............................. -- 7,425
Balance at December 31, 1996 .............. 5 51,948
Cash dividends declared ($.52 per share) .. -- (3,525)
Stock options exercised ................... -- 558
Tax benefit from stock related
compensation ........................ -- 257
Increase in stock grant earned ............ -- 20
Three for two stock split ................. -- (5)
Increase in net unrealized gains
on available-for-sale securities ..... 1,176 1,176
Net earnings .............................. -- 9,180
------------- -------------
Balance at December 31, 1997 .............. 1,181 59,609
============= =============
See accompanying notes to consolidated financial statements.
43
44
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
-----------------------------------------
(dollars in thousands) 1997 1996 1995
--------- --------- ---------
OPERATING ACTIVITIES :
Net Earnings ............................................................ $ 9,180 7,425 7,975
Adjustments to reconcile Net Earnings to Net
Cash Provided by Operating Activities:
Provision for loan losses ............................................... 747 880 581
Depreciation of premises and equipment .................................. 875 728 950
Amortization of goodwill ................................................ 155 168 179
Loss (gain) on sale of investments ...................................... (197) (121) 6
Amortization of investment securities premiums and discounts, net ....... (55) (32) 122
Net decrease in deferred income taxes ................................... (299) (27) (41)
Net increase in accrued interest receivable ............................. (286) (120) (679)
Net increase in accrued interest payable ................................ 589 132 249
Net increase (decrease) in current income taxes ......................... 733 (633) 675
Net (increase) decrease in other assets ................................. (37) (84) 572
Net increase (decrease) in other liabilities and minority interest ...... (8,424) 3,383 1,845
FHLB stock dividends .................................................... (733) (597) (413)
--------- --------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES ........................ 2,248 11,102 12,021
--------- --------- ---------
INVESTING ACTIVITIES:
Proceeds from sales, maturities and prepayments of investment
securities available-for-sale ......................................... 27,606 53,206 17,668
Purchases of investment securities available-for-sale ................... (33,868) (69,741) (39,221)
Proceeds from maturities and prepayments of investment
securities held-to-maturity ........................................... 9,713 1,813 10,493
Purchases of investment securities held-to-maturity ..................... 0 (982) (9,000)
Principal collected on installment and commercial loans ................. 65,987 101,148 79,019
Installment and commercial loans originated or acquired ................. (98,456) (137,516) (121,285)
Proceeds from sales of commercial loans ................................. 2,927 7,857 10,001
Principal collections on mortgage loans ................................. 58,624 50,538 40,402
Mortgage loans originated or acquired ................................... (121,782) (128,528) (102,779)
Proceeds from sales of mortgage loans ................................... 57,546 72,243 58,702
Net proceeds from sales (acquisition) of real estate owned .............. 289 (358) 52
Net purchase of FHLB and FRB stock ...................................... (1,011) (694) (1,310)
Net addition of premises and equipment .................................. (1,326) (1,941) (1,335)
Acquisition of minority interest ........................................ (13) (114) (14)
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES ................................. (33,764) (53,069) (58,607)
--------- --------- ---------
FINANCING ACTIVITIES:
Net increase in deposits ................................................ 25,045 30,154 32,863
Net increase (decrease) in FHLB advances and other borrowed funds ....... (1,513) 26,277 36,593
Net increase (decrease) in advance payments from borrowers for taxes
and insurance ........................................................ 367 (132) 305
Net increase (decrease) in securities sold under repurchase agreements .. 9,464 (11,014) (12,247)
Cash dividends paid to stockholders ..................................... (3,086) (2,054) (2,007)
Treasury stock purchased ................................................ 0 (192) (714)
Proceeds from exercise of stock options and additional shares issued .... 553 748 221
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES ............................... 30,830 43,787 55,014
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................... (686) 1,820 8,428
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........................ 27,149 25,329 16,901
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .............................. $ 26,463 27,149 25,329
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for: Interest ............................ $ 19,389 18,424 15,821
Income taxes ........................ 4,890 5,491 4,367
44
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(A) GENERAL
Glacier Bancorp, Inc. (the "Company"), a Delaware corporation organized in 1
990, is a multi-bank, holding company which provides a full range of banking
services to individual and corporate customers in Montana through its subsidiary
banks. The subsidiary banks are subject to competition from other financial
service providers. The subsidiary banks are also subject to the regulations of
certain government agencies and undergo periodic examinations by those
regulatory authorities.
The accounting and consolidated financial statement reporting policies of the
Company conform with generally accepted accounting principles and prevailing
practices within the banking industry. In preparing the consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported and disclosed amounts of assets and liabilities as of the date of
the statement of financial condition and income and expenses for the period.
Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the subsidiary banks' allowance
for loan losses. Such agencies may require the subsidiary banks to recognize
additions to the allowance based on their judgements about information available
to them at the time of their examination.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its bank subsidiaries, Glacier Bank (the "Savings Bank"), First Security Bank of
Missoula ("First Security"), Glacier Bank of Whitefish (formerly First National
Bank of Whitefish), and Glacier Bank of Eureka (formerly First National Bank of
Eureka) (collectively the "Commercial Banks"). All significant intercompany
transactions have been eliminated in consolidation. The Company owns 100% of the
outstanding stock of Glacier Bank and First Security, and 94% and 93% of the
Glacier Banks of Whitefish and Eureka, respectively.
First Security was acquired on December 31, 1996 through an exchange of stock
with Missoula Bancshares, Inc. formerly the parent company of First Security.
The pooling of interests accounting method was used for this merger transaction.
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.
(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.
45
46
(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 them
in the near term are classified as trading securities and are reported at fair
market value, with unrealized gains and losses included in income. Debt and
equity securities not classified as held-to-maturity or trading are classified
as available-for-sale and are reported at fair value with unrealized gains and
losses, net of income taxes, shown as a separate component of stockholders'
equity.
Premiums and discounts on investment securities are amortized or accreted into
income using a method which approximates the level-yield interest method.
The cost of any investment, if sold, is determined by specific identification.
Declines in the fair value of available-for-sale or held-to-maturity securities
below carrying value that are other than temporary are charged to expense as
realized losses and the related carrying value reduced to fair value.
(E) LOANS RECEIVABLE
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding
unpaid principal balance reduced by any chargeoffs or specific valuation
accounts and net of any deferred fees or costs on originated loans or
unamortized premiums or discounts on purchased loans. 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.
(F) LOANS HELD FOR SALE
Mortgage 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.
(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 specific loans which are
deemed to be impaired. Groups of small balance homogeneous loans (generally
consumer and residential real estate loans) are evaluated for impairment
collectively. A loan is considered impaired when, based upon current information
and events, it is probable that the Company will be unable to collect, on a
timely basis, all principal and interest according to the contractual terms of
the loan's original agreement. When a specific loan is determined to be
impaired, the allowance for loan losses is increased through a charge to expense
for the amount of the impairment. The amount of the impairment is measured using
cash flows discounted at the loan's effective interest rate, except when it is
determined that the sole source of repayment for the loan is the operations or
liquidation of the underlying collateral. In such cases, the current value of
the collateral, reduced by anticipated selling costs, will be used in place of
discounted cash flows. Generally, when a loan is deemed impaired, current period
interest previously accrued but not collected is reversed against current period
interest income. Income on such impaired loans is then recognized only to the
extent that cash in excess of any amounts charged off to the allowance for loan
losses is received and where the future collection of principal is probable.
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.
During 1997 and 1 996 the amount of impaired loans was not material.
46
47
(H) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less depreciation. Depreciation is
generally computed on a straight-line method over the estimated useful lives,
which range from five to fifty years, of the various classes of assets from
their respective dates of acquisition.
(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, not to exceed estimated net
realizable value. 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, this
deficiency is recognized as a valuation allowance and is charged to expense.
(J) RESTRICTED STOCK INVESTMENTS
The Company holds stock in the Federal Home Loan Bank (FHLB) and the Federal
Reserve Bank (FRB). These investments are carried at cost.
(K) GOODWILL
Goodwill is being amortized against income using the straight-line method over
15 years.
(L) INCOME TAXES
Deferred tax assets and liabilities are recognized for estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. 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) EARNINGS PER SHARE
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share"
was issued in February 1997 to simplify the standard for computing earnings per
share (EPS) by replacing the presentation of primary and fully diluted EPS on
the face of the income statement for all entities with complex capital
structures. SFAS No. 128 also requires a reconciliation of the numerator and
the denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. The provisions of SFAS No. 128 apply to financial
statements issued for periods ending after December 15, 1997 with restatement
required of all prior-period EPS data presented.
(N) STOCK-BASED COMPENSATION
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
25, "Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation expense would be recorded over the vesting period only if at
the date of grant the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards
determined on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 for stock
based awards to employees and provide pro forma income and pro forma earnings
per share disclosures for employee stock based compensation granted in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
47
48
(O) IMPAIRMENT AND DISPOSAL OF 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, 1997 and 1996 there were no
assets that were considered impaired.
(P) MORTGAGE SERVICING RIGHTS
The Company recognizes mortgage servicing rights on loans originated and
subsequently sold as an asset regardless of whether the servicing rights are
acquired or retained on loans originated and subsequently sold. The mortgage
servicing rights are assessed for impairment based on the fair value of the
mortgage servicing rights. As of December 31, 1997 and 1996 the carrying value
of originated servicing rights was approximately $572,000 and $396,000,
respectively. There was no impairment of value at December 31, 1997 or 1996.
(R) TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF
LIABILITIES
SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," provides guidance on accounting for transfers
and servicing of financial assets, recognition and measurement of servicing
assets and liabilities, financial assets subject to prepayment, secured
borrowings and collateral, and extinguishment of liabilities.
SFAS No. 125 generally requires the recognition as separate assets the rights
to service mortgage loans for others, whether the servicing rights are acquired
through purchases or loan originations. SFAS No. 125 also specifies that
financial assets subject to prepayment, including loans that can be
contractually prepaid or otherwise settled in such a way that the holder would
not recover substantially all of its recorded investment be measured like debt
securities available-for-sale under SFAS No. 115, as amended by SFAS No. 125.
SFAS No. 125 was adopted by the Company January 1, 1997 and did not have a
material impact on the Company's financial position or results of operations.
(S) FUTURE ACCOUNTING PRONOUNCEMENTS
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was issued and is
effective January 1, 1998, with all prior periods presented. SFAS No. 130
establishes standards for the reporting and display of comprehensive income and
its components in a full set of financial statements. All items required to be
recognized under accounting standards as components of comprehensive income are
to be reported in a financial statement that is displayed as prominently as
other financial statements. SFAS No. 130 also requires the classification of
items of other comprehensive income by their nature in a financial statement and
the display of other comprehensive income separately from retained earnings and
paid-in capital in the stockholders' equity section of the statement of
financial condition. The Company's only significant element of comprehensive
income is the unrealized gains and losses on available-for-sale securities.
48
49
2. CASH ON HAND AND IN BANKS:
The subsidiary banks are required to maintain an average reserve balance with
the Federal Reserve Bank, or maintain such reserve in the form of cash on hand.
The amount of this required reserve balance at December 31, 1997 was
approximately $4,300,000 and was met by maintaining cash on hand and an average
reserve balance with the Federal Reserve Bank in excess of this amount.
3. INVESTMENT SECURITIES:
A comparison of the amortized cost and estimated fair value of the Company's
investment securities is as follows at:
DECEMBER 31, 1997
Gross Unrealized Estimated
Weighted Amortized -------------------------- Fair
(dollars in thousands) yield Cost Gains Losses Value
---------- ---------- ---------- ---------- ----------
HELD-TO-MATURITY
U.S. GOVERNMENT AND FEDERAL AGENCIES:
maturing within one year ................. 5.44% $ 2,998 0 (5) 2,993
maturing five years through ten years .... 7.07% 1,998 0 (1) 1,997
---- ---------- ----- ------ ------
6.09% 4,996 0 (6) 4,990
---- ---------- ----- ------ ------
STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES:
maturing within one year ................. 6.47% 388 1 0 389
maturing one year through five years ..... 5.99% 860 28 0 888
maturing five years through ten years .... 5.20% 620 23 0 643
maturing after ten years ................. 5.70% 1,048 60 0 1,108
---- ---------- ----- ------ ------
5.78% 2,916 112 0 3,028
---- ---------- ----- ------ ------
MORTGAGE-BACKED SECURITIES ..................... 7.24% 3,100 27 0 3,127
---- ---------- ----- ------ ------
TOTAL HELD-TO-MATURITY SECURITIES .... 6.33% $ 11,012 139 (6) 11,145
==== ========== ===== ====== ======
AVAILABLE-FOR-SALE
U.S. GOVERNMENT AND FEDERAL AGENCIES:
maturing within one year ................. 5.77% $ 1,991 1 1,992
maturing one year through five years ..... 5.90% 2,988 15 3,003
maturing five years through ten years .... 6.72% 1,001 0 (2) 999
maturing after ten years ................. 7.28% 9,044 54 (27) 9,071
---- ---------- ----- ------ ------
6.77% 15,024 70 (29) 15,065
---- ---------- ----- ------ ------
STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES:
maturing after ten years ................. 5.55% 24,056 1,110 (2) 25,164
MORTGAGE-BACKED SECURITIES ..................... 7.64% 20,567 667 (18) 21,216
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ....... 7.00% 31,653 256 (100) 31,809
---- ---------- ----- ------ ------
TOTAL AVAILABLE-FOR-SALE SECURITIES .. 6.72$ $ 91,300 2,103 (149) 93,254
==== ========== ===== ====== ======
49
50
DECEMBER 31, 1997
Gross Unrealized Estimated
Weighted Amortized -------------------------- Fair
(dollars in thousands) yield Cost Gains Losses Value
---------- ---------- ---------- ---------- ----------
HELD-TO-MATURITY
U.S. GOVERNMENT AND FEDERAL AGENCIES:
maturing within one year ................. 6.51% $ 1,993 13 0 2,006
maturing one through five years .......... 5.46% 3,000 0 (18) 2,982
maturing five years through ten years .... 7.35% 4,998 3 (15) 4,986
maturing after ten years ................. 7.48% 2,980 0 (48) 2,932
---- ---------- ----- ------ ------
6.81% 12,971 16 (81) 12,906
---- ---------- ----- ------ ------
STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES:
maturing within one year ................. 6.48% 506 1 0 507
maturing one year through five years ..... 6.55% 1,200 37 (1) 1,236
maturing five years through ten years .... 5.33% 585 12 0 597
maturing after ten years ................. 5.65% 1,148 27 0 1,175
---- ---------- ----- ------ ------
6.03% 3,439 77 (1) 3,515
---- ---------- ----- ------ ------
MORTGAGE-BACKED SECURITIES ..................... 7.09% 4,045 2 (32) 4,015
---- ---------- ----- ------ ------
TOTAL HELD-TO-MATURITY SECURITIES .... 6.74% $ 20,455 95 (114) 20,436
==== ========== ===== ====== ======
AVAILABLE-FOR-SALE
U.S. GOVERNMENT AND FEDERAL AGENCIES:
maturing within one year ................. 5.43 $ 8,984 8 (6) 8,986
maturing one year through five years ..... 6.18% 6,177 21 (7) 6,191
maturing five years through ten years .... 7.15% 2,205 10 (4) 2,211
maturing after ten years ................. 7.05% 10,114 11 (188) 9,937
---- ---------- ----- ------ ------
6.33% 27,480 50 (205) 27,325
---- ---------- ----- ------ ------
STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES:
maturing within one year ................. 7.90% 250 5 0 255
maturing one year through five years ..... 6.99% 403 0 (19) 384
maturing after ten years ................. 5.48% 14,920 125 (20) 15,025
---- ---------- ----- ------ ------
5.56% 15,573 130 (39) 15,664
---- ---------- ----- ------ ------
MORTGAGE-BACKED SECURITIES ..................... 7.64% 24,319 534 (164) 24,689
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ....... 7.11% 17,684 0 (312) 17,372
---- ---------- ----- ------ ------
TOTAL AVAILABLE-FOR-SALE SECURITIES .. 6.73 $ 85,056 714 (720) 85,050
==== ========== ===== ====== ======
Maturities of securities do not reflect repricing opportunities present in many
adjustable rate securities, nor do they reflect expected shorter maturities
based upon early prepayment of principal.
The Company has not entered into any swaps, options or futures contracts.
Included in the U.S. Government and Federal Agencies security amounts are
investments in structured notes which have contractual step-up interest rates
and call features.
Gross proceeds from sales of investment securities for the years ended December
31, 1997, 1996, and 1995, were approximately $9,681,000, $23,065,000, and
$5,111,000 respectively, resulting in gross gains of approximately $204,000,
$291,000 and $47,000 and gross losses of approximately $7,000, $170,000, and
$53,000, respectively.
At December 31, 1997, the Company had investment securities with book values of
approximately $55,014,000 pledged as security for deposits of several local
government units, securities sold under agreements to repurchase, and as
collateral for the treasury tax and loan borrowings.
The Real Estate Mortgage Investment Conduits consist of nine certificates which
are backed by the FNMA, GNMA or FHLMC.
At December 31, 1997 and 1996 the minority interest share of the unrealized gain
(loss) was $12,000 and ($7,000), respectively.
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51
4. LOANS RECEIVABLE:
The following is a summary of loans receivable at:
December 31,
---------------------------
(dollars in thousands) ......... 1997 1996
--------- ---------
REAL ESTATE LOANS AND CONTRACTS:
Residential first mortgage loans ...... $ 170,960 160,116
Construction .......................... 11,579 16,651
FHA and VA loans ...................... 14,953 17,940
Loans held for sale ................... 6,727 3,900
--------- ---------
204,219 198,607
COMMERCIAL LOANS:
Real estate ........................... 55,656 49,130
Other commercial loans ................ 65,391 50,940
--------- ---------
121,047 100,070
INSTALLMENT AND OTHER LOANS:
Consumer loans ........................ 68,007 51,780
Home equity loans ..................... 27,368 35,743
Outstanding balances on credit cards .. 3,951 3,725
--------- ---------
99,326 91,248
LESS:
Allowance for losses .................. (3,544) (3,284)
--------- ---------
$ 421,048 386,641
========= =========
SUMMARY OF ACTIVITY IN ALLOWANCE FOR LOSSES ON LOANS:
Years ended December 31,
---------------------------------------
(dollars in thousands) ... 1997 1996 1995
------- ------- -------
Balance, beginning of period .... $ 3,284 3,077 2,647
Net charge offs ................. (487) (673) (151)
Provision ....................... 747 880 581
------- ------- -------
Balance, end of period .......... $ 3,544 3,284 3,077
======= ======= =======
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES: December 31, 1997 December 31, 1996
-------------------------------- --------------------------------
% of loans in % of loans in
Amount Category Amount category
------------- ------------- ------------- -------------
Real estate loans and contracts ........ $ 1,021 0.50% 993 0.50%
Commercial real estate ................. 417 0.75% 368 0.75%
Other commercial loans ................. 1,021 1.56% 933 1.83%
Consumer loans ......................... 869 1.28% 736 1.42%
Home equity loans ...................... 137 0.50% 179 0.50%
Outstanding balances on credit cards ... 79 2.00% 75 2.00%
------------- ------------- ------------- -------------
$ 3,544 0.83% $ 3,284 0.84%
============= ============= ============= =============
Approximately 90 percent of the Company's total loans receivable are with
customers located in Western Montana.
The weighted average interest rate on loans was 8.93%, and 8.82% at December 31,
1997 and 1996, respectively.
At December 31, 1997 and 1996 serviced loans sold to others were $120,052,000
and $115,437,000, 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.
51
52
At December 31, 1997, the Company had outstanding commitments as follows
(dollars in thousands):
Letters of credit ................ $ 3,196
Loans and loans in process ....... 31,223
Unused consumer lines of credit .. 21,796
----------
$ 56,215
==========
ACCRUED INTEREST RECEIVABLE:
December 31,
----------------------------
(dollars in thousands) 1997 1996
---------- ----------
Investment securities .......... $ 823 826
Mortgage-backed securities ..... 381 291
Loans receivable ............... 2,555 2,356
---------- ----------
$ 3,759 3,473
========== ==========
5. PREMISES AND EQUIPMENT:
Premises and equipment consist of the following at:
December 31,
-----------------------------
(dollars in thousands) 1997 1996
---------- ----------
Land ........................................... $ 2,105 2,067
Office buildings and construction in progress .. 9,610 9,378
Furniture, fixtures and equipment .............. 5,771 5,313
Leasehold improvements ......................... 794 580
Accumulated depreciation ....................... (6,537) (6,046)
---------- ----------
$ 11,743 11,292
========== ==========
52
53
6. DEPOSITS:
Deposits consist of the following at: December 31,
---------------------------------------------------------------------------------
1997 1996
------------------------------------------------ ----------------------------
WEIGHTED
(dollars in thousands) AVERAGE RATE AMOUNT PERCENT Amount Percent
------------ ------------ ------------ ------------ ------------
Demand accounts ............................. 0.0% $ 73,639 21.2% $ 64,330 20.0%
------------ ------------ ------------ ------------
NOW accounts ................................ 1.5% 63,736 18.4% 59,602 18.5%
Savings accounts ............................ 3.4% 35,380 10.2% 37,097 11.5%
Money market demand accounts ................ 4.5% 68,788 19.8% 54,754 17.0%
Certificate accounts:
4.00% and lower ........................ 529 0.1% 705 0.3%
4.01% to 5.00% ......................... 11,788 3.4% 16,702 5.2%
5.01% to 6.00% ......................... 61,479 17.7% 63,466 19.8%
6.01% to 7.00% ......................... 29,779 8.6% 23,271 7.2%
7.01% to 8.00% ......................... 1,415 0.4% 1,443 0.4%
8.01% and higher ....................... 251 0.1% 369 0.1%
------------ ------------ ------------ ------------
Total certificate accounts ...... 5.8% 105,241 30.3% 105,956 33.0%
------------ ------------ ------------ ------------
Total interest bearing deposits ............. 4.1% 273,145 78.8% 257,409 80.0%
------------ ------------ ------------ ------------
Total deposits .............................. 3.2% $ 346,784 100.0% 321,739 100.0%
============ ============ ============ ============
Deposits with a balance in excess of $100,000...................... $ 80,699 $ 67,678
At December 31, 1997, scheduled maturities of certificates of deposit are as
follows:
Years ending December 31,
-------- ------------------------------------------------------------------------
(dollars in thousands) .... Total 1998 1999 2000 2001 Thereafter
-------- -------- -------- -------- -------- ----------
4.00% and lower ....... $ 529 313 172 19 20 5
4.01% to 5.00% ........ 11,788 10,052 1,317 411 8 0
5.01% to 6.00% ........ 61,479 48,201 10,262 1,360 1,408 248
6.01% to 7.00% ........ 29,779 9,490 4,316 6,568 1,894 7,511
7.01% to 8.00% ........ 1,415 1,231 75 0 95 14
8.01% and higher ...... 251 202 49 0 0 0
-------- -------- -------- -------- -------- --------
$105,241 69,489 16,191 8,358 3,425 7,778
======== ======== ======== ======== ======== ========
Interest expense on deposits is summarized as follows:
Years ended December 31,
-------------------------------------
(dollars in thousands) 1997 1996 1995
------- ------- -------
NOW accounts ................... $ 1,164 1,185 1,074
Money market demand accounts ... 2,765 2,156 1,667
Certificate accounts ........... 6,091 5,772 4,681
Savings accounts ............... 1,072 1,159 1,197
------- ------ -----
$11,092 10,272 8,619
======= ====== =====
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54
7. ADVANCES FROM FEDERAL HOME LOAN BANK OF SEATTLE:
Advances from the Federal Home Loan Bank of Seattle consist of the following at
December 31, 1997:
Maturing in years ending December 31,
---------------------------------------------------------------------------------
(dollars in thousands) ... TOTAL 1998 1999 2000 2001 2002 2003-2009
-------- -------- -------- -------- -------- -------- ---------
4.00% to 5.00% ...... $ 1,637 605 565 321 146 0 0
5.01% to 6.00% ...... 112,049 47,816 12,933 1,952 1,348 46,773 1,227
6.01% to 7.00% ...... 25,571 18,402 355 6,260 155 114 285
-------- -------- -------- -------- -------- -------- --------
$139,257 66,823 13,853 8,533 1,649 46,887 1,512
======== ======== ======== ======== ======== ======== ========
Advances from the Federal Home Loan Bank of Seattle consist of the following at
December 31, 1996:
Maturing in years ending December 31,
--------------------------------------------------------------------------------------------
(dollars in thousands) ... TOTAL 1997 1998 1999 2000 2001 2002-2011
-------- -------- -------- -------- -------- -------- ---------
4.00% to 5.00% ...... $ 15,435 877 377 336 1,000 12,845 0
5.01% to 6.00% ...... 96,696 66,969 16,414 7,995 2,021 1,398 1,899
6.01% to 7.00% ...... 30,171 5,535 17,470 355 6,260 154 397
7.01% to 8.00% ...... 987 32 32 32 32 32 827
-------- -------- -------- -------- -------- -------- --------
$143,289 73,413 34,293 8,718 9,313 14,429 3,123
======== ======== ======== ======== ======== ======== ========
These advances were collateralized by the Federal Home Loan Bank of Seattle
stock held by the Company, and qualifying real estate loans and investments
totaling approximately $226,976,000 and $233,661,000 at December 31, 1997 and
1996, respectively.
The weighted average interest rate on these advances was 5.70% and 5.67% at
December 31, 1997 and 1996, respectively.
54
55
8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWED FUNDS:
Securities sold under agreements to repurchase consist Book Market
of the following at: Weighted value of value of
Repurchase average underlying underlying
(dollars in thousands) amount rate paid assets assets
---------- ---------- ---------- ----------
DECEMBER 31, 1997:
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE WITHIN:
1-30 DAYS ...................................... $ 12,519 4.26% $ 19,598 20,477
31-90 DAYS ...................................... 6,428 5.47% 7,063 7,389
GREATER THAN 90 DAYS .............................. 308 5.70% 509 520
---------- ---------- ---------- ----------
$ 19,255 4.69% $ 27,170 28,386
========== ========== ========== ==========
December 31, 1996:
Securities sold under agreements to repurchase within:
1-30 days $ 6,532 4.03% $ 10,162 10,457
31-90 days 1,300 5.34% 2,908 2,992
Greater than 90 days. 1,959 5.34% 3,703 3,811
---------- ---------- ---------- ----------
$ 9,791 4.46% $ 16,773 17,260
========== ========== ========== ==========
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, 1997 securities sold under
agreements to repurchase averaged approximately $17,400,000 and the maximum
outstanding at any month end during the year was approximately $21,300,000.
In 1996 the Company entered into the treasury tax and loan account note option
program, which provides short term funding up to $12,000,000 at federal funds
rate minus 25 basis points. The borrowings are secured with investment
securities with a par value of approximately $14,700,000. At December 31, 1997
and 1996 the outstanding balance under this program was approximately $7,700,000
and $5,200,000, respectively.
55
56
9. STOCKHOLDERS' EQUITY:
For regulatory purposes, the Savings Bank is required to maintain three minimum
capital requirements. Failure to maintain the required capital can result in
regulatory action to limit the Savings Bank's operations.
Savings Bank capital components at December 31, 1997, are as follows:
Tangible Capital Core Capital Risk-based Capital
---------------------------------------------------------------------------------------
(dollars in thousands) $ % $ % $ %
---------- ---------- ---------- ---------- ---------- ----------
GAAP Capital ........................ $ 35,572 9.76% $ 35,572 9.76% $ 35,572 18.39%
Net unrealized gains on securities
available-for-sale ............. (821) (0.23)% (821) (0.23)% (821) (0.42)%
Other regulatory adjustments ........ (3) (0.00)% (3) (0.00)% (3) (0.00)%
Allowance for loan losses ........... -- -- -- -- 1,514 0.78%
Regulatory capital computed ......... 34,748 9.53% 34,748 9.53% 36,262 18.75%
Minimum capital requirement ......... 5,468 1.50% 10,936 3.00% 15,473 8.00%
---------- ---------- ---------- ---------- ---------- ----------
Regulatory Capital Excess ........... $ 29,280 8.03% $ 23,812 6.53% $ 20,789 10.75%
========== ========== ========== ========== ========== ==========
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 Boards capital adequacy
guidelines and the Company's compliance with those guidelines as of December 31,
1997.
Tier I (Core) Capital Tier II (Total) Capital Leverage Capital
------------------------- ------------------------- -------------------------
(dollars in thousands) $ % $ % $ %
---------- ---------- ---------- ---------- ---------- ----------
GAAP Capital ........................ $ 59,609 $ 59,609 $ 59,609
Goodwill ............................ (1,371) (1,371) (1,371)
Net unrealized gains on securities
available-for-sale ............. (1,181) (1,181) (1,181)
Other regulatory adjustments ........ 213 213 213
Allowance for loan losses ........... -- 3,544 --
---------- ---------- ----------
Regulatory capital computed ......... $ 57,270 $ 60,814 $ 57,270
========== ========== ==========
Risk weighted assets ................ $ 363,163 $ 363,163
========== ==========
Total average assets $ 569,599
==========
Capital as % of defined assets 15.77% 16.75% 10.05%
Regulatory "well capitalized" requirement 6.00% 10.00% 5.00%
----- ----- ----
Excess over "well capitalized" requirement 9.77% 6.75% 5.05%
===== ===== ====
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
depository 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, 1997, the subsidiary bank's capital measures exceed the highest supervisory
threshold, which requires total tier ll 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,
1997.
Effective February 1, 1998 Glacier Bank, fsb converted its charter from a
savings bank to a State of Montana chartered commercial bank. With that
effective date each of the Companys' subsidiaries are state chartered, Federal
Reserve member, banks.
State banks may pay dividends up to the total of the prior two years earnings
without permission of the state regulator. The amount available for dividend
distribution by the bank subsidiaries as of December 31, 1997, was approximately
$10,670,000.
56
57
10. FEDERAL AND STATE INCOME TAXES:
The following is a summary of consolidated income tax expense for:
Years ended December 31,
---------------------------------------
(dollars in thousands) 1997 1996 1995
------- ------- -------
Current:
Federal .................................. $ 4,668 4,201 4,270
State .................................... 950 916 988
------- ------- -------
Total current tax expense ................ 5,618 5,117 5,258
------- ------- -------
Deferred:
Federal .................................. (348) (45) (90)
State .................................... 49 18 (29)
------- ------- -------
Total deferred tax expense (benefit) ..... (299) (27) (119)
------- ------- -------
Total income tax expense .................. $ 5,319 5,090 5,139
======= ======= =======
Federal and state income tax expense differs from that computed at the federal
statutory corporate tax rate as follows for:
Years ended December 31,
-------------------------------------
1997 1996 1995
------ ------ ------
Federal statutory rate ........................... 34.0% 34.0% 34.0%
State taxes, net of federal income tax benefit ... 4.5% 4.5% 4.5%
Non-deductible merger expenses ................... 0.2% 1.7% 0.0%
Other, net ....................................... (2.0)% 0.5% 0.7%
------ ------ ------
36.7% 40.7% 39.2%
====== ====== ======
The tax effects of temporary differences which give rise to a significant
portion of deferred tax assets and deferred tax liabilities are as follows at:
December 31,
-----------------------
(dollars in thousands) 1997 1996
------- -------
Deferred tax assets:
Allowance for losses on loans .................................... $ 1,390 1,269
Available-for-sale securities fair value adjustment .............. 0 4
Other ............................................................ 416 86
------- -------
Total gross deferred tax assets ................................... 1,806 1,359
------- -------
Deferred tax liabilities:
Federal Home Loan Bank stock dividends ........................... (1,365) (1,058)
Fixed assets, due to differences in depreciation ................. (341) (339)
Discount on loans and investments due to prior years' sale with
concurrent purchase .............................................. (95) (196)
Tax bad debt reserve in excess of base-year reserve .............. (615) (768)
Available-for-sale securities fair value adjustment .............. (761) 0
Basis difference from acquisitions ............................... (197) (216)
Other ............................................................ (344) (228)
------- -------
Total gross deferred tax liabilities ............................. (3,718) (2,805)
------- -------
Net deferred tax liability ....................................... $(1,912) (1,446)
======= =======
There was no valuation allowance at December 31, 1997 and 1996 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.
57
58
Retained earnings at December 31, 1997 includes approximately $3,600,000 for
which no provision for Federal income tax has been made.This amount represents
the base year tax 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.
11. 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, 1997, 1996, and 1995 was approximately $574,000,
$366,000 and $287,000 respectively. The employees of First Security became
eligible to participate in the plan during 1997.
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, 1997, 1996 and 1995 was approximately $157,000, $106,000, and
$95,000, respectively. Employees of First Security became eligible to
participate in the plan in 1997.
In 1995 a Supplemental Executive Retirement Plan (SERP) was adopted 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, 1997, 1996 and 1995
was approximately $46,000, $41,000, and $19,000, respectively.
In 1995 a non-funded deferred compensation plan for directors and senior
officers was established. 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
$144,000, $87,000, and zero, for the years ending December 31, 1997, 1996, and
1995, 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 credit for 1997, 1996, and 1995 was approximately
$66,000, $5,000, and zero, respectively.
First Security had a discretionary non-contributory profit sharing plan covering
substantially all employees, with funding of contributions as accrued. The total
plan expense for the years ended December 31, 1996 and 1995, was approximately
$262,000, and $235,000 respectively. The plan was terminated as of December 31,
1996.
The Company has entered into employment contracts with eight senior officers
that provide benefits under certain conditions following a change in control of
the Company.
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59
12. EARNINGS PER SHARE:
Basic earnings per share is computed by dividing net earnings by the weighted
average number of shares of common stock outstanding during the year. Diluted
earnings per share is computed by including the net increase in shares if all
outstanding stock options were exercised, using the treasury stock method.
Previous period amounts are restated for the effect of stock dividends and the
stock split.
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------
AVERAGE PER-SHARE
INCOME SHARES AMOUNT
---------- ---------- ----------
BASIC EARNINGS PER SHARE:
Income available to common shareholders ........................ $9,180,000 6,807,469 1.35
EFFECT OF DILUTIVE SECURITIES:
Net increase in shares from assumed exercise of stock options .. 127,643
DILUTED EARNINGS PER SHARE:
---------- ---------- ----------
Income available to common stockholders plus assumed options ... 9,180,000 6,935,112 1.32
========== ========== ==========
Year ended December 31, 1997
----------------------------------------------
Average Per-Share
Income Shares Amount
---------- ---------- ----------
BASIC EARNINGS PER SHARE:
Income available to common shareholders ........................ $7,425,000 6,707,792 1.11
EFFECT OF DILUTIVE SECURITIES:
Net increase in shares from assumed exercise of stock options .. 79,586
DILUTED EARNINGS PER SHARE:
---------- ---------- ----------
Income available to common stockholders plus assumed options ... 7,425,000 6,787,378 1.09
---------- ---------- ----------
Year ended December 31, 1997
----------------------------------------------
Average Per-Share
Income Shares Amount
---------- ---------- ----------
BASIC EARNINGS PER SHARE:
Income available to common shareholders ........................ $7,975,000 6,750,211 1.18
EFFECT OF DILUTIVE SECURITIES:
Net increase in shares from assumed exercise of stock options .. 22,305
DILUTED EARNINGS PER SHARE:
---------- ---------- ----------
Income available to common stockholders plus assumed options ... 7,975,000 6,772,516 1.18
========== ========== ==========
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60
13. 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 provides 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 provides for the grant of options limited
to 279,768 shares to key employees of the Company. The option price at which the
Company's common stock may be purchased upon exercise of options granted under
the plan must be at least equal to the per share market value of such stock at
the date the option is granted. The 1984 plan also contains provisions
permitting the optionee, with the approval of the Company, to surrender his or
her options for cancellation and receive cash or common stock equal to the
difference between the exercise price and the then fair market value of the
shares on the date of surrender. 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.
At December 31, 1997, total shares available for option grants to employees are
273,188.
Changes in shares granted for stock options for the years ended December 31,
1997, 1996, and 1995, are summarized as follows:
Options outstanding Options exercisable
----------------------------- -----------------------------
Weighted Weighted
average average
Shares exercise price Shares exercise price
---------- -------------- ---------- --------------
Balance, December 31, 1994 ... 143,166 $ 17.04 29,756 $ 11.09
---------- ---------- ---------- ----------
Canceled ...................... (9,020) (14.52) (9,020) (14.52)
Granted ....................... 2,500 19.60
Became exercisable ............ 78,030 18.69
Stock dividend ................ 12,109 7,559
Exercised ..................... (20,278) (10.90) (20,278) (10.90)
---------- ---------- ---------- ----------
Balance, December 31, 1995 ... 128,477 $ 16.63 86,047 $ 16.69
========== ========== ========== ==========
Canceled ...................... (5,853) (17.43) (1,266) (15.80)
Granted ....................... 112,880 19.06
Became exercisable ............ 55,261 17.34
Stock dividend ................ 20,520 13,286
Exercised ..................... (36,697) (14.96) (36,697) (14.96)
---------- ---------- ---------- ----------
Balance, December 31, 1996 .... 219,327 $ 16.59 116,631 $ 15.65
========== ========== ========== ==========
CANCELED ...................... (9,715) (15.65)
GRANTED ....................... 115,418 23.45
BECAME EXERCISABLE ............ 11,338 17.15
THREE FOR TWO STOCK SPLIT ..... 160,937 57,577
EXERCISED ..................... (51,993) (10.73) (51,993) (10.73)
---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1997 .... 433,974 $ 12.98 133,553 $ 10.94
========== ========== ========== ==========
At December 31, 1997, the remaining stock options outstanding are at exercise
prices ranging from $9.89 to $16.12 per share. The options exercised during the
year ended December 31, 1997 were at prices from $9.89 to $18.13.
60
61
The per share weighted-average fair value of stock options granted during 1997,
1996 and 1995 was $1.79 $1.75 and $2.12, respectively, on the date of grant
using the Black Scholes option-pricing model with the following assumptions:
1997 - expected dividend yield of 2.9%, risk-free interest rate of 5.8%,
volatility ratio of .024, and expected life of 4.8 years: 1996 - expected
dividend yield of 2.9%, risk-free interest rate of 5.8%, volatility ratio of
.024, and expected life of 4.8 years: 1995 - expected dividend yield of 2.9%,
risk-free interest rate 5.9%, volatility ratio .024, and expected life of 3.5
years.
The Company applies APB Opinion No. 25 in accounting for its grants of options
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 at the grant date for its stock options under SFAS No. 123,
the Company's net income would have been reduced to the pro forma amounts
indicated below:
Years ended December 31,
-------------------------------------
1997 1996 1995
------ ------ ------
Net earnings - As reported 9,180 7,425 7,975
Pro forma 9,040 7,378 7,969
Basic earnings per share - As reported 1.35 1.11 1.18
Pro forma 1.33 1.10 1.18
Diluted earnings per share - As reported 1.32 1.09 1.18
Pro forma 1.30 1.09 1.18
Pro forma net earnings and earnings per share reflect only options granted in
1997, 1996 and 1995. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro forma net
earnings and earnings per share amounts presented above because compensation
cost is reflected over the options vesting period of 2 years and proforma
compensation cost for options granted prior to January 1, 1995 is not
considered.
In September 1993 Missoula Bancshares, Inc. granted 1,000 shares of its common
stock to a senior officer to be issued on or after September 1998 at the
election of the officer, with vesting over the five year period. In conjunction
with the merger of Missoula Bancshares, Inc., the Company issued 14,930 shares
which was the vested portion of the 1,000 shares at the exchange ratio, and
converted the non-vested portion to options for 8,040 Company shares (12,060
shares after adjustment for 3 for 2 stock split) which will fully vest at the
end of September 1998. The related compensation expense, based on the fair value
of the common stock at the date of the grant, is being charged to expense over
the service period with a corresponding credit to paid-in capital.
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62
14. PARENT COMPANY INFORMATION (CONDENSED):
The following condensed financial information is the unconsolidated (Parent
Company Only) information for Glacier Bancorp, Inc, combined with Missoula
Bancshares Inc.:
STATEMENTS OF FINANCIAL CONDITION December 31,
---------------------------
(dollars in thousands) 1997 1996
---------- ----------
ASSETS:
Cash ......................................................... $ 102 111
Interest bearing cash deposits ............................... 1,561 1,296
---------- ----------
Cash and cash equivalents .............................. 1,663 1,407
Investments securities, available-for-sale, at market value .. 1,581 1,742
Investments securities, held-to-maturity, at cost ............ 94 97
Other assets ................................................. 981 84
Goodwill, net ................................................ 1,371 1,526
Investment in subsidiaries ................................... 55,872 48,462
---------- ----------
$ 61,562 53,318
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Dividends payable ............................................ $ 1,164 725
Other liabilities ............................................ 789 645
---------- ----------
Total liabilities .................................... 1,953 1,370
---------- ----------
Common stock ................................................. 69 46
Paid-in capital .............................................. 35,383 34,571
Retained earnings ............................................ 24,042 18,392
Treasury stock ............................................... (1,066) (1,066)
Net unrealized gains on securities available-for-sale ........ 1,181 5
---------- ----------
Total stockholders' equity .......................... 59,609 51,948
---------- ----------
$ 61,562 53,318
========== ==========
STATEMENTS OF OPERATIONS Years ended December 31,
------------------------------------------
(dollars in thousands) ....................................... 1997 1996 1995
---------- ---------- ----------
REVENUES
Dividends from subsidiaries .................................. $ 3,415 3,893 4,259
Other income ................................................. 344 266 61
Intercompany charges for services ............................ 1,803 1,584 1,865
---------- ---------- ----------
Total revenues .......................................... 5,562 5,743 6,185
---------- ---------- ----------
EXPENSES
Employee compensation and benefits ........................... 1,974 1,971 2,010
Goodwill amortization ........................................ 155 168 179
Other operating expenses ..................................... 278 989 650
---------- ---------- ----------
Total expenses .......................................... 2,407 3,128 2,839
---------- ---------- ----------
Earnings before income tax benefit and equity in undistributed
earnings of subsidiaries ............................... 3,155 2,615 3,346
Income tax benefit ........................................... (63) (202) (264)
---------- ---------- ----------
Income before equity in undistributed earnings of subsidiaries 3,218 2,817 3,610
Equity in undistributed earnings of subsidiaries ............. 5,962 4,608 4,365
---------- ---------- ----------
NET EARNINGS .................................................... $ 9,180 7,425 7,975
========== ========== ==========
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63
STATEMENTS OF CASH FLOWS Years ended December 31,
------------------------------------------
(dollars in thousands) 1997 1996 1995
---------- ---------- ----------
OPERATING ACTIVITIES
Net earnings .................................................... $ 9,180 7,425 7,975
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Goodwill amortization ........................................... 155 168 179
Gain on sale of investments available-for-sale .................. (184) (127) 0
Equity in undistributed earnings of subsidiaries ................ (5,962) (4,608) (4,365)
Net increase (decrease) in other assets and other liabilities ... (698) 1,007 101
---------- ---------- ----------
Net cash provided by operating activities .......................... 2,491 3,865 3,890
---------- ---------- ----------
INVESTING ACTIVITIES
Purchases of investment securities available-for-sale ........... (176) (221) (1,198)
Purchases of investment securities held-to-maturity ............. 0 0 (100)
Proceeds from sales, maturities and prepayments of securities
available-for-sale ........................................ 484 198 0
Proceeds from maturities of securities held-to-maturity ......... 3 3 0
Acquisition of minority interest ................................ (13) (114) (14)
---------- ---------- ----------
Net cash provided (used) by investing activities ................... 298 (134) (1,312)
---------- ---------- ----------
FINANCING ACTIVITIES
Proceeds from exercise of stock options and other stock issued .. 553 748 221
Treasury stock purchased ........................................ 0 (192) (714)
Principal reductions on notes payable ........................... 0 (1,500) (900)
Cash dividends paid to stockholders ............................. (3,086) (2,054) (2,007)
---------- ---------- ----------
Net cash used by financing activities .............................. (2,533) (2,998) (3,400)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents ............... 256 733 (822)
Cash and cash equivalents at beginning of period ................... 1,407 674 1,496
---------- ---------- ----------
Cash and cash equivalents at end of period ......................... $ 1,663 1,407 674
========== ========== ==========
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64
15. UNAUDITED QUARTERLY FINANCIAL DATA:
Summarized unaudited quarterly financial data is as follows (in thousands except
per share amounts):
Quarters Ended
------------------------------------------------------------------------------------
March 31, 1997 June 30, 1997 September 30, 1997 December 31, 1997
------------------ ------------------ ------------------ ------------------
INTEREST INCOME .................. $ 10,511 10,985 11,207 11,301
INTEREST EXPENSE ................. 4,838 4,986 5,045 5,009
NET EARNINGS ..................... 1,986 2,293 2,319 2,582
BASIC EARNINGS PER SHARE [1] ..... 0.29 0.34 0.34 0.38
DILUTED EARNINGS PER SHARE [1] ... 0.29 0.33 0.33 0.37
DIVIDENDS PER SHARE [1] .......... 0.11 0.12 0.12 0.17[2]
MARKET RANGE HIGH-LOW [1] ........ $16.50-$15.50 $21.00-$15.25 $19.50-$17.50 $25.00-$18.63
Interest income .................. $ 9,825 10,139 10,504 10,680
Interest expense ................. 4,461 4,532 4,723 4,840
Net earnings ..................... 2,028 2,201 1,499 1,697
Basic earnings per share [1] ..... 0.30 0.33 0.23 0.25
Diluted earnings per share [1] ... 0.30 0.32 0.22 0.25
Dividends per share [1] .......... 0.10 0.11 0.11 0.11
Market range high-low [1] ........ $13.63-$11.82 $14.92-$12.73 $16.83-$13.50 $16.83-$15.50
Interest income .................. $ 8,599 8,915 9,542 9,796
Interest expense ................. 3,607 3,820 4,264 4,378
Net earnings ..................... 1,810 1,939 2,114 2,112
Basic earnings per share [1] ..... 0.27 0.29 0.31 0.31
Diluted earnings per share [1] ... 0.27 0.29 0.31 0.31
Dividends per share [1] .......... 0.09 0.09 0.09 0.10
Market range high-low [1] ........ $10.33-$9.09 $11.82-$9.91 $13.33-$10.76 $13.25-$11.21
[1] Per share amounts adjusted to reflect effect of three for two Stock split.
[2] Extraordinary dividend was paid at $.05 per share.
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16. FAIR VALUE OF FINANCIAL INSTRUMENTS.
Financial instruments has 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:
DECEMBER 31, 1997 December 31, 1996
------------------------- -------------------------
(dollars in thousands) AMOUNT FAIR VALUE Amount Fair Value
-------- ---------- -------- ----------
FINANCIAL ASSETS:
Cash ............................................. $ 26,463 26,463 24,666 24,666
Interest bearing cash deposits ................... 0 0 2,483 2,483
Investment securities ............................ 48,141 48,247 59,399 59,410
Mortgage-backed securities ....................... 56,125 56,152 46,106 46,076
Loans ............................................ 421,048 427,254 386,641 388,639
FHLB and Federal Reserve stock ................... 10,670 10,670 8,926 8,926
FINANCIAL LIABILITIES:
Deposits ......................................... $346,784 346,466 321,739 322,033
Advances from the FHLB of Seattle ................ 139,257 139,067 143,289 143,209
Repurchase agreements and other borrowed funds ... 26,976 26,976 14,993 14,098
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
and interest bearing cash accounts. For 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 stock approximates the book value.
Financial Liabilities - The estimated fair value of demand and savings deposits
approximates the book value since rates are periodically adjusted to market
rates. Certificates of deposit fair value is estimated by discounting the future
cash flows using current rates for similar deposits. Repurchase agreements and
other borrowed funds have variable interest rates, or are short term, so fair
value approximates book value. 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.
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.
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17. CONTINGENCIES AND COMMITMENTS:
The Company is a defendant in legal proceedings arising in the normal course of
business. In the opinion of management, the disposition of pending litigation
will not have a material effect on the Company's consolidated financial position
or results of operations.
The Company is in the process of converting its data processing operation from
an outside data processing service for three of its subsidiaries to an upgraded
in-house system currently used by First Security. This conversion will
standardize information processing within the Company and provide enhanced
customer service capabilities. The estimated investment for this conversion,
including hardware, software licensing fees, and conversion costs is
approximately $800,000. Annual expenses for data processing are expected to
decline with this change.
The Company has signed an agreement to purchase a commercial building site in
Kalispell on which it intends to construct a building to be used to relocate one
of its drive-up offices and the corporate headquarters. The estimated cost for
land and building is approximately $2,100,000. As of December 31, 1997 $5,000 in
earnest money has been paid for the land purchase.
The Company is aware of the issues associated with computer systems as the year
2000 approaches. The basic issue is whether computer systems will properly
recognize date-sensitive information when the year changes to 2000. The Company
has a task force to identify all equipment, software, vendor dependencies, and
customers that may be affected by the year 2000 problem. The Company has
provided its business customers, suppliers and vendors with information
regarding the Company's progress on year 2000 issues and has requested similar
information in return. All software currently used within the Company is
supplied by vendors. Vendor readiness for year 2000 has been assessed, and
testing to assure proper functioning is scheduled to be completed by December
31, 1998. The Company continues to bear some risk related to the year 2000 issue
and could be adversely affected if other entities not affiliated with the
Company do not appropriately address their own year 2000 compliance issues.
Based on the study and analysis conducted, the dollar amount required to
remediate the known year 2000 issues is not expected to be material to the
Company's business. Unanticipated problems or difficulties, however, could
significantly increase the Company's estimated expenditures for the year 2000
project.
18. POOLING-OF-INTERESTS COMBINATION:
On December 31, 1996, the Company issued 1,145,599 shares of common stock in
exchange for all of the outstanding stock of Missoula Bancshares, Inc., parent
of First Security Bank of Missoula. 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 Missoula Bancshares, Inc.
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19. AGREEMENT TO MERGE
On December 30, 1997, the Company entered into a definitive agreement to acquire
through merger HUB Financial Corporation (HUB), and its subsidiary Valley Bank
of Helena (VB). Upon completion of the merger VB will operate as an independent,
wholly owned subsidiary of the Company. Because HUB does not own 100% of the
outstanding shares of VB common stock, the acquisition will be accomplished
through two transactions: the merger with HUB and a share exchange with VB
minority shareholders. The total purchase price that the Company will pay for
the acquisition, (both the merger and the share exchange) is 620,000 shares of
common stock, subject to adjustment for those shareholders that have perfected
their dissenters rights. While it is anticipated that the acquisition will be
completed in mid 1998, it is subject to certain conditions, including the
approval of the shareholders of HUB and VB. If completed, the merger will be
accounted for using the pooling-of-interests method, and the acquisition of VB
minority interests (approximately 13.5%) will be accounted for under the
purchase method. Transactions accounted for as a pooling-of-interests reflect
the assets, liabilities, stockholders' equity, and results of operations of the
separate entities as though the entities had been combined as of the earliest
date Reported. Under the purchase method, transactions are included in the
purchasers financial statements from the acquisition date forward with the
proportional interest of the net assets acquired restated to estimated fair
value.
20. COMMON STOCK AUTHORIZED AND ISSUED
In 1990, Glacier Bancorp, Inc. was formed by First Federal Savings Bank of
Montana (First Federal) to acquire all of the savings bank's stock upon its
reorganization. At the time of reorganization First Federal had 12,500,000
shares of common stock authorized. Glacier Bancorp, Inc. was organized as a
Delaware corporation with its articles of incorporation authorizing 6,000,000
shares. As a result of the reorganization, the total number of authorized shares
of the Company was effectively reduced from 12,500,000 to 6,000,000. In 1997,
the Company's board of directors authorized a 3 for 2 stock split which was
completed in May. This stock split, along with additional shares issued in
connection with outstanding stock options, brought the number of issued shares
to 6,847,485 as of December 31, 1997.
Subsequent to December 31, 1997, the Company discovered certain technical
deficiencies in the 3 for 2 stock split, including the existence of the lower
than assumed authorized number of shares. As a result of these technical
deficiencies, the stock split did not result in valid shares being issued in
excess of the currently authorized number. A curative transaction in the form of
a merger with a newly created subsidiary will be presented to shareholders at
the 1998 annual meeting for approval to resolve the technical deficiencies. In
connection with this transaction the authorized shares of common stock will
effectively be increased to 15,000,000. The Company, based on advice from legal
counsel, believes that the curative transaction will result in the 6,847,485
outstanding shares being validly issued. All share and per share information
reflects the actual shares issued during 1997, including the stock split and the
exercise of options, as if currently valid. The effects on the Company, if any,
related to the ineffective stock split are not presently determinable.
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Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure None
PART III
Item 10. Directors and Executive Officers of the Registrant
INFORMATION WITH RESPECT TO DIRECTORS AND EXECUTIVE OFFICERS
The following tables set forth certain information with respect to
directors and executive officers of the Company. The table below includes (i)
principal occupations during the past five years; (ii) the term of office; and
(iii) the number and percentage of shares of Common Stock beneficially owned by
each individual on January 1, 1998. Where beneficial ownership is less than one
percent of all outstanding shares, the percentage is not reflected in the table.
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AMOUNT AND NATURE OF
AGE AS OF BENEFICIAL OWNERSHIP OF
JANUARY 1, DIRECTOR TERM COMMON STOCK AS OF
NAME 1998 POSITION SINCE EXPIRES JANUARY 1, 1998 (1)
---- ---------- -------- ---------- ------- -----------------------
John S. MacMillan 61 Chairman, 1977 1998 182,465 (2.66%)( 2)
President and
Chief Executive
Officer
F. Charles Mercord 66 Director 1975 1998 139,943 (2.04%)(3)
Allen J. Fetscher 53 Director 1996 1998 141,882 (2.07%)(4)
Michael J. Blodnick 45 Director, 1993 1999 90,661 (1.32%)(5)
Executive Vice
President and
Secretary;
President/CEO of
Bank; Executive VP
of GBE
Darrel R. Martin 73 Director 1979 1999 114,358 (1.71%)(6)
Harold A. Tutvedt 68 Director 1983 1999 117,587 (1.72%)(7)
William L. Bouchee 56 Director 1996 2000 136,200 (1.99%)
L. Peter Larson 59 Director 1985 2000 239,664 (3.50%)
Everit A. Sliter 59 Director 1973 2000 166,488 (2.43%)(8)
(1) Pursuant to rules promulgated by the SEC under the Exchange Act, an
individual is considered to beneficially own shares of Common Stock if he
or she has or shares: (1) voting power, which includes the power to vote,
or direct the voting of the shares; or (2) investment power, which
includes the power to dispose, or direct the disposition of the shares.
Unless otherwise indicated, the individual has sole voting and sole
investment power with respect to such holdings.
(2) Includes 18,645 shares owned jointly with Mr. MacMillan's wife; 36,543
owned by Mr. MacMillan's wife; 45,546 shares held for Mr. MacMillan's
account in the Company's Pension and Profit Sharing Plans; 2,206 held in
an IRA account for the benefit of Mr. MacMillan; and 12,766 shares which
may be acquired within 60 days by the exercise of stock options.
(3) Includes 90,642 shares held in an IRA for the benefit of Mr. Mercord;
26,119 shares owned by Mr. Mercord's wife; and 13,282 shares which could
be acquired within 60 days by the exercise of stock options.
(4) Includes 36,153 shares owned by Mr. Fetscher's wife; 29,078 considered
beneficially held as Trustee for shares held in a trust for the benefit of
Mr. Fetscher's minor children; and 38,658 held by a family corporation, of
which Mr. Fetscher is a principal and 1,840 shares which could be acquired
within 60 days by the exercise of stock options.
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(5) Includes 34,184 shares held jointly with Mr. Blodnick's wife; 34,182
shares owned by Mr. Blodnick's wife; 1,204 shares which Mr. Blodnick is
custodian for his children; 7,595 shares held for Mr. Blodnick's account
in the Company's Pension and Profit Sharing Plans; and 12,866 shares which
could be acquired within 60 days by the exercise of stock options.
(6) Includes 45,523 shares owned by Mr. Martin's wife; 2,967 in an IRA account
for the benefit of Mr. Martin; and 13,282 shares which could be acquired
within 60 days by the exercise of stock options.
(7) Includes 63,056 shares owned jointly with Mr. Tutvedt's wife, 2,668 shares
owned by Mr. Tutvedt's wife; 33,624 held jointly with brother; 2,838
shares held in an IRA account for the benefit of Mr. Tutvedt; 7,119 shares
held jointly by Mr. Tutvedt's wife and daughter; and 8,282 shares which
could be acquired within 60 days by the exercise of stock options.
(8) Includes 65,670 shares held jointly with Mr. Sliter's wife; 20,983 shares
owned by Mr. Sliter's wife; 18,738 shares owned by Mr. Sliter's children;
34,154 shares held in an IRA account for the benefit of Mr. Sliter; 3,338
shares held in the Company's SEP; and 13,282 shares which could be
acquired within 60 days by the exercise of stock options.
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EXECUTIVE OFFICERS OF THE COMPANY
Amount and Nature of
Beneficial Ownership of
Common Stock as of
NAME AGE Position January 1, 1998
---- --- -------- -----------------------
Joan L. Holling 57 Senior Vice President and Assistant 63,912 (1)
Secretary of the Company and
Glacier; employed since 1974
James H. Strosahl 55 Senior Vice President and Chief 24,493 (2)
Financial Officer of the Company and
Glacier; employed since 1993
Stephen J. Van Helden 48 Treasurer of the Company and 85,084 (3)
Executive Vice President of Glacier;
employed since 1974
Martin E. Gilman 52 Senior Vice President of the Company
and Glacier; employed since 1973 40,492 (4)
Directors and executive officers as a group 1,546,196 (22.58%) (5)
(thirteen (13) persons)
- ----------
(1) Includes 37,409 shares held jointly with Ms. Holling's husband, with whom
voting and dispositive power is shared; 11,148 shares held jointly in a
margin account with Ms. Holling's daughters; 6,078 shares held in the
Company's Pension & Profit Sharing Plans; and 6,600 shares which could be
acquired within 60 days by the exercise of stock options.
(2) Includes 4,992 shares held jointly with Mr. Strosahl's wife with whom
voting and dispositive power is shared; 8,714 shares held in an IRA
account; and 6,600 shares which could be acquired within 60 days by the
exercise of stock options.
(3) Includes 38,241 shares held jointly with Mr. Van Helden's wife with whom
voting and dispositive power is shared; 35,743 shares held in the
Company's Pension and Profit Sharing Plans; 400 held by Mr. Van Helden's
minor children and 6,600 shares which could be acquired within 60 days by
the exercise of stock options.
(4) Includes 196 shares held jointly with Mr. Gilman's wife with whom voting
and dispositive power is shared; 33,765 shares held in the Company's
Pension and Profit Sharing Plans; 3,561 shares held by a family
corporation, of which Mr. Gilman is a principal; and 2,970 shares which
could be acquired within 60 days by the exercise of stock options.
(5) Includes 98,370 shares which could be acquired within 60 days from the
Voting Record Date by all officers and directors as a group (thirteen
persons) by the exercise of stock options granted pursuant to the
Company's stock option plans.
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COMPLIANCE WITH SECTION 16(A) FILING REQUIREMENTS
Section 16(a) of the Securities Exchange Act of 1934, as amended,
("Section 16(a)") requires that all executive officers and directors of the
Company and all persons who beneficially own more than 10 percent of the
Company's Common Stock file reports with the Securities and Exchange Commission
with respect to beneficial ownership of the Company's securities. The Company
has adopted procedures to assist its directors and executive officers in
complying with the Section 16(a) filings.
Based solely upon the Company's review of the copies of the filings which
it received with respect to the fiscal year ended December 31, 1997, or written
representations from certain reporting persons, the Company believes that all
reporting persons made all filings required by Section 16(a) on a timely basis.
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The following table sets forth a summary of certain information concerning
the compensation awarded to or paid by the Company for the year ended December
31, 1997 for services rendered in all capacities during the last three fiscal
years to the Chief Executive Officer and the most highly compensated executive
officers of the Company whose total compensation during the last fiscal year
exceeded $100,000.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
--------------------------------------------------------------------------------
Other Annual
Name and Salary Bonus Compensation Awards Payouts All Other
Principal Position Year (1) (1) (2) Compensation
--------------------------------------------------------------------------------
Securities (4)(5)
Underlying LTIP
Options (3) Payouts
- ---------------------------------------------------------------------------------------------------------------
John S. MacMillan 1997 $189,616 $80,000 0 8,475 0 $46,426
President and Chief 1996 179,615 110,000 0 9,787 0 23,588
Executive Officer 1995 170,000 100,000 0 0 0 39,770
Michael J. Blodnick 1997 $164,423 $50,000 0 8,475 0 $41,707
Executive Vice President 1996 148,846 75,000 0 9,787 0 20,857
and Secretary 1995 119,135 60,000 0 0 0 23,338
William L. Bouchee 1997 $106,692 $18,739 0 0 0 $19,211
President, First
Security Bank
James H. Strosahl 1997 $76,729 $28,000 0 5,650 $16,825
Senior Vice President 1996 69,934 32,500 0 6,600 0 13,905
Chief Financial Officer 1995 63,655 25,000 0 0 0 11,440
Stephen J. Van Helden 1997 $84,938 $30,000 0 8,475 0 $17,146
Senior Vice President 1996 77,346 40,000 0 6,600 0 17,362
Treasurer 1995 70,722 35,000 0 0 0 13,674
(1) Includes $87,404, $10,000, and $7,000 deferred by Messrs. MacMillan,
Blodnick and Strosahl, respectively, pursuant to the Company's Deferred
Compensation Plan.
(2) Does not include amounts attributable to miscellaneous benefits received
by executive officers, including the use of Company-owned automobiles and
the payment of certain club dues. In the opinion of management of the
Company the costs to the Company of providing such benefits to any
individual executive officer during the year ended December 31, 1997 did
not exceed the lesser of $50,000 or 10% of the total of annual salary and
bonus reported for the individual.
(3) Includes awards granted pursuant to the Company's 1989 Incentive Stock
Option Plan and 1995 Employee Stock Option Plan.
(4) Includes amounts allocated or paid by the Company during the year ended
December 31, 1997 on behalf of Messrs. MacMillan, Blodnick, Bouchee,
Strosahl, and Van Helden pursuant to the Company's noncontributory defined
contribution "Money Purchase" Pension Plan, Profit Sharing and SERP/401(k)
Plan in the amounts of $42,916, $40,837, $17,772, $15,880, and $16,725,
respectively.
(5) Includes life insurance premiums paid by the Company during the year ended
December 31, 1997 on behalf of Messrs. MacMillan, Blodnick, Bouchee,
Strosahl, and Van Helden in the amounts of $3,510, $870, $1,439, $945, and
$421, respectively.
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Option Grants in Last Fiscal Year
The following table sets forth certain information concerning individual
grants of stock options pursuant to the Company's stock option plans awarded to
the named executive officers during the year ended December 31, 1997.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term(3)
- -----------------------------------------------------------------------------------------------------------------
Number of
Securities % of Total
Underlying Options
Options Granted Exercise Expiration
Name Granted (1) to Employees Price(2) Date 5% 10%
- ----------------------------------------------------------------------------------------------------------------
John S. 8,475 5.3 $16.00 1-29-2002 $37,460 $82,800
MacMillan
Michael J. 8,475 5.3 $16.00 1-29-2002 $37,460 $82,800
Blodnick
William L. 8,475 5.3 $16.00 1-29-2002 $37,460 $82,800
Bouchee
James H. 5,650 3.5 $16.00 1-29-2002 $24,793 $55,200
Strosahl
Stephen J. Van 8,475 5.3 $16.00 1-29-2002 $37,460 $82,800
Helden
- ----------
(1) The options were granted on January 29, 1997 and vest over two years from
the date of grant.
(2) The exercise price was based on the market price of the Common Stock on
the date of grant.
(3) The potential realizable value portion of the foregoing table illustrates
values that might be realized upon exercise of the options immediately
prior to the expiration of their term based upon the assumed compounded
rates of appreciation in the value of Common Stock as specified in the
table over the term of the options. These amounts do not take into account
provisions of the options providing for termination of the option
following termination of employment or nontransferability.
Aggregated Option Exercises in Last Fiscal Year
The following table sets forth certain information concerning exercises of
stock options pursuant to the Company's stock option plans by the named
executive officers during the year ended December 31, 1997 and stock options
held at year end.
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR END OPTION VALUES
Shares Number of Value of
Acquired on Value Unexercised Unexercised Options at
Name Exercise Realized Options at Year End Year End(1)
- ------------------------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
-----------------------------------------------------------
John S. MacMillan 7,000 $51,270 2,983 18,262 $40,606 $184,461
Michael J. Blodnick 6,900 $70,109 3,083 18,262 $41,967 $184,461
William L. Bouchee 0 0 6,891 13,644 $165,384 $191,856
James H. Strosahl 4,991 $55,089 0 12,250 $0 $123,790
Stephen J. Van Helden 2,489 $29,520 0 15,075 $0 $146,406
(1) The average of the high and low sales prices of a share of Common Stock as
reported on the Nasdaq Stock Market Inc. on December 31, 1997 was $24.00.
Employment Agreements
On October 28, 1994, the Company and Glacier, following approval of the
Board of Directors, entered into an employment agreement ("Agreement") with Mr.
MacMillan. The Agreement, which replaces Mr. MacMillan's prior employment
agreement with the Company, terminates annually on March 15th (the anniversary
date) and is renewable on an annual basis on the anniversary date, and each
anniversary date thereafter, upon recommendation of the Board of Directors,
unless certain advance notice is given, or upon a change in control (as
defined), in which case the Agreement is automatically extended for an
additional 3 years. Under the Agreement, Mr. MacMillan is entitled to receive
(currently $200,000) a minimum annual base salary, which may be adjusted, as
appropriate, by the Compensation Committee. The Agreement provides that,
subsequent to a change in control, if Mr. MacMillan is discharged otherwise than
for cause (as defined) or resigns for good reason, e.g., a significant
diminution of responsibility or adverse change in working conditions, then he is
entitled to his full compensation for three years.
The Company and Glacier entered into agreements with each of Messrs.
Blodnick, Strosahl and Van Helden. These agreements are for an initial one year
term, which is extended each year for an additional year upon the review and
approval of the Boards of Directors of the Company and Glacier, and provides for
severance benefits payable to Messrs. Blodnick, Strosahl and Van Helden if
either parties are improperly terminated or voluntarily terminates his
employment for good reason following a change in control of the Company. Messrs.
Blodnick, Strosahl and Van Helden are entitled to receive annual salaries,
(currently $175,000, $84,700, and $89,476, respectively), which may be adjusted,
as appropriate, by the Compensation Committee. In the event of termination after
a change in control, as defined in the agreement, Mr. Blodnick would be entitled
to receive three times his annual compensation, payable over 36 months, and each
of Messrs. Strosahl and Van Helden would be entitled to receive two times his
annual compensation payable over 24 months. First Security also entered into a
three-year employment agreement with William Bouchee on similar terms,
except that if terminated upon a change in control, Mr. Bouchee would receive
one years salary (currently $128,256) and certain benefits for a year following
termination.
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Deferred Compensation Plan
In December, 1995, the Board of Directors adopted a Deferred Compensation
Plan ("DCP") for directors and certain officers and key employees, as designated
by resolution of the Board of Directors. The DCP generally provides for the
deferral of certain taxable income earned by participants in the DCP.
Non-employee directors may elect to have any portion of his or her director's
fees deferred. Designated officers or key employees may elect to defer annually
under the DCP up to 25% of his or her salary to be earned in the calendar year,
and up to 100% of any cash bonuses.
Supplemental Executive Retirement Plan
In December, 1995, the Board of Directors adopted a nonqualified and
funded Supplemental Executive Retirement Plan ("SERP") for senior executive
officers. The SERP is intended to supplement payments due to participants upon
retirement under the Company's other qualified plans. The SERP generally
provides that the Company will credit qualified participants' account on an
annual basis, an amount equal to employer contributions that would have
otherwise been allocated to the executive's accounts under the tax-qualified
plans were it not for limitations imposed by the Internal Revenue Service, or
participation in the deferred compensation plan. Messrs. MacMillan, Blodnick
and Strosahl are participants in the SERP. Messrs. MacMillan, Blodnick,
Strosahl and Van Helden received an allocation under the plan in the amounts of
$22,416, $20,337, and $1,787, respectively, for the fiscal year 1997.
1989 Incentive Stock Option Plan
In 1989, the Board adopted and the shareholders approved the 1989
Incentive Stock Option Plan (the "1989 Plan") which authorized the grant and
issuance of 316,151 shares of Common Stock (as adjusted for subsequent stock
splits and dividends) to key employees of the Company. The 1989 Plan provides
for the grant of both Non-Statutory and Incentive Stock Options which are
exercisable for 5 years from the date of grant. At December 31, 1997, all
options to purchase shares under the 1989 Plan have been granted no shares
remain available for future grants. The 1989 Plan was supplemented by the 1995
Employee Stock Option Plan as described below.
1995 Employee Stock Option Plan
At the 1995 Annual Meeting, the shareholders adopted the 1995 Employee
Stock Option Plan (the "1995 Plan"). The 1995 Plan is administered by the Board
of Directors (or a Committee appointed by the Board). It allows additional stock
options to be granted to key employees of the Company in any combination up to
an aggregate of 279,768 shares of Common Stock, subject to appropriate
adjustments for any stock splits, stock dividends, or other changes in the
capitalization of the Company. The 1995 Plan provides for the issuance of
options which qualify as "incentive stock options" within the meaning of Section
422 of the Internal Revenue Code of 1986, and nonqualified stock options.
As of December 31, 1997, options to purchase an aggregate of 200,117
shares (as adopted) have been granted, no shares have been issued pursuant to
the exercise of stock options and 261,500 shares remain available for further
grant.
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COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors of Glacier Bancorp,
Inc. is composed of Committee Chairperson Harold Tutvedt, Everit A. Sliter,
Darrel R. Martin, F. Charles Mercord, and Allen J. Fetscher.
Glacier Bancorp, Inc., acting through the Committee, believes compensation
of its Executives and other key personnel should reflect and support the goals
and strategies of Glacier Bancorp, Inc.
The Committee's objectives in determining executive compensation are to
attract, reward and retain key executive officers; and to motivate executive
officers to perform to the best of their abilities and to achieve short-term and
long-term corporate objectives that will contribute to the overall goal of
enhancing stockholder value. To further these objectives, the Committee has
adopted the following policies:
- - The Company will compensate competitively with the practices of peer
groups, and like performing financial companies;
- - Performance at the corporate, subsidiary and individual executive officer
level will determine a significant portion of compensation; with due
regard to financial performance relative to peer groups;
- - The attainment of realizable but challenging objectives will determine
performance-based compensation; and
- - The Company will encourage executive officers to hold substantial,
long-term equity stakes in the Company so that the interest of executive
officers will coincide with the interest of stockholders - accordingly
stock options will constitute a significant portion of compensation.
Elements of the Company's compensation of executive officers are: (1) Base
salary and bonuses, (2) Incentive compensation in the form of stock options
granted under the Company's 1995 Incentive Stock Option Plan, (3) Salary
Deferral Plan, and (4) Other compensation and employee benefits generally
available to all employees of the Company, such as health, life and long term
disability insurance and employee contributions under the Company's 401-K and
Pension Plans.
The Committee believes the Company's goals are best supported by
attracting and retaining well-qualified executive officers and other personnel
through competitive compensation arrangements, with emphasis on rewards for
outstanding contributions to the Company's success, with a special emphasis on
aligning the interests of executive officers and other personnel with those of
the Company's shareholders.
Executive Compensation Committee
Harold Tutvedt, Chairperson
Everit A. Sliter
Darrel R, Martin
F. Charles Mercord
Allen J. Fetscher
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Glacier Bancorp, Inc.
Total Return Performance
Period Ending
------------------------------------------------------------------------
Index 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
- -------------------------------------------------------------------------------------------------------------------------
Glacier Bancorp, Inc 100.00 120.37 108.06 150.44 206.13 323.75
S&P 500 100.00 110.08 111.53 153.44 188.52 251.44
SNL $500M-$1B Bank Index 100.00 125.46 133.93 177.82 222.29 361.35
Western Bank Monitor 100.00 120.33 124.32 177.53 220.20 403.99
The following table includes information concerning the only persons or
entities, including any "group" as that term is used in Section 13(d) (3) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), who or which
was known to the Company to be the beneficial owner of more than 5% of the
issued and outstanding Common Stock on the Voting Record Date. See "Item 10 -
Directors and Executive Officers of the Registrant" for information concerning
security ownership of management.
Amount and Nature
Name and Address of of Beneficial
Beneficial Owner Ownership (1) Percent of Class
- ------------------- ----------------- ----------------
T. Rowe Price Associates, Inc. 562,500 (2) 8.2%
100 E. Pratt Street
Baltimore, Maryland 21202
(1) Pursuant to rules promulgated by the Securities and Exchange Commission
("SEC") under the Exchange Act, a person or entity is considered to
beneficially own shares of Common Stock if the person or entity has or
shares (i) voting power, which includes the power to vote or to direct the
voting of the shares, or (ii) investment power, which includes the power
to dispose or direct the disposition of the shares.
(2) Based on an amended Schedule 13G filed under the Exchange Act. These
securities are owned by various individual and institutional investors
including the T. Rowe Price Small Cap Fund, Inc., (which owns 352,700
shares, representing 5.1% of the outstanding shares), which T. Rowe Price
Associates, Inc. ("Price Associates") serves as investment adviser with
power to direct investments and/or sole power to vote the securities. For
purposes of the reporting requirements of the Exchange Act, Price
Associates is deemed to be a beneficial owner of such securities; however,
Price Associates expressly disclaims that it is, in fact, the beneficial
owner of such securities.
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CERTAIN TRANSACTIONS
Jordahl & Sliter, a certified public accounting firm in which Everit A.
Sliter is a partner, performs tax services for the Company in the ordinary
course of business. The Company believes that these services have been provided
on terms which are no less favorable than which could have been obtained in
dealings with non-affiliates and that any future transactions will be conducted
on such basis.
EMPLOYEE LOAN PROGRAMS
Federal regulations require that all loans or extensions of credit to
executive officers and directors of the Company and the Banks must be made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other nonaffiliated
persons and must not involve more than the normal risk of repayment or present
other unfavorable features. The regulations authorize that a bank may make
extensions of credit pursuant to a benefit or compensation program that (i) is
available to all employees of the bank or its affiliates; and (ii) does not give
preference to any insider over other employees of the bank or its affiliates.
The regulations govern the amount of credit that a bank may extend to an
insider, and, in those instances where the loan exceeds the allowed limit,
requires that (i) the loan be approved by a majority of the board of directors;
and (ii) the insider abstain from participating directly or indirectly in the
voting.
The Company has adopted an Employee Loan Program, providing that loans be
made to executive officers and directors and all other employees of the Company
and its subsidiaries on equal terms. The following table sets forth loans made
to executive officers and directors of the Company, made under such program,
which in the aggregate exceed $60,000.
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Set forth below is certain information as of December 31, 1997 relating to
loans which, in the aggregate, exceed $60,000 and which were made on
preferential terms, as explained above, to executive officers and directors of
the Company. All loans are secured by real estate, except as noted. The table
does not include loans which have been made on the same terms, including
interest rates and collateral, as those made to non-affiliated parties and which
in the opinion of management do not involve more than the normal risk of
repayment or present other unfavorable features.
Largest Aggregate
Nature of Amount during Interest Note Rate at
Transaction January 1, 1997 to Balance at Rate to December 31,
Name and Indebtedness December 31, 1997 December 31, 1997 Employee 1997
---- ---------------- ------------------ ----------------- -------- ------------
F.C. Mercord First Mortgage on
Primary Residence 150,000 147,338 5.74%(1) 6.875%
Everit A. Sliter, First Mortgage on 91,510 86,427 5.70%(1) 8.30%
Director Primary Residence
James H. Strosahl, First Mortgage on 175,000 168,029 5.74%(1) 7.91%
Senior Vice President and CFO Primary Residence
Stephen J. Van Helden, First Mortgage on 150,579 148,115 5.70%(1) 7.79%
Treasurer Primary Residence
- ----------
(1) This reflects borrowing to finance home improvements or to purchase homes
and is 1% above Glacier's cost of money.
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(3) The following exhibits are included, as part of this Form 1O-K.
Exhibit No. Exhibit
- ----------- -------
3(a) Certificate of Incorporation (1)
3(b) Bylaws (1)
10(a) 1989 Incentive Stock Option Plan (1)
10(b) Employment Agreement dated March 27, 1996 between Glacier
Bancorp, Inc., Glacier Bank, and John S. MacMillan (5)
10(c) Employment Agreement dated August 31, 1996 between Glacier
Bancorp, Inc., Glacier Bank, and Michael J. Blodnick. (5)
10(d) Employment Agreement dated August 31, 1996 between Glacier
Bancorp, Inc., Glacier Bank, and Stephen J. VanHelden. (5)
1O(e) Employment Agreement dated August 31, 1996 between Glacier
Bancorp, Inc., Glacier Bank, and Joan Holling. (5)
10(f) Employment Agreement dated August 31, 1996 between Glacier
Bancorp, Inc., Glacier Bank, and James H. Strosahl. (5)
10(g) Employment Agreement between First Security and William L.
Bouchee dated as of August 9, 1996. (2)
10(h) 1994 Director Stock Option Plan (3) 10(i) 1995 Employee Stock
Option Plan (4)
10(j) Deferred Compensation Plan (3)
10(k) Supplemental Executive Retirement Agreement (3)
21 Subsidiaries of the Company - see Item 1, "Subsidiaries"
23 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedule for year end December 31, 1997
27.2 Financial Data Schedule for quarters ended March 31, 1997, June
30, 1997 and September 30, 1997.
(1) Incorporated by reference to the identically numbered exhibit included in
the Company's Registration Statement on Form S-4 (No. 333-37025), declared
effective by the Securities and Exchange Commission on October 4, 1990.
(2) Incorporated by reference to Exhibit 10.2 of the Company's Registration
Statement on Form S-4 No. 33313595).
(3) Incorporated by reference to the exhibits 10(i), 10(k), and 10(h) included
in the Company's Form 1O-K for the fiscal year ended December 31, 1995.
(4) Incorporated by reference to Exhibit 99.1 of the Company's S-8
Registration Statement (No. 33-94648).
(5) Incorporated by reference to exhibits 10(b), 10(c), 10(d), 1O(e), and
10(f) included in the Company's Form 10-K for the fiscal year ended December 31,
1996.
(b) No reports on Form 8-K were filed during the quarter ended December
31, 1997.
(c) See Item 14(a) (3) above for all exhibits filed herewith and the
Exhibit Index.
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SIGNATURES
PURSUANT to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 25, 1998.
GLACIER BANCORP, INC.
By: /s/ John S. MacMillan
----------------------------------------
John S. MacMillan
President/CEO
PURSUANT to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 25, 1998, by the following persons in the
capacities indicated.
/s/ John S. MacMillan Chairman/President/CEO
- ----------------------------------- (Principal Executive Officer)
John S. MacMillan
/s/ James H. Strosahl Senior Vice President and CFO
- ----------------------------------- (Principal Financial/Accounting
James H. Strosahl Officer)
Majority of the Board of Directors
/s/ Michael J. Blodnick Executive Vice President/COO, and
- -----------------------------------
Michael J. Blodnick Director
/s/ L. Peter Larson Director
- -----------------------------------
L. Peter Larson
/s/ Darrel R. Martin Director
- -----------------------------------
Darrel R. (Bill) Martin
/s/ F. Charles Mercord Director
- -----------------------------------
F. Charles Mercord
/s/ Everit A. Sliter Director
- -----------------------------------
Everit A. Sliter
/s/ Harold A. Tutvedt Director
- -----------------------------------
Harold A. Tutvedt
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/s/ William L. Bouchee Director
- -----------------------------------
William L. Bouchee
/s/ Allen J. Fetscher Director
- -----------------------------------
Allen J. Fetscher
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