Glacier Bancorp, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited consolidated results. Unless noted otherwise, amounts below are in U.S. dollars.
Business context and reporting period
Glacier Bancorp is a community banking company headquartered in Kalispell, Montana, operating through 13 bank divisions in Montana, Idaho, Wyoming, Colorado, Utah and Washington. The filing reports continued loan and deposit growth, lower problem assets, and improved year-over-year earnings. First-half results are not necessarily indicative of full-year results.
Financial performance and position
- Q2 earnings: Net income was $28.7 million, up 26% from $22.7 million in Q2 2013. Diluted EPS was $0.38 versus $0.31.
- First-half earnings: Net income was $55.4 million versus $43.5 million; diluted EPS was $0.74 versus $0.60.
- Revenue and margins: Q2 net interest income was $67.4 million, up 23% year over year; tax-equivalent net interest margin was 3.99%, versus 3.30%. For the first half, net interest income was $134.9 million, up 28%, and tax-equivalent margin was 4.01%, versus 3.23%. The first-half efficiency ratio improved to 54% from 55%.
- Non-interest income and expense: First-half non-interest income fell 9% to $41.9 million, principally as loan-sale gains declined 49% to $8.4 million amid weaker refinancing activity. Non-interest expense rose 12% to $102.7 million, including higher acquisition-related staffing and data-processing costs.
- Assets and loans: Total assets were $7.89 billion at June 30, little changed from year-end. Loans were $4.20 billion, up $140 million from year-end; management cited commercial loan production and seasonal draws. Excluding the North Cascades acquisition, loans increased $314 million, or 9%, year over year.
- Deposits and borrowings: Deposits totaled $5.75 billion, up $166 million from year-end. FHLB advances declined $233 million to $607 million. Subordinated debentures were $125.6 million and repurchase agreements were $315.2 million.
- Liquidity and cash flow: Cash and cash equivalents were $202.4 million, up $46.7 million from year-end. First-half operating cash flow was $75.7 million, investing cash flow was positive $48.2 million, and financing cash flow was negative $77.2 million. Reported available capacity included $839.9 million of FHLB borrowing capacity, $853.4 million at the Federal Reserve discount window, $255 million in unsecured lines, and $1.49 billion of unencumbered securities.
- Credit and capital: The allowance for loan losses was $130.6 million, or 3.11% of loans. Non-performing assets were $102.5 million, down 21% year over year; allowance coverage of non-performing loans was 172%. Stockholders’ equity was $1.01 billion; tangible book value per share was $11.71. The Company reported regulatory capital ratios of 18.11% Tier 1, 19.37% total capital and 12.69% leverage, and stated the Company and Bank were well capitalized.
- Shareholder returns: The quarterly dividend was raised to $0.17 per share from $0.16 in the prior quarter. First-half dividends declared were $0.33 per share.
Material changes versus comparable periods
- Year-over-year earnings improved, supported by higher net interest income and a lower loan-loss provision. First-half provision expense was $1.4 million, down 57%; net charge-offs were $1.1 million, compared with $3.1 million in the first half of 2013.
- Commercial lending drove much of loan growth. Deposits increased while FHLB borrowings fell, reflecting reduced reliance on wholesale funding.
- First-half loan-sale gains declined materially, partially offsetting growth in net interest income and service charges.
- Reported investment securities declined to $3.04 billion from $3.22 billion at year-end and $3.72 billion a year earlier. Comparisons are affected by the January 2014 reclassification of $484.6 million of state and local government securities from available-for-sale to held-to-maturity.
- Accumulated other comprehensive income rose to $24.2 million from $9.6 million at year-end, primarily reflecting changes in securities values, partly offset by cash-flow hedge losses.
Outlook, risks and unusual items
- No quantified earnings or financial guidance was provided. Management described the regional recovery as gradual and said it remained cautiously optimistic while monitoring economic effects on lending and credit quality.
- The Company signed an agreement to acquire First National Bank of the Rockies, with closing anticipated in Q3 2014. At June 30, FNBR reported $345 million in assets, $137 million in gross loans and $306 million in deposits.
- Q2 non-interest expense included $834,000 of one-time conversion costs related to recent acquisitions. Acquisition integration, elevated staffing and data-processing costs, and potential goodwill impairment remain relevant considerations.
- Credit risks include real-estate collateral values and geographic economic conditions. Construction loans were 11% of total loans and 42% of non-accrual loans; land, lot and other construction loans represented $49.1 million, or 48%, of non-performing assets. Management noted that most non-performing assets were real-estate secured, but allowance estimates depend on judgment and collateral valuations.
- Interest-rate changes could affect net interest income and investment values. At June 30, securities had $12.2 million of unrealized losses; management attributed these mainly to rate and market-spread changes and reported no other-than-temporary impairment. The Company said it did not intend, and was not expected to be required, to sell the affected securities before recovery.
- Other disclosed risks include acquisition execution, competition, regulation, cybersecurity and dependence on key executives. Management reported no material change in previously disclosed risk factors, no material change in market-risk disclosures, and no material effect expected from ordinary-course litigation.
Important facts for investors to verify
- Whether the FNBR acquisition closed as expected and its subsequent effect on earnings, costs, loan quality and capital.
- Whether commercial loan growth persists and whether the concentration in real-estate and construction lending produces further credit losses.
- Trends in non-performing assets, early-stage delinquencies, TDRs and allowance adequacy, including collateral appraisal assumptions.
- Whether margin and earnings growth can continue as loan-sale gains remain lower and acquisition-related expenses are absorbed.
- Liquidity and funding trends, including deposit mix, wholesale deposits, FHLB borrowing levels and the interest-rate exposure of securities and hedges.