Glacier Bancorp, Inc. — Q2 2013 Form 10-Q
Business context and reporting period
Unaudited results for the quarter and six months ended June 30, 2013. Glacier Bancorp is a community banking company operating in six western states through Glacier Bank and its divisions. Amounts below are in U.S. dollars; financial-statement amounts are generally in millions unless otherwise noted.
On May 31, the company acquired Wheatland Bankshares/First State Bank of Wyoming for $39.3 million, funded with $11.0 million cash and 1.46 million Glacier shares. The acquisition added $171.2 million in loans and $13.4 million in goodwill. A second acquisition, North Cascades Bankshares in Washington, closed July 31, after quarter-end, for $30.6 million in cash and stock.
Financial performance and condition
- Q2 earnings: Net income was $22.7 million, up 20% from $19.0 million in Q2 2012. Diluted EPS was $0.31 versus $0.26. Annualized return on average assets was 1.17% and return on average equity was 9.78%.
- First-half earnings: Net income was $43.5 million versus $35.3 million, up 23%; diluted EPS increased to $0.60 from $0.49.
- Revenue and margins: Q2 net interest income was $55.0 million, nearly flat year over year and up 9% sequentially. Q2 tax-equivalent net interest margin was 3.30%, up from 3.14% in Q1 but below 3.49% a year earlier. For the first half, net interest income fell 7% to $105.5 million and margin declined to 3.23% from 3.61%. Non-interest income rose 10% year over year to $46.2 million for the first half, including higher loan-sale gains.
- Expenses and credit costs: First-half non-interest expense decreased 3% to $91.9 million, largely reflecting lower OREO expense. Provision for loan losses fell to $3.2 million from $16.6 million in the first half of 2012. Q2 provision was $1.1 million versus $7.9 million a year earlier. Q2 efficiency ratio was 56%, compared with 54% a year earlier; first-half ratio was 55% versus 53%.
- Assets and loans: Total assets were $8.00 billion, up $249 million from year-end 2012. Loans were $3.67 billion, up $276 million; growth included the acquired bank. Excluding Wheatland, management reported loan growth of $98 million during Q2. Investment securities were $3.72 billion, 47% of assets.
- Funding, debt and liquidity: Deposits totaled $5.36 billion, little changed from year-end. FHLB advances rose $220 million to $1.22 billion; repurchase agreements were $300 million. Cash and equivalents declined $54.6 million to $132.5 million. Reported available capacity included $244.8 million from FHLB, $595.4 million at the Federal Reserve discount window, $130 million in unsecured lines, and $2.08 billion in unencumbered securities.
- Cash flow: First-half operating activities provided $166.0 million; investing activities used $175.3 million and financing activities used $45.3 million. Cash and equivalents declined from $187.0 million to $132.5 million.
- Capital and equity: Stockholders’ equity was $929.0 million; tangible equity was $802.2 million. Regulatory capital ratios were 18.20% Tier 1 risk-based, 19.46% total risk-based and 11.85% Tier 1 leverage. The company and bank were classified as well capitalized. Q2 dividend declared was $0.15 per share.
Material changes and asset quality
- Non-performing assets declined to $130.5 million from $143.5 million at year-end and $198.9 million a year earlier; they were 1.64% of subsidiary assets. Non-accrual loans were $89.4 million, and accruing loans 30–89 days past due were $22.1 million.
- The allowance for loan and lease losses was $130.9 million, or 3.56% of loans, and equaled 146% of non-performing loans. Net charge-offs for the first half were $3.1 million, compared with $16.6 million a year earlier. Management considers the allowance adequate, but its determination involves significant judgment.
- Commercial lending increased as a share of the portfolio. Land, lot and other construction remained a notable credit exposure: $57.9 million, or 44% of non-performing assets. Most non-performing assets were real-estate-secured.
- Available-for-sale securities had $26.0 million in gross unrealized losses at June 30, versus $6.5 million at year-end. The resulting first-half other comprehensive loss, net of tax, was $24.6 million, reducing accumulated other comprehensive income to $23.4 million. Management reported no intent or expected requirement to sell temporarily impaired securities and identified no other-than-temporary impairment.
Outlook, risks and unusual items
The filing provides no numerical earnings or margin guidance. Management said refinance activity, while still historically elevated, had begun to slow. Lower investment-security premium amortization supported the sequential Q2 margin improvement, but first-half margin remained pressured by lower loan yields and higher securities premium amortization. Management described improving credit trends and regional housing conditions while noting continued economic uncertainty.
Key risks include deterioration in loan quality or real-estate collateral values, interest-rate changes affecting net interest income, funding and liquidity needs, acquisition integration and goodwill impairment, competition, regulatory changes, and operational or cybersecurity interruptions. The company cautioned that allowance estimates are inherently uncertain. It reported legal matters arising in the ordinary course that management did not expect to have a material adverse effect, and no material change in previously disclosed risk factors. Interest-rate swaps had a $1.27 million liability fair value, with $34.4 million of securities pledged as collateral; additional collateral could be required if swap values decline. Management stated disclosure controls were effective and reported no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether the Q2 margin improvement from lower securities premium amortization persists as rates, prepayments and refinance volumes change.
- Credit trends in construction and land-related loans, including non-accrual balances, OREO valuations, charge-offs and allowance adequacy.
- Funding mix and liquidity after higher FHLB advances and the post-quarter North Cascades acquisition.
- Integration costs, final purchase accounting and potential goodwill or intangible effects from both acquisitions.
- Investment portfolio valuation sensitivity and any change in management’s assessment of whether securities may need to be sold.