Glacier Bancorp, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited consolidated results; dollar amounts below are in millions unless otherwise noted.
Business context
Glacier provides community banking, lending, deposit and mortgage services through Glacier Bank’s divisions across Montana, Idaho, Wyoming, Colorado, Utah and Washington. On August 31, 2014, it acquired FNBR Holding Corporation and First National Bank of the Rockies in Colorado for $31.8 million in cash and stock. FNBR contributed approximately $2.3 million of income and $1.0 million of net income through September 30.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $69.3 | $62.3 | $204.1 | $167.8 |
| Provision for loan losses | $0.4 | $1.9 | $1.7 | $5.1 |
| Non-interest income | $24.4 | $23.9 | $66.3 | $70.0 |
| Non-interest expense | $54.2 | $50.4 | $157.0 | $142.3 |
| Net income | $29.3 | $25.6 | $84.7 | $69.1 |
| Diluted EPS | $0.40 | $0.35 | $1.14 | $0.95 |
- Q3 net interest margin was 3.99% on a tax-equivalent basis, up from 3.56% a year earlier. The nine-month margin was 4.00%, up from 3.34%. Management attributed the improvement primarily to lower securities premium amortization, higher-yielding investment mix and growth in commercial loans.
- Q3 annualized return on average assets was 1.46%; return on average equity was 11.30%. The efficiency ratio was 54% for both Q3 and the year-ago quarter, and 54% for the nine-month period versus 55% a year earlier.
- For the first nine months, total revenue (net interest income plus non-interest income) rose 14% to $270.5 million. Loan-sale gains fell 39% to $14.4 million amid reduced mortgage refinance activity; service charges and other fees increased 10% to $43.7 million.
Balance sheet, credit and liquidity
- At September 30, total assets were $8.11 billion, up $225 million from December 31, 2013. Loans receivable were $4.46 billion, up $396 million; excluding FNBR, management reported $258 million of loan growth since year-end. Total investment securities were $2.88 billion, down $342 million from year-end.
- Deposits were $6.11 billion, up $527 million from year-end. Non-interest-bearing deposits were $1.60 billion. FHLB advances fell to $367 million from $840 million at year-end; repurchase agreements were $367 million. Subordinated debentures were $126 million.
- Cash and cash equivalents were $282 million. Reported liquidity sources included $901 million of unused FHLB capacity, $866 million available at the Federal Reserve discount window, $255 million of unsecured lines and $1.34 billion of unencumbered securities.
- Stockholders’ equity was $1.04 billion; tangible equity was $899 million and tangible book value was $11.98 per share. The company and bank were reported well capitalized; company regulatory capital ratios were 17.85% Tier 1, 19.11% total capital and 12.84% Tier 1 leverage.
- Asset quality improved year over year: non-performing assets were $98.1 million, or 1.21% of subsidiary assets, versus $125.0 million, or 1.56%, a year earlier. Non-accrual loans were $68.1 million. The allowance for loan and lease losses was $130.6 million, 2.93% of loans, versus 3.27% a year earlier. Net charge-offs for nine months were $1.4 million.
- Nine-month operating cash flow was $120.8 million versus $272.6 million a year earlier; investing cash flow was $232.7 million versus $126.6 million, and financing cash outflow was $227.0 million versus $331.6 million. Cash increased $126.4 million to $282.1 million.
Material changes, outlook and risks
- FNBR’s acquisition added assets and deposits and resulted in a $0.7 million bargain-purchase gain; acquisition-related expenses included $0.5 million of third-party costs. The acquisition’s results are included only from August 31.
- Effective January 1, the company transferred $484.6 million fair value of state and local government securities from available-for-sale to held-to-maturity, citing intent and ability to hold them to maturity. This classification change affects how unrealized value changes are reported.
- Management gave no specific earnings or financial guidance. It described economic conditions as improving but remained cautiously optimistic about a gradual recovery. Future dividends remain subject to earnings, capital, asset quality, economic and regulatory factors; Q3 declared dividend was $0.17 per share.
- Key stated risks include credit deterioration and delinquency, real estate collateral and construction-loan exposure, interest-rate changes, economic weakness in local markets, acquisition integration, goodwill impairment, competition, regulation and system security. Construction loans were 12% of loans and 47% of non-accrual loans; land, lot and other construction credits remained a notable non-performing asset concentration.
- Management said ordinary-course litigation was not expected to materially affect the company. The annual goodwill impairment test found no impairment. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Review loan growth and credit quality excluding FNBR, particularly construction and commercial real estate exposures, non-accrual trends, TDRs and collateral valuations.
- Assess whether the improved net interest margin is sustainable, including sensitivity to interest rates, securities premium amortization and funding costs.
- Verify the quality and integration of FNBR’s acquired assets, the purchase accounting and the bargain-purchase gain.
- Monitor the securities portfolio’s unrealized losses and the implications of the available-for-sale to held-to-maturity transfer.
- Compare reported liquidity and regulatory capital with future loan growth, deposit behavior, borrowing needs and dividend policy.