Glacier Bancorp, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Financial statements are unaudited. Unless otherwise noted, amounts below are in millions of dollars.
Business context
Glacier Bancorp is a community banking holding company operating through Glacier Bank across Montana, Idaho, Wyoming, Colorado, Utah, and Washington. In February 2015, it acquired Montana Community Banks, Inc. and subsidiary Community Bank, Inc. for $23.0 million in cash and stock. The acquired bank contributed approximately $0.9 million of revenue and $0.1 million of net income from February 28 through March 31.
Financial performance and condition
- Revenue and earnings: Net interest income was $70.1 million, up 3.9% from Q1 2014. Total non-interest income was $22.7 million, up 17.0%. Net income was $27.7 million, up 3.5%; diluted EPS was $0.37 versus $0.36. The filing reports total net interest and non-interest income of $92.8 million, up from $86.8 million.
- Margins and returns: Tax-equivalent net interest margin was 4.03%, compared with 4.02% a year earlier and 3.92% in Q4 2014. Return on average assets was 1.36%, and return on average equity was 10.72%. The efficiency ratio was 54.8%, versus 53.47% in Q1 2014.
- Expenses and taxes: Non-interest expense rose to $55.5 million from $50.1 million. Income tax expense was $8.9 million, with a 24.3% effective tax rate. Q1 expenses included $0.7 million of one-time acquisition and conversion costs; other income included $0.3 million of bank-owned life insurance proceeds.
- Balance sheet: Total assets were $8.48 billion, up $168.6 million from year-end. Loans receivable were $4.69 billion, up $199.6 million; excluding the Community Bank acquisition, management reported quarterly loan growth of $115 million, or 10% annualized. Total deposits were $6.46 billion, up $113.6 million. Stockholders’ equity was $1.05 billion; tangible book value per share was $12.05.
- Credit quality: Non-performing assets were $90.8 million, or 1.07% of subsidiary assets, down from $106.8 million a year earlier but slightly higher than year-end. Non-accrual loans were $60.3 million. Early-stage delinquencies (30–89 days past due) increased to $33.5 million from $25.9 million at year-end. The allowance for loan and lease losses was $129.9 million, 2.77% of loans and 207% of non-performing loans.
- Cash flow: Operating activities provided $38.1 million, investing activities used $266.9 million, and financing activities used $30.1 million. Cash and cash equivalents fell by $258.9 million to $183.5 million, primarily as the company deployed liquidity into securities; investing cash flows also included $19.7 million net cash received in the acquisition.
- Funding, liquidity, and capital: Year-end-to-quarter-end borrowings included $425.7 million of repurchase agreements, $298.1 million of FHLB advances, and $125.7 million of subordinated debentures. Available liquidity included $1.14 billion of unused FHLB capacity, $837.8 million of Federal Reserve discount-window capacity, $255 million of unsecured lines, and $1.46 billion of unencumbered securities. Glacier Bank’s regulatory ratios exceeded stated “well capitalized” thresholds: total capital 17.70%, Tier 1 16.44%, Common Equity Tier 1 16.44%, and leverage 12.31%.
Changes, outlook, and risks
- Year-over-year earnings growth reflected higher commercial-loan interest income and mortgage-loan sale gains; commercial-loan interest income rose 11%. Deposit costs and interest expense increased, including expense associated with a cash-flow hedge. Management cited loan growth and redeployment of excess liquidity into higher-yielding securities.
- Management described regional economic indicators as improving but remained cautiously optimistic about the housing recovery. No specific earnings or financial guidance was provided; management noted first-quarter results are not necessarily indicative of full-year results.
- Key exposures include borrower credit deterioration, real-estate collateral values, interest-rate movements, acquisition integration and goodwill impairment, regulatory changes, competition, and operational or cybersecurity disruptions. Construction loans represented 42% of non-accrual loans; land, lot, and other construction loans remained a significant problem-credit category.
- Available-for-sale and held-to-maturity securities had $11.6 million of gross unrealized losses at quarter-end. Management attributed these mainly to interest rates and market spreads, reported no other-than-temporary impairment, and said it did not expect to sell the securities before recovery. The interest-rate swaps had a $21.4 million liability fair value; management expected $5.1 million of accumulated hedge losses to be reclassified to interest expense over the next 12 months.
- The company reported ordinary-course litigation that management did not expect to have a material effect. It reported no material change in previously disclosed risk factors, and management assessed disclosure controls as effective.
Important facts for investors to verify
- How much reported loan and deposit growth reflects the Community Bank and prior FNBR acquisitions versus organic growth.
- Whether improving credit trends persist, particularly for construction-related exposures and the increase in early-stage delinquencies.
- Whether growth in operating expenses and the efficiency ratio moderates after acquisition and conversion costs.
- How changes in interest rates affect net interest margin, securities values, and the cash-flow hedge.
- Whether the decline in cash balances and the planned use of borrowing capacity remain consistent with liquidity needs and capital plans.