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GBCI > SEC Filings for GBCI > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for GLACIER BANCORP INC

Form 10-K for GLACIER BANCORP INC


28-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to provide a more comprehensive review of the Company's operating results and financial condition than can be obtained from reading the Consolidated Financial Statements alone. The discussion should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in "Item 8. Financial Statements and Supplementary Data."

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about management's plans, objectives, expectations and intentions that are not historical facts, and other statements identified by words such as "expects," "anticipates," "intends," "plans," "believes," "should," "projects," "seeks," "estimates" or words of similar meaning. These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations in the forward-looking statements, including those set forth in this Annual Report on Form 10-K, or the documents incorporated by reference:
the risks associated with lending and potential adverse changes of the credit quality of loans in the Company's portfolio, including as a result of a slow recovery in the housing and real estate markets in its geographic areas;

increased loan delinquency rates;

the risks presented by a slow economic recovery which could adversely affect credit quality, loan collateral values, OREO values, investment values, liquidity and capital levels, dividends and loan originations;

changes in market interest rates, which could adversely affect the Company's net interest income and profitability;

legislative or regulatory changes that adversely affect the Company's business, ability to complete pending or prospective future acquisitions, limit certain sources of revenue, or increase cost of operations;

costs or difficulties related to the completion and integration of acquisitions;

the goodwill the Company has recorded in connection with acquisitions could become additionally impaired, which may have an adverse impact on earnings and capital;

reduced demand for banking products and services;

the risks presented by public stock market volatility, which could adversely affect the market price of the Company's common stock and the ability to raise additional capital in the future;

consolidation in the financial services industry in the Company's markets resulting in the creation of larger financial institutions who may have greater resources could change the competitive landscape;

dependence on the CEO, the senior management team and the Presidents of the Bank divisions;

potential interruption or breach in security of the Company's systems; and

the Company's success in managing risks involved in the foregoing.

Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in "Item 1A. Risk Factors." Please take into account that forward-looking statements speak only as of the date of this Annual Report on Form 10-K (or documents incorporated by reference, if applicable). The Company does not undertake any obligation to publicly correct or update any forward-looking statement if it later becomes aware that actual results are likely to differ materially from those expressed in such forward-looking statement.


MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2013 COMPARED TO DECEMBER 31, 2012

Highlights and Overview
During the current year, the Company completed the acquisition of Wheatland and its subsidiary, First State Bank, and completed the acquisition of NCBI and its subsidiary, North Cascades National Bank. As a result of the Wheatland acquisition, the Company has increased its presence in the State of Wyoming and further diversified the Company's customer base with Wheatland's strong commitment to agriculture. The NCBI acquisition expanded the Company's presence into central Washington and further diversified the Company's customer base with NCBI's strong economic mix of agriculture, fruit processing and tourism.

The Company had all time record earnings of $95.6 million for 2013, which was an increase of $20.1 million, or 27 percent over the 2012 net income of $75.5 million. Diluted earnings per share for 2013 was $1.31, an increase of $0.26, or 25 percent, from the prior year diluted earnings per share of $1.05. The net income improvement for 2013 over 2012 was principally due to an increase in net interest income and the continued decrease in credit quality expenses.

The current year increase in net interest income resulted from a $9.8 million increase in interest income and a $7.0 million decrease in interest expense. The increase in interest income was primarily attributable to an increase in volume of commercial loans and an increase in yields on investment securities. The increased yields on investment securities was primarily driven by the slowdown of refinance activity that occurred during 2013 and the resulting decrease in premium amortization (net of discount accretion) on the investment securities portfolio ("premium amortization").

The Company experienced an increase in its net interest margin as a percentage of earning assets, on a tax-equivalent basis, during each of the prior four quarters, which ultimately resulted in the current year net interest margin of 3.48 percent which was an 11 basis points increase over the prior year net interest margin of 3.37 percent. The increase was the result of a combination of factors including a decrease in borrowing and deposit interest rates, higher yielding investment securities, and a shift in earning assets to the higher yielding loan portfolio.

For the third consecutive year, the Company decreased its non-performing assets. During the current year, the Company's non-performing assets of $109 million decreased $34.1 million or, 24 percent, from the prior year end. The decrease in non-performing assets was the result of the Company's continued patience and focus on actively managing the disposal of non-performing assets. The improvement in credit quality was reflected in a decrease in credit quality expenses of $26.4 million during 2013 compared to 2012 from the combined decrease in the provision for loan losses and the in OREO expense. Provision for loan losses of $6.9 million during the current year decreased $14.6 million, or 68 percent, over the prior year. OREO expenses of $7.2 million during the current year decreased $11.8 million, or 62 percent, over the prior year.

The Company was pleased with its organic loan growth during the current year which was the first annual increase since 2008. Excluding acquisitions, loans receivable increased $278 million, or 8 percent, during the current year, with the primary increase in commercial loans which increased $294 million from the prior year end. The increase in the loan portfolio allowed the Company to decrease the lower yielding investment securities portfolio during the current year. Excluding the acquisitions and wholesale deposits, the Company's non-interest bearing deposits increased $75.6 million, or 6 percent, during the year while interest bearing deposits remained stable with a small increase of $18.4 million, or less than 1 percent, during the current year. Tangible stockholders' equity increased $35.5 million, or $0.12 per share, as a result of stock issued in connection with the acquisitions and earnings retention which were offset by the decrease in accumulated other comprehensive income. The Company increased its quarterly dividend twice during 2013 from $0.14 per share to $0.16 per share for a record dividend of $0.60 per share for 2013 compared to $0.53 per share for 2012.

Looking forward, the Company's future performance will depend on many factors including economic conditions in the markets the Company serves, interest rate changes, increasing competition for deposits and loans, loan quality, and regulatory burden.


Acquisitions
On May 31, 2013, the Company completed the acquisition of Wheatland and its
subsidiary, First State Bank, and on July 31, 2013, the Company completed the
acquisition of NCBI and its subsidiary, North Cascades National Bank. The
Company incurred $1.5 million of expense in connection with the acquisitions for
the year ended December 31, 2013. The Company's results of operations and
financial condition include the acquisitions of Wheatland and NCBI from the
acquisition dates. The following table provides information on the fair value of
selected classifications of assets and liabilities acquired:
                                           Wheatland      NCBI
                                            May 31,     July 31,
(Dollars in thousands)                       2013         2013       Total
Total assets                              $  300,541     330,028    630,569
Investment securities, available-for-sale     75,643      48,058    123,701
Loans receivable                             171,199     215,986    387,185
Non-interest bearing deposits                 30,758      76,105    106,863
Interest bearing deposits                    224,439     218,875    443,314
FHLB advances                                  5,467           -      5,467

                          Financial Condition Analysis

Assets
The following table summarizes the asset balances as of the dates indicated, and
the amount of change from December 31, 2012:

(Dollars in thousands)                     December 31, 2013     December 31, 2012      $ Change       % Change
Cash and cash equivalents                 $         155,657     $         187,040     $  (31,383 )        (17 )%
Investment securities, available-for-sale         3,222,829             3,683,005       (460,176 )        (12 )%
Loans receivable
Residential real estate                             577,589               516,467         61,122           12  %
Commercial                                        2,901,283             2,278,905        622,378           27  %
Consumer and other                                  583,966               602,053        (18,087 )         (3 )%
Loans receivable                                  4,062,838             3,397,425        665,413           20  %
Allowance for loan and lease losses                (130,351 )            (130,854 )          503            -  %
Loans receivable, net                             3,932,487             3,266,571        665,916           20  %
Other assets                                        573,377               610,824        (37,447 )         (6 )%
Total assets                              $       7,884,350     $       7,747,440     $  136,910            2  %

Investment securities decreased $460 million, or 12 percent, from December 31, 2012 as the Company implemented a strategy to reduce the overall size of the investment securities portfolio as the higher yielding loan portfolio increased. The Company continued to purchase investment securities during the year, although at a much smaller pace than the principal paydowns. The growth in the loan portfolio provided the Company the opportunity to retain higher yielding loans than what the Company could achieve with investment securities. At December 31, 2013, investment securities represented 41 percent of total assets, down from 48 percent at December 31, 2012.

A positive trend for the four consecutive quarters during the current year has been the organic loan growth. Excluding the loans receivable from the acquisitions, the loan portfolio increased $278 million, or 8 percent, during the current year with increases in both residential real estate and commercial loans. Excluding the acquisitions, the largest dollar increase during the current year was in commercial loans which increased $294 million, or 13 percent, of which $200 million of the increase was in commercial real estate loans. The decreases in consumer and other loans was primarily attributable to customers paying off home equity lines of credit as they refinanced their first mortgage.


Liabilities
The following table summarizes the liability balances as of the dates indicated,
and the amount of change from December 31, 2012:
                                        December 31,     December 31,
(Dollars in thousands)                      2013             2012          $ Change       % Change
Non-interest bearing deposits          $  1,374,419     $  1,191,933     $  182,486           15  %
Interest bearing deposits                 4,205,548        4,172,528         33,020            1  %
Repurchase agreements                       313,394          289,508         23,886            8  %
FHLB advances                               840,182          997,013       (156,831 )        (16 )%
Other borrowed funds                          8,387           10,032         (1,645 )        (16 )%
Subordinated debentures                     125,562          125,418            144            -  %
Other liabilities                            53,608           60,059         (6,451 )        (11 )%
Total liabilities                      $  6,921,100     $  6,846,491     $   74,609            1  %

Excluding the acquisitions, non-interest bearing deposits of $1.374 billion at December 31, 2013 increased $75.6 million, or 6 percent, during the current year. Interest bearing deposits of $4.206 billion at December 31, 2013 included $205 million of wholesale deposits (i.e., brokered deposits classified as NOW, money market deposit and certificate accounts). Excluding the acquisitions, interest bearing deposits at December 31, 2013 decreased $410 million, or 10 percent, from December 31, 2012 primarily the result of a decrease of $429 million in wholesale deposits. FHLB advances of $840 million at December 31, 2013 decreased $157 million, or 16 percent, from the prior year end and will continue to fluctuate as the need for funding changes.

Stockholders' Equity
The following table summarizes the stockholders' equity balances as of the dates
indicated and the amount of change from December 31, 2012:
(Dollars in thousands, except per      December 31,    December 31,
share data)                                2013            2012          $ Change       % Change
Common equity                          $   953,605     $   852,987     $  100,618           12  %
Accumulated other comprehensive income       9,645          47,962        (38,317 )        (80 )%
Total stockholders' equity                 963,250         900,949         62,301            7  %
Goodwill and core deposit intangible,
net                                       (139,218 )      (112,274 )      (26,944 )         24  %
Tangible stockholders' equity          $   824,032     $   788,675     $   35,357            4  %
Stockholders' equity to total assets         12.22 %         11.63 %                         5  %
Tangible stockholders' equity to total
tangible assets                              10.64 %         10.33 %                         3  %
Book value per common share            $     12.95     $     12.52     $     0.43            3  %
Tangible book value per common share   $     11.08     $     10.96     $     0.12            1  %
Market price per share at end of
period                                 $     29.79     $     14.71     $    15.08          103  %

Tangible stockholders' equity of $824 million at year end increased $35.4 million, or 4 percent, from the prior year end. The higher capital levels were the result of $45.0 million of Company stock issued in connection with the acquisitions and an increase in earnings retention of $51.4 million which were offset by the decrease in accumulated other comprehensive income of $38.3 million. Tangible book value per common share of $11.08 increased $0.12 per share from the prior year end.


                             Results of Operations

Performance Summary
                                                       Years ended
                                               December 31,    December 31,
(Dollars in thousands, except per share data)      2013            2012
Net income                                    $     95,644          75,516
Diluted earnings per share                    $       1.31            1.05
Return on average assets (annualized)                 1.23 %          1.01 %
Return on average equity (annualized)                10.22 %          8.54 %

Net income for the year ended December 31, 2013 was $95.6 million, an increase of $20.1 million, or 27 percent, from the $75.5 million of net income for the prior year. Diluted earnings per share for the current year was $1.31 per share, an increase of $0.26, or 25 percent, from the diluted earnings per share in the prior year.

Income Summary
The following table summarizes revenue for the periods indicated, including the
amount and percentage change from December 31, 2012:

                                                      Years ended
                                            December 31,      December 31,
(Dollars in thousands)                          2013              2012           $ Change       % Change
Net interest income
Interest income                            $     263,576     $     253,757     $    9,819            4  %
Interest expense                                  28,758            35,714         (6,956 )        (19 )%
Total net interest income                        234,818           218,043         16,775            8  %
Non-interest income
Service charges, loan fees, and other fees        54,460            49,706          4,754           10  %
Gain on sale of loans                             28,517            32,227         (3,710 )        (12 )%
Loss on sale of investments                         (299 )               -           (299 )        n/m
Other income                                      10,369             9,563            806            8  %
Total non-interest income                         93,047            91,496          1,551            2  %
                                           $     327,865     $     309,539     $   18,326            6  %
Net interest margin (tax-equivalent)                3.48 %            3.37 %


_______
n/m - not measurable

Net Interest Income
Net interest income for 2013 increased $16.8 million, or 8 percent, over last year. Interest income for the current year increased $9.8 million, or 4 percent, from the prior year and was principally due to the increased volume of commercial loans in addition to the decrease in premium amortization on investment securities, which were partially reduced by a decrease in yields within the loan portfolio. During 2013, the Company experienced four consecutive quarters of decreases in premium amortization, compared to significant increases experienced during the preceding seven quarters. Interest income was reduced by $64.1 million in premium amortization on investment securities during the current year which was a decrease of $7.9 million from the prior year. Interest expense for 2013 decreased $7.0 million, or 19 percent, from the prior year and was primarily attributable to the decreases in interest rates on interest bearing deposits and borrowings. The funding cost (including non-interest bearing deposits) for the current year was 42 basis points compared to 55 basis points for the prior year.


The net interest margin, on a tax-equivalent basis, for 2013 was 3.48 percent, an 11 basis points increase from the net interest margin of 3.37 percent for 2012. The net interest margin was benefited by the decreased interest rates on deposits and borrowings. The net interest margin was further supported by the continued shift in earning assets from investment securities to the higher yielding loan portfolio and the increased yield on the investment securities portfolio. The increased yields on investment securities was driven by lower premium amortization on investment securities. The premium amortization for 2013 accounted for a 90 basis points reduction in the net interest margin, which was a decrease of 14 basis points compared to the 104 basis points reduction in the net interest margin for last year.

Non-interest Income
Non-interest income of $93.0 million for 2013 increased $1.6 million, or 2 percent, over last year. Service charge fee income increased $4.8 million, or 10 percent, from the prior year which was driven by increases in the number of deposit accounts and changes in internal deposit processing. Gains of $28.5 million on the sale of loans for the current year decreased $3.7 million, or 12 percent, from the prior year. The Company experienced a slowdown in refinance during the current year as mortgage rates moved up, although, the decrease in gain on sale of loans was more than offset by the decrease in premium amortization on investment securities, both of which were attributable to the continuing slowdown of refinance activity. Other income for the current year increased $806 thousand, or 8 percent, over the the prior year. Included in other income was operating revenue of $400 thousand from OREO and gains of $3.1 million on the sale of OREO, which combined totaled $3.5 million for the current year compared to $2.4 million for the prior year.

Non-interest Expense
The following table summarizes non-interest expense for the periods indicated,
including the amount and percentage change from December 31, 2012:
                                                   Years ended
                                         December 31,       December 31,
(Dollars in thousands)                       2013               2012           $ Change        % Change
Compensation and employee benefits     $      104,221     $       95,373     $     8,848            9  %
Occupancy and equipment                        24,875             23,837           1,038            4  %
Advertising and promotions                      6,913              6,413             500            8  %
Outsourced data processing                      4,493              3,324           1,169           35  %
Other real estate owned                         7,196             18,964         (11,768 )        (62 )%
Regulatory assessments and insurance            6,362              7,313            (951 )        (13 )%
Core deposit intangible amortization            2,401              2,110             291           14  %
Other expense                                  38,856             36,087           2,769            8  %
Total non-interest expense             $      195,317     $      193,421     $     1,896            1  %

Compensation and employee benefits for 2013 increased $8.8 million, or 9 percent, from the same period last year. The increase in compensation and employee benefits from the prior year was primarily due to the acquisitions of Wheatland and NCBI and increases in benefit expense and annual merit raises. Outsourced data processing expense increased $1.2 million, or 35 percent, from the prior year primarily from the acquired banks outsourced data processing expense. OREO expense of $7.2 million in the current year decreased $11.8 million, or 62 percent, from the prior year. The OREO expense for the current year included $2.7 million of operating expenses, $3.6 million of fair value write-downs, and $880 thousand of loss on sale of OREO. Other expense for the current year increased by $2.8 million, or 8 percent, from the prior year and was attributable to the legal and professional expenses associated with the acquisitions, debit card fraud losses and deposit account losses.

Efficiency Ratio
The Company calculates the efficiency ratio as non-interest expense before OREO expenses, core deposit intangibles amortization, goodwill impairment charges, and non-recurring expense items as a percentage of tax-equivalent net interest income and non-interest income, excluding gains or losses on sale of investments, OREO income, and non-recurring income items. The efficiency ratio was 55 percent for 2013 and 54 percent for 2012. Although there was an increase net interest income during the current year over the prior year, it was not enough to offset the increase in non-interest expense, excluding OREO expense, resulting in the increased efficiency ratio.


Provision for Loan Losses
The following table summarizes the provision for loan losses, net charge-offs
and select ratios relating to the provision for loan losses for the previous
eight quarters:
                                                                                   Accruing
                                                                                 Loans 30-89         Non-Performing
                              Provision                            ALLL         Days Past Due          Assets to
                              for Loan            Net          as a Percent    as a Percent of     Total Sub-sidiary
(Dollars in thousands)         Losses         Charge-Offs        of Loans           Loans                Assets
Fourth quarter 2013         $     1,802     $       2,216           3.21 %             0.79 %               1.39 %
Third quarter 2013                1,907             2,025           3.27 %             0.66 %               1.56 %
Second quarter 2013               1,078             1,030           3.56 %             0.60 %               1.64 %
First quarter 2013                2,100             2,119           3.84 %             0.95 %               1.79 %
Fourth quarter 2012               2,275             8,081           3.85 %             0.80 %               1.87 %
Third quarter 2012                2,700             3,499           4.01 %             0.83 %               2.33 %
Second quarter 2012               7,925             7,052           3.99 %             1.41 %               2.69 %
First quarter 2012                8,625             9,555           3.98 %             1.24 %               2.91 %

The provision for loan losses was $6.9 million for 2013, a decrease of $14.6 million, or 68 percent, from the same period in the prior year. Net charged-off loans during the current year were $7.4 million, a decrease of $20.8 million from the prior year. Such provision and net-charge off decreases were driven by the continued increase in credit quality that has continued over the prior three years.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                          OF THE RESULTS OF OPERATIONS
           YEAR ENDED DECEMBER 31, 2012 COMPARED TO DECEMBER 31, 2011

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