Glacier Bancorp Finally Breaks the Ice in M&A

Glacier Bancorp (GBCI) in Kalispell, Mont., which juiced up on capital to pursue deals during the financial crisis, is finally getting an opportunity to flex its muscles.

Glacier agreed late last month to buy North Cascades National Bank in Chelan, Wash., for $29 million. The deal came just weeks after Glacier said it would buy Wheatland Bankshares in Wyoming for $38 million.

The deals are welcome news from a once-prolific acquirer that had been unexpectedly idle. Glacier had reeled in $250 million in since 2008 with deals listed as a key reason for raising money.

Glacier's last offering — in 2010 — was associated with an interest in pursuing eight banks with a total of $2 billion in assets that seemed to be headed toward receivership. All of them survived.

"Most of them found, by hook or crook, capital," says Michael "Mick" Blodnick, the $7.7 billion-asset company's president and chief executive.

"Some others just got better little by little. Good for them," Blodnick adds. "It left us with excess capital that needs to be deployed. Once sellers' expectations became more reasonable, we started having a dialogue."

At Dec. 31, Glacier's tangible common equity ratio was 10.33%. Analysts prefer to see the ratio hover somewhere between 7% and 8%, but Blodnick says his goal is to deploy the capital through acquisitions and work it down to around 9%.

"We never want to be below 8%," he says.

Glacier is among a group of large community banks that have suffered from capital indigestion since the pace of bank failures failed to live up to expectations. Turning to open-bank acquisitions has been a viable option, but activity in that area has also been slow as issues involving valuations, credit quality and the economy have stymied deals.

"At the time, you didn't know what to expect, and it is easier to raise a bigger amount," says Daniel Bass, managing director at Performance Trust Capital Partners. "There was an expectation that there was going to be a big M&A wave."

The environment appears to be improving for acquirers. A handful of overcapitalized companies, including 1st United Bancorp (FUBC) in Boca Raton, Fla., and Heritage Financial (HFWA) in Olympia, Wash., have also announced acquisitions during the first quarter.

Given the mentality in recent years that "capital is king," the concept of having too much capital seems strange. Excess capital, however, can be a drag on metrics such as return on equity. Also, investors who participated in earlier capital raises are getting antsy to see their investment put to use.

Those forces, combined with an improving market view of the banking industry, could explain why more publicly traded banks are finally making acquisitions.

"The public guys do have more pressure to do deals," Bass says. "They can't just sit on it. They got it in and they need to put it to work."

Blodnick, who has guided Glacier through 14 acquisitions since 2000, says he is feeling the pressure, but he is being careful to avoid making deals just for the sake of staying active.

"We will be thoughtful about the way we deploy our capital," Blodnick says. "We don't fall in love with one deal. We aren't going to overpay for something. We are disciplined and methodical."

Beyond deploying capital, analysts say Glacier's two acquisitions are great news for the company because they deliver some much needed diversity and vibrancy to its loan portfolio.

Compared to Glacier, North Cascades and Wheatland have a larger concentration of agricultural and ag-related loans. Those agricultural loans should help Glacier reduce its reliance on commercial real estate.

"It has been tough for them to grow organically," says Brett Rabatin, an analyst at Sterne Agree Group. "They really haven't grown the loan portfolio the last two years."

Absent of loan growth, Glacier's securities portfolio has grown significantly. Securities made up 52% of the company's earning assets at Dec. 31, says Timothy Coffey, an analyst at FIG Partners. Securities should be closer 20% to 30% of the portfolio, he says. Having a high concentration in securities could prove to be damaging when interest rates go up.

"The securities portfolio has just grown astronomically," Coffey says. "The only way to get that level down is to go out and buy banks. … When interest rates go up, it could be a big extension of risk on the mortgage-backed securities they hold."

While several analysts say Glacier could announce more acquisitions, Blodnick says none will take place in the immediate future.

"Don't expect us to make another announcement in 30 days," Blodnick says. "We've got to get what we have closed and integrated."