Glacier Bancorp, Inc. — Q2 2010 Form 10-Q
Business context and reporting period
Glacier Bancorp is a Montana-based regional bank holding company operating 11 community banks across Montana, Idaho, Wyoming, Colorado, Utah and Washington. This unaudited report covers the quarter and six months ended June 30, 2010; comparisons are primarily with the corresponding 2009 periods. First National, acquired in October 2009, is included from its acquisition date. Unless stated otherwise, dollar figures below are in millions.
Financial and operating highlights
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net interest income | $60.1 | $60.5 | $119.6 | $120.9 |
| Provision for loan losses | $17.2 | $25.1 | $38.2 | $40.9 |
| Non-interest income | $21.4 | $21.3 | $37.6 | $38.7 |
| Non-interest expense | $48.2 | $43.0 | $90.2 | $82.6 |
| Net earnings | $13.2 | $10.7 | $23.3 | $26.4 |
| Diluted EPS | $0.19 | $0.17 | $0.35 | $0.43 |
- Q2 net earnings rose 24% year over year, partly reflecting a $1.8 million pretax gain on the sale of Mountain West’s merchant-card servicing portfolio. First-half earnings fell 12%; diluted EPS declined 19%.
- Tax-equivalent net interest margin was 4.35% in Q2, down from 4.87% a year earlier and 4.43% in Q1. First-half margin was 4.39%, versus 4.90%.
- Q2 annualized return on average assets was 0.85% and return on average equity 6.25%. The first-half figures were 0.76% and 6.02%. Efficiency ratio was 59% for Q2 and 57% for the first half, worsening from 53% and 52%, respectively, a year earlier.
- At June 30, total assets were $6.295 billion, up 2% from year-end 2009 and 12% from June 2009. Gross loans including loans held for sale were $4.032 billion, down 2% from both comparison dates. Available-for-sale securities were $1.743 billion, up from $1.506 billion at year-end 2009 and $994 million a year earlier.
- Deposits totaled $4.510 billion, up $410 million in the first half. Cash and cash equivalents were $168.5 million, down from $210.6 million at year-end. First-half cash flows were $96.5 million from operations, negative $198.4 million from investing and $59.8 million from financing; cash declined by $42.1 million.
- Period-end borrowings included $530.0 million of FHLB advances, $224.4 million of repurchase agreements and $10.1 million of other borrowed funds; no Federal Reserve discount-window balance remained. Subordinated debentures were $125.1 million.
- Stockholders’ equity was $845.7 million, including $145.6 million of net proceeds from a March public stock offering. Book value was $11.76 per share. The company reported holding-company Tier 1 capital of 17.67%, total capital of 18.94% and leverage capital of 13.23%; each exceeded the stated “well capitalized” thresholds.
Material changes, outlook and risks
- Asset quality remained a major concern. Non-performing assets were $257.8 million, or 4.01% of subsidiary assets, versus $261.1 million and 4.13% at year-end 2009, but materially above $173.9 million and 3.06% a year earlier. Non-accrual loans were $190.3 million and other real estate owned (OREO) was $64.4 million.
- The allowance for loan and lease losses was $141.7 million, 3.51% of loans, versus $97.4 million and 2.36% a year earlier. First-half net charge-offs were $39.4 million, compared with $20.2 million in the first half of 2009. Impaired loans were $216.9 million; troubled debt restructurings were $53.2 million.
- OREO expense increased sharply: $7.4 million in Q2 and $9.7 million in the first half. First-half OREO expense included $3.3 million of fair-value write-downs and $4.2 million of losses on sale. Management said it was actively disposing of problem assets. It considers the allowance adequate but cautions that further deterioration, collateral-value declines or regulatory judgments could require additional provisions.
- Loan growth was subdued: management said loans declined about 1% annualized in the first half after excluding net charge-offs and transfers to OREO. Land, lot and other construction loans declined 19% year over year; residential construction loans declined 48%.
- Deposit growth supported a reduction in borrowings, including repayment of the $225 million FRB discount-window balance outstanding at year-end 2009. The banks reported $1.172 billion of available FHLB credit, of which $530 million was used, plus stated remaining FRB and U.S. Treasury borrowing availability of $424 million and $9 million. The filing also reports substantial brokered funding: brokered certificates of deposit of $504.4 million and brokered demand deposits of $142.3 million.
- Investment securities had $15.3 million of gross unrealized losses at June 30; management concluded none required an other-than-temporary impairment charge. A trust-preferred CDO had a $5.5 million unrealized loss, and 8 of 26 underlying trust subsidiaries were deferring interest. The company reported no intent or expected requirement to sell impaired debt securities.
- The board declared a quarterly dividend of $0.13 per share. The filing warns dividends are subject to earnings, capital, asset quality and regulatory oversight; the Federal Reserve required prior notice and review before dividend declarations or payments.
- No formal earnings guidance was provided. Management noted that interim results are not necessarily indicative of full-year results. Principal risks include continued economic and real-estate weakness, commercial real-estate and construction credit exposure, rising problem assets, funding and interest-rate conditions, FDIC assessments, acquisition integration, goodwill impairment and regulatory changes. Financial regulatory reform legislation enacted in July 2010 was expected to increase compliance costs and introduce new requirements.
- Management reported effective disclosure controls and no material second-quarter change in internal control over financial reporting. The filing reported no pending material legal proceedings.
Most important facts for investors to verify
- Whether non-performing assets, OREO balances and disposal costs continue to improve, and whether collateral values support reported recoveries.
- Whether charge-offs and impaired loans stabilize, and whether the $141.7 million allowance remains adequate relative to portfolio risk and subsequent credit trends.
- The sustainability of earnings excluding the $1.8 million merchant-card sale gain, alongside lower mortgage-sale gains, higher OREO expense and compressed net interest margin.
- The amount, cost and maturity profile of brokered deposits and other funding, and continued access to pledged-collateral borrowing capacity.
- The credit quality and valuation assumptions for securities with unrealized losses, particularly the trust-preferred CDO and Level 3 holdings.
- Capital, dividend capacity and any effects of regulatory review or the July 2010 financial reform law.