GLACIER BANCORP, INC. quarterly report, Q2 FY2011

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Business context and reporting period

Glacier Bancorp, Inc. is a Montana-based regional bank holding company operating through 11 community banks across six western states. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2011; balance-sheet comparisons are primarily with December 31, 2010. Dollar amounts below are in millions unless stated otherwise.

Financial performance and condition

  • Second-quarter earnings: Net earnings were $11.9 million, or $0.17 per diluted share, versus $13.2 million and $0.19 a year earlier. Annualized return on average assets was 0.69% and return on average equity was 5.54%.
  • First-half earnings: Net earnings were $22.2 million, down 5% year over year; diluted EPS was $0.31 versus $0.35. Annualized ROA was 0.66% and ROE was 5.25%.
  • Revenue and margins: First-half net interest income was $116.9 million, down 2%; non-interest income was $35.2 million, down 6%. Tax-equivalent net interest margin was 3.96% for the first half versus 4.39% in 2010, and 4.01% in Q2 versus 4.35% a year earlier. The Q2 margin improved 10 basis points from Q1.
  • Credit costs and expenses: First-half provision for loan losses was $38.7 million, compared with $38.2 million a year earlier. Net charge-offs were $36.0 million, down from $39.4 million. Non-interest expense declined 2% to $88.7 million for the first half; the Q2 total rose 9% sequentially, largely due to seasonal and valuation-related other-real-estate-owned costs.
  • Assets and lending: Total assets were $6.98 billion, up 3% from year-end. Gross loans were $3.60 billion, down 4%; management said the decline slowed in Q2, the smallest quarterly decrease since Q1 2010. Available-for-sale securities increased to $2.78 billion from $2.40 billion at year-end.
  • Credit quality: Non-performing assets were $261.5 million, or 3.68% of subsidiary assets, compared with $270.5 million and 3.91% at year-end. Non-accrual loans were $154.8 million; other real estate owned (OREO) was $99.6 million, up from $73.5 million at year-end. The allowance for loan and lease losses was $139.8 million, or 3.88% of loans, versus 3.66% at year-end. Impaired loans totaled $208.9 million.
  • Deposits, borrowings and equity: Deposits totaled $4.70 billion, up $182.9 million from year-end. FHLB advances were $925.1 million; repurchase agreements, federal funds purchased and other borrowed funds totaled $314.1 million; subordinated debentures were $125.2 million. Total liabilities were $6.11 billion and stockholders’ equity was $864.8 million. Tangible equity to tangible assets was 10.39%.
  • Cash flow and liquidity: First-half operating cash flow was $135.3 million, versus $96.5 million in 2010. Investing activities used $280.2 million and financing activities provided $168.9 million; cash and cash equivalents increased $24.0 million to $129.0 million. Reported available capacity included $177.5 million of FHLB borrowing capacity, $265.5 million at the Federal Reserve discount window, $135.8 million in unsecured lines and $1.77 billion of unencumbered securities.
  • Capital and dividends: The company reported Tier 1 capital of 18.46%, total capital of 19.73% and leverage capital of 12.04%; all bank subsidiaries were considered well capitalized. The quarterly dividend was $0.13 per share, or $0.26 for the first half.

Material changes versus comparable periods

  • First-half earnings, EPS and net interest margin declined year over year amid lower loan balances and yields, a shift toward lower-yielding securities, and increased CMO premium amortization. Lower funding costs partly offset reduced interest income.
  • First-half loan balances fell 9% year over year, while securities grew substantially. Management said security purchases slowed in Q2 and were intended to offset potential loan declines.
  • Credit indicators improved in some respects: non-performing assets and early-stage delinquencies declined from year-end, and first-half net charge-offs were lower year over year. However, Q2 net charge-offs increased sequentially, and OREO balances rose materially from year-end.
  • Stockholders’ equity increased $26.6 million from year-end, mainly due to $24.1 million of after-tax unrealized gains on available-for-sale securities, partly offset by dividends.

Outlook, commentary and risks

The filing provides no specific earnings or revenue guidance. Management noted a soft economic environment and weak loan demand, while describing the Q2 slowdown in loan contraction and improvement in certain credit-quality measures as positive developments. Management said the securities portfolio could continue to grow relative to loans, but at a slower pace. Results for the first half are not necessarily indicative of full-year results.

  • Key exposures include real-estate-dependent lending, construction and land-development credits, collateral values, borrower repayment capacity and potential future increases in credit provisions. Construction loans were 15% of loans and 55% of non-accrual loans.
  • Management considered the $139.8 million allowance adequate, but stated that economic or regulatory developments and revised estimates could require additional provisions.
  • The investment portfolio had $8.3 million of gross unrealized losses at June 30, including $3.0 million on collateralized debt obligations. Management concluded no securities were other-than-temporarily impaired and said it did not intend, nor expect to be required, to sell impaired securities.
  • Interest-rate movements, continued low rates, funding availability and costs, regulatory changes, deposit-insurance costs, competition, acquisition integration and potential goodwill impairment may affect results. Future dividends depend on earnings, capital, asset quality, economic conditions and regulatory requirements; continuation at recent levels is not assured.
  • 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

  1. Whether loan declines continue to slow and whether loan demand improves without weakening underwriting.
  2. Trends in construction-related non-accruals, charge-offs, impaired loans, OREO balances and collateral appraisals—and the resulting adequacy of the allowance.
  3. Whether net interest margin stabilizes as securities mix, CMO premium amortization and funding costs change.
  4. The sustainability of deposit growth and access to wholesale funding, borrowing facilities and unencumbered securities.
  5. Capital and dividend capacity, including the effect of regulatory review and the substantial contribution of unrealized securities gains to reported equity growth.
  6. Performance and valuation of securities with unrealized losses, especially the CDO holdings, and any future impairment or sale decisions.