GLACIER BANCORP, INC. quarterly report, Q3 FY2012

Full document

Glacier Bancorp, Inc. — Q3 2012 Form 10-Q

Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2012. Glacier provides banking services through 11 divisions in Montana, Idaho, Wyoming, Colorado, Utah, and Washington. On April 30, 2012, it combined its 11 bank subsidiaries into Glacier Bank; the company now reports one operating segment.

Financial performance and condition

  • Q3 earnings: Net income was $19.4 million, or $0.27 per diluted share, versus a $19.0 million loss in Q3 2011. The prior-year quarter included a $40.2 million goodwill impairment charge ($32.6 million after tax); excluding that charge, prior-year operating net income was $13.6 million, or $0.19 per diluted share.
  • First nine months: Net income was $54.8 million, or $0.76 per diluted share, versus $3.1 million, or $0.04, a year earlier. Excluding the prior-year goodwill impairment, prior-year operating net income was $35.7 million, or $0.50 per diluted share.
  • Revenue and margin: Q3 net interest income was $53.1 million, down 4% from Q2 and 12% year over year. Tax-equivalent net interest margin was 3.24%, down 25 basis points from Q2 and 68 basis points year over year. Nine-month net interest income was $166.5 million, down 6%; tax-equivalent margin was 3.48%, down 47 basis points. Non-interest income was $24.0 million for Q3 and $66.1 million for nine months, with higher loan-sale gains supporting results.
  • Credit costs and expenses: Q3 provision for loan losses was $2.7 million versus $17.2 million a year earlier; nine-month provision was $19.3 million versus $55.8 million. Q3 non-interest expense was $50.2 million, up 9% from Q2, including $6.4 million of OREO expense. The efficiency ratio was 55% for Q3 and 53% for nine months.
  • Assets and loans: Total assets were $7.63 billion at quarter-end, up $444.3 million from December 31, 2011. Loans receivable were $3.41 billion, down $58.0 million from year-end; available-for-sale securities rose $459.6 million to $3.59 billion and represented 47% of assets.
  • Funding and liquidity: Deposits totaled $5.20 billion, up $381.9 million since year-end. They included $744 million of wholesale deposits. Repurchase agreements were $414.8 million and FHLB advances were $917.0 million. Cash and cash equivalents were $172.4 million. Additional disclosed capacity included $396.3 million of unused FHLB capacity, $455.9 million at the Federal Reserve discount window, $171.0 million in unsecured lines, and $2.28 billion in unencumbered securities.
  • Cash flow: For the first nine months, operating activities provided $153.0 million; investing activities used $466.9 million; financing activities provided $358.3 million. Cash and cash equivalents increased $44.4 million to $172.4 million.
  • Capital and dividends: Stockholders’ equity was $890.2 million, or 11.66% of assets; tangible equity to tangible assets was 10.34%. The company reported regulatory capital ratios of 18.90% Tier 1 risk-based, 20.17% total risk-based, and 11.47% leverage, and said the company and Bank were well capitalized. Dividends declared were $0.13 per share for Q3 and $0.39 for nine months.

Material changes and credit quality

  • Non-performing assets fell to $176.8 million, or 2.33% of subsidiary assets, from $213.5 million at year-end 2011 and $249.4 million a year earlier. Non-accrual loans were $115.9 million; accruing loans at least 90 days past due were $3.3 million. Early-stage delinquencies (30–89 days) were $28.4 million, down from $49.1 million at year-end.
  • The allowance for loan and lease losses was $136.7 million, or 4.01% of loans and 115% of non-performing loans. Nine-month net charge-offs were $20.1 million. Land, lot, and other construction loans totaled $332.5 million, down 17% year over year, but remained a major source of credit exposure and accounted for $86.6 million of non-performing assets.
  • Troubled debt restructurings totaled $161 million; $56.0 million were on non-accrual. OREO declined to $57.7 million from $78.4 million at year-end. Nine-month OREO write-downs were $11.4 million.
  • Goodwill remained $106.1 million. The annual Q3 2012 impairment test found no impairment; the Q3 2011 comparison included the $40.2 million charge.

Outlook, commentary, and risks

Management attributed weaker net interest income and margin to lower loan balances and yields, purchases of lower-yielding securities, and increased premium amortization on securities. Premium amortization reduced investment interest income by $19.5 million in Q3 and $48.7 million in the first nine months. Management cited subdued loan demand and economic uncertainty, while noting improving credit trends and continued efforts to reduce problem assets. The filing gives no specific forward earnings or margin guidance and cautions that nine-month results are not necessarily indicative of full-year results.

Key risks include local economic weakness and real-estate collateral values, credit deterioration and further charge-offs, interest-rate changes affecting earnings and securities values, liquidity and funding costs, regulatory or legislative changes, competition, and potential future goodwill impairment. Management said it did not intend, and did not expect to be required, to sell securities with unrealized losses; it recorded no other-than-temporary impairment. Interest-rate swaps had a $17.4 million fair-value liability, with $21.9 million of securities pledged as collateral. The company reported ordinary-course legal matters that it did not expect to have a material adverse effect, and said disclosure controls were effective.

Important facts for investors to verify

  • Whether margin pressure and unusually high securities premium amortization persist, and how they affect net interest income.
  • Whether the decline in non-performing assets, delinquencies, provisions, and net charge-offs continues, particularly in land, lot, and construction lending.
  • The adequacy of the loan-loss allowance and collateral valuations, given management’s reliance on estimates and the concentration of problem assets in real estate.
  • The cost and stability of funding, including wholesale deposits and repurchase agreements, and the company’s continuing liquidity and capital capacity.
  • Whether loan-sale gains and other non-interest income can offset weak loan growth and lower asset yields, and whether reported earnings remain sustainable.