Glacier Bancorp, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter ended September 30, 2011; comparisons are primarily with Q3 and the first nine months of 2010. Unless otherwise stated, amounts are in millions. Glacier Bancorp is a regional bank holding company operating through 11 community-bank subsidiaries across the Rocky Mountain states and Washington.
Financial performance
| Metric | Q3 2011 | Comparable period |
|---|---|---|
| Total revenue (net interest income plus non-interest income) | $81.1 | $82.5 in Q3 2010 |
| Net interest income | $60.1 | $58.5 in Q3 2010 |
| Net interest margin, tax-equivalent | 3.92% | 4.19% in Q3 2010; 4.01% in Q2 2011 |
| Non-interest income | $20.9 | $24.0 in Q3 2010 |
| Provision for loan losses | $17.2 | $19.2 in Q3 2010 |
| Non-interest expense | $88.3, including $40.2 goodwill impairment | $52.0 in Q3 2010 |
| Net earnings (loss) | $(19.0), or $(0.27) per diluted share | $9.4, or $0.13 per diluted share, in Q3 2010 |
Excluding the $32.6 after-tax goodwill impairment, management reported non-GAAP operating earnings of $13.6 million, or $0.19 per diluted share, versus $9.4 million, or $0.13, a year earlier. This is a company-defined non-GAAP measure; GAAP Q3 results were a loss.
For the first nine months, revenue was $233.3 million versus $239.7 million; net interest income was $177.1 million versus $178.1 million. GAAP net earnings were $3.1 million ($0.04 per diluted share), compared with $32.7 million ($0.48) in 2010. Excluding the after-tax impairment, non-GAAP operating earnings were $35.7 million ($0.50 per diluted share), versus $32.7 million ($0.48).
Q3 net interest income was nearly unchanged from Q2, but margin declined 9 basis points sequentially. Lower deposit and borrowing costs helped year-over-year net interest income; lower loan balances and yields, a larger share of lower-yield securities, and increased mortgage-security premium amortization pressured margin. Nine-month tax-equivalent margin was 3.95%, versus 4.32% in 2010. The efficiency ratio was 48% for Q3 versus 50% a year earlier, and 50% for both nine-month periods.
Financial condition, cash flow and capital
- Total assets were $7.043 billion at September 30, up $283 million from December 31, 2010. Available-for-sale securities were $2.935 billion, up $539 million, while loans receivable were $3.524 billion, down $226 million. Management said securities purchases helped offset weak loan demand and support interest income.
- Deposits totaled $4.771 billion, up $249 million since year-end. Non-interest-bearing deposits rose $140 million. Borrowings included $889 million of FHLB advances, $302 million of repurchase agreements, $45 million of federal funds purchased and $125 million of subordinated debentures. FHLB advances were down $76 million since year-end; repos and federal funds purchased increased.
- Cash and cash equivalents were $133.8 million, up $28.7 million since year-end. Nine-month cash flows were $158.5 million provided by operations, $366.6 million used in investing and $236.8 million provided by financing.
- Stockholders’ equity was $851.4 million; tangible equity was $736.4 million. The company reported a 10.63% tangible-equity-to-tangible-assets ratio and tangible book value of $10.24 per share. Regulatory capital ratios at the holding-company level were 18.88% Tier 1, 20.16% total capital and 12.21% leverage; subsidiaries were described as well capitalized.
- Available liquidity included $214.0 million of unused FHLB capacity, $255.8 million of Federal Reserve discount-window capacity, $138.8 million of unsecured lines and $1.925 billion of unencumbered securities. These are stated capacities, not cash on hand.
Credit quality and material changes
- Non-performing assets were $249.4 million, or 3.49% of subsidiary assets, down from $270.5 million at year-end 2010. Non-performing loans were $155.8 million; other real estate owned (OREO) was $93.6 million, up from $73.5 million at year-end.
- Early-stage delinquencies of 30–89 days fell to $21.1 million from $41.2 million at June 30. The allowance for loan and lease losses was $138.1 million, 3.92% of loans and 89% of non-performing loans. Nine-month net charge-offs were $54.8 million; $26.3 million were in land, lot and other construction loans.
- Impaired loans were $267.9 million. TDRs were $152.9 million, including $74.6 million newly identified after adoption of revised restructuring guidance. The filing reports 246 TDRs during the first nine months and $56.8 million of TDRs that subsequently defaulted during that period.
- Construction lending remained a significant credit concern: construction loans were 14% of the portfolio and 47% of non-accrual loans. Land, lot and other construction loans were down 27% since year-end, while non-accrual construction loans declined during Q3.
- The $40.2 million goodwill impairment reflected a full write-off of $23.2 million at Mountain West Bank and a $17.0 million partial impairment at 1st Bank. The charge was attributed to valuation results amid bank-stock volatility and subsidiary-specific performance and credit-quality concerns. Remaining goodwill was $106.1 million.
- Investment securities increased materially; the company reported $8.1 million of unrealized losses at quarter-end and concluded none were other-than-temporarily impaired. It said it did not intend, and was not expected to be required, to sell the impaired securities.
Outlook, risks and other disclosures
The filing provides no numerical earnings or margin guidance. Management described weak economic conditions and limited loan demand, and said future loan-loss provisions depend on portfolio growth and composition, credit quality and economic conditions. It noted OREO expense can fluctuate as foreclosed assets are managed and sold. The board declared a $0.13-per-share dividend, payable October 20, 2011; future dividends depend on earnings, capital, asset quality, economic conditions and regulatory considerations.
Key disclosed risks include continued weakness in regional real estate and the economy, borrower defaults and collateral-value declines, the adequacy of the loan-loss allowance, commercial real estate and construction exposure, interest-rate and funding risks, securities valuation, possible further goodwill impairment, regulatory changes and potential constraints on dividends. Management cautioned that actual results may differ materially from forward-looking statements. It reported effective disclosure controls and no material change in internal control over financial reporting during Q3. No pending material legal proceedings were reported.
Important facts for investors to verify
- Whether non-GAAP operating earnings meaningfully represent recurring performance given the goodwill charge and the distinction from GAAP results.
- Trends in loan growth, net interest margin and mortgage-security premium amortization as the balance sheet shifts toward securities.
- Subsequent performance of impaired loans, TDRs and construction credits, including collateral values, charge-offs and the allowance’s adequacy.
- OREO disposition pace, carrying costs and valuation adjustments, and whether the elevated OREO balance declines.
- Subsidiary capital and funding conditions, liquidity availability, and the sustainability of the $0.13 quarterly dividend.
- Potential additional goodwill impairment, particularly at subsidiaries with weak earnings or credit quality, and any related regulatory or capital consequences.