GLACIER BANCORP, INC. annual report, FY2011

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Glacier Bancorp, Inc. — 2011 Form 10-K Summary

Business context and reporting period

Glacier Bancorp is a regional bank holding company operating 11 community banks across Montana, Idaho, Wyoming, Colorado, Utah, and Washington. It reported for the fiscal year ended December 31, 2011; the filing also provides unaudited fourth-quarter results. Amounts below are in U.S. dollars.

Financial performance and condition

  • Revenue and earnings: Total revenue was $313.8 million, down 3% from 2010. GAAP net income was $17.5 million and diluted EPS was $0.24, versus $42.3 million and $0.61 in 2010. Results included a $40.2 million pre-tax ($32.6 million after-tax) goodwill impairment charge. Excluding it, management reported non-GAAP operating income of $50.1 million and diluted operating EPS of $0.70, up 18% and 15%, respectively.
  • Fourth quarter: Net interest income was $58.5 million; provision for loan losses was $8.7 million; net income was $14.3 million; diluted EPS was $0.20. The $19.0 million net loss in Q3 included the goodwill impairment.
  • Net interest and expenses: Net interest income was $235.6 million, slightly higher year over year. The tax-equivalent net interest margin declined to 3.89% from 4.21%, reflecting lower loan yields and balances, more lower-yielding securities, and increased mortgage-security premium amortization. Funding cost fell to 0.87% from 1.16%. The reported efficiency ratio was approximately 50% in both years.
  • Credit costs and asset quality: The loan-loss provision fell 24% to $64.5 million; net charge-offs fell to $64.1 million from $90.5 million. Non-performing assets declined 21% to $213.5 million, or 2.92% of subsidiary assets, from $270.5 million and 3.91%. The allowance for loan and lease losses was $137.5 million, 3.97% of loans and 102% of non-performing loans. Impaired loans rose to $258.7 million from $225.1 million; TDRs totaled $165 million.
  • Balance sheet and funding: Assets grew 6% to $7.19 billion. Loans receivable declined 8% to $3.47 billion, while available-for-sale securities rose to $3.13 billion and represented 44% of assets. Deposits increased 7% to $4.82 billion, including $1.01 billion in non-interest-bearing deposits. FHLB advances were $1.07 billion, repurchase agreements $258.6 million, other borrowed funds $10.0 million, and subordinated debentures $125.3 million.
  • Cash flow and liquidity: Operating cash flow was $186.8 million, investing cash flow was negative $529.1 million, and financing cash flow was positive $365.2 million. Cash and cash equivalents ended the year at $128.0 million, up $22.9 million. Disclosed additional capacity included $33.9 million of unused FHLB capacity, $244.9 million at the Federal Reserve discount window, $183.9 million in unsecured lines, and $1.97 billion of unencumbered securities; these sources are not necessarily additive.
  • Capital and shareholder returns: Stockholders’ equity was $850.2 million, or 11.83% of assets; tangible equity was $735.8 million, or 10.40% of tangible assets. Consolidated Tier 1 risk-based, total risk-based, and leverage capital ratios were 18.99%, 20.27%, and 11.81%; all bank subsidiaries were reported well capitalized. The company paid $0.52 per share in dividends for the year.

Material changes versus 2010

  • GAAP earnings fell primarily because of the 2011 goodwill impairment; before that charge, operating earnings improved, chiefly as loan-loss provisions decreased.
  • Loan balances contracted while securities and deposits expanded. Securities purchases helped sustain interest income, but the shift in asset mix and mortgage-security premium amortization weighed on margin.
  • Credit indicators improved overall, including lower non-performing assets and charge-offs, although impaired loans and early-stage delinquencies increased.
  • Non-interest income declined 11% to $78.2 million, principally due to lower gains on loan and investment sales. Excluding goodwill impairment, non-interest expense rose 2%; OREO expense increased 23% to $27.3 million.
  • Stockholders’ equity rose modestly, with higher unrealized securities gains largely offset by the impairment charge. Tangible equity increased 8% to $735.8 million.

Outlook, risks, contingencies, and unusual items

  • Management provided no numerical earnings or revenue guidance. It said future results depend on local economic conditions, interest rates, deposit and loan competition, loan quality, and regulatory burden. Its stated objective is to maintain or increase net interest income within acceptable interest-rate risk.
  • In January 2012, the company announced plans to combine its 11 bank subsidiaries into one commercial bank, retaining separate divisions and names. Completion was expected early in Q2 2012, subject to regulatory approval; management did not expect a material financial effect.
  • Key risks include real-estate and commercial-loan concentrations, collateral-value declines, further credit losses or allowance needs, weak loan demand, securities valuation and interest-rate risk, funding availability and cost, regulatory changes, and potential additional goodwill impairment. The company also noted dividend payments are subject to regulatory review and generally should not exceed recent four-quarter EPS under Federal Reserve guidance.
  • The company held $3.13 billion of investment securities; management identified interest-rate exposure and noted that 44% of assets were securities. It reported no other-than-temporary impairment on securities at year-end. A $160 million interest-rate swap was entered into in Q4 2011; counterparty performance and collateral requirements remain risks.
  • Off-balance-sheet commitments included $728.2 million to extend credit and $20.5 million in letters of credit. Management stated it did not anticipate material losses. Ordinary-course legal matters were not expected by management to materially affect financial position, results, or liquidity.
  • The independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.

Important facts for investors to verify

  • Reconcile GAAP net income and EPS with management’s non-GAAP results, including the goodwill impairment and the specific reporting units affected.
  • Track impaired loans, TDR performance, non-performing assets, OREO sales and write-downs, and allowance coverage—especially commercial real estate and construction exposures.
  • Review securities portfolio composition, duration, premium amortization, unrealized gains and losses, and sensitivity to changing interest rates.
  • Assess deposit stability and concentration, wholesale funding, FHLB maturities and put options, and the availability of disclosed liquidity sources.
  • Confirm regulatory approval and execution of the bank consolidation, and monitor capital, earnings, and regulatory constraints on future dividends.