Glacier Bancorp, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; balance-sheet comparisons are primarily with December 31, 2010 and Q1 2010. Glacier is a regional bank holding company operating through 11 community banks in the Rocky Mountain region. Financial statements are unaudited; management cautions that quarterly results are not necessarily indicative of full-year results.
Key financial results
| Metric | Q1 2011 | Comparable period |
|---|---|---|
| Total assets | $6.910 billion | $6.759 billion at Dec. 31, 2010; $6.226 billion at Mar. 31, 2010 |
| Net interest income | $56.7 million | $59.5 million in Q1 2010 |
| Net interest margin, tax-equivalent | 3.91% | 4.43% in Q1 2010 |
| Non-interest income | $17.4 million | $16.2 million in Q1 2010 |
| Non-interest expense | $42.5 million | $42.0 million in Q1 2010 |
| Provision for loan losses | $19.5 million | $20.9 million in Q1 2010 |
| Net earnings / diluted EPS | $10.3 million / $0.14 | $10.1 million / $0.16 in Q1 2010 |
| Return on average assets / equity | 0.62% / 4.95% | 0.67% / 5.75% in Q1 2010 |
| Operating cash flow | $226.9 million | $62.9 million in Q1 2010 |
All dollar figures above are as reported; income statement and cash flow amounts are for the three-month period. The filing does not clearly explain the drivers of the large year-over-year change in operating cash flow in the supplied text.
Balance sheet, credit and funding
- Gross loans were $3.647 billion, down 3% from year-end 2010 and 9% year over year. Net loans were $3.506 billion. Available-for-sale securities rose to $2.706 billion from $2.396 billion at year-end; management said purchases, predominantly agency mortgage-backed securities, helped offset weak loan growth.
- Deposits totaled $4.552 billion, up from $4.522 billion at year-end. Non-interest-bearing deposits were $888.3 million. The filing reports brokered and CDARS funding; it describes $368.0 million of brokered/CDARS certificates and $196.2 million of brokered demand deposits.
- Borrowings included $960.1 million of FHLB advances, $250.9 million of repurchase agreements, $14.1 million of other borrowed funds, and $125.2 million of subordinated debentures. FHLB advances and repurchase agreements/other borrowed funds together were about $1.225 billion.
- Cash and cash equivalents were $98.1 million at quarter-end. Disclosed additional liquidity included $142.9 million of unused FHLB capacity, $255.8 million of FRB discount-window capacity, $156.8 million of unsecured lines, and $1.905 billion of unencumbered securities.
- Stockholders’ equity was $839.9 million, or 12.15% of assets; tangible equity to tangible assets was 10.12%. Book value per share was $11.68 and tangible book value per share was $9.51. Each bank subsidiary was reported as well capitalized.
- The allowance for loan and lease losses was $140.8 million, 3.86% of loans and 76% of non-performing loans. Non-performing assets were $267.6 million, or 3.78% of subsidiary assets, versus $270.5 million and 3.91% at year-end. Non-accrual loans were $178.4 million; other real estate owned (OREO) was $82.6 million.
Material changes and drivers
- Net earnings increased 2% year over year, but diluted EPS fell 12.5% to $0.14. Average shares rose to 71.9 million from 62.8 million, following the 2010 public stock offering. Returns on average assets and equity also declined.
- Net interest income fell 5% year over year as lower loan balances and asset yields outweighed reduced funding costs. The tax-equivalent net interest margin contracted 52 basis points. Management also cited a $1.2 million quarterly increase in CMO premium amortization, partly associated with refinancing activity.
- Non-interest income rose 7% year over year, including higher service/fee income and gains on loan sales. Compared with Q4 2010, however, total non-interest income fell 33%, primarily as loan-sale gains declined with refinancing activity and investment-sale gains decreased.
- Non-interest expense increased 1% year over year. The efficiency ratio was 52%, compared with 50% in Q1 2010; management attributed the increase to pressure on net interest income.
- Loan-loss provision and net charge-offs were lower than in both Q4 2010 and Q1 2010. Non-performing assets improved as a percentage of assets, but early-stage delinquencies rose to $52.4 million from $45.5 million at year-end, and OREO increased from $73.5 million.
- Construction lending remained a key credit concern: construction loans were 16% of total loans and 55% of non-accrual loans. Non-accrual construction loans declined to $98.6 million from $117.7 million at year-end, while construction loan net charge-offs were $10.3 million in Q1.
- Cash flow from investing was negative $245.6 million, largely reflecting $420.8 million of securities purchases. Financing activities provided $11.7 million. Cash and cash equivalents declined $7.0 million during the quarter.
Outlook, risks and unusual items
No numerical earnings or operating guidance is provided. Management cited the low-rate environment, weak loan growth, real-estate market conditions, and continued credit workout activity as important operating considerations. The filing notes a $128.9 million obligation at March 31 for securities purchased in March and scheduled to settle in April. Management reported no Q1 non-recurring income or expense items affecting EPS and no other-than-temporary impairment on the securities it reviewed, despite $21.4 million of gross unrealized losses on available-for-sale securities.
- Principal risks include further deterioration in local economies, real-estate collateral values and borrower repayment capacity; higher delinquencies, foreclosures, credit provisions or charge-offs; and continued concentration in commercial real estate and construction lending.
- Other cited risks include interest-rate and securities valuation changes, liquidity and funding access or cost, regulatory and deposit-insurance costs, competition, acquisition and integration execution, possible goodwill impairment, and the sustainability of dividends.
- The board declared a $0.13 per-share dividend, payable April 21, 2011. Management said future dividends depend on earnings, capital, asset quality, economic conditions and regulatory considerations.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. No pending material legal proceedings were reported.
Most important facts for investors to verify
- Whether delinquency trends, impaired loans, construction exposures and OREO continue to improve—and whether the $140.8 million allowance remains adequate.
- Whether the decline in loans and net interest margin can be stabilized, and how further rate or prepayment changes affect interest income and security premium amortization.
- The composition, duration, credit quality and valuation sensitivity of the enlarged securities portfolio, including the CDO holdings and unrealized losses.
- The sustainability and cost of deposit funding, including brokered/CDARS balances, and the availability of disclosed borrowing and securities-based liquidity.
- Whether earnings and capital support the dividend, particularly given the regulatory review noted in the filing and diluted EPS below the quarterly dividend per share.
- The drivers of the unusually high Q1 operating cash flow and the nature and settlement of the $128.9 million securities-purchase obligation.