Business context and reporting period
Glacier Bancorp, Inc. is a regional banking company operating in Montana, Idaho, Wyoming, Colorado, Utah and Washington. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2012. On April 30, the company combined its 11 bank subsidiaries into divisions of Glacier Bank; it now reports one operating segment.
Financial results and position
Unless stated otherwise, dollar amounts are in millions.
- Second-quarter earnings: Net income was $19.0 million, or $0.26 per diluted share, versus $11.9 million and $0.17 a year earlier. Return on average assets was 1.04% and return on average equity was 8.69%.
- First-half earnings: Net income was $35.3 million, or $0.49 per diluted share, up from $22.2 million and $0.31 in the first half of 2011.
- Revenue and margin: Second-quarter net interest income was $55.1 million and non-interest income was $21.8 million. Tax-equivalent net interest margin was 3.49%, down from 4.01% a year earlier and 3.73% in Q1 2012. First-half margin was 3.61%, versus 3.96% a year earlier. First-half total revenue (net interest income plus non-interest income) was $155.6 million, up 2% year over year.
- Credit costs and expenses: Q2 provision for loan losses was $7.9 million, compared with $19.2 million a year earlier. First-half provision was $16.6 million, down 57%. First-half non-interest expense rose 7% to $95.2 million; Q2 expense was $46.2 million, essentially unchanged year over year.
- Assets and funding: Total assets were $7.434 billion at June 30, up $246 million from year-end 2011. Loans were $3.445 billion, down 1% from year-end; available-for-sale securities were $3.404 billion, up $278 million. Deposits totaled $4.982 billion. Borrowings included $906 million of FHLB advances, $467 million of repurchase agreements and $125 million of subordinated debentures.
- Credit quality: Non-performing assets were $198.9 million, or 2.69% of subsidiary assets, down from $213.5 million at year-end and $261.5 million a year earlier. Non-accrual loans were $126.5 million. The allowance for loan and lease losses was $137.5 million, 3.99% of loans and 106% of non-performing loans. Early-stage delinquencies (30–89 days past due) rose to $48.7 million from $42.6 million in Q1.
- Cash flow and capital: First-half operating cash flow was $133.7 million; cash and cash equivalents ended at $140.4 million. Stockholders’ equity was $876.2 million. The company reported regulatory capital ratios of 18.91% Tier 1, 20.18% total capital and 11.68% leverage, and stated that it and the Bank were well capitalized.
- Dividend: The declared quarterly dividend was $0.13 per share; first-half dividends were $0.26 per share.
Material changes versus comparable periods
- Year-over-year earnings improved substantially, primarily because lower credit-loss provisions more than offset lower net interest income.
- Net interest income fell 8% in Q2 and 3% in the first half year over year. Management cited declining asset yields and increased investment-security premium amortization, partly offset by lower deposit and borrowing costs. First-half premium amortization was $29.2 million, $11.7 million higher than a year earlier.
- Non-interest income rose 20% in the first half, led by a 60% increase in loan-sale gains as mortgage refinancing and originations increased. First-half compensation expense rose 10%; other real estate owned (OREO) expense rose 26% to $9.0 million.
- Loan balances contracted 4% over the prior year, while securities grew 22%. Land, lot and other construction loans declined 21% year over year to $345.6 million.
- Q2 net charge-offs were $7.1 million, down 65% year over year. OREO fell to $69.2 million from $99.6 million a year earlier, after $16.4 million of additions and $18.9 million of sales in the first half.
Outlook, risks and unusual items
- No specific earnings or financial guidance is provided. Management cautioned that first-half results are not necessarily indicative of full-year results. It noted that weak economic conditions and low loan demand may continue to pressure lending.
- Management identified loan-loss allowances, investment and foreclosed-real-estate valuations, and goodwill impairment as significant estimates. It considered the allowance adequate but warned that changing economic conditions, collateral values or regulatory developments could require higher provisions and materially affect results.
- Credit risk remains concentrated in real estate-related lending: land, lot and other construction made up about half of non-performing assets and 48% of non-accrual loans. Management also reported rising early-stage delinquencies. TDRs totaled $151 million, including $62.3 million on non-accrual; $6.2 million of TDRs made during the first half subsequently defaulted.
- Interest-rate risk includes substantial mortgage-backed securities and accelerated premium amortization as refinancing increases. Two interest-rate swaps had a $14.8 million fair-value liability; $22.1 million of securities were pledged as collateral, and additional collateral could be required.
- Liquidity sources included $241.3 million of available FHLB capacity, $471.0 million at the Federal Reserve discount window, $171.0 million of unsecured lines and $1.949 billion of unencumbered securities. Wholesale deposits included $646 million at quarter-end.
- The 2011 third-quarter goodwill impairment charge was $40.2 million pretax; no new impairment was recorded in the first half of 2012. The company planned its next goodwill impairment review for Q3 2012. Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect; management reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether improving credit metrics persist, especially given higher early-stage delinquencies, TDR defaults and continued real-estate concentration.
- Whether the $137.5 million allowance remains adequate as loan performance and collateral values evolve.
- How lower asset yields, mortgage-security premium amortization and refinancing activity affect net interest margin and earnings.
- Whether loan growth continues and securities, wholesale deposits and repurchase funding remain at current levels.
- The Q3 goodwill impairment assessment, derivative collateral requirements, and the sustainability of earnings as credit-loss provisions decline.