Glacier Bancorp, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Amounts are in U.S. dollars; financial figures are in millions unless noted. Glacier Bancorp provides banking and mortgage services across seven western states. Results include Columbine Capital/Collegiate Peaks Bank from January 31 and Inter-Mountain Bancorp/First Security Bank from February 28.
Financial performance and condition
- Earnings: Net income was $38.6 million, up 23% from $31.3 million in Q1 2017. Diluted EPS rose to $0.48 from $0.41. Pretax income was $47.0 million; income tax expense was $8.4 million, with a 17.9% effective tax rate versus 23.8% a year earlier.
- Revenue and margins: Net interest income increased 19% to $95.3 million; total income rose 15% to $121.4 million. Tax-equivalent net interest margin was 4.10%, up from 4.03% year over year but down from 4.23% in Q4 2017. Non-interest income was $26.1 million, up 2% year over year. The efficiency ratio increased to 57.80% from 55.57% a year earlier.
- Expenses: Non-interest expense increased 16% to $73.6 million, including $1.8 million of acquisition-related expense. Compensation, data processing, occupancy and core deposit intangible amortization also rose, reflecting acquisitions and operating costs.
- Loans and credit: Loans receivable were $7.67 billion, up $1.09 billion from year-end, including acquired loans. The allowance for loan and lease losses was $127.6 million, or 1.66% of loans, compared with 1.97% at year-end. Net charge-offs were $2.8 million versus $1.9 million in Q1 2017. Non-performing assets rose to $74.0 million from $65.2 million at year-end, while non-performing assets were 0.64% of subsidiary assets, down from 0.68% at year-end.
- Cash flow and liquidity: Operating cash flow was $47.9 million, compared with $93.8 million in Q1 2017; investing activities used $112.3 million and financing activities provided $315.4 million. Cash and cash equivalents ended at $451.0 million, up $251.0 million during the quarter. Available liquidity included $1.75 billion of unused FHLB capacity, $906 million of FRB discount-window capacity, $230 million of unsecured lines and $1.39 billion of unencumbered securities.
- Funding and debt: Deposits totaled $9.42 billion, up $1.84 billion from year-end, reflecting the acquisitions and deposits returned to the balance sheet. FHLB advances declined to $155.1 million from $354.0 million; repurchase agreements were $395.8 million and subordinated debentures were $134.1 million.
- Capital and equity: Total assets were $11.66 billion, up 20% from year-end, primarily due to acquisitions and loan growth. Stockholders’ equity was $1.45 billion; tangible book value per share was $13.13. Glacier Bank reported total capital of 14.62%, Tier 1 capital of 13.37%, CET1 of 13.37% and a leverage ratio of 12.24%, above the stated well-capitalized thresholds.
Material changes and unusual items
- The Collegiate and First Security acquisitions added approximately $1.66 billion of assets and $982 million of loans at preliminary fair values. The company issued about 6.43 million shares in connection with the acquisitions and recorded $111.7 million of acquisition goodwill. Purchase accounting remains preliminary.
- Other comprehensive loss was $15.0 million for the quarter, principally reflecting lower fair values of available-for-sale securities; accumulated other comprehensive loss reached $17.0 million. Management attributed securities losses to interest-rate changes and market spreads, reported no other-than-temporary impairment, and said it did not intend or expect to be required to sell the affected securities before recovery.
- The company’s assets exceeded $10 billion during the quarter. Management expects the Durbin Amendment to reduce annual service-charge fee income by approximately $14–$16 million pretax beginning July 2019.
- The quarterly dividend declared was $0.23 per share, up $0.02 from the prior quarter. The company reported that the Tax Act lowered the federal statutory rate from 35% to 21%; the separate Q1 2018 earnings comparison is not presented as adjusted for acquisition effects.
Outlook, risks and contingencies
The filing provides no earnings or revenue guidance. Management described economic conditions across its markets as generally improving but remained cautiously optimistic and said it would continue monitoring economic conditions and loan quality. Key risks include deterioration in borrower credit quality or collateral values, interest-rate and funding-cost changes, acquisition integration and goodwill impairment, competition, cybersecurity and operational disruption, and additional regulatory or compliance costs following the crossing of $10 billion in assets. The company is evaluating the expected-credit-loss standard (CECL), which could increase the allowance at adoption; management said the impact could not yet be reasonably quantified. Pending litigation and ordinary-course claims were not expected by management to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of the reported growth in loans, deposits, revenue and earnings is organic versus attributable to the two acquisitions, and whether preliminary purchase accounting will change.
- Whether credit trends continue to weaken: non-performing assets and early-stage delinquencies increased from year-end, while the allowance ratio declined partly because acquired loans were recorded at fair value without an acquired allowance.
- The earnings and compliance implications of exceeding $10 billion in assets, including the expected Durbin Amendment fee reduction and any other regulatory effects.
- Whether securities valuation losses recover as expected and how interest rates affect accumulated other comprehensive loss, funding costs and net interest margin.
- The eventual CECL adoption impact, acquisition integration costs, and the sustainability of earnings after acquisition-related and other unusual items.