Business context and reporting period
Glacier Bancorp, Inc. is a regional bank holding company serving individuals and businesses across seven western states. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017; balance-sheet comparisons are with December 31, 2016 unless noted.
Results include The Foothills Bank from its April 30, 2017 acquisition date. In June, Glacier agreed to acquire Collegiate Peaks Bank; closing was expected in the first quarter of 2018, subject to approvals and customary conditions.
Financial performance and condition
| Metric | Q2 2017 | Six months 2017 | Comparable prior period |
|---|---|---|---|
| Net interest income | $86.3 million | $166.5 million | Q2: $78.6 million; six months: $155.4 million |
| Non-interest income | $27.7 million | $53.3 million | Q2: $26.8 million; six months: $51.0 million |
| Net income | $33.7 million | $64.9 million | Q2: $30.5 million; six months: $59.1 million |
| Diluted EPS | $0.43 | $0.84 | Q2: $0.40; six months: $0.78 |
| Tax-equivalent net interest margin | 4.12% | 4.08% | Q2: 4.06%; six months: 4.04% |
| Efficiency ratio | 52.89% | 54.17% | Q2: 56.10%; six months: 56.31% |
For Q2, pretax income was $45.6 million, provision for loan losses was $3.0 million, and non-interest expense was $65.3 million. The six-month provision was $4.6 million. The company declared a quarterly dividend of $0.21 per share.
At June 30, total assets were $9.90 billion, up $448.9 million from year-end. Loans receivable were $6.35 billion, up $661.3 million; deposits were $7.80 billion, up $425.7 million. The loan-to-deposit ratio was 81.86%. Total investment securities were $2.80 billion, down $299.3 million from year-end.
Cash and cash equivalents were $237.6 million, versus $152.5 million at year-end. For the six months, operating cash flow was $136.7 million, investing cash flow was negative $55.6 million, financing cash flow was positive $4.0 million, and cash increased $85.0 million.
Total liabilities were $8.69 billion. Major funding and borrowing balances included deposits of $7.80 billion, repurchase agreements of $451.1 million, Federal Home Loan Bank advances of $211.5 million, and subordinated debentures of $126.1 million. Glacier Bank reported regulatory capital ratios of 15.16% total capital, 13.91% Tier 1 and common equity Tier 1, and an 11.53% leverage ratio; management said the Company and Bank met applicable capital requirements.
Asset quality indicators included a $129.9 million allowance for loan and lease losses (2.05% of loans), $68.9 million of non-performing assets (0.70% of subsidiary assets), and $47.2 million of non-accrual loans. The allowance covered 258% of non-performing loans.
Material changes versus the prior comparable period
- Q2 net income increased 11% year over year; six-month net income increased 10%. Diluted EPS rose 8% in both comparisons.
- Six-month net interest income increased 7%, principally on commercial loan growth; investment interest income declined as securities cash flows were redeployed into loans. The six-month tax-equivalent margin increased four basis points.
- Six-month non-interest income increased 5%, led by service charges. Non-interest expense increased 1%; the efficiency ratio improved, reflecting higher net interest income. Prior-year expenses included Core Consolidation Project costs.
- The six-month provision rose to $4.6 million from $0.6 million, while net charge-offs were $4.3 million versus net recoveries of $2.1 million in the prior-year period. Non-performing assets were down 9% from June 2016.
- Foothills added assets and loans, and the company issued 1.38 million shares and paid $17.3 million cash for the acquisition. Acquisition goodwill was $30.6 million. Reported growth therefore includes acquisitions; management also reported strong loan growth excluding them.
Outlook, commentary, risks and unusual items
- Management described regional conditions as gradually improving but characterized the recovery as fragile and expressed cautious optimism. It cited generally low unemployment and positive housing and economic indicators across much of its footprint, while noting weaker conditions in Wyoming and volatile agricultural commodities.
- No earnings or margin guidance was provided. Management said future loan-loss provisioning will depend on portfolio growth, composition, credit quality and other environmental factors. It noted that soft economic conditions or declining real-estate collateral values could raise credit losses.
- The Collegiate transaction remained pending and was expected to close in Q1 2018. Integration costs and execution, acquisition-related goodwill impairment, competition, interest-rate changes, credit quality, regulatory changes, cybersecurity and natural disasters were among the stated risks.
- The company reported $867,000 of acquisition-related expenses in Q2. A new stock-compensation accounting rule reduced six-month income-tax expense by $538,000, or approximately $0.01 per diluted share.
- Management found no other-than-temporary impairment in securities with unrealized losses, attributing those losses primarily to interest-rate changes and market spreads. It said it did not intend, and was not expected, to be required to sell the affected securities before cost recovery.
- Management said pending ordinary-course litigation was not expected to materially affect financial condition, results or liquidity. No material changes to previously disclosed risk factors or market-risk disclosures were reported.
- The company was evaluating the forthcoming expected-credit-loss standard (CECL) and warned that adoption could increase the allowance and require significant process changes; the impact was not yet quantifiable.
Important facts for investors to verify
- How much of loan, deposit and earnings growth is organic versus attributable to Foothills and earlier acquisitions, and how Foothills performs after integration.
- Whether the planned Collegiate acquisition closes on schedule and its eventual purchase accounting, integration costs and contribution to earnings.
- Credit trends behind the higher provision and net charge-offs, including delinquencies, commercial real-estate exposure, collateral values and allowance adequacy.
- Whether the improved margin and efficiency ratio persist as acquired-loan discount accretion changes and funding costs respond to interest rates.
- Capital and liquidity capacity under growth or stress scenarios, including reliance on repurchase agreements and available borrowing facilities.
- The eventual CECL adoption effect and any changes to the allowance, earnings or capital.