Business context and reporting period
Glacier Bancorp, Inc. is a regional banking holding company operating through Glacier Bank across seven western states. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2019; income and cash flow comparisons are against the corresponding 2018 periods, while balance-sheet comparisons are primarily against December 31, 2018. Dollar figures below are in millions unless noted.
Financial results and condition
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net interest income | $120.3 | $108.6 | $235.5 | $203.8 |
| Total non-interest income | $30.8 | $31.8 | $59.3 | $57.9 |
| Total non-interest expense | $86.2 | $81.8 | $169.0 | $155.4 |
| Net income | $52.4 | $44.4 | $101.5 | $82.9 |
| Diluted earnings per share | $0.61 | $0.52 | $1.19 | $1.00 |
- Growth and profitability: Q2 net income rose 18% year over year; first-half net income rose 22%. First-half return on average assets was 1.68%, return on average equity 12.91%, and efficiency ratio 54.93%.
- Interest margin: Tax-equivalent net interest margin was 4.33% in Q2, versus 4.17% a year earlier and 4.34% in Q1. First-half margin was 4.33%, up from 4.14%. Management attributed improvement mainly to loan growth, higher loan yields, and a shift toward higher-yielding loans; rising funding costs partly offset those gains.
- Balance sheet: Total assets were $12.676 billion, up $561 million from year-end. Loans receivable were $8.842 billion, up $554 million; deposits were $9.855 billion, up $361 million. The loan-to-deposit ratio was 90.27%, versus 84.92% at year-end.
- Credit quality: The allowance for loan and lease losses was $129.1 million, or 1.46% of loans, compared with $131.2 million and 1.58% at year-end. Q2 provision was zero; first-half provision was $57,000. First-half net charge-offs were $2.2 million. Non-performing assets were $51.9 million, or 0.41% of subsidiary assets, down from $56.8 million and 0.47% at year-end.
- Cash flow and liquidity: For the first half, operating cash flow was $85.7 million, investing cash outflow $72.1 million, and financing cash inflow $13.9 million. Cash and cash equivalents ended at $231.2 million. Available borrowing capacity included $1.970 billion from FHLB, $938.5 million at the Federal Reserve discount window, and $230 million in unsecured lines; unencumbered securities totaled $1.236 billion.
- Funding and capital: Repurchase agreements were $494.7 million, FHLB advances $320.0 million, and subordinated debentures $139.9 million. Stockholders’ equity was $1.687 billion; equity-to-assets was 13.31% and tangible equity-to-tangible assets 10.59%. Glacier Bank’s regulatory capital ratios were 14.30% total capital, 13.05% Tier 1 and common equity Tier 1, and 11.22% leverage, above stated minimums.
Changes, outlook, and notable items
- Loan growth drove higher interest income, particularly in commercial lending. First-half total income increased 13% year over year; non-interest expense increased 9%, reflecting growth, acquisitions, salary increases, and related operating costs.
- Glacier completed its acquisition of FNB Bancorp on April 30, issuing 2.046 million shares valued at $87.2 million. The preliminary purchase accounting recorded $41.3 million of goodwill. FNB contributed approximately $3.3 million of net interest and non-interest income and $696,000 of net income from acquisition through quarter-end. The acquisition affected period-to-period comparisons.
- On July 31, 2019, after quarter-end, the Company acquired Heritage Bancorp of Nevada. At June 30, Heritage had $842.4 million of assets, $612.0 million of gross loans, and $717.1 million of deposits; initial purchase accounting was not complete.
- Q2 included $1.8 million of acquisition-related expenses. Other comprehensive income was $52.9 million for the first half, largely reflecting a recovery in available-for-sale securities valuations; accumulated other comprehensive income was $43.4 million at June 30, versus a $9.4 million loss at year-end.
- A January 2019 accounting change for callable securities reduced retained earnings by $24.1 million. Adoption of lease accounting recognized a $36.2 million right-of-use asset and $38.2 million lease liability. The Company said expected-credit-loss accounting (CECL), then scheduled for 2020 adoption, could increase the allowance; the impact was not yet quantifiable.
- Management described regional economic indicators as generally positive but expressed caution about housing supply and market conditions. It said the existing allowance was adequate, while noting that loan losses, collateral values, local economic conditions, and estimates could change. No specific earnings or revenue guidance was provided; management noted interim results are not necessarily indicative of full-year results.
- Principal disclosed risks include credit deterioration, interest-rate and funding-cost changes, competition, regulation (including requirements associated with exceeding $10 billion in assets), acquisition integration and goodwill impairment, cybersecurity and system disruption, and natural disasters. Management reported no material change in previously disclosed risk factors; pending litigation was not expected to have a material effect.
Important facts for investors to verify
- Whether loan and deposit growth, and the 90.27% loan-to-deposit ratio, remain sustainable after the FNB and Heritage acquisitions.
- Future trends in funding costs, net interest margin, and the contribution of acquired-loan discount accretion to reported results.
- Whether credit quality and the allowance remain adequate as commercial real estate and construction lending grow; construction loans were 13% of the portfolio.
- The final purchase accounting, integration costs, and earnings contribution for FNB and Heritage, including goodwill and any impairment exposure.
- The eventual CECL adoption impact on the allowance, earnings, and capital, which the filing says was not yet reasonably quantifiable.