Glacier Bancorp, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Glacier Bancorp is a regional bank holding company operating across eight western states. Results include State Bank Corp. of Arizona (SBAZ) from its February 29, 2020 acquisition date.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $148.2 million | $120.3 million | $282.6 million | $235.5 million |
| Credit loss expense | $13.6 million | None | $36.3 million | $0.1 million |
| Non-interest income | $41.2 million | $30.8 million | $74.5 million | $59.3 million |
| Non-interest expense | $98.1 million | $86.2 million | $190.1 million | $169.0 million |
| Net income | $63.4 million | $52.4 million | $106.8 million | $101.5 million |
| Diluted EPS | $0.66 | $0.61 | $1.13 | $1.19 |
Q2 net income increased 21% year over year; first-half net income rose 5%, while first-half diluted EPS declined 5%. Q2 tax-equivalent net interest margin was 4.12%, versus 4.33% a year earlier and 4.36% in Q1 2020. First-half margin was 4.23%, down from 4.33%; management reported first-half core margin of 4.26%, unchanged year over year.
At June 30, total assets were $16.91 billion, loans $11.45 billion, deposits $13.38 billion, and stockholders’ equity $2.20 billion. Cash and cash equivalents were $547.6 million. The allowance for credit losses was $162.5 million, or 1.42% of loans (1.62% excluding PPP loans). Nonperforming assets were $46.0 million, 0.27% of subsidiary assets.
For the six months, operating cash flow was $137.2 million, investing cash outflow $2.18 billion, and financing cash inflow $2.26 billion; cash increased $216.6 million to $547.6 million. The filing reports $139.9 million of subordinated debentures, $38.0 million of FHLB advances and $881.2 million of repurchase agreements at quarter-end. Bank regulatory capital ratios were 14.43% total capital, 13.20% Tier 1 and CET1, and 10.41% leverage. Available liquidity included $2.63 billion of unused FHLB capacity, $1.19 billion of FRB discount-window capacity and $445 million of unsecured lines.
Material changes and drivers
- Balance-sheet expansion reflected SBAZ and unusually large pandemic-related deposit and PPP activity. Assets increased $3.22 billion from year-end 2019; deposits rose $2.61 billion. Deposits increased $1.82 billion during Q2, partly from PPP proceeds, customer savings and federal stimulus payments.
- The Company originated 15,291 PPP loans totaling $1.427 billion in Q2. PPP-related income, including net deferred fees and costs, increased Q2 income by $15.7 million ($11.7 million after tax). PPP loans carry a federal guarantee and no ACL was recorded on them.
- Lower funding costs helped lift net interest income, but lower loan yields pressured margins. Mortgage refinancing drove loan-sale gains to $25.9 million in Q2, up from $7.8 million a year earlier. Service charges fell to $11.4 million from $20.0 million, reflecting reduced overdraft activity and the Durbin Amendment.
- The allowance increased from $124.5 million at year-end to $162.5 million. Management attributed the first-half credit provision primarily to COVID-19 economic forecasts ($37.6 million) and SBAZ acquisition-related provision ($4.8 million). CECL adoption reduced opening retained earnings by $12.3 million.
- SBAZ consideration was approximately $125.9 million, including $112.1 million in stock and $13.7 million cash; preliminary goodwill recognized was $56.9 million. The acquired business contributed about $10.9 million in net interest and non-interest income and a $47,000 net loss from acquisition through June 30. Q2 included $3.7 million of acquisition-related expenses.
- Unrealized gains on available-for-sale securities contributed $90.0 million, net of tax, to first-half other comprehensive income. Accumulated other comprehensive income rose to $129.9 million.
Outlook, risks and contingencies
- The filing gives no quantified earnings or margin guidance. Management said pandemic conditions and their effect on customers, markets and the economy remain uncertain.
- During Q2, the Company modified 3,054 loans totaling $1.515 billion, primarily with payment deferrals of less than six months. At June 30, modified loans were 15.11% of loans excluding PPP loans. Management identified $631 million of direct exposure to higher-risk industries, including hotels, restaurants, travel and tourism, gaming, and oil and gas; 63.49% of those loans had been modified.
- Management cautioned that changing economic forecasts could require further credit-loss provisions. The filing highlights risks from borrower deterioration, COVID-19, interest rates, regulation, competition, acquisitions and integration, goodwill impairment, cybersecurity and operational disruption.
- Management considered goodwill unimpaired at June 30 and said it did not perform interim testing. It stated pending ordinary-course litigation was not expected to materially affect financial position, results or liquidity. The Board declared a $0.29-per-share dividend payable July 16, 2020; future dividends remain subject to earnings, capital, asset quality, economic and regulatory factors.
Important facts for investors to verify
- Track borrower performance after the 3,054 COVID-19 modifications expire, especially hotel, restaurant and other higher-risk exposures, and review subsequent delinquencies, charge-offs and reserve assumptions.
- Assess PPP fee recognition, loan forgiveness and repayment timing, and separate PPP-driven balance-sheet and income effects from underlying trends.
- Review margin sensitivity to low interest rates, deposit repricing, asset yields and the large securities portfolio.
- Monitor SBAZ integration, final purchase-accounting adjustments, goodwill and ongoing acquisition costs.
- Confirm the durability of liquidity, capital and dividend capacity as deposits, loan demand and credit quality evolve.