Business context and reporting period
Glacier Bancorp, Inc. is a Montana-based bank holding company operating through Glacier Bank across six western states. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016; comparisons are primarily with the corresponding 2015 periods and December 31, 2015 balance-sheet amounts. Unless noted, dollar figures below are in millions.
Financial performance and condition
| Metric | Q2 2016 | Six months 2016 |
|---|---|---|
| Net interest income | $78.6 | $155.4 |
| Non-interest income | $26.8 | $51.0 |
| Net income | $30.5 | $59.1 |
| Diluted EPS | $0.40 | $0.78 |
| Tax-equivalent net interest margin | 4.06% | 4.04% |
| Efficiency ratio | 56.10% | 56.31% |
- For the six months, net interest income rose 10% and non-interest income rose 5% year over year; net income increased 4%. Q2 net income increased 4% year over year.
- At June 30, total assets were $9.20 billion; loans net of allowance were $5.25 billion, and investment securities totaled $3.17 billion. Gross loans grew $299.9 million, or 6%, from year-end, led by commercial real estate and other commercial lending.
- Deposits totaled $7.09 billion, up $143.8 million from year-end. The loan-to-deposit ratio was 76.92%. Cash and cash equivalents were $160.3 million, down $32.9 million from year-end.
- Borrowings included $414.3 million of repurchase agreements, $328.8 million of FHLB advances, and $125.9 million of subordinated debentures. Total liabilities were $8.07 billion.
- Six-month operating cash flow was $54.2 million, investing cash outflow was $116.9 million, and financing cash inflow was $29.7 million.
- The allowance for loan and lease losses was $132.4 million, or 2.46% of loans. Non-performing assets were $75.6 million, or 0.82% of subsidiary assets; the allowance equaled 259% of non-performing loans.
- Glacier Bank reported regulatory capital ratios of 16.36% total capital, 15.10% Tier 1 and common equity Tier 1, and 11.57% leverage. Management said the company would meet fully phased-in Basel III requirements.
Material changes versus comparable periods
- Year-over-year first-half net interest income increased $14.0 million, principally from commercial loan growth. Tax-equivalent margin rose to 4.04% from 4.00%.
- First-half non-interest expense increased 10% to $126.8 million. Compensation rose 15%, and data processing rose 32%, with higher staffing and Core Consolidation Project costs among the cited drivers. The efficiency ratio increased from 55.36% to 56.31%.
- Non-performing assets declined 10% from June 2015; TDR loans fell to $73.9 million from $90.6 million at year-end 2015. The allowance ratio declined from 2.55% at year-end.
- Accumulated other comprehensive income increased to $20.4 million from $2.0 million at year-end, principally reflecting unrealized gains on available-for-sale securities as interest rates declined.
Outlook, commentary, risks and unusual items
- No earnings or financial guidance is provided. Management described the regional economy and housing recovery as gradually improving but fragile, and said it would continue monitoring credit exposures. It noted economic weakness in Wyoming tied to lower oil and gas prices and volatility in some agricultural commodities.
- The company expected to complete its Core Consolidation Project by year-end; six of 13 bank divisions had completed conversion by the filing date. Q2 included $1.0 million of acquisition-related expenses and $1.3 million of project-related expenses.
- A definitive agreement to acquire Treasure State Bank was announced April 20, 2016, with closing anticipated in Q3 2016. The target reported $71.8 million of assets, $53.2 million of gross loans and $57.7 million of deposits at December 31, 2015.
- Q2 had no loan-loss provision and included $2.3 million of net recoveries, including a significant recovery. Management cautioned that recoveries and charge-offs can be volatile and that allowance estimates involve judgment.
- Unrealized securities losses totaled $9.5 million at June 30. Management attributed these primarily to interest rates 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.
- Management cited credit deterioration, interest-rate changes, regulatory developments, acquisition execution and integration, technology/security incidents, competition, and goodwill impairment as risks. It reported no material change in previously disclosed risk factors. Ordinary-course legal matters were not expected to materially affect financial condition, results or liquidity.
- The company adopted updated consolidation guidance and deconsolidated its low-income housing tax credit partnerships effective January 1, 2016; management reported no material effect. The new expected-credit-loss standard was issued in June 2016, is effective for the company after December 15, 2019, and was still under evaluation.
Important facts for investors to verify
- Whether commercial loan growth and the 76.92% loan-to-deposit ratio are matched by stable funding, and how wholesale deposits and borrowing costs evolve.
- Credit trends beneath the improving headline measures, particularly construction exposure, non-accrual loans, TDRs, and the adequacy of the $132.4 million allowance.
- The cost, timing, and expected benefits of completing the Core Consolidation Project and integrating Treasure State Bank.
- The sustainability of margin and earnings growth given rate sensitivity, securities valuation movements, higher operating expenses, and the absence of a formal outlook.