Glacier Bancorp, Inc. — Q2 2018 Form 10-Q
Business context and period. Glacier Bancorp is a regional banking company operating through Glacier Bank across seven western states. This unaudited filing covers the quarter and six months ended June 30, 2018. Results include First Security Bank, acquired in February, and Collegiate Peaks Bank, acquired in January, from their respective acquisition dates.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net interest income | $108.6 million | $86.3 million | $203.8 million | $166.5 million |
| Non-interest income | $31.8 million | $27.7 million | $57.9 million | $53.3 million |
| Net income | $44.4 million | $33.7 million | $82.9 million | $64.9 million |
| Diluted earnings per share | $0.52 | $0.43 | $1.00 | $0.84 |
| Net interest margin, tax-equivalent | 4.17% | 4.12% | 4.14% | 4.08% |
| Efficiency ratio | 55.44% | 52.89% | 56.54% | 54.17% |
Q2 net income increased 32% year over year; first-half net income increased 28%. The quarter’s income before taxes was $53.9 million, provision for loan losses $4.7 million, and income tax expense $9.5 million. The first-half effective tax rate was 17.7%, down from 25.0%, primarily reflecting the Tax Act’s federal rate reduction. Q2 acquisition-related expense was $2.9 million; first-half expense was $4.8 million.
Management attributed stronger net interest income mainly to commercial-loan growth, higher loan yields, and the shift of earning assets toward loans. Q2 margin increased seven basis points from Q1, including two basis points of acquisition-related loan discount accretion. The first-half efficiency ratio worsened year over year, reflecting acquisition costs and the tax-rate change, despite higher revenue.
Financial position, funding and cash flow
- Scale and loans: Total assets were $11.90 billion at June 30, up $2.19 billion, or 23%, from year-end 2017, largely from acquisitions and loan growth. Gross loans were $7.95 billion, up $1.37 billion from year-end; Q2 loan growth was $279 million. The loan-to-deposit ratio was 84.92%.
- Deposits and liquidity: Deposits totaled $9.42 billion, including $2.91 billion of non-interest-bearing deposits. Cash and cash equivalents were $368.1 million. Reported available funding included $1.59 billion of unused FHLB capacity, $898.7 million at the FRB discount window, $230 million of unsecured lines, and $1.42 billion of unencumbered securities.
- Borrowings: At quarter-end, repurchase agreements were $361.5 million, FHLB advances $395.0 million, other borrowed funds $9.9 million, and subordinated debentures $134.1 million.
- Capital: Stockholders’ equity was $1.47 billion; tangible equity was $1.13 billion and tangible book value per share $13.39. Glacier Bank’s regulatory ratios were 14.55% total capital, 13.29% Tier 1 and common equity Tier 1, and 11.07% leverage; management said the Company and Bank met applicable capital requirements.
- Cash flow: First-half operating cash flow was $99.2 million, versus $136.7 million a year earlier; investing activities used $438.8 million, while financing activities provided $507.6 million. Cash and cash equivalents rose $168.1 million during the half.
Material changes and credit quality
The acquisitions materially expanded the balance sheet and share count: 6.43 million shares were issued for acquisitions in the first half. The acquired banks contributed preliminary acquired assets of approximately $1.66 billion and goodwill of $111.7 million. Their reported post-acquisition net income through June 30 was approximately $6.3 million combined.
Non-performing assets rose to $84.5 million, from $74.0 million at March 31 and $68.9 million a year earlier; they equaled 0.71% of subsidiary assets. Non-accrual loans were $58.2 million. The allowance was $131.6 million, or 1.66% of loans, and covered 186% of non-performing loans. First-half net charge-offs were $3.5 million, below $4.3 million in the prior-year period. Management considered the allowance adequate, while noting estimation uncertainty and the possibility of additional problem credits or provisions.
Available-for-sale securities had $39.8 million of unrealized losses at June 30; total unrealized losses on available-for-sale and held-to-maturity securities were $52.2 million. Management attributed the losses mainly to interest rates and market spreads, reported no other-than-temporary impairment, and said it did not expect to need to sell the affected securities before recovery.
Outlook, risks and unusual items
- No specific earnings or operating guidance is provided. Management described the regional economy as improving but remained cautiously optimistic, citing housing supply constraints and volatility in some agricultural commodities.
- The Company exceeded $10 billion in assets during 2018. Management expects the Durbin Amendment to reduce annual service-charge fee income by approximately $14–$16 million pre-tax beginning July 2019.
- Key disclosed risks include loan-credit deterioration, interest-rate and funding-cost changes, regulation associated with exceeding $10 billion in assets, acquisition integration and goodwill impairment, competition, cybersecurity and systems disruptions, and natural disasters.
- The expected adoption of the credit-loss standard (CECL) could increase the allowance; the Company said the effect could not yet be reasonably quantified. It also estimated that adopting the callable-debt premium amortization standard as of July 1, 2018 would adjust $21.9 million to retained earnings, but did not expect early adoption.
- Management said ordinary-course litigation was not expected to materially affect the Company. It reported no material changes to previously disclosed risk factors, market-risk disclosures, or internal controls.
Important facts for investors to verify
- Whether acquired-bank integration, purchase-accounting accretion, and acquisition expenses develop as expected.
- Whether rising non-performing assets—particularly commercial real estate and other commercial exposures—lead to higher losses or allowance needs.
- How deposit pricing, borrowing costs, and loan yields affect net interest margin as rates change.
- The timing and realized impact of the expected $14–$16 million annual pre-tax Durbin-related fee reduction beginning July 2019.
- Whether capital and liquidity remain adequate under the regulatory and operating demands associated with assets above $10 billion.
- How securities valuations and future CECL implementation affect equity, earnings, and reported credit reserves.