Glacier Bancorp, Inc. — Q3 2019 Form 10-Q
Business context and period. Glacier Bancorp is a regional bank holding company operating through Glacier Bank across eight western states. This unaudited report covers the three and nine months ended September 30, 2019; balance-sheet comparisons are primarily with December 31, 2018. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net income | $51.6 | $49.3 | $153.1 | $132.3 |
| Diluted EPS | $0.57 | $0.58 | $1.76 | $1.59 |
| Net interest income | $131.4 | $113.7 | $367.0 | $317.6 |
| Non-interest income | $43.0 | $32.4 | $102.4 | $90.3 |
| Provision for loan losses | $0 | $3.2 | $0.1 | $8.7 |
| Tax-equivalent net interest margin | 4.42% | 4.26% | 4.36% | 4.18% |
Balance sheet and funding at September 30, 2019: Total assets were $13.72 billion, up $1.60 billion from year-end 2018. Gross loans were $9.54 billion (net loans $9.42 billion), deposits $10.87 billion, and stockholders’ equity $1.95 billion. Cash and cash equivalents were $406 million. Total debt securities were $2.69 billion. Repurchase agreements were $559 million, FHLB advances $8.7 million, other borrowed funds $14.8 million, and subordinated debentures $139.9 million.
Cash flow and liquidity: For the first nine months, operating cash flow was $114.4 million, investing cash flow was $56.2 million, and financing cash flow was $32.0 million. Cash and cash equivalents rose $202.6 million to $406.4 million. Available FHLB borrowing capacity was $2.24 billion, FRB discount-window capacity $923 million, and unsecured lines $230 million. The loan-to-deposit ratio was 88.71%.
Credit, capital and returns: The allowance for loan and lease losses was $125.5 million, or 1.32% of loans, versus 1.63% a year earlier. Year-to-date net charge-offs were $5.8 million. Non-performing assets were $55.1 million, or 0.40% of subsidiary assets. Glacier Bank’s total capital ratio was 14.57%, Tier 1 risk-based ratio 13.43%, and leverage ratio 11.78%. The quarterly dividend was raised to $0.29 per share.
Changes and management commentary
- Q3 net income increased 5% year over year, while diluted EPS declined 2%, reflecting a higher share count. Nine-month net income rose 16% and diluted EPS rose 11%.
- Loan growth, particularly in commercial lending, drove higher interest income and net interest income. Management cited higher-yielding loans, more low-cost deposits, and lower FHLB borrowings as contributors to improved margin.
- Assets, loans, deposits, locations and employees grew partly through the April acquisition of FNB Bancorp and the July acquisition of Heritage Bancorp. The acquisitions issued approximately 7.5 million shares in aggregate and added $166.8 million of goodwill. Purchase accounting estimates remain preliminary.
- A September balance-sheet repositioning included selling $308 million of securities, generating a $13.8 million gain, terminating $260 million notional of pay-fixed swaps, and paying down FHLB debt. The termination and related debt prepayment generated $13.5 million of expense ($10.0 million swap loss and $3.5 million deferred-cost write-off).
- Q3 expenses also included $5.4 million of accelerated stock compensation tied to Heritage and $2.1 million of acquisition-related costs. Reported efficiency ratio was 65.95%; management said it would have been 54.41% excluding the swap loss, FHLB write-off and accelerated stock compensation.
- The Durbin Amendment took effect for the Company July 1, reducing Q3 service-charge fee income by $5 million, or 57%, according to management. FDIC assessment credits reduced Q3 regulatory assessment expense by $1.3 million; $1.6 million of credits remained for future periods, subject to FDIC timing.
- Management described its market-area economy as generally positive but said it remained cautiously optimistic, and noted continued monitoring of economic conditions and collateral values. It cited a $1.9 million loss on one negotiated short-sale as the main reason Q3 net charge-offs increased.
Outlook, risks and contingencies
- A definitive agreement to acquire State Bank Corp. of Arizona was announced September 30. The transaction, subject to regulatory approval and customary conditions, was expected to close in Q4 2019 or early Q1 2020; SBAZ reported $677 million of assets, $413 million of gross loans and $587 million of deposits at the announcement date.
- The Company was preparing to adopt the expected-credit-loss standard (CECL), effective for it in 2020. Management could not yet quantify the effect and warned adoption could increase the allowance; implementation and model validation were underway.
- Key disclosed risks include loan credit deterioration, interest-rate and funding-cost changes, regulation (including requirements associated with exceeding $10 billion in assets), acquisition execution and integration, goodwill impairment, competition, cybersecurity and system disruptions, and natural disasters.
- Management reported no material change in market-risk disclosures, no material change in internal controls, and no material adverse impact expected from ordinary-course litigation. It stated the Q3 goodwill impairment test found reporting-unit fair value above carrying value.
Important facts for investors to verify
- How much of reported earnings growth reflects ongoing operations versus securities gains, acquisition-related costs, accelerated compensation and balance-sheet restructuring.
- Whether acquired-bank integration, preliminary purchase accounting and the pending SBAZ acquisition meet expected financial and operational objectives.
- Loan growth, commercial real-estate and construction exposures, delinquency and non-performing asset trends, net charge-offs, and the adequacy of the allowance, especially ahead of CECL adoption.
- Deposit mix and cost, reliance on repurchase agreements and other funding, liquidity capacity, and the sustainability of the improved net interest margin as rates and funding conditions change.
- The durability of fee income after the Durbin Amendment and the timing and amount of remaining FDIC assessment credits.
- Capital and tangible book value after acquisition-related share issuance, dividends and any future acquisitions; assess reported bank capital ratios alongside holding-company measures.