Glacier Bancorp, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Glacier Bancorp is a regional banking company operating through Glacier Bank in seven western states. Unless otherwise indicated, amounts below are in millions of dollars.
Financial results and key metrics
| Metric | Q3 2017 | Comparable period |
|---|---|---|
| Net income | $36.5 | $31.0 in Q3 2016; up 18% |
| Diluted EPS | $0.47 | $0.40 in Q3 2016 |
| Net interest income | $88.8 | $78.6 in Q3 2016 |
| Net interest margin, tax-equivalent | 4.11% | 4.00% in Q3 2016; 4.12% in Q2 2017 |
| Non-interest income | $31.2 | $28.3 in Q3 2016 |
| Non-interest expense | $68.6 | $65.2 in Q3 2016 |
| Efficiency ratio | 53.44% | 55.84% in Q3 2016 |
| Provision for loan losses | $3.3 | $0.6 in Q3 2016 |
- Nine-month results: Net income was $101.4 million, up 13% from $90.1 million; diluted EPS was $1.31 versus $1.18. Revenue (net interest income plus non-interest income) was $339.9 million, up 8%. Tax-equivalent net interest margin was 4.09%, versus 4.02%.
- Balance sheet at September 30: Assets were $9.80 billion, loans $6.51 billion, deposits $7.77 billion, and stockholders’ equity $1.21 billion. Since December 31, 2016, assets grew 3.7%, gross loans 14.5%, and deposits 5.4%; investment securities declined 18.0% to $2.54 billion.
- Credit: Allowance for loan and lease losses was $129.6 million, or 1.99% of loans, versus 2.37% a year earlier. Nine-month net charge-offs were $7.9 million, compared with net recoveries of $1.6 million in the prior-year period. Non-performing assets were $65.1 million, or 0.67% of subsidiary assets, down from $78.2 million and 0.84% a year earlier.
- Cash flow and liquidity: Nine-month operating cash flow was $178.5 million versus $128.5 million; investing activities provided $25.2 million versus using $114.7 million; financing activities used $136.0 million versus providing $44.4 million. Cash and cash equivalents ended at $220.2 million. Available capacity included $1.64 billion of FHLB borrowing capacity, $1.13 billion at the Federal Reserve discount window, and $230 million in unsecured lines. These sources are not equivalent to cash on hand.
- Debt and capital: FHLB advances were $153.7 million, repurchase agreements $453.6 million, and subordinated debentures $126.1 million. Glacier Bank’s regulatory capital ratios were 15.11% total capital, 13.86% Tier 1 and common equity Tier 1, and 11.26% leverage; management said the Company and Bank met applicable capital requirements.
Material changes and notable items
- Commercial lending drove performance: Q3 commercial loan interest income rose 26% year over year. Management attributed margin improvement to shifting assets toward higher-yielding loans and maintaining low-cost deposits.
- Loans increased $825.0 million from year-end; the April acquisition of Foothills contributed to growth, alongside organic commercial real estate and commercial lending. Excluding Foothills, loans grew $621 million year over year.
- Management reduced securities, wholesale deposits and borrowings while redeploying cash flows into loans. It said it was managing assets to remain below $10 billion through year-end to delay the Durbin Amendment’s expected effect on debit-card interchange fee income.
- Foothills Bank was acquired April 30, 2017 for $64.0 million in stock and cash; it added $30.6 million of goodwill. Its operations contributed approximately $8.6 million of net interest and non-interest income and $1.9 million of net income from acquisition through September 30.
- The Company declared a regular quarterly dividend of $0.21 per share and a special dividend of $0.30 per share. Q3 declared dividends totaled $0.51 per share; the reported quarterly payout ratio was 108.51%, including the special dividend.
Outlook, risks, and contingencies
- The filing provides no specific earnings or financial guidance. Management described the regional economy as gradually improving but remained cautiously optimistic and said it would continue monitoring economic conditions and their effects on credit.
- Management expects the Collegiate Peaks Bank acquisition, announced in June, to close in Q1 2018 subject to regulatory approval and customary conditions. On October 26, after quarter-end, the Company announced an agreement to acquire First Security Bank, also anticipated to close in Q1 2018. Both transactions carry execution and integration risks.
- Key disclosed risks include loan-credit deterioration, interest-rate and funding-cost changes, competition, regulatory changes, acquisition integration, goodwill impairment, cybersecurity or system disruption, and regional economic or natural-disaster effects. Management reported no material change to previously disclosed risk factors.
- Management found no goodwill impairment in its Q3 assessment. It determined that investment securities with unrealized losses were not other-than-temporarily impaired; losses were attributed primarily to interest-rate and market-spread changes.
- The Company reported $23.3 million of unfunded LIHTC investment commitments at September 30, expected to be funded in 2017 and 2018. It stated it did not anticipate material losses from ordinary-course lending commitments or unconsolidated VIEs. Management considered pending litigation immaterial; the filing gives no clear quantified litigation exposure.
- Expected credit-loss accounting (CECL) adoption is required in 2020. The Company said the impact was not yet quantifiable and could increase the allowance and require significant process changes.
Important facts for investors to verify
- Whether loan growth and the improved net interest margin persist, and how deposit costs respond to interest-rate changes.
- Credit quality trends: charge-offs rose year over year, while non-performing assets declined; assess commercial real estate concentrations and allowance adequacy.
- Whether the Company remains below $10 billion in assets as planned and the resulting timing and revenue impact of the Durbin Amendment.
- Regulatory approvals, closing terms, integration costs, and expected returns for the Collegiate and First Security acquisitions.
- The sustainability of dividends, particularly given the special dividend and Q3 payout ratio above 100%.