Glacier Bancorp, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Glacier Bancorp is a regional banking company headquartered in Montana, operating across seven western states through Glacier Bank. Figures below are in millions of dollars unless noted.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $113.7 | $88.8 | $317.6 | $255.3 |
| Net income | $49.3 | $36.5 | $132.3 | $101.4 |
| Diluted EPS | $0.58 | $0.47 | $1.59 | $1.31 |
| Net interest margin, tax-equivalent | 4.26% | 4.11% | 4.18% | 4.09% |
| Non-interest income | $32.4 | $31.2 | $90.3 | $84.5 |
| Non-interest expense | $82.8 | $68.6 | $238.3 | $197.2 |
Q3 net income rose 35% year over year; nine-month net income rose 30%. Nine-month total income (net interest income plus non-interest income) was $407.9 million, up 20%. The nine-month effective tax rate fell to 17.8% from 24.7%, primarily reflecting the federal corporate tax-rate reduction under the Tax Act. The Q3 efficiency ratio was 52.26%, versus 53.44% a year earlier; the nine-month ratio increased to 55.01% from 53.92%.
Financial position, cash flow and liquidity
- At September 30, total assets were $11.91 billion, up $2.20 billion, or 23%, from year-end 2017. Loans were $8.12 billion, up $1.55 billion; deposits were $9.60 billion, up $2.02 billion. Growth reflected the 2018 acquisitions as well as organic loan and deposit growth.
- Cash and cash equivalents were $307.1 million. The allowance for loan and lease losses was $132.5 million, equal to 1.63% of loans, versus 1.97% at December 31, 2017. The loan-to-deposit ratio was 85.13%.
- For the first nine months, operating cash flow was $167.5 million, investing cash flow was negative $530.7 million, and financing cash flow was positive $470.3 million. Cash, cash equivalents and restricted cash increased $107.1 million to $307.1 million.
- Funding included $408.8 million of repurchase agreements, $155.3 million of FHLB advances, $9.9 million of other borrowed funds and $134.1 million of subordinated debentures. Available liquidity sources included $2.08 billion of unused FHLB capacity, $915.7 million of FRB discount-window capacity, $230 million of unsecured credit lines and $1.38 billion of unencumbered securities.
- Glacier Bank’s regulatory capital ratios were 14.56% total capital, 13.31% Tier 1 and common equity Tier 1, and 11.14% leverage. Management said the Company and Bank met applicable capital requirements.
Material changes and notable items
- Glacier completed acquisitions of First Security Bank in February and Collegiate Peaks Bank in January. Their acquired assets totaled approximately $1.66 billion; the acquisitions contributed $111.7 million of goodwill. The acquired banks’ results were included from their respective closing dates.
- Commercial loan interest income drove much of the earnings and margin growth. Management attributed the higher margin to loan growth and yields, asset mix, and stable funding costs. The Q3 margin also benefited from a 2-basis-point increase in purchase-accounting loan discount accretion.
- Q3 included $1.3 million in acquisition-related expenses and a $2.3 million gain on sale of a former branch building. A $2.2 million write-down on one property contributed to higher other-real-estate-owned expense. Nine-month acquisition-related expenses were $6.1 million, versus $1.2 million a year earlier.
- Available-for-sale securities had $50.6 million of gross unrealized losses at quarter-end; accumulated other comprehensive loss was $29.7 million. Management attributed security losses primarily to interest-rate and market-spread changes, reported no other-than-temporary impairment, and said it did not intend or expect to be required to sell the affected securities before recovery.
- Non-performing assets were $72.1 million, or 0.61% of subsidiary assets, down from $84.5 million in June but up from $65.1 million a year earlier. Net charge-offs for the first nine months were $5.7 million, compared with $7.9 million in 2017.
Outlook, risks and contingencies
- The Company exceeded $10 billion in assets during 2018. Management expects the Durbin Amendment to reduce annual service-charge fee income by approximately $17–$20 million pretax beginning July 2019.
- Management described economic conditions across its markets as generally positive but remained cautiously optimistic, citing limited housing supply and volatility in some agricultural commodities. It noted that real-estate collateral values and local economic conditions may affect credit quality and the allowance.
- The future allowance impact of the expected-credit-loss standard (CECL) was not quantified; management said adoption could increase the allowance and require significant changes to estimation processes.
- Other stated risks include interest-rate and funding-cost changes, acquisition integration and goodwill impairment, competition, regulation, cybersecurity and system disruptions, and natural disasters. Goodwill was not impaired in the Q3 assessment. Management reported no material changes to previously disclosed risk factors; ordinary-course legal matters were not expected to have a material adverse effect.
- The Board declared a regular quarterly dividend of $0.26 per share, payable October 18, 2018. Future dividends remain subject to earnings, capital, asset quality, economic conditions and regulatory considerations.
Important facts for investors to verify
- How much of reported growth and earnings reflects the First Security and Collegiate acquisitions versus organic performance, and what integration costs or synergies remain?
- Whether loan growth, credit quality and the allowance remain appropriate, particularly for commercial real estate and construction lending.
- How rising rates affect net interest margin, deposit pricing, borrowing costs and the value of the securities portfolio.
- The expected timing and realized effect of the projected $17–$20 million annual pretax service-fee reduction beginning July 2019.
- The eventual CECL adoption impact, and whether accumulated securities losses or goodwill valuations change materially.
- Capital, liquidity and dividend capacity as the Company operates above $10 billion in assets and faces the related regulatory requirements.