Glacier Bancorp, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Glacier Bancorp is a regional bank holding company operating through Glacier Bank across eight western states. Results include State Bank of Arizona (SBAZ) from its February 29, 2020 acquisition.
Financial performance
- Q3 net income was $77.8 million, up 51% year over year; diluted EPS was $0.81, up from $0.57. For the first nine months, net income was $184.5 million, up 21%, and diluted EPS was $1.95 versus $1.76.
- Net interest income was $151.4 million in Q3, up 15% year over year; nine-month net interest income was $434.0 million, up 18%. Q3 tax-equivalent net interest margin was 3.92%, compared with 4.42% a year earlier and 4.12% in Q2. The nine-month margin was 4.12%, down from 4.36%.
- Non-interest income was $53.7 million in Q3, up 25% year over year, reflecting $35.5 million of loan-sale gains amid strong mortgage refinancing. Nine-month non-interest income rose 25% to $128.2 million. Service charges fell 27% year to date, partly due to lower overdraft activity and the Durbin Amendment.
- Credit costs and asset quality: Q3 credit loss expense was $2.9 million; nine-month expense was $39.2 million, largely reflecting COVID-19 economic forecasts and the SBAZ acquisition. The loan allowance was $164.6 million, or 1.42% of loans. Non-performing assets were $44.7 million, or 0.25% of subsidiary assets; net charge-offs were $2.9 million year to date.
- Balance sheet at September 30: Assets were $17.93 billion, up $4.24 billion from year-end 2019. Loans were $11.62 billion, up $2.11 billion; debt securities were $4.32 billion, up $1.52 billion. Deposits totaled $14.30 billion, up $3.52 billion. Cash and cash equivalents were $769.9 million.
- Liquidity and funding: The loan-to-deposit ratio was 82.29%, down from 88.71% a year earlier. Available capacity included $2.60 billion of FHLB borrowing capacity, $1.30 billion at the Federal Reserve discount window, $635 million in unsecured lines, and $2.31 billion of unencumbered securities. Repurchase agreements were $965.7 million; FHLB advances were $7.3 million; subordinated debentures were $139.9 million.
- Capital: Stockholders’ equity was $2.26 billion; tangible equity to tangible assets was 9.70%, and tangible book value was $17.64 per share. Glacier Bank’s total capital, Tier 1, CET1, and leverage ratios were 14.35%, 13.12%, 13.12%, and 10.08%, respectively. Management reported capital ratios above applicable requirements.
- Cash flow: Nine-month operating cash flow was $113.8 million, investing cash outflow was $2.88 billion, and financing cash inflow was $3.20 billion. Cash, cash equivalents and restricted cash increased $438.9 million to $769.9 million.
Material changes versus comparable periods
- Loan-sale gains rose sharply with refinancing activity, while the prior-year quarter included a $13.8 million securities-sale gain and $13.5 million of hedging-termination expense. These unusual prior-year items affect comparisons.
- Deposit growth, including PPP-related customer funds and increased savings, supported lending and securities purchases and reduced reliance on FHLB advances. Funding costs fell, but asset yields fell faster, compressing core margins.
- SBAZ added assets, loans, deposits, goodwill and operating costs. The acquisition issued approximately 3.0 million shares and added $57.6 million of goodwill; reported year-to-date results include SBAZ only from the acquisition date.
- CECL adoption on January 1, 2020 reduced retained earnings by $12.3 million and changed the allowance methodology; prior-year figures use the earlier incurred-loss model.
Outlook, commentary and risks
- The filing provides no specific earnings or financial guidance. Management said results for the nine months are not necessarily indicative of full-year results.
- COVID-19 remained a central uncertainty. Of 3,054 loans modified for $1.515 billion during Q2, $466 million remained in deferral at September 30. The company also reported $237 million of eligible Montana loans under a separate state deferment grant program.
- The bank originated 16,090 PPP loans totaling $1.472 billion. Remaining deferred PPP fees were $36.1 million, to be recognized over the loan lives or upon forgiveness; the company began receiving forgiveness payments in Q4.
- Loans in identified higher-risk industries totaled $617.8 million, or 6.08% of loans excluding PPP. Remaining modifications in those industries were $77.5 million. Management described enhanced monitoring but cautioned that changing economic assumptions could require additional credit-loss provisions.
- Other risks cited include interest-rate and credit-quality changes, economic and regulatory developments, acquisition integration and goodwill impairment, competition, cybersecurity and operational disruptions. Management said pending ordinary-course legal proceedings were not expected to have a material effect. The Q3 goodwill impairment test found no impairment.
- The board declared a $0.30 quarterly dividend. Future dividends depend on earnings, capital, asset quality, economic conditions and regulatory considerations.
Important facts for investors to verify
- Whether COVID-19-related deferrals, especially in hotel, restaurant and tourism exposures, convert into delinquencies, non-accrual loans or losses.
- Whether the $164.6 million loan allowance remains adequate as economic forecasts and portfolio performance change, and how CECL assumptions affect future provisions.
- How much reported earnings and margin depend on PPP fees and interest, mortgage refinancing and loan-sale gains, and whether those sources persist.
- Whether deposit growth remains stable and how securities growth, repurchase funding and changing interest rates affect liquidity and net interest margin.
- How SBAZ integration, acquisition-related expenses and added goodwill affect ongoing profitability and tangible capital.
- Future capital ratios, dividend capacity and the effects of the CECL regulatory-capital transition.