GBCI - Glacier Bancorp: Positive Earnings Outlook Appears Priced-In

Summary

• Mortgage banking income is unlikely to fall further from the third quarter’s level.
• Inflation will likely boost non-interest expenses.
• The outlook for the top line appears bright because of sticky deposit costs and moderate credit demand.
• The December 2023 target price suggests a small upside from the current market price. Further, GBCI is offering a small and unattractive dividend yield.

Earnings of Glacier Bancorp (GBCI) will get pressurized by the recent fall in non-interest income and the anticipated surge in non-interest expenses. On the other hand, the growth of loans and the margin will lift earnings. Overall, I'm expecting Glacier Bancorp to report earnings of $2.76 per share for 2022, down 4%, and $3.08 per share for 2023, up 12% year-over-year. Compared to my last report on the company, I've reduced my earnings estimates mostly because I've raised my non-interest expense estimates. Next year's target price is quite close to the current market price. Therefore, I'm maintaining a hold rating on Glacier Bancorp.

Expecting Mortgage Banking Income to Remain Stable from the Third Quarter's Level

Income for the mortgage banking business continued to drop in the third quarter as rising interest rates not only disincentivized refinancing activity but also hurt new home purchases. Income from the mortgage banking business (which is different from interest income as it's a gain-on-sale model) dropped to just 1.6% in total revenues in the third quarter of 2022. In comparison, mortgage banking income reached a peak of 12.9% in 2020 and was at 5.4% in 2019 before the rate cuts cycle started.

Since my last report on the company, which was issued in October, the Mortgage Bankers Association has significantly reduced its forecasts for 2023.

Nevertheless, for Glacier's case I've decided to not change my forecast because its mortgage banking income has already fallen below the level seen in the last up-rate cycle (2017 - 2019). Overall, I'm expecting mortgage banking income to remain at the third quarter's level till the end of 2023. Further, I'm expecting other fee income to gradually creep upwards. In total, I'm expecting non-interest income to increase by 0.8% year-over-year in 2023.

Double-Digit Loan Growth to Lift Earnings

Glacier Bancorp's loan growth remained strong at around 3.1% during the third quarter, which took the first nine-month growth to 10.7%, or 14% annualized. This is in line with the historical trend of double-digit loan growth. I'm expecting growth to slow down a bit from normal in 2023 because of high-interest rates, which will dampen credit demand.

On the other hand, strong job markets bode well for loan growth. Glacier Bancorp operates across several states in the Rocky Mountain area; therefore, the national unemployment rate is a good proxy for unemployment in Glacier's markets. As can be seen below, the country's unemployment rate has been near record lows throughout this year.

The management mentioned in the conference call that its pipelines have continued to slow down in the third quarter of 2022. Considering these conflicting factors, I'm expecting the loan portfolio to grow by 2.5% in the last quarter of 2022, leading to full-year loan growth of 13%. For 2023, I'm expecting the loan portfolio to grow by 10%. Meanwhile, I'm expecting deposits to grow somewhat in line with loans. The following table shows my balance sheet estimates.

In my last report on Glacier Bancorp, I estimated earnings of $2.82 per share for 2022 and $3.17 per share for 2023. I've reduced my earnings estimates mostly because I've raised my non-interest expense estimates.

My estimates are based on certain macroeconomic assumptions that may not come to fruition. Therefore, actual earnings can differ materially from my estimates.

Small Upside Warrants a Hold Rating

Glacier Bancorp has increased its dividend every year over the last decade. Given the earnings outlook, I'm expecting the company to increase its dividend by $0.01 per share to $0.34 per share in the first quarter of 2023. I'm also expecting the company to continue to pay $0.10 per share as a special dividend annually. The earnings and dividend estimates suggest a payout ratio of 47% for 2023, which is below the five-year average of 58%. Based on my dividend estimate, Glacier Bancorp is offering a forward dividend yield of 3.0%.

I'm using the historical price-to-tangible book ("P/TB") and price-to-earnings ("P/E") multiples to value Glacier Bancorp. The stock has traded at an average P/TB ratio of 2.63 in the past, as shown below.

The stock has traded at an average P/E ratio of around 18.6x in the past, as shown below.

Equally weighting the target prices from the two valuation methods gives a combined target price of $52.0 , which implies a 5.6% upside from the current market price. Adding the forward dividend yield gives a total expected return of 8.2%. Hence, I'm maintaining a hold rating on Glacier Bancorp.

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