2023-11-30 17:58:48 ET
Summary
- The upcoming acquisition of Wheatland Bank will drive loan growth in the last quarter of 2023. Further, organic growth will lift the total portfolio size.
- The acquisition will slightly improve the margin because Wheatland had better asset yields and funding costs than GBCI.
- The December 2024 target price suggests a small upside from the current market price. Further, GBCI is offering a moderate dividend yield.
Earnings of Glacier Bancorp, Inc. ( GBCI ) will likely receive support from acquired and organic loan growth. Further, the acquisition of Wheatland Bank will lift the margin and result in cost savings. However, the acquisition will also lead to a dilution of the earnings per share and one-time merger-related expenses. Overall, I'm expecting the company to report earnings of $1.96 per share for 2023 and $1.94 per share for 2024. The year-end target price suggests a small upside from the current market price. Further, Glacier is offering a moderate dividend yield. Based on the total expected return, I'm maintaining a hold rating on Glacier Bancorp.
Acquired and Organic Growth to Lift the Loan Portfolio Size
Glacier Bancorp's loan portfolio grew at a moderate but below-average rate in the third quarter of the year. Loan growth will likely remain robust in upcoming quarters because of acquisition plans as well as a positive organic growth outlook.
Glacier Bancorp plans to acquire Community Financial Group, Inc. (Spokane, WA) ( OTC:CFGW ), the bank holding company for Wheatland Bank, in the fourth quarter of 2023, as mentioned in the acquisition investor presentation . Wheatland Bank had loans worth $474.9 million at the end of June 2023, which means the acquisition could boost Glacier's loan portfolio size by around 3%.
Meanwhile, organic growth will also contribute to the overall loan portfolio's growth. Glacier operates through seventeen banking divisions across eight states, namely Montana, Idaho, Utah, Washington, Wyoming, Colorado, Arizona, and Nevada. Seven of these states are in the Rocky Mountain region. The unemployment rate in Mountain states has increased in recent months, not unlike the national trend. However, the unemployment rate is still quite low when compared to previous years.
As Wheatland Bank is focused on agricultural loans, agricultural commodity prices are also an important indicator of credit demand. Wheatland operates in eastern Washington, which is an important producer of potatoes, wheat, and corn in the country, along with many other crops. As seen below, prices of agricultural products have been on a downtrend for the last few months.
Considering these factors, I'm expecting organic loan growth to remain in the double-digit range as it has done historically. Combined with the acquired growth, I'm expecting the total growth of the loan portfolio to be around 4.0% for the last quarter of 2023. Further, I'm expecting the portfolio to grow by 10.4% in 2024. The following table shows my balance sheet estimates.
Financial Position | FY19 | FY20 | FY21 | FY22 | FY23E | FY24E |
Net Loans | 9,388 | 10,964 | 13,259 | 15,065 | 16,580 | 18,302 |
Growth of Net Loans | 15.1% | 16.8% | 20.9% | 13.6% | 10.1% | 10.4% |
Other Earning Assets | 3,001 | 5,934 | 10,670 | 9,136 | 9,781 | 9,978 |
Deposits | 10,776 | 14,798 | 21,337 | 20,607 | 21,211 | 23,873 |
Borrowings and Sub-Debt | 777 | 1,178 | 1,198 | 2,956 | 4,469 | 4,559 |
Common equity | 1,961 | 2,307 | 3,178 | 2,843 | 2,886 | 2,706 |
Book Value per Share ($) | 22.2 | 24.3 | 28.7 | 25.7 | 25.9 | 23.9 |
Tangible BVPS ($) | 16.3 | 18.3 | 19.3 | 16.4 | 16.8 | 14.9 |
Source: SEC Filings, Author's Estimates(In USD million unless otherwise specified) |
Acquisition to Lift the Margin as Well
The net interest margin slipped further in the third quarter of 2023, however, the pace of decay decreased. The margin declined by 16 basis points in the third quarter, as opposed to a reduction of 34 basis points in the second quarter of the year. The trend improvement gives hope that the margin may bottom out soon.
As the up-rate cycle has apparently ended, the pressure on deposit pricing should ease soon, which will help the margin. Further, the acquisition of Wheatland Bank will lift the margin as the target's asset yields and funding costs are much better compared to Glacier Bancorp. Wheatland had an average yield on loans of 5.95%, while Glacier's average yield on loans was 5.27%. Further, Wheatland had a cost of total deposits of 0.86%, while Glacier had a total deposit cost of 1.03%.
Considering these factors, I'm expecting the margin to increase by four basis points in the last quarter of 2023, and then increase by four basis points in 2024.
Flattish Earnings Likely for Next Year
While the acquisition will inflate the balance sheet size and net interest margin, it will also increase the non-interest expenses. The company expects to report one-time merger-related expenses of $7.3 million, as mentioned in the presentation. On the plus side, management expects to save substantial costs from the merger. As mentioned in the presentation, management expects to save 20% of Wheatland Bank's non-interest expense base.
The acquisition will also lead to a dilution effect on the earnings per share. According to my calculations, Glacier will have to issue 2.3 million new shares to the shareholders and option-holders of CFGW (Wheatland Bank's parent company).
Overall, I'm expecting Glacier Bancorp to report earnings of $0.44 per share for the last quarter of 2023, which will take full-year earnings to $1.96 per share. For 2024, I'm expecting the company to report earnings of $1.94 per share. The following table shows my income statement estimates.
Income Statement | FY19 | FY20 | FY21 | FY22 | FY23E | FY24E |
Net interest income | 503 | 600 | 663 | 788 | 728 | 850 |
Provision for loan losses | 0 | 40 | 23 | 20 | 21 | 36 |
Non-interest income | 131 | 173 | 145 | 121 | 118 | 122 |
Non-interest expense | 375 | 405 | 435 | 519 | 558 | 661 |
Net income - Common Sh. | 211 | 266 | 285 | 303 | 218 | 219 |
EPS - Diluted ($) | 2.38 | 2.81 | 2.86 | 2.74 | 1.96 | 1.94 |
Source: SEC Filings, Author's Estimates (In USD million unless otherwise specified) |
Risks Appear Subdued
I'm not too concerned about Glacier's risk level because of the following factors.
- The acquisition will lower the assets' already low credit risk because Wheatland's risk level is better than Glacier's risk level. Wheatland's non-performing assets were 0.00% of total assets, as mentioned in the presentation. In contrast, Glacier's non-performing assets were 0.15% of total assets, as mentioned in the 10-Q filing .
- Unrealized losses on the available-for-sale securities portfolio totaled $669 million at the end of September, which is around 23% of the total equity balance. These losses aren't high enough to cause concern, in my opinion.
Maintaining a Hold Rating
Glacier Bancorp is offering a dividend yield of 3.9% at the current quarterly dividend rate of $0.33 per share. The earnings and dividend estimates suggest a payout ratio of 68% for 2024, which is much higher than the five-year average of 52%. Nevertheless, I think the dividend level is safe as paying out 68% of earnings is easily affordable. Moreover, Glacier Bancorp is very well capitalized, so there are no threats to the dividend from regulatory requirements. As mentioned in the 10-Q filing, Glacier Bancorp reported a total capital ratio of 13.82% for September-end, which is much higher than the minimum regulatory requirement of 10.50%.
I'm using the historical price-to-tangible book ("P/TB") and price-to-earnings ("P/E") multiples to value Glacier Bancorp. The stock has traded at an average P/TB ratio of 2.66 in the past, as shown below.
FY19 | FY20 | FY21 | FY22 | Average | |
T. Book Value per Share ($) | 16.3 | 18.3 | 19.3 | 16.4 | |
Average Market Price ($) | 41.5 | 37.9 | 55.4 | 51.4 | |
Historical P/TB | 2.55x | 2.07x | 2.87x | 3.14x | 2.66x |
Source: Company Financials, Yahoo Finance, Author's Estimates |
Multiplying the average P/TB multiple with the forecast tangible book value per share of $14.90 gives a target price of $39.60 for the end of 2024. This price target implies a 15.8% upside from the November 29 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
P/TB Multiple | 2.46x | 2.56x | 2.66x | 2.76x | 2.86x |
TBVPS - Dec 2024 ($) | 14.9 | 14.9 | 14.9 | 14.9 | 14.9 |
Target Price ($) | 36.6 | 38.1 | 39.6 | 41.1 | 42.6 |
Market Price | 34.2 | 34.2 | 34.2 | 34.2 | 34.2 |
Upside/(Downside) | 7.1% | 11.4% | 15.8% | 20.1% | 24.5% |
Source: Author's Estimates |
The stock has traded at an average P/E ratio of around 17.3x in the past, as shown below.
FY19 | FY20 | FY21 | FY22 | Average | |
Earnings per Share ($) | 2.38 | 2.81 | 2.86 | 2.74 | |
Average Market Price ($) | 41.5 | 37.9 | 55.4 | 51.4 | |
Historical P/E | 17.4x | 13.5x | 19.4x | 18.8x | 17.3x |
Source: Company Financials, Yahoo Finance, Author's Estimates |
Multiplying the average P/E multiple with the forecast earnings per share of $1.94 gives a target price of $33.50 for the end of 2024. This price target implies a 2.1% downside from the November 29 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
P/E Multiple | 15.3x | 16.3x | 17.3x | 18.3x | 19.3x |
EPS 2024 ($) | 1.94 | 1.94 | 1.94 | 1.94 | 1.94 |
Target Price ($) | 29.6 | 31.5 | 33.5 | 35.4 | 37.3 |
Market Price ($) | 34.2 | 34.2 | 34.2 | 34.2 | 34.2 |
Upside/(Downside) | (13.5)% | (7.8)% | (2.1)% | 3.5% | 9.2% |
Source: Author's Estimates |
Equally weighting the target prices from the two valuation methods gives a combined target price of $36.50 , which implies a 6.8% upside from the current market price. Adding the forward dividend yield gives a total expected return of 10.7%. This expected return isn't high enough for me, therefore, I'm maintaining a hold rating on Glacier Bancorp.
For further details see:
Glacier Bancorp: Acquisition Benefits Along With Organic Growth Ahead