Enhancing Growth Through Heartland Bank Acquisition And Net Interest Margin Improvement

Key Takeaways

• Acquisition of Heartland Bank branches aims to bolster the deposit base and loan portfolio, enhancing net interest income and loan growth potential.
  
• Strategic focus on reducing noninterest and credit loss expenses alongside managing core deposit funding costs contributes positively to net margins and earnings sustainability.
  
• Glacier Bancorp's strategy and market actions, amidst economic and interest rate challenges, could significantly impact its net margins, earnings, and overall profitability.

Catalysts

Operates as the bank holding company for Glacier Bank that provides commercial banking services to individuals, small to medium-sized businesses, community organizations, and public entities in the United States.

• The acquisition of branches from Heartland Bank, which includes $403 million in deposits and $280 million in loans, is expected to provide a boost to the deposit base and loan portfolio, potentially impacting both net interest income and loan growth.
  
• Management's expectation of net interest income growth into 2025, supported by an improving net interest margin (from 2.59% to 2.68% quarter-over-quarter) and strong loan yield increase (up 46 basis points from the previous year), suggests a positive outlook for revenue and profitability.
  
• The focus on reducing noninterest and credit loss expenses, which contributed to strong EPS growth in the quarter, if sustained, could positively affect net margins and overall earnings.
  
• The positive trend in noninterest deposits growth (3% annualized during the quarter) and the strategic management of core deposit funding costs, including successful efforts to stabilize deposit costs, could enhance the company's cost of funding and interest expense management, positively impacting margins.
  
• The disciplined growth in the loan portfolio (3% annualized increase during the quarter), particularly with a focus on high-quality deposits and loans, suggests a cautious yet growth-oriented strategy that could support sustainable revenue growth and risk management, impacting earnings positively.

Assumptions

• Analysts are assuming Glacier Bancorp's revenue will grow by 15.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 24.0% today to 28.4% in 3 years time.
• Analysts expect earnings to reach $333.5 million (and earnings per share of $2.88) by about September 2027, up from $184.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.2x on those 2027 earnings, down from 26.7x today. This future PE is greater than the current PE for the US Banks industry at 11.4x.
• Analysts expect the number of shares outstanding to grow by 2.27% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.24%, as per the Simply Wall St company report.

Risks

• The use of cash to pay down borrowings, leading to a decrease in interest income, could indicate a higher sensitivity to changes in interest rates, impacting net interest income if rates fall or the strategy doesn't yield expected savings.
  
• An increase in loan yields and the continuation of strong disciplined growth in the loan portfolio could pose risks if economic conditions worsen, leading to higher loan defaults and negatively affecting net margins and earnings.
  
• The acquisition of Heartland Bank's Montana branches includes assumptions of deposit and loan balances, which if not integrated smoothly, could lead to higher than expected integration costs or deposit attrition, impacting noninterest income and expense stability.
  
• The focus on maintaining stable noninterest-bearing deposits in a challenging deposit environment may result in increased costs for attracting and retaining deposits, negatively impacting the net interest margin and overall profitability.
  
• Inflationary pressures and the need to invest in control functions, as mentioned, suggest potential increases in noninterest expenses, which could outpace revenue growth, adversely affecting net margins and profitability.

Valuation

• The analysts have a consensus price target of $44.14 for Glacier Bancorp based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $49.0, and the most bearish reporting a price target of just $38.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.2 billion, earnings will come to $333.5 million, and it would be trading on a PE ratio of 19.2x, assuming you use a discount rate of 6.2%.
• Given the current share price of $43.37, the analyst's price target of $44.14 is 1.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.