Earnings of Glacier Bancorp, Inc. (NASDAQ:GBCI) increased to $0.66 per share in the second quarter from $0.46 per share in the first quarter of 2020. The earnings increase was attributable to lower provision expense and higher net interest income on the back of the Paycheck Protection Program, PPP. Earnings will likely continue to increase in the year ahead due to the accelerated booking of fees under PPP. Moreover, the provision expense will likely continue to decline in the year ahead. Overall, I’m expecting earnings in the second half of the year to be 25% higher than the earnings in the first half. For the full year, I’m expecting GBCI to report earnings of $2.54 per share, up 7% from last year. The June 2021 target price suggests a 17% upside from the current market price. This upside is not high enough to compensate for GBCI’s elevated risk level; therefore, I’m adopting a neutral rating on the stock.
Credit Risks High Due to a Large Portion of Loans Requiring Modifications
GBCI reported a provision expense of $14 million in the second quarter, down from $23 million in the first quarter of 2020. As the economic outlook has not worsened much since the end of the last quarter, and because the outlook is likely to remain stable for the next few quarters, I’m expecting the provision expense to decline in the year ahead.
However, GBCI has an elevated level of credit risk amid the COVID-19 pandemic. A massive 15% of loans were under a payment modification program at the end of the last quarter, as mentioned in the second quarter’s 10-Q filing. The modified loans did not impact the provision expense in the second quarter; however, if they deteriorate any further, then they can turn into troubled debt restructurings and increase provision expense. Moreover, COVID-19 sensitive industries made up 6.3% of total loans, according to details given in the 10-Q filing. The following table gives details of the vulnerable industries.
Considering the economic and company-specific factors mentioned above, I’m expecting GBCI to report a provision expense of $58 million for 2020, up from $0.057 million in 2019.
Government Stimulus Program to Lift Net Interest Income in the Second Half of 2020
GBCI funded $1.427 billion of loans under the Paycheck Protection Program, PPP, as mentioned in the 10-Q filing. The company earned fees of $53.6 million, or 3.75%, which it will recognize over the life of the loans. In the second quarter’s conference call, the management mentioned that it expected to start the forgiveness process in August. Consequently, I’m expecting GBCI to accelerate the booking of fees in the second half of the year, which will boost net interest income.
Excluding the impact of PPP, the net interest margin, NIM, will likely decline in the remainder of the year. GBCI’s funding cost dipped by 7bps to just 21bps in the second quarter. As the cost of funds is already too low, there is limited room for it to decline further. Consequently, NIM will likely face some pressure in the year ahead. However, GBCI substantially improved its deposit mix during the second quarter. Non-interest deposits made up 37.7% of total deposits at the end of June 2020, up from 33.5% at the end of March 2020. The full-quarter impact of the deposit mix improvement will likely reflect on the funding cost for the third quarter. Considering these factors, I’m expecting NIM to decline by 4bps in the third quarter and by 3bps in the last quarter of 2020, excluding the impact of accelerated booking of PPP fees. The following table shows my estimates for yield, cost, and NIM adjusted for the accelerated fees.
The forgiveness of PPP loans will likely reduce the loan balance in the remainder of the year. Excluding the impact of PPP, I’m expecting loan growth to remain low in the year ahead. GBCI focuses on commercial real estate, CRE, and other commercial loans, which altogether made up 61% of total loans at the end of the last quarter. I’m expecting credit demand in the commercial segment to remain low because of the economic slowdown. On the other hand, low interest rates will likely boost demand for residential mortgages, which made up 8% of total loans at the end of the last quarter. Overall, I’m expecting GBCI to end the year with a total loan balance of $10.2 billion, down 9.8% from the end of June, and up 8.4% from the end of last year. The following table shows my estimates for loans and other balance sheet items.
Expecting Earnings of $2.54 per Share
The accelerated booking of fees under PPP and lower provision expense will likely increase earnings in the second half of the year compared to the first half. On the other hand, non-interest income will likely decline after surging in the second quarter on the back of gains on sales of loans. I’m not expecting such high gains to recur; hence, I’m expecting non-interest income to normalize in the remainder of the year. Overall, I’m expecting earnings in the second half of the year to be 25% higher than the earnings in the first half of the year. For the full year, I’m expecting GBCI to report earnings of $2.54 per share, up 6.7% from last year. The following table shows my income statement estimates.
Market Price Not Attractive Enough to Compensate for Elevated Risks
I’m using the historical price-to-book value multiple, P/B, to value GBCI. The stock has traded at an average of 1.67 in the first half of the year. Multiplying the average P/B multiple with the June 2021 forecast book value per share of $24.5 gives a target price of $40.9 for the mid of next year. As shown in the shaded column below, the target price provides an upside of 17.2% from the August 21 closing price. The table also shows the sensitivity of the target price to different levels of the P/B multiple.
Apart from the price upside, GBCI is also offering a modest dividend yield of 3.3%, assuming the company maintains its quarterly dividend at the current level of $0.29 per share. The threat of a dividend cut is low because the earnings and dividend estimates suggest a payout ratio of 41% for the second half of 2020, and 50% for 2021, which is manageable.
GBCI is currently carrying a high level of risk because the earnings and valuation depend heavily on future provision expense, which is difficult to predict amid the pandemic. Additionally, a massive 15% of total loans are under payment modification programs. Moreover, 6.3% of total loans are to vulnerable industries, which pose credit risks. The price upside is not high enough to compensate for the elevated risk level; hence, I’m adopting a neutral rating on GBCI.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: This article is not financial advice. Investors are expected to consider their investment objectives and constraints before investing in the stock(s) mentioned in the article.