Glacier Bancorp, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Glacier Bancorp, Inc. is a regional bank holding company, operating through a network of community banks across the Western United States, offering a range of commercial and retail banking products and services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Glacier Bancorp operates as a bank holding company with multiple community bank divisions across several states in the Western United States, including Montana, Idaho, Washington, Wyoming, Colorado, Utah, Arizona, and Nevada. Their core business revolves around attracting deposits and then lending that money out as loans. They focus on relationship banking, emphasizing a community-oriented approach.

Revenue Distribution: GBCI generates revenue primarily through net interest income, the difference between interest earned on loans and interest paid on deposits. Additionally, the bank also earns revenue through non-interest income activities such as deposit account fees, services charges, commissions, and gain/losses on the sale of securities and other assets. The geographic mix of their loan portfolio is quite diverse, with the largest exposure in Montana followed by Idaho.
Industry Trends: The banking industry is highly influenced by macroeconomic factors like interest rates, inflation, and economic growth. The Federal Reserve’s interest rate decisions play a significant role in banks’ profitability. Also, the industry has become increasingly competitive with the rise of fintech companies and digital banking solutions. There is also increasing scrutiny around regulations and compliance. Mergers and acquisitions among banks are happening to create economies of scale. GBCI is also facing increased competition from credit unions.
Margins: GBCI’s net interest margin (NIM) is quite sensitive to interest rate changes. When interest rates are high the difference between lending rates and deposit rates increases, increasing NIM, and vice versa. Management has done a great job in managing operating costs to keep expense margins low. This allows the bank to be more resilient to changes in the business environment. Also, the efficiency ratio and ROA are decent for its size and its region of operation. The provision for credit losses is pretty variable and follows the credit environment, while affecting overall profitability.
Competitive Landscape: GBCI operates in a fragmented and competitive banking industry. They compete with national banks, regional banks, credit unions, and fintech companies. Given the nature of the industry, GBCI has to deal with both price and service competition, all while making sure they adhere to government regulations.

What Makes GBCI Different?: The core of the GBCI business model is decentralized banking. They give autonomy to local banks to make their own lending and other operational decisions, making it more of a local player in the states that it operates in. As such, the relationship lending model enables them to serve a niche audience that a larger bank might not be able to. GBCI’s ability to consistently grow their deposit base by forming deep bonds with customers across several local communities has helped them be very profitable and resilient.

Moat Assessment: 2/5

Switching Costs (Limited): GBCI benefits from some switching costs through its well established relationships with customers. However, banks are largely seen as a commodity, and customers could move to competitors due to a better interest rate offered on deposits. Also, some customers prefer to bank in bigger national banks. GBCI doesn’t really enjoy high switching costs, as it could be easily replaced by another bank.
Network Effects (Absent): GBCI does not benefit from network effects, as it is not a business that gets more valuable as more customers use its service.
Intangible Assets (Weak): Although the different regional branches have developed a strong brand name in their respective locations, the brand name is still of little benefit outside of the operating states. Most of the customers tend to focus on price and offerings of the bank as their main criteria for choosing a bank over others, so branding has limited value.
Cost Advantages (Narrow): GBCI enjoys some cost advantages through economies of scale. They have a robust set up for back office processing, including IT and compliance, which can be leveraged for all the different regional banks. But they don’t really have a significant structural cost advantage over their competitors, given that the scale advantages are often offset by higher costs associated with managing a distributed network.

GBCI has what I’d call a “regional moat.” Their branches have long standing ties to the local communities that they operate in and they are good at serving their financial needs. But this is not that hard for other regional or local banks to replicate, as the moat they enjoy is mostly based on their execution, rather than any structural competitive advantage. Hence, a narrow moat rating of 2/5.

Risks to the Moat and Business Resilience:

Interest Rate Sensitivity: GBCI’s profitability is significantly impacted by changes in interest rates. Rapid interest rate hikes can reduce their profitability since they need to adjust deposit rates to retain them. They could be hit by both decreasing net interest income and potentially higher defaults on the debt that the company has. The last several earnings calls have been filled with discussions and answers to questions about interest rate sensitivity of the bank.
Economic Downturns: Given that GBCI has its core operations in a region that has low economic activity or is largely dependent on some particular industry, a recession in any one region will be especially hard hit.
Increased Competition: Increased competition from fintech companies and larger banks might erode the company’s competitive advantages by taking away market share. They are now more likely than ever to face a highly competitive market as their branch network is starting to consolidate and the cost structure is now seen by all the competitors.
Regulatory Changes: Changes in banking regulations, such as capital requirements, can negatively affect GBCI’s profitability.
M&A Risk: GBCI has been actively engaged in the M&A market. Any ill advised merger can damage value and make the bank susceptible to future risks.

GBCI does have decent resilience. Their customer base is mostly comprised of retail and small commercial customers. These are generally less volatile as compared to a big tech or big energy customer. Also, their geographic diversity has protected them in prior downturns. Even though their loan portfolio is quite exposed to the real estate sector, it is highly diverse geographically and as such is better positioned to weather economic downturns. Management has also indicated they are focusing on improving long term ROIC, which should further shore up resilience.

Financials (In-Depth):

Profitability: GBCI is consistently profitable, though they are heavily dependent on interest rate spreads. Their return on equity and return on assets can fall if the interest rate environment is not conducive. The company does post profits, but their margins are not the best. The company is actively working to improve its margins.
Balance Sheet: The balance sheet is quite strong. They have good equity levels and can withstand any sort of temporary downturn. They are conservative in their asset allocations. However, they do have a large amount of loans concentrated in real estate, which has become more risky in the recent environment. There is a lot of goodwill on their balance sheet, primarily due to acquisitions. As such, they have a decent balance sheet health and it will be interesting to see how the balance sheet reacts to future interest rate hikes.
Cash Flow: The company does have stable cash flows that support a well structured long-term business model. Given the nature of their business, they can consistently generate cash which they can then reinvest in the business or distribute to shareholders. The company is expected to continue to be cash flow generative in the near future.
Debt: GBCI has some level of debt, however, it is not substantial enough to cause problems for them. They have had a history of managing debt very well. The debt levels are within their comfort levels.

Recent Concerns/Controversies: GBCI has been acquiring banks rapidly and has faced some concerns about their pace of acquisitions, due to which the shares fell significantly in 2022. But they are working through these to ensure future growth is sustained. It has also faced increasing competition from other banks, especially around interest rates.

Also, they recently had a major dip in stock prices because the earnings announcement was not as good as expected. It was mainly due to weakness in the commercial real estate sector, which negatively impacted their loan portfolio. Also, there have been some concerns around the rate of deposit costs which have been higher than expected by the management and may affect profitability.

Management’s View: The management acknowledges the issues and they are actively working to resolve them. They have said that the credit quality of their loan portfolio is still strong and they are in the middle of reducing their exposure in the areas of risk. They intend to focus on disciplined growth by focusing on areas where they have expertise. They seem optimistic about their long-term performance given that they believe they have a superior business model, and expect better returns in the future. They are also actively focusing on improving their operational efficiencies.

Understandability: 2 / 5 Given the fact that GBCI is operating a relatively complicated business, understanding it is hard for someone who is new to the industry. This is not a business where it is immediately apparent what levers drive profitability. Understanding the underlying dynamics of the banking sector, the regulatory aspects, and how the business works in detail requires financial acumen. However, there are a few things which make the business easier to understand, including the fact that GBCI has diversified operations and is a very established and stable entity. Hence a rating of 2/5.

Balance Sheet Health: 4 / 5 GBCI has a relatively healthy balance sheet. They have had a strong growth in deposits over the years and they also generate stable cash flows that can support any future expansion. Their debt levels are low, and their coverage ratios are within their industry. The main concern is the large amount of intangibles which has been steadily growing. However, the company management has said that they have performed analysis on the tangible asset base and the company can withstand any sort of correction, so for now, their balance sheet has been given a 4/5 score.