Earnings of Unbiased Bank Company (NASDAQ: IBCP) surged within the third quarter on the again of a drop in provision expense and an increase in mortgage banking income. Earnings will doubtless development downwards subsequent 12 months primarily as a result of mortgage banking income will transfer in direction of normalization. However, decrease provision expense and low loan development will supply some assist to the underside line. Total, I’m anticipating IBCP to report earnings of round $2.27 per share in 2021, down from the estimated earnings of $2.48 per share in 2020. IBCP’s present market price is sort of near subsequent 12 months’s goal price; therefore, I’m adopting a impartial ranking on the stock.
Mortgage Banking Income More likely to Decline Subsequent Yr as Charges Stabilize
IBCP’s mortgage banking income surged within the third quarter because the sharp reduce in rates of interest earlier this 12 months triggered refinancing exercise and new mortgage origination. IBCP reported mortgage banking income of $20.2 million within the third quarter of 2020, up from $5.7 million within the corresponding interval final 12 months. Mortgage banking income made up 34% of whole income within the third quarter.
I’m anticipating the mortgage banking market to stay sturdy over the subsequent few months as a result of mortgage charges reached a brand new low within the week ended November 20, in keeping with information reviews. Low charges will doubtless act as a catalyst for refinance exercise and new mortgages for first-time homebuyers. Additional, homebuilder confidence is at a file excessive, in keeping with information sources, which means that demand for mortgage originations will doubtless stay excessive within the coming months.
Nonetheless, I’m anticipating volumes to begin declining subsequent 12 months as a result of charges will quickly stabilize, thereby eliminating the profit for householders who’ve already refinanced since March 2020. The administration additionally talked about within the third quarter’s convention name that it expects originations in 2021 to be decrease than 2020 however above regular. Contemplating these components, I’m anticipating mortgage banking income to say no subsequent 12 months, main non-interest revenue to dip by 9% subsequent 12 months.
Forgiveness of Paycheck Safety Program Loans to Drag loan Guide
I’m anticipating loan development in 2021 to be a lot decrease than the historic common, partly due to the upcoming forgiveness of Paycheck Safety Program (“PPP”) loans. The corporate had $261 million worth of PPP loans excellent on the finish of the final quarter, as talked about within the convention name. The administration additional talked about that round 14% of PPP loan debtors had utilized for loan forgiveness approval by the point of the convention name (October 27, 2020). Primarily based on the proportion of purposes, I’m anticipating a majority of the PPP loans to get forgiven subsequent 12 months, which is able to drag loan development subsequent 12 months.
Furthermore, the administration talked about within the convention name that its clients at the moment have a number of liquidity amid the pandemic. Subsequently, their demand for credit score is low. Contemplating these components, I’m anticipating loans to extend by simply 1% year-over-year in 2021, as proven within the desk under.
Credit score Dangers Seem to Have Considerably Eased
IBCP’s credit score threat has considerably eased within the third quarter as forbearances declined to 2.3% of the entire loan portfolio from 4.2% of the entire loan portfolio on the finish of the second quarter, as talked about within the third quarter’s investor presentation. Nonetheless, some threat stays due to IBCP’s publicity to COVID-19 delicate industries, together with resorts, eating places, and retail. Altogether, the susceptible industries made up 9.8% of whole loans on the finish of the final quarter, as proven under.
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IBCP will undertake the brand new accounting customary for credit score losses, known as Present Anticipated Credit score Losses or CECL, within the fourth quarter. The administration talked about within the convention name that its estimate for provisions beneath CECL and the incurred loss model was the identical for the primary 9 months of 2020. Subsequently, the adoption of CECL within the fourth quarter mustn’t have a lot of an impression on provision expense. Nonetheless, the chance degree stays above regular due to the accounting change.
IBCP made huge reserve builds within the first half of the 12 months, which is able to doubtless scale back the necessity for additional sizable provisioning within the coming quarters. The availability expense within the first half of 2020 made up 42bps of whole loans, which is way larger than the typical provision expense of 5bps from 2017 to 2019. Contemplating these components, I’m anticipating the availability expense to say no by 46% year-over-year in 2021.
Anticipating Earnings of $2.27 per Share in 2021
The drop in mortgage banking income will doubtless drag earnings subsequent 12 months. However, low loan development and a decline in provision expense will doubtless assist earnings. Total, I’m anticipating IBCP to report earnings of $2.27 per share in 2021, down 8% from my anticipated earnings of $2.48 per share for 2020. The next desk exhibits my estimates for revenue assertion objects.
Precise earnings may differ materially from estimates because of the uncertainties associated to the COVID-19 pandemic.
Target price Already Near the Present Market price
IBCP is providing a dividend yield of 4.7%, assuming the corporate maintains its quarterly dividend on the present degree of $0.20 per share. There may be little risk of a dividend reduce as a result of the earnings and dividend estimates counsel a payout ratio of simply 35% for 2021. Aside from the dividend, IBCP can be more likely to reward traders by means of share repurchases. The administration talked about within the convention name that it deliberate to begin repurchasing shares within the final two months of this 12 months.
I’m utilizing the historic price-to-tangible e book a number of (“P/TB”) to value IBCP. The stock has traded at a median P/TB ratio of 1.02 within the first 9 months of 2020. Multiplying this P/TB a number of with the forecast tangible e book value of $16.7 per share offers a goal price of $17.1 for the mid of subsequent 12 months. This price goal implies solely a 0.9% upside from the November 20 closing price. The next desk exhibits the sensitivity of the goal price to the P/TB ratio.
The present market price is near subsequent 12 months’s goal price, which exhibits that IBCP is already pretty valued. In consequence, I’m adopting a impartial ranking on IBCP.
Disclosure: I/now we have no positions in any stocks talked about, and no plans to provoke any positions inside the subsequent 72 hours. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from In search of Alpha). I’ve no enterprise relationship with any firm whose stock is talked about on this article.
Extra disclosure: Disclaimer: This text just isn’t monetary recommendation. Buyers are anticipated to contemplate their funding aims and constraints earlier than investing within the stock(s) talked about within the article.