Earnings of Impartial Financial institution 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 probably development downwards subsequent yr primarily as a result of mortgage banking income will transfer in the direction of normalization. Alternatively, decrease provision expense and low mortgage progress will supply some assist to the underside line. General, 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 worth is kind of near subsequent yr’s goal worth; therefore, I’m adopting a impartial score on the inventory.
Mortgage Banking Income Prone to Decline Subsequent Yr as Charges Stabilize
IBCP’s mortgage banking income surged within the third quarter because the sharp minimize in rates of interest earlier this yr 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 yr. Mortgage banking income made up 34% of whole income within the third quarter.
I’m anticipating the mortgage banking market to stay strong over the subsequent few months as a result of mortgage charges reached a brand new low within the week ended November 20, based on news reports. Low charges will probably act as a catalyst for refinance exercise and new mortgages for first-time homebuyers. Additional, homebuilder confidence is at a document excessive, based on news sources, which means that demand for mortgage originations will probably stay excessive within the coming months.
Nevertheless, I’m anticipating volumes to begin declining subsequent yr as a result of charges will quickly stabilize, thereby eliminating the profit for owners who’ve already refinanced since March 2020. The administration additionally talked about within the third quarter’s conference call 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 yr, main non-interest revenue to dip by 9% subsequent yr.
Forgiveness of Paycheck Safety Program Loans to Drag Mortgage Ebook
I’m anticipating mortgage progress 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 value 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 mortgage debtors had utilized for mortgage 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 yr, which is able to drag mortgage progress subsequent yr.
Furthermore, the administration talked about within the convention name that its prospects at present have lots 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 danger has considerably eased within the third quarter as forbearances declined to 2.3% of the full mortgage portfolio from 4.2% of the full mortgage portfolio on the finish of the second quarter, as talked about within the third quarter’s investor presentation. Nevertheless, some danger stays due to IBCP’s publicity to COVID-19 delicate industries, together with resorts, eating places, and retail. Altogether, the weak industries made up 9.8% of whole loans on the finish of the final quarter, as proven under.
IBCP will undertake the brand new accounting customary for credit score losses, referred to 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 mannequin was the identical for the primary 9 months of 2020. Subsequently, the adoption of CECL within the fourth quarter shouldn’t have a lot of an impression on provision expense. Nonetheless, the chance stage stays above regular due to the accounting change.
IBCP made huge reserve builds within the first half of the yr, which is able to probably cut 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 greater 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 probably drag earnings subsequent yr. Alternatively, low mortgage progress and a decline in provision expense will probably assist earnings. General, 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 gadgets.
Precise earnings could differ materially from estimates because of the uncertainties associated to the COVID-19 pandemic.
Goal Worth Already Near the Present Market Worth
IBCP is providing a dividend yield of 4.7%, assuming the corporate maintains its quarterly dividend on the present stage of $0.20 per share. There’s little risk of a dividend minimize 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 prone to reward buyers by share repurchases. The administration talked about within the convention name that it deliberate to begin repurchasing shares within the final two months of this yr.
I’m utilizing the historic price-to-tangible e book a number of (“P/TB”) to worth IBCP. The inventory has traded at a mean 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 worth of $16.7 per share offers a goal worth of $17.1 for the mid of subsequent yr. This worth goal implies solely a 0.9% upside from the November 20 closing worth. The next desk exhibits the sensitivity of the goal worth to the P/TB ratio.
The present market worth is near subsequent yr’s goal worth, which exhibits that IBCP is already pretty valued. In consequence, I’m adopting a impartial score on IBCP.
Disclosure: I/we’ve got no positions in any shares 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 (aside from from Searching for Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.
Extra disclosure: Disclaimer: This text shouldn’t be monetary recommendation. Buyers are anticipated to contemplate their funding goals and constraints earlier than investing within the inventory(s) talked about within the article.