ISBC: Raising Estimates and Target Price; Still Focused on Growth Despite BSA/AML Headwinds

PDF ATTACHEDISBC 4Q-2016 Review

Close $14.35 / “Market-Perform”/ $15.50 Price Target / HQ= Short Hills, NJ/ $4.44 Bil. Mkt. Cap

  • Reiterating “Market-Perform” Rating But Adjust Target Price to $15.50 from $12.50
  • Revising 2017 EPS Estimate to $0.68 and Establish 2018 EPS Estimate of $0.76
  • Despite Rate Increase in Markets Loan Pipeline Consistent with 3Q16 at $2.5 Billion

Our revised Target Price partially derives from a Multi-Scenario matrix that we feel is very appropriate in valuing Investors given the many different paths management could take the company along (with recognition of the limitations the BSA/AML Order places on the company).  We do adjust our Target Price to $15.50 from $12.50 to reflect relative consistent forward valuation at 1.49x projected Tangible Book Value and maintain our “Market-Perform” rating on the shares.   All else equal, we would likely readdress our rating on share weakness.

Takeaways from the Quarter/Call:

■ The company continues to operate within the boundaries of an Informal Agreement in regards to certain BSA/AML deficiencies (see our note dated August 14, 2016 for more detail) with its primary regulators (FDIC and NJ Department of Banking).  This ultimately led to the termination of the Bank of Princeton deal and, in our view, likely sidelines the bank from further acquisitions for at least the first half of the year (probably longer).

■ Loan growth was much more diversified this quarter as Other Commercial segments drove $270 Mil. of the growth compared to $99 Mil. in Multifamily as the company continues to monitor its exposure to the latter segment given regulatory concerns. The Loan Pipeline remained robust at $2.5 Billion—consistent with last quarter and has about $600 Mil. related to C&I with a large CRE component as the market conditions have improved and led to the company raising its rates on CRE within the past few weeks.  The concentration ratio for CRE was 375% at quarter-end.

■ Early stage delinquencies increased with the 60– 89 day bucket increasing primarily due to one CRE relationship of five loans totaling $31 Million.  Management notes the borrower has been uncooperative in the past but the loans are backed by solid national credit tenants and estimate a LTV less than 70%.

■ Core Deposit growth continued and now stand at 81% of Total Deposits (excludes all CDs) and remains a focal point of the company this year.  Average Cost of Deposits declined two bps to 0.63% from last quarter as certain high cost CDs from a 2015 promotion ran-off.  Non-Interest Bearing Deposits represented 15% of Deposits at year-end.