PDF ATTACHED: BANC 4Q16 EPS Review
Close $14.80 / “Market-Perform” / $14.00 Price Target / HQ=Irvine, CA / $737 Mil. Mkt. Cap
- Adjusting EPS estimates to $0.23 for 1Q-17 (unchanged), $1.11 for 2017 (from $1.07) and $1.26 for 2018 (from $1.24)
- We Estimate Slower Balance Sheet Growth, Operating Revenues as Expenses Remain Elevated in 2017
Following release of the company’s 4Q-16 results, we are maintaining our rating on BANC-Banc of California at “Market-Perform” and raising our Price Target to $14.00 (from $13.50), as well as adjusting our EPS estimates to $0.23 for 1Q-17 (unchanged), $1.11 for 2017 (from $1.07) and $1.26 for 2018 (from $1.24). Our Price Target is equivalent to 12.6x forward EPS ($1.11) and 103% of forward tangible book value. Our forward estimates exclude gains from historically non-core banking operations.
We estimate BANC reported Core EPS for 4Q-16 of $0.22, which missed our estimate of $0.26. Non-core items in the quarter included $19 Million in gains on the sale PCI residential mortgages, $2.6 Mil on the sale of an equipment finance business and $1.8 Mil in special dividends from the FHLB. The company also recognized $4.2 Mil in non-core legal and audit fees. Including all these items, BANC reported EPS of $0.54.
We believe BANC’s earnings in 2017 could include substantial non-recurring items. The interim management team indicated asset sales not related to the normal mortgage banking operations would remain a balance sheet management tool. Indeed, management guided EPS for 2017 to above Consensus estimates (i.e. more than $2.00). However, BANC expressly excluded our estimates from the Consensus number and our estimates are exclusively based on core operations. For 2016, we estimated non-core operations accounted for $1.19 per share, or 60% of stated earnings.
In our opinion, growth in core operating revenue could slow and expenses could remain elevated in 2017. We believe total asset growth could slow to mid-single digits with loan growth in the low double digits. The improving mix of earning assets should help margin, but the slower growth should limit expansion in spread income with fee income relatively flat. We estimate growth in operating revenues of 3% in 2017. Expenses could remain elevated. The run-rate of annualized non-interest expenses the last two quarters was $497 Mil. While we estimate operating costs in 2017 could decline to $464 Mil, we are modeling for on-going non-core legal expenses, potentially higher compensation to retain key employees and additional expenses to cover the regulatory burden of crossing $10 Billion in total assets. BANC estimates more than 50% of the expense build for the higher assets has been made.
We find it difficult to value BANC above our Price Target. In our opinion, the recently announced SEC investigation severely limits the potential takeout value of the company and makes it impractical to derive BANC’s value relative to peers. We value the company on its on-going core operations. We estimate BANC’s core operations in 2016 generated ROA of 0.35% and ROTCE of 5.43%. While we forecast improvements in 2017, it could be too soon to apply a bigger multiple to core earnings.