PDF ATTACHED: CHFC 4Q16 EPS Review
Close $49.49 / “Market-Perform” / $56.00 Price Target / HQ=Midland, MI / $3.5 Bil. Mkt. Cap
- Lowering FY17 and FY18 EPS estimates each by $0.05 to $3.05 and $3.40, respectively.
- High-single digit net loan growth expected for FY17.
- No change to ‘Market-Perform’ rating at this time. Price target of $56 (vs. $57 before).
We are maintaining our ‘Market-Perform’ rating on CHFC shares and lowering our price target by $1 to $56/share. The reduced target is driven by our modestly lower EPS estimates for FY17 and FY18. Our $56 target assumes CHFC shares trade at ~16.5x our FY18 EPS estimate and ~250% of forward TBV (1-year out). These multiples compare to our current FIG Bank peer group medians of ~17x and 230%, respectively. Based on current pricing the shares have potential upside of ~13%.
Earnings Estimates: Taking into account the 4Q16 results we are lowering our FY17 and FY18 EPS estimates each by $0.05 to $3.05 and $3.40, respectively. For FY17 the adjustment is driven by somewhat lower NII (-$10 million vs. prior estimate) and higher operating expenses (+$6 million) and partially offset by higher fee income (+$6 million) and a lower effective tax rate (30% vs. 32%). Our revised FY17 estimate assumes: (1) net loan growth of ~9%; (2) a NIM in the 3.55-3.60% area over the next few quarters; (3) provision expense of $5 million/qtr.; and (4) quarterly operating expenses in the $95 million area over the next few quarters.
4Q16 Review: CHFC reported 4Q16 EPS of $0.66 vs. $0.21 in 3Q16 (core = $0.72). Core EPS were $0.70 and exclude: merger-related charges of $18.0 million; a $7.4 million gain on the sale of branches; and a +$6.4 million MSR adjustment. Core EPS of $0.70 compared to our $0.71 estimate and the consensus of $0.70.
Other 4Q16 highlights: (1) total loans increased 2.2% vs. 0.9% estimate. The growth was driven by commercial real estate (+7.1%) and consumer loans (+2.2%). Core/originated loans were up 10% vs. 3% estimate while run-off in the acquired portfolio was higher than modeled. The Company is targeting high-single digit net growth in FY17 and is in-line with our revised estimate of ~9% vs. +7-8% estimate before; (2) credit quality remained solid with NPAs (ex-performing TDRs) down 4% to $63 million. The NPA Ratio was 0.84% (on core loans) and the reserve was down 4 bps to 1.05% of core/originated loans. The provision is expected to be ~$5-6 million/qtr. in FY17; (3) the $52 million in cost saves remain on-track and the ER is expected to be in the low-50s later this year. Based on our modeling we have the ER low-50s in 2H17; and (4) M&A outlook: with the TLMR deal now complete we expect the combined Company to focus internally in the near-term and make sure all the various regulatory systems are built out.
4Q16 Actuals vs. FIG Estimates: NII was up 36% Q/Q with the full quarter of Talmer to $135.4 million vs. $139.5 million estimate (-.04/share). While the NIM was in-line at 3.55% the level of AEA was lower by ~$500 million; the provision for loan losses was $6.3 million vs. $4.0 million estimate and NCOs of $1.8 million (-.02/share). The higher provision was driven by the solid loan growth during the quarter; core fee income was somewhat better than modeled (+.01/share); and core operating expenses (ex-merger items) were lower at ~$96 million vs. $100 million estimate (+.04/share).