“Outperform” Rated / $25.00 Price Target / HQ = Los Angeles / $357 MIl. Mkt. Cap.
We are maintaining our rating on CUNB-CU Bancorp at “Outperform” and increasing our Price Target to $25.00. Our Price Target is equivalent to 17.7x forward EPS ($1.41) and 190% of forward tangible book value ($13.15). Our implied Price-to-Earnings ratio is a premium to the current valuation to reflect our expectations for above Consensus earnings in the near-term. In our opinion, a stronger valuation is warranted.
We are revising our EPS estimates to $0.32 for 2Q-15 (from $0.34), $1.28 for 2015 (from $1.39) and $1.59 for 2016 (from $1.60). We are also forecasting tangible book values of $12.00 for 2Q-15, $12.77 for 2015 and $14.41 for 2016. Our tangible book value estimates do not include initiation of a quarterly cash dividend although the company’s current and projected capital levels could support a modest dividend.
The most recent quarter reflected combined financials for CUNB and the 4Q-14 acquisition of 1st Enterprise Bank. In our opinion, the company reported strong fundamentals despite missing our estimate by $0.07 per share. We believe investors should be pleased with core non-interest expenses that were ~$1 Million less than we estimated at $14.7 Mil, or 2.53% of average assets, which was below the company’s trailing average. The earnings miss was mostly the result of an unexpectedly elevated provision expense used to cover a sizable charge-off. We do not believe comparable charge-offs are likely near-term as CUNB’s credit quality is exceptionally strong.
Our forward EPS estimates take into account that asset growth should exceed expense growth going forward. We also anticipate the company’s mix of earning assets to rely heavily on higher-yielding loans and for average cash balances to decline over time. The combination of more loans and less low-yielding cash should enable growth in spread income despite potential (and likely) compression in loan yields. Investors should also note that CUNB’s non-interest bearing deposit represent 53% of total deposits.
The company’s reluctance to institute a cash dividend near-term is likely the result of management’s ambitions for additional whole bank acquisitions. In our opinion, further deals are likely in the next two years.
Please see our report for more information.