PCBK: Lowering to “Market-Perform” and Lowering Price Target to $25.50

PDF ATTACHEDPCBK 4Q16 EPS Review and Rating Change

Close $25.35 / “Market-Perform” / $25.50 Price Target / HQ=Eugene, OR / $574 Mil. Mkt. Cap

  • Reiterating Our EPS Estimates of $0.30 for 1Q-17 and $1.27 for 2017
  • Revised Rating, Price Target Accounts for Lower Stock Price of Acquiring Institution

 Following release of the company’s 4Q-16 results, we are lowering our rating on PCBK-Pacific Continental Corp to “Market-Perform” and our Price Target to $25.50 (from $28.50), as well as reiterating our EPS estimates of $0.30 for 1Q-17 and $1.27 for 2017.  Our Price Target is equivalent to 20.1x forward EPS ($1.27) and 259% of forward tangible book value ($9.83).

PCBK agreed to sell earlier this month to COLB-Columbia Banking System (No Rated) for 100% stock.  The transaction is expected to close in mid-2017.  Our revised Price Target accounts for COLB’s lower stock price since the merger was announced.

Overview:  PCBK reported 4Q-16 EPS of $0.30, topping our estimate of $0.21 and Consensus, ex-FIG Partners, of $0.26.  We had estimated Core EPS of $0.28 that included merger related expenses.  We estimate the company’s Core EPS were $0.33.  The earnings beat resulted from stronger than expected spread income as period-end earning assets exceeded our estimates.  We estimated Core Pre-Tax, Pre-Provision EPS of $0.55 and Core Pre-Pre ROA of 1.99%, compared to $0.51 and 1.94% the previous quarter.  Tangible book value declined 1.2% sequentially on lower AOCI to $8.99 and TCE-Tangible Common Equity ended the quarter at 8.23% of tangible assets.

Spread Income:  NII-Net Interest Income increased 20% sequentially to $25 Million and NIM-Net Interest Margin expanded 16bps to 4.38%.  We had forecasted NII of $22.3 Mil and NIM of 4.28%.  Average earning assets increased 16% sequentially to $2.4 Bil.  Average loans ended the period at $1.8 Bil, or 77.7% of average earning assets, up from 77.5% the previous quarter.  Average loan yields expanded 22bps to 5.41% and average earning asset yields expanded 14bps to 4.71%.

Loans: Gross loans increased 2.8% sequentially, or $51 Mil, or $1.9 Bil with growth centered in Owner-Occupied and Investor CRE-Commercial Real Estate, up $35.67 Mil and $20.8 Mil, respectively.  Multi-Family loans declined $4.8 Mil and Commercial Land credits declined $4 Mil in the quarter.

Deposits:  Total deposits declined 1% sequentially to $2.1 Bil.  Non-interest bearing deposits declined 5% sequentially to $859 Mil, or 40% of total deposits.  Non-CD deposits declined 1% to $1.97 Bil, or 92% of total deposits.  The company’s cost of interest bearing deposits and cost of interest bearing liabilities were unchanged at 0.37% and 0.60%, respectively.

Credit Quality:  PCBK booked a provision of $1.9 Mil, compared to $1.4 Mil the previous quarter.  NPA-Non-Performing Assets, excluding restructured credits, which were not provided, declined 6% sequentially to $21.5 Mil, or 1.15% of Loans+OREO.  Net recoveries in the quarter were $48,000.  Reserves ended the quarter at $22.5 Mil, or 1.21% of loans and 104% of adjusted NPAs.

Non-Interest Items:  Core non-interest income increased 11% sequentially to $2 Mil, or 0.31% of average assets, down from the trailing four quarter average of 0.34%.  The company booked non-core gains of $327,000 on the sale of in the money debt swaps.  Core non-interest expenses increased 9% sequentially to $13.2 Mil, or 2.09% of average assets, down from the trailing average of 2.40%.  Non core expenses included $1.2 Mil in merger-related costs and $250,000 in legal expenses associated with the pending merger with COLB.  The company’s core efficiency ratio was 53.0%, unchanged from the previous quarter.