Financial Institutions

Transcription

1 September 22, 2016 Prices: 9/21/2016 Industry: Financial Institutions Jeff Rulis Financial Institutions Diving Into Uncertainty: Rolling Out 2018 EPS Estimates Tracking Past Sector Catalysts For What May Work Going Forward Industry Update We are introducing our 2018 full-year EPS estimates. With the most recent Fed meeting freshly behind us, we are forging ahead with a view into 2018 for our covered companies. Forecasting beyond next year is challenging/uncertain, but seeing as how 2017 expectations are probably already included in current valuations, we sought to peek ahead for potential indications from 2018 expectations (included in Exhibit 2). Generally speaking, a few of our broad 2018 assumptions include: a relatively flat NIM versus 2017, assuming no greater than a 100bp increase in the Fed Funds rate by year end 2018, increased provisioning costs driven by continued near double-digit loan growth, a worsening credit environment and an initial overall reserve build in anticipation of CECL implementation, better operating efficiency (revenue growth outstripping expense increase) on the whole along with ROE improvement (capital deployment in the form of M&A, increased dividends, and buybacks), reduced fee income as a percent of total revenue from higher rates and increased loan volume, as well as reduced mortgage-related income. Exhibit 1: 2017 Quarterly & 2018 Full-year EPS Estimates Ticker Price Q1'17 Q2'17 Q3'17 Q4' BANR* $ $ 0.73 $ 0.76 $ 0.79 $ 0.82 $ 3.10 $ 3.35 BMRC* $ $ 0.78 $ 0.81 $ 0.86 $ 0.90 $ 3.35 $ 3.60 BOH* $ $ 1.15 $ 1.03 $ 1.05 $ 1.07 $ 4.30 $ 4.55 CACB* $ 6.05 $ 0.09 $ 0.10 $ 0.10 $ 0.11 $ 0.40 $ 0.45 CBSH* $ $ 0.72 $ 0.72 $ 0.73 $ 0.73 $ 2.90 $ 3.15 COLB* $ $ 0.48 $ 0.49 $ 0.51 $ 0.52 $ 2.00 $ 2.15 EBMT* $ $ 0.31 $ 0.32 $ 0.33 $ 0.34 $ 1.30 $ 1.55 EFSC* $ $ 0.58 $ 0.57 $ 0.57 $ 0.63 $ 2.35 $ 2.50 FFNW* $ $ 0.18 $ 0.19 $ 0.21 $ 0.21 $ 0.79 $ 0.85 FIBK* $ $ 0.54 $ 0.55 $ 0.56 $ 0.55 $ 2.20 $ 2.30 GBCI* $ $ 0.42 $ 0.44 $ 0.44 $ 0.45 $ 1.75 $ 1.90 GSBC* $ $ 0.82 $ 0.84 $ 0.86 $ 0.88 $ 3.40 $ 3.70 HFWA* $ $ 0.31 $ 0.32 $ 0.33 $ 0.34 $ 1.30 $ 1.40 HMST* $ $ 0.47 $ 0.59 $ 0.64 $ 0.70 $ 2.40 $ 2.65 HTLF* $ $ 0.74 $ 0.78 $ 0.82 $ 0.86 $ 3.20 $ 3.50 MOFG* $ $ 0.61 $ 0.62 $ 0.65 $ 0.67 $ 2.55 $ 2.75 PCBK* $ $ 0.32 $ 0.33 $ 0.33 $ 0.35 $ 1.33 $ 1.45 PUB* $ $ 0.32 $ 0.32 $ 0.32 $ 0.33 $ 1.29 $ 1.40 QCRH* $ $ 0.62 $ 0.62 $ 0.61 $ 0.60 $ 2.45 $ 2.65 TCBK* $ $ 0.49 $ 0.50 $ 0.52 $ 0.54 $ 2.05 $ 2.20 UMPQ* $ $ 0.31 $ 0.32 $ 0.33 $ 0.34 $ 1.30 $ 1.40 WAFD* $ $ 0.45 $ 0.45 $ 0.47 $ 0.48 $ 1.85 $ 1.95 Source: CapIQ, D.A. Davidson estimates. *D.A. Davidson makes a market in this security. Please refer to pages 4-5 of this report for detailed disclosure and certification information. * D. A. Davidson & Co. makes a market in this security. Member SIPC

2 The catalysts that worked in the previous 12 months. As shown in Exhibit 2, we tracked bank performance over the last year among our coverage universe on eight metrics. The group average on each metric is represented, as well as the Top 5 within each metric. Tracking the Top 5's average stock performance, we draw the following conclusions on what investors were most/least concerned with from a metric basis: NIM growth was the #1 driver of outperformance, leading the Top 5 group to post nearly a 26% return versus the overall group's ~14% return. As anticipated Fed hikes came in below expectations during late 2015, the ability to expand margin was highly rewarded. Building franchise value always in vogue. Above average growth in TBV, deposits and ROE continues to separate the leading bank institutions, a theme we suspect will likely not change much over time. Outliers on efficiency & credit quality still provide upside. These metrics also produced upside relative to peers. Driving operating leverage in a low rate environment continues to be challenging with the average bank seeing an increasing ratio, while the Top 5 improved efficiency by a low double-digit pace. To a lesser degree, a reduction in problem loans was rewarded with above average stock performance, but not by a large margin. Loan growth & a higher fee income mix not enough to outpace the group average. We suspect loan growth is beginning to be questioned as we proceed later in this cycle. Perhaps concerns of credit quality issues developing from outsized loan growth kept the Top 5 group from posting any upside. As for fee income, we suspect the Top 5 benefited from a boon in mortgage-related income, a revenue source not expected to continue at current levels into perpetuity and, therefore, was lightly regarded. Exhibit 2: Past & Expected Future Top Performers in Select Categories Metric Q2'16 TTM Group Avg. Q2'16 TTM Top 5 Avg. Top 5 Return 2018E Group Avg. 2018E Top 5 Avg. NIM -0.8% 4.7% 25.8% 0.0% 1.5% Tangible Book Value 5.5% 9.5% 24.0% 8.1% 11.0% Deposit Growth 5.0% 14.5% 22.4% 7.1% 10.0% ROE 3.5% 56.0% 20.0% 1.8% 5.8% Efficiency Ratio 0.7% -11.5% 20.0% -2.6% -4.2% NPAs/Assets -7.5% -46.7% 14.5% 3.8% -14.1% Coverage Group Average Return 13.8% Loan Growth 8.2% 16.1% 13.7% 8.0% 11.6% Fee Income/Revenue 5.8% 29.3% 9.3% -4.2% -1.3% Source: Company filings, CapIQ, D.A. Davidson The catalysts we think will become more/less relevant by Banks that perform in the Top 5 of these metrics will almost always be well-received from our perspective; however, we suspect there may be some change in preference as investors consider 2018 results. Given that fee income will inevitably include less mortgage-related income, the outliers on growing fee income may increasingly benefit given a greater mix of core fee income into Credit quality may become a larger catalyst in coming years with indications of softening in many operating markets (we suspect the group NPA/ TA average will increase in 2018). NIM may become less important on a relative basis, particularly as investors face the potential for rate fatigue into 2017 and beyond. Highlighting our best-positioned banks considering 2018 expectations. Based on eight key performance drivers going into 2018, we present our single best idea to outperform in the following areas: NIM: We are projecting further margin expansion for EBMT as the bank continues to increase commercial loans as a percent of the overall portfolio mix, as well as benefit from additional improvement on the funding side. 2

3 TBV: HTLF is poised for the highest increase in TBV growth in our universe in The bank has digested several acquisitions over the last few years and optimally leveraging the acquired platforms should translate to above average TBV growth. Deposit Growth: Partially out of necessity given strong loan growth and partially due to an aggressive branching plan, we forecast HMST will be one of the top deposit gatherers in ROE: Among the Top 5 of expected ROE improvement in 2018 is PCBK. Following the completion of the bank s latest acquisition, along with past dividend increases (with the use of both regular quarterly hikes and special dividends), a lean but more than adequate capital base provides PCBK with an ROE advantage. Efficiency Ratio: Post the Sterling acquisition, UMPQ management has been clearly focused on improving efficiency in the current year. Should the bank steer clear of large bank acquisitions in coming quarters, we believe further efficiency improvement is possible. NPAs/Assets: As a product of both further credit quality clean up and elevated asset growth (increasing the denominator), FFNW should be among the best performing group on NPA/TA reduction. Loan Growth: BANR may be one of the best-positioned franchises to post strong loan growth next year and beyond. Management is currently focused on managing growth due to the approaching $10 billion asset threshold, but thereafter the company may be motivated to ramp growth to offset the costs associated with surpassing the mark. Fee Income Growth: Management s continued focus on swap fee income and USDA/SBA loan sale gains should push QCRH into the high growth group in regards to fee income. 3

4 Two Centerpointe Drive, Suite 400 Lake Oswego, Oregon (800) Copyright, All rights reserved. Required Disclosures expects to receive, or intends to seek, compensation for investment banking services from this company in the next three months. is a full service investment firm that provides both brokerage and investment banking services. Jeff Rulis, the research analyst principally responsible for the preparation of this report, will receive compensation that is based upon (among other factors) D.A. Davidson & Co. s investment banking revenue. s analysts, however, are not directly compensated for involvement in specific investment banking transactions. I, Jeff Rulis, attest that (i) all the views expressed in this research report accurately reflect my personal views about the common stock of the subject company, and (ii) no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Rating Information s Institutional Research Rating Scale Definitions (maintained since 7/9/02): BUY: Expected to produce a total return of over 15% on a risk adjusted basis over the next months NEUTRAL: Expected to produce a total return of >0-15% on a risk adjusted basis over the next months UNDERPERFORM: Expected to remain flat or lose value on a risk adjusted basis over the next months Rating Distribution (as of 6/30/16) * BUY (Buy) NEUTRAL (Hold) UNDERPERFORM (Sell) Coverage Universe Distribution IR IIG Combined 56 % 76 % 58 % 41 % 21 % 39 % 3 % 3 % 3 % Investment Banking Distribution IR IIG Combined 9 % 7 % 9 % 8 % 0 % 8 % 0 % 0 % 0 % IR denotes Institutional Research; IIG denotes Individual Investor Group Research whose rating scale is Buy/Add, Neutral, Sell/Reduce. Investment Banking Distribution denotes companies from whom has received compensation in the last 12 months. Target prices are our Institutional Research Department s evaluation of price potential over the next months and 5 years, based upon our assessment of future earnings and cash flow, comparable company valuations, growth prospects and other financial criteria. Certain risks may impede achievement of these price targets including, but not limited to, broader market and macroeconomic fluctuations and unforeseen changes in the subject company s fundamentals or business trends. For a copy of the most recent reports containing all required disclosure information for covered companies referenced in this report, please contact your representative or call Other Disclosures Information contained herein has been obtained by sources we consider reliable, but is not guaranteed and we are not soliciting any action based upon it. Any opinions expressed are based on our interpretation of data available to us at the time of the original publication of the report. These opinions are subject to change at any time without notice. Investors must bear in mind that inherent in investments are the risks of fluctuating prices and the uncertainties of dividends, rates of return and yield. Investors should also remember that past performance is not necessarily an indicator of future performance and makes no guarantee, express or implied, as to future performance. Investors should note this report was prepared by s Institutional Research Department for distribution to s institutional investor clients and assumes a certain level of investment sophistication on the part of the recipient. Readers, who are not institutional investors or other market professionals, should seek the advice of their individual investment advisor for an explanation of this report s contents, and should always seek such advisor s advice before making any investment decisions. Further information and elaboration will be furnished upon request. 4

5 Other Companies Mentioned in this Report Company Name Ticker Rating Price Banner Corp.* BANR BUY $43.84 Bank of Marin Bancorp.* BMRC NEUTRAL $49.75 Bank of Hawaii Corporation* BOH NEUTRAL $70.98 Cascade Bancorp* CACB NEUTRAL $6.17 Commerce Bancshares, Inc.* CBSH NEUTRAL $48.67 Columbia Banking System Inc.* COLB NEUTRAL $32.69 Eagle Bancorp.* EBMT BUY $14.58 Enterprise Financial Services Corp.* EFSC NEUTRAL $31.23 First Financial Northwest, Inc.* FFNW NEUTRAL $13.92 First Interstate BancSystem, Inc.* FIBK NEUTRAL $32.27 Glacier Bancorp* GBCI NEUTRAL $28.74 Great Southern Bancorp Inc.* GSBC NEUTRAL $41.66 Heritage Financial Corp.* HFWA BUY $17.94 HomeStreet, Inc.* HMST NEUTRAL $25.77 Heartland Financial USA Inc.* HTLF BUY $35.80 MidWestOne Financial Group, Inc.* MOFG NEUTRAL $30.32 Pacific Continental Corp.* PCBK BUY $16.47 People's Utah Bancorp* PUB NEUTRAL $20.57 QCR Holdings Inc.* QCRH BUY $31.31 TriCo Bancshares* TCBK NEUTRAL $26.58 Umpqua Holdings Corporation* UMPQ BUY $15.03 Washington Federal* WAFD NEUTRAL $