FBR Starts National Commerce At Market Perform

FBR has started National Commerce Corp NCOM with a Market Perform rating and price target of $27 per share, saying that though the bank's asset quality has been good, equity returns have trailed peer averages. FBR says NCOM shares will rise after it grows tangible book value per share to $16.97 by the first quarter 2017 and generate a 10 percent return on average tangible common equity (ROATCE) in 2016. "Going forward, we believe NCOM shares are fairly valued given the absence of a visible upside earnings catalyst and our outlook for modest ROATCE improvement in 2016," analyst Christopher Nolan wrote in a note. The analyst said, according to data from SNL, NCOM's core return on tangible common equity (ROATCE) in 2015 was 7.79 percent versus a 10.46 percent average for peers due to under-loaned balance sheet and relatively higher operating costs. For the first quarter, loans were 93 percent of deposits, but "we do not think they will materially rise from these levels as management seeks to maintain balance sheet flexibility." For 2016, Nolan sees operating EPS of $1.51 (versus $1.02 in 2015), and slightly above the Street consensus of $1.47. The analyst also projects improving operating efficiencies in 2016 as he expects efficiency ratio to decline in 2016 to 60 percent from 69 percent in 2015. The analyst noted that the company is more likely to be an acquirer in the next 12 months given its acquisition history over the past two years and its share price valuation multiple premium relative to peers. Nolan continued that NCOM shares trades at 1.5x 1Q16 tangible book value of $15.42 and at 15.6x his 2016 EPS estimate. In comparison, the analyst estimates that peers trade at 1.4x tangible book and at 13.6x 2016 estimates. At the time of writing, shares of Birmingham, Alabama-based National Commerce rose 2.76 percent to $23.43.