A Small-Cap Bank Growth Play From Sterne Agee

NEW YORK ( TheStreet) -- First NBC Bank Holding Company ( NBCB) of New Orleans has put up some very strong growth numbers over the past two years, and the party is expected to continue, according to Sterne Agee analyst Peyton Green.

First NBC Bank was chartered in 2006, and the holding company completed its initial public offering on May 10, when the shares were listed on NASDAQ, with an offering price of $24.00. The shares closed at $25.93 Tuesday, rising 8% since the IPO.

Green initiated his firm's coverage of First NBC on Wednesday with a "buy" rating and a $31 price target, writing in a note to clients that "although M&A could benefit growth in 2013E-2014E, our projections only reflect organic balance sheet growth of 16%-17% Y/Y, and no acceleration in NBCB's growth rate."

Green estimates First NBC will earn $2.05 a share this year, with EPS growing to $2.50 in 2014.

First NBC's shares trade for 12.4 times Green's 2014 EPS estimate, which according to the analyst represents "a 1.5x multiple discount to peers."

Underlining the First NBC's discount to peers, many of which have considerably lower growth rates, Green wrote that "NBCB trades for 13x our 2013E and 10x our 2014E EPS, which represents a discount to 17x and 14x, respectively, for peers. We would note that NBCB's pro forma price to tangible book value per share of 1.4x is below the peer multiple of 1.8x."

"We believe the valuation discount is reasonable," Green wrote, because of "NBCB's tax rate (-35% in 2012 and heading much higher in 2013E)," as well as its "relatively young" status, its business concentration in the New Orleans Area, and "higher-cost funding."

The company had $2.8 billion in total assets as of March 31, and has completed four in-market acquisitions, although most of its loan growth has been generated organically. Most of the numbers below are as of Dec. 31, because the company has not made a separate filing for its first quarter results.

First NBC earned $29.5 million in 2012, for a return on average assets (ROA) of 1.19%, increasing from 1.17% in 2011 and 0.79% in 2010, which the company in its offering prospectus said "was due primarily to the increased net interest income resulting from loan growth, as well as a reduced share of expenses attributable to fixed costs."

First NBC had $1.9 billion in total loans as of Dec. 31, including $945 million in commercial real estate (CRE) loans and $684 million in commercial and industrial (C&I) loans not secured by real estate. The CRE portfolio grew by 17% during 2012, while C&I loans were up 26%.

The "higher cost funding" referred to by Green included $514 million in CDs with balances of $100,000 or more, as of Dec. 31. Coveted noninterest-bearing transaction account deposits totaled $229 million at the end of 2012, increasing 72% from a year earlier. For many community based commercial lenders, growth in noninterest-bearing checking accounts goes hand in hand with loan growth, as the banks seek to build a "full relationship" with customers.

First NBC's net interest margin (NIM) during 2012 was 3.36%, declining from 3.44% in 2011, pretty much in line with the banking industry in the prolonged low-rate environment. The company reported $74.8 million in net interest income for 2012, increasing from $52.7 million a year earlier.

Green projects a "relatively stable" NIM in 2014, with First NBC's net interest income growing 13% this year to $84 million and another 17% in 2014 to $99 million.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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