Banking, we're told, will get back to its good ol' days when interest rates begin to rise, and inflation peeks its head out again. But, this bank has been on a fast-track since the first quarter of 2009. It is Eagle Bancorp Inc (EGBN, Financial); it's a community, or regional bank if you prefer, in the Metropolitan Washington, D.C. area, with a market cap of under $1-billion: $866.2-million. The following chart shows that growth, in ETITDA (blue) and share price (green):
This stock came to our attention through the GuruFocus Undervalued Predictable screener.
History
- 1997: company formed in Bethesda, Maryland
- 1998: opens first branch and becomes a bank holding company
- 1998: begins trading on NASDAQ
- 1999: opens its first branch in Washington, D.C., its fifth branch overall to date
- 2008: merges with Fidelity & Trust Bank, which provides a first branch in Northern Virgina
- 2014: announces merger with Virginia Heritage Bank (6 branches and $917.4 million in assets) with Eagle as the surviving institution; announces offering of $55-million in subordinated notes to fund the cash portion of the deal.
Based on information from the EGBN website
Business Model
Eagle Bancorp is a bank holding company based in Bethesda, Maryland, and its primary holding is EagleBank.
EagleBank describes itself 2013 10-K as, "...a local community business bank with eighteen offices in Maryland, Northern Virginia and Washington, DC. The bank focuses on providing superior customer service and custom financial solutions for the local business community. EagleBank also offers a complete line of competitive personal banking products and services."
Most of its income in 2013 came from loans ($257-million) , and a minority came from other income sources ($25-million). As the following excerpt from its 10-K for 2013 shows, EagleBank derives most of that loan income from commercial, construction, and commercial real estate:
As with most other banks, income derives from the spread between what Eagle pays for funds (deposits and Small Business Lending Fund) and what it charges for interest on loans.
Growth Strategy
EagleBank's strategy is to use its local/regional status to appeal to local and regional customers and prospects, "Go to a national or regional bank and they’ll point to their array of products and say pick the one you want, but only if it is on the shelf. We meet with you with a blank piece of paper and ask, "How can we help?" "
And, "Our differentiator: This is our hometown. Our decision makers are right here; headquarters is not in some far-away city. Metropolitan Washington is our only market. And we know it inside and out." (Quotations above from 2013 Letter to Shareholders)
Within that context, Eagle declares its key objective is profitability, "...our goal is to consistently increase the profitability of the Company, not just grow the balance sheet." In its 10-K report for 2009, it noted, " The Company did not make subprime residential mortgage loans to retail customers, and did not invest in private label mortgage backed securities, securities backed by subprime or Alt A mortgages, or the preferred stock of Freddie Mac and Fannie Mae, factors which have negatively impacted many banking companies."
Given that the company does not normally pay a dividend or buy back shares, it can use its earnings for growth.
Management
Chief Executive Officer and Chairman: Ronald Paul, age 56, has served as CEO since the company was organized, and as Chair since 2008. According to his bio at the company website, he also has, "entrepreneurial, management and real estate expertise developed through his operation of a significant real estate and property management company in the Washington metropolitan area. Mr. Paul also has significant experience in corporate governance issues from his Board service with other public companies and major non-profit organizations."
Vice Chairman: Robert P. Pincus, age 65. His bio says, "Mr. Pincus brings to the Board a wealth of experience in the worlds of commercial and investment banking. He has previously served as CEO of two different community banks and as a senior executive for major regional banks."
Chief Operating Officer/Senior Executive Vice President: Susan G. Riel, age 62. Her bio says, "Ms. Riel has over 32 years of experience in the commercial banking industry. Ms. Riel has been with the Company since its inception in 1997." (quotes and information about management from the company website)
Board of Directors: 14 directors/officers (including insiders Mr. Paul and Mr. Pincus) with experience or expertise in investment research, auto and supermarket management, insurance and risk management, law, catering, real estate, construction, land development, title services, and, technology consulting and integration (information about directors from the company website).
ISS Governance QuickScore: 10/10, a poor governance score ("A decile score of 1 indicates lower governance risk, while a 10 indicates higher governance risk."). Eagle Bancorp receives red flags for composition of committees, board practices, related party transactions, voting issues, voting formalities, pay for performance, and controversies. It does not earn any green stars.
American Banker magazine, November 29, 2012, named Ronald Paul one of three Community Bankers of the Year.
Ownership
Gurus: Just one of the gurus followed by GuruFocus holds a position in Eagle Bancorp. Jim Simons (Trades, Portfolio) has been building a position with buys every quarter since the second quarter of 2012, and owned 98,680 shares at the end of the first quarter of 2014.
Institutional Investors: Own 52% of the float, and have generally stayed between 50% and 60% since 2010. According to Yahoo! Finance, 113 institutions held positions, and the largest of them was Forest Hill Capital LLC with just over a million shares. Goldman Sachs was the third largest holder, with three quarters of a million shares.
Insiders: 10% of the float. Yahoo! Finance says CEO Ronald Paul owns 1,274,045 shares (approximately 5% of the outstanding shares), as of February 12, 2014. Susan G. Riel owned 112,323 shares as of the same date.
Short interests: 4%, which is about the average since 2010, as shown in the following chart:
EGBN by the Numbers
June 14, 2013: distribution of a 10% stock dividend; in announcing the dividend Chairman Paul said the one-time dividend, "...was effected in an effort to increase liquidity and shareholder value, and to maintain the relative affordability of an investment in the common stock for individual investors, who are also our customers, and whose support and patronage have been invaluable to the Company's success as a community bank." The distribution diluted shares outstanding by about 2.3 million.
Financial Strength
GuruFocus ranks EGBN at 6/10 for financial strength and 9/10 for Profitability & Growth.
GuruFocus also generates two severe warning signs, for its Altman-Z score and for asset growth outstripping revenue growth; both of these can be metrics may be ignored for financial companies.
EGBN also generates a four-star predictability rating; backtesting by GuruFocus has shown the price of companies with this rating have grown 9.8% per year on average. On the other side of the coin, backtesting shows only 8% of stocks with this rating have been in a loss position after 10 years.
Valuation
According to the GuruFocus Fair Value/DCF Calculator, EGBN's value comes in about a dollar and a half below its current price:
The Peter Lynch Fair Value calculator values the company at $45. According to GuruFocus, "Peter Lynch Fair Value of Eagle Bancorp Inc is ranked higher than 93% of the 1833 Companies in the Banks - Regional - US industry."
Please note that the Fair Value calculation differs from the Peter Lynch Valuation Chart.
Fair Value (for companies growing between 10% and 20% per year) is calculated by multiplying PEG by the 5-Year EBITDA Growth Rate and by Earnings per Share.
On the other hand, the Valuation Chart simply compares the current price with a theoretical P/E of 15 over the same period as the price history.
The Graham Number comes in at $25.53.
The six analysts followed by Yahoo! Finance put their collective low target price at $36, their median target at $38.00, and their high price at $41.00
Outlook & Risks
Many observers suggest that the banking industry in general will perform better once interest rates begin to rise, giving banks more opportunities to increase their spreads. Yet, looking again at a chart of EGBN's EBITDA and share price suggests that the future has already arrived for this bank:
That growth has been achieved by using internally generated funds to expand, rather than pay dividends or buy back shares. So, this stock will appeal more to growth investors than to income investors.
As a community/regional banker, it lacks a diversified geographical base, so its fortunes will rise and fall with economic conditions in the Washington D.C. area.
Its ISS Governance score also prompts some concern; its rating is poor, and these governance issues might affect the long-term strength of the company.
Despite all this, the company does appear to be well managed, with a seasoned management team, a diverse board with good connections to the business community, and a focused mandate for growth.
And, its most recent earnings reports, for the first and second quarters of 2014, the company twice again announced record earnings.
Conclusions
Investors looking for a growth company in the financial sector should take a closer look at Eagle Bancorp, Inc. While it does not pay out a dividend and has not bought back its own shares, it has had excellent price appreciation -from about $5 to about $35 - over the past five years.
