Eagle Bancorp (EGBN) is a small bank narrowly focused on Washington, D.C. and its suburbs, one of the most stable, growing markets in the U.S. Eagle is a traditional community bank operating 20 branches, notes Doug Gerlach, small cap expert and editor of Investor Advisory Service.
Its total assets are $8.5 billion, which places Eagle outside of the top 100 banks in the country. We attribute much of its success to the combined impact of three favorable factors: its modest size, the economic resilience of its D.C. market, and the retention of all profits for reinvestment.
Its return on equity is already a couple percentage points higher than other well-run banks, and it should be able to attain solid growth simply by reinvesting profits. One recent change from its historical pattern is the initiation of a dividend equal to about 20% of profits.
Meanwhile, its founding CEO, Ron Paul, retired on March 21 due to “serious health developments.” Eagle’s Chief Operating Officer, Susan Riel, took over as interim CEO before being named permanent CEO in May. Ms. Riel has been a senior executive at Eagle since its founding.
Eagle tends to sell a high proportion of its residential mortgage originations. This fits well into its general philosophy of matching its assets (loans and investments) with liabilities (deposits).
About 75% of Eagle’s loan portfolio consists of commercial real estate. This is a very high proportion. It is of particular comfort that this property is largely, but not exclusively, located in the stable Washington, D.C. area. Eagle does a good job keeping expenses low.
The pending merger of two large banks will leave Eagle as the eighth largest bank in the region despite capturing just 3% of deposits in the metro D.C. market. This suggests plenty of remaining growth potential.
Eagle’s results for the first quarter of 2019 weren’t as clean as in the past. Higher loan losses and costs related to the CEO transition brought an end to Eagle’s long string of quarterly profit growth. Excluding nonrecurring CEO transition costs, EPS would have risen 7% on 8% revenue growth.
Growth in its D.C. footprint and Eagle’s strong return on equity should allow the company to improve on its first quarter results. We lowered our previous expectation of 13% growth to 10% based primarily on the initiation of a dividend which will reduce growth from reinvestment of retained earnings.
Five years of 10% growth could lead to EPS as high as $7.23. A repeat of the average high P/E ratio of 16.5 could produce a share price of $119. The potential annual return over the next 5 years is 17%.
