Stocks At A Discount In Mid-Atlantic Banks; Investors Who Can Hold On In Turbulent Markets Will Be Rewarded, Says Analyst And Vice President At FBR Capital Markets
January 11, 2012 - The Wall Street Transcript has just published Northeast and Mid-Atlantic Banks Report offering a timely review of the Banking sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Brett Scheiner is an Analyst and Vice President in the financial institutions research group covering community banks at FBR Capital Markets & Co. His coverage includes 27 publicly traded depositories tin the United States and Puerto Rico. Mr. Scheiner began his career covering banks and nonbank financials in equity research at Loomis, Sayles & Company, before serving as a financial sector Equity Strategist and Product Manager for Lehman Brothers. He received his MBA from Columbia Business School and graduated from Johns Hopkins University with a B.A. in economics.
TWST: Why does Eagle stand out above the rest in a bit more detail?
Mr. Scheiner: Eagle has grown loans and deposits 25%-plus in the last four quarters, and at that rate prior as well. They have more than enough capital. They just replaced the TARP that they had taken with small business lending fund money, which has a 1% per year cost, which is fantastically cheap money. And they have done all of this in markets with fantastic credit profiles and collateral valuation profiles. I'm sure they have had their share of headaches but nothing that would disrupt the patient, if you know what I am saying. So the bottom line there has been, as I mentioned, where they have had a problem here or there like any bank, they have been able to manage through it and the growth profile has been just unbelievable.
The $2 billion commercial bank mantra is: We outproduct the $500 million bank and we outservice the regional bank. And everyone says that. I think there are a few examples of people who actually do it, and no matter who you talk to in that the commercial real estate lending or commercial real estate investing business, the reputation that Eagle has is fantastic. Really, you don't even need to go make those anecdotal checks. You can just see it from their growth. Holding your margin and growing in this market shows people want to bank with you.
TWST: And Cardinal?
Mr. Scheiner: Cardinal at one point had one of the lowest Texas ratios in the United States. They had a tremendous amount of capital and absolutely no trouble. They're in northern Virginia. Eagle, the history of the company is in Maryland and metro D.C. and they are moving into northern Virginia. Cardinal is a northern Virginia-focused bank. They have not had as strong growth profile as Eagle, partly because of the markets that they're in - little submarkets that are slightly more skewed toward Eagle's favor - but they have had growth as well, just slightly slower growth.
Any growth in this market will pay, and the stock is not particularly expensive. It's had good returns, though not as good as Eagle of late. But again, they have a very strong credit profile and good markets, and they are certainly a bank that, longer term, would be of interest to a larger player.
TWST: When you drop down to Sandy Springs and Virginia Commerce, how have they performed over the past year or so?
Mr. Scheiner: Virginia Commerce had trouble as they went further out west of the Beltway. If you got far out of metro D.C., the ex-urban markets in D.C. performed about as poorly as the other deep suburbs did in any other major metro. So while metro D.C. held up very well, the surrounding environs didn't. That's especially true in speculative land. A lot of construction and land loans in northern Virginia, outside the Beltway, had some trouble, and Virginia Commerce was involved in that business line to a degree. They did a very nice job very quickly taking the pain there and cleaning that up soon afterward. They have stabilized the bank and they think they are going to repay the TARP that they had out of earnings, so it's going to take some time for them to so that. But in the mean time, they are certainly focused on expenses, keeping credit costs reasonable, and trying to grow pre-tax, pre-provision earnings to earn a pretty nice return. I think where the stock trades right now is more a sign of the credit speed bumps they have hit in the past, and the lack of growth, more than anything else.
We think it would be interesting for a buyer, for sure. The question is: What price does the management and board feel would be enough to sell? Sandy Spring is based in Maryland. The footprint is not metro D.C. focused, but a bit more Maryland focused, mostly between Baltimore and D.C. They also had some credit trouble in which the areas outside the Beltway didn't hold up as well as inside. And they also did a very quick cleanup and have had very impressive performance in the stock. I think the stock has doubled in the last few years. They have a very strong core deposit base; a very impressive core deposit base. And when someone has credit troubles, all investors care about it - all those credit troubles because credit sinks a bank, not how cheap you can fund it. But when credit subsided, I think investors saw the quality of the deposit base here and that's been why the stock has performed so well.
With all of these trading in a reasonably tight band, valuationwise, nothing stands out like Eagle does: They have excess capital, they are growing in fantastic markets. They don't have much of a northern Virginia presence, so as they grow there, that will help them continue their growth. And there are tremendous economies of scale there, as we get to $3 billion. When we started looking at this bank, it was just over $1 billion in assets. They have grown tremendously, and headcount, other than their mortgage business, has not grown that big even as the bank has more than doubled in size, so they continue to have a very impressive efficiency ratio. They are able to run a $3 billion bank with about 15 branches, and $200 million in assets and deposits per branch is a pretty impressive number anywhere in the United States, including New York. Those metrics really stand out. For us, it's all about buying $1 for $0.80, and I think in Eagle's case, you are buying a growth stock at a value stock multiple - you don't get to do that very often.
TWST: Where do we go from here? What's your kind of broadbrush outlook for 2012?
Mr. Scheiner: The reality is that seeing some loan growth in the banking space should help the perception of the group. The concern around Europe or China slowing, or potentially Brazil slowing, certainly keeps people thinking that maybe the U.S. could still double dip, and that would certainly be problematic for collateral values, and therefore for bank credit, and bank loan growth. I can understand why things were traded at discount here, but quite frankly, for great franchises at a discount, an investor who can hold on is certainly going to be rewarded. Eagle's up more than 50% in the last couple of years, and there was not much downside at the price a few years ago. Long and short of it, I think that all of these banks as a whole have upside. I think the ones who are growing book value either by growing their balance sheets and growing earnings or just by having very strong ROEs are going to be the best performers, and that's part of our thought process. I think when everything is cheap, you can almost own anything. But the nice thing about some of the stocks that I cover is there are some great stocks that are cheap, that I would own at higher prices, that you can own sort of as a baby-with-the-bathwater trade.
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