Eagle Bancorp, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Eagle Bancorp is a Maryland-based bank holding company operating EagleBank, primarily in the Washington, D.C. metropolitan area. Unless noted otherwise, amounts are in U.S. dollars.
Financial results and key metrics
- Earnings: Net income was $24.2 million, down 47.0% from $45.7 million in Q1 2022. Diluted EPS was $0.78 versus $1.42.
- Revenue and margin: Total revenue (net interest income plus noninterest income) was $78.7 million, down from $87.9 million. Net interest income declined to $75.0 million from $80.5 million, while net interest margin increased to 2.77% from 2.65%. Noninterest income fell 50.4% to $3.7 million.
- Credit costs: Provision for credit losses was $6.2 million, compared with a $2.8 million reversal in Q1 2022. The loan allowance was $78.4 million, or 1.01% of loans, versus $74.4 million, or 0.97%, at year-end. Net charge-offs were $1.0 million.
- Expenses and returns: Noninterest expense rose 30.9% to $40.6 million; the efficiency ratio worsened to 51.55% from 35.28%. Annualized return on average assets was 0.86% versus 1.46%; return on average tangible common equity was 8.65% versus 14.99%.
- Cash flow: Operating cash flow was $60.8 million; investing cash use was $59.4 million and financing cash use was $140.5 million. Cash and cash equivalents decreased $139.1 million to $172.8 million.
- Balance sheet: Total assets were $11.09 billion, down from $11.15 billion at December 31, 2022. Loans were $7.74 billion, up 1.3% from year-end; net loans were $7.66 billion.
- Funding and liquidity: Deposits fell 14.3% to $7.46 billion from $8.71 billion, while borrowings excluding customer repurchase agreements rose to about $2.18 billion from $1.04 billion. This included $800 million borrowed through the Federal Reserve Bank Term Funding Program (BTFP). The company reported $4.28 billion in available secondary liquidity sources at quarter-end and said deposits had stabilized by April 30.
- Capital: Company CET1 and total risk-based capital ratios were 13.75% and 14.74%, respectively; the tier 1 leverage ratio was 11.42%. Book value per share was $39.92 and tangible common equity ratio was 10.36%.
Material changes versus the comparable period
- Net income declined $21.5 million. Management attributed the change to lower net interest income, higher credit provisions, reduced noninterest income and higher noninterest expense, partly offset by lower income tax expense.
- Rapidly higher deposit and borrowing costs weighed on net interest income: average deposit cost increased to 3.63% from 0.37%, and average short-term borrowing cost to 4.77% from 0.67%. Higher loan yields partly offset these increases.
- Residential mortgage activity weakened: locked commitments were $32.8 million versus $136.7 million in Q1 2022. Gain on loan sales fell to $0.3 million from $1.5 million.
- Noninterest expense increased, including salaries and benefits and legal and professional fees. Management noted Q1 2022 included a one-time $5.0 million reduction in compensation accruals; Q1 2023 legal expense also reflected a $959,000 reversal of a legal-fee receivable after insurance coverage for 2016–2017 was exhausted.
- Unrealized securities losses improved from year-end: AFS securities had $181.2 million of gross unrealized losses at March 31, versus $205.3 million at December 31. HTM securities’ fair value was $111.5 million below carrying value.
Outlook, risks and unusual items
- The filing provides no earnings guidance and cautions that forward-looking statements are subject to risks and are not earnings guidance. Management’s interest-rate model estimated that a 100-basis-point rate increase would raise 12-month net interest income 9%, while a 100-basis-point decrease would reduce it 1.3%; actual outcomes may differ.
- The company began exiting first-lien residential mortgage origination for secondary sale and expected to complete residual activity and sell remaining held-for-sale loans by the end of Q3 2023.
- Credit and concentration risks merit attention: income-producing CRE was 51% of loans; ADC loans totaled $1.6 billion, and construction, land and land-development loans equaled 109% of risk-based capital, above the cited supervisory concentration threshold. Management reported $88.0 million of substandard loans and heightened monitoring of CRE, including office exposures.
- Seven loans totaling $108.3 million were modified for borrowers experiencing financial difficulty during Q1; they were performing under modified terms, and none had subsequently defaulted by the reporting date. Nonperforming assets were $8.7 million, or 0.08% of assets.
- Funding risks include deposit outflows and reliance on alternative funding. Uninsured deposits were estimated at $3.2 billion, or 43% of deposits; non-reciprocal brokered deposits were $2.1 billion, or 28.5%. The company noted such funding could become more expensive or less available. BTFP availability was expected to continue at least until March 2024.
- Interest-rate-sensitive securities remain a consideration: most AFS and HTM unrealized losses were attributed to market rates and spreads, and the company said it did not plan to sell the securities and did not expect to be required to sell before recovery.
- Legal and regulatory proceedings had no material status change from the 2022 annual report; no contingent liabilities were recorded for pending matters. The company may bear future defense costs for 2016–2017 matters because the related D&O insurance policies are exhausted.
- The company repurchased 400,000 shares at an average $45.65 in Q1 and said it expected repurchases to increase beginning in Q2. The annual authorization permits up to 1.6 million shares through December 31, 2023.
Investor verification priorities
- Track deposit stability, uninsured and brokered deposit balances, funding costs, and actual use and availability of borrowing facilities.
- Monitor CRE and construction credit quality, especially office exposures, substandard loans, modifications, charge-offs, and changes in the allowance.
- Assess whether higher funding costs continue to pressure net interest income, margin, efficiency, and earnings against management’s rate-sensitivity assumptions.
- Review the fair-value gap and liquidity implications of AFS and HTM securities, including the conditions under which securities might need to be sold or pledged.
- Verify completion and financial effects of the residential mortgage exit, and monitor legal expenses and potential uninsured defense costs.