Eagle Bancorp, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Eagle Bancorp is a community bank holding company operating primarily in the Washington, D.C. metropolitan area through EagleBank.
Financial performance and position
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $79.0 | $81.0 | $240.1 | $243.3 |
| Provision for credit losses | $6.6 | $3.2 | $40.7 | $10.1 |
| Net income | $41.3 | $36.5 | $93.3 | $107.5 |
| Diluted EPS | $1.28 | $1.07 | $2.88 | $3.12 |
| Net interest margin | 3.08% | 3.72% | 3.27% | 3.88% |
| Noninterest income | $17.8 | $6.3 | $35.8 | $19.0 |
| Noninterest expense | $36.9 | $33.5 | $109.2 | $105.1 |
- Q3 net income rose 13% year over year, principally on higher noninterest income, including mortgage-loan sale gains. Nine-month net income fell 13%, reflecting lower net interest margin and substantially higher credit-loss provisioning.
- Q3 efficiency ratio was 38.10% versus 38.34%; nine-month ratio was 39.56% versus 40.08%.
- At September 30, total assets were $10.11 billion, loans $7.88 billion (including $456.1 million of PPP loans), deposits $8.18 billion, and shareholders’ equity $1.22 billion. Compared with December 31, 2019, assets increased 12.4%, loans 4.4%, and deposits 13.2%.
- Allowance for loan losses was $110.2 million, or 1.40% of loans, versus $73.7 million at year-end 2019. Nine-month net charge-offs were $14.6 million, compared with $6.4 million a year earlier. Nonperforming assets were $63.0 million, or 0.62% of assets; there were no accruing loans 90 days or more past due.
- Cash and cash equivalents were $857.1 million at quarter-end. For the first nine months, operating cash flow was $107.6 million, investing cash outflow $475.6 million, and financing cash inflow $983.1 million; cash and cash equivalents increased $615.1 million.
- Borrowings totaled $568.0 million, excluding customer repurchase agreements: $300 million of short-term borrowings and $268.0 million of long-term borrowings, including $220 million of subordinated notes and a $50 million FHLB advance. Regulatory capital ratios remained above well-capitalized thresholds: company CET1 13.19%, total capital 16.72%, and leverage 10.82%.
Material changes and management commentary
- Lower interest rates and unusually high cash balances pressured margin: Q3 margin declined 64 basis points year over year; nine-month margin declined 61 basis points. Lower deposit costs partly offset reduced yields on earning assets.
- CECL was adopted January 1, 2020. The initial after-tax retained-earnings adjustment was $10.9 million; the loan allowance increased $10.6 million and the unfunded-commitment reserve $4.1 million at adoption. COVID-related forecasts and credit experience contributed to subsequent provisions.
- Mortgage banking benefited from refinancing volume. Gain on loan sales was $12.2 million in Q3 versus $2.6 million a year earlier. A change in best-efforts loan accounting accelerated $1.6 million of Q3 noninterest income; management said the effect of applying the method in prior quarters would have been immaterial.
- Q3 expenses included a $1.7 million one-time rent adjustment after review identified an unrecorded lease extension. Nine-month legal, accounting and professional fees rose to $14.1 million from $8.1 million, largely for investigations and litigation; the reported amount reflects expected D&O insurance recovery where management believes recovery is highly likely.
- Temporary COVID-19 payment modifications were ongoing on 321 loans totaling about $851 million, or 10.8% of loans, down from 708 loans and $1.6 billion at June 30. These deferrals are excluded from asset-quality measures under applicable CARES Act and interagency relief. PPP loans totaled $456.1 million and are government-guaranteed; they earn 1% plus fees.
Outlook, risks and contingencies
- The filing gives no specific earnings or margin guidance. Management says the pandemic’s duration and effects are uncertain and could lead to further credit losses, additional provisioning, reduced fee or interest income, deposit outflows, and pressure on liquidity, capital and margins.
- Credit concentration is material: commercial real estate and real estate construction represented about 73% of loans, and approximately 80% of loans were secured by real estate. Accommodation and food-services exposure was 10.2% of loans; retail trade was 1.3%. Management highlighted risks in hotels, restaurants, retail, and certain real-estate markets.
- Ongoing temporary modifications are not fully reflected in reported nonperforming loans. The filing reports $24.9 million of performing potential problem loans and $19.4 million of TDRs. Nonperforming loans were $58.1 million, up from $48.7 million at year-end; OREO was $5.0 million, including a high-end residential property in a soft market.
- Liquidity sources were reported as strong: $4.5 billion of primary and secondary liquidity under the Bank’s formula. However, $1.74 billion of deposits were brokered deposits excluding reciprocal CDARS/ICS balances; management warns these could run off if the Bank’s condition, regulatory position or reputation deteriorates.
- The company has a significant CRE concentration relative to regulatory guidance and could face pressure to maintain higher capital. Interest-rate simulations showed estimated net interest income changes of +1.9% for a 100-basis-point increase and −1.3% for a 100-basis-point decrease; results depend on assumptions and actual customer behavior.
- The company is defending a putative securities class action alleging misleading disclosures concerning internal controls and related-party loans; its motion to dismiss was under court consideration. It is also cooperating with securities and banking regulators and U.S. Attorney investigations. The company cannot predict their duration or outcome; legal expenses or adverse outcomes could materially affect results or reputation.
- Management said a prior material weakness in internal control had been remediated based on testing, subject to year-end auditor review. Management assessed disclosure controls as effective at September 30, 2020.
Important facts for investors to verify
- Whether borrower deferrals, especially in hospitality, restaurants, retail and CRE, resume repayment or result in increased delinquencies, charge-offs or reserve needs.
- How CECL assumptions and economic forecasts evolve, and whether the $110.2 million loan allowance remains adequate.
- Whether net interest margin stabilizes as excess liquidity, asset yields, deposit costs and PPP loan fees change.
- The sustainability of mortgage banking gains and the impact of the best-efforts accounting change, refinancing activity and loan-sale volumes.
- Developments in the class action, regulatory and U.S. Attorney investigations, related legal costs and any insurance recoveries.
- Deposit mix and brokered funding levels, capital ratios, CRE concentration, and the year-end auditor’s assessment of the reported internal-control remediation.