EAGLE BANCORP INC quarterly report, Q2 FY2020

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Eagle Bancorp, Inc. — Q2 2020 Form 10-Q

Reporting period: Three and six months ended June 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

Q2 2020 results (year-over-year):

  • Net income was $28.9 million, down 23%; diluted EPS was $0.90, down from $1.08.
  • Net interest income was $81.4 million, essentially unchanged. Net interest margin fell to 3.26% from 3.91%, as lower asset yields outweighed lower funding costs.
  • Provision for credit losses was $19.7 million, versus $3.6 million; a separate $0.9 million provision was recorded for unfunded commitments.
  • Noninterest income increased 96% to $12.5 million, including stronger FHA loan activity, SBIC income, swap fees and prepayment fees. Noninterest expense rose 5% to $34.9 million, including higher legal and FDIC costs.
  • Return on average assets was 1.12%, versus 1.74%; the efficiency ratio improved to 37.18% from 38.04%.

First half 2020: Net income was $52.0 million, down 27% from $71.0 million; diluted EPS was $1.60, versus $2.05. Net interest income declined less than 1% to $161.1 million, while net interest margin fell to 3.36% from 3.97%. Provision for credit losses rose to $34.0 million from $7.0 million. Noninterest income increased 42% to $18.0 million; noninterest expense increased 1% to $72.2 million.

  • Balance sheet at June 30: Total assets were $9.80 billion, up 9% from year-end 2019; loans were $8.02 billion, up 6%; deposits were $7.94 billion, up 10%.
  • Credit quality: Allowance for credit losses was $108.8 million, or 1.36% of loans, compared with 0.98% at year-end. Nonperforming loans were $59.0 million (0.74% of loans), up from $48.7 million (0.65%); nonperforming assets were $67.2 million (0.69% of assets). First-half net charge-offs were $9.4 million.
  • Cash flow and liquidity: First-half operating cash flow was $48.3 million; investing cash outflow was $408.2 million; financing cash inflow was $753.9 million. Cash and cash equivalents increased $394.1 million to $636.0 million. Management reported $5.24 billion of primary and secondary liquidity sources at quarter-end.
  • Debt and capital: Borrowings, excluding customer repurchase agreements, totaled $567.9 million, up from $467.7 million at year-end. Company total risk-based capital was 16.26%; CET1 and Tier 1 risk-based capital were each 12.80%; Tier 1 leverage was 10.63%. The common equity-to-assets ratio was 12.12%, down from 13.25%.

Material changes and notable items

  • The company adopted CECL on January 1, 2020. The adoption increased the loan allowance by about $10.6 million and the reserve for unfunded commitments by $4.1 million; the after-tax retained-earnings adjustment was about $10.9 million. COVID-19-related economic forecasts and credit expectations further increased reserves.
  • PPP loans outstanding were $456 million to more than 1,400 businesses. The loans carry a 1% contractual rate and a reported second-quarter average yield of 2.91% including fee amortization; they are federally guaranteed and carried no credit-loss allowance.
  • Temporary payment modifications covered approximately 708 loans with $1.63 billion of exposure at June 30, about 20% of loans. These deferrals were excluded from reported nonperforming-loan measures under applicable CARES Act relief. Through July 31, modifications reached approximately 724 loans and $1.65 billion.
  • Share repurchases were suspended in Q1 amid COVID-19 uncertainty; none were made in Q2. The company declared a $0.22-per-share quarterly dividend.
  • Residential mortgage closings increased to $308 million in Q2 from $152 million a year earlier. The company suspended mandatory loan-sale commitments during Q2 amid market dislocation and operational strain.
  • The company recorded $8.2 million of other real estate owned, including two foreclosed ultra-high-end residential properties. A commercial borrower relationship in personal services drove most Q2 net charge-offs.

Outlook, risks and contingencies

No numerical earnings or growth guidance is provided. Management said the duration and financial effects of COVID-19 remain highly uncertain. It expects low interest rates and elevated liquidity needs to pressure margins; further credit deterioration, additional provisions, lower fee income, or reduced borrower repayment capacity could affect future results. Accommodation and food services represented 10.5% of loans and retail trade 1.3%; 72% of loans were commercial real estate and construction, and 79% were secured by real estate.

  • Funding risk: Brokered deposits excluding reciprocal CDARS/ICS balances were $1.79 billion, or 23% of deposits. Management cautioned that deposit outflows or reduced access to brokered funding could require more expensive alternatives.
  • Legal matters: The company is responding to regulatory and U.S. Attorney document requests and subpoenas concerning, among other matters, related-party transactions and former officers. It is also defending a securities class action; a motion to dismiss was under consideration. The company cannot predict the duration, scope or outcome of the investigations. First-half legal fees were $7.1 million, primarily related to investigations and litigation.
  • Capital and concentrations: Management said capital remained above regulatory well-capitalized levels, but further credit losses could reduce capital. Commercial real estate concentrations may entail heightened risk-management or capital expectations.
  • Controls: Management reported that enhanced controls addressing a previously disclosed material weakness had been tested and were operating effectively; remediation remained subject to the year-end auditor’s assessment. Disclosure controls were assessed as effective at June 30.
  • Goodwill: COVID-19 triggered an impairment assessment; no goodwill impairment was identified at June 30, but future conditions could lead to a charge.

Important facts for investors to verify

  • How COVID-19 loan deferrals perform as relief periods expire, and whether those loans migrate to delinquency, nonaccrual or TDR status.
  • Whether the $108.8 million allowance adequately reflects concentrated commercial real estate, construction, hospitality and retail exposures under changing economic forecasts.
  • Trends in nonperforming loans, charge-offs, collateral values and the two foreclosed high-end residential properties.
  • Deposit stability, brokered-funding reliance, liquidity availability and the effect of continued low rates on net interest margin.
  • Developments in regulatory investigations and the securities class action, related legal costs and any potential effect on reputation or financial results.
  • Whether reported capital and control remediation remain sufficient as credit and operational risks evolve.