Eagle Bancorp, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018 unless noted. Eagle Bancorp is a community bank holding company operating primarily in the Washington, D.C. metropolitan area through EagleBank.
Financial results and position
Amounts are in millions, except per-share data and ratios.
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $81.0 | $75.8 in Q1 2018 |
| Total revenue (net interest income plus noninterest income) | $87.3 | $81.1 in Q1 2018 |
| Net income; diluted EPS | $33.7; $0.98 | $35.7; $1.04 in Q1 2018 |
| Loans; deposits | $7.17 billion; $6.68 billion | $6.99 billion; $6.97 billion at Dec. 31, 2018 |
| Total assets; shareholders’ equity | $8.39 billion; $1.15 billion | $8.39 billion; $1.11 billion at Dec. 31, 2018 |
| Net interest margin; efficiency ratio | 4.02%; 43.87% | 4.17%; 38.38% in Q1 2018 |
| Net charge-offs; allowance for credit losses | $3.4 million; $69.9 million | $0.9 million net charge-offs in Q1 2018; allowance $69.9 million at Dec. 31, 2018 |
| Nonperforming loans; total risk-based capital ratio | $40.3 million; 16.22% | $16.3 million; 16.07% at Dec. 31, 2018 |
Net cash provided by operating activities was $27.7 million; investing activities used $182.6 million and financing activities used $44.9 million. Cash and cash equivalents ended the quarter at $122.1 million, down from $321.9 million at year-end.
Borrowings totaled $467.4 million, including $250 million of FHLB advances and approximately $220 million of subordinated notes before issuance costs. The FHLB advances mature in March 2020 and may be repaid earlier. Management reported $4.4 billion of primary and secondary liquidity sources. The company also reported $2.38 billion of unfunded loan commitments, lines and letters of credit.
Changes and notable items
- Loans grew 3% from year-end, while deposits declined 4%; management described the first-quarter deposit decrease as seasonal. Noninterest-bearing deposits rose $112.1 million, while interest-bearing deposits fell $403.4 million.
- Year-over-year net interest income increased 7%, supported by 11% growth in average earning assets. The margin nevertheless narrowed 15 basis points as the cost of interest-bearing liabilities rose faster than earning-asset yields.
- Reported net income fell 6% year over year. Salaries and benefits included $6.2 million of nonrecurring expense related to share-based compensation awards and the retirement of former Chairman and CEO Ronald D. Paul. Excluding that expense, management reported net income of $38.5 million and diluted EPS of $1.11, versus $35.7 million and $1.04 in Q1 2018.
- Noninterest income increased 19%, substantially reflecting $912,000 of investment gains, including $829,000 recognized in connection with interest-rate swap terminations. Noninterest expense rose 23% as reported; excluding the identified nonrecurring expense, it increased 3%.
- Net charge-offs were $3.4 million, largely from a commercial real estate loan. A $17.5 million condominium-project loan was sold at foreclosure; the sale was ratified April 8, 2019, with closing required within 30 days. The loan remained nonperforming at quarter-end, and management anticipated no further loss. A separate $1.5 million nonperforming loan was paid shortly after quarter-end. Excluding these two balances, nonperforming loans would have been $21.3 million, or 0.30% of total loans.
- The company adopted lease accounting on January 1, 2019, recognizing $29.6 million of right-of-use assets and $33.5 million of lease liabilities. Management said adoption reduced the March 31 total risk-based capital ratio by six basis points.
Outlook, risks and contingencies
- The filing provides no specific earnings or growth guidance. Management cautions that first-quarter results are not necessarily indicative of the remainder of the year. Its interest-rate simulation estimated that a 100-basis-point rate increase would raise net interest income 4.4%, while a 100-basis-point decrease would reduce it 4.1%; these are model estimates, not forecasts.
- Credit exposure is concentrated in real estate: approximately 77% of loans were commercial real estate-related, and 84% of all loans were secured by real estate. Non-owner-occupied CRE, including construction, land and land development, equaled 329% of total risk-based capital. Management noted the possibility of higher capital requirements and adverse effects on shareholder returns from CRE concentration.
- Brokered deposits excluding reciprocal CDARS/ICS balances were $1.28 billion, or 19% of deposits. Management noted that deterioration in the company’s condition or reputation, or interest-rate changes, could cause brokered deposit outflows and require replacement funding.
- Performing loans identified as potential problem loans totaled $57.1 million, down from $102.7 million at year-end, partly because two CRE relationships moved to nonperforming status. The allowance was 0.98% of loans and 174% of nonperforming loans; excluding the identified $19.0 million in loans, management reported coverage of 329%.
- Thirteen troubled debt restructurings totaled $26.7 million; ten, totaling $26.2 million, were performing under modified terms. The company also disclosed $15.4 million of unfunded commitments related to affordable-housing tax-credit investments.
- Management said there were no material changes to previously disclosed risk factors and that incidental legal proceedings were not expected to have a material financial effect. Disclosure controls were reported effective, with no material first-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether the $6.2 million nonrecurring compensation and retirement-related expense is fully isolated from recurring operating costs, and how reported versus adjusted earnings are being compared.
- Subsequent closing and final loss outcome for the condominium foreclosure, and the payment status of the other $1.5 million loan; track nonperforming loans and charge-offs thereafter.
- Deposit trends, brokered-deposit reliance, FHLB funding and liquidity capacity, particularly alongside loan growth and the $2.38 billion of off-balance-sheet commitments.
- Credit quality and collateral performance in the CRE and construction portfolio, including potential problem loans, interest-reserve projects and allowance adequacy.
- Net interest margin, deposit pricing and funding costs, and the assumptions behind management’s interest-rate sensitivity estimates.
- Progress and estimated financial impact of CECL implementation, scheduled to become effective for the company January 1, 2020; the filing says the impact was still under evaluation.