Eagle Bancorp, Inc. — FY 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are primarily with FY 2020. Eagle Bancorp is a bank holding company headquartered in Bethesda, Maryland. Its principal subsidiary, EagleBank, serves the Washington, D.C. metropolitan area.
Financial results and condition
| Metric | FY 2021 / Dec. 31, 2021 | FY 2020 / Dec. 31, 2020 |
|---|---|---|
| Total assets | $11.85 billion | $11.12 billion |
| Total loans | $7.07 billion | $7.76 billion |
| Total deposits | $9.98 billion | $9.19 billion |
| Net interest income | $324.5 million | $321.6 million |
| Net income | $176.7 million; diluted EPS $5.52 | $132.2 million; diluted EPS $4.09 |
| Net interest margin | 2.81% | 3.19% |
| Net cash from operating activities | $239.5 million | $133.1 million |
- Total revenue, defined as net interest income plus noninterest income, was $364.9 million, down from $367.3 million. Noninterest income declined 12% to $40.4 million, mainly reflecting lower residential mortgage loan-sale gains; noninterest expense rose 3% to $149.2 million. The efficiency ratio increased to 40.88% from 39.25%.
- Net income increased 34% (reported EPS increase: 35%), primarily because a $20.8 million provision reversal replaced a $45.6 million provision in 2020. Lower credit-loss estimates reflected economic recovery and improved asset quality; earnings also benefited from lower funding costs and higher average earning assets.
- Loans fell 9%; deposits grew 9%. The resulting liquidity inflows were invested in securities and other short-term assets, contributing to margin compression. The available-for-sale securities portfolio increased to $2.62 billion from $1.15 billion and ended the year with a net unrealized loss of $18.6 million, versus a $22.0 million gain a year earlier.
- Credit quality improved: nonperforming loans were $29.2 million, or 0.41% of loans, versus $60.9 million, or 0.79%. Net charge-offs were $13.3 million, or 0.18% of average loans. The allowance for credit losses was $75.0 million, 1.06% of loans and 257% of nonperforming loans.
- Year-end shareholders’ equity was $1.35 billion. Company CET1 and total risk-based capital ratios were 15.02% and 16.15%, respectively; management said capital remained above regulatory well-capitalized requirements. Borrowings were $369.7 million, in addition to $23.9 million in customer repurchase agreements. Cash and cash equivalents were $1.71 billion.
- Liquidity included $7.4 billion of primary and secondary sources, according to management. Uninsured deposits were approximately $5.3 billion, or 53% of deposits; brokered deposits were approximately 26.5% of deposits. These funding sources and concentrations are material to liquidity risk.
- Cash dividends declared totaled $1.40 per share ($44.7 million). The company repurchased 13,175 shares for approximately $0.7 million in 2021 and authorized a 1.6 million-share repurchase program for 2022.
Material changes and management commentary
- Deposit inflows and loan paydowns increased excess liquidity, while total loans declined as project payoffs and paydowns exceeded originations and advances. Management cited competition, refinancing activity, and abundant liquidity among competing banks as constraints on loan growth.
- Average earning assets increased 14%, but lower yields and a shift toward lower-yielding securities and cash reduced net interest margin by 38 basis points. Average deposits grew 17%; average loans declined 8%.
- The company redeemed $150 million of subordinated notes in August 2021 and repaid a $50 million FHLB advance. Year-end long-term borrowings were $69.7 million, principally subordinated notes due September 2024.
- The Bank’s assets exceeded $10 billion, bringing enhanced supervision and CFPB oversight beginning in 2022, with expected additional compliance and operating costs.
Outlook, risks, contingencies, and unusual items
- No specific earnings or financial guidance was provided. Management expected loan-growth challenges to continue in 2022 and beyond, noted that no additional branches were anticipated in 2022, and described continued focus on quality lending and deposit relationships.
- Key risks include the concentration in Washington-area commercial real estate and construction lending (about 78–79% of loans by disclosed classifications; 85% of loans are secured or partly secured by real estate), economic and property-market deterioration, loan pricing and margin pressure, deposit outflows, and interest-rate changes. Accommodation and food services represented 8.3% of loans; retail trade represented 1.1%.
- COVID-19 effects remained uncertain. Three modified or deferred loans totaling $67 million remained at year-end, including two hotels and an assisted-living facility. Management identified continuing credit, operational, vendor, cybersecurity, and employee-retention risks.
- The company disclosed ongoing SEC, Federal Reserve, banking-regulator, and U.S. Attorney investigations that it believes relate to related-party transaction identification and disclosure, former officers and directors, and relationships with a local public official. The company was cooperating; outcomes, timing, and potential losses were not predictable. Management warned that D&O insurance coverage for defense costs might be exhausted as early as Q1 2022.
- A securities class-action settlement of $7.5 million was approved in February 2022; the company expected insurance carriers to pay the full settlement. A separate shareholder derivative settlement was approved in October 2021; related fees and expenses were reportedly covered by insurance. The company also agreed to spend an additional $2 million by the end of 2023 on governance, risk, and compliance improvements.
- The auditor issued an unqualified opinion on the 2021 financial statements and internal controls; management also concluded controls were effective. The allowance for credit losses was the audit’s critical audit matter. Crowe LLP became auditor for 2021, succeeding Dixon Hughes Goodman LLP.
Important facts for investors to verify
- Whether loan growth, loan pricing, deposit costs, and net interest margin improve or deteriorate as interest rates and competition change.
- Trends in commercial real estate, construction, hospitality, and other concentrated exposures, including criticized/watch loans, deferred loans, and allowance adequacy.
- Stability and cost of uninsured and brokered deposits, and the availability and terms of backup funding if deposits decline.
- Developments, potential costs, insurance coverage, and any regulatory restrictions arising from the ongoing investigations and legal matters.
- Actual costs and effects of enhanced supervision after crossing $10 billion in assets, and the company’s ability to maintain capital and liquidity while paying dividends or repurchasing shares.