Eagle Bancorp, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited consolidated results. EagleBank is a community bank focused primarily on the Washington, D.C. metropolitan area, with substantial commercial and real-estate lending.
Key financial results
Amounts below are in millions, except per-share data and ratios.
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net interest income | $81.3 | $71.9 | $235.3 | $208.5 |
| Provision for credit losses | $2.4 | $1.9 | $6.1 | $4.9 |
| Noninterest income | $5.6 | $6.8 | $16.5 | $19.9 |
| Noninterest expense | $31.6 | $29.5 | $95.0 | $88.7 |
| Net income | $38.9 | $29.9 | $112.0 | $84.7 |
| Diluted EPS | $1.13 | $0.87 | $3.25 | $2.47 |
| Net interest margin | 4.14% | 4.14% | 4.15% | 4.14% |
- Q3 net income rose 30%; nine-month net income rose 32%. Management attributed growth chiefly to higher net interest income and the lower federal corporate tax rate. Effective tax rates were 26.3% for Q3 and 25.7% for nine months, versus 36.8% and 37.2%, respectively, in 2017; Q3 2018 also included a $515,000 tax true-up.
- For Q3, return on average assets was 1.93%, return on average common equity 14.85%, and efficiency ratio 36.37%. Nine-month figures were 1.92%, 14.92%, and 37.74%, respectively.
- Interest income grew faster than funding costs, but deposit and borrowing costs rose: Q3 average earning-asset yield increased 47 basis points to 5.21%, while the cost of interest-bearing liabilities rose 78 basis points to 1.75%. Net interest margin held steady as the benefit of noninterest-bearing funding offset spread compression.
Financial position, cash flow, and capital
- At September 30, total assets were $8.06 billion, up 8% from year-end 2017. Loans were $6.84 billion, up 7%; deposits were $6.37 billion, up 9%; shareholders’ equity was $1.06 billion, up 12%.
- Cash and cash equivalents were $184.5 million at period-end, down $6.0 million during the first nine months. Operating cash flow was $107.9 million; investing cash flow was negative $593.1 million, mainly reflecting loan growth and security purchases; financing cash flow was positive $479.2 million, principally from deposit growth.
- Total borrowings, excluding customer repurchase agreements, were $542.2 million, including $325.0 million of FHLB advances and $220.0 million face value of subordinated notes. The FHLB advances mature in March and June 2019. The notes bear fixed rates of 5.75% and 5.00% (the latter converts to floating rate) and mature in 2024 and 2026.
- Management reported $3.91 billion of primary and secondary liquidity sources. Brokered deposits excluding reciprocal CDARS/ICS balances were $1.08 billion, or 17% of deposits, versus $865.5 million, or 15%, at year-end 2017. Reciprocal CDARS/ICS deposits were $550.7 million, or 9% of deposits.
- Company total risk-based capital ratio was 15.74%; the Bank’s was 14.72%. The company tangible common equity ratio was 12.01%. Management said the Company and Bank exceeded applicable well-capitalized requirements.
Material changes and asset quality
- Loan growth was concentrated in commercial, income-producing commercial real estate, and owner-occupied commercial real estate. About 75% of loans were commercial real estate or related categories, and 84% of loans were secured by real estate. Non-owner-occupied CRE and construction/land-development loans were 332% and 116% of total risk-based capital, respectively.
- Noninterest income declined 17% in both the quarter and nine-month comparison, largely because residential mortgage loan sale volumes and FHA multifamily securitization revenue were lower. Mortgage loans closed were $107 million in Q3 versus $135 million, and $334 million for nine months versus $473 million.
- Noninterest expense rose 7% in both comparison periods. Nine-month legal, accounting, and professional fees increased $3.7 million, reflecting consultant due diligence associated with the late-2017 “internet event” and spending to strengthen risk management and corporate governance as the Company approached $10 billion in assets. Data-processing and marketing costs also increased.
- Allowance for credit losses was $68.2 million, or 1.00% of loans, versus $64.8 million, or 1.01%, at year-end 2017. Nine-month net charge-offs increased to $2.6 million from $1.0 million; the annualized ratio was 0.05% versus 0.02%.
- Nonperforming assets were $16.5 million, or 0.20% of assets, versus $14.6 million at year-end. Nonperforming loans were $15.1 million, or 0.22% of loans. Potential problem loans increased to $32.1 million from $18.8 million. Fourteen troubled debt restructurings totaled $18.3 million; two previously performing restructurings totaling $937,000 moved to nonperforming status during the nine months.
- The investment portfolio’s pretax net unrealized loss widened to $18.9 million from $5.1 million at year-end, which management attributed primarily to higher interest rates. Management said it did not consider the securities’ losses other-than-temporary and did not expect to need to sell before recovery of amortized cost.
Outlook, risks, and other notable items
- The filing provides no specific earnings or growth guidance. Management described local multifamily leasing and the housing market as generally stable, while noting softer suburban office leasing and caution about CRE cap rates and valuations.
- Interest-rate simulation estimated that a 100-basis-point increase would raise 12-month net interest income by 5.4%, while a 100-basis-point decrease would reduce it by 4.4%. Management cautioned that actual results may differ because of deposit pricing, prepayments, borrower behavior, and other model assumptions.
- Key funding and credit risks include reliance on brokered deposits and substantial CRE concentration. Management noted that adverse changes in the Bank’s condition or reputation, or a decision not to match market rates, could lead to brokered-deposit outflows. CRE concentration may also lead regulators to expect heightened controls or higher capital.
- The Company had $2.37 billion of unfunded loan commitments, lines of credit, and letters of credit; commitments may expire undrawn and do not necessarily represent future cash needs.
- The Company said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. It reported no material change in previously disclosed risk factors and said pending legal proceedings were not expected to have a material financial effect.
- CECL was scheduled for adoption beginning January 1, 2020; management had substantially completed a data-gap analysis and engaged a third party to develop an implementation model. The Company early-adopted several accounting standards in 2018; the $674,000 tax-related reclassification from AOCI to retained earnings had no effect on total equity.
Important facts for investors to verify
- Whether CRE concentration, project performance, interest reserves, and the increase in potential problem loans remain well controlled.
- How deposit pricing and the mix of brokered, reciprocal, and noninterest-bearing deposits affect funding costs and liquidity, particularly as FHLB advances mature in 2019.
- Whether credit losses and the allowance remain appropriate as net charge-offs and nonperforming loans change.
- Whether lower mortgage-sale and FHA multifamily activity persists, and whether risk-management and governance spending continues to affect expenses.
- How higher rates affect securities’ unrealized losses, deposit costs, and realized net interest income compared with management’s simulation assumptions.