Eagle Bancorp, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet figures are as of March 31, 2020 unless noted. Eagle Bancorp, through EagleBank, provides commercial and consumer banking primarily in the Washington, D.C. metropolitan area. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net interest income | $79.7 | $81.0; down 1.6% |
| Provision for credit and unfunded commitments | $16.4 | $3.4 credit-loss provision in Q1 2019; Q1 2020 includes $14.3 loan provision and $2.1 unfunded-commitment provision |
| Noninterest income | $5.5 | $6.3; down 13% |
| Noninterest expense | $37.3 | $38.3; down 3% |
| Net income | $23.1 | $33.7; down 31% |
| Diluted earnings per share | $0.70 | $0.98 |
| Net interest margin | 3.49% | 4.02% |
| Return on average assets | 0.98% | 1.62% |
| Efficiency ratio | 43.83% | 43.87% |
| Operating cash flow | $35.8 | $27.7 |
Management attributed lower earnings principally to higher credit provisioning—including the new CECL methodology and COVID-19-related reserves—and higher legal costs. Q1 2019 included $6.2 million of largely nonrecurring compensation charges related to the former CEO and Chairman; excluding those costs, the filing reports Q1 2019 net income of $38.3 million, or $1.11 per diluted share. Legal, accounting and professional fees rose to $7.0 million from $1.7 million, including $4.6 million of legal costs primarily associated with governmental investigations and a securities class action.
Financial position, liquidity and capital
- Assets and loans: Total assets were $9.99 billion, up 11% from year-end 2019. Loans were $7.84 billion, up 4% from year-end; the allowance for credit losses was $96.3 million, or 1.23% of loans, versus $73.7 million and 0.98% at year-end.
- Deposits and liquidity: Deposits totaled $8.14 billion, up 13% from year-end. Cash and cash equivalents were $939.6 million. The Bank reported $4.95 billion of primary and secondary liquidity sources at quarter-end, including borrowing and deposit facilities. Brokered deposits excluding reciprocal CDARS/ICS balances were $2.09 billion, or 26% of deposits.
- Debt: Borrowings excluding customer repurchase agreements totaled $567.8 million: $300 million short-term and $267.8 million long-term. The latter includes $220 million of subordinated notes and a $50 million FHLB advance.
- Equity and capital: Shareholders’ equity was $1.16 billion, down 2% from year-end; the tangible common equity ratio was 10.70%. Company capital ratios included a 12.14% CET1 ratio, 15.44% total risk-based capital ratio and 11.33% Tier 1 leverage ratio. Management said capital ratios remained above regulatory well-capitalized levels.
- Cash flows: Investing activities used $304.5 million, mainly reflecting $293.5 million of net loan growth. Financing activities provided $966.4 million, largely from a $917.2 million increase in deposits. Cash and cash equivalents increased $697.6 million during the quarter.
Material changes and notable developments
- The company adopted CECL on January 1, 2020. Adoption increased the loan allowance by $10.6 million and the reserve for unfunded commitments by $4.1 million; the after-tax cumulative adjustment reduced retained earnings by $10.9 million. The Q1 provision reflected a further reserve build, with management attributing about two-thirds of that build to COVID-19.
- Net charge-offs were $2.2 million, compared with $3.4 million in Q1 2019. Nonperforming loans were $47.7 million, or 0.61% of loans, versus $48.7 million, or 0.65%, at year-end. Nonperforming assets were $56.0 million, including $8.2 million of other real estate owned, up from $1.5 million at year-end.
- Loan exposure is concentrated in real estate: 75% of loans were commercial real estate and construction loans, and 82% were secured by real estate. Accommodation and food services represented 9.7% of loans; retail trade represented 1.1%.
- COVID-19 borrower accommodations covered approximately 32 loans with $45 million outstanding at March 31; by April 30, modifications had grown to approximately 382 loans and $576 million. These short-term modifications were not treated as TDRs under applicable CARES Act provisions.
- As of April 30, the company reported $444.8 million of PPP loans outstanding across 1,090 borrowers and 1,233 approved applications totaling $449.7 million. PPP loans carry a 1% rate and are government-guaranteed; the company expected most to be forgiven, subject to program terms.
- The company repurchased 1,193,052 shares in Q1 at an average $37.31 per share, then put the remaining repurchase authorization on hold amid market volatility and COVID-19 uncertainty. A quarterly dividend of $0.22 per share was declared.
Outlook, risks and contingencies
- Management said the pandemic’s effects on borrowers, credit quality, fee income, interest income, liquidity and results remain highly uncertain and could be material. It provided no quantified full-year earnings or other financial guidance in the supplied filing text.
- Management warned that prolonged economic disruption could require additional credit-loss provisions, weaken asset quality and capital, reduce fee or interest income, and increase reliance on more costly or volatile funding. A low-rate environment is also expected to pressure margins.
- Q1 net interest margin was 3.49%. The company’s interest-rate simulation showed net interest income falling 6.0% under a 100-basis-point rate decline and rising 2.8% under a 100-basis-point increase. The filing also notes that its market-value-of-equity policy limit was exceeded in the down-rate scenarios and was expected to be updated in Q2.
- The company is cooperating with securities and banking regulators and U.S. Attorney’s offices in investigations involving, among other matters, related-party transactions and former officers and directors. It is defending a putative securities class action; defendants filed a motion to dismiss on April 2, 2020. Outcomes and potential liabilities are uncertain.
- Disclosure controls and procedures were reported as ineffective at March 31 because of a previously disclosed material weakness in internal control over financial reporting. Management described remediation efforts as ongoing and said the weakness would not be considered fully remediated until enhanced controls had operated and been tested for a sufficient period.
Most important facts for investors to verify
- Subsequent-quarter loan deferrals, borrower performance, charge-offs and the adequacy of CECL reserves as pandemic effects develop.
- PPP loan balances, processing economics, forgiveness and government-guarantee performance.
- Credit exposure and collateral trends in commercial real estate, construction, accommodation and food services, and retail.
- Progress and outcomes in governmental investigations and securities litigation, including related legal costs and insurance recoveries.
- Remediation and independent testing of the material weakness in internal controls, and any changes in regulatory capital or liquidity.
- Deposit mix and brokered-funding levels, particularly whether elevated deposits persist and how funding costs affect margins.