EAGLE BANCORP INC quarterly report, Q3 FY2022

Eagle Bancorp, Inc. — Q3 2022 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2022. Eagle Bancorp is a Bethesda-based bank holding company whose principal subsidiary, EagleBank, provides commercial and consumer banking services primarily in the Washington, D.C. metropolitan area.

Financial performance and position

Metric	Q3 2022	Q3 2021	Nine months 2022	Nine months 2021
Net interest income	$83.9 million	$79.0 million	$247.3 million	$246.3 million
Net income	$37.3 million	$43.6 million	$98.7 million	$135.1 million
Diluted earnings per share	$1.16	$1.36	$3.07	$4.22
Net interest margin	3.02%	2.73%	2.86%	2.91%
Efficiency ratio	40.59%	41.65%	47.51%	39.78%

• Q3 total revenue was $89.2 million, compared with $87.3 million a year earlier. Nine-month revenue was $265.6 million versus $276.1 million.
• Q3 net income declined 14.5%; nine-month net income declined 26.9%. Nine-month results included $22.9 million of accrued SEC and Federal Reserve settlement expenses. The company’s non-GAAP adjusted nine-month net income was $121.6 million, or $3.78 diluted EPS; this excludes those expenses.
• At September 30, assets were $10.7 billion, loans were $7.3 billion, deposits were $8.8 billion, and shareholders’ equity was $1.2 billion. Loans increased 3.4% from year-end 2021; deposits fell 12.2%.
• Cash and cash equivalents were $144.2 million, down from $1.7 billion at year-end. Nine-month operating cash flow was $139.6 million; investing cash outflow was $663.1 million and financing cash outflow was $1.05 billion. The filing attributes the deposit decline chiefly to customers moving funds in response to rising rates.
• Available-for-sale and held-to-maturity securities had a combined carrying value of approximately $2.8 billion. AFS securities had $224.1 million of gross unrealized losses, which management principally attributed to market rates rather than credit concerns. Shareholders’ accumulated other comprehensive loss was $210.6 million.
• Borrowings, excluding customer repurchase agreements, totaled $584.8 million, including $500 million of short-term FHLB advances and $69.8 million of subordinated notes. The notes bear 5.75% interest and are due September 2024.
• Regulatory capital remained above required thresholds: company CET1 ratio was 15.11%, total risk-based capital 16.10%, and tier 1 leverage 11.55%. Book value per share was $38.02; tangible book value per share was $34.77.

Material changes and management commentary

• Higher rates lifted Q3 loan and investment yields and net interest margin, but also sharply increased deposit costs. Nine-month net interest margin was slightly lower year over year as funding costs rose faster than asset yields.
• Residential mortgage activity weakened as rates rose: nine-month residential mortgage locked commitments fell to $286.2 million from $831.4 million, contributing to lower loan-sale income. Nine-month noninterest income declined 38.5% to $18.3 million.
• Nine-month noninterest expense rose 14.9% to $126.2 million, primarily reflecting the $22.9 million settlement accrual. The company also reported a $5.0 million one-time reduction in compensation accruals related to its former CEO and Chairman.
• In Q1, the company transferred approximately $1.1 billion of securities from AFS to HTM. The transfer preserved $66.2 million of unrealized losses in accumulated other comprehensive loss; $61.1 million remained there at quarter-end and is to be amortized over the securities’ remaining lives.
• Credit metrics improved versus year-end: nonperforming assets were $9.6 million, or 0.09% of assets, versus $30.8 million, or 0.26%, at December 31, 2021. The allowance for loan losses was $75.8 million, or 1.04% of loans. Management cited inflation and economic uncertainty in explaining the 2022 credit-loss provisions.
• Commercial real estate is a material concentration: income-producing CRE was 50% of loans, and construction, land and land-development loans equaled 109% of risk-based capital, above the regulatory concentration screening threshold described in the filing. Management said it maintains heightened monitoring and underwriting practices.

Liquidity, outlook, risks and contingencies

• The company reported $4.3 billion of primary and secondary liquidity under the Bank’s liquidity formula. Sources include cash, marketable AFS securities, borrowing facilities and brokered deposits. These resources should be considered alongside the substantial deposit outflow and increased short-term borrowing.
• Brokered deposits, excluding reciprocal CDARS/ICS balances, were $2.5 billion, or 28.0% of deposits. Management warns that deposit outflows could worsen if rates rise or the company’s regulatory position or reputation deteriorates.
• Interest-rate modeling showed estimated 12-month net interest income changes of +5.7% for a 100-basis-point increase and -4.9% for a 100-basis-point decrease. These are model estimates, not guidance; actual results may differ with deposit pricing, customer behavior, loan repricing and other assumptions.
• The company and Bank settled investigations with the SEC and Federal Reserve in August 2022, without admitting or denying the allegations. The SEC settlement included a $10.0 million civil penalty and $2.6 million disgorgement plus prejudgment interest; the Federal Reserve settlement included an approximately $9.5 million penalty. No additional contingent liabilities were recorded in Q3. The company also said D&O insurance could be exhausted as early as Q4 2022, potentially leaving it responsible for further defense costs.
• The filing provides no earnings guidance. Management cautions that forward-looking statements are uncertain and that historical results are not necessarily indicative of future performance. It reported no material changes to the risk factors in its 2021 Form 10-K.

Important facts for investors to verify

1. Deposit trends, deposit pricing and the availability and cost of brokered deposits and other funding as interest rates change.
2. The scale and repayment performance of CRE and construction exposures, including potential problem loans and projects supported by interest reserves.
3. The effect of unrealized securities losses, HTM classification and further rate movements on tangible book value, capital and liquidity.
4. Settlement payment timing and amounts, any remaining legal or regulatory matters, and whether D&O insurance is exhausted and defense costs become self-funded.
5. Whether higher loan yields continue to offset rising funding costs, and how mortgage origination weakness and credit-loss provisions affect earnings.