Eagle Bancorp, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Eagle Bancorp is a Maryland bank holding company whose principal subsidiary, EagleBank, operates in the Washington, D.C. metropolitan area.
Financial performance and position
Amounts are in U.S. dollars; figures below are rounded. Year-over-year comparisons are to 2018 unless stated otherwise.
| Metric | 2019 | Comparison / change |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $349.7 million | Up 3% |
| Net interest income | $324.0 million | Up 2% |
| Net income | $142.9 million | Down 6%; 2018 was $152.3 million |
| Diluted earnings per share | $4.18 | 2018: $4.42 |
| Net interest margin | 3.77% | Down 33 basis points |
| Efficiency ratio | 39.99% | 2018: 37.31% |
| Provision for credit losses / net charge-offs | $13.1 million / $9.4 million | 2018: $8.7 million / $3.5 million |
| Assets / loans / deposits at year-end | $8.99 billion / $7.55 billion / $7.22 billion | Assets up 7%, loans up 8%, deposits up 4% |
| Total shareholders’ equity | $1.19 billion | 2018: $1.11 billion |
| Regulatory capital ratios | CET1 12.87%; total capital 16.20%; Tier 1 leverage 11.62% | Above applicable well-capitalized thresholds |
| Cash and cash equivalents | $242.0 million | 2018: $321.9 million |
| Operating cash flow | $132.7 million | 2018: $165.5 million |
- Interest expense rose 38% to $105.6 million as deposit competition and funding costs increased. Average cost of interest-bearing liabilities rose to 1.95% from 1.61%; funding costs moderated in the second half as market rates fell.
- Noninterest income increased 14% to $25.7 million, including higher residential mortgage gains and $1.5 million of investment security gains. Noninterest expense rose 10% to $139.9 million.
- Expense growth included $8.2 million of nonrecurring compensation charges associated with the former chairman/CEO’s retirement and certain directors’ resignations. Legal, accounting and professional fees rose 25% to $12.2 million, largely due to government investigations and related requests.
- Nonperforming loans rose to $48.7 million, or 0.65% of loans, from $16.3 million, or 0.23%. Nonperforming assets were $50.2 million, or 0.56% of assets. The allowance was $73.7 million, 0.98% of loans and 151% of nonperforming loans.
Material changes and balance-sheet details
- Commercial real estate and construction-related lending remains concentrated: 78% of loans were commercial real estate and real estate construction, and 85% were secured or partly secured by real estate. ADC loans totaled $1.61 billion; about 65% of ADC balances included loan-funded interest reserves.
- Borrowings increased to $498.7 million from $247.7 million, including $250 million of FHLB advances outstanding at year-end. The company also had $220 million of subordinated notes.
- Brokered deposits, excluding reciprocal CDARS/ICS balances, were approximately 25% of deposits, versus 19% in 2018. Uninsured deposits were approximately $2.82 billion, or 39% of deposits. Noninterest-bearing demand deposits were 29% of deposits.
- Management reported $4.48 billion of primary and secondary liquidity sources. Available facilities included up to $1.54 billion of FHLB advances, $172.5 million of correspondent federal funds lines, and a $653 million Federal Reserve discount-window facility, subject to collateral and terms.
- The company paid $0.66 per share in dividends during 2019 and repurchased 1.30 million shares for approximately $54.9 million. The board authorized purchases of up to 1.641 million shares through December 31, 2020, subject to board discretion and regulatory constraints.
Outlook, risks and unusual matters
- No specific full-year earnings guidance was provided. Management described a data-dependent interest-rate outlook and expects continued elevated legal and professional fees in 2020 while it cooperates with investigations.
- CECL became effective for the company on January 1, 2020. Management preliminarily expected an initial 10%–20% increase in the credit-loss reserve, including unfunded commitments, subject to final model validation. The filing states that the estimate could change.
- The company received subpoenas and document requests from securities and banking regulators and U.S. Attorney’s offices concerning matters management believes relate to related-party transaction identification and disclosure, former officers’ and directors’ departures, and relationships with a local public official. The company is cooperating and says no regulatory restrictions had been imposed on its banking operations; it could not predict the investigations’ scope or outcome.
- A putative securities class action alleges misleading disclosures, including about internal controls and related-party loans. The company intends to defend itself; it could not reasonably estimate potential losses from the investigations and litigation.
- The independent auditor gave an unqualified opinion on the consolidated financial statements but an adverse opinion on internal control over financial reporting. The identified material weakness involved “tone at the top” and a control environment insufficiently tailored to deference to the former chairman/CEO, with deficiencies involving information escalation, related-party loan review and reporting, and certain vendor contracts. Management said remediation steps were taken in 2019 but the weakness would not be considered fully remediated until controls operated effectively for a sufficient period and testing supported that conclusion. Disclosure controls were also deemed ineffective.
- Other principal risks include the local commercial-real-estate concentration, borrower and collateral deterioration, deposit outflows and funding costs, interest-rate and LIBOR transition risks, regulatory changes, cybersecurity and vendor disruptions, and possible growth-related costs as assets approach $10 billion.
Important facts for investors to verify
- Progress and independent testing of material-weakness remediation, and whether disclosure controls become effective.
- Developments, potential financial exposure and legal-cost trajectory from the government investigations and securities litigation.
- Trends in nonperforming loans, charge-offs, allowance coverage, ADC projects and commercial real-estate collateral values.
- Final CECL transition adjustment and its effects on reserves, earnings and regulatory capital.
- Deposit stability, brokered and uninsured deposit levels, funding costs, liquidity availability and FHLB borrowing.
- Whether margin and earnings stabilize after 2019’s margin compression and expense increases; the filing provides no quantified earnings guidance.