Eagle Bancorp, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Eagle Bancorp is a community banking holding company operating primarily in the Washington, D.C. metropolitan area. Financial amounts below are in U.S. dollars; millions unless stated otherwise.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $81.0m | $81.3m | $243.3m | $235.3m |
| Provision for credit losses | $3.2m | $2.4m | $10.1m | $6.1m |
| Noninterest income | $6.3m | $5.6m | $19.0m | $16.5m |
| Noninterest expense | $33.5m | $31.6m | $105.1m | $95.0m |
| Net income | $36.5m | $38.9m | $107.5m | $112.0m |
| Diluted EPS | $1.07 | $1.13 | $3.12 | $3.25 |
| Net interest margin | 3.72% | 4.14% | 3.88% | 4.15% |
- For Q3, net income fell 6% year over year; nine-month net income fell 4%. The company attributed the declines principally to margin compression and higher expenses, including accelerated stock-compensation costs.
- Q3 return on average assets was 1.62%, versus 1.93%; return on average common equity was 12.09%, versus 14.85%. The efficiency ratio increased to 38.34% from 36.37% in Q3 and to 40.08% from 37.74% year to date.
- Net interest income was nearly flat in Q3 despite loan growth: lower earning-asset yields and a higher cost of interest-bearing liabilities compressed the margin. Year-to-date average earning assets grew 11%; average interest-bearing liability cost rose to 2.02% from 1.50%.
- Cash flow for the first nine months: operating activities generated $92.3m, investing activities used $499.4m, and financing activities provided $480.7m. Cash and cash equivalents ended at $395.5m, up $73.7m from year-end 2018.
Financial position, credit and liquidity
- At September 30, total assets were $9.00bn, loans were $7.56bn, deposits were $7.40bn, and shareholders’ equity was $1.18bn. Since December 31, 2018, assets increased 7%, loans 8%, and deposits 6%.
- Loans were concentrated in commercial real estate: income-producing CRE was 51% of loans, owner-occupied CRE 13%, and commercial/residential construction 14%. Management reported that 85% of loans were secured by real estate; non-owner-occupied CRE and construction represented 65% of the portfolio.
- The allowance for credit losses was $73.7m, or 0.98% of loans, compared with $69.9m and 1.00% at year-end. Nine-month net charge-offs were $6.4m (annualized 0.12% of average loans), versus $2.6m (0.05%) in 2018.
- Nonperforming assets rose to $59.1m, or 0.66% of assets, from $17.7m, or 0.21%, at year-end. Nonperforming loans were $57.7m, including a $16.5m loan reported as brought current shortly after quarter-end; excluding it, management cited nonperforming loans of $41.1m and an allowance coverage ratio of 179%, versus the reported 128%.
- Borrowed funds totaled $317.6m, including $100m of FHLB advances; long-term subordinated notes had $220m principal outstanding. The company reported $4.57bn of primary and secondary liquidity sources and $1.7bn of FHLB borrowing capacity based on collateral.
- Brokered deposits, excluding reciprocal CDARS/ICS balances, were $1.70bn, or 23% of deposits, compared with $1.36bn, or 20%, at year-end. Management cautioned that reputation, regulatory, or market-rate changes could lead to brokered-deposit outflows.
- Company total risk-based capital ratio was 16.08%; the Bank’s was 15.38%. Both exceeded applicable well-capitalized thresholds. The company reported a 12.13% tangible common equity ratio and $32.02 tangible book value per share.
Material changes and unusual items
- Q3 included $2.0m of accelerated share-based compensation expense following director resignations and a $1.1m FDIC assessment credit. Management stated that excluding these two items, Q3 net income would have been $37.1m, or $1.08 per diluted share.
- Nine-month results included $8.2m of nonrecurring accelerated stock-compensation charges related to the former Chairman and CEO’s retirement and director resignations. The company repurchased 822,200 shares during the period at a weighted-average $40.58 under a new authorization for up to 1,715,547 shares, expiring December 31, 2019 unless terminated earlier.
- Legal, accounting and professional expense increased to $3.6m in Q3 from $2.1m, primarily due to government investigations. The company expected elevated legal and professional costs through at least the remainder of 2019, could not predict the investigations’ duration, scope, or outcome, and said no regulatory restrictions had been placed on its banking activities.
- A putative securities class action filed July 24, 2019 alleges misrepresentations or omissions in company disclosures, including concerning internal controls and related-party transactions. The company said it believes the claims are without merit and intends to defend vigorously; the case seeks damages.
Outlook, risks and contingencies
- No specific earnings or growth guidance was provided. Management said market-rate declines pressured margins, while the company continued to pursue loan growth and relationship-based deposit funding. Its simulation estimated net interest income would change +4.8% with a 100-basis-point rate increase and -3.7% with a 100-basis-point decrease, based on stated assumptions.
- Management preliminarily expected adoption of CECL on January 1, 2020 to increase the credit-loss reserve by 10%–20%, including commitments to lend; the estimate remained subject to model validation and could change.
- Management identified CRE concentration, especially commercial real estate and construction lending, as a risk. Non-owner-occupied CRE (including construction, land and land development) was 355% of risk-based capital. The filing also noted softness in ultra-high-end residential property markets and increased nonperforming loans.
- Unfunded loan commitments, lines of credit and letters of credit totaled $2.30bn. The company noted that commitments may expire undrawn and therefore do not necessarily equal future cash requirements.
- Operating lease liabilities were $29.6m after adopting the new lease standard in 2019. The filing stated that leases did not impose material dividend or additional-borrowing restrictions.
Important facts for investors to verify
- Progress and potential financial or regulatory consequences of the government investigations and the securities class action, including future legal costs.
- Whether the elevated nonperforming-loan balance persists, particularly after the $16.5m loan’s reported post-quarter cure, and whether the allowance remains adequate.
- CECL implementation outcomes and how the expected 10%–20% reserve increase affects capital, earnings, and lending capacity.
- Loan and deposit growth quality, CRE concentration, brokered-deposit dependence, and available liquidity under stress.
- Whether net interest margin stabilizes as rates and deposit costs change, and the impact of share repurchases and dividends on capital.