Eagle Bancorp, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited consolidated results; dollar amounts below are in millions unless noted. Eagle Bancorp is a community bank serving the Washington, D.C. metropolitan area.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $25.4 | $19.7 | $70.8 | $55.5 |
| Provision for credit losses | $2.9 | $2.0 | $8.2 | $5.8 |
| Net income | $6.5 | $4.8 | $17.4 | $11.6 |
| Net income available to common shareholders | $6.3 | $4.4 | $16.0 | $10.6 |
| Diluted EPS | $0.31 | $0.22 | $0.79 | $0.53 |
| Net interest margin | 3.98% (4.15% excluding settlement deposit) | 4.10% | 4.15% (4.21% excluding settlement deposit) | 4.06% |
Year-to-date net income rose 50%; Q3 net income rose 36%. Management attributed growth primarily to higher net interest income from balance-sheet expansion and, for the nine-month period, improved margin. The $620 million short-term class-action settlement escrow deposit received in September contributed about $30,000 of after-tax income but diluted reported Q3 margin and asset-based ratios.
- Revenue and costs: Nine-month noninterest income increased 73% to $9.6 million, led by residential mortgage loan-sale gains; noninterest expense rose 20% to $45.0 million. The efficiency ratio improved to 55.92% from 61.42% (Q3: 54.43% versus 58.68%). Expenses included $1.2 million of identified nonrecurring merger, conversion and marketing costs during the nine months.
- Returns: Nine-month annualized return on average assets was 1.00% (1.01% excluding the settlement deposit) and return on average common equity was 11.10%. Q3 return on average assets was 1.00% (1.04% excluding the deposit) and return on average common equity was 12.55%.
Financial condition, liquidity and capital
- Total assets were $3.22 billion at September 30, up 54% from year-end 2010; excluding the settlement deposit, management reported $2.60 billion, up 25%. Loans were $2.03 billion, up 21% from year-end. Deposits were $2.75 billion, including the $620 million escrow; excluding it, deposits were $2.13 billion.
- Cash and cash equivalents were $648.0 million at period-end. Nine-month operating cash flow was $3.8 million, investing cash outflow was $506.8 million, and financing cash inflow was $1.10 billion, primarily reflecting deposit growth and the Series B preferred issuance.
- Liquidity was supported by deposit growth, short-term investments and borrowing capacity. Management cited $1.66 billion of primary and secondary liquidity sources, or $1.04 billion excluding the settlement deposit. Brokered deposits totaled $301.2 million; $147.7 million was outstanding under customer repurchase agreements. Long-term borrowings were $49.3 million, and the company also had $9.3 million of subordinated notes due 2016.
- Company total risk-based capital was 12.11% and Tier 1 capital was 10.49%; Bank ratios were 11.29% and 10.06%, respectively. The Bank exceeded regulatory “well-capitalized” thresholds. The reported common-equity-to-assets ratio was 6.27%, versus 8.96% a year earlier; management reported 7.76% excluding the escrow deposit.
- Shareholders’ equity increased to $258.5 million from $204.7 million at year-end. In July, Eagle issued $56.6 million of Series B preferred stock to the U.S. Treasury at a current 1.00% dividend rate, replacing the remaining Series A preferred stock, which it redeemed.
Credit quality and material changes
- Allowance for credit losses was $28.6 million, or 1.41% of loans, versus $24.8 million and 1.48% at year-end. Nine-month net charge-offs were $4.4 million (0.32% of average loans), compared with $4.1 million (0.38%) in 2010.
- Nonperforming loans were $31.4 million, or 1.55% of loans, versus $25.3 million at year-end; nonperforming assets were $34.4 million, or 1.07% of total assets (1.32% excluding the escrow). Management attributed much of the loan increase to a $12 million commercial real estate construction loan placed on nonaccrual in Q1 and anticipated no principal loss on it.
- Loans modified as troubled debt restructurings totaled $12.6 million across six credits; $9.5 million were performing under modified terms. Performing potential problem loans were $25.7 million, down from $36.5 million at year-end.
- Real estate-related lending represented approximately 72% of loans, and 78% of loans were secured by real estate. Commercial real estate loans equaled 501% of risk-based capital and construction, land and land-development loans 143%; management cited heightened risk monitoring and underwriting controls.
Outlook, risks and unusual items
- No specific earnings or financial guidance was provided. Management expected the temporary $620 million settlement deposit to be substantially disbursed to other financial institutions by year-end 2011; its effect materially inflates reported assets, deposits and liquidity measures.
- The company had agreed to acquire Alliance Bankshares in a stock-for-stock transaction (0.4317 Eagle shares per Alliance share, subject to adjustment). The transaction remained subject to shareholder and regulatory approvals and other closing conditions.
- Management planned two additional Northern Virginia offices in 2012. It noted possible pressure on funding costs if competition for noninterest-bearing business deposits intensifies, and uncertainty around interest rates, deposit behavior, real estate values and credit conditions.
- Unfunded loan commitments, home-equity lines and letters of credit totaled $665.9 million; actual funding may be lower because commitments can expire undrawn and are subject to conditions. Management reported no legal proceedings expected to have a material adverse effect, no material change in disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- Whether and when the settlement escrow was disbursed, and the resulting normalized deposit, liquidity, margin and leverage levels.
- Progress and credit performance of the $12 million nonaccrual construction credit, other nonperforming loans, TDRs and potential problem loans; adequacy of the allowance as loans grow.
- Alliance merger approvals, closing conditions, timing, exchange-ratio adjustments and expected costs or benefits.
- Deposit mix and brokered-funding reliance, especially after the escrow deposit leaves, alongside loan growth and the bank’s commercial real estate concentration.
- Whether reported profitability and margin gains persist after excluding unusual settlement-deposit effects, securities gains and identified one-time expenses.