Eagle Bancorp(EGBN) - 2020 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) The unaudited statements reflect the company's financial position, operations, and cash flows, impacted by CECL adoption and COVID-19 Consolidated Balance Sheets Total assets grew to $9.99 billion, driven by deposit growth, while the allowance for credit losses increased due to CECL adoption Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2020 | December 31, 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | $9,992,219 | $8,988,719 | +11.2% | | Loans, net | $7,744,537 | $7,472,090 | +3.6% | | Allowance for credit losses | $96,336 | $73,658 | +30.8% | | Total Deposits | $8,141,568 | $7,224,391 | +12.7% | | Total Liabilities | $8,829,441 | $7,798,038 | +13.2% | | Total Shareholders' Equity | $1,162,778 | $1,190,681 | -2.3% | Consolidated Statements of Operations Net income decreased 31.5% to $23.1 million, primarily due to a significantly higher provision for credit losses Q1 2020 vs Q1 2019 Performance (in thousands, except per share data) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Net Interest Income | $79,744 | $81,017 | -1.6% | | Provision for Credit Losses | $14,310 | $3,360 | +325.9% | | Noninterest Income | $5,470 | $6,291 | -13.1% | | Noninterest Expense | $37,347 | $38,304 | -2.5% | | Net Income | $23,123 | $33,749 | -31.5% | | Diluted EPS | $0.70 | $0.98 | -28.6% | - Legal, accounting and professional fees increased significantly to $7.0 million in Q1 2020 from $1.7 million in Q1 2019[14] Consolidated Statements of Cash Flows Net cash from financing activities drove a $697.6 million net increase in cash and cash equivalents for the period Cash Flow Summary (in thousands) | Activity | Three Months Ended March 31, 2020 | | :--- | :--- | | Net cash provided by operating activities | $35,786 | | Net cash used in investing activities | ($304,522) | | Net cash provided by financing activities | $966,377 | | Net Increase in Cash and Cash Equivalents | $697,641 | Notes to Consolidated Financial Statements The notes detail the material impacts of CECL adoption, the company's response to COVID-19, and credit quality details - The company adopted ASU 2016-13 (CECL) on January 1, 2020, replacing the incurred loss model with an expected loss model, resulting in a $10.6 million increase to the allowance for credit losses on loans and a $4.1 million increase to the reserve for unfunded commitments[44][46][86] - In response to COVID-19, the company implemented a loan modification program, granting temporary relief on approximately 382 loans totaling $576 million in exposure through April 30, 2020[40][152] - The company is an active participant in the SBA's Paycheck Protection Program (PPP), with $444.8 million in principal outstanding across 1,090 borrowers as of April 30, 2020[41] - The allowance for credit losses is estimated using a Discounted Cash Flow (DCF) method for most loan pools, which models lifetime probability of default and loss given default using national unemployment as a key loss driver[73][74][75] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the Q1 net income decline to a higher credit loss provision and legal fees driven by CECL and COVID-19 Results of Operations Net income fell due to a 398% increase in the credit loss provision and a sharp rise in legal fees, despite lower operating expenses Key Performance Metrics (Annualized) | Metric | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Return on Average Assets (ROAA) | 0.98% | 1.62% | | Return on Average Common Equity (ROACE) | 7.81% | 12.12% | | Return on Average Tangible Common Equity (ROATCE) | 8.56% | 13.38% | | Net Interest Margin | 3.49% | 4.02% | | Efficiency Ratio | 43.83% | 43.87% | - The provision for credit losses increased to $16.4 million, a 398% increase from Q1 2019, due to the adoption of CECL and increased reserves associated with the COVID-19 pandemic[259][270] - Legal, accounting and professional fees increased by $5.3 million (309%) to $7.0 million, primarily associated with ongoing governmental investigations and defense of a class action lawsuit[274][328] Financial Condition Total assets grew 11% to $9.99 billion, with key loan portfolio exposures to COVID-19 identified in specific sectors COVID-19 Loan Portfolio Exposure as of March 31, 2020 | Industry / Property Type | Principal Balance (in thousands) | % of Loan Portfolio | | :--- | :--- | :--- | | Accommodation & Food Services | $761,346 | 9.7% | | Retail Trade | $89,753 | 1.1% | | CRE - Retail Property | $391,158 | 5.0% | | CRE - Hotel Property | $40,751 | 0.5% | | CRE - Restaurant Property | $40,031 | 0.5% | - Nonperforming assets were stable at 0.56% of total assets at March 31, 2020, totaling $56.0 million[298] - Brokered deposits (excluding reciprocal CDARS/ICS) were $2.09 billion, or 26% of total deposits, at March 31, 2020[350] Liquidity and Capital Resources The company maintained strong liquidity and capital ratios, though the share repurchase program was suspended due to market uncertainty Regulatory Capital Ratios as of March 31, 2020 | Ratio | Company Actual | Minimum for Adequacy (incl. buffer) | To Be Well-Capitalized* | | :--- | :--- | :--- | :--- | | CET1 Capital Ratio | 12.14% | 7.00% | 6.5% | | Tier 1 Capital Ratio | 12.14% | 8.50% | 8.0% | | Total Capital Ratio | 15.44% | 10.50% | 10.0% | | Tier 1 Leverage Ratio | 11.33% | 4.00% | 5.0% | *Applies to Bank only - The company suspended its share repurchase program due to COVID-19 uncertainty after repurchasing 1,193,052 shares in Q1 2020 at an average price of $37.31[337][406] - The company has elected to adopt the interim final rule providing a two-year delay followed by a three-year phase-in for the regulatory capital impact of CECL[413] Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk via its ALCO, with simulations showing moderate sensitivity to rate changes Interest Rate Sensitivity Analysis (Next 12 Months) | Change in Interest Rates (bps) | % Change in Net Interest Income | % Change in Net Income | % Change in Market Value of Portfolio Equity | | :--- | :--- | :--- | :--- | | +200 | +7.2% | +12.7% | +10.6% | | +100 | +2.8% | +4.9% | +6.1% | | -100 | -6.0% | -10.4% | -16.6% | - At March 31, 2020, 61% of the total loan portfolio consisted of variable and adjustable rate loans, providing some protection in a rising rate environment[373][375] - The cumulative 12-month GAP position was negative $269 million (3% of total assets), a shift from a positive GAP at year-end 2019, indicating a more liability-sensitive stance[392] Controls and Procedures Disclosure controls were deemed ineffective as of March 31, 2020, due to a previously identified material weakness - Management concluded that disclosure controls and procedures were not effective as of March 31, 2020, due to a previously disclosed material weakness[418] - Remediation efforts are ongoing and include restructuring the Board, hiring a new Chief Legal Officer, enhancing policies for related party transactions, and reinforcing the risk management function[421] PART II. OTHER INFORMATION Legal Proceedings The company is involved in a class action lawsuit and regulatory investigations related to internal controls and other matters - A putative class action lawsuit filed in July 2019 alleges violations of the Securities Exchange Act related to disclosures about internal controls and related party loans[426] - The company has received various subpoenas and document requests from regulators and U.S. Attorney's offices in connection with investigations into related party transactions and other matters[427] Risk Factors Key risks include adverse impacts from the COVID-19 pandemic on credit quality, capital, and operational stability - The COVID-19 pandemic is expected to have significant adverse impacts on loan credit quality, especially within the Accommodation & Food Service (9.7% of portfolio) and Retail Trade (1.1% of portfolio) industries[428][431] - The CECL methodology, combined with economic uncertainty from the pandemic, may lead to increased and more volatile provisions for credit losses[432] - Operational risks are heightened due to remote work arrangements, including increased cybersecurity threats and potential disruptions from third-party service providers[439][440] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 1.2 million shares in Q1 2020 before suspending its buyback program due to market uncertainty Issuer Purchases of Equity Securities (Q1 2020) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Jan 1-31, 2020 | 219,812 | $44.47 | | Feb 1-29, 2020 | 343,211 | $44.65 | | Mar 1-31, 2020 | 630,029 | $30.93 | | Total | 1,193,052 | $37.31 | Defaults Upon Senior Securities No defaults upon senior securities were reported during the period - No defaults upon senior securities were reported for the period[445] Mine Safety Disclosures This section is not applicable to the company's operations - This item is not applicable to the company[445] Other Information No other material information was required to be disclosed for the period - No other information was required to be disclosed under this item[445] Exhibits This section lists all exhibits filed with the Form 10-Q, including certifications and various corporate agreements