Eagle Bancorp(US:EGBN)2020-11-09 21:55PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) The unaudited consolidated financial statements as of September 30, 2020, detail the company's financial position, performance, and cash flows, including notes on accounting policies and COVID-19 impacts Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2020 | December 31, 2019 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $10,106,294 | $8,988,719 | +12.4% | | Loans, net | $7,770,040 | $7,472,090 | +4.0% | | Total Deposits | $8,178,785 | $7,224,391 | +13.2% | | Total Liabilities | $8,882,892 | $7,798,038 | +13.9% | | Total Shareholders' Equity | $1,223,402 | $1,190,681 | +2.7% | Consolidated Statements of Income Consolidated Income Statement Highlights (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $79,038 | $80,989 | $240,145 | $243,335 | | Provision for Credit Losses | $6,607 | $3,186 | $40,654 | $10,146 | | Net Income | $41,346 | $36,495 | $93,325 | $107,487 | | Diluted EPS | $1.28 | $1.07 | $2.88 | $3.12 | - Net income for Q3 2020 increased 13.3% YoY to $41.3 million, driven by a significant increase in noninterest income, particularly a $9.7 million YoY increase in gain on sale of loans; however, for the nine months ended September 30, 2020, net income decreased 13.2% YoY to $93.3 million, primarily due to a four-fold increase in the provision for credit losses13 Consolidated Statements of Cash Flows Cash Flow Summary (in thousands) | Activity | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $107,585 | $92,339 | | Net cash used in investing activities | ($475,566) | ($499,399) | | Net cash provided by financing activities | $983,116 | $480,718 | | Net Increase in Cash and Cash Equivalents | $615,135 | $73,658 | - The significant increase in cash and cash equivalents during the first nine months of 2020 was primarily driven by a $954.4 million increase in deposits, which fueled financing activities26 Notes to Consolidated Financial Statements Notes detail accounting policies, the adoption of the CECL standard, COVID-19 impacts, and breakdowns of key financial items - On January 1, 2020, the company adopted the new CECL accounting standard (ASU 2016-13), which resulted in a day-one cumulative-effect adjustment that decreased retained earnings by $10.9 million, net of tax; this standard replaces the incurred loss model with a lifetime expected credit loss model214787 - In response to the COVID-19 pandemic, the company implemented a short-term loan modification program; as of September 30, 2020, ongoing temporary modifications were in place for approximately 321 loans, representing an outstanding balance of $851 million (10.8% of total loans)43157 - The company is an active participant in the Paycheck Protection Program (PPP), with PPP loans totaling $456.1 million as of September 30, 2020; these loans are fully guaranteed by the U.S. government44113 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management analyzes financial performance, noting higher Q3 income offset by a nine-month decline due to increased credit loss provisions Results of Operations Q3 2020 net income rose on strong noninterest income, though nine-month results fell due to higher credit loss provisions and margin compression Key Performance Metrics | Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Income (in millions) | $41.3 | $36.5 | $93.3 | $107.5 | | Diluted EPS | $1.28 | $1.07 | $2.88 | $3.12 | | Net Interest Margin | 3.08% | 3.72% | 3.27% | 3.88% | | ROAA (annualized) | 1.57% | 1.62% | 1.24% | 1.66% | | ROACE (annualized) | 14.46% | 12.09% | 10.44% | 12.34% | - The provision for credit losses increased significantly to $6.6 million for Q3 2020 and $40.7 million for the first nine months of 2020, compared to $3.2 million and $10.1 million for the respective periods in 2019; this increase is attributed to the implementation of the CECL accounting standard and the economic impact of COVID-19275315316 - Noninterest income surged 183% YoY in Q3 2020 to $17.8 million, primarily due to a $12.2 million gain on sale of loans, which was up 377% from Q3 2019, reflecting a strong residential mortgage market and an accounting adjustment that accelerated revenue recognition278280342 Financial Condition Total assets grew to $10.1 billion, driven by deposit growth, while credit loss allowances and nonperforming assets increased Balance Sheet Summary (in billions) | Account | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Assets | $10.1 | $9.0 | | Total Loans | $7.9 | $7.6 | | Total Deposits | $8.2 | $7.2 | | Total Shareholders' Equity | $1.22 | $1.19 | - Nonperforming assets stood at $63.0 million, or 0.62% of total assets, at September 30, 2020, an increase from $50.2 million, or 0.56% of total assets, at December 31, 2019325337 - The company identified industries of potential concern due to COVID-19, with loans to the Accommodation & Food Services sector representing 10.2% of the total loan portfolio and Retail Trade representing 1.3%380382 Liquidity and Capital Resources The company maintains a strong liquidity position and capital ratios well above regulatory minimums, with a delayed CECL impact on capital Regulatory Capital Ratios (Company) | Ratio | Sep 30, 2020 | Dec 31, 2019 | Minimum for Well-Capitalized* | | :--- | :--- | :--- | :--- | | CET1 Capital Ratio | 13.19% | 12.87% | 6.50% | | Tier 1 Capital Ratio | 13.19% | 12.87% | 8.00% | | Total Capital Ratio | 16.72% | 16.20% | 10.00% | | Tier 1 Leverage Ratio | 10.82% | 11.62% | 5.00% | *Applies to Bank only - The company has substantial secondary liquidity sources, including the ability to borrow up to $1.3 billion from the FHLB (with $350 million outstanding) and purchase up to $155 million in federal funds395 - The company's Board of Directors declared a quarterly cash dividend of $0.22 per share in September 2020442 Quantitative and Qualitative Disclosures About Market Risk The company has a moderate interest rate risk profile, with simulations showing limited net interest income sensitivity to rate changes Interest Rate Sensitivity Analysis (at Sep 30, 2020) | Change in Interest Rates (basis points) | Percentage change in net interest income (next 12 months) | | :--- | :--- | | +200 | +6.0% | | +100 | +1.9% | | -100 | (1.3)% | | -200 | (2.0)% | Controls and Procedures Disclosure controls were deemed effective, and remediation for a prior material weakness is considered complete - Management believes that the deficiencies contributing to a previously disclosed material weakness have been remediated as of June 30, 2020454 - Key remediation actions included splitting the roles of Chairman and CEO, restructuring the Board of Directors, enhancing policies for related party transactions, and reinforcing the risk management function455 PART II. OTHER INFORMATION Legal Proceedings The company faces a class action lawsuit and regulatory investigations concerning internal controls and related party transactions - A putative class action lawsuit was filed against the Company, alleging violations of the Securities Exchange Act of 1934 related to disclosures about internal controls and related party loans; the defendants' motion to dismiss is currently under consideration by the court460 - The Company has received document requests and subpoenas from regulators and U.S. Attorney's offices in connection with investigations into related party transactions, the retirement of former officers, and relationships with a local public official462 Risk Factors Key risks include the adverse impacts of the COVID-19 pandemic on credit quality, capital, liquidity, and operational security - The COVID-19 pandemic is expected to continue adversely affecting customers, potentially worsening credit quality; industries of particular concern include Accommodation and Food Service (10.2% of loan portfolio) and Retail Trade (1.3% of loan portfolio)463467 - The company may need to record additional provisions for credit losses as the pandemic evolves, and the uncertainty impairs the ability to accurately forecast future losses under the new CECL methodology468 - Operational risks have increased due to remote work arrangements, including heightened cybersecurity threats (phishing, malware), potential disruptions to IT infrastructure, and challenges in maintaining compliance programs like anti-money laundering473 Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity sales occurred, and no shares were repurchased in Q3 2020 under the reinstated buyback program Issuer Purchases of Equity Securities (Q3 2020) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Maximum Number of Shares that May Yet Be Purchased | | :--- | :--- | :--- | :--- | | July 2020 | 0 | N/A | 447,890 | | August 2020 | 157* | $29.52 | 447,733 | | September 2020 | 0 | N/A | 447,733 | | Total | 157 | $29.52 | 447,733 | *Includes shares acquired for tax withholding on vested restricted shares.