Eagle Bancorp, Inc. Announces Net Income For Second Quarter 2023 Of $28.7 Million Or $0.94 Per Diluted Share

BETHESDA, Md., July 26, 2023 (GLOBE NEWSWIRE) -- Eagle Bancorp, Inc. (the "Company") (NASDAQ: EGBN), the parent company of EagleBank (the "Bank"), today announced net income of $28.7 million for the second quarter 2023, compared to net income of $24.2 million for the first quarter 2023 (the "prior quarter") and $15.7 million for the second quarter 2022 (the "year-ago quarter"). Net income (basic and diluted) was $0.94 per share for the second quarter 2023, compared to $0.78 per share for the prior quarter, and $0.49 per share for the year-ago quarter. Net income for the year-ago quarter included one-time costs related to the legal settlements associated with the previously disclosed government investigations.

The $4.5 million increase in earnings from the prior quarter was attributable to several items including income from a Small Business Investment Company ("SBIC") investment, an increase in swap fee income, lower noninterest expenses, a lower provision for credit losses and a lower provision for unfunded commitments. These improvements were partially offset by lower net interest income as the cost of funding outpaced the increase in yield on earning assets.

Second Quarter 2023 Highlights

• The Company declared a quarterly dividend of $0.45 per share.
• The Company repurchased 1,200,000 shares in the second quarter at an average price of $24.48 per share.
• Common equity and tangible common equity ratios at quarter-end were 11.05% and 10.21%¹, respectively.
• Nonperforming assets as a percent of assets was 0.28%. Net charge-off for the quarter was $5.6 million, or 0.29%.  
• The provision for credit losses was $5.2 million for the quarter, as compared to $6.2 million the prior quarter. The allowance for credit losses as a percent of total loans was 1.00% down from 1.01% a quarter ago.
• Loans at quarter-end were $7.8 billion, up $29 million from the prior quarter-end. This was the seventh consecutive quarterly increase.
• The funding mix changed as deposits at quarter-end were $7.7 billion, up $255 million from the prior quarter-end, and short-term borrowings were $1.8 billion, down $277 million from the prior quarter-end.   The increase in deposits was primarily from growth in brokered time deposits and the decrease in borrowings was from repayment of Federal Home Loan Bank ("FHLB") borrowings.
• Total estimated uninsured deposits at June 30, 2023 were $2.3 billion, or 29.4% of deposits.
• The Company has implemented an expense reduction plan. In the second quarter, two branches were closed with an annual pre-tax cost savings in rental expense of $408 thousand. Early in the third quarter, the Company also implemented a reduction-in-force that along with identified cost savings is expected to generate cost savings of $2.4 million in the second half of 2023 plus an additional reduction of $5.8 million in 2024.

CEO Commentary

Susan G. Riel, President and Chief Executive Officer of Eagle Bancorp, Inc. commented, "While earnings stabilized and were higher than the prior quarter, we remain committed to improving results for our shareholders. During the quarter, our deposits were up, borrowings decreased, and credit metrics continue to remain strong. And, while rising rates continued to put pressure on bank stocks, we used the opportunity to repurchase shares at a historically low price relative to book and tangible book values. Additionally, our regulatory capital ratios remain strong."

"We are also mindful of continuing to remain a highly efficient bank and in the first half of the year we took action to save costs by closing three branches³ and ceasing the origination of first lien residential mortgages as future prospects for sufficient returns were low. Early in the third quarter, we also made the difficult decision to implement a reduction-in-force along with a strategic review of operating expenses."
  
"We once again thank all of our employees for their commitment in serving the needs of our clients and communities. Additionally, we remain committed to a culture of respect, diversity and inclusion in both the workplace and the communities we serve."

Income Statement

• Net interest income was $71.8 million for the second quarter 2023, compared to $75.0 million for the prior quarter and $82.9 million for the year-ago quarter. The decrease in net interest income from the prior quarter was primarily driven by the impact of higher interest rates paid on deposits and the full impact of changes in the funding mix beginning late in the first quarter of 2023. These changes included a higher level of borrowings at rates higher than those of the deposits those borrowings replaced, as well as a shift in noninterest bearing deposit accounts to interest bearing deposit accounts. Although higher interest rates benefited loan yields as variable rate loans adjusted upward and new loans were added at current, higher rates, the increase to interest income was less than the increase in interest expense on average deposits and average borrowings.

• Net interest margin ("NIM") was 2.49% for the second quarter 2023, compared to 2.77% for the prior quarter and 2.94% for the year-ago quarter. The decrease in margin from the prior quarter was 28 basis points. The NIM contraction was based on the cost of funds increasing by 58 basis points, partially offset by the yield on earning assets increasing 27 basis points.
  • The yield on the loan portfolio was 6.64% for the second quarter 2023, compared to 6.35% for the prior quarter and 4.51% for the year-ago quarter. The increase of 29 basis points from the prior quarter was from variable rate loans adjusting upward and from higher rates on newly originated loans.
  • The yield on interest earning assets, which is inclusive of the yields on loans and securities, was 5.44% for the second quarter 2023 compared to 5.17% for the prior quarter and 3.39% for the year-ago quarter. The increase of 27 basis points from the prior quarter was from variable rate loans adjusting upward, higher rates on newly originated loans, and higher rates on short-term investments.
  • The cost of funds was 3.20% for second quarter 2023, compared to 2.62% for the prior quarter and 0.49% for the year-ago quarter.⁴ The increase of 58 basis points from the prior quarter was primarily due to the impact of higher interest rates paid on deposits and the full impact of changes late in the first quarter of 2023 that included a higher level of borrowings at rates higher than those of the deposits the borrowings replaced along with a continued shift in noninterest bearing deposit accounts to interest bearing deposit accounts.
• Pre-provision net revenue ("PPNR"),⁵ a non-GAAP measure, was $42.4 million, or 1.43% of average assets for the second quarter 2023, up from $38.1 million and 1.35%, respectively. This increase from the prior quarter in both PPNR and PPNR as a percent of average assets was primarily attributable to the combined impact of the higher noninterest income and lower noninterest expense outpacing the decline in net interest income.

• Provision for credit losses on loans was $5.2 million for the second quarter 2023, compared to $6.2 million for the prior quarter and $0.5 million for the year-ago quarter. The decrease in the second quarter 2023 provision over the prior quarter was primarily driven by a lower quantitative formula reserve partially offset by a higher reserve based on the qualitative and environmental ("Q&E") portion of the credit model. The decrease in quantitative reserves was primarily driven by improvements in local unemployment data. The increase in Q&E modeling was driven by a higher allowance for commercial real estate office properties partially offset by a lower allowance for accommodations and food services.

• Noninterest income was $8.6 million for the second quarter 2023, as compared to $3.7 million for the prior quarter and $5.6 million for the year-ago quarter. The primary driver for the increase in the second quarter 2023 from the prior quarter were income of $2.8 million from an SBIC fund and an increase in swap fee income of $959 thousand.

• Noninterest expense was $38.0 million for the second quarter 2023 compared to $40.6 million for the prior quarter and $59.0 million for the year-ago quarter. Noninterest expense was down $2.6 million from the prior quarter, primarily due to the prior quarter including higher compensation and legal expenses and was down $21.0 million from the year-ago quarter which included a large non-recurring expense related to legal settlements associated with the previously disclosed government investigations.

Notable changes from the prior quarter were as follows:

• Salaries and employee benefits were $22.0 million, down $2.2 million from the prior quarter. The decrease was primarily due to a reduction in the annual incentive bonus accrual and payroll taxes from the prior quarter.
• Legal, accounting and professional fees were $2.6 million, down $605 thousand from the prior quarter. The decrease was primarily due to lower legal expenses.
• FDIC insurance was $2.6 million, up $1.1 million from the prior quarter. The increase was primarily from higher assessment fees in 2023.
• Other expenses were $3.3 million, down $1.3 million from the prior quarter. The decrease was primarily due to the prior quarter including compensation to the Company's Executive Chairman.

During the second quarter 2023, the Georgetown branch (DC) and Chantilly branch (VA) were closed as their leases were expiring. Associated unamortized costs included in the second quarter was $240 thousand. This reduced our branch count to thirteen, and the annualized pre-tax cost savings in rental expense starting in the third quarter of 2023 will be approximately $408 thousand.

• Efficiency ratio⁶ was 47.2% for the second quarter 2023, compared to 51.6% for the prior quarter. The improvement in the efficiency ratio this quarter was primarily driven by higher noninterest income (as a result of income from an SBIC fund and swap fee income) and lower noninterest expense, which more than offset the reduction in net interest income.

• Effective income tax rate for the second quarter 2023 was 22.2%, compared to 22.1% for the prior quarter.

Balance Sheet

• Total assets were $11.0 billion at June 30, 2023, down 0.5% from a quarter ago and up 0.9% from a year ago. The decrease in assets from a quarter ago was primarily from lower balances in investment securities, partially offset by limited growth in loans. Loans-to-deposits was 101% at June 30, 2023, down from 104% a quarter ago.

• Investment securities Available-for-Sale ("AFS") had a balance of $1.5 billion at June 30, 2023, down 2.9% from a quarter ago and down 12.5% from a year ago. The decrease from the prior quarter-end was primarily from principal paydowns, maturities received and lower carrying values on AFS securities. No new investments were purchased during the second quarter of 2023.

• Investment securities Held-to-Maturity ("HTM") had a balance of $1.1 billion at June 30, 2023, down 1.9% from a quarter ago and down 7.7% from a year ago. The decrease from the prior quarter-end was primarily from principal paydowns and maturities received. No new investments were purchased during the second quarter of 2023.
  
  Investment securities HTM had a fair value that was $132 million less than carrying value at quarter-end, compared to a difference of $112 million a quarter ago.

• Total loans (excluding loans held for sale) were $7.8 billion at June 30, 2023, up 0.4% from a quarter ago and up 8.6% from a year ago. The increase in total loans from the prior quarter-end was driven by growth in commercial real estate ("CRE") loans as period-end balances for commercial & industrial loans and construction loans for commercial and residential properties were down.
  
  At June 30, 2023, income-producing commercial real estate loans secured by office properties other than owner-occupied properties ("CRE office loans") were 12.6% of the total loan portfolio, and we did not have any office construction loans (secured by offices outstanding). Our CRE office loans are primarily located in the Washington DC market with 24.1% in the District of Columbia, 33.0% in Washington's Maryland suburbs, 34.9% in Northern Virginia, and 8.0% located outside these markets.

• Allowance for credit losses was 1.00% of total loans at June 30, 2023, compared to 1.01% a quarter ago, and 1.02% a year ago. See commentary above in section "Provision for Credit Losses on Loans."
  
  Net charge-off was $5.6 million for the quarter, which as a percent of average loans (excluding loans held for sale)⁷ was 0.29% for the second quarter 2023, compared to 0.05% a quarter ago, and net recovery of 0.04% the year-ago quarter. Charge-offs for the second quarter 2023 were primarily from two office properties outside of the District of Columbia.

• Nonperforming loans and assets were $29.2 million and $30.7 million, respectively, at June 30, 2023.
  • Nonperforming loans ("NPLs") as a percent of loans were 0.38% at June 30, 2023, compared to 0.09% a quarter ago and 0.26% a year ago. The increase from a quarter ago was primarily from one commercial office note in Northern Virginia, of which a portion was charged off during the second quarter of 2023.
  • Nonperforming assets ("NPAs") as a percent of assets were 0.28% at June 30, 2023, compared to 0.08% a quarter ago and 0.19% a year ago. The increase in NPAs from the prior quarter are related to the same NPL discussed above. At quarter end, other real estate owned consisted of three properties with an aggregate value of $1.5 million.
  • Loans 30-89 days late were $41.4 million at June 30, 2023, up from $15.7 million a quarter ago and $3.9 million a year ago. The increase from the prior quarter was primarily from one multi-family credit for $39.5 million.

• Total deposits were $7.7 billion at June 30, 2023, up 3.4% from a quarter ago and down 15.8% from a year ago. The increase from the prior quarter-end was primarily attributable to an increase in brokered time deposits. For the quarter, average noninterest bearing deposits to average total deposits was 30.1% for the second quarter 2023, down from 37.4% a quarter ago and down from 37.9% for the year-ago quarter. The percentage decrease in the second quarter 2023 reflected a lower level of noninterest bearing deposits and a higher level of brokered time deposits.
  
  Total estimated uninsured deposits at June 30, 2023 were $2.3 billion⁸, or 29.4% of deposits.

• Other short-term borrowings were $1.8 billion at June 30, 2023, down from $2.1 billion a quarter ago, and up from $280 million a year ago. The decrease in borrowings of $277 million from a quarter ago was primarily driven by the increase in deposits which were used to pay down borrowings. During the quarter, FHLB borrowings decreased by $777 million, while Bank Term Funding Program ("BTFP") borrowings increased by $500 million.
  • BTFP borrowings were $1.3 billion at June 30, 2023 with a rate of 4.53% for a term of up to one year from the date the proceeds were borrowed.
  • FHLB borrowings were $537 million at June 30, 2023 with a floating rate, at an average rate of 5.34% for terms that are either overnight or less than three months. 

Borrowings from the BTFP are secured by U.S. Treasuries, agency debt and mortgage-backed securities as collateral, and borrowings from the FHLB are secured by collateral consisting of qualifying loans in the Bank's commercial mortgage, residential mortgage and home equity loan portfolios as well as qualifying securities.

The BTFP provides a source of liquidity in addition to sources available from the FHLB and others. The Company drew advances from the BTFP to optimize its funding mix taking into account collateral terms and interest rates at the time the program was accessed. As of June 30, 2023, the Company had aggregate undrawn borrowing capacity of $1.84 billion, which includes $1.57 billion in additional aggregate capacity to borrow with the FHLB and BTFP on assets that have been pledged and unencumbered securities totaling approximately $0.27 billion available for pledging to the FHLB or BTFP.

• Total shareholders’ equity was $1.2 billion at June 30, 2023, down 1.8% from a quarter ago, and down 2.6% from a year ago. The decrease in shareholders' equity of $22.2 million from the prior quarter-end was primarily from share repurchases, dividends declared and lower valuations of AFS securities, partially offset by net income. Values for book and tangible book were up as share repurchases, at prices below book and tangible book values, reduced the number of shares outstanding in each of the past two quarters.
  • Book value per share was $40.78, up $0.86 from a quarter ago, and up $1.73 from a year ago.
  • Tangible book value per share⁹ was $37.29, up $0.72 from a quarter ago, and up $1.49 from a year ago.
• Dividends: On June 29, 2023, the Board of Directors declared a quarterly cash dividend of $0.45 per share payable on July 28, 2023 to shareholders of record on July 20, 2023.
• Stock Repurchases: During the quarter, the Company repurchased 1,200,000 shares at an average price of $24.48 per share (including commissions), totaling an aggregate of $29.4 million.
• Capital ratios for the Company are in the table below. Regulatory capital ratios for the Company continue to be strong and in excess of the regulatory requirements (inclusive of applicable buffers).

Additional financial information: The financial information that follows provides more detail on the Company’s financial performance for the three months ended June 30, 2023 as compared to the three months ended March 31, 2023 and June 30, 2022, as well as eight quarters of trend data. Persons wishing additional information should refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, and other reports filed with the SEC.

About Eagle Bancorp: The Company is the holding company for EagleBank, which commenced operations in 1998. The Bank is headquartered in Bethesda, Maryland, and operates through thirteen banking offices and four lending offices, located in Suburban Maryland, Washington, D.C. and Northern Virginia. The Company focuses on building relationships with businesses, professionals and individuals in its marketplace, and is committed to a culture of respect, diversity, equity and inclusion in both its workplace and the communities in which it operates.

Conference call: Eagle Bancorp will host a conference call to discuss its second quarter 2023 financial results on Thursday, July 27, 2023 at 10:00 a.m. eastern time. The public is invited to listen to this call by registering at the link https://register.vevent.com/register/BI30f9a7927bd6415a9f57cd5c54b5bf55 or by accessing the call on the Company’s website, www.EagleBankCorp.com. A replay of the conference call will be available on the Company’s website through August 10, 2023.

Forward-looking statements: This press release contains forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended, including statements of goals, intentions, and expectations as to future trends, plans, events or results of Company operations and policies and regarding general economic conditions. In some cases, forward-looking statements can be identified by use of words such as "may," "will," "can," "anticipates," "believes," "expects," "plans," "estimates," "potential," "continue," "should," "could," "strive," "feel" and similar words or phrases. These statements are based upon current and anticipated economic conditions, nationally and in the Company’s market (including ongoing challenges and uncertainties relating to the continued evolution of COVID-19, including its impact on our credit quality, asset and loan growth and broader business operations; volatility in interest rates and interest rate policy; the current high inflationary environment; competitive factors) and other conditions (such as the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment regarding the stability and liquidity of banks), which by their nature are not susceptible to accurate forecast and are subject to significant uncertainty. Because of these uncertainties and the assumptions on which this discussion and the forward-looking statements are based, actual future operations and results in the future may differ materially from those indicated herein. For details on factors that could affect these expectations, see the risk factors and other cautionary language included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 and in other periodic and current reports filed with the SEC. Readers are cautioned against placing undue reliance on any such forward-looking statements. The Company’s past results are not necessarily indicative of future performance, and nothing contained herein is meant to or should be considered and treated as earnings guidance of future quarters’ performance projections. Information regarding the Company’s uninsured deposits consists of preliminary estimates, which are forward-looking statements and subject to change, possibly materially, as the Company completes its second quarter 2023 Call Report. All information is as of the date of this press release. Any forward-looking statements made by or on behalf of the Company speak only as to the date they are made. Except to the extent required by applicable law or regulation, the Company undertakes no obligation to revise or update publicly any forward-looking statement for any reason.

¹ A reconciliation between this non-GAAP financial measure and the nearest GAAP measure is provided in the tables that accompany this document.
² A reconciliation between this non-GAAP financial measure and the nearest GAAP measure is provided in the tables that accompany this document. Adjusted net income and adjusted earnings per share (diluted) for the year ago quarter are compared to GAAP net income and earnings per share for the second quarter of 2023.
³ Branches closed were Alexandria, VA (March 2023), Georgetown, DC (May 2023) and Chantilly, VA (May 2023).
⁴ Beginning in the second quarter of 2023, the Company revised its methodology for calculating cost of funds. Prior periods have been conformed to the current presentation. See footnote (3) on page 14.
⁵ A reconciliation between this non-GAAP financial measure and the nearest GAAP measure is provided in the table below.
⁶ A reconciliation between this non-GAAP financial measure and the nearest GAAP measure is provided in the tables that accompany this document.
⁷ Net charge-offs as a percent of average loans (excluding loans held for sale) are shown on an annualized basis.
⁸ Estimated amount of uninsured deposits to be reported on line RCON5597 of schedule RC-O in EagleBank's June 30, 2023 Call Report.
⁹ A reconciliation of non-GAAP financial measures to the nearest GAAP measure is provided in the tables that accompany this document.
¹⁰ Capital ratios for June 30, 2023 are subject to final filings with the Federal Reserve.

(1) For the three months ended June 30, 2023, the effective tax rate for the quarter was applied to the adjustment. For the three months ended June 30, 2022, the adjustment was non-taxable with no impact of the effective tax rate.

Tangible common equity to tangible assets (the "tangible common equity ratio"), tangible book value per common share, average tangible common equity, and the return on average tangible common equity are non-GAAP financial measures derived from GAAP based amounts. The Company calculates the tangible common equity ratio by excluding the balance of intangible assets from common shareholders' equity and dividing by tangible assets. The Company calculates tangible book value per common share by dividing tangible common equity by common shares outstanding, as compared to book value per common share, which the Company calculates by dividing common shareholders' equity by common shares outstanding. The Company calculates the annualized return on average tangible common equity ratio by dividing net income available to common shareholders by average tangible common equity, which is calculated by excluding the average balance of intangible assets from the average common shareholders’ equity. The Company considers this information important to shareholders as tangible equity is a measure that is consistent with the calculation of capital for bank regulatory purposes, which excludes intangible assets from the calculation of risk based ratios, and as such is useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions. The above tables provides reconciliation of these financial measures defined by GAAP with non-GAAP financial measures.

Efficiency ratio is a non-GAAP measure calculated by dividing GAAP non-interest expense by the sum of GAAP net interest income and GAAP non-interest (loss) income. The Company believes that reporting the non-GAAP efficiency ratio more closely measures its effectiveness of controlling operational activities. The table above shows the calculation of the efficiency ratio from these GAAP measures.

Adjusted net income is a non-GAAP financial measure calculated by reversing the penalty, disgorgement and prejudgment interest (2nd quarter 2022) to net income. The Company considers this information important to shareholders because it illustrates net income excluding the impact of non-recurring items. The above table provides reconciliation of these financial measures defined by GAAP to non-GAAP financial measures.

Adjusted earnings per share is a non-GAAP financial measure calculated by dividing the penalty, disgorgement and prejudgment interest (2nd quarter 2022) by weighted average common shares outstanding (diluted) then adding the result to earnings per share. The Company considers this information important to shareholders because it illustrates earnings on a per share basis excluding the impact of non-recurring items. The above table provides reconciliation of these financial measures defined by GAAP to non-GAAP financial measures.

Pre-provision net revenue is a non-GAAP financial measure derived from GAAP based amounts. The Company calculates PPNR by subtracting noninterest expenses from the sum of net interest income and noninterest income. PPNR to Average Assets is calculated by dividing the PPNR amount by average assets to obtain a percentage. The Company considers this information important to shareholders because it illustrates revenue excluding the impact of provisions and reversals to the allowance for credit losses on loans. The table in the "Income Statement" section of this earnings release provides a reconciliation of PPNR and PPNR to Average Assets to the nearest GAAP measure.

(1) Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled $4.2 million and $3.7 million for the three months ended June 30, 2023 and March 31, 2023, respectively.
(2) Interest and fees on loans and investments exclude tax equivalent adjustments.
(3) Beginning in the second quarter of 2023, the Company revised its cost of funds methodology to use a daily average calculation where interest expense on interest bearing liabilities is divided by average interest bearing liabilities and average noninterest bearing deposits. Previously, the Company calculated the cost of funds as the difference between yield on earning assets and net interest margin. Under the current methodology, the cost of funds for fourth quarter 2022 was 1.74% and for third quarter 2022 was 1.09%.

(1) Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled $4.2 million and $4.3 million for the three months ended June 30, 2023 and June 30, 2022, respectively.
(2) Interest and fees on loans and investments exclude tax equivalent adjustments.
(3) Beginning in the the second quarter of 2023, the Company revised its cost of funds methodology to use a daily average calculation where interest expense on interest bearing liabilities is divided by average interest bearing liabilities and average noninterest bearing deposits. Previously, the Company calculated the cost of funds as the difference between yield on earning assets and net interest margin.

(1) A reconciliation of non-GAAP financial measures to the nearest GAAP measure is provided in the tables that accompany this document.
(2) Computed by dividing noninterest expense by the sum of net interest income and noninterest income.
(3) Excludes loans held for sale.