KBRA Downgrades Ratings for Eagle Bancorp, Inc.; Outlook Stable

KBRA downgrades the senior unsecured debt rating to BBB from BBB+, the subordinated debt rating to BBB- from BBB, and the short-term debt rating to K3 from K2 for Bethesda, MD based Eagle Bancorp, Inc. (NASDAQ: EGBN) (“Eagle” or “the company”). Additionally, KBRA downgrades the deposit and senior unsecured debt ratings to BBB+ from A-, the subordinated debt rating to BBB from BBB+, and affirms the short-term deposit and debt ratings of K2 for EGBN’s subsidiary, EagleBank. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The downgrade is largely predicated on deposit outflows leading to higher reliance on brokered deposits, FHLB borrowings and BTFP borrowings, which together accounted for over 45% of total funding as of 2Q23. Additionally, the cost of total funding crested 4% during 2Q23, which has materially impacted NIM and the overall earnings profile during 1H23. EGBN’s comparatively less favorable funding profile both in cost and mix is partly a function of its key operating markets in the highly competitive Washington, D.C. MSA. However, the ratings have historically been supported by EGBN’s better than peer earnings performance, benefiting from minimal credit costs experienced and ongoing expense discipline. EGBN reported negative credit migration trends in 2Q23 with substandard loans at 2.8% of total loans at quarter-end compared to 1.1% in the linked quarter. Notable loan exposures include office space accounting for 12.5% of total loans at 2Q23, followed by retail (5.5%) and hotel (5.2%). EGBN’s balance sheet growth has increased overall leverage, reflected in RWA to total assets at 90% at 2Q23 versus 79% at 2Q22, and the loan-to-deposit ratio has trended upward near 100% at 2Q23 from ~80% at 2Q22. While EGBN has historically operated with above peer construction and investor CRE lending concentrations, these ratios have substantially declined to levels more consistent with regulatory guidance. Furthermore, KBRA notes the company’s track record of low loan losses in these portfolios and EGBN has made enhancements to risk management and governance infrastructure. Lastly, the overall capital profile has historically been viewed favorably, despite some recent growth in risk weighted assets as well as share repurchases of ~$50 million occurring in 1H23. EGBN typically has sustained a dividend payout ratio of 35% to 45% of earnings. The ratings also consider EGBN’s sound capital management at levels above peers and a track record of strong asset quality performance, including a history of low loan losses and successful navigation throughout the GFC.

Rating Sensitivities

Positive ratings momentum is unlikely in the medium term. Additional deposit outflows resulting in wholesale funding representing more than 50% of total funding, significant weakening in earnings or capital levels (CET1 ratio less than 12.5%), a more aggressive growth strategy, or deterioration in credit quality beyond expectation would likely pressure the ratings.

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Methodologies