KBRA Affirms Ratings for Eagle Bancorp, Inc.

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

Key Credit Considerations

The Negative Outlook is predicated on the deterioration of the CRE portfolio, which is concentrated in the Office Segment (12.5% of total loans), as well as negative credit migration with 9% of total loans held in criticized and classified, and a weakened earnings profile that has been negatively impacted by the greater reliance on wholesale funding in the current elevated interest rate environment. The CRE Office portfolio is exposed to the DC and VA central business districts which have proven to not be immune to the structural changes to the office market post COVID, despite the historically “recession proof” nature of DC/Northern Virginia economy. With that said, the company has a 4.05% ACL reserve against Office as of 2Q24 and the maturity risk is largely beyond 2025. EGBN’s ratings are supported by its consistently strong core capital base that has tracked between 200 and 300 bps above rated peer averages and its historically solid earnings profile that benefits from its highly efficient banking model, as well as a stable asset quality performance through previous economic cycles. In taking a granular look at the CRE office exposure, we note that office represents 21% of the total income producing CRE segment which is the bulk of the total CRE office exposure ($1.0 billion). (Criticized and Classified loans are 24% of CRE office). As of 2Q24, owner occupied office exposure was 16% of total CRE office with no migration to Criticized and Classified. That said, the majority of the income producing CRE is comprised of non-office (79%) with risk ratings remaining largely unchanged. EGBN’s funding profile, which has a comparatively higher reliance on wholesale funding (brokered deposits/FHLB), is partly a function of its key operating markets in the highly competitive Washington, D.C. MSA. The company’s liability sensitive balance sheet has contributed to above peer funding costs that have weighed on its net interest margin. The escalation of funding costs has moderated as the Federal Reserve contemplates interest rate cuts which has stabilized NIM in 2Q24.

Rating Sensitivities

A return to Stable outlook would require stabilization in the loan portfolio and a reduction in loan concentrations closer to the FDIC guidance over time. In addition, we would expect stable earnings power and a reduced reliance on funding the balance sheet with wholesale funding over the medium term. Further weakening in the earnings and funding profile and credit quality deterioration beyond expectations that materially impacts capital ratios to levels more consistent with the lower rating category could negatively pressure the ratings.

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