Office And Deposit Repositioning Will Support Stronger Returns Over The Next Cycle

Catalysts

About Eagle Bancorp

Eagle Bancorp is a regional bank holding company focused on commercial and consumer banking services through EagleBank.

What are the underlying business or industry changes driving this perspective?

• Deliberate shift away from higher risk commercial real estate and construction concentrations, alongside stronger asset quality metrics such as lower nonperforming assets and reduced criticized and classified balances, sets the stage for more stable credit costs and a smoother path for earnings.
• Ongoing replacement of higher cost brokered deposits with core relationship funding from C&I clients, supported by the branch network and digital platform, is expected to support net interest margin and pre provision net revenue.
• Quarterly reviews of larger office and multifamily credits, plus intensive monitoring of watch list loans, point to earlier problem detection and more options for resolutions, which can limit future charge offs and protect net income.
• Management focus on reducing elevated expense items tied to loan dispositions and one off valuation adjustments, combined with guidance for flatter to lower noninterest expense, provides room for operating leverage and potentially better net margins even with a smaller balance sheet.
• Growth in C&I relationships that bring both loans and deposits, together with higher noninterest income guided in a 15% to 25% range and solid capital ratios, creates a more diversified earnings mix that can support returns on equity and tangible book value per share.

Assumptions

This narrative explores a more optimistic perspective on Eagle Bancorp compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Eagle Bancorp's revenue will grow by 373.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -3027.8% today to 44.1% in 3 years time.
• The bullish analysts expect earnings to reach $186.0 million (and earnings per share of $6.19) by about January 2029, up from $-120.3 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $147.0 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 5.3x on those 2029 earnings, up from -7.0x today. This future PE is lower than the current PE for the US Banks industry at 12.1x.
• The bullish analysts expect the number of shares outstanding to grow by 0.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.96%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The criticized and classified loan book is US$783.4 million, around 10.6% of total loans, so if remediation efforts stall or credit conditions weaken, additional downgrades or charge offs could pressure earnings and limit any support for the share price.
• Eagle Bancorp still carries US$577.1 million of office loans with US$73 million of related reserves, and if office fundamentals worsen or asset sales clear at lower values than expected, future credit losses could erode net income and potentially compress book value.
• The plan to keep shrinking brokered deposits from US$1.56 billion and rely more on core funding assumes that deposits remain stable, so if relationship deposits disappoint or funding costs stay high, net interest margin and pre provision net revenue could come under pressure.
• Multifamily exposure is currently supported by relatively low cap rates and limited new supply, but a sustained period of weaker rent growth, slower lease up or new competitive projects in key submarkets could hurt property level cash flows and increase credit losses, which would weigh on revenue and net margins.
• Management expects average loans and earning assets to be lower in 2026 as the balance sheet is repositioned. If fee income and margin improvement do not offset the smaller base, overall revenue growth and earnings could fall short of expectations and challenge the idea that the share price will hold steady.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Eagle Bancorp is $26.0, which represents up to two standard deviations above the consensus price target of $22.88. This valuation is based on what can be assumed as the expectations of Eagle Bancorp's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $26.0, and the most bearish reporting a price target of just $18.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $422.1 million, earnings will come to $186.0 million, and it would be trading on a PE ratio of 5.3x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $27.88, the analyst price target of $26.0 is 7.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.