Office Credit Cleanup And Core Deposits Will Support Healthier Balance Sheet Over Time

Catalysts

About Eagle Bancorp

Eagle Bancorp operates a relationship-focused regional bank serving commercial and consumer clients in the Washington, D.C. metropolitan area.

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

• Completion of the office credit cleanup, backed by independent portfolio validation and aggressive charge offs, positions the balance sheet for lower future provisions and a clearer path to growing earnings and book value.
• A shift in loan mix toward C&I, with growing C&I balances and deposits in a defense and security oriented government contractor base, should support more diversified revenue and a structurally higher net interest margin.
• Industry wide preference for insured, relationship based deposits, along with Eagle Bancorp's success in growing core deposits while reducing brokered funding, is likely to lower funding costs and boost net interest income and net margins.
• Resilient multifamily fundamentals in the Washington, D.C. region, including sustained investor demand at sub 6 percent cap rates and improving local rental policy, support collateral values and limit long run credit losses, stabilizing earnings.
• High capital ratios and strong on balance sheet liquidity, combined with disciplined expense control and declining FDIC assessments, create capacity to absorb residual credit costs and eventually resume capital return, enhancing future return on equity and earnings per share.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Eagle Bancorp's revenue will grow by 371.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -3027.8% today to 37.7% in 3 years time.
• Analysts expect earnings to reach $157.0 million (and earnings per share of $5.16) by about December 2028, up from $-120.3 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 5.2x on those 2028 earnings, up from -5.5x today. This future PE is lower than the current PE for the US Banks industry at 12.0x.
• 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?

• Further stress in commercial real estate, particularly if office valuations fall more than anticipated or sales of held for sale loans clear below current carrying values, could require additional provisions beyond the independent review baseline, pressuring earnings and tangible book value rather than allowing them to normalize.
• Multifamily credit migration that is currently attributed to temporary cash flow pressure from higher rates and local policy headwinds could prove more structural if elevated debt service costs and D.C. specific issues persist, leading to real collateral impairments and higher loss content, which would weigh on net interest margin and net income.
• A slower than expected improvement in funding mix, for example if brokered deposit reduction and core relationship growth stall in a higher for longer rate environment, could keep funding costs elevated and limit the anticipated net interest income and margin expansion that management is relying on for 2026 earnings improvement.
• Execution risk around leadership transitions in credit and ongoing portfolio restructuring, including the departure of the Chief Credit Officer and reliance on interim hires, could weaken risk controls just as the bank navigates the tail end of the cleanup, increasing the chance of adverse surprises that negatively impact provisions and return on equity.

Valuation

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

• The analysts have a consensus price target of $21.62 for Eagle Bancorp based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $24.5, and the most bearish reporting a price target of just $18.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $416.8 million, earnings will come to $157.0 million, and it would be trading on a PE ratio of 5.2x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $21.9, the analyst price target of $21.62 is 1.3% 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.