EAGLE BANCORP INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Insurance News

The following discussion provides information about the results of operations,
financial condition, liquidity, and capital resources of the Company. The
Company's primary subsidiary is the Bank, and the Company's other direct and
indirect active subsidiaries are Bethesda Leasing, LLC, Eagle Insurance
Services, LLC and Landroval Municipal Finance, Inc.

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This discussion and analysis should be read in conjunction with the audited
Consolidated Financial Statements and Notes thereto, appearing elsewhere in this
report.

Caution About Forward Looking Statements. This report contains forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Exchange Act. These forward looking statements
represent plans, estimates, objectives, goals, guidelines, expectations,
intentions, projections and statements of our beliefs concerning future events,
business plans, objectives, expected operating results and the assumptions upon
which those statements are based. Forward looking statements include, without
limitation, any statement that may predict, forecast, indicate or imply future
results, performance or achievements and are typically identified with words
such as "may," "will," "can," "anticipates," "believes," "expects," "plans,"
"estimates," "potential," "assume," "probable," "possible," "continue,"
"should," "could," "would," "strive," "seeks," "deem," "projections,"
"forecast," "consider," "indicative," "uncertainty," "likely," "unlikely,"
""likelihood," "unknown," "attributable," "depends," "intends," "generally,"
"feel," "typically," "judgment," "subjective" and similar words or phrases.
These forward looking statements are based largely on our expectations and are
subject to a number of known and unknown risks and uncertainties that are
subject to change based on factors which are, in many instances, beyond our
control. Actual results, performance or achievements could differ materially
from those contemplated, expressed or implied by the forward looking statements.

The following factors, among others, could cause our financial performance to
differ materially from that expressed in such forward looking statements:


•Changes in the general economic, political, social and health conditions,
including the macroeconomic and other challenges and uncertainties resulting
from the effects of the COVID-19 pandemic;
•The timely development of competitive new products and services and the
acceptance of these products and services by new and existing customers;
•The willingness of customers to substitute competitors' products and services
for our products and services;
•Our management of liquidity risks in our operations, including, but not limited
to, risks related to customer deposits, deposits in excess of the FDIC insurance
coverage limits, access to capital markets and securities and market values;
•The effect of acquisitions we may make, including, without limitation, the
failure to achieve the expected revenue growth and/or expense savings from such
acquisitions;
•Our management of risks inherent in our real estate loan portfolio, and the
risk of a prolonged downturn in the real estate market, which could impair the
value of, and our ability to sell, properties which stand as collateral for
loans we make;
•Our decision to cease originating residential mortgages (See Note 26 of the
Consolidated Financial Statements for further details);
•The growth and profitability of noninterest or fee income being less than
expected;
•Changes in the level of our nonperforming assets and charge-offs;
•Changes in consumer spending and savings habits;
•The impact of climate change or government action and societal responses to
climate change;
•Difficulty recruiting or retaining successful bankers, executive officers or
other key personnel;
•Changing bank regulatory conditions, policies or programs, whether arising as
new legislation or regulatory initiatives, that could lead to restrictions on
activities of banks generally, or our subsidiary bank in particular, more
restrictive regulatory capital requirements, increased costs, including deposit
insurance premiums, regulation or prohibition of certain income producing
activities or changes in the secondary market for loans and other products;
•The impact of changes in financial services policies, laws and regulations,
including laws, regulations and policies concerning taxes, banking, securities
and insurance and the application thereof by regulatory bodies;
•The effects of, and changes in, trade, monetary and fiscal policies and laws,
including interest rate policies of the Federal Reserve Board, inflation,
interest rate, market and monetary fluctuations;
•Results of examinations of us by our regulators, including the possibility that
our regulators may, among other things, require us to increase our allowance for
credit losses, to write-down assets or to hold more capital;
•The effects or impact of any litigation, regulatory proceeding, including
enforcement proceedings and any possibly resulting fines, judgments, expenses or
restrictions on our business activities;
•Unanticipated regulatory or judicial proceedings;
•The effect of changes in accounting policies and practices, as may be adopted
from time-to-time by bank regulatory agencies, the SEC, the Public Company
Accounting Oversight Board ("PCAOB") or the FASB;
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•Cybersecurity breaches, threats, and cyber-fraud that cause the Bank to sustain
financial losses;
•Technological and social media changes;
•Our management of risks inherent in the use of statistical and quantitative
data and modeling;
•The strength of the United States economy, in general, and the strength of the
local economies in which we conduct operations;
•Geopolitical conditions, including acts or threats of terrorism, actions taken
by the United States or other governments in response to acts or threats of
terrorism and/or military conflicts, which could impact business and economic
conditions in the United States and abroad; and
•The factors discussed under the caption "Risk Factors" in this report.

If one or more of the factors affecting our forward looking information and
statements proves incorrect, then our actual results, performance or
achievements could differ materially from those expressed in, or implied by,
forward looking information and statements contained in this report. You should
not place undue reliance on our forward looking information and statements. We
will not update the forward looking statements to reflect actual results or
changes in the factors affecting the forward looking statements.

GENERAL

The Company is a growth-oriented, one-bank holding company headquartered in
Bethesda, Maryland, which is currently celebrating twenty-four years of
successful operations. The Company provides general commercial and consumer
banking services through the Bank, its wholly owned banking subsidiary, a
Maryland chartered bank which is a member of the Federal Reserve. The Company
was organized in October 1997 and to be the holding company for the Bank. The
Bank was organized in 1998 as an independent, community oriented, full service
banking alternative to the super regional financial institutions, which dominate
the Company's primary market area. The Company's philosophy is to provide
superior, personalized service to its customers. The Company focuses on
relationship banking, providing each customer with a number of services and
becoming familiar with and addressing customer needs in a proactive,
personalized fashion. The Bank currently has a total of sixteen branch offices
(six in Suburban Maryland, five in Washington, D.C. and five in Northern
Virginia), a principal corporate office, five lending centers (two are
co-located with branches and one co-located in the principal corporate office)
and one operations center. Refer to the Business Section above, which describes
in detail the various banking services offered.

Although the global economy has largely adapted operations to a world with
COVID-19, certain adverse residual consequences of the pandemic continue to
impact the macroeconomic environment and they may continue to persist. The
growth in economic activity and demand for goods and services, alongside labor
shortages and supply chain complications and/or disruptions, has contributed
greatly to rising inflationary pressures. In 2022, the Federal Reserve Open
Market Committee ("FOMC"), began a series of rate increases thereby
discontinuing the generally accommodative monetary policy it had pursued when
the COVID-19 pandemic began in early 2020. In late 2022, the Federal Reserve
begun tapering purchases of securities and is no longer expanding its balance
sheet as aggressively. Actual real U.S. GDP growth for 2022 was 2.1%, in
contrast to 5.7% growth in 2021 as the economy re-opened, and was adversely
impacted by the effects of the COVID-19 pandemic. Employment climbed throughout
2022 as the U.S. unemployment rate ended the year at 3.4%, down from 3.9% at the
end of 2021.

Longer-term U.S. interest rates increased in 2022, with the ten year U.S.
Treasury rate averaging 2.95% in 2022 as compared to 1.45% in 2021. The yield
curve in 2022 was inverted as rates increased sharply on the short end of the
curve and remained anchored on the longer end versus a more normal shape in
2021.

As the ten year U.S. Treasury rate continued to increase in 2022, the volume of
residential mortgage lending continued to decrease in 2022. Overall, real estate
values in most of the Company's markets decreased moderately in 2022 as the FOMC
increased interest rates in 2022 to stave off inflationary pressures. Political
gridlock continued in Washington, D.C. over concerns of public debt and
deficits, as well as tax policy and spending levels.

The Company's primary market, the Washington, D.C. metropolitan area, has
continued to perform well relative to other parts of the country notwithstanding
the adverse effects of the COVID-19 pandemic, due to a stable public sector
along with increased government spending. The private sector, in particular, the
Leisure and Hospitality sector has seen some recovery in recent years following
the adverse effects of the pandemic. The multi-family commercial real estate
leasing sector, notwithstanding increased supply of units in the Bank's market
area, has held up relatively well, particularly for well-located close-in
projects. Overall, commercial real estate values have generally held up well,
but we continue to be cautious of the cap rates at which some assets are
trading, and therefore, we are being careful with valuations.

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In spite of recent challenges, the Washington, D.C. metropolitan area maintains
a diverse economy including a large healthcare component, substantial business
services and a highly educated work force.

The Company has the financial resources to meet, and has remained committed to
meeting, the credit needs of its community. The decline in the Company's loan
balances in 2021 was a result of PPP loans paying off, competition refinancing
at lower rates with longer amortization periods, and excess liquidity at
competing banks as well as many companies and construction project sponsors.
Loan balances increased in 2022 as rising rates led to deposit disintermediation
reducing our liquidity levels and earning assets. However, rates on interest
earning assets increased which ultimately had a net positive impact on the net
interest margin and resulted in a higher net interest income in 2022 despite the
decrease in liquidity and earning assets.

The Company's capital position remained strong in 2022 as a result of good
earnings, improved economic conditions and strong asset quality. As a result of
the Company's strong capital position and earnings, we were able to continue our
quarterly dividend in 2022. Additionally, the Company was active in share
repurchase activity as we repurchased 738,300 shares at an average price of
$44.82 per share during 2022.

On December 13, 2022, the Company's Board of Directors authorized a new share
repurchase program to take effect starting January 2, 2023, after the expiration
of the previous repurchase program on December 31, 2022. The Board of Directors
authorized the repurchase of 1,600,000 shares of common stock, or approximately
5% of the Company's outstanding shares of common stock, under the 2023
Repurchase Program, which will expire on December 31, 2023, subject to earlier
termination of the program by the Board of Directors.

The Company believes its strategy of remaining growth-oriented, retaining
talented staff and maintaining focus on seeking quality lending and deposit
relationships has proven successful. Additionally, the Company believes such
focus and strategy of relationship building has fostered future growth
opportunities, as the Company's reputation in the marketplace remains strong. At
December 31, 2022, the Company had total assets of approximately $11.2 billion,
total loans of $7.6 billion, total deposits of $8.7 billion and sixteen branches
in the Washington, D.C. metropolitan area.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company's Consolidated Financial Statements are prepared in accordance with
GAAP and follow general practices within the banking industry. Application of
these principles requires management to make estimates, assumptions and
judgments that affect the amounts reported in the financial statements and
accompanying notes. These estimates, assumptions and judgments are based on
information available as of the date of the Consolidated Financial Statements;
accordingly, as this information changes, the Consolidated Financial Statements
could reflect different estimates, assumptions and judgments. Certain policies,
including those identified below for the year ended December 31, 2022,
inherently have a greater reliance on the use of estimates, assumptions and
judgments and, as such, have a greater possibility of producing results that
could be materially different than originally reported. Estimates, assumptions
and judgments are necessary when assets and liabilities are required to be
recorded at fair value, when a decline in the value of an asset not carried on
the financial statements at fair value warrants an impairment write-down or a
valuation reserve to be established or when an asset or liability needs to be
recorded contingent upon a future event. Carrying assets and liabilities at fair
value inherently results in more financial statement volatility.

Allowance for Credit Losses and Provision for Unfunded Commitments

A consequence of lending activities is that we may incur credit losses, so we
record an ACL with respect to loan receivables and a reserve for unfunded
commitments ("RUC") as estimates of those losses. The amount of such losses will
vary depending upon the risk characteristics of the loan portfolio as affected
by economic conditions such as changes in interest rates, the financial
performance of borrowers and regional unemployment rates, which management
estimates by using a national forecast and estimating a regional adjustment
based on historical differences between the two.

As a result of our January 1, 2020 adoption of FASB's Accounting Standard
Codification ("ASC") 326, Measurement of Credit Losses on Financial Instruments,
and its related amendments, our methodology for estimating these credit losses
changed significantly from years prior to 2020. The standard replaced the
"incurred loss" approach with a "current expected credit loss" approach known as
CECL, which requires an estimate of the credit losses expected over the life of
an exposure (or

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pool of exposures). CECL removes the incurred loss approach's threshold that
delayed the recognition of a credit loss until it was "probable" a loss event
was "incurred."

The Provision for Unfunded Commitments represents the expected credit losses on
off-balance sheet commitments such as unfunded commitments to extend credit and
standby letters of credit. The RUC is determined by estimating future draws and
applying the expected loss rates on those draws.

Management has significant discretion in making the judgments inherent in the
determination of the provisions for credit loss, ACL and the RUC. Our
determination of these amounts requires significant reliance on estimates and
significant judgment as to the amount and timing of expected future cash flows
on loans, significant reliance on historical loss rates on homogenous
portfolios, consideration of our quantitative and qualitative evaluation of
economic factors and the reliance on our reasonable and supportable forecasts.

The ACL represents the expected credit losses arising from the Company's loan
and available-for-sale ("AFS") securities portfolios. The ACL is determined as
follows:

The Company uses a loan-level probability of default ("PD")/ loss given default
("LGD") cash flow method with an exposure at default ("EAD") model to estimate
expected credit losses for the commercial, income producing - commercial real
estate, owner occupied - commercial real estate, real estate mortgage -
residential, construction - commercial and residential, construction - C&I
(owner occupied), home equity and other consumer loan pools. For each of these
loan segments, the Company generates cash flow projections at the instrument
level wherein payment expectations are adjusted for estimated prepayment speed,
probability of default and loss given default. The modeling of expected
prepayment speeds is based on historical internal data.

The Company uses regression analysis of historical internal and peer data (as
Company loss data is insufficient) to determine suitable loss drivers to utilize
when modeling lifetime PD and LGD. This analysis also determines how expected PD
will react to forecasted levels of the loss drivers. For our cash flow model,
management utilizes and forecasts regional unemployment by using a national
forecast and estimating a regional adjustment based on historical differences
between the two as a loss driver over our reasonable and supportable period of
18 months, and reverts back to a historical loss rate over the following twelve
months on a straight-line basis. While the COVID-19 pandemic negatively impacted
unemployment projections for 2021, which informed our CECL economic forecast and
increased our loss reserve for that year, there were positive signs in 2022 as
the unemployment rate and economic forecast continued to improve and suggested
that the effects of the COVID-19 pandemic on credit would not be as significant
as previously considered in 2021. Management leverages economic projections from
reputable and independent third parties to inform its loss driver forecasts over
the forecast period.

The ACL also includes an amount for inherent risks not reflected in the
historical analyses. Relevant factors include, but are not limited to,
concentrations of credit risk, changes in underwriting standards, experience and
depth of lending staff and trends in delinquencies. While our methodology in
establishing the reserve for credit losses attributes portions of the ACL and
RUC to the commercial and consumer portfolio segments, the entire ACL and RUC is
available to absorb credit losses expected in the total loan portfolio and total
amount of unfunded credit commitments, respectively.

Going forward, the impact of utilizing the CECL approach to calculate the
reserve for credit losses will be significantly
influenced by the composition, characteristics and quality of our loan
portfolio, as well as the prevailing economic conditions and forecasts utilized.
Material changes to these and other relevant factors may result in greater
volatility to the reserve for credit losses, and therefore, greater volatility
to our reported earnings. For example, the effects of the COVID-19 pandemic and
related hybrid or fully remote working environment had negatively impacted the
performance outlook in the central business district office commercial real
estate segment of our loan portfolio, which informed our CECL economic forecast
and continued to adversely impact our loss reserve as of December 31, 2022. See
Notes 1, 3 and 4 to the Consolidated Financial Statements, the "Provision for
Credit Losses" section in Management's Discussion and Analysis and the risk
factors related to our business and economic conditions in Item 1A for more
information on the provision for credit losses.