What's happening?

Shares of Eagle Bancorp, Inc. (NASDAQ:EGBN) are down by more than 24% as of 4 p.m. EST after a short seller accused company insiders of treating Eagle "as their own private piggy bank." Aurelius Value wrote that insiders have operated the bank to enrich themselves, often by carving out undisclosed special deals where bank management benefits personally from a customer relationship.

So what

Related-party transactions between publicly traded companies and their managers are often a troubling sign, but they're especially problematic when they aren't disclosed. It's even worse when these related-party transactions involve government-insured bank deposits.

Man putting $1 bill in suit pocket.

Image source: Getty Images.

In one case, Aurelius cited a lawsuit in which a business owner claims that Eagle's Chairman and CEO, Ronald D. Paul, could use his position at the bank to approve the borrower for a loan on favorable terms. In exchange for the discounted loan, Paul would personally receive the option to invest in the company at a low valuation. In effect, Eagle Bancorp's shareholders and depositors would take an underpriced risk for Paul's personal profit.

Aurelius also wrote that it found evidence that Eagle Bancorp has financed at least 10 different properties owned by Ronald D. Paul Companies, which is owned by the bank's Chairman and CEO. The short seller points out that the loans tally to more than $180 million, or more than 21% of the bank's tier 1 capital. In its 2016 proxy filing, the bank only disclosed about $52 million of loans outstanding to related parties at the end of 2016, and that the maximum amount of loans and lines of credit amounted to just $82.6 million.

These are just two issues of many brought up in Aurelius Value's report, which anyone who has an interest in Eagle Bancorp should read. 

Now what

Aurelius Value's research does not paint a very rosy picture of Eagle Bancorp's internal controls, and it raises important questions about the quality of the loan book from which the bank ultimately derives its value. 

At publishing time, Eagle Bancorp had not yet commented on Aurelius Value's report, though Wall Street isn't waiting to hear its side of the story. Eagle Bancorp stock, which started the day at a premium valuation of roughly 2.7 times tangible book value, is now trading at roughly 2.1 times tangible book value after Friday's plunge.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.