Q1 2021 Eagle Bancorp Inc Earnings Call
Just to make sure no almost falling asleep.
Hello, and welcome to the Eagle Bancorp incorporated first quarter 2021 earnings call. Please note that today's meeting is being recorded.
On the meeting we will have a question and answer session. You can submit questions by pressing star one on your telephone keypad. It is now my pleasure to turn today's meeting over to Chief Financial Officer, Charles Levingston. Please go ahead.
Thank you Sean Good morning. This is Charles Levingston, Chief Financial Officer of Eagle Bancorp before.
Before we begin the presentation I would like to remind everyone that some of the comments made during this call maybe considered forward looking statements, while our growth and performance over this past quarter has been positive we cannot make any promises about future performance and it is our policy not to establish with the markets any formal guidance with.
Expect to our earnings none of the forward looking statements made during this call should be interpreted as are providing for them.
Our form 10-K for the 2020 fiscal year, our quarterly reports on form 10-Q, and current reports on form 8-K identify certain factors that could cause the company's actual results to differ materially from those projected in any forward looking statements made this morning.
Eagle Bancorp does not undertake to update any forward looking statements as a result of new information or future events or developments unless required by law.
This morning's commentary will include non-GAAP financial information the earnings release, which is posted on the Investor Relations section of our website and filed with the SEC contains reconciliations this information to the most directly comparable GAAP information.
Our periodic reports are available from Eagle online on our website for the SEC's website.
This morning, Susan Riel, the president and CEO of <unk>.
To start us off with a high level overview, then Jan Williams, our Chief Credit Officer will discuss our her thoughts on loans and credit quality matters, and then I'll return to discuss our financials in more detail at the end all three of us will be available to take questions I would now like to turn it over to our president and CEO Susan Riel.
Thank you Charles Good morning, and welcome to our earnings call for the first quarter of 2021.
It is hard to imagine that when the COVID-19 pandemic began a little more than a year ago Eagle will go on to page two of our highest earning quarters.
Earnings are at record levels equity has risen to an all time high asset quality continues to strengthen efficiency remains a strength and we believe our market area is making progress towards reopening in these ways. We believe we are stronger now and in a better.
And then we were a year ago.
We have also got some good news on the litigation front that I'll share with you later on.
Focusing on earning first earnings in our most recent quarter for $43 5 million or.
$1.36 per share. This was a 1.53% return on average assets and a $15 three 3% return on average tangible common equity.
Earnings over the last four quarters, which includes the second quarter of 2020, when the nation was locked down total.
152, 6 million for $4.75 per diluted share.
These earnings are positively accretive to our equity common equity at the end of the quarter was $1 3 billion or 11, three 4% of assets.
Turning to asset quality at the end of the quarter N P as for 0.51% of assets and for the quarter annualized net charge offs for 0.27 per cent of average loans.
These asset quality ratios combined with an improved economic outlook nationally and locally as well as a decrease in total loans informed our decision to make a two points for a million dollar reversal from our allowance for credit losses.
Even with this reversal our reserves are one point for 7% of loans, excluding P. P P loans in.
In terms of operating efficiency, we continue to be a leader with an efficiency ratio of 47 per cent for the quarter, We just completed and mailed out our proxy and compared to the 19 peers listed in our proxy we reported the lowest efficiency ratio.
This efficiency is achieved through strong revenue growth and expense control.
Total revenue for this quarter was $93 2 million up 9.4% from a year ago. Non interest expenses were 38 million up just 1.7% from a year ago. We are always prudent in our approach to expense management.
As a small example last quarter I mentioned, we were relocating two branches with expiring leases to improved locations and combining to back office locations also with expiring leases into a single new facility. These moves.
Been completed and are projected to save us $460000 annually and rental expenses.
Before moving on I would like to once again mention the contributions our lending team and our residential mortgage division has made.
During the quarter, our lending team worked with our clients on the latest round of PPP and <expletive>isted them with the forgiveness process.
In our residential mortgage division had another great quarter with locked loans of $303 million and a gain on sale of mortgage loans of $5 million, even with interest rates, increasing slightly we expect our residential mortgage division will continue to contribute.
Meaningfully to the bottom line.
In regards to our market a lot has changed in three months on our last call. We noted that D C, Maryland, and Virginia, we're stepping up Covid related restrictions. Since then all three jurisdictions appeared to be loosening restrictions on businesses as the vaccine.
Rollout continues and expands its scope.
The district is now, allowing restaurants gyms to open indoors at 25% capacity and both the nationals and D C. United stadiums are open at limited capacity Merrill.
Maryland also loosened restrictions by removing capacity limits for indoor and outdoor dining and allowing larger venues, including convention and wedding venues to operate at 50% capacity in.
In Montgomery County, where our headquarters is located some stricter restrictions still apply and.
And in Virginia, restaurants May open, but must maintain physical distancing guidelines indoor events that convention centers and concert venues may open at 30% occupancy per.
Public Lee available industry data shows that nationwide hotel occupancy was approximately 55% in March and restaurant menu with expanded outdoor capacity approach 2019 revenue levels in the month of March.
It follows that unemployment has also improved with more people going back to work and the Washington MSA. The preliminary unemployment rate was five 8% in February this is down from six 5% in December and down from six 9% in <unk>.
Timber these improving dynamics are giving a lift to the local economy through increased consumer retail spending, which we believe typically precedes a ramp up in business spending and investment.
Moreover, our market area should disproportionately benefit from any existing or proposed government stimulus.
This past quarter, we faced headwinds in the form of low loan demand.
In a competitively low interest rate environment. We were also experiencing elevated pay offs and prepays due in part to successful project completions and low nominal interest rates.
We are excited about our strong pipeline and long standing relationships in the community, where we continue to get looks on most available commercial projects.
Eagle Bank intends to assertively pursue loan opportunity throughout the rest of 2021, we.
We have the capacity to finance large commercial projects and we believe we are extremely well positioned to take advantage of any economic recovery with common equity of almost one 3 billion and risk based capital of $17 eight 6%.
Obviously, the timing for increases in loan demand will ultimately depend on market development, the competitive marketplace and economic conditions. Those uncertainties. Aside we remain hopeful that loan demand will pick up once the pandemic subsides and society resumes.
Its normal pace of economic activity and social interactions for.
For our shareholders, we remain focused on building value book value Rose to 30.
For 45 cents per share up nine 2% from a year ago and tangible book was $36.16 per share up 10% from a year ago.
We also increased the quarterly dividend to <unk> 25 cents per share and authorized a new stock repurchase program on.
Although with the run up in bank equities, we were not as active in the stock repurchase market as we expected to be at the start of the year.
I would also like to welcome our two new Independent Board members, who joined in January Steve Fradkin, and Ernie Jarvis, Steve as the founder and CEO of his own full service technology firm brings technological expertise to the board and served on our <unk>.
Risk for me.
Arnie as managing principal if it's owned real estate brokerage company adds his expertise in commercial real estate to the board and serves on the bank's directors for whom kidney.
As I have said repeatedly Eagle bank is committed to have a diverse board in terms of gender and ethnicity, as we understand the value of different prospectus, notably of our 10 directors for our female and two if our male directors identify S minorities.
In regards to other diversity measures last month for Washington Business Journal ranked us eighth in terms of corporate diversity for midsized companies in the market.
This was based on us, having 61% of our staff being people of color.
While we have a diverse workforce, we must also help all our people thrive and this year, we created and launched a diversity and inclusion council tasked with developing additional initiatives to support diversity inclusion and equity throughout our organization.
Now on to the good news I mentioned on the legal front.
In the days following our non binding mediation, which occurred on April 13th we reached an agreement to settle a previously disclosed putative class action lawsuit for a total payment of seven $5 million by the company in exchange for the relief.
Of all alleged claims in this suit without any admission or concession of wrongdoing by the company or any defend.
The class action settlement agreement is subject to court approval and the payment amount is expected to be fully covered by our insurance carriers.
In addition, the previously disclosed stipulation of settlement in connection with the shareholder derivative litigation still remains subject to court approval with a preliminary hearing set for May 12 2021.
We are pleased just settled both our major commercial litigation matters and look forward to securing court approval and putting these matters behind us in anticipation of some likely questions. There is nothing material to report on the previously disclosed government investigations.
We continue to cooperate with the government and believe progress is being made towards the resolution of these matters.
Before turning it over to Jan I would like to thank all of our employees for all their hard work and their commitment to support our clients.
With that I would like to turn the speaking duties over to Jan Williams, our Chief Credit Officer.
Thank you Susan good morning, everyone with regard to the reversal of a 2.4 billion from the allowance for credit losses, the improved outlook for growth economy, primarily the improved unemployment numbers.
The improvement in the credit metrics at the loan portfolio and the reduction in total loans all contributed to the reduction in the allowance with the reversal of the allowance for credit losses to total loans, excluding PPP loans was one point for 7% down.
Three basis points from the prior quarter and comparing metrics for the linked quarters, even with our lower allowance for credit losses.
Losses, our coverage of nonperforming loans increased to 195% up from 180% on here and as we saw a reduction in nonperforming loans over the same period.
N P. H to total assets were 51 basis points down eight basis points from the prior quarter and in dollars and Tas for down $8 6 million for.
The decline was primarily from pay offs on nonperforming loans are return to accrual status for some loans and charge offs, which primarily consisted of hotel restaurant and SBA credits before I hand, it off to Charles a quick update on the P. P. P card.
L brands.
In the first quarter, we once again jumped in to help our clients with the latest round of PPP for the quarter, we originated PPP loans of $193 million and assisted clients and the forgiveness process with loans forgiven of $83 million outstanding P. T.
P loans at quarter end were $565 million.
With that I'd like to turn it over to Charles Levingston, Our Chief Financial Officer. Thank you Jan.
Comparisons for the first quarter of 2021 to the first quarter of 2020 are difficult as the current quarter contains a reversal from the allowance for credit losses, and a substantial contribution from our residential mortgage team, whereas in the first quarter of 2020, we were building reserves as the impact of the COVID-19.
<unk> was just coming into focus and we also had a mark to market loss on our hedge position for.
For these reasons and to help compare apples to apples for the first quarters of 2021 versus 2020, we added the pre provision net revenue table to our earnings release.
It shows our P PNR at $55 $3 million for the first quarter of 2021 up from $47 9 million in the first quarter of 2020.
As a percentage of assets annualized PPE and are in the first quarter of 2021 was 195%. This is down nine basis points from the first quarter of 2020, but the decrease is more from the 21, 9% increase in average assets outpacing the increase in <unk> of $15 four per cent.
Comparing our performance over linked quarters net interest income was up one $2 million with the reversals on the provisions to the allowance for credit losses and for unfunded commitments, we had a positive swing of $8 $1 million on the two provisions.
Noninterest income was up $700000 contributing to this was the cancellation of a $50 million in the money FH there'll be borrowing resulting in a $911000 gain.
Offsetting these improvements noninterest expenses were up $3 million, mostly due to annual incentive cost cash from the first quarter in legal and professional fees were up $657000, mostly attributable to non legal advisory fees.
These linked quarter changes led to an increase in pre tax earnings of $7 $1 million.
Bottom line on a linked quarter basis earnings were higher by $4 $6 million and the earnings of $43 5 billion for the first quarter of 2021 was a record for the company.
When the quarter started deposit inflows continued as they had in the prior two quarters, both <expletive>ets and deposits, we're running a bit higher during the quarter by about $400 million, but these deposits flow out by the end of the quarter.
As a result at quarter end assets were flat at $11 $1 billion in deposits were also flat at $9 2 billion as.
Deposits ended flat, we made some progress putting a little over $200 million of excess liquidity to work in investments investments were primarily 20 years, 2% agency mortgage backed securities and callable agency bonds, we will continually look to invest our excess liquidity to seek out higher yielding alternatives to cash.
Also higher cost Cds continued to run off and costs on money market and savings accounts moved lower in the first quarter of 2021, Cvs with a total balance of $239 million with a weighted average rate of $1 six 9% matured.
<unk> had a weighted average term for 18 months at issuance.
We added about half of that $239 million back in the form of.
In the form or lower cost of lower cost Cds and the balance was the balance was another deposits average CD balances for the quarter were nine 6% of average deposits down from 10, 8% in the prior quarter.
The average cost of our money market things.
<unk> is now 33 basis points down from 42 basis points in the prior quarter overall.
Overall, our cost of funds in the first quarter of 2021 decreased to 42 basis points down from 48 basis points in the prior quarter.
Putting some excess liquidity to work and keeping funding costs flow helped us keep the NIM steady at $2 90 per cent for the first quarter of 2021, which was unchanged from the fourth quarter of 2020.
With that I'll hand, it back to Susan for a short wrap up.
Thanks, Charles as we move further into 2021, we will continue our efforts to deliver positive operating and performance results and we will continue to strive to serve both our investors and our community to the best of our ability our earnings credit quality.
<unk> and capitalization remained strong.
Deal flow on development projects and income producing credits continue at a decent pace.
In the Washington market remains a premier business center and tourist destination.
<unk> again for joining us this quarter, we will now open up the call for questions.
As a reminder, you have questions. Please press star one on your telephone keypad once again Thats Star one we'll pause for just a moment to know Paul for Q&A roster.
On your first question comes from the line of Casey Whitman from Piper Sandler.
Hey, good morning.
Good morning Casey.
I think I'd just ask first bigger picture as we think about sort of the balance sheet transition on the emphasis away from certain products you know what what kind of inning are we in in that process I think maybe what I'm trying to wrap my head around is as the economy reopens, perhaps we see growth across the industry.
How confident are we that we.
Or are you that you'll participate in that fully or should we consider that theres still going to be some offset just from some of the strategic mix shifts going on specifically at Eagle.
In terms of the mix of our <expletive>ets going for right.
Yeah, I mean, maybe just in terms of the de emphasis on construction and where that sort of you know is right now.
Do you think or do you think that.
We are fully prepared and are doing construction lending.
I think that the economic forecast certainly add to list to the desirability of loans and I would expect we will have opportunities to see them were now just below the regulatory.
Threshold for constant.
Concentration on the construction side, we've got room to lend there and I think there are going to be continuing opportunities.
Got it great. Thank you.
I'll just ask a few expense questions just to clarify the savings from the branch relocations consolidations is some of that in the numbers already our will that be you know realize you're thinking that in the first or the second quarter.
Yes, I think thats going to be realized more going forward again are kind of just.
Our calculation is about $460000 annually in savings on on specifically rent expense.
Got it.
One more expense when you know congrats on the on the cl<expletive> action settlement. Just wondering can you give us the outlook for where the legal professional fees expense line might run versus I think it was about $3 million this quarter and I appreciate that that's already down materially from a year ago, but can we expect a little bit more relief to come on that line give.
On the settlement you have or do you think it's a pretty stable level from here.
Yes, obviously, the cost that we're going to be dealing with as it relates to that.
As private litigation matters are going to be related to the settlement of these.
The administration <expletive>ociated with with these cases, but theres still.
The expectation that.
On that there'll be continued.
Continue to expenses.
Associated with.
On the.
Investigations, although again as we've as we've mentioned previously.
A lot of that production expense has tapered off for it in terms of.
Providing information, which is the bulk of the cost.
So.
<unk>.
Wouldn't expect.
Significantly greater but.
But it's you know as.
As Mike Counsel advise me, it's certainly an unknown, but yeah, let's take that for what it's worth.
Okay. It sounds like this is a pretty good expense run rate minus whatever payroll taxes that were not wouldn't have driven some of the salaries. This corner.
Yeah.
For expenses.
Yep.
Great. Thank you for protocol.
Great. Thanks Kate.
Your next question comes from the line of Steve Connor <unk> from G Research.
Hey, good morning.
Good morning Sai.
Wanted to ask about the Securities book, Charles I appreciated your comments there on continuing to look for opportunities maybe any thoughts on the pace of deployment of liquidity in the securities book.
Liquidity stays on your balance sheet on demand.
It remains a bit tepid.
Yes, so two tier.
To your point fees, obviously, our first choice is to deploy this excess liquidity into loans and that's what we'd hope to do but with the significant amount of liquidity that we have on the balance sheet.
The next best option seems to be in the investment portfolio.
You know our clip has been.
Paul between $50 million to $80 million a month deployed.
It is a bit of a balancing act between.
Are.
Picking the right points in finding that.
Healthy return and not going too far on on the curve and exposing ourselves to additional price risk.
But again that is the next best alternative to two loans hopefully that gives you a little bit of insight.
Yeah.
Yeah, Yeah, that's that's helpful.
Maybe moving on to loans. So so I noticed in the disclosure of accommodation and food services the exposure actually increased.
Quarter over quarter was that due to line draws or or as the banks seeing opportunities in that area to make new loans.
There were certainly line for US we had a.
Recently approved an increase to align.
From one of our very strong.
Restaurant chain customers, that's continuing to expand and grow they had.
A very success.
Equity raise at the same time Hum quite large deposits with the bank right now that we are.
Seeing more usage of lines and we are selectively working with our existing customers I would not say, we're actively soliciting new restaurants as customers at this point.
Okay. Okay. Thank you and then maybe maybe one more for me on.
On loan yields which are up.
Solidly quarter over quarter.
I Wonder if maybe you could have a discussion about the dynamics there and how much of the rise in loan yields was changing mix versus like what rates youre seeing in the market.
Sure So I would say.
Sure.
The.
Coupons that are being put on these days.
Call it around 4%.
But the pricing pressure continues we did see some prepays.
And this past quarter that also.
A positive contribution to the yield.
What we're seeing there.
So to the extent that those continue we will we will get some.
Hum.
Some positive lift.
On.
But in terms of mix.
It was.
I guess in terms of C&I versus versus CRE.
It was a little lighter quarter on the CRE front.
We've typically had in the past.
On.
And where is it definitely again seeing pricing pressures.
Particularly on the C&I side.
Yeah, I think there's an awful lot of liquidity out there right now which is contributing to the pricing pressure as all banks are looking to moving.
Higher yielding <expletive>et types. So.
We do see that.
We're also.
It's not.
Making significant changes in the overall CRE versus C&I.
Composition of our books I will say, we'll probably be.
Shifting a bit more back into the construction side.
I discussed with Casey earlier.
Okay. Thanks for that and Charles I don't know if you want to put this number out.
Any way to kind of quantify how big of an impact of prepayments were on yield.
Yeah.
Let's see here.
Have that number I'll have to ask to get back back with you on that book, We did we did run net.
Okay No worries. Thank you very much.
Yes.
Okay.
Your next question comes from the line of Stephen Sorry, Stuart Lotz from K B W.
Hey, guys good morning.
Good morning.
Charles.
Maybe if we could start on on the reserve and maybe the outlook for provision following some of the reserve release this quarter.
Do you expect that to continue the next couple of quarters income.
We continued to see.
Further negative provision <expletive>uming.
You continue to let the <unk>.
I'll run down and charge offs, maybe come in line with where they've been the last couple of quarters.
Yes, it's going to be there's a lot of.
Yes, it'll be dependent on where we are really at our next quarter and what the economic forecast looks like.
At that point in time.
Certainly we are seeing some success with the deployment of vaccines out there.
We saw a pretty good unemployment print. This morning, we saw good consumer spending Prince.
Last week so.
The signs are seem to be positive on those forecast, but it will be dependent on that in addition to loan growth.
And how much loan you know how many loans we can put on.
For over quarter, which will obviously also need additional provision Jan anything else you would add tier I would say that it's also going to be dependent on the.
For the continued improvement in cash.
Metrics within our portfolio so.
It's certainly a possibility, but theres a lot of unknown out there in terms of when or if that actually is going to happen.
And Jan maybe.
I'm sorry, if I missed this from the prepared comments, but can you just give any detail on where watch list for cl<expletive>ifieds trended this quarter.
I didn't see anything on the original lease.
Yeah.
On cl<expletive>ified portion of the portfolio is down about $300000 nothing significant very stable there.
Overall watch list is down about $41 million.
Now.
All signs are really positive on the credit metric side.
Thanks.
We've continued to maintain a significant number of loans that received deferrals in the watch category as we wait for a period post PPP.
And performance under regular payment plan.
It's <expletive>uming that that goes well I would think you would see further reduction in the future.
Got it.
And maybe on on loan modifications to.
You guys were under 1% at year end.
Kind of ticked back up closer to the to what what was driving that this quarter end.
Can you provide any color on.
This growth yeah, there's one.
Yes.
<unk> is in that category that's on interest on later.
And there are a couple of restaurants that.
Or also on interest on lease terms, we don't have them.
<unk>.
Okay.
There was nothing with a full deferral contributing to that number.
On.
I don't.
Expect to see anyone getting a third deferrals, so either potentially new to the equity deferral cl<expletive>.
Okay very helpful.
And maybe just one more for Charles.
You guys announced the buyback in December and I think we were.
A little less active than we expected this quarter and with TCE back at 10, 5% in it.
Ah you're currencies for covered a little bit, but how are you guys thinking about the buyback. This year do you do you still plan on utilizing the full you know 1.6 million share authorization.
Yes, I think I think it's something we continue to evaluate on ongoing basis. We're certainly aware of of our very strong capital position, which puts us in a great position for.
For.
Ah rebounding economy, obviously to deploy.
Inc.
Additional loans, but.
But but certainly and also as you know we will note that we did slightly increase our dividend and we're thinking about that as well.
In relation so that's going to be evaluated also on a regular basis, but.
It is a tool in our toolbox.
Again as as we see fluctuations in the marketplace.
We have an opportunity to deploy capital, where we think the prices right to do that.
Great.
Thanks for thanks for taking my questions guys.
Sure.
Okay. Your next question comes from Samuel Varga from Stephens incorporated.
Good morning.
Good morning.
I'm on for Brian This morning, and I just wanted to ask another question going back a little bit tier.
Credit conversation I'm on.
On a test a little bit about your office portfolio with regards to do on loan to values and coverage ratios could you give us a sense of that and maybe if.
If you do you have any insight to it.
While the portfolio items look like in terms of.
The work from home trend.
The office portfolio has held up really from all.
Our company well.
Despite the.
Worked from home atmosphere of Covid and think.
A lot of that has to do with the type of tenants that are in place.
Did you have roughly a billion of office property in the portfolio.
We would anticipate that if there is a permanent change.
Two more remote working status the impact on fees and most significant in the central business District.
And it will occur over a period of time, you know five years or staff as existing leases mature and perhaps smaller players are.
Our desired in the future. So we are looking at that and monitoring it carefully I think at this point we haven't seen.
Any significant drop in.
Average rents because we don't have properties that are right now.
On the income producing side suffering a 100% ROHL and <unk>.
Leases out of the blocks, but we ask for a stress test that portion of the portfolio every quarter as we do all income produced from product and we've been making very severe.
Incremental drops in revenues.
You try to model out what that might look.
Future I think we're feeling like this is a longer term.
Our solution strategy, but we feel pretty good about where we are in terms of the loan to values that we have.
Currently in our office properties.
Great. Thank you on our sites.
Very helpful and then.
Since you're switching back to kind of a more big picture.
Prospective on our loan portfolio, we noticed that there were.
5%.
Quarter on quarter over quarter drops in CRE in construction and so we just wanted to get a sense for what might have been driving that.
I think it's really a timing factor, it's very difficult to pick up.
And make an <expletive>essment as to an overall.
Philosophy about for loan portfolio, I think we're seeing lots of opportunities.
<unk> in the office area by the way.
But we're looking at a property with 15 year on GSA leased so it's not really as vulnerable.
On.
You might think office properties would be they're all very individual and evaluated individually. So we don't intend to.
Be less <expletive>ertive in our CRE philosophy, and I expect that we'll continue to see that segment of the portfolio growth.
Great. Thank you and then I guess, one more question around PPP I just went against them for.
You're around three <unk>.
Moving kind of looks like Big picture, you've noted some items on that and then.
Maybe.
The change your expectations around the forgiveness schedule, if you could give some color on that please.
In terms of the.
Forgiveness pizza on the PPP portfolio I think it's a much more arduous process than anyone would have thought it was at the beginning of the program.
We're still getting now on this day.
Daily Flash.
Information from the small business.
Association in order to.
Tell us how and when and what's needed in order to process forgiveness. So it's difficult to say with any level of certainty the rate at which we might expect to see forgiveness goes forward.
So I think you've also been looking at that yes, I mean, the gears are moving albeit slowly on the forgiveness process and we continue to work with our borrowers to submit those applications for forgiveness for the SBA, but as Jan noted there is.
No it isn't.
Difficult process, so but.
We're moving it along.
Great. Thank you much. Thank you very much that would be for me.
Great.
I will now turn the call back over to President and CEO, Susan Riel for closing remarks.
Thanks, again for joining us today, and we look forward to seeing you at the end of next quarter have a great day.
This concludes today's meeting you may now disconnect.
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