Q3 2021 Eagle Bancorp Inc Earnings Call
Good day, everyone and welcome to the Eagle Bancorp third quarter 2021 earnings conference call. At this time all participants are in a listen only mode. Following management's prepared remarks, we will host a question answer session and our instructions will be given at.
If during your conference today, you require operator assistance. Please press Star then zero and an operator will be happy to assist you. As a reminder, this conference call may be recorded. It is now my pleasure to hand, the conference over to Charles Levingston, Chief Financial Officer. Please proceed.
Thank you Brian.
Morning, This is Charles Levingston.
Chief Financial Officer of Eagle Bancorp 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.
Our growth and performance over this past year has been positive we cannot make any promises about future performance and it is our policy.
At that to establish with the markets any formal guidance with respect to our earnings.
None of the forward looking statements made during this call should be interpreted as are providing formal guidance.
Our Form 10-K for the 2020 fiscal year, our quarterly reports on Form 10-Q, and current reports on form.
Not K identify certain risk factors that could cause the company's actual results to differ materially from those projected in any forward looking statements made this morning.
Eagle Bank Corp, does not undertake to update any forward looking statements as a result of new information or future events or developments unless required by law.
Eight this morning's commentary will include non-GAAP financial information the earnings release, which is posted in the Investor Relations section of our website and filed with the SEC contains reconciliations of this information to the most directly comparable GAAP information.
Our periodic reports are available from Eagle online that.
Off site or the SEC's website.
This morning, Susan Riel, the president and CEO of Eagle Bancorp will start us off with a high level with a high level overview, then Jan Williams, our Chief Credit Officer will discuss for thoughts on loans reserves and credit quality matters.
I'll return to discuss our financials.
Financial 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 third quarter of 2021.
I am pleased to report another great.
Quarter for Eagle earnings.
While not a record was the second highest in the bank's history asset quality continues to improve efficiency.
Efficiency remains a strong point.
And capital is building and.
And directly impacting our shareholders, we've raised our dividend for the third time.
Time, this year and we bought back some shares this quarter.
The one area that's lagged behind has been loan growth, which I'll also touch on later along with some comments on our market and a legal update.
Focusing on earnings first earnings for the quarter was.
$43 6 million or $1 36 per share. This was a 146% return on average assets and a 14 point, 11% return on average tangible common equity.
Earnings for the first three quarters totaled the 100.
$35 million or four $4 22 per diluted share.
Turning to asset at the end of the quarter nonperforming assets were 31 basis points on assets and for the quarter annualized net charge offs were.
Basis points on average loans both of these ratios are the lowest we've seen in the past eight quarters.
These asset quality ratios combined with some factors that Ken will review informed our decision to make a third consecutive reversal.
From our allowance for credit losses.
With the reversal of $8 $2 million for the quarter. The total reversal for the first nine months of the year was 14.
$4 million in terms of operating efficiency, we continue to be a leader.
<unk> and efficiency ratio of 41, 7% for the quarter. We are always prudent in our approach to expense management, yet we always keep an eye on critical infrastructure and investments in controls that are necessary to operate a safe and sound banking institution.
<unk>.
This quarter, we closed our Dulles, Virginia branch as it had an expiring lease and our customers can be served from other northern Virginia branches.
Combined annual pre tax cost savings and rental expense will be about 187.
With <unk>.
And there was no write off of leasehold improvements as he had been fully amortized upon the expiration of the lease.
We are also pleased that all of the employees working at the branch has filled or will be filling positions within the company providing.
There are no mobility opportunities to our employees wherever possible. It's a critical part of our relationship first culture.
With earnings remaining strong capital continues to build at quarter end, the equity was $1 3 billion up.
And to $5 million over the prior quarter end and up $108 million from a year ago.
For our shareholders our earnings led directly to increased capital raising both book and tangible values book value rose to $41 60.
<unk> 20 per share up nine 8% from a year ago and tangible book value was $38 39 per share up 10, 6% from a year ago.
We also increased the quarterly dividend to <unk> 40 per share this.
That's up from 35, the prior quarter and 25 cents a quarter before that with a dividend of <unk> 40 cents in earnings of $1 36.
Our payout ratio for the quarter was 29, 4%.
While we have increased the dividend.
This is times this year, our intent was to increase our dividend yield to be more in line with banks our size based on last night's closing stock price of $57 93 per share and a dividend of <unk> 40 per share our dividend yield is.
And three 8%.
In regards to our stock repurchase plan, we repurchased 11690 shares this past quarter at an average price of $52 94 per share we still have almost one 6 million shares.
Chip's authorized for repurchase remaining in the plan.
On the ground our market has proven to be robust even with setbacks from the Delta variant government spending and contracting remains strong hotels and restaurants are doing better.
<unk> companies.
Sure, they're headed back to work and construction on new projects continues this summer the Washington business Journal list of the top 25 ongoing construction projects totaled $14 5 billion up from $12 $6 billion a.
A year earlier also reported recently by the Washington Business Journal and Amazon Economic impact report stated that Amazon invested a total of $28 $5 billion and northern Virginia over the last 10 years.
And based on government.
<unk> data the unemployment rate in the Washington area dropped to four 8% in the August compared to 5% nationwide.
And recently released census data shows the population in the Washington region grew by 13% over the last decade.
Right.
All very positive signs for our market and the community we serve.
Before discussing loans I would like to once again mention the contributions of the residential mortgage and FHA teams, our residential mortgage team had another great quarter with Lotte.
Of $280 million and a gain on sale of mortgage loans of $3 3 million.
This is on par with the prior quarter and we appreciate our residential mortgage division for their ongoing efforts to obtain these results our FH.
<unk> for the first nine months of the year has generated trade premiums of $3 7 million.
That are included in non interest income the revenue stream from the FHA division is not smooth from quarter to quarter comparatively the FHA division.
Loans to larger transactions and less volume than the mortgage division, which has smaller transactions and higher volume.
In regards to loan.
Over the past 12 months, our loans have decreased as payoffs and paydowns have outpaced funding advances in origination.
Hesitance, but the market and our approach has changed initially at the onset outset of the pandemic, we chose to focus on serving existing clients and maintaining credit quality more recently in the third quarter of 2021 the decline in loans.
<unk> was impacted by the competition to refinance at lower rates with lower amortization periods in some cases these refinancings.
Were from non bank lenders, who are attracted to the strong D C market. Additionally.
Additionally, there is a lot of excess liquidity.
<unk> as well as many companies and construction project sponsors.
Additionally, many of our commercial clients are flush with cash some of which has flowed into the bank in the form of deposits.
However on the loan side this leads to lower utilization rates.
In a longer period from loan approval until the loan is strong.
Over the past quarter, excluding P. P. P loans loans were $6 eight five.
$1 billion down three 4% or $238 million from.
The other prior quarters.
However, both our C&I CRE and C&I teams are seeing an increase in deal flow and in the market.
And given the market conditions. The bank has taken a more competitive stance on credit spreads on high quality loan opportunities.
From the.
The improvement can be seen in our unfunded commitments, which were $2 $4 billion at quarter end up $280 million over the prior quarter and we.
We have had significant success at booking new construction credits balances on.
These loans are expected to increase over time.
Before turning it over to Jan I have a legal update.
On our litigation and investigations, we continue to make progress towards the resolution of all disclosed matters, although a bit slower than we had hoped.
The.
And he received closure on the outstanding shareholder derivative action on Monday October 4th when the D. C. Superior Court approved the settlement of that litigation and the class action settlement is on track consistent with the federal rules of civil procedure.
With the court hearing to approve the settlement and the beginning of 2022.
Our dialogues with the FCC and the Federal reserve are ongoing and we continue to cooperate with this investigation.
Additionally, the company believes its possible we may.
Exhaust our primary D&O coverage at some point in the fourth quarter.
In which case expenses that would have otherwise been covered as insurance claims will become a company expense.
It's impossible to predict these defense costs going forward.
They are highly dependent on the duration and outcome of the investigations.
Which are also impossible to predict.
For more information on this update please see the related disclosure in our earnings release.
Other than the historical expense number we provided in the earnings release.
We are not in a position at this time to offer any guidance on these potential defense costs, except to note that historical defense costs, including significant expenses in defense of litigations that have since settled as well as the investigation.
Please peanut production and witness cost.
We remain hopeful that with each quarterly announcements, we will be in a position to announce progress towards the resolution of all disclosed matters.
With that I would like to turn the speaking duties over to Jan Williams, our Chief Credit Officer.
Thank you Susan and good morning, everyone.
Always good to present positive news and credit continues to improve to levels, we have not seen since before the pandemic.
At quarter end nonperforming assets were 31 basis points. This is down 19 basis points from the prior.
At quarter end.
At 31 basis points, we'd have to go back to the third quarter of 2018 to find a better ratio and <unk>.
NPA is for $36 million down from $54 5 million in.
The prior quarter and.
The decline in NPS was.
Primarily from payoffs of nonperforming loans are returned to accrual status for the first time lines and a future charge offs.
Gross charge offs for the quarter were $2 million and net of recovery.
Charge offs were $1 3 million.
Largest charge offs.
Period was a CNI contracts youre crowded for $1 million.
In regards to the reversal of $8 2 million from the allowance for credit losses.
The reversal resulted primarily from the decline in loans, but was also informed by an improvement in credit.
During holiday.
<unk> included a decline in nonperforming loans and extraordinarily low levels of 30 to 90 day past dues.
Positive improvements and adjustments to both quantitative and environmental factors also contributed.
For more detailed Charles will be able to fill you in during the Q&A with the reversal of the allowance for credit losses to total loans, excluding PPP loans was one 2%, which is down 10 basis points from the prior quarter and.
Even with our lower allowance.
For credit losses, the previously mentioned decline in nonperforming loans puts our coverage ratio of nonperforming loans at 265%.
Well above the $1, 50% to 200% range, where it has been for the last seven quarters.
I'd also like to point.
Now that our provision for unfunded commitments was up 716000 this quarter and this ties in with the comments Susan made earlier about funding drive delays and the increase in unfunded commitments with that I'd like to turn it over to Charles <unk>, Our Chief Financial Officer.
Thank you Jan for.
For the quarter net income was $43 $6 million, which was $2 $3 million more than the same period a year ago.
Looking at the topline net interest income adjusted to remove the accelerated interest expense from the redemption of the sub debt was $84 million slightly.
Higher than the $79 million from the same period a year ago.
While the results are similar net interest income for this quarter was based off of average assets that are 13% higher than a year ago.
The rise in assets was primarily driven by the inflow of deposits in the fourth quarter of 2020, and this past quarter.
Average deposits for this quarter were $9 $95 billion up $720 million versus the third quarter of 2024.
For noninterest income a year ago, the third quarter of 2020 was a record quarter for our mortgage division. So current mortgage production, while still significant won't match that.
To put it in perspective, our mortgage division had locked loans this past quarter, a $280 million, which is up from the second quarter's $248 million, but both periods are well behind the record $593 million, we generated a year ago when the market conditions were optimal.
Additionally in.
Quarter of 2021.
On a linked quarter basis, there was $2 $6 million and gains associated with the origination securitization and sale and servicing of FHA loans. This bolstered noninterest income in the second quarter of 2021 and did not repeat in the third quarter of 2020.
Second while much smaller in comparison other noninterest income was $1 $6 million for the third quarter of 2021 down from $4 million for the same period, a year ago, the primary difference being the past quarter.
This past quarter the company experienced no Oreo gains while at the same quarter a.
Earlier, the company had gains of $1 $2 million.
For noninterest expenses, there was almost no difference in the total between the third quarter of 'twenty one in 'twenty.
For the for the quarter noninterest expenses were $36 4 million compared to $36 nine for the same period a year earlier.
The expense line items with the biggest changes we're essentially offsetting.
Salary and benefits and employee benefits were up $2 $8 million as a result of higher incentive bonus accruals based on the company's performance.
Emesis and equipment were down $1 3 million as the third quarter of 2020 included a $1 7 million.
A year lease expense to adjust for ASC 842.
Legal accounting and professional fees were down $1 1 million.
On the balance sheet assets at the end of the third quarter reached a record high of $11 6 billion.
Up $1 5 billion from a year ago the year over year increase was primarily.
By deposit inflows, which increased both investments and interest bearing deposits with other banks.
The excess liquidity generated by the influx of deposits continues to reduce our margin, which excluding the accelerated interest expense from the sub debt payout the margin was $2 78 four.
This past quarter down from 308, a year ago.
We will continue our efforts to put the excess liquidity to work, but we will remain prudent given the recent uptick in rates and the potential for deposit flows to slow or reverse.
A better measure of spread absent the excess liquidity is to look at our loan yields.
Which were $4 five 9% absent PPP interest income and our cost of funds, which was 35 basis points.
Also while we did redeem our sub debt on August 2nd our cost of funds for this past quarter includes $1 $3 million of accelerated interest expense from.
From the redemption.
For PPP loans with just $67 3 million of PPP left which were mostly originated in mid 2020, we do not have a lot of accelerated fees and expenses remaining we expect these loans to complete the forgiveness process over the near term.
On the liability side.
$5 7 billion up $1 5 billion from a year ago, and long term borrowings declined to $70 million as the bank redeemed $150 million of subordinated debt.
With that I'll hand, it back to Susan for a short wrap up.
Thanks, Charles as we wrap up our commentary.
I'd like to thank all of our employees for all their hard work and their commitment to support our clients. Additionally, we remain committed to a culture of respect diversity and inclusion and both the workplace and the communities we serve.
Before we open.
Things up for.
Questions I would like to summarize our financial results by saying the bank has posted its second best quarter of earnings and.
A 31 basis points of assets common equity is 11, 5% of assets total risk based capital is 16.
<unk>, 6% and we just raised the dividend.
For the third time this year.
<unk> continues to do well.
I would now like to open things up for questions.
Thank you at this time, everyone. If you would like to ask a question over the phone. Please press star and then one on your telephone.
The phone keypad.
Then if you would like to ask a question over the phone at this time that its star and then one on your telephone keypad.
Our first question will come from the line of Casey Whitman with Piper Sandler Your line is now open.
Hey, good morning.
Hi, good morning ADC.
Ken maybe I'll start with you congrats on the available.
Credit moves so we saw the decline in watch loans this quarter in the release can you provide any color on the movements within special mention and classified and safe to say that those came down as well.
There was some movement within categories as long as that had been sub standard.
At least in one case, a significant relationship with upgraded to special mention there is a great deal of movement from <unk>.
Out of the watch category as we had that sustained period of performance.
That we spoke about in our last earnings call.
For the.
So it has had multiple deferrals and wanted to wait six months under regular payment structure in order to move them.
Off the watch list. So that's predominantly the reason for the drop and the improvement did come in the area of classified loans.
As those were reduced and in some cases moved to the special mention category.
Okay understood and then just.
Looking at the big reduction in non performers this quarter of those loans that returned to performing status or are they out of the bank in any particular industry.
Performing non performers.
<unk>.
What.
You might recall that initially what we did.
With loans that have had a multiple COVID-19 deferral situation beyond 90 days, we moved them all onto the watch list to track them.
And once those deferrals.
All periods, where over and they had achieved six months of regular payments, we were able to move a significant number of those loans back into the regular past portfolio.
Okay understood.
Maybe I'll just ask one more kind of bigger picture question.
Question, just given the increase in deposits and all the liquidity you guys have on the balance sheet at kind of what are your high level thoughts on your plans to deploy the liquidity in the near term could we see increases in the securities portfolio or how should we think about.
That liquidity over the next couple of quarters.
Sure.
Yes.
Certainly an accelerated pace of deployment into the investment securities portfolio.
It is likely.
We've.
As Susan mentioned in her comments as well the unfunded commitments.
There is a there is a pipeline for construction funding that we expect.
We will also absorb some of that excess liquidity and then additional loan funding as we are.
Getting looks at.
At deals and fully funded deals hopefully.
Okay.
And as you are getting I think you mentioned getting more competitive on pricing.
The higher balances unfunded commitments, where our new production yields coming in now versus last quarter.
Yes for the for the third quarter, we've seen we.
We saw pricing.
On the coupon on our loan closer to 4%.
Not that holds us as a question.
But that's where we were in the third quarter.
Okay, and then again, that's the coupon you would you add deferred fees and costs.
<unk>.
Understood. Thank.
Thank you.
Thanks, Ken Thanks Casey.
Thank you. Our next question will come from Kathryn Melano, Rick K VW. Your line is now open.
Thanks, Good morning.
Good morning Catherine.
Maybe as a follow up to <unk> question, just thinking about balance sheet composition. So security was that 15% of earning assets cash is.
Now 23, so I know, we would all love to put cash more to loans, because that's higher yield, but as we think about how much of cash.
Could go into securities is there.
Max of how big you would allow the securities portfolio to grow as a percentage of your balance sheet.
Yeah.
I again want to be prudent about about that and as we talk about the potential for liquidity to potentially reverse at some point.
Mindful of that although obviously, we're flushed with it.
Short answer to your question is.
Yes.
I'd be I'd be comfortable going higher certainly on the investment portfolio.
I don't necessarily have a limit, but theres going to be a comfortable cushion.
On the on the cash side.
In the event that we see an outflow.
Okay that helps that makes sense.
And then on just the outlook for loan growth is there.
I mean is there a growth target that you think you could provide for us for next year and.
Maybe kind of talk anecdotally about what kind of opportunities, you're seeing and where you think the most growth could come from and then.
Maybe just kind of some local.
Geographical.
Commentary there would be helpful is do you like the growth has been a little bit slower in the D C Virginia area versus some other markets, we're seeing at least in the southeast. So just curious if theres anything that you think is happening from a regional perspective, that's driving that progress.
Thank you Kathryn and I do think we've been.
<unk> seen a lot more opportunities lately than we have seen in quite some time significantly this year in the construction area construction in the area is up quite a bit so.
I'm not really seeing.
Seeing much of a lag the difference right now I think is that there's so much liquidity out there that a lot of these projects.
We have a tremendous amount of liquidity going in ahead of the drug.
There's going to be more delay in pulling down on construction lending and thats.
Could also be exasperate exacerbated by issues with the supply chain, but I think.
Overall, thats a type of lending we're going to see.
Okay.
Impact us.
<unk> forward also seeing a lot of M&A, which I think is typical.
You know pretty much across the country right now is there's consolidation in various industries.
So that's also giving us some opportunities government contracting again as an opportunity area for us to grow as well.
We're being.
Get competitive on price.
Provided we are getting.
Risk return.
On assets, that's appropriate to the bank. So overall I have cautious optimism.
Charles do you want to talk about liquidity.
Look yes again.
The notion that.
There's a lot of a lot of dollars way more dollars chasing.
A good pipeline of deals again, just echoing your comments.
That's really the challenges presented to us.
Certainly as it relates to pricing.
And I think the other thing that.
Incur.
<unk> is that the housing market here is still extraordinarily strong there is a.
The shortfall in housing in the D. C area, that's expected to take US several years at a minimum to catch up with the population growth that we've had.
The delays caused.
TV certain projects I think.
There's unmet demand out there that still needs to be handled.
Great helpful. Thank you so much.
Have a great gotcha.
Thank you and our next question comes the line of Brody Preston.
Despite COVID-19 zinc your line is now open.
Hey, good morning, everyone.
Rudy.
Hey, I just had a question on the on the sub debt.
Real quick just given that you all redeem that early.
Early in the quarter is as that worked its way into the interest expense yet.
But still if I kind of look at the 3 million you reported for long term borrowings and back out that 1.3 million accelerated interest expense is that a good place to start for the fourth quarter on that run rate yes.
Yes.
We redeemed it on August the second so you've got a day in there.
Interest expense.
So that larger sub debt.
But yes, that's a pretty good place to start.
Okay.
Alright, Great and then just on the on the core loan yield.
No.
No that's probably playing into some of the loan growth. The loan runoff you all have had but it's holding up pretty well and so I guess.
Yes, when I think about what you all are originating.
And new production understanding that it's it's it's not outpacing some of the runoff you're seeing what are you all getting for new origination yields.
Yes so.
Again, I think on the third quarter, we saw.
Fated with coupons of close to 4%.
On a weighted average basis of what was the new loans that were originated and.
<unk>.
And booked.
And funded.
For the third quarter and then there is obviously some component of deferred fees and costs that are added.
Okay.
<unk> results.
The results are.
Yield slightly above that again, whether or not that holds.
The question.
Again things are very competitive.
Hi.
That's where we were for the third quarter.
Got it okay.
And Susan I heard you earlier about the Lumpiness that can occur on the on the FHA fee income side.
But I guess as I think about you know going forward annually do you feel like the pace that you've done year to date is where you would shake out.
Under that in the upcoming years going forward.
Yes, we do we are optimistic on that side too there is a lot on our book that we expect.
Two.
To close so where.
We're moving along in a positive way on that.
Okay, Great and then on the Securities portfolio, Charles maybe do you happen to know what the effective duration of that portfolio is.
Yes effective duration of three eight.
Okay.
Yes, okay.
And then my last one yeah go.
Go ahead Charles.
Sorry, just providing a little bit more color on.
That number is certainly eked up a little bit right. There's more price risk just like they were more price risks in a lot of investment portfolios. These days and many of our competitors.
Seeking.
Seeking some kind of return.
Got.
And then my last one is just on expenses, particularly the salaries and employee benefits could you remind me I wasn't able to find it in my notes, but are there seasonal increases that typically occur in the third quarter and so I guess this $22 1 million kind of be the new run rate.
Going forward.
Yeah, what I'd say on that is typically there is as you approach the end of the year and there is more clarity about.
Individual performances.
At the bank and the base performance overall, we have a better sense of what that annual incentive expense is going to be and make accruals.
It towards that.
So.
Yes.
It is the nature of the way in which we are.
We're booking some of those and obviously this year was inordinately good.
With a lot of the reversals that we had.
And the allowance and.
And some.
The sale of the PPP loans and other.
Other areas, where we've seen some good benefits.
Yes, hopefully.
Hopefully that provides you a little bit of insight there.
Awesome. Thank you very much everyone for taking my questions I appreciate it.
Yes, Sir thank you.
Cool.
Everyone. This concludes our question and answer session for today. So now it's my pleasure to hand, the conference back over to Susan Riel, President and Chief Executive Officer for any closing comments or remarks.
We appreciate your questions and all of you taking the time to join US on the call. We hope you are doing well and we look forward to speaking.
With you again in a few months. Thank you all have a great day.
Everyone. This concludes our Q&A and our call for today you may all disconnect everyone have a wonderful day.
[music].
Yes.
Okay.
[music].
[music].
Good day, everyone and welcome to the Eagle Bancorp third quarter 2021 earnings Conference call. At this time, all participants are in a listen only mode. Following management's.
Prepared remarks, we will host a question and answer session and our instructions will be given at that time. If during your conference today you require operator assistance. Please press star and then zero and an operator will be happy to assist you. As a reminder, this conference call may be recorded. It is now my pleasure to hand, the conference over to Charles Levingston, Chief Financial Officer. Please proceed.
Thank you Brian.
Morning. This is Charles Levingston, Chief Financial Officer of Eagle Bancorp.
Four 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 year has been positive we cannot make.
Promises about future performance and it is our policy not to establish with the markets any formal guidance with respect to our earnings.
None of the forward looking statements made during this call should be interpreted as are providing formal guidance.
Our Form 10-K for the 2020 fiscal year, our quarterly report.
Reports on Form 10-Q, and current reports on form 8-K identify certain risk factors that could cause the company's actual results to differ materially from those projected in any forward looking statements made this morning.
Eagle Bank Corp, does not undertake to update any forward looking statements as a result of new information.
<unk> 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 in the Investor Relations section of our website and filed with the SEC contains reconciliations of this information to the most directly comparable GAAP information.
Our periodic reports are available from Eagle online at our website or the SEC's website.
This morning, Susan Riel, the president and CEO of vehicle Bancorp will start us off with a high level with a high level overview.
Jan Williams, our Chief Credit Officer will discuss for thoughts on loans reserves.
And credit quality matters.
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 third quarter of 2000.
'twenty one.
I'm pleased to report another great quarter for Eagle earnings.
While not a record was the second highest in the bank's history asset quality continues to improve efficiency.
Efficiency remains a strong point.
And capital is building and.
And directly impacting.
And then our shareholders we've raised our dividend for the third time this year and we bought back some shares this quarter.
The one area that's lagged behind has been loan growth, which I'll also touch on later along with some comments on our market and a legal update.
Okay.
<unk> earnings first earnings for the quarter were $43 6 million.
Or $1 36 per share. This was a 146% return on average assets and a 14 point, 11% return on average tangible common equity.
Equity, earning.
Earnings for the first three quarters totaled $135 million.
Or for $4 22 per diluted share.
Turning to asset.
At the end of the quarter nonperforming assets with 31 basis points on assets and.
Second quarter annualized net charge offs were eight basis points on average loans.
Both of these ratios are the lowest we've seen in the past eight quarters.
These asset quality ratios combined with some factors that Ken will review.
Informed alloy.
And for the vision to make a third consecutive reversal from our allowance for credit losses.
With the reversal of $8 2 million for the quarter. The total reversal for the first nine months of the year was 14.
$4 million in terms of operating.
Additionally, efficiency, we continue to be a leader with an efficiency ratio of 41, 7% for the quarter. We are always prudent in our approach to expense management, yes, we always keep an eye on critical infrastructure and investments in controls that are necessary.
Operate very to operate a safe and sound banking institution.
This quarter, we closed our Dulles, Virginia branch as it had an expiring lease and our customers can be served from other northern Virginia branches.
The combined annual pre tax cost savings and rentals.
Rental expense will be about $187000 and foot and there was no write off of leasehold improvements entities had been fully amortized upon the expiration of the lease.
We are also pleased that all of the employees working at the branch has filled or.
We'll be filling positions within the company.
Providing internal mobility opportunities to our employees wherever possible is a critical part of our relationship first culture.
With earnings remaining strong capital continues to build at quarter end.
The equity was $1 3 billion.
Up $25 million over the prior quarter end and up $108 million from a year ago.
For our shareholders our earnings led directly to increased capital raising both book and tangible values.
Book value rose to $41 68 per share up nine 8% from a year ago and tangible book value was $38 39 per share up 10, 6% from a year ago.
We also increased.
Only dividend to <unk> 40 per share. This is up from 35, the prior quarter and 25 cents a quarter before that with the dividend of <unk> 40 cents in earnings of $1 36.
Our payout ratio for the quarter was 29 four.
The core design.
While we have increased the dividend three times. This year, our intent was to increase our dividend yield to be more in line with banks our size based on last night's closing stock price of $57 93 per share and a dividend of <unk>.
4% per share our dividend yield is two 8%.
In regards to our stock repurchase plan, we repurchased 11690 shares this past quarter at an average price of $52 94 per share.
We still have almost one 6 million shares authorized for repurchase remaining in the plan.
On the ground our market has proven to be robust even with setbacks from the Delta variant government spending and contracting remained strong hotels.
These strengths are doing better private companies are headed back to work and construction on new projects continues this summer the Washington business Journal list of the top 25 ongoing construction projects totaled $14 5 billion.
Up from $12 $6 billion a year earlier also reported recently by the Washington Business Journal and Amazon Economic impact report stated that Amazon invested a total of $28 $5 billion in northern Virginia over.
10 years and.
And based on government data the unemployment rate in the Washington area dropped to four 8% in the August compared to 5% nationwide.
And recently released census data shows the population in the Washington region.
<unk> grew by 13% over the last decade.
All very positive signs for our market and the community we serve.
Before discussing loans I would like to once again mention the contributions of the residential mortgage and FHA teams our residential.
The language team had another great quarter with locked loans of $280 million and a gain on sale of mortgage loans of $3 3 million.
This is on par with the prior quarter and we appreciate our residential mortgage division for their ongoing efforts.
To obtain these results.
Our FHA team for the first nine months of the year has generated trade premiums of $3 7 million that are included.
<unk> in non interest income the revenue stream from the FHA division is not smooth from quarter to quarter.
So comparatively the FHA division has the largest transactions in less volume than the mortgage division, which has smaller transactions and higher volume.
In regards to loan over the past 12 months, our loans have decreased as payoffs and paydowns.
<unk> has outpaced funding advances in originations, but the market and our approach has changed initially at the onset outset of the pandemic, we chose to focus on serving existing clients and maintaining credit quality more recently in the third quarter of two.
Quarter Hudson in 'twenty, one the decline in loans was impacted by the competition to refinance at lower rates with lower amortization periods. In some cases. These refinancings were from non bank lenders, who are attracted to the strong D C market.
Additionally, there is a lot of excess liquidity at other banks as well as many companies and construction project sponsors.
Additionally, many of our commercial clients are flushed with cash some of which has flowed into the bank in the form of deposits. However on the loan side.
Syed this leads to lower utilization rates and a longer period from loan approval until the loan is strong.
Over the past quarter, excluding PPP loans loans were $6 85.
$1 billion down three 4%.
Or $238 million from the prior quarter.
However, both our C&I CRE and C&I teams are seeing an increase in deal flow and in the market.
And given the market conditions, the bank has taken a more competitive stance.
On credit spreads on high quality loan opportunities.
The improvement can be seen in our unfunded commitments, which were $2 4 billion at quarter end up $280 million over the prior quarter and we.
We have had significant success at booking.
Booking new construction credits balances on these loans are expected to increase over time.
Before turning it over to Jan I have a legal update.
Our on our litigation and investigations, we continue to make progress towards the resolution of all disclosed matters.
Although a bit slower than we had hoped.
The company received closure on the outstanding shareholder derivative action on Monday October 4th when the DC Superior Court approved the settlement of that litigation and the class action settlement is on track.
System with the federal rules of civil procedure with the court hearing to approve the settlement and the beginning of 2022.
Our dialogues with the FCC and the Federal reserve are ongoing and we continue to cooperate with these investigations.
Additionally.
<unk> the company believes its possible we may exhaust our primary D&O coverage at some point in the fourth quarter.
In which case expenses that would have otherwise been covered as insurance claims will become a company expense.
It's impossible to.
These defense costs going forward as they are highly dependent on the duration and outcome of the investigations, which are also impossible to predict for more information on this update please see the related disclosure in our earnings release.
There then the history.
<unk> expense number we provided in the earnings release, we are not in a position at this time to offer any guidance on these potential defense costs.
To note that historical defense costs, including significant expenses in defense of litigations that have since.
<unk> as well as the investigation to peanut production and witness court.
We remain hopeful that with each quarterly announcements, we will be in a position to announce progress towards the resolution of all disclosed matters.
With that I would like to turn the speaking duties over.
Sun Williams, our Chief Credit Officer.
Thank you Susan and good morning, everyone. It's always good to present positive news from credit continues to improve to levels, we have not seen since before the pandemic.
At quarter end nonperforming assets were 31 basis points.
This is down 19 basis points from the prior quarter end.
At 31 basis points you'd have to go back to the third quarter of 2018 to find better ratio.
In dollars NPA is for $36 million down from $54.5 million.
The prior.
And <expletive>.
A decline in NPA was primarily from payoffs with nonperforming loans are returned to accrual status for the first time lines and a future charge offs.
Gross charge offs for the quarter were $2 million and net of recovery.
Charge offs were one.
<unk> 3 million.
The largest charge off during the period was a C&I contractor crowded for $1 million in.
In regards to the reversal of $8 2 million from the allowance for credit losses.
The reversal resulted primarily from the decline in loans.
One point is also informed by an improvement in credit quality, which increases the decline in <unk>.
Nonperforming loans and extraordinarily low levels of 30 to 90 day past dues.
Positive improvements and adjustments to both quantitative and.
Environmental factors also contributed.
For more detailed Charles will be able to tell you in during the Q&A with the reversal of the allowance for credit losses to total loans, excluding PPP loans was 132%, which is down 10 basis points from the prior.
Quarter end, even with our lower allowance for credit losses. The previously mentioned decline in nonperforming loans puts our coverage ratio of nonperforming loans at 265% well above the 150% to 200% range, where it has been for the last.
Borders.
I'd also like to point out that our provision for unfunded commitments was up 716000 this quarter and this ties in with the comments Susan made earlier about funding drive delays and the increase in unfunded commitments with that I'd like to turn.
It over to Charles Levingston, our Chief Financial Officer, Thank you Jan.
For the quarter net income was $43 $6 million, which is $2 3 million more than the same period a year ago.
Looking at the topline net interest income adjusted to remove the accelerated interest expense from the redemption of the sub.
Sub debt was $84 million slightly higher than the $79 million from the same period a year ago.
While the results are similar net interest income for this quarter was based off of average assets that are 13% higher than a year ago.
The rise in assets was primarily driven by the inflow of deposits in the fourth.
Quarter of 2020, and this past quarter.
Average deposits for this quarter were $9 $95 billion up $720 million versus the third quarter of 2020.
For noninterest income a year ago, the third quarter of 2020 was a record quarter for our mortgage division. So current.
Production, while still significant won't match that.
To put it in perspective, our mortgage division had locked loans this past quarter of $280 million, which is up from the second quarter's $248 million, but both periods are well behind the record $593 million, we generated a year ago.
So when the market conditions were optimal.
Additionally, in the second quarter of 2021.
There was on a linked quarter basis, there was $2 $6 million and gains associated with the origination securitization and sale and servicing of FHA loans. This bolstered noninterest income in the second quarter of 2000.
More than one that did not repeat in the third quarter of 2024.
While much smaller in comparison other noninterest income was $1 6 million for the third quarter of 2021 down from $4 million for the same period, a year ago, the primary difference being the past quarter.
This past.
The quarter the company experienced no Oreo gains while at the same quarter a year earlier, the company had gains of $1 $2 million.
For noninterest expenses, there was almost no difference in the total between the third quarter of 'twenty one in 'twenty.
For the for the quarter noninterest expenses were $36 4 million.
Compared to $36 nine for the same period a year earlier.
The expense line items with the biggest changes we're essentially offsetting salary.
Salary and employee benefits were up $2 $8 million as a result of higher incentive bonus accruals based on the company's performance premises and equipment were down $1 three.
$3 million as the third quarter of 2020 included a $1 $7 million of lease expense to adjust for ASC 842.
And legal accounting and professional fees were down $1 1 million.
On the balance sheet assets at the end of the third quarter reached a record high of $11 6 billion.
Up one.
Billion from a year ago, the year over year increase was primarily driven by deposit inflows, which increased both investments and interest bearing deposits with other banks.
The excess liquidity generated by the influx of deposits continues to reduce our margin, which excluding the accelerated interest expense from.
From the sub debt payout the margin was $2 78 for for this past quarter down from $3 eight a year ago. We will continue our efforts to put the excess liquidity to work, but we will remain prudent given the recent uptick in rates and the potential for deposit flows to slow or reverse.
A better measure of spread absent.
Absent the excess liquidity is to look at our loan yields which were 445, 9% absent PPP interest income and our cost of funds, which was 35 basis points.
Also while we did redeem our sub debt on August 2nd our cost of funds for this past.
Excluding $1 $3 million of accelerated interest expense from the redemption.
For PPP loans with just $67 3 million of PPP left which were mostly originated in mid 2020, we do not have a lot of accelerated fees and expenses remaining we expect these loans to complete the forgive.
Quarter in process over the near term on.
On the liability side.
Nine 7 billion up $1 5 billion from a year ago, and long term borrowings declined to $70 million as the bank redeemed $150 million of subordinated debt.
With that I'll hand, it back to Susan for a short wrap up.
Given us thanks, Charles ethylene wrap up our commentary I would like to thank all of our employees for all their hard work and their commitment to support our clients. Additionally, we remain committed to a culture of respect diversity and inclusion and both the workplace and the communities we serve.
Before we open.
Things up for questions I would like to summarize our financial results by saying the bank has posted its second best quarter of earnings and a 31 basis points of assets common equity is 11, 5% of assets.
Total risk based capital.
16, 6% and we just raised the dividend.
For the third time this year the bank continues to do well.
I'd now like to open things up for questions.
Thank you at this time everyone if.
If you would like to ask a question over the phone. Please press star and then one on your telephone keypad again, if you would like to ask a question over the phone at this time that its star and then one on your telephone keypad.
Our first question will come from the line of Casey Whitman with Piper Sandler Your line is now open.
Hey, good morning.
Hi, good morning ADC.
Yes, maybe I'll start with you congrats on the available credit moves. So we saw the decline in watch loans. This quarter in the release can you provide any color on the movements within special mentioned or classifieds and safe to say that those came down as well.
There was some movement within categories.
Loans that had been sub standard.
At least in one case, a significant relationship with upgraded to special mention there is a great deal of movement from <unk>.
Out of the watch category as we have that sustained period of performance.
We spoke about.
During our last earnings call.
A loan that has had multiple deferral.
I can wait six months under regular payment structure in order to move them.
The watch list so.
Predominantly the reason for the drop and the improvement in.
As in the area of classified loans as those were reduced and in some cases moved to the special mention category.
Okay understood and then just looking at the big reduction in non performers this quarter are those.
Loans that returned to performing status or are they out of the bank entity.
Any particular industry.
Performing non performers.
What.
You might recall that initially what we did with loan. So that's had a multiple COVID-19 deferral situation beyond 90 days, we moved them all onto the watch list to.
To track them.
And once those deferral periods, where over and they had achieved six months of regular payments, we were able to move a significant number of those loans back into the regular past portfolio.
Okay understood.
Maybe.
Ask one more kind of bigger picture question, just given the increase in deposits and all the liquidity you guys have on the balance sheet at kind of what are your high level thoughts on your plans to deploy that liquidity in the near term you know could be see increases in the securities portfolio or how should we think about.
That liquidity over the next couple of core.
Maybe I'll just sure yes.
Yes, it's certainly an accelerated pace of deployment into the investment securities portfolio.
Is likely.
<unk>.
As Susan mentioned in her comments as well the unfunded commitments.
There is a there is a pipeline for.
I mean.
We expect will also absorb some of that excess liquidity and then additional loan funding as were getting.
Getting looks at.
At deals and fully funded deals hopefully.
Mhm.
And as you are getting I think you mentioned getting more.
We're competitive on pricing.
The higher balances unfunded commitments.
There are new production yields coming in now versus last quarter.
Yes for the for the third quarter, we've seen.
We saw pricing.
On the coupon on the loan closer to 4%.
Yeah.
Whether or not that holds us.
As a question.
But that's where we were in the third quarter.
Okay, and then again, that's the coupon you would just add deferred fees and costs.
Okay.
Understood.
<unk>.
Thanks Casey.
Thank you. Our next question will come from line of Katherine Melano recap VW. Your line is now open.
Thanks, Good morning, good morning Catherine.
Maybe as a follow up to Casey's question, just thinking about balance sheet composition. So.
Security was at <unk>.
Percent of earning assets cash is now 23, so I know, we would all love to put cash more into loans, because that's higher yield but as we can.
Think about how much of cash.
Go into securities is there.
Max of how big you would allow the securities portfolio to grow as a percentage of your balance.
15.
Yeah.
I again want to be prudent about about that and as we talk about the potential for liquidity to potentially reverse at some point.
Mindful of that although obviously, we're flushed with it.
Short.
<unk> your question is.
Yes.
I'd be I'd be comfortable going higher certainly on the investment portfolio.
I don't necessarily have a limit, but theres going to be a comfortable cushion.
On the on the cash side.
In the event that we see an outflow.
Answer to you, okay that helps that makes sense.
On just the outlook for loan growth is there.
Is there a growth target that you think you could provide for us for next year and.
Maybe kind of talk anecdotally about what kind of opportunities you're seeing and why you think the most clear.
This could come from and then.
And maybe just kind of some local.
Geographical common.
Commentary would be helpful. I still like the growth has been a little bit slower in the D C Virginia area versus some other markets, we're seeing at least in the southeast. So just curious if theres anything that you think is happening from a regional perspective.
Driving that progress thanks.
Thank you Kathryn and I do think we've been.
<unk> seen a lot more opportunities lately than we have seen in quite some time significantly this year in the construction area construction in the area is that.
Quite a bit so.
I'm not really seeing much of a lag a difference right now I think is that there's so much liquidity out there that a lot of these projects.
Uh huh.
I have a tremendous amount of liquidity going in ahead of the drug.
So theres going to be more delay.
That's pulling down on construction lending and that's you know could also be exasperate exacerbated by issues with the supply chain, but I think overall.
Overall, that's the type of lending we're gonna see.
Impact us going forward also seeing.
Les and M&A, which I think is typical.
And pretty much across the country right now is theres consolidation in various industries.
That's also giving us some opportunities government contracting again as an opportunity area for us to grow as well I think we're being.
A lot of quite competitive on pricing provided we're getting our risk return.
On asbestos.
Appropriate to the bank, so overall I have cautious optimism.
Charles do you want to talk about liquidity.
Well again I mean.
The notion that.
There's a lot of a lot of dollars way more dollars chasing.
Good good.
Pipeline of deals again, just echoing your comments.
That's that's really the challenges presented to us.
Certainly as it relates to pricing as we grow.
And I think the other thing that's encouraging is that the housing market here is still extraordinarily strong.
There is a shortfall in housing in the D. C area, that's expected to take US several years at a minimum to catch up.
With the population growth that we've.
The delays caused by Covid in certain projects I think.
There is unmet demand out there that still needs to be handled.
Great helpful. Thank you so much.
Have a great gotcha.
Thank you and our next question comes from Brody Preston with Stephens, Inc. Your line is now open.
Hey, good morning, everyone.
Good morning Rudy.
Hey, I just had a question on the on the sub debt real quick just given that you you all redeem that.
Early in the quarter is as that worked its way.
<unk> into the interest expense yet so if I kind of look at the 3 million you reported for long term borrowings and back out that 1.3.
Accelerated interest expense is that a good place to start for the fourth quarter on that run rate yes.
Yes.
We redeemed it on August the second so you've got it.
A day and there.
Interest expense associated with that that larger sub debt.
But yes, that's existed pretty good place to start.
Okay Alright.
Alright, Great and then just on the on the core loan yield.
No.
No that's probably playing into some of the loan growth the loan runoff.
You all have had but it's holding up pretty well and so I guess.
When I think about what you all are originating you know in new production understanding that it's it's it's it's not outpacing some of the runoff you're seeing what are you all getting for new origination yields.
Yes so.
I think on the third quarter, we saw coupons of close to 4%.
On a weighted average basis of what was the new loans that were originated.
And.
And booked.
And funding for the <unk>.
Third quarter and then there is.
Again, some component of deferred fees and costs.
Added onto that.
Our results.
Yield slightly above that again, whether or not that holds.
The question.
Again things are very competitive.
Hi.
That's where we were for the third quarter.
Got it okay.
And.
Susan I heard you earlier about the Lumpiness that can occur on the on the FHA fee income side.
But I guess as I think about you know going forward annually do you feel like the pace that you've done year to do.
Obviously, as where you would shake out.
In the upcoming years going forward.
Yes, we do we are optimistic on that side. There is a lot on our book that we expect.
T two.
To close so where we're moving along.
Long.
In a positive way on that.
Okay, Great and then on the Securities portfolio, Charles maybe do you happen to know what the effective duration of that portfolio is.
Yes effective duration of three eight.
Okay.
Yes.
Great.
And then my last one yeah go ahead Charles.
Sorry, just to provide a little bit more color.
That number has certainly picked up a little bit right. There's more price risk just like they were more price risk and a lot of investment portfolios. These days at many of our competitors.
Seeking.
Okay, some kind of return.
Got it and then my last one is just on expenses, particularly the salaries and employee benefits could you remind me.
I wasn't able to find it in my notes, but are there seasonal increases that typically occur in the third quarter and so I guess this $22 1 million.
Tend to be the new run rate.
Going forward.
Yes.
I'd say on that is typically there is as you approach the end of the year and there is more clarity about.
Individual performances.
At the bank and the bank's performance overall, we have a better sense.
Sense of what that annual incentive expense is going to be and make accruals towards that.
So.
Yes.
That is the nature of the way in which we are.
We're booking some of those and obviously this year was in order.
Good.
With a lot of the reversals.
Yes.
And the allowance and.
The sale of the PPP loans.
Another.
Other areas, where we've seen some good benefits so.
Yes.
Hopefully that provides you a little bit of insight there.
Awesome. Thank you very.
That we have for taking my questions I appreciate it.
Yes, Sir thank you.
Yes.
Thank you everyone. This concludes our question and answer session for today. So now it's my pleasure to hand, the conference back over to Susan Riel, President and Chief Executive Officer for any closing comments or remarks.
We appreciate your questions and all of you taking the time to join.
On the call. We hope you are doing well and we look forward to speaking with you again in a few months.
You all have a great day.
Everyone. This concludes our Q&A and our call for today you may all disconnect everyone have a wonderful day.