Q4 2021 Eagle Bancorp Inc Earnings Call

January 20, 2022

Hello, Thank you for standing by and welcome to the Eagle Bancorp fourth quarter and year end 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session.

A question during the session you will need to press star one on your telephone. Please be advised that today's conference maybe recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today Charles.

Levinson Chief Financial Officer. Please go ahead.

Thank you Josh.

Good 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 may be considered forward looking statements, while our growth and performance over this past quarter have 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 respect to our earnings.

None of the forward looking statements made during this call should be interpreted as are providing formal guidance or.

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 risk factors that could cause the company's actual results to differ materially from those projected in any forward looking statements made this morning Igor.

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.

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 on the SEC's website.

This morning, Susan Riel, the president and CEO of Eagle Bancorp will start us off with a high level overview, then Jan Williams, our Chief Credit Officer will discuss her thoughts on loans reserves 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.

Over to our President and CEO Susan Riel.

Thank you Charles Good morning, and welcome to our earnings call I Am pleased to report another successful year with a strong finish at year end, a few highlights which we will cover in more detail later, our earnings for the year and assets at year end were record highs asset.

<unk> continues to improve.

<unk> remains a strong point and most importantly loans, excluding PPP grew by $231 million or.

Or by three 4% in the fourth quarter.

Focusing on earnings first it was our 22nd consecutive profitable year.

Earnings for the year were a record $5 52.

Per diluted share and we paid out $1 40 per share in dividends.

Which was 25%.

Returns for the year with 149% on average assets and 14, seven 3% on average tangible common equity.

Turning to asset quality at the end of the quarter nonperforming assets improved 26 basis points on assets and for the quarter annualized net charge offs improved to seven basis points on average loans.

Both of these ratios are the lowest we've seen in the past nine quarters.

These asset quality ratios combined with some factors at Jan will review informed our decision to make a fourth consecutive reversal from our allowance for credit losses, even with the increase in loan.

With the reversal of $7 million for the quarter. The total reversal for the year was $21 9 million.

Which followed provisioning of $47 million for the full year of 2020.

In terms of operating efficiency, we continue to be a leader with an efficiency ratio of 44, 3% 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 <unk>.

<unk>, sorry to operate a safe and sound banking institution.

This year, we closed three branches all of which had expiring leases and clients who can be served from other northern Virginia branches and through digital channels.

<unk> recent closure with our Reston location in December .

Reducing our branch count to 17, embracing our average deposits per branch to $587 million.

Now, let's talk about loans on last quarter's call. We said that given the market conditions. The bank has taken a more competitive stance on credit spreads on high quality loan opportunities.

So it was encouraging that even as payoffs and pay downs remain tie loans were up and we saw significant contributions from both our CRE and C&I teams, particularly in December .

The largest net increase was in owner occupied CRE loans, which accounted for almost half of the net growth followed by commercial loans and some income producing CRE.

Construction loans also increased.

Were mostly offset by successful completed projects.

We would also like to note our $2 billion in unfunded commitments at quarter end and our total risk based capital of 16, 15% gives us a lot of room to continue to grow the loan portfolio.

Our other lending teams also did well in 2021, the FHA team ended the year strong with the fourth quarter that resulted in trade premiums origination fees and mortgage servicing rights income of $2 5 million.

For the year. The total was five 6 million.

The mortgage team had its second best year.

It'd be difficult to top 2020 locked loans for the fourth quarter.

Hundred $63 million.

Given the mortgage team a total of almost $1 billion for the year.

For our shareholders our earnings contributed to increasing both book intangible values book value Rose to $42 28 per share up eight 3% from a year ago and tangible book value.

Value rose to $38 97 per share up 9% from a year ago.

Also increased the quarterly dividend three times moving from 22 per share in the fourth quarter of 2020 to 40 <unk> per share in the third and fourth quarters of 2021.

Based on last night's closing stock price of $60 77 per share and a quarterly dividend of <unk> 40 per share our annualized dividend yield is two 6%.

In regards to our our stock repurchase plan for the year, we repurchased just over 13000 shares at an average price of $51 78 per share.

Additionally in December the board adopted a new 2022, a share repurchase plan for one 6 million shares or approximately 5% of outstanding shares.

On the ground our market continues to be robust spending from the government government contracting and the consumer remains strong and construction on new projects move forward.

Based on government data the unemployment picture continues to improve the unemployment rate in the Washington area fell from four 9% when we reported in August to three 5% in November .

And for the same periods the U S unemployment rate fell from five 2% to four 2%.

This drop in unemployment in particular, the drop in the local rate was a factor in the release of reserves.

Also the impact of one micron appears to be passing as cases in our area have peaked with new cases down 30%. This week.

With respect to our litigation and investigations, our dialogues with the SEC and the Federal reserve are ongoing and we cooperate with these investigations and we continue to make progress towards the resolution of all disclosed matters with that I would like to turn the speaking duty sofa.

Jan Williams, our Chief Credit Officer.

Thank you Susan and good morning, everyone credit continues to level III have not seen since before the pandemic.

With the Acs reversal of $6 4 million on loans and loan growth ex PPP.

231 million, our ACL to loan.

121 last quarter to one point of six this past quarter.

Comparatively pre COVID-19 increased diesel in the fourth quarter of 2019, our reserves were 97 basis points.

As Susan mentioned, we're 26 basis points on assets total NPA, if were $29 2 million.

About 57% of our CRE and 29% of our commercial credits the remaining npcs or smaller PPP SBA and residential loans.

Net charge offs in the fourth quarter totaled $1 2 million.

There were eight loans charged off or partially charged off the largest of which was a C&I loan.

Proximately 550000 total charge offs for 2021 were $13 3 million and were well below 2020, which came to an $8 1 million.

In terms of risk classifications during the quarter. The past portion of the portfolio increased lateral watch special mention and classified credits were down.

In particular, a number of loans that were placed on watch because of the second COVID-19 modification. We're upgrading after continuing to show sustained performance at the end of their modification periods.

Even with our lower ACL, our coverage ratio of nonperforming loans is 257%.

This is down from 265% the prior quarter this quarter like last quarter is well above 151% to 202% range, where it's been for the prior seven quarters.

Also worth noting that we booked a $1 $1 million gain on the sale of our largest Oreo property and the number of properties remaining in Oreo fell to three with a carrying value and the aggregate of one 6 million.

In regards to the reversal of $6 4 million from the allowance for credit losses, as we model. The allowance we determined that it was appropriate to begin transitioning away from the crisis level loss given default metrics, we've been using since the beginning of the pandemic to a more normalized.

Long term average loss given default.

Additionally, there is continuing improvement in the unemployment and economic forecasts the actual loss rate experienced by the bank in 2021 were significantly below 2020 levels.

We considered a number of qualitative and environmental factors, including among other things the remaining potential risks to the hospitality and restaurant industries.

With that I'd like to turn it over to Charles <unk>, Our Chief Financial Officer.

Thanks Jan.

For the quarter net income was $41 $6 million, which is down $2 million from the prior quarter.

<unk> rose to $11 8 billion up $262 million.

In regards to earnings the primary differences on a linked quarter basis, where net interest income was down 859.

Interest income included a drop of $1 7 million attributable to lower PPP fee income as much of the remaining PPP forgiveness occurred in the third quarter, which ended up with PPP loans of $67 million.

Fourth quarter ended with PPP loans of $51 million.

Down just $16 million.

Additionally, more than half of the loan increase we report was recorded in December so it had little impact on interest income in the fourth quarter.

Noninterest expenses were up $2 9 million.

Compensation and benefits were up $2 5 million as a result of higher incentive bonus accruals based on the company's performance and increases in share based compensation.

Professional fees were up 966000.

And these increases were partially offset by a decline of $1 2 million in FDIC assessment expenses.

Noninterest income excluding security gains was up $2 9 million.

As Susan mentioned earlier gain on sale of residential mortgage loans fell but the difference was more than made up by our FHA group, which had a good fourth quarter and the $1 $1 million gain on Oreo sales.

The other items impacting the earnings on a linked quarter basis were much smaller all under $1 million.

This included a smaller net reversal from the provision and a smaller gain on securities.

On the balance sheet, the biggest changes youll see since the.

<unk> from the prior quarter and are the increases in loans, which Susan covered and our effort to put more cash but to put more of our cash to use in the investment portfolio.

Linked quarter basis loans increased by $214 million $231 million, excluding PPP loans investment securities rose to $836 million, while cash held at the fed fell $771 million more than half of the purchases were in December and most of the activity was to add agencies.

And pass through mortgage backed securities as well as some corporates in munis.

On the other side of the balance sheet deposits continue to flow into the bank as deposits rose $313 million.

Most of the inflows were noninterest bearing which rose by $442 million on a linked quarter basis.

A measure I like to look at is the average noninterest bearing deposits to average deposits, which were 36, 3% this past quarter up from $33 nine in the prior quarter.

For net interest margin, we were down 18 basis points to 255% on a linked quarter basis the.

The deployment of cash into securities had a positive impact but occurred late in the quarter also on a linked quarter basis yields on loans adjusted for PPP interest and fees were down eight basis points from four.

54 to $4 46.

Looking at our cost of funds the fourth quarter was down nine basis points to 26 basis points part of the favorable declining cost was the absence of any interest in or expense from the sub debt issuance that was redeemed earlier in the year. This.

This is our first quarter without any of that issuance included.

The run off of higher priced Cds played a minor role this quarter. There is still some higher rate Cds on the books, but the maturities are mid 2022 or later.

Lastly in terms of rate sensitivity, we remain asset sensitive and should benefit from rising rates as loans come off the floor or reprice and a large percentage of our deposits are noninterest bearing.

With that I'll hand, it back to Susan for a short wrap up.

Thanks Charles.

To 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 during the pandemic second year.

And we remain committed to a culture of respect diversity and inclusion and both the workplace and the communities. We serve lastly, we are encouraged to have momentum going into 2022, and when we feel good about the company and our position in a very competitive strong.

<unk> and dynamic market, we will now open up for questions.

Thank you.

Binders ask a question you will need to press star one on your telephone to withdraw your question press the pound key please stand while we compile the Q&A roster.

Our first question comes from Casey Whitman with Piper Sandler You May proceed with your question.

Hey, good morning.

Hi, Casey.

Hi.

Maybe we will start off with expenses.

So just looking at the growth this quarter, particularly salaries and benefits line. What do you think is a reasonable expectation for where that line might run in 2022, I think et cetera around $25 million right now in the fourth quarter can we assume that we get some of that back in the first quarter or is this a pretty good run rate for that line.

Yes.

We did have an extraordinary year.

In 2021, some of that is reflected in that.

That incentive.

Annual incentive accrual.

Okay.

Wouldn't necessarily expect the same pattern.

No.

Your next year in terms of of the reversals that that we were able to take in particularly from the.

From the allowance so.

I don't know that we see that same kind of heavy.

Heavy incentives associated with the following year.

Okay is there may be a long term sort of efficiency ratio you guys are targeting that we can work with.

Yes.

I think where we've been operating for the past couple of years around that 40% number.

Is is.

As a place where we were hoping to continue to play.

Yes.

Okay, and what about the FDIC expenses do you think they continue to run.

As long as they were in the fourth quarter.

Yes, we noted in the press release that our calculation for the large bank assessment came out too.

In the fourth quarter about a third of what we previously had in terms of expenses, So thats, where I anticipate things continuing.

Okay.

Understood maybe just one more for me on capital assuming you can keep putting up some some of our best growth I'm looking at the current stock price do we have a big appetite for buybacks here or what would what would it take for you guys to become more aggressive there.

Yes, I think we're going to continue to evaluate our options.

Sure.

Quarter by quarter day by day basis.

As we.

We will continue to contemplate or.

Where we are.

We want to how we want to play with that.

Yes. So I think it is just going to be kind of a day by day thing.

Understood I'll, let someone else jump on.

Thank you. Our next question comes from Catherine Mealor with <unk> you May proceed with your question.

Thanks, Good morning.

Thanks Catherine.

Can you just talk about asset sensitivity that you mentioned Charles.

Maybe first start on the loan side it looks in your last quarter's 10-Q, and it looks like about 58% of your loans are variable can you talk about how much of that reprice immediately and how much of that may may lag.

And then my second part of that question is kind of in loan yield where were new.

New loan yields coming on this quarter. So how should we think about the <unk>.

Offset of that with.

The portfolio is still repricing downward until we get to the bottom.

Yeah.

Sure sure Thanks, Kevin Yeah. So.

Yes.

As I look at interest rate risk.

Our asset sensitivity position.

As we evaluate that 100 basis point.

Plus shock over a 12 month period, we're seeing a positive net interest income.

Impact of just under 5%.

So that's kind of.

At the end of the story there we've got.

In terms of LIBOR base, so for base Prime based loans.

Of the total.

Still around just around 50% or so.

Of the total portfolio.

It would be impacted there.

Total adjustable and variable rate loans are still right around that at Pryor.

Quarter number, but 56% to 58% somewhere around there.

Yeah.

And then in terms of where new loans are coming on.

We did have a very large.

Quarter. This this quarter in terms of loans book.

Yields on the new volume were in the neighborhood of $3 75 or so.

So that's that's where we're currently booking loans as of the fourth quarter.

Okay.

Many of them are floating rate.

Okay.

Again on the 58%.

Variable how much. Thank you for the impact there, but very much where you see most of that reprice immediately with the first rate hike.

Yes, so in terms of Fleury pricing.

As we move up.

25, 50 basis points.

About half a billion or so would reprice there.

We probably had another.

$650 million or so with another 50 basis points above that.

So it's about $2 8 billion.

Floors.

Got it.

Hey.

Great and then.

You.

Look at your.

Deposit composition.

I mean, you've got to believe that your deposit betas will be lower in this cycle than they were last just because.

And when you've got so much liquidity into perhaps you could argue you arent growing as fast as you were last cycle or is this quarter's growth was really good.

So how do you I guess, maybe within your Alco modeling maybe first how do you think about deposit betas within that and then and then maybe also more realistically because I think sometimes there's a difference between.

Within Alco modeling and then what you think will actually happen in reality.

No that's a great great point.

We've currently got the model set at <unk>.

Five beta for up rates.

Do we do we think thats going to be the actual experience I think theres a good chance, particularly as you point out with the continued deposit growth.

It might be shy of that so to the extent that our.

Our beta our actual experience a beta is lower that only endures to the benefit of greater asset sensitivity.

Great. Okay and my last question, then I'll Scott Scott.

Scott.

Thank you Charles.

Pat.

You have so much cash on your balance sheet, what kind of strategy should we expect for how quickly you will deploy that into securities and loans.

Yes, obviously, our first choices loans.

We want to put it out there and loans.

While we're here.

But absent that I would expect it will continue a healthy clip in terms of deployment to the investment portfolio.

It's kind of enough enough sitting on the sidelines, particularly again as our as our cash position grows and as we model it out and look at the math of it.

The steady rate hikes over a couple of years, it's better to get in the game now.

Then it is to wait and have those cash balances just earning fed funds.

Overnight interest on excess reserves.

Great Alright. Thank you so much for the help.

Thanks Catherine.

Thank you. Our next question comes from Brody Preston with Stephens, Inc. You May proceed with your question.

Hey, good morning, everyone.

Good morning Brady.

Thank you.

Hey, I guess I just wanted to start back on the loan growth.

It was.

Nice to see you guys return to solid levels of core growth here.

<unk> TPP this quarter.

And so I guess I wanted to ask as we think about the go forward run rate of Eagle Historically, all had been a pretty strong grower.

But just thinking about.

Pipelines currently maybe new any new producers that you hired on the strength of the DC economy, where do you where would you expect loan growth to kind of shake out on a normalized basis going forward.

Alright, thank you.

Difficult.

With any degree of certainty at this point, but I do think the local economy has been particularly strong.

Climate here is significantly lower than.

National basis, and the national rate.

I think there.

Well poised to have.

Economy that continues to grow.

Probably for the next year.

Cheers.

In terms of where we are with.

Demand for loans.

I think that's going to depend to some extent on what happens with interest rates and whether we see a drop in refinancing.

Fixed rate things because of rate shifts.

That will take with it perhaps the opportunity to refi out some other banks.

I do think that we'll see mining usage start to increase as the economy grows.

So I am feeling that we have a good opportunity here.

Pipeline.

Good pipeline.

Okay.

Charles do you have anything you want to add to that.

The pipeline that we have remained strong.

We saw unfunded commitments continue to remain.

Close to our quarterly averages over a period of time about $2 billion. So.

So yes, we.

We expect that.

We'll continue to have healthy growth.

Our lending teams are pretty optimistic going into 2022.

Got it got it.

And then maybe.

Just on the securities portfolio Charles obviously.

You guys put a decent slug of liquidity to work there.

Excuse me.

But deposit growth has remained strong for you all and for the industry and so as I as I think about securities growth going forward.

I wouldn't expect you know like a 46% linked quarter increase.

Next quarter or anything but.

How do we think about.

The pace.

Pace of it and then also if you happen to have what the duration on the securities portfolio I appreciate it.

Yes, the duration just a quick hit there.

The effective duration is right around four years.

<unk>.

Yes.

This is another area, we will just continue to have to evaluate.

<unk>.

Kind of.

Week by week month by month.

Okay.

Obviously, we need to continue to bank our customers and.

As such we saw some healthy deposit growth.

In the fourth quarter.

Got it.

Kind of your guess is as good as buying whether or not there those customers find use for those dollars.

And continue to draw some of that recent growth out.

I think we stopped calling the.

QE effort, a surge liquidity surge several quarters ago. So we know that there is some base there to be maintained but.

Yes, as I mentioned earlier.

I think that.

All things equal we continue at a pretty healthy clip of deploying some some of that cash into the investment portfolio loan.

Loan portfolio. It comes first we want to make sure that we've got the cash for that as well, but with a growing investment portfolio, it's kicking off a lot of cash for us.

Also month after month so.

It really is just going to be the.

The balancing act.

So yeah.

Understood.

Do you know what what percent if any of the securities portfolio is floating rate Charles.

Okay.

Don't have that off hand, but I can.

I can get back on that.

It's going to be.

Relatively small right.

Theres not a lot of <unk>.

Variable rate paper in there.

Okay ill follow up offline on that and I guess the last one that I wanted to ask just.

On the on the legal expense.

The expense front.

That looked like it ticked up again.

Quarter over quarter. So I just wanted to ask was there anything specific that drove that and then I noticed in the release.

You guys didn't put anything in there about the legal proceedings and so.

Are those behind us now or is it or are those still ongoing.

The legal proceedings are.

We've moved forward with them the shareholder derivative action, we settled on October 4th a class action settlement is on track and we have a federal district Court hearing today later in the day on that and as far as the FCC and the Federal Reserve, we continue to make progress towards resolution on that.

Sure.

Understood.

Protium answered your former question as well I think we're looking at about 3% of the total portfolio is floating rate.

Got it. Thank you very much for taking my questions everybody I appreciate the answers.

Yes.

Thank you and our next question comes from Erik Zwick with Boenning and Scattergood you May proceed with your question.

Good morning, everyone.

Good morning, Eric.

I wanted to first just start kind of circling back on.

The net interest margin a little bit you've given some good color there to some of the moving pieces and as I think about it.

Quarter margin at $2 55, and it didn't reflect the new loans that are on the balance sheet.

Did reflect maybe some of the securities just trying to think from this point absent any.

Fed funds rate increases have we potentially seen the bottom here and the margin can it grow at the core just given what you're expecting for loan growth and the new loans that were added and <unk> as well is that a good way to think about it is there something else to consider at this point.

Yes, I mean, right now I think.

Im pointing to a lot of the cash builds because youre right you didnt see the.

You didn't see the impact of some of the new loans.

As they were booked later in the quarter and even the investment portfolio a lot of that those purchases were done during the quarter, but the cash build and the <unk>.

Mix of earning assets has certainly had a downward effect, that's really kind of the.

One of the bigger question marks in terms of the NIM impact I think.

We would experience but.

As I mentioned that you've got where the loans are coming on these days.

And yes, there is.

There's still some cost saves on the cost of funds believe it or not as I mentioned with some higher cost maturing Cds coming off but.

There is not much more to go on that front.

There is some.

And I think they are likely would be a little down drift on on.

On loan yields.

If the current prevailing rates continue.

But do you get a countervailing impact of potential rate increases.

This coming year.

Herb and looked at the trading probabilities suggest any anywhere from four maybe even five rate hikes.

A year or so.

You've got to kind of mix all that together and make your best guess.

Yes, I don't know, if I helped or hurt there but.

There is some color.

No I definitely I appreciate the additional color that was helpful and one last one probably again for you Charles.

Outlook for the effective tax rate in 'twenty two.

Yes.

We ended up.

Close to where we were for the full year.

<unk>.

21 and that 25%.

Range, plus or minus with.

Thats barring any any actions from.

Which at this point appears somewhat unlikely from.

Legislative bodies.

Got it thanks, so much for taking my questions.

Sure.

Yes.

Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Susan Riel for any closing remarks.

We appreciate your questions and for all of you taking the time today to be with us on this call.

Hope that your 2022 is off to a good start and we look forward to speaking to you again in a few months.

Have a great day.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

[music].

Sure.

[music].

Hello, Thank you for standing by and welcome to the Eagle Bancorp fourth quarter and year end 2021 earnings conference call.

At this time all participants are in a listen only mode. After the speaker presentation there'll be a question and answer session.

A question during the session you will need to press star one on your telephone. Please be advised that today's conference may be recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Charles Levingston, Chief Financial Officer. Please go ahead.

Thank you Josh.

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.

Undertake to update any forward looking statements as a result of new information or future events or developments unless required by law.

Our periodic reports are available from Eagle online at our website or on the SEC's website.

This morning, Susan Riel, the president and CEO of Eagle Bancorp will start us off with a high level overview, then Jan Williams, our Chief Credit Officer will discuss her 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.

Over to our President and CEO Susan Riel.

<unk> for the year in assets at year end were record highs.

Quality continues to improve efficiency remains a strong point and most importantly loans, excluding PPP grew by $231 million.

Or by three 4% in the fourth quarter.

Focusing on earnings first it was our 20 <unk> second consecutive profitable year earnings for the year were a record $5 52.

Per diluted share and we paid out $1 40 per share in dividends.

Which was 25% of earnings.

Returns for the year were 149% on average assets and 14, seven 3% on average tangible common equity.

Both of these ratios are the lowest we've seen in the past nine quarters.

These asset quality ratios combined with some factors that can moor reveal informed our decision to make a fourth consecutive reversal from our allowance for credit losses, even with the increase.

With the reversal of $7 million for the quarter. The total reversal for the year was $21 9 million.

Which followed provisioning of $47 million for the full year of 2020.

Our necessary to operate a safe and sound banking institutions.

This year, we closed three branches all of which had expiring leases and clients who can be served from other northern Virginia branches and through digital channels. The.

The most recent closure with our Reston location in December <unk>.

Reducing our branch count to 17, embracing our average deposits per branch to $587 million.

Now, let's talk about loans on last quarter's call. We said that given the market conditions. The bank has taken a more competitive stance on credit spreads on high quality loan opportunities.

So it was encouraging that even as payoffs and pay downs remained high loans were up and we saw significant contributions from both our CRE and C&I teams, particularly in December .

The largest net increase was in owner occupied CRE loans, which accounted for almost half of the net growth followed by commercial loans and some income producing CRE.

Construction loans also increased but were mostly offset by successful completed projects.

We would also like to note our $2 billion in unfunded commitments at quarter end and our total risk based capital of 16, 15% gives us a lot of room to continue to grow the loan portfolio.

Our other lending teams also did well in 2021.

<unk> ended the year strong with a fourth quarter that resulted in trade premiums origination fees and mortgage servicing rights income of $2 5 million.

For the year. The total was five 6 million.

The mortgage team had its second best year as it would be difficult to top 2020 locked loans for the fourth quarter $163 million given the mortgage team a total of almost $1 billion for the year.

For our shareholders our earnings contributed to increasing both book intangible values book value Rose to $42 28 per share up eight 3% from a year ago and tangible book.

Value rose to $38 97 per share up 9% from a year ago.

Also increased the quarterly dividend three times moving from 22 per share in the fourth quarter of 2020 to <unk> 40 per share in the third and fourth quarters of 2021.

Based on last night's closing stock price of $60 77 per share and a quarterly dividend of <unk> 40 per share our annualized dividend yield is two 6%.

In regards to our our stock repurchase plan for the year, we repurchased just over 13000 shares at an average price of $51 78 per share.

Additionally in December the board adopted a new 2022, a share repurchase plan for one 6 million shares or approximately 5% of outstanding shares.

On the ground our market continues to be robust spending from the government government contracting and the consumer remains strong and construction on new projects move forward.

And based on government data the unemployment picture continues to improve the unemployment rate in the Washington area fell from four 9% when we reported in August to three 5% in November .

And for the same periods the U S unemployment rate fell from five 2% to four 2%. This drop in unemployment in particular the drop in the local rate was a factor in the release of reserves.

Also the impact of one micron appears to be passing as cases in our area have peaked with new cases down 30%. This week.

Jan Williams, our Chief Credit Officer.

Thank you Susan and good morning, everyone credit continues to improve.

The levels, we have not seen since before the pandemic.

With the ACL reversal of $6 4 million on loans and loan growth ex PPP.

231 million, our ACL to loan from 121 last quarter to one point of six this past quarter.

Comparatively pre COVID-19 increase they saw in the fourth quarter of 2019, our reserves were 97 basis points.

NPA is as Susan mentioned, we're 26 basis points on assets total NPA as were $29 2 million of which.

About 57% of our CRE and 29% of our commercial credit.

Meaning <unk> or smaller PPP, SBA and residential loans.

Net charge offs in the fourth quarter totaled $1 2 million.

There were eight loans charged off or partially charged off the largest of which was a C&I loan.

Approximately 550000 total charge offs for 2021 were $13 3 million and were well below 2020, which came on $8 1 million.

In terms of risk classification during the quarter the past a portion of the portfolio increased quite a lot of special mention and classified credits were down in.

Even with our lower ACL, our coverage ratio of nonperforming loans is 257%.

This is down from 265% the prior quarter this quarter like last quarter is well above 151% to 202% range, where it's been for the prior seven quarters.

Also worth noting that we booked a $1 $1 million gain on the sale of our largest Oreo property.

And the number of properties remaining in Oreo fell to three with a carrying value in the aggregate of one 6 million.

In regards to the reversal of $6 4 million from the allowance for credit losses, as we modeled the allowance we determined that it was appropriate to begin transitioning away from the crisis level loss given default metrics, we've been using since the beginning of the pandemic to a more normalized long.

Term average loss given default.

Additionally, there is continuing improvement in the unemployment and economic forecast the actual loss rate experienced by the bank in 2021 were significantly below 2020 levels.

And we considered a number of qualitative and environmental factors, including among other things the remaining potential risk to the hospitality and restaurant industries.

With that I'd like to turn it over to Charles <unk>, Our Chief Financial Officer.

Thanks Jan.

For the quarter net income was $41 $6 million, which is down $2 million from the prior quarter and assets Rose to 11 8 billion up $262 million.

In regards to earnings the primary differences on a linked quarter basis, where net interest income was down 859.

Fourth quarter ended with PPP loans of $51 million down just $16 million.

Additionally, more than half of the loan increase we report was recorded in December so it had little impact on interest income in the fourth quarter.

Noninterest expenses were up $2 9 million.

Compensation and benefits were up $2 5 million as a result of higher incentive bonus accruals based on the company's performance and increases in share based compensation.

Professional fees were up 966000.

These increases were partially offset by a decline of $1 2 million in FDIC assessment expenses.

Noninterest income excluding security gains was up $2 $9 million.

As Susan mentioned earlier, a gain on sale of residential mortgage loans fell but the difference was more than made up by our FHA group, which had a good fourth quarter and the $1 $1 million gain on Oreo sales.

The other items impacting the earnings on a linked quarter basis, we're much smaller all under $1 million. This included a smaller net reversal from the provision and a smaller gain on securities.

On the balance sheet, the biggest changes youll see since the.

<unk> from the prior quarter and are the increases in loans, which Susan covered and our effort to put more cash but to put more of our cash to use in the investment portfolio.

On a linked quarter basis loans increased by $214 million $231 million, excluding PPP loans investment Securities Rose $836 million, while cash held at the fed fell $771 million more than half of the purchases were in December and most of the activity was to AD agency.

And pass through mortgage backed securities as well as some corporates in munis.

On the other side of the balance sheet deposits continue to flow into the bank as deposits rose $313 million.

Most of the inflows were noninterest bearing which rose by $442 million on a linked quarter basis.

A measure I like to look at is the average noninterest bearing deposits to average deposits, which were 36, 3% this past quarter up from $33 nine in the prior quarter.

For net interest margin, we were down 18 basis points to 255% on a linked quarter basis. The deployment of cash into securities had a positive impact but occurred late in the quarter also on a linked quarter basis yields on loans adjusted for PPP interest and fees were down eight basis points from.

54% to $4 46.

Looking at our cost of funds the fourth quarter was down nine basis points to 26 basis points part of the favorable declining cost was the absence of any interest in or expense.

From the sub debt issuance that was redeemed earlier in the year. This.

This is our first quarter without any of that issuance included.

The run off of higher priced Cds played a minor role this quarter. There is still some higher rate Cds on the books, but the maturities are mid 2022 or later.

With that I'll hand, it back to Susan for a short wrap up thanks.

Thanks Charles.

As we 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 during the pandemic second here.

<unk> and dynamic market, we will now open up for questions.

Thank you.

<unk> a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.

Our first question comes from Casey Whitman with Piper Sandler You May proceed with your question.

Hey, good morning.

Hi, Casey.

Hi.

Maybe we will start off with expenses.

So just looking at the growth this quarter in particular, the salaries and benefits line. What do you think is a reasonable expectation for where that line might run in 2022, I think et cetera around $25 million right now.

Fourth quarter can we assume that we get some of that back in the first quarter or is this a pretty good run rate for that line.

Yes.

I'd say, we did have an extraordinary year.

In 2021, some of that is reflected in that.

That incentive.

Annual incentive accrual.

Yes.

I wouldn't necessarily expect the same center.

Your next year in terms of of the reversal of that that we were able to take in particularly from the.

From the allowance so.

I don't know that we see the same kind of heavy.

Heavy incentives associated with the following year.

Okay is there may be a long term sort of efficiency ratio you guys are targeting that we can work with.

I see.

Think where we've been operating for the past couple of years around that 40% number.

Is is.

It is a place where we were hoping to continue to play.

Yes.

Okay, and what about the FDIC expenses do you think they continue to run that.

As long as they were in the first fourth quarter.

Yes, we noted in the press release that our calculation for the large bank assessment came out too.

In the fourth quarter about a third of what we previously had in terms of expenses, So thats, where I anticipate things continuing.

Okay.

Understood maybe just one more for me.

Capital, assuming you can keep putting up some from our best growth in looking at the current stock price do we have a big appetite for buybacks here or what would what would it take for you guys to become more aggressive there.

Yes, I think we're going to continue to evaluate our options.

On a quarter by quarter.

Quarter day by day basis.

<unk>.

As we.

We will continue to contemplate.

Where we are.

How we want to have we want to play with that.

Yes. So I think it is just going to be a kind of a day by day thing.

Understood I'll, let someone else jump on.

Thank you. Our next question comes from Catherine Mealor with <unk> you May proceed with your question.

Thanks, Good morning.

Thank you Catherine.

So let's talk about asset sensitivity that you mentioned Charles just if you could just.

Maybe first start on the loan side, if I look in your last quarter's 10-Q, and it looks like about 58% of your loans are variable can you talk about how much of that re prices immediately and how much of that may may lag.

Then my second part of that question is kind of in loan yield where were new.

New loan yields coming on this quarter. So how should we think about the offset of that with the portfolio is still repricing downward until we hit the bottom.

Sure sure Thanks, Kevin Yeah. So.

As I look at interest rate risk in our asset sensitivity position.

As we evaluate that 100 basis points.

Shock over a 12 month period, we're seeing a positive net interest income.

Impact of just under 5%.

So that's kind of the end of the story there we've got.

In terms of LIBOR base, so for base Prime based loans.

<unk>.

The total.

Youre still around just around 50% or so.

Of the total.

Folio.

It would be impacted there.

Total adjustable and variable rate loans are still right around that at Pryor.

Quarter number, but 56% to 58% somewhere around there.

And then in terms of where new loans are coming on.

We did have a very large.

Quarter. This this quarter in terms of loans book.

Yields on the new volume were in the neighborhood of $3 75 or so.

So that's that's where we're currently booking loans as of the fourth quarter.

Okay.

Many of them are floating rate.

Okay.

Again on the 58% variable how much. Thank you for the impact there, but very much where you see most of that reprice immediately with the first rate hike.

Yes, so in terms of Fleury pricing if.

As we move up.

25, 50 basis points.

About half of $1 billion or so would reprice there.

We probably had another.

$650 million or so with another 50 basis points above that.

So it's about $2 8 billion with.

With floors.

Got it okay.

Great and then as you look at your <unk>.

Deposit composition.

I mean, you've got to believe that your deposit betas will be lower in this cycle than they were last just because.

I mean, when you've got so much liquidity into perhaps you could argue you aren't growing as fast as you were last cycle does this quarter's growth was really good.

So how do you I guess, maybe what day your Alco modeling maybe first how do you think about deposit betas within that and then and then maybe also more realistically because I think sometimes there is a difference between.

Within Alco modeling and then what you think will actually happen in reality.

No that's a great great point.

We've currently got the model set at <unk>.

Five beta for up rates.

Do we do we think thats going to be the actual experience I think theres a good chance, particularly as you point out with the continued deposit growth.

It might be shy of that so to the extent that our.

Our beta our actual experience of beta is lower that only endures to the benefit of greater asset sensitivity.

Great, Okay, and my last NIM question, and then I'll stop.

<unk> harassing you Charles.

Just on the cash.

You have so much cash on your balance sheet, what kind of strategy should we expect for how quickly you will deploy that into securities and loans.

Yes, obviously, our first choices loans, we want we want to put it out there.

Thats.

While we are here, but absent that I would expect it will continue a healthy clip in terms of deployment to the investment portfolio.

Kind of enough enough sitting on the sidelines, particularly again as our as our cash position grows.

We model it out and look at the massive.

<unk> rate hikes over a couple of years, it's better to get in the game now.

Then it is to wait and have those cash balances just earning fed funds.

Overnight interest on over there.

So next is preserved.

Great Alright. Thank you so much for the help.

Yes Catherine.

Thank you. Our next question comes from Brody Preston with Stephens, Inc. You May proceed with your question.

Hey, good morning, everyone.

Good morning Brady.

Hey, I guess I just wanted to start back on the loan growth.

It was nice to see you guys return to solid levels of core growth here.

Excluding PPP this quarter.

And so I guess I wanted to ask as we think about the go forward run rate Vigo historically, all have been a pretty strong grower.

But just thinking about <unk>.

Pipelines currently maybe new any new producers that you've hired on the strength of the DC economy, where do you where would you expect loan growth to kind of shake out on a normalized basis going forward.

Alright, thank you.

Difficult.

With any degree of certainty at this point, but I do think the local economy has been particularly strong.

Climate here is significantly lower than it is.

Davidson.

Internationally.

I think there.

Well poised to have an economy that continues to grow.

Looking forward we've been there.

Yes.

In terms of where we are with.

Demand for loans in the area I think thats going to depend to some extent on what happens with interest rates and whether we see it.

Drop in refinancing.

On fixed rate things because of rate shifts.

That will take with it perhaps the opportunity to refi out from other banks.

We think that we'll see mine usage start to increase as the economy grows.

I am feeling that we have a good opportunity here.

Pipeline.

Good pipeline.

Okay.

Charles do you have anything you want to add to that.

The pipeline that we have remained strong.

We saw unfunded commitments continue to remain.

Pretty close to our quarterly averages over a period of time about $2 billion. So.

<unk>.

So, yes, we expect that.

We'll continue to have healthy growth.

Our lending teams are pretty optimistic going into 2022.

Got it got it.

And then maybe just.

Just on the securities portfolio.

Charles obviously.

You guys put a decent slug of liquidity to work there.

Excuse me.

But deposit growth has remained strong for you all and for the industry and so as I as I think about securities growth going forward.

I wouldn't expect you know like a 46% linked quarter increase.

Next quarter or anything but how.

When we think about.

The pace the pace of it and then also if you happen to have what the duration on the securities portfolio I'd appreciate it.

Yes, the duration just two quick hit there.

The effective duration is right around four years.

Yes.

This is another area of growth will just continue to have to evaluate.

<unk>.

Kind of week by week month by month.

Okay.

Obviously, we need to continue to bank our customers and.

And as such we saw some healthy deposit growth.

And in the fourth quarter.

Yes.

Your guess is as good as Brian whether or not there those customers find use for those dollars.

And and continue to draw some of that recent growth out.

I think we stopped calling the.

QE effort, a surge liquidity surge several quarters ago. So we know that there is some base there to be maintained but.

Yes, as I've mentioned earlier.

I think that.

All things equal we continue at a pretty healthy clip of deploying some some of that cash into the investment portfolio loan.

Our loan portfolio comes first we want to make sure that we've got the cash for that as well, but with a growing investment portfolio, it's kicking off a lot of cash for us.

Also month after month so.

It really is just going to be the.

The balancing act.

So yeah.

Understood.

And.

Do you know what.

And what percent if any of the securities portfolio is floating rate Charles.

Hey.

Don't have that off hand, but I can.

I can I can get back on that.

It's going to be.

Relatively small right.

Theres not a lot of <unk>.

Variable rate paper in there.

Okay ill follow up offline on that I guess, the last one that I wanted to ask just on.

On the on the legal express expense front.

That looked like it ticked up again.

Quarter over quarter. So I just wanted to ask was there anything specific that drove that and then I noticed in the release.

You guys didn't put anything in there about the legal proceedings and so.

Those behind us now or is it or are there.

There is still ongoing.

The legal proceedings are.

<unk>.

Understood Brody protein answered your former question as well I think we're looking at about 3% of the total portfolio is floating rate.

Got it. Thank you very much for taking my questions everybody I appreciate the answers.

Yes.

Thank you and our next question comes from Erik Zwick with Boenning and Scattergood you May proceed with your question.

Good morning, everyone.

Good morning, Eric.

I wanted to first just start kind of circling back on.

The net interest margin a little bit you've given some good color there to some of the moving pieces and as I think about it.

Fourth quarter margin at $2 55, and it didn't reflect the new loans that are on the balance sheet.

Did reflect maybe some of the securities just trying to think from this point absent any fed funds rate increases have we potentially seen the bottom here and the margin can it grow at the core just given what youre expecting for loan growth and the new loans that were added and <unk> as well is that a good way to think about it is there something else to consider at this point.

Yes, I mean, right now I think.

Im pointing to a lot of the cash build because you're right you didnt see the.

You didn't see the impact of some of the new loans and as.

They were booked later in the quarter and even the investment portfolio a lot of those purchases were done during the quarter, but the cash build and the mix of earning assets has certainly had a downward effect, that's really kind of the.

One of the bigger question marks in terms of the NIM impact I think.

We would experience but.

As I mentioned that you've got where the loans are.

We're coming on.

These days.

<unk>.

And yes, there is.

Yes.

There's still some cost savings on the cost of funds believe it or not as I mentioned with some higher cost maturing Cds coming off but there is there is not much more to go on that front.

There are some.

And I think they are likely.

Would be a little down drift on on.

On loan yields.

If the current prevailing rates continue.

But do you get a countervailing impact of potential rate increases.

This coming year.

I've heard and looked at the trading probabilities suggest any anywhere from four maybe even five rate hikes.

In a year or so.

You've got to kind of mix all that together and make your best guess.

Yes, I don't know, if I helped or hurt there but.

There is some color.

No I definitely I appreciate the additional color that was helpful and one last one probably again for you Charles.

Outlook for the effective tax rate in 'twenty two.

Yes.

I think we ended up pretty close to where we were for the full year.

<unk>.

21 and that 25%.

Range, plus or minus with that.

Barring any any actions from.

Which at this point appears somewhat unlikely from from a legislative bodies.

Got it thanks, so much for taking my questions.

Sure.

Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Susan Riel for any closing remarks.

Okay.

We appreciate your questions and for all of you taking the time today to be with US on this call. We hope that your 2022 is off to a good start and we look forward to speaking to you again in a few months.

Have a great day.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.

Q4 2021 Eagle Bancorp Inc Earnings Call

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