Q1 2022 Eagle Bancorp Inc Earnings Call
And thank you for standing by welcome to the Eagle Bancorp, Inc. First quarter 2022 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.
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We could today Charles Levingston, Chief Financial Officer. Please go ahead.
Thank you Victor.
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 loan 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.
Under the forward looking statements made during this call should be interpreted as are providing formal guidance.
Our Form 10-K for the 2021 fiscal year 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 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 our thoughts on the local economy 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.
I would now like to turn it over to our President and CEO Susan Riel.
Thank you Charles.
Good morning, and welcome to our first quarterly earnings call.
I'm pleased to report the bank had another successful quarter building on our strong finish to 2021 first a few highlights from the quarter earnings were $1.42 per diluted share.
13th sense from the prior quarter, it was our 89th consecutive profitable quarter.
Loans increased by $48 $2 million.
Prior quarter. This was our second consecutive quarterly increase.
At the same time, our credit quality metrics remained strong.
For fun performing loans with 33 basis points on loans at quarter end and net charge offs were just three basis points or $459000.
Exceptionally strong credit risk management has been a hallmark of vehicle since our founding and it will continue to be a focus of ours going forward.
Our favorable credit quality metrics, along with the continued recovery.
And reopening of the economy led us to a reversal of $2 $8 million from the allowance for credit losses on loans.
This was our fifth consecutive quarterly reversal now.
Now, let's take a closer look at earnings for the quarter earnings were $45 $7 million up $4 $1 million from the prior quarter returns for the quarter were 146% on average assets and $14, 99% on average.
<unk> common equity.
The primary driver of the earnings increase from the prior quarter was a decrease in salaries and employee benefits specifically the $5 million accrual reduction related to the share based compensation awards and deferred compensation to our former CEO and chairman.
During the quarter, we also transferred $1.1 billion of the available for sale securities portfolio to held to maturity.
At quarter end, one $2 billion.
Or about 39% of our securities portfolio was held to maturity.
Charles will speak more about this transfer and putting more of our excess liquidity to work next.
Next let's talk about loans.
This quarter's loan growth was driven by our CRE and C&I lending teams given the opportunity to have more face to face interaction with our customers and our prospects.
These calling efforts, which increased in the middle of last year produced the loans that were booked in the first quarter we.
We believe that this team effort provides us with good momentum as we move through the year within our CRE and C&I portfolios. We successfully completed construction projects that migrated to income producing CRE and owner occupied loan.
This migration reduced loans categorized as construction loans with the decline, partially offset by new and previously committed construction loans drawing down their funding over the course of the quarter.
This migration of construction loans to income producing CRE loans allows us to retain and alone the interest income and expand our lending relationships.
Even with the successful completion of construction projects, our pipeline remains strong and unfunded commitments were up slightly to $2 1 billion.
At quarter end.
As more opportunities arise our total risk based capital of $15 seven 2% gives us ample room to continue to grow the loan portfolio.
In regards to our residential lending division volume was down as higher rates reduced consumer incentives to refinance as a result, both gain on sale of mortgage loans and origination of mortgage loans were down in the first quarter Jan will give more details on our <unk>.
Quality metrics shortly.
On legal matters, there have been no material developments relating to our ongoing government investigations. Although we are hopeful these matters will be resolved in the near future.
And for our shareholders, we remain focused on increasing value and returning cash through dividends at the end of quarter. Our board declared a dividend of 40 cents per share, which is a payout ratio of 28% based on first quarter earnings and equate to annualized.
And yield of two 8% based on last night's closing stock price of $56 19 per share.
With that I would like to turn the speaking duties over to Jan Williams, our Chief Credit officer. Thank.
Thank you Susan and good morning, everyone.
Washington D C market continues to improve.
And the government government contractors and consumers remains strong.
Construction projects are being completed and new projects are moving forward.
Residential housing demand continues to exceed supply.
Amazon continues to expand its presence in both leasing and in hiring in our market area.
March masked mandate for draft for most businesses and schools in the area.
We are seeing more businesses in D C. Returning to work in the half.
Which has a positive ripple down effect for downtown businesses.
Surprisingly unemployment in the Washington Metropolitan Statistical area.
Low at three 5% and after Barry with that background, our credit quality metrics continue to improve.
Our ACL to loans at quarter end was one point or 1% down from one 6% last quarter nonperforming loans as Susan mentioned, we're at 33 basis points of loans.
Total nonperforming loans were $23 8 million of which about 56% were CRE and 32% our commercial and industrial loans.
The remaining npls were smaller PPP SBA and residential loans.
Charge offs in the first quarter were just Portland.
With a gross charge offs of 514000, partially offset by 55000 intra countries, bringing.
Bringing us to net charge offs of 459000 for the quarter or three basis points on an annualized basis.
30 to 89 day past dues are also at very low levels in terms of risk classifications during the quarter. The past a portion of the portfolio increased.
<unk> mentioned in classified credits were flat or down.
Even with our lower ACL salons, our coverage ratio on nonperforming loans is 301%.
From 257% in the prior quarter.
<unk> remained unchanged at the same three properties in a carrying value of $1 6 million.
With regards to the reversal of $2 8 million from the allowance for credit losses factors contributing to the reversal where improvements in the economic environment and related adjustments to the quantitative components of the seasonal model in particular, the lower model probability of default as.
Well as improvements in asset for holiday.
And we considered a number of qualitative and environmental factors, including among other things the remaining potential risks to the hospitality and restaurant industries as well as the potential risks in the office portfolio, giving potentially softer demand for office space in a post pandemic war.
With that I'd like to turn it over to Charles Levingston, Our Chief Financial Officer. Thank you Jan.
As you May have noticed we have made some improvements to the earnings release format on page one our bullets are more dynamic focusing on items of interest for the quarter right below that we have a table of selected highlights that shows trends from the prior quarter and the year ago quarter and in the text and tables, we focus more.
On changes from the prior quarter.
We hope this helps you with your analysis and understanding.
Turning back to the numbers for the quarter net income was $45 $7 million, which is up $4 1 million or nine 9% from the prior quarter and assets were $11 2 billion down $634 million or five 4%.
In regards to earnings the primary differences to the quarter to the prior quarter were net interest income increased by $2 $3 million. The increase in net interest income from the prior quarter was driven by the devote the deployment of excess liquidity into investment securities as rates have increased it.
Has become more attractive to put more of our excess liquidity to work.
The additional interest income on securities was partially offset by lower interest and fees on loans, while loan balances.
We're up for the quarter higher yielding loans continue to be replaced by lower yielding loans. Additionally, the impact of rising rates, which ramped up throughout the quarter has not yet fully impacted outstanding adjustable rate loans, a good portion of which are still at their at the rate floors.
And new loans.
And new loans, particularly those funded later in the quarter have yet to have much impact noninterest income was down $3 $1 million from the prior quarter, Our FHA group had a good year end.
Goodyear and 2021, but FHA multifamily income, which can be inconsistent quarter to quarter and revenue for that business was down to start the year.
The impact of a higher rate environment also reduced gain on sale from investment securities.
Residential mortgage activity was also reduced lock commitments for residential mortgage loans were $137 million down from $163 million in the prior quarter.
Noninterest expense was down $8 $3 million from the prior quarter.
Legal accounting and professional fees were down $1 4 million.
And as Susan mentioned, the largest change to noninterest expense was a one time reduction in salaries and employee benefits.
Absent the $5 million of accrual reduction salaries and employee benefits were down $2 $6 million, primarily on lower incentive bonus accruals offset by increases in share based compensation and payroll taxes.
The $5 million of accrual reduction also positively impacted the efficiency ratio, bringing it down to 35, 3% for the first quarter 2022, compared to 44, 3% for the prior quarter and it lowered the effective tax rate to 23, 4% compared to 26 three.
<unk> from the prior quarter.
The reduction in the effective tax rate from the prior quarter was because the one time adjustment was not tax deductible when recorded Conversely, there was no negative tax impact when reversed.
On the balance sheet assets declined by $634 million.
We had a small decline in deposits of $395 million at quarter end.
Paid off $150 million <unk> advanced during the quarter.
These reductions have liabilities, along with an increase in securities of $306 million reduced some of our excess liquidity.
The biggest movement on the balance sheet, though was that we transferred $1 $1 billion of securities.
From available for sale to held to maturity.
There is no impact of this transfer on the income statement the unrealized loss associated with the held to maturity portfolio will amortize off with the life of those securities.
In regards to the transfer of securities to held to maturity the impact of rising rates during the quarter created unrealized losses in the available for sale securities portfolio, which negatively impacted equity on the balance sheet. These unrealized losses reduced equity as well as both book value and tangible book value.
During the quarter, we evaluated our securities portfolio and determined that certain securities will be maintained for the life of the instrument and made a decision to change the accounting designation to held to maturity.
The securities transferred we're generally municipal bonds corporate bonds bonds that we buy for CRA credit and longer final maturity mortgage backed securities.
Having these securities designated as held to maturity will mitigate some of the impact of future changes in interest rates on equity book and tangible book value.
With regards to interest rate sensitivity, we believe our asset sensitive balance sheet remains well positioned to take advantage of higher interest rates in the future.
Our net interest margin, we were up 10 basis points to $2 65.
Linked quarter basis.
The reduction of excess liquidity and the deployment of cash into securities had a positive impact.
Looking at our cost of funds. It was changed it was unchanged at 26 basis points.
While not much changed during the quarter towards the end of March we raised rates on most interest bearing demand deposit accounts by five basis points and <unk> advances of $150 million were repaid.
Another measure impacting funding cost is average noninterest bearing deposits to average average deposits.
The bank has historically done well, averaging 36, 1% in this quarter down slightly from 36, 3% the prior quarter.
Overall in terms of rate sensitivity, we are asset sensitive and should benefit from rising rates as loans come off the floor and 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 as we wrap up our commentary I would like to thank all of our employees for all their hard work and it's been really great to see people in person on a regular basis.
All of US here at Eagle are encouraged to continue the momentum we had closing out 2021, we feel good about our company our balance sheet and our ability to provide our clients with a superior level of service in a highly competitive strong and dynamic market.
And as always we remain committed to a culture of respect diversity and inclusion and both the workplace and the communities we serve.
With that we will now open things up for questions.
As a reminder to ask a question you will need to press star one on your telephone.
We're drilling a question just press the pound key.
Please standby, we compile the Q&A roster.
Our first question will come from the line of Casey Whitman from Piper Sandler Your line is open.
Hey, good morning.
Hi, Casey JV right.
Nice quarter.
Starting out you saw you already started increasing your deposit rates just kind of curious are you. A first mover. There are you seeing competitors in your market start to move as well.
And then sort of tagging onto that Charles you mentioned your asset sensitivity.
Remind us sort of what kind of deposit betas, we should assume for you guys to get rate hikes.
Yeah sure thing Yeah, I think.
We're seeing kind of the prudent movement of rates and that's the approach that we're taking.
I think the rates that we had for for time deposits previously.
We're not really compelling to many people to move into into time deposits and with the Fed's first move.
Again, we wanted to be prudent about.
Starting to layer in some time deposit says we're now facing forecast of.
Seven to eight.
According to the future with markets.
25 basis points move by the fed before the end of the year so to the extent that we can capture some.
Some of those time deposits and just again compel some folks to.
To.
Locking some of those those rates I think that that's useful for us.
In terms of asset sensitivity.
We're looking just to provide some context.
At up 100 basis points.
Resulting in net interest income of an additional one 9% up 200 basis points at six two.
As we blow through some of the floors.
Deposit betas on that front.
On net where we're modeling about a 50% deposit beta.
There is there's been some spirited discussion with regard to whether or not that's been that's that.
Maybe even a little conservative.
And we can count on lower but the pace at which rates are moving up.
We feel pretty comfortable with with that as a measure at this point.
Okay.
What kind of duration.
We're looking at for that held to maturity book now.
<unk>.
So.
I've got the.
Duration on the overall portfolio.
Is right at five point.
Just to make sure I got this right right at five six years is the total duration the duration is right for.
For eight years.
Okay.
Got it.
I'll just turn it over to one of the thing I mean, your efficiency ratios as best in class just trying to get my arms around some of the debt.
Quarterly expense moves that you guys have is this first quarter level of core expenses, which I'll call around 36 million a pretty good starting point just as I look in particular at the salaries and benefits line and then.
I appreciate there's no material up in legal expenses, but is that is this a good run rate I guess just for that that line item or could we see some more volatility there.
And those expenses in particular.
So as you know that the line item includes more than just legal fees, but it is accurate that the legal fees associated with our realized value related investigations and litigation matters have declined.
The litigation matters have been settled and the fact, finding and document production phase of the government investigations. We believe are complete at this point.
So our outside counsel spend going forward.
It should relate to the cost associated with resolving those matters.
As well as any indemnify will cost.
Associated with our current and former officers once our D&O insurance has been fully exhausted. The policy has some remaining limit still but but as we have disclosed in the past it is.
Nearing exhaustion.
And it's really impossible to predict the exact timing of when the investigations will will be wrapped up.
When the policy.
We'll be exhausted or the.
The actual amount of outside counsel costs, as we don't control or have complete transparency into those indemnify will cost, but we continue to remain hopeful that the investigations will be resolved in the near future.
We'll have a more reasonable legal costs legal expenditure going forward after that.
Okay and on the salaries line, it's just a pretty good starting point at around $22 million.
Yeah.
It is I think we.
Again.
You get to exclude the the reversal, which I think we are.
All comfortable with.
The reduction of that accrual but.
Last year was.
It was a very strong year, so the being.
The incentive bonus accruals were weighed heavy in that number where we're kind of just getting started here and as as we get a better feel for this year that that annual incentive accrual will come more into focus but for now I think I think we're in a note okay place.
There.
Okay, so holding the efficiency ratio in the low 40, so is a reasonable place to be.
Yes.
Okay.
Alright, nice quarter. Thanks for the thanks for the call.
Casey.
Next question comes from the line of Catherine Mealor from K B W. Your line is open.
Thanks, Good morning.
Good morning, good morning, Catherine.
One more thing on the margin as we think about excess liquidity how quickly.
Or you feel like you'll be able to deploy this we saw a big move this quarter.
Just kind of walk us through how you're thinking about that and maybe how deposit.
Gross outlet plays into that assumption. Thanks.
Sure yes so.
I think the deployment of that excess liquidity into the investment portfolio will continue at.
Somewhere around this this clip.
The first quarter, all things being equal obviously.
Better opportunities.
And the investment portfolio for higher yielding instruments. These days so.
Certainly more encouraged by that and looking to deploy that.
The cash is rolling off that securities portfolio.
Back into the best and highest use which you know.
We hope as loans, but in.
In the absence of that there is some again some pretty healthy yields as it relates to the investment portfolio.
And I'm sorry, the deposit gathering I think was the second part of your question. Yes, we are continuing to look.
To Incent depositors and maintain depositors here at the bank.
In terms of growth it's difficult to tell.
As rates rise and again.
With the forecast of rates and rate moves I think the futures market had a 90% probability of a 50 basis point move in early may with the epilepsy.
They are going to be more opportunities for deposits to two.
Place their funds.
Into higher yielding instruments.
So we want to make sure that we're playing appropriate defense on that front.
Hopefully that gives you a little bit of color in terms of our thinking yes, yes, no that helps and maybe on the securities. So you're now at about 23% of average earning asset.
Is there a limit in terms of the percentage of the balance sheet that you would want to take that too.
I don't have a specific limit.
Catherine I think it really is looking at what's the best.
Opportunity for return between those securities into loans.
No.
I'm happy to keep climbing if that is is where the money is doing us and the shareholders. The best good.
Got it okay got it.
One last on the margin just thinking about loan yields.
I know this is an impossible question, but just to just kind of thinking about the puts and takes so your loan yields declined this quarter and then now you're at 437, you've got that you've got downward pricing still on new production, but obviously, we've got the impact of the higher rate that will be a tailwind. So I mean do you.
Do you think we've hit the bottom in loan yields or do you think we still have a little bit of.
Decline before we start to get the lift from from higher rates and how do you think about that.
Two dynamics.
Yes, so I think the the tension really becomes between the excess liquidity, both on our balance sheet and in the marketplace and the rising rates.
I do think that the rising rate impact will.
The impact of rising rates will positively impact our loan yields.
In terms of new loan pricing, though that's that's where I think.
Credit spreads are still being.
Somewhat held.
Held at Bay, if you will.
As a result of the a lot of the excess liquidity in the marketplace.
So.
Again as rates rise should there be more disintermediation in the marketplace as it relates to deposits and liquidity.
<unk>.
It comes in a little bit I think those credit spreads get out that's kind of my Crystal ball view, but.
Your guess is as good as mine I think youre right its possible put task to forecast that but.
I do think that there is a positive we will have the wind at our backs in terms of.
Of an increase.
Rate environment.
And remind us what percentage of the loan book is floating 50.
57%.
Okay.
Okay, great. Thanks for answering all my questions appreciate it sure.
Our next question comes from the line of Christopher Merrimack from Janney Montgomery.
You may begin.
Thanks, Good morning, just wanted to get into loan yields and how they may have changed as March finished and kind of how you see that playing out this quarter, even before the fed makes our next move.
Yeah, sure I mean again as as Kathryn.
I was discussing.
The loan yields have surge.
No.
Come in with the in terms of.
What kind of loans are rolling off and the yields of loans rolling off versus yields of loans.
Coming on.
I'd say, we're kind of right around us.
New originations somewhere in the neighborhood of around a 4% yield.
At this point.
So I would agree with that but I think a lot of what youre seeing in terms of funding now.
Loans that were approved a 60.
60, 90 days ago.
Now the impact.
Rising rates Hasnt fully been incorporated so.
We're looking at today.
In terms of new loan approvals.
It might be.
At more advantageous rates to the bank, reflecting the change in interest rates in the market.
Just a natural time delay between approving loans and having them booked and find and I think she has had been a lagging changes in rate, it's worth noting that Jim and I were talking about this just before the call that the majority of the loans that we're booking we are still seeing a number of our variable rate loans.
That we're putting on so those those are still well positioned to.
Support the loan yields going forward as rates rise.
Great. That's helpful. Thank you both for that and then Jim just a quick one about net charge offs do you see anything on the horizon, where charge offs change materially from here I mean, I know, we all expect some reversion over time, but just curious kind of in the next couple of quarters, if anything changes at all.
Well, if you're one of those.
<unk> believes the 30 to 80 89 day past dues are an indicator.
They're as low as I've seen them in several years.
Pretty comfortable with where we are which isn't to say something couldn't come out of the blue and Chock me, but I think.
But right now I'm cautiously optimistic that charge offs will not become out of control.
Great Jan Good point, Thank you again.
Thanks, Chris.
Our next question comes from the line broke Preston from Stephens you may begin.
Hey, good morning, everyone.
Good morning Brody.
Hey, Charles.
I think you said earlier and I saw it in the press release last night that five basis points.
Is that is that you've raised at an average of five basis points or is that at least five basis points on most interest bearing products just because of the.
The Cds, obviously, I think I've seen anywhere from like 20 to 100 basis point increase in CD rates from you all depending on the maturity profile.
The five basis points was really on money market savings accounts.
Where the Cds are concerned again, we're coming off lows, where we work really waving Cds and those the rates that we had previously were not compelling anybody to take us up on those Cds offers so hence youre going to have a pretty significant move when you are coming.
Coming back into the market.
And I think that you know.
The way that we've come back in again, we're looking to prudently layer in.
And later in time deposits as we see rates continuing to rise and again, the futures market expectations of rate increases.
That's why it looks so dramatic in terms of a.
A large rate increase on the CD front.
Got it okay. Thank you for that clarification.
Then just on the FH L b.
Borrowing repay them and it kind of ties into <unk>.
Internal liquidity.
Question. So you guys have put a lot of excess liquidity to work in.
Obviously on a period end basis, there can be volatility in the deposit base just given the choppiness of it but I mean, how should we be thinking about just average deposit trends are still pretty solid so how should we be thinking about the remainder of the FH L. B.
The answer is what's the duration on those or could we see a similar kind of prepay and then going forward.
Yes.
Theres, a $150 million left and that was a callable 10 year.
And the call option is at the option of the <unk>.
I expect that if we don't go ahead and extinguish that one in.
Short order that it gets called away.
But again that will leave us with the.
The availability of.
Call it $1 2 billion or so.
F N b.
Advances should should the need arise.
Got it okay. Thank you for that and then.
Jan I heard you loud and clear on.
How about on the credit quality.
I guess I did just wanted to circle back to the office.
Office portfolio.
The trends that we're kind of seeing at least from a high level based on the data that we have access to shows that.
And our D. C is still lagging like like a lot of the rest of the country is in terms of return to office.
Are you seeing that holistically.
Holistically amongst your borrowers are you seeing you know your borrowers have more of their employees return to the office at this point.
I think we're really seeing a mixed bag.
You know the.
Returning to office I would say.
At this point seems to be predominantly the hybrid model, which happens to be like Eagle Bank is using where you are.
You have some blacks to work from home a certain amount of time in the week, but we are seeing people move towards full time in the office and really even back to the office at all I think.
That's going to be good for.
Are there businesses that operate downtown example, central business District.
Restaurant that cater to our lunch business has certainly been doing poorly over the last couple of years, but I think.
Overall, we havent had weakness in the portfolio.
In the office segment, we are watching it carefully and I think probably the highest level of concern would be for class B properties in the central business District, we're paying very close attention to that I think what's a little bit different for us is that there are a number.
Longer term leases that are in the market.
Government leases.
Look at the new FCC.
So you see that.
<unk>.
Apparently it's.
Being re contemplated at this point.
Location Hasnt been determined yet.
Yes.
A million square feet of office space a lot.
Activity at scale office.
We're still cautious on it we put an overlay into our reserve.
Terrific.
Qualitative aspect of Central business District downtown office buildings, as we wait to see what happen honestly I think it's going to be.
A question of whether the productivity in office, it's better worse or the same as remote working and businesses will make that judgment as they go forward.
Labor market is tight right now that I think it's probably.
More difficult to have a mandatory returned to office, but that could shift in six months out.
It's really tough to project all we can do as a hedge against the risk that we see.
Yes understood. Thank you for that I guess this is my last one I would ask you just just given the experience and extensive experience you guys have with with real estate.
What is the typical kind of outcome or what would you expect maybe for some of those office buildings.
Maybe you have stronger sponsors, but arent desirable in terms of office going forward from a lease up perspective is there is it repurposing.
Of those properties and what's the most kind of logical.
Repurpose.
You see that going from office to apartment overtime is something we think about sort of a longer term ramifications at this juncture.
I think it depends on the building to be honest with you and what the costs are retro retrofitting to AR.
Our multifamily property I think D. C is there.
Anxious to assist in converting office to residential we still have a.
Shortage of housing.
The D C Metro area.
Now there are.
I would say at this point.
A smattering of conversions and process there may be more.
But I suspect that right now most folks are still getting paid.
On the leases that are in place, even if theyre not being full time occupied.
This will play out over time I do think that most likely is conversion to <unk>.
Multifamily with maybe a little retail space on the first floor.
Got it. Thank you for that thank you for taking all my questions I appreciate it.
Thanks Barry.
Thank you and I'm not showing any further questions indicated this moment.
Turn the call back over to our President and CEO , Susan Riel for any closing remarks.
We thank you and appreciate your questions and your take and you taking the time to join US on the call. We very much look forward to speaking again in a few months.
Yes.
This concludes today's conference call. Thank you for participating you may now.
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