Q2 2022 Eagle Bancorp Inc Earnings Call
[music].
Okay.
Good day, and thank you for standing by and welcome to the Eagle Bancorp second quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the presentation. There will be a question and answer session to ask a question. During the session you will need to press.
Star one on your telephone please be advised that today's conference is being recorded I would now like to hand, the conference over to the Chief Financial Officer Charles Levingston. Please go ahead.
Thank you Carmen 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 maybe considered forward looking statements.
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.
None of 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.
Mornings 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.
And then Jan Williams, our Chief Credit Officer will discuss our thoughts on the local economy lows 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 to our President and CEO Susan Riel.
Charles Good morning, everyone I'm pleased to report the bank had another successful quarter demonstrating both our determination to continue moving forward and the strength and resilience of our operating model.
The bank was founded our operating model focus has been on efficiency credit quality and our relationships first culture, all of which helped us become a leader in the greater Washington D C market.
These areas of focus also helped us be successful through numerous economic ups and downs.
In fact, it is our deep client connections and strong balance sheet that creates opportunity and value for our customers.
In the second quarter. There are a few highlights I'd like to review and comment Todd.
First off we are pleased to have reached an agreement in principle with the SEC.
This negatively impacted our earnings this past quarter. It represents a major step for us moving past the legal issue.
With that said earnings were severe 78 cents per diluted share absent the agreement in principle with the FCC earnings were $1 20 per diluted share.
Moreover, as discussed in the earnings release, we are in advanced discussions with the Federal Reserve board to settle their investigation of the bank.
We are unable to predict the timing of any outcome of the investigation, but assuming we are able to reach an agreement with the fed or we determined we have a probable.
We have probable losses that are reasonably estimable prior to the filing of our upcoming 10-Q, we will reflect the necessary adjustments to the applicable second quarter financials in our 10-Q disclosure.
Other good news for the quarter included an increase in loans improved credit quality metrics and a better mix of deposits.
Loans increased by 40 $41 million from the prior quarter end and excluding P. P. P loans, the increase was $68 million.
This was the third consecutive quarterly increase this quarters loan growth was primarily driven by our our CRE team, which had another solid quarter.
At the same time, our credit quality metrics remained strong.
Nonperforming assets were 19 basis points on assets at quarter end.
And we had a net recovery for the quarter a $674000.
Exceptionally strong credit risk management has been a hallmark of vehicles since our founding and it will continue to be a focus going forward.
In terms of funding our funding mix improved.
Average non interest bearing deposits increased to 37, 9% of average deposits. Additionally.
Additionally, our CRE and C&I team teams their pipelines remained strong as lending as the lending teams continued to be active in their calling efforts and beyond our pipeline unfunded commitments were $2 $3 billion at quarter end.
$251 million from the prior quarter and we.
We are also proud of our community our commitment to the communities. We operate in and have also had success in providing much needed financing for affordable housing.
In April we announced financing of a 54 million dollar project to support Affordable transit adjacent apartments in partnership with Prince George's County, and the Washington Metropolitan Area Transit Authority. This is also the first new construction project.
Benefit from Amazon's housing equity fund.
In June we announced two financings of $48 million project for the Montgomery counting housing opportunities Commission and a $25 million project in the Columbia Heights neighborhood of D. C.
As more opportunities arise our total risk based capital of $15 eight 1% gives us ample room to continue to prudently grow the loan portfolio.
And for our shareholders, we remain focused on increasing value and returning cash dividends at the end of the quarter. Our board declared a dividend of 45 cents per share. This is a five <unk> increase over the prior quarter dividend.
This equates to an annualized dividend yield of three 7% based on last night's closing stock price of $49 five per share.
Before turning it over to Jan I'd like to say that our diversity equity and inclusion council continues to make progress.
We recently launched immense Mentorship program.
Scholarship program and two employee resource groups, our women's group lamp launched earlier this year and our Black employees network launched earlier. This month, we believe participation in these groups will be personally and professionally rewarding and get the <unk>.
Please participating in these groups our full support.
Now Jan Williams, our Chief Credit Officer will give us some insight into the market loan and credit quality.
Thank you Susan and good morning, everyone.
While the rate environment is changing our Washington D. C market continues to show relative strength.
Rising Lee unemployment in the Washington Metropolitan Statistical area remained low at three 3% in May.
A little better than the nationwide figure up three 6% in Jan.
Spending from the government government contractors and consumers continues to remain a strong part of the local economy.
Construction projects are being completed and new projects are moving forward.
Where we do see some softening in the office market in the Central business District on the commercial real estate side.
And on the C&I side in mergers and acquisitions and delays in capital expenditures by C&I borrowers.
The commercial and industrial softening has more to do with clients delaying financing decisions to see how economic conditions play out rather than any deterioration in their own financial position with that background, our credit quality metrics continue to hold steady and improve.
Our allowance for credit losses to loans at the end of the quarter was one 2% up slightly from one 1% last quarter nonperforming.
Nonperforming assets as Susan mentioned were 19 basis points on assets total and Tas were $20 3 million down $5 1 million from the prior quarter, primarily on the sale of several notes from one commercial real estate relationship and one Oreo sales.
Generated a small gain.
This improvement in credit has driven our coverage ratio of nonperforming loans to 386% up from 301% in the prior quarter.
And we had a net recovery of 674000 for the quarter.
With gross recoveries of $2 1 million, which were primarily from two partially charged off high end single family residential construction loans and charge offs of one 4 million, which were mostly the result of one commercial real estate relationship.
Also our loans 30 to 89 days past due fell to $3 9 million down from 13 million in the prior quarter in terms of risk classification during the quarter. The cost portion of the portfolio increased while criticized and classified credits were down.
With regards to the provision of 495000 to the allowance for credit losses. No changes were made this quarter to our loss given default rate as the abatement of pandemic issues have generally been offset with headwinds from higher interest rates and the potential.
For this session, we did make adjustments to the qualitative and environmental components of the CS for model in particular adjustments for higher inflation and the related uncertainty in the broader economy.
Partially offsetting these adjustments were adjustments for improvements in asset quality, particularly as a release of specific reserves associated with the commercial real estate relationship where the notes were sold during the quarter.
We also maintained previously added adjustment.
Four rounds in the accommodation and food service industry and for office properties in the Washington D C Central business district with that I'd like to turn it over to Charles Levingston, Our Chief Financial Officer.
Thank you Jan first I'd like to comment on some changes in the income statement from the prior quarter net.
Net interest income was up $2 $5 million with the increase driven by interest income, which was up $7 3 million on higher average loan balances increasing yields on adjustable rate loans and higher rates on new loans.
Interest expense was up $4 8 million Pri.
Primarily on higher deposit rates paid on savings and money market accounts, our deposit rates were raised after the <unk> announcement in the second quarter.
The impact of the deposit rate increase was partially offset by deposit outflows from these same accounts.
Overall, the increase in deposit rates and reduced excess overall, the increase in deposit rates and.
And reduced excess liquidity from deposit outflows helped increase net interest margin to $2, 94% to 94% up 29 basis points from the prior quarter.
The average loan yield for the quarter was $4 five 1% up 16 basis points, but the average yield on interest, earning balances which include securities as well as the impact of reduction in excess liquidity was 339% up 48 basis points.
On the other side of the balance sheet. The cost of funds was 45 basis points up 19 basis points.
In terms of asset asset sensitivity, 58% or $4 $1 billion of our loans are variable rate loans.
At quarter end, we had $1 billion of variable rate loans still at their floors.
With the rate hike of 75 basis points that already occurred in June $619 million of the $1 billion will come off the floor. When these loans hit their pricing date.
With another 75 basis points, we would see another $259 million of loans move off their floor.
Looking at the provision for credit losses, we had a small provision of $495000. In contrast to the five consecutive quarters of reversals as Jim mentioned this was largely driven by uncertainty in the overall economy as our credit metrics improved against this quarter again this quarter.
Noninterest income was down again this quarter as rising rates impacted several revenue streams.
Notably loan fees were down as fewer fees were collected in mortgage volume was down as higher rates reduced consumer interest in refinancing or purchasing a home.
The most notable difference between this past quarter in the prior quarter within noninterest expense the agreement in principle with the SEC and the one time accrual of $13 $4 million to this past quarter and in the prior quarter salaries and benefits included a onetime accrual reduction of $5 million both of these items.
Had no associated.
Tax or tax benefit.
These two one time items in aggregate represent a swing of $18 $5 million. This accounted for the majority of the decline in earnings of <unk> $25 million.
Another contributing factor was the move from a reversal of the provision for credit losses to a small provision. This was a pre tax swing of $3 $3 million.
On the balance sheet assets declined from the prior quarter and by $291 million.
The decline in assets was largely driven by a reduction in excess liquidity as short term funds declined by $314 million.
These funds along with the new short term borrowings of $130 million were used to fund deposit outflows of $415 million.
As I mentioned earlier, the deposit outflows were primarily from savings and money market accounts.
Outflow improved our funding mix as noninterest bearing deposits average deposits rose to 37, 9% this past quarter up from 36, 1% the prior quarter.
This outflow will also improved our loan to deposit ratio to 78% up from 74% the prior quarter.
Other notable changes on the balance sheet from the prior quarter were loans being up $49 million or <unk> $67 6 million.
Excluding PPP loans and securities being down $31 million.
The reduction in securities balance.
This was primarily driven by lower carrying values on available for sale securities as interest rates continue to rise during the quarter.
The markdown of available for sale Securities also drove the quarter over quarter reduction in equity.
Equity at quarter end was down $17 $3 million essentially this is the $31 million markdown on available for sale securities offset by earnings of $25 $2 million less the $14 5 million in dividends declared.
Capital ratios at quarter end remains strong those ratios based on risk weighted assets declined slightly as risk weighted loan balances increase and those ratios based on assets increased slightly as some excess liquidity ran off.
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 reiterate our focus on conservative credit has served us well through many credit cycles and it is our strong relationship first culture with our customers that allows us to provide superior service and to maintain.
And our leadership position in the community.
Lastly, as always I would like to thank all of our employees for all their hard work and all of US at Eagle 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 it up for questions.
Thank you and as a reminder to ask a question you will need to press star one on your telephone please standby, while we compile the Q&A roster.
One moment for our first question.
We have a question from Catherine Mealor with K B W. Your line is open.
Hey, good morning.
Okay.
I just wanted to start with the margin and maybe Charles if you could could you talk to us about where you saw deposit costs, perhaps in the back half of the quarter, maybe June or July just to give us a sense as to where these are going next quarter. Thanks.
Sure thing, Yes, I think what we saw in terms of the move on deposits.
In.
Certainly in the back half of the quarter.
Sure.
We chose.
Jos to increase rates.
As we saw the echo and see make their move.
Really thinking it prudent to.
Continue to be proactive in maintaining our depositors.
Our top money market rate right now does sit at about 125 basis points.
And I would anticipate that.
As as rates move, we will be making moves commensurate with.
With what we've done here recently.
Okay.
And then how about on just deposit balances.
Was there anything this quarter that you felt was.
Maybe kind of you know.
One off or would you expect to continue to see deposit outflows in the back half of the year.
No.
And I think that.
Not necessarily right there with the caveat that deposit competition.
Could have more to say about that.
Rates move up and we go go forward, but.
I think what we saw happen here in the second quarter was the result of some swift moves up in rate and some disintermediation as it relates to what were previously lower cost deposits shaken out of the balance sheet.
And at this point, we're focused on.
Maintaining our R.
Our customers and pretty happy with.
Noninterest bearing deposits, reaching almost 38% on an average basis for the for the quarter. So thats certainly a positive element in supporting our cost of funds.
Hey, guys.
For the back half of the year is that the balance sheet.
It's kind of flat to actually grows as long as we can grow deposits.
Or do you expect some of this.
Brian come off.
Hard to say right hard to say.
With the future might hold but at this point I don't see any catalyst.
Necessarily glaring four for any significant.
Deposit outflows like we saw in the second quarter.
Yeah.
Okay great.
And then.
It's been great to see the dividend increases.
Continue but any reason why you're not more active in the buyback and when do you think that may be something that you'd pull into your capital plan.
Yes, we are.
Valuation.
All of our options as it relates to capital.
Every quarter this quarter, we determined that an increase in the in the dividend rate by five cents was prudent and we will continue to evaluate that as we move forward.
Okay.
I'll step out and I'll jump back in if there are any other questions. Thank you.
Kevin.
A moment for our next question.
Okay.
Yes.
We have a question from Christopher Mary next from Janney Montgomery Scott. Please go ahead.
Hey, Thanks, good morning.
To ask about your lending team and any additions that you've had on the production side or or any turnover that has occurred at year to date.
Well, we have had turnover earlier in the year, but that's leveled out and we haven't seen that recently I think the second quarter was pretty strong in terms of.
Maintaining our lending group intact, we've seen.
I mean, thats not unusual I think a lot of.
Lenders make their move after bonus time in the first quarter.
I think that we have been successful in bringing in some new lenders from larger banks.
Do have a very strong team.
Concept here in our market executives have been very consistent we have good presence and pretty much.
Northern Virginia D C and Maryland, and there is continuity and those relationships. So we're feeling pretty strong the only thing I would like to add is human capital continues to be a concern throughout the bank for us and for many with with what's going on in our industry.
Well. Thank you both for that I appreciate it and Jan just on the General credit question do you see any early indicators of any change I'm just yet.
Petrol shifts in special mention or or or other credit indicators, just curious kind of how that could play out the next two.
Two to three quarters.
You know, we really havent, our credit quality has continued to improve and we're actually down in criticized assets and classified assets are.
Our paas tiers have never been better.
It's ironic that.
There is.
The headwind from a.
A potential recession, but we have seen no evidence of that in our.
Loan book at this point.
Great and just one more related question I mean, ltvs on the real estate book or are they generally lower than they would've been going back to the past cycle just kind of want to reminder of how are you kind of think about ltvs.
The average loan to value in the real estate portfolio at 64%.
Now that doesn't mean, we don't do 75.
Percent loan to value loans from time to time. It doesn't mean, we don't have one owner occupied that go up to 80%.
But we're very comfortable with where we are on average throughout the portfolio.
And we keep a very close watch on in particular, where we are with office.
Great. Thank you very much for taking my questions.
Sure.
Okay.
And one moment for our next question.
Okay.
Oh and Kathryn Miller from <unk>. Please go ahead your line is open.
Thanks, I wanted to ask one.
One follow up on the margin conversation, but just on loan yields Chuck could you just talk about what youre seeing in loan pricing and.
You also may be if you have any indication of where loan yields.
We're kind of at the end of the quarter.
Well certainly I mean.
New volumes are coming on.
I'd say right around 470 475 basis points or so.
And.
I expect obviously the markets are anticipating another 75 basis point move I believe that's where the money is.
Later this month when the F O C meats, so I would expect that to continue.
We continue to benefit we are still asset sensitive.
100 basis point shock on a static balance sheet over 12 months resulted about an additional $2 8 million or two 8%, rather I would say an additional net interest income.
And that's again us modeling at a 70 beta on the deposits.
I would anticipate.
Additional positive impact as a result of those those moves.
Okay.
Okay, great very helpful. Thank you.
Thank you and with that I'll pass the call back to two two RC all system rail for her final comments.
Just wanted to say that we appreciate the time, you've taken to be with us today and the questions you've been asking we hope that you're enjoying the summer and look forward to seeing you speaking to you again in the fall.
Thank you.
Thank you and with that ladies and gentlemen, we conclude our program you may now disconnect have a wonderful day.
Yeah.
The conference will begin shortly to raise your hand during Q&A you can dial stolen.
[music].
Okay.
Okay.
[music].
Yes.
[music].
The conference will begin shortly to raise your hand during Q&A you can dial stolen.
[music].
Okay.
[music].
The conference will begin shortly to raise your hand during Q&A you can dial stolen.
[music].
Yes.
Okay.
[music].
Uh huh.