Q3 2022 Eagle Bancorp Inc Earnings Call
Yes.
Yeah.
All right.
Good day.
Thank you for standing by.
Welcome to the Eagle Bancorp third quarter 2022 earnings conference call.
At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
I asked the question during the session you will need to press star one what are your telephone.
Please be advised that today's conference is being recorded I would now like to turn the call over to Chief Financial Officer, Charles Levingston. Please go ahead.
Thank you Lisa.
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.
Loan growth and performance over this past quarter had been positive we cannot make any promises about future performance and it is our policy not to establish with the markets a formal guidance with respect to our earnings.
Forward looking statements made during this call should be interpreted as are providing formal guidance.
Our Form 10-K for 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.
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 information.
Our earnings release, which is posted in the Investor Relations section of our website and filed with the SEC.
Conciliation 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 Jim Williams, our Chief Credit Officer will discuss our thoughts on the local economy loan reserves and credit quality matters, and then I'll return to discuss our financials in more detail at.
At the end all three of us will be available to take questions I would now like to turn it over to our president and CEO Susan Riel.
Thank you John good morning, everyone.
I'm pleased to report the bank, Kevin another successful quarter.
In the third quarter.
What are your thoughts on growth this year and credit quality metrics remained steady and strong.
Loans increased by $150 million from the prior quarter and this fiscal fourth consecutive quarterly increase this quarters loan growth was primarily driven.
Our CRE team, which had another solid quarter.
At the same time.
We're 90 basis points on assets or whatever.
And we had another net recoveries for the quarter a little slower this time.
$1000.
Risk management.
Gotcha.
And it will continue to be a focus.
Going forward.
Recently, our CRE and C&I.
I'm working credits grew as our lending teams continue to be active and successful in their calling efforts.
Beyond our pipeline unfunded commitments with <unk> $1 billion up $87 million from the prior.
At quarter end.
That's more opportunities arise our total risk based capital of $15.
Five 9% gives us ample room to grow the loan portfolio and our equity more than one 2 billion gives us for Wednesday limit large enough to close on significant commercial projects.
Additionally, during difficult economic times, it is our ability to.
To understand risk work with our clients and structured deals appropriately that gives us an advantage over our competitors. Our clients know that we are more committed to the business community in the Washington D C market and larger banks located outside of the market.
This commitment also extends to the people and the communities in which we operate over the years, we have had and continue to have success in providing much needed financing for affordable housing.
Example, earlier this month, we announced financing or a $42 million project. This with the land transaction with Howard University to bring our mixed use development cheapest Sean neighborhood, Washington D C.
And for our shareholders, we remain focused on increasing value and returning cash through dividends.
At the end of the quarter, our board declared a dividend.
Chris There, which returned approximately $44 million to our shareholders. This dividend equates to an annualized yield of three 8% based on last night's closing stock price of $46 78 per share.
Before turning it over to Jan I'd like to say that our diversity equity and inclusion council continues to make progress this quarter.
Dollar ships to Eaglebank teammates as part of our scholarship program.
And in addition to our two employee resource groups, the womens group and the Black in place network. We have two other groups in the planning stages.
We believe participation in these groups will be personally and professionally rewarding and we will get the employees participating in these groups our full support.
Now Jan Williams, our Chief Credit Officer, who will give us some insight into the market levels and credit quality.
Thank you Susan good morning, everyone, even with the increasing rate environment, Our Washington D. C market continues to show strength.
Not surprisingly unemployment in the last two Metropolitan Statistical area remained low at three 6% in August a little higher than the nationwide figure three odd percent.
Number.
Spending from the government government contractors and consumers continues to remain a strong and stabilizing part.
Local economy.
Struction projects are being completed and new projects are moving forward not only have we seen an up tick in unfunded commitments that we have.
Also seen an increase in monthly construction funding as these projects ramp up.
In our markets, we have seen some class B office space being converted to multifamily.
Provided the area surrounding the property and the cost of conversion are attractive enough. We may undertake this type of project as housing demand continues to exceed supply.
Areas, where we have seen some softening in demand are central business District office property.
Capital equipment purchases and delays with M&A as C&I capital structures adjust to the rising rate environment.
This softening in demand has more to do with clients delaying decisions.
Decisions.
See how economic conditions play out rather than a deterioration in their own financial position.
That background, we continue to maintain our conservative underwriting standards, which are reflected in our credit quality matrix.
Our ACL to loan quarter end was one 4% up slightly from one point or 2% last quarter.
N P C.
Susan mentioned were nine basis points on assets total NPA is $49 $6 million down from $20 3 million.
From the prior quarter. This improvement was primarily from nonperforming loans being paid in full or return to accrual status as a result of sustained payment performance the.
The improvement in credit that's driven our coverage ratio of nonperforming loans to 997% up from 386% in the prior quarter and we had a net recovery of $57000 for the quarter.
Recoveries for the quarter were 179000 spread out over 30, 10 nodes and charge offs were 123000 spread out over five notes also our 30 to 89 day past dues were $14 3 million. While this is up from $3 $9 million.
At the end of the second quarter. It is still at a very low level and it's similar to the end of first quarter, which was $13 million.
With regard to the third quarter provision for credit losses, the increase of $2 5 million from the prior quarter was driven by three factors.
Higher period end loan balances.
An increase in impairment reserves on one individually evaluated loans.
And a modest weakening in the unemployment forecast coupled with an increase in the localization factor based on the national employment unemployment forecast.
Partially offsetting these increases with an overall decrease from qualitative and environmental factors. This resulted from improved risk rating certain hotel loans that more than offset an increased management overlay on central business District office properties in Washington, DC with that I'd like to turn it over to.
Charles Levingston, our Chief Financial Officer.
Jan.
First I'd like to comment on some changes in the income statement from the prior quarter. The most notable difference between this past quarter in the prior quarter was the second quarter included one time expenses from the settlements with the SEC and Federal Reserve.
It was these one time items from the second quarter that drove second quarter earnings deck.
These one time items adjusted second quarter net income was $38 6 million or $1 20 per share.
For the third quarter net income was $37 3 million or $1 16 per diluted share.
This was $1 3 million or <unk> <unk> per share lower than adjusted second quarter net income.
The largest factor contributing to the decreases of $1 $3 million with the increase in the provision for credit losses, which increased by $2 $5 million before any tax benefit.
The other line items on the income statement had less impact but are meaningful so I'll break them down.
Net interest income increased by $1 million, but there were large underlying changes.
Interest income was up $15 $9 million on higher average loan balances increasing yields on the adjustable rate loans higher rates on new loans and the quarter has an extra day.
Interest expense was up slightly on a slightly smaller <unk>.
$10 $9 million, primarily on the higher deposit rates paid on savings and money market accounts.
Our deposit rates were raised on August 1st after the afternoon <unk> announced it.
After the <unk> announcement in late July .
The impact of these deposit rates.
The deposit rate increase on interest expense was partially offset by a smaller deposit base.
Our margin was also up slightly to three 2% an improvement of eight basis points from the prior quarter.
The increase in our NAV was limited as the increase in our cost of funds was not far behind the increase in yields.
Average loan yield for the quarter was $5, one zero percent up 59 basis points and the average yield on interest bearing balances which include securities was four 1% up 62 basis points on.
On the other side of the balance sheet the cost of funds was <unk>, 99% up 54 basis points.
Some of the drag on the NIM is attributable to the slower repricing of variable rate loans versus the faster repricing of money market and savings accounts.
For noninterest income we were down slightly this quarter by 256000.
Loan fees were down and mortgage volume continued to be light as rising rates further reduced consumer interest in refinancing or purchasing a home.
For noninterest expense the primary changes from the prior quarter absent. The settlement were all relatively small data processing expenses were up 716000 on expenses associated with network upgrades salaries.
Salaries and employee benefits were down 267.
As we chewed up annual incentive bonus accruals legal.
Legal accounting and professional fees were up 195000 on higher consulting fees.
Before moving on to the balance sheet I'd like to note that we did close one branch at quarter end.
The estimated annual cost savings on Red common area maintenance and taxes are $275000.
There were no notable.
<unk> expenses at the lease is set to expire on October 31.
This reduces the number of bank branches to 16.
On the balance sheet assets declined from the prior quarter and by $244 million with.
The decline in assets was largely driven by a reduction in excess liquidity at short term bonds declined by $322 million <unk>.
These short term bonds, along with new short term borrowings of $220 million were used to fund deposit outflows of $408 million.
Regarding the reduction in quarter end deposits, we have some clients that typically draw down balances at the end of each month. So average balances are more indicative of normal funding.
Average deposits for the quarter were down by a smaller amount $277 million.
As mentioned earlier the reduction in deposits were primarily from savings and money market accounts.
As our noninterest bearing accounts held steady our average non interest bearing deposits. The average deposits rose to 38, 4% this past quarter up from $37 nine in the prior quarter.
Other notable changes to the balance sheet from the prior quarter and were loans being up $150 million and securities being down $135 million.
The reduction in security balances was primarily driven by lower carrying values on available for sale securities as interest rates continue to rise during the quarter and from Paydowns.
If the overall interest rate environment continues to rise carrying values will continue to decrease.
These securities in the available for sale portfolio.
The markdown.
Available for sale Securities also drove the quarter over quarter reduction in equities.
Equity at quarter end was down three at $32 9 million.
Essentially this was driven by the markdown of the available for sale securities offset by earnings of $37 $3 million and less of $14 4 million in dividends declared.
Regulatory capital ratios at quarter end remains strong and we are not impacted by the mark on the available for sale Securities.
Common capital ratios were impacted by the Mark down on the available for sale portfolio, which reduced equity, but the decrease was muted by the reduction in assets comma.
Common equity to assets was 11, 4% down five basis points intangible common equity to tangible assets was 10, five 3% down seven basis points.
With that I'll hand, it back to Susan for a short wrap up.
Thanks Charles.
To wrap up our commentary I'd like to say that we are encouraged by the increase in loans this quarter and the strength of our asset quality metrics.
So it is our strong relationship culture with our customers that allows us to provide superior service and to maintain 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.
Our city and inclusion in the workplace and the communities we serve.
With that we will now open it up for questions.
Thank you.
If you'd like to ask a question as a reminder, please press star one one on your telephone.
One moment, while we get ready for questions.
The first question that I had was coming.
From cash.
Catherine Miller of <unk>.
K W. Excuse me K VW. Please go ahead your line is open.
Hi, good morning.
Hey, good morning, guys.
I wanted to start with the deposit costs could you give us.
Just some color around what maybe where deposit costs ended the quarter to get a better sense as to where would that go into the next.
And then just kind of broad picture on deposit costs your betas have been higher.
I noticed the past couple of quarters, which is typical for you similar to last cycle.
Their case to be made that your front running some of this.
Deposit cost increase in your betas should Ken I guess.
<unk> more quickly than peers.
Or do you believe you are just kind of a higher beta story and thats going to be over the next couple of quarters. Thanks.
Sure thing Kevin, Yes, it's hard hard to really say rates tend to forecast that.
We've got a variety of funding relationships with varying levels of sensitivity to rate movements.
Mentioned in the past that we are modeling our interest rate risk and average beta of about 70%.
And even even with that beta we're still seeing asset sensitivity as of 930 to the tune of five 7% and increased interest income with a 100 basis point move up on a static balance sheet over a 12 month period.
Obviously, the real world is abstracted away from the modeling and Theres a lag effect on our liability versus asset re pricing. In addition to other other factors like payoffs.
Our beta as you mentioned.
With just around 67% for the third quarter.
As in line with that modeling.
It's our.
We will endeavor to either match or beat that as as we move forward right.
No.
Yeah.
I think important also to keep in mind, our strong noninterest bearing deposit balances right.
We've seen those increased to 38, 5% of October up from the third quarter.
And so.
I'll just also add that it is not.
Lost on us.
Funding for all banks is obviously going to be more difficult in this environment.
But yes.
We're going to we're going to.
Keep plugging away and.
We're trying to continue to fund the bank.
In the most efficient way possible.
And would you expect to pop.
Catherine I think we lost you.
Virginia.
And one thing I would say is that.
In prior years with <unk>.
Focused on relationship banking.
Sure.
Required deposit accounts.
In connection with any loan request.
During the period.
Excess liquidity that we probably didnt pursue as strongly as we could have.
Think we're refocusing on the basic.
Required deposits in compensating balances as we move into the changing rate environment and I expect that we will have the same success level that we had on that when we were using that tactic pre.
Ash 2020.
Okay.
I think we're working on trying to you Kathryn back in the queue.
We go after.
Yeah.
Katherine you can go ahead and queue backup by pressing star one one please.
Okay.
Yes.
Okay.
Okay.
Lisa I think I think if we're not able to get her back in the queue. Then maybe we can move on to any other questions that we have out there.
If anyone has a question. Please press star one on your telephone.
Okay.
Here's some of them want to bring it back to Greg.
Yes.
Okay.
Yes.
Welcome back Catherine.
Your line is open. Please go ahead.
Okay, Great I, just press star one again.
You bet all right okay.
I'm talking in.
Good to hear anything else.
Okay.
So I guess my.
I guess my follow up question on deposits before I get somewhere else with with all the commentary I guess, just big picture, you believe and we've seen deposit kind of shrink for the past couple of quarters do you think you'll be able to actually grow deposits as we move into next year given kind of all you just you just laid out for us.
Yes.
That's certainly the desire right.
Again, I think I think this is a difficult environment at the money supply is shrinking I think a lot of banks are going to be challenged.
With.
With finding deposits.
So but yes.
As the desired I also think Kathryn as we move as Jan was saying some of this is we lost you.
As we move back to our focus of gathering deposits for all of our relationships and will require a certain amount of deposits.
That will help that also and we are much further in that process now than we were for a while during the pandemic and the excess liquidity that we all had.
You may not have been there.
Yes, it had been in the past and will continue to be.
Great Okay great.
And then on the other side like the lung data was actually I thought.
Really good.
That either 40% beta we saw this quarter is that.
You kind of a level that you think we should see what the next couple of rate hikes or is there any any kind of dynamics with that maybe where your pricing is coming on.
That may have been.
Change that data as we move forward.
Yes, the only comment I would have on that obviously.
<unk> got about 60% of our loan portfolio.
Variable and adjustable rate.
And obviously, we may have mentioned as I think many others have during this earnings call season of the lag associated with.
With the repricing on the asset side of the balance sheet, but.
Generally I think it should be fairly consistent quarter over quarter.
Once the fed pauses.
I do Paul.
If they level off.
See some after effects there lingering quarter to Africa.
Okay great.
Hearing from some other companies that are.
So again there are different markets.
More commentary from banks this quarter say theyre going to slow construction lending and I didn't get that sense from you all in your prepared remarks, as any kind of thoughts on new construction credits and how youre thinking about new originations in that in this environment.
Well I think we are still entertaining construction request, it's really dependent upon the type of project multifamily is still a very strong product in our market. There is still a housing shortage. We're also seeing industrial crop.
<unk>.
That remain attractive to investors and continue to support distribution networks.
We are not looking for office right now.
But.
I think if we're selective about it and continue to implement our underwriting standards as we have.
I see no reason why we can't be successful with continuing in the construction side.
We also think think of ourselves in a pretty special market as it relates to.
Additional.
Demand for construction.
Projects, particularly on the on the multifamily side.
There is always kind of net positive people moving into the DC market.
As we move past that.
Each subsequent election cycle right.
As people come here.
And that's always been a strength of <unk>.
And then my last question is just on the buyback <unk> got a lot of capital.
Dan your construction and CRE to capital ratios are high but still your TCE on absolute basis and regulatory ratios are very very high so any thoughts on re engaging the buyback given where your stock is trading.
Yes, certainly it's something we're always talking actively about.
Again I'd point to.
And.
Compelling case can be made as you pointed out for <unk>.
Where the evaluations sit today.
We certainly are managing capital trying to return to shareholders.
In some way.
We declared another <unk> 45 dividend here this quarter, but yes, its something thats.
We're always talking about.
And remind me do you have.
Currently outstanding an update or do you need to re up that.
Okay.
Yes.
It expires the program expires at the end of the year correct.
Okay. So you need to get regulatory or you need to get board approval before you.
Which actually we've received board approval already so we would.
Thank you.
Be able to initiate.
Well.
Okay.
So much.
Yeah.
There are no more questions in the queue and I would like to go ahead and turn the call back over to.
Susan Riel.
And CEO for closing remarks, thank you.
We appreciate the questions today and thank you for taking the time to join US on the call. We look forward to seeing you speaking with you again next quarter. Thank you.
Everyone. Thank you for joining today's conference call you all have a great rest of your day.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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