Q1 2023 Eagle Bancorp Inc Earnings Call
Okay.
Good day, Thank you for standing by welcome to the Eagle Bancorp incorporated first quarter 'twenty 'twenty 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 to ask a question. During the session you will need to press star one on your telephone you will then hear an automated message advising your hand this race to remove yourself from the queue. Please press star one again, please be advised that today's conference is being.
I would now like to hand, the conference temperatures Speaker today, Charles Levingston, Chief Financial Officer. Please go ahead Sir.
Thank you Norma. 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 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 2022 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 Bancorp does not undertake to update any forward looking statements as a result of new information or future future events or developments unless required by law.
This morning's commentary will include non-GAAP financial information in 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 the company online at our website.
And on the SEC's website.
This morning, Susan Riel, 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 her thoughts on our 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 would now like to turn it over to our president and CEO Susan Riel.
Thank you Charles and good morning, everyone.
While we are disappointed with the first quarter operating results. There were several positive items to point out capital asset quality loan growth and expense control.
First our capital ratios continued to be strong and are well in excess of regulatory requirements. Our tangible common equity is $1 $1 billion, which is 10.36% of tangible assets.
This level of capital is relatively high when compared to our peers and gives us room to continue to lend.
This foundation has also enabled us to continue to support our shareholders by paying a quarterly dividend and purchasing common stock based on last nights closing price our current annualized dividend yield is 571% and during the quarter, we repurchased four.
100000 shares of common stock on.
On a combined basis, we returned capital of $32 $2 million to our shareholders in the first quarter of the year.
Second our asset quality metrics remained strong even against the backdrop of a challenging market.
Nonperforming assets as a percent of assets was eight basis points unchanged from the prior quarter and net charge offs were under a million dollars our long standing commitment to strong underwriting and risk management has served us well during these times of economic turmoil.
Additionally, we remain focused on disciplined loan growth the quarter. We this quarter, we increased loans by $102 million. This was our sixth consecutive quarterly increase thanks to the continued efforts of our CRE and C&I team.
As our clients now we have the local expertise and we are more committed to the business community in the Washington D C market than larger banks based outside our area.
We also continue to focus on controlling expenses, our annualized noninterest expense as a percent of average assets was 144% this past quarter.
Sure it against our peers. This operating efficiency is another way that we provide value to our shareholders.
For our customers, we provide value by meeting their liquidity and credit needs at quarter end, we had an aggregate borrowing capacity of $1 $7 billion. This gives us financial flexibility to provide the support and services our customers expect.
Charles will discuss our borrowing capacity in more detail later on.
With that I'll hand, it over to Jan for a discussion of the market and credit quality.
Thank you Susan and good morning, everyone.
Washington D C market area remains a source of strength the unemployment rate in the Washington Metropolitan Statistical area down to 3% in February which gives us some favorable separation from the nationwide figure of three 5% in March.
Your line is favorable unemployment has.
Discontinued spending from the government government contractors local residents and tourists even with good local economic data and trends, we continue to maintain our conservative underwriting standards, which are reflected in our credit quality metrics.
As Susan mentioned were eight basis points on assets. This is unchanged from the prior quarter and remains the lowest ratios N P. As we've had since 2005.
Total npa's were $8 7 million up modestly by 288000 over the prior quarter.
Net charge offs were 975000, most of which was from one C&I relationship.
Our coverage ratio improved to 11, six times nonperforming loans and loans 30 to 89 days past due were $15 7 million up from $2 2 million at the end of the prior quarter. The increases are entirely from one commercial credit from $14 1 million.
Which was brought parent immediately following quarter end.
For the quarter, we took an ACL provision of $6 2 million and our ACL to total loans at quarter end up one point or 1% up from 0.97% last quarter.
The provision this quarter was primarily driven by qualitative changes, which included increased risk in the Q&A portion of the credit model associated with an allowance for commercial real estate office properties.
The optimal return to work participation continues to limit increases in occupancy while inflationary growth on our net operating income and limits owner pricing power on rent.
Some good news late last week regarding local returned to work as the binding administration instructed federal agencies to return substantially more employees to the Opex and increase meaningful in person work to monitor our credit suite continues to be proactive and reaching.
Out to commercial clients to better understand the headwinds faced in their income producing properties.
From these qualitative considerations the ACL provision for the quarter was also affected by higher period end loans.
Overall in terms of credit.
Being cautious and will continue to apply our strong underwriting skills, having said that we see opportunities to continue to add high quality commercial loans to the portfolio and our pipeline.
And in addition to our pipeline.
Commitments are $2 5 billion at quarter end.
Our focus remains on adding local commercial income producing properties and owner occupied properties and also growing our quality C&I portfolio with that I'd like to turn it over to Charles Levingston, Our Chief Financial Officer, Thanks, Jan <unk>.
Lines for the industry in the first quarter were about funding and funding costs as the federal reserve continued to increase rates to fight inflation, we increased rates paid on deposits and to the extent deposits decreased we increased borrowings.
To get more granular on deposits the reduction in deposits occurred throughout the quarter with approximately 70% occurring prior to the industry turmoil that started March 9th.
Overall, we did not see clients closing accounts in fact, we saw a normal amount of deposit accounts opened during the quarter, but certain accounts moved from noninterest bearing to interest bearing late in the quarter.
To date, we have seen deposit balances level off three weeks into the quarter.
Sort of place the funding from deposits. We initially drew on the FHL advance FHL advance is bringing total advances up to $1 $3 billion. When the Bts program opened up we considered the collateral terms and interest rates offered to be more attractive than advances from the FHL b we've.
And then access to an $800 million advance with a one year term at a rate of 438%.
This brought total borrowing up to $2 $1 billion I would also like to note that since quarter end, we have not accessed additional borrowings from either the FHL b or the Bts P.
If we were to access additional funding we have significant capacity available at.
At quarter end, our borrowing capacity was $1 $7 billion. This included additional aggregate capacity of $689 million with the <unk> plus another $1 billion of unencumbered securities available for pledging. Additionally.
Additionally, the securities portfolio continues to provide cash flow in the first quarter, the cash flow was $55 $2 million.
The increase in interest expense from the borrowings was the primary reason for the decline in net interest margin as these borrowings replace lower cost deposits.
And as mentioned earlier certain accounts moved from noninterest bearing to interest bearing which exacerbated the difference.
Quarter over quarter, the net interest margin moved from $3, one 4% to $2, 77% a decline of 37 basis points. Another factor negatively impacting the margin was the lagging interest income from loans loans were up $102 million at quarter end, but the full interest benefit of higher rates.
On new loans will not be felt until next quarter.
And variable rate loans will reset to higher rates, but these loans take time to re price looking.
Looking at overhead noninterest expense for the quarter was up $1 $7 million, but this included about $1 million from a one time reversal of legal accounts receivable. Additionally, while not impacting this quarter's expenses, we've closed our Alexandria, Virginia branch in March, bringing the number of banking locations.
One to 15.
The annual rental cost savings associated with this closing is just under $200000.
Continuing with expenses, we remain committed to strong and proactive management of costs, while our efficiency ratio climbed to 51, 6%. This quarter. It is more a reflection of a lower net interest margin band and increase in noninterest expense.
A better indicator of our quarter over quarter expense management as noninterest expense as a percentage of average assets.
For the first quarter this was 144% up from 137% the prior quarter.
This ratio compares favorably to our peers as Susan mentioned.
Lastly, capital remains a core strength, which enables us to pay a healthy dividend and repurchase shares to address another industry headline the unrealized losses on the HTM portfolio are modest relative to our capital levels, which would still be strong and compare well to our peers. If those unrealized losses were reflected in capital.
With that I'll hand, it back to Susan for a short wrap up Susan. Thanks, Charles This year will be eaglebank, 25th anniversary. It is through the hard work and dedication of hundreds of team members that we have built our strong relationships first culture. It is this culture that enables us to provide.
<unk> superior service to our clients and to maintain our leadership position in the community.
This culture also includes our commitment to respect diversity and inclusion over.
Over the past 25 years. The foundation, we have built with strong capital strong asset quality metrics and strong cost discipline has served us well and prepared us for the challenges we face today.
With that we will now open it up for questions.
Thank you as a reminder to ask a question you'll need to press star one on your telephone to withdraw your question. Please press star one again, please wait for your name to be announced please standby, while we compile the Q&A roster.
Yes.
One moment for your first question.
Our first question comes from the line of Catherine Mealor from <unk>. Your line is now open.
Thanks, Good morning.
Kathryn Kathryn.
Wanted to start on just the deposit balance.
Balances that we saw.
This quarter and maybe if you could just give us a flavor for some of the granularity of of some of the of that $1 2 billion that came off the balance sheet and then remind us just kind of on the granularity of your of your deposit book.
Maybe.
Size of kind of top 10, depositors you know what percentage of the funding base that is.
And just to give us a sense of to the granularity in two.
So your book That'd be helpful. Thank you.
Sure sure thing Catherine yes, so.
We did have.
Some of those deposits that came off.
Were brokered in nature.
And in some instances we.
We have these relationships that are custodial relationships.
Where it's essentially excess cash and brokerage accounts right from.
They're then consolidated into positive and into our bank and in some situations those those cash balances and as brokerage accounts, we're going to investments right. They were going out of the banking system. So those brokered.
Deposits.
We're not able to be deposited with us so that that was.
In some cases some of those balances that left.
With respect to again some of the larger depositors and some of our deposit balances we do.
Did.
<unk>.
Some movement, there, but by and large again it was it was a similar story, where you had those balances moving out of the banking system into money market mutual funds or U S treasuries.
That's generally what we saw on the flip side, we did bring on some additional.
We did bring on some additional time deposits on average we increased time deposits by about $410 million $411 million.
You know that that provides a little bit more stability to the deposit base moving forward, obviously, it a little bit of a higher cost but.
But that was some of the pluses on on that as well.
Okay. That's helpful. And then just think about the margin going into next quarter, where where deposit.
Cost towards the end of the quarter.
Sure so right on on average rate we had.
363.
Percent.
Right on our.
On our total interest bearing deposits.
Our highest money market yield right now is sitting at about $3, 99%.
That's the prevailing rate obviously, the fed is looking at another rate increase the probabilities are suggesting another 25 basis points here.
The third of May so.
We'll react accordingly.
There, but want to be protective of the deposit base that we have in.
Continue to.
To provide a fair rate to our customers.
I think also Catherine what Charles said earlier is.
We obviously saw deposit outflows, but that we've seen a leveling off of that.
And our top depositors, we have not lost our deposit customers. We seen some money go out, but we have not lost our customers. We've seen some growth in the deposit base. So we've added some customers also but.
So just important to know that we do see a leveling off it's still early in the quarter. So it's hard to say whether that will continue we are watching it closely.
Great and have you seen more of a use of the Ics program.
As a way to kind of okay. Good.
What is that.
Do you see the amount of a mountain of your deposit base that's in that program.
Yes, I don't I don't know that we've published that number right I can tell you that it was about a couple of hundred million dollars that migrated this quarter.
From into the Ics program, but yes. There were there were certainly conversations like like all banks had following the turmoil.
And in early March.
And.
In most cases folks were able to get comfortable with our balance sheet and our strong capital.
In some instances folks wanted to wanted to move their money into Ics and so so we did that.
We have quite a bit of capacity there with with the Ics program. You know I think it's upwards of close to $3 billion plus dollars or so so yeah, yeah that Ics program has been a.
Popular.
So, yes, obviously those with our fiduciary responsibility we're more interested in those.
And those programs than the than others right.
With our commercial customer base, some folks felt the need they needed to protect those deposits.
With with programs like Ics.
And one more if I may just on on moving to credit.
Jim can you give us an update on was there any movement in classified loans this quarter and any.
Just kind of an update on how I know you gave a little bit about it on the office book in your prepared remarks, but any any kind of commentary that you can provide you with some specific credits if youre seeing any degradation in the portfolio. Thank you.
Sure.
We had a decline of about 700000 in classified loans.
Watch list itself was reduced by $86 million.
One of the odd.
Office deals that we have had on our watch list.
We were paid off on.
So we.
Had that reduction.
We have been very proactive in going out and meeting with our.
Income producing property customers.
And having a special task force to address any issues that might come up there.
It's really a case by case situation when Youre looking at these properties depends on.
Obviously trophy and class a properties are performing at a much stronger level of them D. C properties are where we.
Looking at when leases are going to roll over and getting ahead of that with the current tenancies are obviously multitalented more stratified the better.
The loan maturity day.
When we're looking at loans that don't mature for another two and a half years, it's hard to say where rates will be at that point in time, so even though we are seeing.
Very soft market.
Between tenants.
Driving the ball here.
We haven't seen any past dues in our office portfolio.
<unk> performed very well, but anything that's coming up for and what would be a repricing I think we're taking a very hard dive on and understanding what's going on with us.
Great Alright, Thank you I'll hop out of the queue.
Thank you one moment for our next question.
Sure.
Our next.
Question comes from the line of Casey Whitman with Piper Sandler Your line is now open.
Hey, good morning.
Good morning Casey.
So I appreciate the color on the monthly deposit trends just around your comments.
With deposits being relatively stable in April are you still seeing movement out of noninterest bearing but just sort of going into interest bearing bursting out of deposits is that what you're sort of seeing this month or did I mishear that and then I was also wondering if you might have an idea of where sort of the percentage of noninterest bearing might land.
The cycle or is it sort of too early to tell.
Yeah, I think on both those fronts, it's a little.
Premature for me to make a call.
I can say you know again things are leveling off a bit there were accounts that they were closed in the fourth quarter, but there were also quite a few accounts that were opened.
There is.
It appeared to be fairly normal in that respect obviously some balances moved again.
It's hard for it's hard for.
For some of those folks who are.
Looking at the offerings out there in the marketplace to resist with idle cash what they could be earning again out.
<unk>.
Outside of the banking system again in these money market mutual funds and U S U S treasuries.
So I think that's where you're seeing some of the movement, but.
In general I think a more stable interest rate environment is helpful for us.
We're not seeing the 75 basis point moves that we saw last year, we're down to 25 basis point moves with expectations of the fed blinking. Later this year, we'll see what comes with that but a more stable interest rate environment. I think is is helpful. As it relates to any of that movement.
Got it.
And just looking at your uninsured bucket would you say a lot of those relationships or you also have I guess loans with those with those guys where are you. The relationship is actually pretty sticky or you might not have a number around that but that would be kind of an accurate statement.
Yes.
I think I look at our <unk> as our operating accounts, if you will or if that's any indicator again, we've been able to maintain.
Roughly 30 plus percent this quarter was 37, 3% last quarter it was a little heavier.
And those have been pretty consistent throughout the life of the bank.
I am relatively confident that we'll be able to maintain.
<unk> maintained that kind of a ratio and maintain those customers in those deposits.
Okay.
I'll move on to Jan just quickly back to office.
Can you maybe just put some updated numbers around the exposure there that you'd given in the past and if you had it maybe the average loan size in that book or Ltvs or just any sort of granularity you have there for us.
Okay.
Well in terms of the.
Income producing office.
Owner occupied out of it.
We've got about 200 million in D. C about 200 million in Montgomery County, about 200 million in Fairfax County.
Uh huh.
<unk> each in Arlington and Alexandria.
Around FC in Prince George's.
And the balance really throughout the other Maryland, and Virginia areas.
So.
Early.
Equally weighted between Montgomery Fairfax D C.
And everybody else.
The loan to value is 50%.
8%.
We're tracking that that's based on the most recent appraisal now some of these appraisals are.
Four years or so.
They haven't had the right.
Last couple of years.
And they may not be.
Optical to the ride down in terms of value of the property.
We're looking at each.
Each property individually.
Because there are so many different factors that really influence the value of a property right now.
Radically different if at least as opposed to it's got a vacancy.
50% or 60%.
It's a medical office building, we haven't seen any issues there.
Just each property evaluate individually and we do as a matter of course, an evaluation on an annual basis, but this.
Targeted task force is going deeper into the weeds on individual properties and so far.
Mark on Wood, we've had very good results reaching.
Agreement with our borrowers in terms of.
I mean, its sweeping cash or.
Trying to move forward and do an expansion.
With a greater or some other credit enhancement involved.
Mhm.
Is downtown D. C is still there.
Police, you're most worried about or with government work with potentially going back into that a little bit a little bit less.
Less pressure.
I think the central business district itself is still really.
Relatively debts, except for trophy buildings.
<unk>, which are doing fine.
If the federal government. It goes back to work and we're hoping that that does happen.
It'll be probably over a period of time probably over the next.
12 to 18 months I would guess, maybe even longer than that because there are separate unions with each one of the agencies.
Have to go through that and go Sheraton process, but that would certainly make them.
The downtown area much more.
Idle.
It would be.
Godsend for retail, which Fortunately, we don't have much of in our portfolio.
Yes.
Okay last question for me just thinking about your capital here you were still active with the buyback it looks like early in the quarter, but maybe.
Before the events of March so or how are you weighing conserving capital against the sort of attractive math of buybacks here.
Yeah. So I think we are.
We're evaluating that on a quarter to quarter basis, we're obviously grateful that we've been able to return that value to the shareholders over the last quarter, but that's that's something that we'll take a look at and the board will make a decision as to how to proceed.
Okay.
Thank you.
Thank you. Thank you.
One moment for our next question.
Okay.
And in comes from the line of Christopher <unk> with Janney Montgomery Scott. Your line is now open hey.
Thanks. Good morning, just wanted to go back to the point you just made about the loan to value and the appraisals.
We're stress testing your portfolio or if the regulators are having to do that which I presume. They are do you need to get new appraisals on those is there a process where those will get updated.
In the next few quarters and does that have any impact on reserves going forward.
And it would not be a portfolio wide.
New appraisal Egypt, what would happen is if there were any of the properties that looked like they were potential problems are internal policy would have us ordering new appraisals on them I think Chris the one of the problems is.
Appraisers today.
Because we're in such as shifting market.
I've seen.
Different people with an appraisal at $136 million.
Hi.
And as is value.
$90 million, a liquidation value of $70 million, a broker's opinion of value of $24 million I mean, it's hard really hard to get a handle on.
For appraisers to get a handle on new.
Pricing because there just havent been enough trades.
So does that beg the question that you need to have more collateral against these loans or I guess at the end of the day, how do we get comfort that that you have sufficient.
Well I think what we've seen typically.
On the few trades that have happened.
Yes.
Anywhere from 20% to 40% decline in value.
If we had a property that was which we done that.
85% value add origination I would be very worried about it.
I had.
Office property that was tenanted.
That had a maturity date.
Four years from now I, Wouldnt really think I needed to get a new appraisal on it at this point.
It's not going to reprice for a while remember these are at fixed rates.
I would anticipate a year from now.
Rates are going to be a bit lower than they are today. That's the expectation I think a lot of investors feel that way because rather than going into long term fixed rate money right now if they could locate it they don't even want to go to agencies now because theyre counting.
On the fed doing some rate reductions in the next year, so theyre holding off on that.
Got it that's very helpful. Jan Thank you very much and Charles just a quick question for you on the deposit insurance and uninsured portions are those figures net of some of the Ics and intra Phi work that you've been doing or is that a gross number but we saw yesterday.
Yeah, Yeah. So that that includes estimate includes or excludes I should say the Ics balances right. So its already baked in.
To that number.
Yes.
Okay. So then the percentage we have has that included so if you do additional work with those programs that can lower it further in the future.
Yes, that's absolutely right and in fact, some of that migration did did reflect in a lower lower metric between quarters.
Okay.
Do you have any plans about kind of bringing those deposits back like immediately or would you wait for rates to kind of change and perhaps do campaigns later I'm just sort of curious on how we get that 14% back overtime.
The 14%.
Deposit fit fit flowed out of the bank right.
Likewise.
Theyre not theyre not currently with the bank right. So like if if.
That.
I just want to make sure I understand the question that that did not relate to Ics rate those Ics balances when they move to ICF theres still on our balance sheet is reciprocal in nature.
Ed.
No I understand that.
So it was more of a big picture question, if I can general I presume you wanted to get those back over time, and so I'm curious kind of yes.
Happens certainly right if I could wave a wand I would I would bring them back today right, but yes.
Yes.
That's the challenge of the market that we're operating in right now again as Ed mentioned I think a lot of that has to do with other earning opportunities out there in the marketplace again outside of the money market mutual funds and treasuries is a culprit.
A competitor.
<unk>.
That's why I think having a lot more.
Rate stability is going to be helpful for us.
Moving forward.
And again I am grateful that some of these FMC moves are.
Now 25 basis points and not 75.
Every few weeks.
I think thats again, thats going to be helpful for us encouraging those deposits back our way going forward.
Great. Thanks for all the information this morning.
Thanks, Chris.
Thank you for your questions I would now like to hand, the conference back over to Susan Riel, President and Chief Executive Officer for closing remarks.
We appreciate your questions and your taking the time to join US on the call today and we very much look forward to speaking with you again next quarter. Thank you.
This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
Okay.
[music].
Yeah.
Okay.
[music].