Q2 2023 Eagle Bancorp Inc Earnings Call
Question and answer session to ask a question. During this session you will need to press star one one on your telephone you will didn't hear an automated message advising that your hand is raised to withdraw. Your question. Please press star one one again please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today Charles Livingston.
Chief Financial Officer. Please go ahead.
<unk>. Good morning. This is Charles Livingston, Chief Financial Officer vehicle Baycorp before we begin the presentation I would like to remind everyone that some of the comments made during this call maybe considered a 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 though does it.
Forward looking statements made during this call should be interpreted [laughter] regarding formal guidance.
Our Form 10-K for the 2022 fiscal year 10 too [noise].
2023, and current reports on four 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 for reading 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 extra cheese contains reconciliation of this information to the nurse directly comparable gap information.
Our periodic reports are available from the company online at our website <unk> website.
This morning, Susan real the President and CEO vehicle Bank Corp will start us off with a high level overview than Jan Williams are cheap credit officer will discuss her thoughts on the local economy loans reserves and credit quality matters that 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 C E O Susan Rachel.
Thank you Charles Good morning, everyone I am pleased that our second quarter performance improved from the prior cream and with the progress we are making in a very difficult operating environment.
During the second quarter, we increased net income and earnings per share improved our funding next by increasing deposits to reduce borrowings maintained a high level of capitalization and kept our asset quality Netflix strong.
Additionally, we continued to pay out our <unk>, our dividend and repurchase shares based on last nights closing stock price our current annualized dividend yield was 6.47%.
And during the quarter, we repurchased 1.2 million shares of our common stock at an average price equivalent to 67% a tangible value.
On a combined basis, we returned capital of $42.9 million to our shareholders in the second quarter of the year.
In regards to earnings we are actively pursuing opportunities for continuous improvement <unk>.
One way we are seeking to increase earnings is by taking steps to reduce expenses in the first half of the year, we ceased originating residential mortgages and close three branches earlier. This month. We also made the difficult decision to enact a reduction in force and.
Applied other cost savings throughout the bank.
We also know that support for earnings comes from a strong commitment to underwriting and risk management.
Throughout our history. These qualities have been a strength the vehicle and have served us well during times of economic turmoil, while loan grew for a seventh consecutive quarter. The increase was modest as we continue to focus on maintaining our risk adjusted returns in an environment with high funding.
<unk> cost the deposits and borrowings.
Our team continues to be highly focus on deposit cost and is working hard to retain and expand existing relationships and attract new deposit accounts as well.
This is not an easy task in this environment, but we have seen good results using reciprocal deposit platforms and helping other customers to restructure their deposits.
In regards to asset quality metrics asset quality remains of strength and lost some metrics increase they remain near historically low levels Jan will discuss this next with that I'll hand, it over to Jan.
Thank you Susan and good morning, everyone. The Washington D. C market area continues to be a source of strength to the banks the unemployment rate in the Washington Metropolitan Statistical area elegant next quarter to 2.7% in May which is just about the pre pandemic level of two point <unk>.
6% in December 2019, this gives us even more separation from the nationwide figure of 3.6% in June which was up slightly in our lines more with the historical longterm difference relative to the national unemployment rate.
This strength in the Washington area market can be seen in our app that quality mattress and our probation to the a C. L M.
P as for 28 basis points to total assets. While this is an increase over last quarter total M. P A's or $37 million on a portfolio of 7.8 billion. The increase was primarily from one commercial office note in northern Virginia of which a question was charge.
Scott during the second quarter.
There was one other notable cha Cha located outside the Washington D. C area in Baltimore, I office property, bringing the total in that charge off cricket quarter to $5.6 million.
<unk> 30 to 89 days past due or 41.4 million up from $15.7 million at the end of the prior quarter.
The current quarter past due is largely from one multifamily crowded for 39.5 million.
For the second quarter, we had an a C. L provision of 5.2 million, which was somewhat lower than the provision last quarter. This.
This combined with a relatively small increase in loans and the two charge offs moved our a C. L. Two loans at quarter end down one basis point to 1% are.
Our coverage ratio is 2.7 times nonperforming loans with regard to the lower a Seattle provision. The provision was primarily driven by a lower quantitative reserve, which is formula based this was partially offset by a higher reserve based on the queue any portion of the credit model.
The lower quantitative reserve was based on improvements in local unemployment data as I mentioned earlier.
The higher reserve and chewing a modeling was driven by a higher allowance for CRE office properties, partially offset by a lower allowance or accommodations and food service loans.
Optimal returned to work participation continues to limit increases in office occupancy. However, both the federal government and Amazon H Q to have announced plans to increase their in office present in Nepal. This.
This quarter were providing some additional geographic detail Uhm CRE office loans secured by non owner occupied commercial real estate loans. These.
These credits or 12.6% of the total portfolio as of June 30th we did not have any outstanding office construction loans at the end of the second quarter <unk>.
Office properties are primarily located in the Washington D C market with 24.1% in D. C 30, 33% in the Maryland suburbs and 34.9% in Northern Virginia with an additional 8% located outside of these markets.
To monitor our income producing CRE credits, we continue to be proactive in reaching out to commercial clients well in advance of maturity to better understand the headwinds that could be facing these properties and work collaboratively with those borrowers to maximize returns to both of <unk>.
Bank and the borrower.
Overall in terms of credit we remain cautious and we will continue to exercise selectivity and to apply our customary strong underwriting standards, having said that we see opportunities to continue to add high quality commercial loans to the portfolio and maintain our <unk>.
Lifeline as other loans run off with that I'd like to turn it over to Charles <unk>, Our Chief Financial Officer.
Thank you Jan.
This was a good quarter and the the broader market and deposit volatility we experienced back in March has faded and we were able to improve our funding big.
During the quarter, we continued our efforts to gather deposits organically. However, this quarter deposit growth came from time deposits, which were predominantly brokered while our preferences for organic growth our ability to turn out deposit funding is a plus Additionally, we took the opportunity to use these deposits to reduce borrowing.
And approve the reef immaturity mix to do this we paid down FHL V borrowings by $777 million and drew an additional V. T. F. P borrowings for $500 million. This result, this resulted in a net reduction in short term borrowings of $277 million.
The reason for the swap in borrowings is the beat Cfe had a one year term at a rate that was more attractive.
Blended rate or a P. T F. He is now five <unk>.
4.53% versus the FHL b of 534% as of June 30th 2023 for shorter term funding.
The broker deposits, we <unk>, we added had terms of approximately 1.5 years at 4.84 per cent.
We all we also did see a decrease in average non interest bearing deposits at quarter in average non interest bearing deposits were 30% of deposits down from 37% of the prior quarter on.
On the plus side or loan to deposit ratio came down to 101% and uninsured deposits, we're down to 29.4%.
As it relates to the income statement net interest income was down $3.2 million and the net interest margin for the second quarter of 2023 was 2.49% down 28 basis points. The decreases were a result of the continued movement non interest bearing deposits to time deposits and overall higher.
Closing costs.
As we mentioned last quarter, there's a lag in interest income from loans.
The feds slows the pace of rate increases the benefit from the variable rate loans resetting they're from new loans.
Market rates will have more of an impact.
Moving through the income statement are are provisions for the ACO, an unfunded commitments were reduced as Jan mentioned.
Non interest income was a bright spot this quarter, we had it come with $2.8 million from an F. B I C. Reinvested in about 10 years ago and at the end of the first quarter, we entered into some swap agreements that generated additional fee income.
Of $959000 for the quarter.
The F. B I C income is more of an infrequent item and we don't expect to be a recurring source of income this year.
Non interest expense also showed improvement since the first quarter contain some seasonal compensation and one time expenses.
In regards to the expenses, we've always prided ourselves on being highly efficient and we aim to continue to operate in that manner.
Historically, our efficiency ratio had been in the 39% to 41% range. This past quarter. It was higher at 47.2%, but this still compares well to our proxy peers.
However, we know we can do better and have undertaken an expense reduction effort to review all expenses throughout the bank and we continue to make progress.
And the second quarter, we close to branches one in D C and one in northern Virginia.
The annual pretax cost savings and rental expenses is with $480000.
And as the least at least as were expiring or near exploration. The associated Unadvertised costs included in the second quarter was relatively low at $240000.
This reduces our banking physical.
To 13 locations in the Washington D C market supporting assets of $11 billion.
Early in the third quarter. The company also implemented a reduction in force and a review of other non interest expense items that are expected to generate savings of $2.4 million in the second half of 2023, plus an additional reduction of $5.8 billion in 2024.
Excuse me.
[laughter].
[laughter] that'd be pick up with Charles left off on the button on the bottom line.
With the <unk>.
Net income up 4.5 dollars an E P S.
16 cents.
Lastly capital is of course strength of the company of tangible common equity ratio at quarter end was 10.21%, which was higher than all of our proxy Pierce last quarter.
And we had an aggregate borrowing capacity to FHL B N B T. F. P $1.84 billion. This gives us some financial flexibility to provide the support and services our customers expect.
Last week Eco bank.
Celebrated our 25th anniversary and we remain committed to our original vision, which was to provide relationships first.
With a peer leading level of efficiency. This vision enables us to provide superior service to clients maintain our leadership position in the community and generate earnings for our shareholders.
In closing I as well as our entire senior management team, we'd like to thank our employees, who work hard every day to make Eagle a success.
With that we will now open things up for questions.
Certainly as a reminder to ask the question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again, please stand by while we compiled the Q&A roster.
Mmm.
One moment for our first question.
And our first question will come from it can see Whitman Piper Sandler accompany your lines.
Hey, good morning, everyone. Thank you for the call.
[noise] Jen J, maybe we'll start off on on credit can you walk us through a decision and what kind of prompted you to put that one large office phone on non accrual <unk>.
And maybe can you give us some of the underlying metrics like the L. T. B do you have the reserves established against the relationship and how large that charge off but he took on it. Thanks.
The charge off with three and a half million, we took the charge off because this one of the.
Phew mm.
Very few.
Single, Tennessee properties that we had and hopefully all.
The tenant vacated.
We had been sweeping income for the last 18 months as we work through the.
The process of considering returning the property.
And I think the.
Highest and best use of the property is really awesome residential land at this point.
Mm mm.
We chose to have it reappraised.
With the highest and best use the appraisal came in around $25 million the outstanding loan was around $24 million.
And we elected to go ahead and take a charge off of three and a half.
We're carrying it at 25, but we also have cash collateral of about $4 million. We expect this to go through the development process, but it will probably take 12 to 18 months to accomplish.
And that's how he got there.
Okay.
Is this one of the largest in the office portfolio or can you sort of give us an idea of what the the size of your top relationships would be in that book.
It ranges.
All the way up to.
$60 million.
Few and far between at that level.
Loans that I have maturing in the next 18 months total about $400 million.
[noise] proactively reaching out to those borrowers.
In the second order, we have I'm sorry in the third order.
Of this year, we have about 207 million that we're addressing.
Some of those are Maturity's based on short term extensions as we put into place agreements that we've worked out with the.
The sponsors and that accounts for about mmm.
Mmm 110, and then we have the other 90 ish that maybe aren't anticipating any particular issues with however, I would anticipate that we will be dealing with extensions as the market for financing office as you know.
Now isn't there so I would expect that will be dealing with extensions on a fair amount.
Amount of the portfolio.
Okay.
Do you have the updated L. T V for the whole.
Spoke with it yeah.
50, 56%.
Okay.
Okay.
Thank you Jan.
Moving on you guys are pretty active with your buyback this quarter. It looks like you might've exhaust your authorization. So can you speak to your appetite going forward I'm, putting a new one place just given the stocks Leonard handle book and keep that a lot of capital of though.
Yeah, sorry, <unk>, sorry for my absence or we.
At this point you're correct. We did we did exhaust our 2023 program at this point, we don't foresee at least at this point. This year. The addition of of any new program or repurchases at this point.
Okay, I'll, let someone else jump on <unk>.
And one moment for our next question.
Okay.
And our next question will come from Christopher Meronek.
Ah Jamie Montgomery Scott Your line is open.
Hi, Thanks. Good morning, just wanted to ask Charles about kind of what you see for the kind of terminal cost of funds are we getting toward that might sort of stabilized in the third quarter and.
Also maybe part of that is kind of mix sort of.
Sure that two total funding as you get there.
Yeah I mean.
From your lips to God's ears right. It's we've we've got certainly this this latest increase in short term rates.
<unk> did yesterday to respond to still however.
Would be all of the the brokered a turtle deposits that we put on in the <unk> in the second quarter of we're all in the money at this point right. So.
So mostly those those will be impacted additionally by by rising ratio, but again competition is still pretty strong poor deposit. You know we are we are going to be making great adjustments in order to respond it likely will not be as aggressive necessarily as as it has been in the past because I do think.
We're we're hitting the peak here I think that's the conventional wisdom, so I would expect.
That there may be a little bit more lift her there and cost of funds. However, I I would also expect that we may be able to keep pace on the asset side, hopefully, we're seeing that we've seen a bottom here on the on the margin throat.
Gotcha. Thank you for that and then just a question for you about kind of classified and criticize for the whole portfolio kinda outside of your comments on the off the side, but what is happening there and where do you think that may go in the next few quarters.
Honestly, we have seen.
Very little erosion in the entire portfolio not.
Not much on the CNI side at all.
Small loans, you know 100, 200 300000, but nothing.
That's particularly distressing on the CRE side.
Other than the office portfolio loans that we've discussed in the charge off this quarter.
The past due multifamily loan that was in the.
30 to 90 days category I'm not concerned about losses on that there is a dispute amongst the partners, which is precipitating the problem on the passenger side.
In theory, it's possible that could end up.
As a non-performing assets, but at this point I don't believe that's what's gonna happen.
Got it and then what the level of charge offs kind of revert back the next quarter or two or should we kind of expected something similar.
I am not anticipating that they will be at the level that they are right now are they were in the second quarter.
If I hadn't felt that we would have charged off more I suspect we're working our way through a number of.
Office loan extensions that we think will be happening over the next couple of quarters. So it's always possible that I could be surprised by an appraisal.
Great. Thank you all for taking the questions. This morning I appreciate it.
Thank you very much one moment for our next question.
Mmm.
And our next question will come from Catherine Mueller, Okay. B W. Your line is open Kathryn.
Good morning.
Good morning, My hand.
Okay and can you walk us through just anecdotally, what you're seeing him. When you were working through some of these office Lin extension knew what.
Where do you typically see in a praise values can a relative to maybe.
Anywhere you were the one was originally.
Resonated are you seeing your borrower, putting your new equity you just kind of give us a flavor for what that process.
<unk> looked like and what you may expect as you look at this next 110 million over the next order.
Well.
At.
Each property is pretty unique and there could be an appraisal that shows.
No dimunition in value because there's been good.
Good leasing and there's not a lot of rollover and it's a multi talented.
Don't have any issues there there could be Ah.
Property, that's well suited to being flipped to residential and I'm not gonna have any issues there because the residential market is so strong here.
But there could be like this one particular single tenanted property and off the top of my head I can only think of one.
Other single tenanted property that we have but it's.
Something that.
Has a unique high security.
<unk> and it's located near naphtha sale I'm not expecting problems with that.
It's just it's case by case every time I've seen big drops and I've seen no drop.
Got it okay.
And what is your current reserve on your office portfolio.
And the overall reserve is about 2% the reserve on sub standard is 6% the reserve on watch list is 4.2%.
And how much of your.
Uhm office portfolio is on watch versus substandard.
Gosh, let's see.
Trying to think I don't have that total in front of me, but we.
Did a pretty aggressive.
<unk> of the portfolio because of market conditions associated with all thanks right now.
We added to our watch list.
Two.
Three loans this quarter, so it's probably up about.
Yes.
That's probably around.
100 million.
Okay.
Alright got it.
And then <unk>.
Is there any move and criticize or classify this quarter.
Yes, we classified the one line that we partially charge stop moved to sub standard.
And it bounces 20, and a half million dollars.
I'm expecting that to go down next quarter, but we'll see.
We moved a couple of other office loans to sub standard.
That we're in the process of documenting extension for I would expect that with the.
Agreements that were negotiating they will probably be.
Be upgraded to special mention.
When the deals are done, but that's gonna take us probably another 30 days to get through.
Okay.
Great great.
<unk> is it fair to <unk> your question or your answers of Chris minute ago was that charge off should be lowered just from what you see today, depending on how these.
No extensions go but is it fair to assume that the reserves, who continue to build as you still see migration or you can order to some of these.
<unk> portfolio.
I think a lot of it is going to depend on what happens with federal government back to work in September and with.
In Northern Virginia, It's really the H Q2 back to work in person work that.
It's gonna drive that particular sub market.
So I think it's gonna depend on what happens and whether we got a recession, which at this point doesn't seem quite as likely.
It's gonna depend we will have been through over the next 18 months.
Close to half of the office portfolio in terms of renewals and extensions.
So I think depend.
Depending upon where rates shakeout 18 months from now if they're down it obviously makes things easier.
Is there a lot of factors out there to consider.
Okay.
Thank you for taking my questions I appreciate it.
Sure.
And I'm showing no further questions I would now like to turn the conference back to Susan <unk>, President and C E O for closing remarks.
When it take this time to thank everyone for participating on the call and I look forward to speaking with you again next quarter.
Have a good day.
This concludes today's conference call. Thank you for participating you may now disconnect.
Mmm.
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