Eagle Bancorp Inc (EGBN) 2021 Q4 法說會逐字稿

Hello. Thank you for standing by, and welcome to the Eagle Bancorp Fourth Quarter and Year-end 2021 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference may be recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Charles Levingston, Chief Financial Officer. Please go ahead.

Thank you, Josh. Good morning. This is Charles Levingston, Chief Financial Officer of Eagle Bancorp. Before we begin the presentation, I would like to remind everyone that some of the comments made during this call may be considered forward-looking statements. While our 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 our providing formal guidance. Our Form 10-K for the 2020 fiscal year, our quarterly reports on Form 10-Q 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 events or developments, unless required by law.

This morning's commentary will include non-GAAP financial information. The earnings release, which is posted in the Investor Relations section of our website and filed with the SEC, contains reconciliations of this information to the most directly comparable GAAP information. Our periodic reports are available from Eagle online at our website or on the SEC's website.

This morning, Susan Riel, the President and CEO of Eagle Bancorp, will start us off with a high-level overview. Then Jan Williams, our Chief Credit Officer, will discuss her thoughts on loans, reserves and credit quality matters, then I'll return to discuss our financials in more detail. At the end, all 3 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. Good morning, and welcome to our earnings call. I'm pleased to report another successful year with a strong finish at year-end, a few highlights which we will cover in more detail later.

Our earnings for the year and assets at year-end were record highs. Asset quality continues to improve. Efficiency remains a strong point. And most importantly, loans, excluding PPP, grew by $231 million or by 3.4% in the fourth quarter.

Focusing on earnings first. It was our 22nd consecutive profitable year. Earnings for the year were a record $5.52 per diluted share, and we paid out $1.40 per share in dividends, which was 25% of earnings. Returns for the year were 1.49% on average assets and 14.73% on average tangible common equity.

Turning to asset quality. At the end of the quarter, nonperforming assets improved to 26 basis points on assets. And for the quarter, annualized net charge-offs improved to 7 basis points on average loans. Both of these ratios are the lowest we've seen in the past 9 quarters. These asset quality ratios, combined with some factors that Jan will review, informed our decision to make a fourth consecutive reversal from our allowance for credit losses, even with the increase in loans. With a reversal of $7 million for the quarter, the total reversal for the year was $21.9 million, which followed provisioning of $47 million for the full year of 2020.

In terms of operating efficiency, we continue to be a leader with an efficiency ratio of 44.3% for the quarter. We are always prudent in our approach to expense management, yet we always keep an eye on critical infrastructure and investments in controls that are necessary to operate a safe and sound banking institution.

This year, we closed 3 branches, all of which had expiring leases and clients who can be served from other Northern Virginia branches and through digital channels. The most recent closure was our Reston location in December, reducing our branch count to 17 and raising our average deposits per branch to $587 million.

Now let's talk about loans. On last quarter's call, we said that given the market conditions, the bank has taken a more competitive stance on credit spreads on high-quality loan opportunities. So it was encouraging that even as payoffs and paydowns remained high, loans were up, and we saw significant contributions from both our CRE and C&I teams, particularly in December. The largest net increase was in owner-occupied CRE loans, which accounted for almost half of the net growth, followed by commercial loans and some income-producing CRE. Construction loans also increased but were mostly offset by successful completed projects. We would also like to note our $2 billion in unfunded commitments at quarter end and our total risk-based capital of 16.15% gives us a lot of room to continue to grow the loan portfolio.

Our other lending teams also did well in 2021. The FHA team ended the year strong with the fourth quarter that resulted in trade premiums, origination fees and mortgage servicing rights income of $2.5 million. For the year, the total was $5.6 million. The mortgage team had its second best year as it would be difficult to top 2020. Locked loans for the fourth quarter were $163 million, giving the mortgage team a total of almost $1 billion for the year.

For our shareholders, our earnings contributed to increasing both book and tangible values. Book value rose to $42.28 per share, up 8.3% from a year ago, and tangible book value rose to $38.97 per share, up 9% from a year ago. We also increased the quarterly dividend 3x, moving from $0.22 per share in the fourth quarter of 2020 to $0.40 per share in the third and fourth quarters of 2021. Based on last night's closing stock price of $6.77 per share and a quarterly dividend of $0.40 per share, our annualized dividend yield is 2.6%.

In regards to our stock repurchase plan, for the year, we repurchased just over 13,000 shares at an average price of $51.78 per share. Additionally, in December, the Board adopted a new 2022 share repurchase plan for 1.6 million shares or approximately 5% of outstanding shares.

On the ground, our market continues to be robust as spending from the government, government contracting and the consumer remain strong, and construction on new projects move forward. And based on government data, the unemployment picture continues to improve. The unemployment rate in the Washington area fell from 4.9% when we reported in August to 3.5% in November. And for the same period, the U.S. unemployment rate fell from 5.2% to 4.2%. This drop in unemployment, in particular, the drop in the local rate, was a factor in the release of reserves. Also, the impact of omicron appears to be passing as cases in our area have peaked with new cases down 30% this week.

With respect to our litigation and investigations, our dialogues with the SEC and the Federal Reserve are ongoing, and we cooperate with these investigations, and we continue to make progress towards the resolution of all disclosed matters.

With that, I would like to turn the speaking duties over to Jan Williams, our Chief Credit Officer.

Thank you, Susan, and good morning, everyone. Credit continues to improve to levels we have not seen since before the pandemic. With the ACL reversal of $6.4 million on loans and loan growth, ex-PPP, of $231 million, our ACL to loans moved from 1.21% last quarter to 1.06% this past quarter. Comparatively, pre-COVID and pre-CECL in the fourth quarter of 2019, our reserves were 97 basis points.

NPAs, as Susan mentioned, were 26 basis points on assets. Total NPAs were $29.2 million, of which about 57% were CRE and 29% were commercial credits. The remaining [NPPs] were smaller, PPP, SBA and residential loans.

Net charge-offs in the fourth quarter totaled $1.2 million. There were 8 loans charged off or partially charged off, the largest of which was a C&I loan for approximately $550,000. Total charge-offs for 2021 were $13.3 million and were well below 2020, which came in at $20.1 million.

In terms of risk classifications, during the quarter, the past portion of the portfolio increased while watch, special mention and classified credits were down. In particular, a number of loans that were placed on watch because of a second COVID modification were upgrading after continuing to show sustained performance at the end of their modification period. Even with our lower ACL, our coverage ratio of nonperforming loans is 257%. While this is down from 265% the prior quarter, this quarter, like last quarter, is well above the 151% to 202% range where it's been for the prior 7 quarters. It's also worth noting that we booked a $1.1 million gain on the sale of our largest OREO property, and the number of properties remaining in OREO fell to 3 with a carrying value in the aggregate of $1.6 million.

In regards to the reversal of $6.4 million from the allowance for credit losses, as we modeled the allowance, we determined that it was appropriate to begin transitioning away from the crisis-level loss given default metrics we've been using since the beginning of the pandemic to a more normalized long-term average loss given default. Additionally, there is continuing improvement in the unemployment and economic forecast. The actual loss rates experienced by the bank in 2021 were significantly below 2020 levels, and we considered a number of qualitative and environmental factors, including, among other things, the remaining potential risk to the hospitality and restaurant industries.

With that, I'd like to turn it over to Charles Levingston, our Chief Financial Officer.

Thanks, Jan. For the quarter, net income was $41.6 million, which is down $2 million from the prior quarter, and assets rose to $11.8 billion, up $262 million. In regards to earnings, the primary differences on a linked-quarter basis were net interest income was down $859,000. Interest income included a drop of $1.7 million attributable to lower PPP fee income as much of the remaining PPP forgiveness occurred in the third quarter, which ended up with PPP loans of $67 million. The fourth quarter ended with PPP loans of $51 million, down just $16 million. Additionally, more than half of the loan increase was recorded in December, so it had little impact on interest income in the fourth quarter.

Noninterest expenses were up $2.9 million. Compensation and benefits were up $2.5 million as a result of higher incentive bonus accruals based on the company's performance and increases in share-based compensation. Professional fees were up $966,000, and these increases were partially offset by a decline of $1.2 million in FDIC assessment expenses.

Noninterest income, excluding security gains, was up $2.9 million. As Susan mentioned earlier, gain on sale of residential mortgage loans fell, but the difference was more than made up by our FHA group, which had a good fourth quarter and a $1.1 million gain on OREO sale. The other items impacting the earnings on a linked-quarter basis were much smaller, all under $1 million. This included a smaller net reversal from the provision and a smaller gain on securities.

On the balance sheet, the biggest changes you'll see since from the prior quarter end are the increases in loans, which Susan covered, and our effort to put more cash -- and to put more of our cash to use in the investment portfolio. On a linked-quarter basis, loans increased by $214 million, $231 million, if excluding PPP loans. Investment securities rose $836 million, while cash held at the fed fell $771 million. More than half of the purchases were in December, and most of the activity was to add agency and pass-through mortgage-backed securities as well as some corporates and munis.

On the other side of the balance sheet, deposits continue to flow into the bank as deposits rose $313 million. Most of the inflows were noninterest-bearing, which rose by $442 million on a linked-quarter basis. A measure I'd like to look at is the average noninterest-bearing deposits to average deposits which were 36.3% this past quarter, up from 33.9% in the prior quarter.

For net interest margin, we were down 18 basis points to 2.55% on a linked-quarter basis. The deployment of cash into securities had a positive impact but occurred late in the quarter. Also on a linked-quarter basis, yields on loans, adjusted for PPP interest and fees, were down 8 basis points from 4.54% to 4.46%.

Looking at our cost of funds, the fourth quarter was down 9 basis points to 26 basis points. Part of the favorable decline in cost was the absence of any interest -- or expense from the sub-debt issuance that was redeemed earlier in the year. This is our first quarter without any of that issuance included. The runoff of higher-priced CDs played a minor role this quarter. There are still some higher-rate CDs on the books, but the maturities are mid-2022 or later.

Lastly, in terms of rate sensitivity, we remain asset sensitive and should benefit from rising rates as loans come off the floor or reprice, and a large percentage of our deposits are noninterest-bearing.

With that, I'll hand it back to Susan for a short wrap-up. Susan?

Thanks, Charles. As we wrap up our commentary, I would like to thank all of our employees for all their hard work and their commitment to support our clients during the pandemic's second year, and we remain committed to a culture of respect, diversity and inclusion in both the workplace and the communities we serve.

Lastly, we are encouraged to have momentum going into 2022, and we feel good about the company and our position in a very competitive, strong and dynamic market. We will now open up for questions.

(Operator Instructions) Our first question comes from Casey Whitman with Piper Sandler.

Just maybe we'll start off with expenses. So just looking at the growth this quarter, particularly in the salaries and benefits line, what do you think is a reasonable expectation for where that line might run in 2022? I think it's at around $25 million right now in the fourth quarter. Can we assume that we get some of that back in the first quarter? Or is this a pretty good run rate for that line?

Yes. I mean, I'd say, Casey, we did have an extraordinary year. In 2021, some of that is reflected in that incentive -- annual incentive accrual. I wouldn't necessarily expect the same kind of year next year in terms of the reversals that we were able to take in, particularly from the allowance. So I don't know that we see that same kind of heavy incentives associated with the following year.

Okay. Is there maybe a long-term sort of efficiency ratio you guys are targeting that we can work with?

I think where we've been operating for the past couple of years around that 40% number is a place where we were hoping to continue to play.

Okay. And what about the FDIC expenses, do you think they continue to run as low as they were in the first -- fourth quarter?

Yes. We noted in the press release that our calculation for the large bank assessment came out to, in the fourth quarter, about 1/3 of what we previously had in terms of expenses. So that's where I anticipate things continuing.

Okay. Understood. Maybe just one more for me on capital. Assuming you can keep putting up some robust growth and looking at the current stock price, do we have a big appetite for buybacks here? Or what would it take for you guys to become more aggressive there?

Yes. I think we're going to continue to evaluate our options on a quarter-by-quarter, day-by-day basis as we continue to contemplate our -- where we're -- how we want to play with that. Yes. So it's -- I think it is just going to be kind of a day-by-day thing.

Our next question comes from Catherine Mealor with KBW.

I wanted to talk about asset sensitivity that you mentioned, Charles. Just if you can just maybe first start on the loan side. I looked in your last quarter's 10-Q, and it looks like about 58% of your loans are variable. Can you talk about how much of that reprices immediately and how much of that may lag?

And then my second part of that question is kind of within loan yields, where were new loan yields coming on this quarter? So how should we think about the offset of that with the portfolio still repricing downward until we get to a bottom?

Sure thing, Catherine. Yes. So as I look at interest rate risk and our asset sensitivity position as we evaluate that 100 basis point, plus shock, over a 12-month period, we're seeing a positive net interest income impact of just under 5%. So that's kind of the end of the story there.

We've got -- in terms of LIBOR-based, SOFR-based, prime-based loans, of the total, you're still around -- just around 50% or so of the total portfolio that would be impacted there. Total adjustable and variable rate loans are still right around that prior quarter number, 56% to 58%, somewhere around there.

And then in terms of where new loans are coming on, we did have a very large quarter this quarter in terms of loans booked. Yields on the new volume were in the neighborhood of 3.75% or so. So that's where we're currently booking loans as of the fourth quarter, and many of those are floating rate.

Okay. And again, on the 58% variable, how much -- do floors impact there very much? Or will you see most of that reprice immediately with the first rate hike?

Yes. So in terms of floor repricing, if -- as we move up 25, 50 basis points, it's -- about $0.5 billion or so would reprice there. We probably add another $650 million or so with another 50 basis points above that, so it's about $2.8 billion with floors.

Got it. Okay. Great. And then as you look at your deposit composition, I mean, you've got to believe that your deposit betas will be lower in this cycle than they were last, just because when you've got so much liquidity into perhaps you could argue you weren't growing as fast as you were. Last cycle business quarter's growth was really good. And so how do you -- I guess maybe within your ALCO modeling, maybe first, how do you think about deposit betas within that and then maybe also more realistically because I think sometimes there's a difference between -- with an ALCO modeling and then what you think will actually happen in reality.

No, that's a great point. I mean, we've currently got the model set at 0.5 beta for upgrades. But do we think that's going to be the actual experience? I think there's a good chance, particularly, as you point out, with the continued deposit growth, it might be shy of that. So to the extent that our beta -- our actual experience of beta is lower, that only inures to the benefit of greater asset sensitivity.

Great. Okay. And my last NIM question, then I'll stop, I'm harassing you, Charles, is just on the cash. You have so much cash on your balance sheet. So what kind of strategy should we expect for how quickly you'll deploy that into securities and loan?

Yes. Obviously, our first choice is loans. We want to put it out there in loans. That's why we're here. But yes, absent that, I would expect it will continue a healthy clip in terms of deployment to the investment portfolio. It's kind of enough sitting on the sidelines, particularly, again, as our cash position grows. And as we model it out and look at the math of steady rate hikes over a couple of years, it's better to get in the game now than it is to wait and have those cash balances just earning fed funds overnight -- interest on overnight reserves, so -- on excess reserves.

Our next question comes from Brody Preston with Stephens Inc.

I guess I just wanted to start back on the loan growth. It was nice to see you guys return to solid levels of core growth here, excluding PPP, this quarter. And so I guess I wanted to ask, as we think about the go-forward run rate of Eagle, historically, you all have been a pretty strong grower. But just thinking about pipelines currently, maybe new -- any new producers that you've hired and the strength of the D.C. economy, where do you -- where would you expect loan growth to kind of shake out on a normalized basis going forward?

Well, I think it's difficult to predict with any degree of certainty at this point, but I do think the local economy has been particularly strong. Unemployment here is significantly lower than it is on a national basis. I think we're well poised to have an economy that continues to grow and probably roar through the next couple of years.

In terms of where we are with demand for loans in the area, I think that's going to depend, to some extent, on what happens with interest rates and whether we see a drop in refinancing on fixed rate things. Because of rate shifts, that will take with it perhaps the opportunity to refi out some other banks. I do think that we'll see line usage start to increase as the economy grows, so I'm feeling that we have a good opportunity here.

Good pipeline.

Charles, do you have anything you want to add to that?

No. We -- the pipeline that we have remains strong where we saw unfunded commitments continue to remain pretty close to our quarterly averages over a period of time, about $2 billion. So yes, we expect that we'll continue to have healthy growth.

Our lending teams are pretty optimistic going into 2022.

Got it. Got it. And then maybe just on the securities portfolio, Charles, obviously, you guys put a decent slug of liquidity to work there, but deposit growth has remained strong for you all and for the industry. And so as I think about securities growth going forward, I wouldn't expect like a 46% linked-quarter increase next quarter, anything. But how do we think about the pace of it? And then also, if you happen to have with the duration of the securities portfolio, I'd appreciate it.

Yes. The duration, just a quick hit there, were -- effective durations, right around 4 years. Yes, this is another area we'll just continue to have to evaluate kind of week by week, month by month. But -- because, obviously, we need to continue to bank our customers. And as such, we saw some healthy deposit growth in the fourth quarter. The -- kind of your guess is as good as buying whether or not there -- those customers find use for those dollars and continue to draw some of that recent growth out. I think we stopped calling the QE effort a surge -- liquidity surge several quarters ago, so we know that there's some base there to be maintained. But yes, as I mentioned earlier, I think that all things equal, we continue at a pretty healthy clip of deploying some of that cash into the investment portfolio. Loan portfolio comes first. We want to make sure that we've got the cash for that as well. But with a growing investment portfolio, it's kicking off a lot of cash for use also month after month. So it really is just going to be the balancing act, so yes.

Understood. And do you know what percent, if any, of the securities portfolio is floating rate, Charles?

I don't have that off hand, but I can get back on that. It's going to be relatively small, right? I mean, it's -- there's not a lot of variable rate paper in there.

Okay. I'll follow up off-line on that. And I guess the last one that I wanted to ask, just on the legal expense front, that looked like it ticked up again quarter-over-quarter. So I just wanted to ask, was there anything specific that drove that? And then I noticed that in the release, you guys didn't put anything in about the legal proceedings. And so are those behind us now? Or is it -- or are those still ongoing?

The legal proceedings are -- we've moved forward with them. The shareholder derivative action we settled on October 4. Our class action settlement is on track, and we have a federal district court hearing today, later in the day on that. And as far as the SEC and the Federal Reserve, we continue to make progress towards resolution on that.

Brody, I thought I'd answer your former question as well. I think we're looking at about 3% of the total portfolio as floating rate.

And our next question comes from Eric Zwick with Boenning and Scattergood.

Wanted to first just start kind of circling back on, I guess, the net interest margin a little bit. You've given some good color there to some of the moving pieces. And as I think about it, the fourth quarter margin at 2.55%, it didn't reflect the new loans that are on the balance sheet that reflect maybe some of the securities. Just trying to think from this point, absent any fed funds rate increases, have we potentially seen the bottom here in the margin? Can it grow at the core, just given what you're expecting for loan growth and the new loans that were added in 4Q as well? Is that a good way to think about it? Or is there something else to consider at this point?

Yes. I mean, right now, I think I'm pointing to a lot of the cash build because, you're right, you didn't see the impact of some of the new loans as they were booked later in the quarter. And even the investment portfolio, a lot of that -- those purchases were done during the quarter. But the cash build and the mix of earning assets has certainly had a downward effect. That's really kind of the -- one of the bigger question marks in terms of the NIM impact, I think, that we would experience.

But as I mentioned, you've got where the loans are coming on these days. And yes, there's still some cost saves on the cost of funds, believe it or not, as I mentioned, with some higher-cost maturing CDs coming off. But there's not much more to go on that front. There's some, and I think there likely would be a little downdrift on loan yields if the current prevailing rates continue.

But you got a countervailing impact of potential rate increases next -- this coming year, I've heard, and looked at the trading probabilities suggest anywhere from 4, maybe even 5 rate hikes in a year. So you got to kind of mix all that together and make your best guess. Yes, I don't know if I helped or hurt there, but there's some color.

No, I definitely appreciate the additional color there. That was helpful. And one last one, probably again for you, Charles. Any outlook for the effective tax rate in '22?

Yes. I mean I think we end up pretty close to where we were for the full year 2021 in that 25% range, plus or minus, with a -- that's barring any actions from -- which, at this point, appears somewhat unlikely from our legislative bodies.

And I'm not showing any further questions at this time. I would now like to turn the call back over to Susan Riel for any closing remarks.

We appreciate your questions and for all of you taking the time today to be with us on this call. We hope that your 2022 is off to a good start, and we look forward to speaking to you again in a few months. Have a great day.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.