Eagle Bancorp Inc (EGBN) 2022 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Eagle Bancorp Second Quarter 2022 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

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

Thank you, Carmen. Good morning. This is Charles Levingston, Chief Financial Officer of Eagle Bancorp. Before we begin the presentation, I would like to remind everyone that some of the comments made during this call may be considered forward-looking statements. While our loan growth and performance over this past quarter have been positive, we cannot make any promises about future performance, and it is our policy not to establish with the markets any formal guidance with respect to our earnings. None of the forward-looking statements made during this call should be interpreted as our providing formal guidance.

Our Form 10-K for the 2021 fiscal year and current reports on Form 8-K identify certain risk factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made this morning. Eagle 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 Janice Williams, our Chief Credit Officer, will discuss her thoughts on the local economy, 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, everyone. I am pleased to report the bank had another successful quarter demonstrating both our determination to continue moving forward and the strength and resilience of our operating model. Since the bank was founded, our operating model focus has been on efficiency, credit quality, and a relationships-first culture, all of which helped us become a leader in the greater Washington, D.C. market. These areas of focus also helped us be successful through numerous economic ups and down. In fact, it is our deep client connections and strong balance sheet that creates opportunity and value for our customers.

In the second quarter, there are a few highlights I'd like to review and comment on. First off, we are pleased to have reached an agreement in principle with the SEC. While this negatively impacted our earnings this past quarter, it represents a major step for us moving past the legal issue. With that said, earnings were USD 0.78 per diluted share. Absent the agreement in principle with the SEC, earnings were USD 1.20 per diluted.

Moreover, as discussed in the earnings release, we are in advanced discussions with the Federal Reserve Board to settle their investigation of the bank. We are unable to predict the timing of any outcome of the investigation, but assuming we are able to reach an agreement with the Fed or we determine we have a probable losses that are reasonably estimable prior to the filing of our upcoming 10-Q, we will reflect the necessary adjustments to the applicable second quarter financials in our 10-Q disclosure.

Other good news for the quarter included an increase in loans, improved credit quality metrics, and a better mix of deposits. Loans increased by USD 41 million from the prior quarter end, and excluding PPP loan, the increase was USD 68 million. This was the third consecutive quarterly increase. This quarter's loan growth was primarily driven by our CRE team, which had another solid quarter. At the same time, our credit quality metrics remained strong. Nonperforming assets were 19 basis points on assets at quarter end, and we had a net recovery for the quarter of USD 674,000. Exceptionally strong credit risk management has been a hallmark of Eagle since our founding, and it will continue to be a focus going forward.

In terms of funding, our funding mix improved as average noninterest bearing deposits increased to 37.9% of average deposits. Additionally, our CRE and C&I teams their pipelines remained strong as the lending teams continued to be active in their calling efforts. And beyond our pipeline, unfunded commitments were USD 2.3 billion at quarter end, up USD 251 million from the prior quarter end.

We are also proud of our community -- our commitment to the communities we operate in and have also had success in providing much needed financing for affordable housing. In April, we announced financing of a USD 54 million project to support affordable transit-adjacent apartments in partnership with Prince George's County and the Washington Metropolitan Area Transit Authority. This is also the first new construction project to benefit from Amazon Housing Equity Fund.

In June, we announced 2 financings, a USD 48 million project for the Montgomery County Housing Opportunities Commission and a USD 25 million project in the Columbia Heights neighborhood of D.C. As more opportunities arise, our total risk-based capital of 15.81% gives us ample room to continue to prudently grow the loan portfolio.

And for our shareholders, we remain focused on increasing value and returning cash dividends. At the end of the quarter, our Board declared a dividend of USD 0.45 per share. This is a USD 0.05 increase over the prior quarter dividend. This equates to an annualized dividend yield of 3.7% based on last night's closing stock price of USD 49.05 per share.

Before turning it over to Jan, I'd like to say that our Diversity, Equity & Inclusion Council continues to make progress. We recently launched a mentorship program, a scholarship program, and 2 employee resource groups. Our women's group launched earlier this year and our Black Employees Network launched earlier this month. We believe participation in these groups will be personally and professionally rewarding and give the employees participating in these groups our full support.

Now Jan Williams, our Chief Credit Officer, will give us some insight into the market, loans, and credit quality.

Thank you, Susan, and good morning, everyone. While the rate environment is changing, our Washington D.C. market continues to show relative strength. Not surprisingly, unemployment in the Washington Metropolitan Statistical Area remained low at 3.3% in May, a little better than the nationwide figure of 3.6% in June. Spending from the government, government contractors, and consumers continues to remain a strong part of the local economy. Construction projects are being completed and new projects are moving forward.

Where we do see some softening is in the office market in the central business district on the commercial real estate side, and on the C&I side, in mergers and acquisitions and delays in capital expenditures by C&I borrowers. The commercial and industrial softening has more to do with clients delaying financing decisions to see how economic conditions play out rather than any deterioration in their own financial position.

With that background, our credit quality metrics continue to hold steady and improve. Our allowance for credit losses to loans at the end of the quarter was 1.02%, up slightly from 1.01% last quarter. Nonperforming assets, as Susan mentioned, were 19 basis points on assets. Total NPAs were USD 20.3 million, down USD 5.1 million from the prior quarter, primarily on the sale of several notes from 1 commercial real estate. Relationship and 1 OREO sale which generated a small gain. This improvement in credit has driven our coverage ratio of nonperforming loans to 386%, up from 301% in the prior quarter. And we have a net recovery of USD 674,000 for the quarter, with gross recoveries of USD 2.1 million, which were primarily from 2 partially charged off high-end, single-family residential construction loans, and charge offs of USD 1.4 million, which were mostly the result of 1 commercial real estate relationship.

Also, our loans 30 to 89 days past due fell to USD 3.9 million, down from USD 13 million in the prior quarter. In terms of risk classifications, during the quarter, the [past] portion of the portfolio increased, while criticized and classified credits were down. With regards to the provision of USD 495,000 to the allowance for credit losses, no changes were made this quarter to our loss given default rate as the abatement of pandemic issues have generally been offset with headwinds from higher interest rates and the potential for recession. We did make adjustments to the qualitative and environmental components of the seasonal model, in particular adjustments for higher inflation and the related uncertainty in the broader economy.

Partially offsetting these adjustments were adjustments for improvements in asset quality, particularly the release of specific reserves associated with the commercial real estate relationship where the notes were sold during the quarter. We also maintained previously added adjustment for loans in the accommodation and foodservice industry and for office properties in the Washington D.C. central business district.

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

Thank you, Jan. First, I'd like to comment on some changes in the income statement from the prior quarter. Net interest income was up USD 2.5 million with the increase driven by interest income, which was up USD 7.3 million on higher average loan balances, increasing yields on adjustable rate loans and higher rates on new loans. Interest expense was up USD 4.8 million, primarily on higher deposit rates, paid on savings and money market accounts. Our deposit rates were raised after the FOMC announcement in the second quarter. The impact of the deposit rate increase was partially offset by deposit outflows from these same accounts.

Overall, the increase in deposit rates is reduced -- overall the increase in deposit rates and reduced excess liquidity from deposit outflows helps increase net interest margin to 2.94%, up 29 basis points from the prior quarter. The average loan yield for the quarter was 4.51%, up 16 basis points. But the average yield on interest earning balances, which includes securities as well as the impact of reduction in excess liquidity was 3.39%, up 48 basis points. On the other side of the balance sheet, the cost of funds was 45 basis points, up 19 basis points.

In terms of [interest] rate sensitivity 58%, or USD 4.1 billion of our loans, are variable rate loans. And at quarter end, we had USD 1 billion of variable rate loans still at their floors. With the rate hike of 75 basis points that already occurred in June, USD 619 million of the USD 1 billion will come off the floor when these loans hit their pricing date. With another 75 basis points, we would see another USD 259 million of loans move off their floor.

Looking at the provision for credit losses, we had a small provision of USD 495,000, in contrast to the 5 consecutive quarters of reversals. As Jan mentioned, this was largely driven by uncertainty in the overall economy, as our credit metrics improved again this quarter. Noninterest income was down again this quarter, as rising rates impacted several revenue streams. Most notably, loan fees were down as fewer fees were collected and mortgage volume was down as higher rates reduced consumer interest in refinancing or purchasing a home.

The most notable difference between this past quarter and the prior quarter was in noninterest expense. The agreement in principle with the SEC added a onetime accrual of USD 13.4 million to this past quarter, and in the prior quarter, salaries and benefits included a onetime accrual reduction of USD 5 million. Both of these items had no associated tax or tax benefit. These 2 one-time items in aggregate represent a swing of USD 18.5 million. This accounted for the majority of the decline in earnings of USD 20.5 million. Another contributing factor was the move from a reversal of the provision for credit losses to a small provision. This was a pretax swing of USD 3.3 million.

On the balance sheet, assets declined from the prior quarter end by USD 291 million. The decline in assets was largely driven by a reduction in excess liquidity as short-term funds declined by USD 314 million. These loans, along with the new short-term borrowings of USD 130 million, were used to fund deposit outflows of USD 415 million. As I mentioned earlier, the deposit outflows were primarily from savings and money market accounts. This outflow improved our funding mix as noninterest bearing deposits to average deposits rose to 37.9% this past quarter, up from 36.1% the prior quarter. This outflow also improved our loan to deposit ratio to 78%, up from 74% the prior quarter.

Other notable changes on the balance sheet from the prior quarter were loans being up USD 14.9 million, or USD 67.6 million excluding PPP loans, and securities being down USD 30.1 million. The reduction in securities balances was primarily driven by lower carrying values on available-for-sale securities as interest rates continued to rise during the quarter. The markdown of available-for-sale securities also drove the quarter-over-quarter reduction in equity. Equity at quarter end was down USD 17.3 million. Essentially, this is the USD 30.1 million markdown on available-for-sale securities, offset by earnings of USD 25.2 million, less the USD 14.5 million in dividends [declared]. Capital ratios at quarter end remained strong. Those ratios, based on risk-weighted assets, declined slightly as risk-weighted loan balances increased and those ratios based on assets increased slightly as some excess liquidity ran off.

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

Thanks, Charles. As we wrap up our commentary, I'd like to reiterate how our focus on conservative credit has served us well through many credit cycles, and it is our strong relationship-first culture with our customers that allows us to provide superior service and to maintain our leadership position in the community. Lastly, as always, I would like to thank all of our employees for all their hard work, and all of us at Eagle remain committed to a culture of respect, diversity, and inclusion in both the workplace and the communities we serve.

With that, we will now open it up for questions.

(Operator Instructions) We have a question from Catherine Mealor with KBW.

I'm just going to start with the margin and maybe, Charles, is you could -- could you talk to us about where you saw deposit costs perhaps in the back half of this quarter, maybe June or July, just to give us a sense as to where these are going on next quarter.

Sure thing. Yes, I think what we saw in terms of the move on deposits in -- certainly in the back half of the quarter, we chose to increase rates as we saw the FOMC make their move, really thinking it's prudent to continue to be proactive and maintaining our depositors. Our top money market rate right now does sit at about 125 basis points. And I would anticipate that as rates move, we'll be making moves commensurate with what we've done here recently.

Okay. And then how about on just deposit balances, is there anything this quarter that you felt was maybe kind of one-off, or do you expect you expect to continue to see deposit outflows in the back half of the year?

No. I would like to think not necessarily, with the caveat that deposit competition could have more to say about that as rates move up and we go forward. But I think what we saw happen here in the second quarter was a result of some swift moves up in rate and some disintermediation as it relates to what were previously lower-cost deposits shaking out of the balance sheet. And at this point, we're focused on maintaining our customers, and pretty happy with noninterest-bearing deposits reaching almost 38% on an average basis for the quarter. So that's certainly a positive element in supporting our cost of funds.

Okay. So your view for the back half of the year is that the balance sheet is kind of flat to actually grows as long as you can grow deposits? Or do you expect some of [the severity] to come off?

Hard to say what the future might hold. But at this point, yes, I don't see any catalysts necessarily glaring for any significant deposit outflows like we saw in the second quarter.

Okay. Great. And then it's been great to see the dividend increases continue, but any reason why we're not more active in the buyback? And when do you think that may be something that you pull into your capital plan?

Yes. We're evaluating our options as it relates to capital every quarter. This quarter, we determined that an increase in the dividend rate by USD 0.05 was prudent, and we'll continue to evaluate that as we move forward.

Okay. I'll step out and jump back in if there are any other questions.

We have a question from Christopher Marinac from Janney Montgomery Scott.

I wanted to ask about your lending team, any additions that you had on the production side or any turnover that has occurred there year-to-date?

Well, we have had turnover earlier in the year, but that's leveled out, and we haven't seen it recently. I think the second quarter was pretty strong in terms of maintaining our lending group intact. We've seen -- and that's not unusual. I think a lot of lenders make their move after bonus time in the first quarter. I think that we have been successful in bringing in some new lenders from larger banks. We do have a very strong team concept here and our market executives have been very consistent. We have good presence in pretty much Northern Virginia, D.C., and Maryland, and there's continuity in those relationships that we're feeling pretty strong.

The only thing I would like to add is human capital continues to be a concern throughout the bank, for us and for many, with what's going on in our industry.

I appreciate it. And Jan, just as a general credit question. Do you see the early indicators of any change and just potential shifts in special mention or other credit indicators? Just curious how that could play out in the next 2 to 3 quarters?

We really haven't. Our credit quality has continued to improve and we're actually down in criticized assets and classified assets. Our past dues have never been better. It's ironic that there's the headwind from a potential recession, but we have seen no evidence of that in our loan book at this point.

Great. And just one more related question. LTVs on the real estate book, are they generally lower than they would have been going back to the past cycle? I just kind of want a reminder of how you think about LTVs.

The average loan to value in the real estate portfolio is 64%. So that doesn't mean we don't do 75% loan-to-value loans from time to time. It doesn't mean we don't have owner occupied that go up to 80%. But we are very comfortable with where we are on average throughout the portfolio, and we keep a very close watch on, in particular, where we are with office.

Next, Catherine Mealor from KBW.

I had one follow-up on the margin conversation on loan yields. Charles, could you guys talk about what you're seeing in loan pricing and also maybe if you have any indication on where loan yields were kind of at the end of the quarter?

Well, certainly, new volumes are coming on, I'd say, right around 470, 475 basis points or so. And I expect, obviously, the markets are anticipating another 75 basis point move. I believe that's where the money is later this month when the FOMC meets. So I would expect that to continue to benefit. We are still asset sensitive, 100 basis point shock on a [static] balance sheet over 12 months results in about an additional USD 2.8 million -- 2.8% rather, I would say, in additional net interest income. And that's, again, us modeling at a 70 beta on the deposits. So I would anticipate additional positive impact as a result of those moves.

And with that, I'll pass the call back to our CEO, Susan Riel, for her final comments.

I just want to say that we appreciate the time you've taken to be with us today and the questions you've been asking. We hope that you are enjoying the summer and look forward to speaking to you again in the fall. Thank you.

Thank you. And with that, ladies and gentlemen, we conclude our program. You may now disconnect. Have a wonderful day.