Eagle Bancorp Q2 2023 Earnings Call Transcript

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July 27, 2023

There are 7 speakers on the call.

Operator

Welcome to

Speaker 1

the Eagle Bancorp Second Quarter 2023 Earnings Conference Call.

Operator

At this time, all participants are in

Speaker 1

a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Charles Levingston, Chief Financial Officer. Please go ahead.

Speaker 2

Thank you, Latonya. Good morning. This is Charles Leveton, 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. 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.

Speaker 2

None of the forward looking statements made during this call should be interpreted as providing formal guidance. Our Form 10 ks for the 2022 fiscal year 10 Q on 31, 2023 and current reports on Form 8 ks 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.

Speaker 2

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. 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 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.

Speaker 2

I would now like to turn it over to our President and CEO, Susan Riehl.

Operator

Thank you, Charles. Good morning, everyone. I am pleased that our 2nd quarter performance improved from the prior quarter 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 mix by increasing deposits to reduce borrowings, maintained our high level of capitalization and kept our asset quality metrics strong. Additionally, we continued to pay out our dividend and repurchase shares.

Operator

Based on last night's closing stock price, Our current annualized dividend yield was 6.47 percent. And during the quarter, we repurchased 1 point 2,000,000 shares of our common stock at an average price equivalent to 67% of tangible value. On a combined basis, we returned capital of $42,900,000 to our shareholders in the Q2 of the year. In regards to earnings, we are actively pursuing opportunities for continuous improvement. One way we are seeking to increase earnings is by taking steps to reduce expenses.

Operator

In the first half of the year, We ceased originating residential mortgages and closed 3 branches. Earlier this month, we also made decision to enact a reduction in force and identified 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 of Eagle and have served us well during times of economic turmoil. While loans grew for a 7th consecutive quarter, The increase was modest as we continue to focus on maintaining our risk adjusted returns in an environment with high funding costs The deposits and borrowings.

Operator

Our team continues to be highly focused on deposit costs 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 restructure their deposits. In regards to asset quality metrics, asset quality remains a strength. And while some metrics increase, They remain near historically low levels. Jan will discuss this next.

Operator

With that, I'll hand it over to Jan.

Speaker 3

Thank you, Susan, and good morning, everyone. The Washington, D. C. Market area continues to be a source of strength to the bank. The unemployment rate in the Washington Metropolitan Statistical Area in December 2019.

Speaker 3

This gives us even more separation from the nationwide figure of 3.6% in June, which was up slightly and aligns more with the historical long term difference relative to the national unemployment rate. This strength in the Washington area market can be seen in our asset quality metrics and our provision to the ACL. NPAs were 28 basis points to total assets. While this is an increase over last quarter, total NPAs were 30 point $7,000,000 on a portfolio of $7,800,000,000 The increase was primarily from 1 commercial office note in Northern Virginia, of which a portion was charged off during the Q2. There was one other notable charge off located outside Washington D.

Speaker 3

C. Area in Baltimore, an office property, bringing the total net charge off for the quarter to 5,600,000 Loans 30 to 89 days past due were $41,400,000 up from $15,700,000 at the end of the prior quarter. The current quarter past due is largely from 1 multifamily credit for $39,500,000 For the Q2, we had an ACL provision of $5,200,000 which was somewhat lower than the provision last quarter. This combined with a relatively small increase in loans and the 2 charge offs moved our ACL to loans atquarterend down 1 basis point to 1%. Our coverage ratio is 2.7 times nonperforming loans.

Speaker 3

With regard to the lower ACL 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 Q and E portion of the credit model. Driven by a higher allowance for CRE office properties, partially offset by a lower allowance for accommodations and food service loans. Suboptimal return to work participation continues to limit increases in office occupancy. However, Both the federal government and Amazon HQ2 have announced plans to increase their in office presence in the fall.

Speaker 3

This quarter, we're providing some additional geographic detail on CRE office loans secured by non owner occupied commercial real estate loans. These credits were 12.6% of the total portfolio as of June 30. We did not have any outstanding office construction loans at the end of the second quarter. Office properties are primarily located in D. C.

Speaker 3

Market with 24.1 percent in D. C, 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 maturities to better understand the headwinds that could be facing these properties and work collaboratively with those borrowers to maximize returns to both the 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 pipeline as other loans run off.

Speaker 3

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

Speaker 2

Thank you, Jan. This was a good quarter in that the broader market and deposit volatility we experienced back in March has faded And we were able to improve our funding mix. 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 preference is for organic growth, Our ability to term out deposit funding is a plus.

Speaker 2

Additionally, we took the opportunity to use these deposits to reduce borrowings and approved the rate and maturity mix. To do this, we paid down FHLB borrowings by 7.70 And drew on additional BTFP borrowings for $500,000,000 This resulted in a net reduction in short term borrowings of $277,000,000 The reason for the swap in borrowings is the BTFP had a 1 year term and a rate that was more attractive. The blended rate on our BTFP is now 4.53% versus the FHLB of 5.34% as of June 30, 2023 for shorter term funding. The broker deposits we added had terms of approximately 1.5 years at 4.84%. We also did see a decrease in average non interest bearing deposits.

Speaker 2

At quarter end, Average non interest bearing deposits were 30% of deposits, down from 37% in the prior quarter. On the plus side, Our loan to deposit ratio came down to 101% and uninsured deposits were down to 29.4%. As it relates to the income statement, net interest income was down $3,200,000 and the net interest margin The Q2 of 2023 was 2.49 percent, down 28 basis points. The decreases were a result of the continued movement from non interest bearing deposits to time deposits and overall higher funding costs. As we mentioned last quarter, there is a lag in interest income from loans.

Speaker 2

As the Fed slows the pace of rate increases, The benefit from the variable rate loans resetting and from new loans at market rates will have more of an impact. Moving through the income statement, Our provisions for the ACL and unfunded commitments were reduced as Jan mentioned. Non interest income was a bright spot this quarter. We had income of $2,800,000 from an SBIC we invested in about 10 years ago. And at the end of the Q1, we entered into some swap agreements that generated additional fee income of $959,000 for the quarter.

Speaker 2

The SBIC income It's 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 that the Q1 contained some seasonal compensation and one time expenses. In regards to the expenses, we have 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.

Speaker 2

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. In the Q2, we closed 2 branches, 1 in D. C. And 1 in Northern Virginia. The annual pre tax cost savings in rental expenses was $408,000 And as the leases were expiring or near expiration, The associated unamortized costs included in the 2nd quarter was relatively low at $240,000 This reduces our banking footprint to 13 locations in the Washington D.

Speaker 2

C. Market supporting assets of $11,000,000,000 Early in the Q3, the company also implemented a reduction in force and a review of other non interest expense items that are expected to generate savings of $2,400,000 in the second half of twenty twenty three, plus an additional reduction of $5,800,000 in 20.24.

Operator

Let me pick up where Charles left off. On the bottom line, we have earned our net income up $4,500,000 and EPS of $0.16 Lastly, capital is a core strength of the company. Our tangible common equity ratio at quarter end was 10.21%, which was higher than all of our proxy peers last quarter. And we had an aggregate borrowing capacity through FHLB and BTFP of $1,840,000,000 This gives us the financial flexibility to provide the support and services our customers expect. Last week, Eagle 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.

Operator

In closing, I as well as our entire senior management team would 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.

Speaker 4

Certainly.

Operator

One moment for our first question.

Speaker 1

And our first question will come from Casey Whitman of Piper Sandler and Company. Your line is open.

Speaker 4

Hey, good morning, everyone. Thank you for the call. Jen, maybe we'll start off on credit. Can you walk us through the decision and what Kind of prompted you to put that one large office loan on non accrual. And maybe can you give us some of the underlying metrics like the LTV?

Speaker 4

Do you have reserves established against the relationship? And how large that charge off was you took on it? Thanks.

Speaker 3

The charge off was $3,500,000 We took the charge off because this was one of the Few, very few single tenant properties that we had in the portfolio. The tenant vacated. We had been sweeping income for the last 18 months as we worked through the process of considering re tenanting the property. And I think the Highest and best use of the property is really as residential land at this point. And We chose to have it reappraised with the highest and best use.

Speaker 3

The appraisal came in around $25,000,000 the outstanding loan was around $24,000,000 And we elected to go ahead and take a charge off of $3,500,000 We're carrying it at $20,500,000 but we also have Cash collateral of about $4,000,000 We expect this to go through the development process, but it will probably take 12 to 18 months to accomplish. So that's how we got there.

Speaker 4

Okay. Is this one of the largest In the office portfolio or can you sort of give us an idea of what the size of your top relationships would be in that book?

Speaker 3

It ranges all the way up to $60,000,000 few and far between at that level. The loans that I have maturing in the next 18 months total about $400,000,000 We're proactively reaching out to those borrowers. In the second quarter, we have I'm sorry, in the Q3 of this year, we have about $207,000,000 that we're addressing. Some of those Our maturity is based on short term extensions as we put into place agreements that we've worked out with The sponsors and that accounts for about 110 and Then we have the other 90 ish that we 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, Isn't there.

Speaker 3

So I would expect that we'll be dealing with extensions on a fair amount of the portfolio.

Speaker 4

Okay. Do you have the updated LTV for the whole book with you on you?

Speaker 3

56%.

Speaker 2

Okay.

Speaker 4

Thank you, Jan. Moving on, you guys are pretty active with your buyback this quarter. It looks like you might have exhausted your authorization. So can you speak To your appetite going forward of putting a new one place just given the stock is still under tangible book and you've got a lot of capital still?

Speaker 2

Yes. Sorry for my absence there. We at this point, you're correct. We did exhaust our 2023 program. At this point, we don't foresee at least at this point this year, The addition of any new program or repurchases at this point.

Speaker 4

Okay. I'll let someone else jump on. Thank you, guys.

Speaker 1

And one moment for our next question. And our next question will come from to Ferminaik of Janney Montgomery Scott. Your line is open.

Speaker 5

Hi, thanks. Good morning. Just wanted to ask Charles about kind of what you For the kind of terminal cost of funds, are we getting to where that might sort of stabilize in the 3rd quarter? And Also maybe part of that is kind of the mix of sort of your debt to total funding as you get there.

Speaker 2

Yes. I mean, from your lips to God's ears, right, we've got certainly this latest Increase in short term rates that the Fed enacted yesterday to respond to still, however, all of The brokered term deposits that we put on in the second quarter are all in the money at this point, right? So mercifully, those will be impacted additionally by rising rates. But again, competition is still pretty strong For deposits, we are going to be making rate adjustments in order to respond. It likely will not be as aggressive Necessarily as it has been in the past because I do think we're hitting the peak here.

Speaker 2

I think that's the conventional wisdom. So I would expect that there may be a little bit more lift there in cost of funds. However, I would also expect that we may be able to keep pace on the asset side. Hopefully, we're seeing a bottom here on the margin front.

Speaker 5

Got you. Thank you for that. And then Jan, just a question for you about kind of classified and criticized for the whole portfolio kind of outside of your Comments on the office side, what is happening there? And where do you think that may go in the next few quarters?

Speaker 3

Honestly, we have seen very little erosion in the entire portfolio, Not much on the C and I side at all, few small loans, dollars 100,000, dollars 200,000, dollars 300,000 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 day category, I'm not concerned about losses on that. There is a dispute amongst the partners, which is Precipitating the problem on the past due side. So in theory, it's possible that could end up as a nonperforming asset, but at this point, I don't believe that's what's going to happen.

Speaker 5

Got it. And then would the level of charge offs kind of revert back the next quarter or 2? Or should we kind of expect something similar?

Speaker 3

I am not anticipating that they will be at the level that they are right now or they were in the 2nd quarter. If I had felt that, we would have charged off more, I suspect. But 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.

Speaker 5

Great. Thank you all for taking the questions this morning. I appreciate it.

Speaker 2

Thanks, Chris.

Speaker 1

One moment for our next question. And our next question will come from Catherine Mealor of KBW. Your line is open, Catherine.

Speaker 6

Thanks. Good morning.

Speaker 2

Good morning.

Speaker 3

Good morning.

Speaker 2

And can

Speaker 6

you just walk us through just anecdotally what you're seeing when you're working through some of these office loan extensions? What are you typically seeing in appraised values kind of relative to maybe where you were when the one was originally Originated, are you seeing your borrowers putting in new equity? Just kind of give us a flavor for what that process has looked like and what you may expect as you look at this next $110,000,000 over the next quarter.

Speaker 3

Well, Kevin, I would say that each property is pretty unique and There could be an appraisal that shows no diminution in value because there's been Good leasing and there's not a lot of rollover and it's multi tenanted and don't have any issues there. There could be a property that's well suited to being flipped to residential, and I'm not going to 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 Facility and it's located near NASA. So I'm not expecting problems with that.

Speaker 3

It's Just it's case by case every time. I've seen big drops and I've seen no drop.

Speaker 1

Got it.

Speaker 6

Okay. And what is your current reserve on your office portfolio?

Speaker 3

The overall reserve is about 2%. The reserve on Substandard is 6%. The reserve on watch list is 4.2%.

Speaker 6

And how much of your office portfolio is on watch versus substandard?

Speaker 3

Gosh, let's see. I'm trying to think I don't have that Total in front of me, but we did a pretty aggressive downgrade of the portfolio because of market conditions We added to our watch list to Three loans this quarter, so it's probably up about it's probably around $100,000,000

Speaker 6

Okay. All right. Got it. And then Is it were there any move in criticize or classified this quarter?

Speaker 3

Yes. We classified The one loan that we partially charged off moved to substandard and its balance is 20,500,000 I'm expecting that to go down next quarter, but we'll see. We moved a couple of Other office loans to substandard that we're in the process of documenting extensions for, I would expect that with the agreements that we're negotiating, they will probably We upgraded to special mention when the deals are done, but that's going to take us probably another 30 days to get through.

Speaker 2

Okay.

Speaker 6

Great. So then is it fair to think your question or your answer to Chris a minute ago was that charge offs Should be lower just from what you see today depending on how these extensions go. But is it fair to assume that the reserve should continue to build As you still see migration, are you going to work through some of these you work through this portfolio?

Speaker 3

I think a lot of it It's going to depend on what happens with federal government back to work in September. And with In Northern Virginia, it's really the HQ2 back to work, in person work that I think is going to drive That particular submarket. So I think it's going to depend on what happens. And whether we get a recession, which at this point doesn't seem Quite as likely, but it's going to depend. We will have been through over the next 18 months Close to half of the office portfolio in terms of renewals and extensions.

Speaker 3

So I think depending upon where rates shake out 18 months from now, if they're Down, it obviously makes things easier. There are a lot of factors out there to consider.

Speaker 1

And I'm showing no further questions. I would now like to turn the conference back to Susan Riehl, President and CEO, for closing remarks.

Operator

I want to take this time to thank everyone for participating on the call, and I look forward to speaking with you again next

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Eagle Bancorp Q2 2023
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