Eagle Bancorp, Inc.
Q1 2021 Earnings Call Transcript

Published: 22 Apr 2021

[Operator:]

Hello, and welcome to the Eagle Bancorp, Inc. First Quarter 2021 Earnings Call. Please note that today's meeting is being recorded. . It is now my pleasure to turn today's meeting over to Chief Financial Officer, Charles Levingston. Please go ahead.

[Charles Levingston:]

Thank you, Sean. 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 in performance over this past quarter has 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 are providing . 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 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.

[Susan Riel:]

Thank you, Charles. Good morning, and welcome to our earnings call for the first quarter of 2021. It is hard to imagine that when the COVID-19 pandemic began a little more than a year ago, Eagle will go on to post 2 of our highest earning quarters. Earnings are at record levels. Equity has risen to an all-time high. Asset quality continues to strengthen. Efficiency remains a strength, and we believe our market area is making progress towards reopening. In these ways, we believe we are stronger now and in a better position than we were a year ago. We have also got some good news on the litigation front that I'll share with you later on. Focusing on earnings first. Earnings in our most recent quarter were $43.5 million or $1.36 per share. This was a 1.53% return on average assets and a 15.33% return on average tangible common equity. Earnings over the last 4 quarters, which includes the second quarter of 2020, when the nation was locked down, totaled $152.6 million or $4.75 per diluted share. These earnings are positively accretive to our equity. Common equity at the end of the quarter was $1.3 billion or 11.34% of assets. Turning to asset quality. At the end of the quarter, NPAs were 0.51% of assets. And for the quarter, annualized net charge-offs were 0.27% of average loans. These asset quality ratios, combined with an improved economic outlook nationally and locally as well as a decrease in total loans, informed our decision to make a $2.4 million reversal from our allowance for credit losses. Even with this reversal, our reserves are 1.47% of loans, excluding PPP loans. In terms of operating efficiency, we continue to be a leader with an efficiency ratio of 40.7% for the quarter. We just completed and mailed out our proxy and compared to the 19 peers listed in our proxy, we reported the lowest efficiency ratio. This efficiency is achieved through strong revenue growth and expense control. Total revenue for this quarter was $93.2 million, up 9.4% from a year ago. Noninterest expenses were $38 million, up just 1.7% from a year ago. We are always prudent in our approach to expense management. As a small example, last quarter, I mentioned we were relocating 2 branches with expiring leases to improve locations and combining 2 back office locations, also with expiring leases into a single new facility. These moves have been completed and are projected to save us $460,000 annually in rental expenses.

[Janice Williams:]

Thank you, Susan. Good morning, everyone. With regard to the reversal of $2.4 million from the allowance for credit losses, the improved outlook for the economy, primarily the improved unemployment numbers, the improvement in the credit metrics of the loan portfolio and the reduction in total loans all contributed to the reduction in the allowance. With the reversal, the allowance for credit losses to total loans, excluding PPP loans, was 1.47%, down 3 basis points from the prior quarter end. Comparing metrics for linked quarters, even with our lower allowance for credit losses, our coverage of nonperforming loans increased to 195%, up from 180% at year-end as we saw a reduction in nonperforming loans over the same period. NPAs to total assets were 51 basis points, down 8 basis points from the prior quarter end. In dollars, NPAs were down $8.6 million. The decline was primarily from payoffs on nonperforming loans, a return to accrual status for some loans and charge-offs, which primarily consisted of hotel, restaurant and SBA credits. Before I hand it off to Charles, a quick update on the PPP program. In the first quarter, we once again jumped in to help our clients with the latest round of PPP. For the quarter, we originated PPP loans of $193 million and assisted clients in the forgiveness process with loans forgiven of $83 million. Outstanding PPP loans at quarter end were $565 million. With that, I'd like to turn it over to Charles Levingston, our Chief Financial Officer.

[Charles Levingston:]

Thank you, Jan. Comparisons for the first quarter of 2021 to the first quarter of 2020 are difficult as the current quarter contains a reversal from the allowance for credit losses and a substantial contribution from our residential mortgage team, whereas in the first quarter of 2020, we were building reserves as the impact of the COVID-19 pandemic was just coming into focus, and we also had a mark-to-market loss on a hedge position. For these reasons and to help compare apples to apples for the first quarters of 2021 versus 2020, we added a pre-provision net revenue table to our earnings release.

[Susan Riel:]

Thanks, Charles. As we move further into 2021, we will continue our efforts to deliver positive operating and performance results, and we will continue to strive to serve both our investors and our community to the best of our ability. Our earnings, credit quality and capitalization remains strong. Deal flow on development projects and income-producing credits continue at a decent pace, and the Washington market remains a premier business center and tourist destination. Thanks again for joining us this quarter. We will now open up the call for questions.

[Operator:]

. Your first question comes from the line of Casey Whitman from Piper Sandler.

[Casey Whitman:]

I think I'll just ask first, bigger picture. As we think about sort of the balance sheet transition and the emphasis away from certain products, what kind of inning are we in, in that process? I think maybe what I'm trying to get my head around is, as the economy reopens, perhaps we see growth across the industry, how confident are that we -- are you that you'll participate in that fully? Or should we consider that there's still going to be some offset just from some of the strategic mix shifts going on, specifically at Eagle?

[Janice Williams:]

In terms of the mix of our assets going forward?

[Casey Whitman:]

Yes. I mean, maybe just in terms of the emphasis on construction and where that sort of is right now. And do you think -- or just...

[Janice Williams:]

No. I think that we are fully prepared and are doing construction lending. I think that the economic forecast certainly adds a lift to the desirability of those loans. And I would expect we'll have opportunities to see them. We're now just below the regulatory threshold for concentration on the construction side. We've got room to lend there, and I think there are going to be continuing opportunities.

[Casey Whitman:]

Got it. Great. I'll just ask a few expense questions. Just to clarify, the savings from the branch relocation consolidations, is some of that in the numbers already? Or will that be realized, you think, in the first or the second quarter?

[Charles Levingston:]

Yes. I think that's going to be realized more going forward. Again, our kind of just our calculation is about $460,000 annually in savings on specifically rent expenses. Yes.

[Casey Whitman:]

Got it. One more expense one. Congrats on the class action settlement. Just wondering, can you give us the outlook for where the legal professional fees expense line might run versus, I think it was about $3 million this quarter. I appreciate that that's already down materially from a year ago, but can we expect a little bit more relief to come on that line, given the settlements you have? Or do you think it's a pretty stable level from here?

[Charles Levingston:]

Yes. Obviously, the cost that we're going to be dealing with as it relates to those private litigation matters are going to be related to the settlement of these -- of the administration associated with these cases, but there's still the expectation that there'll be continued expenses associated with the investigations, although, again, as we've mentioned previously, a lot of that production expense has tapered off, right, in terms of providing information, which is the bulk of the cost. So I wouldn't expect significantly greater, but it's -- as my counsel advised me, it's certainly unknown, but yes, let's take that for what it's worth.

[Casey Whitman:]

Okay. So it sounds like this is a pretty good expense run rate minus whatever payable taxes would have been and some of the salaries this quarter for expenses.

[Charles Levingston:]

Yes.

[Operator:]

Your next question comes from the line of Steve Comery from G. Research.

[Steven Comery:]

I wanted to ask about the securities book. Charles, I appreciated your comments there on continuing to look for opportunities. Maybe any thoughts on the pace of deployment of liquidity into the securities book, if this liquidity stays on your balance sheet and loan demand remains a bit tepid?

[Charles Levingston:]

Yes. So to your point, Steve, obviously, our first choice is to deploy this excess liquidity into loans, and that's what we'd hope to do. But with the significant amount of liquidity that we have on the balance sheet, the next best option seems to be in the investment portfolio. Our clip has been, call it, between $50 million and $80 million a month deployed. It is a bit of a balancing act between picking the right points and finding that healthy return and not going too far on the curve and exposing ourselves to additional price risk. But again, that is the next best alternative to loans. Hopefully, that gives you a little bit of insight.

[Steven Comery:]

Yes. Yes, that's helpful. Maybe moving on to loans. So I noticed that in the disclosure of accommodation in foodservices, the exposure actually increased quarter over quarter. Was that due to line draws? Or is the bank seeing opportunities in that area to make new loans?

[Janice Williams:]

There were certainly line grows. We had recently approved and increased to a line for one of our very strong restaurant chain customers that's continuing to expand and grow. They had a very successful equity raise at the same time and have quite large deposits with the bank right now, but we are seeing more usage of lines, and we are selectively working with our existing customers. I would not say we're actively soliciting new restaurants as customers at this point.

[Steven Comery:]

Okay. Okay. And then maybe one more for me on loan yields, which were up pretty solidly quarter over quarter. I wonder if maybe you could have a discussion about the dynamics there and how much of the rise in loan yields was changing mix versus like what rates you're seeing in the market?

[Charles Levingston:]

Sure. So I would say the coupons that are being put on these days are call around 4%. But the pricing pressure continues. We did see some prepays in this past quarter that also made a positive contribution to the yield that we're seeing there. So to the extent that those continue, we'll get some positive lift. But in terms of mix, it was, I guess, in terms of C&I versus CRE, it was a little lighter quarter on the CRE front than we've typically had in the past. And we're definitely, again, seeing pricing pressures, particularly on the C&I side.

[Janice Williams:]

Yes. I think there's an awful lot of liquidity out there right now, which is contributing to the pricing pressure as all banks are looking to move into higher-yielding asset types. So we do see that, but we're also not making significant changes in the overall CRE versus C&I composition of our books. I will say we'll probably be shifting a bit more back into the construction side as I discussed with Casey earlier.

[Steven Comery:]

Okay. And Charles, I don't know if you want to put this number out, but any way to kind of quantify how big of an impact the prepayments were on yield?

[Charles Levingston:]

Let's see here. I don't have that number. I'll have to get back with you on that, but we did run that.

[Operator:]

Your next question comes from the line of Steven -- sorry, Stuart Lotz from KBW.

[Stuart Lotz:]

Charles, maybe if we can start on the reserve and maybe the outlook for provision following some of the reserve release this quarter. Do you expect that to continue in the next couple of quarters? And could we continue to see further negative provisions, assuming you continue to let your ACL rundown and charge-offs maybe come in line with where they've been the last couple of quarters?

[Charles Levingston:]

Yes. It's going to be -- there's a lot of -- I guess, it will be dependent on where we are really at next quarter end, what the economic forecast looks like at that point in time. Certainly, we are seeing some success with the deployment of vaccines out there. We saw a pretty good unemployment print this morning. We saw good consumer spending prints last week. So the signs are -- seem to be positive on those forecasts, but it will be dependent on that in addition to loan growth and how much loans -- how many loans we can put on quarter over quarter, which will obviously also need additional provision. Jan, anything else you want to add to?

[Janice Williams:]

Yes. I would say that it's also going to be dependent on the continued improvement in credit metrics within our portfolio. So certainly a possibility, but there's a lot of unknown out there in terms of when or if that actually is going to happen.

[Stuart Lotz:]

And Jan, maybe -- I'm sorry if I missed this in the prepared comments, but can you just give any detail on where watch list or classifieds trended this quarter? I didn't see anything in the release.

[Janice Williams:]

Sure. Yes, the classified portion of the portfolio is down about $300,000, nothing significant, very stable there. The overall watch list is down about $41 million. So all signs are really positive on the credit metric side. I think we've continued to maintain a significant number of loans that received second deferrals in the watch category as we wait for a period post PPP of sustained performance under regular payment plan. So it's -- assuming that, that goes well, I would think you would see further reduction in the future.

[Stuart Lotz:]

Got it. And maybe on loan modifications, too. I think you guys were under 1% at year-end and you kind of ticked back up closer to the 2%. What was driving that this quarter? And can you provide any color on this growth?

[Janice Williams:]

Yes. There's 1 hotel that is in that category that's on interest-only terms. And there are a couple of restaurants that are also on interest-only terms. We don't have -- there was nothing with a full deferral contributing to that number. And I don't expect to see anyone getting a third deferral. So these are potentially new to the second deferral plus.

[Stuart Lotz:]

Yes, very helpful. And so, maybe just one more for Charles. You guys announced the buyback in December. And I think we were a little less active than we expected this quarter. And with TCE back at 10.5%. And if -- your currency has recovered a little bit. But how are you guys thinking about the buyback this year? And do you still plan on utilizing the full 1.6 million share authorization?

[Charles Levingston:]

Yes. I think it's something we continue to evaluate on an ongoing basis. We're certainly aware of our very strong capital position, which puts us in a great position for a rebounding economy, obviously, to deploy into additional loans. But certainly -- and also, as you note -- will note that we did slightly increase our dividend, and we're thinking about that as well in relation. So that's going to be evaluated also on a regular basis. But it is a tool in our toolbox that, again, as we see fluctuations in the marketplace, we'll have an opportunity to deploy capital where we think the price is right to do that.

[Operator:]

Your next question comes from Samuel Varga from Stephens Inc.

[Samuel Varga:]

I'm on for Brody this morning. And I just wanted to ask another question going back a little bit on credit conversation. I wanted to ask a little bit about your office portfolio with regards to loan to values and coverage ratios. Could you give us a sense of that? And maybe if you do have any insight to it, what the portfolio items look like in terms of the work from home trend?

[Janice Williams:]

Yes. The office portfolio has held up really remarkably well despite the work-from-home atmosphere of COVID. I think a lot of that has to do with the type of tenants that are in place. And we do have roughly $1 billion of office property in the portfolio. We would anticipate that if there is a permanent change to more remote working status, the impact will be the most significant in the Central Business District, and it will occur over a period of time, 5 years or so as existing leases mature and perhaps smaller footprints are desired in the future. So we are looking at that and monitoring it carefully. I think at this point, we haven't seen any significant drop in average rents because we don't have properties that are right now on the income-producing side suffering 100% role in leases out of the blocks. But we also stress test that portion of the portfolio every quarter as we do all income-producing product, and we've been making very severe incremental drops in revenues to try to model out what might happen in the future. I think we're feeling like this is a longer-term dilution strategy, but we feel pretty good about where we are in terms of the loan to values that we have currently in our office properties.

[Samuel Varga:]

Great. That's very helpful. And then switching back to kind of a more big picture perspective on the loan portfolio. We noticed that there were 5% quarter-over-quarter drops in CRE and construction. And so we just wanted to get a sense for what might have been driving that.

[Janice Williams:]

I think it's really a timing factor. It's very difficult to pick a point in time and make an assessment as to an overall philosophy about the loan portfolio. I think we're seeing lots of opportunities, including in the office area, by the way, but we're looking at a property with 15-year GSA lease. So it's not really as vulnerable as you might think office properties would be. They're all very individual and evaluated individually. So we don't intend to be less assertive in our CRE philosophy, and I expect that we'll continue to see that segment of the portfolio grow.

[Samuel Varga:]

Great. And then I guess one more question around PPP. I just want to get a sense for what your round 3 involvement kind of looks like big picture. You've noted some items on that and then maybe the change in expectations around the forgiveness schedule. If you could give some color on that, please.

[Janice Williams:]

In terms of the forgiveness piece, on the PPP portfolio, I think it's a much more arduous process than anyone would have thought it was going to be at the beginning of the program. We're still getting almost daily flash information from the Small Business Association in order to tell us how and when and what's needed in order to process for business. So it's difficult to say with any level of certainty, the rate at which we might expect to see forgiveness go forward. Charles, I think you've also been looking at that?

[Charles Levingston:]

Yes. I mean the gears are moving, albeit slowly on the forgiveness process, and we continue to work with our borrowers to submit those applications for forgiveness to the SBA. But as Jan noted, there's -- it's a difficult process. So -- but we're moving it along.

[Operator:]

I will now turn the call back over to President and CEO, Susan Riel, for closing remarks.

[Susan Riel:]

Thanks again for joining us today, and we look forward to seeing you at the end of next quarter. Have a great day.

[Operator:]

This concludes today's meeting. You may now disconnect.