Eagle Bancorp, Inc. (NASDAQ:EGBN) Q4 2022 Earnings Call Transcript

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January 20, 2023 at 10:51 AM·12 min read

Eagle Bancorp, Inc. (NASDAQ:EGBN) Q4 2022 Earnings Call Transcript January 19, 2023

Operator: Good day, and thank you for standing by. Welcome to the Eagle Bancorp Fourth Quarter and Year End 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference call is being recorded. I would like to turn the conference over to your speaker for today, Charles Levingston, Chief Financial Officer. Please go ahead.

Charles Levingston: Thank you so much. 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. This 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 the company 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 the local economy, loans, reserves and credit quality matters; then, I'll return to discuss our financials in more detail.

At the end, all three of us will be available to take questions. I would now like to turn it over to our President and CEO, Susan Riel.

Susan Riel: Thank you, Charles. Good morning, everyone. I'm pleased to report that despite facing economic headwinds, such as higher interest rates, inflation and the threat of recession, the bank ended the year with strong results. We were able to navigate these challenging conditions through our consistent focus on delivering value to our customers and effective cost management strategies. In the fourth quarter, we had our best quarter of loan growth for the year and credit quality metrics remained very strong. Loans increased by 4.5% from the prior quarter-end. This was the fifth consecutive quarterly increase. At the same time, NPAs were 8 basis points on assets at quarter-end. And we had a net charge-off of less than $1 million.

Credit risk management has been a constant strength since our founding and it will continue to be a focus going forward. Additionally, our commercial lending teams continue to find new business opportunities to replenish our loan pipeline. And in addition to our pipeline, unfunded commitments were $2.6 billion at quarter-end, up $120 million from the prior quarter-end. Part of our success is our ability to understand, underwrite and close on significant commercial projects. With total risk-based capital of 14.99% and equity of more than $1.2 billion, we are uniquely well positioned to take advantage of opportunities in our market. Our clients know that we are more committed to the business community in the Washington D.C. market than larger banks based outside the area.

This commitment also extends to the people in the communities in which we operate. We regularly provide much needed financing for affordable housing projects. This past quarter, there were two such projects. In October, we announced financing for a $42 million project with Howard University to bring a mixed-use development to the Shaw neighborhood of Washington D.C. And, in November, we announced financing for a $50 million affordable rent property with 259 units in Reston, Virginia. And to our shareholders, we remain committed to creating value. This past quarter, our Board declared a dividend of $0.45 per share, which equates to an annualized yield of 4.11% based on last night's closing stock price of $43.78 per share. We were also active in stock repurchases, buying back almost 740,000 shares at an average price of $44.82 per share.

In aggregate, the total repurchase amount was $33.1 million. Now, Jan Williams, our Chief Credit Officer, will give us some insight into the market, loans and credit quality.

Jan Williams: Thank you, Susan, and good morning, everyone. We spend a lot of time looking for cracks in the local economy, but our boots on the ground continue to tell us the Washington D.C. market remains one of the most attractive and resilient markets in the country. Even with difficult and volatile economic conditions, local businesses continued to do well and we have not seen a meaningful pullback in overall economic activity. This is illustrated by the unemployment rate in the Washington Metropolitan Statistical Area, which fell to 3.1% in November, and gives us some favorable separation from the nationwide figure of 3.5% in December. Underlying the good unemployment figure is continued spending from the government, government contractors and consumers.

There are some areas where we do see some reduction in demand. Post-pandemic, economic activity in the suburban areas continues to outperform the central business district in Downtown D.C. In Washington D.C., this is somewhat offset by a robust tourist industry, but large parts of the federal government continue to work remotely. Private businesses are more of a mixed bag with a push for more in-office work. With that background, we continue to maintain our conservative underwriting standards, which are reflected in our credit quality metrics. As part of this, while our Downtown office properties continue to perform, we are being more proactive in reaching out to commercial clients to better understand the headwinds facing their income-producing properties.

Looking at our credit metrics, which remain strong, nonperforming assets, as Susan mentioned, were 8 basis points on assets. This is the lowest ratio of NPAs we've had since 2005. Total NPAs were $8.4 million, down $1.1 million from the prior quarter. This improvement was primarily from nonperforming loans being paid in full or returning to accrual status as a result of sustained payment performance and net charge-offs of $896,000, most of which was from one C&I relationship. With NPAs down, there was also improvement to our coverage ratio of nonperforming loans, which was 1,151%, up from 997% in the prior quarter. And loans 30 to 89 days past due were $2.2 million, down from $14.3 million at the end of the third quarter. The improvement in 30 to 89 days past due was mostly from one loan for $11 million becoming current.

For the quarter, we had a negative provision of $464,000, and our ACL to loans at quarter-end was 97 basis points down from 1.04% last year -- last quarter. With regard to the fourth quarter provision reversal, it was largely driven by the improvement in quantitative metrics associated with a decrease in the localization factor relative to the national unemployment forecast. This improvement was only partially offset by the increased risk in Q&E portion of the model from the elevated risk associated with economic and business conditions and higher period-end loan balances. Overall, in terms of credit, we remain cautious and we will continue to apply our strong underwriting skills. Having said that, we see opportunities to continue to add high-quality commercial loans to the portfolio.

Our focus remains on adding local commercial income-producing properties and owner-occupied properties, but we also see opportunities for quality C&I loan growth. With that, I'd like turn it over to Charles Levingston, our Chief Financial Officer.

Charles Levingston: Thank you, Jan. This was a good quarter for earnings coupled with strong loan growth and strong asset quality metrics. These results were in an unprecedented economic environment that saw aggressive Fed action on rates, continuing inflation pressures and the prospect of an oncoming recession. Fortunately, as Jan mentioned, we operate in a strong market, which has remained resilient and continues to grow. Typically, I'd start with a discussion on changes on the income statement, but the bigger changes this quarter are on the balance sheet, so I'll start there. The items of note are the strong loan growth, a small decrease in deposits and a pickup in short-term borrowings. And I'm very pleased to say we were active throughout the quarter with stock repurchases.

On loans, quarter-over-quarter, the loan growth was strong with loans up $331 million or 4.5% for the quarter. But a lot of these loans came on near the end of the quarter as average loans were up by a smaller $97 million. As we manage our liquidity carefully, we drew on some FHLB advances late in the quarter and ended up carrying more cash balances at year-end than we normally would. In terms of deposits, we remained focused on relationship deposits as that is where we see more cost-effective funding and we continue to strive to improve our deposit mix. To this end, our relationship managers are focusing on deposit retention and deposit growth. Now, stock repurchases. This quarter, we repurchased just over 738,000 shares. This was 46% of the 1.6 million shares the Board authorized for 2022 and about 2.3% of the shares outstanding from the beginning of the year.

In total, the aggregate purchase price was $33.1 million and the average share price was $44.82 per share. As the 2022 plan terminated at the end of the year, we have a new plan in place for 2023, which authorizes another 1.6 million shares for repurchase. Turning to the income statement. While net interest income improved marginally up $1.7 million, the most notable changes from the prior quarter were its components, interest income and interest expense. Interest income was up $17.6 million on a higher loan rates and higher loan balances. For the quarter, the average yield on loans was 5.7%, up 77 basis points, and average loans were up $96.6 million. Interest expenses were up $15.9 million on higher funding costs. But the impact was a bit muted by a reduction in interest-bearing liabilities.

For the quarter, the cost of interest-bearing liabilities was 2.86%, up 111 basis points, while average interest-bearing liabilities were down $218.2 million. While borrowings were up, the majority of the increase in interest expenses were from higher rates paid on deposits. As the Fed moved aggressively to raise rates to combat inflation, we have subsequently raised rates each time. This quarter, our jump-in rates reflect the Fed raise in late September and two more during this quarter. As a result, our cost of interest-bearing deposits were up 107 basis points, as the average effective rate from Fed funds for the quarter was up 145 basis points. While this resulted in a relatively high beta for us, it was only slightly more than our modeling assumptions.

And with our low overhead from our limited branch network, our efficiency ratio is still low at just under 43%. This level of efficiency is much better than our peers and represents a significant built in cost advantage we retain even in the rising rate environment. Other items impacting the income statement were the decrease in income tax expense. This reduction was primarily driven by an update in our state apportionment of revenues. This resulted in less taxable income being apportioned to jurisdictions with higher tax rates. While expenses were up on incentive accruals for this quarter, our accrual allocation is generally lower in the first quarter and larger in the last quarter of the year, as we evaluate ongoing performance. On the bottom-line, earnings were $42.2 million, up 13.1% from the prior quarter, and fully diluted EPS was $1.32, up 13.8%.

Lastly, equity at quarter-end rose to $1.2 billion, as earnings and higher carrying values on available for sale securities outpaced the reduction from funds returned to shareholders through stock repurchases and the declaration of the dividend. With that, I'll hand it back to Susan for a short wrap up.

Susan Riel: Thanks, Charles. 2022 was a challenging year, but our Eagle team rose to the challenge. The year ended with solid loan growth and strong asset quality metrics. Even when facing economic headwinds, our commercial focus, coupled with the branch-light footprint, continues to be highly efficient and profitable. Additionally, our team understands that 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. Also, we remain committed to a culture of respect, diversity and inclusion in both the workplace and the communities we serve. Lastly, I would like to thank all of our employees for their hard work all year long and we look forward to an even better year in 2023. With that, we will now open it up for questions.

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