Good day, and thank you for standing by. Welcome to the Eagle Bancorp Q3 2022 earnings Conference Call. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question- and- answer session. To ask a question during the session, you will need to press * one one on your telephone. Please be advised that today's conference is being recorded. I would now like to turn the call over to Chief Financial Officer, Charles Levingston. Please go ahead.
Thank you, Lisa. 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 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 for 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. Jan Williams, our Chief Credit Officer, will discuss her thoughts on the local economy, loans, reserves, and credit quality matters. 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.
Thank you, Charles. Good morning, everyone. I'm pleased to report the bank had another successful quarter. In Q3 , we had our best quarter of loan growth this year, and credit quality metrics remained steady and strong. Loans increased by $150 million from the prior quarter end. This was the fourth consecutive quarterly increase. This quarter's loan growth was primarily driven by our CRE team, which had another solid quarter. At the same time, NPAs were 9 basis points on assets at quarter end, and we had another net recovery for the quarter, a little smaller this time at $57,000. Credit risk management has been a hallmark of Eagle since our founding, and it will continue to be a focus going forward.
Additionally, our CRE and C&I pipelines are moving credits through as our lending teams continue to be active and successful in their calling efforts. Beyond our pipeline, unfunded commitments were $2.4 billion at quarter end, up $87 million from the prior quarter end. As more opportunities arise, our total risk-based capital of 15.559% gives us ample room to grow the loan portfolio. Our equity of more than $1.2 billion gives us a lending limit large enough to close on significant commercial projects. Additionally, during difficult economic times, it is our ability to understand risk, work with our clients, and structure deals appropriately that gives us an advantage over our competitors.
Our clients know that we are more committed to the business community in the Washington, D.C. market than larger banks located outside of our market. This commitment also extends to the people in the communities in which we operate. Over the years, we have had and continue to have success in providing much-needed financing for affordable housing. For example, earlier this month, we announced financing for a $42 million project. This was a land transaction with Howard University to bring a mixed-use development to the Shaw neighborhood of Washington, D.C. For our shareholders, we remain focused on increasing value and returning cash through dividends. At the end of the quarter, our board declared a dividend of $0.45 per share, which returned approximately $14.4 million to our shareholders.
This dividend equates to an annualized yield of 3.8% based on last night's closing stock price of $46.78 per share. Before turning it over to Jan, I'd like to say that our Diversity, Equity and Inclusion Council continues to make progress. This quarter, we awarded five scholarships to EagleBank teammates as part of our scholarship program. In addition to our two employee resource groups, the women's group and the Black Employees Network, we have two other groups in the planning stages. We believe participation in these groups will be personally and professionally rewarding, and we 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. Good morning, everyone. Even with the increase in rate environment, our Washington, D.C. market continues to show strength. Not surprisingly, unemployment in the Washington metropolitan statistical area remained low at 3.6% in August, a little higher than the nationwide figure of 3.5% in September. Spending from the government contractors, and consumers continues to remain a strong and stabilizing part of the local economy. Construction projects are being completed and new projects are moving forward. Not only have we seen an uptick in unfunded commitments, but we have also seen an increase in monthly construction funding as these projects ramp up. In our market, we have seen some class B office space being converted to multifamily.
Provided the area surrounding the property and the cost of conversion are attractive enough, we may undertake this type of project as housing demand continues to exceed supply. Areas where we have seen some softening in demand are central business district office properties, capital equipment purchases, and delays with M&A as C&I capital structures adjust to the rising rate environment. This softening in demand has more to do with clients delaying financing decisions to see how economic conditions play out rather than deterioration in their own financial position. With that background, we continue to maintain our conservative underwriting standards, which are reflected in our credit quality matrix. Our ACL to loans at quarter end was 1.04%, up slightly from 1.02% last quarter. NPAs, as Susan mentioned, were nine basis points on assets.
Total NPAs were $90.6 million, down from $20.3 million from the prior quarter. This improvement was primarily from non-performing loans being paid in full or returning to accrual status as a result of sustained payment performance. The improvement in credit has driven our coverage ratio of non-performing loans to 997%, up from 386% in the prior quarter. We had a net recovery of $57,000 for the quarter. Gross recoveries for the quarter were $179,000 spread out over 32 notes, and charge-offs were $123,000 spread out over 5 notes. Also, our 30- to 89-day past dues were $14.3 million.
While this is up from $3.9 million at the end of Q2 , it is still at a very low level and is similar to the end of the Q1 , which was $13 million. With regard to Q3 provision for credit losses, the increase of $2.5 million from the prior quarter was driven by three factors. Higher period-end loan balances, an increase in impairment reserves on one individually evaluated loan, and a modest weakening in the unemployment forecast, coupled with an increase in the localization factor based on the national unemployment forecast. Partially offsetting these increases was an overall decrease from qualitative and environmental factors. This resulted from improved risk ratings on certain hotel loans that more than offset an increased management overlay on central business district office properties in Washington, D.C.
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. The most notable difference between this past quarter and the prior quarter was Q2 included one-time expenses from the settlements with the SEC and Federal Reserve. It was these one-time items from Q2 that drove Q2 earnings down. Absent these one-time items, adjusted Q2 net income was $38.6 million or $1.20 per share. For the Q3 , net income was $37.3 million or $1.16 per diluted share. This was $1.3 million or $0.04 per share lower than adjusted Q2 net income.
The largest factor contributing to the decreases of $1.3 million was the increase in the provision for credit losses, which increased by $2.5 million before any tax benefit. The other line items on the income statement had less impact but are meaningful, so I'll break some of them down. Net interest income increased by $1 million, but there were large underlying changes. Interest income was up $15.9 million on higher average loan balances, increasing yields on adjustable-rate loans, higher rates on new loans, and the quarter had an extra day. Interest expense was up slightly smaller, $14.9 million, primarily on the higher deposit rates paid on savings and money market accounts.
Our deposit rates were raised on August first after the FOMC announcement in late July. The impact of the deposit rate increase on interest expense was partially offset by a smaller deposit base. Our margin was also up slightly to 3.02%, an improvement of 8 basis points from the prior quarter. The increase in our NIM was limited as the increase in our cost of funds was not far behind the increase in yields. The average loan yield for the quarter was 5.10%, up 59 basis points, and the average yield on interest-bearing balances, which includes securities, was 4.01%, up 62 basis points.
On the other side of the balance sheet, the cost of funds was 0.99%, up 54 basis points. Some of the drag on the NIM is attributable to the slower repricing of variable rate loans versus the faster repricing of money market and savings accounts. For non-interest income, we were down slightly this quarter by $256,000. Loan fees were down and mortgage volume continued to be light as rising rates further reduced consumer interest in refinancing or purchasing a home. For non-interest expense, the primary changes from the prior quarter, absent the settlement, were all relatively small. Data processing expenses were up $716,000 on expenses associated with network upgrades. Salaries and employee benefits were down $267,000 as we trued up annual incentive bonus accruals.
Legal, accounting, and professional fees were up $195 thousand on higher consulting fees. Before moving on to the balance sheet, I'd like to note that we did close 1 branch at quarter end. The estimated annual cost savings on rent, common area maintenance, and taxes are $275 thousand. There were no notable unadvertised expenses as the lease is set to expire on October 31. This reduces the number of bank branches to 16. On the balance sheet, assets declined from the prior quarter end by $244 million. The decline in assets was largely driven by a reduction in excess liquidity as short-term funds declined by $322 million. These short-term funds, along with new short-term borrowings of $220 million, were used to fund deposit outflows of $408 million.
Regarding the reduction in quarter-end deposits, we have some clients that typically draw down balances at the end of each month, so average balances are more indicative of normal funding. Average deposits for the quarter were down by a smaller amount of $277 million. As mentioned earlier, the reduction in deposits were primarily from savings and money market accounts. As our non-interest-bearing accounts held steady, our average non-interest-bearing deposits to average deposits rose to 38.4% this past quarter, up from 37.9% the prior quarter. Other notable changes to the balance sheet from the prior quarter end were loans being up $150 million and securities being down $135 million.
The reduction in security balances was primarily driven by lower carrying values on available-for-sale securities as interest rates continued to rise during the quarter and from paydowns. If the overall interest rate environment continues to rise, carrying values will continue to decrease for the securities in the available-for-sale portfolio. The markdown of available-for-sale securities also drove the quarter-over-quarter reduction in equities. Equity at quarter end was down $32.9 million. Essentially, this was driven by the markdown of the available-for-sale securities, offset by earnings of $37.3 million, and less the $14.4 million in dividends declared. Regulatory capital ratios at quarter end remained strong and were not impacted by the mark on the available-for-sale securities. Common capital ratios were impacted by the markdown on the available-for-sale portfolio, which reduced equity.
The decrease was muted by the reduction in assets. Common equity to assets was 11.4%, down five basis points, and tangible common equity to tangible assets was 10.53%, down seven basis points. With that, I'll hand it back to Susan for a short wrap-up.
Thanks, Charles. As we wrap up our commentary, I'd like to say that we are encouraged by the increase in loans this quarter and the strength of our asset quality metrics. Also, 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. 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.
Thank you. If you'd like to ask a question, as a reminder, please press * one one on your telephone. One moment while we get ready for questions. The first question that I have is coming from Catherine Mealor of KBW. Please go ahead. Your line is open.
Hi. Good morning.
Hey, good morning, Catherine.
Wanted to start with the deposit costs. Could you give us just some color around what maybe where deposit costs ended the quarter to get a better sense as to where we might go into next? Then just kind of broad picture on deposit costs. You know, your betas have been higher than most the past couple of quarters, which, you know, is typical for you similar to last cycle. Is there a case to be made that you're front running some of this, you know, deposit cost increase and your betas should kind of, I guess, slow more quickly than peers? Do you believe, you know, you're just kind of a higher beta story, and that's the way it's gonna be over the next couple of quarters? Thanks. Sure thing, Catherine.
Yeah, it's hard to really say, right, to forecast that. You know, we've got a variety of funding relationships with varying levels of sensitivity to rate movements. I mentioned in the past that we're modeling our interest rate risk at an average beta of about 70%. Even with that beta, we're still seeing asset sensitivity as of 9/30 to the tune of 5.7% and increased interest income with a 100 basis point move up on a static balance sheet over a 12-month period. Obviously, the real world is abstracted away from the modeling and there's a lag effect on the liability versus asset repricing in addition to other factors like payoffs.
Our beta, as you mentioned, was, you know, just around 67% for Q3 , which does align with that modeling. You know, it's our, you know, we'll endeavor to either, you know, match or beat that as we move forward, right? You know, it's I think important also to keep in mind our strong non-interest-bearing deposit balances, right? We've seen those increase to 38.5% of total deposits in Q3 . You know, I'll just also add that, you know, it's not lost on us that just funding for all banks is obviously gonna be more difficult in this environment.
Yeah, it's, you know, we're gonna, you know, keep plugging away and, you know, try and continue to fund the bank in the most efficient way possible.
Would you expect deposit-
Catherine, I think we lost you.
We did?
The one thing I would say is that, in prior years, we've always focused on relationship banking and, required deposit accounts in connection with our C&I loan request. That's something during the period of excess liquidity that we probably didn't pursue as strongly as we could have. I think we're refocusing on those basic, required deposits and compensating balances as we move into, the changing rate environment. I expect that we will have the same success level that we had on that when we were using those tactics pre-2020.
I think we're working on trying to get Catherine back in the queue because we lost her.
Catherine, you can go ahead and queue back up by pressing * one one, please.
Lisa, I think if we're not able to get her back in the queue, then maybe we can move on to any other questions that we have out there.
If anyone has a question, please press * one one on your telephone. Okay. Okay, here she is. I'm gonna bring her back to the phone.
Great. Okay.
Welcome back, Catherine.
Catherine, your line is open. Please go ahead.
Oh. Okay, great. I just pressed * one again. Am I back?
You're back.
All right. Okay. I kept talking, and no one could hear anything I was saying. I guess my follow-up question on deposits before I get somewhere else was, I appreciate all the commentary, and it's, I guess, just big picture. You believe and we've seen deposits kind of shrink for the past couple quarters. Do you think you'll be able to actually grow deposits as we move into next year given all you just laid out for us?
You know, that's certainly the desire, right? Again, I think this is a difficult environment, you know, as the money supply is shrinking. I think a lot of banks are gonna be challenged with finding those deposits. But yes, that is the desire.
I also think, Catherine, as we move, and Jan was saying some of this as we lost you, but as we move back to our focus of gathering deposits for all of our relationships and requiring certain amounts of deposits, that will help that also. We are much further in that process now than we were for a while. During the pandemic and the excess liquidity that we all had, that may not have been as strong a focus as it had been in the past and will continue to be.
Great. Okay, great. On the other side, like, the loan beta was actually, I thought, really good. Is that, you know, this 40% beta we saw this quarter, is that? You know, kind of the level that you think we should see with the next couple of rate hikes. Is there any kind of dynamics within maybe where new pricing is coming on, you know, that may kind of change that beta as we move forward?
Yeah. You know, the only comments I would have on that, obviously we've got about 60% of our loan portfolio is and obviously we've made mention as I think many others have during this earnings call season of the lag associated with the repricing on the asset side of the balance sheet. Generally I think it should be fairly consistent quarter over quarter with you know, once the Fed pauses, if they do pause, right? If they level off, you can see some aftereffects there, lingering, you know, a quarter or two after probably.
Okay, great. We're hearing from some other companies or it's like in their different markets, but I've heard more commentary from banks this quarter saying they're gonna slow construction lending, and I didn't get that sense from y'all in your prepared remarks. Just any kind of thoughts on new construction credits and how you're thinking about new originations in that book in this environment?
I think we are still entertaining construction requests. It's really dependent upon the type of project. Multifamily is still a very strong product in our market. There is still a housing shortage. We're also seeing industrial properties that remain attractive to investors and continue to support distribution networks. We are not looking for office right now. I think if we're selective about it and continue to implement our underwriting standards as we have, I see no reason why we can't be successful with continuing on the construction side.
We also-
Okay.
You know, think of ourselves in a pretty special market as it relates to, you know, additional, you know, demand for construction projects, particularly, you know, on the multifamily side. There's always kind of net positive people moving into the D.C. market, you know, as we move past each subsequent election cycle, right? There's always people coming here, so.
It has always been a strength of Eagle.
Yeah.
Yep. Then my last question is just on the buyback. You've got a lot of capital. You know, again, your construction and CRE to capital ratios are high, but still your TC on an absolute basis and regulatory ratios are very, very high. Any thoughts on reengaging the buyback given where your stock is trading?
Yeah. Certainly it's something we're always, you know, talking actively about. I point to you know, compelling case can be made, as you point out for where the valuations sit today. You know, we certainly are managing capital, trying to return to shareholders in some way. You know, we declared another $0.45 dividend here this quarter. Yeah, it's something that we're always talking about.
Remind me, do you have your buyback currently outstanding and updated, or do you need to re-up that in order to start again?
Yeah. It expires. The program expires at the end of the year. It currently-
Great. Okay.
Yeah.
Okay. You need to get regulatory or you need to get just board approval before you.
Uh, that's-
Re-engage.
Actually, we've received the board approval already, so we would, you know, we would be able to initiate at will.
Great. Okay. Good to know. Thanks so much.
Yeah.
There are no more questions in the queue. I would like to go ahead and turn the call back over to Susan Riel, President and CEO, for closing remarks. Thank you.
We appreciate the questions today, and thank you for taking the time to join us on the call. We look forward to speaking with you again next quarter. Thank you.
Everyone, thank you for joining today's Conference Call. You all have a great rest of your day.