Good day, everyone, and welcome to the Eagle Bancorp Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. Following management's prepared remarks, we
will host a question
and answer session and our instructions will be given at that time. And then 0 and an operator will be happy to assist you. As a reminder, this conference call may be recorded. It is now my pleasure to hand the conference over to Charles Levenson, Chief Financial Officer. Please proceed.
Thank you, Brian. 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 and performance over this past year 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 our providing formal guidance. Our Form 10 ks for the 2020 fiscal year, Our quarterly reports on Form 10 Q 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 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 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 the SEC's website. This morning, Susan Riel, the President and CEO of Eagle Bancorp, will start us off with a high level overview. Benjam Williams, our Chief Credit Officer, will discuss her thoughts on 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 Rio.
Thank you, Charles. Good morning, and welcome to our earnings call for the 3rd Quarter of 2021. I'm pleased to report another great quarter for Eagle. Earnings, While not a record, we're the 2nd highest in the bank's history. Asset quality continues to improve.
Efficiency remains a strong point and capital is building. And directly impacting our shareholders, We raised our dividend for the 3rd time this year, and we bought back some shares this quarter. The one area, though, That's lagged behind has been loan growth, which I'll also touch on later along with some comments on our market and a legal update. Focusing on earnings first. Earnings for the quarter were $43,600,000 or $1.36 per share.
This was a 1.46% return on average assets and a 14.11% return on average tangible common equity. Earnings for the 1st 3 quarters Totaled $135,000,000 or $4.22 per diluted share. Turning to assets. At the end of the quarter, nonperforming assets were 31 basis points on assets. And for the quarter, Annualized net charge offs were 8 basis points on average loans.
Both of these ratios Are the lowest we've seen in the past 8 quarters. These asset quality ratios, combined with some factors that Jan will review, Informed our decision to make a 3rd consecutive reversal from our allowance for credit losses. With the reversal of $8,200,000 for the quarter, the total reversal for the 1st 9 months of the year was 14 $400,000 In terms of operating efficiency, we continue to be a leader with an efficiency ratio of 41.7 percent for the quarter. We are always prudent in our approach to expense management, yet we always keep an eye on critical infrastructure and investments and controls that are necessary to operate a Safe and sound banking institution. This quarter, we closed our Dulles, Virginia branch as it had an expiring lease and our customers can be served from other Northern Virginia branches.
The combined annual pretax cost savings in rental expense will be about $187,000 And there was no write off of leasehold improvements as these had been fully amortized upon the expiration of the lease. We are also pleased that all of the employees working at the branch have filled or will be filling positions within the company, With earnings remaining strong, capital continues to build. At quarter end, Equity was $1,300,000,000 up $25,000,000 over the prior quarter end and up $108,000,000 from a year ago. For our shareholders, our earnings led directly to increased capital, raising both book and tangible values. Book value rose to $41.68 per share, up 9.8 percent from a year ago and tangible book value was $38.39 per share, up 10.6% from a year ago.
We also increased the quarterly dividend to $0.40 per share. This is up from $0.35 the prior quarter and $0.25 the quarter before that. With a dividend of $0.40 and earnings of $1.36 our payout ratio for the quarter was 29.4%. While we have increased the dividend 3 times this year, our intent Was to increase our dividend yield to be more in line with banks our size. Based on last night's closing stock price of $57.93 per share and a dividend of $0.40 per share.
Our dividend yield is 2.8 In regards to our stock repurchase plan, we repurchased 11,609 shares this past 1,600,000 shares authorized for repurchase remaining in the plan. On the ground, our market has Proven to be robust. Even with setbacks from the Delta variant, government spending and contracting remains strong. Hotels and restaurants are doing better. Private companies are headed back to work and construction on new projects continues.
This summer, the Washington Business Journal's list of the top 25 ongoing construction projects Totaled $14,500,000,000 up from $12,600,000,000 a year earlier. Also reported recently by the Washington Business Journal, an Amazon Economic Impact Report Stated that Amazon invested a total of $28,500,000,000 in Northern Virginia over the last 10 years. And based on government data, the unemployment rate in the Washington area dropped to 4.8% in August compared to 5% nationwide. And recently released census data shows the population in the Washington region Grew by 13% over the last decade, all very positive signs for our market and the community we serve. Before discussing loans, I would like to once again mention the contributions of the residential mortgage and FHA teams.
Our residential mortgage team had another great quarter with locked loans of $280,000,000 and a gain on sale of mortgage loans of $3,300,000 This is on par with the prior quarter, and we appreciate our residential mortgage division for their ongoing efforts to obtain these results. Our FHA team for the 1st 9 months of the year has generated trade premiums of $3,700,000 that are included in non interest income. The revenue stream from the FHA division is not smooth from quarter to quarter. Comparatively, the FHA division has larger transactions and less volume than the mortgage division, which has In regards to loans, over the past 12 months, our loans have decreased as payoffs and paydowns have outpaced funding advances and originations, but the market and our approach has changed. Initially, at the onset outset of the pandemic, we chose to focus on serving existing clients and maintaining credit quality.
More recently, in the Q3 of 2021, the decline in loans was impacted by the competition to refinance at lower rates with lower amortization periods. In some cases, these refinancings or from non bank lenders who are attracted to the strong DC market. Additionally, there is a lot of excess liquidity at other banks as well as many companies and construction project sponsors. Additionally, many of our commercial clients are flushed with cash, some of which has flowed into the bank in the form of deposits. However, on the loan side, this leads to lower utilization rates and a longer period from loan approval until the loan is strong.
Over the past quarter, excluding PPP loans, Loans were $6,850,000,000 down 3.4% or $238,000,000 from the prior quarter. However, both our CRE and C and I teams are seeing an increase in deal flow and in the market. And given the market conditions, The bank has taken a more competitive stance on credit spreads on high quality loan opportunities. The improvement can be seen in our unfunded commitments, which were $2,400,000,000 atquarterend, up $280,000,000 over the prior quarter end. We have had significant success at booking new construction credits.
Balances on these loans are expected to increase over time. Before turning it over to Jan, I have a legal update. On our litigation and investigations, we continue to make progress towards a resolution of all disclosed matters, although a bit slower than we had hoped. The company received closure on the outstanding shareholder derivative action On Monday, October 4, when the DC Superior Court approved the settlement of that litigation and the class action settlement is on track consistent with the federal rules of civil procedure with the court hearing to approve the settlement in the beginning of 2022. Our dialogues with the SEC The Federal Reserve are ongoing, and we continue to cooperate with these investigations.
Additionally, the company believes it's possible we may exhaust our primary D and O coverage at some point in the 4th quarter, in which case expenses that would have otherwise been covered as insurance claims will become a company expense. It's impossible to predict these defense costs going forward as they are highly dependent on the duration and outcome of the Which are also impossible to predict. For more information on this update, please see the related disclosure In our earnings release, other than the historical expense number we provided in the earnings release, We are not in a position at this time to offer any guidance on these potential defense costs, except to note That historical defense costs, including significant expenses in defense of litigations that have since settled as well as investigation, subpoena production and witness costs. We remain hopeful that with each quarterly announcement, We will be in a position to announce progress toward a resolution of all disclosed matters. With that, I would like I'll turn the speaking duties over to Jan Williams, our Chief Credit Officer.
Thank you, Susan, and good morning, everyone. It's always good to present positive news and credit continues to improve to levels we have not seen since before the pandemic. At quarter end, nonperforming assets were 31 basis points. This is down 19 basis points from the prior quarter end. At 31 basis points, you'd have to go back to the Q3 of 2018 to find a better ratio.
In dollars, NPAs were $36,000,000 down from $54,500,000
at
The decline in NPAs was primarily from payoffs of non performing loans, a return to accrual status for some loans and a few charge offs. Gross charge offs for the quarter were 2,000,000 And net of recovery charge offs were $1,300,000 The largest charge off during the period was A C and I contractor credit for $1,000,000 In regards to the reversal of $8,200,000 from the allowance for credit losses, The reversal resulted primarily from the decline in loans, but was also informed by an improvement in credit quality, which included a decline in non performing loans and extraordinarily low levels of 30 to 90 day past Positive improvements and adjustments to both quantitative and environmental factors also contributed. For more detail, Charles will be able to fill you in during the Q and A. With the reversal, the allowance for credit losses to total loans, Excluding PPP loans, was 1.22%, which is down 10 basis points from the prior quarter end. Even with our lower allowance for credit losses, the previously mentioned decline in non performing loans Puts our coverage ratio of non performing loans at 2 65%, well above the 150% to 200% range where it has been for the last 7 quarters.
I'd also like to point out that our provision for unfunded commitments was up 700 and 15,000 this quarter and this ties in with the comments Susan made earlier about funding draw delays And the increase in unfunded commitments. With that, I'd like to turn it over to Charles Levingston, our Chief Financial Officer.
Thank you, Jan. For the quarter, net income was $43,600,000 which is $2,300,000 more than the same period a year ago. Looking at the top line, net interest income adjusted to remove the accelerated interest expense on the redemption of the sub debt was $80,400,000 slightly higher than the $79,000,000 from the same period a year ago. While the results are similar, net interest income for this quarter Based off average assets that are 13% higher than a year ago. The rise in assets was primarily driven by the inflow of deposits in the 4th $720,000,000 versus the Q3 of 2020.
For non interest income, a year ago, the Q3 of 2020 was a record quarter for our mortgage division. So current mortgage production, while still significant, won't match that. To put it in perspective, our mortgage division had locked loans this past quarter of $280,000,000 which is up from the 2nd quarter's $248,000,000 but both periods are well behind the record $593,000,000 we generated a year ago when the market conditions were optimal. Additionally, in the Q2 of 2021, there was on a linked quarter basis, there was $2,600,000 and gains associated with the origination, securitization, sale and servicing of FHA loans. This bolstered non Interest income in the Q2 of 2021 and did not repeat in the Q3 of 2021.
While much smaller in comparison, Other non interest income was $1,600,000 for the Q3 of 2021, down from $4,000,000 for the same period a year ago. The primary difference being the past quarter this past quarter, the company experienced no OREO gains, while the same quarter a year earlier, The company had gains of $1,200,000 For non interest expenses, there was almost no difference in the total between the Q3 of 2021 2020. For the quarter, non interest expenses were $36,400,000 compared to $36,900,000 for the same period a year earlier. The expense line items with the biggest changes were essentially offsetting. Salary and employee benefits were up $2,800,000 as a result of Higher incentive bonus accruals based on the company's performance, premises and equipment were down $1,300,000 As the Q3 of 2020 included a $1,700,000 lease expense to adjust for ASC 842 and legal accounting and professional fees were down $1,100,000 On the balance sheet, assets at the end of the 3rd quarter reached a record high of 11 $600,000,000 up $1,500,000,000 from a year ago.
The year over year increase was primarily driven by deposit inflows, which increased both investments The excess liquidity generated by the influx of deposits continues to reduce our margin, which excluding the accelerated interest expense from the sub debt payout, the margin was $2.78 for this past quarter, down from 308 a year ago. We will continue our efforts to put the excess liquidity to work, but will remain prudent given the recent uptick in rates and the potential for deposit flows to slow or reverse. A better measure of spread absent the excess liquidity is to look at our loan yields, which were 4.59 percent absent PPP interest income and our cost of funds, which was 35 basis points. Also, while we did redeem our sub debt on August 2, our cost of funds for this past quarter includes $1,300,000 of accelerated interest For PPP loans, with just $67,300,000 of PPP left, which were mostly originated in mid-twenty 20. We do not have a lot of accelerated fees and expenses remaining.
We expect these loans to complete the forgiveness process over the near term. On the liability side, deposits reached $9,700,000,000 Up $1,500,000,000 from a year ago and long term borrowings declined to $70,000,000 as the bank redeemed the $150,000,000 of subordinated debt. With that, I'll hand it back to Susan for a short wrap up.
Thanks, Charles. As we wrap up our commentary, I would like to thank all of our employees for all their hard work and their commitment to support our clients. Additionally, we remain committed to a culture of respect, Before we open things up For questions, I would like to summarize our financial results by saying the bank has posted its 2nd best quarter of earnings. NPAs are 31 basis points of assets. Common equity is 11.5 percent of assets.
Total risk based capital is 16.6 percent and we just raised the dividend for the 3rd time this year. The bank continues to do well. I would now like to open things up for questions.
Thank Our first question will come from the line of Casey Whitman with Piper Sandler. Your line is now open.
Hey, good morning.
Good morning, Stacy. Good morning, Stacy.
Jan, maybe I'll start with you. Congrats On the variable credit moves, so we saw the decline in watch loans this quarter in the release. Can you provide any color on the movements within special mention or classifieds? Is it safe to say that those came down as well?
There was some movement within Categories as loans that had been substandard may have at least in one case Significant relationship was upgraded to special mention. There was a great deal of movement from Out of the watch category as we had that sustained period of performance that we spoke about in our last earnings call, Those were the loans that have had multiple deferrals and wanted to wait 6 months under regular payment structure in order to move them Off of the watch list, so that's predominantly the reason for the drop. And the improvement did come in the area of classified loans as those were reduced and 5 loans as those were reduced and in some cases moved to the special mention category.
Okay, understood. And then just looking at the big reduction in non performers this quarter, are those loans that returned to performing status or are they out of the bank in any
You might recall that initially what we did With loans that have had a multiple COVID deferral situation that's beyond 90 days, We moved them all onto the watch list to track them. And once those deferral periods were over and they had Achieved 6 months of regular payments, we were able to move a significant number of those loans back into the regular Past portfolio.
Okay, understood. Maybe I'll just ask one more kind of bigger picture Question, just given the increase in deposits and all the liquidity you guys have on the balance sheet, kind of what are your high level thoughts On your plans to deploy the liquidity in the near term, could we see increases in the securities portfolio or how should we think about That liquidity over the next couple of quarters.
Sure. Yes, certainly, an accelerated pace of deployment into the investment Securities portfolio is likely. We've as Susan mentioned in her comments as well, the unfunded commitments, There is a pipeline for construction funding that we expect will also absorb some of that excess liquidity. And then additional loan funding as we're getting looks at deals and fully funded deals, hopefully.
And as you're getting I think you mentioned getting more competitive on pricing and the higher balance of unfunded commitments. Where are new production yields coming in now versus last quarter?
Yes. For the Q3, we've seen We saw pricing on the coupon on the loan closer to 4%. Whether or not that holds is a question, but that's where we were in the Q3. Okay. And then again, that's the coupon.
You would just add deferred fees and costs to boost the yield.
Understood. Thank you. Thanks,
Casey. Thanks, Casey.
Thank you. Our next
Maybe as a follow-up to Casey's question, just thinking about balance sheet composition. So securities is at 15% of earning assets, Cash is now $23,000,000 So I know we would all love to put cash more into loans because that's higher yield. But as we think about how much of cash Could go into securities. Is there a max of how big you would allow the securities portfolio to grow as a percentage of your balance sheet?
I again want to be prudent about that. And As we talk about the potential for liquidity to potentially reverse at some point, I'm mindful of that, although obviously we're flush with it. Short answer to your question is, I'd be comfortable going higher certainly on the investment portfolio. But I don't necessarily have a limit, but there's going to be a comfortable cushion on the cash side In the event that we see an outflow.
Okay. That helps. That makes sense. And then how about on Just an outlook for loan growth. Is there I mean, is there a growth target that you think you could provide for us for next year?
And Maybe kind of talk anecdotally about what kind of opportunities you're seeing and where you think the most growth could come from? And then Maybe just kind of some local geographical commentary would be helpful. I feel like the growth has been a little bit Lower in the D. C, Virginia area versus some other markets we're seeing at least in the Southeast. So just curious if there's anything that you think It's happening from a regional perspective that's driving that fuller growth.
Thanks.
Thank you, Catherine. I do think we've I've been seeing a lot more opportunities lately than we have seen in quite some time. Significantly, this year, in the construction area. Construction in the area is up Quite a bit. So, not really seeing much of a lag.
The difference right now, I think, is that there's so much liquidity out there That a lot of these projects have a tremendous amount of liquidity going in ahead of the draws. So there's going to be more delay in pulling down on construction lending and that could also be exacerbated by issues with the Supply chain, but I think overall that's the type of lending we're going to see Impact us going forward. Also seeing a lot of M and A, which I think is typical Pretty much across the country right now as there's consolidation in various industries. So that's also giving us some opportunities. Government contracting, again, is an opportunity area for us to grow as well.
I think we're being Quite competitive on pricing, provided we're getting a risk return On assets that's appropriate to the bank. So, overall, I have cautious optimism. Charles, do you want to talk about liquidity a little bit?
Well, yes, again, I mean, the notion that there's A lot of dollars, way more dollars chasing a good pipeline of deals. Again, just echoing your comments, That's really the challenges presented to us. And certainly as it relates to pricing.
And I think, the other thing that's Encouraging is that the housing market here is still extraordinarily strong. There is a Shortfall in housing in the DC area that's expected to take us several years at a minimum to catch up With the population growth that we've had and the delays caused by COVID in Certain projects, I think, there's unmet demand out there that still needs to be handled.
Great. Helpful. Thank you so much.
Have a great day.
Thank you.
And our next question comes from the line of Brody Preston with Stephens Inc. Your line is now open.
Hey, good morning, everyone.
Good morning, Bernie.
Hey, I just had a question on the sub debt Real quick, just given that you all redeemed that early in the quarter, has that worked its way into the interest expense Yes. So if I kind of look at the $3,000,000 you reported for long term borrowings and back out that 1,300,000
Deemed it on August 2, so you've got a day in there of the interest expense associated with that larger sub debt. But yes, that's a pretty good place to start.
Okay. All right, great. And then just on the core loan yield, And this is probably playing into some of the loan growth, the loan runoff you all have had, but it's holding up pretty well. And so I guess when I think about What you all are originating in new production, understanding that it's not outpacing Some of the runoffs you're seeing, but what are you all getting for new origination yields?
Yes. So, again, I think on the 3rd quarter, we saw coupons of close to 4% on a weighted average basis of what was The new loans that were originated and booked and funded for the Q3. And then there's obviously some component of deferred fees and costs that are added on to that to result in a yield slightly Again, whether or not that holds is a question. Again, things are very competitive. So That's where we were for the Q3.
Got it. Okay. And Susan, I heard you earlier about the lumpiness that can occur on the FHA fee income side. But I guess as I think about going forward annually, do you feel like the pace that you've done year to date Is where you would shake out in the upcoming years going forward?
Yes, we do. We're optimistic on that side, too. There is a lot on our books that we expect To close, so we're moving along in a positive way on that.
Okay, Great. And then on the securities portfolio, Charles, maybe do you happen to know what the effective duration of that portfolio is?
Yes. Effective duration of 3.8.
Okay.
Yes.
Okay. And then my last one yes, go ahead, Charles.
Sorry, just to provide a little bit more color. I mean that number has certainly Eaked up a little bit, right? There's more price risk just like there are more price risk in a lot of investment portfolios these days and many of our competitors Seeking some kind of return.
Got it. And then my last one is just on expenses, particularly the salaries and employee benefits. Could you remind me, I wasn't able to find it in my notes, but are there No increases that typically occur in the Q3. And so I guess this $22,100,000 kind of be the new run rate, going forward.
Yes. I mean, what I'd say on that is typically there is as you approach the end of the year and there's more clarity about Individual performances at the bank and the bank's performance overall, we have a better sense of what that annual incentive Expense is going to be and make accruals towards that. So yes, that is the nature of the way in which We're booking some of those. And obviously, this year was inordinately good with a lot of the reversals that we had In the allowance and some the sale of the PPP loans and Other areas where we've seen some good benefits. So, yes, that hopefully that provides you a little bit of insight there.
Awesome. Thank you very much everyone for taking my questions. I appreciate it.
Yes, sir. Thank you.
Thank you, everyone. This concludes our question and answer session for today. So now it's my pleasure to hand the conference back over to Susan Riehl, President and Chief Executive Officer, for any closing comments and remarks.
We appreciate your questions and all of you taking the time to join us on the call. We hope you are doing well, and we look forward to
Everyone, this concludes our Q and A and our call for today. You may all disconnect. Everyone, have a wonderful