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

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 [indiscernible].

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. This morning's commentary will include non-GAAP financial 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 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; then Jan Williams, our Chief Credit Officer, will discuss her thoughts on loans 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.

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

Before moving on, I would like to once again mention the contributions our lending team and our residential mortgage division have made. During the quarter, our lending team worked with our clients on the latest round of PPP and assisted them with the forgiveness process.

And our residential mortgage division had another great quarter with locked loans of $303 million and a gain on sale of mortgage loans of $5 million. Even with interest rates increasing slightly, we expect our residential mortgage division will continue to contribute meaningfully to the bottom line.

In regards to our market, a lot has changed in 3 months. On our last call, we noted that DC, Maryland and Virginia were stepping up COVID-related restrictions. Since then, all 3 jurisdictions appeared to be loosening restrictions on businesses as the vaccine rollout continues and expands its scope.

The District is now allowing restaurants and gyms to open indoors at 25% capacity. And both the nationals and DC United stadiums are open at limited capacity. Maryland also loosened restrictions by removing capacity limits for indoor and outdoor dining and allowing larger venues, including convention and wedding venues to operate at 50% capacity.

In Montgomery County, where our headquarters is located, some stricter restrictions still apply. And in Virginia, restaurants may open but must maintain physical distance and guidelines. Indoor events or convention centers and concert venues may open at 30% occupancy.

Publicly available industry data shows that nationwide hotel occupancy was approximately 55% in March. In restaurants, many with expanded outdoor capacity approached 2019 revenue levels in the month of March. It follows that unemployment has also improved with more people going back to work.

In the Washington MSA, the preliminary unemployment rate was 5.8% in February. This is down from 6.5% in December and down from 6.9% in September. These improving dynamics are giving a lift to the local economy through increased consumer retail spending, which we believe typically precedes a ramp-up in business spending and investment.

Moreover, our market areas should disproportionately benefit from any existing or proposed government stimulus. This past quarter, we faced headwinds in the form of low loan demand and a competitively low interest rate environment.

We were also experiencing elevated payoffs and prepays due in part to successful project completions and low nominal interest rates. We are excited about our strong pipeline and long-standing relationships in the community, where we continue to get looks on most available commercial projects.

Eaglebank intends to assertively pursue loan opportunities throughout the rest of 2021. We have the capacity to finance large commercial projects, and we believe we are extremely well positioned to take advantage of any economic recovery with common equity of almost $1.3 billion and risk-based capital of 17.86%.

Obviously, the timing for increases in loan demand will ultimately depend on market developments, the competitive marketplace and economic conditions. Those uncertainties aside, we remain hopeful that loan demand will pick up once the pandemic subsides and society resumes its normal pace of economic activity and social interactions.

For our shareholders, we remain focused on building value. Book value rose to $39.45 per share, up 9.2% from a year ago, and tangible book was $36.16 per share, up 10% from a year ago. We also increased the quarterly dividend to $0.25 per share and authorized a new stock repurchase program.

Although with the run-up in bank equities, we were not as active in the stock repurchase market as we expected to be at the start of the year. I would also like to welcome our 2 new independent Board members who joined in January, Steve Freidkin and Ernie Jarvis.

Steve, as the founder and CEO of his own full-service technology firm, brings technological expertise to the Board and serves on our Risk Committee. Ernie, as managing principal of his own real estate brokerage company, adds his expertise in commercial real estate to the Board and serves on the Bank's Directors Loan Committee.

As I have said repeatedly, Eaglebank is committed to have a diverse Board in terms of gender and ethnicity as we understand the value of different perspectives. Notably of our 10 directors, 4 are female and 2 of our male directors identify as minorities.

In regards to other diversity measures, last month, the Washington Business Journal ranked us eighth in terms of corporate diversity for mid-sized companies in the market. This was based on us having 61% of our staff being people of color. While we have a diverse workforce, we must also help our people thrive.

And this year, we created and launched a diversity and inclusion council tasked with developing additional initiatives to support diversity, inclusion and equity throughout our organization. Now on to the good news I mentioned on the legal front.

In the days following our nonbinding mediation, which occurred on April 13, we reached an agreement to settle a previously disclosed putative class action lawsuit for a total payment of $7.5 million by the company in exchange for the release of all alleged claims in the suit without any admission or concession of wrongdoing by the company or any defender.

The class action settlement agreement is subject to court approval, and the payment amount is expected to be fully covered by our insurance carriers.

In addition, the previously disclosed stipulation of settlement in connection with the shareholder derivative litigation still remains subject to court approval, with the preliminary hearing set for May 12, 2021.

We are pleased to have settled both our major commercial litigation matters and look forward to securing court approval and putting these matters behind us. In anticipation of some likely questions, there is nothing material to report on the previously disclosed government investigations.

We continue to cooperate with the government and believe progress is being made towards a resolution of these matters. Before turning it over to Jan, I would like to thank all of our employees for all their hard work and their commitment to support our clients.

With that, I would like to turn the speaking duties over to Jan Williams, our Chief Credit Officer..

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..

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. It shows our PPNR at $55.3 million for the first quarter of 2021, up from $47.9 million in the first quarter of 2020.

As a percentage of assets, annualized PPNR in the first quarter of 2021 was 1.95%. This is down 9 basis points from the first quarter of 2020, but the decrease is more from the 21.9% increase in average assets, outpacing the increase in PPNR of 15.4%. Comparing our performance over linked quarters, net interest income was up $1.2 million.

With the reversals on the provisions to the allowance for credit losses and for unfunded commitments, we had a positive swing of $8.1 million on the 2 provisions. Noninterest income was up $700,000. Contributing to this was the cancellation of a $50 million in-the-money FHLB borrowing, resulting in a $911,000 gain.

Offsetting these improvements, noninterest expenses were up $3 million, mostly due to annual incentive costs captured in the first quarter, and legal and professional fees were up $657,000, mostly attributable to nonlegal advisory fees. These linked quarter changes led to an increase in pretax earnings of $7.1 million.

Bottom line, on a linked-quarter basis, earnings were higher by $4.6 million and the earnings of $43.5 million for the first quarter of 2021 was a record for the company. When the quarter started, deposit inflows continued as they had in the prior 2 quarters.

Both assets and deposits were running a bit higher during the quarter by about $400 million, but these deposits flowed out by the end of the quarter. As a result, at quarter end, assets were flat at $11.1 billion, and deposits were also flat at $9.2 billion.

As deposits ended flat, we made some progress putting a little over $200 million of excess liquidity to work in investments. Investments were primarily 20 years 2% agency mortgage-backed securities and callable agency bonds. We will continually look to invest our excess liquidity to seek out higher-yielding alternatives to cash.

Also, higher cost CDs continue to run off and costs on money market and savings accounts moved lower. In the first quarter of 2021, CDs with a total balance of $230.9 million with a weighted average rate of 1.69% matured. These CDs had a weighted average term of 18 months at issuance.

We added about half of that $230.9 million back in the form of -- in the form or lower cost -- of lower cost CDs and the balance was in other deposits. Average CD balances for the quarter were 9.6% of average deposits, down from 10.8% in the prior quarter.

The average cost of our money market [indiscernible] is now 33 basis points, down from 42 basis points in the prior quarter. Overall, our cost of funds in the first quarter of 2021 decreased to 42 basis points, down from 48 basis points in the prior quarter.

Putting some excess liquidity to work and keeping funding costs low helped us keep the NIM steady at 2.98% for the first quarter of 2021, which was unchanged from the fourth quarter of 2020. With that, I'll hand it back to Susan for a short wrap up..

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

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?.

In terms of the mix of our assets going forward?.

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....

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..

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?.

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..

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?.

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..

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..

Yes..

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

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?.

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..

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?.

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..

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?.

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..

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..

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?.

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..

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

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?.

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?.

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..

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..

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..

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?.

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..

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?.

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..

Your next question comes from Samuel Varga from Stephens Inc..

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?.

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..

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..

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..

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..

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?.

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..

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

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

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