Eagle Bancorp, Inc. (NASDAQ:EGBN) Q4 2024 Earnings Call Transcript

Eagle Bancorp, Inc. (NASDAQ:EGBN) Q4 2024 Earnings Call Transcript January 23, 2025

Operator: Good day and thank you for standing by. Welcome to the Eagle Bancorp Inc. Fourth Quarter and Year End 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Eric Newell, Chief Financial Officer of Eagle Bancorp. Please go ahead.

Eric Newell: Good morning. This is Eric Newell, Chief Financial Officer of Eagle Bancorp. Before we begin the presentation, I would like to remind everyone that some of the comments made during our call are forward-looking statements. We cannot make any promises about future performance and caution you not to place undue reliance on these forward-looking statements. Our Form 10-K for the 2023 fiscal year and current reports on Form 8-K, including the earnings presentation slides, identify risk factors that could cause the company’s actual results to differ materially from those reflected in any forward-looking statements made this morning, which speak only as of today. 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 the company online at our website or on the SEC’s website. With me today is our President and CEO, Susan Riel; Kevin Geoghegan and Jan Williams. I would now like to turn it over to Susan.

Susan Riel: Thank you, Eric. Good morning everyone. Last night we reported net income of $15.3 million for the quarter. This result reflects our proactive approach to navigating valuation risk, particularly through an increased provision for credit losses. As part of the effort, we moved a $74.9 million office loan to non-accrual status due to a new appraisal. This loan continues to make contractual payments and the property’s improving fundamentals gives us cautious optimism as we manage through this challenging environment. Our team remains focused on executing a disciplined strategy that positions Eagle Bank and our clients for long-term success even amid evolving market dynamics. The enhanced loan disclosures introduced last quarter reflect our commitment to transparency, helping stakeholders better understand the risk we see and how we are addressing them.

Looking back on 2024, we made significant progress toward building a foundation for sustainable growth. We strengthened our C&I team to deepen relationships and grow deposits and fee income, key components of our profitability strategy. Fourth quarter deposit growth of $590.2 million allowed us to fully repay $1 billion in Bank Term Funding Program debt, a testament to our strength, the strength of our balance sheet and liquidity management. As we look ahead our geographic presence is in the DMV, our role as a top local commercial lender and our deeply rooted relationship first values create a strong competitive advantage. These qualities enable us to adapt to change and deliver solutions that build trust and long-term value for our clients.

The entire team is energized by the progress we’ve made and the opportunities ahead. With the groundwork laid in 2024, we are confident in our ability to execute on our strategic goals and deliver results for our shareholders. With that, I will turn things over to Jan.

Jan Williams: Thank you, Susan. Our asset quality metrics were impacted by the migration of an office loan from special mention to non-accrual substandard in the fourth quarter. While the office loan matured in December, because of our extension to September 2025, a new appraisal was obtained. The new appraisal showed a 44% decline in value since the date of the last appraisal in May of 2022. The borrower is cash flowing and continues to be current on payments. There are indications of improvement in the market. We’ve seen increases in leasing activity and positive net absorption in the fourth quarter of 2024. Cash flow from properties and transactions are occurring at higher valuations than recent appraisals. At the same time, appraisals remain inherently backward looking and are heavily dependent on historical comparables.

So an appraisal today may not fully capture current market trends. As more market transactions occur, we would anticipate less volatility in appraisals. Given the outcome of the appraisal, we individually evaluated the loan and took a charge-off of $9 million, more than two-thirds of which was already contained in the reserve. The loan was placed on non-accrual. We believe the loan remains adequately reserved at this time. The balance of the loan is $74.9 million. Since late 2020, we’ve been sweeping cash flow and building reserves for build out on new leases and payment reserves. We continue to sweep excess cash flow and continue building additional reserves. Details about the loan are included on Page 23 and Page 24 of our earnings deck.

Net charge-offs totaled $9.5 million in the fourth quarter, resulting in 2024 charge-offs of $38.6 million or 48 basis points. During the quarter we upgraded two separate office loans that were previously special mentioned and substandard to pass. For one of those loans, we worked with the borrower to secure a three-year extension with three principal curtailments putting the bank in a better position and allowing the borrower to continue exploring redevelopment of the property to multifamily. On the other, we received a curtailment that resulted in a reduced loan to value of less than 70%. We also saw an upgrade in the quarter of a $46.3 million hotel loan from special mention to pass-rated with improved operations. A multifamily loan of $30 million was upgraded from substandard to pass as a result of additional cash reserves sufficient to support a preplanned HUD exit.

Two CNI loans totaling $26.5 million were upgraded from substandard to special mention due to direct assignment of contract proceeds more than sufficient to repay the debt. Other downgrades in addition to the office loan of $74.9 million in the quarter included a $36.8 million owner-occupied industrial commercial real estate property. Substandard loans increased $35.1 million during the fourth quarter to end at $426.4 million. Special mention decreased $120.2 million during the quarter to end at $244.8 million. This represents overall positive migration of our criticized and classified loans for the fourth quarter. We note in our disclosure on Page 20 of our earnings presentation that 69% of our classified and criticized loans are performing following the migration of the aforementioned office loan to nonaccrual during the fourth quarter.

Non-performing loans were $208.7 million at December 31, an increase of $74.3 million from September 30 driven by the office loan. Non-performing assets to total assets were 1.9%, an increase of 68 basis points from the prior quarter. Loans 30 to 89 days past due were $22 million additional December 31st, decreasing from $56.3 million at September 30th. Eric?

Eric Newell: Thanks Jan. We reported net income for the quarter totaling $15.3 million or $0.50 per diluted share. This compares to the prior quarter of $21.8 million or $0.72 per diluted share. Pre-tax income declined $6.9 million to $19.8 million in the fourth quarter. The decline in net interest income, higher provision for credit losses, lower fee income and higher noninterest expenses contributed to the pre-tax decline. Taxes were largely unchanged from the fourth quarter despite lower pre-tax income due to return to provision adjustment and uncertain tax benefit, representing $2.2 million of tax expense in the quarter. This was partially offset by a $1.7 million tax benefit from an investment tax credit purchased during the quarter.

Our capital position remains strong. Tier 1 leverage ratio decreased 3 basis points to 10.74% as average assets increased slightly more than Tier 1 capital quarter-over-quarter. Common equity Tier 1 ratio increased 33 basis points to 14.63%. Tangible common equity ratio increased 16 basis points to 11.02% at quarter-end. Book value per share decreased $0.01 to $40.60 per share as unrealized losses increased due to higher market rates at December 31 compared to the prior quarter end. On balance sheet and contingent liquidity also remain strong. Average deposits have grown $585.1 million from a year ago at December 31, 2023. A significant amount of this annual growth was achieved through our digital channel. Our one-way broker deposits increased $234 million from the comparable 2023 period end due to contractual non-maturity brokered funding relationships.

We reduced brokered CDs throughout the year and expect to resize our contractual non-maturity brokered relationships in 2025. Growth in deposits in the second half of 2024 facilitated our ability to fully pay off early our $1 billion of bank term funding program borrowings that were outstanding at September 30th. Insured deposits totaled 76% of our total deposits. At the end of the quarter, available liquidity from the Federal Home Loan Bank, Federal Reserve discount window, cash and unencumbered securities totaled $4.6 billion. Net interest income before provision totaled $70.8 million in the fourth quarter, decreasing from $71.8 million in the third quarter. Net interest income declined because of 360 – $965,000 reversal from interest income due to the migration to non-accrual of the previously discussed office loan.

NIM declined 8 basis points from the third quarter to 2.29%. Generally, we saw interest income and interest expense declined proportionately to one another. The shift in mix of average earning assets with a higher proportion of interest earning deposits was the largest contributor to the decline in NIM. Of the $162.6 million of funded loan originations in the quarter, we had a weighted average rate of 7.68%. This compares to $91.2 million of funded loan originations at a weighted average rate of 7.11% in the third quarter. Management has reduced rates paid on non-maturity deposits due to declining in interest rates. Following the decisions by the FOMC to ease the policy rate by 25 basis points each in November and December, we reduced rates on for non-maturity deposits by a cumulative 50 basis points.

This follows our actions taken to reduce non-maturity deposit rates from the FOMC easing earlier in the fall. Non-interest income decreased as the third quarter items such as the sale of MSRs, income from SBIC investments as well as income from back to back swap transactions did not reoccur in the fourth quarter. In early January, management added to its bank-owned life insurance policies, which will increase the run rate of cash surrender value growth and related income starting in the first quarter. Non-interest expense totaled $44.5 million increasing from $43.6 million in the prior previous quarter. Salaries and benefits increased due to a true-up on severance for departing employee and higher compensation expense due to forfeitures of share-based compensation in the third quarter, which did not repeat in the fourth quarter.

Marketing and advertising declined because of lower spend on our digital channel. Legal, accounting and professional expenses declined and were offset by higher FDIC expenses. In our quarterly investor deck released along with earnings, we updated our view on 2025. Our thoughts on period end growth of loans next year remain between 2% and 8% though the slide shows average growth. Earning asset growth is flat as we continue to take cash flows from our investment portfolio and reinvest in loans. With our budgeting process completed, management has a more precise view of the net interest margin. As noted last quarter, there is an expected benefit from this repositioning of the investment portfolio and loan mix that is expected to enhance spread.

Growing relationship deposits and reducing and optimizing the use of wholesale funding are also expected to contribute to spread. I’ll turn it over to Kevin to discuss our ACL.

Kevin Geoghegan: Thank you, Eric. As Jan mentioned, net charge-offs increased $4.2 million from the third quarter to $9.5 million. We will continue to evaluate the sufficiency of our qualitative reserves to address market uncertainties. However, we currently expect that any future reserve increases will stem from specific reserves for individually assessed loans, should there be a significant shift in economic expectations not accounted for in our qualitative reserves that would be reflected in the inputs we use to inform our model and that could result in increases in reserves. Last quarter, we mentioned the future reserve build, if any, would be driven by specific reserves from individually evaluated loans. This is, in fact, the driver of the allowance for credit losses during the quarter.

In addition to specific reserves associated with the office loan discussed previously, we increased our specific reserves for an assisted living relationship, which is number three on our non-accrual loan listing on Page 23 of our investor deck. The allowance for credit losses increased to $114 million at 12/31 representing coverage of total loans at 1.44%, an increase of 4 bps from the prior quarter. The ACL coverage to performing office loans totals 3.81% at 12/31, down from 4.55% at 9/30, due to the reserves associated with the office loan following it into the individually evaluated specific reserves. Finally, we continue to believe that our reserves are adequate. I’ll turn it over to Susan for a short wrap up.

Susan Riel: Thanks, Kevin. The team completed foundational actions last year to support our strategic goals, growing and diversifying, building relationship deposits and focusing on operational excellence. While it will take time to reach our operational goals, we are beginning to see early successes that will drive results. At the same time, we remain focused on addressing asset quality concerns and mitigating valuation risk as office loans approach maturity. As a community-focused bank, we take pride in being deeply connected to the communities we serve. This commitment sets us apart and positions EagleBank to thrive amid evolving market dynamics and in the DMV. In closing, I want to thank our dedicated employees. Your hard work makes EagleBank a success and ensures we continue to deliver value to our customers and stakeholders. With that, we will now open things up for questions.

Q&A Session

Operator: [Operator Instructions] And our first question comes from Justin Crowley with Piper Sandler. Your line is open.

Justin Crowley: Hey, good morning, everyone. Just wanted to hit on the office loan that got downgraded in the quarter. Obviously, reappraisal volatility has been an issue overall, but maybe thought some of these Class A buildings, particularly in areas like Montgomery County were a bit more insulated from that risk. Does this situation change at all how you’re thinking about that sort of risk as you look across the portfolio outside of what’s in D.C. central business district and especially as we move through the year and get closer to some of these larger loans with 2026 maturities?

Susan Riel: Yes. I think we are and have been focused on all office whether suburban or central business district. The severity of the decline in raised values is much more in the central business district and is ameliorated to a certain extent in the suburbs. That said, different appraisers have different perspectives on appropriate cap rates, leasing rates, discount rates. For me personally, I was surprised to see a discount rate of 11% in a Class A suburban market with increased leasing activity. On the other hand, we can see that overall the time to stabilization has been reduced due to the current leasing activity. You’re looking at this particular property has a stabilized value of about $110 million. So that’s in 2027.

So I think you’re going to see changes as the pace of leasing increases or decreases in this particular class of building. I have cautious optimism that we are going to be in a position to continue. If you took a look at, there’s one other similar property that you may have thought of, that’s an office property of similar size that is also in Montgomery County and that is on our top 25 list that we provided in our deck. That’s number two on that list. And that particular property was appraised in February of 2023, and compared to the May of 2022 appraisal, on the property that we just placed into non-performing status, there was a 44% drop in valuation on the appraisal from May 2022 until January of 2025. If you kind of extrapolated from there, and this would just be a ballpark swag and took 44% decline in appraised value on the office property that comes up for reappraisal in 2026, you’d be looking at a potential $3 million charge up.

So I don’t think it’s a staggering number. You may have different discounts that you’re looking at or you may feel that different cap rates apply. And that’s a matter of judgment, but I think we’re on top of these and continuing to work with borrowers. One of the things that really helped us on the property that became non-performing was the fact that we had been sweeping cash flow for a significant period of time. And that assisted us both in the collateral valuation and also in the ability to continue forward and fund any TI work that is necessary in connection with value-add leasing. So I know there is TI work in progress right now on a particular new lease. I have cautious optimism on that front. Did that answer your question?

Justin Crowley: Yes. No, that’s helpful. And just for – I guess just a little further detail, you noted just some of the improving fundamentals on that property that moved to non-accrual this quarter. Can you unpack that just a little more just in terms of what the leasing activity has looked like or occupancy levels? And maybe how that squares with the other loan that’s currently on special mention that you had called out.

Susan Riel: Well, I can tell you that the leasing activity has been fairly consistent over the last couple of years in that it’s managed to sustain occupancy in a difficult market. But it’s ticked up right now and what we’re seeing are reductions in concessions in addition to a more rapid lease up period to get to stabilization. I think you’ve, at one point, maybe two years ago in the summer, we were looking at $180 a foot GI [ph] allowances and not an eyebrow was raised at that. And now we’re down around $95 a foot. So, I think effective gross rents are increasing and we are also seeing more activity both in this property and in very similar proximate properties. So I have optimism on that.

Justin Crowley: Okay, got it. And then I guess, somewhat relatedly, with the new administration in place now, there have been some headlines in recent days describing, the potential for some large-scale sales of federal government office space and canceling of leases, et cetera, which would, of course, likely take some time to play out. But are you able to provide any detail on direct exposure to government office? And then, I know it’s early, but just any preliminary thoughts on the impact moves out of the GSA could potentially have on your book?

Susan Riel: We have very little exposure to GSA. I think those properties that had large GSA leases were for the most part in the CMBS market. Those are bigger properties. And at the time, I think GSA lease was thought to be as good as you could get on leasing. That certainly has changed, at least the chatter around it has changed at this point. I do think it pulls two ways. It appears the administration believes that the private sector can provide occupancy to the government less expensively than the government is providing it to itself, and do a better job. I don’t think it’s a huge surprise that this administration would want to privatize that activity. So, I would expect they would be trying to sell some properties, some in this area, some across the country.

I do think that means there’s going to be more leasing as a result of the concurrent directive for federal employees to go back to the office. There has to be someplace for them to go. So there could be for properties that have significant floor plates available that are in the B plus A minus area that might be something that could see an uptick with the federal government leasing. I do think the properties that they’re contemplating selling appear to be B minus C plus properties. And it will take a significant period, I think, for those properties to be rehabbed and brought back to the market. Just one person’s thoughts on it.

Justin Crowley: Okay. That’s helpful. And then shifting gears a little, there’s obviously a larger end market competitor who’s involved in a merger transaction right now. To what extent, has it already created some opportunity for you folks? Or how do you think any dislocation could play out from your standpoint, whether that’s new business or opportunity to add talent?

Eric Newell: Susan, you want to take that?

Susan Riel: We think it will bring opportunities for us. So we’ll be the largest community banker in this area, and we think that will mean opportunities for us. Of course, there’ll be opportunities with people and there are some shared customers that we already have with them. So we’re looking at it as a positive for us. Eric, you want to add anything?

Eric Newell: Yes. There’s a team that has mobilized to analyze where we share customers, if there’s opportunities for us to get greater market or greater wallet share of that shared customer. We think that there will be opportunities around milestones in that transaction when there’s a legal close, when there’s a conversion. And we hope to be able to share our value proposition and deepen the relationships that we share customers with them as well as acquire new customers.

Justin Crowley: Okay, great. I appreciate the time this morning. Thank you.

Operator: Thank you. Our next question comes from Catherine Mealor with KBW. Your line is open.

Catherine Mealor: Thanks. Good morning.

Susan Riel: Good morning, Catherine.

Eric Newell: Good morning.

Catherine Mealor: Maybe just one. Back on credit, as we think about your outlook for the reserve, and I know it’s kind of hard to put a range on reserve bills and net charge-offs, but as you kind of sit here today and you think about your potential exposure. Would you expect to continue to see reserve bills throughout the course of 2025? Or do you think we’re at a good place today? It certainly was good to see less inflows of substandard and special mission [ph] credits, which makes me feel like maybe we’re at a peak in our allowance. Just curious your thoughts on that. Thank you.

Eric Newell: Yes. In our budgeting process, we do not currently anticipate any reserve build beyond what Kevin’s comments talked about in the sense that if there’s an idiosyncratic issue with a credit that requires us to individually evaluate that loan, there could be noise there. But we feel that the office overlay that is a qualitative approach that we’re addressing concerns as we see it for office we feel that that is adequate at this point. I believe last call I put a range out on credit costs. I think it was 25 basis points to 50 basis points for 2025 and we continue to expect that to be the range.

Catherine Mealor: And that’s provisioning versus charge offs, or I guess maybe they’re kind of in the same range?

Eric Newell: Without…

Catherine Mealor: Right?

Eric Newell: Yes. I look at it as kind of the same thing because without a reserve build, you’re going in and out.

Catherine Mealor: Yes, makes sense.

Eric Newell: Go ahead.

Catherine Mealor: Okay. Great.

Eric Newell: Thinking about what we achieved in 2024, actually even the last 18 months ending December 31, 2024, I think at June 30th, our reserve was approximately 100 basis points to loans and now we’re at 144 basis points to loans. We’ve achieved a lot of build over that 18 months, and based on the information that we have today, we believe that that is adequate.

Catherine Mealor: Okay. Great. And then on the outlook for the balance sheet, there’s a big build in the balance sheet from the excess liquidity and deposit growth this quarter. And so I thought it was interesting that your guide for average earning assets was flat. I would think maybe you might see a little bit of decline as we just kind of put some of that excess liquidity to work, but still we’re coming from such a larger average earning asset base at the end of the year. Just curious your thoughts on that as we kind of think about excess liquidity kind of into the bond book and into loan growth?

Eric Newell: We’re not currently expecting any growth in the bond portfolio. And in fact, our goal is to get the percentage of the bond portfolio to assets into the teens. I think Charles was saying around 15% and we’re above that. And that is one of the reasons why in our budgeting process, you can see that there was an improvement in our outlook on NIM for 2025 versus what we previously had disclosed in last quarter. You have about $385 million of cash flows that are currently earning us around 2% that are expected to go into the loan portfolio or even cash in this case. I mean, that’s not really what our goal is. We want to go into the loan portfolio, which materially contributes to an increase in spread. The comment about the average balance sheet. It is true that we had some excess cash on throughout the fourth quarter. We do have expectations that that would be utilized, better utilized into the loan portfolio as well in 2025.

Catherine Mealor: And I’ve noticed that you’ve made a couple of new hires in the C&I line of business. Any commentary there and just thoughts on your loan growth. How much of that’s coming in C&I versus CRE?

Susan Riel: We’re already seeing positive results from the changes that we’ve made in the C&I area. With bringing Evelyn Lee in as the Head of the C&I Group and with the strategic hires that we have made, so far we’re seeing increased activity in that area in a very, very positive way.

Eric Newell: In terms of growth, Catherine, yes, our CRE team is seeing payoffs in the multifamily space, particularly we saw some in the fourth quarter. I think we’re expecting more in the first quarter. And I believe Ryan made a comment about some expected payoffs in the second quarter as well. And what that will allow us to do is, we can opt to, depending on the pipelines, we can opt to work on any types of activity that the CRE team might be seeing and then also use some of that capacity in terms of cash flows coming back to us and redeploy that in our C&I portfolio.

Susan Riel: Right. We’re really looking at our CRE concentration coming down to…

Eric Newell: Yes.

Susan Riel: As a result of that, those payoffs.

Eric Newell: Which is a big benefit of ours, is reducing that CRE concentration ratio.

Catherine Mealor: Yes, for sure. For sure. Great. Thank you very much. Appreciate it.

Susan Riel: Thanks, Catherine.

Operator: Thank you. I’m showing no further questions at this time. I would now like to turn it back to President and CEO, Susan Riel for closing remarks.

Susan Riel: Okay. I’d like to thank everyone for your questions and for you taking the time to join us today. We look forward to speaking with you again next quarter. Have a great day.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.