Eagle Bancorp Inc (EGBN) 2025 Q2 法說會逐字稿

Good day and thank you for standing by. Welcome to the Eagle Bancorp Inc. Second Quarter 2025 earnings 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. To ask a question during the session, you will need to press * 11 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press *11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Eric Newell, Chief Financial Officer of Eric Bancorp. Please go ahead.

Good morning. Before we begin the presentation, I'd like to remind everyone that some of the comments made during this call are forward-looking statements. The current market environment is uncertain, and we cannot make any promises about future performance and caution you not to place under reliance on these forward-looking statements.

Our Form 10K for the fiscal year 2024, Form 10Q for the quarter ended March 31, 2025, and current reports on Form 8K, including the earnings presentation slides, identify risk factors that could cause the company's actual results to differ materially from 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-gap 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 chair, President and CEO Susan Riel, Chief Lending Officer for commercial real estate Ryan Riel, and our Chief Credit Officer Kevin Geoghegan. I'll turn it over to Susan.

Thank you, Eric. Good morning, everyone. As I mentioned in our first quarter earnings call, we anticipated taking a proactive approach to the resolution of challenged office loans and to addressing related valuation pressures. Our second quarter results reflect the expected outcome of that approach. While the financial impact is significant, we believe these actions were prudent and necessary given our belief that the changes affecting the office sector are long term and structural. At the same time, we are making tangible progress toward meeting our object objectives.

Outlined in our strategic plan, we are seeing steady growth from our CNI team, and the shift in our portfolio mix towards CNI is underway. Importantly, we are beginning to see the results of our targeted relationship deposit efforts with core deposit growth contributing to a reduction in our wholesale funding reliance.

While the 2nd quarter performance is disappointing, these steps are deliberate and designed to more quickly normalize provision expenses in the future. The provision this quarter reflects not only continued market deterioration, but also our receipt of new valuation data on office properties.

As a result, we are reserving for substandard performing office loans at 31.2% with the total coverage ratio of the office portfolio at 11.5%. Much of the provisioning this quarter is tied to specific exit strategies. For example, we restructured our largest non-accrual office loan into an AB neo. Continuing payment performance allowed us to return the A portion of this loan to accrual status.

We also made progress on other resolution strategies. Two non-accrual office loans were moved to held for sale, and we've executed a letter of intent on one of those. We expect that sale to close in the 3rd quarter. I'll now turn it to Kevin, who will talk more about our credit provision.

Thank you, Susan. As noted in the 1st quarter, we are continuing to take a proactive and disciplined approach to our workout strategies. Results for the quarter were impacted by a $138 million dollar provision for credit losses.

Of this total $45.4 million is related to an increase in our office overlay, which is a qualitative reserve. Another $11.1 million is associated with individually evaluated loans and is a quantitative component of the model. As we continue to recognize valuation impairments, our established reserve methodology takes into account those losses. Performing office loans rated substandard. And special mention have 31.2% and 15.6% of their balances in the reserve respectively. Nearly $70 million of the provision was attributable to the exit strategies related to loans held for sale or expected sale opportunities. The allowance for credit losses increased to 183 million representing coverage of total loans at 2.38%, increasing 75% bits from the prior quarter.

The ACL coverage ratio to performing office loans increased to 11.54% at the end of Q225, up from 5.78% in the prior quarter. Non-performing loans for $226.4 million at $630 a net increase of $26 million dollars for the quarter.

On slide 22 of our earnings release deck, we provide a walking bridge of non-accrual loans from March 30th first to June 30th. Outflows of non-accrual loans include the office loan that had an AB restructuring during the quarter, resulting in an A note moving from non-accrual to accruing pass. A non-accruing senior housing loan was approved for short sale and closed, and we did not finance that takeout. Finally, $10.5 million is attributable to a disposition of a non-performing land loan.

Inflows to non-accrual include $54 million 54.2 million dollars of office property, $41 million of land properties, $33.6 million dollars related to a data center which includes an office component, and a $9.1 million dollar life Sciences office property. All loans that come into non-accrual have specific reserves if we have determined that there is a lost content associated with them.

Non-performing assets to total assets were 2.16%, an increase of 37 bits from the prior quarter. That charge off totaled $83.9 million in the second quarter. Loans 30 to 89 days past due were $34.7 million at June 30th, decreasing from $83 million at March 31st. Total criticized and classified loans at June 30th totaled $875.4 million increasing from $774.9 million.

Most of these multi-family loans have naturally occurring or mandated affordable components that showed strain due to governmental mandates that inhibit effective landlord remedies which resulted in lower operating income.

We believe this inflow is idiosyncratic rather than systemic and not indicative of future lost content. We do not reflect the same. They do not reflect the same structural or evaluation issues present in the office portfolio.

Importantly, the loan portfolio remains well diversified by industry. And geography within the DMV and we believe this diversification combined with our strong credit underwriting and portfolio management provide us with, well position us well to manage through the current environment.

Our more proactive approach for dealing with problem loans is designed to hasten the resolution of these credits in a more timely fashion. This will allow the bank to minimize losses and achieve our desired results of moving to a more normalized credit provisioning environment that maximizes earnings and shareholder returns. Each problem loan however, is different, and the trade-off between minimizing loss and quickly resolving the problem loan is something we evaluate on a case by case basis.

These business judgments, informed by a myriad of market and borrower dynamics are constantly evolving. That said, the bank is fully aware and fully appreciates the minimizing of uncertainty regarding the overall loss content in our office portfolio itself is a risk to franchise value. This is part of the overall consideration when we evaluate the best course of action for each problem credit. With reserve coverage on office portfolio growing and more problem credits being resolved, resolution of the remaining problem credits should have less of an impact on earnings over time.

Although not possible to predict with any degree of certainty, we believe the 3rd quarter will be better than the 2nd quarter and are hopeful to return to a more normalized provisioning environment in one queue of 26, Eric.

Thanks, Kevin.

Our second quarter results reflect the impact of credit reserve building and loan resolution efforts resulting in a net loss for the quarter totaling $69.8 million or $2.30 per share. This compares to the prior quarter's net income of $1.7 million or $0.06 per diluted share.

Eagle Bank continues to operate safely and soundly from a position of financial strength. There continues to be extensive loss absorption capacity on the balance sheet to address any reasonably foreseeable loss content or valuation risks posed by our office portfolio.

Even with its quarter's credit-related losses, our capital position remains strong. Tier 1 leverage ratio decreased 48 basis points to 10.63%. Our common equity tier 1 ratio decreased 60 basis points to 14.01%, and notably, our tangible common equity ratio increased 18 basis points to 11.18% at quarter end, which was supported by stronger investment portfolio valuations. Our book value per share decreased $1.96 to $39.03%.

Deposit growth and a high level of insured deposits underscore the strength and stability of our funding base. With $4.8 billion of available liquidity, we maintain more than 2 times coverage of uninsured deposits reflecting a well positioned balance sheet.

Average deposits have grown by 1 billion since the 2nd quarter of 2024.

During the core, there were meaningful positive developments in our core performance metrics. Pre-provision net revenue increased 2.3 million to 30.7 million in the 2nd quarter. The increase in net interest income and lower non-interest expenses contributed to the pre-provision net revenue increase. This growth underscores the stability of our core earnings, even with elevated provisioning.

Net interest income rose to $67.8 million which benefited from a combination of lower deposit and borrowing costs, a reduction in short-term borrowings and an additional day in the quarter.

These benefits helped offset pressure from lower loan yields and a shift towards time deposits.

In addition to improvements in funding costs, we continue to see positive movement in our funding profile. We pay down FHLB borrowings by 440 million to $50 million at June 30th.

Additionally, we've reduced non-core broker deposits by 461.7 million and increased core deposits by $304.1 million over the same period.

These changes reflect a deliberate effort to strengthen and diversify our funding base and reduce reliance on wholesale funding consistent with our strategy.

The decline in interest bearing cash balances this quarter was a strategic decision aimed at optimizing our net interest margin. By intentionally reducing excess on balance sheet liquidity and paying down short-term borrowings, we were able to improve net NIM. This is consistent with our broader effort to manage the balance sheet dynamically while supporting long term margin expansion.

Our focus on expanding CNI lending continues to gain traction, demonstrating the resiliency and strength of our commercial banking franchise. In the 2nd quarter, over 2/3 of our loan originations were CNI loans, building on the successes of the 1st quarter and advancing our strategic objective to diversify the loan portfolio.

NIM expanded 9 basis points from the 1st quarter to 2.37%, primarily driven by the pay down of average borrowings and reduced funding costs on money market accounts and other borrowings. With improved deposit pricing, lower average borrowings, and upward repricing of investment portfolio cash flows, we expect, we continue to expect NIM to improve modestly through the balance of 2025.

Non-interest income was $6.4 million for the second quarter of 2025 compared to $8.2 million in the prior quarter. The sequential decline was primarily the result of a $1.9 million loss from a repositioning trade executed to enhance long-term yields in the investment portfolio. We remain confident in our non-interest income forecasts underpinned by stable, bully contribution and our expectation of fee generating activities from growth in our treasury management sales.

Non-interest expense decreased by $2 million to $43.5 million from the previous quarter. This improvement was attributed to lower legal, accounting, and professional fees. We continue to maintain tight control of expenses while making targeted investments to support our strategic objectives.

We've updated our view on full year 2025 on slide 11. Average earning asset growth has been adjusted to reflect our second quarter's strategic decision to manage our excess cash.

We revised our average loan growth outlook from 2 to 5% growth to flat, primarily due to higher than expected CRE payoffs earlier in the year. While our CNI teams have driven solid loan growth, these CRE payoffs have prompted us to reassess overall loan growth expectations.

Importantly, this revision is not a result of market weakness or reduced demand, but rather aligns with our strategic objective to lower CRE concentration.

We've raised our average deposit growth guidance from 1 to 4% growth to 4 to 6% growth, reflecting stronger than anticipated growth in digital deposits.

And finally, we've adjusted the annual tax rate to reflect expectations associated with the loss this quarter. That updated range is reflected in the deck at 37% to 47%, reflecting tax planning actions that we've taken earlier in the year.

Our capital return philosophy is shifting in tandem with current performance and strategic priorities.

We declared a dividend this quarter. However, we are evaluating a near-term reduction or suspension and expect to take this action and expect to take this action that appropriately considers current performance and outlook. This potential action is not motivated by any concerns we have regarding loss of absorption capacity, which remains strong but is a deliberate choice to preserve flexibility as we work through the remainder of our asset quality resolution strategies and position the bank for long term value creation as earnings normalize, we will re-evaluate the most effective forms of capital return.

I'll turn it over to Susan for a short wrap up.

Thanks Eric. We are pleased to see positive momentum towards achieving our strategic priorities, growing and diversifying our franchise, deepening relationship-based deposits, and driving operational excellence. What continues to distinguish Eagle Bank is our deep connection to the communities we serve and our relationship first culture. In an evolving market like the DMV, staying close to our clients and our community remains a core strength that supports our resilience and relevance.

Before we conclude, I want to express my sincere appreciation to our employees and customers. Your dedication and professionalism make all the difference. With that, we will now open things up for questions.

Thank you. At this time, we will conduct the question-and-answer session. As a reminder, to ask a question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Please stand by while we compile our Q&A roster.

Our first question comes from Justin Crowley with Piper Sandler. Justin, go ahead with your question.

Hey, good morning. I wanted to start out on credit and appreciate all the detail and the prepared remarks.

With the reserve bills and charge us in the quarter, can you just sort of help frame for us how you think about, what inning we're in as far as providing for potential loss as you look to move some of these assets off the balance sheet? I know in the past it's been more of, as loans and your maturity and the new appraisals come in, that's when we would tend to see the credit cost filtered through. So curious the scope of the actions taken this quarter in terms of, the extent to which you looked out in the outer years of the office portfolio and other areas.

Yeah, Justin, thanks for the question. Well, I'm a baseball fan, I'm not sure I'm going to put us in any inning, but really to point you back to the remarks that we believe that net charge offs in the next quarter will be similar to this quarter. And but because of our reserve actions and provisioning, we don't see a bigger impact, a more severe impact to the income statement.

And just just to build off of that, thinking through the cycle in terms of office and office-related collateral, and what I define as a cycle is starting June 30th of 2023 we've charged off $113 million to date and at June 30th we have total reserves for office of $109.5 million. And that reserve would include the office overlay as well as in the quantitative aspect of the reserve and any individually evaluated loans.

Right? And I would build on that too and point to the maturity comment that you made, Justin, and say that there's, more than half of the 26 maturities are being dealt with in the numbers that you're seeing now.

Stand by for our next question.

Our next question comes from Katherine Miller with KBW. Catherine, go ahead with your question.

Thanks. Good morning. I guess my follow up to that is, the inflows to MPAs were really large this quarter and so just kind of curious as you I mean I think what we're all trying to figure out right now is are we at the peak right? And that was kind of the maturity question too that that was just asked and so I guess how can we just kind of think about the cadence of work I mean your classified asset bucket is really large and so.

What should our expectations be for kind of the cadence for how we kind of work through that and and and the pace at which we could potentially see that bucket move into NPL could it be similar to the level that we saw this quarter or do you feel like this was accelerated and outsized in some kind of dramatic way this quarter? Thanks.

Yeah, Katherine, good question. Right now we believe the degree of inflow going forward is not going to be nearly to the same degree that it was in this past quarter.

Okay, and as we look at the classified asset ratio, is there a level where that gets where they become kind of regulatory restrictions in terms of, I mean we've already kind of cut the dividend, but any kind of additional kind of regulatory restrictions, or are we still in a range where you know we can kind of kind of work through it.

Yeah Katherine, I would just say that building on Kevin's comment, we're very diligent and deliberate in working that criticizing and classified down, there's obviously a large inflow this quarter and Kevin can characterize that inflow, but you know our expectation is that you're going to see that total portfolio, a decline towards the back half of the year and into 2026.

So as you see it, you believe this is your peak in classified and criticized at 11% today you think?

Based on the information that we know today, we do believe that we're close to the peak.

Okay, great. Maybe just a follow up on the margin, there's a kind of can you talk about where you think deposit costs can go near term, kind of with or without cuts, and I'm curious what your deposit growth where those costs are coming in today.

We've been really successful in all of our lines of businesses and growing deposits in the first half of the year. The more price sensitive deposits would be in our digital channel where we've had some great success. I would say that we're. Raising that (inaudible) probably a 4.4% is where we're raising.

Importantly though, there is a large portion of that portfolio that we raised last year that had a 5 handle on it. That's rolling over this summer, so it should positively impact the third quarter deposit costs, and we've had some really good successes in the renewal rates there and that should be helpful in the cost of funds in terms of deposits in the third and fourth quarter.

And then I would also build on the, some prepared commentary about the CNI team and the growth there.

I think in the back half of the year I mean we start to see some good growth in the second quarter with CNI deposits, relationships deposits and we're expecting that that will continue to build in the back half of this year and into 2026 and those deposits are not price sensitive like the digital channel, and that would be a to our cost of funds. Also, in an addition the treasury, non-interesting job aspect (inaudible) management in terms of fee is going to be helpful to us in the back half of the year as well.

Okay great thank.

Our next question comes from Christopher Marin. With Janie Montgomery Scott. Christopher, go ahead with your question.

Thanks. Good morning. I appreciate you hosting us all and for all the disclosures. I wanted to ask about some of the new multi-family projects that have hit the criticizing and classified list with the slide presentation. Is there anything happening there? Does that portend future losses or how should we think through those new problems?

Yeah, Christopher, thanks that's a good question. We don't see it as systemic, but idiosyncratic, and a bit of it is tied to the comments that I made earlier about affordable housing. But in terms of how the DMV is performing in terms of multi-family, it's actually at rents are increasing 1.1%. Versus the national average of 1%, so our rents continue to increase and our vacancy is still better than the average. We're at 7.7% in the DMV versus 8.2% in the national scope.

Right, and Chris, I would layer in that the valuations in the multi-family sector across the DC region remain at 6% cap rates, so we don't have the same anywhere close to the same valuation risk that's in the office market.

Okay, great. And then there's the process of when you have to evict a tenant, is there anything unique to your market in the DMV versus other major cities in the country.

I think all cities, all jurisdictions have their own unique requirements. The District of Columbia does have some more strenuous. There's data that shows that the bad debt in DC is at about $2200 per unit right now, and the national average is somewhere in the $800 range. So it's a more significant issue that the DC council is addressing that time will help us get through. And in these loans there are structural elements in these loans that simply don't exist in the office loans that will help us get through to that better time.

Okay, great, thank you for that color. And then the question for Eric just about the FDIC insurance. My sense is that it may go up the next few quarters and then eventually work itself down and become a meaningful relief over time.

Is that movement significant the next few quarters, or is it just sort of a smaller addition to the run rate of overall overhead?

I think for the remainder of 2025 I would point you to the first quarter run rate close to 9 million. I think that that's probably a better indicator of where we'll be on a quarterly basis for the remainder of 25. But the point that you're making on as we normalize and credit, there is a material benefit to us on reduced premiums for FDIC insurance. So that will be a meaningful contributor to reduced expenses.

And a lot of that's driven by what what the FDIC calculus looks at in terms of underperforming assets but that's your criticized classified and non-accrual. So, as we work through those, that number will come down meaningfully.

So if we were to look at 6 or 9 months perspectively, if you can get movement on those numbers, then you could have begin to see relief and then that will continue to change as the portfolio gets further and further down on problems.

Yes. I would characterize our current run rate as more than double a normalized level.

And then one last question on the CNI business and the kind of evolution there with Evelyn's group is the commitments progress bigger than the on balance sheet number and when we see a catch up in CNI balances in the next couple of quarters.

Yeah, Chris, if I'm understanding the question appropriately, the question is, does the outstanding loan balance really reflect the full onboarding of new relationships and others, or you know or not showing some of those those balances because the commitments are unfunded? Am I getting that question right?

That's correct.

Yeah, so yes, there are, they're always in that line of business, as unfunded commitments that go through and are part of it. Some companies, come in with a line of credit that goes unused for the life of that relationship, so there is some portion of production that is not reflected in the outstanding balances. I would say that the majority, probably in the 60% or so range, is outstanding or will be funded due to, owner occupied construction as an example.

Okay. And there's still more deposit flows that could happen over time that still is ahead of you with those new relationships.

Absolutely.

Yeah. Okay great thank you so much for taking my questions.

Our next question comes from Justin Crowley with Piper Sandler. Justin, go ahead with your question.

Hey, sorry. I think I might have gotten booted out a little earlier. Just a couple follow-ups quickly, for the, just back to the credit piece just quickly here for the assets that are being sold or or where you're close to the finish line on those transactions, what does pricing look like on those deals, what sort of haircuts are you taking, with those sales?

Yeah, cycle the date Justin the weighted average discount that we're taking is 40% approximately 40%.

Okay, and that's off of original loan value and and taking into account just prior write downs on those assets that am I thinking about that the right way?

Yeah, that that would be original loan balance and any associate subsequent charge offs.

And Justin, did you hear my commentary about cycle the date jar drops before you may have been booted?

Yes, I got that. I appreciate it. That's helpful. And then just one quick one last one, just non-credit related, can you just as far as the updated margin guide, that you provided and you talked through some of the drivers there, but you know what's the sensitivity to rate cuts there? I think previously, your guide has just assumed a flat rate environment, but just wondering how, cuts out of the Fed might impact that guide.

We expect only modest changes. I mean we really manage that that our interest rate position in a neutral fashion, so we're not expecting any material changes on NII in terms of any interest rate movements from the Fed.

Okay, got it. I will leave it there thanks so much.

Our next question comes from Katherine Miller with KBW. Katherine, go ahead with your question.

Catherine?

I'm sorry, I was muted. Thanks for letting me jump back on. One other question was just on, is there any, have you considered or would you consider any kind of bulk loan sale just to TRY to kind of clear this some of some of these problem credits off kind of all at once and you've got a lot of capital, so depending on, I don't know how big it is, it would require a capital raise, but just how do you kind of weigh a transaction like that, especially given that we saw a pretty successful one with Atlantic Union. Earlier this month, although I know the components of your two portfolios are very different, thanks.

Yeah, Katherine, good question. We have many different types of levers, as to pull, but we, as my prepared comments on point two, we look at them on a case-by-case basis and make the best evaluation for the exit that's good for our shareholders and good for the portfolio.

And just adding on to that, Katherine, I mean, the exit pricing if you're doing an active exit that pricing has a cost to it and you know in building up of Kevin's comments, there are situations where it's better for us to have some strategic patience, and I'm not talking a long time here, but some strategic patience to maximize what we believe is the exit that helps. Reduce losses, but to commentary, prepared commentary, we're really looking to find ourselves in a more normalized provision expense level in 2026. And what I mean by normalized, I'm estimating around 50 basis points on average.

There'll be a little bit of a reserve release in 2026 based on our expectations and what we know right now, but that's what we're thinking about for 2026. So that would necessitate resolution of some of these challenged office loans here in the next two quarters.

Great, very helpful, thank you guys.

This concludes the question and answer session. I would now like to turn it back to Susan Riel for closing remarks.

So thank you for your questions and thank you for being with us today and we look forward to speaking to you again next quarter. Have a great day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.