Eagle Bancorp Q4 2023 Earnings Call Transcript

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January 25, 2024

There are 7 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Eagle Bancorp Fourth Quarter and Year End 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer 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.

Operator

Please go ahead.

Speaker 1

Good morning. This is Eric Newell, Chief Financial Officer of Eagle Bancorp. Before we begin the presentation, I would like to remind everyone that Our Form 10 ks for the 2022 fiscal year and 10 Q for September 30, 2023 And current reports on Form 8 ks, including the company's earnings presentation slides, identify certain risk factors that could cause the company's actual 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.

Speaker 1

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

Speaker 2

Thank you, Eric, and good morning, everyone. This last year presented many challenges through which Eagle Bank team persevered. Am excited about the resiliency of our company in light of those challenges. We quickly reacted to uncertainties that crept into the banking sector in the Q1 through the failure of some large banks. We were able to lean into our relationships first culture and focus on and respond to what our customers needed from us in that moment of uncertainty.

Speaker 2

While we experienced a large deposit outflow in the early part of 2023, I am thrilled that we reported total deposits at December 31 that were higher than the year ago period. I am proud of the Eagle Bank team and the strong and trusted relationships they have with our customers, our communities and with each other. I am confident that we will be able to leverage those characteristics as we work to achieve our strategic initiatives in 2024. I touched on those initiatives in our Q3 call, but it is worth highlighting again. We have been and will remain focused on our Our goal in 2024 is to have a higher quality deposit portfolio with enhanced diversification.

Speaker 2

Successfully enhancing our deposit portfolio quality and growing deposits will allow us to reduce wholesale funding and enhanced flexibility for pricing in dynamic interest rate environment. During the year, we will work on enhancing our capabilities to leverage our branch network and better instill sales behaviors, building and improving our treasury management capabilities, services and products and introducing a digital channel, primarily for deposit gathering efforts in and outside our footprint. We are working to grow our C and I portfolio relative to total loans. We have evaluated areas of opportunity to grow our team, ensure those teams are compensated on the appropriate incentive plans and growth and deepen relationships, which can set us up for future years of portfolio growth. Finally, asset quality will remain an important part for us in 2024.

Speaker 2

Our history shows that Eagle Bank has recognized asset quality pressures earlier than our peers. We've taken a conservative and proactive approach by reassessing internal credit ratings for credits exhibiting weaknesses in primary cash flows where those cash flows are our primary source of repayment. This increased our classified assets in the 4th quarter. Jan will speak in more detail about the actions we took in the Q4, which in part drove a higher provision for credit losses and impacted our net income. I am confident that our credit team will work with our borrowers to maximize collateral value while at the same time seeking to improve the credit posture of Eagle Bank through principal pay debts or enhancements on recourse and guarantors.

Speaker 2

Our team aligned with those workouts and surveillance efforts have up to 50 years of experience with CRE and have seen many deep downturns. Our strong capital level positions us well in the face of economic uncertainty, and we have proven over the years to be good stewards of our capital through strong capital management. I am excited about the prospects of Eagle Bank and the team. A lot of progress has been accomplished over the last 6 months. The senior staff is working closely with the entire Eagle Bank team to position ourselves for sustainable growth with improved and consistent profitability for years to come.

Speaker 2

While this upcoming year may throw us some curveballs, we will respond appropriately. Importantly, I am confident that we've identified the actions needed to be accomplished in 2024 to set us up for continued success. With that, I'll hand it over to Jan.

Speaker 3

Thank you, Susan, and good morning, everyone. Our credit teams continue to assess and work with our customers that are or might potentially be experiencing stress or future issues could cause stress on a loan by loan basis, predominantly in our office portfolio. We make every effort to work with our customers to improve their opportunity to succeed and protect the bank through early outreach and intervention. We had 2 notable events in the Q4 that impacted our provision expense. 1st, Late in the quarter, we sold a multifamily construction non performing note that I discussed in our call the past two quarters.

Speaker 3

The note was a $39,500,000 multifamily loan in the DC Metro market. The property was nearing stabilization, however, there were significant impediments to a near term resolution acceptable to the bank. Our team assessed a multitude of disposition and remediation strategies and determined that our best course of action was to sell the note to an unaffiliated third party. We recognized a $5,500,000 loss as a result of the note sale. An important factor in evaluating the decision to sell the note was the assessment of the time to remediate and dispose of the property and the net present value of the carrying cost compared to the disposition value realized.

Speaker 3

2nd, we had a charge off of $6,100,000 recognizing a collateral shortfall from an updated appraisal on a previously performing substandard office loan. As a result of the collateral deficiency, the loan was moved to non accrual in the 4th quarter. Non performing loans fell to $65,500,000 at December 31 from $70,100,000 at September 30, with the aforementioned office loan migrating into non performing and the multifamily construction loan migrating out of the portfolio. NPAs were $66,600,000 which was 57 basis points to total assets. Loans 30 days to 89 days past due were $20,700,000 down from $46,400,000 at the end of the prior quarter.

Speaker 3

The decrease was due to migration of the loan into non performing status at December 31. During the quarter, the teams reviewed and conservatively reassessed internal risk ratings for loans where there may be some weakness or future weakness on the primary source of repayment as compared to how the project was initially underwritten. In many of these situations, we believe we are adequately collateralized based upon a recent appraisal and or we have guarantors with ample income and or assets to supplement repayment. However, management felt it was prudent to downgrade these credits based upon the weakness in the primary source of repayments. As a result of these efforts in the quarter, you will see an increase of special mention and substandard loans.

Speaker 3

As you have seen throughout our disclosures in 2023, we've used modifications as a tool for working with our customers. Our modifications are generally extensions of maturity and are short in duration between 3 12 months. They may require 1 or more credit enhancements, for example, the establishment of a payment and other reserves controlled by Eagle Bank, sweep accounts to control excess cash flow, principal curtails, additional collateral and or other measures as being prudent in exchange for the extension accommodations. Our office exposure will be a continued focus for the in 2024. The expectation of lower interest rates improves the prospects for commercial real estate and will improve the prospects of remediation efforts of more challenged deals.

Speaker 3

Office loans secured by non owner occupied CRE credits or $949,000,000 or 11.9 percent of the total loan portfolio at quarter end. These office properties are primarily located in the Washington DC market with 24.5% in the District of Columbia, 35.4% in the Maryland suburbs, 32.7% in Northern Virginia and 7.4% located outside these markets. For the Q4, we had a provision to the ACL of 14,500,000 Driving this increase were losses on the note sale and the updated appraisal value on the substandard office loan. The ratio of ACL to loans at quarter end was up 3 basis points to 1.08. With that, I'd like to turn it over to Eric.

Speaker 1

Thanks, Jan. Net income for the quarter totaled $20,200,000 or $0.67 per diluted share. As Jan's comments just detailed, net income was meaningfully impacted by the provision expense of $14,500,000 increasing from $5,600,000 in the previous quarter. Notwithstanding the higher provision expense, we are excited that we continued core deposit growth in the 4th quarter, with deposits ending the year at $8,800,000,000 increasing $432,000,000 compared $8,400,000,000 at September 30. The team's efforts throughout the year helped us show year over year deposit growth at year end for the first time in 6 quarters.

Speaker 1

Broker deposits declined by $67,000,000 and were down to 27% of deposits. Our mix of deposits and borrowings at quarter end is now much closer to how it looked at the end of December 2022 before the market disruption in March. At December 31, 2023, deposits of $8,800,000,000 compared to $8,700,000,000 at year end 2022 and borrowings were $1,400,000,000 compared to $1,000,000,000 at year end 2022, due in part to our bank term funding program borrowings totaling $1,300,000,000 During the quarter, we had relatively flat loan growth with loans up $52,000,000 but some of that was timing of existing construction loans funding at quarter end. This was the reason for the reversal of the provision on Even with the increase in loans, the strong growth in deposits drove our loan to deposit ratio down to 90% from 95% the prior quarter. Net interest income totaled $73,000,000 for the 3 months ending December 31, increasing from $70,700,000 in the linked quarter, The first time in several quarters that we've experienced a period to period increase in net interest income.

Speaker 1

Contributing to the increase was stability in our cost of interest bearing funding, while also benefiting from an increase in the yield on our earning assets. Interest bearing liabilities benefited from lower cost borrowings. Since the start of the Q1 Of 2024, management has taken actions to reduce some of our deposit rates on non maturity deposits to reflect lower market rates seen late in the Q4 and into the New Year. Non interest income totaled $2,900,000 for the 4th quarter, a decline from $6,300,000 in the linked quarter. The main driver of the decline was swap fee income and mark to market benefits from higher interest rates in the 3rd quarter that did not repeat in the 4th quarter due to lower swap activity and falling interest rates, in total contributing $3,700,000 of the decline in total non interest income.

Speaker 1

Non interest expense totaled $37,100,000 in the 4th quarter, Relatively flat from the prior quarter. Salaries and benefits declined $3,100,000 in the 4th quarter from the prior quarter due to truing up of incentives and lower salary expenses. Offsetting the decline in salaries and benefits is increased FDIC insurance costs, increasing $1,100,000 from the prior quarter. Impacting our FDIC premium costs is our level of modified loans, which increased the basis points of premium paid on deposits. Eagle Bank was not impacted by the special assessment pursuant the systemic risk determination that was finalized in the 4th quarter.

Speaker 1

As Charles indicated last quarter, we expect to invest the company in 2024 to achieve our strategic goals, but we do not expect a meaningful increase in the run rate of expenses in 2024 due to cost savings actions taken in 2023. This past quarter efficiency was 48.9%, which compares well to our proxy peers. We remain committed to identifying and executing strategies to find positive operating leverage. Starting this quarter, management will release its expectations for full year 2024 performance. At future calls, we will update you as our expectations change.

Speaker 1

Our 2024 performance our expectations near Susan's comments on the strategic goals for the year, mainly with deposit growth and continued improvement the mix of our funding and reduced reliance on wholesale funding. Lastly, capital remains a core strength of the company. Our tangible common equity ratio at quarter end was 10.12%, benefiting from lower market rates decreasing unrealized loss impact on capital. In the face of uncertainty with non owner occupied office market valuations, Management believes it is prudent to gain more certainty before seeking approval from our Board on another share repurchase program. With that, I'll hand it back to Susan for a short wrap up.

Speaker 2

Thanks, Eric. We are all excited about Eagle Bank's future. We have demonstrated our ability to improve the balance sheet and stabilize both earnings and margin. We also continue to meet our commitment relationship first culture, strong conservative underwriting and peer leading efficiency. We are committed to our heightened surveillance of an engagement with our portfolio.

Speaker 2

In closing, our senior management team and I We'd like to thank our employees who work hard every day to make evil a success. With that, we will now open it up for questions.

Operator

Our first question comes from Casey Whitman with Piper Sandler and Co. Your line is now open.

Speaker 4

Hey, good morning. Good morning, Casey.

Speaker 5

Hi. So first, Jan, sorry if you mentioned this in your prepared remarks, but what is the remaining balance of that office loan that you charge off this quarter?

Speaker 3

Right around $20,000,000

Speaker 5

Okay. Thank you. And then sticking with office, I think last quarter you gave us the amount that wasn't substandard special mention. Do you have those numbers for us this quarter, just within the office book?

Speaker 3

With office? I have 130 in office in special mention.

Speaker 5

Okay. And what about substandard?

Speaker 3

Give me a minute to run that total. I'll tell you that after I answer your questions.

Speaker 5

Okay. Would you say though that most of the moves this quarter into the criticized was office or there or maybe walk us through some of the other classes that might be experiencing

Speaker 3

No. In terms of the additions to the substandard category, A little over 2 thirds were C and I loans. There wasn't much on the CRE side that moved into that category, 1 office loans.

Speaker 4

Yes. Okay.

Speaker 5

And then I had one more question with office. And I guess the $950,000,000 in office, like how much of that is currently on extension or in modifications. Do you have that number?

Speaker 3

I think the modifications are disclosed Every quarter, I didn't run a total on what was modified in the last trailing 12 months. Eric, do you happen to have that?

Speaker 1

I don't.

Speaker 3

Doesn't have it with us, but it will come out with the

Speaker 5

With the K.

Speaker 3

Exposure docs.

Speaker 5

Okay. Thank you. Appreciate that. And really appreciate the outlook slide in the presentation. So you guys have done a nice job managing expenses over the last few years.

Speaker 5

So can you just walk through a little bit more about some of the puts and takes into what's going on going into the expectation you put in there for some expense growth this year?

Speaker 1

Yes, I think this is Eric, Casey, there's a little bit of just inflationary expense associated with Salaries

Operator

as well,

Speaker 1

there's actually probably a little more inflationary pressure on professional services and contracts more than even salaries at this point. As contracts that sometimes have 2 to 3 years come up for renewal, we are seeing some more meaningful increases there. So I think that that's driving some of the increases in the salaries or in the non interest expense line.

Speaker 2

Okay.

Speaker 1

And We're also in our orientation of growing some of the or executing some of the strategies that Susan mentioned, there is some additional people that we're going to add to the team throughout the year as well.

Speaker 5

Got it. And then what kind of rate assumptions are you using to get to that margin outlook?

Speaker 1

Flat. So we're not assuming any and that's more just A decision that management has made to not complicate things, so it's not necessarily our expectation of what's going to happen, but There's no assumption in rate change here. And then with one caveat in that Deposit data, there's some repricing there. If we had some deposits that we're re pricing our current period or current rates that they would re price up, but there's no expectation of rate change.

Speaker 5

Okay. Last question, I mean, obviously, some really nice deposit info this quarter. Is there any seasonality there where we shouldn't be surprised to see some leg down, especially in that non interest bearing category in the Q1 or is that not really the case?

Speaker 1

Yes. I think historically, we've seen a little bit of where our DDA is higher at the end of the 4th quarter and there could be some reduction here in the Q1. Obviously, we're working on building new relationships and deposit growth. So We're hoping to stem me some of that, but I think from a historical perspective, there has been a little bit of a seasonality in the Q1 deposit.

Speaker 5

Okay. Got it. I'm going to let someone else ask questions. And Dan, if you get that substandard office number, let us know. Thanks.

Speaker 5

Okay.

Operator

Thank you. One moment for our next question. And our next question comes from Catherine Mealor with KBW. Your line is now open.

Speaker 4

Thanks. Good morning.

Speaker 2

Good morning, Catherine.

Speaker 4

Maybe one follow-up on just the credit conversation. Do you have the updated reserve for your office portfolio? And was there any changes specifically in that book that you took the higher reserve this quarter?

Speaker 1

Yes. I would say when we look at the office reserve, a lot of it is a qualitative overlay for us just because we haven't seen a lot of losses today in the office portfolio from a quantitative perspective. And we're continually evaluating the adequacy. And from the office The majority of that portfolio continues to perform. And as Jan said, Office wasn't a primary driver of classified migration.

Speaker 1

And when we think about the overall ACL and having it improve to 108 basis points of total loans coverage, We're obviously constantly looking at the adequacy of office ACLs and Well, as fact circumstances present themselves throughout this year, we'll see what we need to do to continue to have it adequate.

Speaker 4

Great. And so is there any way I know if there's going to be a big range on this, But is there any way you can help us think about what the LTV is currently on your office book? And as you're getting up to I know just one credit Part of what drove it moved to never part of why you charged it off was you had an updated appraisal. So just trying to think if as you're getting updated appraisals in that book, Are you seeing that LTV on the overall portfolio start to move up?

Speaker 3

Catherine, every Property is pretty unique and it's hard to generalize about where an appraisal is going to come out. I think there's Still a lot of price discovery going on in the market, so even appraisers are struggling with this. It really depends on the characteristics of an individual property, what class of building is it, What kind of leases are in place? Whether or not the property has a parking lot that, For example, could be used as conversion to residential, what type of piece of land, I mean, The worst possible scenario based on what I'm reading is a Class C building that's vacant that has a 0 lot line. Mercifully, I don't have any of those.

Speaker 2

It's very hard to identify. Yes. Okay.

Speaker 4

And then I think this is the question that Casey answered, but I just wanted to make sure that the current Modifications, do you have that number on not even just in office, but kind of generally maybe what percentage of Loans have had a modification in the past year or so.

Speaker 3

We do keep a record of a trailing 12, but I honestly haven't looked at the number for 1231 yet. I don't think it's been Okay.

Speaker 4

And would you think there'd be a big change from last quarter? If we pull last quarter, Did this quarter have a big change or you're probably pretty stable on that?

Speaker 3

I think it's going to be pretty stable because some of what you're going to see is that Loans that we may be modified for 90 days might have been modified Again, during the same trailing 12 as we put into place a longer term solution. So Even if it was modified during the quarter, it's already going to be in the path of trailing 12. So it wouldn't be

Speaker 4

Okay, that makes sense. Okay, great. And then maybe switching over to the margin, any just kind of big picture, I know that 250 to 270 margin guide just assumes A flat rate environment, but if we start to see, assuming you're well positioned in a rate cut scenario, just given your ability to bring deposit cost down. But what are how are you thinking about the sensitivity and maybe The deposit beta on the way down that we should assume or how are you thinking about how much upside we could potentially see once we start to see rate cuts? Yes.

Speaker 1

In terms of how we model on sensitivity and what our approach to sensitivity is, that really more of a neutral Positioning that because I just don't feel we get compensated appropriately enough to be liability sensitive, materially liability or asset sensitive Or else we probably all be in different jobs. But so I think our approach is to really be as neutral as possible. But Given some of the nuances of our funding profile, I would say that we are positioned quite well in that downward rate environment to pass along those any changes to market rates to those folks that have funding with us. And in fact, I've had it in my prepared comments, but we've already taken some actions earlier in January to reduce rates and deposits. And so we're going to continue that effort throughout the quarter even before the Fed potentially could reduce rates.

Speaker 4

Great. Okay, great. That's all I got. Thank you so much.

Speaker 1

And you mentioned you asked a question about betas. I would say maybe in A future call, I could probably talk a little bit more about our thoughts on betas in a downer rate environment.

Speaker 4

And I know it's It's everyone's best guess, right? I think that's a big question of how this is going to react on the way down. But I mean, given you have one of the higher betas on the way up, my hope would be that you would have at least one of the higher betas on the way down on a relative basis and we'll see.

Speaker 1

I hope that as well.

Speaker 4

All right. Thank you so much.

Operator

Thank you. One moment for our next question. Our next question comes from Christopher Marinac with Janney Montgomery Scott. Your line is now open.

Speaker 6

Hey, thanks. Good morning. I kind of want to leverage Catherine's question, just to go a little bit deeper on kind of PP and R, ROA. Eric, where you are now, do you see that gap narrowing the next year or 2? And what are some of the best ways to kind of get there?

Speaker 1

Yes. To me, when we look at our pre provision net revenue ROA, I think It really is a revenue story and largely spread. I mean, if you look at our non interest expense to average assets, We're industry leading there and I think that's a testament to our commitment and focus on operational efficiency. So I don't think we can cut our way to excellence. And from my perspective, our focus strategically on deposit growth, improving the composition of that deposits That will ease up on our funding costs and our focus on ensuring that we get the margin on Loans that the market is giving us and our focus on that will help us on the asset side as well.

Speaker 1

We have about $330,000,000 $350,000,000 that's rolling off the investment portfolio this year that will move into higher yielding assets as well. So I think that looking over the next 12 months on a PPNR basis, It's really going to be a spread story.

Speaker 6

Got it. And is some of that also loan yield in addition to deposits that certainly follow the funded piece?

Speaker 1

Yes. I think there's a little more visibility at from my perspective, having only been here for 3 or 4 months on the funding side and seeing how we could really increased spread income by improving the composition and the qualities of our funding. We've spent a lot of time As a management team over the last 60 days looking at spreads and really understanding how we compare to Competition and making sure that we're getting loan spreads that the market is giving us and assessing ourselves that way and making sure that Our relationship managers are being compensated on profitability. So I do think that It's both sides of the spread calculation.

Speaker 6

Got it. Thanks for that. And then, Jan, just a Question for you on the sort of C and I migration. What's your general sense of the risk of loss on those loans, maybe in general, just kind of using history and how Eagle has C and I in the past?

Speaker 3

Well, I'll tell you, the migration is really, I think A lot to do with the primary source of repayment focus and not really focusing on Additional guarantor support, obviously, the payments are being made or they'd be showing up on the past due report, but They are not. So I think we've been pretty darn conservative in the way that we are assessing this and highlighting it. In today's economic and regulatory climate, I think there's a huge focus on primary source of repayment And we're following that. I don't think it means that they're necessarily in worse shape than they were last quarter. It's a change in the way that we're evaluating them.

Speaker 6

And is this the Q1 of that or could you remind us sort of how long you've been

Speaker 3

This is the Q1 of that.

Speaker 6

Okay, that's helpful. Great. Thank you for taking my questions.

Speaker 1

Thanks, Chris.

Operator

Thank you. And I am showing no Further questions at this time, I would now like to turn it back to Susan Riehl for closing remarks.

Speaker 2

We appreciate your questions

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