Eagle Bancorp Q2 2024 Earnings Call Transcript

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July 25, 2024

Key Takeaways

  • Eagle Bancorp reported a GAAP net loss of $84 million in Q2, largely due to a $104 million goodwill impairment, but achieved operating net income of $20.4 million ($0.67 per share) compared to a Q1 operating loss.
  • Capital and liquidity remain strong with a Tier 1 leverage ratio of 10.6% and Common Equity Tier 1 ratio of 13.9%; tangible book value per share rose 5% quarter-over-quarter to $38.74 and available liquidity exceeds $4 billion.
  • The allowance for credit losses increased to $106.3 million, covering 1.33% of held-for-investment loans, while coverage on performing office loans rose to 4.05% and net charge-offs normalized to $2.3 million.
  • Office CRE remains a challenge, with substandard ACL levels nearing 13% on at-risk loans and nonperforming assets at $98.9 million (0.88% of assets), prompting customized borrower workout strategies.
  • Deposit and funding diversification showed progress with average deposits up $710 million year-over-year, 73% insured deposits, and initiatives like an expatriate banking team and expanding digital channels to lower funding costs.
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Earnings Conference Call
Eagle Bancorp Q2 2024
00:00 / 00:00

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Operator

Good day, and thank you for standing by, and welcome to Eagle Bancorp, Inc. Q2 2024 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you'll need to press star one-one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one-one again. 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, Inc. Please go ahead.

Eric Newell
Eric Newell
CFO at Eagle Bancorp

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 this 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 projected 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.

Eric Newell
Eric Newell
CFO at Eagle Bancorp

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, and our Chief Credit Officer, Jan Williams. I would now like to turn it over to Susan.

Susan Riel
Susan Riel
President and CEO at Eagle Bancorp

Thank you, Eric. Good morning, everyone. Before discussing our progress and continuing to execute our strategic objectives, I want to address our Q2 results announced last night. The quarter's results were affected by a goodwill valuation, which Eric will elaborate on. It's important to note, as you should know, that this impairment does not impact our cash, liquidity, regulatory, or tangible capital ratios. It is a non-operating item that has been fully removed from our balance sheet, ensuring that any goodwill valuation risk will not affect our future results. That said, we are pleased to report that operating earnings in the Q2 have significantly improved from the Q1. This improvement is largely driven by a lower provision for credit losses as we continue to prudently build reserves in response to uncertain market and economic conditions.

Susan Riel
Susan Riel
President and CEO at Eagle Bancorp

We are rigorously focused on executing our strategic objectives of diversifying and growing our loan book and deposit franchise and capitalizing on value propositions for customer segments where we already have market presence. While achieving our loan mix goals is a multi-year endeavor, we anticipate ongoing progress in the interim, though achieving the goal may not be linear.

Susan Riel
Susan Riel
President and CEO at Eagle Bancorp

We are already seeing encouraging results from our efforts to grow deposits and diversify our funding, although it is still early. Notably, we have onboarded a team to lead our expatriate banking services division, and we are excited about the future contributions this division will bring to our deposit diversification. Additionally, our direct digital channel continues to build momentum. As this channel grows, we aim to reduce our reliance on wholesale funding, thereby lowering the cost of our interest-bearing funding. While we acknowledge the significant work ahead, we remain optimistic.

Susan Riel
Susan Riel
President and CEO at Eagle Bancorp

Economic and interest rate uncertainties, particularly regarding office loans and other CRE exposures, have presented challenges. Eagle Bancorp has always been committed to serving commercial real estate investors and commercial business customers in the Washington, D.C. metropolitan area, and it will continue to do so. Our strategy is designed to gradually diversify our loan portfolio while continuing to offer exceptional value to our commercial customers. We remain cautious about the office sector, understanding that a return to pre-COVID absorption rates is unlikely in our region.

Susan Riel
Susan Riel
President and CEO at Eagle Bancorp

Nevertheless, we are dedicated to working closely with our customers to find solutions that maximize the value of their collateral. Our objective is to establish a strong foundation for sustainable growth, achieving improved and consistent profitability regardless of the interest rate environment. I am confident that we have identified the necessary actions to set us up for continued success. With that, I'll hand it over to Eric.

Eric Newell
Eric Newell
CFO at Eagle Bancorp

Thanks, Susan. We reported a GAAP net loss for the quarter totaling $84 million, or a loss of $2.78 per share, recording a $104 million impairment in the value of goodwill. Excluding the goodwill impairment, operating net income totals $20.4 million, or $0.67 per diluted share, materially improved from the $338,000 operating loss experienced in the Q1. This impairment is a non-cash accounting charge to earnings. It has no impact on the company's core net income and operating profit, cash flows, or liquidity, nor does it impact tangible or regulatory capital ratios, which already exclude goodwill. Our capital position remains strong. Tier 1 leverage capital increased 32 basis points to 10.6% at June 30th. Common Equity Tier 1 capital increased 12 basis points to 13.9% at June 30th.

Eric Newell
Eric Newell
CFO at Eagle Bancorp

Our March 31 Common Equity Tier-1 capital ratio continues to exceed the CET-1 capital ratios of 75% of all other financial institutions with assets greater than $10 billion. Tangible common equity continues to exceed 10%. Tangible book value per share increased $0.48 to $38.74 per share, representing an annualized 5% growth rate from the prior quarter. On-balance sheet and contingent liquidity also remain strong.

Eric Newell
Eric Newell
CFO at Eagle Bancorp

Average deposits have grown $710.3 million from a year ago at June 30th, 2023. Insured deposits total 73% of our total deposits, remaining stable at 71% from a year ago. During the Q2, we increased our capacity to borrow from the Federal Reserve discount window by $1.37 billion. Available liquidity from the Federal Home Loan Bank, Federal Reserve discount window, cash, and unencumbered securities now total over $4 billion at June 30th.

Eric Newell
Eric Newell
CFO at Eagle Bancorp

Net charge-offs declined $19.1 million from the Q1 to a more normalized $2.3 million in the Q2. We continue to build reserves given market and economic uncertainty. The allowance for credit losses increased to $106.3 million at June 30th, representing coverage of total held for investment loans of 1.33%, increasing 8 basis points from the prior quarter. Our earnings release and investor deck disclosed the ACL attributed to our performing office loan portfolio.

Eric Newell
Eric Newell
CFO at Eagle Bancorp

The ACL coverage to performing office loans increased to 4.05% at June 30th, increasing from 3.67% at March 31 and 1.91% at December 31. Office loans that are rated substandard have an ACL nearing 13%, reflecting continued evaluation of new information we have received through appraisals on office properties through June 30th. Operating pre-provision net revenue declined to $34.4 million from $38.3 million in the linked period.

Eric Newell
Eric Newell
CFO at Eagle Bancorp

The driver of the decline was average interest-bearing cash balances, which were $387 million lower in the Q2 than the Q1. Early in January 2024, we borrowed $500 million from the Federal Reserve Bank term funding program due to a favorable rate structure. These borrowings were repaid by the end of the Q1, the principal driver impacting the decline in average cash during the Q2.

Eric Newell
Eric Newell
CFO at Eagle Bancorp

Net interest income before provision totaled $71.4 million in the Q2, decreasing from $74.7 million in the Q1. NIM in the Q2 was 2.40%, declining 3 basis points from the Q1. Driving the decline was replacing Bank Term Funding Program borrowings with Federal Home Loan Bank borrowings at a higher market rate. Operating non-interest expense adjusted to exclude goodwill impairment totaled $42.3 million, increasing from $40 million in the previous quarter.

Eric Newell
Eric Newell
CFO at Eagle Bancorp

Of the $2.3 million increase, $803,000 was due to higher marketing expense related to our digital banking channel. Other expenses make up the remainder of the increase and represent an increase in other real estate taxes. During the quarter, we had relatively flat loan growth with period-end loans growing $19 million. In our quarterly investor deck released along with our earnings, we updated our view for the remainder of 2024 performance.

Eric Newell
Eric Newell
CFO at Eagle Bancorp

We provided the components of pre-provision net revenue and the effective tax rate. Our forecast for NIM for the full year is slightly lower from last quarter due to the first half actual, but we see opportunities for expansion in the second half of the year due to repricing cash flows off of the investment portfolio and opportunities to improve the funding mix.

Eric Newell
Eric Newell
CFO at Eagle Bancorp

On a positive side, we expect total operating non-interest expense for the calendar year to be lower. We do not model any changes to interest rates in our forecasting. Of the $175 million of funded loan originations in the quarter, we had a weighted average rate of 7.99%. This compares to $112.5 million of funded loan originations at a weighted average rate of 7.56% in the Q1. Jan?

Janice Williams
Chief Credit Officer at Eagle Bancorp

Thank you, Eric. I'm happy to report a reversion to a more normalized charge-off level this quarter, with net charge-offs totaling $2.3 million compared to $21.4 million and $11.9 million in the Q1 of 2024 and the Q4 of 2023, respectively. As a result of lower charge-offs, our provision for credit losses was lower as well. We continue to build our reserves as a precautionary measure based on the uncertainty with respect to future market conditions, appraisal valuations, and the economic climate.

Janice Williams
Chief Credit Officer at Eagle Bancorp

The methodology for determining the ACL relating to office loans has been designed to incorporate new information as it becomes available. We remain focused on comprehensively considering risks each quarter as we assess ACL adequacy. Performance of our office loan portfolio has not yet been a driver for charge-offs, though valuation risk was the driver of Q1 loss.

Janice Williams
Chief Credit Officer at Eagle Bancorp

We've been continuing to assess strategies to qualitatively assess risk associated with valuation risk. During the quarter, we made refinements to our qualitative methodology to address perceived risks associated with historical and continued expectation of negative net absorption of office in our footprint. Management continues to evaluate other data to incorporate and capture valuation risk. With information available to us at June 30th, we believe the ACL is appropriate.

Janice Williams
Chief Credit Officer at Eagle Bancorp

At the end of the Q2, total classified and criticized loans increased $89.1 million to $716.2 million, which included an increase in classified loans of $46.5 million to $408.3 million. We note in our disclosure on page 20 of our earnings presentation that 91% of classified and criticized loans are performing. Three projects drove the increases in criticized loans, two of which are assisted living properties.

Janice Williams
Chief Credit Officer at Eagle Bancorp

We've seen weakness in the assisted living segment of the market attributed to enhanced in-home coverage from federal programs, reducing the prevalence of individuals needing assisted living facilities, as well as increased human capital costs, together reducing project revenues and profitability. These loans are current as of June 30th. These projects originally expected stabilization with permanent financing through HUD.

Janice Williams
Chief Credit Officer at Eagle Bancorp

Stabilization is taking longer than expected, and therefore our internal risk ratings reflect the heightened risks associated with these projects. A hotel loan, which migrated into special mention status, is also experiencing slower than anticipated stabilization due to the impact of COVID and the resulting delay in the stabilization timeline. While operations are improving and the loan remains current and performing according to terms, the project has yet to reach stabilization.

Janice Williams
Chief Credit Officer at Eagle Bancorp

Non-performing loans increased to $98.2 million at June 30th from $91.5 million at March 31st, largely driven by the $5 million loan now reported as held for sale. NPAs were $98.9 million, which was 88 basis points to total assets, an increase of 8 basis points from the prior quarter. Loans 30 to 89 days past due were $8.4 million at June 30th, declining from $31.1 million at March 31st.

Janice Williams
Chief Credit Officer at Eagle Bancorp

As Eric mentioned, we continue to see benefit from additional data on valuation from appraisals on office collateral. While volatility in discount rates and cap rates continues to be evidenced in appraisals, valuation outside the Central Business District has generally seen smaller negative valuation adjustments recently. As a reminder, for the remainder of 2024, there are no other Central Business District office loans maturing which would result in an updated appraisal.

Janice Williams
Chief Credit Officer at Eagle Bancorp

It's important to note that we believe Central Business District office is not indicative of our total office portfolio, and our office portfolio is not indicative of our income-producing CRE portfolio. Our office disclosure was enhanced in the last quarter and continues to be in our earnings stack. We continue to assess all CRE office loans with maturities over the course of the next 18 months and taking action where appropriate as part of our efforts to mitigate maturity risks.

Janice Williams
Chief Credit Officer at Eagle Bancorp

Such mitigation action may include cash flow sweeps, paydown requirements and return for extensions, enhanced guarantor support, payment reserves, and additional collateral. We are creating solutions for our clients as well. We've designed a bespoke evaluation process with our office portfolio maturities, and our goal is to have a mutually acceptable solution for our client as well as an improved credit posture for the bank.

Janice Williams
Chief Credit Officer at Eagle Bancorp

Our solutions to date have included our borrowers keeping control of their properties. We have worked with our borrowers whenever possible to collaboratively sell assets and pay off associated debt, provide paydowns and interest-only periods, bridging rent commencement on new leases, provide extensions on existing performing debt, and reposition property to residential use. Each resolution is unique to the asset under evaluation. With that, I'll hand it back to Susan.

Janice Williams
Chief Credit Officer at Eagle Bancorp

Thanks, Jan. Throughout the past year, our team has consistently demonstrated resilience, client dedication, and unwavering perseverance. With over 25 years of experience as a commercial lender in this market, we have the expertise to support clients navigating the challenges of higher interest rates. Our robust capital position provides substantial office growth and capacity and enables us to remain agile and continue serving our customers and communities well into the future.

Janice Williams
Chief Credit Officer at Eagle Bancorp

Our growth strategies aim to enhance pre-provision net revenue, thereby supporting returns on assets and equity. This approach allows us to reinvest in innovative products and services for our customers and communities while also delivering strong returns for our shareholders. In closing, I would like to extend a heartfelt thank you to our employees whose hard work every day makes Eagle a success.

Janice Williams
Chief Credit Officer at Eagle Bancorp

We also deeply value the strong partnerships we have forged with our current customers and look forward to building relationships with our future customers. With that, we will now open things up for questions.

Operator

And thank you. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster and one moment for our first question. And our first question comes from Catherine Mealor from KBW. Your line is now open.

Catherine Mealor
Catherine Mealor
Managing Director at KBW

Thanks. Good morning.

Janice Williams
Chief Credit Officer at Eagle Bancorp

Good morning, Catherine.

Catherine Mealor
Catherine Mealor
Managing Director at KBW

I want to start with credit. It was great to see no additional movement in the office book into classifieds. And thank you for the commentary on the other three loans that did move, but nice to see some stabilization in office. I wanted to ask, as I look at the slide that shows, I think it's the $254 million in maturities coming in the back half of the year. Jan, do you have just roughly how much of that is already on classified or criticized? And maybe, and so some of that risk already kind of in those numbers, or is there a risk that we could see more inflection or more downgrades as those loans mature?

Janice Williams
Chief Credit Officer at Eagle Bancorp

There are some of those loans, maybe 60%, that are already criticized or classified. We have taken a hard look at all of our maturities that are coming through. A significant amount of that are short-term extensions that we made when we initially put a modification in place for that borrower. For example, the large loss that we took in the Q1 on that Central Business District property was extended for a year, so it will be looked at again at the end of this year. We also have a loan that we placed in non-performing status in the Q4 of last year that's an office property that we took a write-down on. Those particular properties and really all of our non-performing real estate book have current appraisals.

Janice Williams
Chief Credit Officer at Eagle Bancorp

They would be within less than a year, so we feel we've already absorbed the loss that would come from that area. It's always possible that there could be further deterioration or some kind of valuation risk associated with the appraisal on those properties, but I'm hopeful that based on the consistency I'm starting to see in appraisals. Still some volatility. A lot of it is down to the individual property, but the discount rates seem to be coming a little bit closer together. And while there's still volatility in cap rates, the discount rate seems to be what's really been moving valuations in the last three or four months. So I'm cautiously optimistic that you're not going to be seeing the kind of incident that we had earlier in the year, maturity-related.

Eric Newell
Eric Newell
CFO at Eagle Bancorp

Catherine, this is Eric. I would add, Catherine, I just want to add one note to what Jan mentioned. On those loans that we previously had a charge-off on, they're individually evaluated in our allowance for credit losses, and we evaluate the specific reserve on those quarterly, and we have been setting aside some funds for those individually evaluated loans in the event that there could be a potential further degradation of value when it comes up for renewal.

Catherine Mealor
Catherine Mealor
Managing Director at KBW

Great.

Eric Newell
Eric Newell
CFO at Eagle Bancorp

This is a precaution.

Catherine Mealor
Catherine Mealor
Managing Director at KBW

Perfect. Yes, that's great. Okay. Good to know. And then I think last quarter you said that you thought the ACL would end somewhere around $135 million-$140 million by the end of the year, which I think you're about there now, and then charge-offs would be kind of $20 million-$40 million for the remainder of the year. Is that any update to your guide on those two items?

Janice Williams
Chief Credit Officer at Eagle Bancorp

I think we are pretty close to where we would want to be on the reserve, but so much of that is the reserve level is determined by external data sources that it's tough to say for certain whether we will or won't have further increases. Looking at unemployment, GDP, the CRE index, all of those kind of move independently of EagleBank. So I would say that all things being equal, we're pretty close to where we would need to be.

Catherine Mealor
Catherine Mealor
Managing Director at KBW

Okay. Great. And then the line of sight into charge-off?

Janice Williams
Chief Credit Officer at Eagle Bancorp

Charge-offs, I'm feeling cautiously optimistic about. I think the biggest driver that we've seen on charge-offs have not been performance-related issues. They've been appraisal valuation-related issues. That does seem to be tempering a bit. I do think there are a few more market-based transactions as opposed to liquidation transactions, which are showing remarkably disparate valuations in terms of where they are. So the more that we see of market trades, although they are below what they were in 2022, 2021, right now, I'm not seeing any enormous shift in that. I don't think we're going to see the same level of 55% drop in a year in the value of a property that we've already absorbed a 55% drop on. So I think we'll have much less valuation risk going forward.

Catherine Mealor
Catherine Mealor
Managing Director at KBW

Okay. Great. Helpful. Thank you very much.

Operator

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

Christopher Marinac
Christopher Marinac
Director of Research at Janney Montgomery Scott

Thanks. Good morning. Jan, can you continue on, I guess, on the appraisal process? What is the minimum that you have to do, I guess, by regulation? And then kind of what's the process that you've had in place for a long time? And what do you do with the appraisals that you've had in this last quarter? Just kind of want to understand kind of the impact we've seen already.

Janice Williams
Chief Credit Officer at Eagle Bancorp

Sure. Our policy is a little more stringent than what FIRREA would allow. We need to have an appraisal within one year for any of the loans that you're seeing that are non-performing. And so we would update that appraisal on an annual basis. The updates of those appraisals that have been coming in recently, particularly in suburban markets, have not been as severe with respect to discount rates and cap rates as what we had seen on Central Business District earlier in the year and last year. So I have some level of cautious optimism. I don't think the recent suggestion that hopefully is realizable that interest rates are going to drop has been baked into that yet. So that could be an additional stabilizing factor. Just don't see the same level of falloff that we were seeing.

Janice Williams
Chief Credit Officer at Eagle Bancorp

We recently had a mid-$30 million range project in the Virginia suburbs reappraised, and its valuation held up pretty well, all things considered. There certainly was no indication of an impairment with the loan, so that was encouraging.

Christopher Marinac
Christopher Marinac
Director of Research at Janney Montgomery Scott

Great. If you think about the differences between the suburban and the CBD, I mean, that is still kind of impacting you in a good way, right? Because you're not all Central Business District, and you've got a fair amount of that exposure in the suburban markets. I guess just one follow-up related to that is that it felt like maybe six months ago there was a lack of appraisals, but that's not the issue today. You really have a lot more live examples to lean on.

Janice Williams
Chief Credit Officer at Eagle Bancorp

That's right. I think we are getting more and better live examples. We are getting better data collection. I think it's become a shared topic among banks as to where appraisals are coming in and what they're looking like. So through some of the groups that the bank belongs to, we're also getting the benefit of input from others. I think the rate cuts, if they happen, will also be a good force on the valuations. I couldn't help but notice REITs going up 10% in a 10-day period based on the theory that we were getting those drops in interest rates starting in September.

Christopher Marinac
Christopher Marinac
Director of Research at Janney Montgomery Scott

Great. Just the last one for me, Jan, is what's the capacity of borrowers to kind of make incremental paydowns or for them to put up more collateral support? Are you seeing further evidence of that?

Janice Williams
Chief Credit Officer at Eagle Bancorp

I think that everyone is different. So the credit accommodation that we might ask for in return for an extension has got to be tailored to every situation being different. In the most recent one that we're looking at, we got a paydown in return for an extension, and that is more than adequate to have the loan carry itself. I think each situation is different. I do believe that there's some more optimism now on the part of property owners and more willingness to put in what it would take to get them through the next year to 18 months and hopefully to a new place in the market.

Christopher Marinac
Christopher Marinac
Director of Research at Janney Montgomery Scott

Great. Thanks for all the background. This is very helpful.

Operator

Thank you. I'm showing no further questions. I would now like to turn the call back over to Susan Riel, President and CEO, for closing remarks.

Susan Riel
Susan Riel
President and CEO at Eagle Bancorp

Thank you, everyone. We appreciate your questions and you taking the time to join us on the call 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.

Executives
Analysts
    • Catherine Mealor
      Managing Director at KBW
    • Christopher Marinac
      Director of Research at Janney Montgomery Scott
    • Janice Williams
      Chief Credit Officer at Eagle Bancorp
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