Eagle Bancorp, Inc.

Good day, and thank you for standing by. Welcome to the Eagle Bank Corp, Inc. First Quarter 2025 Earnings Conference Call. At this time, all participants are in listen-only mode. After this speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 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 Eagle Bancorp, Inc. Please go ahead.

Good morning. This is Eric Newell, Chief Financial Officer of Eagle Bancorp. 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 undue reliance on these forward-looking statements. Our Form 10-K for the 2024 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 to 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 Real, Chief Lending Officer for Commercial Real Estate, Ryan Reel, and our Chief Credit Officer, Kevin Gagan. I'll now turn it over to Susan.

Thank you, Eric. Good morning, everyone. Last night, we reported net income of $1.7 million for the quarter. While this reflects continued earnings pressure, our balance sheet remains resilient. We recognize the need for improved performance and remain focused on executing our strategy to drive stronger, more sustainable results. Our first quarter earnings reflect our previously discussed strategy of prudently managing valuation risk by thoughtfully incorporating all known risks into our loss and loss modeling. As Kevin will discuss in more detail later on in this call, we updated our assumptions regarding probability of default and loss given default for our office portfolio, which drove an increase in the qualitative overlay for office loans and in the allowance for loan loss reserves. As a consequence, our overall provision for credit losses materially increased. As sentiment shifts and market risks present themselves in an uncertain and volatile environment, particularly around office valuations, we want to make sure that we are adequately reserved for these uncertain outcomes. We remain focused on the fundamentals of the banking business and maintaining our franchise value. Eagle Bank operates from a position of strength. Capital levels are high, liquidity is strong, and our balance sheet is well positioned to weather continued volatility. We also remain focused on executing on our discipline strategy that positions Eagle Bank and our clients for long-term success. The first quarter of 2025 saw encouraging results from our commercial lending platform as those loans grew period end by $109.1 million or 4.3% over December 31, 2024. New additions to the CNI team have settled in, and we're seeing the impact of those hires reflected in growth and improving market penetration. We expect growth in our commercial lending portfolio to enhance franchise value as we bolster our position as the go-to community bank in the greater Washington, D.C. metro area. Deposits grew in the first quarter by $146.2 million. largely through time deposits in our digital and branch channels, demonstrating our ability to attract funding and providing further support to the bank's overall liquidity strength. There's no question that uncertainty remains as the market adjusts to changes under the new administration. Shifts in the federal workforce and the broader implications of government spending are still unfolding. Importantly, our modest exposure to government contracting and GSA-linked assets reduces our sensitivity to changes in federal budget spending. Moreover, the DC economy extends well beyond the federal government. It includes world-class educational institutions, a growing technology-driven private sector, and a robust tourism industry. all of which support the region's diversification and long-term stability. We believe in this market and community and our geographic presence here. We believe our role as a top local community lender and our deeply rooted relationship-first values create a strong competitive advantage. These qualities and this market are a recipe for long-term value for both our shareholders and our clients. While we remain optimistic about the long-term strength and resilience of the Washington, D.C. region, we must also acknowledge that sustained pressure on office property valuations in our market. Over the past five quarters, we have built reserves and focused on capital preservation, steps that have strengthened our capacity to absorb losses. Looking ahead, we will explore asset disposition strategies for office loans, to reflect evolving short and intermediate-term valuation risk. As market conditions develop, our cost-benefit analysis will similarly evolve, and we may take a more proactive approach to dispositions. This may result in higher near-term credit costs, but is aligned with our objective of reducing non-accrual, criticized, and classified loans. and improving the quality of our loan portfolio. As we continue to navigate a complex operating environment, we remain focused on preserving capital and maintaining financial flexibility. Given persistent uncertainty in the credit conditions, particularly in the office portfolio, we believe it is both necessary and responsible to align all aspects of our capital deployment strategy with the realities of forward-looking earnings. We are actively reassessing capital allocation priorities, including shareholder return strategies, as we continue to pursue our goals of long-term franchise value and capital accretion. Our overarching objective remains to maintain a resilient capital base capable of supporting both strategic growth and prudent risk management. Our team is inspired by the progress we've made and the future possibilities and opportunities available to us as an organization. With our core banking fundamentals intact and our strategic efforts taking root, we are confident in our ability to execute on our goals. With that, I will turn things over to Kevin.

Thank you, Susan. Results for the quarter were impacted by the $26.3 million provision for credit losses. Of this total, 13.9 related to the increase in our office overlay, which is a qualitative reserve. Annually, we reassess the probability of default and loss given default assumptions for loans secured by office properties based on our recent experience with appraisals, and updated assumptions drove an increase in the reserve. The allowance for credit losses increased to $129.5 million at 3-31, representing coverage of total loans at 1.63, increasing 19 BIPs from the prior quarter. The ACL coverage to performing office loans stood at 5.78% at the end of the quarter, up from 3.1 at year end. Non-performing loans were $200.4 million at 331, a decrease of $8.3 million from the prior quarter. The reduction was predominantly associated with the $11.2 million non-performing loans that were charged off during the quarter. Non-performing assets to total assets were 1.79%, a decrease of 11 bps from the prior quarter. Net charge-offs totaled 11.2 million in the first quarter, or an annualized 57 bps of average loans. Loans through to 89 days past due were 83.0 million at 3-31, increasing from 26.8 million at 12-31-24. While this level of past due loans has elevated relative to historical trends, A portion of the increase is attributable to recent maturities that are in process of being remedied. Of the total past due balance at March 31st, we expect $22 million will be remedied by the end of April. Substandard loans increased $75.2 million during the first quarter to end at $501.6 million, primarily reflecting continued stress in the office portfolio. Special mention increased $28.6 million during the quarter to end at $273.4 million as we proactively identified credits showing signs of potential weakness. We note in our disclosure on slide 19 of our earnings presentation that 74 percent of our criticized and classified loans are performing. During the quarter, two office relationships were added to special mention and substandards, respectively. Both reflected clear weakness, primarily due to updated financials showing a decline in net operating income or anticipated pressure on desk service coverage from upcoming interest rate recess. We also added two government contracting relationships to special mention. The first, has experienced contract cancellations and is currently working through the government's established collection protocol. The company has a strong management team that responded quickly to right-sizing their operations. The second loan is also under pressure due to its exposure to USAID and is facing cash flow challenges that could be strained by potential federal cost-cutting measures. Our teams are closely collaborating with our government contracting clients, staying informed on industry developments and providing ongoing support as the situation evolves. Lastly, one multifamily loan was downgraded to substandard. This relationship is tied to an affordable housing project that continues to face cash flow issues stemming from D.C.' 's pandemic-era eviction moratoriums and resulting prolonged adjudication process. More broadly, we remain cautious given the uncertainty in the Washington D.C. market, particularly as it relates to the office sector and the potential downstream effects of the federal budget tightening. Our strategy is centered on preserving capital flexibility, improving portfolio quality, and positioning the company to manage through the continued volatility while staying focused on our long-term franchise value. Eric?

Thanks, Kevin. We reported net income for the quarter totaling $1.7 million or $0.06 per diluted share. This compares to the prior quarter of $15.3 million or $0.50 per diluted share. Pre-tax income declined $17.3 million to $2.4 million in the first quarter. The higher provision for credit losses decline in net interest income, higher non-interest expenses contributed to the pre-tax decline. These factors were partially offset by a 4.1 million increase in non-interest income. Despite this earnings pressure, Eagle Bank continues to operate safely and soundly from a position of financial strength. Our capital position remains strong. Tier one leverage increased 37 basis points to 11.11% as average assets decreased more than tier one capital quarter over quarter. Common equity tier one ratio decreased two basis points to 14.61%. Tangible common equity ratio decreased two basis points to 11% at quarter end. Book value per share increased 39 cents to $40.99 per share as unrealized losses on available for sale securities decreased due to lower market rates at March 31 compared to the prior quarter end. We also remain confident in the strength and flexibility of our balance sheet. Average deposits have grown $381.6 million from a year ago during the first quarter of 2024. As of quarter end, 75% of our total deposits were insured, reflecting a stable funding base. Available liquidity from the federal home loan bank, federal reserve discount window, cash, and unencumbered securities totaled 4.8 billion, providing a robust buffer. Net interest income before provision totaled 65.6 million in the first quarter, decreasing from 70.8 million in the prior quarter. Net interest income declined because of two fewer days in the quarter, lower average interest-bearing cash balances, lower rates on loans, and a higher mix of interest-bearing deposits. Both interest income and interest expense declined due to lower market rates. Of the $238.9 million of funded loan originations in the first quarter, they had an weighted average rate of 7.33%. This compares to $162.6 million of funded loan originations at a weighted average rate of 7.68% in the fourth quarter. NIM declined one basis point from the fourth quarter to 2.28%. The shift in mix of average bearing liabilities with a higher proportion of interest bearing deposits was the primary driver of the decline in NIM. The NIM outlook in our earnings deck for the full year of 2025 is being adjusted downward as funding costs remain higher than initially forecasted. Forecasted higher NIM for the remainder of the year is driven by lower funding costs associated with a large interest bearing transaction relationship, lower average borrowings, and higher yields on earning assets as cash flows off of the investment portfolio reprice upward. Non-interest income was $8.2 million for the first quarter of 2025 compared to $4.1 million in the prior quarter. The primary driver of the increase was an increase in income associated with a $200 million separate account BOLI transaction that was entered into in the first quarter. In addition to supporting future employee benefits through this tax-advantaged investment vehicle, This transaction is designed to provide additional non-interest income to the company. As you can see on slide 12 in our current 2025 outlook, we have revised our growth projection of non-interest income from flat to 35% to 40% to account for this. Non-interest expense increased $900,000 to $45.5 million from the previous quarter. This increase was primarily due to increased legal, accounting, and professional fees, and it's due to the timing of an insurance receivable that we expect this expense will decline in the second quarter. Other expenses declined in the first quarter due to an elevated level of personal property tax true-up in the fourth quarter that did not repeat again in the first quarter. In our quarterly investor deck release along with our earnings, we updated our view on full year 2025, which is on slide 12. Our thoughts on period end growth of loans this year remain between two and eight percent 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. We discussed adjustments to NIM earlier, which reflects an update to a lower range based on higher interest expense in the first quarter. The previously mentioned VOLI transaction, along with the impact of a purchase tax credit transaction, is expected to have a positive impact on our annual tax rate for the year. We updated the range to reflect in the deck to 15% to 17%. Altogether, the strength of our capital, liquidity, and funding positions Eagle Bank to manage through near-term uncertainty while we continue to serve our clients and invest in our strategic priorities. I'll turn it over to Susan for a short wrap-up.

Thanks, Eric. We continue to execute on our strategic priorities. growing and diversifying our franchise, deepening relationship-based deposits, and driving operational excellence. While the path forward includes challenges, particularly around asset quality and valuation pressures in the office segment, we are taking deliberate action to address these issues while laying the foundation for long-term performance. What continues to distinguish Eagle Bank is our deep connection to the communities we serve, In an evolving market like the DMV, staying close to our clients remains a core strength that supports our resilience and relevance. Before we conclude, I want to express my sincere appreciation to our employees. Your dedication and professionalism make all the difference, especially as we navigate through to change and position Eagle Bank for future success. With that, we'll now open things up for questions.

Thank you. At this time, we'll conduct the question and answer session. As a reminder to ask a question, you'll need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. And our first question comes from the line of Justin Crowley of Piper Sandler. Your line is now open.

Hey, good morning. Good morning, Justin. Just wanted to start off digging a little deeper into what you're seeing in office. Just wondering if you could provide a little more color on specific drivers of the reserve build here, and perhaps if you're seeing, you know, if there's any greater transparency into, you know, valuation trends that led to the increased overlay factored into that allowance.

Yeah, Justin, this is Eric. use a management qualitative overlay for our office portfolio and that is driven off of behavior actual experience with appraisals that we've received through the cycle annually in the first quarter we reassess the probability of default and the loss given default based on that behavior that we've had with those received appraisals and we updated those factors and which drove a $14.3 million increase to the ACL as it pertains to the performing office portfolio, which increased the coverage to, I believe, it's 5.78%. In terms of valuation factors, maybe, Ryan, you want to touch on that?

Thanks, Justin. This is Ryan Reel. The valuations, as Eric said, our assumptions looking forward have been informed by the appraisals that we've been getting. Market conditions have somewhat stabilized from the data that we're seeing, although the stabilized point is not a high value point. So our assumptions and our actions are taking all of that into account.

Okay, got it. I guess as we look out to 2026 maturities, particularly taking that portion of loans with appraisals that predate March of last year that you break out in the deck, how is that captured in the allowance and how do you think about the risk there?

With the qualitative overlay for office, it's driven by the internal risk rating that we have. I believe in prior quarters we've told you that substandard performing office loans carried a certain percentage in the allowance, and updating that number to this most recent quarter, it's about 18%. So for all the dollars that sit for office in substandard internal classification, we're carrying 18% in the reserves. So a lot of that is taking into account as best as we can in the framework that we have for the qualitative overlay, the valuation risk that we see in the portfolio.

I would just add to that, Eric, that the loss mitigation strategies that we've been working with our clients on for some time, we're not waiting until that maturity date is around the corner. We've been waiting for some time and we'll continue to.

Okay. And then, you know, just sticking to credit, but maybe outside of what you're seeing within office and the idea of looking through the portfolio and seeing what's at risk given, you know, the climate around trade policy and then also just spending cuts across the federal government. You know, you mentioned some of the migration in government contracting. You know, what else have you seen there as far as, you know, potentially impacted borrowers?

Well, Justin, it's Kevin. First, I'd say our GovCon portfolio is very modest. I think we have 250 outstanding and a $350 million exposure. The uncertainty continues, but as I said in my comments, our RMs are contacting and in contact with their clients very often, both getting information and providing information as well on different trends that we all see.

Okay. And then maybe just one last one, if I could sneak it in. You know, wondering just on the margin, Eric, if you could maybe detail a little further the assumptions that help you get that expansion through the balance of the year, just including the larger pricing opportunity on the deposit side you mentioned. And then, you know, if you could also just comment on how sensitive that guide is to Fed rate cuts.

Yeah, the forecast doesn't include any changes to Fed rate cuts, so it's a stable I would say there's three factors that are driving the forecast on NIM for the remainder of the year. First, we have a third-party payment processing relationship that has a new pricing structure that went into effect on April 1, so that's going to provide benefit to the cost of funds. Second, we have another $300 million approximately of funds that are going to roll out of the investment portfolio, earning us about 180 basis points or less. That will be redeployed into higher earning assets. And then third, but more modest, is our anticipation of some small relationship deposit growth due to the continued execution of our strategy of diversifying the commercial book and the resulting we're starting to see that growth in terms of new customers, and then the balances will come in later in the year from our CNI team. And that should have some benefit to the cost of funds as well.

Okay. And do you think would, you know, if we get a few Fed rate cuts, you know, would that be additive to that guide? How would the margin behave under that scenario?

I would say we're relatively neutral to, at least in the short term, to interest rate movements. And the reason that I say that is, first off, for every change in the Fed funds rate last year, we passed that along through our non-maturity depositors. So we were able to pass all that to our customers. And I think we'll continue to attempt to do that because we've had limited discussions with our customers because of that. And the reason I believe that we've been more successful in doing that is because we do it almost at the same time as when the Fed is reducing rates. So if that were to happen, we would definitely have that conversation. But we also have a large portion of our loan books. floats as well on SOFR. So that, to me, is why I don't think there's a lot of sensitivity to this forecast based off of higher changes to the Fed funds rate.

Okay, got it. Thank you. I'll leave it there.

Thank you. One moment for our next question. And our next question comes from the line of Catherine Miller of KBW. Your line is now open.

Thanks. Good morning.

Hey, Catherine.

Could you all give us some additional information of how much of your office portfolio do you think has exposure to government agencies within the lease?

So, Catherine, this is Ryan Reel. Hey, Ryan. We've done a poll. Hey. We've done a polling of... our office borrowers, and that percentage is very small. It's less than 5% of our lease space in the office portfolio.

Okay. And would you say that, have you seen any kind of change in the values on the appraisals or anything you're seeing anecdotally in these appraisals that have been impacted by just all the kind of doge noise, or do you think this is also just kind of a continuation of just the market and kind of office portfolio being under stress?

I think it's a continuation, Catherine, of the market that we've been in for some time now.

Got it. Okay. And then just anecdotally with your clients, I mean, you have the probably largest concentration of just D.C., so this is a market that you kind of own, and it's a market that everyone's focused on just trying to figure out kind of what happens to D.C. under all this volatility. What are your clients saying in terms of I mean, the credit side is hard to see right now, but just in terms of new originations and really where the risk is, what are you hearing on the ground in terms of appetite for lending? And then I guess it's a two-fold question, one for lending and then also just on the credit side, even though I know that's hard.

Right. On the lending side, we continue to support our clients on the commercial real estate lending side. Our CNI pipeline is robust. at this point in time. On the credit side, I think the word you nailed it. It's the uncertainty. I don't know that anybody can look out very far into that crystal ball and have any confidence right now in that outlook.

I would say, Katherine, just to add to what Ryan's saying, you know, in Kevin's earlier comments about the GovCon portfolio, it's a modest exposure. And, you know, in discussions we've had with investors over the quarter, because they are all calling, wondering about Doge and its impact. And, you know, there's certainly what I characterize as second and third derivative impacts that could impact us, but it's hard to quantify that at this point. So that's why, you know, the continued discussions that our relationship managers have with our clients is critical to understand if there's any evolving trends that could inform how we posture ourselves in the allowance going forward.

And just within your client base, have you seen any pickup in kind of late, I mean, I guess unemployment is the big macro piece that we're looking for to see how that impacts the that impacts the market. So have you seen any commentary within your clients that are in the private sector, either one that are starting to lay off employees, or even on the flip side, two are hiring individuals that have been maybe laid off by Doge? Because there's a big conversation under the private sector. If they're robust, they'll be able to really absorb a lot of the layoff coming from Doge. Have you seen any kind of anecdotes of that in your client base?

Go ahead, Kevin. It's Kevin. I would say it's too early in the cycle for that, but we are seeing resumes coming in, and I think our clients are from the government sector.

Yeah, I would build on that. The USAID contractor that Kevin mentioned in his comments, we have heard from them, and they've had some reduction in force. That's a direct impact, obviously, to Eric's point would be, I guess, a first derivative, right? So we've heard that. We are seeing in the positions that we are looking for an abundance of talent from some former government workers or, frankly, some folks that are just fearful that they may lose their job.

I'm sure I don't need to add to that the comment that our RMs are working closely with their clients every day. So we're gathering and we're getting information back from the RMs through our new chief lending officer in the CNI side on a regular basis. So we are in close contact with our clients.

Great. And then maybe just one question on fees. I know you talked about the BOLI transaction. Can you just kind of walk us through that transaction and just how we should model that moving forward? A big increase in the fee line.

Yeah, we added $200 million of BOLI early in the quarter. I estimate that the fee income off of that will be a separate account product, so there is market value fluctuations. But I think that modeling between $3 to $4 million a quarter from that transaction is what I would suggest. We are starting to see some benefits from our strategic initiatives on growing fee income from treasury management. Susan, do you want to add on to that?

Yeah, I would say what we've already seen, we had modest fee income last year from the treasury management group, but we have already exceeded that in 2025 with a lot of optimism on how much that could grow with the growth that we're seeing in CNI and some of the commitments we already have in our pipeline for treasury management products. So we're very optimistic that we'll see some good growth in that area.

I mean, the biggest factor, Catherine, in the change in the forecast is BOLI, though.

Yes, okay, that makes sense. And then, if I can just get one more in, just on deposit costs, if we don't... I think we're all assuming the Fed cuts at some point later this year, but let's just kind of put that aside and under a flat rate environment, how much more room do you have to lower deposit costs? Or are we, I assume we're not there because your deposit costs are still so high. So just kind of curious if like no rate cuts kind of where deposit costs could potentially bottom.

We have a lot of opportunity to reduce deposit costs based on how our funding is profile is with deposits, whether it's brokered. For us, this isn't an immediate benefit to us. This is why our strategic initiatives are so critical in growing relationship deposits. As we continue to execute and be successful and start to show that in our results, that is going to have a meaningful impact to our cost of funds. There's You know, the digital channel has been very successful for us. It's allowed us to reduce use of brokered funding and wholesale funding. Not always accretive to the cost of funds, because there is a cost to the digital channel, but it certainly has helped us reduce the wholesale funding nature of our portfolio when you compare us to 18 months ago. And frankly, it's added 7,000 to 8,000 customers that we didn't have just a year ago. And a lot of those customers, not a lot, but a portion of those customers are actually in the DMV and have been introduced to Eagle through our digital channel. So we have teams that are working on looking at that subset of customers to understand how we can make that into a, turn that into a relationship.

Right, I would just build on that. diversifying the product base and increasing the share of wallet we have with that specific subset of clients will have a meaningful impact on the cost of funds in a positive direction.

Great. All right. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Christopher Marinak of Janie Montgomery Scott. Your line is now open.

Hey, thanks. Good morning, and thank you for all the background and information today. I wanted to ask about the possibility of doing more aggressive resolutions, loan sales, AB structures, things that you know about from past cycles, and is this the time to kind of put those in a higher priority?

I'll start with that, Chris. Our goal is to reduce non-accrual substandard and special mention loans. And all of those activities that you asked in your question are on the table for us. And the way I look at it and the way we're all looking at it, it's a cost-benefit analysis. There are certainly exposures that will likely come to a conclusion that it makes sense to keep that on our balance sheet because it's a great exposure for us and we want we want to maintain that exposure and then there'll be others that we might decide that the best alternative in the cost-benefit analysis is to exit that and That's the way we're kind of looking at it.

Right. It's just said a little bit differently. It's finding the best possible outcome in each and every situation within the strategy that we're employing.

Okay. And then on the disclosure you gave us about the office portfolio with 2026 maturities, will we see an update on appraisals for that each quarter as we finish 25 and get into 26? Or how much of that are you ahead of the game on?

Chris, I think the chart on page 20 or 18, 16 shows it, and it's inappropriate for 26. It's appropriate right now. We don't wait for the maturity to come. We're actively before that in discussion, and the evaluation or the appraisals are occurring, you know, anywhere between 120 and 90 days out.

I do want to add on slide 16, this disclosure was enhanced this quarter from prior quarters. So we actually are showing the readers if there has been an appraisal after 3-31 of 2024. So you can see that there is a portion, a large portion of 2025 maturities and a smaller portion of 2026 maturities that we've already touched in this cycle.

So obviously some of those blue bars that were before 331.24, those will get refreshed as we go forward. So we just presume that will just happen at the proper time.

Yes, correct.

Got it. Okay, and then last question just has to do with the C&I portfolio and kind of the growth you're seeing, I guess, in the pipeline. Are we going to see that number in terms of the 15% commercial go incrementally higher as this year plays out, or is it hard to say at this point?

All indications point to yes to answer that question, Chris.

We have some new team members that have really hit the ground running, and we're really starting to see the benefit of having them. They have lots of experience in this market, and we're seeing increased activity. The pipeline is really looking good.

And not to take anything away from the new team members, but the diversity of the opportunities that we're seeing coming from across the board in our CNIP.

Agreed.

Great. Sounds good. Thanks again for all the information this morning.

Thanks, Chris.

Thank you. I'm showing no further questions at this time. I'll now turn it back to President and CEO Susan Rill for closing remarks.

Thank you for your participation and for your questions, and we look forward to talking to you again next quarter.

Thank you for your presentation. And today's conference does just conclude the program. You may now disconnect.