Eagle Bancorp, Inc.

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 star 1-1 on your telephone. You will then hear an automated message advising you 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 Eric Bancourt. 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 undue reliance on these forward-looking statements. Our Form 10-K for the fiscal year 2024, Form 10-Q for the quarter ended March 31, 2025, 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 any forward-looking statements made this morning, which speak only as of today. Eagle Bancorp does not undertake to update any forward-looking statements as a result of new information or future events or developments unless required by law. This morning's commentary will include non-GAAP financial information. The earnings release, which is posted in the investor relations section of our website and filed with the SEC, contains reconciliations of this information to the most directly comparable GAAP information. Our periodic reports are available from the company online at our website or on the SEC's website. With me today is our Chair, President, and CEO, Susan Reel, Chief Lending Officer for Commercial Real Estate, Ryan Reel, and our Chief Credit Officer, Kevin Gagin. 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 objectives outlined in our strategic plan. We are seeing steady growth from our CNI team, and the shift in our portfolio mix toward 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 second 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 note. 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 third quarter. I'll now turn it to Kevin who will talk more about our credit provision.

Thank you, Susan. As noted in the first 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 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 pips from the prior quarter. The ACL coverage ratio to performing office loans increased to 11.54 percent at the end of Q2-25, up from 5.78 in the prior quarter. Non-performing loans were $226.4 million at 6-30, a net increase of $26 million for the quarter. On slide 22 of our earnings release deck, We provide a walking bridge of non-accrual loans from March 31st 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 $54.2 million of office property, $41 million of land properties, $33.6 million related to a data center which includes an office component, and a $9.1 million life sciences office property. All loans that come into non-accrual have specific reserves if we have determined that there is a loss content associated with them. Non-performing assets to total assets were 2.16%, an increase of 37 pips from the prior quarter. Net charge-offs 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. The increase was driven by the migration into newly classified loans of $129 million of multifamily loans, $30 million of land loans, and offset by a $90 million reduction in office loan and collateral exposure. Most of these multifamily 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 loss content. We do not reflect the same, they do not reflect the same structural or valuation 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, 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 tradeoff 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 third quarter will be better than the second quarter and are hopeful to return to a more normalized provisioning environment in one Q 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 this quarter's credit-related losses, our capital position remains strong. Tier one leverage ratio decreased 48 basis points to 10.63%. Our common equity tier one 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 two times coverage of uninsured deposits, reflecting a well-positioned balance sheet. Average deposits have grown by one billion since the second quarter of 2024. During the quarter, there were meaningful positive developments in our core performance metrics. Pre-provision net revenue increased 2.3 million to 30.7 million in the second 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've paid down FHLV 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 NIM. This is consistent with our broader effort to manage the balance sheet dynamically while supporting long-term margin expansion. Our focus on expanding C&I lending continues to gain traction, demonstrating the resiliency and strength of our commercial banking franchise. In the second quarter, over two-thirds of our loan originations were CNI loans, building on the successes of the first quarter and advancing our strategic objective to diversify the loan portfolio. NIM expanded nine basis points from the first 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 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 forecast underpinned by stable BOLI 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 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 C&I 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 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 reevaluate 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 a question and answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one 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 in the prepared remarks. You know, with the reserve bill in charge of us in the quarter, can you just sort of help frame for us how you think about, you know, 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? You know, I know in the past it's been more of, you know, as loans near maturity and the new appraisals come in, that's when we would tend to see the credit costs filter through. So curious the scope of the actions taken this quarter in terms of, you know, the extent to which you looked out in the outer years of the office portfolio and other areas.

Yeah, Justin, thanks for the question. While 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. but because of our reserve actions and provisioning, we don't see a bigger impact, a more severe impact to the income statement.

And Justin, 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, you know, 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 Catherine Mueller with KBW. Catherine, go ahead with your question.

Thanks. Good morning. Hi, Catherine. 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're, 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 the maturity question too that was just asked. And so I guess, how can we best 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 the pace at which we could potentially see that bucket move into MPL? 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, Kathryn, 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 there 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 work through it?

Yeah, Catherine, I would just say that, you know, building on Kevin's comment, you know, we're very diligent and deliberate in working that criticized and classified down. You know, 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 decline towards the back half of the year and into 2026. Okay.

So as you see it, you believe this is your peak in classifieds 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. Can you talk about where you think deposit costs can go near term? you know, kind of with or without cuts. And I'm curious with your deposit growth, where those costs are coming in today.

We've been really successful in all of our lines of businesses in 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 at probably a 4.4%. is where we're raising deposits. Importantly, though, there is a large portion of that portfolio that we raised last year that had a five 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 some prepared commentary about the CNI team and the growth there. I think in the back half of the year, I mean, we started to see some good growth in the second quarter with CNI deposits, relationship 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 accretive to our cost of funds.

Also, would there be an additional treasury and non-interest income?

Yeah, absolutely. The treasury management aspect in terms of fee income is going to be helpful to us in the back half of the year as well.

Okay, great. Thank you.

Our next question comes from Christopher Marinak with Janine Montgomery-Scott. Christopher, go ahead with your question.

Christopher Marinak Thanks. Good morning. I appreciate you hosting us all and for all the disclosures. I wanted to ask about some of the new multifamily projects that have hit the criticized 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 multifamily, it's actually at one, 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, too, that the valuations in the multifamily sector across the D.C. region remain at sub-6% cap rates. So we don't have anywhere close to the same valuation risk that's in the office sub-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 some more strenuous there's there's data that shows that the bad debt in DC is at about $2,200 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 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, Culler. And then a question for Eric just about the FDIC insurance. My sense is that that 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 the 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 2025. But the point that you're making on as we normalize and as 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 the FDIC calculus looks at in terms of underperforming assets, but that's your criticized, classified, and non-recrual. So as we work through those, that number will come down meaningfully.

So if we were to look out six or nine months prospectively, if you can get movement on those numbers, then you could 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 C&I business and the kind of evolution there with Evelyn's group is the commitments progress bigger than the on-balance sheet number, and will we see a catch-up in C&I balances the next couple 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 not showing some of those balances because the commitments are unfunded. Am I getting that question right?

That's correct.

Yeah. So, yes, there are always in that line of business, as you know, 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.

Yep. Okay, great. Thank you so much for taking my questions. Thanks, Chris.

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 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?

Cycle of the day, Justin, the weighted average discount that we're taking is approximately 40%.

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

Yeah, that would be original loan balance and any associated subsequent charge-offs. And, Justin, did you hear my commentary about cycle-to-date charge-offs before you may have been booted?

Yes, yes, I've seen the content. 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, you know, your guide has just assumed a flat rate environment, but just wondering how, you know, cuts out of the Fed might impact that guide.

We expect only modest changes. I mean, we really manage our interest rate risk 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 Catherine Miller with KBW.

Catherine, 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 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, if 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 you know, to pull, but we, as my prepared comments point to, 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.

Just adding on to that, Catherine, I mean, the exit pricing, if you're doing an active exit, that pricing has a cost to it. And building off 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 strategic patience to maximize what we believe is the exit that helps reduce losses. But to prepare 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 loan. So there will be a little bit of a reserve, really, 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 Reel 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.