Q3 2023 Eagle Bancorp Inc Earnings Call

Good day, and thank you for standing by welcomed.

Welcome to the Eagle Bancorp third quarter 2023 earnings conference 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 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 again.

Please be advised that today's conference is being recorded.

I'd now like to hand, the conference over to your Speaker today, Charles Levingston, Chief Financial Officer of Eagle Bank. Please go ahead.

Thank you Liz good morning. This is Charles Levingston, Chief Financial Officer of Eagle Bank.

Before we begin the presentation I would like to remind everyone that some of the comments made during this call maybe considered forward looking statements we cannot make any promises about future performance and it is our policy not to establish with the markets any formal guidance with respect to earnings.

None of the forward looking statements made during this call should be interpreted as are providing formal guidance.

Our Form 10-K for the 2022 fiscal year and 10-Q for the June 32023, and current reports for a form 8-K on form 8-K identify certain factors that could cause the company's actual results to differ materially from those projected in any forward looking statements made this morning.

Eagle Bank Corp, 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 I would now like to turn it over to our president and CEO Susan Riel. Thank.

Thank you Charles Good morning, everyone before we start I would like to welcome Eric Newell as a new member of our senior management team and as CFO of Eagle Bancorp.

Adding Eric two hour, our finance team gives us more talent and a deeper bench and enables us to accomplish our long term goals to continue to serve and support our customers and build value for our shareholders.

As Derek joined US late in the quarter, we will follow our normal format today with can discussing her thoughts on the local economy loans reserves and credit quality matters and then Charles returned to discuss our financials in more detail at.

At the end of the three of Us and Eric will be available to take questions. I am pleased that our third quarter performance continued to build on the progress we are making in an uncertain operating environment.

During the third quarter, we saw a stabilization of both earnings and margins and an improvement in the funding mix with deposit inflows and pay downs of short term debt.

On the deposit front, we are working diligently to build capabilities to drive growth in our core deposit base, we have a multi pronged approach to build out a scalable and sustainable deposit growth strategy I will highlight three areas of focus for the Eagle Bank team.

First enhancing our Treasury management program and product suite will assist us in building and maintaining C&I relationships.

Next we are working to enhance our digital banking platform, allowing us to leverage our in footprint brand and increase our market share of deposits in the <unk> region as well as develop opportunities to augment deposit growth outside of our footprint.

Finally, we are looking at ways to better leverage our existing branch network to drive customer acquisition and exploring how to increase Eagle bank's physical presence in lower cost geographies contiguous to the Washington D C Metro market.

With these initiatives I am excited about the future of Eagle bank's ability to grow and improve the deposit mix.

This will continue to this will contribute to the progress we've made in repositioning our balance sheet to meet the challenges of today's high rate environment in.

In addition to the larger initiatives that I have highlighted there are many other smaller initiatives. We are working on as a team.

On the other side of the balance sheet. We are also keeping our focus on asset quality, we have a proven history of superior asset quality and conservative underwriting that has worked well for us in times of market stress.

We have pulled together special expert teams to assess our office and multifamily exposures. We are confident that this approach. Our teams are taking will put eagle bank and our borrowers in the best position in light of the difficult operating and interest rate environment.

Before turning it over to Jan I want to add that I am excited about the hiring of Karen Buck, our new Chief administrative officer, who will be instrumental in providing leadership and guidance through the execution of these strategies with that I'll hand, it over to Jan.

Thank you Susan and good morning, everyone.

The last 10 D. C market area continues to be a source of economic strength, even with the local government workers not yet returning to the office in great numbers, the unemployment rate in the Washington Metropolitan Statistical area Rose to 2.9% August up from 2.7.

10% in May.

Mirrors for change and the nationwide stay here, which grew from three 8% in September.

Up from three 6% in June.

This strength in the Washington area market can be seen in our asset quality metrics.

Nonperforming assets or 72 million, which was 65 basis points of total assets.

The increase of $41 4 million was primarily from one multifamily credit for $39 5 million, which we discussed as a past due to the last quarter there.

There were three charge offs for the quarter totaling 467000, all three were SBA loans.

Total net charge offs for the quarter was 340000.

Loans 30 to 89 days past due were $46 5 million up from $41 million at the end of the prior quarter.

The increase from the prior quarter was primarily from one office property in Northern Virginia, and one assisted living facility in Maryland.

The migration of the previously mentioned multifamily credit moving to nonperforming status.

For the third quarter, we had a provision to the ACL of $5 6 million. This was somewhat higher than the provision last quarter that even with the three charge offs and higher loan balances our ACL to loans at quarter end was up five basis points to one point of 5%.

For unfunded commitments had a reversal. This was primarily from a reduction in unfunded commitments as construction projects were funded and added to our quarter end loan balances.

With regards to the higher ACL provision it was primarily driven by increases in qualitative reserves combined with a smaller increase in the quantitative reserve.

The increase in qualitative reserves was driven by increases in early stage past dues and overall perceived weakness in the commercial real estate market.

The increase in quantitative reserve was primarily due to loan growth during the quarter, particularly in longer life categories to carry corresponding higher reserves as well as slowing prepayment speeds in certain loan categories due to higher interest rates, partly offset by modest improve.

And the unemployment forecast.

On CRE office loans secured by non owner occupied credits.

Loans were $950 million or 12% of the loan portfolio at quarter end down $26 million from the prior quarter.

Keith Office properties are primarily located in the Washington D C market.

With 24%.

In the district of Columbia, 34% in the Maryland suburbs, and 34% in Northern Virginia, and an additional seven 6% located outside of these markets. We did not have any.

Outstanding commercial real estate.

Office construction loans at the end of the third quarter.

To monitor our income producing CRE credits, we continue to be proactive in reaching out to commercial clients well in advance of maturities to better understand the headwinds that their properties could be facing including a significantly higher interest rate environment and work collaboratively to.

Chief results beneficial to both the bank and the borrower over.

Overall in terms of credit underwriting, we remain cautious and we will continue to exercise selectivity and to apply our customary strong underwriting standards.

<unk> said that we see opportunities to continue to add high quality commercial loans to the portfolio and to maintain our portfolio as other loans run off with that I'd like to turn it over to Charles Thanks Jan.

This was another good quarter in that we were able to improve our funding mix one of our strategic goals during the quarter our efforts to gather deposits organically met with success as deposits increased by $658 million.

This increase was led by savings and money market accounts up $339 million and time deposits up $255 million.

At the same time broker deposits declined by $38 million and were down to 29, 6% of deposits.

With deposits up $658 million, we took the opportunity to reduce our higher cost borrowings by paying down 100% of our <unk> advances.

<unk> borrowings, which have a more attractive rate and collateral requirements remain unchanged.

On the balance sheet, our mix of deposits and borrowings at quarter end is now much closer to how it looked at the end of December before the market disruption in March during the quarter deposits climbed to $8 4 billion compared to $8 7 billion at the end of 2022 and short term borrowings were reduced to $1 3 billion.

Compared to $975 million at year end.

One item, though that continues to change is the move by deposit customers into interest bearing accounts for the quarter average noninterest bearing deposits were down $310 million or 12, 1% and interest bearing deposits were up $742 million or 12, 5% of a much bigger base.

For the quarter average noninterest bearing deposits were 25% of deposits down from 30% for the prior quarter Cup.

Customers seeking out higher interest bearing accounts and a rate increase.

Most of all our product lines at the end of July shortly after the fed raise rates by 25 basis points combined to increase our cost of funds by 19 basis points to 339%.

This is a much lower increase than the prior quarter's increase of 58 basis points.

As we are talking about cost of funds I'll continue with commentary on our margin. This.

This quarter net interest income was down $1 $1 million and the net interest margin was 243% down six basis points.

Interest income was adversely impacted by a reversal of $1 6 million because of the one multifamily loan in the district of Columbia entering nonperforming status in the quarter.

This reversal reduced our margin by six basis points and accounts for all the change from the prior quarter.

Before moving on to the income statement, we experienced loan growth this quarter with loans up $150 million, 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 unfunded commitments.

Even with the increase in loans with strong growth in deposits drove our loan to deposit ratio down to 95% from 101% the prior quarter.

Looking at the bottom line net income was $27 4 million for the quarter compared to $28 7 million in the prior quarter. This stabilization of earnings as a result of our targeted targeted efforts to improve the balance sheet mix and reduce the rate of expense growth and maintain our strong asset quality metrics, which are <unk>.

Reflected in the provision for credit losses.

Additionally, as we mentioned last quarter, there was a lag in fed rate changes impacting interest income on loans as compared to interest expense on deposits as.

As the fed has slowed the pace of rate increases the benefit from the variable rate loans resetting higher and from new loans at market rates is beginning to reduce the gap versus interest expense changes.

Other items impacting the quarter over quarter earnings were noninterest income, which was down primarily because of the prior quarter included nonrecurring income of $2 $8 million from an Spic's fund and noninterest expense showed improvement down $345000 from the prior quarter, primarily due to lower.

Overall expenses offset by higher FDIC fees, which were up $761000 from the prior quarter on higher assessment fees.

In regards to expenses, we have always prided ourselves on being highly efficient and we aim to continue to operate in that manner. We recognize that we will need to invest in the company over the next several quarters 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 we've realized.

Year to date.

This past quarter efficiency was 48, 8%, which compares well to our proxy peers.

Lastly, capital remains a core strength of the company our tangible common equity ratio at quarter end was 10, 4%, which was higher than all but one of our proxy peers last quarter and in terms of liquidity, we improved our aggregate borrowing capacity to $2 $2 6 billion, which gives us the financial flexibility to.

Unknown Executive: Good day and thank you for standing by. Welcome to the Eagle Bancorp 3rd quarter 2023 earnings conference call. At this time, all participants are in a listen only mode.

Unknown Executive: After the speaker's presentation, there will 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.

The support and services our customers expect.

With that I'll hand, it back to Susan for a short wrap up Susan.

Charles we are all excited about <unk> future, we have demonstrated our ability to improve the balance sheet and stabilized both earnings and margin. We also continued to meet our commitment to our relationship first culture strong conservative underwriting and peer leading efficiency.

Charles Levingston: Please be advised that today's conference is being recorded I'd now like to hand the conference over to your speaker today, Charles Levingston, Chief Financial Officer of Eagle Bank. Please go ahead. Thank you, Liz. Good morning. This is Charles Levingston, Chief Financial Officer of Eagle Bank. Before we begin the presentation, I would like to remind everyone that some of the comments made during this call may be considered forward looking statements. We cannot make any promises about future performance and it is our policy not to establish with the market any formal guidance with respect to earnings.

And last but certainly not least the recent additions to our leadership team gives us added depth and expertise to meet and succeed at meeting today's challenges.

Charles Levingston: None of the forward looking statements made during this call should be interpreted as our providing formal guidance. Our form 10K for the 2022 fiscal year and 10Q for the June 30 of 2023 and current reports for form 8K on form 8K identify certain factors that could cause the company's actual results to differ materially from those projected in any forward looking statements made this morning. Eagle Bank Court does not undertake to update any forward looking statements as result of new information or future events or developments unless required by law.

Closing, our senior management team would like to thank all of our employees, who work hard every day to make Eagle. The success. It is with that we will now open up for questions.

As a reminder, if you'd like to ask a question at this time. Please press star one one on your Touchtone telephone and wait for your name to be announced to withdraw your question. Please press star one again.

Yes.

Our first question comes from the line of Catherine Mealor with K B W.

Thanks, Good morning.

Good morning Catherine.

I would say with credit Jan I remember last quarter, you talked about I think it was something in the range of $200 million of office loans that are maturing in the next 18 months and you were or maybe it's like 400, but then 200 you were looking at this quarter.

Charles Levingston: 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 file with the SEC contains reconciliations of this information to the most directly comparable gap information.

In some kind of capacity can you just give us an update on what that process looks like and any kind of updated in your office portfolio today versus last quarter. Thanks.

Unknown Executive: Our periodic reports are available from the company online at our website.

Susan Riel: I would now like to turn it over to our president and CEO Susan Reel. Thank you Charles. Good morning everyone.

Sure.

We work through them.

102.

$20 million.

Susan Riel: Before we start, I would like to welcome Eric Newell as a new member of our senior management team and as CFO of Eagle Bank Court. Adding Eric to our finance team gives us more talent and a deeper bench and enables us to accomplish our long term goals to continue to serve and support our customers and build value for our shareholders. As Eric joined us late in the quarter, we will follow our normal format today with Dan discussing her thoughts on the local economy, loans, reserves and credit quality matters. Then Charles returns to discuss our financials in more detail. At the end, the three of us and Eric will be available to take questions.

And office slump in.

In the past quarter with longer term.

Tension.

These are loans that really.

We're going to be seeing more expansions on I think as there really isn't a market right now for office refinance so what we're doing is working with each particular building.

Sponsor guarantors.

Each one is to a certain extent unique we are exploring the continued use this app as office and also alternative uses.

I think we've been pretty successful in moving forward with that that doesn't mean that we wont have.

Susan Riel: I am pleased that our third quarter performance continued to build on the progress we are making in an uncertain operating environment. During the third quarter, we saw a stabilization of both earnings and margins and an improvement in the funding mix with deposit inflows and pay down a short-term debt. On the deposit front, we are working diligently to build capabilities to drive growth in our core deposit base. We have a multi-pronged approach to build out a scalable and sustainable deposit growth strategy.

More nonperforming loans in the future.

But I think based on the underwriting that we did initially.

We have a fairly large amount of room for them to absorb declines and valuations. So I'm not anticipating that we're going to see significant charge offs in that office sector right now.

We're going to continue to work with customers.

And process extension.

Extensions as merited and went in the best interest of the bank and the borrower.

Susan Riel: I will highlight three areas of focus for the Eagle Bank team. First, enhancing our Treasury Management Program and Product Suite will assist us in building and maintaining C&I relationships. Next, we are working to enhance our digital banking platform, allowing us to leverage our input print brand and increase our market share of deposits in the DMV region as well as develop opportunities to augment the deposit growth outside of our footprint. Finally, we are looking at ways to better leverage our existing branch network to drive customer acquisition and exploring how to increase Eagle Bank's physical presence in lower cost geographies, contiguous to the Washington DC Metro market.

Okay, Great. That's very helpful. And then it was nice to see.

Stability in the.

And the special mentioned substandard categories can you remind us how much of your substandard loans are office.

Okay.

In the substandard category, we have 74 million.

In the nonperforming category, we have $23 million.

<unk> mentioned, we have $85 million.

What we have.

<unk> 5 million.

Yes.

Okay, Great alright, thank you.

Youre welcome.

A university the margin it was great to see the increase in total deposits.

Susan Riel: With these initiatives, I am excited about the future of Eagle Bank's ability to grow and improve the deposit mix. This will continue to, this will contribute to the progress we have made in repositioning our balance sheet to meet the challenges of today's high rate environment.

Still seeing a decline in the noninterest bearing category with here.

Can you talk about.

Anecdotes or kind of trends of what youre seeing within that shift in your customer base and as you just and.

And it was so hard to forecast, but as you kind of sit here today, What's your guide on where you stink.

Susan Riel: In addition to the larger initiatives that I have highlighted, there are many other smaller initiatives we are working on as a team. On the other side of the balance sheet, we are also keeping our focus on asset quality. We have a proven history of superior asset quality and conservative underwriting that has worked well for us in times of market stress. We have pulled together special expert teams to assess our office and multi-family exposures. We are confident that the approach our teams are taking will put Eagle Bank and our borrowers in the best position in light of a difficult operating and interest rate environment.

Those balances or that mix shift will bottom.

Yes sure.

Obviously, we've had a long history of being able to maintain noninterest bearing deposits around 30%. We're clearly in a very different environment. These days with rates, where they are in some.

Some of the disintermediation that we've seen over the last 18 months or so has been just that.

These folks not wanting to sit on idle cash and have that cash earning for them.

My observation is most of that migration. If you just look at average average balances quarter over quarter has moved into term deposits.

And that kind of lends itself to this notion of the fed staying higher for longer but also people wanting to capture.

Janice Williams: Before turning it over to Jan, I want to add that I am excited about the hiring of Karen Buck, our new Chief Administrative Officer, who will be instrumental in providing leadership and guidance through the execution of these strategies. With that, I will hand it over to Jan. Thank you, Susan and good morning everyone. The Washington DC market area continues to be a source of economic strength, even with the local government workers not yet returning to the office in great numbers.

The yields on those.

No.

My sense is that we have very solid.

Base of noninterest bearing deposits here.

I would I would expect us to maintain around where we are and at the same time as Susan mentioned earlier in her remarks, there will be continued efforts to build out Treasury management services in order to attract additional operating accounts.

And to continue to pour more in as maybe we see some.

Janice Williams: The unemployment rate in the Washington metropolitan statistical area rose to 2.9 percent in August up from 2.7 percent in May. This mirrors the change in the nationwide figure which grew from 3.8 percent in September up from 3.6 percent in June. This strength in the Washington area market can be seen in our asset quality metrics. Non-performing assets were 72 million which was 65 basis points of total assets. The increase of 41.4 million was primarily from one multi-family credit for 39.5 million which we discussed as a past due last quarter.

Migrating and looking for some yield there, but but my expectation is we're in a pretty happy place with.

With where those are in terms of the the <unk>.

<unk>.

Okay, Alright, great and actually if I can just go back to the office I forgot one thing I wanted to ask you did you incur was part of the increase in the ACL associated with your office booking and can you remind us what your office reserve is today.

Okay.

Yes.

Yeah.

We did have some portion of the.

The reserve that was associated with the office portfolio, Although we have no impairment reserve on the office portfolio right now so.

Janice Williams: There were three charge-offs for the quarter totaling 467,000 all three were S.P.A, loans. The total net charge-off for the quarter was 340,000. Lones, 30 to 89 days past 2 were 46.5 million up from 41 million at the end of the prior quarter. The increase from the prior quarter was primarily from one office property in Northern Virginia and one assisted living facility in Maryland, offset by the migration of the previously mentioned multi-family credit moving to non-performing status.

I think.

A portion of the increase was associated with that to the extent that alone would move from performing to nonperforming.

Obviously, it's not impaired the reserve that was associated with that would go away.

I think our feeling about the market in general in our office overlay.

<unk> has some buffer there.

We have.

In terms of.

Sub standard loans the reserve is about 6%.

Of the substandard loans that allocable to office.

And we have about.

About 3% on a special mention.

Janice Williams: For the third quarter we had a provision to the ACL of 5.6 million. This was somewhat higher than the provision last quarter, that even with the three charge-off and higher loan balances, our ACL to loan the quarter end with up five basis points to 1.05%. For unfunded commitments had a reversal. This was primarily from a reduction in unfunded commitments as construction projects were funded and added to our quarter end loan balances.

Watch is about one in three quarters and then the past portfolio. It's 130.

Okay really helpful. Thank you Tim I appreciate it.

Our next question comes from the line of Casey Whitman with Piper Sandler.

Hey, good morning.

Good morning Casey.

Just sticking with credit.

Maybe can we address just the two loans that moved capacity. This quarter can we talk about just the size of each of the loans and then.

Janice Williams: With regards to the higher ACL provision, it was primarily driven by increases in qualitative reserves combined with a smaller increase in the quantitative reserve. The increase in qualitative reserves was driven by increases in early stage past dues and overall perceived weakness in the commercial real estate market. The increase in quantitative reserve was primarily due to loan growth during the quarter, particularly in longer-life categories to carry corresponding higher reserves, as well as slowing prepayment speeds in certain loan categories due to higher interest rates, partly offset by modest improvements in the unemployment forecast, focusing on CRE office loans secured by non-owner occupied credits.

Any other details you can give us shan around those two in terms of ltvs or any specific reserves you might have on them.

Any details on those two would be helpful. Thank you Laura.

And they are both real estate secured.

Nursing home assisted living facility is.

Owner occupied.

Well.

That was not.

Part of our CRE portfolio.

Based on our current appraisal is not an impaired loan.

There would not be an associated impairment reserve that would go with that.

There is also on the office side that line.

Janice Williams: These loans were 950 million or 12% of the loan portfolio at quarter end, down 26 million from the prior quarter. These office properties are primarily located in the Washington DC market with 24% in the District of Columbia, 34% in the Maryland suburbs, and 34% in Northern Virginia, and an additional 7.6% located outside of these markets. We did not have any outstanding commercial real estate office construction loans at the end of the third quarter.

They are each about $20 million.

On the office side that loans once in the process.

During an extension done.

It was extended.

For a year.

Based on the appraisal that was done in December of 2022, there is no impairment.

Okay.

Okay.

Okay.

Alright, thank you.

Susan I wanted you to address some of your I think in your prepared remarks, you talked about potentially <unk>.

Janice Williams: To monitor our income-producing CRE credits, we continue to be proactive in reaching out to commercial clients well in advance of maturities to better understand the headwinds that their properties could be facing, including a significantly higher interest rate environment, and work collaboratively to achieve results beneficial to both the bank and the borrower. Overall, in terms of credit underwriting, we remain cautious and we will continue to exercise selectivity and to apply our customary strong underwriting standards. Having said that, we see opportunities to continue to add high-quality commercial loans to the portfolio and to maintain our portfolio as other loans run off.

Standing outside the D. M. D can you talk about some of the markets that might make sense for you and with that start with building out more of a branch network or just hiring lenders or sort of what's the broader strategy and how long might just take to execute.

Acacia were still flushing some of that out, but we still will maintain our branch light strategy, but looking at some.

Contiguous areas on what they may bring as far as opportunities for branch deposit growth and potentially loan production also so we will take all of that into consideration as we explore those opportunities, but we are open to that.

Okay, we'll stay tuned.

Back to you Jan just just one more credit question. Just can you address your shared national credit exposure, what kind of syndications.

Charles Levingston: With that, I'd like to turn it over to Charles. Thanks, Jan. This was another good quarter in that we were able to improve our funding mix, one of our strategic goals. During the quarter, our efforts to gather deposits organically met with success as deposits increased by $658 million. This increase was led by savings and money market accounts of $339 million and time deposits of $255 million. At the same time, broker deposits declined by $38 million and were down to 29.6% of deposits.

Syndications you have.

And it's pretty minimal we only have a.

A couple of loans there the largest one.

Yes.

Right.

Part of the wharf complex.

And that's performing.

Well, it's actually done very well this year. It is rated by the national team as special mention so that's how it shows up on our box.

When that that rating changes, we will changes on our books as well, but that's been a pretty successful project in the D C area.

Charles Levingston: With deposits of $658 million, we took the opportunity to reduce our higher cost borrowings by paying down 100% of our FHLB advances. BTSP borrowings which have more attractive rate and collateral requirements remain unchanged. On the balance sheet, our mix of deposits and borrowings at quarter end is now much closer to how it looked at the end of December before the market disruption in March. During the quarter, deposits climbed to $8.4 billion compared to $8.7 billion at the end of 2022. In short, term borrowings were reduced to $1.3 billion compared to $975 million at year end.

And we also have.

A piece of.

A deal that is casino related and.

New England, and if that was doing quite well.

As in the past portfolio.

Yeah.

Okay. Thank.

Thank you.

Hum.

That concludes today's question and answer session I would like to turn the call back to Susan Riel for closing remarks.

Charles Levingston: One item though that continues to change is the move of bike deposit customers into interest-bearing accounts. For the quarter, average non-interest-bearing deposits were down to $310 million or $12.1%. An interest-bearing deposits were up to $742 million or $12.5% of a much bigger base. For the quarter, average non-interest-bearing deposits were 25% of deposits down from 30% to 1% of the prior quarter. Customers seeking out higher interest-bearing accounts and a rate increase across most of our product lines at the end of July shortly after the Fed raised by 25 basis points combined to increase our cost of funds by 19 basis points to 3.39%. This is a much lower increase than the prior quarter's increase of 58 basis points.

Thank you everyone. We appreciate your questions and your taking the time to join US on the call today and we look forward to speaking with you again next quarter have a great day.

Yes.

This concludes today's conference call.

You for participating you may now disconnect.

Yes.

[music].

Charles Levingston: As we are talking about cost of funds, I'll continue with commentary on our margin. This quarter, net interest income was down $1.1 million and the net interest margin was 2.43% down 6 basis points. Interested income was adversely impacted by a reversal of $1.6 million because of the one multifamily loan in the District of Columbia entering non-performing status in the quarter. This reversal reduced our margin by 6 basis points and accounts for all the change from the prior quarter.

Charles Levingston: Before moving on to the income statement, we experienced loan growth this quarter with loans up $150 million, but some of that was timing of existing construction loans funding a quarter end. This was the reason for the reversal of the provision on unfunded commitments. Even with the increase in loans, the strong growth in deposit, the stroke of our loans in deposit ratio down to 95% from 101% to prior quarter. Looking at the bottom line, net income was $27.4 million for the quarter compared to $28.7 million in the prior quarter.

Charles Levingston: Distabilization of earnings is a result of our targeted efforts to improve the balance sheet mix, reduce the rate of expense growth, and maintain our strong aspect of quality metrics, which are reflected in the provision for credit law. As we mentioned last quarter, there was a lag and fed rate changes impacting interest income on loans as compared to interest expense on deposits. As the fed has slowed the pace of rate increases, the benefit from the variable rate loans resetting higher and from new loans at market rates is beginning to reduce the gap versus interest expense changes.

Charles Levingston: Other items impacting quarter over quarter earnings were non-interest income, which was down primarily because the prior quarter included non-recurring income of $2.8 million from an SBIC fund. And non-interest expense showed improvement down $345,000 from the prior quarter primarily due to lower overall expenses offset by higher FDIC fees, which were up $761,000 from the prior quarter on higher assessment fees. In regards to expenses, we have always prided ourselves on being highly efficient and we aim to continue to operate in that manner.

Charles Levingston: We recognize that we will need to invest in the company over the next several quarters 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 we've realized here today. This past quarter efficiency was 48.8%, which compares well to our proxy peers.

Charles Levingston: Lastly, capital remains a core strength of the company. Our tangible common equity ratio at quarter end was 10.04%, which was higher than all but one of our proxy peers last quarter. And in terms of liquidity, we improved our aggregate borrowing capacity to 2.26 billion, which gives us the financial flexibility to provide the support and services our customers expect.

Susan Riel: With that, I'll hand it back to Susan for a short wrap-up. Susan? Thanks, Charles. 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 to a relationship first culture, strong conservative underwriting and peer leading efficiency. And last, but certainly not least, the recent additions to our leadership team gives us added depth and expertise to meet and succeed at meeting today's challenges.

Unknown Executive: In closing, our senior management team would like to thank all of our employees who work hard every day to make Eagle the success it is. With that, we will now open up questions. As a reminder, if you'd like to ask a question at this time, please press star 1-1 on your touch-tone telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again.

Katherine Meeler: Our first question comes from a line of Katherine Meeler with KBW. Thanks.

Janice Williams: Good morning. I was there with credit. I remember last quarter, you talked about, I think it was something in the range of like 200 million of office loans that were maturing in the next 18 months and you were, or maybe it was like 400, but then 200, you were looking at this quarter in some kind of capacity. Can you just give us an update on what that process looked like and any kind of updated in your office portfolio today versus last quarter?

Janice Williams: Sure. We work through about 120 million in office loans in the past quarter with longer term extensions. These are loans that really, we're going to be seeing more extensions on, I think, as there really is no market right now for office refinance. So what we're doing is working with each particular building sponsor, guarantors. Each one is to a certain extent unique. We are exploring the continued uses of office and also alternative uses.

Janice Williams: I'm moving forward with that. That doesn't mean that we want to have more non-performing loans in the future. But I think based on the underwriting that we did initially, we have a fairly large amount of room to absorb declines and valuations. So I'm not anticipating that we're going to see significant charge in that office sector right now. We're going to continue to work with customers and process extensions as marriages and when in the best interest of the bank and the bar work. Okay. Great. That's very helpful.

Janice Williams: And then it was nice to see a stability in the special mention of the standard categories. Can you remind us how much of your substandard loans are office? I can. In the substandard category, we have 74 million. In the non-performing category, we have 23 million. Special mention, we have 85 million. Watch, we have 55 million. Okay.

Katherine Meeler: Great. All right. Thank you.

Charles Levingston: And then I think over to the margin, it was great to see the increase in total deposit, but you were still seeing a decline in the non-interesting category. But can you talk about anecdotes or trends of what you're seeing within that shift in your customer base and as you just, and it was so hard to forecast, but as you kind of stay here today, what's your gut on where you think those balances or that mixed shift will bottom?

Charles Levingston: Yeah, sure. Obviously, we've, we've had a long history of being able to maintain a non-interesting deposit around 30 percent. We're clearly in a very different environment these days with rates where they are. And some of the disintermediation that we've seen over the last 18 months or so has, has been just that, you know, these folks not wanting to sit on idle cash and have that cash earning for them. You know, my observation is most of that migration.

Charles Levingston: If you just look at average, average balances, a quarter over quarter has moved in the term deposits. You know, it, in that kind of lends itself to this notion of the Fed staying higher for longer, but also people wanting to capture the, the yields on those. You know, my sense is that we have a very solid, you know, base of non-interesting bearing deposits here. You know, I would, I would expect us to maintain around where we are.

Charles Levingston: And at the same time, as Susan mentioned earlier in her remarks, you know, there will be continued efforts to build out Treasury Management Services in order to attract additional operating accounts and to continue to pour more in as, you know, maybe we see some migrating and looking for some yield there. But, you know, my expectation is we're in a pretty happy place with, with where those are in terms of the, the baseline.

Janice Williams: Okay, great. And actually, happy to go back to the OSHA. I forgot one thing I wanted to ask. Did you think it was part of the increase in the ACL associated with your office book and can you remind us what your office reserve is today? We did some portion of the reserve that was associated with the office portfolio, although we have no impairment reserves on the office portfolio right now. So I think a portion of the increase was associated with that to the extent that alone would move from performing to non-performing.

Janice Williams: Obviously, if it's not impaired, the reserve that was associated with that would go away. I think our feeling about the market in general and our office overlay provides us some thought for there. We have, in terms of substandard loans, the reserve is about 6% of the substandard loans that's allocable to office. And we have about 3% on the special mention. Watch is about one and a three quarters and then the passport portfolio is 130.

Katherine Meeler: Okay, really helpful. Thank you, Jim. Appreciate it.

Casey Whitman: Our next question comes from the line of Casey Whitman with Piper Sandler. Hey, good morning. Good morning, Casey. Just sticking with credit. Maybe can we address the two loans that moved past you this quarter? Can we talk about just the size of each of the loans and then any other details you can give us Jan around those two in terms of LTVs or any specific reserves you might have on them or any details on those two would be sure.

Casey Whitman: And they are both real estate secured. The nursing home assisted living facility is owner occupied. So that was not part of our CRE portfolio. Based on a current appraisal it's not an impaired loan. So there would not be an associated impairment reserve that would go with that. There's also on the office side that loan. There are each about 20 million dollars on the office side that loans was in the process of having an extension done. It was extended and for a year and I based on the appraisal that was done in December of 2022. There is no impairment. Okay.

Susan Riel: All right, thank you. Susan, I wanted you to address some of your, I think in your prepared remarks you talked about just potentially expanding outside the DMV. Can you talk about some of the markets that might make sense for you and that start with building out more of a branch network or hiring lenders or sort of what's the broader strategy and how long might this take to execute. We, Casey, we're still flushing some of that out, but we still will maintain our branch like the strategy, but looking at some contiguous areas on what they may bring as far as opportunities for branch deposit growth and potentially loan production also. So we will take all of that into consideration as we explore those opportunities, but we are open to that.

Janice Williams: Okay, stay tuned. Back to you, Jan, just just one more credit question. Can you address your shared national credit exposure or what kind of syndications you have? It's pretty minimal. We only have a couple of ones there. The largest one is part of the war complex. And that's performing well. It's actually done very well this year. It is rated by the national team as special mention, so that's how it shows up on our books.

Janice Williams: When that rating changes, we will change it on our books as well, but that's been a pretty successful project in the DC area. And we also have a piece of a deal that is casino related in New England, and that's doing quite well and is in the past portfolio.

Casey Whitman: Okay.

Unknown Executive: Thank you.

Unknown Executive: That concludes today's question and answer session.

Susan Riel: I'd like to turn the call back to Susan real for closing remarks. 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.

Unknown Executive: This concludes today's conference call. Thank you for participating. You may now disconnect.