Q4 2023 Eagle Bancorp Inc Earnings Call
Presentation
Operator
Good day, and thank you for standing by, and welcome to the Eagle Bancorp Fourth Quarter and Year End 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session to ask a question. During the session, you will need to press star one one on your telephone. You will then hear anonymously message advising your hand is raised. To withdraw your question, please press star one one.
Again, please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Eric Newell, Chief Financial Officer of Eagle Bancorp. Please go ahead.
Good morning. This is Eric Newell, Chief Financial Officer of Eagle Bancorp. And before we begin the presentation, I would like to remind everyone that some of the comments made during the call are forward-looking statements. We cannot make any promises about future performance, our four form 10 K for the 2022 fiscal year and 10-Q for September 30, 2023, and current reports on Form eight K, including the accompanying earnings presentation slides identifies certain risk factors that could cause the Company's actual results to differ materially from those projected in any forward-looking statements made this morning. Eagle Bancorp does not undertake to update any forward-looking statements as a result of new information or future events or developments unless required by law.
This morning's commentary will include non-GAAP financial information. 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.
And I would now like to turn it over to our President and CEO, Susan Riel.
Thank you, Eric, and good morning, everyone. this last year presented many challenges through which people Bank team persevered. I'm excited about the resiliency of our company. In light of those challenges, we quickly reacted to uncertainties that crept into the banking sector in the first quarter through the failure of some large banks, we were able to lean into our relationships. First culture and focus on and respond to what our customers needed from us in that moment of uncertainty. While we experienced a large deposit outflow in or in the early part of 2023 I'm thrilled that we reported total deposits at December 31 that were higher than the year ago period. I am proud of the Ecobank team and the strong and trusted relationships they have with our customers, our communities and with each other, I am confident that we will be able to leverage those characteristics as we work to achieve our strategic initiatives in 2024. I touched on those initiatives in our third quarter call, but it is worth highlighting again, we have been and will remain focused on our deposit portfolio. Our goal in 2024 is to have a higher quality deposit portfolio with enhanced diversification. Successfully enhancing our deposit portfolio, quality and growing deposits will allow us to reduce wholesale funding and enhance flexibility for pricing in dynamic interest rate environment. During the year, we will work on enhancing our capabilities to leverage our branch network and better instill sales behaviors, building and improving our treasury management capabilities, services and products, and introducing a digital channel, primarily for deposit gathering efforts in app in and outside our footprint. We are working to grow our C&I portfolio relative to total loans. We have evaluated areas of opportunity to grow our team and ensure those teams are compensated on the appropriate incentive plans and growth and deepen relationships which can set us up for future years of portfolio growth.
Finally, asset quality will remain an important part for us in 2020 for our history shows that Ecobank has recognized asset quality pressures earlier than our peers. We've taken a conservative and proactive approach by reassessing internal credit ratings for credits exhibiting weaknesses in primary cash flows where those cash flows are. Our primary source of repayment. This increased our classified assets in the fourth quarter. Dan will speak in more detail about the actions we took in the fourth quarter, which in part drove a higher provision for credit losses and impacted our net income. I am confident that our credit team will work with our borrowers to maximize collateral value, while at the same time seeking to improve the credit posture of EagleBank through principal paydowns. Our enhancements on recourse and gearing towards our team aligned with those workouts and surveillance efforts have up to 50 years of experience with CRE and have seen many deep downturn. Our strong capital level positions us well in the face of economic uncertainty, and we have proven over the years to be good stewards of our capital through strong capital management. I am excited about the prospects of EagleBank and the team. A lot of progress has been accomplished over the last six months. The senior staff is working closely with the entire Ecobank team to position ourselves for sustainable growth with improved and consistent profitability for years to come. While this upcoming year may throw some curveballs, we will respond appropriately. Importantly, I am confident that we we've identified the actions needed to be accomplished in 2024 to set us up for continued success. With that I'll hand it over to Jim.
Thank you, Susan, and good morning, everyone. Our credit teams continue to assess and work with our customers that are or might potentially be experiencing stress or future issues that could cause Trofile loan by loan basis, predominantly our office portfolio. We make every effort to work with our customers to improve their opportunity to succeed and protect the bank through early outreach and intervention. We had two notable events in the fourth quarter that impacted our provision expense. First, late in the quarter, we sold a multifamily construction, nonperforming note that I've discussed in our calls the past two quarters, the note was at $39.5 million multi-family loan in the D.C. metro market. The property was nearing stabilization however, there were significant impediments to a near term resolution acceptable to the bank. Our team assessed a multitude of disposition and remediation strategies and determined that our best course of action was to sell the note to an unaffiliated third party, we recognized a $5.5 million loss as a result of the note sale, an important factor in evaluating the decision to sell. The note was the assessment of the time to remediate and dispose of the property and the net present value of the carrying costs compared to the disposition value realized second, we had a charge-off of $6.1 million recognized in our collateral shortfall from an updated appraisal on a previously performing substandard office loan as a result of the collateral deficiency, the loan was moved to nonaccrual in the fourth quarter. Nonperforming loans fell to $65.5 million at December 31 from $70.1 million at September 30, with the aforementioned office loan migrating into non-performing and the multifamily construction loan might be migrating out of the portfolio. Npas were $66.6 million, which was 57 basis points to total assets, loans 30 to 89 days past due or $20.7 million, down from $46.4 million at the end of the prior quarter. The decrease was due to migration of the loan into nonperforming status at December 31. During the quarter, the teams reviewed and conservatively reassessed internal risk ratings for loans where there may be some weakness or future weakness on the primary source of repayment as compared to how the project was initially underwritten. In many of these situations, we believe we are adequately collateralized based upon recent appraisal and where we have guarantors with ample income and or assets to supplement repayment. However, management felt it was prudent to downgrade these credits based upon the weakness and weakness in the primary source of prepayments. As a result of these efforts in the quarter, you will see an increase of special mention and substandard loans. As you have seen throughout our disclosures in 2023, we've used modifications of the tool for working with our customers. Our modifications are generally extensions of maturity and are short in duration between three and 12 months and may require one or more credit enhancements. For example, the establishment of a payment and other reserves controlled by Eagle bank sweep accounts to control excess cash flow principal curtails additional collateral and or other measures as being prudent in exchange for the extension accommodations, our office exposure will be a continued focus for the team in 2024 the expectation of lower interest rates, improves the prospects for commercial real estate and will improve the prospects and remediation efforts of more challenged yields. Office loans secured by nonowner occupied CRE credits were $949 million or 11.9% of the total loan portfolio at quarter end. These office properties are primarily located in the Washington, D.C. market with 24.5% in the District of Columbia versus 5.4% in the Maryland suburbs, 32.7% in Northern Virginia and 7.4% located outside these markets. For the fourth quarter, we had a provision to the ACL of $14.5 million. Driving this increase were losses on the notes sale and the updated appraisal value on the substandard office loans. The ratio of ACL to loans at quarter end was up three basis points to 1.08.
With that, I'd like to turn it over to Eric.
Thanks, Jan. net income for the quarter totaled $20.2 million or $0.67 per diluted share. Of John's comments just detail net income was meaningfully impacted by the provision expense of $14.5 million, increasing from $5.6 million in the previous quarter. Notwithstanding the higher provision expense, we are excited that we experienced continued core deposit growth in the fourth quarter with deposits ending the year at $8.8 billion, increasing $432 million compared to $8.4 billion at September 30. The team's efforts throughout the year helped us show year-over-year deposit growth at year end. For the first time in six quarters, brokered deposits declined by $67 million and were down to 27% of deposits. Our mix of deposits and borrowings at quarter end is now much closer to how it looked at look at the end of December 2022 before the market disruption in March at December 31, 2023, deposits of $8.8 billion compared to $8.7 billion at year end 2022 and borrowings were $1.4 billion compared to $1 billion at year end 2022, due in part to our bank term funding program borrowings totaling $1.3 billion. During the quarter, we had relatively flat loan growth with loans up $52 million, but some of that was timing of existing construction loans funding a quarter. This was the reason for the reversal of the provision on unfunded commitments, even with the increase in loans. But strong growth in deposits drove our loan to deposit ratio down to 90% from 95% the prior quarter. Net interest income totaled $73 million for the three months ending December 31, increasing from $70.7 million in the linked quarter, the first time in several quarters that we've experienced a period to period increase in net interest income contributing to the increase with stability in our cost of interest bearing funding, while also benefiting from an increase in the yield on our earning assets. Interest-bearing liabilities benefited benefited from lower cost borrowings since the start of the first quarter of 2024. Management has taken actions to reduce some of our deposit rates on non-maturity deposits to reflect lower market rates seen late in the fourth quarter and into the new year.
Noninterest income totaled $2.9 million for the fourth quarter, a decline from $6.3 million in the linked quarter. The main driver of the decline was swap fee income and mark-to-market benefits from higher interest rates recognized in the third quarter that did not repeat in the fourth quarter due to lower swap activity and falling interest rates in total contributing $3.7 million of the decline in total noninterest income. Noninterest expense totaled $37.1 million in the fourth quarter, relatively flat from the prior quarter. Salaries and benefits declined $3.1 million in the fourth quarter from the prior quarter due to the truing up of incentives and lower salary expense. Offsetting the decline in salaries and benefits is increased. Fdic insurance costs increasing $1.1 million from the prior quarter, impacting our FDIC premium costs at our level of modified loans, which increased two basis points of premium paid on deposits. Eaglebank was not impacted by the special assessment pursuant to systemic risk determination that was finalized in the fourth quarter. As Charles indicated, last quarter. We expect to invest in the company in 2024 to achieve our strategic goals, but we did not, but we do not expect a meaningful increase in our run rate of expenses in 2024 due to cost savings actions taken in 2023. This past quarter, efficiency was 48.9%, which compares well to our proxy peers. We remain committed to identifying and executing strategies to find positive operating leverage. Starting this quarter, management will release its quarterly investor deck along with earnings. As you can see with our filing last night in that deck, we provided insights to our expectations for full year 2024 performance. In future calls, we will update you as our expectations change our 2024 performance or expectations near Susan's comments on the strategic goals for the year, mainly with deposit growth and continued improvement in the mix of our funding and reduce reliance on wholesale funding.
Lastly, capital remains a core strength of the Company. Our tangible common equity ratio at quarter end was 10.12%, but benefiting from lower market rates decreasing our unrealized loss impact on capital in the face of uncertainty with non-owner occupied office market valuations, management believes it is prudent to gain more certainty before seeking approval from our board on another share repurchase program.
With that, I'll hand it back to Susan for a short wrap-up.
And there we are all excited about Eagle bank's future. We have demonstrated our ability to improve the balance sheet and stabilize them coming to market. We also continue to meet our commitment to relationship first culture, strong conservative underwriting and peer-leading efficiency. We are committed to our how our heightened surveillance of and engage with our portfolio in closing our senior management team, and I would like to thank our employees who work hard every day to make Evolus success.
With that, we will now open it up for question.
Question and Answer Session
Operator
As a reminder, to ask a question, please 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 standby while we compile the Q&A roster. Our first question comes from Casey Whitman with Piper Sandler. Your line is now open.
Hey, good morning.
My name is the head of first gen side.
You mentioned this in your prepared remarks, but what is the remaining balance of that office loan that you partially charged off this quarter?
No packaging BRIAN around $20 million. And Gil, and then sticking with office, I think last quarter you gave us the amount that was in substandard special mention, do you have those numbers for this quarter just within the office book and out with office and?
Yes, I have no 130 in the office in special mention.
Okay. And what about substandard and after giving a minute around that total?
I'll tell you that after I answer your question.
Okay. Would you say, though, that most of the move this quarter into the criticized was office or there or maybe walk us through sort of some of the other classes that might be experiencing Mike deficient.
Now in terms of the additions to the substandard category and a little over two thirds were C&I loans. There wasn't much on the CRE side that moved into that category one office loans.
Okay. And then I had one more question about this. I mean, I guess the $950 million in office, like how much of that is currently on extension or in modifications? Do you have that number?
I think the modifications are disclosed every quarter. I can run a total on what was modified in the last trailing 12 months. Our team doesn't have a protocol. I don't have it with us, but it will come out with the UK exposure data.
Okay. Thank you.
Appreciate that. And I really appreciate the outlook slide in the presentation. So you guys have done a nice job managing expense, excess expenses over the last in a few years. So can you just walk through a little bit more about some of the puts and takes into what's going on going into the expectation you put in there for some expense growth this year?
Yes, I think this is Eric Casey.
I know there's a little bit of just inflationary expense associated with our salary as well. If there's actually probably a little more inflationary pressure on professional services and contracts more than salaries at this point, as contracts that sometimes have two or three years come up for renewal, we are seeing some more meaningful increases there. So I think that that's driving some of the increases are in the salaries are up in the noninterest expense line.
Okay.
And we are also we're also in our orientation of growing on some of the or executing some of the strategies that Susan mentioned. There is some additional people that we're going to add to the team throughout the year as well.
Got it. And then what kind of rate assumptions are you using to get to that margin outlook of flat?
So we were not assuming any of that. That's more just a decision that management makes us not complicate things. So it's not necessarily our expectation of what's going to happen, but there's no assumption in rate change here.
And then with one caveat and that deposit betas, there's there's some repricing there. If we had some deposits that were repricing their current period or current rates that they would reprice up. But there's no expectation of a change.
Okay. Last question. I mean, obviously some really nice deposit inflow this quarter. Is there a seasonality there where we shouldn't be surprised to see some leg down, especially in that non-interest bearing category in the first quarter or is that not really the case?
Yes. I think historically, we've seen a little a little bit of seasonality where our average DDA is higher at the end of the fourth quarter and there could be and some reduction here in the first quarter. Obviously, we're working on building our new relationships and deposit growth so I'm we're hoping to see some of that. But I think from a historical perspective, there has been a little bit of the seasonality in the first quarter in deposits.
Got it, and we'll let someone else ask questions. And Dan, if you if you get that substandard office number, let us know. Thanks.
Okay.
Operator
Thank you. One moment for our next question and our next question comes from Catherine Mealor with KBW. Your line is now open.
Thanks. Good morning, Brian and Ken. Maybe one follow-up on the credit conversation on. Do you have the updated reserve for your office portfolio? And was there any changes specifically in that block you had the higher reserve this quarter?
Yes, I would say when we look at the office reserve. A lot of it is a qualitative overlay for us, not just because we haven't seen a lot of losses to date on the office portfolio from a quantitative perspective, and we're continually evaluating the adequacy. I can tell you from an office perspective, the majority of that portfolio continues to perform. And as Jan said, office wasn't a primary driver of classified migration. And when we think about the overall ACO and the cost-cutting, it's improved about 100 basis points of total loans coverage. And we're obviously constantly looking at the adequacy of office based deals. And it will, as circumstances present themselves throughout this year, we'll close to what we need to do to continue to have an adequate and so and is there any way?
And I know it does maybe a big range on this but on, is there any way you can help us think about what the LTV is currently on your office book. And as you're getting up to nine of just one credit part of what drove It's never permit certain part of why you charge it off with you had an updated appraisal there. Just trying to think if there's you're getting updated appraisals in that book, are you seeing that LTV on the overall portfolio starts to move up?
Our corporate equity on property is pretty unique and it's hard to generalize about Blair and an appraisal is going to come out. I think there's still a lot of price discovery going on in the market. So we've been appraisers are struggling with us. It really depends on the characteristics of individual property, what class of building is, what kind of leases are in place whether or not the property has a parking lot. That, for example, could be used as a conversion to residential work as a piece of land and in the worst possible scenario based on operating as a Class A. building that's vacant. That has a zero loss on mercifully. I don't have any of the customers is very, very substantial fines and hence and then I think this is a question that can be answered after.
I just want to make sure that the current no modifications on do you have that number on in diabetes and also potentially generally maybe what percentage of loans have had a modification in the past year.
So we do see a record of a trailing 12, but I honestly haven't looked at the number for 1231? I don't think it's been. Oh, yes, hey.
And then would you think there will be a big change from last quarter? We pull last quarter to this quarter have a big change or you're probably pretty stable on.
I think it's going to be pretty stable because part of what you're going to see is that runs that we may be modified for 90 days might have been modified again during the same trailing 12 as we put into place a longer-term solution. So on even if it was modified during the quarter. It's already going to be in the path of trailing 12. So and they wouldn't have much, yes, yes.
Okay. That makes sense.
Okay, great.
And then maybe switching over to the margin on any just kind of big picture. I know that two 50 to 2 70 margin guide assumes a flat rate environment. But if we start to see assuming you're well positioned in a rate cut scenario, just given your ability to bring deposit costs down on, but what are you how are you thinking about the sensitivity and maybe maybe at the deposit beta on the way down, we should assume? Or how are you thinking about how much of that we could potentially see once we start to see rate cuts?
Yes, in terms of how we model our sensitivity and what our approach to sensitivity is really more of a neutral positioning that you could add, it still feel we get compensated appropriately enough to be liability sensitive, materially liability or asset sensitive or else. We probably albeit different jobs have, but I'm just trying to think are appropriate. Our approach is to really be as neutral as possible. But given some of the nuances of our funding profile, I would say that where we are positioned quite well in a downward rate environment, too, I'll pass along. Are those any changes to market rates on Q2?
Those are folks that are have funding with us from and in fact, you are a dramatic my prepared comments, but we've we've already taken some actions earlier on in June, January to reduce rates and deposits. And so we're going to continue that effort throughout the quarter, even three four that said, potentially could we reduce rates?
Yes.
Okay, great. That's all I got. Thank you so much.
And you mentioned you asked the question about betas on, I would say maybe in a future call, I could probably talk a little bit more about our thoughts on betas on a in a down rate environment.
And I know it is a it's everyone's best guess. Right. I think that's a big question of how this is going to react on the way down. But given you have one of the higher betas on the way up, my hope would be that you would have at least one of the higher betas on the way down on a relative basis.
And we'll see I hope that as well.
Right.
Thank you so much.
Operator
Thank you. One moment for our next question.
And our next question comes from Christopher Marinac with Janney Montgomery Scott. Your line is now open.
Hey, thanks, good morning all, and I kind of want to leverage up Catherine's question just to go a little bit deeper on kind of PPNR ROA down here, Eric, or where you are now? Or do you see that gap narrowing the next year or two? And what are some of the best ways to kind of get there?
Yes. On to me, when we look at our pre-provision net revenue ROA, I think it really is a revenue story and largely spread. I mean, if you look at our noninterest expense to average assets, we're industry-leading there. And I think that's a testament to our commitment and focus on operational efficiency parts. So I don't think we can cut our way to excellence on and from my perspective, our focus strategically on deposit growth, improving the composition of that deposits that will ease up on our funding costs and our focus on ensuring that we get the margin on loans that the market is giving us and our focus on that will help us on the asset side as well. We have about $300 million, call it $350 million that's rolling off the investment portfolio this year that will move into higher yielding assets as well. So I think that that's looking over the next 12 months on a PPNR basis, it's really going to be a Sprint store.
Got it.
And if some of that also loan yield in addition to deposits and necessarily follow the funding base yes, I think that I can give a little more visibility on, at least from my perspective, having only been there for her have three or four months on the funding side, and seeing how we can really increase spread income by improving the composition and the quality of our funding. We spent a lot of time as a management team over the last 60 days looking at spread time and really understanding how we compare to competition and making sure that we're getting loan spreads that the market is giving us and assessing ourselves that way and making sure that our relationship managers are being compensated on profitability. So I do think that it's both sides of the spread calculation.
Got it.
Thanks for that.
And then Jim, just a question for you on on the sort of see in our migration, what's your general sense of the risk of loss on those loans, maybe in general, just kind of using history and how Eagle has performed with C&I in the past where are higher.
And that migration is really adding a lot to do with it primary source of repayment focus and not really focusing on additional guarantor support. Obviously, the payments are being made, are they showing up on the past-due Record Bank. And so I think we've been pretty darn conservative in the way that we are assessing this and highlighting it in today's economic and regulatory climate, I think there's a huge focus on primary source of repayment, and we're following that I don't think it means that they are necessarily in worse shape than they were last quarter. It's a change in the way that we are evaluating.
Yes. And is this the first quarter of that or could you remind us sort of how long you've been instituting this new discipline?
This is the first quarter of that.
Okay. That's helpful.
Great.
Thank you for taking my questions, sir.
Thanks, Chris.
Operator
Thank you. And I am showing no further questions at this time. I would now like to turn it back to Susan real for closing remarks.
We appreciate your questions and your taking the time to be with us on this call today. And we look forward to speaking to you again next quarter.
Thanks and have a great day.
Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.
