Eagle Bancorp, Inc. (EGBN) Earnings Call Transcript & Summary

Good day and thank you for standing by. Welcome to Eagle Bancorp, Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Eric Newell, Chief Financial Officer of Eagle Bancorp. Please go ahead.

Good morning. This is Eric Newell, Chief Financial Officer of Eagle Bancorp. Before we begin the presentation, I would like to remind everyone that some of the comments made during the call are forward-looking statements. We cannot make any promises about future performance and caution you not to place undue reliance on these forward-looking statements. Our Form 10-K for the fiscal year 2025 and current reports on Form 8-K, including the earnings presentation slides, identify important 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, future events, or developments unless required by law. This morning's commentary will also 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 on our website, or on the SEC's website. With me today is our new President and CEO, Stephen Curley; our Chief Lending Officers, Ryan Riel and Evelyn Lee, for commercial real estate and C&I, respectively. I would now like to turn it over to Steve.

Thank you, Eric, and good morning, everyone. Before I start the quarter, let me say how honored I am to join Eagle as its new President and CEO. This is a franchise built over decades through strong client relationships, deep community ties, and an exceptional and seasoned team of bankers. While I've only been with Eagle for 3 weeks, I spent that time meeting and talking with employees, customers, shareholders, while conducting an intensive review of the business. Those conversations have reinforced what attracted me to Eagle in the first place, a strong franchise, talented people, and significant potential. My immediate priorities are clear, maintain disciplined execution, preserve our culture, and make decisions grounded in a thorough understanding of our franchise, our markets, and our best opportunities. Investors are looking for results, not promises. You'll judge us by what we do, not what we say, and that's exactly how we intend to earn your confidence. With that, let me turn to the four priorities receiving my greatest attention. First is asset quality. The issues within the portfolio have been identified, are well understood, and are being actively managed. Addressing them transparently is essential. It builds confidence in our financial reporting and gives investors greater clarity into the strength of the franchise. Our objective here is simple. Maximize recoveries and minimize loss. We will continue to take a disciplined asset-by-asset approach to problem credits, reducing uncertainty around our future credit performance. Consistency will be key to strengthening investor confidence. To support that effort, we're recruiting a new Chief Credit Officer, an important leadership role that will help shape the future of our credit organization. In the meantime, we've benefited from the experience and guidance of Bill Perotti and Dan Callahan, who have been working closely with the bank since last fall. The team has made meaningful progress over the last 18 months, and I see additional opportunities to strengthen credit oversight, portfolio management, and risk discipline. We're also beginning the search for our next Chief Human Resource Officer following a planned retirement. As I look at the organization, it is critical we strengthen our bench. We need to bring in new expertise where appropriate, while also developing and advancing the strong team already in place. At the same time, we will continue to invest in technology, processes, and capabilities that can help us better serve customers. Our second priority is improving our funding profile and deposit base. Often banks start by growing loans and then figuring out how to fund them. We'll take the opposite approach, build relationship-based core deposits and create the capacity to support disciplined loan growth. We are not managing the bank with the objective of shrinking. Our objective is to build a stronger funding franchise, improve asset quality, and position Eagle to deliver responsible growth. The sequencing matters, but growth remains part of this bank's future. We operate in one of the most attractive banking markets in the country. The Washington metropolitan region offers significant opportunities to deepen customer relationships, generate core operating deposits, and support high-quality lending activity. We're going to make the most out of our position in Washington and win new customers and grow a valuable deposit franchise. Our third priority is improving operating performance. That means generating stronger returns from the investments we make across the organization. An important part of that effort is expanding our business banking capabilities and increasing branch productivity. While our branches successfully serve our long-term customer relationships, they have the potential to be an engine for core deposit and business banking growth. We will remain disciplined on expenses while continuing to invest where we see attractive long-term returns. The fourth area receiving my attention is capital. One of the strengths of this franchise is its capital position, and I recognize that capital allocation is an important topic for shareholders and investors. As part of my broader review of the bank, I am evaluating our capital framework, including how we think about capital levels, capital flexibility, and the best ways to create long-term shareholder value. While it is too early to discuss specific capital targets or potential capital actions, we are approaching this topic thoughtfully and deliberately. Capital is a strategic asset and we want to ensure we are deploying it in a manner that supports both the safety and soundness of the bank as well as the long-term interests of our shareholders. As we make progress in asset quality, funding, operating performance, and our capital framework, our longer-term strategic direction will come into sharper focus. Eagle already has a strategy, and we've been executing against it. My responsibility is to build on that work, evaluate where we're making progress, identify areas where we can improve, and determine where adjustments may enhance our ability to create long-term value. Over the coming months, I'll continue to learn the organization, the market, and the opportunities available to us. In the meantime, I'm going to focus on execution. As we demonstrate progress, we'll provide additional perspective on our long-term priorities, our capital objectives, and our vision for creating sustainable shareholder value. I'm optimistic about the future. We have a strong franchise, a dedicated team here at Eagle, a valuable market position, and clear priorities. I look forward to updating you on our progress. With that, I'll turn it back over to Eric to review the quarter.

Thank you, Steve. During the quarter, we reported net income of $6.9 million, or $0.23 per diluted share, compared to $14.7 million the previous quarter. The decline primarily reflects elevated provision expense, a smaller interest-earning asset base, and continued resolutions associated with addressing problem assets and strengthening the overall health of the balance sheet. We believe that the issues within the portfolio are identified, understood, and are actively being managed. Our approach continues to be straightforward. Recognize problems early, reserve adequately, pursue resolution, and maximize recovery. With that context, let me walk through the second quarter asset quality trends, and I'll begin with our concentration metrics. The second quarter saw continued reductions in both our CRE and ADC concentrations as expected payoffs, asset resolutions, and completion of construction projects contributed to further reduction in the concentration risk. Our CRE concentration ratio, which measures CRE loans as a percentage of total risk-based capital and reserves, declined to 268% at quarter end from 295% the prior quarter, moving further below the 300% threshold. ADC concentration ratio ended the quarter at 66%. Turning to criticized and classified assets combining substandard, special mention, and held-for-sale loans, balances declined by approximately $34.5 million during the quarter to $759.6 million at June 30 compared to $794.1 million at March 31. As shown on slide 16 of our investor deck, criticized and classified balances have now declined more than 30% from their peak in the third quarter of 2025. As a percentage of Tier 1 capital and ACL, criticized and classified assets declined to 58.1% at quarter end, compared to 65.7% at year-end 2025. During the quarter, we experienced approximately $216 million of downgrade activity. Of this total, $102 million relates to multifamily loans, of which 3 loans represent all of the downgrade activity. And of that, $35 million has paid off post quarter end. The 2 remaining loans representing $64 million are undergoing restructuring activities with no future losses anticipated. Turning to held-for-sale loans. At quarter end, held-for-sale balances totaled $49.7 million, and importantly, that entire balance is currently under contract or have sold since quarter end. During the quarter, we transferred $155 million into held-for-sale and had $162 million of sales, resulting in a gain on sale of loans totaling $2.3 million. As criticized and classified balances improved during the quarter, so did non-performing loans, declining to $111.1 million, or 1.68% of total loans. Our focus remains on the broader trend and we continue to expect criticized and classified loans to decline from current levels and remain meaningfully below where they stood at year-end 2025. We are starting to see some upgrades from the watch category and that category has fallen 50% from its peak and gives us confidence that inflows into criticized and classified will fall in subsequent quarters. Provision for credit losses totaled $21.4 million during the quarter. While elevated, the provision reflects our continued effort to proactively address problem assets and maintain appropriate reserve coverage as credits migrate through the risk rating process. The entire provision expense can be attributed to disposition activities that took place during the quarter. The allowance for credit losses ended the quarter at $121.1 million, or 1.83% of total loans. Included within that balance is approximately $40 million of reserves allocated specifically to our income-producing office portfolio, reflecting our continued conservative approach to reserving for that sector. Net charge-offs totaled $47.9 million during the quarter, and of that, $18.5 million were for loans being transferred from held-for-investment to held-for-sale. 30- to 89-day past due balances increased by $26.1 million to $44.1 million during the quarter. As of today's earnings call, 1 loan with a balance of $35.4 million was subsequently paid off in full. As a result, we do not view the quarter end balance as indicative of a broader deterioration in delinquency trends. Turning to operating performance. Despite further balance sheet reduction and elevated credit costs, the franchise continued to generate positive earnings, improved pre-provision net revenue, and capital growth during the quarter. We continue to be encouraged by the momentum in C&I where strategic talent acquisition, along with the bank's strong reputation for service and execution, is yielding a strong pipeline of opportunities for primary new relationships. C&I loans are up by 24% year-over-year. Production is well diversified and credit quality in that portfolio remains strong. Importantly, the strength of our relationship-focused model is also evident in CRE. Despite a $1.7 billion reduction in CRE loans year-over-year, deposits associated with the portfolio declined by only $152 million, demonstrating the durability of our core deposit franchise. As a result, CRE portfolio deposit funding ratio improved to 36%, up from 27% a year ago, reflecting the success of our relationship-focused strategy and the significant progress we've made in improving the portfolio's funding profile. Net interest income declined $1.3 million to $62.4 million, primarily reflecting continued commercial real estate payoffs and the resulting reduction in average earning assets, partially offset by improvement in our funding mix. Pre-provision net revenue was $29.1 million, an improvement of $1.4 million from the prior quarter. The increase was driven by lower non-interest expense, which declined $4.7 million to $44 million, primarily due to lower FDIC insurance expense driven by improved risk and performance metrics, as well as reduced expenses related to loan dispositions. Altogether, these factors produced an efficiency ratio of 60.2% compared to 63.8% in the prior quarter. As we previously discussed, one of our objectives is to improve earnings power of the bank. While we're not where we want to be, we are making measurable progress. Year-to-date pre-provision net revenue to average assets was approximately 109 basis points, an improvement from 2025, and a step towards our intermediate target of roughly 150 basis points. Pivoting to funding, period end deposits declined $406.4 million from the prior quarter, driven primarily by lower savings, money market, and brokered time deposits. However, the overall funding profile continued to improve as brokered deposits declined $301.5 million, reflecting our ongoing strategy to reduce higher cost wholesale funding and replace it with more stable relationship-based deposits. Non-interest-bearing deposits increased to $1.56 billion, or 5.2%, from the prior quarter, contributing positively to both funding costs and net interest margin. While total core deposits declined during the quarter, driven in part by C&I, where deposits were incrementally lower on a linked quarter basis, the portfolio continues to show strong trends as we onboard new relationships. From a profitability perspective, that improvement was reflected in net interest margin, which expanded 5 basis points to 2.52%. The expansion was primarily driven by the funding mix optimization that included less reliance on brokered time deposits, which helped mitigate the impact of lower average cash balances. There was roughly a 2 basis point adverse impact on NIM due to the sale of the loan with COVID-deferred interest that was not collected on. Turning briefly to our forecast for 2026, which you can find on slide 11 in our investor deck. There are revisions for the outlook for average deposits, average loans, and average earning assets. These revisions predominantly reflect the actual reductions that occurred in the first half and do not reflect continued declines in the second half of 2026. We have also narrowed our net interest margin outlook to 2.6% to 2.7% compared to our prior range, reflecting greater visibility into the earning asset mix and deployment opportunities. In addition, we have improved our non-interest expense outlook to a decline of 7% to 11% year-over-year compared to our previous expectation, and that is primarily driven by lower FDIC insurance expense. We continue to expect non-interest income growth of 15% to 25% for the year. As I indicated on our last call in response to a question about provision and charge-off levels, I have determined the Q1 provision and charge-off levels are a reasonable run rate for the remainder of 2026. While the second quarter run rate is higher, I stand by the original statement indicating our expectation of lower levels in the second half of 2026. With that, I'll turn the call back over to Steve for some closing remarks before opening up the line for questions.

Thank you, Eric. Before we move to questions, let me make a couple final comments. Since joining Eagle, I spent a significant time reviewing the portfolio alongside our credit and special asset teams. Together with our Director of Special Assets, I've personally visited almost all of our special mention and substandard relationships greater than $7 million, as well as several of our larger watch relationships. These visits have reinforced my belief that we understand the challenges within the portfolio, have realistic plans to address them, and are taking appropriate action to drive resolution. What I found was not a portfolio full of surprises. I found a portfolio with known issues, active resolution plans, and teams focused on executing against them. Asset quality remains my foremost area of focus. I don't believe there is a substitute for getting into the field, seeing the properties firsthand, meeting borrowers, and working alongside the teams responsible for resolving the problem credits. I'm encouraged by what I've seen so far at Eagle. We have a strong franchise, very talented people, an attractive market position, and a clear set of priorities. One of the things that attracted me to Eagle was its reputation for relationship banking and exceptional client service. After spending the last several weeks meeting with employees, customers, shareholders, and members of the community, Eagle's reputation is very well deserved. What attracted me to the organization before I joined has been reinforced by what I've experienced since arriving. The relationships first culture is real. It's evident in how our teams serve customers, how they support one another, and how they approach long-term relationships within our community. That's what makes Eagle special, and it's one of the reasons I'm so excited about the opportunity ahead. My objective isn't to create a different Eagle Bank, it's to build a stronger Eagle Bank. Thank you for your time and for your continued interest in our company. And with that, I'll turn it over to the operator, and we're happy to take some questions.

[Operator Instructions] Our first question is coming from the line of Justin Crowley with Piper Sandler.

I was wondering if, to start out, providing a little more detail on the makeup of the charge-offs in the quarter. You know, it looks like the majority of that came outside of the office portfolio, and that appeared to be on that one C&I loan that's on non-accrual. And so just beyond that, just curious if you could give more detail on the other types of credits taking marks and just what loss severity looks like.

Yes, Justin, I can start with that. The majority of charge-offs in the quarter related to the disposition strategies that we deployed. So, you'll note in our deck, there's a walk on the held-for-sale loans. I think it's $155 million or $156 million that was transferred in, and we had strategies in place for those assets that were transferred in, and when we transfer it from held-for-investment to held-for-sale, that results in that charge-off. And then there's 1 other charge-off that is related to one of the loans that's currently non-accrual as we continue to work through that disposition strategy as well.

Okay, but is that like, you know, is that like multifamily or what's driving that? If I saw the chart correctly, it looked like held-for-sale additions in office were kind of flat. So just wondering, you know, what else might be in there.

Justin, the loan that Eric was commenting on last is an office loan.

And then I guess, Eric, any thoughts on the trajectory of charge-offs beyond the balance of this year, just as we get beyond '26? Is getting back to somewhere closer to 50 basis points, is that what you'd call normalized? Is that fair? And if so, how long does it take to revert back to that kind of a level?

Well, when I look at where we're at, June 30 for the criticized and classified portfolio, and in my prepared commentary I called this out, there's the watch category, which we're not showing here, but that's the lowest pass category. That category has come down by 50% from its peak. We're also seeing some of the criticized and classified have positive trends so they might upgrade and that could cause that total criticized and classified portfolio to come down. So I think from my perspective, I look at that total portfolio and as we continue to show that portfolio decline towards year-end and even into 2027, that could potentially feed non-accrual and charge-offs. But as the overall portfolio declines, so will the charge-offs and so will the non-accrual loans. It's not linear, but to me it's as the overall portfolio gets smaller, so will the incidence of charge-offs.

Okay, that's helpful. And then maybe just like shifting over to loan growth. You know, I think previously you guys have talked about material reduction through the first half of the year which you know we've obviously seen but then a return to growth in the back half. Is that still kind of how you're thinking about things?

Justin, we're confident that we can stabilize balances through the back half of the year. We've already engaged with clients going back 6 to 9 months to get back into the production mode. So that will happen, stabilizing will happen. Growth is probably not going to happen in the second half of this year.

Okay, so that is going to be a function of ramping production and doesn't necessarily mean that any additional moves into held-for-sale are going to necessarily slow?

I think the held-for-sale tool or mechanism for disposition of underperforming assets, it's certainly a tool that we'll continue to use. My expectation, absent inflow during this quarter, as I mentioned in my prepared comments, most of that portfolio has subsequently sold or is under contract to sell.

So that could potentially be at a zero balance at 9/30. Right, and importantly too, Justin, year-to-date through 6/30, you've seen just under $400 million of multifamily credits pay off in full or 6 that were watch or criticized and classified assets. So many of those assets, as we've talked about in this setting, don't contain loss content, and the market can absorb and has absorbed the principal balances that are there.

Justin, one other thing I just want to say, just to make sure we're answering your question, we're going to arrest the decline in the balance sheet in the back half of the year, and we will return to a growth footing in 2027.

Okay, got you. And maybe just one last one, bigger picture here, just as you kind of continue down this process, you learn more about these workout strategies. And, you know, I know it's early, but Steve, we'd love to kind of hear your thoughts here, just again, you know, higher level, just any early thoughts on potential changes to the strategy that you're thinking about at this stage?

You know, honestly, coming in I had looked as part of my due diligence process before taking the job. I looked at statistics, portfolios, reports, and I talked to board members about asset quality and got comfortable. But still, nonetheless, when you show up, what's in the report and what you see with your eyes is slightly different. And so honestly, that's why I went and saw every substandard and special mention that I could get to. And to me, it feels materially different than the future. As you drive up to an asset, you either, you're like, oh, that's not too bad, or you get a pit in your stomach. And I really actually rolled up on a lot of the assets and it felt pretty good. And then as I worked through with the special assets team, there was a very clear plan on each asset and what we're going to do. What's it going to take to upgrade it? What does the borrower need to do? If the borrower doesn't take X action, what's our response to that? And so, honestly, I felt pretty good after getting out in the field and looking at all the loans and all the underlying properties.

Great. I will leave it there. Thank you so much, guys.

Our next question is coming from the line of David Chiaverini with Wedbush.

Maybe following up on that last question with a big picture one, you know, Steve, only 3 weeks at the bank, but where do you see the most immediate opportunity during the turnaround at Eagle Bank? What is the lowest hanging fruit that you'll be focused on?

But I really do think it's arresting the decline in the balance sheet. You know, I mean, I've never seen a bank shrink to greatness. And so from my perspective, there's actually, it's kind of a coiled spring here with people ready to move forward and kind of produce. You have to get through the asset quality issues first and you got to make sure you have a strong balance sheet and that you have capital to grow. But I think everybody's confident in that. And so I feel really good about the production franchise and I spent a lot of time on asset quality, but now I look forward to going on a lot of sales calls. And so I think the biggest opportunity is really just, I think everyone's building a fantastic business in C&I, but I think an immediate opportunity is really to start booking real estate loans again. I know we're below 300%, but I mean, 250%, 260% is not where we want to be either. So I feel good about commercial real estate and moving forward with that with a disciplined credit approach. And then I also think there's a lot of opportunity with the branch network and having the branches go out and then significant calling effort building business banking. And so right now what I'm going to focus on is what we do well and improving on that, and then once we're done with that and we've got the momentum in the franchise, we'll look at some new things.

Great, thanks for that and that's a good segue into my follow-up on C&I loan growth. So very strong up 24% year-over-year. Can you talk about the outlook here, areas or verticals showing the most strength within C&I and the hiring pipeline?

Sure. Thanks, David. So, just a couple of things. So, I've been at Eagle for just under 24 months. And 1 thing I can say with certainty is we just benefit from a great franchise here at Eagle Bank. So, we've had a strategy that includes really ginning up the production machine that was here and then adding some really nice new talent in the market. We have the benefit of some fantastic bankers who are really well known here in the DMV and that's afforded us opportunities to bring in new primary relationships, and that is the growth strategy. What I would say about going forward is, you know, normalized growth for us will probably look more like high-single digits, low-double digits. But we're really pleased with the momentum we've been able to build, kind of growing into that leveling out.

And what I've been really pleased to see is the discipline of the cross-sell on the deposit side. They go after the loan. They're booking loans, but they're cross-selling deposits and treasury management as a function of their sales process, which I think reflects a much more sophisticated approach than you see at most community banks. And then I didn't respond first time around to your sector question. We have some areas of expertise.

Where we really execute well, but the growth is very diversified, and that's our goal. We're not looking to outpace growth in a particular industry segment. We really want the book to grow in a way that's balanced.

Our next question is coming from the line of Catherine Mealor with KBW.

I wanted to ask about the reserve. As I look at the balance between charge-offs and reserve release over the past couple quarters, it's... the data around 50% of your reserve release has been about 50% of your charge-off. And so I don't know if that's just a coincidence that it was around that same level the past 2 quarters, but I just try to think about how we should be modeling the pace of reserve release relative to the level of charge-off that we're modeling. So I think both are a little bit of a shot in the dark from where we sit. I think the provision is the biggest, the hardest thing to model, right? And so just kind of curious how you're thinking about how those 2 things play off each other and then how we should really just be thinking about perhaps provision levels in the back half of the year. Thanks.

Hey, Catherine. This is Eric. I would look towards my comment that I made in the first quarter where I was asked about the provision, the pace of provision and charge-offs, and I had indicated that the first quarter is a good proxy for what you could see for the full year. And while this quarter is a little bit higher, our expectation is that provision expense and charge-off will be lower in the back half. So there is some provision expense coverage release that you'll expect at year-end. I just don't believe it will be at the pace that you've been seeing in the first half of the year. Some of the release or in terms of coverage, the reduction in the coverage ratio that you saw this quarter was related to a charge-off on an individually evaluated loan. So there was a reserve sitting there at March 31. We got additional information about from the client and how we're going to resolve and restructure that, and that resulted in us charging off the individually evaluated specific reserve on that loan. So I don't think you're going to see a much more meaningful coverage reduction to loans like you saw in the first half of the year. And Catherine, I want to just tell you, we're always going to have a fully funded reserve that appropriately reflects the risk in our loan portfolio.

I think last year we had to catch up quite a bit, but we're always going to have a fully funded ACL that reflects the risks in our portfolio, and you'll be able to rely on that.

Okay, great, great. And then if you're for deposit cost, it's interesting. There's such a narrative right now about higher deposit cost and how competitive it is. And as I look at your deposit cost, you're among the highest of your peers. And so as you improve your deposit mix, do you think there's actually opportunity for you to continue to lower deposit costs? Or are we more just so competitive that we're kind of stable at these levels of higher rates?

I do. I do think there is an opportunity. To me, there's a little bit of an elasticity effect there. So if you have somebody that has very low deposit costs, given the composition and mix of their book relative to us, they are experiencing some pressure. But since we're already a high-cost payer, I think that we have a lot of opportunity to do that. Have more opportunity to reduce our costs more than some of the other folks that are feeling that pressure, and we've been demonstrating that in the first half of the year, and I will continue to show NIM expansion in the back half of the year as we have that activity continues.