Eagle Bancorp Inc
NASDAQ:EGBN
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Eagle Bancorp Inc
Earnings Call Analysis
Q3-2024 Analysis
Eagle Bancorp Inc
Eagle Bancorp has embarked on significant foundational changes throughout 2024 to better position itself for growth in the competitive banking landscape. The leadership team has been strategically reinforced, most notably with the addition of Evelyn Lee as the new Chief Lending Officer for the commercial line of business. With over 25 years of industry experience, her leadership is expected to enhance the company's ability to diversify its loan and deposit portfolios, which is a key focus area moving forward.
The company has demonstrated strong financial management by repaying $70 million of maturing subordinated debt and raising $77.7 million through the issuance of unsecured senior debt. This proactive step not only replaced the capital that matured but also reflects investor confidence in Eagle Bancorp’s future. The executive management and the Board notably contributed $3.9 million towards this issuance, indicating strong internal belief in the company’s strategic direction.
Eagle Bancorp has recalibrated its dividend strategy to ensure a better alignment with its future growth objectives. The recent adjustments aim to lower the company's concentration in commercial real estate (CRE) while concurrently supporting growth plans. By addressing its balance sheet and capital structure, the bank has fortified its reserves for credit losses and has enhanced its disclosures, which provide a clearer view of its income-generating assets within the CRE sector.
During the earnings call, it was noted that the company has improved its disclosures around its income-producing CRE assets. The new disclosures provide investors with detailed insights, particularly into its office portfolio. This change comes in light of recent research showing significantly higher loss rates for larger office properties compared to smaller ones, thus allowing investors to assess risk more accurately.
Eagle Bancorp is focusing on reducing its reliance on wholesale funding as it transitions towards a relationship-based deposit strategy. This shift is part of a broader digital strategy aimed at enhancing customer engagement and ensuring sustainable deposit growth over the long term. While transitioning may take time, the comparisons drawn from the early results indicate promising progress.
The bank is witnessing a leadership transition with the retirement of Jan Williams, the long-standing Chief Credit Officer, who has played a pivotal role over the last 20 years. Her successor, Kevin Geoghegan, has already begun collaborating closely with her to ensure a seamless transition. As the leadership evolves, there lies an opportunity for innovative ideas and fresh perspectives that may drive the company’s strategic goals even further.
Overall, Eagle Bancorp's strategic moves this year depict a strong commitment to not just manage existing assets but to expand thoughtfully into the future. The new leadership appointments, proactive debt management, updated dividend strategy, and enhanced disclosures create a stable platform for future growth. For investors, the roadmap laid out by the company indicates a focus on profitability and reduced risk, fostering greater confidence in the company’s ability to navigate the evolving economic landscape.
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Good day, and thank you for standing by. Welcome to the Eagle Bancorp, Inc. Third Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised 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, Inc. 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 this 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 2023 fiscal year and current reports on Form 8-K include the earnings presentation slides -- including the earnings presentation slides, identify risk factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made this morning, which speak only as of today.
Eagle Bancorp does not undertake to update any forward-looking statements as a result of new information or future events or developments unless required by law. This morning's commentary will include non-GAAP financial information. The earnings release, which is posted in the Investor Relations section of our website and filed with the SEC, contains reconciliations of this information to the most directly comparable GAAP information. Our periodic reports are available from the company online at our website or on the SEC's website.
With me today is our President and CEO, Susan Riel; our retiring Chief Credit Officer, Jan Williams, and our incoming Chief Credit Officer, Kevin Geoghegan.
I would now like to turn it over to Susan.
Thank you, Eric. Good morning, everyone. Throughout 2024, we've taken foundational steps that will better position us to achieve our strategic objectives. In the quarters to come, our focus is on growing the bank, proactively managing our asset quality, improving our net income and profitability and diversifying both our loan and deposit books.
We've positioned the senior team over the last year to provide the leadership needed to support our goals. With the latest addition of Evelyn Lee joining us as Chief Lending Officer for our commercial line of business, I am confident we have the necessary leaders in place to succeed in our strategic goals. I am excited about Evelyn's leadership and the over 25 years of experience she brings to EagleBank.
Our work this year will be fundamental to future growth in loans and deposits, and I am confident in our strategy and approach. We repaid our $70 million maturing subordinated debt at the start of September. Subsequently, we raised $77.7 million of unsecured senior debt, replacing the capital that matured earlier in the month. The raise demonstrates the confidence investors have in our vision and in the future of our company.
The issuance received full participation from executive management and the Board, collectively investing $3.9 million or about 5% of the total issuance. At the same time, we announced a recalibrated dividend strategy, positioning our dividend payout ratio to better support the company's future growth plans. This will also contribute to our goal of reducing our CRE concentration ratio.
Our actions this year have reduced uncertainties about Eagle, which better positions us for the future. We've taken steps to address our balance sheet and capital. We have built our reserves for credit losses and substantially enhanced our income-producing CRE disclosures.
The senior leadership team has undergone a notable change, and I am confident we'll provide the leadership needed for the execution of our strategy. Our digital channel momentum showed results during the quarter. We've designed our digital strategy to be a flexible tool to reduce the use of wholesale funding as our relationship-based deposit strategies take hold, which takes time.
As I mentioned earlier, another step our team has taken this year is to enhance our income-producing CRE disclosure and give users of our financial statements, more details about our loan book.
Before turning it over to Jan to talk more about our enhanced disclosure, I want to welcome Kevin Geoghegan to the team. Kevin joined Eagle in early September. Kevin and Jan have been working very closely together to ensure a seamless transition as Jan approaches her announced retirement.
Jan's contributions over the last 20 years have been fundamental to the strong success we've seen with our asset quality over the life of EagleBank, and I am excited for her to spend more time with her family and on achieving her personal goals as she enters her next chapter.
With that, I will turn things over to Jan.
Thank you, Susan, and good morning, everyone. First, I'd like to direct your attention to our earnings presentation deck. Earlier this year, we added disclosure specific to our office portfolio. We've again substantially enhanced our disclosure on our income-producing commercial real estate.
For our office portfolio, we've added more disclosure on slides 27 and 28, which includes the stratification of 5 office buildings in our portfolio. The Federal Reserve recently published a study indicating loss rates nearly 7x greater for office properties at 500,000 square feet as compared to those of 50,000 square feet.
We also added more details about our Washington, D.C. and Central Business District office exposure. It's worth mentioning we have only 4 Central Business District office loans, one of which was mark-to-market and was the source of the first quarter charge-off. The other 3 properties are pass-rated and current as to payment.
We've added details on our multifamily portfolio on pages 19 and 29. On pages 24 through 26, you can see detail on nonaccrual loans, larger special mention and substandard loans and our top 25 loans. On our nonaccrual loans, you will see 3 offices in the population, all of which are on nonaccrual, not due to payment default but because of appraisal valuation. In each case, the receipt of a new appraisal resulted in an associated charge-off and each of the loans being placed on nonaccrual despite being current as to payments. Finally, slides 30 to 33, provide further detail on our credit culture, history of asset quality and other portfolio characteristics.
To summarize, while our office portfolio has been the source of some uncertainty over the last year, through this cycle, we've simply not yet seen payment performance issues in the office portfolio. Valuation risks have driven our charge-off activity from our office portfolio, and that risk is largest in the Central Business District, where we have only 4 loans, 3 of which are pass-rated and one of which has already been written down.
Our total exposure is $132.8 million in the Central Business District. Our Northern Virginia and Maryland office exposure has not seen the same degree of valuation challenges to date. We are not seeing any material shift in the performance of our multifamily portfolio.
Growth in net operating income, primarily as a result of rent increases in multifamily properties has to date compensated for increases in debt service due to higher interest rates. We believe this trend will continue as a housing shortfall continues to exist in our footprint.
Net charge-offs moderated this quarter as compared to earlier in 2024 with net charge-offs totaling $5.3 million this quarter. Year-to-date charge-offs are $29 million or 48 basis points when annualized.
Substandard loans declined $17 million during the third quarter, ending at $391.3 million. Special mention increased $57 million during the quarter, ending at $365 million. We note in our disclosure on Page 21 of our earnings presentation, that 91% of classified and criticized loans are performing.
In our second quarter earnings call, I indicated 3 projects drove the increase in criticized loans, 2 of which were assisted living properties. One of those assisted living properties was moved to nonaccrual at September 30 with a carrying value of $17.9 million after a charge-off of $3.8 million during the quarter based on an updated appraisals. We also have a specific reserve set aside for this credit totaling $2.5 million.
The other 2 loans placed into nonaccrual status at September 30 were unrelated land loans, one in Tysons Corner, Virginia with a principal balance of $16.4 million and one at the end of the Dulles Metro line in Northern Virginia with a principal balance of $10.5 million. Both loans are supported by current appraisals and neither evidences and impairment.
Nonperforming loans were $134.4 million at September 30, an increase from $98.2 million at June 30, inclusive of the 3 loans I just mentioned. NPAs were $137.1 million, which was 122 basis points to total assets, an increase of 8 basis points from the prior quarter.
Loans 30 to 89 days past due were $56.3 million at September 30, increasing from $8.4 million at June 30. Of the increase in 30- to 89-day past dues, 2 relationships totaling $39 million have become current subsequent to the end of the quarter, while the remaining $8.9 million included 1 loan on which we received a paydown of $1 million in early October as a condition of extension.
Eric?
Thank you, Jan. We reported net income for the quarter totaling $21.8 million or $0.72 per diluted share. This compares to the prior quarter GAAP loss of $83.8 million after recording a $104.2 million impairment, the value of goodwill. Excluding the goodwill impairment, operating net income last quarter totaled $20.4 million or $0.67 per share.
Third quarter operating earnings improved $1.4 million attributed to a positive variance related to the change in provision for unfunded commitments, higher fee income and a modest increase in net interest income. This was offset by an increase in provision for credit expense and noninterest expense.
The operating trend is relatively stable from the second quarter and materially improved from the first quarter. Our capital position remains strong. Tier 1 leverage capital increased 36 basis points to 10.9%. Common equity Tier 1 capital increased 62 basis points to 14.5%. Tangible common equity increased 51 basis points to 10.86%. Book value per share increased $1.86 to $40.61 per share, representing an annualized 19% growth rate from the prior quarter.
On balance sheet and contingent liquidity also remained strong. Average deposits have grown $398 million from a year ago at September 30, 2023. Our one-way broker deposits representing nonrelationship deposits have declined $182 million from the comparable 2023 period end and is the result of growth of non wholesale deposits.
Insured deposits totaled 74% of our total deposits. At quarter end, available liquidity from the Federal Home Loan Bank, Federal Reserve discount window, cash and unencumbered securities totaled over $4.5 billion.
I'll pause here and let Kevin talk about reserves for credit losses.
Thanks, Eric. As Jan mentioned, net charge-offs increased $3 million from the second quarter to $5.3 million. While we continue to assess the adequacy of our qualitative reserves to account for market uncertainty, it is more likely that future reserve build, if any, would be driven by specific reserves from individually evaluated loans.
A change in economic estimates from our Moody's inputs to the quantitative regression model may also increase reserves in the event there is a significant shift in economic expectations that we did not consider in our qualitative reserves. We continue to add specific reserves to nonaccrual office loans as our policy is to reappraise annually.
While valuation risk in the office portfolio remains, as interest rates ease, we believe the valuation uncertainty will normalize. The allowance for credit losses increased to $112 million at September 30, representing coverage to held for investment loans to 1.4%, increasing 7 basis points from the prior quarter.
The ACL coverage to performing office loans increased to 4.55% at September 30, increasing from 4.05% at June 30 and 1.91% at December 31.
Eric?
Thank you, Kevin. Operating pre-provision net revenue increased 35 -- increased to $35.2 million from $34.4 million in the prior period. The driver of the increase was higher noninterest income from swap and loan fees and to a lesser degree, an increase of net interest income.
Net interest income before provision totaled $71.8 million in the third quarter, increasing from $71.4 million in the second quarter. NIM in the second quarter was 2.37% declining 3 basis points from the second quarter. Driving the decline was certificate of deposit growth in our digital channel.
Worth mentioning, in August, we reduced rates paid on nonmaturity deposits due to declining interest rates in the summer. Following the decision by the FOMC to ease the policy rate by 50 basis points in September, we reduced rates again for nonmaturity deposits by an additional 50 basis points throughout September. We have $2 billion of loans tied to 30-day or overnight SOFR and $500 million of loans tied to prime.
Operating noninterest expense totaled $43.6 million, increasing from $42.3 million in the previous quarter, adjusted to exclude goodwill impairment in the second quarter. The $1.3 million increase is attributed to higher FDIC expenses.
In our quarterly investor deck released along with our earnings, we added a preliminary view on 2025. Our thoughts on period-end growth of loans next year is between 2% and 8%, though the slide shows average loan growth.
Earning asset growth is flat as we continue to take cash flows from our investment portfolio and reinvest in loans. There is an expected benefit from this repositioning of the investment portfolio and the loan mix, which will enhance spread.
Mix will be critical for -- as well for funding, growing noninterest-bearing deposits and reducing use of wholesale funding should also contribute to spread. Of the $91.2 million of funded loan originations in the quarter, we had a weighted average rate of 7.11%. This compares to $178 million of funded loan originations at a weighted average rate of 8% in the second quarter.
I'll turn it over to Susan for a short wrap up.
Thanks, Eric. Team is planning on a future that will allow us to scale our franchise and continue to be the best community bank in the Washington, D.C. metro area. EagleBank's deep-rooted relationships within the region combined with the expertise of our relationship managers continue to develop tailored solutions that resonate with both our current and future clients.
As a community-focused bank, we are committed to local decision-making, building long-term customer trust and supporting the economic growth of the D.C. market. We believe this sets us apart and positions EagleBank to benefit significantly from the evolving market dynamics.
We are cautiously optimistic regarding how falling interest rates may improve valuation risk that we've discussed over the last 1.5 years. Nevertheless, with over 25 years of experience in this market, we have the expertise to support clients navigating the challenges of relatively higher interest rates.
In closing, I would like to extend a heartfelt thank you to our employees whose hard work every day makes Eagle a success.
With that, we will now open things up for questions.
[Operator Instructions] Our first question comes from Justin Crowley with Piper Sandler.
I just start on credit here, and I appreciate all the added disclosure in the deck. I want to see if you could detail just a little further, the pickup in nonperformers and specifically the assisted living area. I know some of the migration there we've discussed before. So I guess, just what you're seeing in that area looking forward with payment defaults being more of a driver with these credits?
Yes, Justin, I think I can give you a quick run-through on where we are with the current nonperformers. We have the 1 CBD office property that we had discussed in the last 2 quarters. That's about $28 million. We have an assisted living facility in Charles County, Maryland, that's $19.2 million. We have office in Arlington at $19.1 million, office in Northern Virginia at $18.5 million, then the newer loans added this quarter, an assisted living facility in Montgomery County, Maryland, very well-located new facility. It had been current and performing at June 30. I believe there are some issues with achieving stabilization at this property, and the sponsor, I think, has -- is looking at some kind of a negotiation in terms of a lesser payment will cram down really.
That remains to be seen, but we've already marked the property down based on the current appraisal and added an additional reserve for that. I would say the ground lease land in Fairfax in Tysons Corner is actually a great piece of property. But again, the sponsors are looking for some reduction in the amount owed on that, very unlikely to happen. That's a property that should be readily salable at a number significantly in excess of our carrying amount.
And then the land that the final one at $10.5 million is land that's at the end of the Dulles metro. It is zone for multifamily. It's with a ground lease. There are various issues amongst the fee owner, the adjoining land owner and the ground lease holder that is resulting in litigation.
I don't know how long it will take for that to be resolved. If and when we'll have a better idea. Right now, there's an injunction against the property. So we have moved it into nonperforming status. It is protected by loan to value, but that's an evolving situation. Does that answer your question?
Yes. No, that's helpful detail. And then I guess just on office, more broadly, it was nice to see some stability there. Just as we look ahead to '25 lighter year for maturities before we get to '26. Just curious, any commentary or early work you're doing in those buckets in terms of what you're seeing with appraisals and then just what you're seeing with occupancy rates?
There is still a lot of volatility in the appraisal area. I think it's because they're all driven by hindsight and you're looking at what properties sold for in the last year. Most of what you're going to find is distressed sales or foreclosures. And those are what I believe to be the lowest possible values they could be using for calculating valuation on newer properties.
When I look at what's been foreclosed on in our market, and I think this is probably true across the country that large loans in the central business district are the ones that are seeing the biggest drop in valuation. And there's a very limited number of buyers for those properties, very limited financing for anyone who is a buyer on those properties. We're starting to see some green shoots of activity in the market, but I think that the volatility in appraisals while it should be improving will take a while to shake out there.
We are seeing very stable occupancy in the properties that we have that are going out the next 18 months in terms of lease roll or maturities. I think we haven't really seen degradation in terms of the suburban office market in terms of occupancy levels, we're actually seeing some activity out there. We really only have minimal in terms of life sciences projects, which I know have been having issues lately, but we haven't skipped a beat in terms of the office portfolio as a whole.
I think one of the reasons is the proximity on the life sciences side to Fort Detrick and NIH that the 270 Corridor has. So there really hasn't been weakness that we've experienced. I think the 4 loans that we have in the Central Business District, one is a Trophy property. That's our largest loan. It's about $48 million that loan long-term leased to a New York-based international law firm, not expecting a blip on that one. The build-out is almost finished on it, and they should be moving in shortly, and rent payments will commence. So a lot of confidence in that property.
The Trophy market is extremely tight. No change in pricing on that either. No, I'm cautious, but I'm optimistic that with a couple of more drops in interest rate, we should start to see some decent valuations done on these properties as we start to see market trades happen.
Okay. That's helpful. And then maybe it's more of a modeling question. But just on the reserve, I think it's been talked about before, maybe a 135, 140 reserve level. And so being at the high end of that now. I know it wasn't in the outlook's slide for 2025. But just any preliminary thoughts on either go-forward charge-off expectations or provisioning assumptions and what kind of allowance level that gets you looking out to next year?
Yes. We -- in terms of the allowance, I think we kind of talked about our thinking there in terms of any additional build. In terms of credit, I think the range that we're willing to talk about for 2025 is between 25 and 50 basis points on average loans.
However, I think you need to -- that's a wide range, but you need to take in context to all the comments that Jan just mentioned and what we're seeing right now for information that's available to us on that. But -- that's the way we're looking at it for next year for charge-offs.
Okay. Awesome. I appreciate that. I will leave it there.
Our next question comes from Catherine Mealor with KBW.
Thank you for all those additional disclosures. It's very helpful. If I look at Slide 26, that shows your top 25 loans which I think is really cool to see. One thing that you talked about in your slide deck, and you've mentioned before that the biggest thing that's bringing some of your properties to NPL is not necessarily payment default, but it's a maturity and then the need to get an updated appraisal.
And so if I look at that slide, it looks like you're really only kind of your largest loans kind of 2 credits that we might be worried about the next quarter. One is the office loan, that's about $85 million that matures in December and then the data center loan that matures in December both are criticized. Any -- I know it's preliminary -- and that will happen in the fourth quarter, but any kind of preliminary thoughts on those 2 as we kind of think about some migration that we could see next quarter?
Okay. Thanks, Catherine. Yes, we do have those not a ton of maturities coming up in the next 6 months or so. One of them is -- you're correct. One of the larger office properties. It's located in Montgomery County in Bethesda, not expecting there to be an issue on that appraisal because the occupancy is good. The debt service coverage is good.
We've swept all of the cash flow for the last year, 1.5 years, so that we've built up about $6 million in -- $7 million in reserve for build-out for new tenants, if there is rollover there. And then also a payment reserve of about $2.5 million. So we think we're in good shape for that even if they were to lose a tenant or 2. Bethesda market is doing pretty well right now for these Class A properties, not hugely worried.
Tysons the data center that you're talking about. I am a little concerned about that one because while negotiations are ongoing with Amazon, it's tough to predict what Amazon is going to do right now in terms of data centers. They seem to shift their philosophy from rent to buy back and forth frequently. So I don't know which direction that one is going to go in.
Great, very helpful. And then maybe just turning over to the margin. Can you talk a little bit about what you've seen on deposit costs so far this quarter? I mean, your deposit costs have been so high. And so I would think that you would have a pretty high beta on the way down. And so just curious what you've seen so far with the first 50 basis points of cuts in what you would expect from a beta over the next couple of quarters?
Yes. As I mentioned in my prepared commentary, we reduced nonmaturity deposits collectively or cumulatively, I should say, 65 basis points and late in the third quarter, 15 basis points in August and another 50 basis points in September. Haven't seen any preliminary customer behavior that would be concerning. There's been some statement cycles, which to me or at least my history, that's important. That's one the customer oftentimes realizes that rates are falling on their account. But we don't anticipate any issue or concerns there.
In terms of your comment about beta going forward, I would say it's not going to be 100%, but I think it could be pretty high for our customer deposits. And then in terms of wholesale, while it's less wholesale now than before. We're going to continue to use the tools that we have, one of which is the digital channel into next year that will help us reduce the use of wholesale, which has that higher beta money.
And then while digital isn't immediately accretive to our cost of funds, there is a level of complacency that channel -- the customer in that channel does demonstrate, we've seen a little of that already, even though we've been doing it for only 10 months. So I think we're going to learn a lot more here in the fourth quarter and the first quarter on testing that complacency of that customer.
So I think that if you ask me this question next quarter, I could probably give you a little bit more of an informed view on the betas in that -- in the digital channel for Eagle, but my experience in other institutions that I've had experience with this channel is that beta can sometimes be close to 60% -- 60% to 70%.
Okay. Super helpful. And then maybe my last question is just on the dividend reduction that you announced earlier this quarter. Can you just kind of give us some commentary on what drove that decision? And then as we think about your commercial real estate to capital ratio, I mean, you've got a ton of capital, if we just look at capital stand-alone, but obviously an elevated CRE to capital ratio.
And so I know that the plan is to reduce that. But just kind of curious if there are -- there's a level that you hope to be to by next couple of quarters, maybe by end of '25 or just kind of what your target is for that and how that might impact growth over the next year?
In terms of CRE, we -- our strategic plan is focused on and thinking strategically, we think 24 to 36 months out. Our goal is to get the CRE concentration ratio closer to FDIC guideline, but that does not mean that we're not serving our CRE customer. We're -- we have expertise in CRE. Eagle is known for CRE in our market. We're not turning our back on a CRE customer we're serving our clients.
That being said, the dividend, which -- the recalibration of the dividend, which seemed like a natural time to consider that given the refinancing of the subordinated debt and the senior debt. I think the dividend helps us grow the numerator of that, no, but do not -- I'm not great on math, you would think the CFO saying that -- sorry, we're all laughing at Eric right here.
But it grows the capital at much greater by holding on to $32 million of additional capital so that the CRE concentration ratio does get close to that guideline. I think there's another nuance here. So capital is the denominator. And then on the numerator side, in talking with Jan and Ryan Riel, who's our Chief Lending Officer, on CRE, there's about $400 million that the 2 of them believe could -- is kind of primed to go find permanent financing somewhere else.
We're not a perm CRE financing institution. We're more of a bridge lender. And so we're not going to be doing the deals that you would get in a pension fund or a Lifeco or get -- or not going to compete against financing from Ginnie Mae.
So we estimate that there could be about $400 million that if rates continue to fall, these folks are using extensions to kind of wait to get lower rates before locking in. And we think that, that could be quite helpful with reducing the CRE concentration ratio.
So one of the goals that we'll have if we have the benefit of that happening to prop up earning assets would be C&I. And so Susan has spoken throughout this year about our initiative to grow C&I and bringing Evelyn in on the leadership team and her 25 years of experience in this market is certainly helpful in that strategy.
And yes, organic growth in C&I will take some time. And we're certainly -- we have -- we see a lot of activity coming through our management loan committee, but I think there will be other opportunities we could take in the intermediate steps to also keep our earning assets flat and not show a decline in earning assets, and have that to be in the C&I bucket. I hope I've answered your question.
Make sense. Yes, you did. It's all very helpful.
Our next question comes from Christopher Marinac with Janney Montgomery Scott.
Eric, if we dug into the expense guide for 2025, do you already have the FDIC costs in that run rate? And I was just thinking about a scenario where you would go above the expense guide and if that would be primarily just because you were more successful on new hires and if that was a fair scenario?
We -- so in the 2025 view of expenses, FDIC is flat from 2024. And then I believe that we will not see any increases of expenses, material increase in expenses away from where our outlook is showing given -- due to team build out. I think there is enough capacity for us to build out teams where we -- and take on new team members and new relationship managers when we want them on our team, and that's not going to materially alter our expense approach.
Got it. And then with Evelyn joining and as she and her team get ramped up next year, what's the, I guess, outlook, not just for C&I business, but also kind of related deposits? And does that give you some relief on funding costs in the 2025 guide?
C&I deposit generation and growth, as we all know, is a long sales cycle. I don't want to speak for Evelyn. But I think that there's certainly opportunities with our current customers, how do we deepen our relationship with our current C&I customers, providing them treasury management products that they might be useful to them that they're not using.
So I think that, that certainly is a shorter sales cycle, and I think as Evelyn starts to familiarize herself with a team and finds talent that could be accretive to the existing team and gets the team focused on sales outreach and efforts and being out in the community, those efforts will eventually help drive deposit growth.
And a lot of words to say, I don't think we're going to see a material increase in C&I deposit growth in the next quarter or so because that takes some time. But I do believe that in the long term, that, that is definitely an important part of our strategy in improving the quality of our deposits, and it will absolutely be accretive to our cost of funds because it will allow us to reduce the use of wholesale funding and it will also allow us to have less of a digital strategy presence in our deposits because the deposits that Evelyn and her team as well as Ryan and his team and also our small business and our branch channels, consumer channels, those are all relationship deposits that will really build the franchise value that we have here, and we want to continue to build on.
The only thing I would add to that is over this last year, we have spent some time developing our treasury management focus. So we've increased some of the products there and the staffing there. So that will help Evelyn hit the ground running on gathering those deposits and those fees from that kind of a service.
Great. And just, I guess, a relatively quick question for Jan and/or Kevin. Do the maturities in 2024 have anything remaining that are going to be dealt with in the fourth quarter? Or is most of those already taken care of and the real focus is on '25 and '26?
I would say you're correct that the real focus, I think, is going to be on '26. '25 is a pretty light year for maturities. We are working through included in that number for the balance of 2024 are loans that have already matured and are nonperforming. So those loans are mature, but nothing -- no event is going to transpire that would cause an extension of those. So they will sit there until they're sold or repaid. So it's really a lesser number than that, Eric. I think you have the split out there on the maturities during 2024.
Yes, on the 2024 -- but I think you answered Chris's question that in 2024, there's not any valuation risk there...
Well, there's always some, but I think overall, very small in terms of volume going for the balance of this year and even into next year, it's a pretty small number.
Yes.
Got it. Is there any, I guess, risk in terms of working in advance on those '26 maturities? Or is it really just a function of assessing the lost content possible and having the reserve appropriate?
I think there is early intervention action that we've taken going out that far. Typically, that involves a cash flow sweep or a pay down if we're in a position and the buyers in a position to come up with a principal reduction. We probably would not enter into an extension until the time of maturity, but we would put into effect credit enhancements before the maturity date.
Chris, I will add, maybe I've told you this prior. When I talk with institutional investors about the office reserve oftentimes, the number of 10% comes up. And the reason that we don't believe 10% is appropriate for Eagle is given the limited and now you can see the actual exposure we have to the Central Business District. We have limited exposure in a Central Business District office loans.
And when you look at the issuers that have those 10% reserves, they have much more exposure to the larger office loans in the Central Business District. And one of the disclosures that's additive to our deck on Slide 27 in the bottom right-hand corner is the stratification of our office portfolio by square footage.
And in that, you can see we only have 1 office property that has 500,000 square feet or greater. I believe in Jan's prepared comments, although I don't know if you said at this time, we spent so much time talking together, talking about credit. She's talked in the past about the loss rate for something that 500,000 square feet is 7x greater than 50,000 square feet. And that's not Eagle saying that that's the Federal Reserve, I think it was Kansas City, I did a study earlier this year.
So we've spent a lot of time, Jan, myself, and frankly, the whole entire management team, including Susan. We spent a lot of time talking about the reserves that we have for office. And that 4.55%, we feel is adequate at September 30, given the information we have. And you'll note in our prepared comments from Kevin, we believe that if there is any additional reserve build, it's going to be more idiosyncratic and related to individually evaluated loans versus an overall qualitative reserve for office and continuing to build.
I think that's true. And when you look at the portfolio as we sort of postmortem anywhere we've had losses, in the office portfolio, nothing of $20 million or less, no loan of $20 million or less has had any kind of a loss. So I think what the Fed has pointed out, has held true for us that the smaller deals have a much less risk of loss. Typically, you're going to see personal guarantees on the smaller loans. So we have a lot more leverage in negotiating.
Great. Thank you all for your feedback. And again, thanks for the disclosure in the slides, and it's really, really helpful.
And I'm not showing any further questions at this time. I'd like to turn the call back over to President and CEO, Susan Riel for any closing remarks.
Just want to take some time to thank you for your time today and for your questions. And we look forward to speaking to you again next quarter. Have a great day.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.