Eagle Bancorp, Inc. Stock

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. Too 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. Our 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 after 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 charge-offs 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, one 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, CRE paydowns and increased borrowing costs. 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 EagleBank, it's to build a stronger EagleBank. 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 loan -- 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 one 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. It 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, 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. And we're also seeing some of the criticized and classified have positive trends so they might upgrade and that could cause that portfolio to come -- 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 in CRE 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 moves -- 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, we've seen just under $400 million of multifamily credits pay off in full that were 6 -- or that were watched 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, it's 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 -- the past feels materially different than the future because every asset as we -- 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.

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

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 EagleBank? What is the lowest hanging fruit that you'll be focused on?

Well, 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 [ growth ] 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 one thing I can say with certainty is we just benefit from a great franchise here at EagleBank. 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 ] is 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.

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 -- 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 maybe [indiscernible] 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. There's a -- 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 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.

Our next question is coming from the line of Steve Moss with Raymond James.

Steve, starting off with you here, you know, welcome aboard. And, you know, just curious here, you started your introductory comments with on deposits here and just thinking about your background at Western Alliance, I know you ran a number of deposit-rich verticals, just kind of curious if you're thinking about maybe adding something like that here at Eagle.

You know, honestly, I was reflecting on that last night because I'm also a shareholder still there and they had a good quarter. But I think when I started at Western Alliance, we were about $6 billion in assets and now they're just closing in on $100 billion, largely organically. But when I think about that coming over here, I do really want to lean into what we're already good at. But I'm highly confident in our ability to identify some new opportunities to grow loans, grow deposits, and build some new businesses. I do want to fortify the franchise first.

But I will tell you, I'm going to wake up every morning with a keen focus on low-cost granular deposits. I think that is the most accretive thing any CEO can do, is what's our funding profile look like? What does our deposits look like? What are the costs of those deposits? How are they cross-sold into our customers? And are we generating treasury management fees? So I don't know what businesses I'm going to build yet, but I'm confident that I'm going to find something and that business is going to be focused on deposits and the lower the cost those deposits are the better.

Okay, appreciate that color there. My next question here, just in terms of the criticized and classified loans, there are a number of loans in both buckets that mature this quarter. In fact, the largest special mention and largest substandard loan mature this quarter, I'm curious what your guys' expectations are around resolution or if there's going to be an extension here on those types of properties? You know, in particular, a $56 million apartment in Prince George's County and then the storage facility in Montgomery.

Right. Thanks, Steve. We have, as part of our standard operating procedure, we engage on maturities 6 to 9 months before that, engage with clients where there's challenges with the asset, we're engaged actively, and there's active resolution plans, as Steve mentioned in his comments, for each of the loans that are in there. On those 2 specific loans, our expectation and belief is that the multifamily loan in Prince George's County will be restructured for a longer term basis -- on a longer-term basis and that restructure will result in an improved risk profile for that asset. And the expectation on the self-storage facility in Montgomery County is that that will be paid off in full by the end of the year.

Okay, great. And then in terms of the -- in terms of the other additions on the list here, several were apartment buildings and mixed use and condo type stuff. Just kind of curious, is there any common theme with regard to those properties? I know it's a bunch of them are in D.C.

Yes, so you're breaking up a little bit there, Steve, but two-thirds of the inflow of the $216 million is comprised of 4 assets, one of which $34.5 million, Eric mentioned in his prepared remarks that that paid off subsequent to quarter end, so that paid off in full. That was $35 million, we're in active discussions on the other 2 multifamily properties that will result -- that we believe will result in upgrades in the near term and the other asset is an ongoing resolution plan that we have that the maturity that's farther out there.

Okay, great. And then in terms of the C&I loan growth this quarter, you know, continuing 3 very strong quarters of growth. Just kind of curious, you know, what are you guys seeing for origination yields? Kind of, you know, what's the typical average loan size these days? And how much are you guys the lead versus participating?

Steve, you were breaking up a little bit, but I think I heard enough parts of your question. But come back if I don't answer them all. As I mentioned as when I answered the prior question, I think when you look forward, you can anticipate C&I growth that's more high-single digit, low-double digit. In terms of participation versus new primary relationships, the business development strategy is heavily focused on new primary relationships. And one way that I kind of keep tabs on that is the growth in treasury management revenue. That's growing at a nice clip. I'm very pleased with that. So, while we certainly do some clubbing with other community banks and we've entered into a handful of participations, if you looked at the production, it's dominated by either small clubs where we have significant deposits or ancillary and primary new relationships.

In terms of new, I think you asked about new average loan size. Is that right?

Yes.

Yes. I mean, so if you look at the portfolio generally, typical relationship is somewhere between $5 to $10 million in exposure for us in C&I. And as we do new loan production, we're really trying to serve the true commercial and lower middle market client, so while new loan production is a little on top of that, a little bit larger than that, it's still in the band you would expect. So think, you know, typically $7 to $15 or $20 million for a new relationship.

And I just want to kind of reinforce that position. This happened before I joined, but the company since last year really has been very cognizant of the size of loans that they close and selling down pieces of things that are larger, whereas perhaps in the past they would have kept the whole amount. So loan size discipline and concentration is being managed. And I think, frankly, that's some of the challenges Ryan faces will, you know, some of the payoffs are $60 million, $70 million, and we have to do 2, 3 loans to replace that. And so it takes a little while to build the production staff and the manufacturing capacity to do that. But to me, it's well worth it. I'd rather have 3 $30 million loans than one $90 million loans. And that's kind of the approach they've been taking, which I was pleased to see when I got here.

Okay. That's great color. And just my one last question on the commercial. I was just kind of curious, where are new origination yields for the commercial book these days?

When you say where, are they geographically?

No, no, what's the yield of...

The yield...

Yes, I believe, I mean, you can keep me honest here. I think we're in the mid 200 basis point range. That's...

Yes, I would say, because I observed loan committee, but we're probably between 2.25% to 2.75% over is most of the origination activity.

And I think that yield reflects the risk of the portfolio. You know, that's the appropriate yield for the risk that we're taking, you know, and that's why we're comfortable with high-single, low-digit growth because it's good yield, but it's good credit.

Our next question in queue coming from the line of Christopher Marinac with Brean Capital, LLC.

I wanted to ask about C&I deposits and how new inflows are occurring and kind of new account openings in C&I that we may not see from the slide last night.

Yes, sure. So, you know, I think I've been really pleased with the new primary relationship additions that the team has been making since I joined the bank. And I think that's really what shows in that 14% year-over-year growth in deposits. You know, I will note that in our portfolio we have a handful of really great long-dated clients that are impacted either by seasonality or by transaction timing. So a good example of the former would be our charter school portfolio where we receive a lot of funding at a certain time of year and then draw that down across the 12 months. And a good example of the latter would be a class action law firm where inflows can really come in heavy and then get dispersed out. So, on a quarter-by-quarter basis, you could see some variability, but I'm pleased with that kind of overall trend.

And I think I mentioned one of the other metrics that we keep an eye on is the treasury management revenue growth, kind of period-over-period, and that's been climbing at a nice clip. To me, that's really indicative of new account openings, new primary relationships where you're getting all the treasury, all the payables and receivables. So overall, I think very strong positive trends.

And then you're incenting your team to bring in new deposits. So, like, there's been a whole behavior shift that we just haven't seen the balances realized yet.

We're definitely incenting the team on new deposits. I mean, I would argue we are seeing the benefits given the, you know, percentage growth that we've seen over the last 4 quarters. But it's absolutely an important part of the incentive plan.

And then, Steve, maybe the same question for you. I mean, as you've built deposit frameworks over the years, how important are incentives? And is that something that we'll hear more about in the next few quarters?

Yes, I think, you know, 50% is leadership and direction and 50% is incentives because, I mean, you have to back up what you say with actions. But to me, I'm going to wake up every day thinking about and asking about deposits, and that will percolate through the culture pretty quickly. But then I want to make sure that the people that, you know, kind of grab onto that, you know, that we reward them appropriately, you know. So early in my career, I was more of a loan officer. And then, you know, it was a low interest rate environment, and it was kind of like, you know, yes, I get a loan and it was pretty easy to fund it.

And then the last, you know, since rates started rising, I just have had [ a real sea ] change. It's the value of a franchise is its deposits. And so every day I wake up thinking about deposits and how can I get them and how can I get more and how can I cross-sell TM? And, you know, it takes a little while for -- people can hear that, but it takes them a little while to learn how to do it and be good at it. And I think they're through that transition. And then once they are good at it, they should certainly be rewarded for that behavior. And so you will hear more about that. And I think the change is well underway.

One other thing just to mention is, obviously, you know, we can grow new primary relationships. But if we have relationships going out the back door, that can be futile. So I've been very pleased with the client retention that the team has exhibited. And I know Eric mentioned in his prepared remarks the deposit retention in CRE as compared to the loan reduction. So I think the team has done a really good job on retention and maintenance of the franchise and the brand. And now we're driving new relationships.

And Chris, just to pile on too, the -- on the incentive side of that question, we've implemented in recent times an incentive plan that covers our entire branch network and our business bankers that's enhanced and deposit heavy so that that behavior to Steve's point over time will -- you will see the results of that behavior change.

Great. Thank you all for your input on that. Just one last asset quality question, which is, would foreclosures be something that you would do more of and would that kind of accelerate further credit risk recognition?

Yes, I'm not afraid of foreclosures. And sometimes that's the best way, you know, sometimes an expedient way or in a very distressed or difficult situation, a note sale is better. But the reality is sometimes you have to foreclose. And if that's what we have to do to get resolution on the assets, that's what we're going to do. And oftentimes, a foreclosure process will result in the borrower realizing the seriousness of the situation and taking the appropriate action to protect their assets so foreclosure -- foreclosing on properties will be part of our resolution plans.

I am showing no further questions in the Q&A queue at this time. I will now turn the call back over to the company President and CEO, Mr. Stephen Curley, for any closing comments.

Well, I just want to thank everybody for their participation and questions during the call. I just want to reiterate how proud I am to be here at Eagle and how much I'm looking forward to the future here. And we look forward to connecting with you guys again next quarter. Thank you.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.

Good day, and thank you for standing by. Welcome to the Eagle Bancorp Inc. First 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 to Eric Newell, Chief Financial Officer of Eagle Bancorp Inc. Please proceed.

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 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 at our website or on the SEC's website.

With me today is our President and CEO, Susan Riel; and our Chief Lending Officer for Commercial Real Estate, Ryan Riel.

I'll now turn it over to Susan.

Thank you, Eric. Good morning, and thank you for joining us today. We are pleased to begin 2026 on track with our near-term strategic priorities: generating capital through earnings, diversifying the balance sheet across both assets and funding and executing on the repositioning work we have been discussing with you over the past several quarters.

The first quarter reflected meaningful progress on several fronts. We returned to profitability, expanded net interest margin and delivered strong C&I growth, a direct result of the deliberate investments we have made across the franchise and the disciplined execution of our commercial team. At the same time, we are realistic about where we are in this repositioning. The pace at which legacy exposures resolve and scheduled payoffs occur is faster than the pace at which we can prudently generate new earning assets. That asymmetry creates near-term pressure on net interest income and a smaller earning asset base as we work toward a higher quality balance sheet. We are not shrinking the balance sheet because deposits are leaving us. In fact, core deposits have grown $240 million year-over-year. We are making strategic choices on both sides of the balance sheet that we believe position us for stronger, more sustainable and more durable earnings.

We continued to reduce reliance on higher-cost brokered deposits, refinancing the quality of our funding base. In parallel, our active resolution of problem credits is producing elevated charge-offs, a deliberate trade-off we are willing to make because we would rather absorb the near-term earnings impact and emerge with a cleaner balance sheet and carry these exposures for an extended time.

The deliberate actions we took throughout 2025 are producing measurable improvement, a trajectory Eric will walk through in detail. We have a plan designed to deliver materially stronger pre-provision net revenue as the funding mix improves, as disciplined loan growth returns to CRE and the asset quality work I mentioned continues to reduce the impact from nonaccrual and resolution activity, and we are executing against it.

With that, I'll turn the call over to Eric to walk through the quarter in more detail.

Thank you, Susan. Before I walk through the specifics, I want to step back and acknowledge the tangible progress we've made on asset quality this quarter. This quarter, we reported net income of $14.7 million or $0.48 per diluted share, a meaningful swing from the $2.4 million loss we reported last quarter, and that improvement reflects the hard work underway across the portfolio. Rest assured, though, reducing criticized and classified loans, resolving nonperforming exposures, and strengthening the overall health of the portfolio remain the top operational priorities for this management team.

Based upon investor feedback and consistent with our commitment to transparency, we've continued to expand our disclosures to give investors a better picture of portfolio dynamics, both the progress and the challenges. That transparency is something we take seriously, and it shapes how we'll walk through this quarter's activity today. With that as context, let me walk you through what we saw in the first quarter.

I'll start with our concentration metrics. The first quarter saw continued reductions in our CRE and ADC concentrations as expected payoffs, resolutions and the completion of construction projects drove meaningful progress to reduce overall concentration risk to the bank. Our CRE concentration ratio, which measures CRE loans to total risk-based capital and reserves, declined to 295% at March 31, moving below the 300% threshold. Our ADC concentration ratio came in at 76%.

Turning to criticized and classified assets. When combining substandard, special mention and all held-for-sale loans, balances declined by $79.9 million in the quarter to $794.1 million at March 31 compared to $874 million at year-end. As a percentage of Tier 1 capital, that represents 67.3% at quarter end, down from 74.6% at year-end and down meaningfully from the peak of 90% we saw at September 30 of last year. The directional trend is clear, and we're committed to continuing it. Slide 16 of the investor deck provides additional detail on the composition of that portfolio.

On Slide 17, we've added a portfolio walk to help illustrate the various inflows and outflows in the criticized and classified book during the quarter. I want to be direct about the inflow activity. $159.9 million of downgrades occurred in the first quarter, which is elevated relative to the $89.3 million we saw in the fourth quarter of 2025. However, it has materially improved from the $445 million inflow we experienced in the third quarter of 2025.

Let me briefly touch upon the primary drivers of the inflow. Three relationships accounted for the majority of the downgrade activity. The first is a multifamily project in Maryland experiencing pressured net operating income due to tenant credit issues and re-leasing costs. The property has been reappraised and is not considered collateral-dependent. The second is our hotel relationship downgraded upon receipt of 2025 financials, reflecting lower occupancy. We're updating the appraisal and working with a borrower on a remediation path. The third is a single secured C&I relationship moved to special mention. We currently do not expect any loss.

Taken together, these are discrete situations, and we believe they are not indicative of broader portfolio weakness. What they do reflect is our portfolio management process working as intended. Loans migrating in the criticized and classified are predominantly coming from our lowest pass risk rating category, relationships we have actively been monitoring through our criticized asset committee, with upgrade and downgrade triggers and remediation strategies updated each quarter.

Turning to the held-for-sale portfolio. We continue to make meaningful progress in the quarter. The portfolio ended at $55.7 million, down from $90.7 million at year-end. Slide 18 of the investor deck walks through the inflows and outflows during the quarter. We transferred 3 relationships from held for investment during the quarter to facilitate the sale of a fourth held-for-sale relationship, a deliberate action consistent with our strategy of resolving exposures in a manner that minimizes loss. Importantly, of the $55.7 million remaining in the held for sale at quarter end, $55.2 million is already under contract to be sold.

While we made progress on total criticized and classified loans during the quarter, nonperforming loans increased to $128.8 million at March 31, up $21.9 million from the prior quarter, representing 1.86% of total loans. Slide 25 of our investor deck walks through the linked quarter inflows and outflows, loans on nonaccrual undergo specific reserve analysis and those determined to be collateral dependent carry specific reserves in the ACL. The provision for loan losses in the quarter reflects the incremental reserves required for those exposures.

Provision for credit losses totaled $13.4 million in the first quarter, a decline of $2.1 million from the prior quarter. Our allowance for credit losses ended the quarter at $147.2 million or 2.12% of total loans. Within that total, we carry $60 million of reserves, specifically against our income-producing office portfolio. Net charge-offs totaled $26 million in the quarter, an increase of $13.7 million. This was primarily driven by $11.6 million associated with loans moved to held for sale as part of our targeted resolution efforts. These actions reflect disciplined relationship by relationship strategies to resolve legacy exposures, where outcomes are assessed individually to optimize value. In many cases, we believe proactively resolving these credits positions us for stronger long-term results compared to extended workout scenarios.

Early-stage delinquency is often a leading indicator of future credit migration, and the $31.9 million decline in 30 to 89 days past due balances is a constructive signal about the forward pipeline. We're encouraged by the trajectory. At the same time, the increase in nonperforming loans is a reminder that this work is not finished, and we're not treating it as such. Resolving these exposures, maintaining our reserve discipline and continuing to improve the overall health of the portfolio remain our highest priorities.

Turning to earnings. The improvement in profitability this quarter is, in many ways, a direct function of the asset quality work I just walked through. The discipline around resolving exposures, managing expenses tied to loan dispositions and repositioning our funding mix is showing up on the earnings line. With that as context, let me walk through the drivers.

Net interest income declined $4.6 million to $63.7 million, primarily reflecting accelerated CRE loan payoffs and lower average cash balances, partially offset by reduced interest expense from the continued reduction of higher-cost broker deposits. Two fewer days in the quarter also contributed. NIM expanded 9 basis points to 2.47%, driven by an improved funding mix as wholesale funding usage declined. We estimate approximately 3 basis points of NIM pressure from loans moving to nonaccrual and the associated interest reversals.

Pre-provision net revenue was $27.7 million, an improvement of $7 million from the prior quarter. The improvement was driven by lower noninterest expense, which declined $21.1 million to $48.7 million, reflecting the absence of 2 notable items from the fourth quarter, $14.7 million of expenses related to loan dispositions and a $10 million legal provision tied to the probable and estimable resolution of our previously disclosed government investigation. Noninterest income increased modestly to $12.7 million, supported by $3.6 million of gains on loan sales compared to a $1.1 million loss in the prior quarter.

Our capital position remains strong and industry-leading. Tangible common equity to tangible assets was 11.51%, Tier 1 leverage was 10.63% and CET1 was 13.8%. Tangible book value per share increased $0.30 to $37.56 as earnings contributed to capital.

On funding, period-end deposits declined $542 million from December 31, of which, $413 million reflected the intentional reduction of brokered deposits. Year-over-year, we reduced broker deposits by $921 million while growing core deposits by $240 million, reflecting coordinated execution across all our deposit teams. Available liquidity stands at $4.3 billion, and we maintain close to 2x coverage of uninsured deposits.

Turning briefly to the outlook. Our 2026 forecast is substantially unchanged from what we shared last quarter, and Slide 11 of our investor deck provides the detail. We continue to expect full year NIM in the 2.6% to 2.8% range; noninterest income growth of 15% to 25%; and noninterest expense flat to down 4% when adjusting for the notable items I mentioned. Average deposits, loans and earning assets are still expected to decline year-over-year, reflecting intentional balance sheet repositioning rather than operating pressure. Altogether, these trends support our confidence in expanding pre-provision net revenue in 2026 despite a smaller average balance sheet.

I'll turn it over to Susan for final comments ahead of Q&A.

Thank you, Eric. Before we move to questions, I want to leave you with a few final thoughts. The first quarter demonstrated that our strategy is working, asset quality is improving, our funding mix is strengthening, and the earnings profile is beginning to reflect the repositioning work of the past year and true value of our franchise. We still have more to do, and we are not losing sight of that. But the direction is clear and the discipline across this organization is real.

What gives me the greatest confidence in the path ahead is the strength and depth of the team executing against it. Our priorities are well established, continuing to reduce criticized and classified balances, transforming our funding mix toward core deposit relationships, pursuing disciplined loan growth and expanding pre-provision net revenue over the course of 2026. These priorities and the capabilities we've built across credit, finance, lines of business and our risk and control functions are the foundation for the next chapter of Eagle story. This franchise has exceptional talent, a distinctive market position and the institutional strength to continue delivering against these objectives through the leadership transition ahead and well beyond it.

Before we conclude, I want to thank our employees for their continued dedication and professionalism. Their commitment has been instrumental in navigating a challenging period, and positioning the company for the future. Thank you again for your time and for your continued interest in Eagle Bancorp.

With that, we'll open things up for questions.

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

Just wanted to start off on the level of criticized here. Obviously, good to see that continue to fall with some help from the loan sales, but just curious if you could speak a little more to the new inflows and to criticize, Eric and I hit on that a little bit. But is that a pace that you'd expect slows from here? Or how are you thinking about the trajectory as you move through the year?

Justin, this is Ryan. I think the -- forecasting what that is, is tough to do. Our portfolio management practices touch on these loans each and every quarter. We shouldn't see many surprises in that process because we touch it so frequently. But it is expected to continue some migration in there.

Ultimately, though, just to build off of that, Justin, our goal and commitment -- in my prepared commentary is that criticized, classified will continue to come down on an absolute level as well as relative to loans and Tier 1 capital. So we're going to make some -- or expected, based on what we see today and what we believe, and we're going to make some meaningful progress by year-end.

Right. And Justin, to build on that, it's important for us to note that the regulatory definition of criticized and classified loans does not require loss content, right? The potential weakness or well-defined weakness that would define those roles don't necessarily have lost content in them. And that's part of the story we've been telling for several quarters, as you've seen the composition of that list fall away from office.

Okay. Got it. And then -- so I guess, in terms of further loan sales, with what's remaining in held for sale? And I guess anything that can get added from here. Are we at a point where future disposals are largely coming outside of the office portfolio? How would you set expectations there in terms of what you're looking to [indiscernible]?

I think we're looking at each and every case on a one-off basis. We're evaluating it. Management comes to a decision as to what the best path forward is, and we use the tools that are -- our discretion that are there. The anticipation is that tactic will continue to be used as we determine it is the best path to reach the best possible outcome and maximize shareholder value.

Okay. That's fair. And then I guess just one last one on the office reserve, which you took down in the quarter. Can you talk to just a little more on some of the factors that get you comfortable on that decision, I guess, in part, considering the increase in nonaccruals, with a lot of that being office driven?

The biggest driver of the decline in ACL quarter-over-quarter related to office actually comes due to the $37-ish million reduction of substandard loans that is a big driver of that pool, and that's the main driver of that decline. We assess the overall methodology that we apply qualitatively as well as quantitatively to the entire process, but particularly with office, and we believe that the $60 million that's associated with the total office portfolio and the ACL is appropriate at March 31.

Our next question comes from David Chiaverini with Jefferies.

I wanted to follow up on this credit quality discussion. Good to see that criticized, classified down, and it sounds like you're expecting a continued decline through this year. Does this commentary also apply to the nonaccrual loans that we saw increase in the quarter?

I would say, yes, generally. What you're seeing in nonaccrual loans is really the result of us working through some of the loans that have been identified as special mention and substandard. So to me, the way I look at it, the barometer of what could come is really looking at the total portfolio of criticized and classified. As that portfolio continues to decline, which we expect will occur throughout the year, the incidence or the likelihood of some of those loans flowing into nonaccrual or charge-off will also fall. So I think you're going to see some improvement in nonperforming as well as that entire portfolio gets worked through.

Great. And on the held-for-sale portfolio and the sales that you have under contract, are you selling them? It looks like there is, on Slide 18, a valuation adjustment of about $3 million. Are you selling loans kind of in line with what you originally thought? And I guess, to ask another way, curious at what percent of par on average are you selling loans?

I'll answer the first part of that question first. And maybe, Ryan, you can touch on the second part. But I think when you look at the totality of what we put into held for sale through this cycle, which is really over the last 3 to 4 quarters, we've pretty much hit the mark. Yes, we had some losses that we recognized in the fourth quarter, but we had gains that we recognized in the first quarter. So when you net all that together, I think we feel comfortable with the process that we've been undergoing to transfer those loans into held for sale. I would remind everyone that when it comes to office, we're generally using broker opinions of value just because that's more forward-looking and reflective of the conversations that we've been having with market participants with those notes.

Ryan, if you want to touch on the second?

On the question of relative to par, where's the landing spot, it's a hard one to answer, and it's been significant, frankly, drop from par on the office side. If you go back and look through the last several quarters, you'll see those numbers, and that's second, third quarter '25 was where the majority of those challenges sort of showed through the financial statement. So it's -- we haven't compiled the data of where we are relative to the original unpaid principal balance or the starting unpaid principal balance, but it's a substantial decrease because the office market has had a substantial valuation decrease.

I was going to say, just building off of that a little bit, when you look at the office portfolio and the cycle to date, the loss content that we've experienced, so that would be a function of loss given default and probability of default. I mean, for the office portfolio, we've been probably between 45% and 50%.

Right.

Got it. But -- and then as a percentage of carrying value and with the reserves, netting the reserves against that part, it's significantly higher. Is my assumption, would you say that's fair?

And that's what Eric's comments addressed, and that the reduction to the carrying value netted us for that portfolio right about at new par, if you will.

Correct.

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

I had a question about just the size of the balance sheet. It looks like in your outlook slide, deposits, loans, average earning assets are coming in below your original range and part of that just as you kind of clean up and push loans off the -- or push loans in high-cost deposits off the portfolio. So the -- but we haven't changed the guidance. So do you feel like there's -- I assume that the range -- or your full year range will fall as we move through the year? Or is there any reason to think that you'll hedge back up to where you originally thought the balance sheet would be?

Well, there's a couple of things going on. Averages, obviously, are informing NII. But when you think about it from a period-end perspective, our expectation is that CRE will continue to see some decline in the second quarter. But our expectation is that when you compare year-end '25 to year-end '26 for the CRE portfolio, it will be flat. So that will have a -- that's informing the forecast in terms of average balances for loans just because you're seeing a pretty material reduction in the first half for CRE, but we do expect that to come back up in the back half of 2026.

In terms of C&I, that level of growth, I think it was approximately 5% linked quarter growth on the loan side. So on an annualized basis, that's 20%. I would expect that to actually be a little bit lower when you compare the growth -- when you compare year-end to year-end for C&I. And that is one of the reasons why when you look at the forecast, we're actually on the higher end of our loan growth target because of the contribution that C&I contributed relative to our initial expectations in the first quarter.

I'll touch on another thing on the forecast. One of the reasons why we didn't touch the NIM range was because the forward curve at March 31 has largely priced out the 2 rate hikes or reductions, pardon me, that were expected at year-end. And so that, given our balance sheet and interest rate risk stance at the moment is actually beneficial to us.

And then also important to note that we do believe that there will be growth in average cash in the second and third quarter. We have a third-party payment processor that doesn't really impact our quarter end but does impact our averages because there's -- the balances are here for 7 to 10 days in the first quarter is a lower level of seasonal activity for that third-party payment processor. If you put that all that together, that's one of the reasons why we maintained the forecast from the first quarter or last -- [ fourth ] quarter.

Yes, that makes sense. Okay. Awesome. And then maybe back to the credit piece. Is there -- can we talk about the 3 new inflows in the classified that we saw this quarter that you talked about in your prepared remarks? And can you talk about maybe why those credits weren't originally identified when you did your full portfolio evaluation a couple of quarters ago? And so if you've seen a deterioration in those 3 since then, so then the question is, would we see more for the rest of the year? And so what are you looking for in your portfolio to kind of ensure that we've got everything that could be at risk within classified core side? Like do you have any big appraisals that are coming up, maturities and some credits that you may be worried about that is good for us to know about?

So Catherine, starting with the maturity aspect of that. You look at our criticized, classified list, there's a number of loans on there that mature this year, some within a very close proximity to where we are today. We've been engaged with those customers for a long time many months, and figuring out what the next step for that particular asset is. The risk rating is obviously taking into account historical performance, but also forward-looking what the expectations are as part of the considerations and landing where we do.

On the inflow into the criticized and classified, the new entrants are really based on new information, not historic information, right? So the multifamily asset that Eric spoke to new appraisal came in and informed that the performance of the property continues to suffer from tenant credit issues, as Eric said, that, frankly, on a month-over-month basis, continues to get better. And we're continuously engaged with that particular customer.

On the hospitality asset, that's a recent trend where coupled with the world, the secondary and tertiary repayment sources on that particular situation, coupled with the decline in occupancy for hospitality overall in our market, created a greater challenge, a well-defined weakness by the regulatory definition. I'll again make the comment that the loss content does not need to be present in those critical and classified -- criticized and classified assets. So the point I'm trying to make, I guess, is more idiosyncratic to each individual relationship drove the risk rating downgrades on those particular transactions and not something more systemic.

Our next question comes from the line of Steve Moss with Raymond James.

Maybe just following up on your comments there, Ryan, with regard to the couple of new inflows, you have the hotel motel in Arlington and the Prince George's County apartment building as well. Those mature here in the last couple of weeks. Just kind of curious, did you give them extensions or kind of how to -- what's kind of the expectation there in terms of where you're going with those credits?

Yes. We had hoped, obviously, before the maturity date, to have a longer-term plan in place. We didn't arrive at that. So we did put short-term extensions in place in both of those situations, which have already been booked. It's just -- obviously, the debt is as of 3/31. So the current maturity is actually out into the future a bit. And we continue to work with each of those clients for a longer-term solution.

Okay. Got it. And in terms of just kind of like thinking about the overall Washington, D.C. market, I know there's different submarkets have issues and stuff. I'm just kind of curious, maybe just stepping back, what's your overall sense of activity, especially for the multifamily space in terms of renting out properties and where things are going?

The multifamily market as a whole in Washington -- in the region across Maryland, D.C. and Virginia, from a rent growth and occupancy or vacancy perspective, is lessening. It's not leading to a challenge relative to the national averages. We're more equating with those national averages where historically we had exceeded them as a region. That's not necessarily true in each individual region, but as a whole, it's sort of less. And having said that, on the performance side, there's -- the absorption has slowed, new supply has also slowed even more dramatically than that. So that is viewed as a rebalancing mechanism for the supply and demand in the multifamily market across the region.

Additionally, valuations have maintained, and the valuations across the region have maintained at higher than national average. Cap rates in the high 5s where national averages are in the low 6s. So overall, there's sort of cautious optimism in the multifamily market is how I'd phrase it. Not without challenges and not without our need and the owner's need to work through those challenges. But overall, there's still a good and stable multifamily market in our nation's capital.

Okay. And then maybe a similar question on the office side here. My sense has been there's just been better lease-up activity with regards to office in some of the markets. And just kind of curious, what are you seeing for office activity here? Are the green shoots still there? Have they moderated from maybe a few months ago? Thoughts on that.

Yes. So in the office market, the trophy in our region continues to perform really well. There's record-setting rents, it feels like on a regular basis, announcements are made. Trophy and A are really working.

On the B&C side, it's still a struggle. There's not -- the tenant demand is not there. There's a lot of supply that's being pulled off the market through conversions and other tactics by the individual owners. So it continues to be a challenge in the central business districts.

The more suburban stuff, more community amenity stuff, doctors -- stuff that the neighborhood uses, there is more demand for that space in the more suburban even B and C office properties have greater occupancy and therefore, cash flow. So there's more health in that space. Also in those more suburban spaces, at least thinking about our portfolio in that space, there's oftentimes secondary and tertiary sources of repayment tied to those loans. So it's not just looking at the office valuation as a payment source.

Right. Okay. And then the other thing I want to ask about just thinking about the -- going back to the funnel of criticized and classified. You guys kind of touched on that -- seem like a fair amount was related to updated data in terms of just annual financials. Just kind of curious, how do we think about that funnel here? Like is this -- was there just a greater update this quarter than other quarters in terms of financials? Or do you expect more kind of a similar pace for updated financials, maybe a similar funnel in the second quarter?

I think it's sort of -- the point in time the loans -- the loans that we're talking about are not high in quantity, right? It's the lumpiness of our portfolio that drives the dollars in there. And that's less than -- If you track our top 25 loan list as the decline in CRE balances continue, there's a number of loans that have reached full payoff that we've seen, and that's -- the most significant, frankly, portion of our decline in CRE balances is that -- are those either refinances or sale of the assets underlying it.

So the answer to your question is that we don't anticipate this level of inflow every quarter, but we don't know, we don't know, right? We will continue to monitor our portfolio and continue to work to enhance our portfolio management practices.

I think it's important, just building off of that, it's important to reemphasize though the commitment that the team has to reducing the overall criticized and classified on an absolute basis by year-end. And we're going to continue to show progress here in future quarters as well.

Our last question comes from the line of Christopher Marinac with Brean Capital LLC.

I wanted to ask about the -- that sort of granularity point that Ryan was just making. Is that going to work in your favor in terms of inflows possibly being less and because of the smaller-sized loans as you continue to work through the book?

Short answer is yes.

And can that drive the reserve behavior from here? And I guess my question is, is there -- I know there's a scenario where reserves could go back up. But I know you've built this reserve over many quarters, so the decline was no surprise yesterday. Just curious on if the reserves should continue to come in and that we'll see you, obviously, a provision expense less than charge-offs for a while.

Yes. I would say that if you look at the first quarter provision expense as well as charge-offs, that's a decent run rate for our expectation for the remainder of the year for each quarter. So when you put all that together, it does show a reduction in the reserve coverage to loans by the end of the year. Are we going to get to a peer level on that metric by year-end? No. But I do expect that the coverage of ACL to loans will be lower at year-end '26 than where we started the year.

Great. And then just to go back to the C&I evolution. Will we see the C&I deposits kind of grow year-over-year as we get further? I know there was some seasonality in Q1 as the slides implied. Just curious kind of how to think through that a few quarters out.

Yes. Chris, if you look at that from a longer perspective and you go back a year from now to March of last year, C&I deposits have grown. They've grown by a couple of hundred million dollars. So I don't think that the first quarter is indicative of any sort of trend in the C&I. The C&I pipeline continues to be robust. We continue to mandate primary relationships with the transactions that we bring in. And that's -- what you will see differently on the production side and the deposit side is the CRE pipeline, which is now building, we'll begin to be executed, to Eric's earlier point, we'll stabilize balances through the first half and look to grow from where 6/30 numbers are towards the end of the year -- both sides of the balance sheet.

Chris, I would add on, on Slide 29 of our deck, we have added some disclosure about the C&I portfolio, both loans and deposits. And there, you can see that we had 28% growth of deposits in the C&I line of business year-over-year. A lot of that, when you actually look at it from a dollars perspective, C&I more than funded itself dollar for dollar in '25. I asked Evelyn if she could do it again in '26, and we'll see how she can deliver on that.

But our -- joking aside, I think our expectation is that can't fund that line of business dollar for dollar year in and year out. So I think that is informing some of the percentage growth that you see here. But I think that it's certainly been evidence of execution of the strategic plan on how we have described it to you all and investors for the last several years on the remixing of the loan side to have more of a balance between C&I and CRE. Because what that lends itself to is operating account growth, relationship growth, reduction of brokered deposits, better cost of funds, higher NIM, higher pre-provision net revenue, better ROA.

Great. Appreciate that. And then just last question for me, as on FD -- FDIC expense, is that going to be lumpy in terms of how it comes off in future quarters? With this quarter, any indication of kind of where it could go in the near term?

There's really 2 drivers to our FDIC insurance expense. You have our overall asset quality metrics and then you have the structural liquidity improvement. So you do -- we're getting a lot of benefit and we have been getting a lot of benefit over the last year on the improvement of structural liquidity. We look back over the last 2 years, our net noncore funding dependency ratio in 2023 was 30-ish percent, and now we're well below, I think we're like 12% to 15%. And so that has been -- has meaningfully contributed to a reduction in FDIC insurance expense.

And as we continue to reduce the criticized and classified and also the FDIC insurance calculation looks at modifications, they call it underperforming assets in the call report but modifications. So as that activity lessened on our balance sheet going forward, that will have a very positive contribution to FDIC premium expense. I estimate, if you look at where we're at on an annual basis, run rate, when we're normalized on AQ, we're probably going to be about half of where we're at right now.

In terms of timing, I would -- you're always going to have a lag because that premium is based off of refilings that are a quarter behind. But I would expect you're going to see some improvement here in the back half of '26 and definitely into 2027.

Okay. And half is still using this March pace that we just saw?

I would -- you know what, Chris, that would take our full year '25 number and use that as the basis.

Thank you. Ladies and gentlemen, this will conclude the Q&A session. I will pass it back to the President and CEO, Susan Riel, for closing remarks.

I want to thank all of you for your participation and your questions today, and we look forward to talking to you again next quarter. Have a great day.

Thank you. And this concludes our conference. Thank you for participating, and you may now disconnect.

Good day, and thank you for standing by. Welcome to the Eagle Bancorp, Inc., fourth quarter and year-end 2025 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 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 we caution you not to place undue reliance on these forward-looking statements. Our Form 10-K for the fiscal year 2024, Form 10-Q and current reports on Form 8-K including our 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 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; and our Chief Lending Officer for Commercial Real Estate, Ryan Riel. I'll now turn it over to Susan.

Thank you, Eric. Good morning, and thank you for joining us. The fourth quarter marked an important inflection point for Eagle Bank. Over the course of the year, we took actions to diversify our balance sheet, reduce risk and strengthen the overall quality of the franchise. These efforts became clearly visible in the fourth quarter as asset quality metrics improved meaningfully and our balance sheet mix moved closer to the profile we believe is necessary to sustainably support durable earnings.

Importantly, these improvements were the results of intentional decisions, disciplined balance sheet management and a continued focus on reducing concentration risk. While these steps created near-term expense pressure, they significantly improve the underlying risk profile of the company and enhance our flexibility going forward. As we enter the new year, our focus shifts from remediation to execution, we are operating with a stronger foundation, improved asset quality and a more disciplined funding approach. This will position us to drive more consistent earnings and improve returns. I'll now turn the call over to Eric to walk through the quarter's results in more detail.

We reported net income of $7.6 million or $0.25 per diluted share compared with a $67.5 million loss or $2.22 per share last quarter. Let's start with asset quality. The fourth quarter results reflected the trade-offs we discussed on our prior call. Credit stability supported book value, while planned held for sale loan dispositions created some pressure on fourth quarter earnings. In the quarter, $14.7 million was recognized relating to higher expenses associated with the disposition of held for sale loans as well as mark-to-market expenses. At December 31, we had $90.7 million of loans held for sale, a decline of $45.9 million from the prior period, which includes $8.4 million of mark-to-market adjustments due to updated valuations informed by proposed or under contract disposition activities.

We recognized $1.1 million of loss on the $77.9 million of loans sold during the quarter. At December 31, 2025, nonperforming loans declined to $106.8 million, down $12 million from the prior quarter and represented 1.47% of total loans. Slide 23 of our earnings deck shows the walk between linked quarters for inflows and outflows of nonaccrual loans. Total nonperforming assets declined $24 million to $108.9 million, representing 1.04% of total assets as compared to 1.23% in the prior quarter. The land loan transferred to OREO in the third quarter was sold during the fourth quarter with a gain of $900,000. Special mention and substandard loans totaled $783.4 million at year-end declining $175.1 million from the prior quarter. This represents 10.6% of total loans at year-end, declining from 13.1% at September 30.

Provision for credit losses declined $97.7 million in the fourth quarter and totaled $15.5 million. Our allowance for credit losses ended the quarter at $159.6 million or 2.19% of total loans. Of that total, we have $73 million of reserves associated with income-producing office loans representing 13% of the $577.1 million outstanding at year-end. Net charge-offs declined $128.6 million from the third quarter and totaled $12.3 million in the most recent quarter. Loans 30 to 89 days past due totaled $50 million at December 31, up $20.8 million from last quarter primarily due to a participation loan, which was in the process of being renewed and was booked yesterday for closure.

Office loans totaled $577.1 million, and of that total, $469.2 million are pass rated. Loans that exceed $5 million in our pass rated are undergoing quarterly reviews. Smaller office loans have stronger credit enhancements than the larger office loans that we've worked through cycle to date. The fourth quarter saw dramatic reductions in our CRE and ADC concentrations as expected payoffs, resolutions and the completion of construction projects drove down our CRE concentration ratio, which is a measure of CRE loans to total risk-based capital and reserves. That ratio declined to 322% and the ADC concentration ratio, which measures acquisitions, development and construction loans over the same denominator declined to 88% for the company as of year-end.

From an earnings standpoint, pre-provision net revenue was $20.7 million. Included in that is $8.4 million in held for sale, mark-to-market expenses and the $6.3 million in disposition costs related to loan sales. Net interest income grew $144,000 to $68.3 million as the decline in deposit and borrowing costs outpaced a modest reduction in income on earning assets. NIM declined 5 basis points to 2.38% primarily driven by a mix shift between loans and cash partially offset by improved time deposit costs from reduced brokered time deposit usage. Noninterest income totaled $12.2 million compared to $2.5 million last quarter. The increase was primarily due to losses that did not reoccur in the fourth quarter and other income as a result of FDIC investments and the gain on the sale of OREO.

Noninterest expense increased $17.9 million to $59.8 million due to the $6.3 million in costs associated with the disposition of certain held-for-sale loans, and $8.4 million in valuation adjustments on proposed transactions for the remaining held-for-sale loan portfolio. Our capital remains strong. Tangible common equity to tangible assets is 10.87% Tier 1 leverage ratio is 10.17% and CET1 is 13.83%. Tangible book value per share increased $0.59 to $37.59 as earnings added to capital. Continued deposit growth and a rising proportion of insured balances underscore the resilience of our funding base. With $4.7 billion in available liquidity, we maintained 2x coverage of uninsured deposits.

During 2025, our teams have reduced brokered deposits by $602 million while increasing core deposits, $692 million, and we expect continued progress in 2026. The improvement reflects coordinated efforts among our C&I teams, branch network and digital platform. Finally, turning to 2026. We are optimistic about our ability to expand pre-provision net revenue, as outlined in our updated 2026 forecast on Slide 11 of our earnings deck. While we expect average deposits, loans and earning assets to decline on a year-over-year basis, this reflects deliberate balance sheet repositioning rather than operating pressure and reflects prioritization of shareholder returns and profitability. Loan balances entering 2026 begin from a lower level due to paydowns and resolutions that occurred throughout 2025, and the investment portfolio runoff in 2025 further reduces average earning assets.

On the funding side, lower average deposits in 2026 primarily reflect the continued runoff of brokered funding as we prioritize building core deposit relationships. This shift in funding mix is expected to improve profitability. As a result, we're forecasting a meaningful expansion in net interest margin with NIM expected to range between 2.6% and 2.8% for the year. This improvement is driven largely by a reduction in higher-cost brokered deposits. Noninterest income is expected to increase by approximately 15% to 25% while noninterest expense is expected to decline between flat and 4%. Importantly, this reflects normalization following elevated expense levels in the fourth quarter of 2025, which was previously discussed and we do not expect to reoccur. Taken together, these trends support our confidence in expanding pre-provision net revenue in 2026 despite a smaller average balance sheet. I'll turn it back over to Susan for final comments ahead of the Q&A.

The fourth quarter tangibly demonstrates the progress we've made at Eagle Bank executing on our strategic plan. The actions we took throughout 2025 to address credit risk, reduce loan concentrations and improved balance sheet quality are now clearly reflected in our results. We exited the year with an improved risk profile, higher core deposits allowing for reduced use of wholesale funding and improved visibility into the sustainability and trend of our earnings. As we look ahead, our focus will transition from foundational initiatives to consistent performance. While we are not yet where we want to be in terms of bottom line performance, we're optimistic about the franchises direction.

Before we conclude, I want to thank our employees for their continued dedication and professionalism. Their commitment has been instrumental in navigating a challenging period and positioning the company for the future. With that, we'll be happy to take any questions.

[Operator Instructions] And our first question comes from Justin Crowley of Piper Sandler.

Good morning, everyone. I wanted to start off on the asset dispositions, of course. Really encouraging progress, and it's obviously great to see not whole lot in additional loss through the sales that got done. I was wondering if you could talk just a little more on what's left in held for sale in terms of the expected timing. I know you mentioned some agreements in place, and you took the additional mark through the expense line. So maybe just the confidence level in the current carrying value, what's left there?

Justin, this is Eric. At year-end, we had $90.7 million of loans held for sale and they are carried at the lower of cost or fair value. We did have that mark that ran through noninterest expense at year-end to take into consideration fair value, which is informed by under contract or negotiating to a contract on disposition of approximately 2/3 of that portfolio. Right now, 2/3 of that portfolio is scheduled for resolution and disposition in the first quarter, but it's not done until it's done. So it could bleed into the second quarter.

Okay. Got it. And then, of course, you have the wide-ranging third-party review, but what's the thinking or expectation on the potential, if there is any for any further moves into held for sale. Could this be it? Or is there a possibility that as we get through the year and credits with maturities a bit further out, perhaps get a closer look that you could see additional inflow into that bucket. What's kind of the thought there?

And looking at the total criticized and classified portfolio, which is $783 million at year-end, down from $960 million. There certainly could be situations, Justin, where we might decide that selling the loan is the best strategy to maximize value to the shareholders. So I don't want to say that we're done there. There certainly could be situations that arise, I don't suspect you're going to see that at the pace of what you saw in 2025. And it's a case-by-case assessment.

Got it. And then I guess outside of office and maybe one for you, Ryan, but it's certainly good to see some what I thought was stabilization and actually some signs of improvement in multifamily. It looks like a handful of some of these larger watch-list loans, got some updated appraisals that show some breathing room. I was just wondering if you could talk a little bit about the trends you're seeing there. And at this point, we can maybe expect to see things continue to look better in that area?

I think that we'll continue to be proactive in the problem on identification on -- and looking at the portfolio on a regular basis as we have been. So what's in there you've seen, to your point, Justin, there's been some migration positively and negatively in that criticized and classified population. Valuation, again, continues to be strong relative to the office market, where we saw significant losses, obviously, right? The multifamily market, the valuations have held up. Cap rates in our region are still sub-6% when compared to the national average of just over 6%. So where we feel good about that and where our exposure is we're monitoring the income performance. Some of these are in lease-up, recently delivered properties. So my prognostication is that you will continue to see stabilization and improvement within that multifamily portfolio.

Okay. And then just for the total loan portfolio, just as far as where the reserves shook out this quarter with the movement a bit higher, including the increase in the office ACL. Just like bigger picture, how are you thinking about eventually seeing that number move lower and maybe using it to absorb just any further charge-offs without the provisioning to match it.

The office overlay or the portion of the ACL that's attributed to a performing office did increase, even though that's a qualitative aspect to the calculation, it's driven quantitatively by experience that we've incurred throughout the prior 12 months in office. And so when you quantitatively put that together, it's driving approximately 45% of reserves in our substandard loans about 50% of that in our special mention loans and 50% of that for launch. So when you put that all together, that's what comprises of the $73 million of reserves associated with the $577 million of performing office. So as we move forward and we have less loss content in our look back period, you'll see that ease off.

Okay. So the idea would be lower from here if all goes according to plan as you see it today?

That is the way the calculation works.

Okay. And then maybe just 1 last one. I know it's 1 quarter here and there's still some work to do. But obviously, a lot of positive signs. And so when you think about capital planning over maybe the more medium term, how do you think about the levels you're at with maybe a clearer picture on loss content? And I don't know if it's a bit premature, but when do you think you could start entertaining a more offensive stance on capital management when you think about things like buybacks or the dividends. Again, I know it's kind of early days here, but just thinking a little bit more medium or long term.

We are going to continue to be prudent and use caution in terms of capital management. I would point to the criticized and classified loan level and where we're at. We need to continue to see continued migration down. So a favorable trend. The 1 quarter is not a trend. So we need to see 2 or 3 more quarters. And we also need to see a more absolute level that's acceptable before management would consider talking further to our Board about additional changes in our capital management approach. By the way, Justin, you asked how we would characterize the level of capital, and I would say it's strong.

And our next question comes from David Chiaverini of Jefferies.

So I just wanted to follow up on credit quality. Clearly, a good update here. Can you talk about your confidence level that credit issues are behind you. Are you seeing any signs of lingering potential deterioration?

David, I mean again, I'd point back to the criticized, classified portfolio of $783 million. There's a lot of prudent credit management process that we're putting around that. Finance, credit, special assets teams are looking at that portfolio. We also spend time looking at the watch portfolio to understand any trends that could cause negative migration into the criticized classified so given the level of review on this portfolio every quarter as well as pass rated multifamily and office loans that are greater than $5 million. They're undergoing a quarterly review as well. We're not seeing any developing new trends based on what we see today. And what we know today.

I would just simply add to that. We have given problem loans and just loans in general, high attention that we're constantly looking at them. That will not change. We will not slow down on that. So we'll continue to focus on reviewing and monitoring our loans.

Our expectation, David, will be that the criticized classified loan portfolio continues to decline throughout the year.

Great. And in terms of the dispositions, you mentioned 2/3 scheduled for the first quarter. It sounds like the level of buyer interest is high. Can you talk about what you're seeing in the secondary market? Are these private credit funds, are they other banks? And is that a fair characterization that the buyer interest is high for these loans?

So David, this is Ryan Riel. The buyers are a range of types of folks. The 2/3 that you're referencing that Eric referenced in his comments, there's a range in that population, too. There's investors that are supporting local developers to convert to an alternate use, some of the historic office properties. There's existing ownership that is looking at their situation and evaluating the go-forward plan and in some cases, being willing to come in and purchase their own debt. In each and every case, we've said this for a number of quarters now. We are looking at every possible outcome in every possible path in determining on a case-by-case basis what the best path forward is to optimize the results for the bank and its shareholders. That continues to be the game plan in each and every case.

Great. And then on the loan loss provision on a go-forward basis, Eric, you mentioned back in October that you're hopeful to get to a normalized level in early 2026, how should we think about it from here? Are we kind of at that point of getting to a normalized level? And how would you kind of define that normalized level? Are we talking kind of where we were in the second, third and fourth quarter of 2024 kind of in that $10 million range. Any comments there?

Yes, David, looking at the criticized classified portfolio level where it's at, I think that, that would inform a provision expense level that's a little bit greater than what you were indicating from 2024, just given that portfolio was smaller at that point. But we're not -- I'm going to speak to obvious here, but we're not going to see provision like levels that we saw in 2025. But I think that there could be some provisioning expenses that are more heightened than 2024, given the level of where criticized and classified, but it's also important to say what I said last quarter, that capital will continue to -- or credit is not going to cause further degradation of book value.

And our next question comes from Catherine Mealor of Keefe, Bruyette, & Woods.

One follow-up on credit. Just 1 follow-up on the credit on the special mention. It was great to see that decline. I know it looked like you had maybe an upgrade from substandard and then a new credit, but then you had some come off. And so I was just curious if you could give us a bit more discussion on the credits that were upgraded or came out of special mention, just some stories or color around what those credits were, what caused them to move out and just so we can kind of understand some of the puts and takes within that category.

Sure. So Catherine, this is Ryan. Big categories that help the positive migration there are improved performance at the property level. And then in certain cases, there are structural enhancements to that loan that may have been under considered, if you will, in the past with updated information and proof of the willingness and capability of those sponsors to stand behind their credits, we made some of those upgrade decisions as well.

Got it. Great. And then I guess I'm going to maybe drag in on the provisioning piece. I think that's -- that's the biggest question we all have is where do we put our provision expense for '26. And I guess that's the magic number. But as I look at the reserve, I mean, it should be fair that we should see the -- I guess the question is how much of current expectations of losses you think are in the reserve? And is it fair as you continue to work through this level of classified, which to your point, Eric, is still very high, right, still 10%. We still have a lot to work through, but your reserve is also very high over 2%. So as you kind of keep working through that, at what point should we see the reserves start to decline? And where do you -- where is the fair number or maybe a range of where that kind of trends to towards the end of the year?

Given our 1 quarter of improvement. I think it's prudent for management to be cautious about where we think the provision expense and telling you all what we think provision expenses, we certainly have our views on it given what we've worked on. And I can tell you that we do expect the ACL coverage to decline this year. We do expect that there is potentially lost content in that $783 million, some of which we've identified and have reserved for through specific reserves, so it is sitting in ACL. But we also have some unidentified migration, portfolio migration that are things that we don't know about yet. So I guess, Catherine, I probably I'm going to punt a little bit and try not to answer your questions with specificity until I think next quarter, if we have another continued trend, then I think we could be a little more focused in answering that question for you.

Yes, that makes sense. That makes sense. Fair enough. And then maybe my last question is just it was nice to see the inflows of new credits flow dramatically this quarter, which we would have expected just given the portfolio review we saw last quarter. But just there were a couple of -- like you had a couple of inflows, new credits that kind of came into special mention, for example, that $43 million multifamily credit. So for the new credits that came in this quarter, what happened this quarter that your loan review did not catch? And is there anything within that, that we should kind of be thinking about that would be a risk of new migration in the next couple of quarters?

Yes. So with specificity on that $43 million loan, Catherine, that's a newly built multifamily property in a particular submarket of Washington, D.C. that's an inflow or influx of supply. So while this property was nearing stabilization, there is a sort of hiccup in that stabilization process because of that inflow of supply, reintroducing concessions in that submarket. Reacting to that, we worked with the sponsor to put in place a go-forward plan that has cash flow sweeps and other mechanisms in it to protect the bank.

The reality is that the supply -- the new supply under construction in our region is very, very small. It's less than half of what it's been historically. So with the passage of time, those units will be absorbed, those concessions will burn off and the stabilization will occur and we'll have enhanced credit structure on that particular loan through that stabilization period. So that's what happened in that quarter was just that, right? The information came through on the pickup in supply and the plateauing frankly, of that stabilization process.

Our next question comes from James Abbott of Diligence Capital Management.

I wanted to see if we could get some additional color on the C&I loan growth, it was about $120 million. That's about a 40% annualized rate. Could you provide a little context as to whether the loans are coming through SNCs? Are they bilaterals, maybe some yields, that kind of thing, just so that we can understand the color around those -- that type of production? And secondly, is it sustainable?

So the growth of our C&I platform is a sustainable expectation that we should all have. The growth levels seen in the fourth quarter at that enhanced growth level is probably not a sustainable figure. Speaking to the diversity question, James, the portfolio -- the C&I portfolio does not have great concentration really in any industry. There are some syndications and participations in that number. That is not an ongoing strategy that we're going to employ. Evelyn and her team have done an excellent job of bringing in relationships with debt and deposit balances on the other side of the balance sheet. So that's where you see it, and the numbers are reflective of that. You see actually greater in the fourth quarter deposit growth in the C&I book than you do loan growth.

Sorry, Ryan, could you just give us some sort of sense for maybe the typical size of those deals that were coming in during the quarter? Are they typically $5 million and $10 million or more $20 million and $30 million sort of relationships?

There's a range of it. I'd say the more on the higher end of the range that you just cited, probably 15 to 30. That's an off-the-cuff number. I'm not looking at the portfolio to justify it. But I'd say probably on average, it's in that $15 million to $30 million range.

Okay. And then also I had a question probably for Eric. Could you maybe give us some context for the cash level that you're holding and then the broker deposit level? And I suspect it's probably a negative spread at this point and you're probably working to address that. But could you give us a sense for what the broker deposit level is today? And then how much you anticipate bringing that down? Can you use cash to pay that down, et cetera?

Yes. A couple of things. There was -- when you look at average cash in the fourth quarter, it was definitely higher than normal, and it was in anticipation of paying down a material level of broker deposits that were coming up for stated maturity. So we are holding that cash in anticipation of paying down those broker deposits. We have, on an average basis, we do have a third-party payment processor that does hold some deposits with us in the middle of the month that can cause the averages to increase at a high level, but it generally isn't a period and it doesn't impact period-end cash that much. In terms of brokered deposits at year-end, we have, excluding 2-way deposits, we have $1.56 billion with a weighted rate of 4%. And we're going to continue to work that down through 2026.

And Eric, are there maturity dates on those that you could give us some sense for? Is it pretty spread out throughout the year? Is it -- and how much do you think you can attack? Do you think you can get rid of half of that in 2026? Or just any sort of context on that?

Yes. Of the $1.56 billion in brokered, $715 million of that is a brokered CD. So there's -- I would say it's probably spread throughout the year. And our goal is to reduce a lot of those CDs down to close to 0.

And our next question comes from Christopher Marinac of Janney Research.

I think that Ryan addressed a little bit of this question in the last few callers, but I was curious about sort of the surprises on the -- for past loans going bad in the future. It would seem that you have smaller loans, if that indeed is the case. And I just want to sort of talk through sort of where would there be larger loans that could surprise us that are passed now, but that could surprise if they were downgraded in the future?

The top 25 list shows where they are, shows the type of exposure there is. Again, these -- to Eric's earlier point, multifamily loans that are pass rated in size greater than $5 million, we're looking at on a quarterly basis. Office properties are there. There's not an asset -- there's some slight headwinds in the multifamily space, which is what we've talked about, again, with the back end valuation issue not there relative to what we've seen in office. The surprises coming into the substandard category, there was 1 particular land loan that we found out, had some characteristics in it that came to light during the last quarter, and they were material and impactful. That's still -- we're working through that situation and coming up with the determination of where it is. The other transaction that came in the mixed-use residential into the substandard category. That is a multifamily construction loan that we're a participant and a 50% participant in that had some challenges relative to the agency takeout that is committed to on that. The workout plan has already been addressed.

And in fact, we anticipate a full payoff of that by the end of this month. So that's a material thing. It's also notable that 2 of the top 11 loans that are listed in the top 25 loan list in multifamily have been refinanced, and the aggregate balance there is about $130 million. So it's -- there's good and positive migration from a balance perspective, and we don't anticipate any fundamental issues like we've seen in office and therefore, the surprises should be limited with all the risk mitigation structures and processes we've put in place.

And just to build off what Ryan is saying. The theme here is that the proactive credit risk management characteristic or the behaviors that the management team with credit and align have deployed this year to reduce the amount of surprises that we may have seen in earlier years and periods and be very thoughtful about and having a high level of attention in identifying the primary source of repayment and if there's weaknesses or issues there, we will appropriately internal or risk rate that loan so we can monitor it and it allows us to intervene much earlier in the process which will maximize our options to maximize shareholder value in the event that there is some disposition that needs to occur.

Great. I appreciate the additional color. And then, Eric, I know that the guide for '26 is to have shrinkage of the balance sheet. And I'm just curious if there's a point where you may get to where it's stable and grow slightly before year-end? Or do you think you'll be shrinking for the entire calendar year?

I actually don't believe we're going to shrink for the entire calendar year. I suspect we'll see CRE that continue to decline in the first half of the year, and then there will be some stabilization in the back half of the year, which will then support growth, period end growth in the second half of 2026.

Great. And the last question on -- sorry, go ahead.

I was just going to add. The period end is a little different given that we're making money on the averages, and we're comparing the average -- the period end of 2026 compared to the average of last year. So that's why you're seeing that forecast in terms of declines on average earning assets.

Got it. Great. And then just a last question. I know the C&I balances grew quarter-on-quarter. Are you still hiring producers in that part of the operation?

We absolutely are still looking for strong producers in that area. Evelyn has her hand out there constantly reviewing and there are some candidates that we are exploring.

I'm showing no further questions at this time. I'd like to turn it back to Susan Riel, President and CEO, for closing remarks.

Thank you very much for your participation and questions during the call, and we look forward to seeing you again next quarter.

This concludes today's conference call. Thank you for participating, and you may now disconnect.

Good day, and thank you for standing by. Welcome to the Eagle Bancorp, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. Please be advised today's conference is being recorded.

I would now like to turn the conference over to your speaker for today, Eric Newell, Chief Financial Officer of Eagle Bancorp, Inc.. Please go ahead.

Thank you, and good morning. Before we begin the presentation, I'd like to remind everyone that some of the comments made during this call are forward-looking statements. 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 fiscal year 2024 and Form 10-Qs for the first and second quarter 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 at our website or on the SEC's website. With me today is our Chair, President and CEO, Susan Riel; Chief Lending Officer for Commercial Real Estate; Ryan Riel; and our Chief Credit Officer, Kevin Geoghegan. I'll now turn it over to Susan.

Thank you, Eric. Good morning, and thank you for joining us. The third quarter reflected continued progress in addressing asset quality issues and positioning the bank for sustainable profitability. While our results remain below our long-term expectations, we are confident that we are nearing the end of elevated losses from decreased asset values.

On credit, we've balanced appropriate urgency that is driven by our near-term view of the office market outlook with an approach that remains methodical and deliberate, we are directly addressing persistent valuation stress of office buildings. We believe that working directly with counterparties that have local knowledge leads to better execution. It is disciplined work but is the right path to long-term stability.

Specifically, we moved $121 million of criticized office loans to held for sale in the quarter and are working with buyers to sell these assets. Importantly, in the quarter, we also took deliberate steps to reinforce confidence in our asset valuations and reserve levels. First, we engaged with a nationally recognized loan review firm to conduct an independent credit evaluation of our CRE and C&I portfolios.

Additionally, we performed our own supplemental internal review of all CRE exposures of $5 million and above. We'll provide more detail on both initiatives later in our remarks, but I'm pleased to report that the findings from both outcomes support the adequacy of our current provisioning.

Our core commercial and deposit franchises continue to improve. C&I loans increased by $105 million, representing the majority of our loan originations for the quarter. Average C&I deposits grew 8.6% or $134.2 million for the second quarter. This momentum reflects relationship growth, client retention and new account activity. These are clear signs that our brand, our service model and our people are earning and deepening trust in the marketplace because our decisions are made locally by bankers who know their clients and communities, we are able to respond quickly, tailor the structure for each loan, and deliver a level of service larger institutions simply cannot replicate, and we see opportunities to extend that same relationship-driven approach across all our client segments.

We're executing on our strategic plan, addressing potential credit issues, diversifying the balance sheet, improving margins and aligning resources to protect and grow franchise value. These actions are positioning us to further improve funding quality, reduce wholesale funding reliance and drive toward a lower cost of deposits. Our pre-provision net revenue is believed to improve with time.

Our priorities are straightforward: complete the credit cleanup, deepen core relationships, and deliver improved earnings performance, which should drive improved share value for shareholders. The fundamentals of this company are sound. Our strategy is working and we are focused on building long-term sustainable value. I'll now turn it to Kevin, who will talk more about credit.

Thank you, Susan. As discussed over the prior 2 quarters, we continue to take a disciplined approach to resolving loan challenges. Total criticized and classified office loans have declined for 2 consecutive quarters from a peak of $302 million at the end of March 31 to $113.1 million at September 30.

During the quarter, we moved $121 million of loans held for sale. These loans are in different stages of disposition with potential buyers, and we expect to complete sales on a portion of them by the end of the year. Results for the quarter include a $113.2 million provision for credit losses, primarily related to the office portfolio. Our office overlay continues to be robust at $60.3 million or 10.4% of the performing office balance. Another $24.7 million is associated with individually evaluated loans and the model's quantitative component.

Our reserve methodology incorporates those losses from evaluation impairments directly, among performing office loans, those rated substandard carry a reserve of 44.5%, and special mention carry a reserve of 22.2%. All pass-rated office loans greater than $5 million were reviewed in this quarter, resulting in just 1 loan migrating into special mention.

Our allowance for credit losses ended the quarter at $156.2 million or 2.14% of total loans. That's down 24 basis points from the prior quarter, reflecting a decrease in criticized and classified office loan balances.

At the end of the second quarter, nonperforming loans were $226.4 million. At September 30, they declined to $118.6 million, down $108 million from the prior quarter, reflecting transfers to held for sale, charge-offs and loan payoffs. You can see more detail on Slide 23 in our investor deck.

Nonperforming assets were 1.23% of total assets, an improvement of 93 basis points from last quarter. We also transferred 1 $12.6 million land loan to OREO. Loans 30 to 89 days past due totaled $29 million at September 30, down from $35 million last quarter.

Finally, total criticized and classified loans rose to $958 million, from $875 million last quarter. Within that total, Office declined $198 million, while multifamily, including mixed-use predominantly residential increased by $204 million. The increase in criticized and classified multifamily loans largely reflects the impact of higher interest rates on debt service coverage rather than any meaningful deterioration in the underlying property performance.

Net operating income levels remain at or above underwritten expectations across most of the portfolio. There continues to be some pressure within the affordable housing segment, though it represents a relatively small share of the downgrades this quarter.

As we indicated last quarter, we do not believe multifamily loans are affected by the same structural or valuation issues present in the office portfolio. The relative strength of multifamily continues to support stable collateral values, and we believe this pressure is largely limited to a near-term income rather than asset impairment. We will continue to be vigilantly monitoring these portfolios. Eric?

Thanks, Kevin. We reported a net loss of $67.5 million or $2.22 per share compared with $69.8 million loss or $2.30 per share last quarter. In the second quarter, we outlined a more proactive approach to accelerate the resolution of problem loans. This quarter's actions were deliberate as we address valuation risk. Even with this quarter's credit-related losses, our capital position remains strong.

Tangible common equity to tangible assets is 10.39%. Tier 1 leverage ratio declined modestly to 10.4% and CET1 to 13.58%. Tangible book value per share decreased $2.03 to $37, reflecting the impact of credit cleanup rather than core earnings erosion.

Continued deposit growth and an increasing proportion of insured balances reflect the depth and durability of our funding base. With $5.3 billion in available liquidity, we maintained more than 2.3x coverage of uninsured deposits, positioning us exceptionally well.

Our teams have reduced brokered deposits $534 million year-to-date, and we expect continued progress in the fourth quarter. The improvement reflects coordinated efforts among our C&I teams, branch network, and the digital platform. From an earnings standpoint, preprovision net revenue was $28.8 million, down from the prior quarter. Adjusting for $3.6 million in losses from loan sales, PP&R was $32.3 million, a sequential increase, reflecting the underlying strength of our core operating franchise.

Net interest income grew to $68.2 million, up $383,000 as the decline in deposit and borrowing costs outpaced a modest reduction in income on earning assets. NIM expanded 6 basis points to 2.43%, primarily driven by a reduction in interest-earning assets associated with a decline in nonaccrual loan balances in the CRE loan portfolio. Noninterest income totaled $2.5 million compared to $6.4 million last quarter, primarily due to $3.6 million in loan loss sales and a $2 million loss on sale of investments with proceeds used to reduce higher cost funding.

We expect steady contributions from BOLI and a growing fee income as treasury management sales expand. Noninterest expense declined $1.6 million to $41.9 million, reflecting lower FDIC assessments and disciplined cost management. We remain focused on maintaining efficiency while supporting strategic priorities.

We recognize that investors want certainty that credit risk is fully understood and adequately reserved. That's why in the third quarter, we engaged a highly experienced nationally recognized third-party loan reviewer to complete an independent credit review of our commercial portfolio. The goal was to provide us an independent perspective to quantify potential future losses under both baseline and stressed economic scenarios. The review is conducted separately from our internal risk rating control process and included over 400 individual loans representing 84.9% of the commercial loan book about $7.4 billion. It assessed potential losses over a 30-month horizon, a 6-month near-term view plus an additional 24 months based on Moody's baseline and stress scenarios.

Each loan was evaluated for collateral liquidation value, cost to carry and dispose and borrower and guarantor liquidity to determine potential shortfalls. Utilizing Moody's baseline stress scenario, the independent loan review analysis concluded total potential commercial loan losses of $257 million as of July 31, the date of their review. Importantly, where the independent firm identified potential loss contract, it was in credits we had already flagged internally. Their conclusions validated our own view of the portfolio. This was confirmation and not discovery.

Utilizing the Moody's S4 downside stress scenario, where there's only a 4% probability the economy performs worse than the baseline, potential losses increased by $113 million to $370 million. Between July 31, the date of the independent loan review and quarter end, we charged off $140.8 million and continue to hold $60.3 million in our qualitative office overlay and $24.7 million in individually evaluated reserves. Together, that totals $225.8 million, which represents approximately 88% of the total potential losses identified in the baseline scenario.

The independent review assumed liquidation scenarios for consistency across institutions. Our reserve process, by contrast, reflects workout strategies that have historically resulted in better recoveries. That's a methodological distinction, not a difference in recognizing risk. Also during the quarter, we performed a supplemental internal review of all CRE loans greater than $5 million, covering 137 loans totaling $2.9 billion. Following this review, there were 5 downgrades of $158.2 million of special mention and 3 downgrades of $110.8 million to substandard. Together, these reviews give us a data-driven view of potential losses.

They reaffirm our belief that we are adequately reserved and the bulk of loss recognition is behind us. With that foundation in place, let me turn to how these actions position us for improved performance heading into 2026.

On Slide 11 of the investor deck, we presented our forecast for the full year of 2026. We expect net interest income to grow despite a smaller balance sheet, driven by mix improvements and lower funding costs.

As Kevin noted, the total reserve coverage to loans declined primarily due to a reduction in the office qualitative overlay. Our qualitative overlay captures a rolling 12-month evaluation loss experience. As that period rolls off, it will naturally reduce the over life. All pass-rated office loans were reviewed this quarter to ensure current information and support our internal ratings framework.

Looking ahead, we anticipate that loan growth in 2026 will continue to be concentrated in C&I, and we're pursuing that measured growth with a strong focus on disciplined credit standards. We're nearing our target investment portfolio range of 12% to 15% of assets, at which point we'll begin reinvesting cash flows to optimize earnings without compromising liquidity.

Noninterest expenses are expected to remain well controlled. FDIC costs are expected to peak over the next several quarters and then decline as asset quality and liquidity metrics continue to improve, trends we've already seen reflected and lower premiums in the last 2 quarters.

Finally, as mentioned last quarter, our capital return philosophy has shifted in line with performance and priorities. The dividend reduction to $0.01 per share was a proactive step to reserve capital flexibility is not in response to capital adequacy concerns. As earnings normalize and credit stabilizes, we will reassess the most effective forms of capital return. I'll now turn it over to Susan for a wrap-up.

Thanks, Eric. This was a pivotal quarter for Eagle Bank. We've made significant progress on the credit front, controlling valuation risk head on, completing an independent portfolio review and validating that our reserves are adequate. At the same time, we're seeing tangible positive outcomes across our commercial and deposit franchises.

As we look ahead, we believe that in 2026, provisions will be manageable and earnings will improve and our focus on sustainable profitability will come through in our results.

Lastly, before we turn to Q&A, we wanted to announce the voluntary resignation of our Chief Credit Officer, Kevin Geoghegan, who will be moving back to Chicago effect December 31. We have hired 2 seasoned veterans, William Parati, Jr. and Daniel Callahan to serve as Interim Chief Credit Officers and Deputy Chief Credit Officer respectively, until a permanent replacement can be hired.

Bill spent the bulk of his career at Frost Bank in Texas and Dan at Commerce Bank in Missouri. Collectively, their leadership and very deep experience will facilitate the bank's continued focus on enhancing our overall credit risk management. Kevin was instrumental in both helping shape and implementing our credit strategies working tirelessly with the team to both proactively deal with the bank's problem loans and improve our credit risk management, governance and practices. We thank Kevin for his contributions and wish him well.

Before we conclude, I want to express my sincere appreciation to our employees. Your dedication and professionalism make all the difference. With that, we'll now open the line up for questions.

[Operator Instructions]

Our first question today comes from the line of Justin Crowley of Piper Sandler.

Obviously, a lot of steps taken this quarter. You had some of the losses on the sale of those 2 loans. But after all the charge-offs and marks keep taking moving credits into held for sale, and I know you had the independent review, which sounded pretty thorough. But can you talk even a bit more on just what gets you so comfortable or comfortable on when it comes time to close these transactions that further losses won't be there or at least hopefully not too significant.

Thanks, Justin. This is Ryan Riel. I'd like to point out that in those 2 situations that the note sales that we -- or the property dispositions that we executed in the third quarter, the carrying value of those going into the third quarter was based on LOIs that ended up being traded down prior to execution of the transaction.

In response to that, what we've implemented in our process to determine the carrying value of the loans in HFS and then just carrying values in general is we're getting brokers opinion, which, in our opinion, is a better valuation tool than appraisals in this marketplace. Brokers opinions give ranges of values. We've placed the carrying value at the bottom of that range in each case, along with consideration given to cost of disposition in an effort to make sure that, that situation that played out in those 2 examples does not happen again.

Okay. And then as far as timing, and I imagine the sooner the better, but obviously, pricing is part of the conversation but can you get any more specific on the time line here for getting these assets off the balance sheet and maybe what a portion means?

So it's hard to do that holistically. And each and every 1 of these cases, as Eric mentioned in his commentary, we are evaluating the circumstances of each individual asset in and of themselves and looking for that highest and best outcome, obviously, for the bank and for our shareholders. So in many of these cases, we have ongoing discussions in many of these cases, those discussions are far enough along that we can confidently say that disposition will occur during the fourth quarter of 2025. I don't want to -- a little bit superstitious. I don't want to jinx myself and put too fine a point on that, but there will be material action taken in that category during the fourth quarter.

Okay. That's helpful. And then I know last quarter, you gave us a loose idea of where charge-offs could perhaps come in this quarter. And obviously, things changed and could maybe change more. But at the moment, where do you think those could come in that next quarter? And where does that leave things as we get into 2026.

Justin, this is Eric. I think what I would say about that in terms of next quarter and 2026, we're just not seeing early activity that would cause us to believe that there's continued impact on book value from credit, so in terms of charge-offs, I don't want to give you an estimate on that, but I just don't believe charge-off activity in the quarter will have a meaningful impact on provision expense, like it has in the last 2 quarters.

Okay. So the idea would be you'd be more than comfortable with the reserve, taking those hits and not having to replace those losses through the provision?

Based on what we know right now, yes. And where our confidence comes from the 2 activities I talked about in the prepared comments, the independent loan review, which looked at 87% of -- or 88% of the book as well as that supplemental loan review that looked at almost $3 billion of pass rated CRE loans.

Okay. And then with the pickup in total criticized balances? And obviously, despite the charge-offs taken on office, multifamily was again a driver after a similar trend last quarter. And I know potential losses have taken should be far less severe, but just wondering if you could spend just a little more time on that and provide any further detail on metrics just to help us get more comfortable with what we're seeing play out there.

Sure. Justin, this is Ryan again. I'd like to point out that the transaction volume in our marketplace from a multifamily perspective, has sustained at prices that are still represent cap rates that are sub 6%. That is consistent with valuations that we underwrote to.

I'd also like to point out that if you look at Slide 25, specifically and focus on the special mention and substandard categories where you're seeing debt service coverage be challenged. Many of those loans, the actual performance of the property is at or above our underwritten level. So the NOI is coming out at or above our expectation that was set at origination, the debt service coverage ratio that you see reflected is somewhat stressed based on the interest rate environment that we're in today.

If you took that same NOI and compared it with where the permanent market is, you would get a better outcome in those debt service coverage ratios materially better outcome, frankly, because there's somewhere between 150 and 250 basis point gap depending on which permanent provider you look at.

Okay. And then you pointed out on Slide 25, but somewhat related, but there is large $56 million specialty use loan in Montgomery that fell into special mention in the quarter. Can you just talk a little about what that credit is, what the collateral looks like? Just anything you could share?

Yes. So that particular loan is a special use loan. It's actually a self-storage property at Montgomery County. The performance of that property has been impaired by higher-than-expected operating expenses, which are being disputed. The primary driver there is real estate taxes. They're being disputed by that customer and have seen a material drop over the last several quarters of that. It's an ongoing dispute that they're working there. Again, the top line performance of that property is at or above where we underwrote.

the next question. the next question will be coming from the line of Christopher Marinac of Janney Montgomery Scott.

Just wanted to go through briefly the government contract business that you have and how that appears at this time? And does is there any kind of volatility to expect with the shutdown that's ongoing.

Yes. Chris, this is Eric. We haven't seen much of any concerns in the government contracting space because of the government shutdown. As a reminder, the bias of our portfolio is in defense and security. We looked at line of credit usage relative to earlier this year, it's actually down 30% that would be an early indicator of cash flow challenges to clients. And so we're not seeing that.

But our relationship managers keep a constant flow of communication to understand anything that we might be to respond to.

That's right. And obviously, Chris, the risk in that portfolio does increase as the shutdown looms. Friday, tomorrow would meet the first full paycheck of government workers not being met. And we're hopeful and some of the indications are that the shutdown, albeit prolonged at this point to be reaching conclusion, hopefully in the coming time.

All right. Great. And then just back to the kind of main credit issues. From the held for sale that you now have, is the timing on that going to be in the next quarter and can you just kind of walk through kind of how -- or maybe what the risk is that you have an additional write-off as those are finally disposed.

I think I'll point back to the comments I made to Justin, that we've enhanced our process based on the experience we had in the third quarter with the 2 dispositions that we went through. So we are basing our carrying value at the lower end of the range of values that we've determined through third-party work, and I feel very confident based on conversations with market participants and potential buyers that our carrying value is better than where we'll do in many instances.

Great. And then I guess last 1 for me, just has to do with kind of the inflow in future quarters. I mean, do you have visibility about how the inflow may be the same or different in Q4 and Q1. And I guess part of that question is just sort of the ongoing maturity wall that you have in the portfolio. I presume that was addressed by the deeper dive that you just did.

Chris, it's Kevin. And just a clarification, did you mean the inflow into HFS or the inflow into criticized classified.

Really criticized and classified.

Yes, I just wanted to make sure that was the purpose of doing the additional review is to get as much current information as we could on the entire portfolio, so that in our parlance or wouldn't be surprises. So I think that inflow will -- that migration will slow down dramatically.

Yes. I would build on that. This is Eric, that our expectation is that you're going to see criticized classified decline into 2026.

Next question is coming from the line of Brett Scheiner of Ibis Capital Advisors.

I'm just trying to understand, you talked about a temporary cash flow issue in the multifamily space versus a long-term impairment. I'm trying to understand the difference between the 2 and how do we square that?

Okay. So the comments that I made before where the NOI, our underwritten NOI is as compared to the actual performance of many of these properties is at or below our underwritten NOIs at or below the actual performance. So the performance is better in many instances than we expected.

The debt service driven by the floating interest rate structure that is on many of those loans is higher than anticipated and putting stress on that ratio. Additionally, there are some challenges, as we've mentioned in our comments in the affordable housing space that specifically within the District of Columbia, has put pressure on the performance. The bad debt expense in Washington, D.C., unfortunately, is well above the national average. The DC Council's passed the rental Act recently that will help alleviate some of that over time. And that's primarily where we see the short-term pressure and long-term relief.

Doesn't that higher debt service and the pressure that you talked about affect asset values?

It certainly can. Yes.

But how do you think of that as just a temporary cash flow issue versus a valuation impairment?

Because the cash flow will improve over time, and therefore, the valuation will improve over time.

Based on a refinance or some other issue?

based on the passage of time and improved performance.

Okay. Well, I'll follow up offline on that. And then any other comments on Kevin's departure. I know that about a year ago, that was seems to be a big catalyst for a cleanup.

This is Kevin. Thanks for the question. As Susan talked about, I voluntarily resigned and I'm proud -- very proud of what I was able to contribute to the enhanced credit risk management processes and policies here. And I also want to take a second and just thank my colleagues as well. They all know who they are as they continue to manage through our asset quality challenges.

I would also add to that with Kevin's resignation and our desire to be deliberate in our process of finding a replacement and not miss a beat in continuing the strong credit risk management processes that we have put in place. We decided to hire Bill Parati and Dan Callahan on an interim basis so that we would have the time, the appropriate amount of time to seek a permanent replacement for Kevin. .

Okay. Great. And then only 1 other thought. As you go into 4Q, if you're at sort of peak marks and you don't think at this point, you'll need to be adding to reserves or charge-offs will leave through and then you'll have to rebuild into the provision. I assume that you'll be accreting capital in fourth quarter?

Yes. I would direct my -- this is Eric. Brett, I would reaffirm what I said earlier on the call in terms of the independent loan review as well as that supplemental loan review really helping validate management's view of credit and my earlier comment that I don't believe at this time that book value will continue to be degraded by credit.

Okay. So that's a yes. EPNR should exceed provision?

What I'm saying is that I believe that the credit costs will not be degrading book value.

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

Maybe just 1 follow-up on credit, and you've kind of touched on this, but I'm going to just add a little bit more directly. So as you did the independent loan review and the external loan review, what did you see as you did those reviews that was not maybe captured before and how you were categorizing some of these properties. So it was just seems surprising to me the big increase into special mention and then a few into substandard, again, particularly on the multifamily piece. And so just kind of curious what changed and what specifically you saw within that loan review that made you feel like it was now more appropriate to categorize the loans that way. .

Katherine, thanks. That review was really putting all the current information that we had on every single loan in our lap at 1 point. And we do reviews annually on all these properties, all of our loans. But this was all at one time to make sure we really understood the depth of the portfolio. And with that current information, we saw some segments of deterioration, and we took according steps. .

All right. Okay. And then, again, as we think about part that I found really helpful that you brought out is the one on kind of movement in the office book that kind of shows you most where we are in the cycle from where we started and kind of the losses and write-downs and transfers out of the office book.

And so it feels like from the office book, were really kind of far through the cycle and kind of working through those issues. The multifamily piece feels like we're a little bit more early. And so is there any way you can kind of articulate what you think the ultimate losses or write-downs in multifamily maybe relative to what we're seeing in this office book.

Catherine, this is Ryan. I don't think they're comparable at all, right? The structural issues in the office market in the Washington, D.C. region are significant, and you see that in our performance over the last several quarters. structural issues just don't exist in the multifamily segment. If you look at transaction volume, it's a bit down, but investors are still very interested in Washington, D.C., well-located, high-quality Washington, D.C. region multifamily product.

Some of the jurisdictional issues that I referenced are presenting some headwinds for the segment. We're facing those head on. We have good quality sponsorship in those situations. And some of the other issues that are shown on Slide 25, the special mention and substandard category are simply transactions that the interaction of the net operating income and the debt service coverage based on the interest rate structure that's in place in many of those presents a challenge that's below policy levels, sometimes below 1:1 in those situations in all of those situations, we have structural enhancements that allow us to qualify those as potential weakness is not well-defined weaknesses while we work to restructure, and we're in active discussions to restructure.

As you know, in the office category, when we went into restructure conversations or workout conversations, the value of that collateral had diminished substantially. That is just not the case in the properties.

Next question will be coming from the line of Nick Grant of North Reed Capital.

All right. I wasn't on mute. So I don't know what the IT issue was, but thanks for the question. So I mean, first off, I just want to applaud the proactive measures to work through credit like I mean when I step back to $37 a tangible book fells, I mean, much more reflective of the identified risk across your loan exposures, reduces future credit migration. And Susan, in your opening remarks that it here, improving franchise value is a focus, I mean, I really agree with that.

I mean given industry activity on the M&A front, increasing activity like we should see more deals here. How do you feel about the franchise upstream optionality as a way to increase shareholder value?

Yes. I mean I can start with that and Susan and can finish. But I think from our perspective, we're focused on the strategic plan and building shareholder value through the diversification efforts in C&I, improving our funding profile and focused on improving pre-provision net revenue, which should drive enhanced or improved ROA and ROTCE.

But obviously, Nick, the Board will focus on anything that adds value to our shareholders, and we'll consider whatever other options come our way. .

We have a follow-up question coming from Justin Crowley of Piper Sandler.

I just wanted to hop back in and ask 1 quick 1 outside of credit. Just thinking about what will help out the margin looking forward here, you get better yield in C&I, but do you have any detail on how much in fixed loan repricings and adjustable that all reset maybe through the end of next year. I'm not sure if you can give some color on the magnitude and the yield pickup and I guess, maybe excluding anything that's set to hopefully move off the balance sheet.

Yes. I don't have that information in front of me, Justin, so I don't want to make assumptions for you there. But in terms of just more broadly with the NIM expectation, I think you have the similar phenomenon of investment portfolio rolling off, whether it's rolling back into investment portfolio, if we're getting close to that 12% to 15% with higher yields or the cash flows off the portfolio going as use loans, that's going to be helpful on the asset side.

And then the -- on the liability side, it's the continued expectation in the fourth quarter as well as 2026 that we're going to be paying down wholesale funding, brokered funding which should be helpful in terms of cost of funds as well.

About 40% of our loan book is fixed, but it's a short loan book growth. As Ryan has said in the call, a lot of our lending is value add. We're not the permanent financing takeout. So when you look at the average book, it's probably 3 to 4 years.

Thank you. And that does conclude today's Q&A session. I would like to turn the call over to President and CEO Susan Riel for closing remarks. Please go ahead.

Okay. Thank you for your participation and questions during this call, and we look forward to speaking to you again next quarter. Thank you. .

Thank you all for joining. You can now disconnect.