Good day and thank you for standing by. Welcome to the Eagle Bancorp third quarter 2026 earnings conference call. At this time, all participants are in listen- only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Also, please be reminded that today's conference is being recorded. I would now like to turn the call over to Eric Newell, Chief Financial Officer of Eagle Bancorp. Please go ahead.
Good morning. 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 or representations 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 on our website and is 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 President and CEO, Steve Curley, our Chief Lending Officers, Evelyn Lee and Ryan Riel for C&I and Commercial Real Estate respectively. I will now turn it over to Steve.
Good morning and thank you for joining us. We had a strong third quarter. Earnings exceeded expectations. Net interest margin expanded for the third consecutive quarter, and asset quality trends continued to improve. We further reduced our reliance on brokered funding. At the same time, we continued to invest in the people and capabilities that will drive the next phase of growth at Eagle. Those investments are reflected in our expense base, but we are already beginning to see the results in terms of strong business development activity. As we enter the fourth quarter, we are encouraged by the activity we are seeing across the franchise, and we expect pre-provision net revenue to increase from third quarter levels. I spent the first 100 days reviewing the business and meeting with employees, clients, shareholders, regulators, and members of our community.
That work has reinforced for me the resilience of the EagleBank franchise and the significant opportunity in front of us, as well as the priorities we need to focus on. I've described those priorities in three parts: normalize our credit profile, stabilize the balance sheet and funding profile, and continue building a stronger business capable of driving sustainable growth and improve shareholder returns. The third quarter showed meaningful progress against those priorities. Criticized and classified loans declined by $111 million this quarter and are down $448 million or 41% from a year ago. New criticized and classified inflows fell 74% from the second quarter, and brokered deposits declined by $348 million. Loan balances declined again this quarter, but at a materially slower pace than in recent quarters.
As the runoff moderates and the investments we've made in our banking teams take hold, our focus is increasingly shifting from stabilizing the balance sheet to generating disciplined growth. Not every asset quality measure showed improvement. Non-performing assets increased, driven primarily by one previously identified multifamily relationship. Even in this case, I see progress. The bank made the difficult decision to act decisively on a maturing asset of a good customer to protect the bank's economic interest. When I step back from the individual metrics, I see a company well-positioned with less credit risk, a strong capital base, and a renewed capacity to grow. Our job now is to convert that progress into stronger returns for our shareholders. Now let me begin with credit. As I mentioned last quarter, I have visited our significant problem credits, and each has a specific resolution strategy, clear accountability, and active oversight.
We evaluate each loan based on its individual circumstances and the path we believe will produce the best economic outcome for the bank. In practical terms, that generally means one of three paths. The borrower can re-margin, they can refinance with another lender, or we can take the asset back and liquidate. Our objective is to identify the path that maximizes recovery and execute against it with discipline and urgency. The circumstances differ by credit, and that's why the individual resolution strategy matters. Where additional time improves the bank's economic outcome, we'll structure our resolution strategy accordingly. Where a borrower cannot execute, we'll act decisively. At the portfolio level, our focus is to continue reducing elevated credit risk, limit new problem loan migration, and maintain the loss absorption capacity needed to support disciplined growth.
We will measure that progress through criticized and classified assets relative to Tier 1 capital plus our allowance, as well as new levels of inflows of criticized and classified assets. We've made substantial progress. Criticized and classified asset levels remain elevated, but they continue to decline and new inflows fell sharply this quarter. I see more of the same in the fourth quarter. The second phase is stabilizing the balance sheet, and funding is a big part of that. Not all deposits are created equal. Wholesale funding gives us liquidity, but it's expensive and transactional. Rate-sensitive deposits can play an important role as we grow, particularly in the near term. But over time, the most valuable funding is core relationship deposits that come with broad, durable client relationships.
You may see us use higher cost rate-sensitive deposits to support growth along the way, but the longer-term objective is clear: deepen existing relationships and build a larger base of core relationship deposits. We took another meaningful step in that direction this quarter by further reducing our reliance on brokered funding. The other balance sheet consideration is capital. As risk has declined and as capital has continued to build, we have greater flexibility in how we ultimately deploy that capital. In the short run, continued improvement in our credit profile is critical. But we don't need every credit metric to reach its ultimate destination before we begin thinking about the appropriate use of that capital. Growth will be one use, and over time, capital return can be another. We're not at the point of taking capital actions today, but our objective is not to accumulate capital indefinitely.
We intend to deploy capital where it can produce attractive risk-adjusted returns, and when appropriate, return excess capital to shareholders. The third priority is building a higher-performing franchise. Eagle has experienced bankers, established customer relationships, a strong presence in attractive markets, and infrastructure capable of supporting more business. Our opportunity is to generate greater returns from that franchise. That means improving branch productivity, growing relationship deposits, deepening treasury management and fee-based relationships, and holding ourselves accountable for the returns on our investment. We're also expanding our ability to generate new business. We've added experienced bankers and leaders across the commercial banking, commercial real estate, and other areas where we see attractive opportunities. We are encouraged by the early activity we're seeing from those investments. Ultimately, better operating performance means converting activity into sustained revenue growth while maintaining discipline around expense, credit, and pricing.
With that, I'll turn the call over to Eric to review the quarter.
Thank you, Steve. We reported third quarter net income of $24.2 million or $0.79 per diluted share, compared with $6.9 million or $0.23 per diluted share in the second quarter. The increase primarily reflects an $18.6 million reduction in provision expense, along with a $5.3 million income tax benefit related to a state tax refund. Pre-provision net revenue was $23.8 million. I'll come back to the drivers of that result, and importantly, how we see the earnings trajectory developing from here. On our last call, we said we expected provision expense and charge-offs to be lower in the second half of 2026, and the third quarter reflected that. Provision expense declined to $2.8 million from $21.4 million in the second quarter. Net charge-offs were $4.2 million or 25 basis points annualized, down from $47.9 million, and that included a $3.4 million recovery.
This quarter also marks one year since we completed the independent review of our loan portfolio, so it's useful to put the credit trends in that context. We ended the third quarter of 2025 with $1.1 billion of criticized and classified loans, representing approximately 90% of Tier 1 capital. Those balances have declined each quarter since. At September 30th, criticized and classified loans, including held for sale, totaled $648.4 million or 54% of Tier 1 capital. Slide 14 in the investor deck shows the full trend. The improvement is also increasingly evident in migration. Inflows into criticized and classified loans declined to $55.7 million, down 74% from the second quarter and more than 87% from the $445 million we reported a year ago. This was the lowest level since last year's loan review, with no concentration in any single asset class. We're also seeing credits move the other direction.
During the quarter, $40.7 million of loans were upgraded to pass from criticized and classified, special mention balances declined 29% to $195.1 million, and watch balances are now down more than 50% from their peak. 30- 89-day past dues also improved significantly, declining from $44.1 million on June 30th to just $400,000 on September 30th. Held for sale balances declined to $13.5 million from $49.7 million, with no new transfers during the quarter. While we don't expect to pursue loan sales as actively as we have over the past year, it remains one of the tools we may deploy when it's the fastest and cheapest way to exit a problem loan. Against that broader improvement, non-performing assets increased $52.9 million to $166 million or 1.75% of total assets.
The increase was primarily attributable to the $56 million Maryland affordable multifamily relationship that Steve referenced earlier and accounts for 76% of the non-performing inflows this quarter. While the increase in non-performing assets is meaningful, the broader indicators continue to improve, including criticized and classified balances, inflows, upgrades, and past dues. Taken together, we believe these measures show that the bank's credit risk profile continues to trend lower. The allowance for credit losses ended the quarter at $120.8 million or 1.84% of loans, relatively flat from the prior quarter. In office, coverage on performing loans declined to 4.86% from 7.22%, reflecting the reduction in our qualitative overlay as the income-producing office portfolio declined and the credit quality of what remains improved. Turning to operating performance. Over the past year, we significantly repositioned the balance sheet by reducing higher-risk exposures and improving portfolio composition.
That process resulted in a smaller balance sheet, but it's also put us in a stronger position to begin growing again. Net interest margin expanded 8 basis points to 2.6%, marking the third consecutive quarterly increase while our cost of funds declined to 2.75%. Net interest income was $61.3 million, which was down $1 million as the benefit for margin expansion was more than offset by the smaller average earning asset base. The reduction in earning assets reflects, in part, the deliberate repositioning of our loan portfolio. We entered the year intending to reduce CRE exposure, improve the mix between CRE and C&I, and work down higher-risk assets. More than half the loans that paid off were criticized or classified. The trade-off has been a smaller earning asset base in the near term, but a stronger and better-balanced portfolio from which to grow.
Non-interest income was $9.6 million, down $1.2 million from the second quarter. We had no loan sale gains this quarter as compared to the $2.3 million recognized in the second quarter and was partially offset by a $1.1 million increase in swap fee income. Non-interest expense increased $3.1 million to $47.1 million. Salaries and benefits increased $4.9 million including $1.5 million of accelerated awards, $1.5 million of compensation tied to new hires, and $1.3 million of annual incentives. This was partially offset by a $2.1 million decline in FDIC insurance expense. Pre-provision net revenue was $23.8 million compared to $29.1 million last quarter. The linked quarter PPNR comparison reflects several factors. We benefited from continued margin expansion and stronger swap activity while a smaller balance sheet, the absence of second quarter loan sale gains, and several expense items reduced PPNR.
We also continue to absorb the cost of new talent Steve discussed earlier ahead of its full revenue contribution. Importantly, approximately $2.8 million of the quarter's expense increase is not expected to remain in the fourth quarter run rate. In C&I, loan balances were relatively stable during the quarter while deposits grew $101.5 million or 5.9%. Individual relationships can create linked quarter volatility, particularly among larger commercial customers, but C&I loans are up 20% year-over-year. That broader momentum remains positive and reflects the investments that we've made in the commercial franchise since late 2024. Core deposits increased $197 million during this quarter, while brokered deposits declined $348 million. As a result, total deposits declined $151 million, reflecting the continued reduction in brokered funding. In CRE, balances declined by $148 million as payoff activity continued while credit quality across the portfolio strengthens.
The deposit funding ratio remained at 35% compared with 29% a year ago. We have several multifamily maturities in the fourth quarter where we've been actively working with borrowers. We expect a combination of principal curtailments and extensions that should reduce our exposure while allowing us to retain performing earning assets and client relationships. Total loans held for investment declined 0.9% to $6.6 billion. That headline decline reflects continued CRE payoff activity but doesn't fully capture what we're seeing in new business activity. Pipeline activity has strengthened, particularly in commercial real estate, and we expect that momentum to support measured net loan growth beginning in the fourth quarter. Capital continues to build. CET1 increased to 14.99%, tangible common equity increased to 12.24%, and Tier 1 leverage increased to 12.08%. Tangible book value per share rose to $38 and has grown each quarter this year.
Turning to our outlook on Slide nine. For the first time, we provided both a fourth quarter outlook and an initial view of 2027. We're doing so because we believe we now have greater visibility into the trajectory of the business following the balance sheet repositioning of the past year. The outlook doesn't include assumptions for future provision expense, charge-offs, loan sales, or other credit related items, which will depend on economic conditions and portfolio performance. Looking ahead, we expect average loans and deposits to grow in the fourth quarter and continue growing in 2027. Combined with the expense dynamics I've discussed and the production capacity we've added, we expect PPNR to increase from the third quarter levels in the fourth quarter. We believe that represents an important step towards converting the investments we've made and the balance sheet capacity we've created into stronger operating performance.
With that, I'll turn the call back over to Steve.
Thank you, Eric. Before we move to questions, let me close with where we're headed. One of my priorities since arriving has been making sure we have the leadership and talent to execute against the opportunities we see across Eagle. Today, we announced the appointment of Corey Muñoz as our chief people officer, strengthening our leadership around talent, development, culture, and accountability. We've also added experienced bankers tasked with bringing in new to business and growing deposits and loans. In Baltimore, we've added Lynn Sanders as our market executive and Richard Yoskey as a senior C&I relationship manager. Both have deep roots in Baltimore and extensive commercial banking experience. Their addition reflects our commitment to building a larger presence in Baltimore and extending the strength of our Maryland franchise.
In commercial real estate, we've added Matt Nader and Cesar Escamilla, both bringing substantial market experience and additional capabilities to our CRE platform. These additions complement the strong talent we already have at Eagle. We've been very encouraged by our ability to attract accomplished bankers from larger competitors across middle market, nonprofit, dealer finance, and commercial real estate. We think that says something important about the opportunity people see at Eagle. More importantly, we're beginning to see the activity we expected from those investments and expect that momentum to continue through the fourth quarter and well into 2027. That reflects an important transition for Eagle. Risk reduction remains a priority, but we're increasingly positioned to focus on growth and operating performance. After my first 100 days, I'm increasingly confident in what Eagle can become.
We have a valuable franchise and an attractive market, significant capital, experienced bankers, and a stronger foundation on which we can build a premier community banking franchise that importantly generates strong returns for our shareholders. With that, operator, we'd be happy to take your questions.
Thank you. As a reminder, if you would like to ask a question, please press star one one on your telephone. You will then hear that automated message advising your hand is raised. We also ask that you please wait for your name and company to be announced before proceeding with your question. One moment while we compile the Q&A roster. Our first question will be coming from the line of Justin Crowley of Piper Sandler. Please go ahead.
Hey, good morning, everyone.
Good morning.
Just wanted to start on the large multifamily loan. Was just curious if you could provide a little more detail on that property. I know we talked about it a little before. Just what ultimate resolution could look like, and then just how you think you're protected from any future loss on that loan.
Thanks for the question, Justin. We have been working on this credit for some time. We have disclosed this in prior quarters. At this point, we are not going to go into the nitty-gritty detail of each and every play. But the action we did take this quarter protects the economic interest of the bank, and we believe will maximize the ultimate outcome on this asset.
Yeah, I think we thought that this might restructure because there is a subordinate lien on the property, but in the end, that well-capitalized person decided not to support it. Now we are just taking the action we need to protect our interest.
Okay. And there are specific reserves on this loan currently?
Yes, Justin, there is.
Okay. And then, I guess just looking at the broader multifamily book, do you have how much of that, by chance, represents exposure to affordable housing like this loan?
The affordable housing book is really contained materially in this loan. At this point, the balance of our multifamily property is predominantly market-rate housing.
Okay. Got it. And then Eric, you gave some detail on the watch list, how that continued to come down with actually some upgrades similar to the update you gave last quarter. Do you have any color on what exactly that bucket did quarter-over-quarter? And how that gets you thinking about just the level of criticized as we get into the end of the year and then through 2027?
Yeah. Obviously, when we're looking at something for a potential upgrade, we're looking through the underlying performance of the credit. So in these cases, likely that the net operating income is improving, so therefore, they're able to better service their debt. And so we're getting better coverage there. In terms of criticized classified, we work very closely with the special assets team as well as Ryan's team to look at on an asset-by-asset basis what the expectation of disposition and the timing of that. And so we have a good sense of where we think we're going to land at the end of the year. And that will be much improved from what we're reporting here at 9/30.
Okay. That is helpful. Just thinking a little longer term on capital management, you kind of touched on this, Steve, specifically buybacks. I know getting criticized down further is the goal before that maybe becomes a more realistic conversation. Is there any way to put a finer point on that just in terms of broadly what level you think opens that up as a possibility?
Yeah. It is Eric. The way Justin and I look at it is comparing ourselves criticized classified to Tier 1 and ACL. When you look at our peers, there is a little bit more wood to chop. I am not necessarily suggesting we have to get right exactly to our peer level, but we need to get closer there before we have a more substantive conversation with our board about potential capital deployment actions that we could take.
Yeah, I feel like we are making good progress on chopping that wood, though. I think if you saw criticized and classified in kind of the I would feel good if they got to a number in the 3s. I think maybe we start to think about that a little bit more carefully. I do not think that is too far away.
Okay, great. Just one last one. With some of the new hires on the commercial side including the extension into Baltimore. I was just wondering if you could talk a bit more about those initiatives. If we should expect more to come there. Just how you are thinking about any future either geographic or product line expansion.
Thanks, Justin. This is Evelyn, and Ryan Riel can chime in as well because the hires have been both in C&I and in CRE. On the Baltimore side, yes, I think you'll see that team continue to grow. It's really well-anchored with Lynn Sanders and Richard Yosky. The plan is to grow that team over time. Then I think what I'd highlight, and I think Ryan Riel would echo this, is just the hires that we're making are very thoughtful and strategic. We're not going out with a blanket target to hire X number. It's really the folks that we know and trust in this market and know can produce the returns that Eric Newell was describing. I don't know, Ryan, if you'd add to that or.
Just echoing that the new hires are anticipated to provide quick and substantial returns to the bank and our shareholders. On the commercial real estate side, the lines of business, we've always done a broad range of things for our customers as those needs arose. These efforts will be more specific to some of those same tactics with some intentionality around that line of business.
Let me just kind of come a little bit over the top on that one. The bank's assets peaked in the fourth quarter of 2023 at almost $11.7 billion, and they've steadily declined for 11 quarters to where we are today, about $9.5 billion. That's a 19% decline in assets. It's hard to grow a franchise with declining PPNR. To me, normally I want expense to chase revenue, not revenue to chase expense. But in this particular case, we really needed to jumpstart the production franchise, and so we decided to make some upfront investments. But I want you guys to know I'm keenly focused on expenses and our efficiency ratio. But in this case, we had some really excellent opportunities to bring on some high-quality producers that can contribute immediately.
I felt like to get the franchise moving forward and getting PPNR growth going in the right direction, it was worth making that upfront investment.
Great. I appreciate all that color. I'll leave it there. Thanks so much.
Thank you. One moment for the next question. Our next question will be coming from the line of David Bishop of Hovde Group. Please go ahead.
Yeah, good morning. Maybe sticking on that topic, I'm just curious as you have the hires within the Greater Baltimore region. Just curious, I don't know if there's a way to size up, you think the opportunity is. Are we talking about hundreds of millions, maybe getting up to billions in loans over time as you build out that team? You're looking to sort of penetrate maybe some of the more affluent counties around here like Howard County, Anne Arundel, Carroll. Just curious how you're thinking about expansion within the region.
I'm going to have Evelyn talk a little bit. But even as I kind of spend some money to jumpstart it, we need PPNR to grow. So we're going to invest at the pace we can grow our earnings. But we see a huge opportunity in Baltimore, and I think Evelyn has spent a lot of time in the market, so I'm going to turn it over to her.
Yeah. One of the things that has worked well with Baltimore is we had really nice traction there before we hired the team. We have a handful of really nice, well-heeled influential clients in that market that are the result of calling efforts that were already ongoing. The timing really just felt right to bring a team in and serve that market from Baltimore. Going back to the comments that Steve made, it is a fantastic market. It is important to Maryland. We are important to Maryland, so those things just seem to jive. We obviously have a business plan with growth targets, et cetera, and that team is aware of those and working towards them.
Got it. Then, Steve, you spoke in the preamble about the expectations to renew loan growth and the outlook for CRE growing there. Just curious now, just given all the hot headlines, you would think there would be no growth out there, but where are you seeing the opportunities to grow on the CRE front on the segment geographic perspective?
I am going to turn that to Ryan in a second. It is not sectors that drive opportunity. It is loan officers that find good opportunities. What I love about our approach is that we hired two strong managers into that team, and we have a strong team. We are not targeting this or that. What we are doing is we are having salespeople go out, make calls, and find good opportunities, and we are making credit decisions based on the specific characteristics of that opportunity. There are some areas that are a little bit better than others, but what I love is that we have outbound calling officers hunting down good opportunities, and we are making underwriting decisions based on the specifics of those assets. From a general perspective, I think. Go ahead, Ryan.
Yeah, I think it is important to note, as we did in the prior comments, that the relationships we have maintained in the commercial real estate space have remained throughout this cleanup period for our balance sheet. Those customers have not been inactive in the market, and now we are back to participating with the activities that they have. From a pipeline perspective, we are seeing opportunities in for-sale residential. We are seeing opportunities in industrial and retail, in some new multifamily. There are some conversions from office to multifamily happening downtown. It is a pretty diverse pipeline, both in asset type and geography within our region.
Got it. Then one final question, looking back to credit quality. You guys are pretty through the, I guess, the pig through the python, so to speak, with office. As you look at potential loss content on the multifamily segment, is there a way to scale that relative to what you've seen in the market relative to office? Is it 10%, 20%? Just curious how you think eventual loss content could play out. Thanks.
Yeah. The way I look at it is we had $130 million of resolution of criticized and classified this quarter with a $4 million charge-off, so that's about 3% relationship. I think that that gives you a proxy, and you can anchor from that, but it gives you a proxy of how much improved that resolution is on multifamily from an office perspective where we were seeing a weighted average loss rate approaching 50%.
Yeah, I think the dislocation in the market in office in our region was far more substantial than what we're seeing in multifamily to date, and even in a higher interest rate environment going forward, as values are likely to become more pressured. The loss content is not anywhere close to what we experienced in the office market.
Yeah, when I look at multifamily because we go through this every week, our criticized and classified loans. To me, we've engaged with the borrowers for months, and we've been pretty clear in our signaling. We have strong senior positions in these properties. I think what's happening is the borrowers they have significant equity left in the property, and they're doing the rational thing. They're going to either remargin the property and bring the debt load down so it can cash flow, or they're going to refinance the loan with a non-bank. Non-banks are willing to kind of lend on an IO basis. I think we're seeing borrowers do the rational thing, and so I feel like the loss content is going to be quite a bit different. In the cases where they don't do one and two, we'll foreclose and liquidate.
I will tell you, there's plenty of willing buyers that want to buy a brand-new property that's well built, that has occupancy well into the 1990s. From my perspective, it's an entirely different story than the office situation where you had no cash flow to the property at all, no revenue to the property. In this case, there's plenty of revenue. It's just a matter of getting the debt load sized appropriately. I think actually there's a lot of people looking at this as an opportunity to buy trophy properties in good markets if they can get their hands on it. I'm not seeing this at all like office.
Got it. Appreciate the color.
Thank you. One moment please for the next question. Our next question will be coming from the line of Steve Moss of Raymond James. Please go ahead.
Good morning. Maybe just following up on credit here. Just curious how you guys are thinking about provision expense going forward. Does the reserve kind of stabilize here, and maybe there's not as much to add? Just curious on your thought process there.
The way I look at it, Steve, this is Eric. I look at where our criticized and classified assets are today, and if we were to get to our peer level, call that 20% of capital in Tier 1, that's approximately $275 million. We're far away from that. However, when we look at the we have visibility as to where we expect we're going to go this quarter. If there was any loss content, we'll have already put that into the reserve based on that visibility. If you just look again, that relationship I put together on answering Dave's question about the losses that we experienced relative to the amount of pay-down or resolution that we had for criticized and classified of $130 million, that's around 3.5%.
If you even double or triple that, and you take that number and compare it to the remaining amount of dollars left over to get us to the peer median of criticized and classified, that number is below the provision and charge-off that we've experienced year-to-date in 2026. Summing all of that up, I just expect, I don't want to give a range just yet, and I could probably do a better or I'll put a range out in January when we have spent more time on this, because we're going through the budgeting process right now. I think in summary, I would just look at what we've experienced year-to-date on provision and charge-offs and model something that's lower next year for the full year.
Right. Okay, great. I appreciate all that color there. Then, just in terms of going back towards business development here. Steve, you all highlighted the hires here with regard to lenders. Last quarter you did indicate the thoughts of maybe working on some deposit verticals. Just curious, any updated thoughts there and is that something maybe we see with fourth quarter results?
Yeah. Honestly, we're working on some the thing is you recruit people and then they have to accept, right? We're working pretty diligently to bring in some talented treasury management and deposit-gathering business development folk. I think we'll have success, and you'll see some of that in the fourth quarter. I am getting close to putting the final touches on what I would think is the first national business opportunity. But we need to fine-tune it and find the right leader for it, and that's something else I think you'll see early next year. As you get to the end of the year and you look for really strong people, they're pretty close to their bonus. Some of those people, I think, are more likely to come over in the first quarter next year.
Okay, great. Appreciate that color there, and thank you for all the color on this call. I'll step back.
Thanks.
Thank you. One moment please, for the next question. Our next question is coming from the line of Will Jones of KBW. Please go ahead.
Yeah. Hey, guys. Thanks. Good morning.
Morning.
Steve, I wanted to go back to something you mentioned a little bit earlier in the call, just around the capital discussion. You mentioned maybe point in time you get a little more constructive is when criticized and classified have a 3% handle on them. Maybe that kind of feels like the bogey, but you also mentioned that you don't think it's far away, and Eric, I feel like you made some comments around that, too. Could you just give us what line of sight you do have into seeing a further reduction in criticized and classified? Would it be crazy if we looked two quarters down the road and we're kind of there? Just what kind of line of sight or visibility could you give us into that?
That kind of comes in waves as you work through the loans. I feel really good about the fourth quarter. Can you go past the fourth quarter? Because then you've got a few different loans, and the maturities are out pushed out a little bit. But I think to me, I think something with a three handle somewhere around the end of the second quarter is where I'd like to be.
And just as a clarification, when Steve says three handle, you're talking about not percent, you're talking about dollars.
Yes. Yeah. Hundreds of millions.
Yeah.
Yeah. Just to clarify that.
Yeah. Okay. Thanks for clarifying that.
Sorry. Yeah. So where we are today, if you saw us with something around $400 million in criticized and classified, I think that would be pretty good performance.
Yeah. Okay. That is helpful. I appreciate that. Eric, maybe one for you just on the guide, the outlook. It implies that we are kind of at the bottom here in terms of balance sheet shrinkage. The guide next quarter, it does imply a somewhat meaningful ramp in just terms of average earning asset base. Could you just walk us through how the balance sheet kind of evolves over the next 90 days to kind of arrive at this earning asset base, just what the path is to see the growth kind of materialize here?
Yeah. It is the investments that we made in the talent and seeing some of the production come out there. Pipeline for CRE has been growing for the last several quarters. So I think that those efforts will result in net growth in CRE. It is expected to result in net growth in CRE in the fourth quarter. And then we also had some cash flows off the investment portfolio that we reinvested into loans, which had pretty good risk-adjusted returns. And you saw that the residential real estate that is in our earnings release, that was not originated by us, that was purchased by us. And that took an asset that was earning us 2% and is now earning us 6%, and we purchased those at par. So we feel pretty good about that, and we might do a little bit more of that in the fourth quarter as well.
Yeah. Okay. That's great, color helpful there. Last thing for me, maybe more high level, Steve, this is you and I's first call together. You alluded to your confidence there in your prepared remarks. I guess just want to ask, if you just take an assessment, confidence level on day one when you joined Eagle, you spent a few months with the bank, to where your confidence level sits today, could you just walk through that evolution and where you see the Eagle turnaround story going? You've had a little time to look under the hood, kick the tires, and think about a go-forward strategy. Just how has your confidence level changed, evolved, and grown from day one to where you are today?
Frankly, the more information you get, the better decisions you can make, the more you feel like you're in control of your situation. I feel much better. I didn't feel bad coming in, but now that I've peeked under the hood, I feel much better. When I first started I really was focused on asset quality and digging in on the criticized and classified loans. The deeper I've gotten in that, the more comfortable I am with our situation and the quality of our workout staff, which I think is superior. More recently, I've started to worry more about asset growth. It's flip-flopped. I went from being worried about asset quality first and then asset growth second, and now I am absolutely more focused on asset growth and deposit growth than asset quality. Not that they're not both still important.
I'm highly focused on asset quality and resolution of our troubled loans. But I've really shifted to a market-facing role and spending more time with the producers to make sure we can grow deposits, we can grow loans, grow revenue, and drive a higher PPNR.
Yeah. Okay. That's great feedback. I appreciate you sharing that with us. Thanks for the questions.
Yeah. Honestly, I feel great, though. I feel really, really good about the future of EagleBank.
Yeah. Excellent. Well, that's great to hear.
Thank you. One moment please for the next question.
Next question's coming from the line of Christopher Marinac of Brean Capital. Please go ahead.
Hey, thanks. Good morning. I wanted to ask about stress testing in commercial real estate and really anywhere else, and how much of that is already embedded in the special mention and substandard numbers at 9/30?
Yeah, Chris, our team has been looking at higher interest rates for the last several quarters. We've looked at, I think it's 80%-90% of the balances. We've added 25, 50, and 100 basis points of interest rate to look at what could happen to debt service coverage. Any credit that approaches a debt service coverage of one or in some limited cases goes below one. When you look at any of those credits, close to 100% of them are watch, special mention or substandard. None of them were in the pass category, which makes us feel very comfortable that we have a ring-fence any of the potential credits that could have some challenges with higher interest rates.
I also just want to say, we didn't see an increase in watch credits, and that process has gotten fine-tuned where we really do have a much better early warning system. To me, the first signs of issues would be appearing in watch, and that number was flat for the quarter and actually improved a bit. We're testing, we're stressing things, and we're watching things carefully for actual results.
Good. Thank you for sharing that. Then just to follow up on deposits for Evelyn. I know we've had seasonality and both sort of the negative side in Q2 and the positive side in Q3 for C&I deposits. What's happening in terms of net new accounts in the C&I channel and what's the momentum that you see in the next year that could really sort of meaningfully impact those deposits?
Yeah. Thanks, Christopher. You mentioned there is a couple of things going on inside the C&I deposit book. So we have some really nice large depositors that may or may not be seasonal. So they may have large deposit inflows or outflows based on project timing or suit resolution. So that is one layer that can change, like a linked quarter to a linked quarter. You have general seasonality in what I will call the more granular back book. Third quarter tends to be a pretty good quarter for that back book. Fourth quarter, it tends to be down with bonuses and distributions and things of that nature. But overall, if you look at the seasoning of the new relationships that we brought in in 2025, we are very pleased with that. Those contributed to, in round numbers, about $50 million of new deposits in 2026.
So again, those are 25 relationships bringing in seasoning deposits in 2026. And then that trajectory on new primary relationships that we are bringing in is still stable from prior year. And then with some of the investments that we made in talent, we expect that to at least be stable or pick up. But linked quarter to linked quarter can. I like the idea of looking back sort of like a trailing 12 period, and you will continue to see those core relationship deposits grow. But on a quarter- by- quarter, we could be impacted by some of those other dynamics I mentioned.
Got it. And the mix of the deposits should continue to change too. It may be modest quarter to quarter, but just generally speaking, we should see that mix evolve.
In terms of DDA versus money market, or are you going back to broker versus. Sorry, what mix are you referencing?
Well, it's really the C&I business as a percentage of the whole franchise that your component is getting bigger over time.
It has, yes. Ryan and I would be happy to be in a competition for who can gather the most deposits. That would be a win-win situation.
Well, we are happy to be here because we are in that competition.
Yeah.
I would say this, though. I do expect our business banking franchise to start to pick up next year. So what I would like to see is Evelyn grow very strongly and her mix not to change because we have the branches and the business banking team doing a little bit more of the heavy lifting. But no, I think Evelyn's got great momentum and is recruiting heavily for some supplemental people to our team.
Great. Well, thank you all for your input, and thanks for all the disclosure heading into today.
Thanks, Chris.
Thanks, Chris.
Thank you. One moment please for the next question. Our next question is coming from the line of David Chiaverini of Jefferies. Please go ahead.
Hi. Thanks for taking the questions. Maybe just following up on that last line of questioning on the C&I side, but more on the loan side of it. You mentioned about CRE pipelines are strong. Can you talk about the C&I loan pipeline here for the fourth quarter? Particularly, I am curious about how we should think about the loan mix as this turnaround matures between C&I and CRE.
Yeah, I think in Eric's prepared comments, he mentioned the significant strengthening of the CRE pipeline because they have been focused on asset quality. The strength of the C&I pipeline really built actively in the beginning of 2025 and has stayed sort of stable/growing, but it is absolutely still strong. I do not think it was mentioned as growing in the same way that CRE's is, but it is still certainly in a very good position. In terms of the mix, maybe I will let Steve talk about what he is thinking in terms of the ideal mix there.
I think in the long run, from a loan growth, you like to see 40% from Evelyn, 40% from Ryan, and 20%. So C&I 40, CRE 40, and 20% from business banking in the branches or some other asset generation strategies. But that is kind of how I am thinking it. The two workhorses are going to be our C&I and our CRE. We are starting from a low base, but we would really like to see the business banking group start to take a little bit bigger role in this.
Thanks for that. Then a question on the guidance for 2027, particularly on the net interest margin. What could get the NIM for next year to the high end versus the low end of the range of 2.77%-3.05%? What are some of the puts and takes there?
Yeah, in looking at this, we're going through the budgeting process as we speak. Admittedly, the range is a little wide, and we'll tighten that up as we finish that budgeting process here in the fourth quarter. But looking at that, there's a couple things. First off, we're using a forward curve as of 9/30. I believe there's three interest rate hikes priced in, one in October and two early next year. That has an impact on NII and NIM. Then it's remixing of the investment portfolio, so reinvesting some cash flows there, which we haven't done since I've been here. We just start dabbling on that a little bit here in the fourth quarter.
Then it's also loan composition in terms of, yeah, there's about $350 million of roll out of the investment portfolio next year that we'll be able to, that's earning us currently 2%, and we'll be able to put that in higher yields next year. Then it's the loan composition of what we're putting on next year in terms of spread, and also the interest rate environment.
Very helpful. Thank you.
The one dynamic that I would like to leave with you as well is on the funding side. We're at around 11% of brokered deposits when we file our call report here in a couple weeks or by at the end of the month. That's a tool that we're going to continue. We're going to use brokers in some way. We've had the benefit of reducing that broker for the last several years, frankly, but in earnest during this year, and that's had some nice benefits on the cost of funds. I just don't anticipate that we're going to get those tailwinds in 2027. So it's going to be a bit more on the asset side that will be driving NIM expansion.
Yeah. Good color. Thank you.
Thank you. This does conclude today's Q&A session. I would now like to turn the call over to the President and CEO, Steve Curley. Please go ahead.
Well, great. Thanks guys for all calling in. We're really pleased with your interest in our company, and we look forward to coming back in the fourth quarter and delivering similarly good news like we did this quarter. Thank you.
Thank you all for joining today. You may now disconnect.