Eagle Bancorp NASDAQ: EGBN reported third-quarter net income of $24.2 million, or $0.79 per diluted share, as lower credit costs and a state tax refund helped lift results from $6.9 million, or $0.23 per share, in the preceding quarter.
Chief Financial Officer Eric Newell said the quarterly increase primarily reflected an $18.6 million reduction in provision expense and a $5.3 million income tax benefit tied to a state tax refund. Provision expense fell to $2.8 million from $21.4 million in the second quarter, while net charge-offs declined to $4.2 million, or 25 basis points annualized, from $47.9 million in the prior quarter. The third-quarter charge-off figure included a $3.4 million recovery.
President and CEO Steve Curley said the bank made progress on its priorities of reducing credit risk, stabilizing funding and positioning the franchise for renewed growth. “Earnings exceeded expectations,” Curley said, adding that net interest margin expanded for a third consecutive quarter and asset-quality trends continued to improve.
Credit metrics improve, though nonperforming assets rise
Criticized and classified loans, including held-for-sale loans, ended the quarter at $648.4 million, or 54% of Tier 1 capital. That was down $111 million from the prior quarter and $448 million, or 41%, from a year earlier. At the end of the third quarter of 2025, criticized and classified loans totaled $1.1 billion, representing about 90% of Tier 1 capital.
New inflows into criticized and classified categories fell to $55.7 million, down 74% from the second quarter and more than 87% from $445 million a year earlier. The bank also upgraded $40.7 million of loans to pass status. Special mention balances declined 29% to $195.1 million, while watch-list balances were down more than 50% from their peak, according to Newell.
Past-due loans also improved. Loans that were 30 to 89 days past due declined to $400,000 at Sept. 30 from $44.1 million at June 30. Held-for-sale loan balances fell to $13.5 million from $49.7 million, with no new transfers during the quarter.
However, nonperforming assets increased $52.9 million to $166 million, or 1.75% of total assets. Newell said the increase was primarily tied to a previously identified $56 million Maryland affordable multifamily relationship, which represented 76% of nonperforming inflows during the quarter. Management said the loan has specific reserves and that the affordable-housing exposure is materially concentrated in that relationship.
Curley said the bank is evaluating troubled credits individually, with potential resolutions including borrower re-margining, refinancing with another lender, or foreclosure and liquidation. During the question-and-answer session, management contrasted the expected loss potential in multifamily with the office portfolio, saying multifamily properties generally continue to generate revenue and that borrowers may retain meaningful equity.
The allowance for credit losses ended the quarter at $120.8 million, or 1.84% of loans, relatively unchanged from the prior quarter. Newell said the bank has stressed a large share of its commercial real estate balances for interest-rate increases of 25, 50 and 100 basis points. Loans that approach or fall below a debt-service coverage ratio of one are largely already classified as watch, special mention or substandard, he said.
Margin expands as balance sheet continues to reposition
Net interest margin rose 8 basis points from the second quarter to 2.60%, marking the third straight quarterly increase. The cost of funds declined to 2.75%. Net interest income totaled $61.3 million, down $1 million sequentially because margin expansion was offset by a smaller average earning-asset base.
Total loans held for investment declined 0.9% to $6.6 billion, largely due to continued commercial real estate payoff activity. More than half of loans that paid off were criticized or classified, Newell said. Commercial real estate balances declined $148 million during the quarter, while C&I loan balances were relatively stable and were up 20% year over year.
Management said loan pipeline activity has strengthened, particularly in commercial real estate, and expects measured net loan growth to begin in the fourth quarter. The CRE pipeline includes opportunities in for-sale residential, industrial, retail, new multifamily and office-to-multifamily conversions, according to Chief Commercial Real Estate Lending Officer Ryan Riel.
Curley said the bank’s long-term desired mix of loan growth would be approximately 40% from C&I, 40% from commercial real estate and 20% from business banking, branches and other lending strategies.
The bank purchased residential real estate loans at par during the quarter, shifting assets that had been yielding about 2% into loans yielding about 6%, Newell said. He added that approximately $350 million of investment portfolio balances earning around 2% are expected to roll off in 2027, providing an opportunity to reinvest at higher yields.
Deposit mix shifts away from brokered funding
Core deposits increased $197 million in the third quarter, while brokered deposits declined $348 million. Total deposits declined $151 million as the bank continued to reduce brokered funding. C&I deposits rose $101.5 million, or 5.9%, during the quarter.
Newell said brokered deposits represented about 11% of deposits by the time of the company’s expected call report filing. While the bank expects to continue using brokered deposits as a funding tool, he said it does not expect the same cost-of-funds benefit from reducing brokered deposits in 2027. As a result, management expects future margin improvement to be driven more by asset yields and loan mix.
Management said fourth-quarter average loans and deposits are expected to grow, with growth continuing in 2027. The company’s 2027 outlook includes a net interest margin range of 2.77% to 3.05%, though Newell said the range could be narrowed as the budgeting process progresses.
Expenses reflect hiring investments; capital ratios increase
Noninterest expense rose $3.1 million sequentially to $47.1 million. Salaries and benefits increased $4.9 million, including $1.5 million of accelerated awards, $1.5 million tied to new hires and $1.3 million of annual incentives. Those increases were partly offset by a $2.1 million decline in FDIC insurance expense.
Pre-provision net revenue was $23.8 million, compared with $29.1 million in the second quarter. Newell said about $2.8 million of the third-quarter expense increase is not expected to remain in the fourth-quarter run rate. Management expects pre-provision net revenue to increase from third-quarter levels in the fourth quarter.
The company has expanded its banking team, including appointments in Baltimore and commercial real estate, and named Corey Muñoz chief people officer. Curley said the investments were intended to rebuild production capacity following a prolonged period of balance-sheet contraction.
Capital ratios continued to build during the quarter. Common equity Tier 1 capital rose to 14.99%, tangible common equity increased to 12.24%, and Tier 1 leverage rose to 12.08%. Tangible book value per share increased to $38.
Management said it is not currently taking capital-return actions, but Curley said the company does not intend to accumulate excess capital indefinitely. He said Eagle Bancorp would consider deployment options, including growth and eventually capital returns, as its credit profile further improves.
About Eagle Bancorp (NASDAQ:EGBN)
Eagle Bancorp, Inc is the bank holding company for EagleBank, a commercial banking institution headquartered in Bethesda, Maryland. Founded in 1998, EagleBank serves businesses, professional practices, nonprofit organizations and individual customers primarily in the Washington, DC, metropolitan region, including communities in Maryland and Northern Virginia.
EagleBank provides commercial and retail banking services, including business and personal checking and savings accounts, commercial real estate lending, construction financing, commercial and industrial loans, residential mortgages and other credit products.
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