Eagle Bancorp Inc 2026 Q3 Earnings Call

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 to 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.