Eagle Bancorp (EGBN) Q3 2025 Earnings Transcript

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DATE

Oct. 23, 2025 at 10:00 a.m. ET

CALL PARTICIPANTS

President and Chief Executive Officer — Susan Riel

Chief Credit Officer — Kevin Geoghegan

Chief Financial Officer — Eric Newell

Executive Vice President, Chief Real Estate Lending Officer — Ryan Riel

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RISKS

Total criticized and classified loans increased to $958 million from $875 million in the previous quarter (Q2 2025), driven by a $204 million increase in multifamily, including mixed-use predominantly residential loans, in Q3 2025, reflecting "the impact of higher interest rates on debt service coverage," according to Kevin Geoghegan.

Noninterest income declined to $2.5 million from $6.4 million in the previous quarter (Q2 2025), driven by $3.6 million in losses from loan sales and a $2 million loss on investment sales in Q3 2025.

Special use self-storage loan in Montgomery County totaling $56 million was downgraded to special mention status in Q3 2025 due to elevated real estate tax expenses under dispute and higher operating costs.

Chief Credit Officer resignation announced for Kevin Geoghegan, effective Dec. 31, with interim appointments pending search for a permanent replacement.

TAKEAWAYS

Net loss (GAAP) -- $67.5 million, or $2.22 per share, for Q3 2025, compared to a loss of $69.8 million, or $2.30 per share, in the prior quarter.

Allowance for credit losses -- $156.2 million, or 2.14% of total loans, down 24 basis points sequentially.

Provision for credit losses -- $113.2 million for Q3 2025, primarily related to the office loan portfolio.

Nonperforming loans -- $118.6 million at period end, down $108 million from the prior quarter due to held-for-sale transfers, charge-offs, and payoffs.

Nonperforming assets -- 1.23% of total assets, a 93 basis-point improvement from the prior quarter (Q3 2025).

Asset sales -- $121 million of criticized office loans moved to held for sale, with pending transactions expected during the fourth quarter.

Criticized and classified office loans -- Declined from $302 million at March 31 to $113.1 million at Sept. 30, 2025.

C&I loan growth -- Outstanding C&I loans increased by $105 million in Q3 2025; average C&I deposits rose 8.6%, or $134.2 million, in Q2 2025.

Independent loan review -- Third-party review covered 84.9% of commercial loans ($7.4 billion) as of July 31, 2025, identifying potential baseline commercial losses of $257 million and $370 million under a Moody's downside stress scenario as of July 31, 2025.

Charge-offs and reserves -- Between the July 31 independent loan review date and Q3 2025 quarter-end, $140.8 million was charged off, with $60.3 million in qualitative office overlay for Q3 2025 and $24.7 million in individual loan reserves as of Q3 2025, totaling 88% of baseline potential losses identified as of July 31, 2025.

Pre-provision net revenue (PPNR) -- $28.8 million, or $32.3 million when adjusted for $3.6 million in loan sale losses, reflecting a sequential increase.

Net interest income and margin -- Net interest income was $68.2 million, up $383,000 sequentially in Q3 2025; net interest margin expanded by 6 basis points to 2.43%.

Liquidity -- $5.3 billion available, equating to more than 2.3x coverage of uninsured deposits as of Q3 2025.

Brokered deposit reduction -- Brokered deposits decreased by $534 million year-to-date 2025, with further reductions expected in the fourth quarter.

Tangible common equity to tangible assets -- 10.39% for Q3 2025; CET1 capital ratio reported at 13.58% for Q3 2025.

Dividend update -- Dividend reduced to $0.01 per share to maintain capital flexibility, with capital return strategies to be reassessed as performance normalizes.

Internal CRE review -- Internal review of all CRE loans above $5 million (137 loans, $2.9 billion) in Q3 2025 led to $158.2 million downgraded to special mention and $110.8 million downgraded to substandard.

Expense discipline -- Noninterest expense decreased by $1.6 million to $41.9 million, attributed to lower FDIC assessments and strict cost control.

FDIC costs outlook -- FDIC expense expected to peak over the next several quarters and then decline as credit and liquidity continue to improve.

SUMMARY

Eagle Bancorp (NASDAQ:EGBN) completed a comprehensive independent and internal review of commercial loan exposures, both of which validated current provisioning levels and reserve adequacy. Management attributed most of the increase in criticized and classified loans to multifamily exposures, citing higher interest rates impacting debt service coverage but clarifying that structural asset impairment risk is low in this segment. Pending sales of $121 million in criticized office loans and recent loan sale process enhancements were detailed, with management stating they do not expect further material credit-driven book value degradation in the near term, specifically referencing their outlook for the fourth quarter and into 2026. Updated capital ratios, ongoing franchise improvement, and a measured approach to balance sheet and cost structure management set the strategic path forward.

Management emphasized that the $257 million baseline potential commercial loan losses identified by the independent review as of July 31, 2025, were already covered by flagged and reserved credits, with ongoing charge-offs capturing approximately 88% of that exposure as of Q3 2025.

Net operating income levels in most of the portfolio remain at or above underwritten expectations, despite some pressure in affordable housing loans specific to Washington, D.C., due to elevated bad debt expense.

Loan portfolio growth and core commercial deposit momentum continue, with targeted expansion in C&I lending and average deposits, supporting improvements in funding quality and franchise stability, as evidenced by C&I loans increasing by $105 million and average C&I deposits growing 8.6% ($134.2 million) in the second quarter.

Management projects that future loan growth will mainly focus on C&I segments, with funding and investment strategies aimed at reducing wholesale reliance and optimizing net interest income through asset mix improvements.

Eric Newell stated, "I don't believe at this time that book value will continue to be degraded by credit," and confirmed that ongoing reviews and process changes further strengthen credit loss predictability.

The board is open to "anything that adds value to our shareholders," according to Susan Riel, including strategic options beyond current operational improvements.

INDUSTRY GLOSSARY

Held for Sale (HFS): Loans or assets reclassified as available for sale, often indicating management's intent to remove them from the balance sheet, usually due to credit or strategic considerations.

OREO (Other Real Estate Owned): Real estate assets acquired by the bank through foreclosure or deed in lieu of foreclosure, typically when a borrower defaults on a loan.

Special Mention: Loans identified as having potential weaknesses that deserve management’s close attention but do not yet warrant a substandard classification.

Substandard: Loans that are inadequately protected by the sound worth and paying capacity of the obligor or collateral; potential for loss exists if weaknesses are not corrected.

C&I: Commercial and industrial loans, typically unsecured or asset-backed lending extended to business borrowers.

BOLI: Bank-Owned Life Insurance, an asset held by banks where the bank is beneficiary on life insurance policies for certain employees, generating income for the institution.

CET1: Common Equity Tier 1 capital ratio, a regulatory measure of core equity capital relative to risk-weighted assets.

Full Conference Call Transcript

Susan Riel: 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.

Kevin Geoghegan: Thank you, Susan. As discussed over the prior two quarters, we continue to take a disciplined approach to resolving loan challenges. Total criticized and classified office loans have declined for two 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 one 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 one $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?

Eric Newell: 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 overlay. 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 two 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.

Susan Riel: Thanks, Eric. This was a pivotal quarter for Eagle Bancorp, Inc. 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 effective December 31. We have hired two 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: Our first question today comes from the line of Justin Crowley of Piper Sandler.

Justin Crowley: Obviously, a lot of steps taken this quarter. You had some of the losses on the sale of those two 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.

Ryan Riel: Thanks, Justin. This is Ryan Riel. I'd like to point out that in those two 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 two examples does not happen again.

Justin Crowley: 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 timeline here for getting these assets off the balance sheet and maybe what a portion means?

Ryan Riel: So it's hard to do that holistically. And each and every one 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.

Justin Crowley: 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.

Eric Newell: 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 two quarters.

Justin Crowley: 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?

Eric Newell: Based on what we know right now, yes. And where our confidence comes from the two 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.

Justin Crowley: 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.

Ryan Riel: 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.

Justin Crowley: 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?

Ryan Riel: 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.

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

Christopher Marinac: 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.

Eric Newell: 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.

Ryan Riel: 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.

Christopher Marinac: 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.

Ryan Riel: 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 two 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.

Christopher Marinac: Great. And then I guess last one 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.

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

Christopher Marinac: Really criticized and classified.

Kevin Geoghegan: 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.

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

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

Unknown Analyst: 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 two and how do we square that?

Ryan Riel: 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.

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

Ryan Riel: It certainly can. Yes.

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

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

Unknown Analyst: Based on a refinance or some other issue?

Ryan Riel: Based on the passage of time and improved performance.

Unknown Analyst: 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.

Kevin Geoghegan: 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.

Susan Riel: 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.

Unknown Analyst: Okay. Great. And then only one 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?

Eric Newell: 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.

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

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

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

Catherine Mealor: Maybe just one 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.

Ryan Riel: Katherine, thanks. That review was really putting all the current information that we had on every single loan in our lap at one 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.

Catherine Mealor: 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, we're 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.

Ryan Riel: 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.

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

Unknown Analyst: 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?

Eric Newell: 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.

Susan Riel: 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.

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

Justin Crowley: I just wanted to hop back in and ask one quick one 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.

Eric Newell: 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.

Operator: 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.

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

Operator: Thank you all for joining. You can now disconnect.

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