Eagle Bancorp (NASDAQ:EGBN) held its first-quarter earnings conference call on Thursday. Below is the complete transcript from the call.
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Summary
Eagle Bancorp reported a return to profitability with net income of $14.7 million, or $0.48 per diluted share, reversing the previous quarter’s loss. Net interest margin expanded and core deposits grew by $240 million year over year.
The company continues its strategic repositioning by reducing reliance on higher-cost broker deposits and resolving legacy exposures, which has led to elevated charge-offs.
Asset quality showed improvement with a decline in criticized and classified assets, although non-performing loans increased. The allowance for credit losses is $147.2 million, or 2.12% of total loans.
Eagle Bancorp maintained its guidance for 2026, expecting full-year NIM in the 2.6% to 2.8% range, non-interest income growth of 15% to 25%, and flat to down non-interest expenses.
Management highlighted the success in diversifying the balance sheet, reducing concentration risks, and maintaining strong capital positions with tangible common equity of 11.51%.
Full Transcript
OPERATOR
Good day and thank you for standing by. Welcome to the Eagle Bancorp, Inc. First quarter 2026 earnings conference call. At this time all participants are in a 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 11 on your tele. You will then hear a message advising your hand is raised to withdraw your question. Please press star 11 again. Please be advised that today’s conference is being recorded. I would now like to hand the conference to Eric Newell, Chief Financial Officer of Eagle Bancorp, Inc. Please proceed.
Eric Newell (Chief Financial Officer)
Good morning, this is Eric Newell, Chief Financial Officer of Eagle Bancorp, Inc.. Before we begin the presentation, I would like to remind everyone that some of the comments made during this call are forward looking statements. We cannot make any promises about future performance and caution you not to place undue reliance on these forward looking statements. Our Form 10-K for the fiscal year 2025 and current reports on Form 8-K, including the earnings presentation slides, identify important factors that could cause the Company’s actual results to differ materially from any forward looking statements made this morning which speak only as of today, Eagle Bancorp does not undertake to update any forward looking statements as a result of new information, future events or developments unless required by law. This morning’s commentary will also include non-Generally Accepted Accounting Principles (GAAP) financial information. The earnings release, which is posted in the Investor Relations section of our website and filed with the SEC contains reconciliations of this information to the most directly comparable Generally Accepted Accounting Principles (GAAP) information. Our periodic reports are available from the company online at our website or on the SEC’s website. With me today is our President and CEO Susan Real and our Chief Lending Officer for Commercial Real Estate, Ryan Reel. I’ll now turn it over to Susan.
Susan Real (President and CEO)
Thank you Eric. Good morning and thank you for joining us today. We are pleased to begin 2026 on track with our near term strategic priorities. Generating capital through earnings, diversifying the balance sheet across both assets and funding and executing on the repositioning work we have been discussing with you over the past several quarters. The first quarter reflected meaningful progress on several fronts. We returned to profitability, expanded net interest margin and delivered strong C and I growth, a direct result of the deliberate investments we have made across the franchise and the disciplined execution of our commercial teams. At the same time, we are realistic about where we are in this repositioning. The pace at which legacy exposures resolve and scheduled payoffs occur is faster than the pace at which we can prudently generate new earning assets. That asymmetry creates near term pressure on net interest income and a smaller earning asset base as we work toward a higher quality balance sheet. We are not shrinking the balance sheet because deposits are leaving us. In fact, core deposits have grown 240 million year over year. We are making strategic choices on both sides of the balance sheet that we believe position us for stronger, more sustainable and more durable earnings. We continue to reduce reliance on higher cost broker deposits, refinancing the quality of our funding base. In parallel, our active resolution of problem credits is producing elevated charge offs, a deliberate trade off we are willing to make because we would rather absorb the near term earnings impact and emerge with a cleaner balance sheet and carry these exposures for an extended time. The deliberate actions we took throughout 2025 are producing measurable improvement, a trajectory Eric will walk through in detail. We have a plan designed to deliver materially stronger pre provisioned net revenue as the funding mix improves as disciplined loan growth returns to CRE and the asset quality work I mentioned continues to reduce the impact from non accrual and resolution activity and we are executing against it. With that, I’ll turn the call over to Eric to walk through the quarter in more detail.
Eric Newell (Chief Financial Officer)
Thank you Susan. Before I walk through the specifics, I want to step back and acknowledge the tangible progress we’ve made on asset quality this quarter. This quarter we reported net income of 14.7 million or $0.48 per diluted share, a meaningful swing from the 2.4 million loss we reported last quarter and that improvement reflects the hard work underway across the portfolio. Rest assured though, reducing criticizing classified loans, resolving non performing exposures and strengthening the overall health of the portfolio remain the top operational priorities for this management team. Based upon investor feedback and consistent with our commitment to transparency, we’ve continued to expand our disclosures to give investors a better picture of portfolio dynamics, both the progress and the challenges. That transparency is something we take seriously and it shapes how we’ll walk through this quarter’s activity today. With that as context, let me walk you through what we saw in the first quarter. I’ll start with our concentration metrics. The first quarter saw continued reductions in our CRE and ADC concentrations as expected payoffs, resolutions and the completion of construction projects drove meaningful progress to reduce overall concentration risk to the bank. Our CRE concentration ratio, which measures CRE loans to total risk based capital and reserves, declined to 295% at March 31. Moving below the 300% threshold, our ADC concentration ratio came in at 76%. Turning to criticized and classified assets when Combining substandard special mention and all held for sale loans, balances declined by 79.9 million in the quarter to 794.1 million at March 31, compared to 874 million at year end. As a percentage of Tier 1 capital, that represents 67.3% at quarter end, down from 74.6% at year end and down meaningfully from the peak of 90% we saw at September 30th of last year. The directional trend is clear and we’re committed to continuing it. slide 16 of the Investor Deck provides additional details on the composition of that portfolio. On slide 17 we’ve added a portfolio walk to help illustrate the various inflows and outflows in the criticized and classified book during the quarter. I want to be direct about the inflow activity. 159.9 million of downgrades occurred in the first quarter, which is elevated relative to the 89.3 million we saw in the fourth quarter of 2025. However, it has materially improved from the 445 million inflow we experienced in the third quarter of 2025. Let me briefly touch upon the primary drivers of the inflow. Three relationships accounted for the majority of the downgrade activity. The first is a multifamily project in Maryland experiencing pressured net operating income due to tenant credit issues and re leasing costs. The property has been reappraised and is not considered collateral dependent. The second is a hotel relationship downgraded upon receipt of 2025 financials reflecting lower occupancy. We’re updating the appraisal and working with a borrower on a remediation path. The third is a single secured CNI relationship moved to special mention. We currently do not expect any loss. Taken together, these are discrete situations and we believe they are not indicative of broader portfolio weakness. What they do reflect is our portfolio management process working as intended. Loans migrating into criticized and classified are predominantly coming from our lowest pass risk rating category relationships we have actively been monitoring through our criticized asset committee, with upgrade and downgrade triggers and remediation strategies updated each quarter. Turning to the held for sale portfolio, we continue to make meaningful progress in the quarter the portfolio ended at 55.7 million, down from 90.7 million at year end. Slide 18 of the Investor Deck walks through the inflows and outflows during the quarter. We transferred three relationships from Help for Investment during the quarter to facilitate the sale of a fourth held for sale relationship, a deliberate action consistent with our strategy of resolving exposures in a manner that minimizes loss. Importantly, of the 55.7 million remaining and held for sale at quarter end, 55.2 million is already under contract to be sold. While we made progress on total criticizing classified loans during the quarter, non performing loans increased to 1 28.8 million at March 31, up 21.9 million from the prior quarter representing 1.86% of total loans. Slide 25 of our investor deck walks through the linked quarter inflows and outflows. Loans on non accrual undergo specific reserve analysis and those determined to be collateral dependent carry specific reserves in the acl. The provision for loan losses in the quarter reflects the incremental reserves required for those exposures. Provision for credit losses totaled 13.4 million in the first quarter, a decline of 2.1 million from the prior quarter. Our allowance for credit losses ended the quarter at 147.2 million or 2.12% of total loans. Within that total we carry 60 million of reserves specifically against our income producing office portfolio. Net charge offs totaled 26 million in the quarter, an increase of 13.7 million. This was primarily driven by 11.6 million associated with loans moved to held for sale as part of our targeted resolution efforts. These actions reflect disciplined relationship by relationship strategies to resolve legacy exposures where outcomes are assessed individually to optimize value. In many cases, we believe proactively resolving these credits positions us for stronger long term results compared to extended workout scenarios. Early stage delinquency is often the leading indicator of future credit migration and the 31.9 million decline and 30 to 89 day past due balances is a constructive signal about the forward pipeline. We’re encouraged by the trajectory. At the same time, the increase in non performing loans is a reminder that this work is not finished and we’re not treating it as such. Resolving these exposures, maintaining our reserve discipline and continuing to improve the overall health of the portfolio remain our highest priorities. Turning to Earnings the improvement in profitability this quArter is in mAny wAys A direct function of the asset quality work I just walked through. The discipline around resolving exposures, managing expenses tied to loan dispositions and repositioning our funding mix is showing up on the earnings line. With that as context, let me walk through the drivers. Net interest income declined 4.6 million to 63.7 million, primarily reflecting accelerated CRE loan payoffs and lower average cash balances, partially offset by reduced interest expense from the continued reduction of higher cost brokered deposits. Two fewer days in the quarter also contributed. NIM expanded 9 basis points to 2.47% driven by an improved funding mix as wholesale funding usage declined. We estimate approximately 3 basis points of NIM pressure from loans moving to non accrual and the associated interest reversals. Pre provision net revenue was 27.7 million, an improvement of 7 million from the prior quarter. The improvement was driven by lower non interest expense which declined 21.1 million to 48.7 million, reflecting the absence of two notable items from the fourth quarter 14.7 million of expenses related to loan dispositions and a 10 million legal provision tied to the probable and estimable resolution of a previously disclosed government investigation. Non interest income increased modestly to 12.7 million supported by 3.6 million of gains on loan sales compared to a 1.1 million loss in the prior quarter. Our capital position remains strong and industry leading. Tangible common equity of tangible assets was 11.51%, tier 1 leverage was 10.63% and CET1 was 13.8%. Tangible book value per share increased $0.30 to $37.56 as earnings contributed to capital on funding period. End deposits declined $542 million from December 31, of which 413 million reflected the intentional reduction of broker deposits year over year. We reduced brokered deposits by 921 million while growing core deposits by 240 million, reflecting coordinated execution across all our deposit teams. Available Liquidity stands at 4.3 billion and we maintain close to 2 times coverage of uninsured deposits. Turning briefly to the outlook, our 2026 forecast is substantially unchanged from what we shared Last quarter and Slide 11 of our investor deck provides the detail. We continue to expect full year NIM in the 2.6 to 2.8% range, non interest income growth of 15 to 25% and non interest expense flat to down 4% when adjusting for the notable items I mentioned. Average deposits, loans and earning assets are still expected to decline year over year, reflecting intentional balance sheet repositioning rather than operating pressure altogether. These trends support our confidence in expanding pre provision net revenue in 2026 despite a smaller average balance sheet. I’ll turn it over to Susan for
Susan Real (President and CEO)
final comments ahead of Q and A. Thank you Eric. Before we move to questions, I want to leave you with a few final thoughts. The first quarter demonstrated that our strategy is working, asset quality is improving, our funding mix is strengthening, and the earnings profile is beginning to reflect the repositioning work of the past year and true value of our franchise. We still have more to do and we are not losing sight of that but the direction is clear and the discipline across this organization is real. What gives me the greatest confidence in the path ahead is the strength and depth of the team executing against. Our priorities are well established. Continuing to reduce criticized and classified balances, transforming our funding mix toward core deposit relationships, pursuing disciplined loan growth and expanding pre provision net revenue over the course of 2026. These priorities and the capabilities we’ve built across credit finance lines of business and our risk and control functions are the foundation for the next chapter of Eagle’s story. This franchise has exceptional talent, a distinctive market position and the institutional strength to continue delivering against these objectives through the leadership transition ahead and well beyond it. Before we conclude, I want to thank our employees and for their continued dedication and professionalism. Their commitment has been instrumental in navigating a challenging period and positioning the company for the future. Thank you again for your time and for your continued interest in Eagle Bancorp. With that, we’ll open things up for questions.
OPERATOR
Thank you so much. And as a reminder to ask a question, press star 11 on your telephone and wait for your name to be announced. To remove yourself, press Star one one again. One moment. While we compile the Q and A roster, Our first question comes from the line of Justin Crowley with Piper Sandler. Please proceed.
Justin Crowley (Equity Analyst)
Hey, good morning everyone. Just wanted to start off on the level of criticized here. You know, obviously good to see that continue to fall with some help from the loan sales. But just curious if you can speak a little more to the new inflows and to criticize. Eric and I hit on that a little bit. But you know, is that a, you know, a pace that you’d expect slows from here or how are you thinking about the trajectory as you move through the year?
Ryan Reel (Chief Lending Officer for Commercial Real Estate)
Hey Justin, this is Ryan. I think the, you know, forecasting, forecasting what that is is tough to do. Our portfolio management practices touch on these loans each and every quarter. We shouldn’t see many surprises in that process because we touch it so frequently, but it is expected to continue some migration in there.
Eric Newell (Chief Financial Officer)
Ultimately though, just to build off of that, Justin, our goal and and commitment in my prepared commentary is that criticized classified will continue to come down on an absolute level as well as relative to loans and tier one capital. So we’re going to make some, we’re expected based on what we see today and what we believe and we’re going to make some meaningful progress by year end. Right.
Ryan Reel (Chief Lending Officer for Commercial Real Estate)
And Justin, to build on that, it’s important for us to note that the regulatory definition of criticized and classified loans does not Require loss content. Right. The potential weakness or well defined weakness that would define those roles don’t necessarily have loss content in them. And that’s part of the story we’ve been telling for several quarters. As you’ve seen the composition of that list fall away from office.
Justin Crowley (Equity Analyst)
Okay, got it. And then so I guess you know, in terms of further loan sales, you know, with what’s remaining in held for sale and you know, I guess anything that could get added from here. Are we at a point where future disposals are largely coming outside of the office portfolio? You know, how would you set expectations there in terms of, you know, what you’re looking to ring fed?
Ryan Reel (Chief Lending Officer for Commercial Real Estate)
I think we’re looking at each and every case on a one off basis. We’re evaluating it. Management comes to a decision as to what the best path forward is and we use the tools at our discretion that are there. The anticipation is that tactic will continue to be used as we determine it is the best path to reach the best possible outcome and maximize shareholder value.
Justin Crowley (Equity Analyst)
Okay, that’s fair. And then I guess just one last one on the office reserve which you took down in the quarter, can you talk through just a little more on some of the factors that get you comfortable in that decision? You know, I guess in part considering, you know, the increase in non accruals, you know, with a lot of that
Eric Newell (Chief Financial Officer)
being office driven, the biggest driver of the decline in ACL quarter over quarter related to office actually comes due to the 37ish million reduction of substandard loans. That is a big driver of that pool and that’s the main driver of that decline. We assess the overall methodology that we apply qualitatively as well as quantitatively to the entire process, but particularly with office. And we believe that the $60 million that’s associated with the total office portfolio and the ACL is appropriate at March 31st.
Justin Crowley (Equity Analyst)
Okay, great. I will leave it there. Thanks for taking the question.
Ryan Reel (Chief Lending Officer for Commercial Real Estate)
Thanks Justin.
OPERATOR
Thank you. Our next question comes from David Chiaverini with Jefferies. Please proceed.
David Chiaverini (Equity Analyst)
Hi, thanks for taking the questions. Wanted to follow up on this credit quality discussion. Good to see that criticized. Classified down and it sounds like you’re expecting a continued decline through this year. Does this commentary also apply to the non accrual loans that we saw increase in the quarter?
Eric Newell (Chief Financial Officer)
I would say yes. Generally, you know, what you’re seeing in non accrual loans is really the result of us working through some of the loans that have been identified as special mention and substandard. So to me, the way I look at it the barometer of you know, what could come is really looking at the total portfolio of criticized and classified as that portfolio continues to decline, which we expect will occur throughout the year, the incidence or the likelihood of some of those loans flowing into nonaccrual or charge off will also fall. So I think you’re going to see some improvement in non performing as well as that entire portfolio gets worked through.
David Chiaverini (Equity Analyst)
Great, thanks for that. And on the held for sale portfolio and the sales that you have under contract, are you selling them? It looks like there was on slide 18 a valuation adjustment of about $3 million. Are you selling loans in line with what you originally thought? And I guess to ask another way, curious, what percent of par on average are you selling loans?
Eric Newell (Chief Financial Officer)
I’ll answer the first part of that question first and maybe Ryan, you can touch on the second part. But I think when you look at the totality of what we put into held for sale through this cycle, which is really over the last three to four quarters, we pretty much hit the mark. Yes, we had some losses that we recognized in the fourth quarter, but we had gains that we recognized in the first quarter. So when you net all that together, I think that we feel comfortable with the process that we’ve been undergoing to transfer those loans into held for sale. I would remind everyone that when it comes to office, we’re generally using broker opinions of value just because that’s more forward looking and reflective of the conversations that we’ve been having with market participants with those notes. If you want to touch on the
Ryan Reel (Chief Lending Officer for Commercial Real Estate)
second one, on the question of relative to par, where’s the landing spot at? It’s a hard one to answer and it’s been significant, frankly, drop from par on the office side. If you go back and look through the last several quarters, you’ll see those numbers and that’s second third quarter 25 was where the majority of those challenges sort of showed through the financial statement. So we haven’t compiled the data of where we are relative to, to the original unpaid principal balance or the starting unpaid principal balance, but it’s a substantial decrease because the office market has had a substantial valuation decrease. Yep, go ahead. I was going to say just building off of that a little bit. When you look at the office portfolio and the cycle to date, the loss content that we’ve experienced. So that would be the function of loss given default and, and probability of default. I mean for the office portfolio we’ve been probably between 45 and 50%.
David Chiaverini (Equity Analyst)
Right, got it. But and then, you know, as a percentage of carrying value and the reserves, netting the reserves against that part, you know, significantly higher is my assumption. Would you say that’s fair?
Ryan Reel (Chief Lending Officer for Commercial Real Estate)
Well, and that’s what Eric’s comments address. And that the reduction to the carrying value netted us for that portfolio. Right about at new par, if you will.
David Chiaverini (Equity Analyst)
Very helpful. Thank you.
OPERATOR
Thank you. Our next question comes from the line of Catherine Miller with kbw. Please proceed. Thanks.
Catherine Miller (Equity Analyst)
I have a question about just the size of the balance sheet. It looks like in your outlook slide deposits, loans, average earning assets are coming in below your original range. And part of that, just as you kind of clean up and push loans off the portfolio, push high cost deposits off the portfolio. So we haven’t changed the guidance. So do you feel like there’s, I assume that the range or your full year range will fall as we move through the year or is there any reason to think that you’ll catch back up where you originally thought the balance sheet would be?
Eric Newell (Chief Financial Officer)
Well, there’s a couple things going on. Averages obviously are informing nii, but when you think about it from a period end perspective, our expectation is that CRE will continue to see some decline in the second quarter. But our expectation is that when you Compare year end 25 to year end 26 for the crew portfolio will be flat. So that will have. That’s informing the forecast in terms of average balances for loans. Just because you’re seeing a pretty material reduction in the first half for cre. But we do expect that to come back up in the back half of 2026 in terms of CNI. You know, that level of growth, I think it was approximately 5% linked quarter growth on the loan side. So on an annualized basis that’s 20%. I would expect that to actually be a little bit lower when you compare the growth, when you compare year end to year end for cni. And that is one of the reasons why when you look at the forecast, we’re actually on the higher end of our loan growth target because of the contribution that CNI contributed relative to our initial expectation expectations in the first quarter. I’ll touch on another thing on the forecast. One of the reasons why we didn’t touch the NIM range was because the forward curve at March 31 has largely priced out the two rate hikes or reductions, pardon me, that were expected at year end. And so that given our balance sheet and interest rate risk stance at the moment is actually beneficial to us. And then also important to note that we do believe that there will be growth in average cash in the second and third quarter we have a third party payment processor that doesn’t really impact our quarter ends, but does impact our averages because the balances are here for seven to 10 days and the first quarter is a lower level of seasonal activity for that third party payment processor.
Catherine Miller (Equity Analyst)
Okay, that’s really all when you put all that together, that’s one of the reasons why we maintained the forecast from the first quarter or last fourth quarter. Yeah, that makes sense. Okay, awesome. Thank you. And then maybe back to the credit piece. Can we talk about the three new inflows into classified that we saw this quarter that you talked about in your prepared remarks? And can you talk about maybe why those credits weren’t originally identified when you did your full portfolio evaluation a couple quarters ago? And so if you’ve seen deterioration in those three since then, so then the question is, do we see more for the rest of the year? And so what are you looking for in your portfolio to kind of ensure that we’ve got everything that could be at risk within classifieds curbside, like do you have any big appraisals that are coming up or maturities and some credits that you may be worried about that is good for us to know about. Thanks.
Ryan Reel (Chief Lending Officer for Commercial Real Estate)
So Catherine, starting with the maturity aspect of that, you look at our criticized classified list, there’s a number of loans on there that mature this year, some within a very close proximity to where we are today. We’ve been engaged with those customers for a long time, many months in figuring out what the next step for that particular asset is. The risk rating is obviously taking into account historical performance, but also forward looking what the expectations are as part of the considerations in landing where we do, pardon me, on the inflow into the criticized and classified, the new entrants are really based on new information, not historic information. Right. So the multifamily asset that Eric spoke to, new appraisal came in and informed that the performance of the property continues to suffer from tenant credit issues. As Eric said, that frankly on a month over month basis continues to get better and we’re continuously engaged with that particular customer. On the hospitality asset. That’s a recent trend where coupled with the world, the secondary and tertiary repayment sources on that particular situation, coupled with the decline in occupancy for hospitality overall in our market created a greater challenge. Well defined weakness by the regulatory definition. I’ll again make the comment that the loss content does not need to be present in those critical and classified criticized and classified assets. So the point I’m trying to make I guess is more idiosyncratic to each individual relationship drove the risk rating downgrades on those particular transactions, not something more systemic.
Catherine Miller (Equity Analyst)
Great, thank you.
OPERATOR
Thank you. Our next question comes from the line of Steve Moth with Raymond James. Please proceed.
Steve Moth (Equity Analyst)
Good morning. Maybe just following up on your comments there Ryan. With regard to the couple of new inflows. You have the hotel motel in Arlington and the Prince George’s county apartment building as well. Those matured here in the last couple weeks. Just kind of curious, you know, did you give them extensions or kind of how to, you know, what’s kind of the expectation there in terms of where you’re going with those credits?
Ryan Reel (Chief Lending Officer for Commercial Real Estate)
Yeah, we had hoped obviously before the maturity date to have a longer term plan in place. We didn’t arrive at that. So we did put short term extensions in place in both of those situations which have already been booked. It’s obviously the Data says of 331. So the current maturity is actually out into the future a bit and we continue to work with each of those clients for a longer term solution.
Steve Moth (Equity Analyst)
Okay, got you. In terms of kind of like thinking about the overall Washington D.C. market I know there’s different sub markets have issues and stuff but just kind of curious maybe just stepping back, what’s your overall sense of activity especially for the multifamily space in terms of renting out properties and where things are going.
Ryan Reel (Chief Lending Officer for Commercial Real Estate)
The multifamily market as a whole in Washington D in the region across Maryland, D.C. and Virginia from a rent growth and occupancy or vacancy perspective is lessening is it’s not leading to a challenge relative to the national averages. We’re more equating with those national averages where historically we had exceeded them as a region. That’s not necessarily true in each individual region but as a whole it’s sort of less than having said that on the performance side there’s the absorption has load new supply has also slowed even more dramatically than that. So that is viewed as a rebalancing mechanism for the supply and demand in the multifamily market across the region. Additionally, valuations have maintained and the valuations across the region have maintained at higher than national averages cap rates in high fives where national averages are in the low sixes. So overall there’s sort of cautious optimism in the multifamily market is how I’d phrase it not without its challenges and not without our need and the owners need to work through those challenges. But overall there’s still a good and stable multifamily market in our nation’s capital.
Steve Moth (Equity Analyst)
Okay. And then maybe similar question on the office side here. You know, my sense has been there’s just been better lease up activity with, with regards to office in, in some of the markets. And just kind of curious, you know, what’s. What are you seeing for office activity here? You know, are the green shoots still there? Have they moderated from maybe a few months ago? Thoughts on that?
Ryan Reel (Chief Lending Officer for Commercial Real Estate)
Yeah. So in the office market, the trophy in our region continues to perform really well. There’s record setting rents. It feels like on a regular basis announcements are made. Trophy and eight are really working. On the BNC side, it’s still a struggle. There’s not. The tenant demand is not. There’s a lot of supply that’s being pulled off the market through conversions and other tactics by the individual owners. So it continues to be a challenge in the central business districts. The more suburban stuff, the more community amenity stuff, doctors stuff that the neighborhood uses, There is more demand for that space and the more suburban, even B and C office properties have greater occupancy and therefore cash flow. So there’s more health in that space also in those more suburban spaces. At least thinking about our portfolio in that space, there’s oftentimes secondary and tertiary sources of repayment tied to those loans. So it’s not just looking at the office valuation as a payment source.
Steve Moth (Equity Analyst)
Great. Okay. And then the other thing I want to ask about, just thinking about the going back to the funnel of criticizing classified, you guys kind of touched on that. It seems like a fair amount was related to updated data, you know, in terms of just annual financials. Just kind of curious, you know, how do we think about that funnel here? Like, was there just a greater update this quarter than other quarters in terms of financials, or do you expect more kind of a similar pace for updated financials, maybe a similar funnel in the second quarter?
Ryan Reel (Chief Lending Officer for Commercial Real Estate)
I think it’s sort of the point in time. The loans, the loans that we’re talking about are not high in quantity. Right. It’s the lumpiness of our portfolio that drives the dollars in there. And that’s less than if you track our top 25 loan list. As the decline in CRE balances continue, there’s a number of loans that have reached full payoff that we’ve seen. And that’s the most significant, frankly, portion of our decline in CRE balances is that are those either refinances or sale of the assets underlying it. So the answer to your question is that we don’t anticipate anticipate this level of inflow every quarter. But we don’t know what we don’t know. Right. We will continue to monitor our portfolio and continue to work to enhance our portfolio management practices.
Eric Newell (Chief Financial Officer)
I think it’s important just building off of that, it’s important to reemphasize though the commitment that the team has to reducing the overall criticizing classified on an absolute basis by year end. And we’re going to continue to show progress here in future quarters as well.
Steve Moth (Equity Analyst)
All right, great. I appreciate all the call here. Thank you very much guys.
Ryan Reel (Chief Lending Officer for Commercial Real Estate)
Thanks, Steve.
OPERATOR
Thank you. Our last question comes from the line of Christopher Marinek with Breem Capital llc. Please proceed.
Christopher Marinek
Good morning. I want to I wanted to ask about the sort of granularity point that Ryan was just making. Is that going to work in your favor in terms of inflows possibly being less because of the smaller sized loans as you continue to work through the book?
Ryan Reel (Chief Lending Officer for Commercial Real Estate)
Short answer is yes.
Christopher Marinek
And can that drive the reserve behavior from here? And I guess my question is I know there’s a scenario where reserves could go back up, but I know you’ve built this reserve over many quarters. So the decline was no surprise yesterday. Just curious on if the reserve should continue to come in and that we’ll see you obviously a provision expense lessen charge offs for a while. Yeah. I would say that if you look at the first quarter provision expense as well as charge off, that’s a decent run rate for our expectation for the remainder of the year for each quarter. So when you put all that together, it does show a reduction in the reserve coverage to loans by the end of the year. Are we going to get to a peer level on that metric by year end? No. But I do expect that the coverage of ACL to loans will be lower at year end 26 than where we started the year. Great. Thank you for that. And then just to go back to the CI evolution, will we see the C and I deposits kind of grow year over year as we get further? I know there was some seasonality in Q1 as the slides implied. Just curious kind of how to think through that a few quarters out.
Ryan Reel (Chief Lending Officer for Commercial Real Estate)
Yes, Chris, if you look at that from a longer perspective and you go back a year from now to March of last year, CNI deposits have grown. They’ve grown by a couple hundred million dollars. So I don’t think that the first quarter is indicative of any sort of trend in the cni. The CNI pipeline continues to be robust. We continue to mandate primary relationships with the transactions that we Bring in. And that’s what what you will see differently on the production side and the deposit side is the CRE pipeline which is now building will begin to be executed. To Eric’s earlier point, we’ll stabilize balances through the first half and look to grow from where 630 numbers are towards the end of the year, both sides of the balance sheet.
Eric Newell (Chief Financial Officer)
Chris, I would add on slide 29 of our deck we have added some disclosure about the CNI portfolio, both loans and deposits. And there you can see that we had 28% growth of deposits in the CNI line of business year over year. A lot of that when you actually look at it from a dollars perspective, CNI more than funded itself dollar for dollar in 25. I asked Evelyn if she could do it again in 2020 and we’ll see how she can deliver on that. But joking aside, I think our expectation is that you can’t fund that line of business dollar for dollar year in and year out. So I think that is informing some of the percentage growth that you see here. But I think that it’s certainly been evidence of execution of the strategic plan on how we have described it to you all and investors for the last several years on the remixing of the loan side to have more of a balance between CNI and cre because what that lends itself to is operating account growth, relationship growth, reduction of brokered deposits, better cost of funds, higher nim, higher pre provision, net revenue, better roa.
Christopher Marinek
Great, thank you Eric, appreciate that. And just last question for me. I was on the FDIC expense. Is that going to be lumpy in terms of how it comes off in future quarters? Was this quarter any indication of kind of where it could go in the near term?
Eric Newell (Chief Financial Officer)
There’s really two drivers to our FDIC insurance expense. You have our overall asset quality metrics and then you have the structural improvement. So you do. We’re getting a lot of benefit and we have been getting a lot of benefit over the last year on the improvement of structural liquidity. Look back over the last two years our net non core funding dependency ratio in 2023 was, you know, was 30ish percent and now we’re well below, I think we’re like 12 to 15%. And so that has, that has meaningfully contributed to a reduction in the FDIC insurance expense. And you know as we continue to reduce the criticized and classified and also the FDIC insurance calculation looks at modifications, they call it underperforming assets in the call report but modifications. So as that activity lessens on our balance sheet going forward that will have a very positive contribution to FDIC premium expense. I estimate if you look at where we’re at on an annual basis, run rate, when we’re normalized on aq, we’re probably going to be about half of where we’re at right now. Right. In terms of timing, I would, you know, you’re always going to have a lag because that premium is based off of filings that are a quarter behind. But I would expect you’re going to see some improvement here in the back half of 26 and definitely into 2027.
Christopher Marinek
Okay. And half is still using this March pace that we just saw.
Eric Newell (Chief Financial Officer)
I would. You know what, Chris? I would take Our full year 25 Number and use that as the basis.
Christopher Marinek
Great. Thanks for clarifying. Great. Thanks for clarifying that. And thank you all for all the information this morning.
OPERATOR
Thanks, Chris.
Susan Real (President and CEO)
Thank you. Ladies and gentlemen, this will conclude the Q and A session. I will pass it back to the president and CEO Susan Real, for closing remarks.
OPERATOR
I want to thank all of you for your participation and your questions today, and we look forward to talking to you again next quarter. Have a great day.
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