Office valuation concerns lead to shrinking profits at Eagle

While Eagle Bancorp in Bethesda, Maryland, continues to press forward with its pivot to commercial lending and away from commercial real estate, stress in the bank’s legacy office loan portfolio is overshadowing its progress. 

The $11.3 billion-asset bank’s first quarter results, released Thursday, included a $26.3 million provision for loan losses, more than double the level from the three months ending Dec. 31.

“Valuation risk in our office portfolio remains a concern,” Chairman and CEO Susan Riel said on a conference call with analysts. “As sentiment shifts and market risk presents itself in an uncertain and volatile environment — particularly around office valuations — we wanted to make sure we are adequately reserved.”

The lion’s share of Eagle’s office portfolio, 42 loans totaling about $700 million, is located in Washington, D.C., or its close-in suburbs, where the market has been roiled further by the federal government’s downsizing activity. Chief Financial Officer Kevin Gagan said Eagle’s relationship managers are in close contact with all government clients. Government exposure in the office sector is limited to approximately 5% of the portfolio’s lease space, Chief Real Estate Officer Ryan Riel added. 

Eagle, the holding company for EagleBank, was founded in 1997 and focused throughout most of its history on commercial real estate lending. Though Eagle has moved to originate more commercial and industrial loans over the past year, it still has elevated levels of office loans on its books. 

In Washington as well as around the country, a witches-brew combination of persistently high interest rates and declining occupancy have put downward pressure on office valuations. That leaves loans vulnerable when the time comes to reappraise the value of the underlying collateral.

Indeed, when Eagle  reported its fourth-quarter results in January, the company noted that it had been forced to downgrade a $75 million office loan to nonperforming status after one reappraisal “indicated a dramatic decline in the property’s valuation,” according to Riel.

Similarly, the $39.2 billion-asset Bank OZK in Little Rock, Arkansas, has reported increased loan-to-value ratios for several office loans following recent reappraisals.

Eagle, whose office portfolio totaled $1 billion on March 31, is considering attacking the issue through loan sales. About 30% of its office loan book was marked as classified, meaning the loans have demonstrated a weakness that impacts their prospects for repayment.

“As market conditions develop, our cost-benefit analysis will similarly evolve, and we may take a more proactive approach to disposition,” Riel said. “This may result in higher near-term credit costs, but it’s aligned with our objective of reducing nonaccrual, criticized and classified loans.”

Eagle’s robust allowance for credit losses, along with capital ratios that sit comfortably above the well-capitalized threshold, provide ample means to put such a strategy in motion, according to Riel.

“Over the past five quarters, we have built reserves and focused on capital preservation — steps that have strengthened our capacity to absorb losses,” Riel said.

One other bank that reported its first-quarter earnings on Thursday showed similar stress in its office portfolio. Webster Financial, an $80.3 billion-asset bank headquartered in Stamford, Connecticut, said that the percentage of its $809 million office portfolio designated as classified jumped to 20% on March 31, up from 15% at the end of 2024.

Webster also reported a $100 million bump in nonperforming loans, “largely related to a small group of credits in the health care and office portfolios,” Chief Financial Officer Neil Holland said on a conference call with analysts.

At Eagle, the big provision acted as a drag on earnings, which fell to $1.7 million, compared with $15.3 million for the quarter ended Dec. 31.

Looking beyond Eagle’s office loan difficulties, the bank made solid progress in growing its commercial-and-industrial loans and in gathering more deposits, two linchpins of its strategy, Riel said. C&I loans increased $109 million from the year-end 2024 level. Deposits increased $146.2 million in the same span.

“We began to see tangible results from our strategic focus,” Riel said.

As part of that effort, Eagle has expanded its commercial lending team, announcing several senior-level additions in recent months. “We’re seeing the impact of those hires in growth and improved market penetration,” Riel said.