EAGLE BANCORP INC

Asset/Liability Management and Quantitative and Qualitative Disclosures about Market Risk

A fundamental risk in banking is exposure to market risk, specifically interest rate risk, since a bank’s earnings are largely dependent on net interest income. The Bank’s ALCO formulates and monitors the management of interest rate risk through policies and guidelines established by it and overseen by the Audit Committee and the full Board of Directors and through review of detailed reports discussed quarterly. In its consideration of risk limits, the ALCO considers the impact on earnings and capital, the level and direction of interest rates, liquidity, local economic conditions, outside threats and other factors. Banking is generally a business of managing the maturity and repricing mismatch inherent in its asset and liability cash flows to provide stable net interest income growth consistent with the Company’s profit objectives.

The Company, through its ALCO and ongoing financial management practices, monitors the interest rate environment in which it operates and adjusts the rates and maturities of its assets and liabilities to remain competitive and to achieve its overall financial objectives subject to established risk limits.

The loan portfolio decreased 7.9% during the first nine months of 2025. The re-pricing duration on the loan portfolio was 10 months as of September 30, 2025 and 11 months as of December 31, 2024, with fixed-rate loans amounting to 34.0% and 38.1% of total loans as of September 30, 2025 and December 31, 2024, respectively. Variable and adjustable rate loans comprised 66.0% and 61.9% of total loans as of September 30, 2025 and December 31, 2024, respectively. Variable rate loans are generally indexed to the Secured Overnight Funding Rate ("SOFR") or the Wall Street Journal prime interest rate, while adjustable rate loans are indexed primarily to the five year U.S. Treasury interest rate.

Currently, the cash flows from the investment portfolio have not been reinvested in the investment portfolio. As of September 30, 2025, the amortized cost basis, net of allowance, of the investment portfolio decreased by $313.5 million, or 13.4%, as compared to the balance as of December 31, 2024. The table below presents the percentage mix of securities in the investment portfolio.

As of September 30, 2025, $69.2 million of corporate bonds were subordinated debt from other financial institutions. Corporate bonds generally, and subordinated debt in particular, pose credit risk such that if any of these issuers were to enter bankruptcy or insolvency proceedings, we could experience losses that may be material to operating results and our financial condition. We may also experience increases in provisions for credit losses, adversely affecting our earnings, if the creditworthiness of the issuers declines, whether due to idiosyncratic factors, economic conditions generally or other unforeseen factors or events.

The Company has credit Risk Participation Agreements ("RPAs") with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower’s performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. These derivatives are not designated as hedges, are not speculative and had an asset position with a notional value of $21.6 million as of September 30, 2025. The changes in fair value for these contracts are recognized directly in earnings.

The duration of the deposit portfolio increased to 25 months as of September 30, 2025 from 11 months as of December 31, 2024. This increase was attributable to a shift in deposit mix, an increase in time deposits and modeling assumption updates. The Company experienced a total deposit increase of $332.5 million for the nine months ended September 30, 2025 as compared to a total loan decrease of $630.2 million for the same period. Refer to the "Deposits and Other Borrowings" section above for further discussion of deposits and borrowings.

The net unrealized loss before income tax on the AFS securities portfolio was $88.5 million and $141.5 million as of September 30, 2025 and December 31, 2024, respectively. As of September 30, 2025, the net unrealized loss position represented 7.60% of the investment portfolio's book value.

Management relies on the use of models in order to measure the expected future impact on interest income of various interest rate environments, as described below. Through its modeling, the Company makes certain estimates that may vary from actual results. There can be no assurance that the Company will be able to successfully achieve its optimal asset liability mix, given competitive pressures, customer preferences and the inability to forecast future interest rates and movements with complete accuracy.

Our rate risk modeling showed net interest margin expansion in an increased interest rate environment while showing net interest margin compression in a declining interest rate environment. The model's prediction in a rising rate environment is the result of increases in both interest income on variable and adjustable rate loans and interest expense on its deposit liabilities, based on our funding needs, market conditions and certain contractual obligations but with no changes in the mix of assets or liabilities or the spreads we are able to earn. The opposite is true in a falling interest rate environment as decreases in both interest income on variable and adjustable rate loans and interest expense on deposit liabilities drive modest margin compression. The model also assumes a stable interest rate environment after the programmed changes in the yields, which assumes repricing of assets and liabilities as scheduled in a stable environment, which may be quite different than real world conditions.

A portion of the of the Company's variable and adjustable rate loans may contain interest rate floors and may provide asset yield protection in a low-interest rate environment; however, they are also expected to delay the impact of increases to market rates on interest income until such floors have been exceeded. In the first nine months ended September 30, 2025, interest rate floors have not been relevant in the current interest rate environment since most variable rate loans are well above their floor rate. The weighted average rate of the Company's variable rate loans had a decrease of approximately 18 basis points from December 31, 2024 to September 30, 2025.

As of September 30, 2025, the Company had a portfolio of $2.6 billion of variable and adjustable rate loans that were subject to interest rate floors with a weighted average rate of 7.03%, which was a 21 basis points decrease from December 31, 2024. As of September 30, 2025, $134.5 million or 1.84% of loans held by the Company were earning interest at their floor rate, as compared to $123.6 million or 1.56% as of December 31, 2024.

The Company employs an earnings simulation model (immediate parallel shifts along the yield curve) on a quarterly basis to monitor its interest rate sensitivity and risk and to model its balance sheet cash flows and the related statement of operations effects in different interest rate scenarios. The model utilizes current balance sheet data and attributes and is adjusted for assumptions as to investment maturities including prepayments, loan prepayments, interest rates, and deposit decay rates. Further discussion of the limitations of this analysis are listed below and in the risk factors and other cautionary language included in the Company's 2024 Form 10-K, and in other periodic and current reports filed by the Company with the SEC, including the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2025. The data is then subjected to a "shock test" which assumes a simultaneous change in interest rates up and down 100, 200, 300 and 400 basis points, along the entire yield curve, but not below zero. The results are analyzed as to the impact on net interest income over the next twelve and twenty-four month periods and the economic value of equity.

For the analysis presented below, as of September 30, 2025, the change in interest rates on interest-bearing deposits could be less than the change in market interest rates with a floor of 0 basis points. The Bank also has deposits with contractual rate terms that mean these deposits will change 100 basis points for every 100 basis points change in market rates. Thus, the overall measure of the correlation between all deposit costs and market rate changes is less than 100%. The Company previously utilized the assumption for its analysis as of December 31, 2024 that all deposit rates changed 100 basis point for a 100 basis point change in market rates.

Because competitive market behavior does not necessarily track the trend of interest rates but at times moves ahead of financial market influences, the change in the cost of liabilities may be different than anticipated by the interest rate risk model. If this were to occur, the effects of a rising or declining interest rate environment may not be in accordance with management’s expectations.

As quantified in the table below, the Company’s analysis as of September 30, 2025 shows the effect on net interest income over the next 12 months, as well as the effect on the economic value of equity when interest rates are shocked down and up 100, 200, 300 and 400 basis points. As of September 30, 2025, the repricing duration of (a) the investment portfolio was 4.5 years, (b) the loan portfolio 0.8 years, (c) the interest-bearing deposit portfolio was 1.5 years, and (d) the borrowed funds portfolio was 3.2 years.

The table below displays the result of the simulation analysis on the asset and liability balances.

The results of the simulation are within the relevant policy limits adopted by the Company for percentage change in net interest income. For net interest income, the Company has adopted a policy limit of -8% for a 100 basis point change, -15% for a 200 basis point change, -20% for a 300 basis point change and -25% for a 400 basis point change. For the economic value of equity, the Company has adopted a policy limit of -10% for a 100 basis point change, -20% for a 200 basis point change, -25% for a 300 basis point change and -32% for a 400 basis point change.

The decrease in 12-month net interest income of 6.8% given a 100 basis point decrease in market interest rates as of September 30, 2025 compared to a decrease of 1.4% for the same period in 2024.

As part of the Company’s ongoing enhancement of the simulation analysis, the Company has been making updates to its model to incorporate, among other things, improvements to certain assumptions, as well as assumptions related to deposits. The difference in the results of the simulation analysis between the third quarter of 2025 and the second quarter of 2025 is attributable to these model updates.

Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or repricing periods, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that limit changes in interest rates on a short-term basis and over the life of the loan. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the tables. Finally, the ability of many borrowers to service their debt may decrease in the event of a significant interest rate increase.

While an instantaneous parallel shift in interest rates was used in this analysis to provide an estimate of exposure under these scenarios, we believe that a non-immediate parallel shifts in interest rates would have a more modest impact. Further, the earnings simulation model does not take into account factors such as future balance sheet growth, changes in product mix, changes in yield curve relationships, the various rate indexes do not move in parallel (e.g. SOFR, Fed Funds), hedging activities we might take and changing product spreads that could mitigate or exacerbate any potential beneficial or adverse impact of changes in interest rates.

Another key factor to consider is the behavior of our deposit portfolio. The projected impact on net interest income in the table above assumes no change in deposit portfolio size or mix from the baseline forecast in alternative rate environments. In higher rate scenarios, any customer activity resulting in the replacement of low-cost or noninterest-bearing deposits with higher cost deposits or market-based funding would reduce the assumed benefit of those deposits. The projected impact on net interest income in the table above also assumes a static non-maturity deposit beta which may not be an accurate predictor of actual deposit rate changes realized in scenarios of smaller and/or non-parallel interest rate movements.

Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income or economic value of equity will be affected by current and future changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. In addition, certain assets, such as adjustable-rate mortgage loans, have features (generally referred to as interest rate caps and floors) that limit changes in interest rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the maturity of certain instruments. ALCO reviews each of the above interest rate sensitivity analyses along with several different interest rate scenarios as part of its responsibility to provide a satisfactory, consistent level of profitability within the framework of established liquidity, loan, investment, borrowing and capital policies.