Hello, thank you for standing by, and welcome to the Eagle Bancorp Fourth Quarter and Year-end 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Charles Levingston, Chief Financial Officer. Please go ahead.
Thank you, Josh. Good morning. This is Charles Levingston, Chief Financial Officer of Eagle Bancorp. Before we begin the presentation, I would like to remind everyone that some of the comments made during this call may be considered forward-looking statements. While our growth and performance over this past quarter have been positive, we cannot make any promises about future performance, and it is our policy not to establish with the markets any formal guidance with respect to our earnings. None of the forward-looking statements made during this call should be interpreted as our providing formal guidance. Our Form 10-K for the 2020 fiscal year, our quarterly reports on Form 10-Q, and current reports on Form 8-K identify certain risk factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made this morning.
Eagle Bancorp does not undertake to update any forward-looking statements as a result of new information or future events or developments unless required by law. This morning's commentary will include non-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 GAAP information. Our periodic reports are available from Eagle online at our website or on the SEC's website. This morning, Susan Riel, the President and CEO of Eagle Bancorp, will start us off with a high-level overview. Janice Williams , our Chief Credit Officer, will discuss her thoughts on loans, reserves, and credit quality matters. I'll return to discuss our financials in more detail. At the end, all three of us will be available to take questions.
I would now like to turn it over to our President and CEO, Susan Riel.
Thank you, Charles. Good morning and welcome to our earnings call. I'm pleased to report another successful year with a strong finish at year-end. A few highlights which we will cover in more detail later. Our earnings for the year and assets at year-end were record highs. Asset quality continues to improve. Efficiency remains a strong point. Most importantly, loans excluding PPP grew by $231 million or by 3.4% in the fourth quarter. Focusing on earnings first, it was our 22nd consecutive profitable year. Earnings for the year were a record $5.52 per diluted share, and we paid out $1.40 per share in dividends, which was 25% of earnings. Returns for the year were 1.49% on average assets and 14.73% on average tangible common equity.
Turning to asset quality. At the end of the quarter, non-performing assets improved to 26 basis points on assets, and for the quarter, annualized net charge-offs improved to 7 basis points on average loans. Both of these ratios are the lowest we've seen in the past nine quarters. These asset quality ratios, combined with some factors that Jan will review, informed our decision to make a fourth consecutive reversal from our allowance for credit losses even with the increase in loans. With a reversal of $7 million for the quarter, the total reversal for the year was $21.9 million, which followed provisioning of $47 million for the full year of 2020. In terms of operating efficiency, we continue to be a leader with an efficiency ratio of 44.3% for the quarter.
We are always prudent in our approach to expense management, yet we always keep an eye on critical infrastructure and investments and controls that are necessary to operate a safe and sound banking institution. This year we closed three branches, all of which had expiring leases and clients who can be served from other Northern Virginia branches and through digital channels. The most recent closure was our Reston location in December, reducing our branch count to 17 and raising our average deposits per branch to $587 million. Now let's talk about loans. On last quarter's call, we said that given the market conditions, the bank has taken a more competitive stance on credit spreads on high-quality loan opportunities.
It was encouraging that even as payoffs and pay downs remained high, loans were up, and we saw significant contributions from both our CRE and C&I teams, particularly in December. The largest net increase was in owner-occupied CRE loans, which accounted for almost half of the net growth, followed by commercial loans and some income-producing CRE. Construction loans also increased but were mostly offset by successfully completed projects. We would also like to note our $2 billion in unfunded commitments at quarter end and our total risk-based capital is 16.15% gives us a lot of room to continue to grow the loan portfolio. Our other lending teams also did well in 2021. The FHA team ended the year strong with a fourth quarter that resulted in trade premiums, origination fees, and mortgage servicing rights income of $2.5 million.
For the year, the total was $5.6 million. The mortgage team had its second-best year as it would be difficult to top 2020. Locked loans for the fourth quarter were $163 million, giving the mortgage team a total of almost $1 billion for the year. For our shareholders, our earnings contributed to increasing both book and tangible values. Book value rose to $42.28 per share, up 8.3% from a year ago, and tangible book value rose to $38.97 per share, up 9% from a year ago. We also increased the quarterly dividend three times, moving from $0.22 per share in the fourth quarter of 2020 to $0.40 per share in the third and fourth quarters of 2021.
Based on last night's closing stock price of $60.77 per share and a quarterly dividend of $0.40 per share, our annualized dividend yield is 2.6%. In regards to our stock repurchase plan, for the year, we repurchased just over 13,000 shares at an average price of $51.78 per share. Additionally, in December, the board adopted a new 2022 share repurchase plan for 1.6 million shares, or approximately 5% of outstanding shares. On the ground, our market continues to be robust as spending from the government contracting, and the consumer remains strong, and construction on new projects moves forward. Based on government data, the unemployment picture continues to improve.
The unemployment rate in the Washington area fell from 4.9% when we reported in August to 3.5% in November. For the same periods, the U.S. unemployment rate fell from 5.2% to 4.2%. This drop in unemployment, in particular the drop in the local rate, was a factor in the release of reserves. Also, the impact of Omicron appears to be passing as cases in our area have peaked with new cases down 30% this week. With respect to our litigation and investigation, our dialogues with the SEC and the Federal Reserve are ongoing, and we cooperate with these investigations, and we continue to make progress towards a resolution of all disclosed matters. With that, I would like to turn the speaking duties over to Janice Williams , our Chief Credit Officer.
Thank you, Susan, and good morning, everyone. Credit continues to improve to levels we have not seen since before the pandemic. With the ACL reversal of $6.4 million on loans and loan growth ex PPP of $231 million, our ACL to loans moved from 1.21 last quarter to 1.06 this past quarter. Comparatively, pre-COVID and pre-CECL in the fourth quarter of 2019, our reserves were 97 basis points. NPAs, as Susan mentioned, were 26 basis points on assets. Total NPAs were $29.2 million, of which about 57% were CRE and 29% were commercial credits. The remaining NPAs were smaller PPP, SBA, and residential loans. Net charge-offs in the fourth quarter totaled $1.2 million.
There were eight loans charged off or partially charged off, the largest of which was a C&I loan for approximately $550,000. Total charge-offs for 2021 were $13.3 million and were well below 2020, which came in at $20.1 million. In terms of risk classifications, during the quarter, the past due portion of the portfolio increased while watched, special mention, and classified credits were down. In particular, a number of loans that were placed on watch because of a second COVID modification were upgrading after continuing to show sustained performance at the end of their modification period. Even with our lower ACL, our coverage ratio of non-performing loans is 257%.
While this is down from 265% the prior quarter, this quarter, like last quarter, is well above the 151%-202% range where it's been for the prior seven quarters. It's also worth noting that we booked a $1.1 million gain on the sale of our largest OREO property. The number of properties remaining in OREO fell to three, with a carrying value in the aggregate of $1.6 million. In regards to the reversal of $6.4 million from the allowance for credit losses, as we modeled the allowance, we determined that it was appropriate to begin transitioning away from the crisis level loss given default metrics we've been using since the beginning of the pandemic to a more normalized long-term average loss given default.
Additionally, there is continuing improvement in the unemployment and economic forecasts. The actual loss rates experienced by the bank in 2021 were significantly below 2020 levels, and we considered a number of qualitative and environmental factors, including, among other things, the remaining potential risk to the hospitality and restaurant industries. With that, I'd like to turn it over to Charles Levingston, our Chief Financial Officer.
Thanks, Jan. For the quarter, net income was $41.6 million, which is down $2 million from the prior quarter, and assets rose to $11.8 billion, up $262 million. In regards to earnings, the primary differences on a linked-quarter basis were net interest income was down $859,000. Interest income included a drop of $1.7 million attributable to lower PPP fee income, as much of the remaining PPP forgiveness occurred in the third quarter, which ended up with PPP loans of $67 million. The fourth quarter ended with PPP loans of $51 million, down just $16 million. Additionally, more than half of the loan increase was recorded in December, so it had little impact on interest income in the fourth quarter. Non-interest expenses were up $2.9 million.
Compensation and benefits were up $2.5 million as a result of higher incentive bonus accruals based on the company's performance and increases in share-based compensation. Professional fees were up $966,000, and these increases were partially offset by a decline of $1.2 million in FDIC assessment expenses. Non-interest income, excluding security gains, was up $2.9 million. As Susan mentioned earlier, gain on sale of residential mortgage loans fell, but the difference was more than made up by our FHA group, which had a good fourth quarter and a $1.1 million gain on OREO sale. The other items impacting the earnings on a linked-quarter basis were much smaller, all under $1 million. This included a smaller net reversal from the provision and a smaller gain on securities.
On the balance sheet, the biggest changes you'll see since from the prior quarter end are the increases in loans, which Susan covered, and our effort to put more of our cash to use in the investment portfolio. On a linked-quarter basis, loans increased by $214 million, $231 million if excluding PPP loans. Investment securities rose $836 million, while cash held at the Fed fell $771 million. More than half of the purchases were in December, and most of the activity was to add agency and pass-through mortgage-backed securities, as well as some corporates and munis. On the other side of the balance sheet, deposits continued to flow into the bank as deposits rose $313 million.
Most of the inflows were non-interest-bearing, which rose by $442 million on a linked-quarter basis. A measure I like to look at is the average non-interest-bearing deposits to average deposits, which were 36.3% this past quarter, up from 33.9% the prior quarter. For net interest margin, we were down 18 basis points to 2.55% on a linked-quarter basis. The deployment of cash into securities had a positive impact but occurred late in the quarter. Also on a linked-quarter basis, yields on loans adjusted for PPP interest and fees were down 8 basis points from 4.54% to 4.46%. Looking at our cost of funds, the fourth quarter was down 9 basis points to 26 basis points.
Part of the favorable decline in cost was the absence of any interest in or expense from the sub-debt issuance that was redeemed earlier in the year. This is our first quarter without any of that issuance included. The runoff of higher priced CDs played a minor role this quarter. There are still some higher rate CDs on the books, but the maturities are mid-2022 or later. Lastly, in terms of rate sensitivity, we remain asset sensitive and should benefit from rising rates as loans come off the floor or reprice, and a large percentage of our deposits are non-interest-bearing. With that, I'll hand it back to Susan for a short wrap-up. Susan?
Thanks, Charles. As we wrap up our commentary, I would like to thank all of our employees for all their hard work and their commitment to support our clients during the pandemic's second year. We remain committed to a culture of respect, diversity, and inclusion in both the workplace and the communities we serve. Lastly, we are encouraged to have momentum going into 2022, and we feel good about the company and our position in a very competitive, strong, and dynamic market. We will now open up for questions.
Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster.
Our first question comes from Casey Whitman with Piper Sandler. You may proceed with your question.
Hey, good morning.
Good morning.
Hi, Casey.
Hey. Just maybe we'll start off with expenses. So just looking at the growth this quarter, in particular the salaries and benefits line, what do you think is a reasonable expectation for where that line might run in 2022? I think it's at around $25 million right now in the fourth quarter. Can we assume that we get some of that back in the first quarter, or is this a pretty good run rate for that line?
Yeah. I mean, I'd say, Casey, you know, we did have an extraordinary year in 2021. Some of that is reflected in that incentive annual incentive accrual. You know, I wouldn't necessarily expect the same kind of year next year in terms of the reversals that we were able to take in, particularly from the allowance. You know, I don't know that we see that same kind of heavy incentive associated with the following year.
Okay. Is there maybe a long-term sort of efficiency ratio you guys are targeting that we can work with?
You know what? I think where we've been operating, you know, for the past couple of years around that 40% number, you know, is a place where we're hoping to continue to play.
Okay. What about the FDIC expenses? Do you think they continue to run as low as they were in the fourth quarter?
Yeah. We noted in the press release that our calculation for the large bank assessment came out to in the fourth quarter about a third of what we previously had in terms of expenses. That's where I anticipate things continuing.
Okay. Understood. Maybe just one more for me on, you know, capital. Assuming you can keep putting up some robust growth and looking at the current stock price, do we have a big appetite for buybacks here, or what would it take for you guys to become more aggressive there?
Yeah, I think, you know, we're gonna continue to evaluate our options on a quarter by quarter, day by day basis, you know, as we continue to contemplate our, you know, how we wanna play with, you know, with that. Yeah, I think it is just gonna be a kind of a day by day thing.
Understood. I'll let someone else jump on. Thanks.
Thank you. Our next question comes from Catherine Mealor with KBW. You may proceed with your question.
Thanks. Good morning.
Good morning.
Good morning, Catherine.
I wanted to talk about asset sensitivity that you mentioned, Charles. Just if you could, maybe first start on the loan side. I looked in your last quarter's 10-Q, and it looks like about 58% of your loans are variable. Can you talk about how much of that reprices immediately and how much of that may lag? My second part of that question is kind of within loan yields, where were new loan yields coming on this quarter? How should we think about the offset of that with the portfolio still repricing downward until we get to a bottom? Thanks.
Sure. Sure thing, Catherine. Yeah. As I look at interest rate risk and our asset sensitivity position, as we evaluate that 100 basis point plus shock over a 12-month period, we're seeing a positive net interest income impact of just under 5%. That's kind of the end of the story there. You know, we've got, you know, in terms of LIBOR-based, SOFR-based, prime-based loans, you know, of the total, you're still around, you know, just around 50% or so, of the total portfolio, that would be impacted there. Total, you know, adjustable and variable rate loans are still right around that prior quarter number with, you know, 56%-58%, somewhere around there.
You know, in terms of where new loans are coming on, we did have a very large quarter this quarter in terms of loans booked. Yields on the new volume were, you know, in the neighborhood of 3.75% or so. That's where we're currently booking loans is as of the fourth quarter.
And-
Again, many of those are floating rate.
Okay. Again, on the 58% that's variable, how much—like, do floors impact there that very much, or will you see most of that reprice immediately with the first rate hike?
Yeah. In terms of floor repricing, if you know, as we move up you know, 25, 50 basis points, you know, it's about $500 million or so would reprice there. You'll probably add another $650 million or so with another 50 basis points above that. It's about $2.8 billion with floors.
Got it. Okay. Great. As you look at your deposit composition, I mean, you've got to believe that your deposit betas will be lower in this cycle than they were last, just because, I mean, one, you've got so much liquidity, and two, perhaps you could argue you aren't growing as fast as you were last cycle. Although this quarter's growth was really good.
Yeah.
How do you, I guess maybe within your ALCO modeling, maybe first, how do you think about deposit betas within that? Then maybe also more realistically, because I think sometimes there's a difference between within ALCO modeling and then what you think will actually happen in reality.
No, that's a great point. I mean, we've currently got the model set at a you know, 0.5 beta for up rates. Do we think that's gonna be the actual experience? I think there's a good chance, particularly as you point out with the continued deposit growth, that it might be shy of that. You know, to the extent that our actual experience of beta is lower, that only inures to the benefit of greater asset sensitivity.
Great. Okay, my last NIM question then I'll stop harassing you, Charles.
That's okay.
It's just on the cash. You have so much cash on your balance sheet, so what kind of strategies should we expect for how quickly you'll deploy that into securities and loans?
Yeah, obviously our first choice is loans. We wanna put it out there in loans. That's why we're here. But absent that, I would expect it will, you know, continue a healthy clip in terms of deployment to the investment portfolio. You know, it's kind of enough sitting on the sidelines, particularly again, as our cash position grows. As we model it out and look at the math of, you know, steady rate hikes over, you know, a couple of years, it's better to get in the game now than it is to wait and have those cash balances just earning Fed funds, you know, overnight interest on excess reserves. Yeah.
Great. All right. Thank you so much for the help.
Thanks, Catherine.
Thank you. Our next question comes from Brody Preston with Stephens Inc. You may proceed with your question.
Hey, good morning, everyone.
Morning.
Hi, Brody.
Hey, I guess I just wanted to start back on the loan growth. You know, it was nice to see you guys return to solid levels of core growth here, excluding PPP this quarter. I guess I wanted to ask, you know, as we think about the go-forward run rate of Eagle, historically y'all have been a pretty strong grower. Just thinking about, you know, pipelines currently, you know, maybe any new producers that you've hired and the strength of the D.C. economy, where would you expect loan growth to kind of shake out on a normalized basis going forward?
Well, I think it's difficult to predict with any degree of certainty at this point. I do think the local economy has been particularly strong. Unemployment here is significantly lower than it is on a national basis, and the national basis is good. I think we're well-poised to have an economy that continues to grow and probably soar through the next couple of years. In terms of where we are with demand for loans in the area, I think that's gonna depend to some extent on what happens with interest rates and whether we see a drop in refinancing on fixed rate things because of rate shifts. That will take with it perhaps the opportunity to refi out some other banks. I do think that we'll see line usage start to increase as the economy grows.
I'm feeling that we have a good opportunity here.
Pipelines. Good pipeline.
Charles, do you have anything you want to add to that?
No. You know, the pipeline that we have remains strong. You know, we're you know we saw unfunded commitments continue to remain pretty close to our quarterly averages over a period of time about $2 billion. Yeah, we expect that you know we'll continue to have healthy growth.
Our lending teams are pretty optimistic going into 2022.
Got it. Then maybe just on the securities portfolio, Charles, you know, obviously, you guys put a decent slug of liquidity to work there. Excuse me. Deposit growth has remained strong for you all and for the industry. As I think about securities growth going forward, you know, I wouldn't expect, you know, like a 46% linked quarter increase, you know, next quarter or anything. Help me think about, you know, the pace of it, and then also if, you know, if you happen to have with the duration on the securities portfolio, I'd appreciate it.
Yeah, the duration, just a quick hit there, our effective duration is right around four years. Yeah, you know, this is another area where we'll just continue to have to evaluate, you know, kind of week by week, month by month. Because obviously we need to continue to bank our customers and as such, you know, we saw some healthy deposit growth in the fourth quarter. You know, kind of your guess is as good as mine whether or not those customers find use for those dollars, you know, and continue to draw some of that recent growth out.
You know, I think we stopped calling the QE effort a liquidity surge several quarters ago, so we know that there's some base there that to be maintained. As I mentioned earlier, I think that, you know, all things equal, we continue at a pretty healthy clip of deploying some of that cash into the investment portfolio. Loan portfolio comes first. We wanna make sure that we've got the cash for that as well. With a growing investment portfolio, it's kicking off a lot of cash for use also month after month. It really is just gonna be the balancing act. Yeah.
Understood. Do you know what percent, if any, of the securities portfolio is floating rate, Charles?
I don't have that offhand, but I can get back on that. It's gonna be, you know, relatively small, right? I mean, it's. There's not a lot of variable rate paper in there.
Okay. I'll follow up offline on that. I guess the last one that I wanted to ask was just on the legal expense front, that looked like it ticked up again, you know, QoQ. I just wanted to ask, was there anything specific that drove that? Then I noticed that in the release, you guys didn't put anything in about the legal proceedings. Are those behind us now, or is it, you know, or are those still ongoing?
The legal proceedings are, we've moved forward with them. The shareholder derivative action we settled on October fourth. Our class action settlement is on track, and we have a federal district court hearing today, later in the day on that. As far as the SEC and the Federal Reserve, we continue to make progress towards resolution on that.
Understood.
Brody, I kind of answered your former question as well. I think we're looking at about 3% of the total portfolio as floating rate.
Got it. Thank you very much for taking my questions, everybody. I appreciate the answers.
Yep.
Thank you. Our next question comes from Erik Zwick with Boenning & Scattergood. You may proceed with your question.
Good morning, everyone.
Morning, Erik.
Morning.
wanted to first just start kind of circling back on I guess the net interest margin a little bit. You've given some good color there to some of the moving pieces. As I think about it, you know, fourth quarter margin at 2.55%, you know, didn't reflect the new loans that are on the balance sheet, did reflect maybe some of the securities. Just trying to think from this point, absent any Fed funds rate increases, have we potentially seen the bottom here in the margin? Can it grow at the core, just given what you're expecting for loan growth and the new loans that were added in 4Q as well? Is that a good way to think about it? Is there something else to consider at this point?
Yeah. I mean, right now, I think, you know, I'm pointing to a lot of the cash build because you're right. You didn't see the impact of some of the new loans in as they were booked later in the quarter and even the investment portfolio. A lot of those purchases were done during the quarter. The cash build and the mix of earning assets has certainly had a downward effect. That's really kind of one of the bigger question marks in terms of the NIM impact, I think, that we would experience. You know, as I mentioned that, you know, you've got where the loans are coming on these days.
Yeah, you know, there's still some cost savings on the cost of funds, believe it or not, as I mentioned, with some higher cost maturing CDs coming off. You know, there's not much more to go on that front. There's some and I think you know there likely would be a little downdraft on loan yields if the current prevailing rates continue. You get a countervailing impact of potential rate increases next, you know, this coming year. You know, I've heard and looked at the trading probabilities suggest anywhere from, you know, four, maybe even five rate hikes in a year.
You know, you gotta kind of mix all that together and make your best guess. Yeah, I don't know if I helped or hurt there, but there's some color.
No, I definitely appreciate the additional color there. That was helpful. One last one probably again for you, Charles. Any outlook for the effective tax rate in 2022?
Yeah. I mean, I think we end up, you know, pretty close to where we were for the full year, 2021, you know, in that 25% range plus or minus with, you know, that's barring any actions from which at this point appears somewhat unlikely from our legislative bodies.
Got it. Thanks so much for taking my questions.
Yes, sir.
Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Susan Riel for any closing remarks.
We appreciate your questions, and for all of you taking the time today to be with us on this call. We hope that your 2022 is off to a good start, and we look forward to speaking to you again in a few months. Have a great day.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.