Good day. Thank you for standing by. Welcome to the Eagle Bancorp fourth quarter and year-end 2022 earnings conference call. At this time, all participants on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask the question during the session, you will need to press star one one on your telephone. You will hear an automated message advising your hand is raised. Please be advised that today's conference call is being recorded. I would like to turn the conference over to your speaker for today, Charles Levingston, Chief Financial Officer. Please go ahead.
Thank you so much. 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 loan 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 2021 fiscal year 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. This 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 the company 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. Jan Williams, our Chief Credit Officer, will discuss her thoughts on the local economy, 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, everyone. I'm pleased to report that despite facing economic headwinds such as higher interest rates, inflation, and the threat of recession, the bank ended the year with strong results. We were able to navigate these challenging conditions through our consistent focus on delivering value to our customers and effective cost management strategies. In the fourth quarter, we had our best quarter of loan growth for the year, and credit quality metrics remained very strong. Loans increased by 4.5% from the prior- quarter end. This was the fifth consecutive quarterly increase. At the same time, NPAs were 8 basis points on assets at quarter end, and we had a net charge-off of less than $1 million. Credit risk management has been a constant strength since our founding, and it will continue to be a focus going forward.
Additionally, our commercial lending teams continue to find new business opportunities to replenish our loan pipeline. In addition to our pipeline, unfunded commitments were $2.6 billion at quarter end, up $120 million from the prior- quarter end. Part of our success is our ability to understand, underwrite, and close on significant commercial projects. With total risk-based capital of 14.99% and equity of more than $1.2 billion, we are uniquely well-positioned to take advantage of opportunities in our market. Our clients know that we are more committed to the business community in the Washington, D.C. market than larger banks based outside the area. This commitment also extends to the people in the communities in which we operate. We regularly provide much-needed financing for affordable housing projects. This past quarter, there were two such projects.
In October, we announced financing for a $42 million project with Howard University to bring a mixed-use development to the Shaw neighborhood of Washington, D.C. In November, we announced financing for a $50 million affordable rent property with 259 units in Reston, Virginia. To our shareholders, we remain committed to creating value. This past quarter, our board declared a dividend of $0.45 per share, which equates to an annualized yield of 4.11% based on last night's closing stock price of $43.78 per share. We were also active in stock repurchases, buying back almost 740,000 shares at an average price of $44.82 per share. In aggregate, the total repurchase amount was $33.1 million.
Now, Jan Williams, our Chief Credit Officer, will give us some insight into the market, loans, and credit quality.
Thank you, Susan. Good morning, everyone. We spend a lot of time looking for cracks in the local economy. Our boots on the ground continue to tell us the Washington, D.C. market remains one of the most attractive and resilient markets in the country. Even with difficult and volatile economic conditions, local businesses continue to do well. We have not seen a meaningful pullback in overall economic activity. This is illustrated by the unemployment rate in the Washington Metropolitan Statistical Area, which fell to 3.1% in November and gives us some favorable separation from the nationwide figure of 3.5% in December. Underlying the good unemployment figure is continued spending from the government contractors and consumers. There are some areas where we do see some reduction in demand.
Post- pandemic, economic activity in the suburban areas continues to outperform the central business district in Downtown D.C. In Washington, D.C., this is somewhat offset by a robust tourist industry, large parts of the federal government continue to work remotely. Private businesses are more of a mixed bag with a push for more in-office work. With that background, we continue to maintain our conservative underwriting standards, which are reflected in our credit quality metrics. As part of this, while our Downtown office properties continue to perform, we are being more proactive in reaching out to commercial clients to better understand the headwinds facing their income producing properties. Looking at our credit metrics, which remain strong, Non-performing assets, as Susan mentioned, were 8 basis points on assets. This is the lowest ratio of NPAs we've had since 2005.
Total NPAs were $8.4 million, down $1.1 million from the prior quarter. This improvement was primarily from non-performing loans being paid in full or returning to accrual status as a result of sustained payment performance and net charge-offs of $896,000, most of which was from one C&I relationship. With NPAs down, there was also improvement to our coverage ratio of non-performing loans, which was 1,151%, up from 997% in the prior quarter. Loans 30 - 89 days past due were $2.2 million, down from $14.3 million at the end of the third quarter. The improvement in 30 - 89 days past due was mostly from one loan for $11 million becoming current.
For the quarter, we had a negative provision of $464,000, and our ACL to loans at quarter end was 97 basis points, down from 1.04% last year. Last quarter. With regard to the fourth quarter provision reversal, it was largely driven by the improvement in quantitative metrics associated with a decrease in the localization factor relative to the national unemployment forecast. This improvement was only partially offset by the increased risk in Q&E portion of the model from the elevated risk associated with economic and business conditions and higher period end loan balances. Overall, in terms of credit, we remain cautious and we will continue to apply our strong underwriting skills. Having said that, we see opportunities to continue to add high quality commercial loans to the portfolio.
Our focus remains on adding local commercial income producing properties and owner-occupied properties, but we also see opportunities for quality C&I loan growth. With that, I'd like to turn it over to Charles Levingston, our Chief Financial Officer.
Thank you, Jan. This was a good quarter for earnings, coupled with strong loan growth and strong asset quality metrics. These results were in an unprecedented economic environment that saw aggressive Fed action on rates, continuing inflation pressures in the prospect of an oncoming recession. Fortunately, as Jan mentioned, we operate in a strong market which has remained resilient and continues to grow. Typically, I start with a discussion on changes on the income statement, but the bigger changes this quarter are on the balance sheet, so I'll start there. The items of note are the strong loan growth, a small decrease in deposits, and a pickup in short-term borrowings. I'm very pleased to say we were active throughout the quarter with stock repurchases.
On loans, quarter-over-quarter, the loan growth was strong with loans up $331 million or 4.5% for the quarter. A lot of these loans came on near the end of the quarter as average loans were up by a smaller $97 million. As we manage our liquidity carefully, we drew on some FHLB advances late in the quarter and ended up carrying more cash balances at year-end than we normally would. In terms of deposits, we remain focused on relationship deposits as that is where we see more cost-effective funding and we continue to strive to improve our deposit mix. To this end, our relationship managers are focusing on deposit retention and deposit growth. Stock repurchases. This quarter, we repurchased just over 738,000 shares.
This was 46% of the 1.6 million shares the board authorized for 2022, and about 2.3% of the shares outstanding from the beginning of the year. In total, the aggregate purchase price was $33.1 million, and the average share price was $44.82 per share. As the 2022 plan terminated at the end of the year, we have a new plan in place for 2023, which authorizes another 1.6 million shares for repurchase. Turning to the income statement, while net interest income improved marginally up $1.7 million, the most notable changes from the prior quarter were its components, interest income and interest expense. Interest income was up $17.6 million on higher loan rates and higher loan balances.
For the quarter, the average yield on loans was 5.87%, up 77 basis points. Average loans were up $96.6 million. Interest expenses were up $15.9 million on higher funding costs. The impact was a bit muted by a reduction in interest-bearing liabilities. For the quarter, the cost of interest-bearing liabilities was 2.86%, up 111 basis points, while average interest-bearing liabilities were down $218.2 million. While borrowings were up, the majority of the increase in interest expenses were from higher rates paid on deposits. As the Fed moved aggressively to raise rates to combat inflation, we have subsequently raised rates each time. This quarter, our jump- in rates reflects the Fed raise in late- September and two more during this quarter.
As a result, our cost of interest-bearing deposits were up 107 basis points, as the average effective rate for Fed funds for the quarter was up 145 basis points. While this resulted in a relatively high beta for us, it was only slightly more than our modeling assumptions. With our low overhead from our limited branch network, our efficiency ratio is still low at just under 43%. This level of efficiency is much better than our peers and represents a significant built-in cost advantage we retain even in a rising rate environment. Other items impacting the income statement were the decrease in income tax expense. This reduction was primarily driven by an update in our state apportionment of revenues. This resulted in less taxable income being apportioned to jurisdictions with higher tax rates.
While expenses were up on incentive accruals for this quarter, our accrual allocation is generally lower in the first quarter and larger in the last quarter of the year as we evaluate ongoing performance. On the bottom line, earnings were $42.2 million, up 13.1% from the prior quarter, and fully- diluted EPS was $1.32, up 13.8%. Lastly, equity at quarter end rose to $1.2 billion as earnings and higher carrying values on available-for-sale securities outpaced the reduction from funds returned to shareholders through stock repurchases and the declaration of the dividend. With that, I'll hand it back to Susan for a short wrap-up.
Thanks, Charles. 2022 was a challenging year, but our Eagle team rose to the challenge. The year ended with solid loan growth and strong asset quality metrics. Even when facing economic headwinds, our commercial focus, coupled with a branch-light footprint, continues to be highly efficient and profitable. Additionally, our team understands that it is our strong relationships-first culture with our customers that allows us to provide superior service and to maintain our leadership position in the community. Also, we remain committed to a culture of respect, diversity, and inclusion in both the workplace and the communities we serve. Lastly, I would like to thank all of our employees for their hard work all year long, and we look forward to an even better year in 2023. With that, we will now open it up for questions.
Thank you. If you would like to ask a question, please press star one one on your telephone. One moment while I compile the Q&A roster. The first question that we have is coming from Casey Whitman of Piper Sandler and Company. Go ahead. Your line is open.
Hey, good morning.
Morning, Casey.
Morning, Casey.
Yeah, maybe, we could start just by going back to the office exposure. Maybe can you walk us through just how big that total book is now? It sounded like from your prepared comments that you might be most concerned with the central business district in D.C. Do you have some numbers around how big that exposure is? Sort of as you are proactively reaching out to borrowers there, are you seeing any signs, tangible signs of weakness there? Just sort of walk us through some of the office exposure you guys have.
Sure, Casey. We do have a portfolio of income-producing or bridge office properties. It's about $841 million. It's primarily...
In the suburban markets. In the central business district itself, we have $166 million. We have another $88 million in the construction portfolio, which are completed construction projects that are in lease up. Right now, we are concerned because the market has been fairly slow. The good news is there's a fairly big separation in vacancy between trophy and A properties and then B and C properties. The B properties have a much higher vacancy rate today than either trophy or A. The construction properties, while we're always concerned about properties that are in lease up and haven't reached stabilization, they are at least in an A or trophy category in DC. The opportunities there are better than if they were B properties. Some concern and certainly watching as the leasing takes place.
I think, overall, the vacancy rate in D.C. has been about 20%. Again, it's stratified by different properties. We've gone into a situation where we will reach out to everyone who is in that office market and have lenders and/or their team leaders or the chief real estate lender accompany the lender to meet with the customer to understand what their challenges are, to understand what their rent roll looks like and when leases are expecting to roll. The CBD is certainly the slowest market. I think that's generally impacting retail and office in the CBD. Fortunately, we don't have a ton of properties there. We're not as vulnerable as we could be.
I still think the early outreach and the planning as to how we're gonna bridge these periods of time when leases roll has been a really good effort and continues. We don't have any properties, office properties that are non-performing or past due even 30 days at this point. We are trying to be as proactive as possible. That answer your question?
It does. Thank you. Are there any other concerns, I guess, in the CRE book outside office that we should be thinking about?
I think office is the main concern. Of course, in the event we do hit a recession, there would be perhaps other concerns. Retail normally would be a concern in this environment, but we don't have a ton of retail in our portfolio, and what we have is mostly suburban grocery anchored shopping centers. We don't have any big shopping malls or that type of thing in our portfolio. While in general I'd be worried about that, when you get specific to our portfolio, I'm not as concerned.
Got it. Just back to office quickly. I guess, how big is the typical office loan you guys are doing? What's sort of the average loan size? The office books.
I'm sorry. Could you repeat that?
Average loan size.
Hmm?
What's sort of the average loan size of the office-?
Well.
The office book.
I can tell you I did not bring that with me, but I can tell you the average loan to value is 53%.
Okay.
We've got a fair amount of room to move. I'll be happy to follow up and give you the average loan size as well.
Great. Okay, thank you. I'll move on to another question. Charles, the tax rate obviously touched on just pretty low this quarter, but what can we expect for 2023? Would it stay at this, I think, 19%- level, or do you expect...
Not quite that low. Yeah, not quite that low. My expectation is it will be somewhere in the neighborhood of 22%-23%. Again, this is as a result of the updated analysis associated with the apportionment factors. Yeah, I think that's probably a safe run rate as we look forward, all things considered.
Okay. Got it. I'll just ask one more and let someone else jump on. Just as far as sort of FHLB advances go, is there the level you guys are targeting, or is that just gonna be dependent on loan opportunities? You know, curious just your strategy around that and also how you're thinking about the loan deposit ratio. You know, are we kind of comfortable with that going back to, like, the 100% range, or is there any target? Sort of just walk us through how you're thinking about, you know, just various funding sources.
Yeah, sure. The FHLB is actually, you know, I think of it more as a liquidity management tool. As of today, or actually as of a couple of days ago, it's actually fully paid back. We're down to zero on that. You know, we do have, you know, due to the kind of volatile nature of some of or maybe volatile is not the right word. Just the fluctuations we've seen in some of the commercial businesses that we bank.
Mm-hmm.
We've historically in the last couple of quarters had to borrow from the FHLB for liquidity purposes towards the end of the quarter, and that may continue. But again, it's more of a liquidity management tool. In terms of the loan to deposit ratio, we're actually obviously sitting on a very large investment portfolio right now. You know, book value of $2.9 billion. We're gonna continue to see cash roll off of that, and likely the venue for that cash is going to be deployed into new loans that we're seeking out.
You know, I could easily see us, you know, getting back into the, call it upper nineties in terms of the loan to deposit ratio, but it's a walk to get there.
Got it. I'll let someone else jump on. Thank you.
Thank you. One moment while we prepare for the next question. The next question will be coming from Catherine Mealor of KBW. Your line is open.
Thanks. Good morning.
Morning, Catherine.
I just want to start on just the margin and think about a big picture outlook. There's been a lot of the narrative, I think, from a lot of the other banks we've seen this quarter has been that this quarter, maybe next, is where we're seeing peak NIM, and then the margins are kind of flat to maybe even down as you move through the back half of the year as deposit costs continue to ramp. As I think about y'all, you know, you've had some of the higher betas early on. How do you think about that just kind of big picture holistically? Is there an argument to say that you still have more room for margin expansion as we kind of move through the year?
Are you in the camp with most of your peers where we're kind of at or near peak NIM today? Thanks.
Sure thing, Catherine. you know, it, I think it will be pretty significantly dependent on Fed action. Right now, I think futures markets are suggesting a pretty high probability in the mid to high- 90s that we're going to see 25 basis points in February and then another 25 in March. We're still asset sensitive. you know, over a 12-month period, a 100 basis point shock on a static balance sheet sees net interest income expansion of 9.9%, almost 10%. I would expect there to be, you know, additional tailwinds to that. We're through the floors. you know, I think there's positive momentum should rates continue to go up. Hopefully that's responsive.
Yep, that's helpful. Maybe within that, I'm just thinking about the deposit cost. Do you have any more color you can give us on just kind of where current rates are, not for the full quarter, but maybe today or at quarter end, just for your different types of deposit costs? Like see, like where are current CDs coming on, where money market on average are, you know, at the end of the quarter, just to give us a sense as to where we might be going into the first quarter?
Sure. Yeah. So we booked gross CDs for the quarter of about $309 million. The weighted average coupon on those was actually just over about 4.09%. The weighted average maturity on those was 19 months, just over a year and a half. That's where those CDs are coming on. Our top-tier money market rate today is at a 3.10%. You know, we feel those rates are pretty competitive. We wanna continue to encourage deposits into the bank. You know, it does seem like the entire banking system, as rates continue to push up, are losing some of the battle for funding.
We want to offer that compelling case for folks to keep their money here, in addition to the service and relationship banking that we can offer. You know, that's kind of the state of the union on deposits. I would also.
Can we kind of-
Just add on. Sorry.
It's okay. No, no, go ahead. It's great.
Just to add on the, you know, we continue to model at a beta of 70 as I mentioned and, or I've mentioned in prior calls. We, we were just north of that, you know, at about 74%, this quarter. You know, my hope is we can, we can still maintain that, but as I think as rates get higher and competition heats up, that gets more difficult.
And any commentary on just anecdotes you're seeing within your non-interest-bearing accounts, in your expectations for, you know, potential outflows out of that this year?
No, I mean, you know, certainly there's You saw some kind of initial disintermediation out of non-interest-bearing deposits, but we've been able to maintain, you know, right now we're at about 41% of average, of our average deposits are DDA. Some relatively decent stickiness that we've seen there. Our hope is that we can continue to maintain that and serve those customers and keep those deposits here. It gets harder for them too, right? To justify that, you know, not earning interest on those deposits. That's the other challenge is what's going on that, their side of the fence.
Of course. Okay, great. Very helpful. Thank you.
Thank you. One moment while we prepare for the next question. Our next question is coming from Christopher Marinac of Janney Montgomery Scott. Your line is open.
Hey, thanks. Good morning. Wanted to ask about the use of wholesale funds and just debt overall on the balance sheet. Would that percentage continue to rise or is there an upper bound to how high you'd like it to go?
No, again, as I mentioned, I'm, you know, I look at the FHLB line more as a liquidity management tool. Those funds are actually fully paid down at this point. You know, We've had historically over the last couple of quarters the need to, you know, to bring on overnight funding in order to bridge a gap, given some of the fluctuations that we have in some of our commercial deposits. That may continue again, depending on our success of gathering deposits. Additionally, you know, as I mentioned, cash will continue to roll off the investment portfolio. Our being able to fill needs there may also play into a factor.
Ideally, you know, we're hoping to maintain, you know, relatively similar mix to where we are now, on an average basis, I would say. Just be successful in our core deposit gathering.
Great. That's helpful. I was gonna ask about the core deposits. Do you have any metrics that you're tracking in terms of, you know, net new accounts or just, you know, the core business accounts? That again, may not necessarily be a phenomenon in Q1, but just in general, the opportunity to get new core funding in the bank this next year.
Not, we, you know, not that we're divulging publicly any of that, those kinds of detailed metrics. You know, it is a constant effort. Again, we wanna make sure that we're letting both existing and prospective customers know that we have a strong value proposition in terms of the customer service and the relationship banking that we can offer. You know, it's a constant messaging that we're out there in the marketplace doing. You know, our expectation is that we'll be able to continue to provide those services and grow those deposits and grow those relationships.
Great. Thank you. I understand. I appreciate that feedback. Just a quick question for Jan. As you think about sort of classified and criticized assets this year, would it be normal for those to modestly go up, or is there a scenario that you could see them be stable all this year?
Well, there is a scenario where I could see it hold stable, but I think there may be some volatility in that. Right now, we don't have, let's see, let me think. We don't have anything in the classified ad, or criticized asset category, that's office. We do have a special mention property that we're working through. You know, anything's possible, but we will be diligent in pursuing early intervention and working through any potential issues that do come up.
Great. That's helpful, Jan. Thank you very much.
Have a good day.
Thank you. I would now like to turn the call back over to President and CEO, Susan Riel for closing remarks.
Thank you. We appreciate your questions and you taking the time to join us today on this call. We look forward to speaking with you again next quarter. Have a great day.
Thank you all for joining. This concludes today's conference call. You all have a great rest of your day.