Janice Williams
Thank you, Susan.
Our asset quality metrics were impacted by the migration of an office loan from special mention to nonapproval substandard in the fourth quarter while the office loan was cured in December because of our extension to September 2025. A new appraisal was obtained. The new appraisal showed a 44% decline in value since the date of the last appraisal in May of 2022 the borrower is cash flowing and continues to be current on payment.
There are indications of improvement in the market. We've seen increases in leasing activity and positive net absorption in the fourth quarter of 2024 cash flow from properties and transactions are occurring at higher valuations than recent appraisals. At the same time, appraisals remain inherently backward looking and are heavily dependent on historical comparables. So an appraisal today may not fully capture current market trends as more market transactions occur.
We would anticipate less volatility and appraisals. Given the outcome of the appraisal, we individually evaluated the loan and took a charge off of $9 million, more than two thirds of which was already contained in the reserve. The loan was placed on nonaccrual. We believe the loan remains adequately reserved at this time, the balance of the loan is $74.9 million.
Since late 2020. We've been sweeping cash flow and building reserves for build out on new leases and payment reserves. We continue to sweep excess cash flow and continue building additional reserves. Details about the loan are included on page 23 and 24 of our earnings debt net charge offs totaled $9.5 million in the fourth quarter resulting in 2024 charge offs of $38.6 million or 48 basis points. During the quarter, we upgraded two separate office loans that were previously special mention and substandard to pass for one of those loans. We worked with the borrower to secure a three year extension with three principal curtailments, putting the bank in a better position and allowing the borrower to continue exploring redevelopment of the property to multifamily.
On the other. We received a curtailment that resulted in a reduced loan to value of less than 70%. We also saw an upgrade in the quarter of a $46.3 million hotel loan from special mention to pass rated with improved operations.
A multifamily loan of $30 million was upgraded from substandard to pass as a result of additional cash reserves sufficient to support a preplanned hud exit two C&I loans totaling $26.5 million were upgraded from substandard to special mention due to direct assignment of contract proceeds more than sufficient to repay the debt other downgrades. In addition to the office loan of $74.9 million in the quarter included a $36.8 million owner occupied industrial commercial real estate property, substandard loans increased $35.1 million during the fourth quarter to end at $426.4 million. Special mention decreased $120.2 million during the quarter to end at $244.8 million.
This represents overall positive migration of our criticized and classified loans for the fourth quarter. We note in our disclosure on page 20 of our earnings presentation that 69% of our classified and criticized loans are performing following the migration of the aforementioned office loan to nonaccrual. During the fourth quarter. Nonperforming loans were $208.7 million at December 31st, an increase of $74.3 million from September 30th driven by the office loan. Nonperforming assets to total assets were 1.9%. An increase of 68 basis points from the prior quarter loans 30 to 89 days past due were $22 million at December 31st, decreasing from $56.3 million at September 30th. Eric.
Eric Newell
Thanks Jen.
We reported net income for the quarter following $15.3 million or $0.50 per diluted share. This compares to the prior quarter of $21.8 million or $0.72 per diluted share. Pretax income declined $6.9 million to $19.8 million. In the fourth quarter.
The decline in net interest income, higher provision for credit losses, lower fee income and higher noninterest expenses contributed to the pretax decline.
Taxes were largely unchanged from the fourth quarter despite lower pretax income due to return to provision adjustment and uncertain tax benefit representing $2.2 million of tax expense in the quarter. This was partially offset by a $1.7 million tax benefit from an investment tax credit purchased during the quarter. Our capital position remains strong.
Tier one leverage ratio decreased three basis points to 10.74%. As average assets increased slightly more than tier one capital quarter over quarter, common equity, tier one ratio increased 33 basis points to 14.63%.
Tangible common equity ratio increased 16 basis points to 11.02% at quarter. End book value per share decreased a penny to $40.60 per share. As unrealized losses increased due to higher market rates at December 31 compared to the prior quarter. End on balance sheet and contingent liquidity also remains strong.
Average deposits have grown $585.1 million from a year ago at December 31 2023. A significant amount of this annual growth was achieved through our digital channel.
Our one way broker deposits increased $234 million from the comparable 2023 period end due to contractual nonmaturity brokered funding funding relationships.
We reduce brokered cds throughout the year and expect to resize our contractual nonmaturity brokered relationships in 2025 growth in deposits in the second half of 2024 facilitated our ability to fully pay off early. Our $1 billion of bank term funding program borrowings that were outstanding at September 30th insured deposits total 76% of our total deposits at the end of the quarter available liquidity from the federal home loan bank, federal reserve discount, window, cash and unencumbered securities totaled $4.6 billion net interest income before provision totaled totaled $70.8 million in the fourth quarter, decreasing from $71.8 million in the third quarter.
Net interest income declined because of 369 165,000 reversal from interest income due to the migration to non accrual of the previously discussed office loan nim declined eight basis points from the third quarter to 2.29%.
Generally, we saw interest income and interest expense decline proportionately to one another.
The shift in mix of average earning assets with a higher proportion of interest earning deposits was the largest contributor to the decline in them.
Of the $162.6 million of funded loan originations in the quarter, we had a weighted average rate of 7.68%.
This compares to $91.2 million of funded loan originations at a weighted average rate of 7.11% in the third quarter.
Management has reduced rates paid on non maturity deposits due to declining interest rates following the decisions by the FOMC to ease the policy rate by 25 basis points each in November and December, we reduced rates on for nonmature deposits by a cumulative 50 basis points.
This follows our actions taken to reduce nonmature deposit rates from the FOMC easing earlier in the fall, noninterest income decreased as the third quarter. Items such as the sale of MSRS income from SBIC investments as well as income from back to back swap transactions did not reoccur in the fourth quarter in early January management added to its bank owned life insurance policies which will increase the run rate of cash surrender value growth and related income starting in the first quarter, noninterest expense to $44.5 million increasing from $43.6 million in the previous quarter.
Salaries and benefits increased due to a true up on severance for a departing employee and a higher compensation expense due to forfeitures of sharebased compensation in the third quarter which did not repeat in the fourth quarter.
Marketing and advertising declined because of lower spend on our digital channel, legal accounting and professional expenses declined and were offset by higher FD expenses in our quarterly investor debt release along with earnings. We updated our view on 2025. Our thoughts on period and growth of loans next year remain between two and 8% though the slide shows average growth earning asset growth is flat as we continue to take cash flows from our investment portfolio and reinvest in loans with our budgeting process completed management has a more precise view of the net interest margin.
As noted last quarter, there is an expected benefit from this repositioning of the investment portfolio and loan mix that is expected to enhance spread growing relationship deposits and reducing and optimizing the use of wholesale funding are also expected to contribute to spread. I'll turn it over to Kevin to discuss our ACL.
Thank you, Eric, as Jane mentioned, net charge offs increased $4.2 million from the third quarter to $9.5 million. We will continue to evaluate the sufficiency of our qualitative reserves to address market uncertainties. However, we currently expect that any future reserve increases will stem from specific reserves for individually assessed loans. Should there be a significant shift in economic expectations not accounted for in our qualitative reserves that would be reflected in the inputs we use to inform our model and that could result in increases in reserve reserves.
Last quarter, we mentioned the future reserve bill if any would be driven by specific reserves from invi individually evaluated loans. This is in fact the driver of the allowance for credit losses during the quarter.
In addition to specific reserves associated with the office loan discussed previously, we increased our specific reserves for an assisted living relationship, which is number three on our nonaccrual loan listing on page 23 of our investor deck.
The allowance for credit losses increased to $114 million at 1,231 representing coverage of total loans at 1.44% an increase of four bits from the prior quarter. The AC L coverage to, to performing office loans totals 3.81% at 1,231 down from 4.55% at 930 due to the reserves associated with the office loan following it into the individually evaluated specific reserves. Finally, we continue to believe that our reserves are adequate.
I'll turn it over to Susan for a short wrap up.
Susan Riel
Thanks Kevin.
The team completed foundational actions last year to support our strategic goals growing and diversifying building relationship deposits and focusing on operational excellence. While it will take time to reach our our operational goals, we are beginning to see early successes that will drive results. At the same time, we remain focused on addressing asset quality concerns and mitigating valuation risk. As office loans approach maturity as a community focused bank, we take pride in being deeply connected to the communities. We serve this commitment sets us apart and positions Eagle Bank to thrive amid evolving market dynamics in the DMV.
In closing, I want to thank our dedicated employees. Your hard work makes Eagle Bank a success and ensures we continue to deliver value to our customers and stakeholders. With that, we will now open things up for questions.
Operator
(Operator Instructions) Justin Crowley with Piper Sandler.
Justin Crowley
Hey, good morning everyone. I just want to hit on the office loan that got downgraded in the quarter. You know, obviously, reappraisal volatility has been an issue overall, but I maybe thought some of these class a buildings particularly in areas like Montgomery County were a bit more inflated from that risk. You know, does this situation change at all? How you're thinking about that sort of risk as you look across the portfolio outside what's in DC, central business district. And especially as we move through the year and get closer to some of these larger loans with 2026 maturities.
Susan Riel
Yeah, I think we are and have been focused on all office, whether suburban or central business district and the severity of the decline in face values is much more in the central business district and is ameliorated to a certain extent in the suburbs that said different appraisers have different perspective on appropriate cap rates, leasing rates, discount rates.
It's for me personally, I was surprised to see a discount rate of 11% in a class, a suburban market with increased leasing activity. On the other hand, we can see that overall the time to stabilization has been reduced to the current leasing activity. You're looking at this particular property of a stabilized value of about 100 and $10 million So, that's in 2027.
So I think you're going to see changes as the pace of leasing increases or decreases in this particular class of building. I have cautious optimism that we are going to be in a position to continue. If you took a look at, there's one other similar property that you may have thought of. That's an office property of similar size that is also in Montgomery County and that is on our TOP25 list that we provided in our deck. That's number two on that list.
And that particular property was appraised in February of 2023. And compared to the May of 2022 appraisal on the property that we just placed into nonperforming status, there was a 44% drop in valuation the appraisal from May 22 until January of 2025 if you kind of extrapolate from there, and this would just be a ballpark swag and took 44% decline in appraised value on the office property that comes up for reappraisal in 2026. You'd be looking at a potential $3 million charge up.
So I don't think it's a staggering number. You may have different discounts that you're looking at and you may feel that different C grades apply and that, matter of judgment. But I think we're on top of these and continuing to work with borrowers. One of the things that really helped us on the property that became nonperforming was the fact that we had been sleeping cash flow for a significant period of time.
And that assisted us both in the collateral valuation and also in the ability to continue forward and fund any T I work that is necessary in connection with valueadd leasing. So I know there is T I work in progress right now on a particular new lease. I have cau cautious optimism on that front. Did that answer your question?
Justin Crowley
Yeah. No, that's helpful. And just for, I guess just a little further detail, you noted just some of the improving fundamentals on that property that moved to nonaccrual this quarter. Can you unpack that just a little more just in terms of what the leasing activity activities look like or occupancy levels? And you know, maybe how that squares with the other loan that's currently on special mention that you had called out.
Susan Riel
Well, I can tell you that the leasing activity has been fairly consistent over the last couple of years in that it's managed to sustain occupancy in a difficult market, but it's tipped up right now. And what we're seeing are reductions in concessions in addition to a more rapid lease up period to get stabilization. I think you've you know, at one point maybe two years ago in the summer, we were looking at $100 and $80 a foot T I allowances and not an eyebrow was raised at that. And now we're down around $95 a foot. So I think effective gross rents are increasing and we are also seeing more activity both in this property and in very similar proximate properties. So I have optimism on that.
Justin Crowley
Okay. Got it. And then I guess, somewhat relatedly, with the new administration in place. Now there have been some headlines in recent days describing, the potential for some large scale sales of federal government office space and canceling of leases, et cetera, which would of course, likely take some time to play out. But are you able to provide any detail on direct exposure to government office and then, I know it's early but just any preliminary thoughts on, the impact moves out of the GS A could potentially have on your book.
Susan Riel
We have very little exposure to GSA. I think those properties that had large G A leases were for the most part in the C MD F market. Those are bigger properties. And at the time, I think GS A lease was thought to be as good as you could get on leasing that certainly has changed. At least the chatter around it has changed at this point, I do think it pulls two ways it appears the administration believes that the private sector can provide occupancy to the government less expensively than the government is providing it to itself and do a better job.
I don't think it's a huge surprise that this administration would want to privatize that activity. So I would expect they would be trying to sell some properties some in this area, some across the country. I do think that means there's going to be more leasing as a result of the concurrent directive for federal employees to go back to the office, there has to be some place for them to go.
So there could be for properties that have significant floor plates available that are in the B plus A minus area, that might be something that could see an uptick with the federal government leasing. I do think the properties that they're contemplating selling appear to be B minus C plus properties and it will take a significant period. I think for those properties to be rehabbed and brought back to the market and just one person's thoughts on it.
Justin Crowley
Okay. That's helpful. And then, shifting gears a little, there's obviously a larger in market competitor who's involved in the you know, merger transaction right now. You know, to what extent has it already created some opportunity for you folks or you know, how do you think any dislocation could play out from your standpoint, whether that's new business or, or opportunity to add talent.
Eric Newell
You, Susan, you want to take.
Susan Riel
We think it will bring opportunities for us. So we'll be the largest, community banker in this area. And we think that will be mean opportunities for us. Of course, there will be opportunities with people and you know, there are some shared customers that we already have, with them. So, we're, we're looking at it as a positive for us, Eric, you want to add anything.
Janice Williams
There is a team that has mobilized to analyze where we share customers. If there's opportunities for us to get greater market or a greater wallet share of that shared customer, we think that there will be opportunities around milestones in that transaction when there's a legal close, when there's a conversion and we hope to be able to share our value proposition and deepen the relationships that we share, share customers with them as well as acquire new customers.
Okay, great. I appreciate the time this morning. Thank you.
Operator
Katherine Miller with KVW.
Katherine Miller
Thanks. Good morning.
Susan Riel
Morning.
Katherine Miller
Maybe just one back on credit as we think about your outlook for the reserve and, and you know, I know it's kind of hard to put a range on reserve bills and, and the charge off. But as you can see here today and you think about your potential exposure, would, would you expect to continue to see reserve bills throughout the course of 25 or do you think we're at a place today? It certainly was good to see less inflows of, of you know, substandard and special mission credits, which makes me feel like maybe we're at a, at a peak in our allowance. Just curious, your thoughts on that. Thank you.
Eric Newell
Yeah, in our budgeting process, we do not currently anticipate any reserve bill beyond what Kevin's comments talked about in the sense that if there's a an idiosyncratic issue with a credit that requires us to individually evaluate that loan there, there could be noise there. But we do, we feel that the office overlay that is a qualitative approach that we're addressing concerns as we see it for office, we feel that that is adequate at this point.
I believe last call, I put a range out on credit costs. I think it was 25 to 50 basis points for 2025. And we continue to expect that to be the range.
And that's provisioning versus charge also, I guess maybe they're kind of in the same range.
Without the without.
Janice Williams
Yeah, I look, I look at it as kind of the same thing because without a reserve build, you're kind of you're you're going in and out.
Katherine Miller
Makes sense.
Susan Riel
But you know, thinking about what we achieved in '24. Actually in the last 18 months ending December 31, '24 I think at June 30th, our, our reserve was approximately 100 basis points to loans and now we're at 144 basis points to loans.
We've achieved a lot of build over that 18 months.
And based on the information that we have today, we believe that that is adequate.
Katherine Miller
Okay, great.
And then on the outlook for the balance sheet, there's a big build in the balance sheet from the excess liquidity and deposit growth this quarter. And so I thought it was interesting that your guy for average earning assets was flat. I would think maybe you might see a little bit of the decline is that, as we just kind of some of that excess liquidity to work, but still we're coming from such a larger average earning asset base at the end of the year. Just curious your thoughts on that. As we kind of think about excess liquidity kind of into the bond book and into loan growth.
Susan Riel
We're not currently expecting any growth in the bond portfolio. And in fact, our goal is to get the percentage of the bond portfolio to assets into the 10s. I think Charles was saying around 15% and we're above that and that is one of the reasons why in our budgeting process, you can see that there was an improvement in our outlook on them for 2025 versus what we previously had disclosed in last quarter, you have about 385 million of cash flows that are currently earning us around 2% that are expected to go into the loan portfolio or even cash. In this case.
I mean, that's not really what our goal is. We want to go into the loan portfolio which materially contributes to an increase in spread the comment about the average balance sheet. It is true that we had some excess cash on throughout the fourth quarter. We do have expectations that that would be utilized, better utilized into the loan portfolio as well in 2025.
Katherine Miller
And I've noticed that you've made a couple of new hires in the C&I line of business, any commentary there and just thoughts on your loan growth, how much of that's coming in C&I versus CRE.
Susan Riel
We're, we're already seeing positive results from the changes that we've made in the C&I area with bringing Evelyn lee in as the head of the C&I group and with the strategic hires that we have made so far, we're seeing increased activity in that area in a very, very positive way.
Katherine Miller
In terms of growth, Catherine. Yeah, our CRE team is is seeing payoffs in the multi family space particularly, we saw some in the fourth quarter. I think we're expecting more in the first quarter. And I believe Ryan made a comment about some expected payoffs in the second quarter as well. And what that will allow us to do is we can opt to, depending on the pipelines, we can opt to work on any types of activity that the CRE might be seeing. And then also use some of that capacity to in terms of cash flows coming back to us and redeploy that in our C&I.
Portfolio. We're really looking at our CRE concentration coming down too as a result of that, those payoffs.Which is a big focus of ours is reducing our CRE concentration ratio.
Katherine Miller
Yes, for sure, for sure. Okay, great. Thank you very much. Appreciate it.
Susan Riel
Thanks, Katherine.
Operator
Thank you. I'm showing no further questions at this time. I would now like to turn it back to President and CEO Susan Riel for closing remarks.
Susan Riel
I'd like to thank everyone for your questions and for you taking the time to join us today. We look forward to speaking with you again next quarter. Have a great day.
Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.
