Good day, ladies and gentlemen, and welcome to the Eagle Bancorp Fourth Quarter 2017 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Charles Levingston, Chief Financial Officer. Please go ahead.

Thank you. 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. Our Form 10-K for the 2016 fiscal year, our quarterly reports on Form 10-Q and current reports on Form 8-K identify certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made this morning. The company does not undertake to update any forward-looking statements as a result of new information or future events or developments. Our periodic reports are available from the company or online on the company's website or the SEC website. I would like to remind you that while we think that our prospects for continued growth and performance are good, it is our policy not to establish with the markets any earnings, margin or balance sheet guidance. Now, I would like to introduce Ron Paul, the Chairman and CEO of Eagle Bancorp.

Thanks, Charles. Good morning, everybody, and Happy New Year. I'd like to welcome you to our earnings call regarding the results for the fourth quarter and full year of 2017. Thank you for joining us in the call this morning. In addition to Charles, Jan Williams is on the call with us this morning. We will be all available for questions later in the call. I'm extremely pleased to discuss our financial results and activities for the fourth quarter and the full year of 2017, both of which were very successful. As you know, describing our fundamental performance and earnings for both periods is complicated, but the deferred tax asset adjustment known as DTA adjustment, required by the enactment in late December of the Tax Cuts and Jobs Act. Therefore, while my comments will not ignore the impact of the DTA adjustment, I will focus on operating earnings, which give a truer picture of our performance. We have already responded to the anonymous short seller Internet post that surfaced online, December 1, 2017 and we stand by our previous statements. Accordingly, we will not take any questions regarding that matter during this call. We are here this morning to speak about the company's exceptional financial performance. For both the quarter and the year, we produced record levels of operating earnings. For the fourth quarter, we earned $30.2 million of net operating income, which is a 17% increase over the net operating income for the fourth quarter of 2016. This is our 36th consecutive quarter of record increasing operating earnings dating back to 2009. We are excited to have broken through for the first time the level of $30 million of operating earnings per quarter. The operating earnings for the fourth quarter of 2017 also comprised a 1% increase over the…

[Operator Instructions] Our first question is from Casey Whitman with Sandler O'Neill. Your line is now open.

Good morning.

Good morning, Casey.

Good morning, Casey.

Nice quarter. First, so the efficiency ratio continues to improve. Are there - just curious, are there further avenues for improvement, I guess, on the expense side to drive it down from the level it is now? I guess, are there still branch consolidations you're considering, or do you think further improvement is going to come just on the revenue side?

Casey, I think as we look at the fourth quarter, we have been able to hold the line on additional headcount throughout the course of the year and had some additional - had some expenses that didn't necessarily repeat year-over-year that drove that number down. But I think that's a bit of an anomaly, and you could probably look at our annualized efficiency ratio closer to the mid-37s as more of an indicator of what to expect, going forward.

Okay. Helpful, thanks. And then what are your long-term thoughts around this institution crossing $10 billion assets. I know we're ways out from crossing organically, but can you give us any insight as to what kind of expenses you could need to build in for that over the next few years?

Casey, there are areas that we've been spending a lot of money on over the past 18 months. As an example, the ERM program that we've initiated about two years ago is certainly something that we're spending a lot of money on, bringing a lot of people in and spending an awful lot of time analyzing. We've also significantly enhanced our entire IT area and continuing to improve upon that. So clearly, the $10 billion mark is a big number, remaining to be seen as to what Congress will do as it relates to that. But we are working towards building the infrastructure to get to that, and then obviously, there will be certain expenses once we cross that. Charles, I don't know what you might want to add.

Yes, the way that we do look at this, and we've tried to peel the onion back on this and look at it in several different ways. But the way we look at this, really, is the costs associated with ramping up to $10 billion, and then those that are going to be triggered by the $10 billion threshold. And we are well into absorbing those costs, but there's still little ways to go there too, and as Ron said, depending on how legislation shakes out, we may be relieved of that - the dollars that are associated with the trigger of the $10 billion threshold.

We have a task force that we put together about 9 months ago that's focusing on that. We're very active in the mid-bank coalition that talks about and spends a lot of time talking about that $10 billion threshold. So, we're pretty entrenched in what the requirements will be. And as I say, some of them are just good prudent things to do no matter whether it's $10 billion, $11 billion or $9 billion. So those are things that we're very, very active on.

Okay. And then a question for Jan, if you're there. Can you give us some more color on just the elevated charge-offs this quarter? I guess first, just curious, were those loans in a nonaccrual bucket? And then, just the timing of the decision to charge off the loans now, was that in anyway related to upcoming tax reform?

Casey, no, the decision was not related to upcoming tax reforms. It was really the timing on a foreclosure. We had already established a specific reserve for one particular loan, and that's why you see a marginal decline in the average level of the reserve. I think we went from 103 to 101. So that charge-off was provisioned for well in advance. It's just a matter of timing on our residential land development.

Great. Thanks for taking my questions. I’ll let someone else hop on.

Our next question is from Austin Nicholas with Stephens Inc. Your line is now open.

Hi guys, thank for taking my call. I think Casey answered most of my questions, but maybe just looking at the FHA business and now that it's ramped up. How do you see that business growing in terms of adding employees or expanding geographically and maybe what scale you have now that you can really, I guess, increase the revenue production out of that business line?

Sure. The pipeline on FHA still does remain robust. We think that there are strong opportunities. Again, as we've discussed in the past, FHA, the way that they fit into our business model is really kind of an extension of our value chain, if you will. So, to the extent that we can put on bridge financing and hold these people's hands through the process of - the extensive, laborious process of the FHA financing, that's just a continual - continued franchise value that we think are added on. And as we are - throughout their processing, we do see a pretty robust pipeline for 2018, having just cut thread during 2017.

One of the other big advantages of this. An awful - as you can imagine by the CRE that we have, there's an awful lot of customers that we have that were waiting for us to get some traction to be able to see just how we've been able to perform pricing efficiency, and we believe the more that we continue to prove that, which we have under the recent transactions that we've closed, will increase the opportunities that we have. Also, remembering the short-term nature of our portfolio, which is such a key part from a credit risk analysis side is that we believe that the renovation of these buildings will be able to be flipped into the FHA side in a fairly quick process as well.

Got it. That makes sense. And then maybe just following up on that. Given the focus of Eagle on rehab properties and renovation, as you think about the kind of evolution and development of inner D.C, what's the continued opportunity there? What inning are we in? And then, is there a point at which maybe there needs to be more focus on ground-up type construction? Or is there really continued opportunity for years to come kind in your wheelhouse of kind of inner D.C.?

Yes. One of the things that we feel very strongly, and this is, like I say, this is a credit risk perspective as much as anything, is that we love the opportunity of taking an existing building that's a solid building. It might not have the amenities that the ground-up projects have, but they're great locations, they're larger-sized units, they're brick, the bones of the building is extraordinary, and many of them are just a couple of blocks away from Main & Main. So, as we talked about previously and we're continuing to emphasize, being able to put $30,000, $40,000, per unit into the renovation of a building, I also might want to add that those units are larger-sized units, so it gives flexibility as to the type of millennial, let's say, that might move in. They might move in with roommates, they might be able to start a family. So, we really do believe that there's an enormous opportunity, there's a lot of 40, 50-year-old buildings that would do extremely well with that renovation. And again, that does give us an opportunity to flip that into the FHA program after that renovation is completed.

Right. It makes a lot of sense. And then, maybe just one final question on any new branches that we should expect to come online over the next year? Or any consolidation or any changes and how that looks?

No. We're really not looking at any branches. We're looking at juggling, closing some larger, opening smaller. But really nothing of any substance. We really so much believe in the IT side to the deposits as opposed to the branching side.

Understand. Well, that’s all the questions I have. Thanks for your time.

Our next question is from Joe Gladue with Merion Capital Group. Your line is now open.

Good morning.

Good morning, Joe.

Good morning, Joe.

I guess, first, I'd just like to talk about the net interest margin and outlook for three additional rate cut - rate hikes in 2018 in addition to the December hike. Where do you think - do you think there'll be much change in your deposit betas going forward with those?

Joe, I would say that we were certainly starting to feel the pressure of those rate hikes that we've seen here recently. I think the convexity associated with subsequent rate hikes is going to likely increase as individuals perk up and start to recognize that there are opportunities to get a little bit more - earn a little a bit more on deposits. So, we're going to continue to monitor our funding cost, you saw the very strong bases of DDAs. As Ron mentioned the 34% in his comments, that they're going to continue to help our cost of fund. So, we'll continue to monitor our funding cost and adjust rates appropriately to meet our funding needs and manage the cost of funds to the point we need to manage them to.

Okay. And on the loan side, I believe in the third quarter, there had been a, I guess, usually high level of loan payoffs. Just wondering, did that sort of even out with the fourth quarter to a more normal level, or just where did payoffs stand in regards to sort of a normalized level?

Yes, Joe, that's a great question, such an important question, is that whether we talk about the efficiency side, whether we talk about the deposit, whether we talk about loan, we all need to spend more and more time focusing on trends and not the lumpiness of quarter-to-quarter. With a 5-plus percent loan growth that we had in the fourth quarter, we all anticipated that, we certainly, without saying anything, in the third quarter comments, we certainly indicated that there is that lumpiness. So, we still believe that, that very low double-digit loan growth is something that we'll be able to maintain. And again, that's over a trend, not over a quarter-by-quarter.

And I guess, last question. I guess, with the new tax rate, you guys would be generating considerably more capital going forward. Just wondering what your thoughts are on capital deployment. Any thoughts on returning capital to shareholders?

Joe, I mean, I think there's a little bit of wait-and-see approach there. We're still doing a good bit with the capital we've had here with the return on average common equity in the high 12% on an operating basis. So, I think we can continue to monitor that as - the uncertainty is really around what the competitive pressures are going to be as some of these other banks look at what they're going to be doing with rates on loans and deposits may disrupt some of that extra cash, we think we're going to be stuffing in the pockets. So that's kind of where my head's at right now.

And Joe, as a follow-up answer to that, again, because of these type of assets that we have that we just feel very strongly that having an incredibly strong capital base is such an important part that lets everybody sleep at night. And again, the results might not be the return of capital, but certainly, hopefully, going to be through continued stock appreciation.

Alright, thank you. That’s it from me.

And our next question comes from Dave Bishop with FIG Partners. Your line is now open.

Yes, good morning gentlemen. Just some following up on that line of question. Obviously, it sounded like there might have been some noise in some of the fourth quarter deposit flows related to the Tax Reform Act. I guess, two questions. Do you think that had any impact in terms of maybe the loan growth this quarter, was there anything related to tax planning strategy that maybe pulled forward some first quarter 2018 growth? And then just secondarily, expectations for maybe deposit flows and the loan-to-deposit ratio sort of it looks like maybe artificially inflated close to 108%? So, do you expect to see an inflow of funding in the first quarter to reduce that rate? Or will there be a necessary need to maybe pay up a little bit to choose inflows or deposits for funding growth?

Dave, in terms of tax planning and additional lending, I don't think that there's any impact there that I could think of. A lot of those loans were in the pipeline before the tax law was enacted or close to being enacted. So, I think that was a result of some shoe leather there. But on the - I'm sorry, your other question, remind me again, Dave?

Yes. Just anticipating resumption of deposit flows. And it sounds like obviously…

Loan to deposit ratio. Yes, I think seeing the loan deposit ratio in the low 100s is a realistic expectation for us. I think what we saw towards the end of the year here, as we mentioned in our comments and you pointed out again, was a little bit of an anomaly. Having that high deposit - 109% loan-to-deposit ratio that we saw was a little higher than we had anticipated, 109%, 110%.

And if I could just, again, add to that, is that ALCO has always been to be in the high - very high 90s, and we say that, though, based on the alternative sources of funds that we have, which are very significant. Obviously, the ability that we have in our NIM as to cost of funds, our ability on that, so it's a blend of where we're looking for. But the most impressive item that we're so pleased with is that 33% of our deposits are now in DDAs. I know in previous quarters, we've been talking about the continued energy and effort that our CDOs and lenders have been putting forth in expanding relationships with our existing lenders - I'm sorry, existing borrowers. And the fact that now we've been able to see the result of that is wonderful.

And certainly, as we've said, considering those average deposits, it's probably going to be a little bit more indicative of what we've expected as oppose to the period.

Got it. And then I guess turning back to the preamble discussion. Did I hear it right that you're expecting an effective tax rate somewhere around 25% for 2018, is that correct?

Yes. Dave, when we look at the new corporate tax rate, our state apportionment, and we consider some of the other elements of the tax reform where certain - certain items are no longer deductible, we end up, again, with estimating our tax rate somewhere around the 25% rate.

Got it. And just making sure I'm looking at an apples-to-apples comparisons, I know the fourth quarter was noisy. 3Q 2017, I don't know if you have the number in front of you, maybe come back to it. I have an effective tax rate somewhere around 36.8% or so. Does that sound about right?

That's correct. Yes, when we correct for some of the noise, that's about right.

Got it, got it. And one follow-up question, Ron, and maybe just - I know in the past couple of quarters, there've been some pullback in the CRE market from some of the larger banks, maybe getting a little bit better pricing power on some of the larger-size deals. Is that still the case there in the greater D.C. market?

Yes, we're definitely seeing a pullback from the larger banks. But the focus that we continue to have on the shorter-term maturities, I think, is giving us a leg up on not only being - having the flexibility that we have in the structure of these deals, but also it really does give us the opportunity of monitoring and managing the portfolio because when you're at a 17-month area, you really do get a flavor as to exactly how the project is working in a very short period of time, with pretty short expiration period. So, we're seeing that opportunity for us. And as you say, we're in a wonderful position in that we're large enough to be able to do some of the larger-size deals and nimble enough to be able to the smaller size deals, which is something that, if you looked at the stack of banks that we compete against, not many have both of those benefits and opportunities.

Got it. Great. Thank you for the color.

Thank you.

Our next question is from Catherine Mealor with KBW. Your line is now open.

Thanks. Good morning.

Good morning Catherine.

Good morning Catherine.

Most of my questions were asked. Maybe I will just ask one follow up on the margin. It feels like the deposit growth should be higher this year, just then you can manage the loan-to-deposit ratio. So, with that, we'll probably see higher deposit betas, which totally makes sense. But as we think about how to balance that against the asset side, how do you think about, in an environment where you're having a couple of rate hikes this year, how quickly your loan portfolio yields will be able to start to reprice higher? And to basically offset the higher deposit betas and keep the margins fairly flat?

Yes. So, Catherine, certainly, as we noted earlier the short nature of our book and the fact that we've got 57% of our loan portfolio is variable or adjustable rate. Additionally, I'd point out that previously, we've had quite a few loans that were under their floors. At this point, we're - 88% of those loans were floors - are through those floors. So, I think you're going to see an asset base that's a little bit more responsive, perhaps than as it has been in the past in terms of loan yield.

That makes sense. Alright, very helpful. Thanks, great quarter.

Thank you.

Thank you, Catherine.

Thank you. And I'm showing no further questions. I would now like to turn the call back to Ron Paul, Chairman and CEO for any further remarks.

Thank you, again, for participating in the call, and we're looking forward to speaking to you again at the next quarter. Thank you very much, everybody. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. You may all disconnect. Everyone, have a great day.