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Edited Transcript of EGBN earnings conference call or presentation 17-Jan-19 3:00pm GMT

Q4 2018 Eagle Bancorp Inc Earnings Call

BETHESDA Jan 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Eagle Bancorp Inc earnings conference call or presentation Thursday, January 17, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles D. Levingston

Eagle Bancorp, Inc. - Executive VP & CFO

* Janice L. Williams

Eagle Bancorp, Inc. - EVP

* Ronald D. Paul

Eagle Bancorp, Inc. - Chairman, President & CEO

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Conference Call Participants

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* Austin Lincoln Nicholas

Stephens Inc., Research Division - VP and Research Analyst

* Casey Cassiday Whitman

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

* Catherine Fitzhugh Summerson Mealor

Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP

* David Jason Bishop

FIG Partners, LLC, Research Division - Senior VP & Research Analyst

* Steven Comery

G. Research, LLC - Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Eagle Bancorp Fourth Quarter and Year-end 2018 Earnings Conference Call. (Operator Instructions)

I'd now like to introduce your host for today's presentation, Mr. Charles Levingston, Chief Financial Officer. Sir, please begin.

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Charles D. Levingston, Eagle Bancorp, Inc. - Executive VP & CFO [2]

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Thank you, Howard. 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 2017 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 our -- 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.

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Ronald D. Paul, Eagle Bancorp, Inc. - Chairman, President & CEO [3]

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Thanks, Charles. Good morning, everyone. I'd like to welcome you to our earnings call regarding the results of the fourth quarter and full year 2018. Thank you for joining in this call this morning. In addition to Charles Levingston, 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 for the fourth quarter and the full year of 2018 both of which were highly successful. For both the quarter and the year, we produced record levels of profitability. For the fourth quarter, we earned $40.4 million of net income. Coincidently, this is our 40th consecutive quarter of record increasing operating earnings dating back to the first quarter of 2009. Comparisons of the results for the most recent quarter and year to performance of -- for both the fourth quarter and the full year of 2017 kind of look distorted because the fourth quarter of 2017 results included the onetime impact of the $14.6 million deferred tax adjustment taken because of the new tax law passed at that time. Therefore, in my remarks this morning, comparative analysis will be based on operating basis results for the respective 2017 periods, which we feel is a more valid measure of the company's performance. Reconciliations to the GAAP measures can be found in our press release.

The $40.4 million of net income for the fourth quarter in 2018 was a 34% increase over the net operating income of $30.1 million in the fourth quarter of 2017. The earnings for the fourth quarter of 2018 also represented a 4% increase over the third quarter of 2018 earnings of $38.9 million. The 2018 annual income of $152.3 million is also a record level of earnings for the company and represents a 33% increase over the operating earnings for the full year of 2017. Earnings per share for the fourth quarter of 2018 were $1.17 per fully diluted share, a 33% increase over the operating basis EPS of $0.88 in the fourth quarter of 2017. Earnings per share for the full year of 2018 were $4.42 on a fully diluted basis, which is a 32% increase over the diluted operating basis EPS of $3.35 for 2017.

We continue to report top-tier profitability with a return on average assets of 1.9% for the fourth quarter of 2018, a healthy increase of a 1.6% of operating basis ROAA in the fourth quarter of 2017. Our return on average tangible common equity was 16.46% (sic) [16.43%] for the fourth quarter of 2018 as compared to 12.57% on an operating basis for the fourth quarter of 2017.

For the full year of 2018, we've achieved significant increases in both the ROAA and the ROATCE indicating the consistency of high quality of our earnings. These earnings are attributable to continued strong organic growth and our consistent balanced performance in the critical measurement indexes. The fourth quarter and full year exhibited very strong deposit growth, healthy loan growth, a decreased but still strong NIM, continued excellent credit quality and consistent discipline in operating leverage contributing to efficiency.

We monitor and manage all of the dials on the control panel, which ultimately results in the most important item, earnings per share growth. While the relative performance of each component may vary from quarter-to-quarter, we strive to maintain the overall balance of these factors, which produce increasing profitability. The fourth quarter of 2018 was a good example of this strategy.

As indicated in the press release last night, we had good deposit growth during the quarter. However, we also experienced an anticipated high level of loan payoffs. Combined, these 2 factors generally -- generated excess liquidity, which in turn contributed to a lower NIM, but most importantly, contributed to the increase in our EPS. At the same time, the benefit of excellent credit quality and superior efficiency allowed us to achieve record earnings for the period.

For the full year 2018, the increased earnings were driven primarily by continued top line revenue growth along with improved operating leverage and continued strong asset quality as well as the benefit of a lower corporate tax rate. Total revenue for the year increased 8.4% over 2017, while noninterest expenses were up only 6.9%. Pretax provision income for the year 2018 increased 9.32% over the full year of 2017.

As we have stated in previous earnings calls and meetings, we have been expecting to see some compression in the NIM, which is -- which was 3.97% for the fourth quarter of 2018. This level was down 4.13% in the fourth quarter of 2017 and 4.14% in the third quarter of 2018. The decrease was due to several factors. The first was a change in our asset liability mix during the quarter. We generated excellent deposit growth for the quarter, during which we also saw a very high level of construction loan pay-downs. This created excess liquidity which was deployed at lower short-term rates. Secondly, we did experience competitive market pressure impacting both loan yields and the cost of funds during the period. The positive to note here is that as the excess liquidity is redeployed into higher-yielding loans over the next few months, both asset yields and the NIM are expected to improve over the next few quarters. Regarding loan yields, we've demonstrated over the last 2 years of the rising rate environment that we have an asset beta and have generally maintained or increased our loan yields over that period. The yields in our existing book of loans are generally rising during the -- due to the structure of the portfolio, which is 61% variable and adjustable. In the fourth quarter, that increase was partially offset by heavy pay-downs on construction loans and new loans being booked in an increasingly competitive environment.

We are also strategically shifting the mix of the loan portfolio over time to increase the percentage of income-producing CRE loans and C&I loans. We continue to make significant gains in our C&I lending activity. Including owner-occupied loans, C&I lending grew 14% over the past year as compared to 7% growth for CRE. We are moving towards the strategic portfolio composition. We believe we'll maintain the correct balance of yield, credit quality and duration.

While the local markets remain very competitive, we do expect that the NIM will improve over what we achieved in the fourth quarter. With the redeployment of excess liquidity, we feel comfortable with a more normalized NIM in 2019. This situation is very similar to what we experienced in the fourth quarter of 2016 when we had excess liquidity, which was redeployed into the loan portfolio over the next few quarters, increasing the NIM.

Loan growth continues at a very manageable pace. For the full year of 2018, the growth in average loans was 12%, where the net period and loan growth from December 31, 2017 to December 31, 2018 was $580 million or 9%. Net growth for the fourth quarter was in line with expectations as once again we saw the ebbs and flows of large fundings and payoffs during the period. The growth of average loans was 3.7% for the fourth quarter of 2018, while the point-to-point growth from September 30 to December 31 equaled 2.1%.

During the quarter, we saw significant pay-downs on condo construction loans. These were not early payoffs but results in successful completion of those projects. We are pleased by the net growth achieved during the fourth quarter when you consider that a normal level of production was offset by $355 million of payoffs during the quarter. This is close to 1/3 of the total payoffs received for the entire year. Our loan pipeline is strong. Our loan commitments remain at just about $2.4 billion. As I stated earlier, we are being more selective in our marketing and underwriting and are mindful of where we are in the economic and credit cycles and the pricing differentials associated with higher-quality credits in a very competitive environment.

Deposit growth was very strong in the fourth quarter as we grew $602 million or 9.4% on a point-to-point basis reaching $6.97 billion at December 31, 2018. Average deposits for the fourth quarter were up 7.2% over the third quarter of 2018.

Average deposit growth for the full year of 2018 was 11% as compared to 2017. We are very pleased with the continued growth in core deposits. While our cost of funds have increased, we feel we have prudently managed through the rising short-term rate environment and most importantly, have maintained our customer relationships by demonstrating that we will pay fair, reasonable rates as the markets adjust over time.

During the fourth quarter, we made another slight increase in the level of longer-term CDs to lock in a portion of our funding costs. We are pleased with the CD rates that we were able to lock in during the second, third and fourth quarter of 2018. For the fourth quarter, we held an increase in the composite cost of funds to only 9 basis points over the cost in the third quarter. That compared to an 11 basis point increase in the third quarter and a 23 basis point bump in the second quarter of 2018.

A critical point to note is after the fourth quarter, average DDA balances increased $142 million or 6%. This is the result of our strong customer ties and execution of our relationship for our strategy. DDA remains at 33.4% of average deposits for the quarter demonstrating, again, the value of our focus on core deposits and the benefit to the overall composite cost of funds. We made the strategic decision years ago and developed our business model as a commercially oriented bank. Well, that means we may have to pay slightly higher rates in our interest rate-bearing deposit, our successful execution under that business model is what allows us to maintain 33% of our deposits in DDAs and our cost structure, which leads to an efficiency ratio of only 36%.

Regional economy here in Washington area had a very good year in 2018 with employment growth of over 60,000 net new jobs during the year. That was a strong year considering the average growth over the last 10 years has been about 42,000 net new job growth per year. The recent announcement by Amazon was good news, but it only added to what we already have as a powerful story. Clearly, the Washington Metropolitan area remains one of the best markets in the country. We are the fifth largest regional economy in the U.S. with gross regional product of $529 billion, and the federal government spending represents only about 31% of the regional GRP.

The impact of the current partial government shutdown is hard to determine at this point but the general belief is that the impact will be minimal if the situation is resolved by the end of January. If it goes beyond that, the shutdown would begin to impact not only federal employees but also smaller government contractors and have the ripple effect on local retail businesses. We are currently evaluating our customer base to identify any potential issues, are reaching out to our customers and ready to assist with any cash flow needs when possible. We do know that the last federal government shutdown in 2013 had no impact on our credit quality. At this point, we do not anticipate there being a major impact on the region and remain committed to our customers and the market.

We remain consistent in our outlook philosophy and disciplined practices and continue to maintain a relatively neutral position in regard to interest rate sensitivity. Our outlook position remains well balanced. Excluding loans held for sale, 61% of the loan portfolio is in variable or adjustable rate loans. The percentage of variable rate loans is fairly consistent with our position a year ago. So we are still slightly asset sensitive.

As of December 31, 2018, the repricing duration of the loan portfolio is only 17 months. For the fourth quarter of 2018, the bank maintained its excellent position in regard to asset quality. At December 31, NPAs as a percentage of total assets were 20 basis points as compared to 20 basis points in September 2018 and 20 basis points on December 31, 2017. For the fourth quarter of 2018, the company recognized net charge-offs of 5 basis points of average loans as compared to 15 basis points in the fourth quarter of 2017. For the full year of 2018, net charge-offs were just 5 basis points of average loans, improved from 6 basis points from the year of 2017. The allowance for loan loss at December 31, 2018 was 1% of total loans, unchanged from September 30, 2018 and slightly decreased from 1.01% at December 31, 2017. Our reserve methodology and practices have been consistently applied, and that allowance has been computed based upon a risk analysis of each component of the portfolio, loan growth during the period and various environmental factors. The provision expense was $2.6 million for the fourth quarter as compared to $4 million for the fourth quarter of 2017. The decrease in the provision for the fourth quarter of 2018 is consistent with the loan growth during the period, decreased levels of charge-offs and overall improvement in asset quality factors.

The level of nonperforming loans and other nonperforming assets in our portfolio continue to be very favorable levels. The nonperforming loans at 23 basis points of total loans at December 31, the coverage ratio at year-end 2018 was 453%, and we believe that we are adequately reserved. The very favorable efficiency ratio of 36.09% for the fourth quarter and 37.31% for the full year of 2018 clearly shows the results of our continuing emphasis on productivity and operating leverage. For the full year of 2018, revenue increased 8.4% while expenses were up only 6.9% for the period. The efficiency ratio for the fourth quarter was slightly lower than the annual average as we chewed up some accrual items and continued to see the benefit of our branch-like strategy and our focus on technology. Compensation related expenses are well managed with defined incentive programs. Basic data processing costs and FDIC insurance expenses are growing in line with deposit and transaction volumes. As we approach the $10 billion threshold, we continue to make the necessary investments in information security, compliance, risk management and corporate governance functions necessary to support the future growth of the bank. Due to our consistent level of profitability, the company significantly strengthened our capital position during 2018. Through the additions to retain earnings, we added $152 million in capital during the year. At December 31, 2018, we had a Common Equity Tier 1 ratio of 12.11%, a total risk-based capital ratio of 16.06% and a tangible common equity ratio of 12.11%. Our capital levels are well above those necessary to be considered well capitalized.

In summary, I'd like to say how pleased we are with this very successful 2018 during which we celebrated our 20th anniversary. We are very proud of our accomplishments during that period. They include not only our profitability and our asset size of $8.4 billion, but our position in the Washington Metropolitan area as an active commercial and real estate lender, our philanthropic efforts in the community, including primarily the EagleBank Foundation and our relationships with the regional universities and colleges, through which we provide scholarships and internships to develop the future leaders of our industry. We thank our employees, our Board of Directors, our shareholders, and especially our customers for the support given us over the past 20 years. That concludes my formal remarks, and we'd be pleased to take questions at this time.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question or comment comes from the line of Casey Whitman from Sandler O'Neill.

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Casey Cassiday Whitman, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [2]

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Maybe, first, if we could dig into your comments about your outlook for the margin improving. Just starting with the outlook for the asset yield to come up from here. Does that mean you expect the payoff in the construction book going forward to maybe slow down? And if that's the case, is your outlook still for high single-digit loan growth? Or could we even maybe see that in the low double digits?

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Charles D. Levingston, Eagle Bancorp, Inc. - Executive VP & CFO [3]

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Yes, Casey, I think, we do continue to see steps in the construction project. But we -- the yield that we saw in the fourth quarter was also impacted towards mentioning by the acceleration of deferred fees and costs. It was more impacted in our third quarter than it was in the fourth quarter. I would expect some of that to normalize. However, I think that you'll see a relatively consistent level of payoffs, perhaps, a little less so going forward.

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Casey Cassiday Whitman, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [4]

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Okay. So I guess, your outlook kind of holds for high single-digit loan growth going forward then?

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Charles D. Levingston, Eagle Bancorp, Inc. - Executive VP & CFO [5]

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Yes, yes. I think high single digits is still where we're eyeing in terms of the loan growth.

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Casey Cassiday Whitman, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [6]

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Okay. And can you also give us an idea of where loans were coming in on this quarter versus last quarter?

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Ronald D. Paul, Eagle Bancorp, Inc. - Chairman, President & CEO [7]

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Casey, loans are coming in from the typical sources that we've always been successful in growing, the brokerage community, the relationships that we have directly with the developers, and we continue to see that demand there. It's -- on the C&I side, we're seeing additional businesses, larger-size credits, and we were just pleased in terms of what we're getting in the new loan side. I mean, it's just -- it's an ongoing exercise of increasing our loans just through the community.

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Charles D. Levingston, Eagle Bancorp, Inc. - Executive VP & CFO [8]

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And in terms of rates where that was -- it's 5.15%, 5.20%, it's kind of the coupons that you've seen come on in the fourth quarter. Again, you tack on the deferred fees and costs of somewhere around 30 basis points for that to get to a yield.

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Janice L. Williams, Eagle Bancorp, Inc. - EVP [9]

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And Casey, I think some of that new loan rate issue is related to the significant increase that we've had in C&I loans this year. And they are considerably more price competitive for quality large lines of credit that often times come with significant deposits.

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Casey Cassiday Whitman, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [10]

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Got it. Now on the deposit side, you guys saw a really nice inflow in a number of categories. So you mentioned some of that due to seasonality. So is there a chunk in there that maybe you consider be more short term? But I guess, the bigger question is, as you put some of the liquidity to work into loans, where do you guys see that 100% loan deposit ratio going to in 2019? How comfortable are you guys with that going up more?

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Charles D. Levingston, Eagle Bancorp, Inc. - Executive VP & CFO [11]

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Yes, Casey, I think we normalize a little higher. Some of that excess liquidity that we saw in the fourth quarter, which we were still able to earn a healthy rate to defend in excess fund, I think, does -- some of it was the market condition. You had a lot of volatility in the equity markets, it pushed a lot of liquidity out of those equity markets and into the banks. That was part of it. We did also have some big wins. So there is some stability in there as well in terms of that excess liquidity that we'll be able to deploy going forward. And then as we also mentioned that seasonality is kind of the third leg of that, so you'll see some of that normalize. But there is a healthy portion of that. It is here for the near term, it will be able to work into higher-yielding assets.

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Ronald D. Paul, Eagle Bancorp, Inc. - Chairman, President & CEO [12]

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Casey, also if I could just add to that, the big wins that we received in the fourth quarter are our core relationships. So we believe that we have an opportunity to continue to build those relationships. And while it takes time to put it out in loans, at least, it has a nice impact on our EPS.

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Casey Cassiday Whitman, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [13]

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Got it. And I'll just ask one more and let someone else jump on. So the market at the end of the year seems to be pricing in a recession. So I'll just ask, anything you're seeing in your markets that makes you nervous or anything you're staying away from?

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Ronald D. Paul, Eagle Bancorp, Inc. - Chairman, President & CEO [14]

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It's a great question. In the second and third quarter, I think, we were a little bit more apprehensive on the growth but we continue to see the strong employment growth, people coming into the community. This Amazon does have an impact in certain areas. There -- the multifamily residential housing, it continues just to skyrocket, vacancies are coming down and we're seeing just a strong market. So it certainly fights the comment of where we are in our credit cycle but we do believe that the Washington market has some very unique characteristics.

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Operator [15]

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Our next question or comment comes from the line of Austin Nicholas from Stephens.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [16]

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Most of my questions were answered on the asset side of the margin but maybe just digging into the liability side. Your deposit cost kind of increased at a kind of a consistent level to last quarter. Any commentary on what you're seeing in the deposit market and then any expectations kind of for 2019 for -- any alleviation there that you could see after Fed raises maybe onetime or, call it, less than 2018?

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Charles D. Levingston, Eagle Bancorp, Inc. - Executive VP & CFO [17]

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Yes, Austin, we did continue to -- our efforts in the CD gathering process and as rates did move up again in the fourth quarter, we saw similar movement there. A lot of that is kind of falling out of vogue in terms of CD gathering, as they're not getting much given the flatness of the curve at this point as a deposit or so, I would expect some of that to taper. Similarly provided that the outlook remains and holds with respect to no further rate moves in 2019, I would think that we'd be able to stabilize funding costs to some degree. So you wouldn't see the kind of moves that you've seen in prior quarters. We've seen other banks in the market pull down some of their rate specials and folks getting a little less aggressive with how they're marketing for deposit, so the expectation is perhaps that helps us out going forward.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [18]

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Understood. That's helpful. And then maybe just on the fee income side of the business, any outlook on the FHA business or the SBA side of things as you look to '19? And then any impact you're seeing on either of those business lines on the government shutdown would be helpful.

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Ronald D. Paul, Eagle Bancorp, Inc. - Chairman, President & CEO [19]

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As far as the FHA side, we're still optimistic on 2019. We have a good pipeline. Unfortunately, it's sitting on somebody's desk right now where nobody's there to process them. But we do have the confidence we talked about in the past, although disappointing in 2018, feel that the pipeline for 2019 is good.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [20]

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Got it. And then maybe just one last one. Tax rate ticked down a little bit. Is that a good run rate to think about as we think about '19, the kind of 25%?

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Charles D. Levingston, Eagle Bancorp, Inc. - Executive VP & CFO [21]

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Yes. We got involved in a low-income housing tax credit in the fourth quarter and took the benefit of that, which reduced the tax rate. I see the tax rate in the 25% to 25.5% range going forward. Also, yes, we can -- speaking of taxes, we can think of the margin and the tax-affected impact on that. We'll -- and looking at that, when we normalize for tax, it's about 2 basis points higher, just as a note. Something new we've looked at this quarter.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [22]

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So on the margin, you're saying that the tax credit investment impacted the margin?

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Charles D. Levingston, Eagle Bancorp, Inc. - Executive VP & CFO [23]

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No, no. You just pondered the thought that when we're -- as we're talking about taxes here, there is an impact on the margin. Sorry to confuse you.

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Operator [24]

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Our next question or comment comes from the line of Dave Bishop -- David Bishop from FIG Partners.

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David Jason Bishop, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [25]

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Ron, you alluded to the -- you've been through this before in terms of the government shutdown. In terms of last time, did that show up anywhere in terms of -- I know it didn't drag on as long as this. But did some of your government contractors, did they start tapping lines of credits or chewing through deposits? I guess, where would you expect to see the signs of distress if it did emerge and these things drags on longer than expected? And any sense of exposure you can give us in terms of the government contracts exposure there? I guess, some of the federal workers, looks like they'll get some backpay but I guess, there's a lot of angst about the government contracting sector that's still bottled to the D.C. area.

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Ronald D. Paul, Eagle Bancorp, Inc. - Chairman, President & CEO [26]

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Sure. We have about $100 million in outstanding for government contractors. So we do believe that if this continues much longer, we'll see them tapping into their lines of credit. But as a commercial bank, it's going to be across the board, where some of these companies will be looking to tap on their line.

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Janice L. Williams, Eagle Bancorp, Inc. - EVP [27]

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I think we've been proactive in reaching out to our govcon customers and making sure that they have an adequate level of protection. It's really the smaller, less sophisticated, pure government contractors that we're working with the most to ensure that they have the availability if this should drag on. We haven't had to make any adjustments thus far but difficult to figure out how long this is going to last.

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Operator [28]

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Our next question or comment comes from the line of Catherine Mealor from KBW.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [29]

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Just one follow-up on just the loan yields. Just want to circle back after Casey's question there. Can we think that -- we'll take a step back. So Ron, you believe that those margins should move higher moving forward more just from as we -- as your excess liquidity is put to work and that comes down? So just a remixing, but as we think about just loan yields alone, I mean, do you feel like this quarter's decline was -- or are we kind of now step back and that should increase at a more moderate pace? Or do you see further pressure on loan yields, so that really stays more flat this year? Kind of -- and I know what the fed does is a big play on that. I'm just -- I get how there's upside to the margin just on the remix but just trying to think about just the loan yield piece as a stand-alone, and what direction or magnitude we could see that move over time?

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Ronald D. Paul, Eagle Bancorp, Inc. - Chairman, President & CEO [30]

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From the production perspective, our loan yields are been pretty consistent over the past couple quarters. Obviously, it's just difficult to determine based on payoffs because you -- we had one fairly large condominium project that had $53 million worth of payoffs in one quarter, which we were not expecting and that was, again, at a -- had a higher-yielding asset yield. So as far as the loan production side, we've been pretty flat in terms of where we believe we can generate yields to.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [31]

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And do you have the average production -- the average rate of new production?

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Charles D. Levingston, Eagle Bancorp, Inc. - Executive VP & CFO [32]

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Yes, the weighted average rate of new production, again, I've called in that 5.15% to 5.20% range and then again 30-ish basis points or so on deferred fees and costs to get to yields. And again, I point out that those deferred fees and costs were more impactful in the third quarter than they were in the fourth quarter. The loans that paid off had further to go relative to their maturity in the third quarter, so the acceleration of fees that you saw in the third quarter had some positive impact to the yield that we didn't necessarily see in the fourth quarter as those payoffs were much closer to maturity. So that does have the impact, and I think that was a little anomalous. So you may see some positive impact from that perspective going forward.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [33]

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Got it. Okay. So roughly new loan production is coming on right around this 5.60% level give or take. So really the margin expansion is -- aside from another rate increase, all else equal, their margin expansion is really from remix more so than that 5.60% really moving significantly higher from here. Is that a fair statement?

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Charles D. Levingston, Eagle Bancorp, Inc. - Executive VP & CFO [34]

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I think that's fair.

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Operator [35]

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Our next question or comment comes from the line of Steven Comery from G. Research.

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Steven Comery, G. Research, LLC - Research Analyst [36]

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So just wanted to step off the margin for a second. Salaries look like they took pretty meaningful step down in the quarter. Press release talks about stock accruals. Maybe if you can give us some indication as how big the delta is there, like how big of a piece that is of salaries when they're fully in there?

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Charles D. Levingston, Eagle Bancorp, Inc. - Executive VP & CFO [37]

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Yes, I think that looking at the second and third quarters probably a better on average is probably a better run rate going forward. What you saw in 2018 was accruals based on expectations with performance. Obviously, as you get further down the line towards the end of the year, that performance comes into focus. I cite some examples, the FHA group did not quite perform as we expected to, nor did the SBA group. So that -- we were able to true up those what we had accrued for those groups. We also have some performance-based shares, which are measured relative to an index. And again, as you get closer to that cliff vesting which will also takes place here next month, then you get a better sense of what would those payouts are going to be. So that's indicative of some of that true-up. But I think looking at the second and third quarter on average is probably a better indication for '19 of what we can expect in terms of the run rate at this point.

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Steven Comery, G. Research, LLC - Research Analyst [38]

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Okay. That's helpful. And then, yes, I don't want to believe, it is too much. But coming back to the margin for a second. So the December rate hike, I mean, how do you guys think that will play out through kind of through all the puts and takes on the margin? Will you expect the asset yields to increase? And how do you expect deposit pricing to play out? I know you guys said you look at yourselves as asset-neutral. But kind of just into Q1, how do you think about that?

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Charles D. Levingston, Eagle Bancorp, Inc. - Executive VP & CFO [39]

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Yes, it's -- to your point, Steven, it's a push and pull, right, because you got new loan volumes coming on at slightly lower rates and those that are being paid off at the same time. We've got 61% of our portfolio that's adjustable and variable rates that will reprice and have repriced. So I think the net is going to be slightly positive for us. And I think that's where it lands.

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Operator [40]

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We have a follow-up question from the line of David Bishop from FIG Partners.

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David Jason Bishop, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [41]

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A follow-up maybe to the operating expense question. I think this year total operating expenses up were close to 6% or so. You've made some investments in risk management. As you pass off 2019, maybe some outlook -- do you think that mid-single digit, high single digit is probably the right rate of growth to use?

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Charles D. Levingston, Eagle Bancorp, Inc. - Executive VP & CFO [42]

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Yes, I think that's right. We're going to continue to focus on expense control to the extent that we need to. Given that revenue materializes, the expenses will follow. We're going to be -- we're very -- again, as Ron mentioned, feel our prospects are very good for the noninterest income business. It's going to be pivotal for us in the coming year, and we're going to be watching our expenses relative to what that group brings in to make sure that we remain the profitable company that we are and maintain our operating leverage. So I think, to your point, those mid- to high single digits is a good outlook for expenses.

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David Jason Bishop, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [43]

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Got it. And then in the preamble, Ron, I think you mentioned the level of pay-downs this quarter versus last, just curious what that was? And didn't know if you had the actual weighted average yields on the loans that did pay off this quarter.

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Ronald D. Paul, Eagle Bancorp, Inc. - Chairman, President & CEO [44]

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Yes, I believe we can -- Charles, you have that?

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Charles D. Levingston, Eagle Bancorp, Inc. - Executive VP & CFO [45]

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Yes, the weighted average rate, unfortunately, not the yield, the weighted average rate was at 5.52% on the loans that paid off in the fourth quarter for $356 million.

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David Jason Bishop, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [46]

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Do you have the number of mass quarter in terms of payoffs?

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Charles D. Levingston, Eagle Bancorp, Inc. - Executive VP & CFO [47]

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Yes. That was a 5.38% and at $345 million.

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Operator [48]

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I'm showing no additional questions in the queue at this time. I would like to turn the conference back over to Mr. Ron Paul for any closing remark.

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Ronald D. Paul, Eagle Bancorp, Inc. - Chairman, President & CEO [49]

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I'd like to thank everybody again for partaking in the call. And we're available at any time should anybody have any further comments or questions. So thank you very much for attending.

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Operator [50]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.