Good day, ladies and gentlemen and welcome to the Eagle Bancorp Fourth Quarter and Year End 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call maybe recorded. I would now like to turn the conference over to Jim Langmead, Chief Financial Officer of Eagle Bancorp.

Thank you, Nicole. Good morning, everyone. Before we begin the formal remarks, I would like to remind you that some of the comments made during this call maybe considered forward-looking statements. Our Form 10-K for the 2015 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 also 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 Chief Executive Officer of Eagle Bancorp.

Thanks, Jim. Good morning, everyone. I would like to welcome you to our earnings call regarding the results of the fourth quarter and full year 2016. Thank you for joining in this call this morning. In addition to Jim Langmead, Jan Williams and Charles Levingston are on the call with us this morning. We will all be available for questions later in the call. I am extremely pleased to discuss with you our financial results and activities for the fourth quarter and for the full year of 2016, which were both highly successful periods. For both the quarter and the year, we produced record earnings. For the fourth quarter, we earned $25.7 million of net income, which is 15% increase over the net income for the fourth quarter of 2015 and is our 32nd consecutive quarter of record increase in earnings. The earnings for the fourth quarter of 2016 comprised the 5% increase over the third quarter 2016 earnings of $24.5 million. Fully diluted earnings per share for the fourth quarter of 2016 were $0.75 per share, a 15% increase over $0.65 per diluted share for the fourth quarter of 2015 and a 4% increase over the diluted EPS of $0.72 for the third quarter of 2016. This record level of earnings is attributable to continued strong organic growth and our consistent balanced performance in all key measurement indexes, including top line revenue growth, consistent discipline in operating leverage, a strong net interest margin and improvement in our already strong asset quality. As we like to say here at Eagle Bank, we monitor and manage all of the dials on the control panel to achieve our goal of long-term consistent growth in earnings per share. That really is our focus rather than the size of our balance sheet or the…

Thank you. [Operator Instructions] Our first question comes from the line of Casey Whitman of Sandler O’Neill. Your line is now open.

Good morning, great quarter.

Thanks Casey.

Just going back to what was going on with the excess liquidity, I guess the last few quarters, can you may be more specific as to what you think the ideal size is for cash equivalents on the balance sheet for Eagle right now or in other words, how much of the excess liquidity can we assume you keep and maybe the timeframe to get there? Thanks.

Yes. Casey, obviously our goal is to maintain average liquidity in the, call it, $200 million to $300 million range. It was $600 million, a little bit more than $600 million for the fourth quarter. It was around $350 million in the third quarter. So both quarters were a little heavy, which goes to the earlier comments. But the goal is to be between $200 million and $300 million. At that level, we feel we get the flexibility we need, together with the alternative funding source opportunities we see and that allows us to manage cost well.

Okay, very helpful. Thanks. And then can you give us some commentary as to what you are seeing for competitions on or competition on deposit rates versus say a year ago? And how much, if any, impact has the latest rate hike had on deposit pricing?

Yes. I think we keep an eye on the pricing in the marketplace on a week-to-week basis. We have a mini ALCO process and we are looking at competition all the time. I think the banks in the current market have been pretty much stable. Our rates are probably the third or fourth highest. They are not the highest, but I think they are competitive in our local market. And with rates up in the last quarter and I would say that we are experiencing some increase in deposit rate increases due to having more accounts that are index-based. We do have some LIBOR-based pricing. We do have some Fed fund-effective pricing. So with the move the Open Market Committee made in December and with the change in LIBOR here late in the year, we are experiencing some increase in deposit rates. But that’s the situation with our cost. But overall, our asset being asset sensitive, we see us having a good position if rates were to move up. We have got a lot of sensitivity on the asset side of the balance sheet.

Alright, great. Nice quarter.

Thank you.

Thank you. Our next question comes from the line of Catherine Mealor of KBW. Your line is now open.

Thanks. Good morning, everyone.

Hi, Catherine.

Hi, Catherine.

Hey, Ron, you mentioned in your remarks that you expect the fee income contribution to revenue to grow substantially over the next year just from the momentum in your FHA lending group. Can you maybe expand that a little bit? Is there a way to quantify that? I mean, right now, you are sitting at about 9% of fees to revenue, but your spread is also going to be growing pretty substantially given the expanding margin and growth in the balance sheet. And so is there fees to revenue goal that you maybe have in mind that we could maybe help quantify where that can move to over time? Thanks.

Charles?

Sure. Yes, as we look out over 2017, we think that, that mix, we are standing at about 9% of total revenue right now for non-interest income. We think we can move that up about a percentage point or so over the course of the year. So, it is meaningful to us to engage in that FHA business. We are seeing premiums on those FHA loans that we plan on wrapping with that Ginnie Mae approval and selling off. We are seeing those premiums anywhere between 4% and 5%. Not quite what you are seeing on the FDA side of things, but certainly, again meaningful and particularly given the pipeline that we have.

Alright, great. And then Casey had my other question. So, thanks. Great quarter.

Thanks, Catherine.

Thank you. Our next question comes from the line of Joe Gladue of Merion Capital. Your line is now open.

Thanks. Good morning.

Good morning, Joe.

Yes, couple of things on the loan side. I guess, could you just remind us, I guess, what the mix of – on the variable rate loans, what is the basis on the variable rates, whether it’s LIBOR, prime or whatever?

Joe, the – Ron had mentioned, we have 67% of our loans. We are variable rate. We are adjustable. 39% of our loans are LIBOR-indexed, so 39%. And then 17% are indexed to the prime rate and the remainder indexed to treasury rates. So we have moved considerably toward the LIBOR index, which should help us as rates move up. That’s typically the early mover, so 39% in LIBOR, 17% in prime and the rest of the 67% in the U.S. Treasury.

Okay, thank you. And I guess, the third quarter conference call, you have touched a little bit on the large banks and some of them were – seem to be reducing their CRE lending with larger customers. Just wondering I guess a lot has changed in the last 3 months. Is that still the case?

I would say it’s even more pronounced.

And I guess their pullback, is that helping out on pricing?

Yes. The beauty of where we are right now at $7 billion is that there are few things that we can’t do and can’t compete against with the big banks, but obviously providing the customer service and performance that they don’t do. So we are continuing to see the opportunity of larger sized deals, lot of equity in those deals, sometimes secondary sources of collateral and certainly getting the pricing power because of the fact that we can do these larger size deals with the big banks aren’t and then the smaller banks are too small.

Okay. Last question, of course, you had some very good trends in the non-performing loans and OREO and everything. Just wondering if, I guess, those same trends are, I guess, evident in early stage delinquencies?

I think that we have been very successful in managing our past dues. I think our 30 to 90-day past dues are well under $20 million. So I am not seeing any significant trend toward an increase there. At this point, we are very pleased with the average risk rating across the portfolio and really have knowledge of anything that’s looking like it could be moving significantly.

Again, great quarter. Thanks. That’s it for me.

Thank you. Our next question comes from the line of Dave Bishop of FIG Partners. Your line is now open.

Great, thanks. Good morning, guys.

Good morning.

Good morning, Dave.

Good morning, Dave.

I was wondering if you can maybe – I think you mentioned a pretty robust pipeline. I am just curious how the loan pipeline shapes up at the end of the quarter versus the third quarter and maybe what the commitments look like there in terms of construction lending maybe potentially coming online over the next 12 months?

Yes, great question. We – our portfolio in our pipeline is pretty consistent with the strategic approach that we have. So we are not seeing out of balance within the different buckets that we have in our strategic plan and what has been pretty traditional. Our pipeline going into 2017 is still very strong, a lot of activity. There is also a lot of construction lending that we did, that we signed loan documents in 2016, which will just begin to fund up in 2017. So, it’s not only pipeline, but it’s the continuation of funding on this construction lending.

And are there any aspects in your opinion where you are seeing maybe the market getting ahead of itself in terms of supply and demand imbalance?

Yes. Suburban office buildings are certainly something that we have shied away from over the past probably 2 years. And while there is certainly an amazing amount of supply coming online on the multifamily side downtown, most of the multifamily that we are seeing of excess capacity is on the larger sized buildings, which we are much more focused on the more boutique-type buildings, which is a very, very different product, very different operating expense structure in different areas. So, I would say where multifamily around the Washington Metropolitan area is certainly robust, although I do believe that based on the employment growth and the change in the market being the millennial-driven market is that these apartments will be occupied. The construction lending that we are doing again is not ground-up construction, it’s renovation through existing buildings, which takes a significant amount of time risk out of the question.

Got it. And then curious on – saw the increase in average loan yields, you are consistent with what you’ve been saying inter-quarter. Just curious how much maybe of a change you saw sort of in that pricing dynamic beginning in the quarter versus the end of the quarter? Just curious how much if you could quantify that price improvement was?

The pricing changes, it’s not a straight line. We have been sensitive and optimistic over the past couple of quarters that we have seen this ability of an increasing pricing. So the ebbs and flows still exist as to when it does hit the income statement.

Yes. If it helps, our origination rate for the fourth quarter was around 4.95%. That’s the rate and fees, which was up a little bit from third quarter.

And we are also experiencing some floors here that you are going to see some lift from that side if there are additional rate increases over the course of the year.

I guess one final question, I think Ron, you noted the – it came out on the most recent event, anything – I know it’s hush-hush, but anything you could share, I guess some insights on maybe from a macro level that you think could be a good takeaway from the market?

Well, just the general question that’s tough to answer, but I would say that we were very, very pleased with all the different rating categories that exist. I think that we were certainly well in tune to what the hot buttons were in the regulatory world. And we certainly were proactive on that, especially with the $150 million raise that we did. So we were very, very pleased with the results of the exam.

Got it. Thanks for the color.

Thank you. Our next question comes from the line of Matt Schultheis of Boenning. Your line is now open.

Good morning.

Good morning Matt.

I was wondering if you could share with me – you have shared it in the past, hoping you could re-share with me basically the process you guys go through with regard specifically to the investor real estate portfolio loan portfolio, how you look at cap rate changes, adjustments to loan, to values and changes in interest rates and changes in coverage ratios on those loans then, basically where is your loan to value now, if cap rates go up 100 basis points or 200 basis points, what’s your loan to value then, what does that imply for your coverage ratio as well, since I know that you are mostly really cash flow on these things?

Yes. Most of our focus is loan to cost, not loan to value. And that’s a really important part. So we try very hard to take out the cap rate discussion, spend a lot of time on market analysis to understand exactly where the market is, look at vacancy rates. We have a consultant that we bring in on a regular basis that truly knows the market, to understand exactly his feelings as to where the market is going. So I would say that again, a lot of it is loan to cost. On condo deals, we are underwriting them to rentals. So we want to make sure that if a condo does fail and we require a certain amount of units to be sold and sell – we require that before they are allowed to close and settle. But every condo deal that we have ever done is underwritten as a rental. So if it has to get put back into rental, we understand where the market is. The macro answer really Matt, is that every submarket is very, very different and we truly believe that we have our fingers on the pulse of that particular submarket. So I would tell you that again, we are not that cap rate focused. It might – a little cap rate. It might require significantly more equity or some additional forms of collateral. So we are pretty rigid on our underwriting process and that hasn’t changed for a considerable period of time.

And Matt, I do think you may recall that we stress test our loans, both at origination for changes in interest rate and cap rates. And then again, we stress test on a quarterly basis our investment CRE portfolio, including our construction loan portfolio, to make sure that we have coverage with a 2% increase in interest rate. We also increased cap rates. We look at what’s still performing on an amortizing basis, what is still performing on an interest only basis. I can tell you that we are very pleased with the results that we see.

I am sorry, Matt. Just to further that, is that we have something called the spec committee every quarter. And the spec committee is any property that we have that’s non-income producing. And the lenders come in and give a specific detail, status report on those particular loans.

Okay. Are you willing to share with us what the change in coverage ratio would be in those stress test scenarios, in aggregate, realizing that there is a lot of variability within the portfolio, but in aggregate, the portfolio moves from X to Year, so are you willing to share that with us or not?

In terms of breakeven debt service coverage?

Or sort of if the coverage ratio is, let’s just say, 1.8 at origination – or if the weighted coverage ratio today is 1.8, 200 basis points moves it to 1.4 or are we…?

It depends on the deal.

Right.

In general, what I can tell you is that over 80% of the portfolio continues to perform on an amortizing basis with a 2% increase in interest rates. If I were to move that to an interest only position, the number that would cover would be higher. We also double stress with an increase in cap rates and an increase in interest rates or a drop in NOI on the property. And we look at what portion of the portfolio could potentially become non-performing or underwater on a loan to value basis. And again, I think we are very prudent in making sure we are covering ourselves.

Okay. Thank you for that detail.

Thank you. And our next question comes from the line of Austin Nicholas of Stephens. Your line is now open.

Hey guys, nice quarter.

Thank you.

Can you talk about, just maybe briefly, where the recovery came from, was that one large credit or relationship or was it a basket?

We actually had, as we do every quarter, a number of recoveries, but the most significant recovery during the period was about $890,000. And that was as the result of a recovery on a loan that we acquired with the S&P merger back in 2008 and we were able to pull that back in to the long time. But that’s where it came from real estate line of credit.

Got it, great. Thanks. And then maybe just bigger picture, when you think about the M&A environment and the message to investors, has that changed, are you seeing any difference in willingness to talk for potential partners, given the increase in rates and kind of the run-up in currency from – in your own stock and then just banks in general?

Yes. All the bankers know each other very well and we are always talking at different opportunities that we have to talk. As far as we are concerned, we have always stayed in a position with the organic growth that we have been able to maintain that. An M&A situation would have to be accretive out of the box for us. And that’s something that we still feel the same way on. Obviously, as we get closer to that $10 billion threshold, that becomes more and more of a discussion. So it would be interesting to see what happens as far as Dodd-Frank is concerned as it relates to $10 billion. But from a current strategic plan, our thinking is exactly the same as it’s been.

Got it. Thanks Ron. It’s very helpful. And then maybe just one last nit-picky question, the other income line looks a little bit higher this quarter than it’s kind of been trending on a run rate basis, is there anything in there that was meaningful and how should we think about that kind of line going forward?

No. Listen, I am not aware of anything that’s been particularly large there. It’s running around $2 million or so, I would say $1.8 million to $2 million a quarter. It’s comprised of a lot of volumes in their ATM fees, merchant credit card fee. If a loan pre-pays, there might be a fee there, if we collect a commitment fee on a loan that doesn’t go through. But those loan related items could jigger a little bit, but I am not aware of anything specific in the fourth quarter. I would say the $1.8 million to $2 million is sort of what you might expect.

Got it. Okay, alright. Well, thanks guys. I appreciate the time.

Well, thank you very much.

Thank you. And I am showing no further questions at this time. I would like to hand the call back over to Mr. Ron Paul for any closing remarks.

Again, thank you all for joining the call and looking forward to speaking to you again next quarter. Happy and a healthy New Year everybody.

Ladies and gentlemen, thank you for participating in today’s conference. That does conclude today’s program. You may all disconnect. Everyone have a great day.