Eagle Bancorp, Inc. (EGBN) Q4 2017 Earnings Report, Transcript and Summary

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 third quarter 2017 operating earnings of $29.9 million. As indicated in our press release issued last night, GAAP earnings for the quarter were $15.6 million. The GAAP earnings included the impact of the one-time discrete charge of $14.6 million for the DTA adjustment. On an operating basis, fully diluted earnings per share for the fourth quarter of 2017 were $0.88, a 17% increase over $0.75 per diluted share on an operating basis for the fourth quarter of 2016 and a 1% increase over the diluted earnings per share of $0.87 for the third quarter of 2017. On a GAAP basis, fully diluted earnings per share were $0.45 for the fourth quarter of 2017. On an operating basis, we once again reached a record level of earnings for the quarter. These earnings are attributable to continued strong organic growth and our consistent balanced performance in the critical measure indices, including growth in top line revenue and pretax pre-provisioned income, consistent discipline and operating leverage, strong loan growth, a superior net interest margin and improvements in our already strong asset quality. At EagleBank, we monitor and manage all of the dials of the control panel, which ultimately result in earnings per share. This will always be our focus rather than the size of our balance sheet or the change in one ratio from quarter-to-quarter. For the full year of 2017, we achieved record operating income of $114.8 million. This represents an 18% increase over the operating and total earnings of $97.7 million for 2016. Operating basis fully diluted earnings per share for the 2017 were $3.36, a 17% increase over the diluted earnings per share on an operating basis of $2.86 for 2016. On a GAAP basis, fully diluted earnings per share were $2.92 for the full year of 2017. As we all know, the real impact of the new tax law will be a reduction in the effective tax rate going forward for 2018 and beyond. As Charles states at the beginning of each earnings call, we generally don't make any forward-looking statements or establish any guidance on future earnings. However, in this case, I think it is appropriate to say that we are pleased with the benefit that will flow to the company and our shareholders based on the new, lower federal tax rate. We estimate that the $14.6 million charge that we took in the form of the DTA adjustment will be earned back within the first three quarters of 2018. We expect that for 2018 and going forward, our effective tax rate will drop from historic levels to just about 25%. For 2017, we are very pleased with the quality of our earnings and the continued high levels of profitability as evidenced by an operating basis return on average assets of 1.6% for the fourth quarter of 2017 and 1.62% for the year of 2017 and an operating basis return on average common equity of 12.57% for the fourth quarter of 2017 and 12.67% for the full year of 2017. The increases in earnings of both the fourth quarter and the entire 2017 were driven primarily by continued top line revenue growth, along with improved operating leverage and continued strong asset quality. Total revenue for the year fueled by loan growth, a favorable net interest margin and increasing noninterest income increased 10% over 2016, while noninterest expenses were only up 3%. For the fourth quarter, total revenue rose by 15%, as compared to the fourth quarter of 2016, while noninterest expenses showed no increase over the fourth quarter of 2016. Pretax pre-provision income for the fourth quarter grew by 24% over the quarter of 2016, and we continue our trend of increasing pretax pre-provision income. Loan growth was very strong during the fourth quarter as we had anticipated. During the quarter, we increased loans outstanding by $327 million or 5.4%. Loan growth for the full year of 2017 was $734 million comprising a 13% growth rate. In addition, we are very pleased to note that the yield in our loan portfolio in the fourth quarter improved to 5.21% as compared to 5.19% in the third quarter of 2017 and to 5.11% in the fourth quarter of last year. The improved yield on the portfolio is due to a combination of general rise in short and intermediate term rates over last year, along with our disciplined loan pricing strategy and short-term nature of our portfolio. The largest increases in the loan portfolio during the fourth quarter were of income-producing CRE loans, C&I loans and construction loans. We maintain our CRE and construction loan positions in line with our strategic targets and continue to experience demand for high-quality loans, which meet our structure and pricing criteria. During the fourth quarter, we did fund higher levels of draws on construction loans. These are loans which have previously been approved and closed, and for which the equity contributions to the project have been satisfied. As we have anticipated, the pricing on these additional loan balances did contribute to the improved loan yield for the fourth quarter. We are maintaining our underwriting and pricing standards and short-term nature of our maturities. It is important to remember that our construction loans are generally not for ground-up projects, but tend to be the rehab of an existing building or condo conversion in Washington, D.C. We have maintained our disciplined approach to managing the composition of the loan portfolio and remain comfortable with the level of our CRE and ADC concentration ratios. Deposit trends in the fourth quarter reflected some of the same factors that we saw in the loan side of the business earlier in the year. While the general growth trend is steady as we have developed larger customer relationships, there is some lumpiness in transaction flows, and we do see balanced fluctuations in some of these relationships from time to time. Therefore, we feel it's important to look at the average balances over a quarter rather than a particular point in time. Average deposits for the fourth quarter increased $370 million or 5% over the third quarter of 2017, but we actually saw a point-to-point decrease in our deposit levels from September 30 to December 31. This was caused by normal fluctuations in some relationships and by decreases in other customers who drew down their liquidity to accelerate certain expenses in 2017, thus deferring higher profits into 2018 when they would benefit from the new tax law. Additionally, late in the quarter, we used FHLB advances to replace more expensive wholesale deposits. These factors, all in line with our continued execution of our ALCO strategy to control our cost of funds and maintain a superior net interest margin. Our deposit mix and cost of funds remain attractive. DDA balances have increased $207 million or 12% over the past year and comprised 34% of total deposits, continuing to contribute to our favorable cost of funds. The net interest margin for the fourth quarter was 4.13%, which was improved from 3.95% in the fourth quarter of 2016 and down only 1 basis point from the third quarter of 2017. Net interest margin for the full year of 2017 was 4.15%, also down only 1 basis point from 4.16% for the year 2016. We are maintaining our loan yields well in the face of stiff bank and nonbank competition. The average yield on the loan portfolio were 517 for the full year of 2017. The Washington Metropolitan area remains among the most competitive in the country in terms of deposit pricing. Given that, we are pleased to note that while our deposit rates have increased, we were able to manage to an average cost of funds of 58 basis points for the year and only 61 basis points for the fourth quarter. We continue to focus on generating DDA deposits and saw a benefit as we increase DDAs from 30% of average deposits in 2016 to 33% in 2017. At 4.13%, our NIM is being maintained at a level significantly above industry and peer group average levels. Noninterest income was also a highlight of the fourth quarter as revenue in the category was $9.5 million, a 35% increase over the fourth quarter of last year and a 40% increase over the third quarter of 2017. Largest contributions to noninterest income growth during the fourth quarter were from nonrecurring items related to a tax credit investment the bank had made several years ago. The first item was a $1.2 million adjustment to the value of a new market tax credit investment. The second gain reported was a $247,000 gain from the sale of a partnership interest after enjoying a historic tax credit. These two separate investments related to unique real estate development projects in transitional neighborhoods in Washington, D.C. We are proud to have been involved in these projects and pleased with the gain on our investments. Our FHA group had a successful fourth quarter, as during the period, they closed three transactions and generated $947,000 on the origination, securitization, sale and servicing of the FHA Multifamily-backed Ginnie Mae securities. We are very pleased that after 15 months of preparation and startup expenses, the FHA group became fully operational in 2017. Total revenue from this business line was $2.5 million for the year, and we are excited about the commitments currently in place and the opportunities for 2018. The SBA group also saw gains in the fourth quarter, recognizing $893,000 in revenue as compared to $356,000 for the fourth quarter of 2016. The revenue from the sale of SBA loans continues to be lumpy and vary from quarter-to-quarter. Regarding our residential lending division. The gain on sale of residential mortgage loans declined to $2.3 million in the fourth quarter as compared to $3.1 million in the last quarter of 2016. Based upon the size of the market in the D.C. metro area, we feel that even in a rising rate environment with our roster of quality originators, we can still generate a reasonable level of profitability from the residential mortgage business line. The overall Washington area economy continues to achieve steady, consistent growth in the gross regional product. Our forecast for 2018 is that growth rate will remain in the same range of about 2%, in line with the overall U.S. economy. It is important to remember that federal government spending makes up only 30% of the regional economy and that the impact of the current administration on local business trends has been minimal. In fact, over the past year, as the federal government has reduced this employment level of 2,300 jobs, the private sector has grown by over 56,000 net new jobs. For the year, annual employment growth in the region was 27% above average for the area. The largest sector increase over the past year was in professional and business services, followed by education and health care. We also saw significant increases in hospitality sector due to further development at the National Harbor in Maryland, the ball park area and the wharf area in the district. For the first time in several years, we saw greater job growth in suburban Maryland as compared to D.C. and Northern Virginia. EagleBank's position on the market continues to be very strong. We continue to see loan demand that varies across the various submarkets that makes up the region. We retained our ranking as the largest community bank headquartered in Washington metropolitan area as measured by deposits in the most recent FDIC report. We have the 9th largest bank in the region, but only have a 3% share of the entire market, so we still have a tremendous potential for continued growth. Consolidation in the local banking arena continues to provide us opportunities to attract quality personnel and customers. We remain consistent in our ALCO philosophy and disciplined practices and continue to maintain a relatively neutral position in regard to interest rate sensitivity. Our ALCO positioning remains well balanced. Excluding loans held for sale, 67% of our loan portfolio is in variable or adjustable rate loans. The percentage of variable rate loans is consistent with our position a year ago, so we are still slightly asset sensitive. As of December 31, 2017, the repricing duration of the loan portfolio is only 17 months, including fixed-rate loans, 36% of the portfolio reprices and matures within 30 days and another 22% within the first year. In total, 71% of the portfolio reprices or matures within three years and 83% within five years. Of the loans in our portfolio with floors, 88% are already yielding above their floor rate and we anticipate that the next 25 basis point increase in rates, another 5% of the portfolio with pure steep floor rates. For the fourth quarter of 2017, the asset quality of the bank improved from its already strong condition. At December 31, NPAs, as a percentage of total assets, decreased to 19 basis points as compared to 24 basis points at December 30, 2017, and 30 basis points on December 31, 2016. For the fourth quarter, the company recognized net charge-offs of 15 basis points of average loans as compared to a net recovery in the fourth quarter of 2016. For the full year of 2017, net charge-offs were just 6 basis points of average loans, improved from 9 basis points for the year of 2016. At the level of 6 basis points, charge-offs for the year of 2017 are among the lowest annual levels of charge-offs we have achieved in the 19-year history at EagleBank. The allowance for loan losses at December 31, 2017 was 1.01% of the total loans, slightly decreased from 1.03% at September 30, 2017, and 1.04% at December 31, 2016. Our reserve methodology and practices have been consistently applied and the allowance has 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 $4 million for the fourth quarter as compared to $2.1 million over the fourth quarter of 2016. The increase in the provision for the fourth quarter of 2017 is consistent with the loan growth during the period and overall improvement in asset quality factors. The level of nonperforming loans and other nonperforming assets in our portfolio continues to improve. Due to the decline in nonperforming loans of 21 basis points of total loans at December 31, the coverage ratio at the end of 2017 was 489%, and we believe that we are adequately reserved. The efficiency ratio for the fourth quarter of 2017 was excellent at 35.12%, improved from 37.49% in the third quarter of 2017 and from 40.22% in the fourth quarter of 2016. We continue our focus on operating leverage, including disciplined management of noninterest expenses. The efficiency ratio for the full year of 2017 was 37.84%, and the ratio in that range is probably a good indicator of the level we can continue to achieve. While we continuously focus on operating leverage and expense management, we do not have a level run rate. During 2017, we saw certain expenses like marketing, consulting and data processing vary from quarter-to-quarter. While we carefully monitor our occupancy cost and staffing levels, we also continue to invest in IT systems to improve our operational quality and information security. We continue to strategically recruit for revenue-producing positions. We will always try to improve productivity, but we'll maintain the proper infrastructure to support the growth of the bank. Due to our consistent level of profitability, the company has significantly strengthened our capital position during 2017. We now have over $1.1 billion of regulatory capital. At December 31, 2017, we have Common Equity Tier 1 ratio of 11.24% and a total risk-based capital ratio of 15.02% and a tangible common equity ratio of 11.46%. The capital ratio should continue to improve in 2018 and beyond as we see the benefit of the new tax law and higher earnings. In summary, I'd like to say how pleased we are with a very successful 2017, and how excited we are about the opportunities for 2018. Even at our current size of $7.5 billion, as I mentioned earlier, we still only have 3% market share in the Washington Metropolitan area. We continue to build in our market presence, our 19-year track record, our deep commitment and knowledge of the community and the strength of our balance sheet. Accordingly, we are well positioned to continue our success through diligent execution of our relationships for strategy. That concludes my formal remarks, and be pleased to take any questions at this time.

[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.