Eagle Bancorp Inc (EGBN) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Eagle Bancorp Fourth Quarter and Year-End 2019 Earnings Conference Call.

(Operator Instructions).

I would now like to introduce Charles Levingston, Chief Financial Officer.

You may begin, sir.

Thank you, Kevin.

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 2018 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 Susan Riel, the President and CEO of Eagle Bancorp.

Thank you, Charles.

I'd like to welcome all of you to our earnings call for the fourth quarter and full year of 2019.

We appreciate your calling in this morning and your continued interest in EagleBank.

As usual, Jan Williams, our Chief Credit Officer, is also with us this morning.

Jan and Charles will be available later for questions.

I am pleased to discuss our financial and business results, which again showed strong profitability with net income of $35.5 million for the fourth quarter and $142.9 million for the entire year of 2019.

The earnings for the quarter and for the full year are less than the same respective periods in 2018 but still reflects the high-quality of our earnings, which continue to result in return on assets and tangible equity above peer group averages for community banks.

The earnings per share were $1.06 on a diluted basis for the fourth quarter of 2019 as compared to $1.17 in the fourth quarter of 2018 and down slightly from $1.07 in the third quarter of 2019.

For the full year of 2019, the earnings per fully diluted share were $4.18 as compared to $4.42 for the year 2018.

The return on average assets for the fourth quarter was 1.49% and was 1.61% for the year 2019.

The average -- the return on average tangible common equity was 12.91% for the fourth quarter and 13.40% for the full year 2019, levels indicative of continued solid performance.

While our profitability continues to be very good, part of our culture at EagleBank is to strive for strong results across all of the performance indicators for community bank.

In reviewing the fourth quarter, we recognized that there were 3 major factors which somewhat dampened our earnings during the fourth quarter.

The very difficult interest rate environment we are operating in has caused decreasing net interest margin across the entire industry.

It certainly impacted us as LIBOR rates dropped during the quarter.

The second factor which impacted our net interest margin during the quarter was a change in our asset/liability composition during the quarter, which led to an unusually high level of liquidity and lower asset yield.

The final item which hindered net income was the continued elevated level of legal expenses related to the ongoing government investigations.

Since we measure and try to optimize all of the performance indicators, we are pleased to note that on the positive side, we had a very strong quarter of noninterest income driven primarily by gains on the sale of residential mortgages.

We continue our disciplined approach through expense management and maintained a very favorable efficiency ratio, even when including the elevated legal expenses.

We also continued to benefit from our sound credit quality.

Let's talk first about the margin, which decreased 23 basis points to 3.49% for the fourth quarter as compared to 3.72% in the third quarter of 2019.

The decrease was due primarily to a change in our asset/liability mix during the quarter as we saw robust growth in average deposits during the quarter of $398 million or 5.4%.

The growth in average deposits for the quarter outpaced loan growth, which drove down the average loan-to-deposit ratio and led to a change in the asset mix to a lower percentage of loans and a higher level of liquidity.

Our deposit levels were very fluid during the quarter, and on average, we had about $370 million in excess liquidity for the quarter.

We attribute approximately 15 basis points or 71% of the decline in the margin to the impact of this excess liquidity.

The second factor impacting the margin in the fourth quarter was the interest rate environment as evidenced by the average 30-day LIBOR, which was 39 basis points above -- lower than the third quarter of 2019.

Given that 40% of our loan portfolio is indexed to the 30-day LIBOR rate, the impact of the decrease in that rate, together with the competitive market, that we saw loan yields decline from 5.39% in the third quarter of '19 to 5.18% for the fourth quarter.

We also achieved a decrease in the cost of funds.

So we attribute approximately 8 basis points or 29% of the decrease in the margin to a lower spread on the loan book.

We were able to reduce deposit costs during the quarter due to our deposit levels and the falling rate environment.

As compared to the third quarter, we were able to reduce the rates paid on interest-bearing deposits by 20 basis points and the composite cost of funds by 13 basis points during the quarter.

We are pleased by the growth of the deposit base over the last year.

While the point-to-point growth from year-end 2018 to December 31, 2019, was $250 million or 3.6%, the growth in average deposits from the fourth quarter of 2018 to the fourth quarter of 2019 was $766 million or 11%.

As I mentioned earlier, the deposit flows during the quarter were uneven.

Due to our commercially oriented business model, we have a good number of customers with high average deposit level but also have significant fluctuations in their balances during any given period.

As the fourth quarter progressed, we held significant deposits in October and November, which flowed out prior to year-end.

As you know, we bank many law firms and title companies, which had escrow balances which declined as the related real estate transactions went to closings in December.

We continue to benefit from the significant level of DDA balances, which remained favorable with an average of 29.6% of total deposits for the fourth quarter.

The $7.5 billion balance of our loan portfolio at year-end was basically flat as compared to the balance at the end of the third quarter of 2019.

We had reasonable loan production in the fourth quarter as we continued our efforts to be more selective regarding individual credits, and we also slowed our growth on construction lending.

At the same time, we realized significant payoffs during the fourth quarter.

Many of these payoffs were expected and came primarily through the successful completion and sale or refinance of the subject properties.

So despite new loans booked of $281 million in the fourth quarter, net loan growth was essentially flat in the quarter based on the timing of payoffs, which was about 40% of the loan payoff for the full year 2019.

As of December 31, 2019, we achieved point-to-point annual loan growth of $554 million or 8%.

More importantly, the growth in average loan balances from the fourth quarter of 2018 to the fourth quarter of 2019 was $635 million or 9.2%.

Those growth figures are right in line with the expected target levels we have been forecasting.

Also in line with our expected goals, during the fourth quarter, we increased the percentage of C&I and owner-occupied loans in our portfolio while reducing the percentage of CRE and ADC loan balances, which resulted in decreases in the CRE and ADC concentration ratios.

We are pleased that the growth and positioning of the portfolio was in line with our expectations for 2019.

While we continue to see significant loan demand in the market, we remain selective throughout the credit approval and monitoring processes.

Loan pricing is very competitive.

However, EagleBank was built through relationship banking, and we continue to benefit from that strategy.

While many of our competitors seem to be leading with price and not pricing for risk, our strong relationships with our existing customers often gives us the opportunity for the last look at the transaction.

The economy in the Washington area remains healthy with favorable demographics.

While the rate of production and job growth -- population and job growth is slower than the torrid pace of 2017, the economy has picked up in the second half of 2019 as compared to earlier in the year and to 2018.

For the 12-month period ending in October, the region added 52,000 net new jobs, and those jobs are in higher-income white collar positions.

The tech sector continues to flourish in Northern Virginia.

The D.C. metro area has the fifth largest regional economy in the U.S., and the gross regional product is now $541 billion.

The growth rate of the GRP has been about 1.7% per annum for the last 3 years and is expected to increase to 2.2% over the next 2 years.

The efficiency ratio for the fourth quarter was 39.71% as compared to 36.09% in the fourth quarter of 2018 and 38.34% for the third quarter of 2019.

The uptick in the efficiency ratio as compared to the fourth quarter of 2018 and the third quarter in 2019 was caused by both the relative flattening of our top line revenue due to declining interest rate environment and by an increase in noninterest expenses.

The major driver of the noninterest expense increase was a $496,000 increase in legal, accounting and professional fees, which totaled $4.1 million for the fourth quarter as well as an additional $794,000 in FDIC insurance expense following the significant credit received in the third quarter of 2019.

The fees associated with the government investigation were $2.1 million for the fourth quarter of 2019.

These investigations are ongoing, and we expect the related expenses to remain at an elevated level in 2020.

We continue to fully cooperate with the various information requests and are trying to resolve these matters prudently and expeditiously.

We continue to allow our attorneys to handle the bulk of the workload as our management team can continue to focus on building and serving relationships and executing the strategic plan.

We believe that for the next several quarters, we will be able to maintain the efficiency ratio under 40%.

While judiciously managing expenses, we continue to make the necessary investments in systems and personnel and organizational structure as we grow towards the regulatory threshold at $10 billion in assets.

In that regard, I would like to note 2 recent important additions to our EagleBank team.

In October, we welcomed Matt Brockwell to the Boards of both the bank and Eagle Bancorp.

Matt brings a wealth of experience in auditing and regulatory affairs.

Just last week, Paul Saltzman joined the bank as Executive Vice President and Chief Legal Officer.

Paul joins us from the law firm of White & Case and also has many years of experience in the financial services industry.

We are also very pleased with the results to date of the share repurchase program.

From inception on August 9 through December 31, we repurchased 1,304,500 shares, 76% of authorized amounts, at an average price of $42.06 per share.

Because the calculations on based on -- are based on weighted averages, the program did not create much EPS accretion during the third and fourth quarters of 2019 but should have a more beneficial impact in 2020.

In December 2019, with approval from our regulators, the Board authorized a new share repurchase program, which allows for the repurchase of up to 1,641,000 shares through December 31, 2020.

Noninterest income was a plus again during the fourth quarter as total noninterest income grew to $6.7 million as compared to $6.1 million in the fourth quarter of 2018.

The gain on sale of residential mortgages was $2.5 million for the quarter as compared to $1.4 million in the fourth quarter of 2018 and $2.6 million in the third quarter of 2019.

We also recognized just over $500,000 from the sale and servicing of FHA loans and SBA loans during the fourth quarter.

This represented a slight in -- uptick for those units.

The bank continues to maintain solid credit quality.

At December 31, 2019, NPAs as a percentage of total assets were 0.56% as compared to 0.21% a year ago and 2.66% at September 30, 2019.

Nonperforming loans were 0.65% of total loans at the end of the fourth quarter as compared to 0.22% at December 31, 2019, and 0.5% at September 30, 2019.

We continue to constantly evaluate the portfolio and take an aggressive approach to placing loans on nonaccrual status.

Net charge-offs for the fourth quarter of 2019 were 0.16% as compared to 0.05% in the fourth quarter of 2018.

On an annualized basis, net charge-offs were just 0.13% for the full year of 2019 compared to 0.05% in 2018.

The allowance for loan losses was 0.98% of total loans at December 31, 2019.

The provision expense for the quarter was $2.9 million, consistent with our allowance methodology, the current economic climate and our minimal charge-off history.

At December 31, 2019, the coverage ratio was 151%, and we believe we are adequately reserved.

We are finalizing our system to accommodate the new accounting standards for cumulative loan losses, termed CECL, and continue to expect that the adjustment to equity, which will be effective as of January 1, 2020, will be in the range earlier disclosed of 10% to 20%, including a reserve unfunded commitment.

Our capital position remains quite strong.

At the year-end of 2019, the total risk-based capital ratio was 16.20% as compared to 16.08% in December of 2018.

The common equity Tier 1 ratio had improved from 12.49% to 12.87% over the same period, and the tangible common equity ratio had improved from 12.11% at the end of 2018 to 12.22% at December 31, 2019.

Due to our strong profitability, all of these capital ratios continue to improve quarterly even after the effect of the share repurchase and cash dividend actions we initiated during 2019.

We are confident in our ability to continue our quarterly cash dividend.

We intend to continue share repurchases when the effective price allows us to meet our established return objectives.

The Board remains committed to maintaining a strong capital position while always considering any opportunities to enhance shareholder returns.

I would like to thank all of you on the line this morning for your support during 2019.

I would also like to thank the many people who are not on this call, including our EagleBank employees and directors and, most of all, our customers for their confidence and efforts during a very challenging year for our company.

We look forward to a successful 2020.

This concludes my formal remarks.

We would be glad to take any questions.

(Operator Instructions) Our first question comes from Casey Whitman with Piper Sandler

Just a first quick question on the margin.

I appreciate your commentary around it.

Just -- I guess assuming we don't get more downward movement in short-term rates, one, how much more room do you have to lower deposit costs in this scenario?

And then I guess with the liquidity coming off by year-end, could we actually see the margin move up pretty meaningfully in the first quarter and then maybe hold steady from there?

Is that one way to think about it?

Or how should we think about the margin outlook?

Yes.

Casey, I -- we've seen some of the liquidity recover here in the last couple of weeks here as we move back into a new year.

I think given the current facts and circumstances, it's reasonable to expect that there may be some improvement in the margin going forward, as you suggested, with some of the normalization of the liquidity.

We are originating loans right around the weighted average coupon of the overall portfolio and also, as you referenced, the stable rate environment, the stable rate outlook.

So it's -- I think the only other headwinds, in addition to our ability to lower funding costs, would be certainly compression on spreads -- credit spreads, right, with -- in the absence of any kind of significant credit event, more broadly, market-based, broadly, broad credit event, there's going to be some reticence to widen those spreads by our competitors as well.

So we still have to compete on that front.

But yes, in terms of being able to lower deposit rates, I do think that there will continue to be some competitiveness on the deposit side as well.

We're still seeing a little bit of that, but they've certainly softened since the second, third quarter of last year.

But I do think it could be reasonable to expect a little bit of an improvement in the margin.

Okay.

And then maybe just touching on that a little more.

Just as we think about where you guys kind of want to hold liquidity, should we think about it as just your average loan/deposit ratio may be heading more towards like 100% or so versus, I think, it was 98-or-so percent this quarter?

Would that be one way to think about it?

Ideally, we -- I think I've stated before that if we could achieve 100%, 102% loan-to-deposit ratio, that would be fine on my end.

We want to make sure that we're accommodating our customers.

And I think we've seen a lot of liquidity we saw flow in, in the third and fourth quarter was symptomatic of broader market themes as more cash just flowed into the banking system.

So to the extent that, that phenomenon continues, we'll continue to have those elevated costs.

Again, if I had my druthers, we'd be at 101%, 102% on average.

Okay.

Helpful.

And then just your commentary around loan growth this quarter and the payoffs that came in.

I mean do you have confidence that growth will pick back up to the high single digits?

Or should we think about that being a little lower in 2020?

Or what's sort of your outlook for the year?

Our outlook is to continue in the high single digits.

We feel pretty confident.

Our pipeline is strong.

We feel confident that we can meet that.

Great.

I'll just ask one more and let someone else jump on.

Just the tax rate has continued to migrate a little bit higher.

Any outlook for where that shakes out into 2020?

Yes.

I would expect that to normalize next year as we get beyond the impact of the accruals and the lack of deductibility on those for -- associated with the departure of our former CEO.

And again, right around the 26% rate, I think, is where I'm expecting things to land somewhere in '20.

Our next question comes from Joe Gladue with Alden Securities.

I just wanted to touch base on a few of the pluses and minuses from the fourth quarter versus third quarter, and I'll start with the noninterest income.

Just other noninterest income was up about $700,000 versus the third quarter.

Just wondering if you could break out a little bit of where that's mainly coming from.

Sure.

Yes.

I mean we did successfully close an FHA deal in the fourth quarter.

It's a construction deal that will continue to bring as it funds up additional gains.

Additionally, we had some SBA gains that would've contributed there as well.

Okay.

All right.

And on the expense side, just -- so focusing a little more on the salary and compensation expense.

In third quarter, you had the roughly $2 million of compensation, accelerated share-based compensation.

So I was kind of expecting a little bit of, I guess, relief in that line item in the fourth quarter.

I assume that some of the increase is related to some of the preparations you talked about, approaching the $10 billion in asset mark and adding some additional people.

Is that a fair characterization?

And are there any more additions in that regard that you expect in the near term?

Well, certainly, that is part of it.

We did bring on several employees.

I think Susan mentioned the addition of our Chief Legal Officer that actually took place at the start of this year.

But certainly, towards the end of last year, we brought on some additional employees that were higher cost in nature.

We did also have, obviously, the merit increases.

And also, the -- as the incentive comes more into focus in the fourth quarter, there were adjustments associated there.

All right.

Guess I'll just ask one other.

It looks like -- wait a minute.

I guess just on the margin a little bit further, right?

Yes.

Just wondering where the -- where you stand in relation to loans hitting floors after the most recent cuts at the end of the year.

Yes.

So as it stands right now, there's about $1.9 billion, a little under $1.9 billion that -- of loans that are currently at the floors, and that's where it currently sits.

It's about 62% of total loans with floors.

The next question comes from Catherine Mealor of KBW.

I think we're -- I had a couple of margin questions, but I think we've -- we hit most of them.

Let me ask one on asset quality.

The trends this quarter were really good.

But if we look back in the Q, there was a really big increase in classified and watch list credits last quarter.

Can you circle back on that and give us any kind of color on what drove that and then how -- any update on where that trended this quarter?

Sure.

Catherine.

Last quarter, we did have one large loan that was added to our internal watch list.

So at 9/30, you would've seen that, and that was around $100 million.

It was a loan that's at a 70% loan to value with a strong guarantor.

There's -- there was an issue with driving stabilized numbers.

It took longer than we anticipated.

Because it was a larger loan, we wanted to raise its internal profile.

So we did add it to our internal watch category.

Subsequently, we've had success working through that and adding some credit enhancements and some seasoning has been taking place at the property.

So that is not something that will be appearing on the watch list at the end of the year.

So you're going to see a precipitous decline, but it is just one credit.

We have had a reduction in our criticized and classified loans over the course of the year, and I think we're in pretty good shape there.

Overall, when you're looking at nonperforming loans, we've got roughly 40% of them on the CRE side, about 48% on these SBA, C&I side and basically 12% in residential mortgages.

And I think we had talked a couple of calls ago about some fondness in the very high-end market for residential real estate.

So we are seeing a little bit of that.

Got it.

Okay.

And then is the $100 million credit, is that your largest credit?

Or how many other loans do you have of around that size?

We have probably a handful, maybe 5 loans around that size.

This was the largest loan in terms of outstanding, and we're comfortable with the sponsor, comfortable with the property and the loan to value that we're sitting with.

So just coincidentally, at the same time that this $100 million moved into the -- what we call our internal watch category, we did note that the related deposits were about $50 million.

So it's not what I would call a distressed situation.

I think we're -- this was just sort of a heightened scrutiny of loans that hadn't met its stabilization time line.

The next question comes from Brody Preston with Stephens Inc.

So I had a question going back to the margin.

So over the last, let's call it, 5 or 6 quarters, you started to see the noninterest-bearing deposits, the -- I guess the difference between what would -- what you would see between averaging the balances on the period-end balance and what you experience on the average balance sheet pickup.

And so should we -- I guess in terms of thinking about it from a modeling the average balance sheet perspective, should we expect sort of these large, call it, $100 million to $200 million intra-quarter swings in noninterest-bearing deposits to continue?

You know, Brody, I think we've had the ability to maintain that noninterest-bearing level on average, as you point out, right around 30%.

And I would expect us to continue to be able to achieve that, even with the continued growth.

That's the expectation.

We're working hard to continue to expand existing relationships and seek new relationships on that front.

So I'm pretty comfortable that 30% -- right around 30%, we'll be able to hold that.

Okay.

All right.

And I guess as I think about incremental cost of deposits, just on the CD book, is the incremental cost right around 1.45% right now?

I would say that's where we are for the core CDs that we're booking.

On the wholesale side of things, on the brokerage side of things, we're looking at 3-year tenures and out, their all-in cost of 180 basis points or so.

But to the extent that we can continue to book CDs that are core on the -- in the 2- and 3-year range, 1.40%, 1.45% is about where it's coming in.

Okay.

So it's some blend of the 1.45% and 1.80% depending on the mix.

Yes.

Right.

Flipping over to the income statement, compensation expense.

So I saw you had some new hires this quarter on the loan production side to replace some of the folks that have left.

Just wanted to get a sense for how much of the increase in compensation this quarter was tied to more, I guess, onetime in nature items like signing bonuses and how we should be thinking about that line item as we move forward into 2020.

Is it going to remain elevated at that $19 million?

Or do you expect that to come down a little bit?

Yes.

I'd expect that to ratchet back just a bit.

I mean the -- again, there's not much in the way of the signing bonuses.

Again, we did bring on some new employees.

As I mentioned, there have been some increases in salaries over the course of the year.

But there -- it was also -- we also made some adjustments on the incentive front as the year came into focus in terms of those payouts as people achieve certain gates and incentive plans and things of that nature.

So I would expect that to pull back a touch.

Okay.

And on the legal expenses, understand that you say you expect it to remain elevated.

But I guess when we think about the growth outlook, it's been growing by double digits on a quarterly basis for the last few quarters now.

So when we say remain elevated, do you expect it to continue to grow like that?

Or do you expect to sort of remain flattish from here at $4-and-change million?

It's very difficult to predict that.

We work with the attorneys and get some budgets together from them and their recommendations, but it's very difficult for us to project what the outcome of the legal expenses will be.

Okay.

And is that just related to the variance around their billable hours and I guess maybe producing documents that are difficult to predict?

It's probably all of that.

Okay.

Now on -- I guess thinking about the investigation, understanding you can't go into specifics.

But I guess sort of we're probably a year into this or so, how are you guys sort of feeling about the time line of the investigation at this point?

The time line, we really can't say.

I mean you can imagine, dealing with government agencies, you can't predict the time line for them.

I will tell you that we continue to believe the bank will not have a major impact on -- as a result of this.

Okay.

And then one last one for me on the buyback front.

I saw in the 8-K back in December in your longer term -- your long-term incentive comp, you -- it includes a 50% earnings payout target.

You guys played out closer to 80% this quarter.

In terms of modeling and thinking about buybacks, is -- should we move our modeling closer to the 50% payout ratio, all-in?

Or should it be something higher moving forward?

Yes.

I mean in terms of where we're looking to actually purchase -- repurchase shares, I mean, again, as I've said in the past, we are looking at the earn-back of tangible book.

So the pricing needs to make sense.

Does that address your question?

Yes.

I -- yes.

That -- I guess that should suffice.

The next question comes from Christopher Marinac with Janney Montgomery Scott.

Just want to drill back on the balance sheet growth in the quarter.

So if we look at the difference, as we talked about long ago on the call about the average growth versus the period-end growth, does the average this quarter reflect kind of what you are capable of doing these next couple of quarters?

Or would you envision that the pace is different from what we saw on average Q4 versus Q3?

I -- we expect it to be different going forward than it was in the fourth quarter.

We will get back on our normal pace and with an end result of average growth being in the high single digits.

So an acceleration from what we saw.

And then would the period-end differences probably be less likely?

Or is it kind of hard to predict that because it may vary?

It's very difficult to predict.

We generally are tightly communicating all of those expectations, but it's very hard to predict.

Yes.

And we've seen those kinds of fluctuations in the past.

Obviously, again, as we noted, with the successful completion of certain projects, we see kind of some of these lumpy payoffs.

So as Susan mentioned, it's going to oscillate here and there.

But just focusing on the average is I think what we're focusing on.

Okay.

Great.

Then just last question on capital.

Does your capital and your flexibility changed at all this year?

And I'm thinking more because you're -- you've been very conservative for so long on maintaining the capital levels you do.

I mean do you feel that, that -- that you may have more flexibility this year, just with retention and how your pace plays out?

Yes.

We'll continue to evaluate that.

We're always talking about that just in terms of the level, the appropriate level of dividend payout or any other use of capital that we want to employ, but yes.

One other element or constraint that we're sensitive to are these ADC and CRE concentration ratios, which are headed in -- headed downward, which gives us a little bit of relief on that front.

So from -- by that measure, we -- it will provide us with certainly a little bit more flexibility.

Our next question comes from Steve Comery with G. Research.

I was wondering if you guys could kind of just qualitatively talk about sort of the demand you saw during the quarter.

Obviously, we didn't see a lot of net balance sheet growth due to the payoffs, but kind of what was customer activity like and what sort of product demand is coming through.

I think demand has been fairly strong.

Our pipeline is good, and we did book about $281 million in new loans during the quarter.

So we are seeing demand.

We're being quite selective.

So I think -- and as you know, we've taken a bit of a pause in terms of the construction lending side, other than existing customers with very strong deals.

So I think we are continuing to lend in construction, but we're not growing that area.

The demand is still here.

And I think the arrival of Amazon in Northern Virginia is going to further prompt that, along with the election coming up.

We always get a bit of a bump from election year in the D.C. area.

So not really seeing the fall off in demand.

Okay.

That's very helpful.

So then kind of just thinking about the construction completion calendar and the payoffs, you guys mentioned in the release that these completions were expected.

Maybe just talk about like is the calendar for construction completion like clumpy going forward?

Or would we expect to see kind of like a more like measured pace there?

It's always going to be lumpy, just by virtue of how long given different projects take, and some of our larger-loan payoffs may take place early in the quarter, later in the quarter.

I think rather than looking at a point in time, if we focus more on the average growth, I think you'll get a better idea in terms of your modeling.

Okay.

And then just finally, yes, on the sort of like pulling away from construction loans you just mentioned, maybe just talk about how that impacts the margin, the difference in mix going forward with the loan growth.

Well, there is some impact for sure.

But overall, it hasn't been hugely significant in terms of loan yields.

I think Charles pointed out earlier, the difference in loan yields over this last quarter, 21 basis points.

So it's not a huge impact.

Most of that impact really came from rate change, change in LIBOR.

So I think we're certainly not taking on of -- risky of projects.

And if you believe in risk-based pricing, then you would see some decline as a result of that.

But it hasn't been significant thus far.

Our next question comes from Eric Zwick with Boenning and Scattergood.

In the prepared comments, you've focused on kind of the increased composition of the loan portfolio in terms of C&I and the owner-occupied CRE and a kind of corresponding decrease in the income-producing CRE and ADC.

Just curious, kind of based on the current loan pipeline as well as your preference for portfolio composition going forward, do you see that trend continuing?

And if so, do you have kind of a target in mind for the percentage of C&I and owner-occupied CRE segments?

Well, I think we're always looking to have a balanced portfolio.

So we've been working to grow C&I loans over the last several years.

We're also looking for geographic balance.

So we've been working to grow the Northern Virginia business as well, kind of the ultimate being a 1/3 D.C., 1/3 Maryland and 1/3 Northern Virginia.

I think having a balanced portfolio really is a risk mitigant as well.

So we're definitely working towards that.

Okay.

That's helpful.

Go ahead.

We also see a great deal of -- we see a great deal of potential in the government contracting market and have some outstanding relationship managers that are targeting that for growth.

That's great.

And I guess just a follow-up on the geographic comment.

In order to achieve that desired kind of 1/3-1/3-1/3 mix, based on the demand you see in that market, can that happen naturally?

Or would you potentially need to add more lenders and more capacity in some of those markets to achieve that goal?

Well, I actually think the place where we would like to grow the most is Northern Virginia, and that also happens to be the area where there is the most demand and the most growth right now.

So I think we should be able to organically make that happen.

But we will probably need to add to our staff as we ramp up that growth.

And I'm not showing any further questions at this time.

I'd like to turn the call back over to Susan Riel.

I want to thank everyone for being on the call and for your support during the year, and look forward to talking to you at the next quarterly meeting.

Ladies and gentlemen, this does conclude today's presentation.

You may now disconnect, and have a wonderful day.