Ladies and gentlemen, thank you for standing by and welcome to The Eagle Bancorp Inc. Third Quarter 2019 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I'd now like to hand the conference to your host for today's presentation, Charles Levingston, Chief Financial Officer. Please go ahead, sir.

Thank you, Victor. 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 the 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 in the 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 third quarter of 2019. We appreciate your calling in this morning and your continued interest in Eagle Bank. As usual Jan Williams, our Chief Credit Officer, is also with us this morning. Jan and Charles will be available later in the call for questions. I'm pleased to announce that we achieved another quarter of strong profitability with net income for the third quarter of $36.5 million. While that is a decrease from our earnings of $38.9 million in the third quarter of 2018 and slightly below the second quarter of 2019, our profitability still ranks among the highest levels of community banks in the United States. The return on average assets for the quarter was 1.62% and the return on average tangible common equity was 13.25%. We are also very pleased to report that with solid growth in loans, deposits and market share during the quarter, at September 30th, we reached $9 billion in total assets. For the quarter, the earnings were $1.07 per fully diluted share as compared to $1.13 per share in the third quarter of 2018. As mentioned in the press release, there were two significant non-recurring expense items, which somewhat offset each other. So that exclusive of those items, our earnings for the quarter would have been $37.1 million or $1.08 per fully diluted share. I will discuss the details of the FDIC insurance credit and the changes to our Board structure later in my remarks. Given the trend of margin compression across the industry, it is not surprising that the major factor influencing our profitability in the third quarter was the decrease of the net interest margin to 3.72% for the quarter. That was compared to 4.14% a year…

[Operator Instructions] And our first question will come from the line of Catherine Mealor from KBW. You may begin.

I'm going to start with the margin and maybe dig into the deposit side. Can you talk a little bit about, you know, maybe what deposit cost have done in the most recent months or weeks just given the recent Fed cuts and your expectations for your ability to lower you may be seeing your money market accounts as soon as fourth quarter? Thanks.

Sure thing, Catherine, this is Charles. The deposit rates in our market have shown a little bit of softening here in recent weeks. That's something that we've learned in talking to other folks around the country, had happened in other markets, unfortunately in our market where all the banks here are so loaned up, the competition tends to remain fairly stiff although. Again, some of those stubborn rates are starting to soften up. So my expectation is that we will and we actually have already made changes to our money market rates and we'll continue to do so as a probability for another rate decrease looks pretty good at the end of this month. I think it's about an 86%. So I would expect there to be some savings in terms of funding cost going forward in the near term.

So your money market right now or savings and money market of 1.85. Where would you say they are today?

We are just over 1% on the top tier money market accounts at this point and often you hear about this notion that once rates fall below 1%, it tends to change that landscape a little bit. So, yes, that's right where we are in our top-tier.

Okay, So -- I'm sorry, right at 1% in that?

Just above…

Say that one more time.

Just above 1%.

Just above 1%. Okay, great. So, I mean -- so as we think about next quarter, I mean, directionally, do you feel like we still have more NIM compression as LIBOR still pushes loan yields down but we don't get a commensurate decrease in deposit costs quite yet. Just directionally, how you kind of thinking about where the margin goes from here?

Sure. Yes, I would not be surprised to see some additional compression in the margin in the near term. We do -- however, I would not expect them to be as dramatic as we saw between the second and third quarter. We feel pretty comfortable with our liquidity position where it is today, which certainly played a role. We do have CDs that on a weighted average basis have about a 12-month weighted average life and those -- we will be re-pricing those CDs that we put on over the last year, so we will be re-pricing. We also have -- as we talked about, our money market rates that have been brought down and re-pricing those deposits as rates continue to drop. We also have floors on our loans. So on the other side of the balance sheet, we do have a little bit of protection. I think another 25 basis point move and we will be pretty much sitting at the floors, and if there is yet another move down at the end of the year, we'll see the benefit of some of those rate decreases spilling into the 2020. So that's a little bit of color around my expectation for the margin. But yes, to your point, a little bit -- I wouldn't be surprised to see a little bit more compression but I would expect some stabilization going into '20.

Great. Okay. And I'm -- how do you think about a fair pace for loan growth next year? It seems like you made a comment that you're now kind of transitioning to be highly profitable, but more matured company with slower growth than you have historically. So what level of growth do you feel like as appropriate this part of the economic cycle and given your size?

Catherine, we are still projecting a high single-digit growth rate. So we think that we will be comfortable at.

And within the high-single digit, can you talk a little bit about your focus on where you're pulling back in terms of loan types and where most of that growth will come from?

I would say, we're being far more selective on construction loans. So we're not out of the construction lending business, but we're being far more selective than we have been; restaurants and hospitality, we're being very cautious with also.

Thank you. And our next question comes from the line of Casey Whitman from Sandler O'Neill. You may begin.

First, I just wanted to ask on the tax rate, that's ticked up over the last two quarters. So, is 28% a good rate to use going forward or could we see some relief?

Yes, I think, you know, in the fourth quarter, I would expect that tax rate to remain relatively around the same area. But a lot of those expenses associated with Ron's retirement and the lack of deductibility of those expenses will be lost going into 2020 and I think it will normalize back around the 26% area going forward beyond that.

Just thinking about expenses, so just look at maybe the salary and benefits line this quarter, if I exclude the one-time costs, you had a pretty nice relief there. I guess what do you attribute some of that decline to, and then I also just wanted to get a sense for how talent attrition has gone over the last several months through some of the outside noise? I mean, have you been able to keep all the lenders or just kind of give us an idea of how your talent attrition has gone?

We have had turnover. I mean, we're in a business where there is turnover. We're always looking at bringing on people and there are people unfortunately that leave, sometimes that turnover is good. We have attracted some good people. We have a strong team in both the lending teams and the support areas and we're continuing to build on that. We are looking to fill some critical high level senior management positions and we have some good leads in that area also.

Casey, in terms of the cost, here we are kind of getting towards the end of the year end, and some of those incentive accruals that we're making are being trued up based on our expectation for production towards the end of the year, which leads to the result that you see in the financials today. That's part of it.

Got it. I guess, a bigger picture, I mean, do you think you can keep holding the efficiency ratio below 40% as you incur maybe some elevated costs related to going over $10 billion or with other continued IT expenses you guys kind of referenced? Or I guess, can you keep the efficiency ratio this low or is that should pick up a little bit?

We think, Casey, that it may pick up a little bit, but we'll still be at 40% or below. We have spread the cost of going over the $10 billion mark over a period of years. So last year, we did have some, we did some this year, we will add some more next year. So we have been prudent in that and not taking the hit all at one time. So we do expect that the efficiency ratio will still be at a 40% or lower.

And also keep in mind, we are saddled with some of these additional legal expenses at this point that we hope to bring to a different use going forward in terms of those expenses. So -- in terms, again, growing towards that $10 billion, adding the infrastructure, adding people, growing out our risk management apparatus. So, yes, I would agree with Susan it 40% or below is the expectation.

Okay, great. I'll just ask one more question and let somebody else to hop on. Maybe, Jan, just a little bit of color on that that one non-performing loan that was brought current. How long was it on non-accrual, what was the loan type or location, any kind of color you can give us would be helpful?

Sure, Casey. It was one loan in prime location on Wisconsin Avenue that had matured and wasn't promptly address -- was addressed. The documentation and the funding didn't come in until after the 30th. So it was never on non-accrual, but it was over 90 days at September 30. So we included in the over 90-day category. It's a 60% loan to value property. It's really a terrific location. So I don't have concerns from a credit stand point. We just weren't able to get it re-documented and cleared by the end of the quarter.

Thank you. And the next question comes from the line of Christopher Marinac from Janney Montgomery. You may begin.

Thanks, good morning. Jan, I just want to continue along the same lines with you. What's new on the classified fund and criticized? Are those trends going to be similar to what we saw last quarter and do they kind of directionally follow what we saw in the NPAs at 9/30?

There is not going to be a tremendous amount of shift, but there is a bit. You might recall that we had a number of loans that were included as a result of one of our customers that had a number of projects with us. The Hitt transaction, which you may have read about -- Todd Hitt, we're in good shape. But it's still in receivership that that those loans are being carried in that substandard category. We're also any time that a loan becomes non-performing or it goes over 90 days were automatically downgrading through a sub-standard level, so you're see that $16.5 million in there this quarter. Typically, we don't have a ton of migration at any given time, but one loan in the $20 million range can make a big difference in what our average risk rating is. It's down from roughly -- it's down about 1% in terms of the criticized and classified portfolio -- the average risk rate, I'm sorry, is down about 1%. The criticized and classified portfolio has grown by about $22 million in the last quarter. So a lot of it is going to be moving back out of there as we progress through these.

So net-net, it sounds like you've got some incoming and some outgoing. But it's not materially. Got you. Okay, great. Thank you for that. I appreciate that. And Charles just quickly for you, does the wholesale sort of dependency get incrementally better because you have the deposit growth this quarter and then obviously the loan to deposit ratio just tick down; I mean, does that just sort of liquidity ratio is just get better because of the success in Q3?

Yes. I think you'll see that. We had a little bit of reduction as we measure our core deposits to now -- I think, as a result of the regulatory relief, the reciprocal deposits being included as core generally, we did see a little bit of improvement there. So, yes, I think that's the right view.

Okay, great. And then last question, how do your typical prepayments work in this type of environment? Do they generally help you or does it create more of a turnover just with the customers wanting to refinance as rates go low? Just kind of curious on structurally if the way that you're set up sort of helps you with the customers..

I think we generally get the first bite at the apple if a customer is looking to have their rate decreased either through refinance or modification. So we try to take a realistic look at the market and the customer and the particular deal, if it's on our risk-based return and our pricing policy, and whenever parkable, retain that customer looking at the full relationship. There are some times when customers are with us, say, through construction and stabilization and they are ultimately going agency; that's a situation where we may have rollover. I think in the past, you've seen that churn in the portfolio on the construction side. And one of the benefits to add in the income producing portfolio at a more rapid rate is that we do have a longer stabilization period; most of those loans carry prepayment penalties. So we're not as vulnerable on those either. We tend to retain our customers based on our relationships, if we can be competitive on the pricing.

And our next question comes from the line of Steven Comery from G. Research. You may begin.

Hey. Deposit growth is really strong this quarter for you guys, kind of a big tick up from what we've seen in past quarters. Was there anything you guys were doing differently or was the market different or was it just a lot of wins came this quarter?

Yes. I attribute it to continual development of relationships with our customers. There's certainly a market element there as well. Folks are getting perhaps a little skittish about late cycle moving more into cash and that could certainly have a play -- played a role in some of that movement.

Okay, thanks for that. And then the other thing that was really positive, I think, this quarter was that the tick-up in loan sales. Was there anything going on there other than like mortgage volumes were higher, so there was more there to sell or were you guys taking share; was there anything else there?

No, no. I think it was simply a product of tracking with that 10-year treasury; rates were down and volumes are up. So, yes, we did see some benefit from that this quarter.

Thank you. And our next question comes from the line of Erik Zwick from Boenning & Scattergood. You may begin. Erik, your line may be on mute.

With regard to the changes in the Boardroom this year, the reorganization and then more recently the departure of three members; two questions, I guess, first, are there any near-term plans to add any additional Board members, and second, what initiatives or priorities are top of mind with the Board today?

We are always looking for new Board members and the skill sets that will help us to fill in some of the gaps that we might need on the Board. We have a candidate -- a strong candidate at this point that we're expecting to make an offer to in the very short distance. We don't have a goal on how many directors we would have. I mean, 18; we've always been told 18 were too many directors. So we don't have a goal for numbers. Just when the opportunity comes up to get a good qualified director, we will make a move on that.

Okay. And then in terms of, I guess, with the Board being smaller now, I mean, everyone, I guess, maybe gets a little bit more opportunity to kind of voice their preferences, I guess, any changes or any adaptations to initiatives or priorities that the Board is looking at today?

No. I would say, we've always had outspoken directors. So even though we had 18, they were always very involved and outspoken and involved with the Bank. So, no, we don't have any problems with any of that. We are trying to just build the Board with the right skill set as we move into a larger organization and can better meet the expectations of the regulators and our shareholders with that Board.

Maybe just kind of one follow up there, as the Company does grow and become more mature, just a skill set that you look for change with a potential Board number or new hire?

Not totally, but there are some like, now, we're looking at adding a risk committee, which as we move past the $10 billion mark, that is something that is recommended, not required. And one of the Board members that we recently brought on, Theresa LaPlaca, will head up that risk committee. So getting -- giving us the opportunity to bring on people that are qualified to do things like that is a key objective for us.

Thank you. And I'm not showing any further questions at this time. I would like to turn the call back over to Susan Riel for any further closing remarks.

Okay, I want to thank everyone again for being here and attending today and look forward to talking to you at the next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.