Good day, ladies and gentlemen, and welcome to the Eagle Bancorp Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference call may be recorded. I will now turn the conference to Jim Langmead, Chief Financial Officer of Eagle Bancorp. You may begin.

Thank you, Nicole. Good morning, everyone. Before we begin the formal remarks, I'd like to remind you that some of the comments made during this call may be 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'd 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'd like to introduce Ron Paul, the Chairman and Chief Executive Officer of Eagle Bancorp.

Thank you, Jim. I'd like to welcome all of you to our earnings call for the third quarter of 2016. We appreciate you calling in this morning and your continued interest in Eagle Bank. As is our custom, in addition to Jim Langmead, also on the call with me this morning is our Chief Credit Officer, Jan Williams, our Executive Vice President Charles Livingston. Jim, Jan and Charles will all be available later in the call for questions. As you might have seen in the 8-K we filed yesterday, Jim Langmead has informed us that he intends to retire from full service on March 31, 2017. The Bank has significantly grown and prospered during the 11 years that Jim has been with us and the large part of this success is due to the efforts by Jim and leading his team in our finance division. Jim, we truly appreciate your contributions and we'll be forever grateful. He is not leaving us, though. Jim has agreed to continue to serve part time and continue to be part of our finance team going forward. We are pleased to announce that effective April 1st of next year, Charles Livingston will become our Chief Financial Officer. Succession planning is a key part of our management process and we have anticipated that Jim will want to step down and start winding down. Charles has been a key part of our finance division since joining the bank in 2012 and has a keen grasp of what it takes to oversee the financial operations of a $6.7 billion institution. His prized service includes tenure with the federal reserve banks of Atlanta and Philadelphia and with PricewaterhouseCoopers. Like me, Charles will continue to benefit from Jim's experience and advice. Now to the third quarter, for which I'm very…

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.

Good morning, Casey.

Good morning, Casey.

Great quarter. Just wondering, can you give us some more color on the higher level payoff you saw this quarter? What do you think drove that and how much was expected?

Sure. Just to give you a little flavor on that, Casey, first quarter we have $135 million of payoffs; second quarter we had $105 million of payoffs; third quarter we had $220 million of payoffs. A lot of that was construction lending that was expected to happen. It's just the normal ups and downs that we have. There's no anomaly in that third quarter. It's just the consistent running of the business and again a larger percentage of it was as a result of construction lending, but as expected, in the normal course of the construction project. Jim, anything you want to add to that?

No, I think that covers the detailed payoffs in the third quarter. We're about half of the entire nine-month period, so it would have been unusual, but these are projects completing as scheduled and I think that's a really good thing from a credit standpoint.

Okay, great. And then are you seeing as any pull back in the market just from the election uncertainty last quarter or now?

No, not really. As I think I might have mentioned in one of the previous earnings calls, we have a study that was done by one of the large firms in the area and going back to the Roosevelt administration, job growth in the Washington area regardless Republican/Democrat has increased since every presidential election. We haven't seen anything. There are typical discussions, but no slow down at all. Permits are still big and normal, course of business is pretty consistent.

Okay, great. Interesting. Thanks. And then your commentary, Ron, earlier on seeing improved pricing in I guess high quality CRE loans. What do you think has been driving that?

It's quite obvious to us that the large banks which as you know has always been our biggest source of business. But the large banks have pretty much shut off this thicket on real estate lending. As we've discussed previously, typically we've seen that in the smaller sized loans, but now we're seeing it in the larger sized loans as well. It could be an anomaly. We have the insurance companies that are getting more and more active in the market, but it really does come down to the consistent theme that we talk about and that's relationship-building. And we're constantly seeing the bigger developers that want to deal with people that they know are going to be here to discuss issues when they come up if they come up. So the larger sized loans - I literally went to see a project yesterday. It was a very significant project and if we go ahead with the deal, it's a 5% yield and it's from the very, very substantial developer, but it's at a price that would have been 4.5% three months ago.

All right. Great and nice quarter. Thanks.

Thanks, Casey.

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.

Good morning, Catherine.

I know it's early in the quarter, but do you have any senses to what level of pay downs you would be expecting this quarter? You expected to go back down to that $105 million to $130 million level that we saw on the beginning half of the year?

Catherine, I think that's exactly right. I think that the average level of payoffs of around $100 million or so for the quarter is something you can think about on an ongoing basis.

And Catherine, to further that, is obviously the past couple of years we've done larger-sized loans. So therefore the ebbs and flows of the impact that larger-sized loans have is a difference. Obviously you'll see that stabilize over the next X quarters as we continue to book these loans. There's nothing that we know of and we can keep pretty tight range on from an ALCO perspective, liquidity on payoff. There's nothing that we see again that's out of the ordinary within our portfolio at all.

Great. And then Ron, you mentioned that - I think you said in your prepared comments that there was an additional $500 million in commitment that were booked this quarter. Obviously that's not all going to fund at once, but if you think about the payoffs coming down to a more normalized level and then if the pipeline remains really strong and growth can stay as around level, I mean do you think that we are back to a double-digit growth rate next quarter and into next year? Or how should we think about net growth rate for all [ph] moving forward? And does your higher capital make you feel like you've got enough capacity to increase that growth rate any more so than before you have done and I think Ron has said that.

I think the growth rate that we anticipate is consistent with what we've been reporting in the past. Remember that the first quarter we had 3.2% loan growth, second quarter 4.8%, third quarter 1.5%. Again it's the ebbs and flows of a quarter, but we believe that the pipeline and the amount of $500 million that we've funded in commitments, obviously that will get funded up over the next 12 months, but it just indicates just how robust the market is right now on high quality well-priced loans.

Got it. And then maybe other question on the expenses. You've kept expenses amazingly flat at around $28 million despite some really nice revenue growth. Is there anything in the next couple of quarters going to next year that just national course of business is going to push that growth rate a little bit higher? How should we think about I guess the direction of - I'm assuming these things are going high. I can't imagine it going low from here, but maybe the efficiency rate goes lower, but how do we just think about the pace of growth we should expect on the expense pace over the next few quarters?

Jim, you can jump in, but we have nothing in the pipeline as far as new branches. We don't have anything in the pipeline as to new forms of business, so there's nothing that I could think of, Jim, unless you do on anything out of the ordinary that would change from 2016 year-to-date.

Catherine, yes, I think if you look at the different categories, the category that we've had, the highest rate of growth has been in the salary and employee benefit area. So we have been adding folks in the bank here throughout 2016. The most of that did occur in the second and third quarter. The level of salary and employee benefits will go up a little bit and it's that human capital as where we're adding resources. But as Ron mentioned on the premises and equipment area, that's going to be pretty flat. We've actually rationalized the branches, we reduced the square footage of different offices. And then on the other expenses, they've been relatively flat. We really got our arms around OREO [ph] expenses that can move around from quarter-to-quarter, but they've been very, very low of late and legal fees and professional fees and things of that nature have been really under good control. For the fourth quarter, we typically will finalize some incentive plans. We typically have more incentive approvals a little bit more in the fourth quarter, but overall, as Ron said, I think our rate of growth of expenses, I think you can plan for them to be in the low to mid-single digits. That's our expectation, keep that efficiency ratio in very good order, recognizing that the NIM compression is something that everybody is dealing with in this low interest rate environment.

Great. Thank you very much.

Thank you. Our next question comes from the line of Joe [ph] of Maryland Capital Management. Your line is now open.

Yes. Hi, good morning.

Good morning, Joe.

Good morning.

I actually just like to follow up on that expense question a little bit. You did mention, talked about the growth in [indiscernible] benefits in the quarter and said you're adding some stuff. Just wondering, I guess where are you heading to that?

Joe, we're adding it both on the offense and the defense. There have been some additions in the loan areas, relationship managers, portfolio managers of that nature. But we're also adding at - credit area has been one, our human resources area, our risk management area is others. So we're pretty balanced in the way in which we've been adding people into the organization, but it's both sides of the equation, the offense and the defense.

Okay. I guess also wondering, last quarter you talked a little bit about the gain on sell margins you're getting on loan sales and indicated that you were seeing some higher margins recently. I'm just wondering if those margins are holding up at the levels of previous quarters.

They are and for the third quarter of the year, the gross marketing gain was around 215 basis points. We're pretty happy with that. That's before the commission expense, but that is a higher number than it was in the third quarter a year ago. So the mix of business toward more FHA business away from jumbo business has helped that profit margin. So they're executing very well in the residential real estate area and that gross margin has been moving up generally. Third quarter, we had good results.

All right. I think that's it for me. Thanks.

Thanks, Joe.

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

Hey, guys. Good morning. Just a couple of questions here - most of them were already answered. Maybe just taking a step back, looking at some of the disruption that happened in the market over the last couple of months in terms of acquisitions. Do you see any ability to add high quality lenders from those institutions or any disruption that brings the business your way? Have you seen any movement there?

Yes. In the acquisition world, most of the banks put the key people under some type of an employment contract for a period of time. So we see that there might be opportunities as time goes on, but the bigger opportunity is really on the customer side. The uncertainties in merges always lead to some nervousness within the customer base especially in today's economic environment. So we have seen an increase in customer opportunities - many of which we know and many of which we've been looking to expand the relationship with, so we do see the opportunity immediately on the customer side and hopefully as time goes on the employment side.

Got you. That's helpful. Thank you. And then maybe just my other question, just on deposit cost, are you seeing any increased competition for deposits in your market compared to let's say six months ago? And then a number of other banks I've spoken to, I've seen or anticipating to see some increased deposit cost really to the LIBOR move. I guess are you seeing anything on either of those funds in terms of deposit cost?

Austin, yes. We're seeing a little bit. I think Ron mentioned in his remarks that our cost to deposits was up by one basis point in the quarter because actually the first quarter or that we call it the fourth quarter of last year, we went from 29 basis point cost to 32, to 35, to 36. So we are seeing some increase in that area and as you correctly know the changes in the LIBOR market related to the regulatory changes - primarily due to regulatory changes on the corporate area with commercial paper and such on the SEC changes in that market are having an impact and some of our cost to funds are based on LIBOR. So as you point out, LIBOR 1 and three month LIBOR have moved up more than the Fed funds effective rate and that is having some impact as we do have some cost of money that is based on LIBOR. But overall, that's all in our asset liability modeling and mix and we think our cost to funds continues to be very attractive, relative to the competition particularly given the growth rates that we've been able to achieve and in the third quarter in particular, the growth we had in our deposits was very, very strong. So happy with our result, but the direction of the cost of money is up a little bit.

Okay, great. Well, I appreciate the color on that, guys. I'll hop after anyone else. Thanks.

Thanks, Austin.

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

Hey. Good morning, gentlemen, how are you?

Good morning, Dave.

Hey, quick question. I think Ron, you know that some of the deposit growth was filtered by a couple of new larger relationships; I don't know if you could provide any color on that in terms of what - maybe you saw I think that maybe what segments in the market did that came from?

Just core C&I. Some municipality business that we're picking up. Going back to one of the earlier questions, I think that as a result of some of the recent acquisitions, we have some customers that are looking to get on board with Eagle that might have been with some of the previous banks that are now part of the larger bank. It's really across the board, but the two that I mentioned were just core C&I relationships that we've been working on for a period of time.

Got it. Then I wonder if you saw the headline, you coming out with Marriott [ph], seeing local there, just curious, maybe give an update how you think? Obviously I think that's a positive for the local marketing year, but maybe what you're seeing on a broader perspective in and around your core headquarters there on Montgomery county, any sort of update in terms of economic activity in third quarter?

We're telling all of our team at Eagle Bank that are working with us to leave their house 10 minutes earlier once the construction starts in the first at Marriott [ph] - but we're glad the Marriott [ph] certainly staying within our area. We continue to see growth as we mentioned Biotech as an example, the continued growth in health services, the Johns Hopkins, the National Cancer Institute, the NIH just continues to expand and that's literally two miles from where we are. Montgomery County is doing a major push on the tech side, so we are very, very bullish on the net job growth that we believe will continue in the marketplace.

Got it. Thank you for the color.

Thank you. I'm showing no further questions at this time. I'd like to turn the call over to Ron Paul for your closing remarks.

Well, thank you all for attending and listening to the call. I wish you all a happy and healthy new year since I guess the next call we'll have is in January and just as important again to Jim. Thank you for all your efforts that you've given Eagle Bank over the past 11 years and Charles, needless to say, looking forward to continue to work with you and expanding Eagle Bank as we have over the past 18 years. So thank you very much for everybody listening to the call.

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