Good day, ladies and gentlemen, and welcome to the Eagle Bancorp First Quarter 2019 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 for how to participate will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Charles Levingston, Chief Financial Officer. Sir, you may begin.

Thank you, Jimmy. 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 Norman Pozez, the Chairman of Eagle Bancorp.

Thank you, Charles. Welcome everyone to our earnings call this morning. I’d like to start by thanking all of the people who have extended so many wishes, thoughts, and prayers to Ron Paul. Ron and his family are very appreciative of your support. All of us miss Ron. However, it is important to realize that while Ron was at our company, it was not totally expected that he would be leaving. Ron did a wonderful job leading Eagle for many years. Under his guidance, he built a strong organization, including a very capable senior management team. We have done our succession planning and the board is very comfortable that this management team led by Susan Riel can continue the growth and success of the Bank. Prior to Ron’s retirement, many people outside the organization did not understand that all of the business line and support divisions in the bank have reported directly to Susan for the past five years. They have a strong management team, which together with our 482 employees has built one of the leading community banks in the Washington Metropolitan area and one of the most profitable community banks in the United States. We will continue to execute our proven strategy as a commercially oriented bank and as an active lender in the greater Washington D.C. area. We expect that our unique credit culture and the customer service delivered through our relationships first philosophy will continue to drive our organic growth in one of the most attractive markets in the country. I am proud to lead an independent Board of Directors that are seasoned business professionals in our community. Many are very knowledgeable in the commercial real estate market. I have been in the business here for the past 35 years. Additionally, most board members have been with Eagle Bancorp for many years. I joined the board in 2008 and was Vice Chairman prior to Ron’s decision to retire. Before I turn this call over to Susan Riel, our Interim President and CEO, I wanted to mention that Charles Levingston, our Chief Financial Officer; and Jan Williams, our Chief Credit Officer are also here with us and will be available later on for questions. Susan, I’ll turn it over to you.

Thanks Norman. Hello to all the analysts and the investors on the call. As the Interim President and CEO, I am happy to discuss with you our first quarter financial performance. We are pleased to announce that GAAP earnings for the first quarter of 2019 was $33.7 million and earnings per share for the quarter for the first quarter was $0.98. As reported, both the net income and the earnings per share are decreases from the first quarter of 2018 results. However, as described in the press release issued last night, the announced first quarter GAAP earnings include one-time non-recurring charges of $6.2 million related to share based compensation awards and the retirement of our former Chairman and CEO, Ron Paul. Excluding these one-time noninterest expenses, net income for the quarter would have been $38.2 million, which represents a 7% increase over $35.7 million in the first quarter of 2018. Adjusted for these nonrecurring items, earnings per share would be $1.11, a 7% increase over $1.04 per fully diluted share in the first quarter of 2018. I would also like to state that we appreciate the attention and details that you all give to our press releases and other reports. As you saw in our release last night, there were a number of unusual items, which occurred in the first quarter of 2019. For this period, you couldn't just look at the tables or the bottom-line numbers in the press release, you had to read the entire document. We will cover all of the details during the call this morning, but to start at a summary level, I would like to say that we are pleased with the results of the first quarter. The highlights of the quarter and the key drivers of profitability were a continued strong net interest…

[Operator Instructions] Our first question comes from Catherine Mealor with KBW. Your line is now open.

Thank you. Good morning.

Good morning, Catherine.

Good morning Catherine.

I thought I would start with the margin. And so, it’s great to see the margin back up above 4%, but Susan your point, the loan to deposit ratio is now at 107% at an end of period basis. So, I guess as I think about, you know, the deposit growth that you’re expecting over the rest of the year, do you believe that you can still keep that margin above 4% even as you build back the deposit base? And maybe the better question within that is how you're expecting deposit betas to react this year in a flat rate environment? Thanks.

You know I would say, Catherine, by having the good loan growth in the first quarter of 2019 together with mitigating some of the high cost of funds, we got back to the 4% and we expect to stay, you know, around the 4%. You know, the NIM increase we expected after falling just below 4%, we were able to get it back up, you know, so going forward giving our substantial level of non-interest bearing deposits together with the Federal Reserve’s guidance on the rate, the lack of the rate increases we expect our net interest margin to remain close to the 4%.

Now just to add on to that, Catherine, I mean that, you know, in terms of the deposit growth we – you know, the first quarter had typically been seasonally a little weaker in terms of deposit gathering for us as we saw in the first quarter of last year. You know in the middle of the year, second and third quarters have tended to show a little bit more strength in terms of when and how we’re growing deposits. You know, I think the deposit growth – the market for deposit growth here while not quite as frenzied as it was in the middle of last year is still what I’d characterize as pressured. So, you’re still going to see, you know, some upward drift as I’d mentioned previously in other meetings that – in some of those costs. But those betas, I think, are in check and have ideally normalized given the fed outlook and where short-term rates have remained in recent months.

Okay. That makes sense. Thank you. And then on the deposit side, do you feel like there is a big decline in the savings and money market this quarter? How much of that do you feel is seasonal versus customer behavior? And would you expect that to continue to trend down or bounce back throughout the year?

Yes, I think again that [indiscernible] seasonal nature of the deposits as it relates to that decline. You know I think we get some of that mix back, and of course, we’re coming off pretty high level, you know, towards the end of the year as well. So, you know, looking at a more normalized trend over a period of time, I think we get back to where we had to, and of course, result of the DDA non-interest bearing deposits which we’ve been able to maintain at about a third of our deposit mix for quite some time now and we expect to be able to continue to do that.

Okay. That’s great, makes sense. And then maybe one question on credit, could you talk a little bit about the increase in classified assets that we saw at year end? You know certainly one of those increases seem to have moved to drive the charge-offs this quarter, and so are there any other larger credits within your classified bucket that you, you know, foresee, you know, close to working out or maybe could be – could, you know, have more of a credit event this year? And then maybe if you could give us an update on classified assets for this quarter as well that would be helpful? Thank you.

Sure. Catherine, I think we have seen the increase that we had coming off the September 30, 2018 numbers to 12/31. Most of that was attributable to this particular condo loan that we have worked through the process and had purchased by a third-party at foreclosure. The $19 million represented by that and the other non-performer paid in full in the first week of April reduced the balance considerably. And then in addition, we have, you may recall, a group of loans that were under a receivership based on one of our customers who have some legal issues. We were able to successfully remove a $24 million credit. It was released from the receivership earlier this month and expect that to transition out of substandard and back to the non-criticized portfolio. So, at that point, we’ll be dropping back down to around the $50 million mark, which is fairly close to where we were back in September within $1 million or $2 million. So, I think this has been an aberrational period. We did place a particular receivership asset into the substandard category based upon an issue at the timing of receipt and not really as to whether we ultimately would suffer a loss, so I'm not anticipating any kind of a problem there. When I take a look at the non-performing assets, excluding the $19 million we talked about, the largest credit in non-performing status is $3 million. We have about 50 loans that are non-performing, so it's pretty well stratified. When you're looking at the size of these non-performers, they are much smaller than the one aberrational condo deal. I feel pretty comfortable with where we are in terms of asset quality.

That’s great. Thank you for all the color Jan.

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

Hi, good morning.

Good morning, Austin.

Thanks for taking my questions. I guess just maybe the first one on growth, the loan growth came in pretty nicely this quarter, and I guess as you look out through the remainder of the year, is there any reason that we should be, you know, above or below the kind of high-single digit range that we – you know, we saw in 2018? And then I guess more broadly any changes where – and where you would expect the composition kind of incremental loan growth to come from? That would be helpful.

I would say we’re experiencing strong competitions, but our loan growth pipeline seems to be pretty good, and we expect to meet the high low single-digit numbers and our pipeline indicates we can do that.

Okay. And then maybe, you know, on the – in the release, Susan, you mentioned kind of rightsizing the SBA and FHA initiatives. I know on the FHA side that that’s been kind of in the pipeline for a while. I guess can you maybe elaborate on what was done to right-size those businesses, and when that happened? And then maybe just more broadly on – or more specifically on the FHA business, any thoughts on that business kind of for the remainder of the year?

There’s been a reduction in the cost of those areas, and we've done some reduction in staff. The right-size, the FHA continues to be a challenge for us. To say we’re not disappointed with the status we have right now would be incorrect. We had – they seem to have a good pipeline, and there seems to be some opportunities coming into the third quarter of the year, and we’re very optimistic about that, but we’re cautiously optimistic.

Understood. And then maybe just one last one on the $10 billion kind of approach, can you just give us an idea of what needs to be done between now, you know, and that point which maybe happen sometime in 2021 and kind of what the incremental spend needs to be just from an expense perspective kind of as you’re approaching that event?

A lot of the focus is on building out the first – the second line of defense. You know, so we expect a lot of the cost to be in personnel costs, and we will be, at the end of this year, what we budgeted – with what we budgeted and what we will be bringing – the people will be bringing in, should hit about a third of the overall expense. Charles you want to add anything?

Yes, in terms of incremental expense, I mean as we look at people add – as Susan said, a third of the people we’re bringing on, you could attribute those folks to the growth and development of our overall enterprise risk management infrastructure and next year, you know, in 2020, I’d expect it to be, you know, 25% of the people and then following that, you know, 15% to 20% in 2021. You know, there is still some adds that need to be made in terms of IT infrastructure as well, and we’ll see that later in over the next couple of years. But, you know, all-in-all, I think, you know, of an efficiency ratio in the, you know, 38% – 37% to 38% is still a safe set as we kind of grow into what that, you know, what’s going to be needed for $10 billion.

Understood. Thanks, great. Well, thanks for taking my questions today.

Thank you. And our next question comes from Casey Whitman with Sandler O'Neill. Your line is now open.

Good morning.

Good morning Casey.

Good morning Casey.

Maybe just to follow on to Catherine’s questions on margin, just curious are you starting to see deposit pricing pressure at least ease in the market with the pause in rate hike fear? Or is it still, you know, as competitive as last year?

It’s steady. You know – and again, not as frenzied as it was in the middle of last year. The kind of the graph for CDs has dissipated a fair amount. But yes, I would say – I would say, it’s still steady, you know, yes.

Okay. And maybe…

Those deposits are our challenge.

Got it. And maybe just a few more for you Jan. If we could just talk more about the large residential condo project, I'm assuming that that was in market, and then, you know, how much of a specific reserve did you guys have established for going to the quarter?

It was in market. It was in Bethesda. It originated as a $50 million loan. Construction was complete. This was just for selling out the unit. Over a couple of years, we’ve worked through the sell-out of about $30 million and we’re remaining with $20 million. Absorption flowed considerably towards the last six month or so. I think we were fortunate to be able to get the kind of result that we did, albeit with $3.5 million loss. We were able to sell it to a third-party, and make a business judgment in terms of whether it was going to cost us to hold it and carry over the likely sell-out period. I think that was a good result for us. I haven’t seen any weakness in general in the condominium market, in fact, has been pretty strong. But this was a high-end or super high-end luxury building and it just didn't sell as quickly as we thought it would.

Okay, and maybe – you touched a little bit on your largest non-accrual, but what about – you know, what’s your largest performing relationships on the books today?

The largest relationship in any risk category?

Sure.

Okay. We do have some loans that are over $120 million, but they’re generally broken out in terms of relationships that have a number of different projects associated with them. We do have some larger loans that we’re looking at right now that are part of cash flowing performing income-producing commercial real estate. That’s really been more of our focus over the last six months or so as we manage concentrations and work towards maintaining a strong position should we get to an end of cycle situations, so we’re trying to sell out and get in front of that. Have some office, the trophy that – for example, one property that’s a block and a half from the White House that we did a complete rehab on. It’s leased up; it’s in great shape. It will probably be exiting us shortly to go into the PERM market. We will try and compete with the offers that we, however, received, and hopefully be able to retain some of that business. We haven't been as active on the construction side, and Susan had indicated that in her prior remarks. So, we’re definitely following cash flow at this point in the cycle.

Okay, helpful. Thank you, guys.

Thank you. Our next question comes from Steven Comery with G. Research. Your line is now open.

Hey, thanks for taking my question.

Sure, thanks [indiscernible].

So, in prior quarters, we have talked about sort of the payoff levels and how those have impacted loan yields. Maybe – just wondering if maybe you guys could give us some idea how that worked out in Q1 2019?

Yes, it was a little lighter in terms of payoffs this quarter. I think we’d announced in the last call earnings call, a significant payoff. It was upwards around $356 million in the fourth quarter of 2018. In the first quarter of 2019, it was much lower, about $126 million in terms of those payoffs.

Okay. And do you think there was anything specific that drove that? Or was it just sort of, you know, this is what happens sometimes?

Yes, the nature of our business, you know, and even with commercial relationships, you just – you have some of these kind of lumpy quarters where things come in, you know, at argument's time. So, you know, I think it was just a matter of normal course of business, but it can be lumpy.

Alright. Very good, thanks. And then, I know in the prepared remarks, you called out relatively neutral asset liability sensitivity. If rates were to move downward, you know, through fed policy or through market rates, how would that kind of strategic positioning change and sort of what's the thinking behind that?

Yes, I mean, you know, we endeavor to remain interest rate risk neutral, and we've been slightly asset sensitive for quite some time now. I think strategically we would look to tip the balance a little bit more to the liability side should that happen. But again, you know, low-single digits in terms of the interest rate risk associated with 100 basis points, do lead the way is kind of our MO.

Okay. So, it’s sort of like asset neutrality is sort of a policy position that you’ll stick to either way?

That’s right. We – you know, I don’t want to make our money being – with me being a fund manager, I want to make our money-making loans. So that’s – you know, that’s what we are trying to do.

Okay. Very good, makes sense. And then finally from me, you know, another comment from the prepared remarks was thoughts about the dividend and/or buyback, wondering if maybe you guys could go through the puts and takes between those two options? And then, sort of on the same topic, what level of capital, you know, is sort of appropriate or would you guys be comfortable with?

Yes, so – you know I think as we look – obviously, as Susan mentioned in her remarks, we are accumulating capital at a faster clip than the balance sheet is growing, and we recognize that. We have been considering, you know, a dividend or a share repurchase. You know, for the dividend, as you say, you know, puts and takes, you know, once you start that dividend, you want to make sure that you can keep it going; you want to make sure that you’re starting at an appropriate level. So that’s certainly part of the discussion. You know, as it relates to the share repurchase, obviously we’re looking at that as a – you know, as we would the acquisition of a – you know of another -- of another bank essentially and what the earn back on that. So, we want to make sure that we – that the, you know, the earn back given that the price that we are repurchasing is, you know, reasonable given what the market would expect. So, you know, it’s some of that – some of the thinking there on that. Obviously – and also, with the capital position, we have to consider our – you know the – we have to consider the capital levels that relate to the regulators, the ABC concentration that we have. So that’s another consideration in part of the calculus of how we’re considering those moves.

Okay. Very good thank you.

Thank you. And our next question comes from Christopher Marinac with FIG Partners. Your line is now open.

Thanks. Just one more question on asset quality. So, when we saw the increase in substandard commercial real estate at year-end in the 10-K, does that now backdown given what’s occurred this quarter, just kind of curious on just the confirmation there.

Yes. It will.

Okay. So, those numbers right size from what we saw last quarter? So, there is nothing else changing on that?

Yes.

Great. And then Susan for you, can you remind us sort of how you use data analytics to kind of do more business with your existing customers, as well as generating new business with new customers in the footprint?

We, I would say we are working to build up the data analytics capabilities and that we’re working on hard to get that. So, right now we’re more limited. With that, we do have the capabilities of pulling in all of the relationships and we do a lot of the maneuvering on and tracking of products for customer and how many customers we have and what their relationship totals are, and what products they are using? What other products we can build into that relationship. So that is something that we’re doing now, but we look down the road to expanding the capabilities of doing that.

Okay. But for a long-time, you’ve been focused on that as a source of new business though from existing customers. You may not been a formal analytic exercise, it was still something you did internally?

Absolutely. We have been outstanding at expanding our relationships. We have relationships that start at a small level and we have been – our relationship managers are very good at expanding those relationships, and that’s been a core skillset for us.

Great. And then one last one. With the government shutdown kind of distraction in the first quarter, is there any sort of natural catch-up effect that occurs this current quarter in 2Q, just curious if that’s at all something we should watch for?

We didn’t see much of an impact as a result of the shutdown, you know there were marginal things, but it was not significant. So, I wouldn’t expect that to change the results in the [second quarter going forward].

Okay. Great. Thanks for the feedback here.

Thank you.

Thank you. And I am showing no further questions in the queue at this time. So, I’d like to turn the call back over to Charles Levingston for any closing remarks.

Thank you everyone for joining the call. We’ll look forward to speaking with you again next quarter. Have a great day.

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