Ladies and gentlemen, thank you for standing by, and welcome to The Eagle Bancorp Fourth Quarter and Year-End 2019 Earnings Conference Call. At this time, all participants 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 give to 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 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 fourth quarter and full-year 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 for questions. I'm 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 continued 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 return on average tangible common equity was 12.91% for the fourth quarter and 13.40% for the full-year of 2019 levels indicative of continued solid performance. While our profitability continues to be very good, part of our culture at Eagle Bank is to strive for strong results across all of the performance indicators for community banks. In reviewing the fourth quarter, we recognized that there were three major factors which somewhat dampened our earnings during the fourth quarter. The very difficult interest rate environment we are…

[Operator Instructions]. Our first question comes from Casey Whitman with Piper Sandler.

Hey just first quick question on the margin. I appreciate your commentary around it. I was assuming we don't get more downward movement in short-term rates. Well, 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, 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 liquidity. We’re 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 compressional in spreads, credit spreads, right, with -- in the absence of any kind of significant credit event more broadly market base broadly, broad credit event, there's going to be some reticence to just 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 second or 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 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 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 101%, 102% loan deposit ratio, that would be -- 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 will continue to have those elevated costs. Again, if I had my druthers, we'd be 101%, 102% on average.

Okay, thanks, pretty helpful. And then just your commentary about loan growth this quarter and the payoff 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, let someone else jump on. Just the tax rate has continued to migrate a little bit higher, any outlook for where that shakes out in 2020?

Yes, I would expect that to normalize next year as we get beyond the impact of these 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 assign somewhere in 2020.

Our next question comes from Joe Gladue with Alden Securities.

Just wanted to touch based on a few of the pluses and minuses from the fourth quarter versus third quarter. And I'll start with the non-interest income. Other non-interest income was up about $700,000 versus the third quarter. Just wondering if you could break out a little bit of where that was mainly coming from?

Sure. Yes, I mean we did successfully close a -- 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 have contributed there as well.

Okay. All right and on the expense side, just focusing a little more on the salary and compensation expense. In third quarter you had roughly $2 million of compensation in 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 increases 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 costs in nature. We did also have, obviously the merit increases and also as the incentive comes more into focus in the fourth quarter there were investments associated there.

All right. I’ll just ask one other; it looks like -- wait a minute -- just on the margin a little bit further. Just wondering 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 of loans that are currently at the floors. And that's where it currently sits, that 62% of total loans with floors.

The next question comes from Catherine Mealor of KBW.

I think I have a couple of margin questions. I think we hit most of them. One thing I have 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? Thanks.

Sure Catherine. Last quarter, we did have one large loan that was added to our internal watch list. So at 9/30, you would have seen that and that was around $100 million. It was well in that set of 70% loan to value with a strong guarantor, 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 as property. So that is not something that will be appearing on the watch list at the end of the year, you're going to see a precipitous decline. But it is just one credit. We have had a reduction in our credit size 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 non-performing loans, you've got roughly 40% of them on the CRE side, about 48% on these FDA, C&I side, and basically 12% in residential mortgages. And I think we had talked a couple of calls ago about some slowness in the very high-end markets residential real estate. So we’re seeing a little bit of it.

Got it, okay. And then is the $100 million credit, is that your largest credit? Or how many other ones do you have around that size?

We have probably a handful, maybe five loans around that size. This was the largest loan in terms of outstandings 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 the related deposits were about $15 million. So it's not what I would call distressed situation. I think we’re -- this was just a result heightened scrutiny of loans that hadn't met its stabilization timelines.

The next question comes from Brody Preston with Stephens, Inc.

Brody?

Brody, your line is line, you can ask your question or maybe if your phone is muted, could you please unmute the phone?

Sorry about that everyone. I had the phone on mute. Good morning, how are you?

Good morning, Brody.

First question going back to the margin. So, over the last let's call it five or six quarters, you started to see the non-interest bearing deposits, I guess the difference between what would you -- what you would see between averaging the balances on the period end balance and what you experience on the average balance sheet pick-up. 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 inter-quarter swings in non-interest bearing deposits to continue?

No, Brody, I think we've had the ability to maintain that non-interest 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 from the wholesale side of things on the broker side of things, we're looking at three-year tenors and out there all-in costs of 180 basis points or so. But to the extent that we can continue to book CDs that are core in the two and three-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. Okay, thank you. 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 had left. Just wanted to get a sense for how much of the increase in compensation this quarter was tied to more, I guess one-time 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 was also -- we also made some adjustments on the incentive front as the year came into focus in terms of those payouts as people achieved certain gates in incentive plans and things of that nature. So I would expect that to pull back a touch.

Okay. And on the legal expenses, I understand that you say you expected 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 it to sort of remain flattish from here at foreign change?

It's very difficult to project that, we work with the Attorneys and get some budgets together from them in 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. I guess, thinking about the investigation, understanding you can't go into specifics, but I guess sort of we’re a year into this or so, how are you guys sort of feeling about the timeline of the investigation at this point?

The timeline we really can't say I mean, you can imagine dealing with government agencies and you can't predict the timeline for them. I will tell you that we continue to believe the bank will not have a major impact from as a result of these.

Okay. And then one last one from me on the buyback front. I saw in the 8-K back in December and your longer-term -- your long-term incentive comp, it includes a 50% earnings payout target. You guys played closer to 80% this quarter in terms of modeling and thinking about buybacks, should we move a 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 of it. Again, as I 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 guess that should suffice.

Yes.

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

Thanks, good morning. I 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, long ago in the call about the average growth versus a 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?

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 high-single-digit.

So the acceleration from what we saw. And then with 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 these 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 averages I think is what we're focusing on.

Okay, great. And the just last cap -- question on capital, does your capital and your flexibility change 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 and we were 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 that they were 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, it will provide us with certainly a little bit more, more flexibility.

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

Hey, 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 past, 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’re seeing demand, we're being quite selective. So I think, 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 here in D.C area. So not really seeing the fall-off in demand.

Okay, thank you, 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?

Excuse me, always going to be lumpy, just by virtue of how long given different projects take and some of our larger loan payoff may take place early in a quarter, late in a 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 that you just mentioned maybe just talk about how that impacts the margin, the difference in mix before 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 were 21 basis points. So it's not a huge impact. And most of that impact really came from rate change, change in LIBOR. So I think we're certainly not taking on a 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 Erik Zwick with Boenning & 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 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 third D.C., a third, Maryland, and a third 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.

We also see a great deal of --

Go ahead.

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. Thank you. And I guess just a follow-up on the geographic comment in order to achieve that desired kind of one-third, one-third, one-third mix, based on the demands 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?

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've ramp up that growth.

And I'm not showing any further questions at this time. Let's 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 concludes today's presentation. You may now disconnect and have a wonderful day.