Good day, everyone. And welcome to the Eagle Bancorp’s Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will post a question-and-answer session, and our instructions will be given at that time.

[Operator Instructions] As a reminder, this conference call maybe recorded. It is now my pleasure to hand the conference over to Charles Levingston, Chief Financial Officer. Please proceed..

Thank you, Brian. 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 maybe considered forward-looking statements.

While our growth and performance over this past year has been positive, we cannot make any promises about future performance, and it is our policy not to establish with the markets any formal guidance with respect to our earnings. None of the forward-looking statements made during this call should be interpreted as our providing formal guidance.

Our Form 10-K for the 2020 fiscal year, our quarterly reports on Form 10-Q and current reports on Form 8-K identify certain risk factors that could cause the company’s actual results to differ materially from those projected in any forward-looking statements made this morning.

Eagle Bancorp does not undertake to update any forward-looking statements as a result of new information or future events or developments unless required by law. This morning’s commentary will include non-GAAP financial information.

The earnings release, which is posted in the Investor Relations section of our website and filed with the SEC, contains reconciliations of this information to the most directly comparable GAAP information. Our periodic reports are available from Eagle online at our website or the SEC’s website.

This morning, Susan Riel, the President and CEO of Eagle Bancorp will start us off with a high level overview. Then Jan Williams, our Chief Credit Officer will discuss her thoughts on loans, reserves and credit quality matters. Then I will return to discuss our financials in more detail. At the end, all three of us will be available to take questions.

I would now like to turn it over to our President and CEO, Susan Riel..

Thank you, Charles. Good morning. And welcome to our earnings call for the third quarter of 2021. I am pleased to report another great quarter for Eagle. Earnings were -- while not the record, were the second highest in the bank’s history, asset quality continues to improve, efficiency remains a strong point and capital is building.

And directly impacting our shareholders we raised our dividend for the third time this year and we bought back some shares this quarter. The one area though that’s lagged behind has been loan growth, which I will also touch on later along with some comments on our market and the legal update.

Focusing on earnings first, earnings for the quarter were $43.6 million or $1.36 per share. This was a 1.46% return on average assets and a 14.11% return on average tangible common equity. Earnings for the first three quarters totaled $135 million or $4.22 per diluted share.

Turning to assets, at the end of the quarter, non-performing assets were 31 basis points on assets and for the quarter annualized net charge-offs were 8 basis points on average loans. Both of these ratios are the lowest we’ve seen in the past eight quarters.

These asset quality ratios combined with some factors that Jan will review informed our decision to make a third consecutive reversal from our allowance for credit losses. With a reversal of $8.2 million for the quarter, the total reversal for the first nine months of the year was $14.4 million.

In terms of operating efficiency, we continue to be a leader with an efficiency ratio of 41.7% for the quarter. We are always prudent in our approach to expense management. Yet, we always keep an eye on critical infrastructure and investments and controls that are necessary to operate a safe and sound banking institution.

This quarter, we closed our Dulles, Virginia branch as it had an expiring lease and our customers can be served from other Northern Virginia branches.

The combined annual pre-tax plus savings and rental expense will be about $187,000 and there was no write-off of leasehold improvements as these had been fully amortized upon the expiration of the lease.

We are also pleased that all of the employees working at the branch have filled or will be filling positions within the company, providing internal mobility opportunities to our employees wherever possible. It’s a critical part of our relationship-first culture. With earnings remaining strong, capital continues to build.

At quarter end, the equity was $1.3 billion, up $25 million over the prior quarter end and up $108 million from a year ago. For our shareholders, our earnings led directly to increased capital raising both book and tangible values.

Book value rose to $41.68 per share, up 9.8% from a year ago and tangible book value was $38.39 per share, up 10.6% from a year ago. We also increased the quarterly dividend to $0.40 per share. This is up from $0.35 the prior quarter and $0.25 the quarter before that.

With a dividend of $0.40 and earnings of $1.36, our payout ratio for the quarter was 29.4%. While we have increased the dividend three times this year, our intent was to increase our dividend yield to be more in line with banks our size.

Based on last night’s closing stock price of $57.93 per share and a dividend of $0.40 per share, our dividend yield is 2.8%. In regards to our stock repurchase plan, we repurchased 11,609 shares this past quarter at an average price of $52.94 per share. We still have almost 1.6 million shares authorized for repurchase remaining in the plan.

On the ground, our market has proven to be robust, even with setbacks from the Delta variant, government spending and contracting remain strong, hotels and restaurants are doing better, private companies are headed back to work and construction on new projects continues.

This summer, the Washington Business Journal list of the top 25 ongoing construction projects totaled $14.5 billion, up from $12.6 billion a year earlier. Also reported recently by the Washington Business Journal and Amazon Economic Impact Report stated that Amazon invested a total of $28.5 billion in Northern Virginia over the last 10 years.

And based on government data, the unemployment rate in the Washington area dropped to 4.8% in August, compared to 5% nationwide. And recently released census data shows the population in the Washington region grew by 13% over the last decade. All very positive signs for our market and the community we serve.

Before discussing loans, I would like to once again mention the contributions of the residential mortgage and FHA teams. Our residential mortgage team had another great quarter, with locked loans of $280 million and a gain on sale of mortgage loans of $3.3 million.

This is on par with the prior quarter and we appreciate our residential mortgage division for their ongoing efforts to obtain these results. Our FHA team for the first nine months of the year has generated trade premiums of $3.7 million that are included in non-interest income.

The revenue stream from the FHA division is not smooth from quarter-to-quarter. Comparatively the FHA division has larger transactions and less volume than the mortgage division, which has smaller transactions and higher volume.

In regards to loans, over the past 12 months, our loans have decreased as payoffs and paydowns have outpaced funding advances and originations, but the market and our approach has changed. Initially, at the onset -- outset of the pandemic, we chose to focus on serving existing clients and maintaining credit quality.

More recently, in the third quarter of 2021, the decline in loans was impacted by the competition to refinance at lower rates with lower amortization periods. In some cases, these refinancings were from non-bank lenders who are attracted to the strong DC market.

Additionally, there is a lot of excess liquidity at other banks, as well as many companies and construction project sponsors. Additionally, many of our commercial clients are flushed with cash, some of which has flowed into the bank in the form of deposits.

However, on the loan side, this leads to lower utilization rates and a longer period from loan approval until the loan is drawn. Over the past quarter, excluding PPP loans, loans were $6.85 billion, down 3.4% or $238 million from the prior quarter.

However, both our CRE and C&I teams are seeing an increase in deal flow in the market and given the market conditions, the bank has taken a more competitive stance on credit spreads on high quality loan opportunities.

The improvement can be seen in our unfunded commitments, which were $2.4 billion at quarter end, up $280 million over the prior quarter end. We have had significant success at booking new construction credits, balances on these loans are expected to increase over time.

Before turning it over to Jan, I have a little update, our -- on our litigation and investigations, we continue to make progress towards a resolution of all disclosed matters, although a bit slower than we had hoped.

The company received closure on the outstanding shareholder derivative action on Monday, October 4th, when the DC Superior Court approved the settlement of that litigation and the class action settlement is on track consistent, with the federal rules of Civil Procedure with the court hearing to approve the settlement in the beginning of 2022.

Our dialogues with the SEC and the Federal Reserve are ongoing, and we continue to cooperate with these investigations.

Additionally, the company believes it’s possible we may exhaust our primary D&O coverage at some point in the fourth quarter, in which case expenses that would have otherwise been covered as insurance claims will become a company expense.

It’s impossible to predict these defense costs going forward, as they are highly dependent on the duration and outcome of the investigations, which are also impossible to predict. For more information on this update, please see the related disclosure in our earnings release.

Other than the historical expense number we provided in the earnings release, we are not in a position at this time to offer any guidance on these potential defense costs, except to note that historical defense costs including significant expenses in defense of litigations that have since settled, as well as investigation subpoena production and witness costs.

We remain hopeful that with each quarterly announcement, we will be in a position to announce progress toward a resolution of all disclosed matters. With that, I would like to turn the speaking duties over to Jan Williams, our Chief Credit Officer..

Thank you, Susan, and good morning, everyone. It’s always good to present positive news and credit continues to improve to levels we have not seen since before the pandemic. At quarter end, non-performing assets were 31 basis points. This is down 19 basis points from the prior quarter end.

At 31 basis points, you would have to go back to the third quarter of 2018 to find a better ratio. In dollars, NPAs were $36 million, down from $54.5 million at the prior quarter end. The decline in NPAs was primarily from payoffs of non-performing loans, a return to accrual status for some loans and a few charge-offs.

Gross charge-offs for the quarter were $2 million and net of recovery charge-offs were $1.3 million. The largest charge-off during the period was a C&I contracted credit for $1 million.

In regards to the reversal of $8.2 million from the allowance for credit losses, the reversal resulted primarily from the decline in loans, but it was also informed by an improvement in credit quality, which included the decline in non-performing loans and extraordinarily low levels of 30-day to 90-day past dues.

Positive improvements and adjustments to both quantitative and environmental factors also contributed. For more detail, Charles will be able to fill you in during the Q&A. With the reversal of the allowance for credit losses to total loans excluding PPP loans was 1.22%, which is down 10 basis points from the prior quarter end.

Even with our lower allowance for credit losses the previously mentioned decline in non-performing loans puts our coverage ratio of non-performing loans at 265%, well above the 150% to 200% range where it has been for the last seven quarters.

I’d also like to point out that our provision for unfunded commitments was up $716,000 this quarter and this ties in with the comment Susan made earlier about funding draw delays and the increase in unfunded commitments. With that, I’d like to turn it over to Charles Levingston, our Chief Financial Officer..

Thank you, Jan. For the quarter, net income was $43.6 million, which is $2.3 million more than the same period a year ago. Looking at the topline, net interest income adjusted to remove the accelerated interest expense on the redemption of the sub-debt was $80.4 million, slightly higher than the $79 million from the same period a year ago.

While the results are similar, net interest income for this quarter was based off of average assets that are 13% 13% higher than a year ago. The rise in assets was primarily driven by the inflow of deposits in the fourth quarter of 2020 and this past quarter.

Average deposits for this quarter were $9.95 billion, up $720 million versus the third quarter of 2020. For non-interest income a year ago the third quarter of 2020 was a record quarter for our mortgage division. So current mortgage production while a still significant won’t match that.

To put it in perspective, our mortgage division had locked loans this past quarter of $280 million, which is up from the second quarter’s $248 million, but both periods are well behind the record $593 million we generated a year ago when the market conditions were optimal.

Additionally, in the second quarter of 2021, there was -- on a linked quarter basis there was $2.6 million in gains associated with the origination, securitization, sale and servicing of FHA loans. This bolstered non-interest income in the second quarter of 2021 and did not repeat in the third quarter of 2021.

While much smaller in comparison, other non-interest income was $1.6 million for the third quarter of 2021, down from $4 million for the same period a year ago. The primary difference being the past quarter -- this past quarter, the company experienced no OREO gains, while the same quarter a year earlier, the company had gains of $1.2 million.

For non-interest expenses there was almost no difference in the total between the third quarter of 2021 and 2020. For the quarter, non-interest expenses were $36.4 million, compared to $36.9 million for the same period a year earlier. The expense line items with the biggest changes were essentially offsetting.

Salary and benefit -- and employee benefits were up $2.8 million as a result of higher incentive bonus accruals based on the company’s performance, premises and equipment were down $1.3 million as the third quarter of 2020 included a $1.7 million lease expense to adjust for ASC 842, and legal, accounting and professional fees were down $1.1 million.

On the balance sheet, assets at the end of the third quarter reached a record high of $11.6 billion, up $1.5 billion from a year ago. The year-over-year increase was primarily driven by deposit inflows, which increased both investments and interest-bearing deposits with other banks.

The excess liquidity generated by the influx of deposits continues to reduce our margin, which excluding the accelerated interest expense from the sub-debt payout, the margin was 2.78% for this past quarter, down from 3.08% a year ago.

We will continue our efforts to put the excess liquidity to work, but we will remain prudent given the recent uptick in rates and the potential for deposit flows to slow or reverse.

A better measure of spread absent the excess liquidity is to look at our loan yields, which were 4.59% absent PPP interest income and our cost of funds, which was 35 basis points. Also, while we did redeem our sub debt on August 2nd, our cost of funds for this past quarter includes $1.3 million of accelerated interest expense from the redemption.

For PPP loans, with just $67.3 million of PPP left, which were mostly originated in mid-2020, we do not have a lot of accelerated fees and expenses remaining. We expect these loans to complete the forgiveness process over the near-term.

On the liability side deposit increased $9.7 billion, up $1.5 billion from a year ago and long-term borrowings declined to $70 million as the bank redeemed the $150 million of subordinated debt. With that, I will hand it back to Susan for a short wrap up..

Thanks, Charles. As we wrap up our commentary, I would like to thank all of our employees for all their hard work and their commitment to support our clients. Additionally, we remain committed to a culture of respect, diversity and inclusion in both the workplace and the communities we serve.

Before we open things up for questions, I would like to summarize our financial results by saying, the bank has posted its second best quarter of earnings, NPAs are 31 basis points of assets, common equity is 11.5% of assets, total risk-based capital is 16.6% and we just raised the dividend for the third time this year. The bank continues to do well.

I would now like to open things up for questions..

Thank you. [Operator Instructions] Our first question will come from the line of Casey Whitman with Piper Sandler. Your line is now open..

Hey. Good morning..

Good morning..

Good morning, Casey..

Jan, maybe I will start with you. Congrats on the favorable credit boost. So we saw the decline in watch loan this quarter in the release.

Can you provide any color on the movements within special mention or classifieds, is it safe to say that those came down as well?.

Hi. There was some movement within categories of loans that had been substandard, I mean, at least in one case of significant relationship with upgraded to special mention. There was a great deal of movement from out of the watch category as we had that sustained period of performance that we spoke about in our last earnings call.

Those were the loans that has had multiple deferrals and wanted to wait six months under regular payment structure in order to move them off of the watch list. So that’s predominantly the reason for the drop and the improvement did come in the area of classified loans as those were reduced and in some cases moved to the special mention category..

Okay. Understood.

And then just looking at the big reduction in non-performance this quarter, are those loans that returned to performing status or are they out of the bank in any particular industry?.

Performance….

Non-performance….

… and what, you might recall that initially what we did with loans that have had a multiple COVID deferral situation that’s beyond 90 days. We moved them all onto the watch list to track them.

And once those deferral periods were over and they had achieved six months of regular payments, we were able to move a significant number of those loans back into the regular past portfolio..

Okay. Understood.

Maybe I will just ask one more kind of bigger picture question, just given the increase in deposits and all the liquidity you guys have on the balance sheet kind of what are your high level thoughts on your plans to deploy the liquidity in the near-term? Could we see increases in the securities portfolio or how should we think about that liquidity over the next couple of quarters?.

Sure. Yeah.

Certainly, on an accelerated pace of deployment into the investment securities portfolio is likely we’ve -- as Susan mentioned in her comments as well, the unfunded commitments, there’s is a pipeline for construction funding that we expect will also absorb some of that excess liquidity and then additional loan funding as we’re getting looks at deals and fully funded deals hopefully, yeah..

And as you’re getting -- I think, you mentioned, getting more competitive on pricing and the higher balance of unfunded commitments, where are new production yields coming in now versus last quarter?.

Yeah. For the third quarter we’ve seen -- we saw pricing on the coupon on the loan closer to 4%, whether or not that holds is a question, but that’s where we were in the third quarter..

Okay..

And then again that’s the coupon we would add deferred fees and cost to boost these..

Understood. Thank you..

Thanks, Casey..

Thanks Casey..

Thank you. Our next question will come from Catherine Mealor with KBW. Your line is now open..

Thanks. Good morning..

Good morning, Catherine..

Good morning, Catherine..

Good morning, Catherine..

Maybe as a follow up to Casey’s question, just thinking about balance sheet composition. So security was at 15% of earning assets, cash is now 23%. So I know we would all love to put cash more into loans, because that’s higher yields.

But as we think about how much of cash could go into securities, is there a max of how big you would allow the securities portfolio to grow as a percentage of your balance sheet?.

I -- again I want to be prudent about that and as we talk about the potential for liquidity, the potentially reverse at some point, I am mindful of that, although, obviously, we’re flush with it. Short answer to your question is, I’d be comfortable going higher certainly on the investment portfolio.

But I don’t necessarily have a limit, but there’s going to be a comfortable cushion on the cash side in the event that we see an outflow..

Okay. That helps. That makes sense.

And another on just the outlook for loan growth, is there -- I mean, is there a growth target that you think you could provide for us for next year and maybe kind of talk anecdotally about what kind of opportunities you’re seeing and where you think the most growth could come from? And then, maybe just kind of some local geographical commentary will be helpful.

I see like the growth has been a little bit slower in the DC, Virginia area versus some other markets we’re seeing at least in the Southeast. So I just curious if there’s anything that you think is happening from a regional perspective that’s driving that slower growth? Thanks..

Thank you, Catherine. I do think we’ve been seeing a lot more opportunities lately than we have seen in quite some time significantly this year in the construction area. Construction in the area is up quite a bit. So I am not really seeing much of a lag.

The difference right now, I think, is that there’s so much liquidity out there that a lot of these projects have a tremendous amount of liquidity going in ahead of the draws. So there’s going to be more delay in pulling down on construction lending and that’s could also be exacerbated by issues with the supply chain.

But I think, overall, that’s the type of lending we’re going to see impact us going forward. Also seeing a lot of M&A, which I think is typical pretty much across the country right now. There’s consolidation in various industries. So that’s also giving us some opportunities. Government contracting again is an opportunity area for us to grow as well.

I think we’re being quite competitive on pricing provided we’re getting a risk return on assets that’s appropriate to the bank. So, overall, I have cautious optimism.

Charles, you want to talk about liquidity a little bit or?.

Look, yeah, again, I mean, the notion that, there’s a lot of dollars, way more dollars chasing a good pipeline of deals again just echoing your comments. That’s really the challenges presented to us, and certainly, as it relates to pricing that we brought..

And I think, the other thing that’s encouraging is that the housing market here is still extraordinarily strong. There is a shortfall in housing in the DC area that’s expected to take us several years at a minimum to catch up with the population growth that we’ve had and the delays caused by COVID in certain projects.

I think there’s unmet demand out there that still needs to be handled..

Great. Helpful. Thank you so much..

Have a great day..

Thanks, Catherine..

Thank you. And our next question comes from the line of Brody Preston with Stephens, Inc. Your line is now open..

Hey. Good morning, everyone..

Good morning, Brody..

Good morning..

Hey.

I just had a question on the sub-debt real quick, just given that you all redeemed that early in the quarter, is -- has that worked its way into the interest expense yet? So if I kind of look at the $3 million you reported for long-term borrowings and back out that $1.3 million accelerated interest expense, is that a good place to start for the fourth quarter on that run rate?.

Yes. We redeemed it on August the 2nd. So you’ve got a day in there of the interest expense associated with that larger sub-debt. But, yeah, that’s a pretty good place to start..

Okay. All right. Great.

And then just on the core loan yield and it’s probably playing into some of the loan growth, the loan run-off you all have, but it’s holding up pretty well and so I guess when I think about what you all are originating in new production, understanding that it’s not outpacing some of the run-off you’re seeing, but what are you all getting for new origination yields?.

Yeah. So, again, I think, on the third quarter, we saw coupons of close to 4% on weighted average basis and what was the new loans that were originated and booked and funded for the third quarter. And then there’s obviously some component of deferred fees and costs that they’re added on to that to result in a yield slightly above that.

Again, whether or not that holds is a question, and again, things are very competitive. So that’s where we were in the third quarter..

Got it. Okay..

Yeah..

And Susan, I heard you earlier about the lumpiness that can occur on the FHA fee income side.

But I guess, as I think about going forward annually, do you feel like the pace that you’ve done year-to-date is where you would shake out in the upcoming years going forward?.

Yes. We do. We’re optimistic on that side too. There’s lot on our books that we expect to close. So we’re moving along in a positive way on that..

Okay. Great.

And then on the securities portfolio, Charles maybe, do you happen to know what the effective duration of that portfolio is?.

Yeah. Effective duration is 3.8..

Okay..

Yeah..

Okay. And then my last one….

Just….

Yeah. Go ahead, Charles..

Sorry. Just providing a little bit more color. I mean that number is certainly peaked up a little bit, right? And there’s more price risk, just like there are more priced risk than a lot of investment portfolios these days and many of our competitors seeking some kind of return..

Got it. And then my last one is just on expenses, particularly the salaries and employee benefits.

Could you remind me, I wasn’t able to find it in my notes, but are there seasonal increases that typically occur in the third quarter and so I guess this $22.1 million kind of be the new run rate going forward?.

Yeah. I mean, what I’d say on that is, typically there is as you approach the end of the year and there’s more clarity about individual performances of -- at the bank and the bank’s performance overall, we have a better sense of what that annual incentive expense is going to be and make accruals towards that.

So, yes, that is the nature of the way in which we’re booking some of those. And obviously, this year was inordinately good with a lot of the reversals that we had in the allowance and some with the sale of the PPP loans and other areas where we’ve seen some good benefit. So, yeah, that -- hopefully, that provides you a little bit insight there..

Awesome. Thank you very much everyone for taking my questions. I appreciate it..

Yes, sir..

Thank you..

Thank you, everyone. This concludes our question-and-answer session for today. So now it’s my pleasure to hand the conference back over to Susan Riel, President and Chief Executive Officer, for any closing comments or remarks..

We appreciate your questions and all of you taking the time to join us on the call. We hope you are doing well and we look forward to speaking with you again in a few months. Thank you all. Have a great day..

Everyone this concludes our Q&A and our call for today. You may all disconnect. Everyone have a wonderful day..