Eagle Bancorp, Inc.

Good day, everyone, and welcome to the Eagle Bancorp third quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will host a question-and-answer session, and our instructions will be given at that time. If during your conference today you require operator assistance, please press star and then zero, and an operator will be happy to assist you. As a reminder, this conference call may be recorded. It is now my pleasure to hand the conference over to Charles Levenson, Chief Financial Officer. Please proceed.

Thank you, Brian. Good morning. This is Charles Levinson, 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. 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 Bank Corp. 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 EGLE online at our website or the SEC's website. This morning, Susan Riel, the President and CEO of EGLE 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'll 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'm pleased to report another great quarter for Eagle. Earnings, while not a 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'll also touch on later along with some comments on our market and a 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 eight 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 cost 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 is 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 40 cents per share. This is up from 35 cents the prior quarter, and 25 cents the quarter before that. With a dividend of 40 cents 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's 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, an Amazon economic impact report stated that Amazon invested a total of $28.5 billion in 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 flush 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 CNI teams are seeing an increase in deal flow and in the markets. 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 Bancorp, Inc. on the outstanding shareholder derivative action on Monday, October 4th, when the D.C. 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 a 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 litigation 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.