Eagle Bancorp, Inc.

Ladies and gentlemen, thank you for standing by and welcome to Eagle Bank Corpus First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1 on your telephone. As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Charles Livingston, Chief Financial Officer. Please go ahead.

Thank you, Jonathan. Good morning. This is Charles Levingston, Chief Financial Officer at 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 2019 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. This morning's commentary will include non-GAAP financial information. The earnings release, which is posted in the investor relations section of the company's website and filed with the SEC, contains reconciliations of this information to the most directly comparable GAAP information. 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 it is our policy not to establish with the markets any earnings, margin, or balance sheet guidance. Now I would like to introduce Susan Riel, the President and CEO of Eagle Bancorp.

Thanks, Charles. Before I begin my formal remarks, I wanted to mention that Jan Williams, Our Chief Credit Officer is also here with us, and we'll all be available later for questions. I would like to begin by extending our best wishes to all our shareholders and others on this call during this time of great stress and concern related to the COVID-19 pandemic, which is impacting our whole world. This disease has changed the way we live and certainly the way we do business. I would like to give you a brief summary of how Eagle Bank has responded to the challenges presented by this environment. In late February, when we realized the potential severity of COVID-19, we started taking steps to protect the safety and health of our customers, employees, and the community. We immediately enhanced our system capabilities for remote access. Within 10 days, We had over 50% of our staff working remotely from their homes. During that period, we increased the sanitization of our facilities to enhance the safety for our employees who were coming on site. In all situations, we have followed CDC guidelines and local government authorities. Prior to federal plans kicking in, we established the Eagle Bank Relief Program, to allow for additional paid leave for our employees and worked with CareFirst to improve the medical coverage for COVID-19 related matters. We continue to monitor the spread of COVID-19 in the Washington metropolitan area and will take steps as appropriate to foster the safety and health of our employees and their families. We closed 14 of our 20 branches and left six open with drive-through access to offer the necessary services. To maintain a high level of service, we enacted outreach programs to our customers to encourage and facilitate use of our online and mobile banking services and ensure that customers knew how to reach us remotely. We worked with our vendors to make sure that the appropriate technology was available. For example, for one customer, we had 37 remote deposit terminals delivered and installed within three days. We contacted our borrowing customers to assess how they were doing and to discuss the need for loan modifications where appropriate. We have assessed the risk and exposures in our portfolio and will discuss those later in our call. To support our small business customer base, The bank is participating in the CARES Act Paycheck Protection Program, which offers SBA-guaranteed forgivable loans to small businesses to fund payroll and other costs. The administrative aspects of this program have proven to be very difficult, and initially our processing systems had trouble keeping up with demand. We enhanced our processing capability and to date we have approved approximately $107 million of loans through this program. We are focused on being responsive to our customer needs as expected. The additional funding for this program and we'll be able to better handle the additional funding for this program if approved. During the last six weeks, we have relied on our communications technology and other systems. to support our business operations as we have really put them to a test. As a group, we have adapted to the use of meetings conducted through teleconferencing and videoconferencing. Our core processing and backup systems reacted very well to the Finaster wire transfer disruption incident in late March, and we have the framework in place to hold a virtual annual meeting with our shareholders in May. Given the impact that the COVID-19 pandemic has had on the economy, we have spent quite a bit of time assessing the risk in our loan portfolio for those business sectors hit the hardest by the downturn. Of our total loans of $7.8 billion, we have $761 million or 9.7% of the portfolio in loans to firms in the accommodation and food service industry, and another 90 million, or 1.1%, in retail trade. There has been global concern about rent payments, and so note that 2.4 billion, or 31% of our portfolio, is comprised of income-producing CRE loans, and another 971 million, or 12%, of the portfolio in owner-occupied CRE loans. We would also note that these two loan types have been better performing segments of our loan book during previous economic and credit down cycles. During this period of uncertainty, our board of directors has been attentive to matters that would affect risk to our employees, our customers, and the stability and outlook of the company. Under the Board's guidance, we have been responsive to regulatory guidance and enhanced reporting, federal and state mandates, and actions including loan forbearance provisions and stimulus legislation. We don't have a crystal ball. However, we are confident of our ability to work through the coming challenges for two reasons. One is our strong capital position and profitability. which should allow us to work through the current credit cycle. And the second is our market position as one of the leading community banks in the Washington, D.C. metropolitan area. The federal government has created a major stimulus program intended to restart the national economy and our past experience from previous federal stimulus programs is that a significant percentage of the funds from the new government efforts will stay here in the Washington metropolitan area. This region is currently, and we believe is likely to remain, the fifth largest regional economy in the U.S. Now I would like to turn the discussion to the company's financial results for the first quarter of 2020. For the quarter we reported net income of $23.1 million as compared to $33.7 million for the first quarter of 2019. Earnings per share, basic and diluted, were 70 cents per share as compared to 98 cents of earnings per share, basic and diluted, for the first quarter of 2019. A straight-up comparison of the earnings for the two periods isn't really meaningful because each period had some major unusual items. The results for the first quarter of last year included a non-recurring charge of $6.2 million, 13 cents per share, for compensation expenses related to the retirement of our former CEO. And the results for Q1 of 2020 include significant additions to loan loss reserves related to adoption of a new accounting standard known as CECL. This new accounting methodology had, as expected, a significant impact on results for the first quarter. The CECL methodology was adopted as of January 1, 2020, and the resulting day one adjustments, which were charges to stockholders' equity, were an increase in the general allowance for credit losses of $10.6 million. and an increase of $4.1 million to the reserve for unfunded commitments. During the first quarter of 2020, we have made additional provisions to both the general allowance and the reserve for unfunded commitments, totaling $16.4 million. Of those additional provisions, about two-thirds can be attributed to COVID-19 matters. We continue to monitor the portfolio for potential losses due to the economic turmoil from the COVID-19 pandemic. Since mid-March, we have been reviewing individual credit to assess how the volatile economy is impacting their cash flows and ability to service their debt. As of April 16, we had reviewed and approved loan modifications for 234 loans totaling $298 million. The net result of all of these factors was an increase in the allowance for credit losses from 0.98% of total loans at December 31, 2019 to 1.23% of total loans at March 31. The adoption of the CECL accounting standard and related provision had a negative impact on pre-tax income of about $12.1 million for the first quarter of 2020. With that said, I would state that we are pleased with the results of the first quarter during which we saw continued growth in total loans, total deposits and a stable net interest margin, continued solid asset quality and continued strong efficiency and productivity. In addition to the CECL-related adjustments, the other major item impacting the quarterly earnings was the continuation of an elevated level of legal expenses. The net interest margin was 3.49% for the first quarter and was the same as the margin in the fourth quarter of 2019. We were pleased to see this leveling off after several quarters of decreases from the level of 4.02% in the first quarter of 2019. During the first quarter of 2020, loan yields decreased by 11 basis points to an average of 5.07% for the period. Importantly, we were able to significantly reduce our deposit costs by pushing down money market and CD rates in line with the Fed. The Fed moves during the quarter. The cost of interest bearing deposits decreased by 17 basis points to 1.52% for the quarter. While many of our competitors did not adjust deposit rates as much, we moved aggressively in anticipation and in response to short term rate reductions by the Federal Reserve and successfully reduced our deposit rate and our aggregate cost of funds, which was 1.06% for the first quarter of 2020. The net interest margin was impacted by two other factors during the quarter. The first item had a negative effect on the margin, was the more than sufficient on-balance sheet liquidity we held during these uncertain times. The result was that we had about $200 million in excess liquidity invested with the Federal Reserve as they reduced rates to near zero. The average loan-to-deposit ratio for the quarter was 99.4%. On the other hand, our cost of funds and margin continue to benefit from our ability to maintain average demand deposit accounts at 29.5% of total deposits. Our high level of DDA deposits continues to be a major strength of the bank. We continue to have strong credit quality statistics for the first quarter of 2020. Net charge-offs annualized were 12 basis points of average loans for the quarter, decreased from a level of 19 basis points for the first quarter of 2019, and 16 basis points for the fourth quarter of 2019. Non-performing assets increased by $5 million during the quarter due to the addition of two pieces of Oreo property acquired through foreclosure. At March 31st, non-performing assets as a percentage of total assets were 55 basis points, as compared to 50 basis points a year ago and 56 basis points at December 31, 2019. Non-performing loans at quarter end were 47 million and as a percentage of total loans were 60 basis points as compared to 56 basis points at March 31, 2019 and 56 basis points at December 31, 2019. As mentioned, the allowance for credit losses was 1.23% of total loans at the end of the first quarter due primarily to the CECL and COVID-19 related adjustments. Overall credit quality remained solid. At March 31, 2020, the coverage ratio was 205% of non-performing loans as compared to 174% at March 31, 2019, and 151% at December 31, 2019. At these levels, we believe the bank is adequately reserved. For the first quarter of 2020, average loan balances were 8.7%, greater than in the first quarter of 2019. We achieved loan growth during the first quarter of 2020 of 295 million, or about 3.9%. Average loan balances for the quarter were 2% higher than during the fourth quarter of 2019. The largest increases during the quarter were in C&I loans and income-producing CRE loans, while we saw a decrease in construction loans. Since March 31, 2019, We have grown our C&I loans by 11% and income-producing CRE loans by 13%, while our construction loan portfolio has remained flat at just about a million. A significant portion of the growth in C&I lending in the quarter was due to advances under the lines of credit as clients added to their liquidity positions in March in response to COVID-19-related matters. We estimate that about half of the loan growth during the first quarter of 2020 was attributable to this activity. Our loan pipeline continues to look promising, but demand for new loans is hard to determine due to the uncertainty caused by the pandemic. On a period-end basis, total deposits grew by $917 million during the first quarter of 2020, while Average deposits experienced a slight decrease of $20 million. Our deposit balances saw significant fluctuations during the first quarter of 2020. While balances were seasonably low early in the quarter, we saw significant increases in February and March as many of our customers accumulated cash in response to the pandemic and the volatile equity markets. Average deposits for the first quarter of 2020 were $7.7 billion, little changed from the fourth quarter of 2019, but exhibiting a healthy annual growth rate of 10% as compared to the first quarter in 2019. Non-interest income was $5.5 million for the quarter, as compared to $6.3 million in the first quarter of last year, A 13% increase. The decrease in revenue was attributable primarily to lesser gains on the sale of residential mortgages as an otherwise very strong quarter of residential mortgage loan originations and sales volume in 2020 was negatively impacted by hedging losses due to the dislocation in the market pricing of mortgage-backed securities. Net investment gains were slightly lower at $822,000 for the first quarter of 2020 as compared to $912,000 for the same period in 2019. The efficiency ratio was 43.83% for the first quarter of 2020 as compared to 43.87% a year ago and 39.71% in the fourth quarter of 2019. The higher efficiency ratio in the first quarter 2020 was attributable to both reduced level of revenue due substantially to lower interest rates and a higher level of legal fee expenditures related to the previously disclosed governmental investigations and our defense of the previously disclosed class action lawsuits. While we are all grappling with the uncertainty caused by the COVID-19 pandemic, we are cautiously optimistic about the long-range prospects for the Washington metropolitan area. At the end of 2019, we had the fifth largest regional economy in the United States, with a gross regional product of $541 billion. The Fuller Institute at George Mason University recently released their analysis on the effects of the pandemic, which indicates that if our local areas shut down for 90 days, the impact on the regional economy would be a reduction to GRP of 1% or $5.4 billion this year, and that the growth rate would return to its normal level of about 2% growth in 2021. As with the national level, the biggest damage locally would be to the restaurant and hotel sectors, so we will continue to closely monitor those exposures in our loan portfolio. Our Board is committed to maintaining a financially sound, well-capitalized institution. We have done that over the last four quarters as the additions to retained earnings from our continued profitability have been offset by the effect of adopting the CECL standard and by the share repurchases made prior to our recent suspension of the repurchase program. The Board will continue to assess the impact of the COVID-19 pandemic on the regional economy and our asset quality statistics in considering any potential capital-related actions We are proud that even with all of the challenges we have addressed over the last four quarters, our company has earned $132.3 million in net income. During that same period, we have returned to our shareholders $128 million through cash dividends and share repurchases and have increased the tangible book value per share by 11% The Tangible Common Equity Ratio moved from 12.59% a year ago to 10.90% at March 31, 2020. These levels are well above peer averages and regulatory well-capitalized levels. We appreciate the support of our shareholders and those of you on this call. I would like to remind you that our annual shareholders meeting will be held on on a virtual basis at 10 a.m. on May 21st. We hope that many of you are able to participate. Instructions on how to register for the meeting were included in our proxy, which was published on April 6th. That concludes my final remarks. We would be pleased to take any questions at this time.