Eagle Bancorp, Inc.

Thank you, Michelle. Thank you, Michelle.

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 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 Thank you for joining us. 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 Google Bancorp.

Susan Riel Thank you, Charles. As is our custom, our Chief Credit Officer, Jan Williams, is also on the line with us this morning. Charles, Jan, and I will be available later in the call for questions. Before I begin the discussion of our financial results, I would like to extend our thoughts and hope for all of those on the call, our community here in the Washington, D.C. metropolitan area, and especially our customers and employees. during this time of stress caused by COVID-19 pandemic. The impact on the health, social, and economic aspects of our community has been significant, causing us to change the way we live and conduct business. However, we are committed to providing the excellent relationship-first service we are known for while maintaining a safe environment for our customers and employees We are equally committed to our role as a supporter of our local communities as we all work together to define the new normal. The second quarter results of 2020 we reported last evening was the first full quarter operating in the COVID-19 pandemic environment. That environment was both unusual and challenging. Considering all factors, we feel our company performed well. The net income for the second quarter of 2020 was $28.9 million as compared to $37.2 million a year ago. Both basic and fully diluted earnings per share were $0.90 for the second quarter as compared to $1.08 for both measures in the second quarter of 2019. The net income of $28.9 million in the second quarter represented a 25% increase over the first quarter 2020 earnings of $23.1 million. The level of profitability and quality of our earnings remains strong. and we believe above peer group averages as the second quarter resulted in a return on average assets of 1.12%, a return on average common equity of 9.84% and a return on average tangible common equity of 10.80%. The financial results for the second quarter were driven primarily by growth in average loans and deposits Top-line revenue growth by non-interest income, maintenance of credit quality, and improved efficiency and operating leverage. However, during the quarter, we did see a decline in the net interest margin, which was impacted by the abundance of liquidity on our balance sheet by substantially lower interest rates during the quarter due to the actions of the Federal Reserve in March, and by our participation in the Payroll Protection Program. For the second quarter 2020, total revenue grew by 7% as compared to the second quarter of 2019, while over the same 12-month period, non-interest expenses increased only about 5%. The efficiency ratio was 37.18% in the second quarter of 2020 as compared to 38.04% in the second quarter of 2019 and 43.83% for the first quarter of 2020. The significant improvement over the second quarter of 2019 was primarily due to increased levels of non-interest income, primarily gains and fees generated from the sale of loans and modest growth in non-interest expense. Our continuing attention to operating leverage with strong revenue growth combined with lesser growth of our non-interest expenses has traditionally been a key factor for our profitability. and it certainly was in the second quarter of this year. Compared to the first quarter of 2020, our second quarter efficiency ratio improved to 37.18% from 43.83% due to both higher non-interest revenue and lower legal expenses. We are pleased to report that the level of non-interest income was $12.5 million for the quarter, which is a 96% increase over the second quarter of 2019 and 128% increase over the first quarter of 2020. The growth as compared to the second quarter of 2019 included a $1.2 million increase in gains on the sale of residential mortgages, a $2 million $2.5 million increase in fees from the securitization, sale, and servicing of FHA loans and a $1.3 million increase in higher SBIC income. As we have seen across the industry, the low interest rate environment has created tremendous demand for refi mortgages, and we have capitalized on that. Our residential mortgage division closed $308 million of loans in the second quarter of this year, as compared to $152 million in the second quarter of 2019 and $193 million in the first quarter of 2020. We are particularly pleased with the success achieved by our FHA division during the quarter. As we have discussed previously, the revenue stream from the FHA division is not smooth from quarter to quarter, but tends to be irregular, almost lumpy due to the size of the transactions as compared to the high volume business of smaller transactions like the residential mortgage division. We were pleased with the mix of transactions during the quarter as we saw loans that were straight refinanced to allow the borrower to refinance at a lower rate as well as where the FHA loan was the permanent financing to take out a construction or bridge loan we had originally financed. The Small Business Investment Court income recognized was from our investment in mezzanine financing of various small business projects. for which the bank also achieves Community Reinvestment Act regulatory benefits. The trend of loan growth continued as the average loan balance for the second quarter increased 10% over the average loan balance in the second quarter of 2019 and 5% over the first quarter of 2020. About 90% of the loan growth during the quarter was from loans generated under the Paycheck Protection Program, which was part of the CARES Act authorized by Congress in March of this year. As reported earlier, we approved almost $500 million in loans to just over 1,400 businesses under the program. of PPP loans was $456 million at June 30. Other than the PPP loans, we had a net decrease of $276 million in the loan portfolio during the quarter. Decreases were seen in both C&I loans and income-producing CRE loans. As new loan activity was impacted by the COVID-19 environment, We believe the CNI portfolio decline was largely tied to repayments of lines of credit advances that were initially drawn in an abundance of caution by many businesses at the end of March as the COVID-19 pandemic began to show more signs of business concerns. We continue to see some demand in the marketplace but are being very selective in bringing new relationships into the portfolio at this point in the economic and credit cycle. Our lending teams are spending most of their time tending and nurturing existing relationships. As we mentioned in the press release and have discussed many times on these earnings calls, we focus more on average balances deposits than the end of period balances. Our experience during the second quarter really demonstrates that. The point-to-point end-of-period analysis shows a decrease in deposits of $206 million during the quarter with a balance of $7.9 billion at June 30th. However, the average deposit balances for the quarter were $8.5 billion, which comprised an increase of $786 million, or 10%, over the first quarter of 2020 and increased $1.6 billion, or 23%, over the second quarter of 2019. In part, we attribute the second quarter of 2020 disparity between average deposit balance changes and period end balance changes to the large amount of deposit gains that occurred in the first quarter of 2020, plus 13%, which remained in the bank for much of the second quarter and we believe was withdrawn late in the second quarter as the stock market recovered strongly in June and balances moved out of bank deposits. This increase in average deposit is likely the result of the flow of liquidity into the banking system created by the policy decisions of the Federal Reserve over the last two quarters. We have the benefit of these deposits because of our strong customer relationships with financial intermediaries, asset managers, law firms, and title companies. However, these deposit balances do fluctuate, and in this case, the average balance for the quarter was significantly higher than the period end balance. On the asset side of the balance sheet, loan yields dropped 44 basis points during the second quarter with about seven basis points attributable to the low yielding PPP loan. The rest of the decrease in the loan yields is attributable to market conditions, which saw 105 basis point decline in average one month LIBOR during the quarter. At June 30, 2020, the significant portion of our loan portfolio that is variable or adjustable 55% had a majority of its loans in interest rate floors, which we feel gives us some protection against the further declines in loan portfolio yields. The yield on total average earning assets decreased 64 basis points during the quarter. In addition to the drop in loan yields, The returns in the securities portfolio was negatively impacted by substantial prepayments of mortgage-backed securities in the quarter. The average loan-to-deposit ratio for the second quarter of 2020 was 94%, which is at the low end of a range we feel is prudent. We continue to maintain demand deposits at a very favorable level of 30%, of average deposits for the quarter, which certainly benefits the margin. The efficiency ratio improved to 37.18% as compared to 38.04% in the second quarter of 2019, and 43.83% in the first quarter of 2020. As earlier mentioned, consistent with our focus on operating leverage, The improvement in the second quarter as compared to the first quarter of 2020 was due to both the increase in non-interest income combined with a reduction in non-interest expenses. For the quarter, we incurred a more reasonable level of legal expenses and a reduced accrual for expenses related to the resignation of our former chairman and CEO. The previously disclosed government agency investigations and class action lawsuits are ongoing. However, the associated expenses were lower in the second quarter as subpoena production and testimony subsided, and we recovered on certain defense costs against an insurance claim for items otherwise expensed in previous years. We are maintaining our disciplined management of all other expenses while keeping in mind the need to continually improve our human capital and our IT infrastructure as we hover near to the 10 billion asset size and evaluate the additional regulatory requirements which are effective above that level. We are very pleased that in June we had two additions to our executive management team. Sam Pepper, who is our new chief operating officer, has extensive experience with community banks in the Midwest and in New England. Jeff Curry, our new chief risk officer, succeeds Susan Cooker, who retired in April. Jeff joins us from Deloitte where he was an advisor to many bank clients on compliance and risk management functions. Since the acceleration of the COVID-19 pandemic in mid-March, we have been constantly reaching out to our borrowing customers to assess the risk level of each borrower and offer support and, where appropriate, negotiate loan modification. We have approved payment deferrals on 708 loans totaling $1.63 billion, or approximately 20% of the loan portfolio. During the second quarter, we saw a modest uptick in some of the credit quality statistics consistent with the current economic environment, and we are reacting accordingly. At June 30, 2020, NPAs as a percentage of total assets were 0.69% as compared to 0.45% at June 30, 2019 and 0.56% at March 31, 2020. The absolute level of NPAs was $67.2 million at June 30, 2020 as compared to $38.8 million at June 30, 2019. and $55.3 million at March 31, 2020. The bank has consistently taken an aggressive approach to reviewing individual loans for impairment and accrual status. The allowance for loan losses was 1.36% of total loans at the end of the quarter and has increased from 1.23% at the end of the first quarter of 2020. These allowance levels have been derived using the new CECL accounting standards. No allowance has been provided for the $456 million of PPP loans given that those loans are fully guaranteed by the United States Small Business Administration, which has diluted the allowance ratio by approximately eight basis points. Annualized net charge-offs for the second quarter with 36 basis points of average loans as compared to eight basis points in the second quarter of 2019 and 12 basis points in the first quarter of 2020. The charge-offs in the second quarter were primarily from one commercial relationship in the personal services industry. At June 30, 2020, the coverage ratio of reserves to non-performing loans was 185%, as compared to 193% in June 2019. Given the uncertainty about how long the COVID-19 pandemic will impact the Washington, D.C. metropolitan area. We continue to monitor the economy and our customer base. The most recent reports from the Fuller Institute and the Bureau of Labor Statistics indicate that during the period of March through May, the region lost about 337,000 jobs, or about 10.2% of our employment base. Most of the jobs lost in business closings were in the accommodation and food service industries. So we will continue to closely monitor our exposure to that sector, which was 10%, about 10% of the loan portfolio at June 30. Our exposure to the retail sector is about 1% of total loans. While the COVID-19 pandemic have certainly had an impact on the income statement. We feel our balance sheet remains resilient. Our capital position was again strong as of the end of the second quarter. The total risk-based capital ratio was 16.33% at June 30, 2020, and the tier one capital to average assets ratio or leverage ratio was 10.63% at June 30. as compared to a year ago at 16.36% and 12.66% respectively. The reduction in the tier one capital to average assets ratio was largely the result of share repurchase activity. Our capital ratios remain well in excess of both regulatory measures and internal policy levels. Like many, We are concerned about the recent resurgence of COVID-19 across several areas of our country. However, we remain cautiously optimistic about the strength of the regional economy. While we continually monitor that, our strong balance sheet, continued profitability, and our dedicated customer-focused employees are why we feel we are well positioned to work through today's challenging environment. This concludes my formal remarks. We would be pleased to take any questions at this time.