Eagle Bancorp, Inc. (EGBN) Q2 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to The Eagle Bancorp Second Quarter 2019 Earnings Conference Call. At this time, I would like to -- everyone is on a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I'd now like to introduce your host for today's presentation, Mr. Charles Levingston, Chief Financial Officer of Eagle Bancorp. Sir, please begin.

Thank you, Howard. 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 also 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 any formal earnings, margin, or balance sheet guidance. Now, I would like to introduce Susan Riel, the President and CEO of Eagle Bancorp.

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. I would like to welcome all of you to our earnings call for the second quarter of 2019. As noted in the press release issued last night, the net income for the quarter was $37.2 million as compared to $37.3 million a year ago. Fully diluted earnings per share were $1.08 for the second quarters of both 2018 and 2019. The net income for the second quarter showed an increase over GAAP net income of $33.7 million in the first quarter of 2019, which included $6.2 million of non-recurring costs. The second quarter diluted earnings per share of $1.08 increased from $0.98 per share in the first quarter of 2019 on a GAAP basis, $1.11 excluding non-recurring item. Taken as a whole, we view these results, a strong earnings with the return on average assets of 1.74% for the second quarter and a return on average tangible common equity of 14.8% for the period. We feel these bottom line results continue to place us among the most profitable banks in the country. The results for the quarter were driven primarily by continued growth in earnings assets, with robust growth of 3% in the loan portfolio. Top line revenue growth and disciplined adherence to the principles of operating leverage. However, during the quarter, we did see a decline of 11 basis points in the net interest margin and an elevated level of legal and professional fees. We'll expand on both of those issues later in the call and be as forthcoming as possible. For the second quarter, total revenue grew by 5% as compared to the second quarter of 2018, while over the same 12-month period, non-interest expenses increased only 3%. For the second quarter of 2019, annualized non-interest expenses represented only 1.55% of average assets, a level which is superior to industry and peer group averages. The efficiency ratio was 38.04% in the second quarter of 2019 as compared to 38.55% in the second quarter of 2018 and 36.82% excluding non-recurring items for the first quarter of 2019. Our continuing attention to operating leverage with strong revenue growth combined with lesser growth of our non-interest expenses has been a key factor for our profitability. In the second quarter, the net interest margin decreased by -- decreased to 3.91% as compared to 4.15% in the second quarter of 2018 and 4.02% in the first quarter of 2019. We continue to manage through a challenging interest rate environment and a very competitive market. Rather than [pass] [ph] on good quality loan production, we opted to pay more for deposits to fund those loans and take a longer-term view. We achieved an average yield of 5.61% on the loan portfolio in the second quarter, which was an increase over 5.53% in the second quarter of 2018 and only 8 basis points decrease from the first quarter of 2019. This was very positive considering the average LIBOR rate was 4 basis points lower in the second quarter of this year than in the first quarter. However, the pressure on deposit costs continues to be an issue and our composite cost of funds increased by 11 basis points during the quarter to a level of 1.30%. Our experience in the Washington Metro area market is that while loan rates have begun to move lower in conjunction with general money market trends we have not seen any break in deposit pricing. To manage our overall cost of funds, we continue to monitor all market rates and balance our funding sources between core deposits in the local market wholesale deposits, which can be very efficient and FHLB advances. Our expectation is that we will continue to see pressure on the margin until further softness in the economy pushes deposit rates lower and late cycle credit concerns widened spreads on loan. We achieved strong loan growth of $220 million or just over 3% in the second quarter. This came through solid production with $451 million in new loans, while payoffs were in line with typical levels. The loan growth in the second quarter was slightly above expectations and we were pleased to generate quality loans at acceptable rates with established customers. However, for the next few quarters, we expect growth at an annual rate more likely in the high single digits range, as we nurture relationships and maintain the high credit quality of our portfolio. We will continue to rebalance the portfolio, reducing the ADC exposure and growing the longer-term loans secured by income producing properties and continuing to grow C&I loans and owner occupied loans. We are also being more selective on individual transactions. Being mindful that we are in latest stages of the economic cycles. These changes in the composition of the portfolio will have some impact on the portfolio yield over time. But in the risk reward analysis, we would rather err on the side of caution and maintain the quality of our loan portfolio. Deposit growth was also strong during the quarter, net growth during the quarter was $267 million, about 4% as we raise funds to support the growth to the -- of the loan portfolio during the quarter. Average deposits for the quarter were up 10% from the second quarter of 2018 and decreased by 1% from the first quarter of 2019, as we use the FHLB for interim funding as needed to optimize our overall composite cost of funds. Deposit pricing remains very competitive in our markets. In response, we have had to pay more interest to attract and retain certain significant relationships. One effect was that during the second quarter, we saw some DDA balances migrate to interest bearing accounts and as a result, DDA balances average 31% of total deposits for the quarter. While a decrease -- while a decrease, this is still a very attractive level and it contributed to our favorable overall cost of funds and we have maintained our relationships with these valued customers. Generating core deposits is still our biggest challenge that is the primary focus. During the second quarter, we continued to maintain our solid credit quality. At June 30, 2018, NPAs as a percentage of total assets were 0.45% as compared to 0.16% at June 30, 2018 and 0.50% at March 31, 2019. The absolute level of NPA is at $38.8 million at June 30, 2019, as compared to $12.3 million at June 30, 2018 and $40.3 million at March 31, 2019. The Bank has consistently taken an aggressive approach to reviewing individual loans for impairment an accrual status. The allowance for loan losses was 98 basis points of total loans at the end of the quarter, which is reflective of the consistent high-quality of the loan portfolio and by the loan growth in the second quarter together with consistent application of our allowance methodology. Annualized net charge-offs for the second quarter were 8 basis points of average loans as compared to 5 basis points in the second quarter of 2018. And are well below the range of our historical average charged off loan experience. At June 30, 2019, the coverage ratio of reserves to non-performing loans was 192%. We continue to see healthy loan demand in the Washington Metropolitan markets, which is maintaining a moderate growth rate for 2019 year-to-date. The most recent reports on the area’s economy from the Stephen S. Fuller Institute were released in June and show an increase in both the coincident and the leading index. The region has added 27,000 net new jobs over the last -- last year with Northern Virginia outpacing the district and Montgomery County that trend is expected to continue with the opening of the Amazon HQ2 facility in Crystal City. We are on track to open our new loan production office in Prince George's County during the third quarter, we are very excited about the opportunities for C&I and real estate lending in that growth market. We consistently monitor the supply and demand for commercial real estate by sub-market and loan type to manage our exposure and direct new production. This knowledge of the market has been a key factor in our successful underwriting over the years and in maintaining our credit quality, which continues to be a hallmark of Eagle Bank. As I mentioned earlier, we are reducing the level of ADC exposure in the loan portfolio and shifting more towards income producing CRE loans, C&I and owner occupied loans. This adjustment in the loan portfolio will also impact our rate sensitivity position, moving to a slightly less asset sensitive position. Non-interest income during the second quarter was $6.4 million, a 15% increase over the second quarter of 2018 and a 1% increase over the first quarter of 2019. The increase over the prior year was attributed substantially to gains on sale of securities and gains on sale of residential mortgage loans, which were $1.9 million for the quarter as compared to $1.7 million in the second quarter of 2018. We had an uptick in volume of refinance loans as mortgage rates drop during the quarter. As mentioned earlier, for the second quarter of 2019 the efficiency ratio was -- was a very favorable 38.4% as compared to 38.55% in the second quarter of 2018. Non-interest expenses for the second quarter of 2019 was $33.4 million up only 3.3% from the second quarter of 2018, as we adhere to the principles of operating leverage. We reported for the second quarter, an increase in legal fees and other expenses related to investigations by government agencies. The scope of which expanded significantly during the spring of this year. The expenses include legal and professional fees to the preparation of responses to subpoenas and document requests from multiple agencies examining various matters including the Company's identification, classification and disclosure of related party transactions, the retirement of certain former officers and directors and the relationship of the Company and certain of its former officers and directors with a local public official. The company has advanced more likely continue to advance indemnification costs for certain officers and directors. The level of disclosure, we are making at this time is due to the increasing level of expenses associated with the government agency investigations. In the second quarter of 2019, legal accounting and professional fees grew from $1.7 million in the first quarter of 2019 to $2.7 million in the second quarter. In addition, the company expects that it will continue to incur elevated levels of legal accounting and professional fees, at least through the remainder of 2019, as it continues to cooperate with these investigations. Other than these increased costs, we do not believe at this point that the resolution of these investigations will be materially adverse to the Company. As a result of these investigations, there have been no regulatory restrictions placed on the Company's operations, including its ability to continue to pay a dividend or fully engage in its banking business as presently conducted. We are, however, unable to predict the duration, scope or outcome of these investigations. Even with the elevated level of legal expenses and other costs included in the second quarter, we maintained a very favorable efficiency ratio. We have the benefit of our branch-light business model, but also it tends to rationally manage our expenses and are continually seeking ways to improve productivity without sacrificing responsiveness, customer service or the maintenance of quality operation. We continue to develop our systems, human resources and organizational structure as we advance towards the $10 billion regulatory guidance. Given our current size and growth rates, we are continually trying to improve quality of our operator -- of our organizations. The recent changes to our Board structure and the skill sets of our new Board members have enhanced the capability and diversity of the Board and aligns us with current best practices in corporate governance and risk management. Our capital positions are very strong as of the end of the second quarter due to the continued additions to retained earnings from our consistent profitability. As of June 30, 2019 total shareholders' equity was $1.2 billion and the quality of our earnings remain strong. The total risk based capital ratio was 16.36% at June 30, 2019 and the tier 1 capital to average assets ratio was 12.66% at June 30 as compared to 11.97% a year ago. Our capital ratios remain well in excess of both regulatory measures and internal policy level and our capital accretion during the first half of 2019 was at a 13.6% annualized rate. We expect this growth will continue to support the quarterly, I'm sorry -- I lost the spot. We expect this growth will continue to support the quarterly dividend that was recently initiated. We have strong balance sheet and intend to maintain that through the control -- through controlled prudent growth. That concludes my formal remarks. We will be pleased to take any questions at this time.

[Operator Instructions] Our first question or comment comes from the of Austin Nicholas from Stephens Incorporated. Your line is open.

Hey, guys. Good morning.

Good morning, Austin.

Maybe just on the non-interest bearing decline in the quarter, can you maybe just elaborate on how much of that was migration into interest bearing? How much exited the Bank and then kind of any expectations on that front looking forward?

Sure. As Susan mentioned in her comments, the pressure continues on the deposit pricing with -- certainly within our market rate, within our market average deposits did migrate in terms of average balances within the categories. We saw migration more into both time deposits, as well as away from DDA into interest bearing transaction accounts, again a lot of that was, you're paying up to retain or attract new deposits and also again taking advantage of the flatness of the yield curve going little further out on the yield curve. On a weighted average basis, we pushed out our time deposits by about four months on the balance sheet and you can see that also increased rate as a result of all time deposits maturing and putting on being replaced by -- by time deposits at prevailing rates pushing up that rate from 236 in the first quarter to a 250 in the second quarter. In terms of the outlook, the latest number that I looked last night in terms of the expectation of Fed decrease by 25 basis points. The futures market suggest about 64% probability that they're going to reduce rates. That could help reduce the cost. But that gives us and take us away as we're obviously had some sensitivity on the asset side of the balance sheet as well. Certainly, we're still -- feel very comfortable with our 30% plus DDA deposits, that foundation provides a pretty solid foundation for -- for the cost of funds moving forward.

Understood. Thanks. I appreciate the color there. And then maybe moving on to the professional fees. Susan, I appreciate your comments there and that those are expected to remain elevated, but maybe just a little more specifically, how should we think about those expenses in the back half of the year, if they are to remain elevated? Is it at these levels of that $2.6 million or so -- or excuse me -- $2.7 million or could we see those move significantly higher?

I would love to have a crystal ball to be able to answer you Austin. But we really don't know what they will be. So it's hard for us to project that. We just feel confident that they will be elevated and felt that it was necessary for us to notify the market.

Okay, that's helpful. And then maybe can you -- to the extent that you can, can you elaborate on the related party transactions just more in general, on what type of related party transactions that are being looked at in terms of loan relationships or deposit relationships or any sort of other kind of relationship that is being looked at?

Austin, we haven't identified the transactions with particularly in our public filings. The overall amounts in totals were -- are represented in our public filings into 2018 10-K filed March of this year. So that's about as detailed as we can get on the particulars of what those related party transactions were.

Understood. That's helpful. And then I think in the release, it was mentioned that there, you do have some directors and officer insurance and can you maybe elaborate a little bit on how that D&O insurance could offset some of these costs in theory and maybe what costs, maybe it wouldn't offset.

We obviously do have director and officer insurance. We took the most conservative approach and disclosed all of the costs. We are still working with our insurance companies to identify what might be covered and what might not be covered. Charles, do you have anything you want to add to that.

No, it's how these things go. You dance a little with the -- with the insurers to get to a place, where you can get as much reimbursement as you can for these matters based on how the policies are written. So we expect that we will have some or all of the [thoughts recuperating] [ph].

Okay, thank you. And then maybe just one last one, I know you have the new LPO in Prince George's County and that seems like a good market for you to grow into, I guess any expectations for some new hires there. And then any other markets that are in the kind of Greater Washington area or outside of it, that you would seek to grow in either organically through in the LPO or maybe even any thoughts on M&A?

We feel most of our growth will be organic in the markets that we're in; Prince George's County is an exciting move for us. We have an internal move that we will make and that individual has currently been with us for a number of years, but has spent most of his career in the Prince George's County area. So he will move over to that location and we are recruiting for additional RMs in that area.

And I'd just add to that, as Susan suggested. We've been in Prince George's County, we've been lending and operating in Prince George's County. This is us planting a flag there and as you suggested Austin, making more of a concerted effort that have a presence in that market than we already have.

Understood. Susan, Charles, thanks for taking my questions.

Thanks, Austin.

Thank you. Our next question or comment comes from the line of Casey Whitman from Sandler O'Neill. Your line is open.

Good morning. Yeah. Maybe can you give us an update on, I think it was a $17 million condo project from last quarter that was added to non-accrual and I think you guys were on schedule to sell maybe in May. Does that come off and then was there an offsetting kind of inflow? Thank you.

Yes, Casey. That was exactly what happened. We did successfully disposition that property. By over the same period of time, we had a number of loans rolls into non-performing status, principally four single [family] [ph] residential properties, two of which were consumer and two of which were commercial. The total on those was about $12.2 million. It was -- really the lion’s share, the other loans in and out, we're on a much smaller scale.

Okay. Maybe can you tell us where classified loans stand at 6.30 versus 3.31 [ph].

Where problem loans stand?

Classified -- classified.

I don't have the exact number differential. But I can get that to you.

Okay, great. And then I guess just one follow-on question for the legal fees. Maybe if I can just separate out the three things, you guys talked about being investigated for between the related party transactions, the retirement of former officers and the connections to a local public official. Can you just tell us if these investigations are all kind of independent of each other or if they're all tied together?

We are hesitating, Casey. But due to the non-public nature of these matters, we are really not able to comment on that, but we intend to keep you as informed as we can on an ongoing basis.

Got it. Understood. And I guess -- so maybe just your comment about the -- in the prepared remarks, so it seem that these investigations have been ongoing, but the cost just got elevated enough to need to disclose them. Is that kind of an accurate understanding?

I think, again, given the non-public nature of the investigation, we'd prefer not to comment, but, yeah, that's -- I'll stop there.

Okay. Thank you, guys.

Thank you. Our next question or comment comes from the line of Catherine Mealor from KBW. Your line is open.

Just to circle back to the margin, I had a couple of questions about the subpoenas, but I'll just -- I won't ask them. I feel like you can't answer them right now. But -- so I'm going to circle back to the margin. And I guess first on the margin, can you help us think through how quickly you think you're going to be able to bring down deposit costs if rates are cut? I remember a couple of quarters ago, you did a large increase in CDs. With that, can you remind us what the duration was of those CDs and then -- and then just kind of thinking about the different buckets of your deposit portfolio, how quickly you can -- if you think you can cut rates, if we get a cut.

Sure, yeah. Catherine, I -- the CDs that we have the weighted average maturity of the entire book, both brokered and core, is about a little over 14 months, up 14.5 months. We brought on about $600 million in CDs in the second quarter, the average life on those is about 20 months and that was at about a 2.39% weighted average rate, if that's helpful. Overall, in terms of our deposit mix is about $1.3 billion would be our index. So those, we'll be able to reprise down pretty immediately. Again the upward pressure continues on retaining and attracting new deposits, so it's hard to say how that shapes out. Our modeling suggests -- the interest rate risk modeling suggests it down 100 over a 12 month period, we lose about 3% in non-interest income. So, of course, that move is not a realistic expectation. The balance sheet actively managed as the Fed makes it moves as the markets make their move. So, that feels to be the worst of it given that extreme scenario of down 100 basis points, but a million things happened between here and there. So hopefully that's helpful.

Yeah, for sure. It is. And then on the asset side, current loan yields are about 5.6%. Can you compare that to where new loan yields were for the quarter for originations this quarter?

Yeah. So we put on, as Susan mentioned earlier, $451 million in new loans in the second quarter. The coupon at which we put those on -- or rather, the yield that we expect those to achieve is probably just -- just around 5% or little less than 5%. I will note that and that's obviously with the deferred fees and costs in addition to the coupon and the -- I will note that it's probably close to 80% of those. Also as Susan noted, we're in commercial real estate -- investment commercial real estate or income producing commercial real estate. Again, that's us posturing in a little bit more conservative mode as opposed to the construction lending that we -- that we've built the Bank on for many years. So that certainly plays into that, to the risk-reward associated with that kind of a yield.

Got it. And with that initiative, is there a percentage of loans or percentage of capital that you're trying to get your ADC portfolio down to.

I think a move down on the -- on the ADC is something that we're interested in. I think the 115% to 120% is a good range for us to live in right now given the amount of capital that we do have, I think that's a comfortable range.

Got it. Okay and then maybe one last one on credit. The four loans that came into NPL this quarter Jan, is there -- is there any connection between those four, as in are they in one market, sub-market of DC that feels softer than others or anything kind of locally economically that you're seeing that -- that's driving those increased NPLs this quarter.

Yeah. Catherine, I think these four loans are all on very high end, single-family residential properties and I think that market has slowed considerably in the area. In prime locations, Georgetown, Embassy Row, that kind of really premier area, but it's just a slowness in the market at the mid seven figure range.

Got it. Okay. Great. Thank you.

Thank you. Our next question or comment comes from the line of Joe Gladue from Alden Securities. Your line is open.

Hey, good morning.

Good morning, Joe.

I really just have one question left. Just on the loan portfolio, you had, I guess a little bit better than expected production this quarter, just wondering how -- is that pulling anything out of the pipeline or how's the pipeline look now?

Yeah. Pipeline continues to look -- look strong, Joe. I think we still feel that looking forward towards the end of the year that the high single digit is probably a good expectation in terms of loan growth for the year. This was a more significant quarter than we -- we've expected initially. And as you know, in our business in commercial real estate in lending two commercial businesses, it can be kind of lumpy some time. So yeah, I think that it should provide a little -- a little insight there.

All right. Thank you.

Thank you. Our next question or comment comes from the line of Christopher Marinac from Janney Montgomery. Your line is open.

Hey, good morning. I want to follow back up on Casey's question on classified. So you had roughly $70 million of classifieds last quarter tied back to the commercial real estate and then there are $25 million roughly on C&I specifically -- are those directionally higher or are those percentages higher or will they be about the same, Jan? I was just curious if you can kind of give us any color on that. I know the specifics aren't right in front of you, but just a little color would be really helpful.

Yeah, I think our average risk rating in the portfolio is fairly consistent and has been over, gosh, the last three or four years. So I don't think it's any push into the problem loan area. They're down a little bit over last quarter in terms of the classified that Casey asked about earlier. But I think it's a fairly really less than one would expect, given the size of the portfolio since we've been working through these loans pretty successfully over the past years, and I have really no reason to anticipate any significant change.

All right. Great. That's says -- that tells us what we wanted. And then the shift away from construction again is not related to any issues on construction now. it's more of a risk reward as you had described earlier in the call.

I think that's right. We're looking at what may be the end of a business cycle or real estate cycle. So we're just prudently moving into more cash flow producing loans as opposed to construction and for sale type project.

And I would just caveat that, I think Chris said, it's -- we're not going to stop doing the construction deals that still have the right value proposition. So those deals that makes sense, we'll still be engaged in that business, but certainly looking to shift the focus slightly.

And then my last question just goes back to funding. And when you look at your core customer today, is he or she able -- is there a difference between, what your core customers are accepting on deposits versus the wholesale market. I mean the wholesale market seems to have shifted lower, but I realize it doesn't turn as quickly as we all like. So just curious on how the core customer behaves. And does it indeed take a Fed cut to get them to make a -- accept a lower rate?

We've got some pretty decent stickiness on our core customers. There certainly is and has historically been disparities between wholesale and in core funding and lot of what would make this business work. So -- but yes, I think that our core customers, in response to the competition within the markets are going to continue to look to -- to get paid on their deposits as kind of folks wake up even two years later from the fog of zero interest rate environment. So I would expect some continued upward drift in the core portfolio as well.

Okay, very well. Thank you very much guys.

Thank you. Our next question or comment comes from the line of Steven Comery from G. Research. Your line is open.

Hey, guys. Thanks for taking my question.

Sure. Thanks.

So I mean just wanted to go back to the margin for a second. So just given what's already happened, I mean we've already seen LIBOR move down and you've already taken some impact certainly on the loan side of lower rates, just if we go from here and the Fed does end up cutting is that on-net, good or bad in the quarter when it happens. How should we think about that?

Yeah. Again, we're slightly asset sensitive. So it's going to -- it's going to pinch slightly. It's my expectation. So yeah, I think we hover around this range in terms of the margin, but directionally, it's -- there again could be a little drift. So that's -- that's my expectation. We do have $3.2 billion with loan floors -- $3.2 billion of our loan portfolio have loan floors. I think they are pretty far away from the 25% or 25 basis point cuts, but we do have that protection in there, should rates continue to move downward.

Okay. And then sort of the loan to deposit ratio. I mean, you guys continue to grow loans ahead of deposits, starting to creep up over like 105% here now. Is there sort of, like a number there that would concern you or you would manage to and then if so, would that stunt growth in future periods, if you have to dial that back to look for more funding?

We're mindful of the liquidity position of the bank and certainly want to be cautious with that. We can operate here at the level, we're at currently, but ideally we would like to see that that number come down a couple of percentage points to a more comfortable liquidity position.

Okay. And then just finally for me, Susan, in your prepared remarks, you mentioned that generating core deposits is the company's biggest challenge in primary focus. I'm just wondering if you could give us kind of any sort of color or anything you guys are doing there. Just sort of, like either new or earlier, sort of how does this play out if it's the Company's primary focus.

Obviously they -- deposits are our core issue. I mean it's the largest challenge that we have. We are looking to a number of different areas. We have different programs for deposit gathering for our relationship managers and commercial deposit gatherers. We're also looking at a digital banking program, which would go out and raise some probably more consumer loans, consumer deposits. So we are looking at all of that and trying to get some diversity and how we're going about trying to tackle this challenge.

Okay, thanks. That's it from me.

Thank you. Our next question or comment comes from the line of Brody Preston from Piper Jaffray. Your line is open.

Good morning, everyone. How are you?

Good. Good morning, Brody.

Good morning.

So I guess maybe sticking with the margin and the loan to deposit dynamics. Charles, could you give us an update as to what percent of the loan portfolio is tied to one month LIBOR?

Yeah. 41% of the loan portfolio is tied to LIBOR.

Okay. So I guess -- with LIBOR, I guess on average was down 5 basis points in the quarter and it's continuing to leg down since the end of the quarter, so could we see a bit of -- I guess even without a Fed cut, could we see a bit of a catch-up in loan yields migrating downward in the third quarter?

Certainly, yeah. Right at the loan reset timing is varied, so it's certainly possible that some of those have yet to reset and we'll -- it could be reflected slightly going forward.

Okay. And then I guess on the deposit mix, understanding that you had some mix shift between the interest-bearing and the noninterest-bearing. I was hoping to get a better sense for, was that across a broad base of customers or -- I know you guys have some lumpier deposits, just given the nature of your business. So could you better describe what happened there.

Yeah, I mean again, it's call it the disintermediation of deposits that we've been seeing over the last couple of years. But certainly as you described there are some large depositors and it was a couple of -- couple of larger depositors where you saw some of that activity take place.

Okay. And I guess when I look at the average balance sheet and you know and I guess the end of period balance sheet, the largest sort of flow into was into the interest-bearing transaction. And the cost there legged down significantly, which sort of I guess maybe infers, the incremental cost on the new flow into the interest bearing transaction was significantly lower than the 81 basis points from the quarter ago period. So could you give us a sense for what that incremental cost was?

Yeah. Right, so those -- those deposits were somewhere in the neighborhood of, call it 60, 55 basis points or so and again being paid for the transaction components of that account or accounting for that when you're pricing it.

Okay. So did you lower rates for those accounts for existing customers that didn't --

For the newer ones coming in, we were able to bring them on at that rate.

Okay. And then I guess, as I sort of look at the overall composition of deposits. You have a relationship with promontory that I think as of the end -- at the end of the year was $545 million through the insured network deposit program. Are any of those -- I know you have unusual but are there any of those classified as noninterest-bearing within your GAAP data.

I don't believe so -- I don't believe so, but I'll have to double check and get back on that.

Okay. And then I guess just looking at another segment, you had about $550 million between split between public funds and foreign government deposits. Last quarter, which is almost double the year ago period. How volatile are those sources of funding on a quarter-to-quarter basis?

Yeah. Our public fund book certainly again can be -- can be chunky as we kick in $10 million, $20 million in time from the various municipalities in the area. They are price sensitive. We've been successful in meeting those price demands and maintaining those deposits over the past couple of years. So, and we have got good relationships with those folks. But obviously, they have a fiduciary responsibility and we've been able to accommodate those.

Okay, okay. And then I guess I just wanted to swing back to the construction commentary, understanding that -- you guys are describing maybe towards the end of a cycle, I wanted to get a sense for what the leading indicators that you guys are looking at are there, indicating that we're nearing the end or maybe a turn in the cycle?

Well, there are a number of different indicators we look at. I mean, historically, we looked at an inverted yield curve, we looked at unemployment in the construction industry. Internally, we look at the portfolio and split it out by industry and there are certain industries that we've had through past experience that if there is any weakness shown in them, it's generally a precursor. I think it's -- in all other things being stagnant and who knows what's going to happen in terms of what the Fed does or doesn't do and what happens in terms of the election and we may be longer into this up cycle than we otherwise would have been based on the tax cuts. So it's a tough prediction and I'd borrow Susan's crystal ball if she had it. But we're just taking precautionary prudent action to make sure that the quality and stability of our loan portfolio holds up.

Okay. So just to be clear, there are no industries I guess within the construction book or there is no uptick within local construction unemployment that you're seeing that's making you more hesitant?

Not yet. But as I noted earlier, we have seen slowness in the over $2.5 million housing market. So that's something we're keeping an eye on.

Okay. And then, understanding that you don't necessarily want to go into the specifics of the various investigations. I just wanted to try and confirm a few things. You guys are pulling back on construction, that doesn't have anything to do with the ongoing investigations, does it?

Not at all.

Okay, great. And then I guess maybe as it relates to the D&O insurance, I just wanted to understand that, -- that's there to help pay -- potentially pay for any costs related to legal fees for from former directors or executives that you're currently paying for, correct?

It would be there for former and present employees and directors.

Okay. And then I just wanted to get a sense for your last safety and soundness exam. Were any of these issues related to the investigation -- were any of those addressed at all.

We are not at liberty to discuss the regulatory exams.

Okay. Thank you very much.

That's a standard. I'm sorry.

That's okay.

Thank you. I'm showing no additional questions in the queue at this time. I would like to turn the conference back over to Ms. Susan Riel for any closing remarks.

I want to thank everyone for participating today and appreciate your attention to Eagle Banc.

Ladies and gentlemen, thank you for participation in today’s conference. This conclude the program. You may now disconnect. Everyone, have a wonderful day.