Eagle Bancorp Inc (EGBN) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Eagle Bancorp second-quarter 2014 earnings conference call.

(Operator Instructions).

I will now turn the call over to your host, Jim Langmead, Chief Financial Officer of Eagle Bancorp. Please go ahead.

Good morning, everyone. Before we begin the presentation I would like to remind you that some of the comments made during this call may be considered forward-looking statements. Our Form 10-K for the 2013 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 earnings, margin or balance sheet guidance. Now I'd like to introduce Ron Paul, the Chairman and Chief Executive Officer of Eagle Bancorp.

Thank you, Jim. I like to welcome all of you at our earnings call for the second quarter of 2014. Thank you for calling in this morning.

As usual in addition to Jim Langmead, Jan Williams, our Chief Credit Officer, is also on the line with us this morning. Jim and Jan will both be available later in the call for questions.

I'm very pleased to announce that for the second quarter our operating earnings were $13.5 million, which is a record level of quarterly net income and a 16% increase over the second quarter of 2013, and an 8% increase over the first quarter of 2014. Net income available to common shareholders on an operating basis increased 16% over the second quarter of 2013. Fully diluted operating earnings per share were $0.50 for the quarter representing a 14% increase from $0.44 in the second quarter of 2013.

I am referencing operating earnings as opposed to net earnings since our second-quarter 2014 earnings included $576,000, or $0.02 per diluted share of merger-related expenses from the planned acquisition of Virginia Heritage Bank, which we announced in early June. While those expenses are nonrecurring, we felt that for comparative purposes, it would be more relevant to use earnings and financial ratios which exclude those merger expenses. I will comment more about the merger later in my remarks.

We have spoken many times about how important consistency is to EagleBank. We are pleased to note that for the 22nd consecutive quarter we are announcing record earnings that once again the earnings growth was the result of strong results across several key performance measures, not just one factor.

We continued to expand revenue driven primarily by loan growth combined with an exceptional net interest margin. We also realized growth in deposits, continued improvement of our already strong asset quality and through disciplined expense control achieved an excellent efficiency ratio. We are very proud to continue this consistent, balanced performance.

Top-line revenue growth was strong for the quarter at 9% over the same quarter in 2013. Net interest income increased 21% over the second quarter of 2013 more than offsetting the decrease in noninterest income due to the decreased level of mortgage loan origination and sales activity.

Top-line revenue for the second quarter increased 3% as compared to the first quarter of 2014 fueled by the growth in the loan portfolio and improved margin. We are pleased to note that the net interest margin for the second quarter was 4.48%. This represents an increase from 4.27% in the second quarter of 2013 and also represents a 3 basis point increase of a 4.45% net interest margin in the first quarter of 2014.

We continue to monitor market conditions and apply a disciplined approach to loan pricing. As a result, the yield-on-loan portfolio was 5.37% in the second quarter as compared to 5.45% in the first quarter of 2014.

As you can see, loan yields are down slightly. We are being responsive to the market while maintaining our loan pricing discipline. The new loan rates have averaged 4.79% for the first six months of 2014 while our payoffs have averaged 5.39%.

On the liability side we are still actively managing our cost of funds. Our cost of interest-bearing liabilities is down 2 basis points to 44 basis points for the second quarter of 2014 as compared to the first quarter of 2014 and has decreased 13 basis points as compared to the second quarter of 2013.

In addition, we improved the asset liability mix during the second quarter and increased the loan-to-deposit ratio to 97% at June 30, 2014. Loan growth was exceptional during the second quarter with an increase for the period of $260 million, or 7%. The annual net growth rate since June 30, 2013, is 21.8%.

The loan portfolio, excluding loans held for sale, ended the quarter at $3.3 billion. Combined with the results from the first quarter, loan growth for the first half of the year was $334 million, which is equivalent to a 23% annual growth rate.

While we are very satisfied with these results, as they represent a balance of both loan growth and a strong net interest margin, there is active loan demand in the market and we have a strong pipeline. We continue to see opportunities to build relationships with new customers throughout our market.

While the competitive environment and our desire to maintain a strong margin may limit our loan growth going forward, so far it has not impacted us. We are very selective in the projects we will finance and consider whether the project is appropriate for the particular submarket within the Washington area. This has always been a key part of our underwriting process which has resulted in our track record of excellent credit quality.

While the loan growth of the region was somewhat slower in 2013, we have seen a pickup in the second quarter of 2014. This is still one of the strongest economies in the country.

The Washington metropolitan area is the fifth largest regional economy in the US with a gross regional product of over $440 billion. Federal government spending makes up 30% of our economy, down from 39% two years ago. The region had job growth of 27,000 jobs for the year ending June 30, and this is being driven by the private sector.

While the federal government reduced 9,000 jobs during the past year the private sector increased by 36,000 jobs during the period. Monthly increases in housing values have averaged 6% over the past year in our market.

Values in the District of Columbia have been the strongest in the first half of 2014. But remember, our practice is not to look at the market as a whole but to look at individual projects within these submarkets whether for residential or commercial development.

Deposits increased $94 million or 3% during the second quarter with total deposits of $3.4 billion at June 30. Deposit growth has been less robust than loan growth as we actively manage the loan-to-deposit mix and cost of funds.

We continue to emphasize core deposits and have let some wholesale deposits run out of the portfolio as well as higher rate CDs. DDA deposits increased $59 million during the quarter and account for 28% of total deposits. Money market account balances are also increasing and were up $38 million during the second quarter.

Our sustained focus on developing, expanding and strengthening relationships is key to our deposit retention and growth during this low-rate environment. This is the result of day-to-day attention to detail and customer service delivery by our lending officers, branch representatives and the support units that are responsible for these strong customer relationships.

During the second quarter of 2014 the efficiency ratio on an operating basis improved to a very favorable 47.04%, an improvement over 51.94% in the first quarter of 2014 and 49.33% in the second quarter of 2013. For the quarter noninterest expenses on an operating basis increased on the 4.3% from the second quarter of 2013 and decreased 6.7% from the first quarter of 2014.

As we mentioned at the time, the first quarter of this year included some nonrecurring costs related to discretionary bonus payments. During the second quarter we significantly improved our operating leverage as we decreased our noninterest expense by 4.2% while increasing revenue by 3%. Operating leverage was also improved over the past year as revenue for the second quarter of 2014 increased 9.2% and expenses were only up 7% as compared to the second quarter of 2013.

We continue our focus on expense control in particular personnel-related costs in anticipation of the planned merger with Virginia Heritage Bank. We will keep a sharp eye on staffing levels as we work towards the integration of the two banks. Year to date the efficiency ratio on an operating basis is 49.45% and we continue to believe that it is an appropriate level given our size and anticipated growth.

As we have said many times, we appreciate the importance of a strong infrastructure and continue to build this infrastructure for our future growth. We continue our diligent ALCO approach and maintain a moderate level of interest rate risk. We look carefully at the repricing risk in our loan portfolio and the securities portfolio.

While the average duration of the loan portfolio is 48 months based on maturities, it is only 26 months based on repricing triggers. 58.5% of the portfolio consists of variable or adjustable rate loans and we feel that the portfolio is well-positioned.

In a rising rate environment 27.4% of the portfolio reprices or matures within 30 days and another 4.5% within the first year. In total, 59.6% of the portfolio reprices or matures within three years.

Our credit quality matrix continues to improve during the second quarter. At June 30, 2014, NPAs as a percentage of total assets decreased to 80 basis points as compared to 1.19% at March 31, 2014, and 1.05% on June 30, 2013. Nonperforming loans, which are 69 basis points of total loans at June 30, 2014.

Both ratios are very favorable as compared to industry averages and the range of NPA levels we have maintained over the last several years. The absolute level of NPAs decreased by $13.8 million in the second quarter to $31.3 million. This decrease was primarily due to the resolution, as anticipated, of one problem relationship which had been reported as an NPA at the end of the first quarter.

The Bank has consistently taken an aggressive approach reviewing individual loans for impairment and accrual status. The allowance for loan losses was 1.33% of total loans at the end of the quarter, which is down from 1.47% at June 30, 2013, and down slightly from 1.37% at March 31, 2014. The decrease in the allowance as a percentage of total loans is due to the loan growth in the second quarter along with our strong credit quality as reflected in the normal level of NPAs and charge-offs.

Net charge-offs for the second quarter were 20 basis points of average loans, which is below the average charge-off experience over the last several years but a minimal increase over the first quarter of 2014. The provisioned expense of $3.1 million during the second quarter was dictated by the growth in the loan portfolio, consistent application of allowance methodology and recognition of the quality of our loan portfolio.

At June 30, 2014, the coverage ratio was increased to 193%. We believe that we are adequately reserved.

Non-interest income during the second quarter was $3.8 million, down 46% from the second quarter of 2013 and also a decrease from the first quarter of 2014. As expected, the decrease from the prior year is attributable to the significant reduction in volume in the residential lending division.

Mortgage originations in the second quarter were $131 million, an increase over $96 million in the first quarter of 2014 but down from $293 million in the second quarter of 2013. The net gain after commission expenses on the sale of residential mortgages was $938,000 in the second quarter of 2014, down from $1.3 million in the first quarter of 2014.

As the level of refinance transactions have waned, purchase transactions have increased and now make up approximately 65% of our volume. We have been hiring originators with strong ties into the realtor and builder markets and continue to believe that purchase transactions will be important to this business line going forward.

Gain on the sale of SBA guaranteed loans were modest at $83,000 for the second quarter as compared to $1.5 million in the second quarter of 2013 and $547,000 for the first quarter of 2014. We reviewed the origination and sale of SBA loans as an attractive business line but recognize that the revenue flows are lumpy and will vary from quarter to quarter bearing the size and structure of the loans and the timing of sales.

We are expecting a stronger flow of loan sales in the second half of the year. We see continued potential for fee income from this business line.

Demand is strong and premiums are still at attractive levels. Service charges and other fee income totaled $2.5 million for the second quarter which is a 12% increase over the second quarter of 2013.

In regard to our planned merger with Virginia Heritage Bank, we are well underway with the integration process. Immediately after the announcement we formed an integration project group with representatives from every area of both banks.

There are 11 teams in the group addressing all key areas including systems, marketing, human resources, credit and finance. But the best part is that the project has given us the opportunity to really get to know our new teammates from Virginia Heritage Bank.

Dave Summers and Chris Brockett are true professionals and are doing a great job leading their team. The tremendous respect which we have developed and the similar cultures we enjoy have really helped the planning effort. We are well into the regulatory application process and we still anticipate the closing in the fourth quarter of 2014.

That concludes my formal remarks. We would be pleased to take any questions at this time.

Thank you. (Operator Instructions). Catherine Mealor, KBW.

Good morning, everyone. Ron, can you talk a little bit about the growth this quarter and how much of it came from the Metro DC market versus the Northern Virginia market?

It feels like the Northern Virginia market, even before Virginia Heritage, was an area of focus for you all and you have had some recent hires there. Just trying to get a sense as to how much momentum you are already feeling in that market.

Catherine, I don't have the breakout specifically between Northern Virginia and DC and Montgomery County. I will tell you it's pretty much consistent with the way it has been in previous quarters. There's really been no recent hires in the Northern Virginia marketplace.

But we still see it as a huge opportunity especially with the Virginia Heritage merger. And we believe there is a tremendous growth -- well, we know there's tremendous growth.

Recent reports have shown the growth in the northern Virginia marketplace and we are going to be there to capitalize on it. So the answer is that it has been pretty consistent over the past few years.

Okay. Maybe a follow-up on the expenses. Really great improvement in the efficiency ratio this quarter, more than we expected and how should we think about expenses moving forward?

Is this kind of a bottom in terms of the absolute dollars and we will see slow growth moving forward and really just get nice operating leverage from continued strong revenue growth? Is there any way to lower the expenses further? I would doubt it, but just had to ask the question.

Good question. We are building more and more into the technology system that we have, as an example.

Just a minor part, but if you think of about a year ago we spent a lot of money on the Encompass System, which is a technology system for our residential real estate group. That has allowed us to be able to scale back on the staffing side.

From the branches remember that two years ago we increased the number of branches pretty significantly and now we are building more and more into the growth of those branches. So I would tell you that do I see a dramatic decrease in expenses? Absolutely not.

I think that we have always said that the mid to high 40s is where we believe that we can maintain. Again, every quarter is going to have some hiccups one way or the other but from a longer-term perspective the range that we are in we feel pretty good about.

Obviously with the Virginia Heritage merger there will be a little hiccups up or down there. Again we feel over the longer term the efficiency that we have with the infrastructure is something that we are certainly not going to miss.

Building that infrastructure was so important, putting in the system that we put in a couple of years ago allows us to go to a $10 billion bank at least. So these are all the things that we have invested in the past that we are finally seeing the benefits of.

Great. Thank you very much. Congrats on a great quarter.

(Operator Instructions). Casey Orr, Sandler O'Neill.

Good morning. Just wondering what your thoughts are right now on managing that loan-to-deposit ratio now that it is creeping up towards 100%?

Are you comfortable with it going over 100%, or where do you see that going in the next few quarters? What's the ideal level for you guys?

We believe that 95%, 97% is a comfortable level. Bear in mind that we have the opportunity, should we need to, of significant liquidity out in the marketplace. Our interest rates, we continue to drop, so should we decide that we need liquidity we can increase rates as well as we have a significant secondary sources.

We have a drop in the CDs that we have outstanding in wholesale funding. So we feel very comfortable in that 95%, 97% range because we believe that we have the availability of raising additional liquidity.

I also might add, as we have just answered on Catherine's question, that the new branches that we have are seeing a lot of activity so we do see the ability for continuing those deposits. And we are constantly working with our existing customers on being able to cross sell them by increasing the DDAs, which obviously is the ideal answer to funding loan growth.

Okay, great. That's helpful. And, Jan, maybe can you elaborate on that one large commercial loan to got resolved this quarter? Did you have to take any charge-offs on that?

We did not. It was really a timing matter related to the estate and going through the administration and negotiating the sale of assets and resolution of multiple creditor claims.

All right, great. Good quarter, guys.

I am currently showing no further questions. At this time I will now turn the call back over to Ron Paul for further remarks.

Again, I would like to thank everybody for calling in today. Looking forward to another great quarter next quarter and appreciate everybody participating in the call.

Thanks very much. Have a great summer.

Ladies and gentlemen, that does conclude today's conference. You may all disconnect and everyone have a great day.