Eagle Bancorp Inc (EGBN) 2014 Q3 法說會逐字稿

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  • Operator

  • Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Eagle Bancorp third-quarter 2014 earnings conference call.

  • (Operator Instructions)

  • I would now like to hand the conference over to Jim Langmead, Chief Financial Officer. Please go ahead.

  • - CFO

  • 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 FY13, 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 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, net interest margin, or balance sheet guidance.

  • Now I'd like to introduce Ron Paul, the Chairman and Chief Executive Officer of Eagle Bancorp.

  • - Chairman & CEO

  • Thank you, Jim. I'd like to welcome all of you to our earnings call for the third quarter of 2014. We appreciate your calling in this morning and your continued interest in EagleBank. It is our custom, in addition to Jim Langmead, also on the call with me this morning is our Chief Credit Officer, Jan Williams. Jim and Jan will both be available later in the call for questions.

  • I am very pleased to announce our 23rd consecutive quarter of record earnings for EagleBank. Net income for the quarter was $14.1 million and operating earnings were $14.8 million. Operating earnings, which exclude the impact of merger-related expenses from the Virginia Heritage transaction, increased 26% over $11.8 million for the third quarter of 2013. Net income available to common shareholders increased 20% as compared to the third quarter of 2013 but was 26% higher on an operating basis.

  • Operating earnings, excluding $885,000 of pretax merger expenses. Fully diluted net income per share was $0.52 for the quarter and $0.55 on an operating basis as compared to $0.44 on an operating basis per diluted share in the third quarter one year ago. This strong earnings growth in the third quarter is the result of the continued focus on our core banking activities of maintaining a strong margin, making quality loans, generating deposits, and building relationships.

  • This strategy continues to produce balanced results for the key performance indicators, including topline revenue growth, net interest margin, loan and deposit growth, solid credit quality, a strong efficiency ratio, and improved capital position. This collective performance has resulted in consistent growth in earnings per share as well as very favorable return on average assets and equity. Return on average assets has increased from 1.35% in the third quarter of 2013 to 1.44% on an operating basis for the most recent quarter.

  • Return on average equity has also shown a very favorable trend, improving from 14.37% for the third quarter of 2013 to 15.44% on an operating basis for the third quarter of 2014. I am pleased to report that for the third quarter, we continued our trend of increased topline revenue, organic growth of loans and deposits, and record net income while simultaneously managing the integration efforts for our upcoming merger with Virginia Heritage Bank.

  • As mentioned in our press release last week, we received all the necessary regulatory approvals. The Virginia Heritage Bank shareholders meeting is being held this morning, and we are confident that their shareholders will vote for approval. We have a very structured merger integration process on all of the key areas such as marketing and customer communications, IT and systems, human resources, finance, and facilities.

  • We are very focused on customer impact and retention. Dave Summers and Chris Brockett have been instrumental in coordinating meetings with all of the Virginia Heritage significant customers. We have worked together to develop a detailed customer communication strategy for the pre- and post-conversion periods. The closing of the merger transaction is expected to occur on October 31.

  • Our schedule to complete the merger matters and integrate systems was always aggressive, but the orderly and diligent process we followed, together with terrific teamwork by all managers from both banks, has made it possible. We are on track to achieve the cost savings and earning accretion estimates that were initially expected on the transaction. As previously announced, immediately after closing, we will be selling the Gainesville branch, with its deposits, to another local bank. The rationale for that sale was the branch's concentration of high-cost retail CDs which do not fit our business model.

  • We have also looked closely at two other submarkets, Arlington and Tysons Corner, which the EagleBank and Virginia Heritage branches are very close proximity. We've decided to close the EagleBank Tysons Corner branch effective December 5, 2014, and we'll retain the Virginia Heritage Branch. We're still evaluating which Arlington branch to close.

  • We will locate our northern Virginia regional office in Tysons Corner, which has been the Virginia Heritage Bank headquarters. In addition, we will consolidate our lending units from Reston into this regional office in Tysons Corner. But most of all, we are very excited to be significantly increase our presence in this dynamic northern Virginia marketplace, which comprises almost 50% of the entire Washington Metro area gross regional product.

  • The knowledge and influence in that market being added by Dave Summers, Chris Brockett, and their entire team of experienced banking professionals gives EagleBank a much stronger platform from which to expand in northern Virginia. Another significant development during the third quarter was our successful offering of subordinated notes. This offering was made to secure additional Tier 2 capital and to finance the cash portion of the Virginia Heritage Bank transaction.

  • Due to the very strong demand and the notes and the attractive fixed interest rate of 5.75%, we elected to increase the amounts sold from the initial offering of $55 million up to $70 million. The after-tax cost of this capital is about 3.5%, which is very favorable. Our board is committed to always maintaining a very strong capital position so when funding was available at the attractive 5.75% rate, we felt that we should add the additional capital through a means that created minimal dilution to earnings per share.

  • About $46 million of the proceeds will be used for the cash portion of the acquisition of Virginia Heritage and the remainder is available for general corporate purposes. As a result of the offering, combined with another strong quarter of profits added to the retained earnings, our total risk-based capital ratio was 14.51% as of September 30, 2014, as it compared to 13.12% at September 30, 2013. In addition to the tangible common equity ratio was 9.19%, equal to the level of the third quarter a year ago.

  • All capital ratios are significantly above the level needed to be considered well-capitalized. Tangible book value per share was $14.71 at September 30, 2014, an 18% increase over September 30, 2013. Returning to fundamentals and our key performance indicators, increases in earning assets, the net interest margin, and net interest income were all drivers of topline revenue during the third quarter. Total revenue for the third quarter increased to $49.3 million, which was 18% over the third quarter of 2013.

  • Noninterest expense growth over the same period was up 12% on an operating basis. This operating leverage is a key driver to our improved profitability. During the third quarter, we continued the trend of balanced controlled growth in both loans and deposits that we have consistently demonstrated over the last several years.

  • Total loans were $3.4 billion at September 30, and have increased $636 million or 23% since September 30, 2013. Loan growth during the third quarter of 2014 was $153 million or 4.7%, and we produced this growth while maintaining our pricing discipline and a very favorable net interest margin. The loan increases during the third quarter were in income producing real estate loans, C&I loans, and owner occupied real estate loans. Construction loans were down slightly from the second quarter of 2014.

  • Deposits increased $166 million or 4.9% during the third quarter. The growth in deposits was from the third quarter of 2013 was $549 million, an 18% increase. The deposit mix remains strong as DDA deposits increased $107 million during the third quarter and represent 30% of total deposits as compared to 30% at September 30, 2013, and improved from 28% at June 30, 2014. This high level of DDA deposits is the result of our continued commitment to relationship building with our commercial customers in which cross sales of deposits and ancillary products are the key to our marketing and retention strategies.

  • Also, in regard to deposits, we are pleased to report that in the recently released FDIC deposit market share statistics for June 30, 2014, EagleBank continued to achieve growth well outpacing the region and still holds the largest market share in deposits of any community bank in the Washington Metropolitan area. We also moved up to that number 9 rank in market share for the region. It is critical to note that even with that position, Eagle's share of deposits is only 2.08%.

  • When we complete the merger with Virginia Heritage Bank, we will be at 2.56% of the DC Metro market, and we have positioned ourselves for the huge opportunity represented by northern Virginia. The FDIC report also indicates our high level of efficiency with average deposits of $188 million per branch as compared to an average of $95 million per branch for the entire market. The growth of the bank and our market share is the reflection of how well the Washington region has welcomed our approach to relationship banking.

  • Our commitment to the community to create lending solutions and to superior customer service is what has allowed EagleBank to generate over 1,200 new customer relationships within the past year and to solidify and expand our existing customer relationships. We continue to maintain a strong net interest margin, which was 4.45% for the third quarter, an increase from 4.31% in the third quarter of 2013.

  • The margin was slightly below the 4.48% reported in the second quarter due to the issuance of the subordinated notes which slightly raised the average cost of funds. The average yield on the loan portfolio was 5.39% for the third quarter as compared to 5.48% for the third quarter of 2013. New loans in the third quarter are being generated at a yield of about 5%. The mix of earning assets was higher in loans in the third quarter of 2014.

  • We remain committed to the philosophy that maintaining an appropriate margin and risk reward balance is way more important in the long run than loan volume and balance sheet growth. We continue to see attractively priced loan opportunities from customers who value our responsiveness, level of service, certainty of execution, and with whom we are developing deep relationships. We have a strong loan pipeline at this point.

  • While the rate of growth for the Washington area economy has moderated, we still see good growth and demand in submarkets, industries, and product types. The key to EagleBank's underwriting has always been that we study and understand the various submarkets within the greater Washington area and we monitor and control our portfolio composition by product type and location. The bank is maintaining its disciplined approach to the ALCO process, and we remain committed to our strategy of maintaining a neutral position for rate sensitivity and avoid taking interest-rate risk over the long term.

  • We monitor the duration of the loan portfolio just as we do the securities portfolio. The average duration of loan portfolio on a pricing basis is only 26 months. Excluding loans held for sale, 58% of our portfolio is in variable or adjustable rate loans. Including fixed-rate loans, 23% of the portfolio reprices or matures within 30 days and another 8% within the first year. In total, 60% of the portfolio reprices or matures within three years.

  • We continue our strong consistent performance to all credit quality indicators. At September 30, 2014, NPAs as a percentage of total assets were 92 basis points as compared to 1.11% a year ago but were up somewhat from the 80 basis points at June 30, 2014. Nonperforming loans were 86 basis points of total loans and at the end of the third quarter, improved from 98 basis points at September 30, 2013.

  • We continue to constantly evaluate the portfolio and take an aggressive approach to placing loans on nonaccrual status. Our charge-off experience continues to be significantly better than industry norms and at its lowest level in several years. Net charge-offs for the third quarter of 2014 period were only 9 basis points on an annualized basis and just 13 basis points annualized for the 2014 year to date. The allowance for loan losses was 1.31% at the end of third quarter.

  • The provision expense is dictated by the growth of the loan portfolio, consistent application of our allowance methodology, the current economic climate, and our minimal charge-off history. At September 30, 2014, the coverage ratio was 152% as compared to 144% at September 30, 2013. We believe that we are adequately reserved and that our coverage ratio is in excess of averages for the industry and peer group banks.

  • Like all statistics, we look at the credit quality indicators at each quarter end, but most importantly, look at the long-term trend, which in our case has shown consistent improvement. Noninterest income for the third quarter was $4.8 million or a 9% decrease from the third quarter of last year, while it was a 25% increase over the second quarter of 2014. Gains on the sale of mortgages was $1.3 million for the quarter as compared to $938,000 for the second quarter of the year.

  • Service charges and other fees were $2.6 million for the third quarter of 2014, representing a 28% increase over $2.1 million for the third quarter of 2013. As we mentioned last quarter, and have discussed previously, the SBA loan line of business is also an excellent source of noninterest income, but is also a business for which it is very hard to predict the flows from quarter to quarter. We had a strong third quarter with gains of $504,000. That is a significantly better than the $83,000 recognized in the second quarter of 2014 and a 13% increase over the third quarter of 2013.

  • We have a solid pipeline in our SBA lending. Our efficiency ratio for the third quarter was 49.11% on an operating basis. These levels are improved from 51.58% for the third quarter of 2013 and slightly above the 47.04% on an operating basis for the second quarter of 2014. The efficiency ratio in the third quarter was impacted by increased accruals for incentive compensation in 2014.

  • Our compensation plans are heavily weighted towards incentives rather than base salaries, which has resulted in larger accruals in the third quarter based on our strong financial performance over the past three quarters. However, we continue our expense discipline and focus on maintaining favorable operating leverage over the long term and looking to achieve even more improvement as we add the Virginia Heritage base to our operations.

  • As mentioned earlier, when you compare the third quarter of 2014 to the third quarter of 2013, total revenue for the bank has increased 18% while noninterest expense on an operating basis are only up 12%. As we have said many times, expense control is a key factor for us, and we understand the need to spend judiciously as we grow the bank.

  • We will continue to manage expenses prudently and to focus on efficiency, continuing to maintain a solid organization is critical to producing the growth we anticipate. Our commitment is always to have the proper infrastructure to support growth and manage risk. That concludes my formal remarks and we would be pleased to take any questions at this time.

  • Operator

  • Thank you.

  • (Operator Instructions)

  • Catherine Mealor from KBW.

  • - Analyst

  • Good morning, everyone.

  • - Chairman & CEO

  • Good morning, Catherine.

  • - Analyst

  • Great quarter. I just wanted to dig into the marginal little bit and first ask on your loan yields, which continue to be very stable, can you update us on where you're seeing loans coming off and where they're going on? And are you still seeing that gap narrowing?

  • - CFO

  • Catherine, I think in Ron's comments he mentioned the average yield on new loans for the third quarter was about 5%. That is a yield, not an interest rate. It does include fees. And then I would say that the loans are coming off at about 5.40%, so there's probably 40 basis points of give up.

  • The fact we were able to increase the loan-to-deposit ratio in the quarter that's been mentioned a couple of times is the reason we were able to overcome that compression. But we think that compression is modest compared to what is happening with a lot of banks. So those are our numbers.

  • - Analyst

  • Any more room on the cost of funds do you think from here, or have you hit a bottom there?

  • - CFO

  • Well, with interest rates doing what they have been doing in the last couple of weeks, who knows what's going to happen to rates? We do have some opportunity, we think, with CDs continuing to roll off. Brokerage CDs we have been paying off in favor of poor deposits throughout this 2014 nine-month period, and there is some more of that to come.

  • But it's not as much as it was a year ago. So there's a modest opportunity to lower cost of funds, but not by a lot.

  • - Chairman & CEO

  • Also, Catherine, if I could just add to that is that because of the recent capital rates, strength of the bank, us being out more and more in the marketplace, we are seeing, as I've mentioned in previous quarters, some municipalities and other jurisdictions -- institutions, hospitals, et cetera -- that are willing to deposit with us now. And they are not as sensitive to the interest rate side to that. As an example, we've been able to get a significant amount of money on fairly cheap sources.

  • - Analyst

  • Okay, that's helpful. Thank you.

  • One last question on the margin. How should we think about the impact on the margin from Virginia Heritage coming in next quarter?

  • - CFO

  • That is going to be a little bit of a challenge. We continue to work on that, as you know. We have to account for that under a fair value accounting, and that will have some implications to the margin. I'd say that overall, Virginia Heritage has been reporting a net interest margin of around 360.

  • The fair value adjustments we'll make are going to improve that. And the fact that they are 20% to 25% of our asset base is also going to be a factor. So I would say we are going to see some margin compression, but not going down to a significant amount.

  • I'm not going to give you a specific number, but there is going to be some margin compression. But the fair value accounting helps you in that regard. And we think that overall we'll see some compression, but not a lot.

  • - Chairman & CEO

  • The other part to that, Catherine, if I could just add, is that the cross-sell emphasis that we're going to be placing on the Virginia Heritage side will make a big difference on the deposit end in terms of the DDA ratios that we have compared to what VHB does. Dave and Chris Brockett and their entire lending team are completely on board with the energy that we are going to be putting forth on that cross-sell side, mainly starting on the deposit end.

  • - Analyst

  • Okay, great, very helpful. Congrats on a good quarter.

  • - Chairman & CEO

  • Thanks, Catherine.

  • Operator

  • Scott Valentin from FBR & Company.

  • - Analyst

  • Good morning, and thanks for taking my question. It's early days. And, Ron, you mentioned interest rates have kind of fallen down. We have seen some of the regional banks report increased activity, at least on the application side for mortgage banking. I'm wondering if you are seeing the same or if it's too early.

  • - Chairman & CEO

  • We have seen a pickup over the past couple of days; but as we've discussed, it is such an incredibly choppy business. Applications come in. Fortunately from our perspective, everything is pre-sold, pre-qualified, pre-locked. So we are not concerned about interest rate risk, obviously, because of that; but we do see a pickup in volume.

  • - Analyst

  • Okay, and then just on the help for investment growth, the C&I growth really picked up this quarter. I was wondering if that's a reflection of investments you've made in the past, or is that a reflection of the environment?

  • - Chairman & CEO

  • I think your question is about our C&I loan growth in the quarter, Scott. Is that correct?

  • - Analyst

  • That's correct. It looks like it was a pretty sharp pickup from the past. I'm just wondering if that's a reflection of investments you've made, such as hiring loan officers; or if it's just a reflection of the DC market?

  • - Chairman & CEO

  • No, it's a reflection of the DC market. You know, again, so much of what we keep talking about is the choppiness that you have in certain areas of the financials. You have a tremendous pipeline, and you might get a significant closing that takes place, which would boost your numbers for the quarter. But overall our C&I portfolio is strong. It has a great pipeline. We do anticipate that to continue.

  • It has not been as a result of increase of our overhead side. It's just been, again, boots on the ground in terms of being out there and developing business.

  • - Analyst

  • Okay. And then one final question on operating expense. You mentioned it was mostly due to incentive comp accruals in the third quarter. Is that kind of a one-time true-up for the year? Or is that going to reflect going forward to the fourth quarter as well?

  • - CFO

  • Scott, good question. We think it will allow us to moderate accruals in the fourth quarter because that so-called catch-up or true-up, whatever you want to call it, occurred in the third quarter. So we effectively accounted for 75% of any adjustments. That should alleviate pressure on that calculation in the fourth quarter. Great question.

  • - Chairman & CEO

  • A lot of a lot of our incentive plan has to do with thresholds. And the likely situation is that the thresholds surpassed based on the year that we've had in the third quarter. And that's why so much of it is heavied up in that.

  • - Analyst

  • Okay, makes sense. Very helpful.

  • Operator

  • Christopher Marinac from FIG Partners.

  • - Analyst

  • Thanks.

  • Good morning, Ron and Jim and team. Would you remind us on the commercial loan side, how often are you selling portions of loans on the back end, or are you largely retaining 100%?

  • - Chairman & CEO

  • We maintain 100% of our portfolio. The only thing that we sell off is the guaranteed portion of SBA and, as I mentioned, the residential real estate side.

  • - Analyst

  • Right, got it. Okay. Just want to clarify.

  • And then second, Ron, on the portion of the portfolio that is longer than three years at approximately 40%, how often are you going above five years? And are the pricing opportunities getting any narrower on those longer-term deals?

  • - Chairman & CEO

  • You know, that's a great question, Chris, and something that we are spending a lot of time analyzing. Most of our portfolio, as you know, is much shorter than the five years. With the recent drop of rates over the past couple of days, the question is can we capitalize on that through potential swaps on larger-sized loans? It's something that we are looking into.

  • We haven't done it yet. But we do see some opportunities with some of our better bigger customers that we could be able to satisfy their larger needs, but take out the interest rate risk within that portfolio. So I would tell you that is something we're looking into. It doesn't change it all the credit risk, but does give us an opportunity on our loan portfolio where you have less of a churn.

  • - Analyst

  • Okay, great. And then I guess last question for Jim.

  • Of the loan yield, what is approximately the portion that comes from loan fees? Maybe that's just a rule of thumb that we can think about it -- big picture.

  • - CFO

  • Chris, good question. About 30 basis points you could say. So you could say that 5% yield I quoted you for the third quarter, the rate is like 4.70%; add 0.30% to get to the 5%.

  • - Analyst

  • Got you. Great, okay, perfect.

  • - CFO

  • Also, on a lot of these loans we do have prepayment penalties. It's something that needs to be put in that number in terms of their ability to pay us off.

  • - Analyst

  • Great, that would be included in the 30 typically or separate?

  • - CFO

  • No, that would be excluding.

  • - Analyst

  • Got you. Okay, very good. Thank you.

  • - Chairman & CEO

  • Thanks, Chris.

  • Operator

  • Chris Stulpin from Merion Capital.

  • - Analyst

  • Good morning. Thanks for taking my call.

  • Only one question remains on my list, and that's regarding purchase money mortgages. Can you characterize what level of demand you are seeing in your market and what your strategy is to focus on this product going forward? Thanks.

  • - CFO

  • Chris, I think we put in the press release about 60% of the production that we've had in the first nine months of the year was purchase money. So the actual amount of loans closed in the first nine months of the year is about $400 million. So $240 million over nine months, that's sort of the pace of purchase money in our shop right now.

  • - Chairman & CEO

  • And I will tell you, Chris, we are real proud of the fact that our residential real estate guys have been nimble enough to be able to move from the refinance to the purchase. However, I am sure that they'll tell you over the past couple of days, it's flip-flopped back the other way. So that's one of the big advantages of having a group that's as nimble as they've been.

  • - Analyst

  • Okay, great. Thank you.

  • Operator

  • That concludes our question and answer session. I would like to turn the conference back to Eagle Bancorp for any closing comments.

  • - Chairman & CEO

  • Once again, we'd like to thank everybody for joining the call. We look forward to speaking with you again next quarter. Very anxious and excited about closing on the Virginia Heritage transaction at the end of the quarter, and looking forward to speaking to everybody next quarter.

  • Operator

  • Thank you.

  • Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone have a good day.