Eagle Bancorp Inc (EGBN) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Eagle Bancorp Fourth Quarter 2014 Earnings Conference Call.

(Operator Instructions)

As a reminder today's, conference is being recorded. I would like to introduce your host for today's conference call, Jim Langmead, Chief Financial Officer. You may begin, sir.

Good morning, everyone. Before we begin the presentation, I'd 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'd 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 specific earnings margin or balance sheet guidance.

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

Thanks, Jim. Good morning, everyone. I'd like to welcome you to our earnings call to discuss the results of the fourth quarter and full year of 2014. Thank you for joining us on this call this morning. In addition to Jim Langmead, also on the call this morning is our Chief Credit Officer, Jan Williams. Jim and Jan will both be available for questions later in the call.

I am extremely pleased to discuss with you both the fourth quarter and the full year of 2014, which was truly a busy and successful year for EagleBank. For the fourth quarter, we announced net income of $14.7 million, which is a 23% increase over the income of the fourth quarter of 2013 and is our 24th consecutive quarter of record increasing earnings.

On an operating basis, which excludes merger-related expenses from the Virginia Heritage transaction completed on October 31, income for the fourth quarter was $16.9 million, which represents a 41% increase over the fourth quarter of 2013 earnings of $12 million and a 14% increase over the third quarter of 2014 operating earnings of $14.8 million. Diluted earnings per share for the fourth quarter were $0.49 on a net income basis and $0.56 on an operating basis; a 24% increase on the operating earnings per share basis over the $0.45 per diluted share for the fourth quarter of 2013. The earnings per share figures include the impact of the additional shares issued in October in conjunction with the merger.

In addition, we closed the year of 2014 with $5.2 billion in assets. These record levels of earnings and assets are attributable to both continued strong organic performance and the highly successful merger with Virginia Heritage Bank.

For the full year of 2014, we reported net income of $54.3 million on a GAAP basis and $57.7 million on operating basis, which excludes $4.7 million of pretax merger-related expenses. On an operating basis, this represents a 23% increase over the net income of $47 million for the year of 2013.

For the year of 2014, net income available to common shareholders was $53.7 million on a GAAP basis and $57.1 million on an operating basis. Fully diluted earnings per share for the year of 2014 were $1.95 and were $2.08 on an operating basis, which represents an 18% increase on an operating basis over the $1.76 reported for full year of 2013.

We are pleased with the results from our merger with Virginia Heritage Bank. The pre-closing efforts of integration, planning, and obtaining regulatory approvals were accomplished in record time.

The system conversion was completed in early November, only one week after the closing. To date, we've achieved the forecasted level of expense reductions and as you can see from the fourth quarter results, our operating leverage was enhanced and we achieved an operating basis efficiency ratio of 45.71%.

We believe we are on track to realize the additional cost reductions planned for 2015. The majority of the expense reductions from the merger have come through decreasing staff levels and closing redundant facilities. The end market nature of the transaction afforded Eagle significant consolidation opportunities.

It was a very painful process to work through the personnel decisions to eliminate about 100 positions from both banks. We are convinced that the employees that have joined our team are top notch bankers who will contribute to our future growth. We have eliminated two branches and closed two lending offices since the date of the merger. There is one additional branch that is expected to close.

Our ongoing review procedures have determined that the credit quality of the acquired loan portfolio is as strong as initially expected and after future analysis, we decided to retain the book of indirect auto loans. This portfolio has a relatively short duration, which fits our ALCO strategy and excellent credit metrics. We have retained the portfolio, but we will not originate any new indirect loans going forward, so we will be able to make major reductions in the expense associated with that book of business.

Most importantly, we continue our outreach effort with the former Virginia Heritage customers to strengthen and expand the relationships with these customers. Building on this base of business in northern Virginia is one of our key strategic goals for 2015 and beyond. The addition of a very experienced Chief C&I lender, who is stationed in Tysons Corner, will provide much support to this effort.

As expected, the merger with Virginia Heritage significantly increased the size of our balance sheet to over $5.2 billion of assets at year-end and the expense takeouts have enhanced the efficiency ratio. Aside from the merger, 2014 was another very strong year for EagleBank for all performance measures including top line revenue growth, improved efficiency and operating leverage. Organic increases in loans and deposits sustained very strong net interest margin, excellent credit quality, and a strength in capital position.

Top line revenue growth was strong throughout 2014 and improved in the fourth quarter. Total revenue for the year increased 16% over the level in 2013, while non-interest expenses, excluding related merger items, were only up 12%. For the fourth quarter, total revenue rose by 33% as compared to the fourth quarter of 2013, while expenses, excluding merger-related items, increased only 21% over the same quarter in 2013.

So I am pleased to note that, through our focus on both revenue and expense management, we have significantly improved our operating leverage. In total, loan growth through the year 2014 was 46% or $1.3 billion. While a significant portion of that increase was as a result of the merger, we estimate organic growth was about 19% for the full year 2014.

Per our expectations, the combination of the two loan books had no major change on the composition of the total loan portfolio. At December 31, 2014, we had 39% of the portfolio in income producing CRE loans, 21% in C&I loans, 18% in construction loans, and 11% in owner occupied real estate loans. The retention of the indirect auto book slightly increased our level of consumer loans but that is still a modest part of our total portfolio.

Loan demand remains strong in the market. We have an active backlog at this time and expect continued organic growth. Deposit growth for the year of 2014 was $1.1 billion or 33%. We estimate organic deposit growth at about 14% for the full year of 2014. In addition to the merger, we experienced very consistent growth in DDA deposits and money market deposits throughout the year.

We continue to focus on generating DDA deposits from new commercial customer relationships. At December 31, 2014, DDAs represented 27% of total deposits, which is well above industry and peer group averages. The merger impact increased the percentage of CDs to 16% of total deposits, but we still have very favorable cost of funds due to the preponderance of money market funds and DDAs in our deposit base.

On a combined basis, DDAs and money markets, which we define as core deposits, comprise 81% of our overall deposit mix. Over time, we expect Eagle's relationship banking model will effectively replace CD balances with core DDAs and money market commercial deposits.

As a result of the merger, EagleBank has improved its market share position in the Washington metropolitan area. According to the recent FDIC statistics, we maintained our position as the largest community bank headquartered in the region, as measured by deposits and increased our standing to the rank of number nine in the market. However, at 2.56% of the total market, we still have a tremendous opportunity for growth.

The overall Washington DC Metro market and economy remain strong, despite the reduced growth of federal spending. The metro area is the fifth largest region in the country, as measured by population and the size of our regional economy, as we saw growth of 19,000 jobs in the region in the past year and this job growth is driven by the private sector. While some analysts have seemed totally focused on the impact of federal spending, it is important to note that while there has been decreases of 15,000 federal jobs over the last four years, the private sector, which is where EagleBank is focused, has created 179,000 jobs during the same period.

The Case-Shiller Index shows increased home values over the last year and as I mentioned earlier, we see strong loan demand throughout the DC Metro market. The net interest margin for the full year of 2014 was excellent at 4.44% and was improved from 4.3% for the year of 2013. The margin for the fourth quarter was 4.42%, which was an increase over 4.4% in the fourth quarter of 2013 and only a slight variance from 4.45% in the third quarter of 2014.

The margin in the fourth quarter was effective by the impact of the merger with Virginia Heritage Bank, as well as continued competitive pressure and the low interest rate environment. However, we are pleased with our results. At 4.42%, our margin remains well above industry and peer group averages. Our margin is the result of proactive balance sheet management, as well as our disciplined approach to both loan pricing and cost of funds.

During the year, we were able to reduce our cost of funds by 4 basis points on average to 33 basis points and increase the total loan to deposit ratio, which improved average asset yields by 10 basis points. Given our current margin, the high loan to deposit ratio and competitive pressures, we do expect to experience some margin compression in 2015. We remain consistent in our ALCO philosophy and practices and continue to remain a relatively neutral position in regard to interest rate sensitivity.

Excluding loans held for sale, 59% of our portfolio is in a variable or adjustable rate loans. Including fixed rate loans, 24% of the portfolio reprices or matures within 30 days and another 5% within the first year.

In total, 56% of the portfolio reprices or matures within three years and 79% within five years. The asset quality of the bank continued to be strong during the fourth quarter of 2014.

At December 31, 2014, NPAs as a percentage of total assets decreased to 68 basis points as compared to 92 basis points at September 30, 2014 and 90 basis points on December 31, 2013. This level of NPAs was well below industry and peer banks. Net charge-offs for the fourth quarter were 26 basis points of average loans and were 17 basis points of average loans for the full year of 2014, as compared to 23 basis points for the year of 2013.

Charge-offs of 17 basis points for the full year of 2014 was the lowest annual level of charge-offs we have achieved since pre-recession levels in 2008. The allowance for loan loss as of December 31, 2014 was 1.07% of total loans, down from 1.31% at September 30, 2014, which reflects the impact of the merger and the fair value accounting for the loans acquired.

Our reserve methodology and practices have not changed and the allowance has been computed based upon a risk analysis of each component of the portfolio, loan growth during the period, and various environmental factors. Absent the impact of the required fair value accounting, our allowance as a percentage of loans would have been basically unchanged from the level of September 30, 2014.

The provision expense was $3.7 million for the fourth quarter with net charge-offs of $2.6 million. We continue to follow our standard reserve methodology. Due to the declines in non-performing loans to 52 basis points of total loans, the coverage ratio at year end was 205%; a significant improvement over the levels of the last few quarters and we believe that we are adequately reserved.

Revenues from non-interest income was challenging for the year of 2014, due substantially to the decreased level of residential mortgage loans originations and gains on sales, which all banks have been experiencing. However, we saw increasing gains on sales of residential mortgages from $1 million in the fourth quarter of 2013 to $2 million in the fourth quarter of 2014, which contributed to the strong fourth quarter performance.

The current very low interest rate environment should serve to accelerate residential mortgage activity in 2015, as evidenced by our very strong pipeline at this time. The rate environment has spurred increased levels of both refinanced and purchased loans. Gain on sales of SBA loans were $1.3 million for the year 2014 as compared to $2.1 million in 2013, as the closings of several large transactions were delayed beyond year end. These transactions are expected to close in early 2015.

We continue to view the SBA loan business as an attractive long-term opportunity for fee income, but as we have noted previously, the transaction flows are not smooth and volume can vary widely from quarter to quarter. Other fee income sources such as service charges and earnings on our BOLI showed modest but consistent growth. We expect to continue to see increases in non-interest income, but recognize that our revenue will be primarily spread driven.

During 2014, we continued our disciplined management of non-interest expense and its effect on the efficiency ratio and expenses as a percentage of average assets. We improved our operating leverage throughout the year and significantly improved this measure post-merger, as you would expect from an end-market transaction. The efficiency ratio for the fourth quarter of 2014 was 45.71% on an operating basis down from 50.03% in the fourth quarter of 2013.

Total non-interest expense was 2.14% of average assets for the quarter on an operating basis down from 2.39% in the fourth quarter of 2013. Based on the expense reductions achieved to date, together with the leased premises expected to be closed in 2015 and our continued diligence toward managing operating costs, we believe we can maintain the efficiency ratio in the mid-40%s, similar to what we have achieved in the fourth quarter.

I would note, however, that we tend to look at the long term trend for this measure, rather than dwelling on the ratio in a specific quarter. We will continue to invest in the infrastructure to support our outstanding level of customer service and quality of operations. In addition, we will continue to recruit experienced, qualified bankers, for they are critical to our strategy.

In that regard, I am pleased to announce that we recently hired Lindsey Rheaume as a Chief C&I Lending Officer. Lindsey has over 25 years of experience as a commercial lender and manager in the mid-Atlantic region. Experienced bankers like Lindsey and Chris Brockett and other employees who joined us as part of the Virginia Heritage merger are critical to the future success of the bank.

Our capital position was enhanced during 2014 by several factors including $54 million of income generated and added to retained earnings by the capital impact of the merger and by $70 million of Tier 2 capital raised through the subordinated debt offering in August. At December 31, 2014, our capital ratios were strong with common equity to total assets of 10.46% and total risk-based capital of 12.97% and tangible common equity to total assets of 8.54%.

The Board and Management are committed to continually maintaining a strong capital position and plan accordingly. We are mindful that the dividend rate on SBLF preferred stock will adjust in early 2016 and we will continue to evaluate all of the alternative sources of Tier 1 capital and monitor the status of capital markets. Our objective is to refinance the SBLF preferred stock and maintain adequate capital to meet all regulatory standards, as well as support and soundness of future growth of the bank.

In summary, I'd like to say how pleased we are with a very successful 2014. We continued to produce excellent results for all of our key performance factors and completed the highly successful merger with Virginia Heritage Bank and the subordinated debt offering. We are now poised for continued success in 2015. With the merger, we have achieved a much stronger market share in Northern Virginia, which is the largest and most dynamic subregion within the Washington area.

Based on our current size and the strength of our balance sheet, we have both capacity and the demonstrated ability for growth. We are very proud to have become a $5 billion bank by maintaining our focus on customer relationships, our attention to detail, and our commitment to creating shareholder value. That concludes my formal remarks. We would be pleased to take any questions at this time.

(Operator Instructions)

Catherine Mealor, Keefe, Bruyette & Woods,

Hi, everyone. Great quarter and congratulations on the Virginia Heritage deal.

Thanks, Catherine.

I wanted to ask a question about the margin. Can you tell us how much fair value accretion we saw in the margin this quarter?

Jim?

Catherine, I think the amount was pretty minor this quarter. There was some benefit. We estimated that the yield on the loans acquired from the VHB, including the fair value marked was about [5.45%]. Otherwise, the yield on loans would have been about [5.3%]. There was about 5 to 10 basis points of benefit there in the quarter.

As you know, the timing of the recognition is very choppy, based on the amount of loans that are actually paid off, but we did have some benefit in that. But I'd also say that the loans that we originated were also originated at lower rates. When you mash all that together, we actually got a slight decline in loan rates, loan yields in the fourth quarter versus the third quarter.

Can you update us on where loans are typically coming off and coming on? You've given that to us the past couple of quarters.

The loans that were originated are coming on around 5% and they're going off the books at 5.3% or so. We're losing around 30 basis points between the new loans and paid off loans.

Okay, perfect.

By the way, I might add, Jim, correct me if I'm wrong, but those loan yields exclude the fee?

They include the fee.

So they include the fee?

Right.

Okay, okay. Great. One last one on the margin, how does the indirect auto book impact that fair value accretion?

The indirect portfolio has an overall yield, including the credit mark of around 3.25%. So, the mark we made on the indirect portfolio was around $800,000, which is, call it, 75 basis point or so. Then that gets accreted in based on the average life of the portfolio. For indirect, it's around 2.5 to 3 years. But the yield including the credit mark is around 3.25%.

Okay, all right. Perfect. Thank you very much.

Thank you.

Casey Orr, Sandler O'Neill.

Good morning. Great quarter.

Thanks, Casey.

Most of my questions were just answered on the margin, but I did want to ask you, Ron, you just addressed the organic growth levels in your opening remarks. But given the marks taken on the acquired loans this quarter, can you give us some color on how growth at Virginia Heritage turned out? And maybe along those lines, how customer attrition has been thus far with those Virginia Heritage customers?

The opportunity that we see in Northern Virginia with VHB and the tremendous staff that they have there is something that we see as tremendous upside. We have spent a tremendous amount of time, both pre-closing and post-closing, on meeting with the VHB customers and everything has literally just gone as we had expected. We've had absolutely no attrition.

We see tremendous opportunities with their customers because of our increased legal lending limit and with our products that we have, be able to enhance the cross sale. This being an end market deal, many of their customers, we knew they knew us and it's given us a great opportunity to expand in that market.

Okay, great. Just back to the indirect auto book, how big was that book at year end?

About $107 million.

Okay, great. One last question, are there any more merger expenses coming down the road, or is that it?

We do not expect very many at all, Casey. We should be about finished. There could be some dribs and drabs, but I would say that we expected to get that all completed by the end of December. Expect very little, if any, in the first quarter.

Great. That is it.

I also might want to add that the average life of the indirects is 26 months.

That's helpful. Thanks for taking my questions.

Thank you.

Christopher Marinac, FIG Partners.

Good morning, Ron and Jim. I was wondering if you could give us color on any attrition of the lending staff from VHB and perhaps what's normal in this stage of the merger and going back to how Fidelity worked many years ago?

It's exactly as we had hoped, Chris. We really inherited a great group from VHB. We're working with them regularly. They're getting to understand Eagle's philosophy, us theirs. There's an awful lot of time that's spent in meetings and discussions, strategic and tactical. We've just been very pleased with exactly as we had hoped, which is, candidly, we used the model that we did with Fidelity and Trust.

That has also worked well. The knowledge that VHB offers us from the Northern Virginia side is identical to the way F&T offered us in the DC side. We're very pleased in being able to round out the market, which is exactly the strategic plan that the Board came up with four years ago.

Okay, great. My follow-up, separately, Ron, is just talking about average deal size. Are you seeing any larger deals in general or will this year be kind of typical with what you have seen the previous year or two?

As of right now, Chris, our average loan size really hasn't changed much. We are seeing larger transactions because we have the opportunity to do them. It's certainly not a marketing-strategic approach that we have. But we have the $90 million legal lending limit, which allows us and affords us the opportunity of not necessarily seeing larger deals, but seeing more deals from the same borrower, which, obviously, is something that's great for us because it does help your efficiency because of the way we know the customer. We are seeing larger deals, but it's certainly not an off the charts rush.

Okay. I imagine that Lindsey's appointment this week also ties into this as well, that you have opportunities there if you choose to?

I will tell you, Lindsey -- I hope Lindsey's not listening, but Lindsey has just been awesome for us. Lindsey will be an amazing addition to the strength that we have and really round out the whole C&I group. We're very, very excited and see this is a huge opportunity on the C&I side.

Ron, will the customers that he and his team bring be net new customers for Eagle, or are a lot of these existing customers that you'll just do a different type of loan with them in addition to the CRE work of the past?

The mix is pretty much the same that we see. Bear in mind, Lindsey was not with the VHB team, so it really does give us an opportunity of both Lindsey's contacts and book of business, as well the VHB book. There's a great opportunity of C&I lending in Northern Virginia. We see that both Lindsey and the VHB team, Lindsey knows Northern Virginia extremely well, will give us an opportunity to penetrate that market.

Great, Ron. Thank you for all the color.

Thanks, Chris.

I'm not showing any further questions. At this time, I'd like to turn the conference back over to our host.

I'd like to thank everybody. 2014 was a very fruitful, exciting, energetic year and I think that we've -- well, I know that we've hit the ground running coming into 2015. Now our goal, obviously, is execute what we've worked so hard to accomplish in 2014 and prior to that. Thank you very much, everybody, and speak to you again next quarter.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect. Have a wonderful day.