Eagle Bancorp Inc (EGBN) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Eagle Bancorp 2015 earnings conference call. At this time all participants are in 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 is being recorded.

I would like to introduce your host for today's conference, Mr. Jim Langmead, Chief Financial Officer. Sir, you may begin.

Thank you. 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 2014 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 would like to introduce Ron Paul, the Chairman and Chief Executive Officer of Eagle Bancorp.

Thank you, Jim. I'd like to welcome you all to our earnings call for the third quarter of 2015. We appreciate you calling in this morning and your continued interest in EagleBank. As is our custom, in addition to Jim Langley, 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'm very pleased to announce our 27th consecutive quarter of record earnings for Eagle Bancorp. Net income for the third quarter was $21.5 million, a 52% increase over the $14.1 million in earnings for the third quarter of 2014 and a 45% increase over the operating earnings for the third quarter of 2014 of $14.8 million, which excluded the expenses related to the Virginia Heritage merger, which closed in the fourth quarter of last year.

Net income available to common shareholders increased 53% as compared to the third quarter of 2014. Fully diluted net income per share was $0.63 for the quarter as compared to $0.57 per diluted share on an operating basis in the third quarter one year ago, an 11% increase.

The strong earnings growth in the third quarter is a result of our continued, consistent, disciplined approach to our core banking activities combined with significant improvements in the operating leverage and efficiency. After the successful integration of the Virginia Heritage merger, we continue our focus on making quality loans, generating deposits and retaining and expanding relationships in one of the strongest markets in the country. This strategy continues to produce balanced results for all of the key performance indicators including increased topline revenue, driven by loan and deposit growth, solid credit quality, a superior efficiency ratio, an above-peer net interest margin and our strong capital position.

This collective performance has resulted in our consistent growth in a host of profitability measures, with the most important being earnings per share.

Return on average assets increased from 1.37% in the third quarter of 2014 to 1.47% for the most recent quarter. Return on average common equity is strong at 11.95%. It's down from 14.52% in the third quarter of 2014, only because our equity position has significantly increased and is now strong due to the capital increase from the completion of the Virginia Heritage merger in the fourth quarter of 2014 combined with the $100 million capital raise in the first quarter of this year. Our tangible common equity ratio is now very strong at 10.46%.

Increases in earning assets, a strong net interest margin and net interest income were the drivers of topline revenue during the third quarter. Total revenues for the third quarter increased to $65.2 million, which was a 32% increase over the third quarter of 2014. Non-interest expense growth over the same period was only 9%. This operating leverage is one of the key drivers of 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. Total loans were $4.8 billion at September 30 and have increased $1.3 billion or 39% since September 30, 2014.

Of that growth, $544 million or 16% was organic growth beyond the impact of the merger. Loan growth during the third quarter of 2015 was $226 million or 5%.

We achieved 5% organic growth while maintaining our discipline on pricing and terms. However, as we expected and as we have previously discussed in these earning calls, we did see a slight decrease in yields on new loans booked in the quarter due to competition in this continuing low-rate environment. The increased loan volume during the third quarter was primarily in income-producing real estate loans and C&I loans, consistent with our business model.

Deposits increased $101 million or 2.1% during the third quarter and were 4% higher on average in the third quarter than in the second quarter of 2015. Growth in deposits over the past 12 months has been 39% with 21% being organic growth in excess of the deposits acquired in the Virginia Heritage merger. The deposit mix remains strong as DVA deposits increased $32 million during the third quarter and represent 28% of total deposits, consistent with historical levels. This high percentage of DVA deposits is the result of our continued commitment to relationship building with our commercial customers in which cross sales of deposits, treasury management services and ancillary products are the key to our marketing and retention strategies.

For several quarters, we have been talking about our expectations for margin compression due to the low-rate environment and increasing competition pressures. Our net interest margin for the third quarter was 4.23%, a decline of 10 basis points from the second quarter but still a very strong margin which is well above peer and industry averages. The margin during the quarter was impacted by a higher level of deposits and liquidity than anticipated and by slightly lower yields on the loan portfolio. The yield on new loans originated during the third quarter was 4.87%. The average yield on the loan portfolio was 5.19% for the third quarter, down slightly from 5.29% in the second quarter of 2015.

The mix of earning assets also impacted the margin during the third quarter as the strong deposit growth during the quarter created more liquidity, which averaged $378 million for the period.

However, we are always pleased to see increases in core deposits from our loyal long-term customers. We remain committed to our disciplined pricing approach and to the philosophy that maintaining an appropriate margin and risk-reward equilibrium is just as important in the long run as loan volume and balance sheet growth.

We are also maintaining our disciplined approach to the [ALCO] process and continue our strategy of maintaining a neutral position, rate sensitivity and avoid taking excessive 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 for the loan portfolio on a pricing basis is only 26 months. Excluding loans held for sale, 63% of our portfolio is in variable or adjustable-rate loans, up from 57%.

During the past year, we have increased the size of the securities portfolio to $524 million in an effort to balance the overall yield on earning assets with the need for an appropriate level of overnight liquidity. We have a strong loan pipeline at this point and we continue to see quality loan opportunities from customers and prospects that value our responsiveness, level of service and certainty of execution. The Washington area economy is the fifth-largest in the country and has strengthened over the last 18 months.

We have seen growth of 53,000 new jobs in the 12 months ending September 30 as growth in the private sector has far outpaced the slowdown in federal spending. The strongest job growth is occurring in the sectors of healthcare and professional services. We continue to see an influx of younger workers in the Washington region, and the Washington region now has the third highest concentration of Millennials among metropolitan areas in the country.

Demand is not uniform across the whole region. What we have seen is healthy activity in demand in certain submarkets, industries and product types. The key to EagleBank's underwriting has always been that we study and understand the various sub markets within the greater Washington area. And we monitor and control our portfolio composition by product type and location.

As an example, in today's market we may be cautious about the suburban office projects but look more favorably on a boutique multifamily project near or around the Metro station or other high-traffic urban centers in Washington, D.C.

EagleBank sees the demand for financing this type of project while many of the national or larger regional banks shy away from these projects. It is our knowledge of the individual submarkets, our relationships with quality developers, and our certainty of execution which allow us to generate loan volume. And it is disciplined underwriting which allows us to maintain the credit quality and profitability of our loan portfolio.

We continue our strong, consistent performance for all credit quality indicators. At September 30, 2015, NPAs as a percentage of total assets were 41 basis points as compared to 91 basis points a year ago and 44 basis points at June 30, 2015. Nonperforming loans were 30 basis points of total loans at the end of the third quarter, down from 85 basis points at September 30, 2014. We continue to constantly evaluate the portfolio and take an aggressive approach to placing loans on non-accrual status.

Net charge-offs for the third quarter of 2015 period were only 16 basis points on an annualized basis of just 17 basis points for 2015 year to date. The allowance for loan loss was 1.05% of total loans at the end of the third quarter. The allowance figure is significantly lower than the level of 1.31% at September 30, 2014, due to the impact of fair value accounting on those loans acquired during the merger with VHB.

Provision expense is dictated by the growth of the loan portfolio, consistent application of our allowance methodology, current economic climate and our minimal charge-off history.

At September 30, 2015, the coverage ratio was 348% as compared to 153% at September 30, 2014, and 328% at June 30, 2015. We believe that we are adequately reserved and that our coverage ratio is in excess of averages for the industry and peer group banks.

Non-interest income for the third quarter was $6.1 million, a 28% increase over the third quarter of last year and a slight decrease from $6.2 million for the second quarter of 2015. Higher non-interest income was primarily driven by increased gains on the sale of residential mortgages, which were $2.4 million for the quarter as compared to $1.3 million for the third quarter of last year.

The efficiency ratio for the third quarter was 42.04%. This level has improved from 50.9% and 49.11% on an operating basis for the third quarter of 2014 and in line with 41.7% for the second quarter of 2015. The significant improvement in the efficiency ratio from a year ago is due to the cost savings achieved as a result of the merger with VHB and our ongoing expense discipline and focus on maintaining favorable operating leverage.

The benefit to the operating leverage is seen in the increase in topline revenue of 32% from the third-quarter 2014 to third-quarter 2015, while operating non-interest expense have increased only 13% for the same timeframe. Expense control would continue to be a key factor for us. We constantly review all expense categories and look to rationalize our branch network and other facilities.

In that regard, during the fourth quarter of 2015 we will close the Arlington, Virginia branch, which was acquired in the VHB merger a year ago, and in the first quarter of 2016 we will close the Georgetown branch in Washington, D.C. While these closures will enhance our efficiency, we are also constantly evaluating the need to continue to build a solid organization with the proper infrastructure to support growth and manage risk. We are proud of the third-quarter performance, which was the result of ongoing commitment to delivering lending solutions and superior service to grow and to strengthen our customer relationships. The consistent execution of this strategy fuels our continued growth and success in the Washington Metro area. The bank gained 1,700 new customer relationships within the past year. The customers in our lending group are using on average, 5.7 products per relationship.

We are pleased to report that in the recently released FDIC deposit market share statistics, EagleBank continued to achieve growth that is well outpacing the region.

And we still hold the largest market share in deposits of any community bank in the Washington Metropolitan area.

As of June 30, 2015, we had also moved up to the overall number 8 rank in market share for the region. It is critical to note that even with that position our market share is only 3%. So we still have a tremendous opportunity for growth in the region, particularly in northern Virginia.

The FDIC report also indicates our high level of efficiency with average deposits of $225 million per branch as compared to an average of $105 million per branch for the entire market. The growth of the bank and our market share is the reflection of how well our community has welcomed the EagleBank approach to relationship banking.

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

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

If we could dive into the margin a bit here, first you mentioned in your prepared remarks that the yield on new loans, I believe, was 4.87%. Can you remind us how that compares to what you were seeing earlier this year?

The year-to-date number for us is about 5.05% to 5.10%. So that rate is lower by call it 20 basis points in the third quarter compared to the year-to-date number.

Okay, thanks. And then how should we be thinking about your liquidity deployment here? We didn't see a cash and securities shrink this quarter. Could we see some of that get deployed into loans going forward to help stabilize the margin? Or should we expect continued margin compression from here?

Casey, a great question. We continue to accept deposits from core relationships because that's how we build the franchise value. So there's always going to be ebb and flows as it relates to the liquidity position. The past two quarters we have had a lot of liquidity. Obviously, in the last quarter, some of that liquidity was deployed into securities at lower yielding than the second quarter, which had some impact on the NIM. But we do have an incredibly strong pipeline and believe that that liquidity will be deployed.

Okay, great. And then, switching gears, one last question -- on fee income it looks like or looked like other income was up about $500,000 during the quarter. Can you tell us what drove that and if we should expect that to come back down next quarter?

I think you are referring to we had roughly $1.8 million of other income in the non-interest category compared to around $1.3 million in the second quarter. I think it's due to two or three factors. There's a hodgepodge of fees in there -- ATM fees, the insurance revenue was a bit higher. We are starting to get some contraction in insurance, and some of that is seasonal when the renewals occur. So I'd say the third quarter was a little bit higher for insurance. Also the loan prepayment fees.

But the other factor was we have some benefit programs that involve annuities. And those annuities have some guaranteed payment writers that are repaid in the second quarter. So I think your second-quarter number was down by about $300,000 because of that. And that made the third quarter look higher.

I think our run rate of around an average of $1.5 million, $1.6 million is a good number for you to use going forward.

Great. Very helpful, thanks.

Joe Gladue, Merion Capital Group.

I was hoping you could give us a little color on just the competitive landscape in regards to loan pricing. Is anyone out there doing anything irrational or that's contributing to the decline in yields?

I think the answer to that is there's always one that spoils the group. But be that as it may, the position that we are in, in the market, being the size that we are with the legal lending limit that we have and the relationships that we have and all the other items that I mentioned, lets us pretty much stay disciplined in being able to say that we are not going to chase the one or two banks that might have a rate du jour that we are not going to compete against.

I will say that we are being more and more sensitive to the fact that we do believe rates will be going up. And therefore, as I mentioned in my comments, the fact that our portfolio is 63% now on variable or adjustable, which is up from previous quarters. So we are positioning ourselves on that, which does lead to a slightly shorter duration that we are looking for in our loan portfolio. But I can't begin to tell you the pipeline that we have at all different sizes is as a result of the reputation that we built of understanding the market, understanding our customers and satisfying their needs.

Okay. And I guess this is somewhat related, just wondering if you would touch on the M&A outlook. Any change to that? What do things look like?

Everybody is talking to everybody, which is consistent. Everybody wants more than they are entitled to. So our approach is very simple: keep your head down and keep doing what have been doing for the past 18 years.

All right. I guess that's it for me.

Dave Bishop of FIG Partners.

Circling back to Joe's question, in terms of the environment, obviously you're seeing strong loan growth, especially on the commercial real estate front. We are getting more and more questions these days in terms of what's the regulatory talk there as concentrations increase. Clearly, you guys have an expertise in the market within this product.

Are you sensing any sort of change there? Are they raising any sort of cautionary flags in terms of the growth within the commercial real estate market?

Anybody that is successful in the Washington Metropolitan area is going to have a concentration in real estate. The real question is how you manage it.

And I think, when the examiners do come in, they look at us from a regulatory perspective and they say, okay, yes, you do have a concentration in real estate. But how do you manage it?

The levels of our concentration that we've had in CRE has been this way for 18 years and it's not going to change. But as you drill down to the bottom and you look at 15, 16 basis points in charge-offs year in and year out, I think it does beg the question as to how we manage it. And we manage it because we really, really understand the sub markets. We are not doing the single-family housing development project way out West. We are staying local. As I mentioned, we are staying in the metro sites. We are staying at urban areas. We are looking at repeat type projects.

We did go out, obviously, and raised the $100 million, which certainly addressed the Basel III factor. And from a capital perspective, we feel very confident and comfortable in that position.

Got it. And then, addressing some of the comments in the preamble regarding some of the -- like and just alluding to it, in terms of some of the sub markets, are you seeing any sort of supply and demand imbalance in any of those markets as you move out maybe along 270 into towards the upper parts of Maryland or within Virginia? And are there any product types, relative to the loan pipeline, where you are seeing the strongest demand at this point?

Most of the demand we are seeing is really surrounding the urban metro sites, which has always been our focus, not that much as you are going up 270. I would say pretty much stop in that Rockville-Gaithersburg market. 66, if you go out you look at the Reston market being very strong. The consistent theme, though, is town centers and metro.

Obviously, what we are seeing downtown is extraordinary, whether it's the Waterfront, whether it's the Union Market, whether it's the 14th and U. But again, this is all based on the high traffic, very much millennial-focused type of products. So whether it's condo conversions or boutique type apartment buildings, which is really what our forte is, that's really what we are seeing the growth in. And occupancy levels are extraordinary. The recent report that came out -- you have over 97% occupancy level in these type of markets on the residential side.

Great. Just one final question -- in terms of the gain on loan sales this quarter, any sense in terms of how loan sale margins held up this quarter, relative to last?

I think, Dave, we're actually a little bit stronger. We've been focused on improving the profitability of that business unit. And I would say the margins that we are getting in that business in 2015 are better than 14% because of our approach. The gross marketing spreads are over 2%; that's really good for us.

And so, yes, we think that business unit has provided more EPS for us in 2015 than in 2014. That was intentioned. We are very happy with the performance of that business unit.

Great. Thank you, guys.

Matt Schultheis of Boenning.

A couple of quick questions -- with regard to the variable-rate and adjustable-rate loans, I think you said it was 63%, are you swapping these to fix for customers?

We are not, at this point, Matt, really involved in that kind of a derivative program. We are pretty happy with the fact we kept the duration of the portfolio pretty short. And we've actually avoided going out 10-year fixed-rate. I think, to your point, are you giving the customer that 10-year fixed-rate and then swapping it to modify the cash flows -- but we are not doing that. We are not just pretty much in that longer-term fixed-rate market. We think this would be an absolutely poor time to do that with the expectation of where rates might go.

So the answer is no, we are not doing that. We are not doing back-to-back swaps and some of the things at other institutions. We think our core balance sheet is pretty short duration on both sides, assets and liabilities. We like that. We think we are well-positioned if rates go up. We are also well-positioned, we think, if rates stay where they have been because of the floors that we have in many of our loans.

Okay. With regard to some of the funding questions and some of the other questions that have already been asked, with the largest banks pushing deposits out because of the new liquidity rules, is this giving you an opportunity to look at new deposit relationships you haven't in the past? Or are you unable to book these at levels that are economically profitable, so you are passing?

What we are is, as we've gotten bigger and our capital position has gotten stronger and our public ratings have gotten better, we are seeing more and more relationships from municipalities, from larger sized law firms, from escrow agents, etc. So, these are core relationships that we're looking to continue to build. So because our belief is not managing the portfolio quarter by quarter but long term, is that these liquidity factors will continue to grow, which is resulted in the liquidity position that we have. And we do believe we will continue to.

I'd also add, Matt, that there is a lot of liquidity out there. And we've been very disciplined in buying money and getting it in on a core basis. You may have noticed that our cost of money was down 2 basis points in the quarter. We think that's unusual, given the fact that we've grown deposits an average of 4% in the quarter. We are really keeping an eye on the cost of funds, and the mix continues to be, as Ron's comments had said, very much in the DDA space, which is obviously helpful do that cost.

We also-- as an aside to that, we started about a year ago program that is really getting some great legs with assistance to our lenders that are actively working with our lenders on being able to get that cross-sell, which is also helping and will continue to help our DDA growth.

Out of curiosity, just trying to gauge it by size, if you will, you mentioned municipal deposits. And generally, Maryland and Virginia have fairly large municipalities.

And I was wondering, is your cash management service able to do cash management for, say, Montgomery County, Maryland? Would you be able to handle that?

I think, at this point, no; we are not active in that particular area with them. We do have deposits from several of the subdivisions within Maryland. We've got the D.C. government, subdivisions in Virginia we've grown in the last 12 months since the merger.

But no, we are not active with cash management services for those municipalities.

We don't respond to the RFPs that are put out by the county, any of the counties. What we're doing is we are getting excess liquidity that these counties have that they are looking to put or have available in different particular programs that we have been beneficiaries of.

Okay. And just one last question, and it's a caveat, it does not happen in my model. So I'm wondering at what point does your -- do you get big enough that there is a lack of qualified lenders for you to hire from other institutions that even just the law of large number starts working against you and the balance sheet growth rate starts to noticeably slow?

It's a great question.

(multiple speakers) have a sense of that, either.

Well, we might have a sense, but we can't say it. I will say that we are continuing to hire some very, very quality lenders. The beauty of the position we are in is that we have the ability to do a $1 million loan and give the same attention on that $1 million loan to the $15 million loan. And a lot of the lenders love that opportunity. If we look at a chart as to the size of Eagle versus a lot of the other ones, we are at the top size where our average size loan is still $2 million. So the lenders like the fact that we can go from large to small and still give that same level of attention.

That's not going to change. And that has really been the backbone of Eagle and will continue to be the backbone of Eagle. And we have been very fortunate over the past quarter, where we have been able to hire some good lenders, which will help to increase that revenue side.

Can we continue at the 5% loan growth that we had last quarter? Again, that ebbs and flows every quarter. But we believe that mid-teens is a fair loan growth assumption.

Okay, thank you very much.

Catherine Mealor of KBW.

Maybe one final question on expense growth -- can you give us a sense as to what we should think about expense growth going into next year? We've got a couple of cost savings coming in with Arlington and Georgetown branches closing, what you can do to hire these high-quality lenders and see nice growth.

How should we think about the pace of expense growth going into next year and how that impacts the efficiency ratio?

I think the expenses that you are going to see get put on the books predominantly are going to be expenses within offset to revenue. So you might be hiring a lender and you might be hiring assistants to that lender. But obviously, that brings in loan growth. More and more dependency on the technology that we have.

So I think we are in a good position on the efficiency ratio and the operating leverage. That obviously is something we've been talking about for a long time and we are seeing the benefits of.

I would just add, Catherine, that while that's not a specific dollar amount and we are not, obviously, going to give you that or a percentage, we are talking a lot with our teams. And we are very team-oriented in the bank, and we've got all of our people's heads into the fact that we are a very high-performing bank. And to stay that way, we have to continue to exhibit that very pristine efficiency ratio.

So the leverage that we are getting out of individuals, the process improvements we are working on, the need to really look at the use of technology in different ways, stop doing things that don't add value -- that's really where we are in the organization. There's no low hanging fruit; it's just a matter of eking it out and using the brainpower we have in all of our teams to keep the rate of growth at a low level, recognizing that we are going to continue to see low interest rates, margin is going to be difficult. And keeping that efficiency ratio at that 42% level is going to be very, very important to us.

And on the technology comments, do you have any near-term needs for any kind of large technology or maybe compliance expenses or additions in the near future?

No. Our core processor, I think we've mentioned in the past, believes that that -- and our people believe that technology that we have with FIS Fidelity, one of the major providers, would service us up to $10 billion in assets. So we've got a lot of growth in the kind of systems that we have.

We have, this year, implemented, in a staged way, customer information systems, customer relationship, CRM systems that are going to be very useful to our team leaders and our loan folks and our deposit sales folks. We are also looking at other types of technology.

Yes, we use it for compliance. We use it in the finance area. And fortunately, we are an organization that recognizes the benefit of technology. And we are constantly employing it in a way that gives us effectiveness and efficiency.

Great. Thank you very much.

At this time, I'm showing there are no further questions in the queue. I'd like to turn the call back to Ron Paul for any closing remarks.

I would just like to thank everybody for listening in on the call. It's a beautiful day in Washington, so it's hard to believe that the next time we will speak to each other is after the first of the year. So I wish everybody a happy holiday, happy and healthy new year. And we will speak to you in January, if not before. Thank you, everybody.

Ladies and gentlemen, thank you for your participation on today's conference. This concludes your program. You may now disconnect. Everyone have a great day.