Eagle Bancorp Inc (EGBN) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Eagle Bancorp fourth-quarter and year-end 2015 earnings conference call. (Operator Instructions). As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Jim Langmead, Chief Financial Officer of Eagle Bancorp. Please go ahead.

Thank you. Good morning, everyone. Happy New Year. Before we begin the comments, I'd like to remind you that some of the comments we make 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'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 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 for the fourth quarter and full year of 2015. Thank you for joining in the call this morning. In addition to Jim, our Chief Credit Officer, Jan Williams, is on the call with us. And both Jim and Jan will be available for questions later in the call.

I'm extremely pleased to discuss with you our financial results and activities for the fourth quarter and full year of 2015, which were both truly successful periods for EagleBank. In the fourth quarter, we earned $22.3 million of net income, which is a 52% increase over the GAAP net income in the fourth quarter of 2014, and is our 28th consecutive quarter of record increasing earnings. The fourth quarter of 2015 earnings represented a 32% increase over the operating earnings of $16.9 million in the fourth quarter of 2014, which excluded merger-related expenses from the Virginia Heritage transaction completed in October of 2014.

The earnings for the fourth quarter of 2015 comprised a 4% increase over the third quarter of 2015 earnings of $21.5 million. Fully diluted earnings per share for the fourth quarter of 2015 were $0.65, a 33% increase over GAAP EPS of $0.49 per diluted share for the fourth quarter of 2014, and 16% over the operating basis diluted EPS of $0.56 for the fourth quarter of 2014.

Another significant milestone is that we exceeded $6 billion in total assets at year-end 2015. These record levels of earnings and assets are attributable to the continued, long organic growth and our consistent, balanced performance in other key measurement indexes, including strong net interest margin, asset quality, and disciplined expense management.

For the full year of 2015, we reported net income of $84.2 million. These earnings are 55% increase over the GAAP earnings of $54.3 million for 2014 and 46% increase over the full year of 2014 operating earnings, which excluded $4.7 million of pre-tax merger-related expenses.

For the full year of 2015, net income available to common shareholders was $86.3 million. Fully diluted EPS for the year of 2015 were $2.50, which is a 28% increase over the GAAP EPS of $1.95 for 2014, and a 20% increase over the operating basis of EPS of $2.08 for the full year of 2014.

We are very pleased with the quality of our earnings and the continued high level of profitability, as evidenced by our return on average assets of 1.49% for the year of 2015 and 1.5% for the fourth quarter of 2015, and an ROACE of 12.32% for the year 2015, and 12.08% for the fourth quarter. The return on average common equity ratios for both the full year of 2014 -- for the fourth quarter, do reflect the impact of the $100 million equity raise completed in March of 2015.

The increase in earnings for both the fourth quarter and the entire year of 2015 was driven primarily by continued top-line revenue growth along with improved operating leverage. Total revenue for the year, fueled by loan growth, increased 32% over 2014; while noninterest expenses, excluding merger-related items, were only up 17%.

For the fourth quarter, total revenue rose 21% as compared to the fourth quarter of 2014; while expenses, excluding merger-related items, increased only 10% over the fourth quarter of 2014. Our continued focus on combination of top-line revenue growth and improved operating leverage is a key factor in our consistently improving profitability.

The improved revenue during both the fourth quarter and the entire year was the result of our maintaining a very favorable NIM, as well as strong loan and deposit growth. The NIM for the full year of 2015 was excellent, at 4.33%, down slightly from 4.44% for the year of 2014. The margin for fourth quarter was 4.38%, which was down from 4.42% in the fourth quarter of 2014, but was an increase over 4.23% in the third quarter of 2015. The margin in the fourth quarter was improved over the third quarter, primarily due to reduced liquidity and an increased level of loans in our asset mix.

The average loan to deposit ratio improved to 98% during the fourth quarter of 2015 as compared to 96% during the preceding third quarter. We have discussed in the past maintaining a strong margin is the key strategic objective, while never compromising our credit quality. The margins we have achieved over the last several years as a result of our disciplined approach to both loan pricing and the cost of funds, as well as proactive balance sheet management. However, given the competitive environment in our market, we continue to expect downward pressure on the margin as we move through 2016.

Loan growth for the fourth quarter was $221 million or 5%. In total, loan growth for the full year of 2015 was 16% or $686 million. The largest growth categories in the fourth quarter were income-producing commercial real estate loans, construction loans, and C&I loans.

It is important to remember that our construction loans are generally not ground-up projects, but tend to be for the rehab of an existing building or condo conversion throughout our focused market.

We continue to see demand in the market, have a robust pipeline, and feel that we can continue to achieve double-digit loan growth with CRE and C&I loans which meet our pricing and credit standards. The overall Washington area economy remains solid, with expected GRP growth. However, we continue to see loan demand that varies across the various submarkets in the Washington area, and we diligently evaluate the relative risk in each submarket and for each loan product type. We focus on these submarkets in the city and close to the Beltway which we are most familiar with.

Regarding the recent pronouncement from the regulators concerning CRE lending, I can firmly state that our lending and portfolio administration practices have remained consistent, and are in adherence with all the applicable guidance from the regulators.

Our credit quality statistics speak for themselves. Deposit growth for the year of 2015 outpaced loan growth, and was $848 million or 20% growth rate. We experienced very consistent growth in DDA deposits and money market deposit throughout the year, which continued in the fourth quarter, in which we grew $232 million or 5%. We continue to focus on generating DDA deposits from new commercial customer relationships.

At December 31, 2015, DDAs represented 27% of total deposits, which is well above industry and peer group averages. On a combined basis, DDAs and money markets, which we define as core deposits, comprised 82% of our total deposit mix, which leads to our favorable cost of funds.

Our cost of funds was actually a few basis points lower, at 33 basis points in the fourth quarter as compared to 35 for the third quarter of 2015. We remain consistent in our ALCO philosophy and disciplined practices, and continue to maintain a very neutral position in regard to interest rate sensitivity.

Our ALCO positioning remains well-balanced. Excluding loans held for sale, 65% of our portfolio is in variable or adjustable rate loans. As of December 31, 2015, the re-pricing duration of the loan portfolio is only 25 months. Including fixed-rate loans, 24% of the portfolio re-prices or matures within 30 days, and another 12% within the first year. In total, 67% of the portfolio re-prices or matures within three years, and 82% within five years.

With our level of variable and adjusted rate loans and a stable core deposit base, we are well-positioned should a trend of rising rates ensue. In mid-December, FOMC decision to increase the target Fed funds rate had an effect on increasing interest rates on our overnight Fed funds by 25 basis points.

Additionally, the increase in the prime interest rate to 3.5% had a modest positive impact on loan interest in the fourth quarter of 2015.

On the deposit funding side, we have not increased deposit rates and expect that, due to significant liquidity that most banks have, we will not be raising deposit rates anytime soon. We have seen no reaction in our local markets to the Fed's December move in regard to either loan or deposit pricing.

Our position in the market continues to be very strong. We retain our ranking as the largest community bank in the Washington Metropolitan area, as measured by deposits in the most recent FDIC report. We are the eighth-largest bank in the region, but, most importantly, have only a 3% share of the entire market, so we still have a tremendous opportunity for continued growth. The Washington region economy is strong and growing, and has moved beyond the impact of federal spending cutbacks we experienced three years ago.

Today, federal spending contributes less than 30% of total GRP, while we have seen significant growth in the private sector. The percentage of the local economy driven by federal spending has dropped from 39% four years ago to less than 30% today, and is due more to the growth of the private sector than to the federal cutbacks. The unemployment rate in the region is 4.1%, and we have added 62,000 jobs in the last quarter -- I'm sorry, in the last year. The largest growth sector of the new jobs being created are professional services, education, and healthcare.

And there are signs that the federal spending may be on the upswing again. From the omnibus bill recently passed by Congress, $3.6 billion in funding has been earmarked for agencies and projects here in the Washington area, which will lead to further job growth.

However, the key for EagleBank is that we maintain our lending discipline based on both strong underwriting standards, combined with our knowledge of the various submarkets throughout the region. It is so important that we understand that Arlington is different than Rockville, and the market for suburban office space is different than boutique multifamily projects near a Metro station in DC.

The asset of the quality of the Bank was excellent during the fourth quarter, and has been throughout 2015. At December 31, NPAs as a percentage of total assets decreased to 31 basis points as compared to 41 basis points at September 30, 2015, and 68 basis points on December 31, 2014. This level of NPAs is well below industry and peer bank levels.

Net charge-offs for the fourth quarter were 18 basis points of average loans, and was 17 basis points of average loans for the full year of 2015, equal to 17 basis points for the year of 2014. Charge-offs of 17 basis points for the full year of 2014 and 2015 are the lowest annual levels of charge-offs we have achieved since pre-recession levels in 2008.

The allowance for loan loss at December 31, 2015, was 1.05 of total loans, the same as 1.05 at December [30], 2015, and basically in line with 1.07 at December 31, 2014. Our reserve methodology and practices have been consistently applied. And the allowance has been computed based on a risk analysis of each component to the portfolio, loan growth during the period, and various environmental factors. The provision expense was $4.6 million for the fourth quarter as compared to $3.7 million for the fourth quarter of 2014.

The level of nonperforming loans and other nonperforming assets in our portfolio continues to improve. Due to declines in NPLs to 26 basis points of total loans, the coverage ratio at the end of 2015 was 398%, and we believe that we are adequately reserved.

Revenue from noninterest income was $6.5 million during the fourth quarter, a 22% increase over $5.3 million in the fourth quarter of 2014. For the year, noninterest income was $26.6 million, up 45% over the full year of 2014 results. For the full year, the increases were primarily due to improvement in the origination and sale of residential mortgages. For the fourth quarter, the largest contributor to the improvement was $650,000 in additional gains on the sale of SBA loans.

The efficiency ratio for the fourth quarter of 2015 was 41.47% as we continue our disciplined management of noninterest expense and its affect on the efficiency ratio and expenses as a percent of average assets.

We improved our operating leverage, as noninterest expense for the fourth quarter increased only 10% over the operating basis level for the fourth quarter of 2014, while total revenue was up 21% over the same period. Operating expenses were $28.6 million for the fourth quarter.

The level of annualized noninterest expense as compared to average assets was only 1.94% of average assets for the quarter, as compared to 2.16% on an operating basis for the fourth quarter of 2014. This ratio, and the efficiency ratio for the fourth quarter, are significantly better than industry and peer group averages.

Based on our continued diligence in managing operating expenses, we believe we can maintain the efficiency ratio in the low 40s, similar to what we have achieved in the last several quarters. It is important to note 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 needed to support an outstanding level of customer service and quality of operations. We continue to evaluate our branch network and other facilities to make sure our occupancy costs are as efficient as possible.

In that regard, we are in the process of moving our residential lending division to a new space, and we are relocating both our Chevy Chase branch and our Georgetown branch to smaller, less expensive facilities, while remaining in this upscale markets. Meanwhile, we continue to recruit experienced, qualified bankers, for they are critical to our high service, high touch philosophy and strategy.

During November 2015, we redeemed the $71.9 million of SBLF preferred stock, as we had been planning and had discussed. The payoff was made from general corporate funds, including part of the proceeds of the $100 million common stock offering completed last March.

Even with the impact on tier 1 capital from SBLF payoff, our capital ratios remain strong. At December 31, 2015, we had a Common Equity Tier 1 ratio of 10.68%, total risk-based capital of 12.75%, and tangible common equity to tangible assets of 10.56%. The Board and management are continue -- to continually maintain a strong capital position, and continue to plan accordingly.

In summary, I would like to say how pleased we are with a very successful 2015. We have advanced numerous strategic initiatives, particularly in Northern Virginia. And we are very proud to have become a $6 billion bank by maintaining our focus on customer relations, our attention to detail, and our commitment to creating shareholder value. Most importantly, we are extremely proud of the quality of our earnings and consistency of EPS growth that we have been able to achieve.

We are well positioned in the Washington metropolitan area market, and we are poised for continued success in 2016. That concludes my formal remarks.

We'd be pleased to take any questions at this time.

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

Great quarter. I just had a question for Jan. Can you give us some more color on the OREO expenses that came in this quarter? Specifically, was there a valuation adjustment on one specific property, and how much was it written down?

Well, we actually dispositioned a couple pieces of OREO during this period. One was a $3 million-plus piece of property that had some TI work associated with the disposition. And that's really where you got the expenses during the quarter.

Okay, great. That's all I had for you guys. Great quarter. Thanks.

Joe Gladue, Merion Capital Group.

Just to maybe follow-up a little bit on that idea. Just wondering about the detail on -- other noninterest expenses were up a little over $1 million versus the third quarter. Just looking for some color on what made up that increase.

Yes, Joe, that relates directly to Jan's response to Casey on the OREO. Our OREO expenses, our valuation of OREO, is in that category. And I would say that around $800,000 of that increase, maybe $900,000, was due to the OREO. So that was the major component of the increase in other noninterest expenses.

Okay. I thought that might be the case. Thanks. Also, on the deposit side, demand deposits -- I guess non-interest-bearing demand was up just a tiny bit sequentially, and non-interest-bearing demand -- or I mean interest-bearing demand deposits were down sequentially. Just wondering if that's just seasonal, or if there was any big institutional withdrawal, or whatever. Just some color on that, as well.

Joe, we tend to look at deposit numbers in an average basis. And our numbers for the fourth quarter of the year in both total deposits and noninterest deposits were actually some decent growth. And the DDAs wound up to be almost 29% of average deposits in the fourth quarter. They've been at that level for a while. They were actually at 28.7% for the third quarter. And then total deposits have continued to do very well.

The average total deposits for the quarter really increased from $4.84 billion to $4.95 billion. So again, it's an average issue. There could have been some noise at the end of a period. But we tend to look at averages in our balance sheet, and measure growth on that basis.

Okay. All right. I guess the last question I'll ask -- you mentioned you expect to see some continued margin pressure. Just wondering what's baked into your expectations for Fed rate hikes for the year, and how that affects your expectations on margin.

My crystal ball is probably as cloudy as everybody else's.

Sure.

So who knows what will happen as it relates to the Fed? We believe that we price our loans according to risk, and evaluate each credit accordingly. So we believe that we have a strong margin. We think we can maintain, generally, the margin. Competition always has an impact. As I mentioned my comments, we believe there is liquidity in the markets, so we don't see anybody increasing rates. But, again, who knows when that could change?

All right. Thank you.

Dave Bishop, FIG Partners.

Just curious in terms of the overall market there. I think, last quarter, you noted the loan pipeline to demand was strongest in the urban metro [spaces], in the town centers. Is that still the driver of loan growth expectation that you are going to continue to see that drive the majority of the loan growth?

The loan demand is continuing to be stronger and stronger. We're becoming more and more selective. The boutique nature of our typical projects is pretty fast and true. It gives us the opportunity to be able to be a little bit more selective with builders that we know really well. The expansion in Northern Virginia is just tremendous on the C&I side, especially when you look at the increase in government spending; technology, cyber security. If you go up the 270 corridor in Montgomery County, you are seeing an increase in biotech. NIH is talking about doubling the size of their campus.

So you just have an awful lot that's going on within the market. We are sensitive to -- in our opinion, there is a little bit of frothiness in the multifamily side, in the large multifamily side, which is not the market we play in. The boutique side, because of operating expenses, is definitely the place to be. And the Millennials are driving the market, and we continue that to be stronger and stronger.

I also just want to add, obviously that with the change in administration, regardless of which side of the aisle wins, is that you traditionally see an increase in job growth in Washington. People don't leave Washington; more people come into Washington. And again, that's the Millennial side, which you'll see on the multifamily improvement.

Got it. And then I think Ron touched upon the history you guys have in terms of underwriting on the commercial real estate side and the recent regulatory guidance. Are there any expectations? Or is that a hope rather than a belief that maybe this introduces better risk-adjusted pricing here? And do you think any peers are less positioned for what I think promises to be a pretty tough examination cycle next year, and maybe they'll cede some market share to you all? Is there any sort of an expectation or hope that that could crystallize next year?

We feel very good at the size that we are, because we can afford the compliance, the cyber security, certainly the credit, and ERM. So we feel real good that we have obviously managed our expenses, but we have applied them to the right areas. And I do agree with you: I think that the exam cycle is going to be a little bit more difficult, but feel real good that the systems that we have in place is something that is going to work with us.

We also have been selected by the Federal Reserve to have quarterly meetings with them to give -- not specific about Eagle, but just the overall economy. So I think it shows the level of confidence that they have in us, in understanding what the market is, where it's going. And that's both the -- all aspects, all sides of the balance sheet.

Got it. And then just one final question: just curious, current period loan yields, average loan yields. What was on-boarded versus last quarter?

Yes, Dave. The new loan rates for the fourth-quarter yields -- that includes fees -- were a little bit more than 4.90%. And the payoff rate was around 5.30%, so we gave up 40 basis points on that turn. Not equal in terms of volumes, but in terms of just rate, about a 40 basis point give-up between payoffs and new loan yields.

Got it. Appreciate the color. I'll hop back in the queue.

Matt Schultheis, Boenning.

So, a couple of quick questions with regard to a follow-up to Mr. Bishop's questions, and your comments about the regulatory guidance on commercial real estate. What type of interest rate change do you underwrite to, to maintain healthy coverage ratios?

On the HVCRE issue?

Yes.

Really it's about 22 basis points, I think, in terms of the additional capital costs.

Jim can probably outline that better for you.

Yes, Matt. We use -- in terms of pricing, we have a model that takes into account our cost, and we also do it on a matched funding basis. So we use the FHLB curve as an indicator of what our cost of money would be on a matched maturity basis. And then we establish what we think -- and this goes I think to your question, and Dave's as well -- we establish what we think is a very decent return on equity, and price the credit appropriately.

And that is so important to keep our return on equity at very good levels. And as you know, we've been in that 12% to 13% range. So we do allocate capital to our business units. We measure performance based on that. It's all risk-adjusted. And so as the yield curve changes and as rates are changing, we're doing everything on a matched maturity basis.

And then we, through our output processes, are keeping our interest rate risk in line as we look at our entire balance sheet. And I would say that balance is, as Ron's comments earlier noted, we continue to have a very moderate level of interest rate risk.

I suppose actually I may have misworded that. I guess what I'm really getting to is that if regulators are concerned that rates go up and coverage ratios on real estate loans decrease, creating weakness, do you underwrite to a higher interest rate from a coverage ratio standpoint, from a credit quality standpoint?

We do on the initial underwriting side, and then we also stress-test the portfolio quarterly. And we do it for rate increases; we do it for compliance and NOI, whether that's vacancy or reduction in rental rates, expense factors, cap rate. And we've found that our portfolio continues to perform extremely well, even under multiple stress scenarios.

So I think we're pretty careful, and follow all of the regulatory guidance as far as managing a commercial real estate concentration. And I think we've been pretty successful doing that, and the results from our regulatory reviews on that have been positive.

The other item I might want to add is the 18 years history that Eagle's been around, is that all of our condo projects are underwritten to rentals. And, therefore, we understand exactly -- and we put very strict guidelines within our lending on condo conversions, as to when they could actually go to a sale process. So we really try to protect ourselves.

I don't mean to be getting too deep in the weeds, but I think it does clearly show our understanding of exactly what it takes within the market to minimize risk.

Okay. And one last question: I'm asking for just open commentary. A quote from somebody else on the DC the real estate market was that the suburban office park in DC is dead. What's your take on that?

I think that's an almost accurate statement. I don't think it's quite as extreme as dead, but I think there's been a radical shift in the suburban market. And you're seeing some vacant buildings. We're looking at two, actually, right now, where buildings that are well-located but they're aged, that are going to be converted to multifamily. So -- the opportunities. Everything is very much focused on where the Metro is.

Montgomery County is major emphasis now on commuting. So, you're right; it's certainly not a healthy place. Fortunately, we don't have a large position in that. And what we do, we feel good about. The beauty of our office market is that they're multi-tenanted. So it's not like you have one building with one tenant. You have average-sized tenants of 3,000 to 5,000 feet, so it's not that anybody is going to hurt you in rollover, and we underwrite expiration of leases accordingly.

Okay. Thank you.

Dave Bishop, FIG Partners.

One follow-up question: just curious in terms of maybe the outlook on the Maryland side of things. Are you hearing some more optimism from the commercial sector there, with the change in administration? Hogan seems to be a little bit more business-friendly than the typical past administrations. Are you seeing any impact thus far from the (multiple speakers) new change in leadership?

Great point. I think that the state of Maryland realizes that the way Montgomery County goes is the way the state goes. The governor has been very focused. There's been a recent approval of the purple line, as far as mass transit, which will have a big impact in this part of the county.

So the answer is yes. Obviously that's not going to be an immediate change. But I think it does -- and I will tell you, as I mentioned earlier, is that the biotech emphasis right now that's going on in -- up the 270 corridor is also going to be key, along with the NIH expansion.

Got it. Appreciate the color.

Thank you. I'm showing no further questions at this time.

I'd like to turn the call back to Ron Paul for closing remarks.

I want to thank everybody for attending and listening to the call. Obviously, we're available all the time for any further questions. And everybody that's on the East Coast, be safe with the upcoming snowstorms. So thank you again for listening.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.

Thank you.