Eagle Bancorp Inc (EGBN) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Eagle Bancorp's second-quarter 2016 earnings conference call. (Operator Instructions)

I would now like to introduce your host for today's conference call, Mr. Jim Langmead, Chief Financial Officer. You may begin, sir.

Thank you, Kevin. Good morning, everyone. Before we begin the formal remarks, 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 2015 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.

Thank you, Jim. I'd like to welcome all of you to our earnings call for the second quarter of 2016. As usual, in addition to Jim Langmead, our Chief Credit Officer, Jan Williams, is also on the line with us this morning. Jim and Jan will both be available later in the call for questions.

We are very pleased to announce that our second-quarter earnings were $24.1 million, which is another record level of quarterly net income and represents a 15% increase over earnings for the second quarter of 2015 and a 4% increase over earnings for the first quarter of 2016. Net income available to common shareholders was also $24.1 million, a 16% increase over the second quarter of 2015.

Fully diluted earnings per share were $0.71 for the current quarter, representing a 16% increase from $0.61 in the second quarter of 2015 and a 4% increase over $0.68 per diluted share for the first quarter of this year. We are proud to announce that due to our disciplined and consisted management approach, this is the 30th consecutive quarter of record increasing earnings, going back to the first quarter of 2009.

In the most recent quarter, we continued to demonstrate balanced, strong performance across all of the key measurement indicators. We expanded top-line revenue, driven primarily by loan growth of 4.8% in the second quarter, combined with a continued, very strong net interest margin of 4.3%. Noninterest income was also favorable for the second quarter, as compared to both the second quarter of 2015 and the first quarter of 2016.

Additionally, we realized growth in deposits, continued favorable asset quality, and through disciplined expense control an improved efficiency ratio of 39.63%. We continued to monitor and adjust all the dials that are required to consistently produce these balanced, strong results.

The earnings for the second quarter demonstrate our continued focus on growing revenue and improving operating leverage. Top-line revenue growth was strong, as total revenue increased 12% in second quarter over the same quarter in 2015.

The revenue growth was driven primarily by increasing net interest income, and also by growth in noninterest income from gains on sale of SBA loans. The increase in revenue was accompanied by only 6% growth in operating expenses, and we thus continued to improve our operating leverage and efficiency ratio. The level of 39.63% compares very favorably to the 41.7% in the second quarter of 2015.

The efficiency ratio for the second quarter also showed improvement from the first quarter of 2016, as top-line revenue for the second quarter increased 4%, while noninterest expenses increased just 1% as compared to the first quarter. We are very proud to know that we are improving the efficiency ratio by increasing revenue, not by reducing expenses.

The net interest margin continued to be very strong, at 4.3% for the second quarter. As expected, we saw slight compression from 4.33% for the second quarter of 2015 and 4.31% for the linked first quarter of 2016.

We were very pleased to maintain the average loan yield at 5.1% for the second quarter, down only 2 basis points from the first quarter of 2016. At 4.3%, our margin is significantly better than industry and peer group statistics.

Our total loans outstanding were $5.4 billion at June 30, 2016, a 19% increase over June 30, 2015. We had excellent loan growth during the second quarter, at 4.8% or approximately $248 million.

There was solid growth during the quarter in income-producing CRE loans and in C&I loans. We continue to see activity and demand in the Washington Metropolitan area, and we have a solid loan pipeline at this time.

Deposit growth was $146 million or about 3% during the second quarter, with total deposits reaching $5.3 billion. The annual deposit growth rate was 11% over June 30, 2015, but has averaged 15% for the first six months of 2016 over 2015. This is a result of working with centers of influence to develop new customers and the efforts of our relationship managers to strengthen existing customer relationships.

We continue to emphasize core deposits and actively manage our cost of funds. DDA deposits increased $157 million during the quarter and account for 31% of our total deposits at June 30, 2016.

The Washington metropolitan area is continuing to see steady growth and solid economic activity. The area is experiencing a continued trend of private-sector job growth and has moved well beyond the impact of reduced federal government spending seen in 2013.

The region has added over 68,000 net new jobs in the last year, and total employment has grown to 3.2 million people. The unemployment rate is just 3.63%, well below the national average, and the area has the third-highest concentration of Millennials of any market in the country.

The Washington area is the fifth-largest region economy in the country and has the fourth-highest rate of growth. The growth is being driven by healthcare, education, and technology sectors, not by the federal government.

Demand for housing and commercial space varies widely across the multiple submarkets within the region. At EagleBank, we continually monitor the supply and demand for commercial real estate by submarket and loan type, to manage our exposure and direct new loan production. This knowledge of the market has been a key factor in our successful underwriting over the years and in maintaining our credit quality, which continues to be the hallmark of EagleBank.

The second quarter was no exception. At June 30, 2016, NPAs as a percentage of total assets decreased to 39 basis points, as compared to 42 basis points at March 31, 2016, and 44 basis points on June 30, 2015. The current and prior period ratios are very favorable as compared to industry averages and the range of NPA levels we have reported over the last several years.

The absolute level of NPAs decreased by $1.2 million in the second quarter to $24.5 million. The Bank has consistently taken and still uses an aggressive approach to reviewing individual loans for impairment and accrual status.

The allowance for loan losses was 1.05% of total loans at the end of the quarter, which is in line with the level of the reserves reported since the merger with Virginia Heritage Bank in 2014. I would note that if the credit mark on the loans acquired from VHB merger was included, the allowance would be at 1.12%. The increase in the absolute level of the allowance is due to the loan growth in the second quarter, together with consistent application of our allowance methodology.

Net charge-offs for the second quarter were 15 basis points of average loans, as compared to 21 basis points in the second quarter of 2015, and well within the range of our average charge-off experiences over the last several years. At June 30, 2016, the coverage ratio was 264%, and we believe we are adequately reserved.

As you know from our published reports, we constantly monitor and evaluate the composition of our loan portfolio. We strategically plan and track our levels of C&I, owner-occupied CRE, income-producing CRE, and ADC loans.

We feel very comfortable with our level of CRE lending, and we would note that the Bank has steadily reduced our ADC lending over the last several years due to some frothiness in certain sectors of the market. We know that CRE and ADC exposure has become a hot button within the industry, and we have several thoughts on that topic.

One is that all of the guidance in that message from the regulators is just that, guidance, and is consistent with previous communications from the regulatory agencies. The recent communications from the regulators state that if you have concentrations in CRE and ADC lending, which we do, we need to employ disciplined underwriting, need to know and understand each customer and project. We, our financing, need to perform rigorous stress testing, need to have detailed reporting and enhanced monitoring of the entire portfolio and each loan within the portfolio.

At EagleBank, we are and have been adhering to every piece of that regulatory guidance for many years, so this is nothing new for us. Our annual average charge-offs from CRE loans over the past eight years have just been only 9 basis points per annum, which confirms our long-standing disciplined approach, our policies, procedures, and practices, and our ability to manage our real estate loan portfolio.

As we have stated many times, our Board is committed to maintaining and building a strong capital base to support the soundness and future growth of the Bank. We periodically evaluate the potential need for additional capital, above and beyond our strong profitability and additions to retained earnings.

To that end, last night, we announced the launch of an offering of $75 million of Holding Company subordinated notes. Information regarding the offering is included in the prospectus supplement we filed with the Securities and Exchange Commission last night.

As mentioned earlier, for the second quarter of 2016 the efficiency ratio improved to a very favorable 39.63%, an improvement over 41.7% in the second quarter of 2015. The other indicator of efficiency that we track is the percentage of noninterest expense to average assets. That ratio has improved to 1.83% in the second quarter of 2016 from 1.91% one year ago.

We continue to see improvement in our productivity and operating leverage beyond the result of the cost savings achieved during the VHB merger. We continue our prudent (technical difficulty) our branch network and related occupancy expenses. We remain committed to maintaining a sound infrastructure which is sufficient to manage daily operations, control risk, and fuel the growth of the Bank.

Through our ALCO policies and practices, we maintain a very moderate level of interest rate risk. Over the past year, we have slightly increased our level of asset sensitivity. We look carefully at the repricing risk in our loan portfolio and the securities portfolio. While the weighted average maturity of the loan portfolio is 40 months based on maturities, the pricing duration is only 24 months.

65% of the portfolio consists of variable or adjustable rate loans. That has increased from 61% a year ago and better positions us for rising rates when they come.

During the second quarter, we again slightly improved our positioning for a rising rate environment by decreasing DDAs -- I'm sorry, by increasing DDAs and reducing the percentage of money market accounts in our deposit mix. The effective duration of the investment portfolio is only 32 months. In an up 100 basis point interest rate shock modeling, our net interest income increases by 0.9%. Given that the prospectus for the rising rates becomes more and more indefinite, the key for us is to remain short on both sides of the balance sheet and maintain a relatively neutral interest rate risk position.

Noninterest income during the second quarter was $7.6 million, a 22% increase over the second quarter of 2015, and also an increase of 20% over the first quarter of 2016. The increase from the prior year and prior linked-quarter was attributable substantially to higher gains on sale of SBA loans, which were $1.1 million.

Gains on the sale of residential mortgages were down slightly to $2.9 million for the quarter. We continue to view SBA loans as an attractive business, but would always recognize that the revenue flows are lumpy and will vary from quarter to quarter due to the size and structure of the loans and the timing of sales.

Our capital position ratios are very strong as of June 30, 2016, due to the continued additions to retained earnings and our consistent profitability. The return on average assets and the return on average equity have remained in the 1.5% and 12.25% area, respectively.

The total risk-based capital ratio was 12.71% at June 30, 2016. That ratio was decreased from 13.75% a year ago, due to a large part to the redemption of the SBLF preferred stock in December of 2015.

The Common Equity Tier 1 ratio, which we report now under Basel III rules, was 10.74% as of June 30, 2016, as compared to 10.37% a year ago. Also improved is the Tangible Common Equity ratio, up to 10.88% due to the continued strong earnings. We expect the total risk-based capital ratio position of the Company to be improved as a result of the subordinated note offering launched last night.

We're very pleased by the results of the second quarter and encouraged by the continued strength of the economy in the Washington Metropolitan area. Despite our continued growth, we still have only 3% market share, which leaves us tremendous opportunity in this dynamic region.

We remain focused on the core values of our relationships-first strategy, the delivery of superior service, the access to senior management, and the commitment to the community that has led to the success of EagleBank.

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

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

Good morning. Great quarter. First, just wondering. Can we get a little color on the mortgage piece? I guess how much of the volume this quarter was purchased versus refi, and where the gain on sale margin come in versus last quarter?

Yes, Casey, the refi percentage of the loans closed in the second quarter was about 60%. We closed roughly $214 million worth of loans in the quarter, and the profitability gain is moving up.

We're between 1.25% and 1.5%, and it was around 1.15% or so for the first quarter. We have modified the mix, so we've added some real good expertise in FHA lending, and those particular loans generate better profitability, although there's more work effort. But that's a reason -- but that's the answer, I believe, to your question.

That is; thanks. Moving on to the margin, deposit costs continued to trickle up during the quarter. If we assume the Fed doesn't move rates, in that event do you think we see deposit costs continue to move up here for you guys, just due to competitive pressures?

Well, rates, as you know, have been very, very low. We're very focused on our cost of money and it's -- we're much lower than peers; that's part of why our margin is better.

But we're also needing to fund loan growth on a pretty aggressive basis, so we're out there looking at money cost all the time from different sources. I'd say our money market rate has stayed in that 30 to 35 basis point, 40 basis point area for a good while; and if things were to move up, that's a big part of our deposit base. We would do that.

But so far we've been able to manage that cost in that 35, 45 basis point area. But we're very focused on keeping the cost of the money as low as we can, but we also have to be sensitive to the loan-to-deposit ratios and the ability to continue to fund what is a very strong pipeline of loans.

Casey, if I could just add to that, there's been an additional emphasis within the relationship management group on our DDAs, which is why you see the DDA growth go back up to 31%. This is a major program that we're working on with regard to our centers of influence. So we believe that our DDA structure will continue to be a solid piece of our deposit composition.

Okay, great; helpful. And then maybe a little color just on where pricing was coming in during the quarter for new loans versus ones coming off.

Yes. It's interesting, because everything that we're all reading about with regard to the lending world -- we're actually seeing an opportunity in pushing up rates slightly within EagleBank. Our pipeline is very strong. The selectivity that we continue to maintain within our portfolio and the pipeline continues, and we are seeing the opportunity of being able to push rates slightly in the lending world.

That's more on the CRE side than it is on the C&I side.

What do you think is driving that?

I think a lot of it comes down to reputation. I think our ability and certainty of execution, and getting paid for that. Our ability to be able to do larger-size deals and not have to cut the rates dramatically as our -- again, that certainty of execution.

And the entrepreneurial side of understanding what the borrower is looking for in the structure of these deals is giving us some pricing power.

Okay. Then one final question and I'll let someone else jump on. Just about this subdebt issuance. What do you think the impact on the margin is going to be? Or should we assume these funds get immediately deployed to loans?

I think you should assume the latter, frankly, with our pipeline of loans. So if our average earning asset yield is running close to 5%, and we're -- pick up this subdebt, and the expectation is the rate is going to be around there, we shouldn't give up a lot. Even if we calculated a couple of percent, it's not a huge impact.

It's pretty minimal, Casey, is the answer specifically to your question.

All right, great. Thanks for taking my questions.

David Bishop, FIG Partners.

Hey, good morning. Circling back to Casey's question in regards to rate competition on the loan side, I know you said you're getting paid on some of the larger deals. Could you give a sense how close you are in terms of maybe broaching these relationships where it becomes more price-sensitive?

Is the market large enough to continue to support this growth within this relationship banking model within these types of borrowers or with the size of loans that are available within the market?

Dave, the answer is absolutely. Our pipeline today is as strong as it's ever been. We're not competing with the insurance companies, as an example, on pricing. We're certainly not competing with the larger banks, the national banks.

So when you're doing a larger-size deal -- and again, I'm talking about, let's just say in that $15 million, $20 million range -- the ability of us to be able to get the pricing because of that certainty of execution and our understanding of what the market is and how to structure the loan that's not going to jeopardize the credit quality but gives the borrower what they are looking for has really been something that we been able to really excel in over the years. And I strongly believe we'll be able to continue to do that.

Got it. Then maybe provide some color in terms of the growth this quarter, maybe the pipeline, how that's shaping up from a geographic and product type.

We're continuing to see the same geographic lending habits that we've seen for many years. A lot of growth in the DC market.

But again, remember that the frothiness that everybody talks about within DC is in a product that we're not really lending into, and that's the AAA office buildings or that's the 300-unit apartment project. We're still looking at those -- the boutique-type projects.

There's an awful lot of growth throughout the Washington area. You're actually seeing in a market for us the B-minus project that's getting renovated to become a B-plus project. Because that B-plus project is really where I think the market is going to continue to go more and more for these Millennials that want to live downtown.

And you can get significant -- the developer can get significant returns on their capital improvements within the project. So to put $30,000 into the renovation for a kitchen and bathrooms, you're getting significant returns on that, which is exactly why we're seeing a lot of the renovation of some of these apartment projects. Not everybody could afford the $4 a foot in rent; so they can afford $2.80, $3.25 a foot in rent, and they are willing to pay for it with a renovated unit.

Got it. Appreciate the color.

Austin Nicholas, Stephens.

Hey, everybody. Good morning. Just a quick question on the mortgage. What percentage of the gain on sale there was resi mortgage, SBA, and FHA? Just wondering what the breakdown of those was.

Austin, I don't actually have that detail with me. I'd be happy to follow up. I just -- most of our business is the conventional. We do a pretty fair amount of jumbo business, you can imagine, in this geographic area.

FHA is a more modest part. But my comment earlier about it increasing is something we've wanted to do and can do because we've got more expertise. But it's really the jumbo and this FHA business that are comprising the majority.

The average loan sizes continue to be like $440,000. So if that helps you with color -- but if you need specifics, give me a call and I'll be happy to get those to you.

Okay, yes. No, that's helpful. Then just on the CRE market, with larger banks that lend in New York and Florida saying that they're pulling back in CRE, are you seeing any pullback from maybe larger players in the DC market, even if it's not in areas that you play in? Are you seeing any sort of pullback in the market at all?

I wouldn't say pullback. I think there's a little bit more caution.

As I mentioned before, I think that the competition in the 300-unit larger-sized projects -- some of the larger lenders are requiring more equity. As a result of that, you have seen a reduction in permits that have been issued in the District over the past few months.

So I think that you are seeing significant absorption. I think the supply will start trending downward, and therefore I think you'll be able to get additional pricing opportunities.

But in answer to your question, the Washington market is so strong and the vacancy level is still very, very low, so I do believe that you're seeing the big banks and insurance companies and funds -- and now, candidly, with the flattening of the yield curve and the foreign currencies in jeopardy, you're seeing more foreign money coming into -- in the Washington market as well.

Okay, that's very, very helpful. Then just one last question on M&A. Has there been any change in your message there into the type of M&A on both a whole bank and then maybe non-bank fee income areas that you would look at?

No, the M&A philosophy still remains the same. Anything that we would look at would have to be a specific reason to do that, not just to expand within a region that we're already in.

And if it was, it would have to be accretive right away. So that philosophy has stayed consistent.

Okay, great. I think that's all my questions for now. Thanks.

Catherine Mealor, KBW.

Thanks. A follow-up on the M&A question. How do you think that the focus on CRE from the regulators will impact M&A both for you all and for maybe the DC market as a whole, given so many of the banks in DC are so heavily focused on commercial real estate?

That's a great question. I think that the regulators will certainly be drilling down deeper into approval on any M&A if both banks have that concentration of real estate. So I would say that that will be impactful going forward.

And, Ron, does it make you all less likely to look at M&A as an option?

No. Catherine, you really -- you hit the nail on the head when you say that so many banks within the Washington Metropolitan area have real estate concentration. So for us it's not about the acquisition; it's about why would you do the acquisition.

If it's accretive, it makes sense -- again, if you separate the regulatory approval process. You have something that would have to be accretive.

So our philosophy really is that we have great growth opportunities. We have a great franchise.

We think we're located exactly where we want to be. We're in a market that we know very, very well. And we're just going to continue to hit the same nail constantly like we've been doing for 18 years.

All right, great. Thanks for the color.

I'm not showing any more questions at this time. I'd now like to turn the call back over to our host.

I thank everybody for joining the call, and look forward to speaking to you again at the end of the third quarter, and hope everybody has a great summer.

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