Eagle Bancorp Inc (EGBN) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Eagle Bancorp third-quarter 2016 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. You may begin.

Thank you, Nicole. 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 FY15, 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 third quarter of 2016. We appreciate you calling in this morning and your continued interest in EagleBank.

As is our custom, in addition to Jim Langmead, also on the call with me this morning is our Chief Credit Officer, Jan Williams, and our Executive Vice President, Charles Levingston. Jim, Jan and Charles will all be available later in the call for questions.

As you might have seen in the 8-K we filed yesterday Jim Langmead has informed us that he intends to retire from full service on March 31, 2017. The Bank has significantly grown and prospered during the 11 years that Jim has been with us, and a large part of this success is due to the efforts by Jim and leading his team in our finance division. Jim, we truly appreciate your contributions and will be forever grateful.

He is not leaving us, though. Jim has agreed to continue to serve part time and continue to be part of our finance team going forward.

We are pleased to announce that effective April 1 of next year Charles Levingston will become our Chief Financial Officer. Succession planning is a key part of our management process and we have anticipated that Jim will want to step down and start winding down.

Charles has been a key part of our finance division since joining the Bank in 2012 and has a keen grasp of what it takes to oversee the financial operations of a $6.7 billion institution. His prior service includes tenure with the Federal Reserve Banks of Atlanta and Philadelphia and with PricewaterhouseCoopers. Like me, Charles will continue to benefit from Jim's experience and advice.

Now to the third quarter, for which I'm very pleased to announce was our 31st consecutive quarter of income growth and record earnings for EagleBank. Net income for the third quarter was $24.5 million, a 14% increase over the $21.5 million in earnings for the third quarter of 2015.

Net income available to common shareholders increased 15% as compared to the third quarter of 2015. Fully diluted net income per share was $0.72 for the quarter as compared to $0.63 per diluted share for the third quarter a year ago.

The earnings growth in the third quarter is the result of our continued, consistent, disciplined approach to core banking activities, combined with our continued attention to operating leverage and efficiency. We continue our focus on originating quality loans, generating core 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 top-line revenue driven by deposits and loan growth, solid credit quality, a superior efficiency ratio, an above-peer net interest margin and a strength in capital position. This collective performance has resulted in our consistent growth and profitability measures, the most important being earnings per share.

Return on average assets increased to 1.5% for the third quarter of 2016 from 1.47% in the third quarter of 2015. Return on average common equity was 12.04%, an increase over 11.95% for the third quarter of last year. It is important to note the increasing profitability reflected by the higher return on common equity, even as we continued to increase our equity levels with quarter after quarter of net income adding to the retained earnings position.

Furthermore, during the third quarter we improved our capital strength by the addition of tier 2 capital through the placement of $150 million of subordinated notes issued by the Holding Company. The offering of these notes was extremely well received by the markets, with the result that the notes were priced at 5% for the initial five-year fixed-rate portion of the 10-year term.

We believe this was the lowest interest rate achieved during 2016 for subordinated notes of this type by a bank holding company with a BBB rating. While we were already very well capitalized prior to the offering, we decided to upsize the placement to $150 million through the attractive pricing available and our Board's commitment to always maintaining a very strong capital position.

With the additional capital from the subordinated debt offering and the quarterly earnings our already strong capital ratios were further improved. At September 30, 2016 the total risk-based capital ratio was 15.05% as compared to 13.8% at September 30, 2015, and 12.71% at June 30, 2016. The tangible common equity ratio was 10.64% at September 30, 2016. The additional capital also served to lower our loan concentration ratios.

The net interest margin for the third quarter was 4.11%, which, while below the 4.23% of the third quarter of 2015, is still a very strong margin and well above industry and peer averages. We estimate that net interest margin for the third quarter was negatively impacted by 15 basis points due to the additional liquidity from the capital raise which occurred at the end of July.

The proceeds of the offering were invested at a negative spread in the short term but we fully expect the impact on the margin to be reduced as we redeploy the liquidity into higher-yielding loans. Adjusted for the 15 basis point impact, our margin for the third quarter of 2016 would have been 4.26% versus 4.23% in the third quarter of last year.

The liquidity during the quarter was also enhanced by the deposits of two new significant customer relationships. Our loan yields were stable in the third quarter at 5.08% versus 5.1% in the second quarter of 2016, while our cost of deposits was 36 basis points for the third quarter in 2016 versus 35 basis points for the second quarter.

We are seeing a positive trend in the market for loan rates. Over the last couple of months we have seen a noticeable improvement in pricing, particularly for high-quality CRE loans from existing customer relationships. And this should bode well for our yields going forward. We won't see the impact immediately but we will over time as the newer loans begin to fund up.

More than ever, we are committed to our disciplined pricing approach and to the philosophy that maintaining an appropriate margin and risk/reward equilibrium is much more important in the long run than loan volume and balance sheet growth.

The third quarter clearly shows the results of our continued focus on operating leverage and maintaining a favorable efficiency ratio. For the quarter, top-line revenue increased 9.1% over the third quarter of 2015, while noninterest expense was only up 5.2% over the like period a year ago. The efficiency ratio was 40.54% for the third quarter of 2016 as compared to 42.04% in the third quarter of 2015 and 50% in the third quarter of 2014.

Prudent expense management is a key piece of our strategy and we continually measure our expense levels against industry benchmarks. We pay particular attention to our occupancy and administrative expenses, while investing in high-quality personnel and the training and technology these employees need to deliver the high level of customer service that EagleBank is known for.

Total loans were $5.5 billion at September 30 and have increased $705 million, a 15% annual growth rate since September 30, 2015. Loan growth during the third quarter of 2016 was $78 million or 1.5%. New loan production during the quarter remained robust as commitments approaching $500 million were booked.

Payoffs during the quarter, particularly one loan of $32 million, as well as ordinary course of business construction loan curtailments and payoffs particularly, offset new loan production. As these recently committed loans fund up, the Bank expects continued growth in the loan book.

The pipeline remains strong. We continue to maintain our loan pricing discipline and our normal underwriting standards, which have been the cornerstones of our long-term success. As mentioned in the past, we strategically plan and track the level of our specific loan types, including C&I loans, CRE loans and ADC loans.

We know that CRE and ADC exposure continue to be an area for focus for the regulators, but also understand and firmly believe that the regulators' view of the 300% and 100% ratios as guidance and not a bright line that must not be crossed. At EagleBank, because we are an active CRE lender, we have for years been consistently adhering to all of the recommended practices, including disciplined underwriting, independent credit reviews, rigorous stress testing, enhanced monitoring of the entire loan portfolio, and detailed tracking and reporting at both management and the Board level.

Given the $150 million of tier 2 capital raised during the third quarter and the additional capital added each quarter through our consistent earnings, combined with our long-standing disciplined approach to lending policies, procedures and practices, we are very comfortable with our loan concentration ratios and our ability to generate quality loan volume in our market.

At this point, our loan pipeline is as strong as it has ever been and we continue to see loan opportunities from customers and prospects that value our responsiveness and certainty of execution. The Washington area economy is the fifth largest in the country and also has the fifth best growth rate. The region added 98,000 net new jobs in the 12 months ending July 30. We continue to see an influx of young workers and residents.

The Washington region has the third highest concentration of millennials of any metropolitan area in the country. The private sector continues to produce very strong job growth. And over the last six months we have seen the federal government start hiring again.

The strongest growth is occurring in higher-paying jobs in the professional service sector and in healthcare. We are seeing significant activity in the biotech sector of Montgomery County in Maryland and in the IT sector of Northern Virginia.

We carefully monitor activity across the region and continue to see healthy activity and demand in certain submarkets, industries and product types, with softness in others. The key to EagleBank's underwriting has always been that we study and understand the various submarkets within the greater Washington area, and we monitor and control our portfolio composition by product type and location.

We remain generally cautious concerning the suburban office market but look more favorably on a boutique multi-family project near metro station or other high-traffic urban centers in Washington DC. This has been consistent over the past 18 years. It is our knowledge of the individual submarket, our relationships with quality developers, and our certainty of execution which allow us to generate loan volume, and it is our disciplined underwriting which allows us to maintain the credit quality and profitability of our loan portfolio.

Deposit growth was strong during the third quarter as deposits increased $223 million or 4.2%. Deposits have grown 13% over the past 12 months since September 30, 2015. The deposit mix remains favorable as DDA deposits increased $37 million during the third quarter and represent 30% of total deposits at quarter end, consistent with historical levels. This high percentage of DDA deposits is the result of our continued commitment to relationship building with our commercial customers in which deposits, treasury management services, and ancillary products are integral to our relationships first approach.

We are also maintaining our disciplined approach to ALCO process and continue our strategy of maintaining a neutral position for rate sensitivity and avoiding taking excess interest rate risks over the long term. We monitor the duration of our loan portfolio, just as we do the securities portfolio.

The average duration of the loan portfolio on a pricing basis is only 23 months. Excluding loans held for sale, 66% of our portfolio is in variable or adjustable rate loans. The effective duration of the investment portfolio was less than three years at September 30, 2016. And the liquidity position was about $500 million at that date.

We continue our strong consistent performance, all credit quality indicators. At September 30, 2016, NPAs as a percentage of total assets was 41 basis points, unchanged from the 41 basis points a year ago, and as compared to 39 basis points at June 30, 2016. Non-performing loans were 41 basis points of total loans at the end of the third quarter. We continue to consistently evaluate the portfolio and take an aggressive approach to placing loans on nonaccrual status.

Net charge-offs for the third quarter of 2016 period were only 14 basis points on an annualized basis and just 13 basis points for 2016 year to date. The allowance for loan losses was 1.04% of total loans at the end of the third quarter. The provision expense for the third quarter was $2.3 million as dictated by the slower growth in the loan portfolio during the quarter, consistent application of our allowance methodology, the current economic climate, and are minimal charge-off history.

At September 30, 2016 our coverage ratio was 255%. We believe that we are adequately reserved and that our coverage ratio is in excess of averages for the industry and peer group banks.

Noninterest income for the third quarter was $6.4 million, a 5% increase over the third quarter of last year and a 15% decrease from the $7.6 million for the second quarter of 2016. The higher noninterest income was primarily driven by the increased gains on the sale of residential mortgages, which were $2.9 million for the quarter as compared to $2.4 million for the third quarter of last year. Our SBA loan business remains robust but, as we have mentioned before, the volume and closings is somewhat choppy from quarter to quarter.

We are very pleased with the third-quarter performance and with the continued growth and profitability. We are equally pleased by the response from the Washington metropolitan area to our relationships first approach to banking.

The recently released FDIC deposit market share statistics show that for the 12 months ending June 30, 2016 the market grew by 5.2% and EagleBank grew by 8.9%, and that we still hold the largest market share in deposits of any community bank headquartered in the Washington metropolitan area. It is critical to note that even with that position our market share is only 3.14%, so we still have a tremendous opportunity for growth in this strong dynamic region.

Thank you for joining the call this morning and for your continued support of EagleBank. That concludes my formal remarks and we would be pleased to take any questions at this time.

(Operator Instructions)

Casey Whitman of Sandler O'Neill.

Good morning. Great quarter. I just wondered, can you could give us some more color on the higher-level path you saw this quarter? What do you think drove that? And how much was expected?

Sure. Just to give you a little flavor on that, Casey, first quarter we had $135 million of payoffs, second quarter we had $105 million of payoffs, third quarter we had $220 million in payoffs. A lot of that was construction lending that was expected to happen.

It's just the normal ups and downs that we have. There's no anomaly in that third quarter. It's just the consistent running of the business. Again, a larger percentage of it was as a result of construction lending but as expected in the normal course of a construction project. Jim, anything you want to add to that?

No, I think that covers the detail. Payoffs in the third quarter were about half of the entire nine-month period. So it was a bit unusual but these are projects completing as scheduled, and I think that's a really good thing from a credit standpoint.

Okay, great. And then are you seeing there's any pullback in the market just from election uncertainty last quarter or now?

No, not really. As I think I might have mentioned in one of the previous earnings calls, we have a study that was done by one of the large firms in the area. And going back to the Roosevelt administration, job growth in the Washington area, regardless of Republican, Democrat, has increased since every presidential election. So, we haven't seen anything. There's typical discussions but no slowdown at all. Permits are still big, and normal course of business is pretty consistent.

Okay, great. Interesting. Thanks. And then your commentary, Ron, earlier on seeing improved pricing in high-quality CRE loans, what do you think has been driving that?

It's quite obvious to us that the large banks, which, as you know, has always been our biggest source of business, but the large banks have pretty much shut off the spigot on real estate lending. As we've discussed previously, typically we've seen that in the smaller-size loans but now we're seeing it in the larger-size loans, as well. It could be an anomaly.

We have the insurance companies that are getting more and more active in the market. But it really does come down to the consistent theme that we talk about, and that's relationship building. And we are constantly seeing the bigger developers that want to deal with people that they know are going to be here to discuss issues when they come up, if they come up.

So, the larger-size loans -- I literally went to see a project yesterday, it was a very significant project, and if we go ahead with the deal it's a 5% yield. And it's from a very substantial developer. But it's at a price that would have been 4.5% three months ago.

Great. Nice quarter. Thanks.

Thank you. Our next question comes from Catherine Mealor of KBW.

Thanks. Good morning, everyone. Do you have any sense yet, I know it's early in the quarter, but do you have any sense as to what level of paydowns you would be expecting this quarter? Do you expect it to go back down to that $105 million, $130 million level that we saw in the beginning half of the year?

Catherine, I think that's exactly right. I think that the average level of payoffs of around $100 million or so for the quarter is something you can think about on an ongoing basis.

And, Catherine, to further that, obviously over the past couple years we've done larger-size loans, so therefore the ebbs and flows of the impact that larger-size loans have is a difference. Obviously you will see that stabilize over the next X quarters as we continue to book these loans.

So, there's nothing that we know of. And we keep pretty tight reins on from an ALCO perspective, liquidity on payoffs. So, there's nothing that we see, again, that's out of the ordinary within our portfolio at all.

Great. And then, Ron, you mentioned that, I think you said in your prepared comments that there was an additional $500 million in commitments that were booked this quarter. And obviously that's not all going to fund at once.

But if you think about the payoffs coming down to a more normalized level and then the pipeline remains really strong, and growth stays level, do you think we are back to a double-digit growth rate next quarter and into next year? Or how should we think about a net growth rate for you moving forward? And does your higher capital make you feel like you've got enough capacity to increase that growth rate, more so than before you had that?

The growth rate that we anticipate is consistent with what we've been reporting in the past. Remember that the first quarter we had 3.2% loan growth, second quarter 4.8%, third quarter 1.5%. So, again, it's the ebbs and flows of a quarter. But we believe that the pipeline and the amount of $500 million that we funded in commitments, obviously that will get funded up over the next 12 months, but it just indicates just how robust the market is right now on high-quality well-priced loans.

Got it. And then maybe one other question on the expenses. You have kept expenses amazingly flat around $28 million despite some really nice revenue growth. Is there anything in the next couple of quarters, going into next year, that, just natural course of business, is going to push that growth rate a little bit higher?

And how should we think about the direction of -- I'm assuming expenses are going higher, I can't imagine it going lower from here -- maybe the efficiency ratio goes lower. But how do we think about the pace of growth we should expect on the expense base over the next few quarters?

Jim, you can jump in, but we have nothing in the pipeline as far as new branches. We don't have anything in the pipeline as to new forms of business. So, there's nothing that I can think of, Jim, unless you do, on anything out of the ordinary that would change from 2016 year to date.

Catherine, I think if you look at the different categories, the category that we've had the highest rate of growth has been in the salary and employee benefit area. We have been adding folks in the Bank here throughout 2016. Most of that did occur in the second and third quarters. The level of salary and employee benefits will go up a little bit. It's that human capital, is where we are adding resources.

But, as Ron mentioned on the premises and equipment area, that's going to be pretty flat. We've actually rationalized the branches, reduced the square footage of different offices.

And then on the other expenses, they have been relatively flat. We've really got our arms around OREO expenses that can move around from quarter to quarter, but they have been very low of late. And legal fees and professional fees and things of that nature have been really under good control.

For the fourth quarter we typically will finalize some incentive plans, we typically have more incentive accruals, a little bit more in the fourth quarter. But overall, As Ron said, I think our rate of growth of expenses, I think you can plan for them to be in the low to mid single digits. That's our expectation -- keep that efficiency ratio in very good order, recognizing that the NIM compression is something that everybody is dealing with in this low interest rate environment.

Great, thank you very much.

Joe Gladue of Merion Capital Management.

Good morning. Actually, I'd just like to follow-up on that expense question a little bit. You did mention, you talked about the growth in salary and benefits in the quarter and said you're adding some staff. Just wondering, where are you adding staff?

Joe, we are adding it both on the offense and the defense. There have been some additions in the loan areas, relationship managers, portfolio managers, of that nature. But we're also adding it -- credit area has been one. Our human resources area, our risk management area, is others.

So, we are pretty balanced in the way in which we have been adding people into the organization. But it's both sides of the equation, the offense and the defense.

Also wondering, last quarter you talked a little bit about the gain on sale margins you are getting on loan sales, and indicated that you were seeing some higher margins recently. I was just wondering if those margins are holding up at the levels of previous quarters?

They are. And for the third quarter of the year the gross marketing gain was around 215 basis points. We're pretty happy with that. That's before the commission expense. But that is a higher number than it was in the third quarter a year ago.

The mix of business toward more FHA business away from jumbo business has helped that profit margin. So, they are executing very well on the residential real estate area. And that gross margin has been moving up, Joe, and third quarter we had good results.

All right. I think that's it for me. Thanks.

Austin Nicholas with Stephens Inc.

Hey, guys, good morning. Just a couple questions here. Most of them were already answered. Maybe just taking a step back, looking at some of the disruption that happened in the market over the last couple months in terms of acquisitions, do you see any ability to add high-quality lenders from those institutions, or any disruption that brings business your way? Have you seen any movement there?

Yes. In the acquisition world, most of the banks put the key people under some type of an employment contract for a period of time. So, we see that there might be opportunities as time goes on.

But the bigger opportunity is really on the customer side. The uncertainties in mergers always lead to some nervousness within the customer base, especially in today's economic environment. So, we have seen an increase in customer opportunities, many of which we know, many of which we've been looking to expand the relationship with. So, we do see the opportunity immediately on the customer side and hopefully, as time goes on, on the employment side.

Got you. That's helpful. Thank you. And maybe just my other question, just on deposit cost, are you seeing any increased competition for deposits in your market compared to, let's say, six months ago? And then a number of other banks I have spoken to have seen or anticipating to see some increased deposit costs related to the LIBOR move. Are you seeing anything on either of those fronts in terms of deposit cost?

Austin, yes, we are seeing a little bit. I think Ron mentioned in his remarks that our cost of deposits was up by 1 basis point in the quarter. If you go back to the first quarter or, call it, the fourth quarter of last year, we went from 29 basis point cost to 32 to 35 to 36. So, we are seeing some increase in that area.

And, as you correctly note, the changes in the LIBOR market related to the regulatory change, is primarily due to the regulatory changes on the corporate area with commercial paper and such on the SEC changes in that market, are having an impact. And some of our cost of funds are based on LIBOR.

As you point out, one- and three-month LIBOR have moved up more than the Fed fund effective rate, and that is having some impact because we do have some cost of money that is based on LIBOR. But overall that's all in our asset liability modeling and mix. We think our cost of funds continues to be very attractive relative to the competition, particularly with, given the growth rates that we have been able to achieve, and in the third quarter in particular the growth we had in our deposits was very strong. So, happy with our result but the direction in the cost of money is up a little bit.

Okay, great. I appreciate the color there, guys. I'll hop off for anyone else. Thanks.

Dave Bishop of FIG Partners.

Good morning, gentlemen. How are you? A quick question. I think, Ron, you noted some of the deposit growth was bolstered by a couple new larger relationships. I don't know if you can provide any color on that in terms of what maybe you saw, maybe what segments of the market those came from?

Just core C&I, some municipality business that we are picking up. Going back to one of the earlier questions, I think that as a result of some of the recent acquisitions, we have some customers that are looking to get on board with Eagle that might have been with some of the previous banks that are now part of the larger bank. So, it's really across the board. But the two that I mentioned were just core C&I relationships that we've been working on for a period of time.

Got it. And then I saw the headline news coming out with the Marriott staying local there. Just curious, maybe give us an update how you think -- obviously I think that's a positive for the local market here -- but maybe what you are seeing on a broader prospective in and around your core headquarters there in Montgomery County, any sort of update in terms of economic activity intra quarter?

We are telling all of our team at EagleBank that work in Bethesda to leave their house 10 minutes earlier once the construction starts in Bethesda with Marriott. But we are glad that Marriott is certainly staying within our area.

We continue to see growth. As we mentioned, biotech as an example, the continued growth in health services, the Johns Hopkins, the National Cancer Institute. The NIH just continues to expand and that's literally two miles from where we are. Montgomery County is doing a major push on the tech side. So, we are very bullish on the net job growth that we believe will continue within the marketplace.

Got it. Thank you for the color.

I'm showing no further questions at this time. I'd like to turn the call over to Ron Paul for any closing remarks.

Thank you all for attending and listening to the call. I wish you all a happy and healthy new year since the next call we will have is in January. And, just as important, again, to Jim, I thank you for all your efforts that you've given EagleBank over the past 11 years. And, Charles, needless to say, looking forward to continue to work with you in expanding EagleBank, as we have over the past 18 years. So, thank you very much for everybody listening to the call.

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