Eagle Bancorp Inc (EGBN) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Eagle Bancorp First Quarter 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Charles Levingston, Chief Financial Officer.

Sir, you may begin.

Thank you, Terrence.

Good morning.

This is Charles Levingston, Chief Financial Officer of Eagle Bancorp.

Before we begin the presentation, I would like to remind everyone that some of the comments made during this call may be considered forward-looking statements.

Our Form 10-K for the 2016 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 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 CEO of Eagle Bancorp.

Thank you, Charles, and thanks for your first kickoff of our earnings call in your new role as CFO.

Welcome to all of you on the line for the discussion of our results in the first quarter of 2017.

We appreciate you joining us this morning and your continued interest.

Our Chief Credit Officer, Jan Williams is also on the line with us, and she, Charles and I will be glad to answer any questions later in the call.

We are very pleased to announce that earnings for the first quarter were $27 million, a 16% increase from the $23.2 million for the third quarter of -- for the 3 quarters ending March 31, 2016, and a 5% increase over the net earnings in the fourth quarter of 2016, up $25.7 million.

These earnings included a $589,000 benefit or $0.02 per share for the accounting change related to the share-based compensation transactions mentioned in last night's press release.

Excluding this benefit from the new accounting guidance, net income was $26.5 million and earnings per diluted share were $0.77 for the first quarter of 2017, increased from $0.68 a year ago and $0.75 for the first quarter of 2016.

We are very proud to continue our record of consistent growth in earnings with this being our 33rd consecutive quarter of record net income.

We are pleased, not only by the growth in net income, but with the quality of our earnings and the high level of profitability which is reflected in our return on average assets of 1.62% during the first quarter, which is an increase from 1.54% in the first quarter of 2016.

This is the highest ROAA we have ever achieved.

The return on average common equity was 12.74% for the first quarter, improved from 12.39% a year ago.

The highlights of our performance in the first quarter and the key drivers of the increased profitability were very favorable net interest margin, excellent credit quality with low levels of charge-offs and a continued focus on maintaining operating leverage, resulting in a favorable efficiency ratio.

Loan and deposit growth which generally are seasonally lower in the first quarter, exhibited respectable increases for the period, and I'm pleased to report that as of March 31, total assets exceeded $7 billion.

Revenue for the first quarter was driven by growth in net interest income, which represented a 7% increase over the first quarter of 2016 and was consistent with the fourth quarter of 2016.

The higher net interest income was derived from the growth in the loan portfolio, higher average loan yields and balance sheet management in accordance with our disciplined ALCO process.

Total revenue increased 6% over the same quarter of 2016.

We achieved the strong net interest margin of 4.14% for the first quarter of 2017.

As was anticipated, due to continuing low interest rates, the margin was lower than the 4.31% reported in the first quarter a year ago, however, we are pleased that the margin was improved from 3.96% in the fourth quarter of last year.

The improvement in the margin as compared to the fourth quarter of 2016 was due to 2 factors: First, we have higher loan level in our mix of earned assets as we managed down the high levels of liquidity that we had carried in the third and fourth quarters of last year.

More importantly, we continued to see a trend of improving loan yields.

We still feel that we have better pricing power for medium- and larger-sized loans than we did at this time last year, while we are maintaining our credit discipline.

The average yield on loan portfolio was 5.13% for the first quarter of 2017.

While this yield is the same as the first quarter of 2016, it is up from 5.08% and 5.11% respectively, in the third and fourth quarters of 2016.

Our earnings for the first quarter also benefited from our focus on maintaining strong operating leverage.

Total revenue for the first quarter of 2017 increased 6% over the same period in 2016.

Noninterest expense for the quarter was $29.2 million, which was up only 4% as compared to the first quarter of 2016, and down from 2% from the fourth quarter of 2016.

In total, noninterest income was down 3% in the first quarter of 2017 as compared to the first quarter of 2016.

However, this decline was primarily due to a nonrecurring gain on OREO which reported -- which we reported in the first quarter of 2016.

On a recurring basis, noninterest income was up 10% in the first quarter of 2017 over '16 due primarily to increased gain on the sale of residential mortgages, which were $2 million for the first quarter of 2017, up from $1.2 million 1 year ago.

Our FHA group is continuing to work through the approval process with Ginnie Mae and we are still expecting significant fee income from this business line later in 2017.

The efficiency ratio improved to 40.06% for the fourth quarter as compared to 40.80% a year ago and 40.22% in the fourth quarter of 2016.

At $29.2 million, noninterest expenses for the first quarter of '17 were down 2% from the level of fourth quarter of '16.

During the first quarter of 2017 versus '16, we benefited from our continued focus on expense management and its impact on operating leverage.

We are seeing the benefit of the relocations within our branching system completed last year.

Our average deposits per branch are now up $257 million as compared to the average for the Washington Metropolitan area of $112 million.

At the same time, we are prudently adding staff in our lending units in the heart of the house operations and systems departments.

So while we continue to maintain the sound infrastructure needed to ensure quality of operations, meet all compliance requirements and provide superior customer service, we also consistently realize the opportunities for improving operating leverage and feel we can maintain the efficiency ratio in the range achieved over the last several quarters.

At March 31, 2017, the loan portfolio had increased 13% over the balance at March 31, 2016.

We achieved net loan growth during the fourth -- first quarter of 2017 of $147 million or about 2.6%, despite approximately $125 million of payoffs in the last week of December and first week in January and the fundings of new loans late in the first quarter.

Our loan pipeline continues at a very good level and we continue to see loan demand throughout the Washington Metropolitan region.

Deposit balances at March 31, 2017, had grown $600 million or 12% since March 31, 2016.

For the first quarter, deposits increased $73 million or 1.3% over December 31, 2016, as we reduced an excess liquidity position.

Our average overnight liquidity was up $275 million in the first quarter of 2017 as compared to $602 million in the fourth quarter of 2016.

The change in the asset liability mix contributed the improved net interest margin during the first quarter.

At March 31, 2017, core deposits, which excludes CDs, were 86% of total deposits, and DDA deposits were still 32% of total deposits, which is consistent with our business model and long-term strategy.

We continue to strengthen and grow our core customer relationships through cross sales of additional deposit products, treasury management and other related services.

Continuing the favorable mix of noninterest-bearing deposits as we have grown has been a key component of our strong NIM.

We continue our disciplined approach to pricing of both loans and deposits.

We remain committed to maintaining a strong NIM and see no value in growing the balance sheet just for the sake of growth.

Our primary focus will always be on growth in EPS.

We have limited interest rate risk in a rising rate environment due to our relatively neutral position for asset and liability sensitivity.

We maintain a short duration of loans, investments and deposits.

The repricing duration of the loan portfolio is only 22 months, and the investment portfolio, 40 months.

Variable and adjustable rate loans comprise 67% of the portfolio.

We already pierced the floor rates of about 42% of the loans with floors and should burn through another 18% of the loans with floors with the next 25 basis point increase in rates should that day come.

We continue to see an active economy and strong loan demand in the Washington Metropolitan area.

The region has produced growth of 56,000 net new jobs in the last year and most are in the higher-income, white-collar sectors.

The most significant job growth over the last year has been in business services, healthcare and education.

We continue to monitor the potential impact of activities of the administration, but it's important to note that the federal government spending makes up 30% of our $491 billion regional economy.

That level is expected to continue to decrease on a relative basis due primarily to growth in the private sector, not cutbacks at the federal level.

While there is healthy loan demand, the market is very competitive and we still continue our careful underwriting of loans by industry, location and project type.

We still see the possibility for oversupply of certain product types in certain submarkets.

The demand for residential space is still strong in multiple markets in Washington, D.C. proper.

The key to our success over the years is our knowledge of the individual submarkets throughout the Washington Metropolitan area.

Another absolute highlight of the first quarter of 2017 was our credit quality and favorable charge-off experience.

Net charge-offs annualized were a mere 4 basis points of average loans for the quarter as compared to 9 basis points of average loans for the first quarter of 2016.

At 4 basis points, the level of charge-offs were among the best levels the bank has ever achieved and were below our annual average of 9 basis points for 2016 and industry and peer group averages.

At March 31, NPAs as a percentage of total assets, were also at a low level of 22 basis points as compared to 42 basis points a year ago and 30 basis points at December 31, 2016.

Nonperforming loans as a percentage of total loans were 25 basis points as compared to 43 basis points at March 31, 2015 and 31 basis points at March 31, 2015.

The absolute level of NPAs was reduced by $4.9 million in the first quarter of 2017 to $15.7 million.

We continue to adhere to our conservative policy as to when to place a loan on nonperforming status.

The allowance for loan losses was 1.03% at the end of the quarter.

Our credit quality remains solid as we continue to reduce the levels of charge-offs and classified loans, while increasing the size of the portfolio through new loan growth.

Consistent application of our reserve methodology, reduced charge-offs, lower levels of classified loans and low growth results in a modestly lower allowance for total loans.

We continue to add to the allowance at a rate far in excess of charge-offs.

At March 31, 2017, the coverage ratio was 417% of nonperforming loans as compared to 249% at March 31, 2016, and 330% at December 31, 2016.

At these levels, we believe the bank is adequately reserved.

On another positive note, I'd also like to mention that due to favorable adjustments in the apportionment of revenue at the state level, we saw a reduction in the effective tax rate by approximately 1% during the first quarter of 2017.

This reduction is not related to the new accounting rule on share-based transactions, but rather the changing mix of our revenue between Maryland, the District of Columbia, and Virginia, which has a lower tax rate.

Through our high levels of profitability and continued additions to retained earnings quarter after quarter, we sustain our strong capital ratios.

During the first quarter of 2017, we again accreted capital at a higher percentage rate than the growth of the balance sheet, thus improving our capital ratios.

At March 31, 2017, the total risk-based capital ratio was 14.97%, increased from 14.89% at December 31, 2016 and 12.87% in March 31, 2016.

The tangible common equity ratio improved from 10.86% a year ago to 10.97% at March 31, 2017, and as compared to 10.84% at December 31, 2016.

The Tier 1 leverage ratio, which seems to be getting more and more attention from the regulatory agencies, also improved from 11.01% at March 31, '16 and 10.72% at March -- at December 31, 2016, to 11.51% at March 31, 2017.

We are very excited about the opportunities we see for the balance of 2017 as we strive to solidify our position as a leading community bank headquartered in the Washington Metropolitan area.

We are focusing on increasing our visibility in the area and our understanding of the local business community.

In that regard, I would like to acknowledge 2 recent additions to the Board of EagleBank.

Both Lynn Hackney and Leslie Ludwig have tremendous experience and a wealth of knowledge in the Washington Metropolitan area.

We are thrilled that they have chosen to join the EagleBank team.

We appreciate the support of our shareholders and those of you on the call.

We thank you all for your interest in EagleBank.

I'd like to remind you that our annual shareholders' meeting will be held at 10 AM on March 8 -- on May 18 at the Bethesda Marriott Hotel.

We hope to see many of you at the meeting.

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

(Operator Instructions) And our first question comes from Andrew Taylor from KBW.

So first question, just on the margin.

Obviously, deploying the excess liquidity helped drive some of the expansion and offset the higher deposit cost.

As we move forward into this year, just directionally, do you think we could see some pressure to the margin given you just have less of a lever with excess liquidity?

Or do you think that the better loan pricing that you're getting will be enough to offset the higher funding costs?

It's a great question, Drew, and it's the balance that we keep playing with, is that obviously, we're balancing our liquidity position, we want to stay about that 100% loan-to-deposit ratio.

Liability costs clearly are going up, but offset by that -- and I can't say it's going to be dollar for dollar, but offset with that, we certainly see the pricing power that we're having on the loan side.

As we always talk about, we never know who in the market all of a sudden going to wake up one day and decide to boost liabilities.

But right now, we feel pretty comfortable on a stable -- fairly stable liquidity pricing model and our ongoing ability of seeing the pricing.

Obviously, a lot of our loan pricing yields that we've been able to get over the past 6 months, we're just starting to begin to see that in the funding side, both on the construction lending side and on the loans and process that we have in underwriting.

Okay, great.

That's helpful.

Maybe switching to -- over to fee income.

Obviously, you mentioned the FHA business, and you also articulated your target of growing fees to around 10% of operating revenues over the course of the year.

Clearly, the FHA business is the lever for you, and I don't know if you touched on it on your prepared remarks.

Any additional color on where you guys are in the approval process?

Also maybe just talking about production volumes currently and how quickly that will be added over time?

We have a great pipeline in the FHA side.

The team is working diligently on the approvals on the Ginnie Mae side.

We seem to have gone through and completed all of the process and procedures that they've asked us for, so it's really in their hands right now.

And I don't want to say any day because I've said that before, but we certainly believe that is -- it is imminent.

We haven't gotten any kickback from them, answered all their questions.

They've come in and done their scrubbing, and it's just a matter now of time.

Fortunately, we do have a buildup of the pipeline and the ability of closing these FHA deals once we get the Ginnie approval.

Great.

That's helpful.

Yes, Drew, the other thing, just to answer on that, is that obviously, from a funding perspective, you'll have loans that'll come off the books on the loan side once we fund it into the Ginnie side.

So there's a balance between those as well.

And our next question comes from Casey Whitman from Sandler O'Neill.

Just want to follow on for the fee income question.

Wondering how is the pipeline for SBA lending?

What's your outlook for that group this year?

We had a fairly weak first quarter on SBA, but the pipeline is still there.

Unfortunately, SBA is just such a choppy product.

But -- and therefore, you're always vulnerable to the premiums that are associated with SBA.

But we feel pretty good on what we have, especially on the construction side of the SBA product.

Okay, got it.

But again, Casey, again, the same comment, in that 10%, 11% on average on the noninterest income.

Okay, got it.

And then some -- just some questions on the tax rate.

Can you walk us through just how you're thinking about it?

How recurring the tax change is?

Is it something that's going to predominantly happen in the first quarter of every year, because that's when, I guess, equity compensation's paid out?

Or do you think you'll get this lower tax rate throughout the year?

Yes, I think that's right, Casey.

Our -- we're not issuing options as a practice much anymore, just the restricted stock awards, and those are on -- those are issued typically in the first quarter on a vesting schedule -- on the annual vesting schedule, where you'll see annually that difference between the book value and the fair market value booked as a tax expense, and therefore taken as a deduction on those taxes.

So yes, I think that's right.

It's likely you'll see that as a first quarter event.

Okay.

So all else equal, just with the state apportionment taxes you alluded to earlier, if you were running it, call it 38.5% tax rate prior to this quarter for the next 3 quarters, you'll be running closer to 37.5%, call it?

Yes.

I'd say those effective tax rates can move a little.

I'd say -- I think that, that tax apportionment will -- is an ongoing benefit to us.

Between the 37.5%, 38.5% range is likely where you'll see that tax rate going forward, all things equal.

And our next question comes from David Bishop from FIG Partners.

Just curious what the -- I don't know if you have -- in terms of the average loan yields, how does that sort of trend over the course of the quarter, maybe in the beginning of the quarter, January versus March?

Was there much of a change in terms of yields within the commercial and commercial real estate markets?

For the first time, David, we are seeing that opportunity of getting the pricing power that we've been working on for the past 6 months.

So obviously, the payoffs are going to be at one rate, but the higher rate on the new fundings.

So that's something that we think -- we've talked about before and we're seeing more and more at loan committee in terms of the borrower willing to pay up for the benefit of Eagle on the certainty of execution and all the reasons that we've been able to maintain the asset side that we have over the years.

So we see that continuing and we haven't gotten really any pushback from where we think is the appropriate rate.

Got it.

And maybe on the opposite side of the ledger, on the deposit side, we have seen some pressure there.

Is that more just a function of what's happening in the market, or is that just a need to sort of fund that expected loan growth that you're seeing?

Well, a lot of it is just funding the expected loan growth.

When you're growing 12% loan growth and need big chunks of deposits, you're dealing with different type of depositors then.

So the municipalities, as an example, the larger more sophisticated type of borrower -- sorry, depositor, is something that is sensitive to what the market is and what they can get elsewhere.

So that's certainly something that we are fighting.

Although I will say that, certainly, over the past couple of weeks, you've seen a stabilization of that requirement and the opportunity.

But our main focus is still the DDAs.

In the core side, we have a new team that we've put in place over the past 6 months, commercial deposits, operation people that are just really focusing more and more going back to our customers to be able to increase deposit growth.

So we believe that the liability side, hopefully, will stabilize.

And our next question comes from Austin Nicholas from Stephens.

You talked about the FHA approval on the Ginnie Mae.

Is there any impact from the new administration or changes in those government entities that could be slowing things down a bit?

Or is it more just a natural ongoing kind of bumpiness in those businesses?

I think that the FHA Ginnie process is pretty down on the totem pole right now.

I don't think so.

I think if anything, that could be an encouragement of getting this program funded because I think they need to see that the opportunities in getting that into the market.

So the answer is, no.

And this is just unfortunately the bureaucratic process that we're going through that I can only tell you is extremely painful.

But genuinely believe that in a relatively short period of time, that this will get funded, and it will be a great opportunity for us on the noninterest income side.

Got you.

That's helpful.

And then maybe just looking at the D.C. market, you noted oversupply of certain products in certain submarkets and Eagle's ability to kind of target the markets that are more attractive.

And given your footprint and deep penetration down in the kind of central D.C. area, where are those areas that you think there may be oversupply?

And where are you seeing more opportunities versus others?

I'll tell you, I think we're an incredibly awesome place at the bank because we could satisfy the larger borrower but never losing sight off the smaller borrower.

And our ability, and I mentioned earlier, the certainty of execution, is such a key part to this market because we're dealing with one-off type deals.

We're not the ones that you're going to look to borrow to be on the front page off the glossy Annual Report.

So the, I'll say, the Class A apartment buildings that are down by the ballpark right now are not typically the deals that we're looking at.

The B+, maybe to B- type of projects are still our sweet spot, and that's where we're seeing constant demand both on the multifamily side and even a little pick up on the office side.

We were never big on the suburban office market, in the suburbs, but there has been a little bit of a pickup in activity on the leasing side, again, that 3,000, 5,000-foot-type user.

So we're seeing that.

We're also seeing a big increase in our C&I side.

We're probably working on more C&I loan requests that we've seen in a long time with some of the pricing power that we've talked about.

Not nearly, the pricing power that we have on the real estate side.

So submarkets, I would say, certainly, Western Virginia.

And when I say Western, I'm talking about Loudoun County market, is there's an abundance of product out there.

We're really not there.

But if you look at downtown, the millennial growth downtown is just a game-changer, and we've been able to capitalize on that over the past couple of years.

So on the B+, we're seeing a little bit of a slowdown in the ability to push rents.

On the A product, again, I could just, from a real estate background, on the A product, you're seeing a flattening of rents.

There's a tremendous amount of units coming up on the market over the next 18 months.

But again, in a world that we're playing in on that B-type product, there's an enormous demand.

Also remember, that B-type product is an older type product that they're renovating the building.

They're larger-sized units, so you have roommates, which is an opportunity to be able to offset the increase in the pricing.

So the $4-a-foot rental rate, you can have a roommate that's going to help subsidize that.

So we feel pretty good in the space that we play in.

Got you.

That was really helpful, appreciate it.

I think that's all I've got.

And at this time, I am showing no further questions.

Well, thank you, all, again for listening to the call and we appreciate it.

And we're looking forward to speaking with you at the end of next quarter.

Thank you very much.

Ladies and gentlemen, thank you for participation in today's conference.

This concludes the program.

You may now disconnect.

Everyone, have a great day.