Eagle Bancorp Inc (EGBN) 2017 Q2 法說會逐字稿

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

(Operator Instructions) I would now like to introduce your host for today's conference, Mr. Charles Levingston, Chief Financial Officer.

Sir, you may begin.

Thank you, Bruce.

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.

I'd like to welcome all of you to our earnings call for the second quarter of 2017.

As usual, in addition to Charles, our Chief Credit Officer, Jan Williams, is also on the line with us this morning.

Charles and Jan will both be available later in the call for questions.

We are very pleased to announce that our second quarter earnings were $27.8 million, which is another record level of quarterly net income and represents a 15% increase over our earnings for the second quarter of 2016 and a 3% increase over our earnings for the first quarter of 2017.

Fully diluted earnings per share were $0.81 for the current quarter, representing a 14% increase from $0.71 in the second quarter of 2016.

We are proud to announce that due to our disciplined and consistent management approach, this is the 34th consecutive quarter of record increase in earnings, dating back to the first quarter of 2009.

In the most recent quarter, we continued to demonstrate balanced, strong performance across all key measurement indicators.

We expanded top line revenue over both the same quarter in 2016 by 7% and on a linked-quarter basis, by 5%, driven partly by net interest margin of 4.16%, which increased 2 basis points on a linked-quarter, based by loan growth of 2.8% in the second quarter.

Noninterest income was also very favorable for the second quarter as we achieved a 16% increase over the first quarter of 2017.

Additionally, we realized growth in deposits, continued excellent asset quality and through disciplined expense control, a very favorable efficiency ratio of 39.1%.

We continue to monitor and adjust all the dials that are required to consistently produce these balanced strong results.

As we have said many times at EagleBank, we are more focused on earnings and earnings per share than on the size of growth of the balance sheet.

The earnings for the second quarter demonstrate our ongoing commitment to growing revenue and further improving operating leverage.

Top line revenue increased 7% in the second quarter over the same quarter in 2016.

The revenue growth was driven primarily by increasing net interest income on a linked-quarter basis was also due to enhanced noninterest income.

The improvement in noninterest income over the first quarter of 2017 was due in part to initial contributions of revenue from our FHA Multifamily Division, which originates and securitizes qualified loans with a Ginnie Mae guarantee and sells the assets into the market.

Eagle is one of only 13 banks in the U.S. that has achieved the necessary qualifications to operate this type of business unit.

While the development of our FHA Division program took longer and was therefore more expensive to become operational, we are pleased to have begun closing and securitizing loans and are excited about the pipeline at this point.

Since our revenue growth has exceeded growth in our noninterest expense, we are especially pleased to report continued gain in our operating leverage.

The efficiency ratio of 39.1% in the second quarter of 2017 compares to 39.63% in the second quarter of 2016 and 40.06% for the first quarter of 2017.

As noted earlier, our top line revenue for the second quarter increased 5% on a linked-quarter basis, while noninterest expense increased just 3%.

This continuing attention to controlling all of our noninterest expenses as well as increasing revenue has been a key factor in achieving strong bottom line performance.

The net interest margin continued to be very strong at 4.16% for the second quarter.

As expected, we saw slight compression from 4.30% in the second quarter of 2016, but showed improvement in the third and fourth quarters of 2016 and the margin of 4.14% in the first quarter of 2017.

We're very pleased to post an average loan yield of 5.14% for the second quarter, an increase from both the second quarter of 2016 and the first quarter of 2017.

Most importantly, the strong loan portfolio yield resulted from a combination of increases in short-term rates driven by the Federal Reserve and the related impact on our portfolio loans, of which 68% bear variable rates.

We also saw the benefit of the increased pricing power on larger-sized loans that we have been achieving in our market over the last several quarters.

The benefit of this pricing power is gradually impacting yields in the portfolio as loans fund up over time.

With a significant portion of loans tied to LIBOR and prime, we should see continuing increases in yield should market rates continue to rise.

On the other hand, our average cost of funds increased by 3 basis points during the second quarter and research has indicated that the Washington area has amongst the highest deposit rates in the nation.

The intensely competitive market suggests that we will continue to see pressure on the margin as we go forward.

Our total loans outstanding was $60 -- was $6 billion at June 30, 2017, an 11% increase over June 30, 2016.

Loan growth during the second quarter was $161 million or 2.8% increase over the first quarter of 2017.

Loan origination was very good during the quarter, but we also saw a larger amount of payoffs during the quarter as projects we are financing continued to perform successfully.

Our loans were paid off as expected either through sales or our loans on stabilized projects are refinanced by appropriate long-term funding sources.

These are not early payoffs but the result of successful completion of construction and development projects.

We continue to see strong activity and demand over the Washington Metropolitan area, and our loan pipeline remains robust.

Over the last 6 to 9 months, we have experienced better pricing power on CRE loans, but on the other hand are facing irrational rate competition for C&I loans.

Even though we have this pricing power and see many loan opportunities in the market at this point, we remain committed to our long-term strategy that it's much more important to [main] credit quality and strong margin than to achieve a particular rate of growth in the loan portfolio and balance sheet.

We are taking a cautious approach to both C&I and CRE loans, are selective in new loan origination and convinced that moderate growth of a quality loan portfolio is our best approach at this point in the economic cycle.

We are maintaining our disciplined underwriting practices, including use of loan-to-cost ratios, personal guarantees, completion guarantees, identifying multiple sources of repayment, requirement of additional collateral, capital and equity.

Period-end to period-end deposit growth was modest at $79 million or about 1.4% during the second quarter, with total deposits reaching $5.9 billion, while the annual deposit growth rate was 10% over June 30, 2016.

While quarter-to-quarter deposit growth varies, we targeted annual growth rate in the low double digits.

We -- the loan-to-deposit ratio was 102% [at the] June 30, 2017, as we continued to moderate the liquidity levels carried during the last quarter of 2016.

DDA deposits increased $20 million during the quarter and account for 31.5% of total deposits at June 30, 2017, and averaged over 32% for the second quarter.

This high level of DDA deposits is driven by our commercial orientation and certainly mitigates potential increases in the overall cost of funds if rates continue to increase.

A significant portion of these deposits are compensating balances, which are required by our loan agreements.

We continue our disciplined ALCO strategy and carefully weigh the cost of alternative sources of funding, including core money market accounts, time deposits, FHLB advances and wholesale deposits.

During the second quarter, we did use some FHLB advances.

This has enhanced our asset liability mix and had a favorable impact on the NIM.

In our decision process, we are mindful of the regulator's definitions and their views towards the classification of wholesale deposits.

We continue to emphasize growth in core deposits, focusing on strengthening existing relationships and developing new relationships through centers of influence in our community.

At June 30, 2017, NPAs as a percentage of total assets decreased to 26 basis points as compared to 39 basis points at June 30, 2016, and 22 basis points at March 31, 2017.

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 increased minimally by $2.8 million in the second quarter to $18.5 million and compared to $24.5 million at June 30, 2016.

The bank is consistently taking an aggressive approach to reviewing individual loans for impairment and accrual status.

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 a hallmark of EagleBank.

The allowance for loan loss was 1.02% of total loans at the end of the quarter, which is driven by the consistent high quality of the loan portfolio and by the loan growth in the second quarter together with consistent application of our allowance methodology.

Annual net charge-offs for the second quarter were 2 basis points of average loans as compared to 15 basis points in the second quarter of 2016 and are well below the range in our average charge-off loan experience over the last several years.

At June 30, 2017, the coverage ratio of reserves to nonperforming loans was 356%, and we believe that we are adequately reserved.

As mentioned earlier, for the second quarter of 2017, the efficiency ratio improved to a very favorable 39.1%.

We continue our prudent management of expenses and are continually seeking ways to improve productivity through the use of technology and process improvements without sacrificing responsiveness and customer service.

We continue to monitor our branch network and related occupancy expense and are currently evaluating future further branch consolidation.

At the same time, recent M&A activity in the Washington Metro area has created the opportunity to attract customers and selectively recruit experienced bankers from the acquired banks.

So far, we have had more success on the balance -- on the business development side, but we'll see more hires as pay-to-stay contracts expire.

We feel we can become more efficient based on the strength and capacity of our current infrastructure.

Through our ALCO policies and practices, we maintain a very moderate level of interest rate risk.

Over the past year, we've 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 36 months based on maturities, the pricing duration is only 21 months.

68% of the loan portfolio consists of variable or adjustable rate loans.

That has increased from 65% a year ago.

The effective duration of the investment portfolio is only 38 months.

Given that the prospects for rising interest rates become more and more uncertain with a bias towards the upside, 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 million, a 9% increase from the second -- a 9% decrease, excuse me, from the second quarter of 2016, but an increase of 16% over the first quarter of 2017.

The decrease from the prior year was attributable to substantially higher gains on sale of SBA loans and residential mortgage loans in the second quarter of 2016.

During the second quarter of 2017, we had gains on the sale of residential mortgages of $2.3 million.

Gains on the sale of SBA loans were modest in the second quarter of $179,000, but we have a strong pipeline and expect better performance during the second half of 2017.

Like our other fee income-producing loan units, the revenue from the SBA business continues to be very lumpy and gains on sale vary from quarter to quarter.

As we've previously announced in a press release, the FHA Multifamily Division received its Ginnie Mae certification and began to produce revenue during the second quarter.

The unit realized net revenue of $642,000 from its origination and securitization activities in the second quarter.

The FHA division has a solid pipeline of transactions from which we expect strong revenue production going forward.

Our capital position and ratios are very sound as of June 30, 2017, due to the continued additions to retained earnings from our consistent profitability.

The return on average assets was strong at 1.6% for the second quarter and the return on average equity for the quarter was equally strong at 12.51%.

The total risk-based capital ratio was 15.13% at June 30, 2017.

The common equity Tier 1 ratio was 11.18% at the quarter-end and Tier 1 capital ratio was 11.61% at June 30, as compared to 11.24% a year ago.

Our capital ratios remain well in excess of both regulatory measures and internal policy levels and our capital accretion during the first half of 2017 was at a 14.2% annualized rate.

We are very pleased with the results of the second quarter.

Despite our continued growth, we still have only 3% market share, which leaves us tremendous opportunity in the Washington Metropolitan region, especially with the recently closed and even recently -- and even more recently announced M&A activity in the market.

We are continually encouraged by the long-term consistent growth achieved through our approach to expanding existing relationships and generating new customers that see the value of our relationships-first strategy.

That concludes my formal remarks.

We will be pleased to take any questions at this time.

(Operator Instructions) And our first question comes from Catherine Mealor from KBW.

Ron, your commentary seems to suggest growth is going to moderate some from here as you take a more cautious look at CRE and C&I.

And so as we think about that, is it fair to say that a slower growth rate could also drive a higher margin, as it takes a little bit of pressure off the funding side and you are also competing less in the more rational C&I space?

Certainly, a great question and important question.

Catherine, as always, we really try to monitor the market and look to see where we are within the cycle.

Certain areas we feel within the cycle is getting a little overheated and therefore, we're going to pull back a little bit and have pulled back over the past few quarters.

Obviously, we're sensitive to the liquidity side to make sure that all -- as we talked about, all the dials are kind of lined up.

So we could grow the demand and the amount of calls we receive for loans.

It is something that we could grow double digits -- in the high double digits.

But just being cautious feel that we're going to monitor that on an ongoing basis as a result of the NIM.

C&I is very, very competitive.

Pricing is, as I mentioned, almost irrational and surprisingly, very competitive.

And therefore, it's all those things and then some that we're constantly monitoring in determining our loan growth.

But again, see a robust loan growth that we'll always continue to be able to maintain.

Okay.

And then as a follow-up to that, on the margin, your loan yields have been really stable, slightly up.

I'd say up to slightly stable, really for the past 1.5 year, maybe more.

And so what point do you think that you'll really start to see the yields expand more significantly as you would impact -- as we get the benefit of higher rates?

Catherine, June was the first month that we actually saw a higher rate on new loans than on payoff loans.

Now as we've talked about in the past is that a lot of that is as a result of the finally the funding of loans that we approved and started the funding and the closing about a year, 9 months, 6 months ago.

So we are seeing that opportunity of finally getting that increase in rate on loan yields and happy that we're starting to see that as of June.

We're about 8 basis points higher in loan funding than we are in loan payoffs.

And Catherine, I'd add.

We've talked in past calls with regards to our floors.

At this point, about half of our portfolio -- little more than half of our portfolio are at the floors.

We look at the 50 basis point move that we've seen with the Fed and certainly, LIBOR has responded to that as well from December of last year to June of this year.

And those -- the rate on those floors has increased probably about 15 basis points or so as a result of that move and piercing through all of those floors.

So I would say, as rates continue to go up and we get through more of those floors that you will see more benefit there as well.

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

Nice to see those FHL -- or FHA loans sale [and] gains show up in the revenue side of the numbers.

And congrats on getting approval this quarter.

Just wondering, can you give us some more color on how the pipeline looks and how much, I guess, more we can expect this business to add to revenues going forward?

Casey, the issue on -- first, we, obviously, can't give you a forward-looking comment on the amount of reduction.

I will tell you that having finally closed a couple of these loans, we feel that the momentum will start picking up.

There is a number of clients and customers and potential customers that we've had that have said that they wanted to see us get some loans under our belt before we'll be able to start the processing.

So we're even already starting to see some discussions with some new customers as to the opportunity.

Charles, you might want to handle the second question as to the premium side?

Sure.

Yes.

So we -- as we communicated here in the past, we expected premiums to come in on those loans between 3% and 4% of the loans sold and the gains realized.

This quarter, we did achieve pretty close to a 4% premium on those.

In addition, there was some servicing income associated with that.

So those premium expectations are holding up, and we anticipate that those -- that, that will continue.

Okay, helpful.

And just moving back to just loans.

Ron, you mentioned increased pricing power on larger-sized loans.

Can you give us a sense as to what, where your average loan size is, maybe today versus where it was historically?

Our average loan size right now is about $2.8 million on the CRE side.

So again, very disproportionate to where we're seeing loans currently.

But on the larger-sized loans, I'm talking, let's say, in the $15 million range that we're seeing the pricing opportunity.

Okay.

And then my last question.

Just going back to the C&I we were talking about, just the growth this quarter or last couple of quarters has been pretty strong.

So what's been driving that given the irrational pricing you guys mentioned for that product?

Any specific sectors or areas where you're seeing demand there?

I think there are a lot of pressures that are impacting the C&I side.

One of them, I think, is the degree to which both (inaudible) up on the CRE side in terms of concentration concerns.

I do think in this area, particularly on the larger gov con -- contractors that we would have more success in the Northern Virginia area where there is intense competition for those loans.

Also we're seeing funding on the owner-occupied side.

And our next question comes from Joe Gladue from Merion Capital Group.

You mentioned, I guess, on -- in regards to loan growth that there were larger than usual payoffs during the quarter.

Just wondering if you could quantify that, how much there was this quarter versus what's a normal quarter.

Yes.

I don't want to be able to go back into because -- from a trend perspective, but a lot of larger-size loans are financing out into insurance companies, Fannie or Freddie.

So -- but that's the good news of the expectation that when we did the loan that they've worked out as they've expected.

But I would say that you probably have an excess of double the amount of payoffs that we typically have, that we received in the -- in this quarter.

Yes.

I think it is a difficult thing to generalize about because the timing is not going to be consistent throughout the year on what payoffs happen.

The average is going to be a lot different than the median.

So from our standpoint, you could have a payoff of, let's say, a $50 million apartment building that is stabilized and going to the [perm] market on the 30th of June, or you could have it on the 1st of July and it just impacts the quarter differently.

So there's no real -- it's lumpy, I guess, is the best way to say it.

And to follow up on Jan's comment.

So much of what community banks, at least as it relates to Eagle, has that lumpiness.

And whether that's on the noninterest income side, whether that's on deposits and loans, we need to continue to look at the long run and not quarter-by-quarter because it gets a little distorted on that.

Even on the deposit side sometimes, whether it's because of real estate taxes, money comes out at a particular moment of the year or money comes in at a particular moment of the year.

And that's why averages are really what drives our earnings.

Okay.

All right.

That's fair enough.

Just one more, I guess.

The higher, I guess, marketing and professional services expenses.

Are those things that we should expect to continue at this level or were they more, I guess, discrete in time increases?

No -- this is Charles.

I think we had a pretty good push -- marketing push in Northern Virginia that pushed up some of those marketing costs.

And for professional fees and services, we're involved in some IT strategy discussions with an outside consultant.

So some of those charges are going to be specific to this quarter and wouldn't necessarily expect those to continue.

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

Ron, I think you mentioned in terms of the FHA group that you're one of the 13 banks participating in that market.

So just curious in terms of the regional D.C. market.

Are any of your competitors pretty active in that market?

Or is that something that you guys, sort of, can offer, as a unique and premium service here locally?

There are brokerage firms that are in the Washington Metropolitan area that I'm aware of.

But I can't -- I do not know of any bank that has the ability to provide the balance sheet and then flipping it into a FHA program.

So something that we've worked hard on and that opportunity for us to be able to do both the funding initially and be able to put it into the FHA at some point is what I think is pretty unique.

But the only thing I can -- I do know of a number of firms that are brokers that customers would go to, but not through the balance sheet.

Got it.

And then I think during the discussion you also said maybe you're looking at the branch network, branch system for potential cost saves.

Is that something that you think could play out in the second half of the year?

Or is it more of a longer-term 2018 project?

We've had a couple of branches over the past 18 months that we've consolidated, 2 branches into 1, or we've relocated from that 2,500 square foot to a 1,500 square foot branch.

And we do -- we're right now working on the opportunity of doing the same thing for 2 other branches down to 1 branch, which, hopefully, will take place within the next 9 months or so.

And our next question comes from Stan Westhoff from Walthausen & Company.

I kind of want to touch on the -- you mentioned the construction projects' completion as kind of accounting for some of the payoff maturities, I guess, however you want to consider it.

And then moving into longer-term financing, is that -- is that an opportunity you may have missed or didn't want to participate in or is it just the competitive side of the market on the pricing there?

We've taken a very disciplined approach on that in the sense that we'd like -- we would much rather be short than getting locked into the longer-term product.

And honestly, the Fannie, Freddie insurance companies are way more aggressive than we would ever want to be on these loans, they're 10 years, fixed rate, some are assumable, some aren't.

So it's a just not a program that we want to play in.

We'd much rather stay long -- stay short, excuse me, and be able to take the benefit of the high yields.

There -- most of them are all working off of 10-year treasuries, and we know what's that done over the past couple of years.

So it's very -- fortunately, we haven't played in that arena and have no intention to.

Okay.

And then you talked about the market in general for, I guess, you said C&I and CRE was getting a little overheated.

And you basically said that growth would moderate a little bit.

Is that -- is the first 6 months of the year kind of a good gauge of what we might see for the balance of the year going forward or is it just going to -- is it still a little choppy?

Well, it's still choppy.

I will tell you the local economy is still very strong on the multifamily side.

There is still significant opportunities of lending, all of which we're looking at.

But we are spending more and more time drilling down into the specific submarkets to be able to understand what the competition is, what programs are out there right now.

Fortunately, what we've always focused on is the boutique type of project, and we want to make sure that, that boutique project can continue to compete against the 300 units, multifamily as an example.

In the suburbs, that's something that we really haven't been a big player in for a while.

We don't believe that will change.

So I would tell you that the first 2 quarters, I think, were good quarters.

Again, the second quarter a little bit of an anomaly because of the amount of payoffs that we did have.

So it's really hard to predict when these payoffs will take place going forward.

And they're payoffs, again, because the project has been successful and not early payoffs.

So it's hard to monitor.

Right.

How much was that payoff amount over -- in the quarter, roughly?

It was -- as I think I mentioned about double what we typically see in a particular quarter.

And what's that number?

Or are you don't want to...

That's not a number that we typically publish.

Therefore, we wouldn't want to start now.

And at this time, I'm showing no further questions.

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

Yes.

Thank you.

Thank you all for participating in the call.

The one thing I do want to mention, and we didn't spend as much time on it as I think we should, and that is just the competitive nature of the world in deposits.

Although we do have the pricing power that we've seen on the lending side, albeit very selective in what we're going after, I think it's important to note that the Washington Metropolitan area from a community banking perspective is as competitive as ever on the deposit side and with our growth of whatever amount you want to pay, that's still an awful lot of deposits to be able to get.

We've been able to expand our horizon with municipalities, with law firms, with title companies and a variety of other large depositors, but clearly it is getting more and more competitive, and I just want to make sure that, that was mentioned and recognized from the investment bankers' perspective.

Otherwise, thank you very much and looking forward to speaking you -- speaking to you again next quarter and hope you have a great summer.

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

And this does conclude the program.

You may all disconnect.

Everyone, have a great day.

Thank you.