Eagle Bancorp Inc (EGBN) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2018 Earnings Call for Eagle Bancorp.

(Operator Instructions)

I would now like to turn the call over to Mr. Charles Levingston, Chief Financial Officer.

Sir, you may begin.

Thank you, Victor.

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 2017 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.

Welcome to all of you for our discussion and results for the first quarter of 2018.

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

As usual, 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 $35.7 million, a 32% increase from $27 million for the 3 months ending March 31, 2017.

While the reduction in the corporate income tax rate is contributing to increasing net income for many U.S. corporations in 2018, for EagleBank, it was but one factor that is driving our improved operating results.

Overall, our pretax income for the first quarter of 2018 of $48 million was 13% higher than the $42.3 million pretax income for the first quarter of 2017.

We are very proud that not only of the growth in pretax and net income, but with the quality of our earnings and the high level of profitability, which is reflected in a return on average assets of 1.91% during the first quarter, which has increased from 1.62% in the first quarter of 2017.

The ROAA of 1.91% is also a record level for our company and is significantly above industry and peer group averages.

The return on average common equity was also very strong at 15.99% (sic) [14.99%] for the first quarter, improved from 12.74% a year ago.

The highlights of our performance in the first quarter and the key drivers of the increased profitability were a very favorable and slightly expanded net interest margin, continued excellent credit quality with low levels of charge-offs and problem loans, and growth in both loans and deposits.

We continued our focus on maintaining superior operating leverage, resulting in a favorable efficiency ratio.

And as noted, saw the benefit of a decreased effective tax rate under the new tax law.

Revenue for the first quarter was driven by growth in net interest income, which represented a 13% increase over the first quarter 2017 and was consistent with the fourth quarter of 2017.

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

Total revenue increased 11% over the same quarter of 2017.

We achieved a very strong NIM of 4.17% for the first quarter of 2018.

Due to our disciplined loan pricing and ALCO strategies, the margin increased over 4.14% in the first quarter a year ago and was improved from the 4.13% in the fourth quarter of 2017.

The improvement in the margin was due to 2 factors.

First, we had a higher loan level in our loan mix of earning assets, and we continue to see a trend of improving loan yields due primarily to rates adjustments in our predominately variable and adjustable rate loan portfolio.

The average yield on the loan portfolio was 5.3% for the first quarter 2018, a healthy increase over 5.13% in the first quarter of 2017 and is up from 5.21% in the fourth quarter of 2017.

Our earnings in the first quarter also benefited from continued focus on maintaining strong operating leverage.

Total revenue for the first quarter 2018 increased 11% over the same period in 2017.

Noninterest expense for the quarter was $31.1 million, which was up only 6% as compared to the first quarter of 2017 and only a 4% increase from the fourth quarter of 2017.

We had a relatively soft first quarter in terms of noninterest income, which was $5.3 million for the quarter as compared to $6.1 million for the first quarter of last year and $9.5 million for the fourth quarter of 2017, which had included several onetime nonrecurring items.

Gains on the sale of both residential mortgages and SBA loans were lower.

Normal service charge income showed a slight increase for the quarter, and we recognized $48,000 in revenue from the FHA group as compared to the first quarter of 2017, where we had not yet received Ginnie Mae approval and had no revenue.

As we had discussed on the past earnings call, revenue from the sale of SBA and FHA loans does not produce a smooth trend line and varies widely from quarter-to-quarter.

However, we do expect both business lines to make significant revenue contributions during the remainder of 2018.

The efficiency ratio improved to 38.38% for the quarter, first quarter, as compared to 40.06% a year ago.

As expected, the efficiency ratio was higher in the first quarter of 2018 than in the fourth quarter of 2017, which period had been positively impacted by a onetime nonrecurring revenue of $1.4 million in gains from tax credit transactions.

On the inverse, the first quarter of 2018 had some extraordinary expenses, including $1.4 million in legal and professional fees for independent due diligence related to the Internet event in late 2017.

Based upon the information provided, we stand by our previous statements regarding this Internet matter.

The long-term trend of the efficiency ratio does not show the benefits from our continued focus on expense management and its impact on operating leverage.

During the quarter, we completed the consolidation of 2 branches in Rockville, Maryland, into one new location.

We currently operate 20 branches.

Our average deposits per branch are now up to $298 million as compared to the average for the Washington metropolitan area of $125 million.

This clearly provides a significant benefit to our efficiency ratio.

At the same time, we are prudently adding staff in our lending unit and investing in our IT systems.

We will continue to maintain the sound infrastructure needed to ensure quality of operations, meet all compliance requirements and provide superior customer service.

For the first quarter of 2018, average loan balance were 13% greater than for the first quarter of 2017.

We achieved healthy loan growth during the first quarter of 2017 of $191 million or about 3%.

Average loan balances for the quarter were 3.6% higher than during the fourth quarter of 2017.

The largest increase during the quarter were in income-producing CRE loans, C&I loans and owner-occupied CRE loans.

Our loan pipeline continues at a very strong level, and we continue to see loan demand throughout the Washington metropolitan area.

Average deposit balances for the first quarter of 2018 showed an increase of 9.2% over the first quarter of 2017.

Deposits grew by $268 million during the first quarter to a level of $6.1 billion.

Based on the higher rate of loan growth, we saw an increase in the loan-to-deposit ratio to an average of 106% for the quarter.

This certainly helped the net interest margin for the quarter, but is at a higher level than we want to be in the long term.

We continue to focus on maintaining a high level of DDA deposits, which were 35 point -- 33.5% of average deposits during the quarter, up around 1.0% from the fourth quarter 2017 and an increase of 1.2% over the first quarter a year ago.

Growing and maintaining core relationships is key to our strategic goal of maintaining a strong Internet -- interest margin.

We continued our disciplined approach in -- to pricing of both loans and deposits.

We remain -- continue to maintain a strong net interest margin 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 our current risk rising rate environment.

From policy standpoint, we have a relatively neutral position for assets and liability sensitivity, and we maintain a short duration of loans, investments and deposits.

The repricing duration of the loan portfolio is only 16 months.

However, we have moved to being slightly asset-sensitive when we -- than we were 12 to 18 months ago.

Variable and adjustable rate loans now comprise 67% in the portfolio, and we have already pierced the floor rate of about 93% of loans with floors.

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

The region produced growing -- growth of 51,000 net new jobs during 2017 and most were in the higher income white-collar sectors.

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

It is important to note that the federal government spending makes up only 30% of our $491 billion regional economy.

That level is expected to continue to decrease on a relative basis, due primarily to the growth in the private sector, which is more than offsetting the minor cutbacks at the federal level.

While there is healthy loan demand, the market is very competitive and getting more so.

We constantly see new competitors in both the loan and deposit markets.

The key to our success over the years have been our knowledge of the individual submarket throughout the metropolitan area, and so we continue our careful underwriting of loans by industry, location and project type.

We see the possibility of oversupplying, particularly for multifamily, in certain submarkets.

At the same time, we are seeing some improvement in the demand for suburban office space, driven by relative pricing.

On the economic front, the most significant regional news is the recent approvals by Maryland, Virginia and the District of permanent long-term funding for the improvements of the metro transit system.

Having metro's financial and operational issues resolved will stabilize this key piece of our regional infrastructure and allow for more quality plan and development.

Perfect example is the recent decision by Marriott International Headquarters to keep their headquarters and 3,500 jobs in Montgomery County, Maryland, but relocate the headquarters to and build a full-service Marriott Hotel, 2 blocks from the Bethesda Red Line Metro station.

Another highlight for the first quarter 2018 was our credit quality and favorable charge-off expense.

Net charge-offs annualized were only 6 basis points of average loans for the quarter as compared to 4 basis points of average loans for the first quarter of 2017.

At 6 basis points, the level of charge-offs were among the best levels the bank has ever achieved and were equal to our annual average of 6 basis points for 2017.

At March 31, NPAs as a percentage of total assets were also at a low level of 19 basis points as compared to 22 basis points a year ago and 1 basis point below 20 basis points at December 31, 2017.

Nonperforming loans as a percentage of total loans were 20 basis points as compared to 25 basis points at January 31, 2017, and 21 basis points at December 31, 2017.

The absolute level of NPAs rose by just $200,000 in the first quarter of 2018 to $14.8 million.

We continued to adhere to our conservative policy of proactively managing deteriorating credits.

The allowance for loan loss was 1% of total loans at the end of the quarter.

Our credit quality remained strong.

Consistent application of our reserve methodology, reduced charge-offs, low levels of classified loans and loan growth resulted in modestly lower allowance to total loans.

We continued to add to coverage ratio -- to the allowance, excuse me, at a time far in excess of charge-offs.

At March 31, 2017, the coverage ratio was 492% of nonperforming loans as compared to 417% at March 31, 2017, and 489% at December 31, 2017.

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

We are very pleased about the opportunities we see for the balance of 2018, as we strive to solidify our position in the Washington metropolitan area.

In concert with traditional calling programs and targeting of centers of influence, we have been running several print and broadcast advertising campaigns.

These campaigns were also part of our effort to increase the level of CDs in our deposit mix.

In addition, we have entered a 5-year joint-marketing agreement and deposit relationship with D.C. United, the local MLS soccer team.

This agreement will give a significant -- give us significant exposure in their new stadium, Audi Field, which opens this spring in the Southwest area of Washington.

Board of the EagleBank has always been committed to being a financially sound, well-capitalized institution.

Due to our high levels of profitability and continued additions to retain the earnings quarter after quarter, we sustain our strong capital ratios.

At March 31, 2018, the total risk-based capital ratio was 15.32%, increased from 15.02% at December 31, 2017, and 14.97% at March 31, 2017.

The tangible common equity ratio improved from 10.97% a year ago to 11.57% at March 31, 2018, and as compared to 11.44% at December 31, 2017.

In addition, the board has continued to take steps to make sure that our organization is aligned with the best practices and higher standards of corporate governance.

In that regard, I would like to recognize the recent additions of Susan Riehl and Kathy Raffa to the Board of Eagle Bancorp and the election of Norman Pozez as Vice Chairman of the Board.

We thank Susan, Kathy and Norm for the skill, time and commitment they bring to the bank.

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

I would like to remind you that our annual shareholders meeting will be held at 10:00 a.m.

on May 7 at the Bethesda Marriott Hotel.

We hope to see many of you at the meeting.

This concludes my formal remarks.

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

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

Maybe first, just on the CD growth that we saw this quarter and then your comments, Ron, about your CD campaign.

Can you just give us any color around that strategy, the incremental cost of the CDs coming on right now?

And then how big you think it's reasonable to assume your CDs get to as a percentage of deposits?

Looking at deposits, Catherine, we always felt that we were managing between wholesale and core and realized that now the opportunity is for us to be going into the CD market to be able to go on the longer end of the CD market.

So I think that the opportunity for us to continue to grow CDs in a rising interest rate environment is a great opportunity for us.

Charles, do you want to add something?

Yes, certainly, as we look at the direction of rate these days, locking in somewhat potentially could be lower cost funding over the term of those rates, call it 18 months to 2 years, seems to be a prudent move at this point.

So again, not a muscle that we've exercised a lot in the past, but it seems to have been pretty effective for us here in the first quarter and expect to continue to use that as a portion of the funding.

Catherine, I also want to add to that, that there is a number of very wealthy customers that we currently have, that we have not been competitive to be able to get their CD product, and we're actively working with them on being able to bring them into the (inaudible) under our CD program.

Okay.

That's helpful.

And then as we think about, I mean, clearly your deposit betas are moving higher and -- which, just given your growth and the CD strategy that makes sense.

But how should we think about your ability to manage the margin from here?

I mean, the part of what happened to your margin this quarter, which was great to see 4 bps increase, a part of that did come from positive mix shifts from excess liquidity.

So as you kind of use that -- as you move through that lever, moving forward, do you think the direction of the margin from here you likely receive some compression just as deposit betas continue to increase?

Or do you think you've got enough room on the loan side to be able to maintain your margin, even at this higher beta level?

Sure.

Yes.

Catherine, I think, as you point out, we did benefit from positive mix, not only in a slightly higher loan-to-deposit ratio on average of 106%, but also from the fact that we increased our DDAs by 4 percentage points, saw some benefit there.

Additionally, obviously, yields going up on the loan portfolio from a 5.21% to 5.34% quarter-over-quarter were also helpful.

I do think with the way that rates have moved and the competitiveness of the deposit market, we will continue to see upward pressure on funding costs, and it's just -- it's the pricing discipline on the loan side that's going to require our focus to ensure that we are able to keep pace with that -- with those rising funding costs.

But I think that considering where the margin is, I wouldn't be surprised with a flat to slightly compressed margin moving forward.

Catherine, also I would also like to add that seeing where we are within the cycle, we would be looking -- we're looking more and more for a longer-term type debt and longer-term type debt will -- based on the yield curve, obviously, will lend us into a lower lending world away from the ADC side, but into the longer world of many firms.

So another reason that you're likely to see the consolidation of the NIM.

And it's also worth noting the variable on adjustable rates portion of our loan portfolio, up to 67% of our loans are variable and adjustable rate.

Also as we -- I think we talked about on our prior earnings call, we pushed through the floors on 93% of our loans that currently have floors.

That -- those loans would, of course, do represent about 57% of our total loan portfolio we're seeing a lot more sensitivity there.

Given the rate move that took place actually last December, we -- off those loans with floors, we saw about a 22 basis point increase in the coupon on those loans from quarter-to-quarter, which, again, points out the sensitivity to that portion of the book.

So you continue to see that lift, which will be helpful for those loan yields.

I see.

And can we assume any kind of slowdown in loan growth as well, as a way to manage the margin?

Or is your outlook for double-digit loan growth still intact?

Catherine, we believe that we will be able to maintain in that very low double-digit loan growth, between a combination of the C&I, CRE and the other products that we have.

Very, very low.

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

I guess, wanted to ask about the, I guess, elevated legal and professional fees from the Internet event.

Is some of that expected to continue?

Or is that largely completed in the first quarter?

We have some potential run-off that we might have into the second quarter, but we don't know whether there will be further.

We don't -- we didn't expect the initial findings, so I really can't comment as to whether or not there will be additional expected costs.

Okay.

And just wondering, if you'd comment, I guess, both on the loan and deposit side.

There has been a good bit of consolidation in nearby markets in last quarter too.

And has that created any significant change on either the competitiveness on the loan or deposit side?

Joe, we just -- we have -- we are so grateful to have such loyal customers that have been with us for so long and have been through the goods and the bads.

And these are people that know that we know the market, they know that we know the property, they know that we understand the expectations as far as rental increases and what's going on within the market.

And these are the people that recognize that we need the deposits to fund the loans and that we'll -- we're going to be there at closing to fund the loan request.

So I think based on that, they get it.

We get it.

We understand that it's a give-and-take process and that's what's led us to the growth that we've had over the past 20 years, and we just don't see that continue -- that changing at all.

We see the continuation of that model being the model that seems to work very, very well.

And our next question comes from the line of Austin Nicholas from Stephens.

Maybe just hitting on the expenses real quick.

Most of my questions were answered there.

But maybe given the marketing efforts that you mentioned, should we expect the marketing expense to be a little higher this year versus last year?

No, the marketing expense that we have and the programs that we have -- the programs, we have 8 programs from both a short term and a long term on increasing deposits.

The expenses associated with those marketing expenses really just boots on the ground.

It's energy and effort of getting out and meeting with our certain type of customers and being able to pursue certain type of customers.

There will be a slight increase in marketing, but nothing of any materiality.

Got it.

Okay.

Great.

And then maybe just one other one.

As your capital continues to build and is very strong, can you maybe just remind us of how you're managing that?

And any potential usage of that in forms of -- form of dividend or M&A?

We talk about it, we think about it all the time.

Obviously, our goal right now is continuing to maintain that base of increasing our source of capital, which makes us sleep well at night, and it's something that we are looking to continue to do.

And also I'd like to point out, Austin, I mean, we -- when we look at return on average tangible common equity for the first quarter, we posted a 16.86% return there, which is still pretty strong and favorable.

So we're still making good use of the capital at this point.

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

I would now like to turn the call back to Mr. Ron Paul for closing remarks.

I'd like to thank everybody for attending the call.

Appreciate the questions.

And obviously, we're always available to answer any questions during the course of the quarter.

And thank you all, and enjoy the spring.

Thank you very much.

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

This does conclude the program, and you may all disconnect.

Everyone, have a great day.