Eagle Bancorp, Inc. (EGBN) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Eagle Bancorp First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. Please note today’s conference is being recorded. I would now like to hand the conference over to Jim Langmead, Chief Financial Officer. Please go ahead.

Thank you, and good morning, everyone. Before we begin the presentation, I’d like to remind you that some of the comments made during this call may be considered forward-looking statements. Our Form 10-K for the 2014 fiscal year, our quarterly reports on Form 10-Q and current reports on Forms 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 first quarter of 2015. We appreciate you calling in to join us this morning and your continued interest. In addition to Jim Langmead, also on the call this morning is our Chief Credit Officer Jan Williams. As usual Jan and Jim will be available later in the call for questions. We are very pleased to announce that for the first quarter Eagle Bank has once again achieved a record level of quarterly net income which was $19.4 million and which is a 55% increase over $12.5 million in the first quarter of 2014 and a 32% increase over the net income for the fourth quarter of 2014. This continuity of increasing record earnings is the result of our ability to consistently grow revenue and earning assets while controlling expenses and enhancing the company’s operating leverage. Top line revenue, which consists of net-interest income and non-interest income, increased 41% over the first quarter of 2014 and on a linked quarter basis we achieved 9% growth in revenue over the period ending December 31, 2014. The results from the first quarter also demonstrate the consistency of high quality performance for key measures such as net interest margin, credit quality and the efficiency ratio. Fully diluted earnings per share was $0.61 for the first quarter of 2015 which represented a 30% increase over diluted earnings share of $0.47 in the first quarter of 2014. The EPS for the first quarter did reflect the impact of the new shares issued in the common equity offering in March of 2015 which enhanced our capital position. As a result of much higher average equity, the return on average common equity was 13.24% for the first quarter of 2015 still favorable as compared to 14.38% for the first quarter of 2014. Driven by revenue growth and improved operating leverage the return on average assets increased for the quarter to 1.49% as compared to 1.36% a year ago and 1.21% in the fourth quarter of 2014. Revenue growth was driven by 37% growth in net interest income as compared to the first quarter of 2014. The strong level of net interest income is the result of our pricing discipline and ALCO strategies as well as the continued growth in earning assets which increased 38% over the same quarter of 2014. We also achieved significant growth in total and core non-interest income of 77% as compared to the first quarter of last year. This growth was fuelled by substantial increases in gains on the sale of residential mortgage loans, which were $3.2 million for the quarter as compared to $1.3 million a year ago. In addition, we recognized $2.2 million of security gains during the quarter, which were taken in light of favorable market conditions. These gains were partially offset by $1.1 million in charges related to the early payoff of several federal home loan bank advances, which payoffs were initiated to realize lower funding costs at a time when core liquidity was strong. For the first quarter of 2015, our efficiency ratio improved to 44.89% on an operating basis excluding merger expenses. This was achieved as the 41% increase in revenue during the first quarter was accompanied by only a 22% increase in non-interest expenses as compared to the same period in 2014. The current level of efficiency ratio is a result of the continuity with our traditional approach to cost control, combined with the expense savings achieved with the federal -- with the Virginia Heritage merger. Most of the anticipated merger related cost savings have been accomplished with some additional savings expected from these transactions in process. Another measure of expense management and efficiency that we track is the ratio of non-interest expenses to average assets, which improved to 2.13% for the first quarter as compared to 2.47% for the first quarter of 2014 and down from 2.4% in the fourth quarter of 2014. We are maintaining our disciplined approach to cost management throughout the organization. For example, while low interest rates are driving mortgage volume we have added several new loan originators in the residential lending division but have added no fixed costs within that department. In regard to facilities, we have one branch consolidation project in process. We carefully consider our branch locations and are proud that another indicator of our efficiency is our average deposits per branch of a $189 million, while the average in the Washington Metropolitan area is $118 million per branch. So while we will continue to maintain the sound infrastructure needed to ensure quality and support growth, we clearly understand the need for operating leverage and feel we can maintain an efficiency ratio in the mid 40s. The net interest margin of 4.41% was another highlight for the first quarter due primarily to expected loan yield compression. The margin was down slightly from 4.45% in the first quarter of 2014 to 4.42% in the fourth quarter of last year. The average yield on loan portfolio continued to be favorable during the first quarter at 5.26% while the average cost of deposit remain low at just 41 basis points. Due to the overall low rate environment and competitive pressures, some additional margin compression is likely during the balance of this year. However, our margin continues to be significantly higher than industry and peer group averages, and we're confident that this will remain so. Our disciplined approach to pricing of both loan and deposit products remains constant. We remain committed to maintaining a strong NIM and will not increase loans just for the sake of growth. Our pricing process requires an adequate return for both the term risk and the credit risk of each loan transaction. We have limited interest rate risk in the event of rising rates through our relatively neutral position for asset and liability sensitivity. We maintain a short duration of both loans and deposits. The repricing duration of the loan portfolio is only 27 months. Variable and adjustable rate loans comprise 59% of the portfolio. Deposit growth during the first quarter was strong at about 6%. At March 31, total deposits reached $4.6 billion. Total deposits were 40% higher than at March 31, 2014. And excluding the impact of the merger, we achieved 20% organic growth in deposits over the last 12 months. We maintain a very favorable deposit mix. At March 31, 2015, core deposits, which excludes CDs, were 83% of total deposits and DDA deposits were 26% of total deposits, which is consistent with our business model and strategy of attracting and maintaining DDAs and other core commercial deposits. At March 31, the loan portfolio had increased 45% over the balance in March 31, 2014. Excluding the impact of the Virginia Heritage merger, we achieved 19% organic growth over the last 12 months. Growth during the first quarter of 2015 was a $132 million or about 3%. Our loan pipeline is strong today and I want to also like to add the once that throws of the cold winter weather abated and with the advent of Spring, we've seen increased draw activity on CRE loans and higher usage of C&I loans -- lines of credit. Due to our proactive balance sheet management of the loan to deposit ratio at March 31, 2015 was 97% and which is a level that we are very comfortable with. Our credit quality statistics continue to be very favorable level for the first quarter of 2015. Net charge-offs annualized were 15 basis points of average loans for the quarter as compared to 11 basis points of average loans for the first quarter of 2014 and 26 basis points for the fourth quarter of 2014. At 15 basis points the level of charge-offs were below our annual average of 17 basis points in 2014 and well below industry and peer group averages. At March 31, NPAs as a percentage of total assets were 58 basis points as compared to 1.19% a year ago and non-performing loans as a percentage of total loans were 44 basis points as compared to 1.19% at March 31, 2014. The absolute level of NPAs declined by $3.7million in the first quarter of 2015 to $31.9 million. We continue to adhere to our conservative policy as to when to place a loan on non-performing status. The allowance for loan loss was 1.07% at the end of the quarter and we have continued to make a reasonable provision as dictated by the size and quality of the loan portfolio and consistent application of our allowance methodology. The amount of the allowance and the provision expense are dependent upon both the changing mix of the portfolio, economic factors, and fair value accounting impact of the merger with Virginia Heritage Bank. At March 31, 2015, the coverage ratio was 244% of non-performing loans as compared to 205% at December 31, 2014, an even more conservative position. As I mentioned a moment ago, we have a strong loan pipeline today and encouraged by the growth prospects for the next few quarters. The level of economic activity and lending opportunities are uneven across the Washington area. The overall pace of growth has moderated but the key to our success has always been our knowledge and expertise within the market in providing superior customer service and certainty of execution. We research, study, and understand the various submarkets within the entire metropolitan area because it’s not one homogenous market. We continue to focus on projects like boutique condo conversions, small and multifamily projects and office buildings in Washington D.C. Rather than financing large tracts of land in remote suburbs we concentrate on infield residential projects in the closing counties like Fairfax, Arlington, and Montgomery. We are benefiting from the knowledge and opportunities in Northern Virginia that we expected from the Virginia Heritage merger. We are particularly pleased with the level of C&I activity we are seeing in that market which has been enhanced in part by the admission of Lindsey Rheaume, our Chief C&I Lender who joined Eagle in the fourth quarter of 2014. Another highlight of the first quarter was the $100 million equity offering which closed on March 10. The shares were sold at very favorable price of $35.50 which was accretive to book value and tangible book value. The price reflected a discount of only 2 basis points to that day's closing price. The offering was significantly oversubscribed and due to the strong demand for the shares, we were able to upsize the offering from the initial amount of 1.9 million shares to about 2.8 million shares, which included the underwriter exercising its over allotment option. The final gross proceeds were $100 million. We thank all of the investors who we spoke to during the Road Show and marketing process for your interest and support. From the net proceeds of $95 million, we plan to redeem the $71.9 million of SBLF preferred stock outstanding with the balance available to support future growth of the bank. We expect to pay off the SBLF funding during the fourth quarter of 2015, prior to the dividend increase to 9% effective in mid January of 2016. The additional capital from the offering, combined with the earnings of the 2015 first quarter, has significantly strengthened our capital ratios, which remained substantially in excess of regulatory requirements to be considered well capitalized. At March 31, 2015, the total risk based capital ratio was 13.9% as compared to 13.04% on March 31, 2014. Even more importantly, the tangible common equity ratio improved from 9.22% a year ago to 10.39% at March 31, 2015. We are very excited about the opportunities we see for the balance of 2015. We continue to capitalize on the new opportunities in Northern Virginia created by the Virginia Heritage merger. At that same time we are working to strengthen and expand our relationships with over 1,800 new customers who joined the Eagle Bank family by virtue of the merger. Continued success in building new relationships throughout north of Virginia, Washington DC, and suburban Maryland is key and we strive to solidify our position as the leading community bank headquartered in the Washington metropolitan area. We appreciate the support of our shareholders and those of you who are on the call. We thank all of you for your interest in Eagle Bank and in the Eagle Bancorp. Lastly, I would remind you that our Annual Shareholders Meeting is upcoming at 10 a.m. on May 21 at the Bethesda Marriott Hotel. We hope to see many of you at the meeting. That concludes my formal remarks. We will be pleased to take any questions at this time.

Thank you. [Operator Instructions]. Our first question comes from the line of Catherine Mealor from KBW.

Hi good morning everyone and congrats on a great quarter.

Thanks, Catherine.

Thanks, Catherine.

Can you give us any color into the margin and if their value accretion -- if your value accretion impacted the margin at all this quarter?

Catherine, the amortization of the fair value for the first quarter of the year was around $1.2 million to $1.3 million. My estimate is that it impacted the earning asset yields by about 10 basis points in the quarter.

Okay. And this all in the loan -- on loan.

Right. Really in the loan portfolio that was really where the most fair value there wasn't significant impacts in the deposit area. On which day that another factor that actually and that benefits the margin as we've said. But another factor that pulls it down is the mix of the indirect loan portfolio that we acquired from Virginia Heritage. That portfolio is not as high yielding as the CRE and the C&I portfolio. So when you put those factors together, I think that there is some offset to the accretion that's coming in. But overall I'd say the impact on our earning asset yields were let's call it 8 basis points to 10 basis points.

How do you think about that going forward? How quickly that should come down or do you think you should keep that level for then a year or so?

It's being amortized on a loan by loan basis. We’ve got it in the system and its based on the actual maturities of those loans and if there is refinancing that goes on there's an acceleration just as with the -- if we had a discounted loan we originated. So overall the portfolio that we acquired had a average maturity a little longer than Eagle's, Eagle's was around 44 months, 45 months VHP was close to 50 months. So we think that amortization is going to be one-off over a four, five year average life. And because they didn't have a substantial amount of long-term fixed rate loans as we did not they managed and they did not take any straight risk just as we have not done that.

Okay. It should be fairly steady over the next couple of quarters then.

I would say that's right. The hiccups you get have to do with prepayments that you don't anticipate. But generally I would expect that we would say let's call it $300,000, $400,000 a month of amortization.

Thank you. Our next question comes from the line of Scott Valentin from FBR Capital Markets.

Just regard to the gain on sold loans. I know you guys talked about those two components SBA and mortgage. I don't see the mortgage is pretty large this quarter and is consistent across the industry. But the mix also seem to emphasize refi, which I guess come with rates where they are that would be normal. Just wondering how should we think about that gain going forward, will origination volumes and sale volumes come down, if rates go up as the mix goes back to favor more purchase activity?

Well, Scott, I would say that we are at the peer point of the year where the activity continues to be pretty strong the spring and into the summer just seasonally for that business. We had a lot of loans locked in the month of March. So I would say that at least for the second quarter of the year our activity continues to look real strong but who knows what's going to happen with interest rates we know there is a high degree of sensitivity there with this product. But we're ahead of our plan. What happened in the first quarter was a little bit of a surprise to us. We originated $285 million with the loans. But right now the pipeline continues to look very strong I think the second quarter beyond that I don't want to comment.

Scott, the other thing to remember is that we continue to expand our relationship with the builders. So well we had a very slow first quarter because of weather. We hope that will continue to get strong. Secondly that the key to the -- in our opinion on the entire residential real estate group is making sure of the level of variable versus fixed cost. So that's something that I mentioned in the comments and we really do believe that would be strong part of balancing a slowdown or an increase.

Okay. That's true. And then, Ron, you mentioned I guess the basic growth I think you mentioned moderated in DC metro area and it's definitely several occupied submarket but also referenced maybe increased activity from CRE and C&I. I'm just wondering is that more seasonal increased activity or we actually starting to see signs may be of a improving kind of underlying economy in this area?

Scott, we just see our market share picking up dramatically because of again the concentration that we have in North Virginia which we believe to be just a huge opportunity for us. The boutique type projects that we've always been able to concentrate on and focus on and be able to succeed in. And obviously as we increase in our size the ability to do larger size deals is something that we have that opportunity on again cautiously but something that we continue to be able to capitalize on versus the smaller banks and be able to do that certainty of execution versus the larger banks. So the sweet spot that we're in I think is a just a very, very important part of our success today and going forward.

Okay. And one final question. You mentioned post equity raise the capital ratios are pretty strong. I know the SBLF you guys are going to repay in the fourth quarter. But how should we think about, and you're growing obviously loan book but M&A opportunities looks like Virginia Heritage was a very good deal, just want to know how you’re thinking about may be M&A going forward. Do you wait several quarters to integrate Virginia Heritages further or do you think there is opportunity now if the right property comes up?

Well again, we're always opportunistic, we know the marketplace very well, we know our competitors, we're all very friendly. But I would tell you that right now the opportunity that we see in Northern Virginia with what we have on our plate is something that is receiving all of our attention, plus the opportunity for us to expand just within the markets that we've been so successful in. So I'll never say never but right now we've got a lot on our plate that we believe that we’re going to capitalize on.

Thank you. [Operator Instructions]. Our next question comes from the line of Casey Orr from Sandler O'Neill.

I just had one follow-on question on the deposit growth in the quarter. Looks like there was a pretty sizable jump in retail time deposit in particular, what exactly was driving that?

Yes, Casey, good catch. We did have a special that we've since stopped, we had a two-year CD special at 1% that our Chief Deposit Officer had recommended and which we thought was pretty successful in giving us the opportunity to get new customers and to, and when at time when rates were very low and to cross sell them. We did achieve $50 million growth as a result of that campaign and I think that was the big issue that you're pointing to here.

That’s helpful. How long did that run and I guess what time period in the quarter?

It was for the first quarter. We agreed with it in an ALCO meeting and we just closed that out actually last Friday at our meeting we got there a $50 million goal and we just decided with our liquidity position and other opportunities that we have that we did not need to continue with the program. But it does give us a lot of other opportunities for customer relationships and cross sell and that's what we were after.

Great, answering that question. Thanks.

You're welcome.

Thank you. And I see no additional questions at this time. I would like to turn the conference back over to management for any closing comments.

I’d like to thank you all for attending the first quarter conference call and looking forward to speak to you again in three months and hope everybody enjoys this beautiful weather.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.