Eagle Bancorp, Inc. (NASDAQ:EGBN)
Q2 2014 Results Earnings Conference Call
July 23, 2014 10:00 AM ET
Jim Langmead - Chief Financial Officer
Ron Paul - Chairman and CEO
Jan Williams - Chief Credit Officer
Catherine Mealor - KBW
Casey Orr - Sandler O'Neill
Good day, ladies and gentlemen. And welcome to the Eagle Bancorp Second Quarter 2014 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 follow at that time. (Operator Instructions)
I would now turn the call over to your host, Jim Langmead, Chief Financial Officer of Eagle Bancorp. Please go ahead.
Good morning, everyone. Before we begin the presentation, I’d like to remind you that some of the comments made during this call maybe considered forward-looking statements.
Our Form 10-K for the 2013 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 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 at our earnings call for the second quarter of 2014. Thank you for calling in this morning. As usual, in addition to Jim Langmead; Jan Williams, our Chief Credit Officer is also on the line with us this morning. Jim and Jan will both be available later in the call for questions.
I am very pleased to announce that for the second quarter our operating earnings were $13.5 million, which is a record level of quarterly net income and a 16% increase over the second quarter of 2013 and 8% increase over the first quarter of 2014.
Net income available to common shareholders on an operating basis increased 16% over the second quarter of 2013. Fully diluted operating earnings per share were $0.50 for the quarter representing a 14% increase from $0.44 in the second quarter of 2013.
I am referencing operating earnings as opposed to net earnings since our second quarter 2014 earnings included $576,000 or $0.02 per diluted share of merger-related expenses from the planned acquisition of Virginia Heritage Bank, which we announced in early June.
While those expenses are non-recurring, we felt that for comparative purposes, it would be more relevant to use earnings and financial ratios, which exclude those merger expenses. I will comment more about the merger later in my remarks.
We have spoken many times about how important consistency is to our -- to EagleBank. We are pleased to note that for the 22nd consecutive quarter we are announcing record earnings that once again the earnings growth was the result of strong results across several key performance measures not just one factor.
We continue to expand revenue driven primarily by loan growth combined with an exceptional net interest margin. We also realized growth in deposits, continued improvement of our very strong asset quality and through disciplined expense control achieved an excellent efficiency ratio. We are very proud to continue this consistent balanced performance.
Topline revenue growth was strong for the quarter at 9% over the same quarter in 2013. Net interest income increased 21% over the second quarter of 2013, more than offsetting the decrease in non-interest income due to the decreased level of mortgage loan origination and sales activity.
Topline revenue for the second quarter increased 3% as compared to the first quarter of 2014 fueled by the growth in the loan portfolio and improved margin. We are pleased to note that the net interest margin for the second quarter was 4.48%. This represents an increase from 4.27% in the second quarter of 2013 and also represents a 3 basis point increase over 4.45 net interest margin in the first quarter of 2014.
We continue to monitor market conditions and apply disciplined approach to loan pricing. As a result, the yield on loan portfolio was 5.37% in the second quarter as compared to 5.45% in the first quarter of 2014.
As you can see, loan yields are down slightly. We're being responsive to the market while maintaining our loan pricing discipline. The new loan rates have averaged 4.79% for the first six month of 2014, while our payouts have averaged 5.39%.
On the liabilities side we’re still actively managing our cost of funds. Our cost of interest bearing liabilities is down 2 basis points to 44 basis points for the second quarter of 2014 as compared to first quarter of 2014 and has decreased 13 basis points as compared to the second quarter of 2013.
In addition, we improved the asset liability mix during the second quarter and increased loan to deposit ratio to 97% at June 30, 2014. Loan growth was exceptional during the second quarter with an increase for the period of $216 million or 7%. The annual net growth rate since June 30, 2013 is 21.8%.
The loan portfolio excluding loans held for sale ended the quarter at $3.3 billion. Combined with the results from first quarter, loan growth for the first half of the year was $334 million, which is equivalent to a 23% annual growth.
While we are very satisfied with these results as they represent a balance of both loan growth and a strong net interest margin. There is active loan demand in the market and we have a strong pipeline.
We continue to see opportunities to build relationships with new customers throughout our market. While the competitive environment and our desire to maintain a strong margin may limit our loan growth going forward. So far it is not impact to us.
We’re very selective in the projects we will finance and consider whether the project is appropriate for the particular submarket within the Washington area. This is always been a key part of our underwriting process, which has resulted in our track record of excellent credit quality. While the loan growth of the region was somewhat slower in 2013, we've seen a pickup in the second quarter of 2014. This is still one of the strongest economies in the country.
Washington Metropolitan area is the 5th largest regional economy in the U.S., with the gross regional product of over $140 billion. Federal government spending makes up 30% of our economy, down from 39% two years ago. The region had job growth of 27,000 jobs for the year ending 2000 -- June 30th and this is being driven by the private sector.
While the Federal government reduced 9,000 jobs during the past year. The private sector increased by 36,000 jobs during the period. Monthly increases in housing values have averaged 6% over the past year in all market.
Values in the District of Columbia have been the strongest in the first half of 2014. But, remember our practice is not look at the market as a whole but to look at individual projects within these submarkets whether for residential or commercial development.
Deposits increased $94 million or 3% during the second quarter, with total deposits of $3.4 billion at June 30th. Deposit growth has been less robust than loan growth as we actively manage the loan to deposit mix and cost of funds.
We continue to emphasize core deposits and have let’s some wholesale deposits run out of the portfolio, as well as higher rate CDs. DDA deposits increased $59 million during the quarter and account 28% of total deposits.
Money market account balances are also increasing and were up $38 million during the second quarter. Our sustained focus on developing, expanding and strengthening relationships is key to our deposit retention and growth during this low rate environment.
This is the result of day-to-day attention to detail and customer service delivery by our lending officers, branch representatives, and the support units that are responsible for the strong customer relationships.
During the second quarter of 2014, the efficiency ratio on an operating basis improved to a very favorable 47.04%, an improvement over 51.94% in the first quarter of 2014 and 49.33% in the second quarter of 2013. For the quarter, non-interest expenses on an operating basis increased only 4.3% from the second quarter of 2013 and decreased 6.7% from the first quarter of 2014. As we mentioned at the time the first quarter of this year included some non-recurring costs related to discretionary bonus payments.
During the second quarter, we significantly improved our operating leverage as we decreased our non-interest expense by 4.2%, while increasing revenue by 3%. Operating leverage was also improved over the past year, as revenue for the second quarter of 2014 increased 9.2% and expenses were only up 7%, as compared to the second quarter of 2013.
We continue our focus on expense control, in particular personnel-related costs in anticipation of the planned merger with Virginia Heritage Bank. We will keep a sharp eye on staffing levels, as we work towards the integration of the two banks. Year-to-date the efficiency ratio on an operating basis is 49.45%, and we continue to believe that it is an appropriate level given our size and anticipated growth. As we've said many times, we appreciate the importance of a strong infrastructure and continue to build this infrastructure for our future growth.
We continue our diligent ALCO approach and maintain a moderate level of interest rate risk. We look carefully at the repricing risk in our loan portfolio and the securities portfolio. While the average duration of the loan portfolio is 48 months based on maturities, it is only 26 months based on repricing triggers. 58.5% of the portfolio consists of variable or adjustable rate loans and we feel that portfolio is well-positioned.
In a rising rate environment, 27.4% of the portfolio reprices or matures within 30 days and another 4.5% within the first year. In total, 59.6% of the portfolio reprices or matures within three years.
Our credit quality metrics continues to improve during the second quarter. At June 30, 2014, NPAs as a percentage of total assets decreased to 80 basis points, as compared to 1.19% at March 31, 2014, and 1.05% on June 30, 2013. Non-performing loans were just 69 basis points of total loans at June 30, 2014. Both ratios are very favorable as compared to industry averages and the range of NPA levels we have maintained over the last several years.
The absolute level of NPAs decreased by 13.8 million in the second quarter to 31.3 million. This decrease was primarily due to the resolution as anticipated of one problem relationship, which had been reported as an NPA at the end of the first quarter. The bank is consistently taking an aggressive approach reviewing individual loans for impairment and accrual status.
The allowance for loan losses was 1.33% of total loans at the end of the quarter, which is down from 1.47% at June 30, 2013, and down slightly from 1.37% at March 31, 2014. The decrease in the allowance as a percentage of total loans is due to the loan growth in the second quarter, along with our strong credit quality as reflected and the normal level of NPAs and charge-offs.
Net charge-offs for the second quarter were 20 basis points of average loans, which is below the average charge-off experience over the last several years and a minimal increase over the first quarter of 2014. The provision expense of $3.1 million during the second quarter was dictated by the growth in the loan portfolio, consistent application of allowance methodology, and recognition of the quality of our loan portfolio.
At June 30, 2014, the coverage ratio was increased to a 193%, we believe, that we are adequately reserved. Non-interest income during the second quarter was $3.8 million, down 46% from the second quarter of 2013, and also a decrease from the first quarter of 2014.
As expected, the decrease from the prior year is attributable to the significant reduction in volume in the residential lending division. We’ll get originations in the second quarter for $131 million, an increase over $96 million in the first quarter of 2014, but down from $293 million in the second quarter of 2013.
The net gain after commission expenses on the sale of residential mortgages was $938,000 in the second quarter of 2014, down from $1.3 million in the first quarter of 2014. As a level of refinanced transactions have weaned, purchase transactions have increased and now make up approximately 65% of our volume.
We’ve been hiring originators with strong ties into the realtor and builder markets, and continue to believe that purchase transactions will be important to this business line going forward. Gain on the sale of SBA-guaranteed loans were modest at $83,000 for the second quarter, as compared to $1.5 million for the second quarter of 2013, and $547,000 for the first quarter of 2014.
We review the origination and sale of SBA loans as an attractive business line, but recognize that the revenue flows are lumpy and will vary from quarter-to-quarter during the size and structure of the loans and the timing of sale. We are expecting a stronger flow of loan sales in the second half of the year. We see continued potential for fee income from this business line.
Demand is strong and premiums are still on attractive level. Service charges and other fee income totaled $2.5 million for the second quarter, which is a 12% increase over the second quarter of 2013. In regard to our plan merger with Virginia Heritage bank, we are well underway with the integration process. Immediately after the announcement, we formed an integration project group with representatives from every area of both banks.
There are 11 teams in the group addressing all key areas, including systems, marketing, human resources, credit and finance. But the best part is that the project has given us the opportunity to really get to know our new team mates of Virginia Heritage Bank. Dave Summers and Chris Brockett are two professionals and they’re doing a great job of leading their team.
The tremendous respect, which we have developed and the similar cultures we enjoy have really helped the planning effort. We are well into the regulatory application process and we still anticipate a closing in the fourth quarter of 2014.
That concludes my formal remarks. We'll be pleased to take any questions at this time.
Thank you. (Operator Instructions) Our first question comes from Catherine Mealor with KBW. Your line is open.
Catherine Mealor - KBW
Good morning, everyone.
Catherine Mealor - KBW
Ron, can you talk a little bit about the growth this quarter, and how much of it came from the Detroit, D.C. market versus Northern Virginia market? It feels like the Northern Virginia market, even before Virginia Heritage was an area focus for you’ll and you’ve had some recent hires there. Just trying to get a sense as to how much momentum you’re already feeling in that market?
Catherine, I don’t know the breakout specifically between Northern Virginia and D.C. and Montgomery County. I will tell you, it's pretty much consistent with the way it’s been in previous quarters. There's really been no recent hires in the Northern Virginia marketplace, but we still see it as a huge opportunity, especially with the Virginia Heritage merger and we believe there’s a tremendous growth. Well we know there is tremendous growth, these reports are showing the growth in the North Virginia marketplace and we can be there to capitalize on it. So the answer is that we’ve been pretty consistent over the past few years.
Catherine Mealor - KBW
Okay. And maybe follow-up on the expenses, really great improvement in the efficiency ratio this quarter, more than we expected. As we think about expenses moving forward, is there -- is this kind of bottom in terms of the absolute dollars and we’ll see slow growth moving forward and really just getting nice operating leverage from continued strong revenue growth. Is there any way to lower the expenses further? I would doubt it, but why I asked the question?
Good question. We’re building more and more into the technology system that we have as an example, just a minor part. But if you think of about year ago, we spent a lot of money on the encompass system which is a technology assisted by residential real estate group. That’s allowed us to be able to scale back on the staffing side.
From the branches, remember that two years ago, we increased the number of branches pretty significantly and that we’re building more and more into the growth of those branches. So I would tell you that do I see a dramatic decrease in expenses, absolutely not. I think that we’ve always said the mid-to-high 40s is where we believe that we can maintain. Again every quarter, it’s going to have some hiccups one way or the other. But from a longer term perspective, the range that we’re in, we feel pretty good about.
Obviously with the Virginia Heritage merger, there will be a little hiccups up or down there. But again we feel over the longer term the efficiency that we have with the infrastructure is something that we certainly not going to miss. Building that infrastructure was so important, putting in the system that we put in a couple of years ago, allows us to go to a $10 billion bank at least. So these are all the things that we’ve invested in the past that we’re probably seeing the benefits of.
Catherine Mealor - KBW
Great. Thank you very much. Congrats on a great quarter.
(Operator Instructions) Our next question comes from Casey Orr with Sandler O'Neill. Your line is open.
Casey Orr - Sandler O'Neill
Good morning, Casey.
Casey Orr - Sandler O'Neill
Just wondering what your thoughts are right now, managing that loan deposit ratio. Now that it’s creeping up to 100%. Are you comfortable with that growing over 100% or where do you see that growing in the next few quarters. What’s the idea of level for you guys?
We believe that 95%, 97% is a comfortable level. Bear in mind that we have the opportunity should we need to of significant liquidity out in the market place. Our interest rates we continue to drop. So should we decide that we need liquidity, we can increase rates as well as we have significant secondary sources. We have a drop in the CDs that we have outstanding, the wholesale funding. So we feel very comfortable in that 95%, 97% range because we believe that we have the availability of raising adding liquidity.
I also might add as we’ve just answered on the Catherine’s question that the new branches that we have are seeing a lot of activity. So we do see the ability for continuing those deposits and we’re constantly working with our existing customers on being able to cross sell them by increasing the DTAs which obviously is the ideal answer to funding loan growth.
Casey Orr - Sandler O'Neill
Okay. Great. That’s helpful. And Jan, maybe can you elaborate a little on that one, large commercial loan that got resolved this quarter. Did you have to take any charge-offs on that?
We did not. It was really a timing matter related to the state and going through the administration and negotiating these sale of assets and resolution of multiple creditor claims.
Casey Orr - Sandler O'Neill
Okay. Thank you guys. Good quarter guys.
I am clearly showing no further questions at this time. I will now turn the call back over to Ron Paul for further remarks.
Again I like to thank everybody for calling in today. Looking forward to another great quarter next quarter and appreciate everybody participating in the call. Thanks very much. Have a great summer.
Ladies and gentlemen, that does conclude today’s conference. You may all disconnect and everyone have a great day
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