Eagle Bancorp, Inc. (NASDAQ:EGBN)
Q4 2015 Earnings Conference Call
January 21, 2016 10:00 AM ET
James Langmead - Chief Financial Officer
Ron Paul - Chairman and Chief Executive Officer
Jan Williams - Chief Credit Officer
Casey Orr - Sandler O'Neill
Joe Gladue - Merion Capital Group
Dave Bishop - FIG Partners
Matt Schultheis - Boenning
Good day, ladies and gentlemen, and welcome to the Eagle Bancorp Fourth Quarter and Year End 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 follow at that time. [Operator Instructions] As a reminder, this is conference call may be recorded.
I would now like to turn the conference over to Jim Langmead, Chief Financial Officer of Eagle Bancorp. Please go ahead.
Thank you. Good morning, everyone, happy New Year. Before we begin the comments, I'd like to remind you that some of the comments we make 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 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'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.
Thanks, Jim. Good morning, everyone. I'd like to welcome you all to our earnings call to discuss the results for the fourth quarter and full year of 2015. Thank you for joining in the call this morning. In addition to Jim, our Chief Credit Officer, Jan Williams is on the call with us. And both Jim and Jan will be available for questions later in the call.
I’m extremely pleased to discuss with you our financial results and activities for the fourth quarter and full year of 2015 which were both truly successful periods for Eagle Bank. In the fourth quarter, we earned $22.3 million of net income, which is a 52% increase over the GAAP net income in the fourth quarter of 2014 and is our 28th consecutive quarter of record increasing earnings.
The fourth quarter of 2015 earnings represented a 32% increase over the operating earnings of $16.9 million in the fourth quarter of 2014, which excluded merger related expenses from the Virginia Heritage transaction completed in October of 2014. The earnings for the fourth quarter of 2015 comprised a 4% increase over the third quarter of 2015 earnings of $21.5 million.
Fully diluted earnings per share for the fourth quarter of 2015 were $0.65, a 33% increase over GAAP EPS of $0.49 per diluted share for the fourth quarter of ‘14 and 16% over the operating basis diluted EPS of $0.56 for the fourth quarter of ‘14. Another significant milestone is that we exceeded 6 billion in total assets at yearend 2015. These record levels of earnings and assets were attributable to the continued long organic growth and our consistent balanced performance in other key measurement indexes included strong net interest margin, asset quality and disciplined expense management.
For the full year of 2015, we’ve reported net income of $84.2 million. These earnings were 55% increase over the GAAP earnings of $54.3 million for 2014 and 46% increase over the full year of ‘14 operating earnings, which excluded $4.7 million of pretax merger related expenses. For the full year of ‘15, net income available to common shareholders was $86.3 million. Fully diluted EPS for the year of ‘15 were $2.50 which is a 28% increase over the GAAP EPS of a $1.95 for ‘14 and a 20% increase over the operating basis of EPS of $2.08 for the full year of ‘14.
We are very pleased with the quality of our earnings and the continued high level of profitability as evidenced by our return on average assets of 1.49% for the year of 2015 and 1.5% for the fourth quarter of ‘15 and a ROACE of 12.32 for the year ‘15 and 12.08 for the fourth quarter.
The return of average common equity ratios for the full year of ‘14 for the four quarter do reflect the impact of the $100 million equity raise completed in March of 2015.
The increase in earnings for both the fourth quarter and the entire year of ‘15 was driven primarily by continued top line revenue growth along with improved operating leverage. Total revenue for the year fueled by loan growth increased 32% over ‘14, while non-interest expenses excluding merger related items were only up 17%. For the fourth quarter, total revenue rose 21% as compared to the fourth quarter of ‘14, while expenses excluding merger related items increased only 10% over the fourth quarter of ‘14. Our continued focus on combination of top line revenue growth and improved operating leverage is a key factor in our consistently improving profitability.
The improved revenue during both the fourth quarter and the entire year was a result of while maintaining a very favorable NIM as well as strong loan and deposit growth. The NIM for the full year of ‘15 was excellent at 4.33% down slightly from 4.44% for the year of ‘14. The margin for fourth quarter was 4.38% which was down from 4.42% in the fourth quarter of ‘14, but was an increase over 4.23% in the third quarter of ‘15. The margin in the fourth quarter was improved over the third quarter, primarily due to reduced liquidity and an increase level of loans in our asset mix. The average loan to deposit ratio improved to 98% during the fourth quarter of ‘15 as compared to 96% during the preceding third quarter.
We have discussed in the past maintaining a strong margin is the key strategic objective, while never compromising our credit quality. The margins we’ve achieved over the last several years as a result of our disciplined approach to both loan pricing and the cost of funds as well as proactive balance sheet management.
However, given the competitive environment in our market, we continue to expect downward pressure on the margin as we move through 2016.
Loan growth for the fourth quarter was $221 million or 5%. In total, loan growth for the full year of ‘15 was 16% or $686 million. The largest growth categories in the fourth quarter were income producing commercial real estate loans, construction loans and C&I loans.
It is important to remember that our construction loans are generally not ground up projects but tend to be for the rehab of an existing building or condo conversion throughout our focused market.
We continue to see demands in the market, have a robust pipeline and feel that we can continue to achieve double digit loan growth with CRE and C&I loans which meet our pricing and credit standards. The overall Washington area economy remains solid with expected GRP growth. However, we continue to see loan demand that varies across the various submarkets in the Washington area and we diligently evaluate the relative risk in each submarket and for each loan product type.
We focused on these submarkets in the city and close to the broad way which we are most familiar with. Regarding the recent pronouncement from the regulators concerning CRE lending, I can firmly state that our lending and portfolio administration practices have remained consistent and are inherence with all the applicable of guidance from the regulators, our credit quality statistics speak for themselves.
Deposit growth for the year 2015 outpaced loan growth and was $848 million or 20% growth rate. We experienced very consistent growth in DDA deposits and money market deposits throughout the year, which continued in the fourth quarter in which we grew $232 million or 5%. We continued to focus on generating DDA deposits from new commercial customer relationships.
At December 31st, 2015, DDAs represented 27% of total deposits which is well above industry and peer group averages. On a combined basis, DDAs and money markets which we defined as core deposits comprised 82% of our total deposit mix which leads to our favorable cost of funds. Our cost of funds was actually a few basis points lower at 33 basis points in the fourth quarter as compared to 35 for the third quarter ‘15.
We remain consistent in our ALCO philosophy and disciplined practices, and continue to remain a very neutral position in regard to interest rate sensitivity. Our ALCO positioning remains well balanced excluding loans held for sale 65% of our portfolio is in variable or adjustable rate loans.
As of December 31st, 2015, the repricing duration of the loan portfolio is at least only 25 months including fixed rate loans, 24% of the portfolio reprices or matures within 30 days and another 12% within the first year. In total, 67% of the portfolio reprices or matures within three years and 82% within five years.
With our level of variable and adjusted rate loans in a stable core deposit base, we are well positioned, showed a trend of raising rates. In mid-December, FOMC decision to increase the target fed funds rate had an effect on increasing interest rates on our overnight fed funds by 25 basis points. Additionally, the increase in the prime interest rate of 3.5 had a modest positive impact on loan interest in the fourth quarter of 2015.
On the deposit funding side, we’ve not increased deposit rates and expect that due to significant liquidity that most banks have, we will not be raising deposit rates anytime soon. We’ve seen no reaction in our local markets to the fed’s this December move in regard to either loan or deposit pricing.
Our position in the market continues to be very strong. We retain our ranking as a largest community bank in the Washington metropolitan area as measured by deposits in the most recent FDIC report with eight largest bank in the region, but most importantly have only a 3% share of the entire market, so we still have a tremendous opportunity for continued growth.
The Washington region economy is strong and growing and has moved beyond the impact of federal spending cutbacks we experienced three years ago. Today, federal spending contributes less than 30% of total GRP, while we have seen significant growth in the private sector. The percentage of the local economy driven by federal spending has dropped from 39% four years ago to less than 30% today and has due more to the growth of the private sector than to the federal cutbacks.
The unemployment rate of region is 4.1% and we have added 62,000 jobs in the last quarter - I am sorry - in the last year. The largest growth sector of the new jobs being created are professional services, education and healthcare. And these are sign - and there are signs that the federal spending may be on the upswing again. From the omnibus bill recently passed by Congress, $3.6 billion in funding has been earmarked for agencies and projects here in the Washington area which will lead to further job growth.
However, the key for Eagle Bank is that we maintain our lending discipline based on both underwriting standards combined with our knowledge of the various submarkets throughout the region. It is so important that we understand that Arlington is different than Rockville and the market for suburban office space is different than boutique multifamily projects near metro station in DC. The asset of the quality of the back was excellent during the fourth quarter that has been throughout 2015.
At December 31st, NPAs as a percentage of total assets decreased to 31 basis points as compared to 41basis points at September 30th, 2015 and 68 basis points on December 31st, 2014. This level of NPAs is well below industry and peer bank loans.
Net charge-offs for the fourth quarter were 18 basis points of average loans and were 17 basis points as average loans for the full year of ‘15 equal to 17 basis points for the year of 2014. Charge-offs of 17 basis points for the full year of ‘14 and ‘15 of the lowest annual levels of charge-offs we have achieved since pre-rescission levels in 2008.
The amounts for loan loss at December 31st, 2015 was 1.05 of total loans the same as 1.05 at December 30th, 2015 and basically in line with 1.07 at December 31st, 2014. Our reserve methodology and practices have been consistently applied and the allowance has been computed based on risk analysis of each component of the portfolio, loan growth during the period and various environmental factors.
The provision expense was 4.6 million for the fourth quarter as compared to 3.7 million for the fourth quarter of 2015. The level of non-performing loans and other non-performing assets in our portfolio continues to improve through declines in NPLs to 26 basis points of total loans, the coverage ratio at the end of 2015 was 398% and we believe that we are adequately reserved.
Revenue from non-interest income was 6.5 million during the fourth quarter, a 22% increase over 5.3 million in the fourth quarter of ‘14. For the year, non-interest income was 26.6 million of 45% over the full year of ‘14 results. For the full year, the increases were primarily due to improvement in the origination and sales of residential mortgages. For the fourth quarter, the largest contributor to the improvement was 650,000 an additional gains on the sale of SBA loans.
The efficiency ratio for the fourth quarter of ‘15 was 41.47% as we continue our discipline management of non-interest expense and its effect on the efficiency ratio and expenses as a percent of average assets.
We improved our operating leverage as non-interest expense for the fourth quarter increased only 10% over the operating basis level for the fourth quarter of ‘14, while total revenue was up 21% over the same period. Operating expenses were 28.6 million for the fourth quarter.
The level of annualized non-interest expense as compared to average assets was only 1.94% of average assets for the quarter as compared to 2.16 on an operating basis for the fourth quarter of ‘14. This ratio and the efficiency ratio for the fourth quarter are significantly better than industry in peer group averages.
Based on our continued diligence in managing operating expenses, we believe we can maintain the efficiency ratio in the low 40s similar to what we’ve achieved in the last several quarters. It is important to note that we tend to look at the long-term trend for this measure rather than dwelling other ratio any specific quarter.
We will continue to invest in the infrastructure needed to support an outstanding level of customer service and quality of operations. We continue to evaluate our branch network and other facilities to make sure out occupancy costs are as efficient as possible. In that regard, we are in the process of moving our residential lending division to a new space and we are relocating both our Chevy Chase branch and our Georgetown branch the small, less expensive facilities while remaining in this upscale markets.
Meanwhile, we continue to recruit experienced, qualified bankers so they are critical to our high service, high touch philosophy and strategy.
During November 2015, we redeemed the 71.9 million of SBLF preferred stock as we have been planning and have discussed. The payoff was made from a general corporate funds including part of the proceeds of a $100 million common stock offering completed last March. Even with the impact on Tier 1 capital from SBLF payoff, our capital ratios remained strong. At December 31st, 2015, we had a common equity Tier 1 ratio of 10.68%, total risk based capital of 12.75% and tangible common equity to tangible assets of 10.56%. The Board and management are continued to continually maintain a strong capital position and continued to plan accordingly.
In summary, I would like say how pleased we are with a very successful 2015. We’ve advanced numerous strategic initiatives particularly in Northern Virginia and we are very proud to become a $6 billion bank, while maintaining our focus on customer relations, our attention to detail and our commitment to creating shareholder value.
Most importantly, we are extremely proud of the quality of our earnings and consistency of EPS growth that we’ve been able to achieve. We are well positioned in the Washington metropolitan area market and we are poised with continued success in 2016.
That concludes by formal remarks, we’d be pleased to take any questions at this time.
Thank you. [Operator Instructions] Our first question comes from the line of Casey Orr with Sandler O'Neill. Your line is open.
Good morning, Casey.
Great quarter, I just had a question for Jan. Can you give us some more color on the OREO expenses that came in this quarter specifically, you know was there valuation just with one specific property and how much was it writing down?
Well, we actually dispositioned a couple of pieces of OREO during this period. One was $3 million plus some properties that had some TI work associated with the disposition and that’s really where you got the expenses during the quarter.
Okay, great, that’s all I had for you guys. Great quarter, thanks.
Thank you. Our next question comes from the line of Joe Gladue with Merion Capital Group. Your line is open.
Thank you and good morning.
Yeah, just maybe follow-up a little bit on that. Just wondering the detail on other non-interest expenses were up I guess a little over million versus the third quarter. Just looking for some color on what made up that increase?
Hey, Joe, that relates directly to Jan, so response Casey on the OREO. OREO expenses are valuation of OREO is in that category and I would say that you know around $800,000 of that increase would be 900,000 which due to the OREO. So that was the major component of the other - the increase in other non-interest expenses.
Okay, hats off that might be the case. Thanks. Also I guess on the deposit side, the demand deposits I guess non-interest bearing demand was up just a tiny bit sequentially and non-interest bearing demand - I mean interest bearing demand deposits were down sequentially. Just wondering if that’s just seasonal or there was any you know big you know institutional withdrawal or whatever, just some color on that as well?
Alright, Joe, we tend to look at deposit numbers on an average basis and our numbers for the fourth quarter of the year in both deposits and non-interest deposits were actually some decent growth and the DDAs round up to be almost 29% of average deposits in the fourth quarter. They were - they’ve been at that level for a while. They were actually at 28.7% for the third quarter. And then total deposits have continued to do very well. The average total deposits for the quarter really increased from 4.84 million to 4.95 billion.
So again it’s an average issue. There could have been some noise at the end of the period but we tend to look at averages in our balance sheet and measure growth on that basis.
Okay. Alright, I guess last question I’ll ask just you mentioned you expect to see some continued margin pressure. Just wondering what’s backed into your expectations for fed rate for the year and how that effects your expectations on margin?
My crystal ball is probably as clarity as everybody else’s, who knows what will happen as it relates to the fed. You know we believe that we price our loans according to risk and evaluate each credit accordingly. So you know we believe that we have a strong margin. We think we can maintain generally the margin. Competition always has an impact. You know as I mentioned in our comments, we believe there is liquidity in the market, so we don’t see anybody increasing rates. But again who knows when that could change.
Alright, thank you.
Thank you. Our next question comes from the line of Dave Bishop with FIG Partners. Your line is open.
Hey, good morning.
Good morning, Dave.
I am just curious in terms of the overall market there. You know I think last quarter, you know you noted the loan pipeline of demand was strong in the urban, metro sites in the town centers, is that still sort of the driver of loan growth of expectations that you are going to continue to see that drive the majority of loan growth?
The loan is continuing to be stronger and stronger. We are becoming more and more selective. The boutique nature of our typical projects is pretty fast and true. It gives us the opportunity to be able to be a little more selective with builders that we know really well. The expansion in Northern Virginia is tremendous on the C&I side, especially when you look at the increase in government spending, technology, cyber security, if you go up the 270 corridor, Montgomery County you are seeing an increase in biotech, NIH is talking about doubling the size of their campus.
So you just have an awful lot that’s going on within the market. You know we are sensitive to in our opinion, there is a little bit frothiness in the multifamily side, in the large multifamily side, which is not the market we plan, boutique side because operating expenses is definitely the place to be. And you know the millennial are driving the market and we continue that to be strong and stronger.
I also just want to add obviously that with a change in administration regardless of which IO in, side of the IO ins is that you traditionally see an increase in job growth in Washington, people don’t leave Washington, more people come into Washington. So, and again that’s a millennial side which you will see on the multifamily improvement.
Got it. And then I think Ron touched upon the history you guys have in terms of underwriting on the commercial real estate side and their recent regulatory guidance, are there any expectations or is that a hope rather than a believe that maybe that’s introduced better risk adjusted pricing here and you think any peers are sort of less positioned for what I think promises to be a pretty tough examination cycle next year and maybe they’ll feed some market share at you all, I mean is there any sort of expectation or hope that’s crystallize next year?
We feel very good at the size that we are because we can afford the compliance, the cyber security, certainly the credit and ERM. So we feel real good that that we’ve obviously manage their expenses but we’ve applied them the right areas. So, and I do agree with you, I think that the exam cycle is going to be a little bit more difficult but feel real good that the systems that we have in place is something that is going to work with us. We also have been selected by the Federal Reserve to have quarterly meetings with them to give, not specific about Eagle but just the overall economy. So I think it shows the level of confidence that they have is us in understanding what the market is where it’s going and that’s both the all aspects, all size of the balance sheet.
Got it. Then one follow-up question, just curious current period load yields - average loan yield will sort of onboard it versus last quarter?
Hey Dave, the new loan rates for the fourth quarter yields that includes these where a little bit more than 490 and the payoff rate was around 530, so we gave up 40 basis points on that churn, not equal in terms of volumes but in terms of just rates about a 40 basis points give up between payoffs and new loan yields.
Got it, I appreciate the color. I’ll get back in the queue.
Very good, thanks Dave.
Thank you. Our next question comes from the line of Matt Schultheis with Boenning. Your line is open.
So a couple of quick questions with regard to sort of a follow-up to Mr. Bishop’s questions in your comments about the regulatory guidance on, commercial real estate. What type of interest rate change, do you underwrite to maintain healthy coverage ratios?
On the HVCRE issue?
Really it’s about 22 basis points I think in terms of the additional capital cost. Jim can probably outline that better for you.
Hey Matt, we use - in terms of pricing, we have a model that takes into account our cost and we also do it on a matched funding basis. So we use the FHLB curve, it’s an indicator of what our cost of money would be on a matched majority basis. And then established what we think and this goes I think to your question and Dave’s as well, we established or we think is a very decent return on equity and price the credit appropriately. And that is so important to keep our return on equity at very good levels. And as you know we’ve been in that 12% to 13% range. So we do allocate capital to our business units. We measure performance based on that. It’s all risk adjusted. And so as the yield for our changes and as rates are changing, we’re doing everything on a matched maturity basis and then we draw our outlook process or keeping our interest rate risk in line as we look at our entire balance sheet. And I’d say that balances as Ron’s comments earlier noted, we continue to have a very moderate level of interest rate risk.
I suppose, actually I may have missed word to that, I guess where I am really getting to is that if regulators are concerned that rates go up in coverage ratios on, real estate loans decrease creating weakness, do you underwrite to a higher interest rate from a coverage ratio standpoint, from a credit quality stand point?
We do on the initial underwriting side and then we also stress test the portfolio quarterly and we do it for rate increases. We do it for defines in NOI whether that’s vacancy or reduction in rental rates, expense factors, cap rate. And we found that our portfolio continues to perform extremely well even under multiple stress scenarios, so I think we’re pretty careful and follow all of the regulatory guidance as far as managing a commercial real estate concentration. And I think we’ve been pretty successful doing that and the results from our regulatory reveals on that have been held.
The other item I might want to add is the 18 years history that Eagle’s been in around is that all of our condo projects are underwritten to rentals. And therefore we understand exactly and we put very strict guidelines within our lending on condo conversions as to when they could actually go to a sale process. So we really try to protect ourselves. I don’t mean to begin to deep in weaves but I think it does clearly show our understanding of exactly what it takes within the market to minimize risk.
Okay. And one last question, this is a - I am asking for just open commentary, a quote from somebody else on the DC real estate market was that the suburban office park in DC is dead, what’s your take on that?
I think that’s almost accurate statement, I don’t think it’s quite as extreme as dead. But I think that - I think there’s been a radical shift in the suburban market. And you’re seeing some vacant buildings. We’re looking at two actually right now where buildings that are well located but they are aged that it can be converted to multifamily, so there are opportunities. Everything is very much focused on where the metro is. Montgomery County is major emphasis now on commuting. So you are right, it’s certainly not a healthy place, fortunately we don’t have a large position in that. And what we do, we feel good about. The meaning of our multifamily - of our office market is that they are multitalented. So it’s not like you have one building with one tenant, you know you have average sized tenants of 3,000 to 5,000 feet, so it’s not that anybody is going to hurt you in rollover and we underwrite expiration of leases accordingly.
Okay, thank you.
Thank you. We have a follow-up from the line of Dave Bishop with FIG Partners. Your line is open.
Yeah, one follow-up question. Just curious in terms of maybe the Maryland side of things, are you hearing some more optimism I guess from the commercial sector there with the change of administration you know all we can see be a little bit more business friendly than that the typical past administrations. Are you seeing any impact thus far from the rate to change in leadership?
Great point. I think that the state of Maryland relies that the way Montgomery County goes is the way the state goes. The governor has been very focused; there’s been a recent approval of the purple line as far as mass transit which will have a big impact in this part of the County. So the answer is yes, obviously that’s not going to an immediate change but I think it does. And I will tell you, as I mentioned earlier is that the biotech emphasis right now it’s going on in up to 270 quarter is also going to key along with the NIH expansion.
Got it, appreciate the color.
Thank you. I am showing no further questions at this time. I’d like to turn the call back to Ron Paul for closing remarks.
I want to thank everybody for attending and listening to the call. Obviously we are available overtime for any further question and everybody that’s on the East Coast be safe with the upcoming snow storm. So thank you again for listening.
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.
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