Eagle Bancorp, Inc. (NASDAQ:EGBN)
Q1 2016 Earnings Conference Call
April 21, 2016, 10:00 ET
Jim Langmead - CFO
Ron Paul - Chairman & CEO
Casey Orr - Sandler O'Neill
Catherine Mealor - KBW
Joe Gladue - Merion Capital Group
Dave Bishop - FIG Partners
Matt Schultheis - Boenning
Welcome to the Eagle Bancorp First Quarter 2016 Earnings Conference Call. [Operator Instructions]. I would like to introduce your host for today's conference, Mr. Jim Langmead Chief Financial Officer. Sir, you may begin.
Thank you, Tarya. Good morning everyone. Before we begin the formal remarks I would 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 2015 fiscal year and 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 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 would like to introduce Ron Paul, the Chairman and Chief Executive Officer of Eagle Bancorp.
Thanks, Jim. I would like to welcome all of you to our earnings call to discuss our results in the first quarter of 2016. We appreciate you calling in to join us this morning and your continued interest. Our Chief Credit Officer, Jan Williams is out of the office this week so Jim and I will be glad to answer any questions you may have later in the call.
We are very pleased to announce a 20% increase in earnings for the first quarter of 2016 as compared to the first quarter of 2015 and an 11% increase in fully diluted earnings-per-share as compared to the first quarter of last year. Earnings for the first quarter were 23.2 million up from 19.4 million for the three months ending March 31st, 2015. Earnings per diluted share were $0.68 for the first quarter of 2016 increased from $0.61 a year-ago. We are very pleased with the quality of our earnings and profitability which is reflected in the return on average assets of 1.54% during the first quarter which is increased from 1.49% in the first quarter of 2015. The return on average common equity of 12.39% for the first quarter of this year is down slightly from 13.24% a year-ago due to the increased capital raised in March 2015 of $100 million in the equity offering. We are also very proud to note that the first quarter of 2016 is a 29th consecutive quarters in which we have realized record increasing earnings. We continue our consistent long-term performance. As shown in our Annual Report recently mailed to our shareholders over the five year period ended December 31st, 2015 we have achieved a 38% compounded annual growth rate of increased earnings, a 29% growth rate in earnings per share, and an 18% growth rate in tangible book value.
Furthermore, it is now been five quarters since the merger with Virginia Heritage Bank so the results seen for the first quarter of 2016 truly reflect our consistent and balanced performance in multiple areas including continued organic growth of loans and deposits, a superior net interest margin, excellent credit quality and focus on operating leverage. Revenue for the quarter was driven by net interest income which showed a 14.4% increase over the first quarter of 2015 and was consistent with the fourth quarter of 2015. The net interest income derived from both growth in the loan portfolio and the benefits of our disciplined ALCO process to maintain a strong NIM of 431. The margin was down slightly from 441 a year-ago and from 438 in the fourth quarter of last year. However, at 431 the margin is still superior to industry and peer group averages and a key strengthen of Eagle Bancorp. Our earnings in the first quarter also benefited from our intention to expense management and its impact on operating leverage.
Non-interest expense for the quarter was $28.1 million which was basically flat as compared to the first quarter of 2015 and down 2% from the fourth quarter of 2015. The only negative impact in terms of operating leverage during the first quarter was non-interest income. Total non-interest was down 19% as compared to the first quarter of 2015 primarily due to the softness in the residential mortgage markets during the first quarter of 2016 which reduced gain on sale and because in the first quarter of last year we had net $1 million of non-recurring items related to gain on sale of securities and early extinguishment of debt. For the first quarter of 2016 investment gains was $624,000.
A key factor in earnings-per-share growth for the first quarter of 2016 was that non-interest income declined as compared to a year-ago we saw the positive impact on earnings of our continued focus on operating leverage. The efficiency ratio improved to 40.8 for the first quarter. This was achieved as the 10% increase in revenue during the first quarter was accompanied by no increases in non-interest expenses as compared to the same period in 2015. At $28.1 million non-interest expenses for the first quarter of 2016 were down 2% from the level of fourth quarter 2015. During the first quarter of 2016 versus 2015 we benefited from a combination of relatively flat staffing, reduced branch expenses, and low OREO costs. The other measure of expense management inefficiency that we track is the ratio of non-interest expense to average assets which improved to 1.85% for the first quarter as compared to 2.13% for the first quarter of 2015 and reduced from 1.94% in the fourth quarter of 2015.
We remain committed to our disciplined approached to cost management throughout the organization. In regard to facilities, we have or are in the process of downsizing two branches into more economical sites. We carefully consider our branch locations and are proud that another indicator of our efficiency ratio is our average deposits per branch of $236 million while the average in the Washington metropolitan area is $116 million per branch.
So while we continue to maintain the sound infrastructure needed to ensure quality of operations, meet all compliance requirements, and provide superior customer service, we consistently realize on opportunities for operating leverage and feel confident we can maintain the efficiency ratio in a range achieved over the last several quarters. We achieved a strong NIM of 431 for the first quarter due primarily to loan yield compression which was expected and we have previously discussed the margin was down slightly from 441 in the first quarter of 2015 and 438 in the fourth quarter of last year.
The average yield on loan portfolio continued to be very favorable during the first quarter at 5.13% while the average cost of funds was 36 basis points. Due to the overall low rate environment and competitive pressures we see the remaining possibility of some additional margin compression. However, our margin continues to be significantly higher than industry and peer group averages and we are confident that it will remain so. We continue our disciplined approach to pricing of both loans and deposits.
We remain committed to maintaining a strong NIM and see no value in growing the balance sheet just for the sake of growth. Our primary focus will always be on growth in earnings-per-share. We have limited interest rate risk in the event of rising rates through our relatively neutral position for assets and liabilities sensitivity. We maintain a short duration of both loans and deposit. The repricing duration of our loan portfolio is only 25 months. Variable and adjustable rate loans comprise 65% of our portfolio up from 59% a year-ago. We believe we are well-positioned for the increased interest rates should that day come.
At March 31st, 2016 the loan portfolio had increased 16% over the balance of March 31st, 2015. That rate of growth is net of the impact of the sale of the $83 million of indirect auto loans from VHB merger sold in July 2015. We had solid loan growth during the fourth quarter of 2016 of $158 million or about 3.2%. The increases during the quarter were in owner occupied commercial loans, construction loans and income producing CRE loans. Our loan pipeline is strong today and we believe to see demand throughout the Washington metropolitan region.
Deposit balances as of December 31st, 2016 showed growth of $605 million or 13% since March 31st, 2015. Deposits increased only $31 million or 1% over December 31, 2015. Since we routinely see deposits fluctuations especially at year-ends we are more tuned to average balances for each period rather than just a period end. In that regard I would note that average deposit balances for the first quarter of 2016 had grown 19% over the first quarter a year-ago and increased 4% over the fourth quarter of 2015. At March 31st, 2016 core deposits which excludes CDs were 85% of total deposits and DDA deposits were 28% of total deposits which is consistent with our business model and long-term strategy.
We continue to strengthen and grow our core customer relationships through cross sales of additional deposit products, treasury management and other related services. We continue to see an active economy and strong loan demand in the Washington metropolitan area. The region has seen growth of over 68,000 new jobs in the last year and most are in the high income, white collar sectors. The most significant job growth over last year has been in Business Services, Healthcare and Education. While there is healthy loan demand the market is very competitive and we still continue our careful underwriting of loans by industry, location and product type. We still see the possibility for oversupply of certain product type in certain submarkets. The demand for multifamily residential space is still strong in multiple markets in Washington, DC proper and are beginning to see some stabilization and repositioning in the suburban office market.
We continue to see significant opportunities in northern Virginia market and emphasizing our marketing efforts there as we spoke about before. Our credit quality statistics continue to be very favorable levels for the first quarter of 2016. Net charge offs annually were nine basis points of average loans for the quarter as compared to 15 basis points of average loan for the first quarter of 2015 and 18 basis points for the fourth quarter of 2015.
At nine basis points the level of charge offs were equal to the best levels the bank has achieved and were below our average of 17 basis points for 2015 and industry and peer group averages. At March 31st NPAs as a percentage of total assets were 42 basis points as compared to 58 basis points a year-ago and 31 basis points at December 31st, 2015. Nonperforming loans as a percentage of total loans were 43% as compared to 44 basis points at March 31st, 2015 and 26 basis points at March 31st, 2015. The absolute level of NPAs increased by $6.7 million in the first quarter of 2016 to $25.8 million. The increase was caused primarily by two loans which are very well secured and from which we expect no loss. We continue to adhere to our conservative policy as to when to place a loan on non-performing status.
The allowance for loan losses was 1.06% 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 or the provision expense are dependent upon both the changing mix of the portfolio, economic factors, and fair value of accounting impact of the merger with Virginia Heritage Bank.
At March 31st, 2016 the coverage ratio was 249% of nonperforming loans as compared to 244% at March 31st, 2015 and 398% at December 31st, 2015. At these levels we believe the bank is adequately reserved. Based upon the capital raised in March of 2015 combined with the additions to retained earnings from our strong profitability quarter after quarter we sustain our strong capital ratios.
During the first quarter of 2016 we accreted capital at a higher percentage rate than the growth of the balance sheet thus improving our capital ratios. At the March 31st, 2016 the total risk based capital ratio was 12.87% increased from 12.75% at December 31st, 2015. Even more importantly the tangible common equity ratio improved from 10.39% a year-ago to 10.86% at March 31st, 2016 and as compared to 10.56% in December 2015. The Tier 1 leverage ratio was also improved from 10.9% in December 2015 to 11.01 at March 31st, 2016.
We are very excited about the opportunities we see for the balance of 2016 as we strive to solidify our position as the leading Community Bank headquartered in the Washington metropolitan area. We will continue to focus on the principles of relationships versus philosophy. The acronym FIRST stands for flexible, involved, response I've, strong, and trusted. The culture we live by every day. We appreciate the support of our shareholders and those of you on this call. We thank all of you for your interest in Eagle Bancorp. I would like to remind you that our annual shareholders meeting is upcoming at 10.00 AM on May 12th at the Bethesda Marriott Hotel. We hope to see many of you there at the meeting so we can thank you personally.
That concludes my formal remarks. We would be pleased to take any questions at this time.
[Operator Instructions]. Our first question comes from Casey Orr of Sandler O'Neill. Your line is now open.
I was hoping we could dive a little more into the margin and what specifically was going on with deposit cost this quarter. It looked like deposit cost went up, that was driven or was that driven I should say by the Fed move in December or are you running any deposit specials in the quarter that would have impacted those rates?
Yes, Casey. I think your points about the Fed's move in December had an impact. Some of our customers that had larger balance in their accounts have come -- I think it's a competitive factor. We're seeing more and more discussion of higher rates although as you know rates are actually reversed themselves here to an even greater extent in the first quarter of the year, but I would say it's competitive pressure.
Our money market rate averaged 33 basis points in the fourth quarter and it was up 4 basis points in the first quarter to 37 basis points, but overall as Ron commented in the -- his remarks about our ALCO process, we think our cost of money which is only 36 basis points or so is very strong compared to other banks, but we do need to continue to grow that deposit base, we have got competition in the marketplace and that was the reason that that first quarter was up a little bit.
And then on the same lines I guess how high are you comfortable with the loan deposit ratio getting to? I mean could we see that go above 100%?
No. We like to stay at that 95%, 98% range. You know, it fluctuates every day. We feel comfortable with that with the amount of alternative sources of funds that we have. If you look on our list of deposits, you will see that there's significant liquidity that we could tap into if that's what we wanted, but in that 95%, 98% range is the comfortable level. Could it slip above a hundred sure but not for any extended period of time.
One more just switching gears. With the success of integration of Virginia Heritage now well behind you, I guess what's your appetite for future M&A deals and what are some areas that’s outside your current footprint that you would consider moving into?
We continue to take the position that we will stay in the Washington metropolitan area. That hasn't changed. With our currency and with opportunities that are out there we're always looking like everybody, but as we have consistently said that it would have to be accretive out of the box and in a market that we want to continue our footprint in, which is again in that Washington metropolitan area.
Thank you. Our next question comes from Catherine Mealor of KBW. Your line is now open.
One quick follow-on to Casey's deposit questions. So how should we think about additional deposit increases from here if we don't see any more Fed increases for the rest of the year? Do you feel like deposit costs should be stable until the next Fed move or as you think about local competition and trying to keep that loan to deposit ratio at a level that you want you still may see some increases in deposit costs throughout the year?
You know, obviously so much of it is driven by competition. You know, you can have a bank around the corner that's decides do increase their diameters and that's certainly a competitive pressure. We don't see that as of right now to any large degree, but nonetheless it is a question that we're asked all the time as the Fed has increased rates why haven't we aggressively increased deposits. There's always an answer.
Having said that so much of what our deposits consist of our core relationships and so much of that core relationship both has loans and deposits so the standard answer is we will be more than happy to increase deposits if we increase your loans. So that's the balance that we're always playing off of with 28% of our deposits in DDAs we feel good about that because of the size that we are now we are seeing more and more opportunities from larger institutions whether it's universities, hospitals, etcetera. So we're continuing to see that opportunity for large size deposits because they recognize counties as well. They recognize our commitment to putting money back into the community. So we are seeing those opportunities and again it is a competitive market.
And then pushing over [ph] to fees other income was also higher this quarter. Any commentary on what is driving that?
Yes. We had I think at our press release commentary we had an OREO property that we settled and sold and generated a profit of -- it was about $570,000, Catherine in OREO. So that was recorded in other income within non-interest income.
Thank you. Our next question comes from Joe Gladue of Merion Capital Group. Your line is now open.
I wanted to I guess follow the sort of the net interest margin question from topic from the other side on the loan side. Just first off are you still seeing lower yields on new loans that are being issued as opposed to loans that are paying off or rolling off? Is that still the case?
We are, Joe. A good question. Yes, that's the reason in this very low interest rate continuing low rate environment. The average new loan yield we had in the first quarter was about 4 and 7 [indiscernible] call it 484 was the exact number. So that's the rate and the fee and then on the payoff side it's around 520 to 525. So we're giving up 35 to 40 basis points, which is pretty consistent with the fourth quarter of 2015 and the year of 2015. So it is a function of where we are in the rate cycle and how long we have been here and it is probably going to continue to some extent, but we minimize any impacts there.
Okay. And you touched on I guess the loan to deposit ratio a little bit, but I guess I was looking at it from the loans from the perspective of percentage of running assets and the loans have been rising approaching 90% of earning assets these days. Is that something you think you will maintain or do you expect to put on more securities or--
No. I do. I expect that's where we'll be. Ron had commented earlier that we operate kind of in that 95%, 96%, 98% loan to deposit ratio so you can -- and that's been there for are a while. We were a little bit elevated this time because of the loan growth relative to deposits, but over time I think the 96%, 97%, 98% is where we'll operate.
Okay. All right. And I guess just lastly just a couple of I guess relatively minor items, but there was some I guess big percentage increases in, you know, the expenses in regards to marketing and professional services. Those just seasonal bumps there? Anything we should know about going on there?
I mean I think the only thing that's early in the year that's not comparable from a quarter to quarter basis, Joe, as you recall Ron talked extensively about the agreement we have with George Mason University that began kind of mid-year in 2015 and so now we'll have a full year impact. So if you really looking first quarter to first quarter we have a new expense. We had put out a press release on that on the overall cost of it, which is -- you know, I recall somewhere around $600,000 or so per year so you have that impact on a quarter to quarter comparison.
Thank you. Our next question comes from Dave Bishop of FIG Partners. Your line is now open.
A question for you. There's been a lot of headlines regarding the [indiscernible] commercial real estate and we have heard some markets are seeing some weakness maybe on the higher end side, maybe on the condo multi-family. Can you talk about what you're seeing in the metro DC market? You know what areas are stronger than others and maybe where -- if you are seeing any sort of pull back or stabilization maybe?
Sure. Again, as we have said really quarter-over-quarter Washington is just had an incredible growth rate of 68,000 jobs, actually there's an article about it last weakened that they're expecting that to even go higher going forward. A lot of that is millennial driven which is exactly the market that we're playing in downtown. Multifamily there's certainly a lot of construction going on, but I can telling you as of right now we haven't seen any uptick in vacancies or concessions. Again, bear in mind in that we're not doing the 300 units project, we're doing the 100, 150 unit project so the operating expenses are much more manageable, the marking is much more manageable, and the price per foot on the rental side is cheaper.
You know, we probably for the past 18 months to two years we have seen a softening in the suburban office market. However, I will say that over the past couple of months we have been reading and statistically have recognized that we have seen stabilization within the suburban office market and very pleased about that. I can tell you that in the Montgomery County as an example number of office buildings that we follow very carefully the smaller mid-sized tenant which I'm going to say is let's just say the 5000 to 10,000 square foot range is actually seeing a pickup in demand. So I would say that we're seeing a stabilization. If there was a concern I had, it would be in the higher end larger, size multifamily projects downtown.
And then shifting back to operating expenses, you know, clearly good operating leverage this quarter in the phase where you typically see sort of resets on the compensation side. Do you think this is a pretty good run-rate moving forwards into the next few quarters or are you anticipating any sort of operating expense pressure in terms any new initiatives or investments we should bake in?
Well, I would say, Dave, that as we go through the year we have got plans with regard to additional personnel, but I think you can -- the premises and equipment costs are probably going to be pretty stable. Other expenses tends to move up a little bit as the bank moves through the year and we do add people and we get larger and things relating to the size of the organization, but overall we have been operating in that call it 41 to 42.5 range in terms of efficiency ratio and that's kind of a target range for us. So it's one of the dials and I would say we will continue to be consistent in that management, but I would expect that the trends would be slightly up in dollar terms just because of what's going to happen to salary and benefits as you go through the year.
Thank you. Our next question comes from Matt Schultheis of Boenning. Your line is now open.
So a really quick question on your equipment lease that you began to really do in the fourth quarter I guess of last year or you announced. Is that performing as expected, worse than expected, better than expected?
Matt, it's really a minor product that we have in the quiver, but I'm not really anticipating that to be any driving part to it so I would say that it's as expected. The area that we're very excited about being the FHA product is something that we think has a huge opportunity for us so that would certainly be -- those being the two newest products we have a lot of confidence in our FHA program.
And this is kind of a -- it may be hard to quantify and the answer may be zero, but with the DC metro expected to close for a month, maybe 6th, on the blue line, is there a disruption to your borrowers, your business and, if so, what would that look like?
I don't think it has any impact on our customers or -- you know, it obviously creates an inconvenience on the employment side, but I will tell you that without digressing too much into the new head of metro is just a real rockstar and have a lot of confidence and believe strongly that the impact that he is making and the determination of turning around metro is critical and will be a huge long-term benefit to the market. So I really don't -- again, big inconvenience when metro was shut down that one day, traffic wasn't horrible so it's not something that we're -- that concerned about.
Okay. I just wasn't sure if more complex logistics might affect the project development timing and start timing of things of that nature but thanks for the color.
Yes. There's also been some comments that has come back that he has retracted his statement about closing it for a six month period. We're going to start a shuttle service to increase our non-interest income.
Thank you and at this time I am showing there are no further participants in the queue. I would like to turn the call back to management for any closing remarks.
No closing remarks. Just I think that we're very pleased with the way things are going. It's consistent. I think that we're always looking for the run, not for the short period to period. Very satisfied with where things are. Very optimistic as to the market and believe strongly that the growth that we have had will continue based on the pipeline that we have seen. So other than for that thank you everybody for calling in. Hope to see you at the annual meeting and as always if there's any questions don't hesitate to call. Thank you.
Ladies and gentlemen, thank you for your participation on today's conference. This concludes your program. You may now disconnect. Everyone have a great day.
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