Eagle Bancorp Inc (EGBN) 2009 Q3 法說會逐字稿

Good day, and welcome to the Eagle Bancorp third-quarter earnings call. Today's conference is being recorded. At this time, I'd like to turn the call over to Chief Financial Officer, Mr. Jim Langmead. Please go ahead, sir.

Good morning, everyone. Before we begin the presentation, I would like to remind everyone that some of the comments made during this call may be considered forward-looking statements. Our Form 10-K for the 2008 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.

We realize that many analysts are modeling Eagle Bancorp's results, and we certainly appreciate that coverage. However, while we think that our prospects for continued growth are good, we do not plan 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 thank you all for participating in our inaugural earnings conference call. As most of you know, today's earnings announcement is the first since our common stock offering just over a month ago and, in fact, is our first earnings call ever.

In that offering, we raised $55 million after completing many traditional roadshow meetings with investors. During the process, we met many people who were very interested in and supportive of EagleBank, and as a result, we gained many new shareholders. Therefore, we thought this type of call would be appropriate to keep you all abreast of the progress here at the Company.

Also with me on the call is, as you heard earlier, our Chief Financial Officer, Jim Langmead and our Chief Credit Officer, Jan Williams. They will be available later in the call to answer any questions you might have. I am pleased to announce that for the third quarter, we had another period of strong earnings, consistent with our performance over the last several quarters. Our net profit before preferred stock dividends was $2.7 million, which is a 21% increase over that same period last year. After the TARP dividend, we made $2.1 million, which is equal to our earnings for the prior quarter of this year and down only 5% when compared to the $2.3 million earned in the third quarter of last year, when no dividends were paid.

I will discuss more of the details from the P&L statement in a minute, but want to state that we were truly pleased that during the third quarter, we continued to achieve reductions in the level of our nonperforming loans and nonperforming assets. At September 30, the level of our NPAs as a percentage of total assets was down from 2.14% to 1.63%. This is the second consecutive quarter where we have seen reductions.

Even though we operate in the Washington metropolitan area, where the economy is stronger than other regions, we are proud of our success to date with nonperforming loans. This is a testament to the underlying quality of our portfolio, management oversight, and the aggressive approach we've taken towards the problem loans that have surfaced. Both NPAs and past-due loans are at manageable levels.

Our provision expense was $1.86 million for the quarter, which produced a total allowance at quarter end of 1.51% of total loans. We feel this is sufficient to absorb any potential losses and gives us a coverage ratio to total NPAs of 72.85%.

Since the year-over-year comparisons are somewhat skewed by the impact of the Fidelity & Trust acquisition last year, I will be focusing many of our remarks on the results since then, our continued organic growth and other performance factors. I hope you all have had a chance to review the sequential quarterly information on the last page of the press release.

Our net profit earning during the third quarter of 2009 was driven by a continued strong net interest margin of 3.77%. Like most banks, we have seen our margin gradually contract over the past two years, but it's still way above our peer group average. We continue to actively manage both our loan yields and deposit interest rates. Cost of funds rates were significantly reduced during the third quarter, as we continued to change our mix of deposits. We have seen excellent growth in our money market product, which has allowed us to slow the growth of higher cost core market CDs and significantly reduce the level of wholesale CDs and other borrowings. Our growth rate of total deposits has been 17% over the past year. While achieving this, we have been able to grow our DDA balances and maintain our DDA balance at 18% of total deposits.

The net interest margin was impacted during the third quarter as deposit growth exceeded loan growth, and we had some funds invested in liquid short-term lower-yielding assets for the past quarter. Some of this liquidity was held in anticipation of loan fundings. Several of those loan fundings are sizable transactions, for which the loan closings were rescheduled from September into October. In addition, we have a firm backlog in our loan pipeline and expect much of the liquidity to be deployed in the fourth quarter.

Net profit for the third quarter was also enhanced by an increased level of noninterest income as compared to the same period of 2008. Fee income from the sale of residential mortgages and SBA were up. Service charge income is also showing increases, both from the post-acquisition level and number of deposit accounts and from better monitoring and discipline within our retail banking division.

Noninterest expenses moderated from the second quarter of 2009 due to the absence of certain one-time expenses, the largest of which was the FDIC special assessment. Therefore, we showed an improvement in efficiency ratio for the third quarter down to 62.29%. This is similar to the level we reported a year ago prior to the acquisition of Fidelity & Trust. As we have previously discussed, this merger did cause an expected increase in the efficiency ratio, which we have worked back down through the anticipated expense reductions over the last four quarters.

We experienced minimal growth and loans in the third quarter for several reasons. Historically, this is the lowest-growth quarter of the year due to seasonality. Also in this economic climate, our lending officers are spending the necessary time on loan administration and monitoring the portfolio. These efforts have clearly paid off as evidenced by the decline in NPAs over the last few quarters. Another result of our loan policy and management intention can be seen in the shift of mix of our loan portfolio. We increased the level of C&I loans and income-producing real estate loans while shrinking our exposure in construction loans.

And finally, I would like to remark on our capital position. As a result of the common stock offering last month, we went from a strong to a very strong capital position. Based on the tremendous response and demand for the common stock, we issued approximately 6.7 million shares, which netted $51.8 million in additional capital after transaction costs. The results were that as of September 30, we had a total risk-based capital ratio of 15.57% and a tangible common equity ratio of 9.56%. We are now well positioned for the tremendous growth opportunities represented in the greater Washington, DC metropolitan area.

That concludes my remarks. We would be pleased to take any questions at this time.

(Operator Instructions). Carter Bundy, Stifel Nicolaus.

Ron, if you could just talk a little bit about the funding and the earning asset side, it looks like your loan yields were up pretty meaningfully sequentially. If you could talk about if you think that is sort of a sustainable number, if you see that continuing to move up. And then also, do you see much more room on the funding side to continue to reprice down in the CD portfolio particularly?

, Well, obviously, won't discuss forward-looking thoughts, but with regard to the past quarter, what we've been able to see and continue to see is a strong ability on the pricing model on the loan side. We continue to see huge demand, obviously, most of it due to the dysfunctionality of the larger banks, where we are seeing the strong quality loans come in. And the price sensitivity is not nearly as intense as it was two years ago. Obviously, that's on the asset side.

On the liability side, we have seen a significant increase in liquidity, as I mentioned earlier and believe that with the cross-selling and the opportunity and emphasis that we are spending on increasing that cross-selling penetration, and being able to increase deposits from borrowers, we do believe that liquidity ability will continue.

And on the money market campaign you all talked about, what were you all paying on that?

Our money market right now is south of 1%.

Right. The premium money market rate currently is a 1.55% rate. Carter, it had been declining in the last several months as rates in general have come down. But that has, as you indicate, has been a great driver of growth of core deposits. But the current offered rate is 1.55%. That's a tiered product. The overall rate on money markets is less than that.

Okay. And what are you all paying on the CD side, the market CDs, the one year or so or whatever since you all are keeping it short?

Yes, our CD rates are average, I would say at this point. We're offering a six-month rate of 1%, a one-year rate of 1.35%. We have a nine-month penalty-free at 1.25%, and we have a two-year rate at 2%. I think all of those are reasonable but not excessive.

Okay. Could you just talk a little bit in general, and then I will hop off here, just about the general deposit gathering environment and how that compares today versus let's call it a quarter or two ago?

I might just also add that the amount that we have in our CD and wholesale CD portfolio is less than -- in excess of $50 million less than it was a year ago. So where we are is we are seeing more and more of the relationship building within the DDA and our money market account.

So that's been the customers as well as building current customer relationships?

Our new -- yes. It's increasing our new customers on both the deposit and the loan side.

Okay. And Ron, just sort of some general conditions on your markets on how the deposit environment is today.

Well I think only speaking about Eagle, obviously, with the significant increase that we have seen in deposit growth, both from the DDA and the money market side, we are very pleased.

Okay. And obviously you talked about the loan expectations going into the end of the year here. But do you see your loan growth expectations from let's say a quarter or two ago, do you see that easing, given the economic environment, or do you still see significant opportunities out there?

We see significant opportunities out there. And as I said, based on the pipeline that we've had from the third quarter that's going to roll into the fourth quarter, see a very strong pipeline.

Okay. And finally I will hop off then and let other people ask questions. On the credit side, obviously, a nice quarter. Where are you seeing --obviously we can see in the press release where you've had some of the issues. But if you could sort of talk about your conditions at the bank and how you think the markets -- or how the markets are holding up and how you are thinking about that going forward, particularly on the non-owner occupied commercial real estate side?

Jan?

We've actually in our history experienced very little loss in the investment real estate area -- really insignificant. We are seeing some erosion in some cases in debt service coverage, which really, based on our methodology, moves the risk rating on the credit, and that's one of the reasons our allowance increased from 150 to 151. It's not a situation where we have any issues in terms of ability to repay the loan, but maybe their debt service coverage went from 130 to 120. And that moves them into a different risk category.

Overall, our properties are well situated. We've got over 70% of the portfolio in Washington, DC; Montgomery County; Fairfax County; Arlington and Alexandria, all close-in suburbs, primarily inside the Beltway stuff. And we really haven't seen significant problems in that area at this point.

A lot of what we have are going to be Class-B space based on our size. We are not doing a lot of big Class-A projects. And that market has been holding up very well.

Okay. Just sort of a general question. Let's just say your cash flows, your debt service coverage, is performing okay. But it becomes a valuation issue on the property; would regulators theoretically be pushing for any kind of movement to nonaccrual even though if it's still performing just because of a valuation perspective?

No; we haven't had any push down on that at all. And in fact we are very proactive in obtaining updated appraisals on all of our real estate portfolio. And if we found an impairment, we would take care of that and move it to nonperforming status because we are very conservative.

For example, we had a nonperforming real estate loan that we diagnosed two years ago and put into NPA status. It was about $5.6 million. The balance on that is now down to $1.3 million, and the units have -- we have finished the project; the units have sold quickly.

Okay. Thank you all very much.

[Steve Tunsington], Steven Capital.

Thanks for taking the question. You may have just touched on this a little bit, but I guess it looked like you had some C&I charge-offs jump up and get you in the quarter. Could you comment a little bit about what you are seeing within the C&I portfolio?

The erosion that you are seeing in those charge-offs in the C&I portfolio primarily related to one asset-based loan. We have implemented very strong monitoring functions in the ABL portfolio. However, we have experienced two significant charge-offs in that area in the quarter. We continue to monitor vigorously.

Any further weakness expected there?

Not based on the monitoring that we have in place at this point. I can't tell you what could happen in the future, but we are -- I don't think there's any organization that monitors their ABLs more than we do.

Okay. I guess secondly, are there any cost saves left to squeeze out of the Fidelity deal, or you think this is a pretty good run rate at this level?

We've had some cost savings that we've been able to participate in and benefit from in part of the third quarter, so we might not have gotten it for the entire third quarter, but it's very minimal.

Okay. And then as far as future acquisitions, are you seeing opportunities? And what is your appetite for, to the extent there are FDIC-assisted and/or whole bank deals?

Steve, as we talked about during the roadshow, we are certainly looking at opportunities. We are seeing opportunities both from the -- more really from the local players. There's not an awful lot of banks in this market that would be within the footprint that we would be looking to expand to that's an FDIC workout situation. But we are, obviously, always looking for opportunities of existing banks.

Okay.

And now that we have the capital, obviously, we'd be able to participate in that if available.

Okay. Any opportunities from the potential changes in the SBA program from your perspective? As far as --

I think there are opportunities in that area. We have been very active in the SBA market in the past. And I think we will be participating in that in the future. Shouldn't have --

Over the past couple of years, we've been the number one community bank SBA provider. Obviously, we've had a pretty slow year this year for the most part because of the reduction premiums. But we do believe with the new programs that they are initiating on both programs, that we see that there's huge opportunity and obviously we are structured in that way.

Lastly, on the loan growth side, you commented generally about the pipeline -- it's very strong. I think if you look back historically, you guys have been able to do, at times, 3% to 5% linked quarter loan growth. I mean are we in an environment where you would anticipate seeing 12% to 15% annualized loan growth in your opinion?

Well, obviously, we're not going to go in the forward side, but I can only state that what we have seen over the past couple of years in our loan growth is opportunities that right now are stronger than ever because of, again, both from the -- an awful lot right now from the C&I side as well, just because of the situation that we are all experiencing with the big banks.

Okay, great. Thanks, guys. Good quarter.

Brian Hagler, Kennedy Capital.

Good morning. Appreciate you having the call. Steve actually touched on one of my questions about acquisitions, but I guess one thing you didn't mention and maybe this isn't a possibility or an opportunity, but could there be any branch sale opportunities in your markets that you would entertain?

The more likely opportunities that we see right now is, as you mentioned, some branch opportunities and also some opportunities from some of the teams of lenders in the big banks that are now looking to get back into the community banking side.

We've talked to a number of groups, some just individuals and some with teams as much as five or six lenders. So we're looking at the opportunity, and we see that as a huge opportunity. And again, as I mentioned during the roadshow, the opportunity to expand in the Northern Virginia marketplace is something that we are absolutely looking towards.

All right, great. And then I just wanted to make sure I'm interpreting some of the details in the press release. You talk about the higher than average liquidity this quarter. And obviously I can see that that was derived from the deposit growth being much stronger than the loan growth this quarter. But based on your comments about strong growth going into the loan growth into the fourth quarter, do you anticipate, I'm assuming, some of that liquidity going away then?

Absolutely.

Okay. I didn't know if deposit growth would still far outweigh loan growth, but you expect that to be a little bit more balanced in the fourth quarter?

Yes, I think it certainly would be more balanced in the fourth quarter than the third quarter. Obviously, we still continue to see strong deposit growth. But we don't think that we will have the extent of the liquidity as we had in the third quarter.

All right. Great. Thanks a lot, guys.

David Mitchell, William Blair.

Good morning. Almost everybody has asked all the questions I wanted to ask, but can you just give me -- you guys are pretty adamant on the roadshow that credit quality was improving and you clearly proved that today. Do you see the same kind of trends in the fourth quarter versus the third quarter?

The magic word of trends obviously is something that we are not going to get into.

Okay. And have you, can you give us a sense of how big the pipeline of loans for the fourth quarter is?

No, we can't.

Okay. Congratulations. Excellent quarter. And doesn't sound like a lot of management teams have done their first conference call. You guys are doing a great job.

Thank you very much.

(Operator Instructions). Carter Bundy, Stifel Nicolaus.

Ron, sorry to jump on again. Do you have the 30 to 89 balances there that you could give me?

I do. The past dues, about $11 million.

And that's just the 30 to 89s?

Yes.

Okay. Thank you very much.

Thank you. Are there any other questions?

[Eileen Lipsky], Sandler O'Neill Asset Management.

Good morning. Can you just give me what that broker deposit balance was at the end of the quarter, please?

At the end of the quarter, Eileen, about $95 million. About 7% of the deposit base.

Does that include the Cedars deposits as well?

I'm sorry?

Does it include the Cedars deposits as well?

It does not. The Cedars deposits we have that were all reciprocal, they add another say $70 million to that $95 million. So $165 million out of that total overall loan or deposit base. So that's the two pieces.

Great.

I might just add that that's down from $132 million from October of '08.

And is that a trend that we should expect as you are growing some of these money market and other core deposits, you will pay off some of the brokered? Or let them mature, I should say?

Yes, I think strategically, that is what we are trying to do. We are building relationships on the deposit side and the loan side. And, yes, the overall plan is to continue to have more core deposits, although we think our base today is very attractive.

Sure.

If I could just add to that, is that one of the big benefits of the Fidelity & Trust acquisition and now that that process has been completed, is being able to circle back on many of those relationships and be able to expand those borrowers into depositors now. And that's one of the big benefits that we are seeing and see some great opportunities there.

Great. And then just lastly, the ABL portfolio, how large is that portfolio?

The ABL portfolio?

Yes.

I'm sorry.

We may have to e-mail Eileen, on that if we can't find the --

I apologize. I don't have that with me.

Can we just e-mail you back on that, Eileen?

That would be great. And just are there any other portfolios within C&I that are starting to show some deterioration similar to the ABL book?

Well, I think the level of our charge-offs is, although it's higher than we have seen historically when we had pretty much no charge-offs, we are still really pretty good when compared to our peers. I think we're about a-third, less than a-third of what our peers are. I'm not seeing any significant adverse trends. The C&I portfolio asset base loan is really the only area where I've seen significant problems, so we believe we have that under control.

Great. Okay. That's all I had. Thanks, guys.

This does conclude today's question-and-answer session. At this time I would like to turn the conference back over to Mr. Ronald Paul for any additional or closing remarks.

I would like to thank everybody for participating in our first earnings call, and I look forward to speaking to you again next quarter. Thank you.

This does conclude today's conference. We thank you for your participation.