Eagle Bancorp Inc (EGBN) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Eagle Bancorp first-quarter earnings call.

At this time all participants are in a listen-only mode. Later we will conduct a question-and-answers session and instructions will follow at that time. (Operator Instructions) As a reminder this program is being recorded.

I would now like to introduce your host for today's program, Mr. Jim Langmead. Please go ahead, sir.

Good morning, everyone. Before we begin the presentation 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 2009 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 would like to remind you that while we believe that our prospects for continued growth and financial 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 the Eagle Bank.

Thanks, Jim. I would like to welcome you to our quarterly earnings conference call for the first quarter of 2010. We are grateful for the number of shareholders and analysts who participate in these calls and appreciate your interest in the Company.

Also with me on the call this morning are Chief Financial Officer Jim Langmead and our Credit Officer Jan Williams. They will be available later in the call to answer any questions you might have.

I am truly pleased to announce that for the second earnings call in a row we are announcing record earnings for Eagle Bancorp. In our January call we announced record annual earnings for the year of 2009. Today I am very excited to announce that for the first quarter we achieved earnings of $3.4 million which is the highest quarterly profit we have ever reported. This represents an increase of 63% from the first quarter 2009.

We are also reporting a $3.1 million in net income available to common shareholders, which is the figure after the TARP dividend. This again represents an all-time high for Eagle Bancorp. Also, this is the fifth consecutive quarter in which the Company has increased earnings over the immediately prior quarter.

Following along with the theme of strong sequential quarterly performance, the first quarter of 2010 was the fourth consecutive period of both declining dollar levels and percentages of non-performing assets. NPAs as a percentage of total assets are down to 1.36% at March 31, 2010. This is a dramatic improvement over March of 2009 when our NPAs peaked at 3.33% of total assets.

Another indicator of improving credit quality is a decline in the annualized net charge-offs for the quarter to 36 basis points of average loans. Our NPA and charge-off statistics continue to be very favorable as compared to peers. The provision expense was $1.7 million for the quarter. This was driven by the increase in loans during the quarter as well as our standard, very specific analysis of the portfolio.

We continue to manage the loan portfolio very proactively. While our credit quality statistics are very good and the economy here in Washington Metropolitan Area is stronger than most parts of the country, we continue to maintain our disciplined approach to the credit review process. Therefore we feel comfortable with the resulting allowance for loan losses as a percentage of total loans at 1.47% which was the same allowance for loan loss percentage at year-end 2009.

The coverage ratio of our allowance for loan loss to total performing loans -- to non-performing loans has improved to 100% at March 31, 2010. The improvement in the coverage ratio is also being driven primarily by decreases in NPAs.

We continue to experience outstanding growth in our balance sheet. Loan growth was $28 million for the quarter, which is an analyzed growth rate of 8%. This is good growth but I would like to note that we had $45 million in loan closings which slipped over into the early part of April.

We still see opportunities for quality loans and more importantly new relationships with desirable customers as many large national and regional bank competitors continue to under serve this market. There is no question we are picking up market share in the Washington Metropolitan Area. We see it in our new business numbers; we hear it from our customers and prospects.

An example of the kind of relationship we have been able to develop is one which started with a loan to a strong local developer who couldn't get a timely answer from a large national bank. The $18 million loan was for the purchase of a fully-leased Class A office building in central Montgomery County. The loan-to-value was 65% and the transaction was well priced.

After closing the loan ourselves we were able to sell our participation to bring our exposure down to $12 million. As a result of our purposed, quick response and local decision making the customer was extremely pleased and transferred to us a substantial portion of their deposit accounts. These accounts are now in excess of $10 million.

This is an example of how the dislocation in the market and poor service of large banks create opportunities for us and how we were able to deliver to quality customers in our market.

Returning to our balance sheet, core deposits have increased 65% over March of 2009. We continue to have a very favorable deposit mix with 20% of deposits in DDAs. Additionally, we have seen continued success with our money market account products and as a result have reduced the level of CDs from 49% of deposits a year ago to 35% at March 31, 2010.

In addition, we have reduced our level of Federal Home Loan Bank and other borrowings by 18% since March of last year. The entire company has worked hard to reduce the favorable trends in core deposits. As I believe we have previously discussed with you, our incentive plan for our lending and business development officers as well as branch personnel are designed to have them focusing on generation and retention of core deposits.

A very key item to note is that our net interest margin for the quarter was 3.98%, up slightly from the previous quarter. This is the result of continued discipline in both the pricing of loans and cost of funds. As I mentioned before, we have reduced the percentage of CDs in our deposit mix which has helped our margins. Additionally, the CDs renewing and repricing today are at lower rates than one year ago.

We continue to expand the use of floor rates in our loan portfolio and that has helped to mitigate the impact of lower market rates. We continue our proactive approach to the ALCO process and are well-positioned for the current environment and for rising interest rates.

The efficiency ratio for the first quarter was 62.15% and we are pleased with that level. We continue to develop and fine-tune our infrastructure. We are closing an underperforming branch in the Silver Spring area but are also adding personnel to business units that offer strategic growth opportunities and continue to look for branch opportunities.

Just as the turmoil at some of our larger banks has allowed us to acquire customers, it has also allowed us to gain new officers and employees. We have a new Director of Human Resources who joined us from Chevy Chase Bank Capital One. We just announced adding a new Senior Vice President to manage our expanding commercial real estate lending group in North Virginia.

And the most exciting news is that we have added a new team in our residential mortgage division that will significantly increase our mortgage origination and sales activity and the related generation of non-interest fee income. We continue to operate only as a broker with all loans generated being presold to quality investors on a rate lock and servicing release basis.

I should add that this may cause some swings in our non-interest income and efficiency ratio numbers over the next couple of quarters as the personnel and other expenses start right away. But under the new accounting standard 166 the income from sale is deferred until all recourse provisions are expired, a period of about three to four months.

As a final comment, our capital position remains very strong and the total risk-based position at March 31 of 13.5% was only slightly lower than year-end 2009. We continue to hold about $23 million of TARP funds and the Board and management remain attentive to assessing the appropriate levels and forms of capital, including the possibility of repayment or curtailment of TARP and the raising of additional capital.

That concludes my formal remarks. I would like to remind you about our annual shareholders meeting which is scheduled for 10 a.m. on March 20 at the Hyatt Regency Hotel in Bethesda, Maryland. I hope you will all be able to attend. I would be pleased to take any questions at this time.

(Operator Instructions) Carter Bundy, Stifel Nicolaus.

If you all could just speak a little bit about the deposit gathering environment versus competitors right now, if you are starting to see some of the weaker competitors starting to kind of enter the marketplace on both the lending side and the deposit side.

Well, as I mentioned earlier, the opportunities that we are having right now on the loan side is just extraordinary. Loans that we were begging for four or five years ago we are seeing huge opportunities to be able to get right now. These are A quality loans, A quality borrowers.

We haven't modified any of our underwriting standards to satisfy them. It's really all because, as I call it, the dysfunctional side of the national and regional banks.

On the deposit side, because the loan side is so aggressive we are being able to insist on significant compensating balances and really haven't had to modify any of our rates in order to get these deposits.

Okay. Is there still room to lower the funding costs on the CD side and CD base?

Yes, we believe so.

Okay. Regarding the margin, could you all talk a little bit about the yields right now? Have they come in so much just because you all are positioning for rising interest rates?

Jim?

Yes, Carter, I think in terms of the loan yields if you look at that they are very, very stable.

Right.

And the floors that are in that product helps that a lot. As you know rates have come down a lot in the last year or so. But the investment portfolio has had more amortizing credits so mortgage-backed securities are running down at higher rates.

We have been putting on additional securities that helps in our customer repurchase agreement program giving us additional collateral. They are relatively short durations and as you know today there is not much yield in the US agency securities. And we also have a fair amount of liquidity on the balance sheet and continue to have that.

So even though we have got terrific margin we have still got the opportunity to move that money into loans. We like our position but the investment portfolio yields are down because of the lower market rates in the last 12 months.

Okay. Do you anticipate with the floors that you can potentially move the loan yields higher?

I think the floors are going to have an impact if rates start to move up. Clearly that is just the way the math is going to work. But we also have a lot of loans that are repricing during 2010 that do not have floors so we have the opportunity to put floors in those rates.

We also have a pretty substantial portfolio. The deposits that are administered we are really managing when those rates go up. Right now we don't think the money market rate needs to go up dollar per dollar as rates go up, for example. We think that can lag a little bit. We are paying about a 1.45% rate on those money markets and that is really a bit above market.

Even though we are doing that we are still maintaining a good margin so we think we are well-positioned for rates moving up. We have gotten some confirmation from that by having other analysis done by an independent party toward the end of last year so we are pretty happy with our position.

What I also might want to add to that is that the educational process that we are being able to go through with our borrowers really has been able to justify increase in rates and why rates should be where they are. When you go through the educational process, when they see the level of customer service and the local decision-making side they understand it, they get it, and there is really not much pushback.

Okay. And, Ron, could you just talk a little about the commercial real estate environment right now, the credit trends there and what you are seeing? And then I will hop off.

You are not going to ask any more about net interest margin?

Well, it's wonderful just trying to figure out what it looks like when the rates move up.

Okay. The real estate market is very strong in Washington. As I mentioned last call, the demand of condos in the DC market is extremely strong. Where we typically have six months worth of inventory we now have less than four months worth of inventory which has allowed the pricing power of the developers.

And again I go back to drilling down into the specifics of our portfolio. That when you are dealing with 50,000 square-foot office buildings and smaller, the boutique-type nature of these buildings, still has pricing power on the demand side. You are talking about most of our tenants are -- the developers have tenants in the 2,000 square-foot to 3,000 square-foot range. The cost of moving right now is astronomical so they are very content staying where they are.

As Jan has mentioned before, we are still doing our shock tests on the real estate side. So the real estate being able to push interest rates up by 200 basis points and net interest income down -- I am sorry, rental rates down by 10% has still given us a very strong coverage side. So we feel real good about our real estate portfolio.

I think that some of you that were on our non-roadshow roadshow a couple of weeks ago heard us say that we have done $3.5 billion worth of real estate lending since we started and as of the end of the quarter to have less than $1 million worth of charge-offs. So we feel real good about our real estate position.

Great. Thank you all very much.

Ross Haberman, Haberman Funds.

Nice quarter. Could you talk about further expansion plans, any new branches planned for this year? Are you looking for teams of lenders? Any possible acquisitions that we can look forward to over the next year?

Well, we are always being opportunistic which was the reason that we raised the capital that we did last September is to be able to capitalize on the opportunities that you just mentioned. We are certainly looking at acquisitions and expansion opportunities.

As I mentioned in my statement that we are considering expanding in the branching network. We are very actively looking at branches from the, let's say, the Reston market into DC, Arlington, Alexandria, Ballston, and that market. We see that as being a huge opportunity for us.

And in addition to that we have had a substantial number of great opportunities on the employment side. A lot of the bankers, whether it's business development offices, branch people, lenders, that really are very frustrated with the big banks and the system and the requirements and are looking to get back to the customer service side that they grew up in. So we see this as an ongoing opportunistically and we are actively working on that on a daily basis.

Thanks, guys. Best of luck.

Brett Scheiner, FBR.

Congrats on a great quarter. I was just hoping for a little bit of color on the two recent hires. Looked like two hires that were surely in line with what the current strategy is. Maybe you could talk about where they can add value.

Well, as I mentioned in the earnings call, we have somebody that is taking over the real estate side in Northern Virginia. It's somebody that we have known for over 25 years. Started and grew up in the small-, medium-sized banking world and has grown into being with one of the national banks. And as I said before, just really wanted to get back to community banking. We were in discussions with him and he is going to be a great opportunity for us.

Okay, great. Thanks very much.

Thank you. There are no further questions in the queue at this time.

If there are no other questions, I appreciate everybody being on the call and look forward to speaking to you again next quarter.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.