Eagle Bancorp Inc (EGBN) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Eagle Bancorp second-quarter 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 program is being recorded. I would now like to introduce your host for today's program, Mr. Jim Langmead, Chief Financial Officer. Please go ahead, sir.

Good morning, everyone. Before we begin the presentation I'd 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'd also like to remind you that while we think that our prospects for continued growth and performance are good, it is our policy not to establish with the markets any earnings, margin or balance sheet guidance. Now I'd like to introduce Ron Paul, the Chairman and Chief Executive Officer of Eagle Bancorp.

Thank you, Jim, and good morning. I'd like to welcome you to our quarterly earnings call to discuss the results of the second quarter of 2010. We appreciate you calling in to join us this morning and your interest in our company. Also with me on the call this morning, as is our usual practice, are 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 may have.

I'd like to begin my remarks by commenting that, like everybody in the industry, we are analyzing the impact of the Financial Regulatory Reform Act. While it is still early in the process we are not overly concerned at this point because we know that many of the issues addressed by the legislation should have little or no effect on us. As an example, the Volcker Rule will have no impact on us.

Additionally, we don't have any use of any derivatives, so those rules will have no effect as well. And because we are so heavily a commercial rather than a retail oriented bank, there should be an insignificant impact on debit and credit card fees. Those fees only represent about $30,000 per month for us, so any change will have minimal impact on earnings.

We feel that the revision to the FDIC assessment base will be beneficial to our bank. The permanent increase in the level of FDIC insurance coverage to $250,000 is certainly a major benefit. Most importantly, we have already had a strong management infrastructure including internal audit, risk management and compliance functions, the added reporting requirement should not be problematic for EagleBank nor add any personnel costs.

More specifically, I'm very pleased to announce another solid quarter of growth for EagleBank which includes growth in revenue, net income, deposits and loans. We once again reported record quarterly earnings which were $3.4 million; this is the sixth consecutive quarter of increasing earnings both for net income and for net income available to shareholders which is after the TARP dividend.

At $3.4 million the net income for the second quarter of 2010 represents a 30% increase over the second quarter of 2009. The net income of $6.8 million for the first six months of the year is a 45% increase over the first half of 2009, so we clearly have a strong, consistent trend in increasing earnings.

We continue to generate strong organic growth in our balance sheet in both loans and deposits with the deposit mix driving an increased net interest margin. Total deposits have increased 26% from a year ago with core deposits up 63%. We achieved deposit growth of $101 million or 7% during the second quarter of 2010. The growth in core deposits has allowed us to significantly decrease the usage of alternative funding sources and maintain significant levels of liquidity.

Our loan portfolio has increased 15% from a year ago and 5% over the first quarter of this year as we continue to develop quality, new relationships in a market still feeling the dislocation caused by our large competitors. We are finding more and more customers every day in the greater Washington area who want to deal with a strong, well capitalized Community Bank with local decision making and which really understands and is committed to this market.

In regards to the profit growth, I'd like to mention the 30% increase in quarterly earnings included $573,000 of security gains as compared to the second quarter of 2009 which included $1.4 million of gains. In each case the gains came from a result of repositioning the portfolio due to changes in the rate environment and bond markets. Therefore we are very pleased by what we call the quality of our earnings which are driven by revenue and margin growth, not a reduction in the level of provision expense for other expenses like reducing staff.

We continue to make a reasonable and conservative provision expense, $2.1 million for the quarter, which is in line with the continued growth of the loan portfolio of our asset quality. The ratio of non-performing assets as a percentage of total assets was 1.49% at June 30. While this is up slightly from March 31 it is in line with the annual average and well below our peak levels of NPAs seen in early 2009. The allowance for loan losses represented 1.45% of total loan portfolio at quarter end with a coverage ratio of 86%; we are comfortable with that level.

The net interest margin improved 4.1% for the quarter, a 12 basis point increase from the prior quarter. This is as a result of maintaining our loan yields while seeing the benefit of decreasing interest rates in our cost of funds. We have been able to consistently reduce our CD and money market rates over the last few months while showing excellent growth in balances and new customers.

We constantly monitor rates in the Washington, DC metropolitan area to ensure that we are competitive and there is a concerted effort in our sales force of lenders, business development officers and branch managers to cross sell and increase the number of products per customer which the data shows is occurring.

Another indicator that we look at for the quality of earnings is the efficiency ratio which was 63.69% for the quarter. This is down from a year ago at 66.42% put up slightly from the two previous quarters. We continue to monitor our net interest expense closely while at the same time investing in infrastructure and the future of our bank.

The impact of these steps can result in fluctuations in the efficiency ratio from quarter to quarter. A perfect example is that during the second quarter we significantly expanded the residential mortgage division of the Bank. During the quarter we hired five very experienced top producing loan originators and then added 13 additional staff members to provide administrative support.

The impact of this expansion, including the personnel and occupancy costs, started to hit the expense run rate in the second quarter. Production was ramping up during the same time and June was a great month with $64 million in loans locked and $31 million in loans closed. But as you know, there is often a lag between closing and delivery to the investors, so some of the revenue impact gets deferred into the following quarter.

However, I must add that we are very excited to have accomplished this expansion of the residential mortgage division. We were able to hire some very high quality producers, some whose production numbers are amongst the top 10% nationally. This is an important step to increasing our overall level of non-interest fee income.

Another example of timing differences is that we took a charge of about $600,000 in the second quarter for closing the Sligo branch in Maryland, but we'll save money going forward on occupancy and personnel expense. That office was consolidated into another Silver Spring branch with little loss of deposits or relationships expected.

At the same time as we consolidate unprofitable offices we continue to look for new branch locations throughout the Washington area as mentioned in previous meetings and earnings calls. We continue to feel that the close in Virginia markets like Arlington and Fairfax counties have great potential for us. We've hired experienced lenders and business development officers in those markets. We are pleased with their progress to date, but also are committed to building out a branch network as well.

Another new area of fee income for the Bank is insurance services. During the second quarter we finalized our deferral agreement with the Meltzer Group, a well regarded local insurance agency. The bank now has a subsidiary that is a Maryland licensed insurance agency and which will share in the commissions earned for the Bank customers referred to the Meltzer Group for insurance products. We are very encouraged by the initial response from our customers and expect to see the impact on non-interest revenue as we go forward.

To grow the Bank we continue to recruit and hire both teams and individual lenders, business development officers and branch managers. We still see very good opportunities to hire experienced highly skilled bankers who are feeling disenfranchised by the larger banks and who are attracted to the EagleBank business model and our commitment to customers and the community.

In closing, I want to say how proud and pleased we are with the continued consistent strategic growth in earnings, loans and deposits, the increasing number of relationships adding to our array of products and the expansion of our footprint within the Washington metropolitan area. That concludes my formal remarks. We will be pleased to take any questions at this time.

(Operator Instructions). Brett Scheiner, FBR Capital Markets.

Hey, guys, congrats on a good quarter.

Thanks, Brett.

Just real quick. A couple questions around acquisition appetite. We are finally seeing some small sellers at reasonable prices and also some color around future TARP repayment?

To answer your first question, obviously we are always looking and talking. If the opportunity is right it's certainly something we will consider. As you know, we're very, very familiar with all of our local competitors, friendly competitors. And if that opportunity is right and available it's certainly something that we would pursue.

Regarding the second question, obviously with the balance sheet growth we recognize that at some point in the future we will be needing to raise additional capital, it's something that we're constantly monitoring, looking at the marketplace, looking to be able to see exactly what we can. We have very, very strong relationships with our institutional investors that we did the race with last September, and feel very confident at the right time that we would be very deeply successful in another race.

Okay, great. Thanks again.

(Operator Instructions). Carter Bundy, Stifel Nicolaus.

Good morning, everyone. Great quarter.

Thank you very much.

If you could -- a few questions. If you all could just first talk about the loan and deposit gathering environment in your markets from a competitive standpoint, that would be great.

Well, obviously as the numbers show, we've had a tremendous opportunity in our growth. The beauty that we're having, Carter, I think you and I have talked about this before, is that the big bank dislocation is just still as obvious as ever.

Being the size that we are with the capital base that we have, but still having that touch with the investors -- I'm sorry, with the customers is still leading a tremendous amount of business to EagleBank. There aren't many competitors that we have of our size that has the array of products and the personal touch, local decision-making that we do. So from an overall loan and deposit side, we're just seeing as strong of a market now as ever.

What about on the pricing side, Ron? Has there been any sort of increase in competitor pricing?

Yes, we're seeing a little bit of an increase in the competition. But I still go back to the original premises that right now the opportunities are so huge with the amount of demand that's out there that basically customers are not nickeling and diming, they want to know that they can build a relationship. And obviously, as you've seen, even with rates dropping like they have, our yield on our loan portfolio is still very consistent.

Okay. If you look at the growth this quarter, I don't know if you have those numbers there, but was a lot of the loan and deposit growth from new relationship acquisition or was that from current customers building increasing demand and drawing down lines?

Most of it is new.

Okay.

And again, what we're finding is even the larger -- we'll call it the university large players in the marketplace that are, again, disenfranchised with the service they're receiving from the large banks. Because we are as well capitalized as we are they're looking at us and saying, you know, we can justify the fiduciary side and be able to satisfy the needs of our constituents, whatever it is, by going to a large community bank. They also understand that we're also putting a lot back into the community which is another reason that they're coming to us.

Okay. And when we look at the non-interest-bearing growth, was that largely related to those new relationship acquisitions?

Well, as you know, we've been pretty consistent on the DBAs being in that 20% of total deposit range. And that continues to be the impact. So the deposit mix is pretty consistent other than for the large increase in money markets and the drop-off on the CD and wholesale side.

Okay. Flipping gears a little bit. On the expense side, obviously you made five key hires on the mortgage side and did I hear you say you hired 13 support staff just for that group?

That's correct.

Okay. So when we think about the salary run rate this quarter, I suspect that is not inclusive of a full quarter's worth of FTE?

That's correct.

Okay.

And, Carter, just to follow up on that, we also have hired some lenders and the lending staff obviously is also having the backup assistance that come along with that. And obviously we haven't yet seen the loan production of these new lender hires.

Okay. When I look at the other expense line item it was about a $700,000 sequential increase, from about $2.1 million to $2.9 million. Is that -- is there anything non-recurring in there or is that sort of a run rate that we need to start thinking about going forward?

There is an element of non-recurring in there, Carter. We did have some transactional costs in the professional fee area, consulting and things of that nature, that have -- that are over with now, kind of one-time events. So to use that as a core run rate I think would be too high.

Okay, would it be meaningfully lower?

I think a couple hundred thousand dollars was the number that you could probably carve out of that if you're working toward a run rate.

Okay, that's very, very helpful. I appreciate the time. I'll jump off here.

Thanks, Carter.

Ross Haberman, Haberman Fund.

Gentlemen, how are you? Just a quick question, the residential lenders, what loans are they holding and what are you selling in regards to that?

We're selling all of our loans.

Even the adjustables?

Yes.

So you're not keeping any, even the short term five's or ten's or --?

No, we're not.

Okay. And the volume -- you seemed to mention that is pretty good. Are they -- what kind of volume or do you need to be making money with those new hires?

We're making money as it is now with our new hires. If you carved out the run rate, in other words matching the income to the expense, we are making money.

You are now.

Absolutely.

And can I ask what you're running on a monthly basis now in terms of production?

Again, I'll only make the statement that we have the $31 million of closings and the $64 million of locked.

Okay, all right, guys, thanks a lot.

Thank you.

Thank you. I'd like to turn the program back to management for any further remarks.

I don't really have any other questions, if anybody else doesn't, again I appreciate everybody being on the call. I think that the biggest strength that we could show once again is the fact that EagleBank is being consistent quarter after quarter, being able to put up these numbers without doing anything unusual. But it's just solid core earnings and that's something that obviously we're very pleased and proud of. So, other than that I will look forward to talking to everybody 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.

Thank you.