Eagle Bancorp Inc (EGBN) 2010 Q3 法說會逐字稿

Good day ladies and gentlemen. Welcome to the Eagle Bancorp third-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 reminder 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 early 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 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.

Thank you Jim. Good morning. I'd like to welcome you to our quarterly earnings call to discuss the results of the third quarter of 2010. We appreciate you calling in to join us this morning and your interest in EagleBank. Also with me on the call this morning, as is our usual practice, are our Chief Financial Officer, Jim Langmead, and our Credit Officer, Jan Williams. They will be available later in the call for questions.

I'm very pleased to say that, once again, we are announcing record quarterly earnings which were $4.8 million of net income. This is the seventh consecutive quarter of record earnings for the Company, so this is definitely a trend that we are very proud of and pleased with achieving. These net earnings for the third quarter represent a 74% increase over the third quarter of 2009 and a 38% increase over the preceding second quarter of this year.

Net income available to common shareholders, which is the earnings after the TARP dividend, were up 107% to $4.4 million. This is also an all-time high in results for the Company.

While I don't want to sound like a broken record, I would like to say, as I did last quarter, that we are extremely pleased by the quality of the earnings. The increase was driven primarily by consistent growth in loans and deposits, the maintenance of a very favorable net interest margin, and strong asset quality. The net interest margin of 4.1% is excellent as compared to the industry norms, is stable as compared to the second quarter of 2010, and has improved from 3.77% from the third quarter of last year.

The strong growth in our balance sheet is very gratifying. Total deposits are up 24% from a year ago, with the growth occurring in core deposits. I'm very pleased to report that DDA deposits at the end of September are up 63% from a year ago and represent 23% of total deposits. We have consistently maintained our demand deposits as a percentage of total deposits at 20% or better. We know that this compares very favorably to any peer or industry statistic. The growth in DDAs is as a result of our business development efforts and the new customer relationships we have been building as we grow our market share and from the expansion of existing relationships. The recently published FDIC summary of deposit report confirms this. While that report only contains the data as of June 30, it really shows what we have been seeing.

For the one-year period from June of 2009 to June of 2010, the total deposits in the Washington metropolitan area grew less than 1%. Our growth rate was 25%, which was the highest percentage growth rate among the top 25 banks in our market. Our deposit growth of $314 million over the past year compares very favorably to both the national and regional banks and the other community banks in the area.

We are continuing our strategy and success rate of gaining market share in the form of new, high-quality relationships during this time of dislocation in the market. We continue to develop new customers who want to deal with a local bank with the size and strength to accommodate their needs, and which provides access to senior management, local decision-making, and is committed to the local community.

Our loan portfolio has increased 16% from a year ago, not including held-for-sale residential loans. We continue to maintain attractive loan yields through our disciplined approach to pricing. In addition, we've maintained our policy of only lending where we have or can develop a full relationship, including significant deposits. We do not pursue loan-only transactions. While the market is becoming more competitive, we are committed to maintaining our low pricing discipline and the related focus on profitability.

One other point in terms of our discipline and strategy is that we continue to grow and focus our C&I loans, including owner-occupied and income producing real estate loans, while limiting the growth of construction and development loans.

Next, I would like to discuss the development of our Residential Mortgage Lending division, which is one of the real success stories in the Bank this year. As was previously mentioned, during the second quarter of this year, we hired a team of experienced loan originators, added the quality -- the required support staff and began to ramp up the Residential Mortgage division. During the third quarter, the production really kicked in and the division closed volume of $44 million in July, $65 million in August, and $71 million in September.

Overall, we closed 451 loans for a total of $180 million in the quarter. The Bank recognized gains of approximately $600,000 from the sale of these loans in the third quarter of 2010 as compared to less than $100,000 in the third quarter of 2009. At the end of September, we had $71 million of loans still in the held-for-sale category as compared to $24 million at June 30, 2009, which means that most of the associated gain from the sale of these loans has yet to be recognized. These loans are presold to and price-locked with established investors.

As we've previously discussed, the accounting for this business line causes a lag between the recognition of most of the expenses and the revenue which is recognized when the loans are delivered to the investors. This lag in revenue recognition will occur when the business is still in the growth stage, as we certainly are. We're very pleased with the staffing we've added in this division in both the production and operations side of the house. Not surprisingly, our pipeline remains strong in the current interest rate environment.

Also under the heading of non-interest income, I should note that the Bank did realize a modest gain of $260,000 in securities gains during the third quarter. As was the case earlier this year, the gains came as a result of repositioning the portfolio during the changes in the rate environment and bond markets. At the end of the quarter, the portfolio still had an unrealized gain of $8.1 million.

Our asset quality continues at an excellent level. Nonperforming assets as a percentage of total assets were at 1.46% at December 30, which is very much in line with prior periods. Nonperforming loans as a percentage of total loans were 1.61%. Both indicators are improved from the prior quarter. We continue to see changes in the individual deals of the nonperforming list as we migrate loans through the identification, workout and resolution process.

Charge-offs for the quarter were 39 basis points, which is comparable to the prior quarter, and down from 48 basis points for the third quarter of 2009. The provision expense was $2 million for the quarter, which is in line with continued growth of the loan portfolio and our asset quality. The allowance of loan loss represents 1.45% of the total loan portfolio at quarter end with a coverage ratio of 90%.

As we've mentioned before, it should not be surprising to see fluctuations in our efficiency ratio from quarter to quarter. For the most recent quarter, it was 58.68% as we saw the benefit of significant increases in margin income and non-interest income, including the previously mentioned gains from the sale of residential mortgages and other fees.

We continue to emphasize prudent expense control as we also build our infrastructure to grow the Bank. Our earnings and the improved efficiency ratio are driven by revenue growth, not by the expense cutting seen in other institutions.

We continue to add to our infrastructure to support the growth of the Bank. Examples of that are several changes to our branching system. I am pleased to announce that we entered into a lease for a new branch in Rosslyn area of Arlington, Virginia. This will be our second branch in Northern Virginia, and we are excited about this particular submarket. Rosslyn is very dense population of our [proto] typical customers, including both businesses and nonprofit entities. We expect this branch to open in the second quarter of 2011.

We recently announced that we plan to open a branch on 7th Street Northwest in the Penn Quarter Gallery Place section of Washington, DC. This is one of the fastest growing retail and employment submarkets in the city. We are obtaining the branch from OBA Bank. In what is another first for EagleBank, we're assuming approximately $17 million of deposits with the branch. The deposit premium being paid is nominal, and we look forward to welcoming over 1000 new customers to the EagleBank family in January of 2011.

We also announced during the third quarter that we will close our branch at 1725 Eye Street Northwest. We have the opportunity to terminate this lease -- our lease there, and consolidate the activities into our K Street branch, which was only two blocks away. We relocated the branch staff, the lending unit, and the commercial deposit services unit to the K Street location with no disruption in customer service and a major savings in occupancy expense.

We're very excited to be expanding our footprint in the District and in North Virginia. We will continue to explore additional locations in closer in Northern Virginia submarkets, including Arlington, Alexandria, and Reston, which seems to have the best potential for our business model.

In closing, I'd like to say how proud and pleased we are not only with this quarter but the consistent growth in earnings, loans and deposits. As we go forward, we will not relax our efforts in regards to asset quality. We will continue to build new customer relationships, add to our physical presence, and to reach our potential as the leading community bank in the Washington metropolitan area.

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

(Operator Instructions). Avi Barak, Sandler O'Neill.

My first question is I was hoping you could give us some added color on this rep and warranty issue that's been plastered over the financial news over the past few days. Specifically, how much has Eagle originated in 1 to 4 family mortgages and either sold to the GSEs or to Wall Street or the secondary market, call it over the last two or three years? Do you have any estimates or anticipate any potential putbacks, and have you reserved anything against any potential putbacks?

Jim?

We do have recourse; we measure it monthly. As Ron had mentioned, we are dealing with a lot of investors. The amount that we have recourse at the end of September is about $149 million. We do book a reserve under GAAP accounting, and that reserve addition runs through other expenses. So that's one of the reasons other expenses are up in the quarter compared to a year ago.

We do feel that the putback is minimal, given the nature of the underwriting credit quality, all the demographics of this area, and the carefulness that we exhibit in going through all the operational issues. So, we think there is some minor risk, well-managed, but those are the numbers.

I might want to add to that obviously is that the recourse side that we have on these loans is only as a result of the new loans that we've placed, including the underwriting that we placed is significantly improved over what others might have had three or four years ago, which is the issue that you are referring to.

Thank you, that's helpful. Secondly, switching gears, could you provide for us the accruing TDR balances? I think at the end of last quarter it was about $3.1 million.

The TDR balances are the same as they were last quarter. We didn't add any new TDRs.

Lastly, as you noted, you've been doing several branch acquisitions and openings. Can we expect more of the same over the next couple of quarters or should we -- or are you thinking about potentially doing something even bigger than that, say a small acquisition or deploying some excess capital in other ways?

As we've talked about probably for a year now, our focus is in the North Virginia marketplace, although we're going to be opportunistic in anything we see. But I can tell you that the level of due diligence that we do is very extreme as to the marketshare that surrounds probably about a mile radius of that branch site. So, we're spending a lot of time looking at a lot of opportunities. We've turned down probably -- well, we've turned down an awful lot of opportunities on the expansion side. At this point, we're only fortunate to be able to take these two branches. So I don't anticipate any significant growth, although we are constantly looking.

Thank you very much.

(Operator Instructions). Carter Bundy, Stifel Nicolaus.

Good morning everyone. Great quarter. Just sort of continuing on Avi's question on the reps and warranties is there any discussion that you all are having right now if you could help me understand, is there a way that you could limit potential recourse through taking smaller margins on the sales? Is that something being considered, or do you feel like underwriting is strong enough that that exposure is very limited?

Yes, there is some opportunity to do that. As you point out, if you change the terms of the sale, you could reduce your gain and limit your exposure to repurchase. We think, as I mentioned or indicated earlier, we think the exposure is quite limited. We think we've got it well under control, and should -- is not expected to be a problem in any way for us.

Also, I might want to add, we do limit the title companies that we use and feel comfortable with the ones that we could put the business to. So that's also another level of control that we have and feel comfortable with.

Okay. Moving on to sort of a minor -- or a line item question, when you look at the salary run rate right now, given all the hires you have had in the Mortgage group and obviously the delay in revenue recognition, how do we sort of think about an operating run rate from a personal perspective right now? Are we clipping it along at sort of a decent run rate here $6.6 million?

We don't believe there's any substantial increase in employment numbers that we see. Obviously, we're certainly adding to growth. We might have employment growth as a result of the branching side, but for the most part there's not dramatic hiring needs that we have at this point. Again, being opportunistic, we have seen a tremendous opportunity in being able to bring in lenders and business development from the larger banks. So, those are opportunities that we are continuing to look at.

Okay. Moving on to -- the deposit trends have been outstanding, particularly on the non-interest-bearing funding. Ron, could you talk a little bit about where that's coming from? We've seen two pretty hefty quarters of non-interest-bearing growth, and I just wanted to get some color on that.

As you and I have discussed about a number of quarters ago, a lot of it is the focus we have on our C&I, which brings in the non-interest income. We have done, again, as we've discussed previously, we have really ramped up our control system as to making sure that the deposits that we were promised are deposits that we are receiving. We're working more and more with our borrowers to make sure that those deposits come in. As you expand your footprint, as you expand your name recognition, there's an awful lot of larger customers that are coming to us that want to do business with a community bank. I am talking about some very significant players in the marketplace. With the level of capital that we have, the profitability that we have, the name recognition that we are growing every day, they're looking more and more to be associated with the Bank. I don't see that changing.

Okay. Final question then I'll hop off -- could you talk a little bit about where you -- how you feel on capital today and how you think about that going forward, given the growth prospects out there?

As we all know, capital is the critical part of this game. We feel that we are well-positioned in the capital markets. We feel that we are always looking at alternatives. The recent bill that came out, the 5297 bill, might be an opportunity for us on looking at alternatives of capital. The market might be another opportunity for us. So we're monitoring this on a regular basis, and we see a variety of opportunities should the need arise.

Okay, thank you all very much. Good quarter.

(Operator Instructions). I am not showing any further questions at this time. I'd like to turn the program back to you for any further remarks.

Again, I'd like to thank everybody for attending the quarter call. We are extremely pleased, we are extremely optimistic, and we're looking forward to speaking to you again in three months.

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