Eagle Bancorp Inc (EGBN) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Eagle Bancorp fourth-quarter earnings conference call. At this time all participants will be 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 conference is being recorded.

Now I will turn the program over to Jim Langmead, Chief Financial Officer of Eagle Bancorp. Sir, please go ahead.

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 2010 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 we make 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 our Company.

Thank you, Jim. Good morning, everybody. I would like to welcome you to the conference call to discuss the results of the fourth-quarter and full-year 2010. We appreciate you calling in to join us this morning and your interest in EagleBank.

We're under a different format today because of the weather conditions in Washington, so we are all calling in from our homes because of power outages. I promise you all I am not in my fuzzy slippers as I am giving this earnings call.

Also with me on a call this morning, as per our usual practice, Chief Financial Officer Jim Langmead, and our Chief Credit Officer Jan Williams. They will be available later in the call for questions.

Well, I am very pleased that once again we are announcing a record level of quarterly net income, which was $5.1 million for the fourth quarter. This represents a 71% increase over the fourth quarter of 2009 and a 6% increase over the third quarter of 2010. This is the eighth consecutive quarter of record earnings for the Company, and we are very proud of that.

For the year 2010, the net income of $16.7 million represents a 60% increase over the full-year 2009. Even more notable is the 89% annual increase of earnings available to common shareholders. The earnings per share of $0.77 compares very favorably to the prior-year earnings per share of $0.55, producing a 40% increase.

But most importantly, we are very proud of the quality of our earnings and growth, which are not driven by any extraordinary items. The Bank continues to demonstrate very solid performance in all of the key fundamental areas such as margin, loan and deposit growth, and credit quality. I would like to comments on each of those areas separately as well as noninterest fee income.

But overall we are very pleased that for the fourth quarter we achieved an ROAA of 96 basis points and an ROAE of 9.89%. Both of these are in line with the third quarter and are demonstrative of our consistent, quality earnings. These are compared to 68 basis points and 5.76%, respectively, for the fourth quarter of 2009.

Net interest margin is still a major highlight for our Company and was 4.09% for the year 2010. The margin improved during the year, reaching 4.18% in the fourth quarter. This is up from 3.96% in the fourth quarter of 2009 and improved from 4.1% in the second and third quarters of 2010.

We have continued our disciplined approach to loan pricing; and over the course of the year we were generally able to maintain the yields in our loan portfolio while significantly reducing our cost of funds.

The lower rates paid on deposits certainly benefited from the low interest rate environment created by the Federal Reserve. However, what really differentiates us from the peer group is our consistent success in generating low-cost core deposits, especially DDAs, which have grown 30% since December of 2009.

The growth in core deposits allowed us to reduce alternative sources of funds such as Federal Home Loan Bank borrowings and broker deposits over the course of the year. We continue to generate strong and balanced growth in loans and deposits.

At December 31, portfolio loans were up $276 million, a 19.7% increase over December 2009, while total deposits increased $266 million, representing 18.2% gain over the prior year-end.

In addition, loans held for sale had increased $80 million from a year ago due to the expansion of our residential mortgage division. As you would expect, these held-for-sale loans are on our books for just 45 days on average, and all of the residential mortgages originated are presold and rate-locked. While there may be a short-term bump on the balance sheet, residential mortgages are truly a fee income business to us, not a long-term balance sheet item.

In our core loan portfolio, we continue to focus on income-producing commercial real estate loans and C&I loans. EagleBank is still seeing strong loan demand as the national and regional banks continue to underserve the market.

We continue to develop significant new relationships and believe we are taking market share from these larger competitors. The Bank remains committed to our policy of lending only where there is a full relationship and avoiding standalone lending transactions.

On the deposit side of the balance sheet we achieved 30% growth in DDA deposits over one year ago, and the DDAs represent 23% of total deposits. As I have mentioned before, we are proud of -- we have consistently maintained our DDAs at 20% of deposits or better since the formation of our Bank.

Money market accounts balances grew 27% over the course of the year, while the rates paid on these accounts were gradually reduced over the year in line with market conditions. Despite the low rate environment, we have achieved growth in core deposits quarter by quarter throughout 2010.

While being very proud of the strong margin and balance sheet growth, I think 2010 was a turning point for EagleBank in that we made significant progress in growing our noninterest fee income. Obviously, the biggest contributor was the residential mortgage division. As you know, we made some key hires and significantly expanded this division during the second quarter, and the results have been terrific.

The strong performance during the third quarter carried right over to the fourth quarter, and loan sales during the fourth quarter were $236 million, bringing total loan sales for the year to $376 million as compared to $91 million for all of 2009. The gain on sale of loans for the division for the year was $2.5 million.

We see continued opportunity in the residential mortgage arena and hired a new sales manager for the division. His expertise will be invaluable over the next several quarters as the mortgage market is expected to shift somewhat away from refinance deals towards the more purchase transactions.

As you know, the Washington metropolitan area is one of the few markets in the country which has seen an increase in home values over the last year. This was confirmed by the most recent Case-Shiller Report earlier this week.

This market is being driven by a job growth in the metropolitan area, and there are indications of pent-up demand for housing. Plus, the expanded set of mortgage products gives us greater opportunity for cross sales and referrals from the residential developers who we bank, as well as our general customer base.

Staying on the topic of fee income, I would like to comment on our recent announcement of a joint marketing and referral arrangement for investment advisory services, Morgan Stanley Smith Barney. Under this agreement the Bank will be working with Graystone Consulting, which is a local investment advisor.

Graystone has been recognized as one of the leading advisory firms in the Washington area. Like EagleBank, they offer outstanding locally-based customer focus and service, but also have the resources of the national organization behind them. Graystone has significant expertise in the nonprofit sector. We feel they would be a great resource and partner for us as we continue to grow our business with nonprofit institutions in the Washington, DC, and Northern Virginia markets of Arlington and Alexandria.

We also recently announced that we have bolstered our subsidiary, Eagle Insurance Services, by the addition of a sales coordinator. The ability to offer insurance and benefits products are just another example of our commitment to cross-selling and the deepening of our customer relations.

Management remains very focused on credit quality and the diligent monitoring of our loan portfolio. Our credit quality statistics have been very good and relatively stable over the course of 2010. And I might add, we have not lightened up on the level of provision expense or chargeoffs to manage earnings.

The allowance for loan losses was 1.48% at year-end. NPAs as a percentage of total assets were a very reasonable level of 1.53%. Furthermore, our level of TDRs included in the performing loan portfolio is modest at $3.1 million and has not changed over the last several quarters.

Chargeoffs for the year were 35 basis points on average loans. While the local economy remains strong in relation to the rest of the country, we continue to monitor the portfolio and take the aggressive approach to individual credits as necessary.

A final highlight for the fourth quarter of 2010 was the efficiency ratio, which improved to 53.98%. This is another indicator of the quality of earnings, and the improvement was driven by top-line revenue growth, not by slashing expenses. We were still maintaining a disciplined approach to both expense control, but know we need to build the infrastructure of the Bank to continue to provide superior customer service today and to support future growth.

As you know, earlier this week we opened our 13th branch in the Gallery Place-Verizon Center area of Washington, DC. We are planning to open two more branches in Rosslyn and Ballston, both in Arlington, Virginia, during the second quarter of the year. We will be going through a major system conversion in April of this year, which just demonstrates our commitment to a quality operating system.

Additionally, we plan more strategic hires of lenders, particularly for the Northern Virginia markets. So while expense control is certainly important to us, we know we must build a solid foundation for the organization.

In closing, I want to say how proud and pleased we are with both the fourth quarter and the entire year of 2010. As we look forward to 2011, we are committed to continuing the consistent growth in earnings and expanding our presence in the Washington metropolitan area. We will not relax our efforts in regards to asset quality, and we'll continue to build new customer relations, strengthen the ties to our existing customers by enhancing our service and products, and to strengthen our reputation as one of the leading community banks in the Washington area.

That concludes my formal remarks and we would be pleased to take any questions at this time.

(Operator Instructions) Carter Bundy, Stifel Nicolaus.

Good morning, everyone. Ron, could you talk a little bit about your thoughts on capital here, and particularly your thoughts on the Small Business Lending Fund?

Well, obviously as we mentioned before, we have looked a lot at the Small Business Lending Fund. We think it is a great product. We will be submitting an application in the next week or so.

Obviously it's a nonbinding application, so while that is being submitted we are continuing to look at a variety of other alternatives that exist. We are sensitive, and we see the opportunities especially with our stock price, about the opportunity of going out and raising common, although obviously the dilutive effect of that is something to consider.

So we are going to submit the application; again, it is a nonbinding application. And we're going to continue to evaluate exactly what we should do, especially as a result of the $23 million worth of TARP.

Okay. Turning to the loan growth in the quarter, could you provide a little more color on those numbers, how good they were?

Carter, there is just the continuing pent-up demand for loans both on the C&I and the commercial real estate, especially the income-producing commercial real estate. A lot of it, as I mentioned, is the pent-up demand as a result of the shutting off of the spigot of the regional and nationals.

Again, as I have been saying for the past few quarters, because of our legal lending limit and the size of the Bank, more importantly is the personal attention, local decision-making, and being able to continue to touch and address the needs of the borrower at all different sizes. It has just given us a huge opportunity and we believe will continue to.

Okay. We have heard a little bit more about the larger lenders in the marketplace returning. Any commentary if that is happening in your markets?

Honestly, I think it is a lot of discussion. I don't see the activity taking place yet. I still believe that people understand the differences between dialing an 800 number and being able to call somebody that they can meet with in an hour if they have to on a situation. I think everybody has got stung pretty badly by it, and they have pretty long-term memories.

Have you seen any sacrifice on pricing?

Not at all.

So I guess the outlook -- I'm talking about the margin now. The idea is that maybe you can hold this margin here?

Well, I think the margin will -- again without giving any forward-looking statements -- I think certainly the competition will pick up. What the big guys do, who knows?

I want to qualify I guess my statement I made a couple of seconds ago. We're certainly seeing a little bit more issues on pricing. It is not dramatic. We still have been able to get the floors in our loans.

Again, where it goes from here, whether or not our cost of funds increase faster if rates do go up, it is just still an unknown.

But we are not doing any transactional lending. As you can see we have gotten significant increases in our deposits, significant increases in our DDAs, which is an indication on the relationship side that these borrowers recognize that they are going to bring over their deposits if we're going to give to them loans. And we are not seeing that as being a major hurdle.

Okay. Thank you all very, very much. Very good quarter.

Brett Scheiner, FBR.

Okay, guys, congrats on the quarter. Hopefully you are safe and sound with the snow. A couple questions.

On the mortgage noninterest income, can you talk about gain on sale margin, and where you see that going, or where that has been going the last few months?

Jim?

Yes, Brad. For the year 2010, the gain on the $376 million that Ron had mentioned, which was around $2.8 million, was a spread of about 67 to 68 basis points. We -- for the fourth quarter of the year, the spread was a little bit better.

The actual sales were about $225 million, $235 million. It was 80 basis points. So I think we think that that 75, 80, 85 basis point area is where we can operate and generate a decent amount of profitability.

Then again that is the net marketing spread, the difference between what we are selling these loans for, the premiums net of the commissions. Because a lot of the -- of course the producers are commission-only people. But that is the way the numbers shake out.

Brett, just to follow up on that. You see, as you can imagine, with rates being as low as they have been over the past 12 months -- or nine months, the level of activity in the residential real estate group has just been phenomenal. Now we are working more and more, especially as a result of the hiring of the new sales manager, on the cross-selling of that with our products, with our developers, with our homebuilders, with our condo converters.

So there is so much more activity that we see as an opportunity for the cross-selling, both the residential and real side into our real estate group. So we see that as a significant upside even if in fact rates do rise.

Also I might add that on a growth basis we are looking around 2%, if that is the number you were looking -- that is what you were looking for, the growth spreads.

Yes. And you have seen that stable?

It has been stable.

Okay. That's very helpful. Then just a couple thoughts around new branches. Obviously, the branch consolidation was helpful for the OpEx line as you are trying to grow branches elsewhere. Can you talk about timing for breakeven or about what deposit size you'd look for?

Our model shows that somewhere in the $28 million to $30 million of deposits based on a consistent deposit base that we have throughout the Bank is a breakeven, actually slight profit to that.

Okay, and that is a 12 months' time table or 18?

Again, I would rather not give forward-looking comments on that.

I got it. Then just one last question. Between the Small Business Fund, TARP, M&A activity, can you talk about how you are thinking about the capital stack in the next -- well, how you think about it right now, quite frankly?

Jim?

Yes, Brett, as Ron had mentioned we think there is a fair amount of alternatives that we have. The Small Business Lending Fund gives us a very inexpensive source of capital relative to common.

But we also believe that the valuations on our stock certainly warrant -- and the interest in the stock of existing shareholders and other shareholders that could potentially come into the Company -- warrant us continuing to make sure that the capital is at a level that is reasonable, non-dilutive, these raises, and also gives us the growth that we need to support the balance sheet that is going to continue to grow. We are a growth-oriented Company.

But I think that this Small Business Lending Fund is very attractive from a cost of capital standpoint, so we're going -- applying in that area. But also looking at potentially raising common and going through those numbers. We have not made any determination of specific amounts or levels of capital.

Clearly the regulators want more. We know what they are thinking about with the stress testing and the new -- a lot of people have said that the new 10% is 12% on risk-weighted. We are a little bit below that at 12/31.

We are very growth-oriented Company, so we are taking all those things into account. So I hope that helps, but I can't be specific as to the desirable level of capital.

We do understand the EPS potential dilution of book value per share EPS and taking all those things into account. But right now that Small Business Lending Fund we believe, based on all we know, is an attractive vehicle over the next couple of years that could help us to continue to support the growth of the balance sheet.

(multiple speakers) Because you know in October 2009 when we went out and raised all the capital that we did, it was to be opportunistic, stay ahead of the curve, satisfy regulators, and be able to deploy that capital when the opportunity arises. And I think that is certainly something that our Board continues to support and we will be able to continue that strategic approach.

Okay, great. Then just one last bit of color. I know you guys have been close to the Small Business Lending Fund. There has been some discussion around whether matching funds or a portion of matching funds would have to be raised in common, although it seems very vague at this point. Do you have any color around whether that would be required either in your situation or elsewhere?

In all the discussions we've had and all the research we have had -- and we have been very active in the entire process -- we don't believe that to be the case.

Okay. Thanks so much and congrats again. Take care.

Matt Schultheis, Boenning & Scattergood.

Good morning. Very quick question for you regarding mortgage banking. Looking at the volume you did, what, several hundred and $60 million roughly in the fourth quarter out of $376 million. Obviously there was a significant ramp-up given that we really spend the first half of the year building this.

What I'm trying to get to is -- are we looking at something where this is the full effect of the buildout? Or were there some timing issues with loans that might have wanted -- that for whatever reason couldn't not close in the third quarter and ended up closing in the fourth quarter and being sold? Or is this just the full effect of the buildout?

We are continuing to build out the platform. It is -- obviously, the major part of the platform was completed in the end of the third quarter. So you are right, we did see a spillover into the fourth.

Obviously the interest rate environment in the end of the third, beginning of the fourth was significant better than it is now, so the volume was dramatically higher. So, it's the ebb and flow of the interest rate world. But I would say that really at the end of the third quarter our platform was, for the most part, complete.

Okay. Thank you very much. That's all.

(Operator Instructions) Casey Orr, Sandler O'Neill.

Hey, guys. Congratulations on the quarter. You talked briefly about the C&I and CRE growth this quarter. But can you also talk about I guess the construction demand and the increase this quarter?

Sure. Casey, we have seen increased demand for construction projects and we are very selectively looking at these. We have been able to capitalize on some opportunities for prime DC office location, and the demand is really very strong.

What we have seen increases in have been only in very selective locations, very close in. We are not going far outside the Beltway, and we are also looking at deals with solid equity in them and top-quality management. So we are seeing opportunities there.

Okay. That's all I really had. Thanks.

Casey, if I can follow up on that, just to let you know that the recent statistics show that demand of condo units in DC is off the charts. The demand is far exceeding the supply.

On the rental side you're seeing actually double-digit increases in rental rates in the multifamily side. So there is a significant pent-up demand, as I mentioned in my comments, on the residential side as well.

Great. Thanks for the color.

Thank you. At this time there appears to be no additional questioners in the queue. I would like to turn the program back over to Ron Paul for any closing remarks.

I appreciate everybody showing their interest in EagleBank. Again as I said, very, very proud of what we have accomplished in 2010. And I might add, obviously the percentage increases that we had in 2010 was off of a very good 2009.

So just overall very proud of what we have been able to accomplish and really continuing to emphasize the ability of, while we are getting bigger, certainly continuing to focus on that community side and the touch and feel of being able to be a quick decision-maker within the banking industry in Washington.

So again, thank you very much and looking forward to speaking to you again next quarter.

Thank you. Ladies and gentlemen, this does conclude today's program. Thank you for your participation and have a wonderful day. Attendees, you may now disconnect.