Eagle Bancorp Inc (EGBN) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. And welcome to the Eagle Bancorp first-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 conference may be recorded.

And now I will turn the program over to Jim Langmead. Sir, the floor is yours.

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 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 online or on the Company's website or the SEC website.

I would like to remind you also 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.

Good morning. Thank you, Jim. I'd like to welcome you to our first conference call in 2011 to discuss the results for the first quarter. We appreciate you calling in to join us this morning and your interest in EagleBank. Also with me on this call is, as our usual practice, our Chief Financial Officer Jim Langmead and our Chief Credit Officer Jan Williams. They will be available later in the call for questions.

I am very pleased that once again we are announcing a record level of quarterly net income, which was $5.1 million for the quarter. This represents a 51% increase over the first quarter of 2010 and a 2% increase over our record fourth quarter of 2010.

These results are very indicative of our continued growth. And the quarterly trends in earnings per share, net interest margin, return on average assets and return on average equity, and other key measures reflects the consistent performance of our Company.

Our earnings per share were $0.24 for the quarter, which is 60% increase from $0.15 in the first quarter one year ago.

You have heard us frequently mention the term quality of earnings, and we feel that our results reflect that concept because we have continued to perform well in all of the key fundamental areas that I've previously mentioned, such as net interest margin, loan and deposit growth, credit quality, and total revenue growth and operating efficiencies. I'd like to comment on each of those areas separately, as well as noninterest fee income.

Overall, we are very pleased that for the first quarter we achieved a ROAA of 0.98% and an ROAE of 10.49%. Both of these are up slightly from the fourth quarter of 2010 and are up significantly from the first quarter of last year, for which the ROAA was 70.76% (sic -- see press release) and the ROAE was 7.38%.

The net interest margin continues to be a major performance factor for the Company at 4.23% for the first quarter. That margin was improved from an average margin for the year of 2010 of 4.09%, and 4.18% in the fourth quarter of 2010. We have continued our disciplined approach to loan pricing and during the first quarter were able to maintain the yields in our loan portfolio while also benefiting from a stable cost of funds on our deposits.

Interest rates paid on deposits have remained generally low in the Washington metropolitan area. But most importantly for EagleBank, we continued our growth of core deposits, which are up 29% over the first quarter of last year and 4% over the fourth quarter of 2010.

I would note in particular our DDA deposits, which are up 38% over March 31, 2010. Our DDAs were 22% of total deposits for the first quarter of 2011. On a similar basis, money market account balances at quarter end were up 25% over the level a year ago and registered a 6% increase in the first quarter. Total deposit growth was 6% for the first quarter of this year at $100 million.

Total growth in portfolio loans were $115 million for the quarter, amongst the highest in our 12-year history, a 7% quarterly growth rate. This growth was partially offset by the decrease in our loans held for sale category, as during the first quarter we delivered and sold more residential mortgages than we originated.

In our core loan portfolio, we continue to focus on income-producing commercial real estate loans, which were up $52 million for the first quarter, and C&I loans, which increased $32 million in the first quarter.

EagleBank is still seeing strong loan demand as the tone and confidence level in the local economy is improving. We continue to develop significant new relationships and are taking market share from the larger regional and national competitors.

The bank remains committed to our policy of lending only where there is a full relationship and avoiding stand-alone lending transactions. That element of our strategy is key to maintaining the balanced growth on the loan and deposit side of our balance sheet.

We continue to focus on other strategic factors, including lending in the most stable submarkets of the Washington metro area and maintaining the balance of fixed versus variable rate loans in the portfolio. Despite a fairly high level of borrower demand for fixed-rate loans, we have 62% of our portfolio in variable- and adjustable-rate loans as of March 31.

We had another strong quarter in terms of fee income. Noninterest income as a percentage of revenue was 12% for the first quarter of 2011 as compared to 6.6% for the first quarter a year ago and was comparable to the 12.9% for the fourth quarter of 2010.

Total net interest revenues were $2.9 million, with no security gains or losses. Gains on the sale of loans were about $150,000 less than the fourth quarter of 2010, but substantially above the first quarter of 2010, representing an increase of $1.7 million.

Volume in the residential mortgage division has slowed, consistent with most of our competitors in that business. We continue to manage this division closely, given the shift in loan volume, but believe that the combination of stronger purchase money business in our market, continued historically low interest rates, and recent hires of top-producing loan originators will serve to give us acceptable levels of loan production and sales activity in the residential mortgage loans for the remainder of 2011. We are proud that three of our originators were among the top 100 producers nationally during 2010.

The Washington metropolitan area continues to be one of the few regions in the country with a strong housing market, exhibiting increasing housing values. For the region, the most recent Case-Shiller Index shows an increase of 3.6% in average home values over a year ago. This is undoubtedly being driven by the fact that this is the strongest job market in the country. The region added approximately 62,000 jobs from February of 2010 to February of 2011, comprising 2.8% growth. The unemployment rate for the region is amongst the lowest in the country at 5.9%.

These factors are expected to continue to drive demand for housing and therefore purchase finance transactions. Our expanded set of mortgage products give us a greater opportunity for cross-sales and referrals from the residential developers who we bank, as well as our general customer base.

Even though the economy in Washington, DC, area is relatively strong and appears to be improving, we remain focused on credit quality and the diligent monitoring of our loan portfolio. Our credit quality statistics are strong compared to peers.

The allowance to total loans ratio at March 31, 2011, was 1.43%. This is down several basis points from the level of immediate prior quarters and reflects our positive experience in regard to charge-offs and the impact [on] environmental factors of the improving local economy.

The provision expense for the quarter was $2.1 million and was determined primarily by the continued growth in loan portfolio. NPAs as a percentage of total assets were at a very reasonable level of 1.68%. This is up marginally from several previous quarters and is reflective of the immediate and consistent attention to problem loans that is directed by management.

The change from prior-quarter levels were driven primarily by the resolution of four nonperforming loans and the disposition of OREO properties, which aggregated $7.3 million, but was offset by the addition to the NPA list of one credit in the amount of $12.1 million. This credit is a commercial real estate loan which is well secured, in the process of collection, and from which we expect no loss.

Net charge-offs for the quarter were $1.3 million or 30 basis points of average loans, which is consistent with the last several quarters. While the local economy remains strong in relation to the rest of the country, we continue to monitor the portfolio and take an aggressive approach to individual credits as necessary.

The efficiency ratio was 58.57% for the first quarter as compared to 62.15% during the first quarter of 2010. It is indicative of our continued emphasis on expense control while continuing to invest in the future of the Company.

Noninterest expense for the quarter is up over the prior-year levels due to the increased staffing levels to support our overall growth; merit increases; higher loan collection and OREO expenses; the new Gallery Square branch near the Verizon Center in downtown Washington, DC; technology-related items; and higher levels of FDIC insurance premiums due to our increasing deposit levels.

We will continue to spend on infrastructure as we strengthen and grow the organization. In mid-April -- just two weeks ago -- we completed a major system conversion and are pleased to say it went very well. As a result, we and our customers now have more state-of-the-art technology at our disposal, and the system enhancements should serve us well into the future in terms of product offerings, customer service and internal operating productivity.

We have previously announced that we are planning to open two more branches in Rosslyn and Ballston, both in Arlington, Virginia, during the third quarter of the year. And we continue to look for other opportunities in Northern Virginia, including strategic hires of lenders and business development officers.

As our growth continues and capital is being levered, we continue to look at Small Business Lending Fund preferred stock as an attractive source of new equity, both in terms of its structure and cost. However, final details and documentation are still forthcoming from the US Treasury. So we also continue our analysis of alternative sources of capital to support the growth of the Company.

In closing, I want to say how pleased we are with our results for the first quarter of 2011. As we look forward to the rest of 2011, we see a very competitive market, but we remain committed to continuing the consistent growth in earnings and expanding our presence in the Washington metropolitan area. We have gained a reputation as one of the leading community banks in the Washington area by being an institution with enough size and capital to be responsive to the needs of our market, with local decision-makers and demonstrated commitment. We accomplish this through expanded (sic) and strengthening our relationships.

As we said in our Annual Report, building relationships with customers, shareholders, employees and our community is EagleBank's focus and foundation. It is the essence of everything we do.

We appreciate your support and would like to invite all to attend our Annual Meeting, which will be held at 10AM on May 19, 2011, at the Bethesda Marriott Hotel.

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

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

First, on the balance of performing TDRs at year-end, I know it was $3.1 million; did that change this quarter?

It did not.

Okay, great. Second, on the one $12 million commercial real estate loan that went into nonaccrual this quarter, I guess can we get some more detail on that? Was that an income-producing or owner-occupied loan?

Sure, I am happy to give you a little more background. This particular loan was a tenant conversion. In DC, there are significant tenants' rights, and they have the right to match any offer to purchase a building. In this case, they did match that offer. We went into it with 60 potentially presold units. It is a 130-unit condominium project.

Unfortunately, the changes in the mortgage market made it extraordinarily difficult for the tenants to qualify for mortgages to purchase their units. So we had very, very slow absorption. And we just got to the point where we felt it needed to be placed on nonaccrual, not because we don't have adequate collateral coverage, but because we feel that the absorption -- given the tenants and the issues there -- give us more of an indefinite period about when we are going to be able to recover our money.

We are optimistic that we are going to resolve it without any loss to the bank, but the timing of it is uncertain at this point.

Okay. And then I guess another question for you, Jan, on the pricing on the OREO properties that were disposed this quarter. Give us I guess some of the details or where that came in.

On the OREO properties, it was kind of a mixed bag. We had some properties that sold at a gain and some that sold at a loss. We netted out at a $39 million loss.

It's not $39 million.

I'm sorry.

You said $39 million?

No, not $39 million.

Okay. All right.

I'm sorry, $39,000. I apologize. (laughter)

$39,000, okay. Got it.

No, I wouldn't be here if we lost $39 million. (laughter)

It didn't sound right. Okay, switching gears, I guess on the fee income side, looking at just the BOLI income, I guess around $100,000 a quarter -- is that a good run rate or so? Because I know fourth-quarter 2010 was elevated, so I just wanted to make sure.

Yes, I would say that's a good run rate. It is a pretty stable level of income, but I think that number is good to use for your forward-looking information, Casey.

Okay. And then I guess on the margin front, how are you guys positioned for if short-term rates do go up?

I think we are positioned very well. Our interest rate risk models, and we put a number of pieces of data in our 10-K, and I would say our position at the end of March is not much different.

Not much different? Okay.

But we write that out in the Q. We have asset sensitivity from a GAAP position, but we have a lot of loans that have floors in them. That gives us good position if rates stay where they are. But if rates go up, we think that our margin is going to be stable as well. And if rates go down, we think our margin will improve a little bit.

So, overall, no matter what scenario is run through the model, because both our assets and our liabilities are a relatively short duration, we think we are well positioned in this environment that we are in.

Okay. Thank you guys very much for taking my questions.

Brett Scheiner, FBR.

Congrats on another great quarter. Just a real quick question on the SBLF. I know you commented on it. Can you give some color on when you think those results are out? It sounds from the press like it's weeks, not months, at this point.

Honestly, you try to read it; I can't anymore.

Okay.

You know, we do believe -- we have full expectations that will be in the next couple of weeks, but who knows, is really the answer.

Of course. Fair enough. And based on the trailing-12-month indicators, it looks like you would get the 1% rate?

It is slightly above 1% for the first quarter, and then it gets back down to the 1% thereafter.

Okay. And then just one final question -- would you raise more than the $20-million-and-change TARP balance?

We were evaluating; obviously can't really say, but we have submitted an application to SBLF, and we are evaluating exactly the amount that we are looking for.

Okay, great. Take care, guys.

Matthew Schultheis, Boenning & Scattergood.

I actually only have one question, which is, did the weather cause any increase in your noninterest expenses, and did it have any impact on projects, things started, that may have impeded your loan growth, though your loan growth wasn't really flat -- lacking in any way? But were there any projects that were pushed back into the second quarter, perhaps?

Honestly, we didn't really see the severity of weather this quarter that we saw last year. We didn't have nearly that level of storms. So I don't think we had any significant impact from that.

Okay, thank you.

Carter Bundy, Stifel Nicolaus.

Wonderful quarter. If you could just talk a little bit about -- Ron, I heard you say that the environment is very competitive out there, and the growth rate you've been turning have been sort of eye-popping. Just sort of wondering if your outlook for loan growth and balance sheet growth is -- you know, it would seem very difficult to continue to turn these kind of numbers. Just sort of trying to get some color on what you think the opportunities are to grow the loan portfolio right now.

I think you've been asking me that question now for four years.

Yes, I have.

You know, Carter, the reality of it is, is that because, as I mentioned in my comments, because of the size of the bank and the fact that there's an opportunity for us now to be able to really continue to steal that market share from the big banks, the regional and the nationals, we see a tremendous loan demand; obviously can't predict where it will go in the future. I can tell you that we do have a good pipeline.

So, you know, the competition just is continuing. A lot of the banks at least are starting to talk the talk -- I'm not sure that they are actually performing -- in terms of their desire for increasing loan demand. But it's certainly something that we're starting to hear rumblings about.

And is that just on pricing or also on structure?

Both.

Okay.

Probably more on pricing than on structure.

Okay, but nonetheless, still very significant opportunities?

Huge opportunities.

Okay. Now, from a deposit perspective, do you see that -- let's just assume that we get an environment where you've got a lot more participation on the banks and a lending environment out there; do you think it will be tougher to continue to get this sort of deposit growth that you've had, the core deposit growth?

Well, obviously the core deposit growth has always been our focus because of the, again, the same side -- the other side of the balance sheet. But we are seeing a tremendous amount of opportunities from larger depositors now that are, because of our credit quality, because of our capital levels, our continued performance, that are feeling more and more comfortable depositing with us.

We've also significantly strengthened our salesforce over the past few months, both at the branch level, the business development officer level, and the lenders are now spending more and more time out in business development. So we are not doing any transactional lending. So if you are coming to us for loans, you're also bringing significant deposits. And we are finding the deposit opportunities continuing.

Okay. And moving on to the expense base, from a personnel perspective and from a run rate perspective, is this sort of a decent run rate from a personnel plus benefits?

Well, you have to remember that we ramped up the residential real estate side pretty aggressively over the past 12 months, and that's a variable that we are monitoring very carefully. Other than for the cost of employment associated with our branching side, I really don't see any dramatic changes in employment.

Okay. And then on the other expense side, we saw it looked like about a %600,000 -- or, excuse me, about a $400,000 sequential increase. It looks like legal was up a little bit, and that other line item was up. Any sort of meaningful nonrecurring number in there, or is that just given growth in the bank?

It's a combination of growth in the bank; it's collection costs. It's just normal and customary, probably a little bit more of an inflated number on the collection costs over the past 12 months that we see going ahead into the future.

Okay. And then last question -- I will jump off here -- on the data processing, your conversion went well. And should we expect any sort of savings there, or is that just to provide for more growth going forward?

Well, it's both. It's obviously the state-of-the-art opportunities that we have right now. Hopefully it will lead to efficiencies, which we truly believe will be coming over the next 12 months. Additionally, it does ramp us up from the customer perspective, that we are now being able to give better service, more information, and just, as I said, just the overall state-of-the-art of technology.

It's hard to believe it was two weeks ago. We have an incredibly, incredibly committed group here that really made the whole process as transparent as possible.

Okay, great. Well, that sounds wonderful. Thanks for all the answers, and solid quarter.

One more -- Jim, you had a comment?

Yes, Carter, let me comment just a minute on the data processing. We do have a bigger system, a better system. It's certainly going to give us productivity improvement going forward.

There is a higher cost to that system, so you will see some increase in data processing costs in the second quarter. But I would also say that you're going to see a decrease in the FDIC insurance as a result of the FDIC Board's decision to change the calculation for community banks.

We are going to all, in the community bank world, see a rather substantial reduction in FDIC insurance beginning in the second quarter. So there is some offset there when you are modeling and looking at total expenses. But data processing as a standalone item is going to be up in the second quarter.

Okay. And how much should we expect FDIC to come in?

Well, I think that cost is coming down by 25% to 30% for us and the community banks at large, based on the lower assessment rates for community banks. The larger banks are going to eat a much bigger part, but the community banks, I think, 25%, 30% reduction.

Okay. And net-net, I guess data processing would largely offset that?

Yes, I think that's probably right, on balance, yes.

Okay, thank you all very much.

(Operator Instructions). Ross Haberman, Haberman Management Corp.

Nice quarter. Just two quick questions, Paul. Could you talk about the new branches, how quickly they are hitting the breakeven, and roughly, in deposits, what do they need in deposit size to hit that breakeven?

Our analysis shows pretty much around $25 million worth of deposits in the same cost structure as we have throughout our entire branching network.

How many do you have below that number now?

I'm going to guess two.

Okay. And just one other question.

Actually, Ross, just looking at the numbers right now, we have one branch that is below that $25 million number, and that was a branch that we took over in December.

Okay, got it. And given your loan demand, are you starting to raise your deposit rates in anticipation -- I guess at some point -- of higher rates in general?

No, we are not.

Okay. Thanks, guys. Again, nice quarter. Best of luck.

(Operator Instructions). Presenters, at this time, I am showing no additional questioners. I'd like to turn the program back over to Ron Paul for any closing remarks.

Again, I would just like to thank everybody for joining the call, and just very pleased and proud of the entire great staff that we have, that we were able to accomplish such great numbers. And looking forward to a great 2011. I'm available to anybody who needs me. Everybody has my number. Thank you.

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