Eagle Bancorp Inc (EGBN) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Eagle Bancorp second-quarter 2011 earnings conference call. (Operator Instructions). I would like to introduce our host for today, Mr. Jim Langmead, Chief Financial Officer. 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 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, everyone. I would like to welcome you to our call to discuss the results of our second quarter of 2011. I appreciate you calling in, joining us this morning and your continued interest in EagleBank. Also on the call this morning as per our usual practice is our Chief Financial Officer, Jim Langmead, and our Chief Credit Officer, Jan Williams. They will be available later in the call for questions.

I'm very pleased that once again we are announcing a record level of quarterly net income, which was $5.8 million. This represents a 67% increase over the second quarter of 2010 and a 12% increase over our record first quarter of 2011. Diluted earnings per share were $0.24 for the quarter, which represent a 50% increase from $0.16 per share in the second quarter one year ago. We are truly pleased to note with the $5.8 million this represents the 10th consecutive quarter of record earnings for the Company, and we are very proud to once again report to you a quarter with strong results, not just in one or two line items, but in all of the fundamental performance indicators. We are pleased with the continued growth in assets, increased non-interest income, improved operating efficiency and consistent credit quality. All of these led to a very favorable level of profitability with a ROAA of 1.01%, up from 0.73% a year ago, and a ROAE of 10.16%, an increase from 7.27% in the same period last year.

We continue to expand our balance sheet and have done so with consistent growth in both deposits and loans. Total deposits were up $114 million during the quarter, and we continue to maintain our favorable deposit mix. DDAs alone grew $34 million during the quarter and remain at 23% of total deposits.

Overall core deposits have increased $245 million from a year ago. This is consistent with trends over the last few quarters in which EagleBank money market products have remained in favor with our customers as compared to CDs.

Loan production was also strong during the quarter as we saw portfolio growth of $158 million. We have had across-the-board growth in income-producing real estate, C&I and construction and development loans. Despite an increasingly competitive environment, we continue to experience healthy loan demand at acceptable levels of pricing, and we still have an active pipeline of new business opportunities.

We continue to benefit from the displacement in the market of some of the larger banks, making us the lender of choice for more and more borrowers. As always, we continue our practice of seeking full client relationships, including deposit and fee income product opportunities and avoid stand-alone transactions.

The net interest margin was very favorable through the quarter at 4.32%. We continue our disciplined [ALCO] process to control both our loan yields and cost of funds. Loan demand has been such that we have been able to maintain acceptable yields on the portfolio. Our cost of funds has benefited from the overall low rate environment of our very attractive deposit mix. We continue to build our DDA base of transaction accounts from our commercial customers. We are confident in our ability to retain an attractive margin when interest rates eventually do start to increase. 62% of our portfolio is in variable or adjustable rate loans. 50% of the portfolio re-prices or matures within 30 days, another 12% within the first year. 72% of the portfolio re-prices or matures within two years and 81% within three years.

Non-interest income was very positive at $2.6 million for the quarter. This is driven primarily by our residential mortgage division whose revenue is up $800,000 over the second quarter of 2010. As we have previously discussed, this business line can experience uneven results from quarter to quarter due to seasonality and to the accounting rules. These can cause a time lag between the expenses associated with loan origination and the revenue recognition, which is deferred until the loans are sold and delivered.

I am pleased to note that for the second quarter the residential mortgage division originated $123 million in loans. The volume is driven both by refinance transactions and home purchase transactions. Residential property values in the Washington metropolitan area continue to show an improving trend as indicated by the Case-Shiller Index, which in June showed a 4% increase in values over 2010.

We are particularly pleased by the improvement in operations and expense control as indicated by the efficiency ratio, which was at 55.13% for the quarter. This is compared to 63.69% a year ago. This has been achieved even with the significant investments we have made in infrastructure, including opening a new branch, installing a new data processing and general ledger system, and adding to our teams of lenders and business development officers.

Our staffing has grown by 55 people since June of 2010. I think if you look at the trend in our efficiency ratio over time, it demonstrates our commitment to enhancing our infrastructure and quality of operations while continuing to grow our earnings-per-share.

The final but certainly critical performance factor that I would like to touch on is credit quality. The growth in our loan portfolio has been accomplished while adhering to our consistent underwriting standards and our disciplined approach to portfolio monitoring and maintenance. At June 30 our [ALL] was 1.14%, which reflects our expert loan loss history, the performance of our loan portfolio and the relative health of our market environment. The larger than normal provision expense of $3.2 million for the quarter was driven primarily by the growth of our loans during the period. Non-performing assets at quarter-end were 1.47% of total assets, which I'm pleased to note are down from 1.68% of total assets at March 31, 2011.

The coverage ratio was 88% at June 30. We feel comfortable that we have adequately reserved for our risk in the portfolio. Charge-offs in the quarter were modest at 0.28% of loans.

As we announced in a separate press release last week, on July 14 we bolstered our capital by receiving $56.6 million investment from the U.S. Treasury as part of the Small Business Lending Fund. We used part of the proceeds to retire the remaining $23.2 million of TARP funding. Since the SBLF investment by the Treasury is in our preferred stock, the additional funds qualify as Tier 1 capital. So we now have on a pro forma basis a Tier 1 leverage ratio of 10.54% and a total risk-based capital ratio of 12.93%.

In addition to the obvious benefit of adding to our Tier 1 capital, we were able to replace the TARP funds, which had a 5% dividend rate versus new capital with a 1% dividend rate. So we added $33.3 million of additional capital and reduced our annual cash dividend by $596,000.

The bank continues to discuss expansion opportunities that would include potential acquisitions.

In regards to de novo growth, we have gained traction in Northern Virginia. We have three branch openings scheduled in the second half of this year and continue to recruit lenders who are familiar with this market. However, I would say we are extremely bullish on the entire Washington metropolitan area, which is still one of the healthiest regions in the country. We remain committed to grow the size and profitability of EagleBank through our focus on customer relationships. Every day we are adding new customers and strengthening our ties with existing customers, and every day we continue towards our goal of being the leading community bank in the market with accessible leadership and a commitment to the community.

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

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

Congrats on another good quarter. Loan growth obviously has been very impressive, so I was hoping to first address that a little more. Are you guys starting to see some of the bigger players come back to the market, and I guess is loan growth coming more from higher loan demand in the area or from taking marketshare?

It is still coming from the same as it has over the past couple of years, and that is just the disfunctional side of the big banks. Obviously now they were the sizes we are with the legal lending limit that we have and the accessibility to senior management, quick decision-making, it is really the situation right now that the larger, more sophisticated borrowers are looking for that personal relationship. And that just has been really the story over the past couple of years.

Obviously we are continuing to see the standard amount of loan growth in the area, which has been very strong, and just really see that across-the-board and see it continuing.

Yes, I guess how are you guys thinking in terms of loan growth in the back half of the year? Can we expect this type of growth to continue or --?

Well, obviously I can't give any forward-looking statements, but I do believe that the opportunity to be able to continue to take the cream off the top on the relationships that we know we can continue to build with and will be loyal to us is something that we really do continue to see growing.

And then moving onto capital, just given how successful you guys have been able to grow out the base with CT ratio now around 8%, assuming you keep growing at this pace, I guess how low are you comfortable with that ratio getting to without having to raise capital?

We feel comfortable at the levels that we have right now. Obviously the SBLF has made a big difference to us, and as you know, we certainly are looking at other alternatives in terms of -- not other alternatives, but additional alternatives in terms of additional opportunities in capital. So we are being optimistic. Obviously the stock price has done well, and we continue that. We can continue to see that, and we will be looking for opportunities as time goes on in terms of strengthening capital if, in fact, that is what we feel like we need.

Okay. And then my last question and I probably ask this question on every call, but is the balance of TDRs unchanged from last quarter?

The balance of TDRs increased by $200,000.

All right. Well, thanks, guys. Congrats on the quarter, again, and I appreciate you taking my questions.

Cartier Bundy, Stifel Nicolaus.

Great quarter. Continuing on Casey's question on the loan outlook, I know you cannot really talk about future outlook, but Ron, you sound pretty optimistic on continued opportunities. If you could just provide a little color on what was existing client relationships on the growth this quarter versus actually new relationships?

I would say it is probably 60% new relationships, 40% expansion of -- I'm sorry, yes, 60% new relationships, 40% on expansion of existing relationships. I mean there is not a day that goes by that we are not getting a phone call from a new borrower, a customer that is frustrated with the existing situation that they have.

And is this typically larger capital lenders that are still not meeting customer demand trends?

Yes. And, again, it goes back to the same comment. If you have a legal lending limit in excess of $30 million and you can still get that customer service and that touch and feel and have all the products that they need, it has just been a great tool for us to continue the growth that we have had.

Okay. And so would you maybe say that the first half of the year the growth rates were probably a quicker clip than we might see going forward?

I would say that the growth rate in the first half was way more than we anticipated.

Okay. That is helpful. On the deposit side, could you talk a little bit about the success you have on the non (inaudible) spending side and also how you think about the opportunities to continue to grow that and continue to get good pricing on it?

Well, with regard to the deposit side, I can tell you that we have -- yesterday was our 13th birthday, and I think that if you go back to 13 years, you will see that our percentage of DDAs to total deposits have been pretty consistent over 13 years. And a lot of it, as I said in my earlier comments, is just the insistence that we are not doing transactional lending, that, along with loans, has to come compensating balances, and as we expand our footprint with our branches, it gives us the opportunity to have walk-in customers as well. So we really do -- I cannot tell you whether there is going to be 22, 23, 21, but we are optimistic that our percentage of DDAs to total is going to be consistent. And, again, a lot of it is that insistence on not doing transactional lending requiring those core deposits.

Okay. And do you have any concerns that as fast as you are growing the asset side of the growth bank that you can continue to get the pricing you are getting and continue to fund this thing with very, I guess as you said, core accounts?

Well, as you know, we have had pretty significant loan growth over the past 13 years. So we have been able to continue to match it with deposits. We don't have a high percentage of wholesale funding, so it is certainly a fallback position. But we don't believe that is a position that we will be needing to dip into. A lot of it is balancing of pricing that we, again, wholesale versus core because we do have that opportunity of increasing core.

Okay. And then sorry to keep hounding on this, but in terms of pricing on both the asset side and on the funding side, are you seeing competition incrementally increase this quarter or actually stay the same or get worse?

I would say that we are seeing a marginal increase in competition. But again with the loan demand that we have, we are able to be a little bit more selective in our pricing in who we are going to take. I will tell you that the difference of an 1/8 and a 1/4 or a 1/4 does not make a difference to the borrower when your interest rates are like they are right now. And if you can give them the customer service and the quick response and the handholding side, again, that is not going to make a difference. And candidly if it does, then they should be looking for another relationship.

Okay. And moving on to my next question, would it be reasonable to assume then given how strong the margin has been, that with those sort of opportunities on both the loan and deposit side that you might be able to hold this thing here?

Are you really asking me that question for an answer? You know, again -- (multiple speakers). Our net interest margin, as you and I have spoken about many times, is astronomical. It has been that way for many, many years. I think we need to stay focused like we have been over the 13 years on recognizing that there is a balance in pricing both on the asset and liability side, and that is what we are going to continue to focus on. Whether it can stay at 430, whether it is going to go down, whether it is going to go up, again, it is all dictated by the market and what the world is going through right now.

Okay. That is helpful. And then finally, on the expense base, Ron, if you could talk a little bit about your FTE this quarter, how many you added and how you think about a decent run rate, particularly on the personnel side, as you continue to add lenders?

I don't see us adding a tremendous number of lenders at this point. I think we have a very well-balanced attack right now on the lending side, and I would say on the FTE you are going to see more as a result of our branches, but obviously that is at a lower expense rate.

Okay. And then finally, you made a comment about acquisitions, and I know we have spoken about that in the past. Any color you can provide there given how good the organic opportunities are right now?

You know, again, as I have said over many quarters, we are always optimistic. We will continue to be optimistic. We certainly know the market like you do. We do see that there are opportunities, and we are going to strike when we can.

(Operator Instructions). Matthew Schultheis, Boenning & Scattergood.

Most of my questions have been answered, so I just wanted to get a little bit of color where you are looking to open your three branches.

We have a branch that we are opening in Ballston, we have a branch in Rosslyn, and we have a branch in Reston, which are all the Northern Virginia marketplace.

Right. Okay. And really that is it for me. I just wanted to make sure you were not starting to expand too far geographically. Thank you.

No, we have a real commitment just to us within the Washington metropolitan area. We have certainly looked outside the area, but our focus -- and that is the operative word -- is there are just tremendous opportunities in the local market. I think in my last call we only have 1.14% of this entire market share from a deposit perspective, and I think being the second largest bank in the state of Maryland I think with only 1.14%, you see what the opportunities are just within this market place.

As for as geographic, you know, where you have been lending, I know in the past you have occasionally done some loans in Baltimore and occasionally done some loans in Howard County. What percentage of your loans would you say is not in the DC Metro area?

In terms of the geographic locations of our portfolio, it is overwhelmingly in the Washington DC metropolitan area. We have -- sorry I'm looking through it --

While Jan is looking for the answer to your question, I would tell you that there is no question that a significant amount of our growth has been just in the DC market.

We have 35% of our portfolio in the Washington DC area, well in the city proper. In Montgomery County we have 27%, Prince George's 7.9%. Alexandria, Arlington and Fairfax have a total of 11%. We are very, very focused on the close-in counties and in the city of Washington itself. Fairfax, Arlington, Alexandria, Montgomery County are all very affluent counties that are very close into the city.

Thank you and I see no further questions in the queue at this time. I would like to turn the conference back over to our presenters for any further remarks.

Again, I appreciate everybody for jumping on the call. I am very, very pleased on our success not only this quarter but year to date and clearly what we have accomplished over the past 13 years. I am looking forward to speaking to you again next quarter.

Thank you very much. Enjoy your summer.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.