Eagle Bancorp Inc (EGBN) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Eagle Bancorp third-quarter earnings conference call. At this time, all participant lines are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to Mr. Jim Langmead, Chief Financial Officer at Eagle Bancorp. Sir, you may begin.

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 Forms 10-Q and current report 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 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 Eagle Bancorp.

Thank you, Jim. Good morning, everyone. I would like to welcome you to our earnings call to discuss the results of the third quarter of 2011. We appreciate your calling in to join 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 am pleased to once again announce a record level of quarterly net income, which was $6.5 million. This is the 11th consecutive quarter of EagleBank announcing increased record earnings. The $6.5 million of net income represents a 36% increase over the third quarter of 2010 and a 13% increase over net income in our record second quarter of 2011.

Diluted earnings per share was $0.31 for the last quarter, which represents a 41% increase from $0.22 per share in the third quarter one year ago.

As usual, the primary drivers of our increased earnings are the continued organic growth of our loans and deposits, our excellent credit quality and a net interest margin which is amongst the highest in the industry. It is these fundamentals that lead to our consistent performance, not derivatives, unusual investments or changes to our loan-loss reserve policy.

We are proud of our balanced, consistent performance for each of these indicators. But I also want to recognize several other significant events that occurred during the quarter which impacted our reported numbers. One event had an expected impact on earnings; the other had a major impact on our balance sheet.

Earnings per share increased at a greater rate than reported earnings. This was one of the intended results from entering into the Small Business Lending Fund program, which the Bank settled on in July. We raised $56.6 million from the US Treasury, and due to our demonstrated growth in qualified loans, we are eligible for the lowest available dividend rate of 1%.

We repaid the remaining $23.2 million of TARP funds, which had a 5% dividend rate. So we increased our Tier 1 capital by $33.3 million and reduced our dividend costs by $149,000 per quarter. That's an annual increase in income available to common shareholders of nearly $600,000.

The second significant event of the third quarter was that in mid-September, the Bank received a deposit of approximately $618 million into an escrow account held by one of our major law firm clients. The funds are the result of a very large class-action suit settlement. We expect that the settlement deposit will not be on the balance sheet for long, and will be substantially distributed to certain asset management firms before year end. After final resolution of the matter, expected mid-2012, the funds will again flow through the settlement account for disbursement to the individual claimants.

We are honored that this law firm, the judicial system and the other parties to the suit felt comfortable making this large deposit with us. It represents a vote of confidence in EagleBank and the strength of our Company. On the other hand, we know that it provides a short-term increase in our balance sheet and a distortion to several financial ratios and growth trends that analysts and investors would normally be calculating.

Therefore, we included in the press release both actual numbers and ratios that are in accordance with GAAP and adjusted ratios, excluding the settlement funds, which are not GAAP compliant, but we think are more meaningful, and I will refer to those numbers and ratios during my remarks this morning.

Another series of events in the third quarter was related to the continued expansion of our presence in the market share in Northern Virginia. In late July, we announced an agreement to acquire Alliance Bankshares, which had approximately $536 million in assets at June 30, 2011, with six branches. In addition, we continued with our de novo branch development by opening an office in Ballston in late August and one in Roslyn last week. These are truly dynamic submarkets.

I will come back to the Northern Virginia strategy, but first I would like to spend a few minutes on the real drivers of our performance in the third quarter, which were the continued, consistent growth in our balance sheet, sustaining our outstanding credit quality and maintaining our strong net interest margin.

The loan portfolio grew by $81 million during the third quarter to just over $2 billion at September 30. Our loans are up 33% over the past year, but a more moderate 4% during the third quarter. This reflects our strategic, yet always opportunistic, approach to the market. The largest increase in the third quarter was in income-producing real estate loans, with a smaller increase in construction and development loans.

At the same time, we are extremely proud to note that deposits, excluding the settlement funds noted earlier, grew $188 million in the third quarter. We continue to experience outstanding growth in core deposits, which for us are both DDAs and money market accounts.

DDAs grew $52 million during this quarter and continue to drive our favorable deposit mix. DDAs remain at 23% of total deposits. Money market accounts increased $167 million in the quarter, even though in September we slightly reduced the interest rates paid, in keeping with general market conditions.

As always, we continue our practice of seeking full client relationships, including deposit and fee income product opportunities, and avoid stand-alone loan transactions. The net result is that over the last year, we have grown both sides of the balance sheet at an even pace, with loan growth of $499 million and deposits increasing $483 million, excluding the settlement funds.

We continued to outpace our competition in the Washington metropolitan area. We are very proud to note that in the deposit market share statistics for June 30, 2011, which was just released by the FDIC, EagleBank has moved up to become the third largest community bank in the Washington metropolitan region. For the year ended June 30, deposit growth for the entire market was 5%. Our growth was 23%, and we still have tremendous opportunities for growth, because even with our success to date, our overall market share is only 1.38% of one of the strongest markets in the country.

The net interest margin continued to be very strong at 4.15% for the third quarter, excluding the impact of the settlement deposit. We continue our disciplined ALCO process to manage both the loan yields and cost of funds. The decline in the net interest margin in the third quarter as compared to the second quarter was the result of substantially more liquidity on the balance sheet during the most recent quarter.

Loan demand is strong for both C&I loans and commercial real estate loans. We continue to seek floor rates in the vast majority of all loan transactions, as we have for the past few years. Our cost of funds have benefited from the overall low rate environment and our very attractive deposit mix.

Our ALCO strategy is very straightforward, and we are in a neutral position in terms of any interest rate sensitivity modeling. We are confident in our ability to retain an attractive margin when interest rates eventually do start to increase.

Excluding loans held for sale, 62% of our portfolio is in variable or adjusted rate loans. 32% of the portfolio reprices or matures within 30 days, and another 4% within the first year. In total, 62% of the portfolio reprices or matures within two years, and 80% within three years.

Our residential mortgage division continues to be a huge success story and has been setting records for volumes during the third quarter. It is clearly the driver of noninterest income, which was $3.5 million for the quarter as compared to $2.3 million a year ago.

The mortgage division originated $268 million of loans in the third quarter of 2011, which compares to $180 million in the third quarter of 2010. As we have previously discussed, this business line can experience uneven results from quarter to quarter due to the seasonality and 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 any repurchased liability expires.

The volume is about 80% refinance transactions, but home purchases are important for the long-term strategy for this division. We are working closely with our builder customers to become their preferred end loan providers.

Residential property values in the Washington metropolitan area continue to show an improving trend, as indicated by the most recent Case-Shiller Index, which in July showed a 3% increase in value over July of 2010.

The amount of held-for-sale loans on the balance sheet at September 30 was significant at $108 million. But that doesn't reflect a change in our strategy. We still originate only loans for sale into the secondary market and not for our portfolio. Our loans originated are presold and prelocked, and they are high-quality loans, being primarily residential loans in the Washington area.

The average loan size is $395,000, and the average FICO score of the borrowers is 720. We do reserve for repurchase risk, but I am pleased to note that year to date, we have sold 1021 loans totaling $403 million and have had only one loan put back in the amount of $737,000.

We continue to emphasize expense control, as indicated by the improved efficiency ratio, which was 54.43% for the quarter as compared to 58.68% a year ago. This has been achieved even with the significant investments we have made this year in infrastructure, including opening new branches, 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 net 45 people since September of 2010.

While expense control is part of our culture, we will continue to build a quality organization and enhance the infrastructure, whether it is through investments in technology or hiring experienced lenders, such as Tony Marquez, who came on board in August as Chief Real Estate Lending Officer, and Virginia Heine, who just joined us to become our Chief C&I Lending Officer. We will continue to recruit seasoned bankers who really understand the Washington metropolitan area.

The final 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 September 30, our allowance for loan loss was 1.41% of total loans, the same as the previous quarter, and a very reasonable level given the performance of our loan portfolio and the relative health of the Washington metropolitan market.

Charge-offs for the quarter were a modest 36 basis points of average loans and only 32 basis points of average loans for a year-to-date basis.

The provision expense of $2.8 million for the quarter was driven primarily by the growth of loans during the period. Nonperforming assets at quarter end were 1.36% of total assets, adjusted for the settlement funds, which is down from 1.47% of total assets at June 30, 2011.

Our Texas ratio at September 30 was 15.2%, well below the industry average. The coverage ratio was up to 91% at September 30 as compared to 88% at June 30. We feel comfortable that we have adequate reserves for this risk in the portfolio.

As for our focus on growth in Northern Virginia, we are continuing the process for the announced merger with Alliance. The regulatory applications have been filed. As you know, the filings are very detailed and require current financial information. Based on that, we feel the S-4 will not be filed with the SEC until after both banks make our third-quarter 10-Q filings in November.

Due to the complicated nature of a merger, I will not be addressing any further comments during this call regarding the merger.

As I mentioned earlier, we also continue our organic growth in Northern Virginia through recruiting experienced bankers in the market and opening offices. In Arlington, we did open our Ballston branch in August and opened the Rosslyn branch just last week. We are very excited about how we are building our presence and are really gaining traction in Northern Virginia.

At the same time, we continue to attract customers across the entire Washington metropolitan area, which is still one of the healthiest regions in the country. More recently, we have been developing relationships with major deposit customers who are attracted by our financial strength, quality service and operations.

Building these new customer relations, along with strengthening and expanding our current relationships, will always be our primary focus. That will allow us to continue towards our goal of being the leading community bank in the market, with local decision-makers, accessible leadership and a commitment to the community.

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

(Operator Instructions) Christopher Marinac, FIG Partners.

I was curious about sort of what you're seeing on incremental pricing for various loan types, if you could walk us through C&I versus commercial real estate versus mortgages that you are holding on the books.

The commercial real estate side, we are still having a lot of flexibility on our pricing model. There still seems to be a high demand of quality income-producing real estate and it being able to get the pricing that we want, along with compensating balances.

The C&I side is being a little bit more competitive in nature. And what we are doing is we are taking a firm position of what we believe we are entitled to from a yield. And if we can't get that yield unless being extreme on compensating balances, we will let them go elsewhere.

Okay.

And I will tell you, Chris, that a lot of the C&I side, we are finding more on the longer end of the curve, where people are willing to go out on amortizing loans seven years at sub 4.5% rates.

Ron, I guess as a follow-up, can you -- just on an organic and legacy basis, excluding the impact of the merger, of course, can you talk about margin outlook next three and six months?

I'm sorry, Chris. I couldn't hear the question.

Could you give us some color on the legacy portfolio for the net interest margin in terms of just directionally, if you could keep it stable here or if you think you might lose a few basis points for the next two or three quarters.

I think that without going into forward-looking statements, I think that as I just mentioned, the real estate portfolio really does seem to have that opportunity to get the pricing that we want. And we are seeing a lot of opportunities in the C&I side.

We are still seeing a tremendous level of dysfunctional side of the big banks. And as I've said in previous calls, the opportunities right now for the legal lending limit that we have, the size that we have, the ability to get the decision-makers, people are still willing to pay the price, because they are frustrated with the big guys. And that is where our opportunity has been and we see it continuing in the foreseeable future.

Great. Thanks for taking my questions.

Carter Bundy, Stifel Nicolaus.

Good morning, everyone. Good quarter. Could you talk a little bit about the prospects for loan growth a little bit more, Ron? It sounds like it is still a pretty good environment out there for taking share. Do you see that meaningfully slowing from current run rates or do you still see very significant opportunities?

We are still seeing significant opportunity. Again, the real estate and the C&I side is both just great opportunities at all sizes. Just the -- I can't stress it enough. I've said it for quarter in, quarter out, that the ability of us getting quality, solid, local loans on a real estate deal -- I'm talking about income-producing properties inside the Beltway, which we are not seeing any credit issues with -- is just phenomenal.

And it is -- as we've talked about and shown in the statistics, if you look at the FDIC report, you will see that there are very few banks that have the size that we have and the quality that we have and the accessibility to decision-makers that we have. And that is what people want.

So in a long-winded answer to your question, I see us continuing the tremendous opportunity that we have in loan growth at prices that we are willing to accept.

Okay. In terms of the Alliance acquisition, you said you are going to not file the S-4 until after the queue. So that could potentially maybe move into potentially early '12.

We are going to file the S-4 when we have November numbers.

Okay. And then on the deposit trends, Ron, the numbers have been very, very strong. Do you still see opportunities continue to grow that sort of -- that amount of deposits, even with pricing being a little bit more competitive there?

As I've said for 13 years, our DDAs have always been above 20%, and we see no reason that that's going to slow down. I will tell you that, again, going back to the whole size, capital infrastructure, community service, that we are seeing larger-sized depositors coming to us because they, too, are very, very concerned and frustrated with the big banks.

And I think the sentiment is dramatically leaning towards how do I get money back into community banks that are going to put money back into the community. And I see some of the larger institutional players that are continuing to sit and say, Eagle is strong, well-capitalized and putting their money back into the market, and that is why we want to bank with them, along with, obviously, the relationships that we have with many of these players.

Okay. And then a final question. We saw the personnel run rate jump up pretty meaningfully sequentially. Trying to get idea of what that may look like on a go-forward basis. I know we have some probably pretty meaningful comp on the mortgage line. But wanted to get some idea on sort of how to think about that.

Most of our employment growth, as I mentioned earlier, stemmed from some of the branches that we've opened and gearing up for those branches. We are not just hiring somebody today and putting them in a branch tomorrow. So a lot of them is the training process that we've had in the branch personnel. We have had an increase in some of our support staff. And obviously, most of that support staff being the residential real estate group.

So, Ron, would you suggest then that that's not too elevated a run rate? (multiple speakers)

I would believe that our hiring level will stabilize going into the future, because as I say, the branches have just been occupied and our residential real estate group is pretty ramped up.

Okay. And was there some elevated cost associated with the residential production that you book ahead of time?

Remember, as we always talk about, we pay payroll like we should be paying payroll, timely. And the commissions are being paid as the loan closes, and the revenue hasn't been recognized on that particular loan. It could be as long as 150 days.

The other thing, Carter, is I will tell you that we are continuing to see tremendous opportunities on experienced lenders. And whether -- and the likelihood is that we will continue to take those experienced lenders and backfill the Northern Virginia marketplace and other areas that we see a tremendous opportunity for growth.

But again, that clearly is a pretty quick ramp-up on the matching of the income to the compensation, because many of those experienced lenders bring over a portfolio with them.

Okay. And then two follow-up questions and I'll jump off here. From a branching perspective, exclusive of the Alliance deal, could you remind me what you had on the plan for next year and into '13?

Well, we have one branch that will open up -- all of our branches have opened up except one.

Okay.

The Merrifield branch -- excuse me, two. The Merrifield branch won't open up until the end of 2013 -- 2012. And our Reston office will probably be opening up in January of 2012.

January '12? Okay.

Other than that, there is no immediate plans on branch expansion, although we are looking in the Alexandria marketplace.

Okay. And have -- the FTE are largely on board for the Reston branch?

Yes.

Okay. And then final thing, on the mortgage side, the numbers have been strong. Do you continue to see that as a very good opportunity in the market going forward?

I can tell you our lenders are there at 4.30 in the morning almost every day, so there is a tremendous opportunity that we are seeing. And we haven't really begun to start cross-selling a lot of our current customers on the residential real estate side.

These are very experienced residential real estate lenders that have a tremendous portfolio that are bringing over their customers, and little by little, we are working it into our system as well.

Okay. Thank you all very much for all the time.

And back to the residential real estate, as I mentioned in my comments, we have, as you all know, a tremendous stable of builders in our commercial real estate group. And that real estate group is working more and more with our residential real estate guys on getting them to become the preferred lender, to be able to have them do the end loans for those housing projects.

Got it. That's very helpful. Thank you for all the questions.

(Operator Instructions) Matt Schultheis, Boenning & Scattergood.

Good morning. Quick question for you. You had a fairly significant increase in your construction loans this quarter. Can you discuss a little bit of the nature of what type of projects you were financing there?

Matt, this is Jan Williams. We did have an increase in our construction portfolio, and it is pretty spread over commercial, owner-occupied and residential. We've had a lot of good opportunities.

For example, we would see a building come in that is being rehabbed. That would go into our construction portfolio. It may be the end user is a federal government tenant, and since there is a significant quantity of funds to be expended in the rehab, it is moving into construction. So you are not looking necessarily at true ground-up projects when we talk about the increase in our construction portfolio.

Matt, just to add a little further to that is, as an example, we did a funding of a loan in the heart of Bethesda, an existing building that was vacated that's going to get retrofitted. And it is probably with the most experienced developer in the city that specializes in this type of a project.

So again, so much of this is making sure that we drill down into exactly where the loans are. And for those of you that have seen our presentation -- and it's on the website -- you will see that it is all concentrated within the heart of Washington, D.C., as this particular deal is in the heart of Bethesda.

Okay. Next, can you discuss the expected velocity of the $618 million deposit that you took? Is that going to be primarily gone by the end of, say, October or November, or do you think there is sort of an even payout through the fourth quarter?

Jim?

Matt, it is expected that a large portion of it, perhaps a third, will go out within the next couple or three weeks. And then the remaining amounts are expected to be distributed to other banks that are served by this particular beneficiary of the suit over the remainder of 2011.

So by the end of the year, we could still have some of the money, but we expect that most of it will be out of the Bank. And then as Ron mentioned in his comments, it will come back to us once the administrative agents determine the folks, specific folks that will get these checks, and then the money will come back and clear through our system again.

So out by the end of the year, we expect. Could be a little bit carryover and then back in in '12, and then there will be some rundown there as well.

Okay. That's it for me. Thank you.

Thank you. I am showing no further questions at this time. I will now turn the call back over for any further remarks.

If there are no other questions, again, I appreciate everybody being on the call, and wishing you a happy holiday season. And we will speak to you at the end of next quarter. Thank you very much.

Ladies and gentlemen, thank you for your participation. That concludes the presentation. You may disconnect, and have a wonderful day.