Eagle Bancorp Inc (EGBN) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the EagleBank fourth-quarter 2011 conference call. At this time all participants are on 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 call is being recorded. I would now like to turn the conference over to your host, Mister Jim Langmead. 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 2011 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 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 for the fourth quarter and full year of 2011. We appreciate your calling in to join us this morning and your continued interest in Eagle Bancorp. In addition to Jim Langmead, also on the call with me this morning is our Chief Credit Officer Jan Williams. Jim and Jan will both be available later in the call for questions.

I am extremely pleased to once again announce a record level of quarterly net income which was $7.2 million. This is the 12th consecutive quarter of EagleBank producing increased record earnings. The $7.2 million of net income represents a 42% increase over the fourth quarter of 2010 and a 10% increase over the net income in the third quarter of 2011. Net income available to common shareholders and diluted earnings per share were up 50% over the fourth quarter of 2010, $7 million versus $4.7 million. The greater percentage increase in earnings per share and net income available to the common shareholders is due to the decrease in our cash dividends resulted from our payoff of the TARP funds and entry into the small-business lending fund program in July of last year.

You will recall that due to our growth in qualified [SBLF] loans we were eligible for the lowest dividend rate of 1% from the inception of that program.

For the full year of 2011 net income was also a record at $24.6 million and represented a 47% increase over 2010 annual results. The growth in income available to common shareholders and the earnings-per-share were even better at 50%, again, because of the reduced dividend rate. We are actually proud of this growth in net income and earnings per share.

At EagleBank, balanced consistent financial performance and income growth are our primary focus, not just growing on the balance sheet. Our earnings are driven by the core elements of the Bank's values which are a superior margin, strong credit culture, focus on our efficiency ratio, improving our net interest earnings, and efficient and effective organizational structure.

Yet 2011 was a record year for balance sheet growth as well. Deposits at year end were 2000 -- in 2011 were $2.4 billion and are up 38% over December 31, 2010. In the fourth quarter of 2011, we produced continued strong growth in core deposits. The large settlement deposit that we spoke about on the last conference call was dispersed out of the bank during the fourth-quarter as expected.

Excluding that account DDA deposits increased $200 million during the fourth quarter quarter and total core deposits increased $293 million for the fourth quarter excluding the settlement deposit. At December 31, DDA deposits were 29% of total deposits. So, during the fourth quarter we actually improved on our traditionally very favorable core deposit mix.

Loan growth moderated in the fourth quarter to just 1% but was very strong on a year-over-year basis.

Loan growth in 2011 excluding loans held for sale was $381 million which is an annual increase of 23%. We are quite happy with that accomplishment. To have a quarter with only a modest increase in portfolio loans is an anomaly for us and can be attributed to two factors.

The first is that we saw the payoff of several larger real estate construction loans. We view this as a good news/bad news situation in that while we would like to have kept the loans on our books a little longer, the good news is that the loans were on quality projects that were able to move to the next step as projected and we were paid off. We feel this affirms our underwriting standards.

The second impacted factor was that two larger loan transactions we expected to fund in the fourth quarter did not close by year end and are on track to fund during the first quarter of 2012. Our business development production and level of new commitments during the fourth quarter were in line with expectations, and the new business pipeline is still extremely strong. So we feel very confident about loan growth prospects in 2012.

The net interest margin continued to be very strong at 4.16% for the fourth quarter excluding the impact of the settlement deposit. We continue our discipline [Alco] process to manage both our loan yields and cost of funds. The yield on earning assets in the fourth the quarter was impacted as a result of substantially more liquidity on the balance sheet than we traditionally carried. However we were able to reduce our funding costs proportionally such that our net interest margin, excluding the settlement deposit for the most recent quarter, was actually 1 basis point higher than the 4.15% earned in the third quarter of 2011. This excess liquidity will provide us the means to fund our anticipated loan growth.

Loan demand is strong for both C&I loans and commercial real estate loans. While we have seen some pricing pressure in the lending area, we are maintaining our focus on the net interest margin. We continue to employ floor rates as we have for the last five years. 80% of our variable rate loans have a floor which average approximately 5%.

Our cost of funds have benefited from the overall low rate environment and our improving deposit mix. We are confident in our ability to retain an attractive margin when interest rates eventually do start to increase, even with the buffering effect of the floor rates.

Excluding loans held for sale, 61% of our portfolio is in variable or adjustable rate loans. Including fixed rate loans 32% of the portfolio reprices or matures within 30 days and another 4% within the first year.

In total, 63% of the portfolio reprices and matures within two years and 83% within five years. Our credit quality which has again been consistently good over the last few years in a very tough economy remained favorable during the fourth quarter.

At year-end 2011, NPAs as a percentage of total assets, decreased to 1.27% as compared to 1.32% at the September 30 as adjusted for the settlement deposit. This level of NPAs is well below peer levels. Net charge-offs for the fourth quarter were 34 basis points of average loans and were 32 basis points for the year of 2011. These level of charge-offs were also well below industry norms. The allowance for loan losses was 1.44% at the end of the quarter and we have continued to make substantial provisions as dictated by the growth in our loan portfolio, consistent application of our allowance methodology, and the improved quality of our loan portfolio.

Our coverage ratio at the end of the fourth quarter was 91% and we believe that we are adequately reserved. Even though our credit quality is strong and the economy is improving, we continue our diligent approach to monitoring the loan portfolio and taking aggressive action on individual credits as necessary.

Non-interest fee income for the 4th the quarter was driven by residential vending division. Their performance during the quarter was off the charts. Production during the quarter was $387 million which is $151 million greater than the fourth quarter of last year and $119 million greater than the third quarter of 2011, which was our previous record. We closed 1,001 loans in the fourth quarter as compared to 1,021 loans for the first three quarters of the year combined.

Revenue from the division was $2.1 million for the fourth quarter and was the major component of the non-interest income for the Company, which in total was $3.9 million for the fourth quarter.

As we have previously discussed, this business line can experience uneven results from quarter to quarter due to the demand, seasonality, and through accounting rules on revenue recognition. I would note that the bulk of the quarter's expenses associated with the loan origination were recognized in the fourth quarter but a significant portion of the revenue has been deferred into 2012 until the sales to the investors are complete.

As indicated in the financial statements, loans held for sale were $177 million at year end, up from $108 million at the end of the third quarter. This is due to the inability of the investors to process loan purchases rapidly, given the heightened level of refinancing activity taking place in today's market. This mismatched recognizing commission expense to different reporting periods then revenue from sales of negatively impacted our efficiency ratio in the fourth quarter; but we expect to see the correction of that effect in subsequent quarters.

The volume is about 90% refinancing transactions but home purchases are important to our long-term strategy for this division. We continue to work closely with our builder customers to become their preferred [and] loan provider. Residential property values in the Washington metropolitan area continued to show an improving trend as indicated by the recent Case-Shiller Index, which through October showed a 1.25% increase in values over October of 2010. The Washington area is one of only two markets in the country to show a year-over-year increase for that period.

As noted above, the efficiency ratio for the fourth quarter was impacted by deferred revenue in our residential lending division but was still very favorable at 56.97%. The fourth quarter also included one-time charges related to merger-related items, the impact of opening new branches in Northern Virginia, higher incentive compensation, and overall processing costs related to assist -- to asset growth of 36% during the year.

On an annual basis the efficiency ratio improved from 59.26% for 2010 to 56.22% for 2011 and was 55.07%, excluding merger and system conversion-related expenses.

The continual improvement in the efficiency ratio from 66.49% in 2008 to 64.01% in 2009 to 59.26% in 2010 to 56.22% in 2011 is truly indicative of our commitment to managing non-interest expenses as we build the Bank. We continue to feel that an efficiency ratio in the mid- to low 50s is appropriate for EagleBank given our growth rates and our commitment to always having the proper infrastructure to support that growth. As we have previously announced we have two additional branches planned in Northern Virginia for 2012 and will make ongoing investments in technology to support new products, and we will continue to hire seasoned bankers who really understand the Washington metropolitan area.

We are continuing our organic growth in Northern Virginia. We opened two branches in Arlington in the second half of 2011. The Reston branch will open in the first quarter of 2012 and Merrifield, Virginia is in development for opening in the third quarter of 2012. We continue to study other sub markets in Northern Virginia.

However our focus throughout the entire Washington metropolitan area is building new customer relationships and broadening current relationships. We measure our efforts and results in relationship development in multiple ways, which are tracked and reported monthly. It is really gratifying to note that for the year of 2011, we increased our cross sell percentage by 15%. At the same time, the number of net new relationships increased by 16%.

Earlier I mentioned the growth in core deposits that we saw in the fourth quarter. Much of that increase was the result of new relationships with deposit customers who are bidding to EagleBank because of our recognized financial strength and quality of service. This is the real key to our success and it will drive us towards our goal of being the leading community bank in the market with exceptional personal service, local decision-makers, accessible leadership, and a commitment to the community.

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

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

Good morning. Congrats on the quarter.

Thank you.

Actually, Jan, my first question is for you. Can you tell us what the balance of performing TDRs was at year-end? I believe that number was around $9.5 million at September 30.

Of TDRs. We did not have any additional TDRs during the quarter. We did have paydown on some existing TDRs but it is not a significantly material number.

Great. All right, and then moving on to the margin. Specifically on the liability side and money market deposit rates obviously came down a lot in this quarter. Your cost deposit now is around 52 basis points. Do you think you have any more room there?

We do. We are seeing the market -- obviously with the amount of liquidity that is in the marketplace, we do believe that there is additional opportunity for us to shrink the cost of funds. We do a monthly study on that and we are on top of it on a regular basis. So the answer is yes but we are certainly monitoring it on a regular basis.

Great. And then back to the mortgage banking business. I know there are lag periods between expenses and revenue recognition, but maybe it would be helpful if you could break out what the expenses were, specifically related to that business in 2011 and/or maybe just fourth quarter?

We don't really provide in the Bank any segment information or business line information. We look at the entity in total from a public reporting standpoint. So I am afraid that level of detail we don't get into. We obviously are looking internally at the profitability of the entity in a net income way, but we don't publicly report that level of detail.

Okay. But in -- expenses this quarter also increased for the branches. I am just trying to get an idea of how much might be coming out in the next quarter. But -- .

I think that if you look at the quarter at the items that were mentioned in the press release as being a little unusual, the merger expenses in the quarter will clearly not repeat themselves. We had higher costs associated with incentive compensation which I don't think is unusual for companies in the fourth quarter of the year. So in this salary and benefits area, that cost is a bit higher.

And I think the additional personnel that we added are clearly going to repeat themselves. The branch cost that are there associated with the two offices opened in the fourth quarter are going to repeat themselves. But I think the merger expenses and the higher incentive cost are things that you can expect are going to come out and not be part of the run rate going forward.

Including the conversion -- the IT conversion costs.

Yes, the IT conversion costs were very -- virtually nothing in the fourth quarter, they were there for the entire year. I think we had disclosed those as being about $500,000 to $600,000. The merger costs were between $700,000 and $800,000 and the incentive costs were higher in the fourth quarter.

We don't publicly announce or report what that number is but you can see that increase in salaries and benefits that we do report. And that was in part due to higher incentive costs which are not going to carry over into the first quarter of 2012.

All right, thanks. That's helpful. Thanks for the color and I will let someone else get on now.

Thanks, Casey.

Christopher Marinac of FIG Partners.

Thanks. Good morning, everybody. Just wanted to ask about staffing, Ron, in terms of what you're seeing particularly on the loan production side just in terms of whether it is exact numbers or just kind of in general. How that has changed the last quarter or two and what you expect on new hires this year.

I think as you and I talked about previously, the staffing of our lending side is in real good shape. That is not to say that they were -- well, let me say it the other way, we were always looking for quality lenders, experienced quality lenders, especially in the Northern Virginia market place. But we do believe that we have capacity with our lending team. So I wouldn't necessarily anticipate any dramatic change in the lending staff although as I say, we are always looking for quality.

And then I guess follow-up just has to do with just in general cap rates in the market place. Do you anticipate them changing even further on the downside which is positive for valuations or what would you expect this year?

I really don't. I think that the Washington market being such an incredible market which has been the case over the past years, even during the downturn, has stabilized in terms of cap rates. I think people are still a little cautious as to what is going on right now. So I -- from a real estate perspective, cap rates pretty much have stabilized. They are very, very low in the DC area. Certainly in DC proper and in the counties they are a little bit higher, but again very stable.

And I guess final question has to do with some of the competitive environment on what your other banks are doing as pertains to your customers. Do you think that the amount of times you will have to sort of decline customers or turn business away just because the pricing is just not adequate for Eagle -- do you think that may increase this year or is that at all a concern?

It is really a hard to say. This certainly is a little bit more competition than there has been in the past, but I will tell you that based on the experience that many of our customers in our sweet spot have had over the past couple of years loyalty, commitment, service, opportunity to talk to the leaders, and quick decisions is really still the dominant factor.

Candidly, if you are going to leave EagleBank for a 0.25% because somebody else is going to give it to you, then you are really not the core relationship that we are looking for. So we always are sensitive to it. We are always going to stay with our niche of providing that high-end customer service. With rates being down as low as they are whether you are getting a 5% or a 4.78 isn't going to make a difference to the deal and if it does we shouldn't be doing the credit anyway.

Brett Scheiner of FBR.

With the balance sheet growth over the past few years just trying to think about post SBLF, your comfort level with capital, if you are willing to sort of talk about a target on any ratio.

You are correct that we have levered the capital position in the last couple of years as a result of the growth of loans and the risk weighting that they have. We have internal policies with regard to capital and we are north of those numbers in all respects at the end of the year. On a tangible common ratio we were at 7.29 at the end of 2011 compared to 7.61 at the end of September.

And we do believe overall that our level of capital is fine and while that particular tangible common equity is below peer, we think that when you consider all the factors of our Company -- the asset quality, the growth rate of earnings which I think are substantial, we -- what we are crediting into capital as a result of growth of earnings is keeping pace we think pretty closely to the rate of growth we may have in assets going forward. So we are not particularly concerned about the level of capital right now, although our stock has done well. We need to consider capital raises over time. We talked about that.

But we don't have specific tangible common equity goals. We would just say that where we are today we think is okay and there is some ability to continue to lever capital a little bit.

Okay. Great.

(Operator Instructions) Carter Bundy of Stifel Nicolaus.

Good morning, everyone. Great quarter.

Thank you, Carter.

Thank you, Carter.

Good morning, Carter.

Getting back to the margin question, as I always like to do. Could you talk a little bit about the growth of non-interest-bearing deposits in the quarter? I think it was right around $200 million which is pretty staggering. Just wanted to get some color if you could there.

I think it goes back to the age-old statement that as we continue to grow and our strength continues to grow, and our presence continues to grow, that we are continuing to see larger players that want to deal with EagleBank. And we are continuing that as I mentioned in my comments 16% new relationships. Larger new relationships. We are getting continued growth from our law firms in escrow deposits. And it is just core relationships that we are continuing to build on.

So would it be fair to say that that deposit growth this quarter, much of that will be retained on the balance sheet?

Yes. We see that, again, it's core. We don't see any reason why our growth in new relationships and expanding of existing relationships will slow down. With the effort that we have put forth towards the convergence last year, I think we will have that much more time this year and working on continuing to expand and cross sell.

Okay. Ron, on (multiple speakers) loan growth outlook, you know, very strong results for the year. You talked a little bit about pricing pressure out there. Still feel pretty strong going into 2012?

Yes. You know, again, it is hard to predict what will happen to ours in today's crazy world but I do believe that what we have built, what with the infrastructure that we built within the organization as we continue to expand our presence in the community, that the growth opportunities on both sides of the balance sheet will continue. It is just an unbelievably strong market for EagleBank and we are just continuing to see some very significant momentum.

Okay. And in regarding the Northern Virginia market particularly, how many lenders have you hired there recently in the last couple of quarters?

I would just, off the cuff, I would probably say we have hired three lenders over the past 12 months.

Okay. And would be looking to add additional lenders there?

Well as I said earlier the existing lenders that we have have have capacity. The bringing on [Tony Marquez], who is the head of our real estate group has been a huge addition to the organization. And therefore we -- he has capacity as well as some of these lenders do. And I would say the same thing on [Jenny Haya] who is heading our C&I side who both of them have major presences in Northern Virginia and really believe that the can work that market for us.

Right. Moving on to the expense base. You know sort of asking this question again. Obviously the salary line was up a bit or a fair amount given obviously incentive comp in there as well as some mortgage banking comp. When I look at that salary employee combined line item and I look at the gain on sales loan, just to be clear here, is much of the incentive type to the gain on sale to the mortgage bank being recognized in the comp line?

Jim.

Carter, no. The commission -- the variable compensation that comes from that line of business actually on the back -- on the income statement is netted against the gain on sales. So when you look at the non-interest income gain on sale it is netted that variable commission. Now if they are salaried employees in that unit and there are and we are obviously adding to that because of the volume of activity, that is in the salary and benefit line. But the variable commission is treated net of the gross gain on the loans. So what you'll see is that is in the non-interest income section not in the non-interest expense section.

Okay. And I was -- I guess to ask it a little bit differently. How much could I assume of the mortgage banking total expenses would we see that are not producer-related? Obviously the producer-related is a net number in the gain on sale, but in the actual salary and comp line. Do you have that number there?

I don't. I think it goes -- I'd refer back to the answer that I gave earlier to Casey. I think we don't drill down to that level of detail and give salary and benefit information by sectors of our Company. But you can be assured that some element of the increase there is due to that part of the business growing and needing larger support.

Okay. And what were your FTE at quarter end?

We had 338 -- 338 employees at the end of the year and that was up about 16% from the beginning of the year where it was 292. So, those are the numbers. For the quarter, it was up 13 people. From 325 to 328. I'm sorry, from 325 to 338. Can't add there.

Okay. That's simple. And just some detail, one other detail question on the expense base. The other line item was up sequentially. Any other sort of nonrecurring and stuff -- nonrecurring stuff on a go-forward basis from a run rate perspective outside of the charges related to the acquisition?

Well, there's always some seasonality quarter to quarter. There is a lot in that line item that relates to general operating expenses, professional fees, legal expenses, costs relating to collections and problem loans. So you get variance from quarter to quarter. Carter, I can't really say that that number is solid on a run rate basis. But most of that increase we saw in that line item was in the merger cost as you related to.

I think that in answer to your question, Carter, the expenses associated with the merger have all been booked in 2011.

Right.

Right. I guess I was looking at it excluding those charges just to get an idea of what kind of run rate that may look like.

We don't have any extraordinary expenses that we foresee at this point.

Okay. And then final question and I'll hop off. On the branching initiative, Ron, could you remind me the timing of when those branches come on? I was trying to catch that earlier. I think you said 1Q and 3Q.

That is correct.

Okay. Great. Thank you very much. Good quarter.

Thank you, Carter.

Sure, Carter.

Matt Schultheis of Boenning & Scattergood.

Good morning. Quick question. A survey question that I ask pretty much everybody but have your regulators provided any guidance with regard to what final capital rules will look like?

No. That is still being discussed by all the Bank Regulators for those rules here in the United States. No, nothing -- nothing new in that front for us at all.

Okay. Thank you very much.

Thank you. I am showing no further questions in the queue at this time.

If there are no other questions, I appreciate everybody's calling in and looking forward to speaking to you again in April. Thank you.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.