Eagle Bancorp Inc (EGBN) 2012 Q1 法說會逐字稿

Good day ladies and gentlemen. Thank you for standing by. Welcome to the Eagle Bancorp 2012 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 be given at that time. (Operator Instructions).

As a reminder, this conference is being recorded. I would now like to introduce our host for today, Mr. Jim Langmead, Chief Financial Officer. Sir, please go ahead.

Good morning everyone. 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.

Good morning. Thank you, Jim. I would like to welcome all of you to our earnings call for the first quarter 2012. We appreciate you calling in to join us this morning and your continued interest in Eagle Bank.

In addition to Jim Langmead, also on the call with me this morning is our Chief Credit Officer, at Jan Williams. Jim and Jan will both be available later in the call for questions.

I am pleased to once again announce a record level of quarterly net income which was $7.6 million. This is the 13th consecutive quarter of increased record earnings for EagleBank, driven substantially by topline revenue growth. The $7.6 million of net income represents a 49% increase over the first quarter of 2011 and a 6% increase over net income in the fourth quarter of 2011.

Net income available to common shareholders increased 56% over the first quarter of 2011 from $4.8 million to $7.5 million. Fully diluted earnings per share were $0.36 for the quarter, which represents a 50% increase from $0.24 in the first quarter of 2011 and a 3% increase from $0.35 in the fourth quarter 2011.

As in the past two quarters, the greatest increase in earnings per share and net income available to the common shareholders is due to the reduced level of the cash dividend resulting from our payoff of the TARP funds and entry into the Small Business Lending Fund program in July of 2011. Due to our growth of qualified SBLF loans, we pay the lowest available dividend rate of 1% on the capital from that program.

The return on average assets for the first quarter was 1.08%, having increased from 98 basis points a year ago and from 91 basis points in the first quarter 2011. The return on average common equity was a very favorable 13.8% for the first quarter, as compared to 10.49% for the first quarter of 2011 and 13.4% in the fourth quarter of 2011.

While we're certainly pleased with the net profit for the quarter, we're most proud of the consistent and balanced performance of the Company. We continue to show solid results for all the key indicators, including growth in loans and securities, the maintenance of superior net interest margin, continued strong credit quality and increasing level of non-interest income and improved efficiency ratio.

As we have said before, we're not trying to manage the bank quarter to quarter. Our primary focus is long-term, balanced financial performance and growth in earnings per share. As EagleBank has gotten larger, the growth rate of the balance sheet has moderated somewhat, as to be expected. But other important factors were achieved, though, in the first quarter, which contributed to the increased level of profitability.

We grew the loan portfolio 6% or $131 million during the quarter to a total of $2.2 billion, and while portfolio loans are up 22% over March of 2011, the rate of growth has moderated somewhat. If you annualize the 6% growth in the first quarter with the 1% growth experienced in the fourth quarter of this year, the blended annual growth rate has been approximately 16%.

In addition, the securities portfolio was increased by $31 million in the first quarter of 2012, and by $117 million over the past 12 months as we redeployed some of the excess liquidity, which was on the balance sheet during the later half of 2011.

The absolute level of deposits decreased by 1% or $24 million from December 31, 2011 to the end of December 2012. This decrease was primarily due to withdrawals from two large accounts who are still excellent customers of the bank. These withdrawals were expected due to the nature of the accounts, and even with the slight decrease in deposits we still maintain an excellent liquidity position, which is available to deploy into new loans at higher yields.

In addition, our mix of deposits remains very favorable with demand deposits still comprising 29% of total deposits. In fact, core deposits comprising total deposits less CDs, increased 1% or $22 million during the quarter to 78% of total deposits. CDs decreased during the quarter as we have allowed some maturing higher-rate CDs to migrate out of the bank. Thus the overall level of deposits has been impacted by our active management of deposit rates and the mix of deposits to achieve an attractive cost of funds.

Therefore, we are pleased to note that the increase in earning assets, both loans and securities, and the most favorable deposit mix led to a continued superior net interest margin of 4.11% for the quarter, which compares favorably to our peer group and the industry at large, while we are seeing an increase in the competitive pressure on loan rates in the local market.

However, with the outlook of interest rates remaining low as indicated by the Federal Reserve, we believe that the use of [low] rates as established a number of years ago on our existing loans and our disciplined approach to loan pricing will enable us to maintain attractive yields in the loan portfolio.

At the same time, we continue to manage down our cost of funds on deposits. Deposit rates continued to moderate in the Washington metropolitan market, and we continued to benefit from that in our cost of funds. As we have mentioned before, our [ALCO] approach is such that we maintain a neutral position for rate sensitivity and are prepared for the rise in rates when it eventually comes.

Excluding loans held for sale, 61% of our portfolio is in variable or adjustable rate loans. Including fixed rate loans, 31% of the portfolio re-prices and matures within 30 days and another [30%] within the first year. In total, 61% of the portfolio re-prices or matures within two years and 80% within five years.

Our credit quality, which has been consistently good over the last several years, remains favorable during the first quarter. At March 31, NPAs as a percentage of total assets decreased to 1.41% and nonperforming loans were 1.68% of total loans. Both ratios are very acceptable and within the range of NPA levels we have maintained over the past two years. The absolute level of NPAs increased slightly by about $3.7 million in the first quarter to $39.7 million. We continue our conservative policy as to when to place a loan on nonperforming status.

The broader measure of problem credits, which includes past dues from 0 to 89 days plus non-accruals, has declined from 3.22% of total loans at March 31, 2011 to 2.96% at December 31, 2011, to 2.75% at March 31, 2012. The one large nonperforming loan that we have spoken about during the past calls is still on the books, but units in the project have been selling at required release prices, resulting in curtailments of $1.4 million during the quarter, reducing the balance [to] $10.6 million. We retained our ability to obtain title to the property should sales levels not meet the [quarter] proof thresholds, and we still have three prospective purchasers for the entire project.

Net charge-offs for the first quarter were 34 basis points of average loans and were consistent with last several quarters. These level of charge-offs are well below industry norms, the allowance for loan loss of 1.46% 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 allowance methodology and the quality of our loan portfolio.

At March 31, 2012 the coverage ratio was 87% and we believe that to be 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.

Continuing our recent trend, as expected, noninterest fee income was a real high point for the first quarter and was driven primarily by the Residential Lending division. Total noninterest income for the quarter was $6 million, more than double the amount of $2.9 million recognized in the first quarter 2011. Noninterest income was 17% of total revenue in the first quarter of 2012 as compared to 12% in the first quarter of 2011. $3.9 million of noninterest income was from the gain on sale of residential mortgages, up from $1.6 million in the first quarter of 2011.

While the first-quarter results did include the recognition of some of the gains on record production volume in the fourth quarter of 2011, those results also reflected a continued high level of loan originations during the quarter.

Production during the quarter was close to $300 million, which compared to $86 million from originations in the first quarter of 2011. Although volume continues to be predominantly refinance transactions, home purchases are important to our long-term strategy for this division as we continue to leverage our relationships with homebuilders and condominium developers.

I am pleased to note that three of our loan originator officers were recognized in the Scotsman's Guide ranking as among the top loan originators in the US for 2011. In addition, we continued to recruit experienced, high-volume loan originators and expand our capacity in this business line.

The new Reston branch office opened in February as we continued to increase our presence in the Northern Virginia market. The Mary Field branch, which is also in Fairfax County, is on track for an opening in the late fall of this year. We continue to study other submarkets in Northern Virginia for branch locations, yet feel that our branch structure at present is capable of handling and attracting our desired customer growth.

The efficiency ratio for the first quarter was very favorable at 53.83%, and showed significant improvement from the 58.57% in the first quarter of 2011 and 56.97% in the fourth quarter of 2011. Noninterest expenses for the first quarter were up 30% over the first quarter a year ago, but were only 1% greater than the fourth quarter of 2011.

Expense control is a key factor for us. But we are also realistic about the need for some growth in the level of expenses, notably for compensation, occupancy and data processing as we continue to grow the Bank.

A solid organization is critical, producing the levels of loans and noninterest income which drives our profits. 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 have the proper infrastructure to support growth and manage risk.

Our regulatory capital ratios are slightly more leveraged given the continued loan growth. But we remain well-capitalized with total risk-based capital ratio of 11.65% at March 31, 2012, as compared to 11.75% at March 31, 2011 and 11.84% at December 31, 2011.

The tangible common equity ratio at March 31, 2011 was 7.66%, which was improved from 7.29% at December 31, 2011. We are extremely pleased that with no increased leverage in the balance sheet, the higher level of profitability led to the improvement in the tangible common equity ratio.

The Board and Management are committed to maintaining a strong capital position and are continually evaluating the capital markets to assess alternatives and to consider the long-term capital needs of the Company.

Finally, on a daily basis we are focused on our core mission of building new customer relationships and broadening current relationships through the market. The reputation and recognition of EagleBank in the Washington metropolitan area continues to grow.

We're pleased to note that since March of 2011 we achieved an increase of 18% in the number of customers who recognize the value of our approach to quality banking and our commitment to the community.

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

(Operator Instructions) Paul Miller, FBR.

Good morning. This is Kevin Barker on behalf of Paul Miller.

I just wanted to ask a question about the mortgage banking. I noticed that you said you had about $300 million of production this quarter, and I believe that compares to about $387 million last quarter. Can you just give a little detail on that, and what type of margins you are seeing on the mortgage banking business?

Jim?

Yes, Kevin. The comparison you had is correct; about $300 million of originations in the first quarter compared to the fourth quarter of last year was $387 million. The profitability in the business is, in our estimate, doing fine. The overall net marketing spreads we're getting are better than 1%.

We're selling -- that's a number that includes any credits that are given to the borrower at the settlement table and then out of that comes our overall -- the commission comes out of that. So the net number is a little bit more than 1%.

I think the profitability is fine, as we continue to lever up the fixed costs that we have in that operation. We're pretty happy with how it is going, and the pipeline continues to be strong. And this business is really paying off well for us.

How much of that pipeline would you attribute to HARP? Or do you see that as just a minimal amount given your book of business?

I think to your point, a minimal amount. Most of what is going on is some borrowers that have FICO scores that average, say, 740. Very little, I think, of what is going on relates to that HARP or loan modification program that you speak of.

Okay, and then on the expense side, on the comp and the personnel expense, how much of that would you consider variable? Or how much is considered commission from mortgage banking?

Well, a pretty substantial portion of that business; we're trying to keep most of the cost of variable. And I don't know percentage-wise compared to the fixed cost/variable cost, but I would say a dominant part of the operating costs of that unit is variable cost that relates to the commissions that are paid to the loan producers.

Okay, and then on to plans to expand, you mention Reston and Mary Field. How many more branches are you considering right now beyond the two that you opened this year?

We're strategically looking at a variety of sites in the Northern Virginia market place. As I mentioned in my comments, we feel that where we are right now is very strategically located. There might be one or two other branches that we're looking at, but there is no definite plans.

Okay. Thank you very much, gentlemen.

Casey Orr, Sandler O'Neill.

Good morning guys. Congrats on another good quarter.

My first question is going back to the mortgage banking business. With fee income now at about 17% of revenues, can you give us a little color on what you guys are thinking long term about the ideal mix of revenues between mortgage banking and the banking unit, seasonality aside?

We feel that the range that we're in right now is where we would like to be. I can't see as expanding that dramatically. We don't want to be disproportionate to any one particular department, though, than obviously the spread income that we make on lending.

Okay, great. That's helpful. And then, Jan, a question I pretty much always ask you; what is the balance of TDRs now? And then how much of that is performing versus on nonaccrual?

We have [$9.2 million] in performing TDRs. Included in nonperforming is about $2.2 million.

So it's pretty much similar to last quarter?

Yes.

Okay, and then sticking with credit, Jan, can you give us some more detail on just the 12% increase in non-accruals this quarter, with one or two specific credits moving over or --?

Well, we have had movement both in and out of the nonperforming category. So it's not just one specific loan, but we did have two commercial real estate secured loans that moved into a nonperforming category that we're working through right now.

Part of the difficulty on the nonperforming side is the length of time that it takes for us to get through the court process to disposition properties when that is the route we choose to take. District of Columbia in particular is very slow on the residential side. So we have active buyers waiting for properties but haven't gotten them through the cycle yet.

Got it. That's helpful. I will let somebody else jump on. Thanks, guys.

Catherine Mealor, KBW.

Good morning everyone. At the end of period, loan growth was a little bit greater than your average balances. Did you have an increase in production towards the end of the quarter? And how does that make the pipeline look going into the second quarter?

Yes, we had a very strong end of the quarter, and which unfortunately we seem to do on a fairly regular basis, but we see the pipeline as still strong. The credits are coming at a regular basis, and again, very consistently from the dysfunctional side of the big banks, so we really haven't seen much of a change there at all.

Great. And you've done a really nice job maintaining your loan yields. And so as you continue to maintain this 20% loan growth every quarter, at what level do you think you will be able to maintain your loan yield? And maybe how much downside do you think there is from this 5.72% level you saw this quarter?

Well, as I mentioned in my comments, we're really balancing that on a regular basis in the sense that we're certainly, with the loan growth that we have, with the demand that we have, with the performance that we have, with the decision-making process that we go through, we are still seeing a significant demand. And we're not going to buckle under the pressures of competition. If it's a quarter of a point, we're going to -- if that's what makes us keep a relationship, that's not a relationship to us.

So we believe that that range that I talked about in that 15%, 16%, 17% is something that we can continue to maintain, while certainly being flexible with interest rates, but certainly not collapsing on them.

Great, thank you.

Thank you, Catherine.

Christopher Marinac, FIG Partners.

Ron and all, I just wanted to ask about a little bit about the sort of concentration in commercial real estate, and sort of how we see that evolving both on the owner-occupied and the income-producing, and perhaps a little bit more color on kind of what is generating those loans. And are you seeing any out-of-body pricing that you have to reckon with?

As I just mentioned, I think the allocation between owner-occupied and the income-producing real estate is pretty consistent with what we're going to continue to see, and what have seen.

In terms of the pricing side, again, most of our customers are coming to us because of the tremendous frustration that they're having with the big banks. And therefore we haven't had to drop rates, as you can see in our yield, very much, very dramatically.

We are certainly sensitive to the competition. We're certainly sensitive to what is going on in the marketplace. But I will tell you there are a there is an awful lot of people out there that just want the customer service and are willing to pay a reasonable price for it.

Are we walking away from deals? Absolutely. We're not going to go to the low 4%s on a 10-year deal that some of the competition is offering.

And how often are you doing longer-term, whether it's 7-year or 10-year deals, even if they're at better prices for you?

We strongly fight against it, and as I mentioned in the loan run-off, it really hasn't changed much.

Okay. Very well. Is there anything else on deposit pricing that you can do differently that you have not done?

Well, I will tell you that a lot of it goes back to the fact that we have been increasing our intangible common equity. Our capital ratios are still strong. So we're seeing a tremendous amount of opportunity in the marketplace of larger institutional players that really want to stay within our community and not give the money to the big banks, because they know the money is being deployed back into the community.

So we continue to see that. We just had a very large customer that we just met with last week that has agreed to deposit with us because they really want to do what is right by giving back to the community.

As I mentioned a couple of months ago, we are very active in working with the District government and Montgomery County and having them depositing their local deposits back into community banks, as opposed to the nationals and we've got a lot of great traction from that. We think -- we know it's the right thing to do, and we're getting them to recognize that to do that with low capitalized, strong banks is the right thing for them to do. And I think it's moving along nicely.

Great, Ron. Thank you very much.

Carter Bundy, Stifel Nicolaus.

If I could just jump in on the personnel run rates, Ron, could you talk a little bit about what your expectation is there? And Jim, I think you said you didn't have a specific figure on mortgage in that line, but wanted to get what your FTE was at quarter end.

And more importantly, you spent a lot of time hiring over the last six to nine months, and wanted to get your outlook on if you sort of feel comparable where you are on the current lending for us in terms of being able to grow the bank at these sort of run rates.

Jim, the end of month, end of quarter?

Yes, the end of period number was 334 employees compared to where it is down actually little bit from where we were at the beginning of the year, Carter. And it compares to March of '11 when we were at 309, so call that up a 25 employees, 8% or 9% rate.

That does exclude -- we're taking out the commission of folks that are in the res mortgage area because, as you know, that expense really flows through the net against non-interest income. So as we look at non-interest expenses, the number I just quoted to you is a salaried number on an FTE basis.

Carter, going to some of the other questions that you have asked, we've recently hired to very strong lenders in the Northern Virginia marketplace which we're very, very excited about. And -- but overall, I would say that our core banking employment level is pretty much where we need to be.

As Jim mentioned, we have had a slight drop in employment. And a lot of that is because we're implementing some of the savings and efficiencies that we talked about when we did the April conversion last year. And that's -- we think that that is a very positive going forward in terms of getting our arms around additional efficiencies that could be created by that conversion.

We are continuing to add the residential side. As Jim says, from the commission side that's excluded. But you do have support people to those lenders, although again we consider that a very, very variable cost.

So it would be safe to assume that your salary run rate right now is predominantly the commercial bank, not a lot of the infrastructure personnel in there?

I would say that's fairly accurate, other than for as we continue to open branches, you have that infrastructure that is being employed.

Okay. And then from a branching standpoint and data processing, obviously those are up given the growth in the Company. You've got a late fall branch coming online. So would it be reasonable to assume that a lot of the expenses are in the run rate right now?

Yes.

Okay. And if I think about the gain on sale line, you book revenue once the actual loan is sold, is that correct?

Yes, that is correct (multiple speakers) time of sale -- at the time of closing, excuse me.

At the time of closing? Okay, great.

And then if we could talk a little bit about loan pricing, again, Ron, the loan yields have held up very, very well. Given the sort of growth rate and given commentary that the market up there has gotten incrementally more competitive, is it -- I mean, what is it that is differentiating you all to be able to get this type of yield still? And do you think it's going to be tougher to maintain that?

Carter, I hate to say it, but it is the same answer that we have given for a long time. And that is as long as we can continue to provide the kind of service, the local decision-making, quick turnaround, we're seeing the demand out and we're being able to process that as you have seen by our loan growth, without having an effect on yield. Do we see that trending down? Yes, it's going to trend down slightly, but it's not going to be a dramatic drop.

But not incrementally a whole lot tougher to maintain yields versus what you have been turning?

Well, again, it's a balance between the loan demand and the cost of funds. And we're constantly monitoring all that, looking at alternatives as we go.

Okay, thank you all very much. Good quarter.

Thanks, Carter.

Thanks, Carter.

Thank you sir. I see no further questions in the queue at this time.

Thank you everybody.

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