Eagle Bancorp Inc (EGBN) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Eagle Bancorp second-quarter 2012 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded.

I'd now like to turn the call over to your host for today, Mr. Jim Langmead, Chief Financial Officer. 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 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'd 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'd like to introduce Ron Paul, the Chairman and Chief Executive Officer of Eagle Bancorp.

Thanks, Jim. I'd like to welcome all of you to our earnings call for the second quarter of 2012. We appreciate your calling in this morning and your continued interest in EagleBank.

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'm very pleased to once again announce a record level of quarterly net income, which was $7.8 million. This is the 14th consecutive quarter of increased record earnings for EagleBank, and again was driven substantially by topline revenue growth.

The $7.8 million of net income is a 35% increase over the second quarter of 2011 and a 2% increase over the first quarter of 2012. Net income available to common shareholders increased 57% over the second quarter of 2011, growing from $4.9 million to $7.6 million. The $7.6 million also represented a 2% increase over the first quarter of this year.

Fully diluted earnings per share were $0.37 for the quarter, which represents a 54% increase from $0.24 in the second quarter of 2011 and a 3% increase from $0.36 of fully diluted earnings per share in the first quarter of 2012.

It is very important to note that, once again, the record earnings were the outcome of consistent results in all of the Bank's key performance indicators. For the quarter, the increase in earnings were driven by growth in loans and deposits and improved net interest margin, continued strong asset quality, an increase in non-interest income, and an improved efficiency ratio. I will further discuss the specifics of each of those factors in just a moment.

We are proud that we have produced these consistently improving results during the most difficult economic climate over the last 3.5 years.

During the quarter, we also started the process of further building our capital position by selling common stock through an at the market, or ATM, offering. We commenced the offering on May 1, and through June 30 had netted $5.6 million of additional capital. During that time, we issued 364,691 shares at a weighted average of $15.94 per share.

We've taken a very disciplined approach to the sales under the ATM and are extremely pleased with the results. We plan to continue with this disciplined approach and, on a daily basis, gauge the market and the needs of the Bank. We still anticipate placing $35 million of shares under the offering.

As I mentioned earlier, we saw excellent growth in loans during the second quarter. The increase during the period was $132 million, or 6%. The loan portfolio, excluding loans held for sale, ended the quarter at $2.3 billion. During the quarter, loans held for sale were up $15 million as we continue to see excellent volume in our residential lending division. For the portfolio loans, the growth experienced was in income-producing real estate, owner occupied real estate, and C&I loans.

The increase both in dollars funded and the rate of growth are consistent with what our production in the first quarter of 2012 was. The liquidity position at June 30 was very close to where we were at the end of the previous quarter, and we are comfortable with the overall level of liquidity.

Deposits increased $146 million, or 6%, during the second quarter, reaching $2.5 billion at June 30. DDA deposits were up $75 million during the quarter and make up 31% of total deposits. Needless to say, we are very pleased with that composition.

Money market account balances are also up, and we continue to let higher-rate CDs run off.

The deposit mix continues to have a very favorable impact on our cost of funds. Therefore, we are pleased to note that, for the quarter, we had a higher mix of loans and earning assets, and the loan deposit ratio increased slightly to 92.2% by June 30. That trend, combined with the most -- with the more favorable deposit mix, led to an increase in the net interest margin to a level of 4.39% for the second quarter, which compares favorably to almost any peer group and to the industry at large.

We're continuing to see an increase in competitive pressure on loan rates in the local market. However, with the outlook for interest rates remaining low, as indicated recently by the Federal Reserve, we believe that the use of floor rates that we established a number of years ago on our existing portfolio, as well as our disciplined approach to loan pricing, will enable us to maintain attractive yields in the loan portfolio.

We are able to grow the portfolio while maintaining our loan yields because we have a size to compete for larger loans, but still focus on small- and medium-sized relationships. However, regardless of the size of the loan request, we still deliver the responsiveness and level of service that EagleBank has come to be known for in our market.

At the same time, we continue to manage down our cost of funds. Deposit rates continue to moderate in the Washington metropolitan market, and we continue to benefit from that trend. We have mentioned before our ALCO approach is such that we maintain a fairly neutral position for rate sensitivity and are prepared for the rise in rates when it eventually comes, for which the probability seems to be pushed further and further into the future.

Excluding loans held for sale, 57% of our portfolio is in variable- or adjustable-rate loans. Including fixed-rate loans, 31% of the portfolio reprices or matures within 30 days and another 4% within the first year. In total, 63% of the portfolio reprices or matures within three years.

Our credit quality continues to be strong, consistent with our performance over the last several years. At June 30, NPAs as a percentage of total assets decreased to 1.26%, and nonperforming loans were 1.42% of total loans. Both ratios are very good and at the lower end of the range of NPA levels we've maintained over the past two years.

The absolute level of NPAs decreased by $2.4 million in the second quarter to $37.3 million. The allowance for loan losses was 1.47% 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 quality of our loan portfolio.

At June 30, 2012, the coverage ratio was 104%, compared to 88% one year ago, and we believe that we are adequately reserved.

Net charge-offs for the second quarter were 40 basis points of average loans and are within the range we've experienced over the last several years. These levels of charge-offs are well below industry norms.

I am pleased to note that over the last two years, the charge-offs against our C&I portfolio have been only 18 basis points of average loans and only nine basis points of the construction and land loans. On income-producing real estate loans, the charge-offs have been only three basis points of average loans.

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.

Once again, we achieved strong performance in noninterest income during the quarter, driven primarily by the residential lending group. Total noninterest income for the quarter was $4.4 million, a 39% increase over the $3.2 million recognized in the second quarter of 2011. Furthermore, noninterest income increased to 12.5% of total revenue in the second quarter of 2012, as compared to 11.8% in the second quarter of 2011. $2.6 million of total noninterest income was from gains on the sale of residential mortgages, up from $858,000 in the second quarter of 2011.

As expected, the results of the residential lending division were less than the first quarter of this year, which was an extraordinary period and included some recognition of gains on loans originated late in 2011. However, it was still a very strong quarter with production of 788 loans totaling $297 million. This level of production was close to the first quarter of 2012.

Although volume continues to predominantly refinance transactions, home purchases are important to our long-term strategy for this division as we continue to leverage our relationships with our home builders and condominium developers and as we hire new loan originators who are well experienced in the purchase area.

Another highlight in regards to noninterest income is deposit service charges, which are up 39% over the second quarter of 2011. This is due to increases in the number of accounts, as well as the proactive management of this line item by our retail branch system.

A significant point to realize is that while mortgage gains and noninterest income decreased from the first quarter of 2012, we still achieved record earnings because we produced strong growth in net interest income, which was up 30% from the second quarter of 2011 and increased 9% from the first quarter of this year.

We continue to emphasize expense control. The efficiency ratio for the second quarter was very favorable at 52.28%. This was a significant improvement from 55.13% in the second quarter of 2011 and beats the 53.83% ratio in the first quarter of this year.

Total noninterest expenses for the second quarter were up 24% over the second quarter a year ago and about equal to noninterest expenses for the first quarter of 2012. As we have said in the past, expense control is a key factor for us, but we understand the need to spend judiciously as we grow the bank. A solid organization is critical producing the level 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.

We're also continuing our strategic expansion into northern Virginia. During the second quarter, we opened our new northern Virginia regional headquarters in Reston. This new space is larger than the previous location in Tysons Corner and will be able to accommodate the C&I and commercial real estate lenders dedicated to that market.

The construction of the new Merrifield branch in Fairfax County is on track for an opening later this year, and we have signed a lease for a branch in Old Town Alexandria. That branch is expected to open in early 2013. We are pleased with the progress we have made with our branch network and adding lenders to our -- in northern Virginia. We now have the resources in place to really take advantage of the opportunities in that market.

Our regulatory capital ratios are still strong and have been improved due to the capital added through the ATM and other activities, such as our employment stock purchase plan. We remain well capitalized with a total risk-based capital ratio of 11.6% at June 30, 2012, as compared to 11.33% at June 30, 2011.

The tangible common equity ratio at June 30, 2012, was 7.76%, which was improved from 7.66% at March 30, 2012. This improvement in the ratios is due to both a higher level of profitability and the additional capital raise. The capital ratios are expected to show further improvement as we continue with activity under the ATM over the next few months.

Finally, on a daily basis we focused on our core mission of building new customer relationships and broadening current relationships throughout the market. We've expanded the total number of core customer relationships by 11% since December of 2011, and the reputation and recognition of EagleBank in the Washington metropolitan area continues to grow. We are pleased to gain so many new customers who recognize the value of our approach to quality banking with personalized attention and our deep commitment to the community.

In closing, I would like to note that just this past Friday we celebrated the 14th anniversary of the founding of EagleBank, so it is fitting that we also celebrate the 14th consecutive quarter of increased record earnings. We are very proud of what we've been able to accomplish during these past 14 years. I would like to thank our Board, our employees, our shareholders, our community, and all the supporters on the call for your role in the success of our Company.

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

(Operator Instructions). Catherine Mealor, KBW.

Really nice quarter, guys. And Ron, you talked a little bit about your loan yields and how the floor rates and disciplined pricing has really allowed the loan yields to remain stable, which is very evident in your earnings release this morning. Can you give us just a little bit of color on the pricing, and maybe you could talk about generally what is the average price you're putting on for new and renewed loans? Thanks.

First, the demand that we're seeing is as strong as ever. And again, as I mentioned in my comments, it goes back to the fact that the market is recognizing more and more that Eagle is out there, understanding credits, quick decision-making, and therefore over a quarter of a point is not making a difference to them, especially in this low interest rate environment. They want the loan and they want the relationship.

So in answer to the first question, that's really what's driving the demand side.

In terms of a standard, it's really a matrix that we consider, based on deposits, based on the relationship, credit quality, based on the coding of the credit. So there's a variety of items that comes into play.

But we're looking somewhere in that 5.5% range on a standard five-year deal, let's just say, on an income-producing piece of real estate.

Paul Miller, FBR.

Yes, thank you very much. And to follow up on that question a little bit, some of your competitors out there telling us that some -- the bigger companies like a Citi and a BB&T are being very aggressive on loans below $5 million and below on the CRE stuff. Are you seeing the same thing or are you just able to beat that back with service?

It's the latter. We truly are seeing that -- a lot of these borrowers, by the way, were the ones that are chased out of these banks. So they still have that bad taste in their mouth, and I think they do realize that the decision-making process that they go through is painful with the big banks and we can give them that decision, so it really does, Paul, come down to the customer-service side. And again, the rates are not that radically different, and candidly, if they are, we'll let them go. We're not going to chase them.

So given -- I mean, you guys' yields are very good and some of the best yields I've seen out there. But with the yield curve continuing to fall like this, I mean, can you still hold the line there with, I guess, the service? It sounds like you can.

Well, we like to believe that we can. Again, we have not seen -- the comment that you made is absolutely true, and I think probably about nine months ago I mentioned that there were some of the local banks that were dropping their rates considerably, and we certainly haven't seen a drop in loan demand, so although might be dropping their rates, whether they're too small to make the loans that we can make, size-wise, we're being able to hold down pricing.

Do I see that continuing? It's really hard to say. I mean, I think the 10-year dropped below the five-year yesterday, so the yield curve is just getting crazier and crazier. But we're going to stick to our margins as best as we can.

Okay. Hey, gentlemen, thank you very much.

Thank you, Paul.

Christopher Marinac, FIG Partners.

Thanks. Good morning. Ron, I was wondering if you could drive a little bit deeper in terms of customer behavior from the commercial borrowers. Are they more cautious? Less cautious? Is it still about the relationship shift that you mentioned earlier? Just kind of curious if their outlook [in any care con].

Chris, we haven't seen any difference in the demand for customer service today than we did a number of years ago. It's just these customers are sitting, and their level of frustration with the big banks has not changed.

I think we hear a lot of lip service about significant drop in rates, but when you start dealing with the loan application, it's the same issue. It's the 800-number, it's not being responsive, it's just -- it's basic blocking and tackling.

And then, as you continue to spend on infrastructure build, is there a point in time when that may slow, even if that's beyond next year? I'm just curious on other means of reaching customers from electronic commerce and mobile banking and things of that nature. Will that be a bigger part of reaching -- growing in the future?

We've done some dramatic growth over the past 18 months and, as I mentioned, into the first quarter of 2013. I don't really see any dramatic increases. I think that it's going to tail off.

We're very, very focused now on building the northern Virginia marketplace, now that we have the real estate and the lending side in place. We've built a great lending team in northern Virginia and we'll start to see that capitalize on.

So I don't really see anything dramatic. I think, as I mentioned, the first-quarter noninterest expense and the second-quarter noninterest expense was fairly flat, other than the two branches that we mentioned in Merrifield and in Alexandria, and by the way, we have most of those employees on payroll now. We don't really see a major jump in our cost structure.

We also, by the way, as you know, last April put in a lot of money to the infrastructure of technology, and we're just beginning to see the efficiencies and the benefits of that, and that also goes into our residential lending division.

Okay. So ongoing operating leverage, like you had this quarter, is still with the [bean], heading into the future?

Yes.

That's helpful. Thank you so much.

(Operator Instructions). Carter Bundy, Stifel Nicolaus.

Awesome quarter.

Thank you.

Thank you.

Ron, could you talk a little bit about -- jumping back on the loan growth outlook, in the last call you suggested that loan growth prospects, or at least growth rates, may slow from 2011 growth rates. You turned in a very strong quarter this quarter, and based on your commentary, the demand is as strong as ever.

Would it be fair to say that maybe you -- that was being conservative, then, or is that a function of being able to continue to get this pricing that you're getting and so we should still expect this kind of slowdown to be able to maintain this pricing?

It's really tough to call, Carter.

As Paul mentioned earlier, there is a significant drop in rates that some of the big banks are playing. We have not seen that affect loan demand. If that should, obviously you'll see a drop in loan production because we're not going to chase these low rates. But it's hard to say.

We're just seeing some really, really great quality loans. And again, as I mentioned, we have a $45 million legal lending limit, even though our in-house limit is much less than that. We're able to be able to see some just high-quality borrowers that five years ago we never saw being able to come to the bank, that are now coming with significant deals with a lot of equity, and again, the customer service is such that they want to deal with us.

So 20%-plus loan growth, needless to say, is aggressive, but if we continue to see the quality of loans that we're seeing, we'll take them, again, if the pricing is what our expectations are.

Okay. That's helpful. Moving onto the deposit results, you continue to turn very, very strong noninterest-bearing growth, obviously from the commercial tent to the bank. How do you think about -- do you continue to just get as much traction on the funding side as you are on the loan side, and do you think you can continue to fund this thing with core deposits?

The answer is is that it's a balance. It's a balance between looking for deposits that are core and making sure that you're paying the right price for them.

It's obviously we do have available to us the wholesale side, which are a lot cheaper, so it's a balance of what we're doing on a regular basis. Our DDAs being at 31%. We're spending more and more time on expanding that cross-sell ratio that you and I have talked about, which we're definitely seeing an improvement on.

So the borrowers are being forced right now to come up with larger deposits. They have liquidity. They might have had liquidity in their brokerage accounts, and we're saying to them, if you want the loans, then you have to put in the deposits. So we're being much stricter on the compensating balance side, but it absolutely is a balance between rate and where you get them, whether it's core or wholesale.

That's really helpful. And then, final question, as we think about the leverage in the franchise right now, obviously you've ramped up back office, credit support, built out the northern Virginia team. Would it be fair to say that this is a decent run rate from a personnel perspective? Obviously, as you do continue to add modestly over time, but do you feel like there's plenty of capacity right now where we're not going to see this sort of growth? And also, we obviously saw personnel pretty much contained this quarter.

I think the personnel between the first and second quarters is a fairly constant number that we could look for going forward.

I think we've -- as I mentioned earlier, we've increased our lending staff in northern Virginia. They have significant capacity, and we have capacity within our Montgomery and DC divisions. So I think that we're in good shape.

And as I mentioned, we have not yet seen the true benefits from the efficiency systems that we put in in April of 2011. So I believe that our personnel number is a pretty good number right now.

Okay. So from a capacity standpoint, though, Ron, given all the recent hires in the commercial bank, it sounds like right now you've got plenty of capacity, given those investments over the last couple of years?

Yes. Again, I want to -- plenty is a relative term, but I would say that we definitely have capacity. Again, should we decide to expand our nonprofits, that might be an individual, but it's nothing of any substance.

Okay. Great. Thank you all very much.

Thank you, and with no further questions in queue, I'd like to turn the conference back over to management for any closing remarks.

Again, just appreciate everybody being on the call. And as I did mention, and I can't strongly enough say, the consistency of what we've been able to post quarter after quarter and nothing radical to allow us this 14 consecutive quarters is what we're very proud of.

So with that, I'm looking forward to speaking with everybody next quarter. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of the day.