Eagle Bancorp Inc (EGBN) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Eagle Bancorp's third-quarter 2012 earnings conference call.

At this time while 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 call may be recorded.

I would now like to hand the conference over to Jim Langmead, Chief Financial Officer of 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 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 not 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 CEO of Eagle Bancorp.

Thanks, Jim. I would like to welcome all of you to our earnings call for the third quarter of 2012. We appreciate you 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 to answer any questions.

I am very pleased to announce record earnings for EagleBank. Net income for the quarter was $9.7 million, which represents a 49% increase over the earnings for the third quarter of 2011 and a 24% increase over the earnings for the second quarter of 2012.

We are truly pleased with our results for this period and that we are continuing the trend of strong, balanced results for key performance indicators, including total revenue growth, net interest margin, noninterest income, solid credit quality, our efficiency ratio, and capital growth. These drivers have resulted in a very positive trend in earnings per share growth as well as increases in return on average assets and return on average equity, even though we were increasing the capital base.

For the third quarter of 2012 net income available to common shareholders increased 51% over the third quarter of 2011, growing from $6.3 million to $9.5 million. Fully diluted earnings per share were $0.44 for the quarter which represents a 19% increase from $0.37 of earnings per share for the second quarter of 2012. We are very proud of our continued long-term growth rate.

EPS has grown from $0.22 in the third quarter of 2010 to $0.31 in the third quarter of 2011, a 41% increase, to $0.44 for the third quarter of this year, a 42% increase. So, in fact, quarterly earnings per share have doubled in two years.

Return on average assets has increased from 96 basis points in the third quarter of 2010 to 1% in the third quarter of 2011 and is now at 1.27% for the most recent quarter. ROAE has also shown a very favorable trend, increasing from 9.89% in the third quarter of 2010 to 12.55% a year ago to 15.2% for the third quarter of 2012. Again, even as we significantly strengthen our common equity position.

We are pleased to report that during the third quarter we raised an additional $23.2 million of common equity under the aftermarket, or ATM, offering that commenced in May. Through September 30 we have raised a total of $28.8 million from sales of 1.77 million shares at an average price of $16.88. We are very pleased with the results of the ATM to date, because due to our disciplined approach we have been able to strengthen the capital position of the Company while issuing shares at a price that is accretive to book value.

We truly appreciate the interest and support which has been shown by the investment community from both previous and new shareholders. As we announced in an 8-K filing last week, we intend to continue sales under the ATM to reach the planned level of $35 million.

Increase in earning assets, the net interest margin, and noninterest income were the drivers of total revenue during the third quarter as we continue to balance growth of both loans and deposits that we have demonstrated over the last few years. Average loans in the third quarter of 2012 were up $100 million, or 4.4%, from the second quarter of this year. Loans held for sale also increased due to both greater production by our residential lending division and the backlog and processing by all of the secondary market investors.

Average deposits increased $125 million, or 5.1%, on a linked-quarter basis. Average and period end deposits are down from the third quarter of 2011 due to the large settlement deposit which was included in our deposits in the September 30th of last year.

You may recall that has expected those escrowed funds were in EagleBank for 80 days before being dispersed in accordance with the settlement. While that deposit had very little impact on profitability in 2011, it did have a larger impact on deposits on some of the financial ratios for the third quarter and full year of 2011.

Excluding the impact of the settlement deposit, we continued to see growth in core deposits which are DDA, NOW, and money market accounts. Excluding that settlement deposit, average deposits are up $562 million, or 28%, in the third quarter of 2012 over the third quarter of 2011. DDA deposits increased to 32% of total deposits as compared to 29% at December 31, 2011.

We worked very hard on deposit generation and our deposit mix and are very pleased and proud to have that level of DDAs. It is indicated of our relationship approach to our approach in which cross sales of deposits and other products are the key to our marketing strategy.

The result was that after the third quarter we realized a net interest margin of 4.44%. This margin remains superior to industry and peer group levels. The margin was achieved by maintaining a disciplined approach to pricing on the loan portfolio and an improved mix of earning assets as some liquidity position was redeployed to the increased levels of residential mortgage loans held for sale.

Our loan yields continue to benefit from the use of floor rates, which has been our practice for over four years now. We continue to see competitors who are willing to offer loan pricing that we think is irrational. We remain committed to the philosophy that maintaining an appropriate margin and risk/reward balance is important in the long run than loan volume.

We continue to see attractively priced loan opportunities from customers who value our responsiveness and level of service, and with whom we can develop full relationships.

Equally important, we were able to achieve a reduction in the cost of funds during the third quarter of 2012 by carefully managing deposit pricing. This is noteworthy because we were able to achieve this despite the fact that deposit rates in the Washington, DC, metropolitan market remained above national averages for comparable products and maturities.

Furthermore, we are pleased to report that in the recently released FDIC market share statistics for June 30, 2012, EagleBank now has the largest market share of any locally-based community bank in the Washington metropolitan area. We moved up to the top spot from the number three position a year ago.

I am also pleased to note that again we have significantly outperformed a growing market. Overall deposits growth in the region was 10.4% from June 2011 to June 2012 as compared to our growth rate of 29.3%. Furthermore, we have accomplished that growth without absorbing the significant investments in brick-and-mortar that many of our competitors have.

For banks over $2 billion in assets in the metropolitan area the average level of deposits per branch is $97 million. At EagleBank we average $157 million per branch, which is a very good indicator of our efficiency.

We continue our ALCO strategy of maintaining neutral position for rate sensitivity and are prepared for the rise in rates when it eventually comes, even though that time seems to be 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, 34% of the portfolio reprices or matures within 30 days and another 2% within the first year. In total, 63% of the portfolio reprices or matures within three years.

Certainly a major contributor to the top-line revenue growth was another quarter of strong performance for noninterest income, driven primarily by the residential lending division. Total noninterest income for the quarter was $4.9 million, a 38% increase over the $3.5 million in the third quarter of 2011 and a 9.2% increase over the $4.4 million in the second quarter of 2012.

Furthermore, and consistent with our strategic goals, noninterest income increased to 14% of total revenue for the first nine months of 2012 versus 12% for the same period in 2011. During the third quarter $3 million of total noninterest income was from gains on the sale of residential mortgages, up from $993,000 in the third quarter of 2011.

Production in the third quarter was strong with volume of 1,124 loans totaling $425 billion. The level of production is an increase over the second quarter of 2011, which was $268 million, and the first two quarters of 2012 which were each approximately $300 million. Although volume continues to be predominately refinance transactions, home purchases are important to our long-term strategy for this division as we leverage our relationships with our homebuilders and condominium developers as we hire new loan originators with experience in the purchase area and ties to the realtor community.

Importantly, all credit quality indicators continue to be very strong, consistent with our performance over the last several years. At September 30 NPAs as a percentage of total assets decreased to 1.25% and nonperforming loans were 1.35% of total loans. Both ratios are very good and have improved as compared to our range of NPA levels over the last two years.

The absolute level of NPAs at the end of the third quarter were unchanged from the second quarter at $37.3 million, even with $78 million of growth in the loan portfolio. The allowance for loan losses was 1.48% at the end of the third quarter and we have continued to make substantial provisions, as indicated by the growth in the loan portfolio, consistent application of allowance methodology, the current economic climate, and our minimal charge-off history.

At September 30, 2012, the coverage ratio was 110%. We believe that we are adequately reserved.

Net charge-offs for the third quarter were 36 basis points of average loans and are within the range we have 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 in our C&I portfolio have been only 53 basis points of average loans and only 30 basis points of construction and land loans.

For income producing real estate loans the charge-offs have been only 4 basis points of average loans. Even with our strong credit quality, we continue our diligent approach to monitoring the loan portfolio and taking aggressive action on individual credits as necessary.

We continue to show improvement in the efficiency ratio, which was 50.07% for the third quarter. This was a significant improvement from 54.43% in the third quarter of 2011 and it's also better than the 52.28% ratio in the second quarter of this year. Total noninterest expense for the third quarter were up 22% over the third quarter a year ago and only a 3% increase over the expense run rate for the first two quarters 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. However, we are pleased to note that while third quarter 2010 noninterest expense is up 22% over a year ago, top-line revenue is up 32%. Those metrics clearly are having the right impact on the bottom line.

We will continue to manage expenses prudently and to focus on efficiency. Continuing to maintain a solid organization is critical to producing the growth of loans and noninterest income which drive our profits. Therefore, we feel that the efficiency ratio in the low 50%s is appropriate for EagleBank given our growth rates and our commitment to always having the proper infrastructure to support growth and manage risk.

Our regulatory capital ratios have been improving due to the capital added through the ATM, other activities such as our employee stock purchase plan, and of course, retained earnings. We remain well-capitalized with total risk-based capital ratio of 12.21% at September 30, 2012, as compared to 12.11% as of September 30, 2011.

The tangible common equity ratio at December 30, 2012, was 8.88% which was significantly improved from 7.76% at June 30, 2012. A related measure, tangible book value per share, increased to $11.97 at December 30, 2012, as compared to $11.15 at June 30, 2012, and $9.94 at September 30, 2011.

The strategic expansion in Northern Virginia is still ongoing. The Mary Field branch in Fairfax County opened for business earlier in October. The Alexandria branch is in development and is expected to open in early 2013, which will bring the network to a total of 18 branches. We are pleased with the progress we have made with our branch network and adding lenders in Northern Virginia.

In addition, we recently hired a nonprofit banking specialist. The nonprofit sector represents a significant source of deposits in the Arlington and Alexandria markets, as well as the downtown Washington, DC. We now have the resources in place to really take advantage of the opportunities in those markets.

And, as always, we remain committed to our mission of providing outstanding service and creative solutions for our customers. That approach drives our ability to develop new relationships, which have increased 10.5% in the past year, and strengthen the bonds with our current customers.

We are also gaining greater recognition of our commitment to the Greater Washington community. Earlier this month the EagleBank Foundation hosted its eighth annual golf tournament to raise funds for awareness and treatment of breast cancer. The foundation has raised and contributed over $1.3 million for that cause since its inception.

We are pleased that those type of activities, as well as our customer focus, have led to our now having the number one market share position of any locally-based community bank in the Washington metropolitan area. I am Ron Paul, Chairman and CEO of EagleBank, and I stand by this message.

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

(Operator Instructions) Catherine Mealor, KBW.

Good morning, everyone. Really nice quarter, guys, and just wanted to ask you a little bit about the loan growth. Of course, it is still very strong; among the best rates we are seeing across our universe, but pulled back a little bit from the level we saw from you on the first half of the year.

Ron, can you just talk a little bit about your pipeline going into the last half of the year, or the last quarter of the year, and what kind of level of loan growth you expect possibly in fourth quarter? Thanks.

Well, without giving any forward-looking statements, we have had -- we do have a strong pipeline. As I mentioned in my statements, we are very sensitive to pricing and we are only going to go after loans that we feel have cross-sell opportunities to be able to maintain great relationships. So I really -- our pipeline, the strength, what we are seeing is as strong as it has been for a while.

Okay, great. Maybe on the funding side, the funding cost came down really nicely, both on higher DDAs and CD costs coming down, but I know it is competitive.

Where do you see your time deposits coming down to? I think it was about 1.18% this past quarter. Where are your new CDs pricing currently and maybe where do you see that 1.18% going to towards next year? Thanks.

Yes, Catherine, you are correct; the 1.18% is the time deposit rate for the third quarter. We think there is still some room for that to come down. We have got CDs that are still maturing in that 100 to 110 basis point level.

Right now our 12-month CD is at 40 basis points, our 24 month CD at 65 basis points, so what you are seeing is a roll down the curve of those rates. We think there is still some room for that to occur. Not as much as it has been, but still some opportunity to lower time deposit rates.

Catherine, just as a follow-up to that. As I think I said in the last call, what we are continuing to do is balance all the different sources of liquidity that we have. We are very sensitive to where interest rates are and where they potentially could be going, and we are trying to hedge ourselves in accordance with that.

Thank you and congrats on a really nice quarter.

Great, thank you.

Paul Miller, FBR Capital Markets.

Can you talk a little bit about price competition in the market? I know you touched a little bit about demand, but are we seeing a lot of -- what does the competition look like and what type of pricing are you putting on the new loans?

Well, we have a matrix that we work off of from pricing which comes to the entire relationship as to deposits, deposit mix, deposit type, and other sources of deposits. The market is all over the place, I have got to tell you, probably more now than it has ever been. Certainly over the past five years or so.

As I have mentioned before, seeing a loan in the 4.25% rate on a 10-year deal is not out of the ordinary. It's not a deal that we are going to do, but it is out there.

But I will also tell you that I think with rates being as low as they are right now from the real estate side on the income producing, long-term financing, people are still willing to pay up for service and quick decisions and being able to know that they could come to a local community bank to be able to get modifications on the loan as opposed to the yield maintenances and the defeasance and all the rest of that stuff that a lot of people have gotten burnt on over the years.

So as I mentioned earlier, Catherine, I think that the loan demand is still there even though there is some of this irrational pricing.

Are you saying -- a lot of banks have talked about the fiscal cliff is scaring some people to the sidelines, even though the pipeline is strong. But they don't want to really tap anything until after the elections or after this dysfunctionality, I guess, in Congress. Are you seeing the same thing here or is it DC is a little bit different than everybody else?

No, I think DC is pretty consistent and I think some of the drop that we might have seen in the third quarter is reflective in what you just referred to. Everybody is a little gun shy. We have never been very big in government contracting, which is part of your discussion, so right now we are just seeing everybody that is the topic du jour.

I have spoken at a number of conferences recently about this particular topic. Everybody is cautious in what is going to happen over the next couple of months, but again the market is still very robust. We are very fortunate to be in this great market that we are in.

Okay, guys. Thank you very much, great quarter.

Christopher Marinac, FIG Partners.

Thanks, good morning. Ron, I was going to ask you if you could elaborate on sustaining sort of a focus on smaller balance customers versus larger balances and sort of how that mix plays out. And also perhaps maybe some color on sort of new relationships versus just getting deeper with existing customers.

Chris, are you talking about the asset side or the liability side?

On the loan side, I am sorry.

On the loan side, we are definitely seeing an increase in size of requests and I think a lot of that is obviously the fact that there has been a lot of publicity about EagleBank lately and the size that we are and now after the FDIC report. So we are getting requests from some of the larger customers that we have been after for a long time.

Again, but the same mentality in terms of looking for flexibility and looking for quick decisions, turnaround, the same customer service that we have been referring to. So although we are still seeing the $1.5 million, $2 million requests, we are seeing some of the $20 million requests.

And then how about just sort of new relationships versus existing ones doing more with you, just in terms of understanding the growth?

New relationships, again, Chris, it is the same discussion. It is really stealing market share from the big guys.

As I referenced in my comments on the FDIC report that we are over twice what the market is. 80% is from the top nine banks and we are number 10. So you see that at 1.6% we still just have a very small part of the market, but we are constantly inundated by these customers that are just frustrated with the big guys.

Right. I guess just one expense question for next year, Ron, is it possible that you won't do no branch openings next year or just a slower amount? Just curious on the pace of new infrastructure.

That is absolutely correct. We have the one branch that we are looking to open up in the first quarter, and although we are constantly looking right now, as we have said in the past, we feel that the 18 branch mark right now is the right place to be.

We are taking part of our capital and putting it towards human resources than we are towards the bricks and mortar. And with the deposit mix that we have per branch feel real good that we are capitalizing and maximizing on what the bricks and mortar that we have.

Okay, great. Thanks very much.

(Operator Instructions) Carter Bundy, Stifel Nicolaus.

Morning, everyone. Great quarter. Most of my questions have been asked but wanted to touch on the deposit side of the balance sheet.

From a core deposit perspective the numbers have been very nice. Obviously you had some good noninterest-bearing growth this quarter, but wanted to get some commentary on your outlook for core deposit generation kind of going forward. You have been able to fund the loan engine with core deposit growth over several, several quarters now. And do you think that the outlook there is just as bright as it has been?

You know, Carter, I think that the liquidity issue side becomes tougher and tougher as you become bigger and bigger. Having said that, the capital strength that we also have is allowing us to be able to go after larger sources of deposits, like the municipalities and larger-sized property management companies, title companies, etc. So it is very, very hard to predict where liquidity is going to be going.

There is always the concern hanging out there as to what is going to happen with TAG, but as I mentioned earlier to Catherine, we are trying to balance all the different buckets that we have in sources of liquidity. With our cost of funds being as low as it is certainly something that we can slightly increase if we needed to ramp up those deposits with a 4.44% net interest margin.

So we are really -- we are very in the weeds in terms of looking at all the different sources of the liquidity side and we are constantly out there. We just received a fairly large deposit based on a core relationship that we have that we have been after for two years. It has finally come through.

Again, because they are leaving one of the big banks, because they are getting involved with a new type of business and they just needed somebody that was willing to be a little creative to be able to come up with what they were looking for. Obviously, us hiring now the nonprofit we think that is a great source of deposits, so again we are consistently looking at all different areas.

As I mentioned in my comment, the big area that we have is we have $170 million sitting in held for sale. Right now the difficulty that we are having with the investment world purchasing the pre-committed loans is a big drain on liquidity from there as well. And we do believe that that is evening out a little bit when these investors are seeing the amount of volume that is out there.

Okay. How much lower do you think you can run down the bond book from here?

It declined about $45 million in the quarter, Carter, primarily because of the run-up in the loans held for sale. It was our expectation to replace some of those securities we sold in July actually, beginning of the quarter.

So it is not our expectation to run that bond book down, it is just that we have got this anomaly going on right now where the held for sale portfolio is so much larger than we anticipated. I think that will correct itself as the investors start to deal with the loans in the pipeline on a quicker basis, but it wasn't done intentionally. It did help the margin in the third quarter and analysts have picked that point up. We talked about it, but it's not our expectation to have that bond book decline any further.

Okay, that is helpful. Then moving on to mortgage, obviously a great quarter for mortgage across the board. We have got a strong DC market, a great refi market, QE3, etc.

In your perfect crystal ball, Ron, how do you think about that? It sounds like you are still hiring in the mortgage group. How do you think about that with announced QE3?

And given what you said was very high refi activity, do you think that there is an opportunity to continue to grow the purchase money to sort of help sustain that mortgage line sort of in the very near to intermediate term?

Yes, we do. I will tell you, Carter, that part of what we are seeing is that there is just a huge, huge amount of volume every single day. So we see a tremendous opportunity that we haven't yet capitalized on as far as cross-selling. We are starting more and more to get active with our real estate developers, the condo market, the homeowner, the homebuilder in terms of becoming preferred lender to some of these very substantial builders. So we do believe that that is going to balance out.

The good news/bad news is that right now the volume is enormous. We passed $1 billion in production at the end of September, so the volume is tremendous. We are hiring people, in all candor, because right now we just got to get the loans produced and processed and underwritten and then sold.

We do believe that there is a new system that we recently put on place in Compass, which will make the process more efficient and will drop to the bottom line. Again, we don't see interest rates going up much higher.

I can't tell you the amount of people that refinanced a year-and-a-half ago and are refinancing again now. So we have developed just a great core of solid relationships, many of which we are going to bring into the Bank as we have the time to do.

So Ron, let's just assume -- do you think that there is an opportunity, should the market not get any bigger theoretically, that you can continue to grow mortgage just by moving share then?

I think that the noninterest income as a percentage of total income, I think, is a number that we are very much focused on. I think it is a number that we can maintain. I think that there will be more that will drop to the bottom line.

We have become a big engine. We have had some great hires in terms of producers. Some large producers from some of the big banks have joined us recently and that has been a great opportunity for us. So, obviously, it is a very up and down volatile market, but we believe over the next few years with rates are where they are right now in terms of being able to continue the residential side being a core part of our business our noninterest income will continue.

Great. Well, thank you all very much and, again, great quarter.

Thank you.

I am showing no further questions in queue at this time. I like to hand the conference back over to management for any closing remarks.

Again, I appreciate everybody's support. Very pleased and proud of what we have accomplished with the ATM; plan on continuing growing that and looking forward to speaking with you again at the beginning of January.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect and have a wonderful day.