Eagle Bancorp Inc (EGBN) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Eagle Bancorp fourth quarter 2012 earnings call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions).

I would now like to introduce your host for today's conference, Mr. Jim Langmead, Chief Financial Officer of Bancorp. Mr. Langmead, please 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 2012 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, 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 2012. We appreciate you calling in, joining us this morning.

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

I am extremely pleased to once again announce a record level of quarterly net income at $10.2 million. This is the 16th consecutive quarter of increasing earnings for EagleBank. The $10.2 million of net income represents a 42% increase over the fourth quarter of 2011, and a 5% increase over the net income for the third quarter of 2012.

Net income available to common shareholders was up 43% over the fourth quarter of 2011, $10.1 million versus $7 million. This marks the first time our profits for the quarter have exceeded $10 million.

Diluted earnings per share of $0.43 represented an increase of 23% over the $0.35 per share in the fourth quarter of 2011. As you know, since our last conference call in late October 2012 we completed our common stock raise, which ended up being a combination of the aftermarket offering of $35 million and selling an additional $10 million under separate underwritten offering. The earnings press release reports the shares sold and the average shares price for the combined offerings.

We are very pleased with these results, which also have the benefit of adding some additional long-term institutional holders. We also know that the approach of utilizing an ATM maximized the accretion to book value per share and mitigated dilution of earnings per share, as the shares were sold over time at agreed-upon daily prices.

For the full year of 2012 our net income was also at a record level of $35.3 million, a 44% increase over 2011's already strong results. Income available to common shareholders of $34.7 million for the year in 2012 showed an increase of 51% over the 2011 level of $23 million.

Earnings per share growth was 41% for 2012, to $1.61 per diluted share. We are extremely pleased with the growth in revenue, net income, earnings per share as profits continue to be our primary goal. As I have said many times before on these earnings calls, we're most proud because our earnings are driven not by any one item, but by balanced financial performance across all the core elements of the Bank.

These elements include a superior net interest margin, solid growth in both average deposits and loans, and increasing contribution from noninterest income, a continued strong credit culture and an efficient organizational structure. 2012 was another excellent year in terms of balance sheet growth, resulting in $3.4 billion of total assets at year-end.

Total loans, which exclude and loans held for sale, were $2.5 billion at year-end, a 21% increase over December 31, 2011. Our loans grew $437 million over the prior year-end, and $95 million or 4% during the fourth quarter of 2012.

Deposits ended the year at $2.9 billion, which was a 21% increase over the $2.4 billion at December 31, 2011. We saw significant deposit growth of $383 million in the fourth quarter or a 15% increase. This substantial quarterly growth was driven primarily by normal activity.

We also added liquidity to the balance sheet in preparation for any potential repercussions of the extension of the TAG program or federal government decisions related to the fiscal cliff. Regarding TAG, we have seen minimal impact on our deposit levels as a result of the expiration of that program. We had a few customers reallocate their deposits to other products such as SDRs, ICS products, to maximize FDIC insurance, but the relationship remains in our Bank.

Other customers, particularly those with a fiduciary responsibility, may still be working through what they intend to do, but we have had nominal impact so far. While the effect of the TAG expiration on Eagle ended up being very minor to date, our very conservative strategy resulting in us taking a large position at December 31, 2012, and low-yielding overnight funds of about $330 million, which resulted in a loan to deposit ratio of only 86%, well below our traditional position.

In spite of the adding the short-term insurance to the balance sheet, we were very pleased with our fourth quarter 2012 net interest margin of 4.31%, which we believe remains well above peers. Going forward we expect to deploy this excess liquidity into higher-yielding loans.

You may recall that in 2011 we received an extraordinary large settlement deposit, which skewed some of our numbers. The net interest margin of 4.31% for the fourth quarter 2012 compares to a reported interest margin of 3.65% for the fourth quarter 2011. Without the large, short-term deposit the net interest margin for the fourth quarter of 2011 would have been 4.16%.

On a full-year basis the, net interest margin was 4.32% for 2012, versus an adjusted net interest margin of 4.17% and a published margin of 3.99% for the full year 2011. The net interest margin for the fourth quarter of 2012 was 4.31%, for lower than third-quarter margin of 4.44%, due to a significantly higher level of liquidity as previously discussed.

The average yield on earning assets, again, because of the excess liquidity, declined 15 basis points from 4.89% to 4.74%. The average cost of funds decreased by 2 basis point from 45 basis points to 43 basis points. The yield on the loan portfolio for the fourth quarter of 2012 was stable at 5.67% as compared to 5.66% for the fourth quarter of 2012 and 5.78% for the fourth quarter of 2011.

We continued to maintain a very favorable deposit mix and DDAs still comprise 30.4% of total deposits at December 31, 2012. The economy in Washington DC metropolitan area remain strong, as so loan demand for both C&I loans and commercial real estate loans. We continue to see pricing pressure from some competitor banks, but we again are maintaining our strategic disciplined focus on net interest margin.

We continue to employ floor rates in the vast majority of variable rate loan transactions as we have for the last few years. Our ALCO philosophy is to maintain a neutral position with regard to interest rate changes and 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 floor rates.

Excluding loans held for sale, 57% of our portfolio is in a variable or adjustable-rate loan. Including fixed-rate loans, 32% of the portfolio reprices or matures within 30 days and another 5% within the first year. In total, 63% of the portfolio reprices or matures within three years and 80% within five years.

Our credit quality statistics remained extremely strong. At December 31, 2012, NPAs as a percentage of total assets decreased to 1.06 as compared to 1.25 at December 30, 2012, and 1.27 on December 30 -- at December 31, 2011.

Net charge-offs for the fourth quarter were 37 basis points of average loans and were also 37 basis points of average loans for the full year of 2012. These level of charge-offs are well below industry norms.

The allowance for loan loss was 1.5% of total loans at December 31, 2012. We have continued to make substantial provisions as dictated by the growth in the loan portfolio, consistent application of our allowance methodology, current economic conditions and the overall quality of our loan portfolio.

Our coverage ratio, that is the allowance for loan loss divided by the nonperforming loans, at the end of the fourth quarter 2012 was 122%. We believe that we are adequately reserved. Even though our credit quality is strong, we continue our diligent approach to monitoring the loan portfolio and taking aggressive action on individual credits as necessary.

In the fourth quarter of 2012 the Bank continued the trend of growth in noninterest income, driven by the origination and sale of loans in our residential lending group. Production during the fourth quarter of 2012 was $484 million as compared to $387 million in the fourth quarter of 2011, a 25% increase.

For the entire year of 2012, loan production was just over $1.5 billion as compared to $864 million during 2011. We are satisfied with the level of production and we have reached its contribution to noninterest income, but we do not see residential lending ever being the primary driver of our earnings.

Revenue from sales of loans in the residential lending division was $4 million in the fourth quarter of 2012 and was the major component of noninterest income for the Company, which totaled $6.1 million for the fourth quarter. Loans held for sale on which these gains will be realized were $227 million at year-end 2012, up from $171 million at the end of the third quarter.

Many of you on the call this morning have been asking about the impact on the local economy from cutbacks in federal government spending. The results have been insignificant so far, because we have a diversified economy.

Even before the fiscal cliff and other dramatic events, the government has been cutting back employment. In the past year there has been a decrease of 5000 federal jobs in the area, but the private sector more than made up that with a total net increase of 36,000 jobs in the metropolitan area. For the total regional economy, the forecast for 2013 is that we will see a decrease in federal spending of about 3.5% and that will be offset by increases in the private sector.

The Bank continues to focus on expense management. This is evident in our continued improvement in efficiency ratio, which was 51.4% for the full year 2012 as compared to 56.22% for 2011. As we increased revenue and controlled expenses during the year, that operating leverage saw improvements in the efficiency ratio, which improved to 49.82% for the fourth quarter of 2012.

On an annual basis, our efficiency ratio has improved from 59.26% for 2010, to 56.22% 2011, to 51.4% for 2012. This continual improvement in efficiency ratio is truly indicative of our ability to drive topline revenue and manage noninterest expenses as we build the Bank.

During the past year we added lenders, business development officers and branches to implement our growth strategy for Northern Virginia. We retain our commitment to always having the proper infrastructure to support continued growth.

The level of branch expansion will be lower in 2013 as we have one additional branch planned in Old Town Alexandria, Virginia. We will continue to make ongoing investments in technology to support new products and to increase productivity and efficiencies across the Bank.

We believe we are well positioned for 2013, as we will sustain our focus on building new customer relationships and broadening current relationships, which we concentrate on every day.

During 2012 we grew our net new relationships by 10% and developed over 1400 new core customer relationships. These are customers who have moved to EagleBank because of our recognized financial strength and our quality of service. This is a key to our success, and what drives us as a leading community bank in the market, with local decision-makers, accessible leadership and a commitment to the community.

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

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

Good morning and congrats on the quarter. First, thanks for the additional color on the TAG program, but I was hoping to keep discussion going on the excess liquidity

Just in terms of timing, as you mentioned, you hope to deploy into higher-yielding loans. But assuming you continue and not see too many outflows, just given the magnitude of the excess liquidity you took, should we expect to see some balance sheet shrinkage starting in the first quarter?

You are talking about the balance sheet. No, I think we are not expecting shrinkage there. We do expect that we will deploy more of that liquidity into loans. So it will move from short-term investments into the loan portfolio at higher yields. And we hope to get back some of the margin compression that occurred in the fourth quarter.

Okay, got it. And maybe just if you could be more specific on your reference, like normal year-end activity you saw for deposit inflows. From the level we saw this quarter, would you expect to see a decline first quarter or second quarter?

Clearly, the growth we had in the fourth quarter was somewhat seasonal. I think if you go back and look at the fourth quarter of 2011, we had pretty substantial growth. I think that is somewhat typical in the banking business where you have that run-up.

And while we don't expect to lose many of those deposits, we don't expect to have level of growth in the first, second, third or fourth quarter of 2013. I think the fourth quarter is an unusual quarter, so the rate of growth we had there is very much seasonal.

Okay, that is helpful. Thank you. And then you had some nice construction growth this quarter. Maybe you can touch on any specific projects, or just more broadly, geography or areas where you're seeing the most opportunities right now?

This is Jan. We have been fortunate to see some really good construction opportunities in the mixed-use area, the residential area, and to a lesser extent in office properties in our primary market area. We have typically been looking at, for example, an office or mixed-use, rather than a ground-up construction, we are looking at significant rehabs of existing facilities.

I think we have been very successful in capturing and managing that construction segment. Our average construction loan is $2.250 million, but we do have a very wide range going from $100,000 to $26 million.

Okay, and I guess what is the mix between commercial and residential?

Right now we are looking at approximately -- I haven't seen the final numbers split yet for the end of the year, but we are growing the residential segment slightly faster than we are growing the commercial side. Owner-occupied has declined a little bit in the construction book.

And what is the split between owner-occupied and non-owner-occupied in the book? Do you have that yet?

I don't have it yet, but I can tell you, based on having gone through the portfolio, that you're looking at maybe 1.5% of total loans being owner-occupied construction.

Okay. Okay, I will let someone else jump on. Thank you guys for taking my questions.

Catherine Mealor, KBW.

This is Stephen Scouten in for Catherine. I had one more question about the effects of the TAG and the excess liquidity. I was curious as to whether you could give some more detail about the strategy for what you guys might do to retain some of those deposits that might be affected by the expiration of the plan, and if we might see some significant shift in the yields on interest-bearing demand deposits in the next quarter offsetting the effects from this quarter.

We don't believe there is going to be a major shift. Obviously, as I mentioned in my call, you have shift into the ICS product and a variety of other products. But, again, the cost of funds of these products is so low right now that it really doesn't have a major impact, and, again, it is not going to be any significant number.

Okay, so most of that impact is probably realized this quarter already?

Yes. Well, again, who knows who is thinking about what? And we are constantly in contact with our customers. We have sent out letters. We have sent out, obviously, the FDIC required documentation, because of us being as well-capitalized as we are.

And I guess probably more importantly than anything is the verbal conversations, that we communicate with our regular basis to our largest depositors. That is both municipalities, fiduciaries, that the comfort level that they have with the strength of the Bank, I think, has given them a level of comfort.

But, again, one never knows. We do have, as some of you know, a relationship with a large bankruptcy trustee administrative company, and they have a fiduciary responsibility a little different than most, because of the requirements under the court documents. And there is one depositor of approximately $100 million and that is -- has talked about potentially moving that out, and that would be fine if that is what happened.

Great, and then one other question. I know you mentioned mortgage isn't going to be really the primary driver of your growth. But as it relates to continued growth there, and you guys showed this quarter some of the best growth we have seen in that segment, is that something that you expect, into 2013, expect to continue to see some growth?

And then as it relates to that, the personnel expenses you mentioned in the press release, both from mortgage and from incentive pay, can you give me any clarity on the breakdown between the two of those influences?

First, as you probably remember, back in 2009 is when we started ramping up our residential group, and it is now elevated to the point of $1.5 billion worth of gross production. Who knows what is going to happen with interest rates? Obviously, about 88% of our book of business on the residential side has been through refis.

We are working that pretty heavily on bringing in a lot of our mortgage lenders that have relationships with builders. So we hope to balance that out slightly, so even when interest rates do go up, the production will maintain. I don't see it dramatically increasing over the $1.5 billion.

I do see the profitability, though, in our residential group increasing dramatically. We recently put in a number of programs, including [Encompass], which is our high-end technology computer program that will make the whole process more efficient. So I do believe that from a profitability perspective, our residential group will improve much more than just the top line.

Great, thank you guys very much for the color.

Christopher Marinac, FIG Partners.

Could you give us just an update on the number of producers that you have and how that number has changed, and perhaps a little bit of color on how you look at their production size and how that range is now versus the past?

Are you talking on the residential real estate?

Or really just even commercial as well.

I would say in the fourth quarter we pretty much have a balanced group. We are not dramatically looking to increase that number at this point. We feel that we do have capacity within our lending group, within our business development group, and within our residential group.

Again, it is more now working on the efficiencies of that, which is taking advantage of the technology programs. So our assistance to our lenders are going to become more of an impact to allow our lenders to be more productive. In the second and third quarter -- actually in the first, second and third quarter we brought on some great lenders, so they are just ramping up in terms of their game, so we see that being a big benefit going into 2013.

Obviously, the expansion that we had in our branching network in Northern Virginia gives us the exposure, the branding, so we see our lending being able to expand in the Northern Virginia marketplace along with the strong market in the Montgomery County and the District.

Okay, so is it fair for us to interpret that, that your level of production can be consistent to what you have had this last quarter because of new volume?

Let's get into that a little bit, because I think it is important. As I mentioned in my earnings call, and keep mentioning, we are an earnings per share driven Company, not a balance sheet driven Company. There is certainly more competition out there, at much lower rates. And we are going to be extremely sensitive and disciplined in terms of what loan production really means.

We are not looking to add loans for the sake of adding loans. There are banks out there that, as I mentioned last quarter, are doing 4.25%, a 10-year money, some even lower than that. And we are not going to chase loans.

We believe we have a very, very strong relationship and within most of our existing lenders -- most of our existing customers. And we believe that there is a tremendous amount of opportunity out there in terms of people that are leaving the big banks where they have no relationships, looking for large, stable, strong local decision-makers.

And, again, let's bear in mind that we have 1.62% of the entire market share as the FDIC showed in our deposit side, so we believe the opportunity is still enormous. But I can't stress enough that we are not going to go chase loans for the sake of increasing a balance sheet, even with liquidity that we have on the balance sheet.

Okay, that is helpful. And it sort of addresses part of my next question, which is simply just -- without it being too specific, but just generally speaking, if we look at the loan yields compared to what is on average last quarter 5.67%, compared to what is new, doing that today is -- are we going to see a narrowing of that spread between what new business is being booked at and what is on the books? Or are you confident that you can still be picky, as you have been, to keep that high?

The answer is yes and yes. We think that we will see a compression for new interest rates on -- interest rates on new loans, because that is what the market is demanding. But we also believe strongly that we will continue to be disciplined, that we are not going to, as I say, chase the loans that we don't believe are strong relationships.

But I have to tell you, Chris, that with 21% loan growth that we had in 2012, the operative driving part of that, the mantra of EagleBank -- and that is the discipline, accessibility to decision-makers, and telling you, no, I can't do it quickly and if we can do it, getting it done quickly. And that is what drives us. That is where people are flocking to us, and we continue to see that throughout the entire market and believe that to be accurate.

Will it be at lower rates? You have to be competitive, but the average borrower is not balking at 0.25% or 0.375%, even as much as a 0.50% on the interest rate.

Honestly, the obviously, every single loan that we have on a variable rate has a floor, which we have been doing now longer than most banks and we will continue to do. And the big advantage right now, again, you have to remember, Washington, D.C. is a pretty strong market and loan demand at higher numbers is increasing. And, therefore, the ability of the smaller banks to be able to provide that service along with what we believe to be a consolidation in the smaller banks is going to take the eye off the ball of a lot of lenders throughout the market.

Great, thanks for all the color. It is very helpful.

[Pat O'Brien], Fox Asset Management.

I am a rather recent owner of your Bank and one thing that jumps off the page for me is the series of the efficiency ratio -- 50% in the quarter. It was 68% back in 2008. That has an awful lot of operating leverage. How much further does that go? I have seen banks with lower numbers, but this is a pretty low number.

First and most importantly, thank you for being a new shareholder. We aim to please. The efficiency ratio that we have -- I have always said in previous calls that our goal is to -- for a growth Bank like we have, with the market that we have, with the expense factor within our marketplace, is that we believe that being in that low 50%'s is our goal.

Bear in mind that even in 2012 we opened up four branches, hired a lot of people. So even with that was able to maintain that 51% efficiency ratio. I can tell you that I don't anticipate that number going to dramatically lower. Whether we are at 49% or 51% or 53%, I think a lot of it depends on what happens in that particular quarter.

Again, bear in mind that we are always looking for opportunities, whether it is on the lending side, in people, or whatever the case may be. But, again, I believe that low 50%'s is the target number for the Bank.

Okay. One other question is the funding. You guys have borrowings and you have got some time deposits, yet you have got a very low loan to deposit ratio. Why the expensive money? Is that long-term stuff, matched against fixed-rate assets?

Well, bear in mind our average cost of funds is still 67 basis points. So from a total perspective we are pretty happy with that cost of funds, and certainly can match that against any other bank.

As Jim mentioned, and I mentioned in my call, we are very sensitive to the uncertainty as is related to TAG. So we bulked up the liquidity position at the end of the year, and that was done through wholesale findings and a variety of other promotions that we did. So it is an aberration as to what happened towards the end of the fourth quarter, but as Jim said, we do believe that we will deploy that to higher-yielding assets and the first and second quarter.

So it is the continued disciplined approach. We were willing to sacrifice it slightly, because we wanted to not have any issues on liquidity, especially at year-end.

(multiple speakers). Good, thank you.

Matt Schultheis, Boenning & Scattergood.

Actually my question was answered. So thank you.

Carter Bundy, Stifel Nicolaus.

Great quarter. First question, jumping back in on the brokered funding this quarter, Jim, do you have an average sort of maturity on that $127 million?

Yes, Carter, it was a three-year average maturity when we bought those funds and rate was 70 -- 72 basis points. And, really to the earlier call that Pat had, we think that over a three-year period that is going to be a good rate.

We are not guessing interest rates; we are just looking at our money -- some variable, some fixed. But we think three-year money at that rate is going to wind up to be attractive over that period. But that was the average term, three years.

Okay, that is helpful. Moving on to more strategy and growth outlook, Ron, you have obviously met a lot of hires, particularly in the last year and a half, two years. How do you think about going into 2013 from a hiring perspective, particularly at the commercial bank?

And can you continue to turn -- obviously, growth rates are going to probably slow somewhat, but what kind of capacity do you have within the current lending network, getting back to Chris's question? But more importantly do the growth rates, to continue at these levels, need to have significant new hires?

They don't have to have significant new hires. I think that as we have all read in the news, there are a lot of different situations going on in the Washington metropolitan area in terms of Community Banks. And we are going to be opportunistic, and anything that we can in terms of hires.

We are in this thing for the long haul, and we believe that if we can find good hires, and even if they're not going to bulk up the balance sheet and their book of business immediately, we believe that if they're good, they're good. And we will put them on the team.

Does that result in a dramatic increase in hiring? No, it doesn't. I think that a lot of the hiring that we have done over the past couple of years has been in the residential group. And as I mentioned earlier, I think there is efficiencies that we will be able to get out of that, so I don't see a dramatic increase in our hiring in 2013.

On a relative basis, do you think it would be slower than we have seen this past year? Sounds like you made some hires in early 2012.

Yes, I think that your overall noninterest expense and your salaries will be more stabilized in 2013 than it was in 2011 or 2012.

Okay. And from a commercial line usage, have you all seen that number bounce around or -- I guess that is the question. Have you seen the number move much?

I am sorry I didn't understand (multiple speakers).

Your commercial borrowers, your average line usage, has that been driving some of the growth in loans? Or has it been a pretty steady commercial line number?

It is a pretty steady commercial line number. There is not anything radical that we have seen. Again, I keep going back to that disciplined approach in that we are looking -- when we have a loan committing, we are constantly being sensitive to the allocation within our loan portfolio as to where we are bringing in and where we need to be.

As Jan said, it is critical for us. We have always been centralized to the Beltway. We will continue to be. So I think that the disciplined continuation of the commercial book will continue.

I think that is true, Carter. There are some borrowers who do use their line more at the end of the year then they might do over the course of the year, primarily due to tax purposes. However, that is insignificant in the scheme of the growth in that portfolio. The C&I portfolio has really grown significantly in the last quarter, as I think you can see.

Okay, that is really helpful. And have you all seen any more incremental payoff activity in the last couple quarters?

Again, you have certain borrowers that are rate chasers, and those borrowers are looking for the teaser rates. But it is not dramatic.

Okay, great. Thank you all very much. Great quarter.

(Operator Instructions). I am showing no further questions in the queue. I would like to turn the conference back for any further remarks.

Thank you all for attending the call and looking forward to speaking to again in three months.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.