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Eagle Bancorp, Inc. (NASDAQ:EGBN)

Q1 2013 Earnings Conference Call

April 23, 2013; 10:00 a.m. ET

Executives

Ron Paul - Chairman & Chief Executive Officer

Jim Langmead - Chief Financial Officer

Jan Williams - Chief Credit Officer

Analysts

Thomas [Latourneau] - FBR Capital Markets

Casey Orr - Sandler O'Neill

Catherine Mealor - KBW

Christopher Marinac - FIG Partners

Matt Schultheis - Boenning & Scattergood

Operator

Good day ladies and gentlemen and welcome to the Eagle Bancorp’s, first quarter 2013 earning 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).

I will now introduce your host for today’s conference, Jim Langmead, Chief Financial Officer of Eagle Bancorp. You may begin.

Jim Langmead

Good morning everyone. Before we begin the comments this morning, I’d like to remind you that some of the comments made during this call maybe considered forward-looking statements.

Our Form 10-K for the 2012 fiscal year, our quarterly reports on Forms 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.

Ron Paul

Thanks Jim. I’d like to welcome all of you to our earnings call for the first quarter of 2013. We appreciate you calling in to join us this morning and your continued interest with Eagle Bank.

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

I’m very pleased to announce that once again Eagle Bank has achieved a record level of quarterly net income, which was $11.6 million. This is the 17th consecutive quarter of increased record earnings from top line revenue growth, maintaining the superior margin and continuing control of operating expenses.

The $11.6 million of net income was a 52% increase over the first quarter of 2012 and a 13% increase over the net income in the fourth quarter of 2012. The reason for the increase in net income available to common shareholders was similar with a 53% improvement over the first quarter of 2012, going from $7.5 million to $11.6 million.

Fully diluted earnings per share were $0.48 for the quarter and showed a 33% increase from the $0.36 for the first quarter of 2012 and a 12% increase from the $0.44 in the fourth quarter of 2012. It is important to note that the 33% increase in earnings per share as compared to the first quarter of 2012, does reflect the diluted impact of the additional shares issued at the market equity offering and the immediately following underwritten offering conducted last year.

We are very pleased with the results for the first quarter of 2013 and that we have continued our trend of consistent results across all key performance indicators, as well as increasing record earnings per share. As we have continually said on these calls, our focus is on improving profitability and not just growth on the balance sheet.

Our disciplined approach leads to the bank’s superior net interest margin, strong credit quality and very attractive efficiency ratio. The focus on profitability is reflected in the return on average assets, which was 1.39% for the first quarter, having increased from 1.08% a year ago and from 1.25% in the fourth quarter 2012. Likewise the ROAE was also up significantly at 15.29% for the first quarter as compared to 13.8% in the first quarter of 2012 and 13.95% in the fourth quarter of 2012.

The more moderate growth in the balance sheet, particularly the loan portfolio during the quarter directly reflects our disciplined, long-term outlook and approach. In a period of some uncertainty for the national and local economy and increased competition for loans, we are maintaining our standards for loan pricing and underwriting.

In our opinion many of our competitors are employing a rational loan pricing and unusually long fixed rate terms in their attempts to gain some market share and generate additional revenue in the short run, without considering the long-term impact.

Consistent with the Eagle Bank philosophy, we are committed to a disciplined approach to improving profitability and to managing all aspects of the ALCO (ph) process. We pay particular attention to both, yield and duration alone portfolio, as well as the securities portfolio and will always be more concerned about growth in earnings per share than growth in the balance sheet.

As a result of our continuing disciplined approach, we are pleased to report a net interest margin for the first quarter of 4.2%. This represents an increase from 4.11% in the first quarter one year ago and a modest decrease from 4.31% in the fourth quarter 2012.

We experienced only a minimal decrease in loan yields during the quarter at 5.65% as compared to 5.67% in the fourth quarter of 2012. The primary reason for the decrease in the margin was the higher level of liquidity we are carrying. Also during the first quarter we are able to adjust the positive pricing and thus reduce our cost of funds during the period as compared to one year ago and for the fourth quarter 2012.

The loan portfolio, excluding loans held for sale has increased $361 million or 17% since March 31, 2012, and increased $55 million or 2.2% from December 31, 2012. As noted earlier, growth during the first quarter was impacted by our disciplined approach to loan pricing on new transactions. We also saw the expected payoff of several large loans, which occurred because the underlying projects reached completion.

The bank continues to benefit from the impact of floor rates, which we have been using for the last several years. We continue to see opportunities in our market, but are being selective and will maintain our lending discipline regarding underwriting and pricing. With this approach we feel we can maintain a favorable margin and achieve a reasonable level of loan growth.

Deposits were $2.81 billion at the end of the first quarter, which represents a 19% increase over March 31, 2012. Deposits were down slightly for the levels of December 31, 2012 when we had built our deposit and liquidity due to uncertainty about the potential impact of the exploration of the FDIC’s TAG program.

During the first quarter we did loose a $130 million relationship of one fiduciary who manages trustee accounts. The bank was able to provide non-FDIC collateral coverage for these trustee accounts, but when the customer was not willing to accept the associated service charges, we decided to let the business go, rather than maintain an unprofitable relationship. This is the only fiduciary trustee relationship that chose to leave Eagle Bank as a result of the end of the TAG program.

Excluding the impact of that one customer, deposits grew $46 million or 1.6% during the quarter. We generally do have some seasonality in deposit flows, so for the first quarter we are pleased with the activity, which does reflect continual relationship building.

Our deposit mix remains very favorable. VDA accounts make up 27% of total deposits and our cost of funds remains below the peer group average. Additionally we were able to reduce our cost of deposits during the first quarter to 42 basis points and given our high level of liquidity, we have the ability to carefully manage those costs.

Our credit quality continues to be very strong as it has consistently been over the last several years. At March 31, NPA’s as a percentage of total assets were 1.12% as compared to 1.41% a year ago and non-performing loans as a percentage of total loans were 1.11% as compared to 1.68% at March 31, 2012. Both ratios are very acceptable and within the range of NPA levels we have maintained over the last two years. The absolute level of NPA’s increased slightly by about $1.4 million in the first quarter.

We continue our conservative policy as to when to place a loan on our performing status. Net charge-offs annualized for the first quarter were 33 basis points of average loans and were slightly below the level of the last several quarters. The rate of charge-offs continues to be well below industry norms.

The allowance for loan losses was 1.52% at the end of the quarter and we continue to make a reasonable provision as dictated by the size and the quality of the loan portfolio and consistent application of our allowance methodology. The increase in the allowance is due to both economic factors and the changing mix of the portfolio.

The provision there in the first quarter was lower than the provision in the first quarter of 2012, due to the lesser loan growth during that period. At March 31, 2013 the coverage ratio was 138% of non-performing loans and we believe they are adequately reserved.

Non-interest income was very strong for the first quarter and as expected the results were driven primarily by the residential lending group. Total non-interest income for the quarter was $8.1 million, a 35% increase over the $6 million recognized from the first quarter of 2012 and 33% greater than the $6.1 million realized in the fourth quarter of 2012. Non-interest income was 19% of total revenue in the first quarter 2013 as compared to 17% in the first quarter of 2012.

$5.6 million of non-interest income was from gains on the sale of residential mortgages, up from $3.9 million for the first quarter of 2012. The first quarter results did include the recognition of significant gains on the high production volume or the fourth quarter of 2012, but I would note that we had the same effect during the first quarter of last year.

Loan originations during the first quarter were $385 million as compared to $300 million of originations in the first quarter 2012. Although volume continues to be predominantly refinancing transactions, all purchase are important to our long term strategy for this division and purchase transactions continue to grow and represent 16% of our volume in the month of March.

The housing market continues to improve in the Washington metropolitan area, as it has in the other parts of the country. For the region, housing values are up 9% over the last year and the number of sales is up 8%.

We continue to leverage our relationship with homebuilders and condominium developers. We continued to improve the efficiency and productivity of the residential lending division and have reduced staffing levels during the first quarter, in line with the changes in volume and the expected full implementation of an automated processing system.

We opened our newest branch in Old Town, Alexandria, Virginia in March, which rounds out the Northern Virginia branch network and brings us to a total of 18 branches. This network gives us adequate coverage for the strategically important sub-markets of the Washington metropolitan area, and therefore we have no additional branches planed at this time.

We will continue to hire skilled banking professionals, albeit at a slower phase and continue to utilize technology to improve customer experience such as the mobile banking applications, which we introduced during the first quarter and will be improved soon with the enhanced deposit features. Even an old school guy like me has learned to say we have an App for that.

Even with the additional branches and staff we’ve added in the past year, the efficiency ratio for this first quarter was very favorable at 48.56% and showed significant improvement from the 53.83% in the first quarter 2012 and 49.82% in the fourth quarter of 2012.

The improvement in the efficiency ratio continues to be driven primarily by increases in revenue, but we also continue to manage expenses very closely. Non-interest expenses for the first quarter were only up 11.5% over the first quarter a year ago and increased only 1.8% from the fourth quarter of 2012. As a measure of efficiency, we also track non-interest expenses as a percentage of assets and over the past year that indicator has improved from 2.64% to 2.48%.

As we always have, the bank will continue to spend prudently to maintain the proper infrastructure, but expense control is the key factor in our disciplined approach to manage the profitably not just size.

Thanks to our continued record profitability and to the two equity offerings we successfully completed in 2012, our regulatory capital ratios remain strong. We remain well capitalized with a total risk based capital ratio of 12.5% at March 31, 2013. The tangible common equity ratio at March 31, 2013 was 9.08%, which was improved from 8.5% at December 31, 2012.

Finally we are continuing our focus on building new customer relationships and broadening current relationships throughout the Washington metropolitan area. While there has been a lot of media chatter about the impact of sequestration and federal government cutbacks, we see the local economy continuing at a reasonably strong price.

Unemployment for the region is still among the lowest in the country at 5.4%. In the 12-month period ending in February the region added a total 39,700 jobs, which is net of only 2,700 jobs lost in the federal sector. The region continues to add jobs in professional services, leisure and hospitality and education and healthcare.

At Eagle Bank we have increased the number of customer relationships by 8% over the last year. Our reputation in the local market continues to improve. We also appreciate the industry’s recognition that we’ve recently received from sources such as Keefe Bruyette & Woods and SNL Financial. We thank all of you for your interest and continued support of Eagle Bank.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question is from Paul Miller of FBR. Your line is open.

Thomas [Latourneau] - FBR Capital Markets

Morning guys. This is actually Thomas [Latourneau] (ph) on behalf of Paul. A couple of quick questions; can you quantify for me what the loan paths were in the quarter in dollars.

Jim Langmead

Say it again.

Thomas [Latourneau] - FBR Capital Markets

Is it possible to get the dollar amount of the loan path that you have in the quarter?

Jim Langmead

I don’t have a specific number there Thomas, but the excessive amount that Ron was talking about that represented excess payoffs were about $35 million to $40 million, representing about 1.5% of the portfolio.

Thomas [Latourneau] - FBR Capital Markets

Okay, that’s helpful. And then one quick follow up. If you guys could talk a little about, if you can, where you are seeing sort of new loan yields coming on at CNI, what you are seeing in the market.

Ron Paul

The market is certainly more competitive, but we as I say, we have a great discipline to what we are seeing. We see a lot of great borrowers that we have long term relationships with, that are certainly willing to pay up little bit from our competition because of the services, the quality, the turnaround, etc.

As I said all the time, when your are looking at rates where we are right now, in that 5% range, if three-eights of a point is going to make a difference, you shouldn’t be buying the project or doing the deal. So we believe that the market is definitely heating up from a competitive standpoint, but we are fully embracing it and are ready to go at it.

Thomas [Latourneau] - FBR Capital Markets

Okay, great. Thanks guys.

Operator

Thank you. Our next question is from Casey Orr of Sandler O'Neill. Your line is open.

Casey Orr - Sandler O'Neill

Good morning guys.

Ron Paul

Good morning Casey.

Casey Orr - Sandler O'Neill

I just had a few quick questions. If we could start maybe with the residential lending group, you mentioned the mix is still heavily weighted towards refi and I apologize if you gave this in your compared remarks. But you have the exact break out of refi originations this quarter and can you maybe remind us of what that was last quarter.

Ron Paul

As I mentioned in March, 16% which is the highest it’s been, is on purchases. And as I mentioned over the year, we’ve continued to put more and more emphasis on our builders to be able to do business with us on the end loan side. I believe we were as low as 9% at one point on the purchase side.

Casey Orr - Sandler O'Neill

Okay, great. And then do you have your gain on sale margin this quarter and what that was last quarter.

Ron Paul

I’m sorry Casey, could you say that one more time?

Casey Orr - Sandler O'Neill

Do you have your gain on sale margin this quarter and may be what that was last quarter.

Ron Paul

James, you have it?

Jim Langmead

Yes, the margin is about 105 basis points Casey, a little bit higher than it was in the fourth quarter of ‘12. There it was about 101, 102.

Casey Orr - Sandler O'Neill

Is that net of expenses?

Jim Langmead

That was net of your variable price, net of your commissions, but its not you’re operating expenses come out of that. Those fixed costs come out of that, but it is net of the commissions, which as you know is the largest variable expense associated with those originations in sales.

Casey Orr - Sandler O'Neill

Great, thanks, and then a quick question on the net new margin. Securities yields look like they were up about 19 basis points during the quarter. Can you tell us that its what you bought there in the quarter or what drove those yields up?

Jim Langmead

Yes, I think the biggest factor was that we did have some movement in the mix of the portfolio. We have a fare amount of mortgage-backed securities that at higher premiums have subjected us to some negative yield risk as we wrote those premiums off over a shorter period because of the prepayments fees.

We’ve been lightening up on that risk exposure throughout the last couple of quarters, so we got rid of those yields and what we purchased were a bit more municipal securities, highly rated, I would say AA or better. That portion of the portfolio, that is municipals are up to 27% or 28%. We are very comfortable there at high quality portfolios. So those additional yields and that mix change is what drove that yield up during the quarter.

Ron Paul

Jim, if you could just mentioned the term of the average length as I’m curious.

Jim Langmead

Yes, the average, the life of the portfolio is about 48 months, about 40 years is the duration of the investment portfolio, and there is a pretty significant unrealized gain in the portfolio at the end of the quarter of about $7.6 million.

Casey Orr - Sandler O'Neill

Great. That’s all I have for now. Good quarter and I’ll jump off. Thanks.

Ron Paul

Thanks Casey.

Operator

Thank you. Our next question is from Catherine Mealor of KBW. Your line is open.

Catherine Mealor – KBW

Good morning everyone.

Ron Paul

Hi Catherine.

Catherine Mealor – KBW

It feels like you are not going to chase your competition in loan pricing or staying in maturity, if you are seeing that growth as still reasonable. So do you feel like you should bring down our growth expectation to may be the more single digit range. Do you feel like that’s where you feel a little more comfortable in growing the portfolio given how competitive the market is or do you feel like we’ll see a little more of a pickup going into the rest of the year, maybe as first quarter could have been a little more seasonal to and maybe have less pay downs.

Ron Paul

I have four people starting at me to wonder whether I’m giving forward-looking statements, so the answer is no. The answer Catherine is that we have a great pipeline, our lenders are still very active.

As I mentioned, the competition is certainly heating up. I think its irrational as to what many of our competitors are doing, but they’ll do what they decide to do. We are always going to focus on our net interest margin, because that is so important and as you and I talked about before, that we believe so strongly that the reputation that Eagle has build, the relationships that Eagle has built and continue to give us great loan growth.

Catherine Mealor – KBW

That’s helpful, thanks. And then also on the margin, it looks like you can end the period balances; you’re already starting to deploy some of the excess liquidity at period end. So do you feel like we should see a big piece of that deployment happen in the second quarter, which could actually be a positive for your name going forward?

Ron Paul

Yes, that’s a great question and I wish I had the answer to it, but I think that as you know that we finished the quarter with about $300 million of liquidity, which is up $90 million from where we were at the end of 2012.

A lot of it depends on the day-to-day business that we have; payoff that you don’t expect, you very central real estate side, again the pipeline is strong. So we believe that we have pricing strength in our deposit side, so we are not going to by any means increase our liability side and we are going to continue to let the liquidity burn off, which obviously will help our NIM, especially with the discussion we had earlier on loan yields.

Catherine Mealor – KBW

Okay great. And then one follow up, one just kind of housekeeping item, but contingency reserve you mentioned in the press releases, can you give us any comments around that?

Jim Langmead

The reserve is just in the normal course of business for a bank. We have transaction from time-to-time Catherine, where we have some concern about lost potential and where there is a potential, where there is some probability, we are going to be conservative in our accounting and establish a reserve. So of that $840,000 increases in other expense that was mentioned in the press release, $0.75 million of that was the contingency reserve. Again, this is just normal bank accounting transactions that occur where there is some risk, we are being conservative; just conservative GAAP accounting.

Catherine Mealor – KBW

Okay great, thank you. Great quarter guys.

Ron Paul

Thanks Catherine.

Operator

Thank you. Our next question is from Christopher Marinac of FIG Partners. Your line is open.

Christopher Marinac - FIG Partners

I wanted to ask about the concentration of various loan types to capital, and particularly thinking of the evolution of C&I are we going to see some of those concentration percentages back down as (a) you continue to build capital, but also as you evolve further into C&I.

Ron Paul

I think the allocation of that loan portfolio is in an area that we feel comfortable in. We are sensitive to the market, we understand where the market’s going and that’s why we are nimble enough to be able to increase a little bit here or decrease a little bit there.

We are seeing still a tremendous demand in very high-end quality real estate, the expansion in North Virginia has been terrific, which is certainly both in real estate and C&I. We see a strong demand in C&I locally. So I don’t think for the most part you are going to see anything dramatic within our allocation, within our loan portfolio.

Christopher Marinac - FIG Partners

Okay and then I guess from the pricing standpoint, particularly on CRE, are you finding that there has been much change in terms of the deals your are accepting compared to the past quarter and are you having to reject more loans than you have in the past.

Ron Paul

Well, we are seeing loans out there at substantially lower rates than what we are willing to give, but the market that we are looking at, we believe is a strong market to be able to get the yields that we want and as I said, that’s why our NIM really has been held flat and we are proud of that and we are going to continue to do that.

Even at 2.3% loan growth we are still seeing the demand and as Jim mentioned before, that’s worth $40 million of normal expected loans. So we also, we look at our credit quality, our credit quality still is exactly where it was, you haven’t seen any jump in that and we’ve been averaging that 33 basis points in charge offs. So we feel very strong in maintaining that disciplined approach and that’s the way it’s going to stay.

Christopher Marinac - FIG Partners

Okay. That’s helpful and then just last question for Jim, you may have mentioned this earlier, I missed it. What was the mix of purchases versus refinance on the mortgage business this quarter?

Jim Langmead

For the quarter it was about 10% I believe; 90% refinance, 10% for the quarter. For the month the number was much higher for the purchase money mortgages that Ron mentioned, about 16% for the month. But if your question is for quarter, the number was a little lower for purchase that occurred in the month of March.

And we are entering as you know the season where there’s a lot more housing activity. We are in the spring. The second and third quarter of the year are going to generally generate more purchase activity. That’s what we expect based up on the infrastructure that’s being built and the relationship building that’s going on in a residential mortgage area.

Christopher Marinac - FIG Partners

Okay and then with the month of March it had been stronger in terms of absolute dollars of production.

Jim Langmead

Yes, the production was pretty strong. Our pipeline is pretty strong and the amount of loans that are being locked continues to be fairly strong, yes.

Christopher Marinac - FIG Partners

Right, okay. So you had more dollars in March end at a higher purchase rate as you mention.

Jim Langmead

Yes, that’s correct.

Christopher Marinac - FIG Partners

Very well guys. Thank you very much for the color.

Ron Paul

Thanks Chris.

Operator

(Operator Instructions). Our next question is from Matt Schultheis of Boenning & Scattergood. Your line is open.

Matt Schultheis - Boenning & Scattergood

Hi, good morning. How are you?

Ron Paul

Hey Matt.

Matt Schultheis - Boenning & Scattergood

You may have commented on this, but I may have missed it and I apologize for that. But from the standpoint of the excess liquidity that you put on in the fourth quarter, it looks like a lot of that, only it’s a portion of that stuff that you got on Q2 (ph) or the first quarter, where its basically the impact of the TAG and exploration being quantified at this point in time or do you see yourselves allowing some of that liquidity to run off or shift in the balance sheet going forward.

Ron Paul

The liquidity that we have is obviously going to be used to continue front loan growth. Our goal is still to maintain the loan to deposition ratio that we’ve had over the past few years. Clearly that’s down because of the TAG discussion. But we believe the loan to deposit ratio that we’ve done over the past few years is where our goal is.

Matt Schultheis - Boenning & Scattergood

Okay. Thank you very much.

Operator

Thank you. And I’m not showing any further questions in the queue. I’d like to turn the call back over to management for any further remarks.

Ron Paul

I appreciate it. If anybody has any further questions, you know where to call us and I’m looking forward to speaking to you again next quarter. Thank you very much.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.

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