UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
(X)( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2005March 31, 2006
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to_________.to .
------------------ --------
Commission File Number 0-25923
EAGLE BANCORP, INC
(Exact name of registrant as specified in its charter)
Maryland 52-2061461
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7815 Woodmont Avenue, Bethesda, Maryland 20814
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(301) 986-1800
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X|(x) No |_|( )
----- --- ---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer (as definedor a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act Yes |X| No |_|Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act Yes |_|Yes____ No |X|(x)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of October 31, 2005,April 25, 2006, the registrant had 7,174,9977,248,392 shares of
Common Stock outstanding.
1
ITEMItem 1 - FINANCIAL STATEMENTS
- -----------------------------Financial Statements
EAGLE BANCORP, INC.
Consolidated Balance Sheets
September 30, 2005March 31, 2006 and December 31, 20042005
(dollars in thousands)
September 30,March 31,
ASSETS 2006 December 31,
(unaudited) 2005
2004
------------------------ ------------
ASSETS
Cash and due from banks $ 17,63916,689 $ 31,10016,662
Interest bearing deposits with banks and other short term investments 12,015 9,5941,718 11,231
Federal funds sold 30,051 15,03531,630 6,103
Investment securities available for sale, at fair value 63,887 64,09869,954 68,050
Loans held for sale 2,327 2,2083,010 2,924
Loans 504,290 415,509552,375 549,212
Less allowance for credit losses (5,496) (4,240)(6,085) (5,985)
--------- ---------
Loans, net 498,794 411,269546,290 543,227
Premises and equipment, net 5,744 5,7265,852 5,774
Accrued interest, deferred taxes and other assets 16,561 14,42319,423 18,281
--------- ---------
TOTAL ASSETS $ 647,019694,566 $ 553,453672,252
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing demand $ 140,554149,778 $ 130,309165,103
Interest bearing transaction 74,945 57,06366,309 73,666
Savings and money market 133,320 126,299140,697 142,879
Time, $100,000 or more 135,427 99,882140,482 122,571
Other time 61,316 48,73473,979 64,674
--------- ---------
Total deposits 545,562 462,287571,245 568,893
Customer repurchase agreements
and federal funds purchased 31,470 23,98331,549 32,139
Other short-term borrowings 4,000 6,33320,000 -
Other liabilities 2,400 2,3164,531 6,256
--------- ---------
Total liabilities 583,432 494,919627,325 607,288
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; shares authorized 20,000,000, shares
issued and outstanding 7,174,3437,233,864 (2006) and 7,184,891 (2005) and 5,421,730 (2004) 72 5472
Additional paid in capital 48,461 47,01449,419 48,594
Retained earnings 15,355 11,36818,394 16,918
Accumulated other comprehensive (loss) gain (301) 98(644) (620)
--------- ---------
Total stockholders' equity 63,587 58,53467,241 64,964
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 647,019694,566 $ 553,453672,252
========= =========
See notes to consolidated financial statements.
2
EAGLE BANCORP, INC.
Consolidated Statements of Operations
For the Nine and Three Month Periods Ended September 30,March 31, 2006 and 2005 and 2004 (unaudited)
(dollars in thousands, except per share data)
Nine months Nine months Three months Three months
Ended Ended Ended Ended
Sept 30,2006 2005
Sept 30, 2004 Sept 30, 2005 Sept 30, 2004
------------- -------------- -------------- -------------INTEREST INCOME ------- -------
INTEREST INCOME
Interest and fees on loans $23,808 $15,157$10,328 $ 8,949 $ 5,407
Taxable interest6,997
Interest and dividends on investment securities 1,761 1,639 649 584701 487
Interest on balances with other banks & short term investments 331 98 68 37- 42
Interest on federal funds sold 220 241 92 118
------- -------195 184
------- -------
Total interest income 26,120 17,135 9,758 6,146
------- -------11,224 7,710
------- -------
INTEREST EXPENSE
Interest on deposits 4,808 2,689 2,074 9732,959 1,141
Interest on customer repurchase agreements and
federal funds purchased 189 61 86 2733
Interest on other short-term borrowings 187 112 82 27
Interest on long-term borrowings - 266 - 88
------- -------232 61
------- -------
Total interest expense 5,184 3,128 2,242 1,115
------- -------3,380 1,235
------- -------
NET INTEREST INCOME 20,936 14,007 7,516 5,0317,844 6,475
PROVISION FOR CREDIT LOSSES 1,311 457 424 227
------- -------115 417
------- -------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 19,625 13,550 7,092 4,804
------- -------7,729 6,058
------- -------
NONINTEREST INCOME
Service charges on deposits 865 1,014 273 305324 269
Gain on sale of loans 925 561 283 172
Gain (loss) on sale of investment securities 281 193 269 (60)
Bank owned life insurance 301 280 107 98176 495
Other income 793 556 307 182
------- -------340 275
------- -------
Total noninterest income 3,165 2,604 1,239 697
------- -------840 1,039
------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 7,695 6,016 2,461 2,1152,974 2,560
Premises and equipment expenses 2,468 1,971 851 701
Marketing and advertising 344 212 137 53869 801
Advertising 119 96
Outside data processing 574 469 189 183228 181
Other expenses 3,024 2,418 1,091 910
------- -------1,033 837
------- -------
Total noninterest expense 14,105 11,086 4,729 3,962
------- -------5,223 4,475
------- -------
INCOME BEFORE INCOME TAX EXPENSE 8,685 5,068 3,602 1,5393,346 2,622
INCOME TAX EXPENSE 3,206 1,816 1,332 539
------- -------1,363 969
------- -------
NET INCOME $ 5,4791,983 $ 3,252 $ 2,270 $ 1,000
======= =======1,653
======= =======
EARNINGS PER SHARE
Basic $ 0.770.27 $ 0.46 $ 0.32 $ 0.140.23
Diluted $ 0.730.26 $ 0.44 $ 0.30 $ 0.140.22
DIVIDENDS DECLARED PER SHARE $ 0.21 $ - $ 0.07 $ -0.07
See notes to consolidated financial statementsstatements.
3
EAGLE BANCORP, INC.
Consolidated Statements of Cash Flows
For the NineThree Month Periods Ended September 30,March 31, 2006 and 2005 and 2004 (unaudited)
(dollars in thousands)
Nine months Ended Nine months Ended
September 30,2006 2005
September 30, 2004
------------------ -------------------------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,4791,983 $ 3,2521,653
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Decrease in deferred income taxes - (74)
Provision for credit losses 1,311 457115 417
Depreciation and amortization 811 727261 260
Gains on sale of loans (925) (561)(176) (495)
Origination of loans held for sale (19,475) (18,412)(10,838) (10,661)
Proceeds from sale of loans held for sale 20,281 19,484
Gain on sale10,928 9,693
Stock based compensation expense 170 -
Tax benefit from exercise of investment securities (281) (193)non-qualified stock options 191 58
Increase in other assets (1,897) (760)
Decrease(921) (640)
(Decrease) / increase in other liabilities 84 203
--------- ---------(1,916) 95
-------- --------
Net cash provided (used) by operating activities 5,388 4,123
--------- ---------(203) 380
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase / (decrease) in interest bearing deposits with banks
and other banks (2,421) (5,280)short term investments 9,513 (7,910)
Purchases of available for sale investment securities (39,960) (190,580)(5,104) (3,349)
Proceeds from maturities of available for sale securities 27,536 155,720
Proceeds from sale / call of available for sale securities 12,276 39,667
Increase in federal funds sold (15,016) -3,146 1,293
Net increase in loans (88,836) (46,330)(3,178) (21,602)
Bank premises and equipment acquired (829) (1,893)
Purchase of BOLI - (4,000)
--------- ---------(339) (710)
-------- --------
Net cash usedprovided (used) in investing activities (107,251) (52,696)
--------- ---------4,038 (32,278)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits 83,275 75,507
Increase (decrease)2,352 20,623
(Decrease) / increase in customer repurchase agreements and
federal funds purchased 7,487 (11,084)
Decrease(590) 15,515
Increase / (decrease) in other short-term borrowings (2,333) (667)
Decrease in long-term borrowings - (2,478)20,000 (1,000)
Issuance of common stock 1,469 396464 382
Payment of dividends (1,496) -
--------- ---------(507) (500)
-------- --------
Net cash provided by financing activities 88,402 61,674
--------- ---------21,719 35,020
-------- --------
NET (DECREASE) INCREASE IN CASH (13,461) 13,10125,554 3,122
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 31,100 25,103
--------- ---------PERIOD 22,765 46,135
-------- --------
CASH AND DUE FROM BANKS AT END OF YEARPERIOD $ 17,63948,319 $ 38,204
========= =========49,257
======== ========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid $ 4,8053,136 $ 2,996
========= =========1,180
======== ========
Income taxes paid $ 3,825100 $ 1,520
========= =========710
======== ========
See notes to consolidated financial statements.
4
EAGLE BANCORP, INC.
Consolidated Statements of Changes in Stockholders' Equity
For the Nine Month Periods Ended September 30, 2005 and 2004 (unaudited)
(dollars in thousands)
Accumulated
Additional Other Total
Common Paid Retained Comprehensive Stockholders'
Stock in Capital Earnings Income (Loss) Equity
-------- ---------- -------------------- ------------- ------------- --------------- ------------
Balance, January 1, 2006 $ 72 $ 48,594 $ 16,918 $ (620) $ 64,964
Comprehensive Income
Net Income 1,983 1,983
Other comprehensive income:
Unrealized loss on securities
available for sale (net of taxes) (24) (24)
------------------------------
Total Comprehensive Income (24) (24)
Cash Dividend ($ .07 per share) (507) (507)
Stock based compensation 170 170
Exercise of options for 54,531 shares
of common stock 464 464
Tax benefit on non-qualified options exercise 191 $ 191
----------- ------------- ------------- --------------- ------------
Balance, March 31, 2006 $ 72 $ 49,419 $ 18,394 $ (644) $ 67,241
=========== ============= ============= =============== ============
Balance, January 1, 2005 $ 54 $ 47,014 $ 11,368 $ 98 $ 58,534
Comprehensive Income
Net Income 5,479 5,4791,653 1,653
Other comprehensive income:
Unrealized loss on securities
available for sale (net of taxes) (227) (227)
Less: reclassification adjustment for gains net of
taxes of $109 included in net income (172) (172)
-------- --------(487) (487)
------------------------------
Total Comprehensive Income (399) 5,080` (487) (487)
Cash Dividend ($ .21.07 per share) (1,492) (1,492)(4) (496) (500)
1.3 to one stock split in the form
of a 30% stock dividend 17 (17) Cash paid in lieu of fractional shares (4) (4)-
Exercise of options for 127,16041,468 shares
of common stock 1 1,000 1,001382 382
Tax benefit on non-qualified options
exercise 468 468
-------- -------- -------- -------- --------58 58
----------- ------------- ------------- --------------- ------------
Balance, September 30,March 31, 2005 $ 7271 $ 48,46147,433 $ 15,35512,525 $ (301)(389) $ 63,587
======== ======== ======== ======== ========
Balance, January 1, 2004 $ 54 $ 46,406 $ 6,281 $ 271 $ 53,012
Comprehensive Income
Net Income 3,252 3,252
Other comprehensive income:
Unrealized loss on securities available for sale
(net of taxes) (63) (63)
Less: reclassification adjustment for gains net of
taxes of $74 included in net income (119) (119)
-------- --------
Total Comprehensive Income (182) 3,189
Exercise of options for 48,866 shares of common stock 396 396
-------- -------- -------- -------- --------
Balance, September 30, 2004 $ 54 $ 46,802 $ 9,533 $ 89 $ 56,478
======== ======== ======== ======== ========59,640
=========== ============= ============= =============== ============
See notes to consolidated financial statements.
5
Eagle Bancorp, Inc
Notes to Consolidated Financial StatementsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine and three months ended September 30,March 31, 2006 and 2005 and 2004
(unaudited)
1. BASIS OF PRESENTATION
General - The financial statements of Eagle Bancorp, Inc. (the "Company")
included herein are unaudited; however, they reflect all adjustments
consisting only of normal recurring accruals that, in the opinion of
Management, are necessary to present fairly the results for the periods
presented. The amounts as of December 31, 20042005 were derived from audited
consolidated financial statements. Certain information and note disclosures
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. There have been no significant changes
to the Company's Accounting Policies as disclosed in the 2004Company's Annual
Report.Report on Form 10-K for the year ended December 31, 2005. The Company
believes that the disclosures are adequate to make the information
presented not misleading. The results of operations for the nine and three months
ended September 30, 2005March 31, 2006 are not necessarily indicative of the results of
operations to be expected for the remainder of the year, or for any other
period. Certain reclassifications have been made to amounts previously
reported to conform to the classification made in 2006.
2. NATURE OF BUSINESSOPERATIONS
The Company, through its bank subsidiary, provides domestic financial
services primarily in Montgomery County, Maryland and Washington, DC. The
primary financial services include real estate, commercial and consumer
lending, as well as traditional deposit and repurchase agreement products.
The Bank is also active in the origination and sale of residential
mortgages and small business loans. A new noninterest income business was
organized in the first quarter of 2005, which provides title and attendant
services.
3. CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks, and federal funds sold (items with an original
maturity of three months or less).
4. INVESTMENT SECURITIES
Amortized cost and estimated fair value of securities available for sale
are summarized as follows: (in thousands)
6
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
SEPTEMBER 30, 2005MARCH 31, 2006 Cost Gains Losses Value
- ------------------- --------- ---------- ---------- ------------------------ ---------------------------------------------------------
U. S. Government agency securities $41,705$ 45,445 $ - $ 433 $41,272
GNMA mortgage702 $ 44,743
Mortgage backed securities 18,97520,814 - 323 18,652624 20,190
Federal Reserve and Federal Home Loan Bank stock 2,3653,379 - - 2,3653,379
Other equity investments 1,333 2651,380 262 - 1,598
------- ------- ------- -------
$64,3781,642
---------------------------------------------------------
$ 26571,018 $ 756 $63,887
======= ======= ======= =======262 $ 1,326 $ 69,954
=========================================================
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
DECEMBER 31, 20042005 Cost Gains Losses Value
- ----------------- --------- ---------- ---------- -------------------------------------------------------------------
U. S. Government agency securities $34,478$ 47,652 $ - $ 294 $34,184
GNMA mortgage654 $ 46,998
Mortgage backed securities 23,177 77 188 23,06617,798 - 558 17,240
Federal Reserve and Federal Home Loan Bank stock 1,9562,230 - - 1,9562,230
Other equity investments 4,339 555 2 4,892
------- ------- ------- -------
$63,9501,380 214 12 1,582
---------------------------------------------------------
$ 63269,060 $ 484 $64,098
======= ======= ======= =======214 $ 1,224 $ 68,050
=========================================================
Gross unrealized losses and fair value by length of time that the individual
available securities have been in a continuous unrealized loss position as of
September 30, 2005March 31, 2006 are as follows:
6
Estimated Gross
Fair Less than More than Unrealized
SEPTEMBER 30, 2005 (IN THOUSANDS) ValueGross
Fair 12 months 12 months Unrealized
MARCH 31, 2006 Value Losses
- --------------------------------- --------- --------- --------- ------------------------ ---------------------------------------------------------
U. S. Government agency securities $41,272 $ 16844,743 $ 265301 $ 433
GNMA mortgage401 $ 702
Mortgage backed securities 18,652 33 290 32320,190 69 555 624
Federal Reserve and Federal Home Loan Bank stock 2,3653,379 - - -
Other equity investments 1,5981,642 - - -
------- ------- ------- -------
$63,887---------------------------------------------------------
$ 20169,954 $ 555370 $ 756
======= ======= ======= =======956 $ 1,326
=========================================================
Estimated Less than More than Gross
Fair 12 months 12 months Unrealized
DECEMBER 31, 2005 Value Losses
- ----------------- ---------------------------------------------------------
U. S. Treasury securities
U. S. Government agency securities $ 46,998 $ 218 $ 436 $ 654
Mortgage backed securities 17,240 - 558 558
Federal Reserve and Federal Home Loan Bank stock 2,230 - - -
Other equity investments 1,582 12 - 12
---------------------------------------------------------
$ 68,050 $ 230 $ 994 $ 1,224
=========================================================
The unrealized losses that exist are the result of market changes in market interest
rates since the original purchases. All of the U.S. Government agency
and mortgage backed securitiesbonds are rated AAA. The weighted
average life of debt securities, which comprise 93% of total investment
securities is relatively short at 2.3 years. These factors, coupled with the
Company's ability and intent to hold these investments for a period of time
sufficient to allow for any anticipated recovery in fair value substantiates
that the unrealized losses are temporary in nature.
4.7
5. INCOME TAXES
The Company usesemploys the liability method of accounting for income taxes as
required by Statement of Financial Accounting Standards No. 109 (SFAS109),
"Accounting for Income Taxes." Under the liability method, deferred-tax
assets and liabilities are determined based on differences between the
financial statement carrying amounts and the tax bases of existing assets
and liabilities (i.e., temporary differences) and are measured at the
enacted rates that will be in effect when these differences reverse.
5.6. EARNINGS PER SHARE
Basic earningsEarnings per common share are computed by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted earningsnet income per common share is computed by dividing net income by
the weighted average number of common shares outstanding during the period,
including any potential dilutive common shares outstanding, such as options and
warrants.stock
options. As of September 30, 2005March 31, 2006 there were no option59,250 shares as compared to
54,360 option shares at September 30, 2004 that were excluded from the
diluted net income per share computation because their inclusion would be
anti-dilutive.
Earnings per share for the nine and three month periods ended September
30, 2004, have been adjusted to reflect a 1.3 for one stock split in the form of
a 30% stock dividend affected on February 28, 2005.
6. STOCK BASED7. SHARE-BASED COMPENSATION
The Company has adoptedmaintains the disclosure-only provisions1998 Stock Option Plan (the "1998 Plan"). The 1998
Plan provides for the periodic granting of SFAS No. 123
"Accountingincentive and non-qualifying options
to selected key employees and members of the Board. Options for Stock-Based Compensation" and applies the intrinsic value methodnot more than
1,142,732 shares of recognition and measurement principles of Accounting Principles Board Opinion
No.25 and related interpretations in accounting for its Plan. No compensation
expense related to the Plan was recorded during the nine or three month periods
ended September 30, 2005 and 2004. If the Company had elected to recognize
compensation cost based on fair value at the grant dates for awardscommon stock may be granted under the Plan consistentand the term of
such options shall not exceed ten years. Option awards are made with an exercise
price equal to the market price of the Company's shares at the date of grant.
The option grants generally vest over a period of one to two years.
The Company also maintains the 2004 Employee Stock Purchase Plan (the "ESPP").
Under the ESPP, a total of 195,000 shares of common stock, were reserved for
issuance to eligible employees at a price equal to at least 85% of the fair
market value of the shares of common stock on the date of grant. Grants each
year expire no later than the last business day of January in the calendar year
following the year in which the grant is made.
The Company believes that such awards better align the interests of its
employees with those of its shareholders.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the method prescribed by SFAS No. 123, net incomefollowing weighted average
assumptions used for grants during the quarter ended March 31, 2006 and earnings per share wouldthe year
ended December 31, 2005. For periods prior to 2006, the Company used the average
of the option term and the vesting period to estimate the life of the option.
The options granted in the first quarter of 2006 were for 34,099 shares under
the ESPP which have been changed toa one-year term and vest immediately upon grant, and for
1,500 shares granted under the pro forma amounts as follows1998 Plan.
Quarter ended Year ended
March 31, December 31,
2006 2005
-------------------------------
Dividend yield 1.42% 1.63%
Expected volatility 21.83% 22.94%
Weighted average risk free interest rate 4.45% 4.27%
Expected lives (in years) 1.0 6.5
8
Following is a summary of changes in shares under option (split adjusted) for
the ninequarter and three month periods ended September 30, 2005 and 2004.
7
Stock Based Compensationyear indicated:
Nine Months Three Months
Ended September 30, Ended September 30,
------------------------- -------------------------
(inQuarter ended March Year ended December
31, 2006 31, 2005
----------------------- ------------------------
(shares in thousands) 2005 2004 2005 2004Weighted Weighted
Average Number Average
Number Exercise of Exercise
of Shares Price Shares Price
---------- ------------ --------- --------- --------- ----------------------
Net income, as reported $ 5,479 $ 3,252 $ 2,270 $ 1,000
Less pro forma stock-based compensation expenses
determined under theOutstanding at beginning of period 753 $10.13 690 $7.63
Granted 36 19.66 208 17.42
Exercised (55) (8.51) (137) (8.41)
Cancelled / Expired (11) (13.77) (8) (12.98)
---------- ---------
Outstanding at end of period 723 $10.66 753 $10.13
========== =========
Shares exercisable at period end 686 $10.07 661 $9.06
---------- ---------
Non-vested shares 37 92
---------- ---------
Weighted average fair value method, net of related tax effects (626) (724) (113) (6)
--------- --------- --------- ---------
Pro forma net incomeoptions
granted during the period $4.34 $4.94
------------ ------------
Weighted average remaining contract life 5.2 years 5.5 years
------------ ------------
Weighted Average Weighted
Remaining Average
Contract Life (in Exercise
Range of Exercise Price Number years) Price
- ------------------------------------------- ------------- ------------------- -------------
$ 4,853 4.26-$ 2,528 8.75 365,032 3.7 $5.23
$8.76-$ 2,157 13.26 37,683 6.8 10.48
$13.27-$ 994
========= ========= ========= =========
Net income per share:
Basic - as reported 17.77 226,572 8.2 14.76
$17.78-$ 0.77 $ 0.46 $ 0.32 $ 0.14
Basic - pro forma $ 0.68 $ 0.36 $ 0.30 $ 0.14
Diluted - as reported $ 0.73 $ 0.44 $ 0.30 $ 0.14
Diluted - proforma $ 0.64 $ 0.34 $ 0.28 $ 0.1323.28 94,152 3.4 21.94
-------------
723,439 $10.66
============= =============
7. NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123R (revised 2004), "Share-Based Payment", which is a revisionAs of SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123(R)
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees" and
amends SFAS No. 95, "Statement of Cash Flows". Generally, the approach in SFAS
No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS
No, 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their
fair values. Pro forma disclosure of compensation cost, which is contained in
Note 6 on page 8 is applicable will no longer be permitted. The new standard is
effective for the Company in the first annual reporting period beginning after
June 15, 2005 (i.e. calendar year 2006). The impact of this Statement on the
Company in periods subsequent to December 31, 2005, will dependthere was $128 thousand of total unrecognized
compensation cost related to non-vested shares under the 1988 Plan. There was no
unrecognized compensation cost under the ESPP. The $128 thousand cost is being
amortized ratably over calendar year 2006 based on a number of
factors, includingthe remaining vesting period.
Through March 31, 2006, $32 thousand has been recognized in compensation practices, newcost
related to those grants. In February 2006, the Company granted options for
34,099 shares under the ESPP. These awards modifications and
cancellations of existing awards,were vested 100% at grant and the
applicationfair value of alternative option
pricing assumptions.the awards was expensed in the quarter ended March 31, 2006. This
amount was $138 thousand. In MayFebruary, the Company granted 1,500 shares under
the 1998 Plan.
In total, the Company recognized $170 thousand in share based compensation
expense for the first quarter of 2006 ($0.02 per share) as compared to $0
compensation expense recognized for the first quarter of 2005, as a new
accounting rule under FAS123R was adopted as of January 1, 2006.
Prior to January 1, 2006, share based compensation at the Financial Accounting Standards Board ("FASB") issued
SFAS No. 154 "Accounting Changes and Error Corrections" (Statement 154), which
replaces APB Opinion No. 20 "Accounting Changes" and SFAS No. 3 "Reporting
Accounting ChangesCompany was disclosed
in Interim Financial Statements". This Statement changes the
requirements for and reporting of a changefootnote, as pro-forma information, in accounting principle, and all
voluntary changes inaccordance with generally accepted
accounting principles as well as changes required by an
accounting pronouncement inopposed to recognition within the unusual instance it does not include specific
transition provisions. Specifically, this statement requires retrospective
application to prior periods' financial statements, unless it is impracticable
to determineStatement of
Operations. For the period-specific effects orfirst quarter of 2005, the cumulative effect of the change.
When it is impractical to determine the effects of the change, the new
accounting principle must be applied to the balances of assets and liabilities
as of the beginning of the earliest period for which retrospective application
is practicable and a correspondent adjustment must be made to the opening
balance of retained earnings for that period rather than being reported in an
income statement. When it is impracticable to determine the cumulative effect of
the change, the new principle must be applied as if it were adopted
prospectively from the earliest date practicable. This statement is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 31, 2005. This statement does not change the transition
provisions of any existing pronouncements. The Company does not believe that the
adoption of Statement No. 154 will have a significant impact on its consolidated
statement of income or financial condition.
8
ITEMpro-forma share based
compensation amount was $432 thousand ($0.06 per share).
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITIONManagement's Discussion and Analysis of Financial Condition and Results
of Operation.
The following discussion provides information about the results of
operations, and financial condition, liquidity, and capital resources of the
Company and its subsidiary, the Bank.subsidiaries. This discussion and analysis should be read in
conjunction with the unaudited Consolidated Financial Statements and Notes
thereto, appearing elsewhere in this report and the Management Discussion and
Analysis in the Company's Annual Report on Form 10-K for the year ended December
31, 2004.2005.
9
This report contains forward looking statements within the meaning of
the Securities Exchange Act of 1934, as amended, including statements of goals,
intentions, and expectations as to future trends, plans, events or results of
Company operations and policies and regarding general economic conditions. In
some cases, forward looking statements can be identified by use of such words as
"may", "will", "anticipate", "believes", "expects", "plans", "estimates",
"potential", "continue", "should", and similar words or phases. These statements
are based upon current and anticipated economic conditions, nationally and in
the Company's market, interest rates and interest rate policy, competitive
factors and other conditions which, by their nature, are not susceptible to
accurate forecast, and are subject to significant uncertainty. Because of these
uncertainties and the assumptions on which this discussion and the forward
looking statements are based, actual future operations and results in the future
may differ materially from those indicated herein. Readers are cautioned against
placing undue reliance on any such forward looking statements.
GENERAL
Eagle Bancorp, Inc. is a growth oriented, one-bank holding company
headquartered in Bethesda, Maryland. We provide general commercial and consumer
banking services through our wholly owned banking subsidiary EagleBank, a
Maryland chartered bank which is a member of the Federal Reserve System. We were
organized in October 1997, to be the holding company for the Bank. The Bank was
organized as an independent, community oriented, full service banking
alternative to the super regional financial institutions, which dominate our
primary market area. Our philosophy is to provide superior, personalized service
to our customers. We focus on relationship banking, providing each customer with
a number of services, becoming familiar with and addressing customer needs in a
proactive, personalized fashion. The Bank currently has five offices serving
Montgomery County and three offices in the District of Columbia. In February
2004, theThe Company
executed a lease for a newexpects to open its ninth community banking office to be opened in the second quarter 2006 in
Chevy Chase, Montgomery County, Maryland. In February 2005, Eagle Land Title,
LLC, a Bank subsidiary which performs title and attendant services commenced
operations.
The Company offers a broad range of commercial banking services to our
business and professional clients as well as full service consumer banking
services to individuals living and/or working in the service area. We emphasize
providing commercial banking services to sole proprietors, small and
medium-sized businesses, partnerships, corporations, non-profit organizations
and associations, and investors living and working in and near our primary
service area. A full range of retail banking services are offered to accommodate
the individual needs of both corporate customers as well as the community we
serve. These services include the usual deposit functions of commercial banks,
including business and personal checking accounts, "NOW" accounts and money
market and savings accounts, business, construction, and commercial loans,
equipment leasing, residential mortgages and consumer loans and cash management
services. We have developed significant expertise and commitment as an SBA
lender, have been designated a Preferred Lender by the Small Business
Administration (SBA), and are the largestleading community bank SBA lenders in the
Washington Metropolitan area.D.C. district.
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") and follow general practices within the banking industry.
Application of these principles requires management to make estimates,
assumptions, and judgments that affect the amounts reported in the financial
statements and accompanying notes. These estimates, assumptions and judgments
are based on information available as of the date of the consolidated financial
statements; accordingly, as this information changes, the consolidated financial
statements could reflect different estimates, assumptions, and judgments.
Certain policies inherently have a greater reliance on the use of estimates,
assumptions and judgments and as such have a greater possibility of producing
results that could be materially different than originally reported. Estimates,
assumptions, and judgments are necessary when assets and liabilities are
required to be recorded at fair value, when a decline in the value of an asset
not carried on the financial statements at fair value warrants an impairment
write-down or valuation reserve to be established, or when an asset or liability
needs to be recorded contingent upon a future event. Carrying assets and
liabilities at fair value inherently results in more financial statement
volatility. The fair values and the information used to record valuation
adjustments for certain assets and liabilities are based either on quoted market
prices or are provided by other third-party sources, when available.
910
The allowance for credit losses is an estimate of the losses that may
be sustained in our loan portfolio. The allowance is based on two principles of
accounting: (a) Statement on Financial Accounting Standards ("SFAS") 5,
"Accounting for Contingencies", which requires that losses be accrued when they
are probable of occurring and are estimable and (b) SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan", which requires that losses be accrued when
it is probable that the Company will not collect all principal and interest
payments according to the contractual terms of the loan. The loss, if any, can
be determined by the difference between the loan balance and the value of
collateral, the present value of expected future cash flows, or values
observable in the secondary markets.
Three components comprise our allowance for credit losses: a specific
allowance, a formula allowance and a nonspecific or environmental factors
allowance. Each component is determined based on estimates that can and do
change when the actual events occur.
The specific allowance allocates an allowance to identified loans. A
loan for which reserves are individually allocated may show deficiencies in the
borrower's overall financial condition, payment record, support available from
financial guarantors and or the fair market value of collateral. When a loan is
identified as impaired, a specific reserve is established based on the Company's
assessment of the loss that may be associated with the individual loan.
The formula allowance is used to estimate the loss on internally risk
rated loans, exclusive of those identified as requiring specific reserves. Loans
identified in the risk rating evaluation as special mention, substandard, doubtful and loss, are
segregated from non-classified loans. Each loan type is assigned an allowance factor based
on management's estimate of the risk, complexity and size of individual loans
within a particular category. Classified loans are assigned higher allowance
factors than non-classified loans due to management's concerns regarding
collectibility or management's knowledge of particular elements regarding the
borrower.based on an impairment analysis. Allowance factors relate to the level
of the internal risk rating.
The nonspecific or environmental factors allowance is used toan estimate theof
potential loss of the remaining loans (those not identified as either requiring
specific reserves or having classified risk ratings). The loss estimates are
based on more global factors, incident to the overall portfolio, such as delinquency trends, loss history, trends
in the volume and size of individual credits, effects of changes in lending
policy, the experience and depth of management, national and local economic
trends, any concentrations of credit, the quality of the loan review system and
the effect of external factors such as competition and regulatory requirements.
The environmental factors allowance captures losses whose impact on the
portfolio may have occurred but have yet to be recognized in either the formula or specific allowance.formula.
Management has significant discretion in making the judgments inherent
in the determination of the provision and allowance for credit losses,
including, in connection with the valuation of collateral, a borrower's
prospects of repayment, and in establishing allowance factors on the formula
allowance and nonspecific allowance components of the allowance. The
establishment of allowance factors is a continuing evaluation, based on
management's ongoing assessment of the global factors discussed above and their
impact on the portfolio. The allowance factors may change from period to period,
resulting in an increase or decrease in the amount of the provision or
allowance, based upon the same volume and classification of loans. Changes in
allowance factors will have a direct impact on the amount of the provision, and
a related, after tax effect on net income. Errors in management's perception and
assessment of the global factors and their impact on the portfolio could result
in the allowance not being adequate to cover losses in the portfolio, and may
result in additional provisions or charge-offs. Alternatively, errors in
management's perception and assessment of the global factors and their impact on
the portfolio could result in the allowance being in excess of amounts necessary
to cover losses in the portfolio, and may result in lower provisioning in the
future. For additional information regarding the allowance for credit losses,
refer to the discussion under the caption "Allowance for Credit Losses" below.
10
RESULTS OF OPERATIONS OVERVIEW
The Company reported net income of $5.5$2.0 million for the ninethree months
ended September 30, 2005,March 31, 2006, as compared to net income of $3.3$1.7 million for the ninethree
months ended September 30, 2004. EarningsMarch 31, 2005, an increase of 20%. Income per basic share was
$0.77$0.27 for the nine
month periodthree months ended September 30, 2005,March 31, 2006, as compared to $0.46$0.23 same
period in 2005. Income per diluted share was $0.26 for the three months ended
March 31, 2006, as compared to $0.22 for the same period in 2004. Earnings per diluted share was $0.73 for the nine months ended
September 30, 2005, as compared to $0.44 for the same period in 2004. For the
three months ended September 30, 2005, the Company reported net income of $2.3
million as compared to $1.0 million for the same period in 2004. Earnings per
basic share was $.32 and $.30 per diluted share for the three months ended
September 30, 2005, as compared to $.14 per basic and diluted share for the same
period in 2004.
Earnings per share for the three and nine months ended September 30,
2004 have been adjusted to reflect a 1.3 for one stock spilt in the form of a
30% stock dividend affected on February 28, 20052005.
11
The Company had an annualized return on average assets of 1.23%1.20% for
both the first three months of 2006 and 2005 and an annualized return on average
equity of 12.07%12.08% for the first ninethree months of 2005,2006, as compared to returnsa return on average assets and
average equity of 0.92% and 7.91%,
respectively,11.32% for the same ninethree months of 2004.2005. The return on equity
increase resulted from additional leveraging of the equity position. The ratio
of average equity to average assets declined from 10.57% for the first quarter
of 2005 to 9.93% for the first quarter of 2006. As discussed below, the capital
ratios of the Bank and Company remain above well capitalized levels.
The increase in net income for the ninethree months ended September 30, 2005March 31, 2006 as
compared to the same period in 20042005, can be attributed substantially to an
increase of 49%21% in net interest income, resulting from an increase of 28%20% in
average earning assets and ana modest increase in the net interest spread of 57 basis
points and the net interest margin of 74three
basis points between the comparable periods.periods to 5.01%. The net interest margin
increase was due to the increased value of non-interest funding sources during a
period of substantial increases in market interest rates. Since June 2004,March 2005, the
Federal Reserve Bank has increased the federal funds target rate by 275 basis points2.00% to
3.75%4.75% in eleveneight interest rate increases of 25 basis points. Since the Company's
non-interest funding sources comprise approximately 30% of average earning
assets, this effect has been substantial. The value of non-interest sources
(defined as the difference between the net interest margin and the net interest
spread) increased to 89 basis points each. The impactfor the first quarter of these2006 from 40 basis
points for the first quarter of 2005, while the average growth of noninterest
sources funding earning assets amounted to $26 million or 17% between the first
quarter of 2006 and 2005. While the net interest rate increasesmargin has contributedincreased due to the
improvementfavorable position of noninterest funding sources, the net interest spread
(defined as the difference between the yield on earning assets and the cost of
interest bearing liabilities) declined for the first quarter of 2006 as compared
to the same period in the Company's margin in the past several
quarters.2005 from 4.58% to 4.12%. While the averageinterest rate on
earning assets for the nine month period has risen by 102125 basis points from 5.23%for the first quarter of 2006 as
compared to 6.25%,2005, the cost of interest bearing liabilities has increased by only 45171
basis points, from 1.31%due to 1.76%.
Additionally, the growth inproportion of average noninterest bearingtime deposits funding sources for the
nine months ended September 30, 2005 as compared to 2004 has been $49 million or
32%. This significant growth in noninterest bearing funding sources has
increased the benefit of noninterest sources fundingaverage
earning assets from 35
basis pointsincreasing to 31% for the first nine months in 2004 to 52 basis pointsquarter of 2006 from 27% for the
nine
months ended September 30,first quarter of 2005. Thus, theThe Company has been ableacquired these higher levels of average
time deposits to increasefund a portion of its primary source of funds (core deposits) at rates which have allowed its net
interest spread and margin to increaseaverage loan growth in the first nine monthsquarter
of 2005 as
compared to the same period in 2004.2006 over 2005. As a result of competitive pressures and growth objectives,
the rates paid on interest bearing deposits which
have not increased as much or as rapidly asand interest rates on earning assets,bearing liabilities may
result in a higher cost of funding in future periods, which may not be offset by
further increases in interest rates on earning assets. As a result of such
potential margin compression, the Company's earnings could be adversely
impacted.affected.
Loans, which generally have higher yields than securities and other
earning assets, increased from 78%81% of average earning assets in the first ninethree
months of 20042005 to 83%86% of average earning assets for the same period of 2005.2006.
Investment securities forin the first nine monthsquarter of 20052006 amounted to 13%11% of average
earning assets as compared to 16%12% for the first ninethree months in 2004.2005. This
decline in the proportion of investment securities was directly related to average loan growth over the past twelve month
period exceeding the growth of average deposit and other funding sources.
The provision for credit losses was $1.3 million$115 thousand for the first nine
monthsquarter
in 20052006 as compared to $457$417 thousand for the same period in 2004.2005. This increasedecrease
was attributable to the lower rate of growth in the loan portfolio in the first
nine
monthsquarter of 2006 which was 1%, as compared to the first quarter of 2005, which
growth was very favorable.5%. As discussed in the section on Allowance for Credit Losses, the
Company had $55just $15 thousand of net charge-offs in the first nine monthsquarter of 2005.2006.
This compared to net recoveries on previously charged-off loans of $39$6 thousand
for the first ninethree months of 2004.2005. At September 30, 2005,March 31, 2006, the allowance for credit
losses was $5.5$6.1 million or 1.10% of total loans, as compared to $4.7 million or
1.07% of total loans at March 31, 2005 and $6.0 million or 1.09% of total loans
as compared to $4.2
million or 1.15% of total loans at September 30, 2004 and $4.2 million or 1.02%
of total loans at December 31, 2004. The provision for credit losses was $424
thousand for the three months ended September 30, 2005 as compared2005.
Noninterest income decreased 19%, to $227
thousand for the same period in 2004, the increase attributable primarily to
growth in the level of outstanding loans.
11
Total noninterest income was $3.2 million for the first nine months of
2005 as compared to $2.6 million for 2004, a 22% increase. These amounts include
net investment gains of $281$840 thousand for the first ninethree
months of 2005 and $193
thousand in 2004. Excluding gains on the sale of investment securities,
noninterest income was $2.92006, from $1.0 million in 2005 versus $2.4 million for 2004, an
increasethe same period of 20%. This increase2005. The decline was
dueattributed primarily to increasedlower amounts of gains on the sale of SBA loans and SBA service fees which
amounted to $881$138 thousand forin the first nine months in 2005 versus $454 thousand for 2004. For the three months ended
September 30, 2005, total noninterest income was $1.2 millionquarter of 2006 as compared to $697$385
thousand for the same period in 2004. These amounts include net investment
gains of $269 thousand for2005. Activity in SBA loan sales to secondary
markets can vary widely from quarter to quarter. EagleBank has been recognized
as the three months ended September 30, 2005 as compared
to net investment losses of $60 thousand for the same quarterleading community bank SBA lender in 2004. Excluding
gains (losses) on the sale of investment securities, noninterest income was $970
thousand for the third quarter of 2005, versus $757 thousand for the third
quarter of 2004, an increase of 28%. This increase was due substantially to an
increaseits marketplace and continued
emphasis in this business is anticipated. The decline in gains on the sale of
SBA loans was partially offset by an increase in deposit service charges, which
amounted to $324 thousand in the initial quarter of 2006, as compared to $269
thousand for the same period in 2005, a 20% increase. These service charge
increases are associated primarily with new relationships acquired in the first
quarter of 2006. Gains on the sale of residential mortgage loans were $38
thousand for the first quarter of 2006, as compared to $110 thousand for the
same period in 2005. The Company is in the process of renewing its efforts to
expand residential mortgage lending and associated sale of these assets on a
servicing
12
released basis. Other noninterest income increased to $340 thousand in the first
quarter of 2006 as compared to $275 thousand for the same quarter in 2005, a 24%
increase, due primarily to higher loan prepayment and commitment fees.
NoninterestNon-interest expenses increased from $11.1 million in the first nine
months of 2004 to $14.1were $5.2 million for the first nine monthsquarter of 2006,
as compared to $4.5 million for 2005, ana 17% increase. The primary reasons for
this increase of 27%. The increase was attributable primarily towere increases in personnelstaff levels and related benefitpersonnel cost,
director fees, $170 thousand of costs associated with share based compensation
under new accounting expensing rules, occupancy cost increases, higher amounts of incentive based compensation,
increased premises and equipment expenses costs, due in part to new banking
offices, and to higher marketing, outside data
processing, licensing, and other professional fees associated with a larger
organization. In spiteThe efficiency ratio, which is a measure of higher amountsthe level of
noninterest expenses to revenue, was only slightly higher in the Company's stronger growth in revenuefirst quarter
of 2006 at 60.14%, as compared to noninterest
expenses resulted in the efficiency ratio improving in the first nine months of
2005 to 58.52% as compared to 66.74% for the first nine months in 2004. For the
three months ended September 30, 2005, total noninterest expenses were $4.7
million, as compared to $4.0 million59.56% for the same period in 2004, an increase2005. The
company emphasizes the efficiency ratio as a measure of 19%. This increase was due to the same factors mentioned above which affected
the increase for the nine month period.noninterest expense
control.
The combination of increases in net interest income, attributedprimarily from
increased amounts of average loans in the first quarter of 2006 as compared to
both
increased volume and favorable interest rate effects and increases in
noninterest income, offset in part by increases in the2005, a reduced provision for credit losses due to a lower rate of growth in
loans in the first three months of 2006, lower amounts of noninterest income and
increases in noninterest expenses, resulted in significantan improvement in netreported income
for the first nine monthsquarter of 20052006 versus 2004 of 68%2005.
Net Interest Income and for the three months ended September 30, 2005 versus 2004 of
127%.
The following table sets out the annualized returns on average assets, returns
on average equity and equity to assets (average) for the nine months ended
September 30, 2005 and 2004 and the year ended December 31, 2004:
September September December
2005 2004 2004
--------- --------- --------
Return on average assets 1.23% 0.92% 1.04%
Return on average equity 12.07% 7.91% 9.16%
Average equity to average assets 10.22% 11.68% 11.38%
NET INTEREST INCOME AND NET INTEREST MARGINNet Interest Margin
Net interest income is the difference between interest income on
earning assets and the cost of funds supporting those earning assets. Earning assets are
composed primarily of loans and investment securities. The cost of funds
represents interest expense on deposits, customer repurchase agreements and
other borrowings, which comprise federal funds purchased and advances from
the Federal Home Loan Bank of Atlanta.borrowings. Noninterest bearing deposits and capital are other components
representing funding sources.sources, which factors have been significant in the first
quarter of 2006 versus 2005 (refer to discussion above under Results of
Operations). Changes in the volume and mix of assets and funding sources, along
with the changes in yields earned and rates paid, determine changes in net
interest income. Net interest income for the first ninethree months of 20052006 was $20.9$7.8
million compared to $14.0$6.5 million for the first ninethree months of 2004,2005, a 49%21%
increase.
For the three months ended September
30, 2005, net interest income amounted to $7.5 million, as compared to $5.0
million for the same period in 2004, also a 49% increase.
12
The following table below labeled "Average Balances, Interest Yields and Rates
and Net Interest Margin" presents the average balances and rates of the various
categories of the Company's assets and liabilities. Included in the table is a
measurement of interest rate spread and margin. Interest spread is the
difference (expressed as a percentage) between the interest rate earned on
earning assets less the interest expense on interest bearing liabilities. While
net interest spread provides a quick comparison of earnings rates versus cost of
funds, management believes that the net interest margin provides a better measurement of
performance, since the net interest marginperformance. Margin includes the effect of noninterest bearing sources in its
calculation which are significant factors in
the Company's financial performance. The net interest marginand is net interest income (annualized) expressed as a percentage of average
earning assets.
EAGLE BANCORP, INC.13
AVERAGE BALANCES, INTEREST YIELDS AND RATES, AND NET INTEREST MARGIN
(dollars in thousands)
------------------------------------------------------------------------
Nine--------------------------------------------------------------------------
Three Months Ended September 30,
------------------------------------------------------------------------March 31
--------------------------------------------------------------------------
2006 2005
2004
--------------------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
----------------------------------------------------------------------------------------------------------- -----------------------------------
ASSETS:
Interest earning assets:
Interest bearing deposits with other banks and
other short-term investments $ 13,9653,146 $ 331 3.17%30 3.87% $ 5,5717,280 $ 98 2.35%42 2.34%
Loans (1) 463,576 23,808 6.87% 341,559 15,160 5.93%545,594 10,328 7.68% 429,095 6,997 6.61%
Investment securities available for sale 71,399 1,761 3.30% 70,011 1,636 3.12%67,771 671 4.02% 63,536 487 3.11%
Federal funds sold 10,016 220 2.94% 20,510 241 1.57%
------------------- --------------------17,960 195 4.40% 27,380 184 2.73%
------------------------ ----------------------
Total interest earning assets 558,956 26,120 6.25% 437,651 17,135 5.23%
------------------- --------------------
Noninterest634,471 11,224 7.18% 527,291 7,710 5.93%
------------------------ ----------------------
Total noninterest earning assets 39,362 35,58742,222 37,065
Less: allowance for credit losses 4,822 3,881
-------- --------6,029 4,375
------------- ------------
Total noninterest earning assets 34,540 31,706
-------- --------36,193 32,690
------------- ------------
TOTAL ASSETS $593,496 $469,357
======== ========$ 670,664 $559,981
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing transaction $ 59,38987,419 $ 79 0.18%36 0.17% $ 49,51252,278 $ 50 0.13%19 0.15%
Savings and money market 135,147 1,487 1.47% 118,293 854 0.96%119,248 1,142 3.88% 136,155 338 1.01%
Time deposits 164,687 3,242 2.63% 118,665 1,785 2.01%
Total interest bearing deposits 359,223 4,808 1.79% 286,470 2,689 1.25%194,458 1,781 3.71% 144,617 784 2.20%
Customer repurchase agreements and federal
funds purchased 28,35632,567 189 0.89% 16,647 61 0.49%2.35% 27,754 33 0.48%
Other short-term borrowings 6,504 187 3.83% 6,248 112 2.39%
Long term borrowings - - 9,128 266 3.89%
------------------- --------------------14,611 232 6.44% 6,756 61 3.66%
------------------------ ----------------------
Total interest bearing liabilities 394,083 5,184 1.76% 318,493 3,128 1.31%
------------------- --------------------448,303 3,380 3.06% 367,560 1,235 1.35%
------------------------ ----------------------
Noninterest bearing liabilities:
Noninterest bearing demand 136,095 94,396152,344 130,254
Other liabilities 2,650 1,642
-------- --------3,390 2,959
------------- ------------
Total noninterest bearing liabilities 138,745 96,038155,734 133,213
Stockholders' equity 60,668 54,826
-------- --------66,627 59,208
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $593,496 $469,357
======== ========$ 670,664 $559,981
============= ============
Net interest income $ 20,936 $ 14,007
======== =========7,844 $6,475
=========== ==========
Net interest spread 4.49% 3.92%4.12% 4.58%
Net interest margin 5.01% 4.27%4.98%
(1) includesIncludes Loans held for Sale
1314
ALLOWANCE FOR CREDIT LOSSESAllowance for Credit Losses
The provision for credit losses represents the amount of expense
charged to current earnings to fund the allowance for credit losses. The amount
of the allowance for credit losses is based on many factors which reflect
management's assessment of the risk in the loan portfolio. Those factors include
economic conditions and trends, the value and adequacy of collateral, volume and
mix of the portfolio, performance of the portfolio, and internal loan processes
of the Company and Bank.
Management has developed a comprehensive analytical process to monitor
the adequacy of the allowance for credit losses. This process and guidelines
were developed utilizing among other factors, the guidance from Federalfederal banking
regulatory agencies. The results of this process, in combination with
conclusions of the Bank's outside loan review consultant, support management's
assessment as to the adequacy of the allowance at the balance sheet date. Please
refer to the discussion under the caption "Critical Accounting Policies" for an
overview of the methodology management employs on a quarterly basis to assess
the adequacy of the allowance and the provisions charged to expense. Following are tables ofAlso, refer
to the following table which reflects the comparative charge-offs and recoveries
data as
well as information on the Company's non-performing and potential problem loans.of prior loan charge-offs information.
During the first ninethree months of 2005,2006, a provision for credit losses
was made in the amount of $1.3 million$115 thousand and the allowance for credit losses
increased $1.3 million,$100 thousand, including the impact of a modest amount of$15 thousand in net credit losses of
$55 thousandcharge-offs
during the period. The provision for credit losses of $1.3 million$115 thousand in the first
ninethree months of 20052006 compared to a provision for credit losses of $457$417 thousand
in the first ninethree months of 2004.2005. The higherlower level of the provision in 20052006 is
primarily attributable primarily to significanta slower rate of loan growth in the loan portfolio in
the first nine months of 2005. For the three months ended September
30, 2005, a provision for credit losses was made in the amount of $424 thousand,
as compared to $227 thousand for the same period in 2004, the higher provision
being due to growth in the portfolio in the three months ended September 30,
2005 and to accommodate a higher level of net-charge offs. For the third quarter of 2005, net charge-offs amounted to $83 thousand as compared to $8 thousand for
the same period in 2004.2006.
At September 30, 2005,March 31, 2006, the Company had $211 thousand$6.2 million of loans classified as
nonaccrual as compared to $156$491 thousand at December 31, 20042005 and $2.4 million$151 thousand
at September 30, 2004, which included one large credit of $2.2
million which was collected in full in the fourth quarter of 2004.March 31, 2005. The Company had no restructured loans or real estate owned at September 30, 2005,either, March 31,
2006, December 31, 20042005 or September 30, 2004.March 31, 2005. Significant variation in these
amounts may occur from period to period because the amount of nonperforming
loans depends largely on the condition of a small number of individual credits
and borrowers.borrowers relative to the total loan portfolio. The Company had no other
real estate owned (OREO) properties at March 31, 2006, December 31, 2005 or
March 31, 2005. The balance of impaired loans was $211$409 thousand at September 30, 2005,March 31,
2006, with specific reserves against those loans of $27$260 thousand, compared to
$156$151 thousand at DecemberMarch 31, 20042005 with specific reserves of $31$57 thousand. The
significant increase in non-accrual loans in the first quarter of 2006 was due
principally to two real estate loans placed on non-accrual status in first
quarter, which management has been monitoring closely, believes are well secured
and for which no principal loss is anticipated. The allowance for creditloan losses
represented 1.09%1.10% of total loans at September 30, 2005,March 31, 2006 as compared to 1.02%1.09% at
December 31, 2004.2005. This increase in the ratio of the allowance in the first
quarter was due to ana slight increase in
the allocation factors contained in the allowance methodology and to
modifications in the environmental factors allowance.of the
non-specific reserve component related to various factors including potential
impacts of higher interest rates on debt service capacity and on real estate
values.
As part of its comprehensive loan review process, the Company's Board
of Directors and the Bank'sBank Director's Loan Committee and or Board of Director's
Credit Review CommitteeCommittees carefully evaluates loans which are past due 30 days or
more. The Committee(s) make a thorough assessment of the conditions and
circumstances surrounding each delinquent loan. The Bank's loan policy requires
that loans be placed on nonaccrual if they are ninety days past due, unless they
are well secured and in the process of collection.
The maintenance of a high quality loan portfolio, with an adequate
allowance for creditpossible loan losses will continue to be a primary management
objective ofin the Company.
1415
The following table sets forth activity in the allowance for credit
losses for the periods indicated.
Three Months Ended
(dollars in thousands) Nine Months ended
September 30,March 31,
-------------------------
2006 2005
2004
------- ----------------- ---------
Balance at beginning of year $ 4,2405,985 $ 3,6804,240
Charge-offs:
Commercial (82) (95)- -
Real estate - commercial - -
Construction - -
Home Equityequity - -
Other consumer (11) (18)15 -
------- -------
Total (93) (113)15 0
------- -------
Recoveries:
Commercial 38 152- 6
Real estate - commercial - -
Construction - -
Home Equityequity - -
Other consumer - -
------- -------
Total 38 152- 6
------- -------
Net (charge-offs) recoveries (55) 39(15) 6
------- -------
Additions charged to operations 1,311 457115 417
------- -------
Balance at end of period $ 5,4966,085 $ 4,1764,663
======= =======
Annualized ratio of net
charge-offs during the period to
average loans outstanding during
the period .01% (.01)%
------- -------
The following table reflects the allocation of the allowance for credit
losses at the dates indicated. The allocation of the allowance to each category
is not necessarily indicative of future losses or charge-offs and does not
restrict the use of the allowance to absorb losses in any category.
ALLOCATIONS
As of September 30,March 31, As of December 31,
-------------------------------------------------(dollars in thousands) 2006 2005 2004
-------------------------------------------------
Amount % (1) Amount % (1)
-------------------------------------------------------------------------------------------------------
Commercial $ 2,455 23%2,484 22% $ 1,963 25%2,594 22%
Real estate - commercial 2,279 51% 1,426 46%2,578 53% 2,395 52%
Real estate - residential mortgage - - 105 2%34 0% 48 0%
Construction - commercial and residential 491664 15% 431 14%602 16%
Home equity 169 10% 223 11%182 9% 176 9%
Other consumer 9983 1% 5884 1%
Unallocated 3 34
-------------------------------------------------60 86
------------------------------------------------------
Total Loansloans $ 5,4966,085 100% $ 4,2405,985 100%
=======================================================================================================
(1) Represents the percent of loans in each category to total loans
and not the
allowance allocations
1516
NON-PERFORMING ASSETSNonperforming Assets
The Company's non-performingnonperforming assets, which are comprised of loans
delinquent 90 days or more, non-accrual loans, restructured loans and other real
estate owned, totaled $211$6.2 million at March 31, 2006 compared to $151 thousand
at September 30, 2005 compared to $2.6
million at September 30, 2004 and $156 thousand at DecemberMarch 31, 2004.2005. The percentage of non-performingnonperforming loans to total loans was
0.04%1.12% at September 30,
2005,March 31, 2006, compared to 0.17%0.03% at September 30, 2004, and 0.04% at DecemberMarch 31, 2004.2005.
The following table shows the amounts of non-performingnonperforming assets at the
dates indicated.
September 30,March 31, December 31
--------------------- ----------------------------------- --------------
(dollars in thousands) 2006 2005 2004 2004
------ ------ -----------2005
---------- ---------- --------------
Nonaccrual Loans:Loans
Commercial $ 211416 $ 380151 $ 156362
Consumer 129 - - -129
Real estate 5,610 - 2,200 -
Accrual loans-past due 90 days:days
Commercial - - -
Consumer - - -
Real estate - - -
Restructured loans - - -
Real estate owned - - -
------ ------------ ---------------------- ---------- --------------
Total non-performing assets $ 2116,155 $ 2,580151 $ 156
====== ============ ============491
========== ========== ==============
As noted above, the Company experienced an increase in the level of
nonaccrual loans in the first quarter of 2006 resulting primarily from the
addition of two commercial loans, both of which are secured by real estate. The
loans were placed on nonaccrual due to past due status, construction cost
overruns, and/or delays in completion of the associated projects. The Company
continues to monitor these credits. Based upon the Company's review of third
party appraisals of the underlying collateral, the addition of supplementary
collateral, guarantors, and additional equity contributions, the Company
believes it will not incur a principal loss in connection with the resolution of
these loans.
At September 30, 2005,March 31, 2006, there were $626 thousandan additional $1.1 million of performing
loans considered potential problem loans, defined as loans which are not
included in the 90 day past due, nonaccrual or restructured categories, but for which
known information about possible credit problems causes management to be
uncertain as to the ability of the borrowers to comply with the present loan
repayment terms which may in the future result in disclosure in the past due,
non-accrualnonaccrual or restructured loan categories.
NONINTEREST INCOMENoninterest Income
Noninterest income consists primarily of deposit account service
charges, gains on the sale of SBA and residential mortgage loans, investment gains and losses, other
noninterest loan fees, income from bank owned life insurance ("BOLI") and other
service fees. For the ninethree months ended September 30, 2005,March 31, 2006, noninterest income was
$3.2 million.$840 thousand. This compared to $2.6$1.0 million of noninterest income for the ninethree
months ended September 30, 2004.March 31, 2005, a decline of 19% due primarily to a lower amount of
gains on the sale of SBA loans. There were no investment gains or losses in
either the first quarter of 2006 or 2005.
The Company is an active originator of SBA loans and its current
practice is to sell the insured portion of those loans at a premium. Income from
this source was $729$138 thousand for the ninethree months ended September 30, 2005March 31, 2006 compared
to $346$385 thousand for the ninethree months ended September 30, 2004,March 31, 2005. Activity in SBA loan
sales to secondary markets can vary widely from quarter to quarter. EagleBank
has been recognized as the Company emphasized this lending activityleading community bank SBA lender in the first nine months of 2005.its marketplace
and continued emphasis is anticipated. The Company also originates residential
mortgage loans on a pre-sold basis, servicing released. Sales of these mortgage
loans yielded gains of $195$38 thousand in the first ninethree months of 20052006 compared
to $215$110 thousand in the same period in 2004. Net investment gains amounted2005. The Company is in the
17
process of renewing its efforts to $281 thousand for the first nine monthsexpand residential mortgage lending and
associated sale of 2005 as compared to $193 thousand for the same period in 2004.these assets on a servicing released basis. Income for the
ninethree months ended September 30, 2005 included $866March 31, 2006 was $324 thousand from deposit account service
charges, $153$62 thousand from SBA loan service fees and $301$97 thousand from BOLI,
versus $1.0 million$269 thousand from deposit account service charges, $109$46 thousand from SBA
service fees and $280$101 thousand from BOLI for the ninethree months ended September 30, 2004.March 31,
2005. Other noninterest income which comprisesamounted to $181 thousand for the first three
months of 2006, as compared to $127 thousand in the first quarter of 2005. The
increase in deposit services was primarily related to new relationships. The
increase in other service
charges, title and settlement fees, andnon-interest income was due primarily to loan prepayment and
commitment fees,
amounted to $640 thousand for the first nine months of 2005, as compared to $447
thousand in the first nine months of 2004, the increase due in part to income
from Eagle Land Title, which commenced operations in 2005. The decline in
deposit service chargesfees.
Noninterest Expense
Noninterest expense was primarily related to a decline in overdraft fees.
16
Noninterest income was $1.2$5.2 million for the three months ended September 30, 2005March
31, 2006 compared to $697 thousand$4.5 million for the three months ended September 30, 2004,March 31, 2005, an
increase of 78%. These amounts include net investment
gains of $269 thousand for the three months ended September 30, 2005 as compared
to net investment losses of $60 thousand for the same quarter in 2004. Excluding
gains (losses) on the sale of investment securities, noninterest income was $970
thousand for the third quarter of 2005, versus $757 thousand for the third
quarter of 2004, an increase of 28%. This increase was due substantially to an
increase in gains on the sale of SBA loans and loan prepayment and commitment
fees.
NONINTEREST EXPENSES
Noninterest expense was $14.1 million for the nine months ended
September 30, 2005 compared to $11.1 million for the nine months ended September
30, 2004, an increase of 27%17%.
Salaries and benefits were $7.7$3.0 million for the first nine monthsquarter of 2005,2006,
as compared to $6.0$2.6 million for 2004,2005, a 28%16% increase. This increase was due to
staff additions and related benefitpersonnel costs, as well as to increases in
incentiveshare based
compensation. At September 30, 2005compensation under new accounting expensing rules which commenced January 1,
2006, and which amounted to $170 thousand for the Bank had 138 full time
equivalent employeesfirst three months of 2006 as
compared to 111no expense in 2005. Refer to Note 6 above under "Share Based
Compensation" for further details on this expense. At March 31, 2006, the
Company staff numbered approximately 149, as compared to 130 at September 30, 2004.March 31, 2005.
Premises and equipment expenses amounted to $2.5 million$869 thousand for the
first
nine months of 2005quarter ended March 31, 2006 versus $2.0 million$801 thousand for the same period in 2004.2005.
This increase of 25%8% was due in part to a full quarter's operation of a new banking
office opened in late January 2005
and one opened in the second quarter of 2004 and to ongoing operating expense increases
associated with the Company's facilities, all of which are leased, and to
increased equipment costs.
Marketing and advertisingAdvertising costs increased from $212$96 thousand in the nine monthsquarter ended
September 30, 2004March 31, 2005 to $344$119 thousand in the same period in 2005,2006, the increases
associated primarily with increased advertising for deposit
products and to special marketing efforts.ongoing product promotions.
Outside data processing costs were $574$228 thousand for the first nine
months of 2005,initial
quarter in 2006, as compared to $469$181 thousand in 2004,2005, or an increase of 25%.
The increase was due to increases in numbers of accounts and services.
Other expenses, increased from $837 thousand in the first quarter of
2005 to $1.0 million for the three months ended March 31, 2006, or an increase
of 22%. The
higher costs were due to special charges associated with the Company's
conversion of certain core processing systems to new operating platforms and to
higher processing volumes.
Other expenses, increased from $2.4 million in the first nine months of
2004 to $3.0 million for the nine months ended September 30, 2005. The major components of costs in this category include professional
fees, including audit and consulting fees,accounting, ATM expenses, telephone, courier,
printing, business development, office supplies, charitable contributions,
director fees and dues. These costsFor the first quarter of 2006, as compared to 2005, the
significant increases in this category were primarily director fees and special
audit engagement services.
Income Tax Expense
The Company's ratio of income tax expense to pre-tax income (termed
effective tax rate) increased by 25%to 40.7% in the first nine monthsquarter of 20052006 as compared
to 2004.
Noninterest expenses were $4.7 million37.0% for the three months ended
September 30, 2005 compared to $4.0 million for the three months ended September
30, 2004, an increase of 19%. The same factors which contributed to increased
noninterest expense for the nine month period mentioned above also contributed
to the increase in noninterest expenses for the three months ended September 30,
2005, as compared to the same period in 2004.2005. This increase was due to the expensing of
stock based compensation in the first quarter of 2006, which is non-deductible,
and to the use of a 35% marginal federal income tax rate in 2006 as compared to
a 34% marginal federal income tax rate in 2005.
FINANCIAL CONDITION
OVERVIEWSummary
At September 30, 2005, totalMarch 31, 2006, assets were $647.0$694.6 million, loans were $504.3$552.4
million, deposits were $545.6$571.2 million and stockholders' equity was $63.6$67.2
million. As compared to December 31, 2004,2005, assets grew by $93.6$22.3 million (17%(3.3%),
loans by $88.8$3.1 million (21%(1.0%), deposits by $83.3$2.4 million (18%(1.0%) and stockholders'
equity by $5.1$2.3 million (9%(3.5%).
18
The Company paid a cash dividend of $0.07$ .07 per share for the third
quarter of 2005, which dividends commenced in both the first
quarter of 2005.
17
LOANS2006 and 2005
Loans
Loans, net of amortized deferred fees and costs, at September 30, 2005,March 31, 2006,
December 31, 20042005 and September 30, 2004March 31, 2005 by major category are summarized by major type as
follows:below:
As of September 30,March 31, As of December 31, As of September 30,
------------------------------------------------------------------------
2005 2004 2004
------------------------------------------------------------------------March 31,
(dollars in thousands) 2006 2005 2005
---------------------------------------------------------------------------------
Amount % Amount % Amount %
---------------------------------------------------------------------------------------------------------------------------------------------------------
Commercial $ 115,140 23%120,435 22% $ 101,911118,928 22% $ 111,055 25%
$ 85,685 24%
Real estate mortgage - commercial (1) 259,496 51% 189,708 46% 171,110 47%
Real289,377 53% 284,667 52% 209,210 48%
eal estate mortgage - residential mortgage 1,627 - 9,230 2% 1,4801,135 0% 1,130 0% 1,366 0%
Construction - commercial and residential 75,38085,167 15% 62,745 14% 59,57490,035 16% 63,636 15%
Home equity 48,474 10% 49,63252,471 9% 50,776 9% 47,360 11% 42,961 12%
Other consumer 4,1733,790 1% 2,2833,676 1% 3,0144,490 1%
---------------------------------------------------------------------------------------------------------------------------------------------------------
Total loans 504,290552,375 100% 415,509$ 549,212 100% 363,824437,117 100%
=========== ========== =========
Less: Allowance for Credit Losses (5,496) (4,240) (4,176)
--------------- ------------- --------------(6,085) (5,985) (4,663)
---------------------------------------------------------------------------------
Net Loans and Leases $ 498,794546,290 $ 411,269543,227 $ 359,648
=============== ============= ==============432,454
=================================================================================
(1) includes loans for land acquisition and development
DEPOSITS AND OTHER BORROWINGSDeposits and Other Borrowings
The principal sources of funds for the Bank are core deposits,
consisting of demand deposits, NOW accounts, money market accounts, savings
accounts and certificates of deposits from the local market areas surrounding
the Bank's offices. The deposit base includes transaction accounts, time and
savings accounts and accounts which customers use for cash management and which
provide the Bank with a source of fee income and cross-marketing opportunities,
as well as an attractive source of lower cost funds. Time and savings accounts,
including money market deposit accounts, also provide a relatively stable and
low-cost source of funding.
For the ninethree months ending September 30, 2005March 31, 2006, noninterest bearing
deposits grew $83.3declined $15.3 million from $462.3due to seasonal factors, while interest bearing
deposits increased by $17.7 million, primarily due to $545.6 million or 18%.growth in time deposits.
Approximately 36%37% of the Bank's deposits at March 31, 2006 are made up
of time deposits, which are generally the most expensive form of deposit because
of their fixed rate and term. These deposits have shown good increases in the second and third
quartersCertificates of 2005 as the Bank has more emphasized these funding sources. Time deposit in denominations of $100
thousand or more can be more volatile and more expensive than time depositscertificates of
less than $100 thousand. However, because the Bank focuses on relationship
banking, its historical experience has been that large time depositscertificates of deposit
have not been more volatile or significantly more expensive than smaller
denomination certificates. It has been the practice of the Bank to pay posted
rates on its timecertificates of deposit whether under or over $100 thousand.thousand,
although some exceptions have been made for large deposit transactions. From
time to time, when appropriate in order to fund strong loan demand, the Bank
accepts timecertificates of deposits, generally in denominations of less than $100
thousand from bank and credit union subscribers to a wholesale deposit rate
line and may
also accept brokered deposits. Wholesaleline. These deposits amounted to approximately $12$9 million or 2% of total
deposits at September 30, 2005,March 31, 2006, as compared to approximately $29$16 million of deposits
at September 30, 2004March 31, 2005 and approximately $25$11 million at December 31, 2004.2005. The Bank
has found rates on these deposits to be generally competitive with rates in our
market given the speed and minimal noninterest cost at which deposits can be
acquired.
During the first nine months
of 2005, the Bank reduced its wholesale deposits in favor of its core sources,
which provided adequate funding and liquidity and was in accordance with planned
amounts.
At September 30, 2005,March 31, 2006, the Company had approximately $141$150 million in
noninterest bearing demand deposits, representing 26% of total deposits. This
compared to approximately $130$165 million of these deposits at December 31, 2004 or
28% of total2005,
the lower balances due to seasonal declines in commercial deposits. These
deposits are primarily business checking accounts on which the payment of
interest is prohibited by regulations of the Federal Reserve. Proposed
19
legislation has been introduced in each of the last several sessions of Congress
which would permit banks to pay interest on checking and demand deposit accounts
established by businesses. If legislation effectively permitting the payment of
interest on business demand deposits is enacted, of which there can be no
assurance, it is likely that we may be required to pay interest on some portion
of our noninterest bearing deposits in order to compete with other banks.
Payment of interest on these deposits could have a significant negative impact
on our net interest income and net interest margin, net income, and the return
on assets and equity.
18
As an enhancement to the basic noninterest bearing demand deposit
account, the Company offers a sweep account, or "customer repurchase agreement",
allowing qualifying businesses to earn interest on short term excess funds which
are not suited for either a certificate of depositCD investment or a money market account. The
balances in these accounts were $31.5 million at September 30, 2005March 31, 2006 compared to
$24.0$32.1 million at December 31, 2004.2005. Customer repurchase agreements are not
deposits and are not insured but are collateralized by U.S. government agency
securities. These accounts are particularly suitable to businesses with
significant fluctuation in the levels of cash flows. Attorney and title company
escrow accounts are an example of accounts which can benefit from this product,
as are customers who may require collateral for deposits in excess of $100
thousand but do not qualify for other pledging arrangements. This program
requires the Company to maintain a sufficient investment securities level to
accommodate the fluctuations in balances which may occur in these accounts.
At September 30, 2005,March 31, 2006, the Company had no outstanding balances under its
lines of credit provided by a correspondent banks.bank. The Bank had $4.0$20.0 million of
FHLB borrowings, from the Federal Home Loan Bank of Atlanta ("FHLB"), as compared to $6.3 millionno balances outstanding at December 31, 2004.2005.
These advances are secured 50% by U.S.
government agency securities and 50%primarily by a blanket lien on qualifying loans in
the Bank's commercial mortgage loan portfolio. LIQUIDITY MANAGEMENTThe Bank obtained advances during
the first quarter of 2006 to compensate for weaker seasonal flows in core
deposits.
Liquidity Management
Liquidity is a measure of the Bank's ability to meet loan demand and to
satisfy depositor withdrawal requirements in an orderly manner. The Bank's
primary sources of liquidity consist of cash and cash balances due from
correspondent banks, loan repayments, federal funds sold and other short termshort-term
investments, maturities and sales of investment securities and income from
operations. The Bank's entire investment securities portfolio is in an
available
for saleavailable-for-sale status which allows it maximum flexibility to generate cash from
sales as needed to meet ongoing loan demand. These sources of liquidity are
primary and are supplemented by the ability of the Company and Bank to borrow
funds, which are termed secondary sources. The Company maintains secondary
sources of liquidity, which includes a $10 million line of credit with a
correspondent bank, against which there were no outstandingsamounts outstanding at September 30, 2005.March 31,
2006. Additionally, the Bank can purchase up to $37 million in federal funds on
an unsecured basis and $5.5 million on a secured basis from its correspondents,
against which there were no borrowings outstanding at September 30, 2005 and may enter into repurchase agreements up to
$12.5 million, provided adequate collateral exists to secure the lending
relationship.March 31, 2006. At September 30, 2005,March
31, 2006, the Bank was also eligible to take advances from the FHLB up to $120$79
million based on collateral at the FHLB, of which it had $20 million of advances
outstanding of $4.0
million.at March 31, 2006. Also, the Bank may enter into repurchase
agreements as well as obtaining additional borrowing capabilities from the FHLB
provided adequate collateral exists to secure these lending relationships.
The loss of deposits, through disintermediation, is one of the greater
risks to liquidity. Disintermediation occurs most commonly when rates rise and
depositors withdraw deposits seeking higher rates in alternative savings and
investment sources than the Bank may offer. The Bank was founded under a
philosophy of relationship banking and, therefore, believes that it has less of
an exposure to disintermediation and resultant liquidity concerns than do many
banks. There is, however, a risk that some deposits would be lost if rates were
to increase and the Bank elected not to remain competitive with its deposit
rates. Under those conditions, the Bank believes that it is well positioned to
use other sources of funds such as FHLB borrowings, customer repurchase
agreements and Bank lines of credit to offset a decline in deposits in the short
run. Over the long term,long-term, an adjustment in assets and change in business emphasis
could compensate for a potential loss of deposits. The Bank also maintains a
marketable investment portfolio to provide flexibility in the event of
significant liquidity needs. The Bank'sBank Board's Asset Liability Board
Committee recentlyhas
adopted policy guidelines which emphasize the importance of core deposits and
their continued growth.
20
At September 30, 2005,March 31, 2006, under the Bank's liquidity formula, it had $187$208
million of primary and secondary liquidity sources, which was deemed adequate to
meet current and projected funding needs.
19
The following is a schedule of significant funding commitments at September 30,
2005:March
31, 2006:
(in thousands)
--------------
Unused lines of credit (consumer) $ 52,92962,507
Other commitments to extend credit 167,671157,917
Standby letters of credit 3,959
----------4,041
---------
Total $ 224,559
==========
ASSET/LIABILITY MANAGEMENT AND QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK224,465
=========
Asset/Liability Management and Quantitative and Qualitative Disclosure about
Market Risk
A fundamental risk in banking is exposure to market risk, or interest
rate risk, since a bank's net income is largely dependent on net interest
income. The Bank's Asset Liability Committee (ALCO)("ALCO") of the Board of Directors
formulates and monitors the management of interest rate risk through policies
and guidelines established by it and the full Board of Directors. In its
consideration of risk limits, the ALCO considers the impact on earnings and
capital, the level and direction of interest rates, liquidity, local economic
conditions, outside threats and other factors. Banking is generally a business
of managing the maturity and re-pricing mismatch inherent in its asset and
liability cash flows and to provide net interest income growth consistent with
the Company's profit objectives.
The Company, through its ALCO, monitors the interest rate environment
in which it operates and adjusts the rates and maturities of its assets and
liabilities to remain competitive and to achieve its overall financial
objectives subject to established risk limits. In the current interest rate
environment, the Company is managing its assets to be either variably priced or
with relatively short maturities, so as to mitigate the risk to earnings and
capital should interest rates increase from current levels. At the same time,
the Bank seeks to acquire longer-term core deposits to lock in relatively lower
cost funds. In the current market, due to competitive factors and customer
preferences, the effort to attract longer termlonger-term fixed priced liabilities has not
been as successful as the Company's best case asset liability mix would prefer.
There can be no assurance that the Company will be able to successfully carry
out this intention,achieve
its optimal asset liability mix, as a result of competitive pressures, customer
preferences and the inability to perfectly forecast future interest rates.
One of the tools used by the Company to manage its interest rate risk
is a static GAP analysis presented below. The Company also uses an earnings
simulation model (simulation analysis) on a quarterly basis to closely monitor its
interest rate sensitivity and risk and to model its balance sheet cash flows and
its income statement effects in different interest rate scenarios. The model
is based onutilizes current Bankbalance sheet data and Company dataattributes and is adjusted for
assumptions as to growth,investment maturities (calls), loan prepayments, interest
rates, the level of noninterest income and noninterest expense and interest rate sensitivity, based on historical data,
for both assets and liabilities.expense. The data is then
subjected to a "shock test", which assumes a simultaneous change in interest
rate up 100 and 200 basis points or down 100 and 200 basis points, along the
entire yield curve, but not below zero. The results are analyzed as to the
impact on net interest income, and net income over the next twelve monthsand twenty
four month periods and to the market value of equity.equity impact. The Company
analysis at September 30, 2005March 31, 2006 shows a positive effect on income when interest rates
are shocked up 100 and 200 basis points, due to the significant level of
variable rate loans. A negative impact occurs if rates were to decline. With rates at a
relative low level, further interestdecline based on
the Company's asset sensitive position. Interest rate declines would reduce
income on earning assets which could not be offset by a corresponding reductionmore than the benefit of reductions in the cost of
funds, potentially resulting in significant net interest margin contraction. The Company
concluded in the second quarter of 2005, based on market factors and its recent
experience, that larger increases in its retail deposit rate assumptions are
probablewould
likely occur in a rising interest rate environment and modified its model
assumptions to reflect more rate sensitivity within the core deposit base. While
the impact of higher interest rates continues to be viewed as positive to future
net interest income and market values of equity, this assumption change
in assumptions
moderatesmoderated the benefits of such higher interest rates assumptions, as compared to
earlier analysis.
21
The following table reflects the result of a shock simulation on the
September 30, 2005March 31, 2006 balances.
Percentage change in
Change in interest Percentage change Percentage change
rates (basis in net interest Percentage change in Market Value of
rates (basis points) interest income in net income Portfolio Equity
-------------------- --------------------------------------------- -------------------- ---------------------
+200 + 4.5%3.0% +8.1% + 11.7% + .7%.8%
+100 + 2.3% + 6.0 % + .6%+1.5% +4.2% +1.3%
0 - - -
-100 - 3.4% - 8.8% - 2.9%-2.7% -7.5% -3.0%
-200 - 8.6% - 22.5.% - 8.8%-6.5% -17.6% -7.1%
20
Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and liabilities may
have similar maturities or repricing periods, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate mortgage
loans, have features that limit changes in interest rates on a short-term basis
and over the life of the loan. Further, in the event of a change in interest
rates, prepayment and early withdrawal levels could deviate significantly from
those assumed in calculating the tables. Finally, the ability of many borrowers
to service their debt may decrease in the event of a significant interest rate
increase.
GAP POSITIONGap
Banks and other financial institutions earnings are significantly
dependent upon net interest income, which is the difference between interest
earned on earning assets and interest expense on interest bearing liabilities.
In falling interest rate environments, net interest income is maximized
with longer term, higher yielding assets being funded by lower yielding
short-term funds, or what is referred to as a negative mismatch or GAP.
Conversely, in a rising interest rate environment, net interest income is
maximized with shorter term, higher yielding assets being funded by longer-term
liabilities or what is referred to as a positive mismatch or GAP.
The current interest rate environment is signaling higher interest
rates. Management has been emphasizing the acquisition of variable rate and
shorter term assets and has been attempting to secure longer-term core deposits.
While management believes that this overall position creates a good balance in
managing its interest rate risk and maximizing its net interest margin within
plan objectives, there can be no assurance as to actual results.
The GAP position, which is a measure of the difference in maturity and
re-pricing volume between assets and liabilities, is a means of monitoring the
sensitivity of a financial institution to changes in interest rates. The chart
below provides an indication of the rate sensitivity of the Company. A negative
GAP indicates the degree to which the volume of repriceable liabilities exceeds
repriceable assets in given time periods. At September 30, 2005,March 31, 2006, the Company had a
positive cumulative GAP position of 19%approximately 14% out to three months and a
negative cumulative negative GAP position of 5%-1% out to twelve months, as compared to a
three month positive GAP of 38%9% and a cumulative twelve month positive GAP of 8%3%
at December 31, 2004.2005. The change in the GAP position at September 30, 2005March 31, 2006 as
compared to December 31, 20042005 relates primarily to a change in the re-pricing assumption for money marketmix of
deposits to
a shorter time-frame, adopted in the second quarter of 2005. This change was
made to recognize the Company's actual practices and experience over the first
six months of 2005.toward more time deposits with maturities within 12 months. The current
position is within guideline limits established by ALCO.
If interest rates continue to rise, at a measured pace, as many forecasters are predicting,
the Bank's interest income and margin are expected to be stable to slightly up because of the
present positive mismatch position.position combined with a more competitive business
environment for both deposits and loans. Because competitive market behavior
does not necessarily track the trend of interest rates but at times moves ahead
of financial market influences, the rise in the cost of liabilities may be
greater than anticipated by the GAP model. If this were to occur, the benefits
of a rising interest rate environment wouldmay not be as significant as management is expecting.in accordance with management's
expectations. Management has carefully considered its strategy to maximize
interest income by reviewing interest rate levels, economic indicators and call
features within its investment portfolio. These factors have been discussed with
the Board of Directors Asset Liability
CommitteeALCO and management believes that current strategies are appropriate to
current economic and interest rate trends.
2122
GAP ANALYSIS
SEPTEMBER 30, 2005MARCH 31, 2006
(dollars in thousand)
Total Rate Non- Total
Repriceable in: 0-3 mos 4-12 mos 13-36 mos 37-60 mos over 60 mos Total
---------------------------------------------------------------------------Sensitive sensitive Assets
------------------------------------------------------------------------------------------------
RATE SENSITIVE ASSETS:
----------------------
Investments and bank deposits $ 9,6747,541 $ 14,23614,445 $ 26,54827,511 $ 8,35514,118 $ 10,0656,339 $ 68,87869,954
Loans (*) 264,572 17,965 56,936 97,806 69,338 506,617(1) 298,474 60,932 106,097 72,561 17,321 555,385
Fed funds/ equivalents/funds and other
equities 37,075short-term investments 33,348 - - - - 37,075
---------------------------------------------------------------------------33,348
Other earning assets - 11,219 - - - 11,219
------------------------------------------------------------------------
Total repriceable assets $ 311,321339,363 $ 32,20186,596 $133,608 $ 83,48486,679 $ 106,16123,660 $669,906 $24,660 $694,566
------------------------------------------------------------------------
RATE SENSITIVE LIABILITIES:
---------------------------
Noninterest bearing demand $ 79,4036,447 $ 612,570
---------------------------------------------------------------------------
LIABILITIES:20,262 $ 36,521 $ 31,017 $ 55,531 $149,778
Interest Bearing Transaction Acounts $bearing transaction 19,892 - $ 29,978 $13,262 13,262 19,893 66,309
Savings and money market 137,795 - $ 44,967 $622 415 1,865 140,697
Time deposits 34,850 161,576 17,212 823 - $ 74,945
Money Market Accounts 129,554214,461
Customer repurchase agreements 31,549 - - - - 129,554
Time Deposits 28,902 145,425 22,416 - - 196,743
Savings 3,76631,549
Other short-term borrowings 10,000 10,000 - - - - 3,766
Customer repurchase agreements 31,470 - - - - 31,470
Other short-term borrowings 4,000 - - - - 4,000
---------------------------------------------------------------------------20,000
------------------------------------------------------------------------
Total repriceable liabilites $ 197,692240,533 $ 175,403191,838 $ 22,41667,617 $ 44,96745,517 $ -77,289 $622,794 $ 440,478
---------------------------------------------------------------------------4,531 $627,325
------------------------------------------------------------------------
GAP $ 113,629 $(143,202)98,830 $(105,242) $ 61,06865,991 $ 61,19441,162 $(53,629) $ 79,403 $ 172,09247,112
Cumulative GAP $ 113,62998,830 $ (29,573)(6,412) $ 31,49559,579 $100,741 $ 92,689 $ 172,092
Interval gap/earnings47,112
Cumulative gap as percent
of total assets 18.55% (23.38%) 9.97% 9.99% 12.96%
Cumulative gap/earning assets 18.55% (4.83%) 5.14% 15.13% 28.09%14.23% (0.92)% 8.58% 14.50% 6.78%
(*) includes Loans Held(1) Includes loans held for Salesale
Although NOW and MMA accounts are subject to immediate repricing, the
Bank's GAP model has incorporated a repricing schedule to account for a lag in
rate changes based on our experience, as measured by the amount of those deposit
rate changes relative to the amount of rate change in assets.
CAPITAL RESOURCES AND ADEQUACY
The assessment of capital adequacy depends on a number of factors such
as asset quality, liquidity, earnings performance, changing competitive
conditions and economic forces, and the overall level of growth. The adequacy of
the Company's current and future capital needs is monitored by management on an
ongoing basis. Management seeks to maintain a capital structure that will assure
an adequate level of capital to support anticipated asset growth and to absorb
potential losses.
The capital position of both the Company and the Bank continues to
exceed regulatory requirements to be considered well-capitalized. The primary
indicators used by bank regulators in measuring the capital position are the
tier 1 risk-based capital ratio, the total risk-based capital ratio, and the
tier 1 leverage ratio. Tier 1 capital consists of common and qualifying
preferred stockholders' equity less intangibles. Total risk-based capital
consists of Tiertier 1 capital, qualifying subordinated debt, and a portion of the
allowance for credit losses. Risk-based capital ratios are calculated with
reference to risk-weighted assets. The tier 1 leverage ratio measures the ratio
of tier 1 capital to total average assets for the most recent three month
period.
22
The ability of the Company to continue to grow is dependent on its
earnings and the ability to obtain additional funds for contribution to the
Bank's capital, through additional borrowing, the sale of additional common
stock, the sale of preferred stock, or through the issuance of additional
qualifying equity equivalents, such as subordinated debt or trust preferred
securities.
23
Capital
The actual capital amounts and ratios for the Company and Bank as of September 30,March 31,
2006 and March 31, 2005 and September 30, 2004 are presented in the table below:
Well Capitalized
For Capital Ratio Under
Company Company Bank Bank Adequacy Prompt Corrective
Actual Actual Actual Actual Purposes Action Provisions**
Dollars in thousands Amount Ratio Amount Ratio Ratio Ratio
------ ----- ------ ----- ----- ----------- ----------- -------------------
As of September 30, 2005March 31, 2006
Total capital to risk-weighted
$69,384 12.57% $60,012 11.02%assets $73,970 12.4% $64,853 11.0% 8.00% 10.00%
assets
Tier 1 capital to risk-weighted
$63,888 11.58% $54,534 10.01%assets $67,885 11.4% $58,833 10.0% 4.00% 6.00%
assets
Tier 1 capital to average assets
$63,888 10.18% $54,534 8.85%(leverage) $67,885 10.1% $58,833 8.9% 3.00% 5.00%
(leverage)
As of September 30, 2004March 31, 2005
Total capital to risk-weighted
$60,565 14.50% $43,431assets $64,692 13.0% $51,660 10.7% 8.00% 10.00%
assets
Tier 1 to risk-weighted assets $56,389 13.50% $39,300$60,029 12.1% $47,012 9.7% 4.00% 6.00%
Tier 1 capital to average assets
$56,389 12.00% $39,300 8.4%(leverage) $60,029 10.7% $47,012 8.7% 3.00% 5.00%
(leverage)
** Applies to Bank only
Bank and holding company regulations, as well as Maryland law, impose
certain restrictions on dividend payments by the Bank, as well as restricting
extension of credit and transfers of assets between the Bank and the Company. At
September 30, 2005,March 31, 2006, the Bank could pay dividends to the parent to the extent of its
earnings so long as it maintained required capital ratios.
ITEMItem 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative and Qualitative Disclosures About Market Risk
Please refer to Item 2 of this report, "Management's Discussion and
Analysis of Financial Condition and Results of Operations", under the caption
"Asset/Liability Management and Quantitative and Qualitative Disclosure About
Market Risk".
ITEMItem 4. CONTROLS AND PROCEDURESControls and Procedures
The Company's management, under the supervision and with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, evaluated as of the last day of the period covered by this report the
effectiveness of the operation of the Company's disclosure controls and
procedures, as defined in Rule 13a-14 under the Securities and Exchange Act of
1934. Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective.
2324
There were no changes in the Company's internal control over financial
reporting (as defined in Rule 13a-15 under the Securities Act of 1934) during
the quarter ended September 30, 2005 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PARTPart II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGSOther Information
Item 1. Legal Proceedings
From time to time the Company may become involved in legal proceedings.
At the present time there are no proceedings which the Company believes will
have a materialan adverse impact on the financial condition or earnings of the Company.
ITEMItem 1A. Risk Factors
There have been no material changes as of March 31, 2006 in the risk
factors from those disclosed in the Company's Annual Report on Form 10-K for the
year ended December 31, 2005.
Item 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSUnregistered Sales of Equity Securities and Use of Proceeds
(a) Sales of Unregistered Securities. None
(b) Use of Proceeds. Not Applicable.
(c) Issuer Purchases of Securities. None
ITEMItem 3 - DEFAULTS UPON SENIOR SECURITIESDefaults Upon Senior Securities None
ITEMItem 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSSubmission of Matters to a Vote of Security Holders None
ITEMItem 5 - OTHER INFORMATIONOther Information None.
(a) Required 8-K Disclosures None
(b) Changes in Procedures for Director Nominations None
ITEMItem 6 - EXHIBITSExhibits
Exhibit No. Description of Exhibit
- ----------- ----------------------
3(a) Certificate of Incorporation of the Company, as amended (1)
3(b) Bylaws of the Company (2)
10.1 1998 Stock Option Plan (3)
10.2 Employment Agreement between Michael T. Flynn and the Company (4)
10.3 Employment Agreement between Thomas D. Murphy and the Bank (4)
10.4 Employment Agreement between Ronald D. Paul and the Company (4)
10.5 Director Fee Agreement between Leonard L. Abel and the Company (4)
10.6 Employment Agreement between Susan G. Riel and the Bank (4)
10.7 Employment Agreement between Martha F. Tonat and the Bank (4)
10.8 Employment Agreement between Wilmer L. Tinley and the Bank (4)
10.9 Employee Agreement for James H. Langmead (5)
10.10 Employee Stock Purchase Plan (6)
11 Statement Regarding Computation of Per Share Income
21 Subsidiaries of the Registrant
31.1 Rule 13a-14(a) Certification of Ronald D. Paul
31.2 Rule 13a-14(a) Certification of Wilmer L. Tinley
31.3 Rule 13a-14(a) Certification of Michael T. Flynn
31.4 Rule 13a-14(a) Certification of James H. Langmead
24
32.1 Section 1350 Certification of Ronald D. Paul
25
32.2 Section 1350 Certification of Wilmer L. Tinley
32.3 Section 1350 Certification of Michael T. Flynn
32.4 Section 1350 Certification of James H. Langmead
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------
(1) Incorporated by reference to the exhibit of the same number to the
Company's Quarterly Report on Form 10-QSB for the period ended
September 30, 2002.
(2) Incorporated by reference to Exhibit 3(b) to the Company's Registration
Statement on Form SB-2, dated December 12, 1997.
(3) Incorporated by reference to Exhibit 10.1 to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1998. (4)
Incorporated by reference to exhibits of the same number to the
Company's Annual Report on Form 10-K for the year ended December 31,
2003.
(5) Incorporated by reference to exhibits of the same number to the
Company's Annual Report on Form 10-K for the year ended December 31,
2004
(6) Incorporated by reference to Exhibit 4 to the Company's Registration
Statement on Form S-8 (No. 333-116352)
2526
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EAGLE BANCORP, INC.
Date: November 4, 2005May 5, 2006 By: /s/ Ronald D. Paul
------------------------------------------------------------------------------------
Ronald D. Paul, President and CEO
Date: November 4, 2005May 5, 2006 By: /s/ Wilmer L. Tinley
------------------------------------------------------------------------------------
Wilmer L. Tinley, Senior Vice President and
Chief Financial Officer
2627