UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2005
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ 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| No |_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act Yes |X| No |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act Yes |_| No |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, the registrant had 7,174,997 shares of Common
Stock outstanding.
1
ITEM 1 - FINANCIAL STATEMENTS
-----------------------------
EAGLE BANCORP, INC.
Consolidated Balance Sheets
September 30, 2005 and December 31, 2004
(dollars in thousands)
September 30, December 31,
2005 2004
------------- ------------
ASSETS
Cash and due from banks $ 17,639 $ 31,100
Interest bearing deposits with banks and other short term investments 12,015 9,594
Federal funds sold 30,051 15,035
Investment securities available for sale, at fair value 63,887 64,098
Loans held for sale 2,327 2,208
Loans 504,290 415,509
Less allowance for credit losses (5,496) (4,240)
--------- ---------
Loans, net 498,794 411,269
Premises and equipment, net 5,744 5,726
Accrued interest, taxes and other assets 16,561 14,423
--------- ---------
TOTAL ASSETS $ 647,019 $ 553,453
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing demand $ 140,554 $ 130,309
Interest bearing transaction 74,945 57,063
Savings and money market 133,320 126,299
Time, $100,000 or more 135,427 99,882
Other time 61,316 48,734
--------- ---------
Total deposits 545,562 462,287
Customer repurchase agreements
and federal funds purchased 31,470 23,983
Other short-term borrowings 4,000 6,333
Other liabilities 2,400 2,316
--------- ---------
Total liabilities 583,432 494,919
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; shares authorized 20,000,000, shares
issued and outstanding 7,174,343 (2005) and 5,421,730 (2004) 72 54
Additional paid in capital 48,461 47,014
Retained earnings 15,355 11,368
Accumulated other comprehensive (loss) gain (301) 98
--------- ---------
Total stockholders' equity 63,587 58,534
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 647,019 $ 553,453
========= =========
See notes to consolidated financial statements.
2
EAGLE BANCORP, INC.
Consolidated Statements of Operations
For the Nine and Three Month Periods Ended September 30, 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, 2005 Sept 30, 2004 Sept 30, 2005 Sept 30, 2004
------------- -------------- -------------- -------------
INTEREST INCOME
Interest and fees on loans $23,808 $15,157 $ 8,949 $ 5,407
Taxable interest and dividends on investment securities 1,761 1,639 649 584
Interest on balances with other banks & short term investments 331 98 68 37
Interest on federal funds sold 220 241 92 118
------- ------- ------- -------
Total interest income 26,120 17,135 9,758 6,146
------- ------- ------- -------
INTEREST EXPENSE
Interest on deposits 4,808 2,689 2,074 973
Interest on customer repurchase agreements
and federal funds purchased 189 61 86 27
Interest on short-term borrowings 187 112 82 27
Interest on long-term borrowings - 266 - 88
------- ------- ------- -------
Total interest expense 5,184 3,128 2,242 1,115
------- ------- ------- -------
NET INTEREST INCOME 20,936 14,007 7,516 5,031
PROVISION FOR CREDIT LOSSES 1,311 457 424 227
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 19,625 13,550 7,092 4,804
------- ------- ------- -------
NONINTEREST INCOME
Service charges on deposits 865 1,014 273 305
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 98
Other income 793 556 307 182
------- ------- ------- -------
Total noninterest income 3,165 2,604 1,239 697
------- ------- ------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 7,695 6,016 2,461 2,115
Premises and equipment expenses 2,468 1,971 851 701
Marketing and advertising 344 212 137 53
Outside data processing 574 469 189 183
Other expenses 3,024 2,418 1,091 910
------- ------- ------- -------
Total noninterest expense 14,105 11,086 4,729 3,962
------- ------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE 8,685 5,068 3,602 1,539
INCOME TAX EXPENSE 3,206 1,816 1,332 539
------- ------- ------- -------
NET INCOME $ 5,479 $ 3,252 $ 2,270 $ 1,000
======= ======= ======= =======
EARNINGS PER SHARE
Basic $ 0.77 $ 0.46 $ 0.32 $ 0.14
Diluted $ 0.73 $ 0.44 $ 0.30 $ 0.14
DIVIDENDS DECLARED PER SHARE $ 0.21 $ - $ 0.07 $ -
See notes to consolidated financial statements
3
EAGLE BANCORP, INC.
Consolidated Statements of Cash Flows
For the Nine Month Periods Ended September 30, 2005 and 2004 (unaudited)
(dollars in thousands)
Nine months Ended Nine months Ended
September 30, 2005 September 30, 2004
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,479 $ 3,252
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Decrease in deferred income taxes - (74)
Provision for credit losses 1,311 457
Depreciation and amortization 811 727
Gains on sale of loans (925) (561)
Origination of loans held for sale (19,475) (18,412)
Proceeds from sale of loans held for sale 20,281 19,484
Gain on sale of investment securities (281) (193)
Increase in other assets (1,897) (760)
Decrease in other liabilities 84 203
--------- ---------
Net cash provided by operating activities 5,388 4,123
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in interest bearing deposits with other banks (2,421) (5,280)
Purchases of available for sale investment securities (39,960) (190,580)
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) -
Net increase in loans (88,836) (46,330)
Bank premises and equipment acquired (829) (1,893)
Purchase of BOLI - (4,000)
--------- ---------
Net cash used in investing activities (107,251) (52,696)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits 83,275 75,507
Increase (decrease) in customer repurchase agreements and
federal funds purchased 7,487 (11,084)
Decrease in other short-term borrowings (2,333) (667)
Decrease in long-term borrowings - (2,478)
Issuance of common stock 1,469 396
Payment of dividends (1,496) -
--------- ---------
Net cash provided by financing activities 88,402 61,674
--------- ---------
NET (DECREASE) INCREASE IN CASH (13,461) 13,101
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 31,100 25,103
--------- ---------
CASH AND DUE FROM BANKS AT END OF YEAR $ 17,639 $ 38,204
========= =========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid $ 4,805 $ 2,996
========= =========
Income taxes paid $ 3,825 $ 1,520
========= =========
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, 2005 $ 54 $ 47,014 $ 11,368 $ 98 $ 58,534
Comprehensive Income
Net Income 5,479 5,479
Other comprehensive income:
Unrealized loss on securities available for sale
(net of taxes) (227) (227)
Less: reclassification adjustment for gains net of
taxes of $109 included in net income (172) (172)
-------- --------
Total Comprehensive Income (399) 5,080
Cash Dividend ($ .21 per share) (1,492) (1,492)
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 127,160 shares of common
stock 1 1,000 1,001
Tax benefit on non-qualified options exercise 468 468
-------- -------- -------- -------- --------
Balance, September 30, 2005 $ 72 $ 48,461 $ 15,355 $ (301) $ 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
======== ======== ======== ======== ========
5
Eagle Bancorp, Inc
Notes to Consolidated Financial Statements
For the nine and three months ended September 30, 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, 2004 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 2004 Annual Report. 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, 2005 are not
necessarily indicative of the results of operations to be expected for the
remainder of the year, or for any other period.
2. NATURE OF BUSINESS
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. INVESTMENT SECURITIES
Amortized cost and estimated fair value of securities available for
sale are summarized as follows:
(in thousands)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
SEPTEMBER 30, 2005 Cost Gains Losses Value
------------------- --------- ---------- ---------- ----------
U. S. Government agency securities $41,705 $ - $ 433 $41,272
GNMA mortgage backed securities 18,975 - 323 18,652
Federal Reserve and Federal Home Loan Bank stock 2,365 - - 2,365
Other equity investments 1,333 265 - 1,598
------- ------- ------- -------
$64,378 $ 265 $ 756 $63,887
======= ======= ======= =======
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
DECEMBER 31, 2004 Cost Gains Losses Value
----------------- --------- ---------- ---------- ----------
U. S. Government agency securities $34,478 $ - $ 294 $34,184
GNMA mortgage backed securities 23,177 77 188 23,066
Federal Reserve and Federal Home Loan Bank stock 1,956 - - 1,956
Other equity investments 4,339 555 2 4,892
------- ------- ------- -------
$63,950 $ 632 $ 484 $64,098
======= ======= ======= =======
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, 2005 are as follows:
6
Estimated Gross
Fair Less than More than Unrealized
SEPTEMBER 30, 2005 (IN THOUSANDS) Value 12 months 12 months Losses
--------------------------------- --------- --------- --------- ----------
U. S. Government agency securities $41,272 $ 168 $ 265 $ 433
GNMA mortgage backed securities 18,652 33 290 323
Federal Reserve and Federal Home Loan Bank stock 2,365 - - -
Other equity investments 1,598 - - -
------- ------- ------- -------
$63,887 $ 201 $ 555 $ 756
======= ======= ======= =======
The unrealized losses that exist are the result of market changes in
interest rates since the original purchases. All of the U.S. Government agency
and mortgage backed securities are rated AAA. 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. INCOME TAXES
The Company uses 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. EARNINGS PER SHARE
Basic earnings per common share are computed by dividing net income by
the weighted average number of common shares outstanding during the period.
Diluted earnings 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. As of September 30, 2005 there were no option 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 BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation" and applies the intrinsic value method
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 awards under the
Plan consistent with the method prescribed by SFAS No. 123, net income and
earnings per share would have been changed to the pro forma amounts as follows
for the nine and three month periods ended September 30, 2005 and 2004.
7
Stock Based Compensation
Nine Months Three Months
Ended September 30, Ended September 30,
------------------------- -------------------------
(in thousands) 2005 2004 2005 2004
--------- --------- --------- ---------
Net income, as reported $ 5,479 $ 3,252 $ 2,270 $ 1,000
Less pro forma stock-based compensation expenses
determined under the fair value method, net of
related tax effects (626) (724) (113) (6)
--------- --------- --------- ---------
Pro forma net income $ 4,853 $ 2,528 $ 2,157 $ 994
========= ========= ========= =========
Net income per share:
Basic - as reported $ 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 $ 0.13
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 revision
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 depend on a number of
factors, including compensation practices, new awards, modifications and
cancellations of existing awards, and the application of alternative option
pricing assumptions.
In May 2005, 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 Changes in Interim Financial Statements". This Statement changes the
requirements for and reporting of a change in accounting principle, and all
voluntary changes in accounting principles, as well as changes required by an
accounting pronouncement in 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 determine the period-specific effects or 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
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
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. 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.
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, the Company executed a lease for a new 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 largest community bank SBA lenders in the
Washington Metropolitan area.
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.
9
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 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. Allowance factors relate to the level of the internal risk rating.
The nonspecific or environmental factors allowance is used to estimate
the loss of 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.
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 million for the nine months
ended September 30, 2005, as compared to net income of $3.3 million for the nine
months ended September 30, 2004. Earnings per basic share was $0.77 for the nine
month period ended September 30, 2005, as compared to $0.46 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, 2005
The Company had an annualized return on average assets of 1.23% and an
annualized return on average equity of 12.07% for the first nine months of 2005,
as compared to returns on average assets and average equity of 0.92% and 7.91%,
respectively, for the same nine months of 2004.
The increase in net income for the nine months ended September 30, 2005
as compared to the same period in 2004 can be attributed substantially to an
increase of 49% in net interest income, resulting from an increase of 28% in
average earning assets and an increase in the net interest spread of 57 basis
points and the net interest margin of 74 basis points between the comparable
periods. Since June 2004, the Federal Reserve Bank has increased the federal
funds target rate by 275 basis points to 3.75% in eleven interest rate increases
of 25 basis points each. The impact of these interest rate increases has
contributed to the improvement in the Company's margin in the past several
quarters. While the average rate on earning assets for the nine month period has
risen by 102 basis points from 5.23% to 6.25%, the cost of interest bearing
liabilities has increased by only 45 basis points from 1.31% to 1.76%.
Additionally, the growth in average noninterest bearing 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 funding earning assets from 35
basis points for the first nine months in 2004 to 52 basis points for the nine
months ended September 30, 2005. Thus, the Company has been able to increase its
primary source of funds (core deposits) at rates which have allowed its net
interest spread and margin to increase in the first nine months of 2005 as
compared to the same period in 2004.
As a result of competitive pressures, rates paid on deposits, which
have not increased as much or as rapidly as interest rates on earning assets,
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.
Loans, which generally have higher yields than securities and other
earning assets, increased from 78% of average earning assets in the first nine
months of 2004 to 83% of average earning assets for the same period of 2005.
Investment securities for the first nine months of 2005 amounted to 13% of
average earning assets as compared to 16% for the first nine months in 2004.
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 for the first nine
months in 2005 as compared to $457 thousand for the same period in 2004. This
increase was attributable to growth in the loan portfolio in the first nine
months of 2005, which was very favorable. As discussed in the section on
Allowance for Credit Losses, the Company had $55 thousand of net charge-offs in
the first nine months of 2005. This compared to net recoveries of $39 thousand
for the first nine months of 2004. At September 30, 2005, the allowance for
credit losses was $5.5 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 compared 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 thousand for the first nine months of 2005 and $193
thousand in 2004. Excluding gains on the sale of investment securities,
noninterest income was $2.9 million in 2005 versus $2.4 million for 2004, an
increase of 20%. This increase was due primarily to increased gains on the sale
of SBA loans and SBA service fees which amounted to $881 thousand for 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 million as compared to
$697 thousand for the same period in 2004. 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 increased from $11.1 million in the first nine
months of 2004 to $14.1 million for the first nine months of 2005, an increase
of 27%. The increase was attributable primarily to increases in personnel and
related benefit 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 and professional fees
associated with a larger organization. In spite of higher amounts of noninterest
expenses, the Company's stronger growth in revenue 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 million for the same period in 2004, an increase of
19%. This increase was due to the same factors mentioned above which affected
the increase for the nine month period.
The combination of increases in net interest income attributed to both
increased volume and favorable interest rate effects and increases in
noninterest income, offset in part by increases in the provision for credit
losses due to growth, and increases in noninterest expenses, resulted in
significant improvement in net income for the first nine months of 2005 versus
2004 of 68% 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 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. Noninterest bearing deposits and capital
are other components representing funding sources. 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 nine months of 2005 was $20.9 million compared to $14.0 million for the
first nine months of 2004, a 49% 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 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 margin includes the effect of
noninterest bearing sources in its calculation, which are significant factors in
the Company's financial performance. The net interest margin is net interest
income (annualized) expressed as a percentage of average earning assets.
EAGLE BANCORP, INC.
AVERAGE BALANCES, INTEREST YIELDS AND RATES, AND NET INTEREST MARGIN
(dollars in thousands)
------------------------------------------------------------------------
Nine Months Ended September 30,
------------------------------------------------------------------------
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 $ 13,965 $ 331 3.17% $ 5,571 $ 98 2.35%
Loans (1) 463,576 23,808 6.87% 341,559 15,160 5.93%
Investment securities available for sale 71,399 1,761 3.30% 70,011 1,636 3.12%
Federal funds sold 10,016 220 2.94% 20,510 241 1.57%
------------------- --------------------
Total interest earning assets 558,956 26,120 6.25% 437,651 17,135 5.23%
------------------- --------------------
Noninterest earning assets 39,362 35,587
Less: allowance for credit losses 4,822 3,881
-------- --------
Total noninterest earning assets 34,540 31,706
-------- --------
TOTAL ASSETS $593,496 $469,357
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing transaction $ 59,389 $ 79 0.18% $ 49,512 $ 50 0.13%
Savings and money market 135,147 1,487 1.47% 118,293 854 0.96%
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%
Customer repurchase agreements and funds purchased 28,356 189 0.89% 16,647 61 0.49%
Other short-term borrowings 6,504 187 3.83% 6,248 112 2.39%
Long term borrowings - - 9,128 266 3.89%
------------------- --------------------
Total interest bearing liabilities 394,083 5,184 1.76% 318,493 3,128 1.31%
------------------- --------------------
Noninterest bearing liabilities:
Noninterest bearing demand 136,095 94,396
Other liabilities 2,650 1,642
-------- --------
Total noninterest bearing liabilities 138,745 96,038
Stockholders' equity 60,668 54,826
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $593,496 $469,357
======== ========
Net interest income $ 20,936 $ 14,007
======== =========
Net interest spread 4.49% 3.92%
Net interest margin 5.01% 4.27%
(1) includes Loans held for Sale
13
ALLOWANCE FOR CREDIT LOSSES
The provision for credit losses represents the amount of expense
charged to 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 process to monitor the
adequacy of the allowance for credit losses. This process and guidelines were
developed utilizing among other factors, the guidance from Federal 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 of comparative charge-offs and recoveries data as
well as information on the Company's non-performing and potential problem loans.
During the first nine months of 2005, a provision for credit losses was
made in the amount of $1.3 million and the allowance for credit losses increased
$1.3 million, including the impact of a modest amount of net credit losses of
$55 thousand during the period. The provision for credit losses of $1.3 million
in the first nine months of 2005 compared to a provision for credit losses of
$457 thousand in the first nine months of 2004. The higher level of the
provision in 2005 is attributable primarily to significant 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.
At September 30, 2005, the Company had $211 thousand of loans
classified as nonaccrual as compared to $156 thousand at December 31, 2004 and
$2.4 million at September 30, 2004, which included one large credit of $2.2
million which was collected in full in the fourth quarter of 2004. The Company
had no restructured loans or real estate owned at September 30, 2005, December
31, 2004 or September 30, 2004. 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. The
balance of impaired loans was $211 thousand at September 30, 2005, with specific
reserves against those loans of $27 thousand, compared to $156 thousand at
December 31, 2004 with specific reserves of $31 thousand. The allowance for
credit losses represented 1.09% of total loans at September 30, 2005, as
compared to 1.02% at December 31, 2004. This increase was due to an increase in
the allocation factors contained in the allowance methodology and to
modifications in the environmental factors allowance.
As part of its comprehensive loan review process, the Company's Board
of Directors and the Bank's Director's Loan Committee and or Board of Director's
Credit Review Committee 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 credit losses will continue to be a primary management objective
of the Company.
14
The following table sets forth activity in the allowance for credit
losses for the periods indicated.
(dollars in thousands) Nine Months ended
September 30,
2005 2004
------- ------
Balance at beginning of year $ 4,240 $ 3,680
Charge-offs:
Commercial (82) (95)
Real estate - commercial - -
Construction - -
Home Equity - -
Other consumer (11) (18)
------- -------
Total (93) (113)
------- -------
Recoveries:
Commercial 38 152
Real estate - commercial - -
Construction - -
Home Equity - -
Other consumer - -
------- -------
Total 38 152
------- -------
Net (charge-offs) recoveries (55) 39
------- -------
Additions charged to operations 1,311 457
------- -------
Balance at end of period $ 5,496 $ 4,176
======= =======
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.
As of September 30, As of December 31,
-------------------------------------------------
2005 2004
-------------------------------------------------
Amount % (1) Amount % (1)
-------------------------------------------------
Commercial $ 2,455 23% $ 1,963 25%
Real estate - commercial 2,279 51% 1,426 46%
Real estate - residential mortgage - - 105 2%
Construction - commercial and residential 491 15% 431 14%
Home equity 169 10% 223 11%
Other consumer 99 1% 58 1%
Unallocated 3 34
-------------------------------------------------
Total Loans $ 5,496 100% $ 4,240 100%
=================================================
(1) Represents the percent of loans in each category to total loans and not the
allowance allocations
15
NON-PERFORMING ASSETS
The Company's non-performing assets, which are comprised of loans
delinquent 90 days or more, non-accrual loans, restructured loans and other real
estate owned, totaled $211 thousand at September 30, 2005 compared to $2.6
million at September 30, 2004 and $156 thousand at December 31, 2004. The
percentage of non-performing loans to total loans was 0.04% at September 30,
2005, compared to 0.17% at September 30, 2004, and 0.04% at December 31, 2004.
The following table shows the amounts of non-performing assets at the
dates indicated.
September 30, December 31,
--------------------- -----------
(dollars in thousands) 2005 2004 2004
------ ------ -----------
Nonaccrual Loans:
Commercial $ 211 $ 380 $ 156
Consumer - - -
Real estate - 2,200 -
Accrual loans-past due 90 days:
Commercial - - -
Consumer - - -
Real estate - - -
Restructured loans - - -
Real estate owned - - -
------ ------------ ------------
Total non-performing assets $ 211 $ 2,580 $ 156
====== ============ ============
At September 30, 2005, there were $626 thousand 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-accrual or
restructured loan categories.
NONINTEREST INCOME
Noninterest income consists 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 nine months ended September 30, 2005, noninterest
income was $3.2 million. This compared to $2.6 million of noninterest income for
the nine months ended September 30, 2004.
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 thousand for the nine months ended September 30, 2005
compared to $346 thousand for the nine months ended September 30, 2004, as the
Company emphasized this lending activity in the first nine months of 2005. The
Company also originates residential mortgage loans on a pre-sold basis,
servicing released. Sales of these mortgage loans yielded gains of $195 thousand
in the first nine months of 2005 compared to $215 thousand in the same period in
2004. Net investment gains amounted to $281 thousand for the first nine months
of 2005 as compared to $193 thousand for the same period in 2004. Income for the
nine months ended September 30, 2005 included $866 thousand from deposit account
service charges, $153 thousand from SBA loan service fees and $301 thousand from
BOLI, versus $1.0 million from deposit account service charges, $109 thousand
from SBA service fees and $280 thousand from BOLI for the nine months ended
September 30, 2004. Other noninterest income which comprises other service
charges, title and settlement fees, and 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 charges was primarily related to a decline in overdraft fees.
16
Noninterest income was $1.2 million for the three months ended
September 30, 2005 compared to $697 thousand for the three months ended
September 30, 2004, 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%.
Salaries and benefits were $7.7 million for the first nine months of
2005, as compared to $6.0 million for 2004, a 28% increase. This increase was
due to staff additions and related benefit costs as well as to increases in
incentive based compensation. At September 30, 2005 the Bank had 138 full time
equivalent employees as compared to 111 at September 30, 2004.
Premises and equipment expenses amounted to $2.5 million for the first
nine months of 2005 versus $2.0 million for the same period in 2004. This
increase of 25% was due in part to a new banking office opened in 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 advertising costs increased from $212 thousand in the
nine months ended September 30, 2004 to $344 thousand in the same period in
2005, the increases associated primarily with increased advertising for deposit
products and to special marketing efforts.
Outside data processing costs were $574 thousand for the first nine
months of 2005, as compared to $469 thousand in 2004, 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 and consulting fees,
ATM expenses, telephone, courier, printing, business development, office
supplies, charitable contributions, and dues. These costs increased by 25% in
the first nine months of 2005 as compared to 2004.
Noninterest expenses were $4.7 million 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.
FINANCIAL CONDITION OVERVIEW
At September 30, 2005, total assets were $647.0 million, loans were
$504.3 million, deposits were $545.6 million and stockholders' equity was $63.6
million. As compared to December 31, 2004, assets grew by $93.6 million (17%),
loans by $88.8 million (21%), deposits by $83.3 million (18%) and stockholders'
equity by $5.1 million (9%).
The Company paid a cash dividend of $0.07 per share for the third
quarter of 2005, which dividends commenced in the first quarter of 2005.
17
LOANS
Loans, net of amortized deferred fees and costs, at September 30, 2005,
December 31, 2004 and September 30, 2004 are summarized by major type as
follows:
As of September 30, As of December 31, As of September 30,
------------------------------------------------------------------------
2005 2004 2004
------------------------------------------------------------------------
(dollars in thousands) Amount % Amount % Amount %
------------------------------------------------------------------------
Commercial $ 115,140 23% $ 101,911 25% $ 85,685 24%
Real estate - commercial (1) 259,496 51% 189,708 46% 171,110 47%
Real estate - residential mortgage 1,627 - 9,230 2% 1,480 0%
Construction - commercial and residential 75,380 15% 62,745 14% 59,574 16%
Home equity 48,474 10% 49,632 11% 42,961 12%
Other consumer 4,173 1% 2,283 1% 3,014 1%
------------------------------------------------------------------------
Total loans 504,290 100% 415,509 100% 363,824 100%
=========== ========== =========
Less: Allowance for Credit Losses (5,496) (4,240) (4,176)
--------------- ------------- --------------
Net Loans $ 498,794 $ 411,269 $ 359,648
=============== ============= ==============
(1) includes loans for land acquisition and development
DEPOSITS 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 nine months ending September 30, 2005 deposits grew $83.3
million, from $462.3 million to $545.6 million or 18%.
Approximately 36% of the Bank's deposits 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
quarters 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 deposits of less than $100 thousand. However, because the
Bank focuses on relationship banking, its historical experience has been that
large time deposits 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 time deposit whether under or over $100 thousand. From
time to time, when appropriate in order to fund strong loan demand, the Bank
accepts time 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. Wholesale deposits amounted to approximately $12
million or 2% of total deposits at September 30, 2005, as compared to
approximately $29 million of deposits at September 30, 2004 and approximately
$25 million at December 31, 2004. 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, the Company had approximately $141 million in
noninterest bearing demand deposits, representing 26% of total deposits. This
compared to approximately $130 million of these deposits at December 31, 2004 or
28% of total deposits. These are primarily business checking accounts on which
the payment of interest is prohibited by regulations of the Federal Reserve.
Proposed 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 deposit or a money market account.
The balances in these accounts were $31.5 million at September 30, 2005 compared
to $24.0 million at December 31, 2004. 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, the Company had no outstanding balances under
its lines of credit provided by correspondent banks. The Bank had $4.0 million
of borrowings from the Federal Home Loan Bank of Atlanta ("FHLB"), as compared
to $6.3 million at December 31, 2004. These advances are secured 50% by U.S.
government agency securities and 50% by a blanket lien on qualifying loans in
the Bank's commercial mortgage loan portfolio.
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 term
investments, maturities and sales of investment securities and income from
operations. The Bank's entire investment securities portfolio is in an available
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 outstandings at September 30, 2005.
Additionally, the Bank can purchase up to $37 million in federal funds on an
unsecured 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. At September 30, 2005, the Bank was also eligible to take advances
from the FHLB up to $120 million, of which it had advances outstanding of $4.0
million.
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 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, an adjustment in
assets and change in business emphasis could compensate for a loss of deposits.
The Bank also maintains a marketable investment portfolio to provide flexibility
in the event of significant liquidity needs. The Bank's Asset Liability Board
Committee recently adopted policy guidelines which emphasize the importance of
core deposits and their continued growth.
At September 30, 2005, under the Bank's liquidity formula, it had $187
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:
(in thousands)
--------------
Unused lines of credit (consumer) $ 52,929
Other commitments to extend credit 167,671
Standby letters of credit 3,959
----------
$ 224,559
==========
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) 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 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 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, 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 on a quarterly basis to closely monitor interest sensitivity
and to model its balance sheet cash flows and its income statement effects in
different interest rate scenarios. The model is based on current Bank and
Company data and is adjusted for assumptions as to growth, noninterest income
and noninterest expense and interest rate sensitivity, based on historical data,
for both assets and liabilities. The data is then subjected to a "shock test",
which assumes a simultaneous change in interest rate up 200 basis points or down
200 basis points, along the entire yield curve, but not below zero. The results
are analyzed as to the impact on net interest income, net income over the next
twelve months and to the market value of equity. The Company analysis at
September 30, 2005 shows a positive effect on income when interest rates are
shocked up 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 interest rate declines would reduce income on
earning assets, which could not be offset by a corresponding reduction 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, that larger increases in its retail deposit rate assumptions are
probable 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 change in assumptions
moderates the benefits of such higher interest rates as compared to earlier
analysis.
The following table reflects the result of a shock simulation on the
September 30, 2005 balances.
Change in interest Percentage change Percentage change
rates (basis in net interest Percentage change in Market Value of
points) income in net income Portfolio Equity
-------------------- --------------------- -------------------- ---------------------
+200 + 4.5% + 11.7% + .7%
+100 + 2.3% + 6.0 % + .6%
0 - - -
-100 - 3.4% - 8.8% - 2.9%
-200 - 8.6% - 22.5.% - 8.8%
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 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 POSITION
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, the Company had
a positive GAP of 19% out to three months and a cumulative negative GAP of 5%
out to twelve months, as compared to a three month positive GAP of 38% and a
cumulative twelve month positive GAP of 8% at December 31, 2004. The change in
the GAP position at September 30, 2005 as compared to December 31, 2004 relates
primarily to a change in the re-pricing assumption for money market 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.
If interest rates continue to rise at a measured pace, as 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. 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 would not be
as significant as management is expecting. 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
Committee and management believes that current strategies are appropriate to
current economic and interest rate trends.
21
GAP ANALYSIS
SEPTEMBER 30, 2005
(dollars in thousand)
Repriceable in: 0-3 mos 4-12 mos 13-36 mos 37-60 mos over 60 mos Total
---------------------------------------------------------------------------
ASSETS:
Investments and bank deposits $ 9,674 $ 14,236 $ 26,548 $ 8,355 $ 10,065 $ 68,878
Loans (*) 264,572 17,965 56,936 97,806 69,338 506,617
Fed funds/ equivalents/other equities 37,075 - - - - 37,075
---------------------------------------------------------------------------
Total repriceable assets $ 311,321 $ 32,201 $ 83,484 $ 106,161 $ 79,403 $ 612,570
---------------------------------------------------------------------------
LIABILITIES:
Interest Bearing Transaction Acounts $ - $ 29,978 $ - $ 44,967 $ - $ 74,945
Money Market Accounts 129,554 - - - - 129,554
Time Deposits 28,902 145,425 22,416 - - 196,743
Savings 3,766 - - - - 3,766
Customer repurchase agreements 31,470 - - - - 31,470
Other short-term borrowings 4,000 - - - - 4,000
---------------------------------------------------------------------------
Total repriceable liabilites $ 197,692 $ 175,403 $ 22,416 $ 44,967 $ - $ 440,478
---------------------------------------------------------------------------
GAP $ 113,629 $(143,202) $ 61,068 $ 61,194 $ 79,403 $ 172,092
Cumulative GAP $ 113,629 $ (29,573) $ 31,495 $ 92,689 $ 172,092
Interval gap/earnings 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%
(*) includes Loans Held for Sale
Although NOW 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 Tier 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.
The actual capital amounts and ratios for the Company and Bank as of
September 30, 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, 2005
Total capital to risk-weighted $69,384 12.57% $60,012 11.02% 8.00% 10.00%
assets
Tier 1 capital to risk-weighted $63,888 11.58% $54,534 10.01% 4.00% 6.00%
assets
Tier 1 capital to average assets $63,888 10.18% $54,534 8.85% 3.00% 5.00%
(leverage)
As of September 30, 2004
Total capital to risk-weighted $60,565 14.50% $43,431 10.7% 8.00% 10.00%
assets
Tier 1 to risk-weighted assets $56,389 13.50% $39,300 9.7% 4.00% 6.00%
Tier 1 capital to average assets $56,389 12.00% $39,300 8.4% 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, the Bank could pay dividends to the parent to the extent of
its earnings so long as it maintained required capital ratios.
ITEM 3. QUANTITATIVE 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".
ITEM 4. CONTROLS 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.
23
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.
PART II - OTHER 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 material adverse impact on the financial condition or earnings of the
Company.
ITEM 2 - UNREGISTERED 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
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None
ITEM 5 - OTHER INFORMATION
(a) Required 8-K Disclosures None
(b) Changes in Procedures for Director Nominations None
ITEM 6 - EXHIBITS
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 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
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)
25
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, 2005 By: /s/ Ronald D. Paul
----------------------------------------
Ronald D. Paul, President and CEO
Date: November 4, 2005 By: /s/ Wilmer L. Tinley
----------------------------------------
Wilmer L. Tinley, Senior Vice President
and Chief Financial Officer
26