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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 March 31, 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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of April 25, 2005, the registrant had 7,093,201 shares of Common
Stock outstanding.
Item 1 - Financial Statements
EAGLE BANCORP, INC.
Consolidated Balance Sheets
March 31, 2005 and December 31, 2004
(dollars in thousands)
March 31, December 31,
ASSETS 2005 2004
-------------------- --------------------
(unaudited)
Cash and due from banks 23,193 31,100
Interest bearing deposits with banks and other short term investments 17,504 9,594
Federal funds sold 26,064 15,035
Investment securities available for sale, at fair value 65,449 64,098
Loans held for sale 3,671 2,208
Loans 437,117 415,509
Less allowance for credit losses (4,663) (4,240)
-------------------- --------------------
Loans, net 432,454 411,269
Premises and equipment, net 6,176 5,726
Accrued interest, taxes and other assets 15,339 14,423
-------------------- --------------------
TOTAL ASSETS $ 589,850 $ 553,453
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing demand 146,376 130,309
Interest bearing transaction 52,613 57,063
Savings and money market 136,330 126,299
Time, $100,000 or more 98,860 99,882
Other time 48,731 48,734
-------------------- --------------------
Total deposits 482,910 462,287
Customer repurchase agreements and federal funds purchased 39,498 23,983
Other short-term borrowings 5,333 6,333
Other liabilities 2,469 2,316
-------------------- --------------------
Total liabilities 530,210 494,919
-------------------- --------------------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; shares authorized 20,000,000, shares
issued and outstanding 7,088,651 (2005) and 5,421,730 (2004) 71 54
Additional paid in capital 47,433 47,014
Retained earnings 12,525 11,368
Accumulated other comprehensive (loss) income (389) 98
-------------------- --------------------
Total stockholders' equity 59,640 58,534
-------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 589,850 $ 553,453
==================== ====================
See notes to consolidated financial statements.
2
EAGLE BANCORP, INC.
Consolidated Statements of Operations
For the Three Month Periods Ended March 31, 2005 and 2004 (unaudited)
(dollars in thousands, except per share data)
2005 2004
---------------- ----------------
INTEREST INCOME
Interest and fees on loans $ 6,997 $ 4,787
Taxable interest and dividends on investment securities 487 527
Interest on balances with other banks 42 26
Interest on federal funds sold 184 36
--------------- -----------------
Total interest income 7,710 5,376
--------------- -----------------
INTEREST EXPENSE
Interest on deposits 1,141 811
Interest on customer repurchase agreements
and federal funds purchased 33 30
Interest on short-term borrowings 61 27
Interest on long-term borrowings - 101
--------------- -----------------
Total interest expense 1,235 969
--------------- -----------------
NET INTEREST INCOME 6,475 4,407
PROVISION FOR CREDIT LOSSES 417 154
--------------- -----------------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 6,058 4,253
--------------- -----------------
NONINTEREST INCOME
Service charges on deposits 269 346
Gain on sale of loans 495 172
Gain on sale of investment securities - 253
Other income 275 311
--------------- -----------------
Total noninterest income 1,039 1,082
--------------- -----------------
NONINTEREST EXPENSE
Salaries and employee benefits 2,560 1,954
Premises and equipment expenses 801 598
Advertising 96 56
Outside data processing 181 142
Other expenses 837 743
--------------- -----------------
Total noninterest expense 4,475 3,493
--------------- -----------------
INCOME BEFORE INCOME TAX EXPENSE 2,622 1,842
INCOME TAX EXPENSE 969 663
--------------- -----------------
NET INCOME $ 1,653 $ 1,179
=============== =================
EARNINGS PER SHARE
Basic $ 0.23 $ 0.17
Diluted $ 0.22 $ 0.16
See notes to consolidated financial statements.
3
EAGLE BANCORP, INC.
Consolidated Statements of Cash Flows
For the Three Month Periods Ended March 31, 2005 and 2004 (unaudited)
(dollars in thousands)
2005 2004
--------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,653 $ 1,179
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for credit losses 417 154
Depreciation and amortization 260 209
Gains on sale of loans (495) (172)
Origination of loans held for sale (10,661) (7,470)
Proceeds from sale of loans held for sale 9,693 6,950
Gain on sale of investment securities - (253)
Increase in other assets (640) (410)
Increase in other liabilities 153 206
--------------- -----------------
Net cash provided by operating activities 380 393
--------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in interest bearing deposits with other banks (7,910) (649)
Purchases of available for sale investment securities (3,349) (63,060)
Proceeds from maturities of available for sale securities 1,293 45,251
Proceeds from sale of available for sale securities - 30,340
Increase in federal funds sold (11,029) (17,026)
Net increase in loans (21,602) (12,804)
Bank premises and equipment acquired (710) (813)
Purchase of BOLI - (2,000)
--------------- -----------------
Net cash used in investing activities (43,307) (20,761)
--------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits 20,623 50,126
Increase (decrease) in customer repurchase agreements and
federal funds purchased 15,515 (24,496)
Decrease in other short-term borrowings (1,000) -
Proceeds from long-term borrowings - (1,037)
Issuance of common stock 382 331
Payment of dividends (500)
--------------- -----------------
Net cash provided by financing activities 35,020 24,924
--------------- -----------------
NET (DECREASE) INCREASE IN CASH (7,907) 4,556
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 31,100 25,103
--------------- -----------------
CASH AND DUE FROM BANKS AT END OF YEAR $ 23,193 $ 29,659
=============== =================
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid $ 1,180 $ 916
=============== =================
Income taxes paid $ 710 $ 400
=============== =================
See notes to consolidated financial statements.
4
EAGLE BANCORP, INC.
Consolidated Statements of Changes in Stockholders' Equity
For the Three Month Periods Ended March 31, 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
Net Income 1,653 1,653
Cash Dividend ($ .07 per share) (4) (496) (500)
1.3 to one stock split in the form of a 30% stock
dividend 17 (17) - - -
Exercise of options for 41,468 shares of common
stock - 382 - - 382
Tax benefit on non-qualified options exercise 58 58
Other Comprehensive Income
Unrealized loss on securities available for
sale (net of taxes) - - - (487) (487)
------------- ------------- -------------- -------------- --------------
Balance, March 31, 2005 $ 71 $ 47,433 $ 12,525 $ (389) $ 59,640
============= ============= ============== ============== ==============
Balance, January 1, 2004 $ 54 $ 46,406 $ 6,281 $ 271 $ 53,012
Net Income 1,179 1,179
Exercise of options for 42,464 shares of common
stock - 331 - - 331
Other Comprehensive Income
Unrealized gain on securities available for
sale (net of taxes) - - - 134 134
------------- ------------- -------------- -------------- --------------
Balance, March 31, 2004 $ 54 $ 46,737 $ 7,460 $ 405 $ 54,656
============= ============= ============== ============== ==============
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 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
three months ended March 31, 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 professional
services in connection with loan settlement processes.
3. INVESTMENT SECURITIES
Amortized cost and estimated fair value of securities available for sale
are summarized as follows:
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
MARCH 31, 2005 Cost Gains Losses Value
- -------------- ------------------ ----------------- ---------------- ------------------
U. S. Government agency securities $ 37,472 $ - $ 610 $ 36,862
GNMA mortgage backed securities 21,884 10 423 21,471
Federal Reserve and Federal Home Loan Bank stock 2,215 - - 2,215
Other equity investments 4,435 474 8 4,901
------------------ ----------------- ---------------- ------------------
$ 66,006 $ 484 $ 1,041 $ 65,449
================== ================= ================ ==================
Gross Gross
Amortized Unrealized Unrealized Estimated 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
================== ================= ================ ==================
6
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
March 31, 2005 are as follows:
Gross
Estimated Less than More than Unrealized
MARCH 31, 2005 (IN THOUSANDS) Fair Value 12 months 12 months Losses
- ------------------------------ ----------------- -------------- -------------- ----------------
U. S. Government agency securities $ 36,862 $ 476 $ 134 $ 610
GNMA mortgage backed securities 21,471 178 245 423
Federal Reserve and Federal Home Loan Bank stock 2,215 - - -
Other equity investments 4,901 - 8 8
----------------- -------------- -------------- ----------------
$ 65,449 $ 654 $ 387 $ 1,041
================= ============== ============== ================
Gross
Estimated Less than More than Unrealized
DECEMBER 31, 2004 (IN THOUSANDS) Fair Value 12 months 12 months Losses
- --------------------------------- ----------------- -------------- -------------- ----------------
U. S. Government agency securities $ 34,184 $ 221 $ 73 $ 294
GNMA mortgage backed securities 23,066 21 167 188
Federal Reserve and Federal Home Loan Bank stock 1,956 - - -
Other equity investments 4,892 - 2 2
----------------- -------------- -------------- ----------------
$ 64,098 $ 242 $ 242 $ 484
================= ============== ============== ================
The unrealized losses that exist are the result of market changes in interest
rates since the original purchases. All of the bonds 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.
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
Earnings per common share are computed by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted net 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. As of March 31, 2005 there were no shares excluded from the
diluted net income per share computation because their inclusion would be
anti-dilutive. Earnings per share for the three months ended March 31, 2004
have been adjusted to reflect a 1.3 for one stock split in the form of a
30% stock dividend effected on February 28, 2005.
7
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 three
months ended March 31, 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 three month ended March 31, 2005 and 2004.
Three Months
Ended March 31,
------------------
2005 2004
--------- --------
Net income, as reported $ 1,653 $1,179
Less pro forma stock-based compensation expense
determined under the fair value method, net of
related tax effects (432) (718)
--------- --------
Pro forma net income $1,221 $ 461
========= ========
Net income per share:
Basic - as reported $ .23 $ .17
Basic - pro forma $ .17 $ .07
Diluted - as reported $ .22 $ .16
Diluted - pro forma $ .16 $ .06
8
Item 2 - Management'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. 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. The cornerstone of 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 first quarter 2006 in Chevy Chase, Montgomery County,
Maryland. In February 2005, Eagle Land Title, LLC, a Bank subsidiary which
performs professional services in connection with loan settlements, 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 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 one of 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 financial statements;
accordingly, as this information changes, the 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 allowance. Each component is
determined based on estimates that can and do change when the actual events
occur.
The specific allowance individually 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-rated 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-rated loans due to management's concerns regarding
collectibility or management's knowledge of particular elements regarding the
borrower. Allowance factors increase with the worsening of the internal risk
rating.
The nonspecific formula 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 loan review system and the effect of
external factors such as competition and regulatory requirements. The
nonspecific 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. For additional information
regarding the allowance for credit losses, refer to the discussion under the
caption "Allowance for Credit Losses" below.
RESULTS OF OPERATIONS
The Company reported net income of $1.7 million for the three months
ended March 31, 2005, as compared to net income of $1.2 million for the three
months ended March 31, 2004. Income per basic share was $0.23 for the three
months ended March 31, 2005, as compared to $0.17 same period in 2004. Income
per diluted share was $0.22 for the three months ended March 31, 2005, as
compared to $0.16 for the same period in 2004. Earnings per share for the three
months ended March 31, 2004 have been adjusted to reflect a 1.3 for one stock
spilt in the form of a 30% stock dividend effected on February 28, 2005.
10
The Company had an annualized return on average assets of 1.20% and an
annualized return on average equity of 11.32% for the first three months of
2005, as compared to returns on average assets and average equity of 1.08% and
8.78%, respectively, for the same three months of 2004.
The increase in net income for the three months ended March 31, 2005 as
compared to the same period in 2004, can be attributed substantially to an
increase of 47% in net interest income, resulting from an increase of 28% in
average earning assets and an increase in the net interest spread of 59 basis
points and the net interest margin of 65 basis points between the comparable
periods. Since June 2004, the Federal Reserve Bank has increased the federal
funds target rate by 1.75% to 2.75% in seven interest rate increases of 25 basis
points. The impact of these increases has contributed to the improvement in the
Company's margin in the past several quarters. While interest rates on earning
assets have risen by 65 basis points, the cost of interest bearing liabilities
has increased by only 6 basis points. Additionally, the growth in average
noninterest bearing funding sources for the first quarter of 2005 as compared to
2004 has been $52.6 million or 49%. This significant growth in noninterest
bearing funding sources has increased the value of noninterest sources funding
earning assets from 34 basis points for the first three months in 2004 to 40
basis points for the three months ended March 31, 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 quarter
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 effected.
Loans, which generally have higher yields than securities and other
earning assets, increased from 79% of average earning assets in the first three
months of 2004 to 81% of average earning assets for the same period of 2005.
Investment securities in the first quarter of 2005 amounted to 12% of average
earning assets as compared to 16% for the first three months in 2004. This
decline 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 $417 thousand for the first quarter
in 2005 as compared to $154 thousand for the same period in 2004. This increase
was largely attributable to the growth in the loan portfolio in the first
quarter of 2005, which was very favorable. As discussed in the section on
Allowance for Credit Losses, the Company had $6 thousand of net recoveries on
previously charged off loans in the first quarter of 2005. This compared to net
charge-offs of $84 thousand for the first three months of 2004. At March 31,
2005, the allowance for credit losses was $4.7 million or 1.07% of total loans,
as compared to $3.7 million or 1.14% of total loans at March 31, 2004 and $ 4.2
million or 1.02% of total loans at December 31, 2004.
Noninterest income decreased 4%, to $1.0 million for the first three
months of 2005, from $1.1 million in the same period of 2004. However,
noninterest income for the first three months of 2004 included investment
securities gains of $253 thousand, while no securities gains were recognized in
the first quarter of 2005. Excluding gains on the sale of investment securities,
noninterest income was $1.0 million in 2005 versus $0.8 million for 2004, an
increase of 25%. This increase was due primarily to increased gains on the sale
of SBA loans ($385 thousand versus $97 thousand), and residential mortgage loans
($110 thousand versus $75 thousand).
Noninterest expenses increased from $3.5 million in the first quarter
of 2004 to $4.5 million for the first quarter of 2005, an increase of 28%. The
increase was attributable primarily to increases in staff levels, and related
personnel cost increases, to increased occupancy costs, due in part to new
banking offices, and to higher marketing, data processing, and professional fees
associated with a larger organization. The efficiency ratio improved in the
first quarter of 2005 to 59.56% as compared to 63.64% for the first quarter in
2004.
The combination of increases in net interest income from both increased
volume and favorable interest rate effects, offset in part by increases in the
provision for credit losses, stable noninterest income and increases in
noninterest expenses, resulted in the significant improvement in reported income
for the first quarter of 2005 versus 2004.
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 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. 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
three months of 2005 was $6.5 million compared to $4.4 million for the first
three months of 2004.
11
The 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 margin provides a better measurement of
performance. Margin includes the effect of noninterest bearing sources in its
calculation and is net interest income expressed as a percentage of average
earning assets.
AVERAGE BALANCES, INTEREST YIELDS, AND RATES, AND NET
INTEREST MARGIN 2005 2004
------------------------------ -------------------------------
THREE MONTHS ENDED MARCH 31, Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
--------- -------- ----------- ---------- -------- -----------
ASSETS:
Interest earning assets:
Interest bearing deposits with other banks & other
short-term investments $ 7,280 $ 42 2.34% $ 4,163 $ 26 2.56%
Loans (1) 429,095 6,997 6.61% 324,942 4,787 5.93%
Investment securities available for sale 63,536 487 3.11% 65,869 527 3.20%
Federal funds sold 27,380 184 2.73% 14,094 36 1.03%
--------- -------- ---------- --------
Total interest earning assets 527,291 7,710 5.93% 409,068 5,376 5.28%
--------- -------- ---------- --------
Total noninterest earning assets 37,065 33,330
Less: allowance for credit losses 4,375 3,764
--------- ----------
Total noninterest earning assets 32,690 29,566
--------- ----------
TOTAL ASSETS $559,981 $ 438,634
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing transaction $ 52,278 $ 19 0.15% $ 45,263 $ 14 0.13%
Savings and money market 136,155 338 1.01% 111,523 260 0.94%
Time deposits 144,617 784 2.20% 109,774 537 1.97%
Customer repurchase agreements and federal funds
purchased 27,754 33 0.48% 21,263 30 0.56%
Other short-term borrowings 6,756 61 3.66% 4,000 27 2.79%
Long term borrowings - - 0.00% 10,170 101 4.00%
--------- -------- ---------- --------
Total interest bearing liabilities 367,560 1,235 1.35% 301,993 969 1.29%
--------- -------- ---------- --------
Noninterest bearing liabilities:
Noninterest bearing demand 130,254 81,438
Other liabilities 2,959 1,326
--------- ----------
Total noninterest bearing liabilities 133,213 82,764
Stockholders' equity 59,208 53,877
--------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $559,981 $438,634
========= ==========
Net interest income
$ 6,475 $4,407
======== ========
Net interest spread 4.58% 3.99%
Net interest margin 4.98% 4.33%
(1) includes Loans held for Sale
12
Allowance 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 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. Also, refer
to the following table which reflects the comparative charge-offs and recoveries
of prior loan charge-offs information.
During the first three months of 2005, a provision for credit losses
was made in the amount of $417 thousand and the allowance for credit losses
increased $ 423 thousand, including the impact of $6 thousand in net recoveries
during the period. The provision for credit losses of $417 thousand in the first
three months of 2005 compared to a provision for credit losses of $154 thousand
in the first three months of 2004. The higher level of the provision in 2005 is
primarily attributable to growth in the loan portfolio in the first quarter of
2005.
At March 31, 2005, the Company had $151 thousand of loans classified as
nonaccrual as compared to $156 thousand at December 31, 2004 and $561 thousand
at March 31, 2004. The Company had no restructured loans at either, March 31,
2005, December 31, 2004 or March 31, 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 relative to the total loan portfolio. The Company had no other
real estate owned at March 31, 2005, December 31, 2004 or March 31, 2004. The
balance of impaired loans was $151 thousand at March 31, 2005, with specific
reserves against those loans of $57 thousand, compared to $156 thousand at
December 31, 2004 with specific reserves of $31 thousand. The allowance for loan
losses represented 1.07% of total loans at March 31, 2005 as compared to 1.02%
at December 31, 2004. This increase was due to a slight mix shift in the
portfolio toward more commercial real estate loans (48% versus 46%) which
category tends to have larger transactions in the assessment of risk, resulting
in an increase in the unallocated portion of the allowance.
As part of its comprehensive loan review process, the Company's Board
of Directors and the Bank Director's Loan Committee and or Board of Director's
Credit Review Committees 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 possible loan losses will continue to be a primary management
objective in the Company.
13
The following table sets forth activity in the allowance for credit
losses for the periods indicated.
Three Months Ended
(dollars in thousands) March 31,
------------------------
2005 2004
----------- ---------
Balance at beginning of year $ 4,240 $ 3,680
Charge-offs:
Commercial (66)
Real estate - commercial - -
Construction - -
Home equity - -
Other consumer - (18)
----------- ---------
Total 0 (84)
----------- ---------
Recoveries:
Commercial 6 -
Real estate - commercial - -
Construction - -
Home equity - -
Other consumer - -
----------- ---------
Total 6 -
----------- ---------
Net recoveries (charge-offs) 6 (84)
----------- ---------
Additions charged to operations 417 154
----------- ---------
Balance at end of period $ 4,663 $ 3,750
=========== =========
Annualized ratio of net
charge-offs during the period to
average loans outstanding during
the period (.01)% .10%
----------- ---------
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 March 31, As of December 31,
------------------------- --------------------------
2005 2004
------------------------- --------------------------
Amount % (1) Amount % (1)
-------------- ---------- --------------- ----------
Commercial $ 1,975 25% $ 1,963 25%
Real estate - commercial 1,633 48% 1,426 46%
Real estate - residential 84 0% 105 3%
Construction 532 15% 431 14%
Home equity 211 11% 223 11%
Other consumer 105 1% 58 1%
Unallocated 123 -% 34 - %
-------------- ---------- --------------- ----------
Total allowances for credit losses $ 4,663 100% $ 4,240 100%
============== ========== =============== ==========
(1) Represents the percent of loans in each category to total loans
14
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 $151 thousand at March 31, 2005 compared to $561 thousand
at March 31, 2004. The percentage of non-performing assets to total assets was
0.03% at March 31, 2005, compared to 0.17% at March 31, 2004.
The following table shows the amounts of non-performing assets at the
dates indicated.
March 31, December 31
------------------------ --------------
(dollars in thousands) 2005 2004 2004
---------- ---------- --------------
Nonaccrual Loans
Commercial $ 151 $ 470 $ 156
Consumer - 91 -
Real estate - - -
Accrual loans-past due 90 days
Commercial - - -
Consumer - - -
Real estate - - -
Restructured loans - - -
Real estate owned - - -
---------- ---------- --------------
Total non-performing assets $ 151 $ 561 $ 156
========== ========== ==============
At March 31, 2005, there were $3.8 million of performing loans considered
potential problem loans, defined as loans which are not included in the 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, nonaccrual or
restructured loan categories.
Noninterest Income
Noninterest income consists primarily of deposit account service charges, gains
on the sale of SBA and residential mortgage loans, other noninterest loan fees,
income from bank owned life insurance ("BOLI") and other service fees. For the
three months ended March 31, 2005, noninterest income was $1.0 million. This
compared to $1.1 million of noninterest income for the three months ended March
31, 2004, which included $253 thousand in net gains on the sale of investment
securities.
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 $385 thousand for the three months ended March 31, 2005 compared to $97
thousand for the three months ended March 31, 2004, as the Company emphasized
this lending activity in the first three 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 $110 thousand in the first three
months of 2005 compared to $75 thousand in the same period in 2004. Income for
the three months ended March 31, 2005 was $269 thousand from deposit account
service charges, $46 thousand from SBA loan service fees and $102 thousand from
BOLI, versus $346 thousand from deposit account service charges, $32 thousand
from SBA service fees and $83 thousand from BOLI for the three months ended
March 31, 2004. Other noninterest income amounted to $127 thousand for the first
three months of 2005, as compared to $196 thousand in the first quarter of 2004.
The decline in deposit services was primarily related to a decline in overdraft
fees.
Noninterest Expenses
Noninterest expense was $4.5 million for the three months ended March 31, 2005
compared to $3.5 million for the three months ended March 31, 2004, an increase
of 28%.
15
Salaries and benefits were $2.6 million for the first quarter of 2005, as
compared to $ 2.0 million for 2004, a 31% increase. This increase was due to
staff additions and related personnel costs.
Premises and equipment expenses amounted to $801 thousand for the quarter ended
March 31, 2005 versus $598 thousand for the same period in 2004. This increase
of 34% was due to a new banking office opened in the first quarter of 2005 and
to ongoing operating expense increases associated with the Company's facilities,
all of which are leased, and to increased equipment costs.
Advertising costs increased from $56 thousand in the quarter ended March 31,
2004 to $96 thousand in the same period in 2005, the increases associated
primarily with increased advertising for deposit products.
Outside data processing costs were $181 thousand for the initial quarter in
2005, as compared to $142 thousand in 2004, or an increase of 27%. The higher
than usual increase was due to special charges associated with the Company's
conversion of certain core processing systems to new operating platforms.
Other expenses, increased from $743 thousand in the first quarter of 2004 to
$837 thousand for the three months ended March 31, 2005. The major components of
costs in this category include professional fees, ATM expenses, telephone,
courier, printing, business development, office supplies, charitable
contributions, and dues. These costs have been managed to an increase of 13% in
the first three months of 2005 as compared to 2004.
FINANCIAL CONDITION
Summary
At March 31, 2005, assets were $589.8 million, loans were $ 437.1 million,
deposits were $482.9 million and stockholders' equity was $ 59.6 million. As
compared to December 31, 2004, assets grew by $36.4 million (6.6%), loans by
$21.6 million (5.2%), deposits by $20.6 million (4.5%) and stockholders' equity
by $ 1.1 million (1.9%).
The Company paid an initial cash dividend of $ .07 per share in the first
quarter of 2005.
Loans
Loans, net of amortized deferred fees and costs, at March 31, 2005 and 2004 are
summarized by type as follows:
31-Mar-05 % 31-Dec-04 % 31-Mar-04 %
------------ ------- ------------- ------- -------------- -------
Commercial $ 111,055 25% $ 101,911 25% $ 87,471 27%
Real estate - commercial 209,210 48% 189,708 46% 161,228 49%
Real estate - residential 1,366 0% 11,717 3% 960 0%
Construction 63,636 15% 60,258 14% 40,842 12%
Home equity 47,360 11% 49,632 11% 36,140 11%
Other consumer 4,490 1% 2,283 1% 3,612 1%
------------ ------- ------------- ------- -------------- -------
Total loans 437,117 100% 415,509 100% 330,253 100%
less: Allowance for Credit Losses (4,663) (4,240) (3,750)
------------ ------- ------------- ------- -------------- -------
Net Loans $ 432,454 $ 411,269 $ 326,503
============ ======= ============= ======= ============== =======
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.
16
For the three months ending March 31, 2005 deposits grew $20.6 million, from
$462.3 million to $482.9 million.
Approximately 30% of the Bank's deposits are made up of certificates of
deposits, which are generally the most expensive form of deposit because of
their fixed rate and term. Certificates of deposit in denominations of $100
thousand or more can be more volatile and more expensive than certificates of
less than $100 thousand. However, because the Bank focuses on relationship
banking and does not accept brokered certificates, its historical experience has
been that large certificates 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 certificates of deposit
whether under or over $100 thousand. From time to time, when appropriate in
order to fund strong loan demand, the Bank accepts certificates of deposits,
generally in denominations of less than $100 thousand from bank and credit union
subscribers to a wholesale deposit rate line. These deposits amounted to
approximately $16 million or 3% of total deposits at March 31, 2005, as compared
to approximately $33 million of deposits at March 31, 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 quarter 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 March 31, 2005, the Company had approximately $146 million in noninterest
bearing demand deposits, representing 30% of total deposits. This compared to
approximately $130 million of these deposits at December 31, 2004. 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.
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 CD investment or a money market account. The balances in
these accounts were $39.5 million at March 31, 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 March 31, 2005, the Company had no outstanding balances under its lines of
credit provided by a correspondent bank. The Bank had $5.3 million of FHLB
borrowings, 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 sources of
liquidity consist of cash and cash balances due from correspondent banks, loan
repayments, federal funds sold and short term investments, maturities and sales
of investment securities and income from operations. 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 March 31,
2005. Additionally, the Bank can purchase up to $24 million in federal funds on
an unsecured basis from its correspondents, against which there were no
borrowings outstanding at March 31, 2005 and may enter into reverse repurchase
agreements up to $12.5 million, provided adequate collateral exists to secure
the lending relationship. At March 31, 2005, the Bank was also eligible to make
advances from the Federal Home of Atlanta (FHLB) up to $115 million, of which it
had advances outstanding of $5.3 million.
17
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 liability management instruments such as FHLB borrowing,
reverse repurchase agreements and Bank lines 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 March 31, 2005, under the Company's liquidity formula, it had $110 million of
primary and secondary liquidity representing 19.6% of Bank assets.
The following is a schedule of significant funding commitments at March 31,
2005:
(in thousands)
Unused lines of credit (consumer) $ 47,523
Other commitments to extend credit 118,110
Standby letters of credit 3,965
-------------
$ 169,598
=============
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 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 Company data
and adjusted by 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 March
31, 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 near historic lows,
further reduction would reduce income on earning assets, which could not be
offset by a corresponding reduction in the cost of funds, resulting in
significant net interest margin contraction.
18
The following table reflects the result of a shock simulation on the March 31,
2005 balances.
Percentage change
Change in interest Percentage change in net Percentage change in Market Value of
rates (basis points) interest income in net income Portfolio Equity
-------------------- ------------------------ -------------------- ---------------------
+200 +13.5% +28.9% +13.7%
+100 +6.8% +14.4% +7.3%
0 - - -
-100 -5.1% -10.8% -9.9%
-200 -18.7% -39.9% -21.0%
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
Banks and other financial institutions are 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 steady to possibly higher
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 March 31, 2005, the Bank had a
positive GAP of 36% out to three months and a cumulative positive GAP of 4% 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.
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.
19
GAP ANALYSIS
March 31, 2005
(dollars in thousands)
0-3 4-12 13-36 37-60 Over 60
Repriceable in: Months Months Months Months Months Total
----------------------------------------------------------------------------
ASSETS:
Investment securities $1,050 $9,905 $28,070 $13,830 $12,594 $65,449
Interest bearing deposits in
other banks 1,092 792 - - - 1,884
Loans 241,935 9,781 49,483 99,085 40,504 440,788
Federal funds sold
and cash equivalents 41,685 - - - - 41,685
----------------------------------------------------------------------------
Total repriceable assets $285,762 $20,478 $77,553 $112,915 $53,098 $549,806
============================================================================
LIABILITIES:
NOW accounts - $26,306 $5,261 $21,046 - $52,613
Savings and Money Market accounts 53,190 43,248 26,595 13,297 - 136,330
Certificates of deposit 19,414 105,946 21,136 1,095 - 147,591
Customer repurchase agreements
and federal funds purchased 11,849 15,798 3,950 7,901 - 39,498
Other borrowing-short and long term 1,000 4,333 - - - 5,333
----------------------------------------------------------------------------
Total repriceable liabilities $85,453 $195,631 $56,942 $43,339 - $381,365
============================================================================
GAP $200,309 $(175,153) $20,611 $69,576 $53,098 $168,441
Cumulative GAP $200,309 $25,156 $45,767 $115,343 $168,441
Interval gap/earnings assets 36.43% (31.85)% 3.75% 12.65% 9.66%
Cumulative gap/earning assets 36.43% 4.58% 8.33% 20.98% 30.64%
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 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.
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.
20
Capital
The actual capital amounts and ratios for the Company and Bank as of March 31,
2005 and March 31, 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 March 31, 2005
Total capital to risk-weighted
assets $64,692 13.0% $51,660 10.7% 8.00% 10.00%
Tier 1 capital to risk-weighted
assets $60,029 12.1% $47,012 9.7% 4.00% 6.00%
Tier 1 capital to average assets
(leverage) $60,029 10.7% $47,012 8.7% 3.00% 5.00%
As of March 31, 2004
Total capital to risk-weighted
assets $58,431 16.4% $39,003 10.9% 8.00% 10.00%
Tier 1 to risk-weighted assets $54,656 15.3% $35,243 9.9% 4.00% 6.00%
Tier 1 capital to average assets
(leverage) $54,656 14.0% $35,243 8.5% 3.00% 5.00%
** 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 March 31,
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
adequate.
During the first quarter of 2005, the Company established a Disclosure
Controls Committee consisting of Board and Senior Management members. The
Committee has adopted a charter and meets prior to the finalizing of financial
press releases and the Company's reports on Form 10-K and 10-Q in order to
discuss and review material financial information and related information
contained in those releases for accuracy and completeness. This new internal
control over financial reporting (as defined in Rule 13a-15 under the Securities
Act of 1934) was not adopted as a corrective action or as a result of any
identified material weaknesses or deficiency in internal control over financial
reporting, but as an enhancement and supplement to existing internal control
procedures. The Company expects that this committee will provide additional
opportunity for assurance as to the financial reporting process and is judged by
the Company to be a best practice.
21
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 an 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 None.
(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
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
22
- --------------------------------------------------------------------------------
(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)
23
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: May 6, 2005 By: /s/ Ronald D. Paul
-------------------------------------
Ronald D. Paul, President and CEO
Date: May 6, 2005 By: /s/ Wilmer L. Tinley
--------------------------------------------
Wilmer L. Tinley, Senior Vice President and
Chief Financial Officer
24