Table of Contents
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 June 30, 2008
OR
o
|
|
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
(Registrants
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
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
|
|
Accelerated filer
x
|
|
Non-accelerated filer
o
|
|
Smaller Reporting
Company
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act Yes
o
No
x
Indicate
the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practicable date.
As
of August 4, 2008, the registrant had 9,888,898 shares of Common Stock,
$0.01 par value, outstanding.
Table of Contents
Item 1 Financial
Statements
EAGLE BANCORP, INC.
Consolidated Balance Sheets
June 30, 2008 and December 31, 2007
(dollars in thousands, except per share data)
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(unaudited)
|
|
(audited)
|
|
ASSETS
|
|
|
|
|
|
Cash and due
from banks
|
|
$
|
18,565
|
|
$
|
15,408
|
|
Federal funds
sold
|
|
63
|
|
244
|
|
Interest bearing
deposits with banks and other short-term investments
|
|
1,391
|
|
4,490
|
|
Investment
securities available for sale, at fair value
|
|
79,585
|
|
87,117
|
|
Loans held for
sale
|
|
1,484
|
|
2,177
|
|
Loans
|
|
795,102
|
|
716,677
|
|
Less allowance
for credit losses
|
|
(9,154
|
)
|
(8,037
|
)
|
Loans, net
|
|
785,948
|
|
708,640
|
|
Premises and
equipment, net
|
|
6,561
|
|
6,701
|
|
Deferred income
taxes
|
|
4,362
|
|
3,597
|
|
Bank owned life
insurance
|
|
12,217
|
|
11,984
|
|
Other assets
|
|
5,624
|
|
6,042
|
|
TOTAL ASSETS
|
|
$
|
915,800
|
|
$
|
846,400
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
Noninterest
bearing demand
|
|
$
|
143,335
|
|
$
|
142,477
|
|
Interest bearing
transaction
|
|
55,017
|
|
54,090
|
|
Savings and
money market
|
|
187,275
|
|
177,081
|
|
Time, $100,000
or more
|
|
171,127
|
|
173,586
|
|
Other time
|
|
141,687
|
|
83,702
|
|
Total deposits
|
|
698,441
|
|
630,936
|
|
Customer
repurchase agreements and federal funds purchased
|
|
62,710
|
|
76,408
|
|
Other short-term
borrowings
|
|
15,000
|
|
22,000
|
|
Long-term
borrowings
|
|
50,000
|
|
30,000
|
|
Other
liabilities
|
|
5,436
|
|
5,890
|
|
Total
liabilities
|
|
831,587
|
|
765,234
|
|
|
|
|
|
|
|
STOCKHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Common stock,
$0.01 par value; shares authorized 50,000,000, shares issued and outstanding
9,842,571 (2008) and 9,721,315 (2007)
|
|
98
|
|
97
|
|
Additional paid
in capital
|
|
53,401
|
|
52,290
|
|
Retained
earnings
|
|
30,523
|
|
28,195
|
|
Accumulated
other comprehensive income
|
|
191
|
|
584
|
|
Total
stockholders equity
|
|
84,213
|
|
81,166
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
915,800
|
|
$
|
846,400
|
|
See notes to
consolidated financial statements.
2
Table of Contents
EAGLE
BANCORP, INC.
Consolidated Statements of Operations
For
the Six and Three Month Periods Ended June 30, 2008 and 2007 (unaudited)
(dollars in thousands, except per share data)
|
|
Six Months
|
|
Six Months
|
|
Three Months
|
|
Three Months
|
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
|
|
June 30, 2008
|
|
June 30, 2007
|
|
June 30, 2008
|
|
June 30, 2007
|
|
Interest Income
|
|
|
|
|
|
|
|
|
|
Interest and
fees on loans
|
|
$
|
25,824
|
|
$
|
25,498
|
|
$
|
12,944
|
|
$
|
12,967
|
|
Interest and
dividends on investment securities
|
|
2,127
|
|
2,139
|
|
1,032
|
|
958
|
|
Interest on
balances with other banks
|
|
|
|
10
|
|
|
|
10
|
|
Interest on
federal funds sold
|
|
58
|
|
196
|
|
19
|
|
172
|
|
Total interest
income
|
|
28,009
|
|
27,843
|
|
13,995
|
|
14,107
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
|
Interest on
deposits
|
|
8,336
|
|
9,823
|
|
3,908
|
|
4,988
|
|
Interest on
customer repurchase agreements and federal funds purchased
|
|
695
|
|
970
|
|
301
|
|
445
|
|
Interest on
other short-term borrowings
|
|
298
|
|
212
|
|
108
|
|
104
|
|
Interest on
long-term borrowings
|
|
838
|
|
671
|
|
436
|
|
372
|
|
Total interest
expense
|
|
10,167
|
|
11,676
|
|
4,753
|
|
5,909
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income
|
|
17,842
|
|
16,167
|
|
9,242
|
|
8,198
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Credit Losses
|
|
1,534
|
|
339
|
|
814
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income After Provision For Credit Losses
|
|
16,308
|
|
15,828
|
|
8,428
|
|
8,162
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
Income
|
|
|
|
|
|
|
|
|
|
Service charges
on deposits
|
|
913
|
|
713
|
|
484
|
|
364
|
|
Gain on sale of
loans
|
|
279
|
|
571
|
|
152
|
|
334
|
|
Gain on sale of
investment securities
|
|
10
|
|
7
|
|
|
|
|
|
Increase in the
cash surrender value of bank owned life insurance
|
|
233
|
|
220
|
|
117
|
|
113
|
|
Other income
|
|
475
|
|
683
|
|
217
|
|
385
|
|
Total
noninterest income
|
|
1,910
|
|
2,194
|
|
970
|
|
1,196
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
Expense
|
|
|
|
|
|
|
|
|
|
Salaries and
employee benefits
|
|
7,286
|
|
6,806
|
|
3,646
|
|
3,454
|
|
Premises and
equipment expenses
|
|
2,183
|
|
2,463
|
|
1,103
|
|
1,255
|
|
Marketing and
advertising
|
|
195
|
|
222
|
|
114
|
|
131
|
|
Legal,
accounting and professional fees
|
|
408
|
|
302
|
|
238
|
|
158
|
|
Other expenses
|
|
2,668
|
|
2,487
|
|
1,431
|
|
1,233
|
|
Total
noninterest expense
|
|
12,740
|
|
12,280
|
|
6,532
|
|
6,231
|
|
|
|
|
|
|
|
|
|
|
|
Income
Before Income Tax Expense
|
|
5,478
|
|
5,742
|
|
2,866
|
|
3,127
|
|
|
|
|
|
|
|
|
|
|
|
Income
Tax Expense
|
|
1,972
|
|
2,082
|
|
1,011
|
|
1,149
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
3,506
|
|
$
|
3,660
|
|
$
|
1,855
|
|
$
|
1,978
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.36
|
|
$
|
0.38
|
|
$
|
0.19
|
|
$
|
0.21
|
|
Diluted
|
|
$
|
0.35
|
|
$
|
0.37
|
|
$
|
0.19
|
|
$
|
0.20
|
|
Dividends
Declared Per Share
|
|
$
|
0.12
|
|
$
|
0.12
|
|
$
|
0.06
|
|
$
|
0.06
|
|
See notes to
consolidated financial statements.
3
Table of Contents
EAGLE
BANCORP, INC.
Consolidated Statements of Cash Flows
For
the Six Month Periods Ended June 30, 2008 and 2007 (unaudited)
(dollars
in thousands, except per share data)
|
|
2008
|
|
2007
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
Net income
|
|
$
|
3,506
|
|
$
|
3,660
|
|
Adjustments to
reconcile net income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
Provision for
credit losses
|
|
1,534
|
|
339
|
|
Depreciation and
amortization
|
|
663
|
|
672
|
|
Gains on sale of
loans
|
|
(279
|
)
|
(571
|
)
|
Origination of
loans held for sale
|
|
(18,204
|
)
|
(29,072
|
)
|
Proceeds from
sale of loans held for sale
|
|
19,176
|
|
28,946
|
|
Increase in cash
surrender value of BOLI
|
|
(233
|
)
|
(220
|
)
|
Gain on sale of
investment securities
|
|
(10
|
)
|
(7
|
)
|
Stock-based
compensation expense
|
|
126
|
|
130
|
|
Excess tax
benefit from exercise of non-qualified stock options
|
|
(192
|
)
|
(11
|
)
|
(Increase)
decrease in other assets
|
|
(93
|
)
|
262
|
|
Decrease in
other liabilities
|
|
(262
|
)
|
(19
|
)
|
Net cash
provided by operating activities
|
|
5,732
|
|
4,109
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
Decrease in
interest bearing deposits with other banks and short term investments
|
|
3,099
|
|
472
|
|
Purchases of
available for sale investment securities
|
|
(5,879
|
)
|
(591
|
)
|
Proceeds from
maturities of available for sale securities
|
|
4,764
|
|
2,841
|
|
Proceeds from
sale/call of available for sale securities
|
|
8,010
|
|
15,799
|
|
Net increase in
loans
|
|
(78,842
|
)
|
(33,884
|
)
|
Bank premises
and equipment acquired
|
|
(523
|
)
|
(876
|
)
|
Net cash used in
investing activities
|
|
(69,371
|
)
|
(16,239
|
)
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
Increase in
deposits
|
|
67,505
|
|
21,977
|
|
(Decrease)
increase in customer repurchase agreements and federal funds purchased
|
|
(13,698
|
)
|
2,525
|
|
(Decrease)
increase in other short-term borrowings
|
|
(7,000
|
)
|
12,000
|
|
Increase in
long-term borrowings
|
|
20,000
|
|
|
|
Issuance of
common stock
|
|
794
|
|
829
|
|
Excess tax
benefit from exercise of non-qualified stock options
|
|
192
|
|
11
|
|
Payment of
dividends and payment in lieu of fractional shares
|
|
(1,178
|
)
|
(1,144
|
)
|
Net cash
provided by financing activities
|
|
66,615
|
|
36,198
|
|
|
|
|
|
|
|
Net
Increase In Cash And Due From Banks
|
|
2,976
|
|
24,068
|
|
|
|
|
|
|
|
Cash
And Due From Banks At Beginning Of Period
|
|
15,652
|
|
28,977
|
|
|
|
|
|
|
|
Cash
and Due from Banks At End Of Period
|
|
$
|
18,628
|
|
$
|
53,045
|
|
|
|
|
|
|
|
Supplemental
Cash Flows Information:
|
|
|
|
|
|
Interest paid
|
|
$
|
9,894
|
|
$
|
11,640
|
|
Income taxes
paid
|
|
$
|
3,052
|
|
$
|
2,712
|
|
See notes to
consolidated financial statements.
4
Table of Contents
EAGLE
BANCORP, INC.
Consolidated Statements of Changes in Stockholders Equity
For
the Six Month Periods Ended June 30, 2008 and 2007 (unaudited)
(dollars
in thousands, except per share data)
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
Total
|
|
|
|
Common
|
|
Additional Paid
|
|
Retained
|
|
Comprehensive
|
|
Stockholders
|
|
|
|
Stock
|
|
in Capital
|
|
Earnings
|
|
Income (Loss)
|
|
Equity
|
|
Balance,
January 1, 2008
|
|
$
|
97
|
|
$
|
52,290
|
|
$
|
28,195
|
|
$
|
584
|
|
$
|
81,166
|
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
3,506
|
|
|
|
3,506
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss
on securities available for sale (net of taxes)
|
|
|
|
|
|
|
|
(387
|
)
|
(387
|
)
|
Less:
reclassification adjustment for gains net of taxes of $4 included in net
income
|
|
|
|
|
|
|
|
(6
|
)
|
(6
|
)
|
Total
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
3,113
|
|
Cash Dividend
($0.12 per share)
|
|
|
|
|
|
(1,178
|
)
|
|
|
(1,178
|
)
|
Shares issued
under dividend reinvestment plan - 43,243 shares
|
|
|
|
523
|
|
|
|
|
|
523
|
|
Stock-based
compensation
|
|
|
|
126
|
|
|
|
|
|
126
|
|
Exercise of
options for 78,013 shares of common stock
|
|
1
|
|
270
|
|
|
|
|
|
271
|
|
Tax benefit on
non-qualified options exercise
|
|
|
|
192
|
|
|
|
|
|
192
|
|
Balance,
June 30, 2008
|
|
$
|
98
|
|
$
|
53,401
|
|
$
|
30,523
|
|
$
|
191
|
|
$
|
84,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2007
|
|
$
|
95
|
|
$
|
50,278
|
|
$
|
22,796
|
|
$
|
(253
|
)
|
$
|
72,916
|
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
3,660
|
|
|
|
3,660
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain
on securities available for sale (net of taxes)
|
|
|
|
|
|
|
|
(389
|
)
|
(389
|
)
|
Less:
reclassification adjustment for gains net of taxes of $3 included in net
income
|
|
|
|
|
|
|
|
(4
|
)
|
(4
|
)
|
Total
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
3,267
|
|
Cash Dividend
($0.12 per share)
|
|
|
|
|
|
(1,144
|
)
|
|
|
(1,144
|
)
|
Stock-based
compensation
|
|
|
|
130
|
|
|
|
|
|
130
|
|
Exercise of
options for 71,804 shares of common stock
|
|
1
|
|
616
|
|
|
|
|
|
617
|
|
Shares issued
under dividend reinvestment plan - 13,295 shares
|
|
|
|
212
|
|
|
|
|
|
212
|
|
Tax benefit
adjustment on non-qualified options exercise
|
|
|
|
11
|
|
|
|
|
|
11
|
|
Balance,
June 30, 2007
|
|
$
|
96
|
|
$
|
51,247
|
|
$
|
25,312
|
|
$
|
(646
|
)
|
$
|
76,009
|
|
See notes to
consolidated financial statements.
5
Table of Contents
EAGLE
BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Three and Six Months Ended June 30, 2008 and 2007 (unaudited)
1. BASIS OF PRESENTATION
The consolidated 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 and for the year ended December 31, 2007 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 Companys Accounting Policies as disclosed in the Companys Annual
Report on Form 10-K/A (Amendment No. 2) for the year ended December 31,
2007. The Company believes that the
disclosures are adequate to make the information presented not misleading. The
results of operations for the three and six months ended June 30, 2008 are
not necessarily indicative of the results of operations to be expected for the
remainder of the year, or for any other period. Certain reclassifications have
been made to amounts previously reported to conform to the classifications made
in 2008.
2. NATURE OF OPERATIONS
The Company, through
EagleBank, its bank subsidiary (the Bank), conducts a full service community
banking business, primarily in Montgomery County, Maryland and Washington, D.C.
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 mortgage loans
and the origination of small business loans. The guaranteed portion of small
business loans is typically sold through the Small Business Administration, in
a transaction apart from the loans origination. The Bank offers its products
and services through nine banking offices and various electronic capabilities,
including remote deposit services introduced in 2006. Eagle Commercial
Ventures, LLC (ECV), a direct subsidiary of the Company provides subordinated
financing for the acquisition, development and construction of real estate
projects, where the primary financing is provided by the Bank. Prior to the
formation of ECV, the Company engaged directly in occasional subordinated
financing transactions, which involve higher levels of risk, together with
commensurate returns. Refer to Note 4 - Higher Risk Lending Revenue
Recognition below.
3. CASH FLOWS
For purposes of reporting
cash flows, cash and cash equivalents include cash and due from banks, and
federal funds sold (items with an original maturity of three months or less).
4. HIGHER
RISK LENDING REVENUE RECOGNITION
The Company has
occasionally made higher risk acquisition, development, and construction (ADC)
loans that entail higher risks than ADC loans made following normal
underwriting practices (higher risk loan transactions). These higher risk
loan transactions are currently made through the Companys subsidiary, ECV.
This activity is limited as to individual transaction amount and total exposure
amounts based on capital levels and is carefully monitored. The loans are
carried on the balance sheet at amounts outstanding and meet the loan
classification requirements of the Accounting Standard Executive Committee (AcSEC)
guidance reprinted from the CPA Letter, Special Supplement, dated February 10,
1986 (also referred to as Exhibit 1 to AcSEC Practice Bulletin No. 1).
Additional interest earned on these higher risk loan transactions (as defined
in the individual loan agreements) is recognized as realized under the
provisions contained in AcSECs guidance reprinted from the CPA Letter,
Special Supplement, dated February 10, 1986 (also referred to as Exhibit 1
to AcSEC Practice Bulletin No.1) and Staff Accounting Bulletin No. 101
(Revenue Recognition in Financial Statements). The additional interest is
included as a component of noninterest income. The Bank currently has one
higher risk lending transaction outstanding as of June 30, 2008 amounting
to $1.9 million.
6
Table of Contents
5.
INVESTMENT SECURITIES
Amortized cost and
estimated fair value of securities available for sale are summarized as
follows:
(dollars
in thosands)
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
June 30, 2008
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government
agency securities
|
|
$
|
42,173
|
|
$
|
559
|
|
$
|
|
|
$
|
42,732
|
|
Mortgage backed
securities
|
|
25,026
|
|
98
|
|
101
|
|
25,023
|
|
Municipal bonds
|
|
5,063
|
|
|
|
203
|
|
4,860
|
|
Federal Reserve
and Federal Home Loan Bank stock
|
|
5,726
|
|
|
|
|
|
5,726
|
|
Other equity
investments
|
|
1,278
|
|
6
|
|
40
|
|
1,244
|
|
|
|
$
|
79,266
|
|
$
|
663
|
|
$
|
344
|
|
$
|
79,585
|
|
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
December 31, 2007
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government
agency securities
|
|
$
|
50,428
|
|
$
|
885
|
|
$
|
18
|
|
$
|
51,295
|
|
Mortgage backed
securities
|
|
29,218
|
|
220
|
|
135
|
|
29,303
|
|
Municipal bonds
|
|
357
|
|
|
|
6
|
|
351
|
|
Federal Reserve
and Federal Home Loan Bank stock
|
|
4,870
|
|
|
|
|
|
4,870
|
|
Other equity
investments
|
|
1,278
|
|
20
|
|
|
|
1,298
|
|
|
|
$
|
86,151
|
|
$
|
1,125
|
|
$
|
159
|
|
$
|
87,117
|
|
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 June 30, 2008 are as follows:
(dollars
in thosands)
|
|
Estimated
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
Less than
|
|
More than
|
|
Unrealized
|
|
June 30, 2008
|
|
Value
|
|
12 months
|
|
12 months
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed
securities
|
|
$
|
13,500
|
|
$
|
101
|
|
$
|
|
|
$
|
101
|
|
Municipal bonds
|
|
4,860
|
|
203
|
|
|
|
203
|
|
Other equity
investments
|
|
1,244
|
|
40
|
|
|
|
40
|
|
|
|
$
|
19,604
|
|
$
|
344
|
|
$
|
|
|
$
|
344
|
|
|
|
Estimated
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
Less than
|
|
More than
|
|
Unrealized
|
|
December 31, 2007
|
|
Value
|
|
12 months
|
|
12 months
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government
agency securities
|
|
$
|
5,982
|
|
$
|
|
|
$
|
18
|
|
$
|
18
|
|
Mortgage backed
securities
|
|
11,032
|
|
6
|
|
129
|
|
135
|
|
Municipal bonds
|
|
351
|
|
6
|
|
|
|
6
|
|
|
|
$
|
17,365
|
|
$
|
12
|
|
$
|
147
|
|
$
|
159
|
|
The unrealized losses that exist are the result of
changes in market interest rates since original purchases. Except for one municipal bond issue which has
an underlying rating of AA, all of the remaining bonds are rated AAA. The
weighted average duration of debt securities, which comprise 91% of total
investment securities, is relatively short at 2.6 years. These factors, coupled
with the Companys ability and intent to hold these investments
7
Table of
Contents
for a
period of time sufficient to allow for any anticipated recovery in fair value,
substantiates that the unrealized losses are temporary in nature.
6. INCOME
TAXES
The Company employs the liability method of accounting
for income taxes as required by Statement of Financial Accounting Standards (SFAS)
No. 109, 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. The Company
adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes in the first quarter of 2007. The Company utilizes
statutory requirements for its income tax accounting, and avoids risks
associated with potentially problematic tax positions that may incur challenge
upon audit, where an adverse outcome is more likely than not. Therefore, no
provisions are made for either uncertain tax positions nor accompanying
potential tax penalties and interest for underpayments of income taxes in the
Companys tax reserves.
7. 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 stock
options. There were 420,467 and 198,961
shares for the six months ended June 20, 2008 and 2007, respectively, and
495,816 and 198,961 shares for the three months ended June 30, 2008 and
2007, excluded from the diluted net income per share computation because their
inclusion would be anti-dilutive.
Set forth below are the
bases for the computation of earnings per share for the periods shown.
|
|
Six Months Ended
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Earnings Per
Common Share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.36
|
|
$
|
0.38
|
|
$
|
0.19
|
|
$
|
0.21
|
|
Average Shares
Outstanding
|
|
9,807,371
|
|
9,510,788
|
|
9,833,506
|
|
9,532,765
|
|
Diluted
|
|
$
|
0.35
|
|
$
|
0.37
|
|
$
|
0.19
|
|
$
|
0.20
|
|
Average Shares
Outstanding (including dilutive effect of stock options)
|
|
9,926,334
|
|
9,826,739
|
|
9,906,151
|
|
9,813,537
|
|
8.
STOCK-BASED COMPENSATION
The Company
maintains the 1998 Stock Option Plan (1998 Plan) and the 2006 Stock Plan (2006
Plan). No additional options may be granted under the 1998 Plan. The 1998 Plan
provided for the periodic granting of incentive and non-qualifying options to
selected key employees and members of the Board. Option awards were made with
an exercise price equal to the market price of the Companys shares at the date
of grant. The option grants generally vested over a period of one to two years
under the 1998 Plan.
The Company
adopted the 2006 Plan upon approval by shareholders at the 2006 Annual Meeting
held on May 25, 2006. The Plan provides for the issuance of awards of
incentive options, nonqualifying options, restricted stock and stock
appreciation rights with respect to up to 650,000 shares. The purpose of the
2006 Plan is to advance the interests of the Company by providing directors and
selected employees of the Bank, the Company, and their affiliates with the
opportunity to acquire shares of common stock, through awards of options,
restricted stock and stock appreciation rights.
8
Table of Contents
The Company also
maintains the 2004 Employee Stock Purchase Plan (the ESPP). Under the ESPP, a
total of 253,500 shares of common stock, were reserved for issuance to eligible
employees at a price equal to at least 85% of the fair market value of the
shares of common stock on the date of grant. Grants each year expire no later than
the last business day of January in the calendar year following the year
in which the grant is made. No grants have been made under this plan in 2008.
The Company
believes that awards under all plans better align the interests of its
employees with those of its shareholders.
In January 2008,
the Company awarded options to purchase 79,300 shares to employees and 34,000
shares to certain Directors under the 2006 Plan which have a five-year term and
vest in three substantially equal installments on the date of grant, and the
first and second anniversaries of the date of grant.
In January 2008,
the Company awarded options to purchase 46,500 shares to six senior officers
under the 2006 Plan which have a ten-year term. Of the total shares awarded,
21,500 vest in three substantially equal installments on the date of grant, and
the first and second anniversaries of the date of grant. The remaining 25,000
shares awarded vest over a four-year period beginning on the fifth anniversary
date of the grant.
In April 2008,
the Company awarded options to purchase 1,000 shares to an employee under the
2006 Plan which have a five-year term and vest in three substantially equal
installments on the first, second and third anniversaries of the date of grant.
The fair value of
each option grant and other equity based award is estimated on the date of
grant using the Black-Scholes option pricing model with the assumptions as
shown in the table below used for grants during the six months ended June 30,
2008 and the twelve months ended December 31, 2007 and 2006.
Below is a summary
of changes in shares under option (split adjusted) for the six months ended June 30,
2008. The information excludes restricted stock unit awards.
9
Table of Contents
|
|
|
|
|
|
Weighted-Average
|
|
Weighted-Average
|
|
Aggregate
|
|
|
|
|
|
Weighted-Average
|
|
Remaining
|
|
Grant Date
|
|
Intrinsic
|
|
As of 1/1/2008
|
|
Stock Options
|
|
Exercise Price
|
|
Contractual Life
|
|
Fair Value
|
|
Value
|
|
Outstanding
|
|
752,944
|
|
$
|
10.09
|
|
|
|
$
|
3.28
|
|
|
|
Vested
|
|
631,682
|
|
8.70
|
|
|
|
3.15
|
|
|
|
Nonvested
|
|
121,263
|
|
17.36
|
|
|
|
3.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
activity
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
160,800
|
|
$
|
13.05
|
|
|
|
$
|
2.91
|
|
|
|
Exercised
|
|
78,013
|
|
3.47
|
|
|
|
1.53
|
|
|
|
Forfeited
|
|
9,955
|
|
14.76
|
|
|
|
2.82
|
|
|
|
Expired
|
|
13,780
|
|
15.08
|
|
|
|
3.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
6/30/2008
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
811,996
|
|
$
|
11.17
|
|
4.42
|
|
$
|
3.37
|
|
$
|
1,023,228
|
|
Vested
|
|
606,232
|
|
9.84
|
|
4.13
|
|
3.31
|
|
1,023,228
|
|
Nonvested
|
|
205,764
|
|
15.10
|
|
5.27
|
|
3.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding:
|
|
|
|
|
|
Weighted-Average
|
|
Range of
|
|
Stock Options
|
|
Weighted-Average
|
|
Remaining
|
|
Exercise Prices
|
|
Outstanding
|
|
Exercise Price
|
|
Contractual Life
|
|
$3.25 - $8.75
|
|
240,846
|
|
$
|
5.00
|
|
2.48
|
|
$8.76 -
$13.26
|
|
391,529
|
|
12.00
|
|
5.98
|
|
$13.27 - $17.77
|
|
79,760
|
|
16.83
|
|
3.10
|
|
$17.78 - $19.46
|
|
99,861
|
|
18.31
|
|
4.02
|
|
|
|
811,996
|
|
11.17
|
|
4.42
|
|
|
|
|
|
|
|
|
|
|
Exercisable:
Range of
|
|
Stock Options
|
|
Weighted-Average
|
|
Exercise Prices
|
|
Exercisable
|
|
Exercise Price
|
|
$3.25 - $8.75
|
|
240,846
|
|
$
|
5.00
|
|
$8.76 - $13.26
|
|
278,590
|
|
11.57
|
|
$13.27 - $17.77
|
|
20,998
|
|
16.85
|
|
$17.78 - $19.46
|
|
65,797
|
|
17.98
|
|
|
|
606,231
|
|
9.84
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
|
Ended
|
|
Year Ended
|
|
Year Ended
|
|
Assumptions:
|
|
June 30, 2008
|
|
2007
|
|
2006
|
|
Expected
Volatility
|
|
23.7% - 37.1
|
%
|
18.5% - 24.4
|
%
|
21.4% - 24.1
|
%
|
Weighted-Average
Volatility
|
|
27.03
|
%
|
20.12
|
%
|
22.62
|
%
|
Expected
Dividends
|
|
1.8
|
%
|
1.4
|
%
|
1.4
|
%
|
Expected Term
(In years)
|
|
3.5 - 9.0
|
|
3.1 - 4.0
|
|
0.5 - 3.4
|
|
Risk-Free Rate
|
|
2.70
|
%
|
4.73
|
%
|
4.60
|
%
|
Weighted-Average
Fair Value (Grant date)
|
|
$2.91
|
|
$3.18
|
|
$4.40
|
|
Total intrinsic
value of options exercised:
|
|
664,303
|
|
Total fair value
of shares vested:
|
|
220,930
|
|
Weighted-average
period over which nonvested awards are expected to be recognized:
|
|
1.77
|
years
|
The expected lives are
based on the simplified method allowed by SAB No. 107, whereby the
expected term is equal to the midpoint between the vesting date and the end of
the contractual term of the award.
10
Table of Contents
Included in salaries and
employee benefits the Company recognized $92 thousand ($0.01 per share) and
$126 thousand ($0.01 per share) in share based compensation expense for the
three and six months ended June 30, 2008 as compared to $82 thousand
($0.01 per share) and $130 thousand ($0.01 per share) for the same periods in
2007. As of June 30, 2008 there was $648 thousand of total unrecognized
compensation cost related to non-vested equity awards under the Companys
various share based compensation plans. The $648 thousand of unrecognized
compensation expense is being amortized over the remaining requisite service
(vesting) periods through 2015.
9. NEW ACCOUNTING PRONOUNCEMENTS
Recent
Accounting Pronouncements Adopted
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS 157).
This statement provides a single definition of fair value, a framework for
measuring fair value, and expanded disclosures concerning fair value.
Previously, different definitions of fair value were contained in various
accounting pronouncements creating inconsistencies in measurement and
disclosures. SFAS 157 applies under those previously issued pronouncements that
prescribe fair value as the relevant measure of value, except SFAS 123R and
related interpretations and pronouncements that require or permit measurement
similar to fair value but are not intended to measure fair value. This
pronouncement is effective for fiscal years beginning after November 15,
2007.
The Company adopted SFAS No. 157 as
of January 1, 2008 and the adoption did not have a material impact on the
consolidated financial statements or results of operations of the Company.
In February 2007,
the FASB issued SFAS No. 159,
The Fair Value Option for
Financial Assets and Financial Liabilities
(SFAS 159). SFAS 159
allows entities the option to measure eligible financial instruments at fair
value as of specified dates. Such election, which may be applied on an
instrument by instrument basis, is typically irrevocable once elected.
Statement 159 is effective for fiscal years beginning after November 15,
2007.
The Company adopted the provisions of SFAS 159 on January 1,
2008
and the adoption
did not have a material impact on the consolidated financial statements or
results of operations of the Company.
In December 2007,
the SEC issued Staff Accounting Bulletin No. 110 (SAB No. 110),
Certain Assumptions Used in Valuation Methods
,
which extends the use of the simplified method, under certain circumstances,
in developing an estimate of expected term of plain vanilla share options in
accordance with SFAS No. 123R. Prior to SAB No. 110, SAB No. 107
stated that the simplified method was only available for grants made up to December 31,
2007. The Company continues to use the simplified method in developing an
estimate of the expected term of stock options.
In May 2008, the
FASB issued SFAS No. 162,
The Hierarchy of
Generally Accepted Accounting Principles
(SFAS 162). This
Statement identifies the sources for generally accepted accounting principles
(GAAP) in the U.S. and lists the categories in descending order. An
entity should follow the highest category of GAAP applicable for each of its
accounting transactions. The adoption did not have a material effect on
the Companys consolidated financial statements.
Accounting
Pronouncements Issued But Not Yet Effective
In December 2007,
the FASB issued SFAS 141(R),
Business
Combinations (Revised 2007) (SFAS 141R).
SFAS 141R replaces SFAS 141, Business Combinations,
and applies to all transactions and other events in which one entity obtains
control over one or more other businesses. SFAS 141R requires an acquirer,
upon initially obtaining control of another entity, to recognize the assets,
liabilities and any non-controlling interest in the acquiree at fair value as
of the acquisition date. Contingent consideration is required to be recognized
and measured at fair value on the date of acquisition rather than at a later
date when the amount of that consideration may be determinable beyond a
reasonable doubt. This fair value approach replaces the cost-allocation process
required under SFAS 141 whereby the cost of an acquisition was allocated
to the individual assets acquired and liabilities assumed based on their
estimated fair value. SFAS 141R requires acquirers to expense
acquisition-related costs as incurred rather than allocating such costs to the
assets acquired and liabilities assumed, as was previously the case under
SFAS 141. Under SFAS 141R, the requirements of SFAS 146,
Accounting for Costs Associated with Exit or Disposal Activities, would have
to be met in order to accrue for a restructuring plan in purchase accounting.
Pre-acquisition contingencies are to be recognized at fair value, unless it is
a non-contractual contingency that is not likely to materialize, in which case,
nothing should be recognized in purchase accounting and, instead, that
11
Table
of Contents
contingency would be
subject to the probable and estimable recognition criteria of SFAS 5, Accounting
for Contingencies. SFAS 141R is expected to have a significant impact on
the Companys accounting for business combinations closing on or after January 1,
2009.
In December 2007,
the FASB issued SFAS No. 160,
Noncontrolling Interest in Consolidated Financial
Statements, an amendment of ARB Statement No. 51
(SFAS 160).
SFAS 160
amends Accounting Research Bulletin (ARB) No. 51, Consolidated Financial
Statements, to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 clarifies that a non-controlling interest in a
subsidiary, which is sometimes referred to as minority interest, is an
ownership interest in the consolidated entity that should be reported as a
component of equity in the consolidated financial statements. Among other
requirements, SFAS 160 requires consolidated net income to be reported at
amounts that include the amounts attributable to both the parent and the
non-controlling interest. It also requires disclosure, on the face of the
consolidated income statement, of the amounts of consolidated net income
attributable to the parent and to the non-controlling interest. SFAS 160
is effective for the Company on January 1, 2009 and is not expected to
have a significant impact on the Companys financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures
about Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133
(SFAS 161). SFAS 161 is intended to enhance the current
disclosure framework previously required for derivative instruments and hedging
activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities to include how and why an entity uses derivative instruments,
how derivative instruments and related hedge items are accounted for and their
impact on an entitys financial positions, results of operations, and cash
flows. This standard is effective for
fiscal years and interim periods beginning after November 15, 2008, with
early adoption encouraged. While the
Company does not currently utilize derivative instruments, it is currently
evaluating the impact of this new standard on its financial position, results
of operations and cash flows.
10. FAIR
VALUE MEASUREMENTS
SFAS No. 157,
Fair Value Measurements
, defines
fair value, establishes a framework for measuring fair value, establishes a
three-level valuation hierarchy for disclosure of fair value measurement and
enhances disclosure requirements for fair value measurements. The valuation
hierarchy is based upon the transparency of inputs to the valuation of an asset
or liability as of the measurement date. The three levels are defined as
follow:
Level 1
|
Quoted prices (unadjusted) in active markets for identical
assets or liabilities;
|
|
|
Level 2
|
Inputs other than quoted prices included within
Level 1 that are either directly or indirectly observable;
|
|
|
Level 3
|
Unobservable inputs in which little or no market
activity exists, therefore requiring an entity to develop its own assumptions
about the assumptions that market participants would use in pricing.
|
Investment Securities Available for Sale
Investment securities available for sale are recorded
at fair value on a recurring basis. Fair value measurement is based upon quoted
prices, if available. If quoted prices are not available, fair value measured
using independent pricing models or other model-based valuation techniques such
as the present value of future cash flows, adjusted for the securitys credit
rating, prepayment assumptions and other factors such as credit loss
assumptions. Level 1 securities include those traded on an active exchange such
as the New York Stock Exchange, Treasury securities that are traded by dealers
or brokers in active over-the-counter markets and money market funds. Level 2
securities include mortgage backed securities issued by government sponsored
entities, municipal bonds and corporate debt securities. Securities classified
as Level 3 include asset-backed securities in less liquid markets.
12
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Loans
The Company does not record loans at fair value on a
recurring basis, however, from time to time, a loan is considered impaired and
an allowance for loan loss is established. Loans for which it is probable that
payment of interest and principle will not be made in accordance with the
contractual terms of the loan are considered impaired. Once a loan is
identified as individually impaired, management measures impairment in
accordance with SFAS 114, Accounting by Creditors for Impairment of a Loan,
(SFAS 114). The fair value of impaired loans is estimated using one of several
methods, including the collateral value, market value of similar debt,
enterprise value, liquidation value and discounted cash flows. Those impaired
loans not requiring a specific allowance represents loans for which the fair
value of expected repayments or collateral exceed the recorded investment in
such loans. At June 30, 2008, substantially all of the totally impaired
loans were evaluated based upon the fair value of the collateral. In accordance
with SFAS 157, impaired loans where an allowance is established based on the
fair value of collateral
require
classification in the fair value hierarchy. When the fair value of the
collateral is based on an observable market price or a current appraised value,
the Company records the loan as nonrecurring Level 2. When an appraised value
is not available or management determines the fair value of the collateral is
further impaired below the appraised value and there is no observable market
price, the Company records the loan as nonrecurring Level 3.
Assets and Liabilities
Recorded as Fair Value on a Recurring Basis
The table below presents
the recorded amount of assets and liabilities measured at fair value on a
recurring basis as of June 30, 2008:
(dollars in thousands)
|
|
Carrying Value
(Fair Value)
|
|
Quoted Prices
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant Other
Unobservable Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities available for sale
|
|
$
|
79,585
|
|
$
|
1,144
|
|
$
|
78,341
|
|
$
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and Liabilities
Recorded as Fair Value on a Nonrecurring Basis
The Company may be
required from time to time, to measure certain assets at fair value on a
nonrecurring basis in accordance with U.S. generally accepted accounting
principles. These include assets that are measured at the lower of cost or market
that were recognized at fair value below cost at the end of the period. Assets
measured at fair value on a nonrecurring basis are included in the table below:
(dollars in thousands)
|
|
Carrying Value
(Fair Value)
|
|
Quoted Prices
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant Other
Unobservable Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
10,702
|
|
$
|
|
|
$
|
9,818
|
|
$
|
884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. PENDING ACQUISITION
On December 2, 2007
the Company entered into a definitive agreement with Fidelity & Trust
Financial Corporation (Fidelity) and its subsidiary Fidelity & Trust
Bank for the Company to acquire Fidelity and for Fidelity & Trust Bank
to be merged into EagleBank, with EagleBank being the surviving entity. A registration
13
Table of Contents
statement (Registration No. 333-150763)
relating to this transaction has been filed with the Securities and Exchange
Commission.
The
combination is structured as a stock-for-stock exchange, under which
Fidelitys shareholders (based on the original conversion ratio)
would have received 0.9202 shares of Eagle common stock for each share of Fidelity common stock owned. The
original conversion ratio is subject to reductions (through the date of
closing) under certain circumstances set forth in the merger agreement. Based on a partial, preliminary, estimated application of the
adjustment factors forth in the merger agreement
through June 30, 2008, and without adjusting
for, among other things, additional reserves required to comport Fidelitys
reserve policies with ours, Fidelitys shareholders
would receive 0.6687
shares of Eagle common stock
for each share of Fidelity common stock owned. Based
upon the closing stock price for Eagle Bancorp Inc. on July 25, 2008
($8.29 per share) and the preliminarily updated conversion ratio through June 30,
2008 of 0.6687 shares, the aggregate value of the transaction would be $23.3
million, or $5.54 per share of Fidelity common stock. The value of
the transaction at closing may be higher or lower, and is currently expected to
be lower, based on reductions in the conversion ratio which are expected to
result from complete and final application of the adjustment provisions of the
merger agreement. Changes in the
aggregate value of the transaction will also occur based on changes in the
value of Eagle common stock. Following the completion of the merger, Fidelity &
Trusts shareholders will own approximately 22% of Eagle Bancorps outstanding
common stock, based on the preliminarily updated conversion ratio through June 30,
2008. Two members of the Fidelity & Trust Financial Corporation
Board will join the Eagle Bancorp, Inc. Board and four of their directors
will join the EagleBank Board.
Eagle Bancorp, Inc.
is the holding company for EagleBank which commenced operations in 1998. The
bank is headquartered in Bethesda, Maryland, and conducts full service banking
services through nine offices, located in Montgomery County, Maryland and
Washington, D.C. The Company focuses on building relationships with businesses,
professionals and individuals in its marketplace.
Fidelity & Trust
Bank was founded and opened in November 2003. The Banks mission is
to provide its customers with customized banking solutions and above all,
outstanding customer service.
At June 30,
2008, EagleBank had $12.9 million advanced under a demand line of credit
facility secured by the stock of Fidelity & Trust Bank, which is
included in Loans on the Consolidated Balance Sheets. The outstanding line
amount bears interest at the prime interest rate less 0.25%. The line of credit expires at September 30,
2008.
12.
SUBSEQUENT EVENTS
In
July 2008, the Board of Directors authorized proceeding with the
preparation of a registration statement to be filed with the Securities and
Exchange Commission for an offering of up to $30 million of noncumulative
convertible perpetual preferred stock.
The offering is expected to be made primarily to the Companys
shareholders following consummation of the pending transaction with Fidelity &
Trust Financial Corporation, in a manner that would allow shareholders of both
companies to maintain their proportionate interest in the post-merger Company.
In August 2008, the
Company entered into a $20 million line of credit facility with a five year
term out option with a regional commercial bank. The purpose of the facility is to finance
short-term working capital needs, including contributing amounts to the Bank as
capital. The facility will mature in August 2010 and is secured by a
pledge of all the common stock of the Bank. Advances under the facility will
bear interest at a daily floating rate of the regional banks Prime Rate minus
0.25% (currently 4.75% per annum), with a fee of 0.10% per annum on the undrawn
amounts, payable quarterly in arrears. The Company did not pay a commitment fee
in connection with the closing of this facility. The new facility replaces a
similar facility in the amount of $15 million from a correspondent bank which
had matured in early July 2008. The Company had secured a commitment at
the end of June 2008 to extend the existing facility but elected to accept
the new facility commitment.
ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion
provides information about the results of operations, and financial condition,
liquidity, and capital resources of the Company and its subsidiaries as of the
dates and periods indicated. 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 Companys Annual Report on Form 10-K for the year ended December 31,
2007, as amended.
14
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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 Companys 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
The Company is a growth oriented,
one-bank holding company headquartered in Bethesda, Maryland. The Company
provides general commercial and consumer banking services through its wholly
owned banking subsidiary (the Bank), a Maryland chartered bank which is a
member of the Federal Reserve System. The Company was 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 the primary market area. The
Companys philosophy is to provide superior, personalized service to its
customers. The Company focuses 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 six offices
serving Montgomery County and three offices in the District of Columbia.
The Company offers a
broad range of commercial banking services to its business and professional
clients as well as full service consumer banking services to individuals living
and/or working primarily in the service area. The Company emphasizes 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 the 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 the
Company serves. 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. The Company has developed significant expertise
and commitment as an SBA lender, has been designated a Preferred Lender by the
Small Business Administration (SBA), and is a leading community bank SBA
lender in the Washington D.C. district.
PENDING ACQUISITION
In December 2007,
the Company announced the signing of a definitive agreement to acquire Fidelity &
Trust Financial Corporation (Fidelity & Trust), parent of Fidelity &
Trust Bank. At June 30, 2008, Fidelity & Trust had $461 million
of assets. Fidelity & Trust Bank operates six locations, with one in
Northern Virginia, three in Montgomery County, Maryland and two in the District
of Columbia. The transaction is subject to regulatory and shareholder approvals
and the satisfaction of other conditions, as set forth in the merger agreement.
The transaction is currently anticipated to be completed in the third quarter
of 2008.
Refer to Note 11 Pending
Acquisition in the Notes to Consolidated Financial Statements for further
information on this transaction.
CRITICAL ACCOUNTING
POLICIES
The Companys
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
15
Table of Contents
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 investment securities
available for sale are based either on quoted market prices or are provided by
other third-party sources, when available.
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) No. 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
(SFAS
114), 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 actual events occur.
The specific allowance
allocates a reserve to identified loans. Loans identified in the risk rating
evaluation as substandard, doubtful and loss, (classified loans) are segregated
from non-classified loans. Classified
loans are assigned specific reserves based on an impairment analysis. Under
SFAS 114, a loan for which reserves are individually allocated may show
deficiencies in the borrowers 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 Companys 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. The portfolio of non classified
loans is stratified by loan type and risk assessment. Allowance factors relate to the type of loan
and level of the internal risk rating, with loans exhibiting higher risk and
loss experience receiving a higher allowance factor.
The environmental
allowance is also used to estimate the loss associated with pools of
non-classified loans. These unclassified
loans are also stratified by loan type, and environmental allowance factors are
assigned by management based upon a number of conditions, including
delinquencies, loss history, changes in lending policy and procedures, changes
in business and economic conditions, changes in the nature and volume of the
portfolio, management expertise, concentrations within the portfolio, quality
of internal and external loan review systems, competition, and legal and
regulatory requirements.
The allowance captures
losses inherent in the portfolio which have not yet been recognized. Allowance factors and the overall size of the
allowance may change from period to period based upon managements assessment
of the above described factors and the relative weights given to each factor.
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 borrowers prospects of repayment, and in
establishing allowance factors on the formula allowance and environmental
allowance components of the allowance. The establishment of allowance factors
involves a continuing evaluation, based on managements 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 can have a
direct impact on the amount of the provision, and a related after tax effect on
net income. Errors in managements perception and assessment of the global
factors and their impact on the portfolio could result in the
16
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allowance not being
adequate to cover losses in the portfolio, and may result in additional
provisions or charge-offs.
Alternatively, errors in managements 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 provision in the future. For additional information regarding
the allowance for credit losses, refer to the discussion under the caption Allowance
for Credit Losses below.
The Company follows the
provisions of SFAS No. 123R,
Share-Based Payment,
which requires the expense recognition for the fair value of share based
compensation awards, such as stock options, restricted stock units, performance
based shares and the like. This standard
allows management to establish modeling assumptions as to expected stock price
volatility, option terms, forfeiture rates and dividend rates which directly
impact estimated fair value. The accounting standard also allows for the use of
alternative option pricing models which may impact fair value as determined.
The Companys practice is to utilize reasonable and supportable assumptions
which are reviewed with the appropriate Board Committee.
RESULTS
OF OPERATIONS
Summary
The Company reported net income of $3.5 million for
the six months ended June 30, 2008, as compared to net income of $3.7
million for the six months ended June 30, 2007, a decline of 4%. Income
per basic share was $0.36 for the six month period ended June 30, 2008, as
compared to $0.38 for the same period in 2007. Income per diluted share was
$0.35 for the six months ended June 30, 2008, as compared to $0.37 for the
same period in 2007.
For the three months ended June 30, 2008, the
Company reported net income of $1.9 million as compared to $2.0 million for the
same period in 2007. Income per basic share and diluted share was $0.19 for the
three months ended June 30, 2008, as compared to $0.21 per basic share and
$0.20 per diluted share for the same period in 2007.
The Company had an
annualized return on average assets of 0.81% and an annualized return on
average equity of 8.40% for the first six months of 2008, as compared to
returns on average assets and average equity of 0.95% and 9.88%, respectively,
for the same six months of 2007.
For the three months
ended June 30, 2008, the Company had an annualized return on average
assets of 0.84% and an annualized return on average equity of 8.81%, as
compared to an annualized return on average assets of 1.02% and annualized
return on average equity of 10.50% for the same period in 2007.
For the six months ended June 30,
2008, net interest income showed an increase of 10% as compared to the same
period in 2007 on growth in average earning assets of 14%. For the six months
ended June 30, 2008 as compared to the same period in 2007, the Company
experienced a decline in its net interest margin from 4.43% to 4.26% or 17
basis points. This change was primarily due to a smaller benefit from
noninterest funding sources in the first six months of 2008 as compared to 2007
as the Federal Reserve lowered its targeted federal funds interest rate seven
times between June 2007 and June 2008 to combat a slower economic
environment.
For the three months
ended June 30, 2008, net interest income showed an increase of 13% as
compared to the same period in 2007 on growth in average earning assets of 16%.
For the three months ended June 30, 2008 as compared to the same period in
2007, the Company experienced a decline in its net interest margin from 4.44%
to 4.34% or 11 basis points. The decrease for the three months ended June 30,
2008 is due to the same reason stated above for the decline in the margin for
the six months ended June 30, 2008.
For both the six months
ended June 30, 2008 and 2007, average interest bearing liabilities funding
average earning assets was 77%. Additionally, while the average rate on earning
assets for the six month period ended June 30, 2008, as compared to 2007
has declined by 93 basis points from 7.63% to 6.70%, the cost of interest bearing
liabilities has decreased by 103 basis points from 4.18% to 3.15%, resulting in
an increase in the net interest spread of 10 basis points from 3.45% for the
six months ended June 30, 2007 to 3.55% for the six months ended June 30,
2008. The 17 basis point decline in the net interest margin compares to an
increase in the net interest spread as the benefit of average noninterest
sources funding earning assets declined from 98 basis points for the six months
ended
17
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June 30, 2007 to 71
basis points for the six months ended June 30, 2008. This decline was due
to the significantly lower level of interest rates during the six months ended June 30,
2008 as compared to 2007.
For the three months
ended June 30, 2008 and 2007, average interest bearing liabilities funding
average earning assets was 77%.
Additionally, while the average rate on earning assets for the three
months ended June 30, 2007, as compared to 2008 has declined by 108 basis
points from 7.65% to 6.57%, the cost of interest bearing liabilities has
decreased by 130 basis points from 4.18% to 2.88%, resulting in an increase in
the net interest spread of 22 basis points from 3.47% for the quarter ended June 30,
2007 to 3.69% for the three months ended June 30, 2008. The net interest
margin decreased 10 basis points from 4.44% for the three months ended June 30,
2007 to 4.34% for the three months ended June 30, 2007 and compares to an
increase in the net interest spread as the benefit of average noninterest
sources funding earning assets declined from 97 basis points for the three
months ended June 30, 2007 to 66 basis points for the three months ended June 30,
2008, also due to the significantly lower level of interest rates in 2008 as
compared to 2007.
Due to the need to meet
loan funding objectives in excess of deposit growth, the bank has relied to a
larger extent on alternative funding sources, such as Federal Home Loan Bank (FHLB)
advances and brokered time deposits which costs have been judged reasonable as
an alternative to more core funding. If significant reliance on alternative
funding sources continues, the Companys earnings could be adversely impacted,
depending on the cost of those funds when needed.
In terms of the average
balance sheet composition, or mix, loans, which generally have higher yields
than securities and other earning assets, increased from 87% of average earning
assets in the first six months of 2007 to 89% of average earning assets for the
same period of 2008. Investment
securities for the first six months of 2008 amounted to 10% of average earning
assets, a decline of 1% from an average of 11% for the same period in 2007. Federal
funds sold averaged 0.6% in the first six months of 2008 versus 1% of average
earning assets for the same period of 2007.
For the three months
ended June 30, 2008 average loans increased by 2% to 90% of average
earning assets as compared to 88% for the same period in 2007. Investment
securities for both the three months ended June 30, 2008 and 2007 amounted
to 10% of average earning assets. Federal funds sold averaged 0.4% of average
earning assets for the three months ended June 30, 2008 as compared to 2%
for the same period in 2007.
The provision for credit
losses was $1.5 million for the first six months of 2008 as compared to $339
thousand for the same period in 2007.
The higher provisioning in
the first six months of 2008 as compared to 2007 is attributable to
substantially higher levels of loan growth ($78 million for the six months
ended June 30, 2008 versus $33 million for the same period in 2007) and to
increases in reserve allocations on classified credits.
The provision for credit
losses was $814 thousand for the three months ended June 30, 2008 as
compared to $36 thousand for the three months ended June 30, 2007. The higher provisioning in the second quarter
of 2008 as compared to the second quarter of 2007 is primarily attributable to
higher levels of loan growth ($35 million for the three months ended June 30,
2008 versus $22 million for the same period in 2007), increases in specific
reserves for problem and potential problem loans, and higher levels of net
charge-offs in the second quarter of 2008 as compared to the second quarter of
2007.
In total, the ratio of
net charge-offs to average loans was 0.11% for the first six months of 2008 as
compared to 0.13% for the first six months of 2007. The continued management of
a quality loan portfolio remains a key objective of the Company. For the six
months ended June 30, 2008, net charge-offs totaled $417 thousand versus
$424 thousand for the six months ended June 30, 2007. Net charge-offs in
the six months ended June 30, 2008 were attributable to charge-offs in
consumer loans (39% of total), the un-guaranteed portion of SBA Loans (32% of
total), and non-real estate commercial business loans (29% of total).
In total, the ratio of
net charge-offs to average loans was 0.20% for the three months ended June 30,
2008 as compared to 0.01% for the same three month period of 2007. For the
three months ended June 30, 2008, the Company recorded net charge-offs of
$393 thousand as compared to $11 thousand of net charge-offs for the three
months ended June 30, 2007. Net
charge-offs in the three months ended June 30, 2008 were attributable to
charge-offs in consumer loans (38% of total), the un-guaranteed portion of SBA
Loans (32% of total), and non-real estate commercial business loans (30% of
total).
18
Table of Contents
Total noninterest income
was $1.9 million for the first six months of 2008 as compared to $2.2 million
for the same period in 2007, a decline of 13%. The decrease in the six months
ended 2008 was attributed primarily to lower amounts of gains on the sale of
SBA and residential mortgage loans of $279 thousand versus $571 thousand during
the six months ended June 30, 2007, and no income from subordinate
financing of real estate projects in 2008 versus $227 thousand in the prior
year. Income from subordinated financing activities is subject to wide
variances, as it is based on the sales progress of a limited number of development
projects.
Total noninterest income
for the three months ended June 30, 2008 declined 19% from the same period
in 2007 from $1.2 million to $970 thousand. This decline was due to a lower
volume of SBA and residential mortgage loan sales activity, which activity is
subject to significant quarterly variances and no income from subordinate
financing of real estate projects in 2008 versus $227 thousand in the prior
year.
Total noninterest
expenses increased from $12.3 million in the first six months of 2007 to $12.7
million for the first six months of 2008, an increase of 4%. The primary
reasons for this increase were merit increases and related personnel cost
increases, increased broker fees, higher internet and license agreement fees
and increased legal, accounting and professional fees. The efficiency ratio,
which measures the level of non-interest expense to total revenue (defined as
the sum of net interest income and noninterest income) improved to 64.50% for
the six months ended June 30, 2008, as compared to 66.88% for the six
months ended June 30, 2007.
For the three months
ended June 30, 2008, total noninterest expenses were $6.5 million, as
compared to $6.2 million for the same period in 2007, an increase of 5%. This
increase was due to the same factors mentioned above which affected the
increase for the six month period. The efficiency ratio for the three months
ended June 30, 2008 improved to 63.96% as compared to 66.33% for the same
period in 2007. While the Company continues to make strategic investments in
infrastructure, more attention to overall cost management is being emphasized.
For the six months ended June 30,
2008 as compared to 2007, the increase in net interest income from increased
volumes, offset by the combination of a higher provision for credit losses,
lower levels of noninterest income, a lower net interest margin and higher
levels of noninterest expenses, resulted in stable net income during the three
month period.
The ratio of average
equity to average assets declined from 9.65% for the first six months of 2007
to 9.59% for the first six months of 2008. As discussed below, the capital
ratios of the Bank and Company remain above well capitalized levels.
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 (refer to discussion above under Results of
Operations). Changes in the volume and mix of assets and funding sources, along
with the changes in yields earned and rates paid, determine changes in net
interest income. Net interest income for the first six months of 2008 was $17.8
million compared to $16.2 million for the first six months of 2007, a 10%
increase. This increase in net interest income for the six months ended June 30,
2008 was attributable in part to an increased volume of earning assets of 14%
offset somewhat by a 4% decline in the net interest margin from 4.43% to 4.26%.
For the three months ended June 30, 2008, net interest income was $9.2
million as compared to $8.2 million for the same period in 2007, a 13%
increase. This increase was attributable to an increased volume of earning
assets of 16% offset somewhat by a 2% decline in the net interest margin from
4.45% to 4.34%. As earlier mentioned, the decline in the net interest margin in
both the three and six month periods ended June 30, 2008 as compared to
the same periods in 2007 was due to a lower benefit of noninterest funding
sources as market interest rates were substantially lower in 2008 as compared
to 2007. In an effort to combat a weaker economic climate, the Federal Reserve
lowered its targeted federal funds rate from 5.25% at June 2007 to 2.00%
at June 2008.
The tables below labeled Average
Balances, Interest Yields and Rates and Net Interest Margin present the
average balances and rates of the various categories of the Companys assets
and liabilities for the six and three months ended 2008 and 2007. 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
19
Table of Contents
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.
EAGLE BANCORP, INC.
Average Balances, Interest Yields and Rates, and Net Interest Margin
(dollars in thousands)
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
Average
Balance
|
|
Interest
|
|
Average
Yield/Rate
|
|
Average
Balance
|
|
Interest
|
|
Average
Yield/Rate
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing
deposits with other banks and other short-term investments
|
|
$
|
2,974
|
|
$
|
57
|
|
3.85
|
%
|
$
|
4,570
|
|
$
|
131
|
|
5.78
|
%
|
Loans
(1) (2) (3)
|
|
750,768
|
|
25,824
|
|
6.92
|
%
|
642,001
|
|
25,498
|
|
8.01
|
%
|
Investment
securities available for sale (3)
|
|
82,874
|
|
2,070
|
|
5.02
|
%
|
81,440
|
|
2,018
|
|
5.00
|
%
|
Federal funds sold
|
|
4,732
|
|
58
|
|
2.46
|
%
|
7,520
|
|
196
|
|
5.26
|
%
|
Total interest
earning assets
|
|
841,348
|
|
28,009
|
|
6.70
|
%
|
735,531
|
|
27,843
|
|
7.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
noninterest earning assets
|
|
42,643
|
|
|
|
|
|
46,564
|
|
|
|
|
|
Less: allowance
for credit losses
|
|
8,470
|
|
|
|
|
|
7,407
|
|
|
|
|
|
Total
noninterest earning assets
|
|
34,173
|
|
|
|
|
|
39,157
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
875,521
|
|
|
|
|
|
$
|
774,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing
transaction
|
|
$
|
45,968
|
|
$
|
160
|
|
0.70
|
%
|
$
|
53,575
|
|
$
|
126
|
|
0.47
|
%
|
Savings and
money market
|
|
190,480
|
|
1,927
|
|
2.03
|
%
|
168,400
|
|
3,073
|
|
3.68
|
%
|
Time deposits
|
|
295,302
|
|
6,249
|
|
4.26
|
%
|
266,084
|
|
6,624
|
|
5.02
|
%
|
Customer
repurchase agreements and federal funds purchased
|
|
54,950
|
|
695
|
|
2.54
|
%
|
42,841
|
|
970
|
|
4.57
|
%
|
Other short-term
borrowings
|
|
20,346
|
|
298
|
|
2.95
|
%
|
7,757
|
|
212
|
|
5.51
|
%
|
Long-term
borrowings
|
|
42,363
|
|
838
|
|
3.98
|
%
|
25,160
|
|
671
|
|
5.38
|
%
|
Total interest
bearing liabilities
|
|
649,409
|
|
10,167
|
|
3.15
|
%
|
563,817
|
|
11,676
|
|
4.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
bearing demand
|
|
137,378
|
|
|
|
|
|
132,415
|
|
|
|
|
|
Other
liabilities
|
|
4,780
|
|
|
|
|
|
3,732
|
|
|
|
|
|
Total
noninterest bearing liabilities
|
|
142,158
|
|
|
|
|
|
136,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders
equity
|
|
83,954
|
|
|
|
|
|
74,724
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
875,521
|
|
|
|
|
|
$
|
774,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income
|
|
|
|
$
|
17,842
|
|
|
|
|
|
$
|
16,167
|
|
|
|
Net interest
spread
|
|
|
|
|
|
3.55
|
%
|
|
|
|
|
3.45
|
%
|
Net interest
margin
|
|
|
|
|
|
4.26
|
%
|
|
|
|
|
4.43
|
%
|
(1)
Includes Loans held for sale
(2)
Loans placed on nonaccrual
status are included in average balances. Net loan fees and late charges
included in interest income on loans totaled $666 thousand and $580 thousand
for the six months ended June 30, 2008 and 2007, respectively.
(3)
Interest and fees on loans
and investments exclude tax equivalent adjustments.
20
Table of Contents
EAGLE BANCORP, INC.
Average Balances, Interest Yields and Rates, and Net Interest Margin
(dollars in thousands)
|
|
Three Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
Average
Balance
|
|
Interest
|
|
Average
Yield/Rate
|
|
Average
Balance
|
|
Interest
|
|
Average
Yield/Rate
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning
assets:
|
|
$
|
1,854
|
|
$
|
14
|
|
3.04
|
%
|
$
|
4,490
|
|
$
|
70
|
|
6.25
|
%
|
Interest bearing
deposits with other banks and other short-term investments
|
|
770,034
|
|
12,944
|
|
6.76
|
%
|
647,714
|
|
12,967
|
|
8.03
|
%
|
Loans
(1) (2) (3)
|
|
81,721
|
|
1,018
|
|
5.01
|
%
|
73,620
|
|
888
|
|
4.84
|
%
|
Investment
securities available for sale (3)
|
|
3,623
|
|
19
|
|
2.11
|
%
|
13,165
|
|
172
|
|
5.24
|
%
|
Federal funds
sold
|
|
857,232
|
|
13,995
|
|
6.57
|
%
|
738,989
|
|
14,097
|
|
7.65
|
%
|
Total interest
earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,834
|
|
|
|
|
|
47,323
|
|
|
|
|
|
Total
noninterest earning assets
|
|
8,799
|
|
|
|
|
|
7,350
|
|
|
|
|
|
Less: allowance
for credit losses
|
|
34,035
|
|
|
|
|
|
39,973
|
|
|
|
|
|
Total
noninterest earning assets
|
|
$
|
891,267
|
|
|
|
|
|
$
|
778,962
|
|
|
|
|
|
TOTAL ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing
liabilities:
|
|
$
|
47,794
|
|
$
|
95
|
|
0.80
|
%
|
$
|
51,826
|
|
$
|
60
|
|
0.46
|
%
|
Interest bearing
transaction
|
|
195,372
|
|
860
|
|
1.77
|
%
|
171,162
|
|
1,555
|
|
3.64
|
%
|
Savings and
money market
|
|
301,638
|
|
2,953
|
|
3.94
|
%
|
268,846
|
|
3,373
|
|
5.03
|
%
|
Time deposits
|
|
54,887
|
|
301
|
|
2.21
|
%
|
39,146
|
|
445
|
|
4.56
|
%
|
Customer
repurchase agreements and federal funds purchased
|
|
18,692
|
|
108
|
|
2.32
|
%
|
7,440
|
|
104
|
|
5.61
|
%
|
Other short-term
borrowings
|
|
45,055
|
|
436
|
|
3.89
|
%
|
28,363
|
|
372
|
|
5.26
|
%
|
Long-term
borrowings
|
|
663,438
|
|
4,753
|
|
2.88
|
%
|
566,783
|
|
5,909
|
|
4.18
|
%
|
Total interest
bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
bearing liabilities:
|
|
138,347
|
|
|
|
|
|
132,579
|
|
|
|
|
|
Noninterest
bearing demand
|
|
4,774
|
|
|
|
|
|
4,051
|
|
|
|
|
|
Other
liabilities
|
|
143,121
|
|
|
|
|
|
136,630
|
|
|
|
|
|
Total
noninterest bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,708
|
|
|
|
|
|
75,549
|
|
|
|
|
|
Stockholders
equity
|
|
$
|
891,267
|
|
|
|
|
|
$
|
778,962
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,242
|
|
|
|
|
|
$
|
8,188
|
|
|
|
Net interest
income
|
|
|
|
|
|
3.69
|
%
|
|
|
|
|
3.47
|
%
|
Net interest spread
|
|
|
|
|
|
4.34
|
%
|
|
|
|
|
4.44
|
%
|
Net interest
margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes Loans held for sale
(2)
Loans placed on nonaccrual status are included in
average balances. Net loan fees and late charges included in interest income on
loans totaled $369 thousand and $271 thousand for the three months ended
June 30, 2008 and 2007, respectively.
(3)
Interest and fees on loans and investments exclude tax
equivalent adjustments.
21
Table of Contents
Provision 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 managements 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 Banks outside loan review
consultant, support managements 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 six
months of 2008, a provision for credit losses was made in the amount of $1.5
million and the allowance for credit losses increased $1.1 million, including
the impact of $417 thousand in net charge-offs during the period. The provision
for credit losses of $1.5 million in the first six months of 2008 compared to a
provision for credit losses of $339 thousand in the first six months of 2007.
The higher
provisioning in the first six months of 2008 as compared to 2007 is
attributable to substantially higher levels of loan growth and to increases in
reserve allocations on classified credits. In part, higher levels of loan
growth can be attributable to growing demand from existing and new customers
within the Banks trade area as a result of reduced access to funds in the
conduit and life insurance capital markets.
During the three months
ended June 30, 2008, a provision for credit losses was made in the amount
of $814 thousand and the allowance for credit losses increased $421 thousand,
including the impact of $393 thousand in net charge-offs during the period. The
provision for credit losses of $814 thousand in the three months June 30,
2008 compared to $36 thousand in the same period of 2007. The higher
provisioning in the second quarter of 2008 as compared to the second quarter of
2007 is primarily attributable to higher levels of loan growth in the second
quarter of 2008 versus 2007, increases in specific reserves for problem and
potential problem loans, and higher levels of net charge-offs in the second
quarter of 2008 as compared to the second quarter of 2007.
As part of its
comprehensive loan review process, the Companys Board of Directors and the
Bank Directors Loan Committee and or Board of Directors Credit Review
Committees carefully evaluate 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 Banks 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 for the Company.
22
Table of Contents
The following table sets
forth activity in the allowance for credit losses for the periods indicated.
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
(dollars in thousands)
|
|
2008
|
|
2007
|
|
Balance at
beginning of year
|
|
$
|
8,037
|
|
$
|
7,373
|
|
Charge-offs:
|
|
|
|
|
|
Commercial
|
|
251
|
|
421
|
|
Real estate
commercial
|
|
|
|
|
|
Construction
|
|
|
|
|
|
Home equity
|
|
124
|
|
|
|
Other consumer
|
|
58
|
|
24
|
|
Total
charge-offs
|
|
433
|
|
445
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
Commercial
|
|
16
|
|
8
|
|
Real estate
commercial
|
|
|
|
|
|
Construction
|
|
|
|
|
|
Home equity
|
|
|
|
|
|
Other consumer
|
|
|
|
13
|
|
Total recoveries
|
|
16
|
|
21
|
|
Net charge-offs
|
|
(417
|
)
|
(424
|
)
|
|
|
|
|
|
|
Additions
charged to operations
|
|
1,534
|
|
339
|
|
Balance at end
of period
|
|
$
|
9,154
|
|
$
|
7,288
|
|
|
|
|
|
|
|
Annualized ratio
of net charge-offs during the period to average loans outstanding during the
period
|
|
|
|
|
|
|
|
0.11%
|
|
0.13
|
%
|
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 June 30,
|
|
As of December 31,
|
|
|
|
2008
|
|
2007
|
|
(dollars in thousands)
|
|
Amount
|
|
% (1)
|
|
Amount
|
|
% (1)
|
|
Commercial
|
|
$
|
3,925
|
|
20
|
%
|
$
|
3,300
|
|
21
|
%
|
Real estate
commercial (2)
|
|
3,387
|
|
50
|
%
|
3,053
|
|
55
|
%
|
Real estate
residential
|
|
20
|
|
0
|
%
|
21
|
|
0
|
%
|
Construction -
commercial and residential (2) (3)
|
|
1,402
|
|
21
|
%
|
1,314
|
|
15
|
%
|
Home equity
|
|
245
|
|
8
|
%
|
233
|
|
8
|
%
|
Other consumer
|
|
175
|
|
1
|
%
|
116
|
|
1
|
%
|
Unallocated
|
|
|
|
0
|
%
|
|
|
0
|
%
|
Total loans
|
|
$
|
9,154
|
|
100
|
%
|
$
|
8,037
|
|
100
|
%
|
(1) Represents
the percent of loans in each category to total loans.
(2) Includes
loans from land acquisition and development.
(3) Included
in the allowance for construction loans at December 31, 2007 is $367
thousand for one identified loan for which an allowance was not deemed
necessary at June 30, 2008 pursuant to analysis under SFAS 114.
23
Table of Contents
Nonperforming Assets
The Companys
nonperforming assets are comprised of loans delinquent 90 days or more,
non-accrual loans, restructured loans and other real estate owned. The
percentage of nonperforming loans to total loans was 1.45% at June 30,
2008, compared to 0.74% at December 31, 2007 and 0.22% at June 30,
2007.
At June 30, 2008,
the Company had $11.6 million of loans classified as nonperforming, as compared
to $5.3 million at December 31, 2007, and $1.5 million at June 30,
2007.
The increase in nonperforming loans at June 30, 2008 as compared
to December 31, 2007 relates primarily to two commercial loan
relationships which include commercial real estate loans secured by residential
properties which have experienced cost overruns and/or delays in the
development and construction processes.
Management believes that the Company is adequately reserved for these
non-performing real estate secured loans.
The Company had no restructured loans at June 30,
2008, December 31, 2007 or June 30, 2007. 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 (OREO) at June 30, 2008, December 31, 2007 or
June 30, 2007. The balance of impaired loans was $11.6 million with
specific reserves against those loans of $852 thousand at June 30, 2008,
compared to $5.3 million of impaired loans at December 31, 2007 with
specific reserves of $220 thousand and $1.5 million of impaired loans at June 30,
2007 with specific reserves of $500 thousand. The allowance for loan losses
represented 1.15% of total loans at June 30, 2008 as compared to 1.12% at December 31,
2007, and 1.11% at June 30, 2007. The higher allowance percentage at June 30,
2008 as compared to December 31, 2007 and June 30, 2007 relates
primarily to changes in the portfolio mix and higher reserve levels for problem
loans and potential problem loans.
The following table shows
the amounts of nonperforming assets at the dates indicated:
|
|
June 30,
|
|
December 31,
|
|
(dollars in thousands)
|
|
2008
|
|
2007
|
|
2007
|
|
Nonaccrual Loans
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,423
|
|
$
|
1,450
|
|
$
|
1,174
|
|
Other consumer
|
|
|
|
|
|
|
|
Home equity
|
|
|
|
|
|
123
|
|
Construction -
commercial and residential
|
|
9,245
|
|
|
|
3,386
|
|
Real estate -
commercial
|
|
886
|
|
|
|
641
|
|
Accrual
loans-past due 90 days
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
Other Consumer
|
|
|
|
|
|
|
|
Real estate -
commercial
|
|
|
|
|
|
|
|
Restructured
loans
|
|
|
|
|
|
|
|
Real estate
owned
|
|
|
|
|
|
|
|
Total
non-performing assets
|
|
$
|
11,554
|
|
$
|
1,450
|
|
$
|
5,324
|
|
At June 30, 2008,
there were an additional $9.8 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 disclosures in the past- due, nonaccrual or restructured loan
categories.
Noninterest Income
Total noninterest income
includes service charges on deposits, gain on sale of loans, gain on sale of
investments, income from bank owned life insurance (BOLI) and other income.
Total noninterest income
for the six months ended June 30, 2008 was $1.9 million, compared to $2.2
million for the six months ended June 30, 2007, a decrease of 13%. The
decrease in the six months ended June 30, 2008 was attributed to lower
amounts of gains on the sale of SBA (due to lower volume of sales and lower
profit
24
Table of Contents
margins) and residential
mortgage loans of $279 thousand versus $571 thousand in the six months ended June 30,
2007 and no income from subordinated financing of real estate projects in 2008
versus $227 thousand in the prior year. Income from subordinated financing
activities is subject to wide variances, as it is based on the sales progress
of a limited number of development projects.
Total noninterest income
for the three months ended June 30, 2008 declined 19% from the same period
of 2007, from $1.2 million to $970 thousand. The decrease was primarily
attributed to the same reasons mentioned above for the six month periods.
For the six months ended June 30,
2008 service charges on deposit accounts increased to $913 thousand from $713
thousand, an increase of 28%. The increase in service charges on deposit
accounts for the six month period was primarily related to new relationships
and to the effect of lower market interest rate credits on analyzed
accounts. For the three months ended June 30,
2008 service charges on deposit accounts increased from $364 thousand to $484
thousand compared to the same period in 2007, owing to the same factors noted
above for the six month periods.
Gain on sale of loans
consists of SBA and residential mortgage loans. For the six months ended June 30,
2008 gain on sale of loans decreased from $571 thousand to $279 thousand
compared to the same period in 2007 or a decrease of 51%. For the six months
ended June 30, 2008 the gain on sale of SBA loans decreased to $138
thousand compared to $349 thousand for the same period in 2008. Activity in SBA
loan sales to secondary markets can vary widely from quarter to quarter. The
Bank has been recognized as the leading community bank SBA lender in its
marketplace. The Company originates residential mortgage loans on a pre-sold
basis, servicing released. Sales of these residential mortgage loans yielded
gains of $141 thousand in the first six months of 2008 compared to $222
thousand in the same period in 2007. The decline is attributed to a weaker
residential mortgage climate. Loans sold are subject to repurchase in
circumstances where documentation is not accurate or the underlying loan
becomes delinquent within a specified period following sale and loan funding.
The Bank considers these potential recourse provisions to be minimal and to
date has experienced no repurchases. Evaluation of these possible contingencies
is made on an ongoing basis. For the three months ended June 30, 2008,
gain on loan sales decreased from $334 thousand to $152 thousand compared to
the same period in 2007. For the three months ended June 30, 2008, the
gain on sale of SBA loans decreased to $101 thousand compared to $201 thousand
for the same period in 2008. Sales of residential mortgage loans yielded gains
of $50 thousand for the three months ended June 30, 2008, compared to $133
thousand for the same period in 2007.
Other income totaled $475
thousand, for the first six months of 2008 as compared to $683 thousand for the
same period in 2007, a decrease of 30%. The primary reason for the decrease is
due to lower earnings from subordinated financing transactions. The Company
provides subordinated financing for the acquisition, development and
construction of real estate projects. These subordinate financing
transactions which are held by its wholly owned subsidiary Eagle Commercial
Ventures, LLC (ECV), generally entail a higher risk profile (including lower
priority and higher loan to value ratios) than other loans made by the
Bank. A portion of the amount which the Company expects to receive for
such loans will be payments based on the success, sale or completion of the
underlying project, and as such the income from these loans may be volatile
from period to period, based on the status of such projects. For the six months
ended June 30, 2007, the Company recognized $227 thousand as the
settlement of units occurred, compared to no income for the same period in
2008. Income from subordinated financing activities is subject to wide
variances, as it is based on the sales progress of a limited number of
development projects. Other income totaled $217 thousand for the three months
ended June 30, 2008 as compared to $385 thousand for the same period in
2007, a decrease of 44%. The primary reasons for the decrease for the three
months ended June 30, 2008 are the same as mentioned above for the six
months ended June 30, 2008.
For the six and three
months ended June 30, 2008, investment gains amounted to $10 thousand and
$0 thousand, respectively as compared to investment gains of $7 thousand and $0
thousand for the same periods in 2007.
Noninterest Expense
Noninterest expense
consists of salaries and employee benefits, premises and equipment expenses,
marketing and advertising, legal, accounting and professional fees and other
expenses.
25
Table of Contents
Total noninterest expense
was $12.7 million for the six months ended June 30, 2008 compared to $12.3
million for the six months ended June 30, 2007, an increase of 4%. For the
three months ended June 30, 2008, total noninterest expense was $6.5
million versus $6.2 million for the same period in 2007, a 5% increase.
Salaries and employee benefits were $7.3 million for
the six months of 2008, as compared to $6.8 million for 2007, a 7% increase.
For the three months ended June 30, 2008, salaries and employee benefits
amounted to $3.6 million versus $3.4 million for the same period in 2007, a 6%
increase. These increases were due substantially to merit increases, increased
incentive accruals and benefit costs. At June 30, 2008, the Companys
staff numbered 163, as compared to 165 at June 30, 2007
.
Premises and equipment
expenses amounted to $2.2 million for the six months ended June 30, 2008
versus $2.5 million for the same period in 2007. This decrease of 11% was due
primarily to the sublease of certain facilities in the second quarter of 2007
and a $130 thousand reduction in the expense associated with equipment repairs
and maintenance. For the six months ended June 30, 2008 the Company
recognized $144 thousand of sublease revenue as compared to none for the same
period in 2007. The increase in sublease revenue and cost savings reduction in
repairs and maintenance more than offset the minimal increase in other ongoing operating
expenses associated with the Companys facilities, all of which are leased. For
the three months ended June 30, 2008, premises and equipment expenses
amounted to $1.1 million versus $1.3 million for the same period in 2007. For
the three months ended June 30, 2008, the Company recognized $72 thousand
in sublease revenue; no subleasing revenue was recorded for the three months
ended June 30, 2007. The reason for the decrease in expense for the three
months ended June 30, 2008 is the same as mentioned above for the six
months ended.
Marketing and advertising
costs decreased from $222 thousand for the six months ended June 30, 2007
to $195 thousand in the same period in 2008, a decrease of 12%. This decline was due primarily to shifting
certain design work in-house, the decline in time deposit advertising, and a
reduction in sponsorships.
For the three months ended June 30, 2008, marketing and advertising
expenses amounted to $114 thousand versus $131 thousand for the same period in
2007, a decrease of 13%. This decrease was due to the same reasons mentioned
above for the six months ended June 30, 2008.
Legal, accounting and
professional fees were $408 thousand for the six months ended June 30,
2008, as compared to $302 thousand for same period in 2007, a 35% increase.
This increase is primarily due to increased efforts on collection of
nonperforming assets. The costs related to the pending acquisition of Fidelity &
Trust, which will generally be capitalized as of the consummation of the
transaction, are not included in these expense totals. For the three months
ended June 30, 2008, legal, accounting and professional fees amounted to
$238 thousand versus $158 thousand for the same period in 2007, a 51% decrease.
This increase is due to the same reasons mentioned above for the six month
period ended June 30, 2008.
Other expenses, increased
to $2.7 million in the first six months of 2008 from $2.5 million for the same
period in 2007, an increase of 7%. For the three months ended June 30,
2008, other expenses amounted to $1.4 million versus $1.2 million for the same
period in 2007, an increase of 16%. The major components of cost in this
category include internet license agreements, outside data processing,
insurance expenses, ATM expenses, broker fees, telephone, courier,
correspondent bank fees, office supplies and printing, record management and
storage costs, director fees and FDIC insurance premiums. For the six months and three months ended June 30,
2008, as compared to the same periods in 2007, the significant increases in
this category were primarily broker fees, record management and storage costs,
internet license agreements, FDIC insurance premiums and merger related
expenses.
Income Tax Expense
The Companys ratio of
income tax expense to pre-tax income (termed effective tax rate) decreased to
36.0% for the six months ended June 30, 2008 as compared to 36.3% for the
same period in 2007. This decrease was due primarily to higher amounts of federal
tax exempt income for the six months ended June 30, 2008 as compared to
the same period in 2007. For the second quarter of 2008 as compared to 2007,
the effective tax rate was 35.3% as compared to 36.7%, the lower effective rate
due to the same reason above for the six month comparisons.
26
Table of Contents
FINANCIAL CONDITION
Summary
At June 30, 2008,
assets were $915.8 million, loans were $795.1 million, deposits were $698.4
million, customer repurchase agreements and other borrowings were $127.7
million and stockholders equity was $84.2 million. As compared to December 31,
2007, assets grew by $69.4 million (8%), loans by $78.4 million (11%), deposits
increased by $67.5 million (11%), customer repurchase agreements and other
borrowings decreased by $0.7 million (1%) and stockholders equity grew by $3.0
million (4%).
The Company paid a cash
dividend of $0.06 per share in the second quarters of 2008 and 2007. For each
of the six months ended June 30, 2008 and 2007, the Company paid cash
dividends of $0.12 per share.
The Company announced on July 25,
2008 that it will discontinue the payment of cash dividends on the common
stock.
Loans
Loans, net of amortized
deferred fees and costs, at June 30, 2008, December 31, 2007 and June 30,
2007 by major category are summarized below:
|
|
As of June 30,
|
|
As of December 31,
|
|
As of June 30,
|
|
|
|
2008
|
|
2007
|
|
2007
|
|
(dollars in thousands)
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Commercial
|
|
$
|
161,047
|
|
20
|
%
|
$
|
149,332
|
|
21
|
%
|
$
|
137,587
|
|
21
|
%
|
Real estate
mortgage commercial (1)
|
|
395,482
|
|
50
|
%
|
392,757
|
|
55
|
%
|
363,345
|
|
55
|
%
|
Real estate
mortgage residential
|
|
2,022
|
|
0
|
%
|
2,160
|
|
0
|
%
|
1,386
|
|
0
|
%
|
Construction -
commercial and residential (1)
|
|
169,679
|
|
21
|
%
|
110,115
|
|
15
|
%
|
100,678
|
|
15
|
%
|
Home equity
|
|
59,636
|
|
8
|
%
|
57,515
|
|
8
|
%
|
52,558
|
|
8
|
%
|
Other consumer
|
|
7,236
|
|
1
|
%
|
4,798
|
|
1
|
%
|
3,679
|
|
1
|
%
|
Total loans
|
|
795,102
|
|
100
|
%
|
$
|
716,677
|
|
100
|
%
|
659,233
|
|
100
|
%
|
Less: Allowance
for Credit Losses
|
|
(9,154
|
)
|
|
|
(8,037
|
)
|
|
|
(7,288
|
)
|
|
|
Net Loans and
Leases
|
|
$
|
785,948
|
|
|
|
$
|
708,640
|
|
|
|
$
|
651,945
|
|
|
|
(1) Includes loans from
land acquisition and development.
The Companys loan portfolio includes loans made for
real estate Acquisition, Development and Construction (ADC) purposes,
including both investment and owner occupied projects. The majority of
the ADC portfolio, both speculative and non speculative, includes loan funded
interest reserves. ADC loans containing loan funded interest reserves
represent approximately 17% of the outstanding loan portfolio at June 30,
2008. The decision to establish a loan-funded interest reserve is made
upon origination of the ADC loan and is based upon a number of factors
considered during underwriting of the credit including (i) the feasibility
of the project; (ii) the experience of the sponsor; (iii) the
creditworthiness of the borrower and guarantors; (iv) borrower equity
contribution; and (v) the level of collateral protection. When
appropriate, an interest reserve provides an effective means of addressing the
cash flow characteristics of a properly underwritten ADC loan. The
Company does not significantly utilize interest reserves in other loan
products. The Company recognizes that
one of the risks inherent in the use of interest reserves is the potential
masking of underlying problems with the project and/or the borrowers ability
to repay the loan. In order to mitigate this inherent risk, the Company
employs a series of reporting and monitoring mechanisms on all ADC loans,
whether or not an interest reserve is provided, including (i) construction and
development timelines which are monitored on an ongoing basis which track the
progress of a given project to the timeline projected at origination; (ii) a
construction loan administration department independent of lending function; (iii) third
party independent construction loan inspection reports; (iv) monthly
interest reserve monitoring
27
Table
of Contents
reports detailing the balance of the interest reserves approved at
origination and the days of interest carry represented by the reserve balances
as compared to the then current anticipated time to completion and/or sale of
speculative projects; and (v) quarterly commercial real estate
construction meetings among senior Company management which includes monitoring
of current and projected real estate market conditions. If a project has not
performed as expected, it is not the customary practice of the Company to
increase loan funded interest reserves.
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 Banks 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. To meet funding
needs during periods of high loan demand and seasonal variations in core
deposits, the Bank utilizes alternative funding sources such as secured
borrowings from the FHLB, federal funds purchased lines of credit from
correspondent banks and brokered deposits from a regional brokerage firm.
For the six months ended June 30,
2008, noninterest bearing deposits increased $858 thousand as compared to December 31,
2007, while interest bearing deposits increased by $66.6 million during the
same period, primarily due to growth in certificates of deposits.
Approximately 45% of the Banks deposits at June 30,
2008 are made up of time 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 given the demographics of the Companys
marketplace, 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, although some exceptions have been made for large deposit
transactions. 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 and to brokered deposits obtained from qualified investment firms. These
deposits amounted to approximately $53.5 million or 8% of total deposits at June 30,
2008, as compared to approximately $10.2 million or 2% of total deposits at December 31,
2007. 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 these deposits can be acquired.
At June 30, 2008, the Company had approximately
$143.3 million in noninterest bearing demand deposits, representing 21% of
total deposits. This compared to approximately $142.5 million of these deposits
at December 31, 2007 (23% of total deposits). These deposits 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 $46.1 million at June 30,
2008 compared to $52.9 million at December 31, 2007. Customer repurchase
agreements are subject to seasonal fluctuations. The average balance for the
six and three months ended June 30, 2008 was $48,2 million and $46.2
million, respectively, compared to an average balance of $39.1 million for the
full year of 2007. Customer repurchase agreements are not deposits and are not
insured but are collateralized by U.S. government agency and mortgage backed
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
28
Table
of Contents
$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 June 30, 2008, the Company had $16.6 million
in outstanding balances under its federal funds purchased lines of credit provided
by correspondent banks, as compared to $23.5 million at December 31, 2007.
The Bank had $65.0 million of FHLB borrowings outstanding at June 30, 2008
and $52.0 million outstanding at December 31, 2007. These advances are
secured by a blanket lien on qualifying loans in the Banks commercial mortgage
and home equity loan portfolios.
Liquidity Management
Liquidity is a measure of the Banks ability to meet
loan demand and to satisfy depositor withdrawal requirements in an orderly
manner. The Banks 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 Banks
entire investment securities portfolio is in an available-for-sale status which
allows it flexibility to generate cash from sales as needed to meet ongoing
loan demand (subject to the collateralization requirements of the customer
repurchase agreement portfolio). These above 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 at June 30, 2008 included a $15 million line of credit with a
correspondent bank (which matured in July 2008), secured by the stock of
the Bank, against which there were no amounts outstanding. In August 2008,
the Company finalized a new $20 million line of credit with another regional
bank, secured by the stock of the Bank, against which there are currently no
amounts outstanding. This new facility replaces the facility which matured in July 2008.
Please refer to Note 12 Subsequent Events for additional information on this
new secondary liquidity facility. Additionally, the Bank can purchase up to
$76.5 million in federal funds on an unsecured basis and $5.5 million on a
secured basis from its correspondents, against which there were $16.6 million
of borrowings outstanding at June 30, 2008. At June 30, 2008, the
Bank was also eligible to take advances from the FHLB up to $102.8 million
based on collateral at the FHLB, of which it had $65.0 million of advances
outstanding. Also, the Bank may enter into repurchase agreements as well as
obtaining additional borrowing capabilities from the FHLB provided adequate
collateral exists to secure these lending relationships.
The loss of deposits, through disintermediation, is
one of the greater risks to liquidity. Disintermediation occurs most commonly
when rates rise and depositors withdraw deposits seeking higher rates in
alternative savings and investment sources than banks 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 potential loss of deposits. The Bank also maintains a
marketable investment portfolio to provide flexibility in the event of
significant liquidity needs. The Bank Boards Asset Liability Committee has
adopted policy guidelines which emphasize the importance of core deposits and
their continued growth.
At June 30, 2008, under the Banks liquidity
formula, it had $232.7 million of primary and secondary liquidity sources,
which was deemed adequate to meet current and projected funding needs.
29
Table of Contents
Commitments and
Contractual Obligations
The following is a schedule of significant funding
commitments at June 30, 2008:
|
|
(in thousands)
|
|
Unused lines of
credit (consumer)
|
|
$
|
53,540
|
|
Other
commitments to extend credit
|
|
162,635
|
|
Standby letters
of credit
|
|
8,903
|
|
Total
|
|
$
|
225,078
|
|
In April 2008, the
Bank entered into a lease for a new branch office and additional office space
in the business district of Washington, D.C. The initial lease term is 10 years
and the minimum lease obligation is approximately $2.8 million. The lease
commencement is expected in early 2010.
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 banks net income is largely dependent on
net interest income. The Banks 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 and re-pricing mismatch inherent
in its asset and liability cash flows and to provide net interest income growth
consistent with the Companys 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 has been maintaining the duration of its
investment and loan portfolios and acquiring more variable and short-term
liabilities, so as to mitigate the risk to earnings and capital should interest
rates decline from current levels. There can be no assurance that the Company
will be able to successfully achieve its optimal asset liability mix, as a
result of competitive pressures, customer preferences and the inability to
perfectly forecast future interest rates.
One of the tools used by the Company to manage its
interest rate risk is a static GAP analysis presented below. The Company also uses
an earnings simulation model (simulation analysis) on a quarterly basis to
monitor its interest rate sensitivity and risk and to model its balance sheet
cash flows and its income statement effects in different interest rate
scenarios. The model utilizes current balance sheet data and attributes and is
adjusted for assumptions as to investment maturities (calls), loan prepayments,
interest rates, the level of noninterest income and noninterest expense. The
data is then subjected to a shock test which assumes a simultaneous change in
interest rate up 100 and 200 basis points or down 100 and 200 basis points,
along the entire yield curve, but not below zero. The results are analyzed as
to the impact on net interest income, and net income over the next twelve and
twenty four month periods and to the market value of equity impact.
For the analysis
presented below, at June 30, 2008, the bank utilizes an assumption (as
compared to the assumption at June 30, 2007) for the re-pricing of money
market deposit accounts to reflect a change of 50 basis points in money market
account interest rates for each 100 basis points in market interest rates in
both a decreasing and increasing interest rate shock scenario. This assumption
change was based on the Banks demand for funds and its recent experience with
market interest rates in the third quarter of 2007. Analysis prior to September 30,
2007 assumed that money market rates were changed 100 basis points for each 100
basis points movement in general interest rates.
As quantified in the
table below, the Companys analysis at June 30, 2008 shows a moderate
effect on net interest income, net income and the economic value of equity when
interest rates are shocked down 100 and 200 basis points and up 100 and 200
basis points due to the significant level of variable rate and repriceable
assets and liabilities. The re-pricing duration of the investment securities
available for sale is 2.3 years, the loan portfolio 1.2 years, the interest
bearing deposit portfolio 1.4 years and the borrowed funds portfolio 0.9 years.
The following table
reflects the result of a shock simulation on the June 30, 2008 balances.
30
Table of Contents
Change in interest
rates (basis points)
|
|
Percentage change in net
interest income
|
|
Percentage change in
net income
|
|
Percentage change in
Market Value of
Portfolio Equity
|
|
+200
|
|
- 4.1
|
%
|
-10.8
|
%
|
-7.3
|
%
|
+100
|
|
-2.2
|
%
|
-5.8
|
%
|
-3.1
|
%
|
0
|
|
|
|
|
|
|
|
-100
|
|
+1.7
|
%
|
+4.4
|
%
|
-0.7
|
%
|
-200
|
|
+1.8
|
%
|
+4.7
|
%
|
-2.9
|
%
|
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.
Market interest rates (as evidenced by the US Treasury
yield curve), while remaining at relatively low levels, did increase at June 30,
2008 as compared to March 31, 2008, which had the effect of mitigating
risk in a declining interest rate environment. Lower levels of interest rates
tend to create floors (given a shock of -200 basis points) on various deposit
interest rate products, as interest rates cannot be reduced below zero.
The results of simulation at June 30, 2008 are
within the policy limits adopted by the Company. For net interest income, the
Company has adopted a policy risk limit of 15% negative change for a 100 basis
point change in market interest rate shock and a policy risk limit of 20%
negative change for a 200 basis point change in market interest rate
shock. For the market value of equity,
the Company has adopted a policy risk limit of 20% negative change for a 100
basis point change in market interest rates shock and a policy risk limit of
25% negative change for a 200 basis point change in market interest rates
shock.
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.
Based on the current economic environment, management
has generally been endeavoring to extend the duration of assets, to acquire
more fixed and renegotiable rate loans, and has been emphasizing the
acquisition of shorter-term time deposits.
The Company has also been acquiring lower cost FHLB callable advances to
better manage the net interest margin. This strategy has mitigated the Companys
exposure to lower interest rates as measured at June 30, 2008. While
management believes that this overall position creates a reasonable 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 sensitivity of the Company
to changes in interest rates. A negative GAP indicates the degree to which the
volume of repriceable liabilities exceeds repriceable assets in given time
periods. At June 30, 2008, the Company had a positive cumulative GAP
position of approximately 4% of total assets out to
31
Table
of Contents
three months and a negative cumulative GAP position of about 3% out to
12 months, as compared to a three month positive GAP of 2% and a negative
cumulative GAP out to 12 months of 6% at December 31, 2007 The change in the GAP position at June 30,
2008 as compared to December 31, 2007 relates primarily to a change in the
mix of loans toward more construction loans, whose interest rates generally are
variable rate. The current position is within guideline limits established by
ALCO.
If interest rates decline, the Companys net interest
income and margin are expected to contract slightly because of the relatively
low level of market rates at June 30, 2008 as compared to December 31,
2007 and the inability to significantly lower deposit interest rates. Because competitive market behavior does not
necessarily track the trend of interest rates but at times moves ahead of
financial market influences, the change in the cost of liabilities may be
different than anticipated by the GAP model. If this were to occur, the effects
of a declining interest rate environment may not be in accordance with
managements expectations. If interest rates move significantly up or down, the
Companys interest rate sensitivity position at June 30, 2008 shows risk
exposures within established policy limits established by ALCO. 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 ALCO and
management believes that current strategies are appropriate to current economic
and interest rate trends.
GAP
Analysis
June 30,
2008
(dollars
in thousand)
Repriceable in:
|
|
0-3 mos
|
|
4-12 mos
|
|
13-36 mos
|
|
37-60 mos
|
|
over 60 mos
|
|
Total Rate
Sensitive
|
|
Non-sensitive
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RATE SENSITIVE
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
securities
|
|
$
|
13,751
|
|
$
|
9,197
|
|
$
|
37,759
|
|
$
|
6,450
|
|
$
|
12,428
|
|
$
|
79,585
|
|
|
|
|
|
Loans (1)(2)
|
|
363,410
|
|
100,290
|
|
173,691
|
|
128,056
|
|
31,139
|
|
796,586
|
|
|
|
|
|
Fed funds and
other short-term investments
|
|
1,454
|
|
|
|
|
|
|
|
|
|
1,454
|
|
|
|
|
|
Other earning
assets
|
|
|
|
12,217
|
|
|
|
|
|
|
|
12,217
|
|
|
|
|
|
Total
|
|
$
|
378,615
|
|
$
|
121,704
|
|
$
|
211,450
|
|
$
|
134,506
|
|
$
|
43,567
|
|
$
|
889,842
|
|
$
|
25,958
|
|
$
|
915,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RATE SENSITIVE
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
bearing demand
|
|
$
|
4,361
|
|
$
|
14,987
|
|
$
|
39,966
|
|
$
|
39,966
|
|
$
|
44,055
|
|
$
|
143,335
|
|
|
|
|
|
Interest bearing
transaction
|
|
27,512
|
|
|
|
11,002
|
|
11,002
|
|
5,501
|
|
55,017
|
|
|
|
|
|
Savings and money
market
|
|
95,179
|
|
|
|
36,838
|
|
36,839
|
|
18,419
|
|
187,275
|
|
|
|
|
|
Time deposits
|
|
129,813
|
|
165,498
|
|
13,353
|
|
3,360
|
|
790
|
|
312,814
|
|
|
|
|
|
Customer
repurchase agreements and fed funds purchased
|
|
62,710
|
|
|
|
|
|
|
|
|
|
62,710
|
|
|
|
|
|
Other borrowings
|
|
25,000
|
|
|
|
20,000
|
|
20,000
|
|
|
|
65,000
|
|
|
|
|
|
Total
|
|
$
|
344,575
|
|
$
|
180,485
|
|
$
|
121,159
|
|
$
|
111,167
|
|
$
|
68,765
|
|
$
|
826,151
|
|
$
|
5,436
|
|
$
|
831,587
|
|
GAP
|
|
$
|
34,040
|
|
$
|
(58,781
|
)
|
$
|
90,291
|
|
$
|
23,339
|
|
$
|
(25,198
|
)
|
$
|
63,691
|
|
|
|
|
|
Cumulative GAP
|
|
$
|
34,040
|
|
$
|
(24,741
|
)
|
$
|
65,550
|
|
$
|
88,889
|
|
$
|
63,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative gap as
percent of total assets
|
|
3.72
|
%
|
(2.70
|
)%
|
7.16
|
%
|
9.71
|
%
|
6.95
|
%
|
|
|
|
|
|
|
(1) Includes
loans held for sale
(2)
Non-accrual loans are included in the over 60 months category
Although NOW and MMA accounts are subject to immediate
repricing, the Banks 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 Companys current and future capital needs is monitored by
management on an ongoing basis.
32
Table
of Contents
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 Banks 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 federal banking
regulators have issued guidance for those institutions which are deemed to have
concentrations in commercial real estate lending. Pursuant to the supervisory criteria
contained in the guidance for identifying institutions with a potential
commercial real estate concentration risk, institutions which have (1) total
reported loans for construction, land development, and other land acquisitions
which represent in total 100% or more of an institutions total risk-based
capital; or (2) total commercial real estate loans representing 300% or
more of the institutions total risk-based capital and the institutions
commercial real estate loan portfolio has increased 50% or more during the
prior 36 months are identified as having potential commercial real estate
concentration risk. Institutions which
are deemed to have concentrations in commercial real estate lending are
expected to employ heightened levels of risk management with respect to their
commercial real estate portfolios, and may be required to hold higher levels of
capital. The Company, like many
community banks, has a concentration in commercial real estate loans. Management has extensive experience in
commercial real estate lending, and has implemented and continues to maintain
heightened risk management procedures, and strong underwriting criteria with
respect to its commercial real estate portfolio. The Company is well capitalized. Nevertheless, it is possible that we may be
required to maintain higher levels of capital as a result of our commercial
real estate concentration, which could require us to obtain additional capital,
and may adversely affect shareholder returns.
In July 2008, the Board of Directors authorized
proceeding with the preparation of a registration statement to be filed with
the Securities and Exchange Commission for an offering of up to $30 million of
noncumulative convertible perpetual preferred stock. The offering is expected to be made primarily
to the Companys shareholders following consummation of the pending transaction
with Fidelity & Trust Financial Corporation, in a manner that would
allow shareholders of both companies to maintain their proportionate interest
in the post-merger Company.
In addition, the Board of Directors of the Company has
determined that in order to further strengthen capital, the Company will
discontinue the payment of cash dividends on the common stock. The Company announced plans to declare a 10%
stock dividend after the completion of the Fidelity & Trust
transaction. The record and payable
dates for the stock dividend have not been determined.
Capital
The
actual capital amounts and ratios for the Company and Bank as of June 30,
2008 and June 30, 2007 are presented in the table below:
33
Table of Contents
|
|
|
|
|
|
|
|
|
|
For Capital
|
|
To Be Well
|
|
|
|
Company
|
|
Bank
|
|
Adequacy
|
|
Capitalized Under
|
|
|
|
Actual
|
|
|
|
Actual
|
|
|
|
Purposes
|
|
Prompt Corrective Action
|
|
(dollars in thousands)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Ratio
|
|
Provision Ratio *
|
|
As of June 30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to
risk-weighted assets
|
|
$
|
93,176
|
|
10.80
|
%
|
$
|
88,872
|
|
10.36
|
%
|
8.0
|
%
|
10.0
|
%
|
Tier 1 capital to
risk-weighted assets
|
|
84,022
|
|
9.74
|
%
|
79,748
|
|
9.30
|
%
|
4.0
|
%
|
6.0
|
%
|
Tier 1 capital to
average assets (leverage)
|
|
84,022
|
|
9.43
|
%
|
79,748
|
|
9.00
|
%
|
3.0
|
%
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to
risk-weighted assets
|
|
$
|
83,943
|
|
11.87
|
%
|
$
|
75,791
|
|
10.84
|
%
|
8.0
|
%
|
10.0
|
%
|
Tier 1 to
risk-weighted assets
|
|
76,655
|
|
10.84
|
%
|
68,539
|
|
9.80
|
%
|
4.0
|
%
|
6.0
|
%
|
Tier 1 capital to
average assets (leverage)
|
|
76,655
|
|
9.85
|
%
|
68,539
|
|
8.89
|
%
|
3.0
|
%
|
5.0
|
%
|
* 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 June 30,
2008, 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, Managements
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 Companys management, under the supervision and
with the participation of the Companys 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 Companys 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 Companys disclosure controls and
procedures were effective. There were no changes in the Companys internal
controls over financial reporting (as defined in Rule 13a-15 under the
Securities Act of 1934) during the quarter ended June 30, 2008 that have
materially affected, or are reasonably likely to materially affect the Companys
internal control over financial reporting.
34
Table
of Contents
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 1A - RISK FACTORS
There has been no
material changes as of June 30, 2008 in the risk factors from those
disclosed in the Companys Annual Report on Form 10-K/A (Amendment No. 2)
for the year ended December 31, 2007.
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
The 2008 Annual Meeting
of Shareholders was held on May 22, 2008.
The shareholders voted and approved the following matters:
·
The
election of eight directors to serve until the next Annual Meeting of
Shareholders and until their successors are duly elected and qualified.
Nominee
|
|
Shares Voted For
|
|
Authority Withheld
|
|
Leonard L. Abel
|
|
7,919,827
|
|
74,770
|
|
Leslie M.
Alperstein
|
|
7,978,170
|
|
16,426
|
|
Dudley C.
Dworken
|
|
7,962,479
|
|
32,117
|
|
Harvey M.
Goodman
|
|
7,986,562
|
|
8,035
|
|
Phillip N.
Margolius
|
|
7,991,208
|
|
3,388
|
|
Ronald D. Paul
|
|
7,991,208
|
|
3,388
|
|
Donald R. Rogers
|
|
7,816,029
|
|
178,567
|
|
Leland M.
Weinstein
|
|
7,991,378
|
|
3,218
|
|
·
The
approval of an amendment to the Companys Articles of Incorporation increasing
the number of authorized shares of common stock to 50,000,000.
Shares Voted For
|
|
7,796,257
|
|
Shares Voted
Against
|
|
183,992
|
|
Shares Abstained
|
|
14,347
|
|
ITEM 5 - OTHER INFORMATION
|
|
(a)
Required 8-K Disclosures
|
|
None
|
|
|
|
|
|
|
|
(b)
Changes in Procedures for Director Nominations
|
|
None
|
35
Table of Contents
ITEM 6 - EXHIBITS
Exhibit No.
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Description of Exhibit
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2.1
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Agreement and Plan of
Merger, dated as of December 2, 2007 by and among Eagle
Bancorp, Inc., Woodmont Holdings, Inc., Fidelity & Trust
Financial Corporation and Fidelity & Trust Bank (1)
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3.1
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Certificate of
Incorporation of the Company, as amended (2)
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3.2
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Bylaws of the Company
(3)
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10.1
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1998 Stock Option Plan
(4)
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10.2
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Employment Agreement
between Michael Flynn and the Company (5)
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10.3
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Employment Agreement
between Thomas D. Murphy and the Bank (5)
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10.4
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Employment Agreement
between Ronald D. Paul and the Company (6)
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10.5
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Directors Fee
Agreement between Leonard L. Abel and the Company (6)
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10.6
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Employment Agreement
between Susan G. Riel and the Bank (5)
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10.7
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Employment Agreement
between Martha Foulon-Tonat and the Bank (5)
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10.8
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Employment Agreement
between James H. Langmead and the Bank (5)
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10.9
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Employee Stock Purchase
Plan (7)
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10.10
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2006 Stock Plan (8)
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10.11
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Employment Agreement
between Janice L. Williams and the Bank
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11
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Statement Regarding
Computation of Per Share Earnings See Note 7 of the Notes to Consolidated
Financial Statements
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21
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Subsidiaries of the
Registrant
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31.1
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Rule 13a-14(a) Certification
of Ronald D. Paul
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31.2
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Rule 13a-14(a) Certification
of James H. Langmead
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31.3
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Rule 13a-14(a) Certification
of Susan G. Riel
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31.4
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Rule 13a-14(a) Certification
of Michael T. Flynn
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32.1
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Section 1350
Certification of Ronald D. Paul
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32.2
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Section 1350
Certification of James H. Langmead
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32.3
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Section 1350
Certification of Susan G. Riel
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32.4
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Section 1350
Certification of Michael T. Flynn
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(1)
Incorporated by reference to Exhibit 2.1
to the Companys Current Report on Form 8-K filed on December 3,
2007.
(2)
Incorporated by reference to Exhibit 3.1
to the Companys Current Report on Form 8-K filed on July 16, 2008.
(3)
Incorporated by reference to Exhibit 3 to
the Companys Current Report on Form 8-K filed on July 25, 2008.
(4)
Incorporated by reference to Exhibit 4 to
the Companys Registration Statement on Form S-8 No. 333-78449.
(5)
Incorporated by reference to the Companys
Annual Report on Form 10-K for the year ended December 31, 2006.
(6)
Incorporated by reference to exhibit of the
same number to the Companys Annual Report on Form 10-K for the year ended
December 31, 2003.
(7)
Incorporated by reference to Exhibit 4 to
the Companys Registration Statement on Form S-8 (No. 333-116352)
(8)
Incorporated by reference to Exhibit 4 to
the Companys Registration Statement on Form S-8 (No. 333-135072)
36
Table of Contents
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.
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EAGLE
BANCORP, INC.
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Date:
August 8, 2008
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By:
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/s/
Ronald D. Paul
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Ronald
D. Paul, Chairman and Chief Executive Officer
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Date:
August 8, 2008
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By:
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/s/
James H. Langmead
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James
H. Langmead, Senior Vice President and
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Chief
Financial Officer
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37
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