UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to .
---------------- ------------------
Commission file number 0-29687
Eagle Bancorp
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(Exact name of small business issuer as specified in its charter)
United States 81-0531318
--------------------------------------------- --------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1400 Prospect Avenue, Helena, MT 59601
----------------------------------------
(Address of principal executive offices)
(406) 442-3080
---------------------------
(Issuer's telephone number)
Website address: www.americanfederalsavingsbank.com
----------------------------------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No[ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common stock, par value $0.01 per share 1,214,372 shares outstanding
--------------------------------------------------------------------------------
As of February 9, 2004
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
EAGLE BANCORP AND SUBSIDIARY
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
December 31, 2003 (unaudited) and June 30, 2003................1 and 2
Consolidated Statements of Income for the three and
six months ended December 31, 2003 and 2002 (unaudited)........3 and 4
Consolidated Statements of Stockholders' Equity for the
six months ended December 31, 2003 (unaudited).......................5
Consolidated Statements of Cash Flows for the six
months ended December 31, 2003 and 2002 (unaudited)............6 and 7
Notes to Consolidated Financial Statements ....................8 to 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..........................13 to 20
Item 3. Controls and Procedures.............................................21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................22
Item 2. Changes in Securities...............................................22
Item 3. Defaults Upon Senior Securities.....................................22
Item 4. Submission of Matters to a Vote of Security-Holders.................22
Item 5. Other Information............................................22 and 23
Item 6. Exhibits and Reports on Form 8-K....................................23
Signatures...................................................................24
Exhibit 31.1..........................................................25 and 26
Exhibit 31.2..........................................................27 and 28
Exhibit 32.1.................................................................29
EAGLE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, June 30,
2003 2003
------------ ------------
(Unaudited) (Audited)
ASSETS
Cash and due from banks $ 3,576,516 $ 2,966,202
Interest-bearing deposits with banks 6,797,420 7,263,841
------------ ------------
Total cash and cash equivalents 10,373,936 10,230,043
Investment securities available-for-sale,
at market value 87,577,619 76,855,280
Investment securities held-to-maturity,
at amortized cost 1,812,842 2,280,736
Federal Home Loan Bank stock, at cost 1,730,100 1,686,300
Mortgage loans held-for-sale 1,111,037 6,908,373
Loans receivable, net of deferred loan fees
and allowance for loan losses 92,157,310 93,521,165
Accrued interest and dividends receivable 1,099,552 913,101
Mortgage servicing rights, net 1,889,566 1,291,614
Property and equipment, net 6,476,691 6,392,625
Cash surrender value of life insurance 2,409,363 2,347,232
Real estate acquired in settlement of loans,
net of allowance for losses -- 70,010
Other assets 725,516 561,924
------------ ------------
Total assets $207,363,532 $203,058,403
============ ============
See accompanying notes to consolidated financial statements.
-1-
EAGLE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Continued)
December 31, June 30,
2003 2003
------------- -------------
(Unaudited) (Audited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposit accounts:
Noninterest bearing $ 8,183,388 $ 7,868,012
Interest bearing 164,105,636 160,556,053
Advances from Federal Home Loan Bank 9,193,889 9,243,889
Accrued expenses and other liabilities 1,634,192 1,893,668
------------- -------------
Total liabilities 183,117,105 179,561,622
------------- -------------
Stockholders' Equity:
Preferred stock (no par value, 1,000,000 shares
authorized, none issued or outstanding) -- --
Common stock (par value $0.01 per share;
10,000,000 shares authorized; 1,223,572 shares
issued; 1,209,772 outstanding at December 31, 2003
and June 30, 2003, respectively) 12,236 12,236
Additional paid-in capital 4,008,250 3,954,432
Unallocated common stock held by employee
stock ownership plan ("ESOP") (220,848) (239,248)
Treasury stock, at cost (13,800 shares at December 31,
2003 and June 30, 2003, respectively) (188,715) (188,715)
Retained earnings 20,702,355 19,532,409
Accumulated other comprehensive income (loss) (66,851) 425,667
------------- -------------
Total stockholders' equity 24,246,427 23,496,781
------------- -------------
Total liabilities and stockholders' equity $ 207,363,532 $ 203,058,403
============= =============
See accompanying notes to consolidated financial statements.
-2-
EAGLE BANCORP AND SUBSIDIARY
QUARTERLY CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Interest and Dividend Income:
Interest and fees on loans $ 1,612,587 $ 1,926,959 $ 3,285,876 $ 3,997,538
Interest on deposits with banks 11,028 40,418 29,427 73,064
FHLB Stock dividends 21,533 27,394 43,847 51,382
Securities available-for-sale 706,460 589,594 1,266,827 1,198,112
Securities held-to-maturity 23,628 44,016 49,606 93,335
----------- ----------- ----------- -----------
Total interest and dividend income 2,375,236 2,628,381 4,675,583 5,413,431
----------- ----------- ----------- -----------
Interest Expense:
Deposits 665,152 946,296 1,441,922 1,924,323
FHLB Advances 145,085 146,661 290,494 293,742
----------- ----------- ----------- -----------
Total interest expense 810,237 1,092,957 1,732,416 2,218,065
----------- ----------- ----------- -----------
Net Interest Income 1,564,999 1,535,424 2,943,167 3,195,366
Loan loss provision -- -- -- --
----------- ----------- ----------- -----------
Net interest income after loan loss provision 1,564,999 1,535,424 2,943,167 3,195,366
----------- ----------- ----------- -----------
Noninterest income:
Net gain on sale of loans 217,562 497,060 806,543 806,223
Demand deposit service charges 164,820 125,299 326,136 254,158
Mortgage loan servicing fees 337,436 104,851 833,132 200,923
Net gain on sale of available-for-sale securities (8,609) -- 1,302 --
Other 88,375 92,235 180,272 193,156
----------- ----------- ----------- -----------
Total noninterest income 799,584 819,445 2,147,385 1,454,460
----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements.
-3-
EAGLE BANCORP AND SUBSIDIARY
QUARTERLY CONSOLIDATED STATEMENTS OF INCOME
(Continued)
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
Noninterest expense:
Salaries and employee benefits 816,840 721,976 1,536,845 1,445,200
Occupancy expenses 112,342 117,688 232,627 247,630
Furniture and equipment depreciation 60,731 53,074 121,837 106,371
In-house computer expense 56,469 65,131 116,052 119,968
Advertising expense 29,207 49,482 74,227 82,777
Amortization of mtg servicing fees 122,673 216,702 387,808 314,529
Federal insurance premiums 6,316 6,359 12,794 12,635
Postage 28,554 28,732 59,399 56,894
Legal, accounting, and examination fees 43,701 40,076 71,943 66,792
Consulting fees 3,780 15,190 11,340 21,070
ATM processing 12,920 11,314 26,697 22,903
Other 232,183 215,041 472,914 397,752
---------- ---------- ---------- ----------
Total noninterest expense 1,525,716 1,540,765 3,124,483 2,894,521
---------- ---------- ---------- ----------
Income before provision for income taxes 838,867 814,104 1,966,069 1,755,305
---------- ---------- ---------- ----------
Provision for income taxes 258,667 271,730 616,514 595,550
---------- ---------- ---------- ----------
Net income $ 580,200 $ 542,374 $1,349,555 $1,159,755
========== ========== ========== ==========
Basic earnings per share $ 0.49 $ 0.46 $ 1.14 $ 0.99
========== ========== ========== ==========
Diluted earnings per share $ 0.49 $ 0.46 $ 1.13 $ 0.97
========== ========== ========== ==========
Weighted average shares outstanding (basic eps) 1,181,412 1,172,551 1,180,835 1,172,796
========== ========== ========== ==========
Weighted average shares outstanding (diluted eps) 1,195,212 1,190,612 1,194,635 1,190,035
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
-4-
EAGLE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Six Months Ended December 31, 2003
ACCUMULATED
ADDITIONAL UNALLOCATED OTHER
PREFERRED COMMON PAID-IN ESOP TREASURY RETAINED COMPREHENSIVE
STOCK STOCK CAPITAL SHARES STOCK EARNINGS INCOME (LOSS) TOTAL
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance,
June 30, 2003 $ -- $ 12,236 $ 3,954,432 $ (239,248) $ (188,715) $19,532,409 $ 425,667 $23,496,781
Net income
(unaudited) -- -- -- -- -- 1,349,555 -- 1,349,555
Other
comprehensive
income (unaudited) -- -- -- -- -- -- (492,518) (492,518)
-----------
Total
comprehensive
income (unaudited) -- -- -- -- -- -- -- 857,037
-----------
Dividends paid
($.32 per share)
(unaudited) -- -- -- -- -- (179,609) -- (179,609)
-----------
ESOP shares allocated
or committed to be
released for
allocation (2,300
shares) (unaudited) -- -- 53,818 18,400 -- -- -- 72,218
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance,
December 31, 2003
(unaudited) $ -- $ 12,236 $ 4,008,250 $ (220,848) $ (188,715) $20,702,355 $ (66,851) $24,246,427
=========== =========== =========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
-5-
EAGLE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
December 31,
----------------------------
2003 2002
------------ ------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,349,555 $ 1,159,755
Adjustments to reconcile net income to net cash
from operating activities:
Provision for mortgage servicing rights valuation losses (567,651) --
Depreciation 220,877 202,563
Net amortization of marketable securities premium
and discounts 842,283 339,482
Amortization of capitalized mortgage servicing rights 387,808 314,529
Gain on sale of loans (806,542) (806,223)
Net realized (gain) loss on sale of available-for-sale securities (1,313) --
FHLB & other dividends reinvested (79,695) (119,441)
Increase in cash surrender value of life insurance (62,131) (52,171)
Gain on sale of real estate owned (596) --
Change in assets and liabilities:
(Increase) decrease in assets:
Accrued interest and dividends receivable (186,452) 42,377
Loans held-for-sale 6,518,869 (2,303,707)
Other assets (163,592) (292,710)
Increase (decrease) in liabilities:
Accrued expenses and other liabilities 111,878 (392,499)
Deferred compensation payable -- 24,912
Deferred income taxes payable -- 323,819
------------ ------------
Net cash provided by operating activities 7,563,298 (1,559,314)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities:
Investment securities held-to-maturity -- --
Investment securities available-for-sale (37,743,037) (21,282,633)
Proceeds from maturities, calls and principal payments:
Investment securities held-to-maturity 465,173 655,163
Investment securities available-for-sale 18,832,395 7,521,248
Proceeds from sales of investment securities available-for-sale 6,679,310 --
See accompanying notes to consolidated financial statements.
-6-
EAGLE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Six Months Ended
December 31,
----------------------------
2003 2002
------------ ------------
(Unaudited)
CASH FLOWS FROM INVESTING ACTIVITIES (CONTINUED):
Net (increase) decrease in loan receivable, excludes transfers
to real estate acquired in settlement of loans 945,745 7,989,472
Purchase of property and equipment (304,944) (275,892)
Proceeds from the sale of real estate acquired in the
settlement of loans 70,606 --
------------ ------------
Net cash used in investing activities (11,054,752) (5,392,642)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in checking and savings accounts $ 3,864,957 $ 9,665,989
Payments on FHLB advances (1,100,000) (50,000)
FHLB advances 1,050,000
Sale (Purchase) of Treasury Stock -- (61,815)
Dividends paid (179,610) (145,126)
------------ ------------
Net cash provided by financing activities 3,635,347 9,409,048
------------ ------------
Net increase in cash and cash equivalents 143,893 2,457,092
CASH AND CASH EQUIVALENTS, beginning of period 10,230,043 10,622,990
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 10,373,936 $ 13,080,082
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest $ 1,768,761 $ 2,278,331
============ ============
Cash paid during the period for income taxes $ 274,450 $ 682,988
============ ============
NON-CASH INVESTING ACTIVITIES:
(Increase) decrease in market value of securities available-for-sale $ 706,639 $ (217,911)
============ ============
Mortgage servicing rights capitalized $ 418,109 $ 544,845
============ ============
See accompanying notes to consolidated financial statements.
-7-
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
------------------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with instructions for Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for a complete presentation.
However, such information reflects all adjustments (consisting of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of results for the unaudited interim periods.
The results of operations for the three and six month periods ended December 31,
2003 are not necessarily indicative of the results to be expected for the fiscal
year ending June 30, 2004 or any other period. The unaudited consolidated
financial statements and notes presented herein should be read in conjunction
with the audited consolidated financial statements and related notes thereto
included in Eagle's Form 10-KSB dated June 30, 2003.
-8-
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2. INVESTMENT SECURITIES
------------------------------
Investment securities are summarized as follows:
December 31, 2003 (Unaudited) June 30, 2003 (Audited)
---------------------------------------- ----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED FAIR AMORTIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE COST GAINS (LOSSES) VALUE
----------- ----------- ----------- ----------- ----------- -----------
Available-for-sale:
U.S. government and
agency obligations $12,173,152 $ 45,805 $12,218,957 $ 5,039,764 $ 111,500 $ 5,151,264
Municipal obligations 9,023,411 103,685 9,127,096 6,851,051 235,534 7,086,585
Corporate obligations 16,143,452 96,533 16,239,985 6,180,404 217,512 6,397,916
Mortgage-backed
securities 20,673,776 (65,603) 20,608,173 28,032,532 190,352 28,222,884
Mutual Funds -- -- -- 4,696,019 (26) 4,695,993
Collateralized
mortgage obligations 27,566,280 (104,245) 27,462,035 23,461,474 (7,351) 23,454,123
Common stock 168,856 23,832 192,688 58,645 2,710 61,355
Corporate preferred
stock 1,950,000 (221,315) 1,728,685 1,950,000 (164,840) 1,785,160
----------- ----------- ----------- ----------- ----------- -----------
Total $87,698,927 $ (121,308) $87,577,619 $76,269,889 $ 585,391 $76,855,280
=========== =========== =========== =========== =========== ===========
Held-to-maturity:
Municipal obligations $ 931,083 $ 59,827 $ 990,910 $ 1,031,729 $ 75,173 $ 1,106,902
Mortgage-backed
securities 881,759 37,057 918,816 1,249,007 49,206 1,298,213
----------- ----------- ----------- ----------- ----------- -----------
Total $ 1,812,842 $ 96,884 $ 1,909,726 $ 2,280,736 $ 124,379 $ 2,405,115
=========== =========== =========== =========== =========== ===========
-9-
EAGLE BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 3. LOANS RECEIVABLE
-------------------------
Loans receivable consist of the following:
December 31, June 30,
2003 2003
(Unaudited) (Audited)
------------ ------------
First mortgage loans:
Residential mortgage (1-4 family) $ 44,966,237 $ 45,404,699
Commercial real estate 18,333,467 18,819,234
Real estate construction 3,382,531 3,802,257
Other loans:
Home equity 13,543,150 13,791,769
Consumer 8,565,223 9,278,219
Commercial 3,949,011 3,033,786
------------ ------------
Total 92,739,619 94,129,964
Less: Allowance for loan losses (660,871) (672,841)
Deferred loan fees 78,562 64,042
------------ ------------
Total $ 92,157,310 $ 93,521,165
============ ============
Loans net of related allowance for loan losses on which the accrual of interest
has been discontinued were $484,000 and $610,000 at December 31, 2003 and June
30, 2003, respectively. Classified assets, including real estate owned, totaled
$1 million and $1.57 million at December 31, 2003 and June 30, 2003,
respectively.
The following is a summary of changes in the allowance for loan losses:
Six Months Ended Year ended
December 31, June 30,
2003 2003
(Unaudited) (Audited)
------------ ------------
Balance, beginning of period $ 672,841 $ 702,705
Transfer from interest reserve -- --
Provision charged to operations -- --
Charge-offs (16,195) (37,118)
Recoveries 4,225 7,254
------------ ------------
Balance, end of period $ 660,871 $ 672,841
============ ============
-10-
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 4. DEPOSITS
-----------------
Deposits are summarized as follows:
December 31, June 30,
2003 2003
(Unaudited) (Audited)
------------ ------------
Noninterest checking $ 8,183,388 $ 7,868,012
Interest-bearing checking 29,262,604 27,125,488
Passbook 25,531,788 25,762,108
Money market 31,799,485 30,177,605
Time certificates of deposit 77,511,759 77,490,852
------------ ------------
Total $172,289,024 $168,424,065
============ ============
NOTE 5. EARNINGS PER SHARE
---------------------------
Basic earnings per share for the three months ended December 31, 2003 is
computed using 1,181,412 weighted average shares outstanding. Earnings per share
for the six months ended December 31, 2003 is computed using 1,180,835 weighted
average shares outstanding. Basic earnings per share for the three months ended
December 31, 2002 is computed using 1,172,551 weighted average shares
outstanding. Earnings per share for the six months ended December 31, 2002 is
computed using 1,172,796 weighted average shares outstanding. Diluted earnings
per share is computed using the treasury stock method by adjusting the number of
shares outstanding by the shares purchased. The weighted average shares
outstanding for the diluted earnings per share calculations are 1,195,212 for
the three months ended December 31, 2003 and 1,194,635 for the six months ended
December 31, 2003. Diluted earnings per share for the three months and six
months ended December 31, 2002 is computed using 1,190,612 and 1,190,035
weighted average shares outstanding, respectively.
NOTE 6. DIVIDENDS AND STOCK REPURCHASE PROGRAM
-----------------------------------------------
This fiscal year Eagle has paid two dividends of $0.16 per share, on August 22,
2003 and November 14, 2003. A dividend of $0.16 per share was declared on
January 15, 2004, payable February 13, 2004 to stockholders of record on January
30, 2004. Eagle Financial MHC, Eagle's mutual holding company, has waived the
receipt of dividends on its 648,493 shares.
-11-
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 6. DIVIDENDS AND STOCK REPURCHASE PROGRAM (CONTINUED)
-----------------------------------------------------------
At the annual meeting held October 19, 2000, shareholders approved stock option
and restricted stock plans for the Company covering aggregate grants of up to
80,511 and 23,003, respectively. A stock repurchase program was announced on
December 21, 2000, covering 4% of the Company's outstanding common stock, with
the intent of meeting the needs of the restricted stock plan. On January 18,
2002, January 21, 2003 and January 20, 2004, 4,600 shares of the restricted
stock plan vested and were distributed to the participants. By October 24, 2002,
23,000 shares had been repurchased, completing the repurchase program.
At their regular meeting of August 21, 2003, the Company's Board of Directors
approved a stock repurchase program for up to 57,500 shares. This represents
approximately 10% of the outstanding common stock held by the public. The
repurchased shares will be held as treasury stock and will be held for general
corporate purposes and/or issuance pursuant to Eagle's benefit plans. As of
February 9, 2004 no shares have been purchased under this program.
NOTE 7. MORTGAGE SERVICING RIGHTS
----------------------------------
The Bank allocates its total cost in mortgage loans between mortgage servicing
rights and loans, based upon their relative fair values, when loans are
subsequently sold or securitized, with the servicing rights retained. Fair
values are generally obtained from an independent third party. Impairment of
mortgage servicing rights is measured based upon the characteristics of the
individual loans, including note rate, term, underlying collateral, current
market conditions, and estimates of net servicing income. If the carrying value
of the mortgage servicing rights exceeds the estimated fair market value, a
valuation allowance is established for any decline, which is viewed to be
temporary. Charges to the valuation allowance are charged against or credited to
mortgage servicing income. Periodic independent valuations of the mortgage
servicing rights are performed. As a result of the valuations, a temporary
decline in the fair value was determined to have occurred, and a valuation
allowance of $189,069 has been established. The following schedules show the
activity in the mortgage servicing rights and the valuation allowance.
Six months Twelve months
ended ended
December 31, June 30,
2003 2003
(Unaudited) (Audited)
----------- -----------
Mortgage Servicing Rights
Beginning balance $ 2,048,334 $ 1,609,833
Servicing rights capitalized 418,109 1,183,848
Servicing rights amortized (387,808) (745,345)
----------- -----------
Ending balance 2,078,635 2,048,334
----------- -----------
Valuation Allowance
Beginning balance 756,720 21,515
Provision (567,651) 735,205
Adjustments -- --
----------- -----------
Ending balance 189,069 756,720
----------- -----------
Net Mortgage Servicing Rights $ 1,889,566 $ 1,291,614
=========== ===========
-12-
EAGLE BANCORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Note Regarding Forward-Looking Statements
This report contains certain "forward-looking statements." Eagle Bancorp
("Eagle" or the "Company") desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 and is
including this statement for the express purpose of availing itself of the
protections of the safe harbor with respect to all such forward-looking
statements. These forward-looking statements, which are included in Management's
Discussion and Analysis, describe future plans or strategies and include Eagle's
expectations of future financial results. The words "believe," "expect,"
"anticipate," "estimate," "project," and similar expressions identify
forward-looking statements. Eagle's ability to predict results or the effect of
future plans or strategies or qualitative or quantitative changes based on
market risk is inherently uncertain. Factors which could affect actual results
but are not limited to include (i) change in general market interest rates, (ii)
general economic conditions, (iii) local economic conditions, (iv)
legislative/regulatory changes, (v) monetary and fiscal policies of the U.S.
Treasury and Federal Reserve, (vi) changes in the quality or composition of
Eagle's loan and investment portfolios, (vii) demand for loan products, (viii)
deposit flows, (ix) competition, and (x) demand for financial services in
Eagle's markets. These factors should be considered in evaluating the
forward-looking statements. You are cautioned not to place undue reliance on
these forward-looking statements which speak only as of their dates.
Financial Condition
Comparisons of results in this section are between the six months ended December
31, 2003 and June 30, 2003.
Total assets increased by $4.30 million, or 2.12%, to $207.36 million at
December 31, 2003, from $203.06 million at June 30, 2003. Total liabilities
increased by $3.56 million to $183.12 million at December 31, 2003, from $179.56
million at June 30, 2003. Total equity increased $750,000 to $24.25 million at
December 31, 2003 from $23.50 million at June 30, 2003.
The growth in assets was primarily in the available-for-sale (AFS) investment
portfolio, which increased $10.72 million, or 13.95%, to $87.58 million at
December 31, 2003 from $76.86 million at June 30, 2003. The investment category
with the largest increase was U.S. government and agency securities, which
increased $7.07 million. The loan portfolio decreased $1.36 million, or 1.45%,
to $92.16 million at December 31, 2003 from $93.52 million at June 30, 2003. All
loan categories, with the exception of commercial loans, showed minor decreases.
Consumer loans showed the largest decrease, $710,000, due to the sale of student
loans during the current quarter. Total loan originations were $75.02 million
for the six months ended December 31, 2003, with single family mortgages
(including $9.03 million of construction loans) accounting for $61.93 million of
the total. Home equity loan and consumer loan originations totaled $4.63 million
and $4.50 million, respectively, for the same period. Loans held for sale
decreased to $1.11 million at December 31, 2003 from $6.91 million at June 30,
2003.
-13-
EAGLE BANCORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Condition (continued)
Growth in deposits funded asset growth. Deposits grew $3.87 million, or 2.30%,
to $172.29 million at December 31, 2003 from $168.42 million at June 30, 2003.
The two accounts which accounted for the majority of the increase in deposits
were checking accounts and money market accounts. Other deposit types showed
minor changes.
The growth in total equity was the result of earnings for the six months of
$1.35 million offset by a decrease in other comprehensive income of $493,000 and
the payment of two quarterly $0.16 per share regular cash dividends.
Results of Operations for the Three Months Ended December 31, 2003 and 2002
Net Income
Eagle's net income was $580,000 and $542,000 for the three months ended December
31, 2003, and 2002, respectively. The increase of $38,000, or 7.01%, was
primarily due to an increase in net interest income of $30,000 and a decrease in
noninterest expense of $15,000, offset by a decrease in noninterest income of
$20,000. Eagle's tax provision was $13,000 lower in the current quarter. Basic
earnings per share were $0.49 for the current period, compared to $0.46 for the
previous year's period.
Net Interest Income
Net interest income increased to $1.56 million for the quarter ended December
31, 2003, from $1.53 million for the previous year's quarter. This increase of
$30,000 was the result of a decrease in interest expense of $283,000 partially
offset by the decrease in interest and dividend income of $253,000.
Interest and Dividend Income
Total interest and dividend income was $2.38 million for the quarter ended
December 31, 2003, compared to $2.63 million for the quarter ended December 31,
2002, representing a decrease of $253,000, or 9.62%. Interest and fees on loans
decreased to $1.61 million for the three months ended December 31, 2003 from
$1.92 million for the same period ended December 31, 2002. This decrease of
$314,000, or 16.35%, was due to the decrease in the average balances of loans
receivable for the quarter ended December 31, 2003 and the decline in the
average interest rate earned on loans. Average balances for loans receivable,
net, for the quarter ended December 31, 2003 were $95.76 million, compared to
$103.05 million for the previous year. This represents a decrease of $7.29
million, or 7.07%. Most loan categories have shown decreases from the previous
year (the exceptions being commercial loans, real estate construction loans and
commercial real estate loans). The average interest rate earned on loans
receivable decreased by 74 basis points, from 7.48% at December 31, 2002 to
6.74% at December 31, 2003. Interest and dividends on investment securities
available-for-sale (AFS) increased to $706,000 for the quarter ended December
31, 2003 from $590,000 for the same quarter last year. Average balances on
investments increased significantly, to
-14-
EAGLE BANCORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations for the Three Months Ended December 31, 2003 and 2002
(continued)
$91.26 million for the quarter ended December 31, 2003, compared to $63.87
million for the quarter ended December 31, 2002. The average interest rate
earned on investments dropped to 3.20% from 3.97%. Interest on securities
held-to-maturity (HTM) decreased from $44,000 to $24,000 as new purchases are
placed in the AFS portfolio. Interest earned from deposits held at other banks
decreased to $11,000 for the quarter ended December 31, 2003 from $40,000 for
the quarter ended December 31, 2002, due to the drop in short-term interest
rates and lower average balances.
Interest Expense
Total interest expense decreased to $810,000 for the quarter ended December 31,
2003, from $1.09 million for the quarter ended December 31, 2002, a decrease of
$283,000, or 25.96%, primarily due to a decrease in interest paid on deposits.
Interest on deposits decreased to $665,000 for the quarter ended December 31,
2003, from $946,000 for the quarter ended December 31, 2002. This decrease of
$281,000, or 29.70%, was the result of a decrease in average rates paid on
deposit accounts, despite higher balances. All deposit accounts showed decreases
in average rates paid and also had increases in average balances in the current
quarter compared to last year's quarter. Money market accounts and certificates
of deposit represented the largest increases in balances from the previous year.
Average balances in interest-bearing deposit accounts increased to $164.23
million for the quarter ended December 31, 2003, compared to $151.13 million for
the same quarter in the previous year. The average rate paid on liabilities
decreased by 85 basis points from the quarter ended December 31, 2002 to the
quarter ended December 31, 2003. Interest paid on borrowings decreased to
$145,000 for the quarter ended December 31, 2003 from $147,000 for the quarter
ended December 31, 2002. The decrease in borrowing costs was due to a decrease
in the average balance of Federal Home Loan Bank advances.
Provision for Loan Losses
Provisions for loan losses are charged to earnings to maintain the total
allowance for loan losses at a level considered adequate by Eagle's subsidiary,
American Federal Savings Bank (the Bank), to provide for probable loan losses
based on prior loss experience, volume and type of lending conducted by the
Bank, available peer group information, and past due loans in portfolio. The
Bank's policies require the review of assets on a quarterly basis. The Bank
classifies loans as well as other assets if warranted. While the Bank believes
it uses the best information available to make a determination with respect to
the allowance for loan losses, it recognizes that future adjustments may be
necessary. No provision was made for loan losses for either the quarter ended
December 31, 2003 or the quarter ended December 31, 2002. This is a reflection
of the continued strong asset quality of the Bank's loan portfolio. Total
classified assets decreased from $1.57 million at June 30, 2003 to $1.00 million
at December 31, 2003. The Bank currently has no foreclosed real estate.
Noninterest Income
Total noninterest income decreased to $799,000 for the quarter ended December
31, 2003, from $819,000 for the quarter ended December 31, 2002, a decrease of
$20,000 or 2.44%. This was the result of the decrease in net gain on sale of
loans of $279,000 which was partially offset by increases in mortgage loan
servicing fees of $233,000 and demand deposit service charges of $40,000.
-15-
EAGLE BANCORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations for the Three Months Ended December 31, 2003 and 2002
(continued)
Decreased mortgage loan originations compared to the same quarter a year ago
contributed to the decrease in income from sale of loans. Mortgage loan
servicing fees increased due to an increase in the value of the Bank's mortgage
servicing rights, which increased by $202,000. The increase in value was caused
by higher interest rates and expected longer life of the servicing asset. Demand
deposit service charges increased to $165,000 for the quarter ended December 31,
2003 from $125,000 for the quarter ended December 31, 2002. This was due to
changes in the appliable fee structure which resulted in higher fees over the
previous year. The other categories of noninterest income registered small
decreases.
Noninterest Expense
Noninterest expense decreased by $15,000 or 0.97% to $1.53 million for the
quarter ended December 31, 2003, from $1.54 million for the quarter ended
December 31, 2002. This decrease was primarily due to a decrease in amortization
of mortgage servicing fees of $94,000. The decrease in amortization of mortgage
servicing fees was related to decreased prepayment activity on mortgage loans.
Excluding the mortgage servicing fee amortization expense produces an increase
in expenses of 5.96%. Salaries and employee benefits increased $95,000 due to
reduced capitalization of salary costs (per FAS91) related to the decline in
mortgage lending. Advertising expenses decreased $20,000 due to reduced
promotional activity. Other expense categories showed minor changes.
Income Tax Expense
Eagle's income tax expense was $259,000 for the quarter ended December 31, 2003,
compared to $272,000 for the quarter ended December 31, 2002. The effective tax
rate for the quarter ended December 31, 2003 was 30.84% and was 33.38% for the
quarter ended December 31, 2002. Management expects Eagle's effective tax rate
to be approximately 33%.
Results of Operations for the Six Months Ended December 31, 2003 and 2002
Net Income
Eagle's net income was $1.35 million and $1.16 million for the six months ended
December 31, 2003 and 2002, respectively. The increase of $190,000, or 16.38%,
was primarily due to an increase in noninterest income of $693,000, offset by a
decrease in net interest income of $252,000 and an increase in noninterest
expense of $230,000. Noninterest income was up sharply, due primarily to the
higher valuation of the Bank's mortgage servicing rights, which have increased
$568,000 since June 30, 2003. Eagle's tax provision was $21,000 higher in the
current period. Basic earnings per share for the period ended December 31, 2003
were $1.14, compared to $0.99 per share for the period ended December 31, 2002.
-16-
EAGLE BANCORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations for the Six Months Ended December 31, 2003 and 2002
(continued)
Net Interest Income
Net interest income decreased to $2.94 million for the six months ended December
31, 2003 from $3.19 million for the six months ended December 31, 2002. This
decrease of $252,000 was the result of a decrease in interest and dividend
income of $738,000, partially offset by a decrease in interest expense of
$486,000.
Interest and Dividend Income
Total interest and dividend income was $4.67 million for the six months ended
December 31, 2003, compared to $5.41 million for the same period ended December
31, 2002, representing a decrease of $738,000, or 13.64%. Interest and fees on
loans decreased to $3.29 million for 2003 from $4.00 million for 2002. This
decrease of $712,000, or 17.80%, was due to a decrease in the average balances
of loans receivable for the six months ended December 31, 2003 and the decline
in the average interest rate earned on loans. Average balances for loans
receivable, net, for this period were $96.83 million, compared to $105.12
million for the previous year. This is a decrease of $8.29 million, or 7.89%.
Most loan categories had shown decreases from the previous year. The average
interest rate earned on loans receivable decreased by 82 basis points, to 6.79%
from 7.61%. Interest and dividends on investment securities available-for-sale
(AFS) increased to $1.27 million for the six months ended December 31, 2003 from
$1.20 million for the same period ended December 31, 2002. Interest on
securities held-to-maturity (HTM) decreased from $93,000 to $50,000. New
purchases of securities are placed in the AFS portfolio, and the HTM portfolio
will continue to shrink as the securities in it mature. Interest earned from
deposits held at other banks decreased to $29,000 for the six months ended
December 31, 2003 from $73,000 for the six months ended December 31, 2002 due to
the drop in short-term interest rates and the decline in average balances.
Interest Expense
Total interest expense decreased to $1.73 million for the six months ended
December 31, 2003 from $2.22 million for the six months ended December 31, 2002,
a decrease of $486,000, or 21.89%, primarily due to the decrease in interest
paid on deposits as a result of the decline in interest rates in 2003. Interest
on deposits decreased to $1.44 million for the six months ended December 31,
2003 from $1.92 million for the six months ended December 31, 2002. This
decrease of $483,000, or 25.16%, was the result of a decrease in average rates
paid on deposit accounts despite higher balances in deposit accounts.
Certificates of deposit and money market accounts accounted for the largest gain
in balances during the period from December 31, 2002 to December 31, 2003.
Average balances in certificates of deposit increased to $77.23 million from
$72.54 million. The average rate paid on certificates of deposit decreased to
2.84% from 3.86%. Average balances in money market accounts increased to $32.07
million for the six months ended December 31, 2003 from $28.06 million for the
six months ended December 31, 2002. The average rate paid on money market
accounts decreased to 1.16% from 2.00%. Average rates paid on all
interest-bearing deposits declined from 2002 to 2003, with the average rate paid
on all liabilities dropping by 81 basis points from the six month period ended
December 31, 2002 to the six month period ended December 31, 2003. Interest paid
on borrowings decreased to $291,000 for the six months ended December 31, 2003
from $294,000 for the same period ended December 31, 2002. The decrease in
borrowing costs was due to a decrease in the average balance of Federal Home
Loan Bank advances.
-17-
EAGLE BANCORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations for the Six Months Ended December 31, 2003 and 2002
(continued)
Provision for Loan Losses
Provisions for loan losses are charged to earnings to maintain the total
allowance for loan losses at a level considered adequate by Eagle's subsidiary,
American Federal Savings Bank (the Bank), to provide for probable loan losses
based on prior loss experience, volume and type of lending conducted by the
Bank, available peer group information, and past due loans in portfolio. The
Bank's policies require the review of assets on a quarterly basis. The Bank
classifies loans as well as other assets if warranted. While the Bank believes
it uses the best information available to make a determination with respect to
the allowance for loan losses, it recognizes that future adjustments may be
necessary. No provision was made for loan losses for the six month periods ended
December 31, 2003 or December 31, 2002. This is a reflection of the continued
strong asset quality of the Bank's loan portfolio. Total classified assets
decreased to $1.00 million at December 31, 2003 from $1.57 million at June 30,
2003. The Bank currently has no foreclosed property.
Noninterest Income
Total noninterest income increased to $2.14 million for the six months ended
December 31, 2003, from $1.45 million for the six months ended December 31,
2002, an increase of $693,000, or 47.79%. This was the result of an increase in
the value of the Bank's mortgage servicing rights, which, as stated earlier,
increased $568,000 since June 30, 2003. Mortgage loan servicing fees increased
to $833,000 for the current period compared to $201,000 for the same period one
year ago. Demand deposit service charges increased to $326,000 for the six month
period ended December 31, 2003 from $254,000 for the same period ended December
31, 2002. This was due to higher fees over the previous year. Other categories
of noninterest income showed minor changes.
Noninterest Expense
Noninterest expense increased by $230,000, or 7.96% to $3.12 million for the six
months ended December 31, 2003, from $2.89 million for the six months ended
December 31, 2002. This increase was primarily due to increases in salaries and
employee benefits of $92,000, amortization of mortgage servicing fees of $73,000
and in "other" noninterest expense of $75,000. The increase in salaries and
employee benefits expense was due to higher benefit costs and merit pay
increases. The increase in amortization of mortgage servicing fees was related
to increased prepayment activity on mortgage loans for the six month period. The
increase in "other" noninterest expense was due primarily to higher loan
expenses. Other categories of noninterest expense showed modest changes.
Income Tax Expense
Eagle's income tax expense was $616,000 for the six months ended December 31,
2003, compared to $595,000 for the six months ended December 31, 2002. The
effective tax rate for the six months ended December 31, 2003 was 31.36% versus
33.93% for the six months ended December 31, 2002.
-18-
EAGLE BANCORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity, Interest Rate Sensitivity and Capital Resources
The company's subsidiary, American Federal Savings Bank (the Bank), is required
to maintain minimum levels of liquid assets as defined by the Office of Thrift
Supervision (OTS) regulations. The OTS has eliminated the statutory requirement
based upon a percentage of deposits and short-term borrowings. The OTS states
that the liquidity requirement is retained for safety and soundness purposes,
and that appropriate levels of liquidity will depend upon the types of
activities in which the company engages. For internal reporting purposes, the
Bank uses the previous regulatory definitions of liquidity. The Bank's average
liquidity ratio was 25.09% and 27.76% for the months ended December 31, 2003 and
December 31, 2002, respectively. Liquidity decreased due to the reduction in
interest-bearing deposits with banks.
The Bank's primary sources of funds are deposits, repayment of loans and
mortgage-backed securities, maturities of investments, funds provided from
operations, and advances from the Federal Home Loan Bank of Seattle. Scheduled
repayments of loans and mortgage-backed securities and maturities of investment
securities are generally predictable. However, other sources of funds, such as
deposit flows and loan prepayments, can be greatly influenced by the general
level of interest rates, economic conditions and competition. The Bank uses
liquidity resources principally to fund existing and future loan commitments. It
also uses them to fund maturing certificates of deposit, demand deposit
withdrawals and to invest in other loans and investments, maintain liquidity,
and meet operating expenses.
Liquidity may be adversely affected by unexpected deposit outflows, higher
interest rates paid by competitors, and similar matters. Management monitors
projected liquidity needs and determines the level desirable, based in part on
commitments to make loans and management's assessment of the bank's ability to
generate funds.
At September 30, 2003 (the most recent report available), the Bank's measure of
sensitivity to interest rate movements, as measured by the OTS, declined from
the previous quarter. The Bank's capital ratio as measured by the OTS decreased
slightly during the same period. The Bank is well within the guidelines set
forth by the Board of Directors for interest rate risk sensitivity.
As of December 31, 2003, the Bank's regulatory capital was in excess of all
applicable regulatory requirements. At December 31, 2003, the Bank's tangible,
core, and risk-based capital ratios amounted to 11.01%, 11.01%, and 18.52%,
respectively, compared to regulatory requirements of 1.5%, 3.0%, and 8.0%,
respectively. See the following table (amounts in thousands):
-19-
EAGLE BANCORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity, Interest Rate Sensitivity and Capital Resources (continued)
At December 31, 2003
-------------------------
For Capital
Adequacy
Dollar Purposes
Amount % of Assets
----------- -----------
Tangible capital:
Capital level $ 22,654 11.01%
Requirement 3,085 1.50
----------- -----------
Excess $ 19,569 9.51%
=========== ===========
Core capital:
Capital level $ 22,654 11.01%
Requirement 6,170 3.00
----------- -----------
Excess $ 16,484 8.01%
=========== ===========
Risk-based capital:
Capital level $ 23,298 18.52%
Requirement 10,065 8.00
----------- -----------
Excess $ 13,233 10.52%
=========== ===========
Impact of Inflation and Changing Prices
Our financial statements and the accompanying notes have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time and due to inflation. The impact of inflation is reflected in the
increased cost of our operations. Interest rates have a greater impact on our
performance than do the general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
-20-
EAGLE BANCORP AND SUBSIDIARY
EAGLE BANCORP AND SUBSIDIARY
CONTROLS AND PROCEDURES
Based on their evaluation, the company's Chief Executive Officer, Larry A.
Dreyer, and Chief Financial Officer, Peter J. Johnson, have concluded the
company's disclosure controls and procedures are effective as of December 31,
2003 to ensure that information required to be disclosed in the reports that the
company files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. During the last fiscal
quarter, there have been no significant changes in the company's internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the company's internal control over
financial reporting.
-21-
EAGLE BANCORP AND SUBSIDIARY
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
Neither the Company nor the Bank is involved in any pending legal
proceedings other than non-material legal proceedings occurring in the
ordinary course of business.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were voted on at the Annual Meeting of
Stockholders held on October 16, 2003:
1. Election of directors for three-year terms expiring in 2006:
For: Against:
--------- ---------
Thomas J. McCarvel 1,144,618 1,792
James A. Maierle 1,144,618 1,792
2. Ratification of appointment of Anderson ZurMuehlen & Co., P.C. as
auditors for the fiscal year ended June 30, 2004:
For: Against: Abstain:
--------- --------- ----------
1,145,250 700 460
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
a.) Exhibits
31.1 Certification by Larry A. Dreyer, Chief Executive Officer,
pursuant to Rule 13a-14(a) under the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification by Peter J. Johnson, Chief Financial Officer,
pursuant to Rule 13a-14(a) under the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certification by Larry A. Dreyer, Chief Executive Officer,
and Peter J. Johnson, Chief Financial Officer, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
-22-
EAGLE BANCORP AND SUBSIDIARY
Part II - OTHER INFORMATION
b.) Reports on Form 8-K
No current reports on Form 8-K were filed during the second
quarter of the 2004 fiscal year. However, on October 16, 2003, the
registrant furnished under Item 9 of Form 8-K a press release
announcing its earnings for the first quarter of the 2004 fiscal
year. The information contained in the Form 8-K was intended to be
furnished pursuant to Item 12, "Disclosure of Results of
Operations and Financial Condition," and was included under Item 9
in accordance with Securities and Exchange Commission Release No.
33-8216.
-23-
EAGLE BANCORP AND SUBSIDIARY
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EAGLE BANCORP
Date: February 9, 2004 By: /s/ LARRY A. DREYER
----------------------------
Larry A. Dreyer
President/CEO
Date: February 9, 2004 By: /s/ PETER J. JOHNSON
---------------------------
Peter J. Johnson
Sr. VP/Treasurer/CFO
-24-