U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
/X/ Annual report under section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended JUNE 30, 2002.
/ / Transition report under section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ____________ to ______________.
Commission file number: 0-29687
.........................................
Eagle Bancorp
.................................................................................
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
United States 81-0531318
................................... ........................................
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1400 Prospect Avenue, Helena, MT 59601
................................... ........................................
(Address of principal executive (Zip Code)
offices)
Issuer's telephone number: (406) 442-3080
...................................................
Securities to be registered under Section 12(b) of the Act:
Title of class Name of exchange on which registered
None N/A
................................... ........................................
Securities to be registered under Section 12(g) of the Act:
Common stock, par value $0.01 per share
.................................................................................
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 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
......... .........
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
Issuer's revenues for its most recent fiscal year are $13,493,000
...............
The aggregate market value of the common stock held by non-affiliates, computed
by reference to the closing price as of September 3, 2002, was $8,442,720.
As of September 3, 2002, there were 1,206,472 shares of common stock issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the proxy statements for the annual meeting of
stockholders for the fiscal years ended June 30, 2002 and June 30, 2000 and
Registration Statement on Form SB-2 filed on December 20, 1999 (Part III).
TRANSITIONAL SMALL BUSINESS DISCLOSURE
FORMAT (CHECK ONE):
YES NO X
........ ........
TABLE OF CONTENTS
ITEM PAGE
NO. NO.
PART I
1 Description of Business.............................................................. 1
2 Description of Business Properties................................................... 24
3 Legal Proceedings.................................................................... 24
4 Submission of Matters to a Vote of Security Holders.................................. 25
PART II
5 Market for Common Equity and Related Stockholder Matters............................. 25
6 Management's Discussion and Analysis................................................. 25
7 Financial Statements and Supplementary Data.......................................... 32
8 Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.............................................................. 32
PART III
9 Directors and Executive Officers of the Registrant................................... 33
10 Executive Compensation............................................................... 33
11 Security Ownership of Certain Beneficial Owners and Management....................... 33
12 Certain Relationships and Related Transactions....................................... 33
13 Exhibits List including Consolidated Statements of Financial Condition
And Reports on Form 8-K........................................................... 33
i
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Eagle Bancorp (Eagle) is a federally chartered stock holding company. Its
charter was approved on April 4, 2000, when it became the mid-tier stock holding
company for American Federal Savings Bank (the Bank), a federally chartered
stock savings bank headquartered in Helena, Montana. Eagle Bancorp's principal
business is to hold the capital stock of American Federal Savings Bank. Upon the
reorganization and conversion to stock form of American Federal Savings Bank,
Eagle Bancorp issued 575,079 shares of its common stock, par value $.01 per
share (the "Common Stock") to the public at a price of $8 per share. This
represents approximately 47% of the issued and outstanding shares of the Common
Stock. The remaining 648,493 shares of the Common Stock are held by Eagle
Financial MHC, Eagle Bancorp's mutual holding company.
American Federal Savings Bank was founded in 1922 as a Montana chartered
building and loan association and has conducted operations in Helena since that
time. In 1975, American Federal adopted a federal thrift charter. We currently
have four full service offices and one satellite branch. We also have six
automated teller machines located in our market area and we participate in the
CashCard ATM network.
BUSINESS STRATEGY
Since our founding in Helena in 1922, we have operated in the southcentral
portion of Montana. Since the advent of NOW accounts and low and no cost
checking or other transaction accounts, we have sought to operate in a fashion
similar to a commercial bank offering these kinds of deposits and changing our
emphasis on home mortgage lending by broadening and diversifying the kind of
loans we offer. As a result of these efforts, we provide full retail banking
services, including one- to four-family residential mortgage loans, home equity
loans, lines of credit, consumer loans, commercial real estate loans and
commercial loans for businesses as well as certificates of deposit, checking
accounts, NOW accounts, savings accounts and money market accounts.
We attract deposits from the general public and use these deposits
primarily to originate loans and to purchase investment and mortgage-backed and
other securities. The principal sources of funds for lending and investing
activities are deposits, Federal Home Loan Bank advances, the repayment, sale
and maturity of loans and sale and maturity of securities. The principal sources
of income are interest on loans and investments. The principal expense is
interest paid on deposits and Federal Home Loan Bank advances.
MARKET AREA
From our headquarters in Helena, Montana, we operate four full service
offices, including our main office, and one satellite branch. Our satellite
branch is located in Helena and our other full service branches are located in
Bozeman (opened 1980), Butte (opened 1979) and Townsend (opened 1979), Montana.
Montana is one of the largest states in terms of land mass but ranks as one
of the least populated states. As of the 2000 census it had a population of
902,000. Helena, where we are headquartered, is the county seat of Lewis and
Clark County, which has a population of approximately 55,700 and is located
within 120 miles of four of Montana's other five largest cities: Missoula, Great
Falls, Bozeman and Butte. It is approximately midway between Yellowstone and
Glacier National Parks. Helena is also Montana's state capital. Its economy has
shown slow growth, in terms of both employment and income. State government and
the numerous offices of the federal government comprise the largest employment
sector. Helena also has significant employment in the service industries.
Specifically, it has evolved into a central health care center with employment
in the medical and the supporting professions as well as the medical insurance
industry. The local economy is also dependent to a lesser
1
extent upon ranching and agriculture. These have been more cyclical in nature
and remain vulnerable to severe weather conditions, increased competition, both
domestic and international, as well as commodity prices.
Bozeman, where we have a branch, is approximately 95 miles southeast of
Helena. It is located in Gallatin County, which has a population of
approximately 67,800. Bozeman is home to Montana State University and has
achieved its recent growth in part due to the growth of the University as well
as the increased tourism for resort areas in and near Bozeman. Agriculture,
however, remains an important part of Bozeman's economy. Bozeman has also become
an attractive location for retirees, primarily from the West Coast, owing to its
many winter and summer recreational opportunities and the presence of the
University. Residential construction in Bozeman has increased more rapidly than
such construction in Helena and the other cities in which we operate.
Butte, Montana is approximately 64 miles southwest of Helena. We have one
branch in Butte. Butte and the surrounding Silverbow County have a population of
approximately 34,600. Butte's population has declined as a result of the decline
in the mining , energy, and telecommunications industries, which had afforded
many higher paying jobs to residents of Butte and Silverbow County.
Townsend is the smallest community in which we operate. We have one branch
in Townsend. It has a population of about 2,000. Many of its residents commute
to other Montana locations for work. Other employment in Townsend is primarily
in agriculture and services. Townsend is approximately 32 miles southeast of
Helena.
COMPETITION
We face strong competition in our primary market area for the attraction of
retail deposits and the origination of loans. Until recently Montana was a unit
banking state. This means that the ability of Montana state banks to create
branches was either prohibited or significantly restricted. As a result of unit
banking, Montana has a significant number of independent financial institutions
serving a single community in a single location. While the state's population is
approximately 902,000 people, there are approximately 74 credit unions in
Montana as well as three federally chartered thrift institutions, and 80
commercial banks as of December 31, 2001. Our most direct competition for
depositors has historically come from locally owned and out-of-state commercial
banks, thrift institutions and credit unions operating in our primary market
area. The number of such competitor locations has increased significantly in
recent years. Our competition for loans also comes from banks, thrifts and
credit unions in addition to mortgage bankers and brokers. Our principal market
areas can be characterized as markets with moderately increasing incomes, low
unemployment, increasing wealth (particularly in the growing resort areas such
as Bozeman), and moderate population growth.
LENDING ACTIVITIES
GENERAL. American Federal Savings Bank primarily originates one- to
four-family residential real estate loans and, to a lesser extent commercial
real estate loans, real estate construction loans, home equity loans, consumer
loans and commercial loans. Commercial real estate loans include loans on
multi-family dwellings, loans on nonresidential property and loans on developed
and undeveloped land. Home equity loans include loans secured by the borrower's
primary residence. Typically, the property securing such loans is subject to a
prior lien. Consumer loans consist of loans secured by collateral other than
real estate, such as automobiles, recreational vehicles and boats. Personal
loans and lines of credit are made on deposits held by the Bank and on an
unsecured basis. Commercial loans consist of business loans and lines of credit
on a secured and unsecured basis.
LOAN PORTFOLIO COMPOSITION. The following table analyzes the composition of
the Bank's loan portfolio by loan category at the dates indicated.
2
AT JUNE 30,
-------------------------------------------------------------------
2002 2001
-------------------------------- -------------------------------
(DOLLARS IN THOUSANDS)
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ -----
First mortgage loans:
Residential mortgage (1-4 family)(1).. $ 66,958 62.90% $75,962 65.60%
Commercial real estate................ 9,455 8.88% 9,063 7.83%
Real estate construction.............. 2,931 2.76% 1,982 1.71%
-------- -------- -------- -------
Total first mortgage loans.......... 79,344 74.54% 87,007 75.14%
-------- -------- -------- -------
Other loans:
Home equity........................... 14,236 13.37% 15,698 13.56%
Consumer.............................. 10,024 9.42% 10,362 8.95%
Commercial............................ 2,843 2.67% 2,721 2.55%
-------- -------- -------- -------
Total other loans................... 27,103 25.46% 28,781 24.86%
-------- -------- -------- -------
Total loans............................. 106,447 100.00% 115,788 100.00%
------- ======== ------- =======
Less:
Deferred loan fees.................... 121 122
Allowance for loan losses............. 703 688
-------- --------
Total loans, net...................... $105,623 $114,978
======== ========
--------------------
(1) Excludes loans held for sale.
FEE INCOME. American Federal Savings Bank receives lending related fee
income from a variety of sources. Its principal source of this income is from
the origination and subsequent servicing of sold mortgage loans. Fees generated
from mortgage loan servicing, which generally consists of collecting mortgage
payments, maintaining escrow accounts, disbursing payments to investors and
foreclosure processing for loans held by others, were $305,000 and $293,000 for
the years ended June 30, 2002 and 2001, respectively. Other loan related fee
income for contract collections, late charges, credit life commissions and
credit card fees were $95,000 and $93,000 for the years ended June 30, 2002 and
2001, respectively.
LOAN MATURITY SCHEDULE. The following table sets forth the estimated
maturity of the loan portfolio of the Bank at June 30, 2002. Scheduled principal
repayments of loans do not necessarily reflect the actual life of such assets.
The average life of a loan is typically substantially less than its contractual
terms because of prepayments. In addition, due on sale clauses on loans
generally give American Federal Savings Bank the right to declare loans
immediately due and payable in the event, among other things, that the borrower
sells the real property, subject to the mortgage, and the loan is not paid off.
All mortgage loans are shown to be maturing based on the date of the last
payment required by the loan agreement, except as noted. Loans having no stated
maturity, those without a scheduled payment, demand loans and delinquent loans,
are shown as due within six months.
3
WITHIN 6 6 TO 12 1 YEAR TO 2 YEARS TO OVER 5
MONTHS MONTHS 2 YEARS 5 YEARS YEARS TOTAL
------ ------ ------- ------- ----- -----
(IN THOUSANDS)
Residential mortgage (1-4 family)(1) $35 $422 $492 $4,634 $62,728 $68,311
Commercial real estate ............ 0 383 0 1,346 7,726 9,455
Real estate construction............ 127 2,804 0 0 0 2,931
Home equity......................... 9 941 797 6,645 5,843 14,235
Consumer............................ 257 624 721 7,075 1,347 10,024
Commercial ......................... 55 1,145 273 444 926 2,843
-- ----- --- --- --- -----
Total Loans(1)................ $483 $6,319 $2,283 $20,144 $78,570 $107,799
==== ====== ====== ======= ======= ========
--------------------
(1) Includes loans held for sale.
The following table sets forth the dollar amount of all loans, at June 30,
2002, due after June 30, 2003, which have pre-determined interest rates and
which have floating or adjustable interest rates:
FIXED ADJUSTABLE TOTAL
----- ---------- -----
(DOLLARS IN THOUSANDS)
Residential mortgage (1-4 family)....... $62,313 $5,541 $67,854
Commercial real estate.................. 8,954 118 9,072
Real estate construction................ 0 0 0
Home equity............................. 9,073 4,212 13,285
Consumer................................ 8,745 398 9,143
Commercial.............................. 1,229 414 1,643
----- --- -----
Total(1)................................ $90,314 $10,683 $100,997
======= ======= ========
Percent of total........................ 89.42% 10.58% 100.00%
--------------------
(1) Due after June 30, 2003.
4
The following table sets forth information with respect to our loan
originations, purchases and sales activity for the periods indicated.
FOR THE YEARS ENDED JUNE 30,
2002 2001
---- ----
(IN THOUSANDS)
Net loans receivable at beginning of $118,011 $108,308
Period(1):.................................
Loans originated:
Residential mortgage (1-4 family).......... 86,685 55,170
Commercial real estate .................... 3,068 2,580
Real estate construction................... 9,401 4,343
Home equity................................ 8,694 9,038
Consumer................................... 6,856 6,834
Commercial loans........................... 1,446 1,826
-------- --------
Total loans originated.............. 116,150 79,791
------- ------
Loans sold:
Whole loans................................ 70,246 33,435
Participations............................. 0 0
-------- --------
Total loans sold.................... 70,246 33,435
-------- --------
Principal repayments......................... 56,926 36,677
Allowance for losses decrease (increase)..... (14) 24
Net loan increase (decrease)................. (11,036) 9,703
-------- --------
Net loans receivable at end of period........ $106,975 $118,011
======== ========
--------------------
(1) Includes loans held for sale.
RESIDENTIAL LENDING. American Federal Savings Bank's primary lending
activity consists of the origination of one-to-four-family residential mortgage
loans secured by property located in American Federal's market area.
Approximately 62.90% of the bank's loans as of June 30, 2002 were comprised of
such loans. American Federal Savings Bank generally originates one- to
four-family residential mortgage loans in amounts up to 80% of the lesser of the
appraised value or the selling price of the mortgaged property without requiring
private mortgage insurance. A mortgage loan originated by American Federal,
whether fixed rate or adjustable rate, can have a term of up to 30 years.
American Federal Savings Bank holds substantially all of its adjustable rate and
its 8, 10 and 12 year fixed rate loans in portfolio. Adjustable rate loans limit
the periodic interest rate adjustment and the minimum and maximum rates that may
be charged over the term of the loan. The Bank's fixed rate 15-year loans are
held in portfolio or sold in the secondary market depending on market
conditions. All 30 year fixed rate loans are sold in the secondary market. The
volume of loan sales is dependent on the volume, type and term of loan
originations.
American Federal Savings Bank obtains a significant portion of its
noninterest income from servicing loans sold. American Federal Savings Bank
offers many of the fixed rate loans it originates for sale in the secondary
market on a servicing retained basis. This means that we process the borrower's
payments and send them to the purchaser. The retention of servicing enables
American Federal Savings Bank to increase fee income and maintain
5
a relationship with the borrower. Servicing income was $305,000 for the year
ended June 30, 2002. At June 30, 2002, American Federal Savings Bank had $141.67
million in loans sold with servicing retained. American Federal Savings Bank
does not ordinarily purchase home mortgage loans from other financial
institutions.
Property appraisals on real estate securing American Federal's
single-family residential loans are made by state certified and licensed
independent appraisers approved annually by the board of directors. Appraisals
are performed in accordance with applicable regulations and policies. American
Federal Savings Bank generally obtains title insurance policies on all first
mortgage real estate loans originated. On occasion, refinancings of mortgage
loans are approved using title reports instead of title insurance. Title reports
are also allowed on home equity loans. Borrowers generally remit funds with each
monthly payment of principal and interest, to a loan escrow account from which
American Federal Savings Bank makes disbursements for such items as real estate
taxes and hazard and mortgage insurance premiums as they become due.
HOME EQUITY LOANS. American Federal Savings Bank also originates home
equity loans. These loans are secured by the borrowers' primary real estate, but
are typically subject to a prior lien, which may or may not be held by the Bank.
At June 30, 2002, $14.24 million or 13.37% of our total loans, were home equity
loans. Borrowers may use the proceeds from the Bank's home equity loans for many
purposes, including home improvement, debt consolidation, or other purchasing
needs. The Bank offers fixed rate, fixed payment home equity loans as wells as
variable rate home equity lines of credit. Fixed rate home equity loans
typically have terms of no longer than fifteen years.
Although home equity loans are secured by real estate, they carry a
greater risk than first lien residential mortgages because of the existence of a
prior lien on the property securing the loan, as well as the flexibility the
borrower has with respect to the loan proceeds. American Federal Savings Bank
attempts to minimize this risk by maintaining conservative underwriting policies
on such loans. We make home equity loans for up to only 85% of appraised value
of the underlying real estate collateral, less the amount of any existing prior
liens on the property securing the loan.
COMMERCIAL REAL ESTATE. American Federal Savings Bank originates
commercial real estate mortgage loans, including both developed and undeveloped
land loans, and loans on multi-family dwellings. Commercial real estate loans
make up 8.88% of the Bank's total loan portfolio, or $9.46 million at June 30,
2002. The majority of these loans are non-residential commercial real estate
loans. American Federal Savings Bank's commercial real estate mortgage loans are
primarily permanent loans secured by improved property such as office buildings,
retail stores, commercial warehouses and apartment buildings. The terms and
conditions of each loan are tailored to the needs of the borrower and based on
the financial strength of the project and any guarantors. Generally, commercial
real estate loans originated by the Bank will not exceed 75% of the appraised
value or the selling price of the property, whichever is less. The average loan
size is approximately $120,000 and is typically made with fixed rates of
interest with five to 15 year maturities. Upon maturity, the loan is repaid or
the terms and conditions are renegotiated. Generally, all originated commercial
real estate loans are within the market area of the Bank and all are within the
state of Montana. American Federal Savings Bank's largest single commercial real
estate loan had a balance of approximately $1,581,000 on June 30, 2002, and was
secured by a commercial building. This loan contains a 90 percent government
guaranty under the USDA Rural Development Program.
REAL ESTATE CONSTRUCTION LENDING. American Federal Savings Bank also lends
funds for the construction of one- to four-family homes. Real estate
construction loans are made both to individual homeowners for the construction
of their primary residence and to a lesser extent, to local builders for the
construction of pre-sold houses or houses that are being built for speculative
purposes. Real estate construction loans accounted for $2.93 million or 2.76% of
American Federal's loan portfolio at June 30, 2002.
CONSUMER LOANS. As part of its strategy to invest in higher yielding
shorter term loans, American Federal Savings Bank has made significant efforts
to grow its consumer lending portfolio. This portfolio includes personal loans
secured by collateral other than real estate, unsecured personal loans and lines
of credit, and loans secured by deposits held by the Bank. As of June 30, 2002,
consumer loans totaled $10.02 million or 9.42% of the Bank's total loan
portfolio. These loans consist primarily of auto loans, boat loans, personal
loans and credit lines and deposit account loans. Consumer loans are originated
in the Bank's market area and generally have maturities
6
of up to 7 years. For loans secured by savings accounts, American Federal
Savings Bank will lend up to 90% of the account balance on single payment loans
and up to 100% for monthly payment loans.
Consumer loans have a shorter term and generally provide higher interest
rates than residential loans. Consumer loans can be helpful in improving the
spread between average loan yield and cost of funds and at the same time improve
the matching of the maturities of rate sensitive assets and liabilities.
Increasing its consumer loans has been a major part of American Federal's
strategy of operating more like a commercial bank than a traditional savings
bank.
The underwriting standards employed by American Federal Savings Bank for
consumer loans include a determination of the applicant's credit history and an
assessment of the applicant's ability to meet existing obligations and payments
on the proposed loan. The stability of the applicant's monthly income may be
determined by verification of gross monthly income from primary employment, and
additionally from any verifiable secondary income. Creditworthiness of the
applicant is of primary consideration; however, the underwriting process also
includes a comparison of the value of the collateral in relation to the proposed
loan amount.
COMMERCIAL LOANS. Commercial loans amounted to $2.84 million, or 2.67% of
the Bank's total loan portfolio at June 30, 2002. American Federal Savings
Bank's commercial loans are traditional business loans and are not secured by
real estate. Such loans may be structured as unsecured lines of credit or may be
secured by inventory, accounts receivable or other business assets. While the
commercial loan portfolio amounts to only 2.67% of the total portfolio at June
30, 2002, American Federal Savings Bank intends to increase such lending by
focusing on market segments which it has not previously emphasized, such as
business loans to doctors, lawyers, architects and other professionals as well
as to small businesses within its market area. Our management believes that this
strategy provides opportunities for growth, without significant additional cost
outlays for staff and infrastructure.
Commercial loans of this nature usually involve greater risk than 1-4
family residential mortgage loans. The collateral we receive is typically
related directly to the performance of the borrower's business which means that
repayment of commercial loans is dependent on the successful operations and
income stream of the borrower's business. Such risks can be significantly
affected by economic conditions. In addition, commercial lending generally
requires substantially greater oversight efforts compared to residential real
estate lending.
LOANS TO ONE BORROWER. Under federal law, savings institutions have,
subject to certain exemptions, lending limits to one borrower in an amount equal
to the greater of $500,000 or 15% of the institution's unimpaired capital and
surplus. As of June 30, 2002, our largest aggregation of loans to one borrower
was $1,581,470, consisting of one loan secured primarily by commercial real
estate. This was well below our federal legal lending limit to one borrower of
approximately $3.11 million at such date. At June 30, 2002, this loan was
current.
LOAN SOLICITATION AND PROCESSING. Our customary sources of mortgage loan
applications include repeat customers, walk-ins, and referrals from home
builders and real estate brokers. We also advertise in local newspapers and on
local radio and television. Our branch managers and loan officers located at our
headquarters and in branches, have authority to approve certain types of loans
when presented with a completed application. Other loans must be approved at our
main offices as disclosed herein. No loan consultants or loan brokers are
currently used by us for either residential or commercial lending activities.
After receiving a loan application from a prospective borrower, a credit
report and verifications are ordered to confirm specific information relating to
the loan applicant's employment, income and credit standing. When required by
our policies, an appraisal of the real estate intended to secure the proposed
loan is undertaken by an independent fee appraiser. In connection with the loan
approval process, our staff analyze the loan applications and the property
involved. Officers and branch managers are granted lending authority based on
the kind of loan types where they possess expertise and their level of
experience. We have established a series of loan committees to approve any loans
which may exceed the lending authority of particular officers or branch
managers. A quorum of the board of directors is required for approval of any
loan, or aggregation of loans to a single borrower, more than $950,000.
7
Loan applicants are promptly notified of the decision by a letter setting
forth the terms and conditions of the decision. If approved, these terms and
conditions include the amount of the loan, interest rate basis, amortization
term, a brief description of real estate to be mortgaged, tax escrow and the
notice of requirement of insurance coverage to be maintained. We generally
require title insurance on first mortgage loans and fire and casualty insurance
on all properties securing loans, which insurance must be maintained during the
entire term of the loan.
LOAN COMMITMENTS. We generally provide commitments to fund fixed and
adjustable-rate single-family mortgage loans for periods up to 60 days at a
specified term and interest rate. The total amount of our commitments to extend
credit as of June 30, 2002, was approximately $2.29 million.
NON-PERFORMING LOANS AND PROBLEM ASSETS
COLLECTION PROCEDURES. Generally, our collection procedures provide that
when a loan is 15 or more days delinquent, the borrower is notified with a past
due notice. If the loan becomes 30 days delinquent, the borrower is sent a
written delinquent notice requiring payment. If the delinquency continues,
subsequent efforts are made to contact the delinquent borrower, including face
to face meetings and counseling to resolve the delinquency. All collection
actions are undertaken with the objective of compliance with the Fair Debt
Collection Act.
For mortgage loans and home equity loans, if the borrower is unable to
cure the delinquency or reach a payment agreement, we will institute foreclosure
actions. If a foreclosure action is taken and the loan is not reinstated, paid
in full or refinanced, the property is sold at judicial sale at which we may be
the buyer if there are no adequate offers to satisfy the debt. Any property
acquired as the result of foreclosure or by deed in lieu of foreclosure is
classified as real estate owned until such time as it is sold or otherwise
disposed of. When real estate owned is acquired, it is recorded at the lower of
the unpaid principal balance of the related loan or its fair market value less
estimated selling costs. The initial recording of any loss is charged to the
allowance for loan losses. As of June 30, 2002, American Federal Savings Bank
had no real estate owned.
Loans are reviewed on a quarterly basis and are placed on non-accrual
status when they are more than 90 days delinquent. Loans may be placed on
non-accrual status at any time if, in the opinion of management, the collection
of additional interest is doubtful. Interest accrued and unpaid at the time a
loan is placed on non-accrual status is charged against interest income.
Subsequent payments are either applied to the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan. At June 30, 2002, we had $516,000 of loans that were
non-performing and held on non-accrual status.
DELINQUENT LOANS. The following table provides information regarding the
Bank's loans that are delinquent 30 to 89 days at June 30, 2002:
PERCENTAGE OF TOTAL
NUMBER AMOUNT DELINQUENT LOANS
------ ------ ----------------
(DOLLARS IN THOUSANDS)
Loan Type:
Mortgage (1-4 family).... 11 $759 71.60%
Commercial Real Estate 1 5 0.47
Consumer................. 27 262 24.72
Commercial............... 2 34 3.21
- -- ----
Total.................... 41 $1,060 100.00%
== ====== =======
8
NON-PERFORMING ASSETS. The following table sets forth information
regarding American Federal Savings Bank's non-performing assets as of the dates
indicated. The Bank does not have any troubled debt restructurings within the
meaning of the Statement of Financial Accounting Standards No. 114.
AT JUNE 30,
--------------------------------------
2002 2001
------------------ ----------------
(DOLLARS IN THOUSANDS)
Non-accrual loans............................ $516 $408
Accruing loans delinquent 90 days or more.... 227 91
Real estate owned............................ 0 0
---- -
Total........................................ $743 $499
==== ====
Total non-performing loans as a percentage of
total loan portfolio......................... 0.70% 0.43%
Percentage of total assets................... 0.40% 0.30%
The increase in non-accrual loans during the year ended June 30, 2002, was
attributable primarily to $182,000 in residential loans which were placed in
non-accrual status. Subsequent to yearend, $68,000 of the non-accrual
residential loans paid off. During the year ended June 30, 2002, American
Federal Savings Bank had no foreclosures.
During the year ended June 30, 2002, approximately $26,000 of interest
would have been recorded on loans accounted for on a non-accrual basis if such
loans had been current according to the original loan agreements for the entire
period. This amount was not included in the Bank's interest income for the
period.
CLASSIFIED ASSETS. Management, in compliance with regulatory guidelines,
conducts an internal loan review program, whereby loans are placed or classified
in categories depending upon the level of risk of non- payment or loss. These
categories are special mention, substandard, doubtful or loss. When a loan is
classified as substandard or doubtful, management is required to establish an
allowance for loan losses in an amount that is deemed prudent. When management
classifies a loan as a loss asset, a reserve equal to 100% of the loan balance
is required to be established or the loan is required to be charged-off. The
allowance for loan losses is composed of an allowance for both inherent risk
associated with lending activities and particular problem assets.
Management's evaluation of the classification of assets and the adequacy
of the allowance for loan losses is reviewed by the Board on a regular basis and
by the regulatory agencies as part of their examination process. In addition,
each loan that exceeds $200,000 and each group of loans that exceeds $200,000 is
monitored more closely. The following table reflects our classified assets.
9
AT JUNE 30,
--------------------------------------
2002 2001
------------------ ---------------
(IN THOUSANDS)
Residential mortgages
(1-4 family):
Special mention.................... 235 0
Substandard........................ 756 983
Doubtful........................... 0 0
Loss............................... 0 0
Commercial Real Estate:
Special mention.................... 345 49
Substandard........................ 0 0
Doubtful........................... 0 0
Loss............................... 0 0
Home equity loans:
Special mention.................... 0 0
Substandard........................ 223 220
Doubtful........................... 0 0
Loss............................... 6 0
Consumer loans:
Special mention.................... 0 0
Substandard........................ 63 43
Doubtful........................... 0 0
Loss............................... 18 23
Commercial loans:
Special mention.................... 0 157
Substandard........................ 11 20
Doubtful........................... 0 0
Loss............................... 3 5
Real estate owned:
Special mention.................... 0 0
Substandard........................ 0 0
Doubtful........................... 0 0
Loss............................... 0 0
------ ------
Total classified loans and real
estate owned.......................... $1,660 $1,500
====== ======
ALLOWANCE FOR LOAN LOSSES AND REAL ESTATE OWNED. American Federal Savings
Bank segregates its loan portfolio for loan losses into the following broad
categories: residential mortgages (1-4 family), commercial real estate, real
estate construction, commercial loans, home equity loans and consumer loans.
American Federal Savings Bank provides for a general allowance for losses
inherent in the portfolio by the above categories, which consists of two
components. General loss percentages are calculated based on historical analyses
and other factors. A supplemental portion of the allowance is calculated for
inherent losses which probably exist as of the evaluation date even though they
might not have been identified by the more objective processes used. This is due
to the risk of error and/or inherent imprecision in the process. This portion of
the allowance is particularly subjective and requires judgments based on
qualitative factors which do not lend themselves to exact mathematical
calculations such as: trends in delinquencies and non-accruals; trends in
volume; terms and portfolio mix; new credit products;
10
changes in lending policies and procedures; changes in the outlook for the
local, regional and national economy; and peer group comparisons.
At least quarterly, the management of the Bank evaluates the need to
establish reserves against losses on loans and other assets based on estimated
losses on specific loans and on any real estate owned when a finding is made
that a loss is estimable and probable. Such evaluation includes a review of all
loans for which full collectibility may not be reasonably assured and considers;
among other matters; the estimated market value of the underlying collateral of
problem loans; prior loss experience; economic conditions; and overall portfolio
quality.
Provisions for losses are charged against earnings in the period they are
established. We had $703,000 in allowances for loan losses at June 30, 2002.
While we believe we have established our existing allowance for loan
losses in accordance with generally accepted accounting principles, there can be
no assurance that regulators, in reviewing our loan portfolio, will not request
that we significantly increase our allowance for loan losses, or that general
economic conditions, a deteriorating real estate market, or other factors will
not cause us to significantly increase our allowance for loan losses, therefore
negatively affecting our financial condition and earnings.
In making loans, we recognize that credit losses will be experienced and
that the risk of loss will vary with, among other things, the type of loan being
made, the creditworthiness of the borrower over the term of the loan and, in the
case of a secured loan, the quality of the security for the loan.
It is our policy to review our loan portfolio, in accordance with
regulatory classification procedures, on at least a quarterly basis.
Additionally, we maintain a program of reviewing loan applications prior to
making the loan and immediately after loans are made in an effort to maintain
loan quality.
The following table sets forth information with respect to our allowance
for loan losses at the dates indicated:
FOR YEARS ENDED JUNE 30,
-----------------------------------
2002 2001
----------------- --------------
(DOLLARS IN THOUSANDS)
Balance at beginning of period................. $688 $712
--- ---
Loans charged-off.............................. (27) (43)
Recoveries..................................... 35 19
-- --
Net loan recoveries (charge-offs).............. 8 (24)
Provision for possible loan losses............. 0 0
Transfer from interest reserve 7 0
- -
Balance at end of period....................... $703 $688
==== ====
Allowance for loan losses to total loans....... 0.67% 0.60%
Allowance for loan losses to total non-
performing loans............................. 94.62% 137.88%
Net recoveries (charge-offs) to average loans
outstanding during the period................ 0.01% (0.02)%
11
The following table presents our allocation of the allowance for loan
losses by loan category and the percentage of loans in each category to total
loans at the periods indicated.
AT JUNE 30,
---------------------------------------------------------------------------------------------
2002 2001
------------------------------------------- -----------------------------------------------
LOANS IN LOANS IN
PERCENTAGE OF EACH PERCENTAGE OF EACH
ALLOWANCE TO CATEGORY TO ALLOWANCE TO CATEGORY TO
AMOUNT TOTAL ALLOWANCE TOTAL LOANS AMOUNT TOTAL ALLOWANCE TOTAL LOANS
------ --------------- ----------- ------ --------------- -----------
(DOLLARS IN THOUSANDS)
First Mortgage Loans :
Residential mortgage (1-4
family)....................... $150 21.34% 62.90% $191 27.76% 65.60%
Commercial real estate.......... 262 27.62 8.88 190 27.62 7.83
Real estate construction........ 2 0.28 2.75 1 0.15 1.71
--- ----- ----- ---- ----- -----
Total mortgage loans.... 414 55.53 74.53 382 55.53 75.14
--- ----- ----- ---- ----- -----
Other loans:
Home equity..................... 167 23.76 13.38 165 23.98 13.56
Consumer........................ 94 13.37 9.42 111 16.13 8.95
Commercial...................... 28 3.98 2.67 30 4.36 2.35
--- ----- ----- ---- ----- -----
Total other loans....... 289 44.47 25.46 306 44.47 24.86
--- ----- ----- ---- ----- -----
Total................... $703 100.00% 100.00% $688 100.00% 100.00%
==== ====== ====== ==== ====== ======
INVESTMENT ACTIVITIES
GENERAL. Federally chartered savings banks such as American Federal
Savings Bank have the authority to invest in various types of investment
securities, including United States Treasury obligations, securities of various
Federal agencies (including securities collateralized by mortgages),
certificates of deposits of insured banks and savings institutions, municipal
securities, corporate debt securities and loans to other banking institutions.
Eagle maintains liquid assets that may be invested in specified short-term
securities and other investments. Liquidity levels may be increased or decreased
depending on the yields on investment alternatives. They may also be increased
based on management's judgment as to the attractiveness of the yields then
available in relation to other opportunities. Liquidity levels can also change
based on management's expectation of future yield levels, as well as
management's projections as to the short-term demand for funds to be used in the
Bank's loan origination and other activities. Eagle maintains an investment
securities portfolio and a mortgage-backed securities portfolio as part of its
investment portfolio.
INVESTMENT POLICIES. The investment policy of Eagle, which is established
by the board of directors, is designed to foster earnings and liquidity within
prudent interest rate risk guidelines, while complementing American Federal's
lending activities. The policy provides for available-for-sale, held-to-maturity
and trading classifications. However, Eagle does not hold any securities for
purposes of trading and does not anticipate doing so in the future. The policy
permits investments in high credit quality instruments with diversified cash
flows while permitting us to maximize total return within the guidelines set
forth in our interest rate risk and liquidity management policy. Permitted
investments include but are not limited to U.S. government obligations,
government agency or government-sponsored agency obligations, state, county and
municipal obligations, and mortgage-backed securities. Collateralized mortgage
obligations guaranteed by government or government-sponsored agencies,
investment grade corporate debt securities, and commercial paper are also
included. We also invest in Federal Home Loan Bank overnight deposits and
federal funds, but these instruments are not considered part of the investment
portfolio.
Our investment policy also includes several specific guidelines and
restrictions to insure adherence with safe and sound activities. The policy
prohibits investments in high-risk mortgage derivative products (as defined
12
within the policy) without prior approval from the board of directors.
Management must demonstrate the business advantage of such investments. In
addition, the policy limits the maximum amount of the investment in a specific
investment category. We do not participate in hedging programs, interest rate
swaps, or other activities involving the use of off-balance sheet derivative
financial instruments, except certain financial instruments designated as cash
flow hedges related to loans committed to be sold in the secondary market.
Further, Eagle does not invest in securities which are not rated investment
grade.
The board through its asset liability committee has charged the Chief
Financial Officer to implement the investment policy. All transactions are
reported to the board of directors monthly, as well as the current composition
of the portfolio, including market values and unrealized gains and losses.
INVESTMENT SECURITIES. We maintain a portfolio of investment securities,
classified as either available-for-sale or held-to-maturity to enhance total
return on investments. At June 30, 2002, our investment securities were U.S.
government and agency obligations, Small Business Administration pools,
municipal securities, mortgage-backed securities and corporate obligations, all
with varying characteristics as to rate, maturity and call provisions.
Investment securities held-to-maturity represented 7.17% of Eagle's total
investment portfolio. Securities available-for-sale totaled 92.83% of Eagle's
total investment portfolio.
CORPORATE DEBT. We also invest in corporate securities. Corporate bonds
may offer a higher yield than a U.S. Treasury security of comparable duration.
These debt instruments also may have a higher risk of default due to adverse
change in the creditworthiness of the issuer. Our policy limits investments in
corporate bonds to securities rated investment grade or better.
MORTGAGE-BACKED SECURITIES AND SMALL BUSINESS ADMINISTRATION LOAN POOLS.
We invest in mortgage-backed securities to provide earnings, liquidity, cash
flows and diversification to our overall balance sheet. These mortgage-backed
securities are classified as either available-for-sale or held-to-maturity.
These securities are participation certificates issued and guaranteed by the
Government National Mortgage Association, Freddie Mac and Fannie Mae and secured
by interests in pools of mortgages. Mortgage-backed securities typically
represent a participation interest in a pool of single-family or multi-family
mortgages, although we focus on investments in mortgage-backed securities
secured by single-family mortgages. Expected maturities will differ from the
maturities actually set forth in the loans in the pools due to scheduled
repayments and because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or adjustable
rate mortgage loans. Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through certificates. The interest
rate risk characteristics of the underlying pool of mortgages (i.e., fixed-rate
or adjustable-rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages.
Eagle also invests in securities secured by pools of Small Business
Administration loans. The securities are created and serviced by various issuers
and consist of pools of the guaranteed portions of Small Business Administration
business loans which are consolidated by the issuers and which are guaranteed by
the Small Business Administration as to payment of principal and interest. There
is an active secondary market for such securities and American Federal Savings
Bank believes that its investments in such pools are liquid investments.
COLLATERALIZED MORTGAGE OBLIGATIONS. We also invest in collateralized
mortgage obligations, issued or sponsored by Fannie Mae and Freddie Mac, or a
private issuer that possesses one of the three highest rating categories by a
nationally recognized statistical rating firm. Collateralized mortgage
obligations are a type of debt security that aggregates pools of mortgages and
mortgage-backed securities and creates different classes of securities with
varying maturities and amortization schedules as well as a residual interest
with each class having different risk characteristics. The cash flows from the
underlying collateral are usually divided into "tranches" or classes which have
descending priorities with respect to the distribution of principal and interest
repayment of the underlying mortgages and mortgage-backed securities as opposed
to pass through mortgage-backed securities where cash flows are distributed pro
rata to all security holders. Unlike mortgage-backed securities from which cash
flow
13
is received and prepayment risk is shared pro rata by all securities holders,
cash flows from the mortgages and mortgage-backed securities underlying
collateralized mortgage obligations are paid in accordance with a predetermined
priority to investors holding various tranches of such securities or
obligations. A particular tranche may carry prepayment risk, which may be
different from that of the underlying collateral and other tranches. Investing
in collateralized mortgage obligations allows us to protect ourselves to a
degree from reinvestment risk resulting from unexpected prepayment activity
associated with conventional mortgage-backed securities. Management believes
these securities represent attractive alternatives relative to other investments
due to the wide variety of maturity, repayment and interest rate options
available. Eagle's investment policy requires that a pre-purchase analysis be
performed and documented in investment portfolio records. At June 30, 2002,
31.49% of our investment portfolio (exclusive of interest-bearing-deposits with
banks) consisted of collateralized mortgage obligations.
OTHER SECURITIES. Equity securities owned consist of a $1.59 million
investment in Federal Home Loan Bank of Seattle common stock as of June 30,
2002. As a member of the Federal Home Loan Bank of Seattle, ownership of Federal
Home Loan Bank of Seattle common shares is required. The remaining securities
and deposits provide diversification and complement our overall investment
strategy.
The following table sets forth the carrying value of Eagle's investment
and mortgage-backed securities portfolio at the dates indicated.
AT JUNE 30,
------------------------------------------------------
2002 2001
---------------------------- ----------------------
BOOK PERCENTAGE BOOK PERCENTAGE
VALUE OF TOTAL VALUE OF TOTAL
----- -------- ----- --------
(DOLLARS IN THOUSANDS)
Securities available-for-sale, at fair value:
U.S. Government and agency obligations........... $7,034 11.09% $4,610 13.33%
Corporate obligations............................ 8,726 13.76 7,306 21.12
Municipal obligations............................ 4,291 6.77 4,245 12.27
Collateralized mortgage obligations.............. 17,013 26.83 1,186 3.43
Mortgage-backed securities....................... 6,570 10.36 4,103 11.86
Mutual Funds..................................... 4,575 7.22 0 0.00
Corporate preferred stock........................ 1,945 3.07 154 0.45
----- ---- --- ----
Total securities available-for-sale.............. 50,154 79.10 21,604 62.46
------ ----- ------ -----
Securities held-to-maturity, at book value:
U.S. Government and Agency obligations........... 1,355 2.14 1,396 4.04
Mortgage-backed securities....................... 2,521 3.98 4,096 11.84
Municipal obligations............................ 0 0.00 1,079 3.12
- ---- ----- ----
Total securities held-to-maturity............... 3,876 6.11 6,571 19.00
----- ---- ----- -----
Total securities................................. 54,029 85.22 28,175 81.46
------ ----- ------ -----
Interest-bearing deposits........................ 7,786 12.28 4,925 14.24
Federal Home Loan Bank capital stock, at cost.... 1,586 2.50 1,487 4.30
----- ---- ----- ----
Total............................................ $63,402 100.00% $34,587 100.00%
======= ====== ======= ======
14
The following table sets forth information regarding the carrying values,
weighted average yields and maturities of Eagle's investment and mortgage-backed
securities portfolio at June 30, 2002.
15
AT JUNE 30, 2002
------------------------------------------------------------------------------------
ONE YEAR OR LESS ONE TO FIVE YEARS MORE THAN FIVE YEARS
---------------- ----------------- --------------------
ANNUALIZED ANNUALIZED ANNUALIZED
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
----- ----- ----- ----- ----- -----
(DOLLARS IN THOUSANDS)
Securities available-for-sale:
U.S. Government and agency
obligations.............................. $0 0.00% $3,095 4.47% $3,939 3.15%
Corporate obligations...................... 3,277 6.43 5,449 5.52 0 0.00
Municipal obligations...................... 0 0.00 0 0.00 4,291 6.91
Collateralized mortgage obligations........ 0 0.00 0 0.00 17,013 4.68
Mortgage-backed securities................. 140 7.01 126 7.06 6,304 4.70
Corporate preferred stock.................. 0 0.00 0 0.00 1,945 6.92
Mutual fund................................ 0 0.00 0 0.00 4,575 3.15
- - -----
Total securities available-for-sale........ 3,417 6.45 8,670 5.17 38,067 4.71
------- ------ -------
Securities held-to-maturity:
U.S. Government and agency obligations..... 0 0.00 0 0.00 0 0.00
Mortgage-backed securities................. 0 0.00 656 6.29 1,865 5.96
Municipal obligations...................... 321 5.87 201 5.80 833 6.05
------- ------ -------
Total securities held-to-maturity.......... 321 5.87 857 6.18 2,698 5.99
--- --- ------
Total securities........................... 3,738 6.40 9,527 5.26 40,765 4.79
------- ------ -------
Interest-bearing deposits.................. 7,786 1.84 0 0.00 0 0.00
------- ------ -------
Federal Home Loan Bank capital stock....... 0 0.00 0 0.00 1,586 6.00
------- ------ -------
Total...................................... $11,524 3.65% $9,527 5.26% $42,351 4.79%
======= ====== =======
------------------------------------------------
TOTAL INVESTMENT SECURITIES
---------------------------
ANNUALIZED
APPROXIMATE WEIGHTED
CARRYING MARKET AVERAGE
VALUE VALUE YIELD
----- ----- -----
Securities available-for-sale:
U.S. Government and agency
obligations.............................. $ 7,034 $7,034 3.73%
Corporate obligations...................... 8,726 8,726 5.86
Municipal obligations...................... 4,291 4,291 6.91
Collateralized mortgage obligations........ 17,013 17,013 4.68
Mortgage-backed securities................. 6,570 6,570 4.80
Corporate preferred stock.................. 1,945 1,945 6.92
Mutual fund................................ 4,575 4,575 3.15
------- -------
Total securities available-for-sale........ 5 0,154 5 0,154 4.91
------- -------
Securities held-to-maturity:
U.S. Government and agency obligations..... 0 0 0.00
Mortgage-backed securities................. 2,521 2,611 6.05
Municipal obligations...................... 1,355 1,392 5.97
------- -------
Total securities held-to-maturity.......... 3,876 4,003 6.02
------- -------
Total securities........................... 54,030 54,157 4.99
------- -------
Interest-bearing deposits.................. 7,786 7,786 1.84
------- -------
Federal Home Loan Bank capital stock....... 1,586 1,586 6.00
------- -------
Total...................................... $63,402 $63,529 4.63%
======= =======
16
SOURCES OF FUNDS
GENERAL. Deposits are the major source of our funds for lending and other
investment purposes. Borrowings (principally from the Federal Home Loan Bank of
Seattle) are also used to compensate for reductions in the availability of funds
from other sources. In addition to deposits and borrowings, we derive funds from
loan and mortgage-backed securities principal repayments, and proceeds from the
maturity, call and sale of mortgage-backed securities and investment securities
and from the sale of loans. Loan and mortgage-backed securities payments are a
relatively stable source of funds, while deposit inflows are significantly
influenced by general interest rates and money market conditions.
DEPOSITS. We offer a variety of deposit accounts. Deposit account terms
vary, primarily as to the required minimum balance amount, the amount of time
that the funds must remain on deposit and the applicable interest rate.
Our current deposit products include certificates of deposit accounts
ranging in terms from 90 days to five years as well as checking, savings and
money market accounts. Individual retirement accounts (IRAs) are included in
certificates of deposit.
Deposits are obtained primarily from residents of Helena, Bozeman, Butte
and Townsend. We believe we are able to attract deposit accounts by offering
outstanding service, competitive interest rates and convenient locations and
service hours. We use traditional methods of advertising to attract new
customers and deposits, including radio, television, print media advertising and
sales training and incentive programs for employees. We do not utilize the
services of deposit brokers and management believes that non-residents of
Montana hold an insignificant number of deposit accounts.
We pay interest rates on deposits which are competitive in our market.
Interest rates on deposits are set weekly by senior management, based on a
number of factors, including: projected cash flow; a current survey of a
selected group of competitors' rates for similar products; external data which
may influence interest rates; investment opportunities and loan demand; and
scheduled certificate maturities and loan and investment repayments.
Core deposits are deposits that are more stable and somewhat less
sensitive to rate changes. They also represent a lower cost source of funds than
rate sensitive, more volatile accounts such as certificates of deposit. We
believe that our core deposits are our checking, as well as NOW accounts,
passbook and statement savings accounts, money market accounts and IRA accounts.
Based on our historical experience, we include IRA accounts funded by
certificates of deposit as core deposits because they exhibit the principal
features of core deposits in that they are stable and generally are not rate
sensitive. Core deposits amounted to $102.72 million or 67.76% of the Bank's
deposits at June 30, 2002 ($81.78 million or 53.94% if IRA certificates of
deposit are excluded). The presence of a high percentage of core deposits and,
in particular, transaction accounts, is part of our strategy to restructure our
liabilities to more closely resemble the lower cost liabilities of a commercial
bank. However, a significant portion of our deposits remains in certificate of
deposit form. These certificates of deposit, should they mature and be renewed
at higher rates, will result in an increase in our cost of funds.
The following table sets forth American Federal's distribution of deposit
accounts at the dates indicated and the weighted average interest rate on each
category of deposit represented:
17
AT JUNE 30,
----------------------------------------------------------------------------------------
2002 2001
--------------------------------------- --------------------------------------------
WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE
AMOUNT OF TOTAL RATE AMOUNT OF TOTAL RATE
------ -------- ---- ------ -------- ----
(DOLLARS IN THOUSANDS)
Noninterest checking............... $6,835 4.51% 0.00% $6,486 4.84% 0.00%
Passbook and statement savings..... 22,465 14.82 1.50 20,688 15.43 3.00
NOW account/Interest bearing
Checking......................... 24,909 16.43 0.60 22,536 16.81 1.00
Money market accounts.............. 27,569 18.18 2.27 17,399 12.98 3.78
------ ----- ------ -----
Total.............................. 81,778 53.94 1.36 67,109 50.06 2.24
------ ----- ------ -----
Certificates of deposit accounts:
IRA certificates................ 20,942 13.81 5.00 18,646 13.91 5.05
Step-rate certificates.......... 0 0.00 0.00 1,724 1.29 5.16
Other certificates.............. 48,885 32.25 3.63 46,571 34.74 5.69
------ ----- ------ -----
Total certificates of deposit......
69,827 46.06 4.04 66,941 49.94 5.50
------ ----- ------ -----
Total deposits................. $151,605 100.00% 2.59% $134,050 100.00% 3.72%
======== ====== ======== ======
The following table sets forth the amounts and maturities of our
certificates of deposit as of June 30, 2002, for the maturity dates indicated:
CERTIFICATE OF DEPOSIT MATURITIES AS OF JUNE 30, 2002
---------------------------------------------------------------------------------------------------
(IN THOUSANDS)
AFTER
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2003 2004 2005 2005 TOTAL
---- ---- ---- ---- -----
2.01-4.00% $30,899 $2,169 $543 $59 $33,670
4.01-6.00% 21,673 9,629 620 1,366 33,288
6.01-8.00% 1,756 514 421 178 2,869
----- --- --- --- -----
Total........ $54,328 $12,312 $1,584 $1,603 $69,827
======= ======= ====== ====== =======
18
The following table shows the amount of certificates of deposit of
$100,000 or more by time remaining until maturity as of June 30, 2002:
JUMBO CERTIFICATES BY MATURITY
--------------------------------------------------------------------------------------
MATURITY PERIOD AMOUNT
(IN THOUSANDS)
3 months or less.......................... $3,042
Over 3 to 6 months........................ 1,851
Over 6 to 12 months....................... 3,466
Over 12 months............................ 3,293
-----
Total........................... $11,652
=======
The following table sets forth the net changes in deposit accounts for
the periods indicated:
YEAR ENDED JUNE 30,
------------------------------------------------------
2002 2001
------------------------ ------------------------
(DOLLARS IN THOUSANDS)
Opening balance................... $134,050 $124,513
Deposits (Withdrawals), Net....... 13,373 4,575
Interest credited................. 4,182 4,962
----- -----
Ending balance.................... $151,605 $134,050
======== ========
Net increase...................... $17,555 $9,537
Percent increase.................. 13.10% 7.66%
Weighted average cost of
deposits during the period...... 3.23% 4.01%
Weighted average cost
of deposits at end of period... 2.59% 3.72%
Our depositors are primarily residents of the state of Montana. We have no
brokered deposits.
BORROWINGS. Deposits are the primary source of funds for our lending and
investment activities and for general business purposes. However, as the need
arises, or in order to take advantage of funding opportunities, we also borrow
funds in the form of advances from the Federal Home Loan Bank of Seattle to
supplement our supply of lendable funds and to meet deposit withdrawal
requirements.
The following table sets forth information concerning our borrowing from
the Federal Home Loan Bank of Seattle at the end of, and during, the periods
indicated:
19
AT OR FOR THE YEAR ENDED JUNE 30,
----------------------------------------------
2002 2001
------------------- ------------------
(DOLLARS IN THOUSANDS)
Advances from Federal Home Loan Bank:
Average balance................................... $10,331 $10,836
Maximum balance at any month-end.................. 11,436 12,174
Balance at period end............................. 9,344 11,444
Weighted average interest rate during the period.. 6.24% 6.24%
Weighted average interest rate at period end...... 6.20% 6.15%
SUBSIDIARY ACTIVITY
We are permitted to invest in the capital stock of, or originate secured
or unsecured loans to, subsidiary corporations. We do not have any subsidiaries,
except for American Federal Savings Bank, the wholly owned subsidiary of Eagle
Bancorp.
PERSONNEL
As of June 30, 2002, we had 70 full-time employees and 3 part-time
employees. The employees are not represented by a collective bargaining unit. We
believe our relationship with our employees to be good.
REGULATION
Set forth below is a brief description of laws which relate to the
regulation of American Federal and Eagle Bancorp. The description does not
purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations.
REGULATION OF AMERICAN FEDERAL SAVINGS BANK
GENERAL. As a federally chartered savings bank and a member of the FDIC's
Savings Association Insurance Fund, American Federal Savings Bank is subject to
extensive regulation by the Office of Thrift Supervision and the FDIC. Lending
activities and other investments must comply with federal statutory and
regulatory requirements. American Federal Savings Bank is also subject to
reserve requirements of the Federal Reserve System. Federal regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
Savings Association Insurance Fund of the FDIC and depositors. This regulatory
structure gives the regulatory authorities extensive discretion in connection
with their supervisory and enforcement activities and examination policies,
including policies regarding the classification of assets and the establishment
of adequate loan loss reserves.
The Office of Thrift Supervision regularly examines American Federal
Savings Bank and prepares a report on its examination findings to American
Federal's board of directors. American Federal's relationship with its
depositors and borrowers is also regulated by federal law, especially in such
matters as the ownership of savings accounts and the form and content of
American Federal's mortgage documents.
American Federal Savings Bank must file reports with the Office of Thrift
Supervision and the FDIC concerning its activities and financial condition, and
must obtain regulatory approvals prior to entering into transactions such as
mergers with or acquisitions of other financial institutions. Any change in such
regulations, whether by the Office of Thrift Supervision, the FDIC or the United
States Congress, could have a material adverse impact on Eagle and American
Federal, and their operations.
20
INSURANCE OF DEPOSIT ACCOUNTS. The deposit accounts held by American
Federal Savings Bank are insured by the Savings Association Insurance Fund of
the FDIC to a maximum of $100,000 as permitted by law. Insurance on deposits may
be terminated by the FDIC it if finds an institution has engaged in unsafe or
unsound practices, is in an unsafe or unsound condition to continue operations
or has violated any applicable law, regulation, rule, order or condition imposed
by the FDIC or the institution's primary regulator.
REGULATORY CAPITAL REQUIREMENTS. Office of Thrift Supervision (OTS)
capital regulations require savings institutions to meet three capital
standards. The standards for capital adequacy are tangible capital equal to 1.5%
of adjusted total assets, core capital (leverage ratio) equal to at least 4% of
total adjusted assets, and risk-based capital equal to 8% of total risk-weighted
assets. In order to be deemed "Well Capitalized", OTS rules require a leverage
ratio of at least 5%, a Tier 1 risk-based ratio of at least 6%, and a total
risk-based ratio of at least 10%. American Federal's capital ratios at June 30,
2002 are set forth below.
ACTUAL FOR CAPITAL ADEQUACY PURPOSES
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
(DOLLARS IN THOUSANDS)
Tangible...................... $20,060 10.96% $2,744 1.5%
Leverage...................... 20,060 10.96 7,318 4.0
Tier 1 risk-based............. 20,060 19.03 4,217 4.0
Total risk-based.............. 20,736 19.67 8,434 8.0
Tangible capital is defined as core capital less all intangible assets,
less mortgage servicing rights and less investments. Core capital is defined as
common stockholders' equity, noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries,
nonwithdrawable accounts and pledged deposits of mutual savings associations and
qualifying supervisory goodwill, less nonqualifying intangible assets, mortgage
servicing rights and investments.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital of 8% of risk-weighted assets.
Risk-based capital is comprised of core and supplementary capital. The
components of supplementary capital include, among other items, cumulative
perpetual preferred stock, perpetual subordinated debt, mandatory convertible
subordinated debt, intermediate-term preferred stock, and the portion of the
allowance for loan losses not designated for specific loan losses. The portion
of the allowance for loan and lease losses includable in supplementary capital
is limited to a maximum of 1.25% of risk-weighted assets. Overall, supplementary
capital is limited to 100% of core capital. A savings association must calculate
its risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the Office of Thrift Supervision, which
range from 0% for cash to 100% for delinquent loans, property acquired through
foreclosure, commercial loans, and other assets.
Office of Thrift Supervision rules require a deduction from capital for
institutions which have unacceptable levels of interest rate risk. The Office of
Thrift Supervision calculates the sensitivity of an institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the Office of Thrift Supervision. The amount of the interest rate
risk component, if any, is deducted from an institution's total capital in order
to determine if it meets its risk-based capital requirement. Federal savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are exempt from filing the interest rate risk schedule. However,
the Office of Thrift Supervision may require any exempt institution to file such
schedule on a quarterly basis and may be subject to an additional capital
requirement based on its level of interest rate risk as compared to its peers.
DIVIDEND AND OTHER CAPITAL DISTRIBUTION LIMITATIONS. The Office of Thrift
Supervision imposes various restrictions or requirements on the ability of
savings institutions to make capital distributions, including dividend payments.
21
Office of Thrift Supervision regulations impose limitations on all capital
distributions by savings institutions, such as cash dividends, payment to
repurchase or otherwise acquire its shares, payments to stockholders of another
institution in a cash-out merger, and other distributions charged against
capital. The rule establishes three tiers of institutions based primarily on an
institution's capital level. An institution that exceeds all capital
requirements before and after a proposed capital distribution and has not been
advised by the Office of Thrift Supervision that it is in need of more than the
normal supervision has the greatest amount of flexibility for determining
dividends. Such institutions can, after prior notice but without the approval of
the Office of Thrift Supervision, make capital distributions during a calendar
year. These distributions can be equal to the greater of 100% of its net income
to date during the calendar year plus the amount that would reduce by one-half
its excess capital divided by its fully phased-in capital requirements at the
beginning of the calendar year. At the institution's discretion, dividends can
also be 75% of its net income over the most recent four-quarter period. Any
additional capital distributions require prior regulatory notice. As of June 30,
2002, American Federal Savings Bank had this level of flexibility with respect
to dividends.
QUALIFIED THRIFT LENDER TEST. Federal savings institutions must meet a
qualified thrift lender test or they become subject to operating restrictions.
Until recently, the chief restriction was the elimination of borrowing rights
from the Federal Home Loan Bank. However, with passage of the Gramm-Leach-Bliley
Financial Modernization Act of 1999 by Congress, the failure to maintain
qualified thrift lender status will not affect borrowing rights with the Federal
Home Loan Bank. Notwithstanding these changes, American Federal Savings Bank
anticipates that it will maintain an appropriate level of investments consisting
primarily of residential mortgages, mortgage-backed securities and other
mortgage-related investment, and otherwise qualify as a qualified thrift lender.
The required percentage of these mortgage-related investments is 65% of
portfolio assets. Portfolio assets are all assets minus intangible assets,
property used by the institution in conducting its business and liquid assets
equal to 10% of total assets. Compliance with the qualified thrift lender test
is determined on a monthly basis in nine out of every twelve months.
TRANSACTIONS WITH AFFILIATES. Generally, federal banking law requires that
transactions between a savings institution or its subsidiaries and its
affiliates must be on terms as favorable to the savings institution as
comparable transactions with non-affiliates. In addition, some transactions can
be restricted to an aggregate percentage of the savings institution's capital.
Collateral in specified amounts must usually be provided by affiliates in order
to receive loans from the savings institution. In addition, a savings
institution may not extend credit to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of any
affiliate that is not a subsidiary. The Office of Thrift Supervision has the
discretion to treat subsidiaries of a savings institution as affiliates on a
case-by-case basis.
LIQUIDITY REQUIREMENTS. The bank is required to maintain minimum levels of
liquid assets as defined by the Office of Thrift Supervision regulations. The
OTS recently 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 bank
engages.
FEDERAL HOME LOAN BANK SYSTEM. We are a member of the Federal Home Loan
Bank of Seattle, which is one of 12 regional Federal Home Loan Banks. Each
Federal Home Loan Bank serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from funds deposited by
financial institutions and proceeds derived from the sale of consolidated
obligations of the Federal Home Loan Bank System. It makes loans to members
pursuant to policies and procedures established by the board of directors of the
Federal Home Loan Bank.
As a member, we are required to purchase and maintain stock in the Federal
Home Loan Bank of Seattle in an amount equal to at least 1% of our aggregate
unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year, or 5% of our outstanding advances,
whichever is larger. We are in compliance with this requirement. The Federal
Home Loan Bank imposes various limitations on advances such as limiting the
amount of real estate related collateral to 30% of a member's capital and
limiting total advances to a member. As a federal savings bank, we were
mandatory members of the Federal Home Loan Bank of Seattle. Under the recently
enacted Gramm-Leach-Bliley Financial Modernization Act of 1999, we are now
voluntary
22
members of the federal Home Loan Bank of Seattle. We could withdraw or
significantly reduce our required stock ownership in the Federal Home Loan Bank
of Seattle.
FEDERAL RESERVE SYSTEM. The Federal Reserve System requires all depository
institutions to maintain noninterest-bearing reserves at specified levels
against their checking, NOW and Super NOW checking accounts and non-personal
time deposits. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve System may be used to satisfy the Office of Thrift
Supervision liquidity requirements.
Savings institutions have authority to borrow from the Federal Reserve
System "discount window," but Federal Reserve System policy generally requires
savings institutions to exhaust all other sources before borrowing from the
Federal Reserve System.
REGULATION OF EAGLE BANCORP
GENERAL. Eagle Bancorp, as a federal stock corporation in a mutual holding
company structure, is deemed a federal mutual holding company within the meaning
of Section 10(o) of the Home Owners Loan act ("HOLA"). Eagle is registered and
files reports with the Office of Thrift Supervision and is subject to regulation
and examination by the Office of Thrift Supervision. In addition, the Office of
Thrift Supervision has enforcement authority over Eagle and any nonsavings
institution subsidiary of Eagle. The Office of Thrift Supervision can restrict
or prohibit activities that it determines to be a serious risk to us. This
regulation is intended primarily for the protection of our depositors and not
for the benefit of stockholders of Eagle.
FEDERAL TAXATION
Savings institutions are subject to the Internal Revenue Code of 1986, as
amended, in the same general manner as other corporations. Prior to changes to
the Internal Revenue Code in 1996, thrift institutions enjoyed a tax advantage
over banks with respect to determining additions to its bad debt reserves.
The Internal Revenue Code was revised in August 1996 to equalize the
taxation of thrift institutions and banks, effective for taxable years beginning
after 1995. All thrift institutions are now subject to the same provisions as
banks with respect to deductions for bad debt. Now only thrift institutions that
are treated as small banks under the Internal Revenue Code may continue to
account for bad debts under the reserve method; however such institutions may
only use the experience method for determining additions to their bad debt
reserve. Thrift institutions that are not treated as small banks may no longer
use the reserve method to account for their bad debts but must now use the
specific charge-off method.
The revisions to the Internal Revenue Code in 1996 also provided that all
thrift institutions must generally recapture any "applicable excess reserves"
into their taxable income, over a six year period beginning in 1996; however,
such recapture may be delayed up to two years if a thrift institution meets a
residential-lending test. Generally, a thrift institution's applicable excess
reserves equals the excess of the balance of its bad debt reserves as of the
close of its taxable year beginning before January 1, 1996, over the balance of
such reserves as of the close of its last taxable year beginning before January
1, 1988. These are known as pre-1988 reserves. American Federal Savings Bank
will be required to recapture $105,000 of remaining applicable excess reserve as
of June 30, 2002.
In addition, all thrift institutions must continue to keep track of their
pre-1988 reserves because this amount remains subject to recapture in the future
under the Internal Revenue Code. A thrift institution such as American Federal,
would generally be required to recapture into its taxable income its pre-1988
reserves in the case of excess distributions, and redemptions of American
Federal's stock and in the case of a reduction in American Federal's outstanding
loans when comparing loans currently outstanding to loans outstanding at the end
of the base year. For taxable years after 1995, American Federal Savings Bank
will continue to account for its bad debts under the reserve method. The balance
of American Federal's pre-1988 reserves equaled $915,000.
Eagle may exclude from its income 100% of dividends received from American
Federal Savings Bank as a member of the same affiliated group of corporations. A
70% dividends received deduction generally applies with respect to dividends
received from corporations that are not members of such affiliated group.
American Federal's federal income tax returns for the last five tax years
have not been audited by the IRS.
23
STATE TAXATION
American Federal Savings Bank files Montana tax returns. For Montana
tax purposes, savings institutions are presently taxed at a rate equal to 6.75%
of taxable income which is calculated based on federal taxable income, subject
to adjustments (including the addition of interest income on state and municipal
obligations).
American Federal's state tax returns have not been audited for the past
five years by the state of Montana.
ITEM 2. DESCRIPTION OF BUSINESS PROPERTIES.
American Federal Savings Bank's executive office is located at 1400
Prospect Avenue in Helena, Montana. American Federal Savings Bank conducts its
business through five offices, which are located in Helena, Bozeman, Butte, and
Townsend, Montana. All of its offices are owned. Its principal banking office in
Helena also serves as its executive headquarters and operations center. This
office houses over 50% of American Federal Savings Bank's full-time employees.
The following table sets forth the location of each of American Federal's
offices, the year the office was opened, and the net book value including land,
buildings, computer software and its related equipment and furniture. The square
footage at each location is also shown.
Net Book
Value At
June 30, Square
Location Address Opened 2002 Footage
-------- ------- ------ ---- -------
Helena Main 1400 Prospect Ave. 1997 $4,788,144 32,304
Office Helena, MT 59601
Helena Downtown 28 Neill Ave. 1987 $351,678 1,391
Satellite Branch Helena, MT 59601
Butte Office 3401 Harrison Ave. 1979 $574,497 3,890
Butte, MT 59701
Bozeman Office 606 North Seventh 1980 $543,328 5,886
Bozeman, MT 59715
Townsend Office 416 Broadway 1979 $31,162 1,973
Townsend, MT 59644
As of June 30, 2002, the net book value of land, buildings, furniture,
and equipment owned by American Federal, less accumulated depreciation, totaled
$6.3 million.
ITEM 3. LEGAL PROCEEDINGS.
American Federal, from time to time, is a party to routine litigation,
which arises in the normal course of business, such as claims to enforce liens,
condemnation proceedings on properties in which American Federal Savings Bank
holds security interests, claims involving the making and servicing of real
property loans, and other issues incident to the business of American Federal.
There were no lawsuits pending or known to be contemplated against American
Federal Savings Bank at June 30, 2002.
24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders in the fourth
quarter of the fiscal year ended June 30, 2002.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The common stock is traded on the OTC Bulletin Board under the symbol
"EBMT." At the close of business on June 30, 2002, there were 1,208,172 shares
of common stock outstanding, held by approximately 600 shareholders of record.
Eagle Financial MHC, Eagle's mutual holding company, held 648,493 shares of the
outstanding common stock.
The high bid and asked prices noted below for the four quarters of
fiscal 2001 and the four quarters of the current fiscal year were obtained from
the OTC Bulletin Board. The quotations reflect interdealer prices without retail
markup, markdown or commission, and may not represent actual transactions.
HIGH BID LOW BID
-------- -------
Fourth quarter 2002..................... $20.50 $17.75
Third quarter 2002...................... $20.00 $15.50
Second quarter 2002..................... $16.50 $15.25
First quarter 2002...................... $16.00 $11.75
Fourth quarter 2001..................... $13.75 $10.30
Third quarter 2001...................... $12.77 $10.75
Second quarter 2001..................... $11.00 $9.88
First quarter 2001...................... $12.00 $8.63
The closing price of the common stock on June 30, 2002, was $20.00. The
company had paid four quarterly dividends during the year, all in the amount of
$0.10 per share. Eagle Financial MHC waived receipt of its dividends during the
year.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain "forward-looking statements." Eagle
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 that speak only as of their dates.
25
GENERAL
Eagle Bancorp's subsidiary, American Federal Savings Bank, operates as a
community savings bank. It raises money by offering FDIC-insured deposit
products and lending this money, primarily for the purpose of home financing. As
of June 30, 2002, 57.70% of its total loans were residential mortgage loans with
fixed rates and 5.20% were residential mortgage loans with adjustable rates.
Total first lien mortgage loans at June 30, 2002, were $79.34 million or 74.54%
of the total loan portfolio. Other loan products include home equity loans,
consumer and commercial loans. These loans totaled $27.10 million or 25.46% of
the total loan portfolio.
The consolidated financial condition and operating results of Eagle are
primarily dependent on its wholly owned subsidiary, American Federal Savings
Bank. All references to the Company prior to April 4, 2000, except where
otherwise indicated, are to the Bank.
ANALYSIS OF NET INTEREST INCOME
The Bank's earnings have historically depended primarily upon net interest
income, which is the difference between interest income earned on loans and
investments and interest paid on deposits and any borrowed funds. It is the
single largest component of Eagle's operating income. Net interest income is
affected by (i) the difference between rates of interest earned on loans and
investments and rates paid on interest-bearing deposits and borrowings (the
"interest rate spread") and (ii) the relative amounts of loans and investments
and interest-bearing deposits and borrowings.
The following table presents the average balances of and the interest and
dividends earned or paid on each major class of loans and investments and
interest-bearing deposits and borrowings. Nonaccruing loans are included in
balances for all periods. Average balances are daily average balances. The
yields and costs include fees, which are considered adjustments to yields.
26
FOR THE YEARS ENDED JUNE 30,
------------------------------------------------------------------------------
2002 2001
------------------------------------- --------------------------------------
(DOLLARS IN THOUSANDS)
AVERAGE INTEREST AVERAGE INTEREST
DAILY AND YIELD/ DAILY AND YIELD/
BALANCE DIVIDENDS RATE BALANCE DIVIDENDS RATE
------- --------- ---- ------- --------- ----
Assets:
Interest-earning assets:
Federal Home Loan Bank Stock............ $1,526 $99 6.49% $1,428 $94 6.58%
Loans receivable, net................... 114,919 8,987 7.82 114,197 9,207 8.06
Investment securities................... 38,443 1,904 4.95 28,367 1,751 6.17
Interest-bearing deposits with banks.... 8,049 178 2.21 2,206 117 5.30
----- --- ---- ----- --- ----
Total interest-earning assets............... 162,937 11,168 6.85 146,198 11,169 7.64
Noninterest-earning assets.................. 13,608 13,824
------ ------
Total assets................................ $176,545 $160,022
======== ========
Liabilities and Equity:
Interest-bearing liabilities:
Deposit accounts:
Money market......................... $23,513 $651 2.77 $15,209 $602 3.96
Passbooks............................ 21,481 457 2.13 20,426 615 3.01
Checking............................. 24,050 192 0.80 22,710 250 1.10
Certificates of deposit ............. 67,070 3,103 4.63 63,435 3,650 5.75
Advances from Federal Home Loan
Bank............................. 10,331 645 6.24 10,836 676 6.24
------ --- ---- ------ --- ----
Total interest-bearing liabilities.......... 146,445 5,048 3.45 132,616 5,793 4.37
Other noninterest-bearing liabilities....... 2,364 2,175
Noninterest checking........................ 6,860 5,948
----- -----
Total liabilities........................... 155,669 140,739
Total equity................................ 20,876 19,283
------ --------
Total liabilities and equity................ $176,545 $160,022
======== ========
Net interest income/interest rate spread(1). $6,120 3.40% $5,376 3.27%
====== ===== ====== =====
Net interest margin(2)...................... 3.76% 3.68%
===== =====
Total interest-earning assets to
interest-bearing liabilities................ 111.26% 110.24%
======= =======
--------------------------
(1) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average rate on interest-bearing
liabilities.
(2) Net interest margin represents income before the provision for loan losses
divided by average interest-earning assets.
27
RATE/VOLUME ANALYSIS
The following table sets forth information regarding changes in interest
income and interest expense for the periods indicated. For each category of our
loans and investments and our interest-bearing deposits and borrowings,
information is provided on changes attributable to change in volume (change in
volume multiplied by the old rate). The table also provides information on
change in rate (changes in rate multiplied by old volume). The combined effects
of changes in rate and volume have been allocated proportionately to the change
due to rate and the change due to volume.
FOR THE YEAR ENDED JUNE 30,
------------------------------------------------------------------------------------
INCREASE (DECREASE)
(DOLLARS IN THOUSANDS)
------------------------------------------------------------------------------------
2002 VS. 2001 2001 VS. 2000
DUE TO DUE TO
------ ------
VOLUME RATE NET VOLUME RATE NET
------ ---- --- ------ ---- ---
Interest earning assets:
Loans receivable, net............ $57 ($277) ($220) $902 $83 $985
Investment securities............ 543 (390) 153 (100) 27 (73)
Interest-bearing deposits with
banks......................... 162 (101) 61 56 (1) 55
Other earning assets............. 6 (1) 5 6 (4) 2
--- --- - - --- -
Total interest earning assets...... 768 (769) (1) 864 105 969
Interest-bearing liabilities:
Passbook, money market and
checking accounts.............. 240 (407) (167) (20) (31) (51)
Certificates of deposit.......... 199 (746) (547) 299 353 652
Borrowings....................... (31) 0 (31) 47 (20) 27
---- - ---- -- ---- --
Total interest-bearing liabilities. 408 (1,153) (745) 326 302 628
--- ------- ----- --- --- ---
Change in net interest income...... $360 $384 $744 $538 ($197) $341
==== ==== ==== ==== ====== ====
-------------------------------
INTEREST RATE RISK ANALYSIS
INTEREST RATE RISK ANALYSIS. In addition to the asset/liability committee,
the board of directors reviews our asset and liability policies. The board of
directors reviews interest rate risk and interest rate trends quarterly, as well
as liquidity and capital ratio requirements. Management administers the policies
and determinations of the board of directors with respect to our asset and
liability goals and strategies. Our asset and liability policy and strategies
are expected to continue as described so long as competitive and regulatory
conditions in the financial institution industry and market interest rates
continue as they have in recent years.
FINANCIAL CONDITION
Total assets increased by $17.46 million, or 10.45%, to $184.58 million at
June 30, 2002 from $167.12 million at June 30, 2001. Total liabilities increased
by $15.46 million, or 10.49%, to $162.88 million at June 30, 2002, from $147.42
million at June 30, 2001. The growth reflects the influx of deposits during the
past year.
28
Increased liquidity was a constant theme throughout the year ended June
30, 2002. The growth in assets was mainly in the available-for-sale (AFS)
investment portfolio, which increased $28.55 million, or 132.18%, to $50.15
million at June 30, 2002 from $21.60 million at June 30, 2001. The residential
mortgage loan portfolio experienced higher than normal prepayments throughout
the year. This, in conjunction with increased loan sales and large deposit
inflows, contributed to increased levels of cash, which was in turn invested in
the AFS portfolio. Interest-bearing deposits with banks also experienced a
significant increase, to $7.79 million at June 30, 2002 from $4.93 million at
June 30, 2001. The loan portfolio decreased $9.36 million, or 8.14% to $105.62
million at June 30, 2002 from $114.98 million at June 30, 2001. The largest
component of the decrease was the residential mortgage loan portfolio, which
declined $9.00 million from the previous year-end due to the heavy prepayment
and refinancing activity during the year. Investment securities held-to-maturity
(HTM) declined to $3.88 million at June 30, 2002 from $6.57 million at June 30,
2001. The majority of new investment securities purchased are placed in the AFS
portfolio. This, combined with maturities and principal payments on securities,
contribute to the shift from the HTM portfolio to the AFS portfolio.
The growth in liabilities was primarily attributable to the growth in
deposits. Interest-bearing deposits increased to $144.77 million at June 30,
2002 from $127.56 million at June 30, 2001, an increase of $17.21 million, or
13.49%. This increase was the result of increases in all deposit categories. The
most significant increase was in money market accounts, which increased to
$27.57 million from $17.40 million, an increase of $10.17 million, or 58.45%.
These increases were the result of a shift in consumers' funds to insured,
short-term accounts from the volatile stock market and due to uncertain economic
conditions. This has occurred at financial institutions across the country.
Advances from the Federal Home Loan Bank declined to $9.34 million at year-end
2002 from $11.44 million at year-end 2001, a decrease of $2.10 million. This
decrease was the result of a $2 million advance maturing during the year.
Total shareholders' equity was $21.70 million at June 30, 2002, an
increase of $2.00 million. This increase was primarily attributable to the net
income for the year and the increase in accumulated other comprehensive income
that resulted from unrealized gains on securities available-for sale.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDING JUNE 30, 2002 AND 2001
NET INCOME. Eagle's net income was $1.96 million and $1.22 million for the
years ended June 30, 2002 and 2001, respectively. This increase of $740,000, or
60.66%, was primarily due to increases in net interest income (before provision
for loan losses) of $740,000 and noninterest income of $680,000, partially
offset by increases in noninterest expense of $260,000 and income tax expense of
$420,000. Basic earnings per share for the year ended June 30, 2002 were $1.68,
compared to $1.04 for the year ended June 30, 2001. Diluted earnings per share
were $1.65 and $1.03 for 2002 and 2001, respectively.
NET INTEREST INCOME. Net interest income (before provision for loan
losses) increased to $6.12 million for the year ended June 30, 2002, from $5.38
million for the previous year. This increase of $740,000, or 13.75%, was the
result of a decrease in interest expense of $740,000. Interest income was $11.17
million for both years.
INTEREST AND DIVIDEND INCOME. Total interest and dividend income was
$11.17 million for the year ended June 30, 2002, which equaled the $11.17
million earned for the year ended June 30, 2001, representing no change.
Interest and fees on loans decreased to $8.99 million for 2002 from $9.21
million for 2001. This decrease of $220,000, or 2.39%, was due primarily to a
decrease in the average rate on loans receivable for the year ended June 30,
2002. The average interest rate earned on loans receivable decreased by 24 basis
points, to 7.82% from 8.06%. Average balances for loans receivable, net, for the
year ended June 30, 2002 were $114.92 million, compared to $114.20 million for
the previous year. This represents an increase of $0.72 million, or 0.63%.
However, at year-end 2002, some loan categories had shown decreases from the
prior year-end. Total loans receivable, net, at year-end 2002 were $105.62
million, compared to $114.98 million at year-end 2001. This decrease of $9.36
million, or 8.14% was due primarily to a decrease of $9 million in the
residential mortgage portfolio. The other loan categories showed small increases
or decreases. Interest and dividends on investment securities available-for-sale
(AFS) increased to $1.61 million for the year ended June 30, 2002 from $1.21
million for year ended June 30, 2001, an increase of $400,000, or 33.06%. This
increase was the result of increased balances in the AFS portfolio during the
year. Interest earned from deposits at other banks increased to $178,000 for the
year ended June 30, 2002 from $117,000 for the year ended June 30, 2001. Higher
average balances in these accounts resulted from increased loan
29
sale activity and greater loan refinancing. These increases were partially
offset by a decrease in interest and dividends on investments held-to-maturity
(HTM) of $243,000, to $299,000 in 2002 compared to $542,000 in 2001. Lower
balances in the HTM category contributed to the decrease.
INTEREST EXPENSE. Total interest expense decreased to $5.05 million for
the year ended June 30, 2002 from $5.79 million for the year ended June 30,
2001, a decrease of $740,000, or 12.78%. Interest on deposits decreased to $4.40
million for the year ended June 30, 2002 from $5.11 million for the year ended
June 30, 2001. This decrease of $710,000, or 13.89%, was the result of a
decrease on average rates paid despite an increase in balances on deposit
accounts. The average cost of deposits dropped 78 basis points, to 3.23% in 2002
from 4.01% in 2001. The decline in interest rates during the year contributed to
the decrease in the cost of deposits, as the Company lowered rates on all
deposit products during the year. Money market accounts and certificates of
deposit showed the largest increase in balances, as well as the largest declines
in average rates paid. The average balance of money market accounts increased to
$23.51 million for the year ended June 30, 2002, compared to $15.21 million for
the year ended June 30, 2001. The average rate paid on money market accounts
declined to 2.77% in 2002 from 3.96% in 2001. Average balances on certificates
of deposit increased to $67.07 million in 2002 from $63.44 million in 2001. The
average rate paid on certificates of deposit declined to 4.63% from 5.75%. A
decrease in the average balance of borrowings from the Federal Home Loan Bank
resulted in a decrease in interest paid on borrowings to $645,000 for the year
ended June 30, 2002 from $677,000 for the year ended June 30, 2001.
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 American Federal Savings Bank to provide for probable loan losses
based on prior loss experience, volume and type of lending conducted by American
Federal, 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 year ended June 30,
2002 or June 30, 2001. This is a reflection of the continued strong asset
quality of the Bank's loan portfolio, as non-performing loan ratios continue to
be low. Total classified assets increased to $1.66 million at June 30, 2002 from
$1.50 million at June 30, 2001. Total non-performing loans as a percentage of
the total loan portfolio was 0.70%. The Bank currently has no foreclosed real
estate.
NONINTEREST INCOME. Total noninterest income increased to $2.33 million
for the year ended June 30, 2002, from $1.65 million for the year ended June 30,
2001, an increase of $680,000 or 41.21%. This change was the result of an
increase in net gains on sale of loans to $1.11 million for the year ended June
30, 2002 from $420,000 for the year ended June 30, 2001, an increase of $690,000
or 164.29%. This increase was attributable to a record year of mortgage loan
originations for the year ended June 30, 2002. Loan originations increased
significantly due to the decline in interest rates during the period, which in
turn contributed to an increase in the amount of loans prepaid for refinancing
purposes. Other increases during the period were mortgage loan servicing fees of
$12,000 and net gain on sale of available-for-sale securities of $12,000.
Mortgage loan servicing fees increased due primarily to the higher balance of
the Company's servicing portfolio. The securities gains were slightly higher due
to the decline in interest rates that led to higher market values of the
securities. Demand deposit service charges and "other" noninterest income showed
minor decreases from the previous year.
NONINTEREST EXPENSE. Noninterest expense increased by $260,000, or 5.02%
to $5.44 million for the year ended June 30, 2002 from $5.18 million for the
year ended June 30, 2001. This increase was primarily due to an increase in
salaries and employee benefits to $2.97 million for the year ended June 30, 2002
from $2.80 million for the year ended June 30, 2001, an increase of $165,000 or
5.89%. The increase in salaries and benefits was due to normal merit raises and
increased retirement plan contribution expense. The management retention stock
plan also contributed to the increase. Amortization of mortgage servicing fees
increased by $152,000 to $324,000 in the year ended June 30, 2002 from $172,000
in the previous year. The increase in amortization of mortgage servicing rights
was attributable to the increased refinancing activity due to the decline in
interest rates. As loans prepay at faster rates, servicing assets are written
off at faster rates as well. Other increases in noninterest expenses were
"other" noninterest expense of $59,000 and data processing expense of $26,000.
Other noninterest expense increased due to higher loan expenses, travel
expenses, and equipment repair costs. Data processing expense increased due to
increased maintenance costs. These increases were partially offset by decreases
of $52,000 in advertising expense, $41,000 in furniture and equipment
depreciation, $20,000 in legal and accounting fees, and $13,000 in ATM
30
processing expenses. Record activity in loan originations and large deposit
inflows led to a decreased need for product advertising. Legal and accounting
fees declined as expected, as the previous year was the first full year of being
a public company. Lower costs passed on by the Bank's ATM processor led to lower
processing expense for ATM and debit cards.
INCOME TAX EXPENSE. Eagles' income tax expense was $1.04 million for the
year ended June 30, 2002, compared to $625,000 for the year ended June 30, 2001.
The effective tax rate for the year ended June 30, 2002 was 34.77% as opposed to
33.85% for the year ended June 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company's subsidiary, American Federal Savings 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 22.17% and 14.98% for the months ended June 30, 2002 and
2001, respectively. The Bank's liquidity increased due to an increase in
interest bearing deposits with banks and investments available-for-sale for the
year ended June 30, 2002.
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.
Net cash provided by the Company's operating activities, which is
primarily comprised of cash transactions affecting net income was $4.30 million
for the year ended June 30, 2002 and $(325,000) for the year ended June 30,
2001. The change was primarily a result of a decrease in the amount of loans
held for sale.
Net cash used in the Company's investing activities, which is primarily
comprised of cash transactions from the investment securities and
mortgage-backed securities portfolios and the loan portfolio, was $17.26 million
for the year ended June 30, 2002, and $6.68 million for the year ended June 30,
2001. The increase in cash used was primarily due to an increase in investment
securities available-for-sale of $36.94 million. This was partially offset by
proceeds from maturities and principal repayments of investment securities (net
of purchases) and the decrease in loans receivable of $8.73 million.
Net cash provided by the Company's financing activities, which is
primarily cash transactions from net increases in deposits and net Federal Home
Loan Bank advances, totaled $15.23 million for the year ended June 30, 2002, and
$11.88 million for the year ended June 30, 2001. This increase in cash provided
was the result of the large increase in deposit accounts compared to the
previous year, offset by a decrease in FHLB advances.
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
our commitments to make loans and management's assessment of our ability to
generate funds.
At March 31, 2002 (the most recent report available), the Bank's measure
of sensitivity to interest rate movements, as measured by the OTS, improved
slightly from the previous quarter. It has also improved since the previous
year's report. The market value of the Bank's capital position has also improved
from the previous quarter and year. The Bank is well within the guidelines set
forth by the Board of Directors for interest rate sensitivity.
31
As of June 30, 2002, the Bank's regulatory capital was in excess of all
applicable regulatory requirements. At June 30, 2002, the Bank's tangible, core,
and risk-based capital ratios amounted to 11.0%, 11.0%, and 19.7%, respectively,
compared to regulatory requirements of 1.5%, 4.0% and 8.0%, respectively.
IMPACT OF INFLATION AND CHANGING PRICES
Our financial statements and the accompanying notes, which are found it
Item 7, 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations". This statement is effective for all business combinations
initiated after June 30, 2001. The FASB also issued SFAS No. 142 "Goodwill and
Other Intangible Assets" which is effective for all fiscal years beginning after
December 15, 2001. As such, management believes these pronouncements do not have
an affect on the consolidated financial position and results of operations as of
June 30, 2002 and for the year then ended.
In October 2001, the FASB issued Statement 144, "Accounting for the
Impairment of Disposal of Long Lived Assets", which is effective for fiscal
years beginning after December 15, 2001. This statement supercedes FASB
Statement 121. Impairment of goodwill is not included in the scope of Statement
144 and will be treated in accordance with the accounting standards established
in Statement 142. Management does not expect adoption to have a material impact
on the consolidated financial statements of the Company.
ITEM 7. FINANCIAL STATEMENTS.
Eagle Bancorp's audited financial statements, notes thereto, and
auditor's reports are found immediately following Part III of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None to report.
32
PART III
The information required by Items 9, 10, 11 and 12 of this part is
presented in the proxy statement issued by the Board of Directors in connection
with the annual meeting of stockholders to be held October 17, 2002, which is
hereby incorporated by reference into this annual report.
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K.
A. (1) The following documents are filed as part of this report:
The audited Consolidated Statements of Financial Condition of Eagle Bancorp and
subsidiary as of June 30, 2002, and June 30, 2001, and the related Consolidated
Statements of Income, Consolidated Statements of Changes in Stockholder Equity,
and Consolidated Statements of Cash Flows for the years then ended, together
with the related notes and independent auditor's reports.
(2) Schedules omitted as they are not applicable.
B. Exhibits
* 2.1 Amended and Restated Plan of Mutual Holding Company
Reorganization and Stock Issuance
* 3.1 Charter of Eagle Bancorp
* 3.2 Bylaws of Eagle Bancorp
* 4 Form of Stock Certificate of Eagle Bancorp
* 10.1 Employee Stock Ownership Plan and Trust
* 10.2 Employment Contract of Larry A. Dreyer
** 10.3 Stock Plan
11 Computation of per share earnings (incorporated by
reference to Note 3 to Notes To Consolidated
Statements of Financial Condition dated June 30, 2001)
21.1 Subsidiaries of Registrant (incorporated by reference to
Part I, Subsidiary Activity)
23.1 Consent of Anderson ZurMuehlen & Co., P.C.
99 Consolidated Statements of Financial Condition
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
C. No reports on Form 8-K.
------------------
* Incorporated by reference to the identically number exhibit of
the Registration Statement on Form SB-2 (File No. 333-93077)
filed with the SEC on December 20, 1999.
** Incorporated by reference to the proxy statement for 2000
Annual Meeting filed with the SEC on September 19, 2000.
-------------------
33
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
causes this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EAGLE BANCORP
/s/
-------------------------------------------
Larry A. Dreyer
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ President, Chief Executive 9/11/02
------------------------------------ Officer and Director (Principal ------------------
Larry A. Dreyer Executive Officer)
/s/ Senior Vice President 9/11/02
------------------------------------ And Treasurer (Principal ------------------
Peter J. Johnson Financial/Accounting Officer)
/s/ Chairman 9/11/02
------------------------------------ ------------------
Robert L. Pennington
/s/ Vice Chairman 9/11/02
------------------------------------ ------------------
Charles G. Jacoby
/s/ Director 9/11/02
------------------------------------ ------------------
Don O. Campbell
/s/ Director 9/11/02
------------------------------------ ------------------
Teresa Hartzog
/s/ Director 9/11/02
------------------------------------ ------------------
James Maierle
/s/ Director 9/11/02
------------------------------------ ------------------
Thomas P. McCarvel
CERTIFICATION PURSUANT TO
SECTION 302 (a) OF THE SARBANES-OXLEY ACT OF 2002
I, Larry A. Dreyer, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-KSB of Eagle Bancorp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report.
Date: September 13, 2002 /s/ Larry A. Dreyer
Larry A. Dreyer
President and Chief Executive Officer
CERTIFICATION PURSUANT TO
SECTION 302 (a) OF THE SARBANES-OXLEY ACT OF 2002
I, Peter J. Johnson, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-KSB of Eagle Bancorp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report.
Date: September 13, 2002 /s/ Peter J. Johnson
Peter J. Johnson
Sr. VP/Treasurer and Chief Financial
Officer