UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
(
X
) QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the
Quarterly Period Ended March 31, 2009
OR
( ) TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from
to______
Commission
File Number 0-25923
Eagle
Bancorp, Inc.
(Exact
name of registrant as specified in its charter)
Maryland
|
52-2061461
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
|
|
7815
Woodmont Avenue, Bethesda, Maryland
|
20814
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(301)
986-1800
(Registrant's
telephone number, including area code)
N/A
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [x] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [ ]
|
Accelerated
filer [x]
|
Non-accelerated
filer [ ]
|
Smaller
Reporting Company [ ]
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act
Yes [
] No
[x]
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
As of May
8, 2009, the registrant had 12,745,118 shares of Common Stock
outstanding.
EAGLE
BANCORP, INC.
TABLE
OF CONTENTS
PART
I.
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Item 1.
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Item 2.
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Item 3.
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Item 4.
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PART II.
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Item 1.
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Item 1A.
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Item 2.
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Item 3.
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Item 4.
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Item 5.
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Item 6.
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Item 1 –
Financial Statements
EAGLE
BANCORP, INC.
Consolidated
Balance Sheets
(dollars
in thousands, except per share data)
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
(unaudited)
|
|
|
(audited)
|
|
Cash
and due from banks
|
|
$ |
27,322 |
|
|
$ |
27,157 |
|
Federal
funds sold
|
|
|
6,147 |
|
|
|
191 |
|
Interest
bearing deposits with banks and other short-term
investments
|
|
|
3,538 |
|
|
|
2,489 |
|
Investment
securities available for sale, at fair value
|
|
|
158,976 |
|
|
|
169,079 |
|
Loans
held for sale
|
|
|
2,832 |
|
|
|
2,718 |
|
Loans
|
|
|
1,267,958 |
|
|
|
1,265,640 |
|
Less
allowance for credit losses
|
|
|
(19,051 |
) |
|
|
(18,403 |
) |
Loans,
net
|
|
|
1,248,907 |
|
|
|
1,247,237 |
|
Premises
and equipment, net
|
|
|
9,488 |
|
|
|
9,666 |
|
Deferred
income taxes
|
|
|
10,878 |
|
|
|
11,106 |
|
Bank
owned life insurance
|
|
|
12,564 |
|
|
|
12,450 |
|
Other
real estate owned
|
|
|
3,289 |
|
|
|
909 |
|
Other
assets
|
|
|
11,833 |
|
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|
13,825 |
|
TOTAL
ASSETS
|
|
$ |
1,495,774 |
|
|
$ |
1,496,827 |
|
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LIABILITIES
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Deposits:
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|
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Noninterest
bearing demand
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$ |
232,725 |
|
|
$ |
223,580 |
|
Interest
bearing transaction
|
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|
47,840 |
|
|
|
54,801 |
|
Savings
and money market
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303,022 |
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271,791 |
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Time,
$100,000 or more
|
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|
256,506 |
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|
249,516 |
|
Other
time
|
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|
308,625 |
|
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|
329,692 |
|
Total
deposits
|
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|
1,148,718 |
|
|
|
1,129,380 |
|
Customer
repurchase agreements
|
|
|
|
|
|
|
|
|
and
federal funds purchased
|
|
|
120,918 |
|
|
|
98,802 |
|
Other
short-term borrowings
|
|
|
10,000 |
|
|
|
55,000 |
|
Long-term
borrowings
|
|
|
62,150 |
|
|
|
62,150 |
|
Other
liabilities
|
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|
9,459 |
|
|
|
9,124 |
|
Total
liabilities
|
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|
1,351,245 |
|
|
|
1,354,456 |
|
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STOCKHOLDERS'
EQUITY
|
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Preferred
stock, par value $.01 per share, shares authorized
|
|
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|
1,000,000,
Series A, $1,000 per share liquidation preference,
|
|
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shares
issued and outstanding 38,235 and 38,235 respectively,
|
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discount
of $1,809 and $1,892, respectively, net
|
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|
36,374 |
|
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36,312 |
|
Common
stock, $.01 par value; shares authorized 50,000,000,
shares
|
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|
issued
and outstanding 12,745,118 (2009) and 12,714,355
(2008)
|
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|
127 |
|
|
|
127 |
|
Warrants
|
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|
1,892 |
|
|
|
1,892 |
|
Additional
paid in capital
|
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|
76,958 |
|
|
|
76,822 |
|
Retained
earnings
|
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|
26,486 |
|
|
|
24,866 |
|
Accumulated
other comprehensive income
|
|
|
2,692 |
|
|
|
2,352 |
|
Total
stockholders' equity
|
|
|
144,529 |
|
|
|
142,371 |
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$ |
1,495,774 |
|
|
$ |
1,496,827 |
|
See notes
to consolidated financial statements.
EAGLE
BANCORP, INC.
For the
Three Month Periods Ended March 31, 2009 and 2008 (unaudited)
(dollars in thousands,
except per share data)
Interest
Income
|
|
2009
|
|
|
2008
|
|
Interest
and fees on loans
|
|
$ |
18,113 |
|
|
$ |
12,880 |
|
Interest
and dividends on investment securities
|
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|
1,929 |
|
|
|
1,052 |
|
Interest
on balances with other banks and short-term investments
|
|
|
19 |
|
|
|
43 |
|
Interest
on federal funds sold
|
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|
6 |
|
|
|
39 |
|
Total
interest income
|
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|
20,067 |
|
|
|
14,014 |
|
Interest
Expense
|
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|
|
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|
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Interest
on deposits
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5,557 |
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4,428 |
|
Interest
on customer repurchase agreements and
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federal
funds purchased
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|
281 |
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|
394 |
|
Interest
on other short-term borrowings
|
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|
40 |
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|
190 |
|
Interest
on long-term borrowings
|
|
|
726 |
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|
|
402 |
|
Total
interest expense
|
|
|
6,604 |
|
|
|
5,414 |
|
Net
Interest Income
|
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|
13,463 |
|
|
|
8,600 |
|
Provision
for Credit Losses
|
|
|
1,566 |
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|
720 |
|
Net
Interest Income After Provision For Credit Losses
|
|
|
11,897 |
|
|
|
7,880 |
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Noninterest
Income
|
|
|
|
|
|
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|
|
Service
charges on deposits
|
|
|
738 |
|
|
|
358 |
|
Gain
on sale of loans
|
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|
131 |
|
|
|
127 |
|
Gain
on sale of investment securities
|
|
|
132 |
|
|
|
10 |
|
Increase
in the cash surrender value of bank owned life insurance
|
|
|
114 |
|
|
|
116 |
|
Other
income
|
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|
317 |
|
|
|
329 |
|
Total
noninterest income
|
|
|
1,432 |
|
|
|
940 |
|
Noninterest
Expense
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
5,305 |
|
|
|
3,640 |
|
Premises
and equipment expenses
|
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|
1,875 |
|
|
|
1,080 |
|
Marketing
and advertising
|
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|
315 |
|
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|
81 |
|
Data
processing
|
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|
547 |
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|
340 |
|
Legal,
accounting and professional fees
|
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|
590 |
|
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|
170 |
|
FDIC
insurance and regulatory assessments
|
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|
476 |
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|
126 |
|
Other
expenses
|
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|
1,185 |
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|
|
771 |
|
Total
noninterest expense
|
|
|
10,293 |
|
|
|
6,208 |
|
Income
Before Income Tax Expense
|
|
|
3,036 |
|
|
|
2,612 |
|
Income
Tax Expense
|
|
|
961 |
|
|
|
961 |
|
Net
Income
|
|
|
2,075 |
|
|
|
1,651 |
|
Preferred
Stock Dividends and Discount Accretion
|
|
|
583 |
|
|
|
- |
|
Net
Income Available to Common Shareholders
|
|
$ |
1,492 |
|
|
$ |
1,651 |
|
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|
|
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Earnings
Per Common Share
|
|
|
|
|
|
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|
Basic
|
|
$ |
0.12 |
|
|
$ |
0.15 |
|
Diluted
|
|
$ |
0.12 |
|
|
$ |
0.15 |
|
Dividends
Declared Per Common Share
|
|
$ |
- |
|
|
$ |
0.0545 |
|
See notes
to consolidated financial statements.
EAGLE
BANCORP, INC.
For the
Three Month Periods Ended March 31, 2009 and 2008 (unaudited)
(dollars in thousands,
except per share data)
|
|
2009
|
|
|
2008
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,075 |
|
|
$ |
1,651 |
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Provision
for credit losses
|
|
|
1,566 |
|
|
|
720 |
|
Depreciation
and amortization
|
|
|
580 |
|
|
|
332 |
|
Gains
on sale of loans
|
|
|
(131 |
) |
|
|
(127 |
) |
Origination
of loans held for sale
|
|
|
(10,405 |
) |
|
|
(10,423 |
) |
Proceeds
from sale of loans held for sale
|
|
|
10,422 |
|
|
|
10,782 |
|
Increase
in cash surrender value of BOLI
|
|
|
(114 |
) |
|
|
(116 |
) |
Gain
on sale of investment securities
|
|
|
(132 |
) |
|
|
(10 |
) |
Stock-based
compensation expense
|
|
|
136 |
|
|
|
33 |
|
Excess
tax benefit from exercise of non-qualified stock options
|
|
|
- |
|
|
|
(132 |
) |
Decrease
in other assets
|
|
|
159 |
|
|
|
268 |
|
Increase
in other liabilities
|
|
|
335 |
|
|
|
705 |
|
Net
cash provided by operating activities
|
|
|
4,491 |
|
|
|
3,683 |
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
(Increase)
decrease in interest bearing deposits with other banks
|
|
|
|
|
|
and
short term investments
|
|
|
(1,049 |
) |
|
|
2,260 |
|
Purchases
of available for sale investment securities
|
|
|
(6,366 |
) |
|
|
(5,351 |
) |
Proceeds
from maturities of available for sale securities
|
|
|
1,000 |
|
|
|
2,755 |
|
Proceeds
from sale/call of available for sale securities
|
|
|
15,601 |
|
|
|
8,010 |
|
Net
increase in loans
|
|
|
(3,236 |
) |
|
|
(42,894 |
) |
Bank
premises and equipment acquired
|
|
|
(402 |
) |
|
|
(76 |
) |
Net
cash provided by (used in) investing activities
|
|
|
5,548 |
|
|
|
(35,296 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Increase
in deposits
|
|
|
19,338 |
|
|
|
54,804 |
|
Increase
(decrease) in customer repurchase agreements and
|
|
|
|
|
|
federal
funds purchased
|
|
|
22,116 |
|
|
|
(14,681 |
) |
Decrease
in other short-term borrowings
|
|
|
(45,000 |
) |
|
|
- |
|
Increase
in long-term borrowings
|
|
|
- |
|
|
|
10,000 |
|
Payment
of dividends on preferred stock
|
|
|
(372 |
) |
|
|
- |
|
Issuance
of common stock
|
|
|
- |
|
|
|
424 |
|
Excess
tax benefit from exercise of non-qualified stock options
|
|
|
- |
|
|
|
132 |
|
Payment
of dividends and payment in lieu of fractional shares
|
|
|
- |
|
|
|
(588 |
) |
Net
cash (used in) provided by financing activities
|
|
|
(3,918 |
) |
|
|
50,091 |
|
|
|
|
|
|
|
|
|
|
Net
Increase In Cash And Due From Banks
|
|
|
6,121 |
|
|
|
18,478 |
|
|
|
|
|
|
|
|
|
|
Cash
And Due From Banks At Beginning Of Period
|
|
|
27,348 |
|
|
|
15,652 |
|
|
|
|
|
|
|
|
|
|
Cash
and Due from Banks At End Of Period
|
|
$ |
33,469 |
|
|
$ |
34,130 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash Flows Information:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
6,244 |
|
|
$ |
5,124 |
|
Income
taxes paid
|
|
$ |
306 |
|
|
$ |
675 |
|
Non-Cash
Investing Activities
|
|
|
|
|
|
|
|
|
Transfers
from loans to other real estate owned
|
|
$ |
2,380 |
|
|
$ |
- |
|
See notes
to consolidated financial statements.
EAGLE
BANCORP, INC.
For the
Three Month Periods Ended March 31, 2009 and 2008 (unaudited)
(dollars in thousands,
except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Preferred
|
|
Common
|
|
|
|
|
|
Additional
Paid
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Stockholders'
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Warrants
|
|
in
Capital
|
|
|
Earnings
|
|
|
Income
(Loss)
|
|
|
Equity
|
|
Balance,
January 1, 2009
|
|
$ |
36,312 |
|
|
$ |
127 |
|
|
$ |
1,892 |
|
|
$ |
76,822 |
|
|
$ |
24,866 |
|
|
$ |
2,352 |
|
|
$ |
142,371 |
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,075 |
|
|
|
|
|
|
|
2,075 |
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on securities available for sale
(net
of taxes)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
424 |
|
|
|
424 |
|
Less:
reclassification adjustment for gains net
of
taxes of $48 included in net income
|
|
|
|
|
|
|
|
(84 |
) |
|
|
(84 |
) |
Total
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
`
|
|
|
|
|
|
|
|
|
|
|
|
2,415 |
|
Preferred
stock dividends ($9.72 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(372 |
) |
|
|
|
|
|
|
(372 |
) |
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136 |
|
|
|
|
|
|
|
|
|
|
|
136 |
|
Preferred
stock issued pursuant to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
costs
|
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21 |
) |
Discount
accretion
|
|
|
83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(83 |
) |
|
|
|
|
|
|
- |
|
Balance,
March 31, 2009
|
|
$ |
36,374 |
|
|
$ |
127 |
|
|
$ |
1,892 |
|
|
$ |
76,958 |
|
|
$ |
26,486 |
|
|
$ |
2,692 |
|
|
$ |
144,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2008
|
|
$ |
- |
|
|
$ |
97 |
|
|
$ |
- |
|
|
$ |
52,290 |
|
|
$ |
28,195 |
|
|
$ |
584 |
|
|
$ |
81,166 |
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,651 |
|
|
|
|
|
|
|
1,651 |
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on securities available for sale
(net
of taxes)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
725 |
|
|
|
725 |
|
Less:
reclassification adjustment for gains net
of
taxes of $4 included in net income
|
|
|
|
|
|
|
|
(6 |
) |
|
|
(6 |
) |
Total
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
`
|
|
|
|
|
|
|
|
|
|
|
|
2,370 |
|
Cash
Dividend ($0.0545 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(588 |
) |
|
|
|
|
|
|
(588 |
) |
Shares
issued under dividend reinvestment plan -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
. |
|
|
|
|
|
|
|
|
|
22,134
shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
261 |
|
|
|
|
|
|
|
|
|
|
|
261 |
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
33 |
|
Exercise
of options for 46,803 shares of common stock
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
|
162 |
|
|
|
|
|
|
|
|
|
|
|
163 |
|
Tax
benefit on non-qualified options exercise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
132 |
|
Balance,
March 31, 2008
|
|
$ |
- |
|
|
$ |
98 |
|
|
$ |
- |
|
|
$ |
52,878 |
|
|
$ |
29,258 |
|
|
$ |
1,303 |
|
|
$ |
83,537 |
|
See notes
to consolidated financial
statements.
EAGLE
BANCORP, INC.
For
the Three Months Ended March 31, 2009 and 2008 (unaudited)
1.
BASIS OF PRESENTATION
The
consolidated financial statements of Eagle Bancorp, Inc. (the “Company”)
included herein are unaudited. The consolidated financial statements
reflect all adjustments, consisting only of normal recurring accruals that in
the opinion of Management, are necessary to present fairly the results for the
periods presented. The amounts as of and for the year ended December 31, 2008
were derived from audited consolidated financial statements. Certain information
and note disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to the rules and regulations of
the Securities and Exchange Commission. There have been no significant changes
to the Company’s Accounting Policies as disclosed in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2008. The Company
believes that the disclosures are adequate to make the information presented not
misleading. The results of operations for the three months ended March 31, 2009
are not necessarily indicative of the results of operations to be expected for
the remainder of the year, or for any other period. Certain reclassifications
have been made to amounts previously reported to conform to the classifications
made in 2009.
2.
NATURE OF OPERATIONS
The
Company, through EagleBank, its bank subsidiary (the “Bank”), conducts a full
service community banking business, primarily in Montgomery County, Maryland,
Washington, D.C. and Fairfax County in Northern Virginia. On August 31,
2008, the Company completed the acquisition of Fidelity & Trust Financial
Corporation (“Fidelity”) and Fidelity & Trust Bank (“F&T
Bank”). The primary financial services offered by the Bank include
real estate, commercial and consumer lending, as well as traditional deposit and
repurchase agreement products. The Bank is also active in the origination and
sale of residential mortgage loans and the origination of small business loans.
The guaranteed portion of small business loans is typically sold through the
Small Business Administration, in a transaction apart from the loan’s
origination. The Bank currently offers its products and services through
thirteen banking offices and various electronic capabilities, including remote
deposit services. Eagle Commercial Ventures, LLC (“ECV”), a direct subsidiary of
the Company provides subordinated financing for the acquisition, development and
construction of real estate projects, where the primary financing is provided by
the Bank. Refer to Note 4 - Higher Risk Lending – Revenue Recognition
below.
3.
CASH FLOWS
For
purposes of reporting cash flows, cash and cash equivalents include cash and due
from banks, and federal funds sold (items with an original maturity of three
months or less).
4.
HIGHER RISK LENDING – REVENUE RECOGNITION
The
Company has occasionally made higher risk acquisition, development, and
construction (“ADC”) loans that entail higher risks than ADC loans made
following normal underwriting practices (“higher risk loan transactions”). These
higher risk loan transactions are made through the Company’s subsidiary, ECV.
This activity is limited as to individual transaction amount and total exposure
amounts based on capital levels and is carefully monitored. The loans are
carried on the balance sheet at amounts outstanding and meet the loan
classification requirements of the Accounting Standards Executive Committee
(“AcSEC”) guidance reprinted from the CPA Letter, Special Supplement, dated
February 10, 1986 (also referred to as Exhibit 1 to AcSEC Practice Bulletin No.
1). Additional interest earned on these higher risk loan transactions (as
defined in the individual loan agreements) is recognized as realized under the
provisions contained in Exhibit 1 to AcSEC Practice Bulletin No.1 and
Staff Accounting Bulletin No. 101 (Revenue Recognition in Financial Statements).
The additional interest is included as a component of noninterest
income. The Bank had one higher risk lending transaction, amounting to $1.7
million and $1.8 million, outstanding as of March 31, 2009 and December 31,
2008, respectively.
5.
OTHER REAL ESTATE OWNED (OREO)
Assets
acquired through loan foreclosure are held for sale and are initially recorded
at the lower of cost or fair value less estimated selling costs when acquired,
establishing a new cost basis. The new basis is supported by recent appraisals.
Costs after acquisition are generally expensed. If the fair value of the asset
declines, a write-down is recorded through expense. The valuation of foreclosed
assets is subjective in nature and may be adjusted in the future because of
changes in economic conditions or review by regulatory examiners.
6.
INVESTMENT SECURITIES AVAILABLE FOR SALE
Amortized
cost and estimated fair value of securities available for sale are summarized as
follows:
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
March 31, 2009
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. Government agency securities
|
|
$ |
59,467 |
|
|
$ |
1,711 |
|
|
$ |
- |
|
|
$ |
61,178 |
|
Mortgage
backed securities - GSEs
|
|
|
81,070 |
|
|
|
3,048 |
|
|
|
- |
|
|
|
84,118 |
|
Municipal
bonds
|
|
|
5,060 |
|
|
|
- |
|
|
|
217 |
|
|
|
4,843 |
|
Federal
Reserve and Federal Home Loan Bank stock
|
|
|
8,470 |
|
|
|
- |
|
|
|
- |
|
|
|
8,470 |
|
Other
equity investments
|
|
|
396 |
|
|
|
- |
|
|
|
29 |
|
|
|
367 |
|
|
|
$ |
154,463 |
|
|
$ |
4,759 |
|
|
$ |
246 |
|
|
$ |
158,976 |
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
December 31, 2008
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. Government agency securities
|
|
$ |
71,837 |
|
|
$ |
2,197 |
|
|
$ |
5 |
|
|
$ |
74,029 |
|
Mortgage
backed securities - GSEs
|
|
|
77,242 |
|
|
|
2,559 |
|
|
|
31 |
|
|
|
79,770 |
|
Municipal
bonds
|
|
|
5,061 |
|
|
|
- |
|
|
|
353 |
|
|
|
4,708 |
|
Federal
Reserve and Federal Home Loan Bank stock
|
|
|
9,599 |
|
|
|
- |
|
|
|
- |
|
|
|
9,599 |
|
Other
equity investments
|
|
|
1,396 |
|
|
|
- |
|
|
|
423 |
|
|
|
973 |
|
|
|
$ |
165,135 |
|
|
$ |
4,756 |
|
|
$ |
812 |
|
|
$ |
169,079 |
|
Gross
unrealized losses and fair value by length of time that the individual available
securities have been in a continuous unrealized loss position are as
follows:
|
|
Estimated
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
|
Less
than
|
|
|
More
than
|
|
|
Unrealized
|
|
March 31, 2009
|
|
Value
|
|
|
12
months
|
|
|
12
months
|
|
|
Losses
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
bonds
|
|
$ |
4,843 |
|
|
$ |
217 |
|
|
$ |
- |
|
|
$ |
217 |
|
Other
equity investments
|
|
|
149 |
|
|
|
29 |
|
|
|
- |
|
|
|
29 |
|
|
|
$ |
4,992 |
|
|
$ |
246 |
|
|
$ |
- |
|
|
$ |
246 |
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
|
Less
than
|
|
|
More
than
|
|
|
Unrealized
|
|
December 31, 2008
|
|
Value
|
|
|
12
months
|
|
|
12
months
|
|
|
Losses
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. Government agency securities
|
|
$ |
4,480 |
|
|
$ |
5 |
|
|
$ |
- |
|
|
$ |
5 |
|
Mortgage
backed securities - GSEs
|
|
|
7,715 |
|
|
|
31 |
|
|
|
- |
|
|
|
31 |
|
Municipal
bonds
|
|
|
4,707 |
|
|
|
353 |
|
|
|
- |
|
|
|
353 |
|
Other
equity investments
|
|
|
576 |
|
|
|
423 |
|
|
|
- |
|
|
|
423 |
|
|
|
$ |
17,478 |
|
|
$ |
812 |
|
|
$ |
- |
|
|
$ |
812 |
|
The unrealized losses that exist are
the result of changes in market interest rates since original
purchases. Except for one municipal bond issue which has an
underlying rating of AA, all of the remaining bonds are rated AAA. The weighted
average duration of debt securities, which comprise 94% of total investment
securities, is relatively short at 1.8 years. These factors, coupled with the
Company’s ability and intent to hold these investments for a period of time
sufficient to allow for any anticipated recovery in fair value substantiates
that the unrealized losses are temporary in nature.
7.
INCOME TAXES
The
Company employs the liability method of accounting for income taxes as required
by Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for
Income Taxes.” Under the liability method, deferred tax assets and liabilities
are determined based on differences between the financial statement carrying
amounts and the tax bases of existing assets and liabilities (i.e., temporary
differences) and are measured at the enacted rates that will be in effect when
these differences reverse. The Company adopted the provisions of FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” in the first
quarter of 2007. The Company utilizes statutory requirements for its income tax
accounting, and avoids risks associated with potentially problematic tax
positions that may incur challenge upon audit, where an adverse outcome is more
likely than not. Therefore, no provisions are made for either uncertain tax
positions or accompanying potential tax penalties and interest for underpayments
of income taxes in the Company’s tax reserves. In accordance with SFAS No.109,
the Company may establish a reserve against deferred tax assets in those cases
where realization is less than certain.
8.
EARNINGS PER SHARE
The
calculation of net income per common share for the three months ended March 31
was as follows:
(dollars
and shares in thousands)
|
|
2009
|
|
|
2008
|
|
Basic:
|
|
|
|
|
|
|
Net
income allocable to common stockholders
|
|
$ |
1,492 |
|
|
$ |
1,651 |
|
Average
common shares outstanding
|
|
|
12,743 |
|
|
|
10,759 |
|
Basic
net income per common share
|
|
$ |
0.12 |
|
|
$ |
0.15 |
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Net
income allocable to common stockholders
|
|
$ |
1,492 |
|
|
$ |
1,651 |
|
Average
common shares outstanding
|
|
|
12,743 |
|
|
|
10,759 |
|
Adjustment
for common share equivalents
|
|
|
51 |
|
|
|
91 |
|
Average
common shares outstanding-diluted
|
|
|
12,794 |
|
|
|
10,850 |
|
Diluted
net income per common share
|
|
$ |
0.12 |
|
|
$ |
0.15 |
|
Per share
amounts and the number of outstanding shares have been adjusted to give effect
to the 10% stock dividend paid on October 1, 2008.
There
were 1,616,466 and 325,518 common share equivalents at March 31, 2009 and March
31, 2008, respectively, that were excluded from the diluted net income per
common share computation because their effects were anti-dilutive.
9.
STOCK-BASED COMPENSATION
The
Company maintains the 1998 Stock Option Plan (“1998 Plan”) and the 2006 Stock
Plan (“2006 Plan”). No additional options may be granted under the 1998 Plan.
..
The 2006
Plan provides for the issuance of awards of incentive options, nonqualifying
options, restricted stock and stock appreciation rights with respect to up to
650,000 shares to selected key employees and members of the Board. Option
awards were made with an exercise price equal to the market price of the
Company’s shares at the date of grant.
In
January 2009, the Company awarded options to purchase 315,437 shares of common
stock and 30,763 shares of restricted stock to employees, senior officers and to
a Director. Of the total options awarded, 263,700 have a ten-year term and vest
in five substantially equal installments beginning on the first year anniversary
of the date of grant. The remaining options have a ten-year term and vest over a
four-year period beginning on the seventh year anniversary of the date of grant.
The restricted stock is service based, which vest in five substantially equal
installments beginning on the first year anniversary of the date of grant. The
restricted stock is being recognized as compensation expense over a five-year
period based on the market value of shares at the date of grant.
The
fair value of each option grant and other equity based award is estimated on the
date of grant using the Black-Scholes option pricing model with the assumptions
as shown in the table below used for grants during the three months ended March
31, 2009 and the twelve months ended December 31, 2008 and 2007.
Below is
a summary of changes in shares under option (split adjusted) for the three
months ended March 31, 2009. The information excludes restricted stock unit
awards.
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Weighted-Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Remaining
|
|
|
Grant
Date
|
|
|
Intrinsic
|
|
As
of 1/1/2009
|
|
Stock
Options
|
|
|
Exercise
Price
|
|
|
Contractual
Life
|
|
|
Fair
Value
|
|
|
Value
|
|
Outstanding
|
|
|
1,029,067 |
|
|
$ |
13.01 |
|
|
|
- |
|
|
$ |
2.57 |
|
|
|
- |
|
Vested
|
|
|
800,058 |
|
|
|
13.05 |
|
|
|
- |
|
|
|
2.43 |
|
|
|
- |
|
Nonvested
|
|
|
229,009 |
|
|
|
12.85 |
|
|
|
- |
|
|
|
3.07 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
315,437 |
|
|
$ |
6.34 |
|
|
|
- |
|
|
$ |
1.99 |
|
|
|
- |
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
1,596 |
|
|
|
13.50 |
|
|
|
- |
|
|
|
2.56 |
|
|
|
- |
|
Expired
|
|
|
659 |
|
|
|
12.66 |
|
|
|
- |
|
|
|
2.36 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of 3/31/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
1,342,249 |
|
|
$ |
11.44 |
|
|
|
5.54 |
|
|
$ |
2.44 |
|
|
$ |
327,206 |
|
Vested
|
|
|
865,128 |
|
|
|
13.04 |
|
|
|
4.10 |
|
|
|
2.44 |
|
|
|
327,086 |
|
Nonvested
|
|
|
477,121 |
|
|
|
8.53 |
|
|
|
8.14 |
|
|
|
2.44 |
|
|
|
120 |
|
Outstanding:
|
|
|
|
Weighted-Average
|
Range
of
|
|
|
Stock
Options
|
Weighted-Average
|
Remaining
|
Exercise
Prices
|
|
Outstanding
|
Exercise
Price
|
Contractual
Life
|
$2.98 -
|
$8.10
|
|
560,972
|
$ 5.90
|
6.58
|
$8.11 -
|
$11.07
|
|
250,675
|
10.25
|
5.20
|
$11.08 -
|
$15.43
|
|
250,863
|
13.01
|
4.32
|
$15.44 -
|
$26.86
|
|
279,739
|
22.21
|
4.84
|
|
|
|
1,342,249
|
11.44
|
5.54
|
|
|
|
|
|
|
Exercisable:
|
|
|
|
|
|
Range
of
|
|
|
Stock
Options
|
Weighted-Average
|
|
Exercise
Prices
|
|
Exercisable
|
Exercise
Price
|
|
$2.98 -
|
$8.10
|
|
222,189
|
$ 5.05
|
|
$8.11 -
|
$11.07
|
|
248,674
|
10.25
|
|
$11.08 -
|
$15.43
|
|
134,838
|
12.93
|
|
$15.44 -
|
$26.86
|
|
259,427
|
22.62
|
|
|
|
|
865,128
|
13.04
|
|
Assumptions:
|
|
|
|
|
|
|
|
Three
Months Ended
|
Year
Ended
|
Year
Ended
|
|
|
|
March
31, 2009
|
2008
|
2007
|
Expected
Volatility
|
|
25.9%
- 25.9%
|
23.7%
- 78.5%
|
18.5%
- 24.4%
|
Weighted-Average
Volatility
|
25.90%
|
35.47%
|
20.12%
|
Expected
Dividends
|
|
0.0%
|
0.8%
|
1.4%
|
Expected
Term (In years)
|
7.0
- 8.5
|
0.1
- 9.0
|
3.1
- 4.0
|
Risk-Free
Rate
|
|
0.83%
|
2.54%
|
4.73%
|
Weighted-Average
Fair Value (Grant date)
|
$ 1.99
|
$ 1.30
|
$ 4.40
|
Total
intrinsic value of options exercised:
|
|
$ |
- |
|
Total
fair value of shares vested:
|
|
$ |
203,016 |
|
Weighted-average
period over which nonvested awards are expected to be
recognized:
|
|
|
3.02
years
|
|
The
expected lives are based on the “simplified” method allowed by SAB No. 107,
whereby the expected term is equal to the midpoint between the vesting date and
the end of the contractual term of the award.
Included
in salaries and employee benefits the Company recognized $136 thousand ($0.01
per share) and $33 thousand ($0.00 per share) in share based compensation
expense for the three months ended March 31, 2009 and 2008, respectively. As of
March 31, 2009 there was $1.3 million of total unrecognized compensation cost
related to non-vested equity awards under the Company’s various share based
compensation plans. The $1.3 million of unrecognized compensation expense is
being amortized over the remaining requisite service (vesting) periods through
2018.
10.
NEW ACCOUNTING PRONOUNCEMENTS
Recent
Accounting Pronouncements Adopted
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS
141(R), “Business Combinations
(Revised 2007) (“SFAS 141R”). SFAS 141R
replaces SFAS 141, “Business Combinations,” and applies to all transactions and
other events in which one entity obtains control over one or more other
businesses. SFAS 141R requires an acquirer, upon initially obtaining
control of another entity, to recognize the assets, liabilities and any
non-controlling interest in the acquiree at fair value as of the acquisition
date. Contingent consideration is required to be recognized and measured at fair
value on the date of acquisition rather than at a later date when the amount of
that consideration may be determinable beyond a reasonable doubt. This fair
value approach replaces the cost-allocation process required under SFAS 141
whereby the cost of an acquisition was allocated to the individual assets
acquired and liabilities assumed based on their estimated fair value.
SFAS 141R requires acquirers to expense acquisition-related costs as
incurred rather than allocating such costs to the assets acquired and
liabilities assumed, as was previously the case under SFAS 141. Under
SFAS 141R, the requirements of SFAS 146, “Accounting for Costs
Associated with Exit or Disposal Activities,” would have to be met in order to
accrue for a restructuring plan in purchase accounting. Pre-acquisition
contingencies are to be recognized at fair value, unless it is a non-contractual
contingency that is not likely to materialize, in which case, nothing should be
recognized in purchase accounting and, instead, that contingency would be
subject to the probable and estimable recognition criteria of SFAS 5,
“Accounting for Contingencies.” SFAS 141R is expected to have a significant
impact on the Company’s accounting for business combinations closing on or after
January 1, 2009.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling
Interest in Consolidated Financial Statements, an amendment of ARB Statement
No. 51. (“SFAS 160”). SFAS 160 amends
Accounting Research Bulletin (ARB) No. 51, “Consolidated Financial
Statements,” to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 clarifies that a non-controlling interest in a
subsidiary, which is sometimes referred to as minority interest, is an ownership
interest in the consolidated entity that should be reported as a component of
equity in the consolidated financial statements. Among other requirements,
SFAS 160 requires consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the non-controlling
interest. It also requires disclosure, on the face of the consolidated income
statement, of the amounts of consolidated net income attributable to the parent
and to the non-controlling interest. SFAS 160 was effective for the Company
on January 1, 2009 and did not have a significant impact on the Company’s
financial statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No.
133” (“SFAS 161”). SFAS 161 is intended to enhance the current
disclosure framework previously required for derivative instruments and hedging
activities under SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities” to include how and why an entity uses derivative
instruments, how derivative instruments and related hedge items are accounted
for and their impact on an entity’s financial positions, results of operations,
and cash flows. This standard is effective for fiscal years and
interim periods beginning after November 15, 2008, with early adoption
encouraged. The Company does not currently utilize derivative
instruments, and therefore, SFAS 161 did not have a material impact on our
consolidated financial positions, results of operations or cash
flows.
In May
2008, the FASB issued Statement of Financial Accounting Standards No. 163,
“Accounting for Financial
Guarantee Insurance Contracts –an interpretation of FASB Statement No.
60” (“SFAS 163”). SFAS 163 clarifies how Statement of
Financial Accounting Standards No. 60, “Accounting and Reporting by Insurance
Enterprises,” applies to financial guarantee insurance contracts, including the
recognition and measurement of premium revenue and claim
liabilities. SFAS 163 also requires expanded disclosures about
financial guarantee insurance contracts. SFAS 163 is effective for
financial statements issued for fiscal years and interim periods beginning after
December 15, 2008. The Company does not have any guarantee insurance
contracts, and therefore, SFAS 163 did not have a material impact on our
consolidated financial positions, results of operations or cash
flows.
In June
2008, the FASB issued FASB Staff Position Emerging Issues Task Force 03-6-1,
“Determining Whether
Instruments Granted in Share-Based Payment Transaction Are Participating
Securities” (FSP-EITF 03-6-1”). Under FASP-EITF 03-6-1,
unvested share-based payment awards that contain non-forfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of earnings per share
pursuant to the two-class method. FSP-EITF 03-6-1 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those years and requires retrospective
application. The Company does not have any participating securities,
and therefore, EITF 03-6-1 did not have a material impact on our consolidated
financial positions, results of operations or cash flows.
In
December 2008, the FASB issued FASB Staff Position (“FSP”) FAS 140-4 and FIN
46(R)-8, Disclosures by Public
Entities (Enterprises) about Transfers of Financial Assets and Interests in
Variable Interest Entities. The document increases disclosure
requirements for public companies and is effective for reporting periods
(interim and annual) that end after December 15, 2008. The purpose of
this FSP is to promptly improve disclosures by public entities and enterprises
until the pending amendments to FASB Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, and
FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest
Entities, are finalized and approved by the FASB. The FSP
amends Statement 140 to require public entities to provide additional
disclosures about transferors’ continuing involvement with transferred financial
assets. It also amends Interpretation 46(R) to require public
enterprises, including sponsors that have a variable interest in a variable
interest entity, to provide additional disclosures about their involvement with
variable interest entities. This pronouncement is related to
disclosures only and will not have an impact on our consolidated financial
position, results of operations or cash flows.
Accounting
Pronouncements Issued But Not Yet Effective
In April
2009, the FASB issued three final staff positions intended to provide additional
application guidance and enhance disclosures regarding fair value measurements
and impairments of securities. FSP FAS 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly,” provides
guidelines for making fair value measurements more consistent with the
principles presented in FASB Statement No. 157, “Fair Value Measurements.” FSP
FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value
of Financial Instruments,” enhances consistency in financial reporting by
increasing the frequency of fair value disclosures. FSP FAS 115-2 and FAS 124-2,
“Recognition and Presentation
of Other-Than-Temporary Impairments,” provides additional guidance
designed to create greater clarity and consistency in accounting for and
presenting impairment losses on securities. Prior to issuing the FSP, fair
values for these assets and liabilities were only disclosed annually. The FSP
now requires these disclosures on a quarterly basis, providing qualitative and
quantitative information about fair value estimates for all those financial
instruments not measured on the balance sheet at fair value. The FSP is
effective for interim reporting periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. The Company will
adopt the FSP in the second quarter of 2009.
11. FAIR
VALUE MEASUREMENTS
SFAS
No. 157, Fair Value
Measurements, defines fair value, establishes a framework for measuring
fair value, establishes a three-level valuation hierarchy for disclosure of fair
value measurement and enhances disclosure requirements for fair value
measurements. The valuation hierarchy is based upon the transparency of inputs
to the valuation of an asset or liability as of the measurement date. The three
levels are defined as follow:
|
Level
1
|
Quoted
prices (unadjusted) in active markets for identical assets or
liabilities;
|
|
Level
2
|
Inputs
other than quoted prices included within Level 1 that are either directly
or indirectly observable;
|
|
Level
3
|
Unobservable
inputs in which little or no market activity exists, therefore requiring
an entity to develop its own assumptions about the assumptions that market
participants would use in pricing.
|
Investment Securities
Available for Sale
Investment
securities available for sale are recorded at fair value on a recurring basis.
Fair value measurement is based upon quoted prices, if available. If quoted
prices are not available, fair value is measured using independent pricing
models or other model-based valuation techniques such as the present value of
future cash flows, adjusted for the security’s credit rating, prepayment
assumptions and other factors such as credit loss assumptions. Level 1
securities include those traded on an active exchange such as the New York Stock
Exchange, Treasury securities that are traded by dealers or brokers in active
over-the-counter markets and money market funds. Level 2 securities include
mortgage backed securities issued by government sponsored entities, municipal
bonds and corporate debt securities. Securities classified as Level 3 include
asset-backed securities in less liquid markets.
Loans
The
Company does not record loans at fair value on a recurring basis, however, from
time to time, a loan is considered impaired and an allowance for loan loss is
established. Loans for which it is probable that payment of interest and
principal will not be made in accordance with the contractual terms of the loan
are considered impaired. Once a loan is identified as individually impaired,
management measures impairment in accordance with SFAS 114, “Accounting by Creditors for
Impairment of a Loan,” (SFAS 114). The fair value of impaired loans is
estimated using one of several methods, including the collateral value, market
value of similar debt, enterprise value, liquidation value and discounted cash
flows. Those impaired loans not requiring a specific allowance represent loans
for which the fair value of expected repayments or collateral exceed the
recorded investment in such loans. At March 31, 2009, substantially all of the
impaired loans were evaluated based upon the fair value of the collateral. In
accordance with SFAS 157, impaired loans where an allowance is established based
on the fair value of collateral require
classification in the fair value hierarchy. When the fair value of the
collateral is based on an observable market price or a current appraised value,
the Company records the loan as nonrecurring Level 2. When an appraised value is
not available or management determines the fair value of the collateral is
further impaired below the appraised value and there is no observable market
price, the Company records the loan as nonrecurring Level 3.
Assets and Liabilities
Recorded at Fair Value on a Recurring Basis
The table
below presents the recorded amount of assets and liabilities measured at fair
value on a recurring basis as of March 31, 2009:
(dollars
in thousands)
|
|
Carrying
Value
(Fair
Value)
|
|
|
Quoted
Prices
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Other
Unobservable
Inputs
(Level
3)
|
|
|
Trading
Gains
and
(Losses)
|
|
|
Total
Changes
in
Fair
Values
Included
in
Period
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities available for sale
|
|
$ |
158,976 |
|
|
$ |
149 |
|
|
$ |
158,609 |
|
|
$ |
218 |
|
|
$ |
- |
|
|
$ |
- |
|
The following table shows a
reconciliation of the beginning and ending balances for Level 3
assets:
|
|
Three
Months Ended
|
|
(dollars
in thousands)
|
|
March
31, 2009
|
|
Level
3 securites available for sale, beginning of period
|
|
$ |
218 |
|
Transfers
into Level 3
|
|
|
- |
|
Unrealized
gains (losses) included in other comprehensive income
|
|
|
- |
|
Level
3 securites available for sale, end of period
|
|
$ |
218 |
|
Assets and Liabilities
Recorded at Fair Value on a
Nonrecurring Basis
The
Company may be required from time to time, to measure certain assets at fair
value on a nonrecurring basis in accordance with U.S. generally accepted
accounting principles. These include assets that are measured at the lower of
cost or market that were recognized at fair value below cost at the end of the
period. There are no liabilities which the Company measures at fair value on a
nonrecurring basis. Assets measured at fair value on a
nonrecurring basis are included in the table below:
(dollars
in thousands)
|
|
Carrying
Value
(Fair
Value)
|
|
|
Quoted
Prices
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Other
Unobservable
Inputs
(Level
3)
|
|
|
Trading
Gains
and
(Losses)
|
|
|
Total
Changes
in
Fair
Values
Included
in
Period
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$ |
46,494 |
|
|
$ |
- |
|
|
$ |
42,913 |
|
|
$ |
3,581 |
|
|
$ |
- |
|
|
$ |
- |
|
Other
real estate owned
|
|
$ |
3,289 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
3,289 |
|
|
$ |
- |
|
|
$ |
- |
|
12. PREFERRED
STOCK AND WARRANTS
On
December 5, 2008, the Company entered into and consummated a Letter Agreement
(the “Purchase Agreement”) with the United States Department of the Treasury
(the “Treasury”), pursuant to which the Company issued 38,235 shares of the
Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series
A Preferred Stock’), having a liquidation amount per share equal to $1,000, for
a total purchase price of $38,235,000. The Series A Preferred Stock
pays cumulative dividends at a rate of 5% per year for the first five years and
thereafter at a rate of 9% per year. The Company has accrued
dividends on the preferred stock of $583 thousand for the three months ended
March 31, 2009 reducing net income available to common stockholders to $1.5
million ($0.12 per basic and diluted common share). On February 17,
2009, the Company paid the initial quarterly dividend payment of $372 thousand
on the $38.2 million of preferred stock Series A.
The
following discussion provides information about the results of operations, and
financial condition, liquidity, and capital resources of the Company and its
subsidiaries as of the dates and periods indicated. This discussion and analysis
should be read in conjunction with the unaudited Consolidated Financial
Statements and Notes thereto, appearing elsewhere in this report and the
Management Discussion and Analysis in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2008.
This
report contains forward looking statements within the meaning of the Securities
Exchange Act of 1934, as amended, including statements of goals, intentions, and
expectations as to future trends, plans, events or results of Company operations
and policies and regarding general economic conditions. In some cases, forward
looking statements can be identified by use of such words as “may”, “will”,
“anticipate”, “believes”, “expects”, “plans”, “estimates”, “potential”,
“continue”, “should”, and similar words or phases. These statements
are based upon current and anticipated economic conditions, nationally and in
the Company’s market, interest rates and interest rate policy, competitive
factors and other conditions which, by their nature, are not susceptible to
accurate forecast, and are subject to significant uncertainty. Because of these
uncertainties and the assumptions on which this discussion and the forward
looking statements are based, actual future operations and results in the future
may differ materially from those indicated herein. Readers are cautioned against
placing undue reliance on any such forward looking statements.
The
Company is a growth oriented, one-bank holding company headquartered in
Bethesda, Maryland. The Company provides general commercial and consumer banking
services through the Bank, its wholly owned banking subsidiary, a Maryland
chartered bank which is a member of the Federal Reserve System. The Company was
organized in October 1997, to be the holding company for the Bank. The Bank was
organized as an independent, community oriented, full service banking
alternative to the super regional financial institutions, which dominate the
primary market area. The Company’s philosophy is to provide superior,
personalized service to its customers. The Company focuses on relationship
banking, providing each customer with a number of services, becoming familiar
with and addressing customer needs in a proactive, personalized fashion. The
Bank currently has seven offices serving Montgomery County, five offices in the
District of Columbia and one office in Fairfax County, Virginia.
The
Company offers a broad range of commercial banking services to its business and
professional clients as well as full service consumer banking services to
individuals living and/or working primarily in the service area. The Company
emphasizes providing commercial banking services to sole proprietors, small and
medium-sized businesses, partnerships, corporations, non-profit organizations
and associations, and investors living and working in and near the primary
service area. A full range of retail banking services are offered to accommodate
the individual needs of both corporate customers as well as the community the
Company serves. These services include the usual deposit functions of commercial
banks, including business and personal checking accounts, “NOW” accounts and
money market and savings accounts, business, construction, and commercial loans,
residential mortgages and consumer loans and cash management services. The
Company has developed significant expertise and commitment as an SBA lender, and
has been designated a Preferred Lender by the Small Business Administration
(“SBA”).
The
slowing economy, declines in housing construction and the related impact on
contractors and other small and medium sized businesses, has impacted the
Company’s business. There can be no assurance that the steps taken to stimulate
the economy and stabilize the financial system will prove successful, or that
they will improve the financial condition of the Company’s customers or the
Company.
CRITICAL
ACCOUNTING POLICIES
The
Company’s consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
(“GAAP”) and follow general practices within the banking industry. Application
of these principles requires management to make estimates, assumptions, and
judgments that affect the amounts reported in the financial statements and
accompanying notes. These estimates, assumptions and judgments are based on
information available as of the date of the consolidated financial statements;
accordingly, as this information changes, the consolidated financial statements
could reflect different estimates, assumptions, and judgments. Certain policies
inherently have a greater reliance on the use of estimates, assumptions and
judgments and as such have a greater possibility of producing results that could
be materially different than originally reported. Estimates, assumptions, and
judgments are necessary when assets and liabilities are required to be recorded
at fair value, when a decline in the value of an asset not carried on the
financial statements at fair value warrants an impairment write-down or a
valuation reserve to be established, or when an asset or liability needs to be
recorded contingent upon a future event. Carrying assets and liabilities at fair
value inherently results in more financial statement volatility.
The fair
values and the information used to record valuation adjustments for investment
securities available for sale are based either on quoted market prices or are
provided by other third-party sources, when available. The Company’s investment
portfolio is categorized as available for sale with unrealized gains and losses
net of tax being a component of stockholders’ equity and comprehensive
income.
The
allowance for credit losses is an estimate of the losses that may be sustained
in our loan portfolio. The allowance is based on two principles of accounting:
(a) Statement of Financial Accounting Standards (“SFAS”) No. 5, “Accounting for
Contingencies”, which requires that losses be accrued when they are
probable of occurring and are estimable and (b) SFAS No. 114, “Accounting by Creditors for
Impairment of a Loan” (“SFAS 114”), which requires that losses be accrued
when it is probable that the Company will not collect all principal and interest
payments according to the contractual terms of the loan. The loss, if any, can
be determined by the difference between the loan balance and the value of
collateral, the present value of expected future cash flows, or values
observable in the secondary markets.
Three
components comprise our allowance for credit losses: a specific allowance, a
formula allowance and a nonspecific or environmental factors allowance. Each
component is determined based on estimates that can and do change when actual
events occur.
The
specific allowance allocates a reserve to identified impaired loans. Loans
identified in the risk rating evaluation as substandard, doubtful and loss,
(classified loans) are segregated from non-classified
loans. Classified loans are assigned specific reserves based on an
impairment analysis. Under SFAS 114, a loan for which reserves are individually
allocated may show deficiencies in the borrower’s overall financial condition,
payment record, support available from financial guarantors and for the fair
market value of collateral. When a loan is identified as impaired, a specific
reserve is established based on the Company’s assessment of the loss that may be
associated with the individual loan.
The
formula allowance is used to estimate the loss on internally risk rated loans,
exclusive of those identified as requiring specific reserves. The portfolio of
unimpaired loans is stratified by loan type and risk
assessment. Allowance factors relate to the type of loan and level of
the internal risk rating, with loans exhibiting higher risk and loss experience
receiving a higher allowance factor.
The
environmental allowance is also used to estimate the loss associated with pools
of non-classified loans. These unclassified loans are also stratified by loan
type, and environmental allowance factors are assigned by management based upon
a number of conditions, including delinquencies, loss history, changes in
lending policy and procedures, changes in business and economic conditions,
changes in the nature and volume of the portfolio, management expertise,
concentrations within the portfolio, quality of internal and external loan
review systems, competition, and legal and regulatory requirements.
The
allowance captures losses inherent in the portfolio which have not yet been
recognized. Allowance factors and the overall size of the allowance
may change from period to period based upon management’s assessment of the above
described factors, the relative weights given to each factor, and portfolio
composition.
Management
has significant discretion in making the judgments inherent in the determination
of the provision and allowance for credit losses, including, in connection with
the valuation of collateral, a borrower’s prospects of repayment, and in
establishing allowance factors on the formula allowance and environmental
allowance components of the allowance. The establishment of allowance factors
involves a continuing evaluation, based on management’s ongoing assessment of
the global factors discussed above and their impact on the portfolio. The
allowance factors may change from period to period, resulting in an increase or
decrease in the amount of the provision or allowance, based upon the same volume
and classification of loans. Changes in allowance factors can have a direct
impact on the amount of the provision, and a related after tax effect on net
income. Errors in management’s perception and assessment of the global factors
and their impact on the portfolio could result in the allowance not being
adequate to cover losses in the portfolio, and may result in additional
provisions or charge-offs. Alternatively, errors in management’s
perception and assessment of the global factors and their impact on the
portfolio could result in the allowance being in excess of amounts necessary to
cover losses in the portfolio, and may result in lower provisions in the future.
For additional information regarding the provision for credit losses, refer to
the discussion under the caption “Provision for Credit Losses”
below.
The
Company follows the provisions of SFAS No. 123R, “Share-Based Payment”, which
requires the expense recognition for the fair value of share based compensation
awards, such as stock options, restricted stock units, and performance based
shares. This standard allows management to establish modeling
assumptions as to expected stock price volatility, option terms, forfeiture
rates and dividend rates which directly impact estimated fair value. The
accounting standard also allows for the use of alternative option pricing models
which may impact fair value as determined. The Company’s practice is to utilize
reasonable and supportable assumptions which are reviewed with the appropriate
Board Committee.
In
accounting for the acquisition of Fidelity, the Company followed the provisions
of SFAS No. 141 “Business Combinations”, which mandates the use of the purchase
method of accounting and AICPA Statement of Position 03-3 (“SOP 03-3”),
“Accounting for Certain Loans or Debt Securities Acquired in a
Transfer”. Accordingly, the tangible assets and liabilities and
identifiable intangibles acquired were recorded at their respective fair values
on the date of acquisition, with any impaired loans acquired being recorded at
fair value outside the allowance for credit losses. The valuation of the loan
and time deposit portfolios acquired were made by independent analysis for the
difference between the instruments stated interest rates and the instruments
current origination interest rate, with premiums and discounts being amortized
to interest income and interest expense to achieve an effective market interest
rate. An identified intangible asset related to core deposits was recorded based
on independent valuation. Deferred tax assets were recorded for the future value
of a net operating loss and for the tax effect of timing differences between the
accounting and tax basis of assets and liabilities. The Company recorded an
unidentified intangible (goodwill) for the excess of the purchase price of the
acquisition (including direct acquisition costs) over the fair value of net
tangible and identifiable intangible assets acquired.
On August
31, 2008 the Company completed the acquisition of Fidelity & Trust Financial
Corporation (“Fidelity”) and its subsidiary Fidelity & Trust Bank (“F&T
Bank”), which added approximately $360 million in loans, $100 million in
investments, $385 million in deposits, $47 million in customer repurchase
agreements and $13 million in equity capital. The combined
organization is reflected in the balance sheet and results of operations at
March 31, 2009 and for the three months ended March 31, 2009 but is not
reflected at March 31, 2008 and for the three months ended March 31,
2008.
The
Company reported net income of $2.1 million for the three months ended March 31,
2009. Net income available to common shareholders, after accrual of preferred
stock dividends, was $1.5 million for the three months ended March 31, 2009
($0.12 per basic and diluted common share), compared to $1.7 million ($0.15 per
basic and diluted common share) for 2008.
The
Company had an annualized return on average assets of 0.56% and an annualized
return on average common equity of 5.87% for the first three months of 2009, as
compared to returns on average assets and average common equity of 0.77% and
7.98%, respectively, for the same three months of 2008.
For the
three months ended March 31, 2009, net interest income showed an increase of 57%
as compared to the same period in 2008 on growth in average earning assets of
76%. For the three months ended March 31, 2009 as compared to the same period in
2008, the Company experienced a decline in its net interest margin from 4.19% to
3.76% or 43 basis points. This change was primarily due to margin compression,
reflecting declines in market interest rates on earning assets resulting from
Federal Reserve activities which have not been matched by comparable declines in
rates on interest bearing liabilities and by a lesser benefit of noninterest
funding sources in a much lower interest rate environment.
For the
three months ended March 31, 2009 and 2008, average interest bearing liabilities
funding average earning assets was 78% and 77%, respectively. Additionally,
while the average rate on earning assets for the three months ended March 31,
2009, as compared to the same period in 2008 has declined by 123 basis points
from 6.83% to 5.60%, the cost of interest bearing liabilities has decreased by
107 basis points from 3.43% to 2.36%, resulting in a slight decline in the net
interest spread of 16 basis points from 3.40% for the three months ended March
31, 2008 to 3.24% for the three months ended March 31, 2009. The net interest
margin decreased 43 basis points from 4.19% for the three months ended March 31,
2008 to 3.76% for the three months ended March 31, 2009, a larger decline than
in the net interest spread as the benefit of average noninterest sources funding
earning assets declined from 79 basis points for the three months ended March
31, 2008 to 52 basis points for the three months ended March 31, 2009. This
decline was due to the lower level of interest rates in the quarter ended March
31, 2009 as compared to 2008.
Due to
the need to meet loan funding objectives in excess of deposit growth, the bank
has relied to a larger extent on alternative funding sources, such as Federal
Home Loan Bank (“FHLB”) advances, correspondent bank lines of credit and
brokered time deposits which costs have been judged reasonable as an alternative
to more core funding. If significant reliance on alternative funding sources
continues, the Company’s earnings could be adversely impacted, depending on the
cost of those funds when needed.
In terms
of the average balance sheet composition or mix, loans, which generally have
higher yields than securities and other earning assets, decreased from 89% of
average earning assets in the first three months of 2008 to 88% of average
earning assets for the same period of 2009. Investment securities for
the first three months of 2009 amounted to 11% of average earning assets, an
increase of 1% from an average of 10% for the same period in 2008. Federal funds
sold averaged 0.6% in the first three months of 2009 versus 0.7% of average
earning assets for the same period of 2008.
The provision for credit losses was
$1.6 million for the first three months of 2009 as compared to $720 thousand for
the same period in 2008. The higher provisioning in the first quarter of 2009 as
compared to 2008 is attributable to risk migration within the portfolio and
increased reserves for problem loans.
In
total, the ratio of net charge-offs to average loans was 0.29% for the first
three months of 2009 as compared to 0.01% for the first three months of 2008.
The continued management of a quality loan portfolio remains a key objective of
the Company.
Total noninterest income was $1.4
million for the first three months of 2009 as compared to $940 thousand for the
same period in 2008, a 52% increase. This increase was due primarily to the
Fidelity acquisition which added approximately $385 million in deposits
resulting in higher service charges on deposit accounts and to gains realized on
the investment securities portfolio.
Total
noninterest expenses increased from $6.2 million in the first three months of
2008 to $10.3 million for the first three months of 2009, an increase of 66%.
The primary reasons for this increase was the Fidelity acquisition which
increased the size of the organization resulting in higher staff levels and
related personnel costs, increased occupancy costs, higher internet and license
agreement fees, and higher loan collection costs. In addition, higher
costs were incurred for marketing, sponsorships, broker fees and legal,
accounting and professional fees. The efficiency ratio, which
measures the ratio of noninterest expense to total revenue, was 69.10% for the
three months ended March 31, 2009, as compared to 65.07% for the three months
ended March 31, 2008. The Company is placing additional emphasis in 2009 on
noninterest expense management.
For the
three months ended March 31, 2009 as compared to 2008, the increase in net
interest income from increased volumes, offset by the combination of a higher
provision for credit losses, higher levels of noninterest income, a lower net
interest margin and higher levels of noninterest expenses, and the preferred
stock dividend resulted in decreased net income available to common shareholders
during the three month period ended March 31, 2009 as compared to
2008.
The ratio
of average common equity to average assets decreased from 9.67% for the first
three months of 2008 to 6.89% for the first three months of 2009, as the capital
growth in the average balance sheet over the past 12 months was due largely to
the preferred stock issuance in December 2008. As discussed below, the capital
ratios of the Bank and Company remain above well capitalized
levels.
Net
Interest Income and Net Interest Margin
Net
interest income is the difference between interest income on earning assets and
the cost of funds supporting those assets. Earning assets are composed primarily
of loans and investment securities. The cost of funds represents
interest expense on deposits, customer repurchase agreements and other
borrowings. Noninterest bearing deposits and capital are other components
representing funding sources (refer to discussion above under Results of
Operations). Changes in the volume and mix of assets and funding sources, along
with the changes in yields earned and rates paid, determine changes in net
interest income. Net interest income for the first three months of 2009 was
$13.5 million compared to $8.6 million for the first three months of 2008, an
increase of 57%. This increase in net interest income for the three months ended
March 31, 2009 was attributable in part to the Fidelity acquisition which
contributed to an increased volume of average earning assets of 76%, offset
somewhat by a 10% decline in the net interest margin from 4.19% to 3.76%. The
decline in the net interest margin was due to a lower benefit of noninterest
funding sources as market interest rates were substantially lower in the first
three months of 2009 as compared to 2008. In an effort to combat a weaker
economic climate, the Federal Reserve lowered its targeted federal funds rate
from 2.25% at March 31, 2008 to between 0.0% and 0.25% during December,
2008.
The table
below presents the average balances and rates of the various categories of the
Company’s assets and liabilities for the three months ended March 31, 2009 and
2008. Included in the table is a measurement of interest rate spread
and margin. Interest spread is the difference (expressed as a
percentage) between the interest rate earned on earning assets less the interest
expense on interest bearing liabilities. While net interest spread provides a
quick comparison of earnings rates versus cost of funds, management believes
that margin provides a better measurement of performance. Margin
includes the effect of noninterest bearing sources in its calculation and is net
interest income expressed as a percentage of average earning
assets.
Average
Balances, Interest Yields and Rates, and Net Interest Margin
(dollars
in thousands)
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Yield/Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Yield/Rate
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing deposits with other banks and other short-term
investments
|
|
$ |
2,763 |
|
|
$ |
19 |
|
|
|
2.72 |
% |
|
$ |
4,093 |
|
|
$ |
43 |
|
|
|
4.23 |
% |
Loans
(1) (2) (3)
|
|
|
1,281,925 |
|
|
|
18,113 |
|
|
|
5.73 |
% |
|
|
731,501 |
|
|
|
12,880 |
|
|
|
7.08 |
% |
Investment
securities available for sale (3)
|
|
|
159,649 |
|
|
|
1,929 |
|
|
|
4.90 |
% |
|
|
84,029 |
|
|
|
1,052 |
|
|
|
5.04 |
% |
Federal
funds sold
|
|
|
9,166 |
|
|
|
6 |
|
|
|
0.25 |
% |
|
|
5,840 |
|
|
|
39 |
|
|
|
2.69 |
% |
Total
interest earning assets
|
|
|
1,453,503 |
|
|
|
20,067 |
|
|
|
5.60 |
% |
|
|
825,463 |
|
|
|
14,014 |
|
|
|
6.83 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
noninterest earning assets
|
|
|
62,191 |
|
|
|
|
|
|
|
|
|
|
|
42,709 |
|
|
|
|
|
|
|
|
|
Less:
allowance for credit losses
|
|
|
18,658 |
|
|
|
|
|
|
|
|
|
|
|
8,142 |
|
|
|
|
|
|
|
|
|
Total
noninterest earning assets
|
|
|
43,533 |
|
|
|
|
|
|
|
|
|
|
|
34,567 |
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
1,497,036 |
|
|
|
|
|
|
|
|
|
|
$ |
860,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing transaction
|
|
$ |
47,690 |
|
|
$ |
32 |
|
|
|
0.27 |
% |
|
$ |
44,143 |
|
|
$ |
65 |
|
|
|
0.59 |
% |
Savings
and money market
|
|
|
293,551 |
|
|
|
1,088 |
|
|
|
1.50 |
% |
|
|
185,589 |
|
|
|
1,067 |
|
|
|
2.31 |
% |
Time
deposits
|
|
|
601,440 |
|
|
|
4,437 |
|
|
|
2.99 |
% |
|
|
288,965 |
|
|
|
3,296 |
|
|
|
4.59 |
% |
Customer
repurchase agreements and federal funds purchased
|
|
|
98,582 |
|
|
|
281 |
|
|
|
1.16 |
% |
|
|
55,014 |
|
|
|
394 |
|
|
|
2.88 |
% |
Other
short-term borrowings
|
|
|
29,333 |
|
|
|
40 |
|
|
|
0.56 |
% |
|
|
22,000 |
|
|
|
190 |
|
|
|
3.47 |
% |
Long-term
borrowings
|
|
|
62,150 |
|
|
|
726 |
|
|
|
4.73 |
% |
|
|
39,670 |
|
|
|
402 |
|
|
|
4.08 |
% |
Total
interest bearing liabilities
|
|
|
1,132,746 |
|
|
|
6,604 |
|
|
|
2.36 |
% |
|
|
635,381 |
|
|
|
5,414 |
|
|
|
3.43 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
bearing demand
|
|
|
214,546 |
|
|
|
|
|
|
|
|
|
|
|
136,409 |
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
8,404 |
|
|
|
|
|
|
|
|
|
|
|
5,040 |
|
|
|
|
|
|
|
|
|
Total
noninterest bearing liabilities
|
|
|
222,950 |
|
|
|
|
|
|
|
|
|
|
|
141,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
141,341 |
|
|
|
|
|
|
|
|
|
|
|
83,200 |
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$ |
1,497,036 |
|
|
|
|
|
|
|
|
|
|
$ |
860,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
13,463 |
|
|
|
|
|
|
|
|
|
|
$ |
8,600 |
|
|
|
|
|
Net
interest spread
|
|
|
|
|
|
|
|
|
|
|
3.24 |
% |
|
|
|
|
|
|
|
|
|
|
3.40 |
% |
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
3.76 |
% |
|
|
|
|
|
|
|
|
|
|
4.19 |
% |
(1)
Includes Loans held for sale.
|
(2)
Loans placed on nonaccrual status are included in average balances. Net
loan fees and late charges included in
|
interest
income on loans totaled $433 thousand and $297 thousand for the three
months ended March 31, 2009
and 2008, respectively.
|
(3)
Interest and fees on loans and investments exclude tax equivalent
adjustments.
|
Provision
for Credit Losses
The
provision for credit losses represents the amount of expense charged to current
earnings to fund the allowance for credit losses. The amount of the allowance
for credit losses is based on many factors which reflect management’s assessment
of the risk in the loan portfolio. Those factors include economic conditions and
trends, the value and adequacy of collateral, volume and mix of the portfolio,
performance of the portfolio, and internal loan processes of the Company and
Bank.
Management
has developed a comprehensive analytical process to monitor the adequacy of the
allowance for credit losses. This process and guidelines were developed
utilizing, among other factors, the guidance from federal banking regulatory
agencies. The results of this process, in combination with conclusions of the
Bank’s outside loan review consultant, support management’s assessment as to the
adequacy of the allowance at the balance sheet date. Please refer to the
discussion under the caption “Critical Accounting Policies” for an overview of
the methodology management employs on a quarterly basis to assess the adequacy
of the allowance and the provisions charged to expense. Also, refer to the
following table which reflects the comparative charge-offs and recoveries of
loan charge-offs information.
During
the first three months of 2009, a provision for credit losses was made in the
amount of $1.6 million and the allowance for credit losses increased $648
thousand, including the impact of $918 thousand in net charge-offs during the
period. The provision for credit losses of $1.6 million in the first three
months of 2009 compared to a provision for credit losses of $720 thousand in the
first three months of 2008. The higher provisioning in the first quarter of 2009
as compared to 2008 is attributable to risk migration within the portfolio and
increased reserves for problem loans. The reserve allocable to
construction loans declined due to a shift in the risk
classifications and a decline of approximately $20.9 million in
construction loan balances for the three months ended March 31,
2009.
As part
of its comprehensive loan review process, the Bank’s Board of Directors and Loan
Committee or Company’s Credit Review Committees carefully evaluate loans which
are past-due 30 days or more. The Committee(s) make a thorough
assessment of the conditions and circumstances surrounding each delinquent loan.
The Bank’s loan policy requires that loans be placed on nonaccrual if they are
ninety days past-due, unless they are well secured and in the process of
collection. Additionally, Credit Administration specifically analyzes the status
of development and construction projects, sales activities and utilization of
interest reserves in order to carefully and prudently assess potential increased
levels of risk requiring additional reserves.
The
maintenance of a high quality loan portfolio, with an adequate allowance for
possible credit losses, will continue to be a primary management objective for
the Company.
The following table sets forth activity
in the allowance for credit losses for the periods indicated.
|
|
Three
Months Ended
|
|
(dollars
in thousands)
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Balance
at beginning of year
|
|
$ |
18,403 |
|
|
$ |
8,037 |
|
Charge-offs:
|
|
|
|
|
|
|
|
|
Commercial
(1)
|
|
|
938 |
|
|
|
- |
|
Real
estate – commercial
|
|
|
- |
|
|
|
- |
|
Real
estate – residential
|
|
|
- |
|
|
|
- |
|
Construction
- commercial and residential
|
|
|
- |
|
|
|
- |
|
Home
equity
|
|
|
- |
|
|
|
- |
|
Other
consumer
|
|
|
- |
|
|
|
24 |
|
Total
charge-offs
|
|
|
938 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
Commercial
(1)
|
|
|
20 |
|
|
|
- |
|
Real
estate – commercial
|
|
|
- |
|
|
|
- |
|
Real
estate – residential
|
|
|
- |
|
|
|
- |
|
Construction
- commercial and residential
|
|
|
- |
|
|
|
- |
|
Home
equity
|
|
|
- |
|
|
|
- |
|
Other
consumer
|
|
|
- |
|
|
|
- |
|
Total
recoveries
|
|
|
20 |
|
|
|
- |
|
Net
charge-offs
|
|
|
(918 |
) |
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
Additions
charged to operations
|
|
|
1,566 |
|
|
|
720 |
|
Balance
at end of period
|
|
$ |
19,051 |
|
|
$ |
8,733 |
|
|
|
|
|
|
|
|
|
|
Annualized
ratio of net charge-offs during the period to
average
loans outstanding during the period
|
|
|
0.29 |
% |
|
|
0.01 |
% |
The following table reflects the
allocation of the allowance for credit losses at the dates
indicated. The allocation of the allowance to each category is not
necessarily indicative of future losses or charge-offs and does not restrict the
use of the allowance to absorb losses in any category.
|
|
As
of March 31,
|
|
|
As
of December 31,
|
|
(dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
|
|
Amount
|
|
|
|
% |
(1) |
|
Amount
|
|
|
|
% |
(1) |
Commercial
|
|
$ |
9,830 |
|
|
|
25 |
% |
|
$ |
8,923 |
|
|
|
27 |
% |
Real
estate – commercial
|
|
|
5,328 |
|
|
|
46 |
% |
|
|
4,849 |
|
|
|
43 |
% |
Real
estate – residential
|
|
|
24 |
|
|
|
1 |
% |
|
|
58 |
|
|
|
1 |
% |
Construction
- commercial and residential
|
|
|
3,330 |
|
|
|
21 |
% |
|
|
3,972 |
|
|
|
22 |
% |
Home
equity
|
|
|
347 |
|
|
|
6 |
% |
|
|
394 |
|
|
|
6 |
% |
Other
consumer
|
|
|
192 |
|
|
|
1 |
% |
|
|
207 |
|
|
|
1 |
% |
Unallocated
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
loans
|
|
$ |
19,051 |
|
|
|
100 |
% |
|
$ |
18,403 |
|
|
|
100 |
% |
(1)
Represents the percent of loans in each category to total
loans.
As shown in the table below, the
Company’s nonperforming assets, which are comprised of loans delinquent 90 days
or more, nonaccrual loans, restructured loans and other real estate owned,
totaled $49.8 million at March 31, 2009, compared to $26.4 million at December
31, 2008 and $11.7 million at March 31, 2008. The percentage of nonperforming
assets to total assets was 3.33% at March 31, 2009, compared to 1.76% at
December 31, 2008 and 1.30% at March 31, 2008. Included in nonperforming assets
at March 31, 2009 is other real estate owned (OREO) of $3.3 million. The Company
added three foreclosed properties with a net carrying value of approximately
$2.4 million during the quarter ended March 31, 2009 bringing the total OREO
properties to seven at March 31, 2009, compared to four properties with a net
carrying value of $909 thousand at December 31, 2008 and no OREO at March 31,
2008.
Excluding OREO from nonperforming
assets, total nonperforming loans amounted to $46.5 million at March 31, 2009
(3.67% of total loans), compared to $25.5 million at December 31, 2008 (2.01% of
total loans) and $11.7 million (1.54% of total loans) at March 31,
2008.
The
increase in non-performing loans is due to the following: one loan for
approximately $10.9 million which was subsequently brought current in April
2009, fifteen loans acquired from Fidelity totaling approximately $11.7 million,
five commercial real estate loans totaling approximately $5.0 million which are
currently experiencing delays in construction, development, and/or absorption,
two commercial business loans totaling approximately $3.3 million, and a number
of smaller commercial business loans totaling approximately $4.0
million.
Nonaccrual
loans in the table below at March 31, 2009 include approximately $22.7 million
in nonperforming commercial real estate construction loans. The increase as
compared to March 31, 2008 is principally due to the acquisition of
nonperforming loans in connection with the acquisition of Fidelity. Under
generally accepted accounting principles, specific reserves associated with
impaired loans acquired in a merger are to be charged off (or shown as an
unaccretable discount) resulting in the acquiring entity (the Company) carrying
the nonperforming loans at the resulting net fair value. The impact of this
adjustment was to increase nonperforming loans without the corresponding
specific reserves previously assigned by Fidelity, thus lowering the allowance
coverage ratio. Additionally, slowing absorption in commercial construction
projects has caused delays in project sell out and loan repayment according to
contractual terms. Where appropriate, as with all nonperforming loans, specific
reserves have been established for these nonperforming construction
loans.
The
following table shows the amounts of nonperforming assets at the dates
indicated.
|
|
March
31,
|
|
|
December
31,
|
|
(dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
Nonaccrual
Loans:
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$ |
8,193 |
|
|
$ |
1,314 |
|
|
$ |
3,506 |
|
Other
consumer
|
|
|
4 |
|
|
|
- |
|
|
|
- |
|
Home
equity
|
|
|
239 |
|
|
|
123 |
|
|
|
196 |
|
Construction
- commercial and residential
|
|
|
22,694 |
|
|
|
9,645 |
|
|
|
17,588 |
|
Real
estate - commercial
|
|
|
4,455 |
|
|
|
629 |
|
|
|
4,167 |
|
Accrual
loans-past due 90 days:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
consumer
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Real
estate - commercial
|
|
|
10,909 |
|
|
|
- |
|
|
|
- |
|
Restructured
loans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
nonperforming loans
|
|
|
46,494 |
|
|
|
11,711 |
|
|
|
25,457 |
|
Other
real estate owned
|
|
|
3,289 |
|
|
|
- |
|
|
|
909 |
|
Total
nonperforming assets
|
|
$ |
49,783 |
|
|
$ |
11,711 |
|
|
$ |
26,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coverage
ratio, allowance for credit losses to total nonperforming loans
(1)
|
|
|
40.98 |
% |
|
|
74.57 |
% |
|
|
72.29 |
% |
Ratio
of nonperforming loans to total loans
|
|
|
3.67 |
% |
|
|
1.54 |
% |
|
|
2.01 |
% |
Ratio
of nonperforming assets to total assets
|
|
|
3.33 |
% |
|
|
1.30 |
% |
|
|
1.76 |
% |
(1)
The decline in the coverage ratio was due primarily to the acquisition of
nonperforming loans as a result of the
|
Fidelity
acquisition.
|
Significant
variation in the amount of nonperforming loans may occur from period to period
because the amount of nonperforming loans depends largely on the condition of a
relatively small number of individual credits and borrowers relative to the
total loan portfolio.
The
Company had no troubled debt restructured loans at either March 31, 2009 or
2008. Impaired loans consisted of $46.5 million of nonaccrual loans at March 31,
2009, with $2.5 million of specific reserves, compared to $11.7 million of
impaired loans at March 31, 2008 with $580 thousand of specific
reserves.
At March
31, 2009, there were $2.1 million of performing loans considered potential
problem loans, defined as loans which are not included in the 90 day past due,
nonaccrual or restructured categories, but for which known information about
possible credit problems causes management to be uncertain as to the ability of
the borrowers to comply with the present loan repayment terms which may in the
future result in disclosure in the past due, nonaccrual or restructured loan
categories.
Total
noninterest income includes service charges on deposits, gain on sale of loans,
gain on investment securities, income from bank owned life insurance (“BOLI”)
and other income.
Total noninterest income for the three
months ended March 31, 2009 was $1.4 million compared to $940 thousand for the
same three month period in 2008, a 52% increase. This increase was due primarily
to higher service charges on deposit accounts and to gains realized on the
investment securities portfolio.
For the
three months ended March 31, 2009 service charges on deposit accounts increased
to $738 thousand from $358 thousand for the same three month period ended March
31, 2008, an increase of 106%. The increase in service charges for the year was
primarily related to the Fidelity acquisition, to fee increases due in part to
the impact of lower interest rates on customer earnings credits, and to new
relationships.
Gain on
sale of loans consists of SBA and residential mortgage loans. Gain on
sale of loans increased from $127 thousand to $131 thousand for the three months
ended March 31, 2009, compared to the same three month period in 2008, or an
increase of 3%.
The
Company is an originator of SBA loans and its current practice is to sell the
insured portion of those loans at a premium. There was no income from this
source for the three months ended March 31, 2009, compared to $37 thousand for
the same three month period in 2008. The decline was due to lower volumes of
activity due to weaker economic conditions and to a lowering of the profit
margin afforded on SBA guaranteed loan sales. Activity in SBA loan sales to
secondary markets can vary widely from quarter to quarter.
The
Company originates residential mortgage loans on a pre-sold basis, servicing
released. Sales of these mortgage loans yielded gains of $131 thousand for the
three months ended March 31, 2009 compared to $90 thousand in the same period in
2008. The Company continues its efforts to originate residential mortgages and
to sell these assets on a servicing released basis. Loans sold are subject to
repurchase in circumstances where documentation is deficient or the underlying
loan becomes delinquent within a specified period following sale and loan
funding. The Bank considers these potential recourse provisions to be a minimal
risk and to date has not been required to repurchase any loans. The Bank does
not originate so called “sub-prime” loans and has no exposure to this market
segment. Higher refinancing activity resulting from a decline in
residential mortgage rates in 2009 as compared to 2008 was the reason for the
increase.
Other
income totaled $317 thousand for the first three months of 2009 as compared to
$329 thousand for the same three month period in 2008, a decrease of 4%. The
major components of income in this category consist of ATM fees, SBA service
fees, noninterest loan fees and other noninterest fee income. Noninterest loan
fees decreased to $93 thousand for the three months ended March 31, 2009 from
$155 thousand for the same three month period in 2008, a decrease of 40%. Other
noninterest fee income was $81 thousand for the three months ended March 31,
2009 compared to $53 thousand for the same three month period in 2008, a 54%
increase due primarily to increases in miscellaneous bank fees.
Net
investment gains amounted to $132 thousand for the first three months of 2009 as
compared to $10 thousand for the same three month period in
2008. Investment gains and losses are typically recognized as part of
the Company’s asset and liability management to meet loan demand or to better
manage the Bank’s interest rate risk position.
Noninterest
expense consists of salaries and employee benefits, premises and equipment
expenses, marketing and advertising, outside data processing, legal, accounting
and professional fees and other expenses.
Total
noninterest expense was $10.3 million for the three months ended March 31, 2009
compared to $6.2 million for the three months ended March 31, 2008, an increase
of 66%.
Salaries and employee benefits were
$5.3 million for the first three months of 2009, as compared to $3.6 million for
the same three month period in 2008, a 46% increase. This increase was due to
staff additions and related personnel costs, primarily resulting from the
Fidelity acquisition, merit increases, incentive based compensation and
increased benefit costs. At March 31, 2009, the Company’s staff numbered 227, as
compared to 174 at March 31, 2008.
Premises
and equipment expenses amounted to $1.9 million for the three months ended March
31, 2009 versus $1.1 million for the same three month period in 2008. This
increase of 74% was due primarily to new banking offices acquired from the
Fidelity acquisition. Additionally, ongoing operating expense
increases associated with the Company’s facilities, all of which are leased, and
increased equipment costs contributed to the overall increase in
expense. For the three months ended March 31, 2009 the Company
recognized $75 thousand of sublease revenue as compared to $72 thousand for the
same three month period in 2008. The sublease revenue is a direct offset of
premises and equipment expenses.
Marketing
and advertising costs increased from $81 thousand for the three months ended
March 31, 2008 to $315 thousand for the same three month period in 2009, an
increase of 289%. The primary reasons for the significant increase were costs
incurred in the first quarter for the sponsorship of the 2009 EagleBank
Bowl.
Legal,
accounting and professional fees were $590 thousand for the three months ended
March 31, 2009, as compared to $170 thousand for the same three month period in
2008, a 247% increase. This increase is primarily due to collection costs
related to nonperforming assets and professional fees for consulting
services.
FDIC
insurance and regulatory assessments were $476 thousand for the three months
ended 2009, as compared to $126 thousand in 2008, an increase of 278%. The
primary reasons for the increase were an increase in the FDIC premium rates
charged on deposits and higher deposit balances following the Fidelity
acquisition.
Other
expenses increased to $1.2 million for the three months ended 2009 from $771
thousand for the three months ended March 31, 2008, or an increase of 54%. The
major components of costs in this category include ATM expenses, broker fees,
telephone, courier, printing, business development, office supplies,
correspondent bank fees, and Federal Reserve fees.
The Company’s ratio of income tax
expense to pre-tax income (termed effective tax rate) decreased to 31.6% for the
three months ended March 31, 2009 as compared to 36.8% for the same three month
period in 2008. This decrease was due primarily to the purchase accounting
adjustments established in connection with the Fidelity
acquisition.
At March
31, 2009, the Company’s total assets were $1.5 billion, loans were $1.3 billion,
deposits were $1.1 billion, other borrowings, including customer repurchase
agreements were $193.1 million and stockholders’ equity was $144.5
million. As compared to December 31, 2008, at March 31, 2009 assets
decreased by $1.1 million (0.1%), loans increased by $2.4 million (0.2%),
deposits increased by $19.3 million (1.7%), borrowings decreased by $22.9
million (10.6%) and stockholders’ equity grew by $2.2 million
(1.5%).
A
substantial portion of the year over year growth in all categories in the three
months ended March 31, 2009 was due to the Fidelity acquisition completed in the
third quarter of 2008. A significant portion of the growth in
stockholders’ equity was due to participation in the Capital Purchase Program
established under the Emergency Economic Stimulation Act of 2008 (“EESA”)
pursuant to which $38.235 million of preferred stock was sold to the United
States Department of the Treasury (the “Treasury”) in December
2008. In connection with the purchase, the Treasury also received
warrants to purchase 770,236 shares of common stock, which are exercisable for a
term of ten years and are reflected as a category of shareholders
equity.
In July
2008, the Company, in an action to conserve capital, discontinued the payment of
its quarterly cash dividend. On October 1, 2008, the Company
paid a 10% stock dividend on the common stock. The Company paid a
cash dividend of $0.0545 per common share for the first quarter of
2008.
Loans, net of amortized deferred fees
and costs, at March 31, 2009, December 31, 2008 and March 31, 2008 by major
category are summarized below:
|
|
As
of March 31,
|
|
|
|
|
|
As
of December 31,
|
|
|
As
of March 31,
|
|
|
|
|
(dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Commercial
|
|
$ |
321,049 |
|
|
|
25 |
% |
|
$ |
334,999 |
|
|
|
27 |
% |
|
$ |
154,761 |
|
|
|
20 |
% |
Real
estate mortgage – commercial
|
|
|
579,815 |
|
|
|
46 |
% |
|
|
549,069 |
|
|
|
43 |
% |
|
|
385,119 |
|
|
|
51 |
% |
Real
estate mortgage – residential
|
|
|
9,451 |
|
|
|
1 |
% |
|
|
9,757 |
|
|
|
1 |
% |
|
|
2,026 |
|
|
|
0 |
% |
Construction
- commercial and residential
|
|
|
268,555 |
|
|
|
21 |
% |
|
|
283,020 |
|
|
|
22 |
% |
|
|
153,675 |
|
|
|
20 |
% |
Home
equity
|
|
|
81,276 |
|
|
|
6 |
% |
|
|
80,295 |
|
|
|
6 |
% |
|
|
57,793 |
|
|
|
8 |
% |
Other
consumer
|
|
|
7,812 |
|
|
|
1 |
% |
|
|
8,500 |
|
|
|
1 |
% |
|
|
6,173 |
|
|
|
1 |
% |
Total
loans
|
|
|
1,267,958 |
|
|
|
100 |
% |
|
$ |
1,265,640 |
|
|
|
100 |
% |
|
|
759,547 |
|
|
|
100 |
% |
Less:
Allowance for Credit Losses
|
|
|
(19,051 |
) |
|
|
|
|
|
|
(18,403 |
) |
|
|
|
|
|
|
(8,733 |
) |
|
|
|
|
Net
Loans and Leases
|
|
$ |
1,248,907 |
|
|
|
|
|
|
$ |
1,247,237 |
|
|
|
|
|
|
$ |
750,814 |
|
|
|
|
|
Deposits
and Other Borrowings
The
principal sources of funds for the Bank are core deposits, consisting of demand
deposits, NOW accounts, money market accounts, savings accounts and certificates
of deposits from the local market areas surrounding the Bank’s offices. The
deposit base includes transaction accounts, time and savings accounts and
accounts which customers use for cash management and which provide the Bank with
a source of fee income and cross-marketing opportunities, as well as an
attractive source of lower cost funds. To meet funding needs during
periods of high loan demand and seasonal variations in core deposits, the Bank
utilizes alternative funding sources such as secured borrowings from the FHLB;
federal funds purchased lines of credit from correspondent banks and brokered
deposits from a regional brokerage firm.
For the
three months ended March 31, 2009, noninterest bearing deposits increased $9.1
million as compared to December 31, 2008, while interest bearing deposits
increased by $10.2 million during the same period, due substantially to money
market deposits.
From time
to time, when appropriate in order to fund strong loan demand, the Bank accepts
time deposits, generally in denominations of less than $100 thousand from bank
and credit union subscribers to a wholesale deposit rate line and also acquires
brokered deposits from a regional brokerage firm. Additionally, the Bank
participates in the Certificates of Deposit Account Registry Service (“CDARS”),
which provides for reciprocal transactions among banks facilitated by the
Promontory Interfinancial Network, LLC for the purpose of maximizing FDIC
insurance. These funds are currently classified as brokered deposits
for regulatory reporting, but are deemed more core related. At March 31, 2009,
total time deposits included $179.9 million of brokered deposits which
represented 16% of total deposits. The CDARS component represented $76.6 million
or 7% of total deposits. These sources are deemed reliable and cost efficient as
an alternative funding source for the Company. At December 31, 2008, total time
deposits included $192.7 million of brokered deposits which represented 17% of
total deposits. The CDARS component represented $81.1 million or 7% of total
deposits.
At March
31, 2009, the Company had approximately $232.7 million in noninterest bearing
demand deposits, representing 20% of total deposits. This compared to
approximately $223.6 million of these deposits at December 31, 2008 or 20% of
total deposits. These deposits are primarily business checking
accounts on which the payment of interest is prohibited by regulations of the
Federal Reserve. Proposed legislation has been introduced in past
Congresses which would permit banks to pay interest on checking and demand
deposit accounts established by businesses. If legislation effectively
permitting the payment of interest on business demand deposits is enacted, of
which there can be no assurance, it is likely that we may be required to pay
interest on some portion of our noninterest bearing deposits in order to compete
with other banks. Payment of interest on these deposits could have a significant
negative impact on our net interest income and net interest margin, net income,
and the return on assets and equity.
As an
enhancement to the basic noninterest bearing demand deposit account, the Company
offers a sweep account, or “customer repurchase agreement”, allowing qualifying
businesses to earn interest on short-term excess funds which are not suited for
either a certificate of deposit or a money market account. The balances in these
accounts were $120.9 million at March 31, 2009 compared to $93.9 million at
December 31, 2008, the increase being attributed primarily to growth in escrow
accounts from refinancing activities. Customer repurchase agreements are not
deposits and are not insured by the FDIC, but are collateralized by U.S.
government agency securities. These accounts are particularly
suitable to businesses with significant fluctuation in the levels of cash flows.
Attorney and title company escrow accounts are an example of accounts which can
benefit from this product, as are customers who may require collateral for
deposits in excess of FDIC insurance limits but do not qualify for other
pledging arrangements. This program requires the Company to maintain a
sufficient investment securities level to accommodate the fluctuations in
balances which may occur in these accounts.
At March
31, 2009 the Company had no amounts outstanding balances under its federal funds
lines of credit provided by correspondent banks, as compared to $5.0 million
outstanding at December 31, 2008. This decrease was due to changes in the
funding mix to the less expensive funding provided by the Federal Home Loan Bank
of Atlanta (“FHLBA”). At March 31, 2009, the Bank had $60 million borrowings
outstanding under its credit facility from the FHLBA, as compared to $105
million at December 31, 2008. Outstanding advances are secured by collateral
consisting of a blanket lien on qualifying loans in the Bank’s commercial
mortgage loan portfolio.
On August
11, 2008, the Company entered into a Loan Agreement and related Stock Security
Agreement and Promissory Note (the “credit facility”) with United Bank, pursuant
to which the Company may borrow, on a revolving basis, up to $20 million for
working capital purposes, to finance capital contributions to the Bank and ECV.
The credit facility is secured by a first lien on all of the stock of the Bank,
and bears interest at a floating rate equal to the Wall Street Journal Prime
Rate minus 0.25%. Interest is payable on a monthly basis. The term of
the credit facility expires on August 31, 2010. At any time, provided
no event of default exists, the Company may term out repayment of the
outstanding principal balance of the credit facility over a five year term,
based on a ten year straight line amortization. At March 31, 2009,
there were no amounts outstanding under this credit facility.
On August
28, 2008 the Company accepted subscriptions for and sold an aggregate of $12.15
million of subordinated notes (the “Notes”), on a private placement basis, to
seven parties, all of whom are current directors of the Company or the Bank. The
capital treatment of the Notes will be phased out during the last 5 years of the
Notes’ term, at a rate of 20% of the original principal amount per year
commencing in October 2009. The Notes bear interest, payable on the first day of
each month, commencing in October 2008, at a fixed rate of 10.0% per
year. The Notes have a term of approximately six years, and have a
maturity on September 30, 2014.
Liquidity
is a measure of the Company and Bank’s ability to meet loan demand and to
satisfy depositor withdrawal requirements in an orderly manner. The Bank’s
primary sources of liquidity consist of cash and cash balances due from
correspondent banks, loan repayments, federal funds sold and other short-term
investments, maturities and sales of investment securities and income from
operations. The Bank’s investment portfolio of debt securities is
held in an available-for-sale status and had at March 31, 2009 a substantial
unrealized gain position, which allows for flexibility, subject to holdings held
as collateral for customer repurchase agreements to generate cash from sales as
needed to meet ongoing loan demand. These sources of liquidity are
considered primary and are supplemented by the ability of the Company and Bank
to borrow funds, which are termed secondary sources and which are substantial.
The Company’s secondary sources of liquidity, includes a $20 million line of
credit with a regional bank, secured by the stock of the Bank, against which
there were no amounts outstanding at March 31, 2009. Additionally, the Bank can
purchase up to $76.5 million in federal funds on an unsecured basis and $5.5
million on a secured basis from its correspondents, against which there were no
amounts outstanding at March 31, 2009. At March 31, 2009, the Bank was also
eligible to make advances from the FHLB up to $130.0 million based on collateral
at the FHLB, of which it had $60.0 million of advances outstanding at March 31,
2009. Also, the Bank may enter into repurchase agreements as well as obtaining
additional borrowing capabilities from the FHLB provided adequate collateral
exists to secure these lending relationships. The substantial use of the FHLB
facility as of March 31, 2009 was based on it providing the most cost effective
means to fund loan growth in the first quarter of 2009.
The loss of deposits, through
disintermediation, is one of the greater risks to liquidity. Disintermediation
occurs most commonly when rates rise and depositors withdraw deposits seeking
higher rates in alternative savings and investment sources than the Bank may
offer. The Bank was founded under a philosophy of relationship
banking and, therefore, believes that it has less of an exposure to
disintermediation and resultant liquidity concerns than do many banks. There is,
however, a risk that some deposits would be lost if rates were to increase and
the Bank elected not to remain competitive with its deposit rates. Under those
conditions, the Bank believes that it is well positioned to use other sources of
funds such as FHLB borrowings, repurchase agreements and Bank lines of credit to
offset a decline in deposits in the short run. Over the long-term, an adjustment
in assets and change in business emphasis could compensate for a potential loss
of deposits. The Bank also maintains a marketable investment portfolio to
provide flexibility in the event of significant liquidity needs. The Asset
Liability Committee of the Bank’s Board of Directors (“ALCO”) has adopted policy
guidelines which emphasize the importance of core deposits and their continued
growth.
At March
31, 2009, under the Bank’s liquidity formula, it had $371.9 million of primary
and secondary liquidity sources, which was deemed adequate to meet current and
projected funding needs.
Commitments
and Contractual Obligations
Loan
commitments outstanding and lines and letters of credit at March 31, 2009 are as
follows:
|
|
(in
thousands)
|
|
Loan
commitments
|
|
$ |
50,020 |
|
Unused
lines of credit
|
|
|
185,670 |
|
Letters
of credit
|
|
|
14,637 |
|
Total
|
|
$ |
250,327 |
|
Asset/Liability
Management and Quantitative and Qualitative Disclosures about Market Risk
A fundamental risk in banking is
exposure to market risk, or interest rate risk, since a bank’s net income is
largely dependent on net interest income. The ALCO formulates and monitors the
management of interest rate risk through policies and guidelines established by
it and the full Board of Directors. In its consideration of risk limits, the
ALCO considers the impact on earnings and capital, the level and direction of
interest rates, liquidity, local economic conditions, outside threats and other
factors. Banking is generally a business of managing the maturity and re-pricing
mismatch inherent in its asset and liability cash flows and to provide net
interest income growth consistent with the Company’s profit
objectives.
The Company, through its ALCO, monitors
the interest rate environment in which it operates and adjusts the rates and
maturities of its assets and liabilities to remain competitive and to achieve
its overall financial objectives subject to established risk limits. In the
current interest rate environment, the Company has been extending the duration
of its investment portfolios and acquiring more variable and short-term
liabilities, so as to mitigate the risk to earnings and capital should interest
rates decline from current levels. There can be no assurance that the Company
will be able to successfully achieve its optimal asset liability mix, as a
result of competitive pressures, customer preferences and the inability to
perfectly forecast future interest rates.
One of the tools used by the Company to
manage its interest rate risk is a static GAP analysis presented below. The
Company also uses an earnings simulation model (simulation analysis) on a
quarterly basis to monitor its interest rate sensitivity and risk and to model
its balance sheet cash flows and its income statement effects in different
interest rate scenarios. The model utilizes current balance sheet data and
attributes and is adjusted for assumptions as to investment maturities (calls),
loan prepayments, interest rates, the level of noninterest income and
noninterest expense. The data is then subjected to a “shock test” which assumes
a simultaneous change in interest rate up 100 and 200 basis points or down 100
and 200 basis points, along the entire yield curve, but not below zero. The
results are analyzed as to the impact on net interest income, and net income
over the next twelve and twenty four month periods and to the market value of
equity impact.
For the
analysis presented below, at March 31, 2009, the bank’s assumption for the
re-pricing of interest bearing, savings and money market deposit accounts
reflects 50 basis points in interest rates for each 100 basis points in interest
rates in both a decreasing and increasing interest rate shock scenario with a
floor of 10 basis points.
As
quantified in the table below, the Company’s analysis at March 31, 2009 shows a
moderate effect on net interest income, net income and the economic value of
equity when interest rates are shocked down 100 and 200 basis points and up 100
and 200 basis points, due to the significant level of variable rate and
repriceable assets and liabilities. The re-pricing duration of the investment
portfolio is about 1.8 years, the loan portfolio about 1.1 years; the interest
bearing deposit portfolio about 1.2 years and the borrowed funds portfolio about
1.0 years.
The
following table reflects the result of a shock simulation on the March 31, 2009
balances.
Change
in interest rates (basis points)
|
|
Percentage
change in net interest income
|
|
Percentage
change in net income
|
|
Percentage
change in market value of portfolio equity
|
+200
|
|
-3.3%
|
|
-13.4%
|
|
-3.2%
|
+100
|
|
-2.0%
|
|
-8.1%
|
|
-0.6%
|
0
|
|
-
|
|
-
|
|
-
|
-100
|
|
+3.8%
|
|
+15.5%
|
|
-3.0%
|
-200
|
|
+2.9%
|
|
+12.0%
|
|
-6.4%
|
The
results of simulation are within the policy limits adopted by the
Company. For net interest income, the Company has adopted a policy
limit of 10% for a 100 basis point change and 12% for a 200 basis point change.
For the market value of equity, the Company has adopted a policy limit of 12%
for a 100 basis point change and 15% for a 200 basis point change. The change in
the economic value of equity in a lower interest rate shock scenario at March
31, 2009 is due primarily to call risk in the investment portfolio and to the
lower value of noninterest deposits.
Certain
shortcomings are inherent in the method of analysis presented in the foregoing
table. For example, although certain assets and liabilities may have similar
maturities or repricing periods, they may react in different degrees to changes
in market interest rates. Also, the interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable-rate mortgage loans, have
features that limit changes in interest rates on a short-term basis and over the
life of the loan. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels could deviate significantly from those
assumed in calculating the tables. Finally, the ability of many borrowers to
service their debt may decrease in the event of a significant interest rate
increase.
The yield
curve stabilized during the first quarter of 2009 producing a slight increase of
0.06% in the net interest spread from December 31, 2008. During the
first quarter of 2009, the Company’s net interest spread was 3.24% as compared
to 3.18% for the fourth quarter of 2008 and 3.40% for the first quarter of 2008.
The Company believes that the change in the net interest spread has been
consistent with its risk analysis. Furthermore, as market interest rates are
currently very low, the lower rates tend to create floors (given a shock of -100
and -200 basis points) on various deposit interest rate products, as interest
rates cannot be reduced below zero. This effect further serves to compress net
interest income and net interest spreads and margins.
Gap
Position
Banks and other financial institutions
earnings are significantly dependent upon net interest income, which is the
difference between interest earned on earning assets and interest expense on
interest bearing liabilities.
In falling interest rate environments,
net interest income is maximized with longer term, higher yielding assets being
funded by lower yielding short-term funds, or what is referred to as a negative
mismatch or GAP. Conversely, in a rising interest rate environment, net interest
income is maximized with shorter term, higher yielding assets being funded by
longer-term liabilities or what is referred to as a positive mismatch or
GAP.
Based on
the current economic environment, management has generally been endeavoring to
maintain the duration of the investment portfolio in the face of increased call
risk, to acquire more fixed rate loans, where available, and has been
emphasizing the acquisition of shorter-term time deposits, including brokered
CD’s and shorter-term FHLB borrowings. These additional brokered deposits and
non-deposit sources have been required to fund loan growth in excess of core
deposit growth. This strategy had mitigated the Company’s exposure to lower
interest rates through March 31, 2009.
While
management believes that this overall position creates a reasonable balance in
managing its interest rate risk and maximizing its net interest margin within
plan objectives, there can be no assurance as to actual results.
Management
has carefully considered its strategy to maximize interest income by reviewing
interest rate levels, economic indicators and call features within its
investment portfolio. These factors have been discussed with the ALCO and
management believes that current strategies are appropriate to current economic
and interest rate trends.
The GAP position, which is a measure of
the difference in maturity and re-pricing volume between assets and liabilities,
is a means of monitoring the sensitivity of a financial institution to changes
in interest rates. The chart below provides an indication of the sensitivity of
the Company to changes in interest rates. A negative GAP indicates
the degree to which the volume of repriceable liabilities exceeds repriceable
assets in given time periods.
At March 31, 2009, the Company had a
positive GAP position of approximately 15% of total assets out to three months
and a positive cumulative GAP position of 0.11% out to 12 months; as compared to
a positive GAP position of 13% out to three months and a positive cumulative GAP
position of 2% out to 12 months at December 31, 2008. The change in
the GAP position at March 31, 2009 as compared to December 31, 2008 relates
primarily to a change in the deposit mix to longer-term maturities. The current
position is within guideline limits established by ALCO.
If
interest rates decline, the Company’s net interest income and margin are
expected to contract slightly because of the lower market rates at March 31,
2009 and the inability to significantly lower deposit interest
rates. Because competitive market behavior does not necessarily track
the trend of interest rates but at times moves ahead of financial market
influences, the change in the cost of liabilities may be different than
anticipated by the GAP model. If this were to occur, the effects of a declining
interest rate environment may not be in accordance with management’s
expectations. If interest rates move significantly up or down, the Company’s
interest rate sensitivity position at March 31, 2009 shows risk exposures within
established policy limits established by ALCO. Management has carefully
considered its strategy to maximize interest income by reviewing interest rate
levels, economic indicators and call features within its investment portfolio.
These factors have been discussed with the ALCO and management believes that
current strategies are appropriate to current economic and interest rate
trends.
GAP
Analysis
March
31, 2009
(dollars
in thousands)
Repriceable
in:
|
|
0-3
mos
|
|
|
4-12
mos
|
|
|
13-36
mos
|
|
|
37-60
mos
|
|
|
over
60 mos
|
|
|
Total
Rate
Sensitive
|
|
|
Non-
sensitive
|
|
|
Total
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RATE SENSITIVE
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
securities
|
|
$ |
35,972 |
|
|
$ |
50,369 |
|
|
$ |
50,162 |
|
|
$ |
9,371 |
|
|
$ |
13,102 |
|
|
$ |
158,976 |
|
|
|
|
|
|
|
Loans
(1)(2)
|
|
|
669,348 |
|
|
|
119,878 |
|
|
|
253,081 |
|
|
|
182,709 |
|
|
|
45,774 |
|
|
|
1,270,790 |
|
|
|
|
|
|
|
Fed
funds and other short-term investments
|
|
|
9,685 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,685 |
|
|
|
|
|
|
|
Other
earning assets
|
|
|
- |
|
|
|
12,564 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
12,564 |
|
|
|
|
|
|
|
Total
|
|
$ |
715,005 |
|
|
$ |
182,811 |
|
|
$ |
303,243 |
|
|
$ |
192,080 |
|
|
$ |
58,876 |
|
|
$ |
1,452,015 |
|
|
$ |
43,759 |
|
|
$ |
1,495,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RATE SENSITIVE
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
bearing demand
|
|
$ |
7,866 |
|
|
$ |
23,598 |
|
|
$ |
62,929 |
|
|
$ |
62,929 |
|
|
$ |
75,403 |
|
|
$ |
232,725 |
|
|
|
|
|
|
|
|
|
Interest
bearing transaction
|
|
|
23,920 |
|
|
|
- |
|
|
|
9,567 |
|
|
|
9,568 |
|
|
|
4,785 |
|
|
|
47,840 |
|
|
|
- |
|
|
|
|
|
Savings
and money market
|
|
|
151,512 |
|
|
|
- |
|
|
|
60,604 |
|
|
|
60,605 |
|
|
|
30,301 |
|
|
|
303,022 |
|
|
|
- |
|
|
|
|
|
Time
deposits
|
|
|
140,538 |
|
|
|
387,826 |
|
|
|
31,347 |
|
|
|
4,262 |
|
|
|
1,158 |
|
|
|
565,131 |
|
|
|
- |
|
|
|
|
|
Customer
repurchase agreements and fed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
funds
purchased
|
|
|
120,918 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
120,918 |
|
|
|
|
|
|
|
|
|
Other
borrowings
|
|
|
40,000 |
|
|
|
- |
|
|
|
10,000 |
|
|
|
- |
|
|
|
22,150 |
|
|
|
72,150 |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
484,754 |
|
|
$ |
411,424 |
|
|
$ |
174,447 |
|
|
$ |
137,364 |
|
|
$ |
133,797 |
|
|
$ |
1,341,786 |
|
|
$ |
9,459 |
|
|
$ |
1,351,245 |
|
GAP
|
|
$ |
230,251 |
|
|
$ |
(228,613 |
) |
|
$ |
128,796 |
|
|
$ |
54,716 |
|
|
$ |
(74,921 |
) |
|
$ |
110,229 |
|
|
|
|
|
|
|
|
|
Cumulative
GAP
|
|
$ |
230,251 |
|
|
$ |
1,638 |
|
|
$ |
130,434 |
|
|
$ |
185,150 |
|
|
$ |
110,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
gap as percent of total assets
|
|
|
15.39 |
% |
|
|
0.11 |
% |
|
|
8.72 |
% |
|
|
12.38 |
% |
|
|
7.37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes
loans held for sale
|
(2) Non-accrual
loans are included in the over 60 months
category
|
Although NOW and MMA accounts are
subject to immediate repricing, the Bank’s GAP model has incorporated a
repricing schedule to account for a lag in rate changes based on our experience,
as measured by the amount of those deposit rate changes relative to the amount
of rate change in assets.
Capital
Resources and Adequacy
The assessment of capital adequacy
depends on a number of factors such as asset quality, liquidity, earnings
performance, changing competitive conditions and economic forces, and the
overall level of growth. The adequacy of the Company’s current and future
capital needs is monitored by management on an ongoing basis. Management seeks
to maintain a capital structure that will assure an adequate level of capital to
support anticipated asset growth and to absorb potential losses.
The capital position of the Bank
continues to exceed regulatory requirements to be considered well-capitalized
under the definitions promulgated for prompt corrective action purposes. The
capital position of the Company continues to meet the minimum requirements of
the capital guidelines of the Federal Reserve. The primary indicators used by
bank regulators in measuring the capital position are the tier 1 risk-based
capital ratio, the total risk-based capital ratio, and the tier 1 leverage
ratio. Tier 1 capital consists of common and qualifying preferred stockholders’
equity less intangibles. Total risk-based capital consists of tier 1 capital,
qualifying subordinated debt, and a portion of the allowance for credit losses.
Risk-based capital ratios are calculated with reference to risk-weighted assets.
The tier 1 leverage ratio measures the ratio of tier 1 capital to total average
assets for the most recent three month period.
The ability of the Company to continue
to grow is dependent on its earnings and the ability to obtain additional funds
for contribution to the Bank’s capital, through additional borrowing, the sale
of additional common stock, the sale of preferred stock, or through the issuance
of additional qualifying equity equivalents, such as subordinated debt or trust
preferred securities.
The
federal banking regulators have issued guidance for those institutions which are
deemed to have concentrations in commercial real estate
lending. Pursuant to the supervisory criteria contained in the
guidance for identifying institutions with a potential commercial real estate
concentration risk, institutions which have (1) total reported loans for
construction, land development, and other land acquisitions which represent in
total 100% or more of an institution’s total risk-based capital; or (2) total
commercial real estate loans representing 300% or more of the institution’s
total risk-based capital and the institution’s commercial real estate loan
portfolio has increased 50% or more during the prior 36 months are identified as
having potential commercial real estate concentration
risk. Institutions which are deemed to have concentrations in
commercial real estate lending are expected to employ heightened levels of risk
management with respect to their commercial real estate portfolios, and may be
required to hold higher levels of capital. The Company, like many
community banks, has a concentration in commercial real estate
loans. Management has extensive experience in commercial real estate
lending, and has implemented and continues to maintain heightened risk
management procedures, and strong underwriting criteria with respect to its
commercial real estate portfolio. Nevertheless, we may be
required to maintain higher levels of capital as a result of our commercial real
estate concentration, which could require us to obtain additional capital, and
may adversely affect shareholder returns.
Capital
The actual capital amounts and ratios
for the Company and Bank as of March 31, 2009 and March 31, 2008 are presented
in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
Capital
|
|
|
To
Be Well
|
|
(dollars
in thousands)
|
|
Company
|
|
|
Bank
|
|
|
Adequacy
|
|
|
Capitalized
Under
|
|
|
|
Actual
|
|
|
|
|
|
Actual
|
|
|
|
|
|
Purposes
|
|
|
Prompt
Corrective Action
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Ratio
|
|
|
Provision
Ratio *
|
|
As
of March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk-weighted assets
|
|
$ |
163,608 |
|
|
|
12.43 |
% |
|
$ |
143,731 |
|
|
|
10.96 |
% |
|
|
8.0 |
% |
|
|
10.0 |
% |
Tier
1 capital to risk-weighted assets
|
|
|
134,978 |
|
|
|
10.26 |
% |
|
|
127,313 |
|
|
|
9.71 |
% |
|
|
4.0 |
% |
|
|
6.0 |
% |
Tier
1 capital to average assets (leverage)
|
|
|
134,978 |
|
|
|
9.06 |
% |
|
|
127,313 |
|
|
|
8.56 |
% |
|
|
3.0 |
% |
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk-weighted assets
|
|
$ |
90,880 |
|
|
|
10.95 |
% |
|
$ |
86,437 |
|
|
|
10.48 |
% |
|
|
8.0 |
% |
|
|
10.0 |
% |
Tier
1 to risk-weighted assets
|
|
|
82,147 |
|
|
|
9.90 |
% |
|
|
77,734 |
|
|
|
9.42 |
% |
|
|
4.0 |
% |
|
|
6.0 |
% |
Tier
1 capital to average assets (leverage)
|
|
|
82,147 |
|
|
|
9.55 |
% |
|
|
77,734 |
|
|
|
9.11 |
% |
|
|
3.0 |
% |
|
|
5.0 |
% |
* Applies to Bank only
Bank and
holding company regulations, as well as Maryland law, impose certain
restrictions on dividend payments by the Bank, as well as restricting extension
of credit and transfers of assets between the Bank and the
Company. At March 31, 2009, subject to prior approval by the Maryland
Commissioner of Financial Regulation, the Bank could pay dividends to the parent
to the extent of its earnings so long as it maintained required capital
ratios.
Please
refer to Item 2 of this report, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations”, under the caption
“Asset/Liability Management and Quantitative and Qualitative Disclosure about
Market Risk”.
Item
4. Controls and Procedures
The Company’s management, under the
supervision and with the participation of the Company’s Chief Executive Officer
and Chief Financial Officer, evaluated as of the last day of the period covered
by this report the effectiveness of the operation of the Company’s disclosure
controls and procedures, as defined in Rule 13a-14 under the Securities and
Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company’s disclosure controls and
procedures were effective. There were no changes in the Company’s internal
controls over financial reporting (as defined in Rule 13a-15 under the
Securities Act of 1934) during the quarter ended March 31, 2009 that have
materially affected, or are reasonably likely to materially affect the Company’s
internal control over financial reporting.
PART
II - OTHER INFORMATION
From time to time the Company may
become involved in legal proceedings. At the present time there are no
proceedings which the Company believes will have an adverse impact on the
financial condition or earnings of the Company.
There have been no material changes as
of March 31, 2009 in the risk factors from those disclosed in the Company’s
Annual Report on Form 10-K for the year ended December 31,
2008.
(a)
Sales of Unregistered
Securities.
|
None
|
(b)
Use of
Proceeds.
|
Not
Applicable
|
(c)
Issuer Purchases of
Securities.
|
None
|
Item 5 -
Other
Information
None
(a) Required 8-K
Disclosures None
(b) Changes in Procedures for Director
Nominations None
Exhibit No.
|
Description of Exhibit
|
3.1
|
Certificate
of Incorporation of the Company, as amended (1)
|
3.2
|
Articles
Supplementary to the Articles of Incorporation for the Series A Preferred
Stock (2)
|
3.3
|
Bylaws
of the Company (3)
|
4
|
Warrant
to Purchase Common Stock
|
10.1
|
1998
Stock Option Plan (4)
|
10.2
|
Amended
and Restated Employment Agreement between Martha Foulon-Tonat and the Bank
(5)
|
10.3
|
Amended
and Restated Employment Agreement between James H. Langmead and the Bank
(6)
|
10.4
|
Amended
and Restated Employment Agreement between Thomas D. Murphy and the Bank
(7)
|
10.5
|
Amended
and Restated Employment Agreement between Ronald D. Paul and the Company
(8)
|
10.6
|
Amended
and Restated Employment Agreement between Susan G. Riel and the Bank
(9)
|
10.7
|
Director’s
Fee Agreement between Leonard L. Abel and the Company
(10)
|
10.8
|
2006
Stock Plan (11)
|
11
|
Statement
Regarding Computation of Per Share Income
|
|
See
Note 8 of the Notes to Consolidated Financial
Statements
|
21
|
Subsidiaries
of the Registrant
|
31.1
|
Certification
of Ronald D. Paul
|
31.2
|
Certification
of Susan G. Riel
|
31.3
|
Certification
of Michael T. Flynn
|
31.4
|
Certification
of James H. Langmead
|
32.1
|
Certification
of Ronald D. Paul
|
32.2
|
Certification
of Susan G. Riel
|
32.3
|
Certification
of Michael T. Flynn
|
32.4
|
Certification
of James H.
Langmead
|
_____________________________
(1)
|
Incorporated
by reference to the exhibit of the same number to the Company’s Current
Report on Form 8-K filed on July 16,
2008.
|
(2)
|
Incorporated
by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K
filed on December 8, 2008.
|
(3)
|
Incorporated
by reference to the exhibit 3.2 to the Company’s Current Report on Form
8-K filed on October 30, 2007.
|
(4)
|
Incorporated
by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-KSB
for the year ended December 31,
1998.
|
(5)
|
Incorporated
by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K
filed on December 8, 2008.
|
(6)
|
Incorporated
by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K
filed on December 8, 2008.
|
(7)
|
Incorporated
by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K
filed on December 8, 2008.
|
(8)
|
Incorporated
by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K/A
filed on December 22, 2008.
|
(9)
|
Incorporated
by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K
filed on December 8, 2008.
|
(10)
|
Incorporated
by reference to exhibit of the same number to the Company’s Annual Report
on Form 10-K for the year ended December 31,
2003.
|
(11)
|
Incorporated
by reference to Exhibit 4 to the Company’s Registration Statement on Form
S-8 (No. 333-135072)
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
|
EAGLE
BANCORP, INC.
|
|
|
|
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Date:
May 11, 2009
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By: /s/
Ronald D. Paul
|
|
Ronald
D. Paul, Chairman, President
and Chief Executive Officer of the Company
|
|
|
|
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Date:
May 11, 2009
|
By: /s/ James
H. Langmead
|
|
James
H. Langmead, Executive Vice President and Chief Financial
Officer of the
Company
|