U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
/X/ Annual report under section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended June 30, 2004.
/ / Transition report under section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period
from ____________ to ______________.
Commission file number: 0-29687
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Eagle Bancorp
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(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
United States 81-0531318
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(State or other jurisdiction (I.R.S. Employer
of incorporation Identification No.)
or organization)
1400 Prospect Avenue, Helena, MT 59601
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (406) 442-3080
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www.americanfederalsavingsbank.com
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Securities to be registered under Section 12(b) of the Act:
Title of class Name of exchange on which registered
None N/A
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Securities to be registered under Section 12(g) of the Act:
Common stock, par value $0.01 per share
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
Issuer's revenues for its most recent fiscal year are $12,708,000
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The aggregate market value of the common stock held by non-affiliates, computed
by reference to the closing price as of September 1, 2004, was $13,283,361.
As of September 1, 2004, there were 1,190,372 shares of common stock issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the proxy statements for the annual meeting of
stockholders for the fiscal years ended June 30, 2004 and June 30, 2003 and the
Registration Statement on Form SB-2 filed on December 20, 1999 are incorporated
by reference in Part III hereof.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
YES NO X
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TABLE OF CONTENTS
ITEM PAGE
NO. NO.
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PART I
1 Description of Business.............................................................. 1
2 Description of Business Properties................................................... 22
3 Legal Proceedings.................................................................... 23
4 Submission of Matters to a Vote of Security Holders.................................. 23
PART II
5 Market for Common Equity, Related Stockholder Matters and Small Business
Issuers' Purchases of Equity Securities........................................... 23
6 Management's Discussion and Analysis................................................. 24
7 Financial Statements and Supplementary Data.......................................... 30
8 Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.............................................................. 30
8A Controls and Procedures.............................................................. 30
PART III
9 Directors and Executive Officers of the Registrant................................... 31
10 Executive Compensation............................................................... 31
11 Security Ownership of Certain Beneficial Owners and Management....................... 31
12 Certain Relationships and Related Transactions....................................... 31
13 Exhibits List including Consolidated Statements of Financial Condition
And Reports on Form 8-K........................................................... 31
14 Principal Accountant Fees and Services............................................... 31
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Eagle Bancorp ("Eagle" or "the Company" ) a federally chartered stock holding
company holds 100% of the Stock of American Federal Savings Bank ("American
Federal" or "the Bank"). Its charter was approved on April 4, 2000, when it
became the mid-tier stock holding company for the Bank, a federally chartered
stock savings bank headquartered in Helena, Montana. Eagle Bancorp's principal
business is to hold the capital stock of American Federal. Upon the
reorganization and conversion to stock form of American Federal Savings Bank,
Eagle Bancorp issued 575,079 shares of its common stock, par value $.01 per
share (the "Common Stock") to the public at a price of $8 per share. This
represents approximately 47% of the issued and outstanding shares of the Common
Stock. The remaining 648,493 shares of the Common Stock are held by Eagle
Financial MHC, Eagle Bancorp's mutual holding company.
American Federal was founded in 1922 as a Montana chartered building and loan
association and has conducted operations in Helena since that time. In 1975, the
Bank adopted a federal thrift charter. We currently have four full service
offices and one satellite branch. We also have five automated teller machines
located in our market area and we participate in the CashCard ATM network.
BUSINESS STRATEGY
Since our founding in Helena in 1922, we have operated in the southcentral
portion of Montana. Since the advent of NOW accounts and low and no cost
checking or other transaction accounts, we have sought to operate in a fashion
similar to a commercial bank offering these kinds of deposits and changing our
emphasis on home mortgage lending by broadening and diversifying the kind of
loans we offer. As a result of these efforts, we provide full retail banking
services, including one- to four-family residential mortgage loans, home equity
loans, lines of credit, consumer loans, commercial real estate loans and
commercial loans for businesses as well as certificates of deposit, checking
accounts, NOW accounts, savings accounts and money market accounts.
We attract deposits from the general public and use these deposits primarily to
originate loans and to purchase investment and mortgage-backed and other
securities. The principal sources of funds for lending and investing activities
are deposits, Federal Home Loan Bank advances, the repayment, sale and maturity
of loans and sale and maturity of securities. The principal sources of income
are interest on loans and investments. The principal expense is interest paid on
deposits and Federal Home Loan Bank advances.
MARKET AREA
From our headquarters in Helena, Montana, we operate four full service offices,
including our main office, and one satellite branch. Our satellite branch is
located in Helena and our other full service branches are located in Bozeman
(opened 1980), Butte (opened 1979) and Townsend (opened 1979), Montana.
Montana is one of the largest states in terms of land mass but ranks as one of
the least populated states. As of the 2000 census it had a population of
902,000. Helena, where we are headquartered, is the county seat of Lewis and
Clark County, which has a population of approximately 55,700 and is located
within 120 miles of four of Montana's other five largest cities: Missoula, Great
Falls, Bozeman and Butte. It is approximately midway between Yellowstone and
Glacier National Parks. Helena is also Montana's state capital. Its economy has
shown slow growth, in terms of both employment and income. State government and
the numerous offices of the federal government comprise the largest employment
sector. Helena also has significant employment in the service industries.
Specifically, it has evolved into a central health care center with employment
in the medical and the supporting professions as well as the medical insurance
industry. The local economy is also dependent to a lesser extent upon ranching
and agriculture. These have been more cyclical in nature and remain vulnerable
to severe weather conditions, increased competition, both domestic and
international, as well as commodity prices.
1
Bozeman is approximately 95 miles southeast of Helena. It is located in Gallatin
County, which has a population of approximately 67,800. Bozeman is home to
Montana State University and has achieved its recent growth in part due to the
growth of the University as well as the increased tourism for resort areas in
and near Bozeman. Agriculture, however, remains an important part of Bozeman's
economy. Bozeman has also become an attractive location for retirees, primarily
from the West Coast, owing to its many winter and summer recreational
opportunities and the presence of the University. Residential construction in
Bozeman has increased more rapidly than such construction in Helena and the
other cities in which we operate.
Butte, Montana is approximately 64 miles southwest of Helena. Butte and the
surrounding Silver-Bow County have a population of approximately 34,600. Butte's
population has declined as a result of the decline in the energy and
telecommunications industries, which had afforded many higher paying jobs to
residents of Butte and Silver-Bow County.
Townsend is the smallest community in which we operate. It has a population of
about 2,000. Many of its residents commute to other Montana locations for work.
Other employment in Townsend is primarily in agriculture and services. Townsend
is approximately 32 miles southeast of Helena.
COMPETITION
We face strong competition in our primary market area for the attraction of
retail deposits and the origination of loans. Historically, Montana was a unit
banking state. This means that the ability of Montana state banks to create
branches was either prohibited or significantly restricted. As a result of unit
banking, Montana has a significant number of independent financial institutions
serving a single community in a single location. While the state's population is
approximately 902,000 people, there are approximately 70 credit unions in
Montana as well as three federally chartered thrift institutions, and 80
commercial banks as of December 31, 2003. Our most direct competition for
depositors has historically come from locally owned and out-of-state commercial
banks, thrift institutions and credit unions operating in our primary market
area. The number of such competitor locations has increased significantly in
recent years. Our competition for loans also comes from banks, thrifts and
credit unions in addition to mortgage bankers and brokers. Our principal market
areas can be characterized as markets with moderately increasing incomes, low
unemployment, increasing wealth (particularly in the growing resort areas such
as Bozeman), and moderate population growth.
LENDING ACTIVITIES
General.
American Federal Savings Bank primarily originates one- to four-family
residential real estate loans and, to a lesser extent commercial real estate
loans, real estate construction loans, home equity loans, consumer loans and
commercial loans. Commercial real estate loans include loans on multi-family
dwellings, loans on nonresidential property and loans on developed and
undeveloped land. Home equity loans include loans secured by the borrower's
primary residence. Typically, the property securing such loans is subject to a
prior lien. Consumer loans consist of loans secured by collateral other than
real estate, such as automobiles, recreational vehicles and boats. Personal
loans and lines of credit are made on deposits held by the Bank and on an
unsecured basis. Commercial loans consist of business loans and lines of credit
on a secured and unsecured basis.
Loan Portfolio Composition.
The following table analyzes the composition of the Bank's loan portfolio by
loan category at the dates indicated.
2
AT JUNE 30,
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2004 2003
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(DOLLARS IN THOUSANDS)
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ -----
First mortgage loans:
Residential mortgage (1-4 family)(1) $ 49,045 52.74% $ 45,405 48.24%
Commercial real estate 9,336 10.04% 18,819 19.99%
Real estate construction 5,102 5.48% 3,802 4.04%
-------- ------- -------- ------
Total first mortgage loans 63,483 68.26% 68,026 72.27%
-------- ------- -------- ------
Other loans:
Home equity 14,874 15.99% 13,792 14.65%
Consumer 9,802 10.54% 9,278 9.86%
Commercial 4,840 5.21% 3,034 3.22%
-------- ------- -------- ------
Total other loans 29,516 31.74% 26,104 27.73%
-------- ------- -------- ------
Total loans 92,999 100.00% 94,130 100.00%
-------- ======= -------- ======
Less:
Deferred loan fees: (86) (64)
Allowance for loan losses 628 673
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Total loans, net $ 92,457 $ 93,521
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(1) Excludes loans held for sale.
Fee Income.
American Federal Savings Bank receives lending related fee income from a variety
of sources. Its principal source of this income is from the origination and
subsequent servicing of sold mortgage loans. Fees generated from mortgage loan
servicing, which generally consists of collecting mortgage payments, maintaining
escrow accounts, disbursing payments to investors and foreclosure processing for
loans held by others, were $544,000 and $436,000 for the years ended June 30,
2004 and 2003, respectively. A write-down of the mortgage servicing rights in
the amount of $735,000 was added to the valuation allowance in 2003. Of that
amount $696,000 was taken back into income in 2004 reflecting increased interest
rates and lower payoffs of outstanding loans serviced. These amounts are netted
against mortgage loan servicing fees in the Company's income statement. Other
loan related fee income for contract collections, late charges, credit life
commissions and credit card fees were $89,000 and $97,000 for the years ended
June 30, 2004 and 2003, respectively.
Loan Maturity Schedule.
The following table sets forth the estimated maturity of the loan portfolio of
the Bank at June 30, 2004. Scheduled principal repayments of loans do not
necessarily reflect the actual life of such assets. The average life of a loan
is typically substantially less than its contractual terms because of
prepayments. In addition, due on sale clauses on loans generally give American
Federal Savings Bank the right to declare loans immediately due and payable in
the event, among other things, that the borrower sells the real property,
subject to the mortgage, and the loan is not paid off. All mortgage loans are
shown to be maturing based on the date of the last payment required by the loan
agreement, except as noted. Loans having no stated maturity, those without a
scheduled payment, demand loans and delinquent loans, are shown as due within
six months.
3
MORE THAN MORE THAN
WITHIN 6 6 TO 12 1 YEAR TO 2 YEARS TO OVER 5
MONTHS MONTHS 2 YEARS 5 YEARS YEARS TOTAL
------ ------ ------- ------- ----- -----
(IN THOUSANDS)
Residential mortgage (1-4 family)(1) $ - $ 53 $ 406 $ 3,357 $ 46,666 $ 50,482
Commercial real estate 29 498 342 1,231 7,236 9,336
Real estate construction - 5,102 - - - 5,102
Home equity 307 1,289 733 8,305 4,240 14,874
Consumer 236 615 1,054 6,282 1,615 9,802
Commercial - 1,752 146 758 2,184 4,840
------ ------- -------- -------- --------- ---------
Total Loans (1) $ 572 $ 9,309 $ 2,681 $ 19,933 $ 61,941 $ 94,436
====== ======= ======== ======== ========= =========
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(1) Includes loans held for sale.
The following table sets forth the dollar amount of all loans, at June 30, 2004,
due after June 30, 2005, which have fixed interest rates and which have floating
or adjustable interest rates:
FIXED ADJUSTABLE TOTAL
----- ---------- -----
(DOLLARS IN THOUSANDS)
Residential mortgage (1-4 family) $ 45,784 $ 4,645 $ 50,429
Commercial real estate 8,809 - 8,809
Real estate construction - - -
Home equity 6,941 6,337 13,278
Consumer 8,438 513 8,951
Commercial 2,313 775 3,088
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Total (1) $ 72,285 $ 12,270 $ 84,555
========= ========= =========
Percent of total 85.49% 14.51% 100.00%
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(1) Due after June 30, 2005.
4
The following table sets forth information with respect to our loan
originations, purchases and sales activity for the periods indicated.
ENDED JUNE 30,
2004 2003
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(IN THOUSANDS)
Net loans receivable (1) at beginning
of period $100,430 $106,975
Loans originated:
Residential mortgage (1-4 family) 84,800 132,481
Commercial real estate 3,261 9,352
Real estate construction 11,737 9,315
Home equity 13,236 12,437
Consumer 10,866 9,277
Commercial loans 5,351 3,574
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Total loans originated 129,251 176,436
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Loans sold:
Whole loans 66,564 113,652
Participations 9,820 607
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Total loans sold 76,384 114,259
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Principal repayments and loan refinancings 59,471 68,937
Deferred loan fees decrease (increase) 22 185
Allowance for loans decrease (increase) 45 30
Net loan increase (decrease) (6,537) (6,545)
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Net loans receivable (1) at end of period $93,893 $100,430
======= ========
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(1) Includes loans held for sale.
Residential Lending
The Bank's primary lending activity consists of the origination of
one-to-four-family residential mortgage loans secured by property located in the
Bank's market area. Approximately 52.74% of the bank's loans as of June 30, 2004
were comprised of such loans. American Federal generally originates one- to
four-family residential mortgage loans in amounts up to 80% of the lesser of the
appraised value or the selling price of the mortgaged property without requiring
private mortgage insurance. A mortgage loan originated by the Bank, whether
fixed rate or adjustable rate, can have a term of up to 30 years. The Bank holds
substantially all of its adjustable rate and its 8, 10 and 12 year fixed rate
loans in portfolio. Adjustable rate loans limit the periodic interest rate
adjustment and the minimum and maximum rates that may be charged over the term
of the loan. The Bank's fixed rate 15-year and 20-year loans are held in
portfolio or sold in the secondary market depending on market conditions. All 30
year fixed rate loans are sold in the secondary market. The volume of loan sales
is dependent on the volume, type and term of loan originations.
5
The Bank obtains a significant portion of its noninterest income from servicing
loans sold. The Bank offers many of the fixed rate loans it originates for sale
in the secondary market on a servicing retained basis. This means that we
process the borrower's payments and send them to the purchaser. The retention of
servicing enables the Bank to increase fee income and maintain a relationship
with the borrower. Servicing income was $544,000 (before adjustments to the
valuation allowance on Mortgage Servicing Rights) for the year ended June 30,
2004. At June 30, 2004, American Federal Savings Bank had $215.53 million in
loans sold with servicing retained. American Federal Savings Bank does not
ordinarily purchase home mortgage loans from other financial institutions.
Property appraisals on real estate securing the Bank's single-family residential
loans are made by state certified and licensed independent appraisers who are
approved annually by the board of directors. Appraisals are performed in
accordance with applicable regulations and policies. American Federal Savings
Bank generally obtains title insurance policies on all first mortgage real
estate loans originated. On occasion, refinancings of mortgage loans are
approved using title reports instead of title insurance. Title reports are also
allowed on home equity loans. Borrowers generally remit funds with each monthly
payment of principal and interest, to a loan escrow account from which American
Federal Savings Bank makes disbursements for such items as real estate taxes and
hazard and mortgage insurance premiums as they become due.
Home Equity Loans.
American Federal Savings Bank also originates home equity loans. These loans are
secured by the borrowers' primary real estate, but are typically subject to a
prior lien, which may or may not be held by the Bank. At June 30, 2004, $14.87
million or 15.99% of our total loans, were home equity loans. Borrowers may use
the proceeds from the Bank's home equity loans for many purposes, including home
improvement, debt consolidation, or other purchasing needs. The Bank offers
fixed rate, fixed payment home equity loans as wells as variable rate home
equity lines of credit. Fixed rate home equity loans typically have terms of no
longer than fifteen years.
Although home equity loans are secured by real estate, they carry a greater risk
than first lien residential mortgages because of the existence of a prior lien
on the property securing the loan, as well as the flexibility the borrower has
with respect to the loan proceeds. American Federal Savings Bank attempts to
minimize this risk by maintaining conservative underwriting policies on such
loans. We generally make home equity loans for up to only 85% of appraised value
of the underlying real estate collateral, less the amount of any existing prior
liens on the property securing the loan.
Commercial Real Estate.
American Federal Savings Bank originates commercial real estate mortgage loans,
including both developed and undeveloped land loans, and loans on multi-family
dwellings. Commercial real estate loans make up 10.04% of the Bank's total loan
portfolio, or $9.34 million at June 30, 2004. The majority of these loans are
non-residential commercial real estate loans. American Federal Savings Bank's
commercial real estate mortgage loans are primarily permanent loans secured by
improved property such as office buildings, retail stores, commercial warehouses
and apartment buildings. The terms and conditions of each loan are tailored to
the needs of the borrower and based on the financial strength of the project and
any guarantors. Generally, commercial real estate loans originated by the Bank
will not exceed 75% of the appraised value or the selling price of the property,
whichever is less. The average loan size is approximately $128,000 and is
typically made with fixed rates of interest with five to 15 year maturities.
Upon maturity, the loan is repaid or the terms and conditions are renegotiated.
Generally, all originated commercial real estate loans are within the market
area of the Bank and all are within the state of Montana. American Federal
Savings Bank's largest single commercial real estate loan had a balance of
approximately $1,556,000 on June 30, 2004, and was secured by a commercial
building. This loan contains a 90 percent government guaranty under the USDA
Rural Development Program.
Real Estate Construction Lending.
American Federal Savings Bank also lends funds for the construction of one- to
four-family homes. Real estate construction loans are made both to individual
homeowners for the construction of their primary residence and to a lesser
extent, to local builders for the construction of pre-sold houses or houses that
are being built for sale in the future. Real estate construction loans accounted
for $5.10 million or 5.48% of American Federal's loan portfolio at June 30,
2004.
6
Consumer Loans.
As part of its strategy to invest in higher yielding shorter term loans,
American Federal Savings Bank has made significant efforts to grow its consumer
lending portfolio. This portfolio includes personal loans secured by collateral
other than real estate, unsecured personal loans and lines of credit, and loans
secured by deposits held by the Bank. As of June 30, 2004, consumer loans
totaled $9.80 million or 10.54% of the Bank's total loan portfolio. These loans
consist primarily of auto loans, RV loans, boat loans, personal loans and credit
lines and deposit account loans. Consumer loans are originated in the Bank's
market area and generally have maturities of up to 7 years. For loans secured by
savings accounts, American Federal Savings Bank will lend up to 90% of the
account balance on single payment loans and up to 100% for monthly payment
loans.
Consumer loans have a shorter term and generally provide higher interest rates
than residential loans. Consumer loans can be helpful in improving the spread
between average loan yield and cost of funds and at the same time improve the
matching of the maturities of rate sensitive assets and liabilities. Increasing
its consumer loans has been a major part of the Bank's strategy of operating
more like a commercial bank than a traditional savings bank.
The underwriting standards employed by American Federal Savings Bank for
consumer loans include a determination of the applicant's credit history and an
assessment of the applicant's ability to meet existing obligations and payments
on the proposed loan. The stability of the applicant's monthly income may be
determined by verification of gross monthly income from primary employment, and
additionally from any verifiable secondary income. Creditworthiness of the
applicant is of primary consideration; however, the underwriting process also
includes a comparison of the value of the collateral in relation to the proposed
loan amount.
Commercial Loans.
Commercial loans amounted to $4.84 million, or 5.21% of the Bank's total loan
portfolio at June 30, 2004. American Federal Savings Bank's commercial loans are
traditional business loans and are not secured by real estate. Such loans may be
structured as unsecured lines of credit or may be secured by inventory, accounts
receivable or other business assets. While the commercial loan portfolio amounts
to only 5.21% of the total portfolio at June 30, 2004, American Federal Savings
Bank intends to increase such lending by focusing on market segments which it
has not previously emphasized, such as business loans to doctors, lawyers,
architects and other professionals as well as to small businesses within its
market area. Our management believes that this strategy provides opportunities
for growth, without significant additional cost outlays for staff and
infrastructure.
Commercial loans of this nature usually involve greater risk than 1-4 family
residential mortgage loans. The collateral we receive is typically related
directly to the performance of the borrower's business which means that
repayment of commercial loans is dependent on the successful operations and
income stream of the borrower's business. Such risks can be significantly
affected by economic conditions. In addition, commercial lending generally
requires substantially greater oversight efforts compared to residential real
estate lending.
Loans to One Borrower.
Under federal law, savings institutions have, subject to certain exemptions,
lending limits to one borrower in an amount equal to the greater of $500,000 or
15% of the institution's unimpaired capital and surplus. As of June 30, 2004,
our largest aggregation of loans to one borrower was $3,926,121, consisting of
one construction loan secured primarily by commercial real estate. After
deducting the participation sold portion of $1,676,121 from the outstanding
balance, this was well below our federal legal lending limit to one borrower of
approximately $3.57 million at such date. At June 30, 2004, this loan was
current, and was paid in full in early August 2004.
Loan Solicitation and Processing.
Our customary sources of mortgage loan applications include repeat customers,
walk-ins, and referrals from home builders and real estate brokers. We also
advertise in local newspapers and on local radio and television. Our branch
managers and loan officers located at our headquarters and in branches, have
authority to approve certain types of loans when presented with a completed
application. Other loans must be approved at our main offices as disclosed
herein. No loan consultants or loan brokers are currently used by us for either
residential or commercial lending activities.
After receiving a loan application from a prospective borrower, a credit report
and verifications are ordered to confirm specific information relating to the
loan applicant's employment, income and credit standing. When required by our
policies, an appraisal of the real estate intended to secure the proposed loan
is undertaken by an independent fee appraiser. In connection with the loan
approval process, our staff analyze the loan applications and the property
involved. Officers and branch managers are granted lending authority based on
the kind of loan types where they
7
possess expertise and their level of experience. We have established a series of
loan committees to approve any loans which may exceed the lending authority of
particular officers or branch managers. A quorum (four) of the board of
directors is required for approval of any loan, or aggregation of loans to a
single borrower, more than $950,000.
Loan applicants are promptly notified of the decision by a letter setting forth
the terms and conditions of the decision. If approved, these terms and
conditions include the amount of the loan, interest rate basis, amortization
term, a brief description of real estate to be mortgaged, tax escrow and the
notice of requirement of insurance coverage to be maintained. We generally
require title insurance on first mortgage loans and fire and casualty insurance
on all properties securing loans, which insurance must be maintained during the
entire term of the loan.
Loan Commitments.
We generally provide commitments to fund fixed and adjustable-rate single-family
mortgage loans for periods up to 60 days at a specified term and interest rate.
The total amount of our commitments to extend credit as of June 30, 2004, was
approximately $3.30 million.
NON-PERFORMING LOANS AND PROBLEM ASSETS
Collection Procedures
Generally, our collection procedures provide that when a loan is 15 or more days
delinquent, the borrower is notified with a past due notice. If the loan becomes
30 days delinquent, the borrower is sent a written delinquent notice requiring
payment. If the delinquency continues, subsequent efforts are made to contact
the delinquent borrower, including face to face meetings and counseling to
resolve the delinquency. All collection actions are undertaken with the
objective of compliance with the Fair Debt Collection Act.
For mortgage loans and home equity loans, if the borrower is unable to cure the
delinquency or reach a payment agreement, we will institute foreclosure actions.
If a foreclosure action is taken and the loan is not reinstated, paid in full or
refinanced, the property is sold at judicial sale at which we may be the buyer
if there are no adequate offers to satisfy the debt. Any property acquired as
the result of foreclosure or by deed in lieu of foreclosure is classified as
real estate owned until such time as it is sold or otherwise disposed of. When
real estate owned is acquired, it is recorded at the lower of the unpaid
principal balance of the related loan or its fair market value less estimated
selling costs. The initial recording of any loss is charged to the allowance for
loan losses. As of June 30, 2004, American Federal Savings Bank had no real
estate owned.
Loans are reviewed on a quarterly basis and are placed on non-accrual status
when they are more than 90 days delinquent. Loans may be placed on non-accrual
status at any time if, in the opinion of management, the collection of
additional interest is doubtful. Interest accrued and unpaid at the time a loan
is placed on non-accrual status is charged against interest income. Subsequent
payments are either applied to the outstanding principal balance or recorded as
interest income, depending on the assessment of the ultimate collectibility of
the loan. At June 30, 2004, we had $497,000 of loans that were non-performing
and held on non-accrual status.
8
Delinquent Loans.
The following table provides information regarding the Bank's loans that are
delinquent 30 to 89 days at June 30, 2004:
PERCENTAGE
OF TOTAL
DELINQUENT
NUMBER AMOUNT LOANS
------ ------ -----------
(Dollars in thousands)
Loan Type:
Mortgage (1-4 family) 9 $ 581 52.34%
Real estate construction - - 0.00%
Commercial real estate 3 114 10.27%
Home equity 7 191 17.21%
Consumer 32 182 16.40%
Commercial 1 42 3.78%
--- -------- -------
Total 52 $ 1,110 100.00%
=== ======== =======
Non-Performing Assets.
The following table sets forth information regarding American Federal Savings
Bank's non-performing assets as of the dates indicated. The Bank does not have
any troubled debt restructurings within the meaning of the Statement of
Financial Accounting Standards No. 114.
AT JUNE 30,
----------------------------
2004 2003
---- ----
(DOLLARS IN THOUSANDS)
Non-accrual loans $ 497 $ 610
Accruing loans delinquent 90 days or more 125 198
Real estate owned - 70
--------- ---------
Total $ 622 $ 878
========= =========
Total non-performing loans as a percentage
of total loan portfolio 0.67% 0.94%
Percentage of total assets 0.31% 0.43%
The decrease in non-accrual loans during the year ended June 30, 2004, was
attributable primarily to two residential mortgage loans being removed from
non-accrual status. During the year ended June 30, 2004, the Bank had no
foreclosures.
During the year ended June 30, 2004, approximately $39,000 of interest would
have been recorded on loans accounted for on a non-accrual basis if such loans
had been current according to the original loan agreements for the entire
period. This amount was not included in the Bank's interest income for the
period.
Classified Assets.
Management, in compliance with regulatory guidelines, conducts an internal loan
review program, whereby loans are placed or classified in categories depending
upon the level of risk of nonpayment or loss. These categories are special
mention, substandard, doubtful or loss. When a loan is classified as substandard
or doubtful, management is required to establish an allowance for loan losses in
an amount that is deemed prudent. When management classifies a loan as a loss
asset, a reserve equal to 100% of the loan balance is required to be established
or the loan is required to be charged-off. The allowance for loan losses is
composed of an allowance for both inherent risk associated with lending
activities and specific problem assets.
9
Management's evaluation of the classification of assets and the adequacy of the
allowance for loan losses is reviewed by the Board on a regular basis and by the
regulatory agencies as part of their examination process. In addition, each loan
that exceeds $200,000 and each group of loans that exceeds $200,000 is monitored
more closely. The following table reflects our classified assets.
AT JUNE 30,
--------------------
2004 2003
---- ----
(IN THOUSANDS)
Residential mortgages
(1-4 family):
Special mention $ - $ -
Substandard 199 606
Doubtful - -
Loss - -
Commercial Real Estate and Land:
Special mention - 257
Substandard 86 91
Doubtful - -
Loss - -
Home equity loans:
Special mention - -
Substandard 232 264
Doubtful - -
Loss - 4
Consumer loans:
Special mention - -
Substandard 43 13
Doubtful - -
Loss 23 9
Commercial loans:
Special mention - 10
Substandard 317 249
Doubtful - -
Loss - -
Real estate owned/repossessed property
Special mention - -
Substandard 15 70
Doubtful - -
Loss 9 -
--------- ---------
Total classified loans and
real estate owned $ 924 $ 1,573
========= =========
Allowance for Loan Losses and Real Estate Owned.
The Bank segregates its loan portfolio for loan losses into the following broad
categories: residential mortgages (1-4 family), commercial real estate, real
estate construction, commercial loans, home equity loans and consumer loans. The
Bank provides for a general allowance for losses inherent in the portfolio by
the above categories, which consists of two components. General loss percentages
are calculated based on historical analyses and other factors. A supplemental
portion of the allowance is calculated for inherent losses which probably exist
as of the evaluation date even though they might not have been identified by the
more objective processes used. This is due to the risk of error and/or inherent
imprecision in the process. This portion of the allowance is particularly
subjective and requires judgments based on qualitative factors which do not lend
themselves to exact mathematical calculations such as: trends in delinquencies
and non-accruals; trends in volume; terms and portfolio mix; new credit
products; changes in lending policies and procedures; changes in the outlook for
the local, regional and national economy; and peer group comparisons.
At least quarterly, the management of the Bank evaluates the need to establish
reserves against losses on loans and other assets based on estimated losses on
specific loans and on any real estate owned when a finding is made that a loss
is
10
estimable and probable. Such evaluation includes a review of all loans for which
full collectibility may not be reasonably assured and considers; among other
matters; the estimated market value of the underlying collateral of problem
loans; prior loss experience; economic conditions; and overall portfolio
quality.
Provisions for losses are charged against earnings in the period they are
established. We had $628,000 in allowances for loan losses at June 30, 2004.
While we believe we have established our existing allowance for loan losses in
accordance with generally accepted accounting principles, there can be no
assurance that regulators, in reviewing our loan portfolio, will not request
that we significantly increase our allowance for loan losses, or that general
economic conditions, a deteriorating real estate market, or other factors will
not cause us to significantly increase our allowance for loan losses, therefore
negatively affecting our financial condition and earnings.
In making loans, we recognize that credit losses will be experienced and that
the risk of loss will vary with, among other things, the type of loan being
made, the creditworthiness of the borrower over the term of the loan and, in the
case of a secured loan, the quality of the security for the loan.
It is our policy to review our loan portfolio, in accordance with regulatory
classification procedures, on at least a quarterly basis.
The following table sets forth information with respect to our allowance for
loan losses at the dates indicated:
FOR THE YEARS ENDED
JUNE 30,
-----------------------------
2004 2003
------------ ----------
(DOLLARS IN THOUSANDS)
Balance at beginning of period $ 673 $ 703
----------- ----------
Loans charged-off (45) (37)
Recoveries 9 7
----------- ----------
Net loans charged-off (36) (30)
Provision for possible loan losses - -
Transfer to repossessed property reserve (9) -
----------- ----------
Balance at end of period $ 628 $ 673
=========== ==========
Allowance for loan losses to total loans 0.68% 0.72%
Allowance for loan losses to total non-
performing loans 100.96% 76.65%
Net recoveries (charge-offs) to average loans
outstanding during the period (0.04)% (0.03)%
11
The following table presents our allocation of the allowance for loan losses by
loan category and the percentage of loans in each category to total loans at the
periods indicated.
2004 2003
---------------------------------------- --------------------------------------------
(DOLLARS IN THOUSANDS)
PERCENTAGE LOANS IN PERCENTAGE LOANS IN
OF ALLOWANCE EACH CATEGORY OF ALLOWANCE EACH CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------- ------------ ---------- ------ ------------ --------------
First Mortgage Loans:
Residential mortgage (1-4
family) $ 50 7.96% 52.74% $ 90 13.37% 48.24%
Commercial real estate 262 41.72% 10.04% 289 42.94% 19.99%
Real estate construction 4 0.64% 5.48% 16 2.38% 4.04%
------ ------ ------ ------ ------ ------
Total mortgage loans 316 50.32% 68.26% 395 58.69% 72.27%
------ ------ ------ ------ ------ ------
Other loans:
Home equity 141 22.45% 15.99% 149 22.14% 14.65%
Consumer 85 13.54% 10.54% 64 9.51% 9.86%
Commercial 86 13.69% 5.21% 65 9.66% 3.22%
------ ------ ------ ------ ------ ------
Total other loans 312 49.68% 31.74% 278 41.31% 27.73%
------ ------ ------ ------ ------ ------
Total $ 628 100.00% 100.00% $ 673 100.00% 100.00%
====== ======= ======= ====== ======= =======
INVESTMENT ACTIVITIES
General
Federally chartered savings banks such as American Federal Savings Bank have the
authority to invest in various types of investment securities, including United
States Treasury obligations, securities of various Federal agencies (including
securities collateralized by mortgages), certificates of deposits of insured
banks and savings institutions, municipal securities, corporate debt securities
and loans to other banking institutions.
Eagle maintains liquid assets that may be invested in specified short-term
securities and other investments. Liquidity levels may be increased or decreased
depending on the yields on investment alternatives. They may also be increased
based on management's judgment as to the attractiveness of the yields then
available in relation to other opportunities. Liquidity levels can also change
based on management's expectation of future yield levels, as well as
management's projections as to the short-term demand for funds to be used in the
Bank's loan origination and other activities. Eagle maintains an investment
securities portfolio and a mortgage-backed securities portfolio as part of its
investment portfolio.
Investment Policies.
The investment policy of Eagle, which is established by the board of directors,
is designed to foster earnings and liquidity within prudent interest rate risk
guidelines, while complementing American Federal's lending activities. The
policy provides for available-for-sale, held-to-maturity and trading
classifications. However, Eagle does not hold any securities for purposes of
trading and does not anticipate doing so in the future. The policy permits
investments in high credit quality instruments with diversified cash flows while
permitting us to maximize total return within the guidelines set forth in our
interest rate risk and liquidity management policies. Permitted investments
include but are not limited to U.S. government obligations, government agency or
government-sponsored agency obligations, state, county and municipal
obligations, and mortgage-backed securities. Collateralized mortgage
obligations, investment grade corporate debt securities, and commercial paper
are also included. We also invest in Federal Home Loan Bank overnight deposits
and federal funds, but these instruments are not considered part of the
investment portfolio.
Our investment policy also includes several specific guidelines and restrictions
to insure adherence with safe and sound activities. The policy prohibits
investments in high-risk mortgage derivative products (as defined within the
policy) without prior approval from the board of directors. Management must
demonstrate the business advantage of such investments. We do not participate in
hedging programs, interest rate swaps, or other activities involving the use of
off-balance sheet derivative financial instruments, except certain financial
instruments designated as cash flow hedges related to loans committed to be sold
in the secondary market. Further, Eagle does not invest in securities which are
not rated investment grade.
12
The Board, through its asset liability committee, has charged the Chief
Financial Officer to implement the investment policy. All transactions are
reported to the board of directors monthly, as well as the current composition
of the portfolio, including market values and unrealized gains and losses.
Investment Securities.
We maintain a portfolio of investment securities, classified as either
available-for-sale or held-to-maturity to enhance total return on investments.
At June 30, 2004, our investment securities were U.S. government and agency
obligations, Small Business Administration pools, municipal securities,
mortgage-backed securities and corporate obligations, all with varying
characteristics as to rate, maturity and call provisions. Investment securities
held-to-maturity represented 1.74% of Eagle's total investment portfolio.
Securities available-for-sale totaled 98.26% of Eagle's total investment
portfolio.
Corporate Debt.
We also invest in corporate securities. Corporate bonds may offer a higher yield
than a U.S. Treasury security of comparable duration. These debt instruments
also may have a higher risk of default due to adverse change in the
creditworthiness of the issuer. Our policy limits investments in corporate bonds
to securities rated investment grade or better. At June 30, 2004, 19.53% of our
investment portfolio consisted of corporate obligations.
Mortgage-backed Securities and Small Business Administration Loan Pools.
We invest in mortgage-backed securities to provide earnings, liquidity, cash
flows and diversification to our overall balance sheet. These mortgage-backed
securities are classified as either available-for-sale or held-to-maturity.
These securities are participation certificates issued and guaranteed by the
Government National Mortgage Association (GNMA), Freddie Mac and Fannie Mae and
secured by interests in pools of mortgages. Mortgage-backed securities typically
represent a participation interest in a pool of single-family or multi-family
mortgages, although we focus on investments in mortgage-backed securities
secured by single-family mortgages. Expected maturities will differ from the
maturities actually set forth in the loans in the pools due to scheduled
repayments and because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.
Mortgage-backed securities typically are issued with stated principal amounts.
The securities are backed by pools of mortgages that have loans with interest
rates that are within a set range and have varying maturities. The underlying
pool of mortgages can be composed of either fixed-rate or adjustable rate
mortgage loans. Mortgage-backed securities are generally referred to as mortgage
participation certificates or pass-through certificates. The interest rate risk
characteristics of the underlying pool of mortgages (i.e., fixed-rate or
adjustable-rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages. At June 30, 2004, 19.11% of our investment
portfolio (in both held-to-maturity and available-for-sale) consisted of
mortgage-backed securities.
Eagle also invests in securities secured by pools of Small Business
Administration loans. The securities are created and serviced by various issuers
and consist of pools of the guaranteed portions of Small Business Administration
business loans which are consolidated by the issuers and which are guaranteed by
the Small Business Administration as to payment of principal and interest. There
is an active secondary market for such securities and Eagle believes that its
investments in such pools are liquid investments.
Collateralized Mortgage Obligations.
We also invest in collateralized mortgage obligations, issued or sponsored by
Fannie Mae, Freddie Mac, and GNMA or a private issuer that possesses one of the
three highest rating categories by a nationally recognized statistical rating
firm. Collateralized mortgage obligations are a type of debt security that
aggregates pools of mortgages and mortgage-backed securities and creates
different classes of securities with varying maturities and amortization
schedules as well as a residual interest with each class having different risk
characteristics. The cash flows from the underlying collateral are usually
divided into "tranches" or classes which have descending priorities with respect
to the distribution of principal and interest repayment of the underlying
mortgages and mortgage-backed securities as opposed to pass through
mortgage-backed securities where cash flows are distributed pro rata to all
security holders. Unlike mortgage-backed securities from which cash flow is
received and prepayment risk is shared pro rata by all securities holders, cash
flows from the mortgages and mortgage-backed securities underlying
collateralized mortgage obligations are paid in accordance with a predetermined
priority to investors holding various tranches of such securities or
obligations. A particular tranche may carry prepayment risk, which may be
different from that of the underlying collateral and other tranches. Investing
in collateralized mortgage obligations allows us to protect ourselves to a
degree from reinvestment risk resulting from unexpected prepayment activity
associated with conventional mortgage-backed securities.
13
Management believes these securities represent attractive alternatives relative
to other investments due to the wide variety of maturity, repayment and interest
rate options available. Eagle's investment policy requires that a pre-purchase
analysis be performed and documented in investment portfolio records. At June
30, 2004, 35.97% of our investment portfolio (exclusive of interest-bearing-
deposits with banks) consisted of collateralized mortgage obligations.
Other Securities.
Equity securities owned consist of a $1.67 million investment in Federal Home
Loan Bank of Seattle common stock as well as $1.75 million of corporate
preferred stock, $127,000 of corporate common stock and $100,000 in a common
stock mutual fund as of June 30, 2004. As a member of the Federal Home Loan Bank
of Seattle, ownership of Federal Home Loan Bank of Seattle common shares is
required. The remaining securities and deposits provide diversification and
complement our overall investment strategy.
The following table sets forth the carrying value of Eagle's investment and
mortgage-backed securities portfolio at the dates indicated.
AT JUNE 30,
--------------------------------------------------------------------
2004 2003
-------------------------------- ----------------------------------
(DOLLARS IN THOUSANDS)
BOOK PERCENTAGE BOOK PERCENTAGE
VALUE OF TOTAL VALUE OF TOTAL
--------- ---------- -------- ----------
Securities available for sale, at fair value:
U.S. Government and agency obligations $ 10,911 11.79% $ 5,151 5.85%
Corporate obligations 17,595 19.01 6,398 7.26
Municipal obligations 9,073 9.80 7,087 8.05
Collateralized mortgage obligations 32,415 35.03 23,454 26.63
Mortgage-backed securities 16,581 17.92 28,223 32.04
Common Stock 127 0.14 61 0.07
Mutual Funds 100 0.11 4,696 5.33
Corporate preferred stock 1,745 1.89 1,785 2.03
--------- ------ -------- ------
Total securities available-for-sale 88,547 95.68 76,855 87.25
--------- ------ -------- ------
Securities held to maturity, at book value:
U.S. Government and agency obligations - - 1,032 1.17
Mortgage-backed securities 635 0.69 1,249 1.42
Municipal obligations 930 1.00 - -
--------- ------ -------- ------
Total securities held-to-maturity 1,565 1.69 2,281 2.59
--------- ------ -------- ------
Total securities 90,112 97.37 79,136 89.84
--------- ------ -------- ------
Interest-bearing deposits 760 0.82 7,264 8.25
--------- ------ -------- ------
Federal Home Loan Bank capital
stock, at cost 1,672 1.81 1,686 1.91
--------- ------ -------- ------
Total $ 92,544 100.00% $ 88,086 100.00%
========= ====== ======== ======
14
The following table sets forth information regarding the carrying values,
weighted average yields and maturities of Eagle's investment and mortgage-backed
securities portfolio at June 30, 2004.
AT JUNE 30, 2004
-------------------------------------------------------------------------------------------------------
ONE YEAR OR LESS ONE TO FIVE YEARS MORE THAN FIVE YEARS TOTAL INVESTMENT SECURITIES
---------------- ----------------- -------------------- -----------------------------
ANNUALIZED ANNUALIZED ANNUALIZED ANNUALIZED
WEIGHTED WEIGHTED WEIGHTED APPROXIMATE WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING MARKET AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE VALUE YIELD
----- ----- ----- ----- ----- ----- ----- ----- -----
(DOLLARS IN THOUSANDS)
Securities available for
sale:
U.S. Government and agency
obligations $ 1,552 2.30% $ 6,571 3.55% $ 2,788 2.46% $10,911 $10,911 3.09%
Corporate obligations 208 7.41 17,387 3.34 - - 17,595 17,595 3.39
Municipal obligations - - - - 9,073 6.41 9,073 9,073 6.41
Collateralized mortgage
obligations - - 21 5.74 32,394 4.34 32,415 32,415 4.34
Mortgage-backed securities - - 4,207 2.69 12,374 2.89 16,581 16,581 2.84
Mutual funds - - - - 100 4.66 100 100 4.66
Corporate preferred stock - - - - 1,745 4.11 1,745 1,745 4.11
Common stock (dividend
yield) - - - - 127 7.94 127 127 7.94
------ ----- ------ ---- ------ ----- ------ ------ ----
Total securities available
for sale 1,760 2.90 28,186 3.29 58,601 4.27 88,547 88,547 3.93
------ ----- ------ ---- ------ ----- ------ ------ ----
Securities held to maturity:
Mortgage-backed securities 6 5.63 629 5.78 - - 635 664 5.78
Municipal obligations 100 5.50 566 5.78 264 7.04 930 966 6.11
------ ----- ------ ---- ------ ----- ------ ------ ----
Total securities held to
maturity 106 5.51 1,195 5.78 264 7.04 1,565 1,630 5.97
------ ----- ------ ---- ------ ----- ------ ------ ----
Total securities 1,866 3.05 29,381 3.39 58,865 4.28 90,112 90,177 3.97
------ ----- ------ ---- ------ ----- ------ ------ ----
Interest-bearing deposits 760 1.34 - - - - 760 760 1.34
------ ----- ------ ---- ------ ----- ------ ------ ----
Federal Home Loan Bank
capital stock - - - - 1,672 4.00 1,672 1,672 4.00
------ ----- ------ ---- ------ ----- ------ ------ ----
Total $2,626 2.56% $29,381 3.39% $60,537 4.27% $92,544 $92,609 3.95%
====== ===== ======= ==== ======= ===== ======= ======= ====
15
SOURCES OF FUNDS
General.
Deposits are the major source of our funds for lending and other investment
purposes. Borrowings (principally from the Federal Home Loan Bank of Seattle)
are also used to compensate for reductions in the availability of funds from
other sources. In addition to deposits and borrowings, we derive funds from loan
and mortgage-backed securities principal repayments, and proceeds from the
maturity, call and sale of mortgage-backed securities and investment securities
and from the sale of loans. Loan and mortgage-backed securities payments are a
relatively stable source of funds, while loan prepayments and deposit inflows
are significantly influenced by general interest rates and money market
conditions.
Deposits.
We offer a variety of deposit accounts. Deposit account terms vary, primarily as
to the required minimum balance amount, the amount of time that the funds must
remain on deposit and the applicable interest rate.
Our current deposit products include certificates of deposit accounts ranging in
terms from 90 days to five years as well as checking, savings and money market
accounts. Individual retirement accounts (IRAs) are included in certificates of
deposit.
Deposits are obtained primarily from residents of Helena, Bozeman, Butte and
Townsend. We believe we are able to attract deposit accounts by offering
outstanding service, competitive interest rates and convenient locations and
service hours. We use traditional methods of advertising to attract new
customers and deposits, including radio, television, print media advertising and
sales training and incentive programs for employees. We do not utilize the
services of deposit brokers and management believes that non-residents of
Montana hold an insignificant number of deposit accounts.
We pay interest rates on deposits which are competitive in our market. Interest
rates on deposits are set weekly by senior management, based on a number of
factors, including: projected cash flow; a current survey of a selected group of
competitors' rates for similar products; external data which may influence
interest rates; investment opportunities and loan demand; and scheduled
certificate maturities and loan and investment repayments.
Core deposits are deposits that are more stable and somewhat less sensitive to
rate changes. They also represent a lower cost source of funds than rate
sensitive, more volatile accounts such as certificates of deposit. We believe
that our core deposits are our checking, as well as NOW accounts, passbook and
statement savings accounts, money market accounts and IRA accounts. Based on our
historical experience, we include IRA accounts funded by certificates of deposit
as core deposits because they exhibit the principal features of core deposits in
that they are stable and generally are not rate sensitive. Core deposits
amounted to $119.43 million or 70.23% of the Bank's deposits at June 30, 2004
($94.83 million or 55.76% if IRA certificates of deposit are excluded). The
presence of a high percentage of core deposits and, in particular, transaction
accounts, is part of our strategy to restructure our liabilities to more closely
resemble the lower cost liabilities of a commercial bank. However, a significant
portion of our deposits remains in certificate of deposit form. These
certificates of deposit, should they mature and be renewed at higher rates, will
result in an increase in our cost of funds.
The following table sets forth American Federal's distribution of deposit
accounts at the dates indicated and the weighted average interest rate on each
category of deposit represented:
16
AT JUNE 30,
------------------------------------------------------------------------------------
2004 2003
----------------------------------------- ------------------------------------------
WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE
AMOUNT OF TOTAL RATE AMOUNT OF TOTAL RATE
-------- ------ ---- -------- ------ ----
(DOLLARS IN THOUSANDS)
Noninterest checking $ 9,268 5.45% 0.00% $ 7,868 4.67% 0.00%
Passbook savings 25,863 15.21% 0.65% 25,762 15.30% 1.15%
NOW account/Interest bearing
checking 29,370 17.27% 0.19% 27,125 16.11% 0.27%
Money market accounts 30,333 17.83% 0.91% 30,178 17.92% 1.33%
-------- ------ -------- ------
Total 94,834 55.76% 0.53% 90,933 53.99% 0.85%
-------- ------ -------- ------
Certificates of deposit accounts:
IRA certificates 24,597 14.46% 3.05% 23,460 13.93% 3.68%
Other certificates 50,638 29.78% 2.14% 54,031 32.08% 2.86%
-------- ------ -------- ------
Total certificates of deposit 75,235 44.24% 2.44% 77,491 46.01% 3.11%
-------- ------ -------- ------
Total deposits $170,069 100.00% 1.37% $168,424 100.00% 1.89%
======== ====== ======== ======
The following table sets forth the amounts and maturities of our certificates of
deposit as of June 30, 2004, for the maturity dates indicated:
CERTIFICATE OF DEPOSIT MATURITY
-----------------------------------------------------------------------
(IN THOUSANDS)
AFTER
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2005 2006 2007 2007 TOTAL
-------- -------- -------- -------- --------
1.01-2.00% $ 33,321 $ 119 $ - $ - $ 33,440
2.01-3.00% 18,654 12,610 1,092 205 32,561
3.01-4.00% 4,702 819 174 545 6,240
4.01-5.00% 236 839 383 287 1,745
5.01-6.00% 421 337 31 - 789
6.01-7.00% 341 119 - - 460
-------- -------- -------- -------- --------
Total $ 57,675 $ 14,843 $ 1,680 $ 1,037 $ 75,235
======== ======== ======== ======== ========
The following table shows the amount of certificates of deposit of more than
$100,000 by time remaining until maturity as of June 30, 2004:
JUMBO CERTIFICATES BY MATURITY
--------------------------------------------------------------------------------
MATURITY PERIOD AMOUNT
--------------- -------------
(IN THOUSANDS)
3 months or less $ 2,259
Over 3 to 6 months 2,700
Over 6 to 12 months 4,005
Over 12 months 3,228
--------
Total $ 12,192
========
17
The following table sets forth the net changes in deposit accounts for the
periods indicated:
YEAR ENDED JUNE 30,
--------------------------------
2004 2003
---- ----
(DOLLARS IN THOUSANDS)
Opening balance $ 168,424 $ 151,605
Deposits(Withdrawals), Net (882) 13,318
Interest credited 2,527 3,501
------------ ------------
Ending balance $ 170,069 $ 168,424
============ ============
Net increase $ 1,645 $ 16,819
Percent increase 0.98% 11.09%
Weighted average cost of
deposits during the period 1.62% 2.38%
Weighted average cost of
deposits at end of period 1.36% 1.89%
Our depositors are primarily residents of the state of Montana. We have no
brokered deposits.
Borrowings.
Deposits are the primary source of funds for our lending and investment
activities and for general business purposes. However, as the need arises, or in
order to take advantage of funding opportunities, we also borrow funds in the
form of advances from the Federal Home Loan Bank of Seattle to supplement our
supply of lendable funds and to meet deposit withdrawal requirements.
The following table sets forth information concerning our borrowing from the
Federal Home Loan Bank of Seattle at the end of, and during, the periods
indicated:
AT OR FOR THE YEAR
ENDED JUNE 30,
--------------------------
2004 2003
---- ----
(DOLLARS IN THOUSANDS)
Advances from Federal Home Loan Bank:
Average balance $ 9,072 $ 9,290
Maximum balance at any month-end 9,236 9,336
Balance at period end 7,450 9,244
Weighted average interest rate during the period 6.21% 6.25%
Weighted average interest rate at period end 3.58% 6.20%
SUBSIDIARY ACTIVITY
We are permitted to invest in the capital stock of, or originate secured or
unsecured loans to, subsidiary corporations. We do not have any subsidiaries,
except for American Federal Savings Bank, the wholly owned subsidiary of Eagle
Bancorp.
18
PERSONNEL
As of June 30, 2004, we had 69 full-time employees and 5 part-time employees.
The employees are not represented by a collective bargaining unit. We believe
our relationship with our employees to be good.
REGULATION
Set forth below is a brief description of laws which relate to the regulation of
American Federal and Eagle Bancorp. The description does not purport to be
complete and is qualified in its entirety by reference to applicable laws and
regulations.
REGULATION OF AMERICAN FEDERAL SAVINGS BANK
General.
As a federally chartered savings bank and a member of the FDIC's Savings
Association Insurance Fund, American Federal Savings Bank is subject to
extensive regulation by the Office of Thrift Supervision and the FDIC. Lending
activities and other investments must comply with federal statutory and
regulatory requirements. American Federal Savings Bank is also subject to
reserve requirements of the Federal Reserve System. Federal regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
Savings Association Insurance Fund of the FDIC and depositors. This regulatory
structure gives the regulatory authorities extensive discretion in connection
with their supervisory and enforcement activities and examination policies,
including policies regarding the classification of assets and the establishment
of adequate loan loss reserves.
The Office of Thrift Supervision regularly examines American Federal Savings
Bank and provides a report on its examination findings to American Federal's
board of directors. American Federal's relationship with its depositors and
borrowers is also regulated by federal law, especially in such matters as the
ownership of savings accounts and the form and content of American Federal's
mortgage documents.
American Federal Savings Bank must file reports with the Office of Thrift
Supervision and the FDIC concerning its activities and financial condition, and
must obtain regulatory approvals prior to entering into transactions such as
mergers with or acquisitions of other financial institutions. Any change in such
regulations, whether by the Office of Thrift Supervision, the FDIC or the United
States Congress, could have a material adverse impact on Eagle and American
Federal, and their operations.
Insurance of Deposit Accounts.
The deposit accounts held by American Federal Savings Bank are insured by the
Savings Association Insurance Fund of the FDIC to a maximum of $100,000 as
permitted by law. Insurance on deposits may be terminated by the FDIC it if
finds an institution has engaged in unsafe or unsound practices, is in an unsafe
or unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the institution's
primary regulator.
Regulatory Capital Requirements.
Office of Thrift Supervision (OTS) capital regulations require savings
institutions to meet three capital standards. The standards for capital adequacy
are tangible capital equal to 1.5% of adjusted total assets, core capital
(leverage ratio) equal to at least 4% of total adjusted assets, and risk-based
capital equal to 8% of total risk-weighted assets. In order to be deemed "Well
Capitalized", OTS rules require a leverage ratio of at least 5%, a Tier 1
risk-based ratio of at least 6%, and a total risk-based ratio of at least 10%.
American Federal's capital ratios at June 30, 2004 are set forth below.
ACTUAL FOR CAPITAL ADEQUACY PURPOSES
--------------------------------- ---------------------------------
AMOUNT RATIO AMOUNT RATIO
---------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
Tangible $ 23,199 11.43 $ 3,045 1.50
Leverage $ 23,199 11.43 $ 6,089 3.00
Tier 1 risk-based $ 23,199 18.37 $ 5,050 4.00
Total risk-based $ 23,803 18.85 $ 10,100 8.00
19
Tangible capital is defined as core capital less all intangible assets, less
mortgage servicing rights and less investments. Core capital is defined as
common stockholders' equity, noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries,
nonwithdrawable accounts and pledged deposits of mutual savings associations and
qualifying supervisory goodwill, less nonqualifying intangible assets, mortgage
servicing rights and investments.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital of 8% of risk-weighted assets.
Risk-based capital is comprised of core and supplementary capital. The
components of supplementary capital include, among other items, cumulative
perpetual preferred stock, perpetual subordinated debt, mandatory convertible
subordinated debt, intermediate-term preferred stock, and the portion of the
allowance for loan losses not designated for specific loan losses. The portion
of the allowance for loan and lease losses includable in supplementary capital
is limited to a maximum of 1.25% of risk-weighted assets. Overall, supplementary
capital is limited to 100% of core capital. A savings association must calculate
its risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the Office of Thrift Supervision, which
range from 0% for cash to 100% for delinquent loans, property acquired through
foreclosure, commercial loans, and other assets.
Office of Thrift Supervision rules require a deduction from capital for
institutions which have unacceptable levels of interest rate risk. The Office of
Thrift Supervision calculates the sensitivity of an institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the Office of Thrift Supervision. The amount of the interest rate
risk component, if any, is deducted from an institution's total capital in order
to determine if it meets its risk-based capital requirement. Federal savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are exempt from filing the interest rate risk schedule. However,
the Office of Thrift Supervision may require any exempt institution to file such
schedule on a quarterly basis and may be subject to an additional capital
requirement based on its level of interest rate risk as compared to its peers.
Dividend and Other Capital Distribution Limitations.
The Office of Thrift Supervision imposes various restrictions or requirements on
the ability of savings institutions to make capital distributions, including
dividend payments.
Office of Thrift Supervision regulations impose limitations on all capital
distributions by savings institutions, such as cash dividends, payment to
repurchase or otherwise acquire its shares, payments to stockholders of another
institution in a cash-out merger, and other distributions charged against
capital. The rule establishes three tiers of institutions based primarily on an
institution's capital level. An institution that exceeds all capital
requirements before and after a proposed capital distribution and has not been
advised by the Office of Thrift Supervision that it is in need of more than the
normal supervision has the greatest amount of flexibility for determining
dividends. Such institutions can, after prior notice but without the approval of
the Office of Thrift Supervision, make capital distributions during a calendar
year. These distributions can be equal to the greater of 100% of its net income
to date during the calendar year plus the amount that would reduce by one-half
its excess capital divided by its fully phased-in capital requirements at the
beginning of the calendar year. At the institution's discretion, dividends can
also be 75% of its net income over the most recent four-quarter period. Any
additional capital distributions require prior regulatory notice. As of June 30,
2004, American Federal Savings Bank had this level of flexibility with respect
to dividends.
Qualified Thrift Lender Test.
Federal savings institutions must meet a qualified thrift lender test or they
become subject to operating restrictions. The Bank anticipates that it will
maintain an appropriate level of investments consisting primarily of residential
mortgages, mortgage-backed securities and other mortgage-related investment, and
otherwise qualify as a qualified thrift lender. The required percentage of these
mortgage-related investments is 65% of portfolio assets. Portfolio assets are
all assets minus intangible assets, property used by the institution in
conducting its business and liquid assets equal to 10% of total assets.
Compliance with the qualified thrift lender test is determined on a monthly
basis in nine out of every twelve months.
Transactions With Affiliates.
Generally, federal banking law requires that transactions between a savings
institution or its subsidiaries and its affiliates must be on terms as favorable
to the savings institution as comparable transactions with non-affiliates. In
addition, some transactions can be restricted to an aggregate percentage of the
savings institution's capital. Collateral in specified amounts must usually be
provided by affiliates in order to receive loans from the savings institution.
In addition, a savings institution may not extend credit to any affiliate
engaged in activities not permissible for a bank holding
20
company or acquire the securities of any affiliate that is not a subsidiary. The
Office of Thrift Supervision has the discretion to treat subsidiaries of a
savings institution as affiliates on a case-by-case basis.
Liquidity Requirements.
The Bank is required to maintain minimum levels of liquid assets as defined by
the Office of Thrift Supervision regulations. The OTS states that the liquidity
requirement is retained for safety and soundness purposes, and that appropriate
levels of liquidity will depend upon the types of activities in which the bank
engages.
Federal Home Loan Bank System.
We are a member of the Federal Home Loan Bank of Seattle, which is one of 12
regional Federal Home Loan Banks. Each Federal Home Loan Bank serves as a
reserve or central bank for its members within its assigned region. It is funded
primarily from funds deposited by financial institutions and proceeds derived
from the sale of consolidated obligations of the Federal Home Loan Bank System.
It makes loans to members pursuant to policies and procedures established by the
board of directors of the Federal Home Loan Bank.
As a member, we are required to purchase and maintain stock in the Federal Home
Loan Bank of Seattle in an amount equal to at least 1% of our aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year, or 5% of our outstanding advances, whichever is
larger. We are in compliance with this requirement. The Federal Home Loan Bank
imposes various limitations on advances such as limiting the amount of real
estate related collateral to 30% of a member's capital and limiting total
advances to a member. As a federal savings bank, we were mandatory members of
the Federal Home Loan Bank of Seattle. Under the Gramm-Leach-Bliley Financial
Modernization Act of 1999, we are now voluntary members of the Federal Home Loan
Bank of Seattle. We could withdraw or significantly reduce our required stock
ownership in the Federal Home Loan Bank of Seattle.
Federal Reserve System.
The Federal Reserve System requires all depository institutions to maintain
noninterest-bearing reserves at specified levels against their checking, NOW and
Super NOW checking accounts and non-personal time deposits. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve
System may be used to satisfy the Office of Thrift Supervision liquidity
requirements.
Savings institutions have authority to borrow from the Federal Reserve System
"discount window," but Federal Reserve System policy generally requires savings
institutions to exhaust all other sources before borrowing from the Federal
Reserve System.
REGULATION OF EAGLE BANCORP
General.
Eagle Bancorp, as a federal stock corporation in a mutual holding company
structure, is deemed a federal mutual holding company within the meaning of
Section 10(o) of the Home Owners Loan act ("HOLA"). Eagle is registered and
files reports with the Office of Thrift Supervision and is subject to regulation
and examination by the Office of Thrift Supervision. In addition, the Office of
Thrift Supervision has enforcement authority over Eagle and any nonsavings
institution subsidiary of Eagle. The Office of Thrift Supervision can restrict
or prohibit activities that it determines to be a serious risk to us. This
regulation is intended primarily for the protection of our depositors and not
for the benefit of stockholders of Eagle.
FEDERAL TAXATION
Savings institutions are subject to the Internal Revenue Code of 1986, as
amended, in the same general manner as other corporations. Prior to changes to
the Internal Revenue Code in 1996, thrift institutions enjoyed a tax advantage
over banks with respect to determining additions to its bad debt reserves.
The Internal Revenue Code was revised in August 1996 to equalize the taxation of
thrift institutions and banks, effective for taxable years beginning after 1995.
All thrift institutions are now subject to the same provisions as banks with
respect to deductions for bad debt. Now only thrift institutions that are
treated as small banks under the Internal Revenue Code may continue to account
for bad debts under the reserve method; however such institutions may only use
the experience method for determining additions to their bad debt reserve.
Thrift institutions that are not treated as small
21
banks may no longer use the reserve method to account for their bad debts but
must now use the specific charge-off method.
The revisions to the Internal Revenue Code in 1996 also provided that all thrift
institutions must generally recapture any "applicable excess reserves" into
their taxable income, over a six year period beginning in 1996; however, such
recapture may be delayed up to two years if a thrift institution meets a
residential-lending test. Generally, a thrift institution's applicable excess
reserves equals the excess of the balance of its bad debt reserves as of the
close of its taxable year beginning before January 1, 1996, over the balance of
such reserves as of the close of its last taxable year beginning before January
1, 1988. These are known as pre-1988 reserves. American Federal Savings Bank had
recaptured all of it's remaining applicable excess reserve as of June 30, 2004.
In addition, all thrift institutions must continue to keep track of their
pre-1988 reserves because this amount remains subject to recapture in the future
under the Internal Revenue Code. A thrift institution such as American Federal,
would generally be required to recapture into its taxable income its pre-1988
reserves in the case of excess distributions, and redemptions of American
Federal's stock and in the case of a reduction in American Federal's outstanding
loans when comparing loans currently outstanding to loans outstanding at the end
of the base year. For taxable years after 1995, American Federal Savings Bank
will continue to account for its bad debts under the reserve method. The balance
of American Federal's pre-1988 reserves equaled $915,000.
Eagle may exclude from its income 100% of dividends received from American
Federal Savings Bank as a member of the same affiliated group of corporations. A
70% dividends received deduction generally applies with respect to dividends
received from corporations that are not members of such affiliated group.
American Federal's federal income tax returns for the last five tax years have
not been audited by the IRS.
STATE TAXATION
American Federal Savings Bank files Montana tax returns. For Montana tax
purposes, savings institutions are presently taxed at a rate equal to 6.75% of
taxable income which is calculated based on federal taxable income, subject to
adjustments (including the addition of interest income on state and municipal
obligations).
American Federal's state tax returns have not been audited for the past five
years by the state of Montana.
ITEM 2. DESCRIPTION OF BUSINESS PROPERTIES.
The Company's business activities consist of its ownership of 100% of the common
stock of the Bank. The Bank's executive office is located at 1400 Prospect
Avenue in Helena, Montana. American Federal conducts its business through five
offices, which are located in Helena, Bozeman, Butte, and Townsend, Montana. All
of its offices are owned. Its principal banking office in Helena also serves as
its executive headquarters and operations center. This office houses over 50% of
American Federal full-time employees. The following table sets forth the
location of each of American Federal's offices, the year the office was opened,
and the net book value including land, buildings, computer software and its
related equipment and furniture. The square footage at each location is also
shown.
NET BOOK
VALUE AT SQUARE
LOCATION ADDRESS OPENED JUNE 30, 2004 FOOTAGE
----------------------------- -------------------------- ------------ -------------------- -------------
Helena Main 1400 Prospect Ave. 1997 $ 5,065,499 32,304
Office Helena, MT 59601
Helena Downtown 28 Neill Ave. 1987 $ 332,517 1,391
Drive-up Helena, MT 59601
Butte Office 3401 Harrison Ave. 1979 $ 563,423 3,890
Butte, MT 59701
Bozeman Office 606 North Seventh 1980 $ 570,500 5,886
Bozeman, MT 59715
Townsend Office 416 Broadway 1979 $ 27,325 1,973
Townsend, MT 59644
22
As of June 30, 2004, the net book value of land, buildings, furniture, and
equipment owned by American Federal, less accumulated depreciation, totaled $6.6
million.
ITEM 3. LEGAL PROCEEDINGS.
American Federal, from time to time, is a party to routine litigation, which
arises in the normal course of business, such as claims to enforce liens,
condemnation proceedings on properties in which American Federal Savings Bank
holds security interests, claims involving the making and servicing of real
property loans, and other issues incident to the business of American Federal.
The Bank has filed a suit in federal court against the Department of Housing and
Urban Development regarding a dispute over a foreclosed property. Other than
that case, there were no lawsuits pending or known to be contemplated against
Eagle or American Federal at June 30, 2004.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders in the fourth quarter of
the fiscal year ended June 30, 2004.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUERS' PURCHASES OF EQUITY SECURITIES.
The common stock is traded on the OTC Bulletin Board under the symbol "EBMT." At
the close of business on June 30, 2004, there were 1,212,372 shares of common
stock outstanding, held by approximately 600 shareholders of record. Eagle
Financial MHC, Eagle's mutual holding company, held 648,493 shares (or 54.5%) of
the outstanding common stock.
The high bid and asked prices noted below for the four quarters of fiscal 2003
and the four quarters of the current fiscal year were obtained from the OTC
Bulletin Board. The quotations reflect interdealer prices without retail markup,
markdown or commission, and may not represent actual transactions.
HIGH BID LOW BID
Fourth quarter 2004 $45.00 $30.50
Third quarter 2004 $40.00 $34.25
Second quarter 2004 $38.00 $28.00
First quarter 2004 $30.00 $25.10
Fourth quarter 2003 $30.50 $22.25
Third quarter 2003 $25.00 $22.00
Second quarter 2003 $24.30 $19.25
First quarter 2003 $21.10 $18.00
The closing price of the common stock on June 30, 2004, was $32.30. The company
had paid four quarterly dividends during the year, all in the amount of $0.16
per share. Eagle Financial MHC waived receipt of its dividends during the year.
23
ITEM 5(C) SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
-------------------------------------------------------------------------------------------------
TOTAL NUMBER MAXIMUM
OF SHARES NUMBER OF
PURCHASED SHARES THAT
TOTAL AS PART OF MAY YET BE
NUMBER OF AVERAGE PUBLICLY PURCHASED
SHARES PRICE PAID ANNOUNCED PLANS UNDER THE PLANS
PERIOD PURCHASED* PER SHARE OR PROGRAMS OR PROGRAMS
-------------------------------------------------------------------------------------------------
April 2004
4-1-04 to 4-30-04 None N/A N/A
-------------------------------------------------------------------------------------------------
May 2004
5-1-04 to 5-31-04 2,000 $ 32.00 2,000 55,000
-------------------------------------------------------------------------------------------------
June 2004
6-1-04 to 6-30-04 None N/A N/A
-------------------------------------------------------------------------------------------------
Total
2,000 $ 32.00 2,000 55,500
-------------------------------------------------------------------------------------------------
*The Company publicly announced a stock repurchase program on August 21, 2003.
The Company is authorized to acquire up to 57,500 shares of common stock with
the price subject to market conditions. No expiration date was set for the
repurchase program.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain "forward-looking statements." Eagle desires to take
advantage of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995 and is including this statement for the express purpose of
availing itself of the protections of the safe harbor with respect to all such
forward-looking statements. These forward-looking statements, which are included
in Management's Discussion and Analysis, describe future plans or strategies and
include Eagle's expectations of future financial results. The words "believe",
"expect", "anticipate", "estimate", "project", and similar expressions identify
forward-looking statements. Eagle's ability to predict results or the effect of
future plans or strategies or qualitative or quantitative changes based on
market risk is inherently uncertain. Factors which could affect actual results
but are not limited to include (i) change in general market interest rates, (ii)
general economic conditions, (iii) local economic conditions, (iv)
legislative/regulatory changes, (v) monetary and fiscal policies of the U.S.
Treasury and Federal Reserve, (vi) changes in the quality or composition of
Eagle's loan and investment portfolios, (vii) demand for loan products, (viii)
deposit flows, (ix) competition, and (x) demand for financial services in
Eagle's markets. These factors should be considered in evaluating the
forward-looking statements. You are cautioned not to place undue reliance on
these forward-looking statements that speak only as of their dates.
GENERAL
Eagle Bancorp's subsidiary, American Federal Savings Bank, operates as a
community savings bank. It raises money by offering FDIC-insured deposit
products and lending this money, primarily for the purpose of home financing. As
of June 30, 2004, 47.75% of its total loans were residential mortgage loans with
fixed rates and 4.99% were residential mortgage loans with adjustable rates.
Total first lien mortgage loans at June 30, 2004, were $63.48 million or 68.26%
of the total loan portfolio. Other loan products include home equity loans,
consumer and commercial loans. These loans totaled $29.52 million or 31.74% of
the total loan portfolio.
The consolidated financial condition and operating results of Eagle are
primarily dependent on its wholly owned subsidiary, American Federal Savings
Bank. All references to the Company prior to April 4, 2000, except where
otherwise indicated, are to the Bank.
24
ANALYSIS OF NET INTEREST INCOME
The Bank's earnings have historically depended primarily upon net interest
income, which is the difference between interest income earned on loans and
investments and interest paid on deposits and any borrowed funds. It is the
single largest component of Eagle's operating income. Net interest income is
affected by (i) the difference between rates of interest earned on loans and
investments and rates paid on interest-bearing deposits and borrowings (the
"interest rate spread") and (ii) the relative amounts of loans and investments
and interest-bearing deposits and borrowings.
The following table presents the average balances of and the interest and
dividends earned or paid on each major class of loans and investments and
interest-bearing deposits and borrowings. Nonaccruing loans are included in
balances for all periods. Average balances are daily average balances. The
yields and costs include fees, which are considered adjustments to yields.
FOR THE TWELVE MONTHS ENDED JUNE 30,
----------------------------------------- ----------------------------------------
2004 2003
----------------------------------------- ----------------------------------------
(DOLLARS IN THOUSANDS)
AVERAGE INTEREST AVERAGE INTEREST
DAILY AND YIELD/ DAILY AND YIELD/
BALANCE DIVIDENDS RATE BALANCE DIVIDENDS RATE
------- --------- ------- -------- ----------- ------
Interest-earning assets:
FHLB stock $ 1,699 $ 78 4.59% $ 1,626 $ 100 6.15%
Loans receivable, net 94,698 6,266 6.62 104,704 7,694 7.35
Investment securities 90,174 2,881 3.19 64,674 2,478 3.83
Interest-bearing deposits with banks 5,279 49 0.93 10,060 134 1.33
--------- ------ ------ --------- ------- ------
Total interest-earning assets 191,850 9,274 4.83 181,064 10,406 5.75
Noninterest-earning assets 15,265 14,478
--------- ---------
Total assets $ 207,115 $ 195,542
========= =========
Liabilities and Equity:
Interest-bearing liabilities:
Deposit accounts:
Money market $ 31,385 $ 333 1.06 $ 28,753 $ 508 1.77
Passbooks 25,811 201 0.78 23,767 350 1.47
Checking 28,511 72 0.25 25,863 118 0.46
Certificates of deposit 76,763 2,025 2.64 74,094 2,657 3.59
Advances from FHLB 9,072 563 6.21 9,290 581 6.25
--------- ------ ------ --------- ------- ------
Total interest-bearing liabilities 171,542 3,194 1.86 161,767 4,214 2.60
Non-interest checking 9,412 8,295
Other noninterest-bearing liabilities 1,898 2,410
--------- ---------
Total liabilities 182,852 172,472
Total equity 24,263 23,070
--------- ---------
Total liabilities and equity $ 207,115 $ 195,542
========= =========
Net interest income/interest rate spread(1) $ 6,080 2.97% $ 6,192 3.15%
======== ======= ========= ======
Net interest margin(2) 3.17% 3.42%
======= ======
Total interest-earning assets to
int-bearing liabilities 111.84% 111.93%
======= ======
--------------------
(1) Interest rate spread represents the difference between the average yield
on interest-earning assets and the average rate on interest-bearing
liabilities.
(2) Net interest margin represents income before the provision for loan
losses divided by average interest-earning assets.
-----------------------
RATE/VOLUME ANALYSIS
The following table sets forth information regarding changes in interest income
and interest expense for the periods indicated. For each category of our loans
and investments and our interest-bearing deposits and borrowings, information is
provided on changes attributable to change in volume (change in volume
multiplied by the old rate). The table also
25
provides information on change in rate (changes in rate multiplied by old
volume). The combined effects of changes in rate and volume have been allocated
proportionately to the change due to rate and the change due to volume.
FOR THE YEARS ENDED JUNE 30,
INCREASE (DECREASE)
-----------------------------------------------------------------------------------------
2004 VS 2003 2003 VS 2002
DUE TO DUE TO
VOLUME RATE NET VOLUME RATE NET
----------- ------------- ----------- ---------- --------------- -----------
(IN THOUSANDS)
Interest earning assets:
Loans receivable, net $ (700) $ (728) $ (1,428) $ (772) $ (521) $ (1,293)
Investment securities 865 (462) 403 1,078 (504) 574
Interest-bearing deposits with banks (52) (33) (85) 37 (81) (44)
Other earning assets 4 (26) (22) 6 (5) 1
-------- -------- ---------- -------- -------- ---------
TTotal interest earning assets 117 (1,249) (1,132) 349 (1,111) (762)
Interest-bearing liabilities:
Passbook, money market and
checking accounts 85 (455) (370) 158 (482) (324)
Certificates of deposit 93 (725) (632) 302 (748) (446)
Borrowings (14) (4) (18) (65) 1 (64)
-------- -------- ---------- -------- -------- ---------
Total interest-bearing liabilities 164 (1,184) (1,020) 395 (1,229) (834)
Change in net interest income $ (47) $ (65) $ (112) $ (46) $ 118 $ 72
======== ======== ========== ======== ======== ========
-------------
INTEREST RATE RISK ANALYSIS
In addition to the asset/liability committee, the board of directors reviews our
asset and liability policies. The board of directors reviews interest rate risk
and interest rate trends quarterly, as well as liquidity and capital ratio
requirements. Management administers the policies and determinations of the
board of directors with respect to our asset and liability goals and strategies.
Our asset and liability policy and strategies are expected to continue as
described so long as competitive and regulatory conditions in the financial
institution industry and market interest rates continue as they have in recent
years.
FINANCIAL CONDITION
INTRODUCTION Total assets were virtually unchanged at $203.01 million at June
30, 2004, compared to $203.06 million at June 30, 2003. Total liabilities
decreased by $0.57 million, or 0.32%, to $178.99 million at June 30, 2004, from
$179.56 million at June 30, 2003. The lack of growth in total assets was caused
by the Company reducing its borrowings from the Federal Home Loan Bank of
Seattle (FHLB) in the fourth quarter by approximately $2 million. The borrowings
were paid off using short-term funds (interest-bearing deposits with banks). The
reduction of higher interest rate debt will reduce interest expense on
borrowings in future quarters and partially offset the decline in interest
income which was experienced in the year ended June 30, 2004. Mortgage loan
prepayments slowed from the previous year's levels. The loan portfolio shrunk
slightly (approximately 1%). Deposit growth slowed from the previous year's pace
also, as consumers are moving money back into mutual funds.
BALANCE SHEET DETAILS For the third straight year, the asset category with the
most growth was the available-for-sale (AFS) investment portfolio, which
increased $11.69 million, or 15.81%, to $88.55 million at June 30, 2004 from
$76.86 million at June 30, 2003. Declines in two asset categories contributed to
a shift that increased the AFS portfolio. Mortgage loans held-for-sale decreased
significantly, to $1.44 million at June 30, 2004 from $6.91 million at June 30,
2003. As mortgage interest rates increased at the end of the fiscal year,
refinancing activity slowed, leading to lower amounts of loans originated for
sale. Balances in interest-bearing deposits with banks also decreased
significantly, to $760,000 at June 30, 2004 compared to $7.26 million a year
ago. The paydown of FHLB borrowings and the reinvestment of overnight funds into
the AFS portfolio contributed to the decrease. The loan portfolio decreased
$1.06 million, or 1.13%, to $92.46 million at June 30, 2004 from $93.52 million
at June 30, 2003. Prepayments on mortgage loans decreased during the year, as
mortgage interest rates rose from their historical lows. This allowed the
residential mortgage component of the loan portfolio to increase $3.64 million
from the previous year. Real estate construction loans increased $1.30 million,
while commercial real estate loans declined $9.48 million, due to the sale of a
large loan
26
participation. The other loan categories combined for an increase of $3.41
million from the previous year-end, as loan originations in these categories
increased from the previous year.
Total deposits increased $1.64 million. Non-interest checking increased $1.40
million, to $9.27 million at June 30, 2004 from $7.87 million at June 30, 2003.
Interest-bearing deposits increased slightly, to $160.80 million at June 30,
2005 from $160.56 million at June 30, 2003, an increase of $245,000, or 0.15%.
Certificates of deposit decreased $2.26 million, while interest-earning checking
accounts increased $2.25 million. Other deposit categories showed minor
increases. This slowdown of deposit growth is consistent with other financial
institutions across the country, as consumers have shifted funds back to Wall
Street and mutual funds. This trend of slow deposit growth is expected to
continue for fiscal year 2005. Advances from the Federal Home Loan Bank declined
to $7.45 million at year-end 2004 from $9.24 million at year-end 2003, a
decrease of $1.79 million. This decrease was the result of the pay down of FHLB
advances mentioned previously.
Total shareholders' equity was $24.02 million at June 30, 2004, an increase of
$0.52 million. This increase was primarily attributable to the net income for
the year, offset by dividends paid and the decrease in accumulated other
comprehensive income that resulted from unrealized losses on securities
available-for-sale.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDING JUNE 30, 2004 AND 2003
Net Income.
Eagle's net income was $2.08 million and $1.87 million for the years ended June
30, 2004 and 2003 respectively. This increase of $212,000, or 11.34%, was
primarily due to an increase in noninterest income of $864,000 related to
mortgage servicing rights, offset by an increase in noninterest expense of
$208,000 and a decrease in net interest income of $112,000. Eagle's tax
provision was $129,000 higher in 2004. Eagle also incurred an extraordinary loss
of $203,000 (net of tax benefit of $127,000) in the fourth quarter. This was the
result of prepayment penalties on FHLB borrowings, which were paid off prior to
maturity. Basic earnings per share for the year ended June 30, 2004 were $1.76,
compared to $1.59 for the year ended June 30, 2003. Diluted earnings per share
were $1.74 and $1.57 for 2004 and 2003, respectively.
Net Interest Income.
Net interest income (before provision for loan losses) decreased to $6.08
million for the year ended June 30, 2004, from $6.19 million for the previous
year. This decrease of $112,000, or 1.81%, was the result of a decrease in
interest and dividend income of $1.13 million, partially offset by a decrease in
interest expense of $1.02 million.
Interest and Dividend Income.
Total interest and dividend income was $9.27 million for the year ended June 30,
2004, compared to $10.41 million for the year ended June 30, 2003, a decrease of
$1.13 million, or 10.85%. Interest and fees on loans decreased to $6.26 million
for 2004 from $7.69 million for 2003. This decrease of $1.43 million, or 18.60%,
was due to decreases in the average rate and average balances of loans
receivable for the year ended June 30, 2004. The average interest rate earned on
loans receivable decreased by 73 basis points, to 6.62% from 7.35%. Average
balances for loans receivable, net, for the year ended June 30, 2004 were $94.70
million, compared to $104.70 million for the previous year. This represents a
decrease of $10.00 million, or 9.55%. Interest and dividends on investment
securities available-for-sale (AFS) increased to $2.79 million for the year
ended June 30, 2004 from $2.31 million for the year ended June 30, 2003, an
increase of $479,000, or 20.74%. This increase was the result of increased
balances in the AFS portfolio during the year. Interest earned from deposits at
other banks decreased to $49,000 for the year ended June 30, 2004 from $134,000
for the year ended June 30, 2003. Lower interest rates earned on these accounts
and lower balances contributed to the decrease. Interest and dividends on
investments held-to-maturity (HTM) decreased $75,000, to $91,000 in 2004
compared to $166,000 in 2003. Lower balances in the HTM category contributed to
the decrease.
Interest Expense.
Total interest expense decreased to $3.19 million for the year ended June 30,
2004 from $4.21 million for the year ended June 30, 2003, a decrease of $1.02
million, or 24.23%. Interest on deposits decreased to $2.63 million for the year
ended June 30, 2004 from $3.63 million for the year ended June 30, 2003. This
decrease of $1.00 million, or 27.55%, was the result of a decrease on average
rates paid despite an increase in average balances on deposit accounts. The
average cost of deposits dropped 76 basis points, to 1.62% in 2004 from 2.38% in
2003. The continued low interest rate environment during the year contributed to
the decrease in the cost of deposits, as the Company lowered rates on most
deposit products during the year. Certificates of deposit and money market
accounts showed the largest increase in average balances, as well as the largest
declines in average rates paid. The average balance of certificates of deposit
increased to
27
$76.76 million for the year ended June 30, 2004, compared to $74.09 million for
the year ended June 30, 2003. The average rate paid on certificates of deposit
declined to 2.64% in 2004 from 3.59% in 2003. Average balances on money market
accounts increased to $31.38 million in 2004 from $28.75 million in 2003. The
average rate paid on money market accounts declined to 1.06% from 1.77%. A
decrease in the average balance of borrowings from the Federal Home Loan Bank
resulted in a decrease in interest paid on borrowings to $562,000 for the year
ended June 30, 2004 from $581,000 for the year ended June 30, 2003. The Company
paid off higher rate borrowings in the fourth quarter; some were replaced with
lower cost borrowings while others were paid off entirely by using excess
short-term liquidity (interest-bearing deposits with banks). As a result,
management expects interest expense on borrowings will decrease further.
Provision for Loan Losses.
Provisions for loan losses are charged to earnings to maintain the total
allowance for loan losses at a level considered adequate by American Federal
Savings Bank to provide for probable loan losses based on prior loss experience,
volume and type of lending conducted by American Federal, available peer group
information, and past due loans in portfolio. The Bank's policies require the
review of assets on a quarterly basis. The Bank classifies loans as well as
other assets if warranted. While management believes it uses the best
information available to make a determination with respect to the allowance for
loan losses, it recognizes that future adjustments may be necessary. No
provision was made for loan losses for either year ended June 30, 2004 or June
30,2003. This is a reflection of the continued strong asset quality of American
Federal's loan portfolio, as non-performing loan ratios continue to be low.
Total classified assets decreased to $924,000 at June 30, 2004 from $1.57
million at June 30, 2003. Total non-performing loans as a percentage of the
total loan portfolio is 0.67%. As of June 30, 2004, American Federal Savings
Bank had no real estate owned.
Noninterest Income.
Total noninterest income increased to $3.43 million for the year ended June 30,
2004, from $2.57 million for the year ended June 30, 2003, an increase of
$864,000 or 33.62%. This increase was attributable primarily to the reduction in
the valuation allowance for mortgage servicing rights of $696,000. In June of
2003, at the low point in the recent interest rate cycle, the Bank made an
addition to the valuation allowance of $735,000. As interest rates have risen
and prepayments on mortgages have declined, the Bank was able to recapture a
significant amount of the allowance during the current year, which is reflected
in mortgage loan servicing fees on the income statement. This contributed to an
increase of $1.54 million in mortgage loan servicing fees from 2003 to 2004.
Less volatility is expected in mortgage servicing fees in 2005, as the valuation
allowance currently has a balance of $60,000. Another drop in mortgage interest
rates, however, could lead to further additions to the valuation allowance and
lower mortgage loan servicing income. A decline in mortgage loan originations
caused a decline in net gain on sale of loans, to $1.14 million in 2004 from
$1.82 million in 2003. If interest rates rise over the next twelve months as
expected, mortgage loan originations will likely decline. Demand deposit service
charges increased $126,000 to $627,000, as higher fees were in effect for most
of the year. Net gain on securities sales declined $92,000 to $72,000.
Noninterest Expense.
Noninterest expense increased by $208,000 or 3.47% to $6.20 million for the year
ended June 30, 2004 from $5.99 million for the year ended June 30, 2003. This
increase was primarily due to an increase in salaries and employee benefits to
$3.15 million for the year ended June 30, 2004 from $2.92 million for the year
ended June 30, 2003, an increase of $232,000. The increase was due to normal
merit raises and a reduction in the amount of salaries capitalized for SFAS 91
(as loan originations decline, the amount of capitalized salary expense
declines, thereby increasing salary expense). Other increases in noninterest
expenses were "other" noninterest expense of $88,000 and furniture and equipment
depreciation of $48,000. Other noninterest expense increased due primarily to
increased loan expenses related to amortization of previously capitalized costs
per SFAS 91. Depreciation expense was higher due to the addition of computer
hardware and software. Amortization of mortgage servicing fees declined to
$629,000 in 2004 from $745,000 in 2003. This was due to slower prepayment
activity in our residential mortgage loan portfolio. Other expense categories
showed minor changes from the previous year.
Income Tax Expense.
Eagle's income tax expense was $1.03 million for the year ended June 30, 2004,
compared to $905,000 for the year ended June 30, 2003. The effective tax rate
for the year ended June 30, 2004 was 31.17% as opposed to 32.65% for the year
ended June 30, 2003.
28
LIQUIDITY AND CAPITAL RESOURCES
The company's subsidiary, American Federal Savings Bank, is required to maintain
minimum levels of liquid assets as defined by the Office of Thrift Supervision
(OTS) regulations. The OTS has eliminated the statutory requirement based upon a
percentage of deposits and short-term borrowings. The OTS states that the
liquidity requirement is retained for safety and soundness purposes, and that
appropriate levels of liquidity will depend upon the types of activities in
which the company engages. For internal reporting purposes, the Bank uses the
previous regulatory definitions of liquidity. The Bank's average liquidity ratio
average was 17.21% and 30.82% for the months ended June 30, 2004 and 2003,
respectively. The Bank's liquidity decreased due to a decrease in
interest-bearing deposits with banks for the year ended June 30, 2004.
The Bank's primary sources of funds are deposits, repayment of loans and
mortgage-backed securities, maturities of investments, funds provided from
operations, and advances from the Federal Home Loan Bank of Seattle. Scheduled
repayments of loans and mortgage-backed securities and maturities of investment
securities are generally predictable. However, other sources of funds, such as
deposit flows and loan prepayments, can be greatly influenced by the general
level of interest rates, economic conditions and competition. The Bank uses
liquidity resources principally to fund existing and future loan commitments. It
also uses them to fund maturing certificates of deposit, demand deposit
withdrawals and to invest in other loans and investments, maintain liquidity,
and meet operating expenses.
Net cash provided by the Company's operating activities, which is primarily
comprised of cash transactions affecting net income was $9.26 million for the
year ended June 30, 2004 and $(1.49) million for the year ended June 30, 2003.
The change was primarily a result of a decrease in the amount of loans held for
sale.
Net cash used in the Company's investing activities, which is primarily
comprised of cash transactions from the investment securities and
mortgage-backed securities portfolios and the loan portfolio, was $14.57 million
for the year ended June 30, 2004, and $15.27 million for the year ended June 30,
2003. The cash used was primarily due to purchases of investment securities
available-for-sale of $56.24 million. This was partially offset by proceeds from
maturities and principal repayments of investment securities of $30.28 million
and the proceeds from sales of investment securities of $10.72 million.
Net cash provided by the Company's financing activities, which is primarily cash
transactions from net increases in deposits and net Federal Home Loan Bank
advances, totaled $(0.57) million for the year ended June 30, 2004, and $16.37
million for the year ended June 30, 2003. This decrease in cash provided was the
result of the payoff of FHLB advances and the slowdown in deposit growth.
Liquidity may be adversely affected by unexpected deposit outflows, higher
interest rates paid by competitors, and similar matters. Management monitors
projected liquidity needs and determines the level desirable based in part on
our commitments to make loans and management's assessment of our ability to
generate funds.
At March 31, 2004 (the most recent report available), the Bank's measure of
sensitivity to interest rate movements, as measured by the OTS, improved from
the previous quarter. The market value of the Bank's capital position has
improved slightly from the previous quarter and year. The Bank is well within
the guidelines set forth by the Board of Directors for interest rate
sensitivity.
As of June 30, 2004, the Bank's regulatory capital was in excess of all
applicable regulatory requirements. At June 30, 2004, the Bank's tangible, core,
and risk-based capital ratios amounted to 11.4%, 11.4%, and 18.9%, respectively,
compared to regulatory requirements of 1.5%, 3.0%, and 8.0%, respectively.
The Company's charter provides that authorized shares of common stock are
9,000,000 and preferred shares are 1,000,000. The Company incorrectly stated
these amounts as 10,000,000 and 1,000,000, respectively, in earlier reports.
IMPACT OF INFLATION AND CHANGING PRICES
Our financial statements and the accompanying notes, which are found in Item 7,
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of our operations. Interest rates
have a greater impact on our performance than do the general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services.
29
RECENT ACCOUNTING PRONOUNCEMENTS
None.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
There are a number of accounting estimates performed by the Company in preparing
its financial statements. Some of the estimates are developed internally, while
others are obtained from independent third parties. Examples of estimates using
external sources are the fair market value of investment securities, fair value
of mortgage servicing rights, deferred compensation, and appraised value of
foreclosed properties. It is management's assertion that the external sources
have access to resources, methodologies, and markets that provide adequate
assurances that no material impact would occur due to changes in assumptions.
The following accounting estimates are performed internally:
Allowance for Loan and Lease Losses (ALLL)- Management applies its knowledge of
current local economic and real estate market conditions, historical experience,
loan portfolio composition, and the assessment of delinquent borrowers'
situations, to determine the adequacy of its ALLL reserve. These factors are
reviewed by the Bank's federal banking regulator and the Company's external
auditors on a regular basis. The current level of the ALLL reserve is deemed to
be more than adequate given the above factors, with no material impact expected
due to a difference in the assumptions.
Deferred Loan Fees - Management applies time study and statistical analysis to
determine loan origination costs to be capitalized under FAS 91. The analysis is
reviewed by the Company's external auditors for reasonableness. No material
impact is expected if different assumptions are used, as many of our loans have
a short duration.
Deferred Tax Assets - Management expects to realize the deferred tax assets due
to the continued profitability of the Company.
Fair Value of Other Financial Instruments - Management uses an internal model to
determine fair value for its loan portfolio and certificates of deposit. The
assumptions entail spreads over the Treasury yield curve at appropriate maturity
benchmarks. Assumptions incorporating different spreads would naturally deliver
varying results, however due to short-term nature of the loan portfolio and
certificates of deposit, changes in the results would be mitigated. Currently,
the fair value is only presented as footnote information, and changes due to new
assumptions would not, in management's opinion, affect the reader's opinion of
the Company's financial condition.
Economic Life of Fixed Assets - Management determines the useful life of its
buildings, furniture, and equipment for depreciation purposes. These estimates
are reviewed by the Company's external auditors for reasonableness. No material
impact is expected if different assumptions were to be used.
ITEM 7. FINANCIAL STATEMENTS.
Eagle Bancorp's audited financial statements, notes thereto, and auditor's
reports are found immediately following Part III of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 8A. CONTROLS AND PROCEDURES
Based on their evaluation, the registrant's Chief Executive Officer, Larry A.
Dreyer, and Chief Financial Officer, Peter J. Johnson, have concluded the
registrant's disclosure controls and procedures are effective as of June 30,
2004 to ensure that information required to be disclosed in the reports that the
registrant files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms. During the last
fiscal quarter, there have been no changes in the registrant's
30
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the registrant's internal control over
financial reporting.
PART III
The information required by Items 9, 10, 11, 12 and 14 of this part is presented
in the proxy statement issued by the Board of Directors in connection with the
annual meeting of stockholders to be held October 21, 2004, which is hereby
incorporated by reference into this annual report.
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K.
A. (1) The following documents are filed as part of this report: The
audited Consolidated Statements of Financial Condition of Eagle Bancorp and
subsidiary as of June 30, 2004, and June 30, 2003, and the related Consolidated
Statements of Income, Consolidated Statements of Changes in Stockholder Equity,
and Consolidated Statements of Cash Flows for the years then ended, together
with the related notes and independent auditor's reports.
(2) Schedules omitted as they are not applicable.
B. Exhibits
* 2.1 Amended and Restated Plan of Mutual Holding Company
Reorganization and Stock Issuance
* 3.1 Charter of Eagle Bancorp
* 3.2 Bylaws of Eagle Bancorp
* 4 Form of Stock Certificate of Eagle Bancorp
* 10.1 Employee Stock Ownership Plan and Trust
* 10.2 Employment Contract of Larry A. Dreyer
** 10.3 Stock Plan
11 Computation of per share earnings (incorporated by
reference to Note 3 to Notes To Consolidated
Statements of Financial Condition dated June 30,
2004)
14 Code of Ethics
21.1 Subsidiaries of Registrant (incorporated by reference
to Part I, Subsidiary Activity)
23.1 Consent of Anderson ZurMuehlen & Co., P.C.
31.1 Certification by Larry A. Dreyer, Chief Executive
Officer, pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by Peter J. Johnson, Chief Financial
Officer, pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by Larry A. Dreyer, Chief Executive
Officer and Peter J. Johnson, Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99 Consolidated Statements of Financial Condition
C. Reports on Form 8-K.
On April 15, 2004, the registrant filed a Current Report on
Form 8-K to furnish a press release announcing its earning for
the third quarter of the 2004 fiscal year.
------------------
* Incorporated by reference to the identically numbered exhibit
of the Registration Statement on Form SB-2 (File No.
333-93077) filed with the SEC on December 20, 1999.
** Incorporated by reference to the proxy statement for 2000
Annual Meeting filed with the SEC on September 19, 2000.
-------------------
31
Exhibit 99 - Consolidated Statements of Financial Condition
[EAGLE BANCORP LOGO]
AND SUBSIDIARY
FINANCIAL REPORT
JUNE 30, 2004
C O N T E N T S
---------------
PAGE
----
INDEPENDENT AUDITORS' REPORT
ON THE FINANCIAL STATEMENTS...................................................F-l
FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition........................F-2 and F-3
Consolidated Statements of Income.....................................F-4 and F-5
Consolidated Statements of Changes in Stockholders' Equity....................F-6
Consolidated Statements of Cash Flows.................................F-7 and F-8
Notes to Financial Statements.........................................F-9 to F-35
[AZ & COMPANY LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Eagle Bancorp
Helena, Montana 59601
We have audited the accompanying consolidated statements of financial condition
of Eagle Bancorp and subsidiary as of June 30, 2004 and 2003, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Eagle Bancorp and
subsidiary as of June 30, 2004 and 2003, and the results of its operations and
its cash flows for the years then ended in conformity with U.S. generally
accepted accounting principles.
/s/ Anderson ZurMuehlen & Co., P.C.
------------------------------------
Helena, Montana
July 20, 2004
F-1
EAGLE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2004 and 2003
ASSETS 2004 2003
------ ---- ----
Cash and due from banks $ 3,587,145 $ 2,966,202
Interest-bearing deposits with banks 759,621 7,263,841
------------ ------------
Total cash and cash equivalents 4,346,766 10,230,043
------------ ------------
Investment securities available-for-sale, at fair value 88,547,458 76,855,280
Investment securities held-to-maturity, at amortized cost 1,565,692 2,280,736
Federal Home Loan Bank stock restricted, at cost 1,672,200 1,686,300
Mortgage loans held-for-sale 1,436,747 6,908,373
Loans receivable, net of deferred loan fees and allowance
for loan losses 92,456,589 93,521,165
Accrued interest and dividends receivable 1,079,815 913,101
Mortgage servicing rights, net 2,003,258 1,291,614
Property and equipment, net 6,557,883 6,392,625
Cash surrender value of life insurance 2,476,842 2,347,232
Real estate acquired in settlement of loans, net of
allowance for losses
- 70,010
Other assets 870,001 561,924
------------ ------------
Total assets $203,013,251 $203,058,403
============ ============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-2
LIABILITIES AND STOCKHOLDERS' EQUITY 2004 2003
------------------------------------ ---- ----
LIABILITIES
Deposit accounts:
Noninterest-bearing $ 9,267,458 $ 7,868,012
Interest-bearing 160,801,422 160,556,053
Advances from Federal Home Loan Bank of Seattle 7,450,000 9,243,889
Accrued expenses and other liabilities 1,469,832 1,893,668
------------- -------------
Total liabilities 178,988,712 179,561,622
------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock (no par value, 1,000,000 shares
authorized; none issued or outstanding) - -
Common stock (par value $0.01 per share; 9,000,000 shares authorized;
1,223,572 shares issued; 1,212,372 and 1,209,772 shares outstanding at June
30, 2004 and 2003, respectively)
12,236 12,236
Additional paid-in capital 4,072,947 3,954,432
Unallocated common stock held by employee stock
ownership plan (ESOP) (202,448) (239,248)
Treasury stock, at cost (11,200 and 13,800
shares at June 30, 2004 and 2003, respectively) (198,665) (188,715)
Retained earnings 21,250,088 19,532,409
Accumulated other comprehensive income (909,619) 425,667
------------- -------------
Total equity 24,024,539 23,496,781
------------- -------------
Total liabilities and stockholders' equity $ 203,013,251 $ 203,058,403
============= =============
F-3
EAGLE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 2004 and 2003
2004 2003
---- ----
Interest and dividend income:
Interest and fees on loans $ 6,266,332 $ 7,694,258
Interest on deposits with banks 49,054 134,035
Federal Home Loan Bank of Seattle stock dividends 77,600 100,423
Interest and dividends on investment securities
available-for-sale 2,789,898 2,311,120
Interest and dividends on investment securities
held-to-maturity 90,839 166,350
------------ ------------
Total interest and dividend income 9,273,723 10,406,186
------------ ------------
Interest expense:
Deposits 2,631,139 3,632,607
Federal Home Loan Bank of Seattle advances 562,466 581,052
------------ ------------
Total interest expense 3,193,605 4,213,659
------------ ------------
Net interest income 6,080,118 6,192,527
Loan loss provision - -
------------ ------------
Net interest income after loan loss provision 6,080,118 6,192,527
------------ ------------
Non-interest income:
Demand deposit service charges 627,404 501,872
Net gain on sale of loans 1,135,693 1,824,729
Mortgage loan servicing fees, net 1,240,722 (299,587)
Net gain on sale of available-for-sale securities 72,415 164,677
Other 357,545 377,833
------------ ------------
Total non-interest income 3,433,779 2,569,524
------------ ------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-4
2004 2003
---- ----
Non-interest expenses:
Salaries and employee benefits 3,155,219 2,923,077
Occupancy 490,299 496,681
Furniture and equipment depreciation 256,060 207,947
Data processing 231,969 245,775
Advertising 161,447 148,908
Amortization of mortgage servicing rights 628,526 745,345
Federal insurance premiums 25,935 25,596
Postage 120,219 121,307
Legal, accounting, and examination fees 158,828 147,163
Consulting fees 20,585 73,514
ATM processing 51,007 45,173
Other 898,986 811,094
----------- -----------
Total non-interest expense 6,199,080 5,991,580
----------- -----------
Income before provision for income taxes 3,314,817 2,770,471
Provision for income taxes 1,033,070 904,605
----------- -----------
Income before extraordinary item 2,281,747 1,865,866
----------- -----------
Extraordinary item-extinguishment of debt (net of tax
benefit of $127,000) (203,378) -
----------- -----------
Net income $ 2,078,369 $ 1,865,866
=========== ===========
Basic earnings per common share $ 1.76 $ 1.59
=========== ===========
Diluted earnings per common share $ 1.74 $ 1.57
=========== ===========
F-5
EAGLE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended June 30, 2004 and 2003
ADDITIONAL UNALLOCATED
PREFERRED COMMON PAID-IN ESOP TREASURY RETAINED
STOCK STOCK CAPITAL SHARES STOCK EARNINGS
----- ----- ------- ------ ----- --------
Balance, July 1, 2002 $ - $12,236 $3,885,903 $ (276,048) $(180,950) $17,957,601
Net income - - - - - 1,865,866
Other comprehensive income - - - - - -
Total comprehensive income
Dividends paid ($.52 per share) (291,058)
Restricted stock plan shares allocated (4,600
shares) - - (1,150) - 54,050 -
Treasury stock purchased (1,700 shares at
$19.50/shr; 1,300 shares at $22.05/shr) - - - - (61,815) -
ESOP shares allocated or committed to be
released for allocation (4,600 shares) - - 69,679 36,800 - -
---- ------- ---------- ---------- --------- -----------
Balance, June 30, 2003 - 12,236 3,954,432 (239,248) (188,715) 19,532,409
Net income - - - - - 2,078,369
Other comprehensive income - - - - - -
Total comprehensive income
Dividends paid ($.64 per share) (360,690)
Restricted stock plan shares allocated (4,600
shares) - - (1,150) - 54,050 -
Treasury stock purchased (2,000 shares at
$32.00/shr) - - - - (64,000) -
ESOP shares allocated or committed to be
released for allocation (4,600 shares) - - 119,665 36,800 - -
---- ------- ---------- ---------- --------- -----------
Balance, June 30, 2004 $ - $12,236 $4,072,947 $ (202,448) $(198,665) $21,250,088
==== ======= ========== ========== ========= ===========
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME TOTAL
------------- -----
Balance, July 1, 2002 $ 304,135 $ 21,702,877
Net income - 1,865,866
Other comprehensive income 121,532 121,532
------------
Total comprehensive income 1,987,398
------------
Dividends paid ($.52 per share) (291,058)
Restricted stock plan shares allocated (4,600
shares) - 52,900
Treasury stock purchased (1,700 shares at
$19.50/shr; 1,300 shares at $22.05/shr) - (61,815)
ESOP shares allocated or committed to be
released for allocation (4,600 shares) - 106,479
------------ ------------
Balance, June 30, 2003 425,667 23,496,781
Net income - 2,078,369
Other comprehensive income (1,335,286) (1,335,286)
------------
Total comprehensive income 743,083
------------
Dividends paid ($.64 per share) (360,690)
Restricted stock plan shares allocated (4,600
shares) - 52,900
Treasury stock purchased (2,000 shares at
$32.00/shr) - (64,000)
ESOP shares allocated or committed to be
released for allocation (4,600 shares) - 156,465
------------ ------------
Balance, June 30, 2004 $ (909,619) $ 24,024,539
============ ============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-6
EAGLE BANCORP AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
Years Ended June 30, 2004 and 2003
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,078,369 $ 1,865,866
Adjustments to reconcile net income to net cash from
operating activities:
Provision for loan losses - -
Provision for mortgage servicing rights valuation losses (696,372) 735,205
Depreciation 460,658 400,470
Net amortization of marketable securities premiums
and discounts 1,596,014 895,364
Amortization of capitalized mortgage servicing rights 628,526 745,345
Gain on sale of real estate owned
(596) -
Loss on sale of property and equipment
- 6,465
Gain on sale of loans (1,135,693) (1,824,729)
Net realized (gain) loss on sale of available-for-sale
securities (72,415) (164,677)
Dividends reinvested (113,395) (220,740)
Increase in cash surrender value of life insurance (129,610) (102,779)
Restricted stock awards
52,900 52,900
Change in assets and liabilities:
(Increase) decrease in assets:
Accrued interest and dividends receivable (166,714) 85,277
Loans held-for-sale 6,527,370 (3,651,401)
Other assets 54,355 (316,507)
Increase (decrease) in liabilities:
Accrued expenses and other liabilities 180,399 1,625
----------- -----------
Net cash provided by (used in) operating activities 9,263,796 (1,492,316)
----------- -----------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-7
2004 2003
---- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities:
Investment securities available-for-sale (56,235,792) (55,114,594)
Proceeds from maturities, calls and principal payments:
Investment securities held-to-maturity 709,960 1,584,144
Investment securities available-for-sale 30,276,009 23,427,856
Proceeds from sales of investment securities
available-for-sale 10,719,453 4,495,494
Net decrease in loans receivable, excludes transfers to
real estate acquired in settlement of loans 420,775 10,848,193
FHLB Stock redeemed 91,600 -
Proceeds from sale of real estate acquired in the
settlement of loans 70,606 -
Purchase of property and equipment (625,917) (508,176)
------------ ------------
Net cash used in investing activities (14,573,306) (15,267,083)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in checking and savings accounts 1,644,812 16,819,326
Net increase (decrease) in overnight FHLB advances 1,450,000 -
Net increase (decrease) in FHLB advances (3,243,889) (100,000)
Payments to acquire treasury stock
(64,000) (61,815)
Dividends paid (360,690) (291,058)
------------ ------------
Net cash provided by (used in) financing activities (573,767) 16,366,453
------------ ------------
Net decrease in cash and cash equivalents (5,883,277) (392,946)
CASH AND CASH EQUIVALENTS, beginning of year 10,230,043 10,622,989
------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 4,346,766 $ 10,230,043
============ ============
F-8
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
NOTE 1. REPORTING ENTITY
Eagle Bancorp was organized in 2000 as the majority-owned subsidiary of Eagle
Financial, MHC and the sole parent of American Federal Savings Bank (the Bank).
Collectively, Eagle Bancorp and the Bank are referred to herein as "the
Company".
The Bank is a federally chartered savings bank subject to the regulations of the
Office of Thrift Supervision. The Bank is a member of the Federal Home Loan Bank
System and its deposit accounts are insured to the applicable limits by the
Federal Deposit Insurance Corporation ("FDIC").
The Bank is headquartered in Helena, Montana, and operates additional branches
in Butte, Bozeman, and Townsend, Montana. The Bank's market area is concentrated
in south central Montana, to which it primarily offers commercial, residential,
and consumer loans. The Bank's principal business is accepting deposits and,
together with funds generated from operations and borrowings, investing in
various types of loans and securities.
The consolidated financial statements include the accounts of Eagle Bancorp, and
the Bank. Intercompany transactions and balances are eliminated in
consolidation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT ESTIMATES:
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, income and expense. Actual results could differ significantly from
these estimates.
Significant estimates are necessary in determining the recorded value of the
allowance for loan losses, mortgage servicing rights, and available-for-sale
securities. Management believes the assumptions used in arriving at these
estimates are appropriate.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents include cash and
deposits with correspondent banks.
The Company maintains cash balances at several banks. Accounts at each
institution are insured by the FDIC up to $100,000. No account balances were
held with correspondent banks that were in excess of FDIC insured levels.
F-9
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2004 and 2003
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT SECURITIES:
The Company designates debt and equity securities as held-to-maturity,
available-for-sale, or trading.
Held-to-maturity - Debt investment securities that management has the positive
intent and ability to hold until maturity are classified as held-to-maturity and
are carried at their remaining unpaid principal balance, net of unamortized
premiums or unaccreted discounts. Premiums are amortized and discounts are
accreted using the interest method over the period remaining until maturity.
Available-for-sale - Investment securities that will be held for indefinite
periods of time, including securities that may be sold in response to changes in
market interest or prepayment rates, need for liquidity, and changes in the
availability of and the yield of alternative investments, are classified as
available-for-sale. These assets are carried at fair value. Unrealized gains and
losses, net of tax, are reported as other comprehensive income. Gains and losses
on the sale of available-for-sale securities are determined using the specific
identification method.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other than temporary are recognized by
write-downs of the individual securities to their fair value. Such write-downs
would be included in earnings as realized losses.
Trading - No investment securities were designated as trading at June 30, 2004
and 2003.
FEDERAL HOME LOAN BANK STOCK:
The Company's investment in Federal Home Loan Bank (FHLB) stock is a restricted
investment carried at cost ($100 per share par value), which approximates its
fair value. As a member of the FHLB system, the Company is required to maintain
a minimum level of investment in FHLB stock based on specific percentages of its
outstanding FHLB advances. The Company may request redemption at par value of
any stock in excess of the amount it is required to hold. Stock redemptions are
made at the discretion of the FHLB. The FHLB redeemed 916 shares ($91,600)
during the year ended June 30, 2004 and none during the year ended June 30,
2003.
MORTGAGE LOANS HELD-FOR-SALE:
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value, determined in aggregate,
plus the fair value of associated derivative financial instruments. Net
unrealized losses, if any, are recognized in a valuation allowance by a charge
to income.
F-10
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2004 and 2003
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS RECEIVABLE:
Loans receivable that management has the intent and ability to hold until
maturity are reported at the outstanding principal balance adjusted for any
charge-offs, allowance for loan losses, and any deferred fees or costs on
originated loans and unamortized premiums or unaccreted discounts on purchased
loans. Loan origination fees, net of certain direct origination costs are
deferred and amortized over the contractual life of the loan, as an adjustment
of the yield, using the interest method.
IMPAIRED LOANS AND RELATED INCOME:
A loan is considered impaired when management determines that it is probable
that all contractual amounts of principal and interest will not be paid as
scheduled in the loan agreement. These loans may include nonaccrual loans past
due 90 days or more, loans restructured in the current year, and other loans
that management considers to be impaired.
When a loan is placed on nonaccrual status, all interest previously accrued but
not collected is reversed and charged against interest income. Income on
nonaccrual loans is then recognized only when the loan is brought current, or
when, in the opinion of management, the borrower has demonstrated the ability to
resume payments of principal and interest. Interest income on restructured loans
is recognized pursuant to the terms of new loan agreements. Interest income on
other impaired loans is monitored and based upon the terms of the underlying
loan agreement. However, the recorded net investment in impaired loans,
including accrued interest, is limited to the present value of the expected cash
flows of the impaired loan, the observable fair market value of the loan, or the
fair value of the loan's collateral.
PROVISION FOR LOAN LOSSES:
The allowance for loan losses is increased by the provision for loan losses
charged to operations and is decreased by loan charge-offs, net of recoveries.
Management estimates the provision for loan losses by evaluating known and
inherent risks in the loan portfolio. These factors include changes in the size
and composition of the loan portfolio, actual loan loss experience, current
economic conditions, detailed analysis of individual loans for which full
collectibility may not be assured, determination of the existence and realizable
value of the collateral, and guarantees securing the loans. The allowance is
based upon market factors and trends which extend beyond the Company's control,
and which may result in losses or recoveries differing significantly from those
provided for in the financial statements.
A material estimate that is particularly susceptible to significant change
relates to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with the foreclosures or in
satisfaction of loans. In connection with the determination of the estimated
losses on loans, foreclosed assets held-for-sale, and mortgage servicing rights
management obtains independent appraisals for significant properties.
F-11
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2004 and 2003
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The majority of the Company's loan portfolio consists of consumer loans,
commercial real estate loans and single-family residential loans secured by real
estate in south central Montana. Real estate prices in this market have been
stable. However, the ultimate collectibility of a substantial portion of the
Company's loan portfolio may be susceptible to changes in local market
conditions in the future.
MORTGAGE SERVICING RIGHTS:
The Company allocates its total cost in mortgage loans between mortgage
servicing rights and loans, based upon their relative fair values, when loans
are subsequently sold or securitized, with the servicing rights retained. Fair
values are generally obtained through market survey data. Impairment of mortgage
servicing rights is measured quarterly based upon the characteristics of the
individual loans, including note rate, term, underlying collateral, current
market conditions, and estimates of net servicing income. The Company accounts
for its recorded value on a loan-by-loan basis and possible impairment of
mortgage servicing rights on a portfolio basis. Impairment is recorded through a
valuation allowance and a charge to mortgage loan servicing fees.
Mortgage servicing rights are amortized in proportion to, and over the estimated
period of, net servicing income, adjusted for actual loan prepayments.
REAL ESTATE OWNED:
Real estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at the lower of the unpaid principal balance of the related
loan or the fair market value of the real estate acquired less estimated selling
costs. After foreclosure, management performs subsequent valuations, and the
carrying value of a real estate owned property is adjusted by a charge to
expense to reflect any subsequent declines in estimated fair value. Fair value
estimates are based on recent appraisals and other available information.
Routine holding costs are charged to expense as incurred, while significant
improvements are capitalized. Gains and losses on sales of real estate owned are
recognized upon disposition.
PROPERTY AND EQUIPMENT:
Property and equipment is recorded at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the expected useful
lives of the assets, ranging from 3 to 35 years. The costs of maintenance and
repairs are expensed as incurred, while major expenditures for renewals and
betterments are capitalized.
INCOME TAXES:
Income taxes are accounted for under the asset and liability method.
Accordingly, deferred taxes are recognized for the estimated future tax effects
attributable to "temporary differences" between the financial statement carrying
amounts and the tax basis of existing assets and liabilities. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which the temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax laws or rates is recognized in income tax expense in the period
that includes the enactment date of the change.
F-12
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2004 and 2003
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES (CONTINUED):
A deferred tax liability is recognized for all temporary differences that will
result in future taxable income. A deferred tax asset is recognized for all
temporary differences that will result in future tax deductions, subject to
reduction of the asset by a valuation allowance in certain circumstances. This
valuation allowance is recognized if, based on an analysis of available
evidence, management determines that it is more likely than not that some
portion or all of the deferred tax asset will not be realized. The valuation
allowance is subject to ongoing adjustment based on changes in circumstances
that affect management's judgment about the realizability of the deferred tax
asset. Adjustments to increase or decrease the valuation allowance are charged
or credited, respectively, to income tax expense.
ADVERTISING COSTS:
The Company expenses advertising costs as they are incurred. Advertising costs
were approximately $161,000 and $149,000 for the years ended June 30, 2004 and
2003, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN:
Compensation expense recognized for the Company's ESOP equals the fair value of
shares that have been allocated or committed to be released for allocation to
participants. Any difference between the fair value of the shares at the time
and the ESOP's original acquisition cost is charged or credited to stockholders'
equity (additional paid-in capital). The cost of ESOP shares that have not yet
been allocated or committed to be released is deducted from stockholders'
equity.
EARNINGS PER SHARE:
Basic earnings per share (EPS) is calculated by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted EPS
is calculated by dividing net income by the weighted average number of common
shares used to compute basic EPS plus the incremental amount of potential common
stock determined by the treasury stock method. For purposes of computing EPS,
outstanding common shares include all shares issued to the Mutual Holding
Company but exclude ESOP shares that have not been allocated or committed to be
released for allocation to participants.
FINANCIAL INSTRUMENTS:
All derivative financial instruments that qualify for hedge accounting are
recognized in the financial statements and measured at fair value regardless of
the purpose or intent for holding them. Changes in the fair value of derivative
financial instruments used as cash flow hedges are recognized as a component of
comprehensive income. At June 30, 2004 and 2003, the Company was holding forward
delivery commitments that qualify as derivative financial instruments.
The carrying value of the Company's financial instruments approximates fair
value. The fair value of the Company's financial instruments is generally
determined by a third party's valuation of the underlying asset.
F-13
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2004 and 2003
NOTE 3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the years ended June 30:
2004 2003
---- ----
Weighted average shares outstanding during
the year on which basic earnings per share
is calculated 1,183,848 1,175,411
Add: weighted average of stock incentive
shares held in treasury 11,938 15,775
----------------- -----------------
Average outstanding shares on which
diluted earnings per share is calculated 1,195,786 1,191,186
================= =================
Net income applicable to common stockholders $ 2,078,369 $ 1,865,866
================= =================
Basic earnings per share $ 1.76 $ 1.59
================= =================
Diluted earnings per share $ 1.74 $ 1.57
================= =================
NOTE 4. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgements by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of tangible and core capital (as defined in the regulations) to total
adjusted assets (as defined), and of risk-based capital (as defined) to
risk-weighted assets (as defined). Management believes, as of June 30, 2004 and
2003, that the Bank meets all capital adequacy requirements to which it is
subject.
F-14
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2004 and 2003
NOTE 4. REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
The most recent notification from the Office of Thrift Supervision (OTS) (as of
July 19, 2004) categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well-capitalized,
the Bank must maintain minimum tangible, core, and risk-based ratios as set
forth in the table below.
The Bank's actual capital amounts (in thousands) and ratios are presented in the
table below.
TO BE CONSIDERED
WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------ ------------------------ ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
AS OF JUNE 30, 2004:
Tangible $ 23,199 11.43% $ 3,045 1.5% N/A N/A
Leverage $ 23,199 11.43% $ 6,089 3.0% $ 10,149 5.0 %
Tier 1 risk-based $ 23,199 18.37% $ 5,050 4.0% $ 7,575 6.0%
Total risk-based $ 23,803 18.85% $ 10,100 8.0% $ 12,626 10.0%
AS OF JUNE 30, 2003:
Tangible $ 21,737 10.80% $ 3,020 1.5% N/A N/A
Leverage $ 21,737 10.80% $ 6,039 3.0% $ 10,065 5.0%
Tier 1 risk-based $ 21,737 18.53% $ 4,692 4.0% $ 7,038 6.0%
Total risk-based $ 22,397 19.09% $ 9,384 8.0% $ 11,730 10.0%
A reconciliation of the Bank's capital (in thousands) determined by generally
accepted accounting principles to capital defined for regulatory purposes, is as
follows:
June 30,
-----------------------
2004 2003
--------- ----------
Capital determined by generally
accepted accounting principles $ 22,419 $ 22,027
Unrealized (gain) loss on securities
available-for-sale 922 (340)
Unrealized (gain) loss on equity securities (130) 111
Unrealized gain on forward delivery
commitments (12) (61)
---------- ----------
Tier I (core) capital 23,199 21,737
Unallocated allowance for loan losses 604 660
--------- ----------
Total risk based capital $ 23,803 $ 22,397
========= ==========
F-15
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2004 and 2003
NOTE 4. REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
DIVIDEND LIMITATIONS
Under OTS regulations that became effective April 1, 1999, savings associations
such as the Bank generally may declare annual cash dividends up to an amount
equal to net income for the current year plus net income retained for the two
preceding years. Dividends in excess of such amount requires OTS approval. The
Bank has paid dividends totaling $360,690 and $291,058 to the Company during the
years ended June 30, 2004, and 2003, respectively. The Company had paid four
quarterly dividends of $0.16 per share to its shareholders for the year ended
June 30, 2004, and four quarterly dividends of $0.13 per share to its
shareholders for the year ended June 30, 2003.
LIQUIDATION RIGHTS
All depositors who had liquidation rights with respect to the Bank as of the
effective date of the Reorganization continue to have such rights solely with
respect to the Mutual Holding Company, as long as they continue to hold deposit
accounts with the Bank. In addition, all persons who become depositors of the
Bank subsequent to the Reorganization will have liquidation rights with respect
to the Mutual Holding Company.
NOTE 5. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Company is required to maintain cash reserves on deposit with the Federal
Reserve Bank based on deposits.
As of June 30, 2004 and 2003, the Company was required to have aggregate cash
deposits with the Federal Reserve Bank of approximately $425,000 and $370,000,
respectively.
NOTE 6. INVESTMENT SECURITIES
The Company's investment policy requires that the Company purchase only
high-grade investment securities. Municipal obligations are categorized as "AAA"
or better by a nationally recognized statistical rating organization. These
ratings are achieved because the securities are backed by the full faith and
credit of the municipality and also supported by third-party credit insurance
policies. Mortgage backed securities and collateralized mortgage obligations are
issued by government sponsored corporations, including Federal Home Loan
Mortgage Corporation, Fannie Mae, and the Guaranteed National Mortgage
Association. The amortized cost and estimated fair values of securities,
together with unrealized gains and losses, are as follows:
F-16
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2004 and 2003
NOTE 6. INVESTMENT SECURITIES (CONTINUED)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------------ ------------------ ------------------ ------------------
JUNE 30, 2004:
AVAILABLE-FOR-SALE:
U.S. government and
agency obligations $ 11,071,378 $ - $ (159,926) $ 10,911,452
Municipal obligations 9,267,086 - (194,580) 9,072,506
Corporate obligations 17,934,087 - (338,757) 17,595,330
Mortgage-backed
securities 16,755,411 - (174,212) 16,581,199
Mutual funds 99,693 477 - 100,170
Collateralized
mortgage obligations 32,821,048 - (405,785) 32,415,263
Common stock 128,908 - (1,872) 127,036
Corporate preferred
stock 1,950,000 - (205,498) 1,744,502
------------------ ------------------ ------------------- ------------------
Total $ 90,026,711 $ 477 $ (1,480,630) $ 88,547,458
================== ================== =================== ==================
HELD-TO-MATURITY:
Municipal obligations $ 930,422 $ 35,999 $ - $ 966,421
Mortgage-backed
securities 635,270 28,849 - 664,119
------------------ ------------------ ------------------ ------------------
Total $ 1,565,692 $ 64,848 $ - $ 1,630,540
================== ================== ================== ==================
JUNE 30, 2003:
AVAILABLE-FOR-SALE:
U.S. government and
agency obligations $ 5,039,764 $ 111,500 $ - $ 5,151,264
Municipal obligations 6,851,051 235,534 - 7,086,585
Corporate obligations 6,180,404 217,512 - 6,397,916
Mortgage-backed
securities 28,032,532 190,352 - 28,222,884
Mutual funds 4,696,019 - (26) 4,695,993
Collateralized
mortgage obligations 23,461,474 - (7,351) 23,454,123
Common stock 58,645 2,710 - 61,355
Corporate preferred
stock 1,950,000 - (164,840) 1,785,160
------------------ ------------------ ------------------ ------------------
Total $ 76,269,889 $ 757,608 $ (172,217) $ 76,855,280
================== ================== ================== ==================
HELD-TO-MATURITY:
Municipal obligations $ 1,031,729 $ 75,173 $ - $ 1,106,902
Mortgage-backed
securities 1,249,007 49,206 - 1,298,213
------------------ ------------------ ------------------ ------------------
Total $ 2,280,736 $ 124,379 $ - $ 2,405,115
================== ================== ================== ==================
F-17
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2004 and 2003
NOTE 6. INVESTMENT SECURITIES (CONTINUED)
The Company has not entered into any interest rate swaps, options, or futures
contracts relating to investment securities.
Gross recognized gains on securities available-for-sale were $115,271 and
$164,677 for the years ended June 30, 2004 and 2003, respectively. Gross
recognized losses on securities available-for-sale were $42,856 and $0 for the
years ended June 30, 2004 and 2003, respectively.
The amortized cost and estimated fair value of securities at June 30, 2004 by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
June 30, 2004
---------------------------------------------------------------------------------
HELD-T0-MATURITY AVAILABLE-FOR-SALE
SECURITIES SECURITIES
------------------------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---- ----- ---- -----
Due in one year $ 100,000 $ 100,059 $ 200,112 $ 207,508
Due after one year
through five years 565,975 589,289 26,108,567 25,609,711
Due after five years
through ten years 125,000 134,809 981,535 955,931
Due after ten years 139,447 142,264 10,982,492 10,806,138
------------------ ------------------ ------------------ -----------------
930,422 966,421 38,272,706 37,579,288
Preferred stock 1,950,000 1,744,502
Common stock 128,908 127,036
Mortgaged-backed
securities 635,270 664,119 16,755,256 16,581,199
Mutual funds 99,693 100,170
Collateralized
mortgage
obligations 32,821,048 32,415,263
------------------ ------------------ ------------------ -----------------
Total $ 1,565,692 $ 1,630,540 $ 90,027,611 $ 88,547,458
================== ================== ================== =================
Maturities of securities do not reflect repricing opportunities present in
adjustable rate securities, nor do they reflect expected shorter maturities
based on early prepayment of principal.
A federal agency obligation bond with amortized cost of approximately $500,000
has been pledged to the Federal Reserve Bank to serve as collateral for the
Company's treasury, tax, and loan account at June 30, 2004 and 2003. All other
securities are held at the Federal Home Loan Bank for safekeeping.
F-18
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2004 and 2003
NOTE 6. INVESTMENT SECURITIES (CONTINUED)
Two municipal bonds with amortized cost of $304,000 have been pledged to serve
as security for deposits over $100,000 held by the Company at June 30, 2004 and
2003. Thirty-nine mortgage-backed securities with amortized cost of
approximately $8,815,000 have been pledged to the Federal Home Loan Bank of
Seattle to serve as collateral for the Company's borrowings.
Investments with an unrealized loss position at June 30, 2004:
Less than 12 months 12 months or more Total
-------------------------- -------------------------- --------------------------
Unrealized Unrealized Unrealized
Fair Value Loss Fair Value Loss Fair Value Loss
------------ ----------- ------------- ----------- ------------- -----------
Description of securities:
U.S. Government and
agency obligations $ 8,097,660 $ 159,926 $ 785,647 $ 2,786 $ 8,883,307 $ 162,712
Corporate obligations 17,387,768 346,152 - - 17,387,768 346,152
Municipal obligations 3,271,795 134,573 1,179,959 137,852 4,451,754 272,425
Mortgage-backed
securities and
collateralized
mortgage 22,215,641 424,361 10,554,956 277,321 32,770,597 701,682
Common stock 58,300 2,746 - - 58,300 2,746
Corporate preferred
stock 193,422 6,578 1,397,180 202,820 1,590,602 209,398
------------- ----------- ------------- ----------- ------------- -----------
$ 51,224,586 $ 1,074,336 $ 13,917,742 $ 620,779 $ 65,142,328 $ 1,695,115
============= =========== ============= =========== ============= ===========
The table above shows our investment's gross unrealized losses and fair values,
aggregated by investment category and length of time that the individual
securities have been in a continuous unrealized loss position at June 30, 2004.
129 securities are in an unrealized loss position as of June 30, 2004.
Management has evaluated these securities and believes the loss position to be
temporary as a result of the current interest rate environment and not from any
particular credit quality of any of the specific securities.
NOTE 7. LOANS RECEIVABLE
Loans receivable consist of the following:
June 30,
-----------------------------
2004 2003
------------- -------------
First mortgage loans:
Residential mortgage (1 - 4 family) $ 49,044,832 $ 45,404,699
Commercial real estate 9,336,336 18,819,234
Real estate construction 5,101,591 3,802,257
Other loans:
Home Equity 14,874,279 13,791,769
Consumer 9,801,698 9,278,219
Commercial 4,840,045 3,033,786
------------- -------------
Total 92,998,781 94,129,964
Less: Allowance for loan losses (627,733) (672,841)
Deferred loan fees, net 85,541 64,042
------------- -------------
Total $ 92,456,589 $ 93,521,165
============= =============
F-19
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2004 and 2003
NOTE 7. LOANS RECEIVABLE (CONTINUED)
Loans net of related allowance for loan losses on which the accrual of interest
has been discontinued were $497,000 and $610,000 at June 30, 2004 and 2003,
respectively. Interest income not accrued on these loans and cash interest
income were immaterial for the years ended June 30, 2004 and 2003. The allowance
for loan losses on nonaccrual loans as of June 30, 2004 and 2003 was $11,604 and
$4,715, respectively. The Company expects to collect all amounts due on
nonaccrual loans, including interest accrued at contractual rates, accordingly
there are no loans considered impaired at June 30, 2004 and 2003. As of June 30,
2004 and 2003, the Company had $125,000 and $198,000, respectively, of loans
past due greater than ninety days that were still accruing interest.
The following is a summary of changes in the allowance for loan losses:
Years Ended June 30,
2004 2003
------------- -------------
Balance, beginning of period $ 672,841 $ 702,705
Reclassification to repossessed property
reserve (8,671) -
Transfer from interest reserve - -
Provision charged to operations - -
Charge-offs (45,431) (37,118)
Recoveries 8,994 7,254
------------- -------------
Balance, end of period $ 627,733 $ 672,841
============= =============
Loans are granted to directors and officers of the Company in the ordinary
course of business. Such loans are made in accordance with policies established
for all loans of the Company, except that directors, officers, and employees may
be eligible to receive discounts on loan origination costs.
Loans receivable from directors and senior officers of the Company at June 30,
2004 and 2003, were $126,102 and $172,021, respectively. Interest income from
these loans was $6,148 and $7,634 for the years ended June 30, 2004 and 2003,
respectively.
At June 30, 2003, the Bank had pledged its residential mortgage (1-4 family)
loans as collateral for the advances from the Federal Home Loan Bank of Seattle.
As of June 30, 2004, the Bank has pledged mortgage-backed securities as
collateral and no longer uses its residential mortgages as collateral.
F-20
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2004 and 2003
NOTE 8. MORTGAGE SERVICING RIGHTS
The Company is servicing loans for the benefit of others totaling approximately
$215,529,000 and $193,385,000 at June 30, 2004 and 2003, respectively. Servicing
loans for others generally consists of collecting mortgage payments, maintaining
escrow accounts, disbursing payments to investors, and foreclosure processing.
Custodial escrow balances maintained in connection with the foregoing loan
servicing, and included in demand deposits, were approximately $1,789,000 and
$1,980,000 at June 30, 2004 and 2003, respectively.
The following is a summary of activity in mortgage servicing rights and the
valuation allowance:
Years Ended June 30,
2004 2003
----------------- ------------------
Mortgage Servicing Rights
Balance, beginning of period $ 2,048,334 $ 1,609,833
Mortgage servicing rights capitalized 643,798 1,183,848
Amortization of mortgage servicing
rights (628,526) (745,345)
------------------- ------------------
2,063,606 2,048,334
------------------ ------------------
Valuation Allowance
Balance, beginning of period 756,720 21,515
Provision charged to operations (696,372) 735,205
------------------- ------------------
Balance, end of period 60,348 756,720
------------------ ------------------
Net Mortgage Servicing Rights $ 2,003,258 $ 1,291,614
================== ==================
NOTE 9. PROPERTY AND EQUIPMENT
Property and equipment and related depreciation are summarized by major
classification as follows:
June 30,
----------------------------------------
2004 2003
------------------ ------------------
Land, buildings, and improvements $ 7,838,999 $ 7,796,815
Furniture and equipment 3,848,892 3,349,377
------------------ ------------------
Total 11,687,891 11,146,192
Accumulated depreciation (5,130,008) (4,753,567)
------------------- ------------------
Total $ 6,557,883 $ 6,392,625
================== ==================
Depreciation expense totaled $460,658 and $400,470 for the years ended June 30,
2004 and 2003, respectively.
F-21
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2004 and 2003
NOTE 10. DEPOSITS
Deposits are summarized as follows:
June 30,
---------------------------------------
2004 2003
------------------ ------------------
Noninterest checking $ 9,267,458 $ 7,868,012
Interest-bearing checking (0.20%, 0.30%) 29,370,347 27,125,488
Passbook (0.65%, 1.15%) 25,862,734 25,762,108
Money market (0.91%, 1.33%) 30,332,871 30,177,605
Time certificates of deposit
(2004, 1.00% - 6.30%; 2003, 1.39% - 6.53%) 75,235,470 77,490,852
------------------ ------------------
$ 170,068,880 $ 168,424,065
================== ==================
The weighted average cost of funds was 1.36% and 1.89% at June 30, 2004 and
2003, respectively.
Time certificates of deposit maturities at June 30, 2004 are as follows:
Within one year $ 57,675,753
One to two years 14,842,731
Two to three years 1,679,945
Four to five years 635,343
Thereafter 401,698
------------------
Total $ 75,235,470
==================
Interest expense on deposits is summarized as follows:
Years Ended June 30,
2004 2003
------------------ ------------------
Checking $ 70,235 $ 117,694
Passbook 201,590 350,277
Money market 333,678 507,531
Time certificates of deposit 2,025,636 2,657,105
------------------ ------------------
Total $ 2,631,139 $ 3,632,607
================== ==================
At June 30, 2004 and 2003, the Company held $30,082,000 and $27,218,000,
respectively, in deposit accounts in excess of $100,000 or more. Deposit amounts
in excess of $100,000 are not insured by the FDIC.
At June 30, 2004 and 2003 the Company reclassified $18,004 and $26,949,
respectively in overdrawn deposits as loans.
Directors' and senior officers' deposit accounts at June 30, 2004 and 2003, were
$424,161 and $456,673, respectively.
F-22
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2004 and 2003
NOTE 11. ADVANCES FROM THE FEDERAL HOME LOAN BANK OF SEATTLE
Advances from the Federal Home Loan Bank of Seattle mature as follows:
June 30,
---------------------------------------
Maturing period 2004 2003
--------------- ------------------ ------------------
Within one year $ 5,564,815 $ 100,000
One to two years 1,166,667 5,100,000
Two to three years 688,889 3,100,000
Three to four years 29,629 100,000
Four to five years - 100,000
Thereafter - 743,889
------------------ ------------------
$ 7,450,000 $ 9,243,889
================== ==================
Two advances require annual principal payments totaling $1,166,667. The
remaining advances are due at maturity. The advances are subject to prepayment
penalties. The interest rates on advances are fixed. The weighted average
interest rate for advances at June 30, 2004 and 2003 was 3.58% and 6.20%
respectively. The weighted average amount outstanding was $9,072,000 and
$9,290,000 for the years ended June 30, 2004 and 2003, respectively.
The maximum amount outstanding at any month-end was $9,235,556 and $9,335,556
during the years ended June 30, 2004 and 2003, respectively.
Beginning in May 2004, the advances are collateralized by mortgage-backed
securities pledged to the FHLB of Seattle. Previously they were collateralized
by a blanket pledge of the Bank's 1-4 family residential mortgage portfolio. At
June 30, 2004 and 2003, the Company exceeded the collateral requirements of the
FHLB. The Company's investment in FHLB stock is also pledged as collateral on
these advances.
The total FHLB funding line available to the Company at June 30, 2004, was 25%
of total Bank assets, or approximately $50,404,000.
F-23
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2004 and 2003
NOTE 12. INCOME TAXES
The components of the Company's income tax provision (benefit) are as follows:
Years Ended June 30,
2004 2003
------------------ ------------------
Current:
U.S. federal $ 534,231 $ 921,569
Montana 138,057 210,136
------------------ ------------------
672,288 1,131,705
------------------ ------------------
Deferred:
U.S. federal 303,000 (186,500)
Montana 57,782 (40,600)
------------------ ------------------
360,782 (227,100)
------------------ ------------------
Total $ 1,033,070 $ 904,605
================== ==================
The nature and components of deferred tax assets and liabilities, which are a
component of other assets (in 2004) and accrued liabilities (in 2003) in the
accompanying statement of financial condition, are as follows:
June 30,
---------------------------------------
2004 2003
------------------ ------------------
Deferred tax assets:
Deferred compensation $ 266,000 $ 245,000
Allowance for loan losses (state only) 43,000 47,000
Allowance for mortgage servicing
rights (federal only) 23,000 286,000
Securities available-for-sale 559,000
Deferred loan fees - 1,000
Other 21,000 -
------------------ ------------------
Total deferred tax assets 912,000 579,000
------------------ ------------------
Deferred tax liabilities:
Accumulated depreciation 260,000 121,000
Deferred loan fees 32,000 -
FHLB stock 523,000 503,000
Securities available-for-sale - 221,000
Unrealized gain on hedging 7,000 37,000
Interest receivable - 1,000
Allowance for loan losses (federal only) 12,000 36,000
Other - 40,000
------------------ ------------------
Total deferred tax liabilities 834,000 959,000
------------------ ------------------
Net deferred tax (asset) liability $ (78,000) $ 380,000
=================== ==================
F-24
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2004 and 2003
NOTE 12. INCOME TAXES (CONTINUED)
The Company believes, based upon the available evidence, that all deferred tax
assets will be realized in the normal course of operations. Accordingly, these
assets have not been reduced by a valuation allowance.
A reconciliation of the Company's effective income tax provision to the
statutory federal income tax rate is as follows:
Years Ended June 30,
2004 2003
-------------- --------------
Federal income taxes at the
statutory rate of 34% $ 1,127,038 $ 941,960
State income taxes 196,000 170,000
Nontaxable income (218,751) (188,351)
Other, net (71,217) (19,004)
--------------- --------------
Income tax expense $ 1,033,070 $ 904,605
============== ==============
Effective tax rate 31.2% 32.7%
============= =============
Prior to January 1, 1987, the Company was allowed a special bad debt deduction
limited generally in the current year to 32% (net of preference tax) of
otherwise taxable income and subject to certain limitations based on aggregate
loans and savings account balances at the end of the year. If the amounts that
qualified as deductions for federal income tax purposes are later used for
purposes other than for bad debt losses, they will be subject to federal income
tax at the then current corporate rate. Retained earnings include approximately
$915,000 at June 30, 2004 and 2003, for which federal income tax has not been
provided.
NOTE 13. COMPREHENSIVE INCOME
Comprehensive income represents the sum of net income and items of "other
comprehensive income" that are reported directly in stockholders' equity, such
as the change during the period in the after-tax net unrealized gain or loss on
securities available-for-sale.
The Company's other comprehensive income is summarized as follows for the years
ended June 30:
F-25
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2004 and 2003
NOTE 13. COMPREHENSIVE INCOME (CONTINUED)
2004 2003
---- ----
Net unrealized holding gain or loss arising
during the year:
Available for sale securities, net of related
income tax (benefit) expense of $(752,689)
and $103,678, respectively $ (1,240,441) $ 174,168
Forward delivery commitments, net of
related income tax (benefit) expense of $(30,181)
and $30,246, respectively (49,767) 49,876
Reclassification adjustment for net realized
gain included in net income, net of
related income tax expense of $27,337
and $62,165, respectively (45,078) (102,512)
------------------ ------------------
Other comprehensive income $ (1,335,286) $ 121,532
================== ==================
NOTE 14. EMPLOYEE BENEFITS
PROFIT SHARING PLAN:
The Company provides a noncontributory profit sharing plan for eligible
employees who have completed one year of service. The amount of the Company's
annual contribution, limited to a maximum of 15% of qualified employees'
salaries, is determined by the Board of Directors. Profit sharing expense was
$148,309 and $157,846 for the years ended June 30, 2004 and 2003, respectively.
The Company's profit sharing plan includes a 401(k) feature. At the discretion
of the Board of Directors, the Company may match up to 50% of participants'
contributions up to a maximum of 4% of participants' salaries. For the years
ended June 30, 2004 and 2003, the Company's match totaled $38,302 and $37,303,
respectively.
DEFERRED COMPENSATION PLANS:
The Company has entered into deferred compensation contracts with current key
employees. The contracts provide fixed benefits payable in equal annual
installments upon retirement. The Company purchased life insurance contracts
that may be used to fund the payments. The charge to expense is based on the
present value computations of anticipated liabilities. For the years ended June
30, 2004 and 2003, the total expense was $87,039 and to $82,504, respectively.
F-26
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2004 and 2003
NOTE 14. EMPLOYEE BENEFITS (CONTINUED)
EMPLOYEE STOCK OWNERSHIP PLAN:
The Company has established an ESOP for eligible employees who meet certain age
and service requirements. The ESOP borrowed $368,048 from Eagle Bancorp and used
the funds to purchase 46,006 shares of common stock in the Offering. The Bank
makes periodic contributions to the ESOP sufficient to satisfy the debt service
requirements of the loan that has a ten-year term and bears interest at 8%. The
ESOP uses these contributions, and any dividends received by the ESOP on
unallocated shares, to make principal and interest payments on the loan.
Shares purchased by the ESOP are held in a suspense account by the plan trustee
until allocated to participant accounts. Shares released from the suspense
account are allocated to participants on the basis of their relative
compensation in the year of allocation. Participants become vested in the
allocated shares over a period not to exceed seven years. Any forfeited shares
are allocated to other participants in the same proportion as contributions.
Total ESOP expense of $136,913 and $88,585 was recognized in fiscal 2004 and
2003 for 4,600 shares committed to be released to participants during the years
ended June 30, 2004 and 2003 with respect to the plan years ending December 31,
2003 and 2002. The cost of the 25,306 ESOP shares ($202,448 at June 30, 2004)
that have not yet been allocated or committed to be released to participants is
deducted from stockholders' equity. The fair value of these shares was
approximately $817,384 at that date.
STOCK INCENTIVE PLAN:
The Company adopted the Stock Incentive Plan (the Plan) on October 19, 2000. The
Plan provides for different types of awards including stock options, restricted
stock and performance shares. Under the Plan, 23,000 shares of restricted stock
were granted to directors and certain officers during fiscal 2001. These shares
of restricted stock vest in equal installments over five years beginning one
year from the grant date.
During fiscal 2004 and 2003, 4,600 shares vested and were removed from treasury
stock resulting in compensation expense of $52,900.
There were no stock options granted under the Plan as of June 30, 2004.
F-27
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2004 and 2003
NOTE 15. SUPPLEMENTAL CASH FLOW INFORMATION
2004 2003
---- ----
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for interest $ 3,239,470 $ 4,235,764
================== ==================
Cash paid during the year for income taxes $ 826,868 $ 1,130,100
================== ==================
NON-CASH INVESTING ACTIVITIES:
(Increase) decrease in market value of
securities available-for-sale $ 2,065,545 $ (277,846)
================== ==================
Mortgage servicing rights capitalized $ 643,798 $ 1,183,848
================== ==================
ESOP shares released $ 119,665 $ 106,479
================== ==================
NOTE 16. FINANCIAL INSTRUMENTS
All financial instruments held or issued by the Company are held or issued for
purposes other than trading. In the ordinary course of business, the Company
enters into off-balance sheet financial instruments consisting of commitments to
extend credit and forward delivery commitments for the sale of whole loans to
the secondary market.
Commitments to extend credit - In response to marketplace demands, the Company
routinely makes commitments to extend credit for fixed rate and variable rate
loans with or without rate lock guarantees. When rate lock guarantees are made
to customers, the Company becomes subject to market risk for changes in interest
rates that occur between the rate lock date and the date that a firm commitment
to purchase the loan is made by a secondary market investor.
Generally, as interest rates increase, the market value of the loan commitment
goes down. The opposite effect takes place when interest rates decline.
Commitments to extend credit are agreements to lend to a customer as long as the
borrower satisfies the Company's underwriting standards and related provisions
of the borrowing agreements. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee. The Company uses
the same credit policies in making commitments to extend credit as it does for
on-balance-sheet instruments. Collateral is required for substantially all
loans, and normally consists of real property. The Company's experience has been
that substantially all loan commitments are completed or terminated by the
borrower within 3 to 12 months.
F-28
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2004 and 2003
NOTE 16. FINANCIAL INSTRUMENTS (CONTINUED)
The notional amount of the Company's commitments to extend credit at fixed and
variable interest rates were approximately $3,297,000 and $4,144,000 at June 30,
2004 and 2003, respectively. Fixed rate commitments are extended at rates
ranging from 4.625% to 7.50% and 4.375% to 8.00% at June 30, 2004 and 2003,
respectively. The Company has lines of credit representing credit risk of
approximately $20,023,000 and $16,245,000 at June 30, 2004 and 2003,
respectively, of which approximately $6,024,000 and $7,055,000 had been drawn at
June 30, 2004 and 2003, respectively. The Company has credit cards issued
representing credit risk of approximately $3,498,000 and $2,830,000 at June 30,
2004 and 2003, respectively, of which approximately $479,000 and $450,000 had
been drawn at June 30, 2004 and 2003, respectively. The Company has letters of
credits issued representing credit risk of approximately $50,000 and $133,000 at
June 30, 2004 and 2003, respectively.
Forward delivery commitments - The Company uses mandatory sell forward delivery
commitments to sell whole loans. These commitments are also used as a hedge
against exposure to interest-rate risks resulting from rate locked loan
origination commitments on certain mortgage loans held-for-sale. Gains and
losses in the items hedged are deferred and recognized in other comprehensive
income until the commitments are completed. At the completion of the commitments
the gains and losses are recognized in the Company's income statement
As of June 30, 2004 and 2003, the Company had entered into commitments to
deliver approximately $2,727,000 and $15,208,000 respectively, in loans to
various investors, all at fixed interest rates ranging from 5.00% to 8.50% and
4.125% to 6.50%, at June 30, 2004 and 2003, respectively. The Company had
approximately $19,000 and $99,000 of gains deferred as a result of the forward
delivery commitments entered into as of June 30, 2004 and 2003, respectively.
The total amount of the gain is expected to be taken into income within the next
twelve months.
The Company did not have any gains or losses reclassified into earnings as a
result of the ineffectiveness of its hedging activities. The Company considers
its hedging activities to be highly effective.
The Company did not have any gains or losses reclassified into earnings as a
result of the discontinuance of cash flow hedges because it was probable that
the original forecasted transaction would not occur by the end of the originally
specified time frame as of June 30, 2004.
F-29
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2004 and 2003
NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts of financial instrument have been determined by
the Company using available market information and appropriate valuation
methodologies. However, considerable judgement is necessarily required to
interpret data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
June 30,
----------------------------------------------------------------------------
2004 2003
------------------------------------- -------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------------- ------------------ ------------------ -----------------
FINANCIAL ASSETS:
Cash and interest-
bearing accounts $ 4,346,766 $ 4,346,766 $ 10,230,043 $ 10,230,043
Investment securities
available-for-sale $ 88,547,458 $ 88,547,458 $ 76,855,280 $ 76,855,280
Investment securities
held-to-maturity $ 1,565,692 $ 1,630,540 $ 2,280,736 $ 2,405,115
Federal Home Loan
Bank stock $ 1,672,200 $ 1,672,200 $ 1,686,300 $ 1,686,300
Mortgage loans
held-for-sale $ 1,436,747 $ 1,436,747 $ 6,908,373 $ 6,908,373
Loans receivable, net $ 92,456,589 $ 94,119,000 $ 93,521,165 $ 97,813,000
Mortgage servicing
rights $ 2,003,258 $ 2,003,258 $ 1,291,614 $ 1,291,614
Cash surrender value
of life insurance $ 2,476,842 $ 2,476,842 $ 2,347,232 $ 2,347,232
FINANCIAL LIABILITIES:
Deposits $ 94,833,410 $ 94,833,410 $ 90,933,213 $ 90,933,213
Time certificates
of deposit $ 75,235,470 $ 75,651,000 $ 77,490,852 $ 78,669,000
Advances from Federal
Home Loan Bank $ 7,450,000 $ 7,494,000 $ 9,243,889 $ 10,044,000
The following methods and assumptions were used by the Company in estimating the
fair value of the following classes of financial instruments.
Cash and interest-bearing accounts - The carrying amounts approximate fair value
due to the relatively short period of time between the origination of these
instruments and their expected realization.
Investment securities and stock in the FHLB - The fair value of investment
securities is estimated based on bid prices published in financial newspapers or
bid quotations received from securities dealers. The fair value of stock in the
FHLB approximates redemption value.
F-30
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2004 and 2003
NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Loans receivable and mortgage loans held-for-sale - Fair values are estimated by
stratifying the loan portfolio into groups of loans with similar financial
characteristics. Loans are segregated by type such as real estate, commercial,
and consumer, with each category further segmented into fixed and adjustable
rate interest terms.
For mortgage loans, including loans held-for-sale, the Company uses the
secondary market rates in effect for loans that have similar characteristics.
The fair value of other fixed rate loans is calculated by discounting scheduled
cash flows through the anticipated maturities adjusted for prepayment estimates.
Adjustable interest rate loans are assumed to approximate fair value because
they generally reprice within the short term.
Fair values are adjusted for credit risk based on assessment of risk identified
with specific loans, and risk adjustments on the remaining portfolio based on
credit loss experience.
Assumptions regarding credit risk are judgmentally determined using specific
borrower information, internal credit quality analysis, and historical
information on segmented loan categories for non-specific borrowers.
Mortgage servicing rights - Fair values are estimated by stratifying the
mortgage servicing portfolio into groups of loans with similar financial
characteristics, such as loan type, interest rate, and expected maturity. The
Company obtains market survey data estimates and bid quotations from secondary
market investors who regularly purchase mortgage servicing rights. Assumptions
regarding loan payoffs are determined using historical information on segmented
loan categories for nonspecific borrowers.
Cash surrender value of life insurance - The carrying amount for cash surrender
value of life insurance approximates fair value as policies are recorded at
redemption value.
Deposits and time certificates of deposit - The fair value of deposits with no
stated maturity, such as checking, passbook, and money market, is equal to the
amount payable on demand. The fair value of time certificates of deposit is
based on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of similar maturities.
Advances from the FHLB - The fair value of the Company's short-term advances are
estimated using discounted cash flow analysis based on the interest rate that
would be effective June 30, 2003, if the advances repriced according to their
stated terms. The fair value of the Company's putable advances are valued at
amounts received from the FHLB.
F-31
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2004 and 2003
NOTE 18. CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
Set forth below is the condensed statements of financial condition as of June
30, 2004 and 2003, of Eagle together with the related condensed statements of
income and cash flows for the years ended June 30, 2004 and 2003.
Condensed Statements of Financial Condition
2004 2003
----------------- -----------------
Assets
Cash and cash equivalents $ 191,637 $ 236,992
Securities available-for-sale 1,280,030 1,153,282
Investment in American Federal Savings Bank 22,419,013 22,027,473
Other assets 133,859 94,441
----------------- -----------------
Total assets $ 24,024,539 $ 23,512,188
================= =================
Liabilities
Accounts payable and accrued expenses $ - $ 15,408
Stockholders' Equity 24,024,539 23,496,780
----------------- -----------------
Total liabilities and stockholders' equity $ 24,024,539 $ 23,512,188
================= =================
Condensed Statements of Income
Interest income $ 53,650 $ 64,532
Other income 31,141 18,031
Noninterest expense (76,730) (102,667)
------------------ -----------------
Income (loss) before income taxes 8,061 (20,104)
Income tax expense (benefit) 645 (12,399)
----------------- -----------------
Income (loss) before equity in undistributed earnings
American Federal Savings Bank 7,416 (7,705)
Equity in undistributed earnings American Federal
Savings Bank 2,070,953 1,873,571
----------------- -----------------
Net income $ 2,078,369 $ 1,865,866
================= =================
F-32
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2004 and 2003
NOTE 18. CONDENSED PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
Condensed Statements of Cash Flows
Cash Flows from Operating Activities:
Net income $ 2,078,369 $ 1,865,866
Adjustments to reconcile net income to net cash
used in operating activities:
Equity in undistributed earnings of American
Federal Savings Bank (2,070,953) (1,873,571)
Restricted stock awards 52,900 52,900
Other adjustments, net (28,360) (25,563)
------------------ -----------------
Net cash provided by (used in) operating
activities 31,956 19,632
----------------- -----------------
Cash Flows from Investing Activities:
Cash contribution from American Federal Savings Bank 368,050 299,040
Purchase of securities:
Investment securities available-for-sale (783,634) (863,059)
Proceeds from maturities, calls and principal payments:
Investment securities available-for-sale 443,916 784,560
Proceeds from sale of investment securities
available-for-sale 190,380 117,792
----------------- -----------------
Net cash provided by investing activities 218,712 338,333
----------------- -----------------
Condensed Statements of Cash Flows (continued)
2004 2003
---- ----
Cash Flows from Financing Activities:
ESOP payments and dividends 128,667 92,136
Payments to purchase treasury stock (64,000) (61,815)
Dividends paid (360,690) (291,058)
------------------ -----------------
Net cash used in financing
activities (296,023) (260,737)
------------------ -----------------
Net (increase) decrease in cash and cash
equivalents (45,355) 97,228
Cash and cash equivalents at beginning of period 236,992 139,764
----------------- -----------------
Cash and cash equivalents at end of period $ 191,637 $ 236,992
================= =================
F-33
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2004 and 2003
NOTE 19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a condensed summary of quarterly results of operations for the
years ended June 30, 2004 and 2003:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
YEAR ENDED JUNE 30, 2004
Interest and
dividend income $ 2,300,347 $ 2,375,236 $ 2,383,639 $ 2,214,501
Interest expense 922,179 810,237 753,812 707,377
------------------ ------------------ ------------------ ------------------
Net interest income 1,378,168 1,564,999 1,629,827 1,507,124
Non-interest income 1,347,801 799,584 496,985 789,409
Non-interest expense 1,598,767 1,525,716 1,563,612 1,510,985
------------------ ------------------ ------------------ ------------------
Income before income
tax expense 1,127,202 838,867 563,200 785,548
Income tax expense
(benefit) 357,847 258,667 167,041 249,515
------------------ ------------------ ------------------ ------------------
Income before
extraordinary item 769,355 580,200 396,159 536,033
Extraordinary item
(net of tax benefit) - - - (203,378)
Net income $ 769,355 $ 580,200 $ 396,159 $ 332,655
================== ================== ================== ==================
Basic earnings per common
share $ .65 $ .49 $ .33 $ .28
================== ================== ================== ==================
Diluted earnings per common
share $ .64 $ .49 $ .33 $ .28
================== ================== ================== ==================
YEAR ENDED JUNE 30, 2003
Interest and
dividend income $ 2,785,050 $ 2,628,381 $ 2,550,929 $ 2,441,826
Interest expense 1,125,108 1,092,957 1,018,850 976,744
------------------ ------------------ ------------------ ------------------
Net interest income 1,659,942 1,535,424 1,532,079 1,465,082
Non-interest income 635,015 819,445 924,930 190,134
Non-interest expense 1,353,755 1,540,765 1,510,080 1,586,979
------------------ ------------------ ------------------ ------------------
Income before income
tax expense 941,202 814,104 946,929 68,237
Income tax expense
(benefit) 323,820 271,730 320,560 (11,505)
------------------ ------------------ ------------------ ------------------
Net income $ 617,382 $ 542,374 $ 626,369 $ 79,742
================== ================== ================== ==================
Basic earnings per common
share $ .53 $ .46 $ .53 $ .07
================== ================== ================== ==================
Diluted earnings per common
share $ .52 $ .46 $ .53 $ .07
================== ================== ================== ==================
F-34
EAGLE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2004 and 2003
NOTE 20. RELATED PARTY TRANSACTIONS
The Bank has contracted with a subsidiary of the Company which is partially
owned by one of the Company's directors. The Bank paid $15,164 during the year
ended June 30, 2004 for support services, and an additional $10,216 for computer
hardware and software used by the Bank for its computer network. For the year
ended June 30, 2003, expenditures were $53,033 for support services and $39,973
for computer hardware.
The Bank also made a construction loan, in the normal course of lending, to this
affiliated entity during the year for the construction of their new office
building. At June 30, 2004, $3,926,121 had been disbursed, of which $1,676,121
had been sold to another local bank. The loan was paid in full in August 2004.
NOTE 21. SUBSEQUENT EVENTS
The Board announced on July 22, 2004 the declaration of a cash dividend of $0.18
per share for the fourth quarter. It is payable August 27, 2004 to shareholders
of record at the close of business August 6, 2004. Eagle Financial MHC, Eagle's
mutual holding company, has waived its right to receive dividends on the 648,493
shares of Eagle that Eagle Financial MHC holds.
The Board announced a stock repurchase program on August 21, 2003. The Company
is authorized to acquire up to 57,500 shares of common stock subject to market
conditions. The amount represents approximately 10% of the outstanding common
stock held by the public. As of June 30, 2004 the Company had repurchased 2,000
shares. On July 29, 2004 the Company repurchased 22,000 shares.
F-35
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant causes this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
EAGLE BANCORP
/s/ Larry A. Dreyer
---------------------------------------
Larry A. Dreyer
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Larry A. Dreyer President, Chief Executive 9/17/04
--------------------------------------------- Officer and Director (Principal ----------------------
Larry A. Dreyer Executive Officer)
/s/ Peter J. Johnson Senior Vice President 9/17/04
--------------------------------------------- And Treasurer (Principal ----------------------
Peter J. Johnson Financial/Accounting Officer)
/s/ Robert L. Pennington Chairman 9/17/04
--------------------------------------------- ----------------------
Robert L. Pennington
/s/ Charles G. Jacoby Vice Chairman 9/17/04
--------------------------------------------- ----------------------
Charles G. Jacoby
/s/ Don O. Campbell Director 9/17/04
--------------------------------------------- ----------------------
Don O. Campbell
/s/ Teresa Hartzog Director 9/17/04
--------------------------------------------- ----------------------
Teresa Hartzog
/s/ James A. Maierle Director 9/17/04
--------------------------------------------- ----------------------
James A. Maierle
/s/ Thomas McCarvel Director 9/17/04
--------------------------------------------- ----------------------
Thomas McCarvel