Registration No. 333-106199
333-102667
Filed Pursuant to Rule 424(b)(3)
PROSPECTUS
[Eagle Bancorp, Inc. Logo]
2,040,816 Shares of Common Stock - $12.25 per share
MINIMUM PURCHASE - 100 SHARES
Eagle Bancorp, Inc. is the holding company for EagleBank, a growing,
community oriented commercial bank headquartered in Bethesda, Maryland. Our
common stock is traded on the Nasdaq SmallCap Market under the symbol "EGBN".
The closing price of the common stock on June 19, 2003 was $14.40 per share.
We are offering to sell up to 2,040,816 newly issued shares of our
common stock at $12.25 per share. These shares represent approximately 70.1% of
the currently outstanding shares. If there is sufficient demand, we may increase
the number of shares sold by up to an additional 408,163 shares, representing an
additional 14.0% of the currently outstanding shares. This represents an
increase of more than 100% in the size of the offering from the prospectus dated
April 25, 2003. IF YOU HAVE PREVIOUSLY SUBMITTED AN ORDER FORM AND SUBSCRIPTION
FUNDS, YOU DO NOT NEED TO DO ANYTHING TO CONFIRM YOUR SUBSCRIPTION. IF YOU WISH
TO WITHDRAW YOUR SUBSCRIPTION YOU MAY DO SO WITHOUT PENALTY BY NOTIFYING THE
SUBSCRIPTION AGENT IN WRITING NOT LATER THAN 5:00 P.M. EASTERN TIME ON JULY 25,
2003. SEE "THE OFFERING - WITHDRAWAL OF SUBSCRIPTIONS" AT PAGE 11.
This offering is being made without an underwriter, with the limited
assistance of a registered broker-dealer, and we are relying on our directors
and officers to identify potential subscribers. No broker-dealer or other third
party is obligated to purchase any of the shares being offered, or to find
purchasers.
AN INVESTMENT IN OUR COMMON STOCK INVOLVES INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL. PLEASE CAREFULLY READ THE "RISK FACTORS" BEGINNING
ON PAGE 8.
Once made, subscriptions may not be revoked. There is no minimum number
of shares that must be sold in the offering. Until your subscription is
accepted, all funds will be placed in an escrow account at Virginia Commerce
Bank, Arlington, Virginia. If the offering is not completed, or if any part of
your subscription is not accepted, your funds will be promptly returned, without
interest. We may accept or reject any subscription at any time prior to the
expiration of the offering, or we may elect to defer acceptance or rejection of
a subscription until the expiration of the offering, during which time the
subscription funds will remain in escrow.
Once we accept a subscription, we will have immediate access to the
funds related to the subscription. We reserve the right to reject any
subscription, in whole or in part, whether or not the offering is
oversubscribed, and to allocate shares to subscribers in our sole discretion. If
you subscribe for shares through a broker or other nominee, and your broker or
nominee does not identify you in the subscription documents, we may not allocate
any shares to your subscription, although it is not a requirement of the
offering that you identify yourself in order to subscribe.
The offering will continue until July 11, 2003, unless extended in the
discretion of the Board of Directors to a date not later than August 29, 2003.
We may terminate the offering at any time. We will not accept subscriptions and
issue shares until after the expiration of the withdrawal period.
Persons subscribing from states other than Maryland, Virginia, the
District of Columbia, Pennsylvania, New York, New Jersey, Nevada and Florida
must be existing holders of common stock and must be subscribing for additional
shares in the same registration or capacity. Exceptions will be made only if an
exemption from the registration requirements of applicable state law is
available.
Our directors, executive officers and their related parties have
indicated that they intend to subscribe for at least 187,750 shares in the
offering, representing approximately 9.2% of the offered shares. These
intentions are not commitments and could increase or decrease based upon
individual circumstances.
We refer to documents we have previously filed with the Securities and
Exchange Commission for some information about us. You should review these
documents, listed at page 25, for additional information.
SHARES OF OUR COMMON STOCK ARE NOT DEPOSITS, SAVINGS ACCOUNTS, OR OTHER
OBLIGATIONS OF A DEPOSITORY INSTITUTION AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY. INVESTING IN
COMMON STOCK INVOLVES INVESTMENT RISKS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE COMMON STOCK OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Per Share Total(1)
--------- -----------
Price $12.25 $24,999,996
Underwriting discounts and commissions None None
Net proceeds of the offering (before expenses) $12.25 $24,999,996
(1) Assumes the sale of 2,040,816 shares. If the number of shares sold is
increased to 2,448,979 shares, the net proceeds of the offering before
expenses will be $29,999,992.75.
The date of this prospectus
is June 23, 2003.
TABLE OF CONTENTS
PAGE
Summary...........................................................................................................3
Selected Consolidated Financial Data..............................................................................7
Risk Factors......................................................................................................8
Caution About Forward Looking Statements.........................................................................10
The Offering.....................................................................................................11
Use of Proceeds..................................................................................................17
Dilution.........................................................................................................18
Eagle Bancorp, Inc...............................................................................................19
Share Ownership of Management and Five Percent Beneficial Owners.................................................21
Market for Common Stock and Dividends............................................................................22
Description of Our Capital Stock.................................................................................22
Legal Matters....................................................................................................25
Experts..........................................................................................................25
Where You Can Find Additional Information About Eagle Bancorp
And Documents Included With This Prospectus...............................................................25
Annual Report on Form 10-K for the year ended December 31, 2002..........................................Appendix 1
Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.......................................Appendix 2
SUMMARY
This summary presents selected information from this prospectus. You
should carefully read this entire document in order to understand this offering.
This summary includes page references that direct you to more complete
discussions elsewhere in this document.
THE OFFERING
Shares offered Up to 2,040,816 shares of common stock, at $12.25
per share, representing approximately 70.1% of the
currently outstanding shares. We may, in our
discretion, increase the number of shares offered
by an additional 408,163 shares, or an additional
14.0% of the currently outstanding shares. The
number of shares offered represents an increase of
more than 100% in the size of the offering.
Our common stock is traded on the Nasdaq SmallCap
Market under the symbol "EGBN".
Offering price $12.25 per share.
Shares outstanding after
the offering
If 2,040,816 shares are
sold 4,950,890
If an additional
408,163 shares are sold 5,359,053
Minimum Subscription The minimum number of shares for which you may
subscribe is 100, for an investment of $1,225.
No maximum subscription, No maximum subscription has been established.
but we may limit However, we reserve the right to reject, in whole
any subscription in our or in part, any subscription, whether or not there
discretion, WHETHER OR NOT are available shares, and the right to determine,
THE OFFERING IS in our sole discretion, the allocation of shares
OVERSUBSCRIBED to subscribers. We will not issue common stock in
the offering to any person who, in our opinion,
would be required to obtain prior clearance or
approval from any state or federal bank regulatory
authority to own or control such shares if, at the
expiration time, clearance or approval has not
been obtained or any required waiting period has
not expired.
Withdrawal of If you submitted an Order Form based upon the
Subscriptions April 25, 2003 prospectus and before you received
this prospectus, and wish to withdraw your
subscription, you may do so without penalty by
notifying the Subscription Agent in writing by
5:00 P.M., eastern time, on July 25, 2003. If you
do not notify the Subscription Agent that you wish
to withdraw your subscription, you will continue
to be a subscriber for shares in the offering as
reflected in this prospectus. The name, address
and fax number of the Subscription Agent are:
Friedman, Billings, Ramsey & Co., Inc.
(Eagle Bancorp, Inc. - Withdrawal)
1001 Nineteenth Street, North
Arlington, Virginia 22209
Fax: (703) 312-9698
See "The Offering - Withdrawal of Subscriptions"
at page 11.
We will have absolute We will allocate shares among subscribers in our
discretion in determining discretion, based on any factors we deem relevant.
how many shares will be Among the factors we may consider in determining
allocated to subscribers, allocations is a subscriber's existing share
WHETHER OR NOT THE OFFERING ownership. In general, existing share ownership
IS OVERSUBSCRIBED will positively influence our allocation
decisions, although we reserve the right to reduce
or reject in whole or in part any subscription in
the offering, and to allocate no shares to any
subscriber, WHETHER OR NOT THE OFFERING IS
OVERSUBSCRIBED.
3
IF YOU WANT SHARES REGISTERED IN A NAME OTHER THAN
YOUR OWN TO BE CONSIDERED WHEN WE MAKE ALLOCATIONS
OF SHARES IN THE OFFERING, YOU MUST ADVISE US OF
THE NUMBER OF SHARES YOU OWN IN ANOTHER NAME OR
REGISTRATION, HOW YOU OWN THEM AND PROVIDE US WITH
APPROPRIATE DOCUMENTATION SUPPORTING SUCH
OWNERSHIP, SUCH AS A LETTER ON YOUR BANK OR
BROKER'S LETTERHEAD OR A COPY OF A TRUST DOCUMENT
OR RECENT ACCOUNT STATEMENT SHOWING YOUR
OWNERSHIP. If you send an account statement, you
should thoroughly cross out any information which
you do not want us to have. If you do not provide
this information, we may reject your subscription
in the offering or may allocate fewer shares to
you. IF YOU SUBSCRIBE FOR SHARES THROUGH A BROKER
OR OTHER NOMINEE, AND YOUR BROKER OR NOMINEE DOES
NOT IDENTIFY YOU IN THE SUBSCRIPTION DOCUMENTS, WE
MAY NOT ALLOCATE ANY SHARES TO YOUR SUBSCRIPTION.
While not knowing who a subscriber is may
influence our decision on whether to allocate
shares, subscribers through brokers or other
nominees are not required to identify themselves
in order to submit a subscription. See "The
Offering - Procedure for Subscribing to Common
Stock in the Offering" at page 12.
Expiration time The offering will continue until July 11, 2003,
unless earlier terminated, or extended in the
discretion of the Board of Directors to a date not
later than August 29, 2003. See "The Offering -
Expiration Time" at page 11.
No minimum total offering There is no minimum aggregate number of shares
that must be sold in the offering. We intend to
complete the offering if any valid subscriptions
are received before the expiration of the
offering, including any extension, unless it is
terminated by the Board of Directors.
How to subscribe for If you want to participate in the offering and
shares: purchase shares, you must complete the
accompanying Order Form and send the completed
form, with payment of the aggregate offering price
for the shares you want to purchase to Friedman,
Billings, Ramsey & Co., Inc., the Subscription
Agent.
IF YOU SUBMITTED AN ORDER FORM BASED ON THE APRIL
25, 2003 PROSPECTUS, YOU DO NOT NEED TO DO
ANYTHING TO CONFIRM YOUR SUBSCRIPTION. YOU MAY
SUBMIT A NEW ORDER FORM TO SUBSCRIBE FOR
ADDITIONAL SHARES.
Subscriptions irrevocable Once your completed Order Form is received by the
Subscription Agent, you may not revoke your
subscription. See "The Offering - Procedure for
Subscribing for Common Stock in the Offering" at
page 12. Your subscription funds will not be
released to us or for our use or commingled with
our funds unless your subscription is accepted and
shares are to be issued to you with respect to
your funds.
NOTWITHSTANDING, IF YOU SUBMITTED AN ORDER FORM
BASED UPON THE APRIL 25, 2003 PROSPECTUS AND
BEFORE YOU RECEIVED THIS PROSPECTUS, AND WISH TO
WITHDRAW YOUR SUBSCRIPTION, YOU MAY DO SO WITHOUT
PENALTY BY NOTIFYING THE SUBSCRIPTION AGENT IN
WRITING BY 5:00 P.M., EASTERN TIME, ON JULY 25,
2003. IF YOU DO NOT NOTIFY THE SUBSCRIPTION AGENT
THAT YOU WISH TO WITHDRAW YOUR SUBSCRIPTION, YOU
WILL CONTINUE TO BE A SUBSCRIBER FOR SHARES IN THE
OFFERING AS REFLECTED IN THIS PROSPECTUS. SEE "THE
OFFERING - WITHDRAWAL OF SUBSCRIPTIONS" AT PAGE
11.
Subscription Agent The name and address of the Subscription Agent
are:
Friedman, Billings, Ramsey & Co., Inc.
(Eagle Bancorp, Inc.)
1001 Nineteenth Street, North
Arlington, Virginia 22209
4
Delivery of Order Forms Your Order Form and payment must be received by
the Subscription Agent before the expiration time.
If you use the mail to submit your Order Form, we
recommend that you use registered mail, return
receipt requested. None of our directors, officers
or employees are authorized to receive Order Forms
or payment for shares.
Use of proceeds We intend to use the proceeds of the offering for
general corporate purposes, including for
contribution to EagleBank's capital, which will
enable EagleBank to continue as a
"well-capitalized" institution as our assets
increase, allow us to pursue future growth
opportunities through further expansion of our
existing lending and investment activities, and
possible branch expansion. A portion of the
proceeds of the offering may be used to repay all
or a portion of our borrowings under our line of
credit. At June 20, 2003, we owed approximately
$8.6 million under our line of credit. The
proceeds will also be available for financing
possible acquisitions of other institutions or for
investments in activities which are permitted for
bank holding companies and financial holding
companies. A portion of the proceeds of the
offering will be used to fund a new subsidiary of
the Company organized to purchase an impaired loan
from the Bank.
We have no definitive plans for any additional
branches or for any acquisitions or investments,
except that we are currently in discussions for a
letter of intent relating to a location for a
second branch in the District of Columbia. See
"Use of Proceeds" at page 17.
Intentions of directors, Directors and executive officers of Eagle Bancorp
executive officers and and their related parties have indicated that they
others intend to subscribe for at least 187,750
shares in the offering. See "The Offering -
Intentions of Directors, Executive Officers and
Others" at page 16. Our directors and executive
officers currently beneficially own approximately
11% of the outstanding shares, and we expect them
to own at least 10.2% of the shares following
completion of the offering, assuming 2,040,816
shares are sold.
Documents incorporated Important information about us is incorporated
by reference into this prospectus by reference to documents we
have filed with the Securities and Exchange
Commission. See "Where You Can Find Additional
Information About Eagle Bancorp And Documents
Included With This Prospectus" at page 25.
5
EAGLE BANCORP, INC.
7815 WOODMONT AVENUE
BETHESDA, MARYLAND 20814
(301) 986-1800
We are a growing, one-bank holding company headquartered in Bethesda,
Maryland. We provide general commercial and consumer banking services through
our wholly owned banking subsidiary, EagleBank, Bethesda, Maryland. We were
organized in October 1997 to be the holding company for EagleBank.
EagleBank, our primary subsidiary, was organized as an independent,
community-oriented, full-service alternative to the superregional financial
institutions which dominate our primary market area. The cornerstone of our
philosophy is to provide superior, personalized service to our customers. We
focus on relationship banking, providing each customer with a number of
services, becoming familiar with and addressing customer needs in a proactive,
personalized fashion.
EagleBank was organized and opened for business in July 1998. At March
31, 2003, we had consolidated assets of $350.4 million, deposits of $278.9
million, and shareholders' equity of $20.9 million. See "Selected Consolidated
Financial Data" at page 7, and the consolidated financial statements included as
a part of this prospectus.
We offer full commercial banking services to our business and
professional clients as well as complete consumer banking services to
individuals living and/or working in the service area. We emphasize providing
commercial banking services to sole proprietorships, small and medium-sized
businesses, partnerships, corporations, non-profit organizations and
associations, and investors living and working in and near our primary service
area.
A full range of retail banking services are offered to accommodate the
individual needs of both corporate customers as well as the community we serve.
These services include the usual deposit functions of commercial banks,
including business and personal checking accounts, "NOW" accounts and savings
accounts, business, construction, and commercial loans, equipment leasing,
residential mortgages and consumer loans and cash management services. We have
developed significant expertise and commitment as an SBA lender, have been
designated a Preferred Lender, and are one of the largest SBA lenders, in dollar
volume, in the Washington metropolitan area.
EagleBank is a Maryland chartered bank which is a member of the Federal
Reserve System, and its deposits are insured by the Bank Insurance Fund of the
Federal Deposit Insurance Corporation.
Our service areas are Montgomery County, Maryland, and the Washington
D.C. metropolitan area. We operate a total of five banking offices in Maryland,
located in Bethesda, Gaithersburg, Rockville and two in Silver Spring, Maryland,
and one office in the District of Columbia.
6
SELECTED CONSOLIDATED FINANCIAL DATA
The following table shows selected historical consolidated financial
data for Eagle Bancorp. You should read it together with the historical
consolidated financial information contained in the consolidated financial
statements for the year ended December 31, 2002 and for the three months ended
March 31, 2003 included with and incorporated by reference in this prospectus
and with the other information provided in this prospectus. Information for the
three month periods ended March 31, 2003 and 2002 is derived from unaudited
interim financial statements and includes, in the opinion of management, all
adjustments, consisting of only normal recurring adjustments, necessary to
present fairly the data for such period. The Company was a development stage
company, without significant assets or any operations other than those related
to organization, from October 28, 1997 to June 22, 1998, and the Bank did not
open for business until July 20, 1998. Therefore, financial information for 1998
does not represent a full year of banking operations. The results of operations
for the three month period ended March 31, 2003 do not necessarily indicate the
results which may be expected for any future period or for the full year.
Three Months Ended
March 31, Year Ended December 31,
---------------------- -----------------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
--------- --------- --------- --------- --------- --------- ---------
(dollars in thousands, except per share data)
SELECTED BALANCES - AT PERIOD END
Total assets $ 350,370 $ 262,352 $ 347,829 $ 236,833 $ 164,082 $ 113,218 $ 52,039
Total stockholders' equity 20,866 17,322 20,028 17,132 15,522 13,675 14,949
Total loans (net) 236,690 195,116 234,094 180,145 116,576 63,276 19,984
Total deposits 278,909 218,166 278,434 195,688 135,857 90,991 34,631
SUMMARY RESULTS OF OPERATIONS
Interest income $ 4,466 $ 3,689 $ 16,661 $ 14,121 $ 10,501 $ 5,170 $ 1,011
Interest expense 1,075 1,256 5,170 5,998 4,549 2,022 277
Net interest income 3,391 2,433 11,491 8,123 5,952 3,148 734
Provision for credit losses 224 280 843 979 581 424 164
Net interest income after provision for
credit losses 3,167 2,153 10,648 7,144 5,371 2,724 570
Noninterest income 873 299 2,160 1,324 351 211 23
Noninterest expense 2,465 1,893 8,583 6,445 4,664 3,786 1,992
Income (loss) before taxes 1,575 559 4,225 2,023 1,058 (851) (1,399)
Income tax expense (benefit) 592 190 1,558 269 0 0 0
Net income (loss) $ 983 $ 369 $ 2,667 $ 1,754 $ 1,058 $ (851) $ (1,399)
PER SHARE DATA (1)
Net income (loss), basic $ 0.34 $ 0.13 $ 0.92 $ 0.61 $ 0.36 $ (0.29) $ (0.48)
Net income (loss), diluted 0.32 0.12 0.86 0.58 0.36 (0.29) (0.48)
Book value 7.20 5.98 6.91 5.92 5.38 4.74 5.18
GROWTH AND SIGNIFICANT RATIOS (2)
% Change in net income 166.40% (23.44)% 52.05% 65.78% N/M N/M N/A
% Change in assets 33.55% 43.71 % 46.87% 44.34% 44.92% 117.56 % N/A
% Change in net loans 21.31% 47.86 % 29.95% 54.53% 84.23% 216.63 % N/A
% Change in deposits 27.84% 41.87 % 42.22% 44.04% 49.30% 162.74 % N/A
Return on average assets 1.16% 0.60 % 0.91% 0.88% 0.78% (1.07)% (7.19)%
Return on average equity 19.14% 8.52 % 14.51% 10.56% 7.41% (5.91)% (17.23)%
Average equity to average assets 6.08% 7.00 % 6.28% 8.36% 10.40% 18.22 % 41.73%
Efficiency ratio (3) 57.81% 69.29 % 62.87% 68.22% 74.00% 112.71 % 263.14%
(1) Adjusted for all periods presented giving retroactive effect to the five
for four stock split in the form of a 25% stock dividend paid on March 31,
2000, and a seven for five stock split in the form of a 40% stock dividend
paid on June 15, 2001.
(2) Percentage changes shown for the three month periods represent change as
compared to the same period in the preceding fiscal year. Other ratios are
annualized for the three month periods.
(3) Computed by dividing noninterest expense by the sum of net interest income
and noninterest income. Comparison of our efficiency ratio with those of
other companies may not be possible, because other companies may calculate
the efficiency ratio differently.
7
RISK FACTORS
An investment in the common stock involves various risks. You should
carefully consider the risk factors listed below. These risk factors may cause
our future earnings to be lower or our financial condition to be less favorable
than we expect. In addition, other risks of which we are not aware, or which we
do not believe are material, may cause our earnings to be lower, or hurt our
future financial condition. You should read this section together with the other
information in this prospectus.
ALTHOUGH THE COMMON STOCK IS LISTED ON THE NASDAQ SMALLCAP MARKET,
TRADING IN THE COMMON STOCK HAS BEEN SPORADIC AND VOLUME HAS BEEN LIGHT. AS A
RESULT, SHAREHOLDERS MAY NOT BE ABLE TO QUICKLY AND EASILY SELL THEIR COMMON
STOCK.
Although our common stock is listed for trading on the Nasdaq SmallCap
Market, and a number of brokers offer to make a market in the common stock on a
regular basis, trading volume to date has been limited, averaging only
approximately 1,100 shares per day over the past year, and there can be no
assurance that an active and liquid market for the common stock will develop. As
a result, even though there is no holding period required for shares purchased
in the offering, shareholders may find it difficult to sell a significant number
of shares at the prevailing market price.
NO BROKERAGE FIRM OR INVESTMENT BANK HAS AGREED TO PURCHASE ANY OF THE
COMMON STOCK AND WE MAY NOT BE ABLE TO SELL ALL OF THE SHARES WE ARE ATTEMPTING
TO SELL IN THE OFFERING. OUR POTENTIAL GROWTH AND PROFITS MAY BE ADVERSELY
AFFECTED IF LESS THAN ALL OF THE OFFERED SHARES ARE SOLD.
We are selling the common stock directly, through the efforts of our
directors and executive officers, with the limited assistance of a registered
broker-dealer for the purpose of compliance with the securities laws of the
jurisdictions in which we are offering the shares. No broker-dealer who assists
in the offering has any obligation to purchase, or find purchasers for, any
shares of common stock. See "The Offering - Manner of Distribution" at page 14.
There can be no assurance that any particular number of shares will be
sold. If less than all of the shares offered are sold, we will have less capital
to fund future operations and growth, which could result in restricted or slower
growth, slower expansion of activities, and lower shareholder returns. See "The
Offering" at page 11.
WE HAVE NO CURRENT PLANS TO PAY CASH DIVIDENDS.
EagleBank is our principal revenue producing operation. As a result,
the ability to pay cash dividends to shareholders largely depends on receiving
dividends from EagleBank. The amount of dividends that EagleBank may pay is
limited by state and federal laws and regulations. Even if we have earnings in
an amount sufficient to pay cash dividends, the Board currently intends to
retain earnings for the purpose of financing growth. See "Market for Common
Stock and Dividends" at page 22.
MANAGEMENT WILL HAVE BROAD DISCRETION IN ALLOCATING THE PROCEEDS OF THE
OFFERING.
Subject to requirements of safe and sound banking practices and federal
law and regulations limiting the activities in which banks and bank holding
companies may engage, our management and Board of Directors will have
substantial discretion in determining the use of offering proceeds. The
discretion of the Board of Directors and management to allocate the proceeds of
the offering may result in the use of the proceeds for non-banking activities
permitted for bank holding companies or financial holding companies which are
not specifically identified in this prospectus.
CONSUMMATION OF THE OFFERING IS NOT SUBJECT TO THE RECEIPT OF
SUBSCRIPTIONS FOR A MINIMUM NUMBER OF SHARES. SUBSCRIBERS WILL BE REQUIRED TO
PURCHASE SHARES EVEN IF LESS THAN ALL OF THE SHARES OFFERED ARE SOLD.
There is no minimum number of shares that must be sold in the offering.
Subscribers may not revoke their subscriptions. The offering may be completed
even if substantially less than the total number of shares offered is sold. If
this happens, our capital would not be increased to the extent it would be if
all of the shares being offered were sold. We intend to accept subscriptions
even if the offering has not been fully subscribed. See "The Offering" at page
11. Notwithstanding, if you submitted an Order Form based upon the April 25,
2003 prospectus and wish to withdraw your subscription, you may do so without
penalty by notifying the Subscription Agent in writing by July 25, 2003. See
"The Offering - Withdrawal of Subscriptions" at page 11.
8
DIRECTORS AND OFFICERS OF EAGLE BANCORP ARE EXPECTED TO OWN AT LEAST
10.2% OF THE OUTSTANDING COMMON STOCK AFTER THE OFFERING. DIRECTORS OF EAGLEBANK
WHO ARE NOT DIRECTORS OF EAGLE BANCORP CURRENTLY OWN SHARES REPRESENTING
APPROXIMATELY 9.5% OF THE OUTSTANDING SHARES, AND MAY PURCHASE ADDITIONAL SHARES
IN THE OFFERING. AS A RESULT OF THEIR COMBINED OWNERSHIP, THEY COULD MAKE IT
MORE DIFFICULT TO OBTAIN APPROVAL FOR SOME MATTERS SUBMITTED TO SHAREHOLDER
VOTE, INCLUDING ACQUISITIONS. THE RESULTS OF THE VOTE MAY BE CONTRARY TO THE
DESIRES OR INTERESTS OF THE PUBLIC SHAREHOLDERS.
Following completion of the offering, our directors and executive
officers and their affiliates and directors of EagleBank will own at least 19.7%
of the outstanding common stock, assuming that they purchase shares in the
offering as currently expected, assuming the sale of 2,040,816 shares, and
excluding potential purchases in the offering by directors of EagleBank. These
persons may purchase a greater or lesser number of shares than expected in the
offering.
By voting against a proposal submitted to shareholders, the directors
and officers, as a group, may be able to make approval more difficult for
proposals requiring the vote of shareholders (such as some mergers, share
exchanges, asset sales, and amendments to the Articles of Incorporation). See
"Share Ownership of Management and Five Percent Beneficial Owners" at page 21,
and "Description of Our Capital Stock - Selected Provisions of the Articles of
Incorporation and Maryland Law" at page 24.
OUR LEVEL OF ASSETS AND EARNINGS MAY NOT CONTINUE TO GROW AS RAPIDLY AS
THEY HAVE IN THE PAST FEW YEARS.
Since opening for business in 1998, our asset level has increased
rapidly, including a 46.87% increase in 2002. Since 2000, the first full year
for which we achieved profitability, our earnings have increased at an average
annual rate of 58.91%, including a 52.05% increase in 2002. We cannot assure you
that we will continue to achieve comparable results in future years. Loan and
deposit growth were below historic levels for the first quarter of 2003. As our
asset size and earnings increase, it may become more difficult to achieve high
rates of increase in assets and earnings. Additionally, it may become more
difficult to achieve continued improvements in our expense levels and efficiency
ratio. We may not be able to immediately invest all of the capital provided by
the offering in loans. Investment of the offering proceeds in securities until
we are able to deploy the proceeds in loans generally will provide lower margins
than we earn on loans, potentially adversely impacting shareholder returns.
Further, we may not be able to maintain the relatively low levels of
nonperforming assets that we have experienced. Declines in the rate of growth of
income or assets, and increases in operating expenses or nonperforming assets
may have an adverse impact on the value of the common stock.
THE BOOK VALUE OF A SHARE OF COMMON STOCK AFTER THE OFFERING WILL BE
LOWER THAN THE PRICE PAID FOR SHARES IN THE OFFERING.
If all 2,040,816 of the offered shares were sold, the pro forma book
value per share at March 31, 2003, would have been $9.23 per share. The
post-offering book value would be less than the offering price of $12.25 per
share. Investors in the offering would experience dilution of $3.02, or 24.7%,
per share, calculated on the basis of the difference between the $12.25 offering
price and pro forma book value. See "Dilution" at page 18.
A SUBSTANTIAL PORTION OF OUR LOANS ARE REAL ESTATE RELATED LOANS IN THE
WASHINGTON DC METROPOLITAN AREA, AND SUBSTANTIALLY ALL OF OUR LOANS ARE MADE TO
BORROWERS IN THAT AREA. ADVERSE CHANGES IN THE REAL ESTATE MARKET OR ECONOMY IN
THIS AREA COULD LEAD TO HIGHER LEVELS OF PROBLEM LOANS AND CHARGE-OFFS, AND
ADVERSELY AFFECT OUR EARNINGS AND FINANCIAL CONDITION.
We have a substantial amount of loans secured by real estate in the
Washington DC metropolitan area as collateral, and substantially all of our
loans are to borrowers in that area. At March 31, 2003, 49.4% of our loans were
commercial real estate loans and 9.7% were construction and land development
loans. Additionally, 26.8% were commercial and industrial loans which are not
secured by real estate. These concentrations expose us to the risk that adverse
developments in the real estate market, or in the general economic conditions in
the metropolitan Washington DC market, could increase the levels of
nonperforming loans and charge-offs, and reduce loan demand and deposit growth.
In that event, we would likely experience lower earnings or losses.
Additionally, if economic conditions in the area deteriorate, or there is
significant volatility or weakness in the economy or any significant sector of
the area's economy, our ability to develop our business relationships may be
diminished, the quality and collectibility of our loans may be adversely
affected, the value of collateral may decline and loan demand may be reduced.
9
CAUTION ABOUT FORWARD LOOKING STATEMENTS
We make forward looking statements in this prospectus that are subject
to risks and uncertainties. These forward looking statements include:
o Statements of goals, intentions, and expectations as to future
trends, plans, events, or results of operations and policies and
regarding general economic conditions.
o Estimates of risks and of future costs and benefits; and
o Statements of the ability to achieve financial and other goals.
In some cases, forward looking statements can be identified by use of
words such as "may," "will," "anticipates," "believes," "expects," "intends,"
"plans," "estimates," "potential," "continue," "could," "should," and similar
words or phrases. These forward looking statements are subject to significant
uncertainties because they are based upon or are affected by:
o Management's estimates and projections of interest rates and
interest rate policy, competitive factors, and other conditions
which by their nature, are not susceptible to accurate forecast
future interest rates and other economic conditions;
o Future laws and regulations; and
o A variety of other matters.
Because of these uncertainties and the assumptions on which the forward
looking statements are based, actual future operations and results in the future
may differ materially from those indicated herein. Readers are cautioned against
placing undue reliance on any such forward looking statements. We do not
undertake to update any forward looking statements to reflect occurrences or
events that may not have been anticipated as of the date of such statements. In
addition, our past results of operations do not necessarily indicate future
results.
10
THE OFFERING
Securities Offered. We are offering to sell up to 2,040,816 newly
issued shares of our common stock at $12.25 per share. We reserve the right to
increase the number of shares sold in the offering by an additional 408,163
shares, to a total of 2,448,979 shares. This represents an increase of 1,306,122
shares, or more than 100%, in the size of the offering from the prospectus dated
April 25, 2003. There can be no assurance that we will sell any or all of the
additional shares.
Minimum Subscription. The minimum number of shares for which you must
subscribe is 100, for an investment of $1,225. We may, however, permit smaller
subscriptions in our discretion.
No Minimum Offering. There is no minimum aggregate number of shares
that must be sold in the offering. The offering will be completed if any valid
subscriptions are received, unless the Board of Directors has terminated the
offering in its entirety. While the directors and executive officers of Eagle
Bancorp and EagleBank intend to purchase shares in the offering, they are not
obligated to purchase any minimum number of shares. See "The Offering -
Intentions of Directors, Executive Officers and Others" at page 16.
Expiration Time. Subscriptions to purchase shares in the offering must
be received no later than 5:00 p.m., Bethesda, Maryland time, on Friday, July
11, 2003, unless we terminate the offering earlier or extend it. We may
terminate the offering at any time prior to July 11, 2003, or extend the
termination date without notice. Under no circumstances will we extend the
offering beyond Friday, August 29, 2003 without resoliciting subscriptions. See
"The Offering - Procedure for Subscribing to Common Stock" at page 12.
Withdrawal of Subscriptions. If you submitted an Order Form based upon
the April 25, 2003 prospectus and before you received this prospectus, and wish
to withdraw your subscription, you may do so by notifying the Subscription Agent
in writing by 5:00 P.M., eastern time, on July 25, 2003. If you do not notify
the Subscription Agent that you wish to withdraw your subscription, you will
continue to be a subscriber for shares in the offering as reflected in this
prospectus.
If you notify the Subscription Agent before the deadline that you wish
to withdraw your subscription, your funds will be promptly returned, without
interest, deduction or penalty. You may send your notice to the Subscription
Agent at:
Friedman, Billings, Ramsey, & Co., Inc
(Eagle Bancorp, Inc. - Withdrawal)
1001 Nineteenth Street, North
Arlington, Virginia 22209
Fax: (703) 312-9698
Allocation of Shares in the Offering. We reserve the right, in the
exercise of our sole discretion, to accept or reject, in whole or in part, any
subscription in the offering, WHETHER OR NOT THE OFFERING IS OVERSUBSCRIBED. In
making our determinations as to whether to accept a subscription and the number
of shares to allocate to any subscriber, we may take into account any factors we
deem appropriate, including but not limited to:
o the subscriber's existing beneficial ownership of shares of our
common stock, as reflected on our shareholder list or materials
provided to us with the Order Form,
o the subscriber's status as an employee or customer of Eagle Bancorp
or EagleBank,
o a subscriber's potential to do business with, or to direct
customers to, EagleBank,
o the order in which subscriptions are received,
o a subscriber's intentions with respect to the future direction of
the company,
o our desire to have a broad distribution of stock ownership, and
o legal or regulatory restrictions.
11
We intend to consider the following persons to be beneficial owners of shares:
o beneficiaries of an IRA, SEP-IRA or other retirement accounts
established for an individual, which is a shareholder of record,
o the settlor and beneficiaries of a revocable trust which is a
shareholder of record,
o the beneficiaries of an irrevocable trust which is a shareholder of
record,
o the non institutional custodian of shares held for the benefit of a
minor, and
o the individual equity owners of closely held corporations,
partnerships or other entities.
IF YOU WANT YOUR BENEFICIAL OWNERSHIP TO BE CONSIDERED WHEN WE ALLOCATE
SHARES IN THE OFFERING, YOU MUST ADVISE US OF THE NUMBER OF SHARES YOU
BENEFICIALLY OWN, HOW YOU OWN THEM AND PROVIDE US WITH APPROPRIATE DOCUMENTATION
SUPPORTING SUCH OWNERSHIP, SUCH AS A LETTER ON YOUR BANK OR BROKER'S LETTERHEAD,
APPROPRIATE PAGES OF A TRUST DOCUMENT, AND/OR A COPY OF A RECENT ACCOUNT
STATEMENT SHOWING YOUR OWNERSHIP. If you send an account statement, you should
thoroughly cross out any information which you do not want us to have. If you do
not provide this information, or if we are not satisfied in our sole discretion
with the documentation you provide, we may reject your subscription or may
allocate fewer shares to you.
Generally, we will be more likely to allocate shares to existing
shareholders, but allocation of shares in the offering is in our sole
discretion, and we may allocate shares to non-shareholders when existing
shareholders do not receive all or any of the shares they subscribe for, even
where all shares are not subscribed for. We will have no liability to any person
for failure to permit participation for any reason in the offering, for failure
to notify any person about the opportunity to participate, for the failure to
allocate a specific number of shares to any person, or incorrect determinations
of beneficial ownership or other facts which may affect our allocation
determinations. IF YOU SUBSCRIBE FOR SHARES THROUGH A BROKER OR OTHER NOMINEE,
AND YOUR BROKER OR NOMINEE DOES NOT IDENTIFY YOU IN THE SUBSCRIPTION DOCUMENTS,
WE MAY NOT ALLOCATE ANY SHARES TO YOUR SUBSCRIPTION, HOWEVER, IT IS NOT AN
ABSOLUTE REQUIREMENT THAT YOU IDENTIFY YOURSELF IN ORDER TO SUBMIT A
SUBSCRIPTION.
Factors which may cause us not to allocate shares to a subscription
include, but are not necessarily limited to:
o anonymity of the subscriber;
o subscribers who management perceives may not have the same goals
for Eagle Bancorp and EagleBank as the Board of Directors and
shareholders, or who may be disruptive to Eagle Bancorp's
development and its business plan; and
o regulatory approval requirements which are not satisfied at the
conclusion of the offering.
As a community banking institution still in our initial years of growth and
development, we hope to focus our shareholder base on those who have a
connection to and interest in the development of the communities in which we
operate. We believe that the best interests of Eagle Bancorp, our shareholders
and the communities we serve are best served by having a shareholder base
largely comprised of people with a connection with the community, be it a
family, residence or business connection. Such shareholders can be a valuable
source of business and referrals, and we believe, generally are also more likely
to have a long term perspective, enabling us to focus on solid long term growth
and profitability. Where we do not know who a subscriber is, or where we
perceive that an identified subscriber is not supportive of our community
banking principles and long term growth, we may elect not to sell shares to such
persons, even though it may mean foregoing additional capital.
PROCEDURE FOR SUBSCRIBING FOR COMMON STOCK IN THE OFFERING
Order Form. If you want to subscribe for shares in the offering, you
must deliver a properly completed and executed Order Form to the Subscription
Agent, prior to the expiration time, together with payment in full of the
offering price for all shares of common stock for which you wish to subscribe.
If you want us to consider your existing beneficial ownership of shares
not registered in your name in making allocation decisions, you or your broker
must provide us with additional information as discussed under the caption
"Allocation of Shares in the Offering" at page 11.
Prior Subscriptions. If you submitted an Order Form based on the April
25, 2003 prospectus, you do not need to do anything to confirm your
subscription. You may submit a new Order Form to subscribe for additional
shares. IF YOU SUBMITTED AN ORDER FORM BASED UPON THE APRIL 25, 2003 PROSPECTUS
AND WISH TO WITHDRAW YOUR SUBSCRIPTION, YOU MAY DO SO WITHOUT PENALTY BY
12
NOTIFYING THE SUBSCRIPTION AGENT IN WRITING BY 5:00 P.M., EASTERN TIME, ON JULY
25, 2003. IF YOU DO NOT NOTIFY THE SUBSCRIPTION AGENT THAT YOU WISH TO WITHDRAW
YOUR SUBSCRIPTION, YOU WILL CONTINUE TO BE A SUBSCRIBER FOR SHARES IN THE
OFFERING AS REFLECTED IN THIS PROSPECTUS. SEE "THE OFFERING - WITHDRAWAL OF
SUBSCRIPTIONS" AT PAGE 11.
Manner of Payment. Payment in full must be by:
(a) check or bank draft drawn upon a U.S. bank; or
(b) postal, telegraphic or express money order,
in either case, payable to "Eagle Bancorp, Inc. Escrow Account"; or
(c) by wire transfer to an account designated by us. If you wish
to make payment by wire transfer, please contact the
Subscription Agent for instructions.
Payment of the offering price will be deemed to have been received only
upon:
(a) clearance of any uncertified check;
(b) receipt of any certified check or bank draft drawn upon a
U.S. bank or of any postal, telegraphic or express money
order; or
(c) receipt of good funds in the Eagle Bancorp, Inc. Escrow
Account.
If you are paying by uncertified personal check, please note that the
check may take at least five business days to clear. If you wish to pay the
offering price by means of uncertified personal check, we urge you to make
payment sufficiently before the end of the offering to ensure that such payment
is received and clears before the end of the offering. All funds received in
payment of the subscription price will be deposited in the Eagle Bancorp, Inc.
Escrow Account and, until closing of the offering, will be invested at the
direction of Eagle Bancorp.
The address to which subscription agreements and payment of the
offering price, AND NOTICES OF WITHDRAWAL OF SUBSCRIPTIONS, should be delivered
is:
Friedman, Billings, Ramsey, & Co., Inc
(Eagle Bancorp, Inc.)
1001 Nineteenth Street, North
Arlington, Virginia 22209
DELIVERY TO AN ADDRESS OR IN A MANNER OTHER THAN THOSE INDICATED ABOVE
DOES NOT CONSTITUTE GOOD DELIVERY TO THE SUBSCRIPTION AGENT. None of our
directors, officers or employees is authorized to accept any Order Form or
subscription payment.
If the amount you send with your subscription is insufficient to
purchase the number of shares that you indicate are being subscribed for, or if
you do not specify the number of shares to be purchased, then we will treat your
subscription as one to purchase shares to the full extent of the payment sent.
If the amount you send with your subscription exceeds the amount necessary to
purchase the number of shares that you indicate are being subscribed for, then
we will treat your subscription as one to purchase shares to the full extent of
the excess payment sent.
FAILURE TO INCLUDE THE FULL OFFERING PRICE WITH YOUR ORDER FORM MAY
CAUSE US TO REJECT YOUR SUBSCRIPTION.
The method of delivery of subscription agreements and payment of the
offering price will be at your election and risk. If you send your subscription
by mail, we recommend that you use registered mail, return receipt requested,
and that you allow a sufficient number of days to ensure delivery and clearance
of payment prior to the termination date. You will be required to pay the
additional postage costs relating to registered mail.
13
We will decide all questions concerning the timeliness, validity, form
and eligibility of Order Forms received, and our decisions will be final and
binding. We may, in our sole discretion, waive any defect or irregularity, or
permit a defect or irregularity to be corrected within such time as we may
determine, or reject the purported subscription. Order Forms will not be deemed
to have been received or accepted until all irregularities have been waived or
cured within such time as we determine in our sole discretion. Neither Eagle
Bancorp, EagleBank, nor the Subscription Agent or any other broker or dealer
participating in the offering, will be under any duty to give a subscriber
notice of any defect or irregularity in the submission of Order Forms or incur
any liability for failure to give such notification. Neither Eagle Bancorp,
EagleBank, nor the Subscription Agent or any other broker or dealer
participating in the offering will have any liability or obligation to any
person as a result of a decision to not permit a person to participate in the
offering or as a result of a decision regarding the allocation of shares or a
determination regarding beneficial ownership of shares.
SUBSCRIPTIONS FOR COMMON STOCK MAY NOT BE REVOKED BY SUBSCRIBERS.
NOTWITHSTANDING, IF YOU SUBMITTED AN ORDER FORM BASED UPON THE APRIL 25, 2003
PROSPECTUS AND WISH TO WITHDRAW YOUR SUBSCRIPTION, YOU MAY DO SO WITHOUT PENALTY
BY NOTIFYING THE SUBSCRIPTION AGENT IN WRITING BY 5:00 P.M., EASTERN TIME, ON
JULY 25, 2003. IF YOU DO NOT NOTIFY THE SUBSCRIPTION AGENT THAT YOU WISH TO
WITHDRAW YOUR SUBSCRIPTION, YOU WILL CONTINUE TO BE A SUBSCRIBER FOR SHARES IN
THE OFFERING AS REFLECTED IN THIS PROSPECTUS. SEE "THE OFFERING - WITHDRAWAL OF
SUBSCRIPTIONS" AT PAGE 11.
ESCROW ACCOUNT; RELEASE OF FUNDS; NO INTEREST ON SUBSCRIPTION FUNDS
All funds received in payment of the offering price will be promptly
deposited into an escrow account at Virginia Commerce Bank, Arlington, Virginia
subject to the control of any two of the Chairman, President and Chief Financial
Officer of Eagle Bancorp together with an authorized officer of the Subscription
Agent, until acceptance of the subscriptions to which funds relate, rejection of
a subscription, or termination of the offering. Funds in the escrow account will
be invested in short-term obligations of the United States government, or other
investments permitted under SEC rules. Subscription funds will be released to us
from the escrow account only upon receipt by the escrow agent of the
certification that subscriptions relating to such funds have been accepted and
that shares of common stock will be issued to subscribers in respect of such
subscriptions. We may elect not to accept any subscriptions until the expiration
of the offering period and until we have made all allocation decisions, although
we reserve the right to accept any or all subscriptions at any time.
No interest will be paid to subscribers on subscription funds, even if
the offering is terminated in its entirety or an individual subscription is
rejected. We will keep earnings on funds in the escrow account whether or not
the offering is consummated. By submitting a subscription, you will forego
interest you otherwise could have earned on the funds for the period during
which your funds are held in escrow. We will, however, pay interest to the
extent that law, regulation or administrative policy of an investor's state of
residence specifically requires in the event that the offering is not completed.
Prior to the time the offering is completed or terminated, we will be entitled
to request, from time to time, that the escrow agent distribute accrued earnings
on the escrowed funds to us for general corporate purposes.
MANNER OF DISTRIBUTION
The offering is not being underwritten by a broker-dealer or any other
person or entity. Our directors and executive officers will have the primary
responsibility for identifying prospective subscribers in the offering. These
identifications will be based on a director's or officer's preexisting personal
knowledge of such persons, or interest which such persons have previously
expressed in Eagle Bancorp and its securities as a result of their personal or
business relationship with the individual directors or officers. Directors and
officers will also answer investor questions about us, to the extent that the
broker-dealer we have retained is unable to fully respond to them. None of our
directors, executive officers or employees has been authorized by us to make any
recommendation as to whether a prospective investor should subscribe for common
stock, whether an investment in the common stock is suitable for a prospective
investor or to provide any investment advice. None of the directors and
executive officers will receive compensation related to their services in
connection with the offering.
We have retained Friedman, Billings, Ramsey & Co., Inc., a registered
broker-dealer, to provide limited assistance to us in order to effect sales of
shares in compliance with the securities laws of the jurisdictions in which the
shares are being offered. To the extent that we seek to offer shares in
jurisdictions in which Friedman, Billings is not registered and cannot become
registered in a timely fashion, we may effect sales through another registered
broker-dealer. Friedman, Billings will receive Order Forms and checks or other
14
instruments in payment of the cost of subscriptions. Executed Order Forms will
be promptly forwarded to us. Subscription funds will be forwarded to the escrow
agent by noon of the business day following receipt. Neither Friedman, Billings,
Ramsey & Co., Inc. nor any other broker-dealer who assists us in the offering,
nor any other person, has any obligation to purchase any of the shares being
offered. No broker-dealer who assists us in the offering, including Friedman,
Billings, will thereby make any independent assessment of the information in
this prospectus, or determine the value of the common stock or the
reasonableness of the offering price. Friedman, Billings will receive $55,000
for its services in connection with the offering which will be paid only if the
offering is completed. Friedman, Billings will also receive reimbursement of its
actual out-of-pocket expenses, which are not expected to exceed $10,000, and
legal expenses of up to $15,000, whether or not the offering is completed.
No person is authorized to make statements about Eagle Bancorp unless
the information is set forth in this prospectus or the documents included or
incorporated in it, or to render investment advice. None of our directors and
executive officers is registered as a securities broker or dealer under the
federal or applicable state securities laws, other than possible registration
under state laws as an issuer dealer pursuant to waivers of examination or other
requirements for registration, nor are any of such persons affiliated with any
broker or dealer. Because the activities of our directors and executives
officers in the offering will be limited, as discussed above, to identifying
prospective investors from among their personal contacts and responding to
questions about the offering and Eagle Bancorp, they will not receive any
compensation related to the sale of securities or for their activities in the
offering, they will not provide investment advice or recommendations, and they
are not regularly engaged in the offering or sale of securities for the account
of others, we do not believe that such persons are in the business of either
effecting securities transactions for others or buying and selling securities
for their own account. As such, we believe that they are not required to
register as brokers or dealers under the federal securities laws. In addition,
the proposed activities of such directors and executive officers are generally
exempted from registration pursuant to a specific safe-harbor provision under
Rule 3a4-1 under the Securities Exchange Act of 1934. One of our directors, Mr.
Dworken, may not be eligible for the safe harbor as a result of the court order
to which he consented. We do not believe that his limited activities in the
offering, which will consist primarily of identifying potential subscribers from
his contacts, constitutes the business of effecting securities transactions
which would require registration as a broker. Mr. Dworken, like other directors
and executive officers, will not solicit persons who are not among his personal
and business contacts, and he will not receive any compensation related to the
offering. Please refer to "Eagle Bancorp, Inc. - Directors and Executive
Officers" at page 19 for additional information. Substantially similar
exemptions from registration are available under applicable state securities
laws. With respect to New Jersey residents, our directors and officers may only
respond to questions regarding our business. They may not respond to questions
about the offering, which must be directed to Friedman, Billings, the registered
broker dealer assisting us in the offering.
To the extent that the activities of our directors and executive
officers may be deemed to require registration as a "broker", the failure to do
so could result in adverse consequences to the individuals involved or Eagle
Bancorp. These consequences could include criminal or civil enforcement actions,
including monetary fines or penalties, rescission of the sale of securities the
sale of which was effected by unregistered brokers, and injunctions against
future violations of the securities laws. Monetary penalties or rescission could
have a material adverse effect on our financial results and capital position,
and an injunction against future violations could make it more difficult or
expensive for us to register or sell our securities, or raise capital, in the
future, make it more difficult for a director or officer to participate in our
affairs, could require a change of management or directors, or could result in
additional regulatory actions from our banking regulators.
15
DETERMINATION OF OFFERING PRICE
The offering price has been determined by the Board of Directors.
Neither Friedman, Billings nor any other investment bank, broker or dealer
participating in the offering has prepared an independent evaluation of the
common stock or prepared any opinion or report as to the fairness of the
offering price to Eagle Bancorp or its shareholders. In establishing the
offering price, the Board of Directors considered various factors that it deemed
relevant including among other things:
o our current financial condition and operating performance as
presented in our financial statements,
o our regulatory status,
o the recent market value of the common stock,
o the number of shares sought to be issued,
o the amount sought to be raised, and
o the anticipated impact of the offering on the market price of the
common stock.
THIS PROSPECTUS DOES NOT REPRESENT THE EXPRESSION OF AN OPINION OR A
RECOMMENDATION BY EAGLE BANCORP, OR BY ITS BOARD OF DIRECTORS OR MANAGEMENT, AS
TO WHETHER ANY PERSON SHOULD PURCHASE SHARES IN THE OFFERING, AND THEY HAVE NOT
BEEN AUTHORIZED BY EAGLE BANCORP TO RENDER INVESTMENT ADVICE OR RECOMMENDATIONS.
ANY DECISION TO INVEST IN THE COMMON STOCK MUST BE MADE BY EACH INVESTOR BASED
UPON HIS OR HER OWN EVALUATION OF THE OFFERING IN THE CONTEXT OF HIS OR HER BEST
INTERESTS.
INTENTIONS OF DIRECTORS, EXECUTIVE OFFICERS AND OTHERS
Our directors and executive officers and their related parties have
indicated that they intend to subscribe for at least 187,750 shares of common
stock in the offering, representing approximately 9.2% of the shares offered,
excluding the oversubscription shares, and that they are purchasing such shares
with the intent to hold the shares as an investment. These intentions do not
include the intentions of directors of EagleBank, are not commitments, and could
change based upon individual circumstances.
REGULATORY LIMITATION
We will not be required to issue shares of common stock in the offering
to any person who, in our judgment, would be required to obtain prior clearance
or approval from any state or federal bank regulatory authority to own or
control such shares if, at the expiration time, such clearance or approval has
not been obtained or any required waiting period has not expired. Our
determination as to whether clearance or approval is required will be final and
binding.
NONQUALIFIED STATES OR FOREIGN COUNTRIES
We have made a reasonable effort to comply with the securities laws of
all states in the United States in which current shareholders reside. We will
not provide subscription materials to any person who resides in any foreign
country or in any state of the United States if we determine that compliance
with the securities laws of such country or state would be impracticable, and we
will not accept any subscriptions from subscribers located in those states or
countries. Persons subscribing from states other than Maryland, Virginia, the
District of Columbia, Pennsylvania, New York, New Jersey, Nevada and Florida
must be existing holders of common stock and must be subscribing for additional
shares in the same registration or capacity. Exceptions will be made only if an
exemption from the registration requirements of applicable state law is
available.
RIGHT TO AMEND OR TERMINATE THE OFFERING
We expressly reserve the right to amend the terms and conditions of the
offering. In the event of a material change to the terms of the offering, such
as an extension of the offering period beyond the latest stated expiration date,
an increase in the offering price following distribution of a final prospectus,
or a further increase in the size of the offering of more than 20%, we will file
an amendment to the registration statement, of which this prospectus is a part,
and may resolicit subscribers. In the event of such a resolicitation, proceeds
received will be returned promptly to any subscriber who desires to withdraw
their subscription. We expressly reserve the right, at any time prior to
delivery of shares of common stock offered hereby, to terminate the offering if
16
the offering is prohibited by law or regulation or if the Board of Directors
concludes, in its sole judgment, that it is not in the best interests of Eagle
Bancorp to complete the offering under the circumstances. We may terminate the
offering by giving oral or written notice to the Subscription Agent and making a
public announcement. If the offering is terminated, all funds received will be
promptly refunded, without interest, except that if the offering is not
completed we will pay interest to the extent that law, regulation or
administrative policy of an investor's state of residence specifically requires.
ISSUANCE OF COMMON STOCK
Certificates representing shares of common stock purchased in the
offering will be delivered to purchasers as soon as practicable after the
expiration of the right to withdraw subscriptions, and after all prorations and
adjustments contemplated by the offering have been effected. No fractional
shares will be issued in the offering.
REQUESTS FOR ADDITIONAL INFORMATION
If you have questions or require additional information concerning the
offering contact Friedman, Billings at (703) 312-9693.
USE OF PROCEEDS
The proceeds of the offering will be available for contribution to the
capital of EagleBank, for use in the bank's lending and investment activities
and for branch expansion, and for EagleBank's general corporate purposes, for
the reduction of the outstanding balance on our line of credit, which was
approximately $8.6 million at June 20, 2003, for acquisitions of other
institutions or for investments by the holding company in activities which are
permitted for bank holding companies or financial holding companies.
Contribution of capital to EagleBank will strengthen the bank's capital
base and enable it to continue to maintain and exceed regulatory capital levels
required for well capitalized status as our asset base grows, and will permit
continued growth in levels of assets and loans through expansion of its existing
lending and investment business and possible further branching or acquisitions.
While there can be no assurance, we expect to continue to experience substantial
growth, although not necessarily at the rates experienced over the past several
years and prior to reaching our current asset level. As our assets increase, our
need for capital increases proportionately, and we do not yet expect earnings to
fully satisfy our capital needs. At March 31, 2003, EagleBank's total risk
weighted capital ratio was 10.9%, slightly above the amount required for well
capitalized status. In general, without raising additional capital, a bank can
increase asset levels only by ten to twelve times the level of its earnings,
depending on the nature of its asset mix. This offering will enable us to
additional capital without the out-of-pocket costs, interest rate risk and
potential regulatory scrutiny of further borrowings.
While we are always looking for additional branching opportunities and
acquisitions, and are currently in discussions regarding a letter of intent for
a lease for a new branch located in the District of Columbia, there are no
definitive plans for any additional branches or acquisitions. There can be no
assurance that we will establish additional branches, as to how much it will
cost to develop and build out any new branch if a lease is successfully
negotiated, that we will acquire another institution in whole or in part, , or
that any new branch or acquisition will be successful or contribute to
shareholder value. Our preliminary estimate of the cost of developing the branch
site currently under discussion is approximately $500,000. Although we plan to
use the proceeds of the offering for the development and expansion of our
existing businesses, or for entering new lines of business permitted for bank
holding companies or financial holding companies, including possible investment
in real estate investment entities, we have no definitive plans for any
particular investments or the use of any particular amount of the proceeds of
the offering. Investors will rely on the discretion of our Board of Directors
and management in determining the use of proceeds.
A portion of the proceeds of the offering, currently estimated at
approximately $20,000, along with borrowings of approximately $500,000, will be
used to fund a new subsidiary of Eagle Bancorp established to purchase from
EagleBank an impaired loan secured by automobile leases and the related
vehicles. The leases and vehicles collateralizing the loan are expected to be
transferred to the subsidiary from the bankruptcy estate of the borrower. The
sale of the loan to the new subsidiary is being made in an effort to facilitate
more effective management of the leases. There can be no assurance that we will
be able to successfully or profitably manage the leases, or that we will not be
subject to additional liabilities as record owner of the leased vehicles, based
upon the actions of the lessees.
17
Funds retained by the holding company as working capital will be
available for future contribution to EagleBank as its capital needs require.
Following reduction of the outstanding balance of the line of credit with
proceeds of the offering, we will also be able to draw down the full amount of
the line as EagleBank's or Eagle Bancorp's capital needs require. Retention of
proceeds of the offering at the holding company level, rather than immediate
contribution to EagleBank, is desirable not only in that it will enable us to
take advantage of other investment opportunities that may arise, including
participations in loans made by EagleBank, but it will prevent EagleBank from
being considered overcapitalized, and having low return on equity, relative to
its peer banks, during the period from the completion of the offering until the
proceeds can be deployed. Such retention can minimize any impact on EagleBank's
regulatory ratings and will enable the holding company to act as a source of
strength to EagleBank.
The following table reflects the anticipated allocation of the net
proceeds of the offering, after deducting estimated expenses of approximately
$275,000. The presentation assumes the sale of 2,040,816 shares in the offering
at $12.25 per share, for gross proceeds of $24,999,996.
Percentage of
Amount Proceeds (1)
------------ ---------------
Eagle Bancorp
-------------------------------------------------------
Net proceeds $ 24,724,996 100%
Reduction of outstanding balance on line of credit 8,550,000 34.58%
Capital contribution to EagleBank 0 0%
Capital contribution to lease subsidiary 20,000 0.08%
Working capital(2) 16,154,996 65.34%
EagleBank
-------------------------------------------------------
Proceeds of capital contributions by Eagle Bancorp 0 0%
(1) Represents, in case of EagleBank, percentage of total net proceeds of
offering.
(2) Represents funds available for future contribution to EagleBank,
investment in securities, loans, loan participations, for other corporate
purposes, or for investment in other lines of business permitted for bank
holding companies or financial holding companies.
DILUTION
Dilution represents the difference between the amount per share paid by
purchasers of common stock in the offering and the net tangible book value per
share of common stock immediately after the offering. The tangible book value of
Eagle Bancorp was approximately $20.9 million at March 31, 2003, or $7.20 per
share. After adjusting for the receipt of the net proceeds of the sale of
2,040,816 shares of common stock in the offering at $12.25 per share, the pro
forma book value at March 31, 2003 would be approximately $45.6 million, or
$9.23 per share. As the table below shows, this would represent an immediate
dilution of $3.02 per share to investors in the offering, based on the
difference between pro forma book value and the offering price.
Offering price per share $ 12.25
Net tangible book value per share before
the offering $ 7.20
Increase in net tangible book value per share
attributable to the offering $ 2.03
Pro forma net tangible book value per share
after the offering $ 9.23
-------
Dilution to investors in the offering, per share $ 3.02
=======
18
If 2,448,979 shares of common stock were sold in the offering, then the
pro forma tangible book value at March 31, 2003 would be approximately $50.6
million, or $9.46 per share, representing an immediate dilution of $2.79 per
share to new investors, based on the difference between pro forma book value and
the offering price.
EAGLE BANCORP, INC.
Eagle Bancorp is a one-bank holding company headquartered in Bethesda,
Maryland. We provide general commercial and consumer banking services through
our wholly owned banking subsidiary, EagleBank, Bethesda, Maryland. Eagle
Bancorp was organized under Maryland law in October 1997 to be the holding
company for EagleBank. We were formed by a group of local businessmen and
professionals with significant prior experience in community banking in the
Metropolitan Washington D.C. market area, together with an experienced community
bank senior management team.
EagleBank was organized and opened for business and became a wholly
owned subsidiary of Eagle Bancorp in July 1998. At March 31, 2003, we had
consolidated assets of $350.4 million, deposits of $278.9 million, and
shareholders' equity of $20.9 million. See "Selected Consolidated Financial
Data" at page 6, and the consolidated financial statements included as a part of
this prospectus. EagleBank is a Maryland chartered bank which is a member of the
Federal Reserve System, and its deposits are insured by the Bank Insurance Fund
of the Federal Deposit Insurance Corporation. As such, EagleBank is subject to
supervision, regulation and periodic examination by our primary state and
federal regulators, the Maryland Department of Financial Institutions and the
Board of Governors of the Federal Reserve System, through the Federal Reserve
Bank of Richmond. Eagle Bancorp is also subject to supervision, regulation and
examination of the Board of Governors. For additional information on supervision
and regulation of Eagle Bancorp and EagleBank, see "Supervision and Regulation"
in our Annual Report on Form 10-K for the year ended December 31, 2002, included
as part of, and incorporated by reference in, this prospectus.
EagleBank, our primary subsidiary, was organized as an independent,
community-oriented, full-service alternative to the superregional financial
institutions which dominate its primary market area. The cornerstone of the our
philosophy is to provide superior, personalized service to our customers. We
focus on relationship banking, providing each customer with a number of
services, becoming familiar with and addressing customer needs in a proactive,
personalized fashion.
EagleBank offers full commercial banking services to its business and
professional clients as well as complete consumer banking services to
individuals living and/or working in the service area. We emphasize providing
commercial banking services to sole proprietorships, small and medium-sized
businesses, partnerships, corporations, non-profit organizations and
associations, and investors living and working in and near our primary service
area. A full range of retail banking services are offered to accommodate the
individual needs of both corporate customers as well as the community we serve.
These services include the usual deposit functions of commercial banks,
including business and personal checking accounts, "NOW" accounts and savings
accounts, business, construction, and commercial loans, residential mortgages
and consumer loans and cash management services. We are an SBA Preferred Lender,
and one of the largest SBA lenders, by dollar volume, in the Washington DC
metropolitan area
EagleBank's primary service area is Montgomery County, Maryland, with a
secondary market area in the Washington D.C. metropolitan area, particularly
Washington D.C., Prince George's County in Maryland, and Arlington and Fairfax
Counties in Virginia. EagleBank operates a total of five banking offices in
Bethesda, Gaithersburg, Rockville and Silver Spring, Maryland, and one office in
the District of Columbia.
Directors and Executive Officers.
Set forth below is information concerning our directors and executive
officers. Except as otherwise indicated, the occupation listed has been such
person's principal occupation for at least the last five years. Except for Mr.
Ford, all of the directors of Eagle Bancorp are also directors of EagleBank.
19
Leonard L. Abel. Mr. Abel, 76, is Chairman of the Board of Directors of
Eagle Bancorp, and has served in that position since its organization. Until
retiring in 1993, Mr. Abel was partner-in-charge of the certified public
accounting firm of Kershenbaum, Abel, Kernus and Wychulis, Rockville, Maryland
with which he served for forty-five years. From October 1996, until resigning in
September 1997, Mr. Abel was a member of the Board of Directors of F&M National
Corporation (NYSE) and its wholly owned subsidiary, F&M Bank - Allegiance,
Bethesda, Maryland, and prior to that time was Chairman of the Board of
Allegiance Bank, N.A. (collectively with F&M Bank - Allegiance, "Allegiance")
and its holding company Allegiance Banc Corporation, from their organization
until their acquisition by F&M National Corporation ("F&M"). Mr. Abel was also
Chairman of the Board of Directors of Central National Bank of Maryland from
1968 until its acquisition in 1986 by Citizens Bank of Maryland (now Sun Trust
Banks, Inc.).
Dudley C. Dworken. Mr. Dworken, 53, has served as a director of Eagle
Bancorp since August 1999. Mr. Dworken is the owner of Curtis Chevrolet-Geo, an
automobile dealership in Washington, D.C. Mr. Dworken was a Director of
Allegiance from 1987 until October 1997, and a director of Allegiance Banc
Corporation from 1988 until its acquisition by F&M. In November 1998, Mr.
Dworken consented to the entry of an order permanently enjoining him from
violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5 under
that act. The order was issued in connection with an investigation of him in
respect of trading by his uncle in the shares of Allegiance Banc Corporation
during the period during which Allegiance Banc Corporation was involved in
merger negotiations with F&M. Mr. Dworken is an active member of numerous
community, business, charitable and educational institutions in the Washington
D.C./Montgomery County area.
Eugene F. Ford, Sr. Mr. Ford, 73, has served as a director of Eagle
Bancorp since its organization. Mr. Ford is engaged in the business of property
management and development as Chairman of Mid-City Financial Corporation, an
apartment developer, of which he was also president until 1995. He is Chairman
of the Community Preservation and Development Corporation, a non-profit
organization in the business of preserving public purpose housing complexes and
providing social program support for residents thereof. Through his ownership of
Mid-City Financial, Mr. Ford is the largest owner of assisted housing units in
Maryland and the Washington metropolitan area. Mr. Ford has received numerous
awards for his work in the housing development field.
Ronald D. Paul. Mr. Paul, 47, is President and Vice Chairman of the
Board of Directors of Eagle Bancorp and Chairman of the Board of Directors of
EagleBank, and has served in such positions since organization. Mr. Paul is
President of Ronald D. Paul Companies and RDP Management, which are engaged in
the business of real estate development and management activities. Mr. Paul is
also active in private investments, including Chairman of Bethesda Investments,
Inc., a private venture capital fund. Mr. Paul was a director of Allegiance from
1990 until September 1997, and a director of Allegiance Banc Corporation from
1990 until its acquisition by F&M, including serving as Vice Chairman of the
Board of Directors from 1995. Mr. Paul is also active in various charitable
organizations, including serving as Vice Chairman of the Board of Directors of
the National Kidney Foundation from 1996 to 1997, and its Chairman from 2002 to
2003.
H. L. Ward. Mr. Ward, 56, has served as a director of Eagle Bancorp
since March 1999 and of EagleBank since its organization. Mr. Ward, the
President and Chief Executive Officer of EagleBank, was President and Chief
Executive Officer of Allegiance from December 1995 to October 1997. Prior to
that time he served in various executive lending positions at Allegiance and its
former sister bank Prince George's National Bank, including Executive Vice
President - Chief Lending Officer, from 1992 to 1995. Mr. Ward has over 31 years
of experience in the commercial banking and real estate development and finance
industries.
Thomas D. Murphy. Mr. Murphy, 55, the Executive Vice President - Chief
Operating Officer and a director of EagleBank, served at Allegiance from
September 1994, including as Executive Vice President and Chief Operating
Officer from December 1995 until November 1997. Prior to his service at
Allegiance, he served in the same position at First Montgomery Bank from August
1991 until its acquisition by Sandy Spring National Bank of Maryland in December
1993, and he served as a Vice President of that organization until September
1994. Mr. Murphy has 31 years experience in the commercial banking industry.
Susan G. Riel. Ms. Riel, 53, Executive Vice President - Chief
Operations Officer of EagleBank, previously served as Executive Vice President -
Chief Operating Officer of Columbia First Bank, FSB from 1989 until that
institution's acquisition by First Union Bancorp in 1995. Ms. Riel has over 25
years of experience in the commercial banking industry.
20
Wilmer L. Tinley, Jr. Mr. Tinley, 64, Executive Vice President and
Chief Financial Officer of Eagle Bancorp and EagleBank since June 1998, operated
his own tax, accounting and business services company from 1992 through 1998.
Prior to that time, he served as the President and Chief Executive Officer of
Montgomery National Bank (later Allegiance) from its organization in 1987 until
1992.
Martha Foulon-Tonat. Ms. Tonat, 47, Executive Vice President and Chief
Lending Officer of EagleBank, served at Allegiance from January 1990 to December
1997. Her duties included being Senior Vice President and Chief Lending Officer.
Prior to her service at Allegiance, Ms. Tonat served at various commercial banks
in the area. She has over 21 years experience in the commercial banking
industry.
ADDITIONAL INFORMATION
For additional information regarding our business and finances, please
refer to the Management's Discussion and Analysis and Consolidated Financial
Statements included in the Annual Report on Form 10-K for the year ended
December 31, 2002 and the Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003, included as a part of this prospectus, and to the documents
listed in "Where You Can Find Additional Information About Eagle Bancorp and
Documents Included With This Prospectus" which are incorporated by reference in
this prospectus.
SHARE OWNERSHIP OF MANAGEMENT AND FIVE PERCENT BENEFICIAL OWNERS
The following table sets forth information as of June 20, 2003
concerning the number and percentage of shares of the common stock beneficially
owned by our directors and those executive officers whose compensation is
required to be disclosed in our proxy statement, and by all of our directors and
executive officers as a group, as well as information regarding each other
person known by us to own in excess of five percent of the outstanding common
stock. Except as otherwise indicated, all shares are owned directly, and the
named person possesses sole voting and sole investment power with respect to all
such shares. Except as set forth below, we are not aware of any other person or
persons who beneficially own in excess of five percent of the common stock. We
are not aware of any arrangement which at a subsequent date may result in a
change of control of Eagle Bancorp.
21
Name Position Number of Shares Percentage(1)
------------------------------------------------------------------------------------------------------------------------------
Leonard L. Abel Chairman of Board of Eagle Bancorp and 130,550(2) 4.42%
Director of EagleBank
Dudley C. Dworken Director of Eagle Bancorp and 56,973(3) 1.95%
EagleBank
Eugene F. Ford, Sr. Director of Eagle Bancorp 61,733(4) 2.12%
Ronald D. Paul Vice Chairman, President and Treasurer of 205,351(5) 6.86%
4416 East West Highway Eagle Bancorp; Chairman of Board
Bethesda, Maryland 20814 of EagleBank
H.L. Ward Executive Vice President and Director of 46,800(6) 1.59%
Eagle Bancorp; President, Chief Executive
Officer and Director of EagleBank
Thomas D. Murphy Executive Vice President, Chief Operating 31,800(7) 1.08%
Officer and Director of EagleBank
Susan G. Riel Executive Vice President, Senior 23,275(8) 0.79%
Operations Officer of EagleBank
Martha Foulon-Tonat Executive Vice President - Chief Lending 19,600(9) 0.67%
Officer of EagleBank
-------------------- ---------------
All directors and executive
officers of Eagle Bancorp as
a group (9 persons) 596,186(10) 18.70%
==================== ===============
(1) Represents percentage of 2,910,074 shares issued and outstanding as of
June 20, 2003, except with respect to individuals holding options
exercisable within 60 days of that date, in which event, represents
percentage of shares issued and outstanding plus the number of shares for
which that person holds options exercisable within 60 days of June 20,
2003, and except with respect to all directors and executive officers of
Eagle Bancorp and Eagle Bancorp and EagleBank as groups, in which case
represents percentage of shares issued and outstanding plus the number of
shares for which those persons hold options exercisable within 60 days of
June 20, 2003.
(2) Includes warrants to purchase 43,750 shares of common stock.
(3) Includes 43,750 shares held in a trust of which Mr. Dworken is beneficiary
and options and warrants to purchase 12,851 shares of common stock.
(4) Includes options and warrants to purchase 18,233 shares of Common Stock
and 21,875 shares held by Mr. Ford's spouse.
(5) Includes 113,750 shares held in trust for Mr. Paul's children. Includes
options to purchase 83,151 shares of common stock.
22
(6) Includes options to purchase 34,025 shares of common stock.
(7) Includes options to purchase 30,400 shares of common stock. Also includes
400 shares held by his spouse for their minor child.
(8) Includes options to purchase 18,900 shares of common stock.
(9) Includes options to purchase 18,900 shares of common stock.
(10) Includes options and warrants to purchase 277,710 shares of common stock.
23
MARKET FOR COMMON STOCK AND DIVIDENDS
Market for Common Stock and Dividends. Our common stock is listed for
trading on the Nasdaq SmallCap Market under the symbol "EGBN". To date, trading
in the common stock has been sporadic and volume has been light. No assurance
can be given that an active trading market will develop in the foreseeable
future. The following table sets forth the high and low bid prices for the
common stock during each calendar quarter during the last two fiscal years, and
though March 31, 2003. These quotations reflect interdealer prices, without
retail markup, markdown or commission, and may not represent actual
transactions. These quotations do not necessarily reflect the intrinsic or
market values of the common stock. Prices have been adjusted to reflect a seven
for five stock split in the form of a 40% stock dividend paid as of June 15,
2001. As of June 20, 2003, there were 2,910,074 shares of common stock
outstanding, held by approximately 943 total beneficial shareholders, including
approximately 420 shareholders of record.
2003 2002 2001
------------------------ -------------------------- ------------------------
Quarter High Bid Low Bid High Bid Low Bid High Bid Low Bid
---------- ---------- ----------- ---------- ---------- ----------
First $15.30 $13.42 $16.00 $10.65 $ 7.14 $ 5.71
Second $15.75 $14.55 $11.40 $ 6.07
Third $14.55 $11.25 $13.70 $10.26
Fourth $13.66 $11.66 $12.50 $ 9.90
Dividends. We have not paid any cash dividends to date. In March 2000,
we effected a five for four stock split in the form of a 25% stock dividend. In
June 2001 we effected a seven for five stock split in the form of a 40% stock
dividend. The payment of cash dividends will depend largely upon the ability of
EagleBank, our sole operating subsidiary, to declare and pay dividends.
EagleBank's ability to pay dividends will depend primarily upon its earnings,
financial condition, and need for funds, as well as applicable governmental
policies. Even if we have earnings in an amount sufficient to pay dividends, the
Board of Directors may determine, and it is the present intention of the Board
of Directors, to retain earnings for the purpose of funding growth.
Regulations of the Federal Reserve Board and Maryland law place limits
on the amount of dividends EagleBank may pay without prior approval. Prior
regulatory approval is required to pay dividends which exceed EagleBank's net
profits for the current year plus its retained net profits for the preceding two
calendar years, less required transfers to surplus. State and federal bank
regulatory agencies also have authority to prohibit a bank from paying dividends
if such payment is deemed to be an unsafe or unsound practice, and the Federal
Reserve Board has the same authority over bank holding companies.
The Federal Reserve Board has established guidelines with respect to
the maintenance of appropriate levels of capital by registered bank holding
companies. Compliance with such standards, as presently in effect, or as they
may be amended from time to time, could possibly limit the amount of dividends
that we may pay in the future. In 1985, the Federal Reserve Board issued a
policy statement on the payment of cash dividends by bank holding companies. In
the statement, the Federal Reserve Board expressed its view that a holding
company experiencing earnings weaknesses should not pay cash dividends exceeding
its net income, or which could only be funded in ways that weaken the holding
company's financial health, such as by borrowing. As a depository institution,
the deposits of which are insured by the FDIC, EagleBank may not pay dividends
or distribute any of its capital assets while it remains in default on any
assessment due the FDIC. EagleBank currently is not in default under any of its
obligations to the FDIC.
DESCRIPTION OF OUR CAPITAL STOCK
Eagle Bancorp's authorized capital consists of 20,000,000 shares of
common stock, $.01 par value, and 1,000,000 shares of undesignated preferred
stock, $.01 par value. As of June 20, 2003, there were 2,910,074 shares of
common stock outstanding and no shares of preferred stock outstanding. There
were also options and warrants to purchase approximately 455,000 shares of
common stock outstanding under our 1998 Stock Option Plan, all which were
exercisable.
24
Common Stock. Holders of common stock are entitled to cast one vote for
each share held of record, to receive such dividends as may be declared by the
Board of Directors out of legally available funds, and, subject to the rights of
any class of stock having preference to the common stock, to share ratably in
any distribution of Eagle Bancorp's assets after payment of all debts and other
liabilities, upon liquidation, dissolution or winding up. Shareholders do not
have cumulative voting rights or preemptive rights or other rights to subscribe
for additional shares, and the common stock is not subject to conversion or
redemption. The shares of common stock to be issued in this offering will be,
when issued, fully paid and non-assessable.
Preferred Stock. The Board of Directors may, from time to time, by
action of a majority, issue shares of the authorized, undesignated preferred
stock, in one or more classes or series. In connection with any such issuance,
the Board may by resolution determine the designation, voting rights,
preferences as to dividends, in liquidation or otherwise, participation,
redemption, sinking fund, conversion, dividend or other special rights or
powers, and the limitations, qualifications and restrictions of such shares of
preferred stock. As of the date hereof, no shares of preferred stock are
outstanding.
The existence of shares of authorized undesignated preferred stock
enables us to meet possible contingencies or opportunities in which the issuance
of shares of preferred stock may be advisable, such as in the case of
acquisition or financing transactions. Having shares of preferred stock
available for issuance gives us flexibility in that it would allow us to avoid
the expense and delay of calling a meeting of shareholders at the time the
contingency or opportunity arises. Any issuance of preferred stock with voting
rights or which is convertible into voting shares could adversely affect the
voting power of the holders of common stock.
The existence of authorized shares of preferred stock could have the
effect of rendering more difficult or discouraging hostile takeover attempts or
of facilitating a negotiated acquisition. Such shares, which may be convertible
into shares of common stock, could be issued to shareholders or to a third party
in an attempt to frustrate or render a hostile acquisition more expensive.
Limitations on Payment of Dividends. The payment of dividends by Eagle
Bancorp will depend largely upon the ability of EagleBank to declare and pay
dividends to Eagle Bancorp, as the principal source of Eagle Bancorp's revenue
will be from dividends or interest payments on capital debt securities paid by
EagleBank. Dividends will depend primarily upon the bank's earnings, financial
condition, and need for funds, as well as applicable governmental policies and
regulations. Even where we have earnings in an amount sufficient to pay
dividends, the Board of Directors may determine to retain earnings for the
purpose of funding growth.
Regulations of the Federal Reserve and Maryland law place limits on the
amount of dividends EagleBank may pay without prior approval. Prior regulatory
approval is required to pay dividends which exceed the bank's net profits for
the current year plus its retained net profits for the preceding two calendar
years, less required transfers to surplus. Federal bank regulatory agencies also
have authority to prohibit a bank from paying dividends if such payment is
deemed to be an unsafe or unsound practice, and the Federal Reserve Board has
the same authority over bank holding companies.
The Federal Reserve Board has established guidelines with respect to
the maintenance of appropriate levels of capital by registered bank holding
companies. Compliance with such standards, as currently in effect, or as they
may be amended from time to time, could possibly limit the amount of dividends
that we may pay in the future. In 1985, the Federal Reserve Board issued a
policy statement on the payment of cash dividends by bank holding companies. In
the statement, the Federal Reserve Board expressed its view that a holding
company experiencing earnings weaknesses should not pay cash dividends exceeding
its net income, or which could only be funded in ways that weaken the holding
company's financial health, such as by borrowing. As a depository institution,
the deposits of which are insured by the FDIC, EagleBank may not pay dividends
or distribute any of its capital assets while it remains in default on any
assessment due the FDIC. See "Market for Common Stock and Dividends" at page 22.
25
SELECTED PROVISIONS OF THE ARTICLES OF INCORPORATION AND MARYLAND LAW
Consideration of Business Combinations. The Articles of Incorporation
provide that where the Board of Directors evaluates any actual or proposed
business combination, the Board of Directors shall consider the following
factors: the effect of the business combination on the corporation and its
subsidiaries, and their respective shareholders, employees, customers and the
communities which they serve; the timing of the proposed business combination;
the risk that the proposed business combination will not be consummated; the
reputation, management capability and performance history of the person
proposing the business combination; the current market price of the
corporation's capital stock; the relation of the price offered to the current
value of the corporation in a freely negotiated transaction and in relation to
the directors' estimate of the future value of the corporation and its
subsidiaries as an independent entity or entities; tax consequences of the
business combination to the corporation and its shareholders; and such other
factors deemed by the directors to be relevant. In such considerations, the
board of directors may consider all or some of such factors as a whole and may
or may not assign relative weights to any of them. The foregoing is not intended
as a definitive list of factors to be considered by the board of directors in
the discharge of their fiduciary responsibility to the corporation and its
shareholders, but rather to guide such consideration and to provide specific
authority for the consideration by the board of directors of factors which are
not purely economic in nature in light of the circumstances of the corporation
and its subsidiaries at the time of such proposed business combination.
Amendment of the Articles of Incorporation. In general, the Articles of
Incorporation may be amended upon the vote of two-thirds of the outstanding
shares of capital stock entitled to vote, the standard vote required under
Maryland law.
Restrictions on Business Combinations with Interested Shareholders.
Section 3-602 of the Maryland General Corporation Law ("MGCL"), as in effect on
the date hereof, which is applicable to the Bank to the extent that the
Financial Institutions provisions of Maryland law do not provide otherwise,
imposes conditions and restrictions on certain "business combinations"
(including, among other transactions, a merger, consolidation, share exchange,
or, in certain circumstances, an asset transfer or issuance of equity
securities) between a Maryland corporation and any person who beneficially owns
at least 10% of the corporation's stock (an "interested shareholder"). Unless
approved in advance by the board of directors, or otherwise exempted by the
statute, such a business combination is prohibited for a period of five years
after the most recent date on which the interested shareholder became an
interested shareholder. After such five-year period, a business combination with
an interested shareholder must be: (a) recommended by the corporation's board of
directors, and (b) approved by the affirmative vote of at least (i) 80% of the
corporation's outstanding shares entitled to vote and (ii) two-thirds of the
outstanding shares entitled to vote which are not held by the interested
shareholder with whom the business combination is to be effected, unless, among
other things, the corporation's common shareholders receive a "fair price" (as
defined by the statute) for their shares and the consideration is received in
cash or in the same form as previously paid by the interested shareholder for
his or her shares. The Articles of Incorporation and Bylaws of the Bank do not
include any provisions imposing any special approval requirements for a
transaction with a major shareholder, and they do not opt out from the operation
of Section 3-602.
Control Share Acquisition Statute. Under the MGCL's control share
acquisition law, as in effect on the date hereof, voting rights of shares of
stock of a Maryland corporation acquired by an acquiring person at ownership
levels of 10%, 33-1/3% and 50% of the outstanding shares are denied unless
conferred by a special shareholder vote of two-thirds of the outstanding shares
held by persons other than the acquiring person and officers and directors of
the corporation or, among other exceptions, such acquisition of shares is made
pursuant to a merger agreement with the corporation or the corporation's charter
or bylaws permit the acquisition of such shares prior to the acquiring person's
acquisition thereof. Unless a corporation's charter or bylaws provide otherwise,
the statute permits such corporation to redeem the acquired shares at "fair
value" if the voting rights are not approved or if the acquiring person does not
deliver a "control share acquisition statement" to the corporation on or before
the tenth day after the control share acquisition. The acquiring person may call
a shareholder's meeting to consider authorizing voting rights for control shares
subject to meeting disclosure obligations and payment of costs set out in the
statute. If voting rights are approved for more than fifty percent of the
outstanding stock, objecting shareholders may have their shares appraised and
repurchased by the corporation for cash. The Articles of Incorporation and
Bylaws of the Bank do not include any provisions restricting the voting ability
of major shareholders, and do not opt out from the operation of the control
share acquisition law.
26
LEGAL MATTERS
The validity of the shares offered hereby and selected other legal
matters in connection with the offering will be passed upon for Eagle Bancorp by
the law firm of Kennedy, Baris & Lundy, L.L.P., Bethesda, Maryland. Members of
Kennedy, Baris and Lundy, L.L.P. own an aggregate of approximately 3,500 shares
of common stock.
EXPERTS
The consolidated financial statements at December 31, 2002 and 2001 and
for each of the three years in the period ended December 31, 2002 incorporated
by reference in this prospectus have been audited by Stegman & Company,
independent auditors, as stated in their reports, incorporated by reference
herein, and have been incorporated in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION ABOUT EAGLE BANCORP
AND DOCUMENTS INCLUDED WITH THIS PROSPECTUS
This prospectus includes and is being delivered with copies of Eagle
Bancorp's Annual Report on Form 10-K for the year ended December 31, 2002 and
Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.
Eagle Bancorp files annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information that we file with the SEC at the SEC's
public reference room at 450 Fifth Street, NW, Washington, DC 20549. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference room.
The SEC maintains a World Wide Web site on the Internet at "http://www.sec.gov"
that contains reports, proxy and information statements, and other information
regarding companies, including Eagle Bancorp, that file electronically with the
SEC.
We have filed two Registration Statements on Form S-2 to register the
common stock to be sold in the offering. This prospectus is a part of those
Registration Statement. As allowed by SEC rules, this prospectus does not
contain all the information you can find in the Registration Statements or the
exhibits to the Registration Statements. SEC regulations allow us to
"incorporate by reference" information into this prospectus, which means that we
can disclose important information to you by referring you to another document
filed separately with the SEC. The information incorporated by reference is
considered part of this prospectus. Information incorporated by reference from
earlier documents is superceded by information that has been incorporated by
reference from more recent documents.
This prospectus incorporates by reference the documents listed below
that we have previously filed with the SEC (file no. 0-25923).
(1) Annual Report on Form 10-K for the year ended December 31, 2002,
including the information appearing under the following captions
in our Proxy Statement for the Annual Meeting of Stockholders
held on May 20, 2003:
"Voting Securities and Principal Shareholders";
"Election of Directors";
"Executive Compensation";
"Executive Officers Who Are Not Directors";
"Certain Relationships and Related Transactions"; and
"Compliance with Section 16(a) of the Securities Exchange
Act of 1934";
(2) Annual Report to Shareholders for the year ended December 31,
2002;
(3) Quarterly Report on Form 10-Q for the quarter ended March 31,
2003; and
(4) Current Report on Form 8-K filed April 15, 2003.
27
Also incorporated by reference are additional documents that we may
file with the SEC after the date of this prospectus and before the termination
of the offering. These additional documents will be deemed to be incorporated by
reference, and to be a part of, this prospectus from the date of their filing.
These documents include proxy statements and periodic reports, such as Annual
Reports on Form 10-K , Quarterly Reports on Form 10-Q, and to the extent they
are considered filed, Current Reports on Form 8-K. Information contained in
later filed documents will supersede information in earlier filed documents, to
the extent that they are inconsistent.
You can obtain any of the documents incorporated by reference from us,
the SEC or the SEC's Internet web site as described above. Documents
incorporated by reference are available from Eagle Bancorp without charge,
including any exhibits specifically incorporated by reference therein. You may
obtain documents incorporated by reference in this prospectus by requesting them
in writing or by telephone from:
Wilmer L. Tinley, Chief Financial Officer
Eagle Bancorp, Inc.
7815 Woodmont Avenue
Bethesda, Maryland 20814
Telephone (301) 986-1800
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
information that is different from what is contained in this prospectus. This
prospectus is dated June 23, 2003. You should not assume that the information
contained in this prospectus is accurate as of any date other than that date.
28
Appendix 1
Eagle Bancorp, Inc.
Annual Report on Form 10-K
for the year ended
December 31, 2002
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 2002
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _________to _________
Commission file number: 0-25923
Eagle Bancorp, Inc
(Exact Name of Registrant as Specified in its Charter)
Maryland 52-2061461
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
7815 Woodmont Avenue, Bethesda, Maryland 20814
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code: (301) 986-1800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock $.01
par value
Indicate by check mark whether the registrant; (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports; and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers in pursuant to Item
405 of Regulation S-K is not contained herein , and will not 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-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether this registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the outstanding Common Stock held by nonaffiliates
as of June 30, 2002 was approximately $37,507,325.
As of March 25, 2003, the number of outstanding shares of the Common Stock, $.01
par value, of Eagle Bancorp, Inc. was 2,900,474.
DOCUMENTS INCORPORATED BY REFERENCE
Portionsof the Company's definitive Proxy Statement for the Annual
Meeting of Shareholders, to be held on May 20, 2003 are
incorporated by reference in part III hereof.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Eagle Bancorp, Inc. (the "Company") was incorporated under the laws of
the State of Maryland on October 28, 1997, to serve as the bank holding company
for a newly formed Maryland chartered commercial bank. The Company was formed by
a group of local businessmen and professionals with significant prior experience
in community banking in the Company's market area, together with an experienced
community bank senior management team. EagleBank, a Maryland chartered
commercial bank which is a member of the Federal Reserve System, the Company's
sole subsidiary, was chartered as a bank and commenced banking operations on
July 20, 1998. The Bank operates from five southern Montgomery County offices
located in Gaithersburg, Rockville, Bethesda and Silver Spring, Maryland. A
sixth location is located in the District of Columbia, at 20th and K Streets,
NW.
The Bank operates as a community bank alternative to the superregional
financial institutions which dominate its primary market area. The cornerstone
of the Bank's philosophy is to provide superior, personalized service to its
customers. The Bank focuses on relationship banking, providing each customer
with a number of services, familiarizing itself with, and addressing itself to,
customer needs in a proactive, personalized fashion.
Description of Services. The Bank offers full commercial banking
services to its business and professional clients as well as complete consumer
banking services to individuals living and/or working in the service area. The
Bank emphasizes providing commercial banking services to sole proprietorships,
small and medium-sized businesses, partnerships, corporations, non-profit
organizations and associations, and investors living and working in and near the
Bank's primary service area. A full range of retail banking services are offered
to accommodate the individual needs of both corporate customers as well as the
community the Bank serves.
The Bank has developed a loan portfolio consisting primarily of
business loans with variable rates and/or short maturities where the cash flow
of the borrower is the principal source of debt service with a secondary
emphasis on collateral. Real estate loans are made generally for commercial
purposes and are structured using fixed rates which adjust in three to five
years, with maturities of five to ten years. Consumer loans are made on the
traditional installment basis for a variety of purposes. The Bank has developed
significant expertise and commitment as an SBA lender, has been designated a
Preferred Lender, and is one of the largest SBA lenders, in dollar volume, in
the Washington metropolitan area.
All new business customers are screened to determine, in advance, their
credit qualifications and history. This practice permits the Bank to respond
quickly to credit requests as they arise.
In general, the Bank offers the following credit services:
1) Commercial loans for business purposes including working
capital, equipment purchases, real estate, lines of credit,
and government contract financing. Asset based lending and
accounts receivable financing are available on a selective
basis.
2) Real estate loans, including construction loan financing, for
business and investment purposes.
3) Lease financing for business equipment.
4) Traditional general purpose consumer installment loans
including automobile and personal loans. In addition, the Bank
offers personal lines of credit.
5) Credit card services are offered through an outside vendor.
The direct lending activities in which the Bank engages each carries
the risk that the borrowers will be unable to perform on their obligations. As
such, interest rate policies of the Federal Reserve Board and general economic
conditions, nationally and in the Bank's primary market area have a significant
impact on the Bank's and the Company's results of operations. To the extent that
2
economic conditions deteriorate, business and individual borrowers may be less
able to meet their obligations to the Bank in full, in a timely manner,
resulting in decreased earnings or losses to the Bank. To the extent the Bank
makes fixed rate loans, general increases in interest rates will tend to reduce
the Bank's spread as the interest rates the Bank must pay for deposits increase
while interest income is flat. Economic conditions and interest rates may also
adversely affect the value of property pledged as security for loans.
The Bank constantly strives to mitigate risks in the event of
unforeseen threats to the loan portfolio as a results of economic downturn or
other negative influences. Our plans for mitigating inherent risks in managing
loan assets including; carefully enforcing loan policies and procedures,
evaluating each borrower's business plan during the underwriting process,
identifying and monitoring primary and alternative sources for repayment, and
obtaining collateral to minimize losses in the event of liquidation. Specific
loan reserves will be used to increase overall reserves based upon increased
credit and/or collateral risks on an individual loan bases. A risk rating system
is used to proactively determine loss exposure and provide a measuring system
for setting general and specific reserves allocations.
The Bank attempts to further mitigate commercial term loan losses by
using loan guarantee programs offered by the United States Small Business
Administration (SBA). The Bank has been approved for the SBA's preferred lender
program (PLP). SBA loans made using PLP by the Bank are not subject to SBA
preapproval. However, the Bank is very selective of these types of loans because
of the greater responsibility of acting as agents for the SBA.
The composition of the Bank's loan portfolio is heavily commercial real
estate, both owner occupied and investment real estate. At December 31, 2002,
commercial real estate secured loans represented 48.5% of the loan portfolio.
These loans are carefully underwritten to mitigate lending risks typical of this
type of loan such as drops in real estate values, changes in cash flow and
general economic conditions. The Bank requires a loan to values of 80% and cash
flow debt service of 1.2x to 1.0. In making commercial mortgage loans, the Bank
requires that interest rates adjust not less frequently than five years and
generally seeks more frequent adjustments. To date, the Bank's experience with
this type of credit has been excellent and it has experienced no commercial
mortgage loan losses or accounts that have been as much as ninety days past due.
The Bank is also an active general commercial loan lender providing
loans for a large variety of typical commercial loan purposes, including
equipment and account receivable financing. This category represents
approximately 27% of the loan portfolio and is generally characterized by
variably priced loans tied to an index such as prime or U. S. Treasury borrowing
rates. Subject to limitations in a particular loan agreement, interest rates on
variable rate loans change at the same time and at the some rate as the
designated index changes. As do all loans in the portfolio, commercial loans
must meet high underwriting standards with proper collateral, which may include
real estate, and cash flow needed to service the debt. Personal guarantees of
promoters and/or principals are required, although, may be limited. A growing
segment of the commercial loan portfolio is SBA loans.
In making SBA loans, the Company assumes the risk of nonpayment on the
uninsured portion of the credit, which comprises 20-25% of the aggregate loan
amount. The Company generally sells the insured portion of the loan. SBA loans
are subject to the same high underwriting standards, including cash flow
analyses and collateral requirements, as non guaranteed loans.
The balance of the loan portfolio is made up of home equity loans and
other consumer loans and construction loans. These loans, while making up a
smaller portion of the loan portfolio, demand the same emphasis on underwriting
and credit decision processes as the other types of loans advanced by the Bank.
The Bank at December 31, 2002, had a legal lending limit of $4 million
and had customers who had been approved for aggregate loans of this amount.
Because of the legal lending limitation, the Bank has regularly participated out
portions of credits to other area banks, an accepted practice in the industry.
The Bank has also participated loans to the Company. These have generally been
in nominal amounts and for relatively short terms, either until the Bank could
accommodate the participation under its legal limit or the loan could be
participated to another lender. The ability of the Company to assist the Bank
with these credits has expanded the flexibility and service the Bank can offer
its customers. From time to time the Company may make loans for its portfolio.
Such loans, which may be made to accommodate borrowers at the Bank level, may
have higher risk characteristics than loans made by the Bank, such as lower
priority security interests. The Company will generally make such loans only to
3
borrowers in industries where the Company's directors or lending officers have
significant expertise, such as real estate development lending. The Company
seeks interest rates and compensation commensurate with the risks involved in
the particular loan.
Deposit services include business and personal checking accounts, NOW
accounts, and a tiered savings/Money Market Account basing the payment of
interest on balances on deposit. Certificates of Deposits are offered using a
tiered rate structure and various maturities. The acceptance of brokered
deposits is not a part of the current strategy, however, regulators require one
deposit relationship to be classified as a brokered deposit which management
considers a core deposit relationship with a well known party. A complete IRA
program is available. In cooperation with Goldman Sachs Asset Management, the
bank has introduced Eagle Asset Management Account, a sophisticated cash
management checking account that works like an investment account.
Other services for business accounts include cash management services
such as PC banking, sweep accounts, repurchase agreements, lock box, and account
reconciliation, credit card depository, safety deposit boxes and Automated
Clearing House origination. After hours depositories and ATM service are also
available. EagleCaptial was introduced during 2000, as a full service commercial
loan brokerage/placement. EagleCapital can place a variety of long-term,
favorably priced commercial mortgages. In addition, EagleCapital can provide
companion or mezzanine financing for such purposes as hard construction, tenant
improvements or bridge financing. EagleLeasing was also introduced in 2000, to
provide lease financing to small businesses for a variety of equipment
acquisitions.
Investment Portfolio Management, The ALCO Committee of the Bank which,
consists of thirteen directors and two senior officers, operates within
investment and funds management policies established by it and approved by the
Board of Directors. The Committee is the prime steering force setting parameters
for management while providing flexibility to meet changing circumstances
between its monthly meetings. Management, on a daily basis, administers the
investment portfolio and other non-lending, earning assets and prepares reports
and recommendations for the Committee. A typical Committee meeting includes
discussion of current economic conditions, interest rate expectations, report
reviews and consideration of recommendations for modification in strategies and
specific investment issues.
The investment policy limits the Company to investments of the highest
quality, US Treasury securities, US Government agency securities and high grade
municipal securities. High risk investments, derivatives and non traditional
investments are prohibited. Investment maturities are limited to seven years,
except as specifically approved by ALCO, and mortgage backed pass through
securities with average lives of generally seven years or less. The funds
management policy establishes limits on overnight funds purchases and sales,
percentage of holdings of various securities, investments in bank deposits and
other asset and liability instruments.
During 2002, the Committee expanded eligible investments to include
bank certificates of deposits of $100 thousand or less, except CDs issued by
significant regional banks which can be purchased in amounts up to $500
thousand. The addition of this investment vehicle provided additional yield and
flexibility to the portfolio.
During the past year and one-half, the investment strategy has been to
stay short expecting that interest rates would rise and to improve yields by
using mortgage backed pass through securities of short, generally fifteen year
final maturities, where repricing opportunities are provided by monthly cash
flow.
When rates do begin to rise the committee will invest with the rise in
rates improving income opportunities from maturities and cash flow of the
portfolio. When the expectation is for rates to peak, following the next
increase in rates, the Committee will explore the advisability of extending
maturities to accumulate a volume of higher earning investments.
Source of Business. Management believes that the market segments which
the Bank targets, small to medium sized businesses and the consumer base of the
Bank's market area, demand the convenience and personal service that a smaller,
independent financial institution such as the Bank can offer. It is these themes
of convenience and personal service that form the basis for the Bank's business
development strategies. The Bank provides services from its strategically
located main office in Bethesda, Maryland, and branches in Gaithersburg,
Rockville and two locations in Silver Spring. The Bank opened a branch in NW,
Washington, DC in 2001, to complement the needs of the Bank's existing and
4
potential customers, and provide prospects for additional growth and expansion.
Subject to obtaining necessary regulatory approvals, capital adequacy, the
identification of appropriate sites, then current business demand and other
factors, the Company plans for the Bank to establish additional branch offices
over the next two years. There can be no assurance that the Bank will establish
any additional branches or that they will be profitable.
The Bank has capitalized upon the extensive business and personal
contacts and relationships of its Directors and Executive Officers to establish
the Bank's initial customer base. To introduce new customers to the Bank,
reliance is placed on aggressive officer-originated calling programs and
director, customer and shareholder referrals.
The risk of nonpayment (or deferred payment) of loans is inherent in
commercial banking. The Bank's marketing focus on small to medium-sized
businesses may result in the assumption by the Bank of certain lending risks
that are different from those attendant to loans to larger companies. Management
of the Bank carefully evaluates all loan applications and attempts to minimize
its credit risk exposure by use of thorough loan application, approval and
monitoring procedures; however, there can be no assurance that such procedures
can significantly reduce such lending risks.
In addition to holding all of the capital stock of the Bank, the
Company holds investments in securities and loan participation purchased from
the Bank or other financial institutions.
EMPLOYEES
At February 28, 2003 the Bank employed 81 persons on a full time basis,
five of which are executive officers of the Bank. Except for the Chairman of the
Board of Directors and the President of the Company, the Company (as
distinguished from the Bank) does not have any employees or officers who are not
employees or officers of the Bank. None of the Bank's employees are represented
by any collective bargaining group, and the Bank believes that its employee
relations are good. The Bank provides a benefit program which includes health
and dental insurance, a 401k plan, life and long term disability insurance for
substantially all full time employees. The Company has proposed for shareholder
approval an incentive stock option plan for key employees of the Company and
Bank.
MARKET AREA AND COMPETITION
Location and Market Area. The Bank's main office and the headquarters
of the Company and the Bank is located at 7815 Woodmont Avenue, Bethesda,
Maryland 20814. The Bank has five branches, located at 110 North Washington
Street, Rockville, 8677 Georgia Avenue, 850 Sligo Avenue, Silver Spring, Shady
Grove and Blackwood Roads, Gaithersburg, Maryland, and 20th and K Streets, NW,
Washington, DC.
The primary service area of the Bank is Montgomery County, Maryland,
with a secondary market area in the Washington D.C. RMA, particularly Washington
D.C., Prince George's County in Maryland, and Arlington and Fairfax Counties in
Virginia. The Washington, D.C. area attracts a substantial federal workforce as
well as supporting a variety of support industries such as attorneys, lobbyists,
government contractors, real estate developers and investors, non-profit
organizations, tourism and consultants.
Montgomery County, with a total population of about 881,000, represents
the second largest suburban employment center in the Washington, D.C. area, with
approximately 444,634 jobs in 2001, and an unemployment rate below the national
average. While government employment provides a significant number of jobs,
approximately 82% of the jobs in the county involve private employers. In 2001,
there are 80,500 private sector high technology jobs in Montgomery county, which
is 22% of all private sector jobs in the county. Almost half of the county's
employment is located in the Bethesda, Rockville, North Bethesda area in which
the Bank has three branch locations. Much of the job growth and development is
located in that area and in the nearby I-270 technology corridor.
Montgomery County is home to nineteen major federal and private sector
research and development and regulatory agencies, including the National
Institute of Standards and Technology, the National Institutes of Health,
National Oceanic and Atmospheric Administration, Naval Research and Development
Center, Naval Surface Warfare Center, Nuclear Regulatory Commission and the Food
and Drug Administration.
5
Montgomery County leads the State of Maryland and the nation's ten
largest metropolitan areas in high technology employment. Over fifty percent of
Maryland's biotechnology firms are located in the county.
Household income for Montgomery County in 2000 was established at
$125,090 compared to a national average for similar counties of $67,090. Per
capita income of $46,450 similarly exceeded the national average of $22,851.
Competition. Deregulation of financial institutions and holding company
acquisitions of banks across state lines has resulted in widespread, fundamental
changes in the financial services industry. This transformation, although
occurring nationwide, is particularly intense in the greater Washington, D.C.
metropolitan area because of the changes in the area's economic base in recent
years and changing state laws authorizing interstate mergers and acquisitions of
banks, and the interstate establishment or acquisition of branches.
In Montgomery County, Maryland, competition is exceptionally keen from
large banking institutions headquartered outside of Maryland. In addition, the
Bank competes with other community banks, savings and loan associations, credit
unions, mortgage companies, finance companies and others providing financial
services. Among the advantages that many of these institutions have over the
Bank are their abilities to finance extensive advertising campaigns, maintain
extensive branch networks and technology investments, and to directly offer
certain services, such as international banking and trust services, which are
not offered directly by the Bank. Further, the greater capitalization of the
larger institutions allows for substantially higher lending limits than the
Bank. Certain of these competitors have other advantages, such as tax exemption
in the case of credit unions, and lesser regulation in the case of mortgage
companies and finance companies.
REGULATION
The following summaries of statutes and regulations affecting bank
holding companies do not purport to be complete discussions of all aspects of
such statutes and regulations and are qualified in their entirety by reference
to the full text thereof.
The Company. The Company is a bank holding company registered under the
Bank Holding Company Act of 1956, as amended, (the "Act") and is subject to
supervision by the Federal Reserve Board. As a bank holding company, the Company
is required to file with the Federal Reserve Board an annual report and such
other additional information as the Federal Reserve Board may require pursuant
to the Act. The Federal Reserve Board may also make examinations of the Company
and each of its subsidiaries.
The Act requires approval of the Federal Reserve Board for, among other
things, the acquisition by a proposed bank holding company of control of more
than five percent (5%) of the voting shares, or substantially all the assets, of
any bank or the merger or consolidation by a bank holding company with another
bank holding company. The Act also generally permits the acquisition by a bank
holding company of control or substantially all the assets of any bank located
in a state other than the home state of the bank holding company, except where
the bank has not been in existence for the minimum period of time required by
state law, but if the bank is at least 5 years old, the Federal Reserve Board
may approve the acquisition.
With certain limited exceptions, a bank holding company is prohibited
from acquiring control of any voting shares of any company which is not a bank
or bank holding company and from engaging directly or indirectly in any activity
other than banking or managing or controlling banks or furnishing services to or
performing service for its authorized subsidiaries. A bank holding company may,
however, engage in or acquire an interest in, a company that engages in
activities which the Federal Reserve Board has determined by order or regulation
to be so closely related to banking or managing or controlling banks as to be
properly incident thereto. In making such a determination, the Federal Reserve
Board is required to consider whether the performance of such activities can
reasonably be expected to produce benefits to the public, such as convenience,
increased competition or gains in efficiency, which outweigh possible adverse
effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices. The Federal
Reserve Board is also empowered to differentiate between activities commenced de
novo and activities commenced by the acquisition, in whole or in part, of a
going concern. Some of the activities that the Federal Reserve Board has
6
determined by regulation to be closely related to banking include making or
servicing loans, performing certain data processing services, acting as a
fiduciary or investment or financial advisor, and making investments in
corporations or projects designed primarily to promote community welfare.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of credit to
the bank holding company or any of its subsidiaries, or investments in the stock
or other securities thereof, and on the taking of such stock or securities as
collateral for loans to any borrower. Further, a holding company and any
subsidiary bank are prohibited from engaging in certain tie-in arrangements in
connection with the extension of credit. A subsidiary bank may not extend
credit, lease or sell property, or furnish any services, or fix or vary the
consideration for any of the foregoing on the condition that: (i) the customer
obtain or provide some additional credit, property or services from or to such
bank other than a loan, discount, deposit or trust service; (ii) the customer
obtain or provide some additional credit, property or service from or to the
Company or any other subsidiary of the Company; or (iii) the customer not obtain
some other credit, property or service from competitors, except for reasonable
requirements to assure the soundness of credit extended.
Effective on March 11, 2000, the Gramm Leach-Bliley Act of 1999 (the
"GLB Act") allows a bank holding company or other company to certify status as a
financial holding company, which allows such company to engage in activities
that are financial in nature, that are incidental to such activities, or are
complementary to such activities. The GLB Act enumerates certain activities that
are deemed financial in nature, such as underwriting insurance or acting as an
insurance principal, agent or broker, underwriting, dealing in or making markets
in securities, and engaging in merchant banking under certain restrictions. It
also authorizes the Federal Reserve Board to determine by regulation what other
activities are financial in nature, or incidental or complementary thereto. The
GLB Act allows a wider array of companies to own banks, which could result in
companies with resources substantially in excess of the Company's entering into
competition with the Company and the Bank.
The Bank. The Bank, as a Maryland chartered commercial bank which is a
member of the Federal Reserve System (a "state member bank") and whose accounts
will be insured by the Bank Insurance Fund of the Federal Deposit Insurance
Corporation (the "FDIC") up to the maximum legal limits of the FDIC, is subject
to regulation, supervision and regular examination by the Maryland Department of
Financial Institutions and the Federal Reserve Board. The regulations of these
various agencies govern most aspects of the Bank's business, including required
reserves against deposits, loans, investments, mergers and acquisitions,
borrowing, dividends and location and number of branch offices. The laws and
regulations governing the Bank generally have been promulgated to protect
depositors and the deposit insurance funds, and not for the purpose of
protecting stockholders.
Competition among commercial banks, savings and loan associations, and
credit unions has increased following enactment of legislation which greatly
expanded the ability of banks and bank holding companies to engage in interstate
banking or acquisition activities. As a result of federal and state legislation,
banks in the Washington D.C./Maryland/Virginia area can, subject to limited
restrictions, acquire or merge with a bank in another of the jurisdictions, and
can branch de novo in any of the jurisdictions. Additionally, legislation has
been proposed which may result in non-banking companies being authorized to own
banks, which could result in companies with resources substantially in excess of
the Company's entering into competition with the Company and the Bank.
Banking is a business which depends on interest rate differentials. In
general, the differences between the interest paid by a bank on its deposits and
its other borrowings and the interest received by a bank on loans extended to
its customers and securities held in its investment portfolio constitute the
major portion of the bank's earnings. Thus, the earnings and growth of the Bank
will be subject to the influence of economic conditions generally, both domestic
and foreign, and also to the monetary and fiscal policies of the United States
and its agencies, particularly the Federal Reserve Board, which regulates the
supply of money through various means including open market dealings in United
States government securities. The nature and timing of changes in such policies
and their impact on the Bank cannot be predicted.
Branching and Interstate Banking. The federal banking agencies are
authorized to approve interstate bank merger transactions without regard to
whether such transaction is prohibited by the law of any state, unless the home
state of one of the banks has opted out of the interstate bank merger provisions
of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
7
"Riegle-Neal Act") by adopting a law after the date of enactment of the
Riegle-Neal Act and prior to June 1, 1997 which applies equally to all
out-of-state banks and expressly prohibits merger transactions involving
out-of-state banks. Interstate acquisitions of branches are permitted only if
the law of the state in which the branch is located permits such acquisitions.
Such interstate bank mergers and branch acquisitions are also subject to the
nationwide and statewide insured deposit concentration limitations described in
the Riegle-Neal Act.
The Riegle-Neal Act authorizes the federal banking agencies to approve
interstate branching de novo by national and state banks in states which
specifically allow for such branching. The District of Columbia, Maryland and
Virginia have all enacted laws which permit interstate acquisitions of banks and
bank branches and permit out-of-state banks to establish de novo branches.
The GLB Act made substantial changes in the historic restrictions on
non-bank activities of bank holding companies, and allows affiliations between
types of companies that were previously prohibited. The GLB Act also allows
banks to engage in a wider array of non banking activities through "financial
subsidiaries."
Capital Adequacy Guidelines. The Federal Reserve Board and the FDIC
have adopted risk based capital adequacy guidelines pursuant to which they
assess the adequacy of capital in examining and supervising banks and bank
holding companies and in analyzing bank regulatory applications. Risk-based
capital requirements determine the adequacy of capital based on the risk
inherent in various classes of assets and off-balance sheet items.
State member banks are expected to meet a minimum ratio of total
qualifying capital (the sum of core capital (Tier 1) and supplementary capital
(Tier 2)) to risk weighted assets of 8%. At least half of this amount (4%)
should be in the form of core capital.
Tier 1 Capital generally consists of the sum of common stockholders'
equity and perpetual preferred stock (subject in the case of the latter to
limitations on the kind and amount of such stock which may be included as Tier 1
Capital), less goodwill, without adjustment for changes in the market value of
securities classified as "available for sale" in accordance with FAS 115. Tier 2
Capital consists of the following: hybrid capital instruments; perpetual
preferred stock which is not otherwise eligible to be included as Tier 1
Capital; term subordinated debt and intermediate-term preferred stock; and,
subject to limitations, general allowances for loan losses. Assets are adjusted
under the risk-based guidelines to take into account different risk
characteristics, with the categories ranging from 0% (requiring no risk-based
capital) for assets such as cash, to 100% for the bulk of assets which are
typically held by a bank holding company, including certain multi-family
residential and commercial real estate loans, commercial business loans and
consumer loans. Residential first mortgage loans on one to four family
residential real estate and certain seasoned multi-family residential real
estate loans, which are not 90 days or more past-due or non-performing and which
have been made in accordance with prudent underwriting standards are assigned a
50% level in the risk-weighing system, as are certain privately-issued
mortgage-backed securities representing indirect ownership of such loans.
Off-balance sheet items also are adjusted to take into account certain risk
characteristics.
In addition to the risk-based capital requirements, the Federal Reserve
Board has established a minimum 3.0% Leverage Capital Ratio (Tier 1 Capital to
total adjusted assets) requirement for the most highly-rated banks, with an
additional cushion of at least 100 to 200 basis points for all other banks,
which effectively increases the minimum Leverage Capital Ratio for such other
banks to 4.0% - 5.0% or more. The highest-rated banks are those that are not
anticipating or experiencing significant growth and have well diversified risk,
including no undue interest rate risk exposure, excellent asset quality, high
liquidity, good earnings and, in general, those which are considered a strong
banking organization. A bank having less than the minimum Leverage Capital Ratio
requirement shall, within 60 days of the date as of which it fails to comply
with such requirement, submit a reasonable plan describing the means and timing
by which the bank shall achieve its minimum Leverage Capital Ratio requirement.
A bank which fails to file such plan is deemed to be operating in an unsafe and
unsound manner, and could subject the bank to a cease-and-desist order. Any
insured depository institution with a Leverage Capital Ratio that is less than
2.0% is deemed to be operating in an unsafe or unsound condition pursuant to
Section 8(a) of the Federal Deposit Insurance Act (the "FDIA") and is subject to
potential termination of deposit insurance. However, such an institution will
not be subject to an enforcement proceeding solely on account of its capital
ratios, if it has entered into and is in compliance with a written agreement to
increase its Leverage Capital Ratio and to take such other action as may be
necessary for the institution to be operated in a safe and sound manner. The
8
capital regulations also provide, among other things, for the issuance of a
capital directive, which is a final order issued to a bank that fails to
maintain minimum capital or to restore its capital to the minimum capital
requirement within a specified time period. Such directive is enforceable in the
same manner as a final cease-and-desist order.
Prompt Corrective Action. Under Section 38 of the FDIA, each federal
banking agency is required to implement a system of prompt corrective action for
institutions which it regulates. The federal banking agencies have promulgated
substantially similar regulations to implement the system of prompt corrective
action established by Section 38 of the FDIA. Under the regulations, a bank
shall be deemed to be: (i) "well capitalized" if it has a Total Risk Based
Capital Ratio of 10.0% or more, a Tier 1 Risk Based Capital Ratio of 6.0% or
more, a Leverage Capital Ratio of 5.0% or more and is not subject to any written
capital order or directive; (ii) "adequately capitalized" if it has a Total Risk
Based Capital Ratio of 8.0% or more, a Tier 1 Risk Based Capital Ratio of 4.0%
or more and a Tier 1 Leverage Capital Ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized;" (iii)
"undercapitalized" if it has a Total Risk Based Capital Ratio that is less than
8.0%, a Tier 1 Risk based Capital Ratio that is less than 4.0% or a Leverage
Capital Ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a Total Risk Based Capital Ratio that
is less than 6.0%, a Tier 1 Risk Based Capital Ratio that is less than 3.0% or a
Leverage Capital Ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%.
An institution generally must file a written capital restoration plan
which meets specified requirements with an appropriate federal banking agency
within 45 days of the date the institution receives notice or is deemed to have
notice that it is undercapitalized, significantly undercapitalized or critically
undercapitalized. A federal banking agency must provide the institution with
written notice of approval or disapproval within 60 days after receiving a
capital restoration plan, subject to extensions by the applicable agency.
An institution which is required to submit a capital restoration plan
must concurrently submit a performance guaranty by each company that controls
the institution. Such guaranty shall be limited to the lesser of (i) an amount
equal to 5.0% of the institution's total assets at the time the institution was
notified or deemed to have notice that it was undercapitalized or (ii) the
amount necessary at such time to restore the relevant capital measures of the
institution to the levels required for the institution to be classified as
adequately capitalized. Such a guaranty shall expire after the federal banking
agency notifies the institution that it has remained adequately capitalized for
each of four consecutive calendar quarters. An institution which fails to submit
a written capital restoration plan within the requisite period, including any
required performance guaranty, or fails in any material respect to implement a
capital restoration plan, shall be subject to the restrictions in Section 38 of
the FDIA which are applicable to significantly undercapitalized institutions.
A "critically undercapitalized institution" is to be placed in
conservatorship or receivership within 90 days unless the FDIC formally
determines that forbearance from such action would better protect the deposit
insurance fund. Unless the FDIC or other appropriate federal banking regulatory
agency makes specific further findings and certifies that the institution is
viable and is not expected to fail, an institution that remains critically
undercapitalized on average during the fourth calendar quarter after the date it
becomes critically undercapitalized must be placed in receivership. The general
rule is that the FDIC will be appointed as receiver within 90 days after a bank
becomes critically undercapitalized unless extremely good cause is shown and an
extension is agreed to by the federal regulators. In general, good cause is
defined as capital which has been raised and is imminently available for
infusion into the Bank except for certain technical requirements which may delay
the infusion for a period of time beyond the 90 day time period.
Immediately upon becoming undercapitalized, an institution shall become
subject to the provisions of Section 38 of the FDIA, which (i) restrict payment
of capital distributions and management fees; (ii) require that the appropriate
federal banking agency monitor the condition of the institution and its efforts
to restore its capital; (iii) require submission of a capital restoration plan;
(iv) restrict the growth of the institution's assets; and (v) require prior
approval of certain expansion proposals. The appropriate federal banking agency
for an undercapitalized institution also may take any number of discretionary
supervisory actions if the agency determines that any of these actions is
necessary to resolve the problems of the institution at the least possible
long-term cost to the deposit insurance fund, subject in certain cases to
specified procedures. These discretionary supervisory actions include: requiring
the institution to raise additional capital; restricting transactions with
9
affiliates; requiring divestiture of the institution or the sale of the
institution to a willing purchaser; and any other supervisory action that the
agency deems appropriate. These and additional mandatory and permissive
supervisory actions may be taken with respect to significantly undercapitalized
and critically undercapitalized institutions.
Additionally, under Section 11(c)(5) of the FDIA, a conservator or
receiver may be appointed for an institution where: (i) an institution's
obligations exceed its assets; (ii) there is substantial dissipation of the
institution's assets or earnings as a result of any violation of law or any
unsafe or unsound practice; (iii) the institution is in an unsafe or unsound
condition; (iv) there is a willful violation of a cease-and-desist order; (v)
the institution is unable to pay its obligations in the ordinary course of
business; (vi) losses or threatened losses deplete all or substantially all of
an institution's capital, and there is no reasonable prospect of becoming
"adequately capitalized" without assistance; (vii) there is any violation of law
or unsafe or unsound practice or condition that is likely to cause insolvency or
substantial dissipation of assets or earnings, weaken the institution's
condition, or otherwise seriously prejudice the interests of depositors or the
insurance fund; (viii) an institution ceases to be insured; (ix) the institution
is undercapitalized and has no reasonable prospect that it will become
adequately capitalized, fails to become adequately capitalized when required to
do so, or fails to submit or materially implement a capital restoration plan; or
(x) the institution is critically undercapitalized or otherwise has
substantially insufficient capital.
Regulatory Enforcement Authority. Federal banking law grants
substantial enforcement powers to federal banking regulators. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties. In general, these enforcement actions may be initiated for violations
of laws and regulations and unsafe or unsound practices. Other actions or
inactions may provide the basis for enforcement action, including misleading or
untimely reports filed with regulatory authorities.
Deposit Insurance Premiums. The FDIA establishes a risk based deposit
insurance assessment system. Under applicable regulations, deposit premium
assessments are determined based upon a matrix formed utilizing capital
categories - well capitalized, adequately capitalized and undercapitalized -
defined in the same manner as those categories are defined for purposes of
Section 38 of the FDIA. Each of these groups is then divided into three
subgroups which reflect varying levels of supervisory concern, from those which
are considered healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with rates ranging from 0.04% of insured deposits for well
capitalized institutions having the lowest level of supervisory concern, to
0.31% of insured deposits for undercapitalized institutions having the highest
level of supervisory concern. In general, while the Bank Insurance Fund of the
FDIC ("BIF") maintains a reserve ratio of 1.25% or greater, no deposit insurance
premiums are required. When the BIF reserve ratio falls below that level, all
insured banks would be required to pay premiums. The payment of deposit
insurance premiums will have an adverse effect on earnings.
ITEM 2. DESCRIPTION OF PROPERTY.
The main office of the Bank and the executive offices of the Bank and
the Company are located at 7815 Woodmont Avenue, Bethesda, Maryland, in a 12,000
square foot, two story masonry structure (plus basement), with parking. The
Company leases the building under a five year lease which commenced in April
1998, at an initial annual rent $142,500, subject to annual increase based on
the CPI, not to exceed 4% per year. The Company has three five year renewal
options, and an option to purchase the building at a price to be negotiated. The
Silver Spring branch of the Bank is located at 8677 Georgia Avenue, Silver
Spring, Maryland and consists of 2,794 square feet. The property is occupied
under a five year lease, commenced April 1998, at an initial annual rent of
$55,878, subject to annual increase based on the CPI, plus additional rent
relating to common area fees and taxes. The Company has one five year renewal
option. The Rockville branch is located at 110 North Washington Street,
Rockville, Maryland, and consists of 2,000 square feet. The property is occupied
under a five year lease commenced April 1998, at an initial annual rent of
$35,000, subject to annual increase based upon the CPI, with a minimum 3% annual
increase, plus additional rent relating to common area fees and taxes. The
Company has one five-year renewal option. The Sligo branch of the Bank is
located at 850 Sligo Ave, Silver Spring, Maryland and consists of 2,400 square
feet. The property is occupied under a five year lease, commenced August 1999,
at an initial annual rent of $38,400, subject to annual increase based on the
10
CPI, plus additional rent relating to insurance and taxes. The Company has two
five-year renewal options. The K Street branch of the Bank is located at 2001 K
Street NW, Washington, DC and consists of 4,154 square feet. The property is
occupied under a ten year lease, commenced February 2001, at an initial annual
rent of $186,930, subject to annual increase based on the CPI, plus additional
rent relating to common area fees and taxes. The Company has two five-year
renewal options. The Shady Grove/Gaithersburg branch is located at 9600
Blackwood Road, Rockville, Maryland, and consists of 2,326 square feet. The
property is occupied under a ten year lease, commenced February 2002, at an
initial annual rent of $70,361, subject to annual increase based on the CPI,
plus additional rent relating to common area fees and taxes. The Company has one
five-year renewal options.
In January 2002, the Company occupied a new operations center in
Bethesda, consisting of 2,698 square feet, under a 10 year lease, commencing
January 2002, with one five year renewal option, at an initial base rent of
$67,450 per year with a 3% annual increase, plus additional rent relating to
common area fees and taxes.
ITEM 3. LEGAL PROCEEDINGS.
From time to time the Company is a participant in various legal
proceedings incidental to its business. In the opinion of management, the
liabilities (if any) resulting from such legal proceedings will not have a
material effect on the financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market for Common Stock and Dividends. The Company's Common Stock is
listed for trading on the Nasdaq Small Cap Market under the symbol "EGBN". To
date, trading in the common stock has been sporadic and volume has been light.
No assurance can be given that an active trading market will develop in the
foreseeable future. The following table sets forth the high and low bid prices
for the Common Stock during each calendar quarter during the last two fiscal
years, and through January 31, 2003. These quotations reflect interdealer
prices, without retail markup, markdown or commission, and may not represent
actual transactions. These quotations do not necessarily reflect the intrinsic
or market values of the Common Stock. Prices have been adjusted to reflect a
seven for five stock split in the form of a 40% stock dividend paid as of June
15, 2001. As of December 31, 2002, there were 2,897,704 shares of Common Stock
outstanding, held by approximately 943 total beneficial shareholders, including
approximately 420 shareholders of record.
2003 2002 2001
---------------------- ----------------------- ----------------------
Quarter High Bid Low Bid High Bid Low Bid High Bid Low Bid
-------- ------- -------- ------- -------- -------
First $15.30 $13.42 $16.00 $10.65 $ 7.14 $ 5.71
Second $15.75 $14.55 $11.40 $ 6.07
Third $14.55 $11.25 $13.70 $10.26
Fourth $13.66 $11.66 $12.50 $ 9.90
Dividends. The Company has not paid any cash dividends to date. In
March 2000, the Company effected a five for four stock split in the form of a
25% stock dividend. In June 2001 the Company effected a seven for five stock
split in the form of a 40% stock dividend. The payment of cash dividends by the
Company will depend largely upon the ability of the Bank, its sole operating
business, to declare and pay dividends to the Company, as the principal source
of the Company's revenue, other than earnings on retained proceeds of the
Company's initial offering of Common Stock, will initially be from dividends
11
paid by the Bank Dividends will depend primarily upon the Bank's earnings,
financial condition, and need for funds, as well as governmental policies and
regulations applicable to the Company and the Bank. Even if the Bank and the
Company have earnings in an amount sufficient to pay dividends, the Board of
Directors may determine, and it is the present intention of the Board of
Directors, to retain earnings for the purpose of funding the growth of the
Company and the Bank.
Regulations of the Federal Reserve Board and Maryland law place limits
on the amount of dividends the Bank may pay to the Company without prior
approval. Prior regulatory approval is required to pay dividends which exceed
the Bank's net profits for the current year plus its retained net profits for
the preceding two calendar years, less required transfers to surplus. State and
federal bank regulatory agencies also have authority to prohibit a bank from
paying dividends if such payment is deemed to be an unsafe or unsound practice,
and the Federal Reserve Board has the same authority over bank holding
companies.
The Federal Reserve Board has established guidelines with respect to
the maintenance of appropriate levels of capital by registered bank holding
companies. Compliance with such standards, as presently in effect, or as they
may be amended from time to time, could possibly limit the amount of dividends
that the Company may pay in the future. In 1985, the Federal Reserve Board
issued a policy statement on the payment of cash dividends by bank holding
companies. In the statement, the Federal Reserve Board expressed its view that a
holding company experiencing earnings weaknesses should not pay cash dividends
exceeding its net income, or which could only be funded in ways that weaken the
holding company's financial health, such as by borrowing. As a depository
institution, the deposits of which are insured by the FDIC, the Bank may not pay
dividends or distribute any of its capital assets while it remains in default on
any assessment due the FDIC. The Bank currently is not in default under any of
its obligations to the FDIC.
Use of Proceeds: Not Applicable.
12
ITEM 6. SELECTED FINANCIAL DATA.
The following table shows selected historical consolidated financial
data for the Company. You should read it together with the Company's audited
consolidated financial statements for the years ended December 31, 2002, 2001
and 2000. The Company was a development stage company, without significant
assets or any operations other than those related to organization, from October
28, 1997 to June 22, 1998, and the Bank did not open for business until July 20,
1998. Therefore, financial information for 1998 does not represent a full year
of banking operations.
Year Ended December 31
--------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(dollars in thousands, except per share data)
SELECTED BALANCES - AT PERIOD END
Total assets $ 347,829 $ 236,833 $ 164,082 $ 113,218 $ 52,039
Total stockholders' equity 20,028 17,132 15,522 13,675 14,949
Total loans (net) 234,094 180,145 116,576 63,276 19,984
Total deposits 278,434 195,688 135,857 90,991 34,631
SUMMARY RESULTS OF OPERATIONS
Interest income $ 16,661 $ 14,121 $ 10,501 $ 5,170 $ 1,011
Interest expense 5,170 5,998 4,549 2,022 277
Net interest income 11,491 8,123 5,952 3,148 734
Provision for credit losses 843 979 581 424 164
Net interest income after provision for
credit losses 10,648 7,144 5,371 2,724 570
Noninterest income 2,160 1,324 351 211 23
Noninterest expense 8,583 6,445 4,664 3,786 1,992
Income (loss) before taxes 4,225 2,023 1,058 (851) (1,399)
Income tax expense (benefit) 1,558 269 0 0 0
Net income (loss) $ 2,667 $ 1,754 $ 1,058 $ (851) $ (1,399)
PER SHARE DATA (1)
Net income (loss), basic $ 0.92 $ 0.61 $ 0.36 $ (0.29) $ (0.48)
Net income (loss), diluted 0.86 0.58 0.36 (0.29) (0.48)
Book value 6.91 5.92 5.38 4.74 5.18
GROWTH AND SIGNIFICANT RATIOS
% Change in net income 52.05% 65.78% N/M% N/M% N/A%
% Change in assets 46.87% 44.34% 44.92% 117.56% N/A%
% Change in net loans 29.95% 54.53% 84.23% 216.63% N/A%
% Change in deposits 42.22% 44.04% 49.30% 162.74% N/A%
Return on average assets 0.91% 0.88% 0.78% (1.07)% (7.19)%
Return on average equity 14.51% 10.56% 7.41% (5.91)% (17.23)%
Average equity to average assets 6.28% 8.36% 10.40% 18.22% 41.73%
Efficiency ratio (2) 64.47% 70.91% 73.17% 112.58% 263.14%
(1)Adjusted for all years presented giving retroactive effect to the five for
four stock split in the form of a 25% stock dividend paid on March 31, 2000,
and a seven for five stock split in the form of a 40% stock dividend paid on
June 15, 2001.
(2)Computed by dividing noninterest expense by the sum of net interest income on
a tax equivalent basis and noninterest income, net of securities gains or
losses. This is a non-GAAP financial measure, which we believe provides
investors with important information regarding our operational efficiency.
Comparison of our efficiency ratio with those of other companies may not be
possible, because other companies may calculate the efficiency ratio
differently.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
The following discussion provides information about the results of
operations, and financial condition, liquidity, and capital resources of the
Company and its subsidiary the Bank. This discussion and analysis should be read
in conjunction with the audited Consolidated Financial Statements and Notes
thereto, appearing elsewhere in this report.
This report contains forward looking statements within the meaning of
the Securities Exchange Act of 1934, as amended, including statements of goals,
intentions, and expectations as to future trends, plans, events or results of
Company operations and policies and regarding general economic conditions. In
some cases, forward looking statements can be identified by use of such words as
"may", "will", "anticipate", "believes", "expects", "plans", "estimates",
"potential", "continue", "should", and similar words or phases. These statements
are based upon current and anticipated economic conditions, nationally and in
the Company's market, interest rates and interest rate policy, competitive
factors and other conditions which, by their nature, are not susceptible to
accurate forecast, and are subject to significant uncertainty. Because of these
uncertainties and the assumptions on which this discussion and the forward
looking statements are based, actual future operations and results in the future
may differ materially from those indicated herein. Readers are cautioned against
placing undue reliance on any such forward looking statements. The Company does
not undertake to update any forward looking statements to reflect occurrences or
events which may not have been anticipated as of the date of such statements.
GENERAL
Eagle Bancorp, Inc. is a growing, one-bank holding company
headquartered in Bethesda, Maryland. We provide general commercial and consumer
banking services through our wholly owned banking subsidiary EagleBank, a
Maryland chartered bank which is a member of the Federal Reserve System. We were
organized in October 1997 to be the holding company for the Bank. The Bank, our
only subsidiary, was organized as an independent, community oriented,
full-service alternative to the super regional financial institutions, which
dominate our primary market area. The cornerstone of our philosophy is to
provide superior, personalized service to our customers. We focus on
relationship banking, providing each customer with a number of services,
becoming familiar with and addressing customer needs in a proactive,
personalized fashion. The Bank has five offices serving the southern portion of
Montgomery County and one office in the District of Columbia.
The Company offers full commercial banking services to our business and
professional clients as well as complete consumer banking services to
individuals living and/or working in the service area. We emphasize providing
commercial banking services to sole proprietors, small and medium-sized
businesses, partnerships, corporations, non-profit organizations and
associations, and investors living and working in and near our primary service
area. A full range of retail banking services are offered to accommodate the
individual needs of both corporate customers as well as the community we serve.
These services include the usual deposit functions of commercial banks,
including business and personal checking accounts, "NOW" accounts and savings
accounts, business, construction, and commercial loans, equipment leasing,
residential mortgages and consumer loans and cash management services. We have
developed significant expertise and commitment as an SBA lender, have been
designated a Preferred Lender, and are one of the largest SBA lenders, in dollar
volume, in the Washington Metropolitan area.
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") and follow general practices within the industry in which it
operates. Application of these principles requires management to make estimates,
assumptions, and judgments that affect the amounts reported in the financial
statements and accompanying notes. These estimates, assumptions and judgments
are based on information available as of the date of the financial statements;
accordingly, as this information changes, the financial statements could reflect
different estimates, assumptions, and judgments. Certain policies inherently
have a greater reliance on the use of estimates, assumptions and judgments and
as such have a greater possibility of producing results that could be materially
14
different than originally reported. Estimates, assumptions, and judgments are
necessary when assets and liabilities are required to be recorded at fair value,
when a decline in the value of an asset not carried on the financial statements
at fair value warrants an impairment write-down or valuation reserve to be
established, or when an asset or liability needs to be recorded contingent upon
a future event. Carrying assets and liabilities at fair value inherently results
in more financial statement volatility. The fair values and the information used
to record valuation adjustments for certain assets and liabilities are based
either on quoted market prices or are provided by other third-party sources,
when available.
The allowance for credit losses is an estimate of the losses that may
be sustained in our loan portfolio. The allowance is based on two principles of
accounting: (a) Statement on Financial Accounting Standards ("SFAS") 5,
"Accounting for Contingencies", which requires that losses be accrued when they
are probable of occurring and are estimable and (b) SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan", which requires that losses be accrued when
it is probable that the Company will not collect all principal and interest
payments according to the contractual terms of the loan. The loss, if any, is
determined by the difference between the loan balance and the value of
collateral, the present value of expected future cash flows, or values
observable in the secondary markets.
Three basic components comprise our allowance for credit losses: a
specific allowance, a formula allowance and a nonspecific allowance. Each
component is determined based on estimates that can and do change when the
actual events occur. The specific allowance is used to individually allocate an
allowance to loans identified as impaired. An impaired loan may show
deficiencies in the borrower's overall financial condition, payment record,
support available from financial guarantors and/or the fair market value of
collateral. When a loan is identified as impaired a specific reserve is
established based on the Company's assessment of the loss that may be associated
with the individual loan. The formula allowance is used to estimate the loss on
internally risk rated loans, exclusive of those identified as impaired. Loans
identified as special mention, substandard, doubtful and loss, as well as
impaired, are segregated from performing loans. Remaining loans are then grouped
by type (commercial, commercial real estate, construction, home equity or
consumer). Each loan type is assigned an allowance factor based on management's
estimate of the risk, complexity and size of individual loans within a
particular category. Classified loans are assigned higher allowance factors than
non-rated loans due to management's concerns regarding collectibility or
management's knowledge of particular elements regarding the borrower. Allowance
factors grow with the worsening of the internal risk rating. The nonspecific
formula is used to estimate the loss of non-classified loans stemming from more
global factors such as delinquencies, loss history, trends in volume and terms
of loans, effects of changes in lending policy, the experience and depth of
management, national and local economic trends, concentrations of credit,
quality of loan review system and the effect of external factors such as
competition and regulatory requirements. The nonspecific allowance captures
losses whose impact on the portfolio have occurred but have yet to be recognized
in either the formula or specific allowance.
Management has significant discretion in making the judgments inherent
in the determination of the provision and allowance for credit losses, including
in connection with the valuation of collateral, a borrower's prospects of
repayment, and in establishing allowance factors on the formula allowance and
nonspecific allowance components of the allowance. The establishment of
allowance factors is a continuing exercise, based on management's continuing
assessment of the global factors discussed above and their impact on the
portfolio, and allowance factors may change from period to period, resulting in
an increase or decrease in the amount of the provision or allowance, based upon
the same volume and classification of loans. Changes in allowance factors will
have a direct impact on the amount of the provision, and a corresponding effect
on net income. Errors in management's perception and assessment of the global
factors and their impact on the portfolio could result in the allowance not
being adequate to cover losses in the portfolio, and may result in additional
provisions or charge-offs. For additional information regarding the allowance
for credit losses, refer to Notes 1 and 4 to the Consolidated Financial
Statements and the discussion under the caption "Allowance for Credit Losses"
below.
RESULTS OF OPERATIONS
The Company reported net income of $2.67 million for the year ended
December 31, 2002, as compared to income of $1.75 million for the year ended
December 31, 2001 and income of $1.06 million for the year ended December 31,
2000. Income per basic share was $0.92 for the year ended December 31, 2002, as
compared to $0.61 for 2001 and $0.36 for 2000. Income per diluted share was
15
$0.86 for 2002, $0.58 for 2001 and $0.36 for 2000. The Company enjoyed a return
on average assets of 0.92% and return on average equity of 14.51% in 2002, as
compared to returns on average assets and average equity of 0.88% and 10.56%
respectively in 2001 and 0.78% and 7.41% in 2000. The Company recorded an income
tax expense of $1.5 million for 2002, the first full year for which it
recognized tax expense. During 2001, the Company recorded $269 thousand in
income tax expense. The Company did not incur any income tax expense prior to
the third quarter of 2001.
During 2002, the Company recorded a provision for credit losses in the
amount of $843 thousand. At December 31, 2002, the allowance for credit losses
was $2.8 million, as compared to $2.1 million at December 31, 2001. The Company
had net charge-offs of $188 thousand in 2002, less than 0.1% of average loans.
During the year, the Company contributed $3.7 million in additional
capital to the Bank from funds provided through a line of credit obtained by the
Company and discussed later in this analysis. The contributions were made to
support the Bank's growth and in order to maintain the Bank's status as "well
capitalized" as defined by regulatory guidelines.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income is the difference between interest income on
earning assets and the cost of funds supporting those assets. Earning assets are
composed primarily of loans and investment securities. The cost of funds
represents interest expense on deposits, customer repurchase agreements and
other borrowings. Noninterest bearing deposits and capital are other components
representing funding sources. Changes in the volume and mix of assets and
funding sources, along with the changes in yields earned and rates paid,
determine changes in net interest income. Net interest income in 2002 was $11.49
million compared to $8.12 million in 2001 and $5.95 million in 2000.
The table labeled "Average Balances, Interest Yields and Rates and Net
Interest Margin" shows the average balances and rates of the various categories
of the Company's assets and liabilities. Included in the table is a measurement
of interest rate spread and margin. Interest spread is the difference between
the rate earned on assets less the cost of funds expressed as a percentage.
While spread provides a quick comparison of earnings rates versus cost of funds,
management believes that margin provides a better measurement of performance.
Margin includes the effect of noninterest bearing liabilities in its calculation
and is net interest income expressed as a percentage of total earning assets.
Interest spread increased in 2002 from 2001 by 21 basis points, 3.75% from
3.54%; however, margin decreased 15 basis points, 4.16% from 4.31%. The decrease
in margin while the spread increased is attributable to changes in mix in both
earning assets and interest bearing liabilities. While there was an increase of
45% in average earning assets there was only an increase of 41% in net interest
income reflecting the decline in margin. Following the average balance tables is
a rate volume analysis table that clearly demonstrates the significance of a
much larger base of earning assets contributing to income while the margin
declined.
The yield on earning assets decreased from 7.50% for the year ended
December 31, 2001 to 6.03% for the year ended December 31, 2002, and the rates
paid on interest bearing liabilities decreased from 3.96% for the year ended
December 31, 2001 to 2.28% for the year ended December 31, 2002. The average
yield on loans fell 125 basis points from 2001 to 2002, following a decline of
105 basis points from 2000 to 2001. These declines reflect the continued impact
of the significant rate reductions effected by the Federal Reserve in 2001. The
effect of the 2001 reductions in market rates continued through 2002, reflecting
the lagging repricing of the fixed rate portion of the loan portfolio and the
reduction of rates on new fixed rate loans. The investment portfolio yield
declined from 2001 to 2002 by 186 basis points as the Bank maintained a
portfolio of short term fixed rate securities and GNMA pass through mortgage
backed securities. The yield on GNMA securities declined as mortgage refinancing
accelerated, resulting in earlier repayment of mortgage backed securities, and
reinvestment of the proceeds at lower current market rates. The decline in yield
from 2001 to 2002 followed a decline of 72 basis points from 2000 to 2001. The
federal funds rate had fallen to 1.75% by the end of 2001 and for 2002 averaged
1.56%, 227 basis points less than the average yield of 3.83% for 2001 and 456
basis points less than the 2000 average yield of 6.12%. In order to keep the
investment portfolio short for liquidity and expectations that rates would start
to move upward, and to obtain better short term yields, the Bank invested $6
million in interest bearing deposits with other banks, yielding 2.67%, a
16
relatively attractive rate given their short term nature and low risk, as
compared to the rates offered on federal funds and Treasury Bills. The decline
in the yield on interest earning assets continues into 2003 following the
Federal Reserve's November 2002 cut in the federal funds rate.
On the liability side, management aggressively reduced rates on deposit
accounts. The reduction in the rate on total interest bearing liabilities from
2001 to 2002 was 168 basis points which compares to a reduction of 147 basis
points in the yield on earning assets over the same period. This follows a
reduction in the cost of funds of 51 basis points from 2000 to 2001. The
reduction in the rates paid by the Bank reduced the average rate on the cost of
funds below 2% in the latter part of 2002. The cost of funds continued to
decline into the first quarter of 2003 as management further reduced rates
following the Federal Reserve's November cut and as a result of continued
repricing of maturing certificates of deposit.
It is anticipated that any further reductions in interest rates will
have a significant adverse effect on earnings as rates paid on interest bearing
liabilities, which are as low as 0.25% on NOW accounts, cannot continue to
decline at the same rate as yields on loans and investments.
17
AVERAGE BALANCES, INTEREST YIELDS AND RATES, AND NET INTEREST MARGIN
(dollars in thousands)
-------------------------------------------------------------------------
Years Ended December 31
-------------------------------------------------------------------------
2002 2001
---------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
--------- -------- ---------- -------- --------- ----------
ASSETS:
Interest earning assets:
Interest bearing deposits with other banks $ 2,868 $ 77 2.67% $ 158 $ 9 6.00%
Loans 210,303 14,379 6.84 149,056 12,054 8.09
Investment securities 57,983 2,124 3.68 32,530 1,803 5.54
Federal funds sold 5,166 81 1.56 6,657 255 3.83
--------- -------- --------- --------
Total interest earning assets 276,320 16,661 6.03% 188,401 14,121 7.50%
--------- -------- --------- --------
Total noninterest earning assets 19,057 11,886
Less: allowance for credit losses 2,456 1,444
--------- ---------
Total noninterest earning assets 16,601 10,442
--------- ---------
TOTAL ASSETS $ 292,921 $ 198,843
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
NOW accounts $ 30,886 $ 96 0.31% $ 20,896 $ 232 1.11%
Savings and money market accounts 81,509 1,598 1.96 54,211 1,843 3.40
Certificates of deposit $100,000 or more 41,683 1,337 3.21 35,791 2,006 5.61
Other time deposits 36,902 1,301 3.70 25,493 1,405 5.51
Customer repurchase agreements and
federal funds purchased 19,535 230 1.18 13,057 409 3.13
Short-term borrowings 2,847 126 4.43 -- -- --
Long term borrowings 12,982 482 3.71 2,155 103 4.78
--------- -------- --------- --------
Total interest bearing liabilities 226,344 5,170 2.28% 151,603 5,998 3.96%
--------- -------- --------- --------
Noninterest bearing liabilities:
Noninterest bearing demand deposits 46,930 29,727
Other liabilities 1,266 898
--------- ---------
Total noninterest bearing liabilities 48,196 30,625
---------
Stockholders' equity 18,381 16,615
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 292,921 $ 198,843
========= =========
Net interest income $ 11,491 $ 8,123
======== ========
Net interest spread 3.75% 3.54%
Net interest margin 4.16% 4.31%
18
AVERAGE BALANCES, INTEREST YIELDS AND RATES, AND NET INTEREST MARGIN
(dollars in thousands)
Year Ended December 31
-------------------------------------
2000
-------------------------------------
Average Average
Balance Interest Yield/Rate
------- -------- ----------
ASSETS:
Interest earning assets:
Interest bearing deposits with other banks $ 68 $ 4 6.18%
Loans 84,767 7,746 9.14
Investment securities 39,490 2,473 6.26
Federal funds sold 4,548 278 6.12
-------- -------- ----
Total interest earning assets 128,873 10,501 8.15%
-------- -------- ----
Total noninterest earning assets 8,670
Less: allowance for credit losses 787
--------
Total noninterest earning assets 7,883
--------
TOTAL ASSETS $136,756
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
NOW accounts $ 15,681 $ 295 1.88%
Savings and money market accounts 40,065 1,772 4.42
Certificates of deposit $100,000 or more 23,551 1,325 5.63
Other time deposits 11,576 640 5.53
Customer repurchase agreements and
federal funds purchased 8,485 350 4.13
Short-term borrowings 2,387 167 6.99
Long-term borrowings -- -- --
-------- -------- ----
Total interest bearing liabilities 101,745 4,549 4.47%
-------- -------- ----
Noninterest bearing liabilities:
Noninterest bearing demand deposits 19,892
Other liabilities 548
--------
Total noninterest bearing liabilities 20,440
Stockholders' equity 14,571
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $136,756
========
Net interest income $ 5,952
========
Net interest spread 3.68%
Net interest margin 4.62%
19
The rate/volume table shows the composition of the net change in net
interest income for the periods indicated, as allocated between the change in
net interest income due to changes in the volume of average earning assets and
interest bearing liabilities, and the changes in net interest income due to
changes in interest rates. As the table shows, the increases in net interest
income in 2002 as compared to 2001 is due to the growth in the volume of earning
assets, augmented by average rate related declines in interest expense. For 2001
compared to 2000, the increase in net interest income primarily resulted from
increased volume of earning assets.
RATE /VOLUME ANALYSIS OF NET INTEREST INCOME
(dollars in thousands)
2002 compared with 2001 2001 compared with 2000
--------------------------------------------------------------------------------
Total Total
Due to Increase Due to Increase
Volume Due to Rate (Decrease) Volume Due to Rate (Decrease)
------------------------------------- --------------------------------------
INTEREST EARNED ON:
Loans $ 4,188 $(1,863) $ 2,325 $ 5,874 $(1,566) $ 4,308
Investment securities 932 (611) 321 (435) (235) (670)
Interest bearing bank deposits 73 (5) 68 5 -- 5
Federal funds sold (57) (117) (174) 129 (152) (23)
------- ------- ------- ------- ------- -------
Total interest income 5,136 (2,596) 2,540 5,573 (1,953) 3,620
------- ------- ------- ------- ------- -------
INTEREST PAID ON:
NOW accounts 31 (167) (136) 98 (161) (63)
Savings and MMA accounts 535 (780) (245) 624 (553) 71
Certificates of deposit 581 (1,354) (773) 1,464 (18) 1,446
Customer repurchase agreements 72 (257) (185) 183 (124) 59
Other borrowings 532 (21) 511 (7) (57) (64)
------- ------- ------- ------- ------- -------
Total interest expense 1,751 (2,579) (828) 2,362 (913) 1,449
------- ------- ------- ------- ------- -------
NET INTEREST INCOME $ 3,385 $ (17) $ 3,368 $ 3,211 $(1,040) $ 2,171
======= ======= ======= ======= ======= =======
NONINTEREST INCOME
Noninterest income is exclusively from Bank operations and represents
primarily service charge income and fees on deposit relationships, security
gains/losses and gains on the sale of loans. The emphasis management placed on
noninterest income resulted in a 64% increase in noninterest income from $1.3
million in 2001 to $2.1 million in 2002. Noninterest income increased 278% from
2000 to 2001, from $351 thousand to $1.3 million. The increase in noninterest
income from 2000 to 2002 reflects the growth of the Bank and expanded sources of
noninterest income. During the period the Bank concentrated on expanding both
its SBA and residential mortgage lending activities, and in 2002 purchased bank
owned life insurance contracts ("BOLI") which produced non- taxable income in
2002 of $85 thousand. Bank owned life insurance is a whole life insurance policy
on certain directors and officers of the Bank with the Bank as beneficiary in
the event of death of the director or officer. Income is recognized as the
appreciation in underlying cash surrender value and is not taxable under current
tax regulations. If the policy is redeemed for its cash value the appreciation
in value becomes taxable. BOLI is carried as an asset on the books of the Bank
under the category "Other assets".
The increase in noninterest income reflected an increase in deposit
account service charges, which increased 47% during 2002, from $704 thousand for
the year ended December 31, 2001 to $1 million for the year ended December 31,
2002. Deposit account service charges increased 101% from $350 thousand in 2000
to $704 thousand in 2001. Increases in deposit account charges reflect the
increased number of accounts and also the lower interest rate environment. As
20
interest rates decline so do the earnings allowances (which are used to offset
service charges) on demand deposit accounts so that an account, with the same
activity, which paid no service charge when interest rates were high may
currently be paying a charge because the earnings allowance is insufficient to
cover activity charges. The Company is an active originator of SBA loans and
sells the insured portion of those loans at a premium. Income from this source
increased from $96 thousand in 2001 to $327 thousand in 2002. During 2002, the
maximum loan eligible for an SBA guarantee was reduced, contributing to a slow
down in this activity during the fourth quarter of 2002. While it can not be
certain, management does not expect that the reduced level of activity will
significantly affect the growth the Company has experienced in this source of
income. The Company also originates residential construction and permanent loans
on a pre-sold basis, servicing released. Sales of these mortgage loans yielded
gains of $164 thousand in 2002 compared to $52 thousand in 2001. The success of
the mortgage program is directly affected by the low interest rate environment
in 2002 and this source of income may decline when interest rates begin to rise.
Other items in noninterest income increased 158% in 2002 from $114
thousand for the year ended December 31, 2001 to $294 thousand for the same
period in 2002. This category includes noninterest income fees such as
documentation preparation and prepayment penalties. Also included in other
noninterest income are SBA loan servicing fees and income from BOLI, both new
sources of income in 2002. Income for the year ended December 31, 2002 was $45
thousand from SBA servicing fees and $85 thousand from BOLI. SBA loan servicing
income is expected to increase as the number of loans originated and serviced by
the Bank increases. Income from BOLI is expected to increase to $210 thousand in
2003 and remain stable thereafter.
NONINTEREST EXPENSE
Noninterest expenses were $8.58 million in 2002, a 33% increase over
the $6.44 million noninterest expense in 2001, which was a 38% increase over
noninterest expense of $4.66 million in 2000. The increases in noninterest
expense are consistent with the overall growth in assets of 112% from December
31, 2000 to December 31, 2002, and management's internal expectations.
The most significant noninterest expense item is salaries and employee
benefits, which were $4.50 million for the year ended December 31, 2002 an
increase of 31% over the $3.45 million for the year ended December 31, 2001,
which reflected a 41% increase over the $2.45 million for 2000. In 2002, the
additional salary and benefit costs reflected the staffing of the new
Gaithersburg office and additional staffing in the loan and operations areas,
required to keep pace with the growth of the Bank, as well as compensation
increases for existing staff. Increases in 2001 primarily reflected staffing of
the K Street office and normal annual compensation increases. The increase in
premises and equipment expenses of 35% from 2001 to 2002, $1.22 million to $1.65
million can be attributed to a full year of expenses for the K Street office,
opened in 2001, the new Gaithersburg office and a new operations center opened
in January 2002. The new operations center was added to accommodate the growing
activities of the Bank.
Other expenses increased 37% from the year ended December 31, 2001 to
the year ended December 31, 2002, including a 37% increase in advertising
expense from $144 thousand in 2001 to $197 thousand in 2002, and a 40% increase
in outside data processing expense. Other expenses increased 36% from $1.3
million in 2001 to $1.7 million in 2002 and increased 33% from $968 thousand in
2000 to $1.3 million in 2001. In 2003, the Company expects that there will be a
substantial increase in insurance premium expense upon renewal of policies, not
only as a result of the growth of the Company but also as a result of general
increases in premiums since September 11, 2001. In future periods, noninterest
expenses to which the Company has not been subject to date, such as deposit
insurance premiums which may be required as a result of declines in the reserve
ratios of the deposit insurance funds, may have an adverse affect on the results
of operations of the Company.
INCOME TAX
The Company had income tax expense of $1.55 million in 2002 compared to
$269 thousand in 2001, resulting in an effective tax rate of 36.9% and 13.3%
respectively. In 2001, the Company recorded previously unrecorded deferred tax
assets and began recognizing tax on its income on a fully taxable basis. The
21
Company recognized no federal income tax expense during 2000. It is expected
that the Company will continue to record income tax expense based upon its
taxable income in future years.
FINANCIAL CONDITION
The Company ended the year with total assets of $347.8 million, an
increase of 47% from assets of $236.8 million at December 31, 2001. At December
31, 2002 deposits were $278.4 million as compared to $195.7 million at December
31, 2001, an increase of 43%. Gross loans were at $236.9 million at December 31,
2002 as compared to $182.3 million at December 31, 2001, an increase of 30%.
Other liabilities consisting of customer repurchase agreements, Federal Home
Loan Bank ("FHLB") borrowings and advances under the Company's line of credit
increased 109% from $23 million at December 31, 2001 to $48 million at December
31, 2002. Net loans increased 30% from $189.1 million at December 31, 2001 to
$234.1 million at December 31, 2002. Other earning assets (investment
securities, federal funds sold and interest bearing deposits) increased $40.2
million or 101%.
INVESTMENT SECURITIES AND OTHER EARNING ASSETS
The Company's investment securities portfolio is comprised primarily of
U. S. Treasury and Agency securities with maturities not exceeding seven years,
except mortgage pass-through securities which have average expected lives of
less than six years but contractual maturities of up to thirty years. Federal
funds sold also represent a significant earning asset and are sold, on an
unsecured basis, only to highly rated banks, in limited amounts both in the
aggregate and to any one bank.
The investment portfolio balance averaged approximately $58 million in
2002 compared to $32 million in 2001. The increase in investment securities
resulted from the strong growth in deposits and increased borrowings which
occurred in the second half of 2002. The rate of growth in liabilities out-paced
loan growth during 2002 and excess funds were invested in the investment
portfolio. The following tables and Note 3 to the Consolidated Financial
Statements provide additional information regarding the Company's investment
securities.
The Company classifies all investment securities as available for sale
("AFS"). This method of accounting requires that investment securities be
reported at their fair value and the difference between the fair value and
amortized cost (the purchase price adjusted by any accretion or amortization) be
reported in the equity section as accumulated other comprehensive income, net of
deferred taxes. At December 31, 2002, the Company reported an unrealized gain in
AFS securities of $593 thousand and at December 31, 2001, an unrealized gain in
AFS securities of $285 thousand. The accumulated comprehensive component of
these unrealized gains was $392 thousand and $189 thousand respectively. The
Company, except in a planned investment strategy or for liquidity needs, has no
present plan or intention to sell these securities.
In 2002, the Bank began using excess liquidity to invest in
certificates of deposit of other banks, which generally offer more favorable
rates than traditional short term investment securities. These deposits are in
insured institutions, and are generally in amounts of $100 thousand or less. At
December 31, 2002 the Bank had $6 million of this type of investment.
The following table provides information regarding the composition of
the Company's investment portfolio at the dates indicated. Amounts are reported
at estimated fair value.
(dollars in thousands)
December 31,
-----------------------------------------------------------------------
2002 2001 2000
-------------------- ------------------- ---------------------
Percent Percent Percent
Balance of Total Balance of Total Balance of Total
------- -------- ------- -------- ------- --------
U.S. Treasury $ 5,504 7.8% $12,540 31.8% $ 1,507 4.7%
U.S. Government agency obligations 20,114 28.6 14,537 36.9 26,769 82.6
GNMA mortgage backed securities 43,268 61.0 11,217 28.4 3,219 9.9
Federal Reserve and Federal Home Loan
Bank Stock 1,564 2.3 880 2.2 627 1.9
Other equity investments 225 0.3 265 0.7 276 0.9
------- --- ------- --- ------- ---
Total $70,675 100% $39,439 100% $32,398 100%
======= === ======= === ======= ===
22
The following table provides information, on an amortized cost basis,
regarding the contractual maturity and weighted average yield of the investment
portfolio at December 31, 2002. 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.
(dollars in thousands)
After One Year
One Year or Less Through Five Years After Five Years After Ten Years Total
------------------- ------------------ ------------------ ------------------ -------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- -------- -------- --------- -------- --------
U.S. Treasury $5,501 1.47% $ 5,501 1.47%
U.S. Government
agency obligations 3,000 2.88% 14,968 4.13% 1,993 6.22% 19,961 4.15
GNMA mortgage backed
securities 42,782 4.75% 42,782 4.75
Federal Reserve and
Federal Home Loan
Bank Stock 1,564 5.36% 1,564 5.36
Other equity
investments 274 -- 274 --
------- ----- ------- ------ ------- ------- ------- ------ ------- ----
Total $ 8,501 1.96% $14,968 4.13% $ 1,993 6.22% $44,620 4.74% $70,082 4.30%
======= ===== ======= ====== ======= ======= ======= ====== ======= ====
At December 31, 2002, there were no issuers, other than the U.S.
Government and its agencies, whose securities owned by the Company had a book or
fair value exceeding ten percent of the Company's stockholders' equity.
LOAN PORTFOLIO
In its lending activities, the Bank seeks to develop sound credits with
customers who will grow with the Bank. There has not been an effort to rapidly
build the loan portfolio and earnings at the sacrifice of asset quality.
However, loan growth in 2002, 2001 and 2000 was good with loans outstanding
reaching $236.8 million at December 31, 2002 from $182.3 million at December 31,
2001, an increase of $54.5 million or 30%.
During 2001, the Bank became active in the origination and selling of
both residential mortgage loans and the insured portion of SBA loans. In 2002,
in addition to the loans the Bank held for its portfolio it originated
approximately $19 million in loans which were sold. At December 31, 2002, there
were $5.5 million of loans held for sale and at December 31, 2001 there were
$5.9 million of such loans.
The Bank is primarily business oriented in its development focus. This
is demonstrated by the 86% of the loan portfolio which is in commercial, real
estate-commercial and construction loans as compared to 14% in home equity and
other consumer loans.
The following table shows the composition of the loan portfolio by type
of loan at the dates indicated.
23
(dollars in thousands)
December 31,
---------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------ ------------------ ------------------ ------------------- -------------------
Percent Percent Percent Percent Percent
Balance of Total Balance of Total Balance of Total Balance of Total Balance of Total
---------------------------------------------------------------------------------------------------------------------------------
Commercial $ 64,869 27.5% $ 49,432 27.1% $ 37,123 31.5% $ 25,760 40.3% $ 6,983 34.7%
Real Estate - commercial 114,961 48.5 86,553 47.5 58,214 49.4 29,217 45.8 11,832 58.7
Construction 23,180 9.8 15,512 8.5 9,952 8.4 3,545 5.6 -- 0.0
Home equity 30,631 12.9 26,656 14.6 9,129 7.8 2,133 3.3 167 0.8
Other consumer 3,219 1.3 4,103 2.3 3,300 2.9 3,200 5.0 1,166 5.8
---------------------------------------------------------------------------------------------------------------------------------
Total Loans $236,860 100% $182,256 100% $117,718 100% $ 63,855 100% $ 20,148 100%
Less: allowance for
credit losses 2,766 2,111 1,142 579 164
-------- -------- -------- -------- --------
Loans, net $234,094 $180,145 $116,576 $ 63,276 $ 19,984
======== ======== ======== ======== ========
Loan Maturity:
The following table sets forth the term to contractual maturity of the loan
portfolio as of December 31, 2002.
(dollars in thousands)
Due in over
Total One Year or Less One to Five Years Five to Ten Years Over Ten Years
------------------------------------------------------------------------------------
Commercial $ 64,869 $ 18,634 $ 43,863 $ 1,945 $ 427
Real estate - commercial 114,961 -- 10,000 84,249 20,712
Construction 23,180 20,188 2,992 -- --
Home equity 30,631 -- 29,051 1,580 --
Other consumer 3,219 914 1,963 342 --
------------------------------------------------------------------------------------
Total loans $236,860 $ 39,736 $ 87,869 $ 88,116 $ 21,139
====================================================================================
Loans with:
Predetermined fixed interest rate $122,384 $ 11,043 $ 27,389 $ 66,089 $ 17,863
Floating interest rate 114,476 28,693 60,480 22,027 3,276
------------------------------------------------------------------------------------
Total loans $236,860 $ 39,736 $ 87,869 $ 88,116 $ 21,139
====================================================================================
Loan which have adjustable rates and fixed rate are all shown in the
period of contractual maturity. Demand loans, having no contractual maturity,
and overdrafts are reported as due in one year or less.
ALLOWANCE FOR CREDIT LOSSES
The provision for credit losses represents the expense recognized to
fund the allowance for credit losses. The amount of the allowance for credit
losses is based on many factors which reflect management's assessment of the
risk in the loan portfolio. Those factors include economic conditions and
trends, the value and adequacy of collateral, volume and mix of the portfolio,
performance of the portfolio, and internal loan processes of the Company and
Bank.
Management has developed a comprehensive review process to monitor the
adequacy of the allowance for credit losses. The review process and guidelines
were developed utilizing guidance from federal banking regulatory agencies. The
24
results of this review process, in combination with conclusions of the Bank's
outside loan review consultant, support management's view as to the adequacy of
the allowance as of the balance sheet date. During 2002, a provision for credit
losses was made in the amount of $843 thousand before net charge-offs of $188
thousand. A full discussion of the accounting for allowance for credit losses is
contained in Note 1 to the Consolidated Financial Statements; activity in the
allowance for credit losses is contained in Note 4 to the Consolidated Financial
Statements. Please refer to the discussion under the caption, "Critical
Accounting Policies" for an overview of the underlying methodology management
employs on a quarterly basis to maintain the allowance.
At December 31, 2002, the Company had one loan classified as nonaccrual
in the amount of $147 thousand of which $126 thousand was guaranteed by the SBA.
There was one loan past due over ninety days and still accruing interest at
December 31, 2002, in the amount of $818 thousand. Both of these loans are
considered impaired as defined by Statement of Financial Accounting Standards
No. 114. Please refer to Note 1 of the notes to the Consolidated Financial
Statements under the heading Loans for a discussion of the Company's policy
regarding impairment of loans.
As part of its comprehensive loan review process, the Bank's Board of
Director's Loan Committee and/or Board of Directors Credit Review Committee
carefully evaluates loans over thirty days past due and considers if such loans
should be classified as nonaccrual. The Committee(s) makes a thorough assessment
of the conditions and circumstances surrounding each past due loan. The Bank's
loan policy requires that loans be placed on nonaccrual if they are ninety days
past due, unless they are well secured and in the process of collection. After
reviewing the circumstances surrounding the $818 thousand loan, the Credit
Review Committee determined that it was appropriate to continue the accrual of
interest. The loan was extended to an automobile leasing company for the purpose
of funding individual leases. During 2002, the loan became delinquent, and
management worked with the borrower in efforts to return the loan to a current
status. During the third quarter of 2002, management discovered that payments on
the underlying leases were being diverted and not being used to service the loan
as required by the loan agreement. The Bank exercised its rights under the loan
agreement and instructed the lessees of the underlying leases to send all future
lease payments directly to the Bank under a lockbox arrangement. The diversion
of funds is believed to be the primary reason for the loan's delinquency.
Subsequently, the borrower declared bankruptcy, however, the trustee assigned in
the bankruptcy proceedings allowed the Bank to continue to collect payments
directly from the lessees.
In determining the accrual status of the loan, management and the
Credit Review Committee evaluated the expected cash flow of the leases, the
current underlying collateral value of the leases and the residual value of the
underlying vehicles at the end of the leases.
This evaluation resulted in a projected cash flow that was considered
sufficient to amortize the net loan balance including interest. A specific
reserve of $150 thousand was established for this loan. As of December 31, 2002,
this specific reserve had been reduced by $52 thousand in charge-offs resulting
in a remaining specific reserve of $98 thousand.
The provision for credit losses was $843 thousand in 2002 compared to a
provision for credit losses of $979 thousand in 2001. The higher provision in
2001 was as a result of the economic uncertainties surrounding the events of
September 11, 2001 which affected some of the qualitative and quantitative
factors that are imbedded in the analysis of the adequacy of the allowance for
credit losses. The result of these factors was a provision that was $398
thousand higher in 2001 than the provision recorded in 2002. The 2002 provision
was affected by $188 thousand in net charge-offs and $965 thousand in loans that
were classified as impaired as of December 31, 2002. There were no loans
classified as impaired during 2000 and 2001. The unallocated portion of the
allowance to the total allowance remained consistent from December 31, 2001 to
2002 at 6% and 7% respectively.
As the portfolio and allowance review process matures, there will be
changes to different elements of the allowance and this may have an effect on
the overall level of the allowance maintained. To date the Bank has enjoyed a
very high quality portfolio with minimal net charge offs and very low
delinquency. The maintenance of a high quality portfolio will continue to be
management's prime objective as it relates to the lending process and to the
allowance for credit losses.
25
Management, aware of the strong loan growth experienced by the Company
and the problems which could develop in an unmonitored environment, is intent on
maintaining a strong credit review system and risk rating process. In January
2003, the Company established a credit department to perform interim analysis,
manage classified credits and develop a credit scoring system for small business
credits. Over time, this department will increase its review of credit analysis
and processes. The Company is also reviewing its risk rating systems and is
exploring the implementation of additional analytical procedures for risk
ratings. The entire loan portfolio analysis process is an ongoing and evolving
practice directed at maintaining a portfolio of quality credits and quickly
identifying any weaknesses before they become irremediable.
The following table sets forth activity in the allowance for credit
losses for the periods indicated.
(dollars in thousands)
Year Ended December 31,
-------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Balance at beginning of year $ 2,111 $ 1,142 $ 579 $ 164 --
Charge-offs: -- -- -- -- --
Commercial 192 -- -- -- --
Real estate - commercial -- -- -- -- --
Construction -- -- -- -- --
Home equity -- -- -- -- --
Other consumer 40 23 18 11 --
------- ------- ------- ------- -------
Total (232) (23) (18) (11) --
------- ------- ------- ------- -------
Recoveries:
Commercial 26 -- -- -- --
Real estate - commercial -- -- -- -- --
Construction -- -- -- -- --
Home equity -- -- -- -- --
Other consumer 18 13 -- 2 --
------- ------- ------- ------- -------
Total 44 13 -- 2 --
------- ------- ------- ------- -------
Net charge-offs (188) (10) (18) (9) --
------- ------- ------- ------- -------
Additions charged to
operations 843 979 581 424 164
------- ------- ------- ------- -------
Balance at end of period $ 2,766 $ 2,111 $ 1,142 $ 579 $ 164
======= ======= ======= ======= =======
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.09% 0.01% 0.02% 0.02% 0.00%
--------------------------------------------------------------------------------------------------------
At December 31, 2000, 1999 and 1998, the Company had not allocated any
portion of the allowance for credit losses to any individual loan or any
category of loans. In 2001, the Company began an allocation process which is
reflected in the following table. The allocation of the allowance to each
category is not necessarily indicative of future losses or charge-offs and does
not restrict the use of the allowance to absorb losses in any category.
26
(dollars in thousand)
Year Ended December 31,
----------------------------------------------------
2002 2001
----------------------------------------------------
Amount Percent (1) Amount Percent (1)
Commercial $1,134 27.5% $ 743 27.2%
Real estate - commercial 862 48.5 701 49.1
Construction 231 9.8 218 10.1
Home equity 253 12.9 212 11.6
Other consumer 83 1.3 100 2.0
Unallocated 203 -- 137 --
------ --- ------ ---
Total allowance for credit losses $2,766 100% $2,111 100%
====== === ====== ===
(1) Represents the percent of loans in category to gross loans
NON-PERFORMING ASSETS
The Company's non-performing assets, which are comprised of loans
delinquent 90 days or more, non-accrual loans, and other real estate owned,
totaled $965 thousand at December 31, 2002 compared to $19 thousand at December
31, 2001. The percentage of non-performing assets to total assets was 0.28% at
December 31, 2002 compared to 0.01% at December 31, 2001.
Non-performing loans constituted all of the non-performing assets at
December 31, 2002 and December 31, 2001. Non-performing loans at December 31,
2002 consist of loans in non-accrual status in the amount of $147 thousand and
loans past due over ninety days of $818 thousand compared to no non-accrual
loans and loans past due over ninety days of $19 thousand at December 31, 2001.
The Company had no other real estate owned at either December 31, 2002
or 2001.
The following table shows the amounts of non-performing assets at the
dates indicated.
(dollars in thousands)
Year End December 31,
--------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Nonaccrual Loans
Commercial $147 $ -- $ -- $-- $ --
Consumer -- -- -- -- --
Real estate -- -- -- -- --
Accrual loans-past due 90 days
Commercial 818 19 15 -- --
Consumer -- -- -- -- --
Real estate -- -- -- -- --
Restructured loans -- -- -- -- --
Real estate owned
---- ---- ---- ---- ----
Total non-performing assets $965 $ 19 $ 15 $ -- $ --
==== ==== ==== ==== ====
At December 31, 2002, there were no performing loans considered
potential problem loans, defined as loans which are not included in the past
27
due, nonaccrual or restructured categories, but for which known information
about possible credit problems causes management to be uncertain as to the
ability of the borrowers to comply with the present loan repayment terms.
DEPOSITS AND OTHER BORROWINGS
The principal sources of funds for the Bank are core deposits,
consisting of demand deposits, NOW accounts, money market accounts, savings
accounts and relationship certificates of deposits, from the local market areas
surrounding the Bank's offices. The Bank also considers as part of its core
deposits approximately $16 million of deposits from a local customer with a
longstanding relationship with the Bank. These deposits are required to be
classified as brokered deposits for regulatory purposes. The Bank's deposit base
includes transaction accounts, time and savings accounts and accounts which
customers use for cash management and which provide the Bank with a source of
fee income and cross-marketing opportunities as well as a low-cost source of
funds. Time and savings accounts, including money market deposit accounts, also
provide a relatively stable and low-cost source of funding.
One third of the Bank's deposits are made up of certificates of
deposits, which are generally the most expensive form of deposit because of
their fixed term. Certificates of deposit in denominations of $100 thousand or
more can be more volatile and more expensive than certificates of less than $100
thousand. However, because the Bank focuses on relationship banking and does not
accept brokered certificates, its historical experience has been that large
certificates of deposit have not been more volatile or significantly more
expensive than smaller denomination certificates. It has been the practice of
the Bank to pay posted rates on its certificates of deposit whether under or
over $100 thousand. The Bank has paid negotiated rates for deposits in excess of
$500 thousand but the rates paid have rarely been more than 25 to 50 basis
points higher than posted rates and deposits have been negotiated at below
market rates. In late 2000, to fund strong loan demand, the Bank began accepting
certificates of deposits, generally in denominations of less than $100 thousand
on a non brokered basis, from bank and credit union subscribers to a wholesale
deposit rate line. The Bank has found rates on these deposits to be generally
competitive with rates in our market given the speed and minimal noninterest
cost at which deposits can be acquired, although it is possible for rates to
significantly exceed local market rates. At December 31, 2002 the Bank held
$16.4 million of these deposits at an average rate of 3.99% as compared to $12.3
million of these deposits, at an average rate of 4.52% at December 31, 2001.
With the strong core deposit growth experienced by the Bank in 2002 these
deposits are being allowed to mature and may not be renewed. However, the Bank
has found this source of funds to be an effective funds management tool and may
accept more of these deposits in the future.
At December 31, 2002, the Company had approximately $64 million in
noninterest bearing demand deposits, representing an 80% increase from $37
million in demand deposits at December 31, 2001. The percentage of demand
deposits to total deposits from 2001 to 2002 rose by 4%, from 19% to 23%. These
are primarily business checking accounts on which the payment of interest is
prohibited by regulations of the Federal Reserve. Proposed legislation has been
introduced in each of the last several Congresses which would permit banks to
pay interest on checking and demand deposit accounts established by businesses.
If legislation effectively permitting the payment of interest on business demand
deposits is enacted, of which there can be no assurance, it is likely that we
may be required to pay interest on some portion of our noninterest bearing
deposits in order to compete with other banks. Payment of interest on these
deposits could have a significant negative impact on our net income, net
interest income, interest margin, return on assets and equity, and indices of
financial performance. For additional information relating to the composition of
the Bank's deposit base, see average balance tables above and Note 6 to the
Consolidated Financial Statements.
As an enhancement to the basic noninterest bearing demand deposit
account, the Company offers a sweep account, "customer repurchase agreement",
allowing qualifying businesses to earn interest on short term excess funds which
are not suited for either a CD investment or a money market account. The
balances in these accounts were $25 million at December 31, 2002, an 86%
increase over December 31, 2001 balance of $13.5 million. Customer repurchase
agreements are not deposits and are not FDIC insured but are secured by US
Treasury and/or US government agency securities. These accounts are particularly
suitable to businesses with significant change in the peaks and valleys of cash
flow over a very short time frame often measured in days. Attorney and title
company escrow accounts are an example of accounts which can benefit from this
product, as are customers who may require collateral for deposits in excess of
28
$100 thousand but do not qualify for other pledging arrangements. This program
requires the Company to maintain a sufficient investment securities level to
accommodate the fluctuations in balances which may occur in these accounts.
At December 31, 2002, the Company had drawn $4.6 million against a line
of credit provided by a correspondent bank as compared to $1.7 million at
December 31, 2001. These borrowings are principally to fund additions of capital
to the Bank in order to maintain its "well capitalized" ratio. At December 31,
2002, the Bank had $18.3 million of FHLB borrowings, as compared to $8 million
at December 31, 2001. These advances are secured 50% by US government agency
securities and 50% by a blanket lien on qualifying loans in the Bank's
commercial mortgage loan portfolio. For additional information regarding other
borrowings, see Note 7 of the Consolidated Financial Statements.
The following table provides information regarding the Bank's deposit
composition at the dated indicated.
(dollars in thousands)
December 31
2002 2001 2000
------------------ ------------------ ------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-------- ------- --------- ------- -------- -------
Noninterest bearing demand $ 46,930 -- $ 29,727 -- $ 19,892 --
Interest bearing transaction accounts 30,886 0.31% 20,896 1.11% 15,682 1.88%
Savings and money market and accounts 81,509 1.96% 54,211 3.40% 40,065 4.42%
Certificates of deposit $100,000 or more 41,683 3.21% 35,791 5.61% 23,551 5.63%
Other time 36,902 3.70% 25,493 5.51% 11,576 5.53%
-------- -------- --------
Total $237,910 $166,118 $110,766
======== ======== ========
The following table indicates the time remaining until maturity for the Bank's
certificates of deposit of $100,000 or more as of December 31, 2002.
Due in:
3 months or less $ 9,523
Over 3 through 6 months 31,629
Over 6 through 12 months 5,365
Over 12 months 472
--------
Total $ 46,989
========
The following table provides information regarding the Company's
short-term borrowings for the periods indicated. See Note 7 to the Consolidated
Financial Statements for additional information regarding the Company's
borrowings.
29
(dollars in thousands)
Maximum Amount Ending
Outstanding at Any Average Average Ending Average
Year Ended December 31, Month End Balance Rate Balance Rate
------------------------------ ------------------ --------- ------- -------- -------
Customer repurchase agreements
and federal funds purchased
2002 $ 26,560 $ 19,534 1.18% $ 25,054 0.50%
2001 17,078 13,057 3.13 13,452 1.70
2000 12,062 8,485 4.16 11,078 4.38
LIQUIDITY MANAGEMENT
Liquidity is the measure of the Bank's ability to meet the demands
required for the funding of loans and to meet depositor requirements for use of
their funds. The Bank's sources of liquidity consist of cash balances, due from
banks, loan repayments, federal funds sold and short term investments. These
sources of liquidity are supplemented by the ability of the Company and Bank to
borrow funds. During 2002, the Company increased an established line of credit,
with a correspondent bank, from $5 million to $10 million, against which it had
drawn $4.6 million as of December 31, 2002. The Bank can purchase up to $11.6
million in federal funds on an unsecured basis and enter into reverse repurchase
agreements up to $10 million. At year end 2002, the Bank was also eligible to
take FHLB advances of up to $52 million, of which it had advances outstanding of
$18.3 million.
The loss of deposits, through disintermediation, is one of the greater
risks to liquidity. Disintermediation occurs most commonly when rates rise and
depositors withdraw deposits seeking higher rates than the Bank may offer. The
Bank was founded under a philosophy of relationship banking and, therefore,
believes that it has less of an exposure to disintermediation and resultant
liquidity concerns than do banks which build an asset base on non-core deposits
and other borrowings. The history of the Bank, while only four and one-half
years, includes a period of rising interest rates and significant competition
for deposit dollars. During that period the Bank grew its core business without
sacrificing its interest margin in higher deposit rates for non-core deposits.
There is, however, a risk that some deposits would be lost if rates were to
spike up and the Bank elected not to meet the market. Under those conditions the
Bank believes that it is well positioned to use other liability management
instruments such as FHLB borrowing, reverse repurchase agreements and Bank lines
to offset a decline in deposits in the short run. Over the long term an
adjustment in assets and change in business emphasis could compensate for a loss
of deposits. Under these circumstances, further asset growth could be limited as
the Bank utilizes its liquidity sources to replace, rather than supplement, core
deposits.
Certificates of deposit acquired through the subscription service may
be more sensitive to rate changes and pose a greater risk of disintermediation
than deposits acquired in the local community. The Bank has limited the amount
of such deposits to less than 15% of total assets, an amount which it believes
it could replace with alternative liquidity sources, although there can be no
assurance of this.
The mature earning pattern of the Bank is also a liquidity management
resource for the Bank. The earnings of the Bank are now at a level that allows
the Bank to pay higher rates to retain deposits over a short period, while it
adjusts it asset base repricing to offset a higher cost of funds. The cost of
retaining business in the short run and the associated reduction in earnings can
be preferable to reducing deposit and asset levels and restricting growth.
At year end 2002, under the Bank's liquidity formula, it had $61
million of liquidity representing 17.5% of total Bank assets.
30
INTEREST RATE RISK MANAGEMENT
ASSET/LIABILITY MANAGEMENT AND QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK
A fundamental risk in banking, outside of credit risk, is exposure to
market risk, or interest rate risk, since a bank's net income is largely
dependent on net interest income. The Bank's Asset Liability Committee (ALCO) of
the Board of Directors formulates and monitors the management of interest rate
risk within policies established by it and the Board of Directors. In its
consideration of establishing guidelines for levels and/or limits on market
risk, the ALCO committee considers the impact on earnings and capital, the level
and direction of interest rates, liquidity, local economic conditions, outside
threats and other factors. Banking is generally a business of attempting to
match asset and liability components to produce a spread sufficient to provide
net income to the bank at nominal rate risk. The Company, through ALCO,
continually monitors the interest rate environment in which it operates and
adjusts rates and maturities of its assets and liabilities to meet the market
conditions. In the current low interest rate environment, the Company is keeping
its assets either variably priced or with short term maturities or short average
lives. At the same time it strives to attract longer term liabilities to lock in
the lower cost of funds. In the current market, due to competitive factors and
customer preferences, the effort to attract longer term fixed priced liabilities
has not been as successful as the Company's best case asset liability mix would
prefer. When interest rates begin to rise, the Company expects that it will seek
to keep asset maturities and repricing periods short until rates appear to be
nearing their top and then extend maturities to extend the benefit of higher
rates. There can be no assurance that the Company will be able to successfully
carry out this intention, as a result of competitive pressures, customer
preferences and the inability to perfectly forecast future interest rates.
One of the tools used by the Company to manage its interest rate risk
is a static GAP analysis presented below. The Company also uses an earning
simulation model on a quarterly basis to closely monitor interest sensitivity
and to expose its balance sheet and income statement to different scenarios. The
model is based on current Company data and adjusted by assumptions as to growth
patterns, noninterest income and noninterest expense and interest rate
sensitivity, based on historical data, for both assets and liabilities. The
model is then subjected to a "shock test" assuming a sudden interest rate
increase of 200 basis points or a decrease of 200 basis points, but not below
zero. The results are measured by the effect on net income. The Company, in its
latest model, shows a positive effect on income when interest rates immediately
rise 200 basis points because of the short maturities of assets and a negative
impact if rates were to decline further. With rates already at historic lows, a
further reduction would reduce income on earning assets which could not be
offset by a corresponding reduction in the cost of funds.
The following table reflects the result of a "shock test" simulation on
the December 31, 2002, earning assets and interest bearing liabilities and the
change in net interest income resulting from the simulated immediate increase
and decrease in interest of 100 and 200 basis points. Also shown is the change
in the Market Value Portfolio Equity resulting from the simulation. The model as
presented is projected for one year.
Percentage change in
Change in interest Percentage change Percentage change Market Value of
rates (basis points) in net interest income in net income Portfolio Equity
-------------------- ---------------------- ----------------- --------------------
+200 + 8.8% + 21.1% + 10.7%
+100 + 4.8% + 11.4% + 6.8%
0 -- -- --
-100 - 6.3% - 15.1% - 9.2%
-200 -16.2% - 39.0% - 16.7%
Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and liabilities may
have similar maturities or repricing periods, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate mortgage
loans, have features that restrict changes in interest rates on a short-term
31
basis and over the life of the loan. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels could deviate
significantly from those assumed in calculating the tables. Finally, the ability
of many borrowers to service their debt may decrease in the event of a
significant interest rate increase.
GAP
Banks and other financial institutions are dependent upon net interest
income, the difference between interest earned on interest earning assets and
interest paid on interest bearing liabilities. In falling interest rate
environments, net interest income is maximized with longer term, higher yielding
assets being funded by lower yielding short-term funds; however, when interest
rates trend upward this asset/liability structure can result in a significant
adverse impact on interest income. The current interest rate environment is
signaling steady to possibly higher rates. Management has for a number of months
shortened maturities in the Bank's investment portfolio and where possible also
has shorten repricing opportunities for new loan requests. While management
believes that this will help minimize interest rate risk in a rising
environment, there can be no assurance as to actual results.
GAP, a measure of the difference in volume between interest earning
assets and interest bearing liabilities, is a means of monitoring the
sensitivity of a financial institution to changes in interest rates. The chart
below provides an indicator of the rate sensitivity of the Company. A negative
GAP indicates the degree to which the volume of repriceable liabilities exceeds
repriceable assets in particular time periods. At December 31, 2002, the Bank
has a positive GAP of 16.15% out to three months and a cumulative negative GAP
of 8.29% out to twelve months.
If interest rates were to continue to decline further, the Bank's
interest income and margin may be adversely effected. Because of the positive
GAP measure in the 0 - 3 month period, continued decline in the prime lending
rate will reduce income on repriceable assets within thirty to sixty days, while
the repricing of liabilities will occur in later time periods. This will cause a
short term decline in net interest income and net income in a static
environment. Management has carefully considered its strategy to maximize
interest income by reviewing interest rate levels, economic indicators and call
features of some of its assets. These factors have been thoroughly discussed
with the Board of Directors Asset Liability Committee and management believes
that current strategies are appropriate to current economic and interest rate
trends. The negative GAP is carefully monitored and will be adjusted as
conditions change.
32
GAP ANALYSIS
(dollars in thousands)
0-3 4-12 13-36 37-60 Over 60
Repriceable in: Months Months Months Months Months Total
------ ------ ------ ------ ------ -----
ASSETS:
Investment securities $ 12,459 $ 17,483 $ 14,000 10,000 $ 16,733 $ 70,675
Interest bearing deposits in other banks 2,155 1,982 1,982 -- -- 6,119
Loans 97,953 17,180 46,658 59,057 21,558 242,406
Federal funds sold 3,012 -- -- -- -- 3,012
---------------------------------------------------------------
Total repriceable assets 115,579 36,645 62,640 69,057 38,291 322,212
===============================================================
LIABILITIES:
NOW accounts -- 19,984 3,997 15,987 -- 39,968
Savings and Money Market accounts 35,787 29,699 17,892 8,946 -- 92,324
Certificates of deposit 19,251 48,071 13,396 992 -- 81,710
Customer repurchase agreements and
federal funds purchased 7,516 10,022 2,505 5,011 -- 25,054
Other borrowing-short and long term 1,000 7,600 14,333 -- -- 22,933
---------------------------------------------------------------
Total repriceable liabilities 63,554 115,376 52,123 30,936 -- 261,989
===============================================================
GAP $ 52,025 $(78,731) $ 10,517 $ 38,121 $ 38,291 $ 60,223
Cumulative GAP 52,025 (26,706) (16,189) 21,932 60,223
Interval gap/earnings assets 16.15% (24.43)% 3.26% 11.83% 11.88%
Cumulative gap/earning assets 16.15% (8.29)% (5.02)% 6.81% 18.69%
Although, NOW and MMA accounts are subject to immediate repricing, the
Bank's GAP model has incorporated a repricing schedule to account for the
historical lag in effecting rate changes and the amount of those rate changes
relative to the amount of rate change in assets.
CAPITAL RESOURCES AND ADEQUACY
The assessment of capital adequacy depends on a number of factors such
as asset quality, liquidity, earnings performance, changing competitive
conditions and economic forces, and the overall level of growth. The adequacy of
the Company's current and future capital needs is monitored by management on an
ongoing basis. Management seeks to maintain a capital structure that will assure
an adequate level of capital to support anticipated asset growth and to absorb
potential losses.
The capital position of the Company's wholly-owned subsidiary, the
Bank, continues to meet regulatory requirements. The primary indicators relied
on by bank regulators in measuring the capital position are the Tier 1
risk-based capital, total risk-based capital, and leverage ratios. Tier 1
capital consists of common and qualifying preferred stockholders' equity less
goodwill. Total risk-based capital consists of Tier 1 capital, qualifying
subordinated debt, and a portion of the allowance for credit losses. Risk-based
capital ratios are calculated with reference to risk-weighted assets. The
leverage ratio compares Tier1 capital to total average assets. At December 31,
2002, the Company's and Bank's capital ratios were in excess of the mandated
minimum requirements. The Company's and Bank's capital ratios are presented in
Note 14 to the consolidated Financial Statements.
During 2002, the Company continued to borrow funds under a line of
credit with a correspondent bank in order to provide capital to fund anticipated
growth and expansion at the Bank in excess of the growth permitted by
33
reinvestment of earnings. At December 31, 2002, the amount outstanding under the
line of credit was $4.6 million. The ability of the Company to continue to grow
is dependent on its earnings and the ability to obtain additional funds for
contribution to the Bank's capital, through additional borrowing, the sale of
additional common stock, the sale of preferred stock, or through the issuance of
additional qualifying equity equivalents, such as subordinated debt or trust
preferred securities. The Company is currently proposing to raise additional
equity through the sale of additional shares of common stock. To the extent that
the Company is unsuccessful in raising additional equity, it will be required to
seek alternative sources, such as increased reliance on, or expansion of, its
line of credit or the issuance of trust preferred securities. Increased
borrowings or trust preferred securities will have an immediate interest cost,
which will have an adverse impact on earnings, although they may require a lower
internal rate of return on equity than common stock. To the extent that they are
floating or variable rate, the future cost of additional borrowings or trust
preferred securities may increase over time, while the cost of equity will
remain fixed.
In the event that the Company is unable to obtain additional capital
for the Bank on a timely basis, the growth of the Company and the Bank may be
curtailed, and the Company and the Bank may be required to reduce their level of
assets in order to maintain compliance with regulatory capital requirements.
Under those circumstances net income and the rate of growth of net income may be
adversely affected.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto have been
prepared in accordance with accounting principles generally accepted in the
United States of America, which require the measurement of financial position
and operating results in terms of historical dollars without considering the
changes in the relative purchasing power of money over time due to inflation.
The impact of inflation is reflected in the increased cost of operations. Unlike
most industrial companies, nearly all of our assets and liabilities are monetary
in nature. As a result, interest rates have a greater impact on our performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the price of
goods or services.
NEW ACCOUNTING STANDARDS
Refer to Note 1 of the Notes to Consolidated Financial Statements for
statements on New Accounting Standards.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Please refer to Item 7 of this report, "Management's Discussion and
Analysis of Financial Condition and Results of Operations", under the caption
"Interest Rate Risk Management - Asset/Liability Management and Quantitative and
Qualitative Disclosure About Market Risk."
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
Audit Committee of the
Board of Directors and
Stockholders of Eagle Bancorp, Inc.
We have audited the accompanying consolidated balance sheet of Eagle Bancorp,
Inc as of December 31, 2002 and 2001, and the related consolidated statements of
operation, changes in stock holders' equity, and cash flows for each of the
three years in the period ended December 31, 2002. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We have conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
states are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Eagle Bancorp Inc.
as of December 31, 2002 and 2001, and the consolidated results of the operations
and cash flows for each of the three years in the period ending December 31,
202, in conformity with accounting principals generally accepted in the Unite
States of America.
/s/ Stegman & Company
---------------------
Stegman & Company
Baltimore, Maryland
February 7, 2003
35
EAGLE BANCORP, INC.
Consolidated Balance Sheets December 31, 2002 and 2001
(dollars in thousands)
ASSETS
2002 2001
---- ----
Cash and due from banks $ 18,569 $ 6,483
Interest bearing deposits with other banks 6,119 161
Federal funds sold 3,012 --
Investment securities available for sale 70,675 39,439
Loans held for sale 5,546 5,673
Loans 236,860 182,256
Less allowance for credit losses (2,766) (2,111)
--------- ---------
Loans, net 234,094 180,145
Premises and equipment, net 3,601 3,172
Deferred income taxes 464 391
Other assets 5,749 1,369
--------- ---------
TOTAL ASSETS $ 347,829 $ 236,833
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing demand $ 64,432 $ 37,235
Interest bearing transaction 39,968 31,512
Savings and money market 92,324 61,572
Time, $100,000 or more 46,989 35,393
Other time 34,721 29,976
--------- ---------
Total deposits 278,434 195,688
Customer repurchase agreements
and federal funds purchased 25,054 13,452
Other short-term borrowings 8,600 --
Long-term borrowings 14,333 9,675
Other liabilities 1,380 886
--------- ---------
Total liabilities 327,801 219,701
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 20,000,000,
Shares issued and outstanding 2,897,704 (2002) and 2,895,124 (2001) 29 29
Additional paid in capital 16,541 16,515
Retained earnings 3,066 399
Accumulated other comprehensive income 392 189
--------- ---------
Total stockholders' equity 20,028 17,132
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 347,829 $ 236,833
========= =========
See notes to consolidated financial statements.
--------------------------------------------------------------------------------
36
EAGLE BANCORP, INC.
Consolidated Statements of Operations for the years ended December 31, 2002,
2001 and 2000
(dollars in thousands, except per share data)
INTEREST INCOME 2002 2001 2000
---- ---- ----
Interest and fees on loans $ 14,379 $ 12,054 $ 7,746
Taxable interest and dividends on investment securities 2,124 1,799 2,468
Interest on balances with other banks 77 13 9
Interest on federal funds sold 81 255 278
-------- -------- --------
Total interest income 16,661 14,121 10,501
-------- -------- --------
INTEREST EXPENSE
Interest on deposits 4,332 5,486 4,032
Interest on customer repurchase agreements and
federal funds purchased 224 409 350
Interest on short-term borrowings 132 -- 167
Interest on long-term borrowings 482 103 --
------------------------------------
Total interest expense 5,170 5,998 4,549
-------- -------- --------
NET INTEREST INCOME 11,491 8,123 5,952
PROVISION FOR CREDIT LOSSES 843 979 581
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 10,648 7,144 5,371
-------- -------- --------
NONINTEREST INCOME
Service charges on deposits 1,038 704 350
Gain on sale of loans 491 148 --
Gain (loss) on sale of investment securities 337 358 (71)
Other income 294 114 72
-------- -------- --------
Total noninterest income 2,160 1,324 351
-------- -------- --------
NONINTEREST EXPENSE
Salaries and employee benefits 4,505 3,449 2,445
Premises and equipment expenses 1,648 1,220 890
Advertising 197 144 108
Outside data processing 488 349 253
Other expenses 1,745 1,283 968
-------- -------- --------
Total noninterest expense 8,583 6,445 4,664
-------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE 4,225 2,023 1,058
INCOME TAX EXPENSE 1,558 269 --
-------- -------- --------
NET INCOME $ 2,667 $ 1,754 $ 1,058
====================================
INCOME PER SHARE
Basic $ 0.92 $ 0.61 $ 0.36
Diluted $ 0.86 $ 0.58 $ 0.36
See notes to consolidated financial statements.
37
EAGLE BANCORP, INC.
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 2002, 2001 and 2000
(dollars in thousands)
Accumulated
Retained Other Total
Common Additional Paid Earnings Comprehensive Stockholders'
Stock in Capital (Deficit) Income (loss) Equity
----- ---------- --------- ------------- ------
Balances at January 1, 2000 $ 17 $ 16,483 $ (2,413) $ (412) $ 13,675
Five -for-four stock split in the form of a 25% stock
dividend 4 (4) -- -- --
Net income 1,058 -- 1,058
Other comprehensive income-
unrealized gain on investment
securities available for sale -- -- -- 789 789
---------
Total other comprehensive
income -- -- -- -- 1,847
------ -------- -------- -------- ---------
Balances at December 31, 2000 21 16,479 (1,355) 377 15,522
Seven-for-five stock split in the form of a 40% stock
dividend 8 (8) -- -- --
Exercise of options for 7,700 shares of common stock -- 44 -- -- 44
Net income -- 1,754 -- 1,754
Other comprehensive income-
unrealized loss on investment
securities available for sale -- -- -- (188) (188)
---------
Total other comprehensive
income -- -- -- -- 1,610
------ -------- -------- -------- ---------
Balances at December 31, 2001 29 16,515 399 189 17,132
Exercise of options for 2,580 shares of common stock 26 26
Net income -- -- 2,667 -- 2,667
Other comprehensive income-
unrealized gain on investment
securities available for sale -- -- -- 203 203
---------
Total other comprehensive
income -- -- -- -- 2,896
------ -------- -------- -------- ---------
Balances at December 31, 2002 $ 29 $ 16,541 $ 3,066 $ 392 $ 20,028
====== ======== ======== ======== =========
See notes to consolidated financial statements.
38
EAGLE BANCORP, INC.
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002,
2001 and 2000
(dollars in thousands)
2002 2001 2000
-----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,667 $ 1,754 $ 1,058
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Provision for credit losses 843 979 581
Increase in deferred income taxes (178) (391)
Depreciation and amortization 557 420 341
Gains on sale of loans (491) (96) --
Origination of loans held for sale (19,110) (8,628) --
Proceeds from sale of loans held for sale 19,728 3,051 --
(Gains) loss on sale of investment securities (337) (358) 71
Increase in other assets (380) (53) (589)
Increase in other liabilities 494 301 290
-----------------------------------------
Net cash provided (used) by in operating activities 3,793 (3,021) 1,752
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in interest bearing deposits with other banks (5,958) (46) (115)
Purchases of available for sale investment securities (385,210) (147,397) (48,929)
Proceeds from maturities of available for sale securities 333,993 131,113 43,915
Proceeds from sale of available for sale securities 20,626 9,413 9,929
Decrease (increase) in federal funds sold (3,012) 2,121 3,979
Net increase in loans (54,792) (64,548) (53,881)
Bank premises and equipment acquired (986) (968) (280)
Purchase of BOLI (4,000) -- --
-----------------------------------------
Net cash used in investing activities (99,339) (70,312) (45,382)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits 82,746 59,831 44,866
Increase in customer repurchase agreements and
federal funds purchased 11,602 2,374 3,095
Increase (decrease) in other short-term borrowings 8,600 (1,040) 765
Proceeds from long-term borrowings 4,658 9,675 --
Issuance of common stock 26 44 --
-----------------------------------------
Net cash provided by financing activities 107,632 70,884 48,726
NET INCREASE (DECREASE) IN CASH 12,086 (2,449) 5,096
CASH AND DUE FROM BANKS AT
BEGINNING OF YEAR 6,483 8,932 3,836
-----------------------------------------
CASH AND DUE FROM BANKS AT
END OF YEAR $ 18,569 $ 6,483 $ 8,932
=========================================
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid $ 5,092 $ 6,029 $ 4,349
=========================================
Income taxes paid $ 1,840 $ 647 $ --
=========================================
See notes to consolidated financial statements.
39
EAGLE BANCORP, INC.
Notes to Consolidated Financial Statements for the Years Ended December 31,
2002, 2001 and 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Eagle Bancorp,
Inc. (the "Company") and its subsidiary, EagleBank (the "Bank") with all
significant intercompany transactions eliminated. The investment in subsidiary
is recorded on the Company's books (Parent Only) on the basis of its equity in
the net assets of the subsidiary. The accounting and reporting policies of the
Company conform to accounting principles generally accepted in the United States
of America and to general practices in the banking industry. Certain
reclassifications have been made to amounts previously reported to conform to
the classification made in 2002. The following is a summary of the more
significant accounting policies.
NATURE OF OPERATIONS
The Company, through its bank subsidiary, provides domestic financial
services primarily in Montgomery County, Maryland and Washington, D.C.
The primary financial services include real estate, commercial and
consumer lending, as well as traditional demand deposits and savings
products.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks and federal funds sold (items with an original
maturity of three months of less).
LOANS HELD FOR SALE
The Company engages in sales of residential mortgage loans and the
guaranteed portion of Small Business Administration ("SBA") loans
originated by the Bank. Loans held for sale are carried at the lower of
aggregate cost or fair value. Fair value is derived from secondary
market quotations for similar instruments. Gains and losses on sales of
these loans are recorded as a component of noninterest income in the
Consolidated Statements of Operations.
When the Company retains the servicing rights to collect and remit
principal and interest payments, manage escrow account matters and
handle borrower relationships on mortgage loans sold, resulting service
fee income is included in noninterest income. The Company's current
practice is to sell residential mortgage loans on a servicing released
basis, and, therefore, it has no intangible asset recorded for the
value of such servicing as of December 31, 2002.
INVESTMENT SECURITIES
The Company and Bank have elected to account for all investment
securities as available for sale. Those securities are carried at
estimated fair value. Unrealized gains and losses on investment
securities available for sale, net of related deferred income taxes,
are recognized as accumulated other comprehensive income, a separate
component of stockholders' equity. The cost of investment securities
sold is determined using the specific identification method.
40
LOANS
Loans are stated at the principal amount outstanding, net of
origination costs and fees. Interest income on loans is accrued at the
contractual rate on the principal amount outstanding. It is the
Company's policy to discontinue the accrual of interest when
circumstances indicate that collection is doubtful. Fees charged and
costs capitalized for originating loans are being amortized on the
interest method over the term of the loan.
Management considers loans impaired when, based on current information,
it is probable that the Company will not collect all principal and
interest payments according to contractual terms. Loans are tested for
impairment once principal or interest payments become ninety days or
more past due and they are placed on nonaccrual. Management also
considers the financial condition of the borrower, cash flows of the
loan and the value of the related collateral. Impaired loans do not
include large groups of smaller balance homogeneous loans such as
residential real estate and consumer installment loans which are
evaluated collectively for impairment. Loans specifically reviewed for
impairment are not considered impaired during periods of "minimal
delay" in payment (ninety days or less) provided eventual collection of
all amounts due is expected. The impairment of a loan is measured based
on the present value of expected future cash flows discounted at the
loan's effective interest rate, or the fair value of the collateral if
repayment is expected to be provided by the collateral. Generally, the
Company's impairment on such loans is measured by reference to the fair
value of the collateral. Interest income on impaired loans is
recognized on the cash basis.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses represents an amount which, in
management's judgment, will be adequate to absorb probable losses on
existing loans and other extensions of credit that may become
uncollectible. The adequacy of the allowance for credit losses is
determined through careful and continuous review and evaluation of the
loan portfolio and involves the balancing of a number of factors to
establish a prudent level. Among the factors considered are lending
risks associated with growth and entry into new markets, loss
allocations for specific nonperforming credits, the level of the
allowance to nonperforming loans, historical loss experience, economic
conditions, portfolio trends and credit concentrations, changes in the
size and character of the loan portfolio, and management's judgment
with respect to current and expected economic conditions and their
impact on the existing loan portfolio. Allowances for impaired loans
are generally determined based on collateral values. Loans deemed
uncollectible are charged against, while recoveries are credited to,
the allowance. Management adjusts the level of the allowance through
the provision for credit losses, which is recorded as a current period
operating expense. The allowance for credit losses may consist of an
allocated component and an unallocated component.
The components of the allowance for credit losses represent an
estimation done pursuant to either Statement of Financial Accounting
Standards ("SFAS") No. 5, "Accounting for Contingencies," or SFAS No.
114, "Accounting by Creditors for Impairment of a Loan." Specific
allowances are established in cases where management has identified
significant conditions or circumstances related to a credit that
management believes indicate the probability that a loss may be
incurred in an amount different from the amount determined by
application of the formula allowance. For other problem graded credits,
allowances are established according to the application of credit risk
factors. These factors are set by management to reflect its assessment
of the relative level of risk inherent in each grade. The nonspecific
allowance is based upon management's evaluation of various conditions
that are not directly measured in the determination of the formula and
specific allowances. Such conditions include general economic and
business conditions affecting key lending areas, credit quality trends
(including trends in delinquencies and nonperforming loans expected to
result from existing conditions), loan volumes and concentrations,
specific industry conditions within portfolio categories, recent loss
experience in particular loan categories, duration of the current
business cycle, bank regulatory examination results, findings of
outside review consultants, and management's judgment with respect to
various other conditions including credit administration and management
and the quality of risk identification systems. Executive management
reviews these conditions quarterly.
Management believes that the allowance for credit losses is adequate,
however, determination of the allowance is inherently subjective and
requires significant estimates. While management uses available
41
information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions.
Evaluation of the potential effects of these factors on estimated
losses involves a high degree of uncertainty, including the strength
and timing of economic cycles and concerns over the effects of a
prolonged economic downturn in the current cycle. In addition, various
regulatory agencies, as an integral part of their examination process,
and independent consultants engaged by the Bank periodically review the
Bank's loan portfolio and allowance for credit losses. Such review may
result in recognition of additions to the allowance based on their
judgments of information available to them at the time of their
examination.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation
and amortization computed using the straight-line method. Premises and
equipment are depreciated over the useful lives of the assets, which
generally range from three to ten years for furniture, fixtures and
equipment, three to five years for computer software and hardware, and
ten to forty years for buildings and building improvements. Leasehold
improvements are amortized over the terms of the respective leases or
the estimated useful lives of the improvements, whichever are shorter.
The costs of major renewals and betterments are capitalized, while the
costs of ordinary maintenance and repairs are expensed as incurred.
ADVERTISING
Advertising costs are generally expensed as incurred.
INCOME TAXES
The Company uses the liability method of accounting for income taxes.
Under the liability method, deferred-tax assets and liabilities are
determined based on differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities
(i.e., temporary differences) and are measured at the enacted rates
that will be in effect when these differences are settled. During 2001,
management determined that the realization of previously unrecorded net
deferred tax assets were more likely than not and therefore recorded
previously unrecognized net deferred tax assets. Subsequent to the
recognition of the net deferred tax assets the Company recorded current
income tax expense. The Company did not record any tax expense or
benefit for years prior to 2001.
NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing net income
available to common stockholders by the weighted average number of
common shares outstanding during the year. Diluted net income per
common share is computed by dividing net income available to common
stockholders by the weighted average number of common shares
outstanding during the year including any potential dilutive effects of
common stock equivalents, such as options and warrants.
NEW ACCOUNTING STANDARDS
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," which supercedes both SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets to be Disposed Of" and the accounting
and reporting provisions of APB Opinion No. 30, "Reporting the Results
of Operations-Reporting the Effects of Disposal of a segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions" (Opinion 30), for the disposal of a segment of a
business (a previously defined in that Opinion). SFAS No. 144 retains
the fundamental provisions in SFAS No. 121 for recognizing and
measuring impairment losses in long-lived assets held for use and
long-lived assets to be disposed of by sale, while also resolving
significant implementation issues associated with SFAS No. 121. The
provisions of SFAS No. 144 are effective for years beginning after
December 15, 2001. The adoption of SFAS No. 144 did not affect the
financial position or results of operations of the Company.
42
In December 2002, the Financial accounting Standards Board issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" which amends SFAS No. 123, "Accounting for Stock Based
Compensation". SFAS No. 148 provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require additional and more
frequent disclosures in financial statements about the effects of
stock-based compensation. Adoption of SFAS No. 148 had no effect on the
financial position or results of operations of the Company.
2. CASH AND DUE FROM BANKS
Regulation D of the Federal Reserve Act requires that banks maintain reserve
balances with the Federal Reserve Bank based principally on the type and amount
of their deposits. During 2002, the Bank maintained balances at the Federal
Reserve (in addition to vault cash) to meet the reserve requirements as well as
balances to partially compensate for services. Additionally, the Bank maintained
balances with the Federal Home Loan Bank and three domestic correspondents as
compensation for services they provided to the Bank.
3. INVESTMENTS AVAILABLE FOR SALE
The amortized cost and estimated fair values of investments available for sale
at December 31, 2002 and 2001 are as follows:
(in thousands) Gross Gross Estimated
Amortized Unrealized Unrealized Fair
2002 Cost Gains Losses Value
---- ----------------------------------------------------
U. S. Treasury securities $ 5,501 $ 3 $ -- $ 5,504
U. S. Government agency securities 19,961 153 20,114
GNMA mortgage backed securities 42,782 493 (7) 43,268
Federal Reserve and Federal Home Loan Bank stock 1,564 -- -- 1,564
Other equity investments 274 -- (49) 225
----------------------------------------------------
Total $ 70,082 $ 649 $ (56) $ 70,675
====================================================
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
2001 Cost Gains Losses Value
---- ----------------------------------------------------
U. S. Treasury securities $ 12,538 $ 2 $ -- $ 12,540
U. S. Government agency securities 14,289 284 (36) 14,537
GNMA mortgage backed securities 11,178 103 (64) 11,217
Federal Reserve and Federal Home Loan Bank stock 880 -- -- 880
Other equity investments 269 5 (9) 265
----------------------------------------------------
Total $ 39,154 $ 394 $ (109) $ 39,439
====================================================
The amortized cost and estimated fair values of investments available for sale
at December 31, 2002 and 2001 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.
43
2002 2001
Amortized Estimated Fair Amortized Estimated Fair
Cost Value Cost Value
-------------------------------------------------------
Amounts maturing:
One year or less $ 8,501 $ 8,545 $12,387 $12,391
After one year through five years 14,968 15,037 10,943 10,974
After five years through ten years 1,993 2,036 3,497 3,712
GNMA mortgage backed securities 42,782 43,268 11,178 11,217
FRB, FHLB and other equity securities 1,838 1,789 1,149 1,145
-------------------------------------------------------
Total $70,082 $70,675 $39,154 $39,439
======================================================
Realized gains on sales of investment securities were $343 thousand and realized
losses on sales of investment securities were $6 thousand in 2002, the realized
gains on sales of investment securities were $375 thousand and realized losses
on sales of investment securities were $17 thousand in 2001 and the realized
losses on sales of investment securities were $71 thousand in 2000. Proceeds
from sales of securities in 2002 were $20.6 million, in 2001 were $9.41 million
and in 2000 were $9.9 million.
At December 31, 2002, $37.9 million fair value of securities were pledged as
collateral for certain government deposits, FHLB advances and the Bank's
customer repurchase agreement program. The outstanding balance of no single
issuer, except for U. S. Government and U. S. Government agency securities,
exceeded ten percent of stockholders' equity at December 31, 2002 or 2001.
4. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The Bank makes loans to customers primarily in Montgomery County, Maryland and
surrounding communities. A substantial portion of the Bank's loan portfolio
consists of loans to businesses secured by real estate and other business
assets.
Loans, net of unamortized deferred fees, at December 31, 2002 and 2001 are
summarized by type as follows:
(dollars in thousands)
2002 2001
---- ----
Commercial $ 64,869 $ 49,432
Real estate - commercial 114,961 86,553
Construction 23,180 15,512
Home equity 30,631 26,656
Other consumer 3,219 4,103
--------- ---------
Total loans 236,860 182,256
Less: allowance for credit losses (2,766) (2,111)
--------- ---------
Loans, net $ 234,094 $ 180,145
========= =========
Activity in the allowance for credit losses for the years ended December 31,
2002, 2001 and 2000 is shown below:
2002 2001 2000
------- ------- -------
Balance at beginning of year $ 2,111 $ 1,142 $ 579
Provision for credit losses 843 979 581
Loan charge-offs (232) (23) (18)
Loan recoveries 44 13 --
------- ------- -------
Balance at end of year $ 2,766 $ 2,111 $ 1,142
======= ======= =======
44
Information regarding impaired loans at December 31, 2002 and 2001 is as
follows:
2002 2001
---- ----
Impaired loans with a valuation allowance $ 965 $ --
Impaired loans without a valuation allowance -- --
------ ------
Total impaired loans $ 965 $ --
====== ======
Allowance for credit losses related to impaired loans $ 121 $ --
Allowance for credit losses related to other than impaired
loans 2,645 2,111
------ ------
Total allowance for credit losses $2,766 $2,111
====== ======
Average impaired loans for the year $ 202 $ --
Interest income on impaired loans recognized on a cash basis $ 17 $ --
5. PREMISES AND EQUIPMENT
Premises and equipment include the following at December 31:
(dollars in thousands)
2002 2001
---- ----
Leasehold improvements $ 2,041 $ 1,826
Furniture and equipment 3,227 2,456
Premises and equipment 5,268 4,282
Less accumulated depreciation
and amortization (1,667) (1,110)
------- -------
Total premises and equipment, net $ 3,601 $ 3,172
======= =======
The Company occupies banking and office space in seven locations under
noncancellable lease arrangements accounted for as operating leases. The initial
lease periods range from 5 to 10 years and provide for one or more 5-year
renewal options. The leases provide for percentage annual rent escalations and
require that the lessee pay certain operating expenses applicable to the leased
space. Rent expense applicable to operating leases amounted to $769 thousand in
2002, $546 thousand in 2001, and $357 thousand in 2000. At December 31, 2002,
future minimum lease payments under noncancellable operating leases having an
initial term in excess of one year are as follows:
Years ending December 31:
2003 $ 793
2004 795
2005 783
2006 809
2007 830
Thereafter 1,876
------
Total minimum lease payments $5,886
======
6. DEPOSITS
(dollars in thousands)
The remaining maturity of certificates of deposit $100,000 or more at December
31, 2002 and 2001 are as follows:
45
2002 2001
--------------------
Three months or less $ 9,523 $ 9,074
More than three months
through six months 31,629 9,058
More than six months
through twelve months 5,365 15,698
Over twelve months 472 1,563
------- -------
Total $46,989 $35,393
======= =======
Interest expense on deposits for the years ended December 31, 2002, 2001 and
2000 is as follows:
2002 2001 2000
------ ------ ------
Interest bearing transaction $ 95 $ 232 $ 295
Savings and money market 1,599 1,843 1,772
Time, $100,000 or more 1,337 2,006 1,325
Other time 1,301 1,405 640
------ ------ ------
Total $4,332 $5,486 $4,032
====== ====== ======
As of December 31, 2001, the Bank held $16 million in deposits, from one
relationship, which, for regulatory reporting purposes, are considered brokered
deposits.
7. BORROWINGS
Information relating to short and long term borrowings is as follows for the
years ended December 31:
Short-term borrowing 2002 2001
Amount Rate Amount Rate
------------------- ----------------------
At Year-End
Customer repurchase agreements $ 25,054 0.50% 13,452 1.70%
Federal Home Loan Bank - current portion 4,000 2.79% -- -
Bank line of credit 4,600 4.00% -- -
-------- -------
Total $ 33,654 13,452
Average for the Year:
Customer repurchase agreements and
federal funds purchased $ 19,189 1.16% $ 3,057 3.13%
Federal Home Loan Bank - current portion 1,852 2.79% -- -
Bank line of Credit 2,818 4.48% $ 533 5.92%
Maximum Month-end Balance:
Customer repurchase agreements and
federal funds purchased $ 26,560 1.50% $17,078 6.00%
Federal Home Loan Bank - current portion 4,000 2.79% -- -
Line of credit 4,600 4.50% 1,675 4.75%
Long-term borrowing
Bank line of credit due 2002 $ -- $ 1,675 4.00%
Federal Home Loan Bank due 2005 8,000 4.28% 8,000 4.28%
Federal Home loan Bank due 2004 4,000 2.79% -- --
Federal Home Loan Bank due 2005 2,333 2.79% -- --
-------- ------- ----
Total long-term borrowing $ 14,333 $ 9,675
======== =======
46
The Company offers its business customers a repurchase agreement sweep account
in which it sells to the customer U. S. Government and U. S. Government agency
securities segregated in its investment portfolio for this purpose. By entering
into the agreement the customer agrees to have the Bank repurchase the
designated securities on the business day following the initial transaction in
consideration of the payment of interest at the rate prevailing on the day of
the transaction.
The Bank has commitments from correspondent banks under which it can purchase up
to $11.6 million in federal funds and $10 million in secured reverse repurchase
agreements on a short-term basis. The Bank also can draw Federal Home Loan Bank
advances up to $52 million against which it had $18.3 million outstanding at
December 31, 2002. The Company has a line of credit approved for $10 million
secured by stock in the Bank against which it had borrowings outstanding of $4.6
million at December 31, 2002.
8. INCOME TAXES
Federal and state income tax expense (benefit) consist of the following:
Periods Ended December 31
2002 2001 2000
---------------------------------
Current federal income tax $ 1,434 $ 601 $ --
Current state income tax 318 59
Total current 1,752 660 --
--------------------------------
Deferred federal income
tax expense (benefit) (159) (313) --
Deferred state income
tax expense (benefit) (35) (78) --
--------------------------------
Total deferred (194) (391) --
--------------------------------
Total income tax expense (benefit) $ 1,558 $ 269 $ --
================================
The following table is a summary of the tax effect of temporary differences that
give rise to significant portions of deferred tax assets:
Periods Ended December 31
2002 2001 2000
--------------------------------
Deferred tax assets:
Allowance for credit losses $ 731 $ 531 $ 258
Deferred loan fees and costs -- -- 44
Other 29 57 30
Net operating loss carryforwards -- -- 166
Gross deferred tax assets 760 588 498
Less valuation allowance (--) (--) (279)
--------------------------------
Total deferred tax assets 760 588 219
--------------------------------
Deferred tax liabilities:
Unrealized gain on securities
available for sale (218) (97) (128)
Premises and equipment (78) (88) (91)
Deferred loan fees and costs -- (12) --
--------------------------------
Total deferred tax liabilities (296) (197) (219)
Net deferred income taxes $ 464 $ 391 $ 0
================================
During 2001, management determined that the realization of previously unrecorded
deferred tax assets was more likely than not. Accordingly the valuation
allowance was removed in 2001.
47
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate follows:
Periods Ended December 31
2002 2001 2000
----------------------------
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal
income tax benefit 3.8 -- --
Non-taxable income (0.7) -- --
Valuation allowance -- (20.9) (34.0)
Other (0.2) 0.2 --
----------------------------
Effective tax rates 36.9% 13.3% 0.0%
============================
9. INCOME PER COMMON SHARE
In the following table, basic earnings per share is derived by dividing net
income available to common stockholders by the weighted-average number of common
shares outstanding during the year. The diluted earnings per share is calculated
by dividing net income by the weighted-average number of shares outstanding,
adjusted for the dilutive effect of outstanding stock options. Historical
amounts have been restated as a result of the seven-for-five stock split in the
form of a 40% stock dividend declared in 2001.
The calculation of net income per common share for the years ended December 31
was as follows:
2002 2001 2000
------------------------------
Basic:
Net income allocable to common
stockholders $2,667 $1,754 $1,058
Average common shares outstanding 2,895 2,890 2,887
Basic net income per share $ 0.92 $ 0.61 $ 0.36
Diluted:
Net income allocable to common
stockholders $2,667 $1,754 $1,058
Average common shares outstanding 2,895 2,890 2,887
Adjustment for stock options 211 144 22
Average common shares
outstanding-diluted 3,106 3,034 2,909
Diluted net income per share $ 0.86 $ 0.58 $ 0.36
As of December 31, 2002, there were 1,150 shares, and as of December 31, 2001
and 2000 there were -0-shares excluded from the diluted net income per share
computation because the option price exceeded the market price and therefore,
their effect would be anti-dilutive.
10. RELATED PARTY TRANSACTIONS
Certain directors and executive officers have had loan transactions with the
Company. Such loans were made in the ordinary course of business on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with outsiders. The following
table summarizes changes in amounts of loans outstanding, both direct and
indirect, to those persons during 2001 and 2000.
48
2002 2001
---------------------
Balance at January 1 $ 2,256 $ 2,001
Additions 1,476 531
Repayments (776) (276)
---------------------
Balance at December 31 $ 2,956 $ 2,256
=====================
11. STOCK OPTION PLAN
The stockholders, at their May 14, 1998 meeting, approved the Eagle Bancorp,
Inc. 1998 Stock Option Plan (the "Plan") which was amended at the May 21, 2002
meeting. The plan provides for the periodic granting of incentive and
nonqualifying options to selected key employees and members of the Board on a
periodic basis. Options for not more than 579,025 shares of common stock may be
granted under the Plan and the term of such options shall not exceed ten years.
Following is a summary of changes in shares under option for the years
indicated:
Year Ended December 31,
2002 2001 2000
---------------------------------------------------------------------------------
Weighted
Weighted Weighted Average
Number Average Number Average Number Exercise
of Shares Exercise Price Of Shares Exercise Price of Shares Price
--------- -------------- --------- -------------- --------- --------
Outstanding at beginning of year 421 $ 6.72 333 $ 5.71 306 $ 5.71
Granted 20 10.05 96 10.06 30 5.80
Exercised (3) (10.08) (8) 5.71 -- 0.00
Cancelled -- -- -- (5.71) (3) (5.71)
---------------------------------------------------------------------------------
Outstanding at end of year 438 $ 7.09 421 $ 6.72 333 $ 5.72
Weighted average fair value of options
granted during the year $ 6.19 $ 4.35 $ 3.10
Weighted average remaining contract life 6.80 years
Weighted Average
Remaining Weighted
Range of Contract Life Average
Exercise Price Number (in years) Exercise Price
-------------- ------- ----------------- --------------
$ 5.54-$ 6.07 330,606 6.1 $ 5.72
$13.05-$10.36 98,097 8.9 $ 10.21
$11.00-$15.75 9,264 8.7 $ 11.62
------- -------
437,967 $ 6.85
======= ========
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants during the years ended December 31, 2002, 2001 and 2000.
2002 2001 2000
---- ---- ----
Dividend yield 0.00% 0.00% 0.00%
Expected volatility 20.00% 10.00% 10.00%
Risk free interest 5.04% 4.84 - 5.68% 5.28%-6.46%
Expected lives (in years) 10 10 10
49
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" and SFAS 148 "Accounting for
Stock-Based Compensation-Transition and Disclosure", but applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its Plan. No compensation expense related to the Plan was recorded during the
three years ended December 31, 2002. If the Company had elected to recognize
compensation cost based on fair value at the grant dates for awards under the
Plan consistent with the method prescribed by SFAS No. 123, net income and
earnings per share would have been changed to the pro forma amounts as follows
for the years ended December 31.
2002 2001 2000
--------------------------------------------
Net income, as reported $ 2,667 $ 1,754 $ 1,058
Less pro forma stock-based compensation expense
determined under the fair value method, net of
related tax effects (125) (394) (83)
Pro forma net income $ 2,542 $ 1,360 $ 975
Net income per share:
Basic - as reported $ 0.92 $ 0.61 $ 0.36
Basic - pro forma $ 0.88 $ 0.47 $ 0.34
Diluted - as reported $ 0.86 $ 0.58 $ 0.36
Diluted - pro forma $ 0.82 $ 0.45 $ 0.34
The pro forma amounts are not representative of the effects on reported net
income for future years.
12. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Plan covering all employees who have reached the age of
21 and have completed at least one month of service as defined by the Plan. The
Company made contributions to the Plan of approximately $87 thousand, $62
thousand and $46 thousand in 2002, 2001 and 2000, respectively. These amounts
are included in salaries and employee benefits in the accompanying Consolidated
Statements of Operations.
13. COMMITMENTS AND CONTINGENCIES
Various commitments to extend credit are made in the normal course of banking
business. Letters of credit are also issued for the benefit of customers. These
commitments are subject to loan underwriting standards and geographic boundaries
consistent with the Company's loans outstanding.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Outstanding loan commitments and lines and letters of credit at December 31,
2002 and 2001 are as follows:
2002 2001
-------------------------
Loan commitments $ 49,140 $ 32,295
Unused lines of credit 72,349 47,885
Letters of credit 2,233 1,757
Because most of the Company's business activity is with customers located in the
Washington, DC, metropolitan area, a geographic concentration of credit risk
exists within the loan portfolio, and, as such, its performance will be
influenced by the economy of the region.
At December 31, 2002 the Company also had commitments to vendors for leasehold
improvement and equipment acquisitions associated with the Bank's new Shady
50
Grove office and completion of a new operations center. The amount of these
commitments at December 31, 2002 was $553 thousand.
In the normal course of business, the Company may become involved in litigation
arising from banking, financial, and other activities. At December 31, 2002, the
Company was not involved in any litigation.
14. REGULATORY MATTERS
The Company and Bank are subject to various regulatory capital requirements
administered by the 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 Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and Bank must meet specific capital guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank and Company to maintain amounts and ratios (set forth in the
table below) of total Tier 1 capital (as defined in the regulations) to
risk-weighted assets(as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2002 and 2001, that
the Company and Bank met all capital adequacy requirements to which they are
subject.
The actual capital amounts and ratios for the Company and Bank as of December
31, 2002 and 2001 are presented in the table below:
(In Thousands of Dollars)
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Company Bank Adequacy Action
Actual Actual Purposes Provisions*
---------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Ratio Ratio
---------------------------------------------------------------------------------------------------------------------------
As of December 31, 2002
Total capital (to risk weighted
assets) $ 22,402 8.7% $ 26,671 10.4% 8.0% 10.0%
Tier 1 capital (to risk weighted
assets) $ 19,636 7.6% $ 23,905 9.2% 4.0% 6.0%
Tier 1 capital (to average
assets) $ 19,636 6.7% $ 23,905 7.0% 3.0% 5.0%
As of December 31, 2001
Total capital (to risk weighted
assets) $ 19,054 9.9% $ 19,631 10.2% 8.0% 10.0%
Tier 1 capital (to risk weighted
assets) $ 16,943 8.8% $ 17,520 9.1% 4.0% 6.0%
Tier 1 capital ( to average
assets) $ 16,943 7.3% $ 17,520 7.6% 3.0% 5.0%
* Applies to Bank only
Bank and holding company regulations, as well as Maryland law, impose certain
restrictions on dividend payments by the Bank, as well as restricting extensions
of credit and transfers of assets between the Bank and the Company. At December
31, 2002, the Bank was limited from paying dividends to its parent company by
the positive amount of retained earnings it held and the requirement to meet
certain capital ratios. In October 2002, and December 2001 the Bank paid
dividends of $200 thousand and $150 thousand, respectively, to the Company.
51
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
the disclosure of estimated fair values for financial instruments. Quoted market
prices, if available, are utilized as an estimate of the fair value of financial
instruments. Because no quoted market prices exist for a portion of the
Company's financial instruments, the fair value of such instruments has been
derived based on management's assumptions with respect to future economic
conditions, the amount and timing of future cash flows and estimated discount
rates. Different assumptions could significantly affect these estimates.
Accordingly, the net realizable value could be materially different from the
estimates presented below. In addition, the estimates are only indicative of
individual financial istruments' values and should not be considered an
indication of the fair value of the Company taken as a whole.
Cash and federal funds sold: For cash and due from banks, and federal funds sold
the carrying amount approximates fair value.
Investment securities: For these instruments, fair values are based on published
market or dealer quotes.
Loans net of unearned interest: For variable rate loans that reprice on a
scheduled basis, fair values are based on carrying values.
The fair value of the remaining loans are estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining term.
Noninterest bearing deposits: The fair value of these deposits is the amount
payable on demand at the reporting date.
Interest bearing deposits: The fair value of interest bearing transaction,
savings, and money market deposits with no defined maturity is the amount
payable on demand at the reporting date. The fair value of certificates of
deposit is estimated by discounting the future cash flows using the current
rates at which similar deposits would be accepted.
Customer repurchase agreements and other borrowings: The carrying amount for
variable rate borrowings approximate the fair values at the reporting date. All
of the Company's borrowings are on a variable rate basis.
Off-balance sheet items: Management has reviewed the unfunded portion of
commitments to extend credit, as well as standby and other letters of credit,
and has determined that the fair value of such instruments is not material.
The estimated fair values of the Company's financial instruments at December 31,
2002 and 2001 are as follows:
2002 2001
Carrying Fair Carrying Fair
(dollars in thousands) Value Value Value Value
----- ----- ----- -----
ASSETS:
Cash and due from banks $ 18,569 $ 18,569 $ 6,483 $ 6,483
Interest bearing deposits with other banks 6,119 6,322 161 163
Federal funds sold 3,012 3,012 -- --
Investment securities 70,082 70,675 39,154 39,439
Loans, net* 239,640 242,287 185,818 185,818
LIABILITIES:
Noninterest bearing deposits 64,432 64,432 37,235 37,235
Interest bearing deposits 214,002 214,735 158,453 158,787
Borrowings 47,987 48,526 23,127 23,806
* Includes loans held for sale
52
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table reports the unaudited results of operations for each quarter
during 2002, 2001 and 2000:
2002
Fourth Third Second First
quarter quarter quarter quarter
------- ------- ------- -------
Total interest income $ 4,537 $ 4,405 $ 4,030 $ 3,689
Total interest expense 1,294 1,362 1,258 1,256
Net interest income 3,243 3,043 2,772 2,433
Provision for credit losses 168 182 213 280
Net interest income
after provision for credit losses 3,075 2,861 2,559 2,153
Noninterest income 744 689 428 299
Noninterest expense 2,363 2,177 2,150 1,893
Net income before income
tax expenses 1,456 1,373 837 559
Income tax expense 534 525 309 190
Net income 922 848 528 369
Income per share
Basic $ 0.32 $ 0.29 $ 0.18 $ 0.13
Diluted 0.30 0.27 0.17 0.12
2001
Fourth Third Second First
quarter quarter quarter quarter
------- ------- ------- -------
Total interest income $ 3,695 $ 3,644 $ 3,492 $ 3,290
Total interest expense 1,350 1,536 1,603 1,509
Net interest income 2,345 2,108 1,889 1,781
Provision for credit losses 436 288 158 97
Net interest income
after provision for credit losses 1,909 1,820 1,731 1,684
Noninterest income 357 209 576 182
Noninterest expense 1,786 1,694 1,581 1,384
Net income before income tax 480 335 726 482
expenses
Income tax expense (benefit) 163 115 (9) --
Net income 317 220 735 482
Income per share
Basic $ 0.11 $ 0.08 $ 0.25 $ 0.17
Diluted 0.10 0.07 0.24 0.17
53
2000
Fourth Third Second First
quarter quarter quarter quarter
------- ------- ------- -------
Total interest income $ 3,166 $ 2,748 $ 2,488 $ 2,099
Total interest expense 1,442 1,220 1,031 857
Net interest income 1,724 1,528 1,457 1,242
Provision for credit losses 249 104 105 123
Net interest income
after provision for credit losses 1,475 1,424 1,352 1,119
Noninterest income 101 122 52 75
Noninterest expense 1,314 1,159 1,124 1,067
Net income before income tax expense 262 387 280 127
Income tax expense -- -- -- --
Net income 262 387 280 127
Income per share (basic
and diluted) $ 0.08 $ 0.14 $ 0.10 $ 0.04
17. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Eagle Bancorp, Inc. (Parent Company only)
is as follows:
CONDENSED BALANCE SHEETS
December 31, 2002, and 2001
ASSETS: 2002 2001
------------------ ------------------
Cash $ 47 $ 15
Investment securities available for sale 225 1,040
Investment in subsidiary 24,329 17,695
Other assets 33 70
------------------ ------------------
TOTAL ASSETS $ 24,634 $ 18,820
================== ==================
LIABILITIES:
Accounts payable $ 6 $ 13
Short-term borrowings 4,600 --
Long-term borrowings -- 1,675
------------------ ------------------
Total liabilities 4,606 1,688
------------------ ------------------
STOCKHOLDERS' EQUITY:
Common stock 29 29
Additional paid in capital 16,541 16,515
Retained earnings 3,066 399
Accumulated other comprehensive income 392 189
------------------ ------------------
Total stockholders' equity 20,028 17,132
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 24,634 $ 18,820
================== ==================
54
CONDENSED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2002, 2001, and 2000
2002 2001 2000
---- ---- ----
INCOME
EagleBank dividends $ 200 $ 150 $ --
Interest and dividends 41 61 169
Loss on sale of investment securities -- (11) --
--------------- ------------------- -----------------
Total income 241 200 169
EXPENSES:
Salaries and employee benefits 39 27 20
Interest expense 126 32 7
Legal and professional 58 24 14
Directors' fees 14 12 24
Other 134 101 88
--------------- ------------------- -----------------
Total expenses 371 196 153
--------------- ------------------- -----------------
(LOSS) INCOME BEFORE INCOME TAX BENEFIT
AND EQUITY IN UNDISTRIBUTED INCOME OF
SUBSIDIARY (130) 4 16
INCOME TAX BENEFIT (112) (5) --
--------------- ------------------- -----------------
(LOSS) INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARY (18) 9 16
EQUITY IN UNDISTRIBUTED INCOME
OF SUBSIDIARY 2,685 1,745 1,042
--------------- ------------------- -----------------
NET INCOME $ 2,667 $ 1,754 $ 1,058
=============== =================== =================
55
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
-------------- ----------------- ----------------
NET INCOME $ 2,667 $ 1,754 $ 1,058
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH (USED) PROVIDED BY OPERATING ACTIVITIES:
Loss (gain) on sale of assets -- 11 (4)
Equity in undistributed (income) loss of subsidiary (2,685) (1,745) (1,042)
Decrease (increase) in other assets 26
37 (47)
(Decrease) increase in accounts payable (7) 5 2
-------------- ----------------- ----------------
Net cash provided (used) by operating activities 12 (22) 40
-------------- ----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in loans -- 535 (73)
Purchase of available for sale investment securities -- (69)
--
Proceeds from maturity of available for sale investment 769 58 3,239
securities
Investment in subsidiary (3,700) (1,700) (3,750)
-------------- ----------------- ----------------
Net cash used in investing activities (2,931) (1,176) (584)
-------------- ----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 26 44 --
Short term borrowings 2,925 1,135 265
-------------- ----------------- ----------------
Net cash provided by financing activities 2,951 1,179 265
-------------- ----------------- ----------------
NET INCREASE (DECREASE) IN CASH 32 (19) (279)
CASH AT BEGINNING OF PERIOD 15 34 313
-------------- ----------------- ----------------
CASH AT END OF PERIOD $ 47 $ 15 $ 34
============== ================= ================
56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated by reference to,
the material appearing under the captions "Election of Directors", "Executive
Officers who are Not Directors" and "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in the Company's definitive proxy statement for
the Annual Meeting of Shareholders to be held on May 20, 2003.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to
the material appearing under the captions "Election of Directors - Director's
Compensation" ; "- Executive Compensation" and "- Report of the Compensation
Committee" and "Stock Performance Comparison" in the Company's definitive proxy
statement for the Annual Meeting of Shareholders to be held on May 20, 2003.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Securities Authorized for Issuance Under Equity Compensation Plans. The
following table sets forth information regarding outstanding options and other
rights to purchase common stock granted under the Company's compensation plans
as of December 31, 2002:
Equity Compensation Plan Information
Number of securities remaining
Plan category available for future issuance
Number of securities to be issued Weighted average exercise under equity compensation plans
upon exercise of outstanding price of outstanding options, (excluding securities reflected
options, warrants and rights warrants and rights in column (a)
--------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
Equity compensation plans
approved by security holders (1) 437,967 $6.85 130,778
Equity compensation plans not
approved by security holders 0 N/A 0
----------------------------------------------------------------------------------------------
Total 437,967 $6.85 130,778
(1) Consists of the Company's Stock Option Plan described further in Note 11 to
the consolidated financial statements, and under the caption in the proxy
materials for the Company's Annual Meeting of Shareholders to be held on
May 20, 2003, which is incorporated by reference herein. An employment
agreement of the Company, which has not individually been approved by
shareholders, and which is described in the proxy statement under the
caption "Executive Compensation - Employment Agreements" call for the
issuance of options to purchase common stock under the Company's Stock
Option Plan, which has been approved by shareholders.
The other information required by this Item is incorporated by
reference to the material appearing under the caption "Voting Securities and
Principal Shareholders" in the Company's definitive proxy statement for the
Annual Meeting of Shareholders to be held on May 20, 2003 .
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to,
the material appearing under the caption "- Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for the Annual Meeting
of Shareholders to be held on May 20, 2003.
57
ITEM 14. CONTROLS AND PROCEDURES.
Within the ninety days prior to the filing of this report, the
Company's management, under the supervision and with the participation of the
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness
of the design and operation of the Company's disclosure controls and procedures,
as defined in Rule 13a-14 under the Securities Exchange Act of 1934. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were adequate.
There were no significant changes (including corrective actions with regard to
significant deficiencies or material weaknesses) in the Company's internal
controls or in other factors subsequent to the date of the evaluation that would
significantly affect those controls.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
Consolidated Balance Sheets at December 31, 2002 and 2001
Consolidated Statements of Income for the years ended December
31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows
for the years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 2002, 2001 and 2000 Notes to the
Consolidated Financial Statements Report of Independent
Auditors
(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is either inapplicable or included in the consolidated
financial statements or related notes.
(3) Exhibits
Exhibit No. Description of Exhibit
3(a) Certificate of Incorporation of the Company, as amended (1)
3(b) Bylaws of the Company (2)
10.1 1998 Stock Option Plan (3)
10.2 Employment Agreement between H.L. Ward and the Company and Bank (4)
10.3 Employment Agreement between Thomas D. Murphy and the Bank (4)
10.4 Employment Agreement between Ronald D. Paul and the Company (4)
10.5 Consulting Agreement between Leonard L. Abel and the Company (4)
10.6 Employment Agreement between Susan G. Riel and the Bank (4)
10.7 Employment Agreement between Martha F. Tonat and the Bank(1)
11 Statement Regarding Computation of Per Share Income
Please refer to Note 9 to the consolidated financial statements for the
year ended December 31, 2002.
21 Subsidiaries of the Registrant
The sole subsidiary of the Registrant is EagleBank, a Maryland
chartered commercial bank.
23 Consent of Stegman and Company
-----------------------------
(1) Incorporated by reference to the exhibit of the same number to the
Company's Quarterly Report on Form 10-QSB for the period ended
September 30, 2002.
(2) Incorporated by reference to Exhibit 3(b) to the Company's Registration
Statement on Form SB-2, dated December 12, 1997.
(3) Incorporated by reference to Exhibit 10.1 to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1998.
(4) Incorporated by reference to the exhibit of the same number in the
Company's Annual Report on Form 10-KSB for the year ended December 31,
2000.
58
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed in the fourth quarter of 2002.
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EAGLE BANCORP, INC.
March 27, 2003 By: /s/ Ronald D. Paul
----------------------------------------
Ronald D. Paul, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME POSITION DATE
/s/ Leonard L. Abel
----------------------------- Chairman of the Board of Directors March 27, 2003
Leonard L. Abel
/s/ Dudley C. Dworken
----------------------------- Director March 27, 2003
Dudley C. Dworken
/s/ Eugene F. Ford, Sr.
----------------------------- Director March 27, 2003
Eugene F. Ford, Sr.
/s/ Ronald D. Paul President and Director March 27, 2003
----------------------------- Principal Executive Officer
Ronald D. Paul
/s/ H.L. Ward Executive Vice President and Director March 27, 2003
----------------------------- of the Company, President of the Bank
H.L. Ward
/s/ Wilmer L. Tinley Executive Vice President of the Bank, March 27, 2003
----------------------------- Chief Financial Officer of the Company
Wilmer L. Tinley Principal Financial and Accounting Officer
60
CERTIFICATION
I, Ronald D. Paul , certify that:
1. I have reviewed this annual report on Form 10-K of Eagle Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 27, 2003 /s/ Ronald D. Paul
------------------------------------
President and Chief Executive Officer
CERTIFICATION
I, Wilmer L. Tinley, certify that:
1. I have reviewed this annual report on Form 10-K of Eagle Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 27, 2003 /s/ Wilmer L. Tinley
-----------------------
Chief Financial Officer
Appendix 2
Eagle Bancorp, Inc.
Quarterly Report on Form 10-Q
for the quarter ended
March 31, 2003
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------ ---------------------
Commission File Number 0-25923
EAGLE BANCORP, INC
(Exact name of registrant as specified in its charter)
Maryland 52-2061461
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7815 Woodmont Avenue, Bethesda, Maryland 20814
(Address of principal executive offices) (Zip Code)
(301) 986-1800
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ( x ) No ( )
------- -------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act Yes ( ) No ( x )
------- -------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
As of April 28, 2003, the registrant had 2,903,374 shares of Common
Stock outstanding.
Item 1 - Financial Statements
EAGLE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND DECEMBER 31, 2002
(dollars in thousands)
ASSETS
March 31,
2003 December 31,
(unaudited) 2002
----------- ------------
Cash and due from banks $ 16,419 $ 18,569
Interest bearing deposits with other
banks 5,825 6,119
Federal funds sold 10,100 3,012
Investment securities available for sale 67,040 70,675
Loans held for sale 3,597 5,546
Loans 239,551 236,860
Less: allowance of credit losses (2,861) (2,766)
--------- ---------
Loans, net 236,690 234,094
Premises and equipment, net 4,013 3,601
Deferred income taxes 570 464
Other assets 6,116 5,749
--------- ---------
TOTAL ASSETS $ 350,370 $ 347,829
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 65,289 $ 64,432
Interest-bearing transaction 39,227 39,968
Savings and money market 96,268 92,324
Time, $100,000 or more 46,826 46,989
Other time 31,299 34,721
--------- ---------
Total deposits 278,909 278,434
Customer repurchase agreements 24,949 25,054
Other short-term borrowings 10,925 8,600
Other long-term borrowings 13,333 14,333
Other liabilities 1,388 1,380
--------- ---------
Total liabilities 329,504 327,801
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 20,000,000
authorized, 2,897,894 (2003) 2,897,704 (2002)
issued and outstanding 29 29
Additional paid in capital 16,569 16,541
Retained earnings 4,049 3,066
Accumulated other comprehensive income 219 392
--------- ---------
Total stockholders' equity 20,866 20,028
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 350,370 $ 347,829
========= =========
See notes to consolidated financial statements
2
EAGLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(dollars in thousands, except per share amounts - unaudited)
Three Months Three Months
Ended Ended
March 31, March 31,
2003 2002
------------ ------------
INTEREST INCOME:
Interest and fees on loans $3,864 $3,290
Taxable interest and dividends on
investment securities 549 375
Interest on balances with other banks 40 2
Interest on federal funds sold 13 22
------ ------
Total interest income 4,466 3,689
------ ------
INTEREST EXPENSE:
Interest on deposits 841 1,105
Interest on customer repurchase
agreements 28 48
Interest on short-term borrowings 82 19
Interest on long-term borrowings 124 84
------ ------
Total interest expense 1,075 1,256
------ ------
NET INTEREST INCOME 3,391 2,433
PROVISION FOR CREDIT LOSSES 224 280
------ ------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 3,167 2,153
------ ------
NONINTEREST INCOME:
Service charges on deposit accounts 272 176
Gain on sale of loans 248 41
Gain on sale of investment securities 192 --
Other income 161 82
------ ------
Total noninterest income 873 299
------ ------
NONINTEREST EXPENSES:
Salaries and employee benefits 1,346 1,010
Premises and equipment expense 423 378
Advertising 62 38
Outside data processing 135 105
Other expenses 499 362
------ ------
Total noninterest expenses 2,465 1,893
------ ------
NET INCOME BEFORE INCOME TAX EXPENSE 1,575 559
INCOME TAX EXPENSE 592 190
------ ------
NET INCOME $ 983 $ 369
====== ======
NET INCOME PER SHARE:
Basic $ 0.34 $ 0.13
Diluted $ 0.32 $ 0.12
See notes to consolidated financial statements
3
EAGLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 and 2002
(dollars in thousands-unaudited)
Three Months Three Months
Ended Ended
March 31, March 31,
CASH FLOWS FROM OPERATING ACTIVITIES: 2003 2002
Net income $ 983 $ 369
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in deferred income taxes 106 91
Provision for credit losses 224 280
Depreciation and amortization 145 118
Gain on sale of loans (248) (41)
Origination of loans held for sale (7,646) (708)
Proceeds from sale of loans held for sale 9,843 749
Gain on sale of investment securities (192) --
Increase in other assets (367) (295)
Increase in other liabilities 8 436
-------- --------
Net cash provided by operating activities 2,856 999
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in interest bearing deposits with other banks 294 31
Purchases of available for sale investment securities (36,141) (61,392)
Proceeds from maturities of available for sale securities 31,529 53,654
Proceeds from sale of available for sale securities 8,078 --
Increase in federal funds sold (7,088) --
Net increase in loans (2,844) (9,575)
Bank premises and equipment acquired (557) (423)
-------- --------
Net cash used by investing activities (6,729) (17,705)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits 475 22,477
(Decrease) increase in customer repurchase agreements (105) 1,781
Increase in other short term borrowings 2,325 2,305
Decrease in long-term borrowings (1,000) (1,675)
Issuance of common stock 28 --
-------- --------
Net cash provided by financingactivities 1,723 24,888
-------- --------
NET (DECREASE) INCREASE IN CASH (2,150) 8,182
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 18,569 6,483
-------- --------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 16,419 $ 14,665
======== ========
See notes to consolidated financial statements
4
EAGLE BANCORP, INC
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE THREE MONTHS
ENDED MARCH 31, 2003 AND 2002
(dollars in thousands - unaudited)
Accumulated
Additional Other Total
Common Paid in Retained Comprehensive Stockholders
Stock Capital Earnings Income Equity
----------------------------------------------------------------------
Balances at January 1, 2002 $ 29 $ 16,515 $ 399 $ 189 $ 17,132
Net income 369 369
Other comprehensive income-
unrealized loss on investment
securities available for sale (179) (179)
--------
Total comprehensive income 190
---------------------------------------------------------------------
Balances at March 31, 2002 $ 29 $ 16,515 $ 768 $ 10 $ 17,322
---------------------------------------------------------------------
Balances at January 1, 2003 $ 29 $ 16,541 $ 3,066 $ 392 $ 20,028
Net income 983 983
Exercise of options for 2,770 shares
of common stock 28 28
Other comprehensive income-unrealized
loss on investment securities
available for sale (173) (173)
--------
Total comprehensive income 838
--------------------------------------------------------------------
Balances at March 31, 2003 $ 29 $ 16,569 $ 4,049 $ 219 $ 20,866
====================================================================
5
EAGLE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
General - The financial statements of Eagle Bancorp, Inc. (the "Company")
included herein are unaudited; however, they reflect all adjustments
consisting only of normal recurring accruals that, in the opinion of
Management, are necessary to present fairly the results for the periods
presented. The amounts as of December 31, 2002 were derived from audited
financial statements. Certain information and note disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. There have been no significant changes
to the Company's Accounting Policies as disclosed in the 2002 Annual
Report. The Company believes that the disclosures are adequate to make the
information presented not misleading. The results of operations for the
three months ended March 31, 2003 are not necessarily indicative of the
results of operations to be expected for the remainder of the year, or for
any other period.
2. NATURE OF BUSINESS
The Company, through its bank subsidiary, provides domestic financial
services primarily in Montgomery County, Maryland and Washington, DC. The
primary financial services include real estate, commercial and consumer
lending, as well as traditional demand deposits and savings products.
3. INVESTMENT SECURITIES
Amortized cost and estimated fair value of securities available - for -
sale are summarized as follows: (in thousands)
March 31, 2003
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
U. S. Treasury securities $ 22,486 $ -- $ -- $ 22,486
U. S. Government Agency securities 8,993 72 -- 9,065
GNMA mortgage backed securities 33,391 327 (13) 33,705
Federal Reserve Bank and
Federal Home Loan Bank stock 1,564 -- -- 1,564
Other equity investments 275 -- (55) 220
-------- -------- -------- --------
$ 66,709 $ 399 $ (68) $ 67,040
======== ======== ======== ========
December 31, 2002
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
U. S. Treasury securities $ 5,501 $ 3 $ -- $ 5,504
U. S. Government Agency securities 19,961 153 (7) 20,114
GNMA mortgage backed securities 42,782 493 43,268
Federal Reserve Bank and
Federal Home Loan Bank stock 1,564 -- -- 1,564
Other equity investments 274 -- (49) 225
-------- -------- -------- --------
$ 70,082 $ 649 $ (56) $ 70,675
======== ======== ======== ========
6
4. INCOME TAXES
The Company uses the liability method of accounting for income taxes as
required by SFAS No. 109, "Accounting for Income Taxes." Under the
liability method, deferred-tax assets and liabilities are determined based
on differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities (i.e., temporary differences) and
are measured at the enacted rates that will be in effect when these
differences reverse.
5. EARNINGS PER SHARE
Earnings per common share are computed by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted net income per common share is computed by dividing net income by
the weighted average number of common shares outstanding during the period,
including any potential dilutive common shares outstanding, such as options
and warrants. As of March 31, 2003 there were 2,788 shares excluded from
the diluted net income per share computation because the option price
exceeded the average market price and therefore, their effect would be
anti-dilutive.
6. STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation" and SFAS No. 148 "Accounting for
Stock-Based Compensation-Transition and Disclosure", but applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its Plan. No compensation expense related to the Plan was recorded during the
three months ended March 31, 2003 and 2002. If the Company had elected to
recognize compensation cost based on fair value at the grant dates for awards
under the Plan consistent with the method prescribed by SFAS No. 123, net income
and earnings per share would have been changed to the pro forma amounts as
follows for the three months ended March 31.
2003 2002
------- -------
Net income, as reported $ 983 $ 396
Less pro forma stock-based compensation
expense determined under the fair value
method, net of related tax effects (6) (6)
------- -------
Pro forma net income $ 977 $ 363
------- -------
Net income per share:
Basic - as reported $ 0.34 $ 0.13
Basic - pro forma $ 0.34 $ 0.13
Diluted - as reported $ 0.32 $ 0.12
Diluted - pro forma $ 0.31 $ 0.12
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION.
The following discussion provides information about the results of
operations, and financial condition, liquidity, and capital resources of the
Company and its subsidiary the Bank. This discussion and analysis should be read
in conjunction with the unaudited Consolidated Financial Statements and Notes
thereto, appearing elsewhere in this report.
This report contains forward looking statements within the meaning of
the Securities Exchange Act of 1934, as amended, including statements of goals,
intentions, and expectations as to future trends, plans, events or results of
Company operations and policies and regarding general economic conditions. In
some cases, forward looking statements can be identified by use of such words as
"may", "will", "anticipate", "believes", "expects", "plans", "estimates",
"potential", "continue", "should", and similar words or phases. These statements
are based upon current and anticipated economic conditions, nationally and in
the Company's market, interest rates and interest rate policy, competitive
factors and other conditions which, by their nature, are not susceptible to
accurate forecast, and are subject to significant uncertainty. Because of these
uncertainties and the assumptions on which this discussion and the forward
looking statements are based, actual future operations and results in the future
may differ materially from those indicated herein. Readers are cautioned against
placing undue reliance on any such forward looking statements. The Company does
not undertake to update any forward looking statements to reflect occurrences or
events which may not have been anticipated as of the date of such statements.
GENERAL
Eagle Bancorp, Inc. is a growing, one-bank holding company
headquartered in Bethesda, Maryland. We provide general commercial and consumer
banking services through our wholly owned banking subsidiary EagleBank, a
Maryland chartered bank which is a member of the Federal Reserve System. We were
organized in October 1997 to be the holding company for the Bank. The Bank, our
only subsidiary, was organized as an independent, community oriented,
full-service alternative to the super regional financial institutions, which
dominate our primary market area. The cornerstone of our philosophy is to
provide superior, personalized service to our customers. We focus on
relationship banking, providing each customer with a number of services,
becoming familiar with and addressing customer needs in a proactive,
personalized fashion. The Bank has five offices serving the southern portion of
Montgomery County and one office in the District of Columbia.
The Company offers full commercial banking services to our business and
professional clients as well as complete consumer banking services to
individuals living and/or working in the service area. We emphasize providing
commercial banking services to sole proprietors, small and medium-sized
businesses, partnerships, corporations, non-profit organizations and
associations, and investors living and working in and near our primary service
area. A full range of retail banking services are offered to accommodate the
individual needs of both corporate customers as well as the community we serve.
These services include the usual deposit functions of commercial banks,
including business and personal checking accounts, "NOW" accounts and savings
accounts, business, construction, and commercial loans, equipment leasing,
residential mortgages and consumer loans and cash management services. We have
developed significant expertise and commitment as an SBA lender, have been
designated a Preferred Lender, and are one of the largest SBA lenders, in dollar
volume, in the Washington Metropolitan area.
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") and follow general practices within the industry in which it
operates. Application of these principles requires management to make estimates,
assumptions, and judgments that affect the amounts reported in the financial
statements and accompanying notes. These estimates, assumptions and judgments
are based on information available as of the date of the financial statements;
accordingly, as this information changes, the financial statements could reflect
different estimates, assumptions, and judgments. Certain policies inherently
have a greater reliance on the use of estimates, assumptions and judgments and
as such have a greater possibility of producing results that could be materially
different than originally reported. Estimates, assumptions, and judgments are
necessary when assets and liabilities are required to be recorded at fair value,
when a decline in the value of an asset not carried on the financial statements
at fair value warrants an impairment write-down or valuation reserve to be
established, or when an asset or liability needs to be recorded contingent upon
a future event. Carrying assets and liabilities at fair value inherently results
in more financial statement volatility. The fair values and the information used
to record valuation adjustments for certain assets and liabilities are based
either on quoted market prices or are provided by other third-party sources,
when available.
8
The allowance for credit losses is an estimate of the losses that may
be sustained in our loan portfolio. The allowance is based on two principles of
accounting: (a) Statement on Financial Accounting Standards ("SFAS") 5,
"Accounting for Contingencies", which requires that losses be accrued when they
are probable of occurring and are estimable and (b) SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan", which requires that losses be accrued when
it is probable that the Company will not collect all principal and interest
payments according to the contractual terms of the loan. The loss, if any, is
determined by the difference between the loan balance and the value of
collateral, the present value of expected future cash flows, or values
observable in the secondary markets.
Three basic components comprise our allowance for credit losses: a
specific allowance, a formula allowance and a nonspecific allowance. Each
component is determined based on estimates that can and do change when the
actual events occur. The specific allowance is used to individually allocate an
allowance to loans identified as impaired. An impaired loan may show
deficiencies in the borrower's overall financial condition, payment record,
support available from financial guarantors and/or the fair market value of
collateral. When a loan is identified as impaired a specific reserve is
established based on the Company's assessment of the loss that may be associated
with the individual loan. The formula allowance is used to estimate the loss on
internally risk rated loans, exclusive of those identified as impaired. Loans
identified as special mention, substandard, doubtful and loss, as well as
impaired, are segregated from performing loans. Remaining loans are then grouped
by type (commercial, commercial real estate, construction, home equity or
consumer). Each loan type is assigned an allowance factor based on management's
estimate of the risk, complexity and size of individual loans within a
particular category. Classified loans are assigned higher allowance factors than
non-rated loans due to management's concerns regarding collectibility or
management's knowledge of particular elements regarding the borrower. Allowance
factors grow with the worsening of the internal risk rating. The nonspecific
formula is used to estimate the loss of non-classified loans stemming from more
global factors such as delinquencies, loss history, trends in volume and terms
of loans, effects of changes in lending policy, the experience and depth of
management, national and local economic trends, concentrations of credit,
quality of loan review system and the effect of external factors such as
competition and regulatory requirements. The nonspecific allowance captures
losses whose impact on the portfolio have occurred but have yet to be recognized
in either the formula or specific allowance.
Management has significant discretion in making the judgments inherent
in the determination of the provision and allowance for credit losses, including
in connection with the valuation of collateral, a borrower's prospects of
repayment, and in establishing allowance factors on the formula allowance and
nonspecific allowance components of the allowance. The establishment of
allowance factors is a continuing exercise, based on management's continuing
assessment of the global factors discussed above and their impact on the
portfolio, and allowance factors may change from period to period, resulting in
an increase or decrease in the amount of the provision or allowance, based upon
the same volume and classification of loans. Changes in allowance factors will
have a direct impact on the amount of the provision, and a corresponding effect
on net income. Errors in management's perception and assessment of the global
factors and their impact on the portfolio could result in the allowance not
being adequate to cover losses in the portfolio, and may result in additional
provisions or charge-offs. For additional information regarding the allowance
for credit losses, refer to the discussion under the caption "Allowance for
Credit Losses" below.
RESULTS OF OPERATIONS
The Company reported net income of $983 thousand for the three months
ended March 31, 2003, as compared to income of $369 thousand for the three
months ended March 31, 2002. Income per basic share was $0.34 for the three
months ended March 31, 2003, as compared to $0.13 for the same period in 2002.
Income per diluted share was $0.32 for the three months end March 31, 2003, as
compared to $0.12 for the same period in 2002. The Company enjoyed a return on
average assets of 1.16% and return on average equity of 19.03% for the first
quarter of 2003, as compared to returns on average assets and average equity of
0.60% and 8.52% respectively for the first quarter of 2002.
The reported income for the three months ended March 31, 2003,
represents an increase in earnings of 166% from the corresponding period in
2002, $983 thousand from $369 thousand. The strong results, when compared to the
same quarter in 2002, can be attributed to an increase of 39% in net interest
income, reflecting both increases in volume of earning assets and net interest
margin, $2.4 million to $3.4 million, and increase of $207 thousand in the gain
on sale of loans and a gain on the sale of investment securities of $192
thousand.
For the quarter ending March 31, 2003, the Company recorded a provision
for credit losses in the amount of $224 thousand. At March 31, 2003, the
allowance for credit losses was $2.86 million, as compared to $2.77 million at
December 31, 2002. The Company had net charge-offs of $129 thousand during the
first quarter of 2003 representing 0.2% of average loans on an annualized basis.
9
This compared to a provision for credit losses of $280 thousand for the first
quarter of 2002, and net charge-offs of $104 thousand for the same period,
representing 0.2% of average loans on an annualized basis.
The following table sets out the annualized returns on average assets, returns
on average equity and equity to assets (average) for the three months ending
March 31, 2003 and 2002 and the year ending December 31, 2002:
March December March
2003 2002 2002
----- -------- -------
Return on asset 1.16% 0.60% 0.91%
Return on equity 19.14% 8.52% 14.51%
Equity to assets 6.08% 7.00% 6.28%
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income is the difference between interest income on
earning assets and the cost of funds supporting those assets. Earning assets are
composed primarily of loans and investment securities. The cost of funds
represents interest expense on deposits, customer repurchase agreements and
other borrowings. Noninterest bearing deposits and capital are other components
representing funding sources. Changes in the volume and mix of assets and
funding sources, along with the changes in yields earned and rates paid,
determine changes in net interest income. Net interest income for the first
quarter of 2003 was $3.4 million compared to $2.4 million for the first quarter
in 2002.
The table labeled "Average Balances, Interest Yields and Rates and Net
Interest Margin" presents the average balances and rates of the various
categories of the Company's assets and liabilities. Included in the table is a
measurement of interest rate spread and margin. Interest spread is the
difference between the rate earned on assets less the cost of funds expressed as
a percentage. While spread provides a quick comparison of earnings rates versus
cost of funds, management believes that margin provides a better measurement of
performance. Margin includes the effect of noninterest bearing liabilities in
its calculation and is net interest income expressed as a percentage of total
earning assets. Interest spread increased in the first quarter of 2003 from the
first quarter of 2002 by 34 basis points, 4.02% from 3.68%; and margin increased
15 basis points, 4.35% from 4.20%. The increase in both spread and margin, from
period to period, can be attributed to management's increased control over
interest expense as longer term, higher rate CDs originated in earlier periods
matured later in the year 2002 and were replaced with CDs paying lower rates in
effect at the time of renewal. Interest rates on other categories of interest
bearing deposits also declined more rapidly than yields on earning assets. From
the first quarter of 2002 to the first quarter of 2003 the yield on earning
assets declined 63 basis points while the average interest rate paid on interest
bearing liabilities declined 97 basis points.
The declines in both the yields on earning assets and interest bearing
liabilities from the first quarter of 2002 to the first quarter of 2003 reflect
the continued impact of the significant rate reductions effected by the Federal
Reserve in 2001 and continued into 2002 with the last rate reduction occurring
in November 2002. The effect of reductions in market rates continued through
2002 and is continuing into 2003. The investment portfolio yield declined from
2002 to 2003 by 50 basis points as the Bank maintained a portfolio of short term
fixed rate securities and GNMA pass through mortgage backed securities. The
yield on GNMA securities declined as mortgage refinancing accelerated, resulting
in earlier repayment of mortgage backed securities, and reinvestment of the
proceeds at lower current market rates. In order to keep the investment
portfolio short for liquidity and expectations that rates would start to move
upward, and to obtain better short term yields, the Bank invested $6 million in
interest bearing deposits with other banks in late 2002, yielding 2.67%, a
relatively attractive rate given their short term nature and low risk, as
compared to the rates offered on federal funds and U. S. Treasury bills.
The decline in the yield on the loan portfolio, while 48 basis points,
was less than the decline in the yield on other earning assets because
approximately 50% of the loan portfolio is composed of fixed rate loans. The
fixed rate loans stabilize the effects of rate reductions in repricable loans
thereby slowing the decline in the overall yield of the portfolio. Over time, of
course, market pressures and loan repayments and maturities will force the
portfolio yield down even when there may be no further market rate reductions.
On the liability side, management aggressively reduced rates on deposit
accounts. The reduction in the rate on total interest bearing liabilities from
the first quarter of 2002 to the first quarter of 2003 was 97 basis points which
compares to a reduction of 63 basis points in the yield on earning assets over
the same period. The reduction in the rates paid by the Bank reduced the average
10
rate on the cost of funds below 2% in the latter part of 2002. The cost of funds
continued to decline into the first quarter of 2003 as management further
reduced rates following the Federal Reserve's November rate reduction and as a
result of continued repricing of maturing certificates of deposit.
It is anticipated that any further reductions in interest rates will
have a significant adverse effect on earnings as rates paid on interest bearing
liabilities, which are as low as 0.25% on NOW accounts, cannot continue to
decline at the same rate as yields on loans and investments.
AVERAGE BALANCES, INTEREST YIELDS, AND RATES, AND NET INTEREST MARGIN
THREE MONTHS ENDED MARCH 31,
2003 2002
----------------------------------- -----------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
ASSETS:
Interest earnings assets:
Interest bearing deposits with
other banks $ 6,101 $ 40 2.67% $ 139 $ 2 5.60%
Loans 241,805 3,864 6.48% 191,606 3,290 6.96%
Investment securities 62,395 549 3.52% 37,352 375 4.02%
Federal funds sold and other 4,542 13 1.17% 5,614 22 1.55%
-------- -------- -------- --------
Total interest earning assets 314,843 4,466 5.74% 234,542 3,689 6.37%
Total noninterest earning assets 25,732 15,200
Less: allowance for credit losses 2,852 2,207
-------- --------
Total noninterest earning assets 22,880 12,993
-------- --------
TOTAL ASSETS $337,723 $247,565
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest bearing liabilities:
NOW accounts $ 36,018 24 0.27% 25,295 20 0.32%
Savings and money market accounts 95,334 308 1.31% 68,011 353 2.10%
Certificates of deposit 78,231 509 2.63% 74,061 732 4.00%
Customer repurchase agreements 20,577 28 0.55% 12,384 48 1.57%
Short-term borrowing 6,513 60 3.77% -- -- -
Long-term borrowing 16,922 146 3.49% 9,902 103 4.29%
-------- -------- -------- --------
Total interest bearing liabilities 253,595 1,075 1.72% 189,652 1,256 2.69%
-------- -------- -------- --------
Noninterest bearing liabilities:
Noninterest bearing deposits 62,083 39,498
Other liabilities 1,503 1,081
-------- --------
Total noninterest bearing liabilities 63,586 40,579
-------- --------
Stockholders' equity 20,542 17,334
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $337,723 $247,565
======== ========
Net interest income $ 3,391 $ 2,433
======== ========
Net interest spread 4.02% 3.68%
Net interest margin 4.35% 4.20%
11
ALLOWANCE FOR CREDIT LOSSES
The provision for credit losses represents the expense recognized to
fund the allowance for credit losses. The amount of the allowance for credit
losses is based on many factors which reflect management's assessment of the
risk in the loan portfolio. Those factors include economic conditions and
trends, the value and adequacy of collateral, volume and mix of the portfolio,
performance of the portfolio, and internal loan processes of the Company and
Bank.
Management has developed a comprehensive review process to monitor the
adequacy of the allowance for credit losses. The review process and guidelines
were developed utilizing guidance from federal banking regulatory agencies. The
results of this review process, in combination with conclusions of the Bank's
outside loan review consultant, support management's view as to the adequacy of
the allowance as of the balance sheet date. During the first quarter of 2003, a
provision for credit losses was made in the amount of $224 thousand before net
charge-offs of $129 thousand. Please refer to the discussion under the caption,
"Critical Accounting Policies" for an overview of the underlying methodology
management employs on a quarterly basis to maintain the allowance.
At March 31, 2003, the Company had one loan classified as nonaccrual in
the amount of $149 thousand of which $127 thousand was guaranteed by the SBA.
There was one loan past due over ninety days and still accruing interest at
March 31, 2003, in the amount of $5 thousand. Both of these loans are considered
impaired as defined by Statement of Financial Accounting Standards ("SFAS" No.
114). The Company also has one loan, in the amount of $605 thousand, which is
discussed in greater detail below.
As part of its comprehensive loan review process, the Bank's Board of
Director's Loan Committee and/or Board of Directors Credit Review Committee
carefully evaluates loans over thirty days past due and considers if such loans
should be classified as nonaccrual. The Committee(s) makes a thorough assessment
of the conditions and circumstances surrounding each past due loan. The Bank's
loan policy requires that loans be placed on nonaccrual if they are ninety days
past due, unless they are well secured and in the process of collection. After
reviewing the circumstances surrounding the $605 thousand loan, the Credit
Review Committee determined that it was appropriate to continue the accrual of
interest. The loan was extended to an automobile leasing company for the purpose
of funding individual leases. During 2002, the loan became delinquent, and
management worked with the borrower in efforts to return the loan to a current
status. During the third quarter of 2002, management discovered that payments on
the underlying leases were being diverted and not being used to service the loan
as required by the loan agreement. The Bank exercised its rights under the loan
agreement and instructed the lessees of the underlying leases to send all future
lease payments directly to the Bank under a lockbox arrangement. The diversion
of funds is believed to be the primary reason for the loan's delinquency.
Subsequently, the borrower declared bankruptcy, however, the trustee assigned in
the bankruptcy proceedings allowed the Bank to continue to collect payments
directly from the lessees.
In determining the accrual status of the loan, management and the
Credit Review Committee evaluated the expected cash flow of the leases, the
current underlying collateral value of the leases and the residual value of the
underlying vehicles at the end of the leases. This evaluation resulted in a
projected cash flow that was considered sufficient to amortize the net loan
balance including interest. As of March 31, 2003, a specific reserve of $150
thousand had been established and applied to the carrying value of the loan,
along with principal payments received during the quarter, reducing the balance
to $605 thousand.
The provision for credit losses of $224 thousand in the first quarter
of 2003 compared to a provision for credit losses of $280 thousand in the first
quarter of 2002. The lower provision in 2003 is attributable to the level of
growth in the loan portfolio from December 31, 2002 to March 31, 2003. The
amount of growth was $3 million, less than the Company has historically
experienced from quarter to quarter. The amount of the first quarter 2003
provision was affected by the level of net charge-offs experienced during the
quarter, as well as trends in delinquencies and changes in the relative risk
composition of the loan portfolio.
As the portfolio and allowance review process matures, there will be
changes to different elements of the allowance and this may have an effect on
the overall level of the allowance maintained. To date the Bank has enjoyed a
very high quality portfolio with minimal net charge offs and very low
delinquency. The maintenance of a high quality portfolio will continue to be
management's prime objective as it relates to the lending process and to the
allowance for credit losses.
12
Management, aware of the strong loan growth experienced by the Company
over its history and the problems which could develop in an unmonitored
environment, is intent on maintaining a strong credit review system and risk
rating process. In January 2003, the Company established a credit department to
perform interim analysis, manage classified credits and develop a credit scoring
system for small business credits. Over time, this department will increase its
review of credit analysis and processes. The Company is also reviewing its risk
rating systems and is exploring the implementation of additional analytical
procedures for risk ratings. The entire loan portfolio analysis process is an
ongoing and evolving practice directed at maintaining a portfolio of quality
credits and quickly identifying any weaknesses before they become irremediable.
The following table sets forth activity in the allowance for credit
losses for the periods indicated.
----------------------------------------------------------------
Three Months Ended
----------------------------------------------------------------
(dollars in thousands) March 31, Year Ended December 31,
----------------------------------------------------------------
2003 2002 2002 2001 2000
------- ------- ------- ------- -------
Balance at beginning of year $ 2,766 $ 2,111 $ 2,111 $ 1,142 $ 579
Charge-offs: -- -- -- -- --
Commercial (148) (104) (192) -- --
Real estate - commercial -- -- -- -- --
Construction -- -- -- -- --
Home equity -- -- -- -- --
Other consumer -- (18) (40) (23) (18)
------- ------- ------- ------- -------
Total (148) (122) (232) (23) (18)
------- ------- ------- ------- -------
Recoveries:
Commercial 19 -- 26 -- --
Real estate - commercial -- -- -- -- --
Construction -- -- -- -- --
Home equity -- -- -- -- --
Other consumer -- 18 18 13 --
------- ------- ------- ------- -------
Total 19 18 44 13 --
------- ------- ------- ------- -------
Net charge-offs (129) (104) (188) (10) (18)
------- ------- ------- ------- -------
Additions charged to operations 224 280 843 979 581
------- ------- ------- ------- -------
Balance at end of period $ 2,861 $ 2,287 $ 2,766 $ 2,111 $ 1,142
======= ======= ======= ======= =======
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.01 % 0.01 % 0.09 % 0.01 % 0.02 %
------- ------- ------- ------- -------
The following table reflects the allocation of the allowance for credit
losses at the dates indicated. The allocation of the allowance to each category
is not necessarily indicative of future losses or charge-offs and does not
restrict the use of the allowance to absorb losses in any category.
(dollars in thousands) As of March 31, As of December 31,
-------------------------------------------
2003 2002
-------------------- --------------------
Amount Percent (1) Amount Percent (1)
------ ----------- ------ -----------
Commercial $1,047 26.8% $1,134 27.5 %
Real estate - commercial 977 49.4 862 48.5
Construction 249 9.7 231 9.8
Home equity 246 12.7 253 12.9
Other consumer 81 1.4 83 1.3
Unallocated 261 -- 203 --
------ ----- ------ ----
Total allowance for credit losses $2,861 100% $2,766 100%
====== ===== ====== ====
(1) Represents the percent of loans in category to gross loans
13
NON-PERFORMING ASSETS
The Company's non-performing assets, which are comprised of loans
delinquent 90 days or more, non-accrual loans, and other real estate owned,
totaled $759 thousand at March 31, 2003 compared to $22 thousand at March 31,
2002 and $965 thousand at December 31, 2002. The percentage of non-performing
assets to total assets was 0.20% at March 31, 2003, compared to no non
performing assets at March 31, 2002 and 0.28% at December 31, 2002.
Non-performing loans constituted all of the non-performing assets at
March 31, 2003, March 31, 2002 and December 31, 2002. Non-performing loans at
March 31, 2003 consist of loans in non-accrual status in the amount of $149
thousand and impaired loans of $610 thousand compared to no non-accrual loans
and loans past due over ninety days of $22 thousand at March 31, 2002.
The Company had no other real estate owned at either March 31, 2003 or
2002.
The following table shows the amounts of non-performing assets at the
dates indicated.
Three Months Ended Year Ended
(dollars in thousands) March 31, December 31,
------------------------------------------
2002 2001 2002
---- ---- ----
Nonaccrual Loans
Commercial $149 $ -- $147
Consumer -- -- --
Real estate -- -- --
Accrual loans-past due 90 days
Commercial 610 22 818
Consumer -- -- --
Real estate -- -- --
Restructured loans -- -- --
Real estate owned
---- ---- ----
Total non-performing assets $759 $ 22 $965
==== ==== ====
At March 31, 2003, there were no performing loans considered potential
problem loans, defined as loans which are not included in the past due,
nonaccrual or restructured categories, but for which known information about
possible credit problems causes management to be uncertain as to the ability of
the borrowers to comply with the present loan repayment terms.
NONINTEREST INCOME
Noninterest income primarily represents deposit account service charges
and fees, gains on the sale of loans, other noninterest loan fees, income from
bank owned life insurance ("BOLI") and other service fees. For the three months
ended March 31, 2003 noninterest income was $873 thousand which included $192
thousand in gains on the sale of investment securities. This compared to $299
thousand for the three months ended March 31, 2002 which included no gains on
the sale of investment securities. The Company has become a significant SBA
lender in its market area and during the quarter realized gains on the sale of
the insured portion of many of the loans it had originated. The Company has also
been active in the origination of mortgage loans, on a pre-sold basis, and the
historically low interest rate environment has made this a very active program.
These two sale activities contributed $248 thousand in the first quarter of 2003
compared to $41 thousand in the first quarter of 2002. The gains from sales of
both of these types of credits are considered a continuing and regular operating
income source for the Bank. However, the activity in our mortgage sales can be
reduced significantly if interest rates were to rise. Service charges on deposit
accounts increased to $272 thousand in the first quarter of 2003 compared to
$176 thousand in the first quarter of 2002. The increase of 54% is primarily
attributable to an increase in the number of deposit accounts over that period
and the low interest rate environment. As rates decline so do the earning
allowances (which are used to offset service charges) on demand deposit accounts
so that an account, with the same activity, which paid no service charge when
interest rates were high may currently be paying a charge because the earnings
allowance is insufficient to cover activity charges.
14
Other income increased 96% from $82 thousand in the first quarter of 2002 to
$161 thousand in the first quarter of 2003. The significant component
contributing to this increase was income from BOLI contracts of $55 thousand
compared to no BOLI related income in 2002.
NONINTEREST EXPENSE
Noninterest expense was $2.5 million for the quarter ended March 31, 2003
compared to $1.9 million for the quarter ended March 31, 2002. This represented
a 30% increase from period to period. Increases in noninterest expense primarily
relate to increases in the expense category salaries and employee benefits which
increased 33% from the first quarter of 2002 to the first quarter of 2003, $1.0
million to $1.3 million. During the first quarter of 2003, to accommodate the
growth experienced by the Bank in 2002 and accommodate the growth anticipated in
2003, a number of additions to staff were made in the lending and operations
(customer service) areas. Management felt that these additions and the
associated expenses were necessary to assure a continued growth pattern and
quality of service which characterized the Company since its inception.
FINANCIAL CONDITION
As of March 31, 2003, assets were $350 million and deposits were $278 million.
Assets grew from December 31, 2002, by $2.5 million and deposits by
approximately $500 thousand both below historical levels of growth experienced
by the Company. Management believes that weather conditions, local and national
economic conditions and international events did not provide an ideal
environment for business and contributed significantly to the relatively flat
growth in the quarter ending March 31, 2003.
Loans
Total loans, including loans held for sale, increased $742 thousand from
December 31, 2002 to March 31, 2003. During that period a number of loans were
paid off as borrowers found alternative financing at lower rates than the
Company felt it could justify given its internal pricing model and expectations
for future interest rate levels. The loans that paid off generally represented
transactional loans as opposed to relationship borrowings. Based on activity in
the final weeks of March 2003 and early April, loan demand appears to be
improving and while management cannot be certain, this activity may translate to
meaningful loan growth in the second quarter.
Loans, net of amortized deferred fees and costs, at March 31, 2003, March 31,
2002 and December 31, 2002 are summarized by type as follows:
March 31, Percent March 31, Percent December 31, Percent
2003 of Total 2002 of Total 2002 of Total
---------- -------- ---------- ---------- ---------- ---------
Commercial $ 64,254 26.8% $ 51,696 26.2% $ 64,869 27.5%
Real estate - commercial 118,239 49.4% 95,967 48.6% 114,961 48.5%
Construction 23,268 9.7% 18,632 9.4% 23,180 9.8%
Home equity 30,531 12.7% 26,878 13.6% 30,631 12.9%
Other consumer 3,259 1.4% 4,230 2.2% 3,219 1.3%
---------- ---- ---------- --- ---------- ----
Total loans 239,551 100% 197,403 100% 236,860 100%
Less: allowance for credit losses (2,861) (2,287) (2,766)
---------- ---------- ----------
Loans, net $ 236,690 $ 195,116 $ 234,094
========== ========== ==========
15
Deposits And Other Borrowings
The principal sources of funds for the Bank are core deposits,
consisting of demand deposits, NOW accounts, money market accounts, savings
accounts and relationship certificates of deposits, from the local market areas
surrounding the Bank's offices. The Bank also considers as part of its core
deposits approximately $16 million of deposits from a local customer with a
longstanding relationship with the Bank. These deposits are required to be
classified as brokered deposits for regulatory purposes. The Bank's deposit base
includes transaction accounts, time and savings accounts and accounts which
customers use for cash management and which provide the Bank with a source of
fee income and cross-marketing opportunities as well as a low-cost source of
funds. Time and savings accounts, including money market deposit accounts, also
provide a relatively stable and low-cost source of funding.
During the first quarter of 2003 deposit growth was below the levels
historically enjoyed by the Company. Deposit growth totaled $500 thousand for
the quarter, however, management noted some strength returning in the final
weeks of March 2003. The contributing factors to the moderate growth were
weather conditions, local and national economic conditions and international
events.
Approximately 28% of the Bank's deposits are made up of certificates of
deposits, which are generally the most expensive form of deposit because of
their fixed rate and term. Certificates of deposit in denominations of $100
thousand or more can be more volatile and more expensive than certificates of
less than $100 thousand. However, because the Bank focuses on relationship
banking and does not accept brokered certificates, its historical experience has
been that large certificates of deposit have not been more volatile or
significantly more expensive than smaller denomination certificates. It has been
the practice of the Bank to pay posted rates on its certificates of deposit
whether under or over $100 thousand. The Bank has paid negotiated rates for
deposits in excess of $500 thousand but the rates paid have rarely been more
than 25 to 50 basis points higher than posted rates and deposits also have been
negotiated at below market rates. In late 2000, to fund strong loan demand, the
Bank began accepting certificates of deposits, generally in denominations of
less than $100 thousand on a non brokered basis, from bank and credit union
subscribers to a wholesale deposit rate line. The Bank has found rates on these
deposits to be generally competitive with rates in our market given the speed
and minimal noninterest cost at which deposits can be acquired, although it is
possible for rates to significantly exceed local market rates it has not been
the experience of the Bank. At March 31, 2003 the Bank held $12.1 million of
these deposits at an average rate of 4.08% as compared to $21.7 million of these
deposits, at an average rate of 4.10% at March 31, 2002. With the strong core
deposit growth experienced by the Bank in 2002 these deposits are being allowed
to mature and may not be renewed. However, the Bank has found this source of
funds to be an effective funds management tool and may accept more of these
deposits in the future.
At March 31, 2003, the Company had approximately $65 million in
noninterest bearing demand deposits, representing an 23% of total deposits.
These are primarily business checking accounts on which the payment of interest
is prohibited by regulations of the Federal Reserve. Proposed legislation has
been introduced in each of the last several sessions of Congress which would
permit banks to pay interest on checking and demand deposit accounts established
by businesses. If legislation effectively permitting the payment of interest on
business demand deposits is enacted, of which there can be no assurance, it is
likely that we may be required to pay interest on some portion of our
noninterest bearing deposits in order to compete with other banks. Payment of
interest on these deposits could have a significant negative impact on our net
income, net interest income, interest margin, return on assets and equity, and
indices of financial performance.
As an enhancement to the basic noninterest bearing demand deposit
account, the Company offers a sweep account, "customer repurchase agreement",
allowing qualifying businesses to earn interest on short term excess funds which
are not suited for either a CD investment or a money market account. The
balances in these accounts were $25 million at March 31, 2003 essentially
unchanged from December 31, 2002. Customer repurchase agreements are not
deposits and are not FDIC insured but are secured by US Treasury and/or US
government agency securities. These accounts are particularly suitable to
businesses with significant change in the levels of cash flow over a very short
time frame often measured in days. Attorney and title company escrow accounts
are an example of accounts which can benefit from this product, as are customers
who may require collateral for deposits in excess of $100 thousand but do not
qualify for other pledging arrangements. This program requires the Company to
maintain a sufficient investment securities level to accommodate the
fluctuations in balances which may occur in these accounts.
16
At March 31, 2003, the Company had drawn $6.9 million against a line of
credit provided by a correspondent bank as compared to $4.6 million at December
31, 2002. The borrowings in the quarter ending March 31, 2003 were primarily to
fund loan participations with the Bank and a direct loan made by the Company.
Prior borrowings were principally to fund additions of capital to the Bank in
order to maintain its "well capitalized" ratio. At March 31, 2003, the Bank had
$17.3 million of FHLB short and long-term borrowings, as compared to $18.3
million at December 31, 2002. These advances are secured 50% by US government
agency securities and 50% by a blanket lien on qualifying loans in the Bank's
commercial mortgage loan portfolio.
LIQUIDITY MANAGEMENT
Liquidity is the measure of the Bank's ability to meet the demands
required for the funding of loans and to meet depositor requirements for use of
their funds. The Bank's sources of liquidity consist of cash balances, due from
banks, loan repayments, federal funds sold and short term investments. These
sources of liquidity are supplemented by the ability of the Company and Bank to
borrow funds. During 2002, the Company increased an established line of credit,
with a correspondent bank, from $5 million to $10 million, against which it had
drawn $6.9 million as of March 31, 2003. The Bank can purchase up to $11.6
million in federal funds on an unsecured basis and enter into reverse repurchase
agreements up to $10 million. At March 31, 2003, the Bank was also eligible to
take FHLB advances of up to $70 million, of which it had advances outstanding of
$17.3 million.
The loss of deposits, through disintermediation, is one of the greater
risks to liquidity. Disintermediation occurs most commonly when rates rise and
depositors withdraw deposits seeking higher rates than the Bank may offer. The
Bank was founded under a philosophy of relationship banking and, therefore,
believes that it has less of an exposure to disintermediation and resultant
liquidity concerns than do banks which build an asset base on non-core deposits
and other borrowings. The history of the Bank, while just under five years,
includes a period of rising interest rates and significant competition for
deposit dollars. During that period the Bank grew its core business without
sacrificing its interest margin in higher deposit rates for non-core deposits.
There is, however, a risk that some deposits would be lost if rates were to
spike up and the Bank elected not to meet the market. Under those conditions the
Bank believes that it is well positioned to use other liability management
instruments such as FHLB borrowing, reverse repurchase agreements and Bank lines
to offset a decline in deposits in the short run. Over the long term an
adjustment in assets and change in business emphasis could compensate for a loss
of deposits. Under these circumstances, further asset growth could be limited as
the Bank utilizes its liquidity sources to replace, rather than supplement, core
deposits.
Certificates of deposit acquired through the subscription service may
be more sensitive to rate changes and pose a greater risk of disintermediation
than deposits acquired in the local community. The Bank has limited the amount
of such deposits to less than 15% of total assets, an amount which it believes
it could replace with alternative liquidity sources, although there can be no
assurance of this.
The mature earning pattern of the Bank is also a liquidity management
resource for the Bank. The earnings of the Bank are now at a level that allows
the Bank to pay higher rates to retain deposits over a short period, while it
adjusts it asset base repricing to offset a higher cost of funds. The cost of
retaining business in the short run and the associated reduction in earnings can
be preferable to reducing deposit and asset levels and restricting growth.
At March 31, 2003, under the Bank's liquidity formula, it had $77
million of liquidity representing 21.9% of total Bank assets.
ASSET/LIABILITY MANAGEMENT AND QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK
A fundamental risk in banking, outside of credit risk, is exposure to
market risk, or interest rate risk, since a bank's net income is largely
dependent on net interest income. The Bank's Asset Liability Committee (ALCO) of
the Board of Directors formulates and monitors the management of interest rate
risk within policies established by it and the Board of Directors. In its
consideration of establishing guidelines for levels and/or limits on market
risk, the ALCO committee considers the impact on earnings and capital, the level
and direction of interest rates, liquidity, local economic conditions, outside
threats and other factors. Banking is generally a business of attempting to
match asset and liability components to produce a spread sufficient to provide
net income to the bank at nominal rate risk. The Company, through ALCO,
continually monitors the interest rate environment in which it operates and
adjusts rates and maturities of its assets and liabilities to meet the market
conditions. In the current low interest rate environment, the Company is keeping
its assets either variably priced or with short term maturities or short average
lives. At the same time it strives to attract longer term liabilities to lock in
the lower cost of funds. In the current market, due to competitive factors and
customer preferences, the effort to attract longer term fixed priced liabilities
has not been as successful as the Company's best case asset liability mix would
prefer. When interest rates begin to rise, the Company expects that it will seek
17
to keep asset maturities and repricing periods short until rates appear to be
nearing their peak and then extend maturities to extend the benefit of higher
rates. There can be no assurance that the Company will be able to successfully
carry out this intention, as a result of competitive pressures, customer
preferences and the inability to perfectly forecast future interest rates.
One of the tools used by the Company to manage its interest rate risk
is a static GAP analysis presented below. The Company also uses an earning
simulation model on a quarterly basis to closely monitor interest sensitivity
and to expose its balance sheet and income statement to different scenarios. The
model is based on current Company data and adjusted by assumptions as to growth
patterns, noninterest income and noninterest expense and interest rate
sensitivity, based on historical data, for both assets and liabilities. The
model is then subjected to a "shock test" assuming a sudden interest rate
increase of 200 basis points or a decrease of 200 basis points, but not below
zero. The results are measured by the effect on net income. The Company, in its
latest model, shows a positive effect on income when interest rates immediately
rise 200 basis points because of the short maturities of assets and a negative
impact if rates were to decline further. With rates already at historic lows, a
further reduction would reduce income on earning assets which could not be
offset by a corresponding reduction in the cost of funds.
The following table reflects the result of a "shock test" simulation on
the March 31, 2003, earning assets and interest bearing liabilities and the
change in net interest income resulting from the simulated immediate increase
and decrease in interest of 100 and 200 basis points. Also shown is the change
in the Market Value Portfolio Equity resulting from the simulation. The model as
presented is projected for one year.
Percentage change in
Change in interest Percentage change in net Percentage change in Market Value of
rates (basis points) interest income net income Portfolio Equity
-------------------- ------------------------ -------------------- ---------------------
+200 +12.9% +28.5% +15.5%
+100 + 6.5% +14.4% + 9.0%
0 -- -- --
-100 - 5.5% -12.2% -12.1%
-200 -19.7% -43.6% -22.5%
Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and liabilities may
have similar maturities or repricing periods, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate mortgage
loans, have features that restrict changes in interest rates on a short-term
basis and over the life of the loan. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels could deviate
significantly from those assumed in calculating the tables. Finally, the ability
of many borrowers to service their debt may decrease in the event of a
significant interest rate increase.
GAP
Banks and other financial institutions are dependent upon net interest
income, the difference between interest earned on interest earning assets and
interest paid on interest bearing liabilities. In falling interest rate
environments, net interest income is maximized with longer term, higher yielding
assets being funded by lower yielding short-term funds; however, when interest
rates trend upward this asset/liability structure can result in a significant
adverse impact on interest income. The current interest rate environment is
signaling steady to possibly higher rates. Management has for a number of months
shortened maturities in the Bank's investment portfolio and where possible also
has shorten repricing opportunities for new loan requests. While management
believes that this will help minimize interest rate risk in a rising
environment, there can be no assurance as to actual results.
GAP, a measure of the difference in volume between interest earning
assets and interest bearing liabilities, is a means of monitoring the
sensitivity of a financial institution to changes in interest rates. The chart
below provides an indicator of the rate sensitivity of the Company. A negative
GAP indicates the degree to which the volume of repriceable liabilities exceeds
repriceable assets in particular time periods. At March 31, 2003, the Bank has a
positive GAP of 20.7% out to three months and a cumulative negative GAP of 4.7%
out to twelve months.
18
If interest rates were to continue to decline, the Bank's interest
income and margin may be adversely effected. Because of the positive GAP measure
in the 0 - 3 month period, continued decline in the prime lending rate will
reduce income on repriceable assets within thirty to ninety days, while the
repricing of liabilities may occur over future time periods and there may not be
an ability to reduce the cost of interest bearing liabilities to fully offset
the reduction in short term interest rates. This will result in a decline in net
interest income and net income. Management has carefully considered its strategy
to maximize interest income by reviewing interest rate levels, economic
indicators and call features of some of its assets. These factors have been
thoroughly discussed with the Board of Directors Asset Liability Committee and
management believes that current strategies are appropriate to current economic
and interest rate trends. The negative GAP is carefully monitored and will be
adjusted as conditions change.
GAP ANALYSIS
(dollars in thousands)
0-3 4-12 13-36 37-60 Over 60
Repriceable in: Months Months Months Months Months Total
---------------------------------------------------------------------------------
ASSETS:
Investment securities $ 29,440 $ 9,381 $ 10,000 $ 11,500 $ 6,719 $ 67,040
Interest bearing deposits in
other banks 1,764 2,578 1,483 -- -- 5,825
Loans 97,825 19,116 45,159 63,413 17,635 243,148
Federal funds sold 10,100 -- -- -- -- 10,100
---------------------------------------------------------------------------------
Total repriceable assets 139,129 31,075 56,642 74,913 24,354 326,113
=================================================================================
LIABILITIES:
NOW accounts -- 19,613 3,923 15,691 -- 39,227
Savings and Money Market accounts 37,322 30,957 18,659 9,330 -- 92,268
Certificates of deposit 18,410 50,621 8,178 916 -- 78,125
Customer repurchase agreements
and federal funds purchased 7,973 9,701 2,425 4,850 -- 24,949
Other borrowing-short and long term 7,925 3,000 13,333 -- -- 24,258
---------------------------------------------------------------------------------
Total repriceable liabilities 71,630 113,892 46,518 30,787 -- 262,827
=================================================================================
GAP $ 67,499 $ (82,817) $ 10,124 $ 44,126 $ 24,502 $ 63,286
Cumulative GAP 67,499 (15,318) (5,194) 38,932 63,286
Interval gap/earnings assets 20.70% (25.40)% 3.10% 13.53% 7.53%
Cumulative gap/earning assets 20.70% (4.70)% (1.59)% 11.94% 19.25%
Although, NOW and MMA accounts are subject to immediate repricing, the
Bank's GAP model has incorporated a repricing schedule to account for the
historical lag in effecting rate changes and the amount of those rate changes
relative to the amount of rate change in assets.
CAPITAL RESOURCES AND ADEQUACY
The assessment of capital adequacy depends on a number of factors such
as asset quality, liquidity, earnings performance, changing competitive
conditions and economic forces, and the overall level of growth. The adequacy of
the Company's current and future capital needs is monitored by management on an
ongoing basis. Management seeks to maintain a capital structure that will assure
an adequate level of capital to support anticipated asset growth and to absorb
potential losses.
The capital position of the Company's wholly-owned subsidiary, the
Bank, continues to meet regulatory requirements. The primary indicators relied
on by bank regulators in measuring the capital position are the Tier 1
risk-based capital, total risk-based capital, and leverage ratios. Tier 1
capital consists of common and qualifying preferred stockholders' equity less
goodwill. Total risk-based capital consists of Tier 1 capital, qualifying
subordinated debt, and a portion of the allowance for credit losses. Risk-based
capital ratios are calculated with reference to risk-weighted assets. The
leverage ratio compares Tier1 capital to total average assets. At March 31,
2003, the Company's and Bank's capital ratios were in excess of the mandated
minimum requirements.
19
During the quarter ending March 31, 2003, the Company borrowed funds
under a line of credit with a correspondent bank in order to fund loan
participations with the Bank and a direct loan made by the Company. At March 31,
2003, the amount outstanding under the line of credit was $6.9 million. The
ability of the Company to continue to grow is dependent on its earnings and the
ability to obtain additional funds for contribution to the Bank's capital,
through additional borrowing, the sale of additional common stock, the sale of
preferred stock, or through the issuance of additional qualifying equity
equivalents, such as subordinated debt or trust preferred securities. The
Company has commenced an offering of up to 979,591 shares of its common stock at
an offering prince of $12.25 per share, for aggregate gross proceeds of
approximately $12 million. The number of shares offered may be increased to
1,142,457, for aggregate gross proceeds of $14 million. To the extent that the
Company is unsuccessful in raising additional equity, it will be required to
seek alternative sources, such as increased reliance on, or expansion of, its
line of credit or the issuance of trust preferred securities. Increased
borrowings or trust preferred securities will have an immediate interest cost,
which will have an adverse impact on earnings, although they may require a lower
internal rate of return on equity than common stock. To the extent that they are
floating or variable rate, the future cost of additional borrowings or trust
preferred securities may increase over time, while the cost of equity will
remain fixed.
In the event that the Company is unable to obtain additional capital
for the Bank on a timely basis, the growth of the Company and the Bank may be
curtailed, and the Company and the Bank may be required to reduce their level of
assets in order to maintain compliance with regulatory capital requirements.
Under those circumstances net income and the rate of growth of net income may be
adversely affected.
CAPITAL
The actual capital amounts and ratios for the Company and Bank as of March 31,
2002 and 2001 are presented in the table below:
To Be Well
For Capital Capitalized Under
In thousands Company Bank Adequacy Prompt Corrective
Actual Actual Purposes Action Provisions**
As of March 31, 2003 Amount Ratio Amount Ratio Ratio Ratio
------ ----- ------ ----- ----- -----
Total capital (to risk-weighted
assets) $23,727 9.2% $27,793 10.9% 8.0% 10.0%
Tier 1 capital (to risk-weighted
assets) $20,866 8.1% 24,953 9.8% 4.0% 6.0%
Tier 1 capital (to average assets) $20,866 6.2% 24,953 7.4% 3.0% 5.0%
As of March 31, 2002
Total capital (to risk-weighted
assets) $19,599 9.6% $20,813 10.2% 8.0% 10.0%
Tier 1 capital (to risk weighted
assets) $17,312 8.5% 18,526 9.0% 4.0% 6.0%
Tier 1 capital (to average assets) $17,312 7.9% 18,526 7.5% 3.0% 5.0%
** Applies to Bank only
Bank and holding company regulations, as well as Maryland law, impose certain
restrictions on dividend payments by the Bank, as well as restricting extension
of credit and transfers of assets between the Bank and the Company. At March 31,
2003, the Bank could pay dividends to the parent to the extent of its earnings
and so long as it maintained required capital ratios.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Please refer to Item 2 of this report, "Management's Discussion and
Analysis of Financial Condition and Results of Operations", under the caption
"Asset/Liability Management and Quantitative and Qualitative Disclosure About
Market Risk".
20
ITEM 4. CONTROLS AND PROCEDURES
Within the ninety days prior to the filing of this report, the Company's
management, under the supervision and with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness
of the operation of the Company's disclosure controls and procedures, as defined
in Rule 13a-14 under the Securities and Exchange Act of 1934. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were adequate. There were
no significant changes (including corrective actions with regard to significant
deficiencies or material weaknesses) in the Company's internal controls or in
other factors subsequent to the date of the evaluation that could significantly
affect those controls.
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
From time to time the Company may become involved in legal proceedings.
At the present time there are no proceedings which the Company believes will
have an adverse impact on the financial condition or earnings of the Company.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None
ITEM 5. OTHER INFORMATION None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
3(a) Certificate of Incorporation of the Company, as amended (1) 3(b) Bylaws of
the Company (2)
10.1 1998 Stock Option Plan (3)
10.2 Employment Agreement between H.L. Ward and the Company and Bank (4)
10.3 Employment Agreement between Thomas D. Murphy and the Bank (4)
10.4 Employment Agreement between Ronald D. Paul and the Company (4)
10.5 Consulting Agreement between Leonard L. Abel and the Company (4)
10.6 Employment Agreement between Susan G. Riel and the Bank (4)
10.7 Employment Agreement between Martha F. Tonat and the Bank(1)
11 Statement Regarding Computation of Per Share Income
Please refer to Note 9 to the consolidated financial statements for the
year ended December 31, 2002.
21 Subsidiaries of the Registrant
The sole subsidiary of the Registrant is EagleBank, a Maryland
chartered commercial bank.
99(a) Certification of Ronald D. Paul 99(b) Certification of Wilmer L. Tinley
-----------------------------
(1) Incorporated by reference to the exhibit of the same number to the
Company's Quarterly Report on Form 10-QSB for the period ended September
30, 2002.
(2) Incorporated by reference to Exhibit 3(b) to the Company's Registration
Statement on Form SB-2, dated December 12, 1997.
(3) Incorporated by reference to Exhibit 10.1 to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1998.
(4) Incorporated by reference to the exhibit of the same number in the
Company's Annual Report on Form 10-KSB for the year ended December 31,
2000.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
2003.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EAGLE BANCORP, INC.
Date: May 9, 2002 By: /s/ Ronald D. Paul
----------------------------------------
Ronald D. Paul, President
Date: May 9, 2002 By: /s/ Wilmer L. Tinley
----------------------------------------
Wilmer L. Tinley, Senior Vice President, CFO
22
CERTIFICATION
I, Ronald D. Paul , certify that:
1. I have reviewed this quarterly report on Form 10-Q of Eagle Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 9, 2003 /s/Ronald D. Paul
------------------
President and Chief Executive Officer
23
CERTIFICATION
I, Wilmer L. Tinley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Eagle Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 9, 2003 /s/ Wilmer L. Tinley
--------------------
Senior Vice President, Chief Financial Officer
24
[EAGLE BANCORP, INC. LOGO]
2,040,816 SHARES
$12.25 per share
COMMON STOCK
Prospectus
June 23, 2003
EAGLE BANCORP HAS NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION OR MAKE
ANY REPRESENTATION ABOUT THE OFFERING THAT DIFFERS FROM, OR ADDS TO, THE
INFORMATION IN THIS PROSPECTUS OR IN ITS DOCUMENTS THAT ARE PUBLICLY FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THEREFORE, IF ANYONE DOES GIVE YOU
DIFFERENT OR ADDITIONAL INFORMATION, YOU SHOULD NOT RELY ON IT. THE DELIVERY OF
THIS PROSPECTUS AND/OR THE SALE OF SHARES OF COMMON STOCK DO NOT MEAN THAT THERE
HAVE NOT BEEN ANY CHANGES IN EAGLE BANCORP'S CONDITION SINCE THE DATE OF THIS
PROSPECTUS. IF YOU ARE IN A JURISDICTION WHERE IT IS UNLAWFUL TO OFFER TO SELL,
OR TO ASK FOR OFFERS TO BUY, THE SECURITIES OFFERED BY THIS PROSPECTUS, OR IF
YOU ARE A PERSON TO WHOM IT IS UNLAWFUL TO DIRECT SUCH ACTIVITIES, THEN THE
OFFER PRESENTED BY THIS PROSPECTUS DOES NOT EXTEND TO YOU. THIS PROSPECTUS
SPEAKS ONLY AS OF ITS DATE EXCEPT WHERE IT INDICATES THAT ANOTHER DATE APPLIES.