-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Idq//YLyHszSbeDkk+V8iFkc01k/Ld6cGBy1f+W4RSbhkz3psmGFjYh9IEJQsFel x6m0803tQYx006FzrdmLjw== 0001005150-02-000477.txt : 20020415 0001005150-02-000477.hdr.sgml : 20020415 ACCESSION NUMBER: 0001005150-02-000477 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EAGLE BANCORP INC CENTRAL INDEX KEY: 0001050441 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 522061461 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-25923 FILM NUMBER: 02594402 BUSINESS ADDRESS: STREET 1: 7815 WOODMONT AVENUE CITY: BETHESDA STATE: MD ZIP: 20814 BUSINESS PHONE: 3019861800 MAIL ADDRESS: STREET 1: 7815 WOODMONT AVENUE CITY: BETHESDA STATE: MD ZIP: 20814 10KSB 1 form10ksb.txt FORM 10KSB U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-KSB X Annual report under Section 13 or 15(d) of the Securities Exchange ----- Act of 1934 For the fiscal year ended December 31, 2000 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. (Name of Small Business Issuer 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) Issuer's Telephone Number: (301) 986-1800 Securities registered under Section 12(b) of the Act: None Securities registered under Section 12(g) of the Act: Common Stock $.01 par value Check whether the Issuer; (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports; and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. The issuer's revenues for the fiscal year ended December 31, 2001 were approximately $15,445,000. The aggregate market value of the outstanding Common Stock held by nonaffiliates as of March 15, 2002 was approximately $37,361,000 As of March 15, 2002, the number of outstanding shares of the Common Stock, $1.00 par value, of Eagle Bancorp, Inc. was 2,895,124. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's Annual Report to Shareholders for the Year Ended December 31, 2001 are incorporated by reference in part II hereof. Portions of the Company's definitive Proxy Statement for the Annual Meeting of Shareholders, to be held on May 21, 2002 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. In June 1998, the Company completed its initial offering of shares of its common stock, $.01 par value ("Common Stock"), with the sale of 1,650,000 shares of Common Stock, the maximum number offered, at a price of $10.00 per share, for total proceeds of $16,500,000. After expenses of the offering, the Company received net proceeds of $16,399,587. The Company initially capitalized the Bank with $7,750,000 of the proceeds of the offering. 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. 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. 2 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 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. 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. 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 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. 3 EMPLOYEES At February 28, 2002 the Bank employed 62 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 855,000, represents the second largest suburban employment center in the Washington, D.C. area, with approximately 503,000 jobs in 1999, and an unemployment rate below the national average. While government employment provides a significant number of jobs, approximately 75% of the jobs in the county involve private employers. 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. 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 1998 was established at $$115,680 compared to a national average for similar counties of $67,090. Per capita income of $43,350 similarly exceeded the national average of $24,730. 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. 4 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 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. 5 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"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. 6 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. These requirements apply to the Bank and will apply to the Company (a bank holding company) once its total assets equal $150,000,000 or more, it engages in certain highly leveraged activities or it has publicly held debt securities. 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 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%. 7 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 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. 8 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 at a uniform rate of 0.23% of insured deposits. Certain studies by the FDIC and other agencies project that the BIF will fall below the required reserve ratio in 2002, which may result in the imposition of deposit premiums at the uniform rate in 2003, although there can be no assurance of this. 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 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. ITEM 3. LEGAL PROCEEDINGS. At December 31, 2001, the Company was not involved in any legal proceedings. 9 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, 2001. PART II ITEM 5. MARKET FOR 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. 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 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% sock stock dividend paid as of June 15, 2001. As of December 31, 2001, there were 2,895,124 shares of Common Stock outstanding, held by approximately 841 total beneficial shareholders, including approximately 429 shareholders of record. Period Low Bid High Bid First Quarter 2000 $5.43 $6.00 Second Quarter 2000 $4.64 $6.07 Third Quarter 2000 $5.54 $6.88 Fourth Quarter 2000 $5.54 $6.34 First Quarter 2001 $5.71 $7.14 Second Quarter 2001 $6.07 $11.40 Third Quarter 2001 $10.26 $13.70 Fourth Quarter 2001 $9.90 $12.50 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 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. 10 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. Recent Sales of Unregistered Shares. None. Use of Proceeds: Not Applicable. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS. The information required by this item is incorporated by reference to the material appearing under the caption "Management's Discussion and Analysis" appearing at pages 16 to 30 of the Company's Annual Report to Shareholders for the year ended December 31, 2001. ITEM 7. FINANCIAL STATEMENTS. The information required by this item is incorporated by reference to the Consolidated Financial Statements appearing at pages 31 to 49 of the Company's Annual Report to Shareholders for the year ended December 31, 2001. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS. None. Part III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. The information required by this Item is incorporated by reference to, the material appearing at pages 5 to 7, 13 and 16 of the Company's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 21, 2002. ITEM 10. EXECUTIVE COMPENSATION. The information required by this Item is incorporated by reference to, the material appearing at pages 8 to 13 of the Company's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 21, 2002. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is incorporated by reference to, the material appearing at page 4 of the Company's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 21, 2002. 11 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item is incorporated by reference to, the material appearing at pages 13 to 14 of the Company's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 21, 2002. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS Exhibit No. Description of Exhibits 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) 11 Statement Regarding Computation of Per Share Income Please refer to Note 9 to the consolidated financial statements for the year ended December 31, 2001. 13 Annual Report to Shareholders for the year ended December 31, 2001 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 Exhibit 3(a) to the Company's Registration Statement on Form SB-2, dated December 12, 1997. (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 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 in the fourth quarter of 2001. 12 SIGNATURES In accordance with Section 13 of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EAGLE BANCORP, INC. March 29, 2002 By: /s/ Ronald D. Paul ----------------------------- Ronald D. Paul, President In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
NAME POSITION DATE /s/ Leonard L. Abel Chairman of the Board of Directors March 29, 2002 - ------------------------------------ Leonard L. Abel /s/ Dudley C. Dworken Director March 29, 2002 - ------------------------------------ Dudley C. Dworken /s/ Eugene F. Ford, Sr. Director March 29, 2002 - ------------------------------------ Eugene F. Ford, Sr. /s/ Ronald D. Paul President and Director March 29, 2002 - ------------------------------------ Principal Executive Officer Ronald D. Paul /s/ H.L. Ward Executive Vice President and Director March 29, 2002 - ------------------------------------ of the Company, President of the Bank H.L. Ward /s/ Wilmer L. Tinley Senior Vice President of the Bank, March 29, 2002 - ------------------------------------ Chief Financial Officer of the Company Wilmer L. Tinley Principal Financial and Accounting Officer
13 EX-13 3 ex13.txt EXHIBIT 13 EXHIBIT 13 [Logo] 2001 ANNUAL REPORT [Logo] Eagle Bancorp, Inc. [photos omitted] To Our Shareholders: We are extremely pleased with the results of our operations for the year 2001, as reflected in this Annual Report. Our net income for 2001, before income taxes, was $2,023,000, which is 91% greater than that of 2000. Net income after taxes (and including security gains) was $1,754,000 which exceeded 2000 results by more than 66%. Total assets of $237 million and loans of $186 million reflect increases of 44% and 60% respectively. These extraordinary results were achieved in a year in which the economy and banks in general felt the impact of increased unemployment, decreased profits and large losses in the securities markets. To reflect these changing economic conditions, we increased our loan loss reserves by 20% or approximately $400 thousand. We were most fortunate not to have had any significant losses during the year and our loan portfolio continues to be strong and of high quality. Even with the change in the economy, as of December 31, 2001 our total past due loans and leases were $91,000 or less than 0.5% of our loan portfolio. Our total delinquencies in excess of 90 days were just $19,000. Despite the increases in our reserves and extensive capital expenditures to fund our growth, we still achieved the excellent results that are noted above and detailed throughout our report. We continue to expand and grow. In addition to our District of Columbia branch, that opened in June 2001, we opened our sixth branch in Shady Grove on March 18, 2002. We anticipate that, with the significant growth in the Rockville/Gaithersburg areas, Shady Grove will be very successful. In addition, our high concentration of medical and healthcare businesses will be better served by a location in the Shady Grove area. Our success is due to several factors. They include: o An active and productive Board of Directors. During the year EagleBank was fortunate to add two new directors, Phyllis D. Thompson and Neal R. Gross, both of whom will enhance our presence in the District of Columbia. o A staff which is second to none, led by a team of five senior officers who comprise the majority of our Executive Committee and whose talents and experience have combined to provide the smooth and efficient vehicle that is driving our excellent results. They are H.L. Ward, President & CEO; Thomas D. Murphy, Executive Vice President & Chief Operations Officer; Susan G. Riel, Senior Vice President & Chief Administrative Officer; Martha Foulon-Tonat, Senior Vice President & Chief Lending Officer and Wilmer L. Tinley, Senior Vice President & Chief Financial Officer. o Our dedication to personal, prompt and competitive service and products which have attracted considerable business from our larger, highly structured and impersonal competition. We intend to maintain these qualities as we continue to grow and will never compromise this critical ingredient of EagleBank's success. We are extremely excited about the upcoming year. The growth and earnings momentum that we have experienced over the past three years should continue well into the future. The growth of our loan portfolio continues, without compromising credit quality. We are proud of the growth in our Home Equity Product as well as our newly formed SBA Lending program. Our Construction Loan Program has experienced tremendous growth and we have added staff to allow for additional growth in 2002. We were pleased to have been able to issue additional shares last year as a result of a 40% stock split. We thank you for your continued support as the Eagle continues its journey to new heights. We look forward to meeting you at the Annual Meeting on May 21, 2002.
/s/ Leonard Abel /s/ Ronald D. Paul /s/ H. L. Ward Leonard Abel Ronald D. Paul H. L. Ward Chairman, Eagle Bancorp, Inc President and CEO, Eagle Bancorp, Inc. President and CEO, EagleBank Chairman, EagleBank Executive Vice President, Eagle Bancorp, Inc.
1 [Photos. Logos and map omitted] Everything about us says we're different. We don't strive to be different It just happens when you strive to be better. 2 [Photos omitted] You don't keep customers by lower fees or new products. Eventually, those will be duplicated. You keep them by providing better service. I like to provide service so extraordinary that you see surprise in the customer's face. 3 Better Banking Principles Four years ago, we started EagleBank with little more than determination, an idea, and decades of banking experience. The idea was not revolutionary. At least, not to businesspeople. We thought that a community bank could prosper by giving customers good old-fashioned personal attention, competitive products and services, and a single focus on the Washington area. We believed that people had wearied of large and unresponsive national and regional banks whose names and ownership changed at a dizzying pace. We began with seven principles that would guide our enterprise. 1. A bank's home office should be minutes away by car, not hours away by plane. The Washington area is not a part of our business. It is our business. 2. Bankers must know more about their customers than what they read in a financial profile. Sometimes you just have to shake people's hands, look into their eyes, and listen to them to determine their credit worthiness. 3. All banking decisions that affect a community should be made in that community. Otherwise, those decisions are made by formula and formulas don't make good banking sense. 4. Small and medium-sized businesses are the engines of the community. We share with them the deep commitment to the community so our efforts are focused on their success. 5. We want to say yes! If we don't have a service or product that meets a customer's needs, we'll create one. 6. We treasure the friendship and confidence of the Washington community. We think of them as our neighbors and we want them to think of us as the community's bank. 7. We will listen. We will never get better advice than that which we get from our own customers. Those principles form the foundation for everything we do as a bank: our products, our services, our business demeanor, our relationship with the Washington community. 4 [Photos omitted] Failure to listen to your customers is a terminal illness for businesses. You've got to listen to their desires and create the services and products they want. Make it a custom product if you have to. And when a customer offers criticism, thank them. They've just made you a better company. 5 Better Banking Skills So, how did we get to where we are, other than "quickly"? Strong Focus First, we established small businesses and professionals as our market focus and we have never strayed from that focus. Our resources are not scattered and diluted by haphazard ventures into areas beyond that focus. Instead, all of our energy is devoted to acquiring small business expertise and developing products and services that help those businesses succeed. Unlike bigger banks, we want to service one market well, rather than several badly. You don't establish yourself as a small business advocate by saying all the right things but by doing them. The difference quickly becomes apparent to the small business owner. We don't want to tell our customers what we have, we want them to tell us what they need. And when they do, we listen. Strong Growth Strategy Second, we've grown from the inside out, developing our new relationships one at a time, not through the acquisition of smaller banks and bank branches. All of our customers chose to become EagleBank customers. They were not involuntarily traded as part of an acquisition or merger. We therefore enjoy terrific customer loyalty that means greater customer retention. Strong Banking Skills Finally, while our hallmark is the personal attention we give our customers as a community bank, it is not a substitute for banking skill. Smiles are not a substitute for competence, friendliness is not a substitute for resourcefulness, and knowing a customer's name is not a substitute for knowing their needs. The bottom line is that we need to know our market better than anyone else. We need to be innovative. We need to provide top quality products and services. We need to be competitive. Our success is built upon the abilities, drive and experience of our people. "Expert" is what they are. "Friendly" is only how they deliver it. Strong Listening Skills Who knows business better than businesspeople? Our job is not to tell people how to run their businesses but, through our banking skills, to help them run them better. We provide banking solutions to business needs. If we listen to their problems, if we listen to their needs and suggestions, they will tell us how to be a successful bank. And they have. Let's take a few cases in point: Construction/Permanent Loans Local builders told us that banks made it too difficult for individuals to build their own homes. Ordinarily, it takes three loans: one to purchase the land, one to construct the home and finally permanent financing in the form of a mortgage. Each loan has its own costs, requires a considerable time commitment and creates more than a bit of anxiety. We listened. We created EagleBank's Construction/Permanent Loan and rolled all three loans into one loan with a single closing. Construction/Permanent Loans are not only convenient to the buyer but they also provide one-stop shopping and tangible cost savings as well. Meanwhile, builders love Construction/Permanent Loans because they do not tie up the builders' existing lines of credit, they reduce the builders' financing costs, and they are a great marketing tool for growing their custom homebuilding business. 6 Small Business Loans Small business owners told us that one of their most vexing problems was access to affordable capital. At pivotal points in the history of any business, owners need capital that can address their unique business needs. Most conventional loans, because of risk management, are inadequate or too inflexible. We listened. Since we began operations in 1988, EagleBank has participated in Small Business Administration loan guarantee programs. With SBA's guarantees, we can provide loans for more uses (start-up and permanent working capital, equipment, acquisition/construction of owner-occupied real estate, business acquisition, debt refinance and consolidation), for longer terms (7-25 years). We can also provide a higher percentage (up to 90%) of the total financing needed. There is no balloon payment at the end and loans cannot be recalled. Think we're serious about small business? There's more. We appointed a Vice President for SBA Lending to demonstrate our commitment and raise the level of our expertise. By FY 2000, EagleBank had made the Washington Business Journal's 2001 List of the Top SBA Lenders entering the list at number eight. Escrow Management Lawyers, title companies, realtors, and landlords all manage numerous small escrow accounts for clients. And all have told us of the accounting headaches and staff time involved with managing so many separate accounts. We listened. We created the EagleBank Escrow Manager Account. The Escrow Manager is a free client service that allows the numerous funds to be deposited into a single master account. Sub-accounts within the master account are tracked by EagleBank. Customers receive one monthly statement showing the balances and histories of all the sub-accounts. Information on individual accounts can be obtained by the customer at any time. Additionally, EagleBank provides IRS reporting and will mail 1099 forms directly to customers' clients. Finance Leasing Cash flow is always a concern to small businesses. Our customers, among them those in the construction and printing industries, wanted an alternative to tying up large sums of capitol necessitated by purchasing expensive equipment. We listened. We created the EagleBank Finance Leasing Program. Under this program, the bank actually purchases the equipment and leases it to the customer. Because a down payment is not required, this arrangement relieves pressure on the customer's operating funds and cash flow that an outright purchase of the equipment would cause. Leases involve less paperwork and the option to purchase is still available to the customer at a future date. Real Estate Lending Real estate developers and investors told us that what they really needed was a bank that could give an answer 7 to their loan requests within days, not months. Large banks can take weeks for an approval and at least 60 days to get to the settlement table. A customer's business opportunity can be lost because the approval and settlement process takes too long. We listened. EagleBank staffed its real estate department with seasoned professionals with a combined 40 years of real estate lending experience. Our lenders are generalists who make loans from $100,000 up to $5,000,000 and are qualified to handle any of the following types of properties: residential multi-family, office buildings and condominiums, stand-alone retail properties, retail shopping centers, industrial warehouses, self-storage facilities, and builder residential construction. Loan approvals in as little as seven days and settlement often within 30 days, handled by flexible, innovative lenders - that is how EagleBank has responded to its customers' needs. Better Banking Performance So, after almost four years, how are we doing? Even during a year in which all of us were affected by the weakening economy, EagleBank continued its unbroken string of strong performances. Throughout our short history, EagleBank's policy has been one of judicious but aggressive growth, expansion of services, and investment in our community. Despite the challenges that faced all of us in 2001, we at EagleBank reflect with pride on our performance. In number of employees, we've gone "from zero to sixty". From the original "home office" in Bethesda, we now have branches in Silver Spring (2), Rockville, and Washington, DC. And, on March 18, 2002, we opened a second branch in Rockville. To service our customers, we have established twenty-one ATM sites around the area. But we realize that physical growth means little if it isn't accompanied by growth in key financial figures. Those who have followed EagleBank know just how solid our financial performance is. Even in 2001, a difficult year by any standard, EagleBank's performance was robust as you will see in the financial report that follows. 8 [Photos omitted] When a businessperson comes into our office looking worried and leaves looking relieved, that's when we know that we've done our job. 9 Only One Clear and Constant Goal We have a very clear idea of who we are and what we want to be. We don't aspire to be the biggest bank in the country. We aspire to be the best bank in our community. We don't want to be national. We don't want to cover the eastern seaboard. We don't want to be on anyone's "ten largest" list. We want to provide the best products, the fastest service, the most useful knowledge to our customers. We want small business owners to think of us as their advocate, not their adversary. We want to be the Washington area's hometown bank. We want to know our customers as no one else knows them: their needs, their strengths, their aspirations. We want to be their bank of choice, not their bank by default. We have only one goal: We want to be the best at what we do. EagleBank. Different. Better. Here's our list of the top 10 people at EagleBank. The customer is number one and there is no two through ten. Our customers are our most credible advertising. They have nothing personal to gain by recommending us. to gain by recommending us. 10 EAGLEBANK BOARD OF DIRECTORS
Leonard L. Abel * Until retiring in 1994, Mr. Abel was partner-in-charge of Chairman Eagle the certified public accounting firm of Kershenbaum, Abel, Bancorp, Inc. Kernus and Wychullis, Rockville, Maryland. Ronald D. Paul * President of Ronald D. Paul Companies, which is engaged President and CEO in the business of real estate development and management Eagle Bancorp Inc., activities. Chairman of Bethesda Investments, Inc., a private Chairman, EagleBank venture capital fund. H.L. Ward * President and Chief Executive Officer of EagleBank and Executive Vice President of Eagle Bancorp, Inc. Arthur H. Blitz An attorney engaged in private practice and a partner in the Bethesda law firm of Paley, Rothman, Goldstein, Rosenberg & Cooper. Dudley C. Dworken * Owner of Curtis Chevrolet-Geo, an automobile dealer in Washington, D.C. Steven L. Fanaroff Vice President and Chief Financial Officer of Magruder Holdings, Inc., a regional supermarket chain. Eugene F. Ford, Sr. ** Engaged in the business of property management and development. Chairman of Mid-City Financial Corporation, an apartment developer. Eugene F. Ford, Jr. Engaged in the business of property management and apartment development. President of Mid-City Financial Corporation, an apartment developer. Harvey M. Goodman President of Goodman, Gable, Gould Company a Maryland based public insurance adjusting firm. Neal R. Gross Chairman and Chief Executive Officer of Neal R. Gross & Co., Inc., a Washington, D.C. based court reporting service. Benson Klein A partner in the law firm of Ward & Klein. David H. Lavine Owns and operates the local Chesapeake Bagel Bakery retail chain. Bruce H. Lee Vice President of Development and a member of the Board of Directors of Lee Development Group. Philip N. Margolius A partner in the law firm of Margolius, Mallios, Davis, Rider & Tomar, L.L.P. Thomas D. Murphy Executive Vice President and Chief Operating Officer of EagleBank. Donald R. Rogers A partner in the private practice of law with the Rockville, Maryland based firm Shulman, Rogers, Gandal, Pordy & Ecker, P.A. Worthington H. Talcott, Jr. A partner in the private practice of law with the Rockville, Maryland based firm Shulman, Rogers, Gandal, Pordy & Ecker, P.A. Phyllis D. Thompson Partner in the Washington law firm of Covington & Burling. Leland M. Weinstein President of Syscom Services, Inc. an e-business workflow and internet consulting firm.
* Director Eagle Bancorp, Inc. ** Director Eagle Bancorp, Inc. only 11 [Director photos omitted] 12 EAGLE BANCORP, INC. - 2001 Summary of Financial Information (In Thousands of Dollars, except per share data) Summary information is presented for the years 2001, 2000, 1999 and 1998. The Company was a development stage company 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.
Results of Operations 2001 2000 1999 1998 ---- ---- ---- ---- Interest income $ 14,121 $ 10,501 $5,170 $ 1,011 Interest expense 5,998 4,549 2,022 277 Net interest income 8,123 5,952 3,148 734 Provision for credit losses 979 581 424 164 Noninterest income 1,324 351 211 23 Noninterest expense 6,445 4,664 3,786 1,992 Net income (loss) 1,754 1,058 (851) (1,399) Basic income (loss) per share $ 0.61 $ 0.36 $(0.29) $ (0.48) Diluted income (loss) per share $ 0.58 $ 0.36 $(0.29) $ (0.48) Financial Condition (December 31) Total assets $236,833 $164,082 $113,218 $52,039 Net loans 185,818 116,576 63,276 19,984 Total deposits 195,688 135,857 90,991 34,631 Total equity 17,132 15,522 13,675 14,949
Return On Assets and Equity and Average Equity to Average Assets
Results of Operations 2001 2000 1999 1998 ---- ---- ---- ---- Return on assets 0.88% 0.78% (1.07)% (7.19)% Return on equity 10.56% 7.41% (5.91)% (17.23)% Equity to assets 8.36% 10.40% 18.22% 41.73%
13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis provides an overview of the financial condition and results of operations of Eagle Bancorp, Inc. (the "Company") and EagleBank (the "Bank") for the years 2001, 2000 and 1999. 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. It is intended that this discussion and analysis help the readers in their analysis of the accompanying consolidated financial statements. GENERAL Eagle Bancorp, Inc. was incorporated under the general corporation laws of the State of Maryland, on October 28, 1997, and is headquartered in Bethesda, Maryland. The Company was formed to be a bank holding company for EagleBank, its Maryland chartered commercial bank subsidiary. On June 9, 1998 the Company closed its initial offering of shares of the Company stock, having received subscriptions for 1.65 million shares of common stock. Gross proceeds of the offering amounted to $16.5 million. On July 20, 1998, having received the required approvals from the State of Maryland and Federal Reserve System and been accepted for deposit insurance by the FDIC, EagleBank opened its first office in Rockville, Maryland. On that date, the Company became a bank holding company by capitalizing the Bank with $7.75 million. On August 4, 1998, a second office was opened in Silver Spring and on November 9, 1998 the Bank's main office was opened at 7815 Woodmont Avenue, Bethesda. The Bank's main office also serves as the headquarters for the Company. A fourth office, the Bank's second in Silver Spring, was opened September 1, 1999 at 850 Sligo Avenue, Silver Spring. A fifth office was opened May 22, 2001, at 20th and K Streets in Northwest, Washington, DC. A sixth office opened March 18, 2002 at Shady Grove and Blackwell Roads in Gaithersburg, Maryland. This office will expand the Bank's service area in its primary market of Montgomery County. EagleBank was formed to serve the business community of Montgomery County, Maryland, and contiguous areas including Washington, DC. The Company offers a full range of services demanded by the business community including sweep accounts, lock box, escrow management and on-line wire transfer among other services. During 2000, the Bank formed EagleLeasing, as a division of the Bank, to further expand its services to the business community. EagleLeasing was formed to provide lease financing to small businesses for a variety of equipment acquisitions. At year end 2001, leasing accounts stood at $676 thousand and expectations are for good growth in 2002. In March of 2001, the bank expanded on its Small Business Administration ("SBA") loan program and hired a loan officer specifically responsible for further developing the SBA loan portfolio. The expansion of the Bank's SBA loan program in 2001 contributed $96 thousand in gains on the sale of loans and expectations are for this source of income to increase in 2002 as more SBA loans are originated by the Bank. The Company believes that the accompanying financial information attests to the support the Bank has received from the community. Assets of the Company reached $237 million as of December 31, 2001, an increase of 44% from December 31, 2000, and earnings increased 66% to $1.7 million. These achievements were accomplished after only three and one-half years of operations. RESULTS OF OPERATIONS The Company reported earnings of $1.75 million for the year ended December 31, 2001, as compared to income of $1.06 million, for the year ended December 31, 2000 and a net loss of $851 thousand for the year ended December 31, 1999. The income per basic share for 2001 was $0.61 and $0.58 per diluted share, the income per basic and diluted share for 2000 was $0.36 and for 1999 the loss per 14 basic and diluted share was $0.29. During 2001, management determined that the realization of previously unrecorded net deferred tax assets were more likely than not, and therefore recognized previously unrecorded net deferred tax assets. Subsequent to such recognition, the company recorded $269 thousand in income tax expense. No income tax expense was recognized in 2000 or 1999. The results of 2001, earnings in excess of $1.7 million, were largely the result of the Company's growth in assets to $237 million, augmented by gains on the sale of securities of $358 thousand. The asset growth was built on the foundation established in 1999 and 1998 when the Company incurred losses expected of a new bank. The Company ended the year with deposits at $195.7 million as compared to $135.9 million at December 31, 2000, an increase of 44%. Gross loans were at $187.9 million at December 31, 2001 as compared to $117.7 million at December 31, 2000, an increase of 60%. The increase in loans and accompanying decline in lower yielding securities and federal funds resulted in increased net interest income. The increase in loan volume was achieved without sacrificing credit quality as discussed later under the section addressing the provision for credit losses. During 2001, the Company made a provision for credit losses of $979 thousand and ended the year with an allowance of 1.1% of outstanding loans, excluding loans fully secured by cash, readily marketable securities and government guarantees. The Bank uses the services of an outside consultant for periodic reviews of its loan portfolio to assess credit quality, loan documentation and collateral sufficiency. The Bank has also developed a comprehensive loan loss analysis system based on a guide provided by the Office of the Comptroller of the Currency to national banks. See "Asset Quality" below and Note 1 to the Consolidated Financial Statements. During the year, the Company contributed $1.7 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 as the Bank grew 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 investments. 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. The net interest income in 2001 was $8.12 million compared to $5.95 million in 2000 and $3.15 million in 1999. The following table 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 spread and margin. Interest spread is the difference between the percentage rate earned on assets less the cost of funds expressed as a percentage. While spread provides a quick comparison of earnings rates verses 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 decreased in 2001 from 2000 by 14 basis points, 3.54% from 3.68% and margin decreased 31 basis points, 4.31% from 4.62%. The decrease in both ratios is attributable to the rapid decline in interest rates effected by Federal Reserve policy. The effect of the decline in rates in 2001 was more than offset by the increase in the ratio of average loans to average assets from 62% in 2000 to 75% in 2001. Interest spread increased in 2000 from 1999 by 37 basis points, 3.68% from 3.31% while margin increased 33 basis points, 4.62% from 4.29%. Because a significant portion of the loan portfolio is floating rate, the yield on the loan portfolio declined 105 basis points as the Federal Reserve reduced rates through out 2001. The investment portfolio yield declined only 72 basis points since many of the investments were not called or matured until late in 2001. The federal funds rate had fallen to 1.75% by year end. The decline in the yield on interest earning assets continues into 2002 and will be reversed only when the Fed raised its benchmark rates. On the liability side, management aggressively reduced rates on deposit accounts. The effect of these reductions is not evident in the average rate of approximately 5.56% for certificates of deposit. Many of those deposits matured in late 2001 and will mature in the earlier months of 2002. As these deposits mature rates for them also showed a marked decline as they roll into the Bank's much lower CD rate schedule. Following the average balance table is a Rate/Volume table which expands on the basis of net interest income changes from year to year based on changes in interest rates or volumes of interest bearing assets and liabilities. This table reflects the significant increase in income attributable to growth of the Bank during 2001 and 2000 while highlighting the decline in net interest income due to rate in 2001 compared to 200 and the increase in net interest income due to rate in 2000 compared to 1999. 15 AVERAGE BALANCES, INTEREST YIELDS AND RATES, AND NET INTEREST MARGIN (In Thousands of Dollars)
---------------------------------------------------------------------------------- Years Ended December 31 ---------------------------------------------------------------------------------- 2001 2000 ----------------------------------------- -------------------------------------- Average Average Average Average Balance Interest Yield/Rate Balance Interest Yield/Rate ------- -------- ---------- ------- -------- ---------- ASSETS: Interest earning assets: Loans $ 149,056 $ 12,054 8.09%$ 84,767 $ 7,746 9.14% Investment securities (1) 32,688 1,812 5.54% 39,558 2,477 6.26% Federal funds sold 6,657 255 3.83% 4,548 278 6.12% --------- --------- --------- --------- Total interest earning assets 188,401 14,121 7.50% 128,873 10,501 8.15% --------- --------- --------- --------- Total noninterest earning assets 11,886 8,670 Less: allowance for credit losses (1,444) (787) --------- --------- Total noninterest earning assets 10,442 7,883 --------- --------- TOTAL ASSETS $ 198,843 $ 136,756 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities: NOW accounts $ 20,896 $ 232 1.11%$ 15,681 $ 295 1.88% Savings and money market accounts 54,211 1,843 3.40% 40,065 1,772 4.42% Certificates of deposit $100,000 or more 35,791 2,006 5.61% 23,551 1,325 5.63% Other time deposits 25,493 1,405 5.51% 11,576 640 5.53% Customer repurchase agreements and federal funds purchased 13,057 409 3.13% 8,485 350 4.13% Short-term borrowings -- -- -- 2,387 167 6.99% Long term borrowings 2,155 103 4.78% -- -- -- --------- --------- --------- --------- Total interest bearing liabilities 151,603 5,998 3.96% 101,745 4,549 --------- --------- --------- --------- Noninterest bearing liabilities: Noninterest bearing demand deposits 29,727 19,892 Other liabilities 898 548 --------- --------- Total noninterest bearing liabilities 30,625 20,440 --------- Stockholders' equity 16,615 14,571 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 198,843 $ 136,756 ========= ========= Net interest income $ 8,123 $ 5,952 ========= ========= Net interest spread 3.54% 3.68% Net interest margin 4.31% 4.62%
(1) Includes average balances of and interest earned from interest bearing deposits with other banks. 16 AVERAGE BALANCES, INTEREST YIELDS AND RATES, AND NET INTEREST MARGIN (In Thousands of Dollars)
Year Ended December 31 ----------------------------------- 1999 ----------------------------------- Average Average Balance Interest Yield/Rate -------- -------- ---------- ASSETS: Interest earning assets: Loans $39,470 $ 3,379 8.56% Investment securities (1) 28,667 1,534 5.35% Federal funds sold 5,202 256 4.93% ------- ------- Total interest earning assets 73,339 5,169 7.05% ======= ------- Total noninterest earning assets 6,270 Less: allowance for credit losses (347) ------- Total noninterest earning assets 5,923 TOTAL ASSETS $79,262 ------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities: NOW accounts $ 9,294 $ 154 1.66% Savings and money market accounts 22,778 874 3.84% Certificates of deposit $100,000 or more 8,584 407 4.74% Other time deposits 7,186 329 4.57% Customer repurchase agreements and federal funds purchased 6,039 245 4.07% Short-term borrowings 240 12 5.05% Long-term borrowings -- -- -- Total interest bearing liabilities 54,121 2,021 3.74% ------- ------- Noninterest bearing liabilities: Noninterest bearing demand deposits 10,545 Other liabilities 282 ------- Total noninterest bearing liabilities 10,827 Stockholders' equity 14,314 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $79,262 ======= Net interest income $ 3,148 ======= Net interest spread 3.31% Net interest margin 4.29%
(1) Includes average balances of and interest earned from interest bearing deposits with other banks. 17 RATE VOLUME ANALYSIS OF NET INTEREST INCOME (In Thousands of Dollars)
2001 compared with 2000 2000 compared with 1999 Due to Due to Rate Total Increase Due to Due to Rate Total Increase Volume (Decrease) Volume (Decrease) --------------------------------------- -------------------------------------- INTEREST EARNED ON: Loans $ 5,874 $(1,566) $ 4,308 $ 3,877 $ 490 $ 4,368 Investment securities (430) (235) (665) 583 360 942 Federal funds sold 129 (152) (23) (32) 54 22 ------- ------- ------- ------- ------- ------- Total interest income 5,573 (1,953) 3,620 4,428 904 5,332 ------- ------- ------- ------- ------- ------- INTEREST PAID ON: NOW accounts 98 (161) (63) 106 34 141 Savings and MMA accounts 624 (553) 71 664 234 898 Certificates of deposit 1,464 (18) 1,446 910 320 1,230 Customer repurchase agreements 183 (124) 59 99 5 104 Other borrowings (7) (57) (64) 104 51 155 ------- ------- ------- ------- ------- ------- Total interest expense 2,362 (913) 1,449 1,883 644 2,528 ------- ------- ------- ------- ------- ------- NET INTEREST INCOME $ 3,211 $(1,040) $ 2,171 $ 2,545 $ 260 $ 2,804 ======= ======= ======= ======= ======= =======
PROVISION FOR CREDIT LOSSES The Company recorded a provision for credit losses of $979 thousand in 2001 compared to $581 thousand in 2000 and $424 thousand in 1999. The increases were primarily attributable to increases in loans outstanding, however, economic uncertainties resulting from the events of September 11, and which were not otherwise encompassed within the Company's loan loss methodology resulted in a provision for loan losses during the fourth quarter of 2001 in addition to the amount attributable to increased loan volume. Net loan charge offs in 2001 were $10 thousand compared to $18 thousand in 2000 and $8 thousand in 1999. The provision is discussed further under the section Financial Condition. 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. Noninterest income was $1.32 million in 2001, as compared to $351 thousand in 2000 and $211 thousand in 1999. The significant increase from year to year is attributable to an increase in the Bank's deposit account base for each year and gains from sales of assets. In addition to service charge income, the Bank also receives fees for ATM services and safe deposit box rental and other fees not related to account maintenance. Management is exploring other sources of noninterest income and is investigating opportunities which may be provided by new federal banking legislation which expands the types of financial businesses in which banks may participate. During the year 2001, the Bank's construction/permanent mortgage financing program for residential mortgages contributed $52 thousand to noninterest income. In late 2000, the Bank introduced a Goldman Sachs deposit sweep arrangement into a money market fund. This program contributed $31 thousand to other income, however following September 11, and as the stock market and interest rates continued to fall, income from this source declined. In 2001, net gains on the sale of securities was $358 thousand contributing significantly to noninterest income. Actual noninterest income was reduced in both 2000 and 1999 by losses on the sale of investment securities of $71 thousand and $4 thousand, respectively. The gains and losses were taken as part of a strategy to improve overall investment portfolio yields. Also in 2001, the Bank began to sell the insured loan portion of selected SBA loans. These sales resulted in gains totaling $96 thousand. During 2002, the Bank expects to expand its SBA program and anticipates increased income from sales of some of these loans. 18 NONINTEREST EXPENSE Noninterest expenses were $6.44 million in 2001 compared to $4.66 million in 2000 and $3.79 million in 1999. The increase in noninterest expense for 2001 was 38% over 2000. The increase is consistent with the overall growth in assets of 44% and includes the cost of salaries and occupancy expenses associated with the K Street Office. The increase in noninterest expenses in 2000 over 1999 was 23%. The most significant noninterest expense item is salaries and benefits at $3.45 million in 2001 as compared to $2.45 million in 2000, an increase of 41%. These additional salary and benefit costs were incurred to staff the K Street office and add positions in the loan and operations areas, to keep pace with the growth in assets of the Bank, in addition to compensation increases for existing staff. The increase in salaries and benefits from 1999 to 2000 was 20%, as these expenses increased from $2.03 million to $2.45 million. 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 earnings and results of operations of the Company. INCOME TAX The Company had income tax expense of $269 thousand after recording previously unrecorded deferred tax assets. The Company recognized no federal income tax expense during 2000 or 1999. It is expected that the Company will continue to record income tax expense based upon its taxable income in future years. FINANCIAL CONDITION 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 averaged approximately $32 million in 2001 compared to $40 million in 2000. The reduction in investment securities results from the sale or maturity of investments and the reinvestment of the proceeds in higher yielding loans. The following tables and Note 3 to the Consolidated Financial Statements provide additional information regarding the Company's investment securities. The Company holds all investment securities as available for sale ("AFS"). This method of accounting requires that investment securities be reported at their fair market value and the difference between the fair market value and book value (the purchase price adjusted by any accretion or amortization) be reported in the equity section as accumulated other comprehensive income. At December 31, 2001, the Company reported an unrealized gain in AFS securities of $285 thousand and at December 31, 2000, an unrealized gain in AFS securities of $377 thousand. The Company, except in a planned investment strategy or for liquidity needs, has no present plan or intention to sell these securities. If the securities are held to maturity, no gain of loss will be realized. 19 (In Thousands Dollars)
December 31, ------------------------------------------------------------------------ 2001 2000 1999 ---------------------- --------------------- --------------------- Percent Percent Percent Balance of Total Balance of Total Balance of Total -------- --------- -------- --------- -------- --------- U.S. Treasury $12,540 31.8% $ 1,507 4.7% $ 1,494 4.1% U.S. Government agency obligations $14,537 36.9% $26,769 82.6% $33,127 90.6% GNMA mortgage-backed securities $11,217 28.4% $ 3,219 9.9% $ 1,440 3.9% Federal Reserve and Federal Home Loan Bank Stock $ 880 2.2% $ 627 1.9% $ 271 0.7% Other equity investments $ 265 0.7% $ 276 0.9% $ 266 0.7% ------- ------- ------- ------- ------- ------- $39,439 100% $32,398 100% $36,598 100% ======= ======= ======= ======= ======= =======
The following table provides information regarding the contractual maturity and weighted average yield of the investment portfolio at December 31, 2001. (In Thousands of Dollars)
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 $10,999 1.60% $ 1,541 2.31% -- -- -- -- $12,540 1.69% U.S. Government agency obligations 1,392 4.37% 9,433 4.27% 3,712 7.63% -- -- 14,537 5.10% GNMA mortgage-backed securities -- -- -- -- 473 6.15% 10,744 6.23% 11,217 6.23% Federal Reserve and Federal Home Loan Bank Stock -- -- -- -- -- -- 880 6.15% 880 6.15% Other equity investments 265 -- * -- -- -- -- -- 265 -- ------- ------- ------ ------- ------- Total $12,656 1.91% $10,974 3.99% $4,185 7.45% $11,624 6.22% $39,439 4.35% ======= ======= ====== ======= =======
At December 31, 2001, there were no issuers, other than the U.S. Government and its agencies, whose securities owned by the Company had a book or market value exceeding ten percent of the Company's stockholders' equity. 20 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 2001 and 2000 was strong with outstanding loans reaching $187.9 million at December 31, 2001 from $117.7 million at December 31, 2000, an increase of $70.2 million or 60%. The Bank is primarily business oriented in its development focus. This is well demonstrated by the 83% of the loan portfolio which is in commercial, real estate-commercial and construction loans. Emphasis will continue to be the development of business relationships and, as previously noted, two lending programs will be promoted in 2002, the SBA program and lease financing. Both of these programs can be very profitable and provide a service to the Bank's target market. Loan Portfolio. The following table shows the composition of the loan portfolio by type of loan at the dates indicated. (In Thousands of Dollars)
December 31, 2001 2000 1999 1998 Percent Percent Percent Percent Balance of Total Balance of Total Balance of Total Balance of Total Commercial $ 50,932 27.1% $ 37,123 31.5% $ 25,760 40.3% $ 6,983 34.7% Real Estate - commercial 87,200 46.4% 58,214 49.4% 29,217 45.8% 11,832 58.7% Construction 19,038 10.1% 9,952 8.4% 3,545 5.6% -- 0.0% Home equity 26,656 14.2% 9,129 7.8% 2,133 3.3% 167 0.8% Other consumer 4,103 2.2% 3,300 2.9% 3,200 5.0% 1,166 5.8% -------- -------- -------- -------- -------- -------- -------- -------- Total Loans $187,929 100% $117,718 100% $ 63,855 100% $ 20,148 100% -------- -------- -------- -------- Less: allowance for credit losses 2,111 1,142 579 164 -------- -------- -------- -------- Loans, net $185,818 $116,576 $ 63,276 $ 19,984 ======== ======== ======== ========
Note: Included in Commercial loans are lease financing loans totaling $676 thousand at December 31, 2001. Loan Maturity: (In Thousands of Dollars) The following table sets forth the term to contractual maturity of the loan portfolio as of December 31, 2001.
Due in Total One Year of Less One to Five Years Over Five Years Commercial $ 50,932 $ 16,595 $ 21,489 $ 12,848 Real estate - commercial 87,200 3,456 24,192 59,552 Construction 19,038 14,376 846 3,816 Home equity 26,656 -- 21,857 4,799 Other consumer 4,103 1,128 2,125 850 ---------- ---------- ---------- ---------- Total loans $ 187,929 $ 35,555 $ 70,509 $ 81,865 ========== ========== ========== ==========
21
Loans with: Predetermined fixed interest rate $ 59,960 $ 3,886 $ 45,489 $ 10,585 Floating interest rate 127,969 31,669 25,020 71,280 Total loans $ 187,929 $ 35,555 $ 70,509 $ 81,865 ========== ========== ========== ==========
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. PROVISION FOR CREDIT LOSSES The provision for credit losses represents the expense recognized to fund the allowance for credit losses. This amount 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. During 1999, management developed a comprehensive review process to monitor the adequacy of the allowance for credit losses. The review process and guidelines were modeled utilizing the Office of the Comptroller of the Currency's "Practical Guide for a Community Bank's Allowance for Loan and Lease Losses". The results of this review, in combination with conclusions of the Bank's outside loan review consultant, support the adequacy of the allowance at 1.1% of loan outstanding excluding loans secured by cash, marketable securities and government guarantees. During 2001, a provision for credit losses was made in the amount of $979 thousand which included an amount, deemed appropriate by management, to accommodate the uncertainties created by the events of September 11. 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. At December 31, 2001, the Company had no loans classified as non-accrual, $19 thousand in loans contractually past due ninety days, no troubled debt restructurings or loans which were considered impaired as defined by Statement of Financial Accounting Standards No. 114. Policy requires that loans which become delinquent ninety days be placed on non-accrual. However, the $19 thousand in loans past due ninety days at December 31, 2001 continue to accrue interest as an exception to policy. At December 31, 2001, the Company had one commercial loan in the amount of $94 thousand, which was performing in accordance with its terms, however, management had serious concerns as to the ability of the borrower to be able to comply with the existing loan repayment terms. Subsequent to December 31, the loan went into default and is on non-accrual. Management believes that the loss associated with this credit could be $50 thousand and has allocated that amount of the commercial loan allowance to that loan. 22 The following table sets forth activity in the allowance for credit losses for the periods indicated. (In Thousands of Dollars)
Year Ended December 31, ----------------------------------------------- 2001 2000 1999 1998 ------- ------- ------- ------ Balance at beginning of year $ 1,142 $ 579 $ 164 $ -- Charge offs: -- -- -- Commercial -- -- -- -- Real estate - commercial -- -- -- -- Construction -- -- -- -- Home equity -- -- -- -- Other consumer 23 18 11 -- ------- ------- ------- ------- Total $ (23) $ (18) $ (11) $ -- ------- ------- ------- ------- Recoveries: Commercial -- -- -- -- Real estate - commercial -- -- -- -- Construction -- -- -- -- Home equity -- -- -- -- Other consumer 13 -- 2 -- ------- ------- ------- ------- Total 13 -- 2 -- ------- ------- ------- ------- Net charge offs (10) (18) (9) -- ------- ------- ------- ------- Additions charged to operations 979 581 424 164 ------- ------- ------- ------- Balance at end of period $ 2,111 $ 1,142 $ 579 $ 164 ======= ======= ======= ======= Ratio of net charge offs during the period to average loans outstanding during the period 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 and does not restrict the use of the allowance to absorb losses in any category. 2001 Amount Percent (1) Commercial $743 27.2% Real Estate 701 49.1% Construction 218 10.1% Home Equity 212 11.6% Other Consumer 100 2.0% Unallocated 137 -- ------- ------- Total allowance for credit $ 2,111 100% ======= ======= losses 1) Represents the percent of loans in category to gross loans. 23 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. In late 2000, to fund strong loan demand, the bank began accepting certificates of deposits, from bank and credit union subscribers to a wholesale deposit rate line. Subscribers may obtain quotes and place CDs with posting institutions on a non-brokered basis and generally in denominations of less than $100,000. At December 31, 2001 the Bank held $12.3 million of these deposits, at an average rate of 4.52% and at December 31, 2000 the Bank held $3.9 million, at an average rate of 4.35%. At December 31, 2001, the Company had approximately $37 million in noninterest bearing demand deposits, primarily business checking accounts on which the payment of interest is prohibited by regulations of the Federal Reserve. Bills have been introduced in each of the last three Congresses which would permit banks to pay interest on checking and demand deposit accounts established by businesses. If the 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. As a significant portion of our deposits are noninterest bearing demand deposits established by businesses, 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 information relating to the composition of the Bank's deposit base, see average balance tables above and Note 6 to the Consolidated Financial Statements. Another significant source of funding for the Company is customer repurchase agreements. There were approximately $13 million of repurchase agreements outstanding at December 31, 2001, an 18% increase compared to approximately $11 million at December 31, 2000. At December 31, 2001, the Company had drawn $1.7 million against a line of credit provided by a correspondent bank and the Bank had drawn a long-term Federal Home Loan Bank ("FHLB")advance of $8 million. For additional information regarding other borrowings, see Note 7 of the Consolidated Financial Statements. 24 The following table shows the distribution of deposits at December 31, (In Thousands of Dollars)
2001 2000 1999 ---------------------- -------------------- ------------------- Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate -------- -------- -------- -------- -------- -------- Noninterest-bearing demand $ 29,727 -- $ 19,892 -- $ 10,545 -- Interest-bearing transaction accounts 20,896 1.11% 15,682 1.88% 9,293 1.66% Savings and money market accounts 54,211 3.40% 40,065 4.42% 22,778 3.84% Certificates of deposit $100,000 or more 35,791 5.61% 23,551 5.63% 8,584 4.74% Other time 25,493 5.51% 11,576 5.53% 7,186 4.57% -------- -------- -------- Total $166,118 $110,766 $ 58,386 ======== ======== ========
The following table indicates the amount of the Bank's certificates of deposit of $100,000 or more time remaining until maturity as of December 31, 2001. Due in: 3 months or less $ 9,074 Over 3 through 6 months 9,058 Over 6 through 12 months 15,698 Over 12 months 1,563 -------- Total $ 35,393 ======== The following table provides information regarding the Company's short-term borrowing for the periods indicated. See Note 7 to the Consolidated Financial Statements for additional information regarding the Company's borrowings. (In Thousands of Dollars)
Maximum amount Ending outstanding at any Average Average Ending Average Year Ended December 31, Month end Balance Rate Balance Rate - ------------------------------ ------------------- ---------- --------- --------- -------------- Federal funds purchased & repurchase agreements 2001 $ 17,078 $ 12,921 3.16% 13,452 0.50%-2.50% 2000 12,062 8,485 4.16% 11,078 2.96%-5.75% 1999 9,039 6,039 4.07% 7,983 2.96%-4.51%
25 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 are made up of cash balances, due from banks, 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 2001, the Company established a $5 million line of credit with a correspondent bank against which it had drawn $1.7 million as of December 31, 2001. The Bank can purchase up to $5 million in federal funds on an unsecured basis and enter into reverse repurchase agreements up to $10 million. At year end 2001, the Bank was also eligible to take Federal Home Loan Bank ("FHLB") advances of up to $35.5 million of which it had received advances of $8 million. At year end 2001, under the Bank's liquidity formula, it had $25 million of liquidity representing 10.6% of total Bank assets. INTEREST RATE RISK MANAGEMENT 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, 2001, the Bank has a positive GAP of 15.95% out to three months and a cumulative negative GAP of 15.27% out to twelve months. If interest rates where 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 recommend. 26 GAP ANALYSIS (dollars in thousands)
Repriceable in: 0-3 mos 4-12 mos 13-36 mos 37-60 mos over 60 mos --------- ---------- ----------- ----------- ------------ ASSETS: Investment securities $ 12,981 $ 4,892 $ 15,293 2,400 $ 3,697 Loans 70,292 5,574 36,000 60,413 15,648 Federal funds sold -- -- -- -- -- -------- -------- -------- -------- -------- Total repriceable assets 83,273 10,466 51,293 62,813 19,345 -------- -------- -------- -------- -------- LIABILITIES: NOW accounts -- 15,756 3,151 12,605 -- Savings and Money Market accounts 24,102 19,390 12,052 6,025 -- Certificates of deposit 16,551 42,214 6,186 417 -- Customer repurchase agreements and federal funds purchased 4,707 4,035 2,690 2,019 Long-term borrowings 1,675 -- -- 8,000 -- -------- -------- ------- -------- -------- Total repriceable liabilities 47,035 81,395 24,079 29,066 -- -------- -------- ------- -------- -------- GAP $ 36,238 $(70,929) $ 27,214 $ 33,747 $ 19,345 Cumulative GAP 36,238 (34,691) (7,477) 26,270 45,615 Interval gap/earnings assets 15.95% (34.69)% 11.98% 14.85% 8.51% Cumulative gap/earning assets 15.95% (15.27)% (3.29)% 11.56% 20.07%
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 Company was successful in raising $16.5 million in capital in 1998, to fund the Bank and other activities consistent with a bank holding company. The Company originally provided the Bank $7.75 million in capital and through 2001 had added an additional $9.45 million. At December 31, 2001, the Bank and Company met all capital adequacy requirements to which they were subject. The table under Note 14 to the Consolidated Financial Statements recites the capital balances and ratios. The Bank is currently well capitalized and the Company can provide up to $4 million in additional capital to the Bank from assets it holds and from a line of credit negotiated in early 2001. The ability of the Company to continue to grow is dependent on its ability to obtain additional funds for contribution to the Bank's capital, through additional borrowing, the sale of qualifying common equity equivalents, or the sale of additional common stock. 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; NEW ACCOUNTING STANDARDS The Consolidated Financial Statements and Notes thereto have been prepared in accordance with Accounting Principals 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. 27 NEW ACCOUNTING STANDARDS Refer to Note 1 of the Notes to Consolidated Financial Statements for statements on New Accounting Standards. MARKET FOR COMMON STOCK AND DIVIDENDS The Company's common stock has been 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. 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 on June 15, 2001. As of December 31, 2001, there were 2,895,124 shares of common stock outstanding, held by approximately 429 shareholders of record and approximately 841 beneficial owners. Common Stock-EGBN 2001 2000 ---- ---- High Low High Low ---- --- ---- --- 1st quarter $ 7.14 $ 5.71 $ 6.00 $ 5.43 2nd quarter 11.40 6.07 6.07 4.64 3rd quarter 13.70 10.26 6.88 5.54 4th quarter 12.50 9.90 6.34 5.54 The Company has not paid any cash dividends to date. EARNINGS PER SHARE At its May 2001 board meeting, the Company approved a stock split in the form of a 40% stock dividend to stockholders of record June 1, and payable June 15, 2001. Earnings per share information reflects this dividend for years 2001, 2000 and 1999. 28 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Eagle Bancorp, Inc. Bethesda, Maryland We have audited the accompanying consolidated balance sheets of Eagle Bancorp, Inc. as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial an opinion on these financial statements based on our audits. We 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 statements 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 statement 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, 2001 and 2000, and the consolidated results of its operations and cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Stegman & Company Baltimore, Maryland February 2, 2002 29 EAGLE BANCORP, INC. Consolidated Balance Sheets December 31, 2001 and 2000 (In Thousands of Dollars, except per share data)
ASSETS 2001 2000 --------- --------- Cash and due from banks $ 6,483 $ 8,932 Interest bearing deposits with other banks 161 115 Federal funds sold -- 2,121 Investment securities available for sale 39,439 32,398 Loans 187,929 117,718 Less allowance for credit losses (2,111) (1,142) --------- --------- Loans, net 185,818 116,576 Premises and equipment, net 3,172 2,624 Deferred income taxes 391 -- Other assets 1,369 1,316 --------- --------- TOTAL ASSETS $ 236,833 $ 164,082 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Noninterest-bearing demand $ 37,235 $ 26,232 Interest-bearing transaction 31,512 18,927 Savings and money market 61,572 40,673 Time, $100,000 or more 35,393 32,838 Other time 29,976 17,187 --------- --------- Total deposits 195,688 135,857 Customer repurchase agreements and federal funds purchased 13,452 11,078 Short-term borrowings -- 1,040 Long-term borrowings 9,675 -- Other liabilities 886 585 --------- --------- Total liabilities 219,701 148,560 STOCKHOLDERS' EQUITY: Common stock, $.01 par value; authorized 5,000,000, Shares issued and outstanding 2,895,124 (2001) and 2,062,474 (2000) 29 21 Surplus 16,515 16,479 Retained earnings (deficit) 399 (1,355) Accumulated other comprehensive income 189 377 --------- --------- Total stockholders' equity 17,132 15,522 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 236,833 $ 164,082 ========= =========
See notes to consolidated financial statements. 30 EAGLE BANCORP, INC. Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 (In Thousands Dollars, Except Per Share Data)
INTEREST INCOME: 2001 2000 1999 -------- -------- -------- Interest and fees on loans $ 12,054 $ 7,746 $ 3,379 Taxable interest and dividends on investment securities 1,799 2,468 1,518 Taxable dividends on other investments 3 5 17 Interest on balances with other banks 10 4 -- Interest on federal funds sold 255 278 256 -------- -------- -------- Total interest income 14,121 10,501 5,170 -------- -------- -------- INTEREST EXPENSE: Interest on deposits 5,486 4,032 1,764 Interest on customer repurchase agreements and federal funds purchased 409 350 246 Interest on short-term borrowings -- 167 12 Interest on long-term borrowings 103 -- -- Total interest expense 5,998 4,549 2,022 -------- -------- -------- NET INTEREST INCOME 8,123 5,952 3,148 PROVISION FOR CREDIT LOSSES 979 581 424 -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 7,144 5,371 2,724 -------- -------- -------- NONINTEREST INCOME: Service charges on deposits 704 350 172 Gain on sale of loans 96 -- -- Gain (loss) on sale of investment securities 358 (71) (4) Other income 166 72 43 -------- -------- -------- Total noninterest income 1,324 351 211 -------- -------- -------- NONINTEREST EXPENSE: Salaries and employee benefits 3,449 2,445 2,034 Premises and equipment expenses 1,220 890 739 Advertising 144 108 102 Office supplies 111 100 96 Outside data processing 349 253 158 Other expenses 1,172 868 657 -------- -------- -------- Total noninterest expense 6,445 4,664 3,786 -------- -------- -------- INCOME (LOSS) BEFORE INCOME TAX EXPENSE 2,023 1,058 (851) INCOME TAX EXPENSE 269 -- -- -------- -------- -------- NET INCOME (LOSS) $ 1,754 $ 1,058 $ (851) ======== ======== ======== INCOME (LOSS) PER SHARE: Basic $ 0.61 $ 0.36 $ (0.29) Diluted $ 0.58 $ 0.36 $ (0.29)
See notes to consolidated financial statements. 31 EAGLE BANCORP, INC. Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2001, 2000 and 1999 (In Thousands Dollars)
Accumulated Retained Other Total Common Earnings Comprehensive Stockholders' Stock Surplus (Deficit) Income (loss) Equity -------- -------- -------- ------------- ------------- Balances at January 1, 1999 $ 17 $ 16,483 $ (1,562) $ 12 $ 14,950 --------- Net loss -- -- (851) -- (851) Other comprehensive income- unrealized loss on investment securities available for sale -- -- -- (424) (424) -------- Total other comprehensive income (loss) -- -- -- -- (1,275) -------- -------- -------- -------- -------- Balances at December 31, 1999 17 16,483 (2,413) (412) 13,675 -------- Five-for-four stock split in the form of a 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 -- -- -- -- 2,297 -------- -------- -------- -------- -------- Balances at December 31, 2000 21 16,479 (1,355) 377 15,522 -------- Seven-for-five stock split in the form of a 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 ======== ======== ======== ======== ========
See notes to consolidated financial statements. 32 EAGLE BANCORP, INC. Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999 (dollars in thousands)
2001 2000 1999 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 1,754 $ 1,058 $ (851) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Provision for credit losses 979 581 424 Increase in deferred income taxes (391) Depreciation and amortization 420 341 290 Gain on sale of loans (96) -- -- Origination of loans held for sale (2,955) -- -- Proceeds from sale of loans 3,051 -- -- (Gains) loss on sale of investment securities (358) 71 4 Increase in other assets 53 (589) (359) Increase in other liabilities 301 290 141 --------- --------- --------- Net cash provided by (used by) in operating activities 2,652 1,752 (351) CASH FLOWS FROM INVESTING ACTIVITIES: Increase in interest bearing deposits with other banks (46) (115) -- Purchases of available for sale investment securities (147,397) (48,929) (66,630) Proceeds from maturities of available for sale securities 131,113 43,915 49,752 Proceeds from sale of available for sale securities 9,413 9,929 2,425 Decrease (increase) in federal funds sold 2,121 3,979 (671) Net increase in loans (70,221) (53,881) (43,715) Bank premises and equipment acquired (968) (280) (579) --------- --------- --------- Net cash used in investing activities (75,985) (45,382) (59,418) CASH FLOWS FROM FINANCING ACTIVITIES: Increase in deposits 59,831 44,866 56,360 Increase in customer repurchase agreements 2,374 3,095 5,678 (Decrease) increase in short-term borrowings (1,040) 765 275 Proceeds from long-term borrowings 9,675 -- -- Issuance of common stock 44 -- -- --------- --------- --------- Net cash provided by financing activities 70,884 48,726 62,313 NET (DECREASE) INCREASE IN CASH (2,449) 5,096 2,544 CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 8,932 3,836 1,292 --------- --------- --------- CASH AND DUE FROM BANK AT END OF YEAR $ 6,483 $ 8,932 $ 3,836 ========= ========= ========= SUPPLEMENTAL CASH FLOWS INFORMATION: Interest paid $ 6,029 $ 4,349 $ 1,964 Income taxes paid $ 647 $ -- $ --
See notes to consolidated financial statements. 33 EAGLE BANCORP, INC. Notes to Consolidated Financial Statements for the Years Ended December 31, 2000, 1999 and 1998 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 2001. 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. 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. 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. Generally, loans are considered impaired 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. 34 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 unallocated 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. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. 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, except for leasehold improvements which are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. The costs of major renewals and betterments are capitalized, while the costs of ordinary maintenance and repairs are 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 reverse. 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 the years 2000, 1999 or 1998. 35 NET INCOME (LOSS) PER COMMON SHARE Basic net income (loss) per common share is computed by dividing net income (loss) 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 July 2001, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 102, "Selected Loan Loss Allowance Methodology and Documentation Issues." SAB 102, summarizes certain SEC views on the development, documentation, and application of a systematic methodology as required by Financial Reporting Release No. 28 for determining allowances for loan and lease losses in accordance with accounting principles generally accepted in the United States. In particular, the guidance focuses on the documentation the staff normally would expect registrants to prepare and maintain in support of their allowances for credit losses. SAB 102 provides parallel guidance to the federal banking agencies' guidance issued through the Federal Financial Institutions Examination Council as interagency guidance, "Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions". Management believes the Company is in compliance with the provisions of SAB 102. In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria that intangible assets acquired in a purchase method business combination must be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The adoption of SFAS Nos. 141 and 142 had no effect on the financial position or results of operations of the Company. 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 for SFAS No. 144 are effective for years beginning after December 15, 2001. The adoption of SFAS No. 144 is not expected to affect 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 2001, the Bank maintained balances at the Federal Reserve (in addition to vault cash) to meet the reserve requirements plus balances to partially compensate for services. In addition, the Bank maintained balances with the Federal Home Loan Bank and two domestic correspondents as compensation for services they provided to the Bank. 36 3 INVESTMENTS AVAILABLE FOR SALE (in thousands) The amortized cost and estimated fair values of investments available for sale at December 31, 2001 and 2000 are as follows:
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 25,467 387 (100) 25,754 Federal Reserve and Federal Home Loan Bank stock 880 -- -- 880 Other equity investments 269 5 (9) 265 -------- -------- -------- -------- $ 39,154 $ 394 $ (109) $ 39,439 ======== ======== ======== =========
Gross Gross Estimated Amortized Unrealized Unrealized Fair 2000 Cost Gains Losses Value ---- --------- ---------- ----------- ---------- U. S. Treasury securities $ 1,500 $ 7 $ -- $ 1,507 U. S. Government agency securities 29,618 445 (75) 29,988 Federal Reserve and Federal Home Loan Bank stock 627 -- -- 627 Other equity investments 276 26 (26) 276 -------- -------- -------- -------- $ 32,021 $ 478 $ (101) $ 32,398 ======== ======== ======== =========
The amortized cost and estimated fair values of investments available for sale at December 31, 2001 and 2000 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.
2001 2000 ----------------------------------------------------------- Amortized Estimated Fair Amortized Estimated Fair Cost Value Cost Value --------- ------------- --------- ------------ Amounts maturing: One year or less $12,387 $12,391 $ 6,640 $ 6,620 After one year through five years 10,943 10,974 17,804 18,047 After five years through ten years 14,675 14,929 6,674 6,827 Investments in FRB, FHLB and other equity securities 1,149 1,145 903 904 ---------- ------------ --------- ----------- $39,154 $39,439 $32,021 $32,398 ========== ============ ========= ===========
Realized gains on sale of investment securities were $375 thousand and realized losses on sale of investment securities was $17 thousand in 2001 and $71 thousand in 2000, and $4 thousand in 1999. Proceeds from sales of AFS securities in 2001 were $9.41 million, 2000 were $9.93 million and in 1999 $2.43 million. The weighted average yields of the investment portfolio at December 31, 2001 and 2000 were as follows:
2001 2000 ---- ---- One year or less 1.95% 5.61% After one year through five years 4.27% 7.06% After five years through ten years 6.56% 7.30% Total weighted average yield exclusive of equity securities 4.17% 6.96%
37 4 LOANS AND ALLOWANCE FOR CREDIT LOSSES (dollars in thousands) 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 amortized deferred fees, at December 31, 2001 and 2000 are summarized by type as follows:
2001 2000 ---- ---- Commercial $ 50,932 $ 37,104 Real Estate - commercial 87,200 58,214 Construction 19,038 9,952 Home equity 26,656 12,425 Other consumer 4,103 23 -------- -------- Total loans 187,929 117,718 Less: allowance for credit losses (2,111) (1,142) -------- -------- Loans, net $185,818 $116,576 ======== ========
Loans, net of amortized deferred fees, at December 31, 2001, are summarized by maturity as follows:
1 year to 5 years to Greater than 1 year 5 years 10 years 10 years ------ --------- ---------- ------------ Commercial $16,595 $21,489 $ 9,615 $ 3,233 Real Estate - commercial 3,456 24,192 49,679 9,873 Construction 14,376 846 3,816 -- Home equity -- 21,857 4,061 738 Other consumer 1,128 2,125 24 826 ------- ------- ------- ------- Total loans $35,555 $70,509 $67,195 $14,670 ======= ======= ======= =======
Of loans which mature after one year $96,300 are floating rate and $56,074 are fixed rate, or have rate Adjustments features greater than one year but five years or less. Activity in the allowance for credit losses for the years ended December 31, 2001, 2000 and 1999 is shown below: 2001 2000 1999 ---- ---- ---- Balance at beginning of year $ 1,142 $ 579 $ 164 Provision for credit losses 979 581 424 Loan charge-offs - individual (23) (18) (11) Loan recoveries - individual 13 -- 2 ------- ------- ------- Balance at end of year $ 2,111 $ 1,142 $ 579 ======= ======= ======= Net loan charge offs to average outstanding loans was 0.01%for 2001 and 0.02% for 2000 and 1999. As of December 31, 2001 and 2000 and for the years then ended, there were no loans classified as impaired under SFAS No. 114. 38 5 PREMISES AND EQUIPMENT Premises and equipment include the following at December 31: (dollars in thousands) 2001 2000 ---- ---- Leasehold improvements $ 1,826 $ 1,476 Furniture and equipment 2,456 1,838 Less accumulated depreciation and amortization (1,110) (690) ------- ------- Premises and equipment, net $ 3,172 $ 2,624 ======= ======= 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 $515 thousand in 2001, $357 thousand in 2000, and $265 thousand in 1999. At December 31, 2001, future minimum lease payments under noncancellable operating leases having an initial term in excess of one year are as follows: Years ending December 31: 2002 $ 765 2003 698 2004 639 2005 602 2006 603 Thereafter 2,141 ------ Total minimum lease payments $5,448 ====== Total minimum lease payments include commitment on a lease for a new office at 9600 Blackwell Road, Rockville, MD to be occupied in March 2002 and a new Operations Center to be occupied January 2002. Lease payments on the Shady Grove office commenced in February 2002. 6 DEPOSITS (dollars in thousands) The remaining maturity of certificates of deposit $100,000 or more at December 31, 2001 are as follows: 2001 2000 ---- ---- Three months or less $ 9,074 $ 9,409 More than three months through six months 9,058 3,581 More than six months through twelve months 15,698 14,871 Over twelve months 1,563 4,977 ------- ------- $35,393 $32,838 ------- ------- 39 Interest expense on deposits for the years ended December 31, 2001, 2000 and 1999 is as follows: 2001 2000 1999 ---- ---- ---- Interest bearing transaction $ 232 $ 295 $ 154 Savings and money market 1,843 1,772 874 Time, $100,000 or more 2,006 1,325 407 Other time 1,405 640 329 ------ ------ ------ $5,486 $4,032 $1,764 ====== ====== ====== 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 Repurchase agreements are securities sold to the Bank's customers, at the customer's request, under a continuing "rollover" contract that matures in one business day. The underlying securities sold are U. S. Treasury notes or Federal agencies which are segregated in the Bank's Federal Reserve Bank account from the Company's other investment securities. The following table presents certain information for customer repurchase agreements:
Customer repurchase agreements 2001 2000 ----------------------------- -------------------------------- Amount Rate Amount Rate ------ ---- ------ ---- At Year-End $13,452 0.50% - 2.50% $ 11,078 2.96% - 5.75% Average for the Year 12,921 3.16% 8,485 4.16% Maximum month-end balance 17,078 0.50% - 6.00% 12,062 2.96% - 5.75%
The Bank has commitments from correspondent banks under which it can purchase up to $15 million in federal funds and secured reverse repurchase agreements on a short-term basis. The Bank also can draw Federal Home Bank advances up to $35 million against which it had $8 million outstanding at December 31, 2001. The Company has a line of credit approved for $5 million secured by stock in the Bank against which it had borrowings outstanding of $1.7 million at December 31, 2001. At December 31, 2001, the Bank had outstanding a long-term FHLB advance of $8 million at a fixed rate of 4.28% with a final maturity of October 2005. At December 31, 2001, the Company had outstanding, under its line of credit of $5 million, a balance of $1.7 million at a rate, tied to prime, of 4. 50% with final maturity of February 2006. 8 INCOME TAXES Federal and state income tax expense (benefit) consist of the following:
Periods Ended December 31, ----------------------------- 2001 2000 1999 ---- ---- ---- Current federal income tax $ 601 $ -- $ -- Current state income tax 59 -- -- Deferred federal income tax expense (benefit) (313) -- -- Deferred state income tax expense (benefit) (78) -- -- ----- -------- --------- Total income tax expense (benefit) $ 269 $ -- $ -- ===== ======== =========
40 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, ------------------------------ 2001 2000 1999 ---- ---- ---- Deferred tax assets: Allowance for credit losses $ 531 $ 258 $ 126 Deferred loan fees and costs -- 44 25 Other 57 30 42 Net operating loss carryforwards -- 166 670 Tax on unrealized loss on securities available for sale -- -- 102 ----- ----- ----- Gross deferred tax assets 588 498 965 Less valuation allowance (--) (279) (903) ----- ----- ----- Total deferred tax assets 588 219 62 ----- ----- ----- Deferred tax liabilities: Tax on unrealized gain on securities available for sale (97) (128) (--) Premises and equipment (88) (91) (62) Deferred loan fees and costs (12) -- -- ----- ----- ----- Total deferred tax liabilities (197) (219) (62) Net deferred income taxes $ 391 $ -- $ -- ----- ----- -----
A reconciliation of the statutory federal income tax rate to the Company's effective income tax rate follows:
Periods Ended December 31, ------------------------------ 2001 2000 1999 ---- ---- ---- Statutory federal income tax rate 34.0% 34.0% 34.0% State income taxes, net of federal income tax benefit -- -- -- Recognition of deferred taxes -- -- -- Valuation allowance (20.9%) (34.0%) (34.0%) Other .2% -- -- ----- ----- ----- Effective tax rates 13.3% 0.0% 0.0% ----- ----- -----
9 INCOME (LOSS) PER COMMON SHARE In the following table, basic earnings per share is derived by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding and does not include the effect of any potentially dilutive common stock equivalents. The diluted earnings per share calculation method is derived 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 dividend declared in 2001. 41 The calculation of net income (loss) per common share for the years ended December 31 was as follows:
2001 2000 1999 ---- ---- ---- Basic: Net income (loss) allocable to common stockholders $ 1,754 $ 1,058 $ (851) Average common shares outstanding 2,890 2,887 2,887 Basic net income (loss) per share $ 0.61 $ 0.36 $ (0.29) Diluted: Net income (loss) allocable to common stockholders $ 1,754 $ 1,058 $ (851) Average common shares outstanding 2,890 2,887 2,887 Adjustment for stock options 144 22 -- Average common shares outstanding-diluted 3,034 2,909 2,887 Diluted net income (loss) per share $ 0.58 $ 0.36 $ (0.29)
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. 2001 2000 ---- ---- Balance at January 1 $ 2,001 $ 1,649 Additions 531 1,415 Repayments (276) (1,063) ------- ------- Balance at December 31 $ 2,256 $ 2,001 ======= ======= 11 STOCK OPTION PLAN The shareholders, at their May 14, 1998 meeting, approved the Eagle Bancorp, Inc. 1998 Stock Option Plan (the "Plan"). The plan provides for the granting of incentive and nonqualifying options to selected key employees and members of the Board on a periodic basis. Options for not more than 309,375 shares of common stock may be granted under the Plan and the term of such options shall not exceed ten years. Management will present to shareholders, at the annual meeting, a proposal to increase the authorized shares under the Plan by 145,900 to 579,025. There are 19,000 shares which have been granted contingent upon the approval of the proposal by the shareholders. 42 Following is a summary of changes in shares under option for the years indicated: (In Thousands Of Shares)
Year Ended December 31, ----------------------------------------------------------------------------------- 2001 2000 1999 ---- ---- ---- Weighted Weighted Weighted Number Average Number Average Number Average of Shares Exercise Price of Shares Exercise Price of Shares Exercise Price --------- -------------- --------- -------------- --------- -------------- Outstanding at beginning of year 333 $ 5.71 306 $ 5.71 262 $ 5.71 Granted 96 10.06 30 5.80 46 5.71 Exercised (8) 5.71 -- 0.00 -- 0.00 Cancelled -- (5.71) (3) (5.71) (2) (5.71) --------- --------- --------- -------- ------- -------- Outstanding at end of year 421 6.72 333 5.72 306 5.71 ========= ========= ======== Weighted average fair value of options granted during the year $4.35 $ 3.10 $ 2.53 ========= ======== ======== Weighted average remaining contract life 8.79 years
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, 2000 and 1999. Because the options granted in 1998 were subject to stockholder approval at the May 14, 1999 stockholders' meeting, they are treated as if they were granted in 1999 for the purpose of calculating stock-based compensation disclosures.
2001 2000 ---- ---- Dividend yield 0.00% 0.00% Expected volatility 10.00% 10.00% Risk free interest 4.84 - 5.68% 5.28 - 6.46% Expected lives (in years) 10 10
The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-based Compensation" (SFAS 123), 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, 2001. 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,
2001 2000 1999 ---- ---- ---- Net Income (loss): As reported $ 1,754 $ 1,058 $ (851) Pro forma 1,360 975 (1,076) Basic net income (loss) per share: As reported $ 0.61 $ 0.36 (.29) Pro forma 0.47 0.34 (.37) Diluted net income (loss) per share: As reported $ 0.58 $ 0.36 (.29) Pro forma 0.45 0.34 (.37)
The pro forma amounts are not representative of the effects on reported net income for future years. 43 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 $47 thousand, $46 thousand and $41 thousand in 2001, 2000 and 1999, 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, 2001 and 2000 are as follows:
2001 2000 ---- ---- Loan commitments $ 32,295 $ 20,207 Unused lines of credit 47,885 23,807 Letters of credit 1,757 2,313
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, 2001 the Company also had commitments to vendors for leasehold improvement and equipment expenses associated with the Bank's new Shady Grove office and completion of a new operations center. The amount of these commitments outstanding at December 31, 2001 were $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, 2001, 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 judgements by the regulators about components, risk weighing, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank 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, 2001 and 2000, 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, 2001 and for the Bank as of December 31, 2000 are presented in the table below: 44
To Be Well (In Thousands of Dollars) For Capital Capitalized Under Company Bank Adequacy Prompt Corrective In thousands Actual Actual Purposes Action Provisions* ------------------------------------------------------------------------------------------ As of December 31, 2001 Amount Ratio Amount Ratio Ratio Ratio ------ ----- ------ ----- ----- ----- 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% As of December 31, 2000 Total capital (to risk-weighted assets) $ 16,281 12.7% $ 15,217 11.9% 8.0% 10.0% Tier 1 capital (to risk weighted assets) $ 15,145 11.8% 14,075 11.0% 4.0% 6.0% Tier 1 capital ( to average assets) $ 15,145 9.6% 14,075 9.0% 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, 2001, 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 December 2001, the Bank paid dividends of $150 thousand to its parent. 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 instruments' 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. 45 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 are not material. The estimated fair values of the Company's financial instruments at December 31, 2001 and 2000 are as follows:
2001 2000 -------------------------------------------------------------- Carrying Fair Carrying Fair (In Thousands of Dollars) Value Value Value Value ----- ----- ----- ----- ASSETS: Cash and due from banks $ 6,483 $ 6,483 $ 8,932 $ 8,932 Interest bearing deposits with other banks 161 163 115 116 Federal funds sold -- -- 2,121 2,121 Investment securities 39,439 39,439 32,398 32,398 Loans, net 185,818 185,867 116,576 116,516 LIABILITIES: Noninterest bearing deposits 37,235 37,235 26,232 26,232 Interest-bearing deposits 158,453 158,787 109,625 109,794 Borrowings 23,127 23,806 12,118 12,139
16 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table reports the unaudited results of operations for each quarter during 2001, 2000 and 1999:
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 taxes 480 335 726 482 Income tax (benefit) expense 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
46
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 1,219 1,031 857 Net interest income 1,724 1,529 1,457 1,242 Provision for credit losses 249 104 105 123 Net interest income after provision for credit losses 1,475 1,425 1,352 1,119 Noninterest income 102 122 52 75 Noninterest expense 1,314 1,159 1,124 1,067 Net income before income taxes 263 388 280 127 Income tax benefit -- -- -- -- Net income 263 388 280 127 Loss per share (basic and diluted are equal) $ 0.12 $ 0.19 $ 0.14 $ 0.06
1999 ---------------------------------------------------- Fourth Third Second First quarter quarter quarter quarter ------- ------- ------- ------- Total interest income $ 1,771 $ 1,350 $ 1,125 $ 922 Total interest expense 695 498 433 394 Net interest income 1,076 852 692 528 Provision for credit losses 98 139 121 66 Net interest income after provision for credit losses 978 713 571 462 Noninterest income 77 56 46 35 Noninterest expense 1,074 940 916 859 Loss before income taxes (19) (171) (299) (362) Income Tax Benefit -- -- -- -- Net loss (19) (171) (299) (362) Loss per share (basic and diluted are equal) $ (0.01) $ (0.08) $ (0.14) $ (0.18)
47 17 PARENT COMPANY FINANCIAL INFORMATION Condensed financial information for Eagle Bancorp, Inc. (Parent Company only) is as follows: CONDENSED BALANCE SHEETS December 31, 2001, and 2000
ASSETS: 2001 2000 ---- ---- Cash $ 15 $ 34 Investment securities available for sale 1,040 1,040 Loans, net of allowance for credit losses 2000- $0 -- 535 Investment in subsidiary 17,695 14,438 Other assets 70 23 -------- -------- TOTAL ASSETS $ 18,820 $ 16,070 ======== ======== LIABILITIES: Accounts payable $ 13 $ 8 Short-term borrowings -- 540 Long-term borrowings 1,675 -- -------- -------- Total liabilities 1,688 548 -------- -------- STOCKHOLDERS' EQUITY: Common stock 29 21 Surplus 16,515 16,479 Retained Earnings 399 (1,354) Accumulated other comprehensive income 189 376 -------- -------- Total stockholders' equity 17,132 15,522 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,820 $ 16,070 ======== ========
48 CONDENSED STATEMENTS OF OPERATIONS For the Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999 ---- ---- ---- INCOME EagleBank dividends $ 150 $ -- $ -- Interest and dividends 61 169 461 Loss on sale of investment securities (11) -- -- ------- ------- ------- Total Income 200 169 461 EXPENSES: Salaries and employee benefits 27 20 20 Interest expense 32 7 12 Legal and professional 24 14 26 Directors' fees 12 24 28 Other 101 88 88 ------- ------- ------- Total expenses 196 153 174 ------- ------- ------- INCOME BEFORE INCOME TAX BENEFIT AND EQUITY IN UNDISTRIBUTED LOSS OF SUBSIDIARY 4 16 287 INCOME TAX BENEFIT (5) -- -- ------- ------- ------- INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME (LOSS) OF SUBSIDIARY 9 16 287 EQUITY IN UNDISTRIBUTED INCOME (LOSS) OF SUBSIDIARY 1,754 1,041 (1,138) ------- ------- ------- NET INCOME (LOSS) $ 1,754 $ 1,058 $ (851) ======= ======= =======
49 CONDENSED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999 ---- ---- ---- NET INCOME (LOSS) $ 1,754 $ 1,058 $ (851) ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Loss (gain) on sale of assets 11 (4) (2) Equity in undistributed (income) loss of subsidiary (1,745) (1,042) 1,137 Decrease (increase) in other assets (47) 26 35 (Decrease) increase in accounts payable 5 2 (3) ------- ------- ------- Net cash (used) provided by operating activities (22) 40 316 ------- ------- ------- CASH FLOW FROM INVESTING ACTIVITIES Net decrease (increase) in loans 535 (73) 4,228 Purchase of available for sale investment securities (69) -- (5,969) Proceeds from sale of available for sale investment securities 58 3,239 4,887 Investment in subsidiary (1,700) (3,750) (3,500) ------- ------- ------- Net cash used in investing activities (1,176) (584) (354) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock 44 -- -- Borrowings 1,135 265 275 ------- ------- ------- Net cash provided by financing activities 1,179 265 275 ------- ------- ------- NET (DECREASE) INCREASE IN CASH (19) (279) 237 CASH AT BEGINNING OF PERIOD 34 313 76 ------- ------- ------- CASH AT END OF PERIOD $ 15 $ 34 $ 313 ======= ======= =======
50 EagleBank Healthcare Advisory Board
Mark T Birns, M.D. Birns, Gloger & Pollack, M.D., P.C. Bruce J. Bortnick, M.D. Shady Grove Radiological Consultants Sarah M. Cato Prizm Management Group, Inc. Stephen J. Kominsky, D.P.M. Mid-Atlantic Podiatry Associates Frederick P. Smith, M.D. Kenwood Healthcare Management Larry E. Walker The Walker Group Michael H. Weber, D.D.S. Endodontic Associates of Greater Washington Jeffrey E. Weintraub, CPA Kamerow, Weintraub & Swain, LLP Eagle Bancorp, Inc. Founders Advisory Board Leslie M. Alperstein President, Washington Analysis Joshua M. Freeman CEO, Carl Freeman Associates Mitchell D. Herman President, Dana Creative Concepts Corp. Robert J. Reaves President, R.M. Thornton, Inc. John P. Townsend, Jr. President, Bogman, Inc.
51 EX-23 4 ex23.txt EXHIBIT 23 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We hereby consent to the incorporation by reference in Registration Statement No. 333-78449 on Form S-8, and in the Annual Report on Form 10-KSB of Eagle Bancorp, Inc. for the year ended December 31, 2001, of our report dated February 2, 2002, relating to the consolidated financial statements of Eagle Bancorp, Inc. /s/ Stegman and Company Baltimore, Maryland March 27, 2002 -----END PRIVACY-ENHANCED MESSAGE-----