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, 1999
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.
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(Name of Small Business Issuer in its Charter)
Maryland 52-1943477
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization
7815 Woodmont Avenue, Bethesda, Maryland 20814
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(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
$1.00 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. X
The issuer's revenues for the fiscal year ended December 31, 1999 were
approximately $5,381,000
The aggregate market value of the outstanding Common Stock held by nonaffiliates
as of March 17, 2000 was approximately $14,282,044.
As of March 17, 2000, the number of outstanding shares of the Common Stock,
$1.00 par value, of Eagle Bancorp, Inc. was 1,650,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Annual Report to Shareholders
for the Year Ended December 31, 1999 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 24, 2000 are
incorporated by reference in part III hereof.
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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 four southern Montgomery County offices
located in Rockville, Bethesda and Silver Spring, Maryland.
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, is developing 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 be 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) Traditional general purpose consumer installment loans
including automobile and personal loans. In addition, the Bank
offers personal lines of credit.
4) Credit card services are offered through an outside vendor.
The direct lending activities in which the Bank engages each carries
the risk that the borrowers will be unable to perform on their obligations. As
such, interest rate policies of the Federal Reserve Board and general economic
conditions, nationally and in the Bank's primary market area have a significant
impact on the Bank's and the Company's
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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. A complete IRA program is
available.
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.
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 Rockville and Silver
Spring, which it believes 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 capitalizes upon the extensive business and personal
contacts and relationships of its Directors and Executive Officers to establish
the Bank's initial customer base. To introduce new customers to the Bank,
reliance is placed on aggressive officer-originated calling programs and
director, customer and shareholder referrals.
The risk of nonpayment (or deferred payment) of loans is inherent in
commercial banking. The Bank's marketing focus on small to medium-sized
businesses may result in the assumption by the Bank of certain lending risks
that are different from those attendant to loans to larger companies. Management
of the Bank carefully evaluates all loan applications and attempts to minimize
its credit risk exposure by use of thorough loan application, approval and
monitoring procedures; however, there can be no assurance that such procedures
can significantly reduce such lending risks.
In addition to holding all of the capital stock of the Bank, the
Company holds investments in securities and loan participation purchased from
the Bank or other financial institutions.
EMPLOYEES
At February 28, 2000 that Bank employed 39 persons on a full time
basis, five of which are senior 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.
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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 three branches, located at 110 North Washington
Street, Rockville, 8677 Georgia Avenue and 850 Sligo Avenue, Silver Spring,
Maryland.
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 840,000, represents
the second largest suburban employment center in the Washington, D.C. area, with
approximately 470,000 jobs in 1996, and an unemployment rate below the national
average. While government employment provides a significant number of jobs, over
80% 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 will be located. Much of the job growth and development is
located in that area and in the nearby I-270 technology corridor.
Household income for Montgomery County in 1996 was established at
$106,950 compared to a national average for similar counties of $67,090. Per
capita income of $38,400 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.
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
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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.
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
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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.
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
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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%.
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.
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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.
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.
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 commences in April
1998, at an 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, commencing April 1998, at an 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
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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 commencing April 1998, at an 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 Bank is negotiating for the lease of an additional 2,000 square
feet of space in Bethesda, Maryland, t house its operations department. This
expansion is necessitated by the rapid growth of the Bank. Subject to the
foregoing, the Company believes that its existing facilities are adequate to
conduct the Company's business.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in routine legal proceedings in the ordinary
course of its business. In the opinion of management, final disposition of these
proceedings will not have a material adverse effect on the financial condition
or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market for Common Stock and Dividends. The Company's Common Stock is
not traded on any organized exchange or on the Nasdaq National Market or the
Nasdaq Small Cap Market. As of February 28, 1999, three market makers offered to
make a market in the Common Stock in the over the counter "bulletin board"
market under the symbol "EGBN". No assurance can be given that an active or
established 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 since the third quarter of 1998, during which the Company's
initial public offering of shares was completed. 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. The Company has been advised,
and the reader should be aware, that the $15.00 high bid price during the fourth
quarter of 1998 involved a trade of an odd lot of very few shares. As of
December 31, 1999, there were 1,650,000 shares of Common Stock outstanding, held
by approximately 490 shareholders of record and approximately 750 beneficial
owners.
<TABLE>
<CAPTION>
Period Low Bid High Bid
- ----------------------------- ------------------------- -------------------------
<S> <C> <C>
Third Quarter 1998 $10.00 $10.50
Fourth Quarter 1998 $10.00 $15.00
First Quarter 1999 $10.00 $11.50
Second Quarter 1999 $10.00 $12.00
Third Quarter 1999 $10.00 $11.50
Fourth Quarter 1999 $10.00 $11.00
</TABLE>
Dividends. The Company has not paid any dividends to date. The payment
of dividends by the Company will depend largely upon the ability of the Bank,
its sole operating business, to declare and pay dividends to the
9
<PAGE>
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. It
is anticipated that the Bank will incur losses during its initial phase of
operations, and therefore, it is not anticipated that any dividends will be paid
by the Bank or the Company for at least three years and in the foreseeable
future. Even if the Bank and the Company have earnings in an amount sufficient
to pay dividends, the Board of Directors may determine, and it is the present
intention of the Board of Directors, to retain earnings for the purpose of
funding the growth of the Company and the Bank.
Regulations of the Federal Reserve Board and Maryland law place limits
on the amount of dividends the Bank may pay to the Company without prior
approval. Prior regulatory approval is required to pay dividends which exceed
the Bank's net profits for the current year plus its retained net profits for
the preceding two calendar years, less required transfers to surplus. State and
federal bank regulatory agencies also have authority to prohibit a bank from
paying dividends if such payment is deemed to be an unsafe or unsound practice,
and the Federal Reserve Board has the same authority over bank holding
companies.
The Federal Reserve Board has established guidelines with respect to
the maintenance of appropriate levels of capital by registered bank holding
companies. Compliance with such standards, as presently in effect, or as they
may be amended from time to time, could possibly limit the amount of dividends
that the Company may pay in the future. In 1985, the Federal Reserve Board
issued a policy statement on the payment of cash dividends by bank holding
companies. In the statement, the Federal Reserve Board expressed its view that a
holding company experiencing earnings weaknesses should not pay cash dividends
exceeding its net income, or which could only be funded in ways that weaken the
holding company's financial health, such as by borrowing. As a depository
institution, the deposits of which are insured by the FDIC, the Bank may not pay
dividends or distribute any of its capital assets while it remains in default on
any assessment due the FDIC. The Bank currently is not in default under any of
its obligations to the FDIC.
Recent Sales of Unregistered Shares. None.
Use of Proceeds: On February 9, 1998, the Company's registration
statement on Form SB-2 (No. 333-42083)relating to its initial offering of common
stock, $.01 par value, were declared effective by the Securities and Exchange
Commission, and the offering commenced. On May 13, 1999, the Company's
registration statement on Form SB-2 (No. 333-51197), registering an additional
270,000 shares, was declared effective. On June 22, 1998, the offering was
terminated, all of the 1,650,000 shares being offered having been sold at the
offering price of $10.00 per share. Aggregate expenses of the offering were
$100,413, resulting n net proceeds of the offering of $16,399,587. No person or
entity underwrote the Company's offering, which was made through the efforts of
the Company's organizing directors and executive officers, with the limited
assistance of Koonce Securities, Inc. in order to comply with the securities
laws of certain of the states in which the shares were offered. Koonce receive a
fee of $10,000 for it services in connection with the offering, and
reimbursement of $1,280 in out of pocket expenses.
During the Company's organizational period, certain directors of the
Company made advances to the Company which were repaid from the proceeds of the
offering, with an aggregate of $5,010 in interest, representing interest at the
prime rate, as adjusted on a monthly basis. A portion of the loans were
converted, without interest, into payment for subscriptions for common stock in
the offering.
An aggregate of $11,250,000 has been contributed through February 28,
2000 to the capital of the Bank for use in its lending and investment
activities. An aggregate of $3,049,000 has been expended by the Bank in
renovation, construction and equipping of its main offices and three branch
offices. $462,000 of the funds retained by the Company have been used for the
purchase of loan participations from the Bank. The remaining proceeds of the
offering retained by the Company are held in temporary investments pending
contribution to the Bank.
10
<PAGE>
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 3 to 12 of the Company's Annual Report to Shareholders for
the year ended December 31, 1999.
ITEM 7. FINANCIAL STATEMENTS.
The information required by this item is incorporated by reference to
the Consolidated Financial Statements appearing at pages 13 to 32 of the
Company's Annual Report to Shareholders for the year ended December 31, 1999.
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 3 to 6 and 10 of the Company's definitive proxy
statement for the Annual Meeting of Shareholders to be held on May 24, 2000.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to,
the material appearing at pages 6 to 9 of the Company's definitive proxy
statement for the Annual Meeting of Shareholders to be held on May 24, 2000.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
SECURITIES OWNERSHIP OF DIRECTORS, OFFICERS AND CERTAIN BENEFICIAL OWNERS
The information required by this Item is incorporated by reference to,
the material appearing at pages 2 to 3 of the Company's definitive proxy
statement for the Annual Meeting of Shareholders to be held on May 24, 2000.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to,
the material appearing at pages 9 to 10 of the Company's definitive proxy
statement for the Annual Meeting of Shareholders to be held on May 24, 2000.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibits
<S> <C>
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 (4)
10.3 Employment Agreement between Thomas D. Murphy and the Company (5)
11
<PAGE>
11 Statement Regarding Computation of Per Share Income
13 Annual Report to Shareholders for the year ended December 31, 1999
21 Subsidiaries of the Registrant
The sole subsidiary of the Registrant is EagleBank, a Maryland
chartered commercial bank.
27 Financial Data Schedule
</TABLE>
- -----------------------------
(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 10.2 to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1998.
(5) Incorporated by reference to Exhibit 10.3 to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1998.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed in the fourth quarter of 1999.
Subsequent to year end, the Company filed a report on Form 8-K, dated January
20, 2000, under Item 5, disclosing the declaration of a stock split in the form
of a 25% stock dividend, payable on March 31, 2000 to holders of record on March
17, 2000.
12
<PAGE>
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, 2000 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.
<TABLE>
<CAPTION>
Name Position Date
<S> <C> <C>
/s/ Leonard L. Abel Chairman of the Board of Directors March 29, 2000
- -------------------
Leonard L. Abel
/s/ Dudley C. Dworken Director March 29, 2000
- ----------------------
Dudley C. Dworken
Director March , 2000
- --------------------------
Eugene F. Ford, Sr.
Director March , 2000
- -----------------------
William A. Koier
/s/ Ronald D. Paul President and Director March 29, 2000
- -------------------- Principal Executive Officer
Ronald D. Paul
/s/ H.L. Ward
- ---------------- Executive Vice President and Director March 29, 2000
H.L. Ward of the Company, President of the Bank
/s/ Wilmer L. Tinley Senior Vice President of the Bank,
- --------------------- Chief Financial Officer of the Company March 29, 2000
Wilmer L. Tinley Principal Financial and Accounting Officer
</TABLE>
13
EXHIBIT 11
Statement of Computation of Per Share Earnings
Set forth below are the bases for the computation of earnings per share
for the periods shown. Information for all periods has been adjusted to reflect
a stock split in the form of a 25% stock dividend declared on January 19, 2000
and payable on March 31, 2000.
<TABLE>
<CAPTION>
Year Ended December 31,
Earnings (loss) Per Common Share 1999 1998
--------------- --------------
<S> <C> <C>
Basic (0.41) $(1.29)
Average Shares Outstanding 2,062,500 1,084,931
Diluted (0.41) $(1.29)
Average Shares Outstanding 2,062,500 1,084,931
</TABLE>
EXHIBIT 13
Annual Report to Shareholders
for the Year Ended December 31, 1999
<PAGE>
To Our Stockholders,
We are happy to report that we closed the old millennium on a high note, having
reached total assets at year-end in excess of $113,000,000 - an extraordinary
milestone for any bank's first full year of operation. by year-end we also added
a fourth office. Although we sustained an operating loss for the year, we are
now profitable on a month-to-month basis.
Our growth is due in large part to our skilled staff, our pro-active directors
and to many of you who have done and continue to do business with us.
In recognition of the patience and loyalty of our stockholders during these
organizational and start-up times, we declared a 25% stock dividend that was
payable March 31, 2000.
Our stock is now trading on the NASDAQ exchange under the symbol EGBN. If you
can't visit us in person, you can reach us at our website, eaglebankmd.com.
Despite intense competition from banks and financial institutions and the ever
expanding technological innovations including internet banking, we enter the new
millennium confident of our ability to compete effectively and to offer our
customers sate-of-the-art banking on all levels. In addition to the standard
consumer and commercial loans, we have expanded our mortgage lines to include a
full array of home equity products, construction/permanent loans and commercial
real estate financing. As of mid-year, we anticipate being able to provide our
customers with online banking and bill paying. However, none of these expanded
services and products will be at the expense of the same friendly, personal and
responsive service that is at the heart of the EagleBank experience.
We look forward to meeting you at the annual meeting an May 24, or anytime at
your convenience at the Bank.
<TABLE>
<CAPTION>
<S> <C> <C>
Leonard L. Abel Ronald D. Paul H.L. Ward
Chairman, Eagle President and CEO Eagle Bancorp, Inc. President and
Bancorp, Inc. Chairman EagleBank CEO Eagle Bank
</TABLE>
<PAGE>
EAGLE BANCORP, INC. - 1999
SUMMARY OF FINANCIAL INFORMATION
(In Thousands)
Summary information is presented for the years 1999 and 1998. The Company was a
development stage company from October 28, 1997 to June 22, 1998. Management
believes that a presentation of comparative information for the two months of
1997 during which the Company was in existence would not provide a meaningful
comparison or material information regarding the Company's operations.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS 1999 1998
---- ----
<S> <C> <C>
Interest income $5,170 $1,011
Interest expense 2,022 277
Net interest income 3,148 734
Provision for credit losses 424 164
Noninterest income 216 23
Noninterest expense 3,791 1,992
Net loss (851) (1,399)
Basic loss per share (0.41) (1.29)
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL CONDITION (DECEMBER 31)
<S> <C> <C>
Total Assets $113,218 $52,039
Net loans 63,276 19,984
Total deposits 90,991 34,631
Total equity 13,675 14,949
</TABLE>
<PAGE>
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. (Company) and
EagleBank (Bank) for the years 1999 and 1998.
The Company was formed on October 28, 1997. In general, comparative
discussion of the results of operations for the year ended December 31,
1997 is not provided, as the Company had no operations other than
organizational activity in 1997, and as such, comparisons do not provide
accurate or meaningful information regarding the Company's financial
position or results of operations.
This discussion 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. 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 there 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 accom- panying 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 as
defined by the Federal Reserve System.
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, 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, second in Silver Spring, was opened September 1, 1999 at 850
Sligo Avenue, Silver Spring.
EagleBank was formed to serve the business community of Montgomery County,
Maryland, and contiguous areas. The Company believes that the accompanying
financial information attests to the support the Bank has received from the
community as assets of the Company reached $113 million as of December 31,
1999, an increase of 118% from December 31, 1998.
<PAGE>
RESULTS OF OPERATIONS
The Company reported a net loss of $850,793, for the year ended December
31, 1999 as compared to a net loss of $1,399,457 for the year ended
December 31, 1998. The loss per share for 1999 was $(0.41) and for 1998
$(1.29). The loss for 1999 was attributable to general operating costs of
the Bank as it grew its asset base during the year. The Bank lost $1.1
million during 1999 but monthly losses were reduced during the year as the
asset base grew, and for the month of December the Bank achieved its first
profitable month. Earnings on funds not invested in the Bank and held by
the Company offset operating losses of the Bank, resulting in the reported
consolidated loss of $851 thousand.
The Company ended the year with deposits at $90.9 million as compared to
$34.6 at December 31, 1998. A growth of 163%. Gross loans were at $63.9
million at December 31, 1999 as compared to $20.1 million at December 31,
1998. The increase in loans permitted management to meet its goal of
achieving a monthly operating profit at the Bank within eighteen months of
opening. The increase in loan volume was achieved without sacrificing
credit quality as discussed later under the section addressing the
provision for credit losses.
The Company made a provision for credit losses of $424 thousand and plans
to maintain the allowance for credit losses at an adequate level and ended
the year with an allowance of 1% of outstanding loans, excluding loans
fully secured by cash and readily marketable securities. 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.
During the year the Company contributed $3.5 million in additional capital
to the Bank from funds raised in the initial offering. The contributions
were made to maintain the Bank's capital at regulatory guidelines. Further
discussion of the transfers is in the capital section of this analysis.
It was expected that the Bank would sustain losses during its start up
period and not show an operating profit for any month for at least eighteen
months after opening for business. Management believes that the Bank's and
the Company's results will continue to improve as the Bank continues to
grow.
The following table sets out the returns on assets, returns on equity and
equity to assets (average) for the years 1999 and 1998:
1999 1998
---- ----
Return on assets (1.07)% (7.19)%
Return on equity (5.94)% (17.23)%
Equity to assets 18.06% 41.73%
Net Interest Income and Net Interest Margin
Net interest income is the difference between income on 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
interest bearing deposits and 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 1999 was $3,147,874 as compared to $733,226 for
1998. The income
<PAGE>
from earning assets in 1999 included a full year of banking operations and
income earned from a much larger asset base. The net interest income
reflected in the financial statements for 1998 includes interest earned on
subscriptions held by the Company prior to the issuance of stock and only
five full months of banking operations.
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 vs. cost of funds, management believes that margin provides
a better measurement of performance as it includes the effect of
noninterest bearing liabilities in its calculation. Margin is net interest
income expressed as a percentage of total earning assets. The increased
value of margin vs. spread can be seen when comparing 1999 to 1998. In 1998
the spread was 1.42% but the margin was 4.11% because of the high level of
noninterest bearing funding sources represented by capital and demand
deposits as compared to total liabilities and capital. In 1999 the spread
improved 189 basis points to 3.31% as earning assets moved into higher
yielding loans and out of lower yielding investment securities. Margin
increased only 18 basis points, to 4.29% as the average amount of interest
bearing liabilities increased by $47.6 million or 730% to $54.1 million in
1999, while the level of noninterest bearing liabilities increased by only
$6 million or 125%.
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.
The Company began 1999 expecting that interest rates would remain level or
possibly decline. Actions of the Federal Reserve to raise interest rates
has been persistent since the second quarter of 1999 and is continuing into
2000. During this period management expects to improve future margins from
higher loan yields and by investing maturing investment securities at
higher yields.
<PAGE>
AVERAGE BALANCES, INTEREST YIELDS, AND RATES, AND NET INTEREST MARGIN
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998
---- ----
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Interest earnings assets:
Loans $ 39,470,292 $ 3,378,751 8.56% $ 3,128,193 $269,265 8.61%
Investment securities 28,666,493 1,534,409 5.35% 12,236,066 621,985 5.05%
Federal funds sold and securities
purchased under agreement to
resell 5,201,747 256,365 4.93% 2,466,820 119,338 4.84%
---------- --------- ----- ---------- -------- -----
Total interest earning assets 73,338,532 5,169,525 7.05% 17,831,079 1,010,588 5.67%
Total noninterest earning assets 6,270,168 1,645,929
Less: allowance for credit losses 347,012 12,880
---------- ------
Total noninterest earning assets 5,923,156 1,630,449
---------- ---------
TOTAL ASSETS 79,261,688 $ 19,461,528
========== ==============
LIABILITIES AND STOCKHOLDERS'EQUITY
Interest bearing liabilities:
NOW accounts 9,293,494 154,156 1.66% 1,062,062 23,673 2.23%
Savings and money market accounts 22,778,174 873,993 3.84% 2,360,353 97,549 4.13%
Certificates of deposit:
Less than $100,000 7,185,837 328,526 4.57% 1,070,991 55,216 5.16%
$100,000 and more 8,584,027 407,009 4.74% 1,255,228 64,726 5.16%
Customer repurchase agreements 6,039,196 244,560 4.05% 560,958 20,499 3.65%
Short term borrowings 239,836 13,407 5.59% 214,808 15,699 7.31%
-------- ------- ----- -------- ------- -----
Total interest
bearing liabilities 54,120,564 2,021,651 3.74% 6,524,400 277,362 4.25%
----------- ---------- ---------- --------
Non interest bearing liabilities:
Non interest bearing deposits 10,545,016 808,391
Subscriptions - 3,937,919
Other liabilities 281,586 67,965
-------- ------
Total non interest bearing liabilities 10,826,602 4,814,275
---------
Stockholders equity 14,314,522 8,122,853
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 79,261,688 $ 19,461,528
=============== ==============
Net interest income $ 3,147,874 $733,226
============= ============
Net interest spread 3.31% 1.42%
Nst interest margin 4.29% 4.11%
</TABLE>
<PAGE><TABLE>
<CAPTION>
RATE VOLUME ANALYSIS OF NET INTEREST INCOME
1999
1999 COMPARED WITH 1998
Due to Change in Average Increase or
Volume Rate Decrease
<S> <C> <C> <C>
INTEREST EARNED ON:
Loans $ 3,111,050 $ (1,564) $ 3,109,486
Investment securities 875,849 36,575 912,424
Federal funds sold 134,809 2,218 137,027
-------- ------ -------
Total interest income 4,121,708 37,229 4,158,937
INTEREST PAID ON:
Now accounts 136,537 (6,054) 130,483
Savings and MMA accounts 783,282 (6,838) 776,444
Certificates of deposit 627,238 (11,645) 615,593
Customer repurchase
agreements 221,817 2,244 224,061
Other borrowing 1,403 (3,695) (2,292)
------ ------- -------
Total Interest Expense 1,770,277 (25,988) 1,744,289
---------- -------- ---------
NET INTEREST INCOME $ 2,351,431 $ 63,217 $ 2,414,648
------------ --------- -----------
</TABLE>
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 manage- ment's assessment of the risk in its 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,
internal loan processes and capital adequacy of the Company and Bank.
During 1999 management developed a comprehensive review process to
establish the adequacy of the allowance for credit losses. The review
process and guidelines were modeled utilizing the Office of the Comptroller
of the Currecy'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% of loan outstandings excluding loans
secured by cash and marketable securities. During 1999 a provision for
credit losses was made in the amount of $423,700 to maintain the allowance
at the recommended level. At December 31, 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.
Noninterest Income
Noninterest income is exclusively from Bank operations and represents
primarily service charge income and fees on deposit relationships and
security losses. Nonineterest income was
<PAGE>
$211,431 in 1999 as compared to $22,779 in 1998. The significant increase
from year to year is attributable to an increase in the Bank/s deposit
account base and a full yeat of operations in 1999 when compared to 1998.
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.
Noninterest Expense
Non interest expenses were $3,786,308 in 1999 compared to $1,991,662 in
1998. The 90.1% increase in noninterest expenses reflects a full year at
full staff operation when compared to 1998 which was essentially a half
year operation ass well as the increase in staff related to the opening of
the Bank's fourth office in 1999.
The most significant noninterest expense item is salaries and benefits at
$2,033,816 in 1999 and $1,087,236 in 1998. The organizers determined that
it was necessary to bring quality people to the Bank early and build a
staff for growth. This was done and the staff is characterized by banking
professionals who are experienced, energetic and known to the community. It
is through these people that the Company achieved the excellent growth in
1999, providing the foundation for future profitability.
A breakdown of other noninterest expenses is in the income statement and
Note 9 to the Consolidated Financial Statements.
ASSET QUALITY
In its lending activities, the Bank seeks to develop sound credits with
customers who will will grow with the Bank. There has not been an effort to
rapidly build the portfolio and earnings at the sacrifice of asset quality.
However, loan growth in 1999 was very strong with outstanding loans
reaching $63.9 million an increase of $43 million over year-end 1998.
At year end the Bank had no loans delinquent beyond thirty days and no
loans which management considered impaired. As discussed previously an
allowance for credit losses has been established at 1% of outstanding loan
balances, excluding loans secured by cash and readily marketable
securities. Although, management considers the portfolio quality to be
excellent it is prudent to maintain an allowance against unidentified
problems. During 1999 there was one loan loss, a consumer loan net charge
off in the amount of $8,463.
At December 31, 1999 and 1998, the Company had no loans classified as
nonaccrual, contractually past due ninety days, or as troubled debt
restructuring. Policy requires that loans which become delinquent ninety
days be placed on nonaccrual.
The activity in the allowance for credit losses is shown in the following
schedule:
<TABLE>
<CAPTION>
Allowance for credit losses
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of year $163,800 $ ---
Provision for credit losses 423,700 163,800
Loan charged off 10,975 ---
Recoveries 2,512 ---
--------- ------------
Balance at end of year $579,037 $163,800
--------- -----------
</TABLE>
<PAGE>
Other earning assets of the Company include primarily US Treasury and
Agency securities with maturities not exceeding four years, except mortgage
pass through securities with average expected lives of less than four but
final maturities of up to thirty years. Federal funds sold also represent a
significant earning asset. Funds are sold, on an unsecured basis, only to
highly rated banks, in limited amounts in the aggregate and in limited
amounts to any one bank individually.
LIQUIDITY MANAGEMENT
Liquidity is a measure of the Bank's ability to meet the demands required
for the funding of loans and to meet depositors 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 securities. There are
other sources of liquidity which at this time are not relied on by the Bank
but as the Bank matures those sources will also be considered for
liquidity.
At year end 1999, under the Bank's liquidity formula, it had $23.6 million
of liquidity representing 24% of total Bank assets. Not included in the
Bank's liquidity formula are the liquid resources of the Company which
could be available to the Bank. The inclusion of this liquidity would
increase the percentage to 28%. During 2000, the Bank will be applying for
membership in the Federal Home Loan Bank. This association can provide an
additional significant source of liquidity.
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 maturing, higher
yielding assets, being funded by lower yielding short term funds; however,
when interest rates trend upward there can be a significant adverse impact
on interest income. The current interest rate environment is signaling even
higher rates than were seen in 1999. Management has, therefore, managed its
rate risk to reduce its negative GAP wherein repricable liabilities exceed
repricable assets in the short term.
GAP, a measure of the difference in volume between interest bearing 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 repricable liabilities
exceeds repricable assets in particular time periods. At December 31, 1999,
the Bank has a posotive GAP of 18.34% out to three months and a small
cumulative negative GAP of 3.15% out to twelve months.
If interest rate are to continue to rise, the Company's interest income and
margin may be adversely effected. 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 ALCO (Asset
Liability Committee) and management believes that current strategies are
appropriate to current economic and interest rate trends. The small
negative GAP is carefully monitored and will be adjusted as conditions
recommend.
<TABLE>
<CAPTION>
GAP (as of 12/31/99, represents Bank only)
Repricable in: 0-3mos 4-12mos 13-36mos 37-60mos over 5yrs
Assets:
<S> <C> <C> <C> <C> <C>
Investments 10,480 2,634 18,398 360 874
Loans 18,700 3,727 6,447 14,522 15,939
Federal Funds 6,100 - - - -
------ -- -- -- -
Total repricable assets 35,280 6,361 24,845 14,882 16,813
Liabilities:
NOW/Escrow manager - 3,597 3,597 4,796 -
MMA 5,625 13,125 9,374 9,375 -
CDS 3,665 9,773 5,937 860 -
Other - 968 - - -
Repos 7,983 - - - -
------ -- -- -- -
Total repricable liabilities 17,273 27,463 18,908 15,031 -
GAP 18,007 (21,102) 5,937 (149) 16,813
Cumulative GAP 18,007 (3,095) 2,842 2,693 19,506
Interval gap/earning assets 18.34% -21.49% 6.05% -0.15% 17.12%
Cumulative gap/earning assets 18.34% -3.15% 2.89% 2.74% 19.87%
- ----------------------------- ------ ------ ----- ----- ------
</TABLE>
Although, NOW/Escrow 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.
<PAGE>
CAPITAL RESOURCES AND ADEQUACY
The Company was successful in raising $16.5 million in capital to fund the
Bank and other activities consistent with a bank holding company. The
Company originally provided to the Bank $7.75 million in capital and
through 1999 had added an additional $3.5 million. In January 2000, the
Company contributed an additional $500 thousand as a result of the
continued growth of the Bank. At December 31, 1999, the Bank exclusive of
the Company, had a capital ratio of 9.4%. The Bank's Tier 1 capital was
10.4% at December 31, 1999. The regulatory guideline is an 8% ratio ( the
Federal Reserve targets a 9% ratio for the first three years of a newly
formed bank). If an institution has a Tier 1 risk based ratio of at least
10% it is considered well capitalized.
The Bank is currently well capitalized and the Company continues to have
available as much as $3.5 million in additional capital to provide the Bank
as it grows.
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 capital section as accumulated other
comprehensive income. At December 31, 1999, the Company reported an
unrealized loss in AFS securities of $412,728 and at December 31, 1998, and
unrealized gain in AFS securities of $11,155. The rise in interest rates
over the last nine months of 1999 has reduced the market value of the
Company's investment portfolio. 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 loss will be
realized.
MARKET FOR COMMON STOCK
Eagle Bancorp, Inc.'s common stock is traded on the NASDAQ Small Cap Market
under the symbol EGBN. In August of 1999, the Company joined NASDAQ to
enhance the exposure of the Company's stock. Trading volume is light with
the stock having traded between $10 and $12. The Following table sets forth
the range of bid prices for the Company's stock during the four quarters of
1999 and two quarters of 1998 during which shares were outstanding.
Information for periods prior to August 1999 reflect high and low bid
prices in the over the counter market.
COMMON STOCK-EGBN
1999 1998
---- ----
High Low High Low
---- --- ---- ---
1st quarter $11.50 $10.00
2ndquarter $12.00 $10.00
3rd quarter $11.50 $10.00 $10.50 $10.00
4th quarter $11.00 $10.00 $15.00 $10.00
EARNINGS PER SHARE
At its January 2000 board meeting, the Company approved a stock split in
the form of a 25% stock dividend to stockholders of record March 17, and
payable March 31, 2000. Earnings per
<PAGE>
share information reflects this dividend.
Generally accepted accounting principles reporting requires that earnings
per share be stated based on the average number of shares outstanding. The
financial statements show a loss of $1.29 per share, for the year 1998,
which is based on a weighted average number of shares outstanding of
1,084,931.The average number of shares is computed for the entire year
while the actual shares of 2,062,500, were not considered issued until June
22, 1998, the date the Company broke escrow. Had the issued number of share
been outstanding for the full year, the loss per share would have been
shown at about half the reported amount.
The loss per share for 1999 of $0.41 is based on 2,062,500 shares
outstanding, which gives effect to the 25% stock dividend declared January
19, 2000.
<PAGE>
STEGMAN & COMPANY
Certified Public Accounts
Management Consultants Since 1915
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, 1999 and 1998, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the years then ended and for the period from October 28, 1997 (date of
inception) to December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. 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 consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of Eagle Bancorp, Inc. as of December 31, 1999 and 1998, and the
consolidated results of its operations and cash flows for the years then ended
and for the period from October 28, 1997 (date of inception) to December 31,
1997, in conformity with generally accepted accounting principles.
Stegman & Company
Baltimore, Maryland
February 4, 2000
<PAGE>
EAGLE BANCORP, INC.
Consolidated Balance Sheets
December 31, 1999, and 1998
<TABLE>
<CAPTION>
ASSETS
1999 1998
---- ----
<S> <C> <C>
Cash and due from banks $ 3,831,763 $ 1,292,006
Federal funds sold 6,099,872 5,429,047
Investmen securities available for sale 36,598,346 22,569,699
Loans 63,855,195 20,147,924
Less allowance for credit losses (579,037) (163,800)
--------- ---------
Loans, net 63,276,158 19,984,124
--------------- --------------
Premises and equipment, net 2,684,605 2,396,075
Other assets 727,575 368,232
-------- -------
TOTAL ASSETS $ 113,218,319 $ 52,039,183
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 16,240,731 $ 4,096,392
Interest-bearing transaction 11,990,458 3,664,012
Savings and money market 40,252,998 17,061,269
Time, $100,000 or more 13,094,189 5,621,543
Other time 9,412,671 4,187,677
---------- ---------
Total deposits 90,991,047 34,630,893
Customer repurchase agreements 7,982,910 2,304,694
Short-term borrowings 275,000 -
Other liabilities 294,543 154,101
-------- -------
Total liabilities 99,543,500 37,089,688
--------------- --------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized 5,000,000
1,650,000 issued 1999 and 1998 16,500 16,500
Surplus 16,483,500 16,483,500
Accumulated deficit (2,412,453) (1,561,660)
Accumulated other comprehensive income (412,728) 11,155
------
Total stockholders' equity 13,674,819 14,949,495
----------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 113,218,319 $ 52,039,183
=============== ==============
</TABLE>
See notes to consolidated financial statements
<PAGE>
EAGLE BANCORP, INC.
Consolidated Statements of Operation for the Years Ended December 31, 1999 and
1998 and for the Period from October 28, 1997 (Date of Inception) to December
31, 1997
<TABLE>
<CAPTION>
Interest Income: 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest and fees on loans $ 3,378,751 $ 269,265 $ -
Taxable interest and dividends on investment securities 1,517,474 621,985 -
Taxable dividends on other investments 16,935
Interest on federal funds sold
under agreement to resell 256,365 119,338 -
-------- -------- -
Total interest income 5,169,525 1,010,588 -
---------- ---------- -
Interest Expense:
Interest on deposits 1,763,684 241,164 -
Interest on customer repurchase agreements 245,844 20,499 -
Interest on short term borrowings 12,123 15,699 1,056
------- ------- -----
Total interest expense 2,021,651 277,362 1,056
---------- -------- -----
Net Interest Income 3,147,874 733,226 (1,056)
Provision For Credit Losses 423,700 163,800 -
-------- -------- -
Net Interest Income After Provision
For Credit Losses 2,724,174 569,426 (1,056)
---------- -------- -------
NONINTEREST INCOME:
Service charges on deposits 172,550 9,177 -
Other income 43,281 13,602
Loss on sale of investment securities (4,490) - -
------- -- -
Total noninterest income 211,341 22,779 -
-------- ------- -
NONINTEREST EXPENSES:
Salaries and employee benefits 2,033,816 1,087,236 58,270
Premises and equipment expenses 738,925 286,424 -
Stationery, printing and supplies 95,635 110,971 348
Professional fees 113,900 100,077 77,892
Director and committee fees 94,500 54,200 -
Outside data processing 158,515 68,460 -
Other expenses 551,017 284,294 24,637
-------- -------- ------
Total noninterest expenses 3,786,308 1,991,662 161,147
---------- ---------- -------
NET LOSS Before INCOME TAX BENEFIT (850,793) (1,399,457) (162,203)
INCOME TAX BENEFIT - - -
-- -- -
NET LOSS (850,793) (1,399,457) (162,203)
============= ============= ==========
LOSS PER SHARE:
Basic $ (0.41) $ (1.29) $ -
Diluted $ (0.41) $ (1.29) $ -
</TABLE>
* Per share data have been adjusted to give retroactive effect to a 25% stock
split in the form of a dividend declared on January 19, 2000. See notes to
consolidated financial statements.
<PAGE>
EAGLE BANCORP, INC.
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1999 and 1998 and for the Period from October 28, 1997 (Date of
Inception) to December 31, 1997
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Accumulated Comprehensive Stockholders'
Stock Surplus Deficit Income Equity
------ ------- -----------
<S> <C> <C> <C> <C> <C>
Balances at October 28, 1997 $ - $ - $ - $ - $ -
Net loss - - (162,203) - (162,203)
-- -- --------- -- ---------
Balances at December 31, 1997 - - (162,203) - (162,203)
Issuance of common stock 16,500 16,483,500 16,500,000
-
Net loss - - (1,399,457) - (1,399,457)
Other comprehensive income-
unrealized gain on investment
securities available for sale - - - 11,155 11,155
------
Total other comprehensive
income (loss) - - - - (1,388,302)
-- -- -- -- -----------
Balances at December 31, 1998 16,500 16,483,500 (1,561,660) 11,155 14,949,495
Net loss - - (850,793) (850,793)
Other comprehensive income-
unrealized loss on investment
securities available for sale - - - (423,883) (423,883)
---------
Total other comprehensive
income (loss) - - - - (1,274,676)
-- -- -- -- -----------
Balances at December 31, 1999 $ 16,500 $ 16,483,500 $(2,412,453) $ (412,728) $ 13,674,819
============ ============== ============== ============= =============
</TABLE>
See notes to financial statements.
<PAGE>
EAGLE BANCORP, INC.
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999 and
1998 and for the Period from October 28, 1997 (Date of Inception) to December
31, 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (850,793) $ (1,399,457) $ (162,203)
Adjustments to reconcile net loss to net cash
used by operating activities:
Provision for credit losses 423,700 163,800 -
Depreciation and amortization 290,357 58,895 348
Increase in other assets (359,343) (368,232) -
Increase in other liabilities 140,442 110,852 43,249
-------- -------- ------
Net cash used in operating activities (355,637) (1,434,142) (118,606)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale investment securities (66,630,069) (85,904,444) -
Proceeds from maturities of available for sale securities 52,177,539 63,345,900 -
Increase in federal funds sold (670,825) (5,429,047) -
Net increase in loans (43,715,734) (20,147,924) -
Bank premises and equipment acquired (578,887) (2,451,138) (4,180)
--------- ----------- -------
Net cash used in investing activities (59,417,976) (50,586,653) (4,180)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits 56,360,154 34,630,893 -
Increase in customer repurchase agreements 5,678,216 2,304,694 -
(Decrease) increase in short-term borrowings 275,000 (130,000) 130,000
Issuance of common stock - 16,500,000 -
-- ----------- -
Net cash provided by financing activities 62,313,370 53,305,587 130,000
--------------- -------------- ----------
NET INCREASE IN CASH 2,539,757 1,284,792 7,214
CASH AND DUE FROM BANKS AT
BEGINNING OF PERIOD 1,292,006 7,214 -
---------- ------ -
CASH AND DUE FROM BANKS AT
END OF PERIOD $3,831,763 $1,292,006 $ 7,214
=============== =============== =========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid $1,963,605 $ 222,110 $ 1,056
=============== =============== =========
</TABLE>
See notes to financial statements.
<PAGE>
EAGLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND FOR THE PERIOD FROM OCTOBER 27, 1997
(DATE OF INCEPTION) TO DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
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 on the basis of its equity in the
net assets of the subsidiary. The accounting and reporting policies of the
Company conform to generally accepted accounting principles and to general
practices in the banking industry.
Nature of Operations
The Company, through its bank subsidiary, provides domestic
financial services primarily in Montgomery County, Maryland. The primary
financial services include real estate, commercial and consumer lending, as well
as traditional demand deposits and savings products. From October 28, 1997 until
July 20, 1998, when the Bank received regulatory approval, the Company was
considered a development stage enterprise.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles 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
reporting 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.
<PAGE>
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.
Allowance for Credit Losses
The allowance for credit losses represents an amount which, in
management's judgement, will be adequate to absorb probable losses on exiting
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 or 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 judgement 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 charge 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.
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 judgements 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 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 expenses as incurred.
<PAGE>
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. Deferred income taxes will be recognized when it is
deemed more likely than not that the benefits of such deferred income taxes will
be realized. Accordingly, no deferred income taxes or income tax benefits have
been recorded by the Company.
Net Income Per Common Share
Basic net income per common share is computed by dividing net
income available to common stockholders by the weighted average number of common
shares outstanding during the year. Diluted net income per common share is
computed by dividing net income available to common stockholders by the weighted
average number of common shares outstanding during the year including any
potential dilutive effects of common stock equivalents, such as options and
warrants.
New Accounting Standards
Statement of Financial Accounting Standards No. 133 ("SFAS No.
133"), Accounting for Derivative Instruments and Hedging Activities, as amended
by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No.133, requires derivative
instruments be carried at fair value on the balance sheet. The statement
continues to allow derivative instruments to be used to hedge various risks and
sets forth specific criteria to be used to determine when hedge accounting can
be used. The statement also provides for offsetting changes in fair value or
cash flows of both the derivative and the hedge asset or liability to be
recognized in earnings in the same period; however, any changes in fair value or
cash flow that represent the ineffective portions of a hedge are required to be
recognized in earnings and cannot be deferred. For derivative instruments not
accounted for as hedges, changes in fair value are required to be recognized in
earnings.
The Company plans to adopt the provisions of this statement,
as amended, for its quarterly and annual reporting beginning January 1, 2001,
the statement's effective date. The impact of adopting the provisions of this
statement on the Company's financial position, results of operations and cash
flow subsequent to the effective date is not currently estimable and will depend
on the financial position of the Company and the nature and purpose of any
derivative instruments in use at that time.
<PAGE>
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 1999, deposits of the
Bank reached a level which required the Bank to maintain reserves.
However, vault cash held at the Bank and included in Cash and Due
from Banks was sufficient to meet the reserve requirements and no
additional balances were maintained at the Federal Reserve. In 1998,
as a start-up bank EagleBank had no reserve requirements but did
maintain balances with the Federal Reserve in order to conduct
business and partially compensate for services. Such balances were
also maintained in 1999.
3 INVESTMENTS AVAILABLE FOR SALE
The amortized cost and estimated fair values of investments
available for sale at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
1999 Cost Gains Losses Value
---- ---- ----- ------ -----
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 1,498,308 $ - $ (3,933) $ 1,494,375
U. S. Government Agency securities 34,970,060 - (403,304) 34,566,756
Federal Reserve Bank stock 271,100 - - 271,100
Other equity investments 271,606 43,546 (49,037) 266,115
-------- ------- -------- -------
$ 37,011,074 $ 43,546 $ (456,274) $ 36,598,346
------------- --------- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
1998 Cost Gains Losses Value
---- ---- ----- ------ -----
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 1,517,622 $ - $ (6,372) $ 1,511,250
U. S. Government Agency securities 20,538,750 14,542 20,553,292
Federal Reserve Bank Stock 247,500 - - 247,500
Other equity investment securities 254,672 2,985 - 257,657
-------- ------ -- -------
$ 22,558,544 $ 17,527 $ (6,372) $ 22,569,699
------------- --------- ---------- ------------
</TABLE>
Exclusive of one step-up security, an agency security due February
2002, all securities, other than equity securities, are fixed rate.
The amortized cost and estimated fair values of investments
available for sale at December 31, 1999 and 1998 by contractual
maturity are shown below. Except maturities will differ from
contractual maturities because borrows may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
1999 1998
---- ----
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Amounts maturing:
One year or less $ 16,926,998 $ 16,894,549 $ 12,578,407 $ 12,564,259
After one year through five years 18,037,897 17,726,572 8,533,763 8,560,861
After five years through ten years 1,503,473 1,440,010 944,202 939,422
Investments in FRB and other equity securities 542,706 537,215 502,172 505,157
-------- -------- -------- -------
$ 37,011,074 $ 36,598,346 $ 22,558,544 $ 22,569,699
------------- ------------- ------------- ------------
</TABLE>
<PAGE>
In 1999, there was a related loss on sale of securities in the
amount of $4,490.00. During 1998 there were no recognized gains or
losses on the sale of investment securities.
The weighted average yields of the investment portfolio at December
31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
One year or less 5.51% 4.98%
After one year through five years 5.54% 5.57%
After five years through ten years 6.69% 6.50%
Total weighted average yield exclusive
of equity securities 5.54% 5.29%
</TABLE>
4 LOANS AND ALLOWANCE FOR CREDIT LOSSES
The Bank makes loans to customers primarily in Montgomery County,
Maryland. 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, 1999 and 1998
are summarized by type as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Commercial $ 25,759,790 $ 6,983,646
Real Estate 29,216,878 11,832,525
Construction 3,545,143 -
Individual 5,295,595 1,323,620
Other 37,789 8,133
------- -----
Total loans 63,855,195 20,147,924
Less allowance for credit losses 579,037 163,800
-------- -------
Loans, net $ 63,276,158 $ 19,984,124
------------ ------------
</TABLE>
Loans, net of amortized deferred fees, at December 31, 1999, are
summarized by maturity as follows:
<TABLE>
<CAPTION>
1year to Greater than
1year 5years 5 years
<S> <C> <C> <C>
Commercial $ 10,367,359 $ 9,878,112 $ 5,514,319
Real Estate 1,291,103 8,117,242 19,808,533
Construction 573,081 2,972,062 -
Individual 712,507 4,000,088 583,000
Other 37,789 - -
------- -- -
Total loans $ 12,981,839 $ 24,967,504 $ 25,905,852
------------- ------------- ------------
</TABLE>
Of loans which mature after one year $29,175,975 are floating rate
and $21,697,381 are fixed rate/
Activity in the allowance for credit losses for the years ended
December 31, 1999 and 1998 is shown below:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of year $ 163,800 $ -
Provision for credit losses 423,700 163,800
Loan charge-offs (10,975) -
<PAGE>
Loan recoveries 2,512 -
------ -
Balance at end of year $ 579,037 $ 163,800
---------- ---------
</TABLE>
Net loan charge offs to average outstanding loans for 1999 was .02%.
5 PREMISES AND EQUIPMENT
Premises and equipment include the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Leasehold improvements $ 1,442,820 $ 1,208,181
Furniture and equipment 1,591,037 1,246,789
Less accumulated depreciation
and amortization 349,252 58,895
-------- ------
Premises and equipment, net $ 2,684,605 $ 2,396,075
------------ -----------
</TABLE>
The Company occupies banking and office space in four locations
under noncancellable lease arrangements accounted for as operating
leases. The initial lease periods range from 8 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 $265,493 in 1999
and $178,560 in 1998. At December 31, 1999, future minimum lease
payments under noncancellable operating leases having an initial
term in excess of one year are as follows:
Years ending December 31:
2000 $ 322,127
2001 335,185
2002 345,175
2003 321,677
2004 248,085
Thereafter 676,694
-------
Total minimum lease payments $ 2,248,943
-----------
6 DEPOSITS
The remaining maturity of certificates of deposit greater than
$100,000 and $100,000 or less at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
$100,001 or Less than $100,001 or Less than
more 1999 $100,001-1999 more 1998 $100,001-1998
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Three months or less $ 3,587,999 $ 2,321,640 $ 471,567 $ 365,207
More than three months
through six months 875,071 2,075,258 1,053,500 1,384,205
More than six months
through twelve months 4,676,292 2,103,420 3,289,577 2,164,917
Over twelve months 3,954,827 2,912,353 806,899 240,383
---------- ---------- -------- -------
$ 13,094,189 $ 9,412,671 $ 5,621,543 $ 4,154,712
------------- ------------ ------------ -----------
</TABLE>
<PAGE>
Interest expense on deposits for the years ended December 31, 1999
and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Interest bearing transaction $ 154,156 $ 23,694
Savings and money market 873,933 97,547
Time, $100,000 or more 407,010 64,726
Other time 328,585 55,197
-------- ------
$ 1,763,684 $ 241,164
------------ ---------
</TABLE>
As of December 31, 1999, the Bank held $15,314,553 in deposits, from
one relationship, which, for regulatory reporting purposes, are
considered brokered deposits.
7 CUSTOMER REPURCHASE AGREEMENTS
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:
<TABLE>
<CAPTION>
Securities sold under repurchase
agreements 1999 1998
---- ----
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
At year-end $ 7,982,910 2.96%-4.17% $ 2,304,694 2.72%-4.41%
Average for the year 6,039,196 4.07% 560,958 3.58%
Maximum month-end balance 9,038,672 2.96%-4.17% 5,505,264 2.72%-4.41%
</TABLE>
8 SHORT-TERM BORROWINGS
The Bank has commitments from correspondent banks under which it can
purchase up to $3,240,000 in federal funds and secured reverse
repurchase agreements on a short-term basis. The Company has a line
of credit approved for $2,000,000 secured by Federal agency
securities. At December 31, 1999 the Company had borrowings
outstanding of $275,000 and the Bank had no short term borrowings
other than customer repurchase agreements. The Company's borrowing
was drawn on December 31, 1999 and repaid January 4, 2000. There
were no borrowings outstanding at December 31, 1998.
During the period of organization, the organizers made direct loans
and guaranteed a bank loan to the Company in the aggregate of
$825,000 (direct loans $475,000, bank loan $350,000) including
$130,000 in organizer direct loans outstanding on December 31, 1997.
All loans were at prime and were paid in full on June 22, 1998
including interest costs of $15,699 in 1998 and $1,056 in 1997.
9 OTHER EXPENSE
Other expense included in the Consolidated Statements of Operations
for the three years ended December 31, 1999 included the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Advertising $ 101,967 $ 40,409 $ -
Customer checks 29,261 22,920 -
Insurance 77,247 51,191 -
Telephone 32,172 31,006 -
<PAGE>
Other 310,370 138,768 24,637
-------- -------- ------
Total other expense $ 551,017 $ 284,294 $ 24,637
---------- ---------- --------
</TABLE>
10 INCOME TAXES
Federal and state income tax expense (benefit) consist of the
following:
<TABLE>
<CAPTION>
Periods Ended December 31,
-----------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current federal income tax $ - $ - $ -
Current state income tax - - -
Deferred federal income tax expense (benefit) - - -
Deferred state income tax expense (benefit) - - -
-- -- -
Total income tax expense (benefit) $ - $ - $ -
---- ---- ---
</TABLE>
The following chart is a summary of the tax effect of temporary
differences that give rise to significant portions of deferred tax
assets:
<TABLE>
<CAPTION>
Periods Ended December 31,
----------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets:
Allowance for credit losses $ 125,822 $ 63,260 $ -
Deferred loan fees and costs 24,791 16,070 -
Start-up costs 42,516 - -
Net operating loss carryforwards 670,463 531,534 25,240
Tax on unrealized lass on securities
available for sale 101,588 - -
-------- -- -
Gross deferred tax assets 965,180 610,864 25,240
Less valuation allowance (903,240) (558,288) (25,240)
--------- --------- --------
Total deferred tax assets 61,940 52,576 -
------- ------- -
Deferred tax liabilities:
Tax on unrealized (gain) loss on securities
available for sale - (4,308) -
Premises and equipment (61,940) (48,268) -
-------- -------- -
Net deferred income taxes $ - $ - $ -
---- ---- ---
</TABLE>
A reconciliation of the statutory federal income tax rate to the
Company's effective income tax rate follows:
<TABLE>
<CAPTION>
Periods Ended December 31,
-----------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal
income tax benefit 0 4.6 4.6
<PAGE>
Valuation allowance 34.0% (38.6) (38.6)
----- ------ ------
Effective tax rates 0.0% 0.0% 0.0%
---- ---- ----
</TABLE>
At December 31, 1999, the Company had approximately $1,975,000 in
tax loss carryforwards, which expire between 2017 and 2019.
Realization depends on generating sufficient taxable income before
the expiration of the loss carryforwards. The amount of loss
carryforward available for any one year may be limited if the
Company is subject to the alternative minimum tax.
11 EARNINGS PER COMMON SHARE
The calculation of net income per common share for the years ended
December 31, 1999 and 1998 gives effect to the stock split in the
form of a stock dividend declared payable March 31, 2000. The
calculation for 1998 was based on an effective stock date of June
22, 1998:
Basic:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net loss (allocable to common
stockholders) $ 850,793 $ 1,399,457
Average common shares outstanding 2,062,500 1,084,931
Basic net loss per share $ (0.41) $ (1.29)
</TABLE>
Basic and diluted earnings per share are the same for the years
ended December 31, 1999 and 1999 because the inclusion of any common
stock equivalents would have been antidilutive.
12 RELATED PARTY TRANSACTIONS
Certain directors and executive officers have loan transactions with
the Company. Such loans were made in the ordinary course of business
an substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable
transactions with outsiders. The following schedule summarizes
changes in amounts of loans outstanding, both direct and indirect,
to those persons during 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Balance at January 1 $ 229,437 $ -
Additions 1,903,723 250,691
Repayments 483,849 21,254
-------- ------
Balance at December 31 $ 1,649,311 $ 229,437
------------ ---------
</TABLE>
13 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 non qualifying options to
selected key employees and members of the Board on a periodic basis.
Options for not more than 247,500 shares of common stock have been
granted under the Plan and the term of such options shall not exceed
ten years.
Following is a summary of changes in shares under option for the
years indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998
---- ----
Weighted Weighted
<PAGE>
Number Average Number Average
of Shares Exercise Price of Shares Exercise Price
<S> <C> <C> <C> <C>
Outstanding at beginning of year 149,500 $ 10.00 - $0.00
Granted 26,500 10.00 149,500 10.00
Exercised - 0.00 - 0.00
Cancelled (1,000) (10.00) - 0.00
------- ------- -- ----
Outstanding at end of year 175,000 10.00 149,500 10.00
-------- --------
Weighted average fair value of options
granted during the year $ 4.43 $ -
------- ---
</TABLE>
Weighted average remaining contract life 9.15 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 year ended December
31, 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.
Dividend yield 0.00%
Expected volatility 10.00%
Risk free interest 5.70-6.92%
Expected lives (in years) 1000.00%
The Company has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards 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 year ended December 31, 1999. 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 123, net income and earnings per share would have
been changed to the pro forma amounts as follows for the year ended
December 31,
<TABLE>
<CAPTION>
1999
----
<S> <C>
Net loss:
As reported $ (850,793)
Pro forma (1,076,094)
Basic net loss per share:
As reported (0.41)
Pro forma (0.52)
Diluted net loss per share:
As reported (0.41)
Pro forma (0.52)
</TABLE>
The pro forma amounts are not representative of the effects on
reported net income for future years.
14 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 year of
service as defined by the Plan. The Company made contributions to
the Plan of approximately $41,000, $9,000 and $-0- in 1999, 1998 and
1997, respectively. These amounts are included in salaries and
employee benefits in the accompanying Consolidated Statements of
Operations.
15 LITIGATION
In the normal course of business, the Company may become involved in
litigation arising from banking, financial, and other activities.
Management, after consultation with legal counsel, does not
anticipate that the ultimate liability, if any, arising
<PAGE>
out of these matters will have a material effect on the Company's
financial condition, operating results or liquidity.
16 COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company incurs certain
commitments and contingent liabilities, that are not reflected in
the accompanying consolidated financial statements. These off
balance sheet items include various commitments to extend credit and
standby letters of credit. No material losses are expected to result
from these transactions.
Outstanding loan commitments and lines and letters of credit at
December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Loan commitments $ 3,425,000 $ 1,675,000
Unused lines of credit 10,896,000 5,784,000
Letters of credit 1,146,000 819,000
</TABLE>
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.
17 REGULATORY MATTERS
The Bank is 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 Bank's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must
meet specific capital guidelines that involve quantitative measures
of the Bank's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The
Bank's capital amounts and 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, 1999 and 1998, that the Bank meets all
capital adequacy requirements to which it is subject.
The actual capital amounts and ratios for the Bank are presented in
the table below:
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
In thousands Actual Purposes Action Provisions
------------------------ --------- ------------------
As of December 31, 1999 Amount Ratio Ratio Ratio
------ ----- ----- -----
<S> <C> <C> <C> <C>
Total capital (to risk-weighted
assets) $ 9,283 10.4% 8.0% 10.0%
<PAGE>
Tier 1 capital (to risk-weighted
assets) 9,283 10.4% 4.0% 6.0%
Tier 1 capital (to average
assets) 9,283 9.4% 3.0% 5.0%
As of December 31, 1998
Total capital (to risk-weighted
assets) $ 6,921 19.1% 8.0% 10.0%
Tier 1 capital (to risk weighted
assets) 6,921 19.1% 4.0% 6.0%
Tier 1 capital ( to average
assets) 3,394 32.0% 3.0% 5.0%
</TABLE>
Bank and holding company regulations, as well as Maryland law,
impose certain restrictions on dividend payments by the Bank, as
well as restricting extension of credit and transfers of assets
between the Bank and the Company. At December 31, 1999, the Bank was
restricted from paying dividends to its parent company.
18 FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments" (SFAS No. 107), 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.
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, 1999 are as follows:
<PAGE>
<TABLE>
<CAPTION>
Carrying Fair
(in thousands) Value Value
----- -----
<S> <C> <C>
Assets:
Cash and due from banks $ 3,832 $ 3,832
Federal funds sold 6,100 6,100
Investment securities 36,598 36,598
Loans, net 63,276 63,253
Liabilities:
Noninterest bearing deposits 16,241 16,240
Interest-bearing deposits 74,750 68,491
Borrowings 8,168 8,168
</TABLE>
18 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table reports the unaudited results of operations for
each quarter since the opening of the Bank July 20, 1998:
<TABLE>
<CAPTION>
1999
Fourth quarter Third quarter Second quarter First quarter
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Total interest income $ 1,771,930 $ 1,350,383 $ 1,125,029 $ 922,183
Total interest expense 695,443 498,795 433,132 394,281
Net interest income 1,076,487 851,588 691,897 527,902
Provision for credit losses 98,000 139,000 120,700 66,000
Net interest income
after provision for credit losses 978,487 712,588 571,197 461,902
Noninterest income 77,232 56,501 46,478 35,620
Noninterest expense 1,074,618 940,628 916,411 859,141
Net loss before income
taxes (18,899) (171,539) (298,736) (361,619)
Income tax benefit - - - -
Net loss (18,899) (171,539) (298,736) (361,619)
Loss per share (Basic
and diluted are equal) $ (0.01) $ (0.08) $ (0.14) $ (0.18)
</TABLE>
<TABLE>
<CAPTION>
1998
Fourth quarter Third quarter Second quarter First quarter
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Total interest income $ 564,307 $ 242,220 $ 180,615 $ 23,446
Total interest expense 216,994 44,669 10,617 5,082
Net interest income 347,313 197,551 169,998 18,364
Provision for credit losses 134,500 29,300 - -
Net interest income
after provision forcredit losses 212,813 168,251 169,998 18,364
Noninterest income 17,921 4,858 - -
Noninterest expense 861,904 697,462 308,577 123,719
Net loss before income
taxes (631,170) (524,353) (138,579) (105,355)
Loss per share (basic and
diluted are equal) $ (0.59) $ (0.48) $ (0.22) $ -
</TABLE>
NOTE 19 PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Eagle Bancorp, Inc. ( Parent
Company only) is as follows:
<PAGE>
CONDENSED BALANCE SHEETS
December 31, 1999, and 1998
<TABLE>
<CAPTION>
ASSETS: 1999 1998
---- ----
<S> <C> <C>
Cash $ 313,784 $ 76,427
Investment securities available for sale 4,247,936 3,194,982
Loans, net of allowance for credit losses of
1999-$4,500, 1998-$6,800 457,121 4,682,800
Investment in subsidiary 8,888,187 6,921,199
Other assets 48,457 84,106
------- ------
TOTAL ASSETS $ 13,955,485 $ 14,959,514
------------- ------------
LIABILITIES:
Accounts payable $ 5,666 $ 9,147
Short-term borrowing 275,000 -
-------- -
Total Liabilities 280,666 9,147
-------- -----
STOCKHOLDERS' EQUITY:
Common stock 16,500 16,500
Surplus 16,483,500 16,483,500
Accumulated deficit (2,807,860) (1,561,660)
Accumulated other comprehensive (loss) income (17,321) 12,027
-------- ------
Total stockholders' equity 13,674,819 14,950,367
TOTAL LIABILITIES AND STOCK-
HOLDERS' EQUITY $ 13,955,485 $ 14,959,514
------------- ------------
</TABLE>
<PAGE>
CONDENSED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999 and 1998 and for the Period
from October 28, 1997 (Date of Inception) to December 31, 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
INCOME-Interest and Dividend Income $ 461,309 $ 450,387 $ -
EXPENSES:
Salaries and employee benefits 20,381 226,475 58,270
Interest expense 12,123 15,699 1,056
Rent expense - 52,721 -
Legal and professional 25,972 83,755 77,892
Directors' fees 28,200 21,500 -
Other 87,821 120,893 24,985
------- -------- ------
Total expenses 174,497 521,043 162,203
-------- -------- -------
INCOME (LOSS) BEFORE INCOME TAX BENEFIT AND
EQUITY IN UNDISTRIBUTED LOSS OF
SUBSIDIARY 286,812 (70,656) (162,203)
INCOME TAX BENEFIT - - -
-- -- -
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED
LOSS OF SUBSIDIARY 286,812 (70,656) (162,203)
EQUITY IN UNDISTRIBUTED LOSS OF SUBSIDIARY (1,137,605) (1,328,801) -
----------- ----------- -
NET LOSS $ (850,793) $ (1,399,457) $ (162,203)
----------- ------------- -----------
</TABLE>
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999 and 1998 and for the Period
from October 28, 1997 (Date of Inception) to December 31, 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
NET LOSS $ (850,793) $ (1,399,457) $ (162,203)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Provision for credit losses (2,300) 6,800 -
Depreciation - - 348
Equity in undistributed loss of subsidiary 1,137,605 1,328,801 -
Decrease (increase) in other assets 35,649 (80,274) -
(Decrease) increase in accounts payable (3,481) (34,102) 43,249
------- -------- ------
Net cash provided (used) by operating activities 316,680 (178,232) (118,606)
-------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Acquisition of equipment - - (4,180)
Net decrease (increase) in loans 4,227,979 (4,689,600) -
Net increase in investment securities - -
available for sale (1,082,302) (3,182,955) -
Investment in subsidiary (3,500,000) (8,250,000)
----------- -----------
Net cash used in investing activities (354,323) (16,122,555) (4,180)
--------- ------------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock - 16,500,000 -
Short-term borrowings 275,000 (130,000) 130,000
-------- --------- -------
Net cash provided by financing activities 275,000 16,370,000 130,000
-------- ----------- -------
NET INCREASE IN CASH 237,357 69,213 7,214
CASH AT BEGINNING OF PERIOD 76,427 7,214 -
------- ------ -
CASH AT END OF PERIOD $ 313,784 $ 76,427 $ 7,214
---------- --------- -------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
EXHIBIT 27
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from the Form
10-KSB and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0001050441
<NAME> Eagle Bancorp, Inc.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 3,832
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 36,598
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 63,855
<ALLOWANCE> 579
<TOTAL-ASSETS> 113,218
<DEPOSITS> 90,991
<SHORT-TERM> 8,258
<LIABILITIES-OTHER> 295
<LONG-TERM> 0
<COMMON> 17
0
0
<OTHER-SE> 13,658
<TOTAL-LIABILITIES-AND-EQUITY> 113,218
<INTEREST-LOAN> 3,379
<INTEREST-INVEST> 1,517
<INTEREST-OTHER> 273
<INTEREST-TOTAL> 5,170
<INTEREST-DEPOSIT> 2,010
<INTEREST-EXPENSE> 2,021
<INTEREST-INCOME-NET> 3,147
<LOAN-LOSSES> 424
<SECURITIES-GAINS> (4)
<EXPENSE-OTHER> 3,786
<INCOME-PRETAX> (851)
<INCOME-PRE-EXTRAORDINARY> (851)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (851)
<EPS-BASIC> (0.41)
<EPS-DILUTED> (0.41)
<YIELD-ACTUAL> 7.05
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 164
<CHARGE-OFFS> 11
<RECOVERIES> 3
<ALLOWANCE-CLOSE> 579
<ALLOWANCE-DOMESTIC> 579
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 579
</TABLE>
