U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Amendment No. 1
to
FORM 10-K
/X/ [X]Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 2003
/ / Transition[ ]Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from _________to _________
Commission file number: 0-25923
Eagle Bancorp, Inc
(Exact Name of Registrant as Specified in its Charter)
Maryland
52-2061461
(State or other jurisdiction 52-2061461
of incorporation or organization) (I.R.S. Employer Identification No.)
of incorporation or organization)
7815 Woodmont Avenue, Bethesda, Maryland 20814
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code: (301) 986-1800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock $.01
par value
Indicate by check mark whether the registrant; (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports; and (2) has been subject to such
filing requirements for the past 90 days.
[X]Yes /X/ No / /[ ]No
Indicate by check mark if disclosure of delinquent filers in pursuant to Item
405 of Regulation S-K is not contained herein, , and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /[ ]
Indicate by check mark whether this registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes / / [ ]Yes [X]No /X/
The aggregate market value of the outstanding Common Stock held by nonaffiliates
as of June 30, 2003 was approximately $38,873,970.
As of March 26, 2004, the number of outstanding shares of the Common Stock, $.01
par value, of Eagle Bancorp, Inc. was 5,401,267.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders, to be held on May 17, 2004 are incorporated
by reference in part III hereof.
FORM 10-K CROSS REFERENCE OF MATERIAL INCORPORATED BY REFERENCE
The following shows the location in thisThis Amendment No. 1 to Eagle Bancorp, Inc.'s Annual Report on Form 10-K or the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held on
May 17, 2004, of the information required to be disclosed by the United States
Securities and Exchange Commission Form 10-K. References to pages only are to
pages in this report.
PART I ITEM 1. BUSINESS. See "Business" at Pages 46 through 55.
ITEM 2. PROPERTIES. See "Properties" at Page 55.
ITEM 3. LEGAL PROCEEDINGS. From time to time the Company is
a
participant in various legal proceedings incidental to its
business. In the opinion of management, the liabilities (if
any) resulting from such legal proceeding will not have a
material effect on the financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No
matter was submitted to a vote of the security holders of the
Company during the fourth quarter of 2003.
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES. See
"Market Price of Stock and Dividends" at Page 23.
ITEM 6. SELECTED FINANCIAL DATA. See "Summary of Financial
Information" at Page 3.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operation" at Pages 3 through 23.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK. See "Interest Rate Risk Management - Asset/Liability
Management and Quantitative and Qualitative Disclosure About
Market Risk." at Page 20.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See
Consolidated Financial Statements at Pages 25 through 45.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. None.
ITEM 9A. CONTROLS AND PROCEDURES. See "Controls and Procedures" at
Page 56.
PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The
information required by this Item is incorporated by
reference to, the material appearing under the captions
"Election of Directors"; "Executive Officers who are Not
Directors"; and "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in the Proxy Statement. The
company has adopted a code of ethics that applies to its
Chief Executive Officer and Chief Financial Officer. A copy
of the code of ethics will be provided to any person, without
charge, upon written request directed to Michele Midlo,
Corporate Secretary, Eagle Bancorp, Inc., 7815 Woodmont
Avenue, Bethesda, Maryland 20814.
ITEM 11. EXECUTIVE COMPENSATION. The information required by this
Item is incorporated by reference to the material appearing
under the captions "Election of Directors - Director's
Compensation"; "- Executive Compensation" and "- Report of
the Compensation Committee" and "Stock Performance
Comparison" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The information
required by this Item is incorporated by reference to the
material appearing under the captions "Voting Securities and
Principal Shareholders" and "Election of Directors -
Executive Compensation - Securities Authorized for Issuance
Under Equity Compensation Plans" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The
information required by this Item is incorporated by
reference to, the material appearing under the caption
"Election of Directors - Certain Relationships and Related
Transactions" in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. The information
required by this Item is incorporated by reference to, the
material appearing under the caption "Independent Public
Accountants - Fees Paid to Independent Accounting Firm" in
the Proxy Statement.
PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K. See "Financial Statements, Exhibits and Reports on
Form 8-K" at Page 56.
2
SUMMARY OF FINANCIAL INFORMATION
The following table shows selected historical consolidated financial data for
the Company. You should read it together with the Company's audited consolidated
financial statements for the years ended December 31, 2003, 2002 and 2001.
Year Ended December 31
-------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ---------- ---------- ----------
(dollars in thousands, except per share data)
SELECTED BALANCES - AT PERIOD END
Total assets $ 442,997 $ 347,829 $ 236,833 $ 164,082 $ 113,218
Total stockholders' equity 53,012 20,028 17,132 15,522 13,675
Total loans (net) 313,853 234,094 180,145 116,576 63,276
Total deposits 335,514 278,434 195,688 135,857 90,991
SUMMARY RESULTS OF OPERATIONS
Interest income $ 18,404 $ 16,661 $ 14,121 $ 10,501 $ 5,170
Interest expense 3,953 5,170 5,998 4,549 2,022
Net interest income 14,451 11,491 8,123 5,952 3,148
Provision for credit losses 1,175 843 979 581 424
Net interest income after provision for
credit losses 13,275 10,648 7,144 5,371 2,724
Noninterest income 2,936 2,160 1,324 351 211
Noninterest expense 11,094 8,583 6,445 4,664 3,786
Income (loss) before taxes 5,118 4,225 2,023 1,058 (851)
Income tax expense (benefit) 1,903 1,558 269 -- --
Net income (loss) $ 3,215 $ 2,667 $ 1,754 $ 1,058 $ (851)
PER SHARE DATA (1)
Net income (loss), basic $ 0.82 $ 0.92 $ 0.61 $ 0.36 $ (0.29)
Net income (loss), diluted 0.77 0.86 0.58 0.36 (0.29)
Book value 9.89 6.91 5.92 5.38 4.74
GROWTH AND SIGNIFICANT RATIOS
% Change in net income 20.55% 52.05% 65.78% N/M% N/M%
% Change in assets 27.36% 46.87% 44.34% 44.92% 117.56%
% Change in net loans 34.07% 29.95% 54.53% 84.23% 216.63%
% Change in deposits 20.50% 42.22% 44.04% 49.03% 162.74%
Return on average assets 0.86% 0.91% 0.88% 0.78% -1.07%
Return on average equity 9.45% 14.51% 10.56% 7.41% -5.91%
Average equity to average assets 9.05% 6.28% 8.36% 10.40% 18.22%
Efficiency ratio (2) 63.34% 62.67% 68.22% 74.00% 112.71%
(1) Presented giving retroactive effect to the five for four stock split in the
form of a 25% stock dividend paid on March 31, 2000, and a seven for five
stock split in the form of a 40% stock dividend paid on June 15, 2001.
(2) Computed by dividing noninterest expense by the sum of net interest income
and noninterest income on a tax equivalent basis. Comparison of our
efficiency ratio with those of other companies may not be possible, because
other companies may calculate the efficiency ratio differently.
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion provides information about the results of
operations, financial condition, liquidity, and capital resources of Eagle
Bancorp, Inc. (the "Company") and its subsidiaries, EagleBank (the "Bank") and
Bethesda Leasing, LLC ("Bethesda Leasing"). This discussion and analysis should
be read in conjunction with the audited Consolidated Financial Statements and
Notes thereto, appearing elsewhere in this report.
This report contains forward looking statements within the meaning of
the Securities Exchange Act of 1934, as amended, including statements of goals,
intentions, and expectations as to future trends, plans, events or results of
Company operations and policies and regarding general economic conditions. In
some cases, forward looking statements can be identified by use of such words as
"may", "will", "anticipate", "believes", "expects", "plans", "estimates",
"potential", "continue", "should", and similar words or phases. These statements
are based upon current and anticipated economic conditions, nationally and in
the Company's market, interest rates and interest rate policy, competitive
factors and other conditions which, by their nature, are not susceptible to
accurate forecast, and are subject to significant uncertainty. Because of these
uncertainties and the assumptions on which this discussion and the forward
looking statements are based, actual future operations and results in the future
may differ materially from those indicated herein. Readers are cautioned against
placing undue reliance on any such forward looking statements.
GENERAL
Eagle Bancorp, Inc. is a growing, one-bank holding company
headquartered in Bethesda, Maryland. We provide general commercial and consumer
banking services through our wholly owned banking subsidiary EagleBank, a
Maryland chartered bank which is a member of the Federal Reserve System. We were
organized in October 1997 to be the holding company for the Bank. The Bank was
organized as an independent, community oriented, full-service alternative to the
super regional financial institutions, which dominate our primary market area.
The cornerstone of our philosophy is to provide superior, personalized service
to our customers. We focus on relationship banking, providing each customer with
a number of services, becoming familiar with and addressing customer needs in a
proactive, personalized fashion. The Bank has six offices serving the southern
portion of Montgomery County and one office in the District of Columbia. On
December 15, 2003, the Bank opened its sixth office in Montgomery County on
Rockville Pike. However, the Bank has announced that it will close one
Montgomery County office, the Sligo Office located at 850 Sligo Avenue, Silver
Spring, MD, in June 2004. After thorough consideration, management and the board
of directors decided to close the office rather than exercise an option to renew
option in the lease available in June. The decision was made because the office
had failed to reach initial growth and profit expectations and an analysis of
the office's potential, in its existing location, did not provide indications
that the office would improve its performance in the foreseeable future. Silver
Spring will continue to be served by the original Silver Spring Office, which is
located only a few blocks from the Sligo Office, and for this reason, the loss
of business, in particular deposits, is expected to be minimal. The Bank has
entered into a lease and begun improvements for an office in the Dupont Circle
area of the District of Columbia and expects to open this office in April of
2004. In February 2004, the Company executed a lease for a new office to be
opened in 2006 in Friendship Heights, Montgomery County, Maryland, on the
District of Columbia line.
The Company offers full commercial banking services to our business and
professional clients as well as complete consumer banking services to
individuals living and/or working in the service area. We emphasize providing
commercial banking services to sole proprietors, small and medium-sized
businesses, partnerships, corporations, non-profit organizations and
associations, and investors living and working in and near our primary service
area. A full range of retail banking services are offered to accommodate the
individual needs of both corporate customers as well as the community we serve.
These services include the usual deposit functions of commercial banks,
including business and personal checking accounts, "NOW" accounts and savings
accounts, business, construction, and commercial loans, equipment leasing,
residential mortgages and consumer loans and cash management services. We have
developed significant expertise and commitment as an SBA lender, have been
designated a Preferred Lender by the Small Business Administration (SBA), and
are one of the largest SBA lenders, in dollar volume, in the Washington
Metropolitan area.
4
In June 2003, the Company formed a second wholly owned subsidiary,
Bethesda Leasing. Bethesda Leasing was formedfiled solely for the purpose of acquiringcorrecting an impaired loan from the Bank in order to effect more efficient administration and
collection procedures.
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in
accordance with accounting principles generally acceptedinadvertent error in the United Statesaverage
balance of America ("GAAP") and follow general practices within the banking industry.
Application of these principles requires management to make estimates,
assumptions, and judgments that affect the amounts reported"Other time deposits" for 2003 in the financial
statements and accompanying notes. These estimates, assumptions and judgments
are based on information available as of the date of the financial statements;
accordingly, as this information changes, the financial statements could reflect
different estimates, assumptions, and judgments. Certain policies inherently
have a greater reliance on the use of estimates, assumptions and judgments and
as such have a greater possibility of producing results that could be materially
different than originally reported. Estimates, assumptions, and judgments are
necessary when assets and liabilities are required to be recorded at fair value,
when a decline in the value of an asset not carried on the financial statements
at fair value warrants an impairment write-down or valuation reserve to be
established, or when an asset or liability must be recorded contingent upon a
future event. Carrying assets and liabilities at fair value inherently results
in more financial statement volatility. The fair values and the information used
to record valuation adjustments for certain assets and liabilities are based
either on quoted market prices or are provided by other third-party sources,
when available.
The allowance for credit losses is an estimate of the losses that may
be sustained in our loan portfolio. The allowance is based on two principles of
accounting: (a) Statement of Financial Accounting Standards ("SFAS") No. 5,
"Accounting for Contingencies", which requires that losses be accrued when they
are probable of occurring and are estimable and (b) SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan", which requires that losses be accrued when
it is probable that the Company will not collect all principal and interest
payments according to the contractual terms of the loan. The loss, if any, is
determined by the difference between the loan balance and the value of
collateral, the present value of expected future cash flows, or values
observable in the secondary markets.
Three basic components comprise our allowance for credit losses: a
specific allowance, a formula allowance and a nonspecific allowance. Each
component is determined based on estimates that can and do change when the
actual events occur. The specific allowance is used to individually allocate an
allowance to loans identified as impaired. An impaired loan may show
deficiencies in the borrower's overall financial condition, payment record,
support available from financial guarantors and/or the fair market value of
collateral. When a loan is identified as impaired a specific reserve is
established based on the Company's assessment of the loss that may be associated
with the individual loan. The formula allowance is used to estimate the loss on
internally risk rated loans, exclusive of those identified as impaired. Loans
identified as special mention, substandard, doubtful and loss, as well as
impaired, are segregated from performing loans. Remaining loans are then grouped
by type (commercial, commercial real estate, construction, home equity or
consumer). Each loan type is assigned an allowance factor based on management's
estimate of the risk, complexity and size of individual loans within a
particular category. Classified loans are assigned higher allowance factors than
non-rated loans due to management's concerns regarding collectibility or
management's knowledge of particular elements regarding the borrower. Allowance
factors grow with the worsening of the internal risk rating. The nonspecific
formula is used to estimate the loss of non-classified loans stemming from more
global factors such as delinquencies, loss history, trends in volume and terms
of loans, effects of changes in lending policy, the experience and depth of
management, national and local economic trends, concentrations of credit,
quality of loan review system and the effect of external factors such as
competition and regulatory requirements. The nonspecific allowance captures
losses whose impact on the portfolio have occurred but have yet to be recognized
in either the formula or specific allowance.
Management has significant discretion in making the judgments inherent
in the determination of the provision and allowance for credit losses, including
in connection with the valuation of collateral, a borrower's prospects of
repayment, and in establishing allowance factors on the formula allowance and
nonspecific allowance components of the allowance. The establishment of
allowance factors is a continuing exercise, based on
5
management's continuing assessment of the global factors discussed above and
their impact on the portfolio, and allowance factors may change from period to
period, resulting in an increase or decrease in the amount of the provision or
allowance, based upon the same volume and classification of loans. Changes in
allowance factors will have a direct impact on the amount of the provision, and
a related, after tax effect on net income. Errors in management's perception and
assessment of the global factors and their impact on the portfolio could result
in the allowance not being adequate to cover losses in the portfolio, and may
result in additional provisions or charge-offs. For additional information
regarding the allowance for credit losses, refer to Notes 1 and 4 to the
Consolidated Financial Statements and the discussion under the caption
"Allowance for Credit Losses" below.
RESULTS OF OPERATIONS
The Company reported net income of $3.22 million for the year ended
December 31, 2003, as compared to income of $2.67 million for the year ended
December 31, 2002 and income of $1.76 million for the year ended December 31,
2001. Income per basic share was $0.82 for the year ended December 31, 2003, as
compared to $0.92 for 2002 and $0.61 for 2001. Income per diluted share was
$0.77 for 2003, $0.86 for 2002 and $0.58 for 2001. The Company had a return on
average assets of 0.86% and return on average equity of 9.45% in 2003, as
compared to returns on average assets and average equity of 0.91% and 14.51%,
respectively in 2002 and 0.88% and 10.56% in 2001. The Company recorded an
income tax expense of $1.90 million for 2003, compared to $1.56 million for
2002, the first full year for which it recognized tax expense. During 2001, the
Company recorded $269 thousand in income tax expense. The Company did not incur
any income tax expense prior to the third quarter of 2001.
During 2003, the Company recorded a provision for credit losses in the
amount of $ 1.18 million. At December 31, 2003, the allowance for credit losses
was $3.68 million, as compared to $2.77 million at December 31, 2002. The
Company had net charge-offs of $261 thousand in 2003, less than 0.10% of average
loans.
In August 2003, the Company completed a successful stock offering,
resulting in a $30 million increase in capital. This increase in capital,
increasing average assets and average equity for the year, contributed
significantly to the decline in return on average assets from 0.91% in 2002 to
0.86% in 2003 and decline in return on average equity from 14.51% in 2002 to
9.45% in 2003. The net proceeds from the offering were invested in assets whose
yields were lower than those experienced in prior years. This had the effect of
reducing the return on average equity and average assets.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income is the difference between interest income on
earning assets and the cost of funds supporting those assets. Earning assets are
composed primarily of loans and investment securities. The cost of funds
represents interest expense on deposits, customer repurchase agreements and
other borrowings. Noninterest bearing deposits and capital are other components
representing funding sources. Changes in the volume and mix of assets and
funding sources, along with the changes in yields earned and rates paid,
determine changes in net interest income. Net interest income in 2003 was $14.45
million compared to $11.49 million in 2002 and $8.12 million in 2001.
The table labeled "AverageAverage Balances, Interest
Yields and Rates and Net Interest Margin" shows the average balances and ratesMargin table appearing at page 8 of the
various categories
of the Company's assets and liabilities. Included in the table is a measurement
of interest rate spread and margin. Interest spread is the difference between
the rate earned on assets less the cost of funds expressed as a percentage.
While spread provides a quick comparison of earnings rates versus cost of funds,
management believes that margin provides a better measurement of performance.
Margin includes the effect of noninterest bearing liabilities in its calculation
and is net interest income expressed as a percentage of total earning assets.
Interest spread increased in 2003 from 2002 by 2 basis points to 3.77% from
3.75%; however, margin decreased 2 basis points, 4.14% from 4.16%. The decrease
in margin while the spread increased is attributable to changes in mix in both
earning assets and interest bearing liabilities. While there was an increase of
26.36% in average earning assets there was only an increase of 25.76% in net
interest income reflecting the decline in margin. Following the average balance
tables is a rate/volume analysis table that demonstrates the significance of a
much larger base of earning assets contributing to income while the interest
margin declined.
6
The yield on earning assets decreased from 6.03% for the year ended
December 31, 2002 to 5.27% for the year ended December 31, 2003, and the rates
paid on interest bearing liabilities decreased from 2.28% for the year ended
December 31, 2002 to 1.50% for the year ended December 31, 2003. The average
yield on loans fell 71 basis points from 2002 to 2003, following a decline of
125 basis points from 2001 to 2002. These declines reflect the continued impact
of the significant rate reductions effected by the Federal Reserve in 2001 and
continued into 2002 and 2003 with the last rate reduction occurring in June
2003. The effect of the reductions in market rates continued through 2003,
reflecting the lagging repricing of the fixed rate portion of the loan portfolio
and the reduction of rates on new fixed rate loans. The investment portfolio
yield declined by 106 basis points from 2002 to 2003 as the Bank maintained a
portfolio of short term fixed rate securities and mortgage backed securities
(MBS). The yield on MBS securities declined as mortgage refinancing accelerated,
resulting in earlier repayment of mortgage backed securities, and reinvestment
of the proceeds at lower current market rates. Further impacting the decline in
the yield of the investment portfolio was the investment of proceeds from the
stock offering in very short term investments while strategies were implemented
for developing a diversified investment portfolio. The decline in yield from
2002 to 2003 followed a decline of 186 basis points from 2001 to 2002. The
federal funds rate had fallen to 1.75% by the end of 2001 and for 2003 averaged
1.15%, 41 basis points less than the average yield of 1.56% for 2002 and 268
basis points less than the 2001 average yield of 3.83%. In order to keep the
investment portfolio short for liquidity and expectations that rates would start
to move upward, and to obtain better short term yields, the Bank invested $7.84
million in interest bearing deposits with other banks, yielding 2.29%, a
relatively attractive rate given their short term nature and low risk, as
compared to the rates offered on federal funds and U. S. Treasury bills. The
decline in the yield on interest earning assets continues into 2004 following
the Federal Reserve's June 2003 cut in the federal funds rate.
On the liability side, management aggressively reduced rates on deposit
accounts. The reduction in the rate on total interest bearing liabilities from
2002 to 2003 was 78 basis points which compares to a reduction of 76 basis
points in the yield on earning assets over the same period. This follows a
reduction in the cost of funds of 168 basis points from 2001 to 2002.
It is anticipated that any further reductions in interest rates will
have a significant adverse effect on earnings as rates paid on interest bearing
liabilities, which are recently as low as 0.10% on NOW accounts, cannot continue
to decline at the same rate as yields on loans and investments.
7
initial filing.
(dollars in thousands)
Year Ended December 31,
-----------------------------------------------------------------------------
2003 2002
------------------------------------ ------------------------------------
(dollars in thousands) Average Interest Average Average AverageInterest Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------------ ----------- ----------- ----------- ----------- -----------
ASSETS:
Interest earning assets:
ASSETS:
Interest earning assets:
Interest bearing deposits with other banks $ 7,843 180 2.29% $ 2,868 $ 77 2.67%
Loans 266,811 16,355 6.13 210,303 14,379 6.84
Investment securities 69,086 1,807 2.62 57,983 2,124 3.68
Federal funds sold 5,417 62 1.15 5,166 81 1.56
------------ ----------- ----------- -----------
Total interest earning assets $ 349,157 18,404 5.27% $ 276,320 $ 16,661 6.03%
------------ ----------- ----------- -----------
Total noninterest earning assets 29,687 19,057
Less: allowance for credit losses 3,042 2,456
------------ -----------
Total noninterest earning assets 26,645 16,601
------------ -----------
TOTAL ASSETS $ 375,802 $ $292,921
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
NOW accounts $ 38,820 $ 79 0.20% $ 30,886 $ 96 0.31%
Savings and money market accounts 100,226 1,161 1.16 81,509 1,598 1.96
Certificates of deposit $100,000 or more 46,381 953 2.05 41,683 1,337 3.21
Other time deposits 35,38035,407 906 2.56 36,902 1,301 3.70
Federal funds purchased and securities sold
under
agreement to repurchase 22,146 108 0.49 19,535 230 1.18
Short-term borrowingborrowings 7,979 266 3.33 4,670 177 3.79
Long termLong-term borrowings 12,489 480 3.84 11,159 431 3.86
------------ ----------- ----------- -----------
Total interest bearing liabilities $ 263,448 $ 3,953 1.50% $ 226,344 $ 5,170 2.28%
------------ ----------- ----------- -----------
Noninterest bearing liabilities:
Noninterest bearing demand deposits 72,119 46,930
Other liabilities 6,207 1,266
------------ -----------
Total noninterest bearing liabilities 78,326 48,196
Stockholders' equity 34,028 18,381
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 375,802 $ 292,921
STOCKHOLDERS' EQUITY ============ ===========
Net interest income $ 14,451 $ 11,491
=========== ===========
Net interest spread 3.77% 3.75%
Net interest margin 4.14% 4.16%
8
(dollars in thousands) Year ended December 31,
-----------------------------------
2001
-----------------------------------
Average Average
Balance Interest Yield/Rate
----------- ---------- ----------
ASSETS:
Interest earning assets:
Interest bearing deposits with other banks $ 158 $ 9 6.00%
Loans 149,056 12,054 8.09
Investment securities 32,530 1,803 5.54
Federal funds sold 6,657 255 3.83
----------- ----------
Total interest earning assets $ 188,401 $ 14,121 7.50%
----------- ----------
Total noninterest earning assets 11,886
Less: allowance for credit losses 1,444
-----------
Total noninterest earning assets 10,442
-----------
TOTAL ASSETS $ 198,843
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
NOW accounts $ 20,896 $ 232 1.11%
Savings and money market accounts 54,211 1,843 3.40
Certificates of deposit $100,000 or more 35,791 2,006 5.61
Other time deposits 25,493 1,405 5.51
Federal funds purchased and securities sold
under agreement to repurchase 13,057 409 3.13
Short-term borrowings -- -- --
Long term borrowings 2,155 103 4.78
----------- ----------
Total interest bearing liabilities $ 151,603 $ 5,998 3.96%
----------- ----------
Noninterest bearing liabilities:
Noninterest bearing demand deposits 29,727
Other liabilities 898
-----------
Total noninterest bearing liabilities 30,625
Stockholders' equity 16,615
-----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 198,843
===========
Net interest income $ 8,123
==========
Net interest spread 3.54%
Net interest margin 4.31%
The rate/volume table shows the composition of the change in net
interest income for the periods indicated, as allocated between the change in
net interest income due to changes in the volume of average earning assets and
interest bearing liabilities, and the changes in net interest income due to
changes in interest rates. As the table shows, the increase in net interest
income in 2003 as compared to 2002 is primarily due to the growth in the volume
of earning assets. For 2002 compared to 2001, the increase in net interest
income is primarily due to growth in the volume of earning assets, augmented by
average rate related declines in interest expense.
9
RATE /VOLUME ANALYSIS OF NET INTEREST INCOME
2003 compared with 2002 2002 compared with 2001
-----------------------------------------------------------------------------
(dollars in thousands) Due to Total Increase Due to Total Increase
Volume Due to Rate (Decrease) Volume Due to Rate (Decrease)
-----------------------------------------------------------------------------
INTEREST EARNED ON:
Loans $ 3,463 $ (1,487) $ 1,976 $ 4,188 $ (1,863) $ 2,325
Investment securities 290 (607) (317) 932 (611) 321
Interest bearing bank deposits 115 (12) 103 73 (5) 68
Federal funds sold and other
cash equivalents 3 (22) (19) (57) 5,136 (2,596)
---------- ------------ ------------- ----------- ----------- -------------
Total interest income 3,871 (2,128) 1,743 5,136 (2,596) 2,540
---------- ------------ ------------- ----------- ----------- -------------
INTEREST PAID ON:
NOW accounts 16 (33) (17) 31 (167) (136)
Savings and MMA accounts 217 (654) (437) 535 (780) (245)
Certificates of deposit 72 (851) (779) 581 (1,354) (773)
Customer repurchase agreements
and federal funds purchased 4 (143) (139) 72 (257) (185)
Other borrowings 216 (61) 155 532 (21) 511
---------- ------------ ------------- ----------- ----------- -------------
Total interest expense 525 (1,742) (1,217) 1,751 (2,579) (828)
---------- ------------ ------------- ----------- ----------- -------------
NET INTEREST INCOME $ 3,346 $ (386) $ 2,960 $ 3,211 $ (1,040) $ 2,171
========== ============ ============= =========== =========== =============
The increase in noninterest income reflected an increase in deposit
account service charges, which increased 17.15% during 2003, from $1.04 million
for the year ended December 31, 2002 to $1.22 million for the year ended
December 31, 2002. Deposit account service charges increased 47.44% from $704
thousand in 2001 to $1.04 million in 2002. Increases in deposit account charges
reflect the increased number of accounts and also the lower interest rate
environment. As interest rates decline so do the earnings allowances on certain
commercial demand deposit accounts which are used to offset service charges. As
a result an account which paid no service charge when interest rates were high
may currently be paying a charge based on the same activity because the earnings
allowance is insufficient to cover activity charges. The Company is an active
originator of SBA loans and its current practice is to sell the insured portion
of those loans at a premium. Income from this source increased from $327
thousand in 2002 to $472 thousand in 2003. During part of both 2002 and 2003,
the maximum loan eligible for an SBA guarantee was reduced, contributing to a
slow down in this activity during those periods in both years. The Company
believes that this source of income will continue to experience growth. The
Company also originates residential construction and permanent loans on a
pre-sold basis, servicing released. Sales of these mortgage loans yielded gains
of $285 thousand in 2003 compared to $164 thousand in 2002. The success of the
mortgage program was directly affected by the low interest rate environment in
2003 and this source of income may decline when interest rates begin to rise and
as refinancing activity slows due to cessation in the decline in interest rates.
Other items in noninterest income increased 122% in 2003 from $294
thousand for the year ended December 31, 2002 to $652 thousand for the same
period in 2003. This category includes noninterest income fees such as
documentation preparation and prepayment penalties. Income for the year ended
December 31, 2003 was $89 thousand from SBA servicing fees and $250 thousand
from BOLI, versus $45 thousand from SBA servicing fees and $85 thousand from
BOLI for the year ended December 31, 2002. SBA loan servicing income is expected
to increase as the number of loans originated and serviced by the Bank
increases. Income from BOLI is expected to remain constant, except to the extent
that the Bank may elect to purchase additional contracts and interest rates may
fluctuate. BOLI income is adjusted annually based on the prevailing level of
interest rates, although contracts are not pegged to any interest rate index and
the rate paid by one issuer can vary from another issuer.
10
NONINTEREST EXPENSE
Noninterest expenses were $11.09 million in 2003, a 29.26% increase
over the $8.58 million noninterest expense in 2002, which was a 33.17% increase
over noninterest expense of $6.44 million in 2001. The increases in noninterest
expense are consistent with the overall growth in assets of 27.36% from December
31, 2002 to December 31, 2003, and management's internal expectations.
The most significant noninterest expense item is salaries and employee
benefits, which were $ 5.93 million for the year ended December 31, 2003, an
increase of 31.72% over the $4.51 million for the year ended December 31, 2002,
which reflected a 30.62% increase over the $3.45 million for 2001. In 2003, the
additional salary and benefit costs reflected additional staffing in the loan
and operations areas, required to keep pace with the growth of the Bank, as well
as compensation increases for existing staff. Increases in 2002 primarily
reflected staffing of the Gaithersburg office and normal annual compensation
increases. The increase in premises and equipment expenses of 28.09% from 2002
to 2003, from $1.65 million to $2.11 million can be attributed to a full year of
expenses for the Gaithersburg office, the new Rockville Pike office opened in
December 2003, and additional equipment, software and maintenance expenses for
loan and deposit operations departments.
Other expenses increased 25.47% from the year ended December 31, 2002
to the year ended December 31, 2003, including a 23.86% increase in advertising
expense from $197 thousand in 2002 to $ 244 thousand in 2003, and a 13.73%
increase in outside data processing expense. Other expenses increased 28.93%
from $1.75 million in 2002 to $ 2.25 million in 2003 and increased 36.00% from
$1.28 million in 2001 to $1.75 million in 2002. In 2004, the Company expects to
experience slower growth in other expenses as fidelity and directors & officers
insurance premiums have been stabilized for two and one-half years and as
greater control is exercised over various expenses in this category. In future
periods, noninterest expenses to which the Company has not been subject to date,
such as deposit insurance premiums which may be required as a result of declines
in the reserve ratios of the deposit insurance funds, may have an adverse affect
on the results of operations of the Company.
INCOME TAX
The Company had income tax expense of $1.90 million in 2003 compared to
$1.56 million in 2002, resulting in an effective tax rate of 37.1% and 36.9%
respectively. In 2001, the Company recorded previously unrecorded deferred tax
assets and began recognizing tax on its income on a fully taxable basis. It is
expected that the Company will continue to record income tax expense based upon
its taxable income in future years.
FINANCIAL CONDITION
The Company ended the year with total assets of $443.00 million, an
increase of 27.36% from assets of $347.83 million at December 31, 2002. At
December 31, 2003 deposits were $335.51 million as compared to $278.43 million
at December 31, 2002, an increase of 20.50%. Gross loans were at $317.53
million at December 31, 2003 as compared to $236.86 million at December 31,
2002, an increase of 34.06%. Other liabilities consisting of customer repurchase
agreements, Federal Home Loan Bank ("FHLB") borrowings by the Company under a
leveraged repurchase agreement program and an advance to a Bethesda Leasing by a
correspondent bank and guaranteed by the Company, increased 10.3% from $47.99
million at December 31, 2001 to $53.04 million at December 31, 2003. Net loans
increased 34.07% from $234.09 million at December 31, 2002 to $313.85 million
at December 31, 2003. Other earning assets (investment securities, federal funds
sold and other cash equivalents, interest bearing deposits and loans held for
sale) increased $5.21 million or 6.10%.
INVESTMENT SECURITIES AND OTHER EARNING ASSETS
The Company's investment securities portfolio is comprised primarily of
U. S. Treasury and Agency securities with maturities not exceeding seven years,
except mortgage pass-through securities which have average expected lives of
less than six years but contractual maturities of up to thirty years. Federal
funds sold also represent a significant earning asset and are sold, on an
unsecured basis, only to highly rated banks, in limited amounts both in the
aggregate and to any one bank.
11
The investment portfolio averaged approximately $69.09 million in 2003
compared to $57.98 million in 2002. The increase in investment securities from
2002 to 2003 of approximately $11.11 million is directly attributable to the
investment of proceeds from the stock offering in investment securities.
Excluding the proceeds of the offering, the investment portfolio actually
declined to fund the increase in net loans, including loans held for sale, which
out paced the increase in deposits $77.86 million to $57.08 million or $20.78
million. The tables below and Note 3 to the Consolidated Financial Statements
provide additional information regarding the Company's investment securities.
The Company classifies all investment securities as available for sale
("AFS"). This method of accounting requires that investment securities be
reported at their fair value and the difference between the fair value and
amortized cost (the purchase price adjusted by any accretion or amortization) be
reported in the equity section as accumulated other comprehensive income, net of
deferred taxes. At December 31, 2003, the Company reported a net unrealized gain
in AFS securities of $407 thousand and at December 31, 2002, a net unrealized
gain in AFS securities of $593 thousand. The accumulated comprehensive income
component of these unrealized gains was $271 thousand and $392 thousand
respectively. The Company, except in a planned investment strategy or for
liquidity needs, has no present plan or intention to sell these securities.
In 2002, the Bank began using excess liquidity to invest in
certificates of deposit of other banks, which generally offer more favorable
rates than traditional short term investment securities. These deposits are in
insured institutions, and are generally in amounts of $100 thousand or less. At
December 31, 2003 and 2002 the Bank had $4.33 million and $6.12 million,
respectively, of this type of investment.
The following table provides information regarding the composition of
the Company's portfolio at the dates indicated. Amounts are reported at
estimated fair value.
December 31,
-----------------------------------------------------------------------
(dollars in thousands) 2003 2002 2001
--------------------- --------------------- -------------------------
Percent Percent Percent
Balance of Total Balance of Total Balance of Total
----------- --------- --------- ---------- ----------- ------------
U.S. Treasury $ -- --% $ 5,504 7.8% $ 12,540 31.8%
U.S. Government agency obligations 25,373 30.7 20,114 28.6 14,537 36.9
Mortgage backed securities 51,842 62.8 43,268 61.0 11,217 28.4
Federal Reserve and Federal Home Loan
Bank Stock 1,670 2.0 1,564 2.3 880 2.2
Other equity investments 3,696 4.5 225 0.3 265 0.7
----------- --------- --------- ---------- ----------- ------------
Total $ 82,581 100% $ 70,675 100% $ 39,439 100%
=========== ========= ========= ========== =========== ============
The following table provides information, on an amortized cost basis,
regarding the contractual maturity and weighted average yield of the investment
portfolio at December 31, 2003. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
(dollars in thousands) After One Year After Five Years
One Year or Less Through Five Years Through Ten Years After Ten Years Total
------------------- ------------------- ------------------- ------------------ --------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
U.S. Government Agency
obligations $ 6,648 0.91% $15,725 2.91% $ 3,000 4.60% $ -- 0.00% $ 25,373 2.59%
Mortgage backed securities -- 0.00% -- 0.00% -- 0.00% 51,842 3.49% 51,842 3.57%
Federal Reserve and Federal
Home Loan Bank Stock -- 0.00% -- 0.00% -- 0.00% 1,670 4.39% 1,670 4.39%
Other Equity Investments -- 0.00% -- 0.00% -- 0.00% 3,696 4.35% 3,696 4.35%
--------- --------- -------- ---------- -------- --------- -------- --------- --------- ----------
Total $ 6,648 0.91% $15,725 2.91% $ 3,000 4.60% $57,208 3.57% $ 82,581 3.32%
========= ========= ======== ========== ======== ========= ======== ========= ========= ==========
12
At December 31, 2003, there were no issuers, other than the U.S.
Government and its agencies, whose securities owned by the Company had a book or
fair value exceeding ten percent of the Company's stockholders' equity.
LOAN PORTFOLIO
In its lending activities, the Bank seeks to develop sound credits with
customers who will grow with the Bank. There has not been an effort to rapidly
build the loan portfolio and earnings at the sacrifice of asset quality.
However, loan growth in 2003, 2002 and 2001 was strong, with loans outstanding
reaching $317.53 million at December 31, 2003 from $236.86 million at December
31, 2002, an increase of $80.67 million or 34.06%.
During 2001, the Bank became active in the origination and selling of
both residential mortgage loans and the insured portion of SBA loans. In 2003,
in addition to the loans the Bank held for its portfolio, it originated
approximately $28.5 million in loans which were sold. The Bank sells residential
mortgages, servicing released, but retains servicing on the sold SBA loans. As
of December 31, 2003, the Bank serviced $11.34 million in loans which are not
reflected on the balance sheet. At December 31, 2003, there were $3.65 million
of loans held for sale and at December 31, 2002 there were $5.55 million of such
loans.
The Bank is primarily business oriented in its development focus. This
is demonstrated by the 87.8% of the loan portfolio which is in commercial, real
estate and construction loans as compared to 12.2% in home equity and other
consumer loans.
The following table shows the composition of the loan portfolio by type
of loan at the dates indicated.
(dollars in thousands) December 31,
----------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------------- ----------------- ------------------ ------------------ -------------------
Percent Percent Percent Percent Percent
Balance of Total Balance of Total Balance of Total Balance of Total Balance of Total
----------------- ----------------- ------------------ ------------------ -------------------
Commercial $ 93,112 29.3% $ 64,869 27.5% $ 49,432 27.1% $ 37,123 31.5% $ 25,760 40.3%
Real Estate 149,783 47.3 114,961 48.5 86,553 47.5 58,214 49.4 29,217 45.8
Construction 35,644 11.2 23,180 9.8 15,512 8.5 9,952 8.4 3,545 5.6
Home equity 34,092 10.7 30,631 12.9 26,656 14.6 9,129 7.8 2,133 3.3
Other consumer 4,902 1.5 3,219 1.3 4,103 2.3 3,300 2.9 3,200 5.0
----------------- ----------------- ------------------ ------------------ -------------------
Total loans $ 317,533 100% $ 236,860 100% $ 182,256 100% $ 117,718 100% $ 63,855 100%
Less: allowance for
credit losses 3,680 2,766 2,111 1,142 579
--------- -------- --------- --------- ---------
Loans, net $ 313,853 $ 234,094 $ 180,145 $ 116,576 $ 63,276
========= ======== ========= ========= =========
LOAN MATURITY
The following table sets forth the term to contractual maturity of
the loan portfolio as of December 31, 2003
(dollars in thousands) Due In
-----------------------------------------------------------------------
One Year One to Over Five to Over Ten
Total or Less Five Years Ten Years Years
------------ ---------- ----------- ------------- -----------
Commercial $ 93,112 $ 51,326 $ 26,571 $ 15,215 $ --
Real estate 149,783 7,143 40,740 71,851 30,049
Construction 35,644 21,753 13,891 -- --
Home equity 34,092 747 33,345 -- --
Other consumer 4,902 1,792 3,110 -- --
------------ ---------- ----------- ------------ -----------
Total loans $ 317,533 $ 82,761 $ 117,657 $ 87,066 $ 30,049
============ ========== =========== ============ ===========
Loans with:
Predetermined fixed interest
rate $ 138,245 $ 36,124 $ 49,293 $ 22,779 $ 30,049
Floating interest rate 179,288 46,637 68,364 64,287 --
------------ ---------- ----------- ------------ -----------
Total loans $ 317,533 $ 82,761 $ 117,657 $ 87,066 $ 30,049
============ ========== =========== ============ ===========
13
Loans which have adjustable rates and fixed rate loans are all shown in
the period of contractual maturity. Demand loans, having no contractual
maturity, and overdrafts are reported as due in one year of less.
ALLOWANCE FOR CREDIT LOSSES
The provision for credit losses represents the expense recognized to
fund the allowance for credit losses. The amount of the allowance for credit
losses is based on many factors which reflect management's assessment of the
risk in the loan portfolio. Those factors include economic conditions and
trends, the value and adequacy of collateral, volume and mix of the portfolio,
performance of the portfolio, and internal loan processes of the Company and
Bank.
Management has developed a comprehensive review process to monitor the
adequacy of the allowance for credit losses. The review process and guidelines
were developed utilizing guidance from federal banking regulatory agencies. The
results of this review process, in combination with conclusions of the Bank's
outside loan review consultant, support management's view as to the adequacy of
the allowance as of the balance sheet date. During 2003, a provision for credit
losses was made in the amount of $1.18 million before net charge-offs of $261
thousand. A full discussion of the accounting for allowance for credit losses is
contained in Note 1 to the Consolidated Financial Statements; activity in the
allowance for credit losses is contained in Note 4 to the Consolidated Financial
Statements. Please refer to the discussion under the caption, "Critical
Accounting Policies" for an overview of the underlying methodology management
employs on a quarterly basis to maintain the allowance.
At December 31, 2003, the Company had $654 thousand of loans classified
as nonaccrual, of which $255 thousand was guaranteed by the SBA. There were no
loans past due over ninety days and still accruing interest at December 31,
2003. Please refer to Note 1 of the notes to the Consolidated Financial
Statements under the caption "Loans" for a discussion of the Company's policy
regarding impairment of loans.
The provision for credit losses was $1.18 million in 2003 compared to a
provision for credit losses of $843 thousand in 2002. The higher provision in
2003 is attributable to the level of growth in the loan portfolio from December
31, 2002 to December 31, 2003 and the greater amount of net charge-offs for the
corresponding periods $261 thousand in 2003 versus $118 thousand in 2002. The
increase in the level of charge-offs resulted primarily from one loan to a
customer in bankruptcy and the transfer of that loan and related collateral to a
separate subsidiary on a fair market value basis.
As the portfolio and allowance review process matures, there will be
changes to different elements of the allowance and this may have an effect on
the overall level of the allowance maintained. To date the Bank has enjoyed a
very high quality portfolio with minimal net charge-offs and very low
delinquency. The maintenance of a high quality portfolio will continue to be
management's prime objective as it relates to the lending process and to the
allowance for credit losses.
Management, aware of the strong loan growth experienced by the Company
and the problems which could develop in an unmonitored environment, is intent on
maintaining a strong credit review system and risk rating process. In January
2003, the Company established a credit department to perform interim analyses,
manage classified credits and develop a credit scoring system for small business
credits. Over time, this department will increase its review of credit analysis
and processes. The Company is also reviewing its risk rating systems and is
exploring the implementation of additional analytical procedures for risk
ratings. The entire loan portfolio analysis process is an ongoing and evolving
practice directed at maintaining a portfolio of quality credits and quickly
identifying any weaknesses before they become irremediable.
14
The following table sets forth activity in the allowance for credit
losses for the periods indicated.
(dollars in thousands) Year Ended December 31,
--------------------------------------------------------------
2003 2002 2001 2000 1999
----------- --------- -------- --------- ---------
Balance at beginning of year $ 2,766 $ 2,111 $ 1,142 $ 579 $ 164
Charge-offs:
Commercial (319) (192) -- -- --
Real estate -- -- -- -- --
Construction -- -- -- -- --
Home equity -- -- -- -- --
Other consumer (14) (40) (23) (18) (11)
----------- --------- -------- --------- ---------
Total (333) (232) (23) (18) (11)
----------- --------- -------- --------- ---------
Recoveries:
Commercial 68 26 -- -- --
Real estate -- -- -- -- --
Construction -- -- -- -- --
Home equity -- -- -- -- --
Other consumer 4 18 13 -- 2
----------- --------- -------- --------- ---------
Total 72 44 13 -- 2
----------- --------- -------- --------- ---------
Net charge-offs (261) (188) (10) (18) (9)
----------- --------- -------- --------- ---------
Additions charged to operations 1,175 843 979 581 424
----------- --------- -------- --------- ---------
Balance at end of period $ 3,680 $ 2,766 $ 2,111 $ 1,142 $ 579
=========== ========= ======== ========= =========
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.10% 0.09% 0.01% 0.02% 0.02%
----------- --------- -------- --------- ---------
Prior to 2001, the Company had not allocated any portion of the
allowance for credit losses to any individual loan or any category of loans. In
2001, the Company began an allocation process which is reflected in the
following table. The allocation of the allowance to each category is not
necessarily indicative of future losses or charge-offs and does not restrict the
use of the allowance to absorb losses in any category.
(dollars in thousands) Year Ended December 31,
-----------------------------------------------------------------------------------
2003 2002 2001
------------------------ ----------------------- ------------------------
Amount Percent (1) Amount Percent (1) Amount Percent (1)
------------------------ ----------------------- ------------------------
Commercial $ 1,689 29.3% $ 1,134 27.5% $ 743 27.2%
Real estate 888 47.3 862 48.5 701 49.1
Construction 613 11.2 231 9.8 218 10.1
Home equity 171 10.7 253 12.9 212 11.6
Other consumer 72 1.5 83 1.3 100 2.0
Unallocated 247 -- 203 -- 137 --
----------- ---- ----------------------- ------------------------
Total allowance for credit
losses $ 3,680 100% $ 2,766 100% $ 2,111 100%
=========== ==== ======================= ========================
(1) Represents the percent of loans in category to gross loans.
NON-PERFORMING ASSETS
The Company's non-performing assets, which are comprised of loans
delinquent 90 days or more, nonaccrual loans, and other real estate owned,
totaled $654 thousand at December 31, 2003 compared to $965 thousand at December
31, 2002. The percentage of non-performing assets to total assets was 0.2% at
December 31, 2003 compared to 0.4% at December 31, 2002.
15
Non-performing loans constituted all of the non-performing assets at
December 31, 2003 and December 31, 2002. Non-performing loans at December 31,
2002 consist of loans in nonaccrual status in the amount of $147 thousand and
loans past due over ninety days of $818 thousand compared to no nonaccrual loans
and loans past due over ninety days of $19 thousand at December 31, 2001.
The Company had no other real estate owned at either December 31, 2003
or 2002.
The following table shows the amounts of non-performing assets at the
dates indicated.
(dollars in thousands) Year End December 31,
---------------------------------------------------------------
2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
Nonaccrual Loans
Commercial $ 554 $ 147 $ -- $ -- $ --
Consumer 100 -- -- -- --
Real estate -- -- -- -- --
Accrual loans-past due 90 days
Commercial -- 818 19 15 --
Consumer -- -- -- -- --
Real estate -- -- -- -- --
Restructured loans -- -- -- -- --
Real estate owned -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total non-performing
assets $ 654 $ 965 $ 19 $ 15 $ --
========== ========== ========== ========== ==========
At December 31, 2003, there was one performing loan in the amount of
$2.10 million considered by management to be a potential problem loans, defined
as loans which are not included in the past due, nonaccrual or restructured
categories, but for which known information about possible credit problems
causes management to be uncertain as to the ability of the borrowers to comply
with the present loan repayment terms. The identified potential problem loan is
secured by commercial real estate and management does not anticipate any loss.
DEPOSITS AND OTHER BORROWINGS
The principal sources of funds for the Bank are core deposits,
consisting of demand deposits, NOW accounts, money market accounts, savings
accounts and relationship certificates of deposits, from the local market areas
surrounding the Bank's offices. The Bank's deposit base includes transaction
accounts, time and savings accounts and accounts which customers use for cash
management and which provide the Bank with a source of fee income and
cross-marketing opportunities as well as a low-cost source of funds. Time and
savings accounts, including money market deposit accounts, also provide a
relatively stable and low-cost source of funding.
For the year ended December 31, 2003, deposits grew $57.08 million,
from $278.43 million to $335.51 million or 20.51%
Approximately 28.77% of the Bank's deposits are made up of certificates
of deposits, which are generally the most expensive form of deposit because of
their fixed term. Certificates of deposit in denominations of $100 thousand or
more can be more volatile and more expensive than certificates of less than $100
thousand. However, because the Bank focuses on relationship banking and does not
accept brokered certificates, its historical experience has been that large
certificates of deposit have not been more volatile or significantly more
expensive than smaller denomination certificates. It has been the practice of
the Bank to pay posted rates on its certificates of deposit whether under or
over $100 thousand. The Bank has paid negotiated rates for deposits in excess of
$500 thousand but the rates paid have rarely been more than 25 to 50 basis
points higher than posted rates and deposits have been negotiated at below
market rates. In late 2000, to fund strong loan demand, the Bank began accepting
certificates of deposits, generally in denominations of less than $100 thousand
on a non-brokered basis, from bank and credit union subscribers to a wholesale
deposit rate line. The Bank has found rates on these deposits to be generally
competitive with rates in our market given the speed and minimal noninterest
cost at which these deposits can be acquired, although it is possible for rates
to significantly exceed local market rates. At December 31, 2003 the Bank held
$27.00 million of these deposits at an average rate of 2.88% as compared to
$16.36 million of these deposits, at an
16
average rate of 3.99% at December 31, 2002. With the strong core deposit growth
experienced by the Bank in 2002 these deposits were allowed to mature without
renewal or replacement. During the second quarter of 2003 management felt that
there was an opportunity to acquire longer maturities of these deposits at an
attractive interest rate and again began accepting these deposits with
maturities greater than one year. At December 31, 2003 the average life of these
deposits was 17.4 months while at December 31, 2002 the average life was 9.9
months.
At December 31, 2003, the Company had approximately $90.47 million in
noninterest bearing demand deposits, representing a 40.42% increase from $64.43
million in demand deposits at December 31, 2002. These are primarily business
checking accounts on which the payment of interest is prohibited by regulations
of the Federal Reserve. Proposed legislation has been introduced in each of the
last several sessions of Congress which would permit banks to pay interest on
checking and demand deposit accounts established by businesses. If legislation
effectively permitting the payment of interest on business demand deposits is
enacted, of which there can be no assurance, it is likely that we may be
required to pay interest on some portion of our noninterest bearing deposits in
order to compete with other banks. Payment of interest on these deposits could
have a significant negative impact on our net income, net interest income,
interest margin, return on assets and equity, and indices of financial
performance. For additional information relating to the composition of the
Bank's deposit base, see average balance tables above and Note 6 to the
Consolidated Financial Statements.
As an enhancement to the basic noninterest bearing demand deposit
account, the Company offers a sweep account, referred to as a "customer
repurchase agreement", allowing qualifying businesses to earn interest on short
term excess funds which are not suited for either a certificate of deposit
investment or a money market account. The balances in these accounts were $16.09
million at December 31, 2003, a 35.77% decrease from December 31, 2002 balance
of $25.05 million. The decrease in this category of liabilities is attributable
to a slowdown in real estate related activity, from which a significant portion
of these funds are derived. Customer repurchase agreements are not deposits and
are not FDIC insured but are secured by US Treasury and/or US government agency
securities. These accounts are particularly suitable to businesses with
significant change in the peaks and valleys of cash flow over a very short time
frame often measured in days. Attorney and title company escrow accounts are an
example of accounts which can benefit from this product, as are customers who
may require collateral for deposits in excess of $100 thousand but do not
qualify for other pledging arrangements. This program requires the Company to
maintain a sufficient investment securities level to accommodate the
fluctuations in balances which may occur in these accounts.
At December 31, 2003, the Company had entered in to reverse repurchase
agreements totaling $14.36 million to fund the purchase of mortgage backed pass
through securities. Bethesda Leasing had outstanding a $255 thousand balance on
a loan provided by a correspondent bank and guaranteed by the Company. These
borrowings totaled $14.62 million at December 31, 2003 compared to Company
borrowings of $4.60 million at December 31, 2002. At December 31, 2003, the
Bank, in addition to customer repurchase agreements totaling $16.09 million at
December 31, 2003, had $8.00 million in federal funds purchased from other
commercial banks and $14.33 million of FHLB short and long-term borrowings, as
compared to no federal funds purchased and FHLB advances of $18.33 million at
December 31, 2002. The federal funds borrowings are unsecured and FHLB advances
are secured 50% by US government agency securities and 50% by a blanket lien on
qualifying loans in the Bank's Commercial loan portfolio. For additional
information regarding other borrowings, see Note 7 to the Consolidated Financial
Statements.
17
The following table provides information regarding the Bank's deposit
composition at the dates indicated.
(dollars in thousands) December 31
---------------------------------------------------------------------------------
2003 2002 2001
----------------------- ----------------------- ----------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
----------------------- ----------------------- ----------------------
Noninterest bearing demand $ 72,119 -- $ 46,930 -- $ 29,727 --
Interest bearing transaction accounts 38,820 0.20% 30,886 0.31% 20,896 1.11%
Savings and money market and accounts 100,226 1.16% 81,509 1.96% 54,211 3.40%
Certificates of deposit $100,000
or more 46,381 2.05% 41,683 3.21% 35,791 5.61%
Other time 35,380 2.56% 36,902 3.70% 25,493 5.51%
------------ ------------- -------------
Total $ 292,926 $ 237,910 $ 166,118
============ ============= =============
The following table indicates the time remaining until maturity for the
Bank's certificates of deposit of $100,000 or more as of December 31, 2003.
Due in:
3 months or less $ 10,783
Over 3 through 6 months 12,808
Over 6 through 12 months 18,920
Over 12 months 12,481
------------
Total $ 54,992
============
The following table provides information regarding the Company's
short-term borrowings for the periods indicated. See Note 7 to the Consolidated
Financial Statements for additional information regarding the Company's
borrowings.
(dollars in thousands)
Maximum
Amount
Federal funds purchased and Outstanding Ending
securities sold under agreement at Any Average Average Ending Average
to repurchase Month End Balance Rate Balance Rate
------------------------------------------------- ----------- --------- ---------- ---------
Year Ended December 31,
2003 $ 38,454 $ 22,146 0.49% $ 38,454 0.58%
2002 26,560 19,535 1.18 25,054 0.50
2001 17,078 13,057 3.13 13,452 1.70
Other short term borrowings
Year Ended December 31,
2003 13,570 7,979 3.33% 4,000 2.79%
2002 8,600 4,670 3.81 8,600 4.00
2001 1,675 533 2.53 1,675 5.92
CONTRACTUAL OBLIGATIONS
The Company has various financial obligations, including contractual
obligations and commitments that may require future cash payments.
The following table presents, as of December 31, 2003, significant
fixed and determinable contractual obligations to third parties by payment date.
18
One to
Within One Three Three to Over Five
(dollars in thousands) Year Years Five Years Years
------------ ---------- ------------ -----------
Deposits without a stated $ 239,089 $ -- $ -- $ --
maturity (1)
Certificates of deposit (1) 71,086 23,949 1,554 --
Short-term borrowings 42,454 -- -- --
Long term borrowings -- 10,588 -- --
Operating lease obligations 1,052 2,216 2,154 2,673
Purchase obligations 50 -- -- --
------------ ---------- ------------ -----------
Total $ 353,731 $ 36,753 $ 3,708 $ 2,673
============ ========== ============ ===========
(1) Includes accrued interest payable through December 31, 2003.
OFF BALANCE SHEET ARRANGEMENTS
The Company is party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit and standby
letters of credit. They involve, to varying degrees, elements of credit risk in
excess of the amount recognized in the balance sheets. The contract or notional
amounts of those instruments reflect the extent of involvement the Company has
in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as they do for on-balance-sheet instruments. A summary
of the Company's commitments is as follows:
(dollars in thousands) December 31,
-------------------------------
2003 2002
------------- --------------
Loan commitments 58,433 49,140
Unused lines of credit 95,535 72,349
Letters of credit 2,660 2,233
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the party. Collateral held varies, but may
include certificates of deposit, accounts receivable, inventory, property and
equipment, residential real estate and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing and similar
transactions. The majority of the guarantees are short-term, and the remaining
guarantees of $539 thousand expire in decreasing amounts through 2008. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above and is required in instances which the Company deems
necessary. At December 31, 2003, approximately 99% percent of the dollar amount
of standby letters of credit were collateralized.
With the exception of these off-balance sheet arrangements, the Company
has no off-balance sheet arrangements that have or are reasonably likely to have
a current or future effect on the Company's financial condition, changes in
financial condition, revenues or expenses, results of operations, capital
expenditures or capital resources, that is material to investors.
19
LIQUIDITY MANAGEMENT
Liquidity is the measure of the Bank's ability to meet the demands
required for the funding of loans and to meet depositor requirements for use of
their funds. The Bank's sources of liquidity consist of cash balances, due from
banks, loan repayments, federal funds sold and short term investments. These
sources of liquidity are supplemented by the ability of the Company and Bank to
borrow funds. The Company maintains a $10 million line of credit, with a
correspondent bank against which it has guaranteed a $255 thousand loan to its
subsidiary Bethesda Leasing. The Bank can purchase up to $12 million in federal
funds on an unsecured basis, against which it had drawn $8 million at December
31, 2003, and enter into reverse repurchase agreements up to $10 million. At
year end 2003, the Bank was also eligible to take FHLB advances of up to $82
million, of which it had advances outstanding of $14.3 million.
The loss of deposits, through disintermediation, is one of the greater
risks to liquidity. Disintermediation occurs most commonly when rates rise and
depositors withdraw deposits seeking higher rates than the Bank may offer. The
Bank was founded under a philosophy of relationship banking and, therefore,
believes that it has less of an exposure to disintermediation and resultant
liquidity concerns than do banks which build an asset base on non-core deposits
and other borrowings. The history of the Bank, while only five and one-half
years, includes a period of rising interest rates and significant competition
for deposit dollars. During that period the Bank grew its core business without
sacrificing its interest margin in higher deposit rates for non-core deposits.
There is, however, a risk that some deposits would be lost if rates were to
spike up and the Bank elected not to meet the market. Under those conditions the
Bank believes that it is well positioned to use other liability management
instruments such as FHLB borrowing, reverse repurchase agreements and Bank lines
to offset a decline in deposits in the short run. Over the long term an
adjustment in assets and change in business emphasis could compensate for a loss
of deposits. Under these circumstances, further asset growth could be limited as
the Bank utilizes its liquidity sources to replace, rather than supplement, core
deposits.
Certificates of deposit acquired through the subscription service may
be more sensitive to rate changes and pose a greater risk of disintermediation
than deposits acquired in the local community. The Bank has limited the amount
of such deposits to less than 15% of total assets, an amount which it believes
it could replace with alternative liquidity sources, although there can be no
assurance of this.
The mature earning pattern of the Bank is also a liquidity management
resource for the Bank. The earnings of the Bank are now at a level that allows
the Bank to pay higher rates to retain deposits over a short period, while it
adjusts it asset base repricing to offset a higher cost of funds. The cost of
retaining business in the short run and the associated reduction in earnings can
be preferable to reducing deposit and asset levels and restricting growth.
At year end 2003, under the Bank's liquidity formula, it had $69
million of liquidity representing 15.6% of total Bank assets.
INTEREST RATE RISK MANAGEMENT
ASSET/LIABILITY MANAGEMENT AND QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK
A fundamental risk in banking, outside of credit risk, is exposure to
market risk, or interest rate risk, since a bank's net income is largely
dependent on net interest income. The Bank's Asset Liability Committee (ALCO) of
the Board of Directors formulates and monitors the management of interest rate
risk within policies established by it and the Board of Directors. In its
consideration of establishing guidelines for levels and/or limits on market
risk, the ALCO committee considers the impact on earnings and capital, the level
and direction of interest rates, liquidity, local economic conditions, outside
threats and other factors. Banking is generally a business of attempting to
match asset and liability components to produce a spread sufficient to provide
net income to the bank at nominal rate risk. The Company, through ALCO,
continually monitors the interest rate environment in which it operates and
adjusts rates and maturities of its assets and liabilities to meet the market
conditions. In the current low interest rate environment, the Company is keeping
its assets either variably priced or with short term maturities or short average
lives. At the same time it strives to attract longer term liabilities to lock in
the lower cost of funds. In the current market, due to competitive factors and
customer preferences, the effort to attract longer term fixed priced liabilities
has not been as successful as the Company's best case asset liability mix would
prefer. When interest rates begin to rise, the Company expects that it will seek
to keep asset maturities and repricing periods short until rates appear to be
20
nearing their top and then extend maturities to extend the benefit of higher
rates. There can be no assurance that the Company will be able to successfully
carry out this intention, as a result of competitive pressures, customer
preferences and the inability to perfectly forecast future interest rates.
One of the tools used by the Company to manage its interest rate risk
is a static GAP analysis presented below. The Company also uses an earning
simulation model on a quarterly basis to closely monitor interest sensitivity
and to expose its balance sheet and income statement to different scenarios. The
model is based on current Company data and adjusted by assumptions as to growth
patterns, noninterest income and noninterest expense and interest rate
sensitivity, based on historical data, for both assets and liabilities. The
model is then subjected to a "shock test" assuming a sudden interest rate
increase of 200 basis points or a decrease of 200 basis points, but not below
zero. The results are measured by the effect on net income. The Company, in its
latest model, shows a positive effect on income when interest rates immediately
rise 200 basis points because of the short maturities of assets and a negative
impact if rates were to decline further. With rates already at historic lows, a
further reduction would reduce income on earning assets which could not be
offset by a corresponding reduction in the cost of funds.
The following table reflects the result of a "shock test" simulation on
the December 31, 2003, earning assets and interest bearing liabilities and the
change in net interest income resulting from the simulated immediate increase
and decrease in interest of 100 and 200 basis points. Also shown is the change
in the Market Value Portfolio Equity resulting from the simulation. The model as
presented is projected for one year.
Percentage change
Change in interest Percentage change in net Percentage change in in Market Value of
rates (basis points) interest income net income Portfolio Equity
-------------------- --------------------- -------------------- ------------------
+200 +10.1% +26.9% +7.0%
+100 +5.3% +14.2% +4.3%
0 -- -- --
-100 -8.7% -23.1% -8.7%
-200 -21.7% -57.5% -18.4%
Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and liabilities may
have similar maturities or repricing periods, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate mortgage
loans, have features that restrict changes in interest rates on a short-term
basis and over the life of the loan. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels could deviate
significantly from those assumed in calculating the tables. Finally, the ability
of many borrowers to service their debt may decrease in the event of a
significant interest rate increase.
GAP
Banks and other financial institutions are dependent upon net interest
income, the difference between interest earned on interest earning assets and
interest paid on interest bearing liabilities. In falling interest rate
environments, net interest income is maximized with longer term, higher yielding
assets being funded by lower yielding short-term funds; however, when interest
rates trend upward this asset/liability structure can result in a significant
adverse impact on net interest income. The current interest rate environment is
signaling steady to possibly higher rates. Management has for a number of months
shortened maturities in the Bank's investment portfolio and where possible also
has shorten repricing opportunities for new loan requests. While management
believes that this will help minimize interest rate risk in a rising
environment, there can be no assurance as to actual results.
GAP, a measure of the difference in volume between interest earning
assets and interest bearing liabilities, is a means of monitoring the
sensitivity of a financial institution to changes in interest rates. The chart
below provides an indicator of the rate sensitivity of the Company. A negative
GAP indicates the degree to which the volume of repriceable liabilities exceeds
repriceable assets in particular time periods. At December 31, 2003, the
21
Bank has a positive GAP of 11.02% out to three months and a cumulative negative
GAP of 10.06% out to twelve months.
If interest rates were to continue to decline further, the Bank's
interest income and margin may be adversely affected. Because of the positive
GAP measure in the 0 - 3 month period, continued decline in the prime lending
rate will reduce income on repriceable assets within thirty to sixty days, while
the repricing of liabilities will occur in later time periods. This will cause a
short term decline in net interest income and net income in a static
environment. Management has carefully considered its strategy to maximize
interest income by reviewing interest rate levels, economic indicators and call
features of some of its assets. These factors have been thoroughly discussed
with the Board of Directors ALCO Committee and management believes that current
strategies are appropriate to current economic and interest rate trends. The
negative GAP is carefully monitored and will be adjusted as conditions change.
GAP ANALYSIS
(dollars in thousands)
0-3 4 - 12 13 - 36 37 - 60 Over 60
Repriceable in: Months Months Months Months Months Total
------------- ------------ ------------ ------------ ------------ -----------
ASSETS:
Investment securities $ 8,073 $ 4,275 $ 19,620 $ 14,995 $ 35,618 $ 82,581
Interest bearing deposits in
other banks 1,063 2,378 891 -- -- 4,332
Loans 117,911 28,311 65,244 79,667 30,049 321,182
Federal funds sold and cash
equivalents 1,526 -- -- -- -- 1,526
------------- ------------ ------------ ------------ ------------ -----------
Total repriceable assets $ 128,573 $ 34,964 $ 85,755 $ 94,662 $ 65,667 $ 409,621
============= ============ ============ ============ ============ ===========
LIABILITIES:
NOW accounts $ -- $ 22,047 $ 4,410 $ 17,636 $ -- $ 44,093
Savings and Money Market accounts 40,534 33,493 20,267 101,335 -- 101,335
Certificates of deposit 20,441 50,583 23,946 1,554 -- 96,524
Federal funds purchased and securities
sold under agreement to repurchase 12,827 6,437 1,609 3,218 -- 24,091
Other borrowing-short and long
term 9,643 8,720 10,588 -- -- 28,951
------------- ------------ ------------ ------------ ------------ -----------
Total repriceable liabilities $ 83,445 $ 121,280 $ 60,820 $ 32,543 $ -- $ 298,088
============= ============ ============ ============ ============ ===========
GAP $ 45,128 $ (86,316) $ 24,935 $ 62,119 $ 65,667
Cumulative GAP $ 45,128 $ (41,188) $ 16,253 $ 45,866 $ 111,533
Interval gap/earnings assets 11.02% (21.07%) 6.09% 15.16% 16.03%
Cumulative gap/earning assets 11.02% (10.06%) (3.97%) 11.20% 27.23%
Although, NOW and money market accounts are subject to immediate
repricing, the Bank's GAP model has incorporated a repricing schedule to account
for the historical lag in effecting rate changes and the amount of those rate
changes relative to the amount of rate change in assets.
CAPITAL RESOURCES AND ADEQUACY
The assessment of capital adequacy depends on a number of factors such
as asset quality, liquidity, earnings performance, changing competitive
conditions and economic forces, and the overall level of growth. The adequacy of
the Company's current and future capital needs is monitored by management on an
ongoing basis. Management seeks to maintain a capital structure that will assure
an adequate level of capital to support anticipated asset growth and to absorb
potential losses.
The capital position of the Company's wholly-owned subsidiary, the
Bank, continues to meet regulatory requirements. The primary indicators relied
on by bank regulators in measuring the capital position are the Tier 1
risk-based capital, total risk-based capital, and leverage ratios. Tier 1
capital consists of common and qualifying
22
preferred stockholders' equity less goodwill. Total risk-based capital consists
of Tier 1 capital, qualifying subordinated debt, and a portion of the allowance
for credit losses. Risk-based capital ratios are calculated with reference to
risk-weighted assets. The leverage ratio compares Tier1 capital to total average
assets. The Company's and Bank's capital ratios were in excess of all mandated
minimum requirements. At December 31, 2003, the Company's and Bank's capital
ratios are presented in Note 14 to the Consolidated Financial Statements.
The ability of the Company to continue to grow is dependent on its
earnings and the ability to obtain additional funds for contribution to the
Bank's capital, through additional borrowing, the sale of additional common
stock, the sale of preferred stock, or through the issuance of additional
qualifying equity equivalents, such as subordinated debt or trust preferred
securities. On August 1, 2003 the Company completed its offering with the sale
of 2,448,979 shares of common stock for gross proceeds of approximately $30
million.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto have been
prepared in accordance with accounting principles generally accepted in the
United States of America, which require the measurement of financial position
and operating results in terms of historical dollars without considering the
changes in the relative purchasing power of money over time due to inflation.
The impact of inflation is reflected in the increased cost of operations. Unlike
most industrial companies, nearly all of our assets and liabilities are monetary
in nature. As a result, interest rates have a greater impact on our performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the price of
goods or services.
NEW ACCOUNTING STANDARDS
Refer to Note 1 of the Notes to Consolidated Financial Statements for
statements on New Accounting Standards.
MARKET FOR COMMON STOCK AND DIVIDENDS
Market for Common Stock. The Company's Common Stock is listed for
trading on the Nasdaq Small Cap Market under the symbol "EGBN". To date, trading
in the common stock has been sporadic and volume has been light. No assurance
can be given that an active trading market will develop in the foreseeable
future. The following table sets forth the high and low bid prices for the
Common Stock during each calendar quarter during the last two fiscal years, and
through February 29, 2004. These quotations reflect interdealer prices, without
retail markup, markdown or commission, and may not represent actual
transactions. As of March 26, 2004, there were 5,401,267 shares of Common Stock
outstanding, held by approximately 1,949 total beneficial shareholders,
including approximately 921 shareholders of record.
2004 2003 2002
------------------------ -------------------------- ------------------------
Quarter High Bid Low Bid High Bid Low Bid High Bid Low Bid
---------- ---------- ----------- ---------- ---------- ----------
First $20.00 $17.20 $15.30 $13.42 $16.00 $10.65
Second $17.00 $13.08 $15.75 $14.55
Third $15.58 $12.36 $14.55 $11.25
Fourth $17.70 $15.20 $13.66 $11.66
Dividends. The Company has not paid any cash dividends to date. In
March 2000, the Company effected a five for four stock split in the form of a
25% stock dividend. In June 2001 the Company effected a seven for five stock
split in the form of a 40% stock dividend. The payment of cash dividends by the
Company will depend largely upon the ability of the Bank, its sole operating
business, to declare and pay dividends to the Company, as the principal source
of the Company's revenue, other than earnings on retained proceeds of the
Company's initial offering of Common Stock, will initially be from dividends
paid by the Bank Dividends will depend primarily upon the Bank's earnings,
financial condition, and need for funds, as well as governmental policies and
regulations applicable to the
23
Company and the Bank. Even if the Bank and the Company have earnings in an
amount sufficient to pay dividends, the Board of Directors may determine, and it
is the present intention of the Board of Directors, to retain earnings for the
purpose of funding the growth of the Company and the Bank.
Regulations of the Federal Reserve Board and Maryland law place limits
on the amount of dividends the Bank may pay to the Company without prior
approval. Prior regulatory approval is required to pay dividends which exceed
the Bank's net profits for the current year plus its retained net profits for
the preceding two calendar years, less required transfers to surplus. State and
federal bank regulatory agencies also have authority to prohibit a bank from
paying dividends if such payment is deemed to be an unsafe or unsound practice,
and the Federal Reserve Board has the same authority over bank holding
companies.
The Federal Reserve Board has established guidelines with respect to
the maintenance of appropriate levels of capital by registered bank holding
companies. Compliance with such standards, as presently in effect, or as they
may be amended from time to time, could possibly limit the amount of dividends
that the Company may pay in the future. In 1985, the Federal Reserve Board
issued a policy statement on the payment of cash dividends by bank holding
companies. In the statement, the Federal Reserve Board expressed its view that a
holding company experiencing earnings weaknesses should not pay cash dividends
exceeding its net income, or which could only be funded in ways that weaken the
holding company's financial health, such as by borrowing. As a depository
institution, the deposits of which are insured by the FDIC, the Bank may not pay
dividends or distribute any of its capital assets while it remains in default on
any assessment due the FDIC. The Bank currently is not in default under any of
its obligations to the FDIC.
24
INDEPENDENT AUDITORS' REPORT
Audit Committee of the
Board of Directors and
Stockholders of Eagle Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Eagle Bancorp,
Inc as of December 31, 2003 and 2002, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We have conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Eagle Bancorp Inc.
as of December 31, 2003 and 2002, and the consolidated results of its operations
and cash flows for each of the three years in the period ended December 31,
2003, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Stegman & Company
Stegman & Company
Baltimore, Maryland
February 13, 2004
25
EAGLE BANCORP, INC.
Consolidated Balance Sheets
December 31, 2003 and 2002
(dollars in thousands)
ASSETS 2003 2002
----------------- -----------------
Cash and cash equivalents $ 25,103 $ 18,569
Federal funds sold -- 3,012
Interest bearing deposits with other banks 4,332 6,119
Investment securities available for sale 82,581 70,675
Loans held for sale 3,649 5,546
Loans 317,533 236,860
Less allowance for credit losses (3,680) (2,766)
----------------- -----------------
Loans, net 313,853 234,094
Premises and equipment, net 4,259 3,601
Deferred income taxes 862 464
Other assets 8,358 5,749
----------------- -----------------
TOTAL ASSETS $ 442,997 $ 347,829
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing demand $ 90,468 $ 64,432
Interest bearing transaction 44,093 39,968
Savings and money market 104,429 92,324
Time, $100,000 or more 54,992 46,989
Other time 41,532 34,721
----------------- -----------------
Total deposits 335,514 278,434
Federal funds purchased and securities sold under agreement to
repurchase 38,454 25,054
Other short-term borrowings 4,000 8,600
Long-term borrowings 10,588 14,333
Other liabilities 1,429 1,380
----------------- -----------------
Total liabilities 389,985 327,801
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; shares authorized 20,000,000, shares
issued and outstanding 5,359,303 (2003) and 2,897,704 (2002) 54 29
Additional paid in capital 46,406 16,541
Retained earnings 6,281 3,066
Accumulated other comprehensive income 271 392
----------------- -----------------
Total stockholders' equity 53,012 20,028
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 442,997 $ 347,829
================= =================
See notes to consolidated financial statements.
26
EAGLE BANCORP, INC.
Consolidated Statements of Income
Years Ended December 31, 2003, 2002 and 2001
(dollars in thousands, except per share data)
INTEREST INCOME 2003 2002 2001
--------------------------------------------------
Interest and fees on loans $ 16,355 $ 14,379 $ 12,054
Taxable interest and dividends on investment
securities 1,807 2,124 1,799
Interest on balances with other banks 180 77 13
Interest on federal funds sold and other cash
equivalents 62 81 255
--------------------------------------------------
Total interest income 18,404 16,661 14,121
INTEREST EXPENSE
Interest on deposits 3,099 4,332 5,486
Interest on Federal funds purchased and securities
sold under agreement to repurchase 108 230 409
Interest on short-term borrowings 266 177 --
Interest on long-term borrowings 480 431 103
--------------------------------------------------
Total interest expense 3,953 5,170 5,998
NET INTEREST INCOME 14,451 11,491 8,123
--------------------------------------------------
PROVISION FOR CREDIT LOSSES 1,175 843 979
--------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT
LOSSES 13,275 10,648 7,144
NONINTEREST INCOME
Service charges on deposits 1,216 1,038 704
Gain on sale of loans 757 491 148
Gain on sale of investment securities 311 337 358
Other income 652 294 114
--------------------------------------------------
Total noninterest income 2,936 2,160 1,324
NONINTEREST EXPENSE
Salaries and employee benefits 5,934 4,505 3,449
Premises and equipment expenses 2,111 1,648 1,220
Advertising 244 197 144
Outside data processing 555 488 349
Other expenses 2,250 1,745 1,283
--------------------------------------------------
Total noninterest expense 11,094 8,583 6,445
--------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 5,118 4,225 2,023
--------------------------------------------------
INCOME TAX EXPENSE 1,903 1,558 269
--------------------------------------------------
NET INCOME $ 3,215 $ 2,667 $ 1,754
==================================================
INCOME PER SHARE
Basic $ 0.82 $ 0.92 $ 0.61
Diluted $ 0.77 $ 0.86 $ 0.58
See notes to consolidated financial statements.
27
EAGLE BANCORP, INC.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2003, 2002 and 2001
(dollars in thousands)
Accumulated
Additional Retained Other Total
Common Paid Earnings Comprehensive Stockholders'
Stock In Capital (Deficit) Income (Loss) Equity
--------------------------------------------------------------------------
Balance, January 1, 2001 $ 21 $ 16,479 $ (1,355) $ 377 $ 15,522
Seven-for-five stock split in the form
of a 40% stock dividend 8 (8) -- -- --
Exercise of options for 7,700 shares of
common stock -- 44 -- -- 44
Net income -- -- 1,754 -- 1,754
Other comprehensive income:
Unrealized loss on securities
available for sale -- -- -- (188) (188)
--------------
Total other comprehensive income -- -- -- -- 1,610
--------------------------------------------------------------------------
Balance, December 31, 2001 29 16,515 399 189 17,132
Exercise of options for 2,580 shares of
common stock 26 26
Net income -- -- 2,667 -- 2,667
Other comprehensive income:
Unrealized gain on securities
available for sale -- -- -- 203 203
-------------
Total other comprehensive income -- -- -- -- 2,896
--------------------------------------------------------------------------
Balance, December 31, 2002 29 16,541 3,066 392 20,028
Exercise of options for 12,620 shares
of common stock -- 123 -- -- 123
Issuance of 2,448,979 shares of
common Stock 25 29,742 -- -- 29,767
Net income -- -- 3,215 -- 3,215
Other comprehensive income:
Unrealized loss on securities
available for sale -- -- -- (121) (121)
-------------
Total other comprehensive income -- -- -- -- 3,094
--------------------------------------------------------------------------
Balance, December 31, 2003 $ 54 $ 46,406 $ 6,281 $ 271 $ 53,012
==========================================================================
See notes to consolidated financial statements.
28
EAGLE BANCORP, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 2003, 2002 and 2001
(dollars in thousands)
2003 2002 2001
----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,215 $ 2,667 $ 1,754
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for credit losses 1,175 843 979
Increase in deferred income taxes (319) (178) (391)
Depreciation and amortization 714 557 420
Gains on sale of loans (757) (491) (96)
Origination of loans held for sale (24,726) (19,110) (8,628)
Proceeds from sale of loans held for sale 27,380 19,728 3,051
Gains on sale of investment securities (311) (337) (358)
Increase in other assets (708) (380) (53)
Decrease (increase) in other liabilities (126) 494 301
----------------------------------------------
Net cash provided by (used in) operating activities 5,537 3,793 (3,021)
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in interest bearing deposits with
other banks 1,787 (5,958) (46)
Purchases of available for sale investment securities (443,296) (385,210) (147,397)
Proceeds from maturities of available for sale securities 382,186 333,993 131,113
Proceeds from sale of available for sale securities 49,328 20,626 9,413
Net increase in loans (80,673) (54,792) (64,548)
Bank premises and equipment acquired (1,372) (986) (968)
Purchase of bank owned life insurance (2,000) (4,000) --
----------------------------------------------
Net cash used in investing activities (94,040) (96,327) (72,433)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits 57,080 82,746 59,831
Increase in federal funds purchased and securities sold under
agreement to repurchase 13,400 11,602 2,374
(Decrease) increase in other short-term borrowings (4,600) 8,600 (1,040)
(Principal payments on) proceeds from long-term borrowings (3,745) 4,658 9,675
Issuance of common stock 29,890 26 44
----------------------------------------------
Net cash provided by financing activities 92,025 107,632 70,884
NET INCREASE (DECREASE) IN CASH 3,522 15,098 (4,570)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 21,581 6,483 11,053
----------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 25,103 $ 21,581 $ 6,483
==============================================
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid $ 4,024 $ 5,092 $ 6,029
==============================================
Income taxes paid $ 1,887 $ 1,840 $ 647
==============================================
See notes to consolidated financial statements.
29
EAGLE BANCORP, INC.
Notes to Consolidated Financial Statements for the Years Ended December 31,
2003, 2002 and 2001:
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Eagle Bancorp,
Inc. (the "Company") and its subsidiaries, EagleBank (the "Bank") and Bethesda
Leasing, LLC ("Bethesda Leasing") with all significant intercompany transactions
eliminated. The investment in subsidiaries is recorded on the Company's books
(Parent Only) on the basis of its equity in the net assets of the subsidiary.
The accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America and to general
practices in the banking industry. Certain reclassifications have been made to
amounts previously reported to conform to the classification made in 2003. The
following is a summary of the more significant accounting policies.
NATURE OF OPERATIONS
The Company, through its bank subsidiary, provides domestic financial services
primarily in Montgomery County, Maryland and Washington, D.C. The primary
financial services include real estate, commercial and consumer lending, as well
as traditional demand deposits and savings products.
USE OF ESTIMATE
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks, federal funds sold and liquid investments with an original
maturity of three months of less.
LOANS HELD FOR SALE
The Company engages in sales of residential mortgage loans and the guaranteed
portion of Small Business Administration ("SBA") loans originated by the Bank.
Loans held for sale are carried at the lower of aggregate cost or fair value.
Fair value is derived from secondary market quotations for similar instruments.
Gains and losses on sales of these loans are recorded as a component of
noninterest income in the Consolidated Statements of Income.
The Company's current practice is to sell residential mortgage loans on a
servicing released basis, and, therefore, it has no intangible asset recorded
for the value of such servicing as of December 31, 2003.
INVESTMENT SECURITIES
Marketable equity securities and debt securities not classified as held to
maturity or trading are classified as available for sale. Securities
available-for-sale are acquired as part of the Company's asset/liability
management strategy and may be sold in response to changes in interest rates,
loan demand, changes in prepayment risk and other factors. Securities
available-for-sale are carried at fair value, with unrealized gains or losses
based on the difference between amortized cost and fair value reported as
accumulated other comprehensive income, a separate component of stockholders'
equity, net of deferred tax. Realized gains and losses, using the specific
identification method, are included as a separate component of noninterest
income. Related interest and dividends are included in interest income. Declines
in the fair value of individual available-for-sale securities below their cost
that are other than temporary result in write-downs of the individual securities
to their fair value. Factors affecting the determination of whether an
other-than-temporary impairment has occurred include a downgrading of the
security by a rating agency,
30
a significant deterioration in the financial condition of the issuer, or that
management would not have the intent and ability to hold a security for a period
of time sufficient to allow for any anticipated recovery in fair value.
LOANS
Loans are stated at the principal amount outstanding, net of origination costs
and fees. Interest income on loans is accrued at the contractual rate on the
principal amount outstanding. It is the Company's policy to discontinue the
accrual of interest when circumstances indicate that collection is doubtful.
Fees charged and costs capitalized for originating loans are being amortized on
the interest method over the term of the loan.
Management considers loans impaired when, based on current information, it is
probable that the Company will not collect all principal and interest payments
according to contractual terms. Loans are tested for impairment once principal
or interest payments become ninety days or more past due and they are placed on
nonaccrual. Management also considers the financial condition of the borrower,
cash flows of the loan and the value of the related collateral. Impaired loans
do not include large groups of smaller balance homogeneous loans such as
residential real estate and consumer installment loans which are evaluated
collectively for impairment. Loans specifically reviewed for impairment are not
considered impaired during periods of "minimal delay" in payment (ninety days or
less) provided eventual collection of all amounts due is expected. The
impairment of a loan is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate, or the fair value
of the collateral if repayment is expected to be provided by the collateral.
Generally, the Company's impairment on such loans is measured by reference to
the fair value of the collateral. Interest income on impaired loans is
recognized on the cash basis.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses represents an amount which, in management's
judgment, will be adequate to absorb probable losses on existing loans and other
extensions of credit that may become uncollectible. The adequacy of the
allowance for credit losses is determined through careful and continuous review
and evaluation of the loan portfolio and involves the balancing of a number of
factors to establish a prudent level. Among the factors considered are lending
risks associated with growth and entry into new markets, loss allocations for
specific nonperforming credits, the level of the allowance to nonperforming
loans, historical loss experience, economic conditions, portfolio trends and
credit concentrations, changes in the size and character of the loan portfolio,
and management's judgment with respect to current and expected economic
conditions and their impact on the existing loan portfolio. Allowances for
impaired loans are generally determined based on collateral values. Loans deemed
uncollectible are charged against, while recoveries are credited to, the
allowance. Management adjusts the level of the allowance through the provision
for credit losses, which is recorded as a current period operating expense. The
allowance for credit losses may consist of an allocated component and an
unallocated component.
The components of the allowance for credit losses represent an estimation done
pursuant to either Statement of Financial Accounting Standards ("SFAS") No. 5,
"Accounting for Contingencies," or SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." Specific allowances are established in cases where
management has identified significant conditions or circumstances related to a
credit that management believes indicate the probability that a loss may be
incurred in an amount different from the amount determined by application of the
formula allowance. For other problem graded credits, allowances are established
according to the application of credit risk factors. These factors are set by
management to reflect its assessment of the relative level of risk inherent in
each grade. The nonspecific allowance is based upon management's evaluation of
various conditions that are not directly measured in the determination of the
formula and specific allowances. Such conditions include general economic and
business conditions affecting key lending areas, credit quality trends
(including trends in delinquencies and nonperforming loans expected to result
from existing conditions), loan volumes and concentrations, specific industry
conditions within portfolio categories, recent loss experience in particular
loan categories, duration of the current business cycle, bank regulatory
examination results, findings of outside review consultants, and management's
judgment with respect to various other conditions including credit
administration and management and the quality of risk identification systems.
Executive management reviews these conditions quarterly.
Management believes that the allowance for credit losses is adequate, however,
determination of the allowance is inherently subjective and requires significant
estimates. While management uses available information to recognize
31
losses on loans, future additions to the allowance may be necessary based on
changes in economic conditions. Evaluation of the potential effects of these
factors on estimated losses involves a high degree of uncertainty, including the
strength and timing of economic cycles and concerns over the effects of a
prolonged economic downturn in the current cycle. In addition, various
regulatory agencies, as an integral part of their examination process, and
independent consultants engaged by the Bank periodically review the Bank's loan
portfolio and allowance for credit losses. Such review may result in recognition
of additions to the allowance based on their judgments of information available
to them at the time of their examination.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization computed using the straight-line method. Premises and equipment are
depreciated over the useful lives of the assets, which generally range from
three to ten years for furniture, fixtures and equipment, three to five years
for computer software and hardware, and ten to forty years for buildings and
building improvements. Leasehold improvements are amortized over the terms of
the respective leases or the estimated useful lives of the improvements,
whichever is shorter. The costs of major renewals and betterments are
capitalized, while the costs of ordinary maintenance and repairs are expensed as
incurred.
ADVERTISING
Advertising costs are generally expensed as incurred.
INCOME TAXES
The Company uses the liability method of accounting for income taxes. Under the
liability method, deferred-tax assets and liabilities are determined based on
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities (i.e., temporary differences) and are
measured at the enacted rates that will be in effect when these differences are
settled. During 2001, management determined that the realization of previously
unrecorded net deferred tax assets were more likely than not and therefore
recorded previously unrecognized net deferred tax assets. Subsequent to the
recognition of the net deferred tax assets the Company recorded current income
tax expense.
TRANSFER OF FINANCIAL ASSETS
Transfers of financial assets are accounted for as sales, when control over the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company, (2) the
transferee obtain the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
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.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" and SFAS 148 "Accounting for
Stock-Based Compensation-Transition and Disclosure", but applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its Plan. No compensation expense related to the Plan was recorded during the
three years ended December 31, 2003. If the Company had elected to recognize
compensation cost based on fair value at the grant dates for awards under the
Plan consistent
32
with the method prescribed by SFAS No. 123, net income and earnings per share
would have been changed to the pro forma amounts as follows for the years ended
December 31.
2003 2002 2001
---------------- ----------------- ----------------
Net income, as reported $ 3,215 $ 2,667 $ 1,754
Less pro forma stock-based compensation
expense determined under the fair value
method, net of related tax effects (224) (125) (394)
---------------- ----------------- ----------------
Pro forma net income $ 2,991 $ 2,542 $ 1,360
================ ================= ================
Net income per share: $ 0.82 $ 0.92 $ 0.61
Basic - pro forma $ 0.76 $ 0.88 $ 0.47
Diluted - as reported $ 0.77 $ 0.86 $ 0.58
Diluted - pro forma $ 0.72 $ 0.82 $ 0.45
The pro forma amounts are not representative of the effects on reported net
income for future years.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46"),
which explains identification of variable interest entities and the assessment
of whether to consolidate these entities. FIN 46 requires existing
unconsolidated variable interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risks among the
involved parties. December 17, 2003, the FASB revised FIN 46 (FIN 46R) and
deferred the effective date of FIN46 to no later than the end of the first
reporting period that ends after March 15, 2004. The Company has no significant
variable interests in any entities which would require disclosure or
consolidation.
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities". SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The Statement is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. There was no material
impact on the Company's financial condition or results of operations upon
adoption of this Statement.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both a liability and equity. It
requires that an issuer classify certain financial instruments as a liability,
although the financial instrument may previously have been classified as equity.
This Statement is effective for financial instruments entered into or modified
after May 31, 2003 and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. There was no material impact on
the Company's financial condition or results of operations upon adoption of this
Statement.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"), which covers guarantees such as standby
letters of credit, performance guarantees of funding, and direct or indirect
guarantees of the indebtedness of others, but not guarantees of funding. FIN 45
requires a guarantor to recognize, at the inception of a guarantee, a liability
in an amount equal to the fair value of the obligation undertaken in issuing the
guarantee, and requires disclosure about the maximum potential payments that
might be required, as well as the collateral or other recourse obtainable. The
recognition and measurement provisions of FIN 45 were effective on a prospective
basis after December 31, 2002, and its adoption by the Company on January 1,
2003 has not had a significant effect on the Company's consolidated financial
statements.
33
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 2003, the Bank maintained
balances at the Federal Reserve (in addition to vault cash) to meet the
reserve requirements as well as balances to partially compensate for
services. Additionally, the Bank maintained balances with the Federal Home
Loan Bank and three domestic correspondents as compensation for services
they provided to the Bank.
3 INVESTMENTS AVAILABLE FOR SALE
The amortized cost and estimated fair values of investments available for
sale at December 31, 2003 and 2002 are as follows:
(in thousands) Gross Gross Estimated
Amortized Unrealized Unrealized Fair
2003 Cost Gains Losses Value
---- -----------------------------------------------------------
U. S. Government agency securities $ 25,335 $ 76 $ (38) $ 25,373
Mortgage backed securities 51,887 201 (246) 51,842
Federal Reserve and Federal Home Loan Bank
stock 1,670 -- -- 1,670
Other equity investments 3,282 421 (7) 3,696
-----------------------------------------------------------
$ 82,174 $ 698 $ (291) $ 82,581
===========================================================
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
2002 Cost Gains Losses Value
---- -----------------------------------------------------------
U. S. Treasury securities $ 5,501 $ 3 $ -- $ 5,504
U. S. Government agency securities 19,961 153 20,114
Mortgage backed securities 42,782 493 (7) 43,268
Federal Reserve and Federal Home Loan
Bank stock 1,564 -- -- 1,564
Other equity investments 274 -- (49) 225
-----------------------------------------------------------
$ 70,082 $ 649 $ (56) $ 70,675
===========================================================
Gross unrealized losses and fair value by length of time that the
individual available for sale securities have been in a continuous
unrealized position as of December 31, 2003 are as follows:
(in thousands) Total
Less than More than Unrealized
Available for sale: Fair Value 12 Months 12 Months Losses
------------------- -----------------------------------------------------------
U. S. Government agency securities $ 4,637 (38) -- (38)
Mortgage backed securities 38,541 (246) -- (246)
Federal Reserve and Federal Home Loan Bank
stock -- -- -- --
Other equity investments 76 (7) -- (7)
-----------------------------------------------------------
$ 43,254 (291) -- (291)
===========================================================
The available for sale investment portfolio has a fair value of
approximately $82.58 million of which approximately $43.18 million of the
securities have some unrealized losses as compared to amortized cost. Of
these securities, $4.63 million, or 5.61%, are U.S. agency bonds and $58.67
million, or 71.05% are mortgage backed securities. All of the bonds are
rated AAA. The securities representing the unrealized losses in the
available for sale portfolio all have modest duration risk (2.93years), low
credit risk, and minimal loss (approximately 0.65%) when compared to book
value. The unrealized losses that exist are the result of market changes in
interest rates since the original purchase. These factors coupled with the
fact that the Company has both the intent and ability to hold these
investments for a period of time sufficient to allow for any anticipated
34
recovery in fair value substantiates that the unrealized losses in the
available for sale portfolio are temporary. In addition to bonds and
mortgage backed securities, the Company, at December 31, 2003, held $5.37
million in equity securities, $3.70 million which were marketable stocks
and mutual funds and $1.67 million which were investments in Federal
Reserve Bank ("FRB") and Federal Home Loan Bank ("FHLB") stocks which are
not marketable.
The amortized cost and estimated fair values of investments available for
sale at December 31, 2003 and 2002 by contractual maturity are shown below.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
2003 2002
--------------------------------- --------------------------------
Amortized Estimated Fair Amortized Estimated Fair
Cost Value Cost Value
----------------- --------------- ---------------- ---------------
Amounts maturing:
One year or less $ 6,648 $ 6,648 $ 8,501 $ 8,545
After one year through five years 15,687 15,725 14,968 15,037
After five years through ten years 3,000 3,000 1,993 2,036
Mortgage backed securities 51,887 51,842 42,782 43,268
FRB, FHLB and other equity
securities 4,952 5,366 1,838 1,789
----------------- --------------- ---------------- ---------------
$ 82,174 $ 82,581 $ 70,082 $ 70,675
================= =============== ================ ===============
Realized gains on sales of investment securities were $334 thousand and
realized losses on sales of investment securities were $23 thousand in
2003, the realized gains on sales of investment securities were $343
thousand and realized losses on sales of investment securities were $6
thousand in 2002 and the realized gains on sales of investment securities
were $375 thousand and realized losses on sales of investment securities
were $17 thousand in 2001. Proceeds from sales of securities in 2003 were
$49.33 million, in 2002 were $20.63 million and in 2001 were $9.41 million.
At December 31, 2003, $39.2 million fair value of securities were pledged
as collateral for certain government deposits, FHLB advances and securities
sold under agreement to repurchase. The outstanding balance of no single
issuer, except for U. S. Government and U. S. Government agency securities,
exceeded ten percent of stockholders' equity at December 31, 2003 or 2002.
4 LOANS AND ALLOWANCE FOR CREDIT LOSSES
The Bank makes loans to customers primarily in Montgomery County, Maryland
and surrounding communities. A substantial portion of the Bank's loan
portfolio consists of loans to businesses secured by real estate and other
business assets.
Loans, net of unamortized deferred fees, at December 31, 2003 and 2002 are
summarized by type as follows:
(dollars in thousands)
2003 2002
--------------------------------------
Commercial $ 93,112 $ 64,869
Real estate 149,783 114,961
Construction 35,644 23,180
Home equity 34,092 30,631
Other consumer 4,902 3,219
---------------------------------------
Total loans 317,553 236,860
Less: allowance for credit losses (3,680) (2,766)
--------------------------------------
Loans, net $ 313,853 $ 234,094
======================================
35
As of December 31, 2003, the Bank serviced $11.43 million of SBA loans for
others which are not reflected on the balance sheet.
Activity in the allowance for credit losses for the years ended December
31, 2003, 2002 and 2001 is shown below:
2003 2002 2001
-------------------------------------------------------
Balance at beginning of year $ 2,766 $ 2,111 $ 1,142
Provision for credit losses 1,175 843 979
Loan charge-offs (333) (232) (23)
Loan recoveries 72 44 13
-------------------------------------------------------
Balance at end of year $ 3,680 $ 2,766 $ 2,111
=======================================================
Information regarding impaired loans at December 31, 2003 and 2002 is as
follows:
2003 2002
----------------------------------
Impaired loans with a valuation allowance $ 434 $ 965
Impaired loans without a valuation allowance 220 --
----------------------------------
Total impaired loans $ 654 $ 965
==================================
Allowance for credit losses related to impaired loans $ 82 $ 121
Allowance for credit losses related to other than
impaired loans 3,598 2,645
----------------------------------
Total allowance for credit losses $ 3,680 $ 2,766
==================================
Average impaired loans for the year $ 594 $ 202
Interest income on impaired loans recognized on
a cash basis $ -- $ 17
5 PREMISES AND EQUIPMENT
Premises and equipment include the following at December 31:
(dollars in thousands)
2003 2002
----------------------------------
Leasehold improvements $ 2,370 $ 2,041
Furniture and equipment 4,218 3,227
Property and equipment 6,588 5,268
Less accumulated depreciation and amortization (2,329) (1,667)
----------------------------------
Total premises and equipment, net $ 4,259 $ 3,601
==================================
The Company occupies banking and office space in seven locations under
noncancellable lease arrangements accounted for as operating leases. The
initial lease periods range from 5 to 10 years and provide for one or more
5-year renewal options. The leases provide for percentage annual rent
escalations and require that the lessee pay certain operating expenses
applicable to the leased space. Rent expense applicable to operating leases
amounted to $838 thousand in 2003, $769 thousand in 2002, and $546 thousand
in 2001. At December 31, 2003, future minimum lease payments under
noncancellable operating leases having an initial term in excess of one year
are as follows:
36
Years ending December 31:
2004 $ 1,052
2005 1,083
2006 1,133
2007 1,163
2008 991
Thereafter 2,673
---------------------
Total minimum lease payments $ 8,095
=====================
In February 2004, the Company entered into an operating lease with the
intention of opening an additional branch location. The lease, which is
expected to commence in 2006, is for a term of ten years and calls for
initial monthly rental payments of approximately $19 thousand, which are not
included in the above schedule.
6 DEPOSITS
The remaining maturity of certificates of deposit of $100,000 or more at
December 31, 2003 and 2002 are as follows:
(dollars in thousands)
2003 2002
-------------------------------------------
Three months or less $ 10,783 $ 9,523
More than three months through six months 12,808 31,629
More than six months through twelve months 18,920 5,365
Over twelve months 12,481 472
-------------------------------------------
Total $ 54,992 $ 46,989
===========================================
Interest expense on deposits for the three years ended December 31, 2003,
2002 and 2001 is as follows:
2003 2002 2001
----------------------------------------------------------------
Interest bearing transaction $ 79 $ 95 $ 232
Savings and money market 1,161 1,599 1,843
Time, $100,000 or more 953 1,337 2,006
Other time 906 1,301 1,405
----------------------------------------------------------------
Total $ 3,099 $ 4,332 $ 5,486
================================================================
37
7 BORROWINGS
Information relating to short and long-term borrowings is as follows for the
years ended December 31:
2003 2002
Short-term Amount Rate Amount Rate
-------------------------------------------------------
At Year-End
Federal funds purchased and securities sold under
agreement to repurchase $ 38,454 0.78% $ 25,054 0.50%
Federal Home Loan Bank - current portion 4,000 2.79% 4,000 2.79%
Bank line of credit -- -- 4,600 4.00%
------------- -------------
Total $ 42,454 33,654
Average for the Year:
Federal funds purchased and securities sold under
agreement to repurchase $ 22,146 0.49% $ 19,535 1.18%
Federal Home Loan Bank - current portion 4,000 2.79% 1,852 2.79%
Bank line of credit 3,979 3.89% 2,847 4.43%
Maximum Month-end Balance:
Customer repurchase agreements and
federal funds purchased 38,454 0.69% 26,560 1.50%
Federal Home Loan Bank - current portion 4,000 2.79% 4,000 2.79%
Line of credit 9,570 4.00% 4,600 4.50%
Long-term Borrowing
Correspondent bank term loan at prime minus
0.25% due 2006 $ 255 3.75% --
Federal Home Loan Bank 4.28% Advance due 2005 8,000 4.28% 8,000 4.28%
Federal Home loan Bank 2.79% principal reducing
credit due 2004 -- -- 4,000 2.79%
Federal Home loan Bank 2.79% principal reducing
credit due 2005 2,333 2.79% 2,333 2.79%
------------- -------------
Total long-term borrowing $ 10,588 $ 14,333
============= =============
The Company offers its business customers a repurchase agreement sweep
account in which it sells to the customer U. S. Government and U. S.
Government agency securities segregated in its investment portfolio for
this purpose. By entering into the agreement the customer agrees to have
the Bank repurchase the designated securities on the business day following
the initial transaction in consideration of the payment of interest at the
rate prevailing on the day of the transaction.
The Bank has commitments from correspondent banks under which it can
purchase up to $12 million in federal funds and $10 million in reverse
repurchase agreements on a short-term basis. The Bank also can draw Federal
Home Loan Bank advances up to $82 million against which it had $14.3
million outstanding at December 31, 2003. The Company has a line of credit
approved for $10 million secured by stock in the Bank against which it had
no borrowings outstanding as of December 31, 2003 and $4.6 million at
December 31, 2002.
38
8 INCOME TAXES
Federal and state income tax expense consists of the following for the
periods ended December 31:
2003 2002 2001
---------------------------------------------------------
Current federal income tax $ 1,297 $ 1,434 $ 601
Current state income tax 287 318 59
---------------------------------------------------------
Total current 1,584 1,752 660
Deferred federal income tax expense (benefit) (260) (159) (313)
Deferred state income tax expense (benefit) (59) (35) (78)
---------------------------------------------------------
Total deferred (319) (194) (391)
---------------------------------------------------------
Total income tax expense $ 1,903 $ 1,558 $ 269
=========================================================
The following table is a summary of the tax effect of temporary differences
that give rise to significant portions of deferred tax assets for the
periods ended December 31:
2003 2002 2001
---------------------------------------------------------
Deferred tax assets:
Allowance for credit losses $ 1,065 $ 731 $ 531
Deferred loan fees and costs 137 29 --
Other -- -- 57
---------------------------------------------------------
Total deferred tax assets 1,202 760 588
---------------------------------------------------------
Deferred tax liabilities:
Unrealized gain on securities available for sale (139) (218) (97)
Premises and equipment (201) (78) (88)
Deferred loan fees and costs -- -- (12)
---------------------------------------------------------
Total deferred tax liabilities (340) (296) (197)
---------------------------------------------------------
Net deferred income taxes $ 862 $ 464 $ 391
=========================================================
During 2001, management determined that the realization of previously
unrecorded deferred tax assets was more likely than not. Accordingly, the
valuation allowance was removed in 2001.
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate for the years ended December 31 follows:
2003 2002 2001
---------------------------------------------------------
Statutory federal income tax rate 34.00% 34.00% 34.00%
State income taxes, net of federal income tax benefit 4.70 3.80 --
Non-taxable income (1.70) (0.70) --
Valuation allowance -- -- (20.90)
Other 0.20 (0.20) 0.20
---------------------------------------------------------
Effective tax rates 37.20% 36.90% 13.30%
=========================================================
9 INCOME PER COMMON SHARE
In the following table, basic earnings per share is derived by dividing net
income available to common stockholders by the weighted-average number of
common shares outstanding during the year. The diluted
39
earnings per share is calculated by dividing net income available to common
stockholders by the weighted-average number of shares outstanding, adjusted
for the dilutive effect of outstanding stock options.
The calculation of net income per common share for the years ended December
31 was as follows:
2003 2002 2001
---------------------------------------------------------
Basic:
Net income allocable to common stockholders $ 3,215 $ 2,667 $ 1,754
Average common shares outstanding 3,932 2,895 2,890
Basic net income per share $ 0.82 $ 0.92 $ 0.61
Diluted:
Net income allocable to common stockholders $ 3,215 $ 2,667 $ 1,754
Average common shares outstanding 3,932 2,895 2,890
Adjustment for stock options 234 211 144
Average common shares outstanding-diluted 4,166 3,106 3,034
Diluted net income per share $ 0.77 $ 0.86 $ 0.58
As of December 31, 2003, there were 1,075 shares, as of December 31, 2002
there were 1,150 shares, and as of December 31, 2001 there were -0- shares
excluded from the diluted net income per share computation because the
option price exceeded the market price and therefore, their effect would be
anti-dilutive.
10 RELATED PARTY TRANSACTIONS
Certain directors and executive officers have had loan transactions with
the Company. Such loans were made in the ordinary course of business on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with outsiders.
The following table summarizes changes in amounts of loans outstanding,
both direct and indirect, to those persons during 2003 and 2002.
2003 2002
--------------------------------------
Balance at January 1 $ 2,956 $ 2,256
Additions 1,347 1,476
Repayments (412) (776)
--------------------------------------
Balance at December 31 $ 3,891 $ 2,956
======================================
11 STOCK OPTION PLAN
The stockholders, at their May 14, 1998 meeting, approved the Eagle
Bancorp, Inc. 1998 Stock Option Plan (the "Plan"), which was amended at the
May 21, 2002 meeting. The Plan provides for the periodic granting of
incentive and nonqualifying options to selected key employees and members
of the Board on a periodic basis. Options for not more than 579,025 shares
of common stock may be granted under the Plan and the term of such options
shall not exceed ten years.
40
Following is a summary of changes in shares under option for the years
indicated:
(in thousands of shares) Year Ended December 31,
2003 2002 2001
---------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price Of Shares Price
---------------------------------------------------------------------------
Outstanding at beginning of year 438 $ 6.88 422 $ 6.72 334 $ 5.72
Granted 64 15.72 20 10.95 96 10.13
Exercised (12) (9.78) (3) (10.08) (8) 5.71
Cancelled (4) (5.71) (1) (10.24) -- --
---------------------------------------------------------------------------
Outstanding at end of year 486 $ 7.98 438 $ 6.88 422 $ 6.72
Weighted average fair value of
options granted during the year $ 6.19 $ 6.19 $ 4.35
Weighted average remaining contract life 6.6 years
Weighted Weighted
Range of Average Remaining Average
Exercise Price Number Contract Life (in years) Exercise Price
-------------------------------------------------------------------------------------------------
$ 5.54 - $ 6.07 325,456 5.6 $ 5.62
$10.05 - $11.50 91,136 7.6 10.31
$12.00 - $15.75 37,840 9.3 13.83
$17.20 - $17.67 31,165 9.9 17.66
----------------- ---------------
485,597 7.98
================= ===============
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used
for grants during the years ended December 31, 2003, 2002 and 2001.
2003 2002 2001
--------------------------------------------------
Dividend yield 0.00% 0.00% 0.00%
Expected volatility 21.88% 20.00% 10.00%
Risk free interest 4.23% 5.04% 4.84 -5.68%
Expected lives (in years) 10 10 10
12 EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Plan covering all employees who have reached the
age of 21 and have completed at least one month of service as defined by
the Plan. The Company made contributions to the Plan of approximately $98
thousand, $87 thousand and $62 thousand in 2003, 2002 and 2001,
respectively. These amounts are included in salaries and employee benefits
in the accompanying Consolidated Statements of Income.
13 COMMITMENTS AND CONTINGENCIES
Various commitments to extend credit are made in the normal course of
banking business. Letters of credit are also issued for the benefit of
customers. These commitments are subject to loan underwriting standards and
geographic boundaries consistent with the Company's loans outstanding.
41
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements.
Loan commitments outstanding and lines and letters of credit at
December 31, 2003 and 2002 are as follows:
2003 2002
------------------- ------------------
Loan commitments $ 58,433 $ 49,140
Unused lines of credit 95,535 72,349
Letters of credit 2,660 2,233
Because most of the Company's business activity is with customers located
in the Washington, DC, metropolitan area, a geographic concentration of
credit risk exists within the loan portfolio, and, as such, its performance
will be influenced by the economy of the region.
At December 31, 2003 the Company also had commitments to vendors for
leasehold improvement and equipment acquisitions associated with the Bank's
new Dupont Circle office. The amount of these commitments at December 31,
2003 was $50 thousand.
In the normal course of business, the Company may become involved in
litigation arising from banking, financial, and other activities. At
December 31, 2003, the Company was not involved in any litigation.
14 REGULATORY MATTERS
The Company and Bank are subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and Bank must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weighting,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank and Company to maintain amounts and ratios (set forth in
the table below) of total Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of December 31, 2003
and 2002, that the Company and Bank met all capital adequacy requirements
to which they are subject.
42
The actual capital amounts and ratios for the Company and Bank as of
December 31, 2003 and 2002 are presented in the table below:
(In Thousands of Dollars) To Be Well
Company Bank For Capital Capitalized Under
---------------------------------------------- Adequacy Prompt Corrective
Actual Actual Purposes Action Provisions*
As of December 31, 2003 Amount Ratio Amount Ratio Ratio Ratio
--------------------------------------------------------------------------------
Total capital (to risk weighted assets) $56,422 16.4% $37,872 11.3% 8.00% 10.0%
Tier 1 capital (to risk weighted assets) 52,742 15.3% 34,206 10.2% 4.00% 6.0%
Tier 1 capital (to average assets) 52,742 14.0% 34,206 9.5% 3.00% 5.0%
As of December 31, 2002
Total capital (to risk weighted assets) 22,402 8.7% 26,671 10.4% 8.0% 10.0%
Tier 1 capital (to risk weighted assets) 19,636 7.6% 23,905 9.2% 4.0% 6.0%
Tier 1 capital (to average assets) 19,636 6.7% 23,905 7.0% 3.0% 5.0%
* Applies to Bank only
Bank and holding company regulations, as well as Maryland law, impose
certain restrictions on dividend payments by the Bank, as well as
restricting extensions of credit and transfers of assets between the Bank
and the Company. At December 31, 2003, the Bank was limited from paying
dividends to its parent company by the positive amount of retained earnings
it held and the requirement to meet certain capital ratios. In October
2002, and December 2001 the Bank paid dividends of $200 thousand and $150
thousand, respectively, to the Company. The Bank did not pay any dividends
in 2003.
15 FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires the disclosure of estimated fair values for financial instruments.
Quoted market prices, if available, are utilized as an estimate of the fair
value of financial instruments. Because no quoted market prices exist for a
portion of the Company's financial instruments, the fair value of such
instruments has been derived based on management's assumptions with respect
to future economic conditions, the amount and timing of future cash flows
and estimated discount rates. Different assumptions could significantly
affect these estimates. Accordingly, the net realizable value could be
materially different from the estimates presented below. In addition, the
estimates are only indicative of individual financial Instruments' values
and should not be considered an indication of the fair value of the Company
taken as a whole.
Cash and federal funds sold: For cash and due from banks, and federal funds
sold the carrying amount approximates fair value.
Investment securities: For these instruments, fair values are based on
published market or dealer quotes.
Loans net of unearned interest: For variable rate loans that reprice on a
scheduled basis, fair values are based on carrying values. The fair value
of the remaining loans are estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining term.
Noninterest bearing deposits: The fair value of these deposits is the
amount payable on demand at the reporting date.
Interest bearing deposits: The fair value of interest bearing transaction,
savings, and money market deposits with no defined maturity is the amount
payable on demand at the reporting date. The fair value of certificates of
43
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. The fair value of Federal Home Loan Bank advances is estimated by
computing the discounted value of contractual cash flows payable at current
interest rates for obligations with similar remaining terms.
Off-balance sheet items: Management has reviewed the unfunded portion of
commitments to extend credit, as well as standby and other letters of
credit, and has determined that the fair value of such instruments is not
material.
The estimated fair values of the Company's financial instruments at
December 31, 2003 and 2002 are as follows:
(dollars in thousands) 2003 2002
--------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 25,103 $ 25,103 $ 18,569 $ 18,569
Interest bearing deposits with other
banks 4,332 4,332 6,119 6,119
Federal funds sold -- -- 3,012 3,012
Investment securities 82,581 82,581 70,082 70,675
Loans held for sale 3,649 3,649 5,546 5,546
Loans, net 313,853 317,039 234,094 236,741
LIABILITIES:
Noninterest bearing deposits 90,468 90,468 64,432 64,432
Interest bearing deposits 245,046 245,174 214,002 214,735
Borrowings 53,042 53,511 47,987 48,526
16 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table reports the unaudited results of operations for each
quarter during 2003, 2002 and 2001:
(dollars in thousands) 2003
-----------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
-----------------------------------------------------------------
Total interest income $ 5,044 $ 4,541 $ 4,353 $ 4,466
Total interest expense 905 906 1,067 1,075
Net interest income 4,139 3,635 3,286 3,391
Provision for credit losses 445 305 201 224
Net interest income after provision for
credit losses 3,694 3,330 3,085 3,167
Noninterest income 803 687 573 873
Noninterest expense 3,174 2,804 2,651 2,465
Net income before income tax expenses 1,323 1,213 1,007 1,575
Income tax expense 508 435 368 592
Net income 815 778 639 983
Income per share
Basic 0.15 0.14 0.22 0.34
Diluted 0.15 0.13 0.20 0.32
44
2002
-----------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
-----------------------------------------------------------------
Total interest income $ 4,537 $ 4,405 $ 4,030 $ 3,689
Total interest expense 1,294 1,362 1,258 1,256
Net interest income 3,243 3,043 2,772 2,433
Provision for credit losses 168 182 213 280
Net interest income after provision for
credit losses 3,075 2,861 2,559 2,153
Noninterest income 744 689 428 299
Noninterest expense 2,363 2,177 2,150 1,893
Net income before income tax expenses 1,456 1,373 837 559
Income tax expense 534 525 309 190
Net income 922 848 528 369
Income per share
Basic $ 0.32 $ 0.29 $ 0.18 $ 0.13
Diluted 0.30 0.27 0.17 0.12
2001
-----------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
---------------- --------------- --------------- ----------------
Total interest income $ 3,695 $ 3,644 $ 3,492 $ 3,290
Total interest expense 1,350 1,536 1,603 1,509
Net interest income 2,345 2,108 1,889 1,781
Provision for credit losses 436 288 158 97
Net interest income after provision for
credit losses 1,909 1,820 1,731 1,684
Noninterest income 357 209 576 182
Noninterest expense 1,786 1,694 1,581 1,384
Net income before income tax expenses 480 335 726 482
Income tax expense 163 115 (9) --
Net income 317 220 735 482
Income per share
Basic $ 0.11 $ 0.08 $ 0.25 $ 0.17
Diluted 0.10 0.07 0.24 0.17
Note: Earnings per share are calculated on a quarterly basis and may not
be additive to the year-to-date amount.
17 PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Eagle Bancorp, Inc. (Parent Company only)
is as follows:
CONDENSED BALANCE SHEETS
December 31, 2003 and 2002
ASSETS: 2003 2002
---------------------------------------
Cash $ 46 $ 47
Cash equivalents 1,525 --
Investment securities available for sale 30,402 225
Investment in subsidiary 34,238 24,329
Loans 1,150 --
Less: allowance for credit losses 14 --
---------------------------------------
1,146 --
Other assets 168 33
---------------------------------------
TOTAL ASSETS $ 67,525 $ 24,634
=======================================
45
2003 2002
---------------------------------------
LIABILITIES:
Accounts payable $ 13 $ 6
Short-term borrowings 14,363 4,600
Other liabilities 137 --
---------------------------------------
Total liabilities 14,513 4,606
---------------------------------------
STOCKHOLDERS' EQUITY:
Common stock 54 29
Additional paid in capital 46,406 16,541
Retained earnings 6,281 3,066
Accumulated other comprehensive income 271 392
---------------------------------------
Total stockholders' equity 53,012 20,028
---------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 67,525 $ 24,634
=======================================
CONDENSED STATEMENTS OF INCOME
For the Years Ended December 31, 2003, 2002, and 2001
2003 2002 2001
--------------------------------------------------
INCOME
EagleBank dividends $ -- $ 200 $ 150
Other interest and dividends 384 41 61
Loss on sale of investment securities -- -- (11)
--------------------------------------------------
Total income 384 241 200
EXPENSES:
Salaries and employee benefits 39 39 27
Interest expense 180 126 32
Legal and professional 39 58 24
Directors' fees 18 14 12
Other 183 134 101
--------------------------------------------------
Total expenses 459 371 196
Provision for Credit Losses 14 -- --
--------------------------------------------------
(LOSS) INCOME BEFORE INCOME TAX BENEFIT AND
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES (89) (130) 4
INCOME TAX BENEFIT (30) (112) (5)
--------------------------------------------------
(LOSS) INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES (59) (18) 9
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 3,274 2,685 1,745
--------------------------------------------------
NET INCOME $ 3,215 $ 2,667 $ 1,754
==================================================
46
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
----------------------------------------------------
NET INCOME $ 3,215 $ 2,667 $ 1,754
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH (USED) PROVIDED BY OPERATING ACTIVITIES:
Provision for credit losses 14 -- --
Loss on sale of assets - -- 11
Equity in undistributed (income) loss of subsidiary (3,274) (2,685) (1,745)
Decrease (increase) in other assets (135) 37 (47)
(Decrease) increase in other liabilities 15 (7) 5
----------------------------------------------------
Net cash provided (used) by operating activities (165) 12 (22)
----------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in loans (1,150) -- 535
Purchase of available for sale investment securities (229,374) -- (69)
Proceeds from maturity of available for sale investment
securities 199,580 769 58
Investment in subsidiary (7,020) (3,700) (1,700)
----------------------------------------------------
Net cash used in investing activities (37,964) (2,931) (1,176)
----------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 29,890 26 44
Short term borrowings 9,763 2,925 1,135
----------------------------------------------------
Net cash provided by financing activities 39,653 2,951 1,179
----------------------------------------------------
NET INCREASE (DECREASE) IN CASH 1,524 32 (19)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 47 15 34
----------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,571 $ 47 $ 15
====================================================
47
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 six southern Montgomery County offices
located in Gaithersburg, Rockville, Bethesda and Silver Spring, Maryland. A
sixth location is located in the District of Columbia, at 20th and K Streets,
NW. One Montgomery County office, the Sligo Office located at 850 Sligo Avenue,
Silver Spring, MD will be closed in June 2004 at the termination of the current
lease, as the office had failed to reach initial growth and profit expectations
and an analysis of the office's potential, in its existing location, did not
provide indications that the office would improve its performance in the
foreseeable future. Silver Spring will continue to be served by the original
Silver Spring Office, which is located only a few blocks from the Sligo Office,
and for this reason, the loss of business, in particular deposits, is expected
to be minimal. The Bank has entered into a lease and begun improvements for an
office in the Dupont Circle area of the District of Columbia and expects to open
this office in April of 2004. In February 2004, the Company executed a lease for
a new office to be opened in 2006 in Friendship Heights, Montgomery County,
Maryland on the District of Columbia line
The Bank operates as a community bank alternative to the superregional
financial institutions which dominate its primary market area. The cornerstone
of the Bank's philosophy is to provide superior, personalized service to its
customers. The Bank focuses on relationship banking, providing each customer
with a number of services, familiarizing itself with, and addressing itself to,
customer needs in a proactive, personalized fashion.
Description of Services. The Bank offers full commercial banking
services to its business and professional clients as well as complete consumer
banking services to individuals living and/or working in the service area. The
Bank emphasizes providing commercial banking services to sole proprietorships,
small and medium-sized businesses, partnerships, corporations, non-profit
organizations and associations, and investors living and working in and near the
Bank's primary service area. A full range of retail banking services are offered
to accommodate the individual needs of both corporate customers as well as the
community the Bank serves.
The Bank has developed a loan portfolio consisting primarily of
business loans with variable rates and/or short maturities where the cash flow
of the borrower is the principal source of debt service with a secondary
emphasis on collateral. Real estate loans are made generally for commercial
purposes and are structured using fixed rates which adjust in three to five
years, with maturities of five to ten years. Consumer loans are made on the
traditional installment basis for a variety of purposes. The Bank has developed
significant expertise and commitment as an SBA lender, has been designated a
Preferred Lender by the SBA, and is one of the largest SBA lenders, in dollar
volume, in the Washington metropolitan area.
All new business customers are screened to determine, in advance, their
credit qualifications and history. This practice permits the Bank to respond
quickly to credit requests as they arise.
In general, the Bank offers the following credit services:
1) Commercial loans for business purposes including working capital,
equipment purchases, real estate, lines of credit, and government
contract financing. Asset based lending and accounts receivable
financing are available on a selective basis.
2) Real estate loans, including construction loan financing, for
business and investment purposes.
3) Lease financing for business equipment.
4) Traditional general purpose consumer installment loans including
automobile and personal loans. In addition, the Bank offers
personal lines of credit.
5) Credit card services are offered through an outside vendor.
48
The direct lending activities in which the Bank engages each carries
the risk that the borrowers will be unable to perform on their obligations. As
such, interest rate policies of the Federal Reserve Board and general economic
conditions, nationally and in the Bank's primary market area have a significant
impact on the Bank's and the Company's results of operations. To the extent that
economic conditions deteriorate, business and individual borrowers may be less
able to meet their obligations to the Bank in full, in a timely manner,
resulting in decreased earnings or losses to the Bank. To the extent the Bank
makes fixed rate loans, general increases in interest rates will tend to reduce
the Bank's spread as the interest rates the Bank must pay for deposits increase
while interest income is flat. Economic conditions and interest rates may also
adversely affect the value of property pledged as security for loans.
The Bank constantly strives to mitigate risks in the event of
unforeseen threats to the loan portfolio as a results of economic downturn or
other negative influences. Our plans for mitigating inherent risks in managing
loan assets including; carefully enforcing loan policies and procedures,
evaluating each borrower's business plan during the underwriting process,
identifying and monitoring primary and alternative sources for repayment, and
obtaining collateral to minimize losses in the event of liquidation. Specific
loan reserves will be used to increase overall reserves based upon increased
credit and/or collateral risks on an individual loan bases. A risk rating system
is used to proactively determine loss exposure and provide a measuring system
for setting general and specific reserves allocations.
The Bank attempts to further mitigate commercial term loan losses by
using loan guarantee programs offered by the United States Small Business
Administration (SBA). The Bank has been approved for the SBA's preferred lender
program (PLP). SBA loans made using PLP by the Bank are not subject to SBA
preapproval. However, the Bank is very selective of these types of loans because
of the greater responsibility of acting as agents for the SBA.
The composition of the Bank's loan portfolio is heavily commercial real
estate, both owner occupied and investment real estate. At December 31, 2003,
commercial real estate secured loans represented 47.3% of the loan portfolio.
These loans are carefully underwritten to mitigate lending risks typical of this
type of loan such as drops in real estate values, changes in cash flow and
general economic conditions. The Bank requires a loan to values of 80% and cash
flow debt service of 1.2x to 1.0. In making commercial mortgage loans, the Bank
generally requires that interest rates adjust not less frequently than five
years and generally seeks more frequent adjustments. To date, the Bank's
experience with this type of credit has been excellent and it has experienced no
commercial mortgage loan losses or accounts that have been as much as ninety
days past due.
The Bank is also an active general commercial loan lender providing
loans for a large variety of typical commercial loan purposes, including
equipment and account receivable financing. This category represents
approximately 29.3% of the loan portfolio and is generally characterized by
variably priced loans tied to an index such as prime or U. S. Treasury borrowing
rates. Subject to limitations in a particular loan agreement, interest rates on
variable rate loans change at the same time and at the some rate as the
designated index changes. As do all loans in the portfolio, commercial loans
must meet high underwriting standards with proper collateral, which may include
real estate, and cash flow needed to service the debt. Personal guarantees of
promoters and/or principals are required, although, may be limited. A growing
segment of the commercial loan portfolio is SBA loans.
In making SBA loans, the Company assumes the risk of nonpayment on the
uninsured portion of the credit, which comprises 20-25% of the aggregate loan
amount. The Company generally sells the insured portion of the loan, generating
noninterest income from the gains on sale, and servicing income from continuing
to service the loans. SBA loans are subject to the same high underwriting
standards, including cash flow analyses and collateral requirements, as non
guaranteed loans. Recent issues related to the funding of the Small Business
Administration, and the Section 7A lending program in particular, has resulted
in periodic reductions in the maximum size of loans which may receive SBA
guarantees. While the Company believes that the current issues will not have a
long term effect on the availability of the program, there can be no assurance
that the Company will be able to continue to originate SBA loans, be able to
continue to increase the volume of SBA loans, or to maintain or increase the
level of noninterest income relating to SBA loans.
The balance of the loan portfolio is made up of home equity loans and
other consumer loans and construction loans. These loans, while making up a
smaller portion of the loan portfolio, demand the same emphasis on underwriting
and credit decision processes as the other types of loans advanced by the Bank.
49
The Bank at December 31, 2003, had a legal lending limit of $5.7
million and had customers who had been approved for aggregate loans of this
amount. Because of the legal lending limitation, the Bank has regularly
participated out portions of credits to other area banks, an accepted practice
in the industry. The Bank has also participated loans to the Company. These have
generally been in nominal amounts and for relatively short terms, either until
the Bank could accommodate the participation under its legal limit or the loan
could be participated to another lender. The ability of the Company to assist
the Bank with these credits has expanded the flexibility and service the Bank
can offer its customers. From time to time the Company may make loans for its
portfolio. Such loans, which may be made to accommodate borrowers at the Bank
level, may have higher risk characteristics than loans made by the Bank, such as
lower priority security interests. The Company will generally make such loans
only to borrowers in industries where the Company's directors or lending
officers have significant expertise, such as real estate development lending.
The Company seeks interest rates and compensation commensurate with the risks
involved in the particular loan.
The Bank originates residential mortgage loans, on a pre-sold basis,
for sale to secondary market purchasers, on a servicing released basis. This
produces benefits primarily in the form of gains on the sale of the loans at a
premium. Activity in the residential mortgage loan market is highly sensitive to
changes in interest rates. The loans are sold on a limited recourse basis. Most
contracts with investors contain recourse periods that may vary from 90 days up
to one year. In general, the Company may be required to repurchase a previously
sold mortgage loan or indemnify the investor if there is major non-compliance
with defined loan origination or documentation standards, including fraud,
negligence or material misstatement in the loan documents. Repurchase may also
be required if necessary governmental loan guarantees are canceled or never
issued, or if an investor is forced to buy back a loan after it has been re-sold
as part of a loan pool. In addition, the Company may have an obligation to
repurchase a loan if the mortgagor has defaulted early in the loan term. The
potential default period is approximately twelve months after sale of the loan
to the investor. Mortgages subject to recourse are collateralized by
single-family residential properties, have loan-to-value ratios of 80% or less,
or have private mortgage insurance.
Deposit services include business and personal checking accounts, NOW
accounts, and a tiered savings/Money Market Account basing the payment of
interest on balances on deposit. Certificates of Deposits are offered using a
tiered rate structure and various maturities. The acceptance of brokered
deposits is not a part of the current strategy, however, regulators require one
deposit relationship to be classified as a brokered deposit which management
considers a core deposit relationship with a well known party. A complete IRA
program is available. In cooperation with Goldman Sachs Asset Management, the
bank has introduced Eagle Asset Management Account, a sophisticated cash
management checking account that works like an investment account.
Other services for business accounts include cash management services
such as PC banking, sweep accounts, 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.
Investment Portfolio Management, The ALCO Committee of the Bank, which
consists of directors and two senior officers, operates within investment and
funds management policies established by it and approved by the Board of
Directors. The Committee is the prime steering force setting parameters for
management while providing flexibility to meet changing circumstances between
its monthly meetings. Management, on a daily basis, administers the investment
portfolio and other non-lending, earning assets and prepares reports and
recommendations for the Committee. A typical Committee meeting includes
discussion of current economic conditions, interest rate expectations, report
reviews and consideration of recommendations for modification in strategies and
specific investment issues.
The investment policy limits the Company to investments of the highest
quality, US Treasury securities, US Government agency securities and high grade
municipal securities. High risk investments, derivatives and non traditional
investments are prohibited. Investment maturities are limited to seven years,
except as specifically approved by ALCO, and mortgage backed pass through
securities with average lives of generally seven years or less. The funds
management policy establishes limits on overnight funds purchases and sales,
percentage of holdings of various securities, investments in bank deposits and
other asset and liability instruments.
50
During 2002, the Committee expanded eligible investments to include
bank certificates of deposits of $100 thousand or less, except CDs issued by
significant regional banks which can be purchased in amounts up to $500
thousand. The addition of this investment vehicle provided additional yield and
flexibility to the portfolio.
During the past two years, the investment strategy has been to stay
short expecting that interest rates would rise and to improve yields by using
mortgage backed pass through securities of short, generally fifteen year final
maturities, or shorter, where repricing opportunities are provided by monthly
cash flow.
When rates do begin to rise the committee will invest with the rise in
rates improving income opportunities from maturities and cash flow of the
portfolio. When the expectation is for rates to peak, following the next
increase in rates, the Committee will explore the advisability of extending
maturities to accumulate a volume of higher earning investments.
Source of Business. Management believes that the market segments which
the Bank targets, small to medium sized businesses and the consumer base of the
Bank's market area, demand the convenience and personal service that a smaller,
independent financial institution such as the Bank can offer. It is these themes
of convenience and personal service that form the basis for the Bank's business
development strategies. The Bank provides services from its strategically
located main office in Bethesda, Maryland, and branches in Gaithersburg,
Rockville and Silver Spring. The Bank opened a branch in NW, Washington, DC in
2001, and is opening a second branch during 2004, to complement the needs of the
Bank's existing and potential customers, and provide prospects for additional
growth and expansion. Subject to obtaining necessary regulatory approvals,
capital adequacy, the identification of appropriate sites, then current business
demand and other factors, the Company plans for the Bank to establish additional
branch offices over the next two years, including one in Friendship Heights, on
the Maryland /DC border, expected to open in 2006. There can be no assurance
that the Bank will establish any additional branches or that they will be
profitable.
The Bank has capitalized upon the extensive business and personal
contacts and relationships of its Directors and Executive Officers to establish
the Bank's initial customer base. To introduce new customers to the Bank,
reliance is placed on aggressive officer-originated calling programs and
director, customer and shareholder referrals.
The risk of nonpayment (or deferred payment) of loans is inherent in
commercial banking. The Bank's marketing focus on small to medium-sized
businesses may result in the assumption by the Bank of certain lending risks
that are different from those attendant to loans to larger companies. Management
of the Bank carefully evaluates all loan applications and attempts to minimize
its credit risk exposure by use of thorough loan application, approval and
monitoring procedures; however, there can be no assurance that such procedures
can significantly reduce such lending risks.
In addition to holding all of the capital stock of the Bank, the
Company holds investments in securities and loan participation purchased from
the Bank or other financial institutions.
EMPLOYEES
At February 29, 2004 the Bank employed 104 persons on a full time
basis, five of which are executive officers of the Bank. Except for 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 employee, and
an incentive stock option plan for key employees of the Company and Bank. The
Company has proposed for shareholder approval an employee stock purchase plan
for substantially all employees.
MARKET AREA AND COMPETITION
Location and Market Area. The Bank's main office and the headquarters
of the Company and the Bank is located at 7815 Woodmont Avenue, Bethesda,
Maryland 20814. The Bank has five branches, located at 110 North Washington
Street, Rockville, 8677 Georgia Avenue, 850 Sligo Avenue, Silver Spring, 11921
Rockville Pike,
51
Rockville, Maryland, Shady Grove and Blackwood Roads, Gaithersburg, Maryland,
and 20th and K Streets, NW, Washington, DC. The Sligo office will close in
June 2004, and a new office south of Dupont Circle in the District of Columbia
will open in the second quarter of 2004.
The primary service area of the Bank is Montgomery County, Maryland,
with a secondary market area in the Washington D.C. RMA, particularly Washington
D.C., Prince George's County in Maryland, and Arlington and Fairfax Counties in
Virginia. The Washington, D.C. area attracts a substantial federal workforce as
well as supporting a variety of support industries such as attorneys, lobbyists,
government contractors, real estate developers and investors, non-profit
organizations, tourism and consultants.
Montgomery County, with a total population of about 881,000, represents
the second largest suburban employment center in the Washington, D.C. area, with
approximately 444,634 jobs in 2001, and an unemployment rate below the national
average. While government employment provides a significant number of jobs,
approximately 82% of the jobs in the county involve private employers. In 2001,
there are 80,500 private sector high technology jobs in Montgomery county, which
is 22% of all private sector jobs in the county. Almost half of the county's
employment is located in the Bethesda, Rockville, North Bethesda area in which
the Bank has three branch locations. Much of the job growth and development is
located in that area and in the nearby I-270 technology corridor.
Montgomery County is home to nineteen major federal and private sector
research and development and regulatory agencies, including the National
Institute of Standards and Technology, the National Institutes of Health,
National Oceanic and Atmospheric Administration, Naval Research and Development
Center, Naval Surface Warfare Center, Nuclear Regulatory Commission and the Food
and Drug Administration.
Montgomery County leads the State of Maryland and the nation's ten
largest metropolitan areas in high technology employment. Over fifty percent of
Maryland's biotechnology firms are located in the county.
Household income for Montgomery County in 2000 was established at
$125,090 compared to a national average for similar counties of $67,090. Per
capita income of $46,450 similarly exceeded the national average of $22,851.
Competition. Deregulation of financial institutions and holding company
acquisitions of banks across state lines has resulted in widespread, fundamental
changes in the financial services industry. This transformation, although
occurring nationwide, is particularly intense in the greater Washington, D.C.
metropolitan area because of the changes in the area's economic base in recent
years and changing state laws authorizing interstate mergers and acquisitions of
banks, and the interstate establishment or acquisition of branches.
In Montgomery County, Maryland, competition is exceptionally keen from
large banking institutions headquartered outside of Maryland. In addition, the
Bank competes with other community banks, savings and loan associations, credit
unions, mortgage companies, finance companies and others providing financial
services. Among the advantages that many of these institutions have over the
Bank are their abilities to finance extensive advertising campaigns, maintain
extensive branch networks and technology investments, and to directly offer
certain services, such as international banking and trust services, which are
not offered directly by the Bank. Further, the greater capitalization of the
larger institutions allows for substantially higher lending limits than the
Bank. Certain of these competitors have other advantages, such as tax exemption
in the case of credit unions, and lesser regulation in the case of mortgage
companies and finance companies.
REGULATION
The following summaries of statutes and regulations affecting bank
holding companies do not purport to be complete discussions of all aspects of
such statutes and regulations and are qualified in their entirety by reference
to the full text thereof.
The Company. The Company is a bank holding company registered under the
Bank Holding Company Act of 1956, as amended, (the "Act") and is subject to
supervision by the Federal Reserve Board. As a bank holding company,
52
the Company is required to file with the Federal Reserve Board an annual report
and such other additional information as the Federal Reserve Board may require
pursuant to the Act. The Federal Reserve Board may also make examinations of the
Company and each of its subsidiaries.
The Act requires approval of the Federal Reserve Board for, among other
things, the acquisition by a proposed bank holding company of control of more
than five percent (5%) of the voting shares, or substantially all the assets, of
any bank or the merger or consolidation by a bank holding company with another
bank holding company. The Act also generally permits the acquisition by a bank
holding company of control or substantially all the assets of any bank located
in a state other than the home state of the bank holding company, except where
the bank has not been in existence for the minimum period of time required by
state law, but if the bank is at least 5 years old, the Federal Reserve Board
may approve the acquisition.
With certain limited exceptions, a bank holding company is prohibited
from acquiring control of any voting shares of any company which is not a bank
or bank holding company and from engaging directly or indirectly in any activity
other than banking or managing or controlling banks or furnishing services to or
performing service for its authorized subsidiaries. A bank holding company may,
however, engage in or acquire an interest in, a company that engages in
activities which the Federal Reserve Board has determined by order or regulation
to be so closely related to banking or managing or controlling banks as to be
properly incident thereto. In making such a determination, the Federal Reserve
Board is required to consider whether the performance of such activities can
reasonably be expected to produce benefits to the public, such as convenience,
increased competition or gains in efficiency, which outweigh possible adverse
effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices. The Federal
Reserve Board is also empowered to differentiate between activities commenced de
novo and activities commenced by the acquisition, in whole or in part, of a
going concern. Some of the activities that the Federal Reserve Board has
determined by regulation to be closely related to banking include making or
servicing loans, performing certain data processing services, acting as a
fiduciary or investment or financial advisor, and making investments in
corporations or projects designed primarily to promote community welfare.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of credit to
the bank holding company or any of its subsidiaries, or investments in the stock
or other securities thereof, and on the taking of such stock or securities as
collateral for loans to any borrower. Further, a holding company and any
subsidiary bank are prohibited from engaging in certain tie-in arrangements in
connection with the extension of credit. A subsidiary bank may not extend
credit, lease or sell property, or furnish any services, or fix or vary the
consideration for any of the foregoing on the condition that: (i) the customer
obtain or provide some additional credit, property or services from or to such
bank other than a loan, discount, deposit or trust service; (ii) the customer
obtain or provide some additional credit, property or service from or to the
Company or any other subsidiary of the Company; or (iii) the customer not obtain
some other credit, property or service from competitors, except for reasonable
requirements to assure the soundness of credit extended.
Effective on March 11, 2000, the Gramm Leach-Bliley Act of 1999 (the
"GLB Act") allows a bank holding company or other company to certify status as a
financial holding company, which allows such company to engage in activities
that are financial in nature, that are incidental to such activities, or are
complementary to such activities. The GLB Act enumerates certain activities that
are deemed financial in nature, such as underwriting insurance or acting as an
insurance principal, agent or broker, underwriting, dealing in or making markets
in securities, and engaging in merchant banking under certain restrictions. It
also authorizes the Federal Reserve Board to determine by regulation what other
activities are financial in nature, or incidental or complementary thereto. The
GLB Act allows a wider array of companies to own banks, which could result in
companies with resources substantially in excess of the Company's entering into
competition with the Company and the Bank.
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.
53
The laws and regulations governing the Bank generally have been promulgated to
protect depositors and the deposit insurance funds, and not for the purpose of
protecting stockholders.
Competition among commercial banks, savings and loan associations, and
credit unions has increased following enactment of legislation which greatly
expanded the ability of banks and bank holding companies to engage in interstate
banking or acquisition activities. As a result of federal and state legislation,
banks in the Washington D.C./Maryland/Virginia area can, subject to limited
restrictions, acquire or merge with a bank in another of the jurisdictions, and
can branch de novo in any of the jurisdictions. Additionally, legislation has
been proposed which may result in non-banking companies being authorized to own
banks, which could result in companies with resources substantially in excess of
the Company's entering into competition with the Company and the Bank.
Banking is a business which depends on interest rate differentials. In
general, the differences between the interest paid by a bank on its deposits and
its other borrowings and the interest received by a bank on loans extended to
its customers and securities held in its investment portfolio constitute the
major portion of the bank's earnings. Thus, the earnings and growth of the Bank
will be subject to the influence of economic conditions generally, both domestic
and foreign, and also to the monetary and fiscal policies of the United States
and its agencies, particularly the Federal Reserve Board, which regulates the
supply of money through various means including open market dealings in United
States government securities. The nature and timing of changes in such policies
and their impact on the Bank cannot be predicted.
Branching and Interstate Banking. The federal banking agencies are
authorized to approve interstate bank merger transactions without regard to
whether such transaction is prohibited by the law of any state, unless the home
state of one of the banks has opted out of the interstate bank merger provisions
of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Riegle-Neal Act") by adopting a law after the date of enactment of the
Riegle-Neal Act and prior to June 1, 1997 which applies equally to all
out-of-state banks and expressly prohibits merger transactions involving
out-of-state banks. Interstate acquisitions of branches are permitted only if
the law of the state in which the branch is located permits such acquisitions.
Such interstate bank mergers and branch acquisitions are also subject to the
nationwide and statewide insured deposit concentration limitations described in
the Riegle-Neal Act.
The Riegle-Neal Act authorizes the federal banking agencies to approve
interstate branching de novo by national and state banks in states which
specifically allow for such branching. The District of Columbia, Maryland and
Virginia have all enacted laws which permit interstate acquisitions of banks and
bank branches and permit out-of-state banks to establish de novo branches.
The GLB Act made substantial changes in the historic restrictions on
non-bank activities of bank holding companies, and allows affiliations between
types of companies that were previously prohibited. The GLB Act also allows
banks to engage in a wider array of non banking activities through "financial
subsidiaries."
Capital Adequacy Guidelines. The Federal Reserve Board and the FDIC
have adopted risk based capital adequacy guidelines pursuant to which they
assess the adequacy of capital in examining and supervising banks and bank
holding companies and in analyzing bank regulatory applications. Risk-based
capital requirements determine the adequacy of capital based on the risk
inherent in various classes of assets and off-balance sheet items.
State member banks are expected to meet a minimum ratio of total
qualifying capital (the sum of core capital (Tier 1) and supplementary capital
(Tier 2)) to risk weighted assets of 8%. At least half of this amount (4%)
should be in the form of core capital.
Tier 1 Capital generally consists of the sum of common stockholders'
equity and perpetual preferred stock (subject in the case of the latter to
limitations on the kind and amount of such stock which may be included as Tier 1
Capital), less goodwill, without adjustment for changes in the market value of
securities classified as "available for sale" in accordance with FAS 115. Tier 2
Capital consists of the following: hybrid capital instruments; perpetual
preferred stock which is not otherwise eligible to be included as Tier 1
Capital; term subordinated debt and intermediate-term preferred stock; and,
subject to limitations, general allowances for loan losses. Assets are adjusted
under the risk-based guidelines to take into account different risk
characteristics, with the categories ranging from 0% (requiring no risk-
54
based capital) for assets such as cash, to 100% for the bulk of assets which are
typically held by a bank holding company, including certain multi-family
residential and commercial real estate loans, commercial business loans and
consumer loans. Residential first mortgage loans on one to four family
residential real estate and certain seasoned multi-family residential real
estate loans, which are not 90 days or more past-due or non-performing and which
have been made in accordance with prudent underwriting standards are assigned a
50% level in the risk-weighing system, as are certain privately-issued
mortgage-backed securities representing indirect ownership of such loans.
Off-balance sheet items also are adjusted to take into account certain risk
characteristics.
In addition to the risk-based capital requirements, the Federal Reserve
Board has established a minimum 3.0% Leverage Capital Ratio (Tier 1 Capital to
total adjusted assets) requirement for the most highly-rated banks, with an
additional cushion of at least 100 to 200 basis points for all other banks,
which effectively increases the minimum Leverage Capital Ratio for such other
banks to 4.0% - 5.0% or more. The highest-rated banks are those that are not
anticipating or experiencing significant growth and have well diversified risk,
including no undue interest rate risk exposure, excellent asset quality, high
liquidity, good earnings and, in general, those which are considered a strong
banking organization. A bank having less than the minimum Leverage Capital Ratio
requirement shall, within 60 days of the date as of which it fails to comply
with such requirement, submit a reasonable plan describing the means and timing
by which the bank shall achieve its minimum Leverage Capital Ratio requirement.
A bank which fails to file such plan is deemed to be operating in an unsafe and
unsound manner, and could subject the bank to a cease-and-desist order. Any
insured depository institution with a Leverage Capital Ratio that is less than
2.0% is deemed to be operating in an unsafe or unsound condition pursuant to
Section 8(a) of the Federal Deposit Insurance Act (the "FDIA") and is subject to
potential termination of deposit insurance. However, such an institution will
not be subject to an enforcement proceeding solely on account of its capital
ratios, if it has entered into and is in compliance with a written agreement to
increase its Leverage Capital Ratio and to take such other action as may be
necessary for the institution to be operated in a safe and sound manner. The
capital regulations also provide, among other things, for the issuance of a
capital directive, which is a final order issued to a bank that fails to
maintain minimum capital or to restore its capital to the minimum capital
requirement within a specified time period. Such directive is enforceable in the
same manner as a final cease-and-desist order.
Prompt Corrective Action. Under Section 38 of the FDIA, each federal
banking agency is required to implement a system of prompt corrective action for
institutions which it regulates. The federal banking agencies have promulgated
substantially similar regulations to implement the system of prompt corrective
action established by Section 38 of the FDIA. Under the regulations, a bank
shall be deemed to be: (i) "well capitalized" if it has a Total Risk Based
Capital Ratio of 10.0% or more, a Tier 1 Risk Based Capital Ratio of 6.0% or
more, a Leverage Capital Ratio of 5.0% or more and is not subject to any written
capital order or directive; (ii) "adequately capitalized" if it has a Total Risk
Based Capital Ratio of 8.0% or more, a Tier 1 Risk Based Capital Ratio of 4.0%
or more and a Tier 1 Leverage Capital Ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized;" (iii)
"undercapitalized" if it has a Total Risk Based Capital Ratio that is less than
8.0%, a Tier 1 Risk based Capital Ratio that is less than 4.0% or a Leverage
Capital Ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a Total Risk Based Capital Ratio that
is less than 6.0%, a Tier 1 Risk Based Capital Ratio that is less than 3.0% or a
Leverage Capital Ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%.
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
55
quarters. An institution which fails to submit a written capital restoration
plan within the requisite period, including any required performance guaranty,
or fails in any material respect to implement a capital restoration plan, shall
be subject to the restrictions in Section 38 of the FDIA which are applicable to
significantly undercapitalized institutions.
A "critically undercapitalized institution" is to be placed in
conservatorship or receivership within 90 days unless the FDIC formally
determines that forbearance from such action would better protect the deposit
insurance fund. Unless the FDIC or other appropriate federal banking regulatory
agency makes specific further findings and certifies that the institution is
viable and is not expected to fail, an institution that remains critically
undercapitalized on average during the fourth calendar quarter after the date it
becomes critically undercapitalized must be placed in receivership. The general
rule is that the FDIC will be appointed as receiver within 90 days after a bank
becomes critically undercapitalized unless extremely good cause is shown and an
extension is agreed to by the federal regulators. In general, good cause is
defined as capital which has been raised and is imminently available for
infusion into the Bank except for certain technical requirements which may delay
the infusion for a period of time beyond the 90 day time period.
Immediately upon becoming undercapitalized, an institution shall become
subject to the provisions of Section 38 of the FDIA, which (i) restrict payment
of capital distributions and management fees; (ii) require that the appropriate
federal banking agency monitor the condition of the institution and its efforts
to restore its capital; (iii) require submission of a capital restoration plan;
(iv) restrict the growth of the institution's assets; and (v) require prior
approval of certain expansion proposals. The appropriate federal banking agency
for an undercapitalized institution also may take any number of discretionary
supervisory actions if the agency determines that any of these actions is
necessary to resolve the problems of the institution at the least possible
long-term cost to the deposit insurance fund, subject in certain cases to
specified procedures. These discretionary supervisory actions include: requiring
the institution to raise additional capital; restricting transactions with
affiliates; requiring divestiture of the institution or the sale of the
institution to a willing purchaser; and any other supervisory action that the
agency deems appropriate. These and additional mandatory and permissive
supervisory actions may be taken with respect to significantly undercapitalized
and critically undercapitalized institutions.
Additionally, under Section 11(c)(5) of the FDIA, a conservator or
receiver may be appointed for an institution where: (i) an institution's
obligations exceed its assets; (ii) there is substantial dissipation of the
institution's assets or earnings as a result of any violation of law or any
unsafe or unsound practice; (iii) the institution is in an unsafe or unsound
condition; (iv) there is a willful violation of a cease-and-desist order; (v)
the institution is unable to pay its obligations in the ordinary course of
business; (vi) losses or threatened losses deplete all or substantially all of
an institution's capital, and there is no reasonable prospect of becoming
"adequately capitalized" without assistance; (vii) there is any violation of law
or unsafe or unsound practice or condition that is likely to cause insolvency or
substantial dissipation of assets or earnings, weaken the institution's
condition, or otherwise seriously prejudice the interests of depositors or the
insurance fund; (viii) an institution ceases to be insured; (ix) the institution
is undercapitalized and has no reasonable prospect that it will become
adequately capitalized, fails to become adequately capitalized when required to
do so, or fails to submit or materially implement a capital restoration plan; or
(x) the institution is critically undercapitalized or otherwise has
substantially insufficient capital.
Regulatory Enforcement Authority. Federal banking law grants
substantial enforcement powers to federal banking regulators. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties. In general, these enforcement actions may be initiated for violations
of laws and regulations and unsafe or unsound practices. Other actions or
inactions may provide the basis for enforcement action, including misleading or
untimely reports filed with regulatory authorities.
Deposit Insurance Premiums. The FDIA establishes a risk based deposit
insurance assessment system. Under applicable regulations, deposit premium
assessments are determined based upon a matrix formed utilizing capital
categories - well capitalized, adequately capitalized and undercapitalized -
defined in the same manner as those categories are defined for purposes of
Section 38 of the FDIA. Each of these groups is then divided into three
subgroups which reflect varying levels of supervisory concern, from those which
are considered healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
56
classifications, with rates ranging from 0.04% of insured deposits for well
capitalized institutions having the lowest level of supervisory concern, to
0.31% of insured deposits for undercapitalized institutions having the highest
level of supervisory concern. In general, while the Bank Insurance Fund of the
FDIC ("BIF") maintains a reserve ratio of 1.25% or greater, no deposit insurance
premiums are required. When the BIF reserve ratio falls below that level, all
insured banks would be required to pay premiums. The payment of deposit
insurance premiums will have an adverse effect on earnings.
PROPERTIES
The main office of the Bank and the executive offices of the Bank and
the Company are located at 7815 Woodmont Avenue, Bethesda, Maryland, in a 12,000
square foot, two story masonry structure (plus basement), with parking. The
Company leases the building under a five year lease which commenced in April
1998, at an initial annual rent $142,500, subject to annual increase based on
the CPI, not to exceed 4% per year. The Company has three five year renewal
options, and an option to purchase the building at a price to be negotiated. The
Silver Spring branch of the Bank is located at 8677 Georgia Avenue, Silver
Spring, Maryland and consists of 2,794 square feet. The property is occupied
under a five year lease, commenced April 1998, at an initial annual rent of
$55,878, subject to annual increase based on the CPI, plus additional rent
relating to common area fees and taxes. The Company has one five year renewal
option. The Rockville branch is located at 110 North Washington Street,
Rockville, Maryland, and consists of 2,000 square feet. The property is occupied
under a five year lease commenced April 1998, at an initial annual rent of
$35,000, subject to annual increase based upon the CPI, with a minimum 3% annual
increase, plus additional rent relating to common area fees and taxes. The
Company has one five-year renewal option. The Sligo branch of the Bank is
located at 850 Sligo Ave, Silver Spring, Maryland and consists of 2,400 square
feet. The property is occupied under a five year lease, commenced August 1999,
at an initial annual rent of $38,400, subject to annual increase based on the
CPI, plus additional rent relating to insurance and taxes. The Company has two
five-year renewal options. The K Street branch of the Bank is located at 2001 K
Street NW, Washington, DC and consists of 4,154 square feet. The property is
occupied under a ten year lease, commenced February 2001, at an initial annual
rent of $186,930, with a 3% annual increase, plus additional rent relating to
common area fees and taxes. The Company has two five-year renewal options. The
Shady Grove/Gaithersburg branch is located at 9600 Blackwood Road, Rockville,
Maryland, and consists of 2,326 square feet. The property is occupied under a
ten year lease, commenced February 2002, at an initial annual rent of $70,361,
with 3% annual increases, plus additional rent relating to common area fees and
taxes. The Company has one five-year renewal option. The Rockville Pike branch
is located at 11921 Rockville Pike, Rockville, Maryland and consists of 2,183
square feet. The property is occupied under a 5 year lease, commenced December
2003, at an initial annual rent of $64,399, with a 3% annual increase. The
Company has one five-year renewal option. The Dupont Circle branch will be
located at 1228 Connecticut Avenue, N.W., Washington, DC 20036 and consists of
1,738 square feet. The property will be occupied under a 10 year lease, expected
to commence in April 2004, at an initial annual rent of $81,686, with a 3%
annual increase.
In January 2002, the Company occupied a new operations center in
Bethesda, consisting of 2,698 square feet, under a 10 year lease, commencing
January 2002, with one five year renewal option, at an initial base rent of
$67,450 per year with a 3% annual increase, plus additional rent relating to
common area fees and taxes. In June 2003, the Company occupied an additional
facility in Bethesda, consisting of 2,820 square feet under a 10 year lease,
with one five-year renewal option, at an initial base rent of $59,784 per year,
with a 3% annual increase.
In April 2004, the Company will occupy a new operations center at 11961
Tech Road, Silver Spring, Maryland, consisting of 9,172 square feet. The
property will be occupied under a 7 year lease, at an initial annual rent of
$99,789, with a 3% annual increase. The Company has two five-year renewal
options.
In February 2004, the Company entered into a lease for a facility at 11
Wisconsin Circle, Chevy Chase, Maryland, with the intention of opening an
additional branch location in 2006. The facility consists of 4,276 square feet
and will be occupied under a 10 year lease, at an initial annual rent of
$239,884, with a 3% annual increase. The Company has two five-year renewal
options.
57
CONTROLS AND PROCEDURES.
The Company's management, under the supervision and with the
participation of the Chief Executive Officer and Chief Financial Officer,
evaluated, as of the last day of he period covered by this report, the
effectiveness of the design and operation of the Company's disclosure controls
and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act
of 1934. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were adequate. There were no changes in the Company's internal
control over financial reporting (as defined in Rule 13a-15 under the Securities
Act of 1934) during the quarter ended December 31, 2003 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The following financial statements are included in this report
Consolidated Balance Sheets at December 31, 2003 and 2002
Consolidated Statements of Income for the years ended December
31, 2003, 2002 and 2001 Consolidated Statements of Cash Flows
for the years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 2003, 2002 and 2001 Notes to the
Consolidated Financial Statements Report of Independent
Auditors
All financial statement schedules have been omitted as the required
information is either inapplicable or included in the consolidated financial
statements or related notes.
Exhibit No. Description of Exhibit
3(a) Certificate of Incorporation of the Company, as amended (1)
3(b) Bylaws of the Company (2)
10.1 1998 Stock Option Plan (3)
10.2 Employment Agreement between Michael Flynn and the Company, filed herewith
10.3 Employment Agreement between Thomas D. Murphy and the Bank, filed herewith
10.4 Employment Agreement between Ronald D. Paul and the Company, filed herewith
10.5 Director Fee Agreement between Leonard L. Abel and the Company, filed herewith
10.6 Employment Agreement between Susan G. Riel and the Bank, filed herewith
10.7 Employment Agreement between Martha F. Tonat and the Bank, filed herewith
10.8 Employment Agreement between Wilmer L. Tinley and the Bank, filed herewith
11 Statement Regarding Computation of Per Share Income
Please refer to Note 9 to the consolidated financial statements for the year ended December 31, 2003.
21 Subsidiaries of the Registrant
23 Consent of Stegman and Company
31.1 Certification of Ronald D. Paul
31.2 Certification of Wilmer L. Tinley
32.1 Certification of Ronald D. Paul
32.2 Certification of Wilmer L. Tinley
- -----------------------------
(1) Incorporated by reference to the exhibit of the same number to the
Company's Quarterly Report on Form 10-QSB for the period ended
September 30, 2002.
(2) Incorporated by reference to Exhibit 3(b) to the Company's Registration
Statement on Form SB-2, dated December 12, 1997.
(3) Incorporated by reference to Exhibit 10.1 to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1998.
On October 17, 2003, a Current Report on Form 8-K was filed, under
items 7, 9 and 12, reporting earnings for the quarter ended September 30, 2003.
On October 27, 2003, a Current Report on Form 8-K was filed, under
items 5 and 9, reporting the resignation of the President of the Bank.
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EAGLE BANCORP, INC.
March 29,30, 2004 By: /s/ Ronald D. Paul
----------------------------
Ronald D. Paul, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME POSITION DATE
/s/ Leonard L. Abel Chairman of the Board of Directors March 29,30, 2004
- ------------------------------------
Leonard L. Abel
/s/ Leslie M. Alperstein Director March 29,30, 2004
- ------------------------------------
Leslie M. Alperstein
/s/ Dudley C. Dworken Director March 29,30, 2004
- ------------------------------------
Dudley C. Dworken
/s/ Michael T. Flynn Executive Vice President and Director March 29,30, 2004
- ------------------------------------Michael T. Flynn of the Company, President of the Bank
Michael T. Flynn
/s/ Eugene F. Ford, Sr. Director March 29,30, 2004
- ------------------------------------
Eugene F. Ford, Sr.
/s/ PhillipPhilip N. Margolius Director March 29,30, 2004
- ------------------------------------
PhillipPhilip N. Margolius
/s/ Ronald D. Paul President and Director March 29,30, 2004
- ------------------------------------Ronald D. Paul Principal Executive Officer
Ronald D. Paul
/s/ Wilmer L. Tinley Executive Vice President of the Bank, March 29,30, 2004
- ------------------------------------Wilmer L. Tinley Chief Financial Officer of the Company
Wilmer L. Tinley Principal Financial and Accounting Officer
59