UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB10-Q
(MARK ONE)
[X]( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 19992003
OR
[ ]( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)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 ofor other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7815 Woodmont Avenue, Bethesda, Maryland 20814
(Address of principal executive offices) (Zip Code)
(301) 986-1800
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ( x ) No --- ---( )
------- -------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act Yes ( ) No ( x )
------- -------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
As of March 31, 1999,April 28, 2003, the registrant had 1,650,0002,903,374 shares of Common
Stock outstanding.
Item 1 - Financial Statements
EAGLE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 19992003 AND DECEMBER 31, 19982002
(dollars in thousands)
ASSETS
ASSETS
March 31,
2003 December 31,
1999 1998
------------(unaudited) 2002
----------- ------------
Cash and due from banks $ 1,609,91316,419 $ 1,292,00618,569
Interest bearing deposits with other
banks 5,825 6,119
Federal funds sold 7,443,529 5,429,04710,100 3,012
Investment securities available for sale 26,712,478 22,569,699
Loans(net67,040 70,675
Loans held for sale 3,597 5,546
Loans 239,551 236,860
Less: allowance of allowance for credit losses of $229,800 and $163,800) 27,140,579 19,984,124(2,861) (2,766)
--------- ---------
Loans, net 236,690 234,094
Premises and equipment, net 2,577,683 2,396,0754,013 3,601
Deferred income taxes 570 464
Other assets 464,653 368,232
------------ ------------6,116 5,749
--------- ---------
TOTAL ASSETS $ 65,948,835350,370 $ 52,039,183
============ ============347,829
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 7,466,26365,289 $ 4,096,39264,432
Interest-bearing transaction accounts 8,299,147 3,664,01239,227 39,968
Savings and money market 15,083,322 17,061,26996,268 92,324
Time, $100,000 or more 7,102,588 5,621,54346,826 46,989
Other time 5,659,093 4,187,677
------------ ------------31,299 34,721
--------- ---------
Total deposits 43,610,413 34,630,893278,909 278,434
Customer repurchase agreements 7,644,053 2,304,69424,949 25,054
Other short-term borrowings 10,925 8,600
Other long-term borrowings 13,333 14,333
Other liabilities 178,564 154,101
------------ ------------1,388 1,380
--------- ---------
Total liabilities 51,433,030 37,089,688
------------ ------------329,504 327,801
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 5,000,00020,000,000
authorized, 1,650,0002,897,894 (2003) 2,897,704 (2002)
issued and outstanding 16,500 16,500
Surplus 16,483,500 16,483,500
Accumulated deficit (1,923,279) (1,561,660)29 29
Additional paid in capital 16,569 16,541
Retained earnings 4,049 3,066
Accumulated other comprehensive income (loss) (60,916) 11,155
------------ ------------219 392
--------- ---------
Total stockholders' equity 14,515,805 14,949,495
------------ ------------20,866 20,028
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 65,948,835350,370 $ 52,039,183
============ ============347,829
========= =========
See notes to consolidated financial statements
2
EAGLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 19992003 AND 19982002
(dollars in thousands, except per share amounts - unaudited)
Three Months Three Months
Ended Ended
March 31, 1999 March 31,
1998
-------------- --------------2003 2002
------------ ------------
INTEREST INCOME:
Interest and fees on loans $ 468,296 $ --$3,864 $3,290
Taxable interest and dividends on
investment securities 378,960 --549 375
Interest on balances with other banks 40 2
Interest on federal funds and securities
purchased under agreement to resell 74,927 23,446
--------- ---------sold 13 22
------ ------
Total interest income 922,183 23,446
--------- ---------4,466 3,689
------ ------
INTEREST EXPENSE:
Interest on deposits 360,216 --841 1,105
Interest on customer repurchase
agreements 32,888 --28 48
Interest on short-term borrowings 1,177 5,082
--------- ---------82 19
Interest on long-term borrowings 124 84
------ ------
Total interest expense 394,281 5,082
--------- ---------1,075 1,256
------ ------
NET INTEREST INCOME 527,902 18,3643,391 2,433
PROVISION FOR CREDIT LOSSES 66,000 --
--------- ---------224 280
------ ------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 461,902 18,364
--------- ---------3,167 2,153
------ ------
NONINTEREST INCOME:
Service charges on deposit accounts 23,303272 176
Gain on sale of loans 248 41
Gain on sale of investment securities 192 --
Other income 12,317 --
--------- ---------161 82
------ ------
Total noninterest income 35,620 --
--------- ---------873 299
------ ------
NONINTEREST EXPENSES:
Salaries and employee benefits 475,172 66,6961,346 1,010
Premises and equipment expenses 162,566 --expense 423 378
Advertising 25,059 --
Insurance expense 23,584 --62 38
Outside data processing 24,537 --135 105
Other expenses 148,223 57,023
--------- ---------499 362
------ ------
Total noninterest expenses 859,141 123,719
--------- ---------2,465 1,893
------ ------
NET LOSSINCOME BEFORE INCOME TAX BENEFIT (361,619) (105,355)EXPENSE 1,575 559
INCOME TAX BENEFIT -- --
--------- ---------EXPENSE 592 190
------ ------
NET LOSS $(361,619) $(105,355)
========= =========
LOSSINCOME $ 983 $ 369
====== ======
NET INCOME PER SHARE:
Basic $ (0.22) No shares outstanding0.34 $ 0.13
Diluted $ (0.22) No shares outstanding0.32 $ 0.12
See notes to consolidated financial statements
3
EAGLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 19992003 and 19982002
(dollars in thousands-unaudited)
Three Months Three Months
Ended Ended
March 31, March 31,
CASH FLOWS FROM OPERATING ACTIVITIES: March 31, 1999 March 31, 1998
-------------- --------------2003 2002
Net lossincome $ (361,619)983 $ (105,355)369
Adjustments to reconcile net lossincome to net cash
usedprovided by operating activities:
Increase in deferred income taxes 106 91
Provision for credit losses 66,000 --224 280
Depreciation and amortization 68,269 348145 118
Gain on sale of loans (248) (41)
Origination of loans held for sale (7,646) (708)
Proceeds from sale of loans held for sale 9,843 749
Gain on sale of investment securities (192) --
Increase in accrued interest
and other assets (96,421) (23,750)(367) (295)
Increase (decrease) in accrued expenses
and other liabilities 48,314 (17,308)
------------ ------------8 436
-------- --------
Net cash (used)provided by operating activities (275,457) (146,065)
------------ ------------2,856 999
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in interest bearing deposits with other banks 294 31
Purchases of available for sale investment securities (37,636,052) --(36,141) (61,392)
Proceeds from maturities of available for sale securities 33,421,20231,529 53,654
Proceeds from sale of available for sale securities 8,078 --
Increase in federal funds sold (2,014,482)(7,088) --
Net increase in loans (7,222,455) --(2,844) (9,575)
Bank premises and equipment acquired (249,877) (24,140)
------------ ------------(557) (423)
-------- --------
Net cash used by investing activities (13,701,664) (24,140)
------------ ------------(6,729) (17,705)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits 8,955,669 --
Increase475 22,477
(Decrease) increase in customer repurchase agreements 5,339,359 --(105) 1,781
Increase in other short term borrowings 2,325 2,305
Decrease in payable to organizers -- 340,000
Increase inlong-term borrowings (1,000) (1,675)
Issuance of common stock subscriptions28 --
9,934,300
------------ -------------------- --------
Net cash provided by financing activities 14,295,028 10,274,300
------------ ------------financingactivities 1,723 24,888
-------- --------
NET (DECREASE) INCREASE IN CASH 317,907 10,104,095(2,150) 8,182
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 1,292,006 7,214
------------ ------------18,569 6,483
-------- --------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 1,609,91316,419 $ 10,111,309
============ ============14,665
======== ========
See notes to consolidated financial statements
4
EAGLE BANCORP, INC
Consolidated Statements Of Changes In Stockholders' Equity For The
Quarter Ending MarchCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE THREE MONTHS
ENDED MARCH 31, 19992003 AND 2002
(dollars in thousands - unaudited)
Accumulated
Additional Other Total
AccumulatedCommon Paid in Retained Comprehensive Stockholders'
CommonStockholders
Stock Surplus DeficitCapital Earnings Income Equity
---------------------------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998January 1, 2002 $ 16,50029 $ 16,483,50016,515 $ (1,561,660)399 $ 11,155189 $ 14,949,49517,132
Net Loss (361,619) (361,619)income 369 369
Other comprehensive income-
Unrealized gainunrealized loss on investment
securities available for sale (179) (179)
--------
Total other comprehensive income (loss) - - - (72,071) (72,071)
--------- ------------ -------------- ---------- ------------190
---------------------------------------------------------------------
Balances at March 31, 19992002 $ 16,50029 $ 16,483,50016,515 $ (1,923,279)768 $ (60,916)10 $ 14,515,805
========= ============ ============== ========== ============17,322
---------------------------------------------------------------------
Balances at January 1, 2003 $ 29 $ 16,541 $ 3,066 $ 392 $ 20,028
Net income 983 983
Exercise of options for 2,770 shares
of common stock 28 28
Other comprehensive income-unrealized
loss on investment securities
available for sale (173) (173)
--------
Total comprehensive income 838
--------------------------------------------------------------------
Balances at March 31, 2003 $ 29 $ 16,569 $ 4,049 $ 219 $ 20,866
====================================================================
5
EAGLE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
General - The financial statements of Eagle Bancorp, Inc. (the Company)"Company")
included herein are unaudited; however, they reflect all adjustments
consisting only of normal recurring accruals that, in the opinion of
Management, are necessary to present fairly the results for the periods
presented. The amounts as of December 31, 2002 were derived from audited
financial statements. Certain information and note disclosures normally
included in financial statements prepared in accordance with Generally Accepted
Accounting Principlesaccounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. There have been no significant changes
to the Company's Accounting Policies as disclosed in the 2002 Annual
Report. The Company believes that the disclosures are adequate to make the
information presented not misleading. The results of operationoperations for the
three months ended March 31, 1999,2003 are not necessarily indicative of the
results of operations to be expected for the remainder of the year.year, or for
any other period.
2. NATURE OF BUSINESS
The Company, through its bank subsidiary, provides domestic financial
services primarily in Montgomery County, Maryland.Maryland and Washington, DC. The
primary financial services include real estate, commercial and consumer
lending, as well as traditional demand deposits and savings products.
From October 28, 1997
until July 20, 1998, when the Bank received regulatory approval, the
Company was considered a development stage enterprise.
3. INVESTMENT SECURITIES
Amortized cost and estimated fair value of securities available - for -
sale are summarized as follows: (in thousands)
March 31, 2003
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
U. S. Treasury securities $ 22,486 $ -- $ -- $ 22,486
U. S. Government Agency securities 8,993 72 -- 9,065
GNMA mortgage backed securities 33,391 327 (13) 33,705
Federal Reserve Bank and
Federal Home Loan Bank stock 1,564 -- -- 1,564
Other equity investments 275 -- (55) 220
-------- -------- -------- --------
$ 66,709 $ 399 $ (68) $ 67,040
======== ======== ======== ========
December 31, 2002
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
U. S. Treasury securities $ 5,501 $ 3 $ -- $ 5,504
U. S. Government Agency securities 19,961 153 (7) 20,114
GNMA mortgage backed securities 42,782 493 43,268
Federal Reserve Bank and
Federal Home Loan Bank stock 1,564 -- -- 1,564
Other equity investments 274 -- (49) 225
-------- -------- -------- --------
$ 70,082 $ 649 $ (56) $ 70,675
======== ======== ======== ========
6
4. INCOME TAXES
The Company uses the liability method of accounting for income taxes as
required by SFAS No. 109, "Accounting for Income Taxes." Under the
liability method, deferred-tax assets and liabilities are determined based
on differences between the financial statement carrying amounts and the tax
basisbases of existing assets and liabilities (i.e., temporary differences) and
are measured at the enacted rates that will be in effect when these
differences reverse.
Deferred5. EARNINGS PER SHARE
Earnings per common share are computed by dividing net income taxes willby the
weighted average number of common shares outstanding during the period.
Diluted net income per common share is computed by dividing net income by
the weighted average number of common shares outstanding during the period,
including any potential dilutive common shares outstanding, such as options
and warrants. As of March 31, 2003 there were 2,788 shares excluded from
the diluted net income per share computation because the option price
exceeded the average market price and therefore, their effect would be
recognized when it is
deemed more likely than not thatanti-dilutive.
6. STOCK-BASED COMPENSATION
The Company has adopted the benefitsdisclosure-only provisions of such deferredSFAS No. 123
"Accounting for Stock-Based Compensation" and SFAS No. 148 "Accounting for
Stock-Based Compensation-Transition and Disclosure", but applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its Plan. No compensation expense related to the Plan was recorded during the
three months ended March 31, 2003 and 2002. If the Company had elected to
recognize compensation cost based on fair value at the grant dates for awards
under the Plan consistent with the method prescribed by SFAS No. 123, net income
taxes
will be realized; accordingly, no deferred income taxes or income tax
benefitsand earnings per share would have been recorded bychanged to the Company.
6pro forma amounts as
follows for the three months ended March 31.
2003 2002
------- -------
Net income, as reported $ 983 $ 396
Less pro forma stock-based compensation
expense determined under the fair value
method, net of related tax effects (6) (6)
------- -------
Pro forma net income $ 977 $ 363
------- -------
Net income per share:
Basic - as reported $ 0.34 $ 0.13
Basic - pro forma $ 0.34 $ 0.13
Diluted - as reported $ 0.32 $ 0.12
Diluted - pro forma $ 0.31 $ 0.12
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSOPERATION.
The following discussion provides information about the results of
operations, and financial condition, liquidity, and capital resources of the
Company and its subsidiary the Bank. This discussion and analysis provides an overview ofshould be read
in conjunction with the financial
conditionunaudited Consolidated Financial Statements and results of operations of Eagle Bancorp, Inc. (Company) and
EagleBank (Bank) for the quarter ending March 31, 1999. In general,
comparative discussion of the results of operations for the quarter ended
March 31, 1998 and March 31, 1999 is not provided, as the Company had no
operations other than organizational activityNotes
thereto, appearing elsewhere in the first and second
quarters of 1998, and as such, comparisons do not provide accurate or
meaningful information regarding the Company's financial position or
results of operations.this report.
This discussionreport 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, the year 2000 issue, 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 statement.statements. The Company does
not undertake to update any forward looking statementstatements to reflect occurrences or
events which may not have been anticipated as of the date of such statements.
GENERAL
Eagle Bancorp, Inc. was incorporated under the general corporation laws of
the State of Maryland, on October 28, 1997, and is a growing, one-bank holding company
headquartered in Bethesda, Maryland. The Company was formed to beWe provide general commercial and consumer
banking services through our wholly owned banking subsidiary EagleBank, a
Maryland chartered bank holding company as
defined bywhich is a member of the Federal Reserve System. On July 20, 1998, having receivedWe were
organized in October 1997 to be the required approvals from the State of
Maryland and Federal Reserve System and been accepted for deposit insurance
by the FDIC, EagleBank opened its first office in Rockville, Maryland. On
that date the Company became a bank holding company by capitalizing the
Bank with $7.75 million. Since its opening the Bank has established a
branch in Silver Spring and its main office in Bethesda. The Company has
also increased its capital contributions to $9.25 million.
FINANCIAL CONDITION
As of March 31, 1999, assets were $65.9 million and deposits and customer
repurchase agreements were $51.2 million, an increase from year end 1998,
of 26.7% and 38.7% respectively. Management is pleased with the growth
experienced during the quarter as it represents a cross section of business
targeted byfor the Bank. The growthBank, our
only subsidiary, was organized as an independent, community oriented,
full-service alternative to the super regional financial institutions, which
dominate our primary market area. The cornerstone of our philosophy is to
provide superior, personalized service to our customers. We focus on
relationship banking, providing each customer with a number of services,
becoming familiar with and addressing customer needs in a proactive,
personalized fashion. The Bank has five offices serving the southern portion of
Montgomery County and one office in the District of Columbia.
The Company offers full commercial banking services to our business and
professional clients as well as complete consumer banking services to
individuals living and/or working in the service area. We emphasize providing
commercial banking services to sole proprietors, small and medium-sized
businesses, partnerships, corporations, non-profit organizations and
associations, and investors living and working in and near our primary service
area. A full range of retail banking services are offered to accommodate the
individual needs of both corporate customers as well as the community we serve.
These services include the usual deposit functions of commercial banks,
including business and personal checking accounts, "NOW" accounts and savings
accounts, business, construction, and commercial loans, while satisfactory at $7.1 million is behind
projections; however,equipment leasing,
residential mortgages and consumer loans and cash management services. We have
developed significant expertise and commitment as an SBA lender, have been
designated a Preferred Lender, and are one of the largest SBA lenders, in dollar
volume, in the Washington Metropolitan area.
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") and follow general practices within the industry in which it
operates. Application of these principles requires management to make estimates,
assumptions, and judgments that affect the amounts reported in the financial
statements and accompanying notes. These estimates, assumptions and judgments
are based on recent activity, management believes,information available as of the date of the financial statements;
accordingly, as this information changes, the financial statements could reflect
different estimates, assumptions, and judgments. Certain policies inherently
have a greater reliance on the use of estimates, assumptions and judgments and
as such have a greater possibility of producing results that could be materially
different than originally reported. Estimates, assumptions, and judgments are
necessary when assets and liabilities are required to be recorded at fair value,
when a decline in the value of an asset not carried on the financial statements
at fair value warrants an impairment write-down or valuation reserve to be
established, or when an asset or liability needs to be recorded contingent upon
a future event. Carrying assets and liabilities at fair value inherently results
in more financial statement volatility. The fair values and the information used
to record valuation adjustments for certain assets and liabilities are based
either on quoted market prices or are provided by other third-party sources,
when available.
8
The allowance for credit losses is an estimate of the losses that may
be sustained in our loan portfolio. The allowance is based on two principles of
accounting: (a) Statement on Financial Accounting Standards ("SFAS") 5,
"Accounting for Contingencies", which requires that losses be accrued when they
are probable of occurring and are estimable and (b) SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan", which requires that losses be accrued when
it is probable that the Company will not collect all principal and interest
payments according to the contractual terms of the loan. The loss, if any, is
determined by the difference between the loan portfolio should continuebalance 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 at an acceptable rate.
RESULTS OF OPERATIONS
On a consolidated basiswith the Companyworsening of the internal risk rating. The nonspecific
formula is reporting a netused to estimate the loss of $361,619 fornon-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 quarter ended March 31, 1999. This loss was expectedexperience and is consistent
with anticipated results.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 Bank reported a loss of $451,021 whilenonspecific allowance captures
losses whose impact on the Company realized net earnings on capital not investedportfolio 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 Bankdetermination of $89,402. Thesethe provision and allowance for credit losses, are expectedincluding
in connection with the valuation of collateral, a borrower's prospects of
repayment, and in establishing allowance factors on the formula allowance and
nonspecific allowance components of the allowance. The establishment of
allowance factors is a continuing exercise, based on management's continuing
assessment of the global factors discussed above and their impact on the
portfolio, and allowance factors may change from period to be reducedperiod, resulting in
an increase or decrease in the future asamount of the Bank
increases its deposit baseprovision or allowance, based upon
the same volume and generatesclassification of loans. Changes in allowance factors will
have a direct impact on the amount of the provision, and a corresponding effect
on net income. Errors in management's perception and assessment of the global
factors and their impact on the portfolio could result in the allowance not
being adequate to cover losses in the portfolio, and may result in additional
loan volume.
The Bank ended the quarter with deposits and customer repurchase agreements
at $51.2 million and lending activity increased resulting in a net increase
in loans, from year end, of $7.1 million. The market is very
7
competitive and the Bank is committed to maintaining a high quality
portfolio which returns a reasonable market rate.
The Bank plans to maintainprovisions or charge-offs. For additional information regarding the allowance
for credit losses, atrefer to the discussion under the caption "Allowance for
Credit Losses" below.
RESULTS OF OPERATIONS
The Company reported net income of $983 thousand for the three months
ended March 31, 2003, as compared to income of $369 thousand for the three
months ended March 31, 2002. Income per basic share was $0.34 for the three
months ended March 31, 2003, as compared to $0.13 for the same period in 2002.
Income per diluted share was $0.32 for the three months end March 31, 2003, as
compared to $0.12 for the same period in 2002. The Company enjoyed a return on
average assets of 1.16% and return on average equity of 19.03% for the first
quarter of 2003, as compared to returns on average assets and average equity of
0.60% and 8.52% respectively for the first quarter of 2002.
The reported income for the three months ended March 31, 2003,
represents an adequate
levelincrease in earnings of 166% from the corresponding period in
2002, $983 thousand from $369 thousand. The strong results, when compared to the
same quarter in 2002, can be attributed to an increase of 39% in net interest
income, reflecting both increases in volume of earning assets and endednet interest
margin, $2.4 million to $3.4 million, and increase of $207 thousand in the gain
on sale of loans and a gain on the sale of investment securities of $192
thousand.
For the quarter with anending March 31, 2003, the Company recorded a provision
for credit losses in the amount of $224 thousand. At March 31, 2003, the
allowance of 1% of its outstanding
loans.for credit losses was $2.86 million, as compared to $2.77 million at
December 31, 2002. The Company exclusivehad net charge-offs of $129 thousand during the
Bank, held $4.7 million in
participation loans. No allowance is being maintainedfirst quarter of 2003 representing 0.2% of average loans on $4 millionan annualized basis.
9
This compared to a provision for credit losses of those loans considered to be of minimal risk due to an underlying
guarantee, however, 1% is maintained$280 thousand for the remaining approximate $0.7
million.
Basedfirst
quarter of 2002, and net charge-offs of $104 thousand for the same period,
representing 0.2% of average loans on original proformas, it was expected thatan annualized basis.
The following table sets out the Bank would sustain
losses during its start up periodannualized returns on average assets, returns
on average equity and not show an operating profitequity to assets (average) for any
month for at least eighteenthe three months after opening for business. Additional
branching commitments could extend that period for several months. Earnings
from investments byending
March 31, 2003 and 2002 and the Company of capital not invested in the Bank will
partially offset losses of the Bank and,year ending December 31, 2002:
March December March
2003 2002 2002
----- -------- -------
Return on a consolidated basis, the
Company may show a monthly profit earlier, although there can be no
assurance of this.asset 1.16% 0.60% 0.91%
Return on equity 19.14% 8.52% 14.51%
Equity to assets 6.08% 7.00% 6.28%
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income is the difference between interest income on
earning assets and the cost of funds supporting those assets. Earning assets are
composed primarily of loans and investments;investment securities. The cost of funds
represents interest bearingexpense on deposits, and customer repurchase agreements and
other borrowings make up the cost of funds.borrowings. Noninterest bearing deposits and capital are other components
representing funding sources. Changes in the volume and mix of assets and
funding sources, along with the changes in yields earned and rates paid,
determine changes in net interest income. The netNet interest income for the first
quarter of 2003 was $527,902.$3.4 million compared to $2.4 million for the first quarter
in 2002.
The table labeled "Average Balances, Interest Yields and Rates and Net
Interest Margin" presents the average balances and rates of the various
categories of the Company's assets and liabilities. Included in the table is a
measurement of interest rate spread and margin. Interest spread is the
difference between the rate earned on assets less the cost of funds expressed as
a percentage. While spread provides a quick comparison of earnings rates versus
cost of funds, management believes that margin provides a better measurement of
performance. Margin includes the effect of noninterest bearing liabilities in
its calculation and is net interest income expressed as a percentage of total
earning assets. Interest spread increased in the first quarter of 2003 from the
first quarter of 2002 by 34 basis points, 4.02% from 3.68%; and margin increased
15 basis points, 4.35% from 4.20%. The increase in both spread and margin, from
period to period, can be attributed to management's increased control over
interest expense as longer term, higher rate CDs originated in earlier periods
matured later in the year 2002 and were replaced with CDs paying lower rates in
effect at the time of renewal. Interest rates on other categories of interest
bearing deposits also declined more rapidly than yields on earning assets. From
the first quarter of 2002 to the first quarter of 2003 the yield on earning
assets declined 63 basis points while the average interest rate paid on interest
bearing liabilities declined 97 basis points.
The declines in both the yields on earning assets and interest bearing
liabilities from the first quarter of 2002 to the first quarter of 2003 reflect
the continued impact of the significant rate reductions effected by the Federal
Reserve in 2001 and continued into 2002 with the last rate reduction occurring
in November 2002. The effect of reductions in market rates continued through
2002 and is continuing into 2003. The investment portfolio includingyield declined from
2002 to 2003 by 50 basis points as the Bank maintained a portfolio of short term
fixed rate securities and GNMA pass through mortgage backed securities. The
yield on GNMA securities declined as mortgage refinancing accelerated, resulting
in earlier repayment of mortgage backed securities, and reinvestment of the
proceeds at lower current market rates. In order to keep the investment
portfolio short for liquidity and expectations that rates would start to move
upward, and to obtain better short term yields, the Bank invested $6 million in
interest bearing deposits with other banks in late 2002, yielding 2.67%, a
relatively attractive rate given their short term nature and low risk, as
compared to the rates offered on federal funds accounted for nearly 50% of
interest income. Asand U. S. Treasury bills.
The decline in the yield on the loan portfolio, continues to grow it will contribute
a greater portion of interest income both because of volume and yield. Thewhile 48 basis points,
was less than the decline in the yield on other earning assets because
approximately 50% of the loan portfolio is composed of fixed rate loans. The
fixed rate loans is 3%stabilize the effects of rate reductions in repricable loans
thereby slowing the decline in the overall yield of the portfolio. Over time, of
course, market pressures and loan repayments and maturities will force the
portfolio yield down even when there may be no further market rate reductions.
On the liability side, management aggressively reduced rates on deposit
accounts. The reduction in the rate on total interest bearing liabilities from
the first quarter of 2002 to 5% higher thanthe first quarter of 2003 was 97 basis points which
compares to a reduction of 63 basis points in the yield on investment portfolio holdings.earning assets over
the same period. The reduction in the rates paid by the Bank reduced the average
10
rate on the cost of funds below 2% in the latter part of 2002. The cost of funds
primarilycontinued to decline into the first quarter of 2003 as management further
reduced rates following the Federal Reserve's November rate reduction and as a
result of continued repricing of maturing certificates of deposit.
It is anticipated that any further reductions in interest rates will
have a significant adverse effect on deposits, is a function ofearnings as rates paid on interest bearing
liabilities, which are as low as 0.25% on NOW accounts, cannot continue to
decline at the marketsame rate as yields on loans and the Bank has offered competitive rates while building
relationships and does not have any brokered funds.investments.
AVERAGE BALANCES, INTEREST YIELDS, AND RATES, AND NET INTEREST MARGIN
THREE MONTHS ENDED MARCH 31,
2003 2002
----------------------------------- -----------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
ASSETS:
Interest earnings assets:
Interest bearing deposits with
other banks $ 6,101 $ 40 2.67% $ 139 $ 2 5.60%
Loans 241,805 3,864 6.48% 191,606 3,290 6.96%
Investment securities 62,395 549 3.52% 37,352 375 4.02%
Federal funds sold and other 4,542 13 1.17% 5,614 22 1.55%
-------- -------- -------- --------
Total interest earning assets 314,843 4,466 5.74% 234,542 3,689 6.37%
Total noninterest earning assets 25,732 15,200
Less: allowance for credit losses 2,852 2,207
-------- --------
Total noninterest earning assets 22,880 12,993
-------- --------
TOTAL ASSETS $337,723 $247,565
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest bearing liabilities:
NOW accounts $ 36,018 24 0.27% 25,295 20 0.32%
Savings and money market accounts 95,334 308 1.31% 68,011 353 2.10%
Certificates of deposit 78,231 509 2.63% 74,061 732 4.00%
Customer repurchase agreements 20,577 28 0.55% 12,384 48 1.57%
Short-term borrowing 6,513 60 3.77% -- -- -
Long-term borrowing 16,922 146 3.49% 9,902 103 4.29%
-------- -------- -------- --------
Total interest bearing liabilities 253,595 1,075 1.72% 189,652 1,256 2.69%
-------- -------- -------- --------
Noninterest bearing liabilities:
Noninterest bearing deposits 62,083 39,498
Other liabilities 1,503 1,081
-------- --------
Total noninterest bearing liabilities 63,586 40,579
-------- --------
Stockholders' equity 20,542 17,334
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $337,723 $247,565
======== ========
Net interest income $ 3,391 $ 2,433
======== ========
Net interest spread 4.02% 3.68%
Net interest margin 4.35% 4.20%
11
ALLOWANCE AND PROVISION FOR CREDIT LOSSES
The provision for credit losses represents the expense recognized to
fund the allowance for credit losses. ThisThe amount of the allowance for credit
losses is based on many factors which reflect management's assessment of the
risk in itsthe 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 and capital adequacy of the Company and
Bank.
Management has developed a comprehensive review process to monitor the
adequacy of the allowance for credit losses. The review process and guidelines
were developed utilizing guidance from federal banking regulatory agencies. The
results of this review process, in combination with conclusions of the Bank's
outside loan review consultant, support management's view as to the adequacy of
the allowance as of the balance sheet date. During the first quarter of 2003, a
provision for credit losses was made in the amount of $224 thousand before net
charge-offs of $129 thousand. Please refer to the discussion under the caption,
"Critical Accounting Policies" for an overview of the underlying methodology
management electedemploys on a quarterly basis to maintain the allowance.
At March 31, 2003, the Company had one loan classified as nonaccrual in
the amount of $149 thousand of which $127 thousand was guaranteed by the SBA.
There was one loan past due over ninety days and still accruing interest at
March 31, 2003, in the amount of $5 thousand. Both of these loans are considered
impaired as defined by Statement of Financial Accounting Standards ("SFAS" No.
114). The Company also has one loan, in the amount of $605 thousand, which is
discussed in greater detail below.
As part of its comprehensive loan review process, the Bank's Board of
Director's Loan Committee and/or Board of Directors Credit Review Committee
carefully evaluates loans over thirty days past due and considers if such loans
should be classified as nonaccrual. The Committee(s) makes a thorough assessment
of the conditions and circumstances surrounding each past due loan. The Bank's
loan policy requires that loans be placed on nonaccrual if they are ninety days
past due, unless they are well secured and in the process of collection. After
reviewing the circumstances surrounding the $605 thousand loan, the Credit
Review Committee determined that it was appropriate to continue the accrual of
interest. The loan was extended to an allowanceautomobile leasing company for the purpose
of 1%funding individual leases. During 2002, the loan became delinquent, and
management worked with the borrower in efforts to return the loan to a current
status. During the third quarter of outstanding loans. Based principally2002, management discovered that payments on
current economic conditions,
perceived asset qualitythe underlying leases were being diverted and not being used to service the loan
as required by the loan agreement. The Bank exercised its rights under the loan
agreement and instructed the lessees of the underlying leases to send all future
lease payments directly to the Bank under a strong capital position, the allowancelockbox arrangement. The diversion
of funds is believed to be adequate. Atthe primary reason for the loan's delinquency.
Subsequently, the borrower declared bankruptcy, however, the trustee assigned in
the bankruptcy proceedings allowed the Bank to continue to collect payments
directly from the lessees.
In determining the accrual status of the loan, management and the
Credit Review Committee evaluated the expected cash flow of the leases, the
current underlying collateral value of the leases and the residual value of the
underlying vehicles at the end of the leases. This evaluation resulted in a
projected cash flow that was considered sufficient to amortize the net loan
balance including interest. As of March 31, 2003, a specific reserve of $150
thousand had been established and applied to the carrying value of the loan,
along with principal payments received during the quarter, reducing the balance
to $605 thousand.
The provision for credit losses of $224 thousand in the first quarter
of 2003 compared to a provision for credit losses of $280 thousand in the first
quarter of 2002. The lower provision in 2003 is attributable to the level of
growth in the loan portfolio from December 31, 2002 to March 31, 2003. The
amount of growth was $3 million, less than the Company has historically
experienced from quarter to quarter. The amount of the first quarter 2003
provision was affected by the level of net charge-offs experienced during the
quarter, as well as trends in delinquencies and changes in the relative risk
composition of the loan portfolio.
As the portfolio and allowance review process matures, there were nowill be
changes to different elements of the allowance and this may have an effect on
the overall level of the allowance maintained. To date the Bank has enjoyed a
very high quality portfolio with minimal net charge offs and very low
delinquency. The maintenance of a high quality portfolio will continue to be
management's prime objective as it relates to the lending process and to the
allowance for credit losses.
12
Management, aware of the strong loan growth experienced by the Company
over its history and the problems which could develop in an unmonitored
environment, is intent on maintaining a strong credit review system and risk
rating process. In January 2003, the Company established a credit department to
perform interim analysis, manage classified credits and develop a credit scoring
system for small business credits. Over time, this department will increase its
review of credit analysis and processes. The Company is also reviewing its risk
rating systems and is exploring the implementation of additional analytical
procedures for risk ratings. The entire loan portfolio analysis process is an
ongoing and evolving practice directed at maintaining a portfolio of quality
credits and quickly identifying any weaknesses before they become irremediable.
The following table sets forth activity in the allowance for credit
losses for the periods indicated.
----------------------------------------------------------------
Three Months Ended
----------------------------------------------------------------
(dollars in thousands) March 31, Year Ended December 31,
----------------------------------------------------------------
2003 2002 2002 2001 2000
------- ------- ------- ------- -------
Balance at beginning of year $ 2,766 $ 2,111 $ 2,111 $ 1,142 $ 579
Charge-offs: -- -- -- -- --
Commercial (148) (104) (192) -- --
Real estate - commercial -- -- -- -- --
Construction -- -- -- -- --
Home equity -- -- -- -- --
Other consumer -- (18) (40) (23) (18)
------- ------- ------- ------- -------
Total (148) (122) (232) (23) (18)
------- ------- ------- ------- -------
Recoveries:
Commercial 19 -- 26 -- --
Real estate - commercial -- -- -- -- --
Construction -- -- -- -- --
Home equity -- -- -- -- --
Other consumer -- 18 18 13 --
------- ------- ------- ------- -------
Total 19 18 44 13 --
------- ------- ------- ------- -------
Net charge-offs (129) (104) (188) (10) (18)
------- ------- ------- ------- -------
Additions charged to operations 224 280 843 979 581
------- ------- ------- ------- -------
Balance at end of period $ 2,861 $ 2,287 $ 2,766 $ 2,111 $ 1,142
======= ======= ======= ======= =======
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.01 % 0.01 % 0.09 % 0.01 % 0.02 %
------- ------- ------- ------- -------
The following table reflects the allocation of the allowance for credit
losses at the dates indicated. The allocation of the allowance to each category
is not necessarily indicative of future losses or charge-offs and does not
restrict the use of the allowance to absorb losses in any category.
(dollars in thousands) As of March 31, As of December 31,
-------------------------------------------
2003 2002
-------------------- --------------------
Amount Percent (1) Amount Percent (1)
------ ----------- ------ -----------
Commercial $1,047 26.8% $1,134 27.5 %
Real estate - commercial 977 49.4 862 48.5
Construction 249 9.7 231 9.8
Home equity 246 12.7 253 12.9
Other consumer 81 1.4 83 1.3
Unallocated 261 -- 203 --
------ ----- ------ ----
Total allowance for credit losses $2,861 100% $2,766 100%
====== ===== ====== ====
(1) Represents the percent of loans in category to gross loans
13
NON-PERFORMING ASSETS
The Company's non-performing assets, which are comprised of loans
delinquent 90 days or more, non-accrual loans, and other real estate owned,
totaled $759 thousand at March 31, 2003 compared to $22 thousand at March 31,
2002 and $965 thousand at December 31, 2002. The percentage of non-performing
assets to total assets was 0.20% at March 31, 2003, compared to no non
performing assets at March 31, 2002 and 0.28% at December 31, 2002.
Non-performing loans past due more than thirty daysconstituted all of the non-performing assets at
March 31, 2003, March 31, 2002 and only one consumer loan over
thirty daysDecember 31, 2002. Non-performing loans at
March 31, 2003 consist of loans in non-accrual status in the amount of $6,000.$149
thousand and impaired loans of $610 thousand compared to no non-accrual loans
and loans past due over ninety days of $22 thousand at March 31, 2002.
The Company had no other real estate owned at either March 31, 2003 or
2002.
The following table shows the amounts of non-performing assets at the
dates indicated.
Three Months Ended Year Ended
(dollars in thousands) March 31, December 31,
------------------------------------------
2002 2001 2002
---- ---- ----
Nonaccrual Loans
Commercial $149 $ -- $147
Consumer -- -- --
Real estate -- -- --
Accrual loans-past due 90 days
Commercial 610 22 818
Consumer -- -- --
Real estate -- -- --
Restructured loans -- -- --
Real estate owned
---- ---- ----
Total non-performing assets $759 $ 22 $965
==== ==== ====
At March 31, 2003, there were no performing loans considered potential
problem loans, defined as loans which are not included in the past due,
nonaccrual or restructured categories, but for which known information about
possible credit problems causes management to be uncertain as to the ability of
the borrowers to comply with the present loan repayment terms.
NONINTEREST INCOME
Noninterest income is primarily represents deposit account service charges
and fees, andgains on the sale of loans, other noninterest loan fees, income from
bank owned life insurance ("BOLI") and amountedother service fees. For the three months
ended March 31, 2003 noninterest income was $873 thousand which included $192
thousand in gains on the sale of investment securities. This compared to $35,620$299
thousand for the quarter. Thisthree months ended March 31, 2002 which included no gains on
the sale of investment securities. The Company has become a significant SBA
lender in its market area and during the quarter realized gains on the sale of
the insured portion of many of the loans it had originated. The Company has also
been active in the origination of mortgage loans, on a pre-sold basis, and the
historically low interest rate environment has made this a very active program.
These two sale activities contributed $248 thousand in the first quarter of 2003
compared to $41 thousand in the first quarter of 2002. The gains from sales of
both of these types of credits are considered a continuing and regular operating
income source for the Bank. However, the activity in our mortgage sales can be
reduced significantly if interest rates were to rise. Service charges on deposit
accounts increased to $272 thousand in the first quarter of 2003 compared to
$176 thousand in the first quarter of 2002. The increase of 54% is primarily
attributable to an increase in the number of deposit accounts over that period
and the low interest rate environment. As rates decline so do the earning
allowances (which are used to offset service charges) on demand deposit accounts
so that an account, with the same activity, which paid no service charge when
interest rates were high may currently be paying a charge because the earnings
allowance is insufficient to cover activity charges.
14
Other income is expectedincreased 96% from $82 thousand in the first quarter of 2002 to
$161 thousand in the first quarter of 2003. The significant component
contributing to this increase as the Bank's deposit account base
increases and if fee generatingwas income sources being considered by
management prove viable.from BOLI contracts of $55 thousand
compared to no BOLI related income in 2002.
NONINTEREST EXPENSE
Noninterest expense was $859,141$2.5 million for the quarter ended March 31, 2003
compared to $1.9 million for the quarter ended March 31, 2002. This represented
a 30% increase from period to period. Increases in noninterest expense primarily
relate to increases in the expense category salaries and employee benefits which
increased 33% from the first quarter of 2002 to the first quarter of 2003, $1.0
million to $1.3 million. During the first quarter of 2003, to accommodate the
growth experienced by the Bank in 2002 and accommodate the growth anticipated in
2003, a number of additions to staff were made in the lending and operations
(customer service) areas. Management felt that these additions and the
associated expenses were necessary to assure a continued growth pattern and
quality of service which characterized the Company since its inception.
FINANCIAL CONDITION
As of March 31, 2003, assets were $350 million and deposits were $278 million.
Assets grew from December 31, 2002, by $2.5 million and deposits by
approximately $500 thousand both below historical levels of growth experienced
by the Company. Management believes that weather conditions, local and national
economic conditions and international events did not provide an ideal
environment for business and contributed significantly to the relatively flat
growth in the quarter ending March 31, 2003.
Loans
Total loans, including loans held for sale, increased $742 thousand from
December 31, 2002 to March 31, 2003. During that period a number of loans were
paid off as borrowers found alternative financing at lower rates than the
Company felt it could justify given its internal pricing model and expectations
for future interest rate levels. The loans that paid off generally represented
transactional loans as opposed to relationship borrowings. Based on activity in
the final weeks of March 2003 and early April, loan demand appears to be
improving and while management cannot be certain, this activity may translate to
meaningful loan growth in the second quarter.
Loans, net of amortized deferred fees and costs, at March 31, 2003, March 31,
2002 and December 31, 2002 are summarized by type as follows:
March 31, Percent March 31, Percent December 31, Percent
2003 of Total 2002 of Total 2002 of Total
---------- -------- ---------- ---------- ---------- ---------
Commercial $ 64,254 26.8% $ 51,696 26.2% $ 64,869 27.5%
Real estate - commercial 118,239 49.4% 95,967 48.6% 114,961 48.5%
Construction 23,268 9.7% 18,632 9.4% 23,180 9.8%
Home equity 30,531 12.7% 26,878 13.6% 30,631 12.9%
Other consumer 3,259 1.4% 4,230 2.2% 3,219 1.3%
---------- ---- ---------- --- ---------- ----
Total loans 239,551 100% 197,403 100% 236,860 100%
Less: allowance for credit losses (2,861) (2,287) (2,766)
---------- ---------- ----------
Loans, net $ 236,690 $ 195,116 $ 234,094
========== ========== ==========
15
Deposits And Other Borrowings
The principal sources of funds for the Bank are core deposits,
consisting of demand deposits, NOW accounts, money market accounts, savings
accounts and relationship certificates of deposits, from the local market areas
surrounding the Bank's offices. The Bank also considers as part of its core
deposits approximately $16 million of deposits from a local customer with a
longstanding relationship with the Bank. These deposits are required to be
classified as brokered deposits for regulatory purposes. The Bank's deposit base
includes transaction accounts, time and savings accounts and accounts which
customers use for cash management and which provide the Bank with a source of
fee income and cross-marketing opportunities as well as a low-cost source of
funds. Time and savings accounts, including money market deposit accounts, also
provide a relatively stable and low-cost source of funding.
During the first quarter of 2003 deposit growth was below the levels
historically enjoyed by the Company. Deposit growth totaled $500 thousand for
the quarter, however, management noted some strength returning in the final
weeks of March 2003. The contributing factors to the moderate growth were
weather conditions, local and national economic conditions and international
events.
Approximately 28% of the Bank's deposits are made up of certificates of
deposits, which are generally the most expensive form of deposit because of
their fixed rate and term. Certificates of deposit in denominations of $100
thousand or more can be more volatile and more expensive than certificates of
less than $100 thousand. However, because the Bank focuses on relationship
banking and does not accept brokered certificates, its historical experience has
been that large certificates of deposit have not been more volatile or
significantly more expensive than smaller denomination certificates. It has been
the practice of the Bank to pay posted rates on its certificates of deposit
whether under or over $100 thousand. The Bank has paid negotiated rates for
deposits in excess of $500 thousand but the rates paid have rarely been more
than 50%25 to 50 basis points higher than posted rates and deposits also have been
negotiated at below market rates. In late 2000, to fund strong loan demand, the
Bank began accepting certificates of deposits, generally in salariesdenominations of
less than $100 thousand on a non brokered basis, from bank and wages. Managementcredit union
subscribers to a wholesale deposit rate line. The Bank has made a concentrated effortfound rates on these
deposits to budgetbe generally competitive with rates in our market given the speed
and monitorminimal noninterest expenses and believescost at which deposits can be acquired, although it is
possible for rates to significantly exceed local market rates it has not been
the experience of the Bank. At March 31, 2003 the Bank held $12.1 million of
these deposits at an average rate of 4.08% as compared to $21.7 million of these
deposits, at an average rate of 4.10% at March 31, 2002. With the strong core
deposit growth experienced by the Bank in 2002 these deposits are being allowed
to mature and may not be renewed. However, the Bank has found this source of
funds to be an effective funds management tool and may accept more of these
deposits in the future.
At March 31, 2003, the Company had approximately $65 million in
noninterest bearing demand deposits, representing an 23% of total deposits.
These are primarily business checking accounts on which the payment of interest
is prohibited by regulations of the Federal Reserve. Proposed legislation has
been introduced in each of the last several sessions of Congress which would
permit banks to pay interest on checking and demand deposit accounts established
practicesby 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 controlpay interest on some portion of our
noninterest bearing deposits in order to compete with other banks. Payment of
interest on these expenses while meetingdeposits could have a significant negative impact on our net
income, net interest income, interest margin, return on assets and equity, and
indices of financial performance.
As an enhancement to the basic noninterest bearing demand deposit
account, the Company offers a sweep account, "customer repurchase agreement",
allowing qualifying businesses to earn interest on short term excess funds which
are not suited for either a CD investment or a money market account. The
balances in these accounts were $25 million at March 31, 2003 essentially
unchanged from December 31, 2002. Customer repurchase agreements are not
deposits and are not FDIC insured but are secured by US Treasury and/or US
government agency securities. These accounts are particularly suitable to
businesses with significant change in the levels of cash flow over a very short
time frame often measured in days. Attorney and title company escrow accounts
are an example of accounts which can benefit from this product, as are customers
who may require collateral for deposits in excess of $100 thousand but do not
qualify for other pledging arrangements. This program requires the Company to
maintain a sufficient investment securities level to accommodate the
fluctuations in balances which may occur in these accounts.
16
At March 31, 2003, the Company had drawn $6.9 million against a line of
credit provided by a correspondent bank as compared to $4.6 million at December
31, 2002. The borrowings in the quarter ending March 31, 2003 were primarily to
fund loan participations with the Bank and a direct loan made by the Company.
Prior borrowings were principally to fund additions of capital to the Bank in
order to maintain its "well capitalized" ratio. At March 31, 2003, the Bank had
$17.3 million of FHLB short and long-term borrowings, as compared to $18.3
million at December 31, 2002. These advances are secured 50% by US government
agency securities and 50% by a blanket lien on qualifying loans in the Bank's
commercial mortgage loan portfolio.
LIQUIDITY MANAGEMENT
Liquidity is the measure of the Bank's ability to meet the demands
required for the funding of loans and to meet depositor requirements for use of
their funds. The Bank's sources of liquidity consist of cash balances, due from
banks, loan repayments, federal funds sold and short term investments. These
sources of liquidity are supplemented by the ability of the Company and Bank to
borrow funds. During 2002, the Company increased an established line of credit,
with a correspondent bank, from $5 million to $10 million, against which it had
drawn $6.9 million as of March 31, 2003. The Bank can purchase up to $11.6
million in federal funds on an unsecured basis and enter into reverse repurchase
agreements up to $10 million. At March 31, 2003, the Bank was also eligible to
take FHLB advances of up to $70 million, of which it had advances outstanding of
$17.3 million.
The loss of deposits, through disintermediation, is one of the greater
risks to liquidity. Disintermediation occurs most commonly when rates rise and
depositors withdraw deposits seeking higher rates than the Bank may offer. The
Bank was founded under a philosophy of relationship banking and, therefore,
believes that it has less of an aggressively
growing bank.
8
YEAR 2000exposure to disintermediation and resultant
liquidity concerns than do banks which build an asset base on non-core deposits
and other borrowings. The year 2000 ("Y2K") issue is the result of computer programs using two
digits to define the year, rather than four. Therefore, any computer
programs that have time-sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities. Timely and
accurate data processing is essential to the operationshistory of the Company.
The Company enjoys certain advantages as it addresses year 2000 issues. ItBank, while just under five years,
includes a period of rising interest rates and significant competition for
deposit dollars. During that period the Bank grew its core business without
sacrificing its interest margin in higher deposit rates for non-core deposits.
There is, not encumbered with embedded systems and programs purchased years ago,
but has, and is installing, new monitored applications. The Bank's data
processing is outsourcedhowever, a risk that some deposits would be lost if rates were to
spike up and the Bank is carefully reviewing its service
providerelected not to assuremeet the market. Under those conditions the
Bank believes that it is meeting its schedulewell 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 full compliance.
During the monthsa loss
of March and Aprildeposits. Under these circumstances, further asset growth could be limited as
the Bank hasutilizes 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 will be testing the
servicer's compliance with year 2000. The tests conducted in March went
well and all systems seemed to be compliant.
Year 2000 waspose a major issuegreater risk of disintermediation
than deposits acquired in the selectionlocal community. The Bank has limited the amount
of such deposits to less than 15% of total assets, an amount which it believes
it could replace with alternative liquidity sources, although there can be no
assurance of this.
The mature earning pattern of the Bank is also a liquidity management
resource for the Bank. The earnings of the Bank are now at a level that allows
the Bank to pay higher rates to retain deposits over a short period, while it
adjusts it asset base repricing to offset a higher cost of funds. The cost of
retaining business in the short run and the associated reduction in earnings can
be preferable to reducing deposit and asset levels and restricting growth.
At March 31, 2003, under the Bank's data processing
providerliquidity formula, it had $77
million of liquidity representing 21.9% of total Bank assets.
ASSET/LIABILITY MANAGEMENT AND QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK
A fundamental risk in banking, outside of credit risk, is exposure to
market risk, or interest rate risk, since a bank's net income is largely
dependent on net interest income. The Bank's Asset Liability Committee (ALCO) of
the Board of Directors formulates and was foremost inmonitors 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 acquisitionsfactors. Banking is generally a business of systemsattempting to
match asset and applications.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 Bank is actively testing its
systemslower cost of funds. In the current market, due to competitive factors and
requiring its vendorscustomer preferences, the effort to show evidenceattract longer term fixed priced liabilities
has not been as successful as the Company's best case asset liability mix would
prefer. When interest rates begin to rise, the Company expects that it will seek
17
to keep asset maturities and repricing periods short until rates appear to be
nearing their peak and then extend maturities to extend the benefit of readiness for Y2K. Ashigher
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 base from whichinability to perfectly forecast future interest rates.
One of the tools used by the Company commencedto manage its operations,interest rate risk
is a static GAP analysis presented below. The Company also uses an earning
simulation model on a quarterly basis to closely monitor interest sensitivity
and to expose its balance sheet and income statement to different scenarios. The
model is based on current Company data and adjusted by assumptions as to growth
patterns, noninterest income and noninterest expense and interest rate
sensitivity, based on historical data, for both assets and liabilities. The
model is then subjected to a "shock test" assuming a sudden interest rate
increase of 200 basis points or a decrease of 200 basis points, but not below
zero. The results are measured by the effect on net income. The Company, in its
latest model, shows a positive effect on income when interest rates immediately
rise 200 basis points because of the short maturities of assets and a negative
impact if rates were to decline further. With rates already at historic lows, a
further reduction would reduce income on earning assets which could not be
offset by a corresponding reduction in the cost of funds.
The following table reflects the result of a "shock test" simulation on
the March 31, 2003, earning assets and interest bearing liabilities and the
change in net interest income resulting from the simulated immediate increase
and decrease in interest of 100 and 200 basis points. Also shown is the change
in the Market Value Portfolio Equity resulting from the simulation. The model as
presented is projected for one year.
Percentage change in
Change in interest Percentage change in net Percentage change in Market Value of
rates (basis points) interest income net income Portfolio Equity
-------------------- ------------------------ -------------------- ---------------------
+200 +12.9% +28.5% +15.5%
+100 + 6.5% +14.4% + 9.0%
0 -- -- --
-100 - 5.5% -12.2% -12.1%
-200 -19.7% -43.6% -22.5%
Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and liabilities may
have similar maturities or repricing periods, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate mortgage
loans, have features that restrict changes in interest rates on a short-term
basis and over the life of the loan. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels could deviate
significantly from those assumed in calculating the tables. Finally, the ability
of many borrowers to service their debt may decrease in the event of a
significant interest rate increase.
GAP
Banks and other financial institutions are dependent upon net interest
income, the difference between interest earned on interest earning assets and
interest paid on interest bearing liabilities. In falling interest rate
environments, net interest income is maximized with longer term, higher yielding
assets being funded by lower yielding short-term funds; however, when interest
rates trend upward this asset/liability structure can result in a significant
adverse impact on interest income. The current interest rate environment is
signaling steady to possibly higher rates. Management has for a number of months
shortened maturities in the Bank's investment portfolio and where possible also
has shorten repricing opportunities for new loan requests. While management
believes that incremental costs relatedthis will help minimize interest rate risk in a rising
environment, there can be no assurance as to Y2K compliance are not
expectedactual 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 be material tochanges in interest rates. The chart
below provides an indicator of the financial performancerate sensitivity of the Company. A negative
GAP indicates the degree to which the volume of repriceable liabilities exceeds
repriceable assets in particular time periods. At March 31, 2003, the Bank has a
positive GAP of 20.7% out to three months and a cumulative negative GAP of 4.7%
out to twelve months.
18
If interest rates were to continue to decline, the Bank's interest
income and margin may be adversely effected. Because all systemsof the positive GAP measure
in the 0 - 3 month period, continued decline in the prime lending rate will
reduce income on repriceable assets within thirty to ninety days, while the
repricing of liabilities may occur over future time periods and services are new and were purchased Y2K compliant,there may not be
an ability to reduce the estimated cost of testinginterest bearing liabilities to fully offset
the reduction in short term interest rates. This will result in a decline in net
interest income and net income. Management has carefully considered its strategy
to maximize interest income by reviewing is not expected to exceed
$25,000.
The Bank is also workinginterest rate levels, economic
indicators and call features of some of its assets. These factors have been
thoroughly discussed with customers to increase awareness in their
businesses of the need for and importance of Y2K attention.
The Board of Directors of the BankAsset Liability Committee and
management believes that current strategies are appropriate to current economic
and interest rate trends. The negative GAP is active in its oversight of Y2K
preparednesscarefully monitored and regularly receives reports from management. The failure of
the Company, its principal data processing provider, its customers, or of
other service providers, including utilities, and government agencies, to
be year 2000 compliant in a timely manner could have a negative impact on
the Company's business, including but not limited to an inability to
provide accurate and timely processing of customer transactions, and delays
in loan collection practices. The Company's belief that it, and its primary
suppliers of data processing services, will be
Y2K compliant,adjusted as conditions change.
GAP ANALYSIS
(dollars in thousands)
0-3 4-12 13-36 37-60 Over 60
Repriceable in: Months Months Months Months Months Total
---------------------------------------------------------------------------------
ASSETS:
Investment securities $ 29,440 $ 9,381 $ 10,000 $ 11,500 $ 6,719 $ 67,040
Interest bearing deposits in
other banks 1,764 2,578 1,483 -- -- 5,825
Loans 97,825 19,116 45,159 63,413 17,635 243,148
Federal funds sold 10,100 -- -- -- -- 10,100
---------------------------------------------------------------------------------
Total repriceable assets 139,129 31,075 56,642 74,913 24,354 326,113
=================================================================================
LIABILITIES:
NOW accounts -- 19,613 3,923 15,691 -- 39,227
Savings and Money Market accounts 37,322 30,957 18,659 9,330 -- 92,268
Certificates of deposit 18,410 50,621 8,178 916 -- 78,125
Customer repurchase agreements
and federal funds purchased 7,973 9,701 2,425 4,850 -- 24,949
Other borrowing-short and long term 7,925 3,000 13,333 -- -- 24,258
---------------------------------------------------------------------------------
Total repriceable liabilities 71,630 113,892 46,518 30,787 -- 262,827
=================================================================================
GAP $ 67,499 $ (82,817) $ 10,124 $ 44,126 $ 24,502 $ 63,286
Cumulative GAP 67,499 (15,318) (5,194) 38,932 63,286
Interval gap/earnings assets 20.70% (25.40)% 3.10% 13.53% 7.53%
Cumulative gap/earning assets 20.70% (4.70)% (1.59)% 11.94% 19.25%
Although, NOW and MMA accounts are basedsubject 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 assumptionsfactors 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 statementsan
ongoing basis. Management seeks to maintain a capital structure that will assure
an adequate level of capital to support anticipated asset growth and to absorb
potential losses.
The capital position of the Company's wholly-owned subsidiary, the
Bank, continues to meet regulatory requirements. The primary indicators relied
on by bank regulators in measuring the capital position are the Tier 1
risk-based capital, total risk-based capital, and leverage ratios. Tier 1
capital consists of common and qualifying preferred stockholders' equity less
goodwill. Total risk-based capital consists of Tier 1 capital, qualifying
subordinated debt, and a portion of the allowance for credit losses. Risk-based
capital ratios are calculated with reference to risk-weighted assets. The
leverage ratio compares Tier1 capital to total average assets. At March 31,
2003, the Company's and Bank's capital ratios were in excess of the mandated
minimum requirements.
19
During the quarter ending March 31, 2003, the Company borrowed funds
under a line of credit with a correspondent bank in order to fund loan
participations with the Bank and a direct loan made by third parties, involve
eventsthe Company. At March 31,
2003, the amount outstanding under the line of credit was $6.9 million. The
ability of the Company to continue to grow is dependent on its earnings and actions whichthe
ability to obtain additional funds for contribution to the Bank's capital,
through additional borrowing, the sale of additional common stock, the sale of
preferred stock, or through the issuance of additional qualifying equity
equivalents, such as subordinated debt or trust preferred securities. The
Company has commenced an offering of up to 979,591 shares of its common stock at
an offering prince of $12.25 per share, for aggregate gross proceeds of
approximately $12 million. The number of shares offered may be beyondincreased to
1,142,457, for aggregate gross proceeds of $14 million. To the controlextent that the
Company is unsuccessful in raising additional equity, it will be required to
seek alternative sources, such as increased reliance on, or expansion of, its
line of credit or the issuance of trust preferred securities. Increased
borrowings or trust preferred securities will have an immediate interest cost,
which will have an adverse impact on earnings, although they may require a lower
internal rate of return on equity than common stock. To the extent that they are
floating or variable rate, the future cost of additional borrowings or trust
preferred securities may increase over time, while the cost of equity will
remain fixed.
In the event that the Company is unable to obtain additional capital
for the Bank on a timely basis, the growth of the Company and are
subject to uncertainty. The Company also is not able to predict the effect,
if any, onBank may be
curtailed, and the Company financial markets or societyand the Bank may be required to reduce their level of
assets in generalorder to maintain compliance with regulatory capital requirements.
Under those circumstances net income and the rate of growth of net income may be
adversely affected.
CAPITAL
The actual capital amounts and ratios for the Company and Bank as of March 31,
2002 and 2001 are presented in the table below:
To Be Well
For Capital Capitalized Under
In thousands Company Bank Adequacy Prompt Corrective
Actual Actual Purposes Action Provisions**
As of March 31, 2003 Amount Ratio Amount Ratio Ratio Ratio
------ ----- ------ ----- ----- -----
Total capital (to risk-weighted
assets) $23,727 9.2% $27,793 10.9% 8.0% 10.0%
Tier 1 capital (to risk-weighted
assets) $20,866 8.1% 24,953 9.8% 4.0% 6.0%
Tier 1 capital (to average assets) $20,866 6.2% 24,953 7.4% 3.0% 5.0%
As of March 31, 2002
Total capital (to risk-weighted
assets) $19,599 9.6% $20,813 10.2% 8.0% 10.0%
Tier 1 capital (to risk weighted
assets) $17,312 8.5% 18,526 9.0% 4.0% 6.0%
Tier 1 capital (to average assets) $17,312 7.9% 18,526 7.5% 3.0% 5.0%
** Applies to Bank only
Bank and holding company regulations, as well as Maryland law, impose certain
restrictions on dividend payments by the Bank, as well as restricting extension
of credit and transfers of assets between the Bank and the Company. At March 31,
2003, the Bank could pay dividends to the parent to the extent of its earnings
and so long as it maintained required capital ratios.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Please refer to Item 2 of this report, "Management's Discussion and
Analysis of Financial Condition and Results of Operations", under the caption
"Asset/Liability Management and Quantitative and Qualitative Disclosure About
Market Risk".
20
ITEM 4. CONTROLS AND PROCEDURES
Within the ninety days prior to the filing of this report, the Company's
management, under the supervision and with the participation of the public's reactionCompany's
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness
of the operation of the Company's disclosure controls and procedures, as defined
in Rule 13a-14 under the Securities and Exchange Act of 1934. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were adequate. There were
no significant changes (including corrective actions with regard to Y2K.
9
significant
deficiencies or material weaknesses) in the Company's internal controls or in
other factors subsequent to the date of the evaluation that could significantly
affect those controls.
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None.From time to time the Company may become involved in legal proceedings.
At the present time there are no proceedings which the Company believes will
have an adverse impact on the financial condition or earnings of the Company.
ITEM 2 CHANGES IN SECURITIES None.AND USE OF PROCEEDS None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None.None
ITEM 55. OTHER INFORMATION None.
ITEM 66. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data ScheduleExhibit No. Description of Exhibit
- ----------- ----------------------
3(a) Certificate of Incorporation of the Company, as amended (1)
3(b) Bylaws of the Company (2)
10.1 1998 Stock Option Plan (3)
10.2 Employment Agreement between H.L. Ward and the Company and Bank (4)
10.3 Employment Agreement between Thomas D. Murphy and the Bank (4)
10.4 Employment Agreement between Ronald D. Paul and the Company (4)
10.5 Consulting Agreement between Leonard L. Abel and the Company (4)
10.6 Employment Agreement between Susan G. Riel and the Bank (4)
10.7 Employment Agreement between Martha F. Tonat and the Bank(1)
11 Statement Regarding Computation of Per Share Income
Please refer to Note 9 to the consolidated financial statements for the
year ended December 31, 2002.
21 Subsidiaries of the Registrant
The sole subsidiary of the Registrant is EagleBank, a Maryland
chartered commercial bank.
99(a) Certification of Ronald D. Paul 99(b) Certification of Wilmer L. Tinley
- -----------------------------
(1) Incorporated by reference to the exhibit of the same number to the
Company's Quarterly Report on Form 10-QSB for the period ended September
30, 2002.
(2) Incorporated by reference to Exhibit 3(b) to the Company's Registration
Statement on Form SB-2, dated December 12, 1997.
(3) Incorporated by reference to Exhibit 10.1 to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1998.
(4) Incorporated by reference to the exhibit of the same number in the
Company's Annual Report on Form 10-KSB for the year ended December 31,
2000.
(b) Reports on Form 8-K
None.
10
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
11No reports on Form 8-K were filed during the quarter ended March 31,
2003.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EAGLE BANCORP, INC.
Date: May 13, 19999, 2002 By: /s/ Ronald D. Paul
------------------------------------------------------------------------------------
Ronald D. Paul, President
Date: May 13, 19999, 2002 By: /s/ Wilmer L. Tinley
------------------------------------------------------------------------------------
Wilmer L. Tinley, Senior Vice President, CFO
1222
CERTIFICATION
I, Ronald D. Paul , certify that:
1. I have reviewed this quarterly report on Form 10-Q of Eagle Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 9, 2003 /s/Ronald D. Paul
------------------
President and Chief Executive Officer
23
CERTIFICATION
I, Wilmer L. Tinley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Eagle Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 9, 2003 /s/ Wilmer L. Tinley
--------------------
Senior Vice President, Chief Financial Officer
24