-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MCESSXeRuXrYLbiR4BtWWMuDTe/y+7x1Uk/suYYEPAGepGJiE+aUVG2jxYV9Wn1A OpFKGd5YqJSXEBWcJpiQdw== 0001005150-99-000208.txt : 19990331 0001005150-99-000208.hdr.sgml : 19990331 ACCESSION NUMBER: 0001005150-99-000208 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EAGLE BANCORP INC CENTRAL INDEX KEY: 0001050441 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 522061461 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 333-42083 FILM NUMBER: 99578114 BUSINESS ADDRESS: STREET 1: 8101 GLENBROOK RD CITY: BETHESDA STATE: MD ZIP: 20814 BUSINESS PHONE: 3019869288 MAIL ADDRESS: STREET 1: 8101 GLENBROOK RD CITY: BETHESDA STATE: MD ZIP: 20814 10KSB 1 FORM 10KSB U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-KSB X Annual report under Section 13 or 15(d) of the Securities Exchange Act of - --- 1934 For the fiscal year ended December 31, 1998 Transition report under Section 13 or 15(d) of the Securities Exchange Act of - --- 1934 For the transition period from to ----- ----- Commission file number: 333-42083 Eagle Bancorp, Inc. (Name of Small Business Issuer in its Charter) Maryland 52-1943477 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 7815 Woodmont Avenue, Bethesda, Maryland 20814 (Address of Principal Executive Offices) (Zip Code) Issuer's Telephone Number: (301) 986-1800 Securities registered under Section 12(b) of the Act: None Securities registered under Section 12(g) of the Act: None Check whether the Issuer; (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports; and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. X --- The issuer's revenues for the fiscal year ended December 31, 1998 were approximately $1,033,367 The aggregate market value of the outstanding Common Stock held by nonaffiliates as of February 28, 1999 was approximately $13,691,540. As of March 15, 1999, the number of outstanding shares of the Common Stock, $1.00 par value, of Eagle Bancorp, Inc. was 1,650,000. DOCUMENTS INCORPORATED BY REFERENCE None PART I ITEM 1. Description of Business. Eagle Bancorp, Inc. (the "Company") was incorporated under the laws of the State of Maryland on October 28, 1997, to serve as the bank holding company for a newly formed Maryland chartered commercial bank. The Company was formed by a group of local businessmen and professionals with significant prior experience in community banking in the Company's market area, together with an experienced community bank senior management team. EagleBank, a Maryland chartered commercial bank which is a member of the Federal Reserve System, the Company's sole subsidiary, was chartered as a bank and commenced banking operations on July 20, 1998. The Bank operates from three southern Montgomery County offices located in Rockville, Bethesda and Silver Spring, Maryland. The Bank operates as a community bank alternative to the superregional financial institutions which dominate its primary market area. The cornerstone of the Bank's philosophy is to provide superior, personalized service to its customers. The Bank focuses on relationship banking, providing each customer with a number of services, familiarizing itself with, and addressing itself to, customer needs in a proactive, personalized fashion. In June 1998, the Company completed its initial offering of shares of its common stock, $.01 par value ("Common Stock"), with the sale of 1,650,000 shares of Common Stock, the maximum number offered, at a price of $10.00 per share, for total proceeds of $16,500,000. After expenses of the offering, the Company received net proceeds of $16,399,587. The Company initially capitalized the Bank with $7,750,000 of the proceeds of the offering. Description of Services. The Bank offers full commercial banking services to its business and professional clients as well as complete consumer banking services to individuals living and/or working in the service area. The Bank emphasizes providing commercial banking services to sole proprietorships, small and medium-sized businesses, partnerships, corporations, non-profit organizations and associations, and investors living and working in and near the Bank's primary service area. A full range of retail banking services are offered to accommodate the individual needs of both corporate customers as well as the community the Bank serves. The Bank, is developing a loan portfolio consisting primarily of business loans with variable rates and/or short maturities where the cash flow of the borrower is the principal source of debt service with a secondary emphasis on collateral. Real estate loans are made generally be for commercial purposes and are structured using fixed rates which adjust in three to five years, with maturities of five to ten years. Consumer loans are made on the traditional installment basis for a variety of purposes. All new business customers are screened to determine, in advance, their credit qualifications and history. This practice permits the Bank to respond quickly to credit requests as they arise. In general, the Bank offers the following credit services: 1) Commercial loans for business purposes including working capital, equipment purchases, real estate, lines of credit, and government contract financing. Asset based lending and accounts receivable financing are available on a selective basis. 2) Real estate loans, including construction loan financing, for business and investment purposes. 3) Traditional general purpose consumer installment loans including automobile and personal loans. In addition, the Bank offers personal lines of credit. 4) Credit card services are offered through an outside vendor. The direct lending activities in which the Bank engages each carries the risk that the borrowers will be unable to perform on their obligations. As such, interest rate policies of the Federal Reserve Board and general economic conditions, nationally and in the Bank's primary market area have a significant impact on the Bank's and the Company's results of operations. To the extent that economic conditions deteriorate, business and individual borrowers may be less able to meet their obligations to the Bank in full, in a timely manner, resulting in decreased earnings or losses to the Bank. To the extent the Bank makes fixed rate loans, general increases in interest rates will tend to reduce the Bank's spread as the interest rates the Bank must pay for deposits increase while interest income is flat. Economic conditions and interest rates may also adversely affect the value of property pledged as security for loans. Deposit services include business and personal checking accounts, NOW accounts, and a tiered savings/Money Market Account basing the payment of interest on balances on deposit. Certificates of Deposits are offered using a tiered rate structure and various maturities. The acceptance of brokered deposits is not a part of the current strategy. A complete IRA program is available. Other services for business accounts include cash management services such as PC banking, sweep accounts, repurchase agreements, lock box, and account reconciliation, credit card depository, safety deposit boxes and Automated Clearing House origination. After hours depositories and ATM service are also available. Source of Business. Management believes that the market segments which the Bank targets, small to medium sized businesses and the consumer base of the Bank's market area, demand the convenience and personal service that a smaller, independent financial institution such as the Bank can offer. It is these themes of convenience and personal service that form the basis for the Bank's business development strategies. The Bank provides services from its strategically located main office in Bethesda, Maryland, and branches in Rockville and Silver Spring, which it believes complement the needs of the Bank's existing and potential customers, and provide prospects for additional growth and expansion. Subject to obtaining necessary regulatory approvals, capital adequacy, the identification of appropriate sites, then current business demand and other factors, the Company plans for the Bank to establish additional branch offices over the next two years. There can be no assurance that the Bank will establish any additional branches or that they will be profitable. The Bank has capitalizes upon the extensive business and personal contacts and relationships of its Directors and Executive Officers to establish the Bank's initial customer base. To introduce new customers to the Bank, reliance is placed on aggressive officer-originated calling programs and director, customer and shareholder referrals. The risk of nonpayment (or deferred payment) of loans is inherent in commercial banking. The Bank's marketing focus on small to medium-sized businesses may result in the assumption by the Bank of certain lending risks that are different from those attendant to loans to larger companies. Management of the Bank carefully evaluates all loan applications and attempts to minimize its credit risk exposure by use of thorough loan application, approval and monitoring procedures; however, there can be no assurance that such procedures can significantly reduce such lending risks. In addition to holding all of the capital stock of the Bank, the Company holds investments in securities and loan participation purchased from the Bank or other financial institutions. Employees At February 28, 1999, that Bank employed thirty persons on a full time basis, four of which are senior officers of the Bank. Except for the Chairman of the Board of Directors and the President of the Company, the Company (as distinguished from the Bank) does not have any employees or officers who are not employees or officers of the Bank. None of the Bank's employees are represented by any collective bargaining group, and the Bank believes that its employee relations are good. The Bank provides a benefit program which includes health and dental insurance, a 401k plan, life and long term disability insurance for substantially all full time employees. The Company has proposed for shareholder approval an incentive stock option plan for key employees of the Company and Bank. 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 two branches, located at 110 North Washington Street, Rockville, Maryland, and 8677 Georgia Avenue, Silver Spring Maryland. The primary service area of the Bank is Montgomery County, Maryland, with a secondary market area in the Washington D.C. RMA, particularly Washington D.C., Prince George's County in Maryland, and Arlington and Fairfax Counties in Virginia. The Washington, D.C. area attracts a substantial federal workforce as well as supporting a variety of support industries such as attorneys, lobbyists, government contractors, real estate developers and investors, non-profit organizations, tourism and consultants. Montgomery County, with a total population of about 840,000, represents the second largest suburban employment center in the Washington, D.C. area, with approximately 470,000 jobs in 1996, and an unemployment rate below the national average. While government employment provides a significant number of jobs, over 80% of the jobs in the county involve private employers. Almost half of the county's employment is located in the Bethesda, Rockville, North Bethesda area in which the Bank will be located. Much of the job growth and development is located in that area and in the nearby I-270 technology corridor. Household income for Montgomery County in 1996 was established at $106,950 compared to a national average for similar counties of $67,090. Per capita income of $38,400 similarly exceeded the national average of $24,730. Competition. Deregulation of financial institutions and holding company acquisitions of banks across state lines has resulted in widespread, fundamental changes in the financial services industry. This transformation, although occurring nationwide, is particularly intense in the greater Washington, D.C. metropolitan area because of the changes in the area's economic base in recent years and changing state laws authorizing interstate mergers and acquisitions of banks, and the interstate establishment or acquisition of branches. In Montgomery County, Maryland, competition is exceptionally keen from large banking institutions headquartered outside of Maryland. In addition, the Bank competes with other community banks, savings and loan associations, credit unions, mortgage companies, finance companies and others providing financial services. Among the advantages that many of these institutions have over the Bank are their abilities to finance extensive advertising campaigns, maintain extensive branch networks and technology investments, and to directly offer certain services, such as international banking and trust services, which are not offered directly by the Bank. Further, the greater capitalization of the larger institutions allows for substantially higher lending limits than the Bank. Certain of these competitors have other advantages, such as tax exemption in the case of credit unions, and lesser regulation in the case of mortgage companies and finance companies. Regulation The following summaries of statutes and regulations affecting bank holding companies do not purport to be complete discussions of all aspects of such statutes and regulations and are qualified in their entirety by reference to the full text thereof. The Company. The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, (the "Act") and is subject to supervision by the Federal Reserve Board. As a bank holding company, the Company is required to file with the Federal Reserve Board an annual report and such other additional information as the Federal Reserve Board may require pursuant to the Act. The Federal Reserve Board may also make examinations of the Company and each of its subsidiaries. The Act requires approval of the Federal Reserve Board for, among other things, the acquisition by a proposed bank holding company of control of more than five percent (5%) of the voting shares, or substantially all the assets, of any bank or the merger or consolidation by a bank holding company with another bank holding company. The Act also 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. The Bank. The Bank, as a Maryland chartered commercial bank which is a member of the Federal Reserve System (a "state member bank") and whose accounts will be insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation (the "FDIC") up to the maximum legal limits of the FDIC, is subject to regulation, supervision and regular examination by the Maryland Department of Financial Institutions and the Federal Reserve Board. The regulations of these various agencies govern most aspects of the Bank's business, including required reserves against deposits, loans, investments, mergers and acquisitions, borrowing, dividends and location and number of branch offices. The laws and regulations governing the Bank generally have been promulgated to protect depositors and the deposit insurance funds, and not for the purpose of protecting stockholders. Competition among commercial banks, savings and loan associations, and credit unions has increased following enactment of legislation which greatly expanded the ability of banks and bank holding companies to engage in interstate banking or acquisition activities. As a result of federal and state legislation, banks in the Washington D.C./Maryland/Virginia area can, subject to limited restrictions, acquire or merge with a bank in another of the jurisdictions, and can branch de novo in any of the jurisdictions. Additionally, legislation has been proposed which may result in non-banking companies being authorized to own banks, which could result in companies with resources substantially in excess of the Company's entering into competition with the Company and the Bank. Banking is a business which depends on interest rate differentials. In general, the differences between the interest paid by a bank on its deposits and its other borrowings and the interest received by a bank on loans extended to its customers and securities held in its investment portfolio constitute the major portion of the bank's earnings. Thus, the earnings and growth of the Bank will be subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve Board, which regulates the supply of money through various means including open market dealings in United States government securities. The nature and timing of changes in such policies and their impact on the Bank cannot be predicted. Branching and Interstate Banking. The federal banking agencies are authorized to approve interstate bank merger transactions without regard to whether such transaction is prohibited by the law of any state, unless the home state of one of the banks has opted out of the interstate bank merger provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the"Riegle-Neal Act") by adopting a law after the date of enactment of the Riegle-Neal Act and prior to June 1, 1997 which applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks. Interstate acquisitions of branches are permitted only if the law of the state in which the branch is located permits such acquisitions. Such interstate bank mergers and branch acquisitions are also subject to the nationwide and statewide insured deposit concentration limitations described in the Riegle-Neal Act. The Riegle-Neal Act authorizes the federal banking agencies to approve interstate branching de novo by national and state banks in states which specifically allow for such branching. The District of Columbia, Maryland and Virginia have all enacted laws which permit interstate acquisitions of banks and bank branches and permit out-of-state banks to establish de novo branches. Capital Adequacy Guidelines. The Federal Reserve Board and the FDIC have adopted risk based capital adequacy guidelines pursuant to which they assess the adequacy of capital in examining and supervising banks and bank holding companies and in analyzing bank regulatory applications. Risk-based capital requirements determine the adequacy of capital based on the risk inherent in various classes of assets and off-balance sheet items. State member banks are expected to meet a minimum ratio of total qualifying capital (the sum of core capital (Tier 1) and supplementary capital (Tier 2)) to risk weighted assets of 8%. At least half of this amount (4%) should be in the form of core capital. These requirements apply to the Bank and will apply to the Company (a bank holding company) once its total assets equal $150,000,000 or more, it engages in certain highly leveraged activities or it has publicly held debt securities. Tier 1 Capital generally consists of the sum of common stockholders' equity and perpetual preferred stock (subject in the case of the latter to limitations on the kind and amount of such stock which may be included as Tier 1 Capital), less goodwill, without adjustment for changes in the market value of securities classified as "available for sale" in accordance with FAS 115. Tier 2 Capital consists of the following: hybrid capital instruments; perpetual preferred stock which is not otherwise eligible to be included as Tier 1 Capital; term subordinated debt and intermediate-term preferred stock; and, subject to limitations, general allowances for loan losses. Assets are adjusted under the risk-based guidelines to take into account different risk characteristics, with the categories ranging from 0% (requiring no risk-based capital) for assets such as cash, to 100% for the bulk of assets which are typically held by a bank holding company, including certain multi-family residential and commercial real estate loans, commercial business loans and consumer loans. Residential first mortgage loans on one to four family residential real estate and certain seasoned multi-family residential real estate loans, which are not 90 days or more past-due or non-performing and which have been made in accordance with prudent underwriting standards are assigned a 50% level in the risk-weighing system, as are certain privately-issued mortgage-backed securities representing indirect ownership of such loans. Off-balance sheet items also are adjusted to take into account certain risk characteristics. In addition to the risk-based capital requirements, the Federal Reserve Board has established a minimum 3.0% Leverage Capital Ratio (Tier 1 Capital to total adjusted assets) requirement for the most highly-rated banks, with an additional cushion of at least 100 to 200 basis points for all other banks, which effectively increases the minimum Leverage Capital Ratio for such other banks to 4.0% - 5.0% or more. The highest-rated banks are those that are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, those which are considered a strong banking organization. A bank having less than the minimum Leverage Capital Ratio requirement shall, within 60 days of the date as of which it fails to comply with such requirement, submit a reasonable plan describing the means and timing by which the bank shall achieve its minimum Leverage Capital Ratio requirement. A bank which fails to file such plan is deemed to be operating in an unsafe and unsound manner, and could subject the bank to a cease-and-desist order. Any insured depository institution with a Leverage Capital Ratio that is less than 2.0% is deemed to be operating in an unsafe or unsound condition pursuant to Section 8(a) of the Federal Deposit Insurance Act (the "FDIA") and is subject to potential termination of deposit insurance. However, such an institution will not be subject to an enforcement proceeding solely on account of its capital ratios, if it has entered into and is in compliance with a written agreement to increase its Leverage Capital Ratio and to take such other action as may be necessary for the institution to be operated in a safe and sound manner. The capital regulations also provide, among other things, for the issuance of a capital directive, which is a final order issued to a bank that fails to maintain minimum capital or to restore its capital to the minimum capital requirement within a specified time period. Such directive is enforceable in the same manner as a final cease-and-desist order. Prompt Corrective Action. Under Section 38 of the FDIA, each federal banking agency is required to implement a system of prompt corrective action for institutions which it regulates. The federal banking agencies have promulgated substantially similar regulations to implement the system of prompt corrective action established by Section 38 of the FDIA. Under the regulations, a bank shall be deemed to be: (i) "well capitalized" if it has a Total Risk Based Capital Ratio of 10.0% or more, a Tier 1 Risk Based Capital Ratio of 6.0% or more, a Leverage Capital Ratio of 5.0% or more and is not subject to any written capital order or directive; (ii) "adequately capitalized" if it has a Total Risk Based Capital Ratio of 8.0% or more, a Tier 1 Risk Based Capital Ratio of 4.0% or more and a Tier 1 Leverage Capital Ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of "well capitalized;" (iii) "undercapitalized" if it has a Total Risk Based Capital Ratio that is less than 8.0%, a Tier 1 Risk based Capital Ratio that is less than 4.0% or a Leverage Capital Ratio that is less than 4.0% (3.0% under certain circumstances); (iv) "significantly undercapitalized" if it has a Total Risk Based Capital Ratio that is less than 6.0%, a Tier 1 Risk Based Capital Ratio that is less than 3.0% or a Leverage Capital Ratio that is less than 3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. An institution generally must file a written capital restoration plan which meets specified requirements with an appropriate federal banking agency within 45 days of the date the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. A federal banking agency must provide the institution with written notice of approval or disapproval within 60 days after receiving a capital restoration plan, subject to extensions by the applicable agency. An institution which is required to submit a capital restoration plan must concurrently submit a performance guaranty by each company that controls the institution. Such guaranty shall be limited to the lesser of (i) an amount equal to 5.0% of the institution's total assets at the time the institution was notified or deemed to have notice that it was undercapitalized or (ii) the amount necessary at such time to restore the relevant capital measures of the institution to the levels required for the institution to be classified as adequately capitalized. Such a guaranty shall expire after the federal banking agency notifies the institution that it has remained adequately capitalized for each of four consecutive calendar quarters. An institution which fails to submit a written capital restoration plan within the requisite period, including any required performance guaranty, or fails in any material respect to implement a capital restoration plan, shall be subject to the restrictions in Section 38 of the FDIA which are applicable to significantly undercapitalized institutions. A "critically undercapitalized institution" is to be placed in conservatorship or receivership within 90 days unless the FDIC formally determines that forbearance from such action would better protect the deposit insurance fund. Unless the FDIC or other appropriate federal banking regulatory agency makes specific further findings and certifies that the institution is viable and is not expected to fail, an institution that remains critically undercapitalized on average during the fourth calendar quarter after the date it becomes critically undercapitalized must be placed in receivership. The general rule is that the FDIC will be appointed as receiver within 90 days after a bank becomes critically undercapitalized unless extremely good cause is shown and an extension is agreed to by the federal regulators. In general, good cause is defined as capital which has been raised and is imminently available for infusion into the Bank except for certain technical requirements which may delay the infusion for a period of time beyond the 90 day time period. Immediately upon becoming undercapitalized, an institution shall become subject to the provisions of Section 38 of the FDIA, which (i) restrict payment of capital distributions and management fees; (ii) require that the appropriate federal banking agency monitor the condition of the institution and its efforts to restore its capital; (iii) require submission of a capital restoration plan; (iv) restrict the growth of the institution's assets; and (v) require prior approval of certain expansion proposals. The appropriate federal banking agency for an undercapitalized institution also may take any number of discretionary supervisory actions if the agency determines that any of these actions is necessary to resolve the problems of the institution at the least possible long-term cost to the deposit insurance fund, subject in certain cases to specified procedures. These discretionary supervisory actions include: requiring the institution to raise additional capital; restricting transactions with affiliates; requiring divestiture of the institution or the sale of the institution to a willing purchaser; and any other supervisory action that the agency deems appropriate. These and additional mandatory and permissive supervisory actions may be taken with respect to significantly undercapitalized and critically undercapitalized institutions. Additionally, under Section 11(c)(5) of the FDIA, a conservator or receiver may be appointed for an institution where: (i) an institution's obligations exceed its assets; (ii) there is substantial dissipation of the institution's assets or earnings as a result of any violation of law or any unsafe or unsound practice; (iii) the institution is in an unsafe or unsound condition; (iv) there is a willful violation of a cease-and-desist order; (v) the institution is unable to pay its obligations in the ordinary course of business; (vi) losses or threatened losses deplete all or substantially all of an institution's capital, and there is no reasonable prospect of becoming "adequately capitalized" without assistance; (vii) there is any violation of law or unsafe or unsound practice or condition that is likely to cause insolvency or substantial dissipation of assets or earnings, weaken the institution's condition, or otherwise seriously prejudice the interests of depositors or the insurance fund; (viii) an institution ceases to be insured; (ix) the institution is undercapitalized and has no reasonable prospect that it will become adequately capitalized, fails to become adequately capitalized when required to do so, or fails to submit or materially implement a capital restoration plan; or (x) the institution is critically undercapitalized or otherwise has substantially insufficient capital. Regulatory Enforcement Authority. Federal banking law grants substantial enforcement powers to federal banking regulators. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities. ITEM 2. Description of Property. The main office of the Bank and the executive offices of the Bank and the Company are located at 7815 Woodmont Avenue, Bethesda, Maryland, in a 12,000 square foot, two story masonry structure (plus basement), with parking. The Company leases the building under a five year lease which commences in April 1998, at an annual rent $142,500, subject to annual increase based on the CPI, not to exceed 4% per year. The Company has three five year renewal options, and an option to purchase the building at a price to be negotiated. The Silver Spring branch of the Bank is located at 8677 Georgia Avenue, Silver Spring, Maryland and consists of 2,794 square feet. The property is occupied under a five year lease, commencing April 1998, at an annual rent of $55,878, subject to annual increase based on the CPI, plus additional rent relating to common area fees and taxes. The Company has one five year renewal option. The Rockville branch is located at 110 North Washington Street, Rockville, Maryland, and consists of 2,000 square feet. The property is occupied under a five year lease commencing April 1998, at an annual rent of $35,000, subject to annual increase based upon the CPI, with a minimum 3% annual increase, plus additional rent relating to common area fees and taxes. The Company has one five year renewal option. The Company believes that its existing facilities are adequate to conduct the Company's business. ITEM 3. Legal Proceedings. The Company is involved in routine legal proceedings in the ordinary course of its business. In the opinion of management, final disposition of these proceedings will not have a material adverse effect on the financial condition or results of operations of the Company. ITEM 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1998. PART II ITEM 5. Market for Common Equity and Related Stockholder Matters. Market for Common Stock and Dividends. The Company's Common Stock is not traded on any organized exchange or on the Nasdaq National Market or the Nasdaq Small Cap Market. As of February 28, 1999, three market makers offered to make a market in the Common Stock in the over the counter "bulletin board" market under the symbol "EGBN". No assurance can be given that an active or established trading market will develop in the foreseeable future. The following table sets forth the high and low bid prices for the Common Stock during each calendar quarter since the third quarter of 1998, during which the Company's initial public offering of shares was completed. These quotations reflect interdealer prices, without retail markup, markdown or commission, and may not represent actual transactions. These quotations do not necessarily reflect the intrinsic or market values of the Common Stock. The Company has been advised, and the reader should be aware, that the $15.00 high bid price during the fourth quarter of 1998 involved a trade of an odd lot of very few shares. As of December 31, 1998, there were 1,650,000 shares of Common Stock outstanding, held of record by approximately 684 shareholders. Period Low Bid High Bid - ------------------------- ---------------------- --------------------- Third Quarter 1998 $10.00 $10.50 Fourth Quarter 1998 $10.00 $15.00 Dividends. The Company has not paid any dividends to date. The payment of dividends by the Company will depend largely upon the ability of the Bank, its sole operating business, to declare and pay dividends to the Company, as the principal source of the Company's revenue, other than earnings on retained proceeds of the Company's initial offering of Common Stock, will initially be from dividends paid by the Bank. Dividends will depend primarily upon the Bank's earnings, financial condition, and need for funds, as well as governmental policies and regulations applicable to the Company and the Bank. It is anticipated that the Bank will incur losses during its initial phase of operations, and therefore, it is not anticipated that any dividends will be paid by the Bank or the Company for at least three years and in the foreseeable future. Even if the Bank and the Company have earnings in an amount sufficient to pay dividends, the Board of Directors may determine, and it is the present intention of the Board of Directors, to retain earnings for the purpose of funding the growth of the Company and the Bank. Regulations of the Federal Reserve Board and Maryland law place limits on the amount of dividends the Bank may pay to the Company without prior approval. Prior regulatory approval is required to pay dividends which exceed the Bank's net profits for the current year plus its retained net profits for the preceding two calendar years, less required transfers to surplus. State and federal bank regulatory agencies also have authority to prohibit a bank from paying dividends if such payment is deemed to be an unsafe or unsound practice, and the Federal Reserve Board has the same authority over bank holding companies. The Federal Reserve Board has established guidelines with respect to the maintenance of appropriate levels of capital by registered bank holding companies. Compliance with such standards, as presently in effect, or as they may be amended from time to time, could possibly limit the amount of dividends that the Company may pay in the future. In 1985, the Federal Reserve Board issued a policy statement on the payment of cash dividends by bank holding companies. In the statement, the Federal Reserve Board expressed its view that a holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income, or which could only be funded in ways that weaken the holding company's financial health, such as by borrowing. As a depository institution, the deposits of which are insured by the FDIC, the Bank may not pay dividends or distribute any of its capital assets while it remains in default on any assessment due the FDIC. The Bank currently is not in default under any of its obligations to the FDIC. Recent Sales of Unregistered Shares. None. ITEM 6. Management's Discussion and Analysis. This discussion and analysis provides an overview of the financial condition and results of operations of Eagle Bancorp, Inc. (Company) and EagleBank (Bank) for the year 1998. The Company was formed on October 28, 1997. In general, comparative discussion of the results of operations for the year ended December 31, 1997 and December 31, 1998 is not provided, as the Company had no operations other than organizational activity in 1997, and as such, comparisons do not provide accurate or meaningful information regarding the Company's financial position or results of operations. This discussion contains forward looking statements within the meaning of the Securities Exchange Act of 1934, as amended, including statements of goals, intentions, and expectations as to future trends, plans, events or results of Company operations and policies and regarding general economic conditions. These statements are based upon current and anticipated economic conditions, nationally and in the Company's market, interest rates and interest rate policy, 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 statements. The Company does not undertake to update any forward looking statements to reflect occurrences or events which may not have been anticipated as of the date of such statements. It is intended that this discussion and analysis help the readers in their analysis of the accompanying consolidated financial statements. GENERAL Eagle Bancorp, Inc. was incorporated under the general corporation laws of the State of Maryland, on October 28, 1997, and is headquartered in Bethesda, Maryland. The Company was formed to be a bank holding company as defined by the Federal Reserve System. On June 9, 1998 the Company closed its initial offering of shares of the Company stock, having received subscriptions for 1.65 million shares of common stock. Gross proceeds of the offering amounted to $16.5 million. On July 20, 1998, having received the required approvals from the State of Maryland and Federal Reserve System and been accepted for deposit insurance by the FDIC, EagleBank opened its first office in Rockville, Maryland. On that date the Company became a bank holding company by capitalizing the Bank with $7.75 million. On August 4, a second office was opened in Silver Spring and on November 9, the Bank's main office was opened at 7815 Woodmont Avenue, Bethesda. The Bank's main office also serves as the headquarters for the Company. EagleBank was formed to serve the business community of Montgomery County, Maryland, and contiguous areas. The accompanying financial information attests to the support the Bank has received from the community as deposit levels stood at nearly $35million at year end, after only five full months of operation. RESULTS OF OPERATIONS Overview The Company reported a net loss of $1,399,457 for the year ended December 31, 1998. The loss for the year is primarily attributable to start-up costs of the Company associated with filing fees, legal fees, salaries, rents and other related expenses necessary to complete the offering and prepare the Bank for business. These costs were incurred during the first six months of the year. During the last six months the Bank incurred expenses in excess of income as it geared up its operation to do business. These losses are expected to be reduced in the future as the Bank increases its deposit base and generates additional loan volume. The Bank ended the year with deposits at $34.6 million, in line with expectations, but lending activity was not as strong as anticipated. The Bank's lending activity generated $15.7million and the Company purchased $4.7million in participation loans to achieve a higher return than available from investment securities. The market is very competitive and the Bank is committed to maintaining a high quality portfolio which returns a reasonable market rate. The Company expects increased lending activity as the Bank's presence in the market is more widely known and as lending relationships come up for review. The lending staff has been active in contacting new prospects and getting the Bank's name into the community. Management believes that this will translate into increased lending activity and growth of a portfolio of quality loans, although there can be no assurance of this. The Bank plans to maintain the allowance for credit losses at an adequate level and ended the year with an allowance of 1% of outstanding loans, exclusive of a $4 million participation loans held by the Company for which no allowance is being maintained. The Bank plans to review and make adjustments as the portfolio is evaluated and economic conditions suggest. It was expected that the Bank would sustain losses during its start up period and not show an operating profit for any month for at least eighteen months after opening for business. Earnings from investments by the Company of capital not invested in the Bank will partially offset losses of the Bank and, on a consolidated basis, the Company may show a monthly profit earlier, although there can be no assurance of this. Net Interest Income and Net Interest Margin Net interest income is the difference between income on assets and the cost of funds supporting those assets. Earning assets are composed primarily of loans and investments, interest bearing deposits and customer repurchase agreements and other borrowings make up the cost of funds. Noninterest bearing deposits and capital are other components representing funding sources. Changes in the volume and mix of assets and funding sources along with the changes in yields earned and rates paid, determine changes in net interest income. The net interest income in 1998 was $733,226. The income from earning assets reflected in the financial statements includes interest earned on subscriptions held by the Company prior to the issuance of stock and opening of the Bank. Following its opening, the Bank realized strong deposit growth while loan generation lagged. As a result, a substantial portion of the Bank's income was generated by the investment portfolio which yields 3% to 5% less than loans in a mature loan portfolio. The distortions in an interest income analysis caused by the high level of capital with no funding costs and the Company's mix of assets and liabilities are evident when considering net interest spread and interest margin. Interest spread is the mathematical difference between the average interest earned on earning assets and interest paid on interest bearing liabilities. Interest margin represents the net interest yield on earning assets and is derived by dividing net interest income by average earning assets. In a mature financial institution the interest margin gives a reader better indicators of asset earning results when compared to peer groups or industry standards. Because the Bank was operational for only a little over five months during 1998, in conjunction with the relatively high capital levels, the Company does not compare favorably with peer bank holding companies. Throughout 1998 the Company and Bank operated in a stable to declining interest rate environment. This market characteristic is expected to continue through 1999 and the Bank expects that the shift in assets to higher yielding loans will have a positive impact on earnings. However, it is expected that this will also be a year of strong deposit growth which will make the challenge to deploy these funds somewhat greater. The following table reflects the average balances and rates of the various categories of the Company's assets and liabilities. It should be noted that the Company had assets and active operations for approximately six months only, while, the averages reflected below are based on the full 365 day year.
Average Balances, Interest Yields, and Rates, and Net Interest Margin Year ended December 31, 1998 Average Interest Average Balance Yield or Rate Assets Interest earning assets: Loans $ 3,128,193 $ 269,265 8.61% Investment securities 12,236,066 621,985 5.05% Federal funds sold and securities purchased under Agreement to resell 2,466,820 119,338 4.84% ----------- ----------- ----- Total interest-earning assets 17,831,079 1,010,588 5.67% Noninterest-earning assets: Cash and due from banks 657,374 Premises and equipment 856,013 Other assets 129,942 Less: Allowance for credit losses (12,880) ----------- Total non interest-earning assets 1,630,449 TOTAL ASSETS $19,461,528 ----------- Liabilities and stockholders' equity Interest-bearing liabilities: Checking, money market accounts & savings $ 3,422,415 $ 121,222 3.54% Time deposits 2,326,219 119,942 5.16% Customer repurchase agreements 560,958 20,499 3.65% Short-term borrowings 214,808 15,699 7.31% ----------- ----------- ----- Total interest bearing liabilities 6,524,400 277,362 4.25% Noninterest-bearing funding sources: Noninterest-bearing deposits 808,391 Subscriptions 3,937,919 ----------- Total noninterest-bearing funding sources 4,746,310 ----------- Total funding sources 11,270,710 Other liabilities 67,965 Total liabilities ----------- 11,338,675 Stockholders' equity 8,122,853 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $19,461,528 - ----------- ----------- Net interest income $ 733,226 ----------- Net interest spread 1.42% Net interest margin 4.11%
Provision for Credit Losses The provision for credit losses represents the expense recognized to fund the allowance for credit losses. This amount is based on many factors which reflect management's assessment of the risk in its loan portfolio. Those factors include economic conditions and trends, the value and adequacy of collateral, volume and mix of the portfolio, performance of the portfolio, internal loan processes and capital adequacy of the Company and Bank. During the first year of operation, management has elected to maintain a reserve of 1% of outstanding loans. Based principally on current economic conditions, perceived asset quality and a strong capital position, the allowance is believed to be adequate. During 1999, as the portfolio grows and other determining factors become more relevant, management will employ a comprehensive review process to maintain the adequacy of the allowance. The present allowance is at less than 1% of outstanding loans because no provision is being made for $4 million in participation loans held by the Company. These loans, because of collateral considerations and underlying guarantees, are considered to be of minimal risk and therefore, no provision has been made for them. Noninterest Income Noninterest income is exclusively from Bank operations and represents primarily service charge income and fees on deposit relationships. This source of income, at $22,779, was not a significant factor in 1998, however, as the account base grows and the Bank matures and finds additional sources of fee income non interest income will be a major contributor to the overall profitability of the Company. Noninterest Expense Non interest expenses of $1,991,662 are characterized principally by expenses related to the start of the Company and Bank. All organization and start up costs associated with the Company and Bank have been expensed. These include legal, filing, and offering expense of the Company and filing and organization expense of the Bank plus salaries, start up supplies, advertising and customer conversion costs. A significant noninterest expense item is salaries and benefits at $1,087,236. The organizers determined that it was necessary to bring quality people to the Bank early and build a staff for growth. This was done and the staff is characterized by banking professionals who are experienced, energetic and known to the community. Through these people it is expected that the Company and Bank can realize its goal of building a strong profitable community bank in Montgomery County. A breakdown of other noninterest expenses is in the income statement and Note 9 to the Consolidated Financial Statements. ASSET QUALITY In its lending activities, the Bank seeks to develop sound credits with customers who will grow with the Bank. There has not been an effort to rapidly build the portfolio and earnings at the sacrifice of asset quality. This is evidenced by the level of outstanding loans which is below management's initial target. The philosophy of seeking quality credits while possibly forgoing income opportunities will continue. At year end the Bank had no loans delinquent beyond thirty days and no loans which management considered impaired. Nevertheless, as a reserve against potential unidentified quality problems in the portfolio, an allowance for credit losses has been provided at 1% of outstanding loans at the Bank level and a lesser amount for loans held by the Company as loan participations. No part of the allowance has been allocated to any individual loan or category of loans. During the coming year, as the portfolio grows and becomes more diversified, the Bank will implement a comprehensive evaluation process to assess the allowance. Based on its knowledge of the portfolio and current economic conditions, management believes that as of December 31, 1998, the allowance is adequate to absorb reasonably anticipated losses. The allowance maintained by the Company is less than 1% of total loans because no allowance is associated with $4 million of participation loans. These loans are well secured and have a discretionary "put" feature back to the originating bank. The activity in the allowance for credit losses is shown in the following schedule: Allowance for credit losses 1998 ----- Balance at beginning of year $ --- Provision for credit losses 163,800 Loan charged off --- Recoveries ----- ----- Balance at end of year $163,800 -------- Other earning assets of the Company include primarily US Treasury and Agency securities with maturities not exceeding four years, except mortgage pass through securities with average expected lives of less than four but final maturities of up to thirty years. Federal funds sold also represent a significant earning asset. Funds are sold, on an unsecured basis, only to highly rated banks, in limited amounts in the aggregate and in limited amounts to any one bank individually. LIQUIDITY MANAGEMENT Liquidity is a measure of the Bank's ability to meet the demands required for the funding of loans and to meet depositors requirements for use of their funds. At EagleBank, sources of liquidity are made up of cash balances, due from banks, federal funds sold and short term securities. There are other sources of liquidity which at this time are not relied on by the Bank but as the Bank matures those sources will also be considered for liquidity. Because of the start up nature of the Bank, with a strong capital base, excellent deposit growth and slow loan growth, the liquidity position is strong. At year end, under the Bank's liquidity formula, it had $11.5 million of liquidity representing 26% of total Bank assets. The continued strong growth in deposits with sluggish loan growth and level interest rates will result in a high liquidity position. While it is desirable to be liquid, it has the effect of a lower interest margin as funds are not invested in loans but in short term investments which generally carry a lower yield. INTEREST RATE RISK MANAGEMENT Banks and other financial institutions are dependent upon net interest income, the difference between interest earned on interest earning assets and interest paid on interest bearing liabilities. In typical interest rate environments net interest income is maximized with longer maturing, higher yielding assets, being funded by lower yielding short term funds. This composition of assets and liabilities is profitable in stable or declining interest rate periods, however, when interest rates trend upward there can be a significant adverse impact on interest income. The current interest rate environment is stable with indications of declining rates. Management is, therefore, managing its rate risk with a negative GAP wherein repricable liabilities exceed repricable assets in the short term. GAP, a measure of the difference in volume between interest bearing assets and interest bearing liabilities, is a means of monitoring the sensitivity of a financial institution to changes in interest rates. The chart below provides an indicator of the rate sensitivity of the Company. A negative GAP indicates the degree to which the volume of repricable liabilities exceeds repricable assets in particular time periods. The Company has a negative GAP of 6.31% out to three months and a negative GAP out to twelve months. If interest rate were to rise, the Company's interest income and margin may be adversely effected. Management has carefully considered its strategy to maximize interest income by reviewing interest rate levels, economic indicators and features of some of its assets. These factors have been thoroughly discussed with the Board of Directors ALCO (Asset Liability Committee) and management believes that current strategies are appropriate to current economic and interest rate trends. The negative GAP is carefully monitored and will be adjusted as conditions recommend.
(in thousands) 0-3 Over 3-6 Over 6-12 Over Months Months Months One Year Total Interest earning assets: Federal funds sold $ 5,429 $ -- $ -- $ -- $ 5,429 Investments 9,371 150 4,121 8,928 22,570 Loans 5,643 119 4,698 9,688 20,148 -------- -------- -------- -------- -------- Total interest earning assets 20,443 269 8,819 18,616 48,147 -------- -------- -------- -------- -------- Interest-bearing liabilities: NOW accounts 3,664 -- -- -- 3,664 Money market & savings 16,902 159 -- -- 17,061 Time deposits 617 291 7,935 966 9,809 Customer repurchase agreements 2,305 - - - 2,305 -------- -------- -------- -------- -------- Total interest bearing liabilities 23,488 450 7,935 966 32,839 CUMULATIVE GAP $ (3,045) $ (3,226) $ (2,342) $ 15,308 $ 15,308 ======== ======== ======== ======== ======== CUMULATIVE GAP TO TOTAL ASSETS (6.31)% (6.20)% (4.50)% 29.42% 29.42%
CAPITAL RESOURCES AND ADEQUACY The Company was successful in raising $16.5 million in capital to fund the Bank and other activities consistent with a bank holding company. The Company originally provided to the Bank $7.75 million in capital and subsequently added an additional $500 thousand during 1998 and in early 1999 increased its capital contribution to a total of $9.25 million. At December 31, 1998, the Bank exclusive of the Company, had a capital ratio of 32.0% well above regulatory guidelines. The Bank's Tier 1 risk based capital was 19.1% at December 31, 1998. The regulatory guideline is an 8% ratio and if an institution has a Tier 1 risk based ratio of at least 10% it is considered well capitalized. The Bank is currently well capitalized and the Company continues to have available as much as $7 million in additional capital to provide the Bank as it grows. MARKET FOR COMMON STOCK Eagle Bancorp, Inc.'s common stock is traded inactively in the over the counter market and quoted on the Bulletin Board under the symbol EGBN. The following table sets forth the range of bid prices for the Company's stock during the two quarters of 1998, when the stock was available to trade. The Company has been advised, and the reader should be aware, that the $15.00 high in the 4th quarter, was a trade involving an odd lot of very few shares. The next highest bid during the 4th quarter was $10.50. The bid information was obtained from a market maker in the common stock, and reflects inter-dealer prices, without retail mark-up, mark-down or commission, and may not reflect actual transactions. Common Stock-EGBN 1998 High Low ---- --- 3rd quarter $10.50 $10.00 4th quarter $15.00 $10.00 EARNINGS PER SHARE Generally accepted accounting principles reporting requires that earnings per share be stated based on the average number of shares outstanding. The financial statements show a loss of $1.61 per share, which is based on a weighted average number of shares outstanding of 867,945. The average number of shares is computed for the entire year while the actual shares of 1,650,000, were not considered issued until June 22, 1998, the date the Company broke escrow. Had the issued number of share been outstanding for the full year, the loss per share would have been shown at about half the reported amount. YEAR 2000 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 operations of the Company. The Company enjoys certain advantages as it addresses year 2000 issues. It 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 outsourced and the Bank is carefully reviewing its service provider to assure that it is meeting its schedule for full compliance. Year 2000 was a major consideration in the selection of the Bank's data processing provider and was foremost in its consideration of other acquisitions of systems and applications. At the same time the Bank is actively testing its systems and requiring its vendors to show evidence of readiness for Y2K. As a result of the base from which the Company is commencing its operations, the Company believes that incremental costs related to Y2K compliance are not expected to be material to the financial performance of the Company. Because all systems and services are new and were purchased Y2K compliant, the estimated cost of testing and reviewing is not expected to exceed $25,000.00. The Bank is also working with customers to increase awareness in their businesses of the need for and importance of Y2K attention. The Board of Directors of the Bank is active in its oversight of Y2K preparedness 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, are based on a number of assumptions and on statements made by third parties, involve events and actions which may be beyond the control of the Company, and are subject to uncertainty. The Company also is not able to predict the effects, if any, on the Company, financial markets or society in general of the public's reaction to Y2K. ITEM 7. Financial Statements. The audited financial statements for the Company for the year ended December 31, 1998 are included herewith. INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Eagle Bancorp, Inc. Bethesda, Maryland We have audited the accompanying consolidated balance sheets of Eagle Bancorp, Inc. as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the year ended December 31, 1998 and for the period from October 28, 1997 (date of inception) to December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Eagle Bancorp, Inc. as of December 31, 1998 and 1997, and the consolidated results of its operations and cash flows for the year ended December 31, 1998 and for the period from October 28, 1997 (date of inception) to December 31, 1997, in conformity with generally accepted accounting principles. /s/ Stegman & Company Baltimore, Maryland January 29, 1999
EAGLE BANCORP, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997 ASSETS 1998 1997 ------------ ---------- Cash and due from banks $ 1,292,006 $ 7,214 Federal funds sold 5,429,047 - Investment securities available for sale 22,569,699 - Loans (net of allowance for credit losses of $163,800) 19,984,124 - Premises and equipment, net 2,396,075 3,832 Other assets 368,232 - ---------- -------- TOTAL ASSETS $52,039,183 $ 11,046 =========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposits: Noninterest-bearing demand $ 4,096,392 $ - Interest-bearing transaction 3,664,012 - Savings and money market 17,061,269 - Time, $100,000 or more 5,621,543 - Other time 4,187,677 - ---------- -------- Total deposits 34,630,893 - Customer repurchase agreements 2,304,694 - Short-term borrowings - 130,000 Other liabilities 154,101 43,249 ---------- -------- Total liabilities 37,089,688 173,249 ---------- -------- STOCKHOLDERS' EQUITY: Common stock, $.01 par value; authorized 5,000,000 authorized, 1,650,000 issued (1998) no shares issued (1997) 16,500 - Surplus 16,483,500 - Accumulated deficit (1,561,660) (162,203) Accumulated other comprehensive income 11,155 - ---------- -------- Total stockholders' equity 14,949,495 (162,203) ---------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $52,039,183 $ 11,046 ========== ========
See notes to consolidated financial statements.
EAGLE BANCORP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE PERIOD FROM OCTOBER 28, 1997 (DATE OF INCEPTION)TO DECEMBER 31, 1997 1998 1997 ---- ---- INTEREST INCOME: Interest and fees on loans $ 269,265 $ - Taxable interest and dividends on investment securities 621,985 - Interest on federal funds sold and securities purchased under agreement to resell 119,338 - ---------- -------- Total interest income 1,010,588 - ---------- -------- INTEREST EXPENSE: Interest on deposits 241,164 - Interest on customer repurchase agreements 20,499 - Interest on short-term borrowings 15,699 1,056 ---------- -------- Total interest expense 277,362 1,056 ---------- -------- NET INTEREST INCOME 733,226 (1,056) PROVISION FOR CREDIT LOSSES 163,800 - ---------- -------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 569,426 (1,056) ---------- -------- NONINTEREST INCOME: Service charges on deposit accounts 9,177 - Other income 13,602 - ---------- -------- Total noninterest income 22,779 - ---------- -------- NONINTEREST EXPENSES: Salaries and employee benefits 1,087,236 58,270 Premises and equipment expenses 286,424 - Stationery, printing and supplies 110,971 348 Professional fees 100,077 77,892 Director and committee fees 54,200 - Outside data processing 68,460 - Other expenses 284,294 24,637 ---------- -------- Total noninterest expenses 1,991,662 161,147 ---------- -------- NET LOSS BEFORE INCOME TAX BENEFIT (1,399,457) (162,203) INCOME TAX BENEFIT - - ---------- -------- NET LOSS $(1,399,457) $(162,203) ========== ======== LOSS PER SHARE: Basic $(1.61) $.00 Diluted $(1.61) $.00 See notes to consolidated financial statements.
EAGLE BANCORP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE PERIOD FROM OCTOBER 28, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997 Accumulated Other Total Common Accumulated Comprehensive Stockholders' Stock Surplus Deficit Income Equity ----- ------- ------- ------ ------ Balances at October 28, 1997 $ - $ - $ - $ - $ - Net loss - - (162,203) - (162,203) --------- --------- ----------- --------- --------- Balances at December 31, 1997 - - (162,203) - (162,203) Issuance of common stock 16,500 16,483,500 - - 16,500,000 Net loss - - (1,399,457) - (1,399,457) Other comprehensive income - Unrealized gain on investment securities available for sale - - - 11,155 11,155 -------- Total other comprehensive income (loss) - - - - (1,388,302) --------- --------- ----------- --------- ----------- Balances at December 31, 1998 $16,500 $16,483,500 $(1,561,660) $11,155 $14,949,495 ========= ========== =========== ========= ===========
See notes to consolidated financial statements.
EAGLE BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE PERIOD FROM OCTOBER 28, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997 1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(1,399,457) $(162,203) Adjustments to reconcile net loss to net cash used by operating activities: Provision for credit losses 163,800 - Depreciation and amortization 58,895 348 Increase in accrued interest and other assets (368,232) - Increase in accrued expenses and other liabilities 110,852 43,249 ----------- --------- Net cash used in operating activities (1,434,142) (118,606) ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of available for sale investment securities (85,904,444) - Proceeds from maturities of available for sale securities 63,345,900 - Increase in federal funds sold (5,429,047) - Net increase in loans (20,147,924) - Bank premises and equipment acquired (2,451,138) (4,180) ----------- --------- Net cash used in investing activities (50,586,653) (4,180) ----------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in deposits 34,630,893 - Increase in customer repurchase agreements 2,304,694 - (Decrease) increase in short-term borrowings (130,000) 130,000 Issuance of common stock 16,500,000 - ----------- --------- Net cash provided by financing activities 53,305,587 130,000 ----------- --------- NET INCREASE IN CASH 1,284,792 7,214 CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 7,214 - ----------- --------- CASH AND DUE FROM BANKS AT END OF PERIOD $ 1,292,006 $ 7,214 ========== ======== Supplemental cash flows information: Interest paid $222,110 $ 1,056 ========== ======== See notes to consolidated financial statements.
EAGLE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE PERIOD FROM OCTOBER 28, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include the accounts of Eagle Bancorp, Inc. (the "Company") and its subsidiary, EagleBank (the "Bank") with all significant intercompany transactions eliminated. The investment in subsidiary is recorded on the Company's books on the basis of its equity in the net assets of the subsidiary. The accounting and reporting policies of the Company conform to generally accepted accounting principles and to general practices in the banking industry. Nature of Operations The Company, through its bank subsidiary, provides domestic financial services primarily in Montgomery County, Maryland. The primary financial services include real estate, commercial and consumer lending, as well as traditional demand deposits and savings products. From October 28, 1997 until July 20, 1998, when the Bank received regulatory approval, the Company was considered a development stage enterprise. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Investment Securities The Company and Bank have elected to account for all investment securities as available for sale. Those securities are carried at estimated fair value. Unrealized gains and losses on investment securities available for sale, net of related deferred income taxes, are recognized as direct increases or decreases in stockholders' equity. The cost of investment securities sold is determined using the specific identification method. Loans Loans are stated at the principal amount outstanding, net of origination and costs 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 will consider loans impaired when, based on current information, it is probable that the Company will not collect all principal and interest payments according to contractual terms. Generally, loans are considered impaired once principal or interest payments become ninety days or more past due and they are placed on nonaccrual. Management also will consider 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, the Year 2000 issue, 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. Management believes that the allowance for credit losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, and independent consultants engaged by the Bank, periodically review the Bank's loan portfolio and allowance for credit losses. Such review may result in recognition of additions to the allowance based on their judgments of information available to them at the time of their examination. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization computed using the straight-line method. Premises and equipment are depreciated over the useful lives of the assets, except for leasehold improvements which are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. The costs of major renewals and betterments are capitalized, while the costs of ordinary maintenance and repairs are expensed as incurred. Income Taxes The Company uses the liability method of accounting for income taxes. Under the liability method, deferred-tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities (i.e., temporary differences) and are measured at the enacted rates that will be in effect when these differences reverse. Deferred income taxes will be recognized when it is deemed more likely than not that the benefits of such deferred income taxes will be realized, accordingly, no deferred income taxes or income tax benefits have been recorded by the Company. Net Income Per Common Share Basic net income per common share is computed by dividing net income available to common shareholders 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 shareholders by the weighted average number of common shares outstanding during the year including any potential dilutive effects of common stock equivalents, such as options and warrants. New Accounting Standards In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS 125), which provides new accounting and reporting standards for sales, securitizations, and servicing of receivables and other financial assets and extinguishments of liabilities. SFAS 125 is effective for transactions occurring after December 31, 1996, except for the provisions relating to repurchase agreements, securities lending and other similar transactions and pledged collateral, which have been delayed until after December 31, 1997 by SFAS 127, Deferral of the Effective Date of Certain Provisions of SFAS Statement No. 125, an amendment of SFAS 125. Adoption of SFAS 125 was not material; SFAS 127 was adopted as required in 1998 and did not have a material financial impact. In June 1997, Statement of Financial Accounting Standards No. 130 Reporting Comprehensive Income (SFAS 130), was issued and establishes standards for reporting and displaying comprehensive income and its components. SFAS 130 requires comprehensive income and its components, as recognized under the accounting standard, to be displayed in a financial statement with the same prominence as other financial statements. The Company adopted the standard, as required, beginning in 1998. Adoption of this disclosure requirement did not have a material impact on the Company. Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS 131), also issued in June 1997, establishes new standards for reporting information about operating segments in annual and interim financial statements. The standard also requires descriptive information about the way the operating segments are determined, the products and services provided by the segments, and the nature of differences between reportable segment measurements and those used for the consolidated enterprise. This standard is effective for years beginning after December 15, 1997. Adoption in interim financial statements is not required until the year after initial adoption, however, comparative prior period information is required. Operating segments are defined under the standard based on the availability and utilization of discrete financial information as well as the necessity for this discrete financial information to meet certain quantitative thresholds. Management believes that it has no components that qualify for reporting purposes as an operating segment under SFAS 131 for the year ended December 31, 1998. 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. As a start-up bank EagleBank had no reserve requirements during 1998 but did maintain balances with the Federal Reserve in order to conduct business and partially compensate for services. 3. INVESTMENTS AVAILABLE FOR SALE The amortized cost and estimated fair values of investments available for sale at December 31, 1998 are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- U.S. Treasury securities $ 1,517,622 $ - $(6,372) $ 1,511,250 U.S. Government Agency Securities 20,538,750 14,542 - 20,553,292 Federal Reserve Bank stock 247,500 - - 247,500 Other equity investment securities 254,672 2,985 - 257,657 ------- ----- ------- $22,558,544 $17,527 $(6,372) $22,569,699 =========== ======= ======= ===========
The amortized cost and estimated fair values of debt securities available for sale at December 31, 1998 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.
Available for Sale ------------------ Amortized Fair Cost Value ---- ----- Amounts maturing: One year or less $12,578,407 $12,564,259 After one year through five years 8,533,763 8,560,861 After five years through ten years 1,191,702 1,186,922 Investments in other equity securities 254,672 257,657 $22,558,544 $22,569,699 =========== ===========
There were no gains or losses from the sale of any investment securities during 1998. The weighted average yield of the investment portfolio at December 31, 1998 is as follows: One year or less 4.98% After one year through five years 5.57% After five years through ten years 6.50% Total weighted average yield exclusive of equity securities 5.29% All investment securities, other than equity securities, are fixed rate securities. 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES The Bank makes loans to customers primarily in Montgomery County, Maryland. A substantial portion of the Bank's loan portfolio consists of loans to businesses secured by real estate and other business assets. Loans, net of amortized deferred fees, are summarized by type as follows: Commercial $ 6,983,646 Real estate 11,832,525 Individual 1,323,620 Other 8,133 ---------- Total loans 20,147,924 Less allowance for loan losses 163,800 ---------- Loans, net $19,984,124 ========== Activity in the allowance for credit losses for the year ended December 31, 1998 is shown below: Balance at beginning of year $ - Provision for credit losses 163,800 Loan charge-offs - Loan recoveries - --------- Balance at end of year $163,800 ========= There were no loans which management considered impaired as of December 31, 1998 and for the year then ended. 5. PREMISES AND EQUIPMENT Premises and equipment include the following:
December 31, ------------ 1998 1997 ---- ---- Leasehold improvements $1,208,181 $ - Furniture and equipment 1,246,789 4,180 Less accumulated depreciation and amortization (58,895) (348) ----------- ------ Total premises and equipment $2,396,075 $3,832 =========== ======
The Company occupies banking and office space in three locations under noncancellable lease arrangements accounted for as operating leases. The initial lease periods range from 8 to 10 years and provide for one or more 5-year renewal options. The leases provide for percentage annual rent escalations and require that the lessee pay certain operating expenses applicable to the leased space. Rent expense applicable to operating leases amounted to $178,560 in 1998. At December 31, 1998, future minimum lease payments under noncancellable operating leases having an initial term in excess of one year are as follows: Years ending December 31: 1999 $ 234,428 2000 235,570 2001 236,623 2002 240,565 2003 241,647 Thereafter 605,625 ----------- Total minimum lease payments $1,794,458 =========== 6. DEPOSITS Certificates of deposit in amounts of $100,000 or more and their remaining maturities at December 31, 1998 are as follows: Three months or less $ 471,567 More than three months through six months 1,053,500 More than six months through twelve months 3,289,577 Over twelve months 806,899 ---------- $5,621,543 ========== Interest expense on deposits for the year ended December 31, 1998 is as follows: Interest-bearing transaction $ 23,694 Savings and money market 97,547 Time, $100,000 or more 64,726 Other time 55,197 $241,164 7. CUSTOMER REPURCHASE AGREEMENTS Repurchase agreements are securities sold to the Bank's customers, at the customer's request, under a continuing "rollover" contract that matures in one business day. The underlying securities sold are U.S. Treasury notes or Federal agencies which are segregated in the Bank's Federal Reserve Bank account from the Company's other investment securities. The following table presents certain information for short-term borrowings:
Amount Rate ------ ---- Securities sold under repurchase agreements: At year-end $2,304,694 2.72%-4.41% Average for the year 560,958 3.58% Maximum month-end balance 5,505,264 2.72%-4.41%
The Bank has commitments from correspondent banks under which it can purchase up to $1,240,000 in federal funds and secured reverse repurchase agreements on a short-term basis. No borrowings were outstanding under these arrangements during 1998. 8. SHORT-TERM BORROWINGS During the period of organization, the organizers made direct loans and guaranteed a bank loan to the Company in the aggregate of $825,000 (direct loans $475,000, bank loan $350,000) including $130,000 in organizer direct loans outstanding on December 31, 1997. All loans were at prime and were paid in full on June 22, 1998 including interest costs of $15,699 in 1998 and $1,056 in 1997. 9. OTHER EXPENSE Other expense included in the Consolidated Statements of Operations for the year ended December 31, 1998 includes the following: Advertising $ 40,409 Customer checks 22,920 Insurance 51,191 Telephone 31,006 Other 138,768 -------- Total other expenses $284,294 ======== 10. INCOME TAXES Federal and state income tax expense (benefit) consist of the following:
Periods Ended December 31, -------------------------- 1998 1997 ---- ---- Current federal income tax $ - $ - Current state income tax - - Deferred federal income tax expense (benefit) - - Deferred state income tax expense (benefit) - - --------- ---------- Total income tax expense (benefit) $ - $ - ========= ==========
The following chart is a summary of the tax effect of temporary differences that give rise to significant portions of deferred tax assets:
Periods Ended December 31, -------------------------- 1998 1997 ---- ---- Deferred tax assets: Allowance for loan losses $ 63,260 $ - Deferred loan fees and costs 16,070 - Net operating loss carryforwards 531,534 25,240 -------- ---------- Gross deferred tax assets 610,864 25,240 Less valuation allowance (558,288) (25,240) -------- ---------- Total deferred tax assets 52,576 - -------- ---------- Deferred tax liabilities: Tax on unrealized gain on securities available for sale (4,308) - Premises and equipment (48,268) - Net deferred income taxes $ - $ - ========== ========= A reconciliation of the statutory federal income tax rate to the Company's effective income tax rate follows: Periods Ended December 31, -------------------------- 1998 1997 ---- ---- Statutory federal income tax rate 34.0% 34.0% State income taxes, net of federal income tax benefit 4.6 4.6 Valuation allowance (38.6) (38.6) -------- ---------- Effective tax rates .0% .0% ======== ==========
At December 31, 1998, the Company had approximately $1,376,000 in tax loss carryforwards, which expire in 2017 and 2018. Realization depends on generating sufficient taxable income before the expiration of the loss carryforwards. The amount of loss carryforward available for any one year may be limited if the Company is subject to the alternative minimum tax. 11. EARNINGS PER COMMON SHARE The calculation of net income per common share for the year ended December 31, 1998 was based on an effective stock date as of June 22, 1998 as follows: Basic: Net loss (allocable to common stockholders) $1,399,457 Average common shares outstanding 867,945 Basic net loss per share $(1.61) Basic and diluted earnings per share are the same for the year ended December 31, 1998 because the inclusion of any common stock equivalents would have been antidilutive. 12. RELATED PARTY TRANSACTIONS Certain directors and executive officers have loan transactions with the Company. Such loans were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with outsiders. The following schedule summarizes changes in amounts of loans outstanding, both direct and indirect, to these persons during 1998. Balance at January 1 $ - Additions 250,691 Repayments 21,254 -------- Balance at December 31 $229,437 ======== 13. STOCK OPTION PLAN Pending stockholder approval, the Board of Directors has adopted the Eagle Bancorp, Inc. 1998 Stock Option Plan (the "Plan"). The Plan provides for the granting of incentive and nonqualifying options to selected key employees and members of the Board on a periodic basis. Options for not more than 247,500 shares of common stock may currently be granted under the Plan. As of December 31, 1998, 133,000 incentive and nonqualifying options have been granted. The exercise of these options is subject to stockholder approval. 14. LITIGATION In the normal course of business, the Company may become involved in litigation arising from banking, financial, and other activities. Management, after consultation with legal counsel, does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on the Company's financial condition, operating results or liquidity. 15. COMMITMENTS AND CONTINGENCIES In the normal course of business, the Company incurs certain commitments and contingent liabilities, that are not reflected in the accompanying consolidated financial statements. These off balance sheet items include various commitments to extend credit and standby letters of credit. No material losses are expected to result from these transactions. Outstanding loan commitments and lines and letters of credit at December 31, 1998 are as follows: Loan commitments $1,675,000 Unused lines of credit 5,784,000 Letters of credit 819,000 Because most of the Company's business activity is with customers located in the Washington, D.C. 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. 16. REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain amounts and ratios (set forth in the table below) of total and 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, 1998, that the Bank meets all capital adequacy requirements to which it is subject. The actual capital amounts and ratios for the Bank are presented in the table below:
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------ ----------------- ----------------- In thousands Amount Ratio Ratio Ratio ------ ----- ----- ----- As of December 31, 1998: Total capital (to risk-weighted assets) - EagleBank $6,921 19.1% 8.0% 10.0% Tier I capital (to risk weighted assets) - EagleBank 6,921 19.1% 4.0% 6.0% Tier I capital (to average assets) - EagleBank 3,394 32.0% 3.0% 5.0% 17. PARENT COMPANY FINANCIAL INFORMATION Condensed financial information for Eagle Bancorp, Inc. (Parent Company only) is as follows: CONDENSED BALANCE SHEETS DECEMBER 31, 1998 AND 1997 1998 1997 ---- ---- ASSETS: Cash $ 76,427 $ 7,214 Investment securities available for sale 3,194,982 - Loans, net of allowance for credit losses of $6,800 4,682,800 - Investment in subsidiary 6,921,199 - Other assets 84,106 3,832 ------------ -------- TOTAL ASSETS $ 14,959,514 $ 11,046 ============ ======== LIABILITIES: Accounts payable $ 9,147 $ 43,249 Short-term borrowing - 130,000 ------------ -------- Total liabilities 9,147 173,249 ------------ -------- STOCKHOLDERS' EQUITY: Common stock 16,500 - Surplus 16,483,500 - Accumulated deficit (1,561,660) (162,203) Accumulated other comprehensive income 12,027 - ------------ -------- Total stockholders' equity 14,950,367 (162,203) ------------ -------- TOTAL LIABILITIES AND STOCK- HOLDERS' EQUITY $14,959,514 $ 11,046 ============ ========
CONDENSED STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE PERIOD FROM OCTOBER 28, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997 1998 1997 ---- ---- INCOME - Interest income $ 450,387 $ - ------------ -------- EXPENSES: Salaries and employee benefits 226,475 58,270 Interest expense 15,699 1,056 Rent expense 52,721 - Legal and professional 83,755 77,892 Directors' fees 21,500 - Other 120,893 24,985 ------------ -------- Total expenses 521,043 162,203 ------------ -------- LOSS BEFORE INCOME TAX BENEFIT AND EQUITY IN UNDISTRIBUTED LOSS OF SUBSIDIARY (70,656) (162,203) INCOME TAX BENEFIT - - ------------ -------- INCOME BEFORE EQUITY IN UNDISTRIBUTED LOSS OF SUBSIDIARY (70,656) (162,203) EQUITY IN UNDISTRIBUTED LOSS OF SUBSIDIARY (1,328,801) - ------------ -------- NET LOSS $(1,399,457) $(162,203) ============ ========
CONDENSED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE PERIOD FROM OCTOBER 28, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997 1998 1997 ---- ---- NET LOSS $(1,399,457) $(162,203) ADJUSTMENT TO RECONCILE NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Provision for credit losses 6,800 - Depreciation - 348 Equity in undistributed loss of subsidiary 1,328,801 - Increase in other assets (80,274) - (Decrease) increase in accounts payable (34,102) 43,249 ------------ -------- Net cash used in operating activities (178,232) (118,606) ------------ -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of equipment - (4,180) Net increase in loans (4,689,600) - Net increase in investment securities available for sale (3,182,955) - Investment in subsidiary (8,250,000) - ------------ -------- Net cash used in investing activities (16,122,555) (4,180) ------------ -------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock 16,500,000 - Short-term borrowings (130,000) 130,000 ------------ -------- Net cash provided by financing activities 16,370,000 130,000 ------------ -------- NET INCREASE IN CASH 69,213 7,214 CASH AT BEGINNING OF PERIOD 7,214 - ------------ -------- CASH AT END OF PERIOD $ 76,427 $ 7,214 ============ ========
ITEM 8. Changes in and Disagreements with Accountants. None. Part III ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act. The Company's Bylaws provide that the number of Directors of the Company shall be fixed from time to time by the Board of Directors but shall not be less than 3 nor more than 25. The Board has fixed the current number of Directors at 4. The Bylaws may be amended by action of the Board of Directors. All of the Company's current Directors were duly elected or appointed to the Board and will continue to serve as Directors until their successors are elected and qualified. Set forth below is a description of the principal occupation and business experience of each of the directors and executive officers of the Company. Except as expressly indicated below, each person has been engaged in his principal occupation for at least five years. Leonard L. Abel. Until retiring in 1994, Mr. Abel was partner-in-charge of the certified public accounting firm of Kershenbaum, Abel, Kernus and Wychulis, Rockville, Maryland with which he served for forty five years. From October, 1996, until resigning in September 1997, Mr. Abel was a member of the Board of Directors of F&M National Corporation (NYSE) and its wholly owned subsidiary, F&M Bank - Allegiance, Bethesda, Maryland, and prior to that time was Chairman of the Board of Allegiance Bank, N.A. (collectively with F&M Bank - Allegiance, "Allegiance") and its holding company Allegiance Banc Corporation, from their organization until their acquisition by F&M National Corporation. Mr. Abel was also Chairman of the Board of Directors of Central National Bank of Maryland from 1968 until its acquisition in 1985 by Citizens Bank of Maryland (now Crestar Bank). Eugene F. Ford, Sr. Mr. Ford is engaged in the business of property management and development as Chairman of Mid-City Financial Corporation, an apartment developer, of which he was also president until 1995. He is Chairman of the Community Preservation and Development Corporation, a non-profit organization in the business of preserving public purpose housing complexes and providing social program support for residents thereof. Mr. Ford was Chairman of Second National Federal Savings Bank, Salisbury, Maryland, a federal savings association closed by the Office of Thrift Supervision in 1992, and its holding company. Through his ownership of Mid-City Financial, Mr. Ford is the largest owner of assisted housing units in Maryland and the Washington metropolitan area. Mr. Ford has received numerous awards for his work in the housing development field. William A. Koier. Mr. Koier is a private investor involved in the ownership, development and management of real estate properties, as well as investment in debt and equity instruments. Mr. Koier served as a director of Allegiance 1989 until October 1997, and Allegiance Banc Corporation from 1989 until its acquisition. He also served as a director of Central National Bank of Maryland until its acquisition by Citizens Bank of Maryland (now Crestar Bank). Ronald D. Paul. Mr. Paul is President of Ronald D. Paul Companies, which is engaged in the business of real estate development and management activities. Mr. Paul is also active in private investments. Mr. Paul was a director of Allegiance from 1990 until September 1997, and a director of Allegiance Banc Corporation from 1990 until its acquisition, including serving as Vice Chairman of the Board of Directors from 1995. Mr. Paul is also active in various charitable organizations, including serving as Vive Chairman of the Board of Directors of the National Kidney Foundation from 1996 to 1997. Thomas D. Murphy. Mr. Murphy, the Executive Vice President - Chief Operating Officer of the Bank, served at Allegiance from September 1994, including as Executive Vice President and Chief Operating Officer from December 1995 until November 1997. Prior to his service at Allegiance, he served in the same position at First Montgomery Bank from August 1991 until its acquisition by Sandy Spring National Bank of Maryland in December 1993, and he served as a Vice President of that organization until September 1994. Mr. Murphy has 28 years experience in the commercial banking industry. Susan G. Riel. Ms. Riel, Senior Vice President - Senior Operations Officer of the Bank., previously served as Executive Vice President - Chief Operating Officer of Columbia First Bank, FSB from 1989 until that institution's acquisition by First Union Bancorp in 1995. Ms. Riel has over 22 years of experience in the commercial banking industry. Wilmer L. Tinley. Mr. Tinley, Senior Vice President and Chief financial Officer of the Company and the Bank since June 1998, operated his own tax, accounting and business services company from 1992 through 1998. Prior to that time, he served as the president and Chief executive officer of Montgomery National Bank (later Allegiance) from its organization in 1987, until 1992. H. L. Ward. Mr. Ward, the President and Chief Executive Officer of the Bank, was President and Chief Executive Officer of Allegiance from December 1995 to November 1997. Prior to that time he served in various executive lending positions at Allegiance and its former sister bank Prince George's National Bank, including Executive Vice President - Chief Lending Officer, from 1992 to 1995. Mr. Ward has over 28 years of experience in the commercial banking and real estate development and finance industries. Compliance with Section 16(a) of the Securities Exchange Act. Not applicable ITEM 10. Executive Compensation. The following table sets forth a comprehensive overview of the compensation for Mr. Paul, the President of the Company, and executive officer of the Company who received total salary and bonus of $100,000 or more during the fiscal year ended December 31, 1998.
SUMMARY COMPENSATION TABLE Long-term Compensation Annual Compensation Awards --------------------------------------------- ------------------ Name and Principal Securities All Other Position Year Salary Bonus Underlying Compensation($) Options - ------------------------- -------------- -------------- --------------- ------------------ ------------------ Ronald D. Paul, 1998 $18,000(1) $0 40,000(2) $0 President 1997 $0 $0 0 $0 H.L. Ward, President 1998 $149,212 $16,000 7,500 $10,900(3) and Chief Executive 1997 $26,196 $0 0 $1,200(4) Officer of the Bank, Executive Vice President of the Company Thomas D. Murphy, 1998 $122,151 $11,555 6,000 $9,126(5) Executive Vice 1997 23,615 $0 0 $1,000(4) President- Chief Operating Officer of the Bank - ------------------------- (1) Includes $16,500 of payments in lieu of director fees. (2) Mr. Paul's options are subject to shareholder approval at the Annual Meeting. Mr. Paul's options vest over a period of four years (3) Includes $7,200 car allowance, $2,500 insurance premiums, and $1,200 401(k) matching contribution. (4) Represents car allowance. (5) Includes $6,000 car allowance, $2,151 insurance premiums, $975 401(k) matching contribution.
OPTION GRANTS IN LAST FISCAL YEAR Percent of Total Number of Securities Options Granted to Underlying Options Employees in Fiscal Exercise Price Per Name Granted(1) Year Share Expiration Date ------------------------- ----------------------- ---------------------- ---------------- Ronald D. Paul 40,000 51.28% $10.00 December 2008 H.L. Ward 7,500 9.61% $10.00 December 2008 Thomas D. Murphy 6,000 7.69% $10.00 December 2008 - -------------------- (1) Mr. Paul's options are subject to the approval of the Option Plan at the Annual Meeting. Mr. Paul's options vest over a period of four years.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR AND OPTION VALUES Number of Securities Underlying Unexercised Value of Unexercised Options at December 31, In-The-Money Options Shares Acquired on 1998 at December 31, 1998 Name Exercise Value Realized Exercisable/Unexercisable Exercisable/Unexercisable(1) ------------------------- --------------- --------------------------- ------------------------ - -------------------- Thomas D. Murphy 0 $0 6,000/0 $6,000/$0 Ronald D. Paul 0 $0 0/40,000 $0/$40,000 H.L. Ward 0 $0 7,500/0 $7,500/$0 - -------------------- (1) Based on the average of the bid and asked prices for the Common Stock on December 31, 1998.
Employment Agreements. Each of Mr. Ward and Mr. Murphy has an employment agreement with the Company pursuant to which they serve as President and Chief Executive Officer of the Bank and Executive Vice President and Chief Operating Officer of the Bank, respectively. Mr. Ward,, pursuant to his agreement, which commenced as of October 1997 and runs until December 31, 2000, is entitled to an annual base salary of $160,000. He is also be entitled to a bonus, payable over three years, in the amount of $30,000, $750,000 of Bank paid life insurance (at standard rates), a $7,200 annual car allowance, warrants, exercisable for a 5 year term to purchase, at $10,.00 per share, 7,500 shares of Common Stock ("Warrants"), and participation in all other health, welfare, benefit, stock, option and bonus plans, if any, generally available to officers or employees of the Bank or the Company. Mr. Murphy, pursuant to his agreement, which commenced as of October 1997 and runs until October 20, 2000, is entitled to an annual base salary of $130,000. He is also entitled to a bonus, payable over three years, in the amount of $30,000, $600,000 of Bank paid life insurance (at standard rates), a $6,000 annual car allowance, and warrants to purchase 6,000 shares of Common Stock, and participation in all other health, welfare, benefit, stock, option and bonus plans, if any, generally available to officers or employees of the Bank or the Company. Employee Benefit Plans. The Bank provides a benefit program which includes health and dental insurance, life and long term and short term disability insurance and a 401(k) plan under which the Company makes matching contributions up to 3% of an employee's salary, for substantially all full time employees. The Company has also proposed the 1998 Stock Option Plan for approval by the shareholders at the Annual Meeting. Director Compensation. Mr. Paul, President of the Company and Chairman of the Board of Directors of the Bank, is entitled to receive an annual salary of $18,000 from the Company but does not receive regular director fees from the Company, and an annual payment of $18,000 in lieu of regular director fees from the Bank. Mr. Abel, the Chairman of the Board of Directors of the Company is entitled to receive an annual payment of $24,000 in lieu of regular director fees from the Company and the Bank. Each other director of the Company will receive a fee of $200 for each meeting of the Board of Directors attended, but will not receive any fee for committee meetings. Bank directors who are not employees receive fees of $200 per meeting of the Board or its committees, except for the Chairman of a committee, who receives $250. Directors of both the Company and the Bank will be eligible to receive grants of warrants under the Company's Option Plan, if approved at the Annual Meeting. Subject to shareholder approval, members of the Board of Directors of the Company were awarded Warrants to purchase shares of Common Stock as follows: Mr. Abel: 25,000 shares; Mr. Ford: - 10,000 shares; Mr. Koier: 20,000 shares. Mr. Paul has been granted subject to shareholder approval, incentive stock options to purchase 40,000 shares of common stock, vesting over four years. The exercise price of each Warrant and Mr. Paul's options is $10.00 per share, and they expire in December 2008. ITEM 11. Security Ownership of Certain Beneficial Owners and Management. Securities Ownership of Directors, Officers and Certain Beneficial Owners The following table sets forth certain information as of March 31, 1999 concerning the number and percentage of shares of the Company's Common Stock beneficially owned by its directors, nominees for director, executive officers the compensation of which is disclosed herein, and by its directors and all executive officers as a group, as well as information regarding each other person known by the Company to own in excess of 5% of the outstanding Common Stock. Except as otherwise indicated, all shares are owned directly, and the named person possesses sole voting and sole investment power with respect to all such shares. Except as set forth below, the Company knows of no other person or persons, who beneficially own in excess of 5% of the Company's Common Stock. Further, the Company is not aware of any arrangement which at a subsequent date may result in a change of control of the Company.
Name Age Position Number of Shares Percentage(1) - ---------------------------------- ------- ----------------------------------- --------------------- -- --------------- Chairman of Board of the Company; Leonard L. Abel 72 Director of Bank 74,600(2) 4.45% Eugene F. Ford, Sr.(3) 69 Director of Company 25,000(3) 1.51% William A. Koier 79 Director of Company and Bank 70,000(4) 4.19% Vice Chairman, President and Treasurer of Company; Chairman of Ronald D. Paul 43 Board of Bank 80,000(5) 4.81% Executive Vice President, Chief Operating Officer and Director of Thomas D. Murphy 51 the Bank 6,800(6) 0.41% Executive Vice President of the Company, President, Chief Executive officer and Director of the Bank, Nominee for election as H.L. Ward 52 director of the Company 14,600(7) 0.88% All directors and executive officers of Company as a group (8 persons) 280,846(8) 16.19% ===================== =============== All directors and executive officers of Company and Bank as a group (17 persons) 372,961(8) 21.50% ===================== =============== (1) Represents percentage of 1,650,000 shares issued and outstanding as of March 31, 1999, except with respect to individuals holding options exercisable within 60 days of said date, in which event, represents percentage of shares issued and outstanding plus the number of the number of shares with respect to which such person holds options exercisable within 60 days of March 31, 1999, and except with respect to all directors and executive officers of the Company and the Company and the Bank as groups, in which case represents percentage of shares issued and outstanding plus the number of the number of shares with respect to which all such person hold options exercisable within 60 days of March 31, 1999. (2) Includes warrants to purchase 25,000 shares of Common Stock, subject to approval of the Option Plan at the Annual Meeting of Shareholders. (3) Includes warrants to purchase 10,000 shares of Common Stock, subject to approval of the Option Plan at the Annual Meeting of Shareholders. Eugene F. Ford, Sr. is the father of Eugene F. Ford, Jr., a director of the Bank. Beneficial ownership for Mr. Ford, Sr. does not include beneficial ownership by Mr. Ford, Jr. (4) Includes warrants to purchase 20,000 shares of Common Stock, subject to approval of the Option Plan at the Annual Meeting of Shareholders. (5) Includes 65,000 shares held in trust for Mr. Paul's children Includes options to purchase 10,000 shares of Common Stock, subject to approval of the Option Plan at the Annual Meeting of Shareholders. Does not include options to acquire 30,000 shares of common stock which, subject to vesting in equal installments in December 1999, 2000 and 2001. (6) Includes warrants to purchase 6,000 shares of Common Stock. (7) Includes warrants to purchase 7,500 shares of Common Stock. (8) Includes options and warrants to purchase 84,500 shares of Common Stock, 71,000 of which are subject to approval of the Option Plan at the Annual Meeting of Shareholders.
ITEM 12. Certain Relationships and Related Transactions. The Bank has had, and expects to have in the future, banking transactions in the ordinary course of business with some of its and the Company's directors, officers, and employees and their associates. In the past, substantially all of such transactions have been on the same terms, including interest rates, maturities and collateral requirements as those prevailing at the time for comparable transactions with non-affiliated persons and did not involve more than the normal risk of collectibility or present other unfavorable features. The maximum aggregate amount of loans to officers, directors and affiliates of the Company during 1998 amounted to $250,691, representing approximately 1.7% of the Company's total shareholders' equity at December 31, 1998. In the opinion of the Board of Directors, the terms of these loans are no less favorable to the Bank than terms of the loans from the Bank to unaffiliated parties. On December 31, 1998, $229,437 of loans were outstanding to individuals who, during 1998, were officers, directors or affiliates of the Company. At the time each loan was made, management believed that the loan involved no more than the normal risk of collectibility and did not present other unfavorable features. None of such loans were classified as Substandard, Doubtful or Loss. During the organization of the Company and the Bank, certain of the organizing directors of the Company made advances to the Company in the aggregate amount of $475,000 (including $130,000 outstanding at December 31, 1997), which were repaid, with interest at the prime rate (an aggregate of $5,010), from the proceeds of the offering. A portion of the loans were converted to subscriptions for Common Stock in the offering. No interest was paid on these funds. Certain directors also guaranteed a bank loan to the Company in the aggregate amount of $350,000. ITEM 13. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description of Exhibits 3(a) Certificate of Incorporation of the Company, as amended (1) 3(b) Bylaws of the Company (2) 10.1 1998 Stock Option Plan (subject to shareholder approval) 10.2 Employment Agreement between H.L. Ward and the Company 10.3 Employment Agreement between Thomas D. Murphy and the Company 11 Statement Regarding Computation of Per Share Income 21 Subsidiaries of the Registrant The sole subsidiary of the Registrant is EagleBank, a Maryland chartered commercial bank. 27 Financial Data Schedule - ----------------------------- (1) Incorporated by reference to Exhibit 3(a) to the Company's Registration Statement on Form SB-2, dated December 12, 1997. (2) Incorporated by reference to Exhibit 3(b) to the Company's Registration Statement on Form SB-2, dated December 12, 1997. (b) Reports on Form 8-K None. SIGNATURES In accordance with Section 13 of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EAGLE BANCORP, INC. March 26, 1999 By: /s/ Ronald D. Paul ------------------------- Ronald D. Paul, President In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Name Position Date /s/ Leonard L. Abel Chairman of the Board March 26, 1999 - --------------------------- of Directors Leonard L. Abel - -------------------------- Director March 26, 1999 Eugene F. Ford, Sr. /s/ William A. Koier Director March 26, 1999 - -------------------------- William A. Koier /s/ Ronald D. Paul President and Director March 26, 1999 - -------------------------- Principal Executive Officer Ronald D. Paul /s/ Wilmer L. Tinley Senior Vice President of the Bank, March 26, 1999 - -------------------------- Chief Financial Officer of the Wilmer L. Tinley Company Principal Financial and Accounting Officer Index to Exhibits Exhibit No. Description of Exhibits 3(a) Certificate of Incorporation of the Company, as amended (1) 3(b) Bylaws of the Company (2) 10.1 1998 Stock Option Plan 10.2 Employment Agreement between H.L. Ward and the Company 10.3 Employment Agreement between Thomas D. Murphy and the Company 11 Statement Regarding Computation of Per Share Income 21 Subsidiaries of the Registrant The sole subsidiary of the Registrant is EagleBank, a Maryland chartered commercial bank. 27 Financial Data Schedule - ----------------------------- (1) Incorporated by reference to Exhibit 3(a) to the Company's Registration Statement on Form SB-2, dated December 12, 1997. (2) Incorporated by reference to Exhibit 3(b) to the Company's Registration Statement on Form SB-2, dated December 12, 1997. EX-10.1 2 EXHIBIT 10.1 Exhibit 10.1 EAGLE BANCORP, INC. 1998 STOCK OPTION PLAN 1. Purpose of the Plan. The purpose of this Eagle Bancorp, Inc. 1998 Stock Option Plan (the "Plan") is to advance the interests of the Company by providing directors and selected key employees of the Bank, the Company, and their Affiliates with the opportunity to acquire Shares. By encouraging stock ownership, the Company seeks to attract, retain and motivate the best available personnel for positions of substantial responsibility; to provide additional incentive to directors and key employees of the Company, the Bank and their Affiliates to promote the success of the business as measured by the value of its shares; and generally to increase the commonality of interests among directors, key employees, and other shareholders. 2. Definitions. In this Plan: (a) "Affiliate" means any "parent corporation" or "subsidiary corporation" of the Company as such terms are defined in Section 424(e) and (f), respectively, of the Code. (b) "Agreement" means a written agreement entered into in accordance with Paragraph 5(c). (c) "Bank" means EagleBank. (d) "Board" means the Board of Directors of the Company. (e) "Bank Board" means the Board of Directors of the Bank. (f) "Change in Control" means any one of the following events occurring after the Effective Date: (1) the acquisition of ownership, holding or power to vote more than 50% of the Bank's or Company's voting stock, (2) the acquisition of the power to control the election of a majority of the Bank's or Company's directors, (3) the exercise of a controlling influence over the management or policies of the Bank or the Company by any person or by persons acting as a "group" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934), or (4) the failure of Continuing Directors to constitute at least two-thirds of the Board of Directors of the Company or the Bank (the "Company Board") during any period of two consecutive years. For purposes of this Plan, "Continuing Directors" shall include only those individuals who were members of the Company Board at the Effective Date and those other individuals whose election or nomination for election as a member of the Company Board was approved by a vote of at least two-thirds of the Continuing Directors then in office. For purposes of this subparagraph only, the term "person" refers to an individual or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. The decision of the Committee as to whether a, Change in Control has occurred shall be conclusive and binding. (g) "Code" means the Internal Revenue Code of 1986, as amended. (h) "Committee" means the Stock Option Committee appointed by the Board in accordance with Paragraph 5(a) hereof. (i) "Common Stock" means the common stock, par value $0.01 per share, of the Company. (j) "Company" means Eagle Bancorp, Inc. (k) "Continuous Service" means the absence of any interruption or termination of service as an Employee of the Company or an Affiliate. Continuous Service shall not be considered interrupted in the case of sick leave, military leave or any other leave of absence approved by the Company or in the case of transfers between payroll locations of the Company or between the Company, an Affiliate or a successor. (l) "Effective Date" means the date specified in Paragraph 14 hereof. (m) "Employee" means any person employed by the Company, the Bank, or by an Affiliate. (n) "Exercise Price" means the price per Optioned Share at which an Option may be exercised. (o) "ISO" means an option to purchase Common Stock that meets the requirements set forth in the Plan, and which is intended to be and is identified as an "incentive stock option" within the meaning of Section 422 of the Code. (p) "Market Value" means the fair market value of the Common Stock, as determined under Paragraph 7(b) hereof. (q) "Non-Employee Director" means any member of the Board who, at the time discretion under the Plan is exercised, is a "Non-Employee Director" within the meaning of Rule 16b-3. (r) "Non-ISO" means an option to purchase Common Stock that meets the requirements set forth in the Plan but which is not intended to be, and is not identified as, an ISO. (s) "Option" means an ISO or a Warrant or other Non-ISO. (t) "Optioned Shares" means Shares subject to an Option granted pursuant to this Plan. (u) "Outstanding Shares" means the total shares of Common Stock which have been issued and which (a) are not held as treasury shares, and (b) have not been cancelled or retired by the Company. (v) "Participant" means any person who receives an Option pursuant to the Plan. (w) "Plan" means the Eagle Bancorp, Inc. 1998 Stock Option Plan. (x) "Rule 16b-3" means Rule 16b-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended. (y) "Share" means one share of Common Stock. (z) "Transaction" means (i) the liquidation or dissolution of the Company, (ii) a merger or consolidation in which the Company is not the surviving entity, or (iii) the sale or disposition of all or substantially all of the Company's assets. (aa) "Warrant" means a Non-ISO issued to a member of the Board or the Bank Board and designated as a Warrant by the Committee. (bb) "Warrant Certificate" means an Agreement issued with respect to a Warrant. 3. Term of the Plan and Options. (a) Term of the Plan. The Plan shall continue in effect for a term of ten years from the Effective Date unless sooner terminated pursuant to Paragraph 18. No Option may be granted under the Plan after ten years from the Effective Date. (b) Term of Options. The Committee shall establish the term of each Option granted under the Plan. No Option may have a term that exceeds 10 years. No ISO granted to an Employee who owns Shares representing more than 10% of the outstanding shares of Common Stock at the time an ISO is granted may have a term that exceeds five years. 4. Shares Subject to the Plan. Except as otherwise required by the provisions of Paragraph 11, no more than 15% of Shares outstanding on the Effective Date may be issued upon exercise of Options. Optioned Shares may either be authorized but unissued Shares or Shares held in treasury to the extent allowed by Maryland law. If Options should expire, become unexercisable or be forfeited for any reason without having been exercised or become vested in full, the Optioned Shares shall be available for the grant of additional Options under the Plan, unless the Plan shall have been terminated. 5. Administration of the Plan. (a) Composition of the Committee. The Plan shall be administered by the Committee, which shall consist of not less than two (2) members of the Board and up to three (3) additional members, who may be members of the Board, members of the Bank Board, or non-director officers of the Company or the Bank. Members of the Committee may be Employee Directors or Non-Employee Directors, and shall serve at the pleasure of the Board. In the absence at any time of a duly appointed Committee, the Plan shall be administered by the Board. (b) Powers of the Committee. Except as limited by the express provisions of the Plan or by resolutions adopted by the Board, the Committee shall have sole and complete authority and discretion (i) to select Participants and grant Options, (ii) to determine the form and content of Options to be issued in the form of Agreements under the Plan, (iii) to interpret the Plan, (iv) to prescribe, amend and rescind rules and regulations relating to the Plan, and (v) to make other determinations necessary or advisable for the administration of the Plan. The Committee shall have and may exercise such other power and authority as may be delegated to it by the Board from time to time. A majority of the entire Committee shall constitute a quorum and the action of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Committee without a meeting, shall be deemed the action of the Committee. (c) Agreement. Each Option shall be evidenced by a written agreement containing such provisions as may be approved by the Committee. Each such Agreement shall constitute a binding contract between the Company and the Participant, and every Participant, upon acceptance of such Agreement, shall be bound by the terms and restrictions of the Plan and of such Agreement. The terms of each such Agreement shall be in accordance with the Plan, but each Agreement may include such additional provisions and restrictions determined by the Committee, in its discretion, provided that such additional provisions and restrictions are not inconsistent with the terms of the Plan. In particular, the Committee shall set forth in each Agreement (i) the Exercise Price of an Option, (ii) the number of Shares subject to, and the expiration date of, the Option, (iii) the manner, time and rate (cumulative or otherwise) of exercise or vesting of such Option, and (iv) the restrictions, if any, to be placed upon such Option, or upon Shares which may be issued upon exercise of such Option. The Chairman of the Committee and such other officers as shall be designated by the Committee are hereby authorized to execute Agreements on behalf of the Company and to cause them to be delivered to the recipients of Options. (d) Effect of the Committee's Decisions. All decisions, determinations, and interpretations of the Committee shall be final and conclusive on all persons affected thereby. (e) Indemnification. In addition to such other rights of indemnification as they may have, the members of the Committee shall be indemnified by the Company in connection with any claim, action, suit or proceeding relating to any action taken or failure to act under or in connection with the Plan or any Option, granted hereunder to the full extent provided for under the Company's Articles of Incorporation or Bylaws with respect to the indemnification of Directors. 6. Grant of Options. (a) General Rule. The Committee, in its sole discretion, may grant ISO's or Non-ISOs to Employees of the Company or its Affiliates and may grant Warrants and other Non-ISOs to Directors, Bank Directors or directors of Affiliates. (b) Special Rules for ISOs. The aggregate Market Value, as of the date the Option is granted, of the Shares with respect to which ISOs are exercisable for the first time by an Employee during any calendar year (under all incentive stock option plans, as defined in Section 422 of the Code, of the Company or any present or future "parent" or "Subsidiary" of the Company) shall not exceed $100,000. Notwithstanding the prior provisions of this paragraph, the Committee may grant Options in excess of the foregoing limitations, in which case such Options granted in excess of such limitation shall be Options which are Non-ISOs. 7. Exercise Price for Options. (a) Limits on Committee Discretion. The Exercise Price as to any particular Option granted under the Plan shall not be less than the Market Value of the Optioned Shares on the date of grant. In the case of an Employee who owns Shares representing more than 10% of the Company's Outstanding Shares of Common Stock at the time an ISO is granted, the Exercise Price shall not be less than 110% of the Market Value of the Optioned Shares at the time the ISO is granted. (b) Standards for Determining Exercise Price. If the Common Stock is listed on a national securities exchange (including the NASDAQ National Market) on the date in question, then the Market Value per Share shall be not less than the average of the highest and lowest selling price on such exchange on such date, or if there were no sales on such date, then the Exercise Price shall be not less than the mean between the bid and asked prices on such date. If the Common Stock is traded otherwise than on a national securities exchange on the date in question, then the Market Value per Share shall be not less than the mean between the bid and asked price on such date, or, if there is no bid and asked price on such date, then on the next prior business day on which there was a bid and asked price. If no such bid and asked price is available, then the Market Value per Share shall be its fair market value as determined by the Committee, in its sole and absolute discretion. (c) Reissuance of Options. Notwithstanding anything herein to the contrary, the Committee shall have the authority to cancel outstanding Options with the consent of the Participant and to reissue new Options at a lower Exercise Price equal to the then Market Value per share of Common Stock in the event that the Market Value per share of Common Stock at any time prior to the date of exercise of outstanding Options falls below the Exercise Price. 8. Exercise of Options. (a) Generally. Any Option shall be exercisable at such times and under such conditions as shall be permissible under the terms of the Plan and of the Agreement. An Option may not be exercised for a fractional Share. (b) Procedure for Exercise. A Participant may exercise Options, subject to provisions relative to its termination and limitations on its exercise, only by (1) written notice of intent to exercise the Option with respect to a specified number of Shares, and (2) payment to the Company (contemporaneously with delivery of such notice) in cash, in Common Stock, or a combination of cash and Common Stock, of the amount of the Exercise Price for the number of Shares with respect to which the Option is then being exercised. Each such notice (and payment where required) shall be delivered, or mailed by prepaid registered or certified mail, addressed to the Treasurer of the Company at the Company's executive offices. Common Stock utilized in full or partial payment of the Exercise Price for Options shall be valued at its Market Value at the date of exercise. (c) Period of Exercisability-ISOs. An ISO may be exercised by a Participant only while the Participant is an Employee and has maintained Continuous Service from the date of the grant of the ISO, or within three months after termination of such Continuous Service (but not later than the date on which the Option would otherwise expire), except if the Employee's Continuous Service terminates by reason of - (1) "Just Cause" which for purposes hereof shall have the meaning set forth in any unexpired employment or severance agreement between the Participant and the Bank and/or the Company (and, in the absence of any such agreement, means termination because of the Employee's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order), then the Participant's rights to exercise such ISO shall expire on the date of such termination; (2) death, then to the extent that the Participant would have been entitled to exercise the ISO immediately prior to his death, such ISO of the deceased Participant may be exercised within two years from the date of his death (but not later than the date on which the Option would otherwise expire) by the personal representatives of his estate or person or persons to whom his rights under such ISO shall have passed by will or by laws of descent and distribution; (3) Permanent and Total Disability (as such term is defined in Section 22(e)(3) of the Code), then to the extent that the Participant would have been entitled to exercise the ISO immediately prior to his Permanent and Total Disability, such ISO may be exercised within one year from the date of such Permanent and Total Disability, but not later than the date on which the ISO would otherwise expire. Notwithstanding the provisions of any Option that provides for its exercise in installments as designated by the Committee, such Option shall become immediately exercisable upon the Participant's death or Permanent and Total Disability. (d) Period of Exercisability-Non-ISOs. Except to the extent otherwise provided in the terms of an Agreement, a Non-ISO may be exercised by a Participant, or the estate of a Participant, at any time before its expiration date, except if the Participant's Service terminates by reason of - (1) "Just Cause" which for purposes hereof shall have the meaning set forth in any unexpired employment or severance agreement between the Participant and the Bank and/or the Company (and, in the absence of any such agreement, means termination because of the Participant's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order), then the Participant's rights to exercise such Non-ISO shall expire on the date of such termination; or (2) Removal from the Board or the Bank Board pursuant to the respective Articles of Incorporation, then the Participant's rights to exercise such Non-ISO shall expire on the date of such removal. (e) Effect of the Committee's Decisions. The Committee's determination whether a Participant's Continuous Service has ceased, and the effective date thereof shall be final and conclusive on all persons affected thereby. 9. Conditions Upon Issuance of Shares. (a) Compliance with Securities Laws. Shares of Common Stock shall not be issued with respect to any Option unless the issuance and delivery of such Shares shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, any applicable state securities law, and the requirements of any stock exchange upon which the Shares may then be listed. The Plan is intended to comply with Rule 16b-3, and any provision of the Plan than the Committee determines in its sole and absolute discretion to be inconsistent with said Rule shall, to the extent of such inconsistency, be inoperative and null and void, and shall not affect the validity of the remaining provisions of the Plan. (b) Special Circumstances. The inability of the Company to obtain approval from any regulatory body or authority deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder shall relieve the Company of any liability in respect of the non-issuance or sale of such Shares. As a condition to the exercise of an Option, the Company may require the person exercising the Option to make such representations and warranties as the Committee determines may be necessary to assure the availability of an exemption from the registration requirements of federal or state securities law. (c) Committee Discretion. The Committee shall have the discretionary authority to impose in Agreements such restrictions on Shares as it may deem appropriate or desirable, including but not limited to the authority to impose a right of first refusal or to establish repurchase rights or both of these restrictions. 10. Restrictions on Sale of Shares (a) Six-Month Restriction. Shares of Common Stock that have been acquired upon exercise of an Option may not be sold or otherwise disposed of before the end of a six-month period beginning on the date the Option was granted. This restriction is in addition to any other restriction imposed by this Plan or by the Committee pursuant to this Plan. (b) Exceptions. The six-month restriction imposed by subparagraph (a) shall not apply to dispositions by bona fide gifts or to transfers by will or the laws of descent or distribution. 11. Effect of Changes in Control and Changes in Common Stock Subject to the Plan. (a) Effects of Change in Control. (1) Notwithstanding the provisions of any Option that provides for its exercise or vesting in installments, all Options shall be immediately exercisable and fully vested upon a Change in Control. (2) At the time of a Change in Control, the Participant shall, at the sole and absolute discretion of the Committee, be entitled to receive a cash payment in an amount equal to the excess of the Market Value at the time of the Change in Control of the Shares subject to such Option over the Exercise Price of such Shares, in exchange for cancellation of such Options, provided that in no event may an Option be cancelled in exchange for cash within the six-month period following the date of its grant. (3) In the event there is a Transaction, all outstanding Options shall be surrendered. With respect to each Option so surrendered, the Committee shall in its sole and absolute discretion determine whether the holder of each Option so surrendered shall receive-- (A) for each Share then subject to an outstanding Option, an Option for the number and kind of shares into which each Outstanding Share (other than Shares held by dissenting stockholders) is changed or exchanged, together with an appropriate adjustment to the Exercise Price; or (B) the number and kind of shares into which each Outstanding Share (other than Shares held by dissenting stockholders) is changed or exchanged in the Transaction that are equal in market value to the excess of the Market Value on the date of the Transaction of the Shares subject to the Option, over the Exercise Price of the Option; or (C) a cash payment (from the Company or the successor corporation), in an amount equal to the excess of the Market Value on the date of the Transaction of the Shares subject to the Option, over the Exercise Price of the Option. (b) Recapitalizations; Stock Splits, Etc. The number and kind of shares reserved for issuance under the Plan, and the number and kind of shares subject to outstanding Options and the Exercise Price thereof, shall be proportionately adjusted for any increase, decrease, change or exchange of Shares for a different number or kind of shares or other securities of the Company which results from a merger, consolidation, recapitalization, reorganization, reclassification, stock dividend, split-up, combination of shares, or similar event in which the number or kind of shares is changed without the receipt or payment of consideration by the Company. (c) Special Rule for ISOs. Any adjustment made pursuant to subparagraphs (a)(3)(A) or (b) of this Paragraph shall be made in such a manner as not to constitute a modification, within the meaning of Section 424(h) of the Code, of outstanding ISOs. (d) Conditions and Restrictions on New, Additional, or Different Shares or Securities. If, by reason of any adjustment made pursuant to this Paragraph, a Participant becomes entitled to new, additional, or different shares of stock or securities, such new, additional, or different shares of stock or securities shall thereupon be subject to all of the conditions and restrictions which were applicable to the Shares pursuant to the Option before the adjustment was made. (e) Other Issuances. Except as expressly provided in this Paragraph, the issuance by the Company or an Affiliate of shares of stock of any class, or of securities convertible into Shares or stock of another class, for cash or property or for labor or services either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, shall not affect, and no adjustment shall be made with respect to, the number, class, or Exercise Price of Shares then subject to Options or reserved for issuance under the Plan. 12. Non-Transferability of Options. (a) ISOs may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent and distribution, or pursuant to the terms of a "qualified domestic relations order" (within the meaning of Section 414(p) of the Code and the regulations and rulings thereunder). (b) Warrants and other Non-ISO's may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent and distribution, pursuant to the terms of a "qualified domestic relations order" (within the meaning of Section 414(p) of the Code and the regulations and rulings thereunder), or, in the sole discretion of the Committee, in connection with a transfer for estate or retirement planning purposes to a trust established for such purposes. 13. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the later of the date on which the Committee makes the determination of granting such Option and the Effective Date. Notice of the determination shall be given to each Participant to whom an Option is so granted within a reasonable time after the date of such grant. 14. Effective Date. The Plan shall be effective as of December 9, 1998. Option grants may be made prior to approval of the Plan by the stockholders of the Company, if the exercise of Options is conditioned upon stockholder approval of the Plan. 15. Approval by Stockholders. The Plan shall be approved by stockholders of the Company within twelve (12) months before or after the Effective Date. 16. Modification of Options. At any time, and from time to time, the Board may authorize the Committee to direct execution of an instrument providing for the modification of any outstanding Option, provided no such modification shall confer on the holder of said Option any right or benefit which could not be conferred on him by the grant of a new Option at such time, or impair the Option without the consent of the holder of the Option. 17. Amendment and Termination of the Plan. The Board may from time to time amend the terms of the Plan and, with respect to any Shares at the time not subject to Options, suspend or terminate the Plan; provided that shareholder approval shall be required to increase the number of Shares subject to the Plan provided in Paragraph 4 or to extend the terms of the Plan. No amendment, suspension, or termination of the Plan shall, without the consent of any affected holders of an Option, alter or impair any rights or obligations under any Option theretofore granted. 18. Reservation of Shares. The Company, during the term of the Plan, will reserve and keep available a number of Shares sufficient to satisfy the requirements of the Plan. 19. Withholding Tax. The Company's obligation to deliver Shares upon exercise of Options (or such earlier time that the Participant makes an election under Section 83(b) of the Code) shall be subject to the Participant's satisfaction of all applicable federal, state and local income and employment tax withholding obligations. The Committee, in its discretion, may permit the Participant to satisfy the obligation, in whole or in part, by irrevocably electing to have the Company withhold Shares, or to deliver to the Company Shares that he already owns, having a value equal to the amount required to be withheld. The value of Shares to be withheld, or delivered to the Company, shall be based on the Market Value of the Shares on the date the amount of tax to be withheld is to be determined. As an alternative, the Company may retain, or sell without notice, a number of such Shares sufficient to cover the amount required to be withheld. 20. No Employment or Other Rights. In no event shall a Director's or Employee's eligibility to participate or participation in the Plan create or be deemed to create any legal or equitable right of the Director or Employee or any other party to continue service with the Company, the Bank, or any Affiliate of such corporations. No Director or Employee shall have a right to be granted an Option or, having received an Option, the right to be granted an additional Option. 21. Governing Law. The Plan shall be governed by and construed in accordance with the laws of the State of Maryland, except to the extent that federal law shall be deemed to apply. EX-10.2 3 EXHIBIT 10.2 Exhibit 10-2 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the ____ day of _____________, 1998, by and between Eagle Bancorp, Inc., a Maryland corporation, or its assigns ("Eagle") and H.L. Ward ("Ward"). RECITAL Eagle desires to hire Ward as the President and Chief Executive Officer of Eagle, and Ward desires to accept such employment, all upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the recital, the mutual covenants and agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to this Agreement, intending to be legally bound, agree as follows: 1. Certain Definitions. As used in this Agreement, the following terms have the meanings set forth below: 1.1 "Commencement Date " means October 21, 1997. 1.2 "Bank Regulatory Agency" means any governmental authority, regulatory agency, ministry, department, statutory corporation, central bank or other body of the United States or of any other country or of any state or other political subdivision of any of them having jurisdiction over Eagle or any transaction contemplated, undertaken or proposed to be undertaken by Eagle, including, but not necessarily be limited to: (a) the Federal Deposit Insurance Corporation or any other federal or state depository insurance organization or fund; (b) the Federal Reserve System, the Comptroller of the Currency, the Maryland Division of Financial Institutions, or any other federal or state bank regulatory or commissioner's office; (c) any Person established, organized, owned (in whole or in part) or controlled by any of the foregoing; and (d) any predecessor, successor or assignee of any of the foregoing. 1.3 "Board" means the Board of Directors of Eagle. 1.4 "Bylaws" means the Bylaws of Eagle as in effect from time to time. 1.5 "Chairman" means the Chairman of the Board. 1.6 "Person" means any individual, firm, association, partnership, corporation, limited liability company, group, governmental agency or other authority, or other organization or entity. 2. Employment; Term. 2.1 Position. Eagle hereby employs Ward to serve as the President and Chief Executive Officer of Eagle. Ward shall also be a member of Eagle's Board, subject to election by the shareholders of Eagle in accordance with the Bylaws. 2.2 Term. The term of this Agreement and Ward's employment hereunder shall commence with the Commencement Date and continue until December 31, 2000 (the "Term"), unless sooner terminated in accordance with the provisions of this Agreement. 3. Duties of Ward. 3.1 Nature and Substance. Ward shall report directly to the Chairman and shall be under the direction of the Chairman. The specific powers and duties of Ward shall be established, determined and modified by and within the discretion of the Board, including (but not necessarily be limited to): (a) the coordination and leadership of the efforts of Eagle to achieve and maintain any and all necessary and/or appropriate Bank Regulatory Agency approvals and permissions prerequisite to its successful continued operation, including coordination of the professional services of counsel, accountants and bank consultants; (b) the preparation and presentation to the Board of budgets and adherence of Eagle to those approved by the Board; (c) the provision of such reports, updates and other data and information as may be reasonably required by Eagle and Bank Regulatory Agencies; (d) subject to guidelines and/or criteria established by Eagle, the hiring, promotion, supervision, retention and discharge of all employees, except for executive officers of Eagle at or above the level of Executive Vice President; (e) the formulation and implementation of employee personnel policies and benefits, subject to approval by the Board; (f) the promotion of the reputation and business of Eagle within the community; (g) the advancement of the business purposes of Eagle, including, but not limited to, business development and customer, depositor and public relations; (h) participation in and service upon such committees and subcommittees as may be directed by the Board, without additional compensation to that set forth hereinbelow; (i) supervision of the maintenance of the books and accounts and the supervision and maintenance of accounts payable and expenses of Eagle and the reporting of the status thereof at each scheduled or called meeting of the Board or any committee thereof; provided, however, that all expenditures on behalf of Eagle shall be approved in accordance with the terms and conditions of procedures established by the Board; (j) such other duties of the President and Chief Executive Officer as may be enumerated in the Bylaws; and (k) such other duties and responsibilities as are normally incident to the position of President and Chief Executive Officer of a banking institution, including assisting, directing and/or supervising the operations and other employees of Eagle upon such terms, conditions, rules, policies and regulations as may be established by the Board from time to time. 3.2 Performance of Services. Ward agrees to devote his full business time and attention to the performance of his duties and responsibilities under this Agreement, and shall use his best efforts and discharge his duties to the best of his ability for and on behalf of Eagle and toward its successful operation. Ward shall comply with all laws, statutes, ordinances, rules and regulations relating to his employment and duties. During the Term of this Agreement, Ward shall not at any time or place directly or indirectly engage or agree to engage in any business or practice related to the banking business with or for any other Person to any extent whatsoever, other than to the extent required by the terms and conditions of this Agreement. Ward agrees that while employed by Eagle he will not, without the prior written consent of the Board, engage, or obtain a financial or ownership interest, in any other business, employment, consulting or similar arrangement, or other undertaking (an "Outside Arrangement") if such Outside Arrangement would interfere with the satisfactory performance of Ward's duties to Eagle, present a conflict of interest with Eagle, breach Ward's duty of loyalty or fiduciary duties to Eagle, or otherwise conflict with the provisions of this Agreement; provided, however, that Ward shall not be prevented from investing Ward's assets in such form or manner as would not require any services on the part of Ward in the operation or the affairs of the entities in which such investments are made and provided such investments do not present a conflict of interest with Eagle. Ward shall promptly notify the Board of any Outside Arrangement and provide Eagle with any written agreement in connection therewith. 4. Compensation; Benefits. As full compensation for all services rendered pursuant to this Agreement and the covenants contained herein, Eagle shall pay to Ward the following: 4.1 Salary. Beginning on the Commencement Date, Ward shall be paid a salary ("Salary") of One Hundred Thirty-nine Thousand Dollars ($139,000.00) on an annualized basis. Upon the opening of Eagle's first location, Ward's Salary shall be increased to One Hundred Sixty Thousand Dollars ($160,000) on an annualized basis. Eagle shall pay Ward's Salary in equal installments in accordance with Eagle's regular payroll periods as may be set by Eagle from time to time. Ward's Salary shall be further increased from time to time at the discretion of the Board. 4.2 Bonus. During the Term, Ward shall be paid a bonus ("CEO Bonus") totaling Thirty Thousand and No/100 Dollars ($30,000.00), payable in equal monthly installments commencing with the opening of Eagle's first location and continuing until the end of the Term (e.g., the payments shall be amortized over the number of months from the opening of the first location through the end of the Term). At Ward's option the CEO Bonus may be paid in annual installments of Ten Thousand ($10,000.00) each beginning January 2, 1999, provided this cost can be amortized over a calendar period. If at the end of the Term there is any unpaid portion of the CEO Bonus, the unpaid portion shall be paid in full within thirty (30) days after the expiration of the Term unless otherwise agreed by the parties. If Eagle is sold or otherwise acquired and this Agreement does not continue with the successor, any unpaid portion of the CEO Bonus shall be paid in full within thirty (30) days after the date of termination of this Agreement. 4.3 Withholding. Payments of Salary and CEO Bonus shall be subject to the customary withholding of income and other employment taxes as is required with respect to compensation paid by an employer to an employee. 4.4 Vacation and Leave. Ward shall be entitled to such vacation and leave as may be provided for under the current and future leave and vacation policies of Eagle for executive officers. 4.5 Office Space. Eagle will provide customary office space and office support to Ward beginning on the Commencement Date. 4.6 Car Allowance. Eagle will pay Ward a monthly car allowance of Six Hundred Dollars ($600.00). 4.7 Non-Life Insurance. Eagle will provide Ward with group health, disability and other insurance as Eagle may determine appropriate and arranges for all employees of Eagle. 4.8 Life Insurance. 4.8.1 Eagle will obtain, and maintain at all times while this Agreement is in effect, a term life insurance policy (the "Policy") on Ward in the amount of Seven Hundred Fifty Thousand Dollars ($750,000.00), the particular product and carrier to be chosen by Eagle in its discretion. Ward shall have the right to designate the beneficiary of the Policy. Eagle will pay the premium for the Policy at the standard rate. In the event Ward is rated and the premium exceeds the standard rate, Ward shall be responsible for paying the excess, which shall be deducted from Ward's Salary. 4.8.2 Eagle may, at its cost, obtain and maintain "key-man" life insurance on Ward in such amount as determined by the Board from time to time. Ward agrees to cooperate fully and to take all actions reasonably required by Eagle in connection with such insurance. 4.9 Expenses. Eagle shall promptly upon presentation of proper expense reports therefor reimburse Ward, in accordance with the policies and procedures established from time to time by Eagle for its senior executive officers, for all reasonable and customary travel (other than local use of an automobile for which Ward is being provided the car allowance) and other out-of-pocket expenses incurred by Ward in the performance of his duties and responsibilities under this Agreement and promoting the business of Eagle, including appropriate membership fees, dues and the cost of attending meetings and conventions. 4.10 Retirement Plans. Ward shall be entitled to participate in any and all qualified pension or other retirement plans of Eagle which may be applicable to executive personnel of Eagle. 4.11 Warrants. Ward shall be issued warrants to acquire seven thousand five hundred (7,500) shares of Eagle Bancorp, Inc. common stock. Such warrants shall be (a) exercisable on or after an initial public offering of said stock at an exercise price equal to the price to the public in the initial public offering and (b) subject to such terms and conditions as may be required by the underwriter of such offering and as may reasonably be imposed by Eagle with respect to securities of this nature. 4.12 Other Benefits. While this Agreement is in effect, Ward shall be entitled to all other benefits that Eagle provides from time to time to its senior executive officers, including, but not limited to, any stock option plan and other incentive plans. 4.13 Eligibility. Participation in any health, life, accident, disability, medical expense or similar insurance plan or any qualified pension or other retirement plan shall be subject to the terms and conditions contained in such plan. All matters of eligibility for benefits under any insurance plans shall be determined in accordance with the provisions of the applicable insurance policy issued by the applicable insurance company. Eagle shall not be liable to Ward, his family, heirs, executors, beneficiaries, personal or legal representatives or other successors for any payment payable or claimed to be payable under any insurance plan. 5. Conditions Subsequent to Continued Operation and Effect of Agreement. 5.1 Approval by Eagle by Bank Regulatory Agencies. This Agreement shall be null and void and of no force or effect if: (a) any Bank Regulatory Agency does not approve the charter of Eagle or otherwise fails to allow Eagle to commence operations within a reasonable period of time; (b) any Bank Regulatory Agency fails to approve Ward for the position of President and Chief Executive Officer of Eagle; or (c) Eagle fails to raise or otherwise secure a minimum of Eight Million Dollars ($8,000,000.00) in initial capital. 5.2 Continued Approval by Bank Regulatory Agencies. This Agreement and all of its terms and conditions, and the continued operation and effect of this Agreement and Eagle's continuing obligations hereunder, shall at all times be subject to the continuing approval of any and all Bank Regulatory Agencies whose approval is a necessary prerequisite to the continued operation of Eagle. Should any term or condition of this Agreement, upon review by any Bank Regulatory Agency, be found to violate or not be in compliance with any then-applicable statute or any rule, regulation, order or understanding promulgated by any Bank Regulatory Agency, or should any term or condition required to be included herein by any such Bank Regulatory Agency be absent, this Agreement may be rescinded and terminated by Eagle if the parties hereto cannot in good faith agree upon such additions, deletions, or modifications as may be deemed necessary or appropriate to bring this Agreement into compliance. 6. Termination of Agreement. This Agreement may be terminated prior to expiration of the Term as provided below. 6.1 Definition of Cause. For purposes of this Agreement, "Cause" means: (a) any act of theft, fraud, intentional misrepresentation or similar conduct by Ward in connection with or associated with the services rendered by Ward to Eagle under this Agreement; (b) any failure of this Agreement to comply with any Bank Regulatory Agency requirement which is not cured in accordance with Section 5.2 within a reasonable period of time after written notice thereof; (c) any Bank Regulatory Agency action or proceeding against Ward as a result of his negligence, fraud, malfeasance or misconduct; (d) material failure of Eagle to achieve budget requirements, performance standards or targets established annually by the Board, where such failure is not the result of economic conditions or lack of appropriate effort and/or due diligence by Ward; or (e) any of the following conduct on the part of Ward that Ward has not corrected or cured within thirty (30) days after having received written notice from Eagle detailing and describing such conduct: (i) the use of drugs, alcohol or other substances by Ward to an extent which materially interferes with or prevents Ward from performing Ward's duties under this Agreement; (ii) failure by or the inability of Ward to devote full time, attention and energy to the performance of Ward's duties pursuant to this Agreement (other than by reason of his death or disability); (iii) intentional material failure by Ward to carry out the explicit lawful and reasonable directions, instructions, policies, rules, regulations or decisions of the Board which are consistent with his position as President and Chief Executive Officer; or (iv) willful or intentional misconduct on the part of Ward that results in substantial injury to Eagle or any of its parent, subsidiaries or affiliates. 6.2 Termination by Eagle. 6.2.1 For Cause. Eagle shall have the right to cancel and terminate this Agreement and Ward's employment for Cause immediately on written notice. If Ward is terminated for Cause, all rights to compensation and benefits shall cease as of the date of termination, provided, however, that Ward shall be entitled to benefits through the date of termination and accrued compensation or CEO Bonus. 6.2.2 Without Cause. Eagle shall have the right to cancel and terminate this Agreement and Ward's employment at any time on written notice without Cause for any or no reason, subject to the provisions of Section 6.4. 6.3 Termination by Ward. Ward shall have the right to cancel and terminate this Agreement and his employment at any time on sixty (60) days prior written notice to the Board. 6.4 Severance. Except as set forth below, if Ward's employment with Eagle is terminated by Eagle or its successors during the Term without Cause, Eagle shall, for the balance of the Term, continue to pay Ward, in the manner set forth below, Ward's Salary at the rate being paid as of the date of termination plus the unpaid portion of the CEO Bonus; provided, however, that Ward shall not be entitled to any such payments of Salary and CEO Bonus if his employment is terminated due to his death or long-term disability or this Agreement is rendered null and void pursuant to Section 5.1. Any Salary and CEO Bonus due Ward pursuant to this Section 6.4 shall be paid to Ward in installments on the same schedule as Ward was paid immediately prior to the date of termination, each installment to be the same amount Ward would have been paid under this Agreement if he had not been terminated. In the event Ward breaches any provision of Article 7 of this Agreement, Ward's entitlement to any Salary or CEO Bonus payable pursuant to this Section 6.4, if and to the extent not yet paid, shall thereupon immediately cease and terminate. 7. Confidentiality; Non-Competition; Non-Interference. 7.1 Confidential Information. Ward, during employment by Eagle, will have access to and become familiar with various confidential and proprietary information of Eagle, its parent, subsidiaries and/or affiliates and/or relating to the business of Eagle, its parent, subsidiaries and/or affiliates ("Confidential Information"), including, but not limited to: business plans; operating results; financial statements and financial information; contracts; mailing lists; purchasing information; customer data (including lists, names and requirements); feasibility studies; personnel related information (including compensation, compensation plans, and staffing plans); internal working documents and communications; and other materials related to the businesses or activities of Eagle, its parent, subsidiaries and/or affiliates which is made available only to employees with a need to know or which is not generally made available to the public. Failure to mark any Confidential Information as confidential, proprietary or protected information shall not affect its status as part of the Confidential Information subject to the terms of this Agreement. 7.2 Nondisclosure. Ward hereby covenants and agrees that Ward shall not at any time, directly or indirectly, disclose, divulge, reveal, report, publish, or transfer any Confidential Information to any Person, or use Confidential Information in any way or for any purpose, except as required in the course of Ward' employment by Eagle. The covenant set forth in this Section 7.2 shall not apply to information now known by the public or which becomes known generally to the public (other than as a result of a breach of this Article 7 by Ward) or information that is customarily shown or disclosed. 7.3 Documents. All files, papers, records, documents, compilations, summaries, lists, reports, notes, databases, tapes, sketches, drawings, memoranda, and similar items (collectively, "Documents"), whether prepared by Ward, or otherwise provided to or coming into the possession of Ward, that contain any proprietary information about or pertaining or relating to Eagle, its parent, subsidiaries and/or affiliates and/or their businesses ("Eagle Information") shall at all times remain their exclusive property. Promptly after a request by Eagle or the termination of Ward' employment, Ward shall take reasonable efforts to (i) return to Eagle all Documents in any tangible form (whether originals, copies or reproductions) and all computer disks containing or embodying any Document or Eagle Information and (ii) purge and destroy all Documents and Eagle Information in any intangible form (including computerized, digital or other electronic format) as may be requested by Eagle, and Ward shall not retain in any tangible form any such Document or any summary, compilation, synopsis or abstract of any Document or Eagle Information. 7.4 Non-Competition. 7.4.1 Ward hereby acknowledges and agrees that, during the course of employment by Eagle, Ward will become familiar with and involved in all aspects of the business and operations of Eagle. Ward hereby covenants and agrees that during the Term of this Agreement Ward will not at any time, directly or indirectly, in any capacity (whether as a proprietor, owner, agent, officer, director, shareholder, partner, principal, member, employee, contractor, consultant or otherwise) own, be employed by, render services to, or otherwise be involved or engaged in any manner in the operation of, a bank or savings and loan or a holding company of a bank or savings and loan that has an office or branch location within a fifty (50) mile radius of the location of Eagle's headquarters on the date of termination or cessation of employment. 7.4.2 This Section 7.4 shall not apply if (a) Eagle does not give Ward one hundred twenty (120) days written notice prior to the end of the Term that it intends to seek an extension or renewal of this Agreement beyond the Term and, if such notice is given, Ward gives Eagle written notice ninety (90) days prior to the end of the Term that he does not intend to continue employment beyond the Term, or (b) there is a (i) merger or consolidation with a third party in which Eagle is not the survivor, (ii) sale of a controlling interest in Eagle to a third party or (iii) a sale of all or substantially all of the business or assets of Eagle to a third party, and this Agreement is not assigned to such third party or Ward's employment hereunder is otherwise terminated by such third party in connection with such merger, consolidation or sale. Further, Ownership of less than two percent (2%) of the securities of any publicly held corporation shall not constitute a violation of this Section. 7.5 Non-Interference. Ward hereby covenants and agrees that during the Term of this Agreement Ward will not, directly or indirectly, for himself or any other Person (whether as a proprietor, owner, agent, officer, director, shareholder, partner, principal, member, employee, contractor, consultant or any other capacity), induce or attempt to induce any customers, suppliers, officers, employees, contractors, consultants, agents or representatives of, or any other person that has a business relationship with, Eagle or any of its parent, subsidiaries and affiliates to discontinue, terminate or reduce the extent of their relationship with Eagle and/or any such parent, subsidiary or affiliate or to take any action that would disrupt or otherwise be disadvantageous to any such relationship. 7.6 Injunction. In the event of any breach or threatened or attempted breach of any such provision by Ward, Eagle shall, in addition to and not to the exclusion of any other rights and remedies at law or in equity, be entitled to seek and receive from any court of competent jurisdiction (i) full temporary and permanent injunctive relief enjoining and restraining Ward and each and every other Person concerned therein from the continuation of such violative acts and (ii) a decree for specific performance of the applicable provisions of this Agreement, without being required to furnish any bond or other security. Further, Ward shall not plead in defense thereto that there would be an adequate remedy at law. 7.7 Reasonableness. 7.7.1 Ward has carefully read and considered the provisions of this Article 7 and, having done so, agrees that the restrictions and agreements set forth in this Article 7 are fair and reasonable and are reasonably required for the protection of the interests of Eagle and its business, shareholders, directors, officers and employees. Ward further agrees that the restrictions set forth in this Agreement will not impair or unreasonably restrain Ward's ability to earn a livelihood. 7.7.2 If any court of competent jurisdiction should determine that the duration, geographical area or scope of any provision or restriction set forth in this Article 7 exceeds the maximum duration, geographic area or scope that is reasonable and enforceable under applicable law, the parties agree that said provision shall automatically be modified and shall be deemed to extend only over the maximum duration, geographical area and/or scope as to which such provision or restriction said court determines to be valid and enforceable under applicable law, which determination the parties direct the court to make, and the parties agree to be bound by such modified provision or restriction. 8. Survival. Section 6.4 and Article 7 of this Agreement expressly survive any termination of this Agreement. 9. Assignability. Ward shall have no right to assign this Agreement or any of Ward's rights or obligations hereunder to another party or parties. Ward acknowledges and agrees that Eagle may assign this Agreement and its rights and obligations hereunder without the consent of Ward to EagleBank, a Maryland corporation, the entity established and controlled by Eagle to serve as the bank operating entity for the bank proposed to be established by Eagle (the "Operating Entity"). At such time as this Agreement is assigned to the Operating Entity the term "Eagle," for all purposes of this Agreement, shall mean and refer only to the Operating Entity, and Ward acknowledges and agrees that, upon such assignment, Eagle Bancorp, Inc. shall be relieved of any further duties and obligations under this Agreement. 10. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Maryland applicable to contracts executed and to be performed therein, without giving effect to the choice of law rules thereof. 11. Notices. All notices, requests, demands and other communications required or permitted to be given under this Agreement shall be in writing and shall be conclusively deemed to have been duly given (1) when hand delivered to the other party, or (2) when received when sent by facsimile at the address and number set forth below (provided, however, that notices given by facsimile shall not be effective unless either (a) a duplicate copy of such facsimile notice is promptly given by depositing same in a United States post office with first-class postage prepaid and addressed to the parties as set forth below, or the receiving party delivers a written confirmation of receipt for such notice either by facsimile or any other method permitted under this subparagraph, additionally, any notice given by facsimile shall be deemed received on the next business day if such notice is received after 5:00 p.m. (recipient's time) or on a nonbusiness day); or (3) three (3) business days after the same have been deposited in a United States post office with first-class certified mail, return receipt, postage prepaid and addressed to the parties as set forth below; or (4) the next business day after same have been deposited with a national overnight delivery service reasonably approved by the parties (Federal Express and DHL WorldWide Express being deemed approved by the parties), postage prepaid, addressed to the parties as set forth below with next-business-day delivery guaranteed, provided that the sending party received a confirmation of delivery from the delivery service provider. The address of a party set forth below may be changed by that party by written notice to the other from time to time pursuant to this Article. To: H.L. Ward ==================== ==================== Fax: To: Eagle ==================== ==================== Fax: 12. Entire Agreement. This Agreement contains all of the agreements and understandings between the parties hereto with respect to the employment of Ward by Eagle, and supersedes all prior agreements, arrangements and understandings related to the subject matter hereof. No oral agreements or written correspondence shall be held to affect the provisions hereof. No representation, promise, inducement or statement of intention has been made by either party that is not set forth in this Agreement, and neither party shall be bound by or liable for any alleged representation, promise, inducement or statement of intention not so set forth. 13. Headings. The Article and Section headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 14. Severability. Should any part of this Agreement for any reason be declared or held illegal, invalid or unenforceable, such determination shall not affect the legality, validity or enforceability of any remaining portion or provision of this Agreement, which remaining portions and provisions shall remain in force and effect as if this Agreement has been executed with the illegal, invalid or unenforceable portion thereof eliminated. 15. Amendment; Waiver. Neither this Agreement nor any provision hereof may be amended, modified, changed, waived, discharged or terminated except by an instrument in writing signed by the party against which enforcement of the amendment, modification, change, waiver, discharge or termination is sought. The failure of either party at any time or times to require performance of any provision hereof shall not in any manner affect the right at a later time to enforce the same. No waiver by either party of the breach of any term, provision or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term, provision or covenant contained in this Agreement. 16. Gender and Tense. As used in this Agreement, the masculine, feminine and neuter gender, and the singular or plural number, shall each be deemed to include the other or others whenever the context so indicates. 17. Binding Effect. This Agreement is and shall be binding upon, and inures to the benefit of, Eagle, its successors and assigns, and Ward and his heirs, executors, administrators, and personal and legal representatives. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. EAGLE: Eagle Bancorp, Inc. or assigns By: ----------------------------- Title: WARD: -------------------------------- H.L. Ward EX-10.3 4 EXHIBIT 10.3 Exhibit 10.3 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the ____ day of _____________, 1998, by and between Eagle Bancorp, Inc., a Maryland corporation, or its assigns ("Eagle") and Thomas D. Murphy ("Murphy"). RECITAL ------- Eagle desires to hire Murphy as the Executive Vice President and Chief Operating Executive Officer of Eagle, and Murphy desires to accept such employment, all upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the recital, the mutual covenants and agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to this Agreement, intending to be legally bound, agree as follows: 1. Certain Definitions. As used in this Agreement, the following terms have the meanings set forth below: 1.1 "Commencement Date " means October 21, 1997. 1.2 "Bank Regulatory Agency" means any governmental authority, regulatory agency, ministry, department, statutory corporation, central bank or other body of the United States or of any other country or of any state or other political subdivision of any of them having jurisdiction over Eagle or any transaction contemplated, undertaken or proposed to be undertaken by Eagle, including, but not necessarily be limited to: (a) the Federal Deposit Insurance Corporation or any other federal or state depository insurance organization or fund; (b) the Federal Reserve System, the Comptroller of the Currency, the Maryland Division of Financial Institutions, or any other federal or state bank regulatory or commissioner's office; (c) any Person established, organized, owned (in whole or in part) or controlled by any of the foregoing; and (d) any predecessor, successor or assignee of any of the foregoing. 1.3 "Board" means the Board of Directors of Eagle. 1.4 "Bylaws" means the Bylaws of Eagle as in effect from time to time. 1.5 "Person" means any individual, firm, association, partnership, corporation, limited liability company, group, governmental agency or other authority, or other organization or entity. 1.6 "President" means the President of Eagle. 2. Employment; Term. 2.1 Position. Eagle hereby employs Murphy to serve as the Executive Vice President and Chief Operating Officer of Eagle. Murphy shall also be a member of Eagle's Board, subject to election by the shareholders of Eagle in accordance with the Bylaws. 2.2 Term. The term of this Agreement and Murphy's employment hereunder shall commence with the Commencement Date and continue for a period of three (3) years ending on October 20, 2000 (the "Term"), unless sooner terminated in accordance with the provisions of this Agreement. 3. Duties of Murphy. 3.1 Nature and Substance. Murphy shall report directly to the President and shall be under the direction of the President. The specific powers and duties of Murphy shall be established, determined and modified by and within the discretion of the Board, including (but not necessarily be limited to): (a) the coordination and leadership of the efforts of Eagle to achieve and maintain any and all necessary and/or appropriate Bank Regulatory Agency approvals and permissions prerequisite to its successful continued operation, including coordination of the professional services of counsel, accountants and bank consultants; (b) the preparation and presentation to the Board of budgets and adherence of Eagle to those approved by the Board; (c) the provision of such reports, updates and other data and information as may be reasonably required by Eagle and Bank Regulatory Agencies; (d) subject to guidelines and/or criteria established by Eagle, the hiring, promotion, supervision, retention and discharge of all employees, except for executive officers of Eagle at or above the level of Executive Vice President; (e) the formulation and implementation of employee personnel policies and benefits, subject to approval by the Board; (f) the promotion of the reputation and business of Eagle within the community; (g) the advancement of the business purposes of Eagle, including, but not limited to, business development and customer, depositor and public relations; (h) participation in and service upon such committees and subcommittees as may be directed by the Board, without additional compensation to that set forth hereinbelow; (i) supervision of the maintenance of the books and accounts and the supervision and maintenance of accounts payable and expenses of Eagle and the reporting of the status thereof at each scheduled or called meeting of the Board or any committee thereof; provided, however, that all expenditures on behalf of Eagle shall be approved in accordance with the terms and conditions of procedures established by the Board; (j) such other duties of the Executive Vice President and Chief Operating Officer as may be enumerated in the Bylaws; and (k) such other duties and responsibilities as are normally incident to the position of Executive Vice President and Chief Operating Officer of a banking institution, including assisting, directing and/or supervising the operations and other employees of Eagle upon such terms, conditions, rules, policies and regulations as may be established by the Board from time to time. 3.2 Performance of Services. Murphy agrees to devote his full business time and attention to the performance of his duties and responsibilities under this Agreement, and shall use his best efforts and discharge his duties to the best of his ability for and on behalf of Eagle and toward its successful operation. Murphy shall comply with all laws, statutes, ordinances, rules and regulations relating to his employment and duties. During the Term of this Agreement, Murphy shall not at any time or place directly or indirectly engage or agree to engage in any business or practice related to the banking business with or for any other Person to any extent whatsoever, other than to the extent required by the terms and conditions of this Agreement. Murphy agrees that while employed by Eagle he will not, without the prior written consent of the Board, engage, or obtain a financial or ownership interest, in any other business, employment, consulting or similar arrangement, or other undertaking (an "Outside Arrangement") if such Outside Arrangement would interfere with the satisfactory performance of Murphy's duties to Eagle, present a conflict of interest with Eagle, breach Murphy's duty of loyalty or fiduciary duties to Eagle, or otherwise conflict with the provisions of this Agreement; provided, however, that Murphy shall not be prevented from investing Murphy's assets in such form or manner as would not require any services on the part of Murphy in the operation or the affairs of the entities in which such investments are made and provided such investments do not present a conflict of interest with Eagle. Murphy shall promptly notify the Board of any Outside Arrangement and provide Eagle with any written agreement in connection therewith. 4. Compensation; Benefits. As full compensation for all services rendered pursuant to this Agreement and the covenants contained herein, Eagle shall pay to Murphy the following: 4.1 Salary. Beginning on the Commencement Date, Murphy shall be paid a salary ("Salary") of One Hundred Twenty Thousand Dollars ($120,000.00) on an annualized basis. Upon the opening of Eagle's first location, Murphy's Salary shall be increased to One Hundred Thirty Thousand Dollars ($130,000) on an annualized basis. Eagle shall pay Murphy's Salary in equal installments in accordance with Eagle's regular payroll periods as may be set by Eagle from time to time. Murphy's Salary shall be further increased from time to time at the discretion of the Board. 4.2 Bonus. During the Term, Murphy shall be paid a bonus ("COO Bonus") totaling Thirty Thousand Dollars ($30,000.00), payable in equal monthly installments commencing with the opening of Eagle's first location and continuing until the end of the Term (e.g., the payments shall be amortized over the number of months from the opening of the first location through the end of the Term). At Murphy's option the COO Bonus may be paid in annual installments of Ten Thousand ($10,000.00) each beginning January 2, 1999, provided this cost can be amortized over a calendar period. If at the end of the Term there is any unpaid portion of the COO Bonus, the unpaid portion shall be paid in full within thirty (30) days after the expiration of the Term unless otherwise agreed by the parties. If Eagle is sold or otherwise acquired and this Agreement does not continue with the successor, any unpaid portion of the COO Bonus shall be paid in full within thirty (30) days after the date of termination of this Agreement. 4.3 Withholding. Payments of Salary and COO Bonus shall be subject to the customary withholding of income and other employment taxes as is required with respect to compensation paid by an employer to an employee. 4.4 Vacation and Leave. Murphy shall be entitled to such vacation and leave as may be provided for under the current and future leave and vacation policies of Eagle for executive officers. 4.5 Office Space. Eagle will provide customary office space and office support to Murphy beginning on the Commencement Date. 4.6 Car Allowance. Eagle will pay Murphy a monthly car allowance of Five Hundred Dollars ($500.00). 4.7 Non-Life Insurance. Eagle will provide Murphy with group health, disability and other insurance as Eagle may determine appropriate and arranges for all employees of Eagle. 4.8 Life Insurance. 4.8.1 Eagle will obtain, and maintain at all times while this Agreement is in effect, a term life insurance policy (the "Policy") on Murphy in the amount of Six Hundred Thousand Dollars ($600,000.00), the particular product and carrier to be chosen by Eagle in its discretion. Murphy shall have the right to designate the beneficiary of the Policy. Eagle will pay the premium for the Policy at the standard rate. In the event Murphy is rated and the premium exceeds the standard rate, the Policy amount shall be lowered to the maximum amount that can be purchased at the standard rate for a Six Hundred Thousand Dollar ($600,000.00) policy. For example, if Murphy is rated and the standard rate for a Six Hundred Thousand Dollar ($600,000.00) policy would acquire a Five Hundred Thousand Dollar ($500,000.00) policy, Eagle would only be required to purchase the Five Hundred Thousand Dollar ($500,000.00) policy. 4.8.2 Eagle may, at its cost, obtain and maintain "key-man" life insurance on Murphy in such amount as determined by the Board from time to time. Murphy agrees to cooperate fully and to take all actions reasonably required by Eagle in connection with such insurance. 4.9 Expenses. Eagle shall promptly upon presentation of proper expense reports therefor reimburse Murphy, in accordance with the policies and procedures established from time to time by Eagle for its senior executive officers, for all reasonable and customary travel (other than local use of an automobile for which Murphy is being provided the car allowance) and other out-of-pocket expenses incurred by Murphy in the performance of his duties and responsibilities under this Agreement and promoting the business of Eagle, including appropriate membership fees, dues and the cost of attending meetings and conventions. 4.10 Retirement Plans. Murphy shall be entitled to participate in any and all qualified pension or other retirement plans of Eagle which may be applicable to executive personnel of Eagle. 4.11 Warrants. Murphy shall be issued warrants to acquire six thousand (6,000) shares of Eagle Bancorp, Inc. common stock. Such warrants shall be (a) exercisable on or after an initial public offering of said stock at an exercise price equal to the price to the public in the initial public offering and (b) subject to such terms and conditions as may be required by the underwriter of such offering and as may reasonably be imposed by Eagle with respect to securities of this nature. 4.12 Other Benefits. While this Agreement is in effect, Murphy shall be entitled to all other benefits that Eagle provides from time to time to its senior executive officers, including, but not limited to, any stock option plan and other incentive plans. 4.13 Eligibility. Participation in any health, life, accident, disability, medical expense or similar insurance plan or any qualified pension or other retirement plan shall be subject to the terms and conditions contained in such plan. All matters of eligibility for benefits under any insurance plans shall be determined in accordance with the provisions of the applicable insurance policy issued by the applicable insurance company. Eagle shall not be liable to Murphy, his family, heirs, executors, beneficiaries, personal or legal representatives or other successors for any payment payable or claimed to be payable under any insurance plan. 5. Conditions Subsequent to Continued Operation and Effect of Agreement. 5.1 Approval by Eagle by Bank Regulatory Agencies. This Agreement shall be null and void and of no force or effect if: (a) any Bank Regulatory Agency does not approve the charter of Eagle or otherwise fails to allow Eagle to commence operations within a reasonable period of time; (b) any Bank Regulatory Agency fails to approve Murphy for the position of Executive Vice President and Chief Operating Officer of Eagle; or (c) Eagle fails to raise or otherwise secure a minimum of Eight Million Dollars ($8,000,000.00) in initial capital. 5.2 Continued Approval by Bank Regulatory Agencies. This Agreement and all of its terms and conditions, and the continued operation and effect of this Agreement and Eagle's continuing obligations hereunder, shall at all times be subject to the continuing approval of any and all Bank Regulatory Agencies whose approval is a necessary prerequisite to the continued operation of Eagle. Should any term or condition of this Agreement, upon review by any Bank Regulatory Agency, be found to violate or not be in compliance with any then-applicable statute or any rule, regulation, order or understanding promulgated by any Bank Regulatory Agency, or should any term or condition required to be included herein by any such Bank Regulatory Agency be absent, this Agreement may be rescinded and terminated by Eagle if the parties hereto cannot in good faith agree upon such additions, deletions, or modifications as may be deemed necessary or appropriate to bring this Agreement into compliance. 6. Termination of Agreement. This Agreement may be terminated prior to expiration of the Term as provided below. 6.1 Definition of Cause. For purposes of this Agreement, "Cause" means: (a) any act of theft, fraud, intentional misrepresentation or similar conduct by Murphy in connection with or associated with the services rendered by Murphy to Eagle under this Agreement; (b) any failure of this Agreement to comply with any Bank Regulatory Agency requirement which is not cured in accordance with Section 5.2 within a reasonable period of time after written notice thereof; (c) any Bank Regulatory Agency action or proceeding against Murphy as a result of his negligence, fraud, malfeasance or misconduct; (d) material failure of Eagle to achieve budget requirements, performance standards or targets established annually by the Board, where such failure is not the result of economic conditions or lack of appropriate effort and/or due diligence by Murphy; or (e) any of the following conduct on the part of Murphy that Murphy has not corrected or cured within thirty (30) days after having received written notice from Eagle detailing and describing such conduct: (i) the use of drugs, alcohol or other substances by Murphy to an extent which materially interferes with or prevents Murphy from performing Murphy's duties under this Agreement; (ii) failure by or the inability of Murphy to devote full time, attention and energy to the performance of Murphy's duties pursuant to this Agreement (other than by reason of his death or disability); (iii) intentional material failure by Murphy to carry out the explicit lawful and reasonable directions, instructions, policies, rules, regulations or decisions of the Board or the President which are consistent with his position as Executive Vice President and Chief Executive Officer; or (iv) willful or intentional misconduct on the part of Murphy that results in substantial injury to Eagle or any of its parent, subsidiaries or affiliates. 6.2 Termination by Eagle. 6.2.1 For Cause. Eagle shall have the right to cancel and terminate this Agreement and Murphy's employment for Cause immediately on written notice. If Murphy is terminated for Cause, all rights to compensation and benefits shall cease as of the date of termination, provided, however, that Murphy shall be entitled to accrued compensation and benefits through the date of termination. 6.2.2 Without Cause. Eagle shall have the right to cancel and terminate this Agreement and Murphy's employment at any time on written notice without Cause for any or no reason, subject to the provisions of Section 6.4. 6.3 Termination by Murphy. Murphy shall have the right to cancel and terminate this Agreement and his employment at any time on sixty (60) days prior written notice to the Board. 6.4 Severance. Except as set forth below, if Murphy's employment with Eagle is terminated by Eagle or its successors during the Term without Cause, Eagle shall, for the balance of the Term, continue to pay Murphy, in the manner set forth below, Murphy's Salary at the rate being paid as of the date of termination plus the unpaid portion of the COO Bonus; provided, however, that Murphy shall not be entitled to any such payments of Salary and COO Bonus if his employment is terminated due to his death or long-term disability or this Agreement is rendered null and void pursuant to Section 5.1. Any Salary and COO Bonus due Murphy pursuant to this Section 6.4 shall be paid to Murphy in installments on the same schedule as Murphy was paid immediately prior to the date of termination, each installment to be the same amount Murphy would have been paid under this Agreement if he had not been terminated. In the event Murphy breaches any provision of Article 7 of this Agreement, Murphy's entitlement to any Salary or COO Bonus payable pursuant to this Section 6.4, if and to the extent not yet paid, shall thereupon immediately cease and terminate. 7. Confidentiality; Non-Competition; Non-Interference. 7.1 Confidential Information. Murphy, during employment by Eagle, will have access to and become familiar with various trade secrets and other confidential and proprietary information of Eagle, its parent, subsidiaries and/or affiliates and/or relating to the business of Eagle, its parent, subsidiaries and/or affiliates ("Confidential Information"), including, but not limited to: business plans; operating results; financial statements and financial information; marketing and business strategies and techniques; contracts; mailing lists; purchasing information; internal structure; customer data (including lists, names and requirements); feasibility studies; vendor data (including names, lists, and contract terms); operating methods and procedures; personnel related information (including compensation, compensation plans, and staffing plans); internal working documents and communications; and all other materials and information related to the businesses or activities of Eagle, its parent, subsidiaries and/or affiliates which is made available only to employees with a need to know or which is not generally made available to the public. Failure to mark any Confidential Information as confidential, proprietary or protected information shall not affect its status as part of the Confidential Information subject to the terms of this Agreement. 7.2 Nondisclosure. Murphy hereby covenants and agrees that Murphy shall not at any time, directly or indirectly, disclose, divulge, reveal, report, publish, or transfer any Confidential Information to any Person, or use Confidential Information in any way or for any purpose, except as required in the course of Murphy' employment by Eagle. The covenant set forth in this Section 7.2 shall not apply to information now known by the public or which becomes known generally to the public (other than as a result of a breach of this Article 7 by Murphy). 7.3 Documents. All files, papers, records, documents, compilations, summaries, lists, reports, notes, data, databases, tapes, sketches, drawings, memoranda, and similar items (collectively, "Documents"), in any form (including, without limitation, in hard copy, computerized, digital or other format and whether an original, duplicate, copy, recompilation, abstract or other version) and whether prepared by Murphy, or otherwise provided to or coming into the possession of Murphy, that contain any information about or pertaining or relating to Eagle, its parent, subsidiaries and/or affiliates and/or their businesses ("Eagle Information") shall at all times remain their exclusive property. Promptly after a request by Eagle or the termination of Murphy' employment, Murphy shall take reasonable efforts to (i) return to Eagle all Documents in any tangible form (whether originals, copies or reproductions) and all computer disks containing or embodying any Document or Eagle Information and (ii) purge and destroy all Documents and Eagle Information in any intangible form (including computerized, digital or other electronic format) as may be requested by Eagle, and Murphy shall not retain in any form (whether tangible or intangible) any such Document or any summary, compilation, synopsis or abstract of any Document or Eagle Information. 7.4 Non-Competition. 7.4.1 Murphy hereby acknowledges and agrees that, during the course of his employment by Eagle, Murphy will become familiar with and involved in all aspects of the business and operations of Eagle. Murphy hereby covenants and agrees that during the one (1) year period immediately following any termination or cessation of such employment Murphy will not at any time, directly or indirectly, in any capacity (whether as a proprietor, owner, agent, officer, director, shareholder, partner, principal, member, employee, contractor, consultant or otherwise) own, be employed by, render services to, or otherwise be involved or engaged in any manner in the operation of, a bank or savings and loan or a holding company of a bank or savings and loan that has an office or branch location within a fifty (50) mile radius of the location of Eagle's headquarters on the date of termination or cessation of employment. 7.4.2 This Section 7.4 shall not apply if (a) Eagle does not give Murphy one hundred twenty (120) days written notice prior to the end of the Term that it intends to seek an extension or renewal of this Agreement beyond the Term and, if such notice is given, Murphy gives Eagle written notice ninety (90) days prior to the end of the Term that he does not intend to continue employment beyond the Term, or (b) there is a (i) merger or consolidation with a third party in which Eagle is not the survivor, (ii) sale of a controlling interest in Eagle to a third party or (iii) a sale of all or substantially all of the business or assets of Eagle to a third party, and this Agreement is not assigned to such third party or Murphy's employment hereunder is otherwise terminated by such third party in connection with such merger, consolidation or sale. Further, ownership of less than two percent (2%) of the securities of any publicly held corporation shall not constitute a violation of this Section 7.4. 7.5 Non-Interference. Murphy hereby covenants and agrees that, at no time during the period of Murphy's employment by Eagle and for a period of one (1) year immediately following any termination of such employment, Murphy will not, directly or indirectly, for himself or any other Person (whether as a proprietor, owner, agent, officer, director, shareholder, partner, principal, member, employee, contractor, consultant or any other capacity), induce or attempt to induce any customers, suppliers, officers, employees, contractors, consultants, agents or representatives of, or any other person that has a business relationship with, Eagle or any of its parent, subsidiaries and affiliates to discontinue, terminate or reduce the extent of their relationship with Eagle and/or any such parent, subsidiary or affiliate or to take any action that would disrupt or otherwise be disadvantageous to any such relationship. 7.6 Injunction. In the event of any breach or threatened or attempted breach of any such provision by Murphy, Eagle shall, in addition to and not to the exclusion of any other rights and remedies at law or in equity, be entitled to seek and receive from any court of competent jurisdiction (i) full temporary and permanent injunctive relief enjoining and restraining Murphy and each and every other Person concerned therein from the continuation of such violative acts and (ii) a decree for specific performance of the applicable provisions of this Agreement, without being required to furnish any bond or other security. Further, Murphy shall not plead in defense thereto that there would be an adequate remedy at law. 7.7 Reasonableness. 7.7.1 Murphy has carefully read and considered the provisions of this Article 7 and, having done so, agrees that the restrictions and agreements set forth in this Article 7 are fair and reasonable and are reasonably required for the protection of the interests of Eagle and its business, shareholders, directors, officers and employees. Murphy further agrees that the restrictions set forth in this Agreement will not impair or unreasonably restrain Murphy's ability to earn a livelihood. 7.7.2 If any court of competent jurisdiction should determine that the duration, geographical area or scope of any provision or restriction set forth in this Article 7 exceeds the maximum duration, geographic area or scope that is reasonable and enforceable under applicable law, the parties agree that said provision shall automatically be modified and shall be deemed to extend only over the maximum duration, geographical area and/or scope as to which such provision or restriction said court determines to be valid and enforceable under applicable law, which determination the parties direct the court to make, and the parties agree to be bound by such modified provision or restriction. 8. Survival. Section 6.4 and Article 7 of this Agreement expressly survive any termination of this Agreement. 9. Assignability. Murphy shall have no right to assign this Agreement or any of Murphy's rights or obligations hereunder to another party or parties. Murphy acknowledges and agrees that Eagle may assign this Agreement and its rights and obligations hereunder without the consent of Murphy to EagleBank, a Maryland corporation, the entity established and controlled by Eagle to serve as the bank operating entity for the bank proposed to be established by Eagle (the "Operating Entity"). At such time as this Agreement is assigned to the Operating Entity the term "Eagle," for all purposes of this Agreement, shall mean and refer only to the Operating Entity, and Murphy acknowledges and agrees that, upon such assignment, Eagle Bancorp, Inc. shall be relieved of any further duties and obligations under this Agreement. 10. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Maryland applicable to contracts executed and to be performed therein, without giving effect to the choice of law rules thereof. 11. Notices. All notices, requests, demands and other communications required or permitted to be given under this Agreement shall be in writing and shall be conclusively deemed to have been duly given (1) when hand delivered to the other party, or (2) when received when sent by facsimile at the address and number set forth below (provided, however, that notices given by facsimile shall not be effective unless either (a) a duplicate copy of such facsimile notice is promptly given by depositing same in a United States post office with first-class postage prepaid and addressed to the parties as set forth below, or the receiving party delivers a written confirmation of receipt for such notice either by facsimile or any other method permitted under this subparagraph, additionally, any notice given by facsimile shall be deemed received on the next business day if such notice is received after 5:00 p.m. (recipient's time) or on a nonbusiness day); or (3) three (3) business days after the same have been deposited in a United States post office with first-class certified mail, return receipt, postage prepaid and addressed to the parties as set forth below; or (4) the next business day after same have been deposited with a national overnight delivery service reasonably approved by the parties (Federal Express and DHL WorldWide Express being deemed approved by the parties), postage prepaid, addressed to the parties as set forth below with next-business-day delivery guaranteed, provided that the sending party received a confirmation of delivery from the delivery service provider. The address of a party set forth below may be changed by that party by written notice to the other from time to time pursuant to this Article. To: Thomas D. Murphy 13205 Betty Lane Silver Spring, Maryland 20904 Fax: To: Eagle Bancorp, Inc. 7815 Woodmont Avenue Bethesda, Maryland 20814 Fax: 12. Entire Agreement. This Agreement contains all of the agreements and understandings between the parties hereto with respect to the employment of Murphy by Eagle, and supersedes all prior agreements, arrangements and understandings related to the subject matter hereof. No oral agreements or written correspondence shall be held to affect the provisions hereof. No representation, promise, inducement or statement of intention has been made by either party that is not set forth in this Agreement, and neither party shall be bound by or liable for any alleged representation, promise, inducement or statement of intention not so set forth. 13. Headings. The Article and Section headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 14. Severability. Should any part of this Agreement for any reason be declared or held illegal, invalid or unenforceable, such determination shall not affect the legality, validity or enforceability of any remaining portion or provision of this Agreement, which remaining portions and provisions shall remain in force and effect as if this Agreement has been executed with the illegal, invalid or unenforceable portion thereof eliminated. 15. Amendment; Waiver. Neither this Agreement nor any provision hereof may be amended, modified, changed, waived, discharged or terminated except by an instrument in writing signed by the party against which enforcement of the amendment, modification, change, waiver, discharge or termination is sought. The failure of either party at any time or times to require performance of any provision hereof shall not in any manner affect the right at a later time to enforce the same. No waiver by either party of the breach of any term, provision or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term, provision or covenant contained in this Agreement. 16. Gender and Tense. As used in this Agreement, the masculine, feminine and neuter gender, and the singular or plural number, shall each be deemed to include the other or others whenever the context so indicates. 17. Binding Effect. This Agreement is and shall be binding upon, and inures to the benefit of, Eagle, its successors and assigns, and Murphy and his heirs, executors, administrators, and personal and legal representatives. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. EAGLE: Eagle Bancorp, Inc. or assigns By: ------------------------------ Title: MURPHY: -------------------------------- Thomas D. Murphy EX-11 5 EXHIBIT 11 Exhibit 11 Statement of Computation of Per Share Earnings Set forth below are the bases for the computation of earnings per share for the periods shown. The Company had no options, warrants, convertible securities or other potentially dilutive securities outstanding during any period shown. Year Ended December 31, Earnings (loss) Per Common Share 1998 Basic $(1.61) Average Shares Outstanding 867,945 Diluted $(1.61) Average Shares Outstanding 867,945 EX-27 6 EXHIBIT 27 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. Exhibit 27
9 This schedule contains summary financial information extracted from the Form 10-KSB and is qualified in its entirety by reference to such financial statements. 0001050441 Eagle Bancorp, Inc. 1,000 US DOLLAR 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1 1,292 0 5,429 0 22,570 0 0 20,148 164 52,039 34,630 2,304 154 0 17 0 0 14,933 52,039 269 622 119 1,011 241 277 733 164 0 1,991 (1,399) (1,399) 0 0 (1,399) (1.61) (1.61) 5.67 0 0 0 0 0 0 0 164 164 0 164
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