SECURITIES AND EXCHANGE
COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date
of Report (Date of earliest event reported):
September 9,
2009
Eagle Bancorp, Inc.
(Exact
name of registrant as specified in its charter)
Maryland
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0-25923
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52-2061461
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(State or other
jurisdiction
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(Commission file
number)
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(IRS Employer
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of
incorporation)
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Number)
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7815 Woodmont Avenue, Bethesda, Maryland 20814
(Address
of Principal Executive Offices) (Zip Code)
Registrants
telephone number, including area code:
301.986.1800
Check
the appropriate box below if the Form 8-K is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (See General Instruction A.2. below):
o
Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
o
Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
o
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17
CFR 240.14d-2(b))
o
Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17
CFR 240.13e-4(c))
Item 8.01.
Other Events
Announcement
of Offering.
On
September 9, 2009, Eagle Bancorp, Inc. (the Company) issued the
attached press release announcing commencement of a public offering of its
common stock for up to $40 million of gross proceeds.
Update of
Risk Factors.
In connection with the Companys
announced offering of up to $40 million of common stock, the Company prepared a
description of certain risk factors relating to the Company, its business and
industry that are being presented to potential investors. These risk factors are generally an update
and revision of the risk factors included in the Companys Annual Report on Form 10-K
for the fiscal year ended December 31, 2009, as amended, and as previously
updated in the Companys quarterly reports on Form 10-Q filed thereafter.
Forward Looking
Statements.
This Form 8-K and other reports
filed by us under the Securities Exchange Act of 1934 or registration
statements under the Securities Act of 1933 contain statements that are
considered forward-looking statements within the meaning of United States
securities laws. These forward looking
statements represent plans, estimates, objectives, goals, guidelines,
expectations, intentions, projections and statements of our beliefs concerning
future events, business plans, objectives, expected operating results and the
assumptions upon which those statements are based. Forward looking statements
include without limitation, any statement that may predict, forecast, indicate
or imply future results, performance or achievements, and are typically
identified with words such as may, could, should, will, would,
believe, anticipate, estimate, expect, intend, plan, or
words or phases of similar meaning. We caution that the forward looking
statements are based largely on our expectations and are subject to a number of
known and unknown risks and uncertainties that are subject to change based on
factors which are, in many instances, beyond our control. Actual results,
performance or achievements could differ materially from those contemplated, expressed,
or implied by the forward looking statements.
The following factors,
among others, could cause our financial performance to differ materially from
that expressed in such forward looking statements:
·
The strength of the United States economy in general
and the strength of the local economies in which we conduct operations;
·
Geopolitical conditions, including acts or threats of
terrorism, actions taken by the United States or other governments in response
to acts or threats of terrorism and/or military conflicts, which could impact
business and economic conditions in the United States and abroad;
·
The effects of, and changes in, trade, monetary and
fiscal policies and laws, including interest rate policies of the Board of
Governors of the Federal Reserve System, or the Federal Reserve Board,
inflation, interest rate, market and monetary fluctuations;
·
The timely development of competitive new products and
services and the acceptance of these products and services by new and existing
customers;
·
The willingness of users to substitute competitors
products and services for our products and services;
·
The impact of changes in financial services policies,
laws and regulations, including laws, regulations and policies concerning
taxes, banking, securities and insurance, and the application thereof by
regulatory bodies;
·
The effect of changes in accounting policies and
practices, as may be adopted from time-to-time by bank regulatory agencies, the
Securities and Exchange Commission, or the SEC, the Public Company Accounting
Oversight Board, the Financial Accounting Standards Board or other accounting
standards setters;
·
Technological changes;
·
The effect of acquisitions we may make, including,
without limitation, the failure to achieve the expected revenue growth and/or
expense savings from such acquisitions;
·
The growth and profitability of non-interest or fee
income being less than expected;
·
Changes in the level of our non-performing assets and
charge-offs;
·
Changes in consumer spending and savings habits; and
2
·
Unanticipated regulatory or judicial proceedings.
If one or more of the
factors affecting our forward looking information and statements proves
incorrect, then our actual results, performance or achievements could differ
materially from those expressed in, or implied by, forward looking information
and statements contained in this prospectus supplement and the accompanying
prospectus, and in the information incorporated by reference herein and
therein. Therefore, we caution you not to place undue reliance on our forward
looking information and statements. Except as required by applicable law or
regulation, we will not update the forward looking statements to reflect actual
results or changes in the factors affecting the forward looking statements.
The following is a
discussion of risk factors applicable to the Company.
The price of our common stock may fluctuate significantly,
which may make it difficult for investors to resell shares of common stock at
time or prices they find attractive.
Our stock price may
fluctuate significantly as a result of a variety of factors, many of which are
beyond our control. These factors include, in addition to those described
above:
·
Actual or anticipated quarterly fluctuations in our
operating results and financial condition;
·
Changes in financial estimates or publication of
research reports and recommendations by financial analysts or actions taken by
rating agencies with respect to us or other financial institutions;
·
Speculation in the press or investment community
generally or relating to our reputation or the financial services industry;
·
Strategic actions by us or our competitors, such as
acquisitions, restructurings, dispositions or financings;
·
Fluctuations in the stock price and operating results
of our competitors;
·
Future sales of our equity or equity-related
securities;
·
Proposed or adopted regulatory changes or
developments;
·
Anticipated or pending investigations, proceedings, or
litigation that involve or affect us;
·
Domestic and international economic factors unrelated
to our performance; and
·
General market conditions and, in particular,
developments related to market conditions for the financial services industry.
In addition, in recent
years, the stock market in general has experienced extreme price and volume
fluctuations. This volatility has had a significant effect on the market price
of securities issued by many companies, including for reasons unrelated to
their operating performance. These broad market fluctuations may adversely
affect our stock price, notwithstanding our operating results. We expect that
the market price of our common stock will continue to fluctuate and there can
be no assurances about the levels of the market prices for our common stock.
Trading in the common stock has been light. As a result,
shareholders may not be able to quickly and easily sell their common stock,
particularly in large quantities.
Although our common stock
is listed for trading on The NASDAQ Capital Market and a number of brokers
offer to make a market in the common stock on a regular basis, trading volume
to date has been limited, averaging approximately 39,799 shares per day over the
three months ended August 31, 2009, and there can be no assurance that a
more active and liquid market for the common stock will develop or can be
maintained. As a result, shareholders may find it difficult to sell a
significant number of shares at the prevailing market price.
We are not currently able to pay cash dividends on the
common stock, or repurchase shares of common stock.
Until the earlier of December 5,
2011 and the date on which the United Stares Department of the Treasury, or the
Treasury, no longer holds any shares of our Fixed Rate Cumulative Perpetual
Preferred Stock, Series A, or
3
Series A Preferred Stock, our ability to declare
or pay cash dividends or distributions on, or purchase, redeem or otherwise
acquire for consideration, shares of common stock is subject to restrictions,
including a restriction against paying any dividends on the common stock
without Treasury consent. In addition, our ability to declare or pay cash dividends
or distributions on, or repurchase, redeem or otherwise acquire for
consideration, shares of common stock is subject to restrictions in the event
that we fail to declare and pay full dividends (or declare and set aside a sum
sufficient for payment thereof) on the Series A Preferred Stock. Even if
we were permitted to pay dividends under the terms of the Series A
Preferred Stock, our ability to pay dividends would be dependent on the
performance of the Bank, our principal operating subsidiary, and by the capital
requirements of our subsidiaries.
We may issue additional equity securities, or engage in
other transactions which dilute our book value or affect the priority of the
common stock, which may adversely affect the market price of our common stock.
Our board of directors
may determine from time to time that we need to raise additional capital by
issuing additional shares of our common stock or other securities. Except for
restrictions to be contained in the underwrriting agreement relating to the
announced offering, we are not restricted from issuing additional shares of
common stock, including securities that are convertible into or exchangeable
for, or that represent the right to receive, common stock. Because our decision
to issue securities in any future offering will depend on market conditions and
other factors beyond our control, we cannot predict or estimate the amount,
timing or nature of any future offerings, or the prices at which such offerings
may be affected. Such offerings could be dilutive to common stockholders. New
investors also may have rights, preferences and privileges that are senior to,
and that adversely affect, our then current common shareholders. Additionally,
if we raise additional capital by making additional offerings of debt or preferred
equity securities, upon liquidation, holders of our debt securities and shares
of preferred stock, and lenders with respect to other borrowings, will receive
distributions of our available assets prior to the holders of our common stock.
Additional equity offerings may dilute the holdings of our existing
stockholders or reduce the market price of our common stock, or both. Holders
of our common stock are not entitled to preemptive rights or other protections
against dilution.
Directors and officers of Eagle own approximately 20.1% of
the outstanding common stock. As a result of their combined ownership, they
could make it more difficult to obtain approval for some matters submitted to
shareholder vote, including acquisitions of the Company. The results of the
vote may be contrary to the desires or interests of the public shareholders.
Directors and executive
officers and their affiliates own approximately 20.1% of the outstanding shares
of common stock, and combined with directors of EagleBank, are believed to own
approximately 23.3% of the currently outstanding common stock, excluding in
each case shares which may be acquired upon the exercise of options. We
anticipate that our directors and officers will purchase additional shares. By
voting against a proposal submitted to shareholders, the directors and
officers, as a group, may be able to make approval more difficult for proposals
requiring the vote of shareholders, such as some mergers, share exchanges,
asset sales, and amendments to the articles of incorporation.
Substantial regulatory limitations on changes of control and
anti-takeover provisions of Maryland law may make it more difficult for you to
receive a change in control premium.
With certain limited
exceptions, federal regulations prohibit a person or company or a group of
persons deemed to be acting in concert from, directly or indirectly,
acquiring more than 10% (5% if the acquiror is a bank holding company) of any
class of our voting stock or obtaining the ability to control in any manner the
election of a majority of our directors or otherwise direct the management or
policies of our company without prior notice or application to and the approval
of the Federal Reserve Board. There are comparable prior approval requirements
for changes in control under Maryland law. Also, Maryland corporate law
contains several provisions that may make it more difficult for a third party
to acquire control of the Company without the approval of our board of
directors, and may make it more difficult or expensive for a third party to
acquire a majority of our outstanding common stock.
4
The current economic environment poses significant
challenges for us and could adversely affect our financial condition and
results of operations.
We are operating in a
challenging and uncertain economic environment. Financial institutions continue
to be affected by sharp declines in the real estate market and constrained
financial markets. Dramatic declines in the housing market over the past year,
with falling home prices and increasing foreclosures and unemployment, have
resulted in significant write-downs of asset values by financial institutions.
Continued declines in real estate values, home sales volumes, and financial
stress on borrowers as a result of the uncertain economic environment could
have an adverse effect on our borrowers or their customers, which could
adversely affect our financial condition and results of operations. A worsening
of these conditions would likely exacerbate the adverse effects on us and others
in the financial institutions industry. For example, further deterioration in
local economic conditions in our market could drive losses beyond that which is
provided for in our allowance for loan losses. We may also face the following
risks in connection with these events:
·
Economic conditions that negatively affect housing
prices and the job market have resulted, and may continue to result, in a
deterioration in credit quality of our loan portfolios, and such deterioration
in credit quality has had, and could continue to have, a negative impact on our
business;
·
Market developments may affect consumer confidence
levels and may cause adverse changes in payment patterns, causing increases in
delinquencies and default rates on loans and other credit facilities;
·
The methodologies we use to establish our allowance
for loan losses may no longer be reliable because they rely on complex
judgments, including forecasts of economic conditions, which may no longer be
capable of accurate estimation;
·
Continued turmoil in the market, and loss of
confidence in the banking system, could require the Bank to pay higher interest
rates to obtain deposits to meet the needs of its depositors and borrowers,
resulting in reduced margin and net interest income. If conditions worsen
significantly, it is possible that banks such as the Bank may be unable to meet
the needs of their depositors and borrowers, which could, in the worst case,
result in the Bank being placed into receivership; and
·
Compliance with increased regulation of the banking
industry may increase our costs, limit our ability to pursue business
opportunities, and divert management efforts.
As these conditions or
similar ones continue to exist or worsen, we could experience continuing or
increased adverse effects on our financial condition.
Our financial condition and results of operations would be
adversely affected if our allowance for loan losses is not sufficient to absorb
actual losses or if we are required to increase our allowance for loan losses.
Historically, we have
enjoyed a relatively low level of nonperforming assets and net charge-offs,
both in absolute dollars, as a percentage of loans and as compared to many of
our peer institutions. As a result of this historical experience, we have
incurred a relatively lower loan loss provision expense, which has positively
impacted our earnings. However, experience in the banking industry indicates
that a portion of our loans will become delinquent, that some of our loans may
only be partially repaid or may never be repaid and we may experience other
losses for reasons beyond our control. Despite our underwriting criteria and
historical experience, we may be particularly susceptible to losses due to: (1) the
geographic concentration of our loans, (2) the concentration of higher
risk loans, such as commercial real estate, construction and commercial and
industrial loans, (3) the relative lack of seasoning of certain of our
loans, and (4) our lack of experience with the significant volume of loans
acquired from Fidelity. As a result, we may not be able to maintain our
relatively low levels of nonperforming assets and charge-offs. Although we
believe that our allowance for loan losses is maintained at a level adequate to
absorb any inherent losses in our loan portfolio, these estimates of loan
losses are necessarily subjective and their accuracy depends on the outcome of
future events. If we need to make significant and unanticipated increases in
our loss allowance in the future, our results of operations and financial
condition would be materially adversely affected at that time.
5
While we strive to
carefully monitor credit quality and to identify loans that may become
nonperforming, at any time there are loans included in the portfolio that will
result in losses, but that have not been identified as nonperforming or
potential problem loans. We cannot be sure that we will be able to identify
deteriorating loans before they become nonperforming assets, or that we will be
able to limit losses on those loans that are identified. As a result, future
additions to the allowance may be necessary.
Economic conditions and
increased uncertainty in the financial markets could adversely affect ability
to accurately assess our allowance for credit losses. Our ability to assess the
creditworthiness of our customers or to estimate the values of our assets and
collateral for loans will be reduced if the models and approaches we use become
less predictive of future behaviors, valuations, assumptions or estimates. We
estimate losses inherent in our credit exposure, the adequacy of our allowance
for loan losses and the values of certain assets by using estimates based on
difficult, subjective, and complex judgments, including estimates as to the
effects of economic conditions and how these economic conditions might affect
the ability of our borrowers to repay their loans or the value of assets.
Lack of seasoning
of our loan portfolio may increase the risk of credit defaults in the future.
Due to our rapid growth,
a substantial amount of the loans in our portfolio and of our lending
relationships are of relatively recent origin. In general, loans do not begin
to show signs of credit deterioration or default until they have been
outstanding for some period of time, a process referred to as seasoning. A
portfolio of older loans will usually behave more predictably than a newer
portfolio. As a result, because a large portion of our loan portfolio is relatively
new, the current level of delinquencies and defaults may not be representative
of the level that will prevail when the portfolio becomes more seasoned, which
may be higher than current levels. If delinquencies and defaults increase, we
may be required to increase our provision for loan losses, which would
adversely affect our results of operations and financial condition.
Our continued growth depends on our ability to meet minimum
regulatory capital levels. Growth and shareholder returns may be adversely
affected if sources of capital are not available to help us meet them.
As we grow, we will have
to maintain our regulatory capital levels at or above the required minimum
levels. If earnings do not meet our current estimates, if we incur unanticipated
losses or expenses, or if we grow faster than expected, we may need to obtain
additional capital sooner than not have continued access to sufficient capital,
we may be required to reduce our level of assets or reduce our rate of growth
in order to maintain regulatory compliance. Under those circumstances net
income and the rate of growth of net income may be adversely affected.
Additional issuances of equity securities could have a dilutive effect on
existing shareholders.
There can be no assurance that recent legislation and
regulatory actions taken by the federal government will help stabilize the
financial system in the United States.
Several pieces of federal
legislation have been enacted, and the Treasury, the Federal Reserve Board, the
Federal Deposit Insurance Corporation, or FDIC, and other federal agencies have
enacted numerous programs, policies and regulations to address the current
liquidity and credit crises. These measures include the Emergency Economic
Stimulus Act of 2008, or EESA, the American Reinvestment and Recovery Act of
2009, or ARRA, and the numerous programs, including the TARP Capital Purchase
Program, or the CPP, and, expanded deposit insurance coverage, enacted
thereunder. In addition, the Secretary of the Treasury has proposed fundamental
changes to the regulation of financial institutions, markets and products.
We cannot predict the
actual effects of EESA, ARRA, the proposed regulatory reform measures and
various governmental, regulatory, monetary and fiscal initiatives which have
been and may be enacted on the financial markets, on us and the Bank. The terms
and costs of these activities, or the failure of these actions to help
stabilize the financial markets, asset prices, market liquidity and a
continuation or worsening of current
6
financial market and economic conditions could
materially and adversely affect our business, financial condition, results of
operations, and the trading prices of our securities.
We expect to face
increased regulation of our industry, including as a result of EESA, ARRA and
related initiatives by the federal government. Compliance with such regulations
may increase our costs and limit our ability to pursue business opportunities.
The Company is subject to additional uncertainties, and
potential additional regulatory or compliance burdens, as a result of its
participation it the CPP.
The Company accepted an
investment of $38.235 million from the Treasury under the CPP. The Stock
Purchase Agreement executed by the Company (and all other participating
institutions) and Treasury, provides that Treasury may unilaterally amend the
agreement to the extent required to comply with any changes after the execution
in applicable federal statutes. As a result of this provision, the Treasury and
U.S. Congress may impose additional requirements or restrictions on the Company
and the Bank in respect of reporting, compliance, corporate governance,
executive or employee compensation, dividend payments, stock repurchases,
lending or other business practices, capital requirements or other matters. The
Company and Bank may be required to expend additional resources in order to
comply with these requirements. Such additional requirements could impair the
Companys ability to compete with institutions that are not subject to the
restrictions because they did not accept an investment from the Treasury. To
the extent that additional restrictions or limitations on employee compensation
are imposed, such as those contained in ARRA and the regulations issued in June 2009,
the Company and the Bank may be less competitive in attracting and retaining
successful incentive compensation based lenders and customer relations
personnel, or senior executive officers.
Additionally, the ability
of the U.S. Congress to utilize the amendment provisions to effect political or
public relations goals could result in the Company and the Bank being subjected
to additional burdens as a result of public perceptions of issues relating to
the largest banks, and which are not applicable to community oriented
institutions such as the Company. The Company may be disadvantaged as a result
of these uncertainties.
As a result of the
issuance of the Series A Preferred Stock to the Treasury, the Company is required
to comply with certain restrictions on executive and employee compensation
included in EESA, as amended. Certain of these provisions could limit the
amount and the tax deductibility of compensation the Company pays to its
executive officers, and could have an adverse affect on the ability of the
Company to compete for and retain employees and senior executive officers.
Our results of operations, financial condition and the value
of our shares may be adversely affected if we are not able to maintain our
historical growth rate.
Since opening for
business in 1998, our asset level has increased rapidly, including a 77%
increase in 2008. Over the past five fiscal years (2004 - 2008), our net income
has increased at an average annual rate of 18%, with a decline in net income of
4% in 2008. We may not be able to achieve comparable results in future years.
As our asset size and earnings increase, it may become more difficult to
achieve high rates of increase in assets and earnings. Additionally, it may become
more difficult to achieve continued improvements in our expense levels and
efficiency ratio. We may not be able to maintain the relatively low levels of
nonperforming assets that we have experienced. Declines in the rate of growth
of income or assets or deposits, and increases in operating expenses or
nonperforming assets may have an adverse impact on the value of the common
stock.
7
Higher FDIC deposit insurance premiums and assessments could
adversely affect our financial condition.
FDIC insurance premiums have increased substantially
in 2009 already, and we expect to pay significantly higher FDIC premiums in the
future. A large number of bank failures has significantly depleted the deposit
insurance fund and reduced the ratio of reserves to insured deposits. The FDIC
adopted a revised risk-based deposit insurance assessment schedule on February 27,
2009, which raised deposit insurance premiums. On May 22, 2009, the FDIC
also implemented a five basis point special assessment of each insured
depository institutions assets minus Tier 1 capital as of June 30, 2009,
but no more than 10 basis points times the institutions assessment base for
the second quarter of 2009, to be collected on September 30, 2009.
Additional special assessments may be imposed by the FDIC in the future,
including a possible additional assessment in 2009. We participate in the FDICs
Temporary Liquidity Guarantee Program, or TLG, for noninterest-bearing
transaction deposit accounts. Banks that participate in the TLGs
noninterest-bearing transaction account guarantee will pay the FDIC an annual
assessment of 10 basis points on the amounts in such accounts above the amounts
covered by FDIC deposit insurance. To the extent that these TLG assessments are
insufficient to cover any loss or expenses arising from the TLG program, the
FDIC is authorized to impose an emergency special assessment on all
FDIC-insured depository institutions. The FDIC has authority to impose charges
for the TLG program upon depository institution holding companies, as well. The
FDIC has extended the TLG to June 30, 2010, and increased the fee to banks
that elect to participate in the extension to 15 to 25 basis points, depending
on the institutions risk category. The Bank expects that it will continue to
participate in the TLG. These changes will cause our deposit insurance expense
to increase. These actions could significantly increase our noninterest expense
in 2009 and for the foreseeable future.
We may not be able to successfully manage continued growth.
We intend to seek further growth in the level of our
assets and deposits and the number of our branches, both within our existing
footprint and possibly to expand our footprint in the Maryland and Virginia suburbs,
and in Washington, DC. We may not be able to manage increased levels of assets
and liabilities, and an expanded branch system, without increased expenses and
higher levels of nonperforming assets. We may be required to make additional
investments in equipment and personnel to manage higher asset levels and loan
balances and a larger branch network, which may adversely impact earnings,
shareholder returns and our efficiency ratio. Increases in operating expenses
or nonperforming assets may have an adverse impact on the value of our common
stock.
We may face risks with respect to future expansion or
acquisition activity.
We regularly seek to
expand our banking operations through de novo branching or acquisition
activities, and expect to continue to explore such opportunities. We cannot be
certain that any expansion activity, through de novo branching, acquisition of
branches of another financial institution or a whole institution, or
acquisition of nonbanking financial service companies, will prove profitable or
will increase shareholder value. The success of any acquisition will depend, in
part, on our ability to realize the estimated cost savings and revenue
enhancements from combining the businesses of the Company and the target
company. Our ability to realize increases in revenue will depend, in part, on
out ability to retain customers and employees, and to capitalize on existing
relationships for the provision of additional products and services. If our
estimates turn out to be incorrect or we are not able to successfully combine
companies, the anticipated cost savings and increased revenues may not be
realized fully or at all, or may take longer to realize than expected. It is
possible that the integration process could result in the loss of key employees,
the disruption of each companys ongoing business or inconsistencies in
standards, controls, procedures and policies that adversely affect our ability
to maintain relationships with clients and employees or to achieve the
anticipated benefits of the merger. As with any combination of banking
institutions, there also may be disruptions that cause us to lose customers or
cause customers to withdraw their deposits from our banks. Customers may not
readily accept changes to their banking arrangements that we make as part of or
following an acquisition. Additionally, the value of an acquisition to the
Company is dependent on our ability to successfully identify and estimate the
magnitude of, any asset quality issues of acquired companies.
8
Our concentrations of loans may create a greater risk of
loan defaults and losses.
A substantial portion of
our loans are secured by real estate in the Washington, DC metropolitan area,
and substantially all of our loans are to borrowers in that area. We also have
a significant amount of real estate construction loans and land related loans
for residential and commercial developments. At June 30, 2009, 75.3% of
our loans were secured by real estate, primarily commercial real estate.
Management believes that the commercial real estate concentration risk is
mitigated by diversification among the types and characteristics of real estate
collateral properties, sound underwriting practices, and ongoing portfolio
monitoring and market analysis. Of these loans, $275.1 million, or 21% were
construction and land development loans. An additional $317.7 million, or 24%
of portfolio loans were commercial and industrial loans which are not primarily
secured by real estate. These categories of loans generally have a higher risk
of default than other types of loans, such as single family residential
mortgage loans. The repayments of these loans often depends on the successful
operation of a business or the sale or development of the underlying property
and as a result, are more likely to be adversely affected by adverse conditions
in the real estate market or the economy in general. While we believe that our
loan portfolio is well diversified in terms of borrowers and industries, these
concentrations expose us to the risk that adverse developments in the real
estate market, or in the general economic conditions in the Washington, DC
metropolitan area, could increase the levels of nonperforming loans and
charge-offs, and reduce loan demand. In that event, we would likely experience
lower earnings or losses. Additionally, if, for any reason, economic conditions
in our market area deteriorate, or there is significant volatility or weakness
in the economy or any significant sector of the areas economy, our ability to
develop our business relationships may be diminished, the quality and
collectability of our loans may be adversely affected, the value of collateral
may decline and loan demand may be reduced. Under guidance from the banking
agencies, we may be required to maintain higher levels of capital than we would
otherwise be expected to maintain, and to employ greater risk management
efforts, as a result of our real estate concentrations.
Commercial, commercial
real estate and construction loans tend to have larger balances than single
family mortgages loans and other consumer loans. Because the loan portfolio
contains a significant number of commercial and commercial real estate and
construction loans with relatively large balances, the deterioration of one or
a few of these loans may cause a significant increase in nonperforming assets.
An increase in nonperforming loans could result in: a loss of earnings from
these loans, an increase in the provision for loan losses, or an increase in
loan charge-offs, which could have an adverse impact on our results of
operations and financial condition.
Further, under guidance
adopted by the federal banking regulators, banks which have concentrations in
construction, land development or commercial real estate loans (other than
loans for majority owner occupied properties) would be expected to maintain
higher levels of risk management and, potentially, higher levels of capital. It
is possible that we may be required to maintain higher levels of capital than
we would otherwise be expected to maintain as a result of our levels of
construction, development and commercial real estate loans, which may require
us to obtain additional capital sooner than we would otherwise seek it, which
may reduce shareholder returns.
Additionally, through
ECV, we provide subordinated financing for the acquisition, development and
construction of real estate or other projects, the primary financing for which
is provided by the Bank. These subordinated financings and the business of ECV
will generally entail a higher risk profile (including lower priority and
higher loan to value ratios) than loans made by the Bank. A portion of the
amount which the Company expects to receive for such loans will be payments
based on the success, sale or completion of the underlying project, and as such
the income of the Company may be more volatile from period to period, based on
the status of such projects. The Company may not be able to successfully
operate or manage the business of providing higher loan to value financing.
9
Changes in interest rates and other factors beyond our
control could have an adverse impact on our financial performance and results.
Our operating income and
net income depend to a great extent on our net interest margin, i.e., the
difference between the interest yields we receive on loans, securities and
other interest bearing assets and the interest rates we pay on interest bearing
deposits and other liabilities. Net interest margin is affected by changes in
market interest rates, because different types of assets and liabilities may
react differently, and at different times, to market interest rate changes.
When interest bearing liabilities mature or reprice more quickly than interest
earning assets in a period, an increase in market rates of interest could
reduce net interest income. Similarly, when interest earning assets mature or
reprice more quickly than interest bearing liabilities, falling interest rates
could reduce net interest income These rates are highly sensitive to many
factors beyond our control, including competition, general economic conditions
and monetary and fiscal policies of various governmental and regulatory
authorities, including the Federal Reserve Board.
We attempt to manage our
risk from changes in market interest rates by adjusting the rates, maturity,
repricing, and balances of the different types of interest earning assets and
interest bearing liabilities, but interest rate risk management techniques are
not exact. As a result, a rapid increase or decrease in interest rates could
have an adverse effect on our net interest margin and results of operations. At
June 30, 2009, our cumulative net liability sensitive twelve month gap
position was 3.2% of total assets and as such we expect that the decline in
projected net interest income and net income over a twelve month period
resulting from a 100 basis point increase in rates would be approximately 1.9%
and 6.8% respectively. The results of our interest rate sensitivity simulation
model depend upon a number of assumptions which may not prove to be accurate.
There can be no assurance that we will be able to successfully manage our
interest rate risk. Increases in market rates and adverse changes in the local
residential real estate market, the general economy or consumer confidence
would likely have a significant adverse impact on our noninterest income, as a
result of reduced demand for residential mortgage loans, which we make on a
pre-sold basis.
Adverse changes in the
real estate market in our market area could also have an adverse affect on our
cost of funds and net interest margin, as we have a large amount of noninterest
bearing deposits related to real estate sales and development. While we expect
that we would be able to replace the liquidity provided by these deposits, the
replacement funds would likely be more costly, negatively impacting earnings.
Additionally, changes in
applicable law, if enacted, including those that would permit banks to pay
interest on checking and demand deposit accounts established by businesses,
could have a significant negative effect on net interest income, net income,
net interest margin, return on assets and return on equity. At June 30,
2009, 18.5% of our deposits were noninterest bearing demand deposits.
The requirement that the
Bank commence paying deposit insurance premiums in 2007 also adversely affected
our results of operations. Prior to 2007, we were never required to pay any
deposit insurance premiums. Future payments of deposit insurance premiums may
have an adverse effect on our earnings. The FDIC has adopted rules providing
for a substantial increase in deposit premiums, including a special assessment.
We may not be able to adjust our deposit pricing to fully reflect these
additional costs. These changes or other legislative or regulatory developments
could have a significant negative effect on our net interest income, net
income, net interest margin, return on assets and return on equity.
We may not be able to successfully compete with others for
business.
The Washington, DC
metropolitan statistical area in which we operate is considered highly
attractive from an economic and demographic viewpoint, and is a highly
competitive banking market. We compete for loans, deposits, and investment
dollars with numerous regional and national banks, online divisions of
out-of-market banks, and other community banking institutions, as well as other
kinds of financial institutions and enterprises, such as securities firms,
insurance companies, savings associations, credit unions, mortgage brokers, and
private lenders. Many competitors have substantially greater resources than us,
and operate under less stringent regulatory environments. The differences in
resources and regulations may make it harder for us to compete profitably,
reduce the rates that we can earn on loans and investments, increase the
10
rates we must offer on deposits and other funds, and
adversely affect our overall financial condition and earnings.
If dividends paid on our investment in the Federal Home Loan
Bank of Atlanta continue to be suspended, or if our investment is classified as
other-than-temporarily impaired, our earnings and/or stockholders equity could
decrease.
We own common stock of
the Federal Home Loan Bank of Atlanta, or FHLB, in order to qualify for
membership in the Federal Home Loan Bank system and to be eligible to borrow
funds under the FHLBs advance program. There is no market for our FHLB common
stock. The FHLB reported losses for the quarter ended March 31, 2009,
primarily due to other-than-temporary impairment, or OTTI, charges on its
private-label mortgage backed securities portfolio. As a result of the losses,
the FHLB also temporarily suspended the dividend on, and redemptions of, its
common stock, although it resumed a reduced dividend for the second quarter.
The continued reduction of the dividend will decrease our income, and continued
losses by the PHLB, or uncertainty regarding dividend payments or redemption
could result in our investment in FHLB common stock being deemed to be OTTI,
which would cause our earnings and stockholders equity to decrease by the
after-tax amount of the impairment charge.
Government regulation will significantly affect the Banks
business, and may result in higher costs and lower shareholder returns.
The banking industry is
heavily regulated. Banking regulations are primarily intended to protect the
federal deposit insurance funds and depositors, not shareholders. The Company
and Bank are regulated and supervised by the Maryland Department of Financial
Regulation, the Federal Reserve Board and the FDIC. The burden imposed by
federal and state regulations puts banks at a competitive disadvantage compared
to less regulated competitors such as finance companies, mortgage banking
companies and leasing companies. Changes in the laws, regulations and
regulatory practices affecting the banking industry may increase our costs of
doing business or otherwise adversely affect us and create competitive
advantages for others. Regulations affecting banks and financial services
companies undergo continuous change, and we cannot predict the ultimate effect
of these changes, which could have a material adverse effect on our
profitability or financial condition. Federal economic and monetary policy may
also affect our ability to attract deposits and other funding sources, make
loans and investments, and achieve satisfactory interest spreads.
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Item 9.01
Financial Statements and Exhibits
(a) Financial
Statements of Business Acquired. Not
applicable.
(b) Pro Forma
Financial Information. Not applicable.
(c) Shell Company
Transactions. Not applicable.
(d) Exhibits.
99
Press
Release dated September 9, 2009
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Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
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EAGLE BANCORP, INC.
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By:
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/s/ Ronald D. Paul
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Ronald D. Paul, President, Chief Executive Officer
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Dated: September 9,
2009
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