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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
- -
OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
For the fiscal year ended March 31, 1997.
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ...............to................
Commission file number: 0-14379
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EAGLE BANCSHARES, INC.
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(Exact name of registrant as specified in its charter)
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GEORGIA 58-1640222
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(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
4305 LYNBURN DRIVE, TUCKER, GEORGIA 30084-4441
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 770-908-6690
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $1.00
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National Association of Securities Dealers Automated Quotation System
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(Name of each exchange on which registered.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
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Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by nonaffiliates
of the registrant as of July 11, 1997.
Common Stock, $1.00 par value - $101,874,492 based upon the closing price
on July 11, 1997, using beneficial ownership of stock rules adopted pursuant to
Section 13 of the Securities Exchange Act of 1934 to exclude voting stock owned
by directors and certain executive officers, some of whom may not be held to be
affiliates upon judicial determination.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of July 11, 1997. Common Stock $1.00 par value -
5,659,694 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the fiscal year ended
March 31, 1997 ("Annual Report to Stockholders"). (Parts I, II, and IV)
Portions of the definitive proxy statement for the 1997 annual meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A within 120 days of the Registrant's fiscal year end. (Part III)
Index of Exhibits on Page 55
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EAGLE BANCSHARES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
TABLE OF CONTENTS
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Item Page
Number Number
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PART I
1. Business...................................................................3
2. Properties................................................................22
3. Legal Proceedings.........................................................23
4. Submission of Matters to a Vote of
Security Holders..........................................................23
PART II
5. Market for the Registrant's Common Equity
and Related Stockholder Matter............................................24
6. Selected Financial Data...................................................25
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................26
8. Financial Statements and Supplementary Data...............................51
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ......................................52
PART III
10. Directors and Executive Officers of the Registrant........................52
11. Executive Compensation....................................................52
12. Security Ownership of Certain Beneficial Owners
and Management............................................................52
13. Certain Relationships and Related Transactions............................53
PART IV
14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.......................................................53
Signatures....................................................................54
Index of Exhibits.............................................................55
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PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Eagle Bancshares, Inc. (the "Company") is a unitary savings and loan
holding company headquartered in Tucker, Georgia which owns and operates Tucker
Federal Bank ("Tucker Federal" or the "Bank") and Eagle Real Estate Advisors,
Inc. ("EREA"). The Bank is a federally chartered stock savings and loan
association organized in 1956 and based in Tucker, Georgia. The Bank serves the
metropolitan Atlanta area through its home office and 14 full service branch
offices. The Bank's deposits are federally insured by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
The Bank is the largest community financial institution headquartered in the
metropolitan Atlanta area. The Bank has two subsidiaries, Prime Eagle Mortgage
Corporation ("PrimeEagle") and Eagle Service Corporation. As a unitary thrift
holding company, Eagle is permitted, under current regulations, to engage in
activities that bank holding companies cannot legally engage. Therefore, the
Company formed EREA in 1991 initially to perform real estate brokerage
activities. Over the previous three years, EREA has engaged in real estate
development activities and brokerage services.
The Company is engaged in three lines of business through its
subsidiaries: community banking, mortgage banking and real estate investment.
At March 31, 1997, the Company had total assets of $823,882,000, total deposits
of $557,724,000 and stockholders' equity of approximately $67,874,000.
On March 26, 1997, Eagle acquired all of the outstanding shares of
Southern Crescent Financial Corp. ("SCFC"), a bank holding company located in
Union City, Georgia, with four branches, in accordance with the Agreement and
Plan of Merger (the "Merger Agreement") dated August 13, 1996. Simultaneously
therewith, Southern Crescent Bank, a wholly owned commercial bank subsidiary of
SCFC, merged with and into the Bank. The Company is the surviving corporation
in the merger, and Tucker Federal is the surviving entity in the bank merger
and will remain a wholly owned savings association of the Company. The merger
was accounted for as a pooling of interests, and accordingly, the consolidated
financial statements have been restated to include SCFC for all periods
presented.
The purchase price of the transaction was approximately $18,500,000
based on the average of the closing bid and ask price quoted for Eagle
Bancshares on the NASDAQ for the 30 consecutive trading days ending on the date
that was five trading days prior to the closing date. Based on the calculated
stock price, SCFC shareholders received 1.162 shares of Company stock for each
share of SCFC stock. This was the minimum exchange ratio as defined in the
Merger Agreement, and as a result, the Company issued 1,107,494 shares of
common stock.
Prior to 1989, the Bank was engaged primarily in the traditional
business associated with thrift institutions, including the taking of deposits
from the general public and making loans for its portfolio secured by first
mortgage liens on residential and other real estate. Beginning in 1989, the
Bank expanded the focus of its operations to include the development of a loan
production business and the sale of mortgage loans to third parties. In
connection with the expansion of its operations, in 1989 the Bank organized
Atlanta Mortgage Services as a division of Eagle Service Corporation for the
purpose of originating and selling single-family first mortgage loans in the
metropolitan Atlanta area. In November 1992, the Bank acquired the loan
production operation of Prime Lending.
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The Company's strategic focus is based on three basic principals to
enhance shareholder value:
(1) Deliver financial performance within the top quartile of its peer
group,
(2) Develop new business opportunities by taking advantage of the
unitary thrift holding company structure,
(3) Invest capital in growth when the long term return on capital
meets or exceeds minimum requirements.
In keeping with these principles, the Company has developed priorities
to increase shareholder value within the three lines of business: community
banking, mortgage banking and real estate investment.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Community Banking - The Bank is primarily engaged in making commercial
and consumer loans funded by attracting deposits from the general public. In
addition to deposits, sources of funds for the Bank's loans and other
investments include origination and other fees charged on certain types of
loans, prepayment of loans, and in sales of investment securities. The
Company's ability to attract both small business and consumer loans, as well as
deposits, was significantly expanded with the recent acquisition of SCFC. The
banking group has reorganized the management structure to provide for a higher
level of customer service. The Company intends to expand its portfolio of
commercial and consumer loans to increase its level of higher yielding assets
in its loan portfolio. In addition, management has identified opportunities to
improve operational efficiencies which have lead to the selection of a new data
services provider. The principal sources of income for the Bank are interest
and fees collected on loans and, to a lesser extent, interest and dividends
collected on other investments and service charges on deposit accounts. The
principal expenses of the Bank are interest paid on deposits, employee
compensation, office expenses and other overhead expenses.
The Bank competes for loans and deposits with many financial
institutions that are larger and have greater financial resources. In order to
remain competitive, the Bank attempts to identify the specific needs of its
target markets and to design financial products and services to fill those
needs. Additionally, many customers of the Bank express a desire to bank with a
local financial institution. The Bank believes this community banking niche is
one Tucker Federal can fill with a level of personal service applied to each
customer that may not be available from larger national financial institutions.
Mortgage Banking - Effective April 1, 1995, the Bank consolidated its
real estate lending activities into its operating subsidiary, PrimeEagle.
PrimeEagle originates single family mortgage and construction loans from its 20
loan production offices in five southeastern states. Loans are funded primarily
through the sale of these loans in the secondary market, as well as, through
the Bank's ability to borrow from the Federal Home Loan Bank.
PrimeEagle generates revenues through interest on construction and
permanent mortgage loans and selling substantially all of the fixed rate
permanent mortgage loans to investors. PrimeEagle's primary source of fee
income is derived from services including loan application and origination, the
gain or loss on the sale of loans to third parties and from the sale of
mortgage servicing rights. Proceeds from sales of mortgage servicing rights are
the largest component of revenues called mortgage production fees. Management's
analysis of the timing of mortgage prepayments and fluctuations in the value of
servicing rights impact the Company's decision to retain or sell servicing. As
a result of this analysis, the Company has sold substantially all of its fixed
rate mortgage loans on a servicing released basis during the previous five
years.
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The Company provides construction financing in each of its markets and
obtains significant benefits by coordinating the efforts of its construction
lending and permanent lending operations. The Company's permanent mortgage
products are primarily used for purchasing and refinancing single family homes
and producing fee income. Non-interest revenues are also earned as a result of
the Company's construction lending activities. The Company significantly
expanded its mortgage banking activity in 1992 when it acquired the Prime
Lending Division.
Tucker Federal Bank acquired the assets of the Prime Lending Division
of Southern Federal Savings and Loan Association (the "Division") (now a
division of PrimeEagle) from the RTC on November 23, 1992. In connection with
this acquisition, the Bank entered into an operating agreement with a
corporation owned by two individuals who participate in the profits and losses
pursuant to the agreement. The term of the agreement is for five years and is
automatically renewable for an additional three year period unless either party
gives at least 90 days' prior written notice of their desire not to renew
(August 25, 1997). In the event that Tucker Federal elects not to renew the
agreement, the two individuals have the right, but not the obligation, to
purchase certain assets of the Division for 75 percent of their appraised fair
market value, upon assuming all obligations associated with the Division. The
specific impact of nonrenewal on the financial condition of the Company, if
any, cannot be determined at this time.
The Company is involved in an in-depth assessment of the mortgage
banking group. This includes evaluating each office's profitability, business
prospects, and carefully considering the business potential of each local
market. In connection with this analysis, the Company is examining the
alternatives with regard to the above-mentioned agreement including nonrenewal.
For financial information regarding industry segments, see Note 14 of
Notes to Consolidated Financial Statements.
Eagle Real Estate Advisors, Inc. ("EREA") was formed in October 1991
as a wholly-owned real estate services subsidiary of the Company to perform
third party real estate brokerage and development activities, assist the Bank
in identifying and acquiring branch sites and assist in disposing of real
estate acquired through foreclosure. In 1994, EREA invested in the Company's
first development project. In connection with its development activities, the
Company and EREA select only local projects that management believes are well
located and where zoning, utility and economic risks can be minimized before
the Company commits its capital or financial guarantee to engage in development
activities.
(c) NARRATIVE DESCRIPTION OF BUSINESS
The Company is headquartered in the metropolitan Atlanta, Georgia area
and derives a significant portion of its loans and deposits in that area. The
acquisition of SCFC expanded the Company's market in the Atlanta area. In
addition, the Company has expanded its mortgage and construction lending to
other cities in Georgia as well as North Carolina, South Carolina, Florida and
Tennessee. In recent years, the metropolitan Atlanta area has enjoyed strong
economic growth, including growth in employment and population. The Company has
benefited from this growth in the past and expects that its continued growth
and profitability will depend in part on the continued growth and the economic
conditions in the Atlanta area.
As a result of the 1996 Centennial Olympic games employment,
population and economic activities grew rapidly in the Atlanta area. Slightly
slower growth in employment and population is projected for Atlanta for the
period from 1996 to 2001. However, in terms of absolute annual
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growth, Atlanta's population is forecasted to be the most rapidly growing
standard metropolitan statistical area in the country for the period from 1996
to 2001. Employment data is the most important factor in determining the
strength of a given market. Job formations are the catalyst which initiates
population and household growth. Atlanta is projected to rank number one in
terms of absolute annual growth in employment for the period from 1996 to 2001
and is projected to create 73,000 jobs a year. This compares to 80,800 jobs
created during the Olympic build-up from 1991 to 1996. Since the Olympics,
Atlanta's growth continues to exceed growth in other areas of the country. No
assurances can be given that the metropolitan Atlanta area will continue to
have a strong economy or that, if the economy continues to be strong, the
Company will benefit from that economy.
LENDING ACTIVITIES
GENERAL
The Bank's loan portfolio consists of mortgage, construction,
commercial, consumer, home equity and SBA loans offered through its 14 bank
branches and 20 PrimeEagle loan production offices located in metropolitan
Atlanta and five southeastern states. As a result of the acquisition of SCFC
and the addition of new commercial lending officers, the Bank has increased its
line of products to attract the small business customer. The Company believes
that the small business market is currently underserved in the Atlanta
metropolitan area. In addition, the Bank's construction lending activities take
advantage of the cross selling opportunities between construction lending and
mortgage loan originations. In each market, the Bank follows the same stringent
underwriting and construction monitoring procedures. Over the past year, the
Bank elected to wind down its equipment leasing operation due to delinquencies
experienced in this portfolio.
The acquisition of the Prime Lending operations in November 1992
broadened the Company's mortgage lending area outside of the metropolitan
Atlanta market. To date, the Company's lending in these areas has experienced
consistent growth in loan originations. However, PrimeEagle operates in markets
which may be impacted by military bases and their resulting housing
requirements including Augusta, Hinesville, and Warner Robins, Georgia.
Military base closures could adversely affect the Company's business in these
markets. Federal laws and regulations prescribe the types and amounts of loans
which may be made by federal thrifts and generally permit such institutions to
make residential real estate loans, commercial real estate loans, business
loans, agricultural loans and consumer loans.
REAL ESTATE MORTGAGE LOANS
Traditionally, the Bank's principal lending operation has been the
origination of permanent single family residential mortgage loans. These loans
continue to represent a significant part of the Bank's lending activities. Both
fixed rate and adjustable rate permanent loans on residential properties
currently are originated either for sale in the secondary market or for
retention in the Bank's loan portfolio. Generally, the Bank retains the
adjustable rate mortgage loans that it originates and sells the fixed rate
loans that it originates. In addition, the Bank began offering alternate credit
mortgage loans which provide financing to borrowers with less than standard
credit at yields reflecting the credit risk assumed. See "-- Lending Activities
- -- Loan Sales and Purchases."
In the case of owner-occupied single family residences, the Bank may
make permanent residential mortgage loans for up to 100 percent of the
appraised value of the property. Loans on non-owner occupied real estate of not
more than four family units, generally are made for up to 75 percent of the
appraised value. All conventional loans with loan-to-value ratios in excess of
80
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percent generally have private mortgage insurance covering that portion of
the loan in excess of 75 percent of the appraised value. The borrower generally
pays the cost of this insurance either through a single premium paid at the
time of loan origination or through a monthly payment during the term of the
loan. The borrower also generally makes monthly payments into an escrow account
equal to 1/12 of the annual hazard insurance premiums and property taxes on the
property which secures the loan. Interest rates and loan fees charged on loans
originated are competitive with other financial institutions in the Bank's
market areas.
The Bank has offered, in addition to fixed rate residential loans, a
variety of loans on which the interest rate, payment, loan balance or term to
maturity may be adjusted, provided that the adjustments are tied to specified
indices. These adjustable rate mortgage loans ("ARMs") permit greater
flexibility in adjusting loan yields to changes in the cost of funds. ARMs
generally have loan terms up to 30 years with rate adjustments ranging from one
to ten years during the term of the loan. Most ARMs have caps on the maximum
amount of change in the interest rate at any adjustment period and over the
life of the loan.
CONSTRUCTION AND ACQUISITION AND DEVELOPMENT LOANS
The Bank provides interim construction financing for single-family
residences and makes land acquisition and development loans on properties
intended for residential use. The Bank's general policy is to grant single
family construction loans and land acquisition and development loans in an
amount up to 80 percent of the lower of cost or appraised value of the
property. Residential construction loans are made for periods of one year or
less, and land acquisition and development loans are made for periods of up to
three years. These periods may be extended subject to negotiation and,
typically, payment of an extension fee. Interest rates on construction and
acquisition and development loans are indexed to the Bank's base rate and are
adjustable daily during the term of the loan.
In accordance with the Company's business plan, the volume of
construction lending has increased in each of the previous five fiscal years.
The Company does not expect its percentage of construction loans to total loans
to increase significantly above the March 31, 1997 level. Construction loans at
March 31, 1997, were $159,693,000 or 27.3 percent of total loans. The Company
recognizes the risks inherent in construction financing and has designed an
organization and system of controls to properly mitigate those risks through
strict underwriting and close monitoring of the lending and construction
process. Underwriting criteria include, among other things, the track record
and financial condition of the builder, applicable loan to appraised value
ratios, the demand for the type of house to be constructed, including a
marketing survey of inventory levels by price range and location, the
feasibility of house plans and costs and growth prospects for the economy. The
Company has a statewide construction inspection and appraisal network. The
Company's staff closely monitors construction progress and loan draws
throughout the process. In addition, no single customer accounts for more than
2 percent of the Bank's loans.
COMMERCIAL REAL ESTATE LOANS
Interim construction and permanent commercial real estate loans
typically are secured by apartment projects, office buildings, business
properties, shopping centers, nursing homes, extended stay lodging facilities
and motels located in the Company's primary lending areas. Construction and
permanent commercial real estate loans are made generally to 80 percent of the
appraised value of the property, with the loan amount being determined through
an evaluation of the net operating income and cash flows of each project,
replacement costs and sales of comparable projects. Interest rates are
generally determined by market conditions. Commercial
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construction loans generally are made for periods of 12 to 24 months on an
interest only basis at interest rates indexed to the prime rate. Permanent
commercial real estate loans are typically made with 15 year up to 25 year
amortization and five year up to 10 year maturity. Interest rates on permanent
loans are generally tied to the Bank's base rate or other interest rate
indices. As of March 31, 1997, the Company had outstanding $28,764,000 in loans
secured by commercial real estate. This constituted 4.9 percent of the Bank's
loan portfolio.
COMMERCIAL BUSINESS LOANS AND LEASES
The Company is authorized by federal law to make secured and unsecured
loans for business or agricultural purposes in amounts aggregating up to 10
percent of its total assets. Pursuant to this authority, the Company makes
various types of commercial loans to creditworthy borrowers for the purposes of
financing accounts receivable, equipment, capital projects and other legitimate
business needs. The Company also purchases loans from other financial
institutions and companies. In approving financial institutions and companies
to purchase loans or leases, the Company evaluates their financial strength,
reputation, credit worthiness and documentation capabilities.
The Company evaluates creditworthiness of business loans on the basis
of the borrowers' financial strength including analysis of their profitability,
cash flow, balance sheet trends and the liquidation value of collateral. The
Company assigns a credit rating to each borrower based, among other things, on
the borrower's historical cash flow, financial strength, paying habits,
business prospects, debt structure and capitalization, and the reputation and
character of its principals.
Commercial business loans normally carry interest rates indexed to the
Company's base rate, nationally quoted prime rate and U.S. Government Treasury
securities. Commercial business loans as of March 31, 1997 were approximately
$52,144,000 or 8.9 percent of the total loan portfolio. In 1993, the Company
began a leasing operation which purchased leases from approved lessors. Each
credit was underwritten based upon the lessee's cash flow, business prospects
and ability to make rental payments. In December 1995, the Company began to
experience delinquencies in the portfolio. As a result of delinquencies
primarily with two relationships, the Bank discontinued the leasing activities
during the current year. Leases at March 31, 1997, were $19,939,000 or 3.4
percent of total loans compared to $38,032,000 at March 31, 1996.
CONSUMER LOANS
Federal thrifts are authorized to make both secured and unsecured
consumer loans for personal or household purposes in amounts up to 30 percent
of their total assets. In addition, federal thrifts have lending authority
above the 30 percent limit for certain consumer loans, such as home equity
loans (loans secured by the equity in the borrower's residence but not
necessarily used for the purpose of home improvement), property improvement
loans, mobile home loans, deposit account secured loans, education loans and
indirect automobile loans. At March 31, 1997, total consumer loans constituted
$23,648,000 or 4.0 percent of the Company's total loan portfolio. The Company
intends to continue prudent expansion of its consumer lending activities,
subject to market conditions, as part of its plan to become a full service
financial institution providing a wide range of personal financial services.
LOAN ORIGINATION AND PROCESSING
The Company has a structured loan approval process in which lending
authority for various types and amounts of loans is delegated by the Board of
Directors to loan officers on a basis commensurate with seniority and lending
experience. The Bank has a Loan Committee that
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approves loan requests made by loan officers and must approve loans in amounts
above $250,000. Additionally, the Bank's Board of Directors must approve loans
of $1,000,000 or more.
PrimeEagle actively solicits mortgage loan applications from existing
customers, local real estate agents, builders, real estate developers and
others for sale in the secondary market. The Company has received delegated
underwriting from each of its primary investors in loan pools. A majority of
these loans are underwritten to meet Federal National Mortgage Association
("FNMA")and Federal Home Loan Mortgage Corporation ("FHLMC") standards. The
Company's loans are approved by qualified underwriters in the markets they
serve. These underwriters ensure that the loans are closed in accordance with
the guidelines set forth by the Company's lending policy, by FNMA and FHLMC and
by mortgage investors. In fiscal 1997, substantially all of the permanent
mortgage loans originated by PrimeEagle were sold to private investors on a
servicing released basis.
LOAN SALES AND PURCHASES
Permanent first mortgage loans on residential real estate are
originated for sale in the secondary market by PrimeEagle through its 20
offices in the Southeast. These loans are pooled and sold through an assignment
of trade to private investors. Fluctuations in the value of servicing rights
and management's analysis of loan prepayments impact the Company's decision to
retain or sell servicing. Because of the risk of prepayment and the cost to
service loans as compared to the service release premiums paid by investors
last year, the Company sold substantially all of its permanent loans on a
servicing released basis.
CREDIT RISK MANAGEMENT AND ALLOWANCE FOR LOAN LOSSES
The Bank has a multi-faceted program designed to control and monitor
the credit risks inherent in its loan portfolio. The Bank utilizes an asset
classification system which is consistent with the "Interagency Policy
Statement on the Allowance for Loan and Lease Losses" ("ALLL") issued by the
Office of Thrift Supervision ("OTS") to develop common guidance on allowances.
The statement asserts that an institution must maintain an allowance for loan
and lease losses at an adequate level to absorb estimated credit losses
associated with its loan and lease portfolio. Also, the ALLL should be
sufficient to absorb estimated credit losses associated with off-balance sheet
credit instruments, to the extent they are not provided for in a separate
liability account.
The basic objectives of the Bank's ALLL policy are: (i) to provide
essential information regarding the overall quality of the Bank's assets; (ii)
to provide for early identification of potential problem assets so as to
minimize losses to the Bank; (iii) to project relevant trends that affect the
collectibility of the Bank's loan and lease portfolio and to isolate potential
problem areas; (iv) to provide adequate valuation allowances in accordance with
generally accepted accounting principles and OTS policies; (v) to provide
accurate and timely information relating to credit quality that can be used for
financial and regulatory reporting purposes; (vi) to assess the adequacy of
internal controls and adherence to internal credit policies and loan
administration procedures; (vii) to monitor compliance with relevant laws and
regulations through a loan review system; and (viii) to evaluate the activities
of lending personnel through a loan review system.
The Bank utilizes its Asset Classification Committee (the "ACC") to
provide a quarterly evaluation of the Bank's assets, to establish the adequacy
of the valuation allowances and to evaluate the loan review system. The ACC is
responsible for developing and implementing effective credit approval and loan
review systems and controls, including a credit grading system, that
identifies, monitors and addresses asset quality problems in an accurate and
timely manner.
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After a loan has been made, responsibility is placed with loan
officers to analyze continuously the loan portfolio and to identify promptly
and report problem loans. Loans are also reviewed by the loan committee, the
ACC and, periodically on a spot-check basis, by an outside accounting firm that
conducts an independent credit review function for the Bank. The loan officer
responsible for a loan submits the loan to the loan committee for approval in
accordance with the guidelines of the Bank's lending authority. Each commercial
real estate, construction, and lease loan is given a rating which the loan
committee has the ability to approve or disapprove. In addition, the frequency
of ongoing review is determined by the loan officer and approved by the Loan
Committee. The ACC may determine that a loan or borrower's credit grading or
review frequency should be changed in accordance with the framework provided by
the Bank's grading system.
The Bank also periodically performs an analysis of the various
components of its portfolio, including all significant credits on an individual
basis. In order to analyze the adequacy of the ALLL, the Bank will segment the
loan and lease portfolios into components which have similar characteristics.
Characteristics considered include, but are not limited to, geographical
location, risk classification, past due status, type of loan, loan grade, and
industry or collateral. Estimates of credit losses reflect consideration of all
significant factors that affect the collectibility of the portfolio as of the
evaluation date.
The ACC considers historical losses or recent trends, changes in
national and local economic and business conditions and developments, the level
and structure of interest rates, job growth, consumer confidence and the market
value of collateral. The ACC considers (i) the effect of external factors, such
as competition and legal and regulatory requirements on the level of estimated
losses in the Bank's current portfolio; (ii) changes in the duration, type and
level of assets; (iii) the existence and effect of any concentration of assets
and changes in the level of such concentrations; (iv) changes in the
experience, ability and depth of the lending management and loan administration
staff of the Bank; (v) changes in lending policies and procedures, including
underwriting standards and collection, charge-off and recovery practices; (vi)
changes in the trend of the volume and severity of past due and classified
loans; (vii) trends in the volume of non-accrual loans, troubled debt
restructurings and other loan modifications; and (viii) changes in the quality
of the Bank's loan review system and the degree of oversight by the Bank's
Board of Directors.
In addition, ratio analysis is used as a supplemental tool for
evaluating loans, portfolio concentration and the overall reasonableness of the
ALLL. Ratios are used to compare the Bank to its peer group and its historical
practices in identifying divergent trends in the relationship of classified and
nonclassified assets, past due and non-accrual loans and leases, total loans
and binding commitments and historical gross and net charge-offs.
Based upon the amount and type of classifications, the ACC establishes
the appropriate and requisite general and specific valuation allowances and
makes any necessary adjustments to the allowances. The methodology for
determining the amount of general valuation allowances will take the amount of
assets classified special mention, substandard, doubtful and loss into
consideration. Certain percentages derived to properly reflect the risk
associated with the Bank's loan mix will be applied to the balance of all loans
including those classified special mention, substandard, doubtful, and loss.
These percentage range from .25 percent to 100 percent and are derived
primarily through industry standards and the Bank's historical data. These
percentages are reviewed as conditions require. The Bank has a conservative
philosophy and automatically considers any loan that is delinquent 90 days or
more and real estate acquired in the settlement of loans as substandard.
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The Bank will combine its estimates of the reserves needed for each
component of the portfolio. The ALLL will be divided into two distinct
portions: (i) an amount for specific allocations on significant individual
credits and (ii) a general reserve amount. Within the general reserve section,
the loan portfolio will be broken into as many segments as practical for the
purpose of making allocation to the ALLL. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Provision for Loan
Losses and Risk Elements."
ASSET LIABILITY MANAGEMENT
INTEREST RATE RISK
The Bank operates under an interest rate risk policy through the Asset
and Liability Committee ("ALCO"). The policy outlines limits on interest rate
risk in terms of changes in net interest income and changes in the net market
values of assets and liabilities over certain changes in interest rate
environments. These measurements are made through a simulation model which
projects the impact of changes in interest rates on the Bank's assets and
liabilities. The policy also outlines responsibility for monitoring interest
rate risk, and the process for the approval, implementation and monitoring of
interest rate risk strategies to achieve the Bank's interest rate risk
objectives.
The Bank's ALCO is comprised at a minimum of the Chairman of the
Board, the President and CEO, the Executive Vice President, Senior Vice
President & CFO, Group President Community Bank and the Manager of Secondary
Mortgage Operations. The ALCO makes all tactical and strategic decisions with
respect to the sources and uses of funds that may affect net interest income,
including net interest spread and net interest margin. The ALCO's decisions are
based upon policies established by the Bank's Board of Directors which are
designed to meet three goals -- manage interest rate risk, improve interest
rate spread and maintain adequate liquidity.
The ALCO has developed a program of action which includes, among other
things, the following: (i) selling substantially all conforming, long-term,
fixed rate mortgage originations; (ii) originating and retaining for the
portfolio, shorter term, higher yielding loan products which meet the Company's
underwriting criteria; and (iii) actively managing the Company's Gap and
interest rate risk exposure. The Company's ability to expand its loan portfolio
through originations of residential construction, adjustable rate permanent
mortgage loans and business loans has contributed to the Company's ability to
improve its spread while limiting exposure to rising interest rates due to the
variable rates and short term commitments these loans represent.
The excess of interest earning assets versus interest bearing
liabilities repricing or maturing in a given period of time is commonly
referred to as "Gap". The Bank's Gap position is evaluated continuously and
discussed by the ALCO in bi-weekly meetings. A positive Gap indicates an excess
of rate sensitive assets over rate sensitive liabilities, while a negative Gap
indicates an excess of rate sensitive liabilities over rate sensitive assets.
The Bank had a negative one year Gap of 22.48 percent as of March 31, 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Interest Rate Sensitivity." Part of the ALCO strategy for
reducing interest rate risk revolves around increasing the percentage of
shorter term floating rate loans in the Company's portfolio. This has been
accomplished by originating business loans as well as residential construction
and adjustable rate permanent loans as well as increasing originations of
consumer loans and second mortgage loans. In general, these loans have short
maturities and floating interest rates.
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<PAGE> 12
The Bank also operates under a secondary marketing policy. The
secondary marketing policy applies to the use of forward commitments to sell
mortgage-backed securities by PrimeEagle to hedge market exposure in the
pipeline of loans originated for sale. The ALCO is responsible for the
implementation of the policy. The policy outlines acceptable hedging
instruments, sets limits on the maximum exposure to risk and outlines authority
and responsibility for the implementation of the policy.
INVESTMENT ACTIVITIES
Income from investments in securities provides the Bank's second
largest source of interest income after interest on loans. Federally chartered
thrift institutions are required to maintain a minimum amount of liquid assets
that may be invested in specified short-term securities. These assets include,
among others, United States Treasury and Federal Agency obligations, certain
certificates of deposit, bankers' acceptances and Federal Funds. Subject to
various restrictions, investments may also be made in mortgage-backed
securities, commercial paper and corporate debt and equity securities.
Investment decisions are made by authorized officers under the
supervision of the Bank's Board of Directors pursuant to the Bank's investment
policy. Brokers approved by the Board of Directors are used to effect
securities transactions. The Company holds no investment securities issued by a
single issuer, other than mortgage-backed securities issued by an agency of the
United States government, which equaled or exceeded 10 percent of stockholders'
equity at March 31, 1997.
Under the investment policy, the ALCO, with the approval of the Board
of Directors of the Bank, designates all investments at the time of purchase as
either assets available for sale or assets held to maturity. The Company does
not currently maintain a trading portfolio. At March 31, 1997, fixed rate
mortgage-backed securities have been classified as assets available for sale
based on management's determination that such assets may be liquidated prior to
maturity. PrimeEagle classifies all permanent fixed rate loans originated as
assets held for sale unless originated pursuant to a portfolio commitment to
the Bank. All other loans, investments excluding equity securities and
mortgage-backed securities are considered assets held to maturity unless
specifically classified otherwise. As of March 31, 1997, $159,803,000 or 19.4
percent, of the Company's assets were classified as held for sale.
At March 31, 1997, the Bank's investment portfolio, consisted of
United States Agency obligations, investment grade corporate debt securities,
equity securities and FHLB stock. Additionally, the Bank holds investments in
mortgage-backed securities. See Note 4 and Note 10 of the Notes to Consolidated
Financial Statements.
INVESTMENT IN REAL ESTATE
The Company has invested in six real estate development projects with
real estate property totaling $25,828,000 and representing 3.1 percent of total
assets. Set forth below is information regarding each of the projects. The most
significant portion of the Company's investment in real estate is in land to be
developed or in process of development for residential subdivisions. All six
real estate investments are located in metropolitan Atlanta. The Company
consolidates each project on a line-by-line basis, except Hampton Oaks L.P.,
which is accounted for using the equity method. There would be no material
difference in the financial position or results of operations of the Company if
this investment was accounted for as a consolidated investment.
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<PAGE> 13
- Union Hill LLC. In October 1994, the Company formed a limited
liability corporation, Union Hill LLC, which purchased 149.7 acres of land
located in Forsyth County, Georgia for the purpose of developing a 323-lot
single family residential community. The Company has an 80 percent ownership
interest and shares 50 percent in the profits of Union Hill. The initial equity
contribution was funded 100 percent by the Company.
- Hampton Oaks L.P. The Company, in keeping with its goal of providing
affordable housing, invested in Hampton Oaks L.P. to construct a 50-unit
affordable housing project. The development was completed in October 1995 and
remains 100 percent occupied. The Company has a 99 percent limited partnership
interest and recognizes investment tax credits of approximately $173,000 per
year over 15 years through 2010
- Cobb Woodlawn Development LLC. In January 1995, the Company formed a
wholly-owned limited liability corporation, Cobb Woodlawn Development LLC, for
the purpose of purchasing 15.8 acres of land and developing a 48-lot
single-family residential community in Cobb County, Georgia named Woodlawn
Park. The Company has a 100 percent ownership interest in Cobb Woodlawn. The
development and sale of all of the property associated with Cobb Woodlawn were
completed during fiscal year 1997.
- BN Development Company LLC. In December 1995, the Company and an
unaffiliated third party formed BN Development Company LLC for the purpose of
acquiring a commercial lot near Cumberland Mall in Cobb County, Georgia and
developing and leasing a 30,000 square foot Barnes & Noble, Inc. superstore.
During fiscal year 1997, development was completed and the building was leased
to Barnes & Noble, Inc. The initial equity contribution was funded 100 percent
by the Company. The Company has a 50 percent ownership interest and shares 50
percent in the profits of BN Development.
-Trimble Road Development, LLC. In February 1996, the Company formed a
wholly-owned limited liability corporation, Trimble Road Development, LLC, for
the purpose of purchasing 13.63 acres of land and developing a 28 lot
single-family residential subdivision community in Fulton County, Georgia. The
Company has a 100 percent ownership interest in Trimble Road Development, LLC.
-Rivermoore Park. In November 1996, the Company purchased 353 acres of
land in Gwinnett County, Georgia, for the purpose of developing a residential
community, Rivermoore Park ("Rivermoore") The Company has a 100 percent
ownership interest in Rivermoore.
SOURCES OF FUNDS
GENERAL
Deposits are the Bank's largest source of funds for lending and other
investment purposes. In addition to deposits, the Bank obtains funds from
repurchase agreements, loan principal repayments, proceeds from sales of loans
and loan participations and advances from the FHLB. Loan repayments are a
relatively stable source of funds while deposit inflows and outflows and sales
of loans and investment securities are significantly influenced by prevailing
interest rates and economic conditions. Borrowings may be used to compensate
for reductions in normal sources of funds or to support expanded lending
activities.
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<PAGE> 14
DEPOSITS
The Bank offers a variety of savings and other deposit programs and
related services. Deposits are obtained primarily from the communities in which
its banking offices are located. The Bank uses traditional marketing methods to
attract new customers. The Bank does not advertise for deposits outside of its
local market area. For further details as to the composition of the Bank's
savings portfolio, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Deposits" and Note 9 of Notes to
Consolidated Financial Statements.
The Bank competes for deposits principally by attempting to identify
the specific needs of its target market and by offering a high level of
customer service. Analysis of product needs is generated through dialogue with
customers and staff. The Bank offers a wide variety of savings programs
including checking accounts, savings, money markets and certificates of deposit
ranging from three months to five years in maturity, tax deferred retirement
programs, tax deferred certificates of deposit and small savers plans.
Employee commitment to service is another important factor in
attracting deposits. The goal of the Bank is to render superior personal
service through convenient branch and main office locations and hours of
operation. All of the Bank's branches are open on Saturdays for customer
convenience. The Bank does not rely on any individual, group or entity for a
material portion of its deposits.
BORROWINGS
Savings deposits are the primary source of funds for the Bank's
lending and investment activities and for its general business purposes.
However, the Bank periodically obtains additional funds by borrowing from the
FHLB and through repurchase agreements entered into with various brokerage
organizations whose credit worthiness has been approved by the Bank's Board of
Directors. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition -- Borrowings" and Note 10 of Notes to Consolidated
Financial Statements.
COMPETITION
The Bank faces strong competition in attracting deposits and making
loans throughout its market areas. The most significant factors in competing
for deposits are interest rates, the quality and range of financial services
offered, convenience of office locations and office hours. The Bank competes
directly for deposits with commercial banks, money market funds and retail
securities brokerage houses with offices in the Bank's market areas. The Bank
also faces competition for deposits from (i) more distant depository
institutions that advertise locally or through national media, (ii) short-term
money funds, (iii) corporate and government borrowers (including, among others,
insurance companies) and (iv) credit unions.
The Bank's competition for loans comes from mortgage companies, other
thrift institutions and commercial banks, credit unions, consumer finance
companies, insurance companies and investment banking firms. The primary
factors in competing for loans are interest rates, discount points, loan fees
and the quality and range of lending services offered. Competition for
origination of mortgage loans comes primarily from other thrift institutions
and loan production firms, commercial banks and insurance companies. The Bank
competes for loan originations through the quality of services it provides
borrowers, real estate brokers and builders, as well as the interest rate and
terms of its loans. The competition for loans varies from time to time
depending on the general availability of lendable funds and credit, general and
local economic conditions, interest rate levels, conditions in the local real
estate market and other factors that are not readily predictable. The Bank
attempts to charge interest rates and loan fees
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<PAGE> 15
commensurate with the level of risk it accepts. The Bank believes that providing
superior service can allow improved loan pricing
Competition may be further increased as a result of the enactment of
the Riegle-Neal Interstate Banking and Branch Efficiency Act of 1994 (the
"Interstate Banking Act") on September 29, 1994. Beginning in September 1995,
bank holding companies, upon meeting certain criteria, were authorized to
acquire existing banks on a nationwide basis without regard to state statutes
to the contrary. Effective June 1, 1997, the Interstate Banking Act will permit
mergers of banks on an interstate basis, unless states in which such banks are
located pass legislation specifically prohibiting out-of-state banks from
operating interstate branches within their boundaries. In addition, the
Interstate Banking Act provides for de novo interstate branching within the
host state. See "Supervision and Regulation -- Recent Legislation."
EMPLOYEES
At March 31, 1997, the Company had 490 full-time employees and 76
part-time employees. All officers and other personnel serving the Company are
employed and compensated by the Bank. No employees are covered by a collective
bargaining agreement. Management considers its relations with its employees to
be good.
SUPERVISION AND REGULATION
GENERAL
The Company is a savings and loan holding company and, as such, is
subject to regulation, examination, supervision and reporting requirements of
the Office of Thrift Supervision (the "OTS") and the Georgia Department of
Banking and Finance ("DBF"). The Bank is a federally chartered savings
institution and is a member of the FHLB system, subject to examination and
supervision by the OTS and the FDIC, and subject to regulations of the Federal
Reserve Board governing reserve requirements. To the extent that the following
information describes statutory and regulatory provisions, it is qualified in
its entirety by reference to particular statutory and regulatory provisions.
Any change in applicable laws or regulations may have a material effect on the
business and prospects of the Company.
FEDERAL SAVINGS AND LOAN HOLDING COMPANY REGULATIONS
As the owner of all of the stock of the Bank, the Company is a savings
and loan holding company subject to regulation by the OTS under the Home
Owners' Loan Act (the "HOLA"). As a unitary savings and loan holding company
owning only one savings institution, the Company generally is allowed to engage
and invest in a broad range of business activities not permitted to commercial
bank holding companies or multiple savings and loans holding companies,
provided that the Bank continues to qualify as a "qualified thrift lender." See
"-- Regulation of the Bank -Qualified Thrift Lender Test" herein. In the event
of any acquisition by the Company of another savings association subsidiary,
except for a supervisory acquisition, the Company would become a multiple
savings and loan holding company and would be subject to limitations on the
types of business activities in which it could engage.
The Company is prohibited from directly or indirectly acquiring
control of any savings institution or savings and loan holding company without
prior approval from the OTS or from acquiring more than 5 percent of the voting
stock of any savings institution or savings and loan holding company which is
not a subsidiary. Control of a savings institution or a savings and loan
holding company is conclusively presumed to exist if, among other things, a
person acquires more than 25 percent of any class of voting stock of the
institution or holding company or controls
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<PAGE> 16
in any manner the election of a majority of the directors of the insured
institution or the holding company. Control is rebuttably presumed to exist if,
among other things, a person acquires 10 percent or more of any class of voting
stock (or 25 percent of any class of stock) and is subject to any of certain
specified "control factors."
RECENT LEGISLATION
On September 30, 1996, the President signed into law the Omnibus
Consolidated Appropriations Act which included, among other provisions, the
Deposit Insurance Funds Act of 1996 (the "DIFA"). The principal purpose of the
DIFA was to recapitalize the Savings Associate Insurance Fund (the "SAIF") so
that over time its deposit insurance assessments could be reduced to parity
with those of the Bank Insurance Fund (the "BIF"), and to provide for the
eventual merger of the SAIF and the BIF. Specifically, the DIFA requires, in
pertinent part, (i) a one-time special assessment on all financial institutions
holding SAIF deposits on March 31, 1995, calculated at 65.7 basis points, to
recapitalize the SAIF; (ii) full prorata sharing by BIF and SAIF members of the
debt service obligations of the Financing Corp. ("FICO") beginning no later
than January 1, 2000, and non-prorata sharing (with premiums of 6.4 basis
points for SAIF members and 1.3 basis points for non-SAIF members) until that
date; and (iii) a merger of the BIF and the SAIF into a new Deposit Insurance
Fund (the "DIF") on January 1, 1999, if bank and savings association charters
have been combined by that date.
The effects of the DIFA on the Bank are significant. The special
assessment, which was paid to the FDIC on November 27, 1996, was $1,946,000,
based upon the Bank's SAIF-assessable deposits as of March 31, 1995. Since the
FDIC's non-FICO deposit insurance assessments are presently at zero for
well-capitalized institutions such as the Bank, it will pay only the FICO
premium beginning January 1, 1997.
The legislation mandates a Treasury Department study to develop a
common depository institution charter. It also contains environmental liability
provisions indicating that lenders who do not participate in the management of
environmentally contaminated property or who do not cause the contamination are
not liable for environmental clean-up costs. In addition, the legislation
contains over 40 regulatory burden relief provisions in various areas,
including truth in lending and other regulatory reform measures designed to
reduce the burden and costs imposed on financial institutions to comply with
consumer protection provisions. The Congressional Budget Office has published a
report that concludes that the United States no longer needs a separate thrift
industry, in part because resources available for home mortgage lending have
expanded significantly, thereby eliminating the need for thrift institutions. A
financial services bill (H.R. 10) has been reported out of the House Banking
Committee that would abolish the federal thrift charter and treat state
chartered thrifts as state chartered banks. In its present form, the bill would
merge the BIF and SAIF insurance funds and combine functions of the OTS and
OCC, eliminating the federal thrift charter and consequently the unitary thrift
holding company which, unlike bank holding companies, can engage in virtually
any business activity. In the event the Company were required to become a bank
holding company, the Company could lose its ability to engage in real estate
activity and other functions in which it currently engages, subject to
grandfathering provisions.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Interstate Banking Act") allows bank holding companies to acquire
existing banks across state lines, regardless of state statutes. Further, under
the Interstate Banking Act, effective June 1, 1997, a bank holding company may
consolidate interstate bank subsidiaries into branches, and a bank may merge
with an unaffiliated bank across state lines to the extent that the applicable
states have not "opted out" of interstate branching prior to such effective
date. States may elect to permit
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interstate mergers prior to June 1, 1997. Effective June 1, 1997, the Interstate
Banking Act also permits de novo branching to the extent that a particular state
"opts into" the de novo branching provisions. The Interstate Banking Act
generally prohibits an interstate acquisition (other than an initial entry into
a state by a bank holding company), which would result in either the control of
more than (i) 10 percent of the total amount of insured deposits in the United
States, or (ii) 30 percent of the total insured deposits in the home state of
the target bank unless such 30 percent limitation is waived by the home state on
a basis which does not discriminate against out of state institutions.
The Small Business Job Protection Act of 1996 contained provisions
requiring the thrift industry to recapture tax deductions taken pursuant to the
reserve method for accounting for bad debts of savings institutions. Based upon
the provisions, bad debt reserves taken prior to January 1, 1988 would not be
recaptured, and bad debt reserves taken after January 1, 1988 would be
recaptured over a six-year period beginning with the 1996 tax year.
REGULATION OF THE BANK
FEDERAL HOME LOAN BANK SYSTEM
General. The Bank is a member of the FHLB, which consists of 12
regional FHLBs subject to supervision and regulation by the Federal Housing
Finance Board ("FHFB"). The FHLBs maintain central credit facilities primarily
for member institutions.
The Bank, as a member of the FHLB of Atlanta, is required to acquire
and hold shares of capital stock in the FHLB of Atlanta in an amount at least
equal to the greater of: (i) 1 percent of the aggregate outstanding principal
amount of its unpaid residential mortgage loans, home purchase contracts and
similar obligations as of the beginning of each year, (ii) 5 percent of its
advances (borrowings) from the FHLB of Atlanta, or (iii) $500. Additionally,
during 1996 the FHLB of Atlanta imposed a maximum investment in its capital
stock equal to $500,000 over the required minimum. The Bank is in compliance
with this requirement with an investment in stock of the FHLB of Atlanta at
March 31, 1997 of $7,864,000.
Advances from Federal Home Loan Bank. Each FHLB serves as a reserve or
central bank for its member institutions within its assigned regions. It is
funded primarily from proceeds derived from the sale of obligations of the FHLB
System. A FHLB makes advances (i.e., loans) to members in accordance with
policies and procedures established by its Board of Directors. The Bank is
authorized to borrow funds from the FHLB of Atlanta to meet demands for
withdrawals of savings deposits, to meet seasonal requirements and for the
expansion of its loan portfolio. Advances may be made on a secured or unsecured
basis depending upon a number of factors, including the purpose for which the
funds are being borrowed and existing advances. Interest rates charged for
advances vary depending upon maturity, the cost of funds to the regional FHLB
and the purpose of the borrowing.
Liquidity Requirements. Federal regulations require a member savings
institution to maintain an average daily balance of liquid assets (which
includes cash, certain time deposits, certain bankers' acceptances, certain
corporate debt securities and highly-rated commercial paper, securities of
certain mutual funds, balances maintained in a Federal Reserve Bank and
specified United States Government, state or federal agency obligations) equal
to a monthly average of not less than a specified percentage, currently 5
percent, of its net withdrawable savings deposits plus short-term borrowings.
These regulations also require each member institution to maintain an average
daily balance of short-term liquid assets at a specified minimum percentage,
currently 1
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percent, of the total of its net withdrawable accounts and borrowings payable in
one year or less. The Bank complied with its requirements at March 31, 1997.
INSURANCE OF ACCOUNTS
General. Deposits at the Bank are insured to a maximum of $100,000 for
each insured depositor by the FDIC through the SAIF. As an insurer, the FDIC
issues regulations, conducts examinations and generally supervises the
operations of its insured institutions (institutions insured by the FDIC
hereinafter are referred to as "insured institutions"). Any insured institution
which does not operate in accordance with or conform to FDIC regulations,
policies and directives may be sanctioned for non-compliance. The FDIC has the
authority to suspend or terminate insurance of deposits upon the finding that
the institution has engaged in unsafe or unsound practices, is operating in an
unsafe or unsound condition, or has violated any applicable law, regulation,
rule, order or condition imposed by the FDIC. If insurance of accounts is
terminated by the FDIC, the deposits in the institution will continue to be
insured by the FDIC for a period of two years following the date of
termination. The FDIC requires an annual audit by independent accountants and
also periodically makes its own examinations of insured institutions.
Insured institutions are members of either the SAIF or the BIF.
Pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), an insured institution may not convert from one insurance fund
to the other without the advance approval of the FDIC. FIRREA also provides,
generally, that the moratorium on insurance fund conversions shall not be
construed to prohibit a SAIF member from converting to a bank charter during
the moratorium, as long as the resulting bank remains a SAIF member during that
period. When a conversion is permitted, each insured institution participating
in the conversion must pay an "exit fee" to the insurance fund it is leaving
and an "entrance fee" to the insurance fund it is entering.
Insurance Premiums and Regulatory Assessments. As an insurer, the FDIC
issues regulations, conducts examinations and generally supervises the
operations of its insured members. FDICIA directed the FDIC to establish a
risk-based premium system under which each premium assessed against the Bank
would generally depend upon the amount of the Bank's deposits and the risk that
it poses to the SAIF. The FDIC was further directed to set semiannual
assessments for insured depository institutions to maintain the reserve ratio
of the SAIF at 1.25 percent of estimated insured deposits. The FDIC may
designate a higher reserve ratio if it determines there is a significant risk
of substantial future loss to the particular fund. Under the FDIC's
risk-related insurance regulations, an institution is classified according to
capital and supervisory factors. Institutions are assigned to one of three
capital groups: "well capitalized," "adequately capitalized" or
"undercapitalized." Within each capital group, institutions are assigned to one
of three supervisory subgroups. There are nine combinations of groups and
subgroups (or assessment risk classifications) to which varying assessment
rates are applicable
In addition to deposit insurance premiums, savings institutions also
must bear a portion of the administrative costs of the OTS through an
assessment based on the level of total assets of each insured institution and
which differentiates between troubled and nontroubled savings institutions.
Additionally, the OTS assesses fees for the processing of various applications.
QUALIFIED THRIFT LENDER TEST
Historically, the amount of advances which may be obtained by a member
institution from the FHLB has been subject to the institution's compliance with
a qualified thrift lender ("QTL") test. In order to comply with the QTL test,
the Bank must maintain 65 percent of its total
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"Portfolio Assets" in "Qualified Thrift Investments." This level must be
maintained on a monthly average basis in nine out of every twelve months. A
savings institution that does not meet the Qualified Thrift Lender test must
either convert to a bank charter or comply with the restrictions imposed for
noncompliance. For purposes of the QTL test, "Portfolio Assets" equal total
assets minus (i) goodwill and other intangible assets, (ii) the value of
property used by an institution in the conduct of its business and (iii) assets
of the type used to meet liquidity requirements in an amount not exceeding 20
percent of the savings institution's total assets. "Qualified Thrift
Investments" generally include (i) loans made to purchase, refinance, construct,
improve or repair domestic residential or manufactured housing, (ii) home equity
loans, (iii) securities backed by or representing an interest in mortgages on
domestic residential or manufactured housing, (iv) obligations issued by the
federal deposit insurance agencies and (v) shares of FHLB stock owned by the
savings institution. Qualified Thrift Investments also include certain other
specified investments, subject to a percentage of Portfolio Assets limitation.
A savings institution that does not meet the QTL test must either
convert to a bank charter or comply with the restrictions imposed for
noncompliance. If the institution converts to a bank charter, it will continue
to pay SAIF insurance assessments and any applicable exit and entrance fees
before converting to BIF insurance. If the institution does not convert to a
bank charter, it must comply with the following additional restrictions on the
operations of the institution: (i) the institution may not engage in any new
activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for both a national bank and a savings
institution; (ii) the branching powers of the institution shall be restricted
to those of a national bank; (iii) the institution generally will not be
eligible to obtain any advances from its FHLB; and (iv) payment of dividends by
the institution shall be subject to the rules regarding payment of dividends by
a national bank. A savings institution that has not converted to a bank charter
within three years after failing to qualify as a QTL may not retain any
investment or engage in any activity not permitted for both a national bank and
a savings institution and must also repay all FHLB System advances. The Bank
met the requirements of the Qualified Thrift Lender test as of March 31, 1997.
CAPITAL REQUIREMENTS
General. Effective December 7, 1989, OTS capital regulations
established capital standards applicable to all savings institutions, including
a core capital requirement, a tangible capital requirement and a risk-based
capital requirement. The OTS also has established pursuant to FDICIA five
classifications for institutions based upon the capital requirements: well
capitalized, adequately capitalized, under capitalized, significantly under
capitalized and critically under capitalized. At March 31, 1997, the Bank was
"well capitalized." Failure to maintain a status of adequately capitalized
could result in greater regulatory oversight or restrictions on the Bank's
activities.
Core Capital and Tangible Capital. The OTS requires a savings
institution to maintain "core capital" in an amount not less than 3 percent of
the savings institution's total assets. "Core capital" includes, generally,
common stockholders' equity, noncumulative perpetual preferred stock and
related surplus, nonwithdrawable accounts and pledged deposits of mutual
savings associations, and minority interests in fully-consolidated
subsidiaries, less (i) investments in certain "non-includable" subsidiaries (as
determined by regulation) and (ii) certain intangible assets (except for
purchased mortgage servicing rights and purchased credit card relationships).
The "tangible capital" requirement requires a savings institution to
maintain tangible capital in an amount not less than 1.5 percent of its
adjusted total assets. "Tangible capital" means
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core capital less any intangible assets (except for purchased mortgage servicing
rights included in core capital).
Most national banks will be required to maintain a level of core
capital of at least 100 to 200 basis points above the 3 percent minimum level.
Because OTS capital standards for savings institutions may not be less
stringent than capital standards established for national banks, savings
institutions will be required to maintain core capital levels at least as high
as national banks.
Risk-Based Capital. The OTS capital regulations require savings
institutions to maintain a ratio of total capital to total risk-weighted assets
of 8.0 percent. Total capital, for purposes of the risk-based capital
requirement, equals the sum of core capital plus supplementary capital, which
includes cumulative preferred stock, mandatory convertible securities,
subordinated debt, and allowance for loan and lease losses of up to 1.25
percent of total risk-weighted assets. In determining total risk-weighted
assets for purposes of the risk-based capital requirements, (i) each
off-balance sheet item must be converted to an on-balance sheet credit
equivalent amount by multiplying the face amount of each such item by a credit
conversion factor ranging from 0 percent to 100 percent (depending upon the
nature of the item); (ii) the credit equivalent amount of each off-balance
sheet item and each on-balance sheet asset must be multiplied by a risk factor
ranging from 0 percent to 100 percent (again depending on the nature of the
item); and (iii) the resulting amounts are added together and constitute total
risk-weighted assets.
The following table reflects the Bank's minimum regulatory capital
requirements, actual capital and the level of excess capital by category.
REGULATORY CAPITAL
<TABLE>
<CAPTION>
At March 31, 1997 Actual Requirement Excess
($ in 000's) Amount % Amount % Amount %
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Rick-based ratios:
Tier 1 capital $54,019 10.14 $21,311 4.0 $32,708 6.14
Total capital 59,023 11.08 42,622 8.0 16,401 3.08
Tier 1 leverage 54,019 6.72 32,144 4.0 21,875 2.72
Tangible equity 54,019 7.05 11,499 1.5 42,520 5.55
- ----------------------------------------------------------------------------------------------------------
</TABLE>
In addition, the OTS requires institutions with an "above-normal"
degree of interest rate risk to maintain an additional amount of capital. The
test of "above-normal" is determined by postulating a 200 basis point shift
(increase or decrease) in interest rates and determining the effect on the
market value of an institution's portfolio equity. If the decline is less than
2 percent, no addition to risk-based capital is required (i.e., an institution
has only a normal degree of interest rate risk). If the decline is greater than
2 percent, the institution must add additional capital equal to one-half the
difference between its measured interest rate risk and 2 percent multiplied by
the market value of its assets. Management believes that the Bank's interest
rate risk is within the normal range.
CAPITAL DISTRIBUTIONS
Capital distributions by OTS-regulated savings institutions also are
regulated by the OTS. Capital distributions are defined to include, in part,
dividends, stock repurchases and cash-out mergers. An association is
categorized as either a Tier 1, association which is defined as an association
that has, on a pro forma basis after the proposed distribution, capital equal
to or
20
<PAGE> 21
greater than the OTS fully phased-in capital requirements. A Tier 2
association is an association that has, on a pro forma basis after the proposed
distribution, capital equal to or in excess of its minimum capital requirement
but does not meet the fully phased-in capital requirement. A Tier 3 association
is defined as an association that has current capital less than its minimum
capital requirement.
The Bank currently is in compliance with the regulatory capital
requirements and therefore is a Tier 1 association. A Tier 1 association is
permitted to make capital distributions during a calendar year up to the higher
of (i) 100 percent of its net income to date plus the amount that would reduce
by one-half its surplus capital ratio at the beginning of the calendar year, or
(ii) 75 percent of its net income over the most recent four-quarter period. Any
distributions in excess of that amount require prior OTS notice, with the
opportunity for the OTS to object to the distribution. In addition, a savings
association must provide the OTS with a 30-day advance written notice of all
proposed capital distributions, whether or not advance approval is required by
OTS regulations. Currently, the Bank periodically notifies the OTS of the gross
amount of dividends it intends to pay to the Company as the sole stockholder of
the Bank. The Bank's ability to pay dividends to the Company is subject to the
financial performance of the Bank which is dependent upon, among other things,
the local economy, the success of the Bank's lending activities, compliance by
the Bank with applicable regulations, investment performance and the ability to
generate fee income.
FEDERAL RESERVE SYSTEM REQUIREMENTS
The Federal Reserve requires depository institutions to maintain
non-interest-bearing reserves against their deposit transaction accounts,
non-personal time deposits (transferable or held by a person other than a
natural person) with an original maturity of less than one and one-half years
and certain money market deposit accounts. Federal Reserve regulations
currently require financial institutions to maintain average daily reserves
equal to 3 percent on all amounts from $4.3 million to $52.0 million of net
transactions, plus 10 percent on the remainder. The balances maintained to meet
the reserve requirements imposed by the Federal Reserve may be used to satisfy
liquidity requirements imposed by the OTS. Members of the FHLB System also are
authorized to borrow from the Federal Reserve "discount window" subject to
restrictions imposed by Federal Reserve regulations. However, Federal Reserve
policy generally requires that a savings institution exhaust its FHLB resources
before borrowing from the Federal Reserve.
TRANSACTIONS WITH AFFILIATES
The Bank is also subject to certain transactions with affiliates rules
applicable to banks and savings institutions which are set forth in Sections
23A, 23B and 22(h) of the Federal Reserve Act as well as additional limitations
imposed by OTS regulations. Such regulations generally impose quantitative and
qualitative limitations on loans and other transactions between an institution
and its affiliates, including loans to insiders.
CONSUMER PROTECTION AND OTHER LAWS AND REGULATIONS
The Bank and PrimeEagle also are subject to various laws and
regulations dealing generally with consumer protection matters including
without limitation, the Equal Credit Opportunity Act and Regulation B, the
Electronic Funds Transfer Act and Regulation E, the Truth in Lending Act and
Regulation Z, the Truth in Savings Act and Regulation DD, the Expedited Funds
Availability Act and Regulation CC, the Bank Secrecy Act and fair housing laws.
The Bank and PrimeEagle may be subject to potential liability under these laws
and regulations for material violations.
21
<PAGE> 22
STATE REGULATION
As a federally chartered savings institution, the Bank generally is
not subject to those provisions of Georgia law governing state chartered
financial institutions or to the jurisdiction of the DBF. However, the DBF
interprets the Georgia Bank Holding Company Act to require the prior approval
of the DBF for any acquisition of control of any savings institution (whether
chartered by state or federal authority) located in Georgia.
The DBF also interprets the Georgia Bank Holding Company Act to
include savings and loan holding companies as "bank holding companies," thus
giving the DBF the authority to make examinations of the Company and any
subsidiaries and to require periodic and other reports. Existing DBF
regulations do not restrict the business activities or investments of the
Company or the Bank.
State usury laws are applicable to federally insured institutions with
regard to loans made within Georgia. Generally speaking, Georgia law does not
establish ceilings on interest rates although certain specialized types of
lending, in which the Bank engages, such as making loans of $3,000 or less, are
subject to interest rate limitations.
ITEM 2. PROPERTIES
The principal executive offices of the Company are located at 4305
Lynburn Drive, Tucker, Georgia, in a 4,320 square foot building owned by the
Bank. The main office of the Bank is located at 2355 Main Street, Tucker,
Georgia. The Company's 14 branch offices are located in the Doraville,
Dunwoody, Jonesboro, Lawrenceville, Lilburn, Morrow, Northlake, Palmetto,
Roswell, Stone Mountain, Towne Lake, Tucker, Union City and Wesley Chapel areas
of metropolitan Atlanta, Georgia. Three of the Bank's 14 branch locations are
leased under an operating lease and the remaining branch properties, including
the main office are owned by the Bank. The Bank's lease on the Northlake office
expires in 2002 and the leases on the Lawrenceville and Jonesboro offices
expire in 2006. In addition, the Bank's loan operations office, located in
Tucker, Georgia, is leased under an operating lease which expires in 2001. The
Norcross office was closed during the year and is currently for sale.
PrimeEagle operates 20 loan production offices located in Aiken,
Columbia and Sumter, South Carolina; Jacksonville and St. Augustine, Florida;
Alpharetta, Athens, Atlanta, Augusta, Cumming, Hinesville, Peachtree City,
Savannah, Stockbridge and Warner Robins, Georgia; Chattanooga, Knoxville and
Nashville, Tennessee; and Charlotte and Monroe North Carolina. Each of these
offices is leased pursuant to an operating lease with the exception of the
Alpharetta, Georgia, and Charlotte, North Carolina, offices. The Aiken and
Sumpter, South Carolina, St. Augustine, Florida, Augusta and Cumming, Georgia,
Chattanooga, Tennessee, and Monroe, North Carolina, offices are on
month-to-month basis. The Savannah office lease expires in 1997. The Atlanta,
Hinesville and Stockbridge, Georgia, and Nashville, Tennessee, leases expire in
1998. The Atlanta office was sublet in March of 1997, for a term to expire in
1998 concurrent with the Bank's lease. Peachtree City and Warner Robins,
Georgia, leases expire in 1999. The Columbia, South Carolina, and Jacksonville,
Florida, leases expire in 2000. The Knoxville, Tennessee, lease expires in 2001
and the Athens, Georgia, lease expires in 2002. Management believes that it
will be able to renew such leases on satisfactory terms.
22
<PAGE> 23
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company,
the Bank or any subsidiary is a party or to which any of their property is
subject, other than ordinary, routine litigation incident to their respective
businesses.
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 fiscal year ended March 31, 1997.
23
<PAGE> 24
Part II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER
MATTERS
Price Range of Common Stock and Dividend History
The Company's Common Stock is traded on the NASDAQ National Market
under the symbol "EBSI". The following table sets forth for the periods
indicated the high and low last sale prices of the Common Stock as reported on
the NASDAQ National Market and dividends paid per share, which data reflects
the two-for-one stock split of the Common Stock effected in the form of a stock
dividend paid on December 21, 1995.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
DIVIDENDS PAID
FISCAL YEARS END MARCH 31, HIGH LOW PER SHARE
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
1995
First Quarter 12.000 11.125 $ .055
Second Quarter 13.250 11.500 .070
Third Quarter 12.750 9.750 .085
Fourth Quarter 12.000 10.125 .100
- -----------------------------------------------------------------------------------
1996
First Quarter 14.375 11.875 .125
Second Quarter 17.000 14.000 .125
Third Quarter 19.000 16.625 .130
Fourth Quarter 19.000 15.000 .130
- -----------------------------------------------------------------------------------
1997
First Quarter 17.000 14.750 .150
Second Quarter 16.250 14.375 .150
Third Quarter 16.000 13.500 .150
Fourth Quarter 17.500 14.500 .150
- -----------------------------------------------------------------------------------
</TABLE>
On March 31, 1997, the last sale price of the Common Stock, as
reported on the NASDAQ National Market, was $16 1/4. On July 11, 1997, there
were 5,659,694 shares of Common Stock outstanding and approximately record
holders of Common Stock.
The Company began the payment of cash dividends on its Common Stock
during fiscal 1992 and paid $.05 per share for the fourth quarter of that year.
During fiscal 1995, the Company paid four quarterly dividends totaling $.47 per
share. During fiscal 1996, the Company paid four quarterly dividends totaling
$.51 per share. During fiscal 1997, the Company paid four quarterly dividends
totaling $.60 per share. At March 31, 1997, the current indicated dividend
rate, on an annualized basis, is $.60 per share. In addition, on May 23, 1996,
SCFC paid a single cash dividend of $.25 per share to its shareholders' of
record on June 7, 1996.
The ability of the Company to pay cash dividends to its stockholders
is directly dependent upon the Bank's ability to pay cash dividends to the
Company. The Bank is subject to certain restrictions on the amount of dividends
it is permitted to pay. See "Supervision and Regulation - Capital
Distributions". The amount of cash dividend on Common Stock will be determined
by the Company's Board of Directors in light of conditions existing from time
to time, including the Company's growth prospects, profitability, financial
condition, investment opportunities, liquidity requirements, results of
operations, regulatory restrictions and other factors deemed relevant by the
Board of Directors.
24
<PAGE> 25
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA(1)
(dollars in thousands except per share data)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Year Ending March 31,
- ------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 63,785 $ 52,625 $ 39,618 $ 32,026 $ 30,288
Interest expense 33,629 28,821 18,502 14,276 16,429
Net interest income 30,156 23,804 21,116 17,750 13,859
Provision for loan losses 2,652 1,000 643 1,034 790
Other income 12,911 10,853 7,282 9,984 6,338
Other expenses 34,901 24,468 20,164 17,746 12,763
Income after tax (2) 3,746 6,219 4,881 5,569 4,234
Net income 3,746 6,219 4,881 5,462 4,472
- ------------------------------------------------------------------------------------------------------------
PER SHARE DATA(3)
Income after tax-primary and
fully diluted(2) $ .66 $ 1.40 $ 1.18 $ 1.41 $ 1.13
Net income-primary and
fully diluted .66 1.40 1.18 1.38 1.19
Dividends .56 .42 .36 .24 .16
Book Value 11.99 12.03 10.25 9.54 8.43
- ------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS %
Net interest margin-taxable
equivalent 4.37 4.20 4.81 4.59 4.18
Return on average assets(2) .49 .99 1.01 1.32 1.28
Return on average equity(2) 5.55 13.32 12.33 16.31 15.40
Equity to assets 8.24 9.02 7.32 9.10 8.60
Dividend payout 84.85 30.00 30.51 17.39 13.45
- ------------------------------------------------------------------------------------------------------------
ASSET QUALITY RATIOS (%)
Total problem assets/Total assets 1.51 1.63 0.90 1.39 2.42
Total problem assets/
net plus reserves 2.41 2.92 1.40 2.14 4.12
Reserve for loan losses/
Total problem assets 41.78 45.57 92.31 82.39 31.24
- ------------------------------------------------------------------------------------------------------------
MARKET PRICE(3)
High $ 17 1/2 $ 19 $ 13 1/4 $ 12 3/8 $ 9 1/4
Low 13 1/2 11 7/8 9 3/4 7 7/8 4
- ------------------------------------------------------------------------------------------------------------
AT MARCH 31,
Total assets $823,882 $736,384 $568,678 $419,136 $368,018
Loans receivable, net 515,749 410,843 364,491 271,356 216,158
Reserve for loan losses 5,198 5,464 4,704 4,791 2,781
Total problem assets 12,443 11,990 5,096 5,815 8,901
Deposits 557,724 458,458 386,353 334,361 268,141
Borrowings 153,805 174,337 120,688 31,394 48,121
Shareholders' equity 67,874 66,448 41,637 38,137 31,636
- ------------------------------------------------------------------------------------------------------------
</TABLE>
1 All data has been restated for all periods presented to give effect to the
Company's merger with SCFC.
2 Before extraordinary item and cumulative effect of accounting change.
3 Per share data reflects two for one split in the form of a stock dividend
paid on December 21, 1995.
25
<PAGE> 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION AND
FINANCIAL CONDITION
Overview
Net income for fiscal 1997 was $3,746,000 compared with $6,219,000 in
fiscal 1996, a decrease of 39.8 percent. Eagle Bancshares financial results for
fiscal 1997 declined due to several factors including the one-time SAIF
assessment, increased loan loss provisions and expenses related to the
acquisition of SCFC. Per share earnings for fiscal 1997 were $.66 per share,
compared with $1.40 per share in fiscal 1996. Earnings per share also decreased
due to the increase in the number of shares outstanding resulting from the
Company's secondary offering of 1,435,000 new shares of common stock on
February 15, 1996.
On March 26,1997, Eagle acquired all of the outstanding shares of
SCFC, a bank holding company. The transaction was valued at approximately
$18,500,000 and the shareholders of SCFC received 1.162 shares of Eagle stock
for each share of SCFC stock. This was the minimum exchange ratio as defined in
the Merger Agreement, and as a result, the Company issued 1,107,494 shares of
common stock. The merger was accounted for as a pooling of interests, and
accordingly, the consolidated financial statements have been restated to
include SCFC in all periods presented. The Company incurred approximately
$1,685,000 in legal, accounting , consulting and other professional service
fees that were directly related to this merger.
On September 30, 1996, President Clinton signed into law the Deposit
Insurance Funds Act of 1996, which contains provisions to capitalize the SAIF
by imposing a special assessment on federally insured depository institutions.
Pursuant to the Act, on October 8, 1996, the board of directors of the FDIC
imposed a special assessment on SAIF-assessable deposits of the Bank equal to
$.657 per $100 of SAIF-insured deposits as of March 31, 1995, which resulted in
a one-time assessment in the amount of approximately $1,946,000.
Return on average assets (ROA) was .49 percent in fiscal 1997 compared
with .99 percent in fiscal 1996. ROA decreased due to the one-time charges
discussed above and the Company's rapid asset growth. Return on average equity
(ROE) was 5.55 percent in fiscal 1997 compared with 13.32 percent in fiscal
1996. ROE declined due to the issuance of $21,483,000 of additional capital in
connection with the secondary offering.
Net interest income increased 26.7 percent to $30,156,000 in fiscal
1997 compared with $23,804,000 in fiscal 1996. The Company's net interest
margin for 1997 increased to 4.37 percent compared to 4.20 percent, in fiscal
1996. The increase in net interest income is primarily due to the growth in the
loan portfolio and other interest earning assets.
The provision for loan losses was $2,652,000 in fiscal 1997 compared
with $1,000,000 in fiscal 1996. The increase in the provision is due to the
increase in the Company's charge-offs and increased delinquencies in the
Company's leasing portfolio.
Non-interest income increased 19.0 percent to $12,911,000 in fiscal
1997 compared with $10,853,000 in fiscal 1996. The primary reason was due to an
increase in mortgage production fees resulting from higher originations and
gains on the sale of investment in real estate.
Non-interest expense increased 42.6 percent to $34,901,000 in fiscal
1997 from $24,468,000 in fiscal 1996. the SAIF assessment and the merger
related expenses were $3,631,000 or 34.8 percent of the total increase. The
Company's efficiency ratio, excluding the SAIF assessment and the merger
related expenses, was 72.6 percent for fiscal 1997, compared to 70.6 percent
for fiscal 1996. in general the increase in all categories of non-interest
expense is attributable to higher operating costs incurred to build the systems
necessary to support the Company's rapid growth.
26
<PAGE> 27
Tucker Federal Bank acquired the assets of the Prime Lending Division
of Southern Federal Savings and Loan Association (the "Division") (now a
division of PrimeEagle) from the RTC on November 23, 1992. In connection with
this acquisition, the Bank entered into an operating agreement with a
corporation owned by two individuals who participate in the profits and losses
pursuant to the agreement. The term of the agreement is for five years and is
automatically renewable for an additional three year period unless either party
gives at least 90 days' prior written notice of their desire not to renew
(August 25, 1997). In the event that Tucker Federal elects not to renew the
agreement, the two individuals have the right, but not the obligation, to
purchase certain assets of the Division for 75 percent of their appraised fair
market value, upon assuming all obligations associated with the Division. The
specific impact of nonrenewal on the financial condition of the Company, if
any, cannot be determined at this time.
The Company is involved in an in-depth assessment of the mortgage
banking group. This includes evaluating each office's profitability, business
prospects, and carefully considering the business potential of each local
market. In connection with this analysis, the Company is examining the
alternatives with regard to the above-mentioned agreement including nonrenewal.
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED MARCH 31, 1996 AND MARCH 31,
1997
Net income
Eagle Bancshares financial results for fiscal 1997 declined due to
several factors including the one time SAIF assessment, increased loan loss
provisions and expenses related to the acquisition of SCFC. In addition, the
Company has undertaken a growth strategy which has caused noninterest expenses
to rise. This growth strategy includes both internally generated growth as well
as growth through acquisitions. Eagle's core earnings increased 11.4 percent to
$6,926,000 compared to $6,219,000 in the previous year. The increase in core
earnings is primarily attributable to growth in net interest and operating
income. Core earnings are earnings exclusive of the one-time SAIF assessment of
$1,946,000 ($1,495,000 net of tax) and the one-time merger expenses of
$1,685,000 ($1,685,000 net of tax). The Company's net income decreased by
$2,473,000 or 39.8 percent to $3,746,000 in fiscal 1997 from $6,219,000 in
fiscal 1996. Net income per fully diluted share declined due to the 1,277,000
share increase in the weighted average number of shares outstanding. This is
directly attributable to the effect of the Company's secondary issuance of
common stock in February of last year. Net interest income
Net interest income increased by $6,352,000 or 26.7 percent to
$30,156,000 in fiscal 1997 from $23,804,000 in fiscal 1996. This increase
resulted primarily from growth in interest earning assets through loan
originations. The Bank's net interest spread (the difference between the yield
earned on interest earning assets and the cost of interest bearing liabilities)
increased during the year to 417 basis points from 401 basis points in the
prior year. The primary reason for the increase was due to the decline in the
cost of interest bearing liabilities. The yield on interest earning assets
declined 5 basis points to 9.16 percent from 9.21 percent while the cost of
interest bearing liabilities decreased 21 basis points to 4.99 percent from
5.20 percent.
Interest income received on loans increased $7,774,000 or 17.8 percent
to $51,503,000 in fiscal 1997 from $43,729,000 in fiscal 1996. The increase was
primarily attributable to growth in the loan portfolio through originations of
residential construction loans, residential first and second mortgage loans,
home equity, commercial and consumer loans. The yield on the loan portfolio
remained consistent at 9.69 percent for the year compared to 9.64 percent in
the prior year. Interest received on mortgage-backed securities increased
$2,983,000 or 118.0 percent to $5,510,000 in fiscal 1997 from $2,527,000 in
fiscal 1996. This increase is primarily due to purchases of mortgage-backed
securities for the available for sale portfolio near the end of fiscal 1996.
Interest received on securities increased $403,000 or 6.3 percent to $6,772,000
in fiscal 1997 from $6,369,000 in fiscal 1996.
27
<PAGE> 28
Interest expense increased $4,808,000 or 16.7 percent to $33,629,000
in fiscal 1997 from $28,821,000 in fiscal 1996. This is primarily the result of
growth in deposits combined with a decrease in the cost of interest bearing
liabilities. Interest expense on deposits increased $4,351,000 or 20.9 percent
to $25,177,000 in fiscal 1997 from $20,826,000 in fiscal 1996. The increase in
interest expense on deposits is the result of growth in deposit accounts
coupled with a decrease in their cost. The cost of deposits declined 9 basis
points to 4.84 percent during the year from 4.93 percent in the prior year.
Interest expense on FHLB advances and other borrowings also increased $457,000
or 5.7 percent to $8,452,000 in fiscal 1997 from $7,995,000 in fiscal 1996.
During the year, the Bank's cost of FHLB advances and other borrowings declined
53 basis points to 5.51 percent from 6.04 percent in the prior year. The Bank
utilizes short term FHLB advances to fund primarily construction loans and
loans held for sale.
Provision for loan losses
The Company increased its provision for loan losses $1,652,000 or 65.2
percent to $2,652,000 in fiscal 1997 from $1,000,000 in fiscal 1996. This
increase is attributable to an increase in the Company's charge-offs during the
year. These charge-offs resulted from problems in the equipment leasing
portfolio which were caused primarily from a single lessee. Total
non-performing and potential problem assets remained approximately constant at
$12,443,000 at March 31, 1997 compared to $11,990,000 at March 31, 1996. Total
problem assets, which include all non-performing and classified assets,
decreased to 1.51 percent of total assets at March 31, 1997, from 1.63 percent
of total assets at March 31, 1996. Management continually evaluates the
inherent risks in the Company's existing loan portfolio and the level of
existing loan loss reserves.
Non-interest income
Non-interest income increased by $2,058,000 or 19.0 percent to
$12,911,000 for fiscal 1997 from $10,853,000 for fiscal 1996. Mortgage
production fees are the largest component of non-interest income and such fees
increased $503,000 or 7.4 percent to $7,280,000 compared to $6,777,000 in
fiscal 1996. The volume of loans sold in the secondary market increased to
$583,762,000 during 1997 compared to $449,354,000 in fiscal 1996. The dollar
amount of loans sold fluctuates based on the demand for mortgages in the
Company's market which is effected by job creations, interest rates and general
economic conditions. The margin received on loan sales fluctuates due to
changes in the general interest rate and the competitive environment. The
following table shows mortgage production fees, the dollar amount of loans sold
in the secondary market and the margin earned on those loans for the periods
indicated:
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Mortgage production fees $7,280 $6,777 $3,236
Dollar volume sold $583,762 $449,354 $281,421
Margin earned 1.25% 1.51% 1.15%
</TABLE>
The Company evaluates the cost of servicing and premiums offered when
deciding whether to retain or sell servicing rights. In fiscal 1997, 1996 and
1995, the Company sold the majority of it loans with servicing released and the
largest component of mortgage production fees was service release premiums.
In addition, income from Eagle Real Estate Advisors increased $920,000
or 106.7 percent . This increase was due to increased gains recorded on the
sale of investments in real estate amounting to $1,377,000 and real estate
commissions of $405,000. During fiscal 1997, 128 residential lots were sold in
the Company's real estate projects compared to 103 in the prior period. Service
charges, at the community bank, increased $428,000 or 27.6 percent to
$1,979,000 in fiscal 1997 compared to $1,551,000 in fiscal year 1996. This is
the result of growth in the number of checking accounts during the year.
28
<PAGE> 29
Non-interest expense
Non-interest expense increased $10,433,000 or 42.6 percent to
$34,901,000 in fiscal 1997 from $24,468,000 in fiscal 1996. The SAIF assessment
and the merger related expenses were $3,631,000 or 34.8 percent of the total
increase. The Company's efficiency ratio, excluding the SAIF assessment and the
merger related expenses, was 72.6 percent for fiscal 1997, compared to 70.6
percent for fiscal 1996. In general the increase in all categories of
non-interest expense is attributable to the higher operating costs incurred by
the Company's rapid growth. Over the course of the previous year, the Company
opened four retail banking offices in metropolitan Atlanta, Cherokee County to
serve the Towne Lake community, Alpharetta to serve the North Fulton and
Forsyth County markets, Lawrenceville to serve the Gwinnett County market and
Jonesboro to serve the south-metro market.
The Company opened five loan origination branches, in Cumming and
Athens, Georgia, Charlotte, North Carolina and in Nashville and Knoxville,
Tennessee. Mortgage banking companies traditionally have higher efficiency
ratios than banks and thrifts. The Company is focused on streamlining this
business segment to reduce operating expenses, provide a higher margin and
improve customer service. The Company is involved in an in-depth assessment of
the mortgage banking group. This assessment includes evaluating each office's
profitability and carefully considering each local market.
Salaries and employee benefits increased $3,234,000 or 22.5 percent to
$17,620,000 in fiscal 1997 compared to $14,386,000 in fiscal 1996. This
increase is due to the addition of employees in new branches and loan
production offices to support the Company's growth. Occupancy expense increased
$758,000 or 25.1 percent to $3,774,000 in fiscal 1997 compared to $3,016,000 in
fiscal 1996. Marketing expense increased $607,000 or 118.1 percent to
$1,121,000 in fiscal 1997 compared to $514,000 in fiscal 1996. The increase is
due to a marketing campaign designed to position the Bank in the metropolitan
Atlanta market. As a result of the recapitalization of the SAIF, federal
insurance premiums decreased from $.23 per $100 of deposits to $.06 per $100 of
deposits. These premiums decreased $15,000 to $702,000 in fiscal 1997 from
$717,000 in fiscal 1996, even though the Company's deposit base increased, due
to the decline in the SAIF insurance premium.
Miscellaneous expenses increased $1,801,000 or 38.4 percent to
$6,496,000 in fiscal 1997 compared to $4,695,000 in fiscal 1996. This increase
is due to increases in office supplies, telephone and communications, and
consulting and attorney fees.
Income tax expense
The Company's effective tax rate for fiscal 1997 was 32.1 percent
compared to 32.3 percent in the prior year.
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED MARCH 31, 1995 AND MARCH 31,
1996
Net income
The Company's net income increased by $1,338,000 or 27.4 percent to
$6,219,000 in fiscal 1996 from $4,881,000 in fiscal 1995. The increase is
primarily attributable to growth in interest and non-interest income. Net
income per share increased to $1.40 for the year ended March 31, 1996 compared
to $1.18 for the year ended March 31, 1995.
29
<PAGE> 30
Net interest income
Net interest income increased by $2,688,000 or 12.7 percent to
$23,804,000 in fiscal 1996 from $21,116,000 in fiscal 1995. This increase
resulted from growth in interest earning assets primarily through loan
originations.
Interest income received on loans increased by $11,697,000 or 36.5
percent to $43,729,000 in fiscal 1996 from $32,032,000 in fiscal 1995. The
increase in interest received on loans was primarily attributable to growth in
the loan portfolio through originations of residential construction loans,
conforming single family loans held for sale, commercial loans and equipment
leases. The yield on the loan portfolio remained consistent at 9.64 percent for
the year compared to 9.52 percent in the prior year. Interest received on
mortgage-backed securities increased $847,000 or 50.4 percent to $2,527,000 in
fiscal 1996 from $1,680,000 in fiscal 1995. This increase is primarily due to
purchases of mortgage-backed securities for the available for sale portfolio.
Interest received on securities increased $463,000 or 7.8 percent to $6,369,000
in fiscal 1996 from $5,906,000 in fiscal 1995. This is primarily the result of
purchases of securities during the year.
Interest expense increased by $10,319,000 or 55.8 percent to
$28,821,000 in fiscal 1996 from $18,502,000 in fiscal 1995. This is primarily
the result of growth in deposits and FHLB advances combined with an increase in
the cost of these interest bearing liabilities. Interest expense on deposits
increased $6,392,000 or 44.3 percent to $20,826,000 in fiscal 1996 from
$14,434,000 in fiscal 1995. The cost of deposits rose to 4.93 percent during
the year from 4.01 percent in the prior year. Interest expense on FHLB advances
and other borrowings also increased $3,927,000 or 96.5 percent to $7,995,000 in
fiscal 1996 from $4,068,000 in fiscal 1995. During the year the Company's cost
of FHLB advances and other borrowings rose 20 basis points to 6.04 percent from
5.84 percent in the prior year.
Provision for loan losses
The Company increased its provision for loan losses by $357,000 or
55.5 percent to $1,000,000 in fiscal 1996 from $643,000 in fiscal 1995. This
increase is attributable to increased non-performing assets and potential
problem loans. Non-performing assets increased to $7,661,000 at March 31, 1996
compared to $2,133,000 at March 31, 1995. Management continually evaluates the
inherent risks in the Company's existing loan portfolio and the level of
existing loan loss reserves.
Non-interest income
Non-interest income increased by $3,571,000 or 49.0 percent to
$10,853,000 in fiscal 1996 from $7,282,000 in fiscal 1995. Mortgage production
fees are the largest component of non-interest income and such fees increased
$3,541,000 or 109.4 percent to $6,777,000 in fiscal 1996 from $3,236,000 in
fiscal 1995. The volume of loans sold in the secondary market increased to
$449,354,000 in fiscal 1996 compared to $281,421,000 in fiscal 1995. In
addition, the margin earned on these loans (mortgage production fees divided by
mortgage volume sold) increased to 151 basis points in fiscal 1996 compared to
115 basis points in fiscal 1995.
During the year, income from Eagle Real Eagle Advisors increased
$719,000 or 502.8 percent. The increase was due to gains recorded on the sale
of investment in real estate amounting to $697,000 and real estate commissions
of $165,000. This is the result of lot sales in the Company's Union Hill
development in Forsyth County and in the Cobb Woodlawn development in Cobb
County.
Service charges increased by $239,000 or 18.2 percent to $1,551,000 in
fiscal 1996 compared to $1,312,000 in fiscal 1995. This is the result of growth
in the number of checking accounts during the year. Gain on the sale of loans
decreased $874,000 or 82.1 percent to $190,000 in fiscal 1996 from $1,064,000
in fiscal 1995 when the Company sold loans which had been purchased at a
discount from the Resolution Trust Company.
30
<PAGE> 31
Non-interest expense
Non-interest expense increased by $4,304,000 or 21.3 percent to
$24,468,000 for fiscal 1996 from $20,164,000 for fiscal 1995. In general the
increase in all categories of non-interest expense is attributable to the
Company's rapid growth.
Salaries and employee benefits increased by $2,597,000 or 22.0 percent
to $14,386,000 in fiscal 1996 from $11,789,000 for fiscal 1995. This increase
is due to the addition of employees to support the Company's growth. Occupancy
expense increased $266,000 or 9.7 percent to $3,016,000 in fiscal 1996 from
$2,750,000 in fiscal 1995. This is primarily due to the addition of two new
regional banking facilities during the year. Federal insurance premiums
increased by $110,000 or 18.1 percent to $717,000 in fiscal 1996 from $607,000
in fiscal 1995. The increase is a function of the Company's deposit growth.
Income tax expense
The Company's effective tax rate for fiscal 1996 was 32.3 percent
compared to 35.7 percent in the prior year. This decrease is primarily due to
low income housing tax credits utilized during fiscal 1996.
INTEREST RATE SENSITIVITY
Net interest income on a taxable-equivalent basis expressed as a
percentage of average total assets is referred to as the net interest margin.
The net interest margin represents the average net effective yield on earning
assets. The net interest margin increased 17 basis to 4.37 percent during
fiscal 1997 from 4.20 percent during fiscal 1996. The average balance sheet on
the next page presents the individual components of net interest income and
expense, net interest spread and net interest margin. The increase in the net
interest margin in fiscal 1997 was primarily attributable to the decrease in
the cost of interest bearing liabilities rather than a significant change in
the yield earned on interest earning assets. The yield earned on average loans
remained consistent at 9.69 percent for fiscal 1997 compared to 9.64 percent in
fiscal 1996. This is attributable to the Company's ability to expand its loan
portfolio through originations of higher yielding loans for the Company's
portfolio. In addition, the yield earned on mortgage-backed securities improved
72 basis points rising to 7.35 percent in fiscal 1997 from 6.63 percent in
fiscal 1996. The cost of deposits declined primarily because of the 27 basis
point decrease in the cost of certificates of deposit from 6.17 percent in
fiscal 1996 to 5.90 percent in fiscal 1997. The Company also relies on
borrowings from the FHLB and other borrowings to fund asset growth and the cost
of FHLB advances and other borrowings decreased 53 basis points to 5.51 percent
in fiscal 1997 from 6.04 percent in fiscal 1996.
31
<PAGE> 32
The following table reflects the average balances, the interest income or
expense and the average yield and cost of funds of the Company's interest
earning assets and interest bearing liabilities during the fiscal years ended
March 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEET
- --------------------------------------------------------------------------------------------------------------------
Year ended March 31, 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
(dollars in thousands) Balance Interest Cost Balance Interest Cost
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
- --------------------------------------------------------------------------------------------------------------------
Loans(1) $531,619 $ 51,503 9.69% $453,636 $ 43,729 9.64%
Mortgage-backed securities 74,969 5,510 7.35% 38,115 2,527 6.63%
FHLB stock 7,866 553 7.03% 6,947 505 7.27%
Taxable investments(2) 47,239 3,480 7.37% 53,912 4,225 7.84%
Tax-exempt investment securities(2) 39,631 3,227 8.14% 21,392 1,920 8.98%
Interest earning deposits and federal
funds sold 1,322 76 5.75% 1,502 91 6.06%
- --------------------------------------------------------------------------------------------------------------------
Total interest earning assets 702,646 64,349 9.16% 575,504 52,997 9.21%
Non-interest earning assets 64,123 52,595
- --------------------------------------------------------------------------------------------------------------------
Total Assets $766,769 $628,099
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Equity:
- --------------------------------------------------------------------------------------------------------------------
Savings $ 46,157 $ 1,128 2.44% $ 46,583 $ 1,162 2.49%
Checking 72,858 993 1.36% 63,576 1,074 1.69%
Money Market 19,541 496 2.54% 19,973 558 2.79%
Certificates of Deposit 382,117 22,560 5.90% 292,021 18,032 6.17%
- --------------------------------------------------------------------------------------------------------------------
Total Deposits 520,673 25,177 4.84% 422,153 20,826 4.93%
Advances and other borrowings 153,483 8,452 5.51% 132,366 7,995 6.04%
- --------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 674,156 33,629 4.99% 554,519 28,821 5.20%
Non-interest bearing liabilities 25,112 26,887
Stockholders' equity 67,501 46,693
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $766,769 $628,099
- --------------------------------------------------------------------------------------------------------------------
Net Interest/rate spread $ 30,720 4.17% $ 24,176 4.01%
Taxable-equivalent adjustment (564) (372)
- --------------------------------------------------------------------------------------------------------------------
Net interest income, actual $ 30,156 $ 23,804
Net interest earning assets/net
interest margin $ 28,490 4.37% $ 20,985 4.20%
- --------------------------------------------------------------------------------------------------------------------
Interest earning assets as a
percentage of interest bearing liabilities 104.23% 103.78%
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
AVERAGE BALANCE SHEET
- ------------------------------------------------------------------------------------
Year ended March 31, 1995
- ------------------------------------------------------------------------------------
Average Yield/
(dollars in thousands) Balance Interest Cost
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
- ------------------------------------------------------------------------------------
Loans(1) $ 336,647 $32,032 9.52%
Mortgage-backed securities 26,454 1,680 6.35%
FHLB stock 4,040 272 6.73%
Taxable investments(2) 63,764 4,496 7.05%
Tax-exempt investment securities(2) 17,958 1,650 9.19%
Interest earning deposits and federal
funds sold 1,894 74 3.91%
- ------------------------------------------------------------------------------------
Total interest earning assets 450,757 40,204 8.92%
Non-interest earning assets 33,408
- ------------------------------------------------------------------------------------
Total Assets $ 484,165
- ------------------------------------------------------------------------------------
Liabilities and Equity:
- ------------------------------------------------------------------------------------
Savings $ 57,739 $ 1,541 2.67%
Checking 65,223 1,081 1.66%
Money Market 31,620 615 1.94%
Certificates of Deposit 205,323 11,197 5.45%
- ------------------------------------------------------------------------------------
Total Deposits 359,905 14,434 4.01%
Advances and other borrowings 69,610 4,068 5.84%
- ------------------------------------------------------------------------------------
Total interest bearing liabilities 429,515 18,502 4.31%
Non-interest bearing liabilities 15,058
Stockholders' equity 39,592
- ------------------------------------------------------------------------------------
Total liabilities and equity $ 484,165
- ------------------------------------------------------------------------------------
Net Interest/rate spread $21,702 4.61%
Taxable-equivalent adjustment (586)
- ------------------------------------------------------------------------------------
Net interest income, actual $21,116
Net interest earning assets/net
interest margin $ 21,242 4.81%
- ------------------------------------------------------------------------------------
Interest earning assets as a
percentage of interest bearing liabilities 104.95%
- ------------------------------------------------------------------------------------
</TABLE>
(1) Non-accrual loans are included in average balances and income on such
loans, if recognized, is recorded on a cash basis.
(2) The yield for investment securities classified as available for sale is
computed using historical amortized cost balances.
32
<PAGE> 33
The rate volume analysis below explains the components of net interest income
for the periods indicated. For each category of interest earning assets and
interest bearing liabilities, information is provided on changes attributed to
(1) changes in rate (difference in rate x prior period volume), (2) changes in
volume (difference in volume x prior period rate), and (3) changes in
rate-volume (difference in rate x difference in volume). The net change
attributable to both volume and rate, which cannot be segregated, has been
allocated proportionately to change due to volume and change due to rate.
<TABLE>
<CAPTION>
RATE/VOLUME ANALYSIS
- ------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1997 Compared to 1996 1996 Compared to 1995
INCREASE (DECREASE) DUE TO Rate Volume Total Rate Volume Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income on interest earning assets:
Loans $ 228 $ 7,546 $ 7,774 $ 409 $ 11,288 $ 11,697
Mortgage-backed securities 301 2,682 2,983 77 770 847
FHLB Stock (17) 65 48 23 210 233
Taxable investment securities (243) (502) (745) 471 (742) (271)
Tax-exempt investment securities(1) (195) 1,502 1,307 (38) 308 270
Interests earnings deposits and federal funds
sold (4) (11) (15) 35 (18) 17
- ------------------------------------------------------------------------------------------------------------------------------
Total 70 11,282 11,352 977 11,816 12,793
- ------------------------------------------------------------------------------------------------------------------------------
Interest expense on interest bearing liabilities:
Deposits (870) 5,221 4,351 3,280 3,112 6,392
FHLB advances and other borrrowings (741) 1,198 457 144 3,783 3,927
- ------------------------------------------------------------------------------------------------------------------------------
Total (1,611) 6,419 4,808 3,424 6,895 10,319
- ------------------------------------------------------------------------------------------------------------------------------
Net change in net interest income $ 1,681 $ 4,863 $ 6,544 ($2,447) $ 4,921 $ 2,474
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects taxable-equivalent adjustments using the statutory federal and
state income tax rate of 39% in adjusting interest on tax-exempt investment
securities to a taxable equivalent basis.
33
<PAGE> 34
The Company manages the inherently different maturity and re-pricing
characteristics of its loans and deposits to achieve a desired interest rate
sensitivity position and to limit the Company's exposure to interest rate risk.
The Bank's Asset and Liability Committee ("ALCO") has primary responsibility
for managing the Company's exposure to interest rate risk. The ALCO is
comprised of three directors, two officers of the Bank and the manager of the
Bank's secondary marketing department. The ALCO meets two times a week to
establish interest rates on loans and deposits and review interest rate
sensitivity and liquidity positions. Funding positions are kept within
predetermined limits designed to ensure that the interest rate risk of the
Company is properly managed. The Company utilizes a simulation model to measure
interest rate risk and manage its exposure to interest rate risk.
Interest rate sensitivity is a measure of exposure to changes in net
interest income due to changes in market interest rates. The excess of interest
earning assets over interest bearing liabilities repricing or maturing in a
given period of time is commonly referred to as "GAP." A positive Gap indicates
an excess of interest rate sensitive assets over interest rate sensitive
liabilities; a negative gap indicates an excess of interest rate sensitive
liabilities over interest rate sensitive assets. The Company's Gap position is
evaluated continuously and reviewed by the ALCO in bi-weekly meetings. The
Company has a negative one year Gap of 22.48 percent as of March 31, 1997. Part
of the ALCO strategy for reducing interest rate risk revolves around increasing
the percentage of shorter term floating rate loans in the Company's portfolio.
This has been accomplished by originating residential construction and
adjustable rate permanent loans. The Company continues to originate consumer
loans and second mortgage loans. In general, these loans have short maturities
and/or have floating interest rates.
The following table presents the Company's interest sensitivity gap
between interest earning assets and interest bearing liabilities at March 31,
1997. The gap analysis is prepared using either actual repricing intervals or
maturity dates. Assets and liabilities having no stated schedule of repricing,
repayment or maturity are reported in less than three months, except equity
securities which are reported after five years. In addition, loans held for
sale are included in less than three months since it is management's intent to
sell them within that time.
34
<PAGE> 35
GAP ANALYSIS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
March 31, 1997 More than More than More than
Less than 3 months 1 year 3 years to After 5
(dollars in thousands) 3 months to 1 year to 3 years 5 years years Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets re-pricing:
Loans receivable $ 218,168 $ 89,987 $ 51,519 $ 48,000 $115,087 $522,761
Investment securities held to maturity 3,428 5,979 4,554 20,216 17,730 51,907
Securities available for sale 2,673 1,994 6,563 7,791 77,900 96,921
Loans held for sale 62,882 -- -- -- -- 62,882
FHLB Stock -- -- -- -- 7,864 7,864
Interest bearing deposits and federal funds sold 8,581 -- -- -- -- 8,581
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets $ 295,732 $ 97,960 $ 62,636 $ 76,007 $218,581 $750,916
Interest bearing liabilities re-pricing:
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits $ 253,911 $ 200,569 $ 62,467 $ 38,213 $ 2,564 $557,724
Borrowings 124,392 -- 14,088 14,220 1,105 153,805
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities $ 378,303 $ 200,569 $ 76,555 $ 52,433 $ 3,669 $711,529
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity Gap (82,571) (102,609) (13,919) 23,574 214,912 39,387
Cumulative interest rate sensitivity Gap (82,571) (185,180) (207,680) (184,106) 39,387
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative interest rate sensitivity Gap as a
percentage of total assets (10.02%) (22.48%) (24.17%) (21.30%) 4.78%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE> 36
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The following table sets forth certain information at March 31, 1997, regarding
the dollar amount of loans maturing in the Bank's net loan portfolio based on
their contractual terms to maturity. Demand loans having no stated schedule of
repayment and no stated maturity, and overdrafts are reported as due in one
year.
<TABLE>
<CAPTION>
March 31, 1997
- -----------------------------------------------------------------------------------------------------------
One Year to After
(dollars in thousands) One Year Five Five
or Less Years Years Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate mortgage loans:
Fixed rates $ 5,542 $ 11,545 $ 102,682 $ 119,769
Adjustable rates 4,078 6,871 136,620 147,569
Real estate construction, net - Adjustable 141,985 17,230 477 159,692
rates
Commercial loans:
Commercial - Fixed rates 4,542 12,873 4,891 22,306
Commercial - Adjustable rate 10,418 13,453 5,967 29,838
Leases - Fixed rate 3,382 16,557 - 19,939
Consumer and others - Fixed rates 10,458 11,537 1,653 23,648
- -----------------------------------------------------------------------------------------------------------
Total 180,405 90,066 252,290 522,761
- -----------------------------------------------------------------------------------------------------------
Less: Deferred loan origination fees 1,684
Unearned income 212
Reserve for loan losses 5,198
Unearned premium on loans (82)
- -----------------------------------------------------------------------------------------------------------
Total $ 515,749
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Note: The above information was compiled based upon contractual terms to
maturity. The actual maturities may differ from contractual maturities because
borrowers may have the right to call or repay obligations with or without call
or prepayment penalties.
The next table sets forth the dollar amount of all loans due after one year
from March 31, 1997, which have predetermined interest rates and have floating
or adjustable rates.
<TABLE>
<CAPTION>
(dollars in thousands)
Predetermined Floating or
rates Adjustable Rates
<S> <C> <C>
Real estate-mortgage $114,227 $143,491
Real estate-construction, net - 17,707
Commercial 17,764 19,420
Leases 16,557 -
Consumer and other 13,190 -
- ----------------------------------------------------------------------------------------------------------
Total $161,738 $180,618
</TABLE>
Note: The above information was compiled based upon contractual terms to
maturity. The actual maturities may differ from contractual maturities because
borrowers may have the right to call or repay obligations with or without call
or prepayment penalties.
36
<PAGE> 37
Loan Portfolio and Concentration
Since 1993, the Company's loan portfolio has grown 141 percent. Loans
receivable, net, including loans held for sale, increased $75,236,000 or 14.9
percent to $578,631,000 at March 31, 1997 compared to $503,395,000 at March 31,
1996. The primary reason is due to the increase in residential first mortgage
loans, home equity and second mortgage loans, construction, and acquisition and
development loans. The Company's mix has shifted with increases in residential
mortgage loans, home equity and second mortgage as well as commercial and
consumer loans. Decreases occurred in loans held for sale and leases.
The community banking group originates primarily commercial, consumer
and home equity and second mortgage loans in the metro Atlanta area. These loan
categories increased $57,968,000 or 94.1 percent to $119,544,000 at March 31,
1997 compared to $61,576,000 at March 31, 1996. At March 31, 1997, these loans
represented 17.9 percent of the loan portfolio versus 10.4 percent at March 31,
1996. The mortgage-banking group originates primarily construction loans,
acquisition and development loans and loans held for sale. These loan
categories decreased $4,932,000 or 1.6 percent to $303,376,000 at March 31,
1997 compared to $308,308,000 at March 31, 1996. Both groups contribute to the
Company's portfolio of residential mortgage loans. While this loan category
increased $36,825,000 or 23.3 percent, the relative mix to the total loan
portfolio remained constant at 29.2 percent. Residential first mortgages are
generally believed to be a conservative investment. The Company's high
concentration of residential first mortgages tends to reduce its level of
delinquencies and problem loans.
In 1993, the Company began a leasing operation which purchased leases
from approved lessors. Each credit was underwritten based upon the lessee's
cash flow, business prospects and ability to make rental payments. In December
1995, the Company began to experience delinquencies in the portfolio. As a
result of delinquencies primarily with two relationships, the Bank discontinued
the leasing activities during the current year. Leases at March 31, 1997, were
$19,939,000 or 3 percent of total loans compared to $38,032,000 at March 31,
1996. At March 31, 1997, the average duration of these leases was 24 months.
The following table exhibits the Company's loan portfolio mix for the
previous five years.
37
<PAGE> 38
<TABLE>
<CAPTION>
LOAN PORTFOLIO MIX
At March 31,
- -----------------------------------------------------------------------------------------------------------------
1997 1996 1995
(dollars in thousands) Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real Estate-construction loans
Construction $205,086 30.77% $ 185,337 31.17% $ 140,209 29.45%
Acquisition & Development 35,408 5.31% 30,419 5.12% 30,517 6.41%
Real Estate-mortgage loans
Non-residential 28,764 4.32% 28,730 4.83% 32,027 6.73%
Residential 194,821 29.23% 157,996 26.57% 156,001 32.77%
Home equity and second
mortgages 43,752 6.57% 17,212 2.89% 13,272 2.79%
Loans held for sale 62,882 9.44% 92,552 15.56% 41,220 8.66%
- -----------------------------------------------------------------------------------------------------------------
Total real estate loans $570,713 85.64% $ 512,246 86.14% $ 413,246 86.81%
- -----------------------------------------------------------------------------------------------------------------
Other loans:
Commercial $ 52,144 7.82% $ 34,407 5.79% $ 23,617 4.96%
Leases 19,939 2.99% 38,032 6.40% 32,582 6.84%
Consumer and other 23,648 3.55% 9,957 1.67% 6,621 1.39%
- -----------------------------------------------------------------------------------------------------------------
Total other loans $ 95,731 14.36% $ 82,396 13.86% $ 62,820 13.19%
- -----------------------------------------------------------------------------------------------------------------
Total gross loans receivable $666,444 100.00% $ 594,642 100.00% $ 476,066 100.00%
- -----------------------------------------------------------------------------------------------------------------
Less:
Undisbursed portion of loans
in process (80,801) (84,268) (63,246)
Deferred loan origination
fees (1,684) (1,659) (1,699)
Unearned income (212) (384) (593)
Reserve for loan losses (5,198) (5,464) (4,704)
Unearned premium (discount)
on loans purchased 82 528 (113)
- -----------------------------------------------------------------------------------------------------------------
Loans receivable, net(1) $578,631 $503,395 $405,711
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
LOAN PORTFOLIO MIX
At March 31,
- -------------------------------------------------------------------------------------
1994 1993
(dollars in thousands) Amount % Amount %
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real Estate-construction loans
Construction $116,789 32.40% $ 75,789 26.90%
Acquisition & Development 23,771 6.59% 13,059 4.64%
Real Estate-mortgage loans
Non-residential 30,987 8.60% 27,865 9.89%
Residential 92,230 25.59% 92,583 32.87%
Home equity and second
mortgages 14,544 4.03% 14,826 5.26%
Loans held for sale 23,641 6.56% 23,462 8.33%
- --------------------------------------------------------------------------------------
Total real estate loans $301,962 83.77% $247,584 87.89%
- --------------------------------------------------------------------------------------
Other loans:
Commercial $ 20,068 5.57% $ 10,646 3.78%
Leases 29,364 8.15% 18,808 6.68%
Consumer and other 9,060 2.51% 4,648 1.65%
- -------------------------------------------------------------------------------------
Total other loans $ 58,492 16.23% $ 34,102 12.11%
- -------------------------------------------------------------------------------------
Total gross loans receivable $360,454 100.00% $281,686 100.00%
- -------------------------------------------------------------------------------------
Less:
Undisbursed portion of loans
in process (58,012) (35,712)
Deferred loan origination
fees (1,316) (1,211)
Unearned income (1,190) (1,782)
Reserve for loan losses (4,791) (2,781)
Unearned premium (discount)
on loans purchased (148) (580)
- --------------------------------------------------------------------------------------
Loans receivable, net(1) $294,997 $239,620
- --------------------------------------------------------------------------------------
</TABLE>
(1) Includes loans receivable held for sale.
38
<PAGE> 39
In accordance with the Company's business plan, the volume of
construction lending increased in each of the previous three years. The Company
understands the risks inherent in interim construction financing and has
designed an efficient organization to properly mitigate those risks through
strict underwriting and close monitoring of the process. The Company's
underwriting criteria consider, among other things, the equity investment of
the borrower, the track record and financial condition of the builder, the
demand for the type of house to be constructed including a marketing survey of
inventory levels by price range and location, the feasibility of house plans
and costs, the growth prospects for the economy and the impact of changes in
interest rates. The Company has a multistate construction inspection and
appraisal network. Its staff closely monitors construction progress and draws
throughout the process. In addition, no single customer accounted for more than
3.0 percent of the Company's loans in fiscal 1997, 1996 or 1995.
The following table exhibits the geographic location of the Company's
real estate construction and acquisition and development loans.
REAL ESTATE CONSTRUCTION LOANS BY TYPE AND LOCATION
<TABLE>
<CAPTION>
At March 31, 1997
Acquisition & % of Total
(dollars in thousands) Construction Development Total by Location
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Atlanta $ 75,883 $12,847 $ 88,730 55.56%
Augusta 16,001 3,080 19,081 11.95%
Jacksonville 13,679 5,450 19,129 11.98%
Savannah 7,403 2,491 9,894 6.20%
Charlotte 5,701 743 6,444 4.03%
Hinesville 3,383 1,844 5,227 3.27%
All other locations 10,206 982 11,188 7.01%
- --------------------------------------------------------------------------------------------------
Total by type $132,256 $27,437 $159,693 100.00%
- --------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 40
Provision for loan losses and risk elements
The Bank has an Asset Classification Committee (the "ACC"), comprised of
management, which reports at least quarterly to the Board of Directors.
Management and the ACC consider numerous factors in identifying potential
problem loans including, among other factors, the estimated value of the
underlying collateral, loan concentrations, specific loan problems, economic
conditions that may affect the borrower's ability to repay, past payment
experience, general market conditions and such other factors as management or
the ACC believes should be considered under existing circumstances. In addition,
various regulatory agencies, as an integral part of the examination process,
periodically review the reserve for loan losses. Such agencies require the Bank
to recognize additions to the reserve based on judgments with regard to
information available to them at the time of the examination. Management is not
aware of any loans classified for regulatory purposes as loss, doubtful or
substandard that (i) have not been disclosed and (ii) either (a) represent or
result from trends or uncertainties, which management reasonably expects will
materially impact future operating results, liquidity, or capital resources, or
(b) represent material credits in which management is aware of any information
which causes management to have serious doubts as to the ability of such
borrower to comply with the loan repayment terms.
Construction and acquisition and development loans comprise the largest
component of the Company's loan portfolio. Construction loans frequently involve
greater risk than residential mortgage loans principally due to (i) the
creditworthiness of construction borrowers in general, (ii) the potential risks
associated with securing permanent financing, and (iii) general market
conditions in the housing industry.
The Company's investment in equipment leases involves risk because of (i)
the decline in value of the leased equipment, (ii) the Company's reliance on
third party lessors for servicing the leases, and (iii) the location of lessees
outside the Company's geographic market.
Management believes that the Bank's credit review and loan monitoring
processes are adequate to evaluate and monitor these risks and that the Bank's
allowance for possible loan losses is adequate in relation to the composition of
its loan portfolio. Although the Company's non-accrual loans as a percentage of
total loans was 1.36 percent at March 31, 1997, there is a risk that the quality
of the Company's loan portfolio could decline. The rapid growth in loans, the
concentration of construction loans, and the risk inherent in lease portfolio
each present a risk the quality of the loan portfolio could decline. Management
and the ACC, along with regulators, closely monitor total exposure to each
market area and price range in determining the appropriate concentrations of
construction loans. The Office of Thrift Supervision (the "OTS") also monitors
and comments on the adequacy of the Bank's provision for loan losses in
conducting its examinations of the Bank.
Non-performing assets
Total problem assets, which include non-accrual loans, loans classified as
problem assets by the ACC and real estate acquired through the settlement of
loans, increased $453,000 or 3.78 percent to $12,443,000 at March 31, 1997, from
$11,990,000 at March 31, 1996. Total problem assets as a percent of total assets
decreased to 1.51 percent at March 31, 1997 from at 1.63 percent at March 31,
1996. At March 31, 1997, the Company had non-accrual loans of $7,866,000
compared to $6,317,000 at March 31, 1996. Interest income not recognized on
these loans amounted to $241,000 during 1997, and $156,500 during 1996. In
addition, at March 31, 1997, the ACC identified $2,503,000 as potential problem
loans compared to $4,329,000 of potential problem loans at March 31, 1996. Real
estate owned increased by $730,000 or 54.3 percent to $2,074,000 at March 31,
1997, from $1,344,000 at March 31, 1996.
The following table reflects non-performing loans, potential problem
loans and restructured loans as of the dates indicated. Non-performing loans
consist of non-accrual loans and foreclosed properties, as well as loans past
due 90 days or more as to interest or principal and still accruing. Potential
problem loans
40
<PAGE> 41
are those with respect to which management has doubts regarding the ability of
the borrower to comply with current loan repayment terms and have been
classified as such by the ACC, regardless of payment status.
<TABLE>
<CAPTION>
NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS
At March 31,
- -------------------------------------------------------------------------------------------
(dollars in thousands) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans
Residential real estate-construction $ 1,692 $ 1,658 $ 464 $ 647 $ 1,824
Residential real estate-mortgage 2,934 569 469 751 439
Commercial real estate 427 662 - 157 -
Commercial 93 7 57 264 -
Commercial leases 2,508 3,421 - 5 -
Installment 212 - 4 66 -
- -------------------------------------------------------------------------------------------
Total non-accrual 7,866 6,317 994 1,890 2,263
- -------------------------------------------------------------------------------------------
Potential problem loans 2,503 4,329 2,963 2,652 4,096
Loans contractually delinquent 90
days which still accrue interest - - - - -
Troubled debt restructuring - - - - -
- -------------------------------------------------------------------------------------------
Total non-accrual and problem loans $10,369 $10,646 $ 3,957 $ 4,542 $ 6,359
- -------------------------------------------------------------------------------------------
Real estate owned, net 2,074 1,344 1,139 1,273 2,542
- -------------------------------------------------------------------------------------------
Total problem assets $12,443 $11,990 $ 5,096 $ 5,815 $ 8,901
- -------------------------------------------------------------------------------------------
Total problem assets/Total assets 1.51% 1.63% 0.90% 1.39% 2.42%
- -------------------------------------------------------------------------------------------
Total problem assets/Loans receivable,
net plus reserves 2.41% 2.92% 1.40% 2.14% 4.12%
- -------------------------------------------------------------------------------------------
Reserve for loan losses/Problem assets 41.78% 45.57% 92.31% 82.39% 31.24%
- -------------------------------------------------------------------------------------------
</TABLE>
Concentrations by Geographic Location
The following table reflects concentrations of non-accrual, potential
problem loans and real estate owned by geographic location.
NON-ACCRUAL, POTENTIAL PROBLEM LOANS AND REAL ESTATE OWNED BY LOCATION
At March 31, 1997
[CAPTION]
<TABLE>
Potential Real Estate(1) % of Total
(dollars in thousands) Non-accrual Problem Owned Total by Location
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Atlanta $ 1,849 $ 2,024 $ 754 $ 4,627 36.76%
Augusta 1,048 155 235 1,438 11.42%
Jacksonville 22 - 454 476 3.78%
Savannah 291 - - 291 2.31%
Hinesville 1,211 324 - 1,535 12.20%
All other locations 3,445 - 775 4,220 33.53%
- ---------------------------------------------------------------------------------------
Total problem assets $ 7,866 $ 2,503 $ 2,218 $12,587 100.00%
- ---------------------------------------------------------------------------------------
</TABLE>
(1) Does not include reserves of $144,000; real estate owned, net equals
$2,074,000.
41
<PAGE> 42
The following table reflects concentrations of non-accrual, potential
problem loans and real estate owned by geographic location and by type.
NON-ACCRUAL, POTENTIAL PROBLEM LOANS AND REAL ESTATE OWNED BY LOCATION AND TYPE
<TABLE>
<CAPTION>
At March 31, 1997 Residential
-------------------- Comm'l % of Total
(dollars in thousands) Constr Mtgs R-Estate Comm'l Leases Installment Total by Location
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-accrual:
Atlanta $ 14 $ 1,533 $ 64 $ 93 - $ 145 $ 1,849 14.69%
Augusta 656 392 - - - - 1,048 8.33%
Jacksonville - 22 - - - - 22 0.17%
Savannah 291 - - - - - 291 2.31%
Hinesville 703 145 363 - - - 1,211 9.62%
All other locations 28 842 - - 2,508 67 3,445 27.37%
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-accrual 1,692 2,934 427 93 2,508 212 7,866 62.49%
- -----------------------------------------------------------------------------------------------------------------------------------
Potential problem loans:
Atlanta 433 322 891 304 - 74 2,024 16.08%
Augusta 155 - - - - - 155 1.23%
Hinesville 324 - - - - - 324 2.57%
- -----------------------------------------------------------------------------------------------------------------------------------
Total potential problem loans 912 322 891 304 - 74 2,503 19.88%
- -----------------------------------------------------------------------------------------------------------------------------------
Real estate owned:
Atlanta 71 34 220 429 - - 754 5.99%
Augusta - 235 - - - - 235 1.87%
Jacksonville 454 - - - - - 454 3.61%
All other locations 450 325 - - - - 775 6.16%
- -----------------------------------------------------------------------------------------------------------------------------------
Total real estate owned(1) 975 594 220 429 - - 2,218 17.63%
- -----------------------------------------------------------------------------------------------------------------------------------
Total problem assets by type $ 3,579 $ 3,850 $ 1,538 $ 826 $ 2,508 $ 286 $12,587 100.00%
- -----------------------------------------------------------------------------------------------------------------------------------
% of total problem assets by type 28.43% 30.59% 12.22% 6.56% 19.93% 2.27% 100.00%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include reserves of $144,000; real estate owned, net equals
$2,074,000.
Concentrations to Single Borrowers
The Bank has lease exposure, to one company, of $1,780,000. This company is
the lessor on seven leases and has filed for bankruptcy protection. The seven
leases are a part of the bankruptcy proceedings and the lessees remit payments
to the trustee. The trustee has made settlement offers to the Bank which have
been declined.
In addition, one borrower, in Hinesville, Georgia, has non-accrual and
potential problem loans of $1,360,000 at March 31, 1997. This borrower has
$997,000 of construction loans and $363,000 of commercial real estate loans
which are in process of collection. Currently, the borrower is 45 days
delinquent and the total exposure is $1,299,000. There were no other
relationships with single borrowers, which are significant, included in total
problem assets.
42
<PAGE> 43
Loan impairment
At March 31, 1997 and 1996, $1,780,000 and $3,429,000, respectively, of
impaired loans, were on a non-accrual basis, while during the same periods, $0
and $675,000, respectively, of impaired loans were on an accrual basis. Impaired
loans are defined as all non-performing loans except residential mortgages,
construction loans secured by first mortgage liens, and groups of small
homogeneous loans. At March 31, 1997 and 1996, the valuation allowance related
to these impaired loans was $459,000 and $1,310,000, respectively, which is
included in the reserve for loan losses as presented in the tables on the
following page. At March 31, 1997 and 1996, the Company had $0 and $171,000,
respectively, in impaired loans with no related loan loss reserve. For the years
ended March 31, 1997 and 1996, the Company charged-off $2,405,000 and $0 against
loan loss reserves related to impaired loans, respectively. For the years ended
March 31, 1997 and 1996, the average recorded investment in impaired loans was
$3,193,000 and $2,213,000, respectively. The Company recognized interest income
on impaired loans of $11,000 and $273,000 for the years ended March 31, 1997 and
1996, respectively.
The Company uses either the cash or cost recovery method to record cash
receipts on impaired loans that are on non-accrual. Under the cash method,
contractual interest is credited to interest income when received. This method
is used when the ultimate collectibility of the total principal is not in doubt.
Loans on the cost recovery method may be changed to the cash method when the
application of the cash payments has reduced the principal balance to a level
where collection of the remaining recorded investment is no longer in doubt.
Reserve for loan losses
The Company set aside $2,652,000 and $1,000,000, respectively, of
additional reserves for possible loan losses during the years ended March 31,
1997 and 1996. At March 31, 1997, reserves represented .98 percent of average
loans outstanding during the period, decreasing from 1.20 percent at March 31,
1996. Charge-offs in fiscal 1997 were $3,124,000 versus $592,000 in fiscal 1996
and $894,000 in 1995. In fiscal 1997, charge-offs represented .59 percent of
average loans receivable versus .13 percent for fiscal 1996 and .27 percent in
1995. Charge-offs increased due to the decline in the quality of the Company's
lease portfolio. Charge-offs related to this decline were primarily related to a
single lessor in the amount of $1,946,000. All outstanding obligations of this
lessor have been charged off to the reserve and, therefore, no further reserve
is required in connection with this relationship. Loan loss reserves totaled
$5,198,000 and $5,464,000, respectively, at March 31, 1997 and 1996. Loan loss
reserves to total problem assets decreased 8.32 percent from 45.57 percent at
March 31, 1996 to 41.78 percent at March 31, 1997. An allocation of the reserve
for loan losses has been made according to the respective amounts deemed
necessary to provide for the possibility of incurred losses within the various
loan categories. Although other relevant factors are considered, the allocation
is primarily based on previous charge-off experience adjusted for risk
characteristic changes among each category. Additional reserve amounts are
allocated by evaluating the loss potential of individual loans that management
has considered impaired. The reserve for loan loss allocation is based on
subjective judgment and estimates, and therefore is not necessarily indicative
of the specific amounts or loan categories in which charge-offs may ultimately
occur. Management believes that the reserves for losses on loans are adequate
based upon management's evaluation of, among other things, estimated value of
the underlying collateral, loan concentrations, specific problem loans, and
economic conditions that may affect the borrower's ability to repay and such
other factors which, in management's judgment, deserve recognition under
existing economic conditions. While management uses available information to
recognize losses on loans, future additions to the allowances may be necessary
based on changes in economic conditions and composition of the Company's loan
portfolio. The following tables provide an analysis of the reserve for loan
losses.
43
<PAGE> 44
<TABLE>
<CAPTION>
ANALYSIS OF THE RESERVE FOR LOAN LOSSES
- ----------------------------------------------------------------------------------------------------
March 31, 1997 1996 1995 1994 1993
(dollars in thousands)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserve for loan losses,
beginning of year $ 5,464 $ 4,704 $ 4,791 $ 2,781 $ 1,157
Charge-offs:
Real estate-construction 86 44 165 10 184
Real estate-mortgage 160 326 524 251 432
Consumer and other 59 42 77 15 65
Commercial 413 180 128 9 44
Commercial leases 2,406 - - - -
- ----------------------------------------------------------------------------------------------------
Total charge-offs 3,124 592 894 285 725
Recoveries 206 352 164 129 31
- ----------------------------------------------------------------------------------------------------
Net charge-offs 2,918 240 730 156 694
Reserve on purchased loans - - - - 1,528
Reserve from acquisitions - - - 1,132 -
Provision for loan losses 2,652 1,000 643 1,034 790
- ----------------------------------------------------------------------------------------------------
Reserve for loan losses, end of year 5,198 5,464 4,704 4,791 2,781
- ----------------------------------------------------------------------------------------------------
Average loans outstanding for the
period $531,619 $453,636 $336,647 $281,235 $215,600
- ----------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average
loans 0.55% 0.05% 0.22% 0.06% 0.32%
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ALLOCATION OF THE RESERVE FOR LOAN LOSSES
- --------------------------------------------------------------------------------------------------------------------------------
March 31, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
Dollar Dollar Dollar Dollar Dollar
(dollars in thousands) Amount %(1) Amount %(1) Amount %(1) Amount %(1) Amount %(1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of
period applicable to:
Real Estate -
First mortgage loans $ 791 43 $ 693 47 $ 761 48 $ 576 41 $ 449 51
Second mortgage loans 713 7 262 3 148 3 350 4 129 5
Construction 1,027 36 1,078 36 1,173 36 1,064 39 460 31
Commercial 21 8 121 6 116 5 68 5 - 4
Commercial leases 724 3 1,593 6 296 7 308 8 188 7
Consumer and other 220 3 34 2 72 1 139 3 16 2
Unallocated 1,702 - 1,683 - 2,138 - 2,286 - 1,539 -
- --------------------------------------------------------------------------------------------------------------------------------
Total $5,198 100 $ 5,464 100 $ 4,704 100 $4,791 100 $ 2,781 100
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Loan balance in each category expressed as a percentage of total loans.
44
<PAGE> 45
INVESTMENT SECURITIES
During fiscal 1997, investment securities decreased 7.8 percent over the
prior year. At March 31, 1997, the Company had total investments in securities
of $148,828,000 versus $161,329,000 at March 31, 1996. At March 31, 1994, the
Company adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Under SFAS No. 115, the Company classifies its securities in one of
three categories: trading, available for sale, or held to maturity. With the
adoption of SFAS No. 115, the Company has reported the effect of the change in
the method of accounting for investments in debt securities classified as
available for sale as a separate component of equity, net of income taxes.
The investment securities portfolio at March 31, 1997, was comprised of
$51,907,000 of investment securities held to maturity at amortized cost. The
Company has the ability and it is management's intent to hold these securities
to maturity for investment purposes. In addition, the Company had an estimated
market value of $96,921,000 of investment securities available for sale at March
31, 1997. Investment securities available for sale had a net unrealized loss as
shown in the Company's stockholders' equity section of $1,025,000 at March 31,
1997, and a net unrealized loss of $519,000 at March 31, 1996.
Included in other securities at March 31, 1997 and 1996 are $2,696,936 and
$3,676,000, respectively, of investment grade residential mortgage pass through
certificates issued by the RTC. These securities are rated Aa2 by Moody's and AA
by Standard & Poors. The Company holds no investment securities by any single
issuer, other than mortgage-backed securities issued by an agency of the United
States government, which equaled or exceeded 10 percent of stockholders' equity
at March 31, 1997, 1996 or 1995.
The following table reflects securities held in the Bank's securities
portfolio for the periods indicated:
INVESTMENT SECURITIES
<TABLE>
<CAPTION>
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------
March 31,
---------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Securities Held to Maturity:
US Treasury and US Government Agencies $ 27,780 $ 27,450 $ 37,611
Mortgage-backed securities 6,406 8,087 10,009
Corporate bonds 7,429 8,420 10,376
Other debt securities 10,292 11,384 18,582
- ------------------------------------------------------------------------------------------------------------------------
Total 51,907 55,341 76,578
- ------------------------------------------------------------------------------------------------------------------------
Securities Available for Sale:
US Treasury and US Government Agencies 15,176 21,205 11,704
Mortgage-backed securities 62,352 67,956 14,610
Corporate bonds 2,005 2,028 -
Equity securities-preferred stock 13,418 9,629 6,846
Other debt securities 3,970 5,170 -
- ------------------------------------------------------------------------------------------------------------------------
Total 96,921 105,988 33,160
- ------------------------------------------------------------------------------------------------------------------------
Total Investment Securities:
US Treasury and US Government Agencies 42,956 48,655 49,315
Mortgage-backed securities 68,758 76,043 24,619
Corporate bonds 9,434 10,448 10,376
Equity securities-preferred stock 13,418 9,629 6,846
Other debt securities 14,262 16,554 18,582
- ------------------------------------------------------------------------------------------------------------------------
Total $148,828 $ 161,329 $ 109,738
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table reflects the stated contractual maturities, amortized cost
or estimated value and weighted average yield of securities held in the Bank's
portfolio, for the periods indicated:
45
<PAGE> 46
MATURITIES OF INVESTMENT SECURITIES AND AVERAGE YIELDS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Investment Securities Held to Securities Available for Sale
Maturity March 31, 1997 March 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Amortized Weighted Estimated Weighted
(dollars in thousands) Cost Average Yield Fair Value Average Yield(1)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US Treasury and US Government Agencies:
Within 1 year
1-5 years $ 2,001 4.96% $ 3,244 5.46%
5-10 years 20,779 6.97% 10,943 6.22%
More than 10 years 5,000 7.32% 989 7.06%
- - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Total 27,780 6.89% $ 15,176 6.11%
- ---------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities:
Government National Mortgage
Association
Within 1 year - - - -
1 to 5 years - - - -
5 to 10 years - - 29,468 7.36%
More than 10 years 2,978 6.66% 23,369 6.99%
- ---------------------------------------------------------------------------------------------------------------------------------
Total 2,978 6.66% 52,837 7.20%
- ---------------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Assn.
Within 1 year - - - -
1 to 5 years - - 513 6.61%
5 to 10 years - - - -
More than 10 years 705 6.18% 6,059 8.58%
- ---------------------------------------------------------------------------------------------------------------------------------
Total 705 6.18% 6,572 8.43%
- ---------------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
Within 1 year - - - -
1 to 5 years - - - -
5 to 10 years - - 1,218 8.50%
More then 10 years - - 1,725 8.50%
- ---------------------------------------------------------------------------------------------------------------------------------
Total - - 2,943 8.50%
- ---------------------------------------------------------------------------------------------------------------------------------
Other:
Within 1 year - - 54 6.09%
1 to 5 years - - 687 4.62%
5 to 10 years - - 1,256 5.05%
More then 10 years 13,015 6.77% 1,973 6.08%
- ---------------------------------------------------------------------------------------------------------------------------------
Total 13,015 6.77% 3,970 5.50%
- ---------------------------------------------------------------------------------------------------------------------------------
Corporate Debt:
Within 1 year - - - -
1 to 5 years 4,991 7.83% 2,005 7.31%
5 to 10 years 2,438 8.33% - -
More then 10 years - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Total 7,429 7.99% 2,005 7.31%
- ---------------------------------------------------------------------------------------------------------------------------------
Preferred Stock:
Within 1 year - - - -
1 to 5 years - - - -
5 to 10 years - - - -
More than 10 years - - 13,418 7.05%
- ---------------------------------------------------------------------------------------------------------------------------------
Total - - 13,418 7.05%
- ---------------------------------------------------------------------------------------------------------------------------------
Total Securities:
Within 1 year 2,001 4.96% 3,298 5.47%
1 to 5 years 25,770 7.13% 14,148 6.31%
5 to 10 years 7,438 7.65% 32,931 7.31%
More than 10 years 16,698 6.73% 46,544 7.23%
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 51,907 6.99% $ 96,921 7.06%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Weighted average yield computed using amortized cost.
46
<PAGE> 47
DEPOSITS
Deposits are the Company's primary funding source. Total deposits grew by
$99,266,000 million or 21.7 percent to $557,724,000 at March 31, 1997, from
$458,458,000 at March 31, 1996. The Bank uses traditional marketing methods to
attract new customers. Its deposit network is serviced from its fourteen
branches. Management believes that the majority of new accounts are a result of
the continued trend in consolidation of financial institutions in the
metropolitan Atlanta market and the desire of customers to deal with an
independent, local financial institution.
The growth in deposits was primarily in certificates of deposit with
maturities one year or less which grew 38.6 percent to $308,459,000 at March 31,
1997, from $222,551,000 at March 31, 1996. Certificates of deposit $100,000 and
greater were 13.7 percent of total deposits at March 31, 1997, and 9.5 percent
at March 31, 1996. In addition, at March 31, 1997, 23.9 percent of certificates
of deposit with balances $100,000 and more have maturities of over 12 months.
The Bank does not actively solicit deposits outside of its local market area. At
the same time, the weighted average interest rate on deposits at March 31, 1997
decreased 9 basis points to 4.84 percent from 4.93 percent. Demand deposits
including checking accounts, savings accounts and money market accounts were
35.5 percent of the Company's deposits at March 31, 1997.
The following table sets forth information on the maturity distribution of
certificates of deposit of $100,000 or more.
MATURITY DISTRIBUTION OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE
(in thousands)
<TABLE>
<CAPTION>
Certificates of
Deposit
March 31, 1997
- --------------------------------------------------------------
<C> <C>
3 months or less $ 20,635
Over 3 months through 6 months 14,775
Over 6 months through 12 months 22,934
Over 12 months 18,282
- --------------------------------------------------------------
Total outstanding $ 76,626
- --------------------------------------------------------------
</TABLE>
DEPOSIT MIX
The following table exhibits the Company's composition of deposits at March 31
for the years indicated.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------- ----------------------------------------
At March 31, 1997 1996
- ----------------------------------------------------------------------------------------- ----------------------------------------
(dollars in thousands) Amount % of Total Amount % of Total
- ---------------------------------------------------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C>
Non-interest bearing deposits $ 29,843 5.4% $22,349 4.9%
2.25% Interest bearing deposits 48,923 8.8% 45,529 9.9%
2.50% Savings 46,353 8.3% 47,069 10.3%
2.25%-2.50% Money Markets 20,902 3.8% 18,279 4.0%
Certificate accounts less than $100,000
2.50% - 5.99% 253,219 45.4% 172,080 37.5%
6.00% - 7.99% 80,524 14.4% 101,437 22.1%
8.00% - 10.00% 1,334 0.2% 8,172 1.8%
Certificate accounts $100,000 and greater
ranging between 2.50% - 10.25% 76,626 13.7% 43,543 9.5%
- ---------------------------------------------------------------------------------------- ------------------------------------------
Total $557,724 100.0% $458,458 100.0%
- ---------------------------------------------------------------------------------------- ------------------------------------------
</TABLE>
47
<PAGE> 48
AVERAGE DEPOSIT BALANCES AND RATES
The following table exhibits the average amount of deposits and weighted
average rate by the categories indicated.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
(dollars in thousands) Rate Amount Rate Amount Rate Amount
- --------------------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits:
Checking 1.36% $ 72,858 1.69% $ 63,576 1.66% $ 65,223
Savings 2.44% 46,157 2.49% 46,583 2.67% 57,739
Money Market 2.54% 19,541 2.79% 19,973 1.94% 31,620
Certificates of deposits 5.90% 382,117 6.17% 292,021 5.45% 205,323
- --------------------------------------------------------- --------------------------------------------
Total 4.84% $ 520,673 4.93% $ 422,153 4.01% $ 359,905
- --------------------------------------------------------- --------------------------------------------
</TABLE>
BORROWINGS
The FHLB system functions as a reserve credit facility for thrift
institutions and certain other member home financing institutions. The Bank
utilizes advances from the FHLB to fund a portion of its assets. At March 31,
1997, advances were $141,383,000 down from $168,200,000 at March 31, 1996. The
weighted average interest rate on these borrowings was 6.80 percent and 5.53
percent at March 31, 1997 and 1996, respectively.
The following table reflects the amount outstanding, maximum month end and
average balances of short-term borrowings outstanding as well as the weighted
average rate at the end of the year:
SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
(dollars in thousands) At March 31, Maximum Average
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
1997:
Balances outstanding $124,392 $177,445 $135,180
Weighted average rate 6.85% 5.75% 5.47%
- ----------------------------------------------------------------------------
1996:
Balances outstanding $149,700 $149,700 $115,350
Weighted average rate 5.41% 5.41% 5.97%
- ----------------------------------------------------------------------------
1995:
Balances outstanding $109,378 $112,738 $ 50,978
Weighted average rate 6.78% 6.54% 5.74%
- ----------------------------------------------------------------------------
</TABLE>
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money, due to inflation. Unlike most industrial companies, virtually all of
the assets and liabilities of a financial institution are monetary in nature. As
a result, interest rates have a more significant impact on a financial
institution's performance than the effect of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. In the current interest rate
48
<PAGE> 49
environment, liquidity and the maturity structure of the Bank's assets and
liabilities are critical to the maintenance of acceptable performance levels.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY MANAGEMENT
The Asset and Liability Committee ("ALCO") manages the Company's liquidity
needs to ensure there is sufficient cash flow to satisfy demand for credit and
deposit withdrawals, to fund operations and to meet other Company obligations
and commitments on a timely and cost effective basis. Over recent years
increases in core deposits have provided a significant portion of the Company's
cash flow needs and continue to provide a relatively stable, low cost source of
funds. In recent years the Company has also experienced significant growth in
assets. Total assets increased $87,498,000 over the previous year and were
funded by deposits which increased $99,266,000. The Company's core deposits and
stockholders' equity funded 76 percent and 71 percent of total assets at March
31, 1997, and March 31, 1996, respectively. The Company's other primary funding
source was provided by advances from the Federal Home Loan Bank. At March 31,
1997, advances stood at $141,383,000 or 17.2 percent of total assets versus
$168,200,000 or 22.8 percent of total assets at March 31, 1996. Under current
regulations, the Bank is required to maintain liquid assets at 5 percent or more
of its net withdrawal deposits for short term borrowings. At March 31, 1997, the
Company had commitments to originate fixed rate mortgage loans of approximately
$17,080,000 and commitments to originate variable rate mortgage loans of
approximately $7,612,000 with terms of up to thirty years and interest rates
ranging from 6.5 percent to 10.75 percent. The Company had commitments to sell
mortgage loans of approximately $58,303,000 at March 31, 1997. In addition, the
Company is committed to loan funds on unused variable rate lines of credit
approximately $19,773,000 at March 31, 1997. The Company's funding sources for
these commitments include deposits and FHLB advances.
Beginning April 1, 1995, the Bank formed an operating subsidiary,
PrimeEagle, and consolidated all real estate lending activities into this
business unit. This business unit generates revenues by originating construction
loans, permanent mortgage loans and SBA loans. Substantially all fixed rate
permanent mortgage and SBA loans are sold to investors. Permanent mortgage loan
originations increased 10.7 percent to $554,092,000 for fiscal 1997 compared to
$500,686,000 for fiscal 1996. The Company manages the funding requirements of
these loans primarily with short term advances from the FHLB. In addition,
outstanding commitments to originate loans, exclusive of the undisbursed portion
of loans in process, increased to approximately $24,692,000 at March 31, 1997,
from $21,900,000 at March 31, 1996.
CASH FLOWS FROM OPERATING ACTIVITIES
For the year ending March 31, 1997, the Company generated $40,478,000 of
cash flows from operating activity compared to $30,995,000 in cash used by
operating activities for the year ending March 31, 1996. The primary reason for
this fluctuation is timing differences from the sale of loans held for sale
versus originations of loans held for sale. During the 12 months ending March
31, 1997, the Company originated $554,092,000 of loans held for sale and sold
$583,762,000 of loans held for sale. This resulted in a $29,670,000 source of
cash. This compares to the fiscal year ending March 31, 1996, when the Company
originated $500,686,000 of loans held for sale and sold $449,354,000 of loans
held for sale, resulting in a $51,332,000 use of cash.
49
<PAGE> 50
CASH FLOWS FROM INVESTING ACTIVITIES
During the year ended, the Company used $111,338,000 of cash for investing
activities compared to $109,958,000 for the year ending March 31, 1996. Loan
originations net of repayments represented 80.1 percent of cash used or
$89,630,000 compared to 28.6 percent or $31,410,000 for the fiscal year ending
March 31, 1996. In addition, the Company purchased investment securities held to
maturity of $20,588,000 and $15,111,000 of securities available for sale
representing 32.1 percent of total cash used for investing activities during the
year ending March 31, 1997. For the year ending March 31, 1996, comparatively,
the Company purchased $12,569,000 of investment securities held to maturity and
$72,801,000 of investment securities available for sale representing 77.6
percent of cash used in investing activities. The Company also purchased
$18,022,000 of loans receivable for the year ending March 31, 1997, versus
$15,949,000 for the year ending March 31, 1996. Finally, during the year ended
March 31, 1997, the Company used funds of $16,870,000 for investment in real
estate compared to $10,239,000 during the year ended March 31, 1996.
CASH FLOW FROM FINANCING ACTIVITIES
Cash provided from financing activities during the 12 months ending March
31, 1997, was $76,824,000 compared to $144,175,000 during the 12 months ending
March 31, 1996. FHLB advances provided a significant source of funds during both
fiscal 1997 and 1996. The Company borrowed $231,361,000 from the FHLB and repaid
$258,178,000 during the 12 months ended March 31, 1997. This compares to
borrowings of $299,011,000 and repayments of $247,954,000 for the 12 months
ended March 31, 1996. The Company's deposits increased $99,266,000 for the 12
months ending March 31, 1997, $86,471,000 of this increase is attributable to
increases in time deposits and $12,795,000 is attributable to increases in
demand deposits. For the 12 months ending March 31, 1996, the Company's deposits
increased $72,106,000, which is comprised of $70,081,000 of time deposits and
$2,025,000 in demand deposits. In addition, the Company raised $21,483,000
during the 12 months ending March 31, 1996, and as a result of the secondary
offering of common stock. The Company paid cash dividends to its shareholders of
$2,842,000 for the 12 months ending March 31, 1997, and $1,568,000 for the 12
months ending March 31, 1996.
Capital
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") established five capital categories for financial institutions. The
OTS places each federally chartered thrift institution into one of five
categories: well capitalized, adequately capitalized, under capitalized,
significantly under capitalized, and critically under capitalized. These
classifications are based on the Bank's level of risk based capital, leverage
ratios and its supervisory ratings. FDICIA defines "well capitalized" banks as
entities having a total risk based capital ratio of 10 percent or higher, a tier
one risk based capital ratio of 6 percent or higher and a leveraged ratio of 5
percent or higher. At March 31, 1997, the Bank was classified as "well
capitalized" under the OTS regulations that implement the FDICIA provisions
described above. Effective February 15, 1996, the Company raised $21,483,000 of
capital in a secondary offering co-underwritten by Interstate/Johnson Lane and
Morgan Keegan & Company, Inc. Substantially all of the proceeds were contributed
to the Bank.
The following table reflects the Bank's minimum regulatory capital
requirements, actual capital and the level of excess capital by category. The
Bank has historically maintained capital substantially in excess of the minimum
requirement. The Bank paid $683,000 of dividends to the Company over the course
of the year. In addition, during fiscal 1997, the Bank paid a dividend in the
form of equity securities to the Company in the amount of $6,094,000.
50
<PAGE> 51
REGULATORY CAPITAL
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
At March 31, 1997 Actual Requirement Excess
($ in 000's) Amount % Amount % Amount %
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Rick-based ratios:
Tier 1 capital $54,019 10.14 $21,311 4.0 $32,708 6.14
Total capital 59,023 11.08 42,622 8.0 16,401 3.08
Tier 1 leverage 54,019 6.72 32,144 4.0 21,875 2.72
Tangible equity 54,019 7.05 11,499 1.5 42,520 5.55
- -----------------------------------------------------------------------------------------------
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share", and
SFAS No. 129, "Disclosure of Information About Capital Structure". The Company
is required to adopt these new pronouncements effective January 1, 1998. Earlier
application is not permitted. Management anticipates that the adoption of these
new pronouncements will not have a material effect on the Company.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and the Report of Independent Public
Accountants contained in the Annual Report to Stockholders are incorporated
herein by reference.
SELECTED QUARTERLY FINANCIAL DATA
Year ended March 31,
(in thousands except per share data, unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1997 1996
4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 16,014 $ 16,645 $ 15,796 $ 15,330 $ 13,977 $ 13,439 $ 13,035 $ 12,174
Interest expense 8,598 8,752 8,295 7,984 7,744 7,357 7,099 6,621
- ------------------------------------------------------------------------------------------------------------------
Net interest income 7,416 7,893 7,501 7,346 6,233 6,082 5,936 5,553
Provision for loan losses 827 377 924 524 637 309 54 -
- ------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 6,589 7,516 6,577 6,822 5,596 5,773 5,882 5,553
Other income 4,016 2,860 3,477 2,558 3,113 3,248 2,587 1,905
Other expenses 10,135 7,945 9,794 7,027 6,484 6,454 6,040 5,490
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes 470 2,431 260 2,353 2,225 2,567 2,429 1,968
- ------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) 229 932 (88) 695 709 737 825 699
- ------------------------------------------------------------------------------------------------------------------
Net income $ 241 $ 1,499 $ 348 $ 1,658 $ 1,516 $ 1,830 $ 1,604 $ 1,269
- ------------------------------------------------------------------------------------------------------------------
Primary earnings per share
of common stock $ .04 $ .26 $ .06 $ .30 $ .34 $ .41 $ .36 $ .29
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE> 52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information concerning the Board of Directors and the Executive
Officers of the Company and the Bank, the information contained under the
section captioned `PROPOSAL 1-Election of Directors" in the Company's Proxy
Statement for the 1997 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the section captioned "PROPOSAL 1-Election
of Directors-Compensation of Executive Officers" in the Proxy Statement for the
1997 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the sections captioned "PROPOSAL 1-Election
of Directors" and "Ownership of Equity Securities", in the Proxy Statement for
the 1997 Annual Meeting of Stockholders are incorporated herein by reference.
ITEM 13. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the sections captioned "PROPOSAL 1-Election
of Directors" and "Compensation of Executive Officers - Certain Transactions" in
the Proxy Statement for the 1997 Annual Meeting of Stockholders are incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. Financial Statements
1. Reports of Independent Public Accountants Arthur Andersen LLP
2. Eagle Bancshares, Inc. and Subsidiaries
Consolidated Statements of Financial Condition as of March 31,
1997, and 1996
Consolidated Statements of Income for the Years Ended March 31,
1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the Years
Ended March 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
52
<PAGE> 53
B. FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted as the required information is either
inapplicable or included in the Notes to Consolidated Financial Statements.
C. EXHIBITS
3.1(A) Restated Articles of Incorporation of the Company (Exhibit 3 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1988.)
3.1(B) Articles of Amendment to Restated Articles of Incorporation of
the Company (Exhibit 3(a) to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1991).
3.2 Bylaws of the Company, as amended (Exhibit 3(b) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1991).
4 Shareholder Protection Rights Agreement dated as of January 26,
1993 of (Exhibit 1 to the Company's Current Report on Form 8-K
dated February 9, 1993).
10.1 Employment Agreement dated as of October 1, 1993, between Tucker
Federal Savings and Loan Association and Richard B. Inman, Jr.
(Exhibit 10(c) to the Company's Annual Report on Form 10-K for
the year ended March 31, 1995).*
10.2 Employment Agreement dated as of January 1, 1994, between Tucker
Federal Savings and Loan Association and Betty Petrides (Exhibit
10(f) to the Company's Annual Report on Form 10-K for the year
ended March 31, 1995).*
10.3 Employment Agreement dated January 1, 1994, between Eagle
Service Corporation and Conrad J. Sechler, Jr. (Exhibit 10(g) to
the Company's Annual Report on Form 10-K for the year ended
March 31, 1995).*
10.4 Tucker Federal Savings and Loan Association Directors'
Retirement Plan (Exhibit 10(h) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1995).*
10.5 Eagle Bancshares, Inc. 1994 Directors Stock Option Incentive
Plan (Exhibit 10(i) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1995).*
10.6 Agreement for Advances and Security Agreement with Blanket
Floating Lien dated as March 5, 1990 between Tucker Federal
Savings and Loan Association and the Federal Home Loan Bank of
Atlanta as amended as of September 7, 1995 (Exhibit 10.6 to the
Company's Form S-2).
11 Computation of per share earnings.
13.1 Eagle Bancshares, Inc. 1997 Annual Report to Stockholders.
21 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
27 Financial Data Schedule (For SEC use only)
* The referenced exhibit is a compensatory contract, plan or
arrangement.
D. REPORTS ON FORM 8-K
None
53
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly issued this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EAGLE BANCSHARES, INC.
July 14, 1997 By:/s/ Conrad J. Sechler, Jr.
-------------------------------
Conrad J. Sechler, Jr.
Chairman of the Board,
President and
Principal Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
July 14, 1997 By:/s/ Conrad J. Sechler, Jr.
-------------------------------
Conrad J. Sechler, Jr.
Chairman of the Board
and President
July 14, 1997 By:/s/ Walter C. Alford
-------------------------------
Walter C. Alford
Director
July 14, 1997 By:/s/ Richard J. Burrell
-------------------------------
Richard J. Burrell
Director
July 14, 1997 By:/s/ Richard B. Inman, Jr.
-------------------------------
Richard B. Inman, Jr.
Director, Secretary and
Treasurer
July 14, 1997 By:/s/ Weldon A. Nash, Jr.
-------------------------------
Weldon A. Nash, Jr.
Director
July 14, 1997 By:/s/ George G. Thompson
-------------------------------
George G. Thompson
Director
54
<PAGE> 55
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- ----------- --------
<S> <C> <C>
3.1(A) Restated Articles of Incorporation of the Company
(Exhibit 3 to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31,
1988.)
3.1(B) Articles of Amendment to Restated Articles of
Incorporation of the Company (Exhibit 3(a) to the
Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1991).
3.2 Bylaws of the Company, as amended (Exhibit 3(b) to
the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1991).
4 Shareholder Protection Rights Agreement dated as
of January 26, 1993 of (Exhibit 1 to the Company's
Current Report on Form 8-K dated February 9,
1993).
10.1 Employment Agreement dated as of October 1, 1993,
between Tucker Federal Savings and Loan
Association and Richard B. Inman, Jr. (Exhibit
10(c) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1995).*
10.2 Employment Agreement dated as of January 1, 1994,
between Tucker Federal Savings and Loan
Association and Betty Petrides (Exhibit 10(f) to
the Company's Annual Report on Form 10-K for the
year ended March 31, 1995).*
10.3 Employment Agreement dated January 1, 1994,
between Eagle Service Corporation and Conrad J.
Sechler, Jr. (Exhibit 10(g) to the Company's
Annual Report on Form 10-K for the year ended
March 31, 1995).*
10.4 Tucker Federal Savings and Loan Association
Directors' Retirement Plan (Exhibit 10(h) to the
Company's Annual Report on Form 10-K for the year
ended March 31, 1995).*
10.5 Eagle Bancshares, Inc. 1994 Directors Stock Option
Incentive Plan (Exhibit 10(i) to the Company's
Annual Report on Form 10-K for the year ended
March 31, 1995).*
10.6 Agreement for Advances and Security Agreement with
Blanket Floating Lien dated as March 5, 1990
between Tucker Federal Savings and Loan
Association and the Federal Home Loan Bank of
Atlanta as amended as of September 7, 1995
(Exhibit 10.6 to the Company's Form S-2).
11 Computation of per share earnings.
13.1 Eagle Bancshares, Inc. 1997 Annual Report to
Stockholders.
21 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
27 Financial Data Schedule (For SEC use only)
* The referenced exhibit is a compensatory
contract, plan or arrangement.
</TABLE>
55
<PAGE> 1
EXHIBIT 11. COMPUTATION OF PER SHARE EARNINGS
Weighted average common and common equivalent shares for the years ended March
31, 1997, 1996 and 1995 are computed as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Primary:
Net Income per share $ 0.66 $ 1.40 $ 1.18
- ---------------------------------------------------------------------------------------------
Weighted average shares outstanding 5,527,973 4,250,752 4,032,234
Common shares assumed outstanding to
reflect dilutive effect of common stock options 176,604 178,748 93,521
- ---------------------------------------------------------------------------------------------
Weighted average shares and common
equivalent shares outstanding 5,704,577 4,429,500 4,125,755
- ---------------------------------------------------------------------------------------------
Fully diluted:
Net Income per share $0.66 $1.40 $1.18
- ---------------------------------------------------------------------------------------------
Weighted average shares outstanding 5,527,973 4,250,752 4,032,234
Common shares assumed outstanding to
reflect dilutive effect of common stock options 187,178 184,157 98,357
- ---------------------------------------------------------------------------------------------
Weighted average shares and common
equivalent shares outstanding 5,715,151 4,434,909 4,130,591
- ---------------------------------------------------------------------------------------------
</TABLE>
All share data has been adjusted to reflect the effect of a two-for-one
stock split of the Company's common stock effected in the form of a stock
dividend paid on December 21, 1995. In addition, all share data has been
restated for all periods presented to give effect to the Company's merger with
SCFC.
Additionally, on May 23, 1996, SCFC declared a 5% stock dividend on its
common stock, which was paid on June 30, 1996. The dividend was charged to
retained earnings in the amount of $418,000 which was based on the closing price
per share of common stock on the declaration date. Average shares outstanding
and all per share amounts included in the accompanying consolidated financial
statements and notes are based on the increased number of shares, giving
retroactive effect to the stock dividend.
<PAGE> 1
EAGLE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1997, 1996, AND 1995
TOGETHER WITH
AUDITORS' REPORT
<PAGE> 2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Eagle Bancshares, Inc.:
We have audited the accompanying consolidated statements of financial condition
of EAGLE BANCSHARES, INC. (a Georgia corporation) AND SUBSIDIARIES as of March
31, 1997 and 1996 and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended March 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 financial position of Eagle Bancshares,
Inc. and subsidiaries as of March 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
May 30, 1997
<PAGE> 3
EAGLE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
ASSETS:
Cash and amounts due from banks $ 17,405 $ 16,361
Federal funds sold 8,470 3,550
Accrued interest receivable 5,472 4,955
Securities available for sale (Notes 4 and 10) 96,921 105,988
Investment securities held to maturity (Notes 4 and 10) 51,907 55,341
Loans held for sale 62,882 92,552
Loans receivable, net (Notes 5 and 10) 515,749 410,843
Investment in real estate (Note 7) 25,828 12,962
Real estate acquired in settlement of loans, net 2,074 1,344
Stock in Federal Home Loan Bank, at cost 7,864 8,565
Premises and equipment, net (Note 6) 20,379 16,157
Deferred income taxes (Note 11) 2,284 1,168
Other assets 6,647 6,598
--------- ---------
Total assets $ 823,882 $ 736,384
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits (Note 9) $ 557,724 $ 458,458
Federal Home Loan Bank advances and other borrowings (Note 10) 153,805 174,337
Advance payments by borrowers for property taxes and insurance 1,279 1,511
Drafts outstanding 29,043 24,423
Accrued expenses and other liabilities 14,157 11,207
--------- ---------
Total liabilities 756,008 669,936
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTES 5 AND 18)
STOCKHOLDERS' EQUITY (NOTES 12, 13, 16, AND 17):
Common stock, $1 par value; 10,000,000 shares
authorized, 5,961,494 and 5,834,126 shares
issued at March 31, 1997 and 1996, respectively 5,961 5,834
Additional paid-in capital 36,628 35,802
Retained earnings 28,236 27,589
Net unrealized loss on securities available for sale, net of taxes (1,025) (519)
Employee Stock Ownership Trust note payable (Note 12) (836) (1,000)
Unamortized restricted stock (14) (135)
Treasury stock, 301,800 and 307,982 shares
at cost at March 31, 1997 and 1996, respectively (1,076) (1,123)
--------- ---------
Total stockholders' equity 67,874 66,448
--------- ---------
Total liabilities and stockholders' equity $ 823,882 $ 736,384
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 4
EAGLE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1997, 1996, AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME:
Interest on loans $ 51,503 $ 43,729 $ 32,032
Interest on mortgage-backed securities 5,510 2,527 1,680
Interest on securities and other interest-earning assets 6,772 6,369 5,906
-------- -------- --------
Total interest income 63,785 52,625 39,618
-------- -------- --------
INTEREST EXPENSE:
Interest on deposits (Note 9) 25,177 20,826 14,434
Interest on FHLB advances and other borrowings (Note 10) 8,452 7,995 4,068
-------- -------- --------
Total interest expense 33,629 28,821 18,502
-------- -------- --------
Net interest income 30,156 23,804 21,116
PROVISION FOR LOAN LOSSES (NOTE 5) 2,652 1,000 643
-------- -------- --------
Net interest income after provision for loan losses 27,504 22,804 20,473
-------- -------- --------
OTHER INCOME:
Mortgage production fees 7,280 6,777 3,236
Gain on sale of investment in real estate 1,377 697 0
Real estate commissions, net 405 165 143
Service charges 1,979 1,551 1,312
Gain on sale of loans 84 190 1,064
(Loss) gain on securities available for sale (Note 4) (21) 2 14
Miscellaneous 1,807 1,471 1,513
-------- -------- --------
Total other income 12,911 10,853 7,282
-------- -------- --------
OTHER EXPENSES:
Salaries and employee benefits (Note 12) 17,620 14,386 11,789
Net occupancy expense 3,774 3,016 2,750
Data processing expense 1,462 1,140 817
Federal insurance premiums 702 717 607
SAIF assessment (Note 9) 1,946 0 0
Marketing expense 1,121 514 387
Provision for losses on real estate
acquired in settlement of loans 95 0 10
Merger expenses (Note 3) 1,685 0 0
Miscellaneous 6,496 4,695 3,804
-------- -------- --------
Total other expenses 34,901 24,468 20,164
-------- -------- --------
Income before income taxes 5,514 9,189 7,591
INCOME TAX EXPENSE (NOTE 11) 1,768 2,970 2,710
-------- -------- --------
NET INCOME $ 3,746 $ 6,219 $ 4,881
======== ======== ========
PRIMARY EARNINGS PER SHARE OF COMMON STOCK (NOTE 17) $ 0.66 $ 1.40 $ 1.18
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 5
EAGLE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997, 1996, AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS)
ON SECURITIES TOTAL
COMMON STOCK ADDITIONAL AVAILABLE ESOP UNAMORTIZED STOCK-
-------------- PAID-IN RETAINED FOR SALE, NOTE RESTRICTED TREASURY HOLDERS'
SHARES AMOUNT CAPITAL EARNINGS NET OF TAXES PAYABLE STOCK STOCK EQUITY
------ ------ ------- -------- ------------ ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1994 4,304 $4,304 $15,197 $19,709 $ 362 $ (141) $(183) $(1,111) $38,137
Cash dividends declared
($.36 per share) 0 0 0 (1,446) 0 0 0 0 (1,446)
Principal reduction of ESOP
note payable 0 0 0 0 0 130 0 0 130
Issuance of restricted
stock (30,000 shares)
(Note 12) 30 30 308 0 0 0 (338) 0 0
Amortization of restricted
stock (Note 12) 0 0 0 0 0 0 228 0 228
Stock options exercised
(33,000 shares) 33 33 74 0 0 0 0 0 107
Common stock issued under Director
Retirement plan (2,000 shares)
(Note 12) 2 2 23 0 0 0 0 0 25
Change in net unrealized
loss on securities available
for sale, net of taxes 0 0 0 0 (425) 0 0 0 (425)
Net income 0 0 0 4,881 0 0 0 0 4,881
----- ------ ------- ------- ------- ------ ----- ------- -------
BALANCE, MARCH 31, 1995 4,369 4,369 15,602 23,144 (63) (11) (293) (1,111) 41,637
Cash dividends declared
($.42 per share) 0 0 0 (1,774) 0 0 0 0 (1,774)
Principal reduction of
ESOP note payable 0 0 0 0 0 11 0 0 11
ESOP note payable issued
to acquire common stock 0 0 0 0 0 (1,000) 0 0 (1,000)
Issuance of common stock 1,435 1,435 20,048 0 0 0 0 0 21,483
Amortization of restricted
stock (Note 12) 0 0 0 0 0 0 158 0 158
Stock options exercised
(28,000 shares) 28 28 119 0 0 0 0 0 147
Common stock issued under
Director Retirement
plan (2,000 shares) (Note 12) 2 2 33 0 0 0 0 0 35
Change in net unrealized loss
on securities available for
sale, net of taxes 0 0 0 0 (456) 0 0 0 (456)
Purchase of treasury stock
(1,708 shares) 0 0 0 0 0 0 0 (12) (12)
Net income 0 0 0 6,219 0 0 0 0 6,219
----- ------ ------- ------- ------- ------ ----- ------- -------
BALANCE, MARCH 31, 1996 5,834 5,834 35,802 27,589 (519) (1,000) (135) (1,123) 66,448
Cash dividends declared
($.56 per share) 0 0 0 (3,099) 0 0 0 0 (3,099)
Principal reduction of
ESOP note payable 0 0 0 0 0 164 0 0 164
Amortization of restricted
stock (Note 12) 0 0 0 0 0 0 121 0 121
Stock options exercised
(133,550 shares) 133 133 867 0 0 0 0 0 1,000
Change in net unrealized loss on
securities available for sale,
net of taxes 0 0 0 0 (506) 0 0 0 (506)
Cancellation of treasury stock
(6,182 shares) (6) (6) (41) 0 0 0 0 47 0
Net income 0 0 0 3,746 0 0 0 0 3,746
----- ------ ------- ------- ------- ------ ----- ------- -------
BALANCE, MARCH 31, 1997 5,961 $5,961 $36,628 $28,236 $(1,025) $ (836) $ (14) $(1,076) $67,874
===== ====== ======= ======= ======= ====== ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 6
Page 1 of 2
EAGLE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997, 1996, AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,746 $ 6,219 $ 4,881
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation, amortization, and accretion 1,774 1,336 1,247
Provision for loan losses 2,652 1,000 643
Provision for losses on real estate acquired in settlement of loans 95 0 10
Amortization of restricted stock award 121 158 228
Loss (gain) on sale of real estate acquired in settlement of loans 22 (80) (52)
Gain on sale of investment in real estate (1,377) (697) 0
Loss (gain) on securities available for sale 21 (2) (14)
Gain on sale of loans (84) (190) (1,064)
Loss on sales of fixed assets 0 8 0
Deferred income tax (benefit) expense (744) (688) 409
Amortization of deferred loan fees (2,081) (1,791) (1,883)
Proceeds from sale of loans held for sale 583,762 449,354 281,421
Origination of loans held for sale (554,092) (500,686) (299,000)
Changes in assets and liabilities:
Increase in accrued interest receivable (517) (1,318) (2,254)
(Increase) decrease in other assets (133) (508) 112
Increase in drafts outstanding 4,620 13,645 1,620
Increase (decrease) in accrued expenses and other liabilities 2,693 3,245 (187)
--------- --------- ---------
Net cash provided by (used in) operating activities 40,478 (30,995) (13,883)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale (15,111) (72,801) (9,730)
Proceeds from sale of securities available for sale 6,731 9,815 12,620
Purchases of investment securities held to maturity (20,588) (12,569) (43,069)
Principal payments received on securities available for sale 5,068 2,392 3,396
Principal payments received on investment securities held to maturity 2,806 2,925 1,369
Proceeds from calls of securities available for sale 1,948 0 0
Proceeds from calls of investment securities held to maturity 3,000 0 0
Proceeds from maturities of investment securities held to maturity 18,300 12,301 6,739
Proceeds from maturities of securities available for sale 9,600 6,175 988
Loan originations, net of repayments (89,630) (31,410) (91,352)
Purchases of loans receivable (18,022) (15,949) (2,268)
Proceeds from the sale of loans receivable 0 1,517 2,810
Purchases of FHLB stock (5,032) (3,001) (3,244)
Redemption of FHLB stock 5,733 420 601
Proceeds from sale of real estate acquired in settlement of loans 1,349 238 382
Purchases of premises and equipment, net (5,756) (4,465) (3,299)
Proceeds from sale of investment in real estate 5,136 4,693 0
Additions to investment in real estate (16,870) (10,239) (6,620)
--------- --------- ---------
Net cash used in investing activities $(111,338) $(109,958) $(130,677)
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 7
Page 2 of 2
EAGLE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997, 1996, AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in time deposits $ 86,471 $ 70,081 $ 58,806
Net increase (decrease) in demand deposits 12,795 2,025 (6,910)
(Decrease) increase in advance payments from borrowers
for property taxes and insurance (232) (676) 1,233
Proceeds from FHLB advances and other borrowings 239,460 302,890 250,416
Repayment of FHLB advances and other borrowings (259,992) (249,241) (161,122)
Principal reduction of ESOP note payable 164 11 130
Issuance of ESOP note payable to acquire common stock 0 (1,000) 0
Proceeds from the exercise of stock options 1,000 182 132
Proceeds from issuance of common stock 0 21,483 0
Purchase of treasury stock 0 (12) 0
Cash dividends paid (2,842) (1,568) (1,362)
--------- --------- ---------
Net cash provided by financing activities 76,824 144,175 141,323
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,964 3,222 (3,237)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 19,911 16,689 19,926
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 25,875 $ 19,911 $ 16,689
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING YEAR FOR:
Interest $ 33,143 $ 27,885 $ 17,863
========= ========= =========
Income taxes $ 2,358 $ 3,135 $ 2,996
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Acquisition of real estate in settlement of loans $ 3,475 $ 1,006 $ 828
========= ========= =========
Loans made to finance sale of real estate $ 1,279 $ 534 $ 575
========= ========= =========
Transfer of investment securities from
held to maturity to available for sale (Note 4) $ 0 $ 17,777 $ 0
========= ========= =========
Dividends payable $ 849 $ 592 $ 386
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 8
EAGLE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996, AND 1995
1. CORPORATE PROFILE
Eagle Bancshares, Inc. (the "Company" or "Eagle") is a unitary savings and
loan holding company engaged in banking, mortgage banking, and real estate
activities through two subsidiaries, Tucker Federal Bank (the "Bank") and
Eagle Real Estate Advisors, Inc. ("EREA"). As discussed further in Note 3,
Eagle acquired Southern Crescent Financial Corp. ("SCFC") on March 26, 1997
in a transaction accounted for as a pooling of interests.
Tucker Federal Bank is the largest independent community bank in Atlanta,
Georgia. The Bank provides a full range of financial services to individual
and corporate customers through its 14 branches located in metropolitan
Atlanta. Prime Eagle Mortgage Corporation ("PrimeEagle"), the Bank's
mortgage banking subsidiary, originates construction loans and residential
mortgages through 20 loan production offices in 5 southeastern states. The
Bank is subject to competition from other financial institutions in the
markets in which it operates. The Bank is federally regulated by the Office
of Thrift Supervision ("OTS") and certain other federal agencies.
EREA was formed in October 1991 to perform third-party real estate brokerage
and development activities, assist the Bank in identifying and acquiring
branch sites, and assist in disposing of real estate acquired through
foreclosure. Currently, EREA primarily performs real estate development
activities in the Atlanta metropolitan area (Note 7).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and to general practice within the savings
and loan industry. The following is a description of the more significant
policies which the Company follows in preparing and presenting its
consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Eagle Bancshares, Inc. include the
accounts of the Bank, EREA, and Eagle's majority-owned subsidiaries.
Significant intercompany accounts and transactions are eliminated in
consolidation. The Company invests in real estate through limited liability
companies and consolidates these affiliates when at least a 50% equity
ownership interest exists (Note 7).
USE OF ESTIMATES
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP"). The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
<PAGE> 9
- 2 -
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.
SECURITIES
Investments in debt and equity securities are classified into one of two
categories, described and accounted for as follows:
SECURITIES AVAILABLE FOR SALE
Debt and equity securities that may be used to meet liquidity or other
needs are reported at fair value, with unrealized gains and losses,
net of income taxes, excluded from earnings and reported as a separate
component of stockholders' equity.
SECURITIES HELD TO MATURITY
Debt securities that the Company has the positive intent and ability
to hold to maturity are reported at amortized cost.
Premiums and discounts related to securities are amortized or accreted over
the life of the related security as an adjustment to the yield using the
effective interest method and considering prepayment assumptions. Dividend
and interest income is recognized when earned.
Gains and losses on sales of securities are recognized on the settlement
date, based on the adjusted cost basis of the specific security. The
financial statement impact of settlement date accounting versus trade date
accounting is immaterial.
LOANS
Loans held for investment are stated at their unpaid principal balances,
less the undisbursed portion of loans in process, unearned interest,
unamortized discounts and premiums, deferred loan fees, and the reserve for
loan losses.
Loans held for sale are carried at the lower of cost or estimated market
value, as determined by outstanding commitments from investors or current
investor yield requirements calculated on an aggregate basis.
Interest income on all classifications of loans is accrued based on the
outstanding principal amounts over the terms of the loans on a level-yield
basis, except those classified as nonaccrual loans. Interest accrual is
discontinued when it appears that future collection of principal or interest
according to the contractual terms may be doubtful. Interest income on
nonaccrual loans is recognized on a cash basis if there is no doubt of
future collection of principal. Unearned discounts and premiums are
recognized over the term of the loan on a level-yield basis. Loan
origination fees, net of certain direct origination costs, are deferred and
amortized to income over the contractual life of the loan using a
level-yield method, adjusted for loan curtailment payments.
<PAGE> 10
- 3 -
RESERVE FOR LOAN LOSSES
A provision for loan losses is charged to operations based on management's
evaluation of the potential losses in the loan portfolio. This evaluation
considers the balance of impaired loans (which are defined as all
nonperforming loans except residential mortgages, construction loans secured
by first mortgage liens, and groups of small homogeneous loans), the
estimated value of the underlying collateral, the nature and volume of the
portfolio, loan concentrations, specific problem loans, economic conditions
that may affect the borrower's ability to repay, and such other factors as,
in management's judgment, deserve recognition under existing economic
conditions. Loans are charged off to the allowance when, in the opinion of
management, such loans are deemed to be uncollectible.
Subsequent recoveries are added to the allowance.
Management believes that the reserve for loan losses is adequate and that
real estate valuations are appropriate. While management uses available
information to recognize losses on loans and real estate owned, future
additions to the reserve may be necessary based on changes in economic
conditions, particularly in the Company's primary market areas. In addition,
various regulatory agencies, as an integral part of their examination
processes, periodically review the Company's reserve for loan losses and
real estate valuations. Such agencies may require the Company to recognize
additions to the reserve or to write down real estate based on their
judgments about information available to them at the time of their
examination.
MORTGAGE PRODUCTION FEES
PrimeEagle originates loans for sale in the secondary market. Loans held for
sale are sold on a servicing released basis to private investors. Fees
received relating to the origination and sale of these loans are included in
mortgage production fees when the loans are sold. Mortgage production fees
consist of loan servicing release premiums and loan origination and discount
points, net of loan officer commissions.
STOCK IN FEDERAL HOME LOAN BANK ("FHLB")
Investment in stock in FHLB is required of institutions utilizing its
services. The investment is carried at cost, since no ready market exists
for the stock and it has no quoted market value.
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
Real estate acquired in settlement of loans is considered to be held for
sale and is carried at fair value, adjusted for estimated costs to sell.
Such determination is made on an individual asset basis. Any excess of the
loan balance at the time of foreclosure over the fair value of the real
estate held as collateral is treated as a loan charge-off. A provision for
estimated losses on real estate is charged to earnings when a subsequent
decline in value occurs. The allowance for estimated losses on real estate
acquired in settlement of loans was approximately $144,000 and $49,000 at
March 31, 1997 and 1996, respectively. Costs relating to holding properties
are charged to operations.
<PAGE> 11
- 4 -
INVESTMENT IN REAL ESTATE
Investment in real estate is carried at the lower of cost or net realizable
value. Certain carrying charges, including interest, related to properties
under development are capitalized as development costs during the
construction period. Profits are recognized from the sale of real estate
when the sale is consummated based on the selling price, net of the related
total development costs associated with the real estate sold.
LONG-LIVED ASSETS
Premises and equipment are carried at cost, less accumulated depreciation.
Depreciation is provided on a straight-line basis over the estimated useful
lives of the related assets. Estimated lives are 15 to 40 years for office
buildings and improvements and 3 to 10 years for furniture, fixtures, and
equipment.
Other assets in the accompanying statements of financial condition include
$494,000 and $1,001,000 at March 31, 1997 and 1996, respectively, of
intangible assets related to core deposit premiums. These intangible assets
are being amortized by a method which approximates a level yield over nine
years.
Long-lived assets are evaluated regularly for other-than-temporary
impairment. If circumstances suggest that their values may be impaired and
the write-down would be material, an assessment of recoverability is
performed prior to any write-down of the asset. Impairment on intangibles is
evaluated at each statement of financial condition date or whenever events
or changes in circumstances indicate that the carrying amount should be
assessed. Impairment, if any, is recognized through a valuation allowance
with a corresponding charge recorded in the income statement.
INCOME TAXES
Deferred tax assets and liabilities are computed based on the difference
between the financial statement and income tax bases of assets and
liabilities using enacted tax rates. Deferred income tax expense or benefit
is based on the changes in the underlying difference between the book and
tax bases of assets and liabilities from year to year.
The Company files consolidated income tax returns.
EARNINGS PER SHARE
Earnings per common share are based on the weighted average number of common
shares outstanding during each period, plus common shares calculated for
stock options and restricted stock outstanding, using the treasury stock
method. Fully diluted earnings per common share are not materially different
than the primary earnings per common share data presented.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," and SFAS No. 129, "Disclosure of Information About Capital
Structure." The Company is required to adopt
<PAGE> 12
- 5 -
these new pronouncements effective December 31, 1997. Earlier application is
not permitted. Management anticipates that the adoption of these new
pronouncements will not have a material effect on the disclosure or earnings
per share of the Company.
CASH EQUIVALENTS
Cash equivalents include amounts due from banks and federal funds sold.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year balances in order to
conform with current year financial statement presentation.
3. MERGER
On March 26, 1997, Eagle acquired all of the outstanding shares of SCFC, a
bank holding company located in Union City, Georgia, with four branches, in
accordance with the Agreement and Plan of Merger (the "Merger Agreement")
dated August 13, 1996. Simultaneously therewith, Southern Crescent Bank, a
wholly owned commercial bank subsidiary of SCFC, merged with and into the
Bank. The Company is the surviving corporation in the merger, and the Bank
is the surviving entity in the bank merger and will remain a wholly owned
savings association of the Company. The merger was accounted for as a
pooling of interests, and accordingly, the consolidated financial statements
have been restated to include SCFC in all periods presented.
The consideration tendered in the transaction was valued at approximately
$18.5 million based on the average of the closing bid and ask price quoted
on the NASDAQ for the 30 consecutive trading days ending on the date that
was 5 trading days prior to the closing date. Based on the calculated stock
price, SCFC shareholders received 1.162 shares of Company stock for each
share of SCFC stock. This was the minimum exchange ratio as defined in the
Merger Agreement, and as a result, the Company issued 1,107,494 shares of
common stock.
Results of operations for Eagle (prior to the merger) and SCFC and combined
results of operations for the Company are presented below for the fiscal
years ended March 31, 1997, 1996, and 1995 (in thousands, except per share
data):
<TABLE>
<CAPTION>
HISTORICAL
-----------------
EAGLE SCFC COMBINED
-------- ------- --------
<S> <C> <C> <C>
Net interest income:
1997 $23,576 $6,580 $30,156
1996 18,493 5,311 23,804
1995 16,711 4,405 21,116
Noninterest income:
1997 $11,653 $1,258 $12,911
1996 9,830 1,023 10,853
1995 6,166 1,116 7,282
</TABLE>
<PAGE> 13
- 6 -
<TABLE>
<CAPTION>
HISTORICAL
-----------------
EAGLE SCFC COMBINED
-------- ------- --------
<S> <C> <C> <C>
Net income:
1997 $ 2,811 $ 935 $ 3,746
1996 5,020 1,199 6,219
1995 4,101 780 4,881
Net income per common equivalent share:
1997 $ 0.62 $ 0.98 $ 0.66
1996 1.53 1.36 1.40
1995 1.34 0.89 1.18
</TABLE>
The Company incurred approximately $1,685,000 in legal, accounting,
consulting, and other professional service fees that were directly related
to this merger.
4. SECURITIES
Securities available for sale at March 31, 1997 and 1996 are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
1997
-------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST LOSSES GAINS VALUE
-------- ------- ---- --------
<S> <C> <C> <C> <C>
Mortgage-backed securities $ 64,291 $(2,272) $333 $ 62,352
U.S. government and agency
obligations 15,304 (138) 10 15,176
Equity securities--preferred stock 13,006 (64) 476 13,418
Corporate bonds 1,984 0 21 2,005
Other debt securities 3,989 (39) 20 3,970
-------- ------- ---- --------
Total $ 98,574 $(2,513) $860 $ 96,921
======== ======= ==== ========
</TABLE>
<PAGE> 14
- 7 -
<TABLE>
<CAPTION>
1996
--------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Losses Gains Value
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Mortgage-backed securities $ 68,893 $(1,338) $401 $ 67,956
U.S. government and agency
obligations 21,340 (169) 34 21,205
Equity securities--preferred
stock 9,507 (141) 263 9,629
Corporate bonds 1,978 0 50 2,028
Other debt securities 5,107 (48) 111 5,170
-------- ------- ---- --------
Total $106,825 $(1,696) $859 $105,988
======== ======= ==== ========
</TABLE>
As a result of the FASB allowing a one-time transfer of investment
securities from the held to maturity category, investment securities
classified as held to maturity with an amortized cost of approximately
$17,777,000 were transferred to securities available for sale during the
year ended March 31, 1996.
The Company sold debt securities with a carrying value of approximately
$6,731,000, $9,815,000, and $5,109,000, resulting in gross realized gains of
approximately $40,000, $2,000, and $14,000, respectively, during the years
ended March 31, 1997, 1996, and 1995, respectively.
Investment securities held to maturity at March 31, 1997 and 1996 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997
--------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Losses Gains Value
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Mortgage-backed securities $ 6,406 $ (21) $ 40 $ 6,425
U.S. government and agency
obligations 27,780 (315) 41 27,506
Corporate bonds 7,429 0 218 7,647
Other debt securities 10,292 0 178 10,470
------- ----- ------ -------
Total $51,907 $(336) $ 477 $52,048
======= ===== ====== =======
</TABLE>
<PAGE> 15
- 8 -
<TABLE>
<CAPTION>
1996
--------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Losses Gains Value
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Mortgage-backed securities $ 8,087 $ (2) $ 34 $ 8,119
U.S. government and agency
obligations 27,450 (156) 183 27,477
Corporate bonds 8,420 0 406 8,826
Other debt securities 11,384 0 502 11,886
------- ----- ------ -------
Total $55,341 $(158) $1,125 $56,308
======= ===== ====== =======
</TABLE>
The amortized cost and estimated market value of available for sale and held
to maturity securities at March 31, 1997, by contractual maturity, are as
follows (in thousands):
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
SECURITIES
--------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
--------- ---------
<S> <C> <C>
Due in one year or less $ 3,304 $ 3,298
Due in one to five years 14,255 14,148
Due in five to ten years 33,901 32,931
Due after ten years 34,108 33,126
------- -------
$85,568 $83,503
======= =======
</TABLE>
<TABLE>
<CAPTION>
Held to Maturity
Securities
--------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
--------- ---------
<S> <C> <C>
Due in one year or less $ 2,001 $ 1,976
Due in one to five years 25,770 25,708
Due in five to ten years 7,438 7,469
Due after ten years 16,698 16,895
------- -------
$51,907 $52,048
======= =======
</TABLE>
Expected maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
At March 31, 1997, 1996, and 1995, securities with a carrying amount of
$21,742,000, $18,858,000, and $30,550,000, respectively, were pledged as
collateral for public funds.
<PAGE> 16
- 9 -
5. LOANS RECEIVABLE
At March 31, 1997 and 1996, loans receivable are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Real estate loans:
Construction $ 205,086 $ 185,337
Acquisition and development 35,408 30,419
Nonresidential 28,764 28,730
Residential 194,821 157,996
Home equity and second 43,752 17,212
--------- ---------
Total real estate loans 507,831 419,694
--------- ---------
Commercial and consumer loans:
Commercial 52,144 34,407
Leases 19,939 38,032
Consumer and other 23,648 9,957
--------- ---------
Total commercial and consumer loans 95,731 82,396
--------- ---------
Gross loans receivable 603,562 502,090
Less:
Undisbursed portion of loans in process (80,801) (84,268)
Deferred fees (1,684) (1,659)
Unearned income (212) (384)
Reserve for loan losses (5,198) (5,464)
Unearned premium 82 528
--------- ---------
Loans receivable, net $ 515,749 $ 410,843
========= =========
</TABLE>
At March 31, 1997 and 1996, $1,780,000 and $3,429,000, respectively, of
impaired loans, were on a nonaccrual basis, while during the same periods,
$0 and $675,000, respectively, of impaired loans were on an accrual basis.
At March 31, 1997 and 1996, the valuation allowance related to these
impaired loans was $459,000 and $1,310,000, respectively, which is included
in the reserve for loan losses in the accompanying consolidated statements
of financial condition. At March 31, 1997 and 1996, the Company had $0 and
$171,000, respectively, in impaired loans with no related loan loss reserve.
For the years ended March 31, 1997 and 1996, the average recorded investment
in impaired loans was $3,193,000 and $2,213,000, respectively. The Company
recognized interest income on impaired loans of $11,000 and $273,000 for the
years ended March 31, 1997 and 1996, respectively.
<PAGE> 17
- 10 -
At March 31, 1997, 1996, and 1995, an analysis of the reserve for loan
losses is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Reserve for loan losses, beginning of year $ 5,464 $ 4,704 $ 4,791
Charge-offs (3,124) (592) (894)
Recoveries 206 352 164
Provision for loan losses 2,652 1,000 643
------- ------- -------
Reserve for loan losses, end of year $ 5,198 $ 5,464 $ 4,704
======= ======= =======
</TABLE>
Substantially all of the Company's loans held for investment are secured by
real estate in Georgia, primarily in the metropolitan Atlanta, Augusta, and
Savannah areas and in Jacksonville, Florida, and Charlotte, North Carolina.
A substantial portion of the real estate owned also consists of
single-family residential properties and land located in those same markets.
Additionally, no single customer accounted for more than 2% of the Company's
loans in fiscal years 1997 or 1996.
At March 31, 1997, 1996, and 1995, the Company had nonaccrual loans
aggregating approximately $7,866,000, $6,317,000, and $994,000,
respectively. The interest income not recognized on these loans amounted to
$241,000, $156,500, and $85,000 for the years ended March 31, 1997, 1996,
and 1995, respectively.
The Company was servicing loans for others with aggregate principal balances
of approximately $12,341,000, $13,789,000, and $13,271,000 at March 31,
1997, 1996, and 1995, respectively.
At March 31, 1997 and 1996, the Company had sold approximately $20,399,000
and $26,236,000, respectively, of loans with recourse. The recourse period
is 3 to 12 months on a substantial majority of these loans. Investors can
exercise their recourse option in the event the borrower defaults on the
loan during that recourse period. During the years ended March 31, 1997,
1996, and 1995, the Company has incurred nominal losses from the repurchase
of recourse loans.
At March 31, 1997, the Company had commitments to originate fixed rate
mortgage loans of approximately $17,080,000 and commitments to originate
variable rate mortgage loans of approximately $7,612,000 with terms up to 30
years and interest rates ranging from 6.5% to 10.75%. The Company had
commitments to sell mortgage loans of approximately $58,303,000 at March 31,
1997. In addition, the Company is committed to loan funds on unused variable
rate lines of credit of approximately $19,773,000 at March 31, 1997. These
off-balance sheet commitments represent the unused portion of home equity
lines of credit, which are secured by residential real estate.
<PAGE> 18
- 11 -
6. PREMISES AND EQUIPMENT
At March 31, 1997 and 1996, premises and equipment are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Land $ 4,525 $ 3,661
Office buildings and improvements 13,196 10,822
Furniture, fixtures, and equipment 8,556 7,081
------- -------
26,277 21,564
Less accumulated depreciation 5,898 5,407
------- -------
$20,379 $16,157
======= =======
</TABLE>
7. INVESTMENT IN REAL ESTATE
The Company has ownership interests in six real estate projects as of March
31, 1997. As a unitary thrift holding company, the Company is permitted to
invest in real estate.
The most significant portion of the Company's investment in real estate is
in land to be developed or in process of development for residential
subdivisions. All six real estate investments are located in metropolitan
Atlanta. The Company consolidates each project on a line-by-line basis,
except Hampton Oaks L.P., which is accounted for using the equity method.
There would be no material difference in the financial position or results
of operations of the Company if this investment was accounted for as a
consolidated investment. The following information summarizes the principal
activities and financial data of each investment and reflects the individual
project's financial information (in thousands).
UNION HILL LLC
In October 1994, Union Hill LLC ("Union Hill") was formed to purchase and
develop a residential community on 149 acres of land located in Forsyth
County, Georgia. The Company has an 80% ownership interest and shares 50% in
the profits of Union Hill. The initial equity contribution was funded 100%
by the Company.
<TABLE>
<CAPTION>
AS OF MARCH 31
-------------------------
1997 1996
------ -------
<S> <C> <C>
Summary financial position:
Real estate property $4,515 $3,513
Total assets 5,140 3,589
Total debt 2,433 2,064
Total equity 2,467 922
Company's share of equity 1,551 922
</TABLE>
<PAGE> 19
- 12 -
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED MARCH 31
--------------------------------
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Summary operations:
Gross profit from lot sales $ 1,310 $ 282 $ 0
Net income 1,257 211 0
Company's share of net income 629 106 0
</TABLE>
COBB WOODLAWN DEVELOPMENT LLC
In January 1995, Cobb Woodlawn Development LLC ("Cobb Woodlawn") was formed
to purchase and develop a residential community on 15 acres in Cobb County,
Georgia. The Company has a 100% ownership interest in Cobb Woodlawn. The
development and sale of all of the property associated with Cobb Woodlawn
were completed during fiscal year 1997.
<TABLE>
<CAPTION>
AS OF MARCH 31
------------------
1997 1996
------ ------
<S> <C> <C>
Summary financial position:
Real estate property $0 $528
Total assets 0 539
Total debt 0 143
Total equity 0 384
Company's share of equity 0 384
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED MARCH 31
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Summary operations:
Gross profit from lot sales $ 139 $ 380 $ 0
Net income 132 323 2
Company's share of net income 132 323 2
</TABLE>
TRIMBLE ROAD DEVELOPMENT LLC
In February 1996, Trimble Road Development LLC ("Trimble Road") was formed
to purchase and develop a residential community on 14 acres in Fulton
County, Georgia. The Company has a 100% ownership interest in Trimble Road.
<PAGE> 20
- 13 -
<TABLE>
<CAPTION>
AS OF MARCH 31
--------------------
1997 1996
------ ------
<S> <C> <C>
Summary financial position:
Real estate property $1,773 $1,982
Total assets 2,091 2,213
Total debt 1,237 1,631
Total equity 808 550
Company's share of equity 808 550
</TABLE>
<TABLE>
<CAPTION>
FOR THE
YEARS
ENDED
MARCH 31
------------------
1997 1996
---- -----
<S> <C> <C>
Summary operations:
Gross profit from lot sales $264 $0
Net income 259 0
Company's share of net income 259 0
</TABLE>
RIVERMOORE PARK
In November 1996, the Company purchased 353 acres of land, in Gwinnett
County, Georgia, for the purpose of developing a residential community,
Rivermoore Park ("Rivermoore"). The Company has a 100% ownership interest in
Rivermoore. On a consolidated basis, the Company's share of equity is
$3,525,000. As of March 31, 1997, the operations of this project have been
insignificant.
Summary financial position as of March 31, 1997:
<TABLE>
<S> <C>
Real estate property $10,869
Total assets 10,869
Total debt 6,402
Note payable to Bank 3,525
</TABLE>
BN DEVELOPMENT COMPANY LLC
In December 1995, BN Development Company LLC ("BN Development") was formed
for the purpose of acquiring a commercial lot and developing and leasing a
30,000-square-foot Barnes & Noble, Inc. superstore. During fiscal year 1997,
development was completed and the building was leased to Barnes & Noble,
Inc. The initial equity contribution was funded 100% by the Company. The
Company has a 50% ownership interest and shares 50% in the profits of BN
Development.
<PAGE> 21
- 14 -
<TABLE>
<CAPTION>
AS OF MARCH 31
-------------------
1997 1996
------ ------
<S> <C> <C>
Summary financial position:
Real estate property $5,756 $3,905
Total assets 5,904 3,905
Total debt 3,857 3,282
Total equity 596 599
Company's share of equity 539 599
Summary operations for the year ended March 31, 1997:
Other income $353
Other expense 83
Net income 115
Company's share of net income 58
</TABLE>
HAMPTON OAKS L.P.
The Company, in keeping with its goal of providing affordable housing,
invested in Hampton Oaks L.P. to construct a 50-unit affordable housing
project. The development was completed in October 1995 and remains 100%
occupied. The Company has a 99% limited partnership interest and recognizes
investment tax credits of approximately $173,000 per year over 15 years
through 2010. On a consolidated basis, the Company's investment in and
advances to Hampton Oaks L.P. are $2,915,000 and $3,034,000 at March 31,
1997 and 1996, respectively, and is reflected in investment in real estate
in the accompanying statements of financial condition.
<TABLE>
<CAPTION>
AS OF MARCH 31
--------------------
1997 1996
------ -------
<S> <C> <C>
Summary financial position:
Real estate property $3,324 $3,405
Total assets 3,384 3,494
Total debt (payable to Bank) 1,750 1,781
Total equity 1,615 1,698
Company's share of equity 1,320 1,320
</TABLE>
<PAGE> 22
- 15 -
<TABLE>
<CAPTION>
FOR THE
YEARS
ENDED
MARCH 31
-----------------
1997 1996
---- ----
<S> <C> <C>
Summary operations:
Rental income $440 $262
Other expense 432 238
Net income 8 25
Company's share of net income 8 25
</TABLE>
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at March 31, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------------------- --------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and amounts due from banks and
federal funds sold $ 25,875 $ 25,875 $ 19,911 $ 19,911
Securities:
Available for sale 96,921 96,921 105,988 105,988
Held to maturity 51,907 52,048 55,341 56,308
Loans receivable 515,749 525,004 410,843 420,608
Loans held for sale 62,882 63,814 92,552 92,678
Accrued interest receivable 5,472 5,472 4,955 4,955
Financial liabilities:
Deposits 557,724 557,679 458,458 456,501
FHLB advances and other borrowings 153,805 153,832 174,337 174,611
Accrued interest payable 3,562 3,562 2,486 2,486
</TABLE>
The following methods and assumptions were used by the Company in estimating
the fair values of financial instruments:
- Cash and amounts due from banks and federal funds sold are valued
at their carrying amounts reported in the consolidated statements
of financial condition, which are reasonable estimates of fair
value due to the relatively short period to maturity of these
instruments.
- Securities are valued at quoted market prices, where available.
If quoted market prices are not available, fair values are based
on quoted market prices of comparable instruments.
<PAGE> 23
- 16 -
- Loans receivable are valued on the basis of estimated cash flows,
discounted using the current rates at which similar loans would
be made to borrowers with similar credit ratings and for the same
remaining maturities. The carrying amount of accrued interest
receivable approximates its fair value.
- Loans held for sale are valued based on outstanding commitments
from investors or current investor yields.
- Deposits with no defined maturity, such as demand
deposits, savings accounts, NOW, and money market accounts, have
fair values equal to the amounts payable on demand, which are
equal to their respective carrying amounts. Fair values of
certificates of deposit are estimated using a discounted cash
flow calculation using the rates currently offered for deposits
of similar remaining maturities. The intangible value of
long-term relationships with depositors is not taken into
account in estimating the fair value. The carrying amount of
accrued interest payable approximates its fair value.
- Fair values of FHLB advances and other borrowings are estimated
using a discounted cash flow calculation using the Company's
current incremental borrowing rates for similar types of
instruments.
- Off-balance sheet instruments include commitments to extend
credit and standby letters of credit. The fair values of such
instruments are based on fees currently charged for similar
arrangements in the marketplace, adjusted for changes in terms
and credit risk, as appropriate. The carrying values of these
unamortized fees and hence the fair values of the related
commitments were not significant as of March 31, 1997 and 1996.
9. DEPOSITS
At March 31, 1997 and 1996, deposits are summarized by type and remaining
term as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Demand deposits:
Noninterest-bearing deposits $ 29,843 $ 22,349
Interest-bearing deposits 48,923 45,529
Money market 20,902 18,279
Savings 46,353 47,069
-------- --------
Total demand deposits 146,021 133,226
-------- --------
</TABLE>
<PAGE> 24
- 17 -
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Time deposits:
Maturity one year or less $308,459 $222,551
Maturity greater than one year through two years 33,155 34,719
Maturity greater than two years through three years 29,312 17,956
Maturity greater than three years 40,777 50,006
-------- --------
Total time deposits 411,703 325,232
-------- --------
Total deposits $557,724 $458,458
======== ========
</TABLE>
The weighted average interest rate on time deposits for the years ended
March 31, 1997 and 1996 was 5.84% and 5.98%, respectively.
Interest expense on deposits for the years ended March 31, 1997, 1996, and
1995 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Interest-bearing deposits $ 993 $ 1,074 $ 1,081
Money market 496 558 615
Savings 1,128 1,162 1,541
Time deposits 22,560 18,032 11,197
------- ------- -------
$25,177 $20,826 $14,434
======= ======= =======
</TABLE>
On September 30, 1996, President Clinton signed into law the Deposit
Insurance Funds Act of 1996 (the "Act"), which contains provisions to
capitalize the Savings Association Insurance Fund ("SAIF") by imposing a
special assessment on federally insured depository institutions, to fund
Financing Corporation Bonds, and to merge the Bank Insurance Fund with the
SAIF.
Pursuant to the Act, on October 8, 1996, the board of directors of the FDIC
imposed a special assessment on SAIF-assessable deposits of the Bank equal
to $.657 per $100 of SAIF-insured deposits as of March 31, 1995, which
resulted in a one-time assessment in the amount of approximately $1,946,000.
The Act also provides for the establishment of a new deposit insurance
premium rate on SAIF-insured deposits of $.06 per $100, which is
significantly lower than the Bank's previous premium rate of $.23 per $100.
<PAGE> 25
- 18 -
10. FHLB ADVANCES AND OTHER BORROWINGS
FHLB advances and other borrowings at March 31, 1997 and 1996 are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
FHLB advances $141,383 $168,200
Other borrowings 12,422 6,137
-------- --------
$153,805 $174,337
======== ========
</TABLE>
At March 31, 1997, FHLB advances are at least 125% collateralized by
unencumbered mortgage loans and approximately $68,000,000 of investment
securities. The advances mature at various dates through July 1999. The
weighted average interest rate on FHLB advances was 6.8% and 5.53% at March
31, 1997 and 1996, respectively. Maximum short-term borrowings during the
years ended March 31, 1997 and 1996 were $177,445,000 and $149,700,000,
respectively.
As of March 31, 1997, repayments of FHLB advances and other borrowings for
subsequent fiscal years, based on contractual maturities, are as follows (in
thousands):
<TABLE>
<S> <C>
1998 $126,735
1999 16,293
2000 9,900
2001 239
2002 270
Thereafter 368
--------
$153,805
========
</TABLE>
11. INCOME TAXES
Income tax expense for the years ended March 31, 1997, 1996, and 1995 is
allocated as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current expense:
Federal $ 2,477 $ 3,384 $ 2,106
State 35 274 195
------- ------- -------
2,512 3,658 2,301
------- ------- -------
Deferred (benefit) expense:
Federal (559) (523) 351
State (185) (165) 58
------- ------- -------
(744) (688) 409
------- ------- -------
$ 1,768 $ 2,970 $ 2,710
======= ======= =======
</TABLE>
<PAGE> 26
- 19 -
The following is a summary of the differences between the income tax expense
as shown in the accompanying financial statements and the income tax expense
which would result from applying the federal statutory tax rate of 34% for
fiscal years 1997, 1996, and 1995 to income before income taxes
(in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Expected income tax expense $ 1,875 $ 3,124 $ 2,581
(Decrease) increase in income
taxes resulting from:
State income taxes, net of federal
income tax benefit (99) 72 167
Income tax credits (173) (170) 0
Merger expenses 199 0 0
Other, net (34) (56) (38)
------- ------- -------
Actual income tax expense $ 1,768 $ 2,970 $ 2,710
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at March
31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Deferred tax assets:
Loans receivable, due to reserve for loan losses $1,601 $1,705
Deposit base premium, due to difference in
amortization method for tax purposes 258 204
Employee benefits, due to differences
in expense recognition
methods for tax purposes 505 365
Net operating loss carryforward 333 360
Other 373 0
Net unrealized loss on securities
available for sale, not
recognized for tax purposes 628 256
------ ------
Gross deferred tax assets 3,698 2,890
------ ------
Deferred tax liabilities:
FHLB stock, due to dividends not
recognized for tax purposes 117 355
Loans receivable, due to differences
in deferred loan fees and
costs recognition for tax purposes 735 709
Premises and equipment, due to differences in
depreciation methods for tax purposes 562 455
Other 0 203
------ ------
Gross deferred tax liabilities 1,414 1,722
------ ------
Net deferred tax assets $2,284 $1,168
====== ======
</TABLE>
No valuation allowance for net deferred tax assets has been recorded as of
March 31, 1997 and 1996 based on management's assessment that it is more
likely than not that these assets will be realized. This assessment is based
primarily on the level of historical taxable income and projections for
future taxable income over the periods in which the deferred tax assets are
deductible.
<PAGE> 27
- 20 -
Under the Internal Revenue Code (the "Code"), the Bank was allowed a special
bad debt deduction related to additions to tax bad debt reserves established
for the purpose of absorbing losses. The provisions of the Code permitted
the Bank to deduct from taxable income an allowance for bad debt equal to
the greater of 8% of taxable income before such deduction or actual
charge-offs. Retained earnings at March 31, 1997 and 1996 include
approximately $3,900,000 for which no federal income tax has been provided.
These amounts represent allocations of income to bad debt reserves and are
subject to federal income tax in future years at the then-current corporate
rate if the Bank no longer qualifies as a bank for federal income tax
purposes and in certain other circumstances, as defined in the Code.
12. COMMON STOCK AND STOCK PLANS
The following table summarizes common stock reserved, issued, outstanding,
and authorized as of March 31, 1997:
<TABLE>
<CAPTION>
NUMBER
OF SHARES
----------
<S> <C>
Common stock reserved:
1986 Employee Stock Option and Incentive Plan 196,000
1995 Employee Stock Incentive Plan 200,000
1994 Directors Stock Option Incentive Plan 107,000
Dividend Reinvestment and Stock Purchase Plan 220,000
----------
Total shares reserved 723,000
Shares issued 5,961,494
Unissued shares 3,315,506
----------
Total shares authorized 10,000,000
==========
</TABLE>
DIRECTOR OPTION PLANS
EAGLE BANCSHARES, INC. 1994 DIRECTORS STOCK OPTION INCENTIVE PLAN
("DSOP")
The DSOP provides for grants of nonqualified stock options to be made
to directors of the Company or Tucker Federal Bank. Options to
purchase 2,000 shares of common stock are granted at the fair market
value of the common stock on the grant date upon initially becoming a
director of the Company or Tucker Federal Bank. These shares are
exercisable immediately on the date of grant. In addition, the option
to purchase 1,500 shares of common stock is granted upon beginning any
subsequent term as a director of the Company or Tucker Federal Bank.
These options vest at the rate of 500 shares per full year of service
thereafter.
All options granted under the DSOP expire no later than the date
immediately following the tenth anniversary of the date of grant and
may expire sooner in the event of the disability or death of the
optionee or if the optionee ceases to serve as a director.
<PAGE> 28
- 21 -
TUCKER FEDERAL SAVINGS AND LOAN ASSOCIATION DIRECTORS' RETIREMENT PLAN
Participants under the Directors' Retirement Plan will receive a
benefit in the form of a monthly annuity for the life of the
participant. Payments commence as of the first day of the month
following the later of (i) the date on which the participant is no
longer a director or (ii) the date on which the participant attains
age 65. These payments continue until the first day of the month in
which the participant's death occurs.
The amount of a participant's monthly payments under the Directors'
Retirement Plan is generally equal to the product of (i) the average
monthly compensation paid for service as a director and (ii) a
percentage based on the participant's years of service. As of March
31, 1997 and 1996, the plan is underfunded. The liability and
expense attributable to this plan is insignificant to the Company's
financial position.
In addition to the monthly benefit provided to a participant under the
Directors' Retirement Plan, a participant also is generally entitled
to an additional lump-sum benefit if the participant has completed
certain years-of-service requirements. The lump-sum benefit payable to
such participants is 2,000 shares of common stock or a cash payment
equal to the fair market value (determined in accordance with the
provisions of the Company DSOP) of such 2,000 shares, whichever is
elected by the participant.
EMPLOYEE STOCK PLANS
1986 EMPLOYEE STOCK OPTION AND INCENTIVE PLAN
In 1986, at the time of the Bank's conversion to a federally chartered
stock association, the board of directors adopted the Employee Stock
Option and Incentive Plan. The plan provided for grants of
nonincentive stock options and stock appreciation rights equal to 10%
of the shares issued in the Bank's conversion from mutual to stock
form. This plan expired in 1996 in accordance with the original
termination date.
1995 EMPLOYEE STOCK INCENTIVE PLAN ("ESIP")
The ESIP provides for awards of incentive stock options ("ISOs"),
nonqualified stock options ("NQSOs"), reload options, and restricted
stock awards. Awards under the ESIP are granted at the fair market
value of the common stock on the date of grant, unless otherwise
determined by the ESIP committee. ISOs may not be granted at less than
100% of the fair market value of the common stock on the date of
grant. NQSOs may not be granted at less than 75% of the fair market
value of the common stock on the date of grant. Awards become
exercisable in accordance with a schedule established by the ESIP
committee at the time of grant and are typically three to five years
but in no event longer than ten years. Rights with regard to all
nonvested options cease immediately upon the termination of
employment, unless such termination is due to a charge in control.
Options vest 100% upon a change in control of the Company.
<PAGE> 29
- 22 -
TUCKER FEDERAL SAVINGS AND LOAN ASSOCIATION 401(K) SAVINGS AND EMPLOYEE
STOCK OWNERSHIP TRUST
Effective April 1, 1994, the Company merged the Employee Stock Ownership
Plan into its 401(k) plan to form the Tucker Federal Savings and Loan
Association 401(k) Savings and Employee Stock Ownership Trust
("ESOP"). In connection with the Company's secondary offering of common
stock, in February 1996, the ESOP borrowed $1,000,000 from the Company
to acquire 62,500 shares of common stock. These shares become available
to be allocated to plan participants as principal reductions are
applied to the debt. Compensation expense from the eventual allocation
of these shares will be measured based on the fair value of the shares
on the date the shares are committed to be allocated. At March 31,
1997, the fair value of these shares is $1,015,625. The note will be
repaid from the Company's contributions to the plan and from dividends
paid on unallocated shares, and accordingly, the note is reflected as a
reduction in stockholders' equity. Eligible employees participate in the
ESOP, and the Company's contribution is allocated to the participants in
the proportion to their compensation to total eligible compensation. The
Company's contribution is determined annually by the board of directors,
and in fiscal years 1997, 1996, and 1995, the contribution was $415,000,
$385,000, and $723,000, respectively.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The Dividend Reinvestment and Stock Purchase Plan was established to provide
stockholders with an easy way to purchase additional shares of Company
common stock. The Plan allows stockholders to reinvest their quarterly
dividends and make cash investments in stock for a minimum of $25 and a
maximum of $5,000 per quarter with no brokerage commissions or
administrative charges.
All shareholders of record are eligible to participate in the plan.
Beneficial owners of shares of common stock must either arrange for the
holder of record to join the plan or have the shares they wish to enroll in
the plan transferred into their own names.
The Company adopted the disclosure provisions in SFAS No. 123, "Accounting
for Stock-Based Compensation," on April 1, 1996. As permitted by the
provisions of SFAS No. 123, the Company applies Accounting Principles Board
("APB") Opinion No. 25 and the related interpretations in accounting for
its stock option plans and, accordingly, does not recognize compensation
cost.
<PAGE> 30
- 23 -
A summary of the Company's stock option activity during the three-year
period ended March 31, 1997 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
NUMBER PRICE
------ -----
<S> <C> <C>
Outstanding at March 31, 1994 347,164 $7.52
Granted 158,000 11.28
Exercised (33,000) 3.25
--------
Outstanding at March 31, 1995 472,164 9.08
Granted 8,500 14.16
Exercised (33,000) 3.25
--------
Outstanding at March 31, 1996 447,664 9.46
Granted 47,500 15.94
Exercised and expired (143,550) 8.96
--------
Outstanding at March 31, 1997 351,614 10.58
========
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE RANGE OF
EXERCISE EXERCISE
NUMBER PRICE PRICES
------ --------- -------------
<S> <C> <C> <C>
Outstanding options exercisable as of:
March 31, 1995 315,148 $7.01 $3.375-$12.25
March 31, 1996 339,082 7.83 3.375-16.375
March 31, 1997 215,974 8.64 3.375- 16.75
</TABLE>
The weighted average remaining contractual life of options outstanding at
March 31, 1997 is approximately 6.8 years.
The weighted average fair value of stock option grants during fiscal years
1997 and 1996 is $210,506 and $36,662, respectively. No stock options were
granted during the one-month period ended March 31, 1995.
The fair value of these grants was determined using the following
assumptions:
<TABLE>
<CAPTION>
1997 1996
------ -------
<S> <C> <C>
Risk-free interest rate 6.75% 6.82%
Expected option life 7 YEARS 7 years
Expected stock price volatility 26.61% 26.61%
Expected dividend yield 3.6% 3.6%
</TABLE>
As previously indicated, the Company accounts for its stock option plans
using the principles of APB Opinion No. 25 and related interpretations.
Accordingly, no compensation cost has been recognized for its fixed stock
option plans. Had compensation
<PAGE> 31
- 24 -
cost for the Company's stock-based compensation plans been determined based
on the fair value at the grant dates for awards under those plans consistent
with the method of SFAS No. 123, the Company's net income and earnings per
share ("EPS") would have been as reflected in the pro forma amounts below
(in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net income:
As reported $3,746 $6,219 $4,881
Pro forma 3,721 6,212 4,881
EPS:
As reported $ 0.66 $ 1.40 $ 1.18
Pro forma 0.66 1.40 1.18
</TABLE>
During the year ended March 31, 1994, the Company awarded 30,000
nontransferable restricted shares of the Company's common stock to an
officer of the Bank. During the year ended March 31, 1995, the Company
awarded two officers of the Bank 15,000 each, nontransferable restricted
shares of the Company's common stock. The market value of the shares at the
dates of award of $338,000 and $293,000 for the years ended March 31, 1995
and 1994, respectively, is being amortized by charges to compensation
expense over the three-year vesting period. Compensation expense related to
these awards for the years ended March 31, 1997, 1996, and 1995 was
$121,000, $158,000, and $228,000, respectively. The unamortized balance of
the awards is included as a deduction from stockholders' equity in the
statements of financial condition. Additionally, certain officers of the
Company are employed under various employment agreements, which expire over
the next three years.
13. DIVIDEND AND LOAN RESTRICTIONS
The source of funds for payment of dividends by the Company is dividends
paid to the Company by the Bank. The Bank's ability to pay dividends to the
Company is subject to the financial performance of the Bank, which is
dependent on, among other things, the local economy, the success of the
Bank's lending activities, compliance by the Bank with applicable
regulations, investment performance, and the ability to generate fee income.
The Bank currently is in compliance with the regulatory capital requirements
and is considered a Tier 1 association. A Tier 1 association is permitted to
make capital distributions during a calendar year up to the higher of (i)
100% of its net income to date plus the amount that would reduce by one-half
its surplus capital ratio at the beginning of the calendar year or (ii) 75%
of its net income over the most recent four-quarter period. Any
distributions in excess of that amount require prior OTS notice with the
opportunity for the OTS to object to the distribution. In addition, a
savings association must provide the OTS with a 30-day advance written
notice of all proposed capital distributions, whether or not advance
approval is required by OTS regulations. Currently, the Bank periodically
notifies the OTS of the gross amount of dividends it intends to pay to the
Company. The Bank paid cash dividends to the Company of approximately
$683,000, $1,400,000, and $3,415,000 during the years ended March 31, 1997,
1996, and 1995, respectively. In addition, during fiscal year 1997, the Bank
paid a dividend in the form of equity securities to the Company in the
amount of $6,094,000.
<PAGE> 32
- 25 -
The Bank is subject to certain restrictions under the Federal Reserve Act,
including restrictions on extensions of credit to its affiliates. In
particular, the Bank is prohibited from lending to the parent Company and
its nonbank subsidiaries unless the loans are secured by specified
collateral. Such secured loans and other regulated transactions made by the
Bank are limited in amount as to each of its affiliates, including the
parent Company, to 10% of the Bank's capital stock and surplus, as defined.
14. INDUSTRY SEGMENTS
The Company operates principally in the banking industry through the Bank.
The Bank's subsidiary, PrimeEagle, is engaged in the mortgage banking
business and originates and sells residential mortgages and construction
loans. All significant intersegment accounts and transactions are eliminated
in consolidation.
Industry segment information for the years ended March 31, 1997, 1996, and
1995 is presented below (in thousands):
<TABLE>
<CAPTION>
MORTGAGE
BANKING BANKING ELIMINATIONS CONSOLIDATED
------- ------- ------------ ------------
<S> <C> <C> <C> <C>
1997:
Revenues $ 55,571 $ 32,165 $ (11,040) $ 76,696
Net income 7,872 2,498 (6,624) 3,746
Identifiable assets 806,929 220,211 (203,258) 823,882
Capital expenditures, net 5,454 302 0 5,756
Depreciation on premises and
equipment 1,359 175 0 1,534
1996:
Revenues 48,041 23,734 (8,297) 63,478
Net income 8,886 2,799 (5,466) 6,219
Identifiable assets 721,091 225,597 (210,304) 736,384
Capital expenditures, net 3,846 619 0 4,465
Depreciation on premises and
equipment 1,053 275 0 1,328
1995:
Revenues 37,699 15,514 (6,313) 46,900
Net income 5,447 2,149 (2,715) 4,881
Identifiable assets 561,520 117,602 (110,444) 568,678
Capital expenditures, net 3,064 235 0 3,299
Depreciation on premises and
equipment 944 108 0 1,052
</TABLE>
The Company includes construction lending activity and the origination and
sale of first mortgage loans in the mortgage banking segment.
<PAGE> 33
- 26 -
15. FINANCIAL INFORMATION OF EAGLE SERVICE CORPORATION
The following condensed statements of financial condition as of March 31,
1997 and 1996 and the related condensed statements of income for the years
ended March 31, 1997, 1996, and 1995 summarize the financial position and
operating results of the Bank's wholly owned subsidiary, Eagle Service
Corporation:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
ASSETS
<TABLE>
<CAPTION>
1997 1996
------- -------
(In Thousands)
<S> <C> <C>
Cash $ 335 $ 47
Investment in real estate 10,869 0
Other assets 1,394 1,952
------- -------
Total assets $12,598 $ 1,999
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Note payable to parent $ 3,525 $ 371
Other borrowings 6,402 0
Accrued expenses and other liabilities 960 224
------- -------
Total liabilities 10,887 595
------- -------
Common stock 500 500
Retained earnings 1,211 904
------- -------
Total stockholder's equity 1,711 1,404
------- -------
Total liabilities and stockholder's equity $12,598 $ 1,999
======= =======
</TABLE>
<PAGE> 34
- 27 -
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Mortgage production fees $ 0 $ 0 $1,003
Appraisal and other fees 165 169 190
Interest income 34 57 329
Gain on sale of investment in real estate 321 0 0
Retail investment commissions 245 149 193
Other 133 113 123
------ ------ ------
Operating income 898 488 1,838
General and administrative expenses 404 367 1,827
------ ------ ------
Income before income tax 494 121 11
Income tax expense 187 45 4
------ ------ ------
Net income $ 307 $ 76 $ 7
====== ====== ======
</TABLE>
16. REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements which 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 Bank to maintain amounts and ratios (set forth in the table
below) of total and Tier 1 risk-based capital to risk-weighted assets, of
Tier 1 capital to adjusted total assets, and of tangible capital to average
total assets, as defined. Management believes, as of March 31, 1997, that
the Bank meets all capital adequacy requirements to which it is subject.
As of March 31, 1997, the most recent notification from the Bank's primary
regulators categorized the Bank as well-capitalized. There are no conditions
or events since that notification that management believes may have changed
the Bank's category.
<PAGE> 35
- 28 -
A summary of actual, required, and well-capitalized total and Tier 1 capital,
Tier 1 leverage, and tangible capital ratios as of March 31, 1997 is presented
below:
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
---------------- ---------------- ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Risk-based ratios:
Tier 1 capital $54,019 10.14% $21,311 4.0% $31,966 6.0%
Total capital 59,023 11.08 42,622 8.0 53,277 10.0
Tier 1 leverage 54,019 6.72 32,144 4.0 40,180 5.0
Tangible equity 54,019 7.05 11,499 1.5 N/A N/A
</TABLE>
17. EARNINGS PER SHARE
Weighted average common and common equivalent shares for the years ended
March 31, 1997, 1996, and 1995 are computed as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Primary:
Weighted average shares outstanding 5,527,973 4,250,752 4,032,234
Common shares assumed outstanding to reflect
dilutive effect of common stock options 176,604 178,748 93,521
--------- --------- ---------
Weighted average shares and common equivalent
shares outstanding 5,704,577 4,429,500 4,125,755
========= ========= =========
Fully diluted:
Weighted average shares outstanding 5,527,973 4,250,752 4,032,234
Common shares assumed outstanding to reflect
dilutive effect of common stock options 187,178 184,157 98,357
--------- --------- ---------
Weighted average shares outstanding and common
equivalent shares outstanding 5,715,151 4,434,909 4,130,591
========= ========= =========
</TABLE>
All share data has been adjusted to reflect the effect of a two-for-one
stock split of the Company's common stock effected in the form of a stock
dividend paid on December 21, 1995. In addition, all share data has been
restated for all periods presented to give effect to the Company's merger
with SCFC (Note 3).
Additionally, on May 23, 1996, SCFC declared a 5% stock dividend on its
common stock, which was paid on June 30, 1996. The dividend was charged to
retained earnings in the amount of $418,000, which was based on the closing
price per share of common stock on the declaration date. Average shares
outstanding and all per share amounts included in the accompanying
consolidated financial statements and notes are based on the increased
number of shares, giving retroactive effect to the stock dividend.
<PAGE> 36
- 29 -
18. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are parties to claims and lawsuits arising
in the course of their normal business activities. Although the ultimate
outcome of these suits cannot be ascertained at this time, it is the opinion
of management that none of these matters, when resolved, will have a
material effect on the Company's consolidated results of operations or
financial position.
The Bank acquired the assets of Prime Lending Division of Southern Federal
Savings and Loan Association (the "Division") (now a division of PrimeEagle)
from the RTC on November 23, 1992. In connection with this acquisition, the
Bank entered into an operating agreement with a corporation owned by two
individuals who participate in the profits and losses pursuant to the
agreement. The term of the agreement is for five years and is automatically
renewable for an additional three-year period unless either party gives at
least 90 days' prior written notice of their desire not to renew (August 25,
1997). In the event that the Bank elects not to renew the agreement, the two
individuals have the right, but not the obligation, to purchase certain
assets of the Division for 75% of their appraised fair market value, upon
assuming all obligations associated with the Division. The specific impact
of nonrenewal on the financial condition of the Company, if any, cannot be
determined at this time.
The Company is involved in an in-depth assessment of the mortgage banking
group. This includes evaluating each office's profitability, business
prospects, and carefully considering the business potential of each local
market. In connection with this analysis, the Company is examining the
alternatives with regard to the above-mentioned agreement including
nonrenewal.
19. FINANCIAL INFORMATION OF EAGLE BANCSHARES, INC. (PARENT ONLY)
Eagle Bancshares, Inc.'s condensed statements of financial condition as of
March 31, 1997 and 1996 and related condensed statements of income and cash
flows for the years ended March 31, 1997, 1996, and 1995 are as follows:
<PAGE> 37
- 30 -
CONDENSED STATEMENTS OF FINANCIAL CONDITION
ASSETS
<TABLE>
<CAPTION>
1997 1996
------- --------
(In Thousands)
<S> <C> <C>
Cash $ 1,858 $ 1,176
Securities available for sale 5,247 0
Investment in subsidiaries 61,702 65,133
Other assets 1,173 1,419
------- -------
Total assets $69,980 $67,728
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ 2,106 $ 1,280
Stockholders' equity 67,874 66,448
------- -------
Total liabilities and
stockholders' equity $69,980 $67,728
======= =======
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Interest and other income $ 670 $ 320 $ 2
Management fee income from subsidiaries 100 100 100
Cash dividends from the Bank 683 1,400 3,415
------ ------ ------
Total income 1,453 1,820 3,517
Merger expenses 343 0 0
Loss on securities available for sale 61 0 0
General and administrative expenses 801 200 161
------ ------ ------
Income before income taxes and
equity in undistributed earnings
of subsidiaries 248 1,620 3,356
Income taxes 194 195 9
------ ------ ------
Income before equity in undistributed
earnings of subsidiaries 54 1,425 3,347
Equity in undistributed earnings of subsidiaries 3,692 4,794 1,534
------ ------ ------
Net income $3,746 $6,219 $4,881
====== ====== ======
</TABLE>
<PAGE> 38
- 31 -
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- ---------
(In Thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,746 $ 6,219 $ 4,881
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiaries (3,692) (4,794) (1,534)
Amortization of restricted stock award 121 158 228
Loss on sale of securities available for sale 61 0 0
Decrease (increase) in other assets 329 784 (122)
(Decrease) increase in due to subsidiaries 0 (182) 49
Increase in other liabilities 479 632 79
-------- -------- --------
Net cash provided by operating activities 1,044 2,817 3,581
-------- -------- --------
Cash flows from investing activities:
Proceeds from calls of securities available for sale 940 0 0
Loan to subsidiary 0 0 (2,000)
Capital distribution from subsidiary 376 0 0
Capital contributions to subsidiaries 0 (21,633) (817)
-------- -------- --------
Net cash provided by (used in) investing activities 1,316 (21,633) (2,817)
-------- -------- --------
Cash flows from financing activities:
Cash dividends paid (2,842) (1,568) (1,362)
Stock options exercised 1,000 182 132
Proceeds from issuance of common stock 0 21,483 0
Purchase of treasury stock 0 (12) 0
Issuance of ESOP note payable to acquire common stock 0 (1,000) 0
Principal reduction of ESOP note payable 164 11 130
-------- -------- --------
Net cash (used in) provided by financing activities (1,678) 19,096 (1,100)
-------- -------- --------
Net increase (decrease) in cash 682 280 (336)
Cash at beginning of year 1,176 896 1,232
-------- -------- --------
Cash at end of year $ 1,858 $ 1,176 $ 896
======== ======== ========
Supplemental disclosures of noncash financing and
investing activities:
Dividends payable $ 849 $ 592 $ 386
======== ======== ========
Restricted stock award $ 0 $ 0 $ 338
======== ======== ========
Dividend of securities received from Bank $ 6,094 $ 0 $ 0
======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 21. PARENTS AND SUBSIDIARIES
<TABLE>
<CAPTION>
Percentage State of
Parent Company Subsidiaries Owned Incorporation
- -------------- ------------ ----- -------------
<S> <C> <C> <C>
Eagle Bancshares, Inc. Tucker Federal
Bank Federally
100% Chartered
Eagle Real Estate
Advisors, Inc. 100% Georgia
Tucker Federal
Bank Eagle Service
Corporation 100% Georgia
Eagle A.R.M.S.,
Inc. 100% Georgia
Prime Eagle
Mortgage
Corporation 100% Georgia
</TABLE>
<PAGE> 1
Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated May 30, 1997 included in Eagle Bancshares, Inc.'s Annual
Report to Shareholders and incorporated by reference into this Form 10-K,
into the Registrants previously filed Registration Statements No. 333-15041,
No. 333-14787 and No. 333-00977.
Arthur Andersen LLP
Atlanta, Georgia
July 14, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 17,405
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,470
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 96,921
<INVESTMENTS-CARRYING> 51,907
<INVESTMENTS-MARKET> 52,048
<LOANS> 515,749
<ALLOWANCE> 5,198
<TOTAL-ASSETS> 823,882
<DEPOSITS> 557,724
<SHORT-TERM> 0
<LIABILITIES-OTHER> 14,157
<LONG-TERM> 0
0
0
<COMMON> 5,961
<OTHER-SE> 61,913
<TOTAL-LIABILITIES-AND-EQUITY> 823,882
<INTEREST-LOAN> 51,503
<INTEREST-INVEST> 6,772
<INTEREST-OTHER> 5,510
<INTEREST-TOTAL> 63,785
<INTEREST-DEPOSIT> 25,177
<INTEREST-EXPENSE> 33,629
<INTEREST-INCOME-NET> 30,156
<LOAN-LOSSES> 2,652
<SECURITIES-GAINS> (21)
<EXPENSE-OTHER> 34,901
<INCOME-PRETAX> 5,514
<INCOME-PRE-EXTRAORDINARY> 5,514
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,746
<EPS-PRIMARY> 0.66
<EPS-DILUTED> 0.66
<YIELD-ACTUAL> 4.17
<LOANS-NON> 7,866
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,503
<ALLOWANCE-OPEN> 5,464
<CHARGE-OFFS> 3,124
<RECOVERIES> 206
<ALLOWANCE-CLOSE> 5,198
<ALLOWANCE-DOMESTIC> 5,198
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
