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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 For the fiscal year ended March 31, 1998.
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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)
GEORGIA 58-1640222
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(State or other jurisdiction (IRS Employer
of incorporation or organization) 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 June 25, 1998.
Common Stock, $1.00 par value - $126,200,000 based upon the closing
price on June 25, 1998, 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 June 25, 1998 Common Stock $1.00 par value -
5,787,264 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the fiscal year ended
March 31, 1998 ("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 51
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EAGLE BANCSHARES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
TABLE OF CONTENTS
<TABLE>
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Item Page
Number Number
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<S> <C>
PART I
1. Business...................................................................3
2. Properties................................................................19
3. Legal Proceedings.........................................................19
4. Submission of Matters to a Vote of Security Holders.......................20
PART II
5. Market for the Registrant's Common Equity
and Related Stockholder Matters...........................................21
6. Selected Financial Data...................................................22
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................23
8. Financial Statements and Supplementary Data...............................48
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................................48
PART III
10. Directors and Executive Officers of the Registrant........................48
11. Executive Compensation....................................................48
12. Security Ownership of Certain Beneficial Owners
and Management............................................................48
13. Certain Relationships and Related Transactions............................49
PART IV
14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.......................................................49
Signatures....................................................................50
Index of Exhibits.............................................................51
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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"), Eagle Real Estate Advisors, Inc.
("EREA"), and Eagle Bancshares Capital Group, Inc. ("EBCG"). 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 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 four years, EREA has engaged in
real estate development activities and brokerage services. EBCG was formed in
December 1997 to serve the Bank's growing base of small and medium sized
businesses by providing mezzanine financing that is not readily available from
traditional commercial banking sources. Loans with equity features are made to
borrowers that have the potential for significant growth, adequate collateral
coverage and experienced management teams with significant equity ownership.
On July 2, 1998, the Company filed a Form S-3 registration statement to
register 1,000,000 cumulative trust preferred securities having a liquidation
amount of $25.00 each. The Company intends to use the net proceeds as follows:
(i) approximately $10 million will be contributed to the Bank to increase the
Bank's capital ratios to support growth, for working capital and to increase the
Bank's regulatory capital from "adequately capitalized" to "well capitalized",
and (ii) the balance will be used to repay existing debt, invest in investment
grade preferred securities of other issuers, and for general corporate purposes.
The Company anticipates the offering to become effective by September 30, 1998.
On September 21, 1997, the Company acquired a wholesale mortgage
banking business to increase loan originations and improve efficiencies
associated with its mortgage banking business. The purchase price was
approximately $65,000 representing the value of furniture and equipment. The
wholesale division closed $259,545,000 of permanent mortgage loans for the six
month period ended March 31, 1998.
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 was the surviving corporation
in the merger, and Tucker Federal was the surviving entity in the bank merger
and remains 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.
In accordance with the Company's long term growth strategy, effective
February 15, 1996, the Company issued 1,435,000 shares of common stock and
raised $21,483,000 of equity in a secondary offering. The additional capital has
been employed to fuel the Company's growth.
Effective April 1, 1995, the Company consolidated its mortgage banking
and construction lending divisions into an operating subsidiary, PrimeEagle
Mortgage Corporation. Prior to this time, Eagle Service Corporation and the Bank
separately engaged in the origination of permanent mortgage loans held for sale.
The consolidation improved the Company's ability to receive higher servicing
release premiums as a result of higher loan volume.
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The Company is engaged in three lines of business through its
subsidiaries: community banking, mortgage banking and real estate investment. At
March 31, 1998, the Company had total assets of $1,149,483,000, total deposits
of $778,975,000 and total stockholders' equity of $74,702,000.
Management believes the best way to maximize long-term shareholder
value is to continue to improve financial performance and operating efficiency
and to continue to grow market share in the metropolitan Atlanta area. The
Company's long-term strategy is focused on increasing shareholder value by
creating competitive advantages in targeted business niches which include
community banking, mortgage banking and real estate development. The Company
reviews and updates its Strategic Business Plan quarterly. The Company's plan is
focused on five basic areas: (i) improving financial performance and operating
efficiencies, (ii) continuing to grow market share in metropolitan Atlanta,
(iii) developing new sources of net income, (iv) utilizing technology to enhance
the Company's operating results and capitalize on new business opportunities,
and (v) being the "Bank of Choice" for the small business community.
Based on total assets as of March 31, 1998, the Bank is one of the
largest financial institution headquartered in the metropolitan Atlanta area.
The Bank has a significant strategic opportunity as one of Atlanta's leading
community banks. The Company's asset size and legal lending limit per borrower
permit it to serve middle market customers more effectively than many smaller
Atlanta community banks. The Bank's competitive advantage is its ability to
provide a full range of financial products with personalized service and local
decision making, which typically are not available from financial institutions
headquartered out of state. Additionally, management believes that many local
borrowers are being under served as a result of the recent acquisitions of many
of Atlanta's banks and thrifts by large out-of-state banks and that the Bank
will continue to build franchise value by increasing market share in the
metropolitan Atlanta area.
Over the past year, the Company has incurred increased capital
expenditures, data processing costs, training expenses and consulting fees with
the goal of strategically building the infrastructure necessary to support
future growth. The Bank converted its core and branch processing systems to a
data processing environment comparable to commercial banks. This system
increases capacity and provides enhanced customer information to identify the
Bank's customers with the greatest profit improvement potential. Further,
management has undertaken a number of initiatives to improve core earnings,
including realigning deposit mix to lower the cost of funds and negotiating
maintenance, courier, and communications contracts. Management believes these
initiatives will allow it to continue to improve operating efficiency and
customer service.
The Company creates a strategic advantage by utilizing its experience
and historic commitment to construction lending to generate permanent mortgage
loan originations. Because of the Company's long-term participation in
construction lending, it is able to develop a core business of permanent
mortgage originations as a result of relationships with its existing
homebuilders. The Company has relationships with approximately 165 homebuilders
in the Atlanta metropolitan area and does not have significant concentration
with any homebuilder or in any particular market area. Over the past year, the
Company continued to upgrade the origination and processing systems used in its
mortgage banking business to improve efficiencies of loan originations and
sales. Management is implementing an automated underwriting system for its
conforming mortgage loans to continue to improve customer service by providing
faster loan decisions. In September 1997, the Company acquired a wholesale
banking business to increase loan originations and improve efficiencies of its
mortgage banking operations. Currently, the Company sells the majority of its
mortgage servicing rights originated.
The Company's experience as a metropolitan Atlanta area real estate
lender for over 40 years creates a strategic advantage for its real estate
development activities. Local market knowledge and relationships with builders
and developers give the Company a unique position to create and evaluate real
estate development opportunities. Additionally, the Company's real estate
investments and brokerage activities have contributed increasing incremental
income for the previous four years.
(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 sales of investment securities. The Company's
ability to attract small business and consumer loans, as well as deposits, was
significantly expanded with the 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 identified opportunities to improve operational
efficiencies, which lead to the conversion to 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
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charges on deposit accounts. The principal expenses of the Bank are interest
paid on deposits, employee compensation, office expenses and data processing
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 regional financial institutions.
MORTGAGE BANKING - PrimeEagle originates single family mortgage and
construction loans from retail loan production offices in five southeastern
states. The wholesale group operates from a single production office in Ponte
Vedra, Florida, and purchases loans from correspondents who operate in markets
outside of its retail mortgage offices area, primarily in the northeastern
United 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 sales of loans to third parties and from the sales of mortgage
servicing rights. Proceeds from sales of mortgage servicing rights are the
largest component of total mortgage production fees. Management's analysis of
the timing of mortgage prepayments and fluctuations in the value of servicing
rights impacts 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.
The Company currently provides construction financing in some of the
markets where it has a retail loan production office and obtains benefits by
coordinating the efforts of its construction lending and permanent lending
operations.
For financial information regarding industry segments, see Note 14 of
Notes to Consolidated Financial Statements.
(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. Growth
in the metropolitan Atlanta area and ongoing consolidation of the financial
services industry have resulted in significant increases in loans, deposits, and
customers at the Bank. In February 1996, the Company issued 1,435,000 shares of
common stock and raised $21.5 million of additional capital to support growth in
loans and deposits and permitted investments by the Company. The Company also
has benefited from industry consolidation by hiring experienced banking
executives and acquiring branch offices. On March 26, 1997, the Company acquired
Southern Crescent Financial Corp. with total assets of $150 million and four
full-service branches in the rapidly growing markets of south metropolitan
Atlanta. The acquisition enhanced the Company's commercial lending capabilities
and expanded the Company's market share in Atlanta. The Company further
diversified its mortgage lending by acquiring a wholesale mortgage operation in
September 1997 whose primary market area is the northeastern United States. 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
metropolitan Atlanta area.
The Company's long-term strategic business plan is focused on providing
a broad array of financial services to consumers and small and medium sized
businesses that consider personalized service and local decision making an
important component of a banking relationship. The Company's plan has five basic
principles:
IMPROVING FINANCIAL PERFORMANCE AND OPERATING EFFICIENCIES. The
Company's ability to increase market share in the rapidly growing metropolitan
Atlanta area has produced dynamic growth in total assets. The rapid growth,
however, has impacted operating efficiencies.
Management has undertaken a number of initiatives to improve core
earnings. These initiatives are designed to continue to improve operating
efficiency and customer service while increasing fee income and controlling
expenses and include:
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- Shifting the deposit mix by increasing demand deposit
accounts to lower the cost of funds and increase fee
income. A relationship management program will
increase solicitation of borrowers for these accounts
and will require multiple account relationships with
profitability criteria to earn a higher rate on
certificates of deposit.
- The conversion of core and branch processing systems
from an off-site savings and loan system to an
on-site community bank data processing system allows
managers to more effectively serve business
customers. The conversion occurred in February 1998,
and the Bank changed to a new item processing
environment to provide increased capacity to service
a higher level of demand deposit accounts for
consumers and small businesses. In addition,
efficiencies achieved through continued training will
enable management to develop a branch staffing model,
which optimizes the allocation of personnel in each
branch.
- Developing services to increase fee income by
providing new products from existing customers. These
initiatives include a plan to offer insurance
products to builders, small businesses and mortgage
customers.
- Acquiring a wholesale mortgage banking operation to
increase loan origination volume, increase the
efficiency of mortgage banking operations and add
diversity to the Bank's sources of mortgage loans.
The acquisition included the implementation of new
origination and processing technology integrated with
a secondary marketing system. These technological
improvements are now being implemented in the retail
mortgage operation.
- Implementing initiatives to improve efficiency and
control noninterest expense. Management has initiated
cost control measures to renegotiate communications,
facilities maintenance and courier contracts to take
advantage of its increased purchasing power.
- Continued development and extensive profitability
analysis for each line of business and office. For
the year ending March 31, 1998, a number of offices
did not cover their cost to operate. As a result,
management has identified those offices which are
currently not able to meet profitability goals and
has instituted a plan designed to increase overall
profitability.
CONTINUING TO GROW MARKET SHARE IN METROPOLITAN ATLANTA. The Company is
pursuing three approaches to increase market share. First, to sell more products
to existing customers through a relationship banking program. Management is
utilizing enhanced customer information and is training employees to search for
every opportunity to provide financial solutions to customers and enhance the
products and services offered to existing loan and deposit customers. Second, we
are identifying potential new customers in existing markets through an
aggressive marketing and direct mail program. Third, we will continue to
evaluate opportunities to expand market share through acquisitions.
DEVELOPING NEW SOURCES OF NET INCOME. The Company will continue to
pursue allied businesses permitted by its unitary thrift holding company status.
The Company formed EBCG last year to provide financing to borrowers that have
the potential for significant growth, adequate collateral coverage and
experienced management teams with significant equity ownership. Management will
focus on making loans with equity features and will identify investment
opportunities through the Bank's customer base as well as a referral network
comprised of venture capitalists, investment bankers, attorneys and accountants.
To date, the Company has invested $10.7 million in mezzanine financing loans for
commercial real estate projects.
UTILIZING TECHNOLOGY TO ENHANCE THE COMPANY'S OPERATING RESULTS AND
CAPITALIZE ON NEW BUSINESS OPPORTUNITIES. The Company will use technology to
roll out alternative product delivery methods by expanding our call center,
providing cash management products for small businesses and implementing
automatic underwriting for both wholesale and retail mortgage lending. Our
long-term plan calls for the addition of PC Banking capabilities for consumers.
Management has implemented an integrated mortgage origination computer
system in its wholesale group. The origination system together with an automated
underwriting system will be completely tested and operational in the Bank's
wholesale mortgage banking group and will then be implemented throughout its
retail mortgage group. This system will increase efficiency in the retail and
wholesale groups and significantly improve customer service by providing faster
loan underwriting decisions.
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BEING THE "BANK OF CHOICE" FOR THE SMALL BUSINESS COMMUNITY. Personal
relationships and local decision-making are important considerations to small
and medium sized businesses. The Company's size allows it to offer a full range
of products and services to business customers with a level of personal service
that exceeds service provided by larger financial institutions. The Company has
recruited experienced bankers to expand its Small Business Administration
("SBA") and commercial lending areas to provide a complete array of financing
alternatives including SBA guaranteed loans, loans to finance receivables and
inventory, and plant and headquarters expansion, as well as to identify
mezzanine financing opportunities for rapidly growing businesses.
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 bank branches
and retail 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.
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. Substantially all conventional loans with loan-to-value ratios in excess
of 80 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
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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, 1998 level. Construction and
acquisition and development loans at March 31, 1998, were $162,501,000 or 18.6
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 construction inspection and
appraisal network staffed by employees and third party contractors. 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 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 based on 15 to 25 year amortization periods with five to ten year
maturities. Interest rates on permanent loans are generally tied to the Bank's
base rate or other interest rate indices. As of March 31, 1998, the Company had
outstanding $82,261,000 in loans secured by commercial real estate. This
constituted 9.4 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, 1998 were approximately
$15,681,000 or 1.8 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 fiscal 1997. Leases at March 31, 1998, were $9,463,000 or 1.1 percent
of total loans compared to $19,939,000 at March 31, 1997.
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, 1998, total consumer loans constituted
$33,755,000 or 3.9 percent of the Company's total loan portfolio. The Company
intends to continue prudent expansion of its
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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 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 1998, 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 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, the
Company sells 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.
After a loan has been made, loan officers are responsible for
monitoring individual loans and analyzing continuously the loan portfolio to
identify promptly and report problem loans. Loans are also reviewed by the loan
committee, the ACC and, by the Bank's credit administration and loan review
personnel. 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.
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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, 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.
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 and Corporate Secretary,
Executive Vice President and CFO, and includes other senior officers of the Bank
and the Company. 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.
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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 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 positive one year Gap of 15.35 percent as of March 31, 1998. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Interest Rate and Market Risk."
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, 1998.
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, 1998, 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, 1998, $437,328,000 or 38.05
percent, of the Company's assets were classified as held for sale.
At March 31, 1998, 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 $27,595,000 and representing 2.4 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.
- Union Hill LLC. In October 1994, the Company formed a limited
liability corporation, Union Hill LLC, which purchased 237 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 after the allocation of the
preferred return.
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- 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
was 92 percent and 100 percent occupied during fiscal year 1998 and 1997
respectively. The Company has a 99 percent limited partnership interest and is
recognizing investment tax credits of approximately $173,000 per year over 15
years through 2010.
- 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. In 1997, the Company had a 50 percent ownership interest
and shared 50 percent in the profits of BN Development. During fiscal 1998, the
Company purchased the remaining 50 percent interest in BN Development,
increasing the Company's ownership interest to 100 percent.
-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, LLC. 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.
-Lebanon Road LLC. In July 1997, the Company and an unaffiliated third
party formed Lebanon Road LLC for the purpose of purchasing 63 acres of land and
developing a 130 lot single-family residential community in Gwinnett County,
Georgia. The Company has a 60 percent ownership interest and shares 60 percent
in the profits of Lebanon Road LLC.
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.
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.
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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. 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
and 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) regional 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 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 permitted
mergers of banks on an interstate basis, unless states in which such banks are
located passed 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, 1998, the Company had 541 full-time employees and 66
part-time employees. 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 unitary savings and loan holding company, subject to
the 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 stock savings and loan
association under the Home Owners? Loan Act, as amended (the ?HOLA?) 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 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
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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 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 LEGISLATIVE AND REGULATORY DEVELOPMENTS
On May 13, 1998, the House of Representatives passed the Financial
Services Act of 1997, H.R. 10, originally introduced in early 1997 by
Representative Jim Leach, Chairman of the Banking Committee of the United States
House of Representatives. The Act as approved by the House on May 13, 1998, will
be considered by the United States Senate. Unlike prior versions of H.R. 10, the
Act that was passed does not eliminate the thrift charter and the unitary thrift
holding company. Instead, the Act provides a "grandfather" provision under which
companies which are unitary thrift holding companies as of March 31, 1998 (or
have an application to establish a federal savings association before such date)
may continue to engage in all activities which were permitted prior to the Act.
Activities of the Company in connection with real estate development and related
activities are permissible for a unitary thrift under the current law and as
amended by the Act but would not be permissible for a bank holding company. To
be eligible for the "grandfather" provision, the Act requires that the Bank
comply with any lending restrictions which were imposed on it as a savings and
loan association, and that the Bank continue to meet the qualified thrift
lending test. See "--Qualified Thrift Lender Test." The Act also provides for
the creation of financial holding companies, which under certain circumstances
may engage in a broad variety of financial services activities not permitted for
banking holding companies under the current law. The Act provides for broader
insurance and securities powers for financial institutions, subject to the
implementation of regulations. The Act also instructs the Secretary of the
Treasury to formulate plans for consolidating the OTS with the Office of the
Comptroller of the Currency within two years after enactment.
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 and the adoption of a single standard federal
charter. 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 adjustable, semi-annual premiums of approximately 6.2
basis points for SAIF members and 1.2 basis points for BIF 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.
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 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
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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.
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 interstate mergers prior to 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.
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, 1998 of $10,892,000.
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 certain percentage of the sum of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less. The
liquidity requirement may vary from time to time (between 4 percent and 10
percent) depending upon economic conditions and savings plans of all member
savings institutions. Effective November 24, 1997, the OTS amended its liquidity
regulations to, among other things, provide that a savings institution shall
maintain liquid assets of not less than 4 percent of the liquidity base at the
end of the preceding calendar quarter. Prior to November 1997, the required
liquid asset ratio was 5 percent. The amendment also eliminated the requirement
that institutions hold assets equal to 1 percent of the liquidity base in cash
or short-term liquid assets. At March 31, 1998, the Bank was in compliance with
the liquidity ratio regulatory requirements.
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
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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. During fiscal
1998, the Bank paid $351,000 to the FDIC for such assessments. See "Recent
Legislation."
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. During
fiscal 1998, the Bank paid $176,000 to the OTS for such assessments.
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 "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's
Qualified Thrift Investments as of March 31, 1998 were $870,000,000 or 81.3
percent of its Portfolio Assets at that date. The Bank expects to remain in
compliance with the QTL test.
16
<PAGE> 17
CAPITAL REQUIREMENTS
General. Since 1989, OTS capital regulations have established capital
standards applicable to all savings institutions, including a core capital
requirement (or leverage ratio), 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, 1998, the Bank was "
adequately capitalized." Failure to maintain an adequately capitalize status
would 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 core capital less any intangible assets
(except for purchased mortgage servicing rights included in core capital).
Most national banks are 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 are
required to maintain core capital levels at least as high as national banks. At
March 31, 1998, the Bank's core capital and tangible capital were both
$51,173,000 or 4.59 percent of adjusted total assets.
Risk Based Capital. The OTS capital regulations require savings
institutions to maintain a ratio of total capital to total risk-weighted assets
of 8.0 percent. Total capital, for purposes of the risk-based capital
requirement, equals the sum of core capital plus supplementary capital, which
includes cumulative preferred stock, mandatory convertible securities,
subordinated debt, and allowance for loan and lease losses of up to 1.25 percent
of total risk-weighted assets. In determining total risk-weighted assets for
purposes of the risk-based capital requirements, (i) each off-balance sheet item
must be converted to an on-balance sheet credit equivalent amount by multiplying
the amount of each such item by a credit conversion factor ranging from 0
percent to 100 percent (depending upon the nature of the item), (ii) the credit
equivalent amount of each off-balance sheet item and each on-balance sheet asset
must be multiplied by a risk factor ranging from 0 percent to 100 percent (again
depending on the nature of the item), and (iii) the resulting amounts are added
together and constitute total risk-weighted assets. As of March 31, 1998, the
Bank's ratio of total risk-based capital to total risk-weighted assets was 8.31
percent.
The following table reflects the Bank's minimum regulatory capital
requirements, actual capital and the level of excess capital by category.
REGULATORY CAPITAL
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
At March 31, 1998 Actual Requirement Excess
($ in 000's) Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Rick-based ratios:
Tier 1 capital $51,173 7.47 $27,392 4.0 $23,781 3.47
Total capital 56,885 8.31 54,785 8.0 2,100 0.31
Tier 1 leverage 51,173 4.59 33,446 3.0 17,727 1.59
Tangible equity 51,173 5.91 12,988 1.5 38,185 4.41
- -----------------------------------------------------------------------------------------------------------
</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 equity 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.
17
<PAGE> 18
CAPITAL DISTRIBUTIONS
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire shares, payments to shareholders or another institution in a
cash-out merger, and other distributions charged against capital. An association
is categorized as either a "well", "adequate", or "under" capitalized
association. A "well capitalized" association is defined as an association that
has, on a pro forma basis after the proposed distribution, capital equal to or
greater than 10.00 percent. An "adequately capitalized" 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 of 8.00
percent. An "under capitalized" 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 considered an adequately capitalized association.
The association upon prior approval from the OTS, 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" (the excess capital over its fully phased-in capital
requirements) 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 regulatory approval. 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. 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 Board regulations require depository institutions
to maintain non-interest bearing reserves against their deposit transaction
accounts (primarily NOW and regular checking 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 $4.7 million to $47.8 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. Because required reserves must be maintained in the form of
either vault cash, a non-interest bearing account at a Federal Reserve Bank or a
pass-through account as defined by the Federal Reserve Board, the effect of this
reserve requirement is to reduce the Bank's interest-earning assets.
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 a Federal
Reserve Bank.
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 a variety of federal laws
and regulations designed to protect borrowers and to promote lending to various
sectors of the economy. Included among these laws and regulations are the Equal
Credit Opportunity Act and Regulation B, the Federal Home Mortgage Disclosure
Act, 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.
18
<PAGE> 19
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.
FEDERAL SECURITIES LAWS
The Company is subject to the periodic reporting obligations, proxy
solicitation rules, insider trading restrictions and other requirements of the
Securities Exchange Act of 1934, as amended.
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 15 branch offices are located in the Alpharetta,
Doraville, Dunwoody, Jonesboro, Lawrenceville, Lilburn, Morrow, Northlake,
Palmetto, Snellville, Stone Mountain, Towne Lake, Tucker, Union City and Wesley
Chapel areas of metropolitan Atlanta, Georgia. Three of the Bank's 15 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 fiscal 1997 and is
currently under contract for sale.
PrimeEagle operates 20 loan production offices located in Columbia and
Sumter, South Carolina; Jacksonville, Ponte Vedra 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. The Sumpter, South Carolina,
St. Augustine, Florida, Augusta, Cumming, and Savannah, Georgia, and Monroe,
North Carolina, offices are on month-to-month basis. 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. The Ponte Vedra, Florida and 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. The Athens, Georgia, and Chattanooga, Tennessee leases
expire in 2002. Management believes that it will be able to renew such leases on
satisfactory terms.
ITEM 3. LEGAL PROCEEDINGS
Pending Litigation. In November 1992, the Bank acquired certain assets
from the Resolution Trust Corporation, which included four mortgage loan
origination facilities. The Bank then entered into an Operating Agreement (the
"Agreement") with two individuals and a corporation controlled by them
(collectively, the "Plaintiffs"), to form the Prime Lending Division ("Prime").
Under the Agreement, the individual Plaintiffs became employees of the Bank and
plaintiffs compensation was to include a percentage of the net profits to be
calculated after allocating expenses and overhead to Prime. In mid-1997, a
disagreement arose with respect to the allocation of expenses to Prime, which
led to the filing by Plaintiffs of a lawsuit on December 5, 1997 alleging the
Bank had improperly calculated the profits due them under the Agreement since
April 1997. In January 1998, the Bank terminated the Agreement with the
Plaintiffs "for cause". The Bank also maintains that its calculation of the
profits and losses was proper.
The complaint as amended seeks, among other things (i) a declaration
that the Agreement was terminated "without cause" and that, pursuant to the
Agreement, the Plaintiffs have the right to purchase the assets of Prime at 75%
of fair market value; (ii) alleged unpaid profits from Prime's operations (in an
amount estimated by the Plaintiffs to equal approximately $450,000); (iii) a
determination that the term "assets," as used in connection with the Plaintiffs'
alleged purchase option in the Agreement, includes all loans carried as assets
on the books of the Bank that were originated by Prime (the "Prime Loans") and
that plaintiffs would not be required to assume or net against the Prime Loans
any corresponding liability incurred by the Bank in
19
<PAGE> 20
connection with the Prime Loans; (iv) consequential damages in excess of $20
million, which represents the Plaintiffs' assessment of the loss they suffered
by the Bank's refusal to sell to the Plaintiffs Prime's assets under Plaintiffs'
definition of "assets" (i.e., including such loans); and (v) unspecified
punitive damages and attorneys fees. The Bank strongly denies all of Plaintiffs'
allegations, including the Plaintiffs' allegation that they have the right to
purchase the assets of Prime. Further, the Bank specifically disputes
Plaintiffs' contention that all loans originated by Prime constitute "assets" of
Prime.
The Bank believes that the Plaintiffs are not entitled to purchase the
Prime Loans and that the only assets that the Plaintiffs may be permitted to
purchase are the tangible and intangible assets of Prime. At March 31, 1998,
Prime's tangible assets had a collective book value estimated to be
approximately $1.2 million, which could be purchased at 75% of fair market value
under the Agreement. Although the Bank does not believe that Plaintiffs have the
contractual right to purchase the Prime Loans, the Bank contends that if the
court determines that the Plaintiffs do have a right to purchase the Prime
Loans, the Plaintiffs must assume the liabilities associated with such loans
(including funding expenses). The Agreement specifically provides that, if
Plaintiffs purchase the assets of Prime, they must "assume all obligations
associated with [Prime Lending] Division."
If Plaintiffs are successful in obtaining a declaration that they are
entitled to purchase the assets of Prime (or if the Bank agrees to compromise
this case with the Plaintiffs), the Bank may cease originating permanent
mortgages and construction loans from the 11 Prime offices situated outside the
metropolitan Atlanta area. The Agreement provides that, if Plaintiffs purchase
the assets of Prime, the Bank shall refrain for two years from originating
conforming residential loans secured by property located within 25 miles of any
Prime office. The Company does not believe that such cessation of operations
would have a material adverse effect upon its or the Bank's business or
operations. Based on the Bank's calculations for the 12 months ending March 31,
1998. However, as a result of expenses attributable thereto, the Bank sold
approximately $500 million permanent single family mortgage loans originated by
Prime. Prime's permanent mortgage origination business incurred a pre-tax loss
of $200,000. The Bank estimates that during the same period construction loans
originated by Prime have generated pretax income of approximately $1.5 million.
Pending the outcome of the litigation, the Bank will continue to operate Prime's
mortgage loan origination business. In addition, the Bank believes it can
replace loans originated by Prime through its other existing operations,
including the Wholesale Mortgage Division of the Bank.
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, 1998.
20
<PAGE> 21
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>
1996
First Quarter 14.375 11.750 .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
- -------------------------------------------------------------------------------------
1998
First Quarter 18.000 15.000 .150
Second Quarter 21.250 16.125 .150
Third Quarter 23.250 17.250 .150
Fourth Quarter 26.000 19.500 .150
- -------------------------------------------------------------------------------------
</TABLE>
On March 31, 1998, the last sale price of the Common Stock, as reported
on the NASDAQ National Market, was $25.375. On June 25, 1998, there were
5,787,264 shares of Common Stock outstanding and approximately 1,345 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 1996, the Company paid four quarterly dividends totaling $.51 per
share. During fiscal 1997, the Company paid four quarterly dividends totaling
$.60 per share. During fiscal 1998, the Company paid four quarterly dividends
totaling $.60 per share. At March 31, 1998, 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.
21
<PAGE> 22
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
MARCH 31,
==================================================================================
1998 1997 1996 1995 1994
==================================================================================
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
SELECTED RESULTS OF OPERATIONS:
Interest income $ 71,900 $ 63,785 $ 52,625 $ 39,618 $ 32,026
Interest expense 40,007 33,629 28,821 18,502 14,276
Net interest income 31,893 30,156 23,804 21,116 17,750
Provision for loan losses 2,601 2,652 1,000 643 1,034
Noninterest income 16,349 12,911 10,853 7,282 9,984
Noninterest expenses 35,391 34,901 24,468 20,164 17,746
Income before income taxes 10,250 5,514 9,189 7,591 8,954
Net income 7,210 3,746 6,219 4,881 5,462
==================================================================================
PER COMMON SHARE:
Earnings per common share-basic $ 1.27 $ 0.68 $ 1.46 $ 1.21 $ 1.40
Earnings per common share-diluted 1.23 0.66 1.40 1.18 1.36
Dividends declared 0.60 0.56 0.42 0.36 0.24
Book value per share 13.03 11.99 12.03 10.25 9.54
Average common shares outstanding-basic 5,691 5,528 4,251 4,032 3,889
Average common shares outstanding-diluted 5,839 5,705 4,430 4,126 4,004
==================================================================================
SELECTED BALANCE SHEET DATA:
Total assets $1,149,483 $ 823,882 $ 736,384 $ 568,678 $ 419,136
Securities available for sale 104,736 96,921 105,988 33,160 36,730
Investment securities held to maturity 58,138 51,907 55,341 76,578 68,816
Loans held for sale 332,592 62,882 92,552 41,220 23,641
Loans receivable, net 535,732 515,749 410,843 364,491 271,356
Reserve for loan losses 6,505 5,198 5,464 4,704 4,791
Investment in real estate 27,595 25,828 12,962 6,620 --
Deposits 778,975 557,724 458,458 386,353 334,361
FHLB advances and other borrowings 240,855 153,805 174,337 120,688 31,394
Stockholders' equity 74,702 67,874 66,448 41,637 38,137
==================================================================================
PERFORMANCE RATIOS:
Return on average assets 0.83% 0.49% 0.99% 1.01% 1.32%
Return on average equity 10.00% 5.55% 13.32% 12.33% 16.31%
Net interest margin - taxable equivalent 4.11% 4.37% 4.20% 4.81% 4.59%
Equity to assets 6.50% 8.24% 9.02% 7.32% 9.10%
Efficiency ratio 73.36% 81.04% 70.60% 71.01% 63.99%
==================================================================================
ASSET QUALITY :
Total non-accrual loans $ 7,948 $ 7,866 $ 6,317 $ 994 $ 1,890
Potential problem loans 4,009 2,503 4,329 2,963 2,652
Total non-accrual and problem loans 11,957 10,369 10,646 3,957 4,542
Real estate owned, net 2,947 2,074 1,344 1,139 1,273
Total problem assets 14,904 12,443 11,990 5,096 5,815
Total problem assets/Total assets 1.30% 1.51% 1.63% 0.90% 1.39%
Total problem assets/Loans receivable, net
(plus reserves) 2.75% 2.39% 2.88% 1.38% 2.11%
Reserve for loan losses/Total problem assets 43.65% 41.77% 45.57% 92.31% 82.39%
Ratio of net charge-offs to average loans 0.21% 0.55% 0.05% 0.22% 0.06%
==================================================================================
CAPITAL RATIOS (TUCKER FEDERAL BANK):
Leverage capital 4.59% 6.72% 10.14% 6.56% 8.89%
Tier 1 capital 7.47% 10.14% 11.76% 8.37% 10.34%
Total capital 8.31% 11.08% 12.65% 9.44% 11.53%
==================================================================================
MARKET PRICE OF COMMON STOCK:
High $ 26 $ 17 1/2 $ 19 $ 13 1/4 $ 12 3/8
Low 15 13 1/2 11 3/4 9 3/4 7 7/8
</TABLE>
22
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION AND
FINANCIAL CONDITION
Overview
Net income was $7,210,000 or $1.23 per share for the year ended March
31, 1998; a 92 percent increase compared to $3,746,000 or $.66 per share for the
year ended March 31, 1997. Net income for the prior year was affected by two
significant charges to earnings: the Savings Association Insurance Fund (SAIF)
Assessment and merger and restructuring charges in connection with the Company's
acquisition of Southern Crescent Financial Corp. Net income for the year ended
March 31, 1997 without consideration of these charges would have been $6,926,000
or $1.21 per share.
EARNINGS HIGHLIGHTS
Total assets grew 39.5 percent or $325,601,000 to $1,149,483,000
compared to $823,882,000 in the prior year. The growth in assets is principally
attributable to loan growth. Return on average assets improved to .83 percent
compared to .49 percent in the prior year. The improvement in ROA is a result of
increases in net interest and fee income.
Net interest income increased 5.8 percent or $1,737,000, to $31,893,000
million for the year compared to $30,156,000 last year. The increase is due to a
12.6 percent increase in average earning assets combined with a 30 basis point
decline in the net interest spread.
Noninterest income increased 26.6 percent or $3,438,000, to $16,349,000
compared to $12,911,000 in the prior year. The increase was primarily
attributable to a 56.9 percent increase in gain on the sale of investments in
real estate, coupled with a 20.2 percent increase in mortgage production fees.
Noninterest expense increased 1.4 percent or $490,000, to $35,391,000
compared to $34,901,000 for the prior year. The Company's efficiency ratio for
the current year was 73.4 percent. Removing the effect of the SAIF assessment
and restructuring charges from the prior year, noninterest expense would have
been $31,270,000 compared to $35,391,000 for the current year.
The loan loss provision was $2,601,000 for the year compared to
$2,652,000 for the prior year. At March 31, 1998, the reserve for loan losses
equaled $6,505,000 and total problem assets were 1.3 percent of total assets
compared to 1.5 percent in the prior year.
Stockholders' equity increased to $74,702,000 or $13.03 per share
compared to $11.99 per share in the prior year. Return on average equity
increased to 10.0 percent compared to 5.6 percent in the prior year. This
increase is caused by improved net income and higher leverage.
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED MARCH 31, 1998 AND MARCH 31,
1997
Net income
Eagle Bancshares financial results for fiscal 1998 increased due to an
increase in net interest income resulting from growth in average earning assets
and an increase in noninterest income. The Company's net income increased by
$3,464,000 or 92.5 percent to $7,210,000 in fiscal 1998 from $3,746,000 in
fiscal 1997. Net income per average common share assuming dilution increased to
$1.23 compared to $.66 in fiscal 1997. The Company's financial results for
fiscal 1997 declined due to two significant factors including the one-time SAIF
assessment and restructuring and merger expenses related to the acquisition of
SCFC. Eagle's core earnings increased 4.1 percent to $7,210,000 compared to
$6,926,000 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).
23
<PAGE> 24
Net interest income
Net interest income increased by $1,737,000 or 5.8 percent to
$31,893,000 in fiscal 1998 from $30,156,000 in fiscal 1997. 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)
decreased during the year to 387 basis points from 417 basis points in the prior
year. The primary reason for the decrease was due to the increase in the cost of
interest bearing liabilities. The yield on interest earning assets remained
constant at 9.16 percent while the cost of interest bearing liabilities
increased 30 basis points to 5.29 percent from 4.99 percent.
Interest income received on loans increased $9,121,000 or 17.7 percent
to $60,624,000 in fiscal 1998 from $51,503,000 in fiscal 1997. The increase was
primarily attributable to growth in loans through originations of residential
mortgage loans in the Company's loans held for sale portfolio. The yield on the
loan portfolio remained consistent at 9.63 percent for the year compared to 9.69
percent in the prior year. Interest received on mortgage-backed securities
decreased $478,000 or 8.7 percent to $5,032,000 in fiscal 1998 from $5,510,000
in fiscal 1997. This decrease is primarily due to a decrease in the
mortgage-backed securities portfolio during the year. Interest received on
securities and other interest earning assets decreased $528,000 or 7.8 percent
to $6,244,000 in fiscal 1998 from $6,772,000 in fiscal 1997.
Interest expense increased $6,378,000 or 19.0 percent to $40,007,000 in
fiscal 1998 from $33,629,000 in fiscal 1997. This is primarily the result of
growth in deposits combined with an increase in the cost of advances and other
borrowings. Interest expense on deposits increased $4,589,000 or 18.2 percent to
$29,766,000 in fiscal 1998 from $25,177,000 in fiscal 1997. The increase in
interest expense on deposits is the result of growth in deposit accounts coupled
with an increase in their cost. The cost of deposits increased 33 basis points
to 5.17 percent during the year from 4.84 percent in the prior year. Interest
expense on FHLB advances and other borrowings also increased $1,789,000 or 21.2
percent to $10,241,000 in fiscal 1998 from $8,452,000 in fiscal 1997. During the
year, the Bank's cost of FHLB advances and other borrowings increased 14 basis
points to 5.65 percent from 5.51 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 decreased its provision for loan losses $51,000 or 1.9
percent to $2,601,000 in fiscal 1998 from $2,652,000 in fiscal 1997. This
decrease is attributable to a decrease in the Company's charge-offs and a
decline in the ratio of problem assets to total assets during the year. Total
non-performing and potential problem assets increased to $14,904,000 at March
31, 1998 compared to $12,443,000 at March 31, 1997. Total problem assets, which
include all non-performing and classified assets, decreased to 1.30 percent of
total assets at March 31, 1998, from 1.51 percent of total assets at March 31,
1997. Management continually evaluates the inherent risks in the Company's
existing loan portfolio and the level of existing loan loss reserves.
Noninterest income
Noninterest income increased by $3,438,000 or 26.6 percent to
$16,349,000 for fiscal 1998 from $12,911,000 for fiscal 1997. Mortgage
production fees are the largest component of noninterest income and such fees
increased $1,472,000 or 20.2 percent to $8,752,000 compared to $7,280,000 in
fiscal 1997. The volume of loans sold in the secondary market increased to
$729,764,000 during 1998 compared to $583,762,000 in fiscal 1997. 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:
24
<PAGE> 25
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Mortgage production fees $ 8,752 $ 7,280 $ 6,777
Dollar volume sold $729,764 $583,762 $449,354
Margin earned 1.20% 1.25% 1.51%
</TABLE>
The Company evaluates the cost of servicing and premiums offered when
deciding whether to retain or sell servicing rights. In fiscal 1998, 1997, and
1996, 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 generated from Eagle Real Estate Advisors increased
$888,000 or 49.8 percent. This increase was due to increased gains recorded on
the sale of investments in real estate amounting to $2,160,000 and real estate
commissions of $510,000. During fiscal 1998, 184 residential lots were sold in
the Company's real estate projects compared to 128 in the prior period. Service
charges, at the community bank, decreased $55,000 or 2.78 percent to $1,924,000
in fiscal 1998 compared to $1,979,000 in fiscal year 1997.
Noninterest expense
Noninterest expense increased $490,000 or 1.4 percent to $35,391,000 in
fiscal 1998 from $34,901,000 in fiscal 1997. The Company's efficiency ratio was
73.4 percent for fiscal 1998, compared to 72.6 percent, excluding the SAIF
assessment and the merger related expenses, for fiscal 1997. In general, the
increase in all categories of noninterest expense is attributable to the higher
operating costs incurred by the Company's rapid growth and the conversion of the
Company's computer system which was completed in February 1998.
Salaries and employee benefits increased $1,537,000 or 8.7 percent to
$19,157,000 in fiscal 1998 compared to $17,620,000 in fiscal 1997. This increase
is due to the addition of employees in branches and loan production offices to
support the Company's growth. Occupancy expense increased $873,000 or 23.1
percent to $4,647,000 in fiscal 1998 compared to $3,774,000 in fiscal 1997.
Marketing expense decreased $189,000 or 16.9 percent to $932,000 in fiscal 1998
compared to $1,121,000 in fiscal 1997. 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 $351,000 or 50.0 percent to
$351,000 in fiscal 1998 from $702,000 in fiscal 1997, even though the Company's
deposit base increased, due to the decline in the SAIF insurance premium.
Miscellaneous expenses increased $1,083,000 or 16.7 percent to
$7,579,000 in fiscal 1998 compared to $6,496,000 in fiscal 1997. 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 1998 was 29.7 percent
compared to 32.1 percent in the prior year.
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED MARCH 31, 1997 AND MARCH 31,
1996
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. 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.
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
25
<PAGE> 26
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 charge in fiscal 1997, in the amount of $1,946,000.
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.
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.
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.
Provision for loan losses
The Company increased its provision for loan losses $1,652,000 or 165.2
percent to $2,652,0000 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.
Management continually evaluates the inherent risks in the Company's existing
loan portfolio and the level of existing loan loss reserves.
Noninterest income
Noninterest 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 noninterest 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.
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. 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.
26
<PAGE> 27
Noninterest expense
Noninterest 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. In general, the increase in all categories of noninterest expense is
attributable to the higher operating costs incurred by the Company's rapid
growth.
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 better position the Bank in the metropolitan Atlanta
market.
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.
INTEREST RATE AND MARKET RISK
The normal course of business activity exposes the Company to interest
rate risk. Interest rate risk is managed within an overall asset/liability
framework for the Company. The principal objectives of asset/liability
management are to manage the sensitivity of net interest spreads to potential
changes in interest rates and to enhance profitability in ways that promise
sufficient reward for recognized and controlled risk. Funding positions are kept
within predetermined limits designed to ensure that risk-taking is not excessive
and that liquidity is properly managed. The Company employs a sensitivity
analysis in the form of a net interest income simulation to help characterize
the market risk arising from changes in interest rates. Fluctuations in interest
rates may result in changes in the fair market value of the Company's financial
instruments, cash flows and net interest income. The asset/liability management
process manages the Company's interest rate risk position. The objective of this
process is the optimization of the Company's financial position, liquidity and
net interest income, while maintaining a relatively neutral interest rate
sensitive position.
The Company uses a simulation modeling process to measure interest rate
risk and evaluate potential strategies. The Company's net interest income
simulation includes all financial assets and liabilities. This simulation
measures both the term risk and basis risk in the Company's asset/liabilities.
The simulation also captures the option characteristics of products, such as
caps and floors on floating rate loans, the right to pre-pay mortgage loans
without penalty and the ability of customers to withdraw deposits on demand.
These options are modeled through the use of primarily historical customer
behavior and statistical analysis. These simulations incorporate assumptions
regarding balance sheet growth and mix, pricing, and the repricing and maturity
characteristics of the existing and projected balance sheet. Other interest
rate-related risks such as prepayment, basis and option risk are also
considered. Simulation results quantify interest rate risk under various
interest rate scenarios. Management then develops and implements appropriate
strategies. The Board of Directors regularly reviews the overall interest rate
risk position and asset/liability management strategies.
The Company uses four standard scenarios - rates unchanged, expected
rates, high rates, and low rates - in analyzing interest rate sensitivity. The
expected scenario is based on the Company's projected future interest rates,
while the high and low rate scenarios cover a 100 basis points upward and
downward rate movement. The Company closely monitors each scenario to manage
interest rate risk. As of March 31, 1998, the expected rate simulation indicated
a decline in annual net interest income of $314,000 or .86 percent relative to
the unchanged rate simulation and a $49,000 or .07 percent decline in market
value.
Management estimates the Company's annual net interest income would
increase approximately $3,400,000 or 9.40 percent, and decrease approximately
$3,800,000 or 10.59 percent should interest rates instantaneously rise or fall
100 basis points, versus the projection under unchanged rates. A fair market
value analysis of the Company's balance sheet calculated under an instantaneous
100 basis point increase in rates over March 31, 1998, estimates a
27
<PAGE> 28
$521,000 or .89 percent increase in market value. The Company estimates a like
decrease in rates would decrease market value $3,300,000. These changes in
market value represent less than 5.00 percent of the total carrying value of
total assets at year-end. These simulated computations should not be relied upon
as indicative of actual future results. Further, the computations do not
contemplate certain actions that management may undertake in response to future
changes in interest rates.
Looking toward managing interest rate risk in fiscal 1999, the Company
will continue to face term risk and basis risk and may be confronted with
several risk scenarios. If interest rates rise, net interest income may actually
increase, if deposit rates lag increases in market rates. The Company could,
however, experience significant pressure on net interest income if there is a
substantial increase in deposit rates relative to market rates. This basis risk
potentially could be hedged with interest rate caps, but the Company believes
they are not cost-effective in relation to the cost they would mitigate. A
declining interest rate environment might result in a decrease in loan rates,
while deposit rates remain relatively stable. This rate scenario could also
create signficant risk to net interest income.
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 decreased 26 basis to 4.11 percent during fiscal
1998 from 4.37 percent during fiscal 1997. 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 decrease in the net interest margin
in fiscal 1998 was primarily attributable to the increase in the cost of
interest bearing liabilities while the yield earned on interest earning assets
remained 9.16 percent. The yield earned on average loans remained consistent at
9.63 percent for fiscal 1998 compared to 9.69 percent in fiscal 1997. This is
attributable to the Company's ability to originate higher yielding loans for the
Company's portfolio. In addition, the yield earned on mortgage-backed securities
remained consistent at 7.31 percent in fiscal 1998 compared to 7.35 percent in
fiscal 1997. The cost of deposits increased primarily because of the 129 basis
point increase in the cost of checking accounts and the 105 basis point increase
in money market accounts from 1.36 percent and 2.54 percent, respectively, in
fiscal 1997 to 2.62 percent and 3.36 percent, respectively, in fiscal 1998. 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 increased 14
basis points to 5.65 percent in fiscal 1998 from 5.51 percent in fiscal 1997.
28
<PAGE> 29
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, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEET
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended March 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
(dollars in thousands) Balance Interest Cost Balance Interest Cost Balance Interest Cost
- ------------------------------------------------------------------------------------------------------------------------------------
Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans(1) $629,589 $ 60,624 9.63% $531,619 $ 51,503 9.69% $453,636 $ 43,729 9.64%
Mortgage-backed securities 68,794 5,032 7.31% 74,969 5,510 7.35% 38,115 2,527 6.63%
FHLB stock 9,053 674 7.44% 7,866 553 7.03% 6,947 505 7.27%
Taxable investments(2) 32,997 2,250 6.82% 47,239 3,480 7.37% 53,912 4,225 7.84%
Tax-exempt investment securities(2) 44,835 3,636 8.11% 39,631 3,227 8.14% 21,392 1,920 8.98%
Interest earning deposits and federal
funds sold 6,152 312 5.07% 1,322 76 5.75% 1,502 91 6.06%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 791,420 72,528 9.16% 702,646 64,349 9.16% 575,504 52,997 9.21%
Non-interest earning assets 74,818 64,123 52,595
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets 866,238 $766,769 $628,099
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Equity:
- ------------------------------------------------------------------------------------------------------------------------------------
Savings 42,441 1,053 2.48% $ 46,157 $ 1,128 2.44% $ 46,583 $ 1,162 2.49%
Checking 65,746 1,721 2.62% 72,858 993 1.36% 63,576 1,074 1.69%
Money Market 30,717 1,033 3.36% 19,541 496 2.54% 19,973 558 2.79%
Certificates of Deposit 436,727 25,959 5.94% 382,117 22,560 5.90% 292,021 18,032 6.17%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Deposits 575,631 29,766 5.17% 520,673 25,177 4.84% 422,153 20,826 4.93%
Advances and other borrowings 181,260 10,241 5.65% 153,483 8,452 5.51% 132,366 7,995 6.04%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 756,891 40,007 5.29% 674,156 33,629 4.99% 554,519 28,821 5.20%
Non-interest bearing liabilities 37,270 25,112 26,887
Stockholders' equity 72,077 67,501 46,693
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity 866,238 $766,769 $628,099
====================================================================================================================================
Net Interest/rate spread $ 32,521 3.87% $ 30,720 4.17% $ 24,176 4.01%
Taxable-equivalent adjustment (628) (564) (372)
====================================================================================================================================
Net interest income, actual $ 31,893 $ 30,156 $ 23,804
Net interest earning assets/net
interest margin $ 34,529 4.11% $ 28,490 4.37% $ 20,985 4.20%
====================================================================================================================================
Interest earning assets as a
percentage of interest bearing
liabilities 104.56% 104.23% 103.78%
====================================================================================================================================
</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.
29
<PAGE> 30
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.
RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1998 Compared to 1997 1997 Compared to 1996
INCREASE (DECREASE) DUE TO Rate Volume Total Rate Volume Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income on interest earning assets:
Loans $ (321) $ 9,442 $ 9,121 $ 228 $ 7,546 $ 7,774
Mortgage-backed securities (30) (448) (478) 301 2,682 2,983
FHLB Stock 34 87 121 (17) 65 48
Taxable investment securities (244) (986) (1,230) (243) (502) (745)
Tax-exempt investment securities(1) (12) 421 409 (195) 1,502 1,307
Interests earnings deposits and federal funds sold (10) 246 236 (4) (11) (15)
- ----------------------------------------------------------------------------------------------------------------------------------
Total (583) 8,762 8,179 70 11,282 11,352
- ----------------------------------------------------------------------------------------------------------------------------------
Interest expense on interest bearing liabilities:
Deposits 1,788 2,802 4,590 (870) 5,221 4,351
FHLB advances and other borrrowings 220 1,568 1,788 (741) 1,198 457
- ----------------------------------------------------------------------------------------------------------------------------------
Total 2,008 4,370 6,378 (1,611) 6,419 4,808
- ----------------------------------------------------------------------------------------------------------------------------------
Net change in net interest income $(2,591) $ 4,392 $ 1,801 $ 1,681 $ 4,863 $ 6,544
- ----------------------------------------------------------------------------------------------------------------------------------
</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.
30
<PAGE> 31
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 and three officers of the Bank. The ALCO
meets two times a week to establish interest rates on loans and deposits and
review interest rate sensitivity and liquidity positions.
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 positive one year Gap of 15.35 percent as of March 31, 1998.
The following table presents the Company's interest sensitivity gap
between interest earning assets and interest bearing liabilities at March 31,
1998. The gap analysis is prepared using either actual repricing intervals or
maturity dates when stated. Equity securities having no stated maturity are
reported after five years. Demand deposits are decayed over time using a factor
of 33 percent. 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.
31
<PAGE> 32
GAP ANALYSIS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
March 31, 1998 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 $ 275,358 $ 117,377 $ 74,323 $ 30,138 $ 45,677 $ 542,873
Investment securities(1) 35,401 16,195 28,810 37,413 43,703 161,522
Loans held for sale 332,592 -- -- -- -- 332,592
FHLB Stock -- -- -- -- 10,892 10,892
Interest bearing deposits and federal
funds sold 11,358 -- -- -- -- 11,358
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets $ 654,709 $ 133,572 $ 103,133 $ 67,551 $ 100,272 $1,059,237
Interest bearing liabilities re-pricing:
- -----------------------------------------------------------------------------------------------------------------------------------
Deposits $ 67,764 $ 401,209 $ 154,644 $ 67,805 $ 26,483 $ 717,905
Borrowings 110,377 32,489 47,437 50,368 184 240,855
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities $ 178,141 $ 433,698 $ 202,081 $ 118,173 $ 26,667 $ 958,760
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity Gap 476,568 (300,126) (98,948) (50,622) 73,605 100,477
Cumulative interest rate sensitivity Gap 476,568 176,442 77,494 26,872 100,477
===================================================================================================================================
Cumulative interest rate sensitivity Gap
as a percentage of total assets 41.46% 15.35% 6.74% 2.34% 8.74%
===================================================================================================================================
</TABLE>
Excludes the effect of SFAS No. 115, "Accounting for Certain Investment Debt
and Equity Securities", consisting of net unrealized gains in the amount of
$1,352,000.
32
<PAGE> 33
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The following table sets forth certain information at March 31, 1998, 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, 1998
- -----------------------------------------------------------------------------------------------------------
One Year to After
One Year Five Five
or Less Years Years Total
- -----------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Real estate mortgage loans:
Fixed rates $ 6,898 $35,501 $124,237 $166,636
Adjustable rates 11,520 16,662 126,655 154,837
Real estate construction, net - adjustable
rates 142,868 5,883 252 149,003
Real estate construction, net - fixed rates 10,015 3,120 363 13,498
Commercial loans:
Commercial - fixed rates 2,944 4,129 115 7,188
Commercial - adjustable rate 4,855 2,747 891 8,493
Leases - fixed rate 2,847 6,616 -- 9,463
Consumer and others - fixed rates 4,810 16,555 12,390 33,755
- -----------------------------------------------------------------------------------------------------------
Total 186,757 91,213 264,903 542,873
Less: Deferred loan origination fees and other
unearned income (636)
Reserve for loan losses (6,505)
- -----------------------------------------------------------------------------------------------------------
Total $535,732
- -----------------------------------------------------------------------------------------------------------
</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 prepay 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, 1998, 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 $159,738 $143,317
Real estate-construction, net 3,483 6,135
Commercial 4,244 3,638
Leases 6,616 --
Consumer and other 28,945 --
- ------------------------------------------------------------------------------
Total $203,026 $153,090
</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 prepay obligations with or without call
or prepayment penalties.
33
<PAGE> 34
Loan Portfolio and Concentration
Since 1993, the Company's loan portfolio has grown 194 percent. Loans
receivable, net, including loans held for sale, increased $289,693,000 or 50.1
percent to $868,324,000 at March 31, 1998 compared to $578,631,000 at March 31,
1997. The primary reason is due to the increase in residential first mortgages
held for sale.
The community banking group originates primarily non-residential real
estate mortgages, commercial, consumer and home equity and second mortgage loans
in the metro Atlanta area. Additionally, EBCG has invested $10,746,000 as of
March 31, 1998, in twelve mezzanine financing loans made to affiliated LLCs
operating exteded stay hotels. Each of these loans represents a second mortgage
on a commercial real estate property. These loan categories increased
$29,607,000 or 20.0 percent to $177,915,000 at March 31, 1998 from $148,308,000
at March 31, 1997. At March 31, 1998, these loans represented 18.7 percent of
the loan portfolio versus 22.3 percent at March 31, 1997. The mortgage-banking
group originates primarily construction loans, acquisition and development loans
and loans held for sale. These loan categories increased $272,518,000 or 122.4
percent to $495,093,000 at March 31, 1998 compared to $222,575,000 at March 31,
1997. Loans held for sale increased $269,710,000 or 429 percent to $332,592,000
at March 31, 1998 from $62,882,000 at March 31, 1997. Both groups contribute to
the Company's portfolio of residential mortgage loans. This loan category
decreased $1,827,000 or 0.9 percent to $192,994,000 at March 31, 1998 compared
to $194,821,000 at March 31, 1997. 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 fiscal 1997. Leases at March 31, 1998, were $9,463,000
or 1.0 percent of total loans compared to $19,939,000 at March 31, 1997.
The following table exhibits the Company's loan portfolio mix for the
previous five years.
34
<PAGE> 35
LOAN PORTFOLIO MIX
<TABLE>
<CAPTION>
At March 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
(dollars in thousands) Amount % Amount % Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate-construction loans
Construction $197,811 20.76% $205,086 30.77% $185,337 31.17% $140,209 29.45% $116,789 32.40%
Acquisition & Development 41,992 4.41% 35,408 5.31% 30,419 5.12% 30,517 6.41% 23,771 6.60%
Real Estate-mortgage loans
Non-residential 82,261 8.63% 65,748 9.87% 51,020 8.58% 44,868 9.42% 42,970 11.92%
Residential 192,994 20.26% 194,821 29.23% 157,996 26.57% 156,001 32.77% 92,230 25.59%
Home equity and second
mortgages 46,218 4.85% 43,752 6.57% 17,212 2.89% 13,272 2.79% 14,544 4.03%
Loans held for sale 332,592 34.91% 62,882 9.44% 92,552 15.56% 41,220 8.66% 23,641 6.56%
- ------------------------------------------------------------------------------------------------------------------------------------
Total real estate loans $893,868 93.82% $607,697 91.19% $534,536 89.89% $426,087 89.50% $313,945 87.10%
- ------------------------------------------------------------------------------------------------------------------------------------
Other loans:
Commercial $ 15,681 1.65% $ 15,160 2.27% $ 12,117 2.04% $ 10,776 2.26% $ 8,085 2.24%
Leases 9,463 0.99% 19,939 2.99% 38,032 6.40% 32,582 6.85% 29,364 8.15%
Consumer and other 33,755 3.54% 23,648 3.55% 9,957 1.67% 6,621 1.39% 9,060 2.51%
- ------------------------------------------------------------------------------------------------------------------------------------
Total other loans $ 58,899 6.18% $ 58,747 8.81% $ 60,106 10.11% $ 49,979 10.50% $ 46,509 12.90%
- ------------------------------------------------------------------------------------------------------------------------------------
Total gross loans receivable $952,767 100.00% $666,444 100.00% $594,642 100.00% $476,066 100.00% $360,454 100.00%
- ------------------------------------------------------------------------------------------------------------------------------------
Less:
Undisbursed portion of
loans in process (77,302) (80,801) (84,268) (63,246) (58,012)
Deferred fees and other
unearned income (636) (1,814) (1,515) (2,405) (2,654)
Reserve for loan losses (6,505) (5,198) (5,464) (4,704) (4,791)
- ------------------------------------------------------------------------------------------------------------------------------------
Loans receivable, net(1) $868,324 $578,631 $503,395 $405,711 $294,997
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes loans receivable held for sale.
35
<PAGE> 36
In accordance with the Company's business plan, the volume of
construction and acquisition and development lending increased in each of the
previous four 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 multi-state
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 2.0 percent of the Company's loans in fiscal
1998, 1997 or 1996.
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
At March 31, 1998
<TABLE>
<CAPTION>
Acquisition & % of Total
(dollars in thousands) Construction Development Total by Location
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Atlanta, GA $ 64,250 $22,020 $ 86,270 53.09%
Augusta, GA 16,413 3,710 20,123 12.38%
Athens, GA 883 248 1,131 0.70%
Hinesville, GA 1,577 1,594 3,171 1.95%
Savannah, GA 6,631 1,088 7,719 4.75%
Warner Robins, GA 5,113 106 5,219 3.21%
Jacksonville, FL 12,729 3,822 16,551 10.19%
Charlotte, NC 8,787 2,539 11,326 6.97%
Columbia, SC 2,472 782 3,254 2.00%
Chattanooga, TN 7,043 125 7,168 4.41%
Knoxville, TN 106 - 106 0.07%
Nashville, TN 445 18 463 0.28%
- --------------------------------------------------------------------------------------------------
Total by type $126,449 $36,052 $162,501 100.00%
- --------------------------------------------------------------------------------------------------
</TABLE>
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.
36
<PAGE> 37
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 1.5 percent at March 31, 1998, 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 that 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 $2,461,000 or 19.8 percent to $14,904,000 at March 31, 1998,
from $12,443,000 at March 31, 1997. Total problem assets as a percent of total
assets decreased to 1.30 percent at March 31, 1998 from 1.51 percent at March
31, 1997. At March 31, 1998, the Company had non-accrual loans of $7,948,000
compared to $7,866,000 at March 31, 1997. Interest income not recognized on
these loans amounted to $431,000 during 1998, and $241,000 during 1997. In
addition, at March 31, 1998, the ACC identified $4,009,000 as potential problem
loans compared to $2,503,000 of potential problem loans at March 31, 1997. Real
estate owned increased by $873,000 or 42.1 percent to $2,947,000 at March 31,
1998, from $2,074,000 at March 31, 1997.
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 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.
NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS
<TABLE>
<CAPTION>
At March 31,
- -----------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans
Residential real estate-construction $ 1,127 $ 1,692 $ 1,658 $ 464 $ 647
Residential real estate-mortgage 4,026 2,934 569 469 751
Commercial real estate 24 427 662 -- 157
Commercial -- 93 7 57 264
Commercial leases 2,054 2,508 3,421 -- 5
Installment 717 212 -- 4 66
- -----------------------------------------------------------------------------------------------------------------
Total non-accrual $ 7,948 $ 7,866 $ 6,317 $ 994 $ 1,890
- -----------------------------------------------------------------------------------------------------------------
Potential problem loans 4,009 2,503 4,329 2,963 2,652
Loans contractually delinquent 90
days which still accrue interest -- -- -- -- --
Troubled debt restructuring -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
Total non-accrual and problem loans $11,957 $10,369 $10,646 $ 3,957 $ 4,542
- -----------------------------------------------------------------------------------------------------------------
Real estate owned, net 2,947 2,074 1,344 1,139 1,273
- -----------------------------------------------------------------------------------------------------------------
Total problem assets $14,904 $12,443 $11,990 $ 5,096 $ 5,815
- -----------------------------------------------------------------------------------------------------------------
Total problem assets/Total assets 1.30% 1.51% 1.63% 0.90% 1.39%
- -----------------------------------------------------------------------------------------------------------------
Total problem assets/Loans receivable, net
plus reserves 2.75% 2.41% 2.92% 1.40% 2.14%
- -----------------------------------------------------------------------------------------------------------------
Reserve for loan losses/Total problem assets 43.65% 41.78% 45.57% 92.31% 82.39%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 38
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, 1998
<TABLE>
<CAPTION>
Potential Real Estate(1) % of Total
(dollars in thousands) Non-accrual Problem Owned Total by Location
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Atlanta, GA $ 5,874 $ 1,718 $ 1,483 $ 9,075 58.40%
Augusta, GA 907 -- 167 1,074 6.91%
Hinesville, GA 120 -- 903 1,023 6.59%
Savannah, GA 322 -- -- 322 2.07%
Warner Robins, GA 142 -- 330 472 3.04%
Jacksonville, FL -- 2,291 333 2,624 16.89%
Aiken, SC 85 -- 165 250 1.61%
All other locations 498 -- 200 698 4.49%
- ------------------------------------------------------------------------------------------------
Total problem assets $ 7,948 $ 4,009 $ 3,581 $15,538 100.00%
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include reserves of $633,417; real estate owned, net equals
$2,947,448.
38
<PAGE> 39
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, 1998 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, GA $ 282 $ 2,797 $ 24 $ -- $ 2,054 $ 717 $ 5,874 37.81%
Augusta, GA -- 907 -- -- -- -- 907 5.84%
Savannah, GA 322 -- -- -- -- -- 322 2.07%
Hinesville, GA -- 120 -- -- -- -- 120 0.77%
Warner Robins, GA 142 -- -- -- -- -- 142 0.91%
Aiken, SC -- 85 -- -- -- -- 85 0.55%
All other locations 381 117 -- -- -- -- 498 3.20%
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-accrual 1,127 4,026 24 -- 2,054 717 7,948 51.15%
- -----------------------------------------------------------------------------------------------------------------------------------
Potential problem loans:
Atlanta, GA 1,086 -- 274 143 205 10 1,718 11.05%
Jacksonville, FL 2,291 -- -- -- -- -- 2,291 14.75%
- -----------------------------------------------------------------------------------------------------------------------------------
Total potential problem loans 3,377 -- 274 143 205 10 4,009 25.80%
- -----------------------------------------------------------------------------------------------------------------------------------
Real estate owned:
Atlanta, GA 356 448 679 -- -- -- 1,483 9.55%
Augusta, GA 41 126 -- -- -- -- 167 1.07%
Hinesville, GA 829 -- 74 -- -- -- 903 5.81%
Warner Robins, GA 330 -- -- -- -- -- 330 2.13%
Jacksonville, FL 333 -- -- -- -- -- 333 2.14%
Aiken, SC 59 106 -- -- -- -- 165 1.06%
All other locations 112 88 -- -- -- -- 200 1.29%
- -----------------------------------------------------------------------------------------------------------------------------------
Total real estate owned(1) 2,060 768 753 -- -- -- 3,581 23.05%
- -----------------------------------------------------------------------------------------------------------------------------------
Total problem assets by type $ 6,564 $ 4,794 $ 1,051 $ 143 $ 2,259 $ 727 $15,538 100.00%
- -----------------------------------------------------------------------------------------------------------------------------------
% of total problem assets by type 42.24% 30.86% 6.76% 0.92% 14.54% 4.68% 100.00%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include reserves of $633,417: real estate owned, net equals
$2,947,448.
Concentrations to Single Borrowers
The Bank has lease exposure, to one company, of $1,783,000. 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. The Court has ruled that the trustee should begin
disbursing funds collected from leases.
In addition, one borrower in Atlanta, Georgia, has non-accrual loans of
$938,000 and one borrower, in Jacksonville, Florida, has potential problem loans
of $2,291,000 at March 31, 1998. The borrower in Atlanta, Georgia, has $274,000
of construction loans and a $664,000 acquisition and development loan. This
borrower has filed for bankruptcy protection and has filed a repayment plan with
the trustee. The borrower in Jacksonville, Florida, has $1,950,000 of
construction loans and a $341,000 acquisition and development loan. Currently,
the borrower is current on all loans with the exception of three construction
loans which are 30-59 days delinquent and the total exposure is $1,958,000.
There were no other relationships with single borrowers, which are significant,
included in total problem assets.
39
<PAGE> 40
Loan impairment
At March 31, 1998 and 1997, $1,783,000 and $1,780,000, respectively, of
impaired loans, were on a non-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, 1998
and 1997, the valuation allowance related to these impaired loans was $455,000
and $459,000, respectively, which is included in the reserve for loan losses as
presented in the tables on the following page. At March 31, 1998 and 1997, the
Company had no impaired loans on an accrual basis and all impaired loan had a
related loan loss reserve. For the years ended March 31, 1998 and 1997, the
Company charged-off $0 and $2,405,000 against loan loss reserves related to
impaired loans, respectively. For the years ended March 31, 1998 and 1997, the
average recorded investment in impaired loans was $1,784,000 and $3,193,000,
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 $2,601,000 and $2,652,000, respectively, of
additional reserves for possible loan losses during the years ended March 31,
1998 and 1997. At March 31, 1998, reserves represented 1.03 percent of average
loans outstanding (including loans held for sale) during the period, increasing
from .98 percent at March 31, 1997. Charge-offs in fiscal 1998 were $1,548,000
versus $3,124,000 in fiscal 1997 and $592,000 in 1996. In fiscal 1998,
charge-offs represented .25 percent of average loans receivable versus .59
percent for fiscal 1997 and .13 percent in fiscal 1996. Charge-offs increased in
fiscal 1997 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 $6,505,000 and
$5,198,000, respectively, at March 31, 1998 and 1997. Loan loss reserves to
total problem assets increased to 43.65 percent at March 31, 1998 compared 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.
40
<PAGE> 41
ANALYSIS OF THE RESERVE FOR LOAN LOSSES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
March 31, 1998 1997 1996 1995 1994
(dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserve for loan losses,
Beginning of year $ 5,198 $ 5,464 $ 4,704 $ 4,791 $ 2,781
Charge-offs:
Real estate-construction 88 86 44 165 10
Real estate-mortgage 747 160 326 524 251
Consumer and other 635 59 42 77 15
Commercial 78 413 180 128 9
Commercial leases -- 2,406 -- -- --
- ---------------------------------------------------------------------------------------------------------------
Total charge-offs 1,548 3,124 592 894 285
Recoveries 254 206 352 164 129
- ---------------------------------------------------------------------------------------------------------------
Net charge-offs 1,294 2,918 240 730 156
Reserve from acquisitions -- -- -- -- 1,132
Provision for loan losses 2,601 2,652 1,000 643 1,034
- ---------------------------------------------------------------------------------------------------------------
Reserve for loan losses, end of year $ 6,505 $ 5,198 $ 5,464 $ 4,704 $ 4,791
- ---------------------------------------------------------------------------------------------------------------
Average loans outstanding for the
period $629,589 $531,619 $453,636 $336,647 $281,235
- ---------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average
loans outstanding 0.21% 0.55% 0.05% 0.22% 0.06%
- ---------------------------------------------------------------------------------------------------------------
Reserves to average loans outstanding 1.03% 0.98% 1.20% 1.40% 1.70%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
ALLOCATION OF THE RESERVE FOR LOAN LOSSES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
March 31, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
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 $1,517 51 $ 791 50 $ 693 50 $ 761 54 $ 576 48
Second mortgage loans 882 9 713 8 262 4 148 3 350 5
Construction 1,354 30 1,027 31 1,078 32 1,173 29 1,064 30
Commercial 164 3 21 3 121 3 116 3 68 3
Commercial leases 591 1 724 4 1,593 9 296 9 308 11
Consumer and other 821 6 220 4 34 2 72 2 139 3
Unallocated 1,176 -- 1,702 -- 1,683 -- 2,138 -- 2,286 --
- ----------------------------------------------------------------------------------------------------------------------------------
Total $6,505 100 $5,198 100 $5,464 100 $4,704 100 $4,791 100
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Loan balance in each category expressed as a percentage of total loans.
41
<PAGE> 42
INVESTMENT SECURITIES
During fiscal 1998, investment securities increased 9.4 percent over
the prior year. At March 31, 1998, the Company had total investments in
securities of $162,874,000 versus $148,828,000 at March 31, 1997. 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 began reporting the effect of the change
in fair value of securities classified as available for sale as a separate
component of equity, net of income taxes.
The investment securities portfolio at March 31, 1998 was comprised of
$58,138,000 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 $104,736,000 of investment securities available for sale at
March 31, 1998. Securities available for sale had a net unrealized gain as shown
in the Company's stockholders' equity section of $838,000 at March 31, 1998 and
a net unrealized loss of $1,025,000 at March 31, 1997.
Included in other securities at March 31, 1998 and 1997 are $1,996,043
and $2,696,936, 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, 1998, 1997 or 1996.
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,
------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Securities Held to Maturity:
US Treasury and US Government Agencies $ 36,188 $ 27,780 $ 27,450
Mortgage-backed securities 5,010 6,406 8,087
Corporate bonds 7,431 7,429 8,420
Other debt securities 9,509 10,292 11,384
- -----------------------------------------------------------------------------------
Total 58,138 51,907 55,341
- -----------------------------------------------------------------------------------
Securities Available for Sale:
US Treasury and US Government Agencies 16,068 15,176 21,205
Mortgage-backed securities 70,626 62,352 67,956
Corporate bonds 2,037 2,005 2,028
Equity securities-preferred stock 12,210 13,418 9,629
Other debt securities 3,795 3,970 5,170
- -----------------------------------------------------------------------------------
Total 104,736 96,921 105,988
- -----------------------------------------------------------------------------------
Total Investment Securities:
US Treasury and US Government Agencies 52,256 42,956 48,655
Mortgage-backed securities 75,636 68,758 76,043
Corporate bonds 9,468 9,434 10,448
Equity securities-preferred stock 12,210 13,418 9,629
Other debt securities 13,304 14,262 16,554
- -----------------------------------------------------------------------------------
Total $162,874 $148,828 $161,329
- -----------------------------------------------------------------------------------
</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:
42
<PAGE> 43
MATURITIES OF INVESTMENT SECURITIES AND AVERAGE YIELDS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Investment Securities Securities Available
Held to Maturity for Sale
March 31, 1998 March 31, 1998
- --------------------------------------------------------------------------------------------------
Weighted Estimated Weighted
Amortized Average Fair Average
(dollars in thousands) Cost Yield Value Yield(1)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US Treasury and US Government Agencies:
Within 1 year -- -- 2,723 5.59%
1-5 years 26,998 6.37% 2,974 6.12%
5-10 years 9,190 6.47% 10,371 6.22%
More than 10 years -- -- -- --
- --------------------------------------------------------------------------------------------------
Total 36,188 6.40% 16,068 6.10%
- --------------------------------------------------------------------------------------------------
Mortgage-backed securities:
Government National Mortgage
Association
Within 1 year -- -- -- --
1 to 5 years -- -- -- --
5 to 10 years -- -- 27,332 7.37%
More than 10 years 2,415 6.66% 35,439 6.76%
- --------------------------------------------------------------------------------------------------
Total 2,415 6.66% 62,771 7.02%
- --------------------------------------------------------------------------------------------------
Federal National Mortgage Assn
Within 1 year -- -- -- --
1 to 5 years -- -- 407 6.57%
5 to 10 years -- -- -- --
More than 10 years 599 6.18% 4,917 8.59%
- --------------------------------------------------------------------------------------------------
Total 599 6.18% 5,324 8.73%
- --------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
Within 1 year -- -- -- --
1 to 5 years -- -- -- --
5 to 10 years -- -- 2,531 8.50%
More then 10 years -- -- -- --
- --------------------------------------------------------------------------------------------------
Total -- -- 2,531 8.50%
- --------------------------------------------------------------------------------------------------
Other:
Within 1 year -- -- 79 5.77%
1 to 5 years -- -- 781 4.72%
5 to 10 years -- -- 929 4.96%
More then 10 years 11,505 6.69% 2,006 5.78%
- --------------------------------------------------------------------------------------------------
Total 11,505 6.69% 3,795 5.36%
- --------------------------------------------------------------------------------------------------
Corporate Debt:
Within 1 year -- -- -- --
1 to 5 years 5,486 8.11% 2,037 7.30%
5 to 10 years 1,945 7.65% -- --
More then 10 years -- -- -- --
- --------------------------------------------------------------------------------------------------
Total 7,431 7.99% 2,037 7.30%
- --------------------------------------------------------------------------------------------------
Preferred Stock:
Within 1 year -- -- -- --
1 to 5 years -- -- -- --
5 to 10 years -- -- -- --
More than 10 years -- -- 12,210 6.78%
- --------------------------------------------------------------------------------------------------
Total -- -- 12,210 6.78%
- --------------------------------------------------------------------------------------------------
Total Securities:
Within 1 year -- -- 2,802 5.59%
1 to 5 years 32,484 6.66% 6,199 6.38%
5 to 10 years 11,135 6.68% 41,163 7.09%
More than 10 years 14,519 6.66% 54,572 6.89%
- --------------------------------------------------------------------------------------------------
Total $ 58,138 6.66% $104,736 6.90%
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) Weighted average yield computed using amortized cost.
43
<PAGE> 44
DEPOSITS
Deposits are the Company's primary funding source. Total deposits grew
by $221,251,000 or 39.7 percent to $778,975,000 at March 31, 1998, from
$557,724,000 at March 31, 1997. The Bank uses traditional marketing methods to
attract new customers. Its deposit network is serviced from its fifteen
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 33.3 percent to $411,179,000 at March 31,
1998, from $308,459,000 at March 31, 1997. Certificates of deposit $100,000 and
greater were 13.8 percent of total deposits at March 31, 1998, and 13.7 percent
at March 31, 1997. In addition, at March 31, 1998, 26.5 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.
Demand deposits increased by $78,681,000 or 53.9 percent to $224,702,000 at
March 31, 1998 compared to $146,021,000 at March 31, 1997. Demand deposits
including checking accounts, savings accounts and money market accounts were
28.9 percent of the Company's deposits at March 31, 1998. The weighted average
interest rate on deposits during fiscal 1998 increased 33 basis points to 5.17
percent from 4.84 percent.
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
<TABLE>
<CAPTION>
(in thousands)
Certificates of
Deposit
March 31, 1998
- -----------------------------------------------------------------
<S> <C>
3 months or less $24,687
Over 3 months through 6 months 35,409
Over 6 months through 12 months 19,003
Over 12 months 28,440
- -----------------------------------------------------------------
Total outstanding $107,539
- -----------------------------------------------------------------
</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, 1998 1997
- -----------------------------------------------------------------------------------------------
(dollars in thousands) Amount % of Total Amount % of Total
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Demand deposits
Non-interest bearing deposits $ 61,070 7.8% $ 29,843 5.4%
2.25% Interest bearing deposits 86,360 11.1% 48,923 8.8%
2.50% Savings 38,410 4.9% 46,353 8.3%
2.25%-5.00% Money markets 38,862 5.0% 20,902 3.8%
Certificate accounts less than $100,000
2.50% - 5.99% 278,394 35.7% 253,219 45.4%
6.00% - 7.99% 167,833 21.6% 80,524 14.4%
8.00% - 10.00% 507 0.1% 1,334 0.2%
Certificate accounts $100,000 and greater
ranging between 2.50% - 10.20% 107,539 13.8% 76,626 13.7%
- -----------------------------------------------------------------------------------------------
Total $778,975 100.0% $557,724 100.0%
- -----------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE> 45
AVERAGE DEPOSIT BALANCES AND RATES
The following table exhibits the average amount of deposits and
weighted average rate by the categories indicated.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
(dollars in thousands) Rate Amount Rate Amount Rate Amount
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits:
Interest bearing deposits 2.62% $ 65,746 1.36% $ 72,858 1.69% $ 63,576
Savings 2.48% 42,441 2.44% 46,157 2.49% 46,583
Money market 3.36% 30,717 2.54% 19,541 2.79% 19,973
Certificates of deposits 5.94% 436,727 5.90% 382,117 6.17% 292,021
- --------------------------------------------------------------------------------------------------------
Total 5.17% $575,631 4.84% $520,673 4.93% $422,153
- --------------------------------------------------------------------------------------------------------
</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,
1998, advances were $217,835,000 an increase from $141,383,000 at March 31,
1997. The weighted average interest rate on these borrowings was 5.88 percent
and 6.80 percent at March 31, 1998 and 1997, 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>
1998:
Balances outstanding $125,335 $164,320 $131,526
Weighted average rate 5.95% 5.78% 5.46%
- -------------------------------------------------------------------------------------
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%
- -------------------------------------------------------------------------------------
</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 at the same
magnitude as the prices of goods and services. In the current interest rate
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 $325,601,000 over the previous year and
were funded by deposits, which increased $221,251,000. The Company's deposits
and stockholders' equity funded 74 percent and 76 percent of total assets at
March 31, 1998, and March 31, 1997, respectively. The Company's other primary
45
<PAGE> 46
funding source was provided by advances from the Federal Home Loan Bank. At
March 31, 1998, advances stood at $217,835,000 or 19.0 percent of total assets
versus $141,383,000 or 17.2 percent of total assets at March 31, 1997. 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, 1998, the Company had commitments to originate fixed rate
mortgage loans of approximately $20,461,000 and commitments to originate
variable rate mortgage loans of approximately $9,424,000 with terms of up to
thirty years and interest rates ranging from 6.0 percent to 10.5 percent. The
Company had commitments to sell mortgage loans of approximately $84,596,000 at
March 31, 1998. In addition, the Company is committed to loan funds on unused
variable rate lines of credit approximately $11,545,000 at March 31, 1998. 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 80.4 percent to $999,474,000 for fiscal 1998 compared to
$554,092,000 for fiscal 1997. 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 $29,885,000 at March 31, 1998,
from $24,692,000 at March 31, 1997.
Cash flows from operating activities
During fiscal 1998, the Company used $261,621,000 of cash flows from
operating activities compared to $40,478,000 generated from operating activities
for fiscal 1997. The primary reason for this fluctuation is timing differences
from the sale of loans held for sale versus originations of loans held for sale.
In fiscal 1998, the Company originated $999,474,000 of loans held for sale and
sold $729,764,000 of loans held for sale. This resulted in a $269,710,000 use of
cash. This compares to fiscal 1997, when the Company originated $554,092,000 of
loans held for sale and sold $583,762,000 of loans held for sale, resulting in a
$29,670,000 source of cash.
Cash flows from investing activities
In fiscal 1998, the Company used $39,765,000 of cash flows from
investing activities compared to $111,338,000 for the prior year. The Company
purchased investment securities held to maturity of $37,184,000 and $27,865,000
of securities available for sale representing 163.6 percent of total cash used
for investing activities during fiscal 1998. For fiscal 1997, comparatively, the
Company purchased $20,588,000 of investment securities held to maturity and
$15,111,000 of investment securities available for sale representing 32.1
percent of cash used in investing activities. The Company generated cash flows
from calls of investment securities held to maturity of $18,500,000 and
maturities of $10,300,000. In addition, the Company had sales of securities
available for sale of $1,957,000, calls of $8,273,000 and maturities of
$5,250,000. This compares to calls of investment securities held to maturity of
$3,000,000 and maturities of $18,300,000 and sales of securities available for
sale of $6,731,000, calls of $1,948,000 and maturities of $9,600,000 in fiscal
1997. Loan originations net of repayments represented 37.8 percent of cash used
or $15,032,000 compared to 78.0 percent or $86,838,000 cash used for the prior
year. The Company also purchased $569,000 of loans receivable during fiscal 1998
versus $18,022,000 in fiscal 1997. Finally, during fiscal 1998, the Company used
funds of $8,708,000 for investment in real estate compared to $16,870,000 in the
prior year.
Cash flow from financing activities
Cash provided from financing activities during fiscal 1998, was
$310,193,000 compared to $76,824,000 during fiscal 1997. FHLB advances provided
a significant source of funds during both fiscal 1998 and 1997. The Company
borrowed $810,245,000 from the FHLB and repaid $723,195,000 in fiscal 1998. This
compares to borrowings of $231,361,000 and repayments of $258,178,000 during
fiscal 1997. The Company's deposits increased $221,251,000 during fiscal 1998,
$142,570,000 of this increase is attributable to increases in time deposits and
$78,681,000 is attributable to increases in demand deposits. During the prior
year, the Company's deposits increased $99,266,000, which is comprised of
$86,471,000 of time deposits and $12,795,000 in demand deposits. The Company
paid cash dividends to its shareholders of $3,406,000 in fiscal 1998 and
$2,842,000 in fiscal 1997.
46
<PAGE> 47
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, 1998, the Bank was classified as "adequately
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. In fiscal 1998, the Bank paid cash dividends to the Company of
approximately $3,410,000 and a dividend in the form of loans in the amount of
$10,525,000. In addition, during fiscal 1997, the Bank paid to the Company cash
dividends of approximately $683,000 and a dividend in the form of equity
securities in the amount of $6,094,000.
REGULATORY CAPITAL
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
At March 31, 1998 Actual Requirement Excess
($in 000's) Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Risk-based ratios:
Tier 1 capital $51,173 7.47 $27,392 4.0 $23,781 3.47
Total capital 56,885 8.31 54,785 8.0 2,100 0.31
Tier 1 leverage 51,173 4.59 33,446 3.0 17,727 1.59
Tangible equity 51,173 5.91 12,988 1.5 38,185 4.41
- ------------------------------------------------------------------------------------------------------
</TABLE>
YEAR 2000
The market for financial services, including banking services, is
increasingly effected by advances in technology, including developments in
telecommunications, data processing, computers, automation, internet-based
banking, tele-banking, debit cards and so-called "smart cards". The ability of
the Company to compete successfully in its markets may depend on the extent to
which it is able to exploit such technological changes. Additionally, the Bank
is responsible for ensuring that its in-house processing, service providers, and
software vendors are fully compliant with the year 2000 requirements. Based upon
the year 2000 plan developed by management, the Company will require
approximately $500,000 in additional capital expenditures to be fully compliant
with year 2000 requirements. The Bank has identified and developed plans for all
mission critical applications; however, additional expenses may be incurred if
problems are encountered which were not previously identified. The ability of
the Company to compete successfully in its markets may depend on the extent to
which it is able to exploit technological changes and test and modify its
systems as required to meet the challenges of the year 2000. There can be no
assurance that the development of these or any other new technologies or the
Company's success or failure in anticipating or responding to such developments
will materially affect the Company's business, financial condition and operating
results.
RECENT ACCOUNTING PRONOUNCEMENTS
On December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS No. 128
requires basic earnings per share to be based on the weighted average number of
common shares outstanding during each period. Diluted earnings per common share
are based on the weighted average number of common shares outstanding during
each period, plus common share equivalents calculated for stock options and
restricted stock outstanding using the treasury stock method. All share and per
share information included in this 10-K have been restated to give effect to the
Company's adoption.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income",
which is effective for annual and interim periods beginning after December 15,
1997. This statement requires that all items that are required to be recognized
under accounting standards as other comprehensive income be reported in a
financial statement with the same prominence as all financial statement
information. Adoption of this pronouncement will not have a material effect on
the Company's disclosures.
47
<PAGE> 48
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which is effective for annual and interim
periods beginning after December 15, 1997. This statement establishes standards
for the method that public entities use to report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographical areas, and major
customers. Adoption of this pronouncement is not expected to have a material
effect on the Company's disclosures.
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
<TABLE>
<CAPTION>
Year ended March 31,
(in thousands except per share data, unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
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 $ 19,246 $ 18,143 $ 17,474 $ 17,037 $ 16,014 $ 16,645 $ 15,796 $ 15,330
Interest expense 10,954 10,247 9,566 9,240 8,598 8,752 8,295 7,984
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 8,292 7,896 7,908 7,797 7,416 7,893 7,501 7,346
Provision for loan losses 627 657 600 717 827 377 924 524
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 7,665 7,239 7,308 7,080 6,589 7,516 6,577 6,822
Other income 4,558 4,747 3,600 3,444 4,016 2,860 3,477 2,558
Other expenses 8,980 9,537 8,568 8,306 10,135 7,945 9,794 7,027
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,243 2,448 2,341 2,218 470 2,431 260 2,353
- ------------------------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) 1,080 684 618 658 229 932 (88) 695
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 2,163 1,764 1,723 1,560 $ 241 $ 1,499 $ 348 $ 1,658
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per common share - basic $ .38 $ .31 $ .30 $ .28 $ .04 $ .27 $ .06 $ .30
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per common share - diluted $ .37 $ .30 $ .30 $ .27 $ .04 $ .26 $ .06 $ .29
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
48
<PAGE> 49
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, 1998, and 1997
Consolidated Statements of Income for the Years Ended
March 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for
the Years Ended March 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years
Ended March 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
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).
3.1(c) Articles of Amendment to Restated Articles of
Incorporation of the Company.
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. 1998 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
49
<PAGE> 50
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 2, 1998 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 2, 1998 By:/s/ Conrad J. Sechler, Jr.
--------------------------------------------
Conrad J. Sechler, Jr.
Chairman of the Board and President
July 2, 1998 By:/s/Walter C. Alford
--------------------------------------------
Walter C. Alford
Director
July 2, 1998 By:/s/Richard J. Burrell
--------------------------------------------
Richard J. Burrell
Director
July 2, 1998 By:/s/Richard B. Inman, Jr.
--------------------------------------------
Richard B. Inman, Jr.
Director, Secretary and Treasurer
July 2, 1998 By:/s/Weldon A. Nash, Jr.
--------------------------------------------
Weldon A. Nash, Jr.
Director
July 2, 1998 By:/s/George G. Thompson
--------------------------------------------
George G. Thompson
Director
50
<PAGE> 51
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).
3.1(c) Articles of Amendment to Restated Articles of
Incorporation of the Company.
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. 1998 Annual Report to
Stockholders.
21 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
27 Financial Data Schedule (For SEC use only)
</TABLE>
* The referenced exhibit is a compensatory contract,
plan or arrangement.
51
<PAGE> 1
EXHIBIT 11. COMPUTATION OF PER SHARE EARNINGS
Average basic common shares outstanding and average common shares
outstanding assuming dilution for the years ended March 31, 1998, 1997 and 1996
are computed as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Average common shares - basic 5,690,680 5,527,973 4,250,752
Effect of dilutive stock options 148,257 176,604 178,748
--------- --------- ---------
Average common shares - diluted 5,838,937 5,704,577 4,429,500
========= ========= =========
</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.
52
<PAGE> 1
EXHIBIT 13.1
EAGLE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1998 AND 1997, AND
FOR THE YEARS ENDED MARCH 31, 1998, 1997, AND 1996
TOGETHER WITH
AUDITORS' REPORT
<PAGE> 2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 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, 1998 and 1997 and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended March 31, 1998. 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, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
June 26, 1998
<PAGE> 3
EAGLE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
1998 1997
----------- -----------
<S> <C> <C>
ASSETS:
Cash and amounts due from banks $ 34,022 $ 17,405
Federal funds sold 660 8,470
Accrued interest receivable 7,301 5,472
Securities available for sale (Notes 4 and 10) 104,736 96,921
Investment securities held to maturity (Notes 4 and 10) 58,138 51,907
Loans held for sale 332,592 62,882
Loans receivable, net (Notes 5 and 10) 535,732 515,749
Investments in real estate (Note 7) 27,595 25,828
Real estate acquired in settlement of loans, net 2,947 2,074
Stock in Federal Home Loan Bank, at cost 10,892 7,864
Premises and equipment, net (Note 6) 21,868 20,379
Deferred income taxes (Note 11) 3,953 2,284
Other assets 9,047 6,647
----------- -----------
Total assets $ 1,149,483 $ 823,882
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits (Note 9) $ 778,975 $ 557,724
Federal Home Loan Bank advances and other borrowings (Note 10) 240,855 153,805
Advance payments by borrowers for property taxes and insurance 5,477 1,279
Drafts outstanding 30,716 29,043
Accrued expenses and other liabilities 18,758 14,157
----------- -----------
Total liabilities 1,074,781 756,008
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTES 5 AND 17)
STOCKHOLDERS' EQUITY (NOTES 11, 12, 13, AND 15):
Common stock, $1 par value; 10,000,000 shares authorized, 6,037,100 and
5,961,494 shares issued at March 31, 1998 and 1997, respectively 6,037 5,961
Additional paid-in capital 37,336 36,628
Retained earnings 32,028 28,236
Net unrealized gain (loss) on securities available for sale, net of taxes 838 (1,025)
Employee Stock Ownership Trust note payable (Note 12) (165) (836)
Unamortized restricted stock (296) (14)
Treasury stock, 301,800 shares at cost (1,076) (1,076)
----------- -----------
Total stockholders' equity 74,702 67,874
----------- -----------
Total liabilities and stockholders' equity $ 1,149,483 $ 823,882
=========== ===========
</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, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME:
Interest on loans $ 60,624 $ 51,503 $ 43,729
Interest on mortgage-backed securities 5,032 5,510 2,527
Interest on securities and other interest-earning assets 6,244 6,772 6,369
-------- -------- --------
Total interest income 71,900 63,785 52,625
-------- -------- --------
INTEREST EXPENSE:
Interest on deposits (Note 9) 29,766 25,177 20,826
Interest on FHLB advances and other borrowings 10,241 8,452 7,995
-------- -------- --------
Total interest expense 40,007 33,629 28,821
-------- -------- --------
Net interest income 31,893 30,156 23,804
PROVISION FOR LOAN LOSSES (NOTE 5) 2,601 2,652 1,000
-------- -------- --------
Net interest income after provision for loan losses 29,292 27,504 22,804
-------- -------- --------
NONINTEREST INCOME:
Mortgage production fees 8,752 7,280 6,777
Gain on sales of investments in real estate 2,160 1,377 697
Real estate commissions, net 510 405 165
Rental income 773 353 0
Service charges 1,924 1,979 1,551
Gain on sales of loans 16 84 190
(Loss) gain on sales and calls of securities available for sale (Note 4) (82) (21) 2
Miscellaneous 2,296 1,454 1,471
-------- -------- --------
Total noninterest income 16,349 12,911 10,853
-------- -------- --------
NONINTEREST EXPENSES:
Salaries and employee benefits (Note 12) 19,157 17,620 14,386
Net occupancy expense 4,647 3,774 3,016
Data processing expense 2,160 1,462 1,140
Federal insurance premiums 351 702 717
SAIF assessment (Note 9) 0 1,946 0
Marketing expense 932 1,121 514
Provision for losses on real estate acquired in settlement of loans 565 95 0
Merger expenses (Note 3) 0 1,685 0
Miscellaneous 7,579 6,496 4,695
-------- -------- --------
Total noninterest expenses 35,391 34,901 24,468
-------- -------- --------
Income before income taxes 10,250 5,514 9,189
INCOME TAX EXPENSE (NOTE 11) 3,040 1,768 2,970
-------- -------- --------
NET INCOME $ 7,210 $ 3,746 $ 6,219
======== ======== ========
EARNINGS PER COMMON SHARE--BASIC (NOTE 16) $ 1.27 $ 0.68 $ 1.46
======== ======== ========
EARNINGS PER COMMON SHARE--DILUTED (NOTE 16) $ 1.23 $ 0.66 $ 1.40
======== ======== ========
</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, 1998, 1997, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS)
COMMON STOCK ADDITIONAL ON SECURITIES ESOP
--------------- PAID-IN RETAINED AVAILABLE FOR NOTE
SHARES AMOUNT CAPITAL EARNINGS SALE, NET OF TAXES PAYABLE
------ ------ --------- -------- ------------------ --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1995 4,369 $4,369 $ 15,602 $ 23,144 $ (63) $ (11)
Cash dividends declared ($.42 per share) 0 0 0 (1,774) 0 0
Principal reduction of ESOP note payable 0 0 0 0 0 11
ESOP note payable issued to acquire
common stock 0 0 0 0 0 (1,000)
Issuance of common stock 1,435 1,435 20,048 0 0 0
Amortization of restricted stock 0 0 0 0 0 0
Stock options exercised (28,000 shares) 28 28 119 0 0 0
Common stock issued under Director Retirement
plan (2,000 shares) 2 2 33 0 0 0
Change in net unrealized loss on securities
available for sale, net of taxes 0 0 0 0 (456) 0
Purchase of treasury stock (1,708 shares) 0 0 0 0 0 0
Net income 0 0 0 6,219 0 0
------ ------ -------- -------- -------- --------
BALANCE, MARCH 31, 1996 5,834 5,834 35,802 27,589 (519) (1,000)
Cash dividends declared ($.56 per share) 0 0 0 (3,099) 0 0
Principal reduction of ESOP note payable 0 0 0 0 0 164
Amortization of restricted stock 0 0 0 0 0 0
Stock options exercised (133,550 shares) 133 133 867 0 0 0
Change in net unrealized loss on securities
available for sale, net of taxes 0 0 0 0 (506) 0
Cancellation of treasury stock (6,182 shares) (6) (6) (41) 0 0 0
Net income 0 0 0 3,746 0 0
------ ------ -------- -------- -------- --------
BALANCE, MARCH 31, 1997 5,961 5,961 36,628 28,236 (1,025) (836)
Cash dividends declared ($.60 per share) 0 0 0 (3,418) 0 0
Principal reduction of ESOP note payable 0 0 0 0 0 671
Issuance of restricted stock (20,000 shares) 20 20 335 0 0 0
Amortization of restricted stock 0 0 0 0 0 0
Stock options exercised (55,606 shares) 56 56 373 0 0 0
Change in net unrealized gain on securities
available for sale, net of taxes 0 0 0 0 1,863 0
Net income 0 0 0 7,210 0 0
------ ------ -------- -------- -------- --------
BALANCE, MARCH 31, 1998 6,037 $6,037 $ 37,336 $ 32,028 $ 838 $ (165)
====== ====== ======== ======== ======== ========
<CAPTION>
UNAMORTIZED TOTAL
RESTRICTED TREASURY STOCKHOLDERS'
STOCK STOCK EQUITY
----------- -------- -------------
<S> <C> <C> <C>
BALANCE, MARCH 31, 1995 $ (293) $ (1,111) $ 41,637
Cash dividends declared ($.42 per share) 0 0 (1,774)
Principal reduction of ESOP note payable 0 0 11
ESOP note payable issued to acquire
common stock 0 0 (1,000)
Issuance of common stock 0 0 21,483
Amortization of restricted stock 158 0 158
Stock options exercised (28,000 shares) 0 0 147
Common stock issued under Director Retirement
plan (2,000 shares) 0 0 35
Change in net unrealized loss on securities
available for sale, net of taxes 0 0 (456)
Purchase of treasury stock (1,708 shares) 0 (12) (12)
Net income 0 0 6,219
-------- -------- --------
BALANCE, MARCH 31, 1996 (135) (1,123) 66,448
Cash dividends declared ($.56 per share) 0 0 (3,099)
Principal reduction of ESOP note payable 0 0 164
Amortization of restricted stock 121 0 121
Stock options exercised (133,550 shares) 0 0 1,000
Change in net unrealized loss on securities
available for sale, net of taxes 0 0 (506)
Cancellation of treasury stock (6,182 shares) 0 47 0
Net income 0 0 3,746
-------- -------- --------
BALANCE, MARCH 31, 1997 (14) (1,076) 67,874
Cash dividends declared ($.60 per share) 0 0 (3,418)
Principal reduction of ESOP note payable 0 0 671
Issuance of restricted stock (20,000 shares) (355) 0 0
Amortization of restricted stock 73 0 73
Stock options exercised (55,606 shares) 0 0 429
Change in net unrealized gain on securities
available for sale, net of taxes 0 0 1,863
Net income 0 0 7,210
-------- -------- --------
BALANCE, MARCH 31, 1998 $ (296) $ (1,076) $ 74,702
======== ======== ========
</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, 1998, 1997, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,210 $ 3,746 $ 6,219
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation, amortization, and accretion 2,844 1,774 1,336
Provision for loan losses 2,601 2,652 1,000
Provision for losses on real estate acquired in settlement of 565 95 0
loans
Amortization of restricted stock award 73 121 158
Loss (gain) on sales of real estate acquired in settlement of 10 22 (80)
loans
Gain on sales of investments in real estate (2,160) (1,377) (697)
Loss (gain) on sales and calls of securities available for sale 82 21 (2)
Gain on sales of loans (16) (84) (190)
(Gain) loss on sales of fixed assets (45) 0 8
Deferred income tax benefit (2,811) (744) (688)
Amortization of deferred loan fees (2,097) (2,081) (1,791)
Proceeds from sales of loans held for sale 729,764 583,762 449,354
Origination of loans held for sale (999,474) (554,092) (500,686)
Changes in assets and liabilities:
Increase in accrued interest receivable (1,829) (517) (1,318)
Increase in other assets (2,600) (133) (508)
Increase in drafts outstanding 1,673 4,620 13,645
Increase in accrued expenses and other liabilities 4,589 2,693 3,245
--------- --------- ---------
Net cash (used in) provided by operating activities (261,621) 40,478 (30,995)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale (27,865) (15,111) (72,801)
Proceeds from sales of securities available for sale 1,957 6,731 9,815
Purchases of investment securities held to maturity (37,184) (20,588) (12,569)
Principal payments received on securities available for sale 7,450 5,068 2,392
Principal payments received on investment securities held to maturity 2,181 2,806 2,925
Proceeds from calls of securities available for sale 8,273 1,948 0
Proceeds from calls of investment securities held to maturity 18,500 3,000 0
Proceeds from maturities of investment securities held to maturity 10,300 18,300 12,301
Proceeds from maturities of securities available for sale 5,250 9,600 6,175
Loan originations, net of repayments (15,032) (86,838) (31,410)
Purchases of loans receivable (569) (18,022) (15,949)
Proceeds from the sale of loans receivable 0 0 1,517
Purchases of FHLB stock (7,050) (5,032) (3,001)
Redemption of FHLB stock 4,022 5,733 420
Proceeds from sales of real estate acquired in settlement of loans 470 1,349 238
Purchases of premises and equipment, net (3,435) (5,756) (4,465)
Proceeds from sales of investments in real estate 1,675 2,344 4,693
Additions to investments in real estate (8,708) (16,870) (10,239)
--------- --------- ---------
Net cash used in investing activities $ (39,765) $(111,338) $(109,958)
--------- --------- ---------
</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, 1998, 1997, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in time deposits $ 142,570 $ 86,471 $ 70,081
Net increase in demand deposits 78,681 12,795 2,025
Increase (decrease) in advance payments by borrowers for property
taxes and insurance 4,198 (232) (676)
Proceeds from FHLB advances and other borrowings 810,245 239,460 302,890
Repayments of FHLB advances and other borrowings (723,195) (259,992) (249,241)
Principal reduction of ESOP note payable 671 164 11
Issuance of ESOP note payable to acquire common stock 0 0 (1,000)
Proceeds from the exercise of stock options 429 1,000 182
Proceeds from issuance of common stock 0 0 21,483
Purchase of treasury stock 0 0 (12)
Cash dividends paid (3,406) (2,842) (1,568)
--------- --------- ---------
Net cash provided by financing activities 310,193 76,824 144,175
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,807 5,964 3,222
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 25,875 19,911 16,689
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 34,682 $ 25,875 $ 19,911
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING YEAR FOR:
Interest $ 38,620 $ 33,143 $ 27,885
========= ========= =========
Income taxes $ 5,138 $ 2,358 $ 3,135
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of real estate in settlement of loans $ 2,769 $ 3,475 $ 1,006
========= ========= =========
Loans made to finance sales of real estate acquired in settlement of loans $ 816 $ 1,279 $ 534
========= ========= =========
Loans made to finance sales of investments in real estate $ 7,338 $ 2,792 $ 0
========= ========= =========
Transfer of investment securities from held to maturity to
available for sale (Note 4) $ 0 $ 0 $ 17,777
========= ========= =========
Dividends payable $ 861 $ 849 $ 592
========= ========= =========
</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, 1998, 1997, AND 1996
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. The Company has three subsidiaries, Tucker Federal
Bank (the "Bank"), Eagle Real Estate Advisors, Inc. ("EREA"), and Eagle
Bancshares Capital Group, Inc. ("EBCG"). Additionally, 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).
The Bank provides a full range of financial services to individual and
corporate customers through its 15 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).
EBCG was formed in December 1997 to serve the Bank's growing base of
small-and medium-sized businesses by providing mezzanine financing that
is not readily available from traditional commercial banking sources.
Loans with equity features are made to borrowers that have the potential
for significant growth, adequate collateral coverage, and experienced
management teams with significant ownership.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Eagle Bancshares, Inc. include
the accounts of the Bank, EREA, EBCG, and Eagle's majority-owned
subsidiaries. Significant intercompany accounts and transactions are
eliminated in consolidation.
<PAGE> 9
-2-
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
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 or calls 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 not significant.
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
<PAGE> 10
-3-
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.
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
The Bank 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 the 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 the lesser of the remaining loan value or
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
<PAGE> 11
-4-
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 $633,000 and $144,000 at March 31, 1998 and
1997, respectively. Costs relating to holding properties are charged to
operations.
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 $317,000 and $494,000 at March 31, 1998 and 1997, respectively,
of intangible assets related to core deposit premiums. These intangible
assets are being amortized using 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.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are used to hedge interest rate exposures by modifying the
interest rate characteristics of related balance sheet instruments. The
specific criteria required for derivatives used as hedges are described
below. Derivatives that do not meet these criteria are carried at
market value with changes in value recognized currently in earnings.
Currently, it is not the Company's policy to hold derivatives that do
not qualify as hedges.
Derivatives used as hedges must be effective at reducing the risk
associated with the exposure being hedged and must be designated as a
hedge at the inception of the derivative contract. Derivatives used for
hedging purposes may include swaps, forwards, and purchased options.
The fair value of derivative contracts are carried off-balance sheet
and the unrealized gains and losses on derivative contracts are
generally deferred. The interest component associated with derivatives
used as hedges or to modify the interest
<PAGE> 12
-5-
rate characteristics of assets and liabilities is recognized over the
life of the contract in net interest income. During fiscal 1998, the
Company purchased an interest rate floor on an investment security.
The unamortized balance of this purchased option as of March 31, 1998
is approximately $72,000.
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
Basic earnings per share are based on the weighted average number of
common shares outstanding during each period. Diluted earnings per
common share are based on the weighted average number of common shares
outstanding during each period, plus common share equivalents
calculated for stock options and restricted stock outstanding using the
treasury stock method. All share and per share information included in
these financial statements have been restated to give effect to the
Company's adoption of Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share," during fiscal 1998.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," which is effective for annual
and interim periods beginning after December 15, 1997. This statement
requires that all items that are required to be recognized under
accounting standards as other comprehensive income be reported in a
financial statement with the same prominence as all other financial
statement information. Adoption of this pronouncement will not have a
material effect on the Company's disclosures.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related
Information," which is effective for annual and interim periods
beginning after December 15, 1997. This statement establishes standards
for the method that public entities use to report information about
operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments
in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and
services, geographical areas, and major customers. Adoption of this
pronouncement is not expected to have a material effect on the
Company's disclosures.
CASH EQUIVALENTS
Cash equivalents include amounts due from banks and federal funds sold.
<PAGE> 13
-6-
RECLASSIFICATIONS
Certain reclassifications have been made to prior year balances in
order to conform with the current year financial statement
presentation.
3. MERGER
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 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 and SCFC (prior to the merger) and
combined results of operations for the Company are presented below for
the fiscal years ended March 31, 1997 and 1996 (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
Noninterest income:
1997 11,653 1,258 12,911
1996 9,830 1,023 10,853
Net income:
1997 2,811 935 3,746
1996 5,020 1,199 6,219
Net income per share (diluted):
1997 0.62 0.98 0.66
1996 1.53 1.36 1.40
</TABLE>
The Company incurred approximately $1,685,000 in legal, accounting,
consulting, and other professional service fees during fiscal 1997 that
were directly related to this merger.
<PAGE> 14
-7-
4. SECURITIES
Securities available for sale at March 31, 1998 and 1997 are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
1998
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST LOSSES GAINS VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Mortgage-backed securities $ 69,919 $ 0 $ 707 $ 70,626
U.S. government and agency
obligations 16,225 (161) 4 16,068
Equity securities--preferred stock 11,503 (8) 715 12,210
Corporate bonds 1,989 0 48 2,037
Other debt securities 3,748 (6) 53 3,795
-------- -------- -------- --------
Total $103,384 $ (175) $ 1,527 $104,736
======== ======== ======== ========
</TABLE>
<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>
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.
Proceeds from the sales of debt securities were approximately
$1,957,000, $6,731,000, and $9,815,000, resulting in gross realized
gains of approximately $5,000, $40,000, and $2,000, respectively,
during the years ended March 31, 1998, 1997, and 1996, respectively.
During the years ended March 31, 1998 and 1997, proceeds from calls of
securities available for sale were $8,273,000 and $1,948,000,
respectively, resulting in gross realized losses of approximately
$87,000 and $61,000, respectively.
<PAGE> 15
-8-
Investment securities held to maturity at March 31, 1998 and 1997 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998
-------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST LOSSES GAINS VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Mortgage-backed securities $ 5,010 $ (19) $ 58 $ 5,049
U.S. government and agency
obligations 36,188 (42) 78 36,224
Corporate bonds 7,431 0 400 7,831
Other debt securities 9,509 0 516 10,025
------- ------- ------- -------
Total $58,138 $ (61) $ 1,052 $59,129
======= ======= ======= =======
</TABLE>
<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>
The amortized cost and estimated market value of available for sale and
held to maturity securities at March 31, 1998, 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 $ 2,803 $ 2,802
Due in one to five years 6,165 6,199
Due in five to ten years 40,823 41,163
Due after ten years 42,090 42,362
------- -------
$91,881 $92,526
======= =======
</TABLE>
<PAGE> 16
-9-
<TABLE>
<CAPTION>
HELD TO MATURITY
SECURITIES
------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
--------- ---------
<S> <C> <C>
Due in one year or less $ 0 $ 0
Due in one to five years 32,484 32,734
Due in five to ten years 11,135 11,321
Due after ten years 14,519 15,074
------- -------
$58,138 $59,129
======= =======
</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, 1998, 1997, and 1996, securities with a carrying amount of
$58,408,000, $21,742,000, and $18,858,000, respectively, were pledged
as collateral for public funds.
5. LOANS RECEIVABLE
At March 31, 1998 and 1997, loans receivable are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Real estate loans:
Construction $ 197,811 $ 205,086
Acquisition and development 41,992 35,408
Nonresidential 82,261 65,748
Residential 192,994 194,821
Home equity and second 46,218 43,752
--------- ---------
Total real estate loans 561,276 544,815
--------- ---------
Commercial and consumer loans:
Commercial 15,681 15,160
Leases 9,463 19,939
Consumer and other 33,755 23,648
--------- ---------
Total commercial and consumer loans 58,899 58,747
--------- ---------
Gross loans receivable 620,175 603,562
Less:
Undisbursed portion of loans in process (77,302) (80,801)
Deferred fees and other unearned income (636) (1,814)
Reserve for loan losses (6,505) (5,198)
--------- ---------
Loans receivable, net $ 535,732 $ 515,749
========= =========
</TABLE>
At March 31, 1998 and 1997, $1,783,000 and $1,780,000, respectively, of
impaired loans were on a nonaccrual basis. At March 31, 1998 and 1997,
the valuation allowance related to these impaired loans was $455,000
and $459,000, respectively, which is included in the
<PAGE> 17
-10-
reserve for loan losses in the accompanying consolidated statements of
financial condition. At March 31, 1998 and 1997, the Company had no
impaired loans on an accrual basis and all impaired loans had a related
loan loss reserve. For the years ended March 31, 1998 and 1997, the
average recorded investment in impaired loans was $1,784,000 and
$3,193,000, respectively.
At March 31, 1998, 1997, and 1996, the Company had nonaccrual loans
aggregating approximately $7,948,000, $7,866,000, and $6,317,000,
respectively. The interest income not recognized on these loans
amounted to $431,000, $241,000, and $156,500 for the years ended March
31, 1998, 1997, and 1996, respectively.
At March 31, 1998, 1997, and 1996, an analysis of the reserve for loan
losses is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Reserve for loan losses, beginning of year $ 5,198 $ 5,464 $ 4,704
Charge-offs (1,548) (3,124) (592)
Recoveries 254 206 352
Provision for loan losses 2,601 2,652 1,000
------- ------- -------
Reserve for loan losses, end of year $ 6,505 $ 5,198 $ 5,464
======= ======= =======
</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 1998
or 1997.
The Company was servicing loans for others with aggregate principal
balances of approximately $24,979,000, $12,341,000, and $13,789,000 at
March 31, 1998, 1997, and 1996, respectively.
At March 31, 1998 and 1997, the Company had sold approximately
$29,663,000 and $20,399,000, 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 options in the event the
borrowers default on the loans during the recourse period. During the
years ended March 31, 1998, 1997, and 1996, the Company has incurred
nominal losses from the repurchase of recourse loans.
At March 31, 1998, the Company had commitments to originate fixed rate
mortgage loans of approximately $20,461,000 and commitments to
originate variable rate mortgage loans of approximately $9,424,000 with
terms up to 30 years and interest rates ranging from 6% to 10.5%. The
Company had commitments to sell mortgage loans of approximately
$84,596,000 at March 31, 1998. In addition, the Company is committed to
loan funds on unused variable rate lines of credit of approximately
$11,545,000 at March 31, 1998. 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, 1998 and 1997, premises and equipment are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Land $ 4,879 $ 4,525
Office buildings and improvements 13,499 13,196
Furniture, fixtures, and equipment 11,882 8,556
------- -------
30,260 26,277
Less accumulated depreciation 8,392 5,898
------- -------
$21,868 $20,379
======= =======
</TABLE>
7. INVESTMENT IN REAL ESTATE
The Company has ownership interests in six real estate projects as of
March 31, 1998. 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 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 not be a material difference in
the financial position or results of operations of the Company if this
investment were 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 (tabular information in thousands).
UNION HILL LLC
In October 1994, Union Hill LLC ("Union Hill") was formed to purchase
and develop a residential community on 237 acres of land located in
Forsyth County, Georgia. The Company has an 80% ownership interest and
shares 50% in the profits of Union Hill after the allocation of the
preferred return.
<TABLE>
<CAPTION>
AS OF MARCH 31
------------------
1998 1997
------ ------
<S> <C> <C>
Summary financial position:
Real estate property $3,244 $4,515
Total assets 3,259 5,140
Total debt 1,230 2,433
Total equity 1,870 2,467
Company's share of equity 935 1,551
</TABLE>
<PAGE> 19
-12-
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED MARCH 31
------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Summary operations:
Gross profit from lot sales $1,615 $1,310 $ 282
Net income 1,583 1,257 211
Company's share of net income 869 629 106
</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>
FOR THE
YEARS ENDED
MARCH 31
--------------
1997 1996
---- ----
<S> <C> <C>
Summary operations:
Gross profit from lot sales $139 $380
Net income 132 323
Company's share of net income 132 323
</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. The development and sale of all of the property
associated with Trimble Road were completed during fiscal year 1998.
<TABLE>
<CAPTION>
AS OF MARCH 31
------------------
1998 1997
------ ------
<S> <C> <C>
Summary financial position:
Real estate property $ 0 $1,773
Total assets 784 2,091
Total debt 0 1,237
Total equity 610 808
Company's share of equity 610 808
</TABLE>
<PAGE> 20
-13-
<TABLE>
FOR THE
YEARS ENDED
MARCH 31,
--------------
1998 1997
---- ----
<S> <C> <C>
Summary operations:
Gross profit from lot sales $331 $264
Net income 229 259
Company's share of net income 229 259
</TABLE>
RIVERMOORE PARK, LLC
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"). In September 1997, the Company
transferred ownership interest in this land to Rivermoore Park, LLC as
an initial equity investment. The Company has a 100% ownership interest
in Rivermoore.
<TABLE>
<CAPTION>
AS OF MARCH 31
--------------------
1998 1997
------- -------
<S> <C> <C>
Summary financial position:
Real estate property $12,390 $10,869
Total assets 13,599 10,869
Total debt 9,086 6,402
Total equity 3,940 3,525
Company's share of equity 3,940 3,525
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED MARCH 31
------------------
1998 1997
------ ------
<S> <C> <C>
Summary operations:
Gross profit from lot sales $1,156 $ 0
Net income 953 0
Company's share of net income 953 0
</TABLE>
LEBANON ROAD, LLC
In July 1997, Lebanon Road, LLC ("Lebanon Road") was formed to purchase
63 acres of land in Gwinnett County, Georgia, for the purpose of
developing a 130-lot residential community, Sugarloaf Springs. The
Company has a 60% ownership interest and shares 60% in the profits of
Lebanon Road. As of March 31, 1998, the operations of this property
have been insignificant.
<PAGE> 21
-14-
<TABLE>
<CAPTION>
AS OF
MARCH 31,
1998
---------
<S> <C>
Summary financial position:
Real estate property $2,477
Total assets 2,480
Total debt 1,985
Total equity 387
Company's share of equity 387
</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. In fiscal 1997, the Company had a 50% ownership
interest and shared 50% in the profits of BN Development. During fiscal
1998, the Company purchased the remaining 50% interest in BN
Development, increasing the Company's ownership percentage to 100%.
<TABLE>
<CAPTION>
AS OF MARCH 31
------------------
1998 1997
------ ------
<S> <C> <C>
Summary financial position:
Real estate property $6,685 $5,756
Total assets 6,950 5,904
Total debt 5,267 3,857
Total equity 1,677 596
Company's share of equity 1,677 539
</TABLE>
<TABLE>
<CAPTION>
FOR THE
YEARS ENDED
MARCH 31
--------------
1998 1997
---- ----
<S> <C> <C>
Summary operations:
Rental income $782 $353
Expenses 596 83
Net income 192 115
Company's share of net income 192 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 was 92% and
100% occupied during fiscal years 1998 and 1997, respectively. The
Company has a 99% limited partnership interest and is
<PAGE> 22
-15-
recognizing 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 $2,799,000 and
$2,915,000 at March 31, 1998 and 1997, respectively, and are reflected
in investments in real estate in the accompanying statements of
financial condition.
<TABLE>
<CAPTION>
AS OF MARCH 31
------------------
1998 1997
------ ------
<S> <C> <C>
Summary financial position:
Real estate property $3,262 $3,324
Total assets 3,393 3,384
Total debt (payable to Bank) 1,721 1,750
Total equity 1,604 1,615
Company's share of equity 1,205 1,320
</TABLE>
<TABLE>
<CAPTION>
FOR THE
YEARS
ENDED
MARCH 31
-----------------
1998 1997
----- -----
<S> <C> <C>
Summary operations:
Rental income $ 403 $ 440
Other expense 485 432
Net income (loss) (33) 8
Company's share of net income (loss) (33) 8
</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, 1998 and
1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
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 $ 34,682 $ 34,682 $ 25,875 $ 25,875
</TABLE>
<PAGE> 23
-16-
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Securities:
Available for sale $104,736 $104,736 $ 96,921 $ 96,921
Held to maturity 58,138 59,129 51,907 52,048
Loans receivable 535,732 548,579 515,749 525,004
Loans held for sale 332,592 337,732 62,882 63,814
Accrued interest receivable 7,301 7,301 5,472 5,472
Financial liabilities:
Deposits 778,975 779,233 557,724 557,679
FHLB advances and other borrowings
240,855 241,238 153,805 153,832
Accrued interest payable 4,949 4,949 3,562 3,562
</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.
- 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.
<PAGE> 24
-17-
- 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, 1998 and 1997.
9. DEPOSITS
At March 31, 1998 and 1997, deposits are summarized by type and
remaining term as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Demand deposits:
Noninterest-bearing deposits $ 61,070 $ 29,843
Interest-bearing deposits 86,360 48,923
Money market 38,862 20,902
Savings 38,410 46,353
-------- --------
Total demand deposits 224,702 146,021
-------- --------
Time deposits:
Maturity one year or less 411,179 308,459
Maturity greater than one year through two years 47,590 33,155
Maturity greater than two years through three years 36,533 29,312
Maturity greater than three years 58,971 40,777
-------- --------
Total time deposits 554,273 411,703
-------- --------
Total deposits $778,975 $557,724
======== ========
</TABLE>
The weighted average interest rate on time deposits at March 31, 1998
and 1997 was 5.94% and 5.84%, respectively.
Interest expense on deposits for the years ended March 31, 1998, 1997,
and 1996 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Interest-bearing demand deposits $ 1,721 $ 993 $ 1,074
Money market 1,033 496 558
Savings 1,053 1,128 1,162
Time deposits 25,959 22,560 18,032
------- ------- -------
$29,766 $25,177 $20,826
======= ======= =======
</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.
<PAGE> 25
-18-
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. The special assessment resulted in a one-time charge in fiscal
1997 in the amount of $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.
10. FHLB ADVANCES AND OTHER BORROWINGS
FHLB advances and other borrowings at March 31, 1998 and 1997 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
FHLB advances $217,835 $141,383
Other borrowings 23,020 12,422
-------- --------
$240,855 $153,805
======== ========
</TABLE>
At March 31, 1998, FHLB advances are at least 125%, collateralized by
unencumbered mortgage loans and approximately $63,000,000 of investment
securities. The advances mature at various dates through December 2002.
The weighted average interest rate on FHLB advances was 5.9% and 6.8%
at March 31, 1998 and 1997, respectively. Maximum short-term borrowings
during the years ended March 31, 1998 and 1997 were $164,320,000 and
$177,445,000, respectively.
As of March 31, 1998, repayments of FHLB advances and other borrowings,
based on contractual maturities, are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal year:
1999 $142,866
2000 9,753
2001 25,184
2002 184
2003 50,184
Thereafter 12,684
--------
$240,855
========
</TABLE>
<PAGE> 26
-19-
11. INCOME TAXES
Income tax expense for the years ended March 31, 1998, 1997, and 1996
is allocated as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current expense:
Federal $ 5,327 $ 2,477 $ 3,384
State 524 35 274
------- ------- -------
5,851 2,512 3,658
------- ------- -------
Deferred benefit:
Federal (2,360) (559) (523)
State (451) (185) (165)
------- ------- -------
(2,811) (744) (688)
------- ------- -------
$ 3,040 $ 1,768 $ 2,970
======= ======= =======
</TABLE>
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 for fiscal years 1998, 1997, and 1996 to income
before income taxes (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Expected income tax expense $ 3,488 $ 1,875 $ 3,124
(Decrease) increase in income taxes resulting from:
State income taxes, net of federal income tax benefit 47 (99) 72
Income tax credits (173) (173) (170)
Merger expenses 0 199 0
Other, net (322) (34) (56)
------- ------- -------
Actual income tax expense $ 3,040 $ 1,768 $ 2,970
======= ======= =======
</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, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Deferred tax assets:
Loans receivable, due to reserve for loan losses $2,515 $1,601
Loans held for sale, mark-to-market adjustment recognized for tax
purposes 1,939 306
Deposit base premium, due to difference in amortization method for tax
purposes 293 258
Employee benefits, due to differences in expense recognition methods for
tax purposes 497 505
Net operating loss carryforward 307 333
</TABLE>
<PAGE> 27
-20-
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Net unrealized loss on securities available for sale, not recognized for
tax purposes $ 0 $ 628
Other 153 67
------ ------
Gross deferred tax assets 5,704 3,698
------ ------
Deferred tax liabilities:
FHLB stock, due to dividends not recognized for tax purposes 0 117
Loans receivable, due to differences in deferred loan fees and costs
recognition for tax purposes 750 735
Premises and equipment, due to differences in depreciation methods for
tax purposes 487 562
Net unrealized gain on securities available for sale, not recognized for
tax purposes 514 0
------ ------
Gross deferred tax liabilities 1,751 1,414
------ ------
Net deferred tax assets $3,953 $2,284
====== ======
</TABLE>
No valuation allowance for net deferred tax assets has been recorded as
of March 31, 1998 and 1997 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.
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, 1998 and 1997 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, unissued,
and authorized as of March 31, 1998:
<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
</TABLE>
<PAGE> 28
-21-
<TABLE>
<CAPTION>
NUMBER
OF SHARES
----------
<S> <C>
Dividend Reinvestment and Stock Purchase Plan 220,000
----------
Total shares reserved 723,000
Shares issued 6,037,100
Unissued shares 3,239,900
----------
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.
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, 1998 and 1997, 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 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 (as determined in accordance
with the
<PAGE> 29
-22-
provisions of the Company's 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
change in control. Options vest 100% upon a change in control
of the Company.
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, 1998, the fair value of these shares is
$1,585,938. 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 1998, 1997, and 1996, the contribution was
approximately $514,000, $415,000, and $385,000, respectively.
<PAGE> 30
-23-
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 the Company's 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.
A summary of the Company's stock option activity during the three-year
period ended March 31, 1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
NUMBER PRICE
-------- --------
<S> <C> <C>
Outstanding at March 31, 1995 492,082 $ 8.96
Granted 8,500 14.16
Exercised and expired (33,000) 3.25
--------
Outstanding at March 31, 1996 467,582 9.31
Granted 47,500 15.94
Exercised and expired (143,550) 8.96
--------
Outstanding at March 31, 1997 371,532 10.34
Granted 167,217 16.56
Exercised (55,606) 7.48
--------
Outstanding at March 31, 1998 483,143 $12.91
========
</TABLE>
<PAGE> 31
-24-
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE RANGE OF
EXERCISE EXERCISE
NUMBER PRICE PRICES
------- --------- --------------
<S> <C> <C> <C>
Outstanding options exercisable as of:
March 31, 1996 339,082 $ 7.83 $3.375-$16.375
March 31, 1997 215,974 8.64 $3.375-$16.750
March 31, 1998 297,448 11.07 $3.375-$20.000
</TABLE>
The weighted average remaining contractual life of options outstanding
at March 31, 1998 is approximately 7.5 years.
The weighted average fair value of stock option grants during fiscal
years 1998 and 1997 is $797,326 and $210,506, respectively. No stock
options were granted during the three-month period ended March 31,
1996.
The fair value of these grants was determined using the following
assumptions as of March 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Weighted average risk-free interest rate 6.41% 6.75%
Expected option life 7 YEARS 7 years
Expected stock price volatility 29% 27%
Expected dividend yield 2.4% 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 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>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net income:
As reported $7,210 $3,746 $6,219
Pro forma 6,983 3,721 6,212
EPS:
Basic:
As reported $ 1.27 $ .68 $ 1.46
Pro forma 1.23 .67 1.46
Diluted:
As reported $ 1.23 .66 $ 1.40
Pro forma 1.20 .66 1.40
</TABLE>
<PAGE> 32
-25-
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 date of
award was $338,000 and is being amortized by charges to compensation
expense over the three-year vesting period. During the year ended March
31, 1998, the Company awarded an officer of the Bank 20,000
nontransferable restricted shares of the Company's common stock. The
market value of these shares at the date of award was $355,000 and 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, 1998, 1997, and 1996 was $73,000, $121,000, and
$158,000, 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 at various
times over the next three years.
13. DIVIDEND AND LOAN RESTRICTIONS
The source of funds for payment of dividends by the Company is
primarily 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. As of March 31, 1998, the
Bank's primary regulators categorized the Bank as adequately
capitalized; consequently, the Bank is not able to declare any
dividends to the Company without receiving advanced regulatory
approval. A well-capitalized institution, as defined, is permitted to
make capital distributions during a calendar year without receiving
advanced regulatory approval 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 approval with
the opportunity for the OTS to object to the distribution. In addition,
a savings association must provide the OTS with a 30-day advanced
written notice of all proposed capital distributions, whether or not
advanced 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 $3,410,000, $683,000, and $1,400,000 during
the years ended March 31, 1998, 1997, and 1996, respectively. 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. During fiscal
year 1998, the Bank paid a dividend in the form of loans to the Company
in the amount of $10,525,000, which were then contributed to EBCG.
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, as to each of its
affiliates, in the amount of 10% of the Bank's
<PAGE> 33
-26-
capital stock and surplus, as defined, and are limited, in the
aggregate, to 20% 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, 1998, 1997,
and 1996 is presented below (in thousands):
<TABLE>
<CAPTION>
MORTGAGE
BANKING BANKING ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
1998:
Revenues $ 53,436 $ 42,497 $ (7,684) $ 88,249
Net income 6,389 2,181 (1,360) 7,210
Identifiable assets 1,026,572 470,237 (347,326) 1,149,483
Capital expenditures, net 2,702 733 0 3,435
Depreciation on premises and
equipment 1,467 524 0 1,991
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
</TABLE>
The Company includes construction lending activity and the origination
and sale of first mortgage loans in the mortgage banking segment. The
Company includes its investments in real estate activity (Note 7) in
the banking segment.
15. 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.
<PAGE> 34
-27-
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, 1998 that the Bank meets all capital adequacy
requirements to which it is subject.
As of March 31, 1998, the Bank's primary regulators categorized the
Bank as adequately capitalized. There are no conditions or events that
management believes may have changed the Bank's category.
A summary of actual, required, and well-capitalized total and Tier 1
capital, Tier 1 leverage, and tangible capital ratios as of March 31,
1998 is presented below (dollars in thousands):
<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 $51,173 7.47% $27,392 4.0% $41,089 6.0%
Total capital 56,885 8.31 54,785 8.0 68,481 10.0
Tier 1 leverage 51,173 4.59 44,553 4.0 55,691 5.0
Tangible equity 51,173 5.91 12,988 1.5 N/A N/A
</TABLE>
16. EARNINGS PER SHARE
Weighted average common and common equivalent shares for the years
ended March 31, 1998, 1997, and 1996 are computed as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Average common shares--basic 5,690,680 5,527,973 4,250,752
Effect of dilutive common share equivalents 148,257 176,604 178,748
--------- --------- ---------
Average common shares--diluted 5,838,937 5,704,577 4,429,500
========= ========= =========
</TABLE>
17. 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.
<PAGE> 35
-28-
In November 1992, the Bank acquired certain assets from the Resolution
Trust Corporation, which included four mortgage loan origination
facilities. The Bank then entered into an Operating Agreement (the
"Agreement") with two individuals and a corporation controlled by them
(collectively, the "Plaintiffs") to form the Prime Lending Division
("Prime"). Under the Agreement, the Plaintiffs became employees of the
Bank and were to be paid a percentage of the net profits to be
calculated after allocating expenses and overhead to Prime. In
mid-1997, a disagreement arose with respect to the allocation of
expenses to Prime, which led to the filing by the Plaintiffs of a
lawsuit on December 5, 1997 alleging the Bank had improperly
calculated the profits due them under the Agreement since April 1997.
In January 1998, the Bank terminated the Agreement with the Plaintiffs
"for cause." The Bank also maintains that its calculation of the
profits and losses was proper.
The complaint as amended seeks, among other things (i) a declaration
the Agreement was terminated "without cause" and that, pursuant to the
Agreement, the Plaintiffs have the right to purchase the assets of
Prime at 75% of fair market value; (ii) alleged unpaid profits from
Prime's operations (in an amount estimated by the Plaintiffs to equal
approximately $450,000); (iii) a determination that the term "assets,"
as used in connection with the Plaintiff's alleged purchase option in
the Agreement, includes all loans carried as assets on the books of
the Bank that were originated by Prime (the "Prime Loans") without
being required to assume or net against the Prime Loans any
corresponding liability incurred by the Bank in connection with the
Prime Loans; (iv) consequential damages in excess of $20 million,
which represents the Plaintiffs' assessment of the loss they suffered
by the Bank's refusal to sell to the Plaintiff Prime's assets under
Plaintiffs' definition of "assets" (i.e., including such loans); and
(v) unspecified punitive damages and attorney's fees. The Bank
strongly denies all of Plaintiffs' allegations, including the
Plaintiffs' allegation that they have the right to purchase the assets
of Prime. Further, the Bank specifically disputes Plaintiffs'
contention that all loans originated by Prime constitute "assets" of
Prime.
The Bank believes that the Plaintiffs are not entitled to purchase
the Prime Loans and that the only assets that the Plaintiffs may be
permitted to purchase are the tangible and intangible assets of
Prime. Although the Bank does not believe that Plaintiffs have the
contractual right to purchase the Prime Loans, the Bank contends
that if the court determines that the Plaintiffs do have a right to
purchase the Prime Loans, the Plaintiffs must assume the liabilities
associated with such loans (including funding expenses). The
Agreement specifically provides that, if Plaintiffs purchase the
assets of Prime, they must "assume all obligations associated with
[Prime Lending] Division."
If Plaintiffs are successful in obtaining a declaration that they are
entitled to purchase the assets of Prime (or if the Bank agrees to
compromise this case with the Plaintiffs), the Bank may cease
originating permanent mortgages and construction loans from the 11
Prime offices situated outside the metropolitan Atlanta area. The
Agreement provides that, if Plaintiffs purchase the assets of Prime,
the Bank shall refrain for two years from originating conforming
residential loans secured by property located within 25 miles of any
Prime office. The Company does not believe that such cessation of
operations would have a material adverse effect upon its or the
Bank's business or operations. Pending the outcome of the litigation,
the Bank will continue to operate Prime's mortgage loan origination
business. In addition, the Bank believes it can replace loans
originated by Prime through its other existing operations, including
the Wholesale Mortgage Division of the Bank.
18. FINANCIAL INFORMATION OF EAGLE BANCSHARES, INC. (PARENT ONLY)
Eagle Bancshares, Inc.'s condensed statements of financial condition
as of March 31, 1998 and 1997 and related condensed statements of
income and cash flows for the years ended March 31, 1998, 1997, and
1996 are as follows (in thousands):
<PAGE> 36
-29-
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
ASSETS
1998 1997
------- -------
<S> <C> <C>
Cash $ 2,394 $ 1,858
Securities available for sale 3,283 5,247
Investment in subsidiaries 70,378 61,702
Other assets 598 1,173
------- -------
Total assets $76,653 $69,980
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ 1,951 $ 2,106
Stockholders' equity 74,702 67,874
------- -------
Total liabilities and stockholders' equity $76,653 $69,980
======= =======
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Interest and other income $ 429 $ 670 $ 320
Management fee income from subsidiaries 562 100 100
Cash dividends from the Bank 3,410 683 1,400
------ ------ ------
Total income 4,401 1,453 1,820
Merger expenses 0 343 0
Loss on securities available for sale 72 61 0
General and administrative expenses 929 801 200
------ ------ ------
Income before income taxes and equity in
undistributed earnings of subsidiaries 3,400 248 1,620
Income tax provision 564 194 195
------ ------ ------
Income before equity in undistributed earnings of subsidiaries 2,836 54 1,425
Equity in undistributed earnings of subsidiaries 4,374 3,692 4,794
------ ------ ------
Net income $7,210 $3,746 $6,219
====== ====== ======
</TABLE>
<PAGE> 37
-30-
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 7,210 $ 3,746 $ 6,219
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed earnings of subsidiaries (4,374) (3,692) (4,794)
Amortization of restricted stock award 73 121 158
Loss on securities available for sale 72 61 0
Decrease in other assets 575 329 784
Decrease in due to subsidiaries 0 0 (182)
(Decrease) increase in other liabilities (180) 479 632
-------- -------- --------
Net cash provided by operating activities 3,376 1,044 2,817
-------- -------- --------
Cash flows from investing activities:
Proceeds from calls of securities available for sale 1,930 940 0
Capital distributions from subsidiaries 1,969 376 0
Capital contributions to subsidiaries (4,433) 0 (21,633)
-------- -------- --------
Net cash (used in) provided by investing
activities (534) 1,316 (21,633)
-------- -------- --------
Cash flows from financing activities:
Cash dividends paid (3,406) (2,842) (1,568)
Stock options exercised 429 1,000 182
Proceeds from issuance of common stock 0 0 21,483
Purchase of treasury stock 0 0 (12)
Issuance of ESOP note payable to acquire common stock
0 0 (1,000)
Principal reduction of ESOP note payable 671 164 11
-------- -------- --------
Net cash (used in) provided by financing
activities (2,306) (1,678) 19,096
-------- -------- --------
Net increase in cash 536 682 280
Cash at beginning of year 1,858 1,176 896
-------- -------- --------
Cash at end of year $ 2,394 $ 1,858 $ 1,176
======== ======== ========
Supplemental disclosures of noncash financing and
investing activities:
Dividends payable $ 861 $ 849 $ 592
======== ======== ========
Dividend of securities received from Bank $ 0 $ 6,094 $ 0
======== ======== ========
Dividend of loans received from Bank $ 10,525 $ 0 $ 0
======== ======== ========
Contribution of loans to EBCG $ 10,525 $ 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 Federally
Bank 100% Chartered
Eagle Real Estate
Advisors, Inc. 100% Georgia
Eagle Bancshares
Capital Group, Inc. 100% Georgia
Tucker Federal Eagle Service
Bank Corporation 100% Georgia
Eagle A.R.M.S.,
Inc. 100% Georgia
Prime Eagle
Mortgage
Corporation 100% Georgia
</TABLE>
53
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated June 26, 1998 included in Eagle Bancshares, Inc.'s Annual Report to
Shareholders and incorporated by reference into this Form 10-K, into the
Registrant's previously file Registration Statements No. 333-15041, No.
333-49267, No. 333-36399, and No. 333-00977.
/s/ ARTHUR ANDERSEN LLP
- -----------------------
ARTHUR ANDERSEN LLP
Atlanta, Georgia
July 2, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 34,022
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 660
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 104,736
<INVESTMENTS-CARRYING> 58,138
<INVESTMENTS-MARKET> 59,129
<LOANS> 868,324
<ALLOWANCE> 6,505
<TOTAL-ASSETS> 1,149,483
<DEPOSITS> 778,975
<SHORT-TERM> 125,335
<LIABILITIES-OTHER> 54,951
<LONG-TERM> 115,520
0
0
<COMMON> 6,037
<OTHER-SE> 68,665
<TOTAL-LIABILITIES-AND-EQUITY> 1,149,483
<INTEREST-LOAN> 60,624
<INTEREST-INVEST> 6,244
<INTEREST-OTHER> 5,032
<INTEREST-TOTAL> 71,900
<INTEREST-DEPOSIT> 29,766
<INTEREST-EXPENSE> 10,241
<INTEREST-INCOME-NET> 31,893
<LOAN-LOSSES> 2,601
<SECURITIES-GAINS> (82)
<EXPENSE-OTHER> 35,391
<INCOME-PRETAX> 10,250
<INCOME-PRE-EXTRAORDINARY> 10,250
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,210
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.23
<YIELD-ACTUAL> 9.16
<LOANS-NON> 7,948
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 4,009
<ALLOWANCE-OPEN> 5,198
<CHARGE-OFFS> (1,548)
<RECOVERIES> 254
<ALLOWANCE-CLOSE> 6,505
<ALLOWANCE-DOMESTIC> 6,505
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
