<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Georgia 58-1640222
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4305 Lynburn Drive, Tucker, Georgia 30084-4441
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(770) 908-6690
----------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Not Applicable
---------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED
SINCE LAST REPORT.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No NOT APPLICABLE
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 1998
----------------- ------------------------------------
Common Stock, $1.00 Par Value 5,721,514 shares
Index of Exhibit on Page 34
<PAGE> 2
EAGLE BANCSHARES, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
<S> <C>
PART I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition at
September 30, 1998 and March 31, 1998 3
Consolidated Statements of Income
Three and Six months ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows -
Six months ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. Other Information
Item 1. Legal Proceedings 31
Item 2. Changes in Securities 31
Item 3. Defaults upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 33
Index of Exhibits 34
</TABLE>
2
<PAGE> 3
EAGLE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, March 31,
(dollars in thousands except per share data) 1998 1998
ASSETS:
<S> <C> <C>
Cash and amounts due from banks $ 20,891 $ 34,022
Federal funds sold -- 660
Accrued interest receivable 8,161 7,301
Securities available for sale 193,349 104,736
Investment securities held to maturity 48,804 58,138
Loans held for sale 368,318 332,592
Loans receivable, net 521,271 535,732
Investment in real estate 31,045 27,595
Real estate acquired in settlement of loans, net 2,462 2,947
Stock in Federal Home Loan Bank, at cost 11,377 10,892
Premises and equipment, net 21,158 21,868
Deferred income taxes 3,659 3,953
Other assets 12,145 9,047
------------------------------
Total assets $1,242,640 $1,149,483
------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 773,587 $ 778,975
Federal Home Loan Bank advances and other borrowings 308,400 240,855
Advance payments by borrowers for property taxes and insurance 3,190 5,477
Drafts outstanding 33,904 30,716
Guaranteed preferred beneficial interests in the Company's subordinated debentures -
(Trust preferred securities) 28,750 -
Accrued expenses and other liabilities 17,389 18,758
------------------------------
Total liabilities $1,165,220 $1,074,781
------------------------------
STOCKHOLDERS' EQUITY:
Common stock, $1 par value; 10,000,000 shares authorized, 6,111,564 and
6,037,100 shares issued at September 30 and March 31, 1998, respectively 6,111 6,037
Additional paid-in capital 38,075 37,336
Retained earnings 35,624 32,028
Accumulated other comprehensive income 1,241 838
Employee Stock Ownership Plan note payable (1,916) (165)
Unamortized restricted stock (237) (296)
Treasury stock, 324,050 and 301,800 shares at cost, at September 30 and
March 31, 1998, respectively (1,478) (1,076)
Total stockholders' equity 77,420 74,702
------------------------------
Total liabilities and stockholders' equity $1,242,640 $1,149,483
------------------------------
</TABLE>
3
<PAGE> 4
EAGLE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- ----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest on loans $18,285 $ 14,731 $36,642 $ 28,788
Interest on mortgage-backed securities 1,283 1,269 2,554 2,568
Interest on securities and other interest-earning assets 1,742 1,474 3,548 3,155
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest income 21,310 17,474 42,744 34,511
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 10,281 7,347 20,681 14,144
Interest on FHLB advances and other borrowings 2,726 2,219 5,732 4,662
Interest on trust preferred securities 434 -- 434 --
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 13,441 9,566 26,847 18,806
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income 7,869 7,908 15,897 15,705
PROVISION FOR LOAN LOSSES 627 600 1,254 1,317
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 7,242 7,308 14,643 14,388
- ----------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Mortgage production fees 4,690 2,079 7,909 4,120
Gain on sale of investment in real estate 162 405 1,091 631
Real estate commissions, net 241 87 414 193
Rental income 173 172 346 338
Service charges 481 506 1,051 994
Gain/(loss) on sale of investment securities available for sale 202 (51) 469 (51)
Gain on sale of loans 24 -- 24 16
Gain on sale of fixed assets 5 -- 152 3
Miscellaneous 703 402 1,640 800
- ----------------------------------------------------------------------------------------------------------------------------------
Total other income 6,681 3,600 13,096 7,044
- ----------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES:
Salaries and employee benefits 5,189 4,809 10,445 9,524
Net occupancy expense 1,355 1,052 2,517 2,094
Data processing expense 601 461 1,165 1,009
Federal insurance premium 161 70 257 139
Marketing expense 495 160 991 431
Provision for losses on real estate acquired in the settlement of loans -- 170 -- 290
Miscellaneous 2,391 1,845 4,208 3,386
- ----------------------------------------------------------------------------------------------------------------------------------
Total other expenses 10,192 8,567 19,583 16,873
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,731 2,341 8,156 4,559
INCOME TAX EXPENSE 1,260 618 2,705 1,276
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2,471 $ 1,723 $ 5,451 $ 3,283
- ----------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE - BASIC $ .42 $ .30 $ .94 $ .58
- ----------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE - DILUTED $ .41 $ .30 $ .91 $ .56
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 5
EAGLE BANCSHARES, INC.,
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(dollars in thousands)
Six Months ended September 30, 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,451 $ 3,283
Adjustments to reconcile net income to net cash used in operating
Activities:
Depreciation, amortization and accretion 1,240 (233)
Provision for loan losses 1,254 1,317
Provision for losses on real estate acquired in settlement of loans -- 290
(Gain)/loss on sale of investments (469) 51
(Gain)/loss on sale of real estate acquired in settlement of loans (107) 13
Gain on sale of investment in real estate (1,091) (631)
Gain on sale of loans (24) (16)
Gain on sale of premises and equipment (152) (3)
Amortization of restricted stock 59 14
Deferred income tax benefit/(expense) 49 (330)
Proceeds from sale of loans held for sale 731,821 320,007
Originations of loans held for sale (767,547) (343,049)
Changes in assets and liabilities:
Increase in accrued interest receivable (860) (49)
(Increase)/decrease in other assets (3,236) 1,683
Increase (decrease) in drafts outstanding 3,188 (10,929)
Decrease in accrued expense and other liabilities (1,433) (2,261)
- -------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (31,857) (30,843)
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale (114,004) (1,000)
Proceeds from sale of securities available for sale 9,441 --
Purchases of investment securities held to maturity -- (13,000)
Principal payments received on securities available for sale 9,249 2,786
Principal payments received on investment securities held to maturity 1,335 891
Proceeds from calls of securities available for sale 6,249 3,923
Proceeds from calls of investment securities held to maturity 8,000 10,000
Proceeds from maturities of securities available for sale 1,501 1,000
Proceeds from maturities of investment securities held to maturity -- 6,300
Loan originations, net of repayments 15,695 (31,883)
Purchases of loans receivable -- (569)
Proceeds from sale of real estate acquired in settlement of loans 976 212
Purchases of FHLB stock (4,570) (2,486)
Redemption of FHLB stock 4,085 1,754
Proceeds from sales of premises and equipment 535 162
Purchase of premises and equipment (794) (2,618)
Additions to investment in real estate (7,802) (5,234)
Proceeds from sale of investment in real estate 2,681 1,196
- -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities $ (67,423) $ (28,566)
- -------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 6
EAGLE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Six Months ended September 30, 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in time deposits $ (15,154) $ 28,117
Net change in demand deposit accounts 9,766 9,274
Repayment of FHLB advances and other borrowings (467,980) (166,221)
Proceeds from FHLB advances and other borrowings 535,525 187,382
Increase in ESOP debt (1,916) --
Principal reduction of ESOP debt 165 --
Issuance of trust preferred securities 28,750 --
Repurchase of common stock (402) --
Proceeds from exercise of stock options 813 73
Cash dividends paid (1,791) (1,699)
Decrease in advance payments from borrowings for
Property taxes and insurance (2,287) (7)
- ----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 85,489 56,919
- ----------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (13,791) (2,490)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 34,682 25,875
- ----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,891 $ 23,385
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH PAID DURING PERIOD FOR:
Interest $ 30,122 $ 18,528
Income taxes $ 6,866 $ 2,664
Supplemental schedule of noncash investing and financing activities:
Acquisition of real estate in settlement on loans $ 678 $ 1,035
Loans made to finance real estate acquired in settlement of loans $ 294 $ 102
Loans made to finance sales of investments in real estate $ 2,718 $ 1,324
Dividends payable $ 926 $ 850
</TABLE>
6
<PAGE> 7
Eagle Bancshares, Inc.
Notes to Interim Unaudited Consolidated Financial Statements
September 30, 1998
A. Corporate Profile
Eagle Bancshares, Inc. (the "Company") 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.
B. Basis of Presentation:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for preparation of the Securities
and Exchange Commission Form 10-Q. Accordingly, they do not include all of the
information and disclosures required for fair presentation in accordance with
generally accepted accounting principles. These financial statements should
therefore be read in conjunction with management's discussion and analysis of
financial condition and results of operations included in this report and the
complete annual report for the year ended March 31, 1998, which has been filed
with the Company's most recent Form 10-K. In the opinion of management, all
eliminations and normal recurring adjustments considered necessary for fair
presentation have been included. Operating results for the six month period
ended September 30, 1998, are not necessarily indicative of the results that may
be expected for the fiscal year ending March 31, 1999.
C. Reclassification of Prior Period Amounts:
Certain reclassifications have been made in the Company's financial
statements for the prior fiscal period to conform to the classifications used in
the financial statements for the current fiscal period.
D. 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".
7
<PAGE> 8
In the calculation of basic and diluted earnings per share, net income
is identical. Below is a reconciliation for the three months period ended
September 30, 1998 and 1997, of the difference between average basic common
shares outstanding and average diluted common shares outstanding.
<TABLE>
<CAPTION>
COMPUTATION OF PER SHARE EARNINGS
(dollars in thousands except per share data) THREE MONTHS ENDED
SEPT. 30, 1998 Sept. 30, 1997
-----------------------------------
<S> <C> <C>
Basic
- -----
Net income $2,471 $1,723
-----------------------------------
Average common shares 5,788 5,666
-----------------------------------
Earnings per common share - basic $ 0.42 $ 0.30
-----------------------------------
Diluted
Net income $2,471 $1,723
-----------------------------------
Average common shares - basic 5,788 5,666
Incremental shares outstanding 167 165
Average common shares - diluted 5,955 5,831
-----------------------------------
Earnings per common share - diluted $ 0.41 $ 0.30
-----------------------------------
</TABLE>
Below is a reconciliation for the six months period ended September 30, 1998 and
1997, of the difference between average basic common shares outstanding and
average diluted common shares outstanding.
<TABLE>
<CAPTION>
(dollars in thousands except per share data) SIX MONTHS ENDED
SEPT. 30, 1998 Sept. 30, 1997
-----------------------------------
<S> <C> <C>
Basic
Net income $5,451 $3,283
------ ------
Average common shares 5,788 5,666
------ ------
Earnings per common share - basic $ 0.94 $ 0.58
------ ------
Diluted
Net income $5,451 $3,283
------ ------
Average common shares - basic 5,788 5,666
Incremental shares outstanding 183 172
Average common shares - diluted 5,971 5,838
------ ------
Earnings per common share - diluted $ 0.91 $ 0.56
------ ------
</TABLE>
8
<PAGE> 9
E. Comprehensive Income
The Company adopted the provisions in Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This statement requires
that certain transactions and other economic events that bypass the income
statement must be displayed as other comprehensive income. The Company's
comprehensive income consists of net income and unrealized gains and losses on
securities available for sale, net of income taxes.
Comprehensive income for the first three and six months of fiscal year 1999 and
1998 is calculated as follows: (dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------------------------
SEPT. 30, Sept. 30, SEPT. 30, Sept. 30,
1998 1997 1998 1997
---------------------------------------------------
<S> <C> <C> <C> <C>
Unrealized gains (net) recognized in Other comprehensive income:
Before income tax $ 910 $ 265 $ 648 $2,642
Income tax 345 154 245 844
Net of income tax $ 565 $ 111 $ 403 $1,798
Amounts reported in net income:
Gain/(loss) on sale of securities $ 202 $ (51) $ 469 $ (51)
Net amortization (accretion) 36 18 67 18
---------------------------------------------------
Reclassification adjustment 238 (33) 536 (33)
Income tax (expense)/benefit (90) 19 (204) 11
---------------------------------------------------
Reclassification adjustment, net of tax 148 (14) 332 (22)
Amounts reported in other comprehensive income:
Unrealized (loss)/gain arising during period, net of tax 723 97 761 1,766
Reclassification adjustment, net of tax 148 (14) 332 (22)
---------------------------------------------------
Unrealized (loss)/gain (net) recognized in
Other comprehensive income 565 111 403 1,798
Net income 2,471 1,723 5,451 3,283
---------------------------------------------------
Total comprehensive income $3,036 $1,834 $5,854 $5,081
---------------------------------------------------
</TABLE>
F. Year 2000
The Year 2000 issue is the result of computer programs using a
two-digit format, as opposed to four-digits, to indicate the year. These
computer systems will be unable to interpret dates beyond the year 1999, which
could cause system failures or other computer errors, leading to disruptions in
operations. In addition, many software programs and automated systems will fail
to recognize the year 2000 as a leap year. The problem is not limited to
computer systems, or any particular industry or field. Year 2000 issues will
potentially affect every system that has an embedded microchip containing this
flaw, such as alarm systems, vaults and elevators.
The Company has developed a comprehensive business plan to manage Year
2000 issues. The plan is monitored by the Board of Directors. The Company
established Team2000, a group of employees and mission critical vendors to
address the Year 2000 issues. The Company depends on service providers and
vendors who provide equipment, technology and software to it in connection with
its business operations. Team2000 is responsible for ensuring that its in-house
processing, service providers, and software vendors are fully compliant with the
year 2000 requirements. The Company is in constant dialogue with key service
9
<PAGE> 10
providers and is performing due diligence over their remediation and testing
efforts. All computer hardware and software testing, renovation and upgrades are
on target and will be substantially complete by December 31, 1998. The Company
is developing a contingency plan for each system or service, should Year 2000
compliance not be achieved for all mission critical service providers and
vendors by the December 31, 1998 deadline. As of September 30, 1998, the Company
has incurred approximately $500,000 in expenses related to the Year 2000
requirements. The Company estimates the total cost associated with Year 2000
issues will be approximately $600,000. The Company 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
it 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.
In addition, the Company is responsible for evaluating the level of
Year 2000 compliance of material customers including, funds takers, funds
providers and capital market/asset management counterparties. Customers
representing material Year 2000 related risk have been identified and contacted.
The Company is in the final stages of evaluating and assessing these customers'
level of preparedness as related to the Year 2000 issues. Once the individual
and aggregate risk to the Company is evaluated, management will develop and
implement appropriate controls to manage and mitigate any risk.
G. Recent Accounting Pronouncements
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.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. This statement could
increase volatility in earnings and other comprehensive income. This statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Initial application of this statement should be as of the beginning of an
entity's fiscal quarter. On that date, hedging relationships must be
redesignated and documented pursuant to the provisions of this statement.
Earlier application of this statement is encouraged, but it is permitted only as
of the beginning of any fiscal quarter that begins after issuance of this
statement and should not be applied retroactively to financial statements of
prior periods. Adoption of the this statement is not expected to have a material
impact on the Company's consolidated statements of financial condition and
results of operation.
10
<PAGE> 11
H. Trust Preferred Securities
On July 29, 1998, the Company closed a public offering of 1,150,000 of
Trust Preferred Securities offered and sold by EBI Capital Trust I ("the
Trust"), having a liquidation amount of $25.00 each. The Company owns all assets
of the Common Securities of the Trust. The Trust's sole assets are the
subordinated debentures and the back-up obligations, in the aggregate,
constitute a full and unconditional guarantee by the Company of the obligations
of the Trust under the Preferred Securities. Total proceeds to the Company from
the offering were $28,750,000. The Company contributed $11,000,000 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". The Bank used these proceeds to increase its investment securities
available for sale portfolio. Additionally, approximately $4,300,000 was used to
repay existing debt associated with the Company's real estate investment
Rivermoore Park, LLP and to invest in investment grade preferred securities,
held as available for sale by the holding company, of approximately $3,500,000.
The remainder of the net proceeds will be used for general corporate purposes.
I. Treasury Stock
During the second quarter of fiscal 1999, the Company' Board of
Directors approved a stock repurchase program. The plan authorizes the Company
to purchase up to 300,000 shares of its common stock on the open market. As of
September 30, 1998, the Company has repurchased 22,250 shares with a cost of
approximately $402,000.
11
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
<TABLE>
<CAPTION>
SUMMARY FINANCIAL DATA
(dollars in thousands except per share data) % Change
QUARTER ENDED Sept. 30, 1998 from
SEPT. 30, June 30, Sept. 30, June 30, Sept. 30,
For the quarter: 1998 1998 1997 1998 1997
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income $ 2,471 $ 2,980 $ 1,723 (17.08) 43.41
Per common share:
Net income per common share - basic 0.42 0.52 0.30 (19.23) 40.00
Net income per common share - diluted 0.41 0.50 0.30 (18.00) 36.67
Dividends declared 0.16 0.16 0.15 -- 6.67
Book value per share 13.38 13.36 12.59 0.15 6.27
Average common shares outstanding - basic 5,788 5,763 5,666 0.43 2.15
Average common shares outstanding - diluted 5,955 5,961 5,831 (0.10) 2.13
Profitability ratios: (%)
Return on average assets 0.85% 1.04% 0.81% (18.27) 4.94
Return on average equity 13.03 16.14 9.68 (19.27) 34.61
Efficiency ratio 70.05 65.03 74.45 7.72 (5.91)
Net interest margin - taxable equivalent 3.02 3.06 4.20 (1.31) (28.10)
Equity to assets 6.23 6.92 8.17 (9.97) (23.75)
At quarter end:
Loans held for sale $ 368,318 $ 338,384 $ 85,924 8.85 328.66
Loans receivable, net 521,271 513,194 548,615 1.57 (4.98)
Reserve for loan losses 7,184 6,732 6,004 6.71 19.65
Assets 1,242,640 1,120,232 872,706 10.93 42.39
Deposits 773,587 798,007 595,115 (3.06) 29.99
FHLB advances and other borrowings 308,400 197,912 174,966 55.83 76.26
Stockholders' equity 77,420 77,551 71,343 (0.17) 8.52
</TABLE>
SIX MONTHS ENDED
SEPT. 30, Sept. 30,
<TABLE>
<CAPTION>
For the six months: 1998 1997 % Change
----------------------------------
<S> <C> <C> <C>
Net income $5,451 $3,283 66.04
Per common share:
Net income per common share - basic 0.94 0.58 62.07
Net income per common share - diluted 0.91 0.56 62.50
Dividends declared 0.32 0.30 6.67
Average common shares outstanding - basic 5,788 5,666 2.15
Average common shares outstanding - diluted 5,971 5,838 2.28
Profitability ratios: (%)
Return on average assets 0.95 0.78 21.79
Return on average equity 14.56 9.32 56.22
Efficiency ratio 67.54 74.17 (8.93)
Net interest margin - taxable equivalent 3.04 4.21 (27.79)
</TABLE>
12
<PAGE> 13
Overview
The Company's net income for the second quarter of fiscal 1999
increased $748,000 or 43.41% to $2,471,000 or $.41 per diluted share, compared
to $1,723,000 or $.30 per diluted share for the same quarter last year. Net
income for the current six month period increased $2,168,000 or 66.04% to
$5,451,000 or $.91 per diluted share, compared to $3,283,000 or $.56 per diluted
share for the same period last year. The increase is primarily attributable to
an improvement in mortgage banking fees.
Earnings Highlights
(Six-month period September 30, 1998 compared to the six-month period ended
September 30, 1997)
- - Non-interest income increased $6,052,000 or 85.92% to $13,096,000 compared
to the same period last year. Mortgage production fees is the main
contributor to the increase.
- - Return on average equity was 14.56%, compared to 9.32% for the same period
one year ago.
- - Return on average assets was .95% for the current period, compared to .78%
for the six month period last year.
- - The efficiency ratio improved to 67.54% compared to 74.17% for the same
period one year ago.
- - Non-interest expense increased 16.06% or $2,710,000 to $19,583,000 compared
to the same period one year ago.
Net Interest Income
Net interest income decreased by $39,000 or 0.49% to $7,869,000 in the
second quarter of fiscal 1999 from $7,908,000 for the same quarter last year.
Quarterly net interest income remained flat primarily due to a decline in the
net interest margin.
Net interest income increased by $192,000 or 1.22% to $15,897,000
during the first half of fiscal 1999 from $15,705,000 for the same period last
year. This increase is the result of growth in interest earning assets primarily
through loan originations.
Non-Interest Income
Non-interest income increased by $3,081,000 or 85.58% to $6,681,000 for
the second quarter of fiscal 1999 from $3,600,000 for the same period last year.
In addition, non-interest income increased by $6,052,000 or 85.92% to
$13,096,000 for the first half of fiscal 1999 from $7,044,000 for the same
period last year.
Credit Quality
Total problem assets were $15,373,000 at September 30, 1998, or 1.24%
of total assets, compared to 1.30% on March 31, 1998. The reserve for loan
losses totaled $7,183,000 at quarter end or 46.73% of problem assets, compared
to $6,004,000 or 41.56% one year earlier. During the quarter, the provision for
loan losses was $627,000, which exceeded net charge-offs of $175,000. Net
charge-offs for the quarter equaled 0.03% of average loans, a decrease when
compared to 0.07% for the same quarter last year.
Capital Strength
Total shareholders' equity was $77,420,000 on September 30, 1998 or
6.23% of period-end assets, compared to 8.17% on September 30, 1997. Book value
per common share rose to $13.38 at the end of the quarter from 12.59% at
September 30, 1997.
13
<PAGE> 14
EARNINGS ANALYSIS
Net Interest Income - Quarterly Analysis
Net interest income decreased by $39,000 or 0.49% to $7,869,000 in the
second quarter of fiscal 1999 from $7,908,000 for the same quarter last year.
The net interest spread (the difference between the yield earned on
interest-earning assets and the cost of interest-bearing liabilities) declined
141 basis points to 2.66% from 4.07% in the same period last year. This decrease
resulted from the decline in the yield on the Company's loan portfolio. Yield on
interest-earning assets decreased 115 basis points to 8.07% from 9.22% while the
cost of interest-bearing liabilities increased 26 basis points to 5.41% from
5.15%. During a period of declining interest rates, the yield on
interest-earning assets declines more immediately while the reduction in the
cost of the Company's interest-bearing liabilities is slower to take effect. The
Company anticipates the spread will show a moderate improvement in the future as
the decrease in interest rates reduces the cost of interest-bearing liabilities.
Interest income received on loans increased $3,554,000 or 24.13% to
$18,285,000 for the second quarter of fiscal 1999 from $14,731,000 in fiscal
1998. The increase in interest received on loans was primarily attributable to
originations of conforming single family loans held for sale. While higher
originations of loans held for sale increased the Company's interest income, the
yield on the loan portfolio declined 141 basis points to 8.27% for the quarter
compared to 9.68% in the same quarter last year. Interest received on
mortgage-backed securities increased $14,000 or 1.10% to $1,283,000 for the
second quarter of fiscal 1999 from $1,269,000 in the second quarter of fiscal
1998. Interest received on securities increased $268,000 or 18.18% to $1,742,000
in fiscal 1999 from $1,474,000 in the prior period.
Interest expense increased $3,875,000 or 40.51% to $13,441,000 for the
second quarter of fiscal 1999 from $9,566,000 in the second quarter of fiscal
1998. This is primarily the result of growth in deposits and FHLB advances.
Interest expense on deposits increased $2,934,000 or 39.93% to $10,281,000 from
$7,347,000 in the same period in the prior year. The cost of deposits increased
34 basis points to 5.32% during the quarter from 4.98% in the prior period.
Interest expense on FHLB advances and other borrowings also increased $507,000
or 22.85% to $2,726,000 for the second quarter of fiscal 1999 from $2,219,000 in
the second quarter of fiscal 1998. The Bank's cost of FHLB advances and other
borrowings decreased 38 basis points to 5.42% from 5.80% in the same period in
the prior year. The Bank utilizes short term FHLB advances to fund construction
loans and loans held for sale. In addition, interest expense on trust preferred
securities, issued during the second quarter of fiscal 1999, was $434,000.
Net Interest Income - Six Month Analysis
Net interest income increased by $192,000 or 1.22% to $15,897,000
during the first half of fiscal 1999 from $15,705,000 for the same period last
year. The net interest spread (the difference between the yield earned on
interest-earning assets and the cost of interest-bearing liabilities) declined
142 basis points to 2.62% from 4.04% in the same period last year. This increase
resulted from growth in interest-earning assets primarily through loan
originations. Yield on interest-earning assets declined 112 basis points to
8.06% from 9.18% while the cost of interest-bearing liabilities increased 30
basis points to 5.44% from 5.14%. During a period of declining interest rates,
the yield on interest-earning assets declines more immediately while the
reduction in the cost of the Company's interest-bearing liabilities is slower to
take effect. The Company anticipates the spread will show a moderate improvement
in the future as the
14
<PAGE> 15
decrease in interest rates reduces the cost of interest-bearing liabilities.
Interest income received on loans increased $7,854,000 or 27.28% to
$36,642,000 for the first half of fiscal 1999 from $28,788,000 for the same
period last year. The increase in interest received on loans was primarily
attributable to originations of conforming single family mortgages held for
sale. While higher originations of loans held for sale increased the Company's
interest income, the yield on the loan portfolio declined 141 basis points to
8.24% for the first half of fiscal 1999 compared to 9.65% in the same period
last year. Interest received on mortgage backed securities decreased $14,000 or
0.55% to $2,554,000 for the first half of fiscal 1999 from $2,568,000 for the
same period one year ago. Interest received on securities increased $393,000 or
12.46% to $3,548,000 in fiscal 1999 from $3,155,000 in the prior period.
Interest expense increased $8,041,000 or 42.76% to $26,847,000 for the
first half of fiscal 1999 from $18,806,000 in the same period of fiscal 1998.
This is primarily the result of growth in deposits and FHLB advances. Interest
expense on deposits increased $6,537,000 or 46.22% to $20,681,000 from
$14,144,000 in the same period in the prior year. The cost of deposits increased
49 basis points to 5.41% during the period from 4.92% in the prior period.
Interest expense on FHLB advances and other borrowings also increased $1,070,000
or 22.95% to $5,732,000 for the first half of fiscal 1999 from $4,662,000 in the
same period last year. The Bank's cost of FHLB advances and other borrowings
decreased 51 basis points to 5.42% from 5.93% in the same period in the prior
year. The Bank utilizes short term FHLB advances to fund construction loans and
loans held for sale. Interest expense on trust preferred securities was $434,000
for the first half of fiscal 1999.
Interest Rate and Market Risk
The Company employs sensitivity analysis in the form of a net interest
income simulation to help characterize the market risk arising from changes in
interest rates. The Company's net interest income simulation includes all
financial assets and liabilities.
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 September 30, 1998, the expected rate simulation
indicated a decline in annual net interest income of $1,186,000 or 3.31%
relative to the unchanged rate simulation and a $1,874,000 or 2.19% decline in
market value. This compares to March 31, 1998, which indicated a decline in
annual net interest income of $314,000 or 0.86% relative to the unchanged rate
simulation and a $49,000 or 0.07% decline in market value.
As of September 30, 1998, management estimates the Company's annual net
interest income would increase approximately $2,860,000 or 7.99%, and decrease
approximately $4,281,000 or 11.96% should interest rates instantaneously rise or
fall 100 basis points, versus the projection under unchanged rates. As of March
31, 1998, the simulation indicated an increase of approximately $3,430,000 or
9.40% and a decrease of approximately $3,866,000 or 10.59%.
A fair value analysis of the Company's balance sheet calculated under
an instantaneous 100 basis point increase in rates over September 30, 1998,
estimates a $6,284,000 or 9.15% decrease in market
15
<PAGE> 16
value. The Company estimates a like decrease in market rates would decrease
market value $5,690,000 or 8.28%. These changes in market value represent less
that 5.00% of the total carrying value of total assets at September 30, 1998.
Comparatively, at March 31, 1998, an instantaneous increase in market rates of
100 basis points would increase market value approximately $521,000 or 0.89%,
while a like decrease in rates would decrease market value approximately
$3,278,000 or 5.62%.
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.
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
asserts. The net interest margin decreased to 3.02% for the second quarter of
fiscal 1999 from 4.21% for the same period last year. In addition, the net
interest margin decreased to 3.04% for the first half of fiscal 1999 from 4.22%
for the same period one year ago. The average balance sheets on the next page
present the individual components of net interest income and expense, net
interest spread and net interest margin. The decline in the net interest margin
in the first quarter and first six months of fiscal 1999 is primarily
attributable to the decrease in the yield on interest earning assets.
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 second quarter and
first six months ended September 30, 1998 and 1997:
16
<PAGE> 17
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEET
Three months ended September 30, 1998 1997
AVERAGE YIELD/ Average Yield/
(dollars in thousands) BALANCE INTEREST COST Balance Interest Cost
- -----------------------------------------------------------------------------------------------------------------------------------
Earning Assets
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans receivable(1) $530,945 $ 12,255 9.23% $530,764 $13,359 9.86%
Loans held for sale 353,723 6,030 6.82% 78,892 1,389 7.04%
Mortgage-backed securities 74,299 1,284 6.91% 70,423 1,270 7.21%
FHLB stock 8,683 164 7.55% 8,003 154 7.70%
Taxable investments(2) 21,643 401 7.41% 40,568 790 7.79%
Tax-exempt investment securities(2) 72,719 1,273 7.00% 30,433 579 7.61%
Interest earning deposits and Federal funds 2,733 69 10.10% 5,386 78 5.79%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 1,064,745 21,476 8.07% 764,469 17,619 9.22%
Non-interest earning assets 94,722 83,421
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $1,159,467 $847,890
- -----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities
- -----------------------------------------------------------------------------------------------------------------------------------
Savings accounts $ 38,203 $ 201 2.10% $ 42,221 $ 273 2.59%
Checking 99,340 914 3.68% 83,119 338 1.63%
Money market 70,453 795 4.51% 28,595 268 3.75%
Certificates of deposit 565,327 8,372 5.92% 435,784 6,468 5.94%
- -----------------------------------------------------------------------------------------------------------------------------------
Total deposits 773,324 10,282 5.32% 589,719 7,347 4.98%
Advances and other borrowings 201,250 2,726 5.42% 153,154 2,219 5.80%
Trust preferred securities 19,245 434 9.02% -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 993,819 13,442 5.41% 742,873 9,566 5.15%
Non-interest bearing deposits 37,937 21,687
Non-interest bearing liabilities 51,828 12,141
Stockholders' equity 75,883 71,189
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $1,159,467 $847,890
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest rate spread $ 8,034 2.66% $ 8,053 4.07%
Taxable-equivalent adjustment (165) (126)
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income, actual
Net interest earning assets/net interest margin $ 70,926 $ 7,869 3.02% $ 21,596 $ 7,927 4.21%
Interest earning assets as a percentage of
interest bearing liabilities 107.14% 102.91%
- -----------------------------------------------------------------------------------------------------------------------------------
</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 for sale is computed using
historical amortized cost balances.
17
<PAGE> 18
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEET
Six months ended September 30, 1998 1997
AVERAGE YIELD/ Average Yield/
(dollars in thousands) BALANCE INTEREST COST Balance Interest Cost
- ------------------------------------------------------------------------------------------------------------------------------
Earning Assets
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans receivable(1) $ 535,084 $24,937 9.32% $524,316 $26,298 10.03%
Loans held for sale 354,294 11,705 6.61% 73,312 2,528 6.90%
Mortgage-backed securities 73,030 2,554 6.99% 70,269 2,575 7.33%
FHLB stock 9,413 356 7.56% 8,158 320 7.84%
Taxable investments(2) 21,189 791 7.48% 41,597 1,571 7.55%
Tax-exempt investment securities(2) 73,623 2,631 7.15% 32,275 1,284 7.96%
Interest earning deposits and Federal funds 1,936 99 10.23% 8,786 246 5.60%
- ------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 1,068,569 43,073 8.06% 758,713 34,822 9.18%
Non-interest earning assets 81,158 78,684
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $1,149,727 $837,397
- ------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities
- ------------------------------------------------------------------------------------------------------------------------------
Savings accounts $ 38,572 $ 447 2.32% $ 44,489 $ 554 2.49%
Checking 98,599 1,881 3.82% 81,057 630 1.55%
Money market 56,431 1,250 4.43% 25,605 418 3.27%
Certificates of deposit 571,404 17,103 5.99% 423,769 12,542 5.92%
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits 765,006 20,681 5.41% 574,920 14,144 4.92%
Advances and other borrowings 211,576 5,732 5.42% 157,367 4,662 5.93%
Trust preferred securities 9,623 434 9.02% - - -
- ------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 986,205 26,847 5.44% 732,287 18,806 5.14%
Non-interest bearing deposits 42,758 21,271
Non-interest bearing liabilities 45,892 13,417
Stockholders' equity 74,872 70,422
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $1,149,727 $837,397
- ------------------------------------------------------------------------------------------------------------------------------
Net interest rate spread $16,226 2.62% $16,016 4.04%
Taxable-equivalent adjustment (329) (272)
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income, actual $15,897 $15,744
Net interest earning assets/net interest margin $ 82,365 3.04% $ 26,426 4.22%
Interest earning assets as a percentage of
Interest bearing liabilities 108.35% 103.61%
- ------------------------------------------------------------------------------------------------------------------------------
</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 for sale is computed using
historical amortized cost balances.
Non-Interest Income
Non-interest income increased by $3,081,000 or 85.58% to $6,681,000 for
the second quarter of fiscal 1999 from $3,600,000 for the same period last year.
In addition, non-interest income increased by $6,052,000 or 85.92% to
$13,096,000 for the first half of fiscal 1999 from $7,044,000 for the same
period last year.
Mortgage production fees are the largest component of non-interest
income and such fees for the second quarter of fiscal 1999 increased $2,611,000
or 125.59% to $4,690,000 compared to $2,079,000 in the same period last year.
For the first half of fiscal 1999, mortgage production fees increased $3,789,000
or 91.97% to $7,909,000 compared to $4,120,000 for the same period last year.
The dollar amount of loans sold fluctuates based on the demand for mortgages in
the Company's market. The margin received on loan sales fluctuates due to
changes in the general interest rate environment.
18
<PAGE> 19
The following table shows mortgage production fees, the dollar amount
of loans sold in the secondary market and the margin earned on those loans for
the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPT.30, SEPT.30,
(dollars in thousands) 1998 1997 1998 1997
---------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage production fees $ 4,690 $ 2,079 $ 7,909 $ 4,120
Dollar volume sold $359,162 $162,634 $731,821 $320,007
Margin earned 1.30% 1.28% 1.08% 1.29%
</TABLE>
Non-interest income generated from the Company's real estate
subsidiary, Eagle Real Estate Advisors includes gains on the sale of real estate
and real estate commissions. These sources of revenue decreased by $89,000 or
18.09% to $403,000 for the second quarter of fiscal 1999 compared to $492,000
for the same period last year. Gains on the sales of real estate and real estate
commissions increased $681,000 or 82.65% to $1,505,000 for the first six months
of fiscal 1999 compared to $824,000 for the same period last year. During the
current quarter, 27 lots were sold compared to 40 lots in the second quarter
last year. For the first six months of fiscal 1999, 94 lots were sold compared
to 71 lots for the same period last year. Generally, contracts for multiple lot
sales contain terms stipulating that the buyer will purchase a set number of
lots over a specified time period, primarily every 120 days. The terms further
define set time intervals in which the buyer must purchase a predetermined
number of the total lots. Due to the terms included in the Company's contractual
agreements for lot sales, the majority of lots sold during the first six months
of fiscal 1999 occurred during the first quarter.
Service charges decreased $25,000 or 4.94% to $481,000 in the second
quarter of fiscal 1999 compared to $506,000 in the same period one year ago. In
addition, for the first half service charges increased $57,000 or 5.73% to
$1,051,000 compared to $994,000 for the same period last year. The increase for
the first half of fiscal 1999 is the result of growth in the number of checking
accounts during the year.
Non-Interest Expense
Non-interest expense increased by $1,625,000 or 18.97% to $10,192,000
for the second quarter of fiscal 1999 from $8,567,000 for the same period last
year. In addition, for the first half or fiscal 1999 non-interest expense
increased $2,710,000 or 16.06% to $19,583,000 from $16,873,000 for the same
period last year. In general the increase in all categories of non-interest
expense is attributable to the Company's rapid growth.
Salaries and employee benefits increased $380,000 or 7.90% to
$5,189,000 for the second quarter of fiscal 1999 from $4,809,000 for the same
period last year. This increase is due to the addition of employees to support
the Company's growth. Occupancy expense increased $303,000 or 28.80% to
$1,355,000 in the second quarter of fiscal 1999 from $1,052,000 for the same
period last year. Federal insurance premiums increased $91,000 or 130.00% to
$161,000 for the second quarter of fiscal 1999 from $70,000 for the same period
last year. The increase is due to the increase in deposits from the prior year.
Marketing expense increased $335,000 or 209.38% to $495,000 from $160,000 for
the same period last year.
Miscellaneous expenses increased $546,000 or 29.598% to $2,391,000 for
the second quarter of fiscal 1999 from $1,845,000 for the same period last year.
This increase is partially due to increases in consulting and attorney fees due
to the Company's expansion.
19
<PAGE> 20
BALANCE SHEET ANALYSIS
Investment Securities
During the first half of fiscal 1999, investment securities increased
to $242,153,000 from $162,874,000 and $140,445,000 at March 31, 1998 and
September 30, 1997, respectively. The Company classifies its securities in one
of three categories in accordance with Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities": trading, available for sale, or held to maturity. With the adoption
of SFAS No. 115, the Company has reported the effect of the change in the method
of accounting for investments in debt securities classified as available for
sale as a separate component of equity, net of income taxes. The Company has no
trading securities.
The investment securities portfolio at September 30, 1998, was
comprised of $48,804,000 of investment securities held to maturity at amortized
cost compared to $58,138,000 and $47,732,000 at March 31, 1998 and September 30,
1997, respectively. The Company has the ability and it is the management's
intent to hold these securities to maturity for investment purposes. In
addition, investment securities available for sale had an estimated market value
of $193,349,000 at September 30,1998 compared to $104,736,000 and $92,713,000 at
March 31, 1998 and September 30, 1997, respectively. Investment securities
available for sale had a net unrealized gain as shown in the Company's
stockholders' equity section of $1,241,000 at September 30, 1998 versus a net
unrealized gain of $838,000 at March 31, 1998.
During the second quarter of fiscal 1999, the Company used proceeds
from the issuance of trust preferred securities to leverage its balance sheet.
The Bank purchased mortgage-backed securities to increase the investment
securities available for sale portfolio and the Company purchased investment
grade preferred stocks, also classified as available for sale. In addition, due
to rapid repayment speeds experienced due to declining interest rates, the Bank
sold a GNMA mortgage-backed security with a book value of approximately
$7,000,000, recognizing a gain of approximately $198,000.
The Company holds no investment securities by any single issuer, other
than those issued by an agency of the United States government, which equaled or
exceeded 10% of stockholders' equity at September 30, 1998, March 31, 1998 or
September 30, 1997.
20
<PAGE> 21
The following table reflects securities held in the Bank's securities
portfolio for the periods indicated:
<TABLE>
<CAPTION>
INVESTMENT SECURITIES
- --------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, March 31, September 30,
(dollars in thousands) 1998 1998 1997
- --------------------------------------------------------------------------------------------------------------
Investment Securities Held to Maturity:
<S> <C> <C> <C>
US Treasury and US Government Agencies $ 28,189 $ 36,188 $ 24,484
Mortgage-backed securities 3,663 5,010 5,951
Corporate bonds 7,432 7,431 7,430
Other debt securities 9,520 9,509 9,867
- --------------------------------------------------------------------------------------------------------------
Total $ 48,804 $ 58,138 $ 47,732
- --------------------------------------------------------------------------------------------------------------
Securities Available for Sale:
US Treasury and US Government Agencies $ 26,581 $ 16,068 $ 12,572
Mortgage-backed securities 89,399 70,626 61,783
Corporate bonds 2,044 2,037 2,025
Other debt securities 63,126 3,795 3,941
Equity securities - preferred stock 12,199 12,210 12,392
- --------------------------------------------------------------------------------------------------------------
Total $193,349 $104,736 $ 92,713
- --------------------------------------------------------------------------------------------------------------
Total Investment Securities:
US Treasury and US Government Agencies $ 54,770 $ 52,256 $ 37,056
Mortgage-backed securities 93,062 75,636 67,734
Corporate bonds 9,476 9,468 9,455
Other debt securities 72,646 13,304 13,808
Equity securities - preferred stock 12,199 12,210 12,392
- --------------------------------------------------------------------------------------------------------------
Total $242,153 $162,874 $140,445
- --------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
Loan Portfolio and Concentration
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
LOAN PORTFOLIO MIX
SEPT. 30, % OF March 31, % of Gross Sept. 30, % of Gross
(dollars in thousands) 1998 LOANS 1998 Loans 1997 Loans
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real Estate - construction loans
Construction $200,590 32.25% $197,811 31.90% $228,509 35.56%
Acquisition & Development 40,671 6.54% 41,992 6.77% 35,829 5.57%
Real Estate - mortgage loans
Non-Residential 71,675 11.52% 82,261 13.26% 73,285 11.40%
Residential 191,489 30.79% 192,994 31.12% 199,627 31.06%
Home equity and second mortgages 55,786 8.97% 46,218 7.45% 45,760 7.12%
- -------------------------------------------------------------------------------------------------------------------------
Total real estate loans 560,211 90.07% 561,276 90.50% 583,010 90.71%
Commercial and consumer loans:
Commercial 16,723 2.69% 15,681 2.53% 14,177 2.21%
Leases 7,022 1.13% 9,463 1.53% 13,727 2.14%
Consumer and other 37,972 6.11% 33,755 5.44% 31,767 4.94%
- -------------------------------------------------------------------------------------------------------------------------
Total commercial and consumer loans 61,717 9.93% 58,899 9.50% 59,671 9.29%
- -------------------------------------------------------------------------------------------------------------------------
Total gross loans receivable 621,928 100.00% 620,175 100.00% 642,681 100.00%
- -------------------------------------------------------------------------------------------------------------------------
Less:
Undisbursed portion of loans
in process (93,139) (77,302) (86,460)
Deferred fees and other unearned income (334) (636) (1,602)
Reserves for loan losses (7,184) (6,505) (6,004)
=========================================================================================================================
Loans receivable, net $521,271 $535,732 $548,615
=========================================================================================================================
</TABLE>
The loan portfolio has decreased 4.98% or $27,344,000 to $521,271,000
at September 30, 1998, compared to $548,615,000 at September 30, 1997.
Construction and acquisition and development loans, including the
undisbursed portion of loans in process, decreased 8.73% or $23,077,000 to
$241,261,000 compared to $264,338,000. Construction and acquisition and
development loans represent 38.79% of gross loans receivable at September 30,
1998, compared to 41.13% at September 30, 1997. Residential mortgage loans
decreased $8,138,000 or 4.08% to $191,489,000 at September 30, 1998 from
$199,627,000 at September 30, 1997. Residential mortgage loans represent 30.79%
of gross loans receivable, remaining relatively consistent when compared to
31.06% at September 30, 1997. Home equity and second mortgage loans increased
21.91% or $10,026,000 to $55,786,000 at September 30, 1998 from $45,760,000 at
September 30, 1997. These loans represent 8.97% of gross loans receivable at
September 30, 1998, compared to 7.12% at September 30, 1997.
Non-residential mortgage loans decreased 2.20% or $1,610,000 to
$71,675,000 at September 30, 1998 compared to $73,285,000 at September 30, 1997.
Commercial loans increased 17.96% or $2,546,000 to $16,723,000 at September 30,
1998 compared to $14,177,000 at September 30, 1997. Consumer loans increased
19.53% or $6,205,000 to $37,972,000 at September 30, 1998 compared to
$31,767,000 at September 30, 1997.
22
<PAGE> 23
Non-Performing Assets
Total problem assets, which include non-accrual loans, loans classified
as problem assets by Asset Classification Committee (ACC) and real estate
acquired through the settlement of loans, increased by $469,000 or 3.15% to
$15,373,000 at September 30, 1998 from $14,904,000 at March 31, 1998.
Additionally, total problem assets increased $925,000 or 6.40% since the
September 30, 1997, level of $14,448,000. Total problem assets as a percent of
total assets decreased to 1.24% at September 30, 1998 from 1.66% and 1.30% at
March 31, 1998 and September 30, 1997, respectively. At September 30, 1998,
non-accrual loans increased 35.39% or $2,813,000 and 27.00% or $2,288,000 to
$10,761,000 compared to $7,948,000 at March 31, 1998 and $8,473,000 at September
30, 1997. Interest income not recognized on these loans amounted to $390,000 for
the first half of fiscal 1999 and $378,000 for the same period last year. At
September 30, 1998, the ACC identified $2,150,000 of potential problem loans, a
decrease of $1,859,000 or 46.37% compared to $4,009,000 at March 31, 1998. In
addition, potential problem loans decreased by $1,333,000 or 38.27% from
$3,483,000 at September 30, 1997. Real estate owned decreased by $485,000 or
16.46% and $30,000 or 1.20% to $2,462,000 at September 30, 1998 from $2,947,000
and $2,492,000 at March 31, 1998 and September 30, 1997, respectively.
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 which management has doubts regarding the ability of the
borrower to comply with current loan repayment terms. They have been classified
as such by the ACC regardless of payment status.
NON-ACCRUAL, PAST DUE and RESTRUCTURED LOANS
<TABLE>
<CAPTION>
SEPT. 30, June 30, March 31, Sept. 30,
(dollars in thousands) 1998 1998 1998 1997
-----------------------------------------------------------
Non-accrual loans:
<S> <C> <C> <C> <C>
Residential real estate-construction $ 2,137 $ 2,335 $ 1,127 $ 2,343
Residential real estate-mortgage 6,192 5,572 4,026 3,942
Commercial real estate -- -- 24 --
Commercial 28 61 -- 169
Commercial leases 2,084 2,045 2,054 1,775
Installment 320 551 717 244
Total non-accrual 10,761 10,564 7,948 8,473
- ---------------------------------------------------------------------------------------------------------
Potential problem loans 2,150 1,948 4,009 3,483
Loans contractually delinquent 90
days which still accrue interest -- -- -- --
Troubled debt restructurings -- -- -- --
- --------------------------------------------------------------------------------------------------------
Total non-accrual and problem loans $12,911 $12,512 $11,957 $11,956
- --------------------------------------------------------------------------------------------------------
Real estate owned, net 2,462 2,909 2,947 2,492
- --------------------------------------------------------------------------------------------------------
Total problem assets $15,373 $15,421 14,904 $14,448
- --------------------------------------------------------------------------------------------------------
Total problem assets/Total assets 1.24% 1.38% 1.30% 1.66%
- --------------------------------------------------------------------------------------------------------
Total problem assets/Net loans plus
Reserves 2.91% 2.97% 2.75% 2.61%
- --------------------------------------------------------------------------------------------------------
Reserve for loan losses/Total
Problem assets 46.73% 43.65% 43.65% 41.56%
- --------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 24
The following table reflects concentrations of non-accrual, potential
problem loans and real estate owned by geographic location and type.
NON-ACCRUAL, POTENTIAL PROBLEM LOANS AND REAL ESTATE OWNED BY LOCATION AND TYPE
<TABLE>
<CAPTION>
Residential
At Sept. 30, 1998 ----------------- Comm'l % of Total
(dollars in thousands) Const Mtgs R-Estate Comm'l Leases Installment Total Location
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-accrual:
Atlanta $ 900 $5,180 -- $ 28 $2,084 $320 $ 8,512 53.35%
Augusta 219 215 -- -- -- -- 434 2.72%
Savannah 256 -- -- -- -- -- 256 1.60%
St. Augustine 496 -- -- -- -- -- 496 3.11%
Warner Robins 44 -- -- -- -- -- 44 0.28%
All other locations 222 797 -- -- -- -- 1,019 6.39%
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-accrual 2,137 6,192 -- 28 2,084 320 10,761 67.45%
- -----------------------------------------------------------------------------------------------------------------------------------
Potential problem loans:
Atlanta 1,092 261 433 94 128 -- 2,008 12.59%
Warner Robins 142 -- -- -- -- -- 142 0.89%
- -----------------------------------------------------------------------------------------------------------------------------------
Total potential problem loans 1,234 261 433 94 128 -- 2,150 13.48%
- -----------------------------------------------------------------------------------------------------------------------------------
Real estate owned:
Atlanta 119 92 679 -- -- -- 890 5.58%
Augusta -- 87 -- -- -- -- 87 0.55%
Hinesville 800 -- -- -- -- -- 800 5.01%
Warner Robins 156 -- -- -- -- -- 156 0.98%
All other locations 535 574 -- -- -- -- 1,109 6.95%
- -----------------------------------------------------------------------------------------------------------------------------------
Total real estate owned(1) 1,610 753 679 -- -- -- 3,042 19.07%
- -----------------------------------------------------------------------------------------------------------------------------------
Total problem assets by type $4,981 $7,206 $1,112 $122 $2,212 $320 $15,953 100.00%
- -----------------------------------------------------------------------------------------------------------------------------------
% of total problem assets by type 31.22% 45.17% 6.97% 0.76% 13.87% 2.01% 100.00%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include reserves of $580,000; real estate owned, net equals
$2,462,000.
Concentrations to Single Borrowers
The Bank has credit exposure, to one company, of $1,775,000. 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. As of the end of October, the Bank received a payment
of approximately $1,122,000 to be applied to these leases. This amount
represented the Bank's portion of the payments collected on these leases through
September 30, 1998. Furthermore, the bankruptcy court has instructed the trustee
to remit the majority of future payments collected on a monthly basis.
In addition, at June 30, 1998, the Bank had one borrower in Atlanta,
Georgia, with non-accrual loans of totaling $938,000, consisting of $274,000 of
construction loans and a $664,000 acquisition and development loan. The borrower
has filed for bankruptcy protection. As of September 30, 1998, the borrower had
paid off one of the construction loans and the acquisition and development loan,
reducing the amount outstanding to approximately $242,000. As of October 25,
1998, an additional construction loan was paid off, further reducing the Bank's
exposure to one construction loan of approximately $122,000.
24
<PAGE> 25
Loan Impairment
At September 30, 1998, the recorded investment in impaired loans, which
excludes non-accrual first mortgage loans and residential construction loans,
increased $301,000 or 16.88% to $2,084,000 from $1,783,000 at March 31, 1998 and
17.41% or $309,000 from $1,775,000 at September 30, 1997. At September 30, 1998,
March 31, 1998 and September 30, 1997, no impaired loans were on an accrual
basis. At September 30, 1998, the valuation allowance related to these impaired
loans was $690,000, compared to $455,000 at March 31, 1998 and 453,000 at
September 30, 1997. At September 30, 1998, March 31, 1998 and September 30,
1997, all impaired loans had a related loan loss reserve. For the second quarter
and first half of fiscal 1999, the average recorded investment in impaired loans
was $2,059,000 and $1,965,000 compared to $1,778,000 and $1,779,000 for the same
periods a year ago.
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 $627,000 and $600,000, respectively, of
additional reserves for possible loan losses during the second quarters of
fiscal 1999 and 1998. During the first half of fiscal 1999, the Company set
aside $1,254,000 compared to $1,317,000 for the same period last year. At
September 30, 1998, reserves represented 1.35% and 1.34% of average loans
outstanding for the second quarter and first half of fiscal 1999, compared to
1.13% and 1.15% for the same periods last year. During the second quarter and
first half of fiscal 1999, the Company charged-off $262,000 and $738,000,
respectively, compared to $411,000 and $622,000 for the same periods one year
ago. In the second quarter and first half of fiscal 1999, net charge-offs
represented 0.03% and 0.11% of average loans outstanding, compared to 0.07% and
0.10% for the second quarter and first half of fiscal 1998. Loan loss reserves
totaled $7,184,000 at September 30, 1998 compared to $6,505,000 and $6,004,000
at March 31, 1998 and September 30, 1997, respectively. Loan loss reserves to
total problem assets increased to 46.73% at September 30, 1998 from 43.65% at
March 31, 1998 and 41.56% at September 30, 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 borrowers' 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 losses.
25
<PAGE> 26
<TABLE>
<CAPTION>
ANALYSIS OF THE RESERVE FOR LOAN LOSSES
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------------
(dollars in thousands) 1998 1997 1998 1997
---------------------------------------------------
<S> <C> <C> <C> <C>
Reserve for loan losses, beginning of quarter $ 6,732 $ 5,761 $ 6,505 $ 5,198
Charge-offs:
Real estate - construction -- 23 -- 72
Real estate - mortgage 85 314 266 406
Consumer 171 74 437 137
Commercial 6 -- 19 7
Commercial leases -- -- 16 --
- ------------------------------------------------------------------------------------------------------------------------
Total charge-offs 262 411 738 622
Recoveries 87 54 163 111
- ------------------------------------------------------------------------------------------------------------------------
Net charge-offs 175 357 575 511
Reserve on purchased loans -- -- -- --
Reserve from acquisitions -- -- -- --
Provision for loan losses 627 600 1,254 1,317
- ------------------------------------------------------------------------------------------------------------------------
Reserve for loan losses, end of quarter $ 7,184 $ 6,004 $ 7,184 $ 6,004
- ------------------------------------------------------------------------------------------------------------------------
Average loans receivable, net, outstanding for the period $530,944 $530,764 $538,086 $524,316
- ------------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average loans receivable, net 0.03% 0.07% 0.11% 0.10%
- ------------------------------------------------------------------------------------------------------------------------
Reserves to average loans receivable, net 1.35% 1.13% 1.34% 1.15%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment in Real Estate
The Company's investment in real estate increased 12.50% or $3,450,000
to $31,045,000 at September 30, 1998, from $27,595,000 at March 31, 1998 and
6.58% or $1,916,000 from $29,129,000 at September 30, 1997. In September 1998,
Windsor Parkway Development, LLC ("Windsor Parkway") was formed to purchase and
develop a residential community on 14.6 acres of land located in DeKalb County,
Georgia. The Company has a 100% ownership interest in Windsor Parkway. The
Company currently has seven real estate projects in the Atlanta market.
Deposits
Deposits are the Company's primary funding source. Total deposits
decreased by $5,388,000 or 0.69% to $773,587,000 from $778,975,000 at March 31,
1998. The Bank uses traditional marketing methods to attract new customers. Its
deposit network is serviced from its fifteen branches in the Atlanta market. The
decrease in deposits was in certificates of deposits which decreased $15,153,000
or 2.73% to $539,120,000 at September 30, 1998 from $554,273,000 at March 31,
1998. Demand deposits including noninterest-bearing, interest-bearing, savings
and money market accounts increased $9,765,000 or 4.35% of to $234,467,000 at
September 30, 1998, compared to $224,702,000 at March 31, 1998.
26
<PAGE> 27
For the periods indicated, deposits are summarized by type and
remaining term as follows:
Deposit Mix
<TABLE>
<CAPTION>
SEPT. 30, March 31, Sept. 30,
(dollars in thousands) 1998 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Demand deposits:
Noninterest-bearing deposits $ 39,169 $ 38,662 $ 32,365
Interest-bearing deposits 97,586 108,768 53,847
Money market accounts 61,505 38,862 28,278
Savings accounts 36,207 38,410 40,805
------------------------------------
Total demand deposits 234,467 224,702 155,295
------------------------------------
Time deposits:
Maturity one year or less 378,848 411,179 322,756
Maturity greater than one year through
Two years 70,395 47,590 33,520
Maturity greater than two years through
Three years 28,395 36,533 42,084
Maturity greater than three years 61,482 58,971 41,460
------------------------------------
Total time deposits 539,120 554,273 439,820
------------------------------------
Total deposits $773,587 $778,975 $595,115
------------------------------------
</TABLE>
The weighted average interest rate on time deposits for the periods
ended September 30, 1998, March 31, 1998 and September 30, 1997 was 5.85%, 5.94%
and 5.89%, respectively.
For the periods indicated, interest expense on deposits is summarized
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------
(dollars in thousands) 1998 1997 1998 1997
---------------------------------------------
<S> <C> <C> <C> <C>
Interest-bearing deposits $ 905 $ 338 $ 1,865 $ 630
Money market accounts 625 234 1,060 384
Savings accounts 234 264 471 545
Time deposits 8,517 6,511 17,285 12,585
---------------------------------------------
Total $10,281 $7,347 $20,681 $14,144
---------------------------------------------
</TABLE>
Borrowings
The FHLB system functions as a reserve credit facility for thrift
institutions and certain other member institutions. The Bank utilizes advances
from the FHLB to fund a portion of its assets. At September 30, 1998, advances
were $227,550,000 compared to $217,835,000 at March 31, 1998. At September 30,
1998, the weighted average interest rate on these borrowings remained stable at
5.87% compared to 5.88% at March 31, 1998.
27
<PAGE> 28
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. Deposits
provide a significant portion of the Company's cash flow needs and continues to
provide a relatively stable, low cost source of funds. The Company's other
primary funding source was provided by advances from the Federal Home Loan Bank.
At September 30, 1998, advances stood at $227,550,000. The liquidity requirement
may vary from time to time (between 4% and 10%) depending upon economic
conditions and savings plans of all member savings institutions. Under current
regulations, the Bank is required to maintain liquid assets of not less than 4%
of the liquidity base at the end of the preceding calendar quarter. At September
30, 1998, the Company's liquidity ratio was 5.21%. At September 30, 1998, the
Company had commitments to originate loans of approximately $362,830,000. The
Company had commitments to sell mortgage loans of approximately $368,152,000 at
September 30, 1998.
Beginning April 1, 1995, the Bank formed an operating subsidiary,
PrimeEagle. This business unit generates revenues by originating permanent
mortgage loans. Substantially all fixed rate permanent mortgage loans are sold
to investors. Permanent mortgage loan originations increased 123.74% to
$767,547,000 for the first six months of fiscal 1999 compared to $343,049,000
for the same period last year. The Company manages the funding requirements of
these loans primarily with short-term advances from the FHLB.
Cash Flows from Operating Activities
For the first six months of fiscal 1999, the Company used cash from
operating activities of $31,857,000 this remained relatively stable as compared
to $30,843,000 for same period last year. The primary reason is timing
differences from the sale of loans held for sale versus originations of loans
held for sale. During the first six months of fiscal 1999, the Company
originated $767,547,000 of loans held for sale and sold $731,821,000 of loans
held for sale. This resulted in a $35,726,000 use of cash. This compares to the
same period last year, when the Company originated $343,049,000 of loans held
for sale and sold $320,007,000 of loans held for sale, resulting in a
$23,042,000 use of cash.
Cash Flows from Investing Activities
During the first half of fiscal 1999, the Company used $67,423,000 of
cash for investing activities compared to $28,566,000 for the same period last
year. In the first six months of fiscal 1999, the primary use of cash was for
purchases of investment securities available for sale in the amount of
$114,004,000, compared to $1,000,000 in purchases of securities available for
sale in the same period last year. The Company made no purchases of investment
securities held to maturity in the first six months of fiscal 1999, compared to
$13,000,000 in the same period one year ago. Proceeds from sales, calls and
maturities of securities available for sale were $9,441,000, $6,249,000 and
$1,501,000, respectively, for the first six months of fiscal 1999.
Comparatively, for the first six months of fiscal 1998, proceeds from calls and
maturities of securities available for sale were $3,923,000 and $1,000,000,
respectively. Proceeds from calls of investment securities held to maturity were
$8,000,000 during the first six months of fiscal 1999, compared to calls and
maturities of securities held to maturity of $10,000,000 and $6,300,000 for the
same period last year. For the first six months of fiscal 1999, loans receivable
originations, net of repayments provided $15,695,000, compared to a use of
$31,883,000 in the same period one year ago.
28
<PAGE> 29
Cash Flows from Financing Activities
Cash provided from financing activities during the first six months of
fiscal 1999, was $85,489,000 compared to $56,919,000 during the same period one
year ago. FHLB advances provided the most significant increase in cash provided
from financing activities. The Company borrowed $485,525,000 from the FHLB and
repaid $245,031,000 during the six months. This compares to borrowings of
$184,551,000 and repayments of $166,221,000 during the same period last year. In
addition, the Company raised $28,750,000 in additional capital through a new
issue of trust preferred securities which settled in the second quarter of
fiscal 1999. The Company's deposits remained relative stable during the first
half of fiscal 1999, time deposits decreased by $15,154,000 while demand
deposits increased $9,766,000. Comparatively, for the same period one year ago,
deposits increased $37,391,000 comprised of $28,117,000 in time deposits and
$9,274,000 in demand deposits. In the first half of fiscal 1999, the Company
incurred ESOP debt of $1,916,000. The Company paid cash dividends to its
shareholders of $1,791,000 and $1,699,000 for the first six months of fiscal
1999 and 1998, respectively.
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% or higher, a tier one
risk based capital ratio of 6% or higher and a leveraged ratio of 5% or higher.
At September 30, 1998, the Bank was classified as "well capitalized" under the
OTS regulations that implement the FDICIA provisions described above.
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 a dividend in the form of loans to
the Company in the amount of $10,525,000, which were then contributed to the
Company's subsidiary Eagle Bancshares Capital Group, Inc. 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.
29
<PAGE> 30
<TABLE>
<CAPTION>
REGULATORY CAPITAL
- --------------------------------------------------------------------------------------------------------
Regulatory Required Excess
(dollars in thousands) Capital % Capital % Capital %
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SEPTEMBER 30, 1998
RISK-BASED RATIOS:
TIER 1 CAPITAL $67,383 9.59 $28,093 4.00 $39,290 5.59
TOTAL CAPITAL $73,839 10.51 $56,187 8.00 $17,652 2.51
TIER 1 LEVERAGE $67,383 5.62 $47,939 4.00 $19,444 1.62
TANGIBLE EQUITY $67,383 5.81 $17,392 1.50 $49,991 4.31
- --------------------------------------------------------------------------------------------------------
March 31, 1998
Tier 1 capital $51,173 7.47 $27,392 4.00 $23,781 3.47
Total capital $56,885 8.31 $54,785 8.00 $ 2,100 0.31
Tier 1 leverage $51,173 4.59 $44,553 4.00 $ 6,620 0.59
Tangible equity $51,173 5.91 $12,988 1.50 $38,185 4.41
- --------------------------------------------------------------------------------------------------------
September 30, 1997
Tier 1 capital $50,654 8.21 $24,691 4.00 $25,963 4.21
Total capital $56,334 9.13 $49,382 8.00 $ 6,952 1.13
Tier 1 leverage $50,654 5.91 $34,283 4.00 $16,371 1.91
Tangible equity $50,654 5.97 $12,718 1.50 $37,936 4.47
- --------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 31
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 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.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
31
<PAGE> 32
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on Thursday, August
27, 1998, at the Marriott Century Center Hotel in Atlanta, Georgia. A
total of 5,263,288 shares of common stock were represented in person or
by proxy. This represents 90.52% of the 5,814,764 shares outstanding as
of the record date of July 10, 1998. C. Jere Sechler, Jr., Chairman of
the Board and President, presided at the meeting and presented a report
describing the Company's results of operations for fiscal year ending
March 31, 1998 and outlined the strategic goals for fiscal 1999.
Shareholder elected management's nominees to the Board of Directors.
The Directors were elected by votes as shown below:
<TABLE>
<CAPTION>
Directors: For Withhold
---------- --- --------
<S> <C> <C>
C. Jere Sechler, Jr. 4,989,291 273,997
Weldon A. Nash, Jr. 4,927,460 335,828
William F. Waldrop, Jr. 4,931,860 331,428
</TABLE>
Shareholders voted against the Shareholder Proposal. The results of
proxy tabulation were as follows:
<TABLE>
<CAPTION>
Shareholder Proposal
--------------------
<S> <C>
Voting For 1,171,950
Voting Against 2,737,545
Abstain From Voting 46,035
Broker No Vote 1,307,758
---------
Total 5,263,288
</TABLE>
In other business, management's selection of Arthur Andersen LLP as
independent accountants for the Company resulted in 5,209,489 votes
being cast for Arthur Andersen LLP.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(11) Computation of per share earnings
(27) Financial Data Schedule (for SEC use only)
Reports on Form 8-K
None
32
<PAGE> 33
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EAGLE BANCSHARES, INC.
(Registrant)
Date: November 16, 1998 /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 Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Date: November 16, 1998 /s/Richard B. Inman, Jr.
-----------------------------------
Richard B. Inman, Jr.
Director, Secretary and Treasurer
Date: November 16, 1998 /s/ Conrad J. Sechler, Jr.
-----------------------------------
Conrad J. Sechler, Jr.
Chairman of the Board and President
Date: November 16, 1998 /s/ LuAnn Durden
-----------------------------------
LuAnn Durden
Chief Financial Officer
33
<PAGE> 34
EAGLE BANCSHARES, INC.
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description Page No.
- ------ ----------- --------
<S> <C> <C>
11 Computation of per share earnings 35
27 Financial Data Schedule (for SEC use only)
</TABLE>
<PAGE> 1
EXHIBIT 11
EAGLE BANCSHARES, INC.
Statement re: Computation of per share earnings
Below is reconciliation for the three month period ended September 30, 1998 and
1997, of the difference between average basic common shares outstanding and
average diluted common shares outstanding.
<TABLE>
<CAPTION>
COMPUTATION OF PER SHARE EARNINGS
(dollars in thousands except per share data) THREE MONTHS ENDED
SEPT. 30, 1998 Sept. 30, 1997
-----------------------------------------
Basic
- -----
<S> <C> <C>
Net income $2,471 $1,723
-----------------------------------------
Average common shares 5,788 5,666
-----------------------------------------
Earnings per common share - basic $ 0.42 $ 0.30
-----------------------------------------
Diluted
- -------
Net income $2,471 $1,723
-----------------------------------------
Average common shares - basic 5,788 5,666
Incremental shares outstanding 167 165
Average common shares - diluted 5,955 5,831
-----------------------------------------
Earnings per common share - diluted $ 0.41 $ 0.30
-----------------------------------------
</TABLE>
Below is reconciliation for the six month period ended September 30, 1998 and
1997, of the difference between average basic common shares outstanding and
average diluted common shares outstanding.
<TABLE>
<CAPTION>
(dollars in thousands except per share data) SIX MONTHS ENDED
SEPT. 30, 1998 Sept. 30, 1997
-----------------------------------------
Basic
- -----
<S> <C> <C>
Net income $5,451 $3,283
-----------------------------------------
Average common shares 5,788 5,666
-----------------------------------------
Earnings per common share - basic $ 0.94 $ 0.58
-----------------------------------------
Diluted
- -------
Net income $5,451 $3,283
-----------------------------------------
Average common shares - basic 5,788 5,666
Incremental shares outstanding 183 172
Average common shares - diluted 5,971 5,838
-----------------------------------------
Earnings per common share - diluted $ 0.91 $ 0.56
-----------------------------------------
</TABLE>
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0
0
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</TABLE>
