<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 June 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 ------ -------
----------
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
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(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 July 31, 1998
-------------------- --------------------------------
Common Stock, $1.00 Par Value 5,809,764 shares
Index of Exhibit on Page 28
<PAGE> 2
EAGLE BANCSHARES, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 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
June 30, 1998 and March 31, 1998 3
Consolidated Statements of Income -
Three months ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows -
Three months ended June 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 10
PART II. Other Information
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Index of Exhibits 28
</TABLE>
2
<PAGE> 3
EAGLE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, March 31,
(dollars in thousands except per share data) 1998 1998
<S> <C> <C>
ASSETS:
Cash and amounts due from banks $ 20,327 $ 34,022
Federal funds sold 290 660
Accrued interest receivable 7,724 7,301
Securities available for sale 113,290 104,736
Investment securities held to maturity 57,737 58,138
Loans held for sale 338,384 332,592
Loans receivable, net 513,194 535,732
Investments in real estate 26,587 27,595
Real estate acquired in settlement of loans, net 2,909 2,947
Stock in Federal Home Loan Bank, at cost 9,144 10,892
Premises and equipment, net 21,232 21,868
Deferred income taxes 4,054 3,953
Other assets 5,360 9,047
-----------------------------
Total assets $ 1,120,232 $ 1,149,483
-----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 798,007 $ 778,975
Federal Home Loan Bank advances and other borrowings 197,912 240,855
Advance payments by borrowers for property taxes and insurance 2,750 5,477
Drafts outstanding 16,263 30,716
Accrued expenses and other liabilities 27,749 18,758
-----------------------------
Total liabilities $ 1,042,681 $ 1,074,781
-----------------------------
STOCKHOLDERS' EQUITY:
Common stock, $1 par value; 10,000,000 shares authorized, 6,107,564
and 6,037,100 shares issued at June 30 and March 31, 1998, respectively $ 6,108 $ 6,037
Additional paid-in capital 38,030 37,336
Retained earnings 34,079 32,028
Accumulated other comprehensive income 676 838
Employee Stock Ownership Plan note payable -- (165)
Unamortized restricted stock (266) (296)
Treasury stock, 301,800 shares at cost (1,076) (1,076)
-----------------------------
Total stockholders' equity 77,551 74,702
-----------------------------
Total liabilities and stockholders' equity $ 1,120,232 $ 1,149,483
-----------------------------
</TABLE>
3
<PAGE> 4
EAGLE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Unaudited) Three Months Ended
(in thousands except per share data) June 30,
1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME:
Interest on loans $18,357 $14,057
Interest on mortgage-backed securities 1,271 1,299
Interest on securities and other interest-earning assets 1,806 1,681
- ----------------------------------------------------------------------------------------------------
Total interest income 21,434 17,037
- ----------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 10,400 6,797
Interest on FHLB advances and other borrowings 3,006 2,443
- ----------------------------------------------------------------------------------------------------
Total interest expense 13,406 9,240
- ----------------------------------------------------------------------------------------------------
Net interest income 8,028 7,797
PROVISION FOR LOAN LOSSES 627 717
- ----------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 7,401 7,080
- ----------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Mortgage production fees 3,219 2,040
Gains on sales of investment in real estate 929 226
Real estate commissions, net 173 106
Rental income 173 167
Service charges 570 488
Gains on sales of loans -- 16
Gains on sales of securities available for sale 267 --
Gain on sale of fixed assets 147 3
Other income 937 398
- ----------------------------------------------------------------------------------------------------
Total noninterest income 6,415 3,444
- ----------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES:
Salaries and employee benefits 5,256 4,715
Net occupancy expense 1,162 1,042
Data processing expense 564 548
Federal insurance premium 96 69
Marketing expense 496 271
Provision for losses on real estate acquired in the settlement of loans -- 120
Other expense 1,817 1,541
- ----------------------------------------------------------------------------------------------------
Total noninterest expenses 9,391 8,306
- ----------------------------------------------------------------------------------------------------
Income before income taxes 4,425 2,218
INCOME TAX EXPENSE 1,445 658
- ----------------------------------------------------------------------------------------------------
Net income $ 2,980 $ 1,560
- ----------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE - BASIC $ 0.52 $ 0.28
EARNINGS PER COMMON SHARE - DILUTED $ 0.50 $ 0.27
- ----------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 5
EAGLE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
( dollars in thousands)
Three Months ended June 30, 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,980 $ 1,560
Adjustments to reconcile net income to net cash used in operating
Activities:
Depreciation, amortization and accretion 503 (162)
Provision for loan losses 627 717
Provision for losses on real estate acquired in settlement of loans -- 120
Gain on sales of securities available for sale (267) --
Gain on sale of real estate acquired in settlement of loans (62) --
Gain on sales of investment in real estate (929) (226)
Gain on sales of loans -- (16)
Gain on sale of premises and equipment (147) (3)
Amortization of restricted stock 30 14
Deferred income tax benefit -- (67)
Proceeds from sales of loans held for sale 372,659 157,373
Originations of loans held for sale (378,451) (153,708)
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable (423) (276)
Decrease (increase) in other assets 3,609 1,964
Increase (decrease) in drafts outstanding (14,453) (8,129)
Increase (decrease) in accrued expense and other liabilities 8,923 (1,725)
- ---------------------------------------------------------------------------------------------------------
Net cash used in operating activities (5,401) (2,564)
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale (17,500) (1,000)
Proceeds from sales of securities available for sale 2,258 --
Principal payments received on securities available for sale 4,665 1,091
Principle payments received on investment securities held to maturity 404 373
Proceeds from calls of securities available for sale 994 1,500
Proceeds from maturities of securities available for sale 1,000 500
Proceeds from maturities of investment securities held to maturity -- 6,300
Loan originations, net of repayments 23,632 (25,718)
Purchases of loans receivable -- (83)
Proceeds from sale of real estate acquired in settlement of loans 565 148
Purchases of FHLB stock (508) (839)
Redemption of FHLB stock 2,256 86
Proceeds from sale of premises and equipment 522 5
Purchase of premises and equipment, net (237) (924)
Additions to investments in real estate (1,788) (750)
Proceeds from sales of investments in real estate 1,642 904
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities $ 17,905 $ (18,407)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 6
EAGLE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Three Months ended June 30, 1998 1997
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C>
Net change in time deposits $ 22,842 $ 18,602
Net change in demand deposit accounts (3,810) 2,787
Repayment of FHLB advances and other borrowings (282,403) (66,417)
Proceeds from FHLB advances and other borrowings 239,460 76,670
Principal reduction of ESOP debt 165 164
Proceeds from the exercise of stock options 765 --
Cash dividends paid (861) (849)
Increase (decrease) in advance payments from borrowings for
property taxes and insurance (2,727) 244
- ---------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (26,569) 31,201
- ---------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (14,065) 10,230
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 34,682 25,875
- ---------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,617 $ 36,105
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH PAID DURING PERIOD FOR:
- ---------------------------------------------------------------------------------------------------
Interest $ 12,455 $ 8,969
- ---------------------------------------------------------------------------------------------------
Income taxes $ 1,868 $ 565
- ---------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
- ---------------------------------------------------------------------------------------------------
Acquisition of real estate in settlement on loans $ 465 $ 462
- ---------------------------------------------------------------------------------------------------
Loans made to finance sales of investments in real estate $ 2,061 $ 303
- ---------------------------------------------------------------------------------------------------
Dividends payable $ 929 $ 849
- ---------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 7
Eagle Bancshares, Inc.
Notes to Interim Unaudited Consolidated Financial Statements
June 30, 1998
A. Corporate Profile
Eagle Bancshares, Inc. (the "Company") is a unitary savings and loan
holding company engage 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 three month period
ended June 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".
In the calculation of basic and diluted earnings per share, net income
is identical. Below is a reconciliation for the three month periods ended June
30, 1998 and 1997, of the difference between average basic common shares
outstanding and average diluted common shares outstanding.
7
<PAGE> 8
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
(dollars in thousands except per share data) Three Months Ended
JUNE 30, 1998 June 30, 1997
------------------------------
<S> <C> <C>
Basic
Net income $ 2,980 $ 1,560
------------------------------
Average common shares 5,763 5,660
------------------------------
Earnings per common share - basic $ 0.52 $ 0.28
------------------------------
Diluted
Net income $ 2,980 $ 1,560
------------------------------
Average common shares - basic 5,763 5,660
Incremental shares outstanding 198 133
Average common shares - diluted 5,961 5,793
------------------------------
Earnings per common share - diluted $ 0.50 $ 0.27
------------------------------
</TABLE>
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 months of fiscal year 1999 and 1998 is
calculated as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
Before Tax Income Tax Net of Tax
------------------------------------------
<S> <C> <C> <C>
Unrealized (loss) gains (net) recognized in
other comprehensive income:
Three months ended June 30, 1998 $ (262) $ (100) $ (162)
Three months ended June 30, 1997 $2,527 $ 840 $1,687
</TABLE>
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Amounts reported in net income:
Gain on sale of securities $ 267 $ --
Net amortization (accretion) 31 (1)
---------------------
Reclassification adjustment 298 (1)
Income tax expense (116) --
---------------------
Reclassification adjustment, net of tax 182 (1)
Amounts reported in other comprehensive income:
Unrealized (loss)/gain arising during period, net of tax 20 1,686
Reclassification adjustment, net of tax 182 (1)
---------------------
Unrealized (loss)/gain (net) recognized in
other comprehensive income (162) 1,687
Net income 2,980 1,560
---------------------
Total comprehensive income $ 2,818 $ 3,247
---------------------
</TABLE>
8
<PAGE> 9
F. 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.
G. Cumulative Trust Preferred Securities
On July 29, 1998, the Company closed a public offering of 1,150,000 of
Cumulative Trust Preferred Securities offered and sold by EBI Capital Trust I,
having a liquidation amount of $25.00 each. Total proceeds to the Company from
the offering were $28,750,000. The Company intends to use the net proceeds as
follows: (i) approximately $10 million will be contributed to the Bank to
increase the Bank's capital ratios to support growth, for working capital and to
increase the Bank's regulatory capital from "adequately capitalized" to "well
capitalized", and (ii) the balance will be used to repay existing debt, invest
in investment grade preferred securities of other issuers, and for general
corporate purposes.
9
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
(dollars in thousands except per share data) % Change
Quarter Ended June 30, 1998 from
June 30, March 31, June 30, March 31, June 30,
For the quarter: 1998 1998 1997 1998 1997
---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net income $ 2,980 $ 2,163 $ 1,560 37.77% 91.03%
Per common share:
Net income per common share - basic 0.52 0.38 0.28 36.84 85.71
Net income per common share - diluted 0.50 0.37 0.27 35.14 85.19
Dividends declared 0.16 0.15 0.15 6.67 6.67
Book value per share 13.36 13.03 12.45 2.53 7.31
Average common shares outstanding - basic 5,763 5,730 5,660 0.58 1.82
Average common shares outstanding - diluted 5,961 5,923 5,793 0.64 2.90
Profitability ratios: (%)
Return on average assets 1.04% 0.93% 0.76% 11.83 36.84
Return on average equity 16.14 11.57 8.96 39.50 80.13
Efficiency ratio 65.03 69.88 73.89 (6.94) (11.99)
Net interest margin - taxable equivalent 3.06 3.92 4.22 (21.94) (27.49)
Equity to assets 6.92 6.51 8.30 6.30 (16.63)
At quarter end:
Loans held for sale $ 338,384 $ 332,592 $ 59,217 1.74 471.43
Loans receivable, net 513,194 535,732 541,071 (4.21) (5.14)
Reserve for loan losses 6,732 6,505 5,761 3.49 16.85
Assets 1,120,232 1,149,483 848,490 (2.54) 32.03
Deposits 798,007 778,975 579,113 2.44 37.80
FHLB advances and other borrowings 197,912 240,855 164,058 (17.83) 20.64
Stockholders' equity 77,551 74,702 70,450 3.81 10.08
</TABLE>
Overview
Net income for the current quarter, increased $1,420,000 to $2,980,000
or $0.50 per share from $1,560,000 or $0.27 per share for the same quarter one
year ago. The increase was primarily due to increases in mortgage production
fees and gains on sales of investment in real estate. In addition, the Company
recognized gains on the sales of securities available for sale of $267,000 and a
gain on the sale of fixed assets of $147,000.
Earnings Highlights
(First quarter Fiscal 1999 compared to First quarter Fiscal 1998)
- - Non-interest income increased $2,971,000 to $6,415,000 from $3,444,000
for the same quarter one year ago. Increases in mortgage production
fees and gains on sales of investment in real estate were the main
contributors to the increase.
- - Return on average shareholders' equity increased to 16.14%, from 8.96%
in the first quarter last year.
- - Return on average assets increased to 1.04% from 0.76% in the first
quarter last year.
- - Loan loss provisions decreased $90,000 to $627,000 from $717,000 for
the same quarter one year ago.
- - Non-interest expenses increased $1,085,000 to $9,391,000 from
$8,306,000 for the same quarter one year ago. This increase is directly
attributable to the Company's growth.
10
<PAGE> 11
Net Interest Income
In the first quarter, net interest income increased $321,000 to
$7,401,000. The growth was achieved through a 52.68% increase in average loans
while somewhat mitigated by a 137 basis-point decline in the net interest
spread.
Non-Interest Income
Non-interest income rose 86.27% to $6,415,000 in the first quarter of
1999. This growth was primarily attributable to higher levels of mortgage
production fees. Additionally, the Company recognized increased gains on sales
of investment in real estate, gains on sales of securities available for sale,
and gains on the sale of fixed assets.
Efficiency
In the first quarter of fiscal 1999, the efficiency ratio improved
8.86% to 65.03%, compared to 73.89% in the first quarter of fiscal 1998.
Management has redesigned workflow and converted the Company's computer system
improving efficiencies in its community banking and mortgage banking lines of
business.
Credit Quality
Total non-performing loans were $10,564,000 on June 30, 1998, or 1.96%
of outstanding average loans receivable, net compared to 1.31% on June 30, 1997.
The reserve for loan losses totaled $6,732,000 at quarter end, or 63.73% of
non-performing loans, compared to $5,761,000 or 84.96% one year earlier. During
the quarter, the provision for loan losses was $627,000, exceeding net
charge-offs of $400,000. Net charge-offs equaled 0.07% of outstanding average
loans receivable, net for the first quarter of 1999 and 0.03% for the first
quarter of 1998.
Capital Strength
Total shareholders' equity was $77,551,000 on June 30, 1998. This
represented 6.92% of period-end assets, compared to 8.30% at June 30, 1997. Book
value per common share rose to $13.36 at the end of the quarter.
EARNINGS ANALYSIS
Net Interest Income
Net interest income increased by $321,000 or 4.53% to $7,401,000 in the
first quarter of fiscal 1999 from $7,080,000 for the same period last year. This
increase resulted from growth in interest earning assets primarily through loan
originations. The net interest spread (the difference between the yield earned
on interest earning assets and the cost of interest bearing liabilities)
declined 137 basis points to 263 basis points from 400 basis points in the same
period last year. The primary reason for the decline was the decrease in the
yield on interest bearing assets, primarily loans receivable and loans held for
sale. Yield on interest earning assets decreased 107 basis points to 8.05% from
9.12% while the cost of interest bearing liabilities increased 30 basis points
to 5.42% from 5.12%.
Interest income received on loans increased $4,300,000 or 30.59% to
$18,357,000 for the first quarter of fiscal 1999 from $14,057,000 in fiscal
1998. The increase in interest received on loans is attributable to higher
originations in loans held for sale. While higher originations of loans held for
sale increased the Company's interest income, the yield on loans declined 139
basis points at 8.21% for the
11
<PAGE> 12
quarter compared to 9.60% in the same quarter last year. Interest received on
mortgage backed securities decreased $28,000 or 2.16% to $1,271,000 million for
the first quarter of fiscal 1999 from $1,299,000 in the first quarter of fiscal
1998. Interest received on securities increased $125,000 or 7.44% to $1,806,000
in fiscal 1999 from 1,681,000 in the prior period.
Interest expense increased $4,166,000 or 45.09% to $13,406,000 for the
first quarter of fiscal 1999 from $9,240,000 in the first quarter of fiscal
1998. This is primarily the result of growth in deposits coupled with an
increased cost. Interest expense on deposits increased $3,603,000 or 53.01% to
$10,400,000 from $6,797,000 in the same period in the prior year. The cost of
deposits increased to 5.44% during the quarter compared to 4.85% in the prior
period. Interest expense on FHLB advances and other borrowings also increased
$563,000 or 23.05% to $3,006,000 for the first quarter of fiscal 1999 from
$2,443,000 in the first quarter of fiscal 1998. The Bank's cost of FHLB advances
and other borrowings decreased 69 basis points to 5.36% from 6.05% in the same
period in the prior year.
Interest Rate and Market Risk
The Company employs a sensitivity analysis in the form of a net
interest income simulation to help characterize the market risk arising from
changes in interest rates. 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 June 30, 1998, the expected rate simulation indicated
a decline in annual net interest income of $368,000 or 1.09% relative to the
unchanged rate simulation and a $841,000 or 1.19% 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 June 30, 1998, management estimates the Company's annual net
interest income would increase approximately $2,806,000 or 8.30%, and decrease
approximately $3,779,000 or 11.18% 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 June 30, 1998, estimates
a $3,758,000 or 0.32% decrease in market value. The Company estimates a like
decrease in market rates would decrease market value $5,174,000 or 8.70%. These
changes in market value represent less that 5.00% of the total carrying value of
total assets at June 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.
12
<PAGE> 13
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 3.06% during the first quarter of
fiscal 1999 from 4.22% during the first quarter of fiscal 1998. The average
balance sheet on the next page presents the individual components of net
interest income and expense, net interest spread and net interest margin. The
decline in the net interest margin in the first quarter of fiscal 1999 was
primarily attributable to the decrease in the yield on interests 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 quarters ended June
30, 1998 and 1997:
13
<PAGE> 14
AVERAGE BALANCE SHEET
<TABLE>
<CAPTION>
Quarter ended June 30, 1998
Average Yield/ Average
(dollars in thousands) Balance Interest Cost Balance
- --------------------------------------------------------------------------------------------------------------------------------
Earning Assets
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans receivable(1) $ 539,228 $ 12,682 9.41% $517,867
Loans held for sale 354,864 5,675 6.40% $ 67,732
Mortgage-backed securities 72,656 1,270 6.99% 70,114
FHLB stock 10,248 192 7.49% 8,313
Taxable investments(2) 20,982 391 7.45% 42,626
Tax-exempt investment securities(2) 75,269 1,378 7.32% 34,117
Interest earning deposits and Federal funds 1,172 30 10.24% 12,187
- --------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 1,074,419 21,618 8.05% 752,956
Non-interest earning assets 67,594 60,068
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $1,142,013 $813,024
- --------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities
- --------------------------------------------------------------------------------------------------------------------------------
Savings accounts $ 39,345 $ 246 2.50% $ 46,756
Checking 98,914 967 3.91% 78,995
Money market 43,332 455 4.20% 22,614
Certificates of deposit 583,357 8,732 5.99% 411,758
- --------------------------------------------------------------------------------------------------------------------------------
Total deposits 764,948 10,400 5.44% 560,123
Advances and other borrowings 224,301 3,006 5.36% 161,579
- --------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 989,249 13,406 5.42% 721,702
Non-interest bearing deposits 47,579 20,854
Non-interest bearing liabilities 31,324 934
Stockholders' equity 73,861 69,534
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $1,142,013 $813,024
- --------------------------------------------------------------------------------------------------------------------------------
Net interest rate spread $ 8,212 2.63%
Taxable-equivalent adjustment (184)
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income, actual $ 8,028
Net interest earning assets/net interest $ 85,170 3.06% $31,254
margin
Interest earning assets as a percentage of
interest bearing liabilities 108.61% 104.33%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)Non-accrual loans are included in average balances and income on such loans,
<TABLE>
<CAPTION>
1997
Quarter ended June 30, Yield/
(dollars in thousands) Interest Cost
- -----------------------------------------------------------------------------------------------------
Earning Assets
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans receivable(1) $ 12,918 9.98%
Loans held for sale 1,139 6.73%
Mortgage-backed securities 1,299 7.41%
FHLB stock 166 7.99%
Taxable investments(2) 788 7.39%
Tax-exempt investment securities(2) 705 8.27%
Interest earning deposits and Federal funds 168 5.51%
- -----------------------------------------------------------------------------------------------------
Total interest earning assets 17,183 9.12%
Non-interest earning assets
- -----------------------------------------------------------------------------------------------------
Total assets
- -----------------------------------------------------------------------------------------------------
Interest-bearing liabilities
- -----------------------------------------------------------------------------------------------------
Savings accounts $ 281 2.40%
Checking 292 1.47%
Money market 150 2.65%
Certificates of deposit 6,074 5.90%
- -----------------------------------------------------------------------------------------------------
Total deposits 6,797 4.85%
Advances and other borrowings 2,443 6.05%
- -----------------------------------------------------------------------------------------------------
Total interest bearing liabilities 9,240 5.12%
Non-interest bearing deposits
Non-interest bearing liabilities
Stockholders' equity
- -----------------------------------------------------------------------------------------------------
Total liabilities and equity
- -----------------------------------------------------------------------------------------------------
Net interest rate spread $ 7,943 4.00%
Taxable-equivalent adjustment (146)
- -----------------------------------------------------------------------------------------------------
Net interest income, actual $ 7,797
Net interest earning assets/net interest 4.22%
margin
Interest earning assets as a percentage of
interest bearing liabilities
- -----------------------------------------------------------------------------------------------------
</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 $2,971,000 or 86.27% to $6,415,000 for
the first quarter of 1999 from $3,444,000 for the same period last year.
Mortgage production fees are the largest component of non-interest income and
these fees increased $1,179,000 or 57.79% to $3,219,000 compared to $2,040,000
in the first quarter of fiscal 1998. The volume of loans sold in the secondary
market increased by $215,286,000 or 136.80% to $372,659,000 during the first
quarter from $157,373,000 during the first quarter last year. The margin earned
on these loans (mortgage production fees divided by mortgage volume sold)
decreased to 86 basis points in the current period compared to 130 basis points
in the first quarter of fiscal 1998.
During the first quarter of 1999, the Company sold 73 lots and recorded
gains on sales of investment in real estate of $929,000 compared to 31 lots and
gains of $226,000 for the same quarter in 1998.
14
<PAGE> 15
Service charges increased $82,000 or 16.80% to $570,000 in the first
quarter of fiscal 1999 compared to $488,000 for the same period last year. This
is the result of growth in the number of checking accounts during the year.
The Company recognized gains on sales of securities available for sale
of $267,000 and a gain on the sale of fixed assets of $147,000. The one-time
gain on the sale of fixed assets resulted from the sale of real estate acquired
from the merger with Southern Crescent Financial Corp. on March 26, 1997.
In addition, miscellaneous other income increased $539,000 or 135.43%
to $937,000 for the first quarter of fiscal 1999 from $398,000 for the same
period one year ago. This is primarily attributable to an increase in
miscellaneous loans fees.
Non-Interest Expense
Non-interest expense increased by $1,085,000 or 13.06% to $9,391,000
for the first quarter of fiscal 1999 from $8,306,000 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. The Company's efficiency ratio
improved to 65.03% for the first quarter of fiscal 1999 compared to 73.89% for
the same period last year. The conversion of the Company's computer system has
been completed and has improved efficiencies in its community banking and
mortgage banking lines of business.
Salaries and employee benefits increased $541,000 or 11.47% to
$5,256,000 for the first quarter of fiscal 1999 from $4,715,000 for the same
period last year. This increase is due to the addition of employees to support
the Company's growth. Occupancy expense increased $120,000 or 11.52% to
$1,162,000 in the first quarter of fiscal 1999 from $1,042,000 for the same
period last year. Federal insurance premiums increased $27,000 or 39.13% to
$96,000 for the first quarter of fiscal 1999 from $69,000 for the same period
last year.
Miscellaneous expenses increased $276,000 or 17.91% to $1,817,000 for
the first quarter of fiscal 1999 from $1,541,000 for the same period last year.
This increase is due in part to increases in office supplies and telephone and
communications fees due to the Company's expansion.
BALANCE SHEET ANALYSIS
Investment Securities
During the first quarter of fiscal 1999, investment securities
increased to $171,027,000 from $162,874,000 and $142,447,000 at March 31, 1998
and June 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.
15
<PAGE> 16
The investment securities portfolio at June 30, 1998, was comprised of
$57,737,000 of investment securities held to maturity at amortized cost compared
to $58,138,000 and $45,242,000 at March 31, 1998 and June 30, 1997,
respectively. The Company has the ability and it is 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 $113,290,000 at
June 30, 1998 compared to $104,736,000 and $97,205,000 at March 31, 1998 and
June 30, 1997, respectively. Investment securities available for sale had a net
unrealized gain as shown in the Company's stockholders' equity section of
$676,000 and $838,000 at June 30, 1998 and March 31, 1998, respectively.
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 June 30, 1998, March 31, 1998 or June
30, 1997.
The following table reflects securities held in the Bank's securities
portfolio for the periods indicated:
INVESTMENT SECURITIES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
(dollars in thousands) June 30, March 31, June 30,
1998 1998 1997
<S> <C> <C> <C>
Investment Securities Held to Maturity:
US Treasury and US Government Agencies $ 36,188 $ 36,188 $ 21,482
Mortgage-backed securities 4,603 5,010 6,261
Corporate bonds 7,432 7,431 7,429
Other debt securities 9,514 9,509 10,070
- --------------------------------------------------------------------------------------
Total $ 57,737 $ 58,138 $ 45,242
- --------------------------------------------------------------------------------------
Securities Available for Sale:
US Treasury and US Government Agencies $ 31,648 $ 16,068 $ 13,347
Mortgage-backed securities 67,104 70,626 63,387
Corporate Bonds 2,023 2,037 2,005
Other debt securities 3,656 3,795 4,010
Equity securities - preferred stock 8,859 12,210 14,456
- --------------------------------------------------------------------------------------
Total $113,290 $ 104,736 $ 97,205
- --------------------------------------------------------------------------------------
Total Investment Securities:
US Treasury and US Government Agencies $ 67,836 $ 52,256 $ 34,829
Mortgage-backed securities 71,707 75,636 69,648
Corporate bonds 9,455 9,468 9,434
Other debt securities 13,170 13,304 14,080
Equity securities - preferred stock 8,859 12,210 14,456
- --------------------------------------------------------------------------------------
Total $171,027 $ 162,874 $142,447
- --------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
Loan Portfolio and Concentration
LOAN PORTFOLIO MIX
<TABLE>
<CAPTION>
June 30, % of Gross March 31, % of Gross June 30, % of Gross
(dollars in thousands) 1998 Loans Recv 1998 Loans Recv 1997 Loans Recv
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real Estate - construction loans
Construction $ 207,329 34.05% $ 197,811 31.90% $ 225,582 35.74%
Acquisition & Development 39,474 6.48% 41,992 6.77% 34,829 5.52%
Real Estate - mortgage loans
Non-Residential 75,718 12.43% 82,261 13.26% 66,558 10.54%
Residential 180,740 29.68% 192,994 31.12% 199,356 31.58%
Home equity and second mortgages 49,362 8.11% 46,218 7.45% 45,421 7.20%
- -------------------------------------------------------------------------------------------------------------------------
Total real estate loans $ 552,623 90.75% $ 561,276 90.50% $ 571,746 90.58%
- -------------------------------------------------------------------------------------------------------------------------
Commercial and consumer loans:
Commercial 17,609 2.89% $ 15,681 2.53% $ 12,876 2.04%
Leases 8,101 1.33% 9,463 1.53% 16,493 2.61%
Consumer and other 30,606 5.03% 33,755 5.44% 30,076 4.77%
- -------------------------------------------------------------------------------------------------------------------------
Total commercial and consumer loans $ 56,316 9.25% $ 58,899 9.50% $ 59.445 9.42%
- -------------------------------------------------------------------------------------------------------------------------
Total gross loans receivable $ 608,939 100.00% $ 620,175 100.00% $ 631,191 100.00%
- -------------------------------------------------------------------------------------------------------------------------
Less:
Undisbursed portion of loans
in process (88,799) (77,302) (82,538)
Deferred fees and other unearned
income (214) (636) (1,821)
Reserves for loan losses (6,732) (6,505) (5,761)
- -------------------------------------------------------------------------------------------------------------------------
Loans receivable, net $ 513,194 $ 535,732 $ 541,071
=========================================================================================================================
</TABLE>
Loan Portfolio and Concentration
The loan portfolio has decreased $27,877,000 or 5.15% to $513,194,000
at June 30, 1998, compared to $541,071,000 at June 30, 1997.
Construction and acquisition and development loans, including the
undisbursed portion of loans in process, decreased $13,608,000 or 5.23% to
$246,803,000 at June 30, 1998 from $260,411,000 at June 30, 1997. These loans
represent 40.53% of gross loans receivable at June 30, 1998, remaining
consistent when compared to 41.26% at June 30, 1997. Residential mortgage loans
decreased $18,616,000 or 9.34% to $180,740,000 at June 30, 1998 from
$199,356,000 at June 30, 1997. Home equity and second mortgage loans increased
$3,941,000 or 8.68% to $49,362,000 at June 30, 1998 from $45,421,000 at June 30,
1997. These loans represent 37.79% of gross loans receivable at June 30, 1998
remaining relatively stable compared to 38.78% at June 30, 1997.
Non-residential mortgage loans increased to 12.43% of gross loans
receivable at June 30, 1998 compared to 10.54% at June 30, 1997. Commercial
loans represented 2.89% at June 30, 1998 compared to 2.04% at June 30, 1997.
Consumer loans remained consistent at 5.03% when compared to 4.77% at June 30,
1997.
17
<PAGE> 18
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 $517,000 or 3.47% to
$15,421,000 at June 30, 1998 from $14,904,000 at March 31, 1998. Total problem
assets as a percent of total assets increased to 1.38% at June 30, 1998 from
1.30% at March 31, 1998. At June 30, 1998, the Company had non-accrual loans of
$10,564,000 compared to $7,948,000 at March 31, 1998. Interest income not
recognized on these loans amounted to $199,000 during the first quarter of
fiscal 1999 and $240,000 for the same period last year. In addition, at June 30,
1998, the ACC identified $1,948,000 of potential problem loans compared to
$4,009,000 at March 31, 1998. Real estate owned decreased by $38,000 or 1.29% to
$2,909,000 at June 30, 1998 from $2,947,000 at March 31, 1998.
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 and have been classified as
such by the ACC regardless of payment status.
NON-ACCRUAL, PAST DUE and RESTRUCTURED LOANS
<TABLE>
<CAPTION>
June 30, March 31, June 30,
(dollars in thousands) 1998 1998 1998
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual loans:
Residential real estate-construction $ 2,335 $ 1,127 $ 728
Residential real estate-mortgage 5,572 4,026 3,301
Commercial real estate -- 24 --
Commercial 61 -- 23
Commercial lease 2,045 2,054 2,396
Installment 551 717 333
- ----------------------------------------------------------------------------------
Total non-accrual 10,564 $ 7,948 $ 6,781
- ----------------------------------------------------------------------------------
Potential problem loans 1,948 4,009 2,629
Loans contractually delinquent 90
days which still accrue interest -- -- --
Troubled debt restructurings -- -- --
- ----------------------------------------------------------------------------------
Total non-accrual and problem loans 12,512 $ 11,957 $ 9,410
- ----------------------------------------------------------------------------------
Real estate owned, net 2,909 2,947 2,268
- ----------------------------------------------------------------------------------
Total problem assets $ 15,421 $ 14,904 $ 11,678
- ----------------------------------------------------------------------------------
Total problem assets/Total assets 1.38% 1.30% 1.38%
- ----------------------------------------------------------------------------------
Total problem assets/Loans receivable,
net plus reserves 2.97% 2.75% 2.14%
- ----------------------------------------------------------------------------------
Reserve for loan losses/Total
Problem assets 43.65% 43.65% 49.33%
- ----------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
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>
At June 30, 1998 Residential
--------------- 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 $ 946 $3,427 $ -- $ 36 $2,045 $ 551 $ 7,005 43.78%
Augusta 188 842 -- -- -- -- 1,030 6.44%
Jacksonville -- 132 -- -- -- -- 132 0.82%
St. Augustine 563 20 -- 25 -- -- 608 3.80%
Savannah 64 -- -- -- -- -- 64 0.40%
Charlotte 268 -- -- -- -- -- 268 1.67%
Hinesville -- 120 -- -- -- -- 120 0.75%
Warner Robins 152 -- -- -- -- -- 152 0.95%
All other locations 154 1,031 -- -- -- -- 1,185 7.41%
- -----------------------------------------------------------------------------------------------------------------------
Total non-accrual 2,335 5,572 -- 61 2,045 551 10,564 66.02%
- -----------------------------------------------------------------------------------------------------------------------
Potential problem loans:
Atlanta 1,148 -- 555 84 161 -- 1,948 12.17%
- -----------------------------------------------------------------------------------------------------------------------
Total potential problem loans 1,148 -- 555 84 161 -- 1,948 12.17%
- -----------------------------------------------------------------------------------------------------------------------
Real estate owned:
Atlanta 293 92 679 -- -- -- 1,064 6.65%
Augusta -- 87 -- -- -- -- 87 0.55%
Hinesville 800 -- 73 -- -- -- 873 5.46%
Warner Robins 156 -- -- -- -- -- 156 0.97%
Aiken 63 358 -- -- -- -- 421 2.63%
All other locations 507 381 -- -- -- -- 888 5.55%
- ----------------------------------------------------------------------------------------------------------------------
Total real estate owned(1) 1,819 918 752 -- -- -- 3,489 21.81%
- ----------------------------------------------------------------------------------------------------------------------
Total problem assets by type $5,302 $6,490 $1,307 $ 145 $2,206 $ 551 $16,001 100.00%
- ----------------------------------------------------------------------------------------------------------------------
% of total problem assets by type 33.13% 40.56% 8.17% 0.91% 13.79% 3.44% 100.00%
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include reserves of $579,858; real estate owned, net equals
$2,909,308
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. The trustee has made settlement offers to the Bank
which have been declined.
In addition, one borrower in Atlanta, Georgia has non-accrual loans of
$938,000 consisting of $274,000 of construction loans and a $664,000 acquisition
and development loan. The borrower has filed for bankruptcy protection and has
filed a repayment plan with the trustee. The repayment plan has been accepted by
the Bank and approved by the trustee. Under the plan the Bank expects to receive
repayment of all unpaid principal, accrued interest and attorney's fees.
19
<PAGE> 20
Loan Impairment
At June 30, 1998, the recorded investment in impaired loans, which
excludes non-accrual first mortgage loans and residential construction loans,
increased $262,000 or 14.69% to $2,045,000 from $1,783,000 at March 31, 1998 and
increased $248,000 or 13.80% from $1,797,000 at June 30, 1997. At June 30, 1998,
March 31, 1998 and June 30, 1997 all impaired loans were on a non-accrual basis.
At June 30, 1998, the valuation allowance related to these impaired loans was
$673,000 compared to $455,000 at March 31, 1998 and $459,000 at June 30, 1997,
respectively. At June 30, 1998, March 31, 1998 and June 30, 1997, all impaired
loans had a related loan loss reserve. For the first quarter of fiscal 1999, the
average recorded investment in impaired loans was $2,045,000 compared to
$1,784,000 and $1,791,000 for the quarters ending March 31, 1998 and June 30,
1997, respectively.
The Company uses either the cash or cost recovery method to record cash receipts
on impaired loans that are on non-accrual. Under the cash method, contractual
interest is credited to interest income when received. This method is used when
the ultimate collectability 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 $717,000, respectively, of
additional reserves for possible loan losses during the first quarters of fiscal
1999 and 1998. At June 30, 1998, reserves represented 1.25% of outstanding
average loans receivable, net during the period, increasing from 1.19% at March
31, 1998. Net charge-offs during the first quarter of 1999, were $400,000 versus
$387,000 during the quarter ending March 31, 1998. In the first quarter of 1999,
net charge-offs represented 0.07% of outstanding average loans receivable, net,
remaining stable when compared to the quarter ending March 31, 1998. Loan loss
reserves totaled $6,732,000 and $6,505,000 at June 30, 1998 and March 31, 1998,
respectively. Loan loss reserves to total problem assets remained constant at
43.65% at June 30, 1998 and at March 31, 1998. 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.
20
<PAGE> 21
ANALYSIS OF THE RESERVE FOR LOAN LOSSES
<TABLE>
<CAPTION>
(dollars in thousands) June 30, 1998 March 31, 1998 June 30, 1997
------------- -------------- -------------
<S> <C> <C> <C>
Reserve for loan losses, beginning of quarter $ 6,505 $ 6,265 $ 5,198
Charge-offs:
Real estate - construction -- 16 49
Real estate - mortgage 181 180 92
Consumer 266 237 43
Commercial 13 71 27
Commercial leases 16 -- --
- -------------------------------------------------------------------------------------------------------------------
Total charge-offs 476 504 211
Recoveries 76 117 57
- -------------------------------------------------------------------------------------------------------------------
Net charge-offs 400 387 154
Provision for loan losses 627 627 717
- -------------------------------------------------------------------------------------------------------------------
Reserve for loan losses, end of quarter $ 6,732 $ 6,505 $ 5,761
- -------------------------------------------------------------------------------------------------------------------
Average loans receivable, net, outstanding for the period $539,228 $544,916 $517,867
- -------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average loans receivable, net 0.07% 0.07% 0.03%
- -------------------------------------------------------------------------------------------------------------------
Reserves to average loans receivable, net 1.25% 1.19% 1.11%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment in Real Estate
The Company's investment in real estate decreased $1,008,000 since
March 31, 1998 and increased $709,000 since June 30, 1997. The Company currently
has five real estate projects in the Atlanta market.
Deposits
Deposits are the Company's primary funding source. Total deposits
increased by $19,032,000 or 2.44% to $798,007,000 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 Atlanta. The growth in
deposits was primarily in certificates of deposits which grew 4.12% to
$577,115,000 at June 30, 1998 from $554,273,000 at March 31, 1998. Demand
deposits including non-interest -bearing, interest bearing, savings, and money
market accounts were 27.68% of the Company's deposits at June 30, 1998. The
weighted average interest rate on deposits increased to 5.03% at June 30, 1998
from 4.85% at March 31, 1998 and June 30, 1997.
21
<PAGE> 22
For the periods indicated, deposits are summarized by type and
remaining term as follows:
Deposit Mix
<TABLE>
<CAPTION>
June 30, March 31, June 30,
(dollars in thousands) 1998 1998 1997
------------------------------------
<S> <C> <C> <C>
Demand deposits:
Non-interest--bearing deposits $ 32,100 $ 61,070 $ 28,174
Interest-bearing deposits 103,433 86,360 54,361
Money market accounts 46,581 38,862 22,039
Savings accounts 38,778 38,410 44,234
------------------------------------
220,892 224,702 148,808
------------------------------------
Time deposits:
Maturity one year or less 420,819 411,179 313,231
Maturity greater than one year through
two years 63,942 47,590 39,067
Maturity greater than two years through
three years 29,360 36,533 39,743
Maturity greater than three years 62,994 58,971 38,264
------------------------------------
Total time deposits 577,115 554,273 430,305
------------------------------------
Total deposits $798,007 $ 778,975 $579,113
------------------------------------
</TABLE>
The weighted average interest rate on time deposits at June 30, 1998,
March 31, 1998 and June 30, 1997 was 5.92%, 5.94% and 5.83%, respectively.
For the periods indicated, interest expense on deposits is summarized
as follows:
<TABLE>
<CAPTION>
June 30, March 31, June 30,
(dollars in thousands) 1998 1998 1997
------------------------------------
<S> <C> <C> <C>
Interest-bearing deposits $ 960 $ 692 $ 292
Money market accounts 435 371 150
Savings accounts 237 256 281
Time deposits 8,768 6,811 6,074
------------------------------------
Total $ 10,400 $ 8,130 $ 6,797
------------------------------------
</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 June 30, 1998, advances were
$160,100,000 compared to $217,835,000 at March 31, 1998. At June 30, 1998, the
weighted average interest rate on these borrowings was 5.82% compared to 5.88%
at March 31, 1998.
22
<PAGE> 23
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. The Company
has experienced significant growth in both assets and deposit accounts.
Increases in 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 is provided by advances from the
Federal Home Loan Bank. At June 30, 1998, advances stood at $160,100,000. The
liquidity requirement may vary from time to time (between 4 percent and 10
percent) depending upon economic conditions and savings plans of all member
savings institutions. Under current regulations, the Bank is required to
maintain liquid assets of not less than 4 percent of the liquidity base at the
end of the preceding calendar quarter. At June 30, 1998, the Company's liquidity
ratio was 4.67%. At June 30, 1998, the Company had commitments to originate
loans of approximately $32,864,000. The Company had commitments to sell mortgage
loans of approximately $79,138,000 at June 30, 1998.
Beginning April 1, 1995, the Bank formed an operating subsidiary,
PrimeEagle, and consolidated all real estate lending activities into this
business unit. This business unit generates revenues by originating construction
loans and permanent mortgage loans. Substantially all fixed rate permanent
mortgage and SBA loans are sold to investors. Permanent mortgage loan
originations increased 146.21% to $378,451,000 for the first quarter of fiscal
1999 compared to $153,708,000 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 three months of fiscal 1999, the Company used cash from
operating activities of $5,401,000 compared to $2,564,000 for the same period
last year. The primary reason for this is fluctuations in timing differences
from the sale of loans held for sale versus originations of loans held for sale.
During the first quarter of fiscal 1999, the Company originated $378,451,000 of
loans held for sale and sold $372,659,000 of loans held for sale. This resulted
in a $5,792,000 use of cash. This compares to the same quarter last year, when
the Company originated $153,708,000 of loans held for sale and sold $157,373,000
of loans held for sale.
Cash Flows from Investing Activities
During the first three months of fiscal 1999, cash provided by
investing activities was $17,905,000 compared to $18,407,000 used for the same
quarter last year. Loan originations net of repayments represented 131.99% of
cash provided or $23,632,000 compared to 139.72% or $25,718,000 used for the
same period in fiscal 1998. For the first quarter of fiscal 1999, the Company
purchased securities available for sale of $17,500,000 compared to $1,000,000
for the same period last year. Proceeds from sales of securities available for
sale for the first three months of fiscal 1999 provided cash of $2,258,000 and
proceeds from calls of securities available for sale and proceeds from
maturities of investment securities held to maturity provided $994,000 and
$1,000,000, respectively. Comparatively, for the first quarter of fiscal 1998,
the Company received proceeds from calls of securities available for sale of
$1,500,000, proceeds of maturities of securities available for sale of $500,000
and proceeds of investment securities held to maturity of $6,300,000. In
addition, the Company redeemed $2,256,000 of FHLB stock while purchasing
$508,000 in the first three months of fiscal 1999 compared to redemptions of
$86,000 and purchases of $839,000 in the same period last year.
23
<PAGE> 24
Cash Flows from Financing Activities
Cash used in financing activities during the first quarter of fiscal
1999, was $26,569,000 compared to cash provided by of $31,201,000 during same
quarter last year. Repayments of FHLB advances and other borrowings provided the
most significant increase in cash used in financing activities. The Company
borrowed $239,460,000 and repaid $282,403,000 during the first three months of
fiscal 1999. This compares to borrowings of $76,670,000 and repayments of
$66,417,000 during the same period last year. The Company's deposits increased
by $19,032,000 during the first quarter of fiscal 1999. The increase is
comprised of $22,842,000 of time deposits and a decrease of $3,810,000 in demand
deposits. Comparatively, for the same quarter last year, deposits increased
$21,389,000 comprised of $18,602,000 in time deposits and $2,787,000 in demand
deposits. The Company paid cash dividends to its shareholders of $861,000 and
$849,000 for the first three 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 percent or higher, a tier
one risk based capital ratio of 6 percent or higher and a leveraged ratio of 5
percent or higher. At June 30, 1998, the Bank was classified as "adequately
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. 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.
REGULATORY CAPITAL
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
At June 30, 1998 Regulatory Required Excess
(dollars in thousands) Capital % Capital % Capital %
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1998
Risk-based ratios:
Tier 1 capital $53,884 8.17 $26,369 4.00 $27,515 4.17
Total capital $59,873 9.08 $52,737 8.00 $ 7,136 1.08
Tier 1 leverage $53,884 4.98 $43,308 4.00 $10,576 0.98
Tangible equity $53,884 4.72 $17,130 1.50 $36,754 3.22
- --------------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------
June 30, 1997
Tier 1 capital $52,796 9.33 $22,624 4.00 $30,172 5.33
Total capital $58,264 10.30 $45,248 8.00 $13,016 2.30
Tier 1 leverage $52,796 6.41 $32,962 4.00 $19,834 2.41
Tangible equity $52,796 6.55 $12,083 1.50 $40,713 5.05
- --------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 25
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
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
25
<PAGE> 26
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
26
<PAGE> 27
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: August 14, 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: August 14, 1998 /s/Richard B. Inman, Jr.
------------------------
Richard B. Inman, Jr.
Director, Secretary and Treasurer
Date: August 14, 1998 /s/ Conrad J. Sechler, Jr.
--------------------------
Conrad J. Sechler, Jr.
Chairman of the Board and President
Date: August 14, 1998 /s/ LuAnn Durden
----------------
LuAnn Durden
Chief Financial Officer
27
<PAGE> 28
EAGLE BANCSHARES, INC.
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description Page No.
- ------ ----------- --------
<S> <C> <C>
11 Computation of per share earnings 29
27 Financial Data Schedule (for SEC Use Only).
28
</TABLE>
<PAGE> 1
EXHIBIT 11
EAGLE BANCSHARES, INC.
Statement re: Computation of per share earnings
Below is a reconciliation for the three month periods ended June 30, 1998 and
1997 between average basic common shares outstanding and average diluted common
shares outstanding.
Computation of Per Share Earnings
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
JUNE 30, 1998 June 30, 1997
------------- --------------
<S> <C> <C>
Basic
- -----
Net income $ 2,980 $ 1,560
------------- --------------
Average common shares 5,763 5,660
------------- --------------
Earnings per common share - basic $ 0.52 $ 0.28
------------- --------------
Diluted
- -------
Net income $ 2,980 $ 1,560
------------- --------------
Average common shares - basic 5,763 5,660
Incremental share outstanding 198 133
Average common shares - diluted 5,961 5,793
------------- --------------
Earnings per common share - diluted $ 0.50 $ 0.27
------------- --------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 20,157
<INT-BEARING-DEPOSITS> 170
<FED-FUNDS-SOLD> 290
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 113,290
<INVESTMENTS-CARRYING> 57,737
<INVESTMENTS-MARKET> 58,794
<LOANS> 851,578
<ALLOWANCE> 6,732
<TOTAL-ASSETS> 1,120,232
<DEPOSITS> 798,007
<SHORT-TERM> 92,600
<LIABILITIES-OTHER> 46,762
<LONG-TERM> 105,312
0
0
<COMMON> 6,108
<OTHER-SE> 71,443
<TOTAL-LIABILITIES-AND-EQUITY> 1,120,232
<INTEREST-LOAN> 18,357
<INTEREST-INVEST> 1,806
<INTEREST-OTHER> 1,271
<INTEREST-TOTAL> 21,434
<INTEREST-DEPOSIT> 10,400
<INTEREST-EXPENSE> 13,406
<INTEREST-INCOME-NET> 8,028
<LOAN-LOSSES> 627
<SECURITIES-GAINS> 267
<EXPENSE-OTHER> 9,391
<INCOME-PRETAX> 4,425
<INCOME-PRE-EXTRAORDINARY> 4,425
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,980
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.50
<YIELD-ACTUAL> 2.63
<LOANS-NON> 10,564
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,948
<ALLOWANCE-OPEN> 6,505
<CHARGE-OFFS> 476
<RECOVERIES> 76
<ALLOWANCE-CLOSE> 627
<ALLOWANCE-DOMESTIC> 6,732
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
