<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 period ended December 31, 1998.
------------------
OR
- --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from --------------- to ----------------
Commission file number 0-14379
-------
EAGLE BANCSHARES, INC.
-----------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
Georgia 58-1640222
-------------------------------------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4305 Lynburn Drive, Tucker, Georgia 30084-4441
-----------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(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.
<TABLE>
<S> <C>
Class Outstanding at January 31, 1999
----------------------------- -------------------------------
Common Stock, $1.00 Par Value 5,557,514 shares
</TABLE>
Index of Exhibit on Page 31
<PAGE> 2
EAGLE BANCSHARES, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
<S> <C> <C> <C>
PART I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition at -
December 31, 1998 and March 31, 1998 3
Consolidated Statements of Income -
Three and Nine Months Ended December 31, 1998 and 1997 4
Consolidated Statements of Cash Flows -
Nine months ended December 31, 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 29
Item 2. Changes in Securities 29
Item 3. Defaults upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 30
Index of Exhibits 31
</TABLE>
2
<PAGE> 3
EAGLE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
(Unaudited) DECEMBER 31, March 31,
(in thousands except per share data) 1998 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and amounts due from banks $ 26,751 $ 34,022
Federal funds sold -- 660
Securities available for sale 206,250 104,736
Investment securities held to maturity 44,218 58,138
Loans held for sale 419,880 332,592
Loans receivable, net 575,598 535,732
Investment in real estate 34,555 27,595
Real estate acquired in settlement of loans, net 1,843 2,947
Stock in Federal Home Loan Bank, at cost 13,035 10,892
Premises and equipment, net 21,591 21,868
Accrued interest receivable 8,191 7,301
Deferred income taxes 4,672 3,953
Other assets 10,625 9,047
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,367,209 $1,149,483
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 885,718 $ 778,975
Federal Home Loan Bank advances and other borrowings 340,150 240,855
Advance payments by borrowers for property taxes and insurance 2,736 5,477
Drafts outstanding 21,078 30,716
Guaranteed preferred beneficial interests in the Company's subordinated debentures -
(Trust preferred securities) 28,750 --
Accrued expenses and other liabilities 14,253 18,758
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,292,685 1,074,781
- ---------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value, 10,000,000 shares authorized, 6,112,064 and
6,037,100 shares issued at December 31, and March 31, 1998, respectively 6,112 6,037
Additional paid-in capital 38,083 37,336
Retained earnings 37,194 32,028
Accumulated other comprehensive income (427) 838
Employee Stock Ownership Plan note payable (1,978) (165)
Unamortized restricted stock (207) (296)
Treasury stock, 476,550 and 301,800 shares at cost, at December 31, and
March 31, 1998, respectively (4,253) (1,076)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 74,524 74,702
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,367,209 $1,149,483
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 4
EAGLE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
(Unaudited) DECEMBER 31, DECEMBER 31,
(in thousands except per share data) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest on loans $21,142 $15,447 $57,784 $44,235
Interest on mortgage-backed securities 1,675 1,195 4,229 3,763
Interest on investment securities and other interest earning assets 2,589 1,501 6,137 4,656
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest income 25,406 18,143 68,150 52,654
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 10,507 7,492 31,188 21,636
Interest on borrowings 4,095 2,755 9,827 7,417
Interest of trust preferred securities 630 -- 1,064 --
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest expense 15,232 10,247 42,079 29,053
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 10,174 7,896 26,071 23,601
PROVISION FOR LOAN LOSSES 627 657 1,881 1,974
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 9,547 7,239 24,190 21,627
- ---------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Mortgage production fees 3,245 2,454 11,154 6,573
Gains on sales of investment in real estate 323 761 1,414 1,392
Real estate commissions, net 141 121 555 314
Rental income 173 261 519 600
Service charges 517 442 1,568 1,436
Gains/(losses) on investment securities available for sale -- 5 469 (46)
Gains on sales of loans -- -- 24 16
Gains on sales of fixed assets 11 -- 163 3
Miscellaneous 642 703 2,282 1,503
- ---------------------------------------------------------------------------------------------------------------------------------
Total other income 5,052 4,747 18,148 11,791
- ---------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES:
Salaries and employee benefits 5,973 5,003 16,418 14,527
Net occupancy expense 1,409 1,330 3,926 3,424
Data processing 637 499 1,802 1,508
Federal insurance premium 159 70 416 209
Marketing 565 279 1,556 710
Provisions for losses on real estate acquired in settlement of loans 231 225 231 515
Miscellaneous 2,062 2,132 6,270 5,518
- ---------------------------------------------------------------------------------------------------------------------------------
Total other expenses 11,036 9,538 30,619 26,411
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,563 2,448 11,719 7,007
INCOME TAX EXPENSE 1,090 684 3,795 1,960
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2,473 $ 1,764 $ 7,924 $ 5,047
- ---------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE - BASIC $ 0.43 $ 0.31 $ 1.38 $ 0.89
- ---------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE - DILUTED $ 0.42 $ 0.30 $ 1.34 $ 0.87
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 5
EAGLE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
(dollars in thousands)
Nine Months ended December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,924 $ 5,047
Adjustments to reconcile net income to net cash used in operating
Activities:
Depreciation, amortization and accretion 1,865 (428)
Provision for loan losses 1,881 1,974
Provision for losses on real estate acquired in settlement of loans 231 515
(Gains)/losses on sale of investments (469) 46
Losses on sale of real estate acquired in settlement of loans 57 7
Gains on sales of investment in real estate (1,414) (1,391)
Gains on sales of loans (24) (16)
Gains on sales of premises and equipment (163) (3)
Amortization of restricted stock award 89 14
Deferred income tax benefit/(expense) 57 (285)
Proceeds from sales of loans held for sale 1,023,802 452,601
Originations of loans held for sale (1,111,090) (518,706)
Changes in assets and liabilities:
Increase in accrued interest receivable (890) (946)
Increase in other assets (1,757) (2,378)
Decrease in drafts outstanding (9,638) (17,857)
Decrease in accrued expense and other liabilities (4,546) (56)
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities $ (94,085) $(81,862)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale (137,812) (2,953)
Proceeds from sale of securities available for sale 9,441 1,957
Purchases of investment securities held to maturity (5,050) (37,184)
Principal payments received on securities available for sale 16,924 4,762
Principal payments received on investment securities held to maturity 1,774 1,659
Proceeds from calls of securities available for sale 6,749 5,523
Proceeds from calls of investment securities held to maturity 17,200 10,000
Proceeds from maturities of securities available for sale 1,501 4,250
Proceeds from maturities of investment securities held to maturity - 8,300
Loan originations, net of repayments (38,513) (28,809)
Purchases of loans receivable - (569)
Proceeds from sale of real estate acquired in settlement of loans 1,545 230
Purchases of FHLB stock (6,630) (5,315)
Redemption of FHLB stock 4,487 1,981
Proceeds from sales of premises and equipment 590 162
Purchase of premises and equipment, net (1,642) (3,542)
Additions to investment in real estate (12,495) (7,594)
Proceeds from sale of investment in real estate 2,923 4,518
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities $(139,008) $(42,624)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 6
EAGLE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(unaudited)
<TABLE>
<CAPTION>
Nine Months ended December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in time deposits $ 73,798 $ 29,631
Net change in demand deposit accounts 32,945 17,159
Repayment of FHLB advances and other borrowings (664,321) (418,826)
Proceeds from FHLB advances and other borrowings 763,616 495,737
Increase in ESOP debt (2,000) --
Principal reduction of ESOP note payable 187 671
Issuance of trust preferred securities 28,750 --
Repurchase of common stock (3,177) --
Proceeds from exercise of stock options 822 293
Cash dividends paid (2,717) (2,549)
Decrease in advance payments from borrowings for
Property taxes and insurance (2,741) (548)
- ----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 225,162 121,568
- ----------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (7,931) (2,918)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 34,682 25,875
- ----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 26,751 $ 22,957
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH PAID DURING THE PERIOD FOR:
Interest $ 40,755 $ 27,045
Income Taxes $ 8,745 $ 3,350
Supplemental schedule of noncash investing and financing activities:
Acquisition of real estate in settlement on loans $ 1,530 $ 1,488
Loans made to finance real estate acquired in settlement of loans $ 801 $ 695
Loans made to finance sales of investments in real estate $ 3,960 $ 1,924
Dividends payable $ 902 $ 857
</TABLE>
6
<PAGE> 7
Eagle Bancshares, Inc. and Subsidiaries
Notes to Interim Unaudited Consolidated Financial Statements
December 31, 1998
A. Corporate Profile
Eagle Bancshares, Inc. (the "Company") is a unitary savings and loan
holding company engaged in banking, mortgage banking, mezzanine financing 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 nine month period
ended December 31, 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
December 31, 1998 and 1997, of the difference between average basic common
shares outstanding and average diluted common shares outstanding.
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
(dollars in thousands except per share data) THREE MONTHS ENDED
DECEMBER 31, 1998 December 31, 1997
----------------------------------------------------
<S> <C> <C>
Basic
Net income $2,473 $1,764
-----------------------------------------------
Average common shares 5,719 5,695
-----------------------------------------------
Earnings per common share - basic $ 0.43 $ 0.31
-----------------------------------------------
Diluted
Net income $2,473 $1,764
-----------------------------------------------
Average common shares - basic 5,719 5,695
Incremental shares outstanding 119 174
-----------------------------------------------
Average common shares - diluted 5,838 5,869
-----------------------------------------------
Earnings per common share - diluted $ 0.42 $ 0.30
-----------------------------------------------
</TABLE>
Below is a reconciliation for the nine months period ended December 31,
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) NINE MONTHS ENDED
DECEMBER 31, 1998 December 31,1997
----------------------------------------------------
<S> <C> <C>
Basic
Net income $7,924 $5,047
-----------------------------------------------
Average common shares 5,761 5,671
-----------------------------------------------
Earnings per common share - basic $ 1.38 $ 0.89
-----------------------------------------------
Diluted
Net income $7,924 $5,047
-----------------------------------------------
Average common shares - basic 5,761 5,671
Incremental shares outstanding 167 146
-----------------------------------------------
Average common shares - diluted 5,928 5,817
-----------------------------------------------
Earnings per common share - diluted $ 1.34 $ 0.87
-----------------------------------------------
</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.
8
<PAGE> 9
Comprehensive income for the first three and nine months of fiscal year
1999 and 1998 is calculated as follows:
(dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------------------------------------
1998 1997 1998 1997
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Unrealized (losses)/gains, net recognized in
Other comprehensive income:
Before income tax $(2,688) $ 376 $(2,040) $ 3,018
Income tax (1,020) 314 (775) 1,158
-------------------------------------------------------------
Net of income tax $(1,668) $ 62 $(1,265) $ 1,860
-------------------------------------------------------------
Amounts reported in net income:
(Losses)/gains on sale of securities $ 0 $ (46) $ 469 $ (46)
Net amortization (accretion) 40 (15) 107 4
-------------------------------------------------------------
Reclassification adjustment 40 (61) 576 (42)
Income tax (expense)/benefit (15) 35 (219) 13
-------------------------------------------------------------
Reclassification adjustment, net of tax 25 (26) 357 (29)
-------------------------------------------------------------
Amounts reported in other comprehensive income:
Unrealized (losses)/gains arising during period, net of tax (1,643) 36 (908) 1,831
Reclassification adjustment, net of tax 25 (26) 357 (29)
-------------------------------------------------------------
Unrealized (losses)/gains, net recognized in
Other comprehensive income (1,668) 62 (1,265) 1,860
Net income 2,473 1,764 7,924 5,047
-------------------------------------------------------------
Total comprehensive income $ 805 $ 1,826 $ 6,659 $ 6,907
-------------------------------------------------------------
</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, using a two-digit format, 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 could fail to recognize the year 2000 as a leap
year. The problem is not necessarily limited to computer systems, or any
particular industry or field. Year 2000 issues could potentially affect any
system that has an embedded microchip containing this flaw, such as alarm
systems, vaults and elevators.
The Company is committed to addressing the Year 2000 issues and has
developed a comprehensive business plan to manage these issues. The Company
established Team2000, a group of key employees, mission critical vendors and an
outside consulting firm to address the Year 2000 issues. Team2000 is responsible
for ensuring that its in-house processing, service providers, and software
vendors are fully compliant with the Year 2000 requirements. Team2000 has taken
a proactive approach in ensuring Year 2000 compliance. In addition,
subcommittees have been established throughout the Company to identify, address
and mitigate key Year 2000 issues in the organization. Furthermore, Team2000
launched an awareness campaign during 1998 that was designed to raise the
awareness and encourage input from all Company employees. The Company's
Executive Management Team receives progress updates on a monthly basis and the
Board of Directors receives updates on a quarterly basis.
The Company's Year 2000 plan has five phases: inventory, assessment,
renovation, validation and implementation. During the inventory phase, Team2000
identified all areas with potential Year 2000 issues. All hardware and software
systems, including all of its equipment such as elevators, alarm systems, ATMs,
vault locks, etc. that may contain embedded systems have been identified. The
assessment phase involved detailed analysis and planning to determine the method
of renovation. Additionally, during the assessment phase, Team2000 categorized
each issue into one of three levels of priority: mission critical, important and
non-mission critical. The levels of priority were determined based on the
significance of the potential impact on the Company. The inventory and
9
<PAGE> 10
assessment phases are complete. The renovation and validation phases are
currently in progress. Team2000 has prepared a series of procedures to test each
application based on its level of priority. In order to protect current
operations, an isolated test environment has been created to test network and
software applications. Testing includes applications, operating systems,
hardware, databases and internal and external interfaces. Testing will ensure
that applications, and the environment they operate in, can properly process
data and dates without compromising computer-based entries and record keeping
associated with the Year 2000 date change. Team2000s goal is to be 90% complete
with testing by March 31, 1999 and 98% complete by June 30, 1999. The
implementation phase will include any necessary training of users on newly
compliant systems, as well as, introduction of such systems into live operating
environments.
Like many other companies, the operations of the Company are
interconnected with service providers and vendors who provide equipment,
technology and/or software. Therefore, the Company's operations could be
materially affected if those parties fail to achieve Year 2000 readiness. The
Company remains in constant communication with key service providers and
vendors. The Company has required service providers to submit in writing their
expected and/or achieved Year 2000 date of compliance. Team2000 identified and
is tracking more than 200 individual service providers and vendors in the
assessment phase. The Company is monitoring the renovation and testing efforts
of service providers. Additionally, Team2000 is conducting testing of vendors
and vendor provided products. Team2000 has made decisions on a case-by-case
basis to determine whether to continue the current relationship with each vendor
or to replace the product or service. At December 31, 1998, approximately 67% of
service providers are compliant or have been retired.
The Company is developing a contingency plan for each system or
service, should Year 2000 compliance not be achieved by specific deadlines. The
contingency plans will document the course of action the Company will take for
each system that is non-compliant. These plans are being designed to allow the
Company to continue conducting business without compromising computer-based
transactions. Moreover, it is possible that a loss of utilities, such as
electricity, water, telephone service, etc., could cause a disruption of the
Company's alarm systems, vaults, elevators, etc. To the extent possible, the
Company's contingency plans will incorporate these risks. Since it is difficult
to predict all possible scenarios, the Company intends to continue to revise
these plans on an ongoing basis until all problems are identified and resolved.
In addition, Team2000 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 continuing to monitor 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. In addition, during 1999, Team2000 plans to implement an
awareness campaign for our customers to respond to questions regarding Year2000
issues and the Company's state of readiness.
The Company believes it has addressed each issue related to the Year
2000 and has taken the necessary steps to minimize the operational, regulatory
and legal risks associated. However, like other banks, the Company may
experience a decline in the Bank's deposit base if customers withdraw a
significant amount of deposited funds prior to the year 2000. The Company is
currently addressing the Bank's liquidity issues as related to the Year 2000.
Team2000 has also addressed the issues related to loan payment performance by
borrowers. It is possible that borrowers may encounter Year 2000 related issues
that could affect their ability to repay loans according to the agreed upon
terms. Team2000 has identified and assessed the Company's more significant
relationships. While none of these relationships have reported any expectation
of material adverse impact as a result of Year2000, the Company will continue to
monitor these relationships.
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. At this time, management does not believe these expenses will have a
material effect on the operations or financial performance of the Company.
However, the above discussion includes a number of forward-looking statements.
The statements are based upon the information currently available to the Company
as related to Year 2000 compliance efforts and the impact on the Company's
operations by Year 2000 issues. Various factors could influence actual results
to differ materially from those expected through the Company's current
assessment and estimates, including certain factors that are beyond
10
<PAGE> 11
the Company's control. The factors include, in part: (a) the Company's ability
to successfully identify systems and programs that are not Year 2000 compliant,
(b) the Company's ability to successfully identify the nature and estimate the
cost associated with upgrading or replacing these systems and programs, (c) the
ability of third parties to successfully address and resolve their Year 2000
issues by the required deadlines and (d) the Company's ability to successfully
implement contingency plans if needed.
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 this statement is not expected to have a material
impact on the Company's consolidated statements of financial condition and
results of operation.
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 was 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
December 31, 1998, the Company had repurchased 174,750 shares with a cost of
approximately $3,177,000.
11
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
SUMMARY FINANCIAL DATA
(dollars in thousands except per share data)
<TABLE>
<CAPTION>
Change from
QUARTER ENDED Dec. 31, 1998 to
DEC. 31, Sept. 30, Dec. 31, Sept. 30, Dec. 31,
For the quarter: 1998 1998 1997 1998 1997
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income $ 2,473 $ 2,471 $ 1,764 0.08% 40.19%
Per common share:
Net income per common share-basic 0.43 0.42 0.31 2.38 38.71
Net income per common share-diluted 0.42 0.41 0.30 2.44 40.00
Dividends declared 0.16 0.16 0.15 -- 6.67
Book value per share 13.22 13.38 12.84 (1.20) 2.96
Average common shares outstanding-basic 5,719 5,788 5,695 (1.19) 0.42
Average common shares outstanding-diluted 5,838 5,955 5,869 (1.96) (0.53)
Profitability ratios: (%)
Return on average assets 0.74% 0.85% 0.81% (12.94) (8.64)
Return on average equity 12.54 13.03 9.71 (3.76) 29.15
Efficiency ratio 72.48 70.05 75.44 3.47 (3.92)
Net interest margin - taxable equivalent 3.40 3.02 4.04 12.58 (15.84)
Equity to assets 5.45 6.23 7.83 (12.52) (30.40)
At quarter end:
Loans held for sale $ 419,880 $ 368,318 $128,987 14.00 225.52
Loans receivable, net 575,598 521,271 545,073 10.42 5.60
Reserve for loan losses 7,550 7,184 6,265 5.09 20.51
Assets 1,367,209 1,242,640 934,458 10.02 46.31
Deposits 885,718 773,587 604,514 14.49 46.52
FHLB advances and other borrowings 340,150 308,400 230,716 10.30 47.43
Stockholders' equity 74,524 77,420 73,203 (3.74) 1.80
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
1998 1997 Change
----------------------------------------
<S> <C> <C> <C>
For the nine months:
Net income $7,924 $5,047 57.00%
Per common share:
Net income per common share-basic 1.38 0.89 55.06
Net income per common share-diluted 1.34 0.87 54.02
Dividends declared 0.48 0.45 6.67
Average common shares outstanding-basic 5,761 5,671 1.59
Average common shares outstanding-diluted 5,928 5,817 1.91
Profitability ratios: (%)
Return on average assets 0.87% 0.79% 10.13%
Return on average equity 13.86 9.45 46.67
Efficiency ratio 69.24 74.62 (7.21)
Net interest margin - taxable equivalent 3.15 4.17 (24.46)
</TABLE>
12
<PAGE> 13
Overview
The Company's net income for the third quarter ended December 31, 1998,
increased 40% to $2.5 million or $.42 per diluted share compared to $1.8 million
or $.30 per diluted share for the third quarter ended December 31, 1997. Net
income for the nine month period ended December 31, 1998 increased 57% to $7.9
million or $1.34 per diluted share compared to $5.0 million or $.87 per diluted
share for the nine month period ended December 31, 1997. The increase is
primarily attributable to higher levels of net interest income as a result of
the Company's loan growth.
The Company's subsidiary, Eagle Bancshares Capital Group, Inc., was a
significant contributor to the Company's performance during the quarter,
providing additional interest income of $2.2 million as a result of the
repayment of $10.5 million in mezzanine loans. Eagle Bancshares Capital Group,
Inc., provides mezzanine financing to small-and-medium sized businesses.
Earnings Highlights
(Three month period ended December 31, 1998, compared to the three month period
ended December 31, 1997)
- - Net interest income increased $2,278,000 million or 28.85% to
$10,174,000 for the quarter ended December 31, 1998 compared to
$7,896,000 for the three month period last year. The net interest
margin was 3.40% for the quarter ended December 31, 1998. Removing the
effect of the additional interest income generated by Eagle Bancshares
Capital Group, the net interest margin would have been 2.68%.
- - The provision for loan losses remained stable at $627,000 for the
current quarter compared to $657,000 for the same period one year ago.
Total non-performing and problem assets declined to $14,043,000 or
1.03% of total assets at December 31, 1998 compared to $14,471,000 or
1.55% for the same quarter last year.
- - Non-interest income increased $305,000 or 6.43% to $5,052,000 for the
quarter ended December 31, 1998 from $4,747,000 for the three month
period last year. The increase is attributable to higher mortgage
production fees. The Company closed $343,543,000 of loans held for sale
during the current quarter compared to $175,657,000 for the three month
period last year.
- - Non-interest expenses increased $1,498,000 or 15.71% to $11,036,000
from $9,538,000 for the same period last year. The efficiency ratio
improved to 72.48% for the quarter ended December 31, 1998 from 75.44%
for the same period last year.
- - Return on average shareholders' equity was 12.54% for the current
quarter compared to 9.71% for the same period a year ago. Shareholders'
equity was $74,524,000 or $13.22 per share at December 31, 1998.
- - Total assets grew $432,751,000 or 46.31% to $1,367,209,000 at December
31, 1998 from $934,458,000 at December 31, 1997. Return on average
assets was .74% for the current quarter compared to .81% for the same
quarter a year ago.
Earnings Highlights
(Nine month period ended December 31, 1998, compared to the nine month period
ended December 31, 1997)
- - Net interest income increased $2,470,000 or 10.47% to $26,071,000 for
the nine month period ended December 31, 1998 compared to $23,601,000
for the nine month period last year. The increase was achieved through
growth in average assets, primarily an increase in average loans.
- - Non-interest income for the nine month period increased $6,357,000 or
53.91% to $18,148,000 from $11,791,000 for the nine month period last
year. The increase is mainly attributable to higher mortgage production
fees.
- - Non-interest expenses increased $4,208,000 or 15.93% to $30,619,000
compared to $26,411,000 for the same period last year. The efficiency
ratio improved to 69.24% for the nine month period ended December 31,
1998 compared to 74.62% for the nine month period last year.
- - Return on average shareholders' equity was 13.86% for the nine month
period ended December 31, 1998 compared to 9.45% for the same period a
year ago.
- - Return on average assets was .87% for the current nine months compared
to .79% for the same period last year.
13
<PAGE> 14
EARNINGS ANALYSIS
Net Interest Income - Quarterly Analysis
Net interest income increased by $2,278,000 or 28.85% to $10,174,000 in
the third quarter of fiscal 1999 from $7,896,000 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
81 basis points to 3.14% from 3.95% in the same period last year. The yield on
interest-earning assets decreased 93 basis points to 8.34% from 9.27%, while the
cost of interest-bearing liabilities decreased 12 basis points to 5.20% from
5.32%. Removing the effect of the additional interest income generated by Eagle
Bancshares Capital Group, the net interest spread would have been 2.44%, a
decrease of 151 basis points. 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 $5,695,000 or 36.87% to
$21,142,000 for the third quarter of fiscal 1999 from $15,447,000 in fiscal
1998. The increase in interest received on loans was attributable to the
interest contributed by Eagle Bancshares Capital Group and originations of
conforming single family mortgages held for sale. The Company's subsidiary,
Eagle Bancshares Capital Group provided interest income of $2,229,000 as a
result of the repayment of $10,578,000 in mezzanine loans. While interest income
on loans increased, the yield on loans receivable declined 23 basis points to
10.28% for the quarter compared to 10.51% in the same quarter last year.
Removing the effect of the $2,229,000 of interest income received by Eagle
Bancshares Capital Group the on loans receivable which would have been 8.77%.
Interest income on loans held for sale increased $4,769,000 or 276.46% due to
the increase in loan volume experienced in the Company's mortgage banking line
of business. The yield declined 15 basis points to 6.51% for the quarter
compared to 6.36 % in the same quarter last year. Interest received on
mortgage-backed securities increased $480,000 or 40.17% to $1,675,000 for the
third quarter of fiscal 1999 from $1,195,000 in the third quarter of fiscal
1998. Interest received on investment securities increased $1,088,000 or 72.49%
to $2,589,000 in fiscal 1999 from $1,501,000 in the prior period.
Interest expense increased $4,985,000 or 48.65% to $15,232,000 for the
third quarter of fiscal 1999 from $10,247,000 in the third quarter of fiscal
1998. This is primarily the result of growth in deposits and FHLB advances and
other borrowings. Interest expense on deposits increased $3,015,000 or 40.24% to
$10,507,000 from $7,492,000 in the same period in the prior year. The cost of
deposits remained relatively stable at 5.19% during the quarter compared to
5.17% in the same quarter last year. Interest expense on FHLB advances and other
borrowings increased $1,340,000 or 48.64% to $4,095,000 for the third quarter of
fiscal 1999 from $2,755,000 in the third quarter of fiscal 1998. The Bank's cost
of FHLB advances and other borrowings decreased 86 basis points to 4.92% from
5.78% 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 for the third quarter of fiscal
1999 was $630,000. The Company issued $28,750,000 of trust preferred securities
during the second quarter of fiscal 1999.
Net Interest Income - Nine Month Analysis
Net interest income increased by $2,470,000 or 10.47% to $26,071,000
during the first nine months of fiscal 1999 from $23,601,000 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 116 basis points to 2.78% from 3.94% in
the same period last year. The primary reason for the decrease was the decrease
in the yield on interest-earning assets. Yield on interest-earning assets
declined 109 basis points to 8.13% from 9.22% while the cost of interest-bearing
liabilities increased 7 basis points to 5.35% from 5.28%. 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 $13,549,000 or 30.63% to
$57,784,000 for the first nine months of fiscal 1999 from $44,235,000 in fiscal
1998. The increase in interest received on loans was primarily attributable to
growth in originations of conforming single family mortgages held for sale. The
yield on the loan
14
<PAGE> 15
portfolio (including loans receivable and loans held for sale)
declined 134 basis points to 8.38% for the first nine months of fiscal 1999
compared to 9.72% in the same period last year. Interest received on
mortgage-backed securities increased $466,000 or 12.38% to $4,229,000 for the
first nine months of fiscal 1999 from $3,763,000 in the first nine months of
fiscal 1998. Interest received on investment securities increased $1,481,000 or
31.81% to $6,137,000 in fiscal 1999 from $4,656,000 in the prior period.
Interest expense increased $13,026,000 or 44.84% to $42,079,000 for the
first nine months of fiscal 1999 from $29,053,000 in the same period of fiscal
1998. This is primarily the result of growth in deposits and FHLB advances and
other borrowings. Interest expense on deposits increased $9,552,000 or 44.15% to
$31,188,000 from $21,636,000 in the same period in the prior year. The cost of
deposits increased 20 basis points to 5.33% during the period from 5.13% in the
prior period. Interest expense on FHLB advances and other borrowings also
increased $2,410,000 or 32.49% to $9,827,000 for the first nine months of fiscal
1999 from $7,417,000 in the same period of fiscal 1998. The Bank's cost of FHLB
advances and other borrowings decreased 55 basis points to 5.20% from 5.75% 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 for the first nine months of fiscal 1999 was
$1,064,000.
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 December 31, 1998, the expected rate simulation
indicated a decline in annual net interest income of $61,000 or 0.16% relative
to the unchanged rate simulation and a $5,958,000 or 7.27% 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 December 31, 1998, management estimates the Company's annual net
interest income would increase approximately $2,844,000 or 7.56%, and decrease
approximately $3,868,000 or 10.28% 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 December 31, 1998,
estimates a $6,781,000 or 10.13% decrease in market value. The Company estimates
a like decrease in market rates would decrease market value $6,805,000 or
10.17%. These changes in market value represent less that 5.00% of the total
carrying value of total assets at December 31, 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
assets. The net interest margin decreased to 3.40% for the third quarter of
fiscal 1999 from 4.08% for the same period last year. In addition, the net
interest margin decreased to 3.15% for the first nine months of fiscal 1999 from
4.17% for the same period one year ago. The average balance sheets on the next
page present the individual
15
<PAGE> 16
components of net interest income and expense, net interest spread and net
interest margin. The decline in the net interest margin in the third quarter and
first nine months of fiscal 1999 is primarily attributable to the decrease in
the yield on interest earning assets caused b the decline in market rates during
the period.
The following tables reflect 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 and nine
months ended December 31, 1998 and 1997:
AVERAGE BALANCE SHEET
Three months ended December 31,
<TABLE>
<CAPTION>
1998 1997
AVERAGE YIELD/ Average Yield/
(dollars in thousands) BALANCE INTEREST COST Balance Interest Cost
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets
- --------------------------------------------------------------------------------------------------------------------------------
Loans receivable(1) $569,865 $14,648 10.28% $522,084 $13,722 10.51%
Loans held for sale 398,831 6,494 6.51% 108,572 1,725 6.36%
Mortgage-backed securities 99,323 1,675 6.75% 65,978 1,195 7.24%
FHLB stock 12,737 238 7.47% 9,439 167 7.08%
Taxable investments(2) 81,044 1,261 6.22% 39,275 665 6.77%
Tax-exempt investment securities(2) 66,465 1,315 7.91% 39,816 784 7.88%
Interest earning deposits and federal funds 2,098 29 5.53% 3,815 27 2.83%
- --------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 1,230,363 $25,660 8.34% 788,979 $18,285 9.27%
Non-interest earning assets 111,912 85,640
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $1,342,275 $874,619
- --------------------------------------------------------------------------------------------------------------------------------
Savings accounts $ 37,378 $ 233 2.49% $40,092 $ 253 2.52%
Checking 104,623 884 3.38% 65,882 246 1.49%
Money market 76,960 887 4.61% 33,157 261 3.15%
Certificates of deposit 590,058 8,503 5.76% 440,987 6,732 6.11%
- --------------------------------------------------------------------------------------------------------------------------------
Total deposits 809,019 10,507 5.19% 580,118 7,492 5.17%
FHLB advances and other borrowings 332,972 4,095 4.92% 190,777 2,755 5.78%
Trust preferred securities 28,750 630 8.77% - - -
- --------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 1,170,741 $15,232 5.20% 770,895 $10,247 5.32%
Non-interest bearing deposits 51,137 23,003
Non-interest bearing liabilities 41,525 8,040
Stockholders' equity 78,872 72,681
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $1,342,275 $874,619
- --------------------------------------------------------------------------------------------------------------------------------
Net interest rate spread $10,428 3.14% $ 8,038 3.95%
Taxable-equivalent adjustment (254) (142)
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income, actual $10,174 $ 7,896
Net interest earning assets/net interest margin $ 59,622 3.40% $ 18,084 4.08%
Interest earning assets as a percentage of
Interest bearing liabilities 105.09% 102.35%
- --------------------------------------------------------------------------------------------------------------------------------
</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.
16
<PAGE> 17
AVERAGE BALANCE SHEET
Nine months ended December 31,
<TABLE>
<CAPTION>
1998 1997
AVERAGE YIELD/ Average Yield/
(dollars in thousands) BALANCE INTEREST COST Balance Interest Cost
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets
- --------------------------------------------------------------------------------------------------------------------------------
Loans receivable(1) $549,766 $39,585 9.60% $521,817 $39,982 10.22%
Loans held for sale 369,139 18,199 6.57% 84,950 4,253 6.68%
Mortgage-backed securities 81,794 4,229 6.89% 69,045 3,763 7.27%
FHLB stock 10,521 594 7.53% 8,585 487 7.56%
Taxable investments(2) 41,141 2,082 6.75% 40,554 2,206 7.25%
Tax-exempt investment securities(2) 71,237 3,884 7.27% 35,058 2,103 8.00%
Interest earning deposits and Federal funds 1,990 98 6.57% 7,129 274 5.12%
- --------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 1,125,588 $68,671 8.13% 767,138 $53,068 9.22%
Non-interest earning assets 91,409 85,270
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $1,216,997 $852,408
- --------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities
- --------------------------------------------------------------------------------------------------------------------------------
Savings accounts $ 38,174 $ 720 2.51% $43,023 $ 807 2.50%
Checking 100,607 2,765 3.66% 62,069 876 1.88%
Money market 63,274 2,137 4.50% 28,122 679 3.22%
Certificates of deposit 577,622 25,566 5.90% 428,849 19,274 5.99%
- --------------------------------------------------------------------------------------------------------------------------------
Total deposits 779,677 31,188 5.33% 562,063 21,636 5.13%
FHLB advances and other borrowings 252,041 9,827 5.20% 172,034 7,417 5.75%
Trust preferred securities 15,998 1,064 8.87% -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 1,047,716 $42,079 5.35% 734,097 $29,053 5.28%
Non-interest bearing deposits 45,551 21,848
Non-interest bearing liabilities 47,525 25,277
Stockholders' equity 76,205 71,186
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $1,216,997 $852,408
- --------------------------------------------------------------------------------------------------------------------------------
Net interest rate spread $26,592 2.78% $24,015 3.94%
Taxable-equivalent adjustment (521) (414)
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income, actual $26,071 $23,601
Net interest earning assets/net interest margin $ 77,872 3.15% $ 33,041 4.17%
Interest earning assets as a percentage of
Interest bearing liabilities 107.43% 104.50%
- --------------------------------------------------------------------------------------------------------------------------------
</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 $305,000 or 6.43% to $5,052,000 for
the third quarter of fiscal 1999 from $4,747,000 for the same period last year.
In addition, non-interest income increased by $6,357,000 or 53.91% to
$18,148,000 for the first nine months of fiscal 1999 from $11,791,000 for the
same period last year.
Mortgage production fees are the largest component of non-interest
income and these fees increased $791,000 or 32.23% to $3,245,000 for the third
quarter of fiscal 1999 compared to $2,454,000 in the same period last year. For
the first nine months of fiscal 1999, mortgage production fees increased
$4,581,000 or 69.69% to $11,154,000 compared to $6,573,000 for the same period
one year ago. 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. The Company has
experienced an increase in the dollar amount of loans sold due to the low
interest rate environment stimulating consumer demand and the addition of a
wholesale loan origination business in September 1997. The decline in the margin
earned is attributable to the increase in the percent of wholesale loan closings
to total closings. The Company earns a lower margin on wholesale loans, but has
significantly lower cost associated with loan closings when compared to the
Company's retail loan production business.
17
<PAGE> 18
The following table shows mortgage production fees, the dollar amount
of permanent mortgage loans sold in the secondary market and the margin earned
on those loans for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
(dollars in thousands) 1998 1997 1998 1997
---------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage production fees $ 3,245 $ 2,454 $ 11,154 $ 6,573
Dollar volume sold $291,981 $132,594 $1,023,802 $452,601
Margin earned 1.11% 1.85% 1.09% 1.45%
</TABLE>
Service charges increased $75,000 or 16.97% to $517,000 in the third
quarter of fiscal 1999 compared to $442,000 in the third quarter of fiscal 1998.
In addition, for the first nine months service charges increased $132,000 or
9.19% to $1,568,000 compared to $1,436,000 for the same period last year. This
is the result of growth in the number of checking accounts during the year.
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 $418,000 or
47.39% to $464,000 for the third quarter of fiscal 1999 compared to $882,000 for
the same quarter last year. During the current quarter, 42 lots were sold
compared to 39 lots in the same quarter last year. Gains on sales of real estate
and real estate commissions increased $263,000 or 15.42% to $1,969,000 for the
first nine months of fiscal 1999 compared to $1,706,000 for the same period one
year ago. For the first nine months of fiscal 1999, 134 lots were sold compared
to 110 lots for the same period last year. The Bank provides construction loan
financing to approved builders for lot sales in each of its development
projects. Gains on sales of lots are deferred until these loans are repaid,
creating timing differences in the recognition of income. While the number of
lot sales increased for the third quarter and first nine months of fiscal 1999,
the number of loans financed by the Bank also increased causing an increase in
gains deferred. In the third quarter of fiscal 1999, loans made to finance the
sales of investments in real estate were $1,242,000 compared to $600,000 for the
same period one year ago. In addition, for the first nine months of fiscal 1999,
loans made to finance the sales of investments in real estate were $3,960,000
versus $1,924,000 for the same period last year.
Non-Interest Expense
Non-interest expense increased by $1,498,000 or 15.71% to $11,036,000
for the third quarter of fiscal 1999 from $9,538,000 for the same period last
year. In addition, for the first nine months of fiscal 1999 non-interest expense
increased $4,208,000 or 15.93% to $30,619,000 from $26,411,000 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. Non-interest expense for
the nine months as a percent of total assets at December 31, 1998 was 2.24%
versus 2.83% for the nine months ended December 31, 1997.
Salaries and employee benefits increased $970,000 or 19.39% to
$5,973,000 for the third quarter of fiscal 1999 from $5,003,000 for the same
period last year. For the first nine months of fiscal 1999, salaries and
employee benefits increased $1,891,000 or 13.02% to $16,418,000 compared to
$14,527,000 for the same period one year ago. This increase is due to the
addition of employees to support the Company's growth. Occupancy expense
increased $79,000 or 5.94% to $1,409,000 in the third quarter of fiscal 1999
from $1,330,000 for the same period last year. During the first nine months of
fiscal 1999, occupancy expense increased $502,000 or 14.66% to $3,926,000
compared to $3,424,000 for the same period one year ago. Federal insurance
premiums increased $89,000 or 127.14% to $159,000 for the third quarter of
fiscal 1999 from $70,000 for the same period last year. In addition, for the
first nine months of fiscal 1999, federal insurance premiums increased $207,000
or 99.04% to $416,000 from $209,000 in the same period last year. The increase
is due to the increase in deposits from the prior year. In the third quarter of
fiscal 1999, marketing expense increased $286,000 or 102.51% to $565,000
compared to $279,000 for the same quarter last year. In addition, marketing
expense increased $846,000 or 119.15% to $1,556,000 for the first nine months of
fiscal 1999 from $710,000 for the same period one year ago.
Provisions for losses on real estate acquired in settlement of loans
increased $6,000 or 2.67% for the third quarter of fiscal 1999 to $231,000
versus $225,000 for the same period last year. The increase in the provision is
primarily due to one property located in Hinesville, Georgia, consisting of
approximately 63 acres of land. For the first nine months of fiscal 1999,
provisions for losses on real estate acquired in settlement of loans decreased
$284,000 or 55.15% to $231,000 compared to $515,000 for the same period last
year.
18
<PAGE> 19
Miscellaneous expenses decreased $70,000 or 3.28% to $2,062,000 for the
third quarter of fiscal 1999 from $2,132,000 for the same period last year. For
the first nine months of fiscal 1999, miscellaneous expenses increased $752,000
or 13.63% to $6,270,000 compared to $5,518,000 for the same period one year ago.
BALANCE SHEET ANALYSIS
Investment Securities
During the first nine months of fiscal 1999, investment securities
increased to $250,468,000 from $162,874,000 at March 31, 1998 and $155,384,000
at December 31, 1997. The investment securities portfolio at December 31, 1998,
was comprised of $44,218,000 of investment securities held to maturity at
amortized cost compared to $58,138,000 and $69,154,000 at March 31, 1998 and
December 31,1997, 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 $206,250,000 at December 31,1998 compared to $104,736,000 and
$86,230,000 at March 31, 1998 and December 31, 1997, respectively. Investment
securities available for sale had a net unrealized loss as shown in the
Company's stockholders' equity section of $427,000 at December 31, 1998 versus a
net unrealized gain of $838,000 at March 31, 1998.
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.
During the first nine months of fiscal 1999, the Company used proceeds
from the issuance of trust preferred securities to leverage its balance sheet.
The Bank purchased a collateralized mortgage obligation 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 as a result of 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 December 31, 1998, March 31, 1998 or
December 31, 1997.
19
<PAGE> 20
The following table reflects securities held in the Bank's securities
portfolio for the periods indicated:
INVESTMENT SECURITIES
<TABLE>
<CAPTION>
- ------------------------------------------------------ -------------------- -------------------- --------------------
(dollars in thousands) DECEMBER 31, March 31, December 31,
1998 1998 1997
- ------------------------------------------------------ -------------------- -------------------- --------------------
<S> <C> <C> <C>
Investment Securities Held to Maturity:
US Treasury and US Government Agencies $ 18,990 $ 36,188 $ 46,686
Mortgage-backed securities 8,270 5,010 5,419
Corporate bonds 7,433 7,431 7,431
Other debt securities 9,525 9,509 9,618
- ------------------------------------------------------ --------------- -------------------- --------------------
Total $ 44,218 $ 58,138 $ 69,154
- ------------------------------------------------------ --------------- -------------------- --------------------
Securities Available for Sale:
US Treasury and US Government Agencies $ 29,813 $ 16,068 $ 7,721
Mortgage-backed securities 101,971 70,626 60,180
Corporate Bonds 2,035 2,037 2,030
Other debt securities 60,276 3,795 3,889
Equity securities - preferred stock 12,155 12,210 12,410
- ------------------------------------------------------ --------------- -------------------- --------------------
Total $206,250 $104,736 $ 86,230
- ------------------------------------------------------ --------------- -------------------- --------------------
Total Investment Securities:
US Treasury and US Government Agencies $4 8,803 $ 52,256 $ 54,407
Mortgage-backed securities 110,241 75,636 65,599
Corporate bonds 9,468 9,468 9,461
Other debt securities 69,801 13,304 13,507
Equity securities 12,155 12,210 12,410
- ------------------------------------------------------ --------------- -------------------- --------------------
Total $250,468 $162,874 $155,384
- ------------------------------------------------------ --------------- -------------------- --------------------
</TABLE>
Loan Portfolio and Concentration
The loan portfolio has grown $30,525,000 or 5.60% to $575,598,000 at
December 31, 1998, compared to $545,073,000 at December 31, 1997.
Construction and acquisition and development loans, including the
undisbursed portion of loans in process, increased $7,218,000 or 2.85% to
$260,530,000 at December 31, 1998, from $253,312,000 at December 31, 1997.
Construction and acquisition and development loans represent 38.42% of gross
loans receivable at December 31, 1998, remaining relatively stable when compared
to 40.09% at December 31, 1997. Residential mortgage loans increased $38,725,000
or 19.18% to $240,617,000 at December 31, 1998 from $201,892,000 at December 31,
1997. Residential mortgage loans represent 35.49% of gross loans receivable
compared to 31.96% at December 31, 1997. Home equity and second mortgage loans
increased $13,869,000 or 30.62% to $59,169,000 compared to $45,300,000 at
December 31, 1997. These loans represent 8.73% of gross loans at December 31,
1998 compared to 7.17% last year.
Non-residential mortgage loans decreased $11,492,000 or 15.66% to
$61,902,000 at December 31, 1998 from $73,394,000 at December 31, 1997.
Commercial loans increased $4,502,000 or 31.71% to $18,700,000 at December 31,
1998 compared to $14,198,000 at December 31, 1997. The Company's equipment
leasing portfolio continued to repay. Consumer loans increased $273,000 or 0.84%
to $32,693,000 at December 31, 1998 compared to $32,420,000 at December 31,
1997.
20
<PAGE> 21
LOAN PORTFOLIO MIX
<TABLE>
<CAPTION>
DEC. 31, % OF GROSS March 31, % of Gross Dec. 31, % of Gross
(dollars in thousands) 1998 LOANS 1998 Loans 1997 Loans
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real Estate - construction loans
Construction $201,263 29.68% $197,811 31.90% $217,494 34.42%
Acquisition & Development 59,267 8.74 41,992 6.77 35,818 5.67
Real Estate - mortgage loans
Non-Residential 61,902 9.13 82,261 13.26 73,394 11.62
Residential 240,617 35.49 192,994 31.12 201,892 31.96
Home equity and second mortgages 59,169 8.73 46,218 7.45 45,300 7.17
- ---------------------------------------------------------------------------------------------------------------------------------
Total real estate loans $622,218 91.77 $561,276 90.50 $573,898 90.84
- ---------------------------------------------------------------------------------------------------------------------------------
Other loans:
Commercial $ 18,700 2.76 $ 15,681 2.53 14,198 2.25
Leases 4,383 0.65 9,463 1.53 11,230 1.78
Consumer and other 32,693 4.82 33,755 5.44 32,420 5.13
- ---------------------------------------------------------------------------------------------------------------------------------
Total other loans $ 55,776 8.23 $ 8,899 9.50 $ 57,848 9.16
- ---------------------------------------------------------------------------------------------------------------------------------
Total gross loans receivable $677,994 100.00 $620,175 100.00 $631,746 100.00
- ---------------------------------------------------------------------------------------------------------------------------------
Less:
Undisbursed portion of loans
in process (94,164) (77,302) (79,190)
Deferred fees and other unearned income (682) (636) (1,218)
Reserves for loan losses (7,550) (6,505) (6,265)
- ---------------------------------------------------------------------------------------------------------------------------------
Loans receivable, net $575,598 $535,732 $545,073
=================================================================================================================================
</TABLE>
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, decreased by $861,000 or 5.78% to
$14,043,000 at December 31, 1998 from $14,904,000 at March 31, 1998.
Additionally, total problem assets decreased $428,000 or 2.96% since the
December 31, 1997, level of $14,471,000. The primary reason for the improvement
is due to receipt of approximately $1,200,000 of lease payments from the trustee
involved in resolving the Bank's largest single credit exposure. The lessor
filed bankruptcy in the first half of 1997, and the Bank has classified
approximately $1,775,000 as non-accrual since that time. As a result of
receiving the payments, and charging-off approximately $228,000, the Bank's
exposure has been reduced to $311,000. In addition, the Bankruptcy court has
instructed the trustee to continue to remit future lease payments. Total problem
assets as a percent of total assets decreased to 1.03% at December 31, 1998 from
1.30% and 1.55% at March 31, 1998 and December 31, 1997, respectively. At
December 31, 1998, the Company had non-accrual loans of $9,773,000 compared to
$7,948,000 at March 31, 1998 and $8,895,000 at December 31, 1997. Interest
income not recognized on these loans amounted to $632,000 during the first nine
months of fiscal 1999 and $460,000 for the same period last year.
In addition, at December 31, 1998, the ACC identified $2,427,000 of
potential problem loans a decrease of $1,582,000 or 39.46% compared to
$4,009,000 at March 31, 1998 and $1,034,000 or 29.88% from $3,461,000 at
December 31, 1997, respectively. Real estate owned decreased by $1,104,000 or
37.46% to $1,843,000 at December 31, 1998, from $2,947,000 at March 31, 1998 and
by $272,000 or 12.86% from $2,115,000 at
21
<PAGE> 22
December 31, 1997. The Bank charged-off $137,000 of real estate owned during the
third quarter and first nine months of fiscal 1999. In addition, during the same
period, the Bank recorded $231,000 in additional reserves against real estate
owned. Approximately $70,000 of the additional reserves is attributable to one
property located in Hinesville, Georgia. At the time of foreclosure, this
property consisted of approximately 63 acres of land. The Bank sold
approximately 33 acres in the third quarter of fiscal 1999 and recorded a loss
of $105,000.
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>
DECEMBER 31, September 30, June 30, March 31, December 31,
(dollars in thousands) 1998 1998 1998 1996 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Residential real estate-construction $ 1,382 $ 2,137 $ 2,335 $ 1,127 $ 2,162
Residential real estate-mortgage 7,101 6,192 5,572 4,026 4,315
Commercial real estate 51 -- -- 24 --
Commercial 297 28 61 -- 40
Commercial leases 504 2,084 2,045 2,054 1,844
Installment 438 320 551 717 534
- ------------------------------------------------------------------------------------------------------------------
Total non-accrual 9,773 10,761 10,564 7,948 8,895
- ------------------------------------------------------------------------------------------------------------------
Potential problem loans 2,427 2,150 1,948 4,009 3,461
Loans contractually delinquent 90
days which still accrue interest -- -- -- -- --
Troubled debt restructurings -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Total non-accrual and problem loans $12,200 $12,911 $12,512 $11,957 $12,356
- ------------------------------------------------------------------------------------------------------------------
Real estate owned, net 1,843 2,462 2,909 2,947 2,115
- ------------------------------------------------------------------------------------------------------------------
Total problem assets $14,043 $15,373 $15,421 $14,904 $14,471
- ------------------------------------------------------------------------------------------------------------------
Total problem assets/Total assets 1.03% 1.24% 1.38% 1.30% 1.55%
- ------------------------------------------------------------------------------------------------------------------
Total problem assets/Net loans plus
Reserves 2.41% 2.91% 2.97% 2.75% 2.62%
- ------------------------------------------------------------------------------------------------------------------
Reserve for loan losses/Total
Problem assets 53.76% 46.73% 43.65% 43.65% 43.29%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 23
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 December 31, 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 $ 797 $6,211 $ 51 $297 $504 $438 $ 8,298 58.00%
Augusta 194 -- -- -- -- -- 194 1.35%
Charlotte 91 -- -- -- -- -- 91 0.64%
Savannah 256 -- -- 256 1.79%
Warner Robins 44 -- -- -- -- -- 44 0.31%
All other locations -- 890 -- -- -- -- 890 6.22%
- ---------------------------------------------------------------------------------------------------------------------------------
Total non-accrual 1,382 7,101 51 297 504 438 9,773 68.31%
- ---------------------------------------------------------------------------------------------------------------------------------
Potential problem loans:
Atlanta 1,049 75 395 13 106 -- 1,638 11.44%
St. Augustine 507 -- -- -- -- -- 507 3.54%
Warner Robins 141 -- -- -- -- -- 141 0.99%
All other locations 141 -- -- -- -- -- 141 0.99%
- ---------------------------------------------------------------------------------------------------------------------------------
Total potential problem loans 1,838 75 395 13 106 -- 2,427 16.96%
- ---------------------------------------------------------------------------------------------------------------------------------
Real estate owned:
Aiken 33 93 -- -- -- -- 126 0.88%
Atlanta 31 -- 270 -- -- -- 301 2.10%
Augusta -- 268 -- -- -- -- 268 1.87%
Hinesville 230 -- -- -- -- -- 230 1.61%
Warner Robins 156 -- -- -- -- -- 156 1.09%
All other locations 380 647 -- -- -- -- 1,027 7.18%
- ---------------------------------------------------------------------------------------------------------------------------------
Total real estate owned(1) 830 1,008 270 -- -- -- 2,108 14.73%
- ---------------------------------------------------------------------------------------------------------------------------------
Total problem assets by type $4,050 $8,184 $716 $310 $610 $438 $14,308 100.00%
- ---------------------------------------------------------------------------------------------------------------------------------
% of total problem assets by
type 28.31% 57.20% 5.00% 2.17% 4.26% 3.06% 100.00%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)Does not include reserves of $264,715: real estate owned, net, equals
$1,843,221.
Concentrations to Single Borrowers
At December 31, 1998, the Bank has one borrower located in Atlanta, GA,
with non-accrual and potential problem loans totaling $638,000, consisting of
$255,000 of construction loans and a $383,000 acquisition and development loan.
As of December 31, 1998, the two construction loans are over 90 days past due
and the acquisition and development loan is paid current. One construction loan
paid off on February 5, 1999, reducing the Bank's exposure by $129,000. In
addition, the Bank has one borrower located in St. Augustine, FL with a
potential problem loan in the amount of $507,000. This borrower has an
acquisition and development loan, which is paid current as of December 31, 1998.
Due to an excess of collateral, the Bank does not anticipate any loss associated
with either borrower.
Loan Impairment
At December 31, 1998, the recorded investment in impaired loans, which
excludes non-accrual first mortgage loans and residential construction loans,
decreased $1,263,000 or 70.84% to $520,000 from $1,783,000 at March 31, 1998 and
December 31, 1997. At December 31, 1998, March 31, 1998 and December 31, 1997,
all impaired loans were on a nonaccrual basis. At December 31, 1998, the
valuation allowance related to these impaired loans was $280,000, compared to
$455,000 at March 31, 1998 and $453,000 at December 31, 1997. During the third
quarter of fiscal 1999, the Bank charged-off $257,000 against loan loss reserves
related to impaired loans. At December 31, 1998, March 31, 1998 and December 31,
1997, all impaired loans had a related loan loss reserve. For the quarter and
nine months ended December 31, 1998, the average recorded investment in impaired
23
<PAGE> 24
loans was $1,064,000 and $1,676,000, respectively. Comparatively, for the third
quarter and first nine months last year, the average recorded investment in
impaired loans was $1,779,000.
The Company uses either the cash or cost recovery method to record cash
receipts on impaired loans that are on nonaccrual. 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 $657,000, respectively, of
additional reserves for possible loan losses during the third quarter of fiscal
1999 and 1998. During the first nine months of fiscal 1999, the Company set
aside $1,881,000 compared to $1,974,000 for the same period last year. At
December 31, 1998, reserves represented 1.34% and 1.39% of average loans
receivable, net, outstanding for the third quarter and nine months of fiscal
1999 compared to 1.21% and 1.22% for the same periods one year ago. During the
third quarter and first three quarters of fiscal 1999, the Company charged-off
$483,000 and $1,221,000, respectively, compared to $422,000 and $1,044,000 for
the same periods last year. In the third quarter and first nine months of fiscal
1999, charge-offs represented 0.05% and 0.15% of average loans receivable, net,
outstanding, a decrease from 0.08% and 0.18% for the third quarter and first
nine months of fiscal 1998. Loan loss reserves totaled $7,550,000 at December
31, 1998 compared to $6,505,000 and $6,265,000 at March 31, 1998 and December
31, 1997, respectively. Loan loss reserves to total problem assets increased to
53.76% at December 31, 1998 from 43.65% at March 31, 1998 and 43.297% at
December 31, 1997. An allocation of the reserve for loan losses has been made
according to the respective amounts deemed necessary to provide for the
possibility of incurred losses within the various loan categories. Although
other relevant factors are considered, the allocation is primarily based on
previous charge-off experience adjusted for risk characteristic changes among
each category. Additional reserve amounts are allocated by evaluating the loss
potential of individual loans that management has considered impaired. The
reserve for loan loss allocation is based on subjective judgment and estimates,
and therefore is not necessarily indicative of the specific amounts or loan
categories in which charge-offs may ultimately occur. Management believes that
the reserves for losses on loans are adequate based upon management's evaluation
of, among other things, estimated value of the underlying collateral, loan
concentrations, specific problem loans, and economic conditions that may affect
the 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.
24
<PAGE> 25
ANALYSIS OF THE RESERVE FOR LOAN LOSSES
(dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------- ------------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Reserve for loan losses, beginning of period $ 7,184 $ 6,004 $ 6,505 $ 5,198
Charge-offs:
Real estate - construction -- -- -- 72
Real estate - mortgage 7 161 273 567
Consumer 205 261 642 398
Commercial 14 -- 33 7
Commercial leases 257 -- 273 --
- --------------------------------------------------------------------------------------------------------------------------
Total charge-offs 483 422 1,221 1,044
Recoveries 222 26 385 137
- --------------------------------------------------------------------------------------------------------------------------
Net charge-offs 261 396 836 907
Provision for loan losses 627 657 1,881 1,974
- --------------------------------------------------------------------------------------------------------------------------
Reserve for loan losses, end of period $ 7,550 $ 6,265 $ 7,550 $ 6,265
- --------------------------------------------------------------------------------------------------------------------------
Average loans receivable, net, outstanding for the period $562,314 $515,818 $542,216 $515,552
- --------------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average loans receivable, net 0.05% 0.08% 0.15% 0.18%
- --------------------------------------------------------------------------------------------------------------------------
Reserves to average loans receivable, net 1.34% 1.21% 1.39% 1.22%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment in Real Estate
The Company's investment in real estate increased $6,960,000 or 25.22%
to $34,555,000 at December 31, 1998 from $27,595,000 at March 31, 1998 and
$4,926,000 or 16.63% from $29,629,000 at December 31, 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. In
addition, in November 1998, Johnson Road Development, LLC ("Johnson Road") was
formed to purchase and develop a residential community on 21.3 acres of land
located in Gwinnett County, Georgia. The Company has a 100% ownership interest
in Johnson Road. The Company currently has eight real estate projects in the
Atlanta market.
Deposits
Deposits are the Company's primary funding source. During the first
nine months of fiscal 1999, total deposits increased $106,743,000 or 13.70% to
$885,718,000 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 growth in deposits was in
certificates of deposit , which grew $73,798,000 or 13.31% to $628,071,000 at
December 31, 1998 from $554,273,000 at March 31, 1998 and demand deposits which
grew $32,945,000 or 14.66% to $257,647,000 at December 31, 1998 from
$224,702,000 at March 31, 1998. Demand deposits including non-interest bearing
deposits, interest-bearing deposits, savings accounts and money market accounts
were 29.09% of the Company's deposits at December 31, 1998.
25
<PAGE> 26
For the periods indicated, deposits are summarized by type and
remaining term as follows (dollars in thousands):
DEPOSIT MIX
<TABLE>
<CAPTION>
DECEMBER 31, March 31, December 31,
1998 1998 1997
--------------------------------------
<S> <C> <C> <C>
Demand deposits:
Noninterest-bearing deposits $ 52,623 $ 61,070 $ 37,834
Interest-bearing deposits 82,098 86,360 53,188
Money market accounts 87,341 38,862 32,328
Savings accounts 35,585 38,410 39,830
--------------------------------------
Total demand deposits 257,647 224,702 163,180
--------------------------------------
Time deposits:
Maturity one year or less 460,868 411,179 321,716
Maturity greater than one year through
two years 71,759 47,590 38,086
Maturity greater than two years
through three years 30,890 36,533 37,342
Maturity greater than three years 64,554 58,971 44,190
--------------------------------------
Total time deposits 628,071 554,273 441,334
--------------------------------------
Total deposits $885,718 $778,975 $604,514
--------------------------------------
</TABLE>
The weighted average interest rate on time deposits at December 31,
1998, March 31, 1998 and December 31, 1997, was 5.75%, 5.94% and 5.90%.
For the periods indicated, interest expense on deposits is summarized
as follows (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
------------------------------------------------
<S> <C> <C> <C> <C>
Interest-bearing deposits $ 814 $ 399 $ 2,679 $ 1,029
Money market accounts 842 278 1,902 662
Savings accounts 226 252 697 797
Time deposits 8,625 6,563 25,910 19,148
----------------------------------------------
$10,507 $ 7,492 $31,188 $21,636
----------------------------------------------
</TABLE>
Federal Home Loan Bank Advances
The FHLB system functions as a reserve credit facility for
thrift institutions and certain other member home financing institutions. The
Bank utilizes advances from the FHLB to fund a portion of its assets. At
December 31, 1998, advances were $251,550,000 compared to $217,835,000 at March
31, 1998. At December 31, 1998, the weighted average interest rate on these
borrowings was 5.34% compared to 5.88% at March 31, 1998.
26
<PAGE> 27
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. Increases in
deposits have provided a significant portion of the Company's cash flow needs
and continue to provide a relatively stable, low cost source of funds. The
Company's other primary funding source was provided by advances from the Federal
Home Loan Bank. 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 December 31, 1998, the Company's liquidity
ratio was 4.61%. At December 31, 1998, the Company had commitments to originate
loans of approximately $398,545,000. The Company had commitments to sell
mortgage loans of approximately $406,679,000 at December 31, 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 $592,384,000 or
114.20% to $1,111,090,000 for the first nine months of fiscal 1999 compared to
$518,706,000 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 nine months of fiscal 1999, the Company used cash from
operating activities of $94,085,000 compared to $81,862,000 for the same period
one year ago. The primary reason for this fluctuation is timing differences from
the sale of loans held for sale versus originations of loans held for sale.
During the first nine months of fiscal 1999, the Company originated and sold
$1,111,090,000 and $1,023,802,000 of loans held for sale, respectively,
resulting in a $87,288,000 use of cash. This represented 92.78% of cash used
from operating activities. For the same period last year, the Company originated
and sold $518,706,000 and $452,601,000 of loans held for sale, respectively,
resulting in a use of cash of $66,105,000.
Cash Flows from Investing Activities
During the first nine months of fiscal 1999, the Company used
$139,008,000 of cash for investing activities compared to $42,624,000 for the
same period last year. In the first nine months of fiscal 1999, the primary use
of cash was for purchases of investment securities available for sale in the
amount of $137,812,000, compared to $2,953,000 for the same period one year ago.
Purchases of investment securities available for sale represented 99.14% of cash
used in investing activities for the first nine months of fiscal 1999. The
Company purchased $5,050,000 of investment securities held for sale in the first
nine months of fiscal 1999 compared to $37,184,000 for the same period last
year. Proceeds from sales, calls and maturities of securities available for sale
were $9,441,000, $6,749,000 and $1,501,000, respectively, for the first nine
months of fiscal 1999. Comparatively, for the first nine months of fiscal 1998,
proceeds from sales, calls and maturities of securities available for sale were
$1,957,000, $5,523,000 and $4,250,000, respectively. Proceeds from calls of
investment securities held to maturity were $17,200,000 during the first nine
months of fiscal 1999 compared to proceeds from calls and maturities of
securities held to maturity of $10,000,000 and $8,300,000 for the same period
one year ago. For the first nine months of fiscal 1999, the Company used
$38,513,000 for loan originations, net of repayments compared to $28,809,000 for
the same period last year. The Company invested an additional $12,495,000 in
investment in real estate during the first nine months of fiscal 1999. In
comparison, for the first nine months one year ago, the Company invested an
additional $7,594,000 in investment in real estate. Proceeds from the sale of
investment in real estate for the first nine months of 1999, resulted in a
$2,923,000 source of cash versus $4,518,000 for the same period last year. In
the first nine months of fiscal 1999, purchases of premises and equipment
represented a $1,642,000 use of cash and proceeds from sales of premises and
equipment resulted in a $590,000 source of cash. Comparatively, in the first
nine months of fiscal 1998, purchases of premises and equipment represented a
$3,542,000 use of cash and proceeds from sales resulted in a $162,000 source of
cash.
Cash Flows from Financing Activities
Cash provided from financing activities during the first nine months of
fiscal 1999, was $225,162,000 compared to $121,568,000 during the same period
one year ago. FHLB advances provided the most significant increase in cash
provided from financing activities. The Company borrowed $763,616,000 and repaid
$664,321,000
27
<PAGE> 28
for the first nine months of fiscal 1999. This compares to borrowings of
$495,737,000 and repayments of $418,826,000 for the same nine months last year.
In addition, the Company raised $28,750,000 of additional capital through a new
issue of trust preferred securities which settled in the second quarter of
fiscal 1999. The Company's deposits increased by $106,743,000 during the nine
months. The increase is comprised of $73,798,000 of time deposits and
$32,945,000 in demand deposits. Comparatively, for the first nine months last
year, deposits increased $46,790,000 comprised of $29,631,000 in time deposits
and $17,159,000 in demand deposits. In the first nine months of fiscal 1999, the
Company incurred ESOP debt of $2,000,000. In addition, pursuant to the Company's
stock repurchase plan, the Company used $3,177,000 to repurchase common stock.
The Company paid cash dividends to its shareholders of $2,717,000 and $2,549,000
for the first nine 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 December 31, 1998, the Bank was classified as "well capitalized" under the
OTS regulations that implement the FDICIA provisions described above. 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 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.
REGULATORY CAPITAL
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Regulatory Required Excess
(dollars in thousands) Capital % Capital % Capital %
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
RISK-BASED RATIOS:
TIER 1 CAPITAL $68,543 9.12% $30,077 4.00% $38,466 5.12%
TOTAL CAPITAL $75,410 10.03 $60,154 8.00 $15,256 2.03
TIER 1 LEVERAGE $68,543 5.09 $53,868 4.00 $14,675 1.09
TANGIBLE EQUITY $68,543 5.11 $20,134 1.50 $48,409 3.61
- --------------------------------------------------------------------------------------------------------------
December 31, 1997
Risk-based ratios:
Tier 1 capital $50,078 8.17 $24,505 4.00 $25,573 4.17
Total Capital $55,625 9.08 $49,010 8.00 $6,615 1.08
Tier 1 leverage $50,078 5.57 $35,969 4.00 $14,109 1.57
Tangible equity $50,078 5.91 $13,119 1.50 $36,959 4.41
</TABLE>
28
<PAGE> 29
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
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K
None
29
<PAGE> 30
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: February 16, 1999 /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: February 16, 1999 /s/Richard B. Inman, Jr.
-------------------------------------------
Richard B. Inman, Jr.
Director, Secretary and Treasurer
Date: February 16, 1999 /s/ Conrad J. Sechler, Jr.
-------------------------------------------
Conrad J. Sechler, Jr.
Chairman of the Board and President
Date: February 16, 1999 /s/ LuAnn Durden
-------------------------------------------
LuAnn Durden
Chief Financial Officer
30
<PAGE> 31
EAGLE BANCSHARES, INC.
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description Page No.
- ------ ----------- --------
<S> <C> <C>
11 Computation of per share earnings 32
27 Financial Data Schedule (for SEC use only)
</TABLE>
31
<PAGE> 1
EXHIBIT 11
EAGLE BANCSHARES, INC.
Statement re: Computation of per share earnings
In the calculation of basic and diluted earnings per share, net income is
identical. Below is a reconciliation for the three months period ended December
31, 1998 and 1997, of the difference between average basic common shares
outstanding and average diluted common shares outstanding.
COMPUTATION OF PER SHARE EARNINGS
(dollars in thousands except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, 1998 December 31, 1997
------------------------------------------------
<S> <C> <C>
Basic
Net income $2,473 $1,764
------------------------------------------------
Average common shares 5,719 5,695
------------------------------------------------
Earnings per common share - basic $ 0.43 $ 0.31
------------------------------------------------
Diluted
Net income $2,473 $1,764
------------------------------------------------
Average common shares - basic 5,719 5,695
Incremental shares outstanding 119 174
Average common shares - diluted 5,838 5,869
------------------------------------------------
Earnings per common share - diluted $ 0.42 $ 0.30
------------------------------------------------
</TABLE>
Below is a reconciliation for the nine months period ended December 31, 1998 and
1997, of the difference between average basic common shares outstanding and
average diluted common shares outstanding.
<TABLE>
(dollars in thousands except per share data)
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, 1998 December 31, 1997
------------------------------------------------
<S> <C> <C>
Basic
Net income $7,924 $5,047
------------------------------------------------
Average common shares 5,761 5,671
------------------------------------------------
Earnings per common share - basic $ 1.38 $ 0.89
------------------------------------------------
Diluted
Net income $7,924 $5,047
------------------------------------------------
Average common shares - basic 5,761 5,671
Incremental shares outstanding 167 146
Average common shares - diluted 5,928 5,817
------------------------------------------------
Earnings per common share - diluted $ 1.34 $ 0.87
------------------------------------------------
</TABLE>
32
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U. S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1,000
<CASH> 26,751
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 206,250
<INVESTMENTS-CARRYING> 44,218
<INVESTMENTS-MARKET> 45,388
<LOANS> 995,478
<ALLOWANCE> 7,550
<TOTAL-ASSETS> 1,367,209
<DEPOSITS> 885,718
<SHORT-TERM> 140,150
<LIABILITIES-OTHER> 66,817
<LONG-TERM> 200,000
0
0
<COMMON> 6,112
<OTHER-SE> 68,412
<TOTAL-LIABILITIES-AND-EQUITY> 1,367,209
<INTEREST-LOAN> 57,784
<INTEREST-INVEST> 6,137
<INTEREST-OTHER> 4,229
<INTEREST-TOTAL> 68,150
<INTEREST-DEPOSIT> 31,188
<INTEREST-EXPENSE> 42,079
<INTEREST-INCOME-NET> 26,071
<LOAN-LOSSES> 1,881
<SECURITIES-GAINS> 469
<EXPENSE-OTHER> 30,619
<INCOME-PRETAX> 11,719
<INCOME-PRE-EXTRAORDINARY> 11,719
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,924
<EPS-PRIMARY> 1.38
<EPS-DILUTED> 1.34
<YIELD-ACTUAL> 8.13
<LOANS-NON> 9,773
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,427
<ALLOWANCE-OPEN> 6,505
<CHARGE-OFFS> 1,221
<RECOVERIES> 385
<ALLOWANCE-CLOSE> 7,550
<ALLOWANCE-DOMESTIC> 7,550
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
