<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED] For the fiscal year ended March 31, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
-------------- --------------
Commission file number: 0-14379
-------
EAGLE BANCSHARES, INC.
----------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
GEORGIA 58-1640222
------- ----------
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
</TABLE>
4419 COWAN ROAD, TUCKER, GEORGIA 30084-4441
-------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 770-908-6690
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $1.00
National Association of Securities Dealers Automated Quotation System
(Name of each exchange on which registered.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by nonaffiliates
of the registrant as of June 21, 1999.
Common Stock, $1.00 par value - $106,906,211 based upon the closing price
on June 21, 1999, using beneficial ownership of stock rules adopted pursuant to
Section 13 of the Securities Exchange Act of 1934 to exclude voting stock owned
by directors and certain executive officers, some of whom may not be held to be
affiliates upon judicial determination.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of June 21, 1999, Common Stock $1.00 par value -
5,571,514 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 1999 annual meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A within 120 days of the Registrant's fiscal year end. (Part III)
Index of Exhibits on Page 54
<PAGE> 2
EAGLE BANCSHARES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
Number Number
- ------ ------
PART I
<S> <C> <C>
1. Business........................................................................................................ 3
2. Properties..................................................................................................... 21
3. Legal Proceedings.............................................................................................. 22
4. Submission of Matters to a Vote of Security Holders............................................................ 23
PART II
5. Market for the Registrant's Common Equity
and Related Stockholder Matters.............................................................................. 24
6. Selected Financial Data.........................................................................................25
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................................................26
8. Financial Statements and Supplementary Data.....................................................................50
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...........................................................................50
PART III
10. Directors and Executive Officers of the Registrant..............................................................50
11. Executive Compensation..........................................................................................51
12. Security Ownership of Certain Beneficial Owners
and Management................................................................................................51
13. Certain Relationships and Related Transactions..................................................................51
PART IV
14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K...........................................................................................51
Signatures...........................................................................................................53
Index of Exhibits....................................................................................................54
</TABLE>
2
<PAGE> 3
PART I
ITEM 1.BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
Eagle Bancshares, Inc. (the "Company") is a unitary savings and loan
holding company headquartered in Tucker, Georgia which owns and operates Tucker
Federal Bank ("Tucker Federal" or the "Bank"), Eagle Real Estate Advisors, Inc.
("EREA"), and Eagle Bancshares Capital Group, Inc. ("EBCG"). The Bank is a
federally chartered stock savings and loan association organized in 1956 and
based in Tucker, Georgia. The Bank serves the metropolitan Atlanta area through
its full service branch offices. The Bank's deposits are federally insured by
the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC"). The Bank has two subsidiaries, Prime Eagle Mortgage
Corporation ("PrimeEagle") and Eagle Service Corporation.
As a unitary thrift holding company, Eagle is permitted, under current
regulations, to engage in activities that bank holding companies cannot. In
1991, the Company formed EREA to perform third-party real estate brokerage
activities. In 1994 EREA began its first real estate development and sales
activities and brokerage services. Since then EREA has developed approximately
950 single-family lots. EBCG was formed in December 1997 to serve the Bank's
growing base of small and medium sized businesses by providing mezzanine
financing that is not readily available from traditional commercial banking
sources. Loans with equity features are made to borrowers that have the
potential for significant growth, adequate collateral coverage and experienced
management teams with significant equity ownership.
On July 29, 1998, the Company closed a public offering of 1,150,000 of
8.50% Cumulative Trust Preferred Securities (the "Preferred Security") offered
and sold by EBI Capital Trust I (the "Trust"), having a liquidation amount of
$25 each. The proceeds from such issuances, together with the proceeds of the
related issuance of common securities of the Trust purchased by the Company,
were invested in 8.50% Subordinated Debentures (the "Debentures") of the
Company. The sole assets of the Trust is the Debentures. The Debentures are
unsecured and rank junior to all senior debt of the Company. The Company owns
all of the common securities of the Trust. The obligations of the Company under
the Debentures, the Indenture, the relevant Trust agreement, and the Guarantee,
in the aggregate, constitute a full and unconditional guarantee by the Company
of the obligations of the Trust under the Preferred Securities and ranks
subordinate and junior in right of payment to all liabilities of the Company.
The Preferred Securities are subject to redemption prior to maturity at the
option of the Company.
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 securities available for sale. Additionally,
approximately $4,300,000 was used to repay existing debt associated with the
Company's real estate investment in Rivermoore Park, LLP and to invest in
investment grade preferred securities of approximately $3,500,000, held as
available for sale by the Company. The remainder of the net proceeds was used
for general corporate purposes.
On September 21, 1997, the Company acquired a wholesale mortgage banking
business to increase loan originations and improve efficiencies associated with
its mortgage banking business. The wholesale division closed $259,545,000 of
permanent mortgage loans for the six month period ended March 31, 1998 and
$743,535,000 for the full year ending March 31, 1999.
On March 26, 1997, Eagle acquired all of the outstanding shares of Southern
Crescent Financial Corp. ("SCFC"), a bank holding company located in Union City,
Georgia, with four branches, in accordance with the Agreement and Plan of Merger
(the "Merger Agreement") dated August 13, 1996. Simultaneously therewith,
Southern Crescent Bank, a wholly owned commercial bank subsidiary of SCFC,
merged with and into the Bank. The Company was the surviving corporation in the
merger, and Tucker Federal was the surviving entity in the bank merger and
remains a wholly owned savings association of the Company. The merger was
accounted for as a pooling of interests, and accordingly, the consolidated
financial statements have been restated to include SCFC for all periods
presented.
3
<PAGE> 4
The purchase price of the transaction was approximately $18,500,000 based
on the average of the closing bid and ask price quoted for Eagle Bancshares on
the NASDAQ for the 30 consecutive trading days ending on the date that was five
trading days prior to the closing date. Based on the calculated stock price,
SCFC shareholders received 1.162 shares of Company stock for each share of SCFC
stock. As a result, the Company issued 1,107,494 shares of common stock.
In accordance with the Company's long term growth strategy, effective
February 15, 1996, the Company issued 1,435,000 shares of common stock and
raised $21,483,000 of equity in a secondary offering. The additional capital has
been employed to fuel the Company's growth.
Effective April 1, 1995, the Company formed an operating subsidiary,
PrimeEagle Mortgage Corporation. Prior to this time, Eagle Service Corporation
and the Bank separately engaged in the origination of permanent mortgage loans
held for sale. The consolidation improved the Company's ability to receive
higher servicing release premiums as a result of higher loan volume.
The Company is engaged in four lines of business through its subsidiaries:
community banking, mortgage banking, mezzanine financing and real estate
activities. At March 31, 1999, the Company had total assets of $1,230,000,000,
total deposits of $879,665,000 and total stockholders' equity of $74,817,000.
Management believes the best way to maximize long-term shareholder value is
to continue to improve financial performance and operating efficiency and to
continue to grow market share in the metropolitan Atlanta area. The Company's
long-term strategy is focused on increasing shareholder value by creating
competitive advantages in targeted business niches which include community
banking, mortgage banking and real estate development and mezzanine lending. The
Company reviews and updates its Strategic Business Plan quarterly. The Company's
plan is focused on five basic areas: (i) improving financial performance and
operating efficiencies, (ii) continuing to grow market share in metropolitan
Atlanta, (iii) developing new sources of net income, (iv) utilizing technology
to enhance the Company's operating results and capitalize on new business
opportunities, and (v) being the "Bank of Choice" for the small business
community.
Based on total assets as of March 31, 1999, the Bank is one of the largest
financial institutions headquartered in the metropolitan Atlanta area. The Bank
has a significant strategic opportunity as one of Atlanta's leading community
banks. The Company's current technology, asset size and legal lending limit per
borrower permit it to serve middle market customers more effectively than many
smaller Atlanta community banks. The Bank's competitive advantage is its ability
to provide a full range of financial products with personalized service and
local decision making, which typically are not available from financial
institutions headquartered out of state. Additionally, management believes that
many local borrowers are being under served as a result of the recent
acquisitions of many of Atlanta's banks and thrifts by large out-of-state banks
and that the Bank will continue to build franchise value by increasing market
share in the metropolitan Atlanta area.
The Company creates a strategic advantage by utilizing its experience and
historic commitment to construction lending to generate permanent mortgage loan
originations. Because of the Company's long-term participation in construction
lending, it is able to develop a core business of permanent mortgage
originations as a result of relationships with its existing homebuilders. The
Company has relationships with approximately 165 homebuilders in the Atlanta
metropolitan area and does not have significant concentration with any
homebuilder or in any particular market area. Over the past year, the Company
continued to upgrade the origination and processing systems used in its mortgage
banking business to improve efficiencies of loan originations and sales.
Management has implemented an automated underwriting system for its conforming
mortgage loans to improve customer service by providing faster loan decisions.
In September 1997, the Company acquired a wholesale banking business to increase
loan originations and improve efficiencies of its mortgage banking operations.
Currently, the Company sells the majority of its mortgage servicing rights
originated.
The Company's experience as a metropolitan Atlanta area real estate lender
for over 40 years creates a strategic advantage for its real estate development
activities. Local market knowledge and relationships with builders and
developers give the Company a unique position to create and evaluate real estate
development opportunities. Additionally, the Company's real estate investments
and brokerage activities have contributed increasing incremental income for the
previous five years.
4
<PAGE> 5
The Company has made, and may continue to make, various forward-looking
statements with respect to financial and business matters. The following
discussion contains forward-looking statements that involve inherent risks and
uncertainties. Actual results may differ materially from those contained in
these forward-looking statements. For additional information regarding
forward-looking statements, see "A Warning About Forward-Looking Information" on
page 21.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
COMMUNITY BANKING - The Bank is primarily engaged in making construction,
commercial and consumer loans funded by attracting deposits from the general
public. In addition to deposits, sources of funds for the Bank's loans and other
investments include origination and other fees charged on certain types of
loans, prepayment of loans, and sales of investment securities. The Company's
ability to attract small business and consumer loans, as well as deposits, was
significantly expanded with the acquisition of SCFC. The banking group has
reorganized the management structure to provide for a higher level of customer
service. The Company intends to expand its portfolio of commercial and consumer
loans to increase its level of higher yielding assets in its loan portfolio. In
addition, management identified opportunities to improve operational
efficiencies, which lead to the conversion to a new data services provider. The
principal sources of income for the Bank are interest and fees collected on
loans and, to a lesser extent, interest and dividends collected on other
investments and service charges on deposit accounts. The principal expenses of
the Bank are interest paid on deposits, employee compensation, office expenses
and data processing expenses.
The Bank competes for loans and deposits with many financial institutions
that are larger and have greater financial resources. In order to remain
competitive, the Bank attempts to identify the specific needs of its target
markets and to design financial products and services to fill those needs.
Additionally, many customers of the Bank express a desire to bank with a local
financial institution. The Bank believes this community banking niche is one
Tucker Federal can fill with a level of current technologies and personal
service applied to each customer that may not be available from larger regional
financial institutions.
The Company currently provides construction financing in some of the
markets where it has a retail loan production office and obtains benefits by
coordinating the efforts of its construction lending and permanent lending
operations.
MORTGAGE BANKING - PrimeEagle originates single family mortgage loans from
retail loan production offices in the southeast. The wholesale group operates
from a single production office in Ponte Vedra, Florida, and purchases loans
from correspondents who operate in markets outside of its retail mortgage
offices area, primarily in the northeastern United States. Loans are funded
primarily through the sale of these loans in the secondary market, as well as,
through the Bank's ability to borrow from the Federal Home Loan Bank ("FHLB").
PrimeEagle generates revenues through selling substantially all of the
fixed rate permanent mortgage loans to investors and interest on permanent
mortgage loans. PrimeEagle's primary source of fee income is derived from
services including loan application and origination, the gain or loss on the
sales of loans to third parties and from the sales of mortgage servicing rights.
Proceeds from sales of mortgage servicing rights are the largest component of
total mortgage production fees. Management's analysis of the timing of mortgage
prepayments and fluctuations in the value of servicing rights impacts the
Company's decision to retain or sell servicing. As a result of this analysis,
the Company has sold substantially all of its fixed rate mortgage loans on a
servicing released basis during the previous five years.
REAL ESTATE ACTIVITIES - EREA performs third-party real estate brokerage
and real estate development and sales activities in the metropolitan Atlanta
area. The Company's experience as a metropolitan Atlanta area real estate lender
for over 40 years creates a strategic advantage for its real estate development
activities. Local market knowledge and relationships with builders and
developers give the Company a unique position to create and evaluate real estate
opportunities. The principal sources of income are derived from gains on sales
of single-family lots in the Company's development projects and commissions
earned on third-party brokerage activities.
5
<PAGE> 6
MEZZANINE FINANCING - EBCG provides financing for the Bank's growing base
of small- and medium-sized business. Loans with equity features are made to
borrowers that have the potential for significant growth, adequate collateral
coverage, and experienced management teams with significant ownership.
Management identifies investment opportunities through the Bank's customer base
as well as a referral network comprised of venture capitalists, investment
bankers, attorneys and accountants. The principal sources of income for EBCG are
interest and fees collected on loans.
For financial information regarding industry segments, see Note 14 of Notes
to Consolidated Financial Statements.
(c) Narrative Description of Business
The Company is headquartered in the metropolitan Atlanta, Georgia area and
derives a significant portion of its loans and deposits in that area. Growth in
the metropolitan Atlanta area and ongoing consolidation of the financial
services industry have resulted in significant increases in loans, deposits, and
customers at the Bank. In February 1996, the Company issued 1,435,000 shares of
common stock and raised $21.5 million of additional capital to support growth in
loans and deposits and permitted investments by the Company. The Company also
has benefited from industry consolidation by hiring experienced banking
executives and acquiring branch offices. On March 26, 1997, the Company acquired
Southern Crescent Financial Corp. with total assets of $150 million and four
full-service branches in the rapidly growing markets of south metropolitan
Atlanta. The acquisition enhanced the Company's commercial lending capabilities
and expanded the Company's market share in Atlanta. The Company further
diversified its mortgage lending activities by acquiring a wholesale mortgage
operation in September 1997 whose primary market area is the northeastern United
States. In recent years, the metropolitan Atlanta area has enjoyed strong
economic growth, including growth in employment and population. The Company has
benefited from this growth in the past and expects that its continued growth and
profitability will depend in part on the continued growth and the economic
conditions in the metropolitan Atlanta area.
The Company's long-term strategic business plan is focused on providing a
broad array of financial services to consumers and small and medium sized
businesses that consider personalized service and local decision making an
important component of a banking relationship. The Company's plan has five basic
principles:
IMPROVING FINANCIAL PERFORMANCE AND OPERATING EFFICIENCIES. The Company's
ability to increase market share in the rapidly growing metropolitan Atlanta
area has produced dynamic growth in total assets. The rapid growth, however, has
impacted operating efficiencies.
Management has undertaken a number of initiatives to improve core earnings.
These initiatives are designed to continue to improve operating efficiency and
customer service while increasing fee income and controlling expenses and
include:
- Piloting an internet alternative for bill presentment by providing a
direct route for e-billing through the NextBill System.
- Opening our first in-store branch as part of the first SuperTarget
retail store opened east of the Mississippi River.
- Implementing a branch network strategy to improve profitability,
including closing and selling selected traditional branch locations,
while building new convenient multi-tenant branch banking centers.
- Improving efficiencies in our mortgage banking business by providing
new technology, which includes enhanced on-line capabilities and
automatic underwriting.
- Providing four entrepreneurs in excess of $4 million of mezzanine
financing through Eagle Bancshares Capital Group.
- Achieving record revenues through Eagle Real Estate Advisors with the
sale of single-family lots in Company developments and through
third-party brokerage commissions. Additionally, the Company donated
and sold 120 acres to the Land for Public Trust to preserve natural
wildlife habitats along the Chattahoochee River.
- Raising $28.7 million of additional capital by issuing Trust Preferred
Securities in July 1998 to fuel the Company's growth.
- Executing a stock repurchase program to purchase up to 300,000 shares
of Eagle Bancshares stock.
6
<PAGE> 7
CONTINUING TO GROW MARKET SHARE IN METROPOLITAN ATLANTA
The Company is pursuing three approaches to increase community banking
market share. First, to sell more products to existing customers through a
relationship banking program. Management is utilizing enhanced customer
information and is training employees to search for every opportunity to provide
financial solutions to customers and enhance the products and services offered
to existing loan and deposit customers. Second, we are identifying potential new
customers in existing markets through an aggressive marketing and direct mail
program. Third, we will continue to evaluate opportunities to expand market
share through acquisitions.
DEVELOPING NEW SOURCES OF NET INCOME
The Company will continue to pursue allied businesses permitted by its
unitary thrift holding company status. The Company formed EBCG in fiscal 1997 to
provide financing to borrowers that have the potential for significant growth,
adequate collateral coverage and experienced management teams with significant
equity ownership. Management will focus on making loans with equity features and
will identify investment opportunities through the Bank's customer base as well
as a referral network comprised of venture capitalists, investment bankers,
attorneys and accountants.
UTILIZING TECHNOLOGY TO ENHANCE THE COMPANY'S OPERATING RESULTS AND CAPITALIZE
ON NEW BUSINESS OPPORTUNITIES
The Company will use technology to roll out alternative product delivery
methods by expanding our call center, providing cash management products for
small businesses and implementing automatic underwriting for both wholesale and
retail mortgage lending. Our plan calls for the addition of PC Banking
capabilities for consumers.
Management has implemented an integrated mortgage origination computer
system in its wholesale group. The origination system together with an automated
underwriting system will be completely tested and operational in the Bank's
wholesale mortgage banking group and will then be implemented throughout its
retail mortgage group. This system will increase efficiency in the retail and
wholesale groups and significantly improve customer service by providing faster
loan underwriting decisions.
BEING THE "BANK OF CHOICE" FOR THE SMALL BUSINESS COMMUNITY
Personal relationships and local decision-making are important
considerations to small and medium sized businesses. The Company's size allows
it to offer a full range of products and services to business customers with a
level of personal service that exceeds service provided by larger financial
institutions. The Company has recruited experienced bankers to expand its Small
Business Administration ("SBA") and commercial lending areas to provide a
complete array of financing alternatives including SBA guaranteed loans, loans
to finance receivables and inventory, and plant and headquarters expansion, as
well as to identify mezzanine financing opportunities for rapidly growing
businesses.
No assurances can be given that the metropolitan Atlanta area will continue
to have a strong economy or that, if the economy continues to be strong, the
Company will benefit from that economy.
LENDING ACTIVITIES
GENERAL
The Bank's loan portfolio consists of mortgage, construction, commercial,
consumer, home equity and SBA loans offered through bank branches and retail
loan production offices located in metropolitan Atlanta and in the southeast. As
a result of the acquisition of SCFC and the addition of new commercial lending
officers, the Bank has increased its line of products to attract the small
business customer. The Company believes that the small business market is
currently underserved in the Atlanta metropolitan area. In addition, the Bank's
construction lending activities take advantage of the cross selling
opportunities between construction
7
<PAGE> 8
lending and mortgage loan originations. In each market, the Bank follows the
same stringent underwriting and construction monitoring procedures.
REAL ESTATE MORTGAGE LOANS
Traditionally, the Bank's principal lending operation has been the
origination of permanent single family residential mortgage loans. These loans
continue to represent a significant part of the Bank's lending activities. Both
fixed rate and adjustable rate permanent loans on residential properties
currently are originated either for sale in the secondary market or for
retention in the Bank's loan portfolio. Generally, the Bank retains the
adjustable rate mortgage loans that it originates and sells the fixed rate loans
that it originates. In addition, the Bank began offering alternate credit
mortgage loans which provide financing to borrowers with less than standard
credit at yields reflecting the credit risk assumed. See "Lending Activities --
Loan Sales and Purchases."
In the case of owner-occupied single family residences, the Bank may make
permanent residential mortgage loans for up to 100 percent of the appraised
value of the property. Loans on non-owner occupied real estate of not more than
four family units, generally are made for up to 75 percent of the appraised
value. Substantially all conventional loans with loan-to-value ratios in excess
of 80 percent generally have private mortgage insurance covering that portion of
the loan in excess of 75 percent of the appraised value. The borrower generally
pays the cost of this insurance either through a single premium paid at the time
of loan origination or through a monthly payment during the term of the loan.
The borrower also generally makes monthly payments into an escrow account equal
to 1/12 of the annual hazard insurance premiums and property taxes on the
property which secures the loan. Interest rates and loan fees charged on loans
originated are competitive with other financial institutions in the Bank's
market areas.
The Bank has offered, in addition to fixed rate residential loans, a
variety of loans on which the interest rate, payment, loan balance or term to
maturity may be adjusted, provided that the adjustments are tied to specified
indices. These adjustable rate mortgage loans ("ARMs") permit greater
flexibility in adjusting loan yields to changes in the cost of funds. ARMs
generally have loan terms up to 30 years with rate adjustments ranging from one
to ten years during the term of the loan. Most ARMs have caps on the maximum
amount of change in the interest rate at any adjustment period and over the life
of the loan.
CONSTRUCTION AND ACQUISITION AND DEVELOPMENT LOANS
The Bank provides interim construction financing for single-family
residences and makes land acquisition and development loans on properties
intended for residential use. The Bank's general policy is to grant single
family construction loans and land acquisition and development loans in an
amount up to 80 percent of the lower of cost or appraised value of the property.
Residential construction loans are made for periods of one year or less, and
land acquisition and development loans are made for periods of up to three
years. These periods may be extended subject to negotiation and, typically,
payment of an extension fee. Interest rates on construction and acquisition and
development loans are indexed to the Bank's base rate and are adjustable daily
during the term of the loan.
In accordance with the Company's business plan, the volume of construction
lending has increased in each of the previous five fiscal years. The Company
does not expect its percentage of construction loans to total loans to increase
significantly above the March 31, 1999 level. Construction and acquisition and
development loans at March 31, 1999, were $176,168,000 or 20.7 percent of the
Bank's loan portfolio, including loans held for sale, plus reserves. The Company
recognizes the risks inherent in construction financing and has designed an
organization and system of controls to properly mitigate those risks through
strict underwriting and close monitoring of the lending and construction
process. Underwriting criteria include, among other things, the track record and
financial condition of the builder, applicable loan to appraised value ratios,
the demand for the type of house to be constructed, including a marketing survey
of inventory levels by price range and location, the feasibility of house plans
and costs and growth prospects for the economy. The Company has a construction
inspection and appraisal network staffed by employees and third party
contractors. The Company's staff closely monitors construction progress and loan
draws throughout the process. In addition, no single customer accounts for more
than 2 percent of the Bank's loans.
8
<PAGE> 9
COMMERCIAL REAL ESTATE LOANS
Interim construction and permanent commercial real estate loans typically
are secured by apartment projects, office buildings, business properties,
shopping centers, nursing homes, extended stay lodging facilities and motels
located in the Company's primary lending areas. Construction and permanent
commercial real estate loans are made generally to 80 percent of the appraised
value of the property, with the loan amount being determined through an
evaluation of the net operating income and cash flows of each project,
replacement costs, and sales of comparable projects. Interest rates are
generally determined by market conditions. Commercial construction loans
generally are made for periods of 12 to 24 months on an interest only basis at
interest rates indexed to the prime rate. Permanent commercial real estate loans
are typically made based on 15 to 25 year amortization periods with five to ten
year maturities. Interest rates on permanent loans are generally tied to the
Bank's base rate or other interest rate indices. As of March 31, 1999, the
Company had outstanding $58,562,000 in loans secured by commercial real estate.
This constituted 6.9 percent of the Bank's total loan portfolio.
COMMERCIAL BUSINESS LOANS AND LEASES
The Company is authorized by federal law to make secured and unsecured
loans for business or agricultural purposes in amounts aggregating up to 10
percent of its total assets. Pursuant to this authority, the Company makes
various types of commercial loans to creditworthy borrowers for the purposes of
financing accounts receivable, equipment, capital projects and other legitimate
business needs. The Company also purchases loans from other financial
institutions and companies. In approving financial institutions and companies to
purchase loans or leases, the Company evaluates their financial strength,
reputation, credit worthiness and documentation capabilities.
The Company evaluates creditworthiness of business loans on the basis of
the borrowers' financial strength including analysis of their profitability,
cash flow, balance sheet trends and the liquidation value of collateral. The
Company assigns a credit rating to each borrower based, among other things, on
the borrower's historical cash flow, financial strength, paying habits, business
prospects, debt structure and capitalization, and the reputation and character
of its principals.
Commercial business loans normally carry interest rates indexed to the
Company's base rate, nationally quoted prime rate and U.S. Government Treasury
securities. Commercial business loans as of March 31, 1999 were approximately
$22,896,000 or 2.7 percent of the total loan portfolio. In 1993, the Company
began a leasing operation, which purchased leases from approved lessors. Each
credit was underwritten based upon the lessee's cash flow, business prospects
and ability to make rental payments. In December 1995, the Company began to
experience delinquencies in the portfolio. As a result of delinquencies
primarily with two relationships, the Bank discontinued the leasing activities
during the fiscal 1997. Leases at March 31, 1999, were $3,354,000 or 0.4 percent
of total loans.
CONSUMER LOANS
Federal thrifts are authorized to make both secured and unsecured consumer
loans for personal or household purposes in amounts up to 30 percent of their
total assets. In addition, federal thrifts have lending authority above the 30
percent limit for certain consumer loans, such as home equity loans (loans
secured by the equity in the borrower's residence but not necessarily used for
the purpose of home improvement), property improvement loans, mobile home loans,
deposit account secured loans, education loans and indirect automobile loans. At
March 31, 1999, total consumer loans constituted $31,263,000 or 3.7 percent of
the Company's total loan portfolio. The Company intends to continue prudent
expansion of its consumer lending activities, subject to market conditions, as
part of its plan to become a full service financial institution providing a wide
range of personal financial services.
LOAN ORIGINATION AND PROCESSING
The Company has a structured loan approval process in which lending
authority for various types and amounts of loans is delegated by the Board of
Directors to loan officers on a basis commensurate with seniority
9
<PAGE> 10
and lending experience. The Bank has a Loan Committee that approves loan
requests made by loan officers and must approve loans in amounts above $250,000.
Additionally, the Bank's Board of Directors must approve loans of $1,000,000 or
more.
PrimeEagle actively solicits mortgage loan applications from existing
customers, local real estate agents, builders, real estate developers and others
for sale in the secondary market. The Company has received delegated
underwriting from each of its primary investors in loan pools. A majority of
these loans are underwritten to meet Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") standards. The
Company's loans are approved by qualified underwriters in the markets they
serve. These underwriters ensure that the loans are closed in accordance with
the guidelines set forth by the Company's lending policy, by FNMA and FHLMC and
by mortgage investors. In fiscal 1999, substantially all of the permanent
mortgage loans originated by PrimeEagle were sold to private investors on a
servicing released basis.
LOAN SALES AND PURCHASES
Permanent first mortgage loans on residential real estate are originated
for sale in the secondary market by PrimeEagle through its offices in the
southeast. These loans are pooled and sold through an assignment of trade to
private investors. Fluctuations in the value of servicing rights and
management's analysis of loan prepayments impact the Company's decision to
retain or sell servicing. Because of the risk of prepayment and the cost to
service loans as compared to the service release premiums paid by investors, the
Company sells substantially all of its permanent loans on a servicing released
basis.
CREDIT RISK MANAGEMENT AND ALLOWANCE FOR LOAN LOSSES
The Bank has a multi-faceted program designed to control and monitor the
credit risks inherent in its loan portfolio. The Bank utilizes an asset
classification system which is consistent with the "Interagency Policy Statement
on the Allowance for Loan and Lease Losses" ("ALLL") issued by the Office of
Thrift Supervision ("OTS") to develop common guidance on allowances. The
statement asserts that an institution must maintain an allowance for loan and
lease losses at an adequate level to absorb estimated credit losses associated
with its loan and lease portfolio. Also, the ALLL should be sufficient to absorb
estimated credit losses associated with off-balance sheet credit instruments, to
the extent they are not provided for in a separate liability account.
The basic objectives of the Bank's ALLL policy are: (i) to provide
essential information regarding the overall quality of the Bank's assets; (ii)
to provide for early identification of potential problem assets so as to
minimize losses to the Bank; (iii) to project relevant trends that affect the
collectibility of the Bank's loan and lease portfolio and to isolate potential
problem areas; (iv) to provide adequate valuation allowances in accordance with
generally accepted accounting principles and OTS policies; (v) to provide
accurate and timely information relating to credit quality that can be used for
financial and regulatory reporting purposes; (vi) to assess the adequacy of
internal controls and adherence to internal credit policies and loan
administration procedures; (vii) to monitor compliance with relevant laws and
regulations through a loan review system; and (viii) to evaluate the activities
of lending personnel through a loan review system.
The Bank utilizes its Asset Classification Committee (the "ACC") to provide
a quarterly evaluation of the Bank's assets, to establish the adequacy of the
valuation allowances and to evaluate the loan review system. The ACC is
responsible for developing and implementing effective credit approval and loan
review systems and controls, including a credit grading system, that identifies,
monitors and addresses asset quality problems in an accurate and timely manner.
After a loan has been made, loan officers are responsible for monitoring
individual loans and analyzing continuously the loan portfolio to identify
promptly and report problem loans. Loans are also reviewed by the loan
committee, the ACC, and by the Bank's credit administration and loan review
personnel. The loan officer responsible for a loan submits the loan to the loan
committee for approval in accordance with the guidelines of the Bank's lending
authority. Each commercial real estate, construction, and lease loan is given a
rating, which the loan committee has the ability to approve or disapprove. In
addition, the frequency of ongoing review is determined by the loan officer and
approved by the Loan Committee. The ACC may determine that a loan or
10
<PAGE> 11
borrower's credit grading or review frequency should be changed in accordance
with the framework provided by the Bank's grading system.
The Bank also periodically performs an analysis of the various components
of its portfolio, including all significant credits on an individual basis. In
order to analyze the adequacy of the ALLL, the Bank will segment the loan and
lease portfolios into components which have similar characteristics.
Characteristics considered include, but are not limited to, geographical
location, risk classification, past due status, type of loan, loan grade, and
industry or collateral. Estimates of credit losses reflect consideration of all
significant factors that affect the collectibility of the portfolio as of the
evaluation date.
The ACC considers historical losses, recent trends, changes in national and
local economic and business conditions and developments, the level and structure
of interest rates, job growth, consumer confidence and the market value of
collateral. The ACC considers (i) the effect of external factors, such as
competition and legal and regulatory requirements on the level of estimated
losses in the Bank's current portfolio; (ii) changes in the duration, type and
level of assets; (iii) the existence and effect of any concentration of assets
and changes in the level of such concentrations; (iv) changes in the experience,
ability and depth of the lending management and loan administration staff of the
Bank; (v) changes in lending policies and procedures, including underwriting
standards and collection, charge-off and recovery practices; (vi) changes in the
trend of the volume and severity of past due and classified loans; (vii) trends
in the volume of non-accrual loans, troubled debt restructurings and other loan
modifications; and (viii) changes in the quality of the Bank's loan review
system and the degree of oversight by the Bank's Board of Directors.
In addition, ratio analysis is used as a supplemental tool for evaluating
loans, portfolio concentration and the overall reasonableness of the ALLL.
Ratios are used to compare the Bank to its peer group and its historical
practices in identifying divergent trends in the relationship of classified and
nonclassified assets, past due and non-accrual loans and leases, total loans and
binding commitments and historical gross and net charge-offs.
Based upon the amount and type of classifications, the ACC establishes the
appropriate and requisite general and specific valuation allowances and makes
any necessary adjustments to the allowances. The methodology for determining the
amount of general valuation allowances will take the amount of assets classified
special mention, substandard, doubtful and loss into consideration. Certain
percentages derived to properly reflect the risk associated with the Bank's loan
mix will be applied to the balance of all loans including those classified
special mention, substandard, doubtful, and loss. These percentages range from
.25 percent to 100 percent and are derived primarily through industry standards
and the Bank's historical data. These percentages are reviewed as conditions
require. The Bank has a conservative philosophy and automatically considers any
loan that is delinquent 90 days or more and real estate acquired in the
settlement of loans as substandard assets.
The Bank will combine its estimates of the reserves needed for each
component of the portfolio. The ALLL will be divided into two distinct portions:
(i) an amount for specific allocations on significant individual credits and
(ii) a general reserve amount. Within the general reserve section, the loan
portfolio will be broken into as many segments as practical for the purpose of
making allocation to the ALLL. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition -- Provision for Loan Losses and
Risk Elements."
ASSET LIABILITY MANAGEMENT
INTEREST RATE RISK
The Bank operates under an interest rate risk policy through the Asset and
Liability Committee ("ALCO"). The policy outlines limits on interest rate risk
in terms of changes in net interest income and changes in the net market values
of assets and liabilities over certain changes in interest rate environments.
These measurements are made through a simulation model which projects the impact
of changes in interest rates on the Bank's assets and liabilities. The policy
also outlines responsibility for monitoring interest rate risk, and the process
for the approval, implementation and monitoring of interest rate risk strategies
to achieve the Bank's interest rate risk objectives.
11
<PAGE> 12
The Bank's ALCO is comprised of the Chairman of the Board, the President
and CEO, the Executive Vice President and Corporate Secretary, Executive Vice
President and CFO, and includes other senior officers of the Bank and the
Company. The ALCO makes all tactical and strategic decisions with respect to the
sources and uses of funds that may affect net interest income, including net
interest spread and net interest margin. The ALCO's decisions are based upon
policies established by the Bank's Board of Directors which are designed to meet
three goals -- manage interest rate risk, improve interest rate spread and
maintain adequate liquidity.
The ALCO has developed a program of action which includes, among other
things, the following: (i) selling substantially all conforming, long-term,
fixed rate mortgage originations, (ii) originating and retaining for the
portfolio, shorter term, higher yielding loan products which meet the Company's
underwriting criteria; and (iii) actively managing the Company's "Gap", as
defined below, and interest rate risk exposure.
The difference in interest earning assets versus interest bearing
liabilities repricing or maturing in a given period of time is commonly referred
to as "Gap". The Bank's Gap position is evaluated continuously and discussed by
the ALCO in bi-weekly meetings. A positive Gap indicates an excess of rate
sensitive assets over rate sensitive liabilities, while a negative Gap indicates
an excess of rate sensitive liabilities over rate sensitive assets. The Bank had
a positive one year Gap of 11.31 percent as of March 31, 1999. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Interest Rate and Market Risk."
The Bank also operates under a secondary marketing policy. The secondary
marketing policy applies to the use of forward commitments to sell
mortgage-backed securities by PrimeEagle to hedge market exposure in the
pipeline of loans originated for sale. The ALCO is responsible for the
implementation of the policy. The policy outlines acceptable hedging
instruments, sets limits on the maximum exposure to risk and outlines authority
and responsibility for the implementation of the policy.
INVESTMENT ACTIVITIES
Income from investments in securities provides the Bank's second largest
source of interest income after interest on loans. Federally chartered thrift
institutions are required to maintain a minimum amount of liquid assets that may
be invested in specified short-term securities. These assets include, among
others, United States Treasury and Federal Agency obligations, certain
certificates of deposit, bankers' acceptances and Federal Funds. Subject to
various restrictions, investments may also be made in mortgage-backed
securities, commercial paper and corporate debt, and equity securities.
Investment decisions are made by authorized officers under the supervision
of the Bank's Board of Directors pursuant to the Bank's investment policy.
Brokers approved by the Board of Directors are used to effect securities
transactions. The Company holds no investment securities issued by a single
issuer, other than mortgage-backed securities issued by an agency of the United
States government, which equaled or exceeded 10 percent of stockholders' equity
at March 31, 1999.
Under the investment policy, the ALCO, with the approval of the Board of
Directors of the Bank, designates all investments at the time of purchase as
either securities available for sale or investment securities held to maturity.
The Company does not currently maintain a trading portfolio. At March 31, 1999,
substantially all fixed rate mortgage-backed securities have been classified as
securities available for sale based on management's determination that such
securities may be liquidated prior to maturity. PrimeEagle classifies all
permanent fixed rate loans originated as loans held for sale unless originated
pursuant to a portfolio commitment to the Bank. As of March 31, 1999,
$425,988,000 or 34.6 percent of the Company's assets were classified as
available for sale or held for sale.
At March 31, 1999, the Bank's investment portfolio consisted of United
States Agency obligations, investment grade corporate debt securities, equity
securities, trust preferred securities, and collateralized mortgage obligations.
Additionally, the Bank holds investments in mortgage-backed securities. See Note
4 and Note 10 of the Notes to Consolidated Financial Statements.
12
<PAGE> 13
INVESTMENT IN REAL ESTATE
The Company has invested in eight real estate development projects with
real estate property totaling $30,274,000 and representing 2.46 percent of total
assets. Set forth below is information regarding each of the projects. The most
significant portion of the Company's investment in real estate is in land to be
developed or in process of development for residential subdivisions. All eight
real estate investments are located in metropolitan Atlanta. The Company
consolidates each project on a line-by-line basis, except Hampton Oaks L.P.,
which is accounted for using the equity method. There would be no material
difference in the financial position or results of operations of the Company if
this investment was accounted for as a consolidated investment.
- Union Hill, LLC. In October 1994, the Company formed Union Hill, LLC,
which purchased 237 acres of land located in Forsyth County, Georgia for the
purpose of developing a 323-lot single family residential community. The Company
has an 80 percent ownership interest and shares 50 percent in the profits of
Union Hill after the allocation of the preferred return.
- Hampton Oaks L.P. The Company, in keeping with its goal of providing
affordable housing, invested in Hampton Oaks L.P. to construct a 50-unit
affordable housing project. The development was completed in October 1995, and
was 96 percent and 92 percent occupied during fiscal year 1999 and 1998,
respectively. The Company has a 99 percent limited partnership interest and is
recognizing investment tax credits of approximately $173,000 per year over 15
years through 2010.
- BN Development Co., LLC. In December 1995, the Company and an
unaffiliated third party formed BN Development Co., LLC for the purpose of
acquiring a commercial lot near Cumberland Mall in Cobb County, Georgia, and
developing and leasing a 30,000 square foot Barnes & Noble, Inc. superstore.
During fiscal year 1997, development was completed and the building was leased
to Barnes & Noble, Inc. In 1997, the Company had a 50 percent ownership interest
and shared 50 percent in the profits of BN Development. During fiscal 1998, the
Company purchased the remaining 50 percent interest in BN Development,
increasing the Company's ownership interest to 100 percent.
- Trimble Road Development, LLC. In February 1996, the Company formed
Trimble Road Development, LLC, for the purpose of purchasing 13.63 acres of land
and developing a 28 lot single-family residential community in Fulton County,
Georgia. The Company has a 100 percent ownership interest in Trimble Road
Development, LLC.
- Rivermoore Park, LLC. In November 1996, the Company purchased 353 acres
of land in Gwinnett County, Georgia, for the purpose of developing a
single-family residential community, Rivermoore Park ("Rivermoore"). The Company
has a 100 percent ownership interest in Rivermoore.
- Lebanon Road, LLC. In July 1997, the Company and an unaffiliated third
party formed Lebanon Road, LLC to purchase 63 acres of land in Gwinnett County,
Georgia, for the purpose of developing a 130 lot single-family residential
community, Sugarloaf Springs ("Sugarloaf"). The Company has a 60 percent
ownership interest and shares 60 percent in the profits of Sugarloaf after the
allocation of the preferred return.
- Windsor Parkway Development, LLC. In September 1998, the Company
purchased 14.6 acres of land in DeKalb County, Georgia, for the purpose of
developing a single-family residential community, Windsor Park ("Windsor"). The
Company has a 100 percent ownership interest in Windsor.
- Johnson Road Development, LLC. In November 1998, the Company purchased
21.3 acres of land in Gwinnett County, Georgia, for the purpose of developing a
single-family residential community, Pendleton Park ("Pendleton"). The Company
has a 100 percent ownership interest in Pendleton.
13
<PAGE> 14
SOURCES OF FUNDS
GENERAL
Deposits are the Bank's largest source of funds for lending and other
investment purposes. In addition to deposits, the Bank obtains funds from
repurchase agreements, loan principal repayments, proceeds from sales of loans
and loan participations, and advances from the FHLB. Loan repayments are a
relatively stable source of funds while deposit inflows and outflows and sales
of loans and investment securities are significantly influenced by prevailing
interest rates and economic conditions. Borrowings may be used to compensate for
reductions in normal sources of funds or to support expanded lending activities.
DEPOSITS
The Bank offers a variety of savings and other deposit programs and related
services. Deposits are obtained primarily from the communities in which its
banking offices are located. The Bank uses traditional marketing methods to
attract new customers. The Bank does not advertise for deposits outside of its
local market area. For further details as to the composition of the Bank's
savings portfolio, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Deposits" and Note 9 of Notes to
Consolidated Financial Statements.
The Bank competes for deposits principally by attempting to identify the
specific needs of its target market and by offering a high level of customer
service. Analysis of product needs is generated through dialogue with customers
and staff. The Bank offers a wide variety of savings programs including checking
accounts, savings, money markets, certificates of deposit ranging from three
months to five years in maturity, tax deferred retirement programs, tax deferred
certificates of deposit, and small savers plans.
Employee commitment to service is another important factor in attracting
deposits. The goal of the Bank is to render superior personal service through
convenient branch and main office locations and hours of operation. All of the
Bank's branches are open on Saturdays for customer convenience. The Bank does
not rely on any individual, group or entity for a material portion of its
deposits.
BORROWINGS
Savings deposits are the primary source of funds for the Bank's lending and
investment activities and for its general business purposes. However, the Bank
periodically obtains additional funds by borrowing from the FHLB. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Borrowings" and Note 10 of Notes to Consolidated Financial
Statements.
COMPETITION
The Bank faces strong competition in attracting deposits and making loans
throughout its market areas. The most significant factors in competing for
deposits are interest rates, the quality and range of financial services
offered, and convenience of office locations and office hours. The Bank competes
directly for deposits with commercial banks, money market funds and retail
securities brokerage houses with offices in the Bank's market areas. The Bank
also faces competition for deposits from (i) regional depository institutions
that advertise locally or through national media, (ii) short-term money funds,
(iii) corporate and government borrowers (including, among others, insurance
companies) and (iv) credit unions.
The Bank's competition for loans comes from mortgage companies, other
thrift institutions and commercial banks, credit unions, consumer finance
companies, insurance companies and investment banking firms. The primary factors
in competing for loans are interest rates, discount points, loan fees and the
quality and range of lending services offered. Competition for origination of
mortgage loans comes primarily from other thrift institutions and loan
production firms, commercial banks and insurance companies. The Bank competes
for loan originations through the quality of services it provides borrowers,
real estate brokers and builders, as well as the
14
<PAGE> 15
interest rate and terms of its loans. The competition for loans varies from time
to time depending on the general availability of lendable funds and credit,
general and local economic conditions, interest rate levels, conditions in the
local real estate market and other factors that are not readily predictable. The
Bank attempts to charge interest rates and loan fees commensurate with the level
of risk it accepts. The Bank believes that providing superior service can allow
improved loan pricing.
Competition may be further increased as a result of the enactment of the
Riegle-Neal Interstate Banking and Branch Efficiency Act of 1994 (the
"Interstate Banking Act") on September 29, 1994. Beginning in September 1995,
bank holding companies, upon meeting certain criteria, were authorized to
acquire existing banks on a nationwide basis without regard to state statutes to
the contrary. Effective June 1, 1997, the Interstate Banking Act permitted
mergers of banks on an interstate basis, unless states in which such banks are
located passed legislation specifically prohibiting out-of-state banks from
operating interstate branches within their boundaries. In addition, the
Interstate Banking Act provides for de novo interstate branching within the host
state. See "Supervision and Regulation -- Recent Legislation."
EMPLOYEES
At March 31, 1999, the Company had 614 full-time employees and 60 part-time
employees. No employees are covered by a collective bargaining agreement.
Management considers its relations with its employees to be good.
SUPERVISION AND REGULATION
GENERAL
The Company is a unitary savings and loan holding company, subject to the
regulation, examination, supervision and reporting requirements of the Office of
Thrift Supervision (the "OTS") and the Georgia Department of Banking and Finance
("DBF"). The Bank is a federally chartered stock savings and loan association
under the Home Owners' Loan Act, as amended (the "HOLA") and is a member of the
FHLB system, subject to examination and supervision by the OTS and the FDIC, and
subject to regulations of the Federal Reserve Board governing reserve
requirements. To the extent that the following information describes statutory
and regulatory provisions, it is qualified in its entirety by reference to
particular statutory and regulatory provisions. Any change in applicable laws or
regulations may have a material effect on the business and prospects of the
Company.
FEDERAL SAVINGS AND LOAN HOLDING COMPANY REGULATIONS
As the owner of all of the stock of the Bank, the Company is a savings and
loan holding company subject to regulation by the OTS under the HOLA. As a
unitary savings and loan holding company owning only one savings institution,
the Company generally is allowed to engage and invest in a broad range of
business activities not permitted to commercial bank holding companies or
multiple savings and loans holding companies, provided that the Bank continues
to qualify as a "qualified thrift lender." See "-- Regulation of the Bank --
Qualified Thrift Lender Test" herein. In the event of any acquisition by the
Company of another savings association subsidiary, except for a supervisory
acquisition, the Company would become a multiple savings and loan holding
company and would be subject to limitations on the types of business activities
in which it could engage.
The Company is prohibited from directly or indirectly acquiring control of
any savings institution or savings and loan holding company without prior
approval from the OTS or from acquiring more than 5 percent of the voting stock
of any savings institution or savings and loan holding company which is not a
subsidiary. Control of a savings institution or a savings and loan holding
company is conclusively presumed to exist if, among other things, a person
acquires more than 25 percent of any class of voting stock of the institution or
holding company or controls in any manner the election of a majority of the
directors of the insured institution or the holding company. Control is
rebuttably presumed to exist if, among other things, a person acquires 10
percent or more of any class of voting stock (or 25 percent of any class of
stock) and is subject to any of certain specified "control factors."
15
<PAGE> 16
RECENT LEGISLATIVE AND REGULATORY DEVELOPMENTS
On September 30, 1996, the President signed into law the Omnibus
Consolidated Appropriations Act which included, among other provisions, the
Deposit Insurance Funds Act of 1996 (the "DIFA"). The principal purpose of the
DIFA was to recapitalize the Savings Associate Insurance Fund (the "SAIF") so
that over time its deposit insurance assessments could be reduced to parity with
those of the Bank Insurance Fund (the "BIF"), and to provide for the eventual
merger of the SAIF and the BIF and the adoption of a single standard federal
charter. Specifically, the DIFA requires, in pertinent part, (i) a one-time
special assessment on all financial institutions holding SAIF deposits on March
31, 1995, calculated at 65.7 basis points, to recapitalize the SAIF; (ii) full
prorata sharing by BIF and SAIF members of the debt service obligations of the
Financing Corp. ("FICO") beginning no later than January 1, 2000, and
non-prorata sharing (with adjustable, semi-annual premiums of approximately 6.2
basis points for SAIF members and 1.2 basis points for BIF members) until that
date; and (iii) a merger of the BIF and the SAIF into a new Deposit Insurance
Fund (the "DIF").
The effects of the DIFA on the Bank are significant. The special
assessment, which was paid to the FDIC on November 27, 1996, was $1,946,000
based upon the Bank's SAIF-assessable deposits as of March 31, 1995.
The legislation mandates a Treasury Department study to develop a common
depository institution charter. It also contains environmental liability
provisions indicating that lenders who do not participate in the management of
environmentally contaminated property or who do not cause the contamination are
not liable for environmental clean-up costs. In addition, the legislation
contains over 40 regulatory burden relief provisions in various areas, including
truth in lending and other regulatory reform measures designed to reduce the
burden and costs imposed on financial institutions to comply with consumer
protection provisions.
The Small Business Job Protection Act of 1996 contained provisions
requiring the thrift industry to recapture tax deductions taken pursuant to the
reserve method for accounting for bad debts of savings institutions. Based upon
the provisions, bad debt reserves taken prior to January 1, 1988 would not be
recaptured, and bad debt reserves taken after January 1, 1988 would be
recaptured over a six-year period beginning with the 1996 tax year.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking Act") allows bank holding companies to acquire existing
banks across state lines, regardless of state statutes. Further, under the
Interstate Banking Act, effective June 1, 1997, a bank holding company may
consolidate interstate bank subsidiaries into branches, and a bank may merge
with an unaffiliated bank across state lines to the extent that the applicable
states have not "opted out" of interstate branching prior to such effective
date. States may elect to permit interstate mergers prior to June 1, 1997. The
Interstate Banking Act also permits de novo branching to the extent that a
particular state "opts into" the de novo branching provisions. The Interstate
Banking Act generally prohibits an interstate acquisition (other than an initial
entry into a state by a bank holding company), which would result in either the
control of more than (i) 10 percent of the total amount of insured deposits in
the United States, or (ii) 30 percent of the total insured deposits in the home
state of the target bank unless such 30 percent limitation is waived by the home
state on a basis which does not discriminate against out of state institutions.
REGULATION OF THE BANK
FEDERAL HOME LOAN BANK SYSTEM
General. The Bank is a member of the FHLB, which consists of 12 regional
FHLBs subject to supervision and regulation by the Federal Housing Finance Board
("FHFB"). The FHLBs maintain central credit facilities primarily for member
institutions.
The Bank, as a member of the FHLB of Atlanta, is required to acquire and
hold shares of capital stock in the FHLB of Atlanta in an amount at least equal
to the greater of: (i) 1 percent of the aggregate outstanding principal amount
of its unpaid residential mortgage loans, home purchase contracts and similar
obligations as of the beginning of each year, (ii) 5 percent of its advances
(borrowings) from the FHLB of Atlanta, or (iii) $500. Additionally, during 1996
the FHLB of Atlanta imposed a maximum investment in its capital stock equal to
16
<PAGE> 17
$500,000 over the required minimum. The Bank is in compliance with this
requirement with an investment in stock of the FHLB of Atlanta at March 31, 1999
of $8,736,000.
Advances from Federal Home Loan Bank. Each FHLB serves as a reserve or
central bank for its member institutions within its assigned regions. It is
funded primarily from proceeds derived from the sale of obligations of the FHLB
System. A FHLB makes advances (i.e., loans) to members in accordance with
policies and procedures established by its Board of Directors. The Bank is
authorized to borrow funds from the FHLB of Atlanta to meet demands for
withdrawals of savings deposits, to meet seasonal requirements and for the
expansion of its loan portfolio. Advances may be made on a secured or unsecured
basis depending upon a number of factors, including the purpose for which the
funds are being borrowed and existing advances. Interest rates charged for
advances vary depending upon maturity, the cost of funds to the regional FHLB
and the purpose of the borrowing.
Liquidity Requirements. Federal regulations require a member savings
institution to maintain an average daily balance of liquid assets (which
includes cash, certain time deposits, certain bankers' acceptances, certain
corporate debt securities and highly-rated commercial paper, securities of
certain mutual funds, balances maintained in a Federal Reserve Bank and
specified United States Government, state or federal agency obligations) equal
to a certain percentage of the sum of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less. The
liquidity requirement may vary from time to time (between 4 percent and 10
percent) depending upon economic conditions and savings plans of all member
savings institutions. At March 31, 1999, the Bank was in compliance with the
liquidity ratio regulatory requirements.
INSURANCE OF ACCOUNTS
General. Deposits at the Bank are insured to a maximum of $100,000 for each
insured depositor by the FDIC through the SAIF. As an insurer, the FDIC issues
regulations, conducts examinations and generally supervises the operations of
its insured institutions (institutions insured by the FDIC hereinafter are
referred to as "insured institutions"). Any insured institution which does not
operate in accordance with or conform to FDIC regulations, policies and
directives may be sanctioned for non-compliance. The FDIC has the authority to
suspend or terminate insurance of deposits upon the finding that the institution
has engaged in unsafe or unsound practices, is operating in an unsafe or unsound
condition, or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC. If insurance of accounts is terminated by the
FDIC, the deposits in the institution will continue to be insured by the FDIC
for a period of two years following the date of termination.The FDIC requires an
annual audit by independent accountants and also periodically makes its own
examinations of insured institutions.
Insured institutions are members of either the SAIF or the BIF. Pursuant to
the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), an insured institution may not convert from one insurance fund to
the other without the advance approval of the FDIC. FIRREA also provides,
generally, that the moratorium on insurance fund conversions shall not be
construed to prohibit a SAIF member from converting to a bank charter during the
moratorium, as long as the resulting bank remains a SAIF member during that
period. When a conversion is permitted, each insured institution participating
in the conversion must pay an "exit fee" to the insurance fund it is leaving and
an "entrance fee" to the insurance fund it is entering.
Insurance Premiums and Regulatory Assessments. As an insurer, the FDIC
issues regulations, conducts examinations and generally supervises the
operations of its insured members. FDICIA directed the FDIC to establish a
risk-based premium system under which each premium assessed against the Bank
would generally depend upon the amount of the Bank's deposits and the risk that
it poses to the SAIF. The FDIC was further directed to set semiannual
assessments for insured depository institutions to maintain the reserve ratio of
the SAIF at 1.25 percent of estimated insured deposits. The FDIC may designate a
higher reserve ratio if it determines there is a significant risk of substantial
future loss to the particular fund. Under the FDIC's risk-related insurance
regulations, an institution is classified according to capital and supervisory
factors. Institutions are assigned to one of three capital groups: "well
capitalized," "adequately capitalized" or "undercapitalized." Within each
capital group, institutions are assigned to one of three supervisory subgroups.
There are nine combinations of groups and subgroups (or assessment risk
classifications) to which varying assessment rates are applicable. During fiscal
1999, the Bank paid $575,000 to the FDIC for such assessments. See "Recent
Legislation."
17
<PAGE> 18
In addition to deposit insurance premiums, savings institutions also must
bear a portion of the administrative costs of the OTS through an assessment
based on the level of total assets of each insured institution and which
differentiates between troubled and nontroubled savings institutions. During
fiscal 1999, the Bank paid $195,000 to the OTS for such assessments.
Additionally, the OTS assesses fees for the processing of various applications.
QUALIFIED THRIFT LENDER TEST
Historically, the amount of advances which may be obtained by a member
institution from the FHLB has been subject to the institution's compliance with
a qualified thrift lender ("QTL") test. In order to comply with the QTL test,
the Bank must maintain 65 percent of its total "Portfolio Assets" in "Qualified
Thrift Investments." This level must be maintained on a monthly average basis in
nine out of every twelve months. A savings institution that does not meet the
Qualified Thrift Lender test must either convert to a bank charter or comply
with the restrictions imposed for noncompliance. For purposes of the QTL test,
"Portfolio Assets" equal total assets minus (i) goodwill and other intangible
assets, (ii) the value of property used by an institution in the conduct of its
business and (iii) assets of the type used to meet liquidity requirements in an
amount not exceeding 20 percent of the savings institution's total assets.
"Qualified Thrift Investments" generally include (i) loans made to purchase,
refinance, construct, improve or repair domestic residential or manufactured
housing, (ii) home equity loans, (iii) securities backed by or representing an
interest in mortgages on domestic residential or manufactured housing, (iv)
obligations issued by the federal deposit insurance agencies, and (v) shares of
FHLB stock owned by the savings institution. Qualified Thrift Investments also
include certain other specified investments, subject to a percentage of
Portfolio Assets limitation.
A savings institution that does not meet the QTL test must either convert
to a bank charter or comply with the restrictions imposed for noncompliance. If
the institution converts to a bank charter, it will continue to pay SAIF
insurance assessments and any applicable exit and entrance fees before
converting to BIF insurance. If the institution does not convert to a bank
charter, it must comply with the following additional restrictions on the
operations of the institution: (i) the institution may not engage in any new
activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for both a national bank and a savings
institution; (ii) the branching powers of the institution shall be restricted to
those of a national bank; (iii) the institution generally will not be eligible
to obtain any advances from its FHLB; and (iv) payment of dividends by the
institution shall be subject to the rules regarding payment of dividends by a
national bank. A savings institution that has not converted to a bank charter
within three years after failing to qualify as a QTL may not retain any
investment or engage in any activity not permitted for both a national bank and
a savings institution and must also repay all FHLB System advances. The Bank's
Qualified Thrift Investments as of March 31, 1999 were $990,133,000 or 89.02
percent of its Portfolio Assets at that date. The Bank expects to remain in
compliance with the QTL test.
CAPITAL REQUIREMENTS
General. Since 1989, OTS capital regulations have established capital
standards applicable to all savings institutions, including a core capital
requirement (or leverage ratio), a tangible capital requirement and a risk-based
capital requirement. The OTS also has established pursuant to FDICIA five
classifications for institutions based upon the capital requirements: well
capitalized, adequately capitalized, under capitalized, significantly under
capitalized and critically under capitalized. At March 31, 1999, the Bank was "
well capitalized." Failure to maintain an adequately capitalize status would
result in greater regulatory oversight or restrictions on the Bank's activities.
Core Capital and Tangible Capital. The OTS requires a savings institution
to maintain "core capital" in an amount not less than 3 percent of the savings
institution's adjusted total assets. "Core capital" includes, generally, common
stockholders' equity, noncumulative perpetual preferred stock and related
surplus, nonwithdrawable accounts and pledged deposits of mutual savings
associations, and minority interests in fully-consolidated subsidiaries, less
(i) investments in certain "non-includable" subsidiaries (as determined by
regulation) and (ii) certain intangible assets (except for purchased mortgage
servicing rights and purchased credit card relationships).
18
<PAGE> 19
The "tangible capital" requirement requires a savings institution to
maintain tangible capital in an amount not less than 1.5 percent of its adjusted
total assets. "Tangible capital" means core capital less any intangible assets
(except for purchased mortgage servicing rights included in core capital).
Most national banks are required to maintain a level of core capital of at
least 100 to 200 basis points above the 3 percent minimum level. Because OTS
capital standards for savings institutions may not be less stringent than
capital standards established for national banks, savings institutions are
required to maintain core capital levels at least as high as national banks. At
March 31, 1999, the Bank's core capital and tangible capital were both
$69,810,000 or 5.77 percent of adjusted total assets.
Risk Based Capital. The OTS capital regulations require savings
institutions to maintain a ratio of total capital to total risk-weighted assets
of 8.0 percent. Total capital, for purposes of the risk-based capital
requirement, equals the sum of core capital plus supplementary capital, which
includes cumulative preferred stock, mandatory convertible securities,
subordinated debt, and allowance for loan and lease losses of up to 1.25 percent
of total risk-weighted assets. In determining total risk-weighted assets for
purposes of the risk-based capital requirements, (i) each off-balance sheet item
must be converted to an on-balance sheet credit equivalent amount by multiplying
the amount of each such item by a credit conversion factor ranging from 0
percent to 100 percent (depending upon the nature of the item), (ii) the credit
equivalent amount of each off-balance sheet item and each on-balance sheet asset
must be multiplied by a risk factor ranging from 0 percent to 100 percent
(depending on the nature of the item), and (iii) the resulting amounts are added
together and constitute total risk-weighted assets. As of March 31, 1999, the
Bank's ratio of total risk-based capital to total risk-weighted assets was 10.99
percent.
The following table reflects the Bank's minimum regulatory capital
requirements, actual capital and the level of excess capital by category.
REGULATORY CAPITAL
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
At March 31, 1999 Actual Requirement Excess
($ in 000's) Amount % Amount % Amount %
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Risk-based ratios:
Tier 1 capital $69,810 9.97% $28,012 4.00% $41,798 5.97%
Total capital 76,996 10.99% 56,024 8.00% 20,972 2.99%
Tier 1 leverage 69,810 5.77% 48,421 4.00% 21,389 1.77%
Tangible equity 69,810 5.25% 19,951 1.50% 49,859 3.75%
-------------------------------------------------------------------------------------------------------------
At March 31, 1998 Actual Requirement Excess
($ in 000's) Amount % Amount % Amount %
-------------------------------------------------------------------------------------------------------------
Risk-based ratios:
Tier 1 capital $51,173 7.47% $27,392 4.00% $23,781 3.47%
Total capital 56,885 8.31% 54,785 8.00% 2,100 0.31%
Tier 1 leverage 51,173 4.59% 33,446 3.00% 17,727 1.59%
Tangible equity 51,173 5.91% 12,988 1.50% 38,185 4.41%
-------------------------------------------------------------------------------------------------------------
</TABLE>
In addition, the OTS requires institutions with an "above-normal" degree of
interest rate risk to maintain an additional amount of capital. The test of
"above-normal" is determined by postulating a 200 basis point shift (increase or
decrease) in interest rates and determining the effect on the market value of an
institution's portfolio equity. If the decline is less than 2 percent, no
addition to risk-based capital is required (i.e., an institution has only a
normal degree of interest rate risk). If the decline is greater than 2 percent,
the institution must add additional capital equity to one-half the difference
between its measured interest rate risk and 2 percent multiplied by the market
value of its assets. Management believes that the Bank's interest rate risk is
within the normal range. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition - Interest Rate and Market Risk."
CAPITAL DISTRIBUTIONS
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire shares, payments to shareholders or another institution in a
cash-out merger, and other distributions charged against capital. An association
is categorized as either a
19
<PAGE> 20
"well", "adequate", or "under" capitalized association. A "well capitalized"
association is defined as an association that has, on a pro forma basis after
the proposed distribution, capital equal to or greater than 10.00 percent. An
"adequately capitalized" association is an association that has, on a pro forma
basis after the proposed distribution, capital equal to or in excess of its
minimum capital requirement of 8.00 percent. An "under capitalized" association
is defined as an association that has current capital less than its minimum
capital requirement.
The Bank currently is in compliance with the regulatory capital
requirements and is considered a well capitalized association. The Bank is
permitted to make capital distributions during a calendar year without receiving
prior OTS approval up to the higher of (i) 100 percent of its net income to date
plus the amount that would reduce by one-half its" surplus capital ratio" (the
excess capital over its fully phased-in capital requirements) at the beginning
of the calendar year, or (ii) 75 percent of its net income over the most recent
four-quarter period. Any distributions in excess of that amount require prior
regulatory approval. In addition, a savings association must provide the OTS
with a 30-day advance written notice of all proposed capital distributions,
whether or not advance approval is required by OTS regulations. The Bank's
ability to pay dividends to the Company is subject to the financial performance
of the Bank which is dependent upon, among other things, the local economy, the
success of the Bank's lending activities, compliance by the Bank with applicable
regulations, investment performance and the ability to generate fee income.
FEDERAL RESERVE SYSTEM REQUIREMENTS
The Federal Reserve Board regulations require depository institutions to
maintain non-interest bearing reserves against their deposit transaction
accounts (primarily NOW and regular checking accounts), non-personal time
deposits (transferable or held by a person other than a natural person) with an
original maturity of less than one and one-half years and certain money market
deposit accounts. Federal Reserve regulations currently require financial
institutions to maintain average daily reserves equal to 3 percent on all
amounts from $4.7 million to $47.8 million of net transactions, plus 10 percent
on the remainder. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve may be used to satisfy liquidity requirements
imposed by the OTS. Because required reserves must be maintained in the form of
either vault cash, a non-interest bearing account at a Federal Reserve Bank or a
pass-through account as defined by the Federal Reserve Board, the effect of this
reserve requirement is to reduce the Bank's interest-earning assets.
Members of the FHLB System also are authorized to borrow from the Federal
Reserve "discount window" subject to restrictions imposed by Federal Reserve
regulations. However, Federal Reserve policy generally requires that a savings
institution exhaust its FHLB resources before borrowing from a Federal Reserve
Bank.
TRANSACTIONS WITH AFFILIATES
The Bank is also subject to certain transactions with affiliates rules
applicable to banks and savings institutions which are set forth in Sections
23A, 23B and 22(h) of the Federal Reserve Act, as well as additional limitations
imposed by OTS regulations. Such regulations generally impose quantitative and
qualitative limitations on loans and other transactions between an institution
and its affiliates, including loans to insiders.
CONSUMER PROTECTION AND OTHER LAWS AND REGULATIONS
The Bank and PrimeEagle also are subject to a variety of federal laws and
regulations designed to protect borrowers and to promote lending to various
sectors of the economy. Included among these laws and regulations are the Equal
Credit Opportunity Act and Regulation B, the Federal Home Mortgage Disclosure
Act, the Electronic Funds Transfer Act and Regulation E, the Truth in Lending
Act and Regulation Z, the Truth in Savings Act and Regulation DD, the Expedited
Funds Availability Act and Regulation CC, the Bank Secrecy Act and fair housing
laws.
STATE REGULATION
As a federally chartered savings institution, the Bank generally is not
subject to those provisions of Georgia law governing state chartered financial
institutions or to the jurisdiction of the DBF. However, the DBF interprets
20
<PAGE> 21
the Georgia Bank Holding Company Act to require the prior approval of the DBF
for any acquisition of control of any savings institution (whether chartered by
state or federal authority) located in Georgia.
The DBF also interprets the Georgia Bank Holding Company Act to include
savings and loan holding companies as "bank holding companies", thus giving the
DBF the authority to make examinations of the Company and any subsidiaries and
to require periodic and other reports. Existing DBF regulations do not restrict
the business activities or investments of the Company or the Bank.
State usury laws are applicable to federally insured institutions with
regard to loans made within Georgia. Generally speaking, Georgia law does not
establish ceilings on interest rates although certain specialized types of
lending in which the Bank engages, such as making loans of $3,000 or less, are
subject to interest rate limitations.
FEDERAL SECURITIES LAWS
The Company is subject to the periodic reporting obligations, proxy
solicitation rules, insider trading restrictions and other requirements of the
Securities Exchange Act of 1934, as amended.
A WARNING ABOUT FORWARD-LOOKING INFORMATION
This filing contains forward-looking statements. We may also make written
forward-looking statements in our periodic reports to the Securities and
Exchange Commission, in our proxy statements, in our offering circulars and
prospectuses, in press releases and other written materials and in oral
statements made by our officers, directors or employees to third parties.
Statements that are not historical facts, including statements about our beliefs
and expectations, are forward-looking statements. These statements are based on
beliefs and assumptions of management and on information currently available to
such management. Forward-looking statements include statements preceded by,
followed by or that include the words "believes," "expects," "plans,"
"estimates" or similar expressions. Forward-looking statements speak only as of
the date they are made, and we undertake no obligation to update publicly any of
them in light of new information or future events.
Forward-looking statements involve inherent risks and uncertainties. We
caution you that a number of important factors could cause actual results to
differ materially from those contained in any forward-looking statement. Such
factors include, but are not limited to, the following: competitive pressures
among depository and other financial institutions may increase significantly;
changes in the interest rate environment may reduce margins; general economic or
business conditions may lead to a deterioration in credit quality or a reduced
demand for credit; legislative or regulatory changes, including changes in
accounting standards, may adversely affect the business in which the Company is
engaged; changes may occur in the securities markets; and competitors of the
Company may have greater financial resources and develop products that enable
such competitors to compete more successfully than the Company.
Management believes these forward-looking statements are reasonable;
however, undue reliance should not be placed on such forward-looking statements,
which are based on current expectations.
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. The future results and shareholder values
of the Company may differ materially form those expressed in the forward-looking
statements contained in this report. Many of the factors that will determine
these results and values are beyond the Company's ability to control or predict.
ITEM 2. PROPERTIES
The principal executive offices of the Company are located at 4419 Cowan
Road, Tucker, Georgia, in a 33,415 square foot building leased under an
operating lease, which expires in 2003. The main office of the Bank is located
at 2355 Main Street, Tucker, Georgia. The Company's 16 branch offices are
located in the Alpharetta, Doraville, Dunwoody, Jonesboro, Lawrenceville,
Lilburn, Morrow, Northlake, Palmetto, Snellville, Stone Mountain, Towne Lake,
Tucker, Union City and Wesley Chapel areas of metropolitan Atlanta, Georgia.
Three of the Bank's 16 branch locations are leased under an operating lease and
the remaining branch properties, including
21
<PAGE> 22
the main office are owned by the Bank. The Bank's lease on one Stone Mountain
office expires in 2002, the lease on the Jonesboro office expires in 2006, and
the lease on the Lawrenceville office expires in 2011.
Prime Eagle operates 15 loan production offices located in Sumter, South
Carolina; Jacksonville, Ponte Vedra and St. Augustine, Florida; Athens, Augusta,
Cumming, Hinesville, Peachtree City, Savannah and Warner Robins, Georgia;
Chattanooga, Knoxville and Nashville, Tennessee; and Charlotte, North Carolina.
Each of these offices is leased pursuant to an operating lease. The St.
Augustine, Florida, Cumming, and Peachtree City, Georgia, offices are on
month-to-month basis. The Warner Robins, Georgia lease expires in 1999. The
Jacksonville, Florida, lease expires in 2000. The Augusta and Savannah, Georgia,
and Knoxville and Nashville, Tennessee, leases expire in 2001. The Athens,
Georgia and Chattanooga, Tennessee, leases expire in 2002. The Ponte Vedra,
Florida, Hinesville, Georgia, Charlotte, North Carolina, and Sumter, South
Carolina, leases expire in 2003.
EREA leases office space, pursuant to an operating lease, located in
Atlanta, Georgia. EREA subleases space to two independent third parties. In
addition, the Company owns and leases offices, which are used as administrative
and operational facilities. The Bank's loan operations office, located in
Tucker, Georgia, is leased under an operating lease, which expires in 2001. The
Company has two additional offices, which are leased pursuant to operating
leases; both are located in Tucker, Georgia. One lease is on a month-to-month
basis and the second lease is scheduled to expire in 1999. The Bank's operations
center is located in Morrow, Georgia, and owned by the Company. The Company owns
four additional buildings, located in Tucker, Georgia. Three are occupied by
administrative or operational staff and the fourth is leased to an independent
third party. Management believes that it will be able to renew such leases on
satisfactory terms.
The Company also owns land held for future branch sites in Forsyth County,
Gwinnett County and Henry County.
ITEM 3. LEGAL PROCEEDINGS
In November 1992, after acquiring certain assets from the Resolution Trust
Corporation, including various real estate loans, and four mortgage origination
offices, the Bank entered into an Operating Agreement (the "Agreement") with two
individuals and a corporation controlled by them (collectively, the
"Plaintiffs") to assist in the management of the Bank's newly formed Prime
Lending Division ("Prime"). The individual Plaintiffs became employees of the
Bank and their corporation was to be paid a percentage of the net pretax profits
of Prime. In mid-1997, a disagreement arose with respect to the allocation of
expenses to Prime for purposes of calculating the net pretax profits of Prime.
Plaintiffs filed suit on December 5, 1997 alleging, among other things, that the
Bank had improperly calculated net pretax profits under the Agreement since
April 1997. In January 1998, the Bank terminated the employment of the two
individuals "for cause," terminated the Agreement and filed an Answer and
Counterclaim.
The Complaint as amended seeks, among other things (i) a declaration the
Agreement was terminated "without cause" and that, pursuant to a purchase option
in the Agreement, Plaintiffs therefore have the right to purchase the "assets"
of Prime at 75% of fair market value; (ii) a declaration that the term "assets,"
as used in connection with the Plaintiffs' alleged purchase option, includes all
outstanding loans that were originated by Prime at the time of their termination
without having to net against the loans any corresponding liability incurred by
the Bank in connection with these loans; (iii) alleged unpaid profits from
Prime's operations (in an amount estimated by the Plaintiffs to equal
approximately $450,000); (iv) alleged consequential damages in excess of $20
million, which represents the Plaintiffs' assessment of the loss they incurred
by the Bank's "refusal" to sell to Plaintiffs the "assets" as Plaintiffs have
defined them; and (v) unspecified punitive damages and attorneys fees.
The Bank strongly denies Plaintiffs' entitlement to any relief and believes
its Counterclaim has merit. The Bank believes, among other things, that
Plaintiffs were properly terminated for cause, that Plaintiffs have no rights
with respect to the purchase option, that even if the purchase option were
applicable, Plaintiffs would have no right to purchase any loans, but only
certain tangible and intangible assets of the Bank, the value of which is
estimated to be in the $1-2 million range.
22
<PAGE> 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended March 31, 1999.
23
<PAGE> 24
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER
MATTERS
Price Range of Common Stock and Dividend History
The Company's Common Stock is traded on the NASDAQ National Market under
the symbol "EBSI". The following table sets forth for the periods indicated the
high and low last sale prices of the Common Stock as reported on the NASDAQ
National Market and dividends paid per share.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
DIVIDENDS PAID PER
FISCAL YEARS ENDED HIGH LOW SHARE
MARCH 31,
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997
First Quarter 17.000 14.750 .150
Second Quarter 16.250 14.375 .150
Third Quarter 16.000 13.500 .150
Fourth Quarter 17.500 14.500 .150
- ---------------------------------------------------------------------------------------------------------------------------
1998
First Quarter 18.000 15.000 .150
Second Quarter 21.250 16.125 .150
Third Quarter 23.250 17.250 .150
Fourth Quarter 26.000 19.500 .150
- ---------------------------------------------------------------------------------------------------------------------------
1999
First Quarter 27.250 22.750 .160
Second Quarter 26.250 17.000 .160
Third Quarter 19.500 18.000 .160
Fourth Quarter 22.250 17.000 .160
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
On March 31, 1999, the last sale price of the Common Stock, as reported on
the NASDAQ National Market, was $17.25. On June 21, 1999, there were 5,571,514
shares of Common Stock outstanding and approximately 1,326 record holders of
Common Stock.
The Company began the payment of cash dividends on its Common Stock during
fiscal 1992 and paid $.05 per share for the fourth quarter of that year. During
fiscal 1997, the Company paid four quarterly dividends totaling $.60 per share.
During fiscal 1998, the Company paid four quarterly dividends totaling $.60 per
share. During fiscal 1999, the Company paid four quarterly dividends totaling
$.64 per share. At March 31, 1999, the current indicated dividend rate, on an
annualized basis, is $.64 per share. In addition, on May 23, 1996, SCFC paid a
single cash dividend of $.25 per share to its shareholders' of record on June 7,
1996.
The ability of the Company to pay cash dividends to its stockholders is
directly dependent upon the Bank's ability to pay cash dividends to the Company.
The Bank is subject to certain restrictions on the amount of dividends it is
permitted to pay. See "Supervision and Regulation - Capital Distributions". The
amount of cash dividend on Common Stock will be determined by the Company's
Board of Directors in light of conditions existing from time to time, including
the Company's growth prospects, profitability, financial condition, investment
opportunities, liquidity requirements, results of operations, regulatory
restrictions and other factors deemed relevant by the Board of Directors.
24
<PAGE> 25
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
MARCH 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
(dollars in thousands, except per share data)
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED RESULTS OF OPERATIONS:
Interest income $ 90,743 $ 71,900 $ 63,785 $ 52,625 $ 39,618
Interest expense 56,778 40,007 33,629 28,821 18,502
Net interest income 33,965 31,893 30,156 23,804 21,116
Provision for loan losses 2,181 2,601 2,652 1,000 643
Noninterest income 25,478 16,349 12,911 10,853 7,282
Noninterest expenses 42,142 35,391 34,901 24,468 20,164
Income before income taxes 15,120 10,250 5,514 9,189 7,591
Net income 10,222 7,210 3,746 6,219 4,881
------------------------------------------------------------------------
PER COMMON SHARE:
Earnings per common share-basic $ 1.79 $ 1.27 $ 0.68 $ 1.46 $ 1.21
Earnings per common share-diluted 1.74 1.23 0.66 1.40 1.18
Dividends declared 0.64 0.60 0.56 0.42 0.36
Book value per share 13.43 13.03 11.99 12.03 10.25
Average common shares outstanding-basic 5,714 5,691 5,528 4,251 4,032
Average common shares outstanding-diluted 5,866 5,839 5,705 4,430 4,126
------------------------------------------------------------------------
SELECTED BALANCE SHEET DATA:
Total assets $1,230,000 $1,149,483 $823,882 $736,384 $568,678
Securities available for sale 204,618 104,736 96,921 105,988 33,160
Investment securities held to maturity 68,298 58,138 51,907 55,341 76,578
Loans held for sale 221,370 332,592 62,882 92,552 41,220
Loans receivable, net 623,270 535,732 515,749 410,843 364,491
Reserve for loan losses 7,345 6,505 5,198 5,464 4,704
Investment in real estate 30,274 27,595 25,828 12,962 6,620
Deposits 879,665 778,975 557,724 458,458 386,353
FHLB advances and other borrowings 221,552 240,855 153,805 174,337 120,688
Stockholders' equity 74,817 74,702 67,874 66,448 41,637
------------------------------------------------------------------------
PERFORMANCE RATIOS:
Return on average assets 0.82% 0.83% 0.49% 0.99% 1.01%
Return on average equity 13.50% 10.00% 5.55% 13.32% 12.33%
Net interest margin - taxable equivalent 3.03% 4.11% 4.37% 4.20% 4.81%
Equity to assets 6.08% 6.50% 8.24% 9.02% 7.32%
Efficiency ratio 70.89% 73.36% 81.04% 70.60% 71.01%
------------------------------------------------------------------------
ASSET QUALITY:
Total non-accrual loans $ 6,692 $ 7,948 $ 7,866 $ 6,317 $ 994
Potential problem loans 2,550 4,009 2,503 4,329 2,963
Total non-accrual and problem loans 9,242 11,957 10,369 10,646 3,957
Real estate owned, net 2,096 2,947 2,074 1,344 1,139
Total problem assets 11,338 14,904 12,443 11,990 5,096
Total problem assets/Total assets 0.92% 1.30% 1.51% 1.63% 0.90%
Total problem assets/Loans receivable, net (plus
reserves) 1.80% 2.75% 2.39% 2.88% 1.38%
Reserve for loan losses/Total problem assets 64.78% 43.65% 41.77% 45.57% 92.31%
Ratio of net charge-offs to average loans
receivable, net 0.23% 0.25% 0.63% 0.06% 0.23%
------------------------------------------------------------------------
CAPITAL RATIOS (TUCKER FEDERAL BANK):
Leverage capital 5.77% 4.59% 6.72% 10.14% 6.56%
Tier 1 capital 9.97% 7.47% 10.14% 11.76% 8.37%
Total capital 10.99% 8.31% 11.08% 12.65% 9.44%
------------------------------------------------------------------------
MARKET PRICE OF COMMON STOCK:
High $27 1/4 $ 26 $ 17 1/2 $ 19 $13 1/4
Low 17 15 13 1/2 11 3/4 9 3/4
</TABLE>
25
<PAGE> 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION AND
FINANCIAL CONDITION
OVERVIEW
Net income was $10,222,000 or $1.74 per share for the year ended March 31,
1999; a 41.8 percent increase compared to $7,210,000 or $1.23 per share for
the year ended March 31, 1998. The increase in net income was principally
attributable to a $9.1 million or 55.8 percent increase in non-interest income
while net interest income increased $2.1 million or 6.5 percent. At the same
time non-interest expenses increased $6.8 million or 19.1 percent. Return on
average equity reached 13.5 percent and return on average assets was .82
percent.
EARNINGS HIGHLIGHTS
Total assets grew 7.0 percent or $80,517,000 to $1,230,000,000 compared to
$1,149,483,000 in the prior year. The growth in assets is principally
attributable to loan growth. Return on average assets remained relatively stable
at 0.82 percent compared to 0.83 percent in the prior year.
Net interest income increased 6.5 percent from a year earlier to
$33,965,000 as the Company leveraged its balance sheet with increases in its
loan portfolio. Loans receivable, net increased 16.3 percent to $623,270,000
while loans held for sale declined. The net interest margin on earning assets
declined to 3.03 percent primarily due to the general decline in market rates of
interest and the large portfolio of loans held for sale throughout most of the
year, which earn a lower interest rate than most other loans. The Company's
interest bearing assets tend to reprice more quickly than its interest bearing
liabilities causing pressure on the net interest margin in falling rate
environments.
Non-interest income increased 55.8 percent to $25,478,000. The primary
factors were a $6,127,000 increase in mortgage production fees as a result of
growth in mortgage originations and a $1,331,000 increase in revenues from real
estate activities.
Non-interest expense increased 19.1 percent to $42,142,000 reflecting
higher salaries, employee benefits and other costs resulting from the Company's
growth. Additionally, expenses related to the Company's mortgage operations
increased as a result of the considerably higher volume of mortgage loans
originated and sold.
Total problem assets declined 23.9 percent to $11,338,000 or 1.82 percent
of net loans receivable, on March 31, 1999, down $3,566,000 from $14,904,000 one
year earlier. The allowance for loan losses totaled $7,345,000 on March 31,
1999, or 1.18 percent of net loans receivable, compared to $6,505,000 or 1.21
percent of net loans receivable a year earlier. The provision for loan losses
totaled $2,181,000 a decrease from $2,601,000 a year earlier.
Total shareholders' equity was $74,817,000 at March 31, 1999. This
represented 6.1 percent of period-end assets, compared to 6.5 percent on March
31, 1998. Book value per common share rose 3.1 percent to $13.43 at March 31,
1999, from a year earlier.
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED MARCH 31, 1999 AND MARCH 31,
1998
NET INCOME
Eagle Bancshares financial results for fiscal 1999 increased due to an
increase in net interest income resulting from growth in average earning assets
and an increase in non-interest income. The Company's net income increased by
$3,012,000 or 41.8 percent to $10,222,000 in fiscal 1999 from $7,210,000 in
fiscal 1998. Net income per average common share assuming dilution increased to
$1.74 compared to $1.23 in fiscal 1998.
26
<PAGE> 27
NET INTEREST INCOME
Net interest income increased by $2,072,000 or 6.5 percent to $33,965,000
in fiscal 1999 from $31,893,000 in fiscal 1998. This increase resulted primarily
from growth in interest earning assets through loan originations. The Bank's net
interest spread (the difference between the yield earned on interest earning
assets and the cost of interest bearing liabilities) decreased during the year
to 269 basis points from 387 basis points in the prior year. The primary reason
for the decrease was due to the decrease in the yield on interest earning
assets. The yield on interest earning assets decreased to 7.96 percent while the
cost of interest bearing liabilities remained relatively constant at 5.27
percent compared to 5.29 percent in the prior year. The Company's interest
bearing assets tend to reprice more quickly than its interest bearing
liabilities causing pressure on the net interest margin in falling rate
environments.
Interest income received on loans increased $15,504,000 or 25.6 percent to
$76,128,000 in fiscal 1999 from $60,624,000 in fiscal 1998. The increase was
primarily attributable to growth in loans through originations of residential
mortgage loans in the Company's loans held for sale portfolio. While loan
originations increased, the yield on the loan portfolio decreased to 8.21
percent for the year compared to 9.63 percent in the prior year. Interest
received on mortgage-backed securities increased $864,000 or 17.2 percent to
$5,896,000 in fiscal 1999 from $5,032,000 in fiscal 1998. This increase is
primarily due to an increase in the mortgage-backed securities portfolio during
the year. Interest received on securities and other interest earning assets
increased $2,475,000 or 39.6 percent to $8,719,000 in fiscal 1999 from
$6,244,000 in fiscal 1998.
Interest expense increased $16,771,000 or 41.9 percent to $56,778,000 in
fiscal 1999 from $40,007,000 in fiscal 1998. This is primarily the result of
growth in deposits. Interest expense on deposits increased $12,201,000 or 41.0
percent to $41,967,000 in fiscal 1999 from $29,766,000 in fiscal 1998. The cost
of deposits increased 7 basis points to 5.24 percent during the year from 5.17
percent in the prior year. Interest expense on FHLB advances and other
borrowings also increased $2,883,000 or 28.2 percent to $13,124,000 in fiscal
1999 from $10,241,000 in fiscal 1998. During the year, the Bank's cost of FHLB
advances and other borrowings decreased 54 basis points to 5.11 percent from
5.65 percent in the prior year. The Bank utilizes short term FHLB advances to
fund primarily construction loans and loans held for sale. In addition, the
Company issued $28,750,000 of trust preferred securities during the second
quarter of fiscal 1999. Interest expense related to these securities was
$1,687,000 in fiscal 1999, a cost of 8.79 percent.
PROVISION FOR LOAN LOSSES
The Company decreased its provision for loan losses $420,000 or 16.2
percent to $2,181,000 in fiscal 1999 from $2,601,000 in fiscal 1998. This
decrease is attributable to a decline in the Company's ratio of problem assets
to total assets during the year. Total non-performing and potential problem
assets decreased to $11,338,000 at March 31, 1999 compared to $14,904,000 at
March 31, 1998. Total problem assets, which include all non-performing and
classified assets, decreased to 0.92 percent of total assets at March 31, 1999,
from 1.30 percent of total assets at March 31, 1998. Management continually
evaluates the inherent risks in the Company's existing loan portfolio and the
level of existing loan loss reserves.
NON-INTEREST INCOME
Non-interest income increased by $9,129,000 or 55.8 percent to $25,478,000
for fiscal 1999 from $16,349,000 for fiscal 1998. Mortgage production fees are
the largest component of non-interest income and such fees increased $6,127,000
or 70.0 percent to $14,879,000 compared to $8,752,000 in fiscal 1998. The volume
of loans sold in the secondary market increased to $1,485,825,000 during 1999
compared to $729,764,000 in fiscal 1998. The dollar amount of loans sold
fluctuates based on the demand for mortgages in the Company's market, which is
affected by job creations, interest rates and general economic conditions. The
margin received on loan sales fluctuates due to changes in the general interest
rate and the competitive environment. The following table shows mortgage
production fees, the dollar amount of loans sold in the secondary market and the
margin earned on those loans for the periods indicated:
27
<PAGE> 28
<TABLE>
<CAPTION>
(dollars in thousands) 1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
Mortgage production fees $ 14,879 $ 8,752 $ 7,280
Dollar volume sold $1,485,825 $729,764 $583,762
Margin earned 1.00% 1.20% 1.25%
</TABLE>
The Company evaluates the cost of servicing and premiums offered when
deciding whether to retain or sell servicing rights. In fiscal 1999, 1998, and
1997, the Company sold the majority of its loans with servicing released and the
largest component of mortgage production fees was service release premiums.
In addition, income generated from Eagle Real Estate Advisors increased
$1,411,000 or 52.8 percent. This increase was due to increased gains recorded on
the sale of investments in real estate amounting to $3,389,000 and real estate
commissions of $692,000. During fiscal 1999, 221 residential lots were sold in
the Company's real estate projects compared to 184 in the prior period. Service
charges, at the community bank, remained stable at $1,938,000 in fiscal 1999
compared to $1,924,000 in fiscal year 1998.
NON-INTEREST EXPENSE
Non-interest expense increased $6,751,000 or 19.1 percent to $42,142,000 in
fiscal 1999 from $35,391,000 in fiscal 1998. The Company's efficiency ratio was
70.9 percent for fiscal 1999, compared to 73.4 percent for fiscal 1998. In
general, the increase in all categories of non-interest expense is attributable
to the higher operating costs incurred by the Company's rapid growth.
Salaries and employee benefits increased $3,841,000 or 20.1 percent to
$22,998,000 in fiscal 1999 compared to $19,157,000 in fiscal 1998. This increase
is due to the addition of employees in branches and loan production offices to
support the Company's growth. Occupancy expense increased $356,000 or 7.7
percent to $5,003,000 in fiscal 1999 compared to $4,647,000 in fiscal 1998.
Marketing expense increased $1,184,000 or 127.0 percent to $2,116,000 in fiscal
1999 compared to $932,000 in fiscal 1998. The increase in marketing expense is
primarily attributable to a multimedia advertising campaign launched in April
1998. As a result of the increase in deposits, federal insurance premiums
increased $224,000 or 63.8 percent to $575,000 in fiscal 1999 from $351,000 in
fiscal 1998.
Miscellaneous expenses increased $1,221,000 or 16.1 percent to $8,800,000
in fiscal 1999 compared to $7,579,000 in fiscal 1998. This increase is due to
increases in telephone and communications, and professional services, including
attorney fees.
INCOME TAX EXPENSE
The Company's effective tax rate for fiscal 1999 was 32.4 percent compared
to 29.7 percent in the prior year. This increase is primarily a result of the
Company's federal statutory tax rate increasing to 35% in fiscal 1999 from 34%
in fiscal 1998, due to increased earnings.
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED MARCH 31, 1998 AND MARCH 31,
1997
NET INCOME
Eagle Bancshares financial results for fiscal 1998 increased due to an
increase in net interest income resulting from growth in average earning assets
and an increase in non-interest income. The Company's net income increased by
$3,464,000 or 92.5 percent to $7,210,000 in fiscal 1998 from $3,746,000 in
fiscal 1997. Net income per average common share assuming dilution increased to
$1.23 compared to $.66 in fiscal 1997. The Company's financial results for
fiscal 1997 declined due to two significant factors including the one-time SAIF
assessment and restructuring and merger expenses related to the acquisition of
SCFC. Eagle's core earnings increased 4.1 percent to $7,210,000 compared to
$6,926,000 in the previous year. The increase in core earnings is primarily
attributable to growth in net interest and operating income. Core earnings are
earnings exclusive of the one-time SAIF
28
<PAGE> 29
assessment of $1,946,000 ($1,495,000 net of tax) and the one-time merger
expenses of $1,685,000 ($1,685,000 net of tax).
NET INTEREST INCOME
Net interest income increased by $1,737,000 or 5.8 percent to $31,893,000
in fiscal 1998 from $30,156,000 in fiscal 1997. This increase resulted primarily
from growth in interest earning assets through loan originations. The Bank's net
interest spread (the difference between the yield earned on interest earning
assets and the cost of interest bearing liabilities) decreased during the year
to 387 basis points from 417 basis points in the prior year. The primary reason
for the decrease was due to the increase in the cost of interest bearing
liabilities. The yield on interest earning assets remained constant at 9.16
percent while the cost of interest bearing liabilities increased 30 basis points
to 5.29 percent from 4.99 percent.
Interest income received on loans increased $9,121,000 or 17.7 percent to
$60,624,000 in fiscal 1998 from $51,503,000 in fiscal 1997. The increase was
primarily attributable to growth in loans through originations of residential
mortgage loans in the Company's loans held for sale portfolio. The yield on the
loan portfolio remained consistent at 9.63 percent for the year compared to 9.69
percent in the prior year. Interest received on mortgage-backed securities
decreased $478,000 or 8.7 percent to $5,032,000 in fiscal 1998 from $5,510,000
in fiscal 1997. This decrease is primarily due to a decrease in the
mortgage-backed securities portfolio during the year. Interest received on
securities and other interest earning assets decreased $528,000 or 7.8 percent
to $6,244,000 in fiscal 1998 from $6,772,000 in fiscal 1997.
Interest expense increased $6,378,000 or 19.0 percent to $40,007,000 in
fiscal 1998 from $33,629,000 in fiscal 1997. This is primarily the result of
growth in deposits combined with an increase in the cost of advances and other
borrowings. Interest expense on deposits increased $4,589,000 or 18.2 percent to
$29,766,000 in fiscal 1998 from $25,177,000 in fiscal 1997. The increase in
interest expense on deposits is the result of growth in deposit accounts coupled
with an increase in their cost. The cost of deposits increased 33 basis points
to 5.17 percent during the year from 4.84 percent in the prior year. Interest
expense on FHLB advances and other borrowings also increased $1,789,000 or 21.2
percent to $10,241,000 in fiscal 1998 from $8,452,000 in fiscal 1997. During the
year, the Bank's cost of FHLB advances and other borrowings increased 14 basis
points to 5.65 percent from 5.51 percent in the prior year. The Bank utilizes
short term FHLB advances to fund primarily construction loans and loans held for
sale.
PROVISION FOR LOAN LOSSES
The Company decreased its provision for loan losses $51,000 or 1.9 percent
to $2,601,000 in fiscal 1998 from $2,652,000 in fiscal 1997. This decrease is
attributable to a decrease in the Company's charge-offs and a decline in the
ratio of problem assets to total assets during the year. Total non-performing
and potential problem assets increased to $14,904,000 at March 31, 1998 compared
to $12,443,000 at March 31, 1997. Total problem assets, which include all
non-performing and classified assets, decreased to 1.30 percent of total assets
at March 31, 1998, from 1.51 percent of total assets at March 31, 1997.
Management continually evaluates the inherent risks in the Company's existing
loan portfolio and the level of existing loan loss reserves.
NON-INTEREST INCOME
Non-interest income increased by $3,438,000 or 26.6 percent to $16,349,000
for fiscal 1998 from $12,911,000 for fiscal 1997. Mortgage production fees are
the largest component of non-interest income and such fees increased $1,472,000
or 20.2 percent to $8,752,000 compared to $7,280,000 in fiscal 1997. The volume
of loans sold in the secondary market increased to $729,764,000 during 1998
compared to $583,762,000 in fiscal 1997.
In addition, income generated from Eagle Real Estate Advisors increased
$888,000 or 49.8 percent. This increase was due to increased gains recorded on
the sale of investments in real estate amounting to $2,160,000 and real estate
commissions of $510,000. During fiscal 1998, 184 residential lots were sold in
the Company's real estate projects compared to 128 in the prior period. Service
charges, at the community bank, decreased $55,000 or 2.8 percent to $1,924,000
in fiscal 1998 compared to $1,979,000 in fiscal year 1997.
29
<PAGE> 30
NON-INTEREST EXPENSE
Non-interest expense increased $490,000 or 1.4 percent to $35,391,000 in
fiscal 1998 from $34,901,000 in fiscal 1997. The Company's efficiency ratio was
73.4 percent for fiscal 1998, compared to 72.6 percent, excluding the SAIF
assessment and the merger related expenses, for fiscal 1997. In general, the
increase in all categories of non-interest expense is attributable to the higher
operating costs incurred by the Company's rapid growth and the conversion of the
Company's computer system which was completed in February 1998.
Salaries and employee benefits increased $1,537,000 or 8.7 percent to
$19,157,000 in fiscal 1998 compared to $17,620,000 in fiscal 1997. This increase
is due to the addition of employees in branches and loan production offices to
support the Company's growth. Occupancy expense increased $873,000 or 23.1
percent to $4,647,000 in fiscal 1998 compared to $3,774,000 in fiscal 1997.
Marketing expense decreased $189,000 or 16.9 percent to $932,000 in fiscal 1998
compared to $1,121,000 in fiscal 1997. As a result of the recapitalization of
the SAIF, federal insurance premiums decreased from $.23 per $100 of deposits to
$.06 per $100 of deposits. These premiums decreased $351,000 or 50.0 percent to
$351,000 in fiscal 1998 from $702,000 in fiscal 1997, even though the Company's
deposit base increased, due to the decline in the SAIF insurance premium.
Miscellaneous expenses increased $1,083,000 or 16.7 percent to $7,579,000
in fiscal 1998 compared to $6,496,000 in fiscal 1997. This increase is due to
increases in office supplies, telephone and communications, and consulting and
attorney fees.
INCOME TAX EXPENSE
The Company's effective tax rate for fiscal 1998 was 29.7 percent compared
to 32.1 percent in the prior year. The decrease is primarily a result of
non-deductible merger expenses recorded in 1997.
INTEREST RATE AND MARKET RISK
The normal course of business activity exposes the Company to interest rate
risk. Interest rate risk is managed within an overall asset/liability framework
for the Company. The principal objectives of asset/liability management are to
manage the sensitivity of net interest spreads to potential changes in interest
rates and to enhance profitability in ways that promise sufficient reward for
recognized and controlled risk. Funding positions are kept within predetermined
limits designed to ensure that risk-taking is not excessive and that liquidity
is properly managed. The Company employs a sensitivity analysis in the form of a
net interest income simulation to help characterize the market risk arising from
changes in interest rates. Fluctuations in interest rates may result in changes
in the fair market value of the Company's financial instruments, cash flows and
net interest income. The asset/liability management process manages the
Company's interest rate risk position. The objective of this process is the
optimization of the Company's financial position, liquidity and net interest
income, while maintaining a relatively neutral interest rate sensitive position.
The Company uses a simulation modeling process to measure interest rate
risk and evaluate potential strategies. The Company's net interest income
simulation includes all financial assets and liabilities. This simulation
measures both the term risk and basis risk in the Company's asset/liabilities.
The simulation also captures the option characteristics of products, such as
caps and floors on floating rate loans, the right to pre-pay mortgage loans
without penalty and the ability of customers to withdraw deposits on demand.
These options are modeled through the use of primarily historical customer
behavior and statistical analysis. These simulations incorporate assumptions
regarding balance sheet growth and mix, pricing, and the repricing and maturity
characteristics of the existing and projected balance sheet. Other interest
rate-related risks such as prepayment, basis and option risk are also
considered. Simulation results quantify interest rate risk under various
interest rate scenarios. Management then develops and implements appropriate
strategies. The Board of Directors regularly reviews the overall interest rate
risk position and asset/liability management strategies.
The Company uses four standard scenarios - rates unchanged, expected rates,
high rates, and low rates - in analyzing interest rate sensitivity. The expected
scenario is based on the Company's projected future interest rates, while the
high and low rate scenarios cover a 100 basis points upward and downward rate
movement. The
30
<PAGE> 31
Company closely monitors each scenario to manage interest rate risk. As of March
31, 1999, the expected rate simulation indicated an increase in annual net
interest income of $367,000 or 0.94 percent relative to the unchanged rate
simulation and a $36,000 or 0.04 percent decline in market value.
Management estimates the Company's annual net interest income would
increase approximately $3,430,000 or 9.40 percent, and decrease approximately
$3,541,000 or 9.06 percent should interest rates instantaneously rise or fall
100 basis points, versus the projection under unchanged rates. A fair market
value analysis of the Company's balance sheet calculated under an instantaneous
100 basis point increase in rates over March 31, 1999, estimates a $12,969,000
or 19.55 percent decrease in market value. The Company estimates a like decrease
in rates would decrease market value $2,812,000 or 4.24 percent. These changes
in market value represent less than 5.0 percent of the total carrying value of
total assets at year-end. These simulated computations should not be relied upon
as indicative of actual future results. Further, the computations do not
contemplate certain actions that management may undertake in response to future
changes in interest rates.
Looking toward managing interest rate risk in fiscal 2000, the Company will
continue to face term risk and basis risk and may be confronted with several
risk scenarios. If interest rates rise, net interest income may actually
increase, if deposit rates lag increases in market rates. The Company could,
however, experience significant pressure on net interest income if there is a
substantial increase in deposit rates relative to market rates. This basis risk
potentially could be hedged with interest rate caps, but the Company believes
they are not cost-effective in relation to the cost they would mitigate. A
declining interest rate environment might result in a decrease in loan rates,
while deposit rates remain relatively stable. This rate scenario could also
create significant risk to net interest income.
Net interest income on a taxable-equivalent basis expressed as a percentage
of average total assets is referred to as the net interest margin. The net
interest margin represents the average net effective yield on earning assets.
The net interest margin decreased 108 basis points to 3.03 percent during fiscal
1999 from 4.11 percent during fiscal 1998. In addition, the net interest spread
decreased 118 basis points to 2.69 percent during fiscal 1999 from 3.87 percent
during fiscal 1998. The average balance sheet presents the individual components
of net interest income and expense, net interest spread and net interest margin.
The decline in the net interest margin in fiscal 1999 was primarily attributable
to the decrease in the yield on interest earning assets caused by the decline in
market rates during the period. The yield earned on average loans decreased to
8.21 percent for fiscal 1999 compared to 9.63 percent in fiscal 1998. In
addition, the yield earned on mortgage-backed securities declined to 6.67
percent in fiscal 1999 compared to 7.31 percent in fiscal 1998. The cost of
deposits increased slightly to 5.24 percent in fiscal 1999 compared to 5.17
percent in fiscal 1998. The Company also relies on borrowings from the FHLB and
other borrowings to fund asset growth and the cost of FHLB advances and other
borrowings decreased 54 basis points to 5.11 percent in fiscal 1999 from 5.65
percent in fiscal 1998. The Company's interest bearing assets tend to reprice
more quickly than its interest bearing liabilities causing pressure on the net
interest margin in falling rate environments.
The following table reflects the average balances, the interest income or
expense and the average yield and cost of funds of the Company's interest
earning assets and interest bearing liabilities during the fiscal years ended
March 31, 1999, 1998 and 1997.
31
<PAGE> 32
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEET
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended March 31, 1999 1998 1997
Average Yield/ Average Yield/ Average Yield/
(dollars in thousands) Balance Interest Cost Balance Interest Cost Balance Interest Cost
- ------------------------------------------------------------------------------------------------------------------------------------
Assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable(1) $ 572,610 $53,287 9.31% $ 519,393 $ 53,328 10.27% $ 462,073 $45,770 9.91%
Loans held for sale 354,495 22,841 6.44% 110,196 7,296 6.62% 69,546 5,733 8.24%
Mortgage-backed securities 88,363 5,896 6.67% 68,794 5,032 7.31% 74,969 5,510 7.35%
FHLB stock 10,592 794 7.50% 9,053 7.44% 7,866 553 7.03%
674
Taxable investments(2) 50,418 3,218 6.38% 32,997 2,250 6.82% 47,239 3,480 7.37%
Tax-exempt investment
securities(2) 69,999 5,330 7.61% 44,835 3,636 8.11% 39,631 3,227 8.14%
Interest earning deposits and
federal funds sold 3,644 204 5.60% 6,152 312 5.07% 1,322 76 5.75%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 1,150,121 91,570 7.96% 791,420 72,528 9.16% 702,646 64,349 9.16%
Non-interest earning assets 95,136 74,818 64,123
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets 1,245,257 866,238 766,769
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Equity:
Interest-bearing deposits 104,754 3,608 3.44% 65,746 1,721 2.62% 72,858 993 1.36%
Savings 37,884 912 2.41% 42,441 1,053 2.48% 46,157 1,128 2.44%
Money market 69,863 2,772 3.97% 30,717 1,033 3.36% 19,541 496 2.54%
Certificates of deposit 588,246 34,675 5.89% 436,727 25,959 5.94% 382,117 22,560 5.90%
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 800,747 41,967 5.24% 575,631 29,766 5.17% 520,673 25,177 4.84%
Advances and other borrowings 256,771 13,124 5.11% 181,260 10,241 5.65% 153,483 8,452 5.51%
Trust preferred securities 19,186 1,687 8.79% -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing 1,076,704 56,778 5.27% 756,891 40,007 5.29% 674,156 33,629 4.99%
liabilities
Non-interest bearing deposits 47,795 25,696 18,309
Non-interest bearing liabilities 45,049 11,574 6,803
Stockholders' equity 75,709 72,077 67,501
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity 1,245,257 866,238 766,769
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest/rate spread 34,792 2.69% 32,521 3.87% 30,720 4.17%
Taxable-equivalent adjustment (827) (628) (564)
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income, actual $33,965 $ 31,893 $30,156
Net interest earning assets/net
interest margin $ 73,417 3.03% $ 34,529 4.11% $ 28,490 4.37%
- ------------------------------------------------------------------------------------------------------------------------------------
Interest earning assets as a
percentage of interest bearing
liabilities 106.82% 104.56% 104.23%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Non-accrual loans are included in average balances and income on such loans,
if recognized, is recorded on a cash basis.
(2) The yield for investment securities classified as available for sale is
computed using historical amortized cost balances.
32
<PAGE> 33
The rate volume analysis below explains the components of net interest
income for the periods indicated. For each category of interest earning assets
and interest bearing liabilities, information is provided on changes attributed
to (1) changes in rate (difference in rate x prior period volume), (2) changes
in volume (difference in volume x prior period rate), and (3) changes in
rate-volume (difference in rate x difference in volume). The net change
attributable to both volume and rate, which cannot be segregated, has been
allocated proportionately to change due to volume and change due to rate.
<TABLE>
<CAPTION>
RATE/VOLUME ANALYSIS
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1999 Compared to 1998 1998 Compared to 1997
Increase (decrease) due to Rate Volume Total Rate Volume Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income on interest earning assets:
Loans receivable $(5,228) $ 5,187 $ (41) $ 1,709 $5,849 $ 7,558
Loans held for sale (204) 15,749 15,545 (1,293) 2,856 1,563
Mortgage-backed securities (470) 1,334 864 (30) (448) (478)
FHLB stock 5 115 120 34 87 121
Taxable investment securities (154) 1,122 968 (244) (986) (1,230)
Tax-exempt investment securities(1) (237) 1,931 1,694 (12) 421 409
Interest earnings deposits and federal funds
sold 30 (138) (108) (10) 246 236
- -----------------------------------------------------------------------------------------------------------------------------------
Total (6,258) 25,300 19,042 154 8,025 8,179
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense on interest bearing liabilities:
Deposits 408 11,792 12,201 825 3,765 4,590
FHLB advances and other borrowings (1,055) 3,939 2,883 220 1,568 1,788
Trust preferred securities -- 1,687 1,687 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total (647) 17,418 16,771 1,045 5,333 6,378
- -----------------------------------------------------------------------------------------------------------------------------------
Net change in net interest income $(5,611) $ 7,882 $ 2,271 $ (891) $2,692 $ 1,801
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects taxable-equivalent adjustments using the statutory federal and
state income tax rate of 39% in adjusting interest on tax-exempt investment
securities to a taxable equivalent basis.
The Bank's Asset and Liability Committee ("ALCO") has primary
responsibility for managing the Company's exposure to interest rate risk. The
ALCO is comprised of three directors and three officers of the Bank. The ALCO
meets two times a week to establish interest rates on loans and deposits and
review interest rate sensitivity and liquidity positions.
Interest rate sensitivity is a measure of exposure to changes in net
interest income due to changes in market interest rates. The excess of interest
earning assets over interest bearing liabilities repricing or maturing in a
given period of time is commonly referred to as "Gap." A positive Gap indicates
an excess of interest rate sensitive assets over interest rate sensitive
liabilities; a negative Gap indicates an excess of interest rate sensitive
liabilities over interest rate sensitive assets. The Company's Gap position is
evaluated continuously and reviewed by the ALCO in bi-weekly meetings. The
Company has a positive one year Gap of 11.31 percent as of March 31, 1999.
The following table presents the Company's interest sensitivity gap between
interest earning assets and interest bearing liabilities at March 31, 1999. The
gap analysis is prepared using either actual repricing intervals or maturity
dates when stated. Equity securities having no stated maturity are reported
after five years. Demand deposits are decayed over time using a factor of 33
percent. In addition, loans held for sale are included in less than three months
since it is management's intent to sell them within that time.
33
<PAGE> 34
<TABLE>
<CAPTION>
GAP ANALYSIS
- -----------------------------------------------------------------------------------------------------------------------------
March 31, 1999 More than More than More than
Less than 3 months 1 year 3 years to After 5
(dollars in thousands) 3 months to 1 year to 3 years 5 years Years Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets re-pricing:
Loans receivable $264,521 $ 113,076 $ 94,729 $ 52,878 $ 105,411 $ 630,615
Loans held for sale 221,370 -- -- -- -- 221,370
Investment securities(1) 17,519 27,630 39,759 40,602 147,863 273,373
FHLB Stock -- -- -- -- 8,736 8,736
Interest bearing deposits and federal
funds sold 3,497 -- -- -- -- 3,497
- -----------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 506,907 140,706 134,488 93,480 262,010 1,137,591
- -----------------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities re-pricing:
Deposits 182,315 317,824 191,592 106,067 36,130 833,928
Borrowings 816 7,500 50,368 75,368 87,500 221,552
- -----------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 183,131 325,324 241,960 181,435 123,630 1,055,480
- -----------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity Gap 323,776 (184,618) (107,472) (87,955) 138,380 $ 82,111
Cumulative interest rate sensitivity Gap $323,776 $ 139,158 $ 31,686 $ (56,269) $ 82,111
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative interest rate sensitivity
Gap as a percentage of total assets 26.32% 11.31% 2.58% (4.57%) 6.68%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes the effect of SFAS No. 115, "Accounting for Certain Investment Debt
and Equity Securities", consisting of net unrealized losses in the amount of
$457,000.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The following table sets forth certain information at March 31, 1999,
regarding the dollar amount of loans maturing in the Bank's net loan portfolio
based on their contractual terms to maturity. Demand loans having no stated
schedule of repayment and no stated maturity, and overdrafts are reported as due
in one year.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
March 31, 1999 One Year One Year to After
(dollars in thousands) or Less Five Years Five Years Total
<S> <C> <C> <C> <C>
Real estate mortgage loans:
Fixed rates $ 5,981 $ 23,962 $240,805 $270,748
Adjustable rates 8,295 11,614 102,157 122,066
Real estate construction, net - adjustable
rates 118,973 37,627 1,154 157,754
Real estate construction, net - fixed rates 14,353 3,020 1,041 18,414
Commercial loans:
Commercial - fixed rates 1,921 7,164 2,930 12,015
Commercial - adjustable rate 9,356 513 1,012 10,881
Mezzanine - fixed rates 350 1,879 1,475 3,704
Mezzanine - adjustable rates -- 434 -- 434
Leases - fixed rate 2,685 669 -- 3,354
Consumer and others - fixed rates 2,280 17,749 11,234 31,263
- -------------------------------------------------------------------------------------------------------------
Total $164,194 $104,631 $361,808 630,633
Less:
Deferred fees and other unearned income (18)
Reserve for loan losses (7,345)
- -------------------------------------------------------------------------------------------------------------
Total $623,270
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Note: The above information was compiled based upon contractual terms to
maturity. The actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
34
<PAGE> 35
The next table sets forth the dollar amount of all loans due after one year
from March 31, 1999, which have predetermined interest rates and have floating
or adjustable rates.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
March 31, 1999 Predetermined Floating or
(dollars in thousands) Rates Adjustable Rate
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate-mortgage $268,556 $113,771
Real estate-construction, net 4,061 38,781
Commercial 10,094 1,525
Leases 669 --
Consumer and other 28,983 --
- ---------------------------------------------------------------------------------------------
Total $312,363 $154,077
- ---------------------------------------------------------------------------------------------
</TABLE>
Note: The above information was compiled based upon contractual terms to
maturity. The actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
LOAN PORTFOLIO AND CONCENTRATION
Since 1995, the Company's loan portfolio has grown 71.0 percent. Loans
receivable, net, grew $87,538,000 or 16.3 percent to $623,270,000 at March 31,
1999 compared to $535,732,000 at March 31, 1998. The primary reason is due to
the increase in residential first mortgages.
The community banking group originates primarily construction and
acquisition and development loans, non-residential real estate mortgages,
commercial, consumer and home equity and second mortgage loans in the metro
Atlanta area. Additionally, EBCG has invested $4,138,000 as of March 31, 1999,
in four mezzanine financing loans. These loan categories increased $14,310,000
or 4.2 percent to $461,430,000 at March 31, 1999 from $417,718,000 at March 31,
1998. At March 31, 1999, these loans represented 62.6 percent of the loan
portfolio versus 67.4 percent at March 31, 1998. The mortgage-banking group
originates primarily loans held for sale. Loans held for sale decreased
$111,222,000 or 33.4 percent to $221,370,000 at March 31, 1999 from $332,592,000
at March 31, 1998. Both groups contribute to the Company's portfolio of
residential mortgage loans. This loan category increased $79,559,000 or 41.22
percent to $272,553,000 at March 31, 1999 compared to $192,994,000 at March 31,
1998. During fiscal 1999, the Company grew the portfolio of residential mortgage
loans primarily through originations of single-family mortgage loans.
Residential first mortgages are generally believed to be a conservative
investment. The Company's high concentration of residential first mortgages
tends to reduce its level of delinquencies and problem loans.
In 1993, the Company began a leasing operation which purchased leases from
approved lessors. Each credit was underwritten based upon the lessee's cash
flow, business prospects and ability to make rental payments. In December 1995,
the Company began to experience delinquencies in the portfolio. As a result of
delinquencies primarily with two relationships, the Bank discontinued the
leasing activities during fiscal 1997. Leases at March 31, 1999, were $3,354,000
or less than 0.4 percent of total loans compared to $9,463,000 at March 31,
1998.
35
<PAGE> 36
<TABLE>
<CAPTION>
LOAN PORTFOLIO MIX
- -----------------------------------------------------------------------------------------------------------------------------------
At March 31, 1999 1998 1997 1996 1995
(dollars in thousands) Amount % Amount % Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate loans
Construction $210,877 28.60% $197,811 31.90% $205,086 33.98% $185,337 36.91% $140,209 32.25%
Acquisition & development 71,995 9.76% 41,992 6.77% 35,408 5.87% 30,419 6.06% 30,517 7.02%
Real estate mortgage loans
Non-residential 58,562 7.94% 71,515 11.53% 65,748 10.89% 51,020 10.16% 44,868 10.32%
Residential 272,553 36.97% 192,994 31.12% 194,821 32.28% 157,996 31.47% 156,001 35.87%
Home equity and second
mortgages 61,699 8.37% 46,218 7.45% 43,752 7.25% 17,212 3.43% 13,272 3.05%
- -----------------------------------------------------------------------------------------------------------------------------------
Total real estate loans 675,686 91.64% 550,530 88.77% 544,815 90.27% 441,984 88.03% 384,867 88.51%
- -----------------------------------------------------------------------------------------------------------------------------------
Other loans:
Commercial 22,896 3.11% 15,681 2.53% 15,160 2.51% 12,117 2.41% 10,776 2.48%
Mezzanine 4,138 0.56% 10,746 1.73% -- -- -- -- -- --
Leases 3,354 0.45% 9,463 1.53% 19,939 3.30% 38,032 7.57% 32,582 7.49%
Consumer and other 31,263 4.24% 33,755 5.44% 23,648 3.92% 9,957 1.99% 6,621 1.52%
- -----------------------------------------------------------------------------------------------------------------------------------
Total other loans 61,651 8.36% 69,645 11.23% 58,747 9.73% 60,106 11.97% 49,979 11.49%
- -----------------------------------------------------------------------------------------------------------------------------------
Total gross loans receivable 737,337 100.00% 620,175 100.00% 603,562 100.00% 502,090 100.00% 434,846 100.00%
- -----------------------------------------------------------------------------------------------------------------------------------
Less:
Undisbursed portion of loans
in process (106,704) (77,302) (80,801) (84,268) (63,246)
Deferred fees and other
unearned income (18) (636) (1,814) (1,515) (2,405)
Reserve for loan losses (7,345) (6,505) (5,198) (5,464) (4,704)
- -----------------------------------------------------------------------------------------------------------------------------------
Loans receivable, net $623,270 $535,732 $515,749 $410,843 $364,491
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In accordance with the Company's business plan, the volume of construction
and acquisition and development lending increased in each of the previous four
years. The Company understands the risks inherent in interim construction
financing and has designed an efficient organization to properly mitigate those
risks through strict underwriting and close monitoring of the process. The
Company's underwriting criteria consider, among other things, the equity
investment of the borrower, the track record and financial condition of the
builder, the demand for the type of house to be constructed including a
marketing survey of inventory levels by price range and location, the
feasibility of house plans and costs, the growth prospects for the economy and
the impact of changes in interest rates. The Company has a multi-state
construction inspection and appraisal network. Its staff closely monitors
construction progress and draws throughout the process. In addition, no single
customer accounted for more than 2.0 percent of the Company's loans in fiscal
1999, 1998 or 1997.
The following table exhibits the geographic location of the Company's real
estate construction and acquisition and development loans.
REAL ESTATE CONSTRUCTION LOANS BY TYPE AND LOCATION
<TABLE>
<CAPTION>
At March 31, 1999 Acquisition & % of Total
(dollars in thousands) Construction Development Total by Location
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Atlanta, GA $ 70,916 $40,962 $111,878 63.52%
Augusta, GA 13,213 2,521 15,734 8.94%
Athens, GA -- 200 200 0.12%
Hinesville, GA 44 -- 44 0.02%
Savannah, GA 7,137 3,107 10,244 5.81%
Warner Robins, GA 2,805 -- 2,805 1.59%
Jacksonville, FL 12,834 2,887 15,721 8.92%
Charlotte, NC 7,852 982 8,834 5.01%
Chattanooga, TN 9,688 519 10,207 5.79%
Knoxville, TN 501 -- 501 0.28%
- ---------------------------------------------------------------------------------------------
Total by type $124,990 $51,178 $176,168 100.00%
- ---------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE> 37
PROVISION FOR LOAN LOSSES AND RISK ELEMENTS
The Bank has an Asset Classification Committee (the "ACC"), comprised of
management, which reports at least quarterly to the Board of Directors.
Management and the ACC consider numerous factors in identifying potential
problem loans including, among other factors, the estimated value of the
underlying collateral, loan concentrations, specific loan problems, economic
conditions that may affect the borrower's ability to repay, past payment
experience, general market conditions and such other factors as management or
the ACC believes should be considered under existing circumstances. In addition,
various regulatory agencies, as an integral part of the examination process,
periodically review the reserve for loan losses. Such agencies require the Bank
to recognize additions to the reserve based on judgments with regard to
information available to them at the time of the examination. Management is not
aware of any loans classified for regulatory purposes as loss, doubtful or
substandard that (i) have not been disclosed and (ii) either (a) represent or
result from trends or uncertainties, which management reasonably expects will
materially impact future operating results, liquidity, or capital resources, or
(b) represent material credits in which management is aware of any information
which causes management to have serious doubts as to the ability of such
borrower to comply with the loan repayment terms.
Construction and acquisition and development loans comprise the largest
component of the Company's loan portfolio. Construction loans frequently involve
greater risk than residential mortgage loans principally due to (i) the
creditworthiness of construction borrowers in general, (ii) the potential risks
associated with securing permanent financing, and (iii) general market
conditions in the housing industry.
The Company's investment in equipment leases involves risk because of (i)
the decline in value of the leased equipment, (ii) the Company's reliance on
third party lessors for servicing the leases, and (iii) the location of lessees
outside the Company's geographic market.
Management believes that the Bank's credit review and loan monitoring
processes are adequate to evaluate and monitor these risks and that the Bank's
allowance for probable loan losses is adequate in relation to the composition of
its loan portfolio. Although the Company's non-accrual loans as a percentage of
loans receivable, net was 1.07 percent at March 31, 1999, there is a risk that
the quality of the Company's loan portfolio could decline. The rapid growth in
loans, the concentration of construction loans, and the risk inherent in the
lease portfolio each present a risk that the quality of the loan portfolio could
decline. Management and the ACC, along with regulators, closely monitor total
exposure to each market area and price range in determining the appropriate
concentrations of construction loans. The Office of Thrift Supervision (the
"OTS") also monitors and comments on the adequacy of the Bank's provision for
loan losses in conducting its examinations of the Bank.
NON-PERFORMING ASSETS
Total problem assets, which include non-accrual loans, loans classified as
problem assets by the ACC and real estate acquired through the settlement of
loans, decreased $3,566,000 or 23.9 percent to $11,338,000 at March 31, 1999,
from $14,904,000 at March 31, 1998. Total problem assets as a percent of total
assets decreased to .92 percent at March 31, 1999 from 1.30 percent at March 31,
1998. At March 31, 1999, the Company had non-accrual loans of $6,692,000
compared to $7,948,000 at March 31, 1998. Interest income not recognized on
these loans amounted to $386,000 during 1999, and $431,000 during 1998. In
addition, at March 31, 1999, the ACC identified $2,550,000 as potential problem
loans compared to $4,009,000 of potential problem loans at March 31, 1998. Real
estate owned decreased by $851,000 or 28.9 percent to $2,096,000 at March 31,
1999, from $2,947,000 at March 31, 1998.
The following table reflects non-accrual loans, potential problem loans and
real estate acquired through the settlement of loans as of the dates indicated.
Potential problem loans are those with respect to which management has doubts
regarding the ability of the borrower to comply with current loan repayment
terms and have been classified as such by the ACC, regardless of payment status.
37
<PAGE> 38
<TABLE>
<CAPTION>
NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS
- -------------------------------------------------------------------------------------------------------------------
at March 31,
(dollars in thousands) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans
Residential real estate-construction $ 497 $ 1,127 $ 1,692 $ 1,658 $ 464
Residential real estate-mortgage 5,094 4,026 2,934 569 469
Commercial real estate 282 -- 93 7 57
Commercial 37 24 427 662 --
Commercial leases 311 2,054 2,508 3,421 --
Installment 471 717 212 -- 4
- -------------------------------------------------------------------------------------------------------------------
Total non-accrual 6,692 7,948 7,866 6,317 994
- -------------------------------------------------------------------------------------------------------------------
Potential problem loans 2,550 4,009 2,503 4,329 2,963
- -------------------------------------------------------------------------------------------------------------------
Total non-accrual and problem loans 9,242 11,957 10,369 10,646 3,957
- -------------------------------------------------------------------------------------------------------------------
Real estate owned, net 2,096 2,947 2,074 1,344 1,139
- -------------------------------------------------------------------------------------------------------------------
Total problem assets $11,338 $14,904 $12,443 $11,990 $5,096
- -------------------------------------------------------------------------------------------------------------------
Total problem assets/Total assets 0.92% 1.30% 1.51% 1.63% 0.90%
- -------------------------------------------------------------------------------------------------------------------
Total problem assets/Loans receivable, net
plus reserves 1.80% 2.75% 2.41% 2.92% 1.40%
- -------------------------------------------------------------------------------------------------------------------
Reserve for loan losses/Total problem assets 64.78% 43.65% 41.78% 45.57% 92.31%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
CONCENTRATIONS BY GEOGRAPHIC LOCATION
The following table reflects concentrations of non-accrual, potential
problem loans and real estate owned by geographic location.
<TABLE>
<CAPTION>
NON-ACCRUAL, POTENTIAL PROBLEM LOANS AND REAL ESTATE OWNED BY LOCATION
- -------------------------------------------------------------------------------------------------------------------
at March 31, 1999 Potential Real Estate % of Total
(dollars in thousands) Non-accrual Problem Owned(1) Total By Location
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Atlanta, GA $5,601 $1,818 $ 399 $ 7,818 67.46%
Augusta, GA -- 194 268 462 3.99%
Hinesville, GA -- -- 230 230 1.98%
Warner Robins, GA -- -- 156 156 1.35%
Charlotte, NC 80 -- -- 80 0.69%
St. Augustine, FL -- 538 -- 538 4.64%
Aiken, SC -- -- 126 126 1.09%
All other locations -- 1,168 2,179 18.80%
1,011
- -------------------------------------------------------------------------------------------------------------------
Total problem assets $6,692 $2,550 $2,347 $11,589 100.00%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include reserves of $250,764; real estate owned, net equals
$2,096,338.
38
<PAGE> 39
The following table reflects concentrations of non-accrual, potential
problem loans and real estate owned by geographic location and by type.
<TABLE>
<CAPTION>
NON-ACCRUAL, POTENTIAL PROBLEM LOANS AND REAL ESTATE OWNED BY LOCATION AND TYPE
- ------------------------------------------------------------------------------------------------------------------------------------
At March 31, 1999 Residential
----------- Comm'l % of Total
(dollars in thousands) Constr Mtgs R-Estate Comm'l Leases Installment Total by Location
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-accrual:
Atlanta, GA $ 417 $4,083 $ 282 $ 37 $311 $ 471 $ 5,601 48.33%
Charlotte, GA 80 -- -- -- -- -- 80 0.69%
80
All other locations -- 1,011 -- -- -- -- 1,011 8.73%
- --------------------------------------------------------------------------------------------------------------------------------
Total non--accrual 497 5,094 282 37 311 471 6,692 57.75%
- --------------------------------------------------------------------------------------------------------------------------------
Potential problem loans:
Atlanta, GA 1,078 75 561 45 59 -- 1,818 15.69%
Augusta, GA 194 -- -- -- -- -- 194 1.67%
St. Augustine, FL 538 -- -- -- -- -- 538 4.64%
- --------------------------------------------------------------------------------------------------------------------------------
Total potential problem loans 1,810 75 561 45 59 -- 2,550 22.00%
- --------------------------------------------------------------------------------------------------------------------------------
Real estate owned(1):
Atlanta, GA 31 98 270 -- -- -- 399 3.44%
Augusta, GA -- 268 -- -- -- -- 268 2.31%
Hinesville, GA 230 -- -- -- -- -- 230 1.98%
Warner Robins, GA 156 -- -- -- -- -- 156 1.35%
Aiken, SC 72 54 -- -- -- -- 126 1.09%
All other locations 221 947 -- -- -- -- 1,168 10.08%
- --------------------------------------------------------------------------------------------------------------------------------
Total real estate owned(1) 710 1,367 270 -- -- -- 2,347 20.25%
- --------------------------------------------------------------------------------------------------------------------------------
Total problem assets by type $3,017 $6,536 $1,113 $ 82 $ 370 $ 471 $11,589 100.00%
- --------------------------------------------------------------------------------------------------------------------------------
% of total problem assets by type 26.03% 56.41% 9.60% 0.71% 3.19% 4.06% 100.00%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include reserves of $250,764; real estate owned, net equals
$2,096,338.
CONCENTRATIONS TO SINGLE BORROWERS
At March 31, 1999, the Bank has no relationship with a single borrower with
potential problem loans or non-accrual loans in excess of $600,000.
LOAN IMPAIRMENT
Impaired loans exclude residential mortgages, construction loans secured by
first mortgage liens, and groups of small homogeneous loans and amounted to
$581,000 at March 31, 1999, compared to $1,783,000 at March 31, 1998. A loan is
considered impaired when a loan is classified as non-accrual and based on
current information, it is probable the Company will not receive all amounts due
in accordance with the contractual terms of the loan agreement. At March 31,
1999 and 1998, the valuation allowance related to these impaired loans was
$214,000 and $455,000, respectively, which is included in the reserve for loan
losses as presented in the tables on the following page. At March 31, 1999 and
1998, all impaired loans had a related loan loss reserve. For the year ended
March 31, 1999, the Company charged-off $450,000 against loan loss reserves
related to impaired loans. During the year ended March 31, 1998, the Company had
no charge-offs related to impaired loans. For the years ended March 31, 1999 and
1998, the average recorded investment in impaired loans was $1,375,000 and
$1,784,000, respectively.
The Company uses either the cash or cost recovery method to record cash
receipts on impaired loans that are on non-accrual. Under the cash method,
contractual interest is credited to interest income when received. This method
is used when the ultimate collectibility of the total principal is not in doubt.
Loans on the cost recovery method may be changed to the cash method when the
application of the cash payments has reduced the principal balance to a level
where collection of the remaining recorded investment is no longer in doubt.
39
<PAGE> 40
RESERVE FOR LOAN LOSSES
The Company set aside $2,181,000 and $2,601,000, respectively, of
additional reserves for probable loan losses during the years ended March 31,
1999 and 1998. At March 31, 1999, reserves represented 1.28 percent of average
loans receivable, net, outstanding during the period, remaining relatively
stable compared to 1.25 percent at March 31, 1998. Charge-offs in fiscal 1999
were $1,821,000 versus $1,548,000 in fiscal 1998 and $3,124,000 in 1997. In
fiscal 1999, charge-offs represented 0.23 percent of average loans receivable,
net versus 0.25 percent for fiscal 1998 and 0.63 percent in fiscal 1997.
Charge-offs increased in fiscal 1997 due to the decline in the quality of the
Company's lease portfolio. Charge-offs related to this decline were primarily
related to a single lessor in the amount of $1,946,000. All outstanding
obligations of this lessor have been charged off to the reserve and, therefore,
no further reserve is required in connection with this relationship. Loan loss
reserves totaled $7,345,000 and $6,505,000, respectively, at March 31, 1999 and
1998. Loan loss reserves to total problem assets increased to 64.78 percent at
March 31, 1999 compared to 43.65 percent at March 31, 1998. An allocation of the
reserve for loan losses has been made according to the respective amounts deemed
necessary to provide for the probability of incurred losses within the various
loan categories. Although other relevant factors are considered, the allocation
is primarily based on previous charge-off experience adjusted for risk
characteristic changes among each category. Additional reserve amounts are
allocated by evaluating the loss potential of individual loans that management
has considered impaired. The reserve for loan loss allocation is based on
subjective judgment and estimates, and therefore is not necessarily indicative
of the specific amounts or loan categories in which charge-offs may ultimately
occur. Management believes that the reserves for losses on loans are adequate
based upon management's evaluation of, among other things, estimated value of
the underlying collateral, loan concentrations, specific problem loans, and
economic conditions that may affect the borrower's ability to repay and such
other factors which, in management's judgment, deserve recognition under
existing economic conditions. While management uses available information to
recognize losses on loans, future additions to the allowances may be necessary
based on changes in economic conditions and composition of the Company's loan
portfolio. The following tables provide an analysis of the reserve for loan
losses.
<TABLE>
<CAPTION>
ANALYSIS OF THE RESERVE FOR LOAN LOSSES
- ----------------------------------------------------------------------------------------------------------------------------
March 31,
(dollars in thousands) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserve for loan losses,
Beginning of year $ 6,505 $ 5,198 $ 5,464 $ 4,704 $ 4,791
Charge-offs:
Real estate-construction 12 88 86 44 165
Real estate-mortgage 552 747 160 326 524
Consumer and other 764 635 59 42 77
Commercial 27 78 413 180 128
Commercial leases 466 -- 2,406 -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total charge-offs 1,821 1,548 3,124 592 894
Recoveries 480 254 206 352 164
- ----------------------------------------------------------------------------------------------------------------------------
Net charge-offs 1,341 1,294 2,918 240 730
Provision for loan losses 2,181 2,601 2,652 1,000 643
- ----------------------------------------------------------------------------------------------------------------------------
Reserve for loan losses, end of year 7,345 6,505 5,198 5,464 4,704
- ----------------------------------------------------------------------------------------------------------------------------
Average loans receivable, net, outstanding for the
period $ 572,610 $519,393 $462,073 $401,923 $324,338
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average
loans receivable, net, outstanding 0.23% 0.25% 0.63% 0.06% 0.23%
- ----------------------------------------------------------------------------------------------------------------------------
Reserves to average loans receivable, net
outstanding 1.28% 1.25% 1.12% 1.36% 1.45%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE> 41
<TABLE>
<CAPTION>
ALLOCATION OF THE RESERVE FOR LOAN LOSSES
- ------------------------------------------------------------------------------------------------------------------------------------
March 31, 1999 1998 1997 1996 1995
Dollar Dollar Dollar Dollar Dollar
(dollars in thousands) Amount %(1) Amount %(1) Amount %(1) Amount %(1) Amount %(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of
period applicable to:
Real Estate -
First mortgage loans $1,706 53% $1,517 51% $ 791 50% $ 693 50% $ 861 54%
Second mortgage loans 980 9% 882 9% 713 8% 512 4% 648 3%
Construction 1,895 28% 1,754 30% 1,127 31% 1,128 32% 1,373 29%
Commercial 673 4% 364 3% 121 3% 221 3% 296 3%
Commercial leases 315 1% 591 1% 1,724 4% 2,493 9% 596 9%
Consumer and other 1,086 5% 821 6% 220 4% 133 2% 272 2%
Unallocated 690 - 576 - 502 - 284 - 658 -
- ------------------------------------------------------------------------------------------------------------------------------------
Total $7,345 100% $6,505 100% $5,198 100% $5,464 100% $4,704 100%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Loan balance in each category expressed as a percentage of loans receivable,
net.
INVESTMENT SECURITIES
During fiscal 1999, investment securities increased 67.6 percent over the
prior year. At March 31, 1999, the Company had total investments in securities
of $272,916,000 versus $162,874,000 at March 31, 1998. At March 31, 1994, the
Company adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Under SFAS No. 115, the Company classifies its securities in one of
three categories: trading, available for sale, or held to maturity. With the
adoption of SFAS No. 115, the Company began reporting the effect of the change
in fair value of securities classified as available for sale as a separate
component of equity, net of income taxes.
The investment securities portfolio at March 31, 1999 was comprised of
$68,298,000 of investment securities held to maturity at amortized cost. The
Company has the ability and it is management's intent to hold these securities
to maturity for investment purposes. In addition, the Company had an estimated
market value of $204,618,000 of securities available for sale at March 31, 1999.
Securities available for sale had a net unrealized loss as shown in the
Company's stockholders' equity section of $283,000 at March 31, 1999 and a net
unrealized gain of $838,000 at March 31, 1998.
Included in other securities at March 31, 1999 and 1998 are $766,305 and
$1,996,043, respectively, of investment grade residential mortgage pass through
certificates issued by the RTC. These securities are rated Aa2 by Moody's and AA
by Standard & Poors. The Company holds no investment securities by any single
issuer, other than mortgage-backed securities issued by an agency of the United
States government, which equaled or exceeded 10 percent of stockholders' equity
at March 31, 1999, 1998 or 1997.
41
<PAGE> 42
The following table reflects securities held in the Company's securities
portfolio for the periods indicated:
<TABLE>
<CAPTION>
INVESTMENT SECURITIES
- ------------------------------------------------------------------------------------------------------------
as of March 31,
(dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Securities Held to Maturity:
US Treasury and US Government Agencies $ 18,539 $ 36,188 $ 27,780
Mortgage-backed securities 32,866 5,010 6,406
Corporate bonds 7,433 7,431 7,429
Other debt securities 9,460 9,509 10,292
- ------------------------------------------------------------------------------------------------------------
Total 68,298 58,138 51,907
- ------------------------------------------------------------------------------------------------------------
Securities Available for Sale:
US Treasury and US Government Agencies 35,308 16,068 15,176
Mortgage-backed securities 95,539 70,626 62,352
2,027 2,037 2,005
Corporate bonds 12,279 12,210 13,418
Equity securities-preferred stock 59,465 3,795 3,970
Other debt securities
- ------------------------------------------------------------------------------------------------------------
Total 204,618 104,736 96,921
- ------------------------------------------------------------------------------------------------------------
Total Investment Securities:
US Treasury and US Government Agencies 53,847 52,256 42,956
Mortgage-backed securities 128,405 75,636 68,758
Corporate bonds 9,460 9,468 9,434
Equity securities-preferred stock 12,279 12,210 13,418
Other debt securities 68,925 13,304 14,262
- ------------------------------------------------------------------------------------------------------------
Total $272,916 $162,874 $148,828
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The following table reflects the stated contractual maturities, amortized
cost or estimated value and weighted average yield of securities held in the
Bank's portfolio, for the periods indicated:
42
<PAGE> 43
<TABLE>
<CAPTION>
Maturities of Investment Securities and Average Yields
- ----------------------------------------------------------------------------------------------------------------------
Investment Securities
Held to Maturity Securities Available for Sale
March 31, 1999 March 31, 1999
- ----------------------------------------------------------------------------------------------------------------------
Amortized Weighted Estimated Weighted
(dollars in thousands) Cost Average Yield Fair Value Average Yield(1)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
US Treasury and US Government Agencies:
Within 1 year $ 1,000 4.03% -- --
1-5 years 11,999 6.27% $ 6,001 6.09%
5-10 years 5,540 6.52% 29,307 6.45%
More than 10 years -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Total 18,539 6.22% 35,308 6.39%
- ----------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities:
Government National Mortgage Association
Within 1 year -- -- -- --
1 to 5 years -- -- -- --
5 to 10 years -- -- 12,660 7.32%
More than 10 years 16,781 6.57% 49,766 6.68%
- ----------------------------------------------------------------------------------------------------------------------
Total 16,781 6.57% 62,426 6.81%
- ----------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Assn.
Within 1 year -- -- 8 8.25%
1 to 5 years -- -- 283 6.48%
5 to 10 years -- -- 467 8.25%
More than 10 years 490 5.86% 17,022 6.52%
- ----------------------------------------------------------------------------------------------------------------------
Total 490 5.86% 17,780 6.56%
- ----------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
Within 1 year -- -- -- --
1 to 5 years -- -- 183 8.50%
5 to 10 years -- -- 1,657 8.50%
More then 10 years 14,831 6.48% 13,493 6.00%
- ---------------------------------------------------------------------------------------------------------------------
Total 14,831 6.48% 15,333 6.30%
- ---------------------------------------------------------------------------------------------------------------------
Other:
Within 1 year -- -- 101 4.00%
1 to 5 years -- -- 548 4.61%
5 to 10 years -- -- 762 5.13%
More then 10 years 10,224 6.64% 58,054 5.94%
- ---------------------------------------------------------------------------------------------------------------------
Total 10,224 6.64% 59,465 5.91%
- ---------------------------------------------------------------------------------------------------------------------
Corporate Debt:
Within 1 year 2,509 7.85% 2,027 7.29%
1 to 5 years 2,972 8.22% -- --
5 to 10 years 1,952 7.64% -- --
More then 10 years -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Total 7,433 7.94% 2,027 7.29%
- ---------------------------------------------------------------------------------------------------------------------
Preferred Stock:
Within 1 year -- -- -- --
1 to 5 years -- -- -- --
5 to 10 years -- -- -- --
More than 10 years -- -- 12,279 7.09%
- ---------------------------------------------------------------------------------------------------------------------
Total -- -- 12,279 7.09%
- ---------------------------------------------------------------------------------------------------------------------
Total Securities:
Within 1 year 3,509 6.76% 2,136 7.14%
1 to 5 years 14,971 6.66% 7,015 6.05%
5 to 10 years 7,492 6.81% 44,853 6.77%
More than 10 years 42,326 6.55% 150,614 6.35%
- ---------------------------------------------------------------------------------------------------------------------
Total $68,298 6.61% $204,618 6.44%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Weighted average yield computed using amortized cost.
43
<PAGE> 44
DEPOSITS
Deposits are the Company's primary funding source. Total deposits grew by
$100,690,000 or 12.9 percent to $879,665,000 at March 31, 1999, 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 sixteen
branches. Management believes that the majority of new accounts are a result of
the continued trend in consolidation of financial institutions in the
metropolitan Atlanta market and the desire of customers to deal with an
independent, local financial institution.
The growth in deposits was primarily in demand deposits which grew by
$65,656,000 or 29.2 percent to $290,358,000 at March 31, 1999 compared to
$224,702,000 at March 31, 1998. Interest-bearing checking increased by
$35,823,000 or 41.5 percent to $122,183,000 at March 31, 1999 from $86,360,000
at March 31, 1998. Money market accounts grew by $46,654,000 or 120.1 percent to
$85,516,000 at March 31, 1999 from $38,862,000 at March 31, 1998. Demand
deposits including checking accounts, savings accounts and money market accounts
were 33.0 percent of the Company's deposits at March 31, 1999. Certificates of
deposit increased by $35,034,000 or 6.3 percent to $589,307,000 at March 31,
1999 compared to $554,273,000 at March 31, 1998. Certificate of deposits
$100,000 and greater were 16.2 percent of total deposits at March 31, 1999, and
13.8 percent at March 31, 1998. In addition, at March 31, 1999, 27.1 percent of
certificates of deposit with balances $100,000 and more have maturities of over
12 months. The Bank does not actively solicit deposits outside of its local
market area. The weighted average interest rate on deposits during fiscal 1999
increased 7 basis points to 5.24 percent from 5.17 percent.
The following table sets forth information on the maturity distribution of
certificates of deposit of $100,000 or more.
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE
Certificates of
Deposit
(dollars in thousands) March 31, 1999
- ----------------------------------------------------------------------------
<S> <C>
3 months or less $ 49,848
Over 3 months through 6 months 17,454
Over 6 months through 12 months 36,643
Over 12 months 38,668
- ----------------------------------------------------------------------------
Total outstanding $142,613
- ----------------------------------------------------------------------------
</TABLE>
The following table exhibits the Company's composition of deposits at March
31 for the years indicated.
<TABLE>
<CAPTION>
DEPOSIT MIX
- -------------------------------------------------------------------------------------------------------------------------
at March 31, 1999 1998
(dollars in thousands) Amount % of Total Amount % of Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Demand deposits
Non-interest bearing deposits $ 45,737 5.20% $ 61,070 7.84%
1.90% - 2.25% Interest bearing deposits 122,183 13.89% 86,360 11.09%
2.05% Savings 36,922 4.20% 38,410 4.93%
2.25% - 4.25% Money markets 85,516 9.72% 38,862 4.99%
Certificate accounts less than $100,000
2.50% - 5.99% 312,606 35.54% 278,394 35.74%
6.00% - 7.99% 133,770 15.21% 167,833 21.55%
8.00% - 10.00% 318 0.03% 507 0.06%
Certificate accounts $100,000 and greater
ranging between 2.50% - 10.20% 142,613 16.21% 107,539 13.80%
- -------------------------------------------------------------------------------------------------------------------------
Total $879,665 100.00% $778,975 100.00%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE> 45
The following table exhibits the average amount of deposits and weighted
average rate by the categories indicated.
<TABLE>
<CAPTION>
AVERAGE DEPOSIT BALANCES AND RATES
- --------------------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
(dollars in thousands) Rate Amount Rate Amount Rate Amount
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits:
Interest bearing deposits 3.44% $104,754 2.62% $ 65,746 1.36% $ 72,858
Savings 2.41% 37,884 2.48% 42,441 2.44% 46,157
Money market 3.97% 69,863 3.36% 30,717 2.54% 19,541
Certificates of deposits 5.89% 588,246 5.94% 436,727 5.90% 382,117
- --------------------------------------------------------------------------------------------------------------
Total 5.24% $800,747 5.17% $575,631 4.84% $520,673
- --------------------------------------------------------------------------------------------------------------
</TABLE>
BORROWINGS
The FHLB system functions as a reserve credit facility for thrift
institutions and certain other member home financing institutions. The Bank
utilizes advances from the FHLB to fund a portion of its assets. At March 31,
1999, advances were $157,500,000 a decrease from $217,835,000 at March 31, 1998.
The weighted average interest rate on these borrowings was 5.38 percent and 5.88
percent at March 31, 1999 and 1998, respectively.
The following table reflects the amount outstanding, maximum month end and
average balances of short-term borrowings outstanding as well as the weighted
average rate at the end of the year:
<TABLE>
<CAPTION>
SHORT-TERM BORROWINGS
- --------------------------------------------------------------------------------------------------------
(dollars in thousands) at March 31, Maximum Average
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999:
Balances outstanding $ 8,316 $127,550 $ 89,756
Weighted average rate 6.10% 6.17% 5.53%
- --------------------------------------------------------------------------------------------------------
1998:
Balances outstanding $125,335 $164,320 $131,526
Weighted average rate 5.95% 5.78% 5.46%
- --------------------------------------------------------------------------------------------------------
1997:
Balances outstanding $124,392 $177,445 $135,180
Weighted average rate 6.85% 5.75% 5.47%
- --------------------------------------------------------------------------------------------------------
</TABLE>
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN DEBENTURES
On July 29, 1998, the Company closed a public offering of 1,150,000 of
8.50% Cumulative Trust Preferred Securities (the "Preferred Security") offered
and sold by EBI Capital Trust I (the "Trust"), having a liquidation amount of
$25 each. The proceeds from such issuances, together with the proceeds of the
related issuance of common securities of the Trust purchased by the Company,
were invested in Subordinated 8.50% Debentures (the "Debentures") of the
Company. The sole assets of the Trust is the Debentures. The Debentures are
unsecured and rank junior to all senior debt of the Company. The Company owns
all of the common securities of the Trust. See Note 16 of Notes to Consolidated
Financial Statements.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money, due to inflation. Unlike most industrial companies, virtually all of
the assets and liabilities of a financial institution are monetary in nature. As
a result, interest rates have a more significant impact on a financial
institution's performance than the effect of general levels of inflation.
Interest rates do not necessarily move in the same
45
<PAGE> 46
direction or at the same magnitude as the prices of goods and services. In the
current interest rate environment, liquidity and the maturity structure of the
Bank's assets and liabilities are critical to the maintenance of acceptable
performance levels.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY MANAGEMENT
The Asset and Liability Committee ("ALCO") manages the Company's liquidity
needs to ensure there is sufficient cash flow to satisfy demand for credit and
deposit withdrawals, to fund operations and to meet other Company obligations
and commitments on a timely and cost effective basis. Over recent years
increases in core deposits have provided a significant portion of the Company's
cash flow needs and continue to provide a relatively stable, low cost source of
funds. In recent years, the Company has also experienced significant growth in
assets. Total assets increased $80,517,000 over the previous year and were
funded by deposits, which increased $100,690,000. The Company's deposits and
stockholders' equity funded 77.6 percent and 74.3 percent of total assets at
March 31, 1999 and March 31, 1998, respectively. The Company's other primary
funding source was provided by advances from the Federal Home Loan Bank. At
March 31, 1999, advances stood at $157,500,000 or 12.8 percent of total assets
versus $217,835,000 or 19.0 percent of total assets at March 31, 1998. Under
current regulations, the Bank is required to maintain liquid assets at 5 percent
or more of its net withdrawal deposits for short-term borrowings.
At March 31, 1999, the Company had commitments to originate fixed rate
mortgage loans of approximately $59,284,000 and commitments to originate
variable rate mortgage loans of approximately $5,976,000 with terms of up to
thirty years and interest rates ranging from 6.125 percent to 9.0 percent. The
Company had commitments to sell mortgage loans of approximately $220,823,000 at
March 31, 1999. In addition, the Company is committed to loan funds on unused
variable rate lines of credit approximately $45,497,000 at March 31, 1999. The
Company's funding sources for these commitments include deposits and FHLB
advances.
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 $375,129,000 or
37.5 percent to $1,374,603,000 for fiscal 1999 compared to $999,474,000 for
fiscal 1998. The Company manages the funding requirements of these loans
primarily with short-term advances from the FHLB. In addition, outstanding
commitments to originate loans, exclusive of the undisbursed portion of loans in
process, increased to approximately $65,260,000 at March 31, 1999 from
$29,670,000 at March 31, 1998.
CASH FLOWS FROM OPERATING ACTIVITIES
During fiscal 1999, cash provided by operating activities was $95,833,000
compared to $261,621,000 used for fiscal 1998. The primary reason for this
fluctuation is timing differences from the sale of loans held for sale versus
originations of loans held for sale. In fiscal 1999, the Company originated
$1,374,603,000 of loans held for sale and sold $1,485,825,000 of loans held for
sale. This resulted in a $111,222,000 source of cash. This compares to fiscal
1998, when the Company originated $999,474,000 of loans held for sale and sold
$729,764,000 of loans held for sale, resulting in a $269,710,000 use of cash.
CASH FLOWS FROM INVESTING ACTIVITIES
In fiscal 1999, the Company used $200,618,000 of cash flows from investing
activities compared to $39,765,000 for the prior year. The Company purchased
investment securities held to maturity of $29,959,000 and $145,330,000 of
securities available for sale representing 87.4 percent of total cash used for
investing activities during fiscal 1999. For fiscal 1998, comparatively, the
Company purchased $37,184,000 of investment securities held to maturity and
$27,865,000 of securities available for sale representing 163.6 percent of cash
used in investing activities. The Company generated cash flows from calls of
investment securities held to maturity of $17,653,000. In addition, the Company
had sales of securities available for sale of $9,441,000, calls of $7,750,000
and maturities of $2,729,000. This compares to calls of investment securities
held to maturity of $18,500,000 and maturities of
46
<PAGE> 47
$10,300,000 and sales of securities available for sale of $1,957,000, calls of
$8,273,000 and maturities of $5,250,000 in fiscal 1998. Loan originations net of
repayments represented 43.1 percent of cash used or $86,515,000 compared to 37.8
percent or $15,032,000 cash used for the prior year. During fiscal 1999, the
Company used funds of $14,515,000 for investments in real estate while proceeds
from sales of investments in real estate provided $11,177,000 in cash.
Comparatively, during fiscal 1998, the Company used cash of $8,708,000 for
investments in real estate while proceeds from sales provided cash of
$1,675,000.
CASH FLOW FROM FINANCING ACTIVITIES
Cash provided from financing activities during fiscal 1999, was $97,942,000
compared to $310,193,000 during fiscal 1998. FHLB advances provided a
significant source of funds during both fiscal 1999 and fiscal 1998. The Company
borrowed $842,461,000 from the FHLB and repaid $861,764,000 in fiscal 1999. This
compares to borrowings of $810,245,000 and repayments of $723,195,000 during
fiscal 1998. The Company's deposits increased $100,690,000 during fiscal 1999,
$35,034,000 of this increase is attributable to increases in time deposits and
$65,656,000 is attributable to increases in demand deposits. During the prior
year, the Company's deposits increased $221,251,000, which is comprised of
$142,570,000 of time deposits and $78,681,000 in demand deposits. During fiscal
1999, the Company raised $28,750,000 of additional capital through a public
offering of trust preferred securities. In fiscal 1999, the Company issued
$2,000,000 in ESOP debt to acquire common stock. Additionally, pursuant to the
Company's stock repurchase plan, the Company repurchased 252,750 shares with a
cost of $4,599,000 to be held as treasury stock. The Company paid cash dividends
to its shareholders of $3,619,000 in fiscal 1999 and $3,406,000 in fiscal 1998.
CAPITAL
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") established five capital categories for financial institutions. The
OTS places each federally chartered thrift institution into one of five
categories: well capitalized, adequately capitalized, under capitalized,
significantly under capitalized, and critically under capitalized. These
classifications are based on the Bank's level of risk based capital, leverage
ratios and its supervisory ratings. FDICIA defines "well capitalized" banks as
entities having a total risk based capital ratio of 10 percent or higher, a tier
one risk based capital ratio of 6 percent or higher and a leveraged ratio of 5
percent or higher. At March 31, 1999, the Bank was classified as "well
capitalized" under the OTS regulations that implement the FDICIA provisions
described above. Effective February 15, 1996, the Company raised $21,483,000 of
capital in a secondary offering co-underwritten by Interstate/Johnson Lane and
Morgan Keegan & Company, Inc. Substantially all of the proceeds were contributed
to the Bank. Additionally, on July 29, 1998, the Company closed a public
offering of trust preferred securities raising $28,750,000 of capital. The
Company contributed $11,000,000 of the proceeds to the Bank.
The following table reflects the Bank's minimum regulatory capital
requirements, actual capital and the level of excess capital by category. The
Bank has historically maintained capital substantially in excess of the minimum
requirement. In fiscal 1999, the Bank paid no dividends to the Company. In
fiscal 1998, the Bank paid cash dividends to the Company of approximately
$3,410,000 and a dividend in the form of loans in the amount of $10,525,000. In
addition, during fiscal 1997, the Bank paid to the Company cash dividends of
approximately $683,000 and a dividend in the form of equity securities in the
amount of $6,094,000.
47
<PAGE> 48
<TABLE>
<CAPTION>
REGULATORY CAPITAL
-------------------------------------------------------------------------------------------------------------
At March 31, 1999 Actual Requirement Excess
($ in 000's) Amount % Amount % Amount %
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Risk-based ratios:
Tier 1 capital $69,810 9.97% $28,012 4.00% $41,798 5.97%
Total capital 76,996 10.99% 56,024 8.00% 20,972 2.99%
Tier 1 leverage 69,810 5.77% 48,421 4.00% 21,389 1.77%
Tangible equity 69,810 5.25% 19,951 1.50% 49,859 3.75%
-------------------------------------------------------------------------------------------------------------
At March 31, 1998 Actual Requirement Excess
($ in 000's) Amount % Amount % Amount %
-------------------------------------------------------------------------------------------------------------
Risk-based ratios:
Tier 1 capital $51,173 7.47% $27,392 4.00% $23,781 3.47%
Total capital 56,885 8.31% 54,785 8.00% 2,100 0.31%
Tier 1 leverage 51,173 4.59% 33,446 3.00% 17,727 1.59%
Tangible equity 51,173 5.91% 12,988 1.50% 38,185 4.41%
-------------------------------------------------------------------------------------------------------------
</TABLE>
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. Computer systems using
the 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. Subcommittees have
been established throughout the Company to identify, address and mitigate key
Year 2000 issues within the organization. Furthermore, Team2000 launched an
awareness campaign during 1998 that will continue through December 31, 1999,
that is 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
assessment phases are complete. 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. As of March 31, 1999, the
renovation and validation phases are 95% complete. The implementation phase
includes any necessary training of users on newly compliant systems, as well as,
introduction of such systems into live operating environments. The
implementation phase is substantially complete.
48
<PAGE> 49
Like many other companies, the operations of the Company are interconnected
with service providers and vendors who provide services, 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 vendors. The Company has required
vendors to submit in writing their expected and/or achieved Year 2000 date of
compliance. Team2000 identified and is tracking more than 200 individual vendors
in the assessment phase. Team2000 is monitoring the renovation and testing
efforts of these vendors. Additionally, Team2000 is conducting testing of 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 March 31, 1999 approximately 90% of vendors
are compliant, upgraded or have been retired. The majority of the remaining 10%
of vendors being tracked are expected to be fully compliant by September 30,
1999.
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. A Year 2000 risk rating has been assigned to all parties
identified. In addition, Team2000 has appointed an Awareness Subcommittee that
is responsible for increasing customer awareness of the Bank's Year 2000. These
efforts will continue throughout 1999.
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.
As a supplement to The Company's Business Continuation and Recovery Plans,
Team2000 has developed a contingency plan that is specific to Year 2000 issues.
The contingency plan contains the procedures, guidelines, and information
relevant to the ongoing successful operation of each line of business before,
during and after the new millennium. Critical business continuity plans will be
validated as required by current regulatory guidance by June 30, 1999. Business
continuity planning is based on consideration of the most reasonably likely
worst case scenario that could be encountered. Since it is difficult to predict
all possible risk scenarios, the Company intends to continue to revise these
plans on an ongoing basis.
The Company has incurred approximately $500,000 in direct expenses related
to the Year 2000 requirements. The Company estimates the total direct cost
associated with Year 2000 issues will be approximately $750,000. Cost associated
with the redeployment of personnel to the Year 2000 project is not included
above. 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 or anticipated. 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 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.
49
<PAGE> 50
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board ("FASB") 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. Recently, the
FASB issued an exposure draft which proposed deferring the effective date of
this statement to all fiscal quarters of fiscal years beginning after June 15,
2000. Adoption of this statement is not expected to have a material impact on
the Company's financial position or results of operation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and the Report of Independent Public
Accountants are incorporated herein by reference.
<TABLE>
<CAPTION>
SELECTED QUARTERLY FINANCIAL DATA
Year ended March 31,
(in thousands except per share data, unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998
4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $22,593 $25,406 $21,310 $21,434 $19,246 $18,143 $17,474 $17,037
Interest expense 14,699 15,232 13,441 13,406 10,954 10,247 9,566 9,240
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 7,894 10,174 7,869 8,028 8,292 7,896 7,908 7,797
Provision for loan losses 300 627 627 627 627 657 600 717
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 7,594 9,547 7,242 7,401 7,665 7,239 7,308 7,080
Other income 7,330 5,052 6,681 6,415 4,558 4,747 3,600 3,444
Other expenses 11,523 11,036 10,192 9,391 8,980 9,537 8,568 8,306
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,401 3,563 3,731 4,425 3,243 2,448 2,341 2,218
- ------------------------------------------------------------------------------------------------------------------------------------
Income tax expense 1,103 1,090 1,260 1,445 1,080 684 618 658
- ------------------------------------ ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income $ 2,298 $ 2,473 $ 2,471 $ 2,980 $ 2,163 $ 1,764 $ 1,723 $ 1,560
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per common share -
basic $ .41 $ .43 $ .43 $ .52 $ .38 $ .31 $ .30 $ .28
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per common share -
diluted $ .40 $ .42 $ .42 $ .50 $ .37 $ .30 $ .30 $ .27
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information concerning the Board of Directors and the Executive
Officers of the Company and the Bank, the information contained under the
section captioned "PROPOSAL 1-Election of Directors" in the Company's Proxy
Statement for the 1999 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
50
<PAGE> 51
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the section captioned "PROPOSAL 1-Election
of Directors-Compensation of Executive Officers" in the Proxy Statement for the
1999 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the sections captioned "PROPOSAL 1-Election
of Directors" and "Ownership of Equity Securities", in the Proxy Statement for
the 1999 Annual Meeting of Stockholders are incorporated herein by reference.
ITEM 13. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the sections captioned "PROPOSAL 1-Election
of Directors" and "Compensation of Executive Officers - Certain Transactions" in
the Proxy Statement for the 1999 Annual Meeting of Stockholders are incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. Financial Statements
1. Report of Independent Public Accountants Arthur Andersen LLP
2. Eagle Bancshares, Inc. and Subsidiaries Consolidated
Statements of Financial Condition as of March 31, 1999, and
1998 Consolidated Statements of Income for the Years Ended
March 31, 1999, 1998 and 1997 Consolidated Statements of
Stockholders' Equity for the Years Ended March 31, 1999, 1998
and 1997 Consolidated Statements of Cash Flows for the Years
Ended March 31, 1999, 1998 and 1997 Notes to Consolidated
Financial Statements.
B. FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted as the required information is either
inapplicable or included in the Notes to Consolidated Financial Statements.
C. EXHIBITS
3.1(A) Restated Articles of Incorporation of the Company (Exhibit 3
to the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1988.)
3.1(B) Articles of Amendment to Restated Articles of Incorporation of
the Company (Exhibit 3(a) to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1991).
3.1(C) Articles of Amendment to Restated Articles of Incorporation of
the Company.
3.2 Bylaws of the Company, as amended (Exhibit 3(b) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1991).
4 Shareholder Protection Rights Agreement dated as of January
26, 1993 of (Exhibit 1 to the Company's Current Report on Form
8-K dated February 9, 1993).
10.1 Employment Agreement dated as of October 1, 1993, between
Tucker Federal Savings and Loan Association and Richard B.
Inman, Jr. (Exhibit 10(c) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1995).*
51
<PAGE> 52
10.2 Employment Agreement dated as of January 1, 1994, between
Tucker Federal Savings and Loan Association and Betty Petrides
(Exhibit 10(f) to the Company's Annual Report on Form 10-K for
the year ended March 31, 1995).*
10.3 Employment Agreement dated January 1, 1994, between Eagle
Service Corporation and Conrad J. Sechler, Jr. (Exhibit 10(g)
to the Company's Annual Report on Form 10-K for the year ended
March 31, 1995).*
10.4 Tucker Federal Savings and Loan Association Directors'
Retirement Plan (Exhibit 10(h) to the Company's Annual Report
on Form 10-K for the year ended March 31, 1995).*
10.5 Eagle Bancshares, Inc. 1994 Directors Stock Option Incentive
Plan (Exhibit 10(i) to the Company's Annual Report on Form
10-K for the year ended March 31, 1995).*
10.6 Agreement for Advances and Security Agreement with Blanket
Floating Lien dated as March 5, 1990 between Tucker Federal
Savings and Loan Association and the Federal Home Loan Bank of
Atlanta as amended as of September 7, 1995 (Exhibit 10.6 to
the Company's Form S-2).
11 Computation of per share earnings.
13.1 Eagle Bancshares, Inc. 1999 Consolidated Financial Statements.
21 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule (for SEC use only).
* The referenced exhibit is a compensatory contract, plan or
arrangement.
D. REPORTS ON FORM 8-K
None
52
<PAGE> 53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly issued this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EAGLE BANCSHARES, INC.
June 29, 1999 By: /s/ Conrad J. Sechler, Jr.
--------------------------------------------------
Conrad J. Sechler, Jr.
Chairman of the Board, President and
Principal Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
June 29, 1999 By: /s/ Conrad J. Sechler, Jr.
--------------------------------------------------------
Conrad J. Sechler, Jr.
Chairman of the Board and President
June 29, 1999 By: /s/ Walter C. Alford
--------------------------------------------------------
Walter C. Alford
Director
June 29, 1999 By: /s/ Richard J. Burrell
--------------------------------------------------------
Richard J. Burrell
Director
June 29, 1999 By: /s/ Richard B. Inman, Jr.
--------------------------------------------------------
Richard B. Inman, Jr.
Director, Secretary and Treasurer
June 29, 1999 By: /s/ Weldon A. Nash, Jr.
--------------------------------------------------------
Weldon A. Nash, Jr.
Director
June 29, 1999 By: /s/ George G. Thompson
--------------------------------------------------------
George G. Thompson
Director
June 29, 1999 By: /s/ William F. Waldrop
--------------------------------------------------------
William F. Waldrop
Director
</TABLE>
53
<PAGE> 54
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- ----------- --------
<S> <C> <C>
3.1(A) Restated Articles of Incorporation of the Company (Exhibit 3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1988.)
3.1(B) Articles of Amendment to Restated Articles of Incorporation of the Company
(Exhibit 3(a) to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1991).
3.1(C) Articles of Amendment to Restated Articles of Incorporation of the Company.
3.2 Bylaws of the Company, as amended (Exhibit 3(b) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1991).
4 Shareholder Protection Rights Agreement dated as of January 26, 1993 of
(Exhibit 1 to the Company's Current Report on Form 8-K dated February 9,
1993).
10.1 Employment Agreement dated as of October 1, 1993, between Tucker Federal
Savings and Loan Association and Richard B. Inman, Jr. (Exhibit 10(c) to the
Company's Annual Report on Form 10-K for the year ended March 31, 1995).*
10.2 Employment Agreement dated as of January 1, 1994, between Tucker Federal Savings
and Loan Association and Betty Petrides (Exhibit 10(f) to the Company's Annual
Report on Form 10-K for the year ended March 31, 1995).*
10.3 Employment Agreement dated January 1, 1994, between Eagle Service
Corporation and Conrad J. Sechler, Jr. (Exhibit 10(g) to the Company's
Annual Report on Form 10-K for the year ended March 31, 1995).*
10.4 Tucker Federal Savings and Loan Association Directors' Retirement Plan
(Exhibit 10(h) to the Company's Annual Report on Form 10-K for the year
ended March 31, 1995).*
10.5 Eagle Bancshares, Inc. 1994 Directors Stock Option Incentive Plan (Exhibit
10(i) to the Company's Annual Report on Form 10-K for the year ended March
31, 1995).*
10.6 Agreement for Advances and Security Agreement with Blanket Floating Lien
dated as March 5, 1990 between Tucker Federal Savings and Loan Association
and the Federal Home Loan Bank of Atlanta as amended as of September 7, 1995
(Exhibit 10.6 to the Company's Form S-2).
11 Computation of per share earnings.
13.1 Eagle Bancshares, Inc. 1999 Consolidated Financial Statements.
21 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule (for SEC use only).
* The referenced exhibit is a compensatory contract, plan or arrangement.
</TABLE>
54
<PAGE> 1
EXHIBIT 11. COMPUTATION OF PER SHARE EARNINGS
Average basic common shares outstanding and average common shares
outstanding assuming dilution for the years ended March 31, 1999, 1998 and 1997
are computed as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Average common shares - basic 5,714,113 5,690,680 5,527,973
Effect of dilutive stock options 151,510 148,257 176,604
---------------------------------------------
Average common shares - diluted 5,865,623 5,838,937 5,704,577
---------------------------------------------
</TABLE>
All share data has been restated for all periods presented to give effect
to the Company's merger with SCFC.
Additionally, on May 23, 1996, SCFC declared a 5% stock dividend on its
common stock, which was paid on June 30, 1996. The dividend was charged to
retained earnings in the amount of $418,000 which was based on the closing
price per share of common stock on the declaration date. Average shares
outstanding and all per share amounts included in the accompanying consolidated
financial statements and notes are based on the increased number of shares,
giving retroactive effect to the stock dividend.
55
<PAGE> 1
EXHIBIT 13.1
EAGLE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999, 1998, AND 1997
TOGETHER WITH
AUDITORS' REPORT
<PAGE> 2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Eagle Bancshares, Inc.:
We have audited the accompanying consolidated statements of financial condition
of EAGLE BANCSHARES, INC. (a Georgia corporation) AND SUBSIDIARIES as of March
31, 1999 and 1998 and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended March 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Eagle Bancshares,
Inc. and subsidiaries as of March 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1999 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
June 15, 1999
<PAGE> 3
EAGLE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ASSETS:
Cash and amounts due from banks $ 27,839 $ 34,022
Federal funds sold 0 660
Accrued interest receivable 7,766 7,301
Securities available for sale (Notes 4 and 10) 204,618 104,736
Investment securities held to maturity (Notes 4 and 10) 68,298 58,138
Loans held for sale 221,370 332,592
Loans receivable, net (Notes 5 and 10) 623,270 535,732
Investments in real estate (Note 7) 30,274 27,595
Real estate acquired in settlement of loans, net 2,096 2,947
Stock in Federal Home Loan Bank, at cost 8,736 10,892
Premises and equipment, net (Note 6) 23,275 21,868
Deferred income taxes (Note 11) 4,059 3,953
Other assets 8,399 9,047
----------- -----------
Total assets $ 1,230,000 $ 1,149,483
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits (Note 9) $ 879,665 $ 778,975
Federal Home Loan Bank advances and other borrowings (Note 10) 221,552 240,855
Advance payments by borrowers for property taxes and insurance 2,356 5,477
Drafts outstanding 12,800 30,716
Guaranteed preferred beneficial interests in debentures (Note 16) 28,750 0
Accrued expenses and other liabilities 10,060 18,758
----------- -----------
Total liabilities 1,155,183 1,074,781
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTES 4, 5 AND 21)
STOCKHOLDERS' EQUITY (NOTES 11, 12, 13, AND 15):
Common stock, $1 par value; 10,000,000 shares authorized, 6,124,064 and
6,037,100 shares issued at March 31, 1999 and 1998, respectively 6,124 6,037
Additional paid-in capital 38,206 37,336
Retained earnings 38,601 32,028
Accumulated other comprehensive income (Note 19) (283) 838
Employee Stock Ownership Trust note payable (1,978) (165)
Unamortized restricted stock (178) (296)
Treasury stock, 554,550 and 301,800 shares at cost at March 31, 1999 and 1998,
respectively (Note 18) (5,675) (1,076)
----------- -----------
Total stockholders' equity 74,817 74,702
----------- -----------
Total liabilities and stockholders' equity $ 1,230,000 $ 1,149,483
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 4
EAGLE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1999, 1998, AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME:
Interest on loans $76,128 $ 60,624 $ 51,503
Interest on mortgage-backed securities 5,896 5,032 5,510
Interest and dividends on securities and other interest-earning assets 8,719 6,244 6,772
------- -------- --------
Total interest income 90,743 71,900 63,785
------- -------- --------
INTEREST EXPENSE:
Interest on deposits (Note 9) 41,967 29,766 25,177
Interest on FHLB advances and other borrowings 13,124 10,241 8,452
Interest on long-term debt 1,687 0 0
------- -------- --------
Total interest expense 56,778 40,007 33,629
------- -------- --------
Net interest income 33,965 31,893 30,156
PROVISION FOR LOAN LOSSES (NOTE 5) 2,181 2,601 2,652
------- -------- --------
Net interest income after provision for loan losses 31,784 29,292 27,504
------- -------- --------
NONINTEREST INCOME:
Mortgage production fees 14,879 8,752 7,280
Gain on sales of investments in real estate 3,389 2,160 1,377
Real estate commissions, net 692 510 405
Rental income 693 773 353
Service charges 1,938 1,924 1,979
Gain on sales of loans 24 16 84
Gain (loss) on sales and calls of securities available for sale (Note 4) 469 (82) (21)
Gain on sales of fixed assets 164 45 0
Miscellaneous 3,230 2,251 1,454
------- -------- --------
Total noninterest income 25,478 16,349 12,911
------- -------- --------
NONINTEREST EXPENSES:
Salaries and employee benefits (Note 12) 22,998 19,157 17,620
Net occupancy expense 5,003 4,647 3,774
Data processing expense 2,419 2,160 1,462
Federal insurance premiums 575 351 702
saif assessment (Note 9) 0 0 1,946
Marketing expense 2,116 932 1,121
Provision for losses on real estate acquired in settlement of loans 231 565 95
Merger expenses (Note 3) 0 0 1,685
Miscellaneous 8,800 7,579 6,496
------- -------- --------
Total noninterest expenses 42,142 35,391 34,901
------- -------- --------
Income before income taxes 15,120 10,250 5,514
INCOME TAX EXPENSE (NOTE 11) 4,898 3,040 1,768
------- -------- --------
NET INCOME $10,222 $ 7,210 $ 3,746
======= ======== ========
EARNINGS PER COMMON SHARE--BASIC (NOTE 17) $ 1.79 $ 1.27 $ 0.68
======= ======== ========
EARNINGS PER COMMON SHARE--DILUTED (NOTE 17) $ 1.74 $ 1.23 $ 0.66
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 5
EAGLE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1999, 1998, AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ESOP
----------------- PAID-IN RETAINED NOTE
SHARES AMOUNT CAPITAL EARNINGS PAYABLE
------ ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1996 5,834 $ 5,834 $ 35,802 $ 27,589 $(1,000)
Comprehensive income:
Net income 0 0 0 3,746 0
Change in unrealized gains (losses) on securities, net of tax 0 0 0 0 0
Total comprehensive income
Cash dividends declared, ($.56 per share) 0 0 0 (3,099) 0
Principal reduction of ESOP note payable 0 0 0 0 164
Amortization of restricted stock 0 0 0 0 0
Stock options exercised (133,550 shares) 133 133 867 0 0
Cancellation of treasury stock (6,182 shares) (6) (6) (41) 0 0
------ ------- -------- -------- -------
BALANCE, MARCH 31, 1997 5,961 5,961 36,628 28,236 (836)
Comprehensive income:
Net income 0 0 0 7,210 0
Change in unrealized gains (losses) on securities, net of tax 0 0 0 0 0
Total comprehensive income
Cash dividends declared, ($.60 per share) 0 0 0 (3,418) 0
Principal reduction of ESOP note payable 0 0 0 0 671
Issuance of restricted stock (20,000 shares) 20 20 335 0 0
Amortization of restricted stock 0 0 0 0 0
Stock options exercised (55,606 shares) 56 56 373 0 0
------ ------- -------- -------- -------
BALANCE, MARCH 31, 1998 6,037 6,037 37,336 32,028 (165)
Comprehensive income:
Net income 0 0 0 10,222 0
Change in unrealized gains (losses) on securities, net of tax 0 0 0 0 0
Total comprehensive income
Cash dividends declared, ($.64 per share) 0 0 0 (3,649) 0
Principal reduction of ESOP note payable 0 0 0 0 187
ESOP note payable issued to acquire stock 0 0 0 0 (2,000)
Amortization of restricted stock 0 0 0 0 0
Stock options exercised (86,964 shares) 87 87 870 0 0
Purchase of treasury stock (252,750 shares) 0 0 0 0 0
------ ------- -------- -------- -------
BALANCE, MARCH 31, 1999 6,124 $ 6,124 $ 38,206 $ 38,601 $(1,978)
====== ======= ======== ======== =======
<CAPTION>
ACCUMULATED
UNAMORTIZED OTHER TOTAL
RESTRICTED TREASURY COMPREHENSIVE STOCKHOLDERS'
STOCK STOCK INCOME EQUITY
----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE, MARCH 31, 1996 $(135) $(1,123) $ (519) $ 66,448
Comprehensive income:
Net income 0 0 0 3,746
Change in unrealized gains (losses) on securities, net of tax 0 0 (506) (506)
--------
Total comprehensive income 3,240
Cash dividends declared, ($.56 per share) 0 0 0 (3,099)
Principal reduction of ESOP note payable 0 0 0 164
Amortization of restricted stock 121 0 0 121
Stock options exercised (133,550 shares) 0 0 0 1,000
Cancellation of treasury stock (6,182 shares) 0 47 0 0
----- ------- ------- --------
BALANCE, MARCH 31, 1997 (14) (1,076) (1,025) 67,874
Comprehensive income:
Net income 0 0 0 7,210
Change in unrealized gains (losses) on securities, net of tax 0 0 1,863 1,863
--------
Total comprehensive income 9,073
Cash dividends declared, ($.60 per share) 0 0 0 (3,418)
Principal reduction of ESOP note payable 0 0 0 671
Issuance of restricted stock (20,000 shares) (355) 0 0 0
Amortization of restricted stock 73 0 0 73
Stock options exercised (55,606 shares) 0 0 0 429
----- ------- ------- --------
BALANCE, MARCH 31, 1998 (296) (1,076) 838 74,702
Comprehensive income:
Net income 0 0 0 10,222
Change in unrealized gains (losses) on securities, net of tax 0 0 (1,121) (1,121)
--------
Total comprehensive income 9,101
Cash dividends declared, ($.64 per share) 0 0 0 (3,649)
Principal reduction of ESOP note payable 0 0 0 187
ESOP note payable issued to acquire stock 0 0 0 (2,000)
Amortization of restricted stock 118 0 0 118
Stock options exercised (86,964 shares) 0 0 0 957
Purchase of treasury stock (252,750 shares) 0 (4,599) 0 (4,599)
----- ------- ------- --------
BALANCE, MARCH 31, 1999 $(178) $(5,675) $ (283) $ 74,817
===== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 6
Page 1 of 2
EAGLE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1999, 1998, AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,222 $ 7,210 $ 3,746
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation, amortization, and accretion 1,980 747 (307)
Provision for loan losses 2,181 2,601 2,652
Provision for losses on real estate acquired in settlement of
loans 231 565 95
Amortization of restricted stock award 118 73 121
Loss on sales of real estate acquired in settlement of loans 40 10 22
Gain on sales of investments in real estate (3,389) (2,160) (1,377)
(Gain) loss on sales and calls of securities available for sale (469) 82 21
Gain on sales of loans (24) (16) (84)
Gain on sales of fixed assets (164) (45) 0
Deferred income tax expense (benefit) 582 (2,811) (744)
Proceeds from sales of loans held for sale 1,485,825 729,764 583,762
Origination of loans held for sale (1,374,603) (999,474) (554,092)
Changes in assets and liabilities:
Increase in accrued interest receivable (465) (1,829) (517)
Decrease (increase) in other assets 412 (2,600) (133)
(Decrease) increase in drafts outstanding (17,916) 1,673 4,620
(Decrease) increase in accrued expenses and other liabilities (8,728) 4,589 2,693
----------- --------- ---------
Net cash provided by (used in) operating activities 95,833 (261,621) 40,478
----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale (145,330) (27,865) (15,111)
Proceeds from sales of securities available for sale 9,441 1,957 6,731
Purchases of investment securities held to maturity (29,959) (37,184) (20,588)
Principal payments received on securities available for sale 24,040 7,450 5,068
Principal payments received on investment securities held to maturity 2,157 2,181 2,806
Proceeds from calls of securities available for sale 7,750 8,273 1,948
Proceeds from calls of investment securities held to maturity 17,653 18,500 3,000
Proceeds from maturities of investment securities held to maturity 0 10,300 18,300
Proceeds from maturities of securities available for sale 2,729 5,250 9,600
Loan originations, net of repayments (86,515) (15,032) (86,838)
Purchases of loans receivable 0 (569) (18,022)
Purchases of FHLB stock (6,631) (7,050) (5,032)
Redemption of FHLB stock 8,787 4,022 5,733
Proceeds from sales of real estate acquired in settlement of loans 1,957 470 1,349
Purchases of premises and equipment, net (3,359) (3,435) (5,756)
Proceeds from sales of investments in real estate 11,177 1,675 2,344
Additions to investments in real estate (14,515) (8,708) (16,870)
----------- --------- ---------
Net cash used in investing activities (200,618) (39,765) (111,338)
=========== ========= =========
</TABLE>
<PAGE> 7
Page 2 of 2
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in time deposits $ 35,034 $ 142,570 $ 86,471
Net increase in demand deposits 65,656 78,681 12,795
(Decrease) increase in advance payments by borrowers for property
taxes and insurance (3,121) 4,198 (232)
Proceeds from FHLB advances and other borrowings 842,461 810,245 239,460
Repayments of FHLB advances and other borrowings (861,764) (723,195) (259,992)
Principal reduction of ESOP note payable 187 671 164
Issuance of ESOP note payable to acquire common stock (2,000) 0 0
Issuance of trust preferred securities 28,750 0 0
Proceeds from the exercise of stock options 957 429 1,000
Purchase of treasury stock (4,599) 0 0
Cash dividends paid (3,619) (3,406) (2,842)
----------- --------- ---------
Net cash provided by financing activities 97,942 310,193 76,824
----------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (6,843) 8,807 5,964
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 34,682 25,875 19,911
----------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 27,839 $ 34,682 $ 25,875
=========== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING YEAR
FOR:
Interest $ 55,616 $ 38,620 $ 33,143
=========== ========= =========
Income taxes $ 10,533 $ 5,138 $ 2,358
=========== ========= =========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Acquisition of real estate in settlement of loans $ 2,178 $ 2,769 $ 3,475
=========== ========= =========
Loans made to finance sales of real estate acquired in settlement
of loans $ 801 $ 816 $ 1,279
=========== ========= =========
Loans made to finance sales of investments in real estate $ 3,960 $ 7,338 $ 2,792
=========== ========= =========
Dividends payable $ 891 $ 861 $ 849
=========== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 8
EAGLE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998, AND 1997
1. CORPORATE PROFILE
Eagle Bancshares, Inc. (the "Company" or "Eagle") 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 (Note 7).
Tucker Federal Bank is engaged in banking and mortgage banking activities.
The Bank provides a full range of financial services to individual and
corporate customers through its branches located in metropolitan Atlanta.
Prime Eagle Mortgage Corporation ("PrimeEagle"), the Bank's mortgage
banking subsidiary, originates residential mortgages through loan
production offices in the southeast. The Bank is subject to competition
from other financial institutions in the markets in which it operates. The
Bank is federally regulated by the Office of Thrift Supervision ("OTS")
and certain other federal agencies.
EREA was formed in October 1991 to perform third-party real estate
brokerage, development and sales activities, and assist the Bank in
identifying and acquiring branch sites. Currently, EREA primarily performs
residential real estate development and sales activities in the Atlanta
metropolitan area (Note 7).
EBCG was formed in December 1997 to serve the Bank's growing base of
small- and medium-sized businesses by providing mezzanine financing that
is not readily available from traditional commercial banking sources.
Loans with equity features are made to borrowers that have the potential
for significant growth, adequate collateral coverage, and experienced
management teams with significant ownership.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Eagle Bancshares, Inc. include
the accounts of the Bank, EREA, EBCG, and Eagle's majority-owned real
estate subsidiaries. Significant intercompany accounts and transactions
are eliminated in consolidation.
<PAGE> 9
-2-
USE OF ESTIMATES
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles ("GAAP"). The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
SECURITIES
Investments in debt and equity securities are classified into one of two
categories, described and accounted for as follows:
SECURITIES AVAILABLE FOR SALE
Debt and equity securities that may be used to meet liquidity or
other needs are reported at fair value, with unrealized gains and
losses, net of income taxes, excluded from earnings and reported
as a separate component of stockholders' equity.
INVESTMENT SECURITIES HELD TO MATURITY
Debt securities that the Company has the positive intent and
ability to hold to maturity are reported at amortized cost.
Premiums and discounts related to securities are amortized or accreted
over the life of the related security as an adjustment to the yield using
the effective interest method and considering prepayment assumptions.
Dividend and interest income is recognized when earned.
Gains and losses on sales or calls of securities are recognized on the
settlement date based on the adjusted cost basis of the specific security.
The financial statement impact of settlement date accounting versus trade
date accounting is not significant.
LOANS
Loans held for investment are stated at their unpaid principal balances,
less the undisbursed portion of loans in process, unearned interest,
unamortized discounts and premiums, deferred loan fees, and the reserve
for loan losses.
Loans held for sale are carried at the lower of cost or estimated market
value, as determined by outstanding commitments from investors or current
investor yield requirements calculated on an aggregate basis.
Interest income on all classifications of loans is accrued based on the
outstanding principal amounts over the terms of the loans on a level-yield
basis, except those classified as nonaccrual loans. Interest accrual is
discontinued when it appears that future collection of principal or
interest according to the contractual terms may be doubtful. Interest
income on nonaccrual loans is recognized on a cash basis if there is no
doubt of future collection of
<PAGE> 10
-3-
principal. Unearned discounts and premiums are recognized over the term of
the loan on a level-yield basis. Loan origination fees, net of certain
direct origination costs, are deferred and amortized to income over the
contractual life of the loan using a level-yield method, adjusted for loan
curtailment payments.
RESERVE FOR LOAN LOSSES
A provision for loan losses is charged to operations based on management's
evaluation of the probable losses in the loan portfolio. This evaluation
considers the balance of nonaccrual loans, the estimated value of the
underlying collateral, the nature and volume of the portfolio, loan
concentrations, specific problem loans, economic conditions that may
affect the borrower's ability to repay, and such other factors as, in
management's judgment, deserve recognition under existing economic
conditions. Loans are charged off to the allowance when, in the opinion of
management, such loans are deemed to be uncollectible. Subsequent
recoveries are added to the allowance.
Management believes that the reserve for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the reserve may be necessary based on changes in economic
conditions, particularly in the Company's primary market areas. In
addition, various regulatory agencies, as an integral part of their
examination processes, periodically review the Company's reserve for loan
losses. Such agencies may require the Company to recognize additions to
the reserve based on their judgments about information available to them
at the time of their examination.
MORTGAGE PRODUCTION FEES
The Bank originates loans for sale in the secondary market. Loans held for
sale are sold on a servicing released basis to private investors. Fees
received relating to the origination and sale of these loans are included
in mortgage production fees when the loans are sold. Mortgage production
fees consist of loan servicing release premiums and loan origination and
discount points, net of loan officer commissions and other direct costs.
STOCK IN FEDERAL HOME LOAN BANK ("FHLB")
Investment in stock of the FHLB is required of institutions utilizing its
services. The investment is carried at cost, since no ready market exists
for the stock and it has no quoted market value.
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
Real estate acquired in settlement of loans is considered to be held for
sale and is carried at the lesser of the remaining loan value or fair
value, adjusted for estimated costs to sell. Such determination is made on
an individual asset basis. Any excess of the loan balance at the time of
foreclosure over the net realizable value of the real estate held as
collateral is treated as a loan charge-off. A provision for estimated
losses on real estate is charged to earnings when a subsequent decline in
value occurs. The allowance for estimated losses on real estate acquired
in the settlement of loans was approximately $251,000 and $633,000 at
March 31, 1999 and 1998, respectively. Costs relating to holding
properties are charged to operations.
<PAGE> 11
-4-
INVESTMENTS IN REAL ESTATE
Investments in real estate are carried at the lower of cost or net
realizable value. Certain carrying charges, including interest, related to
properties under development are capitalized as development costs during
the construction period. Profits are recognized from the sale of real
estate when the sale is consummated based on the selling price, net of the
related total development costs associated with the real estate sold.
LONG-LIVED ASSETS
Premises and equipment are carried at cost, less accumulated depreciation.
Depreciation is provided on a straight-line basis over the estimated
useful lives of the related assets. Estimated lives are 15 to 40 years for
office buildings and improvements and 3 to 10 years for furniture,
fixtures, and equipment.
Other assets in the accompanying statements of financial condition include
$144,000 and $317,000 at March 31, 1999 and 1998, respectively, of
intangible assets related to core deposit premiums. These intangible
assets are being amortized using a method which approximates a level yield
over nine years.
Long-lived assets are evaluated regularly for other-than-temporary
impairment. If circumstances suggest that their values may be impaired and
the write-down would be material, an assessment of recoverability is
performed prior to any write-down of the asset. Impairment on intangibles
is evaluated at each statement of financial condition date or whenever
events or changes in circumstances indicate that the carrying amount
should be assessed. Impairment, if any, is recognized through a valuation
allowance with a corresponding charge recorded in the statement of income.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are used to hedge interest rate exposures by modifying the
interest rate characteristics of related balance sheet instruments. The
specific criteria required for derivatives used as hedges are described
below. Derivatives that do not meet these criteria are carried at market
value with changes in value recognized currently in earnings. Currently,
it is not the Company's policy to hold derivatives that do not qualify as
hedges.
Derivatives used as hedges must be effective at reducing the risk
associated with the exposure being hedged and must be designated as a
hedge at the inception of the derivative contract. Derivatives used for
hedging purposes may include swaps, forwards, and purchased options. The
fair value of derivative contracts are carried off-balance sheet and the
unrealized gains and losses on derivative contracts are generally
deferred. The interest component associated with derivatives used as
hedges or to modify the interest rate characteristics of assets and
liabilities is recognized over the life of the contract in net interest
income. During fiscal 1998, the Company purchased an interest rate floor
on an investment security. The unamortized balance of this purchased
option as of March 31, 1999 and 1998 is approximately $57,500 and $72,000,
respectively.
<PAGE> 12
-5-
INCOME TAXES
Deferred tax assets and liabilities are computed based on the difference
between the financial statement and income tax bases of assets and
liabilities using enacted tax rates. Deferred income tax expense or
benefit is based on the changes in the underlying difference between the
book and tax bases of assets and liabilities from year to year.
The Company files consolidated income tax returns.
EARNINGS PER SHARE
Basic earnings per share are based on the weighted average number of
common shares outstanding during each period. Diluted earnings per common
share are based on the weighted average number of common shares
outstanding during each period plus common share equivalents calculated
for stock options and restricted stock outstanding using the treasury
stock method.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 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. Recently, the FASB
issued an exposure draft which proposed deferring the effective date of
this statement to all fiscal quarters of fiscal years beginning after June
15, 2000. Adoption of this statement is not expected to have a material
impact on the Company's financial position or results of operation.
CASH EQUIVALENTS
Cash equivalents include amounts due from banks and federal funds sold.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year balances in order
to conform with the current year financial statement presentation.
3. MERGER
On March 26, 1997, Eagle acquired all of the outstanding shares of
Southern Crescent Financial Corp. ("SCFC"), a bank holding company located
in Union City, Georgia, with four branches, in accordance with the
Agreement and Plan of Merger dated August 13, 1996. Simultaneously
therewith, Southern Crescent Bank, a wholly owned commercial bank
subsidiary of SCFC, merged with and into the Bank. The Company is the
surviving corporation in the merger, and the Bank is the surviving entity
in the bank merger and will remain a wholly owned savings association of
the Company. The merger was accounted
<PAGE> 13
-6-
for as a pooling of interests and, accordingly, the consolidated financial
statements have been restated to include SCFC.
The consideration tendered in the transaction was valued at approximately
$18.5 million based on the average of the closing bid and ask price quoted
on the NASDAQ for the 30 consecutive trading days ending on the date that
was 5 trading days prior to the closing date. Based on the calculated
stock price, SCFC shareholders received 1.162 shares of Company stock for
each share of SCFC stock. This was the minimum exchange ratio as defined
in the Merger Agreement and, as a result, the Company issued 1,107,494
shares of common stock.
Results of operations for Eagle and SCFC (prior to the merger) and
combined results of operations for the Company are presented below for the
fiscal year ended March 31, 1997 (in thousands, except per share data):
<TABLE>
<CAPTION>
HISTORICAL
---------------------
EAGLE SCFC COMBINED
-------- --------- --------
<S> <C> <C> <C>
Net interest income $23,576 $6,580 $30,156
Noninterest income 11,653 1,258 12,911
Net income 2,811 935 3,746
Net income per share (diluted) $0.62 $ 0.98 $ 0.66
</TABLE>
The Company incurred approximately $1,685,000 in legal, accounting,
consulting, and other professional service fees during fiscal 1997 that
were directly related to this merger.
4. SECURITIES
Securities available for sale at March 31, 1999 and 1998 are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST LOSSES GAINS VALUE
--------- --------- --------- --------
<S> <C> <C> <C> <C>
1999:
Mortgage-backed securities $ 95,724 $ (741) $ 556 $ 95,539
U.S. government and agency
obligations 35,517 (211) 2 35,308
Equity securities--preferred stock 11,996 (113) 396 12,279
Corporate bonds 1,995 0 32 2,027
Other debt securities 59,843 (442) 64 59,465
--------- --------- --------- --------
Total $ 205,075 $ (1,507) $ 1,050 $204,618
========= ========= ========= ========
</TABLE>
<PAGE> 14
-7-
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST LOSSES GAINS VALUE
--------- --------- --------- --------
<S> <C> <C> <C> <C>
1998:
Mortgage-backed securities $ 69,919 $ 0 $ 707 $ 70,626
U.S. government and agency
obligations
16,225 (161) 4 16,068
Equity securities preferred stock 11,503 (8) 715 12,210
Corporate bonds 1,989 0 48 2,037
Other debt securities 3,748 (6) 53 3,795
--------- --------- --------- --------
Total $ 103,384 $ (175) $ 1,527 $104,736
========= ========= ========= ========
</TABLE>
Proceeds from the sales of debt securities were approximately $9,441,000,
$1,957,000, and $6,731,000, resulting in gross realized gains of
approximately $471,000, $5,000, and $40,000, respectively, during the
years ended March 31, 1999, 1998, and 1997, respectively. During the years
ended March 31, 1999, 1998, and 1997 proceeds from calls of securities
available for sale were $7,750,000, $8,273,000, and $1,948,000
respectively, resulting in gross realized losses of approximately $2,000,
$87,000, and $61,000 respectively.
Investment securities held to maturity at March 31, 1999 and 1998 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST LOSSES GAINS VALUE
--------- --------- --------- --------
<S> <C> <C> <C> <C>
1999:
Mortgage-backed securities $ 32,866 $ (75) $ 122 $ 32,913
U.S. government and agency
obligations 18,539 (14) 127 18,652
Corporate bonds 7,433 0 298 7,731
Other debt securities 9,460 0 510 9,970
--------- --------- --------- --------
Total $ 68,298 $ (89) $ 1,057 $ 69,266
1998:
Mortgage-backed securities $ 5,010 $ (19) $ 58 $ 5,049
U.S. government and agency
obligations 36,188 (42) 78 36,224
Corporate bonds 7,431 0 400 7,831
Other debt securities 9,509 0 516 10,025
--------- --------- --------- --------
Total $ 58,138 $ (61) $ 1,052 $ 59,129
========= ========= ========= ========
</TABLE>
<PAGE> 15
-8-
The amortized cost and estimated market value of available for sale and
held to maturity debt securities at March 31, 1999, by contractual
maturity, are as follows (in thousands):
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
SECURITIES
-----------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
-------- --------
<S> <C> <C>
Due in one year or less $ 2,103 $ 2,136
Due in one to five years 6,990 7,015
Due in five to ten years 44,769 44,853
Due after ten years 139,217 138,335
-------- --------
$193,079 $192,339
======== ========
</TABLE>
<TABLE>
<CAPTION>
HELD TO MATURITY
SECURITIES
-----------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
-------- --------
<S> <C> <C>
Due in one year or less $ 3,509 $ 3,511
Due in one to five years 14,971 15,197
Due in five to ten years 7,492 7,675
Due after ten years 42,326 42,883
-------- --------
$ 68,298 $ 69,266
======== ========
</TABLE>
Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
At March 31, 1999, 1998, and 1997, securities with a carrying amount of
$76,193,000, $58,408,000, and $21,742,000, respectively, were pledged as
collateral for public funds.
5. LOANS RECEIVABLE
At March 31, 1999 and 1998, loans receivable are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Real estate loans:
Construction $210,877 $197,811
Acquisition and development 71,995 41,992
Nonresidential 58,562 71,515
Residential 272,553 192,994
Home equity and second 61,699 46,218
-------- --------
Total real estate loans 675,686 550,530
-------- --------
</TABLE>
<PAGE> 16
-9-
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Commercial and consumer loans:
Commercial $ 22,896 $ 15,681
Mezzanine 4,138 10,746
Leases 3,354 9,463
Consumer and other 31,263 33,755
Total commercial and consumer loans 61,651 69,645
Gross loans receivable 737,337 620,175
Less:
Undisbursed portion of loans in process (106,704) (77,302)
Deferred fees and other unearned income, net of
premiums (18) (636)
Reserve for loan losses (7,345) (6,505)
-------- --------
Loans receivable, net $623,270 $535,732
======== ========
</TABLE>
Loans are normally placed on nonaccrual when payments have been in default
for 90 days or more. At March 31, 1999, 1998, and 1997, the Company had
nonaccrual loans aggregating approximately $6,692,000, $7,948,000, and
$7,866,000, respectively. The interest income not recognized on these
loans amounted to $386,000, $431,000, and $241,000 for the years ended
March 31, 1999, 1998, and 1997, respectively.
Impaired loans exclude residential mortgages, construction loans secured
by first mortgage liens, and groups of small homogeneous loans and
amounted to $581,000 at March 31, 1999, compared to $1,783,000 at March
31, 1998. Management considers a loan to be impaired when the loan is
classified as nonaccrual and based on current information, it is probable
that the Company will not receive all amounts due in accordance with the
contractual terms of the loan agreement. Specific allowances for loan
losses are allocated for impaired loans based on a comparison of the
recorded carrying value of the loan to either the present value of the
loan's expected cash flow, the loan's estimated market price, or the
estimated fair value of the underlying collateral. At March 31, 1999 and
1998, the valuation allowance related to these impaired loans was $214,000
and $455,000, respectively, which is included in the reserve for loan
losses in the accompanying consolidated statements of financial condition.
At March 31, 1999 and 1998, all impaired loans had a related loan loss
reserve. During the year ended March 31, 1999, the Company charged-off
$450,000 against loan loss reserves related to impaired loans. During the
year ended March 31, 1998, the Company had no charge-offs related to
impaired loans. For the years ended March 31, 1999 and 1998, the average
recorded investment in impaired loans was $1,375,000 and $1,784,000,
respectively.
<PAGE> 17
-10-
At March 31, 1999, 1998, and 1997, an analysis of the reserve for loan
losses is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Reserve for loan losses, beginning of year $ 6,505 $ 5,198 $ 5,464
Chargeoffs (1,821) (1,548) (3,124)
Recoveries 480 254 206
Provision for loan losses 2,181 2,601 2,652
----------- --------- ---------
Reserve for loan losses, end of year $ 7,345 $ 6,505 $ 5,198
=========== ========= =========
</TABLE>
Substantially all of the Company's loans held for investment are secured
by real estate in Georgia, Florida, North Carolina, and Tennessee.
Additionally, no single customer accounted for more than 2% of the
Company's loans in fiscal years 1999 or 1998.
The Company was servicing loans for others with aggregate principal
balances of approximately $20,175,000, $24,979,000, and $12,341,000 at
March 31, 1999, 1998, and 1997, respectively.
At March 31, 1999 and 1998, the Company had sold approximately $2,884,000
and $29,663,000, respectively, of loans with recourse. The recourse period
is 3 to 12 months on a substantial majority of these loans. Investors can
exercise their recourse options in the event the borrowers default on the
loans during the recourse period. During the years ended March 31, 1999,
1998, and 1997, the Company has incurred nominal losses from the
repurchase of recourse loans.
At March 31, 1999, the Company had commitments to originate fixed rate
mortgage loans of approximately $59,284,000 and commitments to originate
variable rate mortgage loans of approximately $5,976,000 with terms up to
30 years and interest rates ranging from 6.125% to 9%. The Company had
commitments to sell mortgage loans of approximately $220,823,000 at March
31, 1999. In addition, the Company is committed to loan funds on unused
variable rate lines of credit of approximately $45,497,000 at March 31,
1999. These off-balance sheet commitments represent the unused portion of
home equity lines of credit, which are secured by residential real estate.
<PAGE> 18
-11-
6. PREMISES AND EQUIPMENT
At March 31, 1999 and 1998, premises and equipment are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Land $ 4,502 $ 4,879
Office buildings and improvements 15,957 13,499
Furniture, fixtures, and equipment 13,353 11,882
-------- --------
33,812 30,260
Less accumulated depreciation 10,537 8,392
-------- --------
$ 23,275 $ 21,868
======== ========
</TABLE>
7. INVESTMENTS IN REAL ESTATE
The Company has ownership interests in eight real estate projects as of
March 31, 1999. As a unitary thrift holding company, the Company is
permitted to invest in real estate. The most significant portion of the
Company's investment in real estate is land to be developed or in process
of development for residential subdivisions. All eight real estate
investments are located in metropolitan Atlanta. The Company consolidates
each project on a line-by-line basis, except Hampton Oaks L.P., which is
accounted for using the equity method. There would not be a material
difference in the financial position or results of operations of the
Company if this investment were accounted for as a consolidated
investment. The following information summarizes the principal activities
and financial data of each investment and reflects the individual
project's financial information (tabular information in thousands).
UNION HILL, LLC
In October 1994, Union Hill, LLC ("Union Hill") was formed to purchase and
develop a residential community on 237 acres of land located in Forsyth
County, Georgia. The Company has an 80% ownership interest and shares 50%
in the profits of Union Hill after the allocation of the preferred return.
<TABLE>
<CAPTION>
AS OF MARCH 31
----------------------
1999 1998
-------- --------
<S> <C> <C>
Summary financial position:
Real estate property $ 2,937 $ 3,244
Total assets 3,027 3,259
Total debt 1,077 1,230
Total equity 1,890 1,870
Company's share of equity 1,262 935
</TABLE>
<PAGE> 19
-12-
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED MARCH 31
---------------------
1999 1998
-------- --------
Summary operations:
<S> <C> <C>
Gross profit from lot sales $ 1,022 $ 1,615
Net income 1,020 1,583
Company's share of net income 844 869
</TABLE>
TRIMBLE ROAD DEVELOPMENT, LLC
In February 1996, Trimble Road Development, LLC ("Trimble Road") was
formed to purchase and develop a residential community on 14 acres in
Fulton County, Georgia. The Company has a 100% ownership interest in
Trimble Road. The development and sale of all of the property associated
with Trimble Road was completed during fiscal year 1998.
<TABLE>
<CAPTION>
AS OF
MARCH 31
----------------------
1999 1998
-------- --------
<S> <C> <C>
Summary financial position:
Real estate property $ 0 $ 0
Total assets 6 784
Total debt 0 0
Total equity 5 610
Company's share of equity 5 610
</TABLE>
<TABLE>
<CAPTION>
FOR THE
YEARS ENDED
MARCH 31
----------------------
1999 1998
-------- --------
<S> <C> <C>
Summary operations:
Gross profit from lot sales $ 173 $ 331
Net income 168 229
Company's share of net income 168 229
</TABLE>
RIVERMOORE PARK, LLC
In November 1996, the Company purchased 353 acres of land in Gwinnett
County, Georgia, for the purpose of developing a residential community,
Rivermoore Park ("Rivermoore"). In September 1997, the Company transferred
ownership interest in this land to Rivermoore Park, LLC as an initial
equity investment. The Company has a 100% ownership interest in
Rivermoore.
<PAGE> 20
-13-
<TABLE>
<CAPTION>
AS OF MARCH 31
----------------------
1999 1998
-------- --------
<S> <C> <C>
Summary financial position:
Real estate property $ 11,086 $ 12,390
Total assets 17,666 13,599
Total debt 8,000 9,086
Total equity 8,735 3,940
Company's share of equity 8,735 3,940
FOR THE YEARS
ENDED MARCH 31
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Summary operations:
Gross profit from lot sales $ 2,401 $ 1,156
Net income 1,745 953
Company's share of net income 1,745 953
</TABLE>
LEBANON ROAD, LLC
In July 1997, Lebanon Road, LLC was formed to purchase 63 acres of land in
Gwinnett County, Georgia, for the purpose of developing a 130-lot
residential community, Sugarloaf Springs ("Sugarloaf). The Company has a
60% ownership interest and shares 60% in the profits of Sugarloaf after
the allocation of the preferred return.
<TABLE>
<CAPTION>
AS OF MARCH 31
----------------------
1999 1998
-------- --------
<S> <C> <C>
Summary financial position:
Real estate property $ 1,530 $ 2,477
Total assets 1,625 2,480
Total debt 894 1,985
Total equity 673 387
Company's share of equity 559 387
FOR THE YEARS
ENDED MARCH 31
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Summary operations:
Gross profit from lot sales $ 352 $ 0
Net income 353 0
Company's share of net income 239 0
</TABLE>
<PAGE> 21
-14-
WINDSOR PARKWAY DEVELOPMENT, LLC
In September 1998, Windsor Parkway Development, LLC was formed to purchase
14 acres of land in DeKalb County, Georgia, for the purpose of developing
a residential community, Windsor Park ("Windsor"). The Company has a 100%
ownership interest in Windsor. As of March 31, 1999, the operations of
this property have been insignificant.
<TABLE>
<CAPTION>
AS OF
MARCH 31,
1999
---------------
<S> <C>
Summary financial position:
Real estate property $3,866
Total assets 3,867
Total debt 2,752
Total equity 1,089
Company's share of equity 1,089
</TABLE>
JOHNSON ROAD DEVELOPMENT, LLC
In November 1998, Johnson Road Development, LLC was formed to purchase 21
acres of land in Gwinnett County, Georgia, for the purpose of developing a
residential community, Pendleton Park ("Pendleton"). The Company has a
100% ownership interest in Pendleton. As of March 31, 1999, the operations
of this property have been insignificant.
<TABLE>
<CAPTION>
AS OF
MARCH 31,
1999
---------------
<S> <C>
Summary financial position:
Real estate property $1,578
Total assets 1,692
Total debt 1,052
Total equity 634
Company's share of equity 634
</TABLE>
BN DEVELOPMENT CO., LLC
In December 1995, BN Development Co., LLC ("BN Development") was formed
for the purpose of acquiring a commercial lot and developing and leasing a
30,000-square-foot Barnes & Noble, Inc. superstore. During fiscal year
1997, development was completed and the building was leased to Barnes &
Noble, Inc. In fiscal 1997, the Company had a 50% ownership interest and
shared 50% in the profits of BN Development. During fiscal 1998, the
Company purchased the remaining 50% interest in BN Development, increasing
the Company's ownership percentage to 100%.
<PAGE> 22
-15-
<TABLE>
<CAPTION>
AS OF MARCH 31
----------------------
1999 1998
-------- --------
<S> <C> <C>
Summary financial position:
Real estate property $ 6,602 $ 6,685
Total assets 7,070 6,950
Total debt 5,247 5,267
Total equity 1,822 1,677
Company's share of equity 1,822 1,677
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED MARCH 31
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Summary operations:
Rental income $ 693 $ 782
Expenses 556 596
Net income 145 192
Company's share of net income 145 192
</TABLE>
HAMPTON OAKS L.P.
The Company, in keeping with its goal of providing affordable housing,
invested in Hampton Oaks L.P. to construct a 50-unit affordable housing
project. The development was completed in October 1995 and was 96% and 92%
occupied during fiscal years 1999 and 1998, respectively. The Company has
a 99% limited partnership interest and is recognizing investment tax
credits of approximately $173,000 per year over 15 years through 2010. On
a consolidated basis, the Company's investment in and advances to Hampton
Oaks L.P. are $2,675,000 and $2,799,000 at March 31, 1999 and 1998,
respectively, and are reflected in investments in real estate in the
accompanying statements of financial condition.
<TABLE>
<CAPTION>
AS OF MARCH 31
----------------------
1999 1998
-------- --------
<S> <C> <C>
Summary financial position:
Real estate property $ 3,182 $ 3,262
Total assets 3,272 3,393
Total debt (payable to Bank) 1,685 1,721
Total equity 1,529 1,604
Company's share of equity 1,131 1,205
</TABLE>
<PAGE> 23
-16-
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED MARCH 31
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Summary operations:
Rental income $ 351 $ 403
Other expense 435 485
Net loss (74) (33)
Company's share of net loss (74) (33)
</TABLE>
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at March 31, 1999 and 1998
(in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------- ---------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and amounts due from banks and
federal funds sold $ 27,839 $ 27,839 $ 34,682 $ 34,682
Securities:
Available for sale 204,618 204,618 104,736 104,736
Held to maturity 68,298 69,266 58,138 59,129
Stock in FHLB 8,736 8,736 10,892 10,892
Loans receivable 623,270 631,779 535,732 548,579
Loans held for sale 221,370 225,470 332,592 337,732
Accrued interest receivable 7,766 7,766 7,301 7,301
Financial liabilities:
Deposits 879,665 887,308 778,975 779,233
FHLB advances and other borrowings 221,552 221,702 240,855 241,238
Guaranteed preferred beneficial
interests in debentures 28,750 28,247 0 0
Accrued interest payable 6,111 6,111 4,949 4,949
</TABLE>
The following methods and assumptions were used by the Company in
estimating the fair values of financial instruments:
- Cash and amounts due from banks and federal funds sold are
valued at their carrying amounts reported in the consolidated
statements of financial condition, which are reasonable
estimates of fair value due to the relatively short period to
maturity of these instruments.
<PAGE> 24
-17-
- Securities are valued at quoted market prices, where
available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable
instruments. Stock in FHLB is carried at cost, since no ready
market exists for this stock and it has no quoted market
value.
- Loans receivable are valued on the basis of estimated cash
flows, discounted using the current rates at which similar
loans would be made to borrowers with similar credit ratings
and for the same remaining maturities. The carrying amount of
accrued interest receivable approximates its fair value.
- Loans held for sale are valued based on outstanding
commitments from investors or current investor yields.
- Deposits with no defined maturity, such as demand deposits,
savings accounts, NOW, and money market accounts, have fair
values equal to the amounts payable on demand, which are
equal to their respective carrying amounts. Fair values of
certificates of deposit are estimated using a discounted cash
flow calculation using the rates currently offered for
deposits of similar remaining maturities. The intangible
value of long-term relationships with depositors is not taken
into account in estimating the fair value. The carrying
amount of accrued interest payable approximates its fair
value.
- Fair values of FHLB advances and other borrowings are
estimated using a discounted cash flow calculation using the
Company's current incremental borrowing rates for similar
types of instruments.
- Guaranteed preferred beneficial interests in debentures are
valued at quoted market prices.
- Off-balance sheet instruments include commitments to extend
credit and standby letters of credit. The fair values of such
instruments are based on fees currently charged for similar
arrangements in the marketplace, adjusted for changes in
terms and credit risk, as appropriate. The carrying values of
these unamortized fees and, hence, the fair values of the
related commitments, were not significant as of March 31,
1999 and 1998.
9. DEPOSITS
At March 31, 1999 and 1998, deposits are summarized by type and remaining
term as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Demand deposits:
Noninterest-bearing deposits $ 45,737 $ 61,070
Interest-bearing deposits 122,183 86,360
Money market 85,516 38,862
Savings 36,922 38,410
-------- --------
Total demand deposits 290,358 224,702
-------- --------
</TABLE>
<PAGE> 25
-18-
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Time deposits:
Maturity one year or less $427,203 $411,179
Maturity greater than one year through two years 71,337 47,590
Maturity greater than two years through three years 25,568 36,533
Maturity greater than three years 65,199 58,971
-------- --------
Total time deposits 589,307 554,273
-------- --------
Total deposits $879,665 $778,975
======== ========
</TABLE>
The weighted average interest rate on time deposits at March 31, 1999 and
1998 was 5.6% and 5.94%, respectively.
Interest expense on deposits for the years ended March 31, 1999, 1998, and
1997 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Interest-bearing demand deposits $ 3,608 $ 1,721 $ 993
Money market 2,772 1,033 496
Savings 912 1,053 1,128
Time deposits 34,675 25,959 22,560
----------- --------- ---------
$ 41,967 $ 29,766 $ 25,177
=========== ========= =========
</TABLE>
On September 30, 1996, President Clinton signed into law the Deposit
Insurance Funds Act of 1996 (the "Act"), which contained provisions to
capitalize the Savings Association Insurance Fund ("SAIF") by imposing a
special assessment on federally insured depository institutions to fund
Financing Corporation Bonds and to merge the Bank Insurance Fund with the
SAIF.
Pursuant to the Act, on October 8, 1996, the board of directors of the
FDIC imposed a special assessment on SAIF-assessable deposits of the Bank
equal to $.657 per $100 of SAIF-insured deposits as of March 31, 1995. The
special assessment resulted in a one-time charge in fiscal 1997 in the
amount of $1,946,000. The Act also provided for the establishment of a new
deposit insurance premium rate on SAIF-insured deposits of $.06 per $100,
which is significantly lower than the Bank's previous premium rate of $.23
per $100.
<PAGE> 26
-19-
10. FHLB ADVANCES AND OTHER BORROWINGS
FHLB advances and other borrowings at March 31, 1999 and 1998 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
FHLB advances $157,500 $217,835
Other borrowings 64,052 23,020
-------- --------
$221,552 $240,855
======== ========
</TABLE>
At March 31, 1999, FHLB advances are at least 125% collateralized by
unencumbered mortgage loans and approximately $60,490,000 of investment
securities. The advances mature at various dates through June 2008. The
weighted average interest rate on FHLB advances was 5.38% and 5.88% at
March 31, 1999 and 1998, respectively. Maximum short-term borrowings
during the years ended March 31, 1999 and 1998 were $155,521,000 and
$164,320,000, respectively.
As of March 31, 1999, repayments of FHLB advances and other borrowings,
based on contractual maturities, are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year:
<S> <C>
2000 $ 8,316
2001 25,184
2002 25,184
2003 50,184
2004 25,184
Thereafter 87,500
--------
$221,552
========
</TABLE>
11. INCOME TAXES
Income tax expense for the years ended March 31, 1999, 1998, and 1997 is
allocated as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Current expense:
Federal $ 3,785 $ 5,327 $ 2,477
State 531 524 35
----------- --------- ---------
4,316 5,851 2,512
----------- --------- ---------
Deferred expense (benefit):
Federal 643 (2,360) (559)
State (61) (451) (185)
----------- --------- ---------
582 (2,811) (744)
----------- --------- ---------
$ 4,898 $ 3,040 $ 1,768
=========== ========= =========
</TABLE>
<PAGE> 27
-20-
The following is a summary of the differences between the income tax
expense as shown in the accompanying financial statements and the income
tax expense which would result from applying the federal statutory tax
rate for fiscal years 1999, 1998, and 1997 to income before income taxes
(in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Expected income tax expense $ 5,292 $ 3,488 $ 1,875
(Decrease) increase in income taxes resulting from:
State income taxes, net of federal income tax benefit
(expense) 306 47 (99)
Income tax credits (173) (173) (173)
Interest and dividend income (361) (266) (34)
Merger expenses 0 0 199
Other (166) (56) 0
----------- --------- ---------
Actual income tax expense $ 4,898 $ 3,040 $ 1,768
=========== ========= =========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at March
31, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Loans receivable, due to reserve for loan losses $ 2,585 $ 2,515
Loans held for sale, mark-to-market adjustment recognized
for tax purposes 870 1,939
Deposit base premium, due to difference in amortization method
for tax purposes 293 293
Employee benefits, due to differences in expense recognition
methods for tax purposes 872 497
Net operating loss carryforward 260 307
Net unrealized loss on securities available for sale, not
recognized for tax purposes 174 0
Other 131 153
-------- --------
Gross deferred tax assets 5,185 5,704
-------- --------
Deferred tax liabilities:
FHLB stock, due to dividends not recognized for tax purposes 19 0
Loans receivable, due to differences in deferred loan fees and costs
recognition for tax purposes 610 750
Premises and equipment, due to differences in depreciation methods for tax
purposes 497 487
Net unrealized gain on securities available for sale, not
recognized for tax purposes 0 514
-------- --------
Gross deferred tax liabilities 1,126 1,751
-------- --------
Net deferred tax assets $ 4,059 $ 3,953
======== ========
</TABLE>
<PAGE> 28
-21-
No valuation allowance for net deferred tax assets has been recorded as of
March 31, 1999 and 1998 based on management's assessment that it is more
likely than not that these assets will be realized. This assessment is
based primarily on the level of historical taxable income and projections
for future taxable income over the periods in which the deferred tax
assets are deductible.
Under the Internal Revenue Code (the "Code"), the Bank was allowed a
special bad debt deduction related to additions to tax bad debt reserves
established for the purpose of absorbing losses. The provisions of the
Code permitted the Bank to deduct from taxable income an allowance for bad
debt equal to the greater of 8% of taxable income before such deduction or
actual charge-offs. Retained earnings at March 31, 1999 and 1998 include
approximately $3,900,000 for which no federal income tax has been
provided. These amounts represent allocations of income to bad debt
reserves and are subject to federal income tax in future years at the
then-current corporate rate if the Bank no longer qualifies as a bank for
federal income tax purposes and in certain other circumstances, as defined
in the Code.
12. COMMON STOCK AND STOCK PLANS
DIRECTOR PLANS
EAGLE BANCSHARES, INC. 1994 DIRECTORS STOCK OPTION INCENTIVE PLAN
("DSOP")
The DSOP provides for grants of nonqualified stock options to be
made to directors of the Company or Tucker Federal Bank. Options to
purchase 2,000 shares of common stock are granted at the fair
market value of the common stock on the grant date upon initially
becoming a director of the Company or Tucker Federal Bank. These
shares are exercisable immediately on the date of grant. In
addition, the option to purchase 1,500 shares of common stock is
granted upon beginning any subsequent term as a director of the
Company or Tucker Federal Bank. These options vest at the rate of
500 shares per full year of service thereafter.
All options granted under the DSOP expire no later than the date
immediately following the tenth anniversary of the date of grant
and may expire sooner in the event of the disability or death of
the optionee or if the optionee ceases to serve as a director.
TUCKER FEDERAL SAVINGS AND LOAN ASSOCIATION DIRECTORS' RETIREMENT
PLAN
Participants under the Directors' Retirement Plan will receive a
benefit in the form of a monthly annuity for the life of the
participant. Payments commence as of the first day of the month
following the later of (i) the date on which the participant is no
longer a director or (ii) the date on which the participant attains
age 65. These payments continue until the first day of the month in
which the participant's death occurs.
The amount of a participant's monthly payments under the Directors'
Retirement Plan is generally equal to the product of (i) the
average monthly compensation paid for service as a director and
(ii) a percentage based on the participant's years of
<PAGE> 29
-22-
service. As of March 31, 1999 and 1998, the plan is
underfunded. The liability and expense attributable to this plan
is insignificant to the Company's financial position.
In addition to the monthly benefit provided to a participant
under the Directors' Retirement Plan, a participant is generally
entitled to an additional lump-sum benefit if the participant has
completed certain years-of-service requirements. The lump-sum
benefit payable to such participants is 2,000 shares of common
stock or a cash payment equal to the fair market value (as
determined in accordance with the provisions of the Company's
DSOP) of such 2,000 shares, whichever is elected by the
participant.
EMPLOYEE STOCK PLANS
1986 EMPLOYEE STOCK OPTION AND INCENTIVE PLAN
In 1986, at the time of the Bank's conversion to a federally
chartered stock association, the board of directors adopted the
Employee Stock Option and Incentive Plan. The plan provided for
grants of nonincentive stock options and stock appreciation
rights equal to 10% of the shares issued in the Bank's conversion
from mutual to stock form. This plan expired in 1996 in
accordance with the original termination date.
1995 EMPLOYEE STOCK INCENTIVE PLAN ("ESIP")
The ESIP provides for awards of incentive stock options ("ISOs"),
nonqualified stock options ("NQSOs"), reload options, and
restricted stock awards. Awards under the ESIP are granted at the
fair market value of the common stock on the date of grant,
unless otherwise determined by the ESIP committee. ISOs may not
be granted at less than 100% of the fair market value of the
common stock on the date of grant. NQSOs may not be granted at
less than 75% of the fair market value of the common stock on the
date of grant. Awards become exercisable in accordance with a
schedule established by the ESIP committee at the time of grant
and are typically three to five years but in no event longer than
ten years. Rights with regard to all nonvested options cease
immediately upon the termination of employment, unless such
termination is due to a change in control. Options vest 100% upon
a change in control of the Company.
TUCKER FEDERAL SAVINGS AND LOAN ASSOCIATION 401(K) SAVINGS
AND EMPLOYEE STOCK OWNERSHIP TRUST
Effective April 1, 1994, the Company merged the Employee Stock
Ownership Plan into its 401(k) plan to form the Tucker Federal
Savings and Loan Association 401(k) Savings and Employee Stock
Ownership Trust ("ESOP"). During the year ended March 31, 1999,
the ESOP borrowed $2,000,000 from the Company to acquire 88,400
shares of common stock. These shares become available to be
allocated to plan participants as principal reductions are
applied to the debt. Compensation expense from the eventual
allocation of these shares will be measured based on the fair
value of the shares on the date the shares are committed to be
allocated. At March 31, 1999, the fair value of these shares is
$1,524,900. The note will be repaid
<PAGE> 30
-23-
from the Company's contributions to the plan and from
dividends paid on unallocated shares, and accordingly, the
note is reflected as a reduction in stockholders' equity.
Eligible employees participate in the ESOP, and the Company's
contribution is allocated to the participants in the
proportion to their compensation to total eligible
compensation. The Company's contribution is determined
annually by the board of directors, and in fiscal years 1999,
1998, and 1997, the contribution was approximately $470,000,
$514,000, and $415,000, respectively.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The Dividend Reinvestment and Stock Purchase Plan was
established to provide stockholders with an easy way to
purchase additional shares of the Company's common stock. The
plan allows stockholders to reinvest their quarterly
dividends and make cash investments in stock for a minimum of
$25 and a maximum of $5,000 per quarter with no brokerage
commissions or administrative charges.
All shareholders of record are eligible to participate in the
plan. Beneficial owners of shares of common stock must either
arrange for the holder of record to join the plan or have the
shares they wish to enroll in the plan transferred into their
own names.
The Company adopted the disclosure provisions in SFAS No. 123, "Accounting
for Stock-Based Compensation," on April 1, 1996. As permitted by the
provisions of SFAS No. 123, the Company applies Accounting Principles
Board ("APB") Opinion No. 25 and the related interpretations in accounting
for its stock option plans and, accordingly, does not recognize
compensation cost.
A summary of the Company's stock option activity during the three-year
period ended March 31, 1999 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
NUMBER PRICE
-------- --------
<S> <C> <C>
Outstanding at March 31, 1996 491,082 $ 9.31
Granted 47,500 15.94
Exercised and expired (143,550) 8.96
--------
Outstanding at March 31, 1997 395,032 10.34
Granted 167,217 16.56
Exercised (55,606) 7.48
--------
Outstanding at March 31, 1998 506,643 12.82
Granted 10,750 20.67
Exercised and expired (99,564) 11.07
--------
Outstanding at March 31, 1999 417,829 13.43
========
</TABLE>
<PAGE> 31
-24-
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE RANGE OF
EXERCISE EXERCISE
NUMBER PRICE PRICES
------- --------- --------------
<S> <C> <C> <C>
Outstanding options exercisable as of:
March 31, 1997 215,974 $ 8.64 $3.375-$16.750
March 31, 1998 297,448 11.07 $3.375-$20.000
March 31, 1999 258,409 11.23 $3.375-$20.000
</TABLE>
The weighted average remaining contractual life of options outstanding at
March 31, 1999 is approximately 7.5 years. The weighted average fair value
of stock option grants during fiscal years 1999, 1998, and 1997 is
$64,159, $797,326, and $210,506, respectively. The fair value of these
grants was determined using the following assumptions as of March 31, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Weighted average risk-free interest rate 5.05% 6.41%
Expected option life 7 YEARS 7 years
Expected stock price volatility 30.00% 29.00%
Expected dividend yield 3.20% 2.40%
</TABLE>
As previously indicated, the Company accounts for its stock option plans
using the principles of APB Opinion No. 25 and related interpretations.
Accordingly, no compensation cost has been recognized for its fixed stock
option plans. Had compensation cost for the Company's stock-based plans
been determined based on the fair value at the grant dates for awards
under those plans consistent with the method of SFAS No. 123, the
Company's net income and earnings per share ("EPS") would have been as
reflected in the pro forma amounts below (in thousands, except per share
data):
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Net income:
As reported $ 10,222 $ 7,210 $ 3,746
Pro forma 9,911 6,983 3,721
EPS:
Basic:
As reported $ 1.79 $ 1.27 $ 0.68
Pro forma 1.74 1.23 0.67
Diluted:
As reported 1.74 1.23 0.66
Pro forma 1.69 1.20 0.66
</TABLE>
During the year ended March 31, 1995, the Company awarded two officers of
the Bank 15,000 each nontransferable restricted shares of the Company's
common stock. The market value of the shares at the date of award was
$338,000 and was amortized by charges to compensation expense over the
three-year vesting period. During the year ended March 31, 1998, the
Company awarded an officer of the Bank 20,000 nontransferable
<PAGE> 32
-25-
restricted shares of the Company's common stock. The market value of
these shares at the date of award was $355,000 and is being amortized by
charges to compensation expense over the three-year vesting period.
Compensation expense related to these awards for the years ended March
31, 1999, 1998, and 1997 was $118,000, $73,000, and $121,000,
respectively. The unamortized balance of the awards is included as a
deduction from stockholders' equity in the statements of financial
condition. Additionally, certain officers of the Company are employed
under various employment agreements, which expire at various times over
the next three years.
13. DIVIDEND AND LOAN RESTRICTIONS
The source of funds for payment of dividends by the Company is primarily
dividends paid to the Company by the Bank. The Bank's ability to pay
dividends to the Company is subject to the financial performance of the
Bank, which is dependent on, among other things, the local economy, the
success of the Bank's lending activities, compliance by the Bank with
applicable regulations, investment performance, and the ability to
generate fee income. The Bank currently is in compliance with the
regulatory capital requirements. As of March 31, 1999, the Bank's primary
regulators categorized the Bank as well capitalized; consequently, the
Bank may declare dividends to the Company without receiving advanced
regulatory approval. A well-capitalized institution, as defined, is
permitted to make capital distributions during a calendar year without
receiving advanced regulatory approval up to the higher of (i) 100% of its
net income to date plus the amount that would reduce by one-half its
surplus capital ratio at the beginning of the calendar year or (ii) 75% of
its net income over the most recent four-quarter period. Any distributions
in excess of that amount require prior OTS approval with the opportunity
for the OTS to object to the distribution. In addition, a savings
association must provide the OTS with a 30-day advanced written notice of
all proposed capital distributions, whether or not advanced approval is
required by OTS regulations. Currently, the Bank periodically notifies the
OTS of the gross amount of dividends it intends to pay to the Company. The
Bank paid cash dividends to the Company of $0, $3,410,000, and $683,000
during the years ended March 31, 1999, 1998, and 1997, respectively.
During fiscal year 1997, the Bank paid a dividend in the form of equity
securities to the Company in the amount of $6,094,000. During fiscal year
1998, the Bank paid a dividend in the form of loans to the Company in the
amount of $10,525,000, which were then contributed by the Company to EBCG.
The Company contributed capital of $12,000,000 to the Bank during fiscal
1999.
The Bank is subject to certain restrictions under the Federal Reserve Act,
including restrictions on extensions of credit to its affiliates. In
particular, the Bank is prohibited from lending to the parent company and
its nonbank subsidiaries unless the loans are secured by specified
collateral. Such secured loans and other regulated transactions made by
the Bank are limited, as to each of its affiliates, in the amount of 10%
of the Bank's capital stock and surplus, as defined, and are limited, in
the aggregate, to 20% of the Bank's capital stock and surplus, as defined.
<PAGE> 33
-26-
14. INDUSTRY SEGMENTS
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," requires disclosure of certain information related to the
Company's reportable operating segments. The reportable operating segments
were determined based on management's internal reporting approach. The
reportable segments consist of: banking, mortgage banking, real estate
development and sales, and mezzanine financing. The banking segment offers
a wide array of banking services to individual and corporate customers and
earns interest income from loans made to customers and interest and
dividend income from investments in certain debt and equity securities.
The banking segment also recognizes fees related to deposit services,
lending, and other services provided to customers. The mortgage banking
segment originates residential mortgage loans through retail loan
production offices and purchases residential mortgage loans from
correspondents through a wholesale lending office. The mortgage banking
segment generates revenues through interest on residential mortgage loans
and selling substantially all of the fixed rate residential mortgage loans
to investors. The mortgage banking segment's primary source of fee income
is derived from services including loan application and origination, the
gain or loss on the sale of loans to third parties, and from the sale of
mortgage servicing rights. The real estate development and sales segment
performs real estate development activities in the Atlanta metropolitan
area by investing in land for the development of residential subdivisions.
The real estate development and sales segment sells the lots within these
subdivisions and frequently provides the lot and or construction loan
financing through Tucker Federal Bank. The mezzanine financing segment
provides mezzanine financing to small- and medium-sized businesses that is
not readily available from traditional commercial banking sources. The
mezzanine financing segment generates revenues through interest and fees
on loans. No transactions with a single customer contributed 10% or more
to the Company's total revenue.
<PAGE> 34
-27-
The results for each reportable segment are included in the following
table (dollars in thousands):
<TABLE>
<CAPTION>
REAL ESTATE
MORTGAGE DEVELOPMENT
BANKING BANKING AND SALES
------- ------- ---------
<S> <C> <C> <C>
March 31, 1999:
Net interest income (expense) $ 32,021 $ 56 $ (134)
Noninterest income (expense) 4,429 16,648 4,807
Depreciation on premises and equipment 1,772 522 0
Income tax expense (benefit) 2,280 798 1,237
Net income 4,845 1,197 1,856
Provision for loan losses 2,134 47 0
Total assets 1,175,922 253,355 38,239
Expenditures for additions to premises and equipment, net 2,811 548 0
Total revenues from external customers 67,995 38,670 4,827
Intersegment revenues 24,614 1,763 64
March 31, 1998:
Net interest income (expense) 31,079 509 (457)
Noninterest income (expense) 2,747 10,242 3,482
Depreciation on premises and equipment 1,467 524 0
Income tax expense (benefit) 3,180 (1,057) 795
Net income 6,757 (1,586) 1,193
Provision for loan losses 2,601 0 0
Total assets 1,111,908 344,039 29,014
Expenditures for additions to premises and equipment, net 2,702 733 0
Total revenues from external customers 67,329 16,046 3,503
Intersegment revenues 6,338 936 46
March 31, 1997:
Net interest income (expense) 27,871 1,924 (56)
Noninterest income (expense) 1,375 9,536 2,135
Depreciation on premises and equipment 1,359 175 0
Income tax expense (benefit) 1,161 101 639
Net income 2,468 151 958
Provision for loan losses 2,652 0 0
Total assets 947,770 69,761 14,346
Expenditures for additions to premises and equipment, net 5,454 302 0
Total revenues from external customers 59,325 14,438 2,224
Intersegment revenues 3,704 664 15
<CAPTION>
MEZZANINE
FINANCING OTHER ELIMINATIONS CONSOLIDATED
--------- ----- ------------ ------------
<S> <C> <C> <C> <C>
March 31, 1999:
Net interest income (expense) $ 3,209 $ (1,080) $ (107) $ 33,965
Noninterest income (expense) 147 2,132 (2,685) 25,478
Depreciation on premises and equipment 0 0 0 2,294
Income tax expense (benefit) 1,287 (704) 0 4,898
Net income 1,931 393 0 10,222
Provision for loan losses 0 0 0 2,181
Total assets 19,573 98,700 (355,789) 1,230,000
Expenditures for additions to premises and equipment, net 0 0 0 3,359
Total revenues from external customers 3,167 1,562 0 116,221
Intersegment revenues 188 1,177 (27,806) 0
March 31, 1998:
Net interest income (expense) 345 466 (49) 31,893
Noninterest income (expense) 0 1,239 (1,361) 16,349
Depreciation on premises and equipment 0 0 0 1,991
Income tax expense (benefit) 138 (16) 0 3,040
Net income 207 639 0 7,210
Provision for loan losses 0 0 0 2,601
Total assets 10,924 70,083 (416,485) 1,149,483
Expenditures for additions to premises and equipment, net 0 0 0 3,435
Total revenues from external customers 345 1,026 0 88,249
Intersegment revenues 0 709 (8,029) 0
March 31, 1997:
Net interest income (expense) 0 500 (83) 30,156
Noninterest income (expense) 0 768 (903) 12,911
Depreciation on premises and equipment 0 0 0 1,534
Income tax expense (benefit) 0 (133) 0 1,768
Net income 0 169 0 3,746
Provision for loan losses 0 0 0 2,652
Total assets 0 58,384 (266,379) 823,882
Expenditures for additions to premises and equipment, net 0 0 0 5,756
Total revenues from external customers 0 709 0 76,696
Intersegment revenues 0 560 (4,943) 0
</TABLE>
<PAGE> 35
-28-
15. REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements which
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance sheet items, as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain amounts and ratios (set forth in the table
below) of total and Tier 1 risk-based capital to risk-weighted assets, of
Tier 1 capital to adjusted total assets, and of tangible capital to
average total assets, as defined. Management believes as of March 31, 1999
that the Bank meets all capital adequacy requirements to which it is
subject.
As of March 31, 1999, the Bank's primary regulators categorized the Bank
as well-capitalized. There are no conditions or events that management
believes may have changed the Bank's category.
A summary of actual, required, and well-capitalized total and Tier 1
capital, Tier 1 leverage, and tangible capital ratios as of March 31, 1999
and 1998 is presented below (dollars in thousands):
<TABLE>
<CAPTION>
TO BE WELL-
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------ ------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
1999:
Risk-based ratios:
Tier 1 capital $69,810 9.97% $28,012 4.0% $42,018 6.0%
Total capital 76,996 10.99 56,024 8.0 70,029 10.0
Tier 1 leverage 69,810 5.77 48,421 4.0 60,526 5.0
Tangible equity 69,810 5.25 19,951 1.5 N/A N/A
1998:
Risk-based ratios:
Tier 1 capital 51,173 7.47 27,392 4.0 41,089 6.0
Total capital 56,885 8.31 54,785 8.0 68,481 10.0
Tier 1 leverage 51,173 4.59 44,553 4.0 55,691 5.0
Tangible equity 51,173 5.91 12,988 1.5 N/A N/A
</TABLE>
16. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN DEBENTURES
On July 29 1998, the Company closed a public offering of 1,150,000 of
8.50% Cumulative Trust Preferred Securities (the "Preferred Securities")
offered and sold by EBI Capital Trust I (the "Trust"), having a
liquidation amount of $25 each. The proceeds from such issuances, together
with the proceeds of the related issuance of common securities of the
Trust purchased by the Company, were invested in 8.50% Subordinated
Debentures (the
<PAGE> 36
-29-
"Debentures") of the Company. The sole asset of the Trust is the
Debentures. The Debentures are unsecured and rank junior to the all
senior debt of the Company. The Company owns all of the common securities
of the Trust. The obligations of the Company under the Debentures, the
Indenture, the relevant Trust agreement, and the Guarantee, in the
aggregate, constitute a full and unconditional guarantee by the Company
of the obligations of the Trust under the Preferred Securities and ranks
subordinate and junior in right of payment to all liabilities of the
Company. The Preferred Securities are subject to redemptions prior to
maturity at the option of the Company.
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 securities available for
sale. Additionally, approximately $4,300,000 was used to repay existing
debt associated with the Company's real estate investment in Rivermoore
Park, LLP and to invest in investment grade preferred securities of
approximately $3,500,000, held as available for sale by the Company. The
remainder of the net proceeds was used for general corporate purposes.
17. EARNINGS PER SHARE
Weighted average common and common equivalent shares for the years ended
March 31, 1999, 1998, and 1997 are computed as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Average common shares--basic 5,714,113 5,690,680 5,527,973
Effect of dilutive common share equivalents 151,510 148,257 176,604
--------- --------- ---------
Average common shares--diluted 5,865,623 5,838,937 5,704,577
========= ========= =========
</TABLE>
18. TREASURY STOCK
During fiscal 1999, the Company's 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 March 31,
1999, the Company had repurchased 252,750 shares with a cost of
approximately $4,599,000.
19. ACCUMULATED OTHER COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
the reporting and displaying of other comprehensive income. Comprehensive
income is defined as the change in equity from all transactions other than
those with stockholders. Other comprehensive income includes the change in
net unrealized gains or losses on certain debt and equity securities,
foreign currency transactions, and minimum pension liability adjustments.
The Company's comprehensive income consists of net income and unrealized
gains and losses on securities available for sale, net of income taxes.
<PAGE> 37
-30-
Comprehensive income for the years ended March 31, 1999, 1998, and 1997 is
presented as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Unrealized (losses) gains, net recognized in other
accumulated comprehensive income:
Before income tax $ (1,809) $ 3,005 $ (816)
Income tax (688) 1,142 (310)
----------- --------- ---------
Net of income tax $ (1,121) $ 1,863 $ (506)
=========== ========= =========
Amounts reported in net income:
Gains (losses) on sales and calls of securities
available for sale $ 469 $ (82) $ (21)
Net accretion (amortization) on securities 137 15 (89)
----------- --------- ---------
Reclassification adjustment 606 (67) (110)
Income tax (expense) benefit (230) 25 42
----------- --------- ---------
Reclassification adjustment, net of tax $ 376 $ (42) $ (68)
----------- --------- ---------
Amounts reported in other accumulated
comprehensive income:
Unrealized (losses) gains arising during the
period, net of tax $ (745) $ 1,821 $ (574)
Less reclassification adjustment, net of tax 376 (42) (68)
----------- --------- ---------
Unrealized (losses) gains, net recognized
in other accumulated comprehensive
income, net (1,121) 1,863 (506)
Net income 10,222 7,210 3,746
----------- --------- ---------
Total comprehensive income $ 9,101 $ 9,073 $ 3,240
=========== ========= =========
</TABLE>
20. FINANCIAL INFORMATION OF EAGLE BANCSHARES, INC. (PARENT ONLY)
Eagle Bancshares, Inc.'s condensed statements of financial condition as of
March 31, 1999 and 1998 and related condensed statements of income and
cash flows for the years ended March 31, 1999, 1998, and 1997 are as
follows (in thousands):
<PAGE> 38
-31-
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
ASSETS
1999 1998
-------- --------
<S> <C> <C>
Cash $ 1,388 $ 2,394
Securities available for sale 3,895 3,283
Investment in subsidiaries 96,791 70,378
Other assets 3,924 598
-------- --------
Total assets $105,998 $ 76,653
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Guaranteed preferred beneficial interests in debentures $ 28,750 $ 0
Other liabilities 2,431 1,951
Stockholders' equity 74,817 74,702
-------- --------
Total liabilities and stockholders' equity $105,998 $ 76,653
======== ========
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Interest and other income $ 851 $ 429 $ 670
Management fee income from subsidiaries 780 562 100
Gain (loss) on securities available for sale 259 (72) (61)
Cash dividends from the Bank 0 3,410 683
----------- --------- ---------
Total income 1,890 4,329 1,392
Interest expense 1,687 0 0
Merger expenses 0 0 343
General and administrative expenses 1,313 929 801
----------- --------- ---------
(Loss) income before income taxes and
equity in undistributed earnings of
subsidiaries (1,110) 3,400 248
Income tax provision 292 564 194
----------- --------- ---------
(Loss) income before equity in undistributed
earnings of subsidiaries -- 2,836 54
(1,402)
Equity in undistributed earnings of subsidiaries 11,624 4,374 3,692
----------- --------- ---------
Net income $ 10,222 $ 7,210 $ 3,746
=========== ========= =========
</TABLE>
<PAGE> 39
-32-
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 10,222 $ 7,210 $ 3,746
Adjustments to reconcile net income to net
cash (used in) provided by operating
activities:
Equity in undistributed earnings of
subsidiaries (11,624) (4,374) (3,692)
Amortization of restricted stock award 118 73 121
(Gain) loss on securities available for sale (259) 72 61
(Increase) decrease in other assets (3,326) 575 329
Increase (decrease) in other liabilities 701 (180) 479
----------- --------- ---------
Net cash (used in) provided by
operating activities (4,168) 3,376 1,044
----------- --------- ---------
Cash flows from investing activities:
Purchases of securities available for sale (4,000) 0 0
Proceeds from sales of securities available for
sale 2,261 0 0
Proceeds from calls of securities available for
sale 1,006 1,930 940
Capital distributions from subsidiaries 1,689 1,969 376
Capital contributions to subsidiaries (17,470) (4,433) 0
----------- --------- ---------
Net cash (used in) provided by
investing activities (16,514) (534) 1,316
----------- --------- ---------
Cash flows from financing activities:
Cash dividends paid (3,619) (3,406) (2,842)
Stock options exercised 957 429 1,000
Purchase of treasury stock (4,599) 0 0
Issuance of ESOP note payable to acquire
common stock (2,000) 0 0
Principal reduction of ESOP note payable 187 671 164
Issuance of trust preferred securities 28,750 0 0
----------- --------- ---------
Net cash provided by (used in)
financing activities 19,676 (2,306) (1,678)
----------- --------- ---------
Net (decrease) increase in cash (1,006) 536 682
Cash at beginning of year 2,394 1,858 1,176
----------- --------- ---------
Cash at end of year $ 1,388 $ 2,394 $ 1,858
=========== ========= =========
Supplemental disclosures of noncash financing
and investing activities:
Dividends payable to shareholders $ 891 $ 861 $ 849
=========== ========= =========
Dividend of securities received from Bank $ 0 $ 0 $ 6,094
=========== ========= =========
</TABLE>
<PAGE> 40
-33-
21. COMMITMENTS AND CONTINGENCIES
In November 1992, after acquiring certain assets from the Resolution Trust
Corporation, including various real estate loans, and four mortgage
origination offices, the Bank entered into an Operating Agreement (the
"Agreement") with two individuals and a corporation controlled by them
(collectively, the "Plaintiffs") to assist in the management of the Bank's
newly formed Prime Lending Division ("Prime"). The individual Planitiffs
became employees of the Bank and their corporation was to be paid a
percentage of the net pretax profits of Prime. In mid-1997, a disagreement
arose with respect to the allocation of expenses to Prime for purposes of
calculating the net pretax profits of Prime. Plaintiffs filed suit on
December 5, 1997 alleging, among other things, that the Bank had
improperly calculated net pretax profits under the Agreement since April
1997. In January 1998, the Bank terminated the employment of the two
individuals "for cause," terminated the Agreement and filed an Answer and
Counterclaim.
The Complaint as amended seeks, among other things (i) a declaration the
Agreement was terminated "without cause" and that, pursuant to a purchase
option in the Agreement, Plaintiffs therefore have the right to purchase
the "assets" of Prime at 75% of fair market value; (ii) a declaration that
the term "assets," as used in connection with the Plaintiffs' alleged
purchase option, includes all outstanding loans that were originated by
Prime at the time of their termination without having to net against the
loans any corresponding liability incurred by the Bank in connection with
these loans; (iii) alleged unpaid profits from Prime's operations (in an
amount estimated by the Plaintiffs to equal approximately $450,000); (iv)
alleged consequential damages in excess of $20 million, which represents
the Plaintiffs' assessment of the loss they incurred by the Bank's
"refusal" to sell to Plaintiffs the "assets" as Plaintiffs have defined
them; and (v) unspecified punitive damages and attorneys fees.
The Company strongly denies Plaintiffs' entitlement to any relief and
believes its Counterclaim has merit. The Company believes, among other
things, that Plaintiffs were properly terminated for cause, that
Plaintiffs have no rights with respect to the purchase option, that even
if the purchase option were applicable, Plaintiffs would have no right to
purchase any loans, but only certain tangible and intangible assets of the
Bank, the value of which is estimated to be in the $1-2 million range.
<PAGE> 1
<TABLE>
<CAPTION>
EXHIBIT 21. PARENTS AND SUBSIDIARIES
Percentage State of
Parent Company Subsidiaries Owned Incorporation
-------------- ------------ ----- -------------
<S> <C> <C> <C>
Eagle Bancshares, Inc. Tucker Federal Bank 100% Federally Chartered
Eagle Real Estate Advisors, Inc. 100% Georgia
Eagle Bancshares Capital Group, Inc. 100% Georgia
Tucker Federal Bank Eagle Service Corporation 100% Georgia
Eagle A.R.M.S., Inc. 100% Georgia
Prime Eagle Mortgage Corporation 100% Georgia
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report dated June 15, 1999 included in Eagle
Bancshares, Inc.'s Form 10-K, into the Registrant's previously filed
Registration Statements No. 333-15041, No. 333-49267, No. 333-36399,
No. 333-00977, and No. 333-14787.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
June 28, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF EAGLE BANCSHARES FOR THE YEAR ENDED MARCH 31, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 27,839
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 204,618
<INVESTMENTS-CARRYING> 68,298
<INVESTMENTS-MARKET> 69,266
<LOANS> 844,640
<ALLOWANCE> 7,345
<TOTAL-ASSETS> 1,230,000
<DEPOSITS> 879,665
<SHORT-TERM> 8,316
<LIABILITIES-OTHER> 10,060
<LONG-TERM> 213,236
0
0
<COMMON> 6,124
<OTHER-SE> 68,693
<TOTAL-LIABILITIES-AND-EQUITY> 1,230,000
<INTEREST-LOAN> 76,128
<INTEREST-INVEST> 8,719
<INTEREST-OTHER> 5,896
<INTEREST-TOTAL> 90,743
<INTEREST-DEPOSIT> 41,967
<INTEREST-EXPENSE> 56,778
<INTEREST-INCOME-NET> 33,965
<LOAN-LOSSES> 2,181
<SECURITIES-GAINS> 469
<EXPENSE-OTHER> 42,142
<INCOME-PRETAX> 15,120
<INCOME-PRE-EXTRAORDINARY> 15,120
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,222
<EPS-BASIC> 1.79
<EPS-DILUTED> 1.74
<YIELD-ACTUAL> 7.96
<LOANS-NON> 6,692
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,550
<ALLOWANCE-OPEN> 6,505
<CHARGE-OFFS> 1,821
<RECOVERIES> 480
<ALLOWANCE-CLOSE> 7,345
<ALLOWANCE-DOMESTIC> 7,345
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
