EX-13.1 4 g77084exv13w1.txt EX-13.1 2002 CONSOLIDATED FINANCIAL STATEMENTS EXHIBIT 13.1 EAGLE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED MARCH 31, 2002 AND INDEPENDENT AUDITORS' REPORT EAGLE BANCSHARES, INC. AND SUBSIDIARIES TABLE OF CONTENTS --------------------------------------------------------------------------------
PAGE INDEPENDENT AUDITORS' REPORT 1 FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED MARCH 31, 2002: Consolidated Statement of Financial Condition 2 Consolidated Statement of Operations 3 Consolidated Statement of Stockholder's Equity 5 Consolidated Statement of Cash Flows 6 Notes to Consolidated Financial Statements 8
INDEPENDENT AUDITORS' REPORT To the Board of Directors of Eagle Bancshares, Inc. and Subsidiaries: We have audited the accompanying consolidated statement of financial condition of Eagle Bancshares, Inc. and subsidiaries (the "Company") as of March 31, 2002, and the related consolidated statements of operations, stockholders' equity, and cash flow for the year ended March 31, 2002. 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Eagle Bancshares, Inc, and subsidiaries at March 31, 2002, and the results of their operations and their cash flows for the year ended March 31, 2002, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Atlanta, Georgia June 26, 2002 EAGLE BANCSHARES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL CONDITION MARCH 31, 2002 (IN THOUSANDS, EXCEPT SHARE DATA) -------------------------------------------------------------------------------- ASSETS: Cash and cash equivalents: Cash and due from banks $ 35,131 Federal funds sold 109 ----------- Cash and cash equivalents 35,240 Investment securities: Available for sale, at fair value (amortized cost of $258,927) 258,783 Held to maturity, at amortized cost (fair value of $32,928) 32,508 Loans receivable, net 712,088 Investments in real estate 39,620 Stock in Federal Home Loan Bank, at cost - restricted 9,750 Premises and equipment, net 18,523 Accrued interest receivable 7,398 Deferred income taxes 4,618 Other assets 14,034 ----------- Total assets $ 1,132,562 =========== LIABILITIES: Deposits $ 795,272 Federal Home Loan Bank advances and other borrowings 210,794 Advance payments by borrowers for property taxes and insurance 645 Guaranteed preferred beneficial interests in debentures (trust preferred securities) 28,750 Accrued expenses and other liabilities 19,995 ----------- Total liabilities 1,055,456 ----------- COMMITMENTS AND CONTINGENCIES (Notes 5 and 20) STOCKHOLDERS' EQUITY: Common stock, $1 par value; 20,000,000 shares authorized, 6,315,602 shares issued and outstanding at March 31, 2002 6,316 Additional paid-in capital 40,023 Retained earnings 38,884 Accumulated other comprehensive loss (89) Employee Stock Ownership Trust note payable (1,542) Treasury stock, 601,800 shares at cost (6,486) ----------- Total stockholders' equity 77,106 ----------- Total liabilities and stockholders' equity $ 1,132,562 ===========
See notes to consolidated financial statements. - 2 - EAGLE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 2002 (IN THOUSANDS, EXCEPT SHARE DATA) -------------------------------------------------------------------------------- INTEREST INCOME: Interest on loans $ 53,267 Interest on mortgage-backed securities 11,444 Debt securities: Taxable 4,927 Tax-exempt 2,008 Interest and dividends on other interest-earning assets 1,457 -------- Total interest income 73,103 -------- INTEREST EXPENSE: Interest on deposits 33,173 Interest on FHLB advances and other borrowings 10,292 Interest on trust preferred securities 2,489 -------- Total interest expense 45,954 -------- Net interest income 27,149 Provision for loan losses 11,686 -------- Net interest income after provision for loan losses 15,463 -------- NONINTEREST INCOME: Gain on sale of investments in real estate 9,483 Service charges 4,300 Minority interests in consolidated entities (2,807) Real estate commissions, net 1,279 Gain on sales of securities available for sale 774 Loss on sale of premises and equipment (122) Mortgage production fees 669 Other 2,042 -------- Total noninterest income 15,618 --------
(Continued) - 3 - EAGLE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 2002 -------------------------------------------------------------------------------- NONINTEREST EXPENSES: Salaries and employee benefits $ 14,365 Net occupancy expense 3,909 Data processing expense 2,611 Federal insurance premiums 411 Marketing expense 1,010 Professional services 1,756 Other 8,095 -------- Total noninterest expense 32,157 -------- Loss before income taxes (1,076) Income tax benefit (356) -------- Net loss $ (720) ======== Loss per common share-basic and diluted $ (0.13) ========
(Concluded) See notes to consolidated financial statements. - 4 - EAGLE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEAR ENDED MARCH 31, 2002 (IN THOUSANDS) --------------------------------------------------------------------------------
ACCUMULATED COMMON STOCK ADDITIONAL OTHER ----------------- PAID-IN RETAINED COMPREHENSIVE SHARES AMOUNT CAPITAL EARNINGS LOSS Balance, April 1, 2001 6,239 $6,239 $39,518 $39,604 $(168) Comprehensive loss: Net loss (720) Change in unrealized losses on securities, net of tax 79 Total comprehensive loss (Note 17) Principal reduction of ESOP note payable Stock options exercised (77,000 shares) 77 77 505 ----- ------ ------- ------- ----- BALANCE, March 31, 2002 6,316 $6,316 $40,023 $38,884 $ (89) ===== ====== ======= ======= ===== ESOP TOTAL NOTE TREASURY STOCKHOLDER'S PAYABLE STOCK EQUITY Balance, April 1, 2001 $(1,771) $(6,486) $76,936 Comprehensive loss: Net loss (720) Change in unrealized losses on securities, net of tax 79 ------- Total comprehensive loss (Note 17) (641) ------- Principal reduction of ESOP note payable 229 229 Stock options exercised (77,000 shares) 582 ------- ------- ------- BALANCE, March 31, 2002 $(1,542) $(6,486) $77,106 ======= ======= =======
See notes to consolidated financial statements. - 5 - EAGLE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED MARCH 31, 2002 (IN THOUSANDS) -------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (720) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization, and accretion 2,946 Provision for loan losses 11,686 Provision for losses on real estate acquired in settlement of loans 190 Gain on sales of real estate acquired in settlement of loans (64) Gain on sales of investments in real estate (6,676) Gain on sales and calls of securities available for sale (774) Impairment on security available for sale 94 Loss on sales of premises and equipment 122 Deferred income tax benefit (3,142) Proceeds from sales of loans held for sale 22,720 Origination of loans held for sale (8,570) Changes in assets and liabilities: Decrease in accrued interest receivable 2,637 Decrease in other assets 944 Decrease in accrued expenses and other liabilities (3,680) --------- Net cash provided by operating activities 17,713 --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of securities available for sale (188,919) Proceeds from sales of securities available for sale 103,596 Principal payments received on securities available for sale 40,999 Principal payments received on investment securities held to maturity 12,557 Proceeds from calls and maturities of securities available for sale 3,000 Proceeds from calls and maturities of investment securities held to maturity 5,235 Loan originations, net of repayments 55,369 Purchases of loans receivable (9,964) Purchases of FHLB stock (1,687) Redemption of FHLB stock 2,008 Proceeds from sales of real estate acquired in settlement of loans 3,089 Proceeds from sales of premises and equipment 313 Purchases of premises and equipment (659) Proceeds from sales of investments in real estate 55,602 Additions to investments in real estate (21,985) --------- Net cash provided by investing activities 58,554 ---------
(Continued) - 6 - EAGLE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED MARCH 31, 2002 (IN THOUSANDS) -------------------------------------------------------------------------------- CASH FLOW FROM FINANCING ACTIVITIES: Net decrease in time deposits $(135,346) Net increase in demand deposits 80,696 Decrease in advance payments by borrowers for property taxes and insurance (205) Proceeds from FHLB advances and other borrowings 153,557 Repayments of FHLB advances and other borrowings (171,142) Principal reduction of ESOP note payable 229 Proceeds from the exercise of stock options 582 --------- Net cash used in financing activities (71,629) --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 4,638 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 30,602 --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 35,240 ========= SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING YEAR FOR: Interest $ 48,443 ========= Income taxes $ 1,522 ========= SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES: Acquisition of real estate in settlement of loans $ 1,586 ========= Loans made to finance sales of real estate acquired in settlement of loans $ 535 =========
(Concluded) See notes to consolidated financial statements. - 7 - EAGLE BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED MARCH 31, 2002 -------------------------------------------------------------------------------- 1. CORPORATE PROFILE Eagle Bancshares, Inc. (the "Company" or "Eagle") is a unitary savings and loan holding company engaged in community banking, real estate development and sales, and mezzanine financing. 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. Tucker Federal Bank is engaged in community banking activities. The Bank provides a full range of financial services to individual and corporate customers through its branches located in metropolitan Atlanta. 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 performs third-party real estate brokerage, development and sales activities and assists the Bank in identifying and acquiring branch sites. Currently, EREA primarily performs residential real estate development and sales activities in the Atlanta metropolitan area. EBCG serves the Bank's 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. On March 26, 2002, Eagle entered into an agreement with Royal Bank of Canada ("RBC") and its wholly owned subsidiary RBC Centura Banks, Inc. ("RBC Centura") providing for RBC's acquisition of Eagle pursuant to the merger of a wholly owned acquisition subsidiary to be formed by RBC with and into Eagle, with Eagle surviving the merger. At the effective date of the merger, Eagle shareholders will receive US $26.00 in exchange for each share of Eagle common stock they own. Consummation of the merger is subject to certain conditions, including approval by the shareholders of Eagle and the receipt of various regulatory approvals. The merger is expected to close during the third calendar quarter of 2002. On June 26, 2002, a majority of the Company's shareholders approved the proposed merger with RBC and its wholly owned subsidiary RBC Centura. 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. Use of Estimates - The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). The - 8 - 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. Significant Group Concentrations of Credit Risk - Most of the Company's activities are with customers located in metropolitan Atlanta, Georgia. Note 4 includes a discussion of the types of securities that the Company invests, Note 5 includes a discussion of the types of lending by the Company. The Company has significant concentrations in construction and acquisition and development loans, and residential real estate loans representing 25.37% and 47.75%, respectively. Cash and Cash Equivalents - Cash equivalents include demand and time deposits (with original maturities of 90 days or less) at other financial institutions. Investment Securities - Investment securities are classified into three categories. Debt securities that the Company has the positive intent and ability to hold to maturity are classified as "held-to-maturity securities" and reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling in the near term are classified as "trading securities" and reported at fair value, with unrealized gains and losses included in earnings. Debt securities not classified as either held-to-maturity securities or trading securities and equity securities not classified as trading securities are classified as "available-for-sale securities" and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of other comprehensive income. No securities have been classified as trading securities by the Company as of March 31, 2002. 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. Declines in fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. 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 allowance for loan losses. Management considers a loan to be impaired when the loan is classified as nonaccrual, or when, based on current information, it is probable that the Bank will not receive all amounts due in accordance with the contractual terms of the loan agreement. Impaired loans exclude larger groups of smaller balance homogeneous loans, residential mortgages, construction loans secured by first mortgage liens, and consumer installment loans, that are collectively evaluated for impairment. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical matter, at the loan's observable market value or fair value of the collateral if the loan is collateral-dependent. 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. The Bank's policy for recognition of interest income on impaired loans is the same as its interest income recognition policy for non-impaired loans. The total of impaired loans, impaired loans on a nonaccrual basis, the related allowance for loan losses and interest income recognized on impaired loans are disclosed in Note 5. - 9 - 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 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. Allowance 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 credited to the allowance. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance 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 allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance 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. Balance was included in other assets at March 31, 2002. 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 $113,000 at March 31, 2002. To the extent recoverable, costs related to the improvement of properties are capitalized, whereas costs related to holding properties are charged to expense. 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. At March 31, 2002, all - 10 - investments in real estate represented more than 50% ownership and have been consolidated for financial reporting purposes. 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. Gains or losses on dispositions are included in current operations. The Bank reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. If the sum of the expected cash flows is less than the stated amount of the asset, an impairment loss is recognized. Impairment, if any, is recognized through a valuation allowance with a corresponding charge recorded in the statement of operations. 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 federal and state 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 dilutive common share equivalents calculated for stock options and restricted stock outstanding using the treasury stock method. Common share equivalents are not considered in loss periods. New Accounting Pronouncements - 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. The Company adopted SFAS No. 133 on April 1, 2001; there was no material impact to the Company's financial statements. In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which replaces SFAS No. 125. SFAS No. 140 revised criteria for accounting for securitizations and other transfers of financial assets and collateral and requires new disclosures, but otherwise carries forward most of SFAS No. 125's provisions without amendment. This statement is effective for reporting periods beginning after March 31, 2001. However, the disclosure provisions are effective for fiscal years ending after December 15, 2000. Eagle adopted SFAS No. 140 effective April 1, 2001. SFAS No. 140 did not have a material impact on the Company's financial position or results of operation. In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 establishes accounting and reporting standards for business combinations. It requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method. SFAS No. 141 also addresses the recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS - 11 - No. 141 did not have a significant impact on the Company's financial position or results of operation. SFAS No. 142 establishes accounting and reporting standards for goodwill and intangible assets. Goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. The Company adopted SFAS No. 142 on April 1, 2001. SFAS No. 142 did not have a material impact on the Company's financial position or results of operation. As of the date of adoption, the Company did not have any unamortized goodwill subject to the transition provisions of SFAS No. 142 and therefore an annual assessment for impairment is not required. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supercedes both SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which previously governed impairment of long-lived assets, and APB Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, which addressed the disposal of a business segment. This Statement improves financial reporting by requiring one accounting model be used for long-lived asset to be disposed of by sale and by broadening the presentation of discontinued operations to include more disposal transactions. This Statement is effective for financial statements issued for fiscal years beginning after December 15, 2001. The adoption of this statement is not expected to have a material impact on the Company's financial position or results of operation. In June 2001, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues ("SAB102"). SAB 102 sets forth guidelines for determining the allowance for loan losses under generally accepted accounting principles. In addition, SAB 102 sets forth guidelines for documentation by registrants in support of the allowance for loan losses. The Company adopted SAB 102 in July 2001. Pursuant to the methodology effect, Eagle prepares a detailed loan classification and estimated loss, which is the basis for the determination of the allowance for loan losses. This methodology and related documentation thereof, has historically been in place. The adoption of SAB 102 did not have a material impact on its consolidated financial statements. 3. RESTRUCTURING CHARGES In the fiscal year ended March 31, 2001, the Company recorded $2,325,000 in restructuring charges associated with the Company's strategic plans to exit wholesale mortgage operations and outlying retail mortgage and construction lending markets, enabling the Company to focus on its metropolitan Atlanta franchise. Charges recorded in connection with these plans include employee severance and termination costs, leasehold and other contract termination costs, asset impairment costs, and transaction fees. Through March 31, 2002, $2,093,000 has been charged against the accrual. At March 31, 2002, the remaining accrual related to employee severance and termination costs and leasehold and other contract termination costs. Restructuring charges for the year ended March 31, 2002 are presented below (in thousands): - 12 -
BALANCE AS OF BALANCE AS OF APRIL 1, 2001 UTILIZED REVERSED(1) MARCH 31, 2002 Restructuring charges: Employee severance and termination costs $ 339 $(277) $(30) $ 32 Leasehold and other contract termination costs 690 (520) (49) 121 ------ ----- ---- ---- Total restructuring charges $1,029 $(797) $(79) $153 ====== ===== ==== ====
(1) Reversal of restructuring reserves is a result of lower actual severance and termination costs and facility shutdown costs than originally estimated. 4. INVESTMENT SECURITIES Securities available for sale at March 31, 2002 are summarized as follows (in thousands):
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST LOSSES GAINS VALUE Mortgage-backed securities $172,329 $(1,455) $ 701 $171,575 U.S. government and agency obligations 30,362 (16) 817 31,163 Equity securities 12,640 (141) 12,499 Corporate bonds 156 156 Other debt securities 43,440 (173) 123 43,390 -------- ------- ------ -------- Total $258,927 $(1,785) $1,641 $258,783 ======== ======= ====== ========
Proceeds from the sales of available for sale securities were approximately $103,596,000. Gross realized gains amounted to approximately $900,000. Gross realized losses amounted to approximately $126,000. During the year ended March 31, 2002, proceeds from calls of securities available-for-sale were $3,000,000, resulting in no realized gains or losses. Securities held to maturity at March 31, 2002 are summarized as follows (in thousands):
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST LOSSES GAINS VALUE Mortgage-backed securities $ 26,291 $ (26) $ 194 $26,459 U.S. government and agency obligations 2,000 62 2,062 Corporate bonds 2,472 164 2,636 Other debt securities 1,745 26 1,771 -------- ----- ----- ------- Total $ 32,508 $ (26) $ 446 $32,928 ======== ===== ===== =======
The amortized cost and estimated market value of available-for-sale and held-to- maturity debt securities at March 31, 2002, by contractual maturity, are as follows (in thousands): - 13 -
AVAILABLE-FOR-SALE SECURITIES ---------------------------- ESTIMATED AMORTIZED MARKET COST VALUE Due in one year or less $ $ Due in one to five years 29,619 30,620 Due in five to ten years 41,513 41,399 Due after ten years 187,795 186,764 --------- -------- $ 258,927 $258,783 ========= ========
HELD-TO-MATURITY SECURITIES ---------------------------- ESTIMATED AMORTIZED MARKET COST VALUE Due in one year or less $ 3,245 $ 3,333 Due in one to five years 2,972 3,136 Due after ten years 26,291 26,459 --------- -------- $ 32,508 $ 32,928 ========= ========
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, 2002, securities with a carrying amount of $65,935,000 were pledged as collateral for public funds on deposit by local municipalities. - 14 - 5. LOANS RECEIVABLE At March 31, 2002, loans receivable are summarized as follows (in thousands): Real estate loans: Construction $ 118,002 Acquisition and development 81,184 Nonresidential 139,957 Residential 247,689 Home equity and second 127,344 --------- Total real estate loans 714,176 --------- Commercial and consumer loans: Commercial 34,861 Mezzanine 13,024 Consumer and other 23,243 --------- Total commercial and consumer loans 71,128 --------- Gross loans receivable 785,304 Less: Undisbursed portion of loans in process (57,779) Deferred costs and other unearned income 1,082 Allowance for loan losses (16,519) --------- Loans receivable, net $ 712,088 =========
Loans are normally placed on nonaccrual when payments have been in default for 90 days. At March 31, 2002, the Company had nonaccrual loans aggregating approximately $23,885,000. The unrecognized interest income was on these loans totaled approximately $2,414,000 for the year ended March 31, 2002. Impaired loans totaled to $16,868,000 at March 31, 2002, the valuation allowance related to these impaired loans was $6,901,000 which is included in the allowance for loan losses in the accompanying consolidated statements of financial condition. At March 31, 2002, all impaired loans had a related loan loss allowance. Total impaired nonaccrual loans were $16,722,000 at March 31, 2002. During the year ended March 31, 2002, the Company charged off $3,354,000 against the loan loss allowance related to impaired loans. For the year ended March 31, 2002, the average recorded investment in impaired loans was approximately $9,010,000 and the Company recognized interest income on the impaired loans of $70,000. 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. - 15 - At March 31, 2002, an analysis of the allowance for loan losses is as follows (in thousands): Allowance for loan losses, beginning of year $ 9,255 Charge-offs (5,111) Recoveries 689 Provision for loan losses 11,686 --------- Allowance for loan losses, end of year $ 16,519 =========
The majority of the Company's loans held for investment are secured by real estate in Georgia. Additionally, no single customer accounted for more than 2% of the Company's loans in fiscal year 2002. The Company serviced loans for others with aggregate principal balances of approximately $10,712,000 at March 31, 2002. At March 31, 2002, the Company had sold approximately $477,000 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 year ended March 31, 2002, the Company has incurred nominal losses from the repurchase of recourse loans. At March 31, 2002, the Company has commitments outstanding on closed loans of approximately $163,541,000, including loans in process and lines of credit. These off-balance sheet commitments represent the undisbursed portion of construction loans and nonmortgage loans and unused portion of home equity lines of credit, which are secured by residential real estate and commercial lines of credit. In addition, the Company has issued approximately $2,732,000 in letters of credit at March 31, 2002. 6. INVESTMENTS IN REAL ESTATE The Company has ownership interest (equity) in 10 real estate projects as of March 31, 2002. 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 10 real estate investments are located in metropolitan Atlanta. The Company consolidates each project by financial statement line item. - 16 - The following tables reflect the individual projects' financial information as of and for the year ended March 31, 2002 (in thousands):
REAL COMPANY'S NET COMPANY'S ESTATE TOTAL TOTAL SHARE OF INCOME SHARE OF PROPERTY DEBT EQUITY EQUITY (LOSS) NET INCOME Investments in real estate at March 31, 2002: Union Hill, LLC $ $ $ 55 $ 28 $ 99 $ (268) Rivermoore Park, LLC 2,711 4,701 4,701 534 534 Windsor Parkway Development, LLC (50) (50) Johnson Road Development, LLC 1,073 305 799 799 (56) (56) Riverside Road, LLC 2,286 1,242 1,054 782 (49) (29) The Phoenix on Peachtree, LLC 12,291 4,194 8,338 6,329 5,370 3,362 Eagle Mason Mill Development, LLC 6,783 3,930 3,237 3,180 289 232 Eagle Acworth Development II, LLC 364 364 Eagle Acworth Development III, LLC 133 133 43 43 Eagle White Columns Development, LLC 5,801 1,434 4,486 2,209 694 416 Eagle Atlanta Road Development 1,845 1,472 429 372 571 464 Fayetteville Village, LLC 6,830 4,846 2,103 2,090 197 187 -------- -------- ------- ------- ------- ------- $ 39,620 $ 17,423 $25,335 $20,623 $ 8,006 $ 5,199 ======== ======== ======= ======= ======= =======
7. PREMISES AND EQUIPMENT At March 31, 2002, premises and equipment are summarized as follows (in thousands): Land $ 3,899 Office buildings and improvements 16,471 Furniture, fixtures, and equipment 10,892 --------- 31,262 Less accumulated depreciation (12,739) --------- $ 18,523 =========
Depreciation expense for the year ended March 31, 2002 was approximately $2,361,000. - 17 - 8. DEPOSITS At March 31, 2002, deposits are summarized by type and remaining term as follows (in thousands): Demand deposits: Noninterest-bearing deposits $ 57,434 Interest-bearing deposits 162,269 Money market 123,670 Savings 29,201 --------- Total demand deposits 372,574 --------- Time deposits: Maturity one year or less $ 285,517 Maturity greater than one year through two years 53,664 Maturity greater than two years through three years 31,511 Maturity greater than three years through four years 32,393 Maturity greater than four years through five years 18,662 Maturity greater than five years 951 --------- Total time deposits 422,698 --------- Total deposits $ 795,272 =========
The weighted average interest rate on time deposits at March 31, 2002 was 4.54%. The aggregate amount of time deposits in denominations of $100,000 or more at March 31, 2002, was approximately $93,617,000. Interest expense on deposits for the year ended March 31, 2002 is summarized as follows (in thousands): Interest-bearing demand deposits $ 3,469 Money market 3,600 Savings 356 Time deposits 25,748 --------- $ 33,173 =========
- 18 - 9. FHLB ADVANCES AND OTHER BORROWINGS FHLB advances and other borrowings at March 31, 2002 are summarized as follows (in thousands): FHLB advances $ 190,206 Other borrowings: 7.00% fixed rate revolving line of credit with available credit of up to $2,000,000 and interest payable monthly through July 27, 2002; outstanding principal is payable in full on July 27, 2002 1,550 5.00% construction loan with available credit of up to $32,046,000 and with interest adjusting to the note holder's base rate plus .25% and payable monthly through February 10, 2003; outstanding principal is payable in full on February 10, 2003 3,430 4.75% construction loan with available credit of up to $11,100,000 and with interest adjusting to the note holder's base rate plus .25% and payable monthly through February 28, 2005; outstanding principal is payable in full on February 28, 2005 285 4.75% construction loan with available credit of up to $1,200,000 and with interest adjusting to the note holder's base rate and payable monthly through May 25, 2002; outstanding principal is payable in full on May 25, 2002 1,148 5.00% construction loan with available credit of up to $7,800,000 and with interest adjusting to the note holder's base rate plus .25% and payable monthly through November 15, 2002; outstanding principal is payable in full on November 15, 2002 3,930 5.00% construction loan with available credit of up to $2,300,000 and with interest adjusting to the noteholder's base rate plus .25% and payable monthly through May 17, 2002; outstanding principal is payable in full on May 17, 2002 1,242 5.25% construction loan with available credit of up to $4,400,000 and with interest adjusting to the noteholder's base rate plus .50% and payable monthly through July 31, 2002; outstanding principal is payable in full on July 31, 2002 1,472 5.25% construction loan with available credit of up to $5,800,000 and with interest adjusting to the Wall Street Journal prime rate plus .50% and payable monthly through February 15, 2003; outstanding principal is payable in full on February 15, 2003 3,879 Other 3,652 --------- Total other borrowings 20,588 --------- $ 210,794 =========
At March 31, 2002, FHLB advances are at least 125% collateralized by unencumbered mortgage loans and approximately $32,505,000 of investment securities. The advances mature at various dates through June 2010. The weighted average interest rate on FHLB advances was 5.29% at March 31, 2002. At March 31, 2002, the Bank had $185,000,000 in fixed rate FHLB advances with interest rates ranging from 3.56% to 6.62% and variable rate FHLB advances of $5,206,000 at 1.94%. The maximum short-term borrowings during the year ended March 31, 2002 were $59,566,000. The weighted average interest rate on maximum short-term borrowings during the year ended March 31, 2002 was 3.54%. - 19 - At March 31, 2002, other borrowings for construction loans are secured by $39,620,000 of real estate. At March 31, 2002, the 7.00% revolving line of credit was secured by certain equity securities and corporate bonds with a fair market value of $3,632,000. As of March 31, 2002, repayments of FHLB advances and other borrowings, based on contractual maturities, are as follows (in thousands): Fiscal year: 2003 $ 50,509 2004 30,000 2005 5,285 2008 and thereafter 125,000 --------- $ 210,794 =========
10. INCOME TAXES Income tax expense (benefit) for the year ended March 31, 2002 is allocated as follows (in thousands): Current expense - federal $ 2,738 Deferred benefit - federal (3,094) --------- Total $ (356) =========
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 year 2002 to loss before income taxes (in thousands): Expected income tax benefit $ (377) --------- (Decrease) increase in income taxes resulting from: Income tax credits (173) Interest and dividend income (190) Other 384 --------- Actual income tax benefit $ (356) =========
- 20 - The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at March 31, 2002 is as follows (in thousands): Deferred tax assets: Loans receivable, due to allowance for loan losses $ 5,914 Deposit base premium, due to difference in amortization method for tax purposes 293 Employee benefits, due to differences in expense recognition methods for tax purposes 592 Net operating loss carryforward 187 Net unrealized loss on securities available for sale, not recognized for tax purposes 93 Exit costs associated with the disposal of the wholesale and retail mortgage lending groups 172 Impairment of preferred stock investment, not recognized for tax purposes 121 Writedown on investment securities 371 Loans receivable, due to differences in deferred loan fees and costs recognition for tax purposes 704 Other (167) --------- Gross deferred tax assets 8,280 --------- Deferred tax liabilities: Loans held for sale, mark-to-market adjustment recognized for tax purposes 314 Premises and equipment, due to differences in depreciation methods for tax purposes 347 Interest income, due to income not recognized for tax purposes 3,001 --------- Gross deferred tax liabilities 3,662 --------- Net deferred tax assets $ 4,618 =========
No valuation allowance for net deferred tax assets has been recorded as of March 31, 2002 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 allowances 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, 2002 include approximately $3,900,000 for which no federal income tax has been provided. These amounts represent allocations of income to bad debt allowances 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. - 21 - 11. STOCK COMPENSATION 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 service. 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, and the Company's shareholders approved, 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 - 22 - 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. Eagle Bancshares, Inc. Performance Stock Plan - The board of directors of the Company approved and adopted the Eagle Bancshares, Inc. Performance Stock Plan (the "Performance Plan") effective as of April 1, 1999. Participants in the Performance Plan include named senior executive officers and directors of the Company and Tucker Federal. Participants are granted a specified number of shares of Restricted Stock under the DSOP or the 1995 ESIP, as applicable, and Phantom Stock ("Units") on each date of grant. The Performance Plan provides that if all or any part of a grant of Restricted Stock may not be made under the DSOP or the 1995 ESIP, as applicable, then the recipient will be granted Units in lieu of Restricted Stock. Grants of Restricted Stock or Units may be made in any Plan Year based upon the percentage increase in earnings per share or Annual Stock Price provided either increase is greater than 15%. When a grant is made to a participant, vesting in the Restricted Stock or Units is subject to the Company achieving a 200% increase in earnings per share or annual stock price. In order to be fully vested, the per share price of Company Common Stock on March 31, 1999 must double or earnings per share of the Company as of the fiscal year end March 31, 1999 must double. When full vesting of the Restricted Stock or Units shall occur, the grant becomes nonforfeitable on a date which is five years following the date of attaining the performance goal or prior to such date on the occurrence of a change in control, as defined in the Performance Plan, the retirement of the participant at age 65 or termination of employment of the participant, without cause. During the period after grant of Restricted Stock or Units but prior to vesting, the participant will be entitled to receive dividends as declared on the Restricted Stock or Units as of each dividend record date. Any grantor portion thereof which is not vested on the date the participant ceases to perform services will be forfeited as of such date. The cash value of the Units granted to a recipient will be paid to the recipient in a single lump sum within sixty days of the date that the Units become vested and not subject to forfeiture. The value of each Unit will be equal to the value of a share of the Company's Common Stock on the date of determination. As of March 31, 2002, no shares of Restricted Stock or Units have been granted under this plan. Tucker Federal Savings and Loan Association 401(k) Savings and Employee Stock Ownership Trust - The Employee Stock Ownership Trust ("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, 2002, 61,267 shares were unallocated and the fair value was $1,577,000. The note will be repaid from the Company's contributions to the plan and from dividends paid on unallocated shares, and accordingly, the note is reflected as a reduction in stockholders' equity. Eligible employees participate in the 401(k) Savings and ESOP, and the Company's contribution is allocated to the participants in proportion to their compensation to total eligible compensation. The Company's contribution is determined annually by the board of directors, and in fiscal year 2002, the contribution was approximately $548,000. - 23 - Dividend Reinvestment and Stock Purchase Plan - The Dividend Reinvestment and Stock Purchase Plan was established to provide stockholders with an easy way to purchase additional shares of the Company's common stock. The plan allows stockholders to reinvest their quarterly dividends and make cash investments in stock for a minimum of $25 and a maximum of $5,000 per quarter with no brokerage commissions or administrative charges. All shareholders of record are eligible to participate in the plan. Beneficial owners of shares of common stock must either arrange for the holder of record to join the plan or have the shares they wish to enroll in the plan transferred into their own names. No dividends were declared during the year ended March 31, 2002. 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 year ended March 31, 2002 is as follows:
WEIGHTED AVERAGE EXERCISE NUMBER PRICE Outstanding at April 1, 2001 495,396 $ 14.53 Granted 73,424 14.37 Exercised (76,667) 7.59 Forfeited (67,500) 17.01 -------- ------- Outstanding at March 31, 2002 424,653 $ 15.36 ======== =======
OPTIONS WEIGHTED ----------------------------- AVERAGE RANGE OF OUTSTANDING EXERCISABLE EXERCISE EXERCISE NUMBER NUMBER PRICE PRICES 301,353 130,610 13.900 $10.875-$16.000 122,300 114,911 18.375 $16.375-$24.250 1,000 333 24.875 $24.875
- 24 - The weighted average remaining contractual life of options outstanding at March 31, 2002 is approximately six years. The weighted average fair value of stock option grants during fiscal year 2002 was $6.67. The fair value of these grants was determined using the following assumptions as of March 31, 2002:
2002 Risk-free interest rate 4.79% Expected option life 7 years Expected stock price volatility 34.00% Expected dividend yield 0.00%
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):
2002 Net loss: As reported $ (720) Pro forma (1,047) EPS: Basic and diluted: As reported (0.13) Pro forma (0.19)
Additionally, certain officers of the Company are employed under various employment agreements, which expire at various times over the next three years. 12. DEFERRED COMPENSATION PLAN The board of directors of the Company adopted the Eagle Bancshares, Inc. Deferred Compensation Plan (the "Deferred Compensation Plan"). Eligible consultants, outside directors and employees who are among a select group of management or highly compensated employees can elect by the beginning of each fiscal year to defer compensation or fees that they would otherwise receive during such fiscal year. The Company, at its discretion, may credit a matching contribution in any amount it chooses for participants who make such deferrals. Earnings and losses are credited to the deferrals and matching contributions. Benefits payable under the Deferred Compensation Plan are unsecured obligations of the Company, but the Company currently intends to contribute participant deferrals, as well as the Company's matching contributions, to a grantor trust that will hold such amounts to pay benefits under the Deferred Compensation Plan. As part of their annual deferral elections, participants can elect to receive their benefits at retirement, disability, death, termination of employment, or at least three years after their elections. In certain other circumstances, participants can receive their benefits earlier, such as in the event of a personal hardship, a change in control of the Company, or simply with the approval of the Administrative Committee which in that event will reduce the amount of the benefit payable at 10%. The Company can amend or terminate the - 25 - Deferred Compensation Plan at any time, and in the event of termination, the participants would receive their benefits. The Company's contribution for fiscal year 2002 was approximately $17,000. 13. 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: community banking, real estate development and sales, and mezzanine financing. The community banking segment offers a wide array of banking services to individual and corporate customers. The community banking segment earns interest income from loans made to customers and interest and dividend income from investments in certain debt and equity securities, and records interest expense related to deposit accounts and borrowings. The community banking segment also recognizes fees related to deposit services, lending, and other services provided to customers. 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 properties. The real estate development and sales segment also provides third-party brokerage services for the Bank and for unaffiliated third parties. 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, fees on loans, and equity participation agreements. The other segment consists of parent only corporate activities. The other segment generates revenues from securities available for sale and records interest expense related to the Company's trust preferred securities. No transactions with a single customer contributed 10% or more to the Company's total revenue. The results for each reportable segment are included in the following table (dollars in thousands):
REAL ESTATE COMMUNITY DEVELOPMENT MEZZANINE BANKING AND SALES FINANCING OTHER ELIMINATIONS CONSOLIDATED March 31, 2002: Net interest income (expense) $ 29,125 $ (12) $ (61) $(1,808) $ (95) $ 27,149 Noninterest (expense) income (17,789) 4,606 (2,227) (1,224) 95 (16,539) Depreciation on premises and equipment 2,319 40 0 2 2,361 Income tax benefit 2,564 1,838 (3,510) (1,248) (356) Net income (loss) 5,122 2,756 (6,814) (1,784) 0 (720) Provision for loan losses 3,650 0 8,036 0 11,686 Total assets 1,078,264 47,010 11,151 4,307 (8,170) 1,132,562 Expenditures for additions to premises and equipment 659 0 0 0 0 659 Total revenues from external customers 80,392 8,505 (454) 278 0 88,721 Intersegment revenues 36 34 18 512 (600) 0
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance primarily based on profit or loss from operations before income taxes not including nonrecurring gains or losses. Other factors such as revenues and assets at risk are also considered. 14. REGULATORY MATTERS 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, 2002, the most recent notification from the OTS categorized the Bank as well-capitalized. A well-capitalized institution, - 26 - 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 $870,000, during the year ended March 31, 2002. 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. 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 that as of March 31, 2002, the Bank meets all capital adequacy requirements to which it is subject. There are no conditions or events that management believes may have changed the Bank's category. If necessary, to ensure the Bank maintains a well-capitalized status and the holding company has sufficient liquidity, the Company would consider participation of certain mezzanine loans, seeking additional equity partners or additional - 27 - credit facilities. A summary of actual, required, and well-capitalized total and Tier 1 capital, Tier 1 leverage, and tangible capital ratios as of March 31, 2002 is presented below (dollars in thousands):
TO BE WELL- FOR CAPITAL CAPITALIZED UNDER ADEQUACY PROMPT CORRECTIVE ACTUAL PURPOSES ACTION PROVISION --------------------- ------------------- -------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT Risk-based ratios: Tier 1 capital (to risk-weighted assets) $ 71,970 9.91% $ 29,060 4.0% $ 43,589 6.0% Total capital (to risk-weighted assets) 80,928 11.14% 58,119 8.0% 72,649 10.0% Tier 1 leverage (to total adjusted assets) 71,970 6.70% 42,943 4.0% 53,679 5.0% Tangible capital (to total adjusted assets) 71,970 6.70% 16,104 1.5% N/A N/A
15. 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 "Debentures") of the Company. The sole asset of the Trust is the Debentures. The Debentures are unsecured and rank junior to all the 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 rank 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. 16. EARNINGS PER SHARE Weighted average common and common equivalent shares for the year ended March 31, 2002 are computed as follows: Average common shares-basic 5,671,077 Effect of dilutive common share equivalents --(1) ---------- Average common shares-diluted 5,671,077 ==========
(1) 22,538 shares excluded due to net loss 17. ACCUMULATED OTHER COMPREHENSIVE LOSS 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. Comprehensive income for the year ended March 31, 2002 is presented as follows (in thousands): - 28 - Unrealized gains, net, recognized in accumulated other comprehensive income: Before income tax $ 126 Income tax 47 --------- Net of income tax $ 79 ========= Amounts reported in net income: Gains on sales and calls of securities available for sale $ 774 Net amortization on securities (196) --------- Reclassification adjustment 578 Income tax expense (220) --------- Reclassification adjustment, net of tax $ 358 ========= Amounts reported in accumulated other comprehensive income: Unrealized gains arising during the period, net of tax 437 Less reclassification adjustment, net of tax 358 --------- Unrealized gains, nets recognized in accumulated other comprehensive income, net 79 Net loss (720) --------- Total comprehensive loss $ (641) =========
- 29 - 18. FINANCIAL INFORMATION OF EAGLE BANCSHARES, INC. (PARENT ONLY) Eagle Bancshares, Inc.'s condensed statement of financial condition as of March 31, 2002 and related condensed statement of income and cash flow for the year ended March 31, 2002 is as follows (in thousands):
CONDENSED STATEMENTS OF FINANCIAL CONDITION ASSETS Cash $ 228 Securities available for sale 3,632 Notes receivable 550 Investment in subsidiaries 104,326 Deferred income taxes 104 Other assets 1,969 --------- Total assets $ 110,809 ========= LIABILITIES AND STOCKHOLDERS' EQUITY Note payable $ 1,550 Guaranteed preferred beneficial interests in debentures 28,750 Other liabilities 3,403 Stockholders' equity 77,106 --------- Total liabilities and stockholders' equity $ 110,809 =========
CONDENSED STATEMENTS OF INCOME 2002 (In thousands) Interest and other income $ 452 Management fee income from subsidiaries 338 Cash dividends from the Bank 870 Cash dividends from EREA 888 --------- Total income 2,548 Interest expense 2,260 General and administrative expenses 1,515 Other losses 47 --------- Loss before income taxes and equity in undistributed earnings of subsidiaries (1,274) Income tax provision (719) --------- Loss before equity in undistributed earnings of subsidiaries (1,993) Equity in undistributed earnings of subsidiaries 1,273 --------- Net loss $ (720) =========
- 30 -
CONDENSED STATEMENTS OF CASH FLOWS 2002 (IN THOUSANDS) Cash flows from operating activities: Net loss $ (720) Adjustments to reconcile net income to net cash used in operating activities: Equity in undistributed earnings of subsidiaries (1,273) Loss on impairment of securities available for sale 94 Deferred income tax expense 43 Increase in other assets (197) Decrease in other liabilities (288) --------- Net cash used in operating activities (2,341) --------- Cash flows from investing activities: Note receivable origination (550) Capital distributions from subsidiaries 1,102 Capital contributions to subsidiaries (4,061) --------- Net cash used in investing activities (3,509) --------- Cash flows from financing activities: Proceeds from other borrowings 2,350 Repayments of other borrowings (800) Stock options exercised 582 Principal reduction of ESOP note payable 229 --------- Net cash provided by financing activities 2,361 --------- Net decrease in cash (3,489) Cash at beginning of year 3,717 --------- Cash at end of year $ 228 =========
- 31 - 19. FAIR VALUE OF FINANCIAL INSTRUMENTS The following estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at March 31, 2002 (in thousands):
CARRYING FAIR AMOUNT VALUE ----------- ---------- Financial assets: Cash and cash equivalents $ 35,240 $ 35,240 Securities: Available for sale 258,783 258,783 Held to maturity 32,508 32,928 Stock in FHLB - Restricted 9,750 9,750 Loans receivable, net 712,088 723,078 Accrued interest receivable 7,398 7,398 Financial liabilities: Deposits 795,272 797,635 FHLB advances and other borrowings 210,794 219,845 Guaranteed preferred beneficial interests in debentures 28,750 28,463 Accrued interest payable 3,297 3,297
The following methods and assumptions were used by the Company in estimating the fair values of financial instruments: - Cash and amounts due from banks are valued at their carrying amounts reported in the consolidated statements of financial condition, which are reasonable estimates of fair value due to the relatively short period to maturity of these instruments. - Securities are valued at quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. 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. - 32 - - 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, 2002. 20. 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 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 lost wages, benefits, and other payments totaling approximately $4.6 million; (iv) alleged consequential damages in excess of $20 million, which represents the amount Plaintiffs believe another bank would have paid for the Prime Lending loan origination business and the net "assets" as Plaintiffs have defined them; and (v) unspecified punitive damages and attorneys fees. By Order of November 1, 2000, the trial court granted summary judgment in favor of Tucker Federal with respect to Plaintiffs' claims for punitive damages, holding that the only substantive claim of Plaintiffs remaining for trial are those founded on alleged breach of contract. The trial court also determined that genuine issues of fact exist with respect to Tucker Federal's counterclaim based on breach of contract. Both Tucker and Plaintiffs appealed the trial court's ruling to the Georgia Court of Appeals, which affirmed the trial court in a decision entered November 7, 2001. Both - 33 - parties sought pretrial review of this decision by the Georgia Supreme Court, which was denied. The case is presently pending in the trial court for further consideration of pretrial motions and trial. The Bank strongly denies Plaintiffs' entitlement to any relief and believes the Bank's 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, and 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. The Counterclaim, as amended, seeks compensatory damages presently estimated to total approximately $500,000 as well as other relief. Management believes the resolution of the aforementioned matters would not have a material effect on its financial condition, results of operations or cash flows. - 34 -