UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended September 30, 1998
Commission File Number: 000-20739
EAGLE BANCGROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
37-1353957
(IRS Employer Identification No.)
301 Fairway Drive, Bloomington, IL 61701
(309) 663-6345
(Address, including zip code, and telephone number, including area code, of
principal executive offices)
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 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 __
As of November 12, 1998, there were 1,096,655 shares of the Registrant's
Common Stock, par value $.01 per share, outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Eagle BancGroup, Inc.
Consolidated Statements of Condition
(amounts in thousands)
September 30 December 31
1998 1997
ASSETS
Cash and due from banks 456 1,628
Fed funds sold and overnight deposits 5,952 3,386
Investment securities 13,155 13,037
Mortgage-backed securities 27,445 24,596
Federal Home Loan Bank stock 1,322 1,310
Loans, net 123,286 122,409
Premises and equipment 2,731 2,834
Other assets 2,103 1,937
------- -------
Total Assets 176,450 171,137
======= =======
LIABILITIES and STOCKHOLDERS' EQUITY
Deposits 135,635 131,452
FHLB advances 20,000 18,000
Other liabilities 891 1,380
------- -------
Total Liabilities 156,526 150,832
------- -------
Capital stock 13 13
Paid in capital 12,428 12,323
Retained earnings 10,931 10,134
Treasury stock (3,505) (2,055)
Accumulated other comprehensive income 57 (110)
------- -------
Total Stockholders' Equity 19,924 20,305
------- -------
Total Liabilities and Stockholders' Equity 176,450 171,137
======= =======
Note: The balance sheet at December 31, 1997 has been derived from the
audited financial statements at that date but does not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
Eagle BancGroup, Inc.
Consolidated Statements of Income
(amounts in thousands except per share data)
For the Three Months For the Nine Months
Ended September 30 Ended September 30
1998 1997 1998 1997
Interest income:
Interest and fees on loans 2,319 2,447 7,028 7,003
Investment securities and other
interest earning assets 319 267 914 810
Mortgage-backed securities 378 391 1,164 1,394
Federal funds sold 51 29 158 41
----- ----- ----- -----
Total Interest Income 3,067 3,134 9,264 9,248
----- ----- ----- -----
Interest expense:
Deposits:
Passbook 144 145 424 440
MMDA and NOW 89 55 246 144
Certificates of deposit 1,544 1,570 4,578 4,714
Borrowings 268 315 906 790
----- ----- ----- -----
Total Interest Expense 2,045 2,085 6,154 6,088
----- ----- ----- -----
Net Interest Income Before
Provision for Loan Loss 1,022 1,049 3,110 3,160
Provision for loan loss 60 60 180 180
----- ----- ----- -----
Net Interest Income After
Provision for Loan Loss 962 989 2,930 2,980
Non-interest income:
Gains on loans sold 271 52 754 83
Other 125 104 294 333
----- ----- ----- -----
Total Non-Interest Income 396 156 1,048 416
Non-interest expense:
Salaries and employee benefits 647 546 1,782 1,538
Net occupancy expense 148 148 424 418
Federal deposit insurance premium 20 20 61 46
Data processing expense 71 107 211 249
Other 162 168 554 541
----- ----- ----- -----
Total Non-Interest Expense 1,048 989 3,032 2,792
Income Before Federal Income Tax 310 156 946 604
Federal income tax expense 110 52 343 204
----- ----- ----- -----
Net Income 200 104 603 400
----- ----- ----- -----
Other comprehensive income, net of tax
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period 134 208 187 195
Less: reclassification adjustment
for (gains) losses included
in net income (22) 11 (20) (30)
----- ----- ----- -----
Other comprehensive income 112 219 167 165
----- ----- ----- -----
Comprehensive Income 312 323 770 565
===== ===== ===== =====
Per Share Data:
Basic Earnings Per Share 0.19 0.09 0.56 0.34
Diluted Earnings Per Share 0.19 0.09 0.55 0.34
Dividends Per Share 0.00 0.00 0.00 0.00
See accompanying notes.
Eagle BancGroup, Inc.
Consolidated Statements of Cash Flows
(amounts in thousands)
For the Nine Months
Ended September 30
1998 1997
Cash Flows from Operating Activities
Net Income 603 400
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan loss 180 180
Provision for depreciation 231 213
Amortization of premiums and discounts on
investment securities (94) 15
Gains on securities sold, net (31) (58)
Gains on loans sold, net (754) (83)
Compensation expense related to incentive plans 298 210
Proceeds from sale of loans originated for sale 58,960 10,544
Loans originated for sale (61,768) (10,995)
Increase in accrued interest receivable (45) (28)
Increase in accrued interest payable 12 3
Increase in other assets (172) (51)
(Decrease) increase in other liabilities (486) 32
------ ------
Net cash (used in) provided by operating activities (3,066) 382
Cash Flows from Investing Activities
Investment securities
Purchases (17,312) (3,089)
Proceeds from sales 17,422 6,181
Mortgage-backed securities
Purchases (11,649) (5,946)
Proceeds from sales 2,268 13,992
Principal collected 6,711 2,893
Purchase of FHLB stock (12) (333)
Principal collected on loans 48,142 28,512
Loans originated, net (45,625) (45,502)
Purchases of premises and equipment (180) (178)
Purchase of other real estate (25) --
------ ------
Net cash used in investing activities (260) (3,470)
Cash Flows from Financing Activities
Increase in savings, demand and NOW accounts, net 4,507 980
Decrease in certificate accounts, net (338) (3,231)
Proceeds from FHLB advances 9,000 31,750
Principal payments on FHLB advances (7,000) (28,300)
Purchase of treasury stock (1,449) (1,676)
Purchase of MDRP stock -- (840)
------ ------
Net cash provided by (used in) financing activities 4,720 (1,317)
Increase (decrease) in cash and cash equivalents 1,394 (4,405)
Cash and cash equivalents at beginning of period 5,014 7,060
------ ------
Cash and cash equivalents at end of period 6,408 2,655
====== ======
See accompanying notes.
Eagle BancGroup, Inc.
Notes to Consolidated Financial Statements
1. Basis of Presentation
The unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and therefore do not include all information and disclosures
required by generally accepted accounting principles for complete financial
statements. All adjustments which are, in the opinion of management,
necessary for a fair presentation of the results for the periods reported,
consisting only of normal recurring adjustments, have been included in the
accompanying consolidated financial statements. Operating results for the
three and nine months ended September 30, 1998 are not necessarily indicative
of the results that may be expected for the year ended December 31, 1998. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1997.
2. Earnings Per Share and Dividends
Basic earnings per share is computed by dividing net income for the period by
the weighted average number of shares outstanding of 1,084,244 and 1,161,670
for the nine months ended September 30, 1998 and 1997, respectively, and
1,060,969 and 1,130,235 for the three months ended September 30, 1998 and 1997,
respectively. Diluted earnings per share is computed by dividing net income
for the period by the weighted average number of common shares and common
share equivalents outstanding of 1,105,822 and 1,164,408 for the nine months
ended September 30, 1998 and 1997, respectively, and 1,086,806 and 1,135,119
for the three months ended September 30, 1998 and 1997, respectively. Common
share equivalents assume exercise of stock instruments and use of proceeds to
purchase treasury stock at the average market price for the period. The
Company has not yet paid any dividends.
3. Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130) which requires disclosure of
comprehensive income in the financial statements. The Company has included
this disclosure in the statements of income. Comprehensive income consists
of the net income or loss of an entity plus or minus the change in equity of
the entity during the period from transactions, other events and circumstances
resulting from non-owner sources. The statements of income for the nine and
three months ended September 30, 1997 have been restated to include
disclosure of comprehensive income for each period.
Eagle BancGroup, Inc.
Item 2. Management's Discussion and Analysis
RESULTS OF OPERATIONS
GENERAL: Eagle BancGroup, Inc.'s (the 'Company') net income increased to
$200,000, or $.19 per share, in the three months ended September 30, 1998 from
$104,000, or $.09 per share, in the same period in 1997. In the nine months
ended September 30, the Company's net income increased to $603,000, or $.56 per
share, in 1998 from $400,000, or $.34 per share, in 1997. The increase in net
income in 1998 from 1997 is due primarily to significant increases in gains on
sales of residential mortgage loans in 1998 compared to 1997.
NET INTEREST INCOME: Net interest income decreased to $1,022,000 in the three
months ended September 30, 1998 from $1,049,000 in the same period in 1997. In
the nine months ended September 30, net interest income decreased to $3,110,000
in 1998 from $3,160,000 in 1997. In the three months ended September 30, total
interest income decreased to $3,067,000 in 1998 from $3,134,000 in 1997 and
total interest expense decreased to $2,045,000 in 1998 from $2,085,000 in
1997. In the nine months ended September 30, total interest income increased
to $9,264,000 in 1998 from $9,248,000 in 1997 and total interest expense
increased to $6,154,000 in 1998 from $6,088,000 in 1997. Net interest income
decreased in 1998 from 1997 due to a decline in the interest rate spread, the
difference between the yield on average interest earning assets and the cost
of average interest bearing liabilities, in 1998. In the first nine months of
1998, the interest rate spread was 1.91% and in the three months ended
September 30, 1998, the interest rate spread was 1.87% compared to 1.99% in
both the nine and three months ended September 30, 1997.
The decline in the interest rate spread was primarily the result of the overall
decline in interest rates in 1998 from previous years. The yield on average
interest earning assets decreased to 7.23% in the first nine months of 1998
from 7.43% in the same period in 1997 and the cost of average interest bearing
liabilities decreased to 5.33% in the first nine months of 1998 from 5.44% in
the same period in 1997. Due to the higher level of prepayments on mortgage
loans in the portfolio, the yield on average interest earning assets decreased
more than the cost of average interest bearing liabilities.
The decrease in mortgage rates in 1998 resulted in a substantial increase in
refinancing activity and a decrease of over $8 million in the amount of average
residential mortgage loans outstanding and a 30 basis point decrease on the
yield earned on the average outstanding loans to 7.37% in 1998 compared to
1997. The decrease in residential mortgage loans was offset by an increase of
over $10 million in average commercial real estate and commercial loans
although many of the commercial real estate loans were originated in the third
quarter. Their impact on the yield on average total loans is not fully
reflected as of September 30, 1998. The yield on average total loans
decreased to 7.88% in 1998 from 8.04% in 1997. The yield on average
investment securities and short-term investments decreased 27 basis points to
5.75% and the average amount of these other interest earning assets increased
over $2 million in 1998 compared to 1997. Total average interest earning
assets increased to $171,221,000 in the first nine months of 1998 from
$166,374,000 in the same period in 1997.
Average interest bearing liabilities increased to $154,450,000 in the first
nine months of 1998 from $149,650,000 in the same period in 1997 due primarily
to an increase of over $4 million in average borrowed funds. The cost of
average borrowed funds decreased 45 basis points to 5.46% in 1998 from 1997.
The cost of average deposits decreased 8 basis points to 5.30% in 1998 from
1997 due primarily to a change in the deposit mix. In 1998, average demand
and savings deposits increased almost $3.5 million while average time deposits
decreased almost $3 million compared to 1997. In 1998, the average cost of
demand and savings deposits was 3.16% and the average cost of time deposits
was 5.89%.
For the quarter ended September 30, 1998, the yield on average interest earning
assets decreased to 7.17% and the cost of average interest bearing liabilities
decreased to 5.29% compared to 7.37% and 5.41%, respectively, in the same
period in 1997. The decline in the yield on earning assets was due primarily
to the continued acceleration of prepayments on mortgage loans as a result of
increased refinancing activity. The decrease in the cost of average interest
bearing liabilities was also due to a decline in the cost of average borrowed
funds to 5.32% in the third quarter of 1998 from 5.89% in the same period in
1997.
The net interest margin, net interest income divided by average interest
earning assets, decreased to 2.43% in the first nine months of 1998 from 2.54%
in the same period in 1997. In the third quarter, the net interest margin
decreased to 2.39% in 1998 from 2.47% in 1997. The net interest margin
decreased due to the declining rate environment during the year, which
resulted in more prepayments on loans. The accelerated principal payments on
higher rate loans in the portfolio caused the yield on average interest
earning assets to decline more rapidly than the cost of average interest
bearing liabilities.
All loans contractually past due 90 days or more at September 30, 1998 were
classified as non-accrual. Interest income on these loans is recognized only
upon cash receipt and no interest income is accrued. In the nine months ended
September 30, 1998, cash interest payments of $45,000 were included in interest
income. Additional interest income of $19,000 would have accrued had the loans
not been past due 90 days or more. Total non-accrual loans at September 30,
1998 were $859,000.
PROVISION FOR LOAN LOSS: The provision for loan loss was $180,000 in the nine
months ended September 30, 1998 and 1997 and was $60,000 in the three months
ended September 30, 1998 and 1997. The provision is determined as the amount
necessary to maintain the allowance for loan losses at a level deemed adequate
to absorb estimated future losses inherent in the loan portfolio. In the first
nine months of 1998, loans totaling $117,000 have been charged against the
allowance for loan losses and $9,000 has been credited to the allowance due to
recoveries of loans previously charged off. At September 30, 1998, the
allowance for loan losses was $1,007,000, or .81% of total loans, compared to
$935,000, or .76% of total loans, at December 31, 1997.
NON-INTEREST INCOME: Non-interest income increased to $1,048,000 in the nine
months ended September 30, 1998 from $416,000 in the same period in 1997 due to
the significant increase in gains on residential mortgage loans sold in 1998.
In the first nine months of 1998, proceeds from the sale of residential
mortgage loans totaled $58,960,000 with gains on the sales of $754,000. In
the same period in 1997, proceeds from sales were $10,544,000 with gains on
the sales of $83,000. Other non-interest income decreased to $294,000 in the
first nine months of 1998 from $333,000 in the same period in 1997 due to net
gains on sales of securities, which were $31,000 in the first nine months of
1998 and $58,000 in the same period in 1997.
In the third quarter of 1998, non-interest income increased to $396,000 from
$156,000 in the third quarter of 1997 due to gains on residential mortgage
loans sold, which were $271,000 in the 1998 period and $52,000 in the 1997
period. Proceeds from the loan sales totaled $19,767,000 in the third quarter
of 1998 and $7,782,000 in the third quarter of 1997. Other non-interest income
increased to $125,000 in the third quarter of 1998 from $104,000 in the same
period in 1997 due to net gains (losses) on securities sold which were $35,000
in the 1998 period and $(4,000) in the 1997 period.
NON-INTEREST EXPENSE: Non-interest expense increased to $3,032,000 in the
first nine months of 1998 from $2,792,000 in the same period in 1997. The
increase was primarily due to salaries and employee benefits, which was
$1,782,000 in the nine months ended September 30, 1998 compared to $1,538,000
in the same period in 1997. In 1998, salaries and employee benefits increased
over 1997 due incentive payroll costs related to the volume of residential
mortgage loans originated and sold, higher expense related to employee benefit
plans and other normal increases in employee costs. Federal deposit insurance
premiums increased to $61,000 in the first nine months of 1998 from $46,000 in
the same period in 1997 due to a one-time premium rebate received in 1997.
Data processing expense decreased to $211,000 in the nine months ended
September 30, 1998 from $249,000 in the same period of 1997 due to expenses
incurred related to the data processing conversion in the third quarter of
1997.
Non-interest expense increased to $1,048,000 in the third quarter of 1998 from
$989,000 in the same period in 1997. Salaries and employee benefits increased
to $647,000 in the third quarter of 1998 from $546,000 in the same period in
1997 due primarily to mortgage related incentive payroll costs incurred in
1998. Data processing expense decreased to $71,000 in the third quarter of
1998 from $107,000 in the same period in 1997 due to the data processing
conversion expenses incurred in the third quarter of 1997.
INCOME TAX EXPENSE: The provision for income taxes increased to $343,000 in
the nine months ended September 30, 1998 from $204,000 in the same period in
1997. In the third quarter of 1998, the provision for income taxes increased
to $110,000 from $52,000 in the same period in 1997. In both 1998 periods,
the provision for income taxes increased due to the increase in income before
tax. The effective tax rates were 36% for the nine months ended September 30,
1998, 35% for the three months ended September 30, 1998 and 34% for both
periods in 1997.
FINANCIAL CONDITION:
Total assets increased to $176,450,000 at September 30, 1998 from $171,137,000
at December 31, 1997. Mortgage-backed securities increased to $27,445,000 at
September 30, 1998 from $24,596,000 at December 31, 1997 due to investment of
funds available as a result of the accelerated prepayments in the mortgage
loan portfolio and from restructuring of the FHLB advance portfolio. Net loans
increased to $123,286,000 at September 30, 1998 from $122,409,000 at December
31, 1997 due to increases in commercial real estate, commercial and direct
consumer loans, primarily home equity loans and lines of credit, that offset
the decrease in residential mortgage loans, which was due to the acceleration
of mortgage prepayments in 1998. Total deposits, primarily demand deposits,
increased to $135,635,000 at September 30, 1998 from $131,452,000 at December
31, 1997. FHLB advances also increased to $20,000,000 at September 30, 1998
from $18,000,000 at December 31, 1997.
Stockholder's equity decreased to $19,924,000, or 11.3% of total assets, at
September 30, 1998 from $20,305,000, or 11.9% of total assets, at December 31,
1997 due to the purchase of additional treasury stock in the third quarter of
1998 partially offset by 1998 income to date. Book value increased to $18.17
per share at September 30, 1998 from $17.24 per share at December 31, 1997.
Savings institutions are required to maintain minimum capital levels measured
by the following ratios: Risk-based capital to risk weighted assets ratio of
8.00%; Core capital to tangible assets ratio of 3.00%; and Tangible core
capital to adjusted tangible assets ratio of 1.50%. The Company's savings
institution subsidiary had ratios of 15.59%, 9.65% and 9.65%, respectively, at
September 30, 1998 compared to 16.30%, 9.99% and 9.99%, respectively, at
December 31, 1997.
Savings institutions are also required to maintain a minimum 4% liquidity ratio
measured as the ratio of cash, cash equivalents, short-term investments and
certain long-term investments to deposits and certain borrowed funds. The
Company's savings institution subsidiary had liquidity ratios of 13.83% and
12.07% at September 30, 1998 and December 31, 1997, respectively.
At September 30, 1998, funds committed for loan originations and loans in
process totaled $3,149,000 and unused lines of credit totaled $5,444,000. Cash
and cash equivalents, scheduled principal and interest payments on loans,
mortgage-backed and investment securities, new deposits and borrowed funds are
sources of funds used to meet such commitments. Funds are primarily invested
in residential mortgage, commercial, commercial real estate and consumer
loans and investment and mortgage-backed securities. Funds are also used for
deposit interest payments, maturities and withdrawals.
YEAR 2000
The Company faces many challenges and risks in its efforts to be Year 2000
('Y2K') compliant. As a financial institution, the Company relies on the
performance of its in house and third party data processing systems to
accurately maintain deposit, loan and all other records. In addition to data
processing concerns, the Company also relies on public and private utilities
for voice and data phone lines, electricity and other such services over
which it has no control. In the event of a Y2K failure related to an in house
system or by any third party service provider, the Company must be prepared to
continue to operate and serve its customers or risk a decline in its financial
performance.
The Company began formulating its Y2K compliance plan in September, 1997 and
has revised and updated the plan since that time. The Office of Thrift
Supervision ('OTS'), the Company's primary regulator, conducted an on-site
review of Y2K compliance efforts in early 1998 and has been furnished with
compliance plan updates throughout the remainder of 1998. Through the end of
September, the Company's Y2K compliance plan and efforts to date have been
approved by the OTS.
Specific events that occurred in the third quarter related to the Y2K
compliance effort include: Certification of the Company's in house hardware
as Y2K compliant by the Company's third party network consultant; Continuation
of planning for software compliance testing of the Company's primary data
processing provider that began, under the provider's timetable for all users,
in November, 1998; Follow-up contact to monitor compliance status of third
party software vendors and other service providers; and initial contact with
the Company's significant loan customers to determine their Y2K status.
Direct costs related to Y2K incurred by the Company through the end of the
third quarter, 1998 totaled $17,000 which consisted of $5,000 paid to the
Company's third party network consultant for hardware certification and $12,000
paid to the Company's primary data processing provider related to the testing
process. The Company is obligated to pay an additional $13,000 to the data
processing provider to under a prearranged billing schedule for the testing
services. The network consultant may provide additional Y2K compliance
services at a cost not expected to exceed $25,000. The Company has also
incurred indirect costs related to the Y2K compliance effort consisting
primarily of salaries and benefits for the employees involved. The Company
has not segregated these expenses but estimates that in the first nine months
of 1998, approximately 20,000 of salary and benefit expense would be related
to Y2K. The number of employees and the time involved in the compliance
effort will increase in the fourth quarter of 1998 as the testing phase begins
and the Company expects an additional $20,000 of expense could be allocated to
Y2K but total salary and benefit expense is not expected to increase during the
period. The testing phase is scheduled to be completed in the first quarter
of 1999.
In the third quarter of 1997, the Company converted to its current data
processing provider and invested $175,000 in new hardware related to the
conversion. In 1998, the Company migrated to new teller and retail software
and invested an additional $28,000 for new hardware. Since the data provider
conversion and subsequent software migration would have been done in any event,
the costs related thereto are not considered direct Y2K costs. These events
have assisted the Company's Y2K compliance effort, however.
The Company's Y2K compliance plan briefly outlines a contingency plan. The
Company intends to complete a detailed contingency plan by the end of the first
quarter, 1999. A detailed contingency plan requires further study and
assessment of testing efforts prior to completion and will be necessary to
address what steps the Company will take to overcome any Y2K failure.
The Company believes that its Y2K compliance plan will be effective but the
effort to be Y2K compliant relies to no small extent on the compliance efforts
of a large number of third parties over which the Company has little or no
control. The Company is monitoring the compliance efforts of as many third
party service providers as possible but cannot guarantee that any information
received from third parties is accurate. The Year 2000 problem is extremely
complex and potentially impacts any computer process. As such, it is not
possible at this time to state that Y2K compliance can be achieved without
potentially significant unanticipated expenditures that could impact the
financial performance of the Company.
Eagle BancGroup, Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
NONE
Item 2. Changes in Securities
NONE
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Security Holders
NONE
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
Eagle BancGroup, Inc. did not file any reports on Form 8-K during the three
months ended September 30, 1998.
The following exhibits are included herein:
(27) - Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATE: November 13, 1998 /s/ Gerald A. Bradley
---------------------
GERALD A. BRADLEY
Chairman of the Board
DATE: November 13, 1998 /s/ Donald L. Fernandes
-----------------------
DONALD L. FERNANDES
President and
Chief Executive Officer