SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File No. 000-20739
EAGLE BANCGROUP, INC
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 37-1353957
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
301 FAIRWAY DRIVE, BLOOMINGTON, IL 61702-0429
(Address of Principal Executive Offices) (Zip Code)
(309) 663-6345
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES XX NO __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405) of this chapter) is not contained
herein, and will not be contained, to the best of the Registrant's knowledge,
in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. XX
As of March 21, 1997, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was approximately $16,289,000 (1,026,055
shares at $15.875 per share). The per share price of $15.875 is based on the
last sale price of the common stock at March 21, 1997, as reported by The
Nasdaq Stock Market.
As of March 21, 1997, there were 1,277,705 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference:
Annual Report to Stockholders for the Fiscal Year Ended December 31, 1996--
Part I and II.
1997 Notice and Proxy Statement for the Annual Meeting of Stockholders to
be held on April 16, 1997--Part III
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business 3
Item 2. Properties 38
Item 3. Legal Proceedings 38
Item 4. Submission of Matters to a Vote of
Security Holders 38
PART II
Item 5. Market for the Registrant's Common Stock and
Related Security Matters 39
Item 6. Selected Financial Data 39
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 39
Item 8. Financial Statements and Supplementary Data 39
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 39
PART III
Item 10. Directors and Executive Officers of Registrant 40
Item 11. Executive Compensation 40
Item 12. Security Ownership of Certain Beneficial Owners
and Managament 40
Item 13. Certain Relationships and Related Transactions 40
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 40
Signatures 41
Exhibit Index 42
-Page 2-
PART I
Item 1. BUSINESS
Eagle BancGroup, Inc. ('Eagle'), a non-diversified unitary savings and
loan holding company as defined in the Home Owner's Loan Act, as amended, was
incorporated as a Delaware corporation on January 24, 1996. Eagle owns all of
the common stock of First Federal Savings and Loan Association, Bloomington,
Illinois ('First Federal'). In June, 1996, First Federal converted from a
mutual savings association to a capital stock savings association at which
time Eagle acquired all of the common stock of First Federal. Eagle conducted
a subscription stock offering simultaneous to the charter conversion which
resulted in the issuance of 1,302,705 shares of Eagle's common stock. At
present, Eagle is engaged only in the business of managing its investments and
directing, planning and coordinating the business activities of First Federal.
In the future, Eagle may expand its current operations or acquire or
organize other first-tier subsidiaries, including other financial
institutions. At present, however, there are no agreements, plans or
understandings for such expansion. For the foreseeable future, Eagle expects
that First Federal will continue to be the major source of Eagle's assets,
revenues and net income. Eagle does not maintain separate offices from First
Federal and does not separately employ or compensate its officers.
At December 31, 1996, Eagle had consolidated total assets of $172,666,000
and stockholders' equity of $22,141,000. At December 31, 1996, Eagle was the
third largest financial institution holding company headquartered in McLean
county, Illinois, based on its consolidated assets as of that date.
First Federal
First Federal is a federally-chartered capital stock savings association
regulated by the Office of Thrift Supervision (the 'OTS') and its deposits are
insured by the Federal Deposit Insurance Corporation (the 'FDIC') through the
Savings Association Insurance Fund (the 'SAIF'). First Federal was originally
chartered in 1919. At December 31, 1996, First Federal had total assets of
$168,335,000, deposit accounts of $135,105,000 and stockholders' equity of
$16,005,000.
First Federal conducts business from its main office in Bloomington,
Illinois and two full service branch offices located in Bloomington and LeRoy,
Illinois. Bloomington and LeRoy, which is approximately 20 miles southeast of
Bloomington, are located in central Illinois in McLean County, the largest
county geographically in Illinois. First Federal's primary market area is
McLean and DeWitt Counties. DeWitt County is directly southeast of McLean
County. Bloomington and its adjacent sister city, Normal, have a combined
population of approximately 100,000. Of the five major metropolitan areas in
Illinois outside of Chicago, Bloomington-Normal's population is projected to
grow the fastest the remainder of this decade. Outside of Bloomington-Normal,
McLean and Dewitt Counties are a mix of small towns and rural areas. The
economy of the region is diversified in four major sectors- agriculture,
education, manufacturing and insurance. Bloomington-Normal is home to two
large insurance companies, two four-year universities and numerous national
manufacturers. McLean County annually ranks at or near the top nationally in
corn and soybean production per county. This diversification has resulted in
a strong, growing local economy that is expected to continue to grow in the
future.
-Page 3-
The principal business of First Federal has been and continues to be
attracting retail deposits in its primary market area from the general public
and investing those deposits, along with funds generated from operations and
borrowings, in one-to-four family residential mortgage loans, automobile
loans, mortgage-backed and other investment securities, and to a lesser
extent, in commercial real estate, commercial business and other consumer
loans. Residential mortgage loans are originated for investment and for sale
in the secondary market, with servicing rights normally retained by First
Federal. Revenues are derived principally from interest on residential
mortgage and consumer loans, interest and dividends on mortgage-backed and
other investment securities and, to a lesser extent, loan fees, loan servicing
income and gains on sale of loans. Primary sources of funds are deposits,
principal and interest payments on loans, mortgage-backed and other investment
securities, FHLB advances and proceeds from the sale of residential mortgage
loans.
First Federal competes with thirteen other savings institutions and banks
as well as numerous credit unions, finance companies and other financial
intermediaries in its primary market area. Competition has been and will
continue to be intense with respect to attracting deposits and making loans.
Interest rates and customer service are the primary factors affecting
competition for deposits and loans. First Federal's seventy-seven years as a
locally owned and managed savings institution and a tradition of customer
service are advantages current and future customers have at First Federal in
addition to locally competitive interest rates on deposits and loans. First
Federal offers a variety of demand, savings and time deposit products.
First Federal has one wholly-owned service corporation, FFS Investment
Services ('FFS'), which was incorporated in Illinois on March 25, 1994. FFS
sells investment products, including annuities, offered by PrimeVest Financial
Services, Inc., a specialty brokerage firm. Customers seeking alternatives to
the deposit products at First Federal have access to other financial products
through the FFS staff.
Collectively, Eagle, First Federal and FFS are referred to herein as 'the
Company'.
-Page 4
<TABLE>
Average Balance Sheets
The following table sets forth information with respect to average
balances of assets and liabilities, dollar amounts of interest income or
expense from average interest-earning assets and interest-bearing liabilities,
respectively, resultant yields and costs, interest rate spreads, net interest
margins and the ratio of interest-earning assets to interest-bearing
liabilities for the periods indicated. Average balances for each period have
been calculated using the average of month-end balances during such period,
the use of which management of the Company believes are not materially
different from averages calculated using the daily balances (amounts in
thousands):
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
Average Interest & Yield/
Balance Dividends Cost
<S> <C> <C> <C>
Interest-earning assets <F1>:
Mortgage loans <F2> 65,224 4,862 7.45%
Indirect auto loans 22,962 1,985 8.64
Other consumer loans 8,346 754 9.03
Other loans 848 80 9.43
Total loans 97,380 7,681 7.89
Mortgage-backed securities:
Collateralized mortgage obligations 19,583 1,153 5.89
Other mortgage-backed securities 19,499 1,205 6.18
Investment securities 13,916 832 5.98
Overnight and short-term investments 3,106 172 5.54
Federal Home Loan Bank stock 760 51 6.71
Total interest-earning assets 154,244 11,094 7.19
Non-interest-earning assets:
Office properties and equipment, net 2,997
Real estate, net 649
Other non-interest-earning assets 1,506
Total assets 159,396
Interest-bearing liabilities:
Passbook accounts 15,462 577 3.73
NOW accounts 5,338 96 1.80
Money market accounts 2,964 85 2.87
Certificates of deposit 111,859 6,673 5.97
Total deposits 135,623 7,431 5.48
FHLB advances and other borrowed funds 4,386 272 6.20
Total interest-bearing liabilities 140,009 7,703 5.50
Non-interest bearing liabilities:
Non-interest bearing deposits 549
Other liabilities 1,682
Total liabilities 142,240
Stockholders' equity 17,156
Total liabilities and
stockholders' equity 159,396
Net interest income 3,391
Interest rate spread 1.69
Net interest margin 2.20%
Average interest-earning assets to
average interest-bearing liabilities 1.10x
-Page 5-
FOR THE YEAR ENDED DECEMBER 31, 1995
Average Interest & Yield/
Balance Dividends Cost
Interest-earning assets <F1>:
Mortgage loans <F2> 60,081 4,528 7.54%
Indirect auto loans 20,436 1,655 8.10
Other consumer loans 6,775 671 9.90
Other loans 490 45 9.18
Total loans 87,782 6,899 7.86
Mortgage-backed securities:
Collateralized mortgage obligations 19,384 1,175 6.06
Other mortgage-backed securities 17,347 1,055 6.08
Investment securities 9,713 552 5.68
Overnight and short-term investments 3,335 207 6.21
Federal Home Loan Bank stock 683 45 6.59
Total interest-earning assets 138,244 9,933 7.19
Non-interest-earning assets:
Office properties and equipment, net 3,234
Real estate, net 5,392
Other non-interest-earning assets 2,673
Total assets 149,543
Interest-bearing liabilities:
Passbook accounts 13,947 494 3.54
NOW accounts 4,821 86 1.78
Money market accounts 3,611 103 2.85
Certificates of deposit 113,876 6,612 5.81
Total deposits 136,255 7,295 5.35
FHLB advances and other borrowed funds 1,243 81 6.52
Total interest-bearing liabilities 137,498 7,376 5.36
Non-interest bearing liabilities:
Non-interest bearing deposits 468
Other liabilities 802
Total liabilities 138,768
Stockholders' equity 10,775
Total liabilities and
stockholders' equity 149,543
Net interest income 2,557
Interest rate spread 1.83
Net interest margin 1.85%
Average interest-earning assets to
average interest-bearing liabilities 1.01x
-Page 6-
FOR THE YEAR ENDED DECEMBER 31, 1994
Average Interest & Yield/
Balance Dividends Cost
Interest-earning assets <F1>:
Mortgage loans <F2> 54,351 4,176 7.68%
Indirect auto loans 14,730 1,081 7.34
Other consumer loans 5,741 504 8.78
Other loans 526 48 9.13
Total loans 75,348 5,809 7.71
Mortgage-backed securities:
Collateralized mortgage obligations 20,359 1,184 5.82
Other mortgage-backed securities 17,311 894 5.16
Investment securities 10,046 571 5.68
Overnight and short-term investments 1,880 94 5.00
Federal Home Loan Bank stock 734 43 5.86
Total interest-earning assets 125,678 8,595 6.84
Non-interest-earning assets:
Office properties and equipment, net 2,628
Real estate, net 6,578
Other non-interest-earning assets 2,347
Total assets 137,231
Interest-bearing liabilities:
Passbook accounts 14,991 474 3.16
NOW accounts 4,041 84 2.08
Money market accounts 5,596 154 2.75
Certificates of deposit 97,950 4,542 4.64
Total deposits 122,578 5,254 4.29
FHLB advances and other borrowed funds 2,762 142 5.10
Total interest-bearing liabilities 125,340 5,396 4.30
Non-interest bearing liabilities:
Non-interest bearing deposits 418
Other liabilities 1,111
Total liabilities 126,869
Stockholders' equity 10,362
Total liabilities and
stockholders' equity 137,231
Net interest income 3,199
Interest rate spread 2.54
Net interest margin 2.55%
Average interest-earning assets to
average interest-bearing liabilities 1.00x
<FN>
<F1>
Does not include interest on loans 90 days or more past due.
<F2>
Includes one-to-four family, construction, multi-family and commercial
real estate loans.
</FN>
</TABLE>
-Page 7-
<TABLE>
The following table sets forth the effects of changing interest rates and
volumes of interest-earning assets and interest-bearing liabilities on net
interest income. Information is provided with respect to (i) effects on
interest income attributable to changes in rate (changes in rate multiplied by
prior volume), (ii) effects on interest income attributable to changes in
volume (changes in volume multiplied by prior rate) and (iii) changes in
rate/volume (change in rate multiplied by change in volume) (amounts in
thousands):
<CAPTION>
1996 COMPARED TO 1995
Increase (Decrease) Due To
Rate/
Rate Volume Volume Net
<S> <C> <C> <C> <C>
Interest earning-assets <F1>:
Mortgage loans <F2> (49) 387 (4) 334
Indirect auto loans 111 205 14 330
Other consumer loans (59) 156 (14) 83
Other loans 1 33 1 35
Total loans 4 781 (3) 782
Mortgage-backed securities:
Collateralized mortgage obligations (34) 12 - (22)
Other mortgage-backed securities 17 131 2 150
Investment securities 29 239 12 280
Overnight and short-term investments (22) (14) 1 (35)
Federal Home Loan Bank Stock 1 5 - 6
Total net change in income on
interest-earning assets (5) 1,154 12 1,161
Interest-bearing liabilities:
Passbook accounts 26 54 3 83
NOW accounts 1 9 - 10
Money market accounts 1 (19) - (18)
Certificates of deposit 181 (117) (3) 61
Total deposits 209 (73) - 136
FHLB advances and other borrowed funds (4) 205 (10) 191
Total net change in expense on
interest-bearing liabilities 205 132 (10) 327
Net change in net interest income (210) 1,022 22 834
-Page 8-
1995 COMPARED TO 1994
Increase (Decrease) Due To
Rate/
Rate Volume Volume Net
Interest earning-assets (1):
Mortgage loans (2) (79) 440 (8) 353
Indirect auto loans 112 419 43 574
Other consumer loans 65 90 12 167
Other loans - (3) - (3)
Total loans 98 946 47 1,091
Mortgage-backed securities:
Collateralized mortgage obligations 50 (57) (2) (9)
Other mortgage-backed securities 159 2 - 161
Investment securities - (19) - (19)
Overnight and short-term investment 23 73 17 113
Federal Home Loan Bank Stock 5 (3) - 2
Total net change in income on
interest-earning assets 335 942 62 1,339
Interest-bearing liabilities:
Passbook accounts 57 (33) (4) 20
NOW accounts (12) 16 (2) 2
Money market accounts 6 (55) (2) (51)
Certificates of deposit 1,145 739 186 2,070
Total deposits 1,196 667 178 2,041
FHLB advances and other borrowed funds 39 (78) (21) (60)
Total net change in expense on
interest-bearing liabilities 1,235 589 157 1,981
Net change in net interest income (900) 353 (95) (642)
<FN>
<F1>
Does not include interest on loans 90 days or more past due
<F2>
Includes one-to-four family, construction, multi-family and commercial
real estate loans.
</FN>
</TABLE>
-Page 9-
Lending Activities
First Federal has historically focused primarily on the origination of
residential mortgage loans secured by one-to-four family homes. In 1993,
First Federal began originating indirect automobile loans through a network of
local automobile dealerships. At December 31, 1996, one-to-four family
residential mortgage loans totaled 62.7% and indirect automobile loans totaled
21.8% of gross loans. The indirect automobile loans are generally higher
yielding and more interest rate sensitive than residential mortgage loans and
provide a degree of diversification to the loan portfolio. First Federal has
not actively pursued origination of commercial real estate or business loans
in recent years but plans to increase activity in these loan types starting in
1997 to add more diversification to the loan portfolio. Commercial real
estate and business loans totaled 4.6% of gross loans at December 31, 1996.
Home equity loans totaled 4.5% of gross loans at December 31, 1996. First
Federal also originates multi-family mortgage loans, construction loans and
consumer loans (other than indirect automobile loans) although none of these
categories comprise more than 3% of gross loans at December 31, 1996. The
following table sets forth the composition of the loan portfolio as of the
dates indicated:
<TABLE>
December 31,
1996 1995 1994
Amount Pct Amount Pct Amount Pct
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family <F1> 67,855 62.7% 53,294 59.2% 53,850 63.6%
Construction 1,183 1.1 716 .8 - -
Multi-family 1,562 1.4 1,776 2.0 1,954 2.3
Commercial real estate 3,827 3.5 4,484 5.0 4,902 5.8
Total mortgage 74,427 68.7 60,270 67.0 60,706 71.7
Indirect auto loans 23,640 21.8 21,598 24.0 16,708 19.7
Other consumer loans:
Direct auto 2,136 2.0 1,515 1.7 1,120 1.3
Home equity 4,904 4.5 4,275 4.7 3,872 4.6
Other consumer 1,479 1.4 1,332 1.5 1,328 1.6
Total other consumer 8,519 7.9 7,122 7.9 6,320 7.5
Commercial business loans 1,145 1.1 541 .6 496 .6
Accrued interest
receivable-all loans 563 .5 489 .5 432 .5
Gross loans 108,294 100 90,020 100 84,662 100
Less:
Due to borrowers on
construction loans (610) (246) (50)
Unearned income (120) (81) (50)
Allowance for possible
loan losses (923) (907) (973)
Net loans receivable 106,641 88,786 83,589
<FN>
<F1>
Includes construction loans converted to permanent loans.
</FN>
</TABLE>
Other than the categories listed above, no other concentrations or categories
of loans exceeding 10% of total loans are known to exist.
-Page 10-
One-to-Four Family Residential Lending. The primary lending activity of
First Federal has been the origination of first mortgage loans to enable
borrowers to purchase new or existing or to construct one-to-four family homes
located in First Federal's primary market area. Such lending includes loans
secured by detached single-family residences or condominiums and individually
owned residences in attached housing containing not more than four separate
dwelling units. Representing well over half of the loan portfolio,
residential mortgage loans have contributed significantly to interest income
and have low delinquency and loss rates. To remain competitive, a variety of
mortgage products are offered including fixed or variable rate and term or
balloon loans.
Fixed-rate, fixed-term residential mortgage loans are competitively
priced based on market conditions and the cost of funds. Terms of 10, 15, 20
and 30 years are available. First Federal maintains a policy of selling in
the secondary market all new fixed-rate, fixed-term residential mortgage loans
with terms of over 15 years and some such loans with terms of 15 years
depending on market conditions. Loans are sold to either the Federal National
Mortgage Association ('FNMA'), a government sponsored agency, or to Fleet
Mortgage Company ('Fleet'), a private mortgage investor. At December 31,
1996, fixed-rate, fixed-term loans represented about 40% of the one-to-four
family mortgage loans outstanding.
Adjustable-rate ('ARM') residential mortgage loans having initial
adjustment periods of one, three, five or seven years, with annual adjustments
thereafter and maturities of up to 30 years, are offered by First Federal. In
recent years, the three year ARM has been emphasized and generated the most
originations. ARM loans are adjusted at the beginning of each adjustment
period based on a fixed spread above the average yield on US Treasury
securities as published by the Federal Reserve Board. Generally, ARM loan
rate adjustments are limited to 2% per adjustment period and to 6% aggregate
over the life of the loan. At December 31, 1996, ARM loans represented about
37% of the one-to-four family mortgage loans outstanding.
Balloon loans are also offered by First Federal. These loans have a
fixed-rate and fixed monthly payments (normally based on a thirty year
amortization schedule) but have a five or seven year term at which time the
entire unpaid principal balance is due. Borrowers have the option of renewing
the loan at then current rates. About 23% of the one-to-four family mortgage
loans outstanding at December 31, 1996 were balloon loans.
Factors such as the general level of interest rates, competition, funds
availability and borrower preference all affect the amount and type of loans
originated. Generally, borrowers prefer ARM loans in periods of higher
interest rates and fixed-rate loans in periods of lower interest rates.
Because ARM loans allow for adjustment of the interest rate, such loans
are retained due to the lower level of interest rate risk compared to fixed-
rate, fixed-term loans. Balloon loans also have lower interest rate risk than
fixed-rate, fixed-term loans but higher interest rate risk relative to ARM
loans since balloon loans usually are repriceable later than ARM loans but
sooner than fixed-term loans. ARM loans do have higher credit risk compared
to fixed-rate loans due to the possibility of borrower default when interest
rates reset higher and monthly payment amounts increase. ARM borrowers are
normally qualified at the highest possible rate to reduce credit risk.
Generally, one-to-four family mortgage loans are underwritten to FNMA
guidelines to allow for sale in the secondary market. If the loan to value
ratio exceeds 80%, private mortgage insurance is required to cover the excess
-Page 11-
above 80%. With private mortgage insurance, loan to value ratios cannot
exceed 95%. Title insurance or attorney's opinion to title is required as is
hazard insurance for any property securing mortgage loans.
Construction Loans. First Federal originates construction loans at the
request of borrowers but does not actively solicit such loans. Generally,
such loans are for construction of owner-occupied, single-family dwellings and
are usually converted to permanent mortgage financing upon completion. The
loans usually have variable rates and have maturities of up to twelve months
in which time construction must be completed. Loan amounts usually do not
exceed 80% of the estimated value of the completed property. Credit risk
associated with construction loans is higher than permanent residential loans
due to uncertainty as to the final value of the property, possible
construction delays or underestimation of construction costs. At December 31,
1996, construction loans totaled $1,183,000, or 1.1% of gross loans.
Multi-Family Residential Lending. First Federal offers multi-family
residential loans but has originated only one loan in the last two years.
Such loans usually carry adjustable rates with maturities up to 15 years.
Loan to value ratios usually do not exceed 80%. At December 31, 1996, multi-
family residential loans totaled $1,562,000, or 1.4% of gross loans.
Commercial Real Estate Lending. In recent years, First Federal was not
active in commercial real estate lending but plans to increase activity in
1997. Total commercial real estate loans were $3,827,000, or 3.5% of gross
loans, at December 31, 1996 and balances have decreased slightly each of the
last two years compared to the prior year. Such loans usually have variable
rates and maturities up to 15 years. Loans are underwritten based on analysis
of the cash flow generated by the business in which the real estate is used
and the ability of the borrower to meet payment obligations. In addition to
securing the loan with a first mortgage on the real estate, personal
guarantees from the business owners are usually sought. Loans are usually
limited to 75% of the value of the property.
Commercial real estate loans have significantly more risk than one-to-
four family mortgage loans due to the usually higher loan amounts and the
credit risk, which arises from concentration of principal in a smaller number
of loans, the effects of general economic conditions on income producing
property and the difficulty of evaluating and monitoring the loans. Events
that affect the operations and cash flow of the business which is on the
secured property must be monitored to ensure the borrower has the ability to
repay the loan.
Indirect Auto Loans. In 1993, First Federal began originating indirect
auto loans through a network that includes most local auto dealerships. Loan
totals have increased each year since and equaled $23,640,000, or 21.8% of
gross loans outstanding, at December 31, 1996. Current policy allows for
underwriting of loans on new or used automobiles with maturities between three
and five years. All loans are secured by the new or used automobile. Loan
amounts on new automobiles are limited to the manufacturer's suggested price
while used automobile loan amounts are limited to the retail price as listed
in the National Automobile Dealers Association used car guide.
Following a credit review of the dealer, First Federal enters into a
contractual relationship with the dealer. Short response times for credit
decisions, consistent application of underwriting standards and immediate
funding of indirect loans upon delivery of required documents have allowed
First Federal to successfully compete for these loans. First Federal is
believed to have the highest volume of indirect loans among local financial
-Page 12-
institutions and third highest volume among all local indirect underwriters.
Management intends to maintain the same percentage of indirect auto loans to
total loans in the future. The amount of indirect loan originations is
dependent on the volume of new and used automobile sales and the financing
choices of purchasers, factors over which First Federal has no control. Loans
have been originated through 24 local dealerships with the highest amount
outstanding from any one dealer totalling 17% of the total indirect auto loans
outstanding at December 31, 1996.
Underwriting standards are maintained to assess an applicant's ability to
repay amounts due and to verify the adequacy of the automobile financed as
collateral. Even with the underwriting standards, the risks inherent in
indirect auto lending indicate that some loans will default. Loans secured by
assets that depreciate rapidly, such as automobiles, are generally considered
to entail greater risks than residential mortgage loans. Through the efforts
of a full-time collections officer, loan delinquencies have been kept at or
below industry averages. At December 31, 1996, six loans (equaling $44,000 or
.2% of total indirect loans) were delinquent 90 days or more. No recourse is
available from dealerships on loan defaults. The provision for loan losses
increased from $100,000 in 1995 to $183,000 in 1996 due in part to the
increase in indirect auto loans outstanding in 1996 and the increase in net
charge-offs on indirect auto loans to $134,000 in 1996 from $52,000 in 1995.
Other Consumer Loans. First Federal also originates a variety of other
consumer loans including direct auto loans and home equity loans and lines of
credit. Direct auto loans are originated following the same underwriting
standards as indirect auto loans but are made directly with the borrower
rather than through a dealer. Direct auto loans have the same amount and term
limits as indirect auto loans and also require as collateral the vehicle
purchased with the loan. At December 31, 1996, direct auto loans outstanding
totaled $2,136,000 or 2.0% of gross loans outstanding. Direct auto loans are
usually made to customers with previous borrowings and or deposit accounts
with First Federal.
Home equity loans and lines of credit are secured by second liens on
residential real estate. Home equity loans generally have fixed rates, fixed
monthly payments and maturities up to 15 years. Home equity lines of credit
have adjustable rates and flexible payment plans depending on the amount
actually borrowed. Loan amounts are made up to a maximum 80% loan to value
ratio taking into account all other liens on the property. Underwriting
standards are virtually the same as for first mortgage loans and originations
are not limited to borrowers for whom First Federal holds the first mortgage.
At December 31, 1996, home equity loans and lines of credit totaled $4,904,000
or 4.5% of gross loans outstanding. The amount of such loans increased 15% in
1996 from 1995 and First Federal intends to continue to actively solicit such
loans, especially home equity lines of credit, in the future.
First Federal makes a variety of other consumer loans that totaled
$1,479,000, or 1.4% of gross loans outstanding as of December 31, 1996.
Included in this total are loans to purchase consumer goods, loans secured by
deposit accounts and unsecured personal loans. Underwriting standards for
these loans vary based on the loan type but all consider the creditworthiness
of the borrower and the value of underlying collateral, with secured loans
limited to 90% of the value of the underlying collateral. Interest rates and
maturities vary depending on the loan type as well. As with direct auto loans
these types of loans are generally granted to customers with previous
borrowings and or existing deposit accounts with First Federal.
-Page 13-
Commercial Business Lending. As with commercial real estate loans, First
Federal has not actively solicited commercial business loans in recent years.
As of December 31, 1996, commercial business loans equaled $1,145,000, or 1.1%
of gross loans outstanding. Commercial business loans are secured by accounts
receivable, inventory, capital stock or real estate of the business and are
usually personally guaranteed by the business owners. Risks involved are
similar to commercial real estate loans with loan repayment often dependent
upon the business generating sufficient cash flow, but commercial business
loans carry even more credit risk than commercial real estate loans due to the
nature of the collateral underlying the loan. Commercial business loans
usually have variable interest rates and maturities up to ten years. First
Federal intends to more actively solicit commercial business loans in 1997.
Loan Originations, Purchases and Sales. First Federal's general policy
is to sell all fixed-rate, fixed-term residential mortgage loans with
maturities over 15 years at origination to either FNMA or Fleet. Fixed-rate,
fixed-term residential mortgage loans with maturities of 15 years and certain
adjustable rate and balloon loans may be sold at origination depending on
market conditions but general policy is to retain all such loans in First
Federal's loan portfolio. Servicing rights are retained on loans sold to FNMA
and are not retained on loans sold to Fleet. All loans are sold without
recourse. In 1996, $10,776,000 of residential mortgage loans were sold.
Sales to FNMA equaled about 84% of the total amount sold.
In recent years, First Federal has not made a practice of purchasing
whole loans or participations in loans originated by other financial
institutions and has not sold participations in loans it originated.
Purchases of participations in loans originated by other financial
institutions will be considered in the future as one way to increase the
amount of commercial real estate and commercial business loans.
<TABLE>
Contractual Principal Repayments. The following table sets forth
information with respect to scheduled contractual maturity of loans receivable
at December 31, 1996 (in thousands):
<CAPTION>
Due after
Due in One Year Due After
One Year Through Five
or Less Five Years Years Total
<S> <C> <C> <C> <C>
Mortgage Loans:
One-to-four family 3,271 11,040 53,544 67,855
Construction 1,183 - - 1,183
Multi-family 110 507 945 1,562
Commercial real estate 522 1,415 1,890 3,827
Total mortgage 5,086 12,962 56,379 74,427
Indirect auto loans 7,182 15,816 642 23,640
Other consumer loans
Direct auto 797 1,339 - 2,136
Home equity 1,653 2,814 437 4,904
Other consumer 591 888 - 1,479
Total other consumer 3,041 5,041 437 8,519
Commercial business loans 137 629 379 1,145
Total loans 15,446 34,448 57,837 107,731
</TABLE>
Demand loans, loans having no stated schedule of repayment and no stated
maturity and overdraft loans are reported as due in one year or less.
Scheduled repayments are reported in the maturity category in which the
payment is due.
-Page 14-
The amount of loans due after one year having predetermined
interest rates and floating or adjustable interest rates is as follows (in
thousands):
<TABLE>
<S> <C>
Fixed 61,996
Adjustable 30,289
</TABLE>
Loan Commitments. At December 31, 1996, outstanding loan commitments
totaled $301,000. Commitments are normally provided to prospective borrowers
following approval of a residential mortgage loan application and indicate
that at any time within a 30 day period from the date of approval, subject to
satisfaction of certain specified conditions, the approved loan will be
funded. Unused lines of credit, primarily home equity lines of credit,
totaled $3,544,000 at December 31, 1996. In management's opinion, these
commitments represent no more than normal lending risk and can be funded from
normal sources.
Loan Origination, Servicing and Other Fees. Origination fees are not
collected on most loans but when such fees are collected, the amount is offset
against certain direct loan origination costs, then deferred and recognized as
an adjustment to interest income over the expected life of the loan. At
December 31, 1996, deferred loan fees equaled $80,000. Certain costs paid by
First Federal necessary for loan processing and closing, such as the cost of
an independent appraisal, credit reports and title insurance, are reimbursed
by borrowers. Loans totaling $35,278,000 were serviced for others as of
December 31, 1996. Servicing income in 1996 totaled $146,000 which includes
$51,000 recognized as a net servicing asset in 1996 as a result of the
adoption of Statement of Financial Accounting Standards No. 122, 'Accounting
for Mortgage Servicing Rights.' Fees may also be collected in connection with
loan modifications, late payments, prepayments and for other miscellaneous
loan related services all of which are recognized as non-interest income upon
receipt.
Loans to One Borrower. Under OTS regulations, First Federal is generally
subject to the same loans-to-one borrower limits that apply to national banks.
Generally, loans and extensions of credit at one time to one borrower (and
certain related entities of the borrower) may not exceed 15% of First
Federal's unimpaired capital and surplus, plus an additional 10% of unimpaired
capital and surplus for loans fully secured by certain readily marketable
collateral. First Federal's lending limit for loans to one borrower as of
December 31, 1996 was approximately $2,400,000. As of the same date, no
single borrower had loans exceeding $700,000.
Delinquencies. Borrowers with loans 30 days past due are initially
notified by letter and then contacted by telephone by the collections officer
or other loan personnel. These reminders cure most delinquencies with no
legal action necessary. With respect to residential mortgage loans and
consumer loans other than indirect auto loans, if the delinquency exceeds 90
days, measures to enforce remedies resulting from the default, including
mailing a 30 day notice of the commencement of a foreclosure action or the
repossession of collateral, are instituted. With respect to indirect auto
loans, repossession of collateral is initiated if the loan is 60 days past
due. Delinquencies on multi-family and commercial real estate and business
loans are addressed on a case by case basis.
-Page 15-
The following table sets forth
information with respect to loans past due 60-89 days and over 90 days at the
dates indicated (in thousands):
<TABLE>
December 31,
1996 1995 1994
60-89 Over 90 60-89 Over 90 60-89 Over 90
Days Days Days Days Days Days
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family 288 310 165 305 344 149
Construction - - - - - -
Multi-family - - - - 19 -
Commercial real estate - 333 - 146 - 145
Total mortgage 288 643 165 451 363 294
Indirect auto loans 49 44 4 51 53 11
Other consumer loans
Direct auto 22 7 8 - - 9
Home equity 13 - - 10 3 -
Other consumer 6 11 5 1 4 55
Total other consumer 41 18 13 11 7 64
Commercial business loans 81 - - - 100 29
Total 459 705 182 513 523 398
Percent of Gross Loans 0.42% 0.65% 0.20% 0.57% 0.62% 0.47%
</TABLE>
Non-Performing Assets. All loans 90 days or more past due are placed on
non-accrual status unless such loans are adequately collateralized and in the
process of collection. At December 31, 1996, 1995 and 1994, all loans 90 days
or more past due were on non-accrual status. Interest income on such loans is
recognized only upon cash receipt and such loans are returned to accrual
status only after all contractually past due payments are brought current and
management believes collection of outstanding principal and interest is not in
doubt. Additional interest income that would have been recognized on non-
accrual loans, had each been current, totaled $40,000, $28,000 and $24,000,
respectively, in 1996, 1995 and 1994. In addition to non-accrual loans, other
assets classified as non-performing include troubled debt restructuring,
repossessed automobiles and certain real estate owned. Real estate owned
includes property acquired through foreclosure, property upon which a judgment
of foreclosure has been entered but for which no foreclosure sale has yet
taken place, property which is in substance foreclosed and property acquired
for investment purposes.
As of December 31, 1996 and 1995, real estate owned consisted entirely of
property acquired for investment purposes. In late 1995, First Federal sold
for $5,900,000 a property acquired through foreclosure in 1993. A loan for
$6,500,000 had been made to a manufacturer for construction of a warehouse
facility on the property. The purchaser paid cash at the closing with no
unusual terms or conditions attached to the sale. The significant decline in
real estate owned from December 31, 1994 to December 31, 1995 was the result
of this sale. At December 31, 1996, the largest parcel of real estate owned
was 32 acres of industrial property valued at $600,000 acquired in 1992. Sale
of this property is being actively pursued.
-Page 16-
The following table sets forth
information with respect to non-performing assets (in thousands):
<TABLE>
December 31,
1996 1995 1994
<S> <C> <C> <C>
Mortgage loans:
One-to-four family 310 305 149
Construction - - -
Multi-family - - -
Commercial real estate 333 146 145
Total mortgage 643 451 294
Indirect auto loans 44 51 11
Other consumer loans
Direct auto 7 - 9
Home equity - 11 -
Other consumer 11 - 55
Total other consumer 18 11 64
Commercial business loans - - 29
Total Non-Accrual Loans 705 513 398
Real estate owned 653 644 6,413
Troubled debt restructuring - - -
Repossessed automobiles 76 46 41
Total Non-Performing Assets 1,434 1,203 6,852
Percent of Total Assets 0.83% 0.80% 4.86%
</TABLE>
Classified Assets. OTS regulations and First Federal policy require the
review and classification of assets on a regular basis. First Federal
performs such a review quarterly. Regulatory examiners also have the
authority to review and, if appropriate, classify assets as part of their
regular examination procedures. Problem assets can be classified as either
substandard, doubtful or loss. Substandard assets have one or more defined
weaknesses and the distinct possibility exists that a loss will be sustained
if the weaknesses are not corrected. Doubtful assets have the weaknesses of
substandard assets and, based on current information, the weaknesses make
collection or liquidation in full questionable resulting in the high
probability of loss. Loss assets are considered uncollectible and of such
little value that continued treatment of the asset as an asset is not
warranted. Insured institutions such as First Federal are required to
establish a prudent general allowance for loan losses with respect to assets
classified as substandard or doubtful. Assets classified as loss are required
to either be charged-off or to be offset 100% with a specific allowance. The
following table sets forth information with respect to the classification of
assets as of December 31, 1996 (in thousands):
<TABLE>
<S> <C>
Substandard assets 547
Doubtful assets 40
Loss 68
Total Classified Assets 655
Percent of Total Assets 0.38%
</TABLE>
Allowance for Loan Losses. The allowance for loan losses was established
to recognize the risks inherent with lending activities and may consist of a
general allowance and a specific allowance. A specific allowance reserves
against specific assets with respect to which a loss may be realized. A
general allowance reserves against the entire loan portfolio. Allowances for
loan loss are determined through analysis of factors such as past loan loss
-Page 17-
experience, current loan volume, growth and composition of the loan portfolio,
local and national economic conditions and other factors deemed appropriate by
management.
Evaluation of the allowance for loan losses is undertaken at least
quarterly. This evaluation includes a review of all loans for which full
collectibility is not reasonably assured and includes an estimation of the
market value of collateral underlying problem loans, prior loss experience,
economic conditions, overall portfolio quality and other factors. The
allowance for loan losses, including general and specific reserves, are
subject to review by the OTS, which can require First Federal to establish
additional general or specific reserves. Provisions for loan losses are
charged against earnings in the year established. Loan losses are charged
against the allowance and recoveries of loans previously charged against the
allowance are added back to the allowance.
The provision for loan losses in 1996 was $183,000. This provision was
deemed appropriate due to the growth of the loan portfolio and an increase in
net charge-offs to $167,000 in 1996 from $66,000 in 1995. The 1996 provision
relates primarily to consumer loans the outstanding total of which increased
12% in 1996 from 1995. As total consumer loans outstanding have increased in
recent years, net charge-offs related to consumer loans have also increased.
Management will continue to monitor actual experience with the consumer loan
portfolio as part of the determination of future provisions. Management
believes that the allowance for loan losses at December 31, 1996 is adequate
though there can be no assurance as to the adequacy of the allowance or the
need for additional provisions for loan losses that may adversely impact
earnings of the Company.
-Page 18-
The following table sets forth information with
respect to activity in the allowance for loan losses for the years indicated
(in thousands):
<TABLE>
For the Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Allowance for loan loss at
beginning of period 907 873 946
Provision for loan losses 183 100 (32)
Charge-offs:
Mortgage loans:
One to four family 1 - -
Construction - - -
Multi-family - - -
Commercial real estate - - -
Total mortgage 1 - -
Indirect auto loans 145 54 30
Other consumer loans
Direct auto 21 9 -
Home equity - - -
Other consumer 11 5 13
Total other consumer 32 14 13
Commercial business loans - - -
Total charge-offs 178 68 43
Recoveries:
Mortgage loans:
One to four family - - 2
Construction - - -
Multi-family - - -
Commercial real estate - - -
Total mortgage - - 2
Indirect auto loans 11 2 -
Other consumer loans
Direct auto - - -
Home equity - - -
Other consumer - - -
Total other consumer - - -
Commercial business loans - - -
Total recoveries 11 2 2
Net charge-offs (167) (66) (41)
Allowance for loan loss at
end of period 923 907 873
Allowance for loan losses to total
loans outstanding at end of period 0.85% 1.01% 1.03%
Net charge-offs to average loans
outstanding during the period 0.17% 0.08% 0.05%
</TABLE>
-Page 19-
<TABLE>
The following table sets forth information with respect to the breakdown
of the allowance for loan losses by loan category at the dates indicated
(amounts in thousands):
December 31,
1996 1995 1994
Loan Percent Loan Percent Loan Percent
Loss of Loss of Loss of
Amount Loans Amount Loans Amount Loans
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One to four family 352 0.52% 250 0.47% 278 0.52%
Construction 6 0.51 - - - -
Multi-family 16 1.02 18 1.01 20 1.02
Commercial real estate 127 3.32 334 7.45 327 6.67
Total mortgage 501 0.67 602 1.00 625 1.03
Indirect auto loans 244 1.03 221 1.02 170 1.02
Other consumer loans
Direct auto 23 1.08 15 0.99 12 1.07
Home equity 36 0.73 57 1.33 40 1.03
Other consumer 15 1.01 1 0.08 1 0.08
Total other consumer 74 0.87 73 1.02 53 0.84
Commercial business loans 6 0.52 11 0.60 2 0.40
Unallocated 98 - - - 23 -
Total Allowance for Loan Loss 923 0.85 907 1.01 873 1.03
</TABLE>
Loan Loss Amount represents the portion of the allowance for loan loss
allocated to each loan category. Percent of Loans represents the ratio of the
allowance for loan loss for each category to the total amount of loans in the
same category.
Investment Activities
General. The Company is permitted under federal law to make investments
in securities issued by the U.S. government, various federal agencies and
state and municipal governments, in deposits at the Federal Home Loan Bank, in
certificates of deposit and federal funds at federally insured institutions
and in other earning assets within certain limitations. The Board of
Directors has established and periodically reviews the investment policy, the
objectives of which include holding investments that provide and maintain
liquidity and generate a favorable return without incurring undue interest
rate risk. At present, the investment securities portfolio includes mortgage-
backed and related securities and securities issued or guaranteed by the U.S.
government and various federal agencies. In recent years, no investment
products designed to hedge interest rate risk, such as futures, options, swaps
or other derivative securities, have been purchased or held. All investment
securities are designated as 'available-for-sale' and are reported at fair
value as of December 31, 1996. Investment securities can also be designated
as 'trading securities' or 'held-to-maturity' according to Generally Accepted
Accounting Principals and regulatory guidelines but no securities have been so
designated in recent years.
Mortgage-Backed and Related Securities. Mortgage-backed securities
represent a participation interest in a pool of mortgages, the principal and
interest payments of which are passed through intermediaries, who pooled and
repackaged the participation interest as securities, to investors.
Intermediaries include quasi-governmental agencies such as Federal Home Loan
Mortgage Corp. ('FHLMC'), Federal National Mortgage Association ('FNMA') and
Government National Mortgage Association ('GNMA'), each of whom guarantees or
insures payment of principal and interest to investors. By virtue of the
-Page 20-
guarantees, mortgage-backed securities generally increase the quality of the
Company's assets. In addition, mortgage-backed securities can be used to
collateralize borrowings or other obligations of the Company and are generally
more liquid than mortgage loans. Mortgage loans with similar interest rates
and maturities are normally pooled so that the characteristics of the
mortgage-backed security, which will mirror the underlying mortgage loans, can
be reasonably defined. Mortgage-backed securities can have fixed or
adjustable interest rates.
Mortgage-backed security holders assume the interest rate risk
characteristics of the underlying pool of mortgage loans. Prepayments made by
the mortgage loan holders are passed on to the security holders which can
adversely affect the yield to maturity and market value of the mortgage-backed
security. Prepayment assumptions, based on historical performance, are used
to determine anticipated maturity dates, which are then used to amortize
premium or discount on a level yield basis. When actual prepayments on a
mortgage-backed security differ from previous assumptions, adjustments to
anticipated maturity dates may be necessary. At December 31, 1996, mortgage-
backed securities with a book value of $19,685,000 and a market value of
$19,612,000 were held.
Mortgage related securities were created to reduce the prepayment risk
associated with mortgage-backed securities. Collateralized mortgage
obligations ('CMOs') and real estate mortgage investment conduits ('REMICs'),
issued in a variety of legal forms by both quasi-government agencies and
private entities, are aggregate pools of mortgage-backed securities or
mortgage loans. Once combined, separate classes or tranches of individual
securities are created each having designated priority to future cash flows.
As principal and interest payments are received on the underlying pools or
mortgage loans, the class or tranche with highest priority is first to receive
such payments. Once a class or tranche is fully paid out, the cash flows are
directed to the class or tranche with the next highest priority. Security
purchasers can buy certain classes or tranches with reasonable expectation as
to when principal will be repaid. Prepayment risk is reduced with CMOs and
REMICs compared to mortgage-backed securities but is not eliminated since
changes in the general level of interest rates can affect prepayment rates.
The market value of CMOs and REMICs, most of which have fixed interest rates,
can also be more affected by the general level of interest rates than
adjustable rate mortgage-backed securities. At December 31, 1996, CMOs with a
book value of $18,125,000 and a market value of $17,833,000 were held.
Regulatory policy requires at least an annual 'stress' test of mortgage
related securities to determine if price volatility under a 200 basis point
interest rate shock for each security exceeds a benchmark 30 year mortgage-
backed security. Securities that fail the stress test are considered high
risk and may only be purchased to reduce interest rate risk. Regulators can
require institutions to dispose of such high risk securities. At December 31,
1996, First Federal held two mortgage-related securities, with a book value of
$1,720,000 and a market value of $1,690,000, that were considered high risk by
virtue of failing the stress test. To date, the OTS has not required the
disposal of the securities. No new mortgage-related securities were purchased
in 1996.
Other Investment Securities. First Federal also owns U.S. government,
federal agency and state and municipal securities in addition to stock in the
Federal Home Loan Bank of Chicago. At December 31, 1996, the book value of
other investment securities held was $16,583,000 and the market value was
$16,438,000.
-Page 21-
The table below sets forth information with respect to the
carrying value of investment securities at the dates indicated (in thousands):
<TABLE>
December 31,
1996 1995 1994
<S> <C> <C> <C>
Mortgage-backed securities:
Collateralized mortgage obligations 18,125 21,305 19,974
Other mortgage-backed 19,685 20,286 15,151
U.S. government and agencies 15,181 10,664 9,684
Other securities 447 482 521
FHLB stock 955 694 650
Total investments, at carrying value 54,393 53,431 45,980
</TABLE>
<TABLE>
The following table sets forth information with respect to the carrying
value, weighted average yields and scheduled maturities of investment
securities at December 31, 1996 (amounts in thousands):
Over One Over Five
One Year or Less to Five Years to Ten Years
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Collateralized mortgage
obligations 82 5.66% 1,940 5.76% 1,656 5.79%
Other mortgage-backed 745 7.07 208 5.01 911 5.89
U.S. government and
agencies 215 6.07 13,467 5.91 1,499 6.99
Other securities 26 7.60 212 8.47 138 7.60
FHLB stock
Total Investments 1,068 6.77% 15,827 5.91% 4,204 6.30%
</TABLE>
<TABLE>
Over Ten Years Total
Weighted Weighted
Carrying Average Carrying Average Market
Value Yield Value Yield Value
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Collateralized mortgage
obligations 14,447 5.63% 18,125 5.66% 17,833
Other mortgage-backed 17,821 6.70 19,685 6.68 19,612
U.S. government and
agencies 15,181 6.02 15,036
Other securities 71 7.60 447 8.01 447
FHLB stock 955 6.75 955 6.75 955
Total Investments 33,294 6.25% 54,393 6.17% 53,883
</TABLE>
With the exception of the U.S. government and federal agencies, as of
December 31, 1996, the Company did not hold securities of any one issuer the
aggregate total of which exceeded 10% of stockholder's equity.
Deposit Activities and Other Sources of Funds
General. Primary sources of funds for use in lending, investing and
other general purposes are deposits and proceeds from principal and interest
payments on loans, mortgage-backed and other securities and FHLB advances.
Contractual loan repayments are a relatively stable source of funds while loan
and mortgage-backed security prepayments and deposit inflows and outflows are
significantly influenced by general interest rate levels and money market
-Page 22-
conditions. Borrowings can be used to increase liquidity on a short-term
basis and on a long-term basis for general operational purposes.
Deposit Accounts. A variety of deposit products are offered to customers
in the primary market area. Non-interest bearing checking accounts,
negotiable order of withdrawal ('NOW') accounts, money market accounts and
passbook savings accounts, with several variations of each available, are the
types of demand accounts offered. Demand account terms vary based on minimum
balance requirements, withdrawal restrictions and interest rates. In 1996,
Visa check cards were added to the features available on certain demand
accounts. Time certificate of deposit accounts, with maturities of up to six
years, are also offered. Interest rates offered on all accounts are reviewed
by management and subject to change as deemed necessary. The flow of deposits
is greatly influenced by general economic conditions, changes in money market
and local interest rates and competition. Brokered deposits are not solicited
or accepted.
First Federal attracts and maintains deposit accounts, in part, because
of its tradition of customer service and seventy-seven years as a locally
owned and managed savings association. Locally competitive interest rates,
convenient locations with hours of service designed to meet customer needs and
membership in a nationwide ATM network are used by First Federal to attract
customers. From December, 1994 through July, 1995, First Federal offered to
match competitor's terms on certain fixed-rate, fixed-term certificates of
deposit. From December 31, 1994 to December 31, 1995, total certificates
increased 15% to $114,999,000. Since the program was discontinued,
certificate balances have gradually decreased slightly to $109,072,000 at
December 31, 1996. The following table sets forth information with respect to
the average amount outstanding and the weighted average rate paid on the
categories of deposit accounts listed for the years indicated (amounts in
thousands):
<TABLE>
For the Year Ended December 31,
1996 1995 1994
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
<S> <C> <C> <C> <C> <C> <C>
Demand Accounts:
Non-interest bearing 549 0.00% 468 0.00% 418 0.00%
NOW 5,338 1.80 4,821 1.78 4,041 2.08
Money market 2,964 2.87 3,611 2.85 5,596 2.75
Passbook 15,462 3.73 13,947 3.54 14,991 3.16
Total Demand 24,313 3.13 22,847 2.99 25,046 2.84
Certificate of Deposit Accounts:
6 months or less 9,335 4.95 11,863 5.24 14,816 3.46
7 to 12 months 27,011 5.71 27,608 5.57 24,886 3.77
13 to 24 months 18,390 6.17 18,733 5.54 16,001 4.46
25 to 36 months 27,509 5.94 26,050 5.64 19,396 5.02
37 to 60 months 12,077 6.30 12,187 6.65 11,096 6.88
Over 60 months 10,117 6.61 9,643 6.59 6,083 5.85
Jumbo 7,420 6.31 7,792 6.46 5,672 5.02
Total Certificates 111,859 5.97 113,876 5.81 97,950 4.64
Total Deposits 136,172 5.48% 136,723 5.35% 122,996 4.29%
</TABLE>
-Page 23-
<TABLE>
The following table sets forth information with respect to the maturity of
jumbo time certificates of deposit as of December 31, 1996. Jumbo time
certificates of deposit require minimum deposits of $100,000. No other time
deposits of $100,000 or more are outstanding (in thousands):
Amount
<S> <C>
Due in three months or less 2,042
Due in over three through six months 900
Due in over six through twelve months 1,675
Due in over twelve months 3,441
</TABLE>
Borrowings. Prior to 1996, First Federal had relied on advances from the
FHLB of Chicago only in the event of a reduction in available funds from other
sources. In the last six months of 1996, FHLB advances were used to fund loan
originations rather than more traditional sources of funds due to the lower
cost of the advances. In 1997, First Federal plans to continue to use FHLB
advances as a source of funds. Advances are available with a variety of terms
including fixed or variable rate and open line or fixed maturity. Most fixed
maturity advances allow prepayments under certain conditions. At December 31,
1996, FHLB advances totaled $15,300,000. Of this amount, $7,300,000 had
variable rates. All advances had fixed maturity dates. All advances are
secured by stock in the FHLB and a blanket floating lien on First Federal's
one-to-four family residential mortgage loans. The FHLB determines the
creditworthiness of and sets a credit limit for each institution. The
following table sets forth information with respect to FHLB advances at the
end of and during the periods indicated (amounts in thousands):
<TABLE>
At and For the Year Ended December 31,
1996 1995
<S> <C> <C>
Balance on December 31 15,300 -
Highest month-end balance 19,100 5,000
Average balance during the year 4,342 1,075
Average rate during the year 6.20% 6.49%
Average rate at year-end 5.73% -
</TABLE>
During 1996 and 1995, First Federal entered into repurchase agreements
under which funds were borrowed in exchange for investment securities pledged
to and held by counterparties. No such agreements were in effect at any month
end in 1996 or 1995, including December. The average amount of repurchase
agreements outstanding was $44,000 and $171,000 and the average rate paid on
the repurchase agreements were 5.25% and 6.78% in 1996 and 1995, respectively.
Repurchase agreements are usually used as a source of funds for short periods
of time. In certain circumstances, repurchase agreements may be used as a
source of funds in the future but there are no plans to make frequent use of
this source of funds.
At December 31, 1996, the Company had 42 full-time and 16 part-time
employees none of whom were represented by a union or collective bargaining
group. The Company considers its relations with employees to be satisfactory.
REGULATION AND SUPERVISION
General
First Federal is chartered under federal law by the OTS. It is a
member of the FHLB System, and its deposit accounts are insured up to legal
limits by the FDIC under the SAIF. The OTS is charged with overseeing and
regulating First Federal's activities and monitoring its financial condition.
-Page 24-
This regulatory framework sets parameters for First Federal's activities and
operations and grants the OTS extensive discretion with regard to its
supervisory and enforcement powers and examination policies. First Federal
files periodic reports with the OTS concerning its activities and financial
condition, must obtain OTS approval prior to entering into certain
transactions or initiating new activities, and is subject to periodic
examination by the OTS to evaluate the First Federal's compliance with various
regulatory requirements.
Eagle is a savings and loan holding company and, like First
Federal, is subject to regulation by the OTS. As part of this regulation,
Eagle is required to file certain reports with, and is subject to periodic
examination by, the OTS.
Recent Legislative and Regulatory Developments
During calender year 1996, several new laws and regulations were
adopted that affect savings associations like First Federal.
Deposit Insurance Reform Legislation. The SAIF and the Bank
Insurance Fund (the 'BIF') were required by law to achieve and maintain a
ratio of insurance reserves to total insured deposits equal to 1.25 percent.
The BIF reached this required reserve ratio during 1995, while some
predictions indicated the SAIF would not reach this target until the year
2002. The SAIF had not grown as quickly as the BIF for many reasons, but in
large part because almost half of SAIF premiums had to be used to retire bonds
issued by the Financing Corporation ('FICO Bonds') in the late 1980's to
recapitalize the Federal Savings and Loan Insurance Corporation.
Until 1995, the SAIF and BIF deposit insurance premium rate
schedules had been identical. But in-mid 1995, the FDIC issued final rules
modifying its assessment rate schedules for SAIF and BIF member institutions.
Under the revised schedule, SAIF members continued to pay assessments ranging
from $0.23 to $0.31 per $100 of deposits, while BIF members paid assessments
ranging from zero to $0.27 per $100 of deposits. But the majority of BIF
members paid only the $2,000 minimum annual premium. Thrift industry
representatives argued that this significant premium differential caused
savings associations to operate at a competitive disadvantage to their BIF-
insured bank counterparts.
On September 30, 1996, President Clinton signed the Deposit
Insurance Funds Act of 1996 ('DIFA') that was part of the omnibus spending
bill enacted by Congress at the end of its 1996 session. DIFA mandated that
the FDIC impose a special assessment on the SAIF-assessable deposits of each
insured depository institution at a rate applicable to all such institutions
that the FDIC determined would cause the SAIF to achieve its designated
reserve ratio of 1.25 percent as of October 1, 1996. The assessment was based
on the amount of SAIF-insured deposits owned by each institution as of March
31, 1995, the record date established in the original drafts of the
legislation. DIFA allowed the FDIC to exempt any insured institution that it
determined to be weak from paying the special assessment if the FDIC
determined that the exemption would reduce the risk to the SAIF.
DIFA provides that the FDIC may not set semiannual assessments
with respect to SAIF or BIF in excess of the amount needed to maintain the
1.25 percent designated reserve ratio or, if the reserve ratio is less than
the designated reserve ratio, to increase the reserve ratio to the designated
reserve ratio.
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'Oakar' banks (i.e., BIF-member banks holding SAIF deposits) are
eligible for a 20 percent discount from the special assessment with respect to
the SAIF-insured deposits they own, provided the ratio of SAIF-insured
deposits to total deposits they owned as of June 30, 1995 was 50 percent or,
in some cases, 75 percent. Some 'Sasser' banks (i.e., SAIF-member banks that
converted to state savings banks or commercial banks) are also eligible for
this reduced assessment rate.
On October 10, 1996, the FDIC adopted a final rule governing the
payment of the SAIF special assessment. The FDIC imposed a special assessment
in the amount of 65.7 basis points, which is less than the 85-95 basis points
estimated during the early stages of the law's enactment in 1995. The SAIF
special assessment was due by November 27, 1996. First Federal's portion of
this special assessment amounted to $875,000 on a pre-tax basis. First
Federal paid this amount to the FDIC during its fiscal third quarter ended
September 30, 1996, as mandated by the Financial Accounting Standards Board
that ruled that the SAIF special assessment should be recorded as an ordinary
non-interest expense for the quarter ended September 30, 1996 for calender
year reporting institutions. DIFA also confirmed that the special assessment
is tax deductible.
In response to the recapitalization of the SAIF, the FDIC
announced on December 11, 1996 that deposit insurance rates for most savings
associations insured under the SAIF would be lowered to zero effective January
1, 1997. BIF-insured institutions would also no longer have to pay the $2,000
minimum for deposit insurance, thereby equalizing deposit premiums for savings
associations and banks.
Merger of SAIF and BIF. DIFA mandates the merger of the SAIF and
BIF, effective January 1, 1999, but only if no insured depository institution
is a savings association on that date. The combined deposit insurance fund
will be called the 'Deposit Insurance Fund', or 'DIF'.
FICO Bond Payments. Before DIFA, federal regulators and thrift
industry trade groups were predicting that a default would occur on the FICO
Bonds as early as 1998, as SAIF-assessable deposits continued to decline.
DIFA amends The Federal Home Loan Bank Act to impose the FICO assessment
against both SAIF and BIF deposits beginning after December 31, 1996. But the
assessment imposed on insured depository institutions with respect to any BIF-
assessable deposit will be assessed at a rate equal to one-fifth of the rate
(approximately 1.3 basis points) of the assessments imposed on insured
depository institutions with respect to any SAIF-assessable deposit
(approximately 6.7 basis points). The FICO assessment for 1996 was paid
entirely by SAIF-insured institutions. BIF-insured banks will pay the same
FICO assessment as SAIF-insured institutions beginning as of the earlier of
December 31, 1999 or the date as of which the last savings association ceases
to exist.
Deposit Shifting. DIFA provides that until the earlier of
December 31, 1999 or the date as of which the last savings association ceases
to exist, the Office of the Comptroller of the Currency (the 'OCC'), the FDIC,
the Board of Governors of the Federal Reserve System, and the OTS will take
appropriate actions, including enforcement actions and denial of applications,
to prevent insured depository institutions from facilitating or encouraging
the shifting of deposits from SAIF-assessable deposits to BIF-assessable
deposits for the purpose of evading the assessments imposed on insured
depository institutions with respect to SAIF-assessable deposits.
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Bad Debt Recapture. The Small Business Job Protection Act of
1996, signed by President Clinton on August 20, 1996, removed a significant
tax obstacle for savings associations that desire to become commercial banks.
It also eliminated a potential impediment to business combinations between
banks and thrifts and the creation of a new depository institution charter.
Before this new law, savings associations that converted to
commercial banks had to change their method of accounting for bad debt
reserves, which forced a recapture of the savings association's untaxed bad
debt reserves into taxable income. Under prior law, savings associations were
allowed to use the reserve method for establishing bad debt reserves. This
meant in recent years they could deduct up to 8 percent of their taxable
income each year as a charge for bad debts, regardless of their actual loan
loss experience. Since the 1950's, this deduction has steadily declined from
its initial rate of 100 percent. These annual deductions resulted in
significant tax savings for savings associations and an accumulation by
savings associations of untaxed income.
Under the new law, a savings association's base-year reserves
established before 1988 will not be taxed should it convert to a commercial
bank. But reserves created after 1987 would be recaptured into taxable income
ratably over six years (beginning with the first tax year after December 31,
1995) whether or not a savings association converts to a commercial bank.
Recapture of post-1987 reserves may be deferred until after January 1, 1998 if
the savings association maintains a high level of residential loan
originations. In the future, all savings associations must account for bad
debts under tax rules applicable to commercial banks.
Relaxation of the Qualified Thrift Lender Test. In September
1996, the Economic Growth and Regulatory Paperwork Reduction Act of 1996
became law (the 'Economic Growth Act of 1996'). In the past, savings
associations were required to satisfy a qualified thrift lender test ('QTL'
test) by maintaining 65 percent of their portfolio assets (defined as all
assets minus intangible assets, property used by the association in conducting
its business and liquid assets equal to 20% of total assets) in certain
'qualified thrift investments' (primarily residential mortgages and related
investments, including certain mortgage-backed securities) on a monthly basis
in nine out of every twelve months.
The Economic Growth Act of 1996 liberalized the QTL test for
savings associations by permitting them to satisfy a similar-but-different 60
percent asset test under the Internal Revenue Code. Alternatively, savings
associations may meet the QTL test by satisfying a more liberal 65 percent
asset test that allows an institution to include small business, credit card
and education loans as qualified investments for purposes of the test.
Furthermore, consumer loans now count as qualified thrift investments up to 20
percent of portfolio assets. On November 27, 1996, OTS issued an interim
final rule that implements provisions of the Economic Growth Act of 1996,
including the amended QTL test.
Increased Commercial and Consumer Lending Authority. Before the
Economic Growth Act of 1996, federal savings associations were able to lend up
to 10 percent of their assets in commercial business loans (i.e., secured or
unsecured loans for commercial, corporate, business, or agricultural purposes)
and, subject to OTS approval for a higher amount, up to 400 percent of their
capital in commercial real estate loans. In addition, federal savings
associations were permitted to make consumer loans (i.e., loans for personal,
family or household purposes) in an amount not to exceed 35 percent of their
- Page 27-
assets.
The Economic Growth Act of 1996 amended the commercial-lending-
asset limit by increasing the ceiling from 10 percent to 20 percent, but
provides that amounts in excess of 10 percent may be used only for small
business loans. Moreover, the new law exempts credit card and educational
loans from any percentage of asset limitations applicable to consumer loans.
The interim final rule issued by the OTS on November 27, 1996, defines a
'small business loan' as one which meets the Small Business Administration
size eligibility standards. This definition also applies for purposes of the
new QTL test.
Effective October 30, 1996, the OTS (as part of its regulatory
streamlining project) amended its lending regulations for federal savings
associations to remove the requirement that commercial loans made at the
service corporation level be aggregated with the 10 percent of assets limit on
commercial lending.
Charter Overhaul. Proposals to eliminate the savings association
charter have been considered by the U.S. Congress several times in recent
years. DIFA mandates that the Secretary of the Treasury conduct a study of
all issues which the Secretary considers to be relevant with respect to the
development of a common charter for all insured depository institutions and
the abolition of separate and distinct charters between banks and savings
associations.
The Secretary of the Treasury must submit a report to the Congress
on or before March 31, 1997, containing the findings and conclusions of the
Secretary in connection with this study. The report must include a detailed
analysis of each issue the Secretary considers relevant to the subject of the
study, recommendations of the Secretary with regard to the establishment of a
common charter for insured depository institutions and such recommendations
for legislative and administrative action as the Secretary determines to be
appropriate to implement the recommendations of the Secretary.
Regulatory Relief for Thrifts and Banks. The Economic Growth Act
of 1996 included dozens of changes to financial institution laws granting
regulatory relief to financial institutions (including savings associations)
and simplifying and streamlining the regulatory application process with
respect to certain transactions. Many existing laws were affected by the new
legislation, including the Truth in Lending Act (the 'TILA'), the Real Estate
Settlement Procedures Act, the Truth in Savings Act, the Fair Credit Reporting
Act, the Home Mortgage Disclosure Act and Fair Lending, among others. In
particular, the new law expands the definition of a small depository
institution that qualifies for an extended examination cycle (18 rather than
12 months) to include institutions with assets of $250 million (as opposed to
the former $175 million asset threshold).
Environmental Liability Reform. On September 30, 1996, President
Clinton signed into law amendments to the Comprehensive Environmental Response
Compensation and Liability Act ('CERCLA'). These amendments provide relief
for lenders in connection with their liability for environmental contamination
in making and administering loans.
Overhaul of Thrift Conflict of Interest, Corporate Opportunity and
Corporate Governance Rules. For several years the OTS has been engaged in an
extensive review of its regulations to identify regulations that are obsolete
and areas where regulatory streamlining is appropriate. This review has
-Page 28-
culminated in several substantial revisions to OTS regulations. In 1996, the
OTS issued final regulations streamlining its regulations in the areas of
lending and investment authority, corporate governance, subsidiaries and
equity investments and conflicts of interest, among others. As a result of
this project, many OTS regulations have been removed to the OTS Thrift
Activities Handbook.
New Thrift Subsidiary and Equity Investment Rules. On December
18, 1996, the OTS issued a final rule updating and streamlining its
regulations governing subsidiary and equity investments. The regulation
recasts operating subsidiaries and service corporations as 'subordinate
organizations,' revises the list of permissible activities for service
corporations, confirms federal preemption of state law regarding the
activities of operating subsidiaries and clarifies the application process for
establishing subordinate organizations. The new rule also codifies the
authority of a federal savings association to invest in certain pass-through
investments, such as limited partnerships and mutual funds.
Federal-Savings-Association Regulation
Business Activities. The activities of savings associations are
governed by the Home Owners' Loan Act, as amended (the "HOLA"), and, in
certain respects, the Federal Deposit Insurance Act (the "FDI Act"). The HOLA
and the FDI Act were amended by the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") and the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). FIRREA was enacted for the
purpose of resolving problem savings associations, establishing a new thrift
insurance fund, reorganizing the regulatory structure applicable to savings
associations, and imposing bank-like standards on savings associations.
FDICIA, among other things, requires that federal banking regulators intervene
promptly when a depository institution experiences financial difficulties,
mandates the establishment of a risk-based deposit insurance assessment system
and requires imposition of numerous additional safety and soundness
operational standards and restrictions. FIRREA and FDICIA both contain
provisions affecting numerous aspects of the operations and regulations of
federally-insured savings associations and empowers the OTS and the FDIC,
among other agencies, to promulgate regulations implementing its provisions.
Branching. A federally-chartered savings association, like First
Federal, can establish branches in any state or states in the United States
and its territories, subject to a few exceptions. The exercise by the OTS of
its authority to permit interstate branching by federal savings associations
is preemptive of any state law purporting to address the subject of branching
by a federal savings association.
Loans to One Borrower. Under HOLA, savings associations are
generally subject to the national bank limits regarding loans to one borrower.
Generally, savings associations may not make a loan or extend credit to a
single or related group of borrowers in excess of 15 percent of the
association's unimpaired capital and surplus, where the borrowing is not fully
secured by readily-marketable collateral. An additional amount may be lent,
equal to 10 percent of the association's unimpaired capital and surplus, if
such additional borrowing is secured by readily-marketable collateral at least
equal to the amount of such additional funds. At December 31, 1996, First
Federal had no outstanding loans or commitments that exceeded the loans to one
borrower limit at the time made or committed.
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Brokered Deposits. Well-capitalized savings associations that
are not troubled are not subject to brokered deposit limitations.
Adequately-capitalized associations are able to accept, renew or roll over
brokered deposits but only (i) with a waiver from the FDIC and (ii) subject to
the limitation that they do not pay an effective yield on any such deposit
that exceeds by more than (a) 75 basis points the effective yield paid on
deposits of comparable size and maturity in such association's normal market
area for deposits accepted in its normal market area or (b) 120 basis points
of the current yield on similar maturity U.S. Treasury obligations or, in the
case of any deposit at least half of which is uninsured, 130 percent of such
Treasury yield. Undercapitalized associations are not permitted to accept
brokered deposits and may not solicit deposits by offering an effective yield
that exceeds by more than 75 basis points the prevailing effective yields on
insured deposits of comparable maturity in the association's normal market
area or in the market area in which such deposits are being solicited. First
Federal is not presently soliciting brokered deposits.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings associations and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on
an insured association. Civil penalties cover a wide range of violations and
actions. Criminal penalties for most financial association crimes include
fines and imprisonment. In addition, regulators have substantial discretion
to impose enforcement action on an association that fails to comply with its
regulatory requirements, particularly with respect to amounts of capital.
Possible enforcement action ranges from requiring the preparation of a capital
plan or imposition of a capital directive to receivership, conservatorship or
the termination of deposit insurance. Under the FDI Act, the FDIC has the
authority to recommend to the Director of OTS enforcement action be taken with
respect to a particular savings association. If action is not taken by the
Director, the FDIC has authority to take enforcement action under certain
circumstances.
Assessments. Savings associations are required by OTS regulation
to pay assessments to the OTS to fund the operations of the OTS. The general
assessment paid on a semi-annual basis is computed based upon the savings
association's total assets, including consolidated subsidiaries, as reported
in the association's latest quarterly thrift financial report.
Federal Home Loan Bank System. First Federal is a member of the
FHLB System, which consists of 12 regional FHLB's. The FHLB provides a central
credit facility primarily for member associations. First Federal, as a member
of the FHLB-Chicago, is required to acquire and hold shares of capital stock
in that FHLB in an amount at least equal to 1 percent of the aggregate
principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB-Chicago, whichever is greater. First Federal is in
compliance with this requirement, with an investment in FHLB-Chicago stock at
December 31, 1996, of $955,000. FHLB advances must be secured by specified
types of collateral and may be obtained only for the purpose of purchasing or
funding new residential housing finance assets.
OTS Capital Requirements. The OTS capital regulations require
savings associations to meet three capital standards: a 1.5 percent tangible
capital standard, a 3 percent leverage ratio (or core capital ratio) and an 8
percent risk-based capital standard.
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Tangible capital is defined as common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
related earnings, certain nonwithdrawable accounts and pledged deposits of
mutual savings associations, and minority interests in equity accounts of
fully consolidated subsidiaries, less intangible assets (other than certain
mortgage servicing rights) and certain equity and debt investments in
nonqualifying subsidiaries (as hereinafter defined).
Core capital is defined as common stockholders' equity (including
retained earnings), certain noncumulative perpetual preferred stock and
related surplus, minority interests in equity accounts of consolidated
subsidiaries, certain nonwithdrawable accounts and pledged deposits of mutual
savings associations, certain amounts of goodwill resulting from prior
regulatory accounting practices, less intangible assets (other than certain
mortgage servicing rights) and certain equity and debt investments in
nonqualifying subsidiaries.
The OTS capital regulation requires that in meeting the leverage
ratio, tangible and risk-based capital standards, savings associations must
deduct investments in and loans to subsidiaries engaged in activities not
permissible for a national bank (a "nonqualifying subsidiary"). At December
31, 1996, First Federal did not own a nonqualifying subsidiary.
In April 1991, the OTS issued a proposal to amend its regulatory
capital regulation to establish a 3 percent leverage ratio (defined as the
ratio of core capital to adjusted total assets) for associations in the
strongest financial and managerial condition, with a 1 CAMEL Rating (the
highest rating of the OTS for savings associations). For all other
associations, the minimum core capital leverage ratio would be 3 percent plus
at least an additional 100 to 200 basis points. In determining the amount of
additional capital under the proposal, the OTS would assess both the quality
of risk management systems and the level of overall risk in each individual
association through the supervisory process on a case-by-case basis.
Associations that failed the new leverage ratio would be required to file with
the OTS a capital plan that details the steps they would take to reach
compliance. If enacted in final form as proposed, management does not believe
that the proposed regulation would have a material effect on First Federal.
Although the OTS has not adopted this regulation in final form,
generally a savings association that has a leverage capital ratio of less than
4 percent will be deemed to be "undercapitalized" under the OTS prompt
corrective action regulations and consequently can be subject to various
limitations on activities.
The OTS' risk-based capital standard requires that savings
associations maintain a ratio of total capital (which is defined as core
capital and supplementary capital) to risk-weighted assets of 8 percent. In
calculating total capital, a savings association must deduct reciprocal
holdings of depository institution capital instruments, all equity investments
and that portion of land loans and nonresidential construction loans in excess
of 80 percent loan-to-value ratio and its interest rate risk component (as
discussed below), in addition to the assets that must be deducted in
calculating core capital. In determining the amount of risk-weighted assets,
all assets, including certain off-balance sheet assets, are multiplied by a
risk-weight of 0 percent to 100 percent, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed
above under the 3 percent leverage standard. The components of supplementary
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capital include cumulative preferred stock, long-term perpetual preferred
stock, mutual capital certificates, certain nonwithdrawable accounts and
pledged deposits, certain net worth certificates, income capital certificates,
certain perpetual subordinated debt, mandatory convertible subordinated debt,
certain intermediate-term preferred stock, certain mandatorily redeemable
preferred stock and allowance for loan and lease losses (up to 1.25 percent of
risk-weighted assets). Allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25 percent. Overall, the
amount of capital counted toward supplementary capital cannot exceed 100
percent of core capital. At December 31, 1996, First Federal met each of its
capital requirements.
FDICIA required that the OTS (and other federal banking agencies)
revise risk-based capital standards, with appropriate transition rules, to
ensure that they take account of interest rate risk, concentration of risk and
the risks of nontraditional activities.
The OTS' interest rate risk component became effective on January
1, 1994. Under the rule, savings associations with "above normal" interest
rate risk exposure would be subject to a deduction from total capital for
purposes of calculating their risk-based capital requirements. A savings
association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200-basis point increase or
decrease in market interest rates (except when the three-month Treasury bond
equivalent yield falls below 4%, then the decrease would be equal to one-half
of that Treasury rate) divided by the estimated economic value of the
association's assets, as calculated in accordance with guidelines set forth
by the OTS. A savings association whose measured interest rate risk exposure
exceeds 2% must deduct an interest rate component in calculating its total
capital under the risk-based capital rule. The interest rate risk component
is an amount equal to one-half of the difference between the association's
measured interest rate risk and 2%, multiplied by the estimated economic value
of the association's assets. That dollar amount is deducted from an
association's total capital in calculating compliance with its risk-based
capital requirement. Savings associations with assets of less than $300
million and risk-based capital ratios in excess of 12% are not subject to the
interest rate risk component. The rule also provides that the Director of the
OTS may waive or defer an association's interest rate risk component. The OTS
has postponed the date that the risk component will first be deducted from an
institution's total capital to allow, among other things, the OTS to evaluate
the interest rate risk proposals issued by the other banking agencies.
Liquidity. First Federal is required to maintain an average daily
balance of liquid assets (e.g., cash, accrued interest on liquid assets,
certain time deposits, savings accounts, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares of
certain mutual funds and certain corporate debt securities and commercial
paper) equal to not less than a specified percentage of the average daily
balance of its net withdrawal deposit accounts plus short-term borrowings.
This liquidity requirement may be changed from time to time by the OTS to any
amount within the range of 4 percent to 10 percent depending upon economic
conditions and the savings flows of member associations; this requirement is
currently 5 percent. OTS regulations also require each member savings
association to maintain an average daily balance of short-term liquid assets
at a specified percentage (currently 1 percent) of the average daily balance
of its net withdrawable deposit accounts and borrowings. The OTS may initiate
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enforcement actions for failure to meet these liquidity requirements. First
Federal has never been subject to monetary penalties for failure to meet its
liquidity requirements.
Insurance of Deposit Accounts. FDICIA required the FDIC to
establish a risk-based assessment system for insured depository associations
that takes into account the risks attributable to different categories and
concentrations of assets and liabilities. Under the rule, the FDIC assigns an
association to one of three capital categories consisting of (i) well
capitalized, (ii) adequately capitalized or (iii) undercapitalized, and one of
three supervisory subcategories. The supervisory subgroup to which an
association is assigned is based on a supervisory evaluation provided to the
FDIC by the association's primary federal regulator and information which the
FDIC determines to be relevant to the association's financial condition and
the risk posed to the deposit insurance funds (which may include, if
applicable, information provided by the association's state supervisor). An
association's assessment rate depends on the capital category and supervisory
category to which it is assigned. There are nine assessment risk
classifications (i.e., combinations of capital groups and supervisory
subgroups) to which different assessment rates are applied. Assessment rates
range from 23 basis points for an association in the highest category (i.e.,
well-capitalized and healthy) to 31 basis points for an association in the
lowest category (i.e., undercapitalized and of substantial supervisory
concern).
Limitation on Capital Distributions. The OTS regulations impose
limitations upon all capital distributions by savings associations, such as
cash dividends, payments to repurchase or otherwise acquire its shares,
payments to shareholders of another association in a cash-out merger and other
distributions charged against capital. The regulations establish three tiers
of associations. An association that exceeds all fully phased-in capital
requirements before and after the proposed capital distribution ("Tier 1
Association") and has not been advised by the OTS that it is in need of more
than normal supervision, could, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year up to the higher of
(a) 100 percent of its net income to date during the calendar year plus the
amount that would reduce by one-half its "surplus capital ratio" (the excess
capital over its fully phased-in capital requirements) at the beginning of the
calendar year or (b) 75 percent of its net reserve over the most recent four-
quarter period. Any additional capital distributions would require prior
regulatory approval. In computing the association's permissible percentage of
capital distributions, previous distributions made during the prior four
quarter period must be included. As of December 31, 1996, First Federal met
the requirements of a Tier 1 Association. In the event First Federal's
capital fell below its fully phased-in requirement or the OTS notified it that
it was in need of more than normal supervision, the Savings Bank's ability to
make capital distributions could be restricted. In addition, the OTS could
prohibit a proposed capital distribution by any association, which would
otherwise be permitted by regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice. Moreover, under
the OTS prompt corrective action regulations, First Federal would be
prohibited from making any capital distribution if, after the distribution,
First Federal would have, (i) total risk-based capital ratio of less than 8
percent, (ii) Tier 1 risk-based capital ratio of less than 4 percent, or (iii)
a leverage ratio of less than 4 percent or has a leverage ratio that is less
than 3 percent if the association is rated composite 1 under the CAMEL rating
system in the most recent examination of the association and is not
experiencing or anticipating significant growth.
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Community Reinvestment. The OTS, the FDIC, the Federal Reserve
Board and the OCC have jointly issued a final rule (the "Final Rule") under
the Community Reinvestment Act (the "CRA"). The Final Rule eliminates the
existing CRA regulation's twelve assessment factors and substitutes a
performance based evaluation system. The Final Rule will be phased in over a
period of time and become fully effective by July 1, 1997. Under the Final
Rule, an institution's performance in meeting the credit needs of its entire
community, including low- and moderate-income areas, as required by the CRA,
will generally be evaluated under three tests: the "lending test," the
"investment test," and the "service test."
The lending test analyzes lending performance using five criteria:
(i) the number and amount of loans in the institution's assessment area, (ii)
the geographic distribution of lending, including the proportion of lending in
the assessment area, the dispersion of lending in the assessment area, and the
number and amount of loans in low-, moderate-, middle-, and upper-income areas
in the assessment area, (iii) borrower characteristics, such as the income
level of individual borrowers and the size of businesses or farms, (iv) the
number and amount, as well as the complexity and innovativeness of an
institution's community development lending and (v) the use of innovative or
flexible lending practices in a safe and sound manner to address the credit
needs of low- or moderate-income individuals or areas. The investment test
analyzes investment performance using four criteria: (i) the dollar amount of
qualified investments, (ii) the innovativeness or complexity of qualified
investments, (iii) the responsiveness of qualified investments to credit and
community development needs, and (iv) the degree to which the qualified
investments made by the institution are not routinely provided by private
investors. The service test analyzes service performance using six criteria:
(i) the institution's branch distribution among low-, moderate-, middle-, and
upper-income areas, (ii) its record of opening and closing branches,
particularly in low- and moderate-income areas, (iii) the availability and
effectiveness of alternative systems for delivering retail banking services,
(iv) the range of services provided in low-, moderate-, middle- and upper-
income areas and extent to which those services are tailored to meet the needs
of those areas, (v) the extent to which the institution provides community
development services, and (vi) the innovativeness and responsiveness of
community development services provided.
An independent financial institution with assets of less than $250
million, or a financial institution with assets of less than $250 million that
is a subsidiary of a holding company with assets of less than $1 billion, will
be evaluated under a streamlined assessment method based primarily on its
lending record. The streamlined test considers an institution's loan-to-
deposit ratio adjusted for seasonal variation and special lending activities,
its percentage of loans and other lending related activities in the assessment
area, its record of lending to borrowers of different income levels and
businesses and farms of different sizes, the geographic distribution of its
loans, and its record of taking action, if warranted, in response to written
complaints. In lieu of being evaluated under the three assessment tests or
the streamlined test, a financial institution can adopt a "strategic plan" and
elect to be evaluated on the basis of achieving the goals and benchmarks
outlined in the strategic plan.
Transactions with Related Parties. First Federal's authority to
engage in transactions with related parties or "affiliates," (i.e., any
company that controls or is under common control with an association)
including the Corporation and its non-savings-association subsidiaries or to
make loans to certain insiders, is limited by Sections 23A and 23B of the
-Page 34-
Federal Reserve Act ("FRA"). Subsidiaries of a savings association are
generally exempted from the definition of "affiliate." Section 23A limits the
aggregate amount of transactions with any individual affiliate to 10 percent
of the capital and surplus of the savings association and also limits the
aggregate amount of transactions with all affiliates to 20 percent of the
savings association's capital and surplus. Certain transactions with
affiliates are required to be secured by collateral in an amount and of a type
described in the FRA and the purchase of low quality assets from affiliates is
generally prohibited. Section 23B provides that certain transactions with
affiliates, including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same or
at least as favorable to the association as those prevailing at the time for
comparable transactions with non-affiliated companies. In the absence of
comparable transactions, such transactions may only occur under terms and
circumstances, including credit standards, that in good faith would be offered
to or would apply to non-affiliated companies. Notwithstanding Sections 23A
and 23B, FIRREA prohibits any savings association from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies under Section 4(c) of the Bank Holding Company Act ("BHC
Act"). Further, no savings association may purchase the securities of any
affiliate other than a subsidiary.
First Federal's authority to extend credit to executive officers,
directors and 10 percent shareholders, as well as such entities such persons
control are currently governed by Section 22(g) and 22(h) of the FRA and
Regulation O promulgated by the Federal Reserve Board. Among other things,
these regulations require such loans to be made on terms substantially similar
to those offered to unaffiliated individuals, place limits on the amount of
loans the Savings Bank may make to such persons based, in part, on the Savings
Bank's capital position, and require certain approval procedures to be
followed. OTS regulations, with the exception of minor variations, apply
Regulation O to savings associations.
Prompt Corrective Regulatory Action. FDICIA establishes a system
of prompt corrective action to resolve the problems of undercapitalized
associations. Under this system, the OTS is required to take certain
supervisory actions against undercapitalized associations, the severity of
which depends upon the association's degree of undercapitalization.
Generally, subject to a narrow exception, FDICIA requires the OTS to appoint a
receiver or conservator for an association that is critically
undercapitalized. FDICIA authorizes the OTS to specify the ratio of tangible
equity to assets at which an association becomes critically undercapitalized
and requires that ratio be no less than 2 percent of assets.
Under OTS regulations, a savings association is considered to be
undercapitalized if it has risk-based capital of less than 8 percent or has a
Tier 1 risk-based capital ratio that is less than 4 percent or has a leverage
ratio that is less than 4 percent or has a leverage ratio less than 3 percent
if the savings association is rated composite 1 under the CAMEL rating system
in the most recent examination of the association. A savings association that
has risk-based capital less than 6 percent or a Tier 1 risk-based capital
ratio that is less than 3 percent or a leverage ratio that is less than 3
percent would be considered to be "significantly undercapitalized." A savings
association that has a tangible equity to total assets ratio equal to or less
than 2 percent would be deemed to be "critically undercapitalized."
Generally, a capital restoration plan must be filed with the OTS within 45
days of the date an association receives notice that it is undercapitalized,
significantly undercapitalized or critically undercapitalized. In addition,
-Page 35-
numerous mandatory supervisory actions become immediately applicable to the
association, including, but not limited to, restrictions on growth, investment
activities, capital distributions, and affiliate transactions. In addition,
the OTS could issue a capital directive to the savings association that
includes additional discretionary restrictions on the savings association.
Real Estate Lending Standards. The OTS and the other federal
banking agencies have uniform regulations prescribing real estate lending
standards. The OTS regulation requires each savings association to establish
and maintain written internal real estate lending standards consistent with
safe and sound banking practices and appropriate to the size of the
institution and the nature and scope of its real estate lending activities.
The policy must also be consistent with accompanying OTS guidelines, which
include maximum loan-to-value ratios for the following types of real estate
loans: raw land (65 percent), land development (75 percent), nonresidential
construction (80 percent), improved property (85 percent) and one- to four-
family residential construction (85 percent). Owner-occupied one- to four-
family mortgage loans and home equity loans do not have maximum loan-to-value
ratio limits, but those with a loan-to-value ratio at origination of 90
percent or greater are to be backed by private mortgage insurance or readily
marketable collateral. Institutions are also permitted to make a limited
amount of loans that do not conform to the proposed loan-to-value limitations
so long as such exceptions are appropriately reviewed and justified. The
guidelines also list a number of lending situations in which exceptions to the
loan-to-value standard are justified.
Standards for Safety and Soundness. As required by FDICIA and
subsequently amended by the Riegle Community Development and Regulatory
Improvement Act of 1994, the federal banking regulators adopted interagency
guidelines establishing standards for safety and soundness for depository
institutions on matters such as internal controls, loan documentation, credit
underwriting, interest-rate risk exposure, asset growth, compensation and
other benefits and asset quality and earnings (the "Guidelines"). The
agencies expect to request a compliance plan from an institution whose failure
to meet one or more of the standards is of such severity that it could
threaten the safe and sound operation of the institution. FDIC regulations
enacted under FDICIA also require all depository institutions to be examined
annually by the banking regulators (but see, 'Regulatory Relief for Thrifts
and Banks') and depository institutions having $500 million or more in total
assets to have an annual independent audit, an audit committee comprised
solely of outside directors, and to hire outside auditors to evaluate the
institution's internal control structure and procedures and compliance with
laws and regulations relating to safety and soundness. The FDIC, in adopting
the regulations, reiterated its belief that every depository institution,
regardless of size, should have an annual independent audit and an independent
audit committee.
Financial Management Requirements. FDICIA imposes new financial
reporting requirements on all depository institutions with assets of more than
$500 million, their management, and their independent auditors. It also
establishes new rules for the composition, duties and authority of such
institutions' audit committees and boards of directors. Among other things,
all such depository institutions will be required to prepare and make
available to the public annual reports on their financial condition and
management (including statements of managements' responsibility for the
financial statements, internal controls and compliance with certain federal
banking laws and regulations relating to safety and soundness, and an
assessment by management of the effectiveness of the institution's internal
-Page 36-
controls and procedures and the institution's compliance with such laws and
regulations). The institution's independent public accountants are required
to attest to these management assessments. Each such institution is also
required to have an audit committee composed of independent directors.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions
to maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts), non-personal time deposits
(those which are transferable or held by a person other than a natural person)
with an original maturity of less than one and one-half years and certain
money market accounts. The Federal Reserve Board regulations generally
require that reserves of 3% must be maintained against aggregate transaction
accounts of $52 million or less (subject to adjustment by the Federal Reserve
Board) and an initial reserve of $1.6 million plus 10 percent (subject to
adjustment by the Federal Reserve Board between 8 percent and 14 percent)
against that portion of total transaction accounts in excess of $52 million.
The first $4.3 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. First Federal is in compliance with the foregoing requirements.
The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements by
the OTS. Because required reserves must be maintained in the form of either
vault cash, a non-interest-bearing account at a Federal Reserve Bank or a
pass-through account as defined by the Federal Reserve Board, the effect of
this reserve requirement is to reduce the Savings Bank's interest-earning
assets.
FHLB System members are also authorized to borrow from the Federal
Reserve "discount window," but Federal Reserve Board regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal
Reserve Bank.
Holding Company Regulation
Eagle is considered a non-diversified, savings and loan holding
company within the meaning of the HOLA, has registered as a savings and loan
holding company with the OTS and is subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Corporation and its non-savings association subsidiaries.
Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from (i) acquiring control
of, or acquiring by merger or purchase of assets, another savings association
or holding company thereof, without prior written approval of the OTS; (ii)
acquiring or retaining, with certain exceptions, more than 5 percent of a non-
subsidiary savings association, a non-subsidiary holding company, or a non-
subsidiary company engaged in activities other than those permitted by the
HOLA; or (iii) acquiring or retaining control of an institution that is not
federally insured. In evaluating applications by holding companies to acquire
savings associations, the OTS must consider the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the insurance funds, the convenience
-Page 37-
and needs of the community and competitive factors.
As a unitary savings and loan holding company, Eagle generally is
not restricted under existing laws as to the types of business activities in
which it may engage, provided that its savings association subsidiary
continues to satisfy the QTL test. Upon any acquisition by Eagle of another
SAIF-insured institution (other than the Corporation), a federal savings bank
insured by the BIF, or a state-chartered BIF-insured savings bank meeting the
QTL test that is deemed to be a savings institution by OTS, except for a
supervisory acquisition, Eagle would become a multiple savings and loan
holding company (if the acquired institution is held as a separate subsidiary)
and would be subject to extensive limitations on the types of business
activities in which it could engage. The HOLA, as amended by the FIRREA,
limits the activities of a multiple savings and loan holding company and its
non-insured institution subsidiaries primarily to activities permissible for
bank holding companies under Section 4(c)(8) of the BHC Act, subject to the
prior approval of the OTS, and activities in which multiple savings and loan
holding companies were authorized by regulation to engage in on March 5, 1987.
Such activities include mortgage banking, consumer finance, operation of a
trust company, and certain types of securities brokerage. The services and
activities in which multiple holding companies were authorized to engage in on
March 5, 1987 generally correspond to the activities which are permitted for
service corporations of federally-chartered savings institutions.
Item 2. PROPERTIES
The Company conducts its business through three full-service offices.
The main office is located at 301 Fairway Drive, Bloomington, Illinois. All
offices are owned in fee and are unencumbered. The Company believes that its
current facilities are adequate to meet its present and foreseeable needs.
<TABLE>
Date Net Book Value
Office Acquired December 31, 1996
(in thousands)
<S> <C> <C>
Main Office
301 Fairway Drive
Bloomington, Illinois 61701 1981 1,183
Veterans Parkway Branch
1111 South Veterans Parkway
Bloomington, Illinois 61701 1994 1,404
LeRoy Branch
207 South East Street
LeRoy, Illinois 61752 1983 249
</TABLE>
Item 3. LEGAL PROCEEDINGS
The Company is, from time to time, party to legal proceedings arising in
the normal course of its business, including legal proceedings to enforce its
rights against borrowers. The Company is not currently party to any legal
proceedings which could reasonably be expected to have a material adverse
effect on the financial condition or operations of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders through a
solicitation of proxies or otherwise in the quarter ended December 31, 1996.
-Page 38-
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information called for by this item is incorporated by reference to
'Common Stock - Market Information' on page 29 of the Corporation's
Annual Report to Stockholders for the year ended December 31, 1996.
Item 6. SELECTED FINANCIAL DATA
The information called for by this item is incorporated by reference to
'Selected Financial Highlights' on page 1 of the Corporation's Annual Report
to Stockholders for the year ended December 31, 1996.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information called for by this item is incorporated by reference to
'Managament's Discussion and Analysis' on pages 2 through 7 of the
Corporation's Annual Report to Stockholders for the year ended December 31,
1996.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of the Corporation and its
subsidiaries included in the Corporations's Annual Report to Stockholders for
the year ended December 31, 1996 are incorporated herein by reference.
1996 Annual
Report Page(s)
Report of Independent Auditors 8
Consolidated Statements of Condition as of
December 31, 1996 and 1995 9
Consolidated Statements of Income for the Years
Ended December 31, 1996, 1995 and 1994 10
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994 11
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1996, 1995 and 1994 12
Notes to Consolidated Financial Statements 12-28
Note 12 of Notes to Consolidated Financial Statements titled 'Quarterly
Financial Information' on pages 25 and 26 of the Corporation's 1996 Annual
Report to Stockholders for the year ended December 31, 1996 is incorporated
herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-Page 39-
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Listed below is the executive officer of Eagle, who was appointed on
January 24, 1996 when Eagle was incorporated. Commencing with the annual
meeting on April 16, 1997, executive officer(s) will be elected annually.
There are no arrangements or understandings between the person so named and
any other person pursuant to which such person was appointed an executive
officer.
Donald L. Fernandes, age 39, President, Chief Executive Officer and Director
of Eagle. President, Chief Executive officer and Director of First Federal
since August, 1995. Senior Vice President and Chief Financial Officer of
First Federal, prior thereto.
The information called for by this item with respect to directors and
director nominees for election to the Board of Directors is presented in
Eagle's Notice and Proxy Statement dated March 27, 1997 on pages 3 and 4 under
the caption 'Proposal 1 - Election of Directors' and is incorporated herein by
reference.
Item 11. EXECUTIVE COMPENSATION
The information called for by this item is presented in Eagle's Notice
and Proxy Statement dated March 27, 1997 on pages 5 through 9 under the
caption 'Executive Compensation' and is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is presented in Eagle's Notice
and Proxy Statement dated March 27, 1997 on pages 1 through 3 under the
caption 'Voting Securities and Principal Holders Therof' and is incorporated
herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements - The financial statements required by this
item are included under Item 8. of Part II of this document.
2. Financial Statement Schedules - The financial statement schedules
required by this item are either not applicable or are included in the
financial statements.
3. Exhibits - The exhibits listed on the Exhibit Index beginning on
page 42 of this Form 10-K are filed herewith or are incorporated herein
by reference to other Filings.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended December
31, 1996.
-Page 40-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
EAGLE BANCGROUP, INC
Date: March 27, 1997 By: /s/ Donald L. Fernandes
---------------------------
DONALD L. FERNANDES,
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
President, Chief Executive
/s/ Donald L. Fernandes Officer and Director March 27, 1997
- -------------------------
DONALD L. FERNANDES
Chief Financial Officer and
/s/ Larry C. McClellan Principal Accounting Officer March 27, 1997
- -------------------------
LARRY C. MCCLELLAN
/s/ Gerald A. Bradley Chairman of the Board March 27, 1997
- ---------------------
GERALD A. BRADLEY
/s/ Robert P. Dole Director March 27, 1997
- ---------------------
ROBERT P. DOLE
/s/ William J. Hanfland Director March 27, 1997
- -----------------------
WILLIAM J. HANFLAND
/s/ Louis F. Ulbrich Director March 27, 1997
- --------------------
LOUIS F. ULBRICH
/s/ Steven J. Wannamacher Director March 27, 1997
- -------------------------
STEVEN J. WANNEMACHER
<TABLE>
EXHIBIT INDEX
Item Exhibit Page
<S> <C> <C>
2. Plan of acquisition, 2.1 Amended Plan of Conversion of First
reorganization, Federal Savings and Loan Association
arrangement, of Bloomington <F1>
liquidation or
succession
3. Articles of 3.1 Certificate on Incorporation of
Incorporation and Registrant as filed in Delaware on
Bylaws January 24, 1996 <F1>
3.2 Bylaws of Registrant as adopted by the
Board of Directors of Registrant on
January 25, 1996 <F1>
4. Instruments defining 4.1 Specimen Stock Certificate of
the rights of holders, Registrant <F1>
including indentures
4.2 Articles IV, V, VI, VII, XI, XII, XIII,
XIV, XVI, and XVII of the Registrant's
Certificate of Incorporation (See
Exhibit 3.1)
4.3 Articles II, III, IV, VIII and XI of
the Registrant's Bylaws (See
Exhibit 3.2)
10. Material contracts 10.1 First Federal Savings and Loan
Association of Bloomington Employee
Stock Ownership Plan <F1>
10.2 Credit Agreement between Registrant
and First Federal Savings and Loan
Association of Bloomington Employee
Stock Ownership Plan <F1>
10.3 Eagle BancGroup, Inc. 1996 Stock
Option and Incentive Plan <F2>
10.4 Eagle BancGroup, Inc. Management
Development and Recognition Plan
and Trust Agreement <F2>
10.5 Deferred Compensation Agreement,
dated as of September 22, 1992,
between First Federal Savings and
Loan Association of Bloomington
and Donald L. Fernandes <F1>
10.6 Release and Settlement Agreement,
dated as of July 18, 1995, between
First Federal Savings and Loan
Association of Bloomington and
Jon C. Thetard <F1>
10.7 Employment Agreement, dated as of
June 29, 1996, among Eagle
BancGroup, Inc., First Federal Savings
and Loan Association of Bloomington
and Donald L. Fernandes 44
10.8 Employment Security Agreement, dated
as of July 1, 1996, between the
Registrant and Larry C. McClellan 53
10.9 Employment Security Agreement, dated
as of July 5, 1996, between the
Registrant and Laurel B. Donovan 57
10.10 Employment Security Agreement, dated
as of July 8, 1996, between the
Registrant and Gary L. Richardson 62
13. Annual report to 13.1 1996 Annual Report to
security holders Stockholders 67
21. Subsidiaries of 21.1 List of subsidiaries of the
the registrant Registrant 100
23. Consent of experts 23.1 Consent of Ernst & Young LLP 101
and counsel
27. Fiancial data 27.1 Financial data schedule
schedule
99. Additional exhibits 99.1 Notice and Proxy Statement dated
March 27, 1997 <F3>
<FN>
<F1>
Incorporated by reference to Exhibits filed with the Registration
Statement on Form S-1, Registration No. 333-2474
<F2>
Incorporated by reference to Notice and Proxy Statement for Special
Meeting of Stockholders dated January 10, 1997, filed January 9, 1997
<F3>
Incorporated by reference to Notice and Proxy Statement dated March 27,
1997, filed March 27, 1997
</FN>
</TABLE>
-Page 43-
EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into this 29th day of June, 1996, among First
Federal Savings and Loan Association of Bloomington (the "Association"), Eagle
BancGroup, Inc. (the "Holding Company") and Donald L. Fernandes (the
"Employee") in connection with the Association's conversion from mutual to
stock form and simultaneous holding company formation (the "Conversion").
WHEREAS, the Employee has heretofore been employed by the Association as
President and Chief Executive Officer and is experienced in all phases of the
business of the Association; and
WHEREAS, upon completion of the Conversion the Holding Company will be a
public company; and
WHEREAS, the parties desire by this writing to set forth the continued
employment relationship of the Employee;
NOW THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed as the President and Chief
Executive Officer of the Association and the Holding Company. The Employee
shall render administrative and management services to the Association and the
Holding Company such as are customarily performed by persons situated in a
similar executive capacity. He shall also promote, by entertainment or
otherwise, as and to the extent permitted by law, the business of the
Association and the Holding Company. The Employee's other duties shall be
such as the Board of Directors of the Association and the Holding Company may
from time to time reasonably direct, including normal duties as an officer of
the Association and the Holding Company.
2. Base Compensation. The Association and the Holding Company agree
to pay the Employee during the term of this Agreement a salary at the rate of
$100,000 per annum, payable in cash not less frequently than twice monthly.
Such rate of salary, or increased rate of salary, if any as the case may be,
shall be reviewed by the Board of Directors of the Association and the Holding
Company no less often than annually. Any increase in the Employee's rate of
salary shall have the effect of amending this Section 2 to provide that the
Employee's Base Compensation shall equal such increased rate of salary.
3. Discretionary Bonuses. The Employee shall be entitled to
participate in an equitable manner with all other key management personnel of
the Association and the Holding Company in discretionary bonuses authorized
and declared by the Board of Directors of the Association and the Holding
Company to its key management employees. No other compensation provided for
in this Agreement shall be deemed a substitute for the Employee's right to
participate in such discretionary bonuses when and as declared by the Board of
Directors of the Association and the Holding Company. Any such bonus shall
take into account the Association's and the Holding Company's current
financial condition, operations and the Board of Directors' evaluation of the
performance of the Employee.
4. (a) Participation in Retirement and Medical Plans. The Employee
shall be entitled to participate in any plan of the Association and the
Holding Company relating to pension, profit-sharing, or other retirement
benefits and medical coverage or reimbursement plans that the Association and
the Holding Company may adopt for the benefit of its employees.
-Page 44-
(b) Employee Benefits; Expenses. The Employee shall be eligible
to participate in any fringe benefits that may be or become applicable to the
Association's and the Holding Company's executive employees, including
participation in a stock option or incentive plan adopted by the Board of
Directors, and any other benefits that are commensurate with the
responsibilities and functions to be performed by the Employee under this
Agreement. The Association and the Holding Company shall reimburse Employee
for all reasonable, ordinary and necessary out-of-pocket expenses that
Employee shall incur in connection with his services for the Association and
the Holding Company.
5. Term. The term of employment under this Agreement shall be for a
36 month period commencing June 29, 1996 and ending June 28, 1999. The said
36 month period of employment may be extended for an additional 12 full
calendar months by action of the Board of Directors of the Association and the
Holding Company sixty (60) days prior to June 28, 1997, and 60 days prior to
each succeeding June 28 thereafter, respectively.
6. Loyalty; Noncompetition.
(a) The Employee shall devote his full time and best efforts to
the performance of his employment under this Agreement. During the term of
this Agreement, the Employee shall not, at any time or place, either directly
or indirectly, engage in any business or activity in competition with the
business affairs or interests of the Association or the Holding Company or be
a director, officer or employee of or consultant to any bank, savings
association, credit union or similar financial institution in McLean County
and all other counties in which the Association has a full-service facility.
(b) Upon termination of this Agreement for any reason other than
the reasons set forth in paragraph 9 of this Agreement, for a period of one
year from the termination of this Agreement, the Employee shall not at any
time or place, either directly or indirectly, engage in any business or
activity in competition with the business affairs or interests of the
Association or the Holding Company or be a director, officer or employee of or
consultant to any bank, savings association, credit union or similar financial
institution in McLean County and all other counties in which the Association
has a full-service facility.
(c) Nothing in the foregoing subparagraphs in this paragraph 6
shall apply to subsidiaries and affiliates or shall be determined to prevent
or limit the right of Employee to invest in the capital stock or other
securities of any business dissimilar from that of the Association and the
Holding Company or solely as a passive investor in any business.
(d) Directly or indirectly engaging in any business or activity
in competition with the business affairs or interests of the Association or
the Holding Company shall include engaging in business as owner, partner,
agent or employee of any person, firm or corporation engaged in such business
individually or as beneficiary by interest in any partnership, corporation or
other business entity or in being interested directly or indirectly in any
such business conducted by any person, firm or corporation.
(e) In the event of violation by Employee of this Agreement for
loyalty and noncompetition, the Employee will be subject to damages and
because of the relationship of employer and employee, it is hereby agreed
injunctive relief is necessary for the Association and the Holding Company to
enforce these provisions of the Agreement to protect their business and good
will.
-Page 45-
7. Standards. The Employee shall perform his duties under this
Agreement in accordance with such reasonable standards expected of employees
with comparable positions in comparable organizations and as may be
established from time to time by the Boards of Directors of the Association
and the Holding Company. The Employee shall be subject to an annual
performance review on or about each anniversary of this Agreement, to be
performed by the Board of Directors of the Association or the Holding Company,
or a committee appointed by such Board of Directors, to determine that his
performance is in compliance with these standards.
8. Vacation and Sick Leave. At such reasonable times as the Board of
Directors of the Association and the Holding Company shall in their discretion
permit, the Employee shall be entitled, without loss of pay, to absent himself
voluntarily from the performance of his employment under this Agreement, all
such voluntary absences to count as vacation time; provided that:
(a) The Employee shall be entitled to any annual vacation in
accordance with the policies as periodically established by the Board of
Directors of the Association and the Holding Company for senior management
officials of the Association and the Holding Company.
(b) The timing of vacations shall be scheduled in a reasonable
manner by the Employee. The Employee shall not be entitled to receive any
additional compensation from the Association or the Holding Company on account
of his failure to take a vacation; nor shall he be entitled to accumulate
unused vacation from one fiscal year to the next except to the extent
authorized by the Board of Directors of the Association and the Holding
Company for senior management officials of the Association and the Holding
Company, respectively.
(c) In addition to the aforesaid paid vacations, the Employee
shall be entitled without loss of pay, to absent himself voluntarily from the
performance of his employment with the Association and the Holding Company for
such additional period of time and for such valid and legitimate reasons as
the Board of Directors of the Association and the Holding Company in their
discretion may determine. Further, the Board of Directors of the Association
and the Holding Company shall be entitled to grant to the Employee a leave or
leaves of absence with or without pay at such time or times and upon such
terms and conditions as such Boards in their discretion may determine.
(d) In addition, the Employee shall be entitled to an annual
sick leave as established by the Board of Directors of the Association and the
Holding Company for senior management officials of the Association and the
Holding Company, respectively. In the event any sick leave time shall not
have been used during any year, such leave shall accrue to subsequent years
only to the extent authorized by the Board of Directors of the Association and
the Holding Company. Upon termination of his employment, the Employee shall
not be entitled to receive any additional compensation from the Association or
the Holding Company for unused sick leave.
9. Termination and Termination Pay.
This Agreement shall be terminated upon the following occurrences:
(a) The death of the Employee during the term of this Agreement,
in which event the Employee's estate shall be entitled to receive the
compensation due the Employee through the last day of the calendar month in
which his death shall have occurred.
-Page 46-
(b) This Agreement may be terminated at any time by a decision
of the Board of Directors of the Association or the Holding Company for
conduct not constituting termination for "Just Cause," or by the Employee upon
sixty (60) days written notice to the Association or the Holding Company, as
the case may be. In the event this Agreement is terminated by the Board of
Directors of the Association or the Holding Company without Just Cause, the
Association and the Holding Company shall be obligated to continue to pay the
Employee a severance payment equal to the remaining amount due under this
Agreement. In the event this Agreement is terminated by the Employee, the
compensation and benefits will be terminated upon the effective date of the
employment termination or as may otherwise be determined by the Board of
Directors of the Association and the Holding Company.
(c) The Association and the Holding Company reserve the right to
terminate this Agreement at any time for Just Cause. Termination for "Just
Cause" shall mean termination for personal dishonesty, incompetence, willful
misconduct, breach of a fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than a law, rule or regulation relating to a traffic
violation or similar offense), final cease-and-desist order, termination under
the provisions of subparagraphs (d) and (e) below, or material breach of any
provision of this Agreement. If this Agreement is terminated for Just Cause,
the Association and the Holding Company shall only be obligated to continue to
pay the Employee his salary up to the date of termination.
(d) (i) If the Employee is suspended and/or temporarily
prohibited from participating in the conduct of the Association's
affairs by a notice served under Section 8(e)(3) or (g)(1) of the
Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1818(e)(3) and
(g)(1)), the Association's obligations under the Agreement shall be
suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the
Association may in its discretion (a) pay the Employee all or part of
the compensation withheld while its contract obligations were suspended
and (b) reinstate (in whole or in part) any of its obligations that were
suspended.
(ii) If the Employee is removed and/or permanently
prohibited from participating in the conduct of the Association's
affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA
(12 U.S.C. 1818(e)(4) or (g)(1)), all obligations of the Association
under the Agreement shall terminate as of the effective date of the
order, but vested rights of the contracting parties shall not be
affected.
(e) If the Association is in default (as defined in Section
3(x)(1) of the FDIA), all obligations under this Agreement shall terminate as
of the date of default, but this paragraph shall not affect any vested rights
of the parties hereto.
(f) All obligations under this Agreement may be terminated,
except to the extent determined that continuation of the Agreement is
necessary for the continued operations of the Association (i) by the Director
of the Office of Thrift Supervision (the "Director") or his or her designee at
the time the Federal Deposit Insurance Corporation or the Resolution Trust
Corporation enters into an agreement to provide assistance to or on behalf of
the Association under the authority contained in Section 13(c) of the FDIA or
(ii) by the Director, or his or her designee at the time the Director or such
designee approves a supervisory merger to resolve problems related to
-Page 47-
operation of the Association or when the Association is determined by the
Director to be in an unsafe or unsound condition. Any rights of the parties
that have already vested, however, shall not be affected by such action.
(g) If, at any time after the date hereof a "Change of Control"
(as hereinafter defined) occurs and within one year thereafter (i) the Holding
Company or the Association, or their successors or assigns, terminate the
Employee's employment for any reason other than for Just Cause (as defined in
Paragraph 9(c)), or (ii) the Employee terminates his employment for good
reason (as defined in Paragraph 9(h)), then the Association and the Holding
Company shall pay to the Employee the following:
(i) The Association shall promptly pay to the Employee an
amount equal to the product of 2.99 times the Employee's "Base Amount"
as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986,
as amended, provided, however, that in no event shall said sum be paid
to the extent that payments under this paragraph would cause the
Association to fail to meet its minimum capital requirements as
established by the Office of Thrift Supervision. Any payments made to
the Employee pursuant to this Agreement, or otherwise, are subject to
and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and
any regulation promulgated thereunder.
(ii) During the period of 24 calendar months beginning with
the event of termination, the Employee, his dependents, beneficiaries
and estate shall continue to be covered under all employee benefit plans
of the Association and the Holding Company, including, but not limited
to, any pension or retirement plan, stock incentive plan, life insurance
and health insurance as if the Employee was still employed during such
period under this Agreement.
(iii) If and to the extent that benefits or service credit
for benefits provided by paragraph 9(g)(ii) shall not be payable or
provided under any such plans covered by paragraph 9(g)(ii) by reason of
his no longer being an employee of the Association or the Holding
Company as a result of termination of employment, the Association and
the Holding Company shall themselves pay or provide for payment of such
benefits and service credit for benefits to the Employee, his
dependents, beneficiaries or estate. Any such payment relating to
retirement shall commence on a date selected by the Employee which must
be a date on which payments under the Association's or the Holding
Company's qualified pension plan or successor plan may commence.
(iv) (a) Anything in this Agreement to the contrary
notwithstanding, it is the intention of the Association, the
Holding Company and the Employee that no portion of any payment
under this Agreement, or payments to or for the benefit of the
Employee under any other agreement or plan, be deemed to be an
"Excess Parachute Payment" as defined in Section 280G of the Code,
or its successors. It is agreed that the present value of and
payments to or for the benefit of the Employee in the nature of
compensation, receipt of which is contingent on occurrence of a
Change of Control, and to which Section 280G of the Code applies
(in the aggregate "Total Payments") shall not exceed an amount
equal to one dollar less than the maximum amount that the
Association and Holding Company may pay without loss of deduction
under Section 280G(a) of the Code. Present value for purposes of
this Agreement shall be calculated in accordance with Section
280G(d)(4) of the Code. Within sixty (60) days following the
-Page 48-
earlier of (i) the giving of the notice of termination of
employment or (ii) the giving of notice by the Association or the
Holding Company to the Employee of its belief that there is a
payment or benefit due the Employee which will result in an excess
parachute payment as defined in Section 280G of the Code, the
Employee, the Association and the Holding Company, at the
Association's or Holding Company's expense, shall obtain the
opinion of the Association's and the Holding Company's public
accounting firm (the "Accounting Firm"), which opinion need not be
unqualified, which sets forth: (i) the amount of the Base Period
Income of the Employee (as defined in Code Section 280G), (ii) the
present value of Total Payments and (iii) the amount and present
value of any excess parachute payments. In the event that such
opinion determines that there would be an excess parachute
payment, the payment hereunder shall be modified, reduced or
eliminated as specified by the Employee in writing delivered to
the Association or Holding Company within thirty (30) days of his
receipt of such opinion or, if the Employee fails to so notify the
Association or Holding Company, then as the Association or Holding
shall reasonably determine, so that under the bases of calculation
set forth in such opinion there will be no excess parachute
payment. In the event that the provisions of Sections 280G and
4999 of the Code are repealed without succession, this Section
shall be of no further force or effect.
(b) In the event that the Accounting Firm is serving
as accountant or auditor for the individual, entity or group
effecting the Change of Control, the Employee shall appoint
another nationally recognized public accounting firm to make the
determinations required hereunder (which accounting firm shall
then be referred to as the Accounting Firm under this Section
9(g)(iv)). All fees and expenses of the Accounting Firm shall be
borne solely by the Association or Holding Company. Any
determination by the Accounting Firm shall be binding upon the
Association, the Holding Company and the Employee.
(v) The Association and the Holding Company shall pay all
legal fees and expenses which the Employee may incur as a result of the
Association's or the Holding Company's contesting the validity or
enforceability of this Agreement, provided that the Employee is the
prevailing party in such contest or that any dispute may otherwise be
settled in favor of the Employee. The Employee shall be entitled to
receive interest thereon for the period of any delay in payment from the
date such payment was due at the rate determined by adding two hundred
basis points to the six month Treasury Bill rate.
(vi) The Employee shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other
employment or otherwise nor shall any amounts received from other
employment or otherwise by the Employee offset in any manner the
obligations of the Association or the Holding Company hereunder.
(h) For purposes of this Agreement, "good reason" shall exist
if, without the Employee's express written consent, (i) the Employee is
assigned new duties involving a material amount of the Employee's time that
are not of an executive or supervisory nature or do not involve the level of
responsibility generally comparable to responsibilities of the Employee's
duties prior to the Change of Control; (ii) the Employee's duties and
responsibilities are substantially reduced from those of the Employee's
-Page 49-
present position, excluding reductions that are a normal consequence of the
Holding Company ceasing to be widely or publicly owned; (iii) there occurs any
material reduction in the Employee's aggregate compensation, incentive and
benefit package in effect at the time of the Change of Control, excluding (in
the case of an incentive or benefit package whose benefits are proportionate
to the performance of the Employee, the Association or the Holding Company)
reductions in benefits resulting from diminished performance of the Employee,
the Association or the Holding Company; or (iv) the Employee is an officer of
the Association or the Holding Company at the time of the Change of Control
and thereafter the Holding Company shall require the Employee to perform
services outside of a forty-mile radius of the Association's offices at which
the Employee is currently based except for travel on the Association's or the
Holding Company's business that the Association or the Holding Company
reasonably requires.
10. Change of Control. Paragraph 9(g) shall become operative
upon the occurrence of a "Change of Control" of the Holding Company (or the
Association). A "Change of Control" shall be deemed to have occurred if at
any time during the period of employment of the Employee set forth in
paragraph 5 of this Agreement:
(i) Any person becomes the beneficial owner, directly or
indirectly, of 25% or more of the outstanding shares of any class of
voting stock issued by the Holding Company; or any person (other than
the Holding Company) becomes the beneficial owner, directly or
indirectly, of 25% or more of the outstanding shares of any class of
voting stock issued by the Association;
(ii) Any person becomes the beneficial owner, directly or
indirectly, of 10% or more, but less than 25%, of the outstanding shares
of any class of voting stock issued by the Holding Company, if such
beneficial ownership constitutes or will constitute control of the
Holding Company for regulatory purposes; or any person (other than the
Holding Company) becomes the beneficial owner, directly or indirectly,
of 10% or more, but less than 25%, of the outstanding shares of any
class of voting stock issued by the Association, if such beneficial
ownership constitutes or will constitute control of the Association for
regulatory purposes;
(iii) Any person (other than the persons named as proxies
solicited on behalf of the Board of Directors of the Holding Company)
holds revocable or irrevocable proxies as to the election or removal of
a majority or more of the directors of the Holding Company, or for 25%
or more of the total number of voting shares of the Holding Company;
(iv) The OTS or other appropriate regulatory authority has
given the required approval of non-objection to the acquisition of
control of the Holding Company by any person; or the OTS or other
appropriate regulatory authority has given the required approval of non-
objection to the acquisition of control of the Association by any person
(other than the Holding Company);
(v) During any period of 24 consecutive months,
individuals who at the beginning of such period constitute the
Association's and the Holding Company's Board of Directors cease for any
reason to constitute at least a majority of the Board of the Association
or the Holding Company, as the case may be, unless the election of each
director who was not a director at the beginning of such period has been
approved in advance by directors of the Association or the Holding
-Page 50-
Company, as the case may be, representing at least two-thirds of the
directors then in office who were directors at the beginning of the
period; or
(vi) Any person acquires substantially all of the assets
and assumes substantially all of the liabilities of the Company or First
Federal.
A person shall be deemed a beneficial owner as that term is used
in Section 13(d)(3) under the Securities Exchange Act of 1934, as amended (as
in effect on the date hereof). No "Change of Control" shall be deemed to have
taken place solely by reason of the Holding Company owning stock in its
wholly-owned subsidiaries.
11. Expenses to Enforce Agreement. In the event any dispute shall
arise between the Employee and the Association or the Holding Company as to
the terms or interpretation of this Agreement, whether instituted by formal
legal proceedings or arbitration proceedings, including any action taken by
Employee in defending against any action taken by the Association or the
Holding Company, the prevailing party shall be reimbursed for all costs and
expenses, including reasonable attorney's fees, arising from such dispute,
proceedings or actions. Such reimbursement shall be paid within 10 days of
the furnishing to the non-prevailing party of written evidence, which may be
in the form of a canceled check or receipt, among other things, of any costs
or expenses incurred by the prevailing party. Any such request for
reimbursement shall be made no more frequently than at 60-day intervals.
12. Successor and Assigns.
(a) This Agreement shall inure to the benefit of and be binding
upon any corporate or other successor of the Association or the Holding
Company which shall acquire, directly or indirectly, by merger, consolidation,
purchase or otherwise, all or substantially all of the assets of the
Association or the Holding Company.
(b) Since the Association is contracting for the unique and
personal skills of the Employee, the Employee shall be precluded from
assigning or delegating his rights or duties hereunder without first obtaining
the written consent of the Association and the Holding Company.
13. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by the parties hereto, except as herein
otherwise provided.
14. Applicable Law. This Agreement shall be governed in all respects
whether as to validity, construction, capacity, performance or otherwise, by
the laws of Illinois, except to the extent that Federal law shall be deemed to
apply. This Agreement is intended to comply with the requirements of 12
C.F.R. 563.39 and to the extent it conflicts with the provisions of that
Section, 563.39 shall control.
15. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
-Page 51-
IN WITNESS HEREOF, the parties have executed this Agreement on the day
and year first hereinabove written.
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF BLOOMINGTON
By: /s/ Gerald A. Bradley
EAGLE BANCGROUP, INC.
By: /s/ Gerald A. Bradley
ATTEST:
/s/ Louis F. Ulbrich
WITNESS:
/s/ Larry C. McClellan
/s/ Donald L. Fernandes
Employee
-Page 52-
EMPLOYMENT SECURITY AGREEMENT
Dear Mr. McClellan:
The Board of Directors of Eagle BancGroup, Inc. (the "Company"
which reference, for purposes hereof, shall include subsidiaries of the
Company) has determined that it is advisable and in the best interests of the
Company and its stockholders to provide reasonable assurance to certain key
employees of the Company with respect to appropriate severance arrangements in
the event of a change of control of the Company. By this Agreement, the
Company is seeking to gain the benefit of your future services and avoid undue
concern about changes of control of the Company.
The following is offered as an inducement to you to remain in the
employ of the Company and to dedicate your efforts to its best interests:
SECTION 1. Subject to Section 3(c) below, payments and benefits herein
provided to be paid to you by the Company will be made without regard to and
in addition to any other payments or benefits required to be paid to you at
any time hereafter under the terms of any other agreement (if any) between you
and the Company and under any other policy of the Company relating to
compensation, severance pay or retirement or other benefits; in other words,
the payments and benefits provided herein shall be in addition to and not in
lieu of salary, consulting payments, bonus payments, incentive compensation,
retirement benefits or any other payments or benefits. No payments or
benefits provided to you hereunder shall be reduced by any amount you may earn
or receive from employment with the Company, with another employer, or from
any other source.
SECTION 2. You agree that without the consent of the Company you will
not terminate your employment without giving at least two weeks' prior notice
to the Company, which may become effective earlier than two weeks at the
discretion of the Board of Directors of the Company.
SECTION 3. If at any time after the date hereof a Change of Control (as
hereinafter defined) occurs and within one year thereafter (i) the Company
involuntarily terminates your employment for any reason other than for good
cause (as hereinafter defined), disability, death or retirement pursuant to
any retirement plan or policy of the Company of general application to key
employees, or (ii) you terminate your employment for good reason (as
hereinafter defined), then:
(a) The Company will pay to you in an immediate lump-sum cash
payment an amount equal to the product of 1.0 times your "Base Amount"
as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986,
as amended. Any payments made to you pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12
U.S.C. 1828(k) and any regulations promulgated thereunder.
(b) Medical, life and long-term disability insurance coverage
provided to you and your family by the Company, if any, shall be
continued by the Company at no cost to you as if you continued to be an
employee until the first to occur of the following events: (i) you waive
coverage by giving written notice of waiver to the Company; (ii) 12
months elapse from the effective date of your termination; or (iii) you
become a participant in group insurance benefit programs of a new
employer which does not contain any exclusion or limitation for you or
your dependents with respect to any preexisting condition. If coverage
is not permitted under applicable policy terms, the Company will provide
equivalent benefits (i.e., by reimbursing you for the full cost of COBRA
premiums). Upon termination of this benefit in accordance with the
terms hereof, you shall be entitled to exercise the policy options
normally available to employees upon termination of their employment.
(c) (i) Anything in this Agreement to the contrary
-Page 53-
notwithstanding, it is the intention of the Company and you that
no portion of any payment under this Agreement, or payments to you
or for your benefit under any other agreement or plan, be deemed
to be an "Excess Parachute Payment" as defined in Section 280G of
the Code, or its successors. It is agreed that the present value
of and payments to you or for your benefit in the nature of
compensation, receipt of which is contingent on occurrence of a
Change of Control, and to which Section 280G of the Code applies
(in the aggregate "Total Payments") shall not exceed an amount
equal to one dollar less than the maximum amount that the Company
may pay without loss of deduction under Section 280G(a) of the
Code. Present value for purposes of this Agreement shall be
calculated in accordance with Section 280G(d)(4) of the Code.
Within sixty (60) days following the earlier of (i) the giving of
the notice of termination of employment or (ii) the giving of
notice by the Company to you of its belief that there is a payment
or benefit due you which will result in an excess parachute
payment as defined in Section 280G of the Code, you and the
Company, at the Company's expense, shall obtain the opinion of the
Company's public accounting firm (the "Accounting Firm"), which
opinion need not be unqualified, which sets forth: (i) the amount
of your Base Period Income (as defined in Code Section 280G), (ii)
the present value of Total Payments and (iii) the amount and
present value of any excess parachute payments. In the event that
such opinion determines that there would be an excess parachute
payment, the payment hereunder shall be modified, reduced or
eliminated as specified by you in writing delivered to the Company
within thirty (30) days of your receipt of such opinion or, if you
fail to so notify the Company, then as the Company shall
reasonably determine, so that under the bases of calculation set
forth in such opinion there will be no excess parachute payment.
In the event that the provisions of Sections 280G and 4999 of the
Code are repealed without succession, this Section shall be of no
further force or effect.
(ii) In the event that the Accounting Firm is serving as
accountant or auditor for the individual, entity or group
effecting the Change of Control, you shall appoint another
nationally recognized public accounting firm to make the
determinations required hereunder (which accounting firm shall
then be referred to as the Accounting Firm under this Section
3(c)(i)). All fees and expenses of the Accounting Firm shall be
borne solely by the Company. Any determination by the Accounting
Firm shall be binding upon the Company and you.
(d) It is understood that as a part or as a result of a Change
of Control, business operations of the Company may be transferred to
parties that are not affiliates of the Company that may continue your
employment as a successor employer and, in such event, your employment
shall not be deemed to have been terminated by the Company and, instead,
"employment by the Company" as used in this Section 3 shall be deemed to
include employment by successor employers. The obligation of the
Company hereunder to provide payments or benefits to you as set forth
herein shall continue in effect and apply to any subsequent termination
of your employment by a successor employer.
SECTION 4. For purposes of this Agreement, "Change of Control" shall be
deemed to have taken place if, subsequent to the date hereof,
(i) Any person becomes the beneficial owner, directly or
indirectly, of 25% or more of the outstanding shares of any class
of voting stock issued by the Company; or any person (other than
the Company) becomes the beneficial owner, directly or indirectly,
-Page 54-
of 25% or more of the outstanding shares of any class of voting
stock issued by First Federal Savings and Loan Association of
Bloomington, the Company's wholly-owned subsidiary (the
"Association");
(ii) Any person becomes the beneficial owner, directly or
indirectly, of 10% or more, but less than 25%, of the outstanding
shares of any class of voting stock issued by the Company, if such
beneficial ownership constitutes or will constitute control of the
Company for regulatory purposes; or any person (other than the
Company) becomes the beneficial owner, directly or indirectly, of
10% or more, but less than 25%, of the outstanding shares of any
class of voting stock issued by the Association, if such
beneficial ownership constitutes or will constitute control of the
Association for regulatory purposes;
(iii) Any person (other than the persons named as proxies
solicited on behalf of the Board of Directors of the Company)
holds revocable or irrevocable proxies as to the election or
removal of a majority or more of the directors of the Company, or
for 25% or more of the total number of voting shares of the
Company;
(iv) The Office of Thrift Supervision ("OTS") or other
appropriate regulatory authority has given the required approval
or non-objection to the acquisition of control of the Company by
any person; or the OTS or other appropriate regulatory authority
has given the required approval of non-objection to the
acquisition of control of the Association by any person (other
than the Company);
(v) During any period of 24 consecutive months,
individuals who at the beginning of such period constitute the
Association's and the Company's Board of Directors cease for any
reason to constitute at least a majority of the Board of the
Association or the Company, as the case may be, unless the
election of each director who was not a director at the beginning
of such period has been approved in advance by directors of the
Association or the Holding Company, as the case may be,
representing at least two-thirds of the directors then in office
who were directors at the beginning of the period; or
(vi) Any person acquires substantially all of the assets
and assumes substantially all of the liabilities of the Company or
First Federal.
A person shall be deemed a beneficial owner as that term is used
in Section 13(d)(3) under the Securities Exchange Act of 1934, as amended (as
in effect on the date hereof). No "Change of Control" shall be deemed to have
taken place solely by reason of the Company owning stock in wholly-owned
subsidiaries.
SECTION 5. For purposes of this Agreement, "good cause" shall mean your
personal dishonesty, incompetence, willful misconduct, breach of a fiduciary
duty involving personal profit, intentional failure to perform your stated
duties, willful violation of any law, rule or regulation (other than a law,
rule or regulation relating to a traffic violation or similar offense), final
cease-and-desist order, or material breach of any provision of this Agreement.
For purposes of this Agreement, "good reason" shall exist if,
without your express written consent, (i) you are assigned new duties
involving a material amount of your time that are not of an executive or
supervisory nature or do not involve the level of responsibility generally
comparable to your responsibilities and duties prior to the Change of Control;
(ii) your duties and responsibilities are substantially reduced from your
present position, excluding reductions that are a normal consequence of the
Company ceasing to be widely or publicly owned; (iii) there occurs any
-Page 60-
material reduction in your aggregate compensation, incentive and benefit
package in effect at the time of the Change of Control, excluding (in the case
of an incentive or benefit package whose benefits are proportionate to your
performance or the performance of the Association or the Company) reductions
in benefits resulting from your diminished performance, or the diminished
performance of the Association or the Company; or (iv) you are an officer of
the Association or the Company at the time of the Change of Control and
thereafter the Company shall require you to perform services outside of a
forty-mile radius of the Association's offices at which you are currently
based except for travel on the Association's or the Company's business that
the Association or the Company reasonably requires.
SECTION 6. Any payment not made when due in accordance with this
Agreement shall thereafter bear interest at the prime rate from time to time
as reported in The Wall Street Journal.
SECTION 7. This Agreement may not be assigned by the Company except in
connection with a merger involving the Company or a sale of substantially all
of its assets, and the obligations of the Company provided for in this
Agreement shall be the binding legal obligations of any successor to the
Company by purchase, merger, consolidation, or otherwise. This Agreement may
not be assigned by you during your life, and upon your death will be binding
upon and inure to the benefit of your heirs, legatees and the legal
representatives of your estate.
SECTION 8. No provisions of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in a
writing signed by you, approved by the Board of Directors and signed by an
appropriate officer of the Company empowered to sign the same by the Board of
Directors of the Company. No waiver by either party at any time of any breach
by the other party of, or compliance with, any condition or provision of this
Agreement to be performed by the other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same time or at any
prior to or subsequent time. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Illinois. The invalidity or unenforceability of any provision of this
Agreement shall not effect the validity or enforceability of any other
provision of this Agreement.
SECTION 9. This Agreement does not constitute a contract for the
continued employment of you by the Company. Subject only to those rights of
yours that are specified herein following a Change of Control, the Company
reserves all of its rights to modify your compensation and other terms of your
employment and to terminate your employment to the same extent as before the
execution of this Agreement.
SECTION 10. The Company shall pay your out-of-pocket expenses, including
attorney's fees, in connection with any judicial proceeding to enforce this
Agreement or to construe or determine the validity of this Agreement or
otherwise in connection herewith unless the Company prevails in such
litigation.
SECTION 11. The initial term of this Agreement shall be for a 36 month
period commencing June 29, 1996 and ending June 28, 1999. The said 36-month
term may be extended for an additional 12 full calendar months by action of
the Board of Directors sixty (60) days prior to June 28, 1997, and on sixty
(60) days prior to each succeeding June 28 thereafter, respectively.
Very truly yours,
By: /s/ Donald L. Fernandes
Title: President
Accepted and agreed to this 1st
day of July, 1996.
/s/ Larry C. McClellan
-Page 56-
EMPLOYMENT SECURITY AGREEMENT
Dear Ms. Donovan:
The Board of Directors of Eagle BancGroup, Inc. (the "Company"
which reference, for purposes hereof, shall include subsidiaries of the
Company) has determined that it is advisable and in the best interests of the
Company and its stockholders to provide reasonable assurance to certain key
employees of the Company with respect to appropriate severance arrangements in
the event of a change of control of the Company. By this Agreement, the
Company is seeking to gain the benefit of your future services and avoid undue
concern about changes of control of the Company.
The following is offered as an inducement to you to remain in the
employ of the Company and to dedicate your efforts to its best interests:
SECTION 1. Subject to Section 3(c) below, payments and benefits herein
provided to be paid to you by the Company will be made without regard to and
in addition to any other payments or benefits required to be paid to you at
any time hereafter under the terms of any other agreement (if any) between you
and the Company and under any other policy of the Company relating to
compensation, severance pay or retirement or other benefits; in other words,
the payments and benefits provided herein shall be in addition to and not in
lieu of salary, consulting payments, bonus payments, incentive compensation,
retirement benefits or any other payments or benefits. No payments or
benefits provided to you hereunder shall be reduced by any amount you may earn
or receive from employment with the Company, with another employer, or from
any other source.
SECTION 2. You agree that without the consent of the Company you will
not terminate your employment without giving at least two weeks' prior notice
to the Company, which may become effective earlier than two weeks at the
discretion of the Board of Directors of the Company.
SECTION 3. If at any time after the date hereof a Change of Control (as
hereinafter defined) occurs and within one year thereafter (i) the Company
involuntarily terminates your employment for any reason other than for good
cause (as hereinafter defined), disability, death or retirement pursuant to
any retirement plan or policy of the Company of general application to key
employees, or (ii) you terminate your employment for good reason (as
hereinafter defined), then:
(a) The Company will pay to you in an immediate lump-sum cash
payment an amount equal to the product of 1.0 times your "Base Amount"
as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986,
as amended. Any payments made to you pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12
U.S.C. 1828(k) and any regulations promulgated thereunder.
(b) Medical, life and long-term disability insurance coverage
provided to you and your family by the Company, if any, shall be
continued by the Company at no cost to you as if you continued to be an
employee until the first to occur of the following events: (i) you waive
coverage by giving written notice of waiver to the Company; (ii) 12
months elapse from the effective date of your termination; or (iii) you
become a participant in group insurance benefit programs of a new
employer which does not contain any exclusion or limitation for you or
your dependents with respect to any preexisting condition. If coverage
is not permitted under applicable policy terms, the Company will provide
equivalent benefits (i.e., by reimbursing you for the full cost of COBRA
premiums). Upon termination of this benefit in accordance with the
terms hereof, you shall be entitled to exercise the policy options
normally available to employees upon termination of their employment.
(c) (i) Anything in this Agreement to the contrary
-Page 57-
notwithstanding, it is the intention of the Company and you that
no portion of any payment under this Agreement, or payments to you
or for your benefit under any other agreement or plan, be deemed
to be an "Excess Parachute Payment" as defined in Section 280G of
the Code, or its successors. It is agreed that the present value
of and payments to you or for your benefit in the nature of
compensation, receipt of which is contingent on occurrence of a
Change of Control, and to which Section 280G of the Code applies
(in the aggregate "Total Payments") shall not exceed an amount
equal to one dollar less than the maximum amount that the Company
may pay without loss of deduction under Section 280G(a) of the
Code. Present value for purposes of this Agreement shall be
calculated in accordance with Section 280G(d)(4) of the Code.
Within sixty (60) days following the earlier of (i) the giving of
the notice of termination of employment or (ii) the giving of
notice by the Company to you of its belief that there is a payment
or benefit due you which will result in an excess parachute
payment as defined in Section 280G of the Code, you and the
Company, at the Company's expense, shall obtain the opinion of the
Company's public accounting firm (the "Accounting Firm"), which
opinion need not be unqualified, which sets forth: (i) the amount
of your Base Period Income (as defined in Code Section 280G), (ii)
the present value of Total Payments and (iii) the amount and
present value of any excess parachute payments. In the event that
such opinion determines that there would be an excess parachute
payment, the payment hereunder shall be modified, reduced or
eliminated as specified by you in writing delivered to the Company
within thirty (30) days of your receipt of such opinion or, if you
fail to so notify the Company, then as the Company shall
reasonably determine, so that under the bases of calculation set
forth in such opinion there will be no excess parachute payment.
In the event that the provisions of Sections 280G and 4999 of the
Code are repealed without succession, this Section shall be of no
further force or effect.
(ii) In the event that the Accounting Firm is serving as
accountant or auditor for the individual, entity or group
effecting the Change of Control, you shall appoint another
nationally recognized public accounting firm to make the
determinations required hereunder (which accounting firm shall
then be referred to as the Accounting Firm under this Section
3(c)(i)). All fees and expenses of the Accounting Firm shall be
borne solely by the Company. Any determination by the Accounting
Firm shall be binding upon the Company and you.
(d) It is understood that as a part or as a result of a Change
of Control, business operations of the Company may be transferred to
parties that are not affiliates of the Company that may continue your
employment as a successor employer and, in such event, your employment
shall not be deemed to have been terminated by the Company and, instead,
"employment by the Company" as used in this Section 3 shall be deemed to
include employment by successor employers. The obligation of the
Company hereunder to provide payments or benefits to you as set forth
herein shall continue in effect and apply to any subsequent termination
of your employment by a successor employer.
SECTION 4. For purposes of this Agreement, "Change of Control" shall be
deemed to have taken place if, subsequent to the date hereof,
(i) Any person becomes the beneficial owner, directly or
indirectly, of 25% or more of the outstanding shares of any class
of voting stock issued by the Company; or any person (other than
-Page 58-
the Company) becomes the beneficial owner, directly or indirectly,
of 25% or more of the outstanding shares of any class of voting
stock issued by First Federal Savings and Loan Association of
Bloomington, the Company's wholly-owned subsidiary (the
"Association");
(ii) Any person becomes the beneficial owner, directly or
indirectly, of 10% or more, but less than 25%, of the outstanding
shares of any class of voting stock issued by the Company, if such
beneficial ownership constitutes or will constitute control of the
Company for regulatory purposes; or any person (other than the
Company) becomes the beneficial owner, directly or indirectly, of
10% or more, but less than 25%, of the outstanding shares of any
class of voting stock issued by the Association, if such
beneficial ownership constitutes or will constitute control of the
Association for regulatory purposes;
(iii) Any person (other than the persons named as proxies
solicited on behalf of the Board of Directors of the Company)
holds revocable or irrevocable proxies as to the election or
removal of a majority or more of the directors of the Company, or
for 25% or more of the total number of voting shares of the
Company;
(iv) The Office of Thrift Supervision ("OTS") or other
appropriate regulatory authority has given the required approval
or non-objection to the acquisition of control of the Company by
any person; or the OTS or other appropriate regulatory authority
has given the required approval of non-objection to the
acquisition of control of the Association by any person (other
than the Company);
(v) During any period of 24 consecutive months,
individuals who at the beginning of such period constitute the
Association's and the Company's Board of Directors cease for any
reason to constitute at least a majority of the Board of the
Association or the Company, as the case may be, unless the
election of each director who was not a director at the beginning
of such period has been approved in advance by directors of the
Association or the Holding Company, as the case may be,
representing at least two-thirds of the directors then in office
who were directors at the beginning of the period; or
(vi) Any person acquires substantially all of the assets
and assumes substantially all of the liabilities of the Company or
First Federal.
A person shall be deemed a beneficial owner as that term is used
in Section 13(d)(3) under the Securities Exchange Act of 1934, as amended (as
in effect on the date hereof). No "Change of Control" shall be deemed to have
taken place solely by reason of the Company owning stock in wholly-owned
subsidiaries.
SECTION 5. For purposes of this Agreement, "good cause" shall mean your
personal dishonesty, incompetence, willful misconduct, breach of a fiduciary
duty involving personal profit, intentional failure to perform your stated
duties, willful violation of any law, rule or regulation (other than a law,
rule or regulation relating to a traffic violation or similar offense), final
cease-and-desist order, or material breach of any provision of this Agreement.
For purposes of this Agreement, "good reason" shall exist if,
without your express written consent, (i) you are assigned new duties
involving a material amount of your time that are not of an executive or
supervisory nature or do not involve the level of responsibility generally
comparable to your responsibilities and duties prior to the Change of Control;
(ii) your duties and responsibilities are substantially reduced from your
-Page 59-
present position, excluding reductions that are a normal consequence of the
Company ceasing to be widely or publicly owned; (iii) there occurs any
material reduction in your aggregate compensation, incentive and benefit
package in effect at the time of the Change of Control, excluding (in the case
of an incentive or benefit package whose benefits are proportionate to your
performance or the performance of the Association or the Company) reductions
in benefits resulting from your diminished performance, or the diminished
performance of the Association or the Company; or (iv) you are an officer of
the Association or the Company at the time of the Change of Control and
thereafter the Company shall require you to perform services outside of a
forty-mile radius of the Association's offices at which you are currently
based except for travel on the Association's or the Company's business that
the Association or the Company reasonably requires.
SECTION 6. Any payment not made when due in accordance with this
Agreement shall thereafter bear interest at the prime rate from time to time
as reported in The Wall Street Journal.
SECTION 7. This Agreement may not be assigned by the Company except in
connection with a merger involving the Company or a sale of substantially all
of its assets, and the obligations of the Company provided for in this
Agreement shall be the binding legal obligations of any successor to the
Company by purchase, merger, consolidation, or otherwise. This Agreement may
not be assigned by you during your life, and upon your death will be binding
upon and inure to the benefit of your heirs, legatees and the legal
representatives of your estate.
SECTION 8. No provisions of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in a
writing signed by you, approved by the Board of Directors and signed by an
appropriate officer of the Company empowered to sign the same by the Board of
Directors of the Company. No waiver by either party at any time of any breach
by the other party of, or compliance with, any condition or provision of this
Agreement to be performed by the other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same time or at any
prior to or subsequent time. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Illinois. The invalidity or unenforceability of any provision of this
Agreement shall not effect the validity or enforceability of any other
provision of this Agreement.
SECTION 9. This Agreement does not constitute a contract for the
continued employment of you by the Company. Subject only to those rights of
yours that are specified herein following a Change of Control, the Company
reserves all of its rights to modify your compensation and other terms of your
employment and to terminate your employment to the same extent as before the
execution of this Agreement.
SECTION 10. The Company shall pay your out-of-pocket expenses, including
attorney's fees, in connection with any judicial proceeding to enforce this
Agreement or to construe or determine the validity of this Agreement or
otherwise in connection herewith unless the Company prevails in such
litigation.
SECTION 11. The initial term of this Agreement shall be for a 36 month
period commencing June 29, 1996 and ending June 28, 1999. The said 36-month
term may be extended for an additional 12 full calendar months by action of
the Board of Directors sixty (60) days prior to June 28, 1997, and on sixty
(60) days prior to each succeeding June 28 thereafter, respectively.
-Page 60-
Very truly yours,
By: /s/ Donald L. Fernandes
Title: President
Accepted and agreed to this 5th
day of July, 1996.
/s/ Laurel Beth Donovan
-Page 61-
EMPLOYMENT SECURITY AGREEMENT
Dear Mr. Richardson:
The Board of Directors of Eagle BancGroup, Inc. (the "Company"
which reference, for purposes hereof, shall include subsidiaries of the
Company) has determined that it is advisable and in the best interests of the
Company and its stockholders to provide reasonable assurance to certain key
employees of the Company with respect to appropriate severance arrangements in
the event of a change of control of the Company. By this Agreement, the
Company is seeking to gain the benefit of your future services and avoid undue
concern about changes of control of the Company.
The following is offered as an inducement to you to remain in the
employ of the Company and to dedicate your efforts to its best interests:
SECTION 1. Subject to Section 3(c) below, payments and benefits herein
provided to be paid to you by the Company will be made without regard to and
in addition to any other payments or benefits required to be paid to you at
any time hereafter under the terms of any other agreement (if any) between you
and the Company and under any other policy of the Company relating to
compensation, severance pay or retirement or other benefits; in other words,
the payments and benefits provided herein shall be in addition to and not in
lieu of salary, consulting payments, bonus payments, incentive compensation,
retirement benefits or any other payments or benefits. No payments or
benefits provided to you hereunder shall be reduced by any amount you may earn
or receive from employment with the Company, with another employer, or from
any other source.
SECTION 2. You agree that without the consent of the Company you will
not terminate your employment without giving at least two weeks' prior notice
to the Company, which may become effective earlier than two weeks at the
discretion of the Board of Directors of the Company.
SECTION 3. If at any time after the date hereof a Change of Control (as
hereinafter defined) occurs and within one year thereafter (i) the Company
involuntarily terminates your employment for any reason other than for good
cause (as hereinafter defined), disability, death or retirement pursuant to
any retirement plan or policy of the Company of general application to key
employees, or (ii) you terminate your employment for good reason (as
hereinafter defined), then:
(a) The Company will pay to you in an immediate lump-sum cash
payment an amount equal to the product of 1.0 times your "Base Amount"
as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986,
as amended. Any payments made to you pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12
U.S.C. 1828(k) and any regulations promulgated thereunder.
(b) Medical, life and long-term disability insurance coverage
provided to you and your family by the Company, if any, shall be
continued by the Company at no cost to you as if you continued to be an
employee until the first to occur of the following events: (i) you waive
coverage by giving written notice of waiver to the Company; (ii) 12
months elapse from the effective date of your termination; or (iii) you
become a participant in group insurance benefit programs of a new
employer which does not contain any exclusion or limitation for you or
your dependents with respect to any preexisting condition. If coverage
is not permitted under applicable policy terms, the Company will provide
equivalent benefits (i.e., by reimbursing you for the full cost of COBRA
premiums). Upon termination of this benefit in accordance with the
terms hereof, you shall be entitled to exercise the policy options
normally available to employees upon termination of their employment.
(c) (i) Anything in this Agreement to the contrary
-Page 62-
notwithstanding, it is the intention of the Company and you that
no portion of any payment under this Agreement, or payments to you
or for your benefit under any other agreement or plan, be deemed
to be an "Excess Parachute Payment" as defined in Section 280G of
the Code, or its successors. It is agreed that the present value
of and payments to you or for your benefit in the nature of
compensation, receipt of which is contingent on occurrence of a
Change of Control, and to which Section 280G of the Code applies
(in the aggregate "Total Payments") shall not exceed an amount
equal to one dollar less than the maximum amount that the Company
may pay without loss of deduction under Section 280G(a) of the
Code. Present value for purposes of this Agreement shall be
calculated in accordance with Section 280G(d)(4) of the Code.
Within sixty (60) days following the earlier of (i) the giving of
the notice of termination of employment or (ii) the giving of
notice by the Company to you of its belief that there is a payment
or benefit due you which will result in an excess parachute
payment as defined in Section 280G of the Code, you and the
Company, at the Company's expense, shall obtain the opinion of the
Company's public accounting firm (the "Accounting Firm"), which
opinion need not be unqualified, which sets forth: (i) the amount
of your Base Period Income (as defined in Code Section 280G), (ii)
the present value of Total Payments and (iii) the amount and
present value of any excess parachute payments. In the event that
such opinion determines that there would be an excess parachute
payment, the payment hereunder shall be modified, reduced or
eliminated as specified by you in writing delivered to the Company
within thirty (30) days of your receipt of such opinion or, if you
fail to so notify the Company, then as the Company shall
reasonably determine, so that under the bases of calculation set
forth in such opinion there will be no excess parachute payment.
In the event that the provisions of Sections 280G and 4999 of the
Code are repealed without succession, this Section shall be of no
further force or effect.
(ii) In the event that the Accounting Firm is serving as
accountant or auditor for the individual, entity or group
effecting the Change of Control, you shall appoint another
nationally recognized public accounting firm to make the
determinations required hereunder (which accounting firm shall
then be referred to as the Accounting Firm under this Section
3(c)(i)). All fees and expenses of the Accounting Firm shall be
borne solely by the Company. Any determination by the Accounting
Firm shall be binding upon the Company and you.
(d) It is understood that as a part or as a result of a Change
of Control, business operations of the Company may be transferred to
parties that are not affiliates of the Company that may continue your
employment as a successor employer and, in such event, your employment
shall not be deemed to have been terminated by the Company and, instead,
"employment by the Company" as used in this Section 3 shall be deemed to
include employment by successor employers. The obligation of the
Company hereunder to provide payments or benefits to you as set forth
herein shall continue in effect and apply to any subsequent termination
of your employment by a successor employer.
SECTION 4. For purposes of this Agreement, "Change of Control" shall be
deemed to have taken place if, subsequent to the date hereof,
(i) Any person becomes the beneficial owner, directly or
indirectly, of 25% or more of the outstanding shares of any class
of voting stock issued by the Company; or any person (other than
the Company) becomes the beneficial owner, directly or indirectly,
-Page 63-
of 25% or more of the outstanding shares of any class of voting
stock issued by First Federal Savings and Loan Association of
Bloomington, the Company's wholly-owned subsidiary (the
"Association");
(ii) Any person becomes the beneficial owner, directly or
indirectly, of 10% or more, but less than 25%, of the outstanding
shares of any class of voting stock issued by the Company, if such
beneficial ownership constitutes or will constitute control of the
Company for regulatory purposes; or any person (other than the
Company) becomes the beneficial owner, directly or indirectly, of
10% or more, but less than 25%, of the outstanding shares of any
class of voting stock issued by the Association, if such
beneficial ownership constitutes or will constitute control of the
Association for regulatory purposes;
(iii) Any person (other than the persons named as proxies
solicited on behalf of the Board of Directors of the Company)
holds revocable or irrevocable proxies as to the election or
removal of a majority or more of the directors of the Company, or
for 25% or more of the total number of voting shares of the
Company;
(iv) The Office of Thrift Supervision ("OTS") or other
appropriate regulatory authority has given the required approval
or non-objection to the acquisition of control of the Company by
any person; or the OTS or other appropriate regulatory authority
has given the required approval of non-objection to the
acquisition of control of the Association by any person (other
than the Company);
(v) During any period of 24 consecutive months,
individuals who at the beginning of such period constitute the
Association's and the Company's Board of Directors cease for any
reason to constitute at least a majority of the Board of the
Association or the Company, as the case may be, unless the
election of each director who was not a director at the beginning
of such period has been approved in advance by directors of the
Association or the Holding Company, as the case may be,
representing at least two-thirds of the directors then in office
who were directors at the beginning of the period; or
(vi) Any person acquires substantially all of the assets
and assumes substantially all of the liabilities of the Company or
First Federal.
A person shall be deemed a beneficial owner as that term is used
in Section 13(d)(3) under the Securities Exchange Act of 1934, as amended (as
in effect on the date hereof). No "Change of Control" shall be deemed to have
taken place solely by reason of the Company owning stock in wholly-owned
subsidiaries.
SECTION 5. For purposes of this Agreement, "good cause" shall mean your
personal dishonesty, incompetence, willful misconduct, breach of a fiduciary
duty involving personal profit, intentional failure to perform your stated
duties, willful violation of any law, rule or regulation (other than a law,
rule or regulation relating to a traffic violation or similar offense), final
cease-and-desist order, or material breach of any provision of this Agreement.
For purposes of this Agreement, "good reason" shall exist if,
without your express written consent, (i) you are assigned new duties
involving a material amount of your time that are not of an executive or
supervisory nature or do not involve the level of responsibility generally
comparable to your responsibilities and duties prior to the Change of Control;
(ii) your duties and responsibilities are substantially reduced from your
present position, excluding reductions that are a normal consequence of the
-Page 64-
Company ceasing to be widely or publicly owned; (iii) there occurs any
material reduction in your aggregate compensation, incentive and benefit
package in effect at the time of the Change of Control, excluding (in the case
of an incentive or benefit package whose benefits are proportionate to your
performance or the performance of the Association or the Company) reductions
in benefits resulting from your diminished performance, or the diminished
performance of the Association or the Company; or (iv) you are an officer of
the Association or the Company at the time of the Change of Control and
thereafter the Company shall require you to perform services outside of a
forty-mile radius of the Association's offices at which you are currently
based except for travel on the Association's or the Company's business that
the Association or the Company reasonably requires.
SECTION 6. Any payment not made when due in accordance with this
Agreement shall thereafter bear interest at the prime rate from time to time
as reported in The Wall Street Journal.
SECTION 7. This Agreement may not be assigned by the Company except in
connection with a merger involving the Company or a sale of substantially all
of its assets, and the obligations of the Company provided for in this
Agreement shall be the binding legal obligations of any successor to the
Company by purchase, merger, consolidation, or otherwise. This Agreement may
not be assigned by you during your life, and upon your death will be binding
upon and inure to the benefit of your heirs, legatees and the legal
representatives of your estate.
SECTION 8. No provisions of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in a
writing signed by you, approved by the Board of Directors and signed by an
appropriate officer of the Company empowered to sign the same by the Board of
Directors of the Company. No waiver by either party at any time of any breach
by the other party of, or compliance with, any condition or provision of this
Agreement to be performed by the other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same time or at any
prior to or subsequent time. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Illinois. The invalidity or unenforceability of any provision of this
Agreement shall not effect the validity or enforceability of any other
provision of this Agreement.
SECTION 9. This Agreement does not constitute a contract for the
continued employment of you by the Company. Subject only to those rights of
yours that are specified herein following a Change of Control, the Company
reserves all of its rights to modify your compensation and other terms of your
employment and to terminate your employment to the same extent as before the
execution of this Agreement.
SECTION 10. The Company shall pay your out-of-pocket expenses, including
attorney's fees, in connection with any judicial proceeding to enforce this
Agreement or to construe or determine the validity of this Agreement or
otherwise in connection herewith unless the Company prevails in such
litigation.
SECTION 11. The initial term of this Agreement shall be for a 36 month
period commencing June 29, 1996 and ending June 28, 1999. The said 36-month
term may be extended for an additional 12 full calendar months by action of
the Board of Directors sixty (60) days prior to June 28, 1997, and on sixty
(60) days prior to each succeeding June 28 thereafter, respectively.
-Page 65-
Very truly yours,
By: /s/ Donald L. Fernandes
Title: President
Accepted and agreed to this 8th
day of July, 1996.
/s/ Gary L. Richardson
-Page 66-
1996 Annual Report
Eagle BancGroup, Inc.
Holding Company for First Federal Savings and Loan Association
Bloomington, IL
(front cover)
<TABLE>
Table of Contents
<S> <C>
Financial Highlights 1
Management's Discussion and Analysis 2
Report of Independent Auditors 8
Consolidated Statements of Condition 9
Consolidated Statements of Income 10
Consolidated Statements of Cash Flow 11
Consolidated Statements of Changes in Stockholders' Equity 12
Notes to Consolidated Financial Statements 12
Other Corporate Information 29
</TABLE>
To Our Stockholders:
It is truly an honor to present to our stockholders this 1996 Annual Report,
as it is our first annual report as a public company. In the seventy-seven
year history of our subsidiary, First Federal Savings and Loan, many changes
have occurred, but in no one year have the changes been more numerous and more
dramatic than in 1996. Besides converting from a mutual savings and loan
association and the creation of the new holding company, we also saw the
entire industry recapitalize the federal deposit insurance fund through
legislation that most likely will ultimely result in the modernization of
banking charters. The impact of these events perhaps cannot be fully
appreciated at this time, but it is certain that 1996 will be remembered as
the year in which our Company and the entire industry established the
framework for many years of prosperity and growth in the future.
We have made many changes in the past year, all with the intent of better
serving our customers, improving the performance of the Company and enhancing
the long-term investment value for our stockholders. We appreciate the
support we have received from our customers, employees and stockholders and we
look forward to an exciting and challenging year in 1997.
Sincerely,
/S/ Donald L. Fernandes /S/ Gerald A. Bradley
Donald L. Fernandes Gerald A. Bradley
President and Chief Executive Officer Chairman of the Board
(inside front cover)
-Page 67-
<TABLE>
Eagle BancGroup, Inc.
Financial Highlights
<CAPTION>
At and For the Year Ended December 31,
1996 1995 1994 1993 1992
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data
Total assets 172,666 150,974 140,932 137,368 142,940
Cash on hand and in
other institutions 1,487 1,072 1,092 938 485
Federal funds sold and
overnight deposits 5,573 2,828 1,611 8,882 10,376
Investments 53,883 53,186 42,680 50,468 30,508
Loans receivable, net 106,641 88,786 83,589 67,939 93,228
Deposits 133,995 138,396 122,388 125,156 132,265
FHLB advances and other
borrowings 15,300 - 7,936 - -
Total equity 22,141 11,515 9,501 11,320 10,190
Selected Operating Data
Interest income 11,094 9,933 8,595 8,913 11,219
Interest expense 7,703 7,376 5,396 5,838 7,778
Net interest income before
provision for loan losses 3,391 2,557 3,199 3,075 3,441
Provision for loan losses 183 100 (32) (3) -
Net interest income after
provision for loan losses 3,208 2,457 3,231 3,078 3,441
Non-interest income 418 395 261 1,206 105
Non-interest expense 4,373 2,955 2,840 2,584 2,426
Income (loss) before
federal income taxes (747) (103) 652 1,700 1,120
Federal income tax
(benefit) expense (258) (30) 222 570 345
Net income (loss) (489) (73) 430 1,130 775
Selected Financial Ratios and Other Data
Performance Ratios (based on balance sheet averages) <F1>
Return on assets -0.31% -0.05% 0.31% 0.81% 0.53%
Return on equity -2.85 -0.68 4.15 10.31 8.48
Interest rate spread
during period <F2> 1.69 1.83 2.54 2.27 2.39
Net interest margin
during period <F3> 2.20 1.85 2.55 2.38 2.47
Non-interest expense
to assets <F4> 2.74 1.98 2.06 1.86 1.64
Non-interest income
to assets 0.26 0.26 0.19 0.87 0.07
Interest-earning assets
to interest-bearing
liabilities 1.10x 1.01x 1.00x 1.02x 1.02x
Asset Quality Ratios
Non-performing loans
to gross loans <F5> 0.66% 0.57% 0.47% 1.19% 0.90%
Non-performing assets
to total assets <F6> 0.79 0.80 4.86 5.56 4.39
Allowance for loan losses
to total loans 0.86 1.01 1.04 1.38 1.01
Allowance for loan losses
to non-performing loans 130.92 176.80 219.35 115.09 111.66
-Page 68-
Net charge-offs to
average gross loans 0.17 0.08 0.05 0.00 0.21
Regulatory Capital and Capital Ratios <F7>
Tangible capital ratio 9.66% 7.73% 8.20% 8.22% 6.51%
Core capital ratio 9.66 7.73 8.20 8.22 6.51
Risk-based capital ratio 18.29 15.78 15.80 17.70 13.60
Average equity to
average assets 10.76 7.21 7.55 7.89 6.19
Equity to assets at
end of period 12.82 7.63 6.74 8.24 7.13
Note: Data prior to 1996 relates to First Federal Savings and Loan only
<FN>
<F1>
With the exception of end of period ratios, all ratios are based on
average month-end balances during the respective periods.
<F2>
Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and weighted average cost of
interest-bearing liabilities.
<F3>
Net interest margin represents net interest income as a percentage of
average interest-earning assets.
<F4>
The 1996 ratio includes the effect of the SAIF special assessment.
<F5>
Non-performing loans consist of non-accrual and accruing loans which are
contractually past due 90 days or more.
<F6>
Non-performing assets consist of non-performing loans and foreclosed real
estate owned. The significant decline in this ratio between the 1994 and 1995
periods occurred as a result of the sale by First Federal of a substantial
real estate owned property during the fourth quarter of 1995.
<F7>
Tangible capital, Core capital and Risk-based capital ratios relate to
First Federal only.
</FN>
</TABLE>
(-Page 1-)
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's discussion and analysis of results of operations and financial
condition is intended to assist in understanding the financial condition,
changes in financial condition and results of operations of Eagle BancGroup,
Inc. This discussion should be read in conjunction with the Consolidated
Financial Statements, accompanying Notes to Consolidated Financial Statements
and other information contained elsewhere in this document.
Eagle BancGroup, Inc. is a non-diversified unitary savings and loan holding
company engaged in the business of managing its investments and directing,
planning and coordinating the business activities of its wholly-owned
subsidiary, First Federal Savings and Loan, a federally chartered savings
association, and First Federal's wholly-owned subsidiary, FFS Investment
Services, Inc., a service corporation that sells investment products
(collectively, 'the Company').
Financial information for periods before 1996 relate to First Federal Savings
and Loan Association only.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
GENERAL. In 1996 the Company had a net loss of $489,000, or $(.38) per share,
compared to a net loss of $73,000 in 1995. The 1996 results include the SAIF
recapitalization special assessment, which, net of tax, reduced earnings
$600,000. Excluding the net effect of the SAIF recapitalization, the Company
had net income in 1996 of $111,000.
-Page 69-
NET INTEREST INCOME. Net interest income increased 32.6% to $3,391,000 in
1996 from $2,557,000 in 1995. Interest income increased 11.7% to $11,094,000
in 1996 from $9,933,000 in 1995 while interest expense increased 4.4% to
$7,703,000 in 1996 from $7,376,000 in 1995. Interest-earning assets increased
in 1996 compared to 1995 resulting in the increase in interest income and in
net interest income. Average interest-earning assets increased to
$154,244,000 in 1996 compared to $138,244,000 in 1995 as the Company realized
net proceeds of $11,186,000 from its subscription stock offering in June, 1996
and over $5,000,000 from the sale in late 1995 of a large commercial property
that was held as real estate owned. These funds were used to originate
residential mortgage and retail automobile loans or were invested in
government and mortgage-backed securities. Comparing 1996 to 1995, average
loans increased to $97,380,000 from $87,782,000 and average investments
increased to $52,998,000 from $46,444,000. In 1996, loan originations
amounted to over $63,000,000. The yield on average interest-earning assets
was 7.19% in 1996 and 1995.
Average interest-bearing liabilities increased to $140,009,000 in 1996 from
$137,498,000 in 1995. Average deposits decreased to $135,623,000 in 1996 from
$136,255,000 in 1995 while average borrowed funds increased to $4,386,000 in
1996 from $1,243,000 in 1995. The rate paid on average interest-bearing
liabilities increased to 5.50% in 1996 from 5.36% in 1995 due to an increase
in the rate paid on average certificates of deposit to 5.97% in 1996 from
5.82% in 1995. The increase in the rate paid on average certificates of
deposit in 1996 from 1995 was due to the higher rate environment in 1995 and
1996 than prior years and the effects for a full year of the 1995 deposit
attraction marketing program, which involved offering to match the certificate
of deposit rates of all local competitors. The rate paid on average borrowed
funds decreased to 6.20% in 1996 from 6.52% in 1995.
The difference between the rate earned on average interest-earning assets and
the rate paid on average interest-bearing liabilities is the interest rate
spread. In 1996, the interest rate spread decreased to 1.69% from 1.83% in
1995 due to the higher rate paid on average interest-bearing liabilities in
1996 than 1995. The net interest margin, net interest income divided by
average interest-earning assets, increased in 1996 to 2.20% from 1.85% in 1995
due to the increase in net interest income.
All loans contractually past due 90 days or more are classified as non-
performing and no interest income is accrued on such loans. In the twelve
months ended December 31, 1996, cash interest payments of $47,000 were
recorded as income on such loans. Additional income of $40,000 would have
been recorded on these loans on an accrual basis. Non-accrual loans at
December 31, 1996 totaled $705,000.
(-Page 2-)
PROVISION FOR LOAN LOSSES. In 1996, the provision for loan losses was
$183,000 compared to $100,000 in 1995. The increase was in part the result of
an increase in net charge-offs to $167,000 in 1996 from $66,000 in 1995.
Analysis of the allowance for loan losses, including a review of loan charge-
offs and delinquencies as well as industry practice and experience, and an
increase in the loan portfolio in 1996 from 1995, justified the amount of the
provision. The increase in the allowance for loan losses relates primarily to
consumer loans. The average balance of consumer loans increased $4,097,000 to
$31,308,000 in 1996. At December 31, 1996, the allowance for loan losses was
$923,000, or .86% of total loans, compared to $907,000, or 1.01% of total
loans, at December 31, 1995.
-Page 70-
NON-INTEREST INCOME. Total non-interest income increased to $418,000 in 1996
from $395,000 in 1995. In 1996, the Company adopted Statement of Financial
Accounting Standards No 122, 'Accounting for Mortgage Servicing Rights' which
resulted in the recognition of a net servicing rights asset totaling $51,000.
Gains on loans sold increased to $68,000 in 1996 from $51,000 in 1995 due to
increased loan sales. Net gains on securities sold were $15,000 in 1996
compared to zero in 1995. Deposit account service fees increased $17,000 to
$51,000 and brokerage commissions increased $19,000 to $44,000 in 1996 from
1995 due to an increased number of accounts. In 1995, $100,000 was recognized
as income as the result of a reduction in the valuation allowance for loans
held for sale. No income was recognized as a result of changes to the
valuation allowance in 1996. As a percent of average assets, non-interest
income was .26% in both 1996 and 1995.
NON-INTEREST EXPENSE. Total non-interest expense increased to $4,373,000 in
1996 from $2,955,000 in 1995. Of this increase, $875,000 was due to the SAIF
recapitalization special assessment paid in 1996. In 1995, net income from
real estate owned operations totaled $184,000 compared to zero in 1996 due to
the sale of the large commercial property on which the net rental income was
generated. A gain of $50,000 was also realized on the sale of the property in
1995. Salaries and employee benefits increased $118,000 to $1,736,000 in 1996
from 1995 primarily due to the funding of the Employee Stock Ownership Plan
which resulted in expense of $104,000 in 1996.
New advertising campaigns accounted for a $78,000 increase in advertising
expense to $121,000 in 1996 from 1995. The increased number of deposit
accounts resulted in the expense increases in 1996 from 1995 as follows: data
processing increased $26,000 to $249,000; net ATM fees increased $24,000 to
$30,000 and office supplies increased $19,000 to $59,000. Regular FDIC
premium expense increased $21,000 to $356,000 in 1996 compared to 1995 due to
higher deposits. Expenses related to holding company matters of $15,000 were
realized following formation of the Company in 1996.
Net of the SAIF recapitalization special assessment, non-interest expense was
2.19% of average assets in 1996. In 1995, non-interest expense was 1.98% of
average assets.
INCOME TAX EXPENSE. In 1996, a benefit for income taxes of $258,000 was
recorded compared to a benefit of $30,000 recorded in 1995. The decrease in
pre-tax income in 1996 from 1995 resulted in the increase in the income tax
benefit. The effective tax benefit rate in 1996 was 35% compared to 29% in
1995.
(-Page 3-)
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
GENERAL. Due primarily to a decline in net interest income caused by a
sharply higher cost of certificates of deposit, the Company recognized a net
loss of $73,000 in 1995, compared to net income of $430,000 in 1994.
NET INTEREST INCOME. Net interest income decreased 20.1% to $2,557,000 in
1995 from $3,199,000 in 1994. Interest income increased 15.6% to $9,933,000
in 1995 from $8,595,000 in 1994 and interest expense increased 36.7% to
$7,376,000 in 1995 from $5,396,000 in 1994. Interest income and interest
expense increased in 1995 from 1994 due to increases in average balances of
both interest-earning assets and interest-bearing liabilities. The opening of
a new branch office in November, 1994 and a marketing strategy of matching
competitors' terms on certain certificates of deposit from December, 1994
through June, 1995 resulted in an increase in average interest-bearing
-Page 71-
deposits from $122,578,000 in 1994 to $136,255,000 in 1995. The new funds
deposited and proceeds from the sale in late 1995 of a large real estate owned
property resulted in an increase in average interest-earning assets to
$138,244,000 in 1995 from $125,678,000 in 1994.
The increase in average interest-earning assets in 1995 from 1994 was
primarily in residential mortgage loans and indirect automobile loans. The
yield on average loans increased to 7.86% in 1995 from 7.71% in 1994 and the
yield on average interest-earning assets increased to 7.19% in 1995 from 6.84%
in 1994.
The average balance of certificates of deposit increased to $113,876,000 in
1995 from $97,950,000 in 1994 due to the new branch office and the marketing
program. The new certificates were gained during a period of increasing
interest rates as evidenced by an increase in the rate paid on average
certificates of deposit to 5.81% in 1995 from 4.64% in 1994. Average
interest-bearing liabilities were $137,498,000 in 1995 and $125,340,000 in
1994. The rate paid on average interest-bearing liabilities was 5.36% in 1995
and 4.30% in 1994.
The interest rate spread decreased to 1.83% in 1995 from 2.54% in 1994 due to
the increase in the rate paid on average interest-bearing liabilities. The
net interest margin decreased to 1.85% in 1995 from 2.55% in 1994 due to the
decrease in net interest income in the year ended December 31, 1995 compared
to the same period in 1994.
PROVISION FOR LOAN LOSSES. In 1995, a provision for loan losses of $100,000
was recorded compared to a negative provision of $32,000 in 1994. The
provision for loan losses in 1995 was deemed prudent based on continued growth
of the consumer loan portfolio and actual net charge-offs in 1995 of $66,000.
Even though consumer loan delinquencies improved in 1995 from 1994, management
determined, based on industry practice and experience, that actual losses
would likely increase which warranted the addition to the allowance for loan
losses. The negative provision in 1994 was recorded due to a decline in non-
performing loans at December 31, 1994 to .47% of total loans from 1.19% of
total loans at December 31, 1993. The allowance for loan losses was $907,000,
or 1.01% of total loans, at December 31, 1995 compared to $873,000, or 1.04%
of total loans, at December 31, 1994.
NON-INTEREST INCOME. Non-interest income increased to $395,000 in 1995 from
$261,000 in 1994 due primarily to the recognition as income of the $100,000
valuation allowance for loans held for sale. The allowance was established as
a charge to non-interest expense at December 31, 1994 due to a decline in the
market value of loans then held for sale. Gains on loans sold increased to
$51,000 in 1995 from $26,000 in 1994. Other loan fees increased $11,000 to
$146,000 in 1995 from 1994. As a percentage of average assets, non-interest
income was .26% in 1995 compared to .19% in 1994.
NON-INTEREST EXPENSE. Non-interest expense increased from $2,840,000 in 1994
to $2,955,000 in 1995. Salaries and employee benefits increased to $1,618,000
in 1995 from $1,514,000 in 1994 due to a severance payment in 1995 and normal
increases in employee costs. Net occupancy expense increased to $552,000 in
1995 from $423,000 in 1994 due expenses related to the opening of the new
branch office in late 1994. Data processing expense increased $37,000 to
$223,000 in 1995 from 1994 due mainly to the outsourcing of deposit account
statement and document imaging services, which was offset by a $13,000
decrease in office supplies and a $4,000 decrease in postage expense in 1995
from 1994, both of which related to the services no longer handled in-house.
-Page 72-
Advertising expense decreased $40,000 to $41,000 in 1995 due to special
promotional advertising in 1994 that was not repeated in 1995. In 1994,
$100,000 was charged to non-interest expense to establish a valuation
allowance related to loans held for sale. As a percentage of average assets,
non-interest expense was 1.98% in 1995 and 2.06% in 1994.
INCOME TAX EXPENSE. In 1995, a benefit for income taxes of $30,000 was
recorded compared to expense of $222,000 recorded in 1994 due to the decrease
in pre-tax income in 1995 from 1994. The effective tax benefit rate was 29%
in 1995 compared to the effective rate of 34% in 1994.
(-Page 4-)
FINANCIAL CONDITION
The Company had total assets at December 31, 1996 of $172,666,000 compared to
$150,974,000 at December 31, 1995. The increase in assets in 1996 was due y
to the subscription stock offering completed in 1996, the net proceeds of
which totaled over $11,000,000, and the use of FHLB advances to fund
origination of residential mortgage loans and to purchase adjustable-rate
mortgage-backed securities.
Net loans receivable increased 20.1% to $106,641,000 at December 31, 1996 from
$88,786,000 at December 31, 1995. Much of the increase was in residential
mortgage loans which totaled $70,600,000 at December 31, 1996 compared to
$55,786,000 at year-end, 1995. Total residential mortgage loan originations
in 1996 were $37,188,000 compared to $13,171,000 in 1995. Consumer loans
increased to $32,159,000 at year-end, 1996 from $28,720,000 at year-end, 1995.
Consumer loan originations in 1996 totaled $24,200,000 compared to $20,300,000
in 1995.
Total deposits at December 31, 1996 were $133,995,000, a decrease of 3.2% from
the total of $138,396,000 at year-end, 1995. Certificate of deposit balances
increased substantially in 1995 as a result of the marketing strategy used by
the Company in the first half of 1995. In 1996, the Company was focused on
reducing its cost of funds and did not offer special promotional terms on
certificates of deposit to attract and retain deposit balances. Due in part
to the absence of these programs upon the maturity of accounts opened in 1995,
total certificates of deposit decreased to $109,072,000 at December 31, 1996
from $114,999 at December 31, 1995.
Due to the decline in certificates of deposit and the increase in loan demand
in 1996, the Company chose to fund loan originations with borrowings, with
various rates and terms, from the Federal Home Loan Bank which totaled
$15,300,000 at December 31, 1996 compared to none at year-end, 1995.
Stockholder's equity increased to $22,141,000 at December 31, 1996 from
$11,515,000 at December 31, 1995 due to the net proceeds realized from the
subscription stock sale in 1996. As a percent of total assets, stockholders'
equity was 12.8% at December 31, 1996 compared to 7.6% at December 31, 1995.
Savings institutions are required to maintain minimum capital levels measured
by three capital to asset ratios: Risk-based capital to risk weighted assets
of 8%; core capital to adjusted tangible assets of 3% and tangible core
capital to tangible assets of 1.5%. The Company's savings institution
subsidiary had ratios of 18.29%, 9.66% and 9.66%, respectively, at December
31, 1996 compared to December 31, 1995 ratios of 15.78%, 7.73% and 7.73%,
respectively.
-Page 73-
INTEREST RATE RISK
The management of interest rate risk includes evaluation of the interest rate
risk inherent in certain assets and liabilities, determination of the
appropriate risk level given the Company's business strategy, operating
environment, capital and liquidity requirements and management of the risk
consistent with guidelines approved by the Board of Directors. Successful
management of interest rate risk reduces the vulnerability of the Company's
operations to changes in interest rates, which could have a negative impact on
earnings.
The management of interest rate risk was enhanced in 1996 by the receipt of
funds from the subscription stock sale. The funds were used to continue the
strategies utilized in recent years, namely (i) emphasizing origination of
one-to-four family adjustable rate and balloon mortgage loans; (ii) sale at
origination of longer-term, fixed-rate one-to-four family mortgage loans;
(iii) diversifying the loan portfolio (primarily into short-term consumer
loans such as indirect auto and home equity loans); (iv) classifying all
investment securities as available for sale; (v) holding primarily adjustable
rate or short-term (five years or less) fixed-rate investment securities; (vi)
reducing interest sensitivity of liabilities by offering locally competitive
rates on longer term certificates and implementing programs to attract low
cost demand deposits.
Interest rate sensitivity is measured on a quarterly basis through the use of
a model produced by the Office of Thrift Supervision ('OTS') based on data
submitted as part of the Company's savings association subsidiary's quarterly
Thrift Financial Reports. The model generates estimates of the change in net
portfolio value ('NPV') over a range of interest rate scenarios. NPV is the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts. The NPV ratio of each scenario
is defined as the NPV in that scenario divided by the present value of assets
in the same scenario.
<TABLE>
At December 31, 1996, the Company's savings association subsidiary's NPV
information was as follows (dollars in thousands):
<CAPTION>
Net Portfolio Value NPV as Percent of Present
Change Value of Assets
in Dollar Dollar Percent NPV Basis Point
Rate Amount Change Change Ratio Change
- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
+400 bp 12,498 -5,249 -30% 7.78% -257 bp
+300 bp 14,158 -3,588 -20% 8.65% -170 bp
+200 bp 15,677 -2,069 -12% 9.41% - 93 bp
+100 bp 16,852 - 894 - 5% 9.96% - 38 bp
0 17,746 10.35%
- -100 bp 18,322 575 3% 10.56% 21 bp
- -200 bp 18,584 838 5% 10.60% 25 bp
- -300 bp 18,872 1,125 6% 10.65% 30 bp
- -400 bp 19,529 1,783 10% 10.87% 53 bp
</TABLE>
(-Page 5-)
-Page 74-
<TABLE>
RISK MEASURES: 200 BP RATE SHOCK:
<S> <C>
Pre-shock NPV Ratio 10.35%
Exposure measure: Post-shock NPV ratio 9.41%
Sensitivity measure: Change in NPV ratio - 93 bp
</TABLE>
At December 31, 1996, the changes in NPV in the various interest rate
scenarios were all within the limits approved by the Board of Directors.
The methodology used in the above measurement of interest rate risk has
certain shortcomings due primarily to assumptions utilized in the model.
Actual changes in market interest rates may result in different yield and cost
changes than assumed in the model. In addition, holdings of interest
sensitive assets and liabilities are assumed to remain constant under each
interest rate change scenario which may be different than actual
circumstances. Accordingly, the NPV measurements provide an indication of
interest rate risk exposure at a particular point in time and are not intended
and should be used to forecast the effect of changes in interest rates on the
Company's net interest income.
LIQUIDITY
Primary sources of funds are deposits, FHLB advances and proceeds from
principal and interest payments on loans and mortgage-backed and other
securities. Scheduled maturities of loans and mortgage-backed and other
securities are predictable sources of funds while deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition.
Funds are invested in one-to-four family residential loans, short-term
consumer loans and mortgage-backed and other securities. 1n 1996, 1995 and
1994, originations of one-to-four family residential mortgages totaled
$36,970,000, $13,171,000 and $21,215,000, respectively, and purchases of
mortgage-backed and other securities totaled $26,686,000, $11,890,000 and
$11,158,000, respectively. In 1996, the net cash used by investing activities
was $20,309,000 and the net cash provided by financing activities was
$22,079,000.
An adequate level of liquidity must be maintained to ensure the availability
of sufficient funds to support loan growth and deposit withdrawals, satisfy
financial commitments and take advantage of investment opportunities. At
December 31, 1996, approved loan commitments totaled $301,000 and unused lines
of credit amounted to $3,544,000. Certificates of deposit scheduled to mature
in 1997 total $63,865,000. Scheduled loan payments and maturities in 1997
amount to $15,446,000 and maturities of mortgage-backed and other securities
total $1,068,000 in 1997. An unknown amount of principal payments on
mortgage-backed securities will also be received in 1997. Principal payments
on mortgage-backed securities in 1996 amounted to $5,625,000.
OTS regulations require savings institutions to maintain a minimum 5%
liquidity ratio measured as the ratio of cash, cash equivalents, short-term
investments and certain long-term investments to deposits and certain short-
term borrowed funds. The Company's savings institution subsidiary had
liquidity ratios of 12.04% and 12.79% at December 31, 1996 and 1995,
respectively.
INFLATION
The Consolidated Financial Statements and Notes thereto included in this
report have been prepared in accordance with GAAP and reflect the results of
-Page 75-
operations and financial position measured in historical dollars without
regard for the changes in the relative purchasing power of money over time due
to inflation. Inflation impacts the Company due to the increased cost of
operations and as an inherent factor in the general level of interest rates.
Due to the monetary nature of most of the Company's assets and liabilities,
changes in interest rates have a greater impact on the Company's financial
performance than the general level of inflation. Effective interest rate risk
management can minimize the effects of inflation on the Company's monetary
assets and liabilities. Inflation has not had a significant impact on the
costs of operation or the non-monetary assets of the Company.
RECENT LEGISLATIVE DEVELOPMENTS
DEPOSIT INSURANCE. On September 30, 1996, the Deposit Insurance Funds Act of
1996 (the 'Act') was signed into law by the President. Included in the Act
was a provision to recapitalize the Savings Association Insurance Fund
('SAIF') through a one-time special assessment on SAIF deposits that was paid
in November, 1996. The special assessment, which amounted to $875,000 for the
Company, increased the SAIF reserve ratio to the statutory minimum of 1.25% of
SAIF deposits. The Act also included provisions for partial sharing of
Financing Corporation ('FICO') obligations among SAIF and Bank Insurance Fund
('BIF') members from 1997 through 1999 and pro-rata sharing starting in 2000.
SAIF members will pay approximately 83% of the FICO obligation through 1999.
The assessment rate for SAIF deposits cannot be less than the rate for BIF
deposits for two years. The FDIC cannot set assessment rates that will exceed
the amount needed to maintain the statutory required reserve for SAIF or BIF
members. For the Company, the 1997 assessment rate is expected to be
approximately $0.065 per $100 of deposits compared to $0.26 per $100 of
deposits in 1996. SAIF and BIF will merge to form the Deposit Insurance Fund
in 1999 if certain conditions are met. The Act also directed the Treasury
Department to provide recommendations to Congress in 1997 regarding a common
charter for savings institutions and banks as well as numerous regulatory
relief provisions that are not expected to significantly impact the Company.
CHARTER REFORM. In early 1997, two bills regarding charter reform were
introduced into the 105th Congress. Both bills would require federally
chartered savings institutions, such as the Company's savings institution
subsidiary, to recharter as national banks or state depository institutions by
1998. Institutions that do not voluntarily recharter would automatically
convert to national banks. Both bills provide for merger of SAIF and BIF in
1999 or earlier. Savings institutions would have to divest of activities that
do not conform to national bank powers and would have restrictions on other
activities allowed under the present charter though the bills have different
provisions in these regards. Congressional debate on these bills is expected
to start by March, 1997. Management cannot predict whether any bill with any
of the provisions mentioned will be enacted. As such, no determination on the
effect these provisions could have on the Company is possible.
(-Page 6-)
IMPACT OF NEW ACCOUNTING PRONOUNCMENTS
ACCOUNTING FOR IMPAIRMENT OF A LOAN. On January 1, 1995, the Company adopted
Statement of Financial Accounting Standards No. 114, 'Accounting by Creditors
for Impairment of a Loan' ('SFAS 114') and its amendment, Statement of
Financial Accounting Standards No. 118, 'Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures' ('SFAS 118'). These
statements require a loan to be classified as impaired if it is probable that
collection of all contractual principal and interest payments will not be
made. A loan valuation allowance must be established for the amount by which
-Page 76-
the carrying amount of the impaired loan exceeds the estimated discounted
future cash flows or the fair market value of the collateral for certain
collateral dependent loans. No interest income on impaired loans can be
accrued. The Company recognizes interest income on impaired loans only upon
cash receipt. SFAS 114 and SFAS 118 have not had a significant impact on the
results of operations, financial condition or disclosures contained in the
Company's financial statements.
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS. Statement of Financial Accounting
Standards No. 122, 'Accounting for Mortgage Servicing Rights' ('SFAS 122') was
adopted as of January 1, 1996. SFAS 122, an amendment of SFAS 65, 'Accounting
for Certain Mortgage Banking Activities', requires the recognition as a
separate asset the rights to service mortgage loans regardless of how the
servicing rights were acquired. The capitalized servicing rights asset must
be evaluated for impairment based on the fair value of the rights with any
impairment recognized in a valuation allowance. At December 31, 1996, the
Company had a servicing rights asset in the amount of $51,000. Actual
capitalized servicing rights in 1996 totaled $58,000 of which $7,000 was
amortized during the year. No impairment of the servicing rights asset was
recognized.
ACCOUNTING FOR STOCK-BASED COMPENSATION. Statement of Financial Accounting
Standards No. 123, 'Accounting for Stock-Based Compensation' ('SFAS 123') will
be adopted in 1997 based on the approval by the Company's shareholders of the
1996 Stock Option Plan ('SOP') and the Management Development and Recognition
Plan and Trust Agreement ('MDRP'). A special meeting of shareholders was held
in February, 1997 to vote on both plans, which will require disclosures under
SFAS 123. SFAS 123 allows entities the choice of accounting for stock-based
compensation plans under Accounting Practices Board Opinion No. 25 ('APB 25')
or SFAS 123. The accounting provisions of APB 25 were followed by all
entities prior to SFAS 123. Entities choosing to follow the accounting
provisions of APB 25 will still be required to make pro-forma disclosure of
net income and earnings per share, including option valuation methods and
assumptions, as if the accounting provisions of SFAS 123 had been adopted.
The Company anticipates following the accounting provisions of APB 25 for the
SOP and the MDRP and providing the pro-forma disclosures required by SFAS 123.
Employee Stock Ownership Plans ('ESOP'), including the Company's ESOP, are
specifically excluded from the scope of SFAS 123.
(-Page 7-)
Report of Independent Auditors
Board of Directors
Eagle BancGroup, Inc.
We have audited the accompanying consolidated statements of condition of Eagle
BancGroup, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income cash, and cash flows and changes in
stockholders' equity for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit includes examining, on a test basis, evidence supporting the amounts
-Page 77-
and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Eagle BancGroup,
Inc. and subsidiaries at December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 2 of the Notes to the Consolidated Financial Statements,
in 1994 the Company changed its method of accounting for certain investments
in debt and equity securities as a result of adopting a new accounting
standard.
/S/ Ernst & Young LLP
Indianapolis, Indiana
January 17, 1997
(-Page 8-)
-Page 78-
<TABLE>
<CAPTION>
Eagle BancGroup, Inc.
Consolidated Statements of Condition
December 31,
1996 1995
(amounts in thousands)
<S> <C> <C>
ASSETS
Cash on hand and in other institutions 1,487 1,072
Fedeeal funds sold and overnight deposits 5,573 2,828
Investment securities-available for sale(Note 2) 16,438 11,810
Mortgage-backed securities-available for sale(Note 2) 37,445 41,376
Loans receivable, net (Note 3) 106,641 88,786
Real estate owned 652 644
Premises and equipment (Note 4) 2,889 3,112
Other assets 1,541 1,346
Total Assets 172,666 150,974
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 5) 133,995 138,396
FHLB advances (Note 6) 15,300 -
Other liabilities 1,230 1,063
Total Liabilities 150,525 139,459
Commitments and contingencies - -
Stockholders' equity (Notes 8 and 9):
Preferred stock, par value $.01 per share,
100,000 shares authorized, none issued - -
Common stock, par value $.01 per share,
5,000,000 shares authorized, 1,302,705
and no shares issued, respectively 13 -
Paid in capital 12,215 -
Unearned ESOP shares (938) -
Retained earnings-substantially restricted (Note 8) 11,188 11,677
Unrealized losses on investments-net of tax (Note 2) (337) (162)
Total Stockholders' Equity 22,141 11,515
Total Liabilities and Stockholders' Equity 172,666 150,974
</TABLE>
See accompanying notes.
(-Page 9-)
-Page 79-
<TABLE>
<CAPTION>
Eagle BancGroup, Inc.
Consolidated Statements of Income
For the Year Ended December 31,
1996 1995 1994
(amounts in thousands except per share data)
<S> <C> <C> <C>
Interest income:
Interest and fees on loans 7,681 6,899 5,809
Interest on investment securities
and temporary investments 1,055 804 708
Interest on mortgage-backed
securities 2,358 2,230 2,078
Total Interest Income 11,094 9,933 8,595
Interest expense:
Interest on deposits:
Passbooks 577 494 474
MMDA and NOW 181 189 238
Certificates of deposit 6,673 6,612 4,542
Total interest on deposits 7,431 7,295 5,254
Interest on borrowed funds 272 81 142
Total Interest Expense 7,703 7,376 5,396
Net Interest Income Before Provision
for Loan Losses 3,391 2,557 3,199
Provision for loan losses 183 100 (32)
Net Interest Income After Provision
for Loan Losses 3,208 2,457 3,231
Non-interest income:
Loan servicing 146 97 106
Gains on loans sold (Note 3) 68 51 26
Gains on securities sold (Note 2) 15 - 6
Other 189 247 123
Total Non-Interest Income 418 395 261
Non-interest expense
Salaries and employee benefits 1,736 1,618 1,514
Net occupancy 544 552 423
Federal deposit insurance
premiums (Note 14) 1,231 335 319
Data processing 249 223 186
Other 613 227 398
Total Non-Interest Expense 4,373 2,955 2,840
Income(Loss) Before Federal Income Taxes (747) (103) 652
Federal income tax (benefit)
expense(Note 7) (258) (30) 222
Net Income(Loss) (489) (73) 430
Earnings per share (Note 1) $(0.38) N/A N/A
</TABLE>
See accompanying notes.
(-Page 10-)
-Page 80-
<TABLE>
<CAPTION>
Eagle BancGroup, Inc.
Consolidated Statements of Cash Flows
For the Year Ended December 31,
1996 1995 1994
(amounts in thousands)
<S> <C> <C> <C>
Operating Activities
Net (loss)income (489) (73) 430
Adjustment to reconcile net (loss)
income to net cash provided by
operating activities:
Provision for loan losses 183 100 (32)
Provision for depreciation 288 452 396
Deferred income taxes (39) 103 75
Amortization of premiums and discounts
on investment securities 74 29 27
Net gains on sales of investment
securities (15) - (6)
(Purchase)sale of FHLB stock (261) (44) 334
Release of ESOP shares 104 - -
Proceeds from sale of mortgage loans
originated-for-sale 10,776 7,039 2,317
Loans receivable originated-for-sale (9,209) (6,988) (2,291)
Increase in accrued interest receivable (130) (84) (94)
Increase(decrease) in accrued
interest payable 94 (19) 27
Increase in other assets (65) (195) (242)
Increase (decrease)in other liabilities 79 (19) (141)
Net Cash Provided by Operating Activities 1,390 301 800
Investing Activities
Proceeds from sale of investment
securities 10,602 1,035 2,076
Purchases of investment securities (15,019) (1,998) (4,444)
Purchases of mtg-backed securities (11,667) (9,892) (6,714)
Proceeds from sale of mtg-backed
securities 9,749 - 9,927
Principal collected on mtg-backed
securities 5,625 3,457 3,318
Principal collected on loans receivable 34,270 22,456 21,059
Loans receivable originated (53,796) (27,757) (36,739)
Purchases of premises and equipment (65) (91) (1,753)
Net (purchases) sales of real estate (8) 5,620 187
Net Cash Used by Investing Activities (20,309) (7,170) (13,083)
Financing Activities
Change in savings accounts, demand
deposits and NOW accounts 1,520 605 (2,982)
Change in certificate accounts (5,927) 15,397 212
Increase(decrease) in borrowings 15,300 (7,936) 7,936
Proceeds from the sale of capital stock 11,186 - -
Net Cash Provided by Financing Activities 22,079 8,066 5,166
-Page 81-
Net increase(decrease) in cash and cash
equivalents 3,160 1,197 (7,117)
Cash and cash equivalents at beginning
of year 3,900 2,703 9,820
Cash and Cash Equivalents at End of Year 7,060 3,900 2,703
See accompanying notes.
</TABLE>
(-Page 11-)
<TABLE>
<CAPTION>
Eagle BancGroup, Inc.
Consolidated Statement of Changes in Stockholders' Equity
Unearned
Common Paid-In Retained Unrealized ESOP
Stock Capital Earnings Gain(loss) Shares Total
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance as of
January 1, 1994 - - 11,320 - - 11,320
Net income 430 430
Change in unrealized
loss (2,249) (2,249)
Balance as of
December 31, 1994 - - 11,750 (2,249) - 9,501
Net loss (73) (73)
Change in unrealized
loss 2,087 2,087
Balance as of
December 31, 1995 - - 11,677 (162) 11,515
Sale of capital
stock 13 12,215 12,228
Common stock
acquired by ESOP (1,042) (1,042)
Release of ESOP shares 104 104
Net loss (489) (489)
Change in unrealized
loss (175) (175)
Balance as of
December 31, 1996 13 12,215 11,188 (337) (938) 22,141
See accompanying notes.
</TABLE>
Eagle BancGroup, Inc.
Notes to Consolidated Financial Statements
1. Significant Accounting Policies
Organization
Eagle BancGroup, Inc. ('Eagle') was formed in January, 1996 and purchased all
of the stock of First Federal Savings and Loan Association ('First Federal')
with the proceeds of a subscription stock offering completed in June, 1996.
Simultaneous to the stock offering, First Federal converted from a federally-
chartered mutual savings association to a federally-chartered capital stock
savings association. Prior to June, 1996, Eagle had no assets or liabilities.
All financial information prior to 1996 relates to First Federal only.
-Page 82-
Eagle issued 1,302,705 shares of common stock following the subscription stock
offering. Expenses related to the offering totaled $799,000 and $1,042,000
was loaned to First Federal to create an Employee Stock Ownership Plan (Note
9). Net proceeds to Eagle were $11,186,000 of which $6,200,000 was paid to
First Federal in exchange for all of the common stock of First Federal.
(-Page 12-)
Business and Principles of Consolidation
The consolidated financial statements include the accounts of Eagle, its
wholly-owned subsidiary, First Federal and First Federal's wholly-owned
subsidiary, FFS Investment Services, Inc.(collectively, the 'Company'). Eagle
is an unitary savings and loan holding company engaged in the business of
managing its investments and directing, planning and coordinating the business
activities of First Federal. First Federal operates as a traditional thrift
institution in McLean and surrounding counties of Central Illinois. FFS
Investment Services, Inc. sells investment products, including annuities. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash Equivalents
Cash equivalents include federal funds sold and overnight deposits.
Generally, federal funds are sold for one-day periods.
Investments
Management determines the appropriate classification of debt securities at the
time of purchase. Debt securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost. Debt
securities not classified as held-to-maturity are classified as available for
sale and are carried at fair value, with unrealized gains and losses, net of
tax, reported in a separate category of equity. At December 31, 1996 and 1995
all debt securities are classified as available-for-sale.
The carrying value of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity computed using the level-yield method. Such
amortization is included in interest income. Realized gains and losses and
declines in value judged to be other than temporary on available-for-sale
securities are included in other income. The cost of securities sold is based
on the specific identification method.
Stock in the Federal Home Loan Bank of Chicago is stated at cost and the
amount of stock First Federal is required to own is determined by regulation.
Loans Receivable
First Federal has a mortgage lien on all property on which mortgage,
participation or purchased loans are made. Loans secured by deposits are
secured by equal or greater deposit account balances. In general, First
Federal originates all long-term fixed rate mortgage loans for sale in the
secondary market. Other fixed rate loans and all adjustable rate loans are
held for long-term investment unless designated as held for sale at the time
of origination. Loans designated as held for sale are carried at the lower of
cost or market value with changes in the valuation allowance reflected in
income. All loans are sold without recourse.
(-Page 13-)
-Page 83-
Allowance for Loan Losses
The allowance for loan losses is established through provisions for loan
losses charged against income. Loans deemed to be uncollectible are charged
against the allowance for loan losses and subsequent recoveries, if any, are
credited to the allowance. In 1995, Statement of Financial Accounting
Standards No. 114, 'Accounting by Creditors for Impairment of a Loan' ('SFAS
114') and Statement of Financial Accounting Standards No. 118, 'Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures' ('SFAS
118'), an amendment to SFAS 114, were adopted. The allowance for loan losses
related to troubled loans identified for evaluation in accordance with SFAS
114 is based on estimated discounted cash flows using the loan's initial
effective interest rate or the fair value of the collateral for certain
collateral dependent loans. Consumer loans and one-to-four family residential
loans are collectively evaluated for impairment as homogeneous loan groups
which are outside the scope of SFAS 114. Under SFAS 118, no interest income
on loans determined to be impaired is accrued. Interest income on such loans
is recognized only upon cash receipt. SFAS 114 and SFAS 118 have not had a
significant impact on results of operations in 1996 or 1995.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated future losses inherent in the loan portfolio.
Management's determination of the adequacy of the allowance is based on an
evaluation of the portfolio including consideration of past loan experience,
current economic conditions, volume, growth and composition of the loan
portfolio and other relevant factors. This evaluation is inherently
subjective as it requires material estimates including the amounts and timing
of future cash flows expected to be received on impaired loans that may be
susceptible to significant change.
Interest on Loans, Mortgage Loan Fees and Discounts
Interest income on loans is computed monthly based upon the principal amount
of the loans outstanding. Allowances are established for uncollected interest
on mortgage loans on which any payments are more than 90 days past due.
Loan origination and commitment fees and certain direct loan origination costs
are deferred and the net amount is amortized as an adjustment to yield over
the contractual life of the related loans for loans originated after December
31, 1987. For loans originated prior to that date, such fees were generally
recognized in income in the year the loan was made.
Real Estate Owned
Real estate owned includes land acquired for investment and properties arising
from loan foreclosure or deed in lieu of foreclosure. All real estate owned
is carried at the lower of cost (the unpaid balance at the date of acquisition
plus foreclosure and other related costs) or fair value, less estimated
selling costs. Costs of improvements made to facilitate sale are capitalized;
costs of holding the property, including depreciation, are charged to expense.
Premises and Equipment
Premises and equipment is stated at cost less accumulated depreciation.
Provisions for depreciation of premises and equipment are computed using
straight-line and accelerated methods over the estimated useful lives of the
related assets.
-Page 84-
The Company recognizes impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Assets to be disposed of are recorded at the lower of their
carrying amount or fair value less cost to sell.
(-Page 14-)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Earnings Per Share
Earnings per share are based on 1,302,705 average shares outstanding for 1996.
Earnings per share information for 1995 and 1994 is not applicable as no
shares were issued or outstanding prior to the subscription stock offering in
1996.
Reclassifications
Certain elements of the 1995 and 1994 consolidated financial statements have
been reclassified to conform with the presentation herein.
2. Investments
Statement of Financial Accounting Standards No. 115, 'Accounting for Certain
Investments in Debt and Equity Securities', was adopted as of January 1, 1994
resulting in a $200,000 increase in the carrying value of investment
securities to reflect the net unrealized holding gains on securities
classified as available-for-sale on that date. The securities had previously
been carried at amortized cost. The after tax effect of $133,000 was
recognized as an addition to equity. These additions represent non-cash
adjustments of carrying value. Investments are summarized as follows:
<TABLE>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(amounts in thousands)
<S> <C> <C> <C> <C>
December 31, 1996
Investment securities
U. S. Treasury and
agencies 15,181 4 149 15,036
Stock in Federal Home
Loan Bank of Chicago 955 - - 955
Other debt securities 447 - - 447
Total Investment Securities 16,583 4 149 16,438
Mortgage-backed securities
Collateralized mortgage
obligations 18,125 6 298 17,833
Other mortgage-backed
securities 19,685 77 150 19,612
Total Mortgage-Backed
Securities 37,810 83 448 37,445
Total Investments 54,393 87 597 53,883
</TABLE>
(-Page 15-)
-Page 85-
<TABLE>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(amounts in thousands)
<S> <C> <C> <C> <C>
December 31, 1995
Investment securities
U. S. Treasury and
agencies 10,664 27 57 10,634
Stock in Federal Home
Loan Bank of Chicago 694 0 0 694
Other debt securities 482 0 0 482
Total Investment Securities 11,840 27 57 11,810
Mortgage-backed securities
Collateralized mortgage
obligations 21,305 25 358 20,972
Other mortgage-backed
securities 20,286 182 64 20,404
Total Mortgage-Backed
Securities 41,591 207 422 41,376
Total Investments 53,431 234 479 53,186
</TABLE>
<TABLE>
The amortized cost and market value of investment and mortgage-backed
securities at December 31, 1996, by contractual maturity, are as follows:
Amortized Market
Cost Value
(amounts in thousands)
<S> <C> <C>
Due in one year or less 1,068 1,072
Due after one year through five years 15,827 15,668
Due after five years through ten years 4,204 4,100
Due in more than ten years 33,294 33,043
Total 54,393 53,883
</TABLE>
At December 31, 1996, $36,370,000 par value of mortgage-backed and related
securities were insured or guaranteed by quasi-governmental agencies (e.g.
GNMA, FNMA, FHLMC). $1,116,000 par value of these securities were not insured
or guaranteed by such agencies.
Accrued interest receivable on investment and mortgage-backed securities
totaled $439,000 and $389,000 at December 31, 1996 and 1995, respectively.
Gross realized gains on sales of investments were $49,000, $0 and $59,000 and
gross realized losses on sales of investments were $34,000, $0 and $53,000 in
1996, 1995 and 1994, respectively.
(-Page 16-)
-Page 86-
3. Loans Receivable
<TABLE>
Loans receivable consist of the following at December 31 (in thousands):
1996 1995
<S> <C> <C>
Residential mortgage loans 70,600 55,786
Commercial real estate loans 3,827 4,484
Consumer loans 32,159 28,720
Commercial installment loans 1,145 541
Accrued interest receivable 563 489
Gross Loans 108,294 90,020
Less:
Deferred loan fees 80 36
Reserve for uncollected interest 40 45
Allowance for loan losses 923 907
Undisbursed portion of loan proceeds 610 246
Loans Receivable, net 106,641 88,786
Weighted average interest rate 7.93% 8.02%
</TABLE>
Loans serviced at December 31, 1996, 1995 and 1994 totaled $35,278,000,
$32,913,000 and 30,650,000, respectively. On January 1, 1996, Statement of
Financial Accounting Standards No. 122, 'Accounting for Mortgage Servicing
Rights' ('SFAS 122') was adopted. SFAS 122 requires recognition of the rights
to service loans for others, regardless of how the servicing rights were
acquired, as a separate asset at the time of acquisition. The servicing
rights asset will be amortized over the expected life of the serviced loans.
In addition, SFAS 122 requires that the servicing rights asset be assessed for
impairment based on the fair value of the rights with any impairment
recognized in a valuation allowance. The Company used the discounted cash
flow method to determine the value of servicing rights asset. At December 31,
1996, no impairment of the servicing rights asset was recognized. Retroactive
adoption of SFAS 122 was not allowed. A summary of the 1996 activity in the
servicing rights asset follows (in thousands):
<TABLE>
<S> <C>
Servicing rights on loans sold $58
Amortization of servicing rights 7
Balance at end of year $51
</TABLE>
Loans totaling $10,776,000, $7,039,000 and $2,317,000 were sold resulting in
net gains of $68,000, $51,000 and $26,000 in 1996, 1995 and 1994,
respectively.
Advances from the Federal Home Loan Bank of Chicago are secured by a floating
lien on First Federal's one-to-four family residential mortgage loans (see
note 6).
Lending activities are concentrated within a 50-mile radius of Bloomington,
Illinois. Unused consumer lines of credit totaled $3,544,000 and $2,480,000
at December 31, 1996 and 1995, respectively.
(-Page 17-)
-Page 87-
<TABLE>
Changes in the allowance for loan losses are as follows (in thousands):
1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year 907 873 946
Provision for losses 183 100 (32)
Charge-offs (178) (68) (43)
Recoveries 11 2 2
Balance at end of year 923 907 873
</TABLE>
4. Premises and Equipment
<TABLE>
Premises and equipment is summarized as follows at December 31 (in thousands):
1996 1995
<S> <C> <C>
Land 775 775
Buildings 2,906 2,900
Furniture and equipment 2,127 2,069
5,808 5,744
Less allowance for depreciation 2,919 2,632
2,889 3,112
</TABLE>
5. Deposits
<TABLE>
Deposits at December 31 are summarized as follows (in thousands):
1996 1995
Weighted Weighted
Average Average
Interest Rate Amount Interest Rate Amount
<S> <C> <C> <C> <C>
Passbook accounts 3.663% $15,668 3.622% $14,700
NOW accounts 1.941 9,230 2.083 8,678
Certificate accounts
(original term)
91 day 4.433 614 4.386 654
6 month 5.013 8,095 5.286 9,160
9 month 5.088 3,922 5.750 5,603
1 year 5.388 19,537 6.195 22,980
2 year 6.376 13,851 6.181 12,854
2 1/2 year 6.121 18,151 5.943 16,901
3 year 5.700 6,179 5.357 7,800
4 year 6.988 5,370 7.068 5,094
5 year 5.584 3,182 6.053 3,606
6 year 6.679 10,202 6.678 9,840
Jumbo (over
($100,000) 6.180 8,058 6.637 7,764
IRA 6.210 11,911 6.391 12,743
133,970 138,377
Accrued interest 25 19
5.416% $133,995 5.603% $138,396
</TABLE>
(-Page 18-)
Interest totaling $7,609,000, $7,395,000 and $5,368,000 was paid on deposits
and other borrowings in 1996, 1995 and 1994, respectively. Investments with a
book value of approximately $5,150,000 were pledged as of December 31, 1996 to
secure public deposits and for other purposes as required or permitted by law.
Deposits over $100,000 are not federally insured. Contractual maturities of
certificates of deposit at December 31, 1996 were: 1997- $63,865,000; 1998-
$17,241,000; 1999- $15,215,000; 2000- $10,333,000; 2001- $2,085,000 and after
2001- $333,000.
-Page 88-
6. Other Borrowings
FHLB advances are funds borrowed from the Federal Home Loan Bank of Chicago
under various terms and conditions. Open line, variable rate advances are
generally held for short terms. Fixed amount advances can have fixed or
variable rates with short or long term maturities and generally allow
prepayments under certain conditions. At December 31, 1996 all FHLB advances
were fixed amounts. All advances are secured by all stock in the Federal Home
Loan Bank and a blanket floating lien on First Federal's one-to-four family
residential mortgage loans. During 1996 and 1995, First Federal entered into
repurchase agreements under which funds were borrowed in exchange for
investment securities pledged to and held by counterparties. No such
agreements were in effect at any month end in 1996 or 1995, including
December. The average amount of repurchase agreements outstanding was $44,000
and $171,000 and the average rates paid on the repurchase agreements were
5.25% and 6.78% in 1996 and 1995, respectively. A summary of FHLB advances
follows (in thousands):
<TABLE>
1996 1995
<S> <C> <C>
Balance on December 31 15,300 -
Highest month-end balance 19,100 5,000
Average balance during the year 4,342 1,075
Average rate during the year 6.20% 6.49%
Average rate at year-end 5.73% -
</TABLE>
7. Income Taxes
<TABLE>
The provision for federal income taxes for the years ended December 31
consists of the following (in thousands):
1996 1995 1994
<S> <C> <C> <C>
Current (benefit) expense (254) (145) 150
Deferred (benefit) expense (4) 115 72
Total (Benefit) Expense (258) (30) 222
</TABLE>
<TABLE>
A reconciliation of the statutory federal income tax rate to the effective
income tax rate for the years ended December 31 follows:
1996 1995 1994
<S> <C> <C> <C>
Statutory rate 34% 34% 34%
Recoveries on sales of real estate owned - (4%) -
Municipal bond interest and other 1% (1%) -
35% 29% 34%
</TABLE>
(-Page 19-)
-Page 89-
<TABLE>
The components of the deferred tax asset (liability) at December 31 are as
follows (in thousands):
1996 1995
<S> <C> <C>
Deferred tax assets:
Provision for holding losses on investment
securities and mortgage-backed securities 172 80
Allowance for loan and real estate losses 314 334
Deferred compensation 71 70
Other 158 114
Gross Deferred Tax Asset 715 598
Deferred tax liabilities:
Depreciation (280) (288)
Other (45) (45)
Gross Deferred Tax Liability (325) (333)
Net Deferred Tax Asset 390 265
</TABLE>
Income tax payments of $0, $10,000 and $280,000 were made in 1996, 1995 and
1994, respectively.
8. Stockholders' Equity
Eagle has authorized the issuance of 100,000 shares of preferred stock with a
par value of $.01 per share. Preferred stock may be issued by the Board of
Directors from time to time on terms set by the Board without further
authorization from the stockholders.
Pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ('FIRREA'), as implemented by a rule promulgated by the Office of Thrift
Supervision ('OTS'), savings institutions must meet three separate minimum
capital-to-assets requirements: (i) a risk based capital requirement of 8% of
risk-weighted assets, (ii) a leverage ratio of 3% core capital to adjusted
tangible assets and (iii) a tangible capital requirement of 1.5% tangible core
capital to tangible assets. The following table summarizes, as of December
31, 1996 and 1995, the capital requirements under FIRREA, the actual capital
and the capital ratios of First Federal (in thousands):
<TABLE>
Capital Actual
Requirements Capital
Percent Amount Percent Amount Excess
<S> <C> <C> <C> <C> <C>
December 31, 1996
Risk-based 8.0% 7,513 18.29% 17,175 9,662
Leverage 3.0% 5,070 9.66% 16,325 11,255
Tangible 1.5% 2,535 9.66% 16,325 13,790
December 31, 1995
Risk-based 8.0% 6,330 15.78% 17,175 10,845
Leverage 3.0 4,534 7.73 16,325 11,791
Tangible 1.5 2,267 7.73 16,325 14,058
</TABLE>
-Page 90-
<TABLE>
At December 31,1996, equity is reconciled to Actual Capital in the above table
as follows (in thousands):
<S> <C>
Equity - per statement of condition 22,141
Equity at parent company (6,145)
Equity at First Federal 15,996
Unrealized investment holding losses at First Federal 329
Leverage and tangible capital 16,325
General loan loss allowance 850
Risk-based capital 17,175
</TABLE>
(-Page 20-)
The Company qualified under provisions of the Internal Revenue Code which
permitted it to deduct from taxable income a provision for bad debts which was
differs from the provision for such losses charged to income. Accordingly,
retained earnings at December 31, 1996 includes approximately $3,563,000 for
which no provision for federal income taxes has been made. If, in the future,
this portion of retained earnings is used for any purpose other than to absorb
loan losses, federal income taxes may be imposed at the then appicable rates.
First Federal established a liquidation account at the time of conversion from
a mutual savings association to a capital stock savings association. The
account balance was equal to the amount of First Federal's net worth on June
29, 1996. The account will be maintained for the benefit of eligible deposit
account holders who continue to maintain deposit accounts following the
conversion. In the unlikely event of a complete liquidation, each eligible
deposit account holder will be entitled to receive a liquidation distribution
of any assets remaining after payment of all valid creditor's claims,
including the claims of all depositors to the withdrawal values of their
deposit accounts, but before any liquidation distribution may be made with
respect to Eagle's common stock. Eligible deposit account holders have a
subaccount in the liquidation account for each deposit account as of March 31,
1996. The liquidation account balance will gradually decrease as eligible
deposit account holders subaccount balances are reduced or cease to exist.
Dividends cannot be paid from the liquidation account.
The Board of Directors may declare dividends to be paid on Eagle's common
stock the payment of which may depend on dividends paid by First Federal to
Eagle. The amount First Federal can pay in dividends is limited by Office of
Thrift Supervision rules that generally allow for capital distributions in any
calendar year equal to the higher of net income for the calendar year to date
plus an amount that would reduce by one-half the surplus capital ratio at the
beginning of the calendar year or 75% of the net income over the previous four
quarters. As of January 1, 1997, First Federal's allowable capital
distribution amount was approximately $5,600,000.
9. Employee and Director Benefit Plans
Pension Plan - First Federal has a defined benefit pension plan that was
frozen on March 31, 1996 as a result of the creation of the Employee Stock
Ownership Plan (see below). Benefits, which were based on years of service
and compensation, ceased to accrue January 1, 1996. Annual contributions are
made to the plan as required by actuarial calculation and as allowed as a
deduction for federal income tax purposes. Contributions are intended to
provide for benefits attributed to service through December 31, 1995. The
following table sets forth the plan's funded status and amounts recognized in
the Company's statement of financial condition at December 31 (in thousands):
-Page 91-
<TABLE>
1996 1995
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $511,000 in 1996 and $393,000 in 1995 546 402
Projected benefit obligation for service rendered 562 657
Plan assets at fair value 473 447
Plan assets in excess of (less than) projected
benefit obligation (89) (210)
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions 64 189
Prior service cost, subsequent to the curtailment,
not yet recognized in net periodic pension cost 4 26
Unrecognized net asset at December 31 (19) (20)
Prepaid (Accrued) Pension Cost (40) (15)
</TABLE>
(-Page 21-)
<TABLE>
Net pension expense for the years ended December 31 included the following
components (in thousands):
1996 1995 1994
<S> <C> <C> <C>
Service costs-benefits earned during the year 19 64 48
Interest cost on projected benefit obligation 42 55 54
Actual return on plan assets (54) (61) 17
Net amortization and deferral 26 28 (50)
Net Periodic Pension Expense 33 86 69
</TABLE>
401(k) Plan - First Federal maintains a 401(k) plan that allows eligible
employees to establish a tax-favored savings plan. Matching contributions
were made by First Federal up to a maximum of $1,000 per employee annually to
all eligible employees on the last day of 1996, 1995 and 1994. Future
contributions may be made by First Federal at the discretion of the Board of
Directors. Eligible employees fully vest in their share of employer
contributions after six years of qualified service. Matching expense for
1996, 1995 and 1994 totaled $22,000, $24,000 and $22,000, respectively.
Employee Stock Ownership Plan ('ESOP') - In conjunction with Eagle's
subscription stock offering, an ESOP was created and 104,216 shares of Eagle's
stock were purchased for future allocation to employees. The purchase was
funded with a loan from Eagle. Shares will be allocated to all eligible
employees annually on the last day of the fiscal year based on a pro rata
share of total compensation for the year. Benefits will vest over a six year
schedule and in full upon completion of six years of qualified service
commencing with 1996.
First Federal will make minimum contributions to the ESOP sufficient to meet
annual principal and interest obligations on the loan from Eagle.
Contributions in excess of this amount may be made at First Federal's
discretion. Cash dividends received with respect to unallocated shares, if
any, will be applied to principal and interest due on the loan.
On December 31, 1996, 10,422 shares were released for allocation to eligible
participants in the ESOP and 93,794 shares remain unallocated. First Federal
contributed $147,000 to the ESOP with this amount accounted for as
compensation and employee benefits expense. Of this amount, $43,000 was
recognized as interest income by the Company, which resulted in net expense on
a consolidated basis of $104,000 for 1996.
-Page 92-
Management Development and Recognition Plan and Stock Option Plan - A special
meeting of stockholders scheduled for February, 1997 will be held for the
purpose of voting on a Management Development and Recognition Plan ('MDRP')
and a Stock Option Plan ('SOP'). If approved, the MDRP will serve as a means
of providing existing directors and selected officers and employees of Eagle
and First Federal with a proprietary interest in the Company by awarding
shares of stock to the participants. Under the plan, shares awarded would
vest over a five year period. Annual compensation and employee benefits
expense equal to the fair market value of the shares that vest at the end of
each fiscal year would be recognized.
The SOP, if approved, would promote stock ownership by directors and selected
officers and employees of Eagle and First Federal by granting stock options to
participants. Options granted will vest and become exercisable over a five
year period. Options granted are not expected to result in any compensation
and employee benefits expense for the Company either at time of the grant or
at the time of exercise of the option.
(-Page 22-)
10. Loans to Related Parties
Certain directors and officers of the Company were loan customers in the
ordinary course of business during 1996 and 1995. Such loans were made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with unrelated
parties. A summary of the activity in such loans follows (in thousands):
<TABLE>
1996 1995
<S> <C> <C>
Balance at beginning of year 617 654
New loans made 336 126
Less: Repayments 156 163
Balance at end of year 797 617
</TABLE>
11. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, 'Disclosures About Fair
Value of Financial Instruments' ('SFAS 107'), requires disclosure of fair
value information about financial instruments, whether or not recognized in
the balance sheet, for which it is practicable to estimate the value. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. In that regard, the derived fair
value estimates cannot be substantiated by comparison to independent markets
and, in many cases, could not be realized in immediate settlement of the
instrument. SFAS 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value
of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and short-term investments: The carrying amounts reported in the
balance sheet for cash and short-term investments approximate their fair
values.
Investment securities (including mortgage-backed securities): Fair
values for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are
-Page 93-
based on quoted market prices of comparable instruments.
Loans receivable: For variable rate loans that reprice frequently and
with no significant change in credit risk, fair values are based on
carrying values. The fair values for all other loans are estimated using
discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality. The carrying amount of accrued interest approximates its fair
value.
(-Page 23-)
Deposit liabilities: The fair values disclosed for demand deposits,
including interest-bearing and non-interest bearing accounts, passbook
savings and certain types of money market accounts are, by definition,
equal to the amount payable on demand at the reporting date (i.e. their
carrying amounts). Fair values for fixed-rate certificates of deposit
are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
Off-balance-sheet instruments: Fair values of off-balance-sheet
instruments (loan commitments) are based on quoted rates and fees
currently charged to enter into similar agreements, taking into account
the counterparties' credit standing. The terms of loan commitments
outstanding at December 31, 1996 are comparable to terms available for
new commitments at that date.
The estimated fair values of the Company's financial instruments at December
31 are as follows (in thousands):
<TABLE>
1996
Carrying Fair
Amount Value
<S> <C> <C>
Assets
Cash on hand and in other institutions 1,487 1,487
Federal funds sold and overnight deposits 5,573 5,573
Investment securities 53,883 53,883
Net loans 106,641 106,487
Liabilities
Deposits 133,995 134,456
Borrowed funds 15,300 15,297
1995
Carrying Fair
Amount Value
Assets
Cash on hand and in other institutions 1,072 1,072
Federal funds sold and overnight deposits 2,828 2,828
Investment securities 53,186 53,186
Net loans 88,786 89,021
Liabilities
Deposits 138,396 141,001
Borrowed funds - -
</TABLE>
(-Page 24-)
-Page 94-
12. Quarterly Financial Data (Unaudited)
<TABLE>
Summarized quarterly financial data for 1996 and 1995 follows:
1996
First Second Third Fourth
Quarter Quarter Quarter Quarter
(in thousands except per share data)
<S> <C> <C> <C> <C>
Operating Summary
Interest income 2,598 2,664 2,820 3,012
Interest expense 1,902 1,916 1,881 2,004
Net interest income 696 748 939 1,008
Provision for loan losses 15 20 103 45
Net interest income after
provision for loan losses 681 728 836 963
Non-interest income 109 75 69 165
Non-interest expense 839 827 1,772 935
Income before income tax (49) (24) (867) 193
Income tax (benefit) expense (15) ( 8) (277) 42
Net income (loss) (34) (16) (590) 151
Per Share Data
Net income (loss) N/A (.01) (.45) .12
Book value N/A 17.15 16.76 17.00
Selected Balance Sheet Averages
Assets 151,136 155,718 160,432 170,168
Investment securities 56,153 56,513 56,610 58,168
Loans 89,292 93,690 100,375 106,035
Interest bearing deposits 138,200 138,158 133,834 132,356
Borrowed funds - 1,428 2,224 13,812
Stockholders' equity (Note 1) 11,434 14,432 21,219 21,448
</TABLE>
(-Page 25-)
-Page 95-
<TABLE>
1995
First Second Third Fourth
Quarter Quarter Quarter Quarter
(in thousands except per share data)
<S> <C> <C> <C> <C>
Operating Summary
Interest income 2,340 2,456 2,527 2,610
Interest expense 1,638 1,840 1,951 1,947
Net interest income 702 616 576 663
Provision for loan losses 15 15 15 55
Net interest income after
provision for loan losses 687 601 561 608
Non-interest income 96 123 92 84
Non-interest expense 688 662 874 731
Net income before tax 95 62 (221) (39)
Income tax (benefit) expense 30 20 (68) (12)
Net income (loss) 65 42 (153) (27)
Per Share Data:
Net income (loss) N/A N/A N/A N/A
Book value N/A N/A N/A N/A
Selected Balance Sheet Averages
Assets 144,358 150,369 152,828 150,513
Investment securities 45,817 50,167 52,063 53,696
Loans 85,670 87,916 88,093 89,405
Interest bearing deposits 129,886 138,737 138,289 137,997
Borrowed funds 4,649 27 117 240
Equity 9,700 10,774 11,477 11,125
</TABLE>
(-Page 26-)
13. Parent Company Information
<TABLE>
Condensed financial information for Eagle BancGroup, Inc (parent company only)
follows (in thousands):
December 31, 1996
<S> <C>
Condensed Balance Sheet
Assets
Cash on deposit with bank subsidiary 1,074
Investment securities available for
sale at market value, cost $4,060 4,048
Investment in subsidiary 15,995
First Federal ESOP loan 1,085
Total Assets 22,202
Liabilities and Stockholders' Equity
Liabilities 61
Stockholders' Equity 22,141
Total Liabilities and Stockholders' Equity 22,202
</TABLE>
-Page 96-
<TABLE>
Condensed Statement of Income
Year Ended
December 31, 1996
<S> <C>
Interest income on investments 154
Interest income on ESOP loan 43
Total Interest Income 197
Non-interest income 9
Non-interest expense 15
Income Before Income Tax 191
Income tax expense 65
Income Before Equity in Undistributed
Net Income of Subsidiary 126
Equity in undistributed net income (loss)
of subsidiary (615)
Net Loss (489)
</TABLE>
(-Page 27-)
<TABLE>
Condensed Statement of Cash Flows
Year Ended
December 31, 1996
<S> <C>
Operating Activities
Net loss (489)
Adjustments to reconcile net income to net
cash provided by operating activities
Undistributed earnings of subsidiary 615
Increase in accrued interest receivable (105)
Increase in other liabilities 61
Net Cash Provided by Operating Activities 82
Investing Activities
Purchases of available for sale securities (6,030)
Proceeds from sale of available for sale
securities 2,036
Loan to ESOP for stock purchase (1,042)
Net Cash Used by Investing Activities (5,036)
Financing Activities
Proceeds from sale of common stock 12,228
Purchase of First Federal common stock (6,200)
Net Cash Provided by Financing Activities 6,028
Increase in cash and cash equivalents 1,074
Cash and cash equivalents at beginning of period -
Cash and Cash Equivalents at End of Year Period 1,074
</TABLE>
14. SAIF Recapitalization
The Deposit Insurance Funds Act of 1996 (the 'Act')
was signed into law on September 30, 1996. The Act included a provision to
bring the Savings Association Insurance Fund ('SAIF') reserve ratio to the
statutory minimum of 1.25% of insured deposits through a one-time special
assessment on SAIF members. In November, 1996, savings institutions paid an
assessment of $0.657 per $100 of deposits as of March 31, 1995. First
Federal's special assessment amounted to $875,000. Net of tax, 1996 earnings
-Page 97-
were reduced $600,000. Starting in 1997, deposit insurance premium rates will
be lower than in previous years as only the amount necessary to maintain the
statutory minimum SAIF reserve ratio will be paid. SAIF members will continue
to pay additional premiums to service the Financing Corporation debt, though
the portion paid by SAIF members will decrease in three years.
(-Page 28-)
OTHER CORPORATE INFORMATION
Directors of Eagle BancGroup, Inc.
Gerald A. Bradley, Chairman of the Board, Bloomington Tent and Awning Copmany,
Bloomington, Illinois
Robert P. Dole, Retired President, National Union Electric Coporation,
Normal, Illnois
Louis F. Ulbrich, Attorney-at-Law, retired, Bloomington, Illinois
William J. Hanfland, Assistant Treasurer, Illinois Agricultural Association,
Bloomington, Illinois
Steven J. Wannemacher, Executive Vice President, Heritage Enterprises, Inc.,
Bloomington, Illinois
Donald L. Fernandes, President and Chief Executive Officer, Eagle BancGroup,
Inc., Bloomington, Illinois
Executive Officers - Eagle BancGroup, Inc.
Donald L. Fernandes, President and Chief Executive officer
Louis F. Ulbrich, Secretary
Senior Officers - First Federal Savings
Donald L. Fernandes, President and Chief Executive Officer
Gary Richardson, Vice President - Lending
Larry C. McClellan, Vice President - Operations
Laurel Beth Donovan, Vice President - Retail Banking Services
Corporate Headquarters
Eagle BancGroup, Inc., 301 Fairway Drive, P. O. Box 429, Bloomington, IL 61701
Telephone (309) 663-6345 Facsimile (309) 663-8763
Corporate Attorneys
Schiff Hardin & Waite, 7200 Sears Tower, Chicago, IL 60606
Independent Auditors
Ernst & Young LLP, One Indiana Square, Indianapolis, IN 46204
Transfer Agent and Registrar
Registrar and Transfer Company, 10 Commerce Drive, Cranford, NJ 07016
(908) 272-8511
Annual Meeting
The annual meeting of stockholders of Eagle BancGroup, Inc. will be held at
2:00 p.m. (CDT) on Wednesday, April 16, 1997 at The Best Western Eastland
Suites Conference Center, Bloomington, Illinois.
Form 10-K Report
Single copies of Eagle BancGroup, Inc.'s 1996 Report on Form 10-K, as filed
withthe Securities and Exchange Commission, are available at no charge.
Contact Lori campbell, Assistant Secretary, Eagle BancGroup, Inc., 301 fairway
Drive, Bloomington, IL 61701 or phone (309) 663-6345.
-Page 98-
Common Stock - Market Information
The Company's common stock trades on The Nasdaq Stock Market under the symbol
EGLB. At December 31, 1996, there were 1,302,705 shares of the Company's
common stock issued and outstanding and there were approximately 450 holders
of record and beneficial holders.
<TABLE>
The high and low sales price of the Company's common stock for the quarters
ended September 31 and December 31, 1996, as provided by Nasdaq, are as
follows:
High Low
<S> <C> <C>
Quarter ended:
September 30, 1996 13 10 1/4
December 31, 1996 15 12 13/16
The Company has not paid any dividends. For information regarding resrictions
on dividend payments see Note 8 of the Notes to Consolidated Financial
Statements.
(-Page 29 (inside back cover))
-Page 99-
</TABLE>
Subsidiaries of the Registrant
Wholly-owned subsidiary of the Registrant:
First Federal Savings and Loan Association,
a federally-chartered savings association originally chartered in 1919
Wholly-owned subsidiary of First Federal Savings and Loan Association:
FFS Investments, Inc.
incorporated in Illinois in 1994
-Page 100-
Consent of Independent Auditors
We consent to the incorporation by reference in the Annual Report (Form 10-K)
of Eagle BancGroup, Inc. of our report dated January 17, 1997, included in the
1996 Annual Report to Shareholders of Eagle BancGroup, Inc.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-307355) pertaining to the First Federal Savings 401(k) Plan
of our report dated January 17, 1997, with respect to the consolidated
financial statements included in the 1996 Annual Report (Form 10-K) of Eagle
BancGroup, Inc.
/s/ Ernst & Young LLP
Indianpolis, Indiana
March 27, 1997
-Page 101-
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,487
<INT-BEARING-DEPOSITS> 5,073
<FED-FUNDS-SOLD> 500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 53,883
<INVESTMENTS-CARRYING> 53,883
<INVESTMENTS-MARKET> 53,883
<LOANS> 107,564
<ALLOWANCE> (923)
<TOTAL-ASSETS> 172,666
<DEPOSITS> 133,995
<SHORT-TERM> 15,300
<LIABILITIES-OTHER> 1,230
<LONG-TERM> 0
0
0
<COMMON> 13
<OTHER-SE> 22,128
<TOTAL-LIABILITIES-AND-EQUITY> 172,666
<INTEREST-LOAN> 7,681
<INTEREST-INVEST> 3,257
<INTEREST-OTHER> 156
<INTEREST-TOTAL> 11,094
<INTEREST-DEPOSIT> 7,431
<INTEREST-EXPENSE> 7,703
<INTEREST-INCOME-NET> 3,391
<LOAN-LOSSES> 183
<SECURITIES-GAINS> 15
<EXPENSE-OTHER> 4,373
<INCOME-PRETAX> (747)
<INCOME-PRE-EXTRAORDINARY> (747)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (489)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.38)
<YIELD-ACTUAL> (2.53)
<LOANS-NON> 705
<LOANS-PAST> 705
<LOANS-TROUBLED> 1,710
<LOANS-PROBLEM> 19
<ALLOWANCE-OPEN> 907
<CHARGE-OFFS> 178
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 923
<ALLOWANCE-DOMESTIC> 923
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 847
</TABLE>
