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, 1997
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 61701
(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 23, 1998, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was approximately $19,307,000 (930,466
shares at $20.75 per share). The per share price of $20.75 is based on the
last sale price of the common stock at March 23, 1998, as reported by The
Nasdaq Stock Market.
As of March 23, 1998, there were 1,177,205 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, 1997
--Part I and II.
1998 Notice and Proxy Statement for the Annual Meeting of Stockholders to
be held on April 15, 1998--Part III
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business 3
Item 2. Properties 36
Item 3. Legal Proceedings 37
Item 4. Submission of Matters to a Vote of
Security Holders 37
PART II
Item 5. Market for the Registrant's Common Stock and
Related Security Matters 37
Item 6. Selected Financial Data 37
Item 7. Manaagement's Discussion and Analysis of
Financial Condition and Results of Operations 37
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk 37
Item 8. Financial Statements and Supplementary Data 38
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 38
PART III
Item 10. Directors and Executive Officers of Registrant 38
Item 11. Executive Compensation 38
Item 12. Security Ownership of Certain Beneficial Owners
and Managament 39
Item 13. Certain Relationships and Related Transactions 39
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 39
Signatures 40
Exhibit Index 41
PART I
Item 1. BUSINESS
Eagle BancGroup, Inc. ('Eagle'), a non-diversified unitary savings and
loan holding company as defined in the Home Owners' 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, 1997, Eagle had consolidated total assets of $171,137,000
and stockholders' equity of $20,305,000. At December 31, 1997, 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, 1997, First Federal had total assets of
$168,516,000, deposit accounts of $131,558,000 and stockholders' equity of
$16,729,000.
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. Outside of Bloomington-Normal, McLean
and Dewitt Counties feature a mix of small towns and rural areas with a
population of approximately 60,000. The local population is projected to grow
7% in the next five years which is well above the 2% projected population
increase in the state of Illinois. No other major downstate Illinois
metropolitan area population is projected to grow more than 1.5%. 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.
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, commercial real
estate loans, commercial business loans, automobile and other consumer loans
and mortgage-backed and other investment securities. Residential mortgage
loans are originated primarily for sale in the secondary market, with
servicing rights retained by First Federal on approximately half of the loans
sold. Revenues are derived principally from interest on residential mortgage,
consumer loans, commercial 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.
In August, 1997, David R. Wampler joined First Federal as President and
Director. Having worked at two local commercial banks for 15 years, the last
four years as President and Chief Executive Officer of his former employer,
Mr. Wampler brought extensive experience in the local commercial banking
market. First Federal had increased its activity in commercial real estate
and commercial business loans in 1997 prior to Mr. Wampler's addition. Since
then, First Federal has continued to diversify its lending portfolio by selling
a greater number of the residential loan originations and by actively pursuing
commercial loans, commercial real estate loans and consumer loans more
aggressively than in prior years. Mr. Wampler was also appointed Director of
Eagle. Donald L. Fernandes remains as Chief Executive Officer and Chairman
of First Federal.
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-eight 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'.
<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, 1997
Average Interest & Yield/
Balance Dividends Cost
<S> <C> <C> <C>
Interest-earning assets <F1>:
Mortgage loans <F2> $ 86,619 $ 6,633 7.66%
Indirect auto loans 21,355 1,834 8.59
Other consumer loans 8,238 848 10.29
Other loans 1,828 157 8.59
Total loans 118,040 9,472 8.02
Mortgage-backed securities:
Collateralized mortgage obligations 15,448 881 5.70
Other mortgage-backed securities 14,045 857 6.10
Investment securities 14,667 897 6.12
Overnight and short-term investments 2,649 143 5.40
Federal Home Loan Bank stock 1,126 76 6.75
Total interest-earning assets 165,975 12,326 7.43
Non-interest-earning assets:
Premises and equipment, net 2,876
Real estate, net 651
Other non-interest-earning assets 2,451
Total assets 171,953
Interest-bearing liabilities:
Passbook accounts 15,832 579 3.66
NOW accounts 6,751 132 1.96
Money market accounts 2,438 70 2.87
Certificates of deposit 106,491 6,285 5.90
Total deposits 131,512 7,066 5.37
FHLB advances and other borrowed funds 17,905 1,055 5.89
Total interest-bearing liabilities 149,417 8,121 5.44
Non-interest bearing liabilities:
Non-interest bearing deposits 786
Other liabilities 1,045
Total liabilities 151,248
Stockholders' equity 20,705
Total liabilities and
stockholders' equity $171,953
Net interest income $4,205
Interest rate spread 1.99
Net interest margin 2.53%
Average interest-earning assets to
average interest-bearing liabilities 1.11x
FOR THE YEAR ENDED DECEMBER 31, 1996
Average Interest & Yield/
Balance Dividends Cost
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:
Premises 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
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:
Premises 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
<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>
<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>
1997 COMPARED TO 1996
Increase (Decrease) Due To
Rate/
Rate Volume Volume Net
<S> <C> <C> <C> <C>
Interest earning-assets <F1>:
Mortgage loans <F2> $133 $1,595 $43 $1,771
Indirect auto loans (13) (139) 1 (151)
Other consumer loans 105 (10) (1) 94
Other loans (7) 92 (8) 77
Total loans 218 1,538 35 1,791
Mortgage-backed securities:
Collateralized mortgage obligations (36) (244) 8 (272)
Other mortgage-backed securities (15) (337) 4 (348)
Investment securities 19 45 1 65
Overnight and short-term investments (4) (25) - (29)
Federal Home Loan Bank Stock - 25 - 25
Total net change in income on
interest-earning assets 182 1,002 48 1,232
Interest-bearing liabilities:
Passbook accounts (12) 14 - 2
NOW accounts 9 25 2 36
Money market accounts - (15) - (15)
Certificates of deposit (71) (320) 3 (388)
Total deposits (74) (296) 5 (365)
FHLB advances and other borrowed funds (13) 838 (42) 783
Total net change in expense on
interest-bearing liabilities (87) 542 (37) 418
Net change in net interest income $269 $ 460 $85 $814
1996 COMPARED TO 1995
Rate/
Rate Volume Volume Net
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
<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>
Lending Activities
Historically, First Federal primarily originated residential mortgage
loans secured by one-to-four family homes for its own portfolio. In 1992,
some residential loans, primarily long-term, fixed-rate loans, were sold in the
secondary market for the first time. In 1993, First Federal began originating
indirect automobile loans through a network of local automobile dealerships in
order to diversify the portfolio. Indirect automobile loans are generally
higher yielding and more interest sensitive than residential mortgage loans
and the balance of indirect automobile loans increased each year through 1996.
In the last six months of 1997, First Federal adopted a new lending strategy
under which most residential mortgage loans are sold at origination, less
emphasis is placed on originating indirect automobile loans and more emphasis
is placed on origination of commercial real estate, commercial business and
direct consumer loans. This strategy is intended to further diversify and
increase the average yield of the loan portfolio. This strategy is also
intended to increase non-interest income due to gains on loans sold and
additional servicing income. One-to-four family mortgage loans represented
63% of gross loans at December 31, 1997 while other mortgage loans comprised
12% and indirect automobile loans comprised 16%. In 1997, the percentage of
indirect automobile loans decreased while the percentage of other mortgage
loans increased. The following table sets forth the composition of the loan
portfolio as of the dates indicated:
<TABLE>
December 31,
1997 1996 1995
Amount Pct Amount Pct Amount Pct
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family <F1> $77,994 62.7% $67,855 62.7% $53,294 59.2%
Construction 3,009 2.4 1,183 1.1 716 .8
Multi-family 5,080 4.1 1,562 1.4 1,776 2.0
Commercial real estate 6,791 5.5 3,827 3.5 4,484 5.0
Total mortgage 92,874 74.7 74,427 68.7 60,270 67.0
Indirect auto loans 19,593 15.7 23,640 21.8 21,598 24.0
Other consumer loans:
Direct auto 2,190 1.8 2,136 2.0 1,515 1.7
Home equity 5,810 4.7 4,904 4.5 4,275 4.7
Other consumer 1,643 1.3 1,479 1.4 1,332 1.5
Total other consumer 9,643 7.8 8,519 7.9 7,122 7.9
Commercial business loans 1,588 1.3 1,145 1.1 541 .6
Accrued interest
receivable-all loans 631 .5 523 .5 489 .5
Gross loans 124,329 100 108,254 100 90,020 100
Less:
Due to borrowers on
construction loans (871) (610) (246)
Deferred loan fees (114) (80) (81)
Allowance for possible
loan losses (935) (923) (907)
Net loans receivable $122,409 $106,641 $88,786
<FN>
<F1>
Includes construction loans converted to permanent loans.
</TABLE>
Other than the categories listed above, no other concentrations or categories
of loans exceeding 10% of total loans are known to exist.
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 homes, and 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
adjustable 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. Prior to 1997, First Federal maintained a
practice 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 or less depending on market conditions. The emphasis
was changed in the last six months of 1997 and now most new fixed-rate, fixed-
term loans that meet underwriting standards are sold in the secondary market.
Loans are primarily sold to either the Federal National Mortgage Association
('FNMA'), a government sponsored agency, or to other private corporate
investors. At December 31, 1997, fixed-rate, fixed-term loans represented
about 33% 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, 1997, ARM loans represented about
50% of the one-to-four family mortgage loans outstanding.
Prior to 1997, ARM loans were retained in First Federal's portfolio due
to the lower level of interest rate risk compared to fixed-rate, fixed-term
loans. Beginning in the last half of 1997, most new ARM loans that meet
underwriting standards are now sold in the secondary market. In 1997,
$4,000,000 of ARM loans were sold privately to two other financial
institutions. No similar sales are anticipated in 1998. 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.
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. 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. As with new ARM loans, new balloon loans
that meet underwriting standards are now sold in the secondary market. About
17% of the one-to-four family mortgage loans outstanding at December 31, 1997
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.
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
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. In
1997, one loan was originated to a group of qualified local developers to
finance construction of a hotel in McLean County. 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 loans due to uncertainty as to the
final value of the property, possible construction delays or underestimation
of construction costs. At December 31, 1997, construction loans totaled
$3,009,000, or 2.4% of gross loans, with approximately $1,300,000 of the total
related to the commercial construction loan. The commercial construction loan
converted to permanent financing in early 1998.
Multi-Family Residential Lending. First Federal offers mortgage loans
secured by multi-family residential properties. Most such loan originations
feature balloon payments due in five years with amortization terms up to 20
years and loan to value ratios that usually do not exceed 80%. Interest rates
may be fixed or adjustable. At December 31, 1997, multi-family residential
loans totaled $5,080,000, or 4.1% of gross loans. The significant increase in
these loans in 1997 was due primarily to a $2,800,000 participation loan,
secured by a multi-building apartment complex, purchased in early 1997.
Commercial Real Estate Lending. As previously mentioned, in the last six
months of 1997, First Federal shifted its lending focus away from indirect
automobile loans and toward commercial real estate and commercial business
loans. Total commercial real estate loans were $6,791,000, or 5.5% of gross
loans, at December 31, 1997 as balances increased almost $3,000,000 from year-
end, 1996. These loans usually have variable rates, normally floating at
prime or a fixed spread above prime, and balloon payments due in five years
with amortization terms up to 20 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. As the balance of
commercial real estate and commercial business loans increases, the average
yield on the entire loan portfolio should increase.
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 increased each year through 1996. The shift in lending strategy in
1997 resulted in total indirect automobile loans of $19,593,000, or 15.7% of
gross loans, at December 31, 1997, a decrease of slightly over $4,000,000 from
year-end, 1996. The decrease is due in part to increased competition from
both national and local lenders. First Federal continues to originate
indirect automobile loans but has tightened its guidelines preferring to
originate loans to buyers who qualify as higher grade credits. 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 allowed First
Federal to successfully compete for these loans in the past. 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 28 local
dealerships with the highest amount outstanding from any one dealer totaling
18% of the total indirect auto loans outstanding at December 31, 1997.
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, 1997, no loans were delinquent 90
days or more. No recourse is available from dealerships on loan defaults.
The provision for loan losses increased from $183,000 in 1996 to $240,000 due
in part to the increase in net charge-offs related to indirect automobile
loans to $228,000 in 1997 from $134,000 in 1996.
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. Under the new lending strategy, emphasis will be placed on
originating these types of loans, especially when a customer closes a new
residential mortgage loan. 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, 1997, direct auto loans
outstanding totaled $2,190,000 or 1.8% 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 90% 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, 1997, home equity loans and lines of credit totaled $5,810,000
or 4.7% of gross loans. The amount of such loans has increased at least 15%
in each of the last two years 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
$1,643,000, or 1.3% of gross loans outstanding as of December 31, 1997.
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.
Commercial Business Lending. As previously noted, commercial business
loans will be emphasized under the new lending strategy though originations of
these loans will be subject to strict guidelines. As of December 31, 1997,
commercial business loans equaled $1,588,000, or 1.3% of gross loans, an
increase of less than $500,000 from year-end, 1996. 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
of five years or less.
Loan Originations, Purchases and Sales. First Federal's policy,
implemented in 1997, is to sell all residential mortgage loans at origination
in the secondary market. Previously, long-term, fixed-rate residential
mortgages were usually sold at origination while fixed-rate, fixed-term
residential mortgage loans with maturities of 15 years or less, adjustable
rate and balloon loans were usually retained in the portfolio. Servicing
rights are retained on loans sold to FNMA and are not retained on loans sold
to other investors. All loans are sold without recourse. In 1997,
$19,314,000 of residential mortgage loans were sold. Sales to Fleet and FNMA
equaled about 52% and 28%, respectively, of the total amount sold. Included
in the 1997 sales amount were two private bulk sales of ARM loans, totaling
$3,900,000 to other financial institutions. Servicing rights were retained on
these loans and no similar sales are anticipated in 1998.
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. In 1997,
however, one participation loan was purchased as First Federal joined with
three other Central Illinois thrifts to underwrite a multi-building apartment
complex mortgage loan. First Federal's share of the loan was $2,800,000.
Similar 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, 1997 (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 $6,584 $21,105 $50,305 $77,994
Construction 3,009 - - 3,009
Multi-family 119 828 4,133 5,080
Commercial real estate 1,159 4,107 1,525 6,791
Total mortgage 10,871 26,040 55,963 92,874
Indirect auto loans 6,381 12,577 635 19,593
Other consumer loans
Direct auto 710 1,417 63 2,190
Home equity 3,571 1,709 530 5,810
Other consumer 1,445 188 10 1,643
Total other consumer 5,726 3,314 603 9,643
Commercial business loans 943 482 163 1,588
Total loans $23,921 $42,413 $57,634 $123,698
</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.
<TABLE>
The amount of loans due after one year having predetermined interest
rates and floating or adjustable interest rates is as follows (in thousands):
<S> <C>
Fixed $67,014
Adjustable 33,033
</TABLE>
Loan Commitments. At December 31, 1997, outstanding loan commitments
totaled $567,000. 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 $2,841,000 at December 31, 1997. 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, 1997, deferred loan fees equaled $114,000. Certain costs paid by
First Federal necessary for loan processing and closing, including credit
reports, an independent appraisal and title insurance, are reimbursed by
borrowers. Loans totaling $38,370,000 were serviced for others as of December
31, 1997. Servicing income of $138,000 was recorded in 1997. Fees may also
be collected in connection with loan modifications, late payments, prepayments
and for other miscellaneous loan related services. Such payments 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, 1997 was approximately $2,667,000. As of the same date, First
Federal had no single borrower with loans exceeding $2,125,000.
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.
<TABLE>
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):
December 31,
1997 1996 1995
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 $215 $103 $288 $310 $165 $305
Construction 100 112 - - - -
Multi-family - - - - - -
Commercial real estate - - - 333 - 146
Total mortgage 315 215 288 643 165 451
Indirect auto loans 28 - 49 44 4 51
Other consumer loans
Direct auto - - 22 7 8 -
Home equity - 11 13 - - 10
Other consumer 36 - 6 11 5 1
Total other consumer 36 11 41 18 13 11
Commercial business loans - 69 81 - - -
Total $379 $295 $459 $705 $182 $513
Percent of Gross Loans 0.31% 0.24% 0.42% 0.65% 0.20% 0.57%
</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, 1997, 1996 and 1995, 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 $9,000, $40,000 and $28,000,
respectively, in 1997, 1996 and 1995. 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, 1997 and 1996, real estate owned consisted entirely of
property acquired for investment purposes. At December 31, 1997, the largest
parcel of real estate owned was 32 acres of industrial property valued at
$580,000 acquired in 1992. Sale of this property is being actively pursued.
The following table sets forth information with respect to non-performing
assets (in thousands):
<TABLE>
December 31,
1997 1996 1995
<S> <C> <C> <C>
Mortgage loans:
One-to-four family $103 $310 $305
Construction 112 - -
Multi-family - - -
Commercial real estate - 333 146
Total mortgage 215 643 451
Indirect auto loans - 44 51
Other consumer loans
Direct auto - 7 -
Home equity 11 - 11
Other consumer - 11 -
Total other consumer 11 18 11
Commercial business loans 69 - -
Total Non-Accrual Loans 295 705 513
Real estate owned 633 653 644
Troubled debt restructuring - - -
Repossessed automobiles 49 76 46
Total Non-Performing Assets $977 $1,434 $1,203
Percent of Total Assets 0.57% 0.83% 0.80%
</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.
<TABLE>
The following table sets forth information with respect to the
classification of assets as of December 31, 1997 (in thousands):
<S> <C>
Substandard assets $288
Doubtful assets -
Loss 32
Total Classified Assets $320
Percent of Total Assets 0.19%
</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
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 1997 was $240,000. This provision was
deemed appropriate due to the growth of the loan portfolio and an increase in
net charge-offs to $228,000 in 1997 from $167,000 in 1996. The 1997 provision
relates primarily to consumer loans, even though the outstanding total of
those loans decreased in 1997 from 1996. 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, 1997 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.
<TABLE>
The following table sets forth information with respect to activity in
the allowance for loan losses for the years indicated (in thousands):
<CAPTION>
For the Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Allowance for loan loss at
beginning of period $923 $907 $873
Provision for loan losses 240 183 100
Charge-offs:
Mortgage loans:
One to four family 7 1 -
Construction - - -
Multi-family - - -
Commercial real estate - - -
Total mortgage 7 1 -
Indirect auto loans 197 145 54
Other consumer loans
Direct auto 30 21 9
Home equity - - -
Other consumer 5 11 5
Total other consumer 35 32 14
Commercial business loans - - -
Total charge-offs 239 178 68
Recoveries:
Mortgage loans:
One to four family - - -
Construction - - -
Multi-family - - -
Commercial real estate - - -
Total mortgage - - -
Indirect auto loans 10 11 2
Other consumer loans
Direct auto 1 - -
Home equity - - -
Other consumer - - -
Total other consumer 1 - -
Commercial business loans - - -
Total recoveries 11 11 2
Net charge-offs (228) (167) (66)
Allowance for loan loss at
end of period $935 $923 $907
Allowance for loan losses to gross
loans outstanding at end of period 0.76% 0.85% 1.01%
Net charge-offs to average loans
outstanding during the period 0.19% 0.17% 0.08%
</TABLE>
<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):
<CAPTION>
December 31,
1997 1996 1995
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 $382 0.49% $352 0.52% $250 0.47%
Construction 21 0.70 6 0.51 - -
Multi-family 51 1.00 16 1.02 18 1.01
Commercial real estate 123 1.81 127 3.32 334 7.45
Total mortgage 577 0.62 501 0.67 602 1.00
Indirect auto loans 201 1.03 244 1.03 221 1.02
Other consumer loans
Direct auto 23 1.05 23 1.08 15 0.99
Home equity 29 0.50 36 0.73 57 1.33
Other consumer 29 1.77 15 1.01 1 0.08
Total other consumer 81 0.84 74 0.87 73 1.02
Commercial business loans 8 0.50 6 0.52 11 0.60
Unallocated 68 - 98 - - -
Total Allowance for Loan Loss $935 0.76% $923 0.85% $907 1.01%
</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, 1997. 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
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, 1997, mortgage-
backed securities with a book value of $12,296,000 and a market value of
$12,281,000 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, 1997, CMOs with a
book value of $12,467,000 and a market value of $12,315,000 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,
1997, First Federal held two mortgage-related securities, with a book value of
$1,321,000 and a market value of $1,294,000, 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 1997.
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, 1997, both the book value
and the market value of other investment securities held was $14,347,000.
<TABLE>
The table below sets forth information with respect to the amortized cost
of investment securities at the dates indicated (in thousands):
<CAPTION>
December 31,
1997 1996 1995
<S> <C> <C> <C>
Mortgage-backed securities:
Collateralized mortgage obligations $12,467 $18,125 $21,305
Other mortgage-backed 12,296 19,685 20,286
U.S. government and agencies 12,642 15,181 10,664
Other securities 395 447 482
FHLB stock 1,310 955 694
Total investments, at amortized cost $39,110 $54,393 $53,431
</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, 1997 (amounts in thousands):
<CAPTION>
Over One Over Five
One Year or Less to Five Years to Ten Years
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Collateralized mortgage
obligations $ 55 5.57% $1,840 5.78% $1,000 5.65%
Other mortgage-backed 3,403 5.82 - - 1,054 5.60
U.S. government and
agencies 3,175 5.36 8,467 6.26 1,000 7.00
Other securities 22 7.60 86 7.60 148 7.60
FHLB stock - - -
Total Investments $6,655 5.60% $10,393 6.19% $3,202 6.15%
</TABLE>
<TABLE>
Over Ten Years Total
Weighted Weighted
Amortized Average Amortized Average Market
Cost Yield Cost Yield Value
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Collateralized mortgage
obligations $ 9,572 5.53% $12,467 5.58% $12,315
Other mortgage-backed 7,839 6.37 12,296 6.15 12,281
U.S. government and
agencies - - 12,642 5.49 12,635
Other securities 139 7.60 395 7.60 402
FHLB stock 1,310 6.75 1,310 6.75 1,310
Total Investments $18,860 5.98% $39,110 5.79% $38,943
</TABLE>
With the exception of the U.S. government and federal agencies, as of
December 31, 1997, 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
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. In 1997, First Federal revised and enhanced its demand
account products. Non-interest bearing accounts feature unlimited check
writing, no minimum balance and no service charge. NOW accounts earn interest
and feature unlimited check writing, a Visa check debit card (to qualifying
customers) and no service charge if the customer has a loan or other deposit
account with First Federal or a minimum balance. Money market accounts have
the same features as NOW accounts but earn higher interest with a tiered rate
schedule under which higher balance accounts earn the highest rate. ATM cards
are available for qualifying customers on all accounts and commercial accounts
are also offered. Passbook savings accounts are available under two plans
with higher interest earned on one plan with a minimum balance. 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-eight 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. In July, 1995, First Federal ended a time deposit attraction
marketing program that attracted over $15,000,000 in new time deposits but
also resulted in an increase in the cost of funds as the average rate paid on
certificates increased to 5.81% in 1995 from 4.64% in 1994. Since then,
efforts to reduce the cost of funds, including the use of FHLB advances as a
funding source and not offering special rates at maturity on the certificates
attracted as part of the marketing program, have been made. 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,
1997 1996 1995
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 $786 0.00% $ 549 0.00% $ 468 0.00%
NOW 6,751 1.96 5,338 1.80 4,821 1.78
Money market 2,438 2.87 2,964 2.87 3,611 2.85
Passbook 15,832 3.66 15,462 3.73 13,947 3.54
Total Demand 25,807 3.12 24,313 3.13 22,847 2.99
Certificate of Deposit Accounts:
6 months or less 8,075 5.10 9,335 4.95 11,863 5.24
7 to 12 months 23,400 5.44 27,011 5.71 27,608 5.57
13 to 24 months 20,532 5.91 18,390 6.17 18,733 5.54
25 to 36 months 22,642 6.04 27,509 5.94 26,050 5.64
37 to 60 months 13,116 6.29 12,077 6.30 12,187 6.65
Over 60 months 10,236 6.63 10,117 6.61 9,643 6.59
Jumbo 8,490 6.16 7,420 6.31 7,792 6.46
Total Certificates 106,491 5.90 111,859 5.97 113,876 5.81
Total Deposits $132,298 5.37% $136,172 5.48% $136,723 5.35%
</TABLE>
<TABLE>
The following table sets forth information with respect to the maturity
of jumbo time certificates of deposit as of December 31, 1997. 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 $2,555
Due in over three through six months 663
Due in over six through twelve months 1,025
Due in over twelve months 3,878
</TABLE>
Borrowings. Prior to 1996, First Federal relied on Federal Home Loan
Bank ('FHLB') advances only in the event of a reduction in available funds
from other sources. In 1996, FHLB advances were used to fund loan
originations rather than more traditional sources of funds due to the lower
cost of the advances relative to similar term certificates of deposit. In
1997, First Federal continued to use FHLB advances as a source of funds. The
change in lending strategy in 1997, namely the decision of sell most
residential mortgage originations, has reduced the dependence on 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. Some fixed maturity
advances allow prepayments under certain conditions. At December 31, 1997,
FHLB advances were fixed rate and totaled $18,000,000. 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,
1997 1996
<S> <C> <C>
Balance on December 31 $18,000 $15,300
Highest month-end balance 21,050 19,100
Average balance during the year 17,905 4,342
Average rate during the year 5.89% 6.20%
Average rate at year-end 5.74% 5.73%
</TABLE>
During 1996, 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 time in 1997 or
at any month end in 1996, including December. The average amount of
repurchase agreements outstanding was $44,000 and the average rate paid on the
repurchase agreements was 5.25% in 1996. 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, 1997, the Company had 44 full-time and 20 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.
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 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
Deposit Insurance Reform Legislation. 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.
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. 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
(bonds issued in the late 1980s to recapitalize the Federal Savings and Loan
Insurance Corporation) 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 is 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.
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
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.
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 OTS and the
FDIC promulgate regulations implementing other provisions of HOLA and the FDI
Act.
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, 1997, First
Federal had not originated loans and had no outstanding commitments that
exceeded the loans to one borrower limit at the time made or committed.
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, 1997, of $1,288,000. 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.
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, 1997,
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
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, 1997, First Federal met each of its
capital requirements.
The OTS' interest rate risk component of the risk-based capital standards
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. The
OTS may initiate 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. The FDIC has established 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, 1997, 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.
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 became 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
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, no savings association may lend 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.
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. 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 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.
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
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.
Executive Officers of the Registrant
<TABLE>
The following are the executive officers of the Company, each of whom is
elected annually, and there are no arrangements or understandings between any
of the persons so named and any other person pursuant to which such person was
elected as an executive officer.
Name Age Positions with Registrant
<S> <C> <C>
Donald L. Fernandes 40 President, Chief Executive Officer and Director
of Eagle since formation of the Company in 1996.
Chairman of the Board and Chief Executive Officer
Of First Federal since August, 1997. From
August, 1995 to August, 1997, President and Chief
Executive Officer of First Federal. Senior Vice
President and Chief Financial Officer of First
Federal prior thereto.
David R. Wampler 37 Vice President and Director of Eagle since
August, 1997. President and Director of First
Federal since August, 1997. From July, 1993
through July, 1997, President of Central Illinois
Bank of McLean County. Commercial Lending
Officer for Bank One, Bloomington, prior thereto.
Larry C. McClellan 43 Vice President - Operations of First Federal
since August, 1995. Controller of First Federal
prior thereto.
Laurel B. Donovan 44 Vice President - Retail Banking Services of First
Federal since 1990.
Gary L. Richardson 46 Vice President - Lending of First Federal since
February, 1993. Senior Consumer Lending Officer
for First of America Bank-Illinois, NA,
Bloomington prior thereto.
</TABLE>
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, 1997
(in thousands)
<S> <C> <C>
Main Office
301 Fairway Drive
Bloomington, Illinois 61701 1981 $1,221
Veterans Parkway Branch
1111 South Veterans Parkway
Bloomington, Illinois 61701 1994 1,336
LeRoy Branch
207 South East Street
LeRoy, Illinois 61752 1983 224
</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, 1997.
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 37 of the Corporation's Annual
Report to Stockholders for the year ended December 31, 1997.
Item 6. SELECTED FINANCIAL DATA
The information called for by this item is incorporated by reference to
'Financial Highlights' on page 1 of the Corporation's Annual Report to
Stockholders for the year ended December 31, 1997.
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
'Management's Discussion and Analysis' on pages 2 through 9 of the
Corporation's Annual Report to Stockholders for the year ended December 31,
1997.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is incorporated by reference to
'Management's Discussion and Analysis' on pages 2 through 9 of the
Corporation's Annual Report to Stockholders for the year ended December 31,
1997.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of the Corporation and its
subsidiaries included in the Corporation's Annual Report to Stockholders for
the year ended December 31, 1997 are incorporated herein by reference.
<TABLE>
1997 Annual
Report Page(s)
<S> <C>
Report of Independent Auditors 10
Consolidated Statements of Condition as of
December 31, 1997 and 1996 11
Consolidated Statements of Income for the Years
Ended December 31, 1997, 1996 and 1995 12
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995 14-15
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1997, 1996 and 1995 13
Notes to Consolidated Financial Statements 16-36
</TABLE>
Note 13 of Notes to Consolidated Financial Statements titled 'Quarterly
Financial Data' on pages 33 and 34 of the Corporation's 1997 Annual Report to
Stockholders for the year ended December 31, 1997 is incorporated herein by
reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information called for by this item has been previously reported on
Form 8-K. See item 14 (b) below.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information called for by this item with respect to directors and
director nominees is presented in Eagle's Notice and Proxy Statement dated
March 13, 1998 on pages 4 and 5 under the caption 'Proposal 1 - Election of
Directors' and on page 14 under the caption 'Section 16(a) Beneficial
Ownership Reporting Compliance' and is incorporated herein by reference.
The information called for by this item with respect to executive
officers is included under the caption 'Executive Officers of the Registrant'
under Item 1 of this Form 10-K on page 36.
Item 11. EXECUTIVE COMPENSATION
The information called for by this item is presented in Eagle's Notice
and Proxy Statement dated March 13, 1998 on pages 6 through 11 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 13, 1998 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
The information called for by this item is presented in Eagle's Notice
and Proxy Statement dated March 13, 1998 on page 10 under the caption
'Compensation Committee Interlocks and Insider Participations' and is
incorporated herein by reference.
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 listed 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:
A report on Form 8-K dated October 17, 1997 was filed by Eagle to
report a change in certifying accountants by the Corporation. No financial
statements were included in the filing.
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, 1998 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, Director, Chief March 27, 1998
- ------------------------- Financial Officer and
DONALD L. FERNANDES Principal Accounting Officer
/s/ Gerald A. Bradley Chairman of the Board March 27, 1998
- ---------------------
GERALD A. BRADLEY
/s/ David R. Wampler Vice President and Director March 27, 1998
- ---------------------
DAVID R. WAMPLER
/s/ Robert P. Dole Director March 27, 1998
- ---------------------
ROBERT P. DOLE
/s/ William J. Hanfland Director March 27, 1998
- -----------------------
WILLIAM J. HANFLAND
/s/ Louis F. Ulbrich Director March 27, 1998
- --------------------
LOUIS F. ULBRICH
/s/ Steven J. Wannemacher Director March 27, 1998
- -------------------------
STEVEN J. WANNEMACHER
EXHIBIT INDEX
<TABLE>
Item Exhibit Page
<S> <C> <C> <C>
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 Employment Agreement, dated as of
June 29, 1996, among Eagle
BancGroup, Inc., First Federal Savings
and Loan Association of Bloomington
and Donald L. Fernandes <F3>
10.7 Employment Security Agreement, dated
as of July 1, 1996, between the
Registrant and Larry C. McClellan <F3>
10.8 Employment Security Agreement, dated
as of July 5, 1996, between the
Registrant and Laurel B. Donovan <F3>
10.9 Employment Security Agreement, dated
as of July 8, 1996, between the
Registrant and Gary L. Richardson <F3>
10.10 Employment Security Agreement, dated as
of September 26, 1997, between the
Registrant and David R. Wampler 43
13. Annual report to 13.1 1997 Annual Report to
security holders Stockholders 52
21. Subsidiaries of 21.1 List of subsidiaries of the
the registrant Registrant 92
23. Consent of experts 23.1 Consent of McGladrey & Pullen, LLP 92
and counsel
23.2 Consent of Ernst & Young LLP 92
99. Additional exhibits 99.1 Report of Independent Auditors 93
27. Financial Data 27.1 Financial Data Schedule as of
Schedule December 31, 1997
27.2 Revised Financial Data Schedules as
of March 31, 1997, June 30, 1997 and
September 30, 1997
<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 Exhibits filed with Annual Report on Form
10-K for the fiscal year ended December 31, 1996, filed March 31, 1997
</FN>
</TABLE>
Exhibit 10.10
EMPLOYMENT SECURITY AGREEMENT
Dear Mr. Wampler:
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. Section 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
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 or 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,
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 Suptevision ("OTS") or other
appropriate regulatory authority has given the required approval
of 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
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 October 1, 1997 and ending September 30, 2000. 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 September 30, 1998, and on
sixty (60) days prior to each succeeding September 30 thereafter,
respectively.
Very truly yours,
By: /s/ Donald L. Fernandes
Title: President
Accepted and agreed to this 26th
day of September, 1997.
/s/ David L. Wampler
Exhibit 13.1
1997 Annual Report
Eagle BancGroup, Inc.
Holding Company for First Federal Savings & Loan Association
Bloomington, Illinois
(Front Cover)
Eagle BancGroup, Inc. and subsidiary
<TABLE>
Table of Contents
<S> <C>
Financial Highlights 1
Management's Discussion and Analysis 2
Independent Auditor's Report 10
Consolidated Statements of Condition 11
Consolidated Statements of Income 12
Consolidated Statements of
Changes in Stockholders' Equity 13
Consolidated Statements of Cash Flows 14
Notes to Consolidated Financial Statements 16
Other Corporate Information 37
</TABLE>
To Our Stockholders:
We are pleased to present to our stockholders this annual report for 1997. The
theme used on the cover was chosen because we believe it captures the spirit
and philosophy of the Company and its employees. The challenges we face are
best met by a positive and aggressive approach, whereby we seek new
possibilities and create opportunities which will have a positive and lasting
effect on our employees, our customers, the communities we live in and our
stockholders. We have established a goal to be the premier independent
financial institution in the communities we serve by delivering outstanding
service to our customers, with integrity and a friendly, personalized style.
The past year was a rewarding experience as we made significant progress in
many areas. We believe the Company is positioned well to achieve the goals we
have set for ourselves. We continue to work to grow and improve our financial
performance, while enhancing the long-term investment value for our
stockholders. The continued support we have received from our customers and
our stockholders is greatly appreciated and we look forward to an exciting and
prosperous year in 1998.
Sincerely,
/s/ Gerald A. Bradley /s/ Donald L. Fernandes
Gerald A. Bradley Donald L. Fernandes
Chairman of the Board President and Chief Executive Officer
(Inside Front Cover)
Eagle BancGroup, Inc. and Subsidiary
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following table sets forth, on a historical basis, selected consolidated
financial data for the Company. Data prior to 1996 relates to First Federal
only.
As of and For the Year Ended December 31,
1997 1996 1995 1994 1993
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data
Total assets $171,137 $172,666 $150,974 $140,932 $137,368
Cash and due from banks 1,628 1,487 1,072 1,092 938
Federal funds sold and
overnight deposits 3,386 5,573 2,828 1,611 8,882
Investments 38,943 53,883 53,186 42,680 50,468
Loans, net 122,409 106,641 88,786 83,589 67,939
Deposits 131,452 133,995 138,396 122,388 125,156
FHLB advances and other
borrowings 18,000 15,300 - 7,936 -
Total equity 20,305 22,141 11,515 9,501 11,320
Selected Operating Data
Interest income $12,326 $11,094 $ 9,933 $ 8,595 $ 8,913
Interest expense 8,121 7,703 7,376 5,396 5,838
Net interest income before
provision for loan losses 4,205 3,391 2,557 3,199 3,075
Provision for loan losses 240 183 100 (32) (3)
Net interest income after
provision for loan losses 3,965 3,208 2,457 3,231 3,078
Non-interest income 576 418 395 261 1,206
Non-interest expense 3,768 4,373 2,955 2,840 2,584
Income (loss) before income
taxes 773 (747) (103) 652 1,700
Income taxes 264 (258) (30) 222 570
Net income (loss) 509 (489) (73) 430 1,130
Per Share Data
Book value per share $17.24 $17.00 N/A N/A N/A
Basic earnings (loss)
per share 0.44 (0.38) N/A N/A N/A
Diluted earnings (loss)
per share 0.44 (0.38) N/A N/A N/A
Cash dividends per share - - N/A N/A N/A
Selected Financial Ratios and Other Data
Performance Ratios (based on balance sheet averages) <F1>
Return on assets 0.30% -0.31% -0.05% 0.31% 0.81%
Return on equity 2.46% -2.85% -0.68% 4.15% 10.31%
Interest rate spread
during period <F2> 1.99% 1.69% 1.83% 2.54% 2.27%
Net interest margin
during period <F3> 2.53% 2.20% 1.85% 2.55% 2.38%
Non-interest expense
to assets <F4> 2.19% 2.74% 1.98% 2.06% 1.86%
Non-interest income to
assets 0.33% 0.26% 0.26% 0.19% .87%
Interest-earning assets to
interest-bearing
liabilities 1.11x 1.10x 1.01x 1.00x 1.02x
Asset Quality Ratios
Non-performing assets to
total assets <F5> 0.54% 0.79% 0.80% 4.86% 5.56%
Allowance for loan losses to
non-performing loans 316.95% 130.92% 176.80% 219.35% 115.09%
Net charge-offs to
average gross loans 0.19% 0.17% 0.08% 0.05% 0.00%
Regulatory Capital and Capital Ratios <F6>
Tangible capital ratio 9.99% 9.66% 7.73% 8.20% 8.22%
Core capital ratio 9.99% 9.66% 7.73% 8.20% 8.22%
Risk-based capital ratio 16.30% 18.29% 15.78% 15.80% 17.70%
Average equity to
average assets 12.04% 10.76% 7.21% 7.55% 7.89%
Equity to assets at
end of period 11.86% 12.82% 7.63% 6.74% 8.24%
<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 the 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 reflects the effect of the SAIF special assessment.
<F5>
Non-performing assets consist of non-performing loans and foreclosed real
estate owned. The significant decline in this ratio between the 1994 to
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.
<F6>
Tangible capital, Core capital and Risk-based capital ratios relate to
First Federal only.
</FN>
</TABLE>
(Page 1)
Eagle BancGroup, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's discussion and analysis of the 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 report.
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 relates to First Federal Savings
and Loan Association only.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
GENERAL. In 1997, the Company earned net income of $509,000, or $.44 per
share, compared to a net loss of $489,000, or $(.38) per share, in 1996. The
1996 results include the SAIF capitalization special assessment which, net of
tax, reduced earnings $600,000. Excluding the net effect of the special
assessment, the Company had net income of $111,000 in 1996.
NET INTEREST INCOME. Net interest income increased to $4,205,000 in 1997 from
$3,391,000 in 1996. The 24% increase in net interest income was due to
improvement in the interest rate spread, which increased to 1.99% in 1997 from
1.69% in 1996. The interest rate spread is the difference between the yield
on average interest earning assets and the cost of average interest bearing
liabilities. The net interest margin, net interest income divided by average
interest earning assets, also improved to 2.53% in 1997 from 2.20% in 1996.
Interest income increased 11% to $12,326,000 in 1997 from $11,094,000 in 1996
and interest expense increased 5% to $8,121,000 in 1997 from $7,703,000 in
1996.
In 1997, the Company benefited from a full year's effect of the investment of
the $11,186,000 net proceeds received from the initial stock offering
completed in June of 1996. In addition, strong loan demand in 1997 and
Company efforts to restructure the loan and investment portfolios resulted in
an increase in average loans outstanding to $118,040,000 in 1997 from
$97,380,000 in 1996. Much of the increase in loans outstanding was in
residential mortgage loans. During the second half of 1997, the Company began
to increase its emphasis on originations of commercial loans and commercial
real estate mortgage loans. Total average interest earning assets were
$165,975,000 in 1997 and $154,244,000 in 1996. The increased emphasis on loan
originations resulted in higher yielding loans comprising a greater share of
earning assets in 1997 than 1996. As a percentage of average interest earning
assets, average loans outstanding equaled 71% in 1997 compared to 63% in 1996.
(Page 2)
The yield earned on average interest earning assets increased to 7.43% in 1997
from 7.19% in 1996. The yield earned on average loans outstanding was 8.02%
in 1997 compared to 7.89% in 1996. The yield on the other interest earning
assets was 5.95% in 1997 and 6.00% in 1996, and the average balance of these
assets decreased to $47,935,000 in 1997 from $56,864,000 in 1996.
Average interest bearing liabilities increased to $149,417,000 in 1997 from
$140,009,000 in 1996 while the rate paid on average interest bearing
liabilities decreased to 5.44% in 1997 from 5.50% in 1996. Average borrowed
funds, consisting entirely of Federal Home Loan Bank ('FHLB') advances,
increased to $17,905,000 in 1997 from $4,386,000 in 1996 while average
deposits decreased to $131,512,000 in 1997 from $135,623,000 in 1996. The
increase in loans outstanding in 1997 was funded in part with FHLB advances.
The rate paid on average borrowed funds decreased to 5.89% in 1997 from 6.20%
in 1996 and the rate paid on average deposits decreased to 5.37% in 1997 from
5.48% in 1996.
At December 31, 1997, loans totaling $295,000 were contractually past due 90
days or more and were classified as non-accrual. Interest income is
recognized on such loans only upon cash receipt and no interest income is
accrued. In 1997, cash interest payments of $16,000 were included in interest
income on the non-accrual loans. Additional interest income of $9,000 would
have been recorded on the loans on an accrual basis. No other loans were
contractually past due 90 days or more at December 31, 1997.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased to
$240,000 in 1997 from $183,000 in 1996 due mainly to the increased lending
activity. The amount of the provision is determined through analysis of the
loan portfolio and the allowance for loan losses, including a review of
charge-offs and delinquencies, as well as industry practice and experience.
At December 31, 1997, the allowance for loan loss was $935,000, or .76% of
total loans, compared to $923,000, or .86% of total loans, at December 31,
1996. The growth in the loan portfolio in 1997 related primarily to
residential mortgage loans, which historically have low loss rates that did
not justify a more significant increase in the allowance for loan losses. Net
charge-offs were $228,000 in 1997, up from $167,000 in 1996. The net charge-
offs in 1997 related entirely to consumer loans. The total balances of
consumer loans decreased approximately $3,000,000 in 1997, due largely to less
emphasis on the origination of indirect auto loans in 1997.
NON-INTEREST INCOME. Non-interest income increased to $576,000 in 1997 from
$418,000 in 1996 due primarily to gains on loans sold, which increased to
$178,000 in 1997 from $68,000 in 1996. Loans sold increased to $19,314,000 in
1997 from $10,844,000 in 1996. Net gains on securities sold increased to
$46,000 in 1997 from $15,000 in 1996. In May, 1997, over $8,000,000 of
securities were sold for gains of $58,000. Later in 1997, $9,000,000 of
(Page 3)
securities, mostly underperforming mortgage-related holdings, was sold at a
net loss of $23,000. Proceeds from the security sales were used primarily to
originate loans. Service charges on deposit accounts increased to $80,000 in
1997 from $51,000 in 1996 due to an increased number of accounts and a revised
account and fee schedule. Non-interest income was .33% of average assets in
1997 compared to .26% in 1996.
NON-INTEREST EXPENSE. Non-interest expense increased to $3,768,000 in 1997,
compared to $3,498,000 in 1996, net of the SAIF special assessment. Total
non-interest expenses in 1996 were $4,373,000 including the SAIF
recapitalization special assessment of $875,000. Salaries and employee
benefits increased to $2,150,000 in 1997 from $1,736,000 in 1996 due primarily
to staff additions and normal increases in employee costs as well as expenses
related to benefit plans implemented following the stock conversion. Data
processing expense increased to $322,000 in 1997 from $249,000 in 1996 due to
one-time expenses related to converting to a new data provider and
deconverting from the previous provider. Audit and legal fees increased to
$240,000 in 1997 from $120,000 in 1996 due primarily to increased corporate
meeting and reporting requirements following formation of the holding company.
The expense increases were partially offset by a decrease in regular FDIC
premium expense to $67,000 in 1997 from $356,000 in 1996 due to the premium
rate reduction following payment of the recapitalization special assessment in
1996.
As a percentage of average assets, non-interest expense was 2.19% in both 1997
and 1996, net of the recapitalization assessment.
INCOME TAX EXPENSE. Due to the increase in income before income tax, income
tax expense was $264,000 in 1997 compared to a benefit for income tax of
$258,000 in 1996. The effective tax rate was 34% in 1997 compared to an
effective benefit rate of 35% in 1996.
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 reduced earnings $600,000,
net of tax. Excluding the recapitalization assessment, the Company had net
income of $111,000 in 1996.
NET INTEREST INCOME. Net interest income increased 33% to $3,391,000 in 1996
from $2,557,000 in 1995. Interest income increased 12% to $11,094,000 in 1996
from $9,933,000 in 1995 while interest expense increased 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 due to the $11,186,000 net proceeds from
the stock offering completed in June, 1996 and the over $5,000,000 received in
late 1995 from the sale of a large commercial property that was held as real
estate owned. These funds were used to originate loans or were invested in
government or 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 in 1997 from $46,444,000 in 1996. 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
(Page 4)
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 was due to the higher rate environment in 1996 and 1995 than previous
years and the full year effect of the 1995 deposit attraction marketing
program that involved matching competitors' rates on certain certificates.
The rate paid on average borrowed funds decreased to 6.20% in 1996 from 6.52%
in 1995.
The interest rate spread decreased to 1.69% in 1996 from 1.83% in 1995 due to
the higher rate paid on average interest-bearing liabilities in 1996 than
1995. The net interest margin 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 at December 31, 1996, which
totaled $705,000, were classified as non-accrual. Interest income is
recognized only upon cash receipt and no interest income is accrued on such
loans. In 1996, cash interest payments of $47,000 were included in interest
income related to these loans. Additional interest income of $40,000 would
have been recorded on these loans on an accrual basis.
PROVISION FOR LOAN LOSS. 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 over
$4,000,000 in 1996 from 1995. 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.
NON-INTEREST INCOME. 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 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 due to 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. Non-interest income equaled .26% of average assets in both
1996 and 1995.
NON-INTEREST EXPENSE. 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
(Page 5)
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 expense related to the Employee Stock Ownership
Plan established following the stock conversion 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 following expense increases in 1996 from 1995: 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 compared to 1.98% in 1995.
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 effective tax
benefit rate in 1996 was 35% compared to 29% in 1995.
FINANCIAL CONDITION
Total assets were $171,137,000 at December 31, 1997 a slight decrease from
$172,666,000 at December 31, 1996. While total assets changed little, the
composition of the portfolio of interest bearing assets did change
considerably. During 1997, over $25,000,000 in securities were sold with
approximately half of the proceeds used to originate residential mortgage or
commercial loans.
Net loans increased 15% to $122,409,000 at December 31, 1997 from $106,641,000
at December 31, 1996. Much of the increase was in residential mortgage loans,
which totaled $86,083,000 at December 31, 1997 and $70,600,000 at December 31,
1996. Origination of residential mortgage loans continues to be the primary
focus of the Company's lending efforts. Most new residential loan production
is sold in the secondary market. Efforts to originate direct consumer loans,
commercial loans and commercial real estate loans have increased and less
emphasis is being placed on the origination of indirect automobile loans.
Commercial real estate and commercial loans increased to $8,379,000 at
December 31, 1997 from $4,972,000 at December 31, 1996 while consumer loans,
primarily indirect automobile loans, decreased to $29,236,000 at December 31,
1997 from $32,159,000 at December 31, 1996.
Investment securities decreased to $37,633,000 at December 31, 1997 from
$52,928,000 at December 31, 1996. The decrease was primarily related to
mortgage-backed securities, which totaled $24,596,000 at December 31, 1997 and
$37,445,000 at December 31, 1996. The securities sold in 1997 provided funds
for loan originations and also generated net realized gains, improving 1997
results and allowing the Company to dispose of some underperforming issues.
Total deposits decreased to $131,452,000 at December 31, 1997 from
$133,995,000 at year-end, 1996. The Company continued to focus on reducing
the cost of funds in 1997. Certificates of deposit attracted during aa 1995
marketing program that matured in 1997 were not offered special terms at
renewal which resulted in a decrease in certificate balances from $109,072,000
(Page 6)
at December 31, 1996 to $104,735,000 at December 31, 1997. NOW account
balances increased from $9,230,000 at December 31, 1996 to $11,569,000 at
December 31, 1997 due in part to an enhanced NOW account product line in 1997.
Borrowed funds, all FHLB advances, increased to $18,000,000 at December 31,
1997 from $15,300,000 at December 31, 1996 as the Company continued to fund
loan originations with FHLB advances when necessary in 1997. The increase in
borrowed funds partially offset the decrease in deposits.
Stockholder's equity decreased to $20,305,000, or 11.9% of total assets, at
December 31, 1997 from $22,141,000, or 12.8% of total assets, at December 31,
1996. In 1997, the Company repurchased 125,000 shares of stock to be held in
treasury and purchased additional shares to be awarded under the Management
Development and Recognition Plan that was approved by stockholders in 1997.
Offsetting the decrease in equity due to the stock purchases was 1997 net
income and a decrease in the net unrealized loss on investment securities from
year-end 1996 to year-end 1997. Book value per share increased to $17.24 per
share at December 31, 1997 from $17.00 per share at December 31, 1996.
Savings institutions are required to maintain minimum capital levels measured
by three 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%. At December 31, 1997, the Company's savings
institution subsidiary had ratios of 16.30%, 9.99% and 9.99%, respectively,
compared to December 31, 1996 ratios of 18.29%, 9.66% and 9.66%, respectively.
INTEREST RATE RISK
Interest rate risk is managed through evaluation of the interest rate risk
inherent in certain assets and liabilities and the determination of the
appropriate risk level given the Company's business strategy, operating
environment, capital and liquidity requirements. Interest rate risk
management guidelines are reviewed and approved by the Board of Directors.
Successful management of interest rate risk can reduce the potential negative
impact of changes in interest rates on the Company's operations.
The restructuring of the earning assets in the portfolio in 1997 and the
receipt of funds from the subscription stock sale in 1996 are recent events
that reduced the level of interest rate risk for the Company. Specific
strategies used to reduce interest rate risk include (i) diversifying the loan
portfolio by originating short-term commercial and commercial real-estate
loans; (ii) selling at origination all long-term, fixed rate residential
mortgage loans and most adjustable rate residential mortgage loans; (iii)
classifying all investments as held for sale; (iv) holding primarily
adjustable rate or short-term, fixed rate investment securities; (v) utilizing
medium-term, fixed rate FHLB advances as a funding source; and (vi)
emphasizing deposit products that reduce liability interest sensitivity
(demand deposits and long-term, fixed rate certificates).
Interest rate sensitivity is measured quarterly by use of the Office of Thrift
Supervision ('OTS') model that is based in part on data provided by the
Company's thrift subsidiary in various regulatory reports. The model
generates estimates of the change in net portfolio value ('NPV') over a range
of interest rate scenarios. NPV is measured as the difference between
incoming and outgoing cash flows from assets, liabilities and off-balance
(Page 7)
sheet contracts. The NPV ratio of each scenario is the NPV in that scenario
divided by the present value of assets in the same scenario.
<TABLE>
Risk Measures: 200 BP Rate Shock:
<S> <C>
Pre-shock NPV Ratio 10.71%
Exposure measure: Post-shock NPV Ratio 9.22%
Sensitivity measure: Change in NPV Ratio -149 bp
</TABLE>
The OTS measurement of interest rate risk, in the table below, has inherent
shortcomings due to the assumptions utilized in the model. Actual changes in
market interest rates may result in different yield and cost changes than
assumed in the model. The model also assumes that holdings of interest
sensitive assets and liabilities would remain constant under each interest
rate change scenario, which may be different than actual circumstances. As
such, the NPV measurements below provide an indication of interest rate risk
exposure at December 31, 1997 only and are not intended to and should not be
used to forecast the effect of changes in interest rates on the Company's net
interest income.
<TABLE>
NPV as Percent of
Present Value
Change Net Portfolio Value of Assets
In Dollar Dollar Percent NPV
Rate Amount Change Change Ratio Change
<S> <C> <C> <C> <C> <C>
+400 bp $11,151 $-7,111 -39% 7.09% -362 bp
+300 bp 13,193 -5,069 -28% 8.20% -250 bp
+200 bp 15,149 -3,112 -17% 9.22% -149 bp
+100 bp 16,898 -1,364 - 7% 10.08% - 62 bp
0 18,262 - - 10.71% -
- -100 bp 19,348 1,087 6% 11.16% 46 bp
- -200 bp 19,900 1,638 9% 11.33% 62 bp
- -300 bp 20,517 2,255 12% 11.51% 81 bp
- -400 bp 21,692 3,430 19% 11.97% 126 bp
</TABLE>
All changes in NPV ratios at December 31, 1997 were within the limits approved
by the Board of Directors.
MARKET RISK
The Company's market risk arises primarily from interest rate risk inherent in
its lending, investing, deposit taking and borrowing activities. The varying
levels of sensitivity to changes in market interest rates of the Company's
interest-earning assets, primarily loans and mortgage-backed and investment
securities, and interest-bearing liabilities, namely deposits and borrowings,
create market risk. Evaluation of market risk is an integral component of
interest rate risk management.
The Company's portfolio of trading assets, consisting entirely of loans held
for sale, is an immaterial amount and is not exposed to a significant amount
of market risk. The Company does not hold or use any derivative instruments
to manage market or interest rate risk.
LIQUIDITY
Primary sources of funds are deposits, FHLB advances and 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 prepayments of mortgage
loans and mortgage-backed securities are greatly influenced by general
interest rates, economic conditions and competition.
Funds are invested in residential mortgage, commercial real estate, commercial
and short-term consumer loans and mortgage-backed and other securities. Loan
originations totaled $72,203,000, $63,005,000 and $34,745,000 in 1997, 1996
and 1995, respectively. Purchases of mortgage-backed and other securities
totaled $13,218,000, $26,686,000 and $11,890,000 in 1997, 1996 and 1995,
(page 8)
respectively. Net cash provided by operating activities in 1997 was
$1,732,000, while $1,047,000 in net cash was used by investing activities and
$2,731,000 in net cash was used by financing activities.
Adequate liquidity must be maintained to ensure that sufficient funds are
available to support loan growth and deposit withdrawals, satisfy financial
commitments and take advantage of investment opportunities. Approved loan
commitments totaled $567,000 and unused lines of credit totaled $2,841,000 at
December 31, 1997. Scheduled maturities of certificates of deposit in 1998
total $53,659,000 and scheduled loan maturities and payments in 1998 total
$23,920,000. Principal payments will also be received on mortgage-backed
securities in 1998 though the amount cannot be predetermined. In 1997,
principal payments on mortgage-backed securities amounted to $3,799,000.
Thrifts are required by OTS regulations to maintain a 4% 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
12.07% and 12.04% at December 31, 1997 and 1996, respectively.
INFLATION
The Consolidated Financial Statements and notes thereto included in this
report have been prepared in accordance with generally accepted accounting
principles and reflect the results of 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 in the increased cost of operations and as an inherent factor in the
general level of interest rates. Changes in interest rates have a greater
impact on the Company's financial performance than the general level of
interest rates due to the monetary nature of most of the Company's assets and
liabilities. Effective interest rate 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
FINANCIAL SERVICES MODERNIZATION. Throughout 1997 and into early 1998,
various congressional committees have debated modernization of the financial
services industry. At present, no consensus of opinion has been reached as to
what law or laws to enact to modernize the industry. While it is likely that
Congress will enact financial modernization legislation in the relatively near
future, the nature and scope of the legislation, and resulting effect on the
Company, cannot be predicted.
YEAR 2000
In 1997, the Company initiated efforts to verify that its information systems,
both in-house and third-party provided, will be Year 2000 compliant. In
addition, the Company converted to a new primary data processing provider in
the third quarter of 1997 that coincided with an ongoing hardware technology
upgrade. The new provider has a program in place that includes allowing the
Company to test actual data in any manner deemed necessary for Year 2000
compliance. Other third-party software vendors have been contacted and have
provided details of compliance steps undertaken to date. Necessary follow-up
to these actions will continue in 1998. The Company, at this time, does not
anticipate that the costs related to the Year 2000 compliance effort will have
a material impact on its financial condition or results of operations.
(Page 9)
Independent Auditor's Report
To the Stockholders and Board of Directors
Eagle BancGroup, Inc.
Bloomington, Illinois
We have audited the accompanying consolidated statements of
condition of Eagle BancGroup, Inc. and subsidiary as of December
31, 1997, and the related consolidated statements of income,
statements of changes in stockholders' equity, and cash flows
for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audit. The consolidated financial statements of Eagle
BancGroup, Inc. and subsidiary, for the years ended December 31,
1996 and 1995, were audited by other auditors whose report dated
January 17, 1997, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Eagle BancGroup, Inc. and
subsidiary as of December 31, 1997, and the results of their
operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
/S/ McGladrey & Pullen, LLP
Peoria, Illinois
February 20, 1998
(Page 10)
Eagle BancGroup, Inc. and Subsidiary
<TABLE>
Consolidated Statements of Condition
December 31, 1997 and 1996
1997 1996
(Dollars in thousands)
<S> <C> <C>
Assets
Cash and due from banks $ 1,628 $ 1,487
Federal funds sold and overnight deposits 3,386 5,573
Investment securities - available for sale 13,037 15,483
Mortgage-backed securities - available for sale 24,596 37,445
Federal Home Loan Bank ("FHLB") stock 1,310 955
Loans, net 122,409 106,641
Premises and equipment 2,834 2,889
Other assets 1,937 2,193
Total assets $171,137 $172,666
Liabilities
Deposits $131,452 $133,995
Federal Home Loan Bank advances 18,000 15,300
Other liabilities 1,380 1,230
Total liabilities 150,832 150,525
Stockholders' Equity
Preferred stock, par value $.01 per share,
100,000 shares authorized, no shares issued - -
Common stock, par value $.01 per share,
5,000,000 shares authorized;
1,302,705 shares issued 13 13
Paid-in capital 12,323 12,215
Retained earnings - substantially restricted 11,697 11,188
Unrealized loss on investment securities
available for sale, net (110) (337)
Total stockholders' equity before treasury stock,
unearned ESOP shares and Management
Development and Recognition Plan 23,923 23,079
Treasury stock, at cost, 125,000 shares in 1997 (2,055) -
Unearned Employee Stock Ownership Plan
("ESOP") shares (834) (938)
Management Development and Recognition
Plan ("MDRP") (729) -
Total stockholders' equity 20,305 22,141
Total liabilities and stockholders' equity $171,137 $172,666
</TABLE>
See Notes to Consolidated Financial Statements.
(Page 11)
Eagle BancGroup, Inc. and Subsidiary
<TABLE>
Consolidated Statements of Income
Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
(Dollars in thousands except per share data)
<S> <C> <C> <C>
Interest income:
Loans and fees on loans $ 9,472 $ 7,681 $ 6,899
Investment securities and
other interest earning assets 1,044 1,024 759
Mortgage-backed securities 1,738 2,358 2,230
Federal funds sold 72 31 45
Total interest income 12,326 11,094 9,933
Interest expense:
Deposits:
Passbook 579 577 494
MMDA and NOW 202 181 189
Certificates of deposit 6,285 6,673 6,612
7,066 7,431 7,295
Borrowings 1,055 272 81
Total interest expense 8,121 7,703 7,376
Net interest income before
provision for loan losses 4,205 3,391 2,557
Provision for loan losses 240 183 100
Net interest income after
provision for loan losses 3,965 3,208 2,457
Non-interest income:
Loan servicing 138 146 97
Gains on loans sold, net 178 68 51
Gains on securities sold, net 46 15 -
Other 214 189 247
Total non-interest income 576 418 395
Noninterest expense:
Salaries and employee benefits 2,150 1,736 1,618
Net occupancy 537 544 552
Federal deposit insurance premium 67 1,231 335
Data processing 322 249 223
Other 692 613 227
Total noninterest expense 3,768 4,373 2,955
Income (loss) before income tax
expense (benefit) 773 (747) (103)
Income tax expense (benefit) 264 (258) (30)
Net income (loss) $ 509 $ (489) $ (73)
Basic earnings (loss) per share $ 0.44 $ (0.38) N/A
Diluted earnings (loss) per share $ 0.44 $ (0.38) N/A
</TABLE>
See Notes to Consolidated Financial Statements.
(page 12)
Eagle BancGroup, Inc. and Subsidiary
<TABLE>
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
Unrealized
Loss on
Securities
Common Paid-In Retained Available
Stock Capital Earnings For Sale
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance, December 31, 1994 $ - $ - $11,750 $(2,249)
Net loss - - (73) -
Change in unrealized loss
on securities available
for sale - - - 2,087
Balance, December 31, 1995 - - 11,677 (162)
Sale of capital stock 13 12,215 - -
Common stock acquired
by ESOP - - - -
Release of ESOP shares - - - -
Net loss - - (489) -
Change in unrealized loss
on securities available
for sale - - - (175)
Balance, December 31, 1996 13 12,215 11,188 (337)
Purchase of 125,000 shares
for the treasury - - - -
Release of ESOP shares - 96 - -
Purchase of 52,106 shares
for MDRP - - - -
Allocation of MDRP shares - 12 - -
Net income - - 509 -
Change in unrealized loss
on securities available
for sale - - - 227
Balance, December 31, 1997 $ 13 $12,323 $11,697 $ (110)
</TABLE>
<TABLE>
Management
Development
Unearned and
Treasury ESOP Recognition
Stock Shares Plan Total
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance, December 31, 1994 $ - $ - $ - $ 9,501
Net loss - - - (73)
Change in unrealized loss
on securities available
for sale - - - 2,087
Balance, December 31, 1995 - - - 11,515
Sale of capital stock - - - 12,228
Common stock acquired
by ESOP - (1,042) - (1,042)
Release of ESOP shares - 104 - 104
Net loss - - - (489)
Change in unrealized loss
on securities available
for sale - - - (175)
Balance, December 31, 1996 - (938) - 22,141
Purchase of 125,000 shares
for the treasury (2,055) - - (2,055)
Release of ESOP shares - 104 - 200
Purchase of 52,106 shares
for MDRP - - (840) (840)
Allocation of MDRP shares - - 111 123
Net income - - - 509
Change in unrealized loss
on securities available
for sale - - - 227
Balance, December 31, 1997 $(2,055) $ (834) $ (729) $20,305
</TABLE>
See Notes to Consolidated Financial Statements.
(Page 13)
Eagle BancGroup, Inc. and Subsidiary
<TABLE>
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ 509 $ (489) $ (73)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Provision for loan losses 240 183 100
Provision for depreciation 284 288 452
Provision for deferred income taxes (114) (39) 103
Amortization of premiums and accretion of
discounts on investment securities (11) 74 29
Gains on securities sold, net (46) (15) -
Gains on loans sold, net (178) (68) (51)
Compensation expense related to ESOP shares 200 104 -
Compensation expense related to MDRP shares 123 - -
Proceeds from sale of loans
originated for sale 19,314 10,844 7,090
Loans originated for sale (19,009) (9,209) (6,988)
Decrease (increase) in accrued
interest receivable 43 (130) (84)
(Decrease) increase in accrued
interest payable (5) 94 (19)
Decrease (increase) in other assets 232 (65) (195)
Increase (decrease) in other liabilities 150 79 (19)
Net cash provided by operating activities 1,732 1,651 345
Cash Flows from Investing Activities
Investment securities
Purchases (5,610) (15,019) (1,998)
Proceeds from sales 8,173 10,602 1,035
Mortgage-backed securities
Purchases (7,608) (11,667) (9,892)
Proceeds from sales 16,790 9,749 -
Principal collected 3,799 5,625 3,457
Purchase of FHLB stock (355) (261) (44)
Principal collected on loans 37,167 34,270 22,456
Loans originated, net (53,194) (53,796) (27,757)
Purchases of premises and equipment (229) (65) (91)
Net sales (purchases) of other real estate 20 (8) 5,620
Net cash used in investing activities (1,047) (20,570) (7,214)
</TABLE>
(Continued on page 15)
(Page 14)
Eagle BancGroup, Inc. and Subsidiary
<TABLE>
Consolidated Statements of Cash Flows - Continued
Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Financing Activities
Purchase of MDRP shares $ (840) $ - $ -
Purchase of treasury stock (2,055) - -
Increase in savings accounts, demand
deposits and NOW accounts, net 1,801 1,520 605
Increase (decrease) in certificate
accounts, net (4,337) (5,927) 15,397
Proceeds from FHLB advances 29,750 36,311 3,445
Principal payments on FHLB advances (27,050) (21,011) (11,381)
Proceeds from the sale of capital stock - 11,186 -
Net cash (used in) provided by
financing activities (2,731) 22,079 8,066
(Decrease) increase in cash and
cash equivalents (2,046) 3,160 1,197
Cash and cash equivalents:
Beginning of year 7,060 3,900 2,703
End of year $ 5,014 $ 7,060 $ 3,900
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest on deposits $ 7,074 $ 7,425 $ 7,289
Interest on borrowed funds 1,053 184 106
Income taxes 210 - 10
</TABLE>
See Notes to Consolidated Financial Statements.
(Page 15)
Eagle BancGroup, Inc. and Subsidiary
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.
Eagle issued 1,302,705 shares of common stock following the subscription
stock offering. 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. Expenses related to the offering totaled $799,000 and $1,042,000
was loaned to First Federal to create an Employee Stock Ownership Plan.
The significant accounting and reporting policies for Eagle
BancGroup, Inc. and its subsidiary follow:
Principles of Presentation
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 a 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 material intercompany accounts and transactions have
been eliminated in consolidation.
The consolidated financial statements of the Company have been prepared in
conformity with generally accepted accounting principles and conform to
predominant practice within the banking industry.
Use of Estimates
In preparing the consolidated financial statements, the Company's management
is required to make estimates and assumptions which significantly affect the
amounts reported in the consolidated financial statements and accompanying
notes. Significant estimates which are particularly susceptible to change
in a short period of time include the determination of the allowance for
loan losses and valuation of real estate and other properties acquired in
connection with foreclosures or in satisfaction of amounts due from
borrowers on loans. Actual results could differ significantly from those
estimates.
Cash Equivalents
Cash equivalents include federal funds sold and overnight deposits.
Generally, federal funds are sold for one-day periods.
(Page 16)
Eagle BancGroup, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Investment Securities
Securities classified as available-for-sale are those securities that the
Company intends to hold for an indefinite period of time, but not necessarily
to maturity, and marketable equity securities. Any decision to sell a
security classified as available-for-sale would be based on various factors,
including significant movements in interest rates, changes in the maturity
mix of the Company's assets and liabilities, liquidity needs, regulatory
capital considerations and other similar factors. Securities available-for-
sale are carried at fair value. Accrued interest receivable on the related
securities is included in the amortized cost balance to agree with amounts
reported to the Company's regulatory authority. The difference between fair
value and cost, adjusted for amortization of premium and accretion of
discounts, results in an unrealized gain or loss. Unrealized gains or losses
are reported as increases or decreases in stockholders' equity, net of the
related deferred tax effect. Gains or losses on the sale of securities are
determined on the basis of the specific security sold and are included in
earnings. Premiums and discounts are recognized in interest income using
the interest method over their contractual lives.
Federal Home Loan Bank Stock
Federal Home Loan Bank stock is carried at cost and the amount of stock
First Federal is required to own is determined by regulation.
Loans
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 residential mortgage loans for sale in the secondary
market. Other 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.
Interest income on loans is computed monthly based upon the principal amount
of the loans outstanding. A valuation allowance is established for
uncollected interest on loans on which any payments are more than ninety 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.
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. The allowance for loan losses related to troubled
loans identified for evaluation in accordance with Statement of Financial
Accounting Standards No. 114 (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 1997, 1996 or 1995.
(page 17)
Eagle BancGroup, Inc. and Subsidiary
Notes to Consolidated Financial Statements
The allowance for loan losses is maintained at a level management believes to
be adequate 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. While management uses the best information
available to make its evaluation, future adjustments to the allowance may be
necessary if there are significant changes in economic conditions. In
addition, various regulatory agencies periodically review the allowance for
loan losses. These agencies may require First Federal to make additions to
the allowance for loan losses based on their judgments of collectibility based
on information available to them at the time of their examination.
Real Estate Owned
Real estate owned includes land acquired for investment and properties arising
from loan foreclosure or deed in lieu of foreclosure. Real estate owned is
held for sale and is recorded at the date of foreclosure at the fair value of
the properties less estimated costs of disposal. Property is evaluated
regularly to ensure the recorded amount is supported by its current fair value
and valuation allowances to reduce the carrying amount to fair value less
estimated costs to dispose are recorded as necessary. 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.
Deferred Income Taxes
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Deferred tax assets are
also recognized for operating loss and tax credit carryforwards. Valuation
allowances are established when necessary to reduce deferred tax assets to an
amount expected to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" (SFAS 128). SFAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the SFAS 128
requirements.
(Page 18)
Eagle BancGroup, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Basic earnings per share is computed by dividing net income for the year by
the weighted average number of shares outstanding of 1,146,538 and 1,302,705
for 1997 and 1996, respectively.
Diluted earnings per share is determined by dividing net income for the year
by the weighted average number of shares of common stock and common stock
equivalents outstanding. Common stock equivalents assume exercise of stock
instruments and use of proceeds to purchase treasury stock at the average
market price for the period. The weighted average shares of common stock and
common stock equivalents were 1,152,169 and 1,302,705 for 1997
and 1996, respectively.
Earnings per share information for 1995 is not applicable as no shares were
issued or outstanding prior to the subscription stock offering in 1996.
Reclassifications
Certain elements of the 1996 and 1995 consolidated financial statements have
been reclassified to conform with the 1997 presentation. Such
reclassifications have no effect on previously reported net income.
Recent Accounting Pronouncements
Reporting Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" (SFAS 130). This Statement requires an
entity to include a statement of comprehensive income in their full set of
general-purpose financial statements. Comprehensive income consists of the
net income or loss of the entity, plus or minus the change in equity of the
entity during the period from transactions, other events, and circumstances
resulting from nonowner sources. SFAS 130 is effective for years beginning
after December 15, 1997, and will require financial statements of earlier
periods that are presented for comparative purposes to be reclassified.
Disclosures about Segments of an Enterprises and Related Information
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 establishes
standards for the manner in which public business enterprises report certain
information about operating segments of their business in both their annual
and interim financial reports provided to shareholders. SFAS 131 is effective
for financial statement periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years is to
be restated, unless impracticable. In addition, the provisions of SFAS 131
need not be applied to interim financial statements issued in the initial year
of application.
(Page 19)
Eagle BancGroup, Inc. and Subsidiary
Notes to Consolidated Financial Statements
2. Investments
<TABLE>
Investment securities and mortgage-backed securities available
for sale are summarized below:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars in thousands)
<S> <C> <C> <C> <C>
December 31, 1997
Investment securities:
U.S. Treasury and agencies $12,642 $ 13 $ 20 $12,635
Other securities 395 7 - 402
Total investment securities 13,037 20 20 13,037
Mortgage-backed securities:
Collateralized mortgage
obligations 12,467 - 152 12,315
Other mortgage-backed
securities 12,296 32 47 12,281
Total mortgage-backed
Securities 24,763 32 199 24,596
Total $37,800 $ 52 $ 219 $37,633
December 31, 1996
Investment securities:
U.S. Treasury and agencies $15,181 $ 4 $ 149 $15,036
Other securities 447 - - 447
Total investment securities 15,628 4 149 15,483
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 $53,438 $ 87 $ 597 $52,928
</TABLE>
(Page 20)
Eagle BancGroup, Inc. and Subsidiary
Notes to Consolidated Financial Statements
The amortized cost and fair value of investment and mortgage-backed
securities, other than equity securities, which had an amortized cost of
$102,000 and fair value of $109,000, as of December 31, 1997, by contractual
maturity, are shown below. Expected maturities may differ from contractual
maturities because mortgage-backed securities may be called or prepaid
without penalty. Therefore, these securities are not included in the
maturity categories in the following maturity summary.
<TABLE>
Available for Sale
Amortized Fair
Cost Value
(Dollars in thousands)
<S> <C> <C>
Due within one year $ 3,197 $ 3,186
Due after one year through five years 8,553 8,558
Due after five through ten years 1,148 1,147
Due after ten years 37 37
Mortgage-backed securities 24,763 24,596
Total $37,698 $37,524
</TABLE>
<TABLE>
Realized gains and losses related to sales of investments were
as follows:
Year Ended December 31,
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Realized gains $102 $ 49 $ -
Realized losses (56) (34) -
Net gain $ 46 $ 15 $ -
</TABLE>
Investments with a carrying value of approximately $6,450,000 and $5,150,000
as of December 31, 1997 and 1996, respectively, were pledged to secure public
deposits and for other purposes as required or permitted by law.
(Page 21)
Eagle BancGroup, Inc. and Subsidiary
Notes to Consolidated Financial Statements
3. Loans
<TABLE>
Loans consist of the following :
December 31,
1997 1996
(Dollars in thousands)
<S> <C> <C>
Residential mortgage loans $ 85,326 $ 69,716
Loans held for sale 757 884
Commercial real estate loans 6,791 3,827
Consumer loans 29,236 32,159
Commercial installment loans 1,588 1,145
Accrued interest receivable 631 523
Gross loans 124,329 108,254
Less:
Deferred loan fees 114 80
Allowance for loan losses 935 923
Undisbursed portion of loan proceeds 871 610
Loans, net $122,409 $106,641
</TABLE>
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.
The Company's opinion as to the ultimate collectibility of these loans is
subject to estimates regarding the future cash flows from operations and the
value of the property, real and personal, pledged as collateral. These
estimates are affected by changing economic conditions and the economic
prospects of the borrowers.
The amount of loans serviced by the Company for the benefit of others is not
included in the accompanying consolidated financial statements. Loans serviced
at December 31, 1997 and 1996 totaled approximately $38,370,000 and
$35,278,000, respectively.
<TABLE>
Changes in the allowance for loan losses were as follows:
Year Ended December 31,
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 923 $ 907 $ 873
Provision for losses 240 183 100
Charge-offs (239) (178) (68)
Recoveries 11 11 2
Balance at end of year $ 935 $ 923 $ 907
</TABLE>
(Page 22)
Eagle BancGroup, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Certain directors and officers of the Company were loan customers in the
ordinary course of business during 1997 and 1996. 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. Balances outstanding at December 31, 1997 and 1996 were $1,004,000
and $797,000, respectively.
4. Premises and Equipment
<TABLE>
Premises and equipment are summarized as follows:
December 31,
1997 1996
(Dollars in thousands)
<S> <C> <C>
Land $ 775 $ 775
Buildings 2,935 2,906
Furniture and equipment 2,326 2,127
6,036 5,808
Less allowance for depreciation 3,202 2,919
$2,834 $2,889
</TABLE>
5. Deposits
<TABLE>
Deposits are summarized as follows:
December 31,
1997 1996
(Dollars in thousands)
<S> <C> <C>
Passbook accounts $ 15,130 $ 15,668
NOW accounts 11,569 9,230
Certificate accounts 96,614 101,014
Time deposits over $100,000 8,121 8,058
131,434 133,970
Accrued interest payable 18 25
$131,452 $133,995
</TABLE>
<TABLE>
As of December 31, 1997, certificates of deposit have scheduled maturity
dates as follows (in thousands):
Year of Maturity Amount
<S> <C>
1998 $ 53,659
1999 30,609
2000 15,658
2001 2,524
2002 and thereafter 2,285
$104,735
</TABLE>
(Page 23)
Eagle BancGroup, Inc. and Subsidiary
Notes to Consolidated Financial Statements
6. Federal Home Loan Bank Borrowings
Federal Home Loan Bank of Chicago (FHLB) provides advances with 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 allow prepayments under certain conditions.
At December 31, 1997, all FHLB advances were fixed amounts.
<TABLE>
Future payments at December 31, 1997 for all FHLB advances were as follows
(in thousands):
Year of Maturity Amount
<S> <C>
1998 $ 7,000
1999 -
2000 -
2001 -
2002 and thereafter 11,000
$18,000
</TABLE>
<TABLE>
A summary of FHLB advances follows:
Year Ended December 31,
1997 1996
(Dollars in thousands)
<S> <C> <C>
Balance on December 31 $18,000 $15,300
Highest month-end balance 21,050 19,100
Average balance during the year 17,905 4,342
Average rate 5.89% 6.20%
Average rate at year-end 5.74% 5.73%
</TABLE>
7. Income Taxes
Under provisions of the Internal Revenue Code and similar sections of the
Illinois income tax law for years beginning before January 1, 1996,
qualifying thrifts could claim bad debt deductions based on the greater of
(1) a specified percentage of taxable income, as defined, or (2) actual loss
experience.
The Small Business Job Protection Act became law on August 20, 1996. One of
the provisions in this law repealed the reserve method of accounting for bad
debts for thrift institutions so that the bad debt deduction described in the
preceding paragraph will no longer be effective for tax years beginning after
December 31, 1995. The change in the law requires that the tax bad debt
reserves accumulated after September 30, 1988 be recaptured into taxable
income over a six-year period. The Company has no deferred tax liability
related to this change.
(Page 24)
Eagle BancGroup, Inc. and Subsidiary
Notes to Consolidated Financial Statements
The Company qualified under provisions for the Internal Revenue Code which
permitted it to deduct from taxable income a provision for bad debts which
differs from the provision for such losses charged to income. Accordingly,
retained earnings at December 31, 1997 includes approximately $3,565,000 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 applicable rates.
<TABLE>
The federal income tax expense (benefit) consists of the following:
Year Ended December 31,
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Current $ 378 $(254) $(145)
Deferred (114) (4) 115
$ 264 $(258) $ (30)
</TABLE>
<TABLE>
A reconciliation of the statutory federal income tax rate to the
effective income tax rate follows:
Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Statutory rates 34% 34% 34%
Recoveries on sales of real estate owned - - (4)
Other - 1 (1)
34% 35% 29%
</TABLE>
<TABLE>
The components of the deferred tax asset (liability) are as follows:
December 31,
1997 1996
(Dollars in thousands)
<S> <C> <C>
Deferred tax assets:
Provision for holding losses on investment
and mortgage-backed securities $ 56 $172
Allowance for loan and real estate losses 318 314
Deferred compensation 114 71
Other 225 158
Total deferred tax assets 713 715
Deferred tax liabilities:
Premises and equipment (250) (280)
Other (75) (45)
Total deferred tax liabilities (325) (325)
Net deferred tax assets $388 $390
</TABLE>
(Page 25)
Eagle BancGroup, Inc. and Subsidiary
Notes to Consolidated Financial Statements
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.
First Federal is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on First Federal's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
First Federal must meet specific capital guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. First Federal's capital
amounts and classifications are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require First Federal to maintain minimum amounts and ratios (set forth in the
table below) of Tangible and Tier I capital (as defined by the regulations) to
tangible assets (as defined) and Total and Tier I capital (as defined) to
risk-weighted assets (as defined). Management believes, as of December 31,
1997, that First Federal meets all capital adequacy requirements to which it
is subject.
As of December 31, 1997, the most recent notification from the Office of
Thrift Supervision categorized First Federal as well capitalized under the
regulatory framework for prompt corrective action under FDICIA. To be
categorized as well capitalized, First Federal must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
following table. There are no conditions or events since that notification
that management believes would change First Federal's category.
<TABLE>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Tangible Capital to
Tangible Assets $16,845 9.99% $ 2,530 1.50% N/A N/A
Core Capital to
Tangible Assets $16,845 9.99% $ 5,060 3.00% $ 8,434 5.00%
Tier I Capital to
Risk Weighted Assets $16,845 15.44% N/A N/A $ 6,545 6.00%
Total Capital to
Risk Weighted Assets $17,780 16.30% $ 8,726 8.00% $10,908 10.00%
As of December 31, 1996:
Tangible Capital to
Tangible Assets $16,325 9.66% $ 2,535 1.50% N/A N/A
Core Capital to
Tangible Assets $16,325 9.66% $ 5,070 3.00% $ 8,450 5.00%
Tier I Capital to
Risk Weighted Assets $16,325 17.38% N/A N/A $ 5,635 6.00%
Total Capital to
Risk Weighted Assets $17,175 18.29% $ 7,513 8.00% $ 9,392 10.00%
</TABLE>
(Page 26)
Eagle BancGroup, Inc. and Subsidiary
Notes to Consolidated Financial Statements
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. Such payments 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, 1998, First Federal's allowable capital
distribution amount was approximately $5,900,000.
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. 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. Management intends
to terminate the plan during 1998, subject to the IRS and Department of Labor
approvals. The following table sets forth the plan's funded status and
amounts recognized in the Company's statement of financial condition at
December 31:
<TABLE>
December 31,
1997 1996
(Dollars in thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of approximately $574,000 in 1997 and
$511,000 in 1996 $ 613 $ 546
Projected benefit obligation for service rendered $ 631 $ 562
Plan assets at fair value 543 473
Plan assets in excess of (less than) projected
benefit obligation (88) (89)
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions 86 64
Prior service cost, subsequent to the curtailment,
not yet recognized in net periodic pension cost 3 4
Unrecognized net asset at December 31 (18) (19)
Prepaid (accrued) pension cost $ (17) $ (40)
</TABLE>
(Page 27)
Eagle BancGroup, Inc. and Subsidiary
Note to Consolidated Financial Statements
<TABLE>
Net pension expense included the following components:
Year Ended December 31,
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Service costs-benefits earned during the year $ 19 $ 19 $ 64
Interest cost on projected benefit obligation 44 42 55
Actual return on plan assets (44) (54) (61)
Net amortization and deferral 10 26 28
Net periodic pension expense $ 29 $ 33 $ 86
</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 1997, 1996 and 1995. 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
1997, 1996 and 1995 totaled $26,000, $22,000 and $24,000, 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 vest in full upon
completion of six years of qualified service. Compensation expense for the
ESOP was $200,000 and $104,000 for the years ended December 31, 1997 and 1996,
respectively.
<TABLE>
The following table reflects the shares held by the ESOP:
December 31,
1997 1996
<S> <C> <C>
Shares allocated to participants 20,844 10,422
Unallocated shares 83,372 93,794
Total 104,216 104,216
Fair value of unallocated shares $1,573,646 $1,406,910
</TABLE>
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.
(Page 28)
Eagle BancGroup, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Management Development and Recognition Plan - The Management Development and
Recognition Plan ("MDRP") was approved with an effective date of February 11,
1997. The MDRP purchased, with funds provided by the Company, 52,106 shares
in the open market during February, 1997. Directors and officers become
vested in the shares of common stock awarded to them under the MDRP at a rate
of 20 percent per year, commencing one year after the grant date, and 20
percent on each anniversary date thereof for the following four years. As of
December 31, 1997, 44,289 shares have been awarded to officers and directors.
MDRP compensation expense was $123,000 for the year ended December 31, 1997.
First Federal accounts for its MDRP in accordance with Accounting Principle
Board Statement 25 (APB No. 25). Compensation expense is recognized over the
vesting period for shares awarded under the plan.
Stock Option Plans - At a special stockholder's meeting on February 11, 1997,
the 1996 Stock Option Plan ("SOP") was approved. The Board has reserved an
amount of stock equal to 130,270 shares, or 10 percent of the common stock
sold in the conversion for issuance under the SOP. The options will be
granted by a Committee, comprised of directors, to key employees and directors
based on their services. The exercise price of options granted must be at
least equal to the fair market value of the common stock on the date the
option is granted. The options granted under the plan become exercisable at a
rate of 20 percent per year commencing one year after the grant date and 20
percent on each anniversary date for the following four years. As of December
31, 1997, 110,729 options had been granted.
The SOP promotes 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 the time of the grant
or at the time of exercise of the option.
<TABLE>
A summary of the status of the Company's stock option plan as of
December 31, 1997 and the changes during the year is as follows:
1997
Weighted-
Average
Exercise
Shares Price
<S> <C> <C>
Outstanding at beginning of year - $ -
Granted 110,729 15.48
Exercised - -
Outstanding at end of year 110,729 $15.48
Exercisable at end of year -
Weighted-average fair value per option
of options granted during the year $4.57
</TABLE>
(Page 29)
Eagle BancGroup, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Grants under the above plan are accounted for following APB No. 25 and related
interpretations. Accordingly, no compensation cost has been recognized for
grants under this plan. Had compensation cost for stock-based compensation
been determined based on the grant date fair values of awards (the method
described in SFAS 123), reported net income and earnings per common share
would have been reduced. There is no difference for 1997 since no options
were vested as of December 31, 1997.
The Black-Scholes option pricing model was used in estimating the fair value
of traded options which have no vesting restrictions. In addition, the model
requires the use of subjective assumptions, included expected stock price
volatility. In management's opinion, such valuation model may not necessarily
provide the best single measure of option value. The fair value of the stock
options granted has been estimated using the Black-Scholes option pricing
model with the following weighted average assumptions:
<TABLE>
1997
<S> <C>
Number of options granted 110,729
Risk-free interest rate 5.69%
Expected life, in years 10
Expected volatility 16.6%
Expected dividend yield 2.00%
Estimated fair value per option $4.57
</TABLE>
10. Fair Value of Financial Instruments
Following are disclosures of the estimated fair value of the Company's
financial instruments. The estimated fair value amounts have been determined
using available market information and appropriate valuation methodologies.
However, considerable judgment is necessarily required to interpret market
data to develop the estimates of fair value. Accordingly, the estimates
presented are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated
fair value amounts.
The following 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, mortgage-backed securities and FHLB stock: Fair
values for investment securities and mortgage-backed securities are
based on quoted market prices, where available. If quoted market prices
are not available, fair values are based on quoted market prices of
comparable instruments. Fair value of FHLB stock is estimated to equal
cost. The carrying amount of accrued interest receivable
approximates fair value.
(Page 30)
Eagle BancGroup, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Loans: 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 receivable
approximates its fair value.
Deposits: The fair value disclosed for demand deposits, including
interest-bearing and noninterest 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 offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits. The carrying amount of
accrued interest payable approximates fair value.
Borrowed funds: The fair value of the Company's borrowed funds are
estimated using discounted cash flow analysis based on the Company's
current incremental borrowing rates for similar types of borrowing
arrangements.
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, 1997 are comparable to terms available for
new commitments at that date.
<TABLE>
The estimated fair values of the Company's financial instruments
are as follows:
<CAPTION>
December 31,
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
(Dollars in thousands)
<S> <C> <C> <C> <C>
Assets:
Cash on hand and in other
institutions $ 1,628 $ 1,628 $ 1,487 $ 1,487
Federal funds sold and
overnight deposits 3,386 3,386 5,573 5,573
Investment securities,
mortgage-backed securities
and FHLB stock 38,943 38,943 53,883 53,883
Loans, net 122,409 123,141 106,641 106,487
Liabilities:
Deposits $131,452 $131,744 $133,995 $134,456
Borrowed funds 18,000 17,811 15,300 15,297
</TABLE>
(Page 31)
Eagle BancGroup, Inc. and Subsidiary
Notes to Consolidated Financial Statements
11. SAIF Recapitalization
The Economic Growth and Regulation Paperwork Reduction 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
were reduced $600,000. In 1997, deposit insurance premium rates were lower
than in previous years as only the amount necessary to maintain the statutory
minimum SAIF reserve ratio was paid.
12. Commitments and Contingencies
In the normal course of business, there are outstanding various contingent
liabilities such as claims and legal actions, which are not reflected in the
consolidated financial statements. In the opinion of management, the ultimate
resolution of these matters is not expected to have a material effect on the
consolidated financial statements.
First Federal is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, standby
letters of credit, and financial guarantees. Those instruments involve, to
varying degrees, elements of credit and interest rate risk. The contract or
notional amounts of those instruments reflect the extent of involvement First
Federal has in particular classes of financial instruments. First Federal's
exposure to credit loss, in the event of nonperformance by the other party to
the financial instruments for commitments to extend credit and standby letters
of credit, is represented by the contractual notional amount of those
instruments. First Federal uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
First Federal had outstanding commitments to originate new loans totaling
approximately $567,000 and $301,000 at December 31, 1997 and 1996,
respectively. In addition, First Federal committed to approximately
$2,841,000 and $3,544,000 of lines of credit, which were undrawn at December
31, 1997 and 1996, respectively. Such commitments are recorded in the
financial statements when they are funded or related fees are incurred or
received. These commitments are principally at variable interest rates.
The Company and First Federal do not engage in the use of interest rate
swaps, futures, forwards, or option contracts.
(Page 32)
Eagle BancGroup, Inc. and Subsidiary
Notes to Consolidated Financial Statements
13. Quarterly Financial Data (Unaudited)
<TABLE>
Summarized quarterly financial data for 1997 and 1996 follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
(in thousands except per share data)
<S> <C> <C> <C> <C>
1997
Operating summary:
Interest income $ 2,974 $ 3,140 $ 3,134 $ 3,078
Interest expense 1,963 2,040 2,085 2,033
Net interest income 1,011 1,100 1,049 1,045
Provision for loan losses 60 60 60 60
Net interest income after
provision for loan losses 951 1,040 989 985
Non-interest income 99 161 156 160
Non-interest expense 859 944 988 977
Income before income tax 191 257 157 168
Income tax expense 65 87 53 59
Net income $ 126 $ 170 $ 104 $ 109
Per share data:
Basic earnings per share $ 0.10 $ 0.15 $ 0.09 $ 0.10
Diluted earnings per share 0.10 0.15 0.09 0.10
Book value 16.28 16.69 17.03 17.24
Selected balance sheet averages:
Assets $170,518 $172,839 $173,427 $172,748
Investment securities 54,066 49,938 46,773 42,107
Loans 109,913 117,431 121,948 122,684
Interest bearing deposits 132,474 131,221 131,660 130,711
Borrowed funds 13,897 18,406 21,220 18,015
Stockholders' equity 21,513 20,584 20,438 20,301
</TABLE>
(Page 33)
Eagle BancGroup, Inc. and Subsidiary
Notes to Consolidated Financial Statements
<TABLE>
First Second Third Fourth
Quarter Quarter Quarter Quarter
(in thousands except per share data)
<S> <C> <C> <C> <C>
1996
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
(Loss) income before income tax (49) (24) (867) 193
Income tax (benefit) expense (15) (8) (277) 42
Net (loss) income $ (34) $ (16) $ (590) $ 151
Per share data:
Basic earnings per share N/A $ (0.01) $ (0.45) $ 0.12
Diluted earnings per share N/A (0.01) (0.45) 0.12
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 11,434 14,432 21,219 21,448
</TABLE>
The 1996 and first three quarters of 1997 earnings per share amounts have
been restated to comply with Statement of Financial Accounting Standards No.
128, "Earnings per Share."
(Page 34)
Eagle BancGroup, Inc. and Subsidiary
Notes to Consolidated Financial Statements
14. Parent Company Information
<TABLE>
Consolidated financial information for Eagle BancGroup, Inc.
(parent company only) follows:
December 31,
1997 1996
(Dollars in thousands)
<S> <C> <C>
Condensed statements of condition
Assets:
Cash on deposit with bank subsidiary $ 89 $ 1,074
Investment securities available for sale
at market value, cost, $2,630 1997;
$4,060 1996 2,649 4,048
Investment in subsidiary 16,722 15,995
First Federal ESOP loan 834 1,085
Other assets 22 -
Total assets $20,316 $22,202
Liabilities and stockholders' equity:
Liabilities $ 11 $ 61
Stockholders' equity 20,305 22,141
Total liabilities and stockholders' equity $20,316 $22,202
</TABLE>
<TABLE>
Year Ended December 31,
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Condensed statements of income
Interest income on investments $ 204 $ 154 $ -
Interest income on ESOP loan 77 43 -
Total interest income 281 197 -
Non-interest income 5 9 -
Non-interest expense 146 15 -
Total non-interest expense (141) (6) -
Income before income tax expense 140 191 -
Income tax expense 47 65 -
Income before equity in undistributed
net income (loss) of subsidiary 93 126 -
Equity in undistributed net income
(loss) of subsidiary 416 (615) -
Net income (loss) $ 509 $(489) $ -
</TABLE>
(Page 35)
Eagle BancGroup, Inc. and Subsidiary
Notes to Consolidated Financial Statements
<TABLE>
Year Ended December 31,
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Condensed statements of cash flows
Operating activities:
Net income (loss) $ 509 $ (489) $ -
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Amortization of investment premiums
and discounts, net (2) - -
Gains on securities sold, net (5) - -
Undistributed (earnings) loss of
Subsidiary (416) 615 -
Release of ESOP shares 96 - -
Allocation of MDRP shares 123 - -
Decrease (increase) in interest receivable 34 (105) -
(Decrease) in other assets (33) - -
(Decrease) increase in other liabilities (7) 61 -
Net cash provided by operating activities 299 82 -
Investing activities:
Purchases of available for sale securities (2,133) (6,030) -
Proceeds from sale of available for sale
securities 3,536 2,036 -
Loan to ESOP for stock purchase - (1,042) -
Loan repayment 208 - -
Net cash provided by (used in)
investing activities 1,611 (5,036) -
Financing activities:
Purchase MDRP stock (840) - -
Purchase of treasury stock (2,055) - -
Proceeds from sale of common stock - 12,228 -
Purchase of First Federal common stock - (6,200) -
Net cash (used in) provided by
financing activities (2,895) 6,028 -
(Decrease) increase in cash and
cash equivalents (985) 1,074 -
Cash and cash equivalents:
Beginning of year 1,074 - -
End of year $ 89 $ 1,074 $ -
</TABLE>
(Page 36)
Eagle BancGroup, Inc. and Subsidiary
Other Corporate Information
Directors - Senior Officers- Form 10-K Report
Eagle BancGroup, Inc. First Federal Savings Single copies of Eagle
Gerald A. Bradley Donald L. Fernandes BancGroup, Inc.'s 1997
Chairman of the Board Chairman and Chief Annual Report on Form 10-K,
Owner, Bloomington Tent Executive Officer as filed with the
and Awning Company Securities and Exchange
Bloomington, Illinois David R. Wampler Commision, are available at
President no charge. Contact Lori
Robert P. Dole Campbell, Assistant
Retired President, Gary Richardson Secretary, Eagle BancGroup,
National Union Vice President-Lending Inc., 301 Fairway Drive,
Electric Corporation Bloomington, Illinois 61701
Normal, Illinois Larry C. McClellan or phone (309) 663-6345
Vice President-Operations
Louis F. Ulbrich Common Stock-
Attorney-at-law, Retired Laurel Beth Donovan Market Information
Bloomington, Illinois Vice President- The Company's common stock
Retail Banking Services trades on the Nasdaq Stock
William J. Hanfland Market under the symbol
Assistant Treasurer, Corporate Headquarters EGLB. At December 31, 1997
Illinois Agricultural Eagle BancGroup, Inc. there were 1,177,705 shares
Association 301 Fairway Drive of the Company's common
Bloomington, Illinois P. O. Box 429 stock issued and
Bloomington, IL 61701 outstanding and there were
Steven J. Wannemacher Telephone (309)663-6345 approximately 350 holders
Executive Vice President Facsimile (309)663-8763 of record and beneficial
Heritage Enterprises,Inc. holders.
Bloomington, Illinois Corporate Attorneys
Schiff Hardin & Waite The high and low sales
Donald L. Fernandes 7200 Sears Tower price of the Company's
President and Chicago, Illinois 60606 common stock for the four
Chief Executive Officer, quarters ended March 31,
Eagle BancGroup, Inc. Independent Auditors June 30, September 30 and
McGladrey & Pullen, LLP December 31, as provided
David R. Wampler 401 Main Street by Nasdaq, are as follows:
Vice President Peoria, Illinois 61602 High Low
Eagle BancGroup, Inc. Quarter Ended:
Bloomington, Illinois Transfer Agent and Mar 31, 1997 16.250 14.500
Registrar Jun 30, 1997 15.875 14.750
Officers- Registrar and Transfer Sep 30, 1997 18.375 15.250
Eagle BancGroup, Inc. Company Dec 31, 1997 20.375 18.000
Donald L. Fernandes 10 Commerce Drive
President and Cranford, NJ 07016 The Company has not paid
Chief Executive Officer (908) 497-2300 any dividends. For
information regarding
David R. Wampler Annual Meeting restrictions on dividend
Vice President The annual meeting of payments see Note 8 of the
Stockholders of Eagle Notes to Consolidated
Louis F. Ulbrich BancGroup, Inc. will be Financial Statements.
Secretary held at 10:00am (CDT) on
Wednesday, April 15, 1998
at the Best Western Eastland
Suites Conference Center,
Bloomington, Illinois
(Page 37)
Exhibit 21.1
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
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 33-307355) pertaining to the First Federal Savings 401(k) Plan
of our report dated February 20, 1998, with respect to the consolidated
statements of condition of Eagle BancGroup, Inc. and Subsidiary as of December
31, 1997 and its statements of income, stockholders' equity and cash flows for
the year then ended which are incorporated by reference in the 1997 Annual
Report on Form 10-K of Eagle BancGroup, Inc.
/s/ McGladrey & Pullen, LLP
Champaign, Illinois
March 30, 1998
Exhibit 23.2
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-45763) pertaining to the 1996 Stock Option and Incentive
Plan and the Registration Statement (Form S-8 No. 333-45761) pertaining to the
Management Development and Recognition Plan and Trust Agreement of Eagle
BancGroup, Inc. (the 'Company') of our report dated January 17, 1997, with
respect to the consolidated financial statements of the Company included in
the Annual Report on Form 10-K for the year ended December 31, 1997, filed
with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Indianapolis, Indiana
March 27, 1998
Exhibit 99.1
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 two 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
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 two years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/S/ Ernst & Young LLP
Indianapolis, Indiana
January 17, 1997
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