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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
EAGLE BANCGROUP, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, $.01 par value per share
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
1,029,270 shares of Common Stock and 45,999 options
to purchase shares of Common Stock
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
$25.74 per share of Common Stock, $10.61 per option for
33,876 options, $9.11 per option for 10,420 options,
$5.36 per option for 1,303 options and $7.11 per option
for 400 options
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$26,957,588.44
-----------------------------------------------------------------------
(5) Total fee paid:
$5,391.52
-----------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
-----------------------------------------------------------------------
(4) Date Filed:
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<PAGE>
, 1999
To the stockholders of Eagle BancGroup, Inc.:
You are cordially invited to attend a special meeting of stockholders of
Eagle BancGroup, Inc. to be held on 1999, at , local time, at
.
At the meeting, you will be asked to approve and adopt a merger agreement
pursuant to which:
- each outstanding share of Eagle's common stock will be converted into the
right to receive $25.74 in cash; and
- Eagle will become a wholly owned subsidiary of First Busey Corporation.
The investment banking firm of Trident Securities, a division of McDonald
Investments, Inc., has issued its written opinion advising Eagle that, as of the
date of the opinion, the price to be paid by First Busey for the shares of Eagle
common stock is fair, from a financial point of view, to the stockholders of
Eagle.
After carefully considering the merger, the merger agreement and the
benefits which will result to the stockholders, the board of directors has
determined that the merger is in the best interests of the stockholders and
recommends that you vote in favor of the merger agreement.
A notice of special meeting of stockholders and a proxy statement containing
a discussion of the merger and related transactions accompany this letter. We
urge you to read this material carefully before voting. If you attend the
meeting, you may vote in person if you desire, even if you had previously
returned your proxy.
Your vote is important. Approval of the merger agreement requires the
affirmative vote of the holders of a majority of the outstanding shares of
common stock of Eagle BancGroup, Inc. Whether or not you expect to attend the
meeting in person, please complete and sign the accompanying proxy and return it
promptly in the enclosed envelope.
Sincerely,
/s/ Donald L. Fernandes
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PLEASE DO NOT SEND YOUR COMMON STOCK CERTIFICATES AT THIS TIME. IF THE
MERGER IS CONSUMMATED, YOU WILL BE SENT INSTRUCTIONS REGARDING THE SURRENDER OF
YOUR STOCK CERTIFICATES.
<PAGE>
EAGLE BANCGROUP, INC.
301 FAIRWAY DRIVE
BLOOMINGTON, ILLINOIS 61701
(309) 663-6345
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1999
NOTICE IS HEREBY GIVEN that a special meeting of the stockholders of Eagle
BancGroup, Inc. will be held at , on , 1999 at , local
time, for the following purposes:
1. To approve and adopt an agreement and plan of merger, dated as of June 30,
1999, by and among First Busey Corporation, FBC Acquisition Corp. (a wholly
owned subsidiary of First Busey) and Eagle BancGroup, Inc. under which FBC
Acquisition Corp. will merge with and into Eagle, with Eagle surviving as a
wholly owned subsidiary of First Busey. A copy of the merger agreement is
attached to the proxy statement as Appendix A; and
2. To transact such other business as may properly come before the meeting
or any adjournments or postponements of the meeting.
Only stockholders of record at the close of business on , 1999
will be entitled to notice of, and to vote at, the meeting and any adjournments
or postponements.
Each stockholder has the right to dissent and demand payment of the fair
value of the stockholder's shares. The right of a stockholder to receive this
payment is contingent upon strict compliance with the requirements of Section
262 of the Delaware General Corporation Law, which is contained in Appendix D to
this proxy statement. A summary of these requirements is contained in the
accompanying proxy statement.
By Order of the Board of Directors
/s/ Donald L. Fernandes
PRESIDENT AND CHIEF EXECUTIVE OFFICER
, 1999
Bloomington, Illinois
<PAGE>
EAGLE BANCGROUP, INC.
301 FAIRWAY DRIVE
BLOOMINGTON, ILLINOIS 61701
(309) 663-6345
------------------
PROXY STATEMENT
---------------------
This proxy statement is furnished to the holders of outstanding shares of
common stock of Eagle BancGroup, Inc. in connection with the solicitation of
proxies by Eagle to approve and adopt an agreement and plan of merger involving
Eagle, First Busey Corporation and FBC Acquisition Corp.
If the merger contemplated by the merger agreement is completed, First Busey
will pay you $25.74 in cash for each share of Eagle common stock you own, and
Eagle will become a wholly owned subsidiary of First Busey.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT.
We have scheduled a special meeting for our stockholders to vote on the
merger agreement. YOUR VOTE IS VERY IMPORTANT. This meeting will be held at
, local time, on , 1999, at .
Whether or not you plan to attend the meeting, please take the time to vote
by completing and signing the enclosed proxy card and mailing it to us. IF YOU
COMPLETE, SIGN, AND MAIL YOUR PROXY WITHOUT INDICATING HOW YOU WANT TO VOTE,
YOUR PROXY WILL BE COUNTED AS A VOTE IN FAVOR OF THE MERGER AGREEMENT. If you
abstain or do not vote, this will have the effect of a vote against the merger
agreement.
This proxy statement provides you with detailed information about the
proposed merger. In addition, you may obtain information about Eagle from
documents that we have filed with the Securities and Exchange Commission. We
encourage you to read this entire document carefully.
THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION HAS NOT PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.
------------------------
This proxy statement, the accompanying notice of special meeting and the
accompanying form of proxy are first being mailed to Eagle stockholders on or
about , 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
SUMMARY................................................................................................... 1
The Meeting........................................................................................... 1
The Parties........................................................................................... 1
The Merger............................................................................................ 2
Merger Consideration.................................................................................. 2
Recommendation of the Board of Directors; Reasons for the Merger...................................... 2
Opinion of the Financial Advisor...................................................................... 3
Dissenters' Appraisal Rights.......................................................................... 3
Effective Time; Closing Date.......................................................................... 3
Interests of Certain Persons in the Merger............................................................ 3
Regulatory Approvals.................................................................................. 4
Material Provisions of the Merger Agreement........................................................... 4
Federal Income Tax Consequences of the Merger......................................................... 4
Market and Market Prices.............................................................................. 5
Accounting Treatment.................................................................................. 5
SELECTED CONSOLIDATED FINANCIAL DATA...................................................................... 6
THE MEETING............................................................................................... 8
Place, Time, Date and Record Date..................................................................... 8
Matters to be Considered.............................................................................. 8
Vote Required......................................................................................... 8
Proxies............................................................................................... 9
Security Ownership.................................................................................... 9
THE MERGER................................................................................................ 12
General............................................................................................... 12
Merger Consideration.................................................................................. 12
Background of and Reasons for the Merger.............................................................. 12
Recommendation of the Board of Directors.............................................................. 14
Opinion of Financial Advisor.......................................................................... 15
First Busey's Financial Resources..................................................................... 20
Effective Time; Closing Date.......................................................................... 20
Exchange of Certificates by Eagle Stockholders........................................................ 20
Dissenters' Appraisal Rights.......................................................................... 21
Regulatory Approvals.................................................................................. 23
THE MERGER AGREEMENT...................................................................................... 23
Representations and Warranties........................................................................ 23
Business Pending the Merger and Other Covenants....................................................... 24
Conditions to the Merger.............................................................................. 26
Waiver and Amendment; Termination..................................................................... 27
Dividends............................................................................................. 29
Interests of Certain Persons in the Merger............................................................ 29
Federal Income Tax Consequences of the Merger......................................................... 32
PRICE RANGE OF COMMON STOCK AND DIVIDENDS................................................................. 33
AUDITORS.................................................................................................. 33
STOCKHOLDER PROPOSALS..................................................................................... 34
</TABLE>
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<TABLE>
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PAGE
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AVAILABLE INFORMATION..................................................................................... 34
INCORPORATION OF DOCUMENTS BY REFERENCE................................................................... 34
</TABLE>
<TABLE>
<S> <C> <C>
Appendix A -- Agreement and Plan of Merger
Appendix B -- Opinion of Trident Securities
Appendix C -- Eagle's Annual Report on Form 10-K for the fiscal year ending
December 31, 1998 and Quarterly Report on Form 10-Q for the quarter
ending June 30, 1999
Appendix D -- Section 262 of the Delaware General Corporation Law
</TABLE>
ii
<PAGE>
SUMMARY
This summary highlights selected information from this proxy statement. It
does not contain all the information that you should consider. Therefore, you
also should read the more detailed information contained elsewhere in this proxy
statement, including the appendices and the documents incorporated by reference.
THE MEETING
MEETING AND RECORD DATE. A special meeting of the stockholders of Eagle
BancGroup, Inc. will be held on , 1999, at ,
at , local time. Only holders of record of common stock at the close
of business on the record date, , 1999, are entitled to notice of,
and to vote at, the meeting. See "THE MEETING--PLACE, TIME, DATE AND RECORD
DATE."
MATTERS TO BE CONSIDERED. At the meeting, stockholders will vote on the
approval and adoption of the agreement and plan of merger, dated as of June 30,
1999, by and among First Busey Corporation, FBC Acquisition Corp. (a wholly
owned subsidiary of First Busey) and Eagle, under which FBC Acquisition Corp.
will merge with and into Eagle and each share of Eagle common stock will be
converted into the right to receive $25.74 in cash. Stockholders will also
consider and vote upon other matters as may properly be brought before the
meeting. See "THE MEETING--MATTERS TO BE CONSIDERED."
VOTE REQUIRED. Approval of the merger agreement requires the affirmative
vote of the holders of a majority of the outstanding shares of Eagle common
stock. As of the record date, there were shares of Eagle common stock
entitled to be voted at the meeting. See "THE MEETING--VOTE REQUIRED."
Approval and adoption of the merger agreement by the Eagle stockholders is a
condition to, and required for, consummation of the merger. See "THE
MERGER--CONDITIONS TO THE MERGER."
SECURITY OWNERSHIP OF MANAGEMENT. As of the record date, directors and
executive officers of Eagle held in the aggregate with the ability to vote
shares or approximately % of the common stock. These persons have
indicated that they intend to vote their shares of common stock for approval and
adoption of the merger agreement.
THE PARTIES
EAGLE. Eagle is a unitary savings and loan holding company and was
incorporated as a Delaware corporation in January, 1996. Eagle owns all of the
common stock of First Federal Savings and Loan Association of Bloomington, a
federally chartered savings association. In June, 1996, First Federal converted
from a mutual savings association to a capital stock savings association, at
which time Eagle acquired all of First Federal's common stock. Simultaneous with
this conversion, Eagle issued 1,302,705 shares of common stock in a subscription
stock offering. Eagle's common stock is quoted on The Nasdaq Stock Market under
the symbol "EGLB."
Eagle is engaged in the business of managing its investments and directing,
planning and coordinating the business activities of First Federal. At June 30,
1999, Eagle had consolidated total assets of $180,674,000 and stockholders'
equity of $19,289,000.
First Federal's principal business involves attracting retail deposits in
its primary market area, McLean and DeWitt counties, from the general public and
investing those deposits, together 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.
1
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Eagle and First Federal serve the financial needs of communities in their
market area through a main office located in Bloomington, Illinois and three
full-service branch offices located in Bloomington, LeRoy and Lexington,
Illinois.
Eagle's principal executive office is located at 301 Fairway Drive,
Bloomington, Illinois 61701, and its telephone number is (309) 663-6345.
FIRST BUSEY. First Busey Corporation, a Nevada corporation and bank holding
company located in Urbana, Illinois, had total assets of $991,046,000 at June
30, 1999. The indirect and direct subsidiaries of First Busey include a
state-chartered bank, a trust company and a securities broker-dealer subsidiary.
First Busey's bank, Busey Bank, provides a full-range of general commercial
and retail banking services. First Busey and its subsidiaries conduct business
in 18 locations.
First Busey's principal executive office is located at 201 West Main Street,
Urbana, Illinois 61801, and its telephone number is (217) 365-4513.
FBC ACQUISITION CORP. FBC Acquisition Corp., a recently formed Delaware
corporation and wholly owned subsidiary of First Busey, does not conduct any
ongoing operations. Its primary purpose is to facilitate First Busey's
acquisition of Eagle.
THE MERGER
Each Eagle stockholder is being asked to consider and vote upon a proposal
to approve and adopt the merger agreement, under which FBC Acquisition Corp.
will merge with and into Eagle, with Eagle surviving the merger as a wholly
owned subsidiary of First Busey. Upon consummation of the merger, the ownership
interest of all current stockholders in Eagle will cease. See "THE
MERGER--GENERAL."
MERGER CONSIDERATION
Subject to the terms, conditions and procedures in the merger agreement,
each share of Eagle common stock issued and outstanding immediately before the
merger, EXCEPT shares:
- held in the treasury of Eagle,
- held by any of Eagle's subsidiaries, other than in a fiduciary capacity,
- available for plan share awards or subject to existing unvested plan share
awards under the Eagle management development and recognition plan and
trust,
- owned by First Busey, FBC Acquisition Corp. or any other subsidiary of
First Busey, other than in a fiduciary capacity, and
- for which Eagle stockholders have validly demanded and perfected appraisal
rights under Section 262 of the Delaware General Corporation Law,
will be converted into the right to receive $25.74 in cash. See "THE
MERGER--MERGER CONSIDERATION."
RECOMMENDATION OF THE BOARD OF DIRECTORS; REASONS FOR THE MERGER
Eagle's board of directors has unanimously approved and adopted the merger
agreement and the transactions contemplated thereby and has determined that the
merger is in the best interests of Eagle and its stockholders. THE BOARD
UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
2
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For a discussion of the factors considered by the board in reaching its
decision to approve the merger agreement and the transactions contemplated
thereby, see "THE MERGER--BACKGROUND OF AND REASONS FOR THE MERGER."
OPINION OF FINANCIAL ADVISOR
Eagle retained Trident Securities, a division of McDonald Investments, Inc.,
to be its financial advisor in connection with the transactions contemplated by
the merger agreement and to evaluate the financial terms of the merger. See "THE
MERGER--BACKGROUND OF AND REASONS FOR THE MERGER."
On August 5, 1999, Trident delivered its updated written opinion to Eagle to
the effect that, as of that date, the merger consideration to be paid by First
Busey for each share of Eagle common stock is fair, from a financial point of
view, to the stockholders of Eagle.
The full text of the written opinion of Trident is attached as Appendix B
and is incorporated by reference in this proxy statement. YOU ARE URGED TO READ
THIS OPINION IN ITS ENTIRETY. See "THE MERGER--OPINION OF FINANCIAL ADVISOR."
DISSENTERS' APPRAISAL RIGHTS
Holders of record of shares of common stock who do not vote to approve and
adopt the merger agreement may dissent and elect to have the fair value of their
shares of common stock, based on all relevant factors and excluding any element
of value arising from the accomplishment or expectation of the merger,
judicially appraised and paid to them in cash. This fair value may be more, the
same as, or less than the merger consideration. These stockholders must deliver
a written demand for this appraisal to Eagle before the vote on the approval and
adoption of the merger agreement and comply with other requirements of Section
262 of the Delaware General Corporation Law, the full text of which is attached
to this proxy statement as Appendix D. Any deviation from the requirements of
Section 262 may result in forfeiture of appraisal rights. Voting for approval of
the merger agreement, or delivering a proxy in connection with the meeting,
unless the proxy directs a vote against, or expressly abstains from the vote on,
the approval and adoption of the merger agreement, will constitute a waiver of a
stockholder's right to seek appraisal for the shares of common stock voted or
covered by that proxy and will nullify any written demand for appraisal
submitted by that stockholder. Return of a blank, executed proxy will constitute
a vote in favor of the merger agreement and result in waiver of appraisal
rights. Voting against or failing to vote for the merger agreement will not by
itself constitute a valid demand for appraisal rights. See "THE
MERGER--DISSENTERS' APPRAISAL RIGHTS."
EFFECTIVE TIME; CLOSING DATE
The effective time of the merger will be as of the day on which a
certificate of merger is filed with the Delaware Secretary of State, which will
occur only after the satisfaction or waiver of all conditions to the merger. The
closing of the merger will take place on a date mutually agreed upon by Eagle,
First Busey and FBC Acquisition Corp. See "THE MERGER--EFFECTIVE TIME; CLOSING
DATE."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Some of Eagle's executive officers and directors may be deemed to have
certain interests in the merger in addition to their interests as stockholders
of Eagle. These material interests include, among others, provisions in the
merger agreement relating to indemnification and the purchase of directors' and
officers' liability insurance coverage. In addition, the consummation of the
merger will affect compensation benefits payable to, and the Eagle stock options
and the plan share awards under Eagle's management recognition plan held by,
executive officers and directors. Eagle's board was aware of all of the
interests described in this proxy statement and considered them, among other
matters, in approving the merger
3
<PAGE>
agreement and the transactions contemplated thereby. See "THE MERGER--INTERESTS
OF CERTAIN PERSONS IN THE MERGER."
REGULATORY APPROVALS
A merger transaction, like the merger, involving a bank holding company,
like First Busey, is subject to the prior approval of the Board of Governors of
the Federal Reserve System under the Bank Holding Company Act of 1956. On August
5, 1999, First Busey submitted an application for approval by the Federal
Reserve Board.
First Busey anticipates obtaining the Federal Reserve Board's approval
during the third quarter of 1999. However, there can be no assurance as to the
timing of this approval or that the Federal Reserve Board will approve the
transaction.
Also, the consummation of the merger is conditioned upon the expiration of
all required regulatory waiting periods and there having been no motion for
rehearing or appeal from the Federal Reserve Board approval nor commencement of
any suit or action seeking to enjoin the transaction or to obtain substantial
damages. There can be no assurance that these conditions will be satisfied. See
"THE MERGER-- REGULATORY APPROVALS."
MATERIAL PROVISIONS OF THE MERGER AGREEMENT
The merger agreement is attached as Appendix A to this proxy statement. You
should read the merger agreement because it is the legal document that governs
the merger. The merger agreement includes many material terms and provisions
which are described in detail elsewhere in this proxy statement, including
provisions that:
- require Eagle to conduct its business in accordance with certain
guidelines (see "THE MERGER-- BUSINESS PENDING THE MERGER AND OTHER
COVENANTS");
- require that certain conditions, in addition to the regulatory approval
and stockholder approval already discussed, be satisfied or waived before
the merger may be consummated (see "THE MERGER--CONDITIONS TO THE
MERGER");
- regulate the ability of the parties to waive or amend certain provisions
of the merger agreement (see "THE MERGER--WAIVER AND AMENDMENT;
TERMINATION"); and
- regulate the ability of the parties to terminate the agreement (see "THE
MERGER--WAIVER AND AMENDMENT; TERMINATION").
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
In general, the receipt of cash for shares of common stock under the merger
agreement or pursuant to perfection of dissenters' appraisal rights will be a
taxable transaction for federal income tax purposes and may be a taxable
transaction for state, local and other tax purposes as well.
BECAUSE TAX CONSEQUENCES MAY VARY DEPENDING UPON THE PARTICULAR
CIRCUMSTANCES OF A STOCKHOLDER, YOU ARE URGED TO CONSULT YOUR TAX ADVISOR
CONCERNING THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO YOU, INCLUDING THE
APPLICABILITY AND EFFECT OF FEDERAL AND VARIOUS STATE, LOCAL AND FOREIGN TAX
LAWS. See "THE MERGER--FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER."
4
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MARKET AND MARKET PRICES
Eagle's common stock is currently included for quotation on The Nasdaq Stock
Market (symbol: EGLB). The following table sets forth the high and low sale
prices per share of Eagle common stock for the trading date preceding public
announcement of the proposed merger and the most recent practicable trading date
preceding the mailing of this proxy statement. See "PRICE RANGE OF COMMON STOCK
AND DIVIDENDS":
<TABLE>
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HIGH LOW
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<S> <C> <C>
June 30, 1999.......................................................... $ 22.125 $ 21.8125
, 1999..................................................... $ $
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ACCOUNTING TREATMENT
The merger will be accounted for as a "purchase transaction."
5
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SELECTED CONSOLIDATED FINANCIAL DATA
The following table shows in summary form historical consolidated financial
data of Eagle. This information is qualified in its entirety by the historical
consolidated financial statements of Eagle, including the notes, which are
incorporated by reference in this proxy statement and included in the Form 10-K
and Form 10-Q attached as Appendix C to this proxy statement.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, AS OF AND FOR THE YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets...................... $ 180,674 $ 174,085 $ 180,101 $ 171,137 $ 172,666 $ 150,974 $ 140,932
Cash and due from banks........... 956 987 1,084 1,628 1,487 1,072 1,092
Federal funds sold and overnight
deposits........................ 4,214 4,943 7,653 3,386 5,573 2,828 1,611
Investments....................... 52,518 47,339 49,822 38,943 53,883 53,186 42,680
Loans, net........................ 117,872 116,109 116,551 122,409 106,641 88,786 83,589
Deposits.......................... 135,241 132,019 134,091 131,452 133,995 138,396 122,388
FHLB advances and other
borrowings...................... 25,000 20,000 25,000 18,000 15,300 -- 7,936
Total equity...................... 19,289 20,976 19,697 20,305 22,141 11,515 9,501
Selected Operating Data:
Interest income................... $ 6,324 $ 6,197 $ 12,462 $ 12,326 $ 11,094 $ 9,933 $ 8,595
Interest expense.................. 3,893 4,109 8,208 8,121 7,703 7,376 5,396
Net interest income before
provision for loan losses....... 2,431 2,088 4,254 4,205 3,391 2,557 3,199
Provision for loan losses......... 120 120 240 240 183 100 (32)
Net interest income after
provision for loan losses....... 2,311 1,968 4,014 3,965 3,208 2,457 3,231
Non-interest income............... 660 652 1,711 576 418 395 261
Non-interest expense.............. 2,438 1.984 4,305 3,768 4,373 2,955
Income (loss) before federal
income taxes.................... 533 636 1,420 773 (747) (103) 652
Federal income taxes.............. 210 233 514 264 (258) (30) 222
Net income (loss)................. 323 403 906 509 (489) (73) 430
Per Share Data:
Book value per share............ $18.07 $17.82 $18.24 $17.24 $17.00 N/A N/A
Basic earnings (loss) per
share......................... 0.32 0.37 0.85 0.44 (0.38) N/A N/A
Diluted earnings (loss) per
share......................... 0.32 0.36 0.83 0.44 (0.38) N/A N/A
Cash dividends per share........ 0.20 -- 0.10 -- -- N/A N/A
Selected Financial Ratios and
Other Data Performance Ratios
(Based on Balance Sheet
Averages) (1):
Return on assets................ 0.35% 0.45% 0.51% 0.30% -0.31% -0.05% 0.31%
Return on equity................ 3.27% 3.90% 4.44% 2.46% -2.85% -0.68% 4.15%
Interest rate spread during
period (2).................... 2.38% 1.92% 1.97% 1.99% 1.69% 1.83% 2.54%
Net interest margin during
period (3).................... 2.77% 2.45% 2.47% 2.53% 2.20% 1.85% 2.55%
Non-interest expense to
assets (4).................... 2.66% 2.19% 2.42% 2.19% 2.74% 1.98% 2.06%
Non-interest income to assets... 0.72% 0.33% 0.96% 0.33% 0.26% 0.26% 0.19%
Interest-earning assets to
interest-bearing
liabilities................... 1.09x 1.11x 1.11x 1.11x 1.10x 1.01x 1.00x
</TABLE>
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<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, AS OF AND FOR THE YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Asset Quality Ratios:
Non-performing assets to total
assets (5).................... 0.53% 0.53% 0.62% 0.54% 0.79% 0.80% 4.86%
Allowance for loan losses to
non-performing loans.......... 398.09% 401.26% 255.67% 316.95% 130.92% 176.80% 9.35%
Net charge-offs to average gross
loans........................... 0.08% 0.08% 0.13% 0.19% 0.17% 0.08% 0.05%
Regulatory Capital and Capital
Ratios (6):
Tangible capital ratio.......... 9.23% 10.07% 9.59% 9.99% 9.66% 7.73% 8.20%
Core capital ratio.............. 9.23% 10.07% 9.59% 9.99% 9.66% 7.73% 8.20%
Risk-based capital ratio........ 15.56% 17.04% 16.04% 16.30% 18.29% 15.78% 15.80%
Average equity to average
assets........................ 10.78% 11.63% 11.48% 12.04% 10.76% 7.21% 7.55%
Equity to assets at end of
period........................ 10.68% 12.05% 10.94% 11.86% 12.82% 7.63% 6.74%
</TABLE>
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(1) With the exception of end of period ratios, all ratios are based on average
month-end balances during the respective months.
(2) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(3) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(4) The 1996 ratio includes the effect of the SAIF special assessment.
(5) 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.
(6) Tangible capital, core capital and risk-based capital ratios relate to First
Federal only.
7
<PAGE>
THE MEETING
PLACE, TIME, DATE AND RECORD DATE
A special meeting of the stockholders of Eagle will be held on ,
1999, at , at , local time. This proxy statement is being sent
to stockholders and accompanies a form of proxy which Eagle is soliciting for
use at the meeting and at any and all adjournments or postponements of the
meeting.
Eagle has fixed the close of business on , 1999 as the record date
for determining holders of common stock who will be entitled to notice of, and
to vote at, the meeting. Only holders of record of shares of common stock at the
close of business on the record date are entitled to notice of, and to vote at,
the meeting. As of the record date, there were outstanding and entitled to be
voted shares of common stock.
MATTERS TO BE CONSIDERED
At the meeting, stockholders will vote on the approval and adoption of the
merger agreement, under which FBC Acquisition Corp. will merge with and into
Eagle and each share of Eagle common stock will be converted into the right to
receive $25.74 in cash upon the consummation of the merger. Stockholders will
also consider and vote upon other matters as may properly be brought before the
meeting. As of the date of this proxy statement, Eagle knows of no business that
will be presented for consideration at the meeting other than the matters
described in this proxy statement.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding shares
of Eagle common stock is required for approval and adoption of the merger
agreement. ABSTENTIONS AND BROKER NON-VOTES WILL HAVE THE SAME EFFECT AS VOTES
AGAINST THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT. Brokers holding
shares of record for customers generally are not entitled to vote on certain
matters unless they receive voting instructions from their customers. "Broker
non-votes" means the votes that could have been cast on the merger agreement by
brokers with respect to uninstructed shares if the brokers had received their
customers' instructions.
Each holder of record of shares of common stock on the record date will be
entitled to cast one vote per share on the merger agreement at the meeting. This
vote may be exercised in person or by properly executed proxy. The certificate
of incorporation of Eagle provides that for a period of five years following the
conversion of First Federal from mutual to stock form, no person, including any
individual, company or group acting in concert, shall acquire beneficial
ownership of more than 10% of any class of equity security of Eagle. The
certificate of incorporation further provides that, where any person directly or
indirectly acquires beneficial ownership of more than 10% of any class of equity
security of Eagle during this five-year period, the securities beneficially
owned in excess of 10% shall not be counted as shares entitled to vote, shall
not be voted by any person or counted as voting shares in connection with any
matter submitted to the stockholders for a vote and shall not be counted as
shares outstanding for purposes of determining a quorum or the affirmative vote
necessary to approve any matter submitted to the stockholders for a vote. Based
upon information available to Eagle, Eagle is not aware of any stockholder
beneficially owning more than 10% of Eagle common stock.
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of common stock entitled to vote at the
meeting is necessary to constitute a quorum. In the absence of a quorum, it is
expected that the meeting will be adjourned or postponed by the stockholders
entitled to vote at the meeting present in person or represented by proxy to
solicit additional proxies. Abstentions and broker non-votes will be treated as
shares present at the meeting for purposes of determining the presence of a
quorum.
8
<PAGE>
Approval and adoption of the merger agreement by the stockholders of Eagle
is a condition to, and required for, consummation of the merger. See "THE
MERGER--CONDITIONS TO THE MERGER."
PROXIES
Shares of common stock represented by properly executed proxies received
before or at the meeting will, unless these proxies have been revoked, be voted
at the meeting and any adjournments or postponements of the meeting, in
accordance with the instructions indicated in the proxies. IF NO INSTRUCTIONS
ARE INDICATED ON A PROPERLY EXECUTED PROXY, THE SHARES WILL BE VOTED "FOR" THE
MERGER AGREEMENT.
Any proxy given pursuant to this solicitation or otherwise may be revoked by
the person giving it at any time before it is voted either:
- by delivering to Marilyn Lockwood, Assistant Secretary, at Eagle
BancGroup, Inc., 301 Fairway Drive, Bloomington, Illinois 61701, on or
before the taking of the vote at the meeting, a written notice of
revocation bearing a later date than the date of the proxy or a later
dated proxy relating to the same shares, or
- by attending the meeting and voting in person.
Attendance at the meeting will not in itself constitute the revocation of a
proxy.
If any other matters are properly presented at the meeting for
consideration, the persons named in the proxy or acting under the proxy will
have discretion to vote on these matters in accordance with their best judgment.
If a proposal to adjourn the meeting is properly presented, however, the persons
named in the enclosed form of proxy will not have discretion to vote in favor of
the adjournment proposal any shares which have been voted against the approval
and adoption of the merger agreement. As of the date of this proxy statement,
Eagle knows of no other matters to be presented at the meeting.
In addition to solicitation by mail, directors, officers and employees of
Eagle, who will not be specifically compensated for these services, may solicit
proxies from the stockholders of Eagle, personally or by telephone, telegram or
other forms of communication. Brokerage houses, nominees, fiduciaries and other
custodians will be requested to forward soliciting materials to beneficial
owners and will be reimbursed for their reasonable expenses incurred in sending
proxy material to beneficial owners. Registrar and Transfer Company, Eagle's
transfer agent, will perform some of these functions. Eagle will bear its own
expenses in connection with the solicitation of proxies for the meeting.
Robert P. Dole, William J. Hanfland and Steven J. Wannemacher serve as
trustees under the First Federal ESOP, which is the record owner of all shares
of common stock held by participants in this ESOP. The trustee will vote the
shares allocated to the account of each participant in this ESOP in accordance
with the directions received from the participant. In order to obtain these
voting directions, the trustee will forward this proxy statement and a proxy to
each participant in this ESOP. This proxy must be executed and returned if the
shares held under this ESOP are to be voted. Unallocated shares of common stock
held in the First Federal ESOP or allocated shares for which no voting
instructions are received will be voted by the trustee in the same proportion as
allocated shares voted by participants, unless inconsistent with the trustee's
fiduciary responsibility. Because the First Federal ESOP participants are not
therecord owners of the related shares, these shares may not be voted in person
by participants in this ESOP at the meeting.
Holders of common stock are requested to complete, date and sign the
accompanying proxy and return it promptly in the enclosed postage-paid envelope.
SECURITY OWNERSHIP
As of , 1999, directors and executive officers of Eagle held in
the aggregate and were entitled to vote shares, or approximately %, of the
common stock. The directors and executive officers
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<PAGE>
of Eagle have indicated that they intend to vote these shares of common stock
for approval and adoption of the merger agreement.
The following table sets forth, as of July 15, 1999, information regarding
share ownership of:
- those persons or entities known by Eagle to beneficially own more than
five percent of the outstanding shares of the common stock,
- each director of Eagle,
- the president and chief executive officer of Eagle, who is also a
director, and
- all directors and executive officers of Eagle as a group.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED AT
JULY 15, PERCENTAGE OF
BENEFICIAL OWNER 1999(1) COMMON STOCK
- --------------------------------------------------------------------------------- --------------- -----------------
<S> <C> <C>
PRINCIPAL STOCKHOLDERS:
First Federal Savings and Loan................................................... 103,472(2) 9.73%
Association of Bloomington ESOP
301 Fairway Drive
Bloomington, Illinois 61701
Jeffrey L. Gendell............................................................... 86,800(3) 8.16%
Tontine Management, L.L.C.
Tontine Financial Partners, L.P.
Tontine Overseas Associates, L.L.C.
200 Park Avenue, Suite 3900
New York, New York 10166
DIRECTORS:
Gerald A. Bradley................................................................ 13,708(4) 1.29% (12)
Robert P. Dole................................................................... 23,648(5) 2.22% (12)
Donald L. Fernandes.............................................................. 32,169(6) 3.03% (12)
William J. Hanfland.............................................................. 13,648(7) 1.28% (12)
Louis F. Ulbrich................................................................. 23,648(8) 2.22% (12)
David R. Wampler................................................................. 12,899(9) 1.21% (12)
Steven J. Wannemacher............................................................ 8,648(10) 0.81% (12)
All directors and executive officers as a group (10 persons)..................... 148,469(11) 13.96% (13)
</TABLE>
- ------------------------
(1) Unless otherwise indicated, the nature of beneficial ownership for shares
shown in this column is sole voting and investment power.
(2) Messrs. Dole, Hanfland and Wannemacher hold 103,472 shares of common stock
in their capacity as trustees of the First Federal ESOP. Messrs. Dole,
Hanfland and Wannemacher have no voting and investment power with respect to
ESOP shares allocated to participant accounts and have shared voting and
investment power with respect to unallocated ESOP shares. Participants in
the ESOP are entitled to direct the trustee as to the voting of shares
allocated to their accounts under the ESOP. Unallocated shares and allocated
shares for which no direction is received will be voted by the trustee in
the same proportion that the allocated shares were voted, unless
inconsistent with the trustee's fiduciary responsibility.
(3) Based on Amended Schedule 13D dated October 13, 1998. Tontine Management,
L.L.C. is the general partner of Tontine Financial Partners, L.P. Jeffrey L.
Gendell is the managing member of Tontine Management, L.L.C. and of Tontine
Overseas Associates, L.L.C. Of the 86,800 shares
10
<PAGE>
reported, Mr. Gendell reported shared ownership of 86,800 shares, Tontine
Management, L.L.C. reported shared ownership of 7l,l00 shares, Tontine
Financial Partners, L.P. reported shared ownership of 7l,100 shares and
Tontine Overseas Associates, L.L.C. reported shared ownership of 15,700
shares.
(4) Of the 13,708 shares reported as beneficially owned by Mr. Bradley, 2,590
are held by Mutual Service Company, Inc. as custodian for Mary C. Bradley,
Mr. Bradley's wife. Also includes options to purchase 2,606 shares of common
stock under Eagle's stock option plan.
(5) Of the 23,648 shares reported as beneficially owned by Mr. Dole, 10,000 are
held jointly with Joyce L. Dole, Mr. Dole's wife, 5,000 are held by the
Robert P. Dole Trust for which Mr. Dole and Ms. Dole act as co-trustees with
shared voting and investment power and 5,000 are held by the Joyce L. Dole
Trust for which Mr. Dole and Ms. Dole act as co-trustees with shared voting
and investment power. Also includes options to purchase 2,606 shares of
common stock under Eagle's stock option plan.
(6) Includes options to purchase 13,028 shares of common stock under Eagle's
stock option plan and 3,049 shares allocated to Mr. Fernandes under the
First Federal ESOP, which shares are also included above under the ESOP's
beneficial ownership total.
(7) Includes options to purchase 2,606 shares of common stock under Eagle's
stock option plan.
(8) Includes options to purchase 2,606 shares of common stock under Eagle's
stock option plan.
(9) Includes options to purchase 10,420 shares of common stock under Eagle's
stock option plan and 395 shares allocated to Mr. Wampler under the First
Federal ESOP, which shares are also included above under the ESOP's
beneficial ownership total.
(10) Includes options to purchase 2,606 shares of common stock under Eagle's
stock option plan.
(11) Includes options to purchase 42,993 shares of common stock under Eagle's
stock option plan and 8,675 shares allocated to the executive officers under
the First Federal ESOP, which shares are also included above under the
ESOP's beneficial ownership total.
(12) Percentage is calculated on a partially diluted basis, assuming only the
exercise of stock options by that individual which are exercisable within 60
days.
(13) Percentage is calculated on a fully diluted basis, assuming the exercise of
all stock options which are exercisable within 60 days.
11
<PAGE>
THE MERGER
The information in this proxy statement concerning the terms of the merger
is qualified in its entirety by the full text of the merger agreement, which,
excluding the schedules, is attached as Appendix A and incorporated by
reference, and the other information contained elsewhere in this proxy
statement, including the appendices and the documents incorporated by reference.
All stockholders are urged to read carefully this entire proxy statement,
including the appendices and any document incorporated by reference.
GENERAL
Under the merger agreement, FBC Acquisition Corp. will be merged with and
into Eagle, with Eagle being the surviving corporation. After the conditions to
consummation of the merger described below have been satisfied or waived, and
unless the merger agreement has been terminated as provided below, a certificate
of merger will be filed with the Delaware Secretary of State regarding the
merger. The merger will become effective when the certificate of merger has been
filed with the Delaware Secretary of State. See "--Effective Time; Closing
Date," "--Conditions to the Merger" and "--Waiver and Amendment; Termination."
Upon consummation of the merger, the Eagle stockholders will be entitled to
receive $25.74 in cash per share in consideration for their common stock and
will no longer be stockholders of Eagle. As a consequence of the merger, Eagle
will become a wholly owned subsidiary of First Busey.
MERGER CONSIDERATION
In accordance with the merger agreement, each share of common stock issued
and outstanding immediately before the merger, EXCEPT shares:
- held in the treasury of Eagle,
- held by any of Eagle's subsidiaries, other than in a fiduciary capacity,
- available for plan share awards or subject to existing unvested plan share
awards under the Eagle management recognition plan,
- owned by First Busey, FBC Acquisition Corp. or any other subsidiary of
First Busey, other than in a fiduciary capacity, and
- for which Eagle stockholders have validly demanded and perfected
dissenters' appraisal rights under Section 262 of the Delaware General
Corporation Law,
will be converted into the right to receive $25.74 in cash at the effective time
of the merger. As of the effective time of the merger, each outstanding and
unexercised Eagle stock option which is exercisable at such date under Eagle's
stock option plan will be converted into the right to receive $25.74 in cash
less the exercise price of the stock option.
BACKGROUND OF AND REASONS FOR THE MERGER
BACKGROUND OF THE MERGER. In recent years, the financial institution
industry has witnessed substantial and rapid change characterized by increasing
consolidation, intensifying competition and acquisition growth of many domestic
banking organizations. Eagle's executive officers and directors have sought to
remain apprised of trends and issues in the financial services industry.
In the fall of 1998, the New Jersey investment group led by Lawrence B.
Seidman acquired more than five percent of the outstanding shares of Eagle's
common stock. According to Mr. Seidman, the maximum per share value of Eagle's
common stock was not adequately reflected in its market price, and he suggested
that Eagle consider the possible sale to or merger of Eagle with another local
banking institution to
12
<PAGE>
maximize stockholder value. In November, 1998, Mr. Seidman requested
representation on Eagle's board of directors as the representative of the New
Jersey investment group. In November 12, 1998 correspondence to Eagle, Mr.
Seidman requested that Eagle furnish him with a copy of the Eagle stockholder
list for communication with Eagle stockholders regarding the request for board
representation. In December 16, 1998 correspondence to Eagle, Mr. Seidman
expressed dissatisfaction with Eagle's quarterly dividend of $0.10 per share and
noted that a sale of Eagle would provide stockholders with a premium to the
market price of Eagle's common stock, more liquidity and a dividend with a
greater percentage return than $0.10 per share.
In January 22, 1999 correspondence, Mr. Seidman notified Eagle that the New
Jersey investment group intended to nominate Mr. Seidman and Mr. Dennis Pollack,
another group member, for election to Eagle's board at the next annual meeting
of stockholders and requested that Eagle provide him with a list of Eagle's
stockholders to solicit proxies for the two director nominees.
On March 2, 1999, Eagle announced that it would undertake, with Trident as
its advisor, a review of the strategic alternatives available to maximize
stockholder value, including the possible sale or merger of Eagle. After this
announcement, Mr. Seidman and the New Jersey investment group ended its proposed
proxy contest for seats on Eagle's board.
The board reviewed with Trident a list of financial institutions and
financial services companies which Trident identified as possibly having an
interest in the acquisition of or a merger with Eagle. At the board's request,
Trident prepared a confidential information memorandum that described Eagle in
detail. After consulting with management, Trident contacted twelve prospective
acquirors in late March 1999. Copies of the confidential information memorandum
were distributed upon the execution of confidentiality agreements. Four
prospective acquirors submitted indications of interest, including First Busey.
Eagle's board invited three prospective acquirors to perform due diligence
and to submit a final indication of interest. One prospective acquiror was
eliminated from consideration since its indication of interest was deemed to be
inadequate. In May, 1999, a fifth prospective acquiror signed a confidentiality
agreement and reviewed the confidential information memorandum, but decided
against submitting an indication of interest.
By June 2, 1999, the three prospective acquirors had completed their due
diligence and submitted final indications of interest to Trident. On June 3,
Eagle's board considered these final indications of interest. Because the two
highest indications of interest were very similar, the board decided to give the
prospective acquirors who submitted them 24 hours to improve their proposals. On
June 4, the board considered these proposals. The board found First Busey's
proposal to be superior and authorized the negotiation of a definitive merger
agreement with First Busey.
During June, 1999, Eagle and its counsel, Schiff Hardin & Waite, and First
Busey and its counsel, Chapman and Cutler, conducted negotiations over the terms
of the merger agreement. In addition, Eagle provided additional documents
requested by First Busey.
A board meeting was held on June 30, 1999. Following a review and discussion
of the proposed terms of the merger, consideration of the fairness opinion of
Trident of the same date and numerous other relevant factors, the board, by a
unanimous vote of all directors, approved and adopted the merger agreement and
the transactions contemplated thereby. The board also authorized and directed
that the merger agreement be submitted to a vote of the stockholders. The
parties executed the merger agreement on June 30, 1999.
THE BOARD'S REASONS FOR THE MERGER. After careful study and evaluation, the
board has unanimously approved the merger agreement and has determined that the
merger is in the best interests of Eagle and its stockholders. The board
believes that the merger will enable stockholders to realize significant value
on their investment.
13
<PAGE>
In reaching its determination that the merger is in the best interests of
Eagle and its stockholders, the board carefully considered a variety of factors
with the assistance of its legal and financial advisors. Among the factors it
considered were the following.
- Based upon the financial terms of other recent business combinations in
the financial institution industry and information concerning the
business, financial condition, results of operations and prospects of
Eagle, the board solicited an opinion from Trident regarding the fairness
of the merger consideration, from a financial point of view, to the
stockholders of Eagle. Based upon the opinion of Trident (see "--Opinion
of Financial Advisor") and the likelihood that the proposed transaction
would be consummated, the board determined that the merger was the most
preferable proposal available to Eagle.
- The prices and premiums paid in comparable acquisition transactions
involving other financial institutions of which the board was aware,
based, among other things, on information supplied by Trident. The board
noted that the price offered by First Busey compared favorably with
similar transactions involving other financial institutions.
- First Busey represented and warranted in the merger agreement its ability
to pay the merger consideration.
- The current and prospective environments in which Eagle operates,
including national and local economic conditions, the current regulatory
environment and the trend toward consolidation in the financial
institution industry generally were also factors in the board's decision.
The increases in competition, together with increased bank regulatory
reporting and other requirements, have made it more difficult for
independent banks to compete with the banking affiliates of much larger
institutions regarding the range of products and services offered and the
costs at which the products and services can be offered.
- The merger consideration to be paid to the stockholders in relation to the
market value, book value, earnings per share and dividend rates on Eagle's
common stock.
- The anticipated impact of the merger on depositors, employees, customers
and communities served by Eagle.
While each director individually evaluated each of these as well as other
factors, the board collectively did not assign any specific or relative weights
to the factors considered and did not make any determination regarding any
individual factor. The board collectively made its determination about the
merger based on the unanimous conclusion reached by the directors that the
merger, in light of the factors that each director, individually, considered as
appropriate, is in the best interests of Eagle and its stockholders.
In approving the merger, the board was aware that the merger agreement
contains provisions prohibiting Eagle from soliciting or entertaining other
proposals relating to the disposition of Eagle's business or assets, the
acquisition of its capital stock or the merger of it or any of its subsidiaries.
The board was aware that Eagle would be obligated to pay a $750,000 termination
fee relating to a failure of Eagle to consummate the merger because of a
business combination proposal involving Eagle by a party other than First Busey
or its affiliates. However, the board was also aware that these terms were
bargained for as inducements for First Busey to enter into the merger agreement.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The board has unanimously approved and adopted the merger agreement and the
transactions contemplated thereby and has determined that the merger is in the
best interests of Eagle and its stockholders. THE BOARD UNANIMOUSLY RECOMMENDS
THAT STOCKHOLDERS OF EAGLE VOTE FOR THE PROPOSAL TO APPROVE AND ADOPT THE MERGER
AGREEMENT.
14
<PAGE>
OPINION OF FINANCIAL ADVISOR
Eagle retained Trident to act as its financial advisor and to render a
fairness opinion in connection with a possible merger. In November, 1998,
Trident was engaged by Eagle to perform a valuation analysis of Eagle in an
acquisition context and to advise Eagle's board about strategic alternatives. On
December 3, 1998, Trident presented its valuation report to the board. In March,
1999, Eagle engaged Trident to assist Eagle in exploring the possibility of a
merger with another financial institution, and to render a fairness opinion in
connection with the merger.
On June 30, 1999, Trident met with Eagle's board to review the proposed
terms of the merger agreement. At that time, Trident summarized the financial
terms of the merger and provided updated market information regarding thrift
mergers and acquisitions. Trident also analyzed the advantages and disadvantages
of the merger from a financial point of view. In addition, Trident rendered its
written opinion to Eagle's board to the effect that, as of that date, the
consideration to be received by Eagle's stockholders pursuant to the merger
agreement was fair to them from a financial point of view.
Trident confirmed and delivered its updated written opinion to Eagle's board
as of the date of this proxy statement that the consideration to be received by
the stockholders of Eagle in the merger is fair from a financial point of view
as of that date. A copy of Trident's updated opinion, which sets forth
assumptions made, matters considered and limitations on the reviews undertaken,
is attached to and incorporated by reference in this proxy statement as Appendix
B. Trident has consented to the inclusion of this opinion and a summary of the
matters considered in forming its opinion in this proxy statement.
Trident's opinion is directed to the board of directors of Eagle and is
directed only to the fairness, from a financial point of view, of the merger
consideration to be received by Eagle's stockholders. Its opinion is based on
conditions as they existed and could be evaluated as of the date of its opinion.
Trident's opinion does not constitute a recommendation to any Eagle stockholder
as to how the stockholder should vote, nor does Trident's opinion address the
underlying business decision to effect the merger. This summary of Trident's
opinion is qualified in its entirety by reference to the full text of the
opinion, which is attached to and incorporated by reference in this proxy
statement as Appendix B. Stockholders are urged to read Trident's opinion in its
entirety for a description of the assumptions made and matters considered and
the limits on the review undertaken in rendering the opinion.
In connection with rendering its opinion, Trident reviewed and analyzed,
among other things, the following:
- the merger agreement;
- this proxy statement;
- publicly available information concerning Eagle, including the audited
consolidated financial statements of Eagle for each of the years in the
three-year period ended December 31, 1998 and the unaudited consolidated
financial statements of Eagle for the six months ended June 30, 1999;
- publicly available information concerning First Busey, including the
audited consolidated financial statements of First Busey for each of the
years in the three-year period ended December 31, 1998 and the unaudited
consolidated financial statements of First Busey for the six months ended
June 30, 1999;
- other internal information, primarily financial in nature, concerning the
business and operations of Eagle and First Busey furnished to Trident by
Eagle and First Busey for purposes of Trident's analysis;
- information regarding the trading market for Eagle common stock;
- publicly available information regarding other companies that Trident
believed to be comparable to Eagle and the trading markets for those
companies' securities; and
15
<PAGE>
- publicly available information concerning the nature and terms of other
transactions that Trident considered relevant to its inquiry.
Trident also met with officers and employees of Eagle and First Busey to discuss
the foregoing, as well as other matters it believed to be relevant to its
inquiry. Trident also took into account its assessment of general economic,
market, financial and regulatory conditions and trends, as well as its knowledge
of the financial institutions industry, its experience in connection with
similar transactions, and its knowledge of securities valuation generally. No
limitations were imposed by either Eagle or its board or management regarding
the investigation made or procedures followed by Trident.
In its review and analysis and in arriving at its opinion, Trident assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided to it by Eagle and First Busey, or that was publicly
available, the accuracy of the representations and warranties of the officers
and the employees of Eagle and First Busey with whom Trident held discussions,
and the accuracy of the representations and warranties of Eagle and First Busey
in the merger agreement, and did not attempt independently to verify any of this
information. Trident further assumed that there are no conditions in the
regulatory approvals of the merger agreement that will have a material adverse
effect upon the contemplated economic benefits of the merger.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial or summary description. Trident believes that
its analyses and the summary below must be considered as a whole, and that
selecting portions of its analyses without considering all of the analyses, or
reviewing the summary without considering all factors and analyses, would create
an incomplete view of the processes underlying the analyses in Trident's reports
and its opinion. Therefore, the ranges of valuations resulting from any single
analysis described below should not be taken to be Trident's view of the actual
value of Eagle. In performing its analyses, Trident made numerous assumptions
regarding industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Eagle. The results of the
specific analyses performed by Trident may differ from Eagle's actual values or
actual future results as a result of changing economic conditions, changes in
strategy and policies and other factors. These individual analyses were prepared
to provide valuation guidance solely as part of Trident's overall valuation
analysis and the determination of the fairness of the merger consideration to be
paid to Eagle's stockholders. The analyses do not purport to be appraisals or to
reflect the prices at which an entity might actually be sold or the prices at
which any securities may trade at the present time or at any time in the future.
In addition, Trident's opinion and presentations to Eagle's board were among the
many factors taken into consideration by Eagle's board in making its
determination to approve and adopt the merger agreement.
The summaries below reflect all the material analysis, factors and
assumptions considered by Trident and the material valuation methodologies used
by Trident in arriving at its opinion as to fairness.
STATE OF THE MARKET. Trident reviewed the current and historical trading
market for thrift and bank equity securities and current and historical
trends in the acquisition markets for banks and thrifts. Trident focused on
the acquisition market for thrifts with particular attention to the segments
of the market which it believed to be the most relevant to Eagle, such as
thrifts of similar size and profitability, thrifts with similar capital
structures and asset quality, and thrifts located in the same geographic
region. Trident also studied the trading market for Eagle common stock and
compared the performance of Eagle common stock over the preceding twelve
months to the performance of the Standard and Poor's 500 Index and an index
of thrift stocks.
FINANCIAL ANALYSIS OF EAGLE. Trident examined Eagle's financial performance
for the period from December 31, 1994 through June 30, 1999 by analyzing the
composition of its balance sheet, adjusting and normalizing its earnings,
and calculating a variety of operating and financial ratios for Eagle.
16
<PAGE>
Trident compared Eagle's deposit market share with other financial
institutions operating in the same market.
COMPARISON TO ACTIVELY-TRADED THRIFTS. Trident evaluated Eagle's strengths
and weaknesses by comparing the financial performance of Eagle to that of
the following groups of actively-traded thrifts:
- all U.S. thrifts;
- Midwest thrifts;
- Illinois thrifts;
- thrifts with tangible capital between 10% and 13%;
- thrifts with a return on equity during the trailing four quarters between
2% and 5%;
- thrifts with a return on assets during the trailing four quarters between
0.25% and 0.50%;
- thrifts with total assets between $100 million and $250 million; and
- nine actively-traded thrifts Trident believed were most similar to Eagle
in terms of size, capital structure, profitability and asset quality.
Trident compared Eagle to the foregoing groups of actively-traded thrifts on
the basis of its stock pricing, balance sheet composition, capital ratios,
asset quality and reserve coverage, asset and deposit growth, return on
average assets, return on average equity, and the components of earnings
during the trailing four quarters.
PEER GROUP ANALYSIS. Trident also compared First Federal to the following
groups of stock thrift institutions based on regulatory financial
information as of March 31, 1999:
- all U.S. thrifts;
- Illinois thrifts;
- Midwest thrifts;
- U.S. thrifts of similar size, that is, $100 to $250 million of assets; and
- Midwest thrifts of similar size.
This analysis compared a number of Eagle's historical financial ratios to
those of the peer groups, including but not limited to:
- balance sheet composition;
- key ratios;
- income and expense ratios for the trailing four quarters, the most recent
quarter, and the most recent calendar year;
- historical ROAA and ROAE; and
- asset, loan, deposit and equity growth rates for selected periods.
CONTROL VALUATION OF EAGLE'S COMMON STOCK. Trident estimated the fair market
value of Eagle's common stock in a merger. In valuing Eagle's common stock,
Trident utilized the income approach, the asset approach and the market
approach, and then reconciled the values derived from these approaches.
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Trident used an income approach in its valuation of Eagle by discounting
Eagle's projected future earnings contribution in a merger context. With the
assistance of Eagle's management, Trident projected Eagle's earnings for the
next six years as an independent entity. Trident then assumed that cost
savings of 20% to 40% of total operating expenses could be realized as a
result of a merger. The future earnings contribution is the sum of the
projected earnings and the after-tax cost savings. The earnings
contributions were then discounted at a rate of 17%. The earnings
contribution for the sixth year was capitalized at rates between 12% and 14%
in order to derive a terminal value for earnings contributions in subsequent
years. The terminal value was also discounted at a rate of 17%. The discount
rate and capitalization rates chosen were estimates of the required rates of
return for holders or prospective holders of stock of financial institutions
similar to Eagle, based on a number of factors, including prevailing
interest rates, the pricing ratios of publicly traded financial
institutions, the financial condition and operating results of Eagle, the
relationship between projected future earnings and Eagle's past performance,
as well as Trident's general knowledge of valuation, the securities markets,
and acquisition values in mergers involving other financial institutions.
Trident adjusted the resulting values to reflect the costs and benefits of
terminating benefit plans and other merger-related expenses. Using the
income approach, Trident established a reference range of between $19.75 to
$26.25 per share.
The asset approach considers the market value of an entity's assets and
liabilities, as well as any intangible value that the entity may have.
Trident estimated Eagle's net asset value by adjusting the carrying value of
its assets and liabilities to reflect current market values. In addition,
Trident adjusted Eagle's net asset value for the impact of terminating
benefit plans and other merger-related expenses. Based on these adjustments,
Trident estimated Eagle's fully diluted net asset value to be approximately
$21.2 million, or $17.51 per share. After determining Eagle's net asset
value, Trident added an intangible premium to reflect the estimated value of
its customer relationships. Based on intangible or core deposit premiums
observed in the market for thrift acquisitions, as well as Trident's
knowledge of Eagle, Trident applied premiums equal to 4% and 9% of core
deposits to Eagle's estimated fully-diluted net asset value. Using the asset
approach, Trident established a reference range of between $21.25 to $26.25
per share.
In the market approach, Trident analyzed market pricing ratios, such as
price to book value, price to tangible book value, price to earnings, price
to assets, resulting from selected completed thrift merger transactions, as
well as recently announced pending transactions. In applying the market
approach, Trident considered the median pricing ratios for the following
groups of thrift merger transactions:
- all pending thrift merger transactions or 41 transactions;
- all pending thrift mergers announced during the preceding 90 days or 17
transactions;
- all recent thrift mergers announced in the preceding 18 months involving
thrifts located in the Midwest region or 45 transactions;
- all recent thrift mergers in which the target thrift had assets between
$100 million and $250 million or 24 transactions;
- all recent thrift mergers in which the aggregate consideration was between
$20 million and $30 million or 11 transactions;
- all recent thrift mergers in which the target thrift had a return on
assets of between 0.25% and 0.50% or 25 transactions;
- all recent thrift mergers in which the target thrift had a return on
equity of between 2% and 5% or 28 transactions; and
- all recent thrift mergers in which the target thrift had a tangible equity
to assets ratio of between 10% and 13% or 19 transactions.
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Trident also considered the pricing ratios for eight pending or completed
thrift merger transactions in which the target thrift was of similar size
and capital structure as Eagle, and in which the target thrift had similar
profitability and asset quality. Trident then compared a number of financial
ratios for Eagle to those of the target thrift institutions.
Based on Eagle's financial condition and results of operations, as well as
other factors, relative to the groups of thrift mergers noted above, Trident
chose ranges of pricing ratios to apply to Eagle. Trident chose price to
book value ratios of 120% to 140%, resulting in per share values of between
$21.75 to $25.50; price to tangible book value ratios of 120% to 140%, also
resulting in per share values of between $21.75 to $25.50; and price to
assets ratios of 14% to 17%, resulting in per share values of between $22.50
to $27.25. Price to earnings ratios were not meaningful. Based on these
derived ranges of value, Trident established a reference range of between
$22.00 to $26.00 per share using the market approach.
Trident then reviewed the results from the three approaches, and after
consideration of all relevant facts, determined a final range of between
$21.00 to $26.00 per share for the acquisition value of Eagle. Trident did
not apply specific weights to the three individual approaches, but Trident
gave greater consideration to the asset and market approaches in its final
range of value for Eagle.
STRATEGIC ALTERNATIVES. Trident presented a list of the advantages and
disadvantages of various strategic alternatives available to Eagle:
- remain independent;
- merge with a larger financial institution; or
- enter into a merger of equals.
Trident projected future trading prices and acquisition values for Eagle
common stock based on Eagle's business plan. Trident also compared the
present values and rates of return for remaining independent with the
expected present value and rate of return that might be realized in a merger
transaction.
PROSPECTIVE ACQUIRORS. Trident presented Eagle with a list of other
financial services companies with operations in central Illinois that it
believed to be prospective acquirors or 23 entities. These prospective
acquirors were categorized based on Trident's perceived level of interest
from the prospective acquiror and fit with Eagle.
PROCESS. Trident briefly reviewed the process that led to the negotiation of
the merger agreement. Trident presented a list of the financial services
companies that were contacted regarding a possible business combination with
Eagle, and the response from each entity contacted.
SUMMARY OF PROPOSED TRANSACTION. Trident presented a summary of the
financial terms of the merger. Trident discussed the advantages and
disadvantages of the merger from a financial point of view. Trident compared
the pricing ratios for the merger with the median pricing ratios for
selected groups of recently announced thrift mergers and acquisitions.
Trident also presented a pro forma balance sheet for the combined entity
that indicated the resulting capital ratios.
Trident reported that during its investigation, Trident did not discover any
conditions that would prevent it from rendering its fairness opinion to Eagle's
board.
Trident, as part of its investment banking business, is continually engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, and valuations for corporate and
other purposes. Trident has extensive experience with the valuation of financial
institutions. Trident served as the Eagle's sales agent in the 1996 conversion,
and received total
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fees and commissions of approximately $228,000 for that transaction. In
addition, in the ordinary course of business, Trident may trade the securities
of Eagle for its own account and for the accounts of its customers and,
accordingly, may at any time hold a long or short position in these securities.
Eagle's board selected Trident as its financial advisor because of its previous
experience with Trident, because Trident is a nationally recognized investment
banking firm specializing in the financial institution industry, and because of
its substantial experience in transactions similar to the merger. Trident is not
affiliated with Eagle or First Busey.
Pursuant to an engagement letter dated November 19, 1998 between Eagle and
Trident, for financial advisory services, Eagle paid Trident a fee of $15,000 to
provide Eagle's board with a written report examining Eagle's strategic
alternatives and estimating current and future stockholder values of Eagle.
Pursuant to an engagement letter dated March 9, 1999 between Eagle and Trident,
for its services as financial advisor, Trident credited Eagle with the fee of
$15,000 it paid pursuant to the November 19, 1998 engagement letter for
performing a valuation of Eagle. Eagle paid Trident a fee of $25,000 upon
execution of the merger agreement. An additional fee equal to 1.00% of the
aggregate merger consideration received by Eagle's stockholders, less $40,000,
will be payable to Trident upon the consummation of the merger. Eagle also
agreed to reimburse Trident for all of its reasonable out-of-pocket expenses and
to indemnify Trident against certain liabilities, including certain liabilities
under federal securities law.
FIRST BUSEY'S FINANCIAL RESOURCES
In the merger agreement, First Busey has represented and warranted that it
has the financial wherewithal, whether by using its internal funds, external
financing, or both to perform its obligations under the merger agreement.
EFFECTIVE TIME; CLOSING DATE
In order to consummate the merger, a certificate of merger must be filed
with the Delaware Secretary of State. This filing will occur only after the
receipt of all regulatory approvals and the approval and adoption of the merger
agreement by Eagle's stockholders and the satisfaction or waiver of all other
conditions to the merger. See "--CONDITIONS TO THE MERGER." The effective time
of the merger will be as of the day of this filing with the Delaware Secretary
of State. The closing of the merger will take place on a date mutually agreed
upon by Eagle, First Busey and FBC Acquisition Corp.
EXCHANGE OF CERTIFICATES BY EAGLE STOCKHOLDERS
Before the effective time of the merger, First Busey will instruct the
paying agent, which First Busey will designate and which is reasonably
satisfactory to Eagle, to mail to each holder of record of common stock
certificate(s), a letter of transmittal and instructions for use in effecting
the surrender of the certificate(s) in exchange for merger consideration into
which the shares represented by the certificate(s) will have been converted in
accordance with the merger agreement. At or before the effective time of merger,
First Busey will irrevocably deposit or cause to be deposited with the paying
agent an amount of cash sufficient for payment of the merger consideration
payable to Eagle stockholders. STOCKHOLDERS SHOULD NOT SEND IN THEIR
CERTIFICATES UNTIL THEY RECEIVE THE TRANSMITTAL MATERIALS FROM THE PAYING AGENT.
Following the consummation of the merger, upon the proper surrender by a
stockholder to the paying agent of all necessary transmittal materials and the
certificate(s), the stockholder will be entitled to receive a check for the
merger consideration to which the stockholder is entitled and the certificate(s)
will be cancelled. No interest will be paid or will accrue on any cash payment
payable to a holder of Eagle certificate(s). Payment may be made to a person
other than the person in whose name a surrendered certificate is registered only
if the certificate is properly endorsed or accompanied by an appropriate
instrument of transfer and otherwise in proper form for transfer.
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After the effective time of the merger, there will be no transfer on the
stock transfer books of Eagle of shares of common stock issued and outstanding
immediately before the effective time of the merger.
Until properly surrendered, each outstanding certificate formerly
representing shares of common stock will be deemed to evidence solely the right
to receive the merger consideration to which the stockholder is entitled under
the merger agreement. If any certificate evidencing the common stock has been
lost, stolen or destroyed, the stockholder must submit to the paying agent an
affidavit of lost, stolen or destroyed certificate and post a bond in an amount
the paying agent determines to be reasonably necessary as indemnity against
claims that may be made against that certificate. The paying agent will issue in
exchange for the foregoing the applicable merger consideration.
Any portion of the merger consideration held by the paying agent for payment
to Eagle's stockholders which remains unclaimed for twelve months after the
effective time of the merger will be paid by the paying agent to Eagle as the
surviving corporation of the merger, after which time any holder of
certificate(s) who has not delivered the certificate(s) to the paying agent will
look only to Eagle for payment of the merger consideration payable for that
stockholder's shares of common stock, without interest.
DISSENTERS' APPRAISAL RIGHTS
Under the Delaware General Corporation Law, stockholders are entitled to
appraisal rights in connection with the merger. Any holder of record of common
stock that objects to the merger may elect to have his or her shares of common
stock appraised under the procedures of the Delaware General Corporation Law and
to be paid the fair value of his or her shares. The fair value of the shares
will not include any value arising from the merger but may include a fair rate
of interest. It is possible that the fair value determined may be more or less
than the consideration to be received by holders of common stock in the merger.
Any stockholder who is considering exercising his or her appraisal rights is
urged to review carefully the provisions of Section 262 of the Delaware General
Corporation Law, a copy of which is attached to this proxy statement as Appendix
D, particularly with respect to the procedural steps required to perfect the
right of appraisal. The right of appraisal may be lost if the procedural
requirements of Section 262 are not followed exactly. The following is a summary
of the procedures relating to exercise of the right of appraisal, which should
be read together with the full text of Section 262.
Under Section 262, Eagle is required to notify each stockholder entitled to
appraisal rights at least 20 days before the meeting that the appraisal rights
are available. The notice should include a copy of Section 262. This proxy
statement constitutes this notice to the stockholders of Eagle.
A stockholder electing to exercise his or her appraisal rights under Section
262 must deliver to Eagle a written demand for appraisal before the vote is
taken at the meeting. The written demand must identify the stockholder and state
that the stockholder intends to demand appraisal of his or her shares of common
stock. A vote against the approval and adoption of the merger agreement or an
abstention will not constitute a demand for appraisal. A stockholder electing to
make a demand for appraisal must do this by a separate written demand to Eagle.
Demands should be mailed or delivered to Eagle BancGroup, Inc., 301 Fairway
Drive, Bloomington, Illinois 61702-0429, Attention: Marilyn Lockwood, Assistant
Secretary. Within ten days after the effective time of the merger, Eagle will
notify each stockholder who has made a proper written demand for appraisal and
who has not voted for the approval and adoption of the merger agreement that the
merger has been completed. A vote for the approval and adoption of the merger
agreement will have the effect of waiving all appraisal rights.
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Within 120 days after the effective time of the merger, Eagle or any
stockholder who has complied with the foregoing notice requirement and the other
requirements of Section 262 may file a petition in the Delaware Court of
Chancery demanding a determination of the fair value of his or her shares of
common stock. Eagle has no obligation to file a petition and does not currently
intend to do this. As a result, any dissenting stockholder who wishes to file a
petition is advised to do this on a timely basis. If a petition for appraisal is
not filed during the 120-day period, all appraisal rights relating to the common
stock will terminate. Any stockholder may withdraw a demand for appraisal at any
time within 60 days after the effective time of the merger.
If a stockholder either withdraws his or her demand for appraisal or has his
or her appraisal rights terminated as described above, the stockholder will only
be entitled to receive the merger consideration for his or her shares of common
stock as provided in the merger agreement.
Within 120 days after the effective time of the merger, any stockholder who
has complied with the above-described notice requirements and the other
requirements of Section 262 may request in writing a list of the aggregate
number of shares of common stock for which demands for appraisal have been made
and the aggregate number of holders demanding appraisal rights.
If a petition is filed by a dissenting stockholder, Eagle will receive
notice from the Delaware Court of Chancery of the filing. Within 20 days after
Eagle receives this notice, Eagle must file with the office of the Register in
Chancery in which the petition was filed a list containing the names and
addresses of all stockholders who have demanded appraisal rights and the names
of all stockholders who have disagreements with Eagle regarding the value of
their shares of common stock. If a petition is filed by Eagle, the petition will
be accompanied by a similar list. If ordered by the Delaware Court of Chancery,
the Register in Chancery will give notice of the time and place of the hearing
by registered or certified mail to Eagle and to each stockholder shown on the
list. The notice will also be given by publishing the notice in a newspaper of
general circulation published in Wilmington, Delaware, or any other location the
Delaware Court of Chancery may determine, at least one week before the hearing.
The forms of the notices to be used will be approved by the Delaware Court of
Chancery, and all costs related to the distribution of the notices will be paid
by Eagle.
After the Delaware Court of Chancery determines which of the stockholders
are entitled to an appraisal under Section 262, the Delaware Court of Chancery
will appraise the fair value of the shares of the common stock. Following this
determination of the fair value of the shares, Eagle will pay all dissenting
stockholders the fair value of their shares, together with interest, if any,
upon surrender to Eagle of their certificates representing common stock. The
costs of the appraisal proceeding may be determined by the Delaware Court of
Chancery and charged to the parties as the Delaware Court of Chancery deems
equitable under the circumstances. Upon application of a dissenting stockholder,
the Delaware Court of Chancery may order all or a portion of the expenses
incurred by any dissenting stockholder in connection with the appraisal
proceeding, including reasonable attorneys' fees and the fees and expenses of
experts, to be charged pro rata against the value of all of the shares entitled
to an appraisal.
After the effective time of the merger, no stockholder who has demanded his
or her appraisal rights as set forth above will be entitled to vote his or her
shares for any purpose or to receive payment of dividends or other distributions
on his or her common stock, except permitted dividends or other permitted
distributions payable to stockholders of record at a date before the effective
time of the merger.
THE PRECEDING DISCUSSION IS A SUMMARY OF THE PROVISIONS REGARDING APPRAISAL
RIGHTS UNDER THE DELAWARE GENERAL CORPORATION LAW AND IS QUALIFIED IN ITS
ENTIRETY BY THE TEXT OF SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW,
WHICH IS ATTACHED TO THIS PROXY STATEMENT AS APPENDIX D. EAGLE STOCKHOLDERS WHO
ARE INTERESTED IN PERFECTING APPRAISAL RIGHTS IN CONNECTION WITH THE MERGER
SHOULD CONSULT WITH THEIR LEGAL COUNSEL FOR ADVICE AS TO THE PROCEDURES REQUIRED
TO BE FOLLOWED.
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REGULATORY APPROVALS
The merger, which involves First Busey, a bank holding company, is subject
to the prior approval of the Federal Reserve Board under the Bank Holding
Company Act of 1956. On August 5, 1999, First Busey submitted an application for
approval by the Federal Reserve Board.
In general, the Federal Reserve Board must consider the financial and
managerial resources and future prospects of the institutions involved in the
transaction and the convenience and needs of the communities to be served. The
Federal Reserve Board cannot approve the merger if it would:
- result in a monopoly or be in furtherance of any combination or conspiracy
to monopolize or to attempt to monopolize the business of banking in any
part of the United States,
- lessen competition substantially or tend to create monopoly in any section
of the country, or
- be a restraint of trade in any other manner,
unless the Federal Reserve Board finds that the anti-competitive effects of the
merger are clearly outweighed in the public interest by the probable effect of
it meeting the convenience and needs of the communities to be served. The
Federal Reserve Board has the authority to deny an application if it concludes
that the combined organization would have an inadequate capital position. Also,
the Federal Reserve Board must assess the records of the depository subsidiaries
of First Busey and Eagle under the Community Reinvestment Act of 1977, which
requires that the Federal Reserve Board analyze and consider when evaluating an
application each depository institution's record of meeting the credit needs of
its local communities, including low and moderate income neighborhoods,
consistent with safe and sound operation.
First Busey anticipates obtaining the Federal Reserve Board's approval
during the third quarter of 1999. However, there can be no assurance as to the
timing of this approval or that the Federal Reserve Board will approve the
transaction.
Under the Bank Holding Company Act, the merger may not be consummated until
the thirtieth day following the date of Federal Reserve Board approval, during
which time the Department of Justice may challenge the merger on antitrust
grounds. The commencement of an antitrust action would stay the effectiveness of
the Federal Reserve Board's approval unless a court specifically orders
otherwise. With the approval of the Federal Reserve Board and the Department of
Justice, the waiting period following Federal Reserve Board approval may be
reduced to no less than fifteen days. The Bank Holding Company Act provides for
the publication of notice and public comment on the application and authorizes
the regulatory agency to permit interested parties to intervene in the
proceedings.
The consummation of the merger is conditioned upon the expiration of all
required regulatory waiting periods and there having been no motion for
rehearing or appeal from the Federal Reserve Board approval nor commencement of
any suit or action seeking to enjoin the transaction or to obtain substantial
damages. There can be no assurance that these conditions will be satisfied.
THE MERGER AGREEMENT
REPRESENTATIONS AND WARRANTIES
The parties made representations and warranties to each other in the merger
agreement customary for this type of a transaction. It is a condition of the
closing that each party's representations and warranties in the merger agreement
or in any related documents be true and correct as of the closing date, as
though made on and as of the closing date, subject to conditions in the merger
agreement. See "--CONDITIONS TO THE MERGER." As of the date of this proxy
statement, neither Eagle nor First Busey or FBC Acquisition Corp. has any
knowledge that this condition will not be satisfied as of the closing date.
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BUSINESS PENDING THE MERGER AND OTHER COVENANTS
Eagle has agreed to conduct its business in accordance with guidelines in
the merger agreement.
Eagle has agreed that, pending the closing date, and without the prior
written consent of First Busey, which will not be unreasonably withheld, Eagle
will and will cause First Federal to:
- make no changes in their charters or bylaws or in the number of their
issued and outstanding shares except upon the exercise of existing stock
options, the vesting of existing awards under Eagle's management
recognition plan or Eagle's repurchase of up to 4,000 shares from the
First Federal employees' pension plan;
- not increase the compensation of their directors, officers or employees,
except that the compensation of officers and employees may be increased in
a manner consistent with prior practice;
- make no loan for $500,000 or more other than loans currently committed to
be made pursuant to written commitment letters and make no other loans,
renewals or restructuring of loans except in the ordinary course of
business and consistent in all material respects with prudent banking
practices and applicable rules and regulations of regulatory authorities;
- use their best efforts to maintain their present insurance coverage
regarding their properties and businesses;
- make no significant changes outside the ordinary course of business in the
general nature of their business;
- not enter into any employment, consulting or similar agreements that are
not terminable on 30 days' notice or less without penalty or obligation;
- not take any action that would result in a termination, partial
termination, curtailment, discontinuance or merger into another plan or
trust of any Eagle employee benefit plan, except as contemplated by the
merger agreement or disclosed in the related schedules;
- timely file all required tax returns with all applicable taxing
authorities without any extension of time for filing or the applicable
period of limitations;
- except as already reflected in the financial statements as described in
the merger agreement, not make any expenditure for fixed assets in excess
of $25,000 for any single item, or $50,000 in the aggregate, or enter into
any lease of fixed assets with a monthly rental payment exceeding $5,000;
- not incur any liabilities or obligations, make any commitments or
disbursements, acquire or dispose of any property or asset, dispose of any
real estate owned, make any agreement, or engage in any transaction,
except in the ordinary course consistent in all material respects with
prudent banking practices;
- not do or fail to do anything that will cause a breach of, or default
under, any agreement or other arrangement to which Eagle or First Federal
is bound, which would have a material adverse effect on Eagle;
- make no material changes in their accounting procedures or practices or
the manner of conducting their businesses and maintaining their records;
- substantially comply with all material laws applicable to the conduct of
their business;
- use their best efforts to preserve their business organization intact, to
keep available the services of their present officers and employees and to
preserve the goodwill of their customers and others having business
relations with them;
- not make any borrowings except in the ordinary course of business;
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- not purchase or invest in securities or obligations, or accept deposits,
except for deposits at rates consistent with those being paid generally by
other financial institutions in First Federal's markets, having a maturity
of more than three years from the date of purchase or acceptance; and
- not extend credit or make advances, or grant any extension of any
outstanding loan, advance or other credit, to any customer of First
Federal who is listed on First Federal's problem or watch list or who has
any outstanding loan, advance or other credit from First Federal which is
in default, has been placed on nonaccrual status or has been internally
classified as among "other loans specifically mentioned," or as
"substandard," "doubtful" or "loss."
Also, Eagle will:
- not declare or pay any dividend or other distribution without the prior
written consent of First Busey, except its fiscal 1999 second quarter cash
dividend to its stockholders in an amount not to exceed $0.10 per share,
and First Federal may pay cash dividends to Eagle in the aggregate amount
necessary for Eagle to pay this dividend;
- cause First Federal not to accept any brokered deposits;
- not grant any new stock options under the Eagle stock option plan or any
new plan share awards under the Eagle management recognition plan; and
- not nominate or appoint any new directors or executive officers of Eagle
or its subsidiaries and cause its subsidiaries not to do the foregoing.
In the merger agreement, Eagle agreed that it will not, during the term of
the merger agreement:
- solicit, encourage or authorize any individual, corporation or other
entity to solicit from any third party any inquiries or proposals relating
to:
- the disposition of its business or assets,
- the acquisition of its capital stock, or
- the merger of it or any of its subsidiaries with any corporation or
other entity,
other than as provided by the merger agreement, except pursuant to written
direction from a regulatory authority; or
- negotiate with or entertain any proposals from any other person for any
transaction in which the business, assets or capital stock of it or its
subsidiaries would be acquired by any party other than as provided by the
merger agreement, except pursuant to written direction from any regulatory
authority or upon receipt of an unsolicited offer from a third party where
the Eagle board reasonably believes, with the opinion of counsel, that its
fiduciary duties require it to enter into discussions with that party.
Eagle will promptly notify First Busey and keep First Busey informed of all
relevant details of all inquiries or proposals that it may receive about any
proposed disposition of its business or assets, acquisition of its capital
stock, or the merger of it or its subsidiaries with any entity other than as
provided by the merger agreement.
Eagle may disclose to its stockholders a position contemplated by Rule
14e-2(a) under the Securities Exchange Act of 1934 relating to a tender offer
for its common stock.
Under the terms of the merger agreement, Eagle will also:
- use reasonable efforts to preserve its reputation and relationship with
suppliers, clients, depositors, customers, employees and others having
business relations with it;
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- give reasonable notice to First Busey of board and committee meetings of
Eagle and First Federal and the agendas if known; and
- transmit to First Busey promptly copies of materials that Eagle or First
Federal provide to their directors to the extent permissible under law,
except materials regarding the proposed acquisition of Eagle or First
Federal.
Pending the closing date of the merger, the parties agree to and to cause
their subsidiaries to conduct their businesses in the usual and ordinary course
consistent in all material respects with prudent banking practices.
The parties also agree to use reasonable efforts in good faith to satisfy
the conditions to closing and to consummate the merger as soon as practicable.
None of the parties will intentionally take or permit to be taken any action
that would be in breach of the merger agreement or that would cause any
representation and warranty to be or become untrue.
During the term of the merger agreement, each party must immediately give
detailed written notice to any other party of any facts or the occurrence or
impending occurrence of any event that would cause any representation or
warranty to be or become untrue as of the closing date.
Within 45 days after the date of the merger agreement, Eagle, at its
expense, will furnish First Busey with a title insurance commitment covering
certain of its owned real properties and surveys on these properties, as
described in the merger agreement. Within ten days after the delivery of the
title insurance commitment and surveys, First Busey must notify Eagle in writing
of any title defects in these documents which are not permitted exceptions or
otherwise be deemed to have accepted title to these properties. If First Busey
timely notifies Eagle of any title defect, Eagle must advise First Busey within
five days of receipt of this notification whether it will remove any title
defect on or before the closing date or not. If Eagle advises First Busey that
it will not cause the title defects to be removed, First Busey will have five
days after Eagle's notification to elect, as its sole remedy, to proceed with
the merger and accept the title defects or terminate the merger agreement by
written notice to Eagle. If First Busey does not give Eagle notice of its
election within this period, First Busey will be deemed to have elected to
proceed with the merger.
Within 45 days after the date of the merger agreement, Eagle, at its
expense, will furnish to First Busey, regarding certain parcels of its owned
real properties, a written environmental audit prepared by an engineering firm
or other qualified expert satisfactory to First Busey and prepared in accordance
with terms of the merger agreement. First Busey may request within ten days
following receipt of any Phase I audit the performance of any recommended
additional investigation. Costs associated with this Phase II work will be paid
by Eagle up to $15,000, with any excess paid by First Busey. Within ten days of
receiving the results of any Phase II work that confirms the presence of a
significant environmental concern that may reasonably have a material adverse
effect on Eagle, First Busey and Eagle will agree to negotiate a mutually
agreeable resolution. If a mutually agreeable resolution cannot be reached after
ten days, Eagle and First Busey will have the right to terminate the merger
agreement by providing written notice of the same.
CONDITIONS TO THE MERGER
The obligations of the parties under the merger agreement are subject to the
satisfaction or waiver of the following conditions before or at closing, among
others, that:
- the representations and warranties of Eagle or First Busey and FBC
Acquisition Corp. in the merger agreement or in any related documents be
true and correct as of the date of the merger agreement and as of the
closing date, as though made on and as of the closing date, except if the
failure to satisfy this condition would not have, individually or in the
aggregate, a material adverse effect on any party.
26
<PAGE>
- the parties have performed all agreements required to be performed by them
on or before the closing date;
- all necessary regulatory approvals, including, without limitation, that of
the Federal Reserve Board, to consummate the merger have been obtained by
First Busey, all required waiting periods have expired and there has been
no motion for rehearing or appeal from approval or commencement of any
action to enjoin the merger or to obtain substantial damages;
- the merger agreement has been approved by the boards of all parties and
the stockholders of Eagle and FBC Acquisition Corp. and the proper
officers of the parties have executed and delivered the merger agreement
and the related documents; and
- no suit or other legal proceeding has been instituted or threatened to
enjoin the merger, which reasonably could be expected to result in the
issuance of a court order enjoining the merger.
The obligations of First Busey and FBC Acquisition Corp. under the merger
agreement are also subject to the satisfaction or waiver of the following
conditions that:
- First Federal has terminated all its obligations under the deferred
compensation agreement entered into with Mr. Fernandes, as amended,
provided that neither Eagle nor First Federal will prepay any future
payment required under this agreement;
- pending the closing date, the business of Eagle and First Federal, taken
as a whole, has been conducted in the ordinary course consistent in all
respects with prudent banking practices, and there has not been any
material adverse change or any circumstance other than general economic or
competitive conditions that may reasonably be expected to result in a
material adverse change in their business, properties, financial
condition, loan portfolio, operations or prospects of Eagle or First
Federal, taken as a whole; and
- Eagle and First Federal have obtained all written consents required under
any agreements or other arrangements with third parties required to effect
the transactions contemplated by the merger agreement.
As of the date of this proxy statement, no party has any knowledge that any
of the foregoing closing conditions will not be satisfied by closing. For
purposes of the merger agreement, a material adverse effect means any material
adverse effect on the business, assets, properties, results of operations,
financial condition or, as can be reasonably foreseen, prospects of the party
and its subsidiaries, taken as a whole, or on the consummation of the merger.
WAIVER AND AMENDMENT; TERMINATION
Before the effective time of the merger, by action of the Eagle, First Busey
and FBC Acquisition Corp. boards:
- the time for performance of any obligations of any other party under the
merger agreement may be extended,
- any inaccuracies in the representations and warranties in or any document
delivered pursuant to the merger agreement may be waived, or
- compliance with any agreements or conditions in the merger agreement may
be waived,
provided that after Eagle's stockholders approve and adopt the merger agreement,
there may not be any extension or waiver of any part of the merger agreement
which reduces the amount or changes the form of merger consideration other than
as contemplated by the merger agreement without additional Eagle stockholder
approval. Any agreement by a party to any extension or waiver must be in a
written instrument signed on behalf of that party.
27
<PAGE>
The merger agreement may be amended by action of the Eagle, First Busey and
FBC Acquisition Corp. boards before or after approval of the merger agreement by
the stockholders of Eagle, provided that after Eagle's stockholders approve the
merger agreement, there may not be any amendment of the merger agreement which
changes the amount or form of merger consideration other than as contemplated by
the merger agreement. The merger agreement can be amended only by written
instrument signed on behalf of each party.
The merger agreement may be terminated before the effective time of the
merger:
- at any time by the written agreement of Eagle and First Busey upon
determination of the boards;
- at any time by either the board of Eagle or the boards of First Busey and
FBC Acquisition Corp. if a governmental entity that must grant a requisite
regulatory approval has issued a final and non-appealable denial of
approval of the merger or if a governmental entity with competent
jurisdiction has issued a final nonappealable order prohibiting the
consummation of the merger;
- by either the board of Eagle or the boards of First Busey and FBC
Acquisition Corp. if the merger is not consummated on or before February
29, 2000, unless this is due to the failure of performance by the party
seeking termination;
- by First Busey or Eagle if Eagle stockholder approval of the merger
agreement is not obtained by the requisite vote;
- by Eagle upon two days prior written notice to First Busey in connection
with an unsolicited tender offer by a party other than First Busey or its
affiliates or any written proposal regarding a merger, share exchange,
sale of a material portion of its assets or other business combination by
a party other than First Busey or its affiliates and Eagle's board
determines in good faith that its fiduciary obligations under applicable
law require that this proposal be accepted if:
- Eagle's board has been advised in an opinion of outside counsel that
notwithstanding a binding commitment to consummate an agreement of
the nature of the merger agreement entered into in the proper
exercise of its applicable fiduciary duties, and all concessions that
First Busey may offer in negotiations entered into as described
below, these fiduciary duties would require the directors to
reconsider the commitment as a result of the proposal; and
- before delivering notice to First Busey to effect the termination,
Eagle shall, and shall cause its financial and legal advisors to,
negotiate with First Busey for three calendar days to make
adjustments in the terms and conditions of the merger agreement as
would enable Eagle to proceed with the transactions contemplated
thereby on adjusted terms. At the time of this termination, Eagle
must pay to First Busey $750,000 in immediately available funds;
- by Eagle by written notice to First Busey:
- if there exists any material breach of any representation or warranty
made by First Busey which remains uncured for 30 days after the
receipt by First Busey of written notice from Eagle; or
- if First Busey fails to perform and comply with, in all material
respects, any agreement or covenant, which remains uncured for 30
days after the receipt by First Busey of written notice from Eagle.
At the time of termination for one of the foregoing circumstances, First
Busey will pay to Eagle no later than three business days after receiving
notice from Eagle of all documented out-of-pocket expenses and fees
incurred by Eagle up to $250,000 in cash, provided that if the merger
agreement is terminated by Eagle due to a willful breach by First Busey,
Eagle may pursue remedies and may be entitled to recover amounts at law
or in equity in addition to the foregoing expenses and fees without
limitation;
28
<PAGE>
- by First Busey by written notice to Eagle:
- if there exists any material breach of any representation or warranty
made by Eagle which remains uncured for 30 days after the receipt by
Eagle of written notice from First Busey; or
- if Eagle fails to perform and comply with, in all material respects,
any agreement or covenant, which remains uncured for 30 days after
the receipt by Eagle of written notice from First Busey.
At the time of termination for one of the foregoing circumstances, Eagle
will pay to First Busey no later than three business days after receiving
notice from First Busey of all documented out-of-pocket expenses and fees
incurred by Eagle up to $250,000 in cash, provided that if the merger
agreement is terminated by First Busey due to a willful breach by Eagle,
First Busey may pursue remedies and may be entitled to recover amounts at
law or in equity in addition to the foregoing fees and expenses without
limitation; or
- if Eagle's board or any committee:
- withdraws or modifies in any manner adverse to First Busey its approval
or recommendation of the merger agreement or the merger;
- fails to reaffirm this approval or recommendation at First Busey's
request;
- approves or recommends any business combination proposal involving
Eagle other than the merger involving a party other than First Busey or
any of its affiliates; or
- resolves to take any of the foregoing actions.
The parties agree that the agreements in the merger agreement regarding
termination fee and expenses constitute liquidated damages and do not constitute
a penalty. If a party fails to promptly pay any other party any termination fee,
the defaulting party will pay the costs and expenses in connection with any
action, together with interest on the amount of any unpaid fee at the publicly
announced prime rate published in the Midwest Edition of the Wall Street Journal
from the date this fee was required to be paid.
In the event of termination of the merger agreement by Eagle or First Busey
as described above, there will be no liability on the part of either of these
parties or their officers or directors under the merger agreement, except that
provisions regarding confidentiality in due diligence, title to real property,
effect of termination and termination fee and expenses will survive the
termination.
DIVIDENDS
Under the merger agreement, Eagle may not declare or pay any further cash
dividends to its stockholders.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Some of Eagle's executive officers and directors may be deemed to have
certain interests in the merger in addition to their interests as stockholders
of Eagle generally.
EMPLOYMENT AGREEMENTS. Six executive officers of Eagle--Donald L. Fernandes,
David R. Wampler, Donald L. Lambert, James E. Lyons, Larry C. McClellan and Gary
L. Richardson--are covered by employment and employment security agreements
providing certain benefits upon the termination of the executive officer's
employment within one year following a change of control of Eagle. The merger,
upon consummation, will constitute a change of control of Eagle under the
employment and employment security agreements. First Busey has agreed to honor
the provisions of these employment and employment security agreements.
29
<PAGE>
SEVERANCE PROGRAM. Eagle's severance program, as amended and restated,
covers employees who do not have employment or employment security agreements.
First Busey has agreed to honor this severance program.
DEFERRED COMPENSATION AGREEMENT. Upon the termination by First Federal of
all of its obligations under the deferred compensation agreement with Mr.
Fernandes before the closing, Mr. Fernandes will receive ownership of the life
insurance policy that funded First Federal's obligation under the deferred
compensation agreement.
STOCK OPTIONS. The executive officers, certain employees and directors of
Eagle hold stock options covering an aggregate of shares of common stock as
of the record date; options representing the right to acquire 45,999 shares of
common stock are expected to have vested before the effective time of the
merger. This plan was approved by the stockholders. The merger agreement
provides that upon the consummation of the merger, the holders of unexercised
vested stock options will receive the difference between the $25.74 cash merger
consideration per share and the option exercise price for each share covered by
a stock option. The average option exercise price is $15.644. Executive officers
and directors will receive payments in consideration of these stock options in
an amount estimated to be $464,404 in the aggregate. Unvested options,
representing 69,336 shares having an estimated value of $679,572, will be
cancelled upon the consummation of the merger. No payment will be made to the
directors or executive officers for these unvested options. The following
information assumes the merger will be consummated as of December 31, 1999 and
that no options will be exercised before then:
<TABLE>
<CAPTION>
VESTED
OPTIONS UNVESTED
FOR OPTIONS FOR
OPTION SHARES OF VALUE OF SHARES OF
EXERCISE COMMON VESTED COMMON
NAME PRICE STOCK OPTIONS(1) STOCK(2)
- ------------------------------------------------------------------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Donald L. Fernandes................................................ $ 15.125 13,028 $ 138,292 19,539
Gerald A. Bradley.................................................. 15.125 2,606 27,663 3,908
Robert P. Dole..................................................... 15.125 2,606 27,663 3,908
Laurel Beth Donovan................................................ 15.125 2,606 27,663 0
William J. Hanfland................................................ 15.125 2,606 27,663 3,908
Gary L. Richardson................................................. 15.125 2,606 27,663 3,908
Larry C. McClellan................................................. 15.125 2,606 27,663 3,908
Louis F. Ulbrich................................................... 15.125 2,606 27,663 3,908
Steven Wannemacher................................................. 15.125 2,606 27,663 3,908
David R. Wampler................................................... 16.625 10,420 94,978 15,630
James Lyons........................................................ 20.38 1,303 6,984 5,211
Randy D. Jacobs.................................................... 18.625 400 2,846 1,600
----------- ----------- -----------
Total............................................................ 45,999 $ 464,404 69,336
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------------------
(1) Represents the difference between the cash merger consideration per share,
$25.74, and the option exercise price multiplied by the number of shares
subject to the option.
(2) The unvested options, with an estimated value of $679,572, will be cancelled
upon the consummation of the merger. No payment will be made to the
directors or executive officers for these unvested stock options.
30
<PAGE>
MANAGEMENT RECOGNITION PLAN. Under Eagle's management recognition plan,
directors and executive officers of Eagle have been awarded 45,329 shares of
common stock subject to vesting requirements. Plan share awards representing
18,237 shares of common stock are expected to have vested as of the effective
time of the merger and shares of common stock will have been issued to
participants in these awards. This plan was approved by the stockholders.
Executive officers and directors will receive payments for these vested plan
share awards in an amount estimated to be $469,420 in the aggregate. Unvested
plan share awards, representing 27,092 shares, having an estimated value of
$697,348, will be cancelled upon the consummation of the merger. No payment will
be made to the directors or executive officers for these unvested plan share
awards. Below is information regarding plan share awards expected to be held by
Eagle's directors and executive officers as of December 31, 1999:
<TABLE>
<CAPTION>
VALUE OF
VESTED VESTED UNVESTED
NAME SHARES SHARES(1) SHARES(2)
- --------------------------------------------------------------------------------- --------- ---------- -----------
<S> <C> <C> <C>
Donald L. Fernandes.............................................................. 5,212 $ 134,157 7,815
Gerald A. Bradley................................................................ 1,042 26,821 1,563
Robert P. Dole................................................................... 1,042 26,821 1,563
Laurel Beth Donovan.............................................................. 1,042 26,821 0
William J. Hanfland.............................................................. 1,042 26,821 1,563
Gary L. Richardson............................................................... 1,042 26,821 1,563
Larry C. McClellan............................................................... 1,042 26,821 1,563
Louis F. Ulbrich................................................................. 1,042 26,821 1,563
Steven Wannemacher............................................................... 1,042 26,821 1,563
David R. Wampler................................................................. 4,168 107,284 6,252
James Lyons...................................................................... 521 13,411 2,084
--------- ---------- -----------
Total.......................................................................... 18,237 $ 469,420 27,092
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
- ------------------------
(1) Determined by multiplying the number of vested shares by the cash merger
consideration per share, $25.74.
(2) The unvested shares, with an estimated value of $697,348, will be cancelled
upon the consummation of the merger. No payment will be made to the
directors or executive officers for these unvested shares.
FIRST FEDERAL ESOP. If the First Federal ESOP terminates before December 31,
1999, it is assumed that no shares of common stock will be awarded under the
ESOP for 1999 and it is estimated that the following executive officers of
Eagle--Mr. Fernandes, Mr. Wampler, Mr. Lyons, Mr. McClellan and Mr.
Richardson--will receive cash payments of approximately $577,310, in the
aggregate, upon termination.
DIRECTORS AND OFFICERS INDEMNIFICATION RIGHTS. The merger agreement provides
that from and after the effective time of the merger, First Busey will cause
Eagle as the surviving corporation to fulfill and honor the obligations of Eagle
or its subsidiaries under any indemnification agreements between Eagle and its
officers and directors existing before the date of the merger agreement. For
five years after the effective time of the merger, First Busey agrees to
indemnify and hold harmless those Eagle directors and officers entitled to
indemnification under and to the fullest extent permitted by Eagle's certificate
of incorporation as it existed immediately before the effective time of the
merger and as if still in effect without amendment during the five-year period.
However, all indemnification rights regarding any claim asserted or made during
this period will continue until the final disposition of the claim. In addition,
Eagle may purchase a policy of directors' and officers' liability insurance to
be effective for no longer than three years from the
31
<PAGE>
effective time of the merger covering the current directors and officers of
Eagle who are covered by Eagle's directors' and officers' liability insurance
policy, but only to the extent and on terms comparable to those applicable to
Eagle's current policy, but in no event will Eagle pay more than 110% of the
annual premium currently being paid by Eagle for this coverage for each year of
coverage.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
THE FOLLOWING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF THE MATERIAL U.S.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER AND DOES NOT PURPORT TO BE A
COMPLETE ANALYSIS OR DESCRIPTION OF ALL POTENTIAL TAX EFFECTS OF THE MERGER.
THIS DISCUSSION DOES NOT COVER ANY ASPECT OF STATE, LOCAL OR FOREIGN TAXATION.
THIS DISCUSSION IS BASED UPON LAWS, REGULATIONS, RULINGS AND DECISIONS NOW IN
EFFECT, ALL OF WHICH ARE SUBJECT TO CHANGE BY LEGISLATION, ADMINISTRATIVE ACTION
OR JUDICIAL DECISION. NO RULING HAS BEEN OR WILL BE REQUESTED FROM THE INTERNAL
REVENUE SERVICE ON ANY TAX MATTER RELATING TO THE TAX CONSEQUENCES OF THE
MERGER.
The following discussion of material federal income tax consequences of the
merger under present law is for general information only and does not purport to
be a complete analysis of all tax consequences that may be relevant to any
particular stockholder. Some stockholders, including, without limitation,
insurance companies, tax-exempt organizations, financial institutions,
broker-dealers, employee stockholders, foreign corporations and persons who are
not citizens or residents of the United States, may be subject to special rules
not discussed below. The discussion assumes that each stockholder holds shares
of common stock as a capital asset within the meaning of Section 1221 of the
Internal Revenue Code of 1986. However, stockholders who are employees or
directors of Eagle may not be entitled to treat particular shares which they may
have acquired from Eagle as capital assets or a portion of the gain on the sale
of these shares as capital gain because they will be required to report any gain
on the sale of the shares as taxable compensation from Eagle.
The receipt of cash in exchange for shares of common stock pursuant to the
merger or to the exercise of dissenters' appraisal rights by stockholders will
be treated as a sale or exchange of the shares of Eagle common stock for federal
income tax purposes, and may also be a taxable transaction for state, local and
other tax purposes. Each stockholder will recognize gain or loss for federal
income tax purposes in an amount equal to the difference between the amount of
cash received in exchange for the shares of common stock and the adjusted basis
of his or her shares of common stock.
Except for gain attributable to particular shares owned by employees or
directors of Eagle as described above, gain or loss on the sale of the shares by
non-corporate stockholders will be a long-term capital gain or loss if the
shares of common stock have been held by the stockholder for more than one year.
Otherwise, gain or loss on the sale of the shares will be a short-term capital
gain or loss. The holding period relating to the shares of common stock must be
calculated separately for those shares of common stock held by a particular
stockholder.
For non-corporate taxpayers, the tax rate on long-term capital gains depends
on the type of asset sold. If the asset is stock, other than small business
stock under Section 1202 of the Internal Revenue Code, the rate is generally
20%. However, the maximum tax rate on ordinary income and short-term capital
gains is 39.6%. The distinction between capital gains and ordinary income is
relevant in that taxpayers may be limited in their ability to deduct net capital
losses, which may be deducted in full against capital gains, against ordinary
income. For corporate taxpayers, net capital gains, which is the excess of net
long-term capital gain over net short-term capital loss, and ordinary income are
taxed at the same rate.
The receipt of cash for shares of common stock may be subject to backup
withholding at the rate of 31% unless the holder:
- is a corporation or comes within other exempt categories, or
- provides a certified taxpayer identification number and otherwise complies
with the back-up withholding rules.
32
<PAGE>
Back-up withholding is not an additional tax; any amounts withheld may be
credited against the federal income tax liability of the person subject to the
withholding. The back-up withholding rate should be checked to make sure it has
not been changed. There is no assurance that applicable tax laws will not change
after the date of this proxy statement.
On August 5, 1999, the U.S. Congress passed legislation to amend various
provisions of the Internal Revenue Code. If the President approves this
legislation and it becomes law, the tax generally applicable to long-term
capital gains recognized on or after January 1, 1999 would be reduced from 20%
to 18%. It should be noted that the President has indicated that he intends to
veto this legislation.
EACH STOCKHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX AND FINANCIAL
ADVISORS AS TO THE EFFECT OF THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
ON HIS OR HER OWN PARTICULAR FACTS AND CIRCUMSTANCES AND ALSO AS TO ANY STATE,
LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES ARISING OUT OF THE MERGER.
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
Eagle's common stock is traded over the counter and is listed on The Nasdaq
Stock Market under the symbol "EGLB." At the record date, there were
shares of common stock issued and outstanding and there were approximately
holders of record. The table below shows the price range of the common stock for
each quarter of fiscal years 1997 and 1998 and for the first and second quarters
of fiscal 1999 and through , 1999. These prices do not represent
actual transactions and do not include retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
PER SHARE
QUARTER ENDEDED HIGH LOW DIVIDEND
- ------------------------------------------------------------------------------- --------- ---------- -----------
<S> <C> <C> <C>
March 31, 1997................................................................. $ 16.25 $ 14.50 $ -0-
June 30, 1997.................................................................. $ 15.875 $ 14.75 $ -0-
September 30, 1997............................................................. $ 18.375 $ 15.50 $ -0-
December 31, 1997.............................................................. $ 20.375 $ 18.00 $ -0-
March 31, 1998................................................................. $ 21.125 $ 19.25 $ -0-
June 30, 1998.................................................................. $ 21.125 $ 19.125 $ -0-
September 30, 1998............................................................. $ 19.25 $ 13.75 $ -0-
December 31, 1998.............................................................. $ 21.00 $ 13.00 $ 0.10
March 31, 1999................................................................. $ 23.875 $ 18.625 $ 0.10
June 30, 1999.................................................................. $ 22.125 $ 21.8125 $ 0.10
through , 1999.............................................................. $ $ $ -0-
</TABLE>
The stock price information set forth in the table above was provided by
Nasdaq. High, low and closing prices and daily trading volume are reported in
most major newspapers.
Eagle has agreed in the merger agreement to not declare or pay any dividend
without the prior written consent of First Busey, except for its fiscal 1998
second quarter cash dividend, which has already been paid.
AUDITORS
The consolidated financial statements of Eagle at December 31, 1998 and
1997, and for each of the two years in the period ended December 31, 1998,
included in Eagle's Annual Report to Stockholders and incorporated by reference
in this proxy statement, have been audited by McGladrey & Pullen, LLP,
independent auditors, to the extent indicated in their report included in the
Annual Report and incorporated in this proxy statement by reference. McGladrey &
Pullen, LLP were retained as the principal
33
<PAGE>
accountants of Eagle on October 17, 1997. These consolidated financial
statements have been incorporated in this proxy statement by reference in
reliance upon the report given upon the authority of this firm as experts in
accounting and auditing.
McGladrey & Pullen, LLP has been selected as independent auditors for Eagle
for the fiscal year ending December 31, 1999. Eagle expects that a
representative of McGladrey & Pullen, LLP will be present at the meeting with
the authority to make a statement if he or she desires to do so and to respond
to appropriate questions.
Eagle dismissed its former principal accountants, Ernst & Young LLP,
effective October 17, 1997. During the fiscal year ended December 31, 1996 and
the subsequent interim period through October 17, 1997, there were no
disagreements with the former accountants on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of the former
accountants, would have caused them to make reference in connection with their
report to the subject matter of the disagreements. The report of the former
principal accountants on the financial statements of Eagle or First Federal for
the fiscal year ended December 31, 1996 contained no adverse opinion or
disclaimer of opinion, nor was either qualified or modified as to uncertainty,
audit scope or accounting principles. Eagle's board approved the decision to
change accountants.
STOCKHOLDER PROPOSALS
If the merger is not consummated, it is anticipated Eagle's next annual
meeting of stockholders will be held on or about April 19, 2000 or on another
date as may be fixed by the board. In order to be eligible for inclusion in
Eagle's proxy materials for such annual meeting, any stockholder proposal to
take action at such meeting must be received by Eagle no later than November 23,
1999. Any proposal will be subject to the requirements of the proxy rules
adopted under the Exchange Act.
AVAILABLE INFORMATION
Eagle files annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any document Eagle files at the SEC's public reference rooms in Washington,
D.C., New York, New York and Chicago, Illinois. Please call the SEC at (800)
SEC-0330 for further information on the public reference rooms. Eagle's SEC
filings are also available to the public at the SEC's website at
HTTP://WWW.SEC.GOV.
INCORPORATION OF DOCUMENTS BY REFERENCE
The SEC allows Eagle to "incorporate by reference" into this proxy statement
the information Eagle files with it, which means that Eagle can disclose
important information by referring to those documents. The information
incorporated by reference is to be considered part of this proxy statement.
Copies of Eagle's Annual Report on Form 10-K for the year ended December 31,
1998 (which includes as an exhibit its 1998 Annual Report to Stockholders) and
its Quarterly Report on Form 10-Q for the quarter ending June 30, 1999 are
attached as Appendix C to this proxy statement and are incorporated by
reference. Eagle's Current Report on Form 8-K filed on March 3, 1999, Quarterly
Report on Form 10-Q for the quarter ending March 31, 1999, and Current Report on
Form 8-K filed on July 1, 1999 also are incorporated by reference in this proxy
statement.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH NEITHER ARE
PRESENTED IN NOR DELIVERED WITH THE PROXY STATEMENT. COPIES OF THESE DOCUMENTS
WILL BE FURNISHED TO YOU WITHOUT CHARGE UPON REQUEST TO EAGLE BANCGROUP, INC.,
301 FAIRWAY DRIVE, BLOOMINGTON, ILLINOIS 61701, ATTENTION: MARILYN LOCKWOOD,
ASSISTANT SECRETARY, TELEPHONE NUMBER: (309) 663-6345.
34
<PAGE>
APPENDIX A - AGREEMENT AND PLAN OF MERGER
APPENDICES
<PAGE>
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
FIRST BUSEY CORPORATION,
FBC ACQUISITION CORP.
AND
EAGLE BANCGROUP, INC.
DATED AS OF JUNE 30, 1999
APPENDICES
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I
THE MERGER.............................................................A - 1
1.1 The Merger....................................................A - 1
1.2 Effective Time................................................A - 2
1.3 Effects of the Merger.........................................A - 2
1.4 Effect on Capital Stock.......................................A - 2
1.5 Stock Options.................................................A - 3
1.6 The Closing...................................................A - 3
ARTICLE II
EXCHANGE OF CERTIFICATES...............................................A - 4
2.1 Buyer to Make Merger Consideration Available..................A - 4
2.2 Exchange of Certificates......................................A - 4
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF EAGLE................................A - 5
3.1 Corporate Organization........................................A - 5
3.2 Capitalization................................................A - 6
3.3 Authority.....................................................A - 7
3.4 Consents and Approvals........................................A - 8
3.5 Reports.......................................................A - 8
3.6 SEC Documents.................................................A - 9
3.7 Broker's Fees.................................................A - 9
3.8 Absence of Certain Changes or Events..........................A - 10
3.9 Legal Proceedings.............................................A - 10
3.10 Taxes and Tax Returns.........................................A - 10
3.11 Employee Benefit Plans........................................A - 11
3.12 Compliance with Applicable Law................................A - 13
3.13 Certain Contracts.............................................A - 13
3.14 Agreements with Regulatory Agencies...........................A - 14
3.15 Other Activities of Eagle and its Eagle Subsidiaries..........A - 15
3.16 Investment Securities.........................................A - 15
3.17 Undisclosed Liabilities.......................................A - 15
3.18 Insurance.....................................................A - 15
3.19 Allowance for Loan Loss.......................................A - 16
3.20 Title to Properties; Leases...................................A - 16
3.21 Environmental Matters.........................................A - 17
3.22 Approval Delays...............................................A - 18
3.23 Vote Required.................................................A - 18
3.24 Powers of Attorney............................................A - 18
3.25 Fairness Opinion..............................................A - 18
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER AND ACQUISITION CORP...........A - 18
4.1 Corporate Organization........................................A - 18
A-i APPENDICES
<PAGE>
4.2 Authority.....................................................A - 18
4.3 Consents and Approvals........................................A - 19
4.4 Financial Resources...........................................A - 19
4.5 Approval Delays...............................................A - 19
4.6 Vote Required.................................................A - 19
ARTICLE V
ADDITIONAL AGREEMENTS..................................................A - 19
5.1 Conduct of Business...........................................A - 19
5.2 Negative Covenants............................................A - 20
5.3 Access to Information and Due Diligence.......................A - 22
5.4 Meeting of Shareholders of Eagle..............................A - 23
5.5 Regulatory Filings............................................A - 24
5.6 Reasonable Efforts............................................A - 24
5.7 Business Relations and Publicity..............................A - 24
5.8 No Conduct Inconsistent with this Agreement...................A - 24
5.9 Board of Directors' Notices, Minutes, Etc.....................A - 25
5.10 Untrue Representations and Warranties.........................A - 25
5.11 Indemnification; Directors' and Officers' Insurance...........A - 25
5.12 Employee Benefit and Incentive Plans..........................A - 26
5.13 Employment and Employment Security Agreements.................A - 28
5.14 Severance Program.............................................A - 29
5.15 COBRA.........................................................A - 29
5.16 Pension Plan..................................................A - 29
5.17 Certain Consents..............................................A - 30
5.18 Title to Real Property........................................A - 30
5.19 Environmental Surveys.........................................A - 30
5.20 List of Eagle Stockholders....................................A - 31
ARTICLE VI
CONDITIONS PRECEDENT...................................................A - 31
6.1 Conditions Precedent to Obligations of Buyer and
Acquisition Corp...........................................A - 31
6.2 Conditions Precedent to Obligations of Eagle..................A - 34
ARTICLE VII
TERMINATION, EXPENSES AND AMENDMENT....................................A - 36
7.1 Termination...................................................A - 36
7.2 Effect of Termination.........................................A - 38
7.3 Termination Fee; Expenses.....................................A - 39
7.4 Amendment.....................................................A - 39
7.5 Extension; Waiver.............................................A - 40
ARTICLE VIII
GENERAL PROVISION......................................................A - 40
8.1 Non-survival of Representations, Warranties and Agreements....A - 40
8.2 Notices.......................................................A - 40
8.3 Interpretation................................................A - 41
8.4 Counterparts..................................................A - 41
8.5 Entire Agreement..............................................A - 41
8.6 Governing Law.................................................A - 42
8.7 Severability..................................................A - 42
A-ii APPENDICES
<PAGE>
8.8 Publicity.....................................................A - 42
8.9 Assignment; Third Party Beneficiaries.........................A - 42
</TABLE>
SCHEDULES
<TABLE>
<S> <C>
Schedule 3.1(b) Ownership of Voting Stock or Equity Securities by Eagle
Schedule 3.1(c) Ownership of Voting Stock or Equity Securities by Eagle Subsidiaries
Schedule 3.2(a) Stock Options and MRP Awards
Schedule 3.5 Regulatory Report Exceptions
Schedule 3.7 Financial Advisor Contract
Schedule 3.8(a) Material Liabilities and Events
Schedule 3.9(a) Legal Proceedings, Claims etc.
Schedule 3.11(b) List of Eagle Plans
Schedule 3.11(c) Eagle Title IV or Multiemployer Plan
Schedule 3.13(a) Certain Contracts
Schedule 3.14 Agreements with Regulatory Agencies
Schedule 3.17 Undisclosed Liabilities
Schedule 3.18 Insurance
Schedule 3.21 Environmental Matters
</TABLE>
A-iii APPENDICES
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "AGREEMENT") is made and
entered into as of the 30th day of June, 1999, by and among FIRST BUSEY
CORPORATION, a Nevada corporation ("BUYER"), FBC ACQUISITION CORP., a Delaware
corporation and wholly-owned subsidiary of Buyer ("ACQUISITION CORP."), and
EAGLE BANCGROUP, INC., a Delaware corporation ("EAGLE").
WHEREAS, the respective Boards of Directors of the parties hereto deem
it advisable and in the best interests of the parties hereto and their
respective shareholders to consummate the Merger (as defined in SECTION 1.1),
upon the terms and subject to the conditions of this Agreement;
WHEREAS, the parties hereto desire to make certain representations,
warranties, covenants and agreements in connection with this Agreement and the
Merger;
NOW THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants, agreements and conditions herein
contained, the parties hereto covenant and agree as follows.
ARTICLE I
THE MERGER
1.1 THE MERGER. At the Effective Time (as hereinafter defined) and
subject to and upon the terms and conditions of this Agreement and the Delaware
General Corporation Law ("DELAWARE LAW"), Acquisition Corp. shall merge with and
into Eagle, the separate corporate existence of Acquisition Corp. shall cease,
and Eagle shall continue as the surviving corporation (as such, the "SURVIVING
CORPORATION"), which shall be a wholly owned subsidiary of Buyer. Pursuant to
the Merger:
(a) the Certificate of Incorporation of Eagle, as in effect
immediately before the Effective Time, shall be, from and after the Effective
Time, the Certificate of Incorporation of the Surviving Corporation, until
thereafter amended as provided therein and under Delaware Law;
(b) the Bylaws of Eagle, as in effect immediately before the
Effective Time, shall be, from and after the Effective Time, the Bylaws of the
Surviving Corporation, until thereafter amended as provided therein and under
Delaware Law;
(c) the directors of Acquisition Corp. immediately before the
Effective Time shall be, from and after the Effective Time, the directors of the
Surviving Corporation to serve until his or her death, resignation or removal or
until his or her successor is duly elected and qualified; and
(d) the officers of Acquisition Corp. immediately before the
Effective Time shall be, from and after the Effective Time, the officers of the
Surviving Corporation to serve until his or her death, resignation or removal or
until his or her successor is duly elected and qualified.
A-1 APPENDICES
<PAGE>
1.2 EFFECTIVE TIME. As promptly as practicable on the Closing Date (as
hereinafter defined), the Parties shall cause the Merger to be consummated by
filing a Certificate of Merger (the "CERTIFICATE OF MERGER") with the Delaware
Secretary of State with respect to the Merger, in such form as required by, and
executed in accordance with, the relevant provisions of Delaware Law. The Merger
shall become effective at such time as the Certificate of Merger is duly filed
with the Delaware Secretary of State, or at such later date or time as may be
set forth in the Certificate of Merger (such time as the Merger becomes
effective being hereinafter referred to as the "EFFECTIVE TIME").
1.3 EFFECTS OF THE MERGER. At the Effective Time, the effect of the
Merger shall be as provided in the applicable provisions of Delaware Law.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time all the property, rights, privileges, powers and franchises of
Eagle and Acquisition Corp. shall continue with, or vest in, as the case may be,
Eagle as the Surviving Corporation, and all debts, liabilities and duties of
Eagle and Acquisition Corp. shall continue to be, or become, as the case may be,
the debts, liabilities and duties of Eagle as the Surviving Corporation. At the
Effective Time, the Surviving Corporation shall be a direct wholly owned
subsidiary of Buyer.
1.4 EFFECT ON CAPITAL STOCK.
(a) At the Effective Time, subject to SECTION 2.2 hereof,
by virtue of the Merger and without any action on the part of Eagle, or the
holder of any securities of Eagle, each share of common stock, $.01 par value
per share, of Eagle (the "EAGLE COMMON STOCK") issued and outstanding
immediately before the Effective Time (other than shares canceled pursuant to
SECTION 1.4(B)), shall be converted into the right to receive an amount of
cash equal to $25.74 (the "PER SHARE MERGER CONSIDERATION"). All of the
shares of Eagle Common Stock converted into the right to receive the Per
Share Merger Consideration pursuant to this Article I shall no longer be
outstanding, shall automatically be canceled and shall cease to exist as of
the Effective Time, and each certificate (each an "EAGLE COMMON STOCK
CERTIFICATE") previously representing any such shares of Eagle Common Stock
shall thereafter represent only the right to receive the cash consideration
hereunder.
(b) At the Effective Time, each share of Eagle Common Stock
(i) held in the treasury of Eagle, (ii) held by any of Eagle's subsidiaries
(other than in a fiduciary capacity), (iii) available for plan share awards or
subject to existing unvested plan share awards under the Eagle Management
Development and Recognition Plan and Trust (the "EAGLE MRP") and (iv) owned by
Buyer, Acquisition Corp. or any other subsidiary of Buyer (other than in a
fiduciary capacity), immediately before the Effective Time, shall be canceled
and retired and no Per Share Merger Consideration shall be paid with respect
thereto. Any share
A-2 APPENDICES
<PAGE>
of Eagle Common Stock the holder of which has validly demanded and perfected
appraisal rights pursuant to Section 262 of the Delaware Law (the "DISSENTING
SHARES") shall not be converted into the right to receive the Per Share
Merger Consideration at or after the Effective Time, unless and until the
holder of such shares withdraws the demand for appraisal of their shares or
otherwise becomes ineligible to pursue appraisal rights under Section 262 of
the Delaware Law. If converted into the right to receive the Per Share Merger
Consideration or other amount of consideration in settlement of an appraisal
demand or by order of a court of competent jurisdiction, the Dissenting
Shares shall be canceled and shall cease to exist.
(c) At the Effective Time, the shares of common stock, par
value $.01 per share, of Acquisition Corp. issued and outstanding immediately
before the Effective Time, and all rights in respect thereof, shall, without any
action on the part of Buyer, forthwith cease to exist and be converted into an
aggregate of 100 validly issued, fully paid and nonassessable shares of common
stock of the Surviving Corporation, par value $.01 per share (the "SURVIVING
CORPORATION COMMON STOCK"). Immediately after the Effective Time and upon
surrender by Buyer of the certificate representing the shares of the common
stock of Acquisition Corp., the Surviving Corporation shall deliver to Buyer an
appropriate certificate or certificates representing the shares of Surviving
Corporation Common Stock created by conversion of the common stock of
Acquisition Corp. owned by Buyer.
1.5 STOCK OPTIONS. Buyer shall, as of the Effective Time, convert any
outstanding and unexercised stock option granted by Eagle for the purchase of
shares of Eagle Common Stock, but only if any such option is then exercisable
under the terms of the Eagle BancGroup, Inc. 1996 Stock Option and Incentive
Plan (the "EAGLE OPTION PLAN"), into cash in an amount equal to the excess of
the Per Share Merger Consideration over the exercise price of such option,
multiplied by the number of shares of Eagle Common Stock subject to such option.
Such cash, net of any amount that must be withheld for federal, state or local
tax purposes, shall be paid to the holder of such option on the Closing Date,
whereupon such option shall terminate.
1.6 THE CLOSING. The consummation of the transactions contemplated by
this Agreement shall take place at a closing (the "CLOSING") to be held upon the
satisfaction or waiver of all of the conditions to the Merger set forth herein,
which Closing shall take place at 10:00 a.m., local time, at the offices of
Chapman and Cutler (or at such other place upon which the parties may agree), on
a date mutually agreeable to the parties hereto, but in no event later than the
last business day of the month in which all of the conditions to the Merger set
forth herein have been satisfied or waived, unless the parties mutually agree to
another date (hereinafter referred to as the "CLOSING DATE").
A-3 APPENDICES
<PAGE>
ARTICLE II
EXCHANGE OF CERTIFICATES
2.1 BUYER TO MAKE MERGER CONSIDERATION AVAILABLE. At or before the
Effective Time, Buyer shall designate a paying agent reasonably satisfactory to
Eagle (the "PAYING AGENT") and shall irrevocably deposit, or shall cause to be
deposited, with the Paying Agent, for the benefit of the holders of Eagle Common
Stock Certificates, for payment in accordance with Article I hereof and this
Article II, an amount of cash sufficient for payment of the aggregate Per Share
Merger Consideration payable to the holders of Eagle Common Stock under SECTION
1.4 of this Agreement (such cash being hereinafter referred to as the
"CONVERSION FUND").
2.2 EXCHANGE OF CERTIFICATES.
(a) Before the Effective Time, Buyer shall cause the Paying
Agent to mail to each holder of record of one or more Eagle Common Stock
Certificates a letter of transmittal and instructions for use in effecting the
surrender of the Eagle Common Stock Certificates in exchange for the Per Share
Merger Consideration into which the shares of Eagle Common Stock represented by
such Eagle Common Stock Certificate or Certificates shall have been converted
pursuant to this Agreement. Upon proper surrender of an Eagle Common Stock
Certificate for payment and cancellation to the Paying Agent, together with such
properly completed letter of transmittal, duly executed, the holder of such
Eagle Common Stock Certificate shall be entitled to receive in exchange therefor
a check representing the cash payment for such holder's shares pursuant to
SECTION 1.4 of this Agreement, and the Eagle Common Stock Certificate so
surrendered shall forthwith be canceled. No interest will be paid or accrued on
any cash payment payable to a holder of Eagle Common Stock Certificates.
(b) If any check is to be issued in a name other than that in
which the Eagle Common Stock Certificate surrendered in exchange therefor is
registered, it shall be a condition of the issuance thereof that the Eagle
Common Stock Certificate so surrendered shall be properly endorsed or
accompanied by an appropriate instrument of transfer and otherwise in proper
form for transfer.
(c) After the Effective Time, there shall be no transfers on
the stock transfer books of Eagle of the shares of Eagle Common Stock that were
issued and outstanding immediately before the Effective Time. If, after the
Effective Time, Eagle Common Stock Certificates are presented for transfer to
the Paying Agent, they shall be canceled and exchanged for the cash
consideration as provided in SECTION 1.4 hereof and this Article II.
A-4 APPENDICES
<PAGE>
(d) Any portion of the Conversion Fund that remains unclaimed
by the shareholders of Eagle for twelve (12) months after the Effective Time
shall be paid to the Surviving Corporation. Any shareholders of Eagle who have
not theretofore complied with this Article II shall thereafter look only to the
Surviving Corporation for the cash consideration payable in respect of each
share of Eagle Common Stock such shareholder holds as determined pursuant to
this Agreement, in each case, without any interest thereon. Notwithstanding the
foregoing, none of Buyer, Eagle, the Paying Agent or any other person shall be
liable to any former holder of shares of Eagle Common Stock, for any amount
delivered in good faith to a public official pursuant to applicable abandoned
property, escheat or similar laws.
(e) In the event any Eagle Common Stock Certificate shall have
been lost, stolen or destroyed, upon the making of an affidavit of that fact by
the person claiming such Eagle Common Stock Certificate to be lost, stolen or
destroyed and the posting by such person of a bond in such amount as the Paying
Agent may determine is reasonably necessary as indemnity against any claim that
may be made against it with respect to such Eagle Common Stock Certificate, the
Paying Agent shall issue in exchange for such lost, stolen or destroyed Eagle
Common Stock Certificate the cash consideration payable in respect thereof
pursuant to this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF EAGLE
Eagle hereby represents and warrants to Buyer as follows.
3.1 CORPORATE ORGANIZATION.
(a) Eagle is a corporation duly organized and validly existing
under the laws of the State of Delaware. Eagle has the corporate power and
authority to own or lease all of its properties and assets and to carry on its
business as it is now being conducted, and is duly licensed or qualified to do
business in each jurisdiction in which the nature of the business conducted by
it or the character or location of the properties and assets owned or leased by
it makes such licensing or qualification necessary, except where the failure to
be so licensed or qualified would not have a Material Adverse Effect (as defined
below) on Eagle. Eagle is duly registered as a savings and loan holding company
under the Home Owners' Loan Act ("HOLA"). True and complete copies of the
Certificate of Incorporation and Bylaws of Eagle, as in effect as of the date of
this Agreement, have previously been made available by Eagle to Buyer. As used
in this Agreement, the term "MATERIAL ADVERSE EFFECT" means, with respect to
Eagle or Buyer, as the case may be, a material adverse effect (i) on the
business, assets, properties, results of operations, financial condition, or
(insofar as they can reasonably be foreseen) prospects of such party and its
subsidiaries, taken as a whole, or (ii) on the
A-5 APPENDICES
<PAGE>
consummation of the Merger. The word "SUBSIDIARY" when used with respect to
any party means any bank, corporation, partnership, limited liability
company, or other organization, whether incorporated or unincorporated, which
is consolidated with such party for financial reporting purposes. With
respect to Eagle, however, the word subsidiary shall not be deemed to include
Eagle's interests under the Joint Venture Agreement between Eagle and
Lawrence F. Hundman or its interests under the Joint Venture Agreement
between Eagle and Jeff McElravy. Eagle has provided Buyer with true and
complete copies of these two Joint Venture Agreements.
(b) As of the date of this Agreement, Eagle has, as its
sole direct or indirect subsidiaries, First Federal Savings and Loan
Association of Bloomington (the "ASSOCIATION"), a
federally-chartered-capital-stock savings and loan association and FFS
Investment Services, Inc., an Illinois corporation (together with the
Association, the "EAGLE SUBSIDIARIES"). Except as set forth in SCHEDULE
3.1(b) of the disclosure schedules to this Agreement prepared and delivered
by Eagle (the "EAGLE DISCLOSURE SCHEDULES"), Eagle does not own any voting
stock or equity securities of any bank, corporation, partnership, limited
liability company, or other organization, whether incorporated or
unincorporated, other than the Eagle Subsidiaries.
(c) Each Eagle Subsidiary (i) is duly organized and validly
existing as a business corporation or depository institution, as the case may
be, under the laws of its jurisdiction of organization, (ii) is duly
qualified to do business and in good standing in all jurisdictions (whether
federal, state, local or foreign) where its ownership or leasing of property
or the conduct of its business requires it to be so qualified and in which
the failure to be so qualified would have a Material Adverse Effect on Eagle,
and (iii) has all requisite corporate power and authority to own or lease its
properties and assets and to carry on its business as now conducted. Except
as set forth in SCHEDULE 3.1(c) of the Eagle Disclosure Schedules, none of
the Eagle Subsidiaries owns any voting stock or equity securities of any
bank, corporation, partnership, limited liability company, or other
organization, whether incorporated or unincorporated.
3.2 CAPITALIZATION.
(a) The authorized capital stock of Eagle consists of
5,000,000 shares of Eagle Common Stock, $0.01 par value per share, of which,
as of the date hereof, 1,067,239 shares were issued and outstanding, and
100,000 shares of Preferred Stock, $0.01 par value per share, of which, as of
the date hereof, none were issued and outstanding. As of the date hereof,
235,466 shares of Eagle Common Stock were held in treasury. All of the issued
and outstanding shares of Eagle Common Stock have been duly authorized and
validly issued and are fully paid, nonassessable and free of preemptive
rights. Except for the Eagle Option
A-6 APPENDICES
<PAGE>
Plan and the Eagle MRP, Eagle does not have and is not bound by any
outstanding subscriptions, options, warrants, calls, commitments, agreements,
preemptive or other rights of any character calling for the purchase or
issuance of any shares of Eagle Common Stock or any other equity securities
of Eagle or any securities representing the right to purchase or otherwise
receive any shares of the capital stock of Eagle, nor are there any
securities, debts, obligations or rights outstanding which are convertible
into or exchangeable for shares of the capital stock of Eagle. No shares of
Eagle Common Stock have been reserved for issuance, other than the shares of
Eagle Common Stock reserved for issuance under the Eagle Option Plan and the
Eagle MRP. Since December 31, 1998, Eagle has not issued any shares of its
capital stock or any securities convertible into or exercisable for any
shares of its capital stock except upon exercise of stock options pursuant to
the Eagle Option Plan outstanding as of December 31, 1998 and upon the
vesting of awards under the Eagle MRP. SCHEDULE 3.2(a) of the Eagle
Disclosure Schedules sets forth as of the date hereof (i) the number of
outstanding stock options for the purchase of Eagle Common Stock granted
under the Eagle Option Plan by optionee and the dates on which such options
became or become exercisable and (ii) the number of outstanding plan share
awards for Eagle Common Stock under the Eagle MRP for each participant in the
Eagle MRP and the dates on which plan shares were earned or will be earned
under such awards.
(b) Eagle owns, directly or indirectly, all of the issued
and outstanding shares of capital stock of each of the Eagle Subsidiaries,
free and clear of any liens, pledges, charges, encumbrances and security
interests whatsoever ("LIENS"). All of the shares of capital stock of each
Eagle Subsidiary are duly authorized and validly issued and are fully paid
and nonassessable. No Eagle Subsidiary has or is bound by any outstanding
subscriptions, options, warrants, calls, commitments or agreements of any
character calling for the purchase or issuance of any shares of capital stock
or any other equity security of such Eagle Subsidiary or any securities
representing the right to purchase or otherwise receive any shares of capital
stock or any other equity security of such Eagle Subsidiary.
3.3 AUTHORITY. Eagle has full corporate power and authority to execute
and deliver each of this Agreement and, subject to shareholder and regulatory
approvals, to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly and validly approved by the Board of Directors of Eagle.
The Board of Directors of Eagle has directed that this Agreement and the
transactions contemplated hereby be submitted to Eagle's shareholders for
approval at a meeting of such shareholders and, except for the adoption of this
Agreement by the affirmative vote of the holders of a majority of the
outstanding shares of Eagle Common Stock, no other corporate proceedings on the
part of Eagle are necessary to approve this
A-7 APPENDICES
<PAGE>
Agreement and to consummate the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by Eagle and
(assuming due authorization, execution and delivery by Buyer) constitutes a
valid and binding obligation of Eagle, enforceable against Eagle in
accordance with its terms.
3.4 CONSENTS AND APPROVALS. No consents or approvals of or filings
or registrations with any court, administrative agency or commission or other
governmental authority or instrumentality (each a "GOVERNMENTAL ENTITY") or
with any third party are necessary in connection with the execution and
delivery by Eagle of this Agreement and the consummation by Eagle of the
Merger and the other transactions contemplated hereby except for (a) the
filing by Buyer of an application with the Board of Governors of the Federal
Reserve System (the "FRB") and the approval of such application (the
"REGULATORY APPLICATION"), (b) the filing with the Securities and Exchange
Commission (the "SEC") of a proxy statement in definitive form relating to
the meeting of Eagle's shareholders to be held in connection with this
Agreement and the transactions contemplated hereby (the "PROXY STATEMENT"),
(c) the filing of the Certificate of Merger with the Delaware Secretary of
State under Delaware Law and (d) the approval of this Agreement by the
requisite vote of the shareholders of Eagle and by Buyer, as sole shareholder
of Acquisition Corp.
3.5 REPORTS. Eagle and each of the Eagle Subsidiaries have timely filed
all reports, registrations and statements, together with any amendments required
to be made with respect thereto, that they were required to file during the five
years preceding the date hereof with (i) the Office of Thrift Supervision (the
"OTS"), (ii) the Federal Deposit Insurance Corporation, (iii) any state
regulatory authority, (iv) the SEC, and (v) any self-regulatory organization
with jurisdiction over any of the activities of Eagle or any of the Eagle
Subsidiaries (collectively "REGULATORY AGENCIES"), and all other reports and
statements required to be filed by them during the five years preceding the date
hereof, including, without limitation, any report or statement required to be
filed pursuant to the laws, rules or regulations of the United States, any
state, or any Regulatory Agency, and have paid all fees and assessments due and
payable in connection therewith, except where the failure to file such report,
registration or statement or to pay such fees and assessments, either
individually or in the aggregate, will not have a Material Adverse Effect on
Eagle. Except for normal examinations conducted by a Regulatory Agency in the
regular course of the business of Eagle and the Eagle Subsidiaries, no
Regulatory Agency has initiated any proceeding or, to the best knowledge of
Eagle, investigation into the business or operations of Eagle or any of the
Eagle Subsidiaries during the five years preceding the date hereof. Except as
set forth in SCHEDULE 3.5 of the Eagle Disclosure Schedules, there is no
unresolved written violation, written criticism, or written exception by any
Regulatory Agency with
A-8 APPENDICES
<PAGE>
respect to any report or statement relating to any examinations of Eagle or
any of the Eagle Subsidiaries, which is likely, either individually or in the
aggregate, to have a Material Adverse Effect on Eagle.
3.6 SEC DOCUMENTS. Eagle has made available to Buyer a true and
complete copy of each report, schedule, registration statement and definitive
proxy statement filed by Eagle with the SEC (other than reports filed
pursuant to Section 13(d) or 13(g) of the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT") since the date Eagle has been required to file
such documents (as such documents have since the time of their filing been
amended, the "EAGLE SEC DOCUMENTS"), which are all the documents (other than
preliminary material and reports required pursuant to Section 13(d) or 13(g)
of the Exchange Act) that Eagle was required to file with the SEC since such
date. As of their respective dates of filing with the SEC, the Eagle SEC
Documents, including any Eagle SEC Documents filed after the date hereof
until the Closing, complied or will comply, as the case may be, in all
material respects with the requirements of the Securities Act of 1933, as
amended (the "SECURITIES ACT"), or the Exchange Act, as the case may be, and
the rules and regulations of the SEC thereunder applicable to such Eagle SEC
Documents, and did not, or will not, as the case may be, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of Eagle included and, to be included as the case may be, in the
Eagle SEC Documents complied and will comply, as the case may be, as to form,
as of their respective dates of filing with the SEC, in all material respects
with applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis
during the periods involved (except as may be indicated in the notes thereto
or, in the case of the unaudited statements, as permitted by Form 10-Q of the
SEC) and fairly present in all material respects the consolidated financial
position of Eagle and the consolidated Eagle Subsidiaries as of the dates
thereof and the consolidated results of operations, changes in stockholders'
equity and cash flows of such companies for the periods then ended. All
material agreements, contracts and other documents required to be filed as
exhibits to any of the Eagle SEC Documents have been so filed or will be so
filed prior to Closing.
3.7 BROKER'S FEES. Other than Eagle's arrangement with Trident
Securities, a division of McDonald Investments, Inc. ("TRIDENT") to serve as a
financial advisor to Eagle in connection with the Merger and related
transactions contemplated by this Agreement, neither Eagle nor any Eagle
Subsidiary nor any of their respective officers or directors has employed any
financial advisor, broker or finder or incurred any liability for any financial
advisory fees, broker's fees, commissions or finder's fees in
A-9 APPENDICES
<PAGE>
connection with the Merger or related transactions contemplated by this
Agreement. Trident's contract with Eagle is included as SCHEDULE 3.7 of the
Eagle Disclosure Schedules.
3.8 ABSENCE OF CERTAIN CHANGES OR EVENTS.
(a) Except as publicly disclosed in the Eagle SEC Documents
(as defined in SECTION 3.6) filed before the date hereof or as set forth in
SCHEDULE 3.8(a) of the Eagle Disclosure Schedules, since December 31, 1998,
(i) Eagle and the Eagle Subsidiaries, taken as a whole, have not incurred any
material liability, except in the ordinary course of their respective
businesses, and (ii) no event has occurred which has had, individually or in
the aggregate, a Material Adverse Effect on Eagle or will have a Material
Adverse Effect on Eagle.
(b) Except as publicly disclosed in the Eagle SEC Documents
filed before the date hereof, since December 31, 1998, Eagle and the Eagle
Subsidiaries have conducted their respective businesses in all material
respects in the ordinary and usual course consistent with past practice and,
since the date of this Agreement, consistent with the restrictions set forth
in SECTION 5.2.
3.9 LEGAL PROCEEDINGS.
(a) Except as set forth in SCHEDULE 3.9(a), of the Eagle
Disclosure Schedules to the best of Eagle's knowledge, there are no pending
or threatened, legal, administrative, arbitration or other proceedings,
claims, actions or governmental or regulatory investigations of any nature
against Eagle or any of the Eagle Subsidiaries or challenging the validity or
propriety of the transactions contemplated by this Agreement.
(b) There is no injunction, order, judgment, decree, or
regulatory restriction (other than regulatory restrictions that apply to
similarly situated savings and loan holding companies or savings
associations) imposed upon Eagle, any of the Eagle Subsidiaries or the assets
of Eagle or any of the Eagle Subsidiaries.
3.10 TAXES AND TAX RETURNS.
(a) Each of Eagle and the Eagle Subsidiaries has duly filed
all federal, state, county, foreign and, to the best of Eagle's knowledge,
local information returns and tax returns required to be filed by it on or
before the date hereof (all such returns being accurate and complete in all
material respects) and has duly paid or made provisions for the payment of
all Taxes (as defined in SECTION 3.10(b)) and other governmental charges
which have been incurred or are due or claimed to be due from it by federal,
state, county, foreign or local taxing authorities on or before the date of
this Agreement (including, without limitation, if and to the extent
applicable, those due in respect of its properties, income, business, capital
A-10 APPENDICES
<PAGE>
stock, deposits, franchises, licenses, sales, use and payrolls) other than
Taxes or other charges which are not yet delinquent or are being contested in
good faith and have not been finally determined. There are no material
disputes pending with respect to, or claims asserted for, Taxes or
assessments upon Eagle or any of the Eagle Subsidiaries for which Eagle does
not have adequate reserves, nor has Eagle or any of the Eagle Subsidiaries
given any currently effective waivers extending the statutory period of
limitation applicable to any federal, state, county, foreign or local income
tax return for any period. In addition, proper and accurate amounts have been
withheld by Eagle and each of the Eagle Subsidiaries from their employees for
all prior periods in compliance in all material respects with the tax
withholding provisions of applicable federal, state, foreign and local laws,
except where failure to do so would not, in the aggregate, have a Material
Adverse Effect on Eagle. There are no Tax liens upon any property or assets
of Eagle or any of the Eagle Subsidiaries except liens for taxes not yet past
due.
(b) As used in this Agreement, the term "Tax" or "Taxes"
means all federal, state, county, local, and foreign income, excise, gross
receipts, gross income, ad valorem, profits, gains, property, capital, sales,
transfer, use, payroll, employment, severance, withholding, duties,
intangibles, franchise, backup withholding, and other taxes, charges, levies
or like assessments together with all penalties and additions to tax and
interest thereon.
3.11 EMPLOYEE BENEFIT PLANS.
(a) (i) EAGLE PLAN. The term "EAGLE PLAN" includes each
bonus, deferred compensation, pension, retirement, profit sharing, thrift
savings, employee stock ownership, stock bonus, stock purchase, restricted
stock and stock option plan, each employment or severance contract, each
other material employee benefit plan, any applicable "change in control" or
similar provisions in any plan, program, policy, contract or arrangement, and
each other benefit plan, contract, program, policy or arrangement, including
but not limited to, each employee benefit plan, as defined in Section 3(3) of
ERISA (other than an Eagle Multiemployer Plan and including any terminated
Eagle Plans) that currently or since January 1, 1993: (1) is or has been
maintained for directors or employees of Eagle or of any Eagle Control Group
member or (2) to which Eagle or any Eagle Control Group member made or was
required to make contributions.
(ii) EAGLE QUALIFIED PLAN. The term "EAGLE
QUALIFIED PLAN" means any Eagle Plan which is an employee pension benefit
plan as defined in Section 3(2) of ERISA and which is intended to meet the
qualification requirements of the Internal Revenue Code, as amended (the
"CODE"),
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(iii) EAGLE TITLE IV PLAN. The term "EAGLE TITLE
IV PLAN" means any Eagle Qualified Plan that is a defined benefit plan (as
defined in Section 3(37) of ERISA) and is subject to Title IV of ERISA.
(iv) EAGLE MULTIEMPLOYER PLAN. The term
"EAGLE MULTIEMPLOYER PLAN" means any employee benefit plan that is a
"multiemployer plan" within the meaning of Section 3(37) of ERISA and to
which Eagle or any Eagle Control Group member has or had any obligation to
contribute.
(v) EAGLE CONTROL GROUP. The term "EAGLE
CONTROL GROUP" means a controlled group of corporations of which Eagle is
a member within the meaning of Section 414(b) of the Code, any group of
corporations or entities under common control with Eagle within the meaning
of Section 414(c) of the Code or any affiliated service group of which Eagle
is a member within the meaning of Section 414(m) of the Code.
(vi) ERISA. The term "ERISA" means the Employee
Retirement Income Security Act of 1974, as amended.
(b) All Eagle Plans are set forth in SCHEDULE 3.11(b) of
the Eagle Disclosure Schedules.
(c) (i) Each Eagle Plan has been administered in material
compliance with its terms and with all filing, reporting, disclosure and
other requirements of all applicable statutes (including but not limited to
ERISA and the Code), regulations or interpretations thereunder.
(ii) Except as set forth in SCHEDULE 3.11(c)
of the Eagle Disclosure Schedules, neither Eagle nor any Eagle Control
Group member currently or at any time maintains or maintained, or contributes
or contributed to, or is required to contribute to, any Eagle Title IV Plan
or any Eagle Multiemployer Plan.
(iii) Neither Eagle nor any Eagle Control Group
member, nor any of their respective employees or directors, nor any
fiduciary, has engaged in any transaction, including the execution and
delivery of this Agreement and other agreements, instruments and documents
for which execution and delivery by Eagle is contemplated herein, in
violation of Section 406(a) or (b) of ERISA or any "prohibited transaction"
(as defined in Section 4975(c)(1) of the Code) for which no exemption exists
under Section 408(b) of ERISA or Section 4975(d) of the Code or for which no
administrative exemption has been granted under Section 408(a) of ERISA.
(iv) Each Eagle Qualified Plan is the subject of a
favorable Internal Revenue Service determination with respect to such
qualification and exemption.
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(v) Except as set forth in SCHEDULE 3.11(c), no
matter is pending relating to any Eagle Plan before any court or governmental
agency.
(d) (i) Complete and correct copies of all current and
prior documents, including all amendments thereto, with respect to each Eagle
Plan, have been delivered to Buyer. These documents include, but are not
limited to, the following: Eagle Plan documents, trust agreements, insurance
contracts, annuity contracts, summary plan descriptions, filings with
governmental agencies, investment manager and investment adviser contracts,
and actuarial reports, audit reports, financial statements and annual reports
(Form 5500) for the most recent three plan years ending before the date of
this Agreement.
(ii) All contributions payable to each Eagle
Qualified Plan for all benefits earned and other liabilities accrued through
December 31, 1998, determined in accordance with the terms and conditions of
such Eagle Qualified Plan, ERISA and the Code, have been paid or otherwise
provided for, and to the extent unpaid are reflected in the consolidated
balance sheet of Eagle and Eagle Subsidiaries as of December 31, 1998.
3.12 COMPLIANCE WITH APPLICABLE LAW. Eagle and each of the Eagle
Subsidiaries hold all licenses, franchises, permits and authorizations
necessary for the lawful conduct of their respective businesses under and
pursuant to all, and have complied with and are not in default under any,
applicable laws, statutes, orders, rules, regulations, policies and/or
guidelines of any Governmental Entity relating to Eagle or any of the Eagle
Subsidiaries, except where the failure to hold such license, franchise,
permit or authorization or such noncompliance or default would not,
individually or in the aggregate, have a Material Adverse Effect on Eagle.
3.13 CERTAIN CONTRACTS.
(a) Except as set forth in SCHEDULE 3.13(a) of the Eagle
Disclosure Schedules or as an exhibit to the Eagle SEC Documents, neither
Eagle nor any of the Eagle Subsidiaries is a party to or bound by:
(i) any contract, arrangement, commitment
or understanding (whether written or oral) with respect to the employment
or compensation of any directors, officers or employees;
(ii) any contract, arrangement, commitment or
understanding (whether written or oral) which, upon the consummation of the
transactions contemplated by this Agreement, will (either alone or upon the
occurrence of any additional acts or events) result in any payment
(including, without limitation, severance, unemployment compensation, golden
parachute or otherwise) becoming due from
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Eagle, Buyer, the Surviving Corporation, or any of their respective
Subsidiaries to any officer, director or employee thereof or to the trustee
under any "rabbi trust" or similar arrangement;
(iii) any contract, arrangement, commitment or
understanding (whether written or oral), including any stock option plan,
stock appreciation rights plan, restricted stock plan or stock purchase plan,
any of the benefits of which will be increased or be required to be paid, or
the vesting of the benefits of which will be accelerated, by the occurrence
of any of the transactions contemplated by this Agreement, or the value of
any of the benefits of which will be calculated on the basis of any of the
transactions contemplated by this Agreement;
(iv) any agreement of indemnification or guaranty
not entered into in the ordinary course of business, including any
indemnification agreements between Eagle or any of the Eagle Subsidiaries and
any of its officers or directors;
(v) any agreement, contract or commitment
currently in force relating to the disposition or acquisition of assets not
in the ordinary course of business; or
(vi) any material agreement relating to the sale
or purchase of any business or business assets providing for payment of any
deferred or contingent consideration by Eagle or providing for
indemnification by Eagle.
Each contract, arrangement, commitment or understanding of
the type described in this SECTION 3.13(a), is referred to herein as an
"EAGLE CONTRACT," and neither Eagle nor any of the Eagle Subsidiaries knows
of, or has received notice of, any violation of any Eagle Contract by any of
the other parties thereto, which, individually or in the aggregate, would
have a Material Adverse Effect on Eagle.
(b) (i) Each Eagle Contract is valid and binding on Eagle
or the applicable Eagle Subsidiary, as the case may be, and is in full force
and effect, (ii) Eagle and each of the Eagle Subsidiaries has performed all
obligations required to be performed by it to date under each Eagle Contract
to which it is a party, except where such noncompliance, individually or in
the aggregate, would not have a Material Adverse Effect on Eagle, and (iii)
no event or condition exists which constitutes or, after notice or lapse of
time or both, would constitute, a default on the part of Eagle or any of the
Eagle Subsidiaries under any such Eagle Contract, except where any such
default, individually or in the aggregate, would not have a Material Adverse
Effect on Eagle.
3.14 AGREEMENTS WITH REGULATORY AGENCIES. Except as set forth in
SCHEDULE 3.14 of the Eagle Disclosure Schedules, neither Eagle nor any of the
Eagle Subsidiaries is subject to any cease-and-desist or other order issued
by, or is a party to any written agreement, consent agreement or memorandum of
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understanding with, or is a party to any commitment letter or similar
undertaking to, or is subject to any order or directive by, or has been
during the three years preceding the date hereof, a recipient of any
supervisory letter from, or during the three years preceding the date hereof,
has adopted any board resolutions at the request of any Regulatory Agency or
other Governmental Entity that currently restricts the conduct of its
business or that relates to its capital adequacy, compliance with laws, its
credit policies, its management or its business (each, whether or not set
forth in the Eagle Disclosure Schedules, an "EAGLE REGULATORY AGREEMENT"),
nor has Eagle or any of the Eagle Subsidiaries been advised during the three
years preceding the date hereof by any Regulatory Agency or other
Governmental Entity that it is considering issuing or requesting any such
Eagle Regulatory Agreement.
3.15 OTHER ACTIVITIES OF EAGLE AND ITS EAGLE SUBSIDIARIES. Neither
Eagle nor any of the Eagle Subsidiaries that is either a savings association,
a savings association operating subsidiary or a savings association service
corporation directly or indirectly engages in any activity prohibited by the
OTS. Without limiting the generality of the foregoing, no equity investment
of Eagle or any Eagle Subsidiary that is neither a savings association, a
savings association operating subsidiary nor a savings association service
corporation is prohibited by the OTS.
3.16 INVESTMENT SECURITIES. Each of Eagle and the Eagle Subsidiaries
has good and marketable title to all securities held by it (except securities
sold under repurchase agreements or held in any fiduciary or agency
capacity), free and clear of any Lien, except to the extent such securities
are pledged in the ordinary course of business consistent with prudent
banking practices to secure obligations of Eagle or any of the Eagle
Subsidiaries. Such securities are valued on the books of Eagle and the Eagle
Subsidiaries in accordance with GAAP.
3.17 UNDISCLOSED LIABILITIES. Except for those liabilities that are
fully reflected or reserved against on the consolidated statement of
financial condition of Eagle included in the Eagle Form 10-K for fiscal year
ended December 31, 1998, liabilities disclosed in SCHEDULE 3.17 of the Eagle
Disclosure Schedules, and liabilities incurred in the ordinary course of
business consistent with past practice since December 31, 1998, neither Eagle
nor any of the Eagle Subsidiaries has incurred any liability of any nature
whatsoever (whether absolute, accrued, contingent or otherwise and whether
due or to become due) that, either alone or when combined with all similar
liabilities, has had, or could reasonably be expected to have, a Material
Adverse Effect on Eagle.
3.18 INSURANCE. SCHEDULE 3.18 of the Eagle Disclosure Schedules
describes all policies of insurance in which Eagle or any of the Eagle
Subsidiaries is named as an insured party or which otherwise
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relate to or cover any assets or properties of Eagle or any of the Eagle
Subsidiaries. Each of such policies is in full force and effect, and the
coverage provided under such policies complies with the requirements of any
contracts binding on Eagle or any of the Eagle Subsidiaries relating to such
assets or properties. Except as set forth in SCHEDULE 3.18 of the Eagle
Disclosure Schedules, neither Eagle nor any of the Eagle Subsidiaries has
received any notice of cancellation or termination with respect to any
material insurance policy of Eagle or any of the Eagle Subsidiaries.
3.19 ALLOWANCE FOR LOAN LOSS. The allowance for loan losses set
forth in the December 31, 1998 financial statements of Eagle is adequate in
all material respects under the requirements of GAAP to provide for possible
losses, net of recoveries relating to loans previously charged off, on loans
outstanding (including accrued interest receivable) as of December 31, 1998.
The aggregate loan balances of the Association at such date in excess of such
allowance are, to the best knowledge and belief of Eagle, collectible in
accordance with their terms.
3.20 TITLE TO PROPERTIES; LEASES. (a) Eagle, or each of the Eagle
Subsidiaries, as applicable, is the owner of good and marketable title to all
real properties and is the owner of good title to all other property and
assets, tangible and intangible, that it claims or otherwise purports to own
to the extent it claims or otherwise purports to own them (including, without
limitation, all of its assets reflected in its financial statements for the
fiscal year ended December 31, 1998 or that it purports to have acquired
since December 31, 1998), free and clear of any Liens, except for (the
following collectively referred to as "PERMITTED EXCEPTIONS") (i) pledges and
liens given to secure deposits and other banking liabilities arising in the
ordinary course of business, (ii) liens for current taxes not yet due and
payable, (iii) all easements, covenants, conditions, assignments, defects,
restrictions, exceptions, reservations and other encumbrances, whether
recorded or unrecorded, which do not materially interfere with the use or
operation of the property as the same is being currently used and operated,
or render title to any material portion of the property unmarketable, (iv)
all leases, subleases and any memoranda thereof and any non-disturbance
agreements with tenants, subtenants or other occupants of any property or (v)
any liens, encumbrances, objections or other matters which are caused or
created by or on behalf of Buyer or the Surviving Corporation.
(b) Each lease under which Eagle or any of the Eagle
Subsidiaries is the lessee of any real or personal property will be, upon
consummation of the Merger, in full force and effect, and Eagle or each of
the Eagle Subsidiaries has been in peaceable possession of the property
covered thereby since the commencement of the original term of such lease.
With respect to the facility leased by Eagle located at 302 West Main Street,
Lexington, Illinois, (i) no right of approval or consent on the part of the
lessor under such
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lease exists or will exist with respect to the Merger, (ii) no waiver,
indulgence or postponement of Eagle or the Eagle Subsidiaries' obligations
under such lease has been granted by the lessor thereunder, or of such
lessor's obligations by Eagle or the Eagle Subsidiaries and (iii) neither
Eagle nor the Eagle Subsidiaries nor, to the knowledge of Eagle, the lessor
under such lease has violated, in any material respect, any of the terms or
conditions of such lease, and all of the material covenants to be performed
by Eagle or the Eagle Subsidiaries and the lessor as of the date hereof have
been fully performed in all material respects.
3.21 ENVIRONMENTAL MATTERS. Neither Eagle nor any of the Eagle
Subsidiaries has received notice of any material violation of any applicable
environmental law, regulation, ordinance, order or requirement relating to
its operations or properties; to Eagle's knowledge no such violation exists;
and to Eagle's knowledge all properties and buildings and other structures
occupied, owned, leased or used by Eagle or the Eagle Subsidiaries, or in
which Eagle or any of the Eagle Subsidiaries has an interest (whether
acquired by foreclosure or otherwise), comply, in all material respects, with
all applicable environmental laws, regulations, ordinances, orders and
requirement, except where any noncompliance would not have a Material Adverse
Effect on Eagle. Except as set forth in SCHEDULE 3.21 of the Eagle Disclosure
Schedules, to Eagle's knowledge, all properties occupied, owned leased or
used by Eagle or the Eagle Subsidiaries, or in which Eagle or the Eagle
Subsidiaries has an interest (whether by foreclosure or otherwise, including
all improvements thereon: (i) are free from contamination; (ii) have not been
subject to a release, discharge or emission, or imminent threat of release,
discharge or emission, of any hazardous substance, gas or liquid, as defined
by the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended by the Superfund Amendments and Reauthorization Act or
the rules and regulations promulgated or published thereunder, or any other
substance, gas or liquid, which is prohibited, controlled or regulated
thereunder, or which is regulated under any law or regulation dealing with
protection or public health or safety, or the environment except as would be
expected in the ordinary course of business (collectively, "HAZARDOUS
SUBSTANCES"); and (iii) have not appeared or have not proposed to appear on
the United State Environmental Protection Agency's National Priority List or
any similar state list. There have been no past, and to Eagle's knowledge
there are no pending or threatened, claims, complaints, notices, or requests
for information received by Eagle or the Eagle Subsidiaries with respect to
any alleged violation of any Environmental Law, or potential liability under
any Environmental Law. The term "Environmental Law" means all applicable
statutes, laws, regulations, orders, judgments, decrees or principles of
common law, and any permits, licenses, authorization, relating to pollution,
protection of the environment, public health or safety, employee health or
safety, or the emission, discharge, release or threatened release of Hazardous
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Substances into the environment or otherwise relating to the presence,
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Substances.
3.22 APPROVAL DELAYS. Eagle knows of no reason why any of the
regulatory approvals referenced in SECTION 6.1(c) and SECTION 6.2(c)
should be denied or unduly delayed.
3.23 VOTE REQUIRED. The approval by the holders of a majority of the
votes entitled to be cast by all holders of Eagle Common Stock of this
Agreement and the Merger is the only vote of the holders of any class or
series of the capital stock of Eagle required for any of the transactions
contemplated by this Agreement.
3.24 POWERS OF ATTORNEY. No power of attorney or similar
authorization given by Eagle not in the ordinary course of business is
currently outstanding.
3.25 FAIRNESS OPINION. Eagle has received a written opinion from
Trident, dated as of a date within five business days of the date hereof, to
the effect that as of such date, the Per Share Merger Consideration is fair
to Eagle from a financial point of view. Eagle has delivered to Buyer a copy
of such opinion.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER AND ACQUISITION CORP.
Each of Buyer and Acquisition Corp. jointly and severally represent
and warrant to Eagle as follows.
4.1 CORPORATE ORGANIZATION. Each of Buyer and Acquisition Corp. is a
corporation duly organized and validly existing under the laws of the States
of Nevada and Delaware, respectively. Each of Buyer and Acquisition Corp. has
the corporate power and authority to own or lease all of its properties and
assets and to carry on its business as it is now being conducted. Buyer is
duly registered as a bank holding company under the Bank Holding Company Act
of 1956, as amended ("BHCA"). True and complete copies of the Certificate of
Incorporation and Bylaws of each of Buyer and Acquisition Corp., as in effect
as of the date of this Agreement, have previously been made available by each
of Buyer and Acquisition Corp. to Eagle. Buyer owns directly all of the
issued and outstanding shares of capital stock of Acquisition Corp.
4.2 AUTHORITY. Each of Buyer and Acquisition Corp. has full
corporate power and authority to execute and deliver this Agreement subject
to shareholder and regulatory approvals, and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and
validly approved by the Board of Directors of each of Buyer and Acquisition
Corp, and Buyer, as the owner of all of the outstanding shares of capital
stock of Acquisition Corp. has caused this Agreement and the Merger to be
approved in accordance with Delaware
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Law. Except for the adoption of this Agreement and the transactions
contemplated hereby by Buyer, as sole shareholder of Acquisition Corp., no
other corporate proceedings on the part of Buyer or Acquisition Corp. are
necessary to approve this Agreement and to consummate the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by each of Buyer and Acquisition Corp. and, assuming due
authorization, execution and delivery by Eagle, constitutes a valid and
binding obligation of each of Buyer and Acquisition Corp., enforceable
against each of Buyer and Acquisition Corp. in accordance with its terms.
4.3 CONSENTS AND APPROVALS. No consents or approvals of or filings
or registrations with any Governmental Entity or with any third party are
necessary in connection with the execution and delivery by each of Buyer and
Acquisition Corp. of this Agreement and the consummation by Acquisition Corp.
of the Merger and the other transactions contemplated hereby except for (a)
the filing by Buyer and Acquisition Corp. of the Regulatory Application and
the approval of the Regulatory Application, (b) the filing with the SEC of
the Proxy Statement in definitive form relating to the meeting of Eagle's
shareholders to be held in connection with this Agreement and the
transactions contemplated hereby, (c) the filing of the Certificate of Merger
with the Delaware Secretary of State under Delaware Law and (d) the approval
of this Agreement by the requisite vote of the shareholders of Acquisition
Corp. and Eagle.
4.4 FINANCIAL RESOURCES. Buyer has the financial wherewithal,
whether by using its internal funds, external financing, or both, to perform
its obligations under this Agreement. Buyer and its subsidiaries are, and
will be following the Merger, in compliance with all applicable capital, debt
and financial and non-financial criteria of state and federal banking
agencies having jurisdiction over them.
4.5 APPROVAL DELAYS. Buyer knows of no reason why any of the
regulatory approvals referred to in SECTION 6.1(c) and SECTION 6.2(c)
should be denied or unduly delayed.
4.6 VOTE REQUIRED. The approval by Buyer, as sole stockholder of
Acquisition Corp., of this Agreement and the Merger is the only vote of the
holders of any class or series of the capital stock of Buyer or Acquisition
Corp. required for any of the transactions contemplated by this Agreement.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 CONDUCT OF BUSINESS. Between the date hereof and the Closing
Date, the parties shall conduct their respective businesses and shall cause
their subsidiaries to conduct their businesses in the usual and ordinary
course consistent in all material respects with prudent banking practices.
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5.2 NEGATIVE COVENANTS. Between the date hereof and the Closing
Date, without the prior written consent of Buyer, which consent shall not be
unreasonably withheld:
(a) except upon the exercise of existing options under the
Eagle Option Plan or the vesting of existing awards under the Eagle MRP or
the repurchase by Eagle of up to 4,000 shares of Eagle Common Stock from the
First Federal Savings and Loan Association Employees Pension Plan ("PENSION
PLAN") at a per share price not to exceed the Per Share Merger Consideration,
Eagle shall, and shall cause the Association to, make no changes in their
respective charters or bylaws or in the number of their issued and
outstanding shares;
(b) Eagle shall, and shall cause the Association to, not
increase the compensation of their directors, officers or employees,
PROVIDED, HOWEVER, that the compensation of officers and employees of Eagle
and the Association may be increased in a manner consistent with prior
practice of Eagle and the Association;
(c) Eagle shall, and shall cause the Association to, make
no loan for $500,000 or more, except for loans currently committed to be made
pursuant to written commitment letters, and Eagle shall, and shall cause the
Association to, make no other loans, or renewals or restructuring of loans
regardless of amount except in the ordinary course of business and consistent
in all material respects with prudent banking practices and applicable rules
and regulations of regulatory authorities with respect to amount, terms,
security and quality of the borrower's credit;
(d) Eagle shall not declare or pay any stock dividend, cash
dividend or other distribution without the prior written consent of Buyer,
PROVIDED, HOWEVER, that until the Closing Date, Eagle may declare and pay its
fiscal 1999 second quarter cash dividend to its shareholders in an amount not
to exceed $.10 per share of Common Stock, and the Association may pay cash
dividends to Eagle in the aggregate amount necessary for Eagle to pay its
fiscal 1999 second quarter cash dividend;
(e) Eagle shall, and shall cause the Association to, use
their best efforts to maintain their present insurance coverage in respect to
their respective properties and businesses;
(f) Eagle shall, and shall cause the Association to, make
no significant changes, outside the ordinary course of business, in the
general nature of the business conducted by Eagle and the Association,
including but not limited to the investment or use of their assets, the
liabilities they incur, or the facilities they operate;
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(g) Eagle shall, and shall cause the Association to, not
enter into any employment, consulting or other similar agreements that are
not terminable on 30 days' notice or less without penalty or obligation;
(h) Eagle shall, and shall cause the Association to, not
take any action that would result in a termination, partial termination,
curtailment, discontinuance or merger into another plan or trust of any Eagle
Plan, except as contemplated by this Agreement or as disclosed in the Eagle
Disclosure Schedules;
(i) Eagle shall, and shall cause the Association to, timely
file all required tax returns with all applicable taxing authorities and
shall not make any application for or consent to any extension of time for
filing any tax return or any extension of the period of limitations
applicable thereto;
(j) except as already reflected in the financial statements
referred to in SECTION 3.6 hereof, Eagle shall, and shall cause the
Association to, not make any expenditure for fixed assets in excess of
$25,000 for any single item, or $50,000 in the aggregate, or enter into any
lease of fixed assets, if the monthly rental payment under such lease exceeds
$5,000;
(k) Eagle shall, and shall cause the Association to, not
incur any liabilities or obligations, make any commitments or disbursements,
acquire or dispose of any property or asset, dispose of real estate owned,
make any contract or agreement, or engage in any transaction, except in the
ordinary course consistent in all material respects with prudent banking
practices;
(l) Eagle shall, and shall cause the Association to, not do
or fail to do anything that will cause a breach of, or default under, any
contract, agreement, commitment, obligation, appointment, plan, trust or
other arrangement to which Eagle or the Association is a party or by which
either Eagle or the Association is otherwise bound where such breach would
have a Material Adverse Effect on Eagle;
(m) Eagle shall, and shall cause the Association to, make
no changes of a material nature in their accounting procedures, methods,
policies or practices or the manner in which they conduct their businesses
and maintain their records;
(n) Eagle shall cause the Association not to accept any
brokered deposits;
(o) Eagle shall not grant any new stock options under the
Eagle Option Plan or any new plan share awards under the Eagle MRP;
(p) Eagle shall, and shall cause the Association to,
substantially comply with all material laws applicable to the conduct of
its business;
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(q) Eagle shall, and shall cause the Association to, use
its best efforts to preserve its business organization in tact, to keep
available the services of its present officers and employees and to preserve
the goodwill of its customers and others having business relations with it;
(r) Eagle shall, and shall cause the Association to, not
make any borrowings, except in the ordinary course of business (indebtedness,
other than deposits in customary amounts accepted by the Association in the
ordinary course of its business, maturing more than one year after its
creation is not for the purpose of this Agreement considered as being in the
"ordinary course");
(s) Eagle shall, and shall cause the Association to, not
purchase or invest in securities or obligations, or accept deposits (except
for deposits at rates consistent with those being paid generally by other
financial institutions in markets in which the Association has branch
offices) having a maturity of more than three years from the date of purchase
or acceptance;
(t) Eagle shall, and shall cause the Association to, not
extend credit or make advances, or grant any extension of any outstanding
loan, advance or other credit, to any customer of the Association who is
listed on the Association's problem or watch list or who has any outstanding
loan, advance or other credit from the Association which is in default, has
been placed on nonaccrual status or has been internally classified as among
"other loans specifically mentioned," or as "substandard," "doubtful" or
"loss;" and
(u) Eagle shall, and shall cause the Eagle Subsidiaries to,
not nominate or appoint any new directors or executive officers of Eagle or
the Eagle Subsidiaries, as the case may be.
5.3 ACCESS TO INFORMATION AND DUE DILIGENCE.
(a) Upon reasonable notice and subject to applicable laws
relating to the exchange of information, Eagle shall, and shall cause the
Eagle Subsidiaries to, afford to the officers, employees, accountants,
counsel and other representatives of Buyer, access, during normal business
hours during the period before the Effective Time, to all its properties,
books, contracts, commitments and records and, during such period, Eagle
shall, and shall cause the Eagle Subsidiaries to, make available to Buyer (i)
a copy of each report, schedule, registration statement and other document
filed or received by it during such period pursuant to the requirements of
federal securities laws or federal banking laws, and (ii) all other
information concerning its business, properties and personnel as Buyer may
reasonably request. Neither Eagle nor the Eagle Subsidiaries shall be
required to provide access to or to disclose information where such access or
disclosure would (A) violate or prejudice the rights of Eagle's customers or
contravene any law, rule, regulation, order, judgment, decree, fiduciary duty
or binding agreement entered into before the date of this Agreement, or (B)
impair any attorney-client privilege of the disclosing party. The parties
hereto shall make
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appropriate substitute disclosure arrangements under circumstances in which
the restrictions of the preceding sentence apply.
(b) Buyer shall hold all information furnished by or on
behalf of Eagle or the Eagle Subsidiaries or their representatives pursuant
to SECTION 5.3(a) in confidence and shall return all documents containing any
information concerning the properties, business and assets of such parties
that may have been obtained in the course of negotiations or examination of
the affairs of Eagle either before or after the execution of this Agreement
(other than such information as shall be in the public domain or otherwise
ascertainable from public sources) and shall destroy any information,
analyses or the like derived from such confidential information. Buyer shall
use such information solely for the purpose of conducting business, legal and
financial reviews of the Eagle and for such other purposes as may be related
to this Agreement.
(c) No investigation by either of the parties or their
respective representatives shall affect the representations and warranties of
the other set forth herein. Without limitation of the foregoing, each party
shall promptly notify the other party of any information obtained by such
party during the course of any due diligence conducted by such party or its
representatives in accordance with this SECTION 5.3 which is materially
inconsistent with any representation or warranty made by the other party
under this Agreement; PROVIDED, HOWEVER, that either party's failure to
provide such notice to the other party shall not, in turn, be deemed to
constitute a material breach of such party's obligations under this Agreement.
5.4 MEETING OF SHAREHOLDERS OF EAGLE. As soon as practicable after
the date of this Agreement, Eagle shall call and convene a meeting of its
shareholders for the purpose of voting upon this Agreement and the
transactions herein contemplated in accordance with Eagle's Certificate of
Incorporation, its bylaws and Delaware Law (the "SHAREHOLDERS MEETING").
Eagle shall, through its Board of Directors, consistent with the Board's
fiduciary duties, recommend to its shareholders approval of this Agreement
and the Merger. As soon as practicable after the date of this Agreement,
Eagle shall prepare and mail to the holders of Eagle Common Stock appropriate
proxy materials (the "PROXY MATERIALS"), including a notice of the meeting,
the Proxy Statement and a form of proxy that comply with applicable laws and
regulations. Buyer shall furnish to Eagle all information concerning Buyer
and Acquisition Corp. required for inclusion in the Proxy Materials, and all
such information shall be true and correct in all material respects without
omission of any material fact required to be stated to make the information
stated therein not misleading. In the Proxy Materials, Eagle shall present
this Agreement and the transactions contemplated hereby for approval by the
holders of the Eagle Common Stock at the Shareholders Meeting.
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5.5 REGULATORY FILINGS. Buyer, as soon as is reasonably practical,
but in no event later than the 60th day following the date of this Agreement,
shall take all appropriate actions necessary to obtain the regulatory
approvals referred to in SECTION 6.1(c) hereof, and Eagle will cooperate
fully in the process of obtaining all such approvals. As soon as practicable
after the date of this Agreement, Buyer shall make all appropriate initial
filings necessary to obtain the regulatory approvals referred to in SECTION
6.1(c) hereof. Buyer shall provide Eagle with draft copies of all regulatory
applications sufficiently in advance of the proposed filing date to allow
Eagle time to review and comment on such draft copies. In addition, Buyer
shall provide Eagle with copies of all applications filed and all approvals
when received.
5.6 REASONABLE EFFORTS. The parties to this Agreement agree to use
their reasonable efforts in good faith to satisfy the various conditions to
Closing and to consummate the Merger as soon as practicable. None of the
parties hereto shall intentionally take or intentionally permit to be taken
any action that would be in breach of the terms or provisions of this
Agreement or that would cause any of the representations and warranties
contained herein to be or to become untrue.
5.7 BUSINESS RELATIONS AND PUBLICITY. Eagle shall use reasonable
efforts to preserve its reputation and relationship with suppliers, clients,
depositors, customers, employees and others having business relations with
it. No press release or other communication in connection with or relating to
this Agreement or the transactions contemplated hereby (other than
communications with appropriate regulatory authorities) shall be issued or
made except as mutually agreed upon, provided that either party hereto, after
consultation with the other party, may make such disclosures concerning the
transactions provided for herein as the disclosing party believes are
required by law.
5.8 NO CONDUCT INCONSISTENT WITH THIS AGREEMENT.
(a) Eagle agrees that it shall not, during the term of this
Agreement, (i) solicit, encourage or authorize any individual, corporation or
other entity to solicit from any third party any inquires or proposals
relating to the disposition of its business or assets, or the acquisition of
its capital stock, or the merger of it or any of the Eagle Subsidiaries with
any corporation or other entity other than as provided by this Agreement
except pursuant to a written direction from a regulatory authority; or (ii)
negotiate with or entertain any proposals from any other person for any such
transaction wherein the business, assets or capital stock of it or the Eagle
Subsidiaries would be acquired, directly or indirectly, by any party other
than as provided by this Agreement, except pursuant to a written direction
from any regulatory authority or upon the receipt of an unsolicited offer
from a third party where the Board of Directors of Eagle reasonably believes,
upon the opinion of counsel, that its fiduciary duties require it to enter
into discussions with such
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<PAGE>
party. Eagle shall promptly notify Buyer of all of the relevant details
relating to all inquiries and proposals that it may receive relating to any
proposed disposition of its business or assets, or the acquisition of its
capital stock, or the merger of it or the Eagle Subsidiaries with any
corporation or other entity other than as provided by this Agreement and
shall keep Buyer informed of the status and details of any such inquiry or
proposal.
(b) Nothing contained in SECTION 5.8(a) hereof shall
prohibit Eagle from disclosing to its shareholders a position contemplated by
Rule 14e-2(a) under the Exchange Act with respect to a tender offer for
Eagle's common stock.
5.9 BOARD OF DIRECTORS' NOTICES, MINUTES, ETC. Eagle shall give
reasonable notice to Buyer of all meetings of the Board of Directors and
Board committees of Eagle and the Association, and if known, the agenda for
or business to be discussed at such meeting. Eagle shall transmit to Buyer,
promptly, copies of all notices, minutes, consents and other materials that
Eagle or the Association provides to their directors to the extent
permissible under law, other than materials relating to any proposed
acquisition of Eagle or the Association. Buyer agrees to hold in confidence
and trust and to act in a fiduciary manner with respect to such information.
5.10 UNTRUE REPRESENTATIONS AND WARRANTIES. During the term of this
Agreement, if a party hereto becomes aware of any facts or of the occurrence
or impending occurrence of any event that would cause one or more of such
party's representations and warranties contained in this Agreement to be or
to become untrue as of the Closing Date, then such party shall immediately
give detailed written notice thereof to the other party.
5.11 INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE.
(a) From and after the Effective Time, Buyer shall cause
the Surviving Corporation to fulfill and honor in all respects the
obligations of Eagle or the Eagle Subsidiaries pursuant to any
indemnification agreements between Eagle and its directors and officers
existing prior to the date hereof. Furthermore, for a period of five years
following the Effective Time, Buyer agrees to indemnify and hold harmless
those directors and officers of Eagle entitled to indemnification under, and
to the fullest extent permitted by, the Certificate of Incorporation of Eagle
as it existed immediately prior to the Effective Time and as if the
Certificate of Incorporation were still in effect without amendment during
such five year period; provided, however, that all rights to indemnification
in respect of any claim asserted or made within such period shall continue
until the final disposition of such claim.
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(b) Notwithstanding SECTION 5.2 hereof, Eagle may purchase
a policy of directors' and officers' liability insurance, to be effective for
a period not to exceed three years from the Effective Time, covering those
persons who are currently directors and officers of Eagle and who are covered
by Eagle's directors' and officers' liability insurance policy but only to
the extent and on terms comparable to those applicable to Eagle's current
policy; PROVIDED, HOWEVER, that in no event shall Eagle expend in excess of
110% of the annual premium currently paid by Eagle for such coverage for each
such year of coverage.
5.12 EMPLOYEE BENEFIT AND INCENTIVE PLANS.
(a) At the Effective Time, except as otherwise provided in
this paragraph, each employee of Eagle and the Eagle Subsidiaries shall
immediately become eligible to participate in all employee welfare benefit
plans and other fringe benefit programs offered or maintained by Buyer and
its subsidiaries on the same terms and conditions that Buyer and its
subsidiaries may make available to their officers and employees, including,
without limitation, any health, life, long-term disability, severance,
vacation or paid time off programs ("BUYER'S WELFARE PLANS"). The period of
employment and compensation of each employee of Eagle and the Eagle
Subsidiaries before the Effective Time shall be counted for all purposes
under Buyer's Welfare Plans, including, without limitation, for purposes of
service credit, eligibility and vesting. Any expenses incurred by an employee
of Eagle or the Eagle Subsidiaries under Eagle's or the Association's
employee welfare benefit plans (such as deductibles or co-payments), shall be
counted for all purposes under Buyer's Welfare Plans. Buyer shall waive any
pre-existing condition exclusions for conditions existing on the Closing
Date, and actively-at-work requirements for periods ending on the Closing
Date contained in Buyer's Welfare Benefit Plans as they apply to Eagle's
employees and former employees and their dependents.
(b) At the Effective Time, the First Federal Savings and
Loan Association of Bloomington Employee Stock Ownership Plan (the "ESOP")
shall be terminated on such terms and conditions as Eagle shall determine,
and the loan between Eagle and the ESOP shall be repaid in full from the cash
consideration received for unallocated shares of Eagle Common Stock held by
the ESOP upon the conversion pursuant to the Merger of such shares of Eagle
Common Stock held by the ESOP. Any remaining cash consideration received for
such unallocated shares after such repayment shall be allocated to the ESOP
accounts of those employees of Eagle and the Eagle Subsidiaries who are ESOP
participants and beneficiaries (the "ESOP PARTICIPANTS") in accordance with
the terms of the ESOP as amended with respect to such termination and as in
effect on the Effective Time. All ESOP Participants shall fully vest and have
a nonforfeitable interest in their accounts under the ESOP (including
allocations of the consideration
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received on the unallocated shares) determined as of the Effective Time. As
soon as practicable after the receipt of a favorable determination letter
from the Internal Revenue Service ("IRS") as to the tax qualified status of
the ESOP upon its termination under Section 401(a) and 4975(e) of the Code
(the "FINAL DETERMINATION LETTER"), distributions of the benefits under the
ESOP shall be made to the ESOP Participants. From and after the date of this
Agreement, in anticipation of such termination and distribution, Eagle shall
cause the Association and its representatives before the Effective Time, and
Buyer and its representatives after the Effective Time, shall use their best
efforts to apply for and to obtain such favorable Final Determination Letter
from the IRS. If the Association and its representatives, before the
Effective Time, and Buyer and its representatives after the Effective Time,
reasonably determine that the ESOP cannot obtain a favorable Final
Determination Letter, or that the amounts held therein cannot be so applied,
allocated or distributed without causing the ESOP to lose its tax qualified
status, Eagle, or the Association at the direction of Eagle, before the
Effective Time and Buyer after the Effective Time, shall take such action as
they may reasonably determine with respect to the distribution of benefits to
the ESOP Participants, provided that the assets of the ESOP shall be held or
paid for the benefit of the ESOP Participants and provided further that in no
event shall any portion of the amounts held in the ESOP revert, directly or
indirectly, to Eagle or any affiliate thereof, or to Buyer or any affiliate
thereof. If Eagle or Association employees otherwise become eligible to
participate in an employee stock ownership plan maintained by Buyer or any
affiliate thereof ("BUYER ESOP"), each Eagle or Eagle Subsidiary employee's
period of employment with Eagle or the Eagle Subsidiaries before the
Effective Time shall be counted for all purposes under Buyer ESOP, including
without limitation, for purposes of eligibility and vesting.
(c) (i) Immediately prior to the Effective Time, Eagle
shall cause the Association's Profit Sharing 401(k) Plan (the "401(k) Plan")
to be terminated, and in connection therewith to fully vest the accounts held
by the 401(k) Plan participants on the date of such termination. All 401(k)
Plan participants who are not employed by the Buyer immediately following the
Effective Time shall have the distribution options available to participants
who terminate employment or otherwise separate from service. As soon as
practicable after receipt of a favorable determination letter from the IRS as
to the tax-qualified status of the 401(k) Plan under Section 401(a) and
501(a) of the Code upon its termination (the "401(K) DETERMINATION LETTER"),
the remaining account balances held under the 401(k) Plan shall be directly
transferred into the First Busey Corporation Profit Sharing Plan for which
Buyer has received a favorable determination letter from the IRS as to its
tax-qualified status under Sections 401(a) and 501(a) of the Code (the "BUYER
PLAN"). Eagle and its representatives prior to the Effective Time and Buyer
and its representatives after the Effective Time
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shall use their best efforts to apply and obtain such 401(k) Final
Determination Letter from the IRS. In the event that Eagle and its
representatives prior to the Effective Time and Buyer and its representatives
after the Effective Time reasonably determine that the 401(k) Plan cannot
obtain a favorable 401(k) Final Determination Letter, or that the amounts
held therein cannot be transferred to the Buyer Plan without causing the
401(k) Plan to lose its tax-qualified status, Eagle and its representatives
prior to the Effective Time and Buyer after the Effective Time shall take
such actions as they may reasonably determine, with respect to the
distribution of benefits to the 401(k) Plan participants, provided that the
assets of the 401(k) Plan shall be held or paid only for the benefit of such
401(k) Plan participants; and provided further that in no event shall any
portion of the amounts held in the 401(k) Plan revert, directly or
indirectly, to Eagle or any affiliate thereof, or to Buyer or any affiliate
thereof.
(ii) If employees of Eagle or any Eagle Subsidiary
become eligible to participate in the Buyer Plan: (A) all such employees who
are or were 401(k) Plan participants shall become participants in the Buyer
Plan on the date the Buyer Plan is made available; and (B) each such
employee's period of employment with Eagle or the Eagle Subsidiary before the
Closing Date shall be counted for all purposes under the Buyer Plan,
including, without limitation, for purposes of eligibility and vesting.
(d) TREATMENT OF PLAN SHARE AWARDS UNDER THE EAGLE MRP. All
shares of Eagle Common Stock subject to plan share awards under the Eagle MRP
that have vested as of the Effective Time shall be treated as issued and
outstanding shares of Eagle Common Stock for purposes of SECTION 1.4. Prior
to the Effective Time and in recognition that the Buyer has expressly agreed
not to assume the Eagle MRP, the Board of Directors of Eagle shall terminate
the Eagle MRP, shall direct the trustees of the Eagle MRP to return to Eagle
or the Association all shares of Eagle Common Stock subject to plan share
awards but not yet earned by a recipient thereof to whom they were allocated
and any shares of Eagle Common Stock subject to plan share awards that have
not been allocated, all of which shares shall be canceled pursuant to SECTION
1.4(B)(III) at the Effective Time.
(e) TREATMENT OF STOCK OPTIONS UNDER THE EAGLE OPTION PLAN.
Prior to the Effective Time and in recognition that the Buyer has expressly
agreed not to assume the Eagle Option Plan, the Board of Directors of Eagle
shall terminate the Eagle Option Plan and cancel any and all outstanding
stock options that have not vested in the recipient as of the Effective Time.
5.13 EMPLOYMENT AND EMPLOYMENT SECURITY AGREEMENTS. Buyer agrees to
honor the provisions of the present employment and employment security
agreements between each of Donald L. Fernandes, David R. Wampler, Donald L.
Lambert, James E. Lyons, Larry C. McClellan and Gary L. Richardson on one
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<PAGE>
hand and Eagle and/or the Association on the other hand, including those that
relate to a termination of employment following a change-in-control of Eagle.
5.14 SEVERANCE PROGRAM. Buyer Agrees to honor the Severance Program
of Eagle, as amended and restated as of the date hereof, a copy of which has
been previously provided to Buyer.
5.15 COBRA. Until the Effective Time, Eagle shall be liable for all
obligations for continued health coverage pursuant to Section 4980B of the
Code and Section 601 through 609 of ERISA ("COBRA") with respect to each
qualified beneficiary (as defined in COBRA) of Eagle who incurs a qualifying
event (as defined in COBRA) before the Effective Time. Buyer shall be liable
for (i) all obligations for continued health coverage under COBRA with
respect to each Eagle qualified beneficiary (as defined in COBRA) who incurs
a qualifying event (as defined in COBRA) from and after the Effective Time,
and (ii) for continued health coverage under COBRA from and after the
Effective Time for each Eagle qualified beneficiary who incurs a qualifying
event before the Effective Time.
5.16 PENSION PLAN. The Pension Plan has been terminated effective
March 31, 1998 and appropriate filings have been made with respect to such
termination with the Pension Benefit Guaranty Corporation ("PBGC") and the
IRS. The appropriate noncompliance period under Section 4041(b)(3)(C) of
ERISA has expired without receipt of a notice of noncompliance from the PBGC
with respect to the termination of the Pension Plan. An application has been
filed with the IRS for a final determination letter ("PENSION PLAN FINAL
DETERMINATION LETTER") with respect to the termination of the Pension Plan.
From and after the date of this Agreement, Buyer, Eagle and their respective
representatives before the Effective Time, and Buyer and its representatives
after the Effective Time, shall use their best efforts to obtain such Pension
Plan Final Determination Letter from the IRS. If such Pension Plan Final
Determination Letter is received from the IRS before the Effective Time,
Buyer, Eagle and their respective representatives shall use their best
efforts to complete full and final distribution of the assets of the Pension
Plan to participants thereunder. If either such Pension Plan Final
Determination Letter is not obtained before the Effective Time, or if the
assets of the Pension Plan are not fully and finally distributed to
participants before the Effective Time, Buyer and its representatives shall
use their best efforts to obtain such Pension Plan Final Determination Letter
from the IRS, and/or to complete such distribution of the assets of the
Pension Plan, as soon as practicable after the Effective Time. All
participants in the Pension Plan as of the Effective Time shall be fully
vested in their accrued benefits thereunder and all assets of the Pension
Plan shall be applied only to provide benefits to participants in the Pension
Plan as of the Effective Time. In no event shall any portion of the assets of
the Pension Plan revert directly or indirectly to Eagle or any affiliate
thereof,
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or to Buyer or any affiliate thereof.
5.17 CERTAIN CONSENTS. In the event of a request by Eagle for
written consent from Buyer for purposes of Sections 5.2 and 6.1 hereof, Buyer
shall use reasonable efforts to respond to such request promptly; Eagle shall
be entitled to rely, for purposes of any of such sections, on a verbal
consent given on behalf of Buyer by Douglas C. Mills, its Chairman of the
Board and Chief Executive Officer, or Barbara J. Kuhl, its Executive Vice
President.
5.18 TITLE TO REAL PROPERTY.
(a) Within 45 days after the date hereof, Eagle, at its
expense, will furnish to Buyer the following documents with respect to the
real property owned by Eagle located at (i) 301 Fairway Drive, Bloomington,
Illinois, (ii) 1111 South Veterans Parkway, Bloomington, Illinois and (iii)
207 South East Street, LeRoy, Illinois (the "OWNED REAL PROPERTY"):
(i) An ALTA owner's title insurance commitment, in
the minimum amount of $10,000 with respect to each parcel of Owned Real
Property, and showing Eagle or the Eagle Subsidiaries as the owner of such
Owned Real Property, subject only to Permitted Exceptions; and
(ii) An ALTA Class A survey, including Table 3
requirements 1-12, of each parcel of Owned Real Property, certified to the
title insurance company issuing the title insurance commitment with respect
to such parcel referred to in clause (i) directly above, Eagle and Buyer, and
disclosing no survey matters affecting such parcel other than Permitted
Exceptions.
(b) Buyer shall have ten days after the delivery of the
title commitments and surveys to examine the title commitments and surveys
and notify Eagle in writing of any defects noted therein that are not
Permitted Exceptions ("TITLE DEFECTS"). If Buyer fails to notify Eagle of any
Title Defects, title to the Owned Real Property shall be deemed accepted. If
Buyer timely notifies Eagle of any Title Defects within such ten day period,
Eagle shall have five days after receipt of Buyer's notification to advise
Buyer that: (i) Eagle will remove any Title Defects on or before the Closing
Date; or (ii) Eagle will not cause the Title Defects to be removed. If Eagle
advises Buyer that it will not cause the exceptions to be removed, Buyer will
have five days after Eagle's notification to elect, as its sole remedy, to:
(i) proceed with the transaction and accept such Title Defects; or (ii)
terminate this Agreement by written notice to Eagle. If Buyer does not give
Eagle notice of its election within such period, Buyer will be deemed to have
elected to proceed with this transaction.
5.19 ENVIRONMENTAL SURVEYS. Within 45 days after the date hereof,
Eagle, at its expense, will furnish to Buyer, with respect to each parcel of
Owned Real Property, a written environmental audit prepared by an engineering
firm or other qualified expert satisfactory to Buyer, and prepared in
accordance with the
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ASTM standard for Phase I environmental site assessments exclusive of the
title search (as such search is being done independent of the environmental
audit), and designed to meet the requirements of any applicable state law
relating to an innocent owner defense to liability for releases of Hazardous
Substances (the "PHASE I AUDITS"). Buyer may request with ten days following
receipt of any Phase I Audit that recommends additional investigation, that
such recommendations be performed ("PHASE II WORK"). Costs associated with
Phase II Work shall be paid by Eagle up to $15,000 and thereafter paid by
Buyer. Within ten days of receiving the results of any Phase II Work that
confirms the presence of a significant environmental concern that may
reasonably have a Material Adverse Effect on Eagle, Buyer and Eagle will
agree to negotiate a mutually agreeable resolution. If a mutually agreeable
resolution cannot be reached after ten days, Eagle and Buyer shall have the
right to terminate this Agreement by providing written notice of the same.
5.20 LIST OF EAGLE STOCKHOLDERS. At the Effective Time, Eagle shall
deliver to Buyer a list of holders of record of the outstanding Eagle Common
Stock as of the most recent reasonably practicable date, and the accuracy of
such list shall be certified by an authorized officer of Eagle.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER AND ACQUISITION
CORP. Unless the conditions are waived by Buyer or Acquisition Corp., all
obligations of Buyer and Acquisition Corp. under this Agreement are subject
to the fulfillment, before or at the Closing, of each of the following
conditions:
(a) REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF
AGREEMENTS. The representations and warranties of Eagle contained in Article
III of this Agreement, or in any documents, certificates, schedules or
exhibits delivered by, or on behalf, of Eagle to Buyer pursuant to this
Agreement shall be true and correct as of this date and shall be true and
correct as of the Closing Date as though made on and as of the Closing Date,
except where the failure of such representations and warranties to be so true
and correct would not have, individually or in the aggregate, a Material
Adverse Effect on Eagle. Eagle shall have performed all agreements herein
required to be performed by it on or before the Closing Date.
(b) CLOSING CERTIFICATE. Buyer shall have received a
certificate signed by the Chief Executive Officer of Eagle, dated as of the
Closing Date, certifying in such detail as Buyer may reasonably request, as
to the fulfillment of the conditions to the obligations of Buyer as set forth
in this Agreement and required to be fulfilled by Eagle on or before the
Closing Date.
(c) REGULATORY AND OTHER APPROVALS. Buyer shall have
obtained the approval of all appropriate regulatory entities (including,
without limitation, the approval of the FRB) of the transactions
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contemplated by this Agreement, all required regulatory waiting periods shall
have expired, and there shall have been no motion for rehearing or appeal
from such approval or commencement of any suit or action seeking to enjoin
the transaction provided for herein or to obtain substantial damages in
respect of them.
(d) APPROVAL OF MERGER AND DELIVERY OF THIS AGREEMENT. This
Agreement and the transactions contemplated herein shall have been approved
by the Board of Directors and the shareholders of Eagle in accordance with
applicable law and the Certificate of Incorporation and Bylaws of Eagle, and
the proper officers of Eagle shall have executed and delivered to Buyer
copies of this Agreement and the Certificate of Merger, in form suitable for
filing with the Delaware Secretary of State, and shall have executed and
delivered all such other certificates, statements or other instruments as may
be necessary or appropriate to effect such filings.
(e) NO LITIGATION WITH RESPECT TO TRANSACTIONS. No suit or
other legal proceeding shall have been instituted or threatened seeking to
enjoin the consummation of the transactions contemplated hereby, which
reasonably could be expected to result in the issuance of a court order
enjoining such transactions;
(f) DEFERRED COMPENSATION AGREEMENT. The Association shall
have terminated all of its obligations under the Deferred Compensation
Agreement entered into between Donald L. Fernandes and the Association dated
December 15, 1986, as amended on September 22, 1992 (the "COMPENSATION
Agreement"); PROVIDED, HOWEVER, that neither Eagle nor the Association shall
prepay any future payment required under the Compensation Agreement. Donald
L. Fernandes shall receive ownership, effective as of the termination of the
Compensation Agreement, of the Massachusetts Mutual Policy, number 7-238-768,
pursuant to Section 3(c) of the Compensation Agreement.
(g) OPINION OF COUNSEL. Buyer shall have received an
opinion of Schiff Hardin & Waite, counsel for Eagle, dated as of the Closing
Date, and in form and substance satisfactory to Buyer and its counsel as
follows:
(i) Eagle is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Delaware and has full corporate power and authority to own, lease and operate
its properties and to carry on its business as now being conducted as
described in Eagle's 1998 Form 10-K. Eagle is duly authorized to transact
business under the laws of the State of Delaware and each state in which the
nature of its business or the ownership or leasing of its properties makes
such qualification necessary, except where the failure to so qualify would
not have a Material Adverse Effect. Eagle is a registered savings and loan
holding company under the Home Owners' Loan Act.
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(ii) The Association is validly existing as a
savings association under the laws of the United States of America and has
full corporate power and authority to own, lease and operate its properties
and to carry on its business as now being conducted as described in Eagle's
1998 Form 10-K. The Association is duly authorized to transact business under
the laws of each state in which the nature of its business or the ownership
or leasing of its properties makes such qualification necessary, except where
the failure to so qualify would not have a Material Adverse Effect.
(iii) To the best of our knowledge, there are no
actions, suits or proceedings pending or threatened against Eagle or the
Eagle Subsidiaries at law or in equity, before any federal, state, foreign,
local or other governmental department, court, commission, board, bureau,
agency or instrumentality which, in our opinion, based upon such knowledge,
if the relief sought in the pleadings in such actions, suits, and proceedings
were granted or if the threatened claims were accrued in full, are likely to
have a Material Adverse Effect on Eagle.
(iv) The execution and delivery of the Agreement,
compliance with the provisions thereof, and consummation of the transactions
contemplated therein (a) shall not constitute a violation by Eagle or the
Eagle Subsidiaries of any provision of law or (b) do not conflict with or
result in any breach of any of the terms, conditions or provisions of, or
constitute a default under, Eagle's or the Eagle Subsidiaries' corporate
charter or bylaws.
(v) Eagle has full corporate power and authority
to enter into and perform the Agreement. The Agreement has been duly
authorized, executed and delivered by Eagle and is a legal and binding
obligation of Eagle enforceable against Eagle in accordance with its terms.
(vi) No consent of any party or Governmental
Entity is required for the execution, delivery and performance by Eagle of
the Agreement and the transactions contemplated thereby that have not been
received or obtained as of the date hereof, except where the failure to
obtain such consent will not have or be reasonably likely to have a Material
Adverse Effect on Eagle.
(vii) There are 5,000,000 authorized shares
of Common Stock, $.01 par value, of Eagle and 100,000 authorized
shares of Preferred Stock, $.01 par value, of Eagle. Eagle has no other
authorized or outstanding stock of any class, series, designation or
description. The issuance and the sale of the 1,302,705 shares of Eagle
Common Stock on June 29, 1996 in connection with the mutual-to-stock
conversion of the Association and the simultaneous formation of Eagle as the
savings and loan holding company for the Association were duly and validly
authorized by all necessary corporate action on the part of Eagle and were
validly issued, fully paid and nonassessable.
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In rendering its opinion, such counsel may rely as to
matters of fact upon such certificates of the officers of Eagle or the
Association or governmental officials as such counsel deems appropriate.
(h) NO ADVERSE CHANGES. Between the date of this Agreement
and the Closing Date, the business of Eagle and the Association, taken as a
whole, shall have been conducted in the ordinary course consistent in all
respects with prudent banking practices, and there shall not have occurred
any material adverse change or any condition, event, circumstance, fact or
occurrence (other than general economic or competitive conditions) that may
reasonably be expected to result in a material adverse change in the
business, properties, financial condition, loan portfolio, operations or
prospects of Eagle or the Association, taken as a whole.
(i) CONSENTS. Eagle and the Association shall have obtained
all such written consents, permissions and approvals as required under any
agreements, contracts, appointments, indentures, plans, trusts or other
arrangements with third parties required to effect the transactions
contemplated by this Agreement.
(j) OTHER DOCUMENTS. Buyer shall have received at the
Closing all such other documents, certificates or instruments as it may have
reasonably requested evidencing compliance by Eagle with the terms of this
Agreement.
6.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF EAGLE. Unless the
conditions are waived by Eagle, all obligations of Eagle under this Agreement
are subject to the fulfillment, before or at the Closing, of each of the
following conditions:
(a) REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF
AGREEMENTS. The representations and warranties of Buyer and Acquisition Corp.
contained in Article IV of this Agreement, or in any documents, certificates
or exhibits delivered by them, or on their behalf to Eagle pursuant to this
Agreement shall be true and correct as of this date and shall be true and
correct as of the Closing Date as though made on and as of the Closing Date,
except where the failure of such representations and warranties to be so true
and correct would not have, individually or in the aggregate, a Material
Adverse Effect on Buyer. Buyer and Acquisition Corp. shall have performed all
agreements herein required to be performed by them on or before the Closing
Date.
(b) CLOSING CERTIFICATE. Eagle shall have received a
certificate signed by the Chairman of the Board and Chief Executive Officer
of Buyer, dated as of the Closing Date, certifying in such detail as Eagle
may reasonably request, as to the fulfillment of the conditions to the
obligations of Eagle as set forth in this Agreement and required to be
fulfilled by Buyer or Acquisition Corp. on or before the Closing.
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<PAGE>
(c) REGULATORY AND OTHER APPROVALS. Buyer shall have
obtained the approval of all appropriate regulatory entities (including,
without limitation, the approval of the FRB) of the transactions contemplated
by this Agreement; all required regulatory waiting periods shall have
expired, and there shall have been no motion for rehearing or appeal from
such approval or commencement of any suit or action seeking to enjoin the
transaction provided for herein or to obtain substantial damages in respect
of them.
(d) APPROVAL OF MERGER AND DELIVERY OF THIS AGREEMENT. This
Agreement and the transactions contemplated herein shall have been approved
by the Board of Directors of Buyer and Acquisition Corp., and Buyer, as the
sole shareholder of Acquisition Corp., in accordance with applicable law and
the Certificate of Incorporation and Bylaws of Acquisition Corp., and the
proper officers of Buyer and Acquisition Corp. shall have executed and
delivered to Eagle copies of this Agreement and the Certificate of Merger, in
form suitable for filing with the Delaware Secretary of State, and shall have
executed and delivered all such other certificates, statements or other
instruments as may be necessary or appropriate to effect such filings.
(e) NO LITIGATION WITH RESPECT TO TRANSACTIONS. No suit or
other legal proceeding shall have been instituted or threatened seeking to
enjoin the consummation of the transactions contemplated hereby, which
reasonably could be expected to result in the issuance of a court order
enjoining such transactions.
(f) OPINION OF COUNSEL. Buyer shall have received an
opinion of Chapman and Cutler, counsel for Buyer, dated as of the Closing
Date, and in form and substance satisfactory to Eagle and its counsel as
follows.
(i) Buyer is a corporation validly existing and in
good standing under the laws of the State of Nevada and has the corporate
power to own all of its properties and assets and to carry on its business as
it is now being conducted. Acquisition Corp. is a corporation duly organized
and validly existing under the laws of the State of Delaware and has the
corporate power to own all of its properties and assets and to carry on its
business as it is now being conducted. Buyer is a registered bank holding
company under the BHCA.
(ii) Buyer and Acquisition Corp. have full
corporate power and authority to execute and deliver the Agreement and to
consummate the transactions contemplated hereby. The execution and delivery
and performance of the Agreement and the consummation of the transactions
contemplated hereby have been duly and validly approved by the Board of
Directors of Buyer and Acquisition Corp., and, in the case of the Agreement,
by Buyer as the sole shareholder of Acquisition Corp., these being the only
A-35 APPENDICES
<PAGE>
corporate authorizations required under the Certificate of
Incorporation and Bylaws of Buyer and Acquisition Corp. and Delaware Law. The
Agreement has been duly and validly executed and delivered by Buyer and
Acquisition Corp. and constitute the valid and binding obligation of Buyer
and Acquisition Corp. enforceable against Buyer and Acquisition Corp. in
accordance with its terms.
(iii) the execution, delivery and performance by
Buyer and Acquisition Corp. of the Agreement do not violate the Certificate of
Incorporation or Bylaws of Buyer or Acquisition Corp.
(iv) no consents or approvals of, or filings or
registrations with, any Governmental Entity are necessary in connection with
the execution and delivery by Buyer or Acquisition Corp. of the Agreement and
the consummation by Buyer and Acquisition Corp. of the Merger and the other
transactions contemplated hereby, that have not been received or obtained as of
the date hereof, except where the failure to obtain such consent or approval or
to make such filing or registration will not have or be reasonably likely to
have a Material Adverse Effect on Buyer or Eagle.
(v) no consent, approval, authorization, order,
registration or qualification of or with any court or Governmental Entity are
necessary for the consummation by Buyer or Acquisition Corp. of the
transactions contemplated by this Agreement, except such as have been
obtained.
In rendering its opinion, such counsel may rely as to matters
of fact upon such certificates of the officers of Buyer or governmental
officials as such counsel deems appropriate.
(g) FAIRNESS OPINION. Eagle shall have received from Trident,
a fairness opinion dated as of the date of the Proxy Statement and in form and
substance reasonably satisfactory to Eagle, to the effect that the consideration
to be received in the Merger by the shareholders of Eagle is fair, from a
financial point of view, to the shareholders of Eagle.
(h) OTHER DOCUMENTS. Eagle shall have received at the Closing
all such other documents, certificates or instruments as it may have reasonably
requested evidencing compliance by Buyer and Acquisition Corp. with the terms of
this Agreement.
ARTICLE VII
TERMINATION, EXPENSES AND AMENDMENT
7.1 TERMINATION. This Agreement may be terminated before the
Effective Time:
(a) at any time, whether before or after approval of the
matters presented in connection with the Merger by the shareholders of Eagle, by
written agreement between Buyer and Eagle, if the Board of Directors of each so
determines;
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<PAGE>
(b) at any time, whether before or after approval of the
matters presented in connection with the Merger by the shareholders of Eagle, by
either the Board of Directors of Eagle or the Board of Directors of Buyer and
Acquisition Corp. if (i) any Governmental Entity that must grant a Requisite
Regulatory Approval has denied approval of the Merger and such denial has become
final and nonappealable or (ii) any Governmental Entity of competent
jurisdiction shall have issued a final nonappealable order permanently enjoining
or otherwise prohibiting the consummation of the transactions contemplated by
this Agreement;
(c) by either the Board of Directors of Eagle or the Board of
Directors of Buyer and Acquisition Corp. if the Merger shall not have been
consummated on or before February 29, 2000, unless the failure of the Closing to
occur by such date shall be due to the failure of the party seeking to terminate
this Agreement to perform or observe the covenants and agreements of such party
set forth herein;
(d) by Buyer or Eagle if any approval of the shareholders of
Eagle required for the consummation of the Merger shall not have been obtained
by reason of the failure to obtain the required vote at a duly held meeting of
shareholders or at any adjournment or postponement thereof;
(e) by Eagle, upon two (2) days' prior notice to Buyer, if, as
a result of an unsolicited tender offer by a party other than Buyer or its
affiliates or any written offer or proposal with respect to a merger, share
exchange, sale of a material portion of its assets or other business combination
(each, a "BUSINESS COMBINATION PROPOSAL") by a party other than Buyer or its
affiliates, the Board of Directors of Eagle determines in good faith that its
fiduciary obligations under applicable law require that such Business
Combination Proposal be accepted; PROVIDED, HOWEVER, that:
(i) the Board of Directors of Eagle shall have
been advised in an opinion of outside counsel that notwithstanding a binding
commitment to consummate an agreement of the nature of this Agreement entered
into in the proper exercise of its applicable fiduciary duties, and
notwithstanding all concessions that may be offered by Buyer in negotiations
entered into pursuant to clause (ii) below, such fiduciary duties would
require the directors to reconsider such commitment as a result of such
tender offer or other written offer or proposal; and
(ii) before delivering the two (2) days' prior
notice to Buyer to effect a termination under this paragraph (e), Eagle
shall, and shall cause its financial and legal advisors to, negotiate with
Buyer for three (3) calendar days to make such adjustments in the terms and
conditions of this Agreement as would enable Eagle to proceed with the
transactions contemplated herein on such adjusted terms;
A-37 APPENDICES
<PAGE>
(f) by Eagle, by written notice to Buyer, if:
(i) there exists any material breach or breaches
of the representations and warranties of Buyer made herein, and such breaches
shall not have been remedied within thirty (30) days after receipt by Buyer
of notice in writing from Eagle, specifying the nature of such breaches and
requesting that they be remedied; or
(ii) Buyer shall have failed to perform and comply
with, in all material respects, its agreements and covenants hereunder and
such failure to perform or comply shall not have been remedied within thirty
(30) days after receipt by Buyer of notice in writing from Eagle, specifying
the nature of such failure and requesting that it be remedied; or
(g) by Buyer, by written notice to Eagle, if:
(i) there exists any material breach or breaches
of the representations and warranties of Eagle made herein, and such breaches
shall not have been remedied within thirty (30) days after receipt by Eagle
of notice in writing from Buyer, specifying the nature of such breaches and
requesting that they be remedied; or
(ii) Eagle shall have failed to perform and comply
with, in all material respects, its agreements and covenants hereunder and
such failure to perform or comply shall not have been remedied within thirty
(30) days after receipt by Eagle of notice in writing from Buyer, specifying
the nature of such failure and requesting that it be remedied; or
(iii) the Board of Directors of Eagle or any
committee thereof:
(A) shall withdraw or modify in any manner
adverse to Buyer its approval or recommendation of this Agreement or
the Merger,
(B) shall fail to reaffirm such approval or
recommendation upon Buyer's request,
(C) shall approve or recommend any
Business Combination Proposal involving Eagle other than the Merger involving
Eagle, in each case, by or involving a party other than Buyer or any of its
affiliates or
(D) shall resolve to take any of the actions
specified in clause (A), (B) or (C).
7.2 EFFECT OF TERMINATION. Subject to SECTION 7.3, in the event of
termination of this Agreement by Eagle or Buyer pursuant to SECTION 7.1 there
shall be no liability on the part of either Eagle or Buyer or
A-38 APPENDICES
<PAGE>
their respective officers or directors hereunder, except that SECTION
5.3(B), SECTION 5.18, SECTION 7.2 and SECTION 7.3 shall survive the
termination.
7.3 TERMINATION FEE; EXPENSES.
(a) TERMINATION FEE. If this Agreement is terminated at such
time that this Agreement is terminable pursuant to one (but not both) of (A)
SECTION 7.1(f)(i) or (ii), or (B) SECTION 7.1(g)(i) or (ii), then the breaching
party shall promptly (but no later than three (3) business days after receipt of
notice from the non-breaching party) pay to the non-breaching party in cash an
amount equal to all documented out-of-pocket expenses and fees incurred by the
non-breaching party (including, without limitation, fees and expenses payable to
all legal, accounting, financial, public relations and other professional
advisors arising out of, in connection with or related to the Merger or the
transactions contemplated by this Agreement) not in excess of $250,000;
PROVIDED, HOWEVER, that, if this Agreement is terminated by a party as a result
of a willful breach by the other party, the non-breaching party may pursue any
remedies available to it at law or in equity and shall, in addition to its
documented out-of-pocket expenses and fees (which shall be paid as specified
above and shall not be limited to $250,000), be entitled to recover such
additional amounts as such non-breaching party may be entitled to receive at law
or in equity.
(b) ALTERNATIVE TERMINATION FEE. If this Agreement is
terminated at such time that this Agreement is terminable pursuant to Section
7.1(e), then Eagle shall pay to Buyer, in immediately available funds at the
time of the termination of this Agreement, $750,000.
(c) EXPENSES. The parties agree that the agreements contained
in this SECTION 7.3 are an integral part of the transactions contemplated by
this Agreement and constitute liquidated damages and not a penalty. If one party
fails to promptly pay to any other party any fee due hereunder, the defaulting
party shall pay the costs and expenses (including legal fees and expenses) in
connection with any action, including the filing of any lawsuit or other legal
action, taken to collect payment, together with interest on the amount of any
unpaid fee at the publicly announced prime rate as published in the Wall Street
Journal (Midwest Edition) from the date such fee was required to be paid.
7.4 AMENDMENT. Subject to compliance with applicable law, this
Agreement may be amended by the parties hereto, by action taken or authorized by
their respective Boards of Directors, at any time before or after approval of
the matters presented in connection with the Merger by the shareholders of
Eagle; PROVIDED, HOWEVER, that after any approval of the transactions
contemplated by this Agreement by the shareholders of Eagle, there may not be,
without further approval of such shareholders, any amendment of this Agreement
that changes the amount or the form of the consideration to be delivered to the
holders of
A-39 APPENDICES
<PAGE>
Eagle Common Stock hereunder other than as contemplated by this Agreement.
This Agreement may not be amended except by an instrument in writing signed
on behalf of each of the parties hereto.
7.5 EXTENSION; WAIVER. At any time before the Effective Time, the
parties hereto, by action taken or authorized by their respective Board of
Directors, may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(b) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto, and (c) waive compliance
with any of the agreements or conditions contained herein; PROVIDED, HOWEVER,
that after any approval of the transactions contemplated by this Agreement by
the shareholders of Eagle, there may not be, without further approval of such
shareholders, any extension or waiver of this Agreement or any portion thereof
which reduces the amount or changes the form of the consideration to be
delivered to the holders of Eagle Common Stock hereunder other than as
contemplated by this Agreement. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party, but such extension or waiver or
failure to insist on strict compliance with an obligation, covenant, agreement
or condition shall not operate as a waiver of, or estoppel with respect to, any
subsequent or other failure.
ARTICLE VIII
GENERAL PROVISION
8.1 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. None of
the representations, warranties, covenants and agreements in this Agreement (or
in any instrument delivered pursuant to this Agreement, which shall terminate in
accordance with its terms) shall survive the Effective Time, except for those
covenants and agreements contained herein which by their terms apply in whole or
in part after the Effective Time. Without by implication limiting the foregoing,
none of the directors or officers of the parties hereto shall have any liability
for any of the representations, warranties, covenants and agreements contained
herein.
8.2 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation), mailed by registered or certified mail (return receipt requested)
or delivered by an express courier (with confirmation) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
If to Buyer addressed to:
First Busey Corporation
102 E. Main, Suite 102
Urbana, Illinois 61801
Attention: Douglas C. Mills, Chairman of the Board
and
Chief Executive Officer
Telephone: (217) 365-4512
A-40 APPENDICES
<PAGE>
Facsimile: (217) 365-4592
with a copy to:
Mark J. Kneedy, Esq.
Chapman and Cutler
111 West Monroe
Chicago, Illinois 60603
Telephone: (312) 845-3000
Facsimile: (312) 701-2361
If to Eagle, addressed to:
Eagle BancGroup, Inc.
301 Fairway Drive
Bloomington, Illinois 61701
Attention: Donald L. Fernandes, President and
Chief Executive Officer
Telephone: (309) 663-6345
Facsimile: (309) 663-8763
with a copy to:
Christopher J. Zinski, Esq.
Schiff Hardin & Waite
6600 Sears Tower
Chicago, Illinois 60606
Telephone: (312) 258-5548
Facsimile: (312 ) 258-5600
8.3 INTERPRETATION. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a section of or
exhibit or schedule to this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation." No provision of this Agreement shall be construed to require Eagle,
the Eagle Subsidiaries, Buyer or Buyer Subsidiaries or affiliates to take any
action that would violate any applicable law, rule or regulation.
8.4 COUNTERPARTS. This Agreement may be executed in counterparts, all
of which shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each of the parties and
delivered to the other parties, it being understood that all parties need not
sign the same counterpart.
8.5 ENTIRE AGREEMENT. This Agreement (including the documents and the
instruments referred to herein) constitutes the entire agreement and supersedes
all prior agreements and understandings, both written and oral, among the
parties hereto with respect to the subject matter hereof.
A-41 APPENDICES
<PAGE>
8.6 GOVERNING LAW. This Agreement and the exhibits attached hereto
shall be governed and construed in accordance with the laws of the State of
Illinois, without regard to any applicable conflicts of law.
8.7 SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If, however, any
provision of this Agreement is declared invalid or unenforceable by a court of
competent jurisdiction, then the parties hereto shall in good faith amend this
Agreement to include an alternative provision that accomplishes a similar
result.
8.8 PUBLICITY. Except as otherwise required by applicable law or the
rules of The Nasdaq Stock Market or any other applicable securities exchange,
neither Eagle nor Buyer shall, nor shall Eagle or Buyer permit the Eagle
Subsidiaries or any subsidiary of Buyer, respectively, to issue or cause the
publication of any press release or other public announcement with respect to,
or otherwise make any public statement concerning, the transactions contemplated
by this Agreement without the consent of the other party, which consent shall
not be unreasonably withheld.
8.9 ASSIGNMENT; THIRD PARTY BENEFICIARIES. Neither this Agreement nor
any of the rights, interests or obligations of the parties under this Agreement
shall be assigned by any of the parties hereto (whether by operation of law or
otherwise) without the prior written consent of the other parties. Subject to
the preceding sentence, this Agreement shall be binding upon, inure to the
benefit of, and be enforceable by the parties and their respective successors
and assigns. Except as otherwise specifically provided in this SECTION 8.9 and
in SECTION 5.11, this Agreement (including the documents and instruments
referred to herein) is not intended to confer upon any person other than the
parties hereto any rights or remedies hereunder.
A-42 APPENDICES
<PAGE>
IN WITNESS WHEREOF, Buyer, Acquisition Corp. and Eagle have executed
this Agreement as of the day and year hereinabove first written.
FIRST BUSEY CORPORATION
By: /s/ Douglas C. Mills
------------------------
Name: Douglas C. Mills
Title: Chairman of the Board and
Chief Executive Officer
FBC ACQUISITION CORP.
By: /s/ Douglas C. Mills
------------------------
Name: Douglas C. Mills
Title: President
EAGLE BANCGROUP, INC.
By: /s/ Donald L. Fernandes
-------------------------------
Name: Donald L. Fernandes
Title: President and Chief Executive
Officer
A-43 APPENDICES
<PAGE>
APPENDIX B - OPINION OF TRIDENT SECURITIES
APPENDICES
<PAGE>
[LETTERHEAD OF TRIDENT SECURITIES]
[FORM OF FAIRNESS OPINION]
Board of Directors
Eagle BancGroup, Inc.
301 Fairway Drive
Bloomington, IL 61701
Members of the Board:
You have requested our opinion as to the fairness, from a financial
point of view, of the consideration to be paid by First Busey Corporation
("First Busey") to the holders of the issued and outstanding shares of common
stock, $0.01 par value (the "Eagle Common Stock") of Eagle BancGroup, Inc.
("Eagle") pursuant to the Agreement and Plan of Merger dated as of June 30,
1999 (the "Agreement") by and among Eagle, First Busey, and FBC Acquisition
Corp. ("Acquisition Corp."). Unless otherwise noted, all terms used herein
will have the same meaning as defined in the Agreement.
Under the terms of the Agreement, at the Effective Time of the
Merger, each of the issued and outstanding shares of Eagle Common Stock
(other than shares held in treasury, held by any of Eagle's subsidiaries,
other than in a fiduciary capacity, available for plan share awards or
subject to existing unvested share awards under the Eagle MRP, owned by
Buyer, Acquisition Corp., or any other subsidiary of Buyer, other than in a
fiduciary capacity, and shares as to which dissenters' rights of appraisal
have been perfected under applicable provisions of Delaware Law) will be
exchanged for $25.74 of cash, and each vested option to purchase Eagle Common
Stock will be exchanged for an amount of cash equal to $25.74 less the
exercise price for such option (collectively referred to as the "Merger
Consideration"). Acquisition Corp. will be merged with and into Eagle, and
Eagle will become a wholly owned subsidiary of First Busey.
Trident Securities ("Trident"), a division of McDonald Investments,
Inc., as part of its investment banking business, is customarily engaged in
the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes.
In connection with rendering our opinion, we have reviewed and
analyzed, among other things, the following: (i) the Agreement, including the
exhibits and schedules thereto; (ii) certain publicly available information
concerning Eagle, including the Annual Reports on Form 10-K of Eagle for each
of the years in the three year period ended December 31, 1998 and the
Quarterly Report on Form 10-Q of Eagle for the quarter ended March 31, 1999;
(iii) certain publicly available information concerning First Busey,
including the Annual Reports on Form 10-K of First Busey for each of the
years in the three year period ended December 31, 1998 and the Quarterly
Report on
B-1 APPENDICES
<PAGE>
Form 10-Q of First Busey for the quarter ended March 31, 1999; (iv) certain
other internal information, primarily financial in nature, concerning the
business and operations of Eagle furnished to us by Eagle for purposes of our
analysis; (v) information with respect to the trading market for Eagle Common
Stock; (vi) certain publicly available information with respect to other
companies that we believe to be comparable to Eagle and the trading markets
for such other companies' securities; and (vii) certain publicly available
information concerning the nature and terms of certain other transactions
that we consider relevant to our inquiry. We have also met with certain
officers and employees of Eagle and First Busey to discuss the business and
prospects of Eagle and First Busey, as well as other matters we believe
relevant to our inquiry.
In our review and analysis and in arriving at our opinion, we have
assumed and relied upon the accuracy and completeness of all of the financial
and other information provided to us or publicly available, and we have
assumed and relied upon the representations and warranties of Eagle and First
Busey contained in the Agreement. We have not been engaged to, and have not
independently attempted to, verify any of such information. We have not
conducted a physical inspection or appraisal of any of the assets, properties
or facilities of Eagle nor have we been furnished with any such evaluation or
appraisal. We have also assumed that the conditions to the Merger as set
forth in the Agreement would be satisfied and that the Merger would be
consummated on a timely basis in the manner contemplated by the Agreement.
It should be noted that this opinion is based on economic and market
conditions and other circumstances existing on, and information made
available as of, the date hereof and does not address any matters subsequent
to such date. In addition, our opinion is, in any event, limited to the
fairness, as of the date hereof, from a financial point of view, of the
consideration to be received and does not address Eagle's underlying business
decision to effect the Merger or any other terms of the Merger.
We have acted as financial advisor to Eagle in connection with the
Merger and will receive from Eagle a fee for our services, a significant
portion of which is contingent upon the consummation of the Merger, as well
as Eagle's agreement to indemnify us under certain circumstances.
In the ordinary course of business, we may actively trade securities
of both Eagle and First Busey for our own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
It is understood that this opinion was prepared solely for the
confidential use of the Board of Directors and senior management of Eagle and
may not be disclosed, summarized, excerpted from or otherwise publicly referred
to without our prior written consent. Trident Securities consents to the
reproduction of this letter in Our opinion does not constitute a recommendation
to any
B-2 APPENDICES
<PAGE>
stockholder of Eagle as to how such stockholder should vote at the
stockholders' meeting held in connection with the Merger.
Based upon and subject to the foregoing and such other matters as we consider
relevant, it is our opinion that as of the date hereof, the Merger
Consideration is fair, from a financial point of view, to the stockholders of
Eagle.
Very truly yours,
TRIDENT SECURITIES,
a division of McDonald Investments, Inc.
B-3 APPENDICES
<PAGE>
APPENDIX C - EAGLE'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDING
DECEMBER 31, 1998 (INCLUDES ONLY EXHIBIT 13.1, 1998 ANNUAL REPORT TO
STOCKHOLDERS) AND QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDING JUNE 30,
1999 (EXCLUDES ALL EXHIBITS); COPIES OF THE OMITTED EXHIBITS WILL BE FURNISHED
TO YOU UPON REQUEST TO EAGLE BANCGROUP, INC., 301 FAIRWAY DRIVE, BLOOMINGTON,
ILLINOIS 61701, ATTENTION: MARILYN LOCKWOOD, ASSISTANT SECRETARY, TELEPHONE
NUMBER: (309) 663-6345.
APPENDICES
<PAGE>
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, 1998
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 18, 1999, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately $18,570,000
(825,320 shares at $22.50 per share). The per share price of $22.50 is based
on the last sale price of the common stock at March 17, 1999, as reported by
The Nasdaq Stock Market.
As of March 18, 1999, there were 1,067,456 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,
1998--Part I and II.
1999 Notice and Proxy Statement for the Annual Meeting of Stockholders
to be held on April 21, 1999--Part III
APPENDICES
<PAGE>
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business...........................................................C-1
Item 2. Properties........................................................C-32
Item 3. Legal Proceedings.................................................C-32
Item 4. Submission of Matters to a Vote of Security Holders...............C-32
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Matters..................................................C-33
Item 6. Selected Financial Data...........................................C-33
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................C-33
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk.......................................................C-33
Item 8. Financial Statements and Supplementary Data.......................C-33
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................C-34
PART III
Item 10. Directors and Executive Officers of Registrant....................C-35
Item 11. Executive Compensation............................................C-35
Item 12. Security Ownership of Certain Beneficial Owners
and Management....................................................C-35
Item 13. Certain Relationships and Related Transactions....................C-35
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K...............................................C-36
Signatures........................................................C-37
Exhibit Index.....................................................C-39
C-i APPENDICES
<PAGE>
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, 1998, Eagle had consolidated total assets of
$180,101,000 and stockholders' equity of $19,697,000. At December 31, 1998,
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, 1998, First Federal had total
assets of $178,616,000, deposit accounts of $134,722,000 and stockholders'
equity of $17,031,000.
First Federal conducts business from its main office in Bloomington,
Illinois and three full service branch offices located in Bloomington, LeRoy and
Lexington, Illinois. All three cities are located in central Illinois in McLean
County, the largest county geographically in Illinois. From Bloomington, LeRoy
is approximately 20 miles southeast and Lexington is approximately 20 miles
northeast. Both Lexington and LeRoy are adjacent to interstate highways that
circle around Bloomington. The Lexington branch opened in December, 1998, in an
office building that the branch rents from and shares with a local insurance
agency. The branch is managed by one of the insurance agents, who splits time
between the two entities. There are no other common employees between the branch
and the insurance agency and the two entities are not affiliated in any other
way.
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 100,000. Outside of
Bloomington-Normal, McLean and Dewitt Counties feature a mix of small
communities and rural areas with a population of approximately 60,000. LeRoy has
the largest population of the twenty other communities in McLean County while
Lexington is the fourth largest. The local population is projected to grow 4.5%
in the next five years which is more than double the 2% projected population
increase in the state of Illinois. No other major downstate Illinois
metropolitan area population is projected to grow more than 2.4%.
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
C-1 APPENDICES
<PAGE>
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 twenty percent 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 at
origination most residential mortgage loans and by actively pursuing commercial
loans, commercial real estate loans and direct 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.
In November, 1998, Donald L. Lambert joined First Federal as
Vice-President-Retail Banking Services. Mr. Lambert previously worked for
another local bank in a similar capacity.
First Federal competes with fourteen 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. In 1999, First Federal will celebrate its
80th year of serving the financial needs of Bloomington-Normal and McLean
County. First Federal's history and a tradition of customer service are
advantages current and future customers have 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 sold
investment products, including annuities, offered by PrimeVest Financial
Services, Inc., a specialty brokerage firm, through December 31, 1998. The
agreement between FFS and PrimeVest expired on December 31, 1998 and was not
renewed. As of January 1, 1999, FFS will sell investment products through Mutual
Service Corporation, under an agreement between FFS and Secord Asset Management.
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".
C-2 APPENDICES
<PAGE>
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):
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Average Interest & Yield/
Balance Dividends Cost
------- --------- ----
<S> <C> <C> <C>
Interest-earning assets (1):
Mortgage loans (2) $ 83,398 $ 6,252 7.50%
Indirect auto loans 18,266 1,598 8.75
Other consumer loans 11,432 1,075 9.40
Other loans 7,150 592 8.28
------- -----
Total loans 120,246 9,517 7.91
Mortgage-backed securities:
Collateralized mortgage obligations 8,765 468 5.34
Other mortgage-backed securities 19,189 1,115 5.81
Investment securities 14,857 873 5.88
Overnight and short-term investments 7,729 403 5.21
Federal Home Loan Bank stock 1,305 86 6.59
------- ------
Total interest-earning assets 172,091 12,462 7.24
Non-interest-earning assets:
Premises and equipment, net 2,789
Real estate, net 688
Other non-interest-earning assets 2,257
-------
Total assets 177,825
Interest-bearing liabilities:
Passbook accounts 15,599 549 3.52
NOW accounts 11,129 272 2.44
Money market accounts 2,081 58 2.79
Certificates of deposit 104,045 6,103 5.87
------- -----
Total deposits 132,854 6,982 5.26
FHLB advances and other borrowed funds 22,838 1,226 5.37
------- -----
Total interest-bearing liabilities 155,692 8,208 5.27
Non-interest bearing liabilities:
Non-interest bearing deposits 552
Other liabilities 1,164
-------
Total liabilities 157,408
Stockholders' equity 20,417
-------
Total liabilities and stockholders' equity $177,825
Net interest income $4,254
Interest rate spread 1.97
Net interest margin 2.47%
Average interest-earning assets to
average interest-bearing liabilities 1.11x
</TABLE>
C-3 APPENDICES
<PAGE>
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Average Interest & Yield/
Balance Dividends Cost
------- --------- ----
<S> <C> <C> <C>
Interest-earning assets (1):
Mortgage loans (2) $ 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
</TABLE>
C-4 APPENDICES
<PAGE>
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Average Interest & Yield/
Balance Dividends Cost
------- --------- ----
<S> <C> <C> <C>
Interest-earning assets (1):
Mortgage loans (2) $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
</TABLE>
- -------------------
(1) Does not include interest on loans 90 days or more past due.
(2) Includes one-to-four family, construction, multi-family and commercial
real estate loans and loans held for sale.
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
C-5 APPENDICES
<PAGE>
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):
1998 COMPARED TO 1997
<TABLE>
<CAPTION>
Rate/
Rate Volume Volume Net
---- ------ ------ ---
<S> <C> <C> <C> <C>
Interest earning-assets (1):
Mortgage loans (2) $(139) $(247) $ 5 $(381)
Indirect auto loans 34 (265) (5) (236)
Other consumer loans (73) 329 (29) 227
Other loans (6) 457 (16) 435
-----------------------------------------------------------------
Total loans (184) 274 (45) 45
Mortgage-backed securities:
Collateralized mortgage obligations (56) (381) 24 (413)
Other mortgage-backed securities (41) 314 (15) 258
Investment securities (35) 12 (1) (24)
Overnight and short-term investments (5) 274 (9) 260
Federal Home Loan Bank Stock (2) 12 - 10
-----------------------------------------------------------------
Total net change in income on
interest-earning assets (323) 505 (46) 136
Interest-bearing liabilities:
Passbook accounts (22) (8) - (30)
NOW accounts 33 85 22 140
Money market accounts (2) (10) - (12)
Certificates of deposit (38) (145) 1 (182)
---- ----- --- -----
Total deposits (29) (78) 23 (84)
FHLB advances and other borrowed funds (94) 291 (26) 171
-----------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities (123) 213 (3) 87
-----------------------------------------------------------------
Net change in net interest income $(200) $292 $(43) $49
</TABLE>
1997 COMPARED TO 1996
<TABLE>
<CAPTION>
Increase (Decrease) Due To
--------------------------
Rate/
Rate Volume Volume Net
---- ------ ------ ---
<S> <C> <C> <C> <C>
Interest earning-assets (1):
Mortgage loans (2) $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
C-6 APPENDICES
<PAGE>
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
</TABLE>
(1) Does not include interest on loans 90 days or more past due
(2) Includes one-to-four family, construction, multi-family and commercial
real estate loans and loans held for sale.
LENDING ACTIVITIES
In 1998, First Federal continued to follow the lending strategy adopted
in mid-1997 of selling at origination most residential mortgage loans,
emphasizing origination of commercial business, commercial real estate and
direct consumer loans and placing less emphasis on origination of indirect
automobile loans. This strategy was adopted to further diversify, increase the
average yield and improve the interest sensitivity of the loan portfolio by
replacing longer-term residential mortgage loans with shorter-term,
higher-yielding commercial and consumer loans. In addition, this strategy is
intended to increase non-interest income due to gains on sales of residential
mortgage loans and increased servicing income.
Prior to 1992, the loan portfolio consisted primarily of residential
mortgage loans that had been originated by First Federal. In 1992, for the first
time, First Federal sold selected residential mortgage loans, primarily
long-term, fixed-rate loans, in the secondary market. Fixed rate residential
mortgage loans with maturities of less than 15 years and adjustable rate
residential mortgage loans were generally retained in the portfolio. In 1993,
First Federal began originating indirect automobile loans through a network of
local automobile dealerships. This effort helped diversify and reduce the
interest sensitivity of the portfolio since indirect auto loans generally are
shorter term than residential mortgage loans. The balance of indirect automobile
loans increased each year through 1996.
The effects of the change in strategy in 1997 are evident in the
composition of the loan portfolio. One-to-four family residential mortgage loans
decreased over $20,800,000 while multi-family mortgage and commercial real
estate loans increased over $10,300,000, commercial business loans increased
over $6,200,000, other consumer loans increased over $2,400,000 and indirect
automobile loans decreased over $2,800,000 during 1998. At December 31, 1998,
one-to-four family residential mortgage loans comprised 48% of gross loans
compared to 63% the previous two year-ends. Indirect auto loans decreased to 14%
of gross loans at December 31, 1998 from 16% at December 31, 1997 and 22% at
December 31, 1996. Multi-family mortgage, commercial real estate and commercial
business loans comprised 25% of gross loans at December 31, 1998 compared to 11%
at December 31, 1997.
C-7 APPENDICES
<PAGE>
The following table sets forth the composition of the loan portfolio as
of the dates indicated:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997 1996
---- ---- ----
Amount Pct Amount Pct Amount Pct
------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family (1) $57,162 48.2% $77,994 62.7% $67,855 62.7%
Construction 1,947 1.6 3,009 2.4 1,183 1.1
Multi-family 11,514 9.7 5,080 4.1 1,562 1.4
Commercial real estate 10,729 9.1 6,791 5.5 3,827 3.5
------ ------ ------
Total mortgage 81,352 68.6 92,874 74.7 74,427 68.7
Indirect auto loans 16,755 14.1 19,593 15.7 23,640 21.8
Other consumer loans:
Direct auto 2,586 2.2 2,190 1.8 2,136 2.0
Home equity 8,313 7.0 5,810 4.7 4,904 4.5
Other consumer 1,170 1.0 1,643 1.3 1,479 1.4
------- ----- -----
Total other consumer 12,069 10.2 9,643 7.8 8,519 7.9
Commercial business loans 7,792 6.6 1,588 1.3 1,145 1.1
Accrued interest
receivable-all loans 638 .5 631 .5 523 .5
------- ---- ------- ---- ------- ----
Gross loans 118,606 100 124,329 100 108,254 100
Less:
Due to borrowers on
construction loans (931) (871) (610)
Deferred loan fees (109) (114) (80)
Allowance for loan losses (1,015) (935) (923)
-------- -------- --------
Net loans $116,551 $122,409 $106,641
</TABLE>
(1) Includes loans held for sale and construction loans converted to
permanent loans.
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 or to construct one-to-four family
homes located in First Federal's primary market area. Such lending includes
loans secured by detached single-family residences or condominiums and
individually owned residences in attached housing containing not more than four
separate dwelling units. Prior to 1998, one-to-four family residential mortgage
loans represented well over half of the loan portfolio and still comprise 48% of
the portfolio at December 31, 1998. Of the $162,709,000 in loans originated in
1998, $102,583,000, or 63%, were one-to-four family residential mortgage loans.
The volume of loan originations in 1998 was due to the declining rate
environment during the year. The decrease in the amount of residential mortgage
loans in the portfolio was due primarily to customers who refinanced portfolio
loans that were then sold in the secondary market.
One-to-four family residential mortgage loans have contributed
significantly to interest income and have low delinquency and loss rates. The
volume of residential mortgage loans sold in 1998 resulted in a substantial
increase in non-interest income in 1998 due to the gains on the loan sales. To
remain competitive, a variety of mortgage products are offered including fixed
or adjustable rate and term or balloon loans.
C - 8 APPENDICES
<PAGE>
Fixed-rate, fixed-term residential mortgage loans are competitively
priced based primarily on the daily rate quotes received from the various
secondary market investors to whom loans are sold. 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 Federal National Mortgage Association ('FNMA'), a government
sponsored agency, or to other private corporate investors. At December 31, 1998,
fixed-rate, fixed-term loans represented about 45% 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. 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, 1998, ARM loans represented about 40% 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
met underwriting standards were sold in the secondary market. 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
fixed-rates and fixed monthly payments (normally based on a 30 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 generally 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 fixed-rate and ARM loans, new balloon loans that
meet underwriting standards are now sold in the secondary market. About 15% of
the one-to-four family mortgage loans outstanding at December 31, 1998 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. The increase
in construction loans in 1997 was due to one loan originated to a group of
qualified local developers to finance construction of a hotel in McLean County.
This project was completed in early 1998 and the loan was converted to permanent
financing and is included with commercial real estate loans in the portfolio
composition breakdown. Residential construction 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, 1998, construction loans totaled $1,947,000, or 1.6% of
C - 9 APPENDICES
<PAGE>
gross loans. Other than the loan noted above, no other commercial construction
loans were outstanding during or at the end of 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. Increased emphasis on these types of loans in 1998
resulted in a substantial increase in such loans to $11,514,000, or 9.7% of
gross loans, at December 31, 1998. The increase related primarily to the
financing of existing, multiple-building apartment complexes.
COMMERCIAL REAL ESTATE LENDING. Commercial real estate loans also
increased significantly in 1998 to $10,729,000, or 9.1% of gross loans, at
December 31, 1998 due to increased emphasis on such loans. The increase was
primarily due to the financing of an existing local hotel complex and the
conversion of the hotel construction loan to permanent financing. 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.
Multi-family residential and 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 and loan
totals increased each year through 1996. The shift in lending strategy in 1997
resulted in total indirect auto loans of $16,755,000, or 14.1% of gross loans,
at December 31, 1998, a decrease of almost $3,000,000 from year-end, 1997 and
almost $7,000,000 from year-end, 1996. The decrease is due to less emphasis on
indirect auto loan originations and to increased competition from both national
and local lenders. First Federal continues to originate indirect auto 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 indirect
auto loans are secured by the new or used automobile purchased with loan
proceeds. 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. At December 31, 1998, loans originated from 29 local dealerships
were outstanding with the highest amount from any one dealer totaling 13% of the
total indirect auto loans.
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, 1998, four
loans
C - 10 APPENDICES
<PAGE>
totaling $31,000 were delinquent 90 days or more. No recourse is available
from dealerships on loan defaults. Net charge-offs related to indirect auto
loans decreased to $134,000 in 1998 from $187,000 in 1997.
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. These types of direct loans totaled $12,069,000, or 10.2% of gross
loans, at December 31, 1998, an increase of over $2,400,000 during the year.
Originations of these types of loans have increased following the change in
lending strategy.
Direct auto loans are originated using 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, 1998, direct auto loans outstanding totaled $2,586,000
or 2.2% 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,
1998, home equity loans and lines of credit totaled $8,313,000 or 7.0% of gross
loans. The amount of such loans has increased in each of the last three 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
$1,170,000, or 1.0% of gross loans outstanding as of December 31, 1998. 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 are emphasized under the current lending strategy though originations of
these loans will be subject to strict guidelines. As of December 31, 1998,
commercial business loans equaled $7,792,000, or 6.6% of gross loans, an
increase of over $6,200,000 from year-end, 1997. The increase relates to a
number of business projects not concentrated in any industry, business type or
location to lessen the risk. 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. Since 1997, First Federal has
originated most residential mortgage loans for sale 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,
which was about 21% of loans sold in 1998, and are not retained on loans sold to
other investors. All loans are sold without recourse. In 1998, proceeds from
sales of residential mortgage loans totaled $93,164,000. All sales in 1998 were
on a loan-by-loan basis. In 1999, changes in underwriting methods may allow for
sales of groups of loans at more beneficial pricing. No other changes in the
origination and sale of residential mortgage loans are anticipated.
C - 11 APPENDICES
<PAGE>
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 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 original share of the loan was $2,800,000. Due to
monthly principal payments and repurchase of approximately 30% of the original
participation amount by the lead lending institution, the outstanding balance at
December 31, 1998 was $1,800,000. 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. First Federal will also look to participate out portions of commercial
real estate and commercial business loans originated in house when the loan
amount exceeds the lending limit.
CONTRACTUAL PRINCIPAL REPAYMENTS. The following table sets forth
information with respect to scheduled contractual maturity of loans receivable
at December 31, 1998 (in thousands):
<TABLE>
<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 $10,454 $26,151 $20,557 $57,162
Construction 1,927 - - 1,947
Multi-family 419 6,976 4,119 11,514
Commercial real estate 1,772 8,241 716 10,729
------ ------ ------ -------
Total mortgage 14,592 41,368 25,392 81,352
Indirect auto loans 5,679 10,550 526 16,755
Other consumer loans
Direct auto 843 1,653 90 2,586
Home equity 4,634 3,077 602 8,313
Other consumer 933 232 5 1,170
------ ------ ------ -------
Total other consumer 6,410 4,962 697 12,069
Commercial business loans 3,368 4,348 76 7,792
------ ------ ------ -------
Total loans $30,049 $61,228 $26,691 $117,968
</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.
The amount of loans due after one year having predetermined interest
rates and floating or adjustable interest rates is as follows (in thousands):
Fixed $70,166
Adjustable 17,753
LOAN COMMITMENTS. At December 31, 1998, outstanding loan commitments
totaled $479,000. 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 totaled $8,826,000 at December 31, 1998. Of this amount,
$4,249,000 relates to home equity lines of credit and the remainder relates to
various commercial business and commercial real estate lines of credit. In
management's opinion, these commitments represent no more than normal lending
risk and can be funded from normal sources.
C - 12 APPENDICES
<PAGE>
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, 1998, deferred loan fees equaled $109,000. 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 $41,979,000 were serviced for others as of December 31, 1998. Servicing
income of $157,000 was recorded in 1998. 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, 1998 was approximately $2,667,000. As of the same date, First
Federal had no single borrower with loans exceeding $2,487,000.
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.
The following table sets forth information with respect to loans past
due 60-89 days and over 90 days at the dates indicated (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1998 1997 1996
---- ---- ----
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 $299 $223 $215 $103 $288 $310
Construction 85 - 100 112 - -
Multi-family - - - - - -
Commercial real estate - 129 - - - 333
--- --- --- --- --- ---
Total mortgage 384 352 315 215 288 643
Indirect auto loans
Direct auto 7 - - - 22 7
Home equity - 14 - 11 13 -
Other consumer 21 - 36 - 6 11
--- --- --- --- --- ---
Total other consumer 28 14 36 11 41 18
Commercial business loans - - - 69 81 -
--- --- --- --- --- ---
Total $456 $397 $379 $295 $459 $705
Percent of Gross Loans 0.38% 0.33% 0.31% 0.24% 0.42% 0.65%
</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, 1998, 1997 and 1996, 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
C - 13 APPENDICES
<PAGE>
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 $12,000, $9,000, and
$40,000, respectively, in 1998, 1997 and 1996. 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, 1998 and 1997, real estate owned consisted entirely
of property acquired for investment purposes. At December 31, 1998, the largest
parcel of real estate owned was 30 acres of industrial property valued at
$580,000 acquired in 1992. In 1998, First Federal transferred the land to Eagle
via dividend. Eagle then entered into a joint venture agreement with a local
developer in which Eagle agreed to contribute the land to the partnership and
the developer will provide expertise in developing such projects. Under terms of
the agreement, as parcels are developed and sold, Eagle will be repaid first
until it has received 100% of the basis of the land contributed and then the
remaining proceeds will be split between the partners. If any amounts are
borrowed in the development process, such loans will be repaid before the
remaining proceeds are split after Eagle is repaid for the land.
Eagle also paid $25,000 in 1998 for a lot in LeRoy next to another lot
already owned by First Federal. The previously owned lot was adjacent to First
Federal's LeRoy office and was held for possible expansion of the facility.
Since no plans for expansion were being considered, First Federal transferred
the lot via dividend to Eagle, who combined the parcels and contributed the land
as part of a joint venture agreement with another local developer. The developer
constructed a three unit retail center on the property and has leased two of the
three units. Eagle and the developer will share in the proceeds of the
development.
The following table sets forth information with respect to
non-performing assets (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Mortgage loans:
One-to-four family $223 $103 $310
Construction - 112 -
Multi-family - - -
Commercial real estate 129 - 333
--- --- ---
Total mortgage 352 215 643
Indirect auto loans 31 - 44
Other consumer loans
Direct auto - - 7
Home equity 14 11 -
Other consumer - - 11
--- --- ---
Total other consumer 14 11 18
Commercial business loans - 69 -
--- --- ---
Total Non-Accrual Loans 397 295 705
Real estate owned 711 633 653
Troubled debt restructuring - - -
Repossessed automobiles 27 49 76
----- --- -----
Total Non-Performing Assets $1,135 $977 $1,434
Percent of Total Assets 0.63% 0.57% 0.83%
</TABLE>
C - 14 APPENDICES
<PAGE>
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 uncollectable and of such little value that continued treatment of
the asset as an asset is not warranted. Insured institutions such as First
Federal are required to establish a prudent general allowance for loan losses
with respect to assets classified as substandard or doubtful. Assets classified
as loss are required to either be charged-off or to be offset 100% with a
specific allowance.
The following table sets forth information with respect to the
classification of assets as of December 31, 1998 (in thousands):
<TABLE>
<S> <C>
Substandard assets $186
Doubtful assets 9
Loss -
Total Classified Assets $195
----
Percent of Total Assets 0.11%
</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
collectability 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 1998 was $240,000. This provision was
deemed appropriate due to the change in composition of the loan portfolio even
though the total loans outstanding and net charge-offs both decreased in 1998.
The increase in multi-family, commercial real estate and commercial loans, which
generally carry more risk than residential mortgage loans, to 25% of gross loans
outstanding at December 31, 1998 from 11% at December 31, 1997 was the primary
reason the provision for loan losses increased in 1998. Net charge-offs
decreased to $160,000 in 1998 from $228,000 in 1997 due primarily to reduced
charge-offs of indirect auto loans. Net charge-offs related to indirect auto
loans should continue to decrease as the amount of such loans decreases.
Management believes that the allowance for loan losses at December 31, 1998 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.
C - 15 APPENDICES
<PAGE>
The following table sets forth information with respect to activity in
the allowance for loan losses for the years indicated (in thousands):
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Allowance for loan loss at beginning of period $935 $923 $907
Provision for loan losses 240 240 183
Charge-offs:
Mortgage loans:
One to four family - 7 1
Construction - - -
Multi-family - - -
Commercial real estate - - -
--- --- ---
Total mortgage - 7 7
Indirect auto loans 144 197 145
Other consumer loans
Direct auto 5 30 21
Home equity - - -
Other consumer 21 5 11
--- --- ---
Total other consumer 26 35 32
Commercial business loans - - -
--- --- ---
Total charge-offs 170 239 178
Recoveries:
Mortgage loans:
One to four family - - -
Construction - - -
Multi-family - - -
Commercial real estate - - -
--- --- ---
Total mortgage - - -
Indirect auto loans 10 10 11
Other consumer loans
Direct auto - 1 -
Home equity - - -
Other consumer - - -
--- --- ---
Total other consumer - 1 -
Commercial business loans - - -
--- --- ---
Total recoveries 10 11 11
--- --- ---
Net charge-offs (160) (228) (167)
Allowance for loan loss at end of period $1,015 $935 $923
Allowance for loan losses to gross loans
outstanding at end of period 0.86% 0.76% .85%
Net charge-offs to average loans outstanding
during the period 0.13% 0.19% 0.17%
</TABLE>
C - 16 APPENDICES
<PAGE>
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):
<TABLE>
<CAPTION>
December 31,
------------
1998 1997 1996
---- ---- ----
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 $ 292 0.51% $382 0.49% $352 0.52%
Construction 19 1.00 21 0.70 6 0.51%
Multi-family 115 1.00 51 1.00 16 1.02
Commercial real estate 89 0.83 123 1.81 127 3.32
-- --- ---
Total mortgage 515 0.63 577 0.62 501 0.67
Indirect auto loans 177 1.06 201 1.03 244 1.03
Other consumer loans
Direct auto 26 1.00 23 1.05 23 1.08
Home equity 64 0.77 29 0.50 36 0.73
Other consumer 12 1.03 29 1.77 15 1.01
-- -- --
Total other consumer 102 0.85 81 0.84 74 0.87
Commercial business loans 31 0.40 8 0.50 6 0.52
Unallocated 190 - 68 - 98 -
--- -- --
Total Allowance for Loan Loss $1,015 0.86% $935 0.76% $923 0.85%
</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, 1998. 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
C - 17 APPENDICES
<PAGE>
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, 1998, mortgage-backed securities with a book value of
$29,864,000 and a market value of $29,712,000 were held. Holdings of these
securities increased significantly in 1998 due to investment of residential loan
sale proceeds and reinvestment of funds received from U. S. government and
agency securities that matured, were called or were sold. In addition, principal
payments and sale proceeds of mortgage related securities were also reinvested
in mortgage-backed securities.
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, 1998, CMOs with a book value of $7,563,000 and a market value of $7,532,000
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,
1998, First Federal held one mortgage-related security, with a book value of
$293,000 and a market value of $291,000, that was considered high risk by virtue
of failing the stress test. To date, the OTS has not required the disposal of
the security, which has been held over 5 years.
OTHER INVESTMENT SECURITIES. First Federal also owns U.S. government
and federal agency securities, commercial paper and stock in the Federal Home
Loan Bank of Chicago. The commercial paper held was issued by U.S. corporations
and was rated A1/P1. At December 31, 1998, other investment securities held had
a book value of $12,613,000 and a market value $12,578,000.
C-18 APPENDICES
<PAGE>
The table below sets forth information with respect to the amortized
cost of investment securities at the dates indicated (in thousands):
<TABLE>
<CAPTION>
December 31.
------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Mortgage-backed securities:
Collateralized mortgage obligations $7,563 $12,467 $18,125
Other mortgage-backed $29,864 12,296 19,685
U.S. government and agencies 8,141 12,642 15,181
Other securities 3,222 395 447
FHLB stock 1,250 1,310 955
------ ------ ------
Total investments, at amortized cost $50,040 $39,110 $54,393
</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, 1998 (amounts in thousands):
<TABLE>
<CAPTION>
Over One Over Five
One Year or Less to Five Years to Ten Years
---------------- ------------- ------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Collateralized mortgage
obligations $ 35 5.64% $ - - $2,939 5.97%
Other mortgage-backed 3,505 5.71 1,014 6.54 1,045 5.47
U.S. government and agencies 1,643 5.62 - - 6,498 6.30
Other securities 2,983 5.78 - - - -
FHLB stock - - - - -
----- ----- ------
Total Investments $8,166 5.72% $1,014 6.54% $10,482 6.12%
</TABLE>
<TABLE>
<CAPTION>
Over Ten Years Total
-------------- ----------------------------------
Weighted Weighted
Carrying Average Carrying Average Market
Value Yield Value Yield Value
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Collateralized mortgage obligations $4,589 5.43% $7,563 5.64% $7,532
Other mortgage-backed 24,300 6.32 29,864 6.23 29,712
U.S. government and agencies - - 8,141 6.16 8,153
Other securities 239 2.00 3,222 5.50 3,175
FHLB stock 1,250 6.75 1,250 6.75 1,250
----- ---- ----- ---- -----
Total Investments $30,378 5.72% $50,040 6.09% $49,822
</TABLE>
C-19 APPENDICES
<PAGE>
With the exception of the U.S. government and federal agencies, as of
December 31, 1998, 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. First Federal offers a full line of 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 First Federal operates ATMs at all but
its new Lexington branch. Commercial accounts are also offered and in 1999, new
commercial demand products will be available. 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-nine 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.
C-20 APPENDICES
<PAGE>
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>
<CAPTION>
1998 1997 1996
---- ---- ----
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 $ 552 0.00% $ 786 0.00% $ 549 0.00%
NOW 11,129 2.44 6,751 1.96 5,338 1.80
Money market 2,081 2.79 2,438 2.87 2,964 2.87
Passbook 15,599 3.52 15,832 3.66 15,462 3.73
------ ------ ------
Total Demand 29,361 3.05 25,807 3.12 24.313 3.13
Certificate of Deposit Accounts:
6 months or less 7,882 5.01 8,075 5.10 9,335 4.95
7 to 12 months 22,460 5.43 23,400 5.44 27,011 5.71
13 to 24 months 20,247 5.81 20,532 5.91 18,390 6.17
25 to 36 months 21,720 6.02 22,642 6.04 27,509 5.94
37 to 60 months 14,386 6.34 13,116 6.29 12,077 6.30
Over 60 months 10,373 6.52 10,236 6.63 10,117 6.61
Jumbo 6,977 5.99 8,490 6.16 7,420 6.31
----- ----- -------
Total Certificates 104,045 5.87 106,491 5.90 111,859 5.97
------- ------- -------
Total Deposits $133,406 5.26% 106,491 5.90 136,172 5.48%
</TABLE>
Jumbo time certificates of deposit require minimum deposits of $100,000
with negotiated interest rates and terms and are not automatically renewable.
Other certificates of deposit over $100,000 are not classified as Jumbo
certificates of deposit if the interest rates and terms were the same as offered
on certificates of deposit of less than $100,000. Such certificates of deposit
can also be automatically renewed. The total of these certificates of deposit at
December 31, 1998 was $5,804,000.
The following table sets forth information with respect to the maturity of Jumbo
time certificates of deposit as of December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Amount
------
<S> <C>
Due in three months or less $1,750
Due in over three through six months 603
Due in over six through twelve months 750
Due in over twelve months 3,347
</TABLE>
In July, 1995, First Federal ended a time deposit attraction marketing
program that ran for seven months and attracted over $15,000,000 in new time
deposits. The higher rates paid on the new certificates 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, not offering special
rates at maturity on the certificates attracted as part of the marketing program
and increasing balances of lower cost demand
C-21 APPENDICES
<PAGE>
and savings deposits, have been made. The following table sets forth
information with respect to the amounts and remaining maturities of
certificates of deposit at December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Under 3 4-6 7-12 1-2 2-3 Over 3
Months months months years years years Total
------ ------ ------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Under 5% $2,769 $2,429 $4,196 $ 26 $ - $ - $9,420
5.01% to 6% 17,527 8,665 18,744 13,272 4,618 3,751 66,577
6.01% to 7% 1,770 1,393 610 4,803 1,507 2,891 13,037
Over 7.01% 3,385 3,303 - 6,559 - 166 13,413
------- ------- ------- ------- ------ ------ --------
TOTAL $25,451 $15,790 $23,550 $24,660 $6,188 $6,808 $102,447
</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. Since then, First Federal has
continued to use FHLB advances as a source of funds. In the first quarter of
1998, new advances were obtained to prefund repayment of advances that matured
in the second quarter in an effort to reduce the average cost of borrowed funds.
The new advances had an average cost 140 basis less than the maturing advances.
The average cost of all advances decreased to 5.37% in 1998 from 5.89% in 1997
and the average rate at year-end, 1998 was 5.05% compared to 5.74% at year-end,
1997.
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 or are subject to periodic
call. At December 31, 1998, all FHLB advances were fixed rate and totaling
$25,000,000. All advances had fixed maturity dates and were subject to periodic
call at various 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>
<CAPTION>
At and For the Year Ended December 31,
-----------------------------------------
1998 1997
---- ----
<S> <C> <C>
Balance on December 31 $25,000 $18,000
Highest month-end balance 27,000 21,050
Average balance during the year 22,917 17,905
Average rate during the year 5.37% 5.89%
Average rate at year-end 5.05% 5.74%
</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
1998. 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, 1998, the Company had 48 full-time and 19 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.
C-22 APPENDICES
<PAGE>
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 calendar 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.
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 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.
C-23 APPENDICES
<PAGE>
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.
CAPITAL DISTRIBUTION. Effective April 1, 1999 the OTS revised its
capital distribution regulation. Under the revised regulation, institutions that
are not subsidiaries of a savings and loan holding company can qualify for a
capital distribution without a notice or application to OTS, if they meet
certain conditions, including retaining a well capitalized designation following
the distribution and having CAMELS and compliance ratings of 1 or 2. Other
institutions either have to notify OTS or obtain the OTS's approval, depending
on the condition of the institution and the amount and nature of the capital
distribution, but such institutions may now file a schedule of proposed capital
distributions for a year at a time, rather than filing separate notices.
TB 13a. On December 1, 1998, the OTS adopted comprehensive guidance, in
the form of Thrift Bulletin 13a (TB 13a), covering interest rate risk,
investment securities and the use of financial derivatives. TB 13a replaces
seven prior OTS thrift bulletins covering these and related topics. The OTS also
updated its regulations with a new rule (effective January 1, 1999) on forward
commitments, futures transactions and financial options transactions. The new
C-24 APPENDICES
<PAGE>
rule, which is designed to work with TB 13a, establishes general requirements
applicable to all derivative instruments, sets forth responsibilities of the
board of directors and management with respect to financial derivatives and
makes clear that reducing risk exposure should be the primary reason for
entering into a derivative transaction. TB 13a provides guidelines for
evaluating an institution's risk management, identifies a set of "sound
practices" for consideration of management and describes the qualitative and
quantitative guidelines the OTS will use in assessing an institution's current
exposure to interest rate changes and its ability to manage that exposure
effectively. The OTS will use the results of its NPV model to measure an
institution's current exposure. Under TB 13a, an institution's board of
directors should establish interest rate risk limits in terms of its capital
position (its economic capital-to-assets ratio). Investment securities and
derivatives, especially those with the potential to alter significantly an
institution's risk profile, should be evaluated on the basis of their impact on
the institution's economic capital. Institutions with greater capacity to absorb
potential losses will have greater latitude in using derivatives and other
complex financial instruments.
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, 1998, 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
C-25 APPENDICES
<PAGE>
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, 1998, of
$1,250,000. 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 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, 1998, 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.
C-26 APPENDICES
<PAGE>
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, allowance for loan and lease losses (up to 1.25 percent of risk-weighted
assets) and certain unrealized gains on equity investments. 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, 1998, 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
C-27 APPENDICES
<PAGE>
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, 1998, 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 First Federal'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
C-28 APPENDICES
<PAGE>
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.
C-29 APPENDICES
<PAGE>
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
C-30 APPENDICES
<PAGE>
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
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.
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH REGISTRANT
<S> <C> <C>
Donald L. Fernandes 41 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 38 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 44 Vice President - Operations of First Federal since August,
1995. Controller of First Federal prior thereto.
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.
James E. Lyons 39 Vice President - Finance of First Federal since March,
1998. From October, 1995 to March, 1998, Assistant Vice
President of First Federal. Assistant Vice President of
Commerce Bank prior thereto.
Donald L. Lambert 38 Vice President - Retail Banking Services of First Federal
since November, 1998. Vice President - Business Development
of Pontiac National Bank From January, 1997 to November,
1998. Vice President - Farm Manager of Pontiac National
Bank prior thereto.
</TABLE>
C-31 APPENDICES
<PAGE>
ITEM 2. PROPERTIES
The Company conducts its business through four full-service offices.
The main office is located at 301 Fairway Drive, Bloomington, Illinois. All
offices are owned in fee and are unencumbered with the exception of the
Lexington branch, which opened in December, 1998 in an office building shared
with an insurance agency. The owner of the insurance agency owns the building,
which First Federal paid to renovate. First Federal signed a three year lease in
August, 1998 and has an option to renew. The Company believes that its current
facilities are adequate to meet its present and foreseeable needs.
<TABLE>
<CAPTION>
Date Net Book Value
Office Acquired December 31, 1998
- ------ -------- -----------------
(in thousands)
<S> <C> <C>
Main Office
301 Fairway Drive
Bloomington, Illinois 61701 1981 $1,213
Veterans Parkway Branch
1111 South Veterans Parkway
Bloomington, Illinois 61701 1994 1,272
LeRoy Branch
207 South East Street
LeRoy, Illinois 61752 1983 220
Lexington Branch
302 West Main Street
Lexington, Illinois 61753 1998 114
</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, 1998.
C-32 APPENDICES
<PAGE>
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 C-84 of the Corporation's
Annual Report to Stockholders for the year ended December 31, 1998.
ITEM 6. SELECTED FINANCIAL DATA
The information called for by this item is incorporated by reference
to "Financial Highlights" on page C-43 of the Corporation's Annual Report to
Stockholders for the year ended December 31, 1998.
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 C-45 through C-54 of the
Corporation's Annual Report to Stockholders for the year ended December 31,
1998.
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 C-45 through C-54 of the
Corporation's Annual Report to Stockholders for the year ended December 31,
1998.
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, 1998 are incorporated herein by reference.
<TABLE>
<CAPTION>
1998 Annual
Report Page(s)
--------------
<S> <C>
Report of Independent Auditors C-55
Consolidated Statements of Condition as of
December 31, 1998 and 1997 C-56
Consolidated Statements of Income for the Years
Ended December 31, 1998, 1997 and 1996 C-57
Consolidated Statements of Changes in Stockholders'
Equity For the Years Ended December 31, 1998,
1997 and 1996 C-58 - C-59
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998, 1997 and 1996 C-60 - C-61
Notes to Consolidated Financial Statements C-62 - C-83
</TABLE>
C-33 APPENDICES
<PAGE>
Note 13 of Notes to Consolidated Financial Statements titled "Quarterly
Financial Data" on pages C-80 and C-81 of the Corporation's 1998 Annual
Report to Stockholders for the year ended December 31, 1998 is incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
C-34 APPENDICES
<PAGE>
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
22, 1999 on pages 4 and 5 under the caption "Proposal 1 - Election of Directors"
and on page 13 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 C-31.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is presented in Eagle's
Notice and Proxy Statement dated March 22, 1999 on pages 6 through 10 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 22, 1999 on pages 2 through 4 under the
caption "Voting Securities and Principal Holders Thereof" 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 22, 1999 on page 9 under the caption
"Compensation Committee Interlocks and Insider Participations" and is
incorporated herein by reference.
C-35 APPENDICES
<PAGE>
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 C-39 of this Form 10-K are filed
herewith or are incorporated herein by reference to
other Filings.
(b) Reports on Form 8-K:
No reports on Form 8-K filed during the quarter ended
December 31, 1998.
C-36 APPENDICES
<PAGE>
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 24, 1999 By: /s/ Donald L. Fernandes
------------------------
DONALD L. FERNANDES,
President and Chief
Executive Officer
C-37 APPENDICES
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Donald L. Fernandes President, Chief Executive Officer, March 24, 1999
- ----------------------- Director, Chief Financial Officer and
DONALD L. FERNANDES Principal Accounting Officer
/s/ Gerald A. Bradley Chairman of the Board March 24, 1999
- ---------------------
GERALD A. BRADLEY
/s/ David R. Wampler Vice President and Director March 24, 1999
- --------------------
DAVID R. WAMPLER
/s/ Robert P. Dole Director March 24, 1999
- ------------------
ROBERT P. DOLE
/s/ William J. Hanfland Director March 24, 1999
- -----------------------
WILLIAM J. HANFLAND
/s/ Louis F. Ulbrich Director March 24, 1999
- --------------------
LOUIS F. ULBRICH
/s/ Steven J. Wannemacher Director March 24, 1999
- -------------------------
STEVEN J. WANNEMACHER
</TABLE>
C-38 APPENDICES
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Item Exhibit Page
---- ------- ----
<S> <C> <C>
3. Articles of Incorporation and Bylaws 3.1 Certificate on Incorporation of Registrant as
filed in Delaware on January 24, 1996 (1)
3.2 Bylaws of Registrant as adopted by the Board of
Directors of Registrant on January 25, 1996 (1)
4. Instruments defining the rights of 4.1 Specimen Stock Certificate of Registrant (1)
holders,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 (1)
10.2 Credit Agreement between Registrant and First
Federal Savings and Loan Association of
Bloomington Employee Stock Ownership Plan (1)
10.3 Eagle BancGroup, Inc. 1996 Stock Option and
Incentive Plan (2)
10.4 Eagle BancGroup, Inc. Management Development and
Recognition Plan and Trust Agreement (2)
10.5 Deferred Compensation Agreement, dated as of
September 22, 1992, between First Federal Savings
and Loan Association of Bloomington and Donald
L. Fernandes (1)
10.6 Employment Security Agreement, dated as of July 1,
1996, between the Registrant and Larry C. McClellan
10.7 Employment Security Agreement, dated as of July 8,
1996, between the Registrant and Gary L. Richardson
10.8 Employment Agreement, dated as of October 23,
1998, among Eagle BancGroup, Inc., First Federal
Savings and Loan Association of Bloomington and
Donald L. Fernandes
C-39 APPENDICES
<PAGE>
<CAPTION>
Item Exhibit Page
---- ------- ----
<S> <C> <C>
10.9 Employment Agreement, dated as of October 23,
1998, among Eagle BancGroup, Inc., First Federal
Savings and Loan Association of Bloomington and
David R. Wampler
10.10 Employment Security Agreement, dated as of
October 23, 1998, between the Registrant and
James E. Lyons
10.11 Employment Security Agreement, dated as of
November 30, 1998, between the Registrant and
Donald L. Lambert
13. Annual report to security holders 13.1 1998 Annual Report to Stockholders C-41
21. Subsidiaries of the registrant 21.1 List of subsidiaries of the Registrant
23. Consent of experts and counsel 23.1 Consent of McGladrey & Pullen, LLP
23.2 Consent of Ernst & Young LLP
27. Financial Data Schedule 27.1 Financial Data Schedule as of December 31, 1999
99. Additional exhibits 99.1 Report of Independent Auditors
</TABLE>
(1) Incorporated by reference to Exhibits filed with the Registration
Statement on Form S-1, Registration No. 333-2474.
(2) Incorporated by reference to Notice and Proxy Statement for Special
Meeting of Stockholders dated January 10, 1997, filed January 9, 1997.
The exhibits listed in the Exhibit Index on pages C-39 - C-40 of this Report
on Form 10-K for the fiscal year ended December 31, 1998 are not attached.
Copies of these exhibits are available for a nominal charge. Please contact
Marilyn Lockwood, Assistant Secretary, Eagle BancGroup, Inc., 301 Fairway
Drive, Bloomington, IL 61701, for more information.
C-40 APPENDICES
<PAGE>
EXHIBIT 13.1
EAGLE BANCGROUP, INC.
1998 ANNUAL REPORT
Eagle BancGroup, Inc. is a Holding Company for First Federal Savings & Loan
Association Bloomington, Illinois
(Front Cover)
<TABLE>
<CAPTION>
Eagle BancGroup, Inc. and subsidiary
Table of Contents
<S> <C>
Financial Highlights C-43
Management's Discussion and Analysis C-45
Independent Auditor's Report C-55
Consolidated Statements of Condition C-56
Consolidated Statements of Income C-57
Consolidated Statements of Changes in Stockholders' Equity C-58
Consolidated Statements of Cash Flows C-60
Notes to Consolidated Financial Statements C-62
Other Corporate Information C-84
</TABLE>
To Our Stockholders:
We are pleased to present to our stockholders this annual report for 1998. We
have continued to build on the theme we used in last year's report, "Opening
doors to new possibilities and Creating windows of opportunity." The
architectural look this year is reflective of the building process mentality we
have adopted. We believe it captures the spirit and philosophy of the Company
and its employees. Our goal is to create a healthy banking franchise by building
strong personal relationships within the communities we serve. Some examples of
these relationships are featured within this year's report, and we are pleased
to share them with you.
We had an exciting year in 1998 that included the opening of our new branch
office in Lexington, Illinois, dramatic growth in loan originations and
continued improvement in our earnings. These results are further evidence that
we continue to work to grow and to improve our financial performance, while
enhancing the long-term investment value for our stockholders. The positive and
aggressive approach to our business we have employed, whereby we seek out the
new possibilities and create the opportunities that will have a positive and
lasting effect on our employees, our customers, the communities we live in and
our stockholders, continues to serve us well.
C-41 APPENDICES
<PAGE>
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
1999.
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)
C-42 APPENDICES
<PAGE>
Eagle BancGroup, Inc. and Subsidiary
FINANCIAL HIGHLIGHTS
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.
<TABLE>
<CAPTION>
As of and For the Year Ended December 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA
Total assets $180,101 $171,137 $172,666 $150,974 $140,932
Cash and due from banks 1,084 1,628 1,487 1,072 1,092
Federal funds sold and
overnight deposits 7,653 3,386 5,573 2,828 1,611
Investments 49,822 38,943 53,883 53,186 42,680
Loans, net 116,551 122,409 106,641 88,786 83,589
Deposits 134,091 131,452 133,995 138,396 122,388
FHLB advances and other
borrowings 25,000 18,000 15,300 - 7,936
Total equity 19,697 20,305 22,141 11,515 9,501
SELECTED OPERATING DATA
Interest income $12,462 $12,326 $11,094 $ 9,933 $ 8,595
Interest expense 8,208 8,121 7,703 7,376 5,396
Net interest income before
provision for loan losses 4,254 4,205 3,391 2,557 3,199
Provision for loan losses 240 240 183 100 (32)
Net interest income after
provision for loan losses 4,014 3,965 3,208 2,457 3,231
Non-interest income 1,711 576 418 395 261
Non-interest expense 4,305 3,768 4,373 2,955 2,840
Income (loss) before income
taxes 1,420 773 (747) (103) 652
Income taxes 514 264 (258) (30) 222
Net income (loss) 906 509 (489) ((73) 430
PER SHARE DATA
Book value per share $18.24 $17.24 $17.00 N/A N/A
Basic earnings (loss)
per share 0.85 0.44 (0.38) N/A N/A
Diluted earnings (loss)
per share 0.83 0.44 (0.38) N/A N/A
Cash dividends per share 0.10 - - N/A N/A
</TABLE>
C-43 APPENDICES
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA
Performance Ratios (based on balance sheet averages) (1)
Return on assets 0.51% 0.30% -0.31% -0.05% 0.31%
Return on equity 4.44% 2.46% -2.85% -0.68% 4.15%
Interest rate spread 1.97% 1.99% 1.69% 1.83% 2.54%
during period (2)
Net interest margin 2.47% 2.53% 2.20% 1.85% 2.55%
during period (3)
Non-interest expense 2.42% 2.19% 2.74% 1.98% 2.06%
to assets(4)
Non-interest income to 0.96% 0.33% 0.26% 0.26% 0.19%
assets
Interest-earning assets
to interest-bearing 1.11x 1.11x 1.10x 1.01x 1.00x
liabilities
Asset Quality Ratios
Non-performing assets to 0.62% 0.54% 0.79% 0.80% 4.86%
total assets (5)
Allowance for loan losses 255.67% 316.95% 130.92% 176.80% 219.35%
to non-performing loans
Net charge-offs to 0.13% 0.19% 0.17% 0.08% 0.05%
average gross loans
Regulatory Capital and Capital Ratios (6)
Tangible capital ratio 9.59% 9.99% 9.66% 7.73% 8.20%
Core capital ratio 0.96% 9.99% 9.66% 7.73% 8.20%
Risk-based capital ratio 16.04% 16.30% 18.29% 15.78% 15.80%
Average equity to 0.51% 12.04% 10.76% 7.21% 7.55%
average assets
Equity to assets at 4.44% 11.86% 12.82% 7.63% 6.74%
end of period
</TABLE>
(1) With the exception of end of period ratios, all ratios are based on
average month-end balances during the respective periods.
(2) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost
of interest-bearing liabilities.
(3) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(4) The 1996 ratio reflects the effect of the SAIF special assessment.
(5) 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.
(6) Tangible capital, Core capital and Risk-based capital ratios relate to
First Federal only.
C-44 APPENDICES
<PAGE>
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. ("Eagle") is a non-diversified unitary savings and loan
holding company engaged in the business of managing its investments and
directing, planning and coordinating the activities of its wholly-owned
subsidiary, First Federal Savings and Loan "(First Federal"), a federally
charted savings association, and First Federal's wholly-owned subsidiary, FFS
Investment Services Inc., a service corporation that sells investment products
(collectively, "the Company").
Eagle was formed in January, 1996 and purchased all of the stock of 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.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
GENERAL. In 1998, the Company had net income of $906,000, or $.85 per share
(basic), compared to $509,000, or $.44 per share (basic), in 1997. The increase
in 1998 was primarily the result of significantly higher non-interest income,
primarily gains on sales of residential mortgage loans, partially offset by
higher non-interest expense.
NET INTEREST INCOME. Net interest income increased slightly to $4,254,000 in
1998 from $4,205,000 in 1997. Interest income increased to $12,462,000 in 1998
from $12,326,000 in 1997 while interest expense increased to $8,208,000 in 1998
from $8,121,000 in 1997. The interest rate spread, the difference between the
yield on average interest earning assets and the cost of average interest
bearing liabilities, was 1.97% in 1998 and 1.99% in 1997. The net interest
margin, net interest income divided by average interest earning assets, was
2.47% in 1998 and 2.53% in 1997. The Company experienced pressures on the spread
and margin due to declining market interest rates throughout 1998. The declining
rate environment resulted in shifts in the loan portfolio that decreased the
yield on earning assets more quickly than the benefits of the decreasing cost of
funds.
Average interest earning assets and average interest bearing liabilities both
increased over $6,000,000 in 1998 from 1997 to result in the increases in
interest income and expense. Average commercial loans increased over $13,200,000
and average direct consumer loans, primarily home equity loans, increased over
$3,200,000 as the Company emphasized higher yielding, shorter term loans
relative to traditional residential mortgage loans. Average residential mortgage
loans decreased $11,100,000 in 1998 as the low rate environment spurred
increased refinancing activity with most new residential mortgage loans sold at
origination. Overall, average loans increased over $2,200,000 while the rate
earned declined slightly to 7.91% in 1998 from 8.02% in 1997 as the loan
portfolio restructuring reduced the effects of the declining rate environment.
Average investments increased $3,900,000 in 1998 due primarily to temporary
investment of residential mortgage loan sale proceeds. The rate earned on
average investments decreased to 5.68% in 1998 from 5.95% in 1997 due to the
rate environment and the increased holdings of lower yielding, short-term
investments. Overall, the rate earned on average interest earning assets
decreased to 7.24% in 1998 from 7.43% in 1997.
The rate paid on average interest bearing liabilities also decreased in 1998 to
5.27% from 5.44% in 1997.
C-45 APPENDICES
<PAGE>
The decrease was due to both increases in demand deposit balances and a
restructuring of the Federal Home Loan Bank ('FHLB') advance portfolio. Average
deposits increased $1,300,000 as average demand deposits increased $4,000,000
while average time deposits decreased $2,400,000 in 1998 compared to 1997. The
higher percentage of demand deposits in total deposits resulted in a reduction
in the cost of average deposits to 5.26% in 1998 from 5.37% in 1997.
Average borrowed funds, all FHLB advances, increased $4,900,000 in 1998 while
the cost of the borrowings decreased to 5.37% in 1998 from 5.89% in 1997. New
advances taken out in 1998 had an average cost of 4.69% while the advances
repaid in 1998 had an average cost of 6.11%. At year-end, 1998, the average cost
of all advances was 5.05%.
At December 31, 1998, loans totaling $397,000 were contractually past due 90
days or more and were classified as non-accrual. No interest income is accrued
on such loans. Income is recognized only upon receipt of cash payments, which
totaled $28,000 in 1998. Additional income of $12,000 would have been accrued
had the loans not been past due. No other loans were contractually past 90 days
or more at December 31, 1998.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $240,000 in both
1998 and 1997. The provision is determined each year through analysis of the
loan portfolio, the allowance for loan losses, loan charge-offs and recoveries
and industry practice and experience. At December 31, 1998, the allowance for
loan losses was $1,015,000, or .86% of total loans, compared to $935,000, or
.76% of total loans, at December 31, 1997. The increase in 1998 was deemed
necessary due to changes in the portfolio mix even though total loans at
December 31, 1998 were less than at December 31, 1997. From year-end 1997 to
year-end 1998, residential mortgage loans and loans held for sale declined
$15,500,000 while commercial and commercial real estate loans increased
$10,100,000. Net charge-offs declined to $160,000 in 1998 from $228,000 in 1997.
In both years, the charge-off and recovery activity related to indirect auto
loans with the decline in net charge-offs in 1998 corresponding to a decline in
the indirect loan portfolio.
NON-INTEREST INCOME. Due to a significant increase in gains of sales of
residential mortgage loans, non-interest income increased to $1,711,000 in 1998
from $576,000 in 1997. Proceeds from sales of residential mortgage loans were
$93,164,000 in 1998 compared to $19,314,000 in 1997. Gains realized on the sales
were $1,218,000 in 1998 compared to $178,000 in 1997. Loan servicing income
increased $19,000 in 1998 due to the increased amount of serviced loans. The
increase in demand deposit accounts led to an increase in deposit account
service charges of $33,000 in 1998. Commission income earned by the Company's
service corporation brokerage subsidiary also increased $13,000 in 1998.
As a percentage of average assets, non-interest income increased to .96% in
1998 from .33% in 1997. Net of the gains on loan sales, non-interest income
was .28% of average assets in 1998 compared to .23% in 1997.
NON-INTEREST EXPENSE. Non-interest expense increased to $4,305,000 in 1998 from
$3,768,000 in 1997 due primarily to an increase in salaries and employee
benefits. Most of the $380,000 increase in salaries and employee benefits in
1998 was due to incentive payments related to the volume of residential mortgage
loans originated and sold. The remainder of the salary and employee benefit
increase was due to staff additions for the Company's new branch that opened in
December, 1998 in Lexington, Illinois. Advertising expense increased $60,000 in
1998 due to promotional expenses related to the branch opening and increased
radio and television advertising. Equipment expense increased $64,000 in 1998
related to hardware and software upgrades and the new branch. Other non-interest
expense increased $90,000 due to higher supplies, phone, postage and other
miscellaneous costs related to both the volume of mortgage loans processed and
the new branch opening.
As a percentage of average assets, non-interest expense was 2.42% in 1998
compared to 2.19% in 1997. When the loan origination incentive payments are
removed, non-interest expense was 2.23% of average assets in 1998.
INCOME TAX EXPENSE. Income tax expense increased to $514,000 in 1998 from
$264,000 in 1997 due to the increase in income before tax. The effective tax
rate was 36% in 1998 and 34% in 1997.
C-46 APPENDICES
<PAGE>
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 recapitalization special assessment which reduced
earnings $600,000, net of tax. Excluding the net effect of the special
assessment, 1996 net income was $111,000.
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 to $12,326,000 in 1997 from $11,094,000 in 1996 and
interest expense increased to $8,121,000 in 1997 from $7,703,000 in 1996.
In 1997, the Company benefited from a full year's effect of investment of the
$11,186,000 net proceeds received from the initial stock offering completed in
June, 1996. In addition, strong loan demand and efforts to restructure the loan
and investment portfolios in 1997 resulted in a $20,700,000 increase in average
loans outstanding, primarily related to residential mortgage loans. During the
second half of 1997, the Company began emphasizing originations of commercial
real estate and commercial 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 was 71% in 1997 compared to 63% in 1996. The
yield earned on average interest earning assets increased to 7.43% in 1997 from
7.19% in 1996. The yield on average loans outstanding was 8.02% in 1997 compared
to 7.89% in 1996. The yield on other interest earning assets was 5.95% in 1997
and 6.00% in 1996 and the average balance of these assets decreased $8,900,000
in 1997.
Average interest bearing liabilities increased to $149,417,000 in 1997
form$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, all FHLB advances, increased $13,500,000 while average deposits decreased
$4,100,000 in 1997 compared to 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 LOSS. 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 losses 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 balance of consumer loans decreased approximately
$3,000,000 in 1997, due largely to the Company placing 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.
C-47 APPENDICES
<PAGE>
Proceeds from the sales of securities of $25,000,000 in 1997 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 expense in 1996 was $4,373,000 including the $875,000 SAIF
recapitalization special assessment. Salaries and employee benefits increased by
$414,000 in 1997 due primarily to staff additions and normal increases in
employee costs as well as to expenses related to benefit plans implemented
following the stock conversion. Data processing expense increased $73,000 in
1997 due to one-time expenses related to converting to a new data provider and
deconverting from the previous provider. Audit and legal fees increased $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 of $289,000 in 1997 due to
the premium rate reduction following the 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 special 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.
FINANCIAL CONDITION
Total assets increased 5% to $180,101,000 at December 31, 1998 from $171,137,000
at December 31, 1997. Increases in deposits and FHLB advances were initially
used to fund commercial and consumer loan originations. Refinancing activity
throughout the last half of 1998 resulted in increased loan repayments and the
Company invested the funds in mortgage-backed and other securities.
The decline in mortgage loan rates in 1998 caused an increase in refinancing
activity that resulted in a decrease in residential mortgage loans of
$15,500,000. The reduction was due to the fact that most new residential loan
originations were sold in the secondary market. In 1998, residential loan
originations totaled $105,700,000 while proceeds of residential mortgage loan
sales were $93,164,000. Commercial and commercial real estate loans increased
$10,100,000 to result in a net decrease of $5,900,000 in total loans during
1998. Consumer loans decreased $400,000 as a decrease in indirect automobile
loans of $2,800,000 was partially offset by increases in home equity loans and
lines of credit.
Total investments increased $10,900,000 in 1998 due to investment of loan sale
proceeds and funds received from new deposits and FHLB advances. Mortgage-backed
securities increased $12,600,000 and investment securities decreased $1,700,000.
Cash and cash equivalents increased $3,700,000 in 1998 due to temporary
investment of loan sale proceeds and in preparation for the first quarter of
1999 when a larger than usual amount of certificates of deposit are scheduled to
mature.
Total deposits increased $2,600,000 in 1998 due to a $4,300,000 increase in
demand deposits and a $600,000 increase in savings deposits offset by a
$2,300,000 decrease in time deposits. The increase in demand deposits reflects
the Company's efforts to reduce the cost of funds and improve the interest rate
sensitivity of the deposit portfolio.
(MARKETING INSERT)
"THEIR COMMITMENT TO ME IS MORE THAN WINDOW DRESSING" - Jeff "Mac" McElravy,
owner of Cornerstone Construction in Bloomington.
C-48 APPENDICES
<PAGE>
Every bank will call you "friend," but the key to a good financial relationship
is trust and commitment. To earn customer confidence, First Federal Savings gets
to know them first and then grows the relationship over time.
"At First Federal Savings, I feel the respect that comes when people understand
that I know my business," says Mac McElravy, commercial customer. "When I
proposed a new business venture, they listened and gave the advice I needed. Now
I feel comfortable just stopping by anytime and kicking around a few ideas. I
know they won't go running when I mention something cutting-edge."
"When Mac comes in with a new business proposal, we do more than examine the
plan," says Dave Wampler, First Federal Savings President. "We look at the
person's philosophy and dedication. That's how we build trust and long-term
relationships with our customers."
When First Federal talks about good working relationships, it's not just a sales
pitch... it's the way they do business. Every customer relationship is built
with trust and commitment... and that makes all the difference.
"WITH SOME BANKS, OPPORTUNITY KNOCKS ONCE. BUT FIRST FEDERAL SAVINGS LEANS ON MY
DOORBELL." - Ron Brucker, owner of Brucker Farms Inc.
You don't deposit a check and then close the account. And you don't make an
investment without thinking of how it will affect your future. So why should you
choose a bank that does? First Federal Savings knows that financial success
means being available for customers every step of the way.
"Farming has its ups and downs, but I've found success by consistently giving it
my all. I need a bank that does the same. That's why I chose First Federal,"
says Ron Brucker, agri-business customer. "They not only know me and my
business, but they are also in it for the long haul."
"Ron is not just an application to us and I like to think we're more than
application takers to him," says Randy Jacobs, First Federal Savings account
representative. "We work hard to anticipate his financial needs and want to be
there whenever he needs us. It's long-term relationships like these that lead to
trust and a higher level of comfort."
The old adage says, "Success is not a goal, it's a journey." The same holds true
for financial achievements and security. That's why First Federal Savings is
committed to building a lasting relationship with its customers.
(END MARKETING INSERT)
The borrowed funds portfolio, all FHLB advances, was restructured in 1998 to
reduce the average cost of borrowed funds. The Company repaid $7,000,000 in
advances that matured in 1998 with new advances that cost, on average, over 140
basis points less. The average cost of the advance portfolio decreased from
5.74% at December 31, 1997 to 5.05% at December 31, 1998. In total, borrowed
funds increased $7,000,000 in 1998.
Stockholders' equity decreased to $19,697,000, or 10.9% of total assets, at
December 31, 1998 from $20,305,000, or 11.9% of total assets, at December 31,
1997. The decrease in equity in 1998 was due to the repurchase of additional
shares for the treasury at a cost of $1,762,000 offset by 1998 net income. Book
value per share increased to $18.24 per share at December 31, 1998 from $17.24
per share at December 31, 1997.
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 4% and tangible core capital to tangible assets of
1.5%. At December 31, 1998, the Company's savings institution subsidiary had
ratios of 16.04%, 9.59% and 9.59%, respectively, compared to ratios of 16.30%,
9.99% and 9.99%, respectively, at December 31, 1997.
C-49 APPENDICES
<PAGE>
INTEREST RATE RISK
Interest rate risk arises from the impact of changes in interest rates on the
Company's assets and liabilities. Successful management of interest rate risk
reduces the impact of such changes on the Company's operations. Interest rate
risk is managed through evaluation of the interest rate risk inherent in certain
assets and liabilities and determination of the appropriate risk level given the
Company's business plan, operating environment and capital and liquidity
requirements. Interest rate risk management guidelines are reviewed and approved
annually by the Board of Directors.
Specific strategies used to reduce interest rate risk include (i) diversifying
the loan portfolio by emphasizing origination of short-term direct consumer
loans, commercial and commercial real estate loans; (ii) selling at origination
all long-term, fixed rate and most adjustable rate residential mortgage loans;
(iii) classifying all investments as available for sale; (iv) maintaining an
investment portfolio of primarily adjustable rate and short-term, fixed rate
securities; (v) utilizing medium-term, fixed rate FHLB advances as a funding
source; and (vi) emphasizing deposit products that reduce interest sensitivity
(demand and savings deposits and long-term, fixed rate certificates).
The effects of these strategies are evident in the Company's 1998 operations.
Commercial and commercial real estate loan originations in 1998, totaling
$20,700,000, primarily mature in five years or less. Proceeds of residential
real estate loan sales exceeded $93,000,000 and the amount of residential
mortgage loans in the portfolio declined $15,500,000. All investments remain
classified as available for sale. Of the over $48,000,000 in new investments
purchased in 1998, $13,400,000 were adjustable rate and $25,300,000 matured or
were subject to call within 5 years. The FHLB advance portfolio consists of all
medium-term, fixed rate advances that carry an average cost at year-end, 1998
that is 69 basis points less than the average cost at year-end, 1997.
Demand and savings deposits grew $4,900,000 in 1998.
Interest rate sensitivity is measured quarterly by use of the Office of Thrift
Supervision ('OTS') net portfolio value ('NPV') model. Data provided by the
Company's thrift subsidiary in various regulatory reports is the primary basis
for the model, which generates estimates of the amount of and change in NPV over
a range of interest rate change scenarios. NPV is defined as the difference
between incoming and outgoing cash flows from assets, liabilities and certain
off-balance 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.
The benchmark measurements are the decline in NPV and the change in NPV ratio
given a 200 basis point shock (increase) in interest rates. The figures below,
provided by the OTS, show the changes under this scenario. The Board of
Directors has determined that the maximum allowable decline in NPV given a 200
basis point shock is 45%. The OTS figures show a decline in NPV of 10%, which is
well within the board of directors guidelines.
C-50 APPENDICES
<PAGE>
<TABLE>
<S> <C>
RISK MEASURES: 200 BP Rate Shock 10.14%
Pre-shock NPV ratio
Exposure measure: Post-shock NPV Ratio 9.47%
Sensitivity measure: Change in NPV Ratio 68 basis points
</TABLE>
<TABLE>
<CAPTION>
NPV as Percent of Present
Net Portfolio Value Value of Assets
--------------------------------------- -------------------------------
Change Dollar Dollar Percent NPV
In Rate Amount Change Change Ratio Change
------- ------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C>
+400 bp $13,482 $-4,872 -27% 8.02% -212 bp
+300 bp 15,108 -3,246 -18% 8.81% -134 bp
+200 bp 16,651 -1,793 -10% 9.47% - 68 bp
+100 bp 17,706 - 648 - 4% 9.94% - 20 bp
0 18,354 - - 10.14% -
-100 bp 18,703 349 2% 10.18% 4 bp
-200 bp 18,849 495 3% 10.11% - 3 bp
-300 bp 19,253 898 5% 10.16% 2 bp
-400 bp 19,223 869 5% 10.00% - 15 bp
</TABLE>
All changes in NPV ratios at December 31, 1998 were within the limits approved
by the Board of Directors.
The OTS measurement of interest rate risk 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 in the table provide an
indication of interest rate risk exposure at December 31, 1998 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.
MARKET RISK
Market risk arises primarily from interest rate risk inherent in the Company's
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 investments, and interest-bearing
liabilities, primarily deposits and borrowed funds, create market risk.
Evaluation of market risk is an integral component of interest rate risk
management.
The Company's exposure to market risk is lessened by not holding or using any
derivative instruments to manage interest rate risk. In addition, the Company
does not maintain a portfolio of trading account investments. At December 31,
1998, the Company did hold $3,701,000 as loans held for sale, the entire amount
of which was residential mortgage loans originated in December, 1998 that had
been sold to various secondary market investors. The loans remained on the
Company's books at year-end due to the usual delay between a loan closing and
the funding by the investor. As such, the market risk exposure on these loans
was not significant.
LIQUIDITY
Primary sources of funds are deposits, FHLB advances and principal and interest
payments on loans and mortgage-backed and investment securities. Scheduled
maturities of loans and mortgage-backed and investment securities are
C-51 APPENDICES
<PAGE>
predictable sources of funds while deposit inflows and loan and mortgage-backed
securities prepayments are greatly influenced by general interest rates,
economic conditions and competition.
Funds are invested in loans, primarily residential mortgage, commercial,
commercial real estate and direct consumer loans, and mortgage-backed and
investment securities. Loan originations totaled $162,709,000, $72,203,000 and
$63,005,000 in 1998, 1997 and 1996, respectively. Purchases of mortgage-backed
and investment securities were $48,142,000, $13,218,000 and $26,686,000 in 1998,
1997 and 1996, respectively. Net cash provided by financing activities in 1998
was $7,765,000 while $1,498,000 net cash was used by operating activities and
$2,544,000 net cash was used by investing activities.
Adequate liquidity must be maintained to ensure that sufficient funds are
available to support loan originations, deposit withdrawal demands, satisfy
other financial commitments and take advantage of investment opportunities.
Approved loan commitments totaled $479,000 and unused lines of credit equaled
$8,826,000 at December 31, 1998. Scheduled maturities of certificates of deposit
in 1999 total $64,793,000. Scheduled loan maturities and principal payments in
1999 total $30,049,000 and scheduled maturities of investment securities in 1999
total $4,630,000. In addition, an unknown amount of principal payments will be
received on mortgage-backed securities in 1999. In 1998, principal payments
totaling $9,944,000 were received on mortgage-backed securities.
The OTS requires thrifts 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 borrowed funds. The Company's savings
institution subsidiary had liquidity ratios of 14.11% and 12.07% at December 31,
1998 and 1997, 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 inflation 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.
YEAR 2000
The Year 2000 ('Y2K') computer problem has received considerable publicity as
January 1, 2000 nears. The ability of computers and computer systems to
successfully function on and after January 1, 2000 has been the subject of much
concern and speculation. All companies face many challenges in their efforts to
be Y2K compliant.
As a financial institution, the Company relies heavily on both in house and
third party data processing systems to maintain accurate loan, deposit and other
financial and corporate information and records. The Company also relies on
public and private utilities for phone and data lines, electricity, water and
other such services over which it has little, if any, control. In the event of a
Y2K failure in house or by any other service provider, the Company must be
prepared to operate as normally as possible or risk a decline in its financial
performance.
The Company formulated its initial Y2K compliance plan in September, 1997. This
plan has been expanded, revised and updated continually since then. The OTS has
and continues to monitor the compliance effort including an on-site inspection
in early 1998 and by reviewing compliance plan updates. To date the Company's
compliance plan and efforts have been approved by the OTS. A second on-site
inspection and review is scheduled for February, 1999.
C-52 APPENDICES
<PAGE>
In the fourth quarter, the Company took the following actions related to its Y2K
compliance effort: Started the initial round of software compliance testing on
the Company's primary third party data provider (following the provider's
pre-determined testing schedule for all users); continued follow-up contacts to
monitor compliance status of third party software vendors; set up testing
procedures with third party software vendors as applicable; followed up initial
contact with significant loan and deposit customers regarding their Y2K status;
and began developing a comprehensive contingency plan.
The initial round of software compliance testing on the primary third party data
provider is scheduled for completion in January, 1999. A second round of testing
is scheduled to begin in February, 1999 after review and analysis of the initial
testing by the provider and all users. The comprehensive contingency plan will
expand upon the plan briefly detailed in previous versions of the Y2K compliance
plan. Development of the contingency plan was delayed pending completion and
review of the initial round of testing.
Direct costs related to the Y2K compliance effort incurred by the Company in
1998 include $25,000 paid to the primary data provider related to the software
compliance testing and $5,000 paid to the Company's third party network
consultant for testing and certifying that in house hardware was Y2K compliant.
In 1999, additional costs related to the Y2K compliance effort will be incurred.
The third party network consultant may provide additional services at a cost not
expected to exceed $25,000. Compliance testing on other software providers will
be conducted at a cost not expected to exceed $10,000. An informational mailing
to all customers will be sent that is not expected to cost more than $5,000.
The Company also incurred indirect costs related to the Y2K compliance effort in
1998, primarily salaries and benefits for the employees involved with the
testing. In 1998, the Company estimates that approximately $40,000 of salary and
benefit expense could be allocated to the Y2K compliance effort. This amount
does not represent additional expense, rather a reallocation of expense that
would have been incurred even without the Y2K testing. In 1999, more salary and
benefit expense could be allocated to the Y2K compliance effort but total salary
and benefit expense is not expected to increase due to the Y2K compliance
effort.
In addition to the direct and indirect costs noted, the Company has also spent
over $200,000 upgrading hardware since the third quarter of 1997 related to
conversion to the current data provider, which occurred in August, 1997. In late
1998, the Company, as planned at the time of the conversion, migrated to updated
hardware to support teller operations and also converted to new teller and
platform software. These events have assisted in the Company's Y2K compliance
effort but since the data provider conversion was necessary without regard to
Y2K compliance, the costs associated with the conversion are not considered
directly related to Y2K compliance.
The Y2K problem is extremely complex and potentially impacts any computer
process. The Company believes its Y2K compliance effort will be effective.
However, since the Company relies on so many third parties for various services,
over which the Company has little or no control, no reasonable assurance can be
given that the Company will not suffer a Y2K related service interruption or
incur potentially significant unanticipated expenditures that could impact the
financial performance of the Company.
(MARKETING INSERT)
"FIRST FEDERAL SAVINGS IS PROUD TO SPONSOR THE OPPORTUNITY TO OPEN MANY WINDOWS
THROUGH SOARING EAGLES, A SPECIAL CLUB FOR CUSTOMERS AND FRIENDS %) AND OVER." -
Roberta Leake, Coordinator (Lexington)
In April, First Federal Savings will launch Soaring Eagles, their new travel
club for customers and friends 50 and over. The group, which is coordinated by
Roberta Leake, offers a wide variety of trips, seminars and social events. The
Soaring Eagles will visit such places as Amish Acres (Nappanee, IN); the Long
Grove Village Strawberry Festival; Drury Lane Theatre (Oakbrook, IL); the New
England Countryside; and the Branson Christmas Extravaganza.
C-53 APPENDICES
<PAGE>
According to Roberta, "Soaring Eagles offers worry-free travel because all the
arrangements are made for those who attend - from tipping to luggage and meals
to hotels - we take care of everything!" Roberta is assisted by Judy Schlosser
of the LeRoy branch and Mary Kay Kates, Bloomington.
This club is just another way First Federal consistently adds value to customer
relationships.
(END MARKETING INSERT)
C-54 APPENDICES
<PAGE>
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, 1998 and 1997, and the related
consolidated statements of income, statements of changes in stockholders'
equity, and cash flows for the years 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 audits. The consolidated
statements of income, stockholders' equity and cash flows of Eagle BancGroup,
Inc. and subsidiary, for the year ended December 31, 1996, 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, 1998 and 1997, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
- ---------------------------
Peoria, Illinois
January 29, 1999
C-55 APPENDICES
<PAGE>
Eagle BancGroup, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CONDITION
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----- ----
(Dollars in thousands)
<S> <C> <C>
Assets
Cash and due from banks $1,084 $1,628
- ------------------------------------------------------------------------------------------
Federal funds sold and overnight deposits 7,653 3,386
Investment securities - available for sale 11,328 13,037
Mortgage-backed securities -
available for sale 37,244 24,596
Federal Home Loan Bank ("FHLB") stock 1,250 1,310
Loans, net of allowance for loan losses:
$1,015 in 1998, $935 in 1997 112,850 121,652
Loans held for sale 3,701 757
Premises and equipment 2,819 2,834
Other assets 2,172 1,937
------- -------
Total assets $180,101 $171,137
Liabilities
Deposits $134,091 $131,452
Federal Home Loan Bank advances 25,000 18,000
Other liabilities 1,313 1,380
------- -------
Total liabilities 160,404 150,832
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 12,456 12,323
Retained earnings - substantially restricted 12,495 11,697
Unrealized loss on investment securities
available for sale, net (144) (110)
------- -------
Total stockholders' equity before treasury
stock, unearned ESOP shares and Management
Development and Recognition Plan 24,820 23,923
Treasury stock, at cost, 125,000 shares in 1997 (3,817) (2,055)
Unearned Employee Stock Ownership Plan
("ESOP") shares (730) (834)
Management Development and Recognition
Plan ("MDRP") (576) (729)
------- -------
Total stockholders' equity 19,697 20,305
------- -------
Total liabilities and stockholders' equity $180,101 $171,137
</TABLE>
See Notes to Consolidated Financial Statements.
C-56 APPENDICES
<PAGE>
Eagle BancGroup, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----- ---- ----
(Dollars in thousands except per share
data)
<S> <C> <C> <C>
Interest income:
Loans and fees on loans $ 9,517 $ 9,472 $ 7,681
Investment securities and
other interest earning assets 1,150 1,044 1,024
Mortgage-backed securities 1,583 1,738 2,358
Federal funds sold 212 72 31
------ ------ ------
Total interest income 12,462 12,326 11,094
Interest expense:
Deposits:
Passbook 549 579 577
MMDA and NOW 330 202 181
Certificates of deposit 6,103 6,285 6,673
------ ------ ------
6,982 7,066 7,431
Borrowings 1,226 1,055 272
------ ------ ------
Total interest expense 8,208 8,121 7,703
Net interest income before
provision for loan losses 4,254 4,205 3,391
Provision for loan losses 240 240 183
------ ------ ------
Net interest income after
provision for loan losses 4,014 3,965 3,208
Non-interest income:
Loan servicing 157 138 146
Gains on loans sold, net 1,218 178 68
Gains on securities sold, net 49 46 15
Other 287 214 189
------ ------ ------
Total non-interest income 1,711 576 418
Noninterest expense:
Salaries and employee benefits 2,530 2,150 1,736
Net occupancy 590 537 544
Federal deposit insurance premium 80 67 1,231
Data processing 305 322 249
Other 800 692 613
------ ------ ------
Total noninterest expense 4,305 3,768 4,373
Income (loss) before income tax
expense (benefit) 1,420 773 (747)
Income tax expense (benefit) 514 264 (258)
------ ------ ------
Net income (loss) $ 906 $ 509 $ (489)
Basic earnings (loss) per share $ 0.85 $ 0.44 $ (0.38)
Diluted earnings (loss) per share $ 0.83 $ 0.44 (0.38)
</TABLE>
See Notes to Consolidated Financial Statements.
C-57 APPENDICES
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income
------- ------- -------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ - $ - $11,677 $ (162)
Comprehensive income:
Net loss - - (489) -
Unrealized loss on securities
available for sale arising during
the period, net taxes of $85 - - - (165)
Less: Reclassification
adjustment, net of tax of $5 - - - (10)
Comprehensive income(loss)
Sale of capital stock 13 12,215 - -
Common stock acquired
by ESOP - - - -
Release of ESOP shares - - - -
Balance, December 31, 1996 13 12,215 11,188 (337)
Comprehensive income:
Net income - - 509 -
Unrealized loss on securities
available for sale arising
during the period, net taxes
of $133 - - - 257
Less: Reclassification
adjustment, net of tax of $16 - - - (30)
Comprehensive income
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 - -
---------------------------------------------------------------
Balance, December 31, 1997 13 12,323 11,697 (110)
Comprehensive income:
Net income - - 906 -
Unrealized loss on securities
available for sale arising
during the period, net taxes of $1 - - - (2)
Less: Reclassification
adjustment, net of tax of $17 - - - (32)
Purchase of 97,597 shares
for the treasury - - - -
Release of ESOP shares - 94 - -
Allocation of MDRP shares - 39 - -
Cash dividend paid - - (108) -
---------------------------------------------------------------
Balance, December 31, 1998 $ 13 $12,456 $12,495 $ (144)
---------------------------------------------------------------
</TABLE>
C-58 APPENDICES
<PAGE>
<TABLE>
<CAPTION>
Management
Development
Unearned and
Treasury ESOP Recognition
Stock Shares Plan Total
-------- -------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ - $ - $ - $11,515
Comprehensive income:
Net loss - - - (489)
Unrealized loss on
securities available
for sale arising during
the period, net taxes of $85 - - - (165)
Less: Reclassification
adjustment, net of tax of $5 - - - (10)
------
Comprehensive income(loss) (664)
------
Sale of capital stock - - - 12,228
Common stock acquired by ESOP - (1,042) - (1,042)
Release of ESOP shares - 104 - 104
Balance, December 31, 1996 - (938) - 22,141
Comprehensive income:
Net income - - - 509
Unrealized loss on
securities available for
sale arising during the
period, net taxes of $133 - - - 257
Less: Reclassification
adjustment, net of tax of $16 - - - (30)
------
Comprehensive income 736
------
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
---------------------------------------------------------------
Balance, December 31, 1997 (2,055) (834) (729) 20,305
Comprehensive income:
Net income - - - 906
Unrealized loss on
securities available for
sale arising during the
period, net taxes of $1 - - - (2)
Less: Reclassification
adjustment, net of tax of $17 - - - (32)
------
Comprehensive income 872
------
Purchase of 97,597 shares
for the treasury (1,762) - - (1,762)
Release of ESOP shares - 104 - 198
Allocation of MDRP shares - - 153 192
Cash dividend paid - - - (108)
---------------------------------------------------------------
Balance, December 31, 1998 $(3,817) $ (730) $ (576) $19,697
</TABLE>
See Notes to Consolidated Financial Statements.
C-59 APPENDICES
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ 906 $ 509 $(489)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Provision for loan losses 240 240 183
Provision for depreciation 315 284 288
Provision for deferred income taxes (36) (114) (4)
Amortization of premiums and accretion of
discounts on investment securities (106) (11) 74
Gains on securities sold, net (49) (46) (15)
Gains on loans sold, net (1,218) (178) (68)
Compensation expense related to ESOP shares 198 200 104
Compensation expense related to MDRP shares 192 123 -
Proceeds from sale of loans
originated for sale 93,164 19,314 10,844
Loans originated for sale (94,890) (19,009) (9,209)
Decrease (increase) in accrued
interest receivable (47) 43 (130)
(Decrease) increase in accrued
interest payable 24 (5) 94
Decrease (increase) in other assets (140) 232 (65)
(Decrease) increase in other liabilities (51) 150 44
------ ------ ------
Net cash provided by (used in)
operating activities (1,498) 1,732 1,651
Cash Flows from Investing Activities
Investment securities
Purchases (23,274) (5,610) (15,109)
Proceeds from sales 25,149 8,173 10,602
Mortgage-backed securities
Purchases (24,868) (7,608) (11,667)
Proceeds from sales 2,268 16,790 9,749
Principal collected 9,944 3,799 5,625
Sale (purchase) of FHLB stock 60 (355) (261)
Principal collected on loans 76,374 37,167 34,270
Loans originated, net (67,819) (53,194) (53,796)
Purchases of premises and equipment (353) (229) (65)
Net sales (purchases) of other real estate (25) 20 (8)
------ ------ ------
Net cash used in investing activities (2,544) (1,047) (20,570)
</TABLE>
(Continued on page C-61)
C-60 APPENDICES
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Financing Activities
Increase in savings accounts, demand
deposits and NOW accounts, net $ 4,923 $ 1,801 $ 1,520
Increase (decrease) in certificate
accounts, net (2,288) (4,337) (5,927)
Proceeds from FHLB advances 14,000 29,750 36,311
Principal payments on FHLB advances (7,000) (27,050) (21,011)
Purchase of MDRP shares - (840) -
Purchase of treasury stock (1,762) (2,055) -
Dividends paid (108) - -
Proceeds from the sale of capital stock - - 11,186
------ ------ ------
Net cash (used in) provided by
financing activities 7,765 (2,731) 22,079
(Decrease) increase in cash and
cash equivalents 3,723 (2,046) 3,160
Cash and cash equivalents:
Beginning of year 5,014 7,060 3,900
End of year $ 8,737 $ 5,014 $ 7,060
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest on deposits $ 6,978 $ 7,074 $ 7,425
Interest on borrowed funds 1,206 1,053 184
Income taxes 714 210 -
</TABLE>
See Notes to Consolidated Financial Statements.
C-61 APPENDICES
<PAGE>
Eagle BancGroup, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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. 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.
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), which was issued in June 1997. SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components, but has no effect on the Company's net income or total
stockholders' equity. SFAS 130 requires unrealized gains and losses on the
Company's available-for-sale securities, which prior to adoption were reported
separately in stockholder's equity, to be included in comprehensive income.
Prior year financial statements have been reclassified to conform to the
requirements of SFAS 130.
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards 131, "Disclosures about Segments of an Enterprise and Related
Information," (SFAS 131). SFAS 131 requires a publicly held entity to disclose
financial and other descriptive information about all of its reportable
segments. The Statement requires disclosure of net income or loss, certain
specific revenue and expense items, and assets for each segment presented and
disclosure of a reconciliation of this information with the corresponding
amounts recognized in the financial statements of the entity. This statement
also requires disclosure of other pertinent segment information, including the
products and services provided by its operating segments and the method by which
the operating segments were determined.
Based on the Company's approach to decision making, it has decided that its
business is comprised of a single segment and that SFAS 131 therefore has no
impact on it consolidated financial statements.
C-62 APPENDICES
<PAGE>
Eagle BancGroup, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and fair
value of investments and mortgage-backed securities. 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.
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 accumulated
comprehensive income net of the related deferred tax effect in the statement of
stockholders' equity. 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.
First Federal originates qualifying mortgage loans for sale in the secondary
market. The majority of these loans are sold with servicing released.
C-63 APPENDICES
<PAGE>
Eagle BancGroup, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 an done-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 1998, 1997 or 1996.
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.
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
Basic earnings per share is computed by dividing net income for the year by
the weighted average number of shares outstanding of 1,066,003, 1,146,538 and
1,302,705 for 1998, 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 dilutive potential
common shares outstanding. Dilutive potential common shares 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
dilutive potential common shares 1,088,654, 1,152,169 and 1,302,705 for 1998,
1997 and 1996, respectively.
C-64 APPENDICES
<PAGE>
Eagle BancGroup, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Derivative Instruments and Hedging Activities. In June 1998, the
Financial Accounting Standards Board issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" which is required to be adopted
for all fiscal quarters of fiscal years beginning after June 15, 1999. The
Statement permits early adoption as of the beginning of any fiscal quarter after
its issuance. The Statement will require the bank to recognize all derivatives
on the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income.
Management does not anticipate that the adoption of the new Statement will have
a significant effect on the Bank's financial statement.
NOTE 2. INVESTMENTS
Investment securities and mortgage-backed securities available for sale are
summarized below:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
December 31, 1998
Investment securities:
U.S. Treasury and agencies $ 8,141 $ 18 $ 6 $ 8,153
Other securities 3,222 2 49 3,175
------- ------- ------- -------
Total investment securities 11,363 20 55 11,328
Mortgage-backed securities:
Collateralized mortgage
obligations 7,563 1 32 7,532
Other mortgage-backed
securities 29,864 11 163 29,712
------- ------- ------- -------
Total mortgage-backed
Securities 37,427 12 195 37,244
------- ------- ------- -------
Total $48,790 $ 32 $ 250 $48,572
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
</TABLE>
C-65 APPENDICES
<PAGE>
Eagle BancGroup, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair value of investment and mortgage-backed securities
at December 31, 1998, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because mortgage-backed
securities may be called or prepaid without penalty and therefore they are not
included in the maturity categories in the following summary. Equity securities
are not included in the maturity categories in the following maturity summary,
since they do not have maturity dates.
<TABLE>
<CAPTION>
Available for Sale
------------------
Amortized Fair
Cost Value
--------- -------
(Dollars in thousands)
<S> <C> <C>
Due within one year $ 4,626 $ 4,630
Due after one year through five years - -
Due after five through ten years 6,498 6,506
Due after ten years - -
Mortgage-backed securities 37,427 37,244
Equity securities 239 192
------- -------
Total $48,790 $48,572
</TABLE>
Realized gains and losses related to sales of investments were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Realized gains $ 61 $102 $ 49
Realized losses (12) (56) (34)
---- ---- ----
Net gain $ 49 $ 46 $ 15
</TABLE>
Investments with a carrying value of approximately $5,049,000 and $6,450,000
as of December 31, 1998 and 1997, respectively, were pledged to secure public
deposits and for other purposes as required or permitted by law.
C-66 APPENDICES
<PAGE>
Eagle BancGroup, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. LOANS
Loans consist of the following :
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Residential mortgage loans $ 66,922 $ 85,326
Commercial real estate loans 10,729 6,791
Consumer loans 28,824 29,236
Commercial installment loans 7,792 1,588
Accrued interest receivable 638 631
-------- --------
Gross loans 114,905 123,572
Less:
Deferred loan fees 109 114
Allowance for loan losses 1,015 935
Undisbursed portion of loan proceeds 931 871
-------- --------
Loans, net $112,850 $121,652
</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, 1998 and 1997 totaled approximately $41,979,000 and $38,370,000,
respectively.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 935 $ 923 $ 907
Provision for losses 240 240 183
Charge-offs (170) (239) (178)
Recoveries 10 11 11
------ ----- -----
Balance, December 31 $1,015 $ 935 $ 923
</TABLE>
C-67 APPENDICES
<PAGE>
Eagle BancGroup, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the normal course of business, loans are made to directors, executive
officers and principal stockholders of the Company and of parties which the
Company or its directors, executive officers, and stockholders have the ability
to significantly influence its management or operating policies (related
parties). The terms of these loans, including interest rates and collateral, are
similar to those prevailing comparable transactions with other customers and do
not involve more than a normal risk of collectibilty. Activity associated with
loans (in thousands) made to related parties during 1998 was as follows:
<TABLE>
<S> <C>
Balance, January 1 $ 1,004
New loans 712
Repayments (862)
-------
Balance, December 31 $ 854
</TABLE>
NOTE 4. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Land $ 721 $ 775
Buildings 3,048 2,935
Furniture and equipment 2,558 2,326
------ ------
6,327 6,036
Less allowance for depreciation 3,508 3,202
------ ------
$2,819 $2,834
</TABLE>
NOTE 5. DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Passbook accounts $ 15,756 $ 15,130
NOW accounts 15,866 11,569
Certificate accounts 90,193 96,614
Time deposits over $100,000 12,254 8,121
-------- --------
134,069 131,434
Accrued interest payable 22 18
-------- --------
$134,091 $131,452
</TABLE>
C-68 APPENDICES
<PAGE>
Eagle BancGroup, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1997, certificates of deposit have scheduled maturity dates
as follows (in thousands):
<TABLE>
<CAPTION>
Amount
Year of Maturity ------
<S> <C>
1999 $ 64,793
2000 24,660
2001 6,188
2002 4,204
2003 and thereafter 2,602
--------
$102,447
</TABLE>
NOTE 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, 1998, all FHLB advances were fixed amounts.
Future payments at December 31, 1998 for all FHLB advances were as follows (in
thousands):
<TABLE>
<CAPTION>
Amount
Year of Maturity ------
<S> <C>
1999 $ -
2000 -
2001 -
2002 11,000
2003 -
Thereafter 14,000
-------
$25,000
</TABLE>
A summary of FHLB advances follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Balance on December 31 $25,000 $18,000
Highest month-end balance 27,000 21,050
Average balance during the year 22,917 17,905
Average rate during the year 5.37% 5.89%
Average rate at year-end 5.05% 5.74%
</TABLE>
C-69 APPENDICES
<PAGE>
Eagle BancGroup, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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.
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, 1998 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.
The federal income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Current $ 550 $ 378 $(254)
Deferred (36) (114) (4)
----- ----- -----
$ 514 $ 264 $(258)
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
income tax rate follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory rates 35% 35% 35%
Other 1 (1) -
--- --- ---
36% 34% 35%
</TABLE>
C-70 APPENDICES
<PAGE>
Eagle BancGroup, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan and real estate losses $ 345 $318
State net operating loss carryforwards 290 345
Unrealized loss on securities available for sale 75 57
Deferred compensation 110 114
MDRP accrual 42 50
Other 35 54
----- ----
Total deferred tax assets 897 938
Valuation allowance for deferred tax assets 154 225
--- ---
Total deferred tax assets, net valuation allowance 743 713
Deferred tax liabilities:
Premises and equipment (228) (250)
Other (90) (75)
----- -----
Total deferred tax liabilities (318) (325)
----- -----
Net deferred tax assets $ 425 $ 388
</TABLE>
NOTE 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 Core 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, 1998,
that First Federal meets all capital adequacy requirements to which it is
subject.
C-71 APPENDICES
<PAGE>
Eagle BancGroup, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1998, 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>
<CAPTION>
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, 1988
Tangible Capital to
Tangible Assets $17,135 9.59% $ 2,681 1.50% N/A N/A
Core Capital to
Tangible Assets $17,135 9.59% $ 7,150 4.00% $ 8,938 5.00%
Tier I Capital to
Risk Weighted Assets $17,135 15.15% N/A N/A $ 6,787 6.00%
Total Capital to
Risk Weighted Assets $18,150 16.04% $ 9,050 8.00% $11,312 10.00%
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% $ 6,747 4.00% $ 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%
</TABLE>
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
C-72 APPENDICES
<PAGE>
Eagle BancGroup, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1999, First Federal's allowable capital distribution amount was
approximately $5,900,000.
NOTE 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 terminated the plan as of March
31, 1998. Subject to the IRS and Department of Labor approvals, final
distribution to plan participants will be made in 1999.
During the year ended December 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 132, " Employer's Disclosures about Pensions
and Other Postretirement Benefits - an amendment of SFAS 87, 88 and 106" (SFAS
132). SFAS 132 revises employer's disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans. It standardizes the disclosure requirements for pensions and
other postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis and eliminates certain disclosures.
Prior period disclosures have been restated.
Change in Benefit Obligation:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Assumptions at beginning of year:
Discount rate 7.50% 7.50%
Average rate of compensation increase - -
Assumptions at end of year:
Discount rate 6.75% 7.50%
Average rate of compensation increase - -
Benefit obligation at beginning of year:
Service cost $ 631 $ 562
Interest cost - 19
Actuarial (gain)/loss including effect of
change in assumptions 23 32
Benefits paid (4) (25)
------ ------
Benefit obligation at end of year 693 631
</TABLE>
C-73 APPENDICES
<PAGE>
Eagle BancGroup, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Change in Plan Assets:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Fair value of plan assets at beginning of year $ 543 $ 473
Actual return on plan assets (net of expenses) 41 43
Employer contributions 125 52
Benefits paid (4) (25)
----- -----
Fair value of plan assets at end of year $ 705 $ 543
</TABLE>
Information on Funded Status and Amounts Recognized
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Discount rate 6.75% 7.50%
Average rate of compensation increases - -
Accumulated benefit obligation $ 693 $ 613
----- -----
Projected benefit obligation 693 631
Fair value of assets 705 543
----- -----
Funded status 12 (87)
Unrecognized net actuarial (gain)/loss 116 86
Unrecognized prior service cost 2 3
Unrecognized transition (asset)/obligation (17) (18)
----- -----
Net amount recognized $ 113 $ (16)
</TABLE>
Components of Net Periodic Benefit Cost:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Discount rate 7.50% 7.50% 7.50%
Average rate of compensation increases - - -
Expected rate on assets 7.50% 7.50% 7.50%
Service cost $ - $ 19 $ 19
Interest cost 43 43 42
Expected return on plan assets (48) (37) (35)
Net amortization and deferral amounts:
</TABLE>
C-74 APPENDICES
<PAGE>
Eagle BancGroup, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Unrecognized transition obligation/ (asset) (1) (1) (1)
Prior service cost 1 1 1
Amortization of (gains) / losses - 4 7
------ ------ ------
Total 0 4 7
------ ------ ------
Net periodic pension expense $ (5) $ 29 $ 33
</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 1998, 1997 and 1996. 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 1998, 1997 and 1996 totaled
$29,000, $26,000 and $22,000, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) - In conjunction with Eagle's subscription
stock offering, an ESOP was created and 104,216 shares of Eagle's stock were
purchased for future allocation to employees. The purchase was funded with a
loan from Eagle. Shares will be allocated to all eligible employees annually on
the last day of the fiscal year based on a pro rata share of total compensation
for the year. Benefits vest in full upon completion of six years of qualified
service. Compensation expense for the ESOP was $198,000, $200,000 and $104,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
The following table reflects the shares held by the ESOP:
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Shares allocated to participants 31,266 20,844
Unallocated shares 72,950 83,372
---------- ----------
Total 104,216 104,216
Fair value of unallocated shares $1,477,238 $1,573,646
</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.
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,
1998, 46,892 shares have been awarded to officers and directors. MDRP
compensation expense was $192,000 and $123,000 for the years ended December 31,
1998 and 1997, respectively. First Federal accounts for its MDRP in accordance
with
C-75 APPENDICES
<PAGE>
Eagle BancGroup, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998, 117,243 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.
A summary of the status of the Company's stock option plan as of December 31,
1998 and the changes during the year is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 110,729 $15.48 - $ -
Granted 6,514 20.88 110,729 15.48
Exercised - - - -
-------- ------ ------- ------
Outstanding at end of year 117,243 $15.78 110,729 $15.48
Exercisable at end of year 22,146 -
Weighted-average fair value per
option of options granted during
the year $ 8.03 $ 4.57
</TABLE>
The following table presents certain information with respect to stock option
granted:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
Weighted-
Average
Remaining Weighted-Average
Number Contractual Exercise
Outstanding Life Price
Exercise Prices ----------- ----------- ----------------
<S> <C> <C> <C>
$15.125 84,679 8.12 $15.125
$16.625 26,050 8.66 16.625
$20.875 6,514 9.22 20.875
</TABLE>
C-76 APPENDICES
<PAGE>
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 to the pro forma amounts shown below. There is no difference for 1997
since no options were vested as of December 31, 1997.
<TABLE>
<CAPTION>
1998
----
<S> <C>
Net income
As reported $ 906
Pro forma 856
Basic earnings per common share
As reported $0.85
Pro forma 0.80
Diluted earnings per common share
As reported $0.83
Pro forma 0.79
</TABLE>
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, this 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>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Number of options granted 6,514 110,729
Risk-free interest rate 4.65% 5.69%
Expected life, in years 10 10
Expected volatility 32.6% 16.6%
Expected dividend yield 2.0% 2.0%
Estimated fair value per option $8.03 $4.57
</TABLE>
NOTE 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.
C-77 APPENDICES
<PAGE>
Eagle BancGroup, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
FHLB Advances: 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, 1998 are
comparable to terms available for new commitments at that date.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1998 1997
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
...... ..... ...... .....
<S> <C> <C> <C> <C>
(Dollars in thousands)
Assets:
Cash on hand and in other
institutions $ 1,084 $1,084 $ 1,628 $ 1,628
Federal funds sold and
overnight deposits 7,653 7,653 3,386 3,386
C-78 APPENDICES
<PAGE>
Eagle BancGroup, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investment securities,
mortgage-backed securities
and FHLB stock 49,822 49,822 38,943 38,943
Loans, net 116,551 117,863 122,409 123,141
Liabilities:
Deposits $134,091 $135,072 $131,452 $131,744
Borrowed funds 25,000 24,938 18,000 17,811
</TABLE>
NOTE 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.
NOTE 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 $479,000 and $567,000 at December 31, 1998 and 1997,
respectively. In addition, First Federal committed to approximately
$8,826,000 and $2,841,000 of lines of credit, which were undrawn at December
31, 1998 and 1997, 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.
C-79 APPENDICES
<PAGE>
Eagle BancGroup, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1998 and 1997 follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands except per share data)
<S> <C> <C> <C> <C>
1998
Operating summary:
Interest income $ 3,093 $ 3,104 $ 3,067 $ 3,198
Interest expense 2,057 2,052 2,045 2,054
------- ------- ------- -------
Net interest income 1,036 1,052 1,022 1,144
Provision for loan losses 60 60 60 60
------- ------- ------- -------
Net interest income after
Provision for loan losses 976 992 962 1,084
Non-interest income 319 333 396 664
Non-interest expense 984 1,000 1,048 1,274
------- ------- ------- -------
(Loss) income before income tax 311 325 310 474
Income tax (benefit) expense 110 123 200 171
------- ------- ------- -------
Net (loss) income $ 201 $ 202 $ 200 $ 303
Per share data:
Basic earnings per share $ 0.18 $ 0.19 $ 0.19 $ 0.29
Diluted earnings per share 0.18 0.18 0.19 0.28
Dividends paid 0.00 0.00 0.00 0.10
Book value 17.56 17.82 18.17 18.24
Selected balance sheet averages:
Assets $177,718 $177,867 $175,122 $180,591
Investment securities 49,225 54,180 52,416 51,527
Loans 122,423 118,059 117,380 123,145
Interest bearing deposits 131,517 132,028 133,237 134,596
Borrowed funds 23,623 22,967 20,000 24,782
Stockholders' equity 20,508 20,834 20,387 19,945
</TABLE>
C-80 APPENDICES
<PAGE>
Eagle BancGroup, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
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>
C-81 APPENDICES
<PAGE>
Eagle BancGroup, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. PARENT COMPANY INFORMATION
Consolidated financial information for Eagle BancGroup, Inc. (parent company
only) follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Condensed statements of condition
Assets:
Cash on deposit with bank subsidiary $ 607 $ 89
Investment securities available for sale
at fair value, cost, $738 in 1998;$2,630 in 1997 690 2,649
Investment in subsidiary 17,024 16,722
Loans, net 2,214 -
First Federal ESOP loan 730 834
Real estate owned 667 -
Other assets 72 22
------- --------
Total assets $22,004 $20,316
Liabilities and stockholders' equity:
Liabilities $ 2,307 $ 11
Stockholders' equity 19,697 20,305
------- --------
Total liabilities and stockholders' equity $22,004 $20,316
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Condensed statements of income
Interest income on loans $ 51 $ - $ -
Interest income on investments $ 111 204 154
Interest income on ESOP loan 69 77 43
------- ------ -----
Total interest income 231 281 197
Non-interest income 10 5 9
Non-interest expense 122 146 15
------- ------ -----
Total non-interest expense (112) (141) (6)
Income before income tax expense 119 140 191
Income tax expense 41 47 65
------- ------ -----
Income before equity in undistributed net
income (loss) of subsidiary 78 93 126
Equity in undistributed net income
(loss) of subsidiary 828 416 (615)
------- ------ -----
Net income (loss) $ 906 $ 509 $(489)
</TABLE>
C-82 APPENDICES
<PAGE>
Eagle BancGroup, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Condensed statements of cash flows
Operating activities:
Net income (loss) $ 906 $ 509 $ (489)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Amortization of investment premiums
and discounts, net (1) (2) -
Gains on securities sold, net (10) (5) -
Undistributed (earnings) loss of Subsidiary (828) (416) 615
Release of ESOP shares 94 96 -
Allocation of MDRP shares 192 123 -
Decrease (increase) in interest receivable 15 34 (105)
(Decrease) in other assets (65) (33) -
(Decrease) increase in other liabilities 2,346 (7) 61
------- ------ -------
Net cash provided by operating activities 2,649 299 82
Investing activities:
Purchases of available for sale securities (638) (2,133) (6,030)
Proceeds from sale of available for sale
securities 2,510 3,536 2,036
Loan originations and purchases (2,225) - -
Principal collected on loans 11 - -
Loan to ESOP for stock purchase - - (1,042)
Loan repayment 104 208 -
Purchase of real estate held for investment (25) - -
------- ------ -------
Net cash provided by (used in)
investing activities (263) 1,611 (5,036)
Financing activities:
Purchase MDRP stock - (840) -
Purchase of treasury stock (1,762) (2,055) -
Proceeds from sale of common stock - - 12,228
Purchase of First Federal common stock - - (6,200)
Dividends paid (108) - -
------- ------ -------
Net cash (used in) provided by
financing activities (1,870) (2,895) 6,028
------- ------ -------
(Decrease) increase in cash and
cash equivalents 516 (985) 1,074
Cash and cash equivalents:
Beginning of year 89 1,074 -
End of year $ 605 $ 89 $ 1,074
</TABLE>
C-83 APPENDICES
<PAGE>
OTHER CORPORATE INFORMATION
DIRECTORS -
EAGLE BANCGROUP, INC.
GERALD A. BRADLEY
CHAIRMAN OF THE BOARD
Owner, Bloomington Tent and Awning Company
Bloomington, Illinois
ROBERT P. DOLE
Retired President,
National Union Electric Corporation
Normal, Illinois
LOUIS F. ULBRICH
Attorney-at-law, Retired
Bloomington, Illinois
WILLIAM J. HANFLAND
Assistant Treasurer
Illinois Agricultural Association
Bloomington, Illinois
STEVEN J. WANNEMACHER
Executive Vice President
Heritage Enterprises, Inc.
Bloomington, Illinois
DONALD L. FERNANDES
President and Chief Executive Officer
Eagle BancGroup, Inc.
DAVID R. WAMPLER
Vice President
Eagle BancGroup, Inc.
Bloomington, Illinois
OFFICERS-
EAGLE BANCGROUP, INC.
DONALD L. FERNANDES
President and
Chief Executive Officer
DAVID R. WAMPLER
Vice President
SENIOR OFFICERS -
FIRST FEDERAL SAVINGS
DONALD L. FERNANDES
Chairman and Chief Executive Officer
DAVID R. WAMPLER
President
GARY RICHARDSON
Vice President-Lending
LARRY C. MCCLELLAN
Vice President -
Operations
DONALD L. LAMBERT
Vice President
Retail Banking Services
JAMES E. LYONS
Vice President - Finance
CORPORATE HEADQUARTERS
Eagle BancGroup, Inc.
301 Fairway Drive
P.O. Box 429
Bloomington, IL 61701
Telephone (309) 663-6345
Facsimile (309) 663-8763
CORPORATE ATTORNEYS
SCHIFF HARDIN & WAITE
7200 Sears Tower
Chicago, Illinois 60606
INDEPENDENT AUDITORS
MCGLADREY & PULLEN, LLP
401 Main Street
Peoria, Illinois 61602
TRANSFER AGENT AND
REGISTRAR
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
(908) 497-2300
ANNUAL MEETING
ANNUAL MEETING
The annual meeting of stockholders of Eagle BankGroup, Inc. will be held at
10:00 a.m. (CDT) on Wednesday, April 21, 1999 at The Best Western Eastland
Suites Conference Center, Bloomington, IL.
FORM 10-K REPORT
Single copies of Eagle BancGruop, Inc.'s 1998 Annual Report on Form 10-K, as
filed with the Securities and Exchange Commission, are available at no charge.
Contact Marilyn Lockwood, Asst. Secretary,
EAGLE BANCGROUP, INC.
301 Fairway Drive
Bloomington, IL 61701
or phone (309) 663-6345.
COMMON STOCK -
MARKET INFORMATION
The Company's common stock trades on The Nasdaq Stock Market under the symbol
EGLB. At December 31, 1998, there were 1,080,108 shares of the Company's common
stock issued and outstanding and there were approximately 400 holders of record
and beneficial holders. The high and low sales price of the Company's common
stock for the four quarters ended March 31, June 30, September 30 and December
31, 1998, as pro- by Nasdaq, are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
<S> <C> <C>
Mar 31, 1998 21.125 19.250
June 30, 1998 21.125 19.125
Sep 30, 1998 19.250 14.000
Dec 30, 1998 21.000 13.000
</TABLE>
C-84 APPENDICES
<PAGE>
LOUIS F. ULBRICH
Secretary
The Company declared its First dividend in December 1998. For information
regarding restrictions on dividend payments, see Note 8 of the Notes to
Consolidated Financial Statements
C-85 APPENDICES
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended June 30, 1999
Commission File Number: 000-20739
EAGLE BANCGROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 37-1353957
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
301 FAIRWAY DRIVE, BLOOMINGTON, IL 61701
(309) 663-6345
(Address, including zip code, and telephone number, including area code, of
principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
As of July 28, 1999, there were 1,063,239 shares of the Registrant's
Common Stock, par value $.01 per share, outstanding.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
APPENDICES
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
Eagle BancGroup, Inc.
Consolidated Statements of Condition (unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- ---------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 956 $ 1,084
Fed funds sold and overnight deposits 4,214 7,653
Investment securities 12,116 11,307
Mortgage backed securities 39,132 37,244
Federal Home Loan Bank stock 1,270 1,271
Loans, net 117,872 116,551
Premises and equipment 2,739 2,819
Other assets 2,375 2,172
Total Assets $ 180,674 $180,101
------------- ---------------
------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $135,241 $134,091
FHLB advances 25,000 25,000
Other liabilities 1,144 1,313
------------- ---------------
Total Liabilities 161,385 160,404
------------- ---------------
Capital stock 13 13
Paid in capital 12,531 12,456
Retained earnings 11,440 11,189
Treasury stock (4,074) (3,817)
Accumulated other comprehensive income (621) (144)
------------- ---------------
Total Stockholders' Equity 19,289 19,697
------------- ---------------
Total Liabilities and
Stockholders' Equity $180,674 $180,101
------------- ---------------
------------- ---------------
</TABLE>
NOTE: THE BALANCE SHEET AT DECEMBER 31, 1998 HAS BEEN DERIVED FROM THE
AUDITED FINANCIAL STATEMENTS AT THAT DATE BUT DOES NOT INCLUDE ALL THE
INFORMATION AND FOOTNOTES REQUIRED BY GENERALLY
C-86 APPENDICES
<PAGE>
ACCEPTED ACCOUNTING PRINCIPLES FOR COMPLETE FINANCIAL STATEMENTS.
SEE ACCOMPANYING NOTES.
Eagle BancGroup, Inc.
Consolidated Statements of Income (unaudited)
(amounts in thousands except per share data)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $2,327 $2,328 $4,659 $4,709
Investment securities and other interest earning assets 252 310 493 595
Mortgage-backed securities 560 408 1,092 786
Federal funds sold 28 58 80 107
------------- ------------- ------------- -------------
Total Interest Income 3,167 3,104 6,324 6,197
Interest expense:
Deposits:
Passbook 125 141 249 280
MMDA and NOW 102 86 215 157
Certificates of deposit 1,377 1,515 2,794 3,034
Borrowings 319 310 635 638
------------- ------------- ------------- -------------
Total Interest Expense 1,923 2,052 3,893 4,109
Net Interest Income Before Provision For Loan Losses 1,244 1,052 2,431 2,088
Provision for loan losses 60 60 120 120
------------- ------------- ------------- -------------
Net Interest Income After Provision For Loan Losses 1,184 992 2,311 1,968
Non-interest income:
Gains on loans sold 201 246 442 483
Other 116 87 218 169
------------- ------------- ------------- -------------
Total Non-Interest Income 317 333 660 652
Non-interest expense:
Salaries and employee benefits 748 567 1,378 1,135
Net occupancy expense 160 138 331 276
Federal deposit insurance premium 20 21 40 41
Data processing expense 82 73 167 140
C-87 APPENDICES
<PAGE>
Other 266 201 522 392
------------- ------------- ------------- -------------
Total Non-Interest Expense 1,276 1,000 2,438 1,984
Income Before Federal Income Tax 225 325 533 636
Federal income tax expense 102 123 210 233
------------- ------------- ------------- -------------
Net Income 123 202 323 403
============= ============= ============= =============
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period (369) (2) (476) 53
Less: reclassification adjustment for
(gains) losses included in net income (1) (1) (1) 2
------------- ------------- ------------- -------------
Other comprehensive income (370) (3) (477) 55
------------- ------------- ------------- -------------
Comprehensive Income $(247) $199 $(154) $458
============= ============= ============= =============
Per Share Data:
Basic Earnings Per Share $012 $019 $032 $037
Diluted Earnings Per Share 012 018 032 036
Dividends Per Share 010 000 020 000
</TABLE>
SEE ACCOMPANYING NOTES.
Eagle BancGroup, Inc.
Consolidated Statements of Cash Flows (unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
-----------------------------------------
1999 1998
------------------- ------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $323 $403
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan loss 120 120
Provision for depreciation 175 154
Amortization of premiums and discounts on
investment securities 86 (63)
(Gains) losses on securities sold, net (1) 4
Gains on loans sold, net (442) (483)
Compensation expense related to ESOP shares 115 110
Compensation expense related to MDRP shares 101 117
Proceeds from sale of loans originated for sale 32,528 39,193
Loans originated for sale (31,315) (40,453)
Increase in accrued interest receivable (129) (45)
Increase (decrease) in accrued interest payable 6 (4)
Decrease in other assets 44 30
Decrease in other liabilities (164) (287)
------------------- ------------------
Net cash provided by (used in) operating activities 1,447 (1,204)
C-88 APPENDICES
<PAGE>
Cash Flows from Investing Activities
Investment securities
Purchases (8,024) (15,346)
Proceeds from sales and maturities 7,019 9,796
Mortgage-backed securities
Purchases (8,900) (8,864)
Proceeds from sales and maturities - 2,268
Principal collected 6,463 3,975
Purchase of FHLB stock - (12)
Principal collected on loans 32,916 34,900
Loans originated, net (35,063) (27,005)
Purchases of premises and equipment (95) (122)
Purchase of other real estate - (25)
------------------- ------------------
Net cash used in investing activities (5,684) (435)
Cash Flows from Financing Activities
Increase in savings, demand and NOW accounts, net 2,564 1,741
Decrease in certificate accounts, net (1,423) (1,172)
Proceeds from FHLB advances - 9,000
Principal payments on FHLB advances - (7,000)
Dividends paid (214) -
Purchase of treasury stock (257) (14)
------------------- ------------------
Net cash provided by financing activities 670 2,555
Increase in cash and cash equivalents (3,567) 916
Cash and cash equivalents at beginning of period 8,737 5,014
------------------- ------------------
Cash and cash equivalents at end of period $5,170 $5,930
=================== ==================
</TABLE>
SEE ACCOMPANYING NOTES.
C-89 APPENDICES
<PAGE>
Eagle BancGroup, Inc.
Notes to Consolidated Financial Statements
1. Basis of Presentation
The unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and therefore do not include all information and
disclosures required by generally accepted accounting principles for complete
financial statements. All adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the periods
reported, consisting only of normal recurring adjustments, have been included
in the accompanying consolidated financial statements. Operating results for
the six and three months ended June 30, 1999 are not necessarily indicative
of the results that may be expected for the year ended December 31, 1999. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
2. Earnings Per Share and Dividends
Basic earnings per share is computed by dividing net income for the
period by the weighted average number of common shares outstanding of 999,153
and 1,096,075 for the six months ended June 30, 1999 and 1998, respectively,
and 997,792 and 1,097,217 for the three months ended June 30, 1999 and 1998,
respectively. Diluted earnings per share is computed by dividing net income
for the period by the weighted average number of common shares and common
share equivalents outstanding of 1,021,829 and 1,115,488 for the six months
ended June 30, 1999 and 1998, respectively, and 1,029,020 and 1,123,054 for
the three months ended June 30, 1999 and 1998, respectively. Common share
equivalents assume exercise of stock instruments and use of proceeds to
purchase treasury stock at the average market price for the period.
The Company has paid dividends at the rate of $.10 per share in each
of the last three quarters. The agreement and Plan of Merger, dated June 30,
1999, providing for the acquisition of the Company by First Busey Corporation
does not permit the Company to pay additional dividend on its common stock. A
copy of the Agreement and Plan of Merger is filed as an exhibit to this Form
10-Q.
C-90 APPENDICES
<PAGE>
Eagle BancGroup, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
GENERAL: Eagle BancGroup, Inc. (the "Company") had net income of $323,000, or
$.32 per share (basic), in the first six months of 1999 compared to $403,000,
or $.37 per share (basic) in the same period in 1998. In the three months
ended June 30, the Company had net income of $123,000, or $.12 per share, in
1999 compared to $202,000, or $.19 per share, in 1998. The decrease in income
in 1999 was primarily the result of additional employee benefits expense of
$75,000, net of the applicable income tax benefit, related to the termination
of the Company's pension plan in June 1999.
NET INTEREST INCOME: Net interest income increased to $2,431,000 in the first
six months of 1999 from $2,088,000 in the same period in 1998 and to
$1,244,000 in the second quarter of 1999 from $1,052,000 in the same period
in 1998. The increase in net interest income was due to improvement in the
interest rate spread in 1999 compared to 1998. In the first six months, the
interest rate spread was 2.38% in 1999 compared to 1.92% in 1998 while in the
second quarter, the interest rate spread was 2.44% in 1999 compared to 1.92%
in 1998. In 1999, the Company has reduced the cost of funds while maintaining
the earning asset yield resulting in the increase in the interest rate spread
and net interest income.
Interest income was $6,324,000 in the first six months of 1999
compared to $6,197,000 in the same period in 1998 and was $3,167,000 in the
second quarter of 1999 compared to $3,104,000 in the same period in 1998.
Average earning assets increased to $176,740,000 in the first half of 1999
from $171,945,000 in the same period in 1998 and increased to $176,555,000 in
the second quarter of 1999 from $172,239,000 in the same period in 1998 which
resulted in the increase in interest income in 1999. The composition of
earning assets has changed due to the volume of residential mortgage loans
originated and sold in 1998 and 1999. Many of the new originations were to
refinance loans for existing customers and the result was a decrease in
residential mortgage loans in the portfolio. In the first six months of 1999,
average loans decreased to $116,220,000 from $120,229,000 in the same period
in 1998 while average investments increased to $60,520,000 in the first half
of 1999 from $51,716,000 in the same period in 1998.
The earning asset yield was 7.21% in the first half of 1999 compared
to 7.27% in the first half of 1998 and was 7.19% in the second quarter of
1999 compared to 7.23% in the same period in 1998. The Company has been able
to maintain the earning asset yield by offsetting much of the decrease in
residential mortgage loans with commercial and commercial real estate loans
that generally earn higher yields. The yield on average loans increased to
8.08% in the first half of 1999 from 7.90% in the same period of 1998.
Commercial and commercial real estate loans comprised 24% of average loans in
the first half of 1999 compared to 9% in the first half of 1998. The yield on
average investments declined to 5.55% in the first half of 1999 from 5.81% in
the first half of 1998.
In the second quarter, average loans decreased to $116,052,000 in
1999 from $118,059,00 in 1998 while average investments increased to
$60,503,000 in 1999 from $54,180,000 in 1998. The yield on average loans
increased to 8.04% in second quarter of 1999 from 7.91% in the same period in
1998 as commercial and commercial real estate loans comprised 25% of the
average loans in 1999 compared to 10% in 1998. The yield on average
investments decreased to 5.57% in the second quarter of 1999 from 5.75% in
the same period in 1998.
C-91 APPENDICES
<PAGE>
Interest expense declined to $3,893,000 in the six months ended June
30, 1999 from $4,109,000 in the same period in 1998 and to $1,923,000 in the
second quarter of 1999 from $2,052,000 in the same period in 1998. The
decrease in interest expense in 1999 was the result of decreases in the cost
of funds even though average interest bearing liabilities increased in 1999
from 1998. The cost of funds decreased to 4.83% in the first half of 1999
from 5.34% in the same period in 1998 and to 4.75% in the second quarter of
1999 from 5.31% in the same period in 1998. The cost of funds decline was due
to decreases in rates paid on demand and savings balances in the fourth
quarter of 1998, an increase in demand deposits and a restructuring of the
borrowings portfolio in 1998.
Average interest bearing liabilities increased to $162,346,000 in
the first half of 1999 from $155,067,000 in the same period in 1998. Average
deposits, primarily demand deposits, increased from $131,774,000 in the first
six months of 1998 to $137,346,000 in the first six months of 1999. As a
percentage of average deposits, demand deposits increased to 14% in the first
half of 1999 from 9% in the first half of 1998. The cost of average deposits
decreased to 4.78% in the first half of 1999 from 5.31% in the first half of
1998. Average borrowed funds were $25,000,000 at a cost of 5.12% in the first
half of 1999 compared to $23,293,000 at a cost of 5.52% in the first half of
1998.
In the second quarter, average interest bearing liabilities
increased to $162,198,000 in 1999 from $154,995,000 in 1998. Average deposits
increased to $137,198,000 in the second quarter of 1999 from $132,028,000 in
the same period in 1998 with demand deposits comprising 14% of the total in
1999 and 10% in 1998. The cost of average deposits decreased to 4.69% in the
second quarter of 1999 from 5.29% in the same period in 1998. Average
borrowed funds increased to $25,000,000 in the second quarter of 1999 from
$22,967,000 in the same period in 1998 at costs of 5.12% in 1999 and 5.41% in
1998.
The increase in the interest rate spread also resulted in an
increase in the net interest margin, defined as net interest income divided
by average earning assets. In the first half, the net interest margin
increased to 2.77% in 1999 from 2.45% in 1998 and in the second quarter, the
net interest margin increased to 2.83% in 1999 from 2.45% in 1998.
Loans totaling $262,000 were contractually past due 90 days or more
at June 30, 1999 and were classified as non-accrual. Interest income is
recognized only upon cash receipt, and no interest income is accrued on such
loans. In the first half of 1999, cash interest payments of $12,000 on these
loans was included in interest income. Additional interest income of $6,000
would have accrued had the loans not been contractually past due 90 days or
more.
PROVISION FOR LOAN LOSS: In the first six months of both 1999 and 1998, the
provision for loan loss was $120,000 and in the second quarter of both 1999
and 1998, the provision for loan loss was $60,000. The provision is
determined as the amount necessary to maintain the allowance for loan losses
at a level deemed adequate to absorb estimated future losses inherent in the
loan portfolio. Management evaluates the adequacy of the allowance for loan
losses quarterly. The allowance for loan losses was $1,043,000, or .88% of
total loans, at June 30, 1999 compared to $1,015,000, or .86% of total loans,
at December 31, 1998. In the first six months of 1999, loans totaling
$102,000 were charged against the reserve and $11,000 was credited to the
allowance due to recoveries of loans previously charged off.
NON-INTEREST INCOME: In the first six months of 1999, non-interest income was
$660,000 compared to $652,000 in the same period in 1998. Gains on sales of
residential mortgage loans decreased to $442,000 in the first half of 1999 from
$483,000 in the same period in 1998 as proceeds from sales of residential
mortgage loans decreased to $32,528,000 in the first half of 1999 from
C-92 APPENDICES
<PAGE>
$39,193,000 in the same period in 1998. Other non-interest income increased
to $218,000 in the first half of 1999 from $169,000 in the same period in
1998 due primarily to servicing fees on loans sold, other miscellaneous loan
fees and deposit account service charges.
Non-interest income decreased to $317,000 in the second quarter of
1999 from $333,000 in the same period in 1998 as gains on residential
mortgage loans sales declined to $201,000 in 1999 from $246,000 in 1998.
Proceeds from residential mortgage loan sales declined from $19,502,000 in
the second quarter of 1998 to $14,674,000 in the same period in 1999.
Partially offsetting the decline in gains were increased servicing fees on
loans sold, miscellaneous loan fees and deposit account service charges as
other non-interest income increased to $116,000 in the second quarter of 1999
from $87,000 in the same period in 1998.
NON-INTEREST EXPENSE: Non-interest expense increased to $2,438,000 in the
first half of 1999 from $1,984,000 in the same period in 1998 due in part to
the $112,000 additional employee benefits expense related to termination of
the Company's pension plan in June 1999. The pension plan was terminated in
March 1998 but the final IRS determination letter was not received until May
1999. Due to the length of time between the termination and the final IRS
determination, certain actuarial assumptions used in calculating the
participants termination benefits changed dramatically. A decrease in
interest rates used in the calculations was primarily responsible for the
increase in total benefits. The total termination benefits then exceeded plan
assets available to fund the benefits and an additional contribution was
necessary to fully fund the plan. Salaries and employee benefits expense
increased to $1,378,000 in the first half of 1999 from $1,135,000 in the same
period in 1998 due primarily to the pension expense adjustment. In addition,
salaries and employee benefits expense of approximately $70,000 related to
the new staff at the branch opened in Lexington in December 1998 was incurred
in the first half of 1999. The remainder of the increase in salaries and
employee benefits in the first six months of 1999 from the same period in
1998 was due to normal increases in employee costs.
Other non-interest expense increased to $522,000 in the first six
months of 1999 from $392,000 in the same period in 1998 due primarily to
corporate professional fees, which increased $85,000 in 1999 over 1998.
Office supplies expense increased $22,000 in the first half of 1999 from the
first half of 1998 due to the branch opening and the increase in demand
deposit accounts. Postage expense increased $15,000 in the first six months
of 1999 from the same period in 1998 due to the increased number of accounts
and a special Y2K informational mailing sent to all customers in 1999. Net
occupancy expense increased to $331,000 in the first half of 1999 from
$276,000 in the same period in 1998 due to the branch opening and
depreciation and maintenance expense related to recent hardware and software
upgrades. Data processing expense increased to $167,000 in the first six
months of 1999 from $140,000 in the same period in 1998 due primarily to Y2K
testing fees charged by the Company's primary data provider and the increased
number of accounts processed.
In the second quarter, non-interest expense increased to $1,276,000
in 1999 from $1,000,000 in 1998 due primarily to salaries and benefits
expense, which increased to $748,000 in 1999 from $567,000 in 1998. The
increase in salaries and employee benefits relates primarily to the $112,000
in additional pension expense and also due to staff added at the new branch
and normal increases in employee costs in the second quarter of 1999 compared
to the same period in 1998. Other non-interest expense increased to $266,000
in the second quarter of 1999 from $201,000 in the second quarter of 1998 due
primarily to corporate professional fees, which increased $48,000 in 1999.
Supplies and postage expense also increased in the second quarter of 1999
compared to the same period in 1998. Net occupancy expense increased to
$160,000 in the second quarter of 1999 from $138,000 in the second quarter of
1998 due to
C-93 APPENDICES
<PAGE>
the branch opening and increased depreciation and maintenance related to
recent hardware and software upgrades.
INCOME TAX EXPENSE: The provision for income taxes decreased to $210,000 in
the first six months of 1999 from $233,000 in the first six months of 1998
and to $102,000 in the second quarter of 1999 from $123,000 in the second
quarter of 1998 due to the decrease in income before income tax in 1999 from
1998. The effective tax rate increased to 39% in the first half of 1999 from
37% in the first half of 1998 and to 45% in the second quarter of 1999 from
38% in the second quarter of 1998.
FINANCIAL CONDITION
Total assets increased to $180,674,000 at June 30, 1999 from
$180,101,000 at December 31, 1998. Net loans increased to $117,872,000 and
investment and mortgage-backed securities increased to $51,248,000 at June
30, 1999 from $116,551,000 and $48,551,000, respectively, at December 31,
1998. These increases were funded by an increase in deposits to $135,241,000
at June 30, 1999 from $134,091,000 at December 31, 1998 and a decrease in
cash and cash equivalents to $5,170,000 at June 30, 1999 from $8,737,000 at
December 31, 1998. The increase in loans is due to originations of
commercial, commercial real estate and direct consumer loans partially offset
by decreased residential mortgage loans. The increase in deposits, primarily
demand accounts, relates in part to the new branch opening.
Stockholders' equity decreased to $19,289,000, or 10.7% of total
assets, at June 30, 1999 from $19,697,000, or 10.9% of total assets, at
December 31, 1998. The decline relates to a decrease in accumulated other
comprehensive income, the purchase of additional shares for the treasury and
the payment of dividends partially offset by 1999 year to date net income.
Book value per share decreased to $18.07 per share at June 30, 1999 from
$18.24 at December 31, 1998.
Savings institutions are required to maintain minimum capital levels
measured by the following ratios: Risk-based capital to risk weighted assets
ratio of 8.00%; Core capital to tangible assets ratio of 3.00% and Tangible
core capital to adjusted tangible assets ratio of 1.50%. The Company's
savings institution subsidiary had ratios of 15.56%, 9.23% and 9.23%,
respectively, as of June 30, 1999 compared to 15.56%, 9.25% and 9.25%,
respectively, at December 31, 1998.
Savings institution are also required to maintain a minimum 4%
liquidity ratio measured as the ratio of cash, cash equivalents, short-term
investments and certain long-term investments to deposits and certain
borrowed funds. At June 30, 1999, the Company's savings institution
subsidiary had a liquidity ratio of 13.05% compared to 14.11% at December 31,
1998.
At June 30, 1999, funds committed for loan originations and loans in
process totaled $1,267,000 and unused lines of credit totaled $9,755,000.
Cash and cash equivalents, scheduled principal and interest payments on
loans, mortgage-backed and investment securities, new deposits and borrowed
funds are sources of funds used to meet such commitments. Funds are primarily
invested in residential mortgage, commercial, commercial real estate and
direct consumer loans and mortgage-backed and investment securities. Funds
are also used for deposit interest payments, maturities and withdrawals.
C-94 APPENDICES
<PAGE>
YEAR 2000 READINESS DISCLOSURE
The Company formulated its initial Y2K compliance plan in September
1997 and has expanded, revised and updated the plan continually since that time.
The Office of Thrift Supervision ("OTS"), the Company's primary regulator,
continues to monitor the compliance effort via copies of plan updates and with
on-site inspections, including one in the first quarter of 1999. Another on-site
inspection is scheduled for July 1999.
Specific Y2K compliance actions that occurred in the second quarter of
1999 include: continued follow-up contacts to monitor compliance of third-party
software vendors including installation of vendor certified compliant software
upgrades and testing of such systems as allowed and deemed necessary;
continued development of a comprehensive contingency plan; and contracting with
the Company's primary data provider for business continuity services and hotsite
availability if needed in January 2000.
Software compliance testing on the primary data provider was completed
in the first quarter of 1999 with no significant Y2K problems noted by the
Company or other users. Testing results from each user were shared with all
other users by the vendor. A second round of testing was available to all users
following review of the first round results, but the Company chose not to
participate. Results of the second round of testing were reviewed with no
adverse results noted.
The business continuity services contracted for include interactive
loan and deposit trial balance databases that can be utilized on the Company's
hardware (which has previously been certified as Y2K compliant). Daily updates,
the ability to enter debits and credits and ACH reporting are also included in
the service. The hotsite availability service reserves a daily time slot for the
Company to input transactions at a remote facility in the event communications
between the Company and the provider are interrupted.
Direct costs related to the Y2K compliance effort incurred in the
second quarter of 1999 include $2,000 paid to the primary data provider for the
final share of the software compliance testing fees. An additional $8,000 will
be paid to the provider in the third quarter for the business continuity and
hotsite availability services previously contracted for. The Company's third
party network consultant may provide additional services at a cost not expected
to exceed $25,000 and compliance testing on other third-party software providers
may be conducted at a cost not expected to exceed $10,000.
The Company has also incurred indirect costs related to the Y2K
compliance effort, primarily salaries and benefits for the employees involved
with the various testing procedures and with development of the contingency
plan. The Company estimates that approximately $10,000 of salary and benefit
expense could be allocated to the Y2K compliance effort for the second quarter
of 1999. This amount does not represent additional expense, rather a
reallocation of expense that would have been incurred even without the Y2K
compliance effort. A similar amount of salary and benefit expense could likely
be allocated to the Y2K compliance effort for the third quarter of 1999, but, as
with previous quarters, salary and benefit expense is not expected to increase
solely due to the Y2K compliance effort.
In addition to the direct and indirect costs noted, the Company has
also invested over $220,000 upgrading hardware since conversion to the current
primary data provider in August 1997. Included in this total is additional
hardware necessary to support new teller and platform software that the Company
migrated to from December 1998 through March 1999 as planned at the time of the
conversion. While
C-95 APPENDICES
<PAGE>
these events have assisted in the Company's Y2K compliance effort, the costs
involved are not associated with Y2K compliance because the data provider
conversion was necessary due to contractual considerations.
The Y2K problem is extremely complex and potentially impacts any
computer process. The Company believes its Y2K compliance program will be
effective. However, since the Company relies on so many third parties for
various services, over which the Company has little or no control, no reasonable
assurance can be given that the Company will not suffer a Y2K-related service
interruption or incur potentially significant unanticipated expenditures that
could impact the financial performance of the Company.
This analysis may contain certain forward looking statements which
are based on management's current expectations regarding economic,
legislative and regulatory issues that may impact the Company's earnings in
future periods. Factors that could cause future results to vary materially
from current management expectations include, but are not limited to, general
economic conditions, changes in interest rates, deposit flows, real estate
values or competition, changes in accounting principles, policies or
guidelines, changes in legislation or regulation and other economic,
competitive, governmental, regulatory and technical factors affecting the
Company's operations, pricing, products and services.
C-96 APPENDICES
<PAGE>
Eagle BancGroup, Inc.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk faced by the Company arises primarily from interest rate
risk inherent in the Company's 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 investments,
and interest-bearing liabilities, primarily deposits and borrowed funds, create
market risk. Evaluation of market risk is an integral component of the Company's
interest rate risk management.
Interest rate risk arises from the impact of changes in interest rates
on the Company's assets and liabilities. Successful management of interest rate
risk reduces the impact of such changes on the Company's operations. Interest
rate risk is managed through the 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 plan, operating environment and capital and
liquidity requirements. Interest rate risk management guidelines are reviewed
and approved annually by the Board of Directors.
In December 1998, the OTS issued Thrift Bulletin #13a ("TB 13a")
concerning market risk and interest rate risk management guidelines, primarily
through the use of market value analysis. The Company has incorporated the
market value analysis approach to interest rate risk measurement in its interest
rate risk policy. In addition, interest rate risk is measured and evaluated by
use of gap analysis and income simulation analysis.
The market value analysis utilized is produced by the OTS net portfolio
value ("NPV") model. Data provided by the Company's thrift subsidiary in various
regulatory reports is the primary basis for the NPV model, which generates
estimates of the amount of and changes in NPV over a range of interest rate
change scenarios. NPV is defined as the difference between incoming and outgoing
cash flows from assets, liabilities and certain off-balance sheet contracts. The
NPV ratio is the NPV in a scenario divided by the present value of assets in the
same scenario.
The guidelines established in the interest rate risk policy include
maintaining a minimum 7% NPV ratio under any interest rate shock scenario. At
March 31, 1998, the NPV ratio ranged from 9.73% to 10.54% under interest rate
shocks ranging from +300 basis points to -300 basis points. The NPV analysis for
June 30, 1999 has not been received from the OTS as of this date.
The OTS NPV model is the primary interest rate risk measurement but gap
analysis is also used. At June 30, 1999, the Company had a positive one year
cumulative gap of $14,910,000 compared to $15,120,000 at December 31, 1998. In
general, a positive gap is preferable in periods when interest rates are
expected to rise since more interest-earning assets will reprice at higher rates
than interest-bearing liabilities.
Gap analysis does have limitations arising from both assumptions
utilized in determining the repricing periods of certain assets and liabilities
and the uncertainty as to the probable response of assets and liabilities to
changes in interest rates. While gap analysis is useful in analyzing the
inter-relationship between the repricing of assets and liabilities, the interest
sensitivity of the assets and liabilities is not measured. Assumptions used to
determine the repricing frequency of demand and savings deposits, which have no
stated maturity date, are critical to the effectiveness of the gap calculation.
C-97 APPENDICES
<PAGE>
The OTS NPV model also has limitations due to the assumption that
holdings of interest sensitive assets and liabilities will remain constant in
each interest rate shock scenario. In addition, actual changes in market
interest rates may not result in the yield and cost changes assumed in the
model. As such, the NPV measurements on a specific date should be treated as
an analysis of interest rate risk exposure on that date and should not be use
to forecast the effect of changes in interest rates on the Company's results
of operations.
The Company's interest rate risk strategies include emphasizing the
origination of short-term (under 5 years) commercial, commercial real estate and
direct consumer loans; selling all fixed-rate residential mortgage loans at
origination; classifying all investment securities as available for sale;
maintaining a portfolio of primarily adjustable-rate or short-term, fixed-rate
investment securities; utilizing medium-term (five to ten year) FHLB advances as
a funding alternative; and emphasizing lower rate, less interest sensitive
demand and savings deposits.
The Company's exposure to market risk is lessened by not holding or
using any derivative instruments to manage interest rate risk. In addition, the
Company does not maintain a portfolio of trading account securities. At June 30,
1999, the Company did have $2,929,000 in residential mortgage loans held for
sale. All loans comprising that amount were previously sold to various secondary
market investors and were held for sale only due to the usual delay between the
loan closing date and the date funding is received from the investors. The
market risk exposure on these loans was not significant.
C-98 APPENDICES
<PAGE>
Eagle BancGroup, Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
NONE
Item 2. Changes in Securities or Use of Proceeds.
NONE
Item 3. Defaults Upon Senior Securities.
NONE
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Company held its annual meeting on April 21, 1999.
(b) The following directors were elected to a three-year term
(expiring in 2002):
Robert P. Dole
Louis F. Ulbrich
Directors whose term in office continued after the meeting
are as follows:
Gerald A. Bradley, William J. Hanfland
(terms expire in 2000)
Donald L. Fernandes, Steven J. Wannemacher,
David L. Wampler (terms expire in 2001)
(c) The voting results of the director elections were as follows:
A total of 849,343 shares, representing 79.4% of total outstanding
shares, were present in person or by proxy at the meeting. Each director
received 834,843 votes for election, representing 98.3% of votes cast, and
14,500 votes to withhold election, representing 1.7% of votes cast. There were
no abstentions.
No other matters were submitted to a vote of shareholders.
(d) Not applicable
Item 5. Other Information.
NONE
C-99 APPENDICES
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
The following exhibits are included herein:
(2) - Agreement and Plan of Merger, dated as of June 30, 1999, by and
among First Busey Corporation, FBC Acquisition Corp. and Eagle BancGroup, Inc.
(27) - Financial Data Schedule
(b) Reports on Form 8-K:
NONE
C-100 APPENDICES
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATE: July 30, 1999 Eagle BancGroup, Inc
(registrant)
By: /s/ Donald L. Fernandes
-----------------------------------------
DONALD L. FERNANDES
President and Chief Executive Officer
(Principal Financial Officer)
C-101 APPENDICES
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Page
<S> <C> <C>
2 Agreement and Plan of Merger By and Among
First Busey Corporation, FBC Acquisition Corp. and
Eagle BancGroup, Inc.
Dated as of June 30, 1999
27 Financial Data Schedule
</TABLE>
C-102 APPENDICES
<PAGE>
APPENDIX D - SECTION 262 OF THE
DELAWARE GENERAL CORPORATE LAW
APPENDICES
<PAGE>
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
262 APPRAISAL RIGHTS.--(a) Any stockholder of a corporation of this
State who holds shares of stock on the date of the making of a demand
pursuant to subsection (d) of this section with respect to such shares, who
continuously holds such shares through the effective date of the merger or
consolidation, who has otherwise complied with subsection (d) of this section
and who has neither voted in favor of the merger or consolidation nor
consented thereto in writing pursuant to Section 228 of this title shall be
entitled to an appraisal by the Court of Chancery of the fair value of the
stockholder's shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and
also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and
the words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions
thereof, solely of stock of a corporation, which stock is deposited with the
depository.
(b) Appraisal rights shall be available for the shares of any class
or series of stock of a constituent corporation in a merger or consolidation
to be effected pursuant to Section 251 (other than a merger effected pursuant
to Section 251(g) of this title), Section 252, Section 254, Section 257,
Section 258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this
section shall be available for the shares of any class or series of
stock, which stock, or depository receipts in respect thereof, at the
record date fixed to determine the stockholders entitled to receive
notice of and to vote at the meeting of stockholders to act upon the
agreement of merger or consolidation, were either (i) listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000
holders; and further provided that no appraisal rights shall be
available for any shares of stock of the constituent corporation
surviving a merger if the merger did not require for its approval the
vote of the stockholders of the surviving corporation as provided in
subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of any
class or series of stock of a constituent corporation if the holders
thereof are required by the terms of an agreement of merger or
consolidation pursuant to Section 251, 252, 254, 257, 258, 263 and 264
of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or
resulting from such merger or consolidation, or depository receipts
in respect thereof;
D-1 APPENDICES
<PAGE>
b. Shares of stock of any other corporation, or
depository receipts in respect thereof, which shares of stock (or
depository receipts in respect thereof) or depository receipts at
the effective date of the merger or consolidation will be either
listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system
by the National Association of Securities Dealers, Inc. or held of
record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs a. and
b. of this paragraph; or
d. Any combination of the shares of stock, depository
receipts and cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs a.,
b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under Section 253 of this
title is not owned by the parent corporation immediately prior
to the merger, appraisal rights shall be available for the
shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its
certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or substantially
all of the assets of the corporation. If the certificate of incorporation
contains such a provision, the procedures of this section, including those
set forth in subsections (d) and (e) of this section, shall apply as nearly
as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for approval
at a meeting of stockholders, the corporation, not less than 20 days
prior to the meeting, shall notify each of its stockholders who was
such on the record date for such meeting with respect to shares for
which appraisal rights are available pursuant to subsections (b) or (c)
hereof that appraisal rights are available for any or all of the shares
of the constituent corporations, and shall include in such notice a
copy of this section. Each stockholder electing to demand the appraisal
of such stockholder's shares shall deliver to the corporation, before
the taking of the vote on the merger or consolidation, a written demand
for appraisal of such stockholder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of
the stockholder and that the stockholder intends thereby to demand the
appraisal of such stockholder's shares. A proxy or vote against the
merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate
written demand as herein provided. Within 10 days after
D-2 APPENDICES
<PAGE>
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that
the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to
Section 228 or Section 253 of this title, each constituent corporation,
either before the effective date of the merger or consolidation or
within ten days thereafter, shall notify each of the holders of any
class or series of stock of such constituent corporation who are
entitled to appraisal rights of the approval of the merger or
consolidation and that appraisal rights are available for any or all
shares of such class or series of stock of such constituent
corporation, and shall include in such notice a copy of this section;
provided that, if the notice is given on or after the effective date of
the merger or consolidation, such notice shall be given by the
surviving or resulting corporation to all such holders of any class or
series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the
date of mailing of such notice, demand in writing from the surviving or
resulting corporation the appraisal of such holder's shares. Such
demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of such holder's shares. If such notice
did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send
a second notice before the effective date of the merger or
consolidation notifying each of the holders of any class or series of
stock of such constituent corporation that are entitled to appraisal
rights of the effective date of the merger or consolidation or (ii) the
surviving or resulting corporation shall send such a second notice to
all such holders on or within 10 days after such effective date;
provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only
be sent to each stockholder who is entitled to appraisal rights and who
has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall
be not more than 10 days prior to the date the notice is given,
provided, that if the notice is given on or after the effective date of
the merger or consolidation, the record date shall be such effective
date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the
day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the
D-3 APPENDICES
<PAGE>
surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms
offered upon the merger or consolidation. Within 120 days after the effective
date of the merger or consolidation, any stockholder who has complied with
the requirements of subsections (a) and (d) hereof, upon written request,
shall be entitled to receive from the corporation surviving the merger or
resulting from the consolidation a statement setting forth the aggregate
number of shares not voted in favor of the merger or consolidation and with
respect to which demands for appraisal have been received and the aggregate
number of holders of such shares. Such written statement shall be mailed to
the stockholder within 10 days after such stockholder's written request for
such a statement is received by the surviving or resulting corporation or
within 10 days after expiration of the period for delivery of demands for
appraisal under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service
of a copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If
the petition shall be filed by the surviving or resulting corporation, the
petition shall be accompanied by such a duly verified list. The Register in
Chancery, if so ordered by the Court, shall give notice of the time and place
fixed for the hearing of such petition by registered or certified mail to the
surviving or resulting corporation and to the stockholders shown on the list
at the addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail
and by publication shall be approved by the Court, and the costs thereof
shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates
to submit their certificates of stock to the Register in Chancery for
notation thereon of the pendency of the appraisal proceedings; and if any
stockholder fails to comply with such direction, the Court may dismiss the
proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. In determining such
fair value, the Court shall take into account all relevant factors. In
determining the fair rate of
D-4 APPENDICES
<PAGE>
interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay
to borrow money during the pendency of the proceeding. Upon application by
the surviving or resulting corporation or by any stockholder entitled to
participate in the appraisal proceeding, the Court may, in its discretion,
permit discovery or other pretrial proceedings and may proceed to trial upon
the appraisal prior to the final determination of the stockholder entitled to
an appraisal. Any stockholder whose name appears on the list filed by the
surviving or resulting corporation pursuant to subsection (f) of this section
and who has submitted such stockholder's certificates of stock to the
Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that such stockholder is not
entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple or
compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and
the case of holders of shares represented by certificates upon the surrender
to the corporation of the certificates representing such stock. The Court's
decree may be enforced as other decrees in the Court of Chancery may be
enforced, whether such surviving or resulting corporation be a corporation of
this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances.
Upon application of a stockholder, the Court may order all or a portion of
the expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded appraisal rights as provided
in subsection (d) of this section shall be entitled to vote such stock for
any purpose or to receive payment of dividends or other distributions on the
stock (except dividends or other distributions payable to stockholders of
record at a date which is prior to the effective date of the merger or
consolidation); provided, however, that if no petition for an appraisal shall
be filed within the time provided in subsection (e) of this section, or if
such stockholder shall deliver to the surviving or resulting corporation a
written withdrawal of such stockholder's demand for an appraisal and an
acceptance of the merger or consolidation, either within 60 days after the
effective date of the merger or consolidation as provided in subsection (e)
of this section or thereafter with the written approval of the corporation,
then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of
Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court
deems just.
D-5 APPENDICES
<PAGE>
(l) The shares of the surviving or resulting corporation to which
the shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized
and unissued shares of the surviving or resulting corporation. (Last amended
by Ch. 339, L. '98, eff. 7-1-98.)
D-6 APPENDICES
<PAGE>
REVOCABLE PROXY
EAGLE BANCGROUP, INC.
301 FAIRWAY DRIVE
BLOOMINGTON, ILLINOIS 61701
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF EAGLE BANCGROUP, INC.
The undersigned hereby appoint(s)_________________ and
__________________, or either of them, as proxy or proxies for the
undersigned, with the full power of substitution, and hereby authorize(s)
them or either of them to represent and to vote, as designated below, all the
shares of common stock of Eagle BancGroup, Inc. held of record by the
undersigned on ________, 1999 at the special meeting of stockholders of Eagle
to be held at ___________________ on ________, 1999 at ______________, local
time, and at all adjournments and postponements thereof.
The board of directors recommends a vote "FOR" the following proposals:
(1) To approve and adopt the agreement and plan of merger, dated as of
June 30, 1999, by and among First Busey Corporation, FBC Acquisition
Corp. (a wholly owned subsidiary of First Busey) and Eagle BancGroup,
Inc., as more fully described in the accompanying Eagle proxy
statement.
<TABLE>
<S> <C> <C>
/ / FOR approval / / AGAINST / / ABSTAIN from
and adoption of approval and vote on the
the merger adoption of the merger
agreement merger agreement agreement
</TABLE>
(2) In his/her discretion, a proxy is authorized to vote upon such
other business as may properly come before the meeting; PROVIDED,
HOWEVER, if a proposal to adjourn the meeting is properly presented, a
proxy will not have discretion to vote in favor of the adjournment
proposal any shares of common stock which have been voted against
approval and adoption of the merger agreement.
<PAGE>
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE APPROVAL AND ADOPTION
OF THE MERGER AGREEMENT.
Dated: __________________ , 1999
_____________________________________
Signature
_____________________________________
Signature, if held jointly
Please sign exactly as your name appears hereon. When shares are held by joint
tenants, each should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. When executed by a
corporation, the proxy should be signed by a duly authorized officer, including
title as such. If a partnership, please sign in the partnership name by an
authorized person.
PLEASE COMPLETE, DATE, EXECUTE AND MAIL THIS PROXY PROMPTLY USING THE ENCLOSED
ENVELOPE.
