<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q/A
AMENDMENT NO. 1 TO QUARTERLY REPORT ON FORM 10-Q QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, as filed
with the Securities and Exchange Commission on August 11, 1994
For the quarterly period ended June 30, 1994
Commission file number: 0-16751
EAGLE FINANCIAL CORP.
(Exact name of Registrant as specified in its charter)
Delaware 06-1194047
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
P.O. Box 1157, Bristol, Connecticut, 06010
(Address of principal executive offices)
(Zip Code)
(203) 589-4600
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
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 No. X
------ -------
Indicate the number of shares outstanding for the issuer's classes of common
stock, as of the latest practicable date.
Common Stock (par value $0.01) 3,131,911
(class) (Approximate No. of Shares
Outstanding at 9/7/94,
Excluding Treasury Stock)
This Amendment No. 1 to Quarterly Report on Form 10-Q/A for the
quarterly period ended March 31, 1994 is being filed to amend the Consolidated
Statement of Cash Flows (unaudited) for the nine month periods ended June 30,
1994 and 1993, Notes to Consolidated Financial Statements (unaudited) and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
<PAGE>
EAGLE FINANCIAL CORP.
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets at June 30, 1994 (unaudited) and September 30, 1993............
Consolidated Statements of Income (unaudited) for the Three and Nine Months Ended
June 30, 1994 and 1993.....................................................................
Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended
June 30, 1994 and 1993.....................................................................
Notes to Consolidated Financial Statements (unaudited).....................................
Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................................
SIGNATURES
</TABLE>
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Eagle Financial Corp. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(dollars in thousands, except for per share data) June 30, 1994 September 30,
(Unaudited) 1993
------------- -------------
<S> <C> <C>
Assets
Cash and amounts due from depository institutions .......... $ 18,285 $ 12,462
Interest-bearing deposits .................................. 57,904 9,496
Federal funds sold ......................................... 23,700 --
----------- -----------
Cash and cash equivalents ................................. 99,889 21,958
Securities available for sale (market value $16,815
at June 30, 1994 and $15,601 at September 30, 1993) ....... 16,815 15,599
Investment securities (market value $83,658 at
June 30, 1994 and $47,954 at September 30, 1993) .......... 84,415 46,880
Mortgage-backed securities (market value $72,311 at
June 30, 1994 and $24,748 at September 30, 1993) .......... 72,712 25,953
Loans receivable, net of allowance for loan losses of $8,370
at June 30, 1994 and $5,005 at September 30, 1993 ........ 775,135 656,344
Accrued interest receivable ................................ 5,156 4,380
Real estate acquired in settlement of loans and
in-substance repossessed real estate, net ................. 3,932 5,471
Stock in Federal Home Loan Bank of Boston, at cost ......... 6,535 5,949
Premises and equipment, net ................................ 6,132 6,029
Prepaid expenses and other assets .......................... 29,005 3,905
----------- -----------
Total assets ................................................. $ 1,099,726 $ 792,468
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Deposits ................................................... $ 982,673 $ 706,214
Federal Home Loan Bank advances ............................ 23,750 15,500
Borrowed money ............................................. 7,892 752
Advance payments by borrowers for taxes and insurance ...... 6,533 3,577
Accrued expenses and other liabilities ..................... 14,233 6,018
----------- -----------
Total liabilities ............................................ 1,035,081 732,061
Shareholders' Equity:
Serial preferred stock, $.01 par value,
2,000,000 shares authorized and unissued .................. -- --
Common stock, $.01 par value, 8,000,000 shares authorized;
3,161,851 and 3,097,547 shares issued at
June 30, 1994 and September 30, 1993, respectively,
including 43,066 shares held in treasury .................. 32 31
Additional paid-in capital ................................. 34,415 33,562
Retained earnings .......................................... 31,777 27,928
Cost of common treasury stock .............................. (362) (362)
Employee stock ownership plan stock ........................ (542) (752)
Unrealized securities losses, net .......................... (675) --
----------- -----------
Total shareholders' equity ................................ 64,645 60,407
----------- -----------
Commitments and contingencies
Total liabilities and shareholders' equity ................... $ 1,099,726 $ 792,468
=========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
Eagle Financial Corp. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
(dollars in thousands, except for per share data) Three Months Ended Nine Months Ended
June 30, June 30,
----------------------------- -----------------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interset Income:
Interest and fees on loans ................ $ 12,540 $ 12,163 $ 36,834 $ 36,383
Interest on mortgage-backed securities .... 628 459 1,357 1,420
Interest on investment securities ......... 1,164 941 2,530 3,113
Dividends on investment securities ........ 494 347 1,354 1,024
---------- ---------- ---------- ----------
Total interest income ................... 14,826 13,910 42,075 41,940
Interest Expense:
Interest on deposits ...................... 6,649 6,716 19,277 21,228
Interest on Federal Home Loan Bank advances 402 109 896 326
Interest on borrowed money ................ 34 4 36 13
---------- ---------- ---------- ----------
Total interest expense .................. 7,085 6,829 20,209 21,567
Net interest income ..................... 7,741 7,081 21,866 20,373
Provision for loan losses ................... 300 529 900 1,179
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses ........................ 7,441 6,552 20,966 19,194
Other income:
Net gain on sale of investment securities . -- 1 -- --
Net gain on sale of loans ................. -- -- 120 --
Customer service fee income ............... 546 421 1,343 1,247
Other ..................................... 269 204 786 561
---------- ---------- ---------- ----------
Total other income ...................... 815 626 2,249 1,808
---------- ---------- ---------- ----------
8,256 7,178 23,215 21,002
---------- ---------- ---------- ----------
Other expenses:
Compensation, payroll taxes and benefits .. 2,094 1,840 6,391 5,464
Office occupancy .......................... 535 482 1,529 1,379
Advertising ............................... 138 109 425 400
Provision for losses on real estate
acquired in settlement of loans .......... 80 91 435 199
Operation of real estate acquired
in settlement of loans ................... 159 158 597 532
Federal insurance premium ................. 408 347 1,106 1,054
Data processing expenses .................. 322 265 874 809
Other ..................................... 750 637 2,138 2,206
---------- ---------- ---------- ----------
Total other expenses .................... 4,486 3,929 13,495 12,043
---------- ---------- ---------- ----------
Income before income taxes and cumulative
effect of accounting changes ........... 3,770 3,249 9,720 8,959
Income taxes ................................ 1,608 1,618 4,078 4,235
---------- ---------- ---------- ----------
Income before cumulative
effect of accounting changes ........... 2,162 1,631 5,642 4,724
Cumulative effect of accounting changes ..... -- -- 30 --
---------- ---------- ---------- ----------
Net income .............................. $ 2,162 $ 1,631 $ 5,612 $ 4,724
========== ========== ========== ==========
Net income per share before cumulative
effect of accounting change .............. $ 0.67 $ 0.52 $ 1.75 $ 1.51
Cumulative effect of accounting change ...... -- -- 0.01 --
Net income per share ........................ 0.67 0.52 1.74 1.51
Weighted-average shares outstanding ......... 3,239,079 3,145,049 3,219,244 3,122,846
Dividends per share ......................... $ 0.19 $ 0.15 $ 0.57 $ 0.46
</TABLE>
<PAGE>
Eagle Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flow (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
(in thousands) June 30,
--------------------
1994 1993
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income .................................................. $5,612 $4,724
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses ........................ 900 1,179
Provision for losses on real estate acquired
in settlement for loans ....................... 435 199
Provision for depreciation and amortization ...... 419 415
Accretion of discounts and fees on loans ......... (764) (400)
Amortization of premiums on loans ................ 1 1
Amortization of premiums (accretion of discounts)
on mortgage-backed securities ................. (7) 7
Amortization of premiums (accretion of discounts)
on investments ................................ 110 73
Amortization of core deposit intangibles ......... 361 217
Realized mortgage loan losses (gains), net ....... (120) --
Decrease (increase) in accrued interest receivable (776) 216
Increase (decrease) in accrued interest payable .. 173 (84)
Loan origination fees ............................ 981 989
Other, net ....................................... (3,538) 3,703
-------- --------
Net Cash Provided by Operating Activities ........ 3,787 11,239
INVESTING ACTIVITIES:
Proceeds from sales of investment securities
available for sale ....................................... 2,800 --
Proceeds from sales of investment securities
prior to maturity ........................................ -- 2,099
Proceeds from maturities of investment securities ........... 8,000 5,750
Proceeds from amortization of investment securities ......... 17,297 14,474
Purchases of securities available for sale .................. (4,800) --
Purchases of investment securities .......................... (38,685) (1,932)
Principal payments on mortgage-backed securities ............ 8,902 2,995
Purchases of mortgage-backed securities ..................... (7,135) --
Principal payments on loans receivable ...................... 108,815 76,167
Loan originations ........................................... (164,068) (147,839)
Proceeds from sales of loans ................................ 10,980 673
Proceeds from sales of real estate acquired in
settlement of loans ...................................... 2,187 2,600
Purchases of premises and equipment ......................... (522) (476)
Increase in investment in Federal Home Loan Bank stock ...... (586) --
Acquisition of loans, investments and other assets .......... (155,724) --
-------- --------
Net Cash Used by Investing Activities ............ (222,910) (47,099)
FINANCING ACTIVITIES:
Net increase in Passbook, NOW and Money
Market Accounts .......................................... 23,688 22,480
Net increase (decrease) in certificate accounts ............. (20,056) 1,226
Assumption of deposits and liabilities of acquired banks .... 275,986 --
Borrowings under Federal Home Loan Bank advances ............ 31,950 --
Principal payments under Federal Home Loan Bank advances .... (23,700) --
Net increase (decrease) in borrowed money ................... 7,140 (1,012)
</TABLE>
<PAGE>
Eagle Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flow (Unaudited) (continued)
<TABLE>
<CAPTION>
Nine Months Ended
(in thousands) June 30,
-----------------------
1994 1993
-------- --------
<S> <C> <C>
Net increase in advance payments by borrowers
for taxes and insurance ......................................................... $ 2,956 $ 2,574
Proceeds from exercise of stock options and dividends reinvested ................... 853 631
Cash dividends ..................................................................... (1,763) (1,393)
-------- --------
Net Cash Provided by Financing Activities ............................... $ 297,054 $ 24,506
======== ========
Increase (decrease) in cash and cash equivalents ........................ $ 77,931 $(11,354)
Cash and cash equivalents at beginning of period ................................... 21,958 33,132
-------- --------
Cash and cash equivalents at end of period .............................. $ 99,889 $ 21,778
======== ========
NON-CASH INVESTING ACTIVITIES:
Transfers of loans to foreclosed real estate ....................................... $ 1,760 $ 2,736
========= ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited, consolidated financial statements include all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented. All adjustments
were of a normal recurring nature. The results of operations for the nine-month
period ended June 30, 1994 are not necessarily indicative of the results which
may be expected for the entire fiscal year.
2. Principles of Consolidation
The consolidated financial statements include the accounts of Eagle Financial
Corp. ("Eagle" or the "Company") and its wholly owned subsidiary, Eagle Federal
Savings Bank ("Eagle Federal" or the "Bank"), a federally-chartered savings
bank.
3. Acquisition
The Company acquired assets of $267 million and liabilities of The Bank of
Hartford, Inc. (the "Bank of Hartford") from the Federal Deposit Insurance
Corporation ("FDIC") in an assisted transaction on June 10, 1994. The
acquisition accounted for as a purchase transaction, increased the Company's
assets to approximately $1.1 billion.
4. Accounting Pronouncements
In February, 1992, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 109 "Accounting for
Income Taxes." This SFAS requires a change from the deferred method of
accounting for income taxes to the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and
liabilities of a change in tax rate is recognized in income in the period that
includes the enactment date.
The Company adopted SFAS No. 109 as of October 1, 1993. The cumulative effect of
this change in accounting for income taxes of $1,273,000 as of October 1, 1993
is reported as a cumulative effect of an accounting change in the statement of
operations for the nine months ended June 30, 1994. Prior periods' financial
statements have not been restated to apply the provisions of SFAS No. 109.
At June 30, 1994, the Company has a net deferred tax asset of approximately $2.9
million. In order to fully realize the net deferred tax asset, the Company will
need to either generate tax losses to carryback to recover taxes previously paid
or generate future taxable income. Based upon the Company's historical and
current pre-tax earnings, management believes it is more likely than not that
the Company will realize the net deferred tax asset. However, there can be no
specific assurance that the Company will generate any specific level of
continuing earnings.
The Company had taxable income, pre-tax book income and taxes paid for the
periods presented as follows:
1993 1992 1991
------ ------ ------
(in thousands)
Taxable income..................... $11,358 $10,600 $7,834
Pre-tax book income................ 11,789 10,066 7,392
Federal taxes paid................. 3,934 3,614 2,671
The primary differences between taxable income and pre-tax book income relates
to the provisions for loan losses and charge-offs. The Company would expect
these differences to continue in the future.
<PAGE>
For the nine months ended June 30, 1994, income tax expense attributable to
income from continuing operations consists of:
Current Deferred Total
(in thousands)
Federal.......................... $ 3,202 $ (184) $ 3,018
State............................ 1,120 (60) 1,060
----- ---- -----
$ 4,322 $ (244) $ 4,078
===== ==== =====
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at June 30, 1994 and
October 1, 1993 are presented below: (In thousands)
<TABLE>
<CAPTION>
June 30, 1994 October 1, 1993
------------- ---------------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Deferred loan fees............................................ $ 996 $ 907
Post retirement benefits...................................... 938 891
Deferred compensation......................................... 249 190
Loans receivable, primarily due to allowance
for loan losses............................................ 3,398 2,046
--------- --------
Other miscellaneous........................................... 76
--
Total gross deferred assets............................ 5,581 4,110
Less valuation allowance...................................... -- --
--------- --------
Net deferred tax asset................................. 5,581 4,110
--------- --------
Deferred tax liabilities:
Premises and equipment primarily due to
depreciation............................................... (786) (772)
Tax discount on acquired loans................................ (1,912) (714)
Other miscellaneous........................................... (14)
---------- --------
Total gross deferred tax liabilities.......................... (2,712) (1,486)
---------- --------
Net deferred tax asset........................................ $ 2,869 $ 2,624
========== ========
</TABLE>
The valuation allowance for deferred tax assets as of June 30, 1994 was $0.
There was no change in the allowance for the nine months ended June 30, 1994.
The actual income tax expense for the nine months ended June 30, 1994 and June
30, 1993 differs from the expected income tax expense for the same periods
(computed by applying the U.S., Federal statutory corporate tax rate of 35% and
34%, respectively) as follows:
<TABLE>
<CAPTION>
1994 1993
------ ------
(in thousands)
<S> <C> <C>
Expected income taxes on income taxes........................................... $ 3,402 $ 3,046
State income taxes, net of Federal income tax benefit........................... 700 788
Other, net...................................................................... (24) 400
----- -----
$ 4,078 $ 4,234
===== =====
</TABLE>
<PAGE>
Eagle Federal has not provided deferred income taxes for Eagle Federal's tax
return reserve for bad debts that arose in tax years beginning before December
31, 1987 because it is not expected that this difference will reverse in the
foreseeable future. The cumulative net amount of income tax temporary difference
related to the reserve for bad debts for which deferred taxes have not been
provided was approximately $8.9 million at June 30, 1994. If Eagle Federal does
not meet the income tax requirements necessary to permit it to claim a
percentage of taxable income loan loss deduction in the future, the Bank under
certain circumstances could incur a tax liability for the previously deducted
tax return loan loss in the year in which such requirements are not met. This
potential liability for which no deferred income taxes have been provided was
approximately $3.7 million as of June 30, 1994.
On October 1, 1993, the Company also adopted SFAS No. 106, "Accounting for
Post-retirement Benefits Other Than Pensions" ("SFAS106"). SFAS reguires that
the expected cost of post-retirement benefits be charged to expense during the
period that the eligble employees render services. This accumulated
post-retirement benefit obligation ("APBO") existing at time of adoption was
approximately $2,194,000 before income taxes of $891,000. The $1,303,000
reduction in income net of taxes was recognized as a cumulative effect of a
change in accounting method in the statement of operations for the nine months
ended June 30, 1994.
The Company provides health benefits for future retirees within certain limits
and for current retirees. The Company does not have any assets specifically
segregated for the payment of health benefits and funds the benefits through
cash flows from operations.
The following is a summary of the obligation to provide health benefits at
October 1, 1993:
<TABLE>
<S> <C>
Accumulated post-retirement benefit obligation related to active employees.............. $ 1,594,000
Accumulated post-retirement benefit related to retirees................................. 600,000
---------
Total accumulated post-retirement benefit obligation and amount
recognized in statement of condition................................................. $ 2,194,000
=========
Netperiodic post-retirement benefit cost for the year ended September 30, 1994
will be approximately:
Service cost............................................................................ $ 89,000
Interest in APBO........................................................................ 135,000
Amortization of APBO (a)................................................................ (28,000)
---------
Total cost.............................................................................. $ 196,000
=========
<FN>
(a) Amortization to reflect changes in Eagle Financial post-retirement benefits
plan made subsequent to October 1, 1993.
</TABLE>
The APBO was calculated using a discount rate of 7%. The APBO for the
post-retirement benefits plan was determined using a health care cost trend
assumption starting at 11% on October 1, 1993 and decreasing the health care
cost trend assumption by 1% per year until reaching 5% and remaining at 5%
thereafter. The APBO for the post-retirement medical benefits plan would
increase by 8.3% on an annual basis and the combined service cost and interest
cost would increase by 5.7% on an annual basis if the health care cost trend
assumption were increased by 1% each year.
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations
Overview
At June 30, 1994, Eagle had total assets of $1.1 billion, compared to
$792.5 million at September 30, 1993. The primary reason for the growth from
fiscal year end 1993 to June 30, 1994 is the recent Bank of Hartford, Inc.
transaction. See "--Financial Condition." Deposits grew to $982.7 million at
June 30, 1994 from $706.2 million at September 30, 1993. The growth in deposits
includes the impact of the June 1994 assumption of $275.0 million of deposits of
the Bank of Hartford.
For the three months ended June 30, 1994, Eagle had net income of $2.2
million, or $0.67 per share, compared to $1.6 million, or $0.52 per share, for
the same period in 1993. For the nine months ended June 30, 1994, Eagle had net
income of $5.6 million, or $1.74 per share, compared to $4.7 million, or $1.51
per share, for the same period in 1993. Eagle's return on average shareholders'
equity for the nine months ended June 30, 1994 was 12.01% (annualized). For the
same period, Eagle's return on average assets was 0.90%.
Increases in net income in recent fiscal years are principally
attributable to increases in the average balance, or volume, of interest-earning
assets, as net interest margins remained relatively stable over such periods.
Since the second quarter of fiscal 1994, however, interest rates have risen. As
a result, those of Eagle's assets which are subject to repricing in the
short-term have begun to earn higher yields. In contrast, the prevailing market
interest rates paid on deposit liabilities, Eagle's primary source of funds and
largest amount of interest-bearing liabilities, have not significantly
increased. Eagle anticipates that if market interest rates continue to rise, the
cost of interest-bearing deposits will increase, thereby having a negative
impact on Eagle's average interest rate spread and net interest margin.
Net income for the fourth quarter of fiscal 1994 will be favorably
affected by the Bank of Hartford acquisiton. See "- Results of Operations - Bank
of Hartford Acquisition." Net income for such quarter will be reduced by several
non-recurring expenses related to future retirement payments for services
rendered by two executive officers. See "- Results of Operations - Comparison
of Periods Ended June 30, 1994 and 1994."
The operations of the Company and the entire thrift industry are
significantly affected by prevailing economic conditions, competition and the
monetary and fiscal policies of governmental agencies. Lending activities are
influenced by the demand for and supply of housing, competition among lenders,
the level of interest rates and the availability of funds. Deposit flow and
costs of funds are influenced by prevailing market rates of interest, primarily
on competing investments, account maturities, and the levels of personal income
and savings nationwide.
Results of Operations - Bank of Hartford Acquisition
The Bank of Hartford acquisition was completed on June 10, 1994 and,
although reflected in the financial condition of Eagle at June 30, 1994, did not
have a significant impact on Eagle's operating results for the nine months ended
June 30, 1994. As part of the acquisition, Eagle acquired $265.0 million of
assets (not including $11.0 million of goodwill and core deposit intangibles),
and assumed $272.8 million of deposits as well as $2.3 million of advance
payments by borrowers for taxes and insurance and $978,000 of other liabilities,
primarily accrued interest payable on deposits.
The assets acquired included $112.4 million of cash and receivables due
from the FDIC, $80.6 million of loans, $72.7 million of investments and
mortgage-backed securities, and $2.6 million of other assets (consisting of $1.4
million of accrued interest receivable, $880,000 of mortgage servicing rights
and $260,000 of real estate acquired in settlement of loans). See "-Financial
Condition."
The $112.4 million in cash and receivables due from the FDIC included
$30.4 million of cash, amounts due from banks and interest bearing deposits of
the Bank of Hartford which were acquired. The remaining $82.0 million of cash
and receivables due from the FDIC represented the excess of liabilities assumed
over assets acquired in the transaction, the estimated amount due from the FDIC
to adjust the investment and mortgage-backed securities to market value at June
10, 1994 and certain settlement items currently being negotiated with the FDIC,
less an $8.7 million premium paid by Eagle to the FDIC to purchase the assets
and assume the liabilities. Of the $82.0 million of cash and receivables due
from the FDIC, $72.3 million was received on June 13, 1994. At June 30, 1994,
substantially all of the acquired cash, net of the amount used to fund deposit
run-off, was invested in federal funds and interest-bearing deposits at a
weighted average yield of 4.25%. Eagle intends to increase the yield received on
such funds, primarily through the use of such funds to originate loans and, to a
lesser extent, to purchase short-and intermediate-term investments.
Investments and mortgage-backed securities acquired included $24.1
million of debt securities, consisting of $16.0 million of collateralized
mortgage obligations, $4.9 million of U.S. government agency and corporation
debt, $2.3 million of U.S. Treasury securities and an $880,000 municipal bond.
Also acquired were $48.5 million of Federal Home Loan Mortgage Corporation
mortgage-backed certificates. The actual purchase price of the investment and
mortgage-backed securities is subject to adjustment based upon a valuation of
such securities as of June 10, 1994 to be obtained by the FDIC. Eagle intends to
retain the portfolio, except for FHLB securities with an estimated market value
at June 10, 1994 of approximately $4.9 million, which do not meet Eagle's
investment securities criteria because of their repricing formula. Eagle is
seeking to have the FDIC exclude the FHLB securities from the Bank of Hartford
acquisition. Based upon management's valuation of the investment and
mortgage-backed securities acquired at June 10, 1994, except for the FHLB
securities, which are not expected to be retained, the acquired portfolio had an
estimated weighted average yield of 7.22% at June 30, 1994.
Loans acquired in the Bank of Hartford acquisition included $60.0
million of residential 1-4 family mortgage loans and $20.6 million of consumer
loans, primarily home equity loans. The net premium of loans acquired was
$190,000. The weighted average yield of the $80.6 million acquired loans was
8.33% at June 30, 1994. This compares to a weighted average yield of 7.06% for
Eagle's $705.3 million other loans receivable at June 30, 1994. Also as part of
the Bank of Hartford acquisition, Eagle purchased for $880,000 the loan
servicing rights on $80.5 million of 1-4 family residential loans with an
average loan servicing fee of 0.375%. The $272.8 million of deposits assumed in
the Bank of Hartford acquisition had a weighted average interest cost of 3.82%
at June 30, 1994.
Based solely on the weighted average yields of the interest-earning
assets acquired and the weighted average costs of the interest-bearing
liabilities assumed, the average interest rate spread relating to such assets
and liabilities acquired in the Bank of Hartford acquisition was approximately
2.40% at June 30, 1994, which would significantly increase Eagle's net interest
income. However, the actual impact of the Bank of Hartford acquisition on net
interest income will depend upon a number of variables including the amount of
deposit runoff subsequent to the acquisition, how management reinvests the net
cash and receivables from the acquisition, the prepayment experience on the
investment and mortgage-backed securities and loans purchased, and changes in
interest rates.
Based solely on the purchase of mortgage servicing rights and
additional customer service fees on deposits at June 30, 1994, Eagle's other
income would increase by approximately $700,000, on an annualized basis.
However, the actual impact of the Bank of Hartford acquisition on other income
is subject to many of the same variables as discussed above for net interest
income.
The Bank of Hartford transaction is expected to have a positive impact
on Eagle's efficiency ratio (other expenses to net interest income and other
income). As to other expenses, Eagle believes that the primary impact of the
transaction will be additional office occupancy and compensation related
expenses for the six new banking offices acquired. Eagle has retained
approximately 50 former branch personnel of the Bank of Hartford to operate the
new banking offices. It is estimated that the annual compensation and benefits
expense for these additional employees in the first year will be approximately
$1.0 million. First year occupancy expenses for the six offices are anticipated
to be approximately $450,000. Other expenses such as federal insurance premiums,
and data processing, marketing and other operating expenses also will increase
as a result of the increase in deposit accounts. As to the six new offices, as
of June 30, 1994 the average amount of deposits held in each office was $41.6
million, which approximates the average amount of deposits held in the other
banking offices of Eagle.
As part of the Bank of Hartford acquisition, Eagle intends to purchase
for $65,000 three former Bank of Hartford banking offices. Based on current
appraisals, Eagle believes that the fair value of the purchased offices will
exceed significantly the amount of the purchase price. The final determination
of fair value is subject to further review of current appraisals and
environmental issues related to the purchased offices. The amount of any excess
of fair value over the purchase price will result in a corresponding increase in
the carrying value of the purchased premises and a reduction in the amount of
the intangible asset that resulted from the Bank of Hartford transaction.
The Bank of Hartford acquisition initially resulted in $11.9 million of
intangible assets, including $8.6 million of goodwill, $2.4 million of core
deposit intangibles and $880,000 of purchased mortgage servicing rights. The
goodwill amount will be reduced by any amount that the fair value of banking
offices to be acquired from the FDIC as part of the acquisition exceeds the
purchase price, as discussed above. The amortization of the goodwill on a
straight-line basis over a period of 15 years will increase non-interest
expenses by approximately $570,000 annually. The core deposit intangible, which
is based upon certain industry average estimates and assumptions, will be
amortized on a accelerated basis over a 10 year period and will increase annual
non-interest expenses on average by approximately $238,000 with charges of
$588,000, $370,000, $292,000, $230,000 and $182,000 in each of the first five
years following the acquisition, respectively. The $880,000 cost of purchased
mortgage servicing rights will be amortized over the life of the loans being
serviced.
Results of Operations - Comparison of Periods Ended June 30, 1994 and 1993
Net Income - Eagle had net income of $5.6 million, or $1.74 per share,
for the nine months ended June 30, 1994, an increase of $888,000, or 18.8%, from
net income of $4.7 million, or $1.51 per share, for the comparable period in
1993. Net interest income increased $1.5 million, or 7.3%, from $20.4 million
for the nine months ended June 30, 1993 to $21.9 million for the comparable
period in 1994. Other income increased $441,000, or 24.4%, to $2.2 million for
the nine months ended June 30, 1994 and other expenses increased $1.5 million,
or 12.1%, to $13.5 million.
Eagle had net income of $2.2 million, or $0.67 per share, for the
quarter ended June 30, 1994, an increase of $531,000, or 32.6%, from net income
of $1.6 million, of $0.15 per share. Net interest income increased $660,000, or
9.3%, from $7.1 million for the quarter ended June 30, 1993 to $7.7 million for
the quarter ended June 30, 1994. Compared to the June 30, 1993 quarter, other
income increased $189,000, or 30.2% to $815,000 for the quarter ended June 30,
1994, and other expenses increased $557,000, or 14.2%, to $4.5 million for the
quarter ended June 30, 1994.
Net Interest Income - Net interest income increased $660,00, or 9.3%,
from $7.1 million for the June 30, 1993 quarter to $7.7 million for the June 30,
1994 quarter. Net interest income increased $1.5 million, or 7.3%, to $21.9
million for the nine months ended June 30, 1994, as compared to $20.4 million
for the nine months ended June 30, 1993. The increased net interest income is
reflected in a $135,000 increase in interest income, coupled with a $1.4 million
decrease in interest expense. For the nine months ended June 30, 1994, Eagle's
average interest rate spread was 3.40%, and its net interest margin was 3.61%,
compared to 3.42% and 3.65%, respectively, for the nine months ended June 30,
1993.
Interest income for the June 30, 1994 quarter increased $916,000, or
6.6%, to $14.8 million, compared to $13.9 million for the comparable period in
1993. Interest income during the nine months ended June 30, 1994 remained
relatively stable compared to the same period in 1993, increasing $135,000, or
0.3%, to $42.1 million. Average interest earning assets increased to $807.7
million for the nine months ended June 30, 1994, compared to $744.8 million for
the same period in 1993. This increase is reflected primarily in a $64.6 million
increase in average loans receivable which resulted from high levels of loan
originations during the nine months ended June 30, 1994. The growth in average
interest-earning assets was substantially offset by a 56 basis point decline in
the average yield of such assets.
Interest expense for the June 30, 1994 quarter increased $256,000, or
3.7%, to $7.1 million, compared to $6.8 million for the comparable period in
1993. Interest expense decreased $1.4 million, or 6.3%, to $20.2 million for the
nine months ended June 30, 1994 compared to $21.6 million for the same period in
1993. Notwithstanding a $39.1 million increase in average deposits to $736.3
million for the nine months ended June 30, 1994, the interest expense
attributable to such funds decreased $2.0 million, resulting in an average cost
of deposits of 3.49% for the 1994 period compared to 4.06% for the 1993 period.
Average total borrowings also increased to $22.1 million during the 1994 period
compared to $6.1 million during the 1993 period. However, the average cost of
such borrowings in the 1994 period was 5.62% compared to 7.44% in the 1993
period. The average cost of funds for Eagle was 3.55% for the nine months ended
June 30, 1994 compared to 4.09% for the same period in 1993.
Provision for Loan Losses - Eagle added provisions for loan losses of
$300,000 for the quarter ended June 30, 1994, compared to $529,000 for the same
period in 1993. Eagle added provisions of $900,000 to its allowance for loan
losses during the nine month period ended June 30, 1994. This compares to $1.2
million in loan loss provisions for the nine months ended June 30, 1993. Net
loan charge-offs for the nine months ended June 30, 1994 were $1.0 million (or
0.15% of average net loans receivable), compared to $958,000 (or 0.11% of
average net loans receivables) for the same period in 1993. The decreased
provision in 1994 reflects management's analysis of the risk elements of the
loan portfolio, current delinquency and payment trends (including the slightly
increased level of loan charge-offs in the nine months ended June 30, 1994) and
the adequacy of the allowance for loan losses. At June 30, 1994, Eagle's
allowance for loan losses was $8.4 million, or 1.07% of loans receivable,
compared with $4.5 million, or 0.70%, one year earlier. The allowance for loan
losses at June 30, 1994 includes $3.5 million added to the allowance as part of
the Bank of Hartford transaction. See "-Financial Condition - Allowance for Loan
Losses."
Other Income - Other income increased $189,000, or 30%, to $815,000 for
the June 30, 1994 quarter, compared to $626,000 for the same period in 1993. The
increase includes a $125,000 increase in customer services fee income.
Other income increased $441,000, or 24.4%, to $2.2 million for the nine
months ended June 30, 1994 from $1.8 million for the same period in 1993. The
increase in the 1994 nine month period is attributable primarily to a $120,000
net gain on sale of mortgage loans and a $218,000 increase in customer service
fee income.
Other Expenses - Other expenses increased $557,000, or 14.2%, to $4.5
million for the June 30, 1994 quarter, compared to $3.9 million for the same
period in 1993. The increase includes a $254,000 increase in compensation
related expenses, $61,000 increase in federal deposit insurance premiums and
$57,000 increase in data processing expenses.
Other expenses for the nine months ended June 30, 1994 increased $1.5
million, or 12.1%, to $13.5 million compared to $12.1 million for the nine month
period ended June 30, 1993. The largest contributing factors to the increase
included higher compensation related expenses of $6.4 million for the nine
months ended June 30, 1994, compared to $5.5 million for the same period in
1993, and larger provisions for losses on real estate owned of $435,000,
compared to $199,000 for the same respective periods. The higher compensation
related expenses reflect increased pension expenses for the 1994 period compared
to 1993 because the Company's pension plan was over-funded during part of 1993.
Also, the Company's post-retirement benefits expenses increased as a result of
the adoption of Statement of Financial Accounting Standards ("SFAS") No. 106
(see "-Cumulative Effect of Accounting Change" below). In addition to the
increased compensation expenses reported for the nine months ended June 30,
1994, Eagle will record several non-recurring expenses totalling approximately
$500,000, after tax, in the fourth quarter of fiscal 1994 relating to
retirements of Ralph T. Linsley, President and Chief Executive Officer, and
Howard E. Walsh, Vice President. The increase in the provision for losses on
real estate owned during the first nine months of fiscal 1994 reflects Eagle's
current strategy to sell properties more aggressively than in the past. A total
of 29 properties with a book value of $2.2 million were sold in the nine months
ended June 30, 1994.
Income Taxes - Income tax expense was $1.6 million for both the quarter
ended June 30, 1994 and June 30, 1993. Income tax expense was $4.1 million for
the nine months ended June 30, 1994, compared to $4.2 million for the same
period in 1993. Notwithstanding higher income during the 1994 period as compared
to the 1993 period, income tax expense was $157,000, or 3.7%, less for the 1994
period. As a result of the adoption of SFAS No. 109, "Accounting for Income
Taxes," (see "-Cumulative Effect of Accounting Change" below), Eagle is
permitted a tax benefit for certain real estate owned and loan loss provisions
that was not allowed under prior accounting rules.
Cumulative Effect of Accounting Changes - Eagle was required to adopt
two accounting pronouncements in the first quarter of fiscal 1994. The
cumulative effect of these accounting changes, net of related tax benefits, was
to reduce net income by approximately $30,000 during the nine months ended June
30, 1994. The adoption of SFAS No. 109, "Accounting for Income Taxes", resulted
in recognition of a tax benefit of approximately $1.3 million during the nine
months ended June 30, 1994. The adoption of SFAS No. 106, "Accounting for
Postretirement Benefits Other than Pensions", resulted in a one-time cumulative
adjustment that, net of the related tax benefit, reduced net income by
approximately $1.3 million.
Financial Condition
Total assets of the Company increased to $1.1 billion at June 30, 1994
from $792.5 million at September 30, 1993. The growth in assets from fiscal year
end 1993 to June 30, 1994 reflects primarily Eagle's acquisition of certain
assets and assumption of certain liabilities of the Bank of Hartford from the
FDIC. In the Bank of Hartford transaction, which was completed on June 10, 1994,
Eagle recorded on additional $276.0 million of assets. The assets acquired
included $80.6 million of loans, (substantially all of which were 1-4 family
first mortgage and home equity loans) before giving effect to the $190,000
premium paid on such loans and an additional $3.5 million allowance for loan
losses recorded in connection with such loans. See "- Allowance for Loan
Losses." The Company also acquired $112.4 million of cash, other amounts due
from banks and cash receivables due from the FDIC, $72.7 million of investment
securities (substantially all of which were U.S. Treasury and government agency
securities) and $13.6 million of other assets. The $13.6 million of other assets
included $8.7 million of goodwill, $2.4 million of core deposit intangibles,
$1.4 million of interest receivable on the purchased loans, $880,000 of mortgage
servicing rights and $260,000 of real estate acquired in settlement of loans.
Also, as part of the Bank of Hartford acquisition, Eagle intends to purchase
three of the former Bank of Hartford banking offices. See "--Results of
Operations -- Bank of Hartford Acquisition."
Loans Receivable, Net - The Company's net loans receivable portfolio
increased to $775.1 million at June 30, 1994 from $656.3 million at September
30, 1993. The growth in the net loans receivable portfolio reflects strong total
loan originations of $164.1 million during the nine months ended June 30, 1994.
Increased loan origination activity during the first nine months of fiscal 1994
is due in substantial part to refinancings of mortgage loans in reaction to
generally low market interest rates. Also, in June 1994 the Bank acquired $80.6
million of loans in the Bank of Hartford transaction. Substantially all of the
loans purchased in this transaction consisted of 1-4 family first mortgage and
home equity loans.
As a result of generally higher mortgage interest rates and a lower
demand for loan refinancing, Eagle anticipates a decline in demand for 1-4
family residential mortgages and, beginning in fiscal 1995, intends to implement
strategies which will put more emphasis on originating commercial real estate
loans, predominantly on existing structures. This will involve hiring additional
personnel with proven experience in commercial real estate loan products. Eagle
also intends to put more emphasis on its multi-family and consumer lending
programs. The marketing of these loans will focus on Eagle's existing customer
base, as well as new relationships within Eagle's primary market areas. By
increasing originations of commercial real estate, multi-family and consumer
loans, Eagle's goal is to increase the yield on its loan portfolio while
offsetting the anticipated decline in 1-4 family residential loan originations.
Eagle also anticipates that these loan products generally will be more
interest-rate sensitive, with rates typically adjusting from monthly to
annually. See "Certain Considerations--Commercial Real Estate, Multi-Family and
Consumer Lending."
At June 30, 1994 commercial real estate loans totaled $12.5 million,
consisting of 66 loans with an average balance of $187,000 and secured by a mix
of retail and professional office properties. In order to implement its
anticipated commercial real estate lending strategies, Eagle is currently
seeking to hire an experienced senior commercial lender, credit analyst and
support personnel. In the first year of any commercial real estate lending
program, in light of personnel and other start-up costs, Eagle expects such
program to have a negligible impact on results of operations. Thereafter,
commercial real estate lending is expected to contribute positively to Eagle's
net income.
At June 30, 1994, consumer loans totaled $67.9 million and multi-family
loans totaled $17.7 million. Over the next three fiscal years, Eagle plans to
place greater emphasis on these loan products, with a three year goal to
increase consumer loans outstanding by 50% and multi-family loans by 100%. Eagle
intends to continue emphasizing home equity loans (91.2% of consumer loans at
June 30, 1994), as well as automobile and personal loans. The increase in
multi-family loans is expected to develop from an increase in demand for rental
units in Eagle's primary market areas. As to both consumer and multi-family
lending, Eagle intends to utilize its existing credit programs and personnel,
although multi-family lending personnel will be supplemented by the credit
analyst expected to be hired for commercial real estate lending.
Allowance for Loan Losses - At June 30, 1994, Eagle's allowance for
loan losses totaled $8.4 million, compared to $5.0 million at September 30,
1993. Management monitors the adequacy of the allowance for loan losses and
periodically makes additions based upon an ongoing assessment of the loan
portfolio. During the nine months ended June 30, 1994, in addition to a $900,000
provisions for loan losses, Eagle increased the allowance by $3.5 million in
connection with the acquisition of $80.6 million of loans in the Bank of
Hartford transaction.
Management monitors the adequacy of the allowance for loan losses and
periodically makes additions in the form of provisions for loan losses based
upon an ongoing assessment of the loan portfolio. These provisions are based on
an evaluation of the loan portfolio, past loan loss experience, current market
and economic conditions, volume, growth and composition of the loan portfolio,
and other relevant factors. The provisions are computed quarterly based on a
review of the loan portfolio. The additional $3.5 million and $1.8 million of
allowance for loan losses that were booked as part of the Bank of Hartford and
Danbury Federal transactions, respectively, were based on management's
evaluation of the loans acquired in these transactions. Such evaluation included
an analysis of the loss on all delinquent loans as well as the risk of the
remaining 1-4 family and consumer loans acquired. The additional allowances were
accounted for as an adjustment to the premium paid by Eagle in the Bank of
Hartford and Danbury Federal transactions.
The ratio of allowance for loan losses to non-performing loans was 104%
and 77% at June 30, 1994 and September 30, 1993, respectively. This coverage
ratio will vary from time to time based upon the composition of, and
management's analysis of the risk elements in the loan portfolio, as well as the
composition of problem loans. The allowance for loan losses is not based on a
percentage of non-performing loans, but on the total portfolio classified by
risk group plus estimated losses on individual problem loans.
The following table sets forth the amount of accruing loans delinquent
60-89 days, the amount of non-accrual loans, the balance of the Company's
allowance for loan losses and the coverage ratio of such allowance to the total
of loans at the dates indicated. See "--Non-performing Assets" below for
definition of non-accrual loans.
<TABLE>
<CAPTION>
June 30, September 30, September 30,
1994 1993 1992
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Accruing loans delinquent 60-89
days................................ $ 1,724 (a) $ 2,412 $ 2,332
Non-accrual loans..................... 8,027 (b) 6,492 3,996
----- ----- -----
Total................................. $ 9,751 $ 8,904 $ 6,328
===== ===== =====
Allowance for loan losses............. $ 8,370 (c) $ 5,005 $ 4,011
Coverage ratio........................ 85.8% 56.2% 63.4%
- - -----------------
<FN>
(a) Includes $431,000 of loans delinquent 60-89 days or more acquired in the Bank of Hartford transaction.
(b) Includes $2.5 million of non-performing loans acquired in the Bank of Hartford transaction.
(c) Includes an additional $3.5 million of allowance for loan losses established as part of the Bank of Hartford
transaction.
</TABLE>
At June 30, 1994, loans delinquent 60 days or more (including
non-performing loans) totaled $6.8 million (before giving effect to $2.9 million
of such loans acquired in the Bank of Hartford transaction), compared to $8.9
million at September 30, 1993 and $6.3 million at September 30, 1992. Eagle's
progress in reducing loans delinquent 60 days or more during the nine months
ended June 30, 1994 is attributable to a stabilized Connecticut economy coupled
with the Bank's increased collection efforts earlier in the collection cycle.
Various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for losses on loans and real
estate owned. Such agencies may require the Bank to recognize additions to the
allowances based on their judgments of information available to them at the time
of their examination. The OTS completed a regularly scheduled examination of the
Bank during 1993 and no changes to the allowance for loan losses were required
at that time.
Non-performing Assets - All mortgage and home equity loans generally
are placed on a non-accrual basis when a loan is contractually delinquent for
more than three complete calendar months, when collectability is doubtful or
when legal action has been instituted. Unsecured consumer loans are placed on a
non-accrual basis when a payment default has existed for more than 60 days or
when collectability is doubtful or when legal action has been instituted; such
loans are fully charged-off when a payment default has existed for 90 days.
At June 30, 1994, the Company's total non-performing assets, including
non-performing (or non-accrual) loans, real estate owned as a result of
foreclosure or deed in lieu thereof and in-substance foreclosures, was $12.0
million or 1.09% of total assets. Non-performing assets were $9.2 million or
1.10% of total assets (without giving effect to the $2.8 million of
non-performing assets acquired in the Bank of Hartford transaction). This
compares to non-performing assets of $12.0 million, or 1.51% of total assets, at
September 30, 1993. Exclusive of the non-performing assets acquired in the Bank
of Hartford transaction, the amount of non-performing assets has declined during
the nine months ended June 30, 1994. Management believes this trend reflects the
stabilization in the real estate market and economy in Connecticut over the past
12-18 months.
At June 30, 1994, non-performing assets (including the $2.8 million
acquired in the Bank of Hartford transaction) included $8.0 million in
non-performing loans (consisting of loans delinquent 90 days or more) and $3.9
million in real estate owned and in-substance foreclosures. Approximately
$30,000 in interest income was recognized on non-performing loans during the
nine-month period ended June 30, 1994. If these loans had been performing in
accordance with their original terms, approximately $404,000 would have been
received during the nine-month period ended June 30, 1994. At September 30,
1993, non-performing assets included $6.5 million in non-performing loans and
$5.5 million in real estate owned and in-substance foreclosures.
Although the level of non-performing loans has declined in the nine
months ended June 30, 1994 (before giving effect to the non-performing assets
acquired in the Bank of Hartford transaction), management expects a number of
the non-performing loans to become real estate owned. The overall level of real
estate owned will depend on the number of loans which can be resolved prior to
foreclosure and the ability of Eagle to sell properties which it owns. The
Company aggressively markets properties and has been able to decrease the level
of real estate owned during the nine months ended June 30, 1994. A more active
real estate market reduces the level of non-performing loans and real estate
owned as properties are sold. Demand for 1-4 family residential properties in
the Company's market areas has been strong in recent months.
Mortgage-Backed and Investment Securities - The Company's total
holdings of mortgage-backed and investment securities increased to $173.9
million at June 30, 1994 from $88.4 million at September 30, 1993. The increase
from fiscal year end 1993 to June 30, 1994 reflects the purchase of investment
securities funded with matching FHLB advances, as well as the acquisition of
$72.7 million of investment securities, substantially all of which are U.S.
Treasury and agency securities, in the Bank of Hartford transaction.
The Company's investment portfolio at June 30, 1994 was comprised
primarily of U.S. Treasury and government agency securities and other investment
securities rated in the top grade by at least one nationally recognized rating
agency. The collateralized mortgage obligation portion of the investment
portfolio contains no derivative investment securities such as interest only
tranches, principal only tranches or strips. The mortgage-backed securities held
by Eagle are subject to interest rate and prepayment risks customarily
associated with such securities. The average weighted life of mortgage-backed
securities will differ from contractual maturities, depending upon the rate of
prepayments. Borrowers on the underlying mortgages may have the right to prepay
their loans with or without prepayment penalties. In a declining interest rate
environment, more borrowers than would otherwise be anticapated may choose to
prepay their loans in order to refinance the loans at lower rates. As a result,
the actual yield on mortgage-backed securities may be less than the expected
yields based upon prepayment experience.
Deposits - Deposits increased to $982.7 million at June 30, 1994 from
$706.2 million at September 30, 1993. The growth in deposits includes the
assumption of $275.0 million of deposits of the Bank of Hartford in June 1994.
Total borrowings increased to $31.6 million at June 30, 1994 from $16.3 million
at September 30, 1993. The increase in borrowed money for the first nine months
of fiscal 1994 reflects the use of FHLB advances to fund a portion of loan
originations and to purchase investment securities with matching durations. Loan
originations also were funded with loan repayments and deposits.
Asset and Liability Management
Net interest income, the primary component of the Company's net income,
is derived from the difference or "spread" between the yield on interest-earning
assets and the cost of interest-bearing liabilities. The Company has sought to
reduce its exposure to changes in interest rates by matching more closely the
effective maturities and repricings of its interest-sensitive assets and
liabilities. At the same time, the Company's asset and liability management
strategies also must accommodate customer demands for particular types of
deposit and loan products.
While much of the Company's asset and liability management efforts
involve strategies which increase the rate sensitivity of its loans and
investments, such as originations of adjustable rate loans and purchases of
adjustable rate mortgage-backed securities and short term investments, it also
uses certain techniques to reduce the rate sensitivity of its deposits and
borrowed money. Those techniques include attracting longer term certificates of
deposit when the market will permit, emphasizing core deposits which are less
sensitive to changes in interest rates, and borrowing through long-term FHLB
advances. At June 30, 1994 and September 30, 1993, 57.8% and 58.3%,
respectively, of Eagle's net loans receivable portfolio consisted of
adjustable-rate mortgage and other loans. While Eagle has generally retained its
local loan originations in portfolio, it may from time to time sell loans to
maintain an acceptable interest rate sensitivity tolerance.
The Company measures its exposure to rate fluctuations on a quarterly
basis primarily by using a computer modeling system designed for savings
institutions such as Eagle Federal. The computer modeling system quantifies the
approximate impact that increases and decreases in interest rates would have on
Eagle's net interest income. Under the model, interest rates are assumed to move
to specified levels on an immediate or "shock" basis. The Board-approved
tolerance for decreases in net interest income is up to 20%, based upon the
model's prediction of the impact of an immediate 200 basis point increase in
interest rates. At June 30, 1994, according to the computer model and using
asset and liability repricing assumptions based on Eagle's historical
experience, if interest rates were to immediately increase by 200 basis points
the negative impact on the Company's net interest income would be within the
Board-approved tolerance level.
The Company also monitors other indicators of interest rate risk. One
commonly used measure of interest rate risk exposure is reflected in the
Company's one-year cumulative gap, which is the difference between rate
sensitive assets and rate sensitive liabilities maturing or repricing within one
year. An asset or liability is said to be interest rate sensitive within a
specific period if it will mature or reprice within that period. The interest
rate sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities, and
is considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets.
At June 30, 1994, using assumptions based on the Bank's historical
experience, the Company's one-year gap was positive 2.7%. The Company's current
asset liability management strategy is to maintain a one-year gap within a
tolerance of plus or minus 15%. However, the Company believes there are certain
shortcomings inherent in the gap analysis and, accordingly does not rely solely
on gap analysis as an accurate measure of interest rate risk. Although certain
assets and liabilities may have similar maturities or periods of repricing, they
may react in different degrees to changes in market interest rates. The interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types of assets
and liabilities may lag behind changes in market interest rates. Certain assets,
such as adjustable-rate mortgages, have features which restrict changes in
interest rates on a short-term basis and over the life of the assets. In the
event of a change in interest rates, prepayment and early withdrawal levels
would likely deviate significantly from those assumed in calculating the table.
The ability of many borrowers to service their debt may decrease in the event of
an interest rate increase.
Under OTS regulations to be effective as of September 30, 1994, an
institution's interest rate risk exposure is measured based upon a 200 basis
point change in market interest rates. A savings institution whose measured
interest rate risk exposure is greater than specified levels must deduct an
interest rate risk component when calculating total capital for purposes of
determining regulatory risk-based capital levels. As of June 30, 1994, the
Company believes that it would not have been required to deduct any interest
rate risk component under the OTS interest rate risk capital regulations.
Liquidity and Capital Resources
Total shareholders' equity increased to $64.6 million at June 30, 1994
from $60.4 million at September 30, 1993. The increase in shareholders' equity
during the first nine months of fiscal 1994 reflects total net income of $5.6
million, offset by cash dividends to shareholders aggregating $1.8 million. Also
during the period, shareholders' equity increased by $1.1 million as a result of
a reduction in debt related to the Company's employee stock ownership plan,
exercise of stock options, and purchases by shareholders under the Company's
dividend reinvestment and stock purchase plan. This increase was partly offset
by a $675,000 reduction in shareholders' equity at June 30, 1994 to reflect net
unrealized losses on the Company's mutual fund and marketable equity securities
portfolio.
Management periodically reviews the unrealized losses on securities to
assess whether a security has an other than temporary decline in value. At June
30, 1994, management did not believe that any of Eagle's securities had an other
than temporary decline in value that should result in a write down of securities
and a corresponding decrease in the Company's income. Management continues to
monitor whether any portions of the $675,000 net unrealized losses on the
Company's mutual fund and marketable securities portfolio (on a pre-tax basis at
June 30, 1994) should be reflected through a write-down of such securities
during future periods.
As a member of the FHLB System, the Bank is required to maintain liquid
assets at 5% of its withdrawable deposits plus short-term borrowings. At June
30, 1994, the Bank was in compliance with the OTS liquidity requirements, having
a ratio of 11.7%.
The Company's principal sources of funds include deposits, loan
payments (including interest, amortization of principal and prepayments),
earnings and amortization on investments, maturing investments and FHLB
advances. Principal uses of funds include loan originations, investments,
payments of interest on deposits, and payments to meet operating expenses. At
June 30, 1994, the Company had approximately $75.4 million in loan commitments
outstanding including $24.2 million in available home equity lines of credit and
$7.5 million in amounts due borrowers for construction loan advances. It is
expected that these and future loans will be funded primarily by deposits, loan
repayments, investment maturities and amortization and borrowings. The Bank has
the aggregate capacity to borrow up to $625.6 million in advances from the FHLB
of Boston and will continue to consider this source for lending. FHLB advances
at June 30, 1994 were $23.7 million, compared to $15.5 million at September 30,
1993.
It is the Company's general policy to purchase debt securities
(including mortgage-backed securities) with the intent and ability to hold to
maturity for purposes of earning interest income and meeting regulatory
liquidity requirements. Events which may be reasonably anticipated are
considered when determining the Company's intent to hold investment securities
to maturity. Such securities are classified as investment securities and are
stated at cost adjusted for amortization of premiums and accretion of discounts.
Equity securities and mutual fund investments are accounted for, in the
aggregate, at the lower of cost or market value with any unrealized loss being
recorded as a reduction to shareholders' equity. When a security available for
sale is sold, the proceeds are used to fund loans when deposit flows are not
adequate, the rates offered on advances are not favorable, and liquidity ratios
support such sales. Management believes such an approach to be prudent since it
provides an opportunity to reinvest the proceeds from sales of this type into
higher yielding mortgage loans. The Company also occasionally sells securities
available for sale to restructure an asset/liability mismatch. During the nine
months ended June 30, 1994, Eagle sold $2.8 million of investment securities.
During fiscal 1993, investment securities sold totaled $12.0 million, producing
net gains of $52,000, while maturing investment securities totaled $6.4 million.
There were no mortgage-backed securities sold or maturing in fiscal 1993.
The Bank is required by the OTS to meet minimum capital requirements,
which include tangible capital, core capital and risk-based capital
requirements. The Bank's actual capital as reported to the OTS at June 30, 1994
exceeded all three requirements. The following chart sets forth the actual and
required minimum levels of regulatory capital for the Bank under applicable OTS
regulations as of June 30, 1994:
<TABLE>
<CAPTION>
Excess Actual Percent Required Percent
-------- -------- --------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Core......................... $ 50,898 4.69% $ 32,572 3.00% $ 18,326
Tangible..................... 50,564 4.66 16,286 1.50 34,278
Risk-based................... 53,930 10.59 40,726 8.00 13,204
</TABLE>
The OTS has proposed to increase the minimum required core capital
ratio from the current 3% level to a range of 4% to 5% for all but the most
highly rated financial institutions. While the OTS has not taken final action on
such proposal, it has adopted a prompt corrective action regulation that
classifies any savings institution that maintains a core capital ratio of less
than 4% (3% in the event the institution was assigned a composite 1 rating in
its most recent report of examination) as "undercapitalized." As of June 30,
1994, the Bank had a core capital ratio of 4.66% and met the requirements for an
"adequately capitalized" institution.
Recent Accounting Developments
In May 1993, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 114, Accounting by Creditors for Impairment of a Loan. SFAS No. 114
requires that loans be impaired when it is probable that a creditor will be
unable to collect all amounts (i.e., principal and interest) contractually due,
and that the impairment be measured based on the present value of expected
future cash flows discounted at the loan's original effective interest rate.
SFAS No. 114 also allows impairments to be measured based on the loan's market
price or the fair value of the collateral if the loan is collateral dependent.
The effective date for SFAS No. 114 is for fiscal years beginning after December
15, 1994. Eagle has not yet determined the impact of adoption of this statement.
In May 1993, the FASB issued SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. SFAS No. 115 generally would require
that debt and equity securities that have readily determinable fair values be
carried at fair value unless they are classified as held to maturity. Securities
would be classified as held to maturity and carried at amortized cost only if
the reporting entity has a positive intent and ability to hold those securities
to maturity. If not classified as held to maturity, such securities would be
classified as trading securities or securities available for sale. Unrealized
holding gains or losses for securities available for sale would be excluded from
earnings and reported as a net amount in a separate component of shareholders'
equity. The effective date for the statement is for fiscal years beginning after
December 15, 1993. Based on the securities held by Eagle at June 30, 1994 the
Company does not believe that this statement will have a material effect on the
classification of its securities upon adoption. The impact on Eagle's future
financial position or results of operations will be based on the future fair
values of its securities.
<PAGE>
EAGLE FINANCIAL CORP.
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.
EAGLE FINANCIAL CORP.
Date: September 12, 1994
By: /s/ Ercole J. Labadia
-------------------------------
Ercole J. Labadia
Vice President, Administration
Date: September 12, 1994
By: /s/ Barbara S. Mills
Barbara S. Mills
Vice President and Treasurer
<PAGE>
