UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
Eagle Financial Corp.
(Exact name of Registrant as specified in its charter)
Delaware 06-1194047
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) identification No.)
222 Main Street, Bristol, CT 06010
(Address of principal executive offices)
(860) 314-6400
(Registrant's telephone number, including area code)
Not applicable
(Former name, address and fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities and 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 X No
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) 4,522,776
- --------------------------------------------------------------------------------
(Class) (Approximate No. of Shares
Outstanding at August 9, 1996
(Excluding Treasury Stock)
<PAGE>
EAGLE FINANCIAL CORP. AND SUBSIDIARIES
INDEX
PART 1 - FINANCIAL INFORMATION
Consolidated Balance Sheets at June 30, 1996
(unaudited) and September 30, 1995 2
Consolidated Statements of Income for the Three and Nine
Months Ended June 30, 1996 and 1995 (unaudited) 3
Consolidated Statements of Cash Flows for the Nine Months
Ended June 30, 1996 and 1995 (unaudited) 4-5
Notes to Consolidated Financial Statements 6-8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-16
PART II - OTHER INFORMATION 17
SIGNATURES 18
1
<PAGE>
EAGLE FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except for share data)
<TABLE>
<CAPTION>
6/30/96 9/30/95
Assets (Unaudited)
- ------ ----------- -----------
<S> <C> <C>
Cash and amounts due from depository institutions $ 23,840 $ 22,670
Interest-bearing deposits 11,256 40,637
------ ------
Cash and cash equivalents 35,096 63,307
Investment securities available for sale (amortized cost $23,682 at
June 30, 1996 and $54,386 at September 30, 1995) 23,702 53,816
Investment securities held to maturity (market value $1,018 at
June 30, 1996 and $2,543 at September 30, 1995) 984 2,476
Mortgage-backed securities available for sale (amortized cost $393,680 at June
30, 1996 and $231,145 at September 30, 1995) 390,967 232,160
Mortgage-backed securities held to maturity (market value $77,833 at
June 30, 1996 and $124,763 at September 30, 1995) 79,289 123,625
Loans held for sale 1,184 2,467
Loans receivable, net of allowance for loan losses of $8,920
at June 30, 1996 and $7,457 at September 30, 1995 795,999 713,856
Accrued interest receivable:
Loans 4,832 4,900
Investment securities 393 972
Mortgage-backed securities 3,679 2,608
Real estate owned, net 3,517 2,128
Stock in Federal Home Loan Bank of Boston, at cost 10,061 8,945
Premises and equipment, net 9,565 8,066
Prepaid expenses and other assets 43,149 17,960
------ ------
Total Assets $1,402,417 $1,237,286
========== ==========
Liabilities and Shareholders' Equity
- ------------------------------------
Liabilities
- -----------
Deposits $1,069,372 $ 951,751
Federal Home Loan Bank advances 179,330 73,150
Reverse repurchase agreements and other borrowed money 30,395 82,317
Advance payments by borrowers for taxes and insurance 10,050 5,498
Accrued expenses and other liabilities 10,914 32,110
------ ------
Total Liabilities 1,300,061 1,144,826
----------------- --------- ---------
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; 4,564,117 shares issued at June 30,
1996 and 4,507,107 shares issued at September 30, 1995, including
47,373 shares held in treasury 46 45
Additional paid-in capital 60,402 59,514
Retained earnings 43,883 33,092
Cost of common treasury stock (362) (362)
Employee stock ownership plan stock - (94)
Net unrealized gain (loss) on available for sale securities (1,613) 265
------ ---
Total Shareholders' Equity 102,356 92,460
------- ------
Total Liabilities and Shareholders' Equity $1,402,417 $1,237,286
========== ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
<PAGE>
EAGLE FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except for share data)
<TABLE>
<CAPTION>
Three Month Ended Nine Months Ended
-----------------------------------------------
6/30/96 6/30/95 6/30/96 6/30/95
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $15,642 $16,643 $45,190 $48,150
Interest on mortgage-backed securities 8,065 3,682 20,987 8,584
Interest on investment securities 406 600 1,596 2,209
Dividends on investment securities 668 734 3,177 1,808
--- --- ----- -----
Total interest income 24,781 21,659 70,950 60,751
====== ====== ====== ======
Interest expense:
Interest on deposits 11,137 9,556 33,162 26,497
Interest on Federal Home Loan Bank advances 2,515 1,178 5,602 2,433
Interest on reverse repurchase agreements
and other borrowed money 630 817 2,845 1,617
--- --- ----- -----
Total interest expense 14,282 11,551 41,609 30,547
====== ====== ====== ======
Net interest income 10,499 10,108 29,341 30,204
Provision for loan losses 225 525 1,816 975
--- --- ----- ---
Net interest income after provision
for loan losses 10,274 9,583 27,525 29,229
====== ===== ====== ======
Non-interest income:
Net gain (loss) on sale of securities 64 (10) (468) (114)
Gain (loss) from mortgage banking activities 255 - (1,479) -
Gain on sale of deposits - - 15,904 -
NOW account service fees 542 501 1,776 1,486
Other customer service fees 222 190 658 525
Other income 506 372 1,265 1,149
--- --- ----- -----
Total non-interest income 1,589 1,053 17,656 3,046
----- ----- ------ -----
11,863 10,636 45,181 32,275
====== ====== ====== ======
Non-interest expense:
Compensation, payroll taxes and benefits 3,168 2,957 9,306 8,444
Office occupancy 892 672 2,462 1,969
Advertising 280 238 1,221 703
Net cost of real estate owned operations 342 243 1,140 467
Federal deposit insurance premiums 312 613 1,123 1,717
Service bureau processing fees 367 397 1,227 1,177
Amortization of intangible assets 739 402 1,732 1,218
Other expense 856 871 3,636 2,544
--- --- ----- -----
Total non-interest expense 6,956 6,393 21,847 18,239
----- ----- ------ ------
Income before income taxes 4,907 4,243 23,334 14,036
Income taxes 1,989 1,728 9,452 5,795
----- ----- ----- -----
Net Income $2,918 $2,515 $13,882 $8,241
===== ===== ====== =====
Net Income per share:
Primary $ 0.62 $ 0.55 $ 2.97 $ 1.82
==== ==== ==== ====
Fully Diluted $ 0.62 $ 0.54 $ 2.96 $ 1.79
==== ==== ==== ====
Average number of shares and equivalent shares:
Primary 4,673,779 4,588,996 4,667,559 4,528,248
Fully Diluted 4,701,460 4,623,361 4,684,959 4,591,337
Dividends per share $ 0.23 $ 0.21 $ 0.69 $ 0.61
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
EAGLE FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
--------------------------
1996 1995
---- ----
<S> <C> <C>
Net income $ 13,882 $ 8,241
OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided (used)
by operating activities
Provision for loan losses 1,816 975
Provision for losses on real estate owned 419 159
Provision for depreciation and amortization 474 524
Accretion of fees on loans (354) (138)
Amortization of premiums (accretion of discounts) on investment
and mortgage-backed securities 714 (961)
Amortization of core deposit and other intangibles 1,732 1,218
Gain on sale of deposits (15,904) -
Loss (gain) on trading securities (40) -
Proceeds from sales of trading securities 16,928 -
Realized gain on sale of real estate owned, net (103) (69)
Realized loss on sale of securities, net 532 114
Loss from mortgage banking activities 1,479 -
Origination of loans held for sale (55,983) -
Proceeds from sales of loans held for sale 17,020 -
Increase in accrued interest receivable (191) (1,632)
Decrease (increase) in prepaid expenses and other assets (5,860) 8,306
Loan origination fees 691 224
Decrease in accrued expenses and other liabilities (1,554) (309)
------- -------
Net cash provided (used) by operating activities (24,302) 16,652
------- -------
INVESTING ACTIVITIES:
Proceeds from sales of investment securities availiable for sale 19,808 2,210
Proceeds from maturities of investment securities 21,000 12,200
Principal payments on investment securities available for sale 2,810 4,016
Principal payments on investment securities held to maturity - 3,618
Purchases of investment securities available for sale (22,017) (5,742)
Purchases of investment securities held to maturity - (7,892)
Proceeds from sales of mortgage-backed securities available for sale 144,483 -
Principal payments on mortgage-backed securities available for sale 77,149 2,632
Principal payments on mortgage-backed securities held to maturity 7,786 8,444
Purchases of mortgage-backed securities available for sale (304,454) (82,820)
Purchases of mortgage-backed securities held to maturity (54,030) (48,764)
Proceeds from sales of mortgage-backed securities prior to maturity - 4,032
Principal payments on loans receivable 94,238 59,042
Loan originations (125,903) (101,770)
Proceeds from sales of loans 999 354
Decrease in real estate owned - 437
Proceeds from sales of real estate owned 2,264 2,425
Purchases of premises and equipment (1,511) (1,248)
Proceeds from sales of premises and equipment 713 -
Increase in investment in Federal Home Loan Bank stock (1,116) (2,410)
Acquisition of loans and other assets (39,109) -
------- -------
Net cash used by investing activities (176,890) (151,236)
------- -------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
EAGLE FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
--------------------------
1996 1995
---- ----
<S> <C> <C>
FINANCING ACTIVITIES:
Net increase (decrease) in Passbook, NOW and Money Market accounts (22,690) (46,058)
Net increase (decrease) in certificate accounts 71,582 49,539
Assumption of deposits and liabilities of acquired branches 235,893 -
Sales of deposits (168,506) -
Borrowings under Federal Home Loan Bank advances 381,785 133,425
Repayment of Federal Home Loan Bank advances (275,605) (81,935)
Net increase (decrease) in borrowed money (51,828) 60,087
Net increase in advance payments by borrowers for taxes and insurance 4,552 6,042
Proceeds from exercise of stock options and dividends reinvested 889 654
Proceeds from sale of common stock - 16,658
Cash dividends (3,091) (2,700)
------- -------
Net cash provided by financing activities 172,981 135,712
------- -------
Increase (decrease) in cash and cash equivalents (28,211) 1,128
Cash and cash equivalents at beginning of period 63,307 24,652
------- -------
Cash and cash equivalents at end of period $ 35,096 $ 25,780
======= =======
NON-CASH INVESTING ACTIVITIES:
Transfer of investment securities held to maturity
to investment securities available for sale $ - $ 53,124
Transfer of mortgage-backed securities held to maturity to
mortgage-backed securities available for sale 90,603 18,529
Securitization of loans held for sale into trading securities 16,888 -
Transfer of loans to loans held for sale - 52,485
Transfer of loans held for sale to loans held for portfolio 21,879 -
Transfer of loans to real estate owned 3,969 1,412
======= =======
SUPPLEMENTAL DISCLOSURES:
Income taxes paid $ 11,948 $ 7,490
Interest paid 41,535 30,346
======= =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
EAGLE FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
- --------------------------
Eagle Financial Corp. (the "Company") is the holding company and parent of Eagle
Federal Savings Bank (the "Bank"). The Bank serves customers from nineteen
branch offices located in Hartford and eastern Litchfield counties.
The accompanying unaudited, consolidated financial statements include all
adjustments of a normal, recurring nature which are, in the opinion of
management, necessary for a fair presentation. The results of operations for the
three and nine month periods ended June 30, 1996 and 1995 are not necessarily
indicative of the results which may be expected for the entire fiscal year. The
accompanying unaudited, consolidated financial statements should be read in
conjunction with the consolidated financial statements contained in the
Company's 1995 annual report on Form 10-K.
(2) Accounting Pronouncements
- ------------------------------
Effective October 1, 1995, the Bank adopted Statements of Financial Accounting
Standards ("SFAS") No. 114 "Accounting by Creditors for Impairment of a Loan"
and No. 118 "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures." SFAS No. 114 and SFAS No. 118 require that
creditors evaluate the collectability of both contractual interest and
contractual principal of all loans when identifying impaired loans. Impaired
loans shall have impairment measured based on the present value of the expected
future cash flows discounted at the loan's effective interest rate, the
observable market price of the loan, or the fair value of the collateral if the
loan is collateral-dependent. SFAS No. 114 and SFAS No. 118 allow the exclusion
of large groups of small-balance homogenous loans that are collectively
evaluated for impairment such as residential and consumer loans. As a result of
this allowable exclusion the requirements of these statements have been applied
to the following loan types within the loan portfolio; construction loans, land
loans, commercial mortgages, multi-family loans and commercial loans.
The adoption of these statements had no impact on the results of operations. At
June 30, 1996, the Bank had $6.8 million of impaired loans, of which $1.9
million had an impairment reserve of $573,000 attributed to them. The impairment
reserve on impaired loans represents an allocation from the existing allowance
for loan losses.
The Bank's method of recognizing interest income is to generally discontinue the
accrual of interest when a loan becomes 90 days past due as to principal or
interest. Upon adoption of SFAS No. 114 and SFAS No. 118, the Bank's method for
recognition of interest income on impaired loans is consistent with the method
for recognition of interest income on all loans. Interest income recognized on
impaired loans totaled $164,329 for the nine months ended June 30, 1996.
6
<PAGE>
SFAS No. 122, "Accounting for Mortgage Servicing Rights," was issued in May 1995
and is effective for fiscal years beginning after December 15, 1995. Earlier
application is permitted. SFAS No. 122 requires the capitalization of mortgage
servicing rights acquired through either purchase of mortgage loan servicing or
origination and sale or securitization of mortgage loans with retention of
servicing. SFAS No. 122 also requires the analysis of capitalized mortgage
servicing rights for potential impairment to be based on the fair value of the
rights. The Company has not decided whether SFAS No. 122 will be adopted prior
to the required effective date. The effect of adoption by the Company will vary
based on the extent of mortgage servicing rights existing upon adoption and
mortgage servicing rights acquired subsequent to adoption. At this time, the
adoption of SFAS No. 122 is not expected to have a material effect on the
Company's financial position or results of operations.
In November 1995, the Financial Accounting Standards Board ("FASB") issued a
Special Report, A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities that provides additional
guidance relating to the application of SFAS No. 115. In connection with the
issuance of this Special Report the FASB allowed all organizations the ability
to review the current portfolio classification between held to maturity,
available for sale and trading and make a one-time reclassification of
securities between categories during the period from November 15, 1995 to
December 31, 1995.
Effective December 1, 1995, the Bank made a one-time reclassification of
securities from the held to maturity classification to the available for sale
classification in accordance with the Special Report. A total of $90.6 million
of mortgage-backed securities were reclassified.
<PAGE>
(3) Restatement of Quarter Ended March 31, 1996
- -----------------------------------------------
Results for the quarter ended March 31, 1996 have been restated to reflect
adjustments primarily related to errors in the calculation of accrued interest
on certain loans acquired as part of the Fleet/Shawmut acquisition. The effect
of the restatement is as follows (in thousands, except per share data):
Three months ended Six months ended
March 31, 1996 March 31, 1996
-------------- --------------
Net interest income ($389) ($389)
Net income ($229) ($229)
Net income per share:
Primary ($0.05) ($0.05)
Fully Diluted ($0.04) ($0.04)
The result of the restatement is as follows (in thousands, except per share
data):
Three months ended Six months ended
March 31, 1996 March 31, 1996
-------------- --------------
Net interest income $9,441 $18,842
Net income $8,040 $10,964
Net income per share:
Primary $ 1.72 $ 2.35
Fully Diluted $ 1.72 $ 2.35
7
<PAGE>
(4) Allowance for Loan Losses
-------------------------
The following is a summary of the activity in the allowance for loan losses for
the periods indicated (dollars in thousands):
Nine months ended June 30,
1996 1995
---- ----
Balance, beginning of period $ 7,457 $ 8,311
Provisions charged to operations 1,816 975
Charge-offs (2,260) (1,667)
Recoveries 36 78
Additions to allowance for purchased loans 1,871 -
----- -----
Balance, end of period $ 8,920 $ 7,697
===== =====
(5) Net Cost of Real Estate Owned Operations
----------------------------------------
The net cost of real estate owned operations is summarized as follows for the
periods indicated (dollars in thousands):
Nine months ended June 30,
1996 1995
---- ----
Net (gain) loss on sales of real estate owned $ (103) $ (69)
---- ---
Provision for losses charged to operations 419 159
Expenses of holding real estate owned,
net of rental income 824 377
--- ---
$1,140 $ 467
===== ===
8
<PAGE>
EAGLE FINANCIAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL - Eagle Financial Corp. (the "Company") is a $1.4 billion savings bank
holding company and parent to Eagle Federal Savings Bank (the "Bank"). The Bank
is a federally chartered savings bank headquartered in Bristol, Connecticut,
which conducts business from 19 banking offices located in Hartford and eastern
Litchfield Counties. The Bank's primary business is to provide consumer banking
services in the communities in Connecticut that it serves. The Bank primarily
invests its funds in first mortgage loans on one-to-four family residential real
estate in Connecticut or, when loan demand is low, mortgage-backed securities
with similar characteristics. The Bank's major source of funds is deposits from
the communities in which its banking offices are located.
The Bank's earnings depend largely on its net interest income, which is the
difference between interest earned on its loans and investments versus the
interest paid on its deposits and borrowed funds. Additional earnings are
derived from a variety of financial services provided to customers, mainly
deposit and loan products.
At June 30, 1996, the Company had total assets of $1.40 billion compared to
$1.24 billion at September 30, 1995, an increase of $165 million or 13.3%. Total
outstanding loans, which includes loans receivable, net, and loans held for
sale, increased $80.9 million to $797.2 million at June 30, 1996 from $716.3
million at September 30, 1995. Total deposits increased 12.4%, or $117.6
million, from $951.8 million at September 30, 1995 to $1.07 billion at June 30,
1996. At June 30, 1996 shareholders' equity represented 7.30% of total assets
compared to 7.47% at September 30, 1995. Total securities, including
mortgage-backed securities, were $494.9 at March 31, 1996 compared to $412.1
million at September 30, 1995, an increase of $82.8 million or 20.1%.
On January 19, 1996, the Bank completed the acquisition of five branch offices,
related deposits and certain other assets and liabilities from Fleet Bank, N.A.
and Shawmut Bank Connecticut,N.A. The following assets and liabilities were
recorded as a result of the transactions (in thousands):
Cash $196,785
Loans Receivable 35,720
Goodwill 19,527
Other Assets,including 1,681
premises and equipment -------
Total Assets $253,713
=======
Deposits $253,139
Other Liabilities 574
-------
Total Liabilities $253,713
=======
On March 1, 1996, the Bank completed the sale of seven branch offices and
related deposits to Union Savings Bank of Danbury. Deposits totaling $184
million were sold in the transaction. Also included were loans receivable of
$999,000 and premises and equipment of $713,000. The Bank received a premium on
the deposits of 9% that resulted in a gain of $15.9 million being recorded in
the second quarter of fiscal 1996.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
In addition to the above mentioned branch related transactions, on March 1, 1996
the Bank closed two branch offices that were in close proximity to two of the
branch offices acquired from Fleet/Shawmut. All accounts related to the closed
branches were transferred to the newly acquired branches.
LIQUIDITY - Liquidity is the ability of the Company to meet each maturing
obligation or customer demand for funds. The principal source of funds of the
Company is represented by dividends received from its subsidiary bank. As a
result, the liquidity of the Company is largely dependent upon the liquidity and
profitability of the Bank and the ability of the Bank to pay dividends under
applicable laws and regulations.
Under Office of Thrift Supervision ("OTS") regulations, the bank is required to
maintain liquid assets at 5% of its net withdrawable deposits plus short-term
borrowings. At June 30, 1996, the Bank was in compliance with the applicable
liquidity requirements having an average liquidity ratio of 7.36% for the three
months ended June 30, 1996.
The Bank's principal sources of funds include deposits, loan payments (including
interest, amortization of principal and prepayments), interest and principal
amortization on debt securities, maturing investments and Federal Home Loan Bank
advances and other borrowings. Principal uses of funds include loan originations
and investment purchases, payments of interest on deposits and payments to meet
operating expenses. At June 30, 1996, the Bank had approximately $60.4 million
in loan commitments outstanding, including $32.7 million in available home
equity lines of credit and $10.8 million in amounts due borrowers for
construction loan advances. It is expected that these and future loans will be
funded by deposits, investment maturities and principal amortization, loan
repayments, and borrowings. The Bank has the capacity to borrow an additional
$557 million in advances from the Federal Home Loan Bank of Boston and will
continue to consider this source of funds for lending and investment purchases.
Federal Home Loan Bank advances at June 30, 1996 were $179.3 million compared to
$73.2 million at September 30, 1995, an increase of $106.1 million. Other
borrowed money decreased $51.9 million to $30.4 million at June 30, 1996
compared to $82.3 million at September 30, 1995. The overall increase in
borrowed funds was used to fund purchases of mortgage-backed securities.
Loan originations for the nine months ended June 30, 1996 were $181.9 million
compared to $101.8 million for the same period in 1995.
It has been the Company's general policy to purchase debt securities (including
mortgage-backed securities) for purposes of earning interest income and meeting
regulatory liquidity requirements. At date of purchase, a decision is made to
classify debt securities as either held to maturity or available for sale.
Various factors are considered when determining whether debt securities are
classified as either available for sale or held to maturity, including:
repricing characteristics, liquidity needs, expected security life, yield and
overall asset/liability strategies. Events which may be reasonably anticipated
are considered when determining the Company's ability to hold debt securities to
maturity. For those debt securities for which the Company has determined it has
both the intent and ability to hold to maturity, a classification of held to
maturity is made.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Other debt securities are classified as available for sale. When a security
available for sale is sold, the proceeds are generally used to fund loans when
either deposit inflows have not been adequate, the rates offered on Federal Home
Loan Bank advances are not favorable, or liquidity ratios support such sales.
The Bank may also occasionally sell securities available for sale to restructure
an asset/liability mismatch. There were $181.5 million of securities sold during
the nine months ended June 30, 1996 compared to $6.2 million for the same period
in 1995.
The significant level of security sales during the first nine months of fiscal
1996 can be primarily attributed to two distinct management decisions. The first
decision, which was consummated in the first quarter of fiscal 1996, was to sell
$58.8 million of fixed rate mortgage-backed securities created from the
securitization in the prior year of certain mortgage loans within the Bank's
loan portfolio. The sales represent the final step of a balance sheet
restructuring which converted approximately $150 million of fixed rate mortgage
loans into adjustable rate mortgage related securities. The sales resulted in a
realized gain of $631,000. The second decision, which occurred in March 1996,
was to dispose of approximately $92 million of the Bank's lowest yielding
securities and reinvest the proceeds in securities that will generate an
estimated improvement in yield of between 125 to 175 basis points. The March
1996 sales resulted in a realized loss of $1.2 million.
REGULATORY CAPITAL REQUIREMENTS - The Bank is required by the Office of Thrift
Supervision ("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, 1996 exceeded the currently
applicable tangible, core and risk-based capital requirements as the following
chart indicates (dollars in thousands):
Required Actual Excess
---------------------------------------------
Tangible Capital $20,674 1.50% $75,024 5.44% $54,350
Core Capital 41,347 3.00% 75,024 5.44% 33,677
Risk-based Capital 51,738 8.00% 83,117 12.85% 31,379
ASSET/LIABILITY MANAGEMENT - The primary component of the Company's earnings is
net interest income. The Company's asset/liability management strategy is to
maximize net interest income over time by reducing the impact of fluctuating
interest rates. This is accomplished by matching the mix and maturities of its
assets and liabilities. At the same time the Company's asset/liability
strategies for managing interest rate risk must also accommodate customer
demands for particular types of deposit and loan products. The Company uses
various asset/liability management techniques in an attempt to maintain a
profitable mix of financial assets and liabilities, provide deposit and loan
products that meet the needs of its market area, and maintain control over
interest rate risk resulting from changes in interest rates.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Strategies employed by Eagle to manage the rate sensitivity of its assets
include origination of adjustable rate mortgage and consumer loans and purchase
of short-term and adjustable rate investments. Eagle also attempts to reduce the
rate sensitivity of its liabilities by emphasizing core deposits, which are less
sensitive to changes in interest rates, attracting longer term certificates of
deposits when the market permits, and using long term Federal Home Loan Bank
advances when such rates are competitive. Management will continue to monitor
the impact of its borrowings and lending policies on Eagle's sensitivity to
interest rate fluctuations.
NON-PERFORMING ASSETS - At June 30, 1996, the Company had total non-performing
assets of $12.0 million, or 0.86% of total assets, including $8.5 million in
non-performing loans and $3.5 million in real estate owned. The allowance for
loan losses totaled $8.9 million or, 105% of total non-performing loans, at June
30, 1996. Information regarding non-performing assets and other asset quality
data for June 30, 1996 and September 30, 1995 is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
June 30, 1996 September 30, 1995
------------- ------------------
<S> <C> <C>
Non-performing loans $ 8,524 $11,130
Real estate owned, net 3,517 2,439
------- -------
Non-performing assets $12,041 $13,569
======= =======
Restructured loans $ 4,429 $ 2,653
======= =======
Impaired loans:
Non-performing (1) $ 2,340 -
Performing $ 4,462 -
======= =======
Non-performing assets/total assets 0.86% 1.10%
Non-performing loans/gross loans receivable 1.06% 1.54%
Allowance for loan losses/non-performing loan 1.05% 67%
</TABLE>
(1) Non-performing impaired loans are included in the non-performing loans total
of $8,524,000.
The Company's non-performing assets are almost exclusively residential in
nature. Assets secured by residential property account for approximately 97% of
the non-performing assets at June 30, 1996.
The Company makes every effort to work with delinquent borrowers to negotiate an
affordable payment schedule. This strategy has been more prevalent in hardship
cases where rates have adjusted upward one or more times on adjustable rate
mortgages. The terms of the restructures were primarily reductions in interest
rates to a rate approximating the current rate on newly originated one year
adjustable rate mortgage loans. The rate reduction is generally in effect for a
period of six to twelve months and is then subject to review. Loans secured by
one-to-four family residential properties represents $3.8 million, or 86%, of
restructured loans. Approximately $2.0 million restructured loans are owner
occupied primary residences. All non-performing assets and restructured loans
are reviewed quarterly as part of the internal review process.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Loans delinquent between 30 and 90 days totaled $5.2 million at June 30, 1996
compared to $5.1 million at September 30, 1995.
The following table represents a breakdown of non-performing assets as of June
30, 1996 (dollars in thousands):
Non- Real Total non-
performing estate performing % of
loans owned, net assets Total
----- ---------- ------ -----
Residential mortgage loans
One to four family $6,781 3,195 9,976 82.8%
Multi-family - 297 297 2.5%
Land loans - 25 25 0.2%
Commercial mortgage loans 863 - 863 7.2%
Consumer loans 15 - 15 0.1%
Home equity loans 865 - 865 7.2%
----- ----- ------ ---
Total $8,524 3,517 12,041 100%
===== ===== ====== ===
The allowance for loan losses increased to $8.9 million at June 30, 1996 from
$7.5 million at September 30, 1995 due to provisions of $1.8 million, offset by
net charge-offs of $2.2 million, and a purchase accounting adjustment of $1.9
million related to the loans acquired in the Fleet/Shawmut transaction. The loan
loss provision of $1.8 million on the existing portfolio for the nine months
ended June 30, 1996 increased $841,000 when compared to the nine months ended
June 30, 1995.
The increase in the provision, which is predominately the result of a second
quarter charge, can be attributed to a number of factors. The most significant
factor was an increase in the general loan loss allowance allocation percentage
on two specific loan categories. These loan categories had evidenced a trend in
recent quarters of an increased charge-off to loan balance ratio and, as a
result, the allowance allocation was increased to compensate for the higher
charge-off ratio. In addition, a number of properties foreclosed on during the
quarter ended March 31, 1996 resulted in larger than expected charge-offs due to
property valuations obtained in the foreclosure proceedings being lower than
previous valuations. The second quarter provision for loan losses contemplated
the likelihood that this trend would continue into the third quarter and, based
on foreclosures occuring in the third quarter, the charge-off trend did
continue.
Management monitors the adequacy of the allowances for loan and real estate
owned losses on a continual basis. While management uses available information
to recognize losses on loans and real estate owned, future additions to the
allowances may be necessary based on changes in economic conditions,
particularly here in Connecticut. In connection with the determination of the
allowances for losses and real estate owned, management reviews and grades all
adversely classified loans as part of its internal loan review process. Each
loan is reviewed to determine loss exposure and the borrowers ability to pay.
Management obtains independent appraisals for significant properties.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowances 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 the examination.
RESULTS OF OPERATIONS
- ---------------------
Comparison of the Three and Nine Month Periods Ended June 30, 1996 and 1995.
GENERAL
- -------
Net income increased $403,000 to $2.9 million for the three months ended June
30, 1996 compared to net income of $2.5 million for the comparable period in
1995. Increases in net interest income of $391,000 from $10.1 million for 1995
to $10.5 million in 1996 and non-interest income of $536,000 contributed to the
improvement in net income but were offset by an increase in non-interest expense
of $563,000. The provision for loan losses decreased to $225,000 for the three
months ended June 30, 1996 from $525,000 for the three months ended June 30,
1995.
Net income for the nine months ended June 30, 1996 was $13.9 million, a $5.7
million increase from net income for the nine months ended June 30, 1995 of $8.2
million. The increase is primarily attributable to the $15.9 million gain
recorded as a result of the sale of seven branch offices and related deposits in
the second quarter of fiscal 1996. The impact of the above mentioned gain was
offset by several non-recurring items including: a $1.5 million loss from
mortgage banking activities, an increase of $841,000 in the provision for loan
losses and second quarter non-recurring one-time charges totaling $1.2 million.
NET INTEREST INCOME
- -------------------
For the quarter ended June 30, 1996 net interest income was $10.5 million, an
increase of $391,000, or 3.9%, from the $10.1 million reported for the quarter
ended June 30, 1995. The increase was achieved despite a 30 basis point decline
in the net interest spread from 3.31% in 1995 to 3.01% during the three months
ended June 30, 1996. The spread differential was overcome by an increase in the
average balances of both interest earning assets and interest bearing
liabilities of approximately $200 million from the 1995 quarter to the 1996
quarter. A 16 basis point increase in the cost of deposits combined with the
investment of the balance sheet growth in the securities portfolio were the
primary contributors to the interest rate spread decline. The interest rate
spread for the quarter ended June 30, 1996 of 3.01% is a substantial improvement
over the interest rate spread for the first half of the 1996 fiscal year of
2.80%.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Net interest income for the nine months ended June 30, 1996 decreased $863,000
to $29.3 million from $30.2 million for the nine months ended June 30, 1995. The
results were driven by a 12.8% increase in the cost of deposits from 3.76% in
1995 to 4.24% in 1996 and the investment of funds received in the Fleet/Shawmut
transaction in lower yielding assets for a portion of the second quarter of
fiscal 1996 which led to a decline of 12 basis points in the yield on interest
earning assets. These factors resulted in the lowering of the interest rate
spread to 2.88% for the nine months ended June 30, 1996 compared to 3.52% for
the nine months ended June 30, 1995. This decline in interest rate spread was
too significant to be completely offset by an increase in the average interest
earning assets and interest bearing liabilities of approximately $200 million in
the comparable periods in 1996 and 1995.
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses decreased by $300,000 from $525,000 for the
quarter ended June 30, 1995 to $225,000 for the quarter ended June 30, 1996. For
the nine months ended June 30, 1996, the provision for loan losses was $1.8
million, a $800,000 increase from the comparable period in 1995. The changes in
the provision resulted from several factors, see "Non-Performing Assets".
NON-INTEREST INCOME
- -------------------
Non-interest income increased $536,000 to $1.6 million during the quarter ended
June 30, 1996 from $1.1 million during the quarter ended June 30, 1995. The
increase was mainly due to a $255,000 gain resulting from mortgage banking
activities for the three months ended June 30, 1996. There were no comparable
results from mortgage banking activities during 1995. A $74,000 increase in
gains from securities sales and a $134,000 increase in other income also
contributed to the overall increase in non-interest income.
The significant increase of $14.6 million in non-interest income to $17.7
million for the nine months ended June 30, 1996 was primarily the result of a
gain recorded from the sale of deposits. The gain was partially offset by a $1.5
million loss from mortgage banking activities.
NON-INTEREST EXPENSE
- --------------------
Non-interest expense increased $563,000 from $6.4 million during the three
months ended June 30, 1995 to $7.0 million during the three months ended June
30, 1996. Increases from the quarter ended June 30, 1995 to the quarter ended
June 30, 1996 of $211,000 in compensation, $220,000 in office occupancy and
$337,000 in the amortization of intangible assets were responsible for the
overall increase in non-interest expense. An offsetting decrease of $301,000 in
Federal deposit insurance premiums was caused by the replacement of higher cost
SAIF insured deposits with lower cost BIF insured deposits as a result of the
branch acquisitions and divestitures occurring in the second quarter of fiscal
1996.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Non-interest expense was $21.8 million for the nine months ended June 30, 1996,
an increase of $3.6 million, or 19.8%, from the nine months ended June 30, 1995.
The principal components of the increase are as follows: $1.2 million of
non-recurring expenses, primarily marketing and other consulting charges,
operating expenses relating to an expanded branch network for a portion of the
second quarter of fiscal 1996, a $514,000 increase in amortization of intangible
assets caused by the goodwill created in the Fleet/Shawmut acquisition and a
$673,000 increase in the net cost of real estate owned operations, mainly due to
increased holding costs. The increases were partially offset by a decrease in
Federal deposit insurance premiums of $594,000.
INCOME TAXES
- ------------
Income taxes were $2.0 million for the three months ended June 30, 1996 compared
to $1.7 million for the three months ended June 30, 1995. The increase is
attributable to higher pre-tax income but was partially offset by a $124,000
credit recorded as a result of a settlement reached with the State of
Connecticut regarding the tax treatment of interest income on certain investment
securities. Income taxes increased by $3.7 million to $9.5 million for the nine
months ended June 30, 1996 when compared to the similar period in the prior
year, caused by a significant increase in pre-tax income. The effective tax rate
for the three months ended June 30, 1996 and 1995 was 40.5% and 40.7%,
respectively, and 40.5% and 41.3% for the nine months ended June 30, 1996 and
1995, respectively.
16
<PAGE>
EAGLE FINANCIAL CORP. AND SUBSIDIARIES
PART II
Item 1 - Legal Proceedings
- --------------------------
Not applicable
Item 2 - Changes in Securities
- ------------------------------
Not applicable
Item 3 - Defaults upon Senior Securities
- ----------------------------------------
Not applicable
Item 4 - Submission of Matter to a Vote of Security Holders
- -----------------------------------------------------------
Not applicable
Item 5 - Other Information
- --------------------------
Not applicable
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
Not applicable
17
<PAGE>
EAGLE FINANCIAL CORP. AND SUBSIDIARIES
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: August 14, 1996 By: /s/ Mark J. Blum
--------------------------
Mark J. Blum
Vice President, Chief Financial Officer
Date: August 14, 1996 By: /s/ Barbara S. Mills
--------------------------
Barbara S. Mills
Vice President, Treasurer
18
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 23,840
<INT-BEARING-DEPOSITS> 11,256
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 414,669
<INVESTMENTS-CARRYING> 80,273
<INVESTMENTS-MARKET> 78,851
<LOANS> 797,183
<ALLOWANCE> 8,920
<TOTAL-ASSETS> 1,402,417
<DEPOSITS> 1,069,372
<SHORT-TERM> 129,637
<LIABILITIES-OTHER> 20,964
<LONG-TERM> 80,088
0
0
<COMMON> 46
<OTHER-SE> 102,402
<TOTAL-LIABILITIES-AND-EQUITY> 1,402,417
<INTEREST-LOAN> 15,642
<INTEREST-INVEST> 9,139
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 24,781
<INTEREST-DEPOSIT> 11,137
<INTEREST-EXPENSE> 14,282
<INTEREST-INCOME-NET> 10,499
<LOAN-LOSSES> 225
<SECURITIES-GAINS> 64
<EXPENSE-OTHER> 6,956
<INCOME-PRETAX> 4,907
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,918
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.62
<YIELD-ACTUAL> 7.46
<LOANS-NON> 8,524
<LOANS-PAST> 0
<LOANS-TROUBLED> 4,429
<LOANS-PROBLEM> 4,462
<ALLOWANCE-OPEN> 9,673
<CHARGE-OFFS> 1,011
<RECOVERIES> 33
<ALLOWANCE-CLOSE> 8,920
<ALLOWANCE-DOMESTIC> 8,920
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
