SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-15311
EAGLE FINANCIAL CORP.
------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1194047
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 Main Street, Bristol, Connecticut 06010
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 314-6400.
Securities registered pursuant to Section 12(b) of the Act:
(Not applicable)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]
Based upon the closing price of the registrant's common stock as of
December 16, 1996, the aggregate market value of the voting stock held by
non-affiliates of the registrant is $104.3 million.*
The number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date is:
Class: Common Stock, par value $.01 per share.
Outstanding at December 16, 1996: 4,543,398 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Part II:
Annual report to shareholders for the fiscal year ended September 30,
1996.
Part III:
Portions of the definitive proxy statement for the Annual Meeting of
Shareholders to be held on January 28, 1997.
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* Solely for purposes of this calculation, all executive officers and directors
of the registrant, Employee Stock Ownership Plan and all shareholders reporting
beneficial ownership of more than 5% of the registrant's common stock are
considered to be affiliates.
<PAGE>
PART I
Item 1. Business
General
Eagle Financial Corp. ("Eagle" or the "Company") is the holding company
of Eagle Federal Savings Bank ("Eagle Federal" or the "Bank"). Eagle was
organized in 1986 under Delaware law for the purpose of becoming the holding
company of First Federal Savings and Loan Association of Torrington, Connecticut
("Torrington") upon its conversion to a stock company in 1987. In 1988, BFS
Bancorp, Inc., the holding company of Bristol Federal Savings Bank, Bristol,
Connecticut ("Bristol"), merged into Eagle in a combination structured as a
merger of equals and accounted for as a pooling-of-interests. Bristol had
converted to a stock company in 1987. Torrington and Bristol have operated as
savings institutions since 1919 and 1924, respectively. In January 1993, Eagle
merged Bristol with Torrington under the new name Eagle Federal Savings Bank.
Unless otherwise stated, all references herein to Eagle or the Company include
Eagle Federal and other subsidiaries on a consolidated basis.
Eagle, at September 30, 1996, had total assets of $1.4 billion, net
loans receivable of $814.5 million, deposits of $1.1 billion and shareholders'
equity of $101.1 million. Through Eagle Federal, the Company provides consumer
banking services through 19 traditional banking offices and 4 in-store
supermarket branch offices in Connecticut, serving the Torrington, Bristol, and
Hartford market regions. As a community oriented savings bank, Eagle Federal
focuses on the financial needs of its customers in these local markets, seeking
to develop long-term deposit and lending relationships. In its lending
activities, the Bank stresses asset quality through its emphasis on 1-4 family
residential first mortgage lending in its local markets and the use of
conservative loan underwriting standards. Deposit accounts at the Bank are
insured by the Federal Deposit Insurance Corporation (the "FDIC").
Eagle's net income has increased each of the previous eight fiscal
years from $3.5 million, or $1.06 per share, in fiscal 1989 to $13.6 million, or
$2.89 per share, in fiscal 1996. Eagle intends to continue to concentrate on
increasing its earnings, maintaining high asset quality, meeting customer needs
in its existing local markets and expanding through selected future
acquisitions.
The following table indicates selected ratios for the periods
indicated:
<TABLE>
<CAPTION>
For the years ended September 30,
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
Return on average assets 1.00% 0.95% 0.85%
Return on average equity (a) 13.82% 12.68% 11.99%
Dividend payout ratio 31.8% 34.5% 32.5%
Average equity to average assets ratio (b) 7.23% 7.51% 7.05%
</TABLE>
(a) If the effect of the unrealized gains and losses on securities
available for sale had been excluded, the return on equity
ratio would have been 13.82% and 12.55% for the years ended
September 30, 1996 and 1995, respectively.
(b) If the effect of the unrealized gains and losses on securities
available for sale had been excluded, the average equity to
average assets ratio would have been 7.23% and 7.58% for the
years ended September 30, 1996 and 1995, respectively.
Eagle's principal executive office is located at 222 Main Street,
Bristol, Connecituct 06010 and its telephone number is (860) 314-6400.
2
<PAGE>
Acquisitions - In past years, Eagle has significantly expanded its
operations through three federally assisted acquisitions in which Eagle Federal
acquired certain assets and assumed deposit liabilities from the FDIC or the
Resolution Trust Corporation ("RTC"). Substantially all of the loans acquired in
these acquisitions consisted of 1-4 family residential first mortgage loans and
home equity loans. In the largest and most recent assisted acquisition, the
Bank of Hartford, Inc. ("Bank of Hartford") acquisition, Eagle Federal also
acquired $72.7 million of investment securities, substantially all of which were
U.S. Treasury and Government agency obligations, and loan servicing rights on
$80.5 million of loans with an average loan servicing fee of 0.375%.
During 1996, Eagle reshaped the structure of its branch network as a
result of two open market transactions. In October 1995, Eagle announced the
purchase of five branch offices located in the greater Hartford market area that
were being divested as part of the merger transaction between Fleet Bank, N.A.
and Shawmut Bank Connecticut, N.A. (the "Fleet/Shawmut transaction"). In
December 1995, Eagle announced the sale of seven branch offices located in the
Danbury market to Union Savings Bank of Danbury ("Union"). The combination of
these two transactions demonstrated Eagle's commitment to expanding its presence
in the Hartford market area while at the same time creating a more efficient
branch network made up of larger, more geographically concentrated branch
offices.
Eagle purchased five branch offices in the Fleet/Shawmut transaction,
assumed deposits totaling $253 million and acquired $36 million in loans,
approximately $24 million of which were commercial loans. As a result of the
premium paid on the deposits assumed, along with certain other purchase
accounting adjustments, Eagle Federal recorded goodwill in the amount of $19.9
million. The transaction was completed in January 1996. Shortly thereafter,
Eagle Federal closed two branch offices that were in close proximity to two of
the acquired branch offices and transferred all customer accounts to the newly
acquired branch offices.
The sale of the branches to Union, which was completed in March 1996,
included $184 million of deposits and generated a $15.9 million gain principally
due to the premium received on the deposits. This transaction removes Eagle from
a highly competitive, geographically separate market place and allows for the
focus of resources in a more concentrated area of Connecticut.
Eagle's expansion strategy, initially reflected in the Bank of Hartford
acquisition and reinforced through the Fleet/Shawmut and Union transactions,
represents a natural extension of Eagle's original markets since many residents
of Bristol and Torrington commute to the Hartford area. The Hartford market area
is contiguous to Eagle's original market areas, has a higher population density
and is generally more affluent than the Bristol and Torrington markets.
Eagle believes that the operation of more geographically concentrated
branch offices will not only provide for an efficient retail service network but
also allow Eagle to maximize opportunities for residential and commercial loan
production, in addition to other services.
Business - As a holding company, the business operations of Eagle are
conducted through the Bank. The Bank primarily is engaged in the business of
accepting deposits from the general public and using such funds in the
origination of first mortgage loans for the purchase, refinance or construction
of 1-4 family homes. At September 30, 1996, 90.3%, or $744.8 million, of the
Bank's $824.7 million total gross loans receivable was secured by first
mortgages on real estate. The Bank's real estate loans included $666.8 million
of first mortgage loans secured by 1-4 family residential real estate (80.9% of
total gross loans receivable) and $77.9 million of multi-family, construction,
commercial real estate, and land loans (9.4% of total gross loans receivable).
The remaining $79.9 million of loans (9.7% of total gross loans receivable)
includes $38.4 million of home equity lines of credit (4.7% of total gross loans
receivable), $27.5 million of second mortgage loans (3.3% of total gross loans
receivable) and $6.9 million of commercial loans (0.8% of total gross loans
receivable) with the remainder of the loans being primarily loans secured by
deposits and personal loans.
3
<PAGE>
Eagle has experienced increased loan originations, with $236.1 million
of originations in fiscal 1996, compared to $155.7 million in fiscal 1995. The
increase is primarily attributable to a favorable interest rate environment for
the origination of fixed rate residential mortgage loans, which accounted for
48% of total loan production in 1996. Commercial loan originations of $22.8
million in 1996 compared to $700,000 in 1995 also contributed significantly to
the improved loan origination activity. Residential mortgage lending has been
and will continue to be Eagle Federal's main focus, however, the Bank is moving
forward with its strategy to diversify the loan portfolio by originating
commercial real estate and small business loans within its primary market area.
The Bank began the commercial banking initiative in 1995, made significant
progress in 1996 and expects to further the expansion of commercial banking in
1997. Eagle also intends to increase the emphasis on its home equity and
consumer lending programs. The marketing of these loans will focus on Eagle's
existing customer base, customers acquired as part of the Fleet/Shawmut
acquisition and new relationships within Eagle's primary market areas. See
"Lending Activities -- General."
Based on its lending strategy, Eagle has been able to maintain
relatively stable asset quality. Total non-performing assets of Eagle were $12.3
million at September 30, 1994, $13.6 million at September 30, 1995 and $12.3
million at September 30, 1996. At those dates, non-performing assets constituted
1.51%, 1.89%, and 1.51% respectively, of total loans receivable and real estate
owned. At September 30, 1996, Eagle's allowance for loan losses totaled $8.6
million, or 93% of total non-performing loans.
Eagle Federal's funding strategy is focused primarily on developing
core deposits such as regular savings and checking accounts, and attracting
term certificates of deposit.
Eagle also makes available to its customers various investment products
through Liberty Securities Corporation, a registered broker-dealer not
affiliated with Eagle. These products include mutual funds, unit investment
trusts and fixed- and variable-rate annuity contracts, as well as discount
brokerage services.
Regulation - Eagle, as a unitary thrift holding company, and Eagle
Federal, as its wholly-owned subsidiary, are subject to comprehensive
regulation, supervision and examination by the Office of Thrift Supervision
("OTS"), as the primary federal regulator of the Bank. The FDIC also has
significant regulatory authority over the Bank. The Board of Governors of the
Federal Reserve System ("FRB") has regulatory authority as to certain matters
concerning the Bank. Eagle Federal is a member of the Federal Home Loan Bank
("FHLB") System. FHLB advances are a source of funds for the Bank. See
"Regulation."
Lending Activities
General. Eagle traditionally has concentrated its lending activities on
the origination and purchase of loans secured by first mortgage liens for the
purchase, refinancing or construction of residential real property. At September
30, 1996, mortgage loans, including those secured by 1-4 family residential
units, multi-family residential units, commercial real estate and land,
aggregated $744.8 million or 90.3% of Eagle's gross loans receivable portfolio.
At September 30, 1995 and 1994, such mortgage loans aggregated $654.6 million,
or 90.7%, and $751.9 million, or 91.6%, respectively. The remainder of Eagle's
portfolio consists of commercial and consumer loans, primarily home equity
loans. At September 30, 1996, over 95% of Eagle's real estate mortgage loans
were secured by property located in Connecticut. Substantially all of the
remaining real estate secured loans were originated prior to 1982.
At September 30, 1996 commercial real estate loans totaled $39.5
million and are generally secured by a mix of retail and professional office
properties. This represents a significant increase from the amount outstanding
at September 30, 1995 of $15.0 million. The increase was principally the result
of the acquisition of commercial real estate loans in the Fleet/Shawmut
transaction totaling $22.2 million. At September 30, 1996, the Company had a
total of $6.9 million of non-real estate commercial loans outstanding.
Multi-family loans, secured by properties with 5 units or more, totaled $15.5
million as of September 30, 1996. This amount is down slightly from the
September 30,1995 total of $16.7 million. Land development loans increased to
$8.6 million at September 30, 1996 from $6.8 million at September 30, 1995.
4
<PAGE>
Eagle made significant progress in implementing its strategy to
emphasize the origination of commercial real estate and small business loans.
Commercial related originations totaled $22.8 million for the year ended
September 30, 1996 demonstrating strong growth from prior years. Eagle also
significantly expanded both its commercial origination resources and credit
administration resources. The origination of commercial based loans not only
increases the overall yield on the portfolio but adds to the base of interest
rate sensitive assets, as the rate structures for these loans generally call for
annual, quarterly or monthly rate adjustments.
At September 30, 1996 consumer loans totaled $73.1 million compared to
$66.5 million at September 30, 1995 and $67.7 million at September 30, 1994. The
increase in consumer loans is attributable to the $13.2 million of home equity
and other consumer loans acquired in the Fleet/Shawmut transaction. Eagle
intends to continue emphasizing home equity lines of credit (52.5% of consumer
loans at September 30, 1996), using its existing credit programs and personnel.
At September 30, 1996, the Company's largest loan relationship
aggregated $12.8 million. That relationship represents eight loans, of which
$2.4 million are secured by multi-family properties and $10.4 million are
secured by commercial properties. At that date, the next largest lending
relationship was $2.8 million, representing four loans, of which $2.7 million
are secured by multi-family properties. No other lending relationship exceeded
$2.5 million, in aggregate.
The following tables set forth the composition of the total loan
portfolio of Eagle, in dollar amounts and in percentages, at the dates shown,
and a reconciliation of loans receivable, net.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
Amount % Amount % Amount % Amount % Amount %
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(in thousands)
Residential mortgage
loans:
1-4 family
Permanent $ 666,815 80.9 $ 604,063 83.6 $ 704,912 85.8 $ 573,165 86.3 $ 481,804 83.5
Construction 14,413 1.7 12,014 1.7 7,103 0.9 5,739 0.9 13,255 2.3
Multi-family 15,471 1.9 16,694 2.3 17,513 2.2 18,629 2.8 16,709 2.9
Commercial real estate 39,510 4.8 15,025 2.1 15,862 1.9 11,268 1.6 11,455 2.0
Land development (a) 8,555 1.0 6,804 0.9 6,551 0.8 5,735 0.9 4,517 0.8
-----------------------------------------------------------------------------------------------------
Total conventional loans 744,764 90.3 654,600 90.7 751,941 91.6 614,536 92.5 527,710 91.4
FHA/VA mortgage loans -- -- 1 -- 2 -- 3 -- 5 --
------------------------------------------------------------------------------------------------------
Total mortgage loans 744,764 90.3 654,601 90.7 751,943 91.6 614,539 92.5 527,715 91.4
-----------------------------------------------------------------------------------------------------
Commercial Other 6,863 0.8 883 0.1 -- -- -- -- -- --
-----------------------------------------------------------------------------------------------------
Consumer loans:
Secured by deposits 3,066 0.4 4,283 0.6 3,322 0.4 3,490 0.5 3,485 0.6
Second mortgages 27,526 3.3 21,750 3.0 21,734 2.6 402 0.1 411 0.1
Home equity lines of credit 38,375 4.7 37,018 5.1 38,246 4.7 43,864 6.6 42,892 7.4
Education -- -- 16 -- 140 0.1 250 0.1 555 0.1
Personal 3,712 0.5 3,075 0.4 4,147 0.5 1,488 0.2 1,693 0.3
Automobile 404 -- 357 -- 128 -- 174 -- 379 0.1
-----------------------------------------------------------------------------------------------------
Total consumer loans 73,083 8.9 66,499 9.2 67,717 8.4 49,668 100% 49,415 8.6
-----------------------------------------------------------------------------------------------------
Total loans receivable
(before net items) 824,710 100% 721,983 100% 821,172 100% 664,207 100% 577,130 100%
==== ==== ==== ==== ====
Add (deduct):
Unearned discounts
and premiums (350) 137 183 3 4
Loans in process -- -- -- (600) (3,518)
Allowance for loan losses (8,592) (7,457) (8,311) (5,005) (4,011)
Deferred loan
origination fees (1,280) (1,118) (2,339) (2,261) (1,481)
--------- --------- ---------- --------- -----------
Total loans receivable $ 814,488 $ 713,545 $ 810,705 $ 656,344 $ 568,124
========= ========= ========== ========= ===========
</TABLE>
- -------------------------
(a) Loans for developed building lots, acquisition and development of land and
unimproved land.
5
<PAGE>
The following table sets forth certain information at September 30,
1996 regarding the dollar amount of loans maturing in Eagle's loan portfolio
based on scheduled payments to maturity. Demand loans and loans having no stated
schedule of repayments and no stated maturity are reported as due in one year or
less.
<TABLE>
<CAPTION>
Due Within Due 1 to Due After
1 Year 5 Years 5 Years Total
----------- ----------- ----------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Residential 1-4 family and land $ 25,250 $ 109,883 $ 540,237 $ 675,370
loans
Multi-family and commercial
real estate loans 4,039 15,097 35,845 54,981
Residential construction loans 609 -- 13,804 14,413
Commercial loans 3,361 3,129 373 6,863
Consumer loans 7,742 20,338 45,003 73,083
----------- ----------- ----------- -------------
Total $ 41,001 $ 148,447 $ 635,262 $ 824,710
=========== =========== =========== =============
</TABLE>
The following table sets forth as of September 30, 1996 the dollar
amount of all loans of Eagle due after one year which have predetermined
interest rates and floating or adjustable interest rates.
<TABLE>
<CAPTION>
Due 1 to 5 Years Due After 5 Years Total
--------------------------------- ----------------------------- ----------------------------
Floating Floating Floating
Predetermined or Predetermined or Predetermined or
Rates Adjustable Rates Adjustable Rates Adjustable
Rates Rates Rates
------------- ------------ ------------- ----------- ------------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential 1-4 family
and land loans $ 77,055 $ 33,828 $ 142,498 $ 397,739 $ 219,553 $ 430,567
Multi-family and commercial
real estate loans 9,105 5,992 11,619 24,226 20,724 30,218
Residential construction
loans -- -- 13,804 -- 13,804 --
Commercial loans 865 2,264 -- 373 865 2,637
Consumer loans 12,669 7,669 10,578 34,425 23,247 42,094
------------- ------------ ------------- ----------- ------------- -----------
Total $ 94,694 $ 48,753 $ 178,499 $ 456,763 $ 278,193 $ 505,516
============= ============ ============= =========== ============= ===========
</TABLE>
One- to Four-Family First Mortgage Loans. At September 30, 1996, first
mortgage loans (including construction loans) secured by one-to four-family
homes comprised 82.6% of Eagle's portfolio, before net items. From time to time
Eagle has experienced more rapid loan prepayments, primarily during periods of,
and as a result of, a rapid decline in mortgage interest rates.
Federally chartered institutions, such as Eagle Federal, have
substantial flexibility in structuring the terms of mortgage loans to adjust to
changes in interest rates. Federal regulations permit mortgage loans to be
written for varying maturities and at adjustable and fixed interest rates. See
"Lending Activities -- Purchase and Sale of Loans and Loan Servicing."
Eagle currently offers a variety of adjustable rate loans including, a
one-year adjustable rate loan with a limit on the maximum change per interest
rate adjustment of 2% and several adjustable loans that have fixed rates for an
initial period, from 3 to 10 years, and adjust annually thereafter with a
maximum interest rate change of 2% per year. In addition, Eagle's adjustable
rate loans have limits on the total interest rate adjustments during the life of
the loan ranging from 4.0% to 6.0% depending upon the initial rate and type of
the loan. Interest rate adjustments currently are based on changes in the rates
on comparable maturity U.S. Treasury securities. There are no prepayment
penalties for any of these adjustable rate loans. Origination fees ranging from
no fees to 2% of the loan amount are charged on such loans.
6
<PAGE>
Although adjustable rate mortgage loans allow Eagle to increase the
sensitivity of its asset base to changes in interest rates, the extent of this
interest-sensitivity is limited by the interest rate "caps" contained in
adjustable-rate loans. The terms of such loans may also increase the likelihood
of delinquencies in periods of high interest rates, particularly if such loans
are originated at discounted interest rates. Under regulations adopted by the
Federal Reserve Board, although no specific interest rate limit is set, lenders
are required to impose interest rate caps on all adjustable-rate mortgage loans
and all dwelling-secured consumer loans, including home equity loans, which
provide for interest rate adjustments.
The rates offered on adjustable rate mortgage loans are set at levels
that are intended to be competitive in the market areas served by Eagle and to
produce a yield that provides an acceptable first-year profit margin over the
cost of funds. Eagle from time to time offers mortgage loans at an initial,
discounted interest rate (i.e., a rate which is less than the then-current index
plus margin) until the first loan repricing period, at which time the interest
rate generally is adjusted to equal the index plus margin. Eagle generally
qualifies the borrower at the rate which would be in effect after one year,
assuming the maximum upward adjustment.
Most of the fixed rate mortgage loans originated by Eagle include a
"due-on-sale" clause, which is a provision giving Eagle the right to declare a
loan immediately due and payable in the event, among other things, that the
borrower sells or otherwise disposes of the real property subject to the
mortgage and the loan is not repaid. Due-on-sale clauses are an important means
of increasing the rate on existing fixed rate mortgage loans during periods of
rising interest rates, and Eagle actively enforces such clauses.
Multi-family and Commercial Mortgage Loans. Eagle also makes loans
secured by mortgages on multi-family and commercial properties. At September 30,
1996, these loans totaled $55.0 million or 6.7% of the total loan portfolio,
before net items. Multi-family loans generally are originated on a one-year,
adjustable rate basis. Commercial real estate loans, secured by properties such
as office buildings, are a mix of one-year or three-year adjustable rate loans
or fixed rate loans, and the interest rates and fees are often negotiated with
the borrower.
Loans secured by commercial and multi-family properties can involve
greater risks than single-family residential mortgage lending. Such loans
generally are substantially larger than single-family residential mortgage
loans, and repayment of the loan generally depends on cash flow generated by the
property. Because the payment experience on loans secured by such property is
often dependent on successful operation or management of the security property,
repayment of the loan may be subject to a greater extent to adverse conditions
in the real estate market or the economy generally than is the case with one- to
four-family residential mortgage loans. The commercial real estate business is
cyclical and subject to downturns, overbuilding and local economic conditions.
Eagle seeks to limit these risks in a variety of ways, including, among others,
limiting the size of its commercial and multi-family real estate loans,
generally requiring a personal guaranty from the borrower, limiting such loans
to a lower maximum loan-to-value ratio and generally lending on the security of
property located within its market areas. At September 30, 1996, multi-family
and commercial real estate loans comprised 1.9% and 4.8%, respectively, of the
total loan portfolio, before net items, compared to 2.3% and 2.1%, respectively,
at September 30, 1995.
Construction Loans. Eagle makes a limited number of construction loans
to individuals and, to a lesser extent, to professional builders who wish to
construct one-to four-family residential properties, either as a primary
residence or for investment or resale. The construction loans made by Eagle are
typically construction/permanent loans that automatically convert to a permanent
first mortgage loan at the end of the construction phase. At September 30, 1996,
construction loans totaled $14.4 million or 1.7% of the total loan portfolio of
Eagle, before net items, compared to $12.0 million or 1.7% at September 30,
1995.
Consumer Loans. At September 30, 1995, the consumer loan portfolio of
Eagle included loans secured by deposit accounts, home equity lines of credit,
second mortgages, education, personal and automobile loans and totaled $73.1
million or 8.9% of the total loan portfolio of Eagle before net items. The home
equity loans and second mortgage loans are secured by the equity in a borrower's
home.
7
<PAGE>
Loan Originations. Residential loan originations principally come from
three separate sources. Originations generated through the retail branch network
accounts for approximately 30% of total originations. Traditional mortgage
originators that cover the Bank's market area account for approximately 40% of
total originations. In addition, Eagle also obtains approximately 30% of total
originations through agreements with independent mortgage brokers in
Connecticut. Multi-family and commercial real estate loan originations are
currently obtained primarily from direct contacts with Eagle. Eagle seeks to
attract consumer loans by direct advertising and solicitation of its customers.
Loan originations (excluding purchased loans and participations) were
$236.1 million for the year ended September 30, 1996 compared to $155.7 million
in fiscal 1995. Residential mortgage loan originations accounted for $193.1
million of the total originations in fiscal 1996. Of the total, $114.0 million
or 59%, represented originations of fixed rate residential mortgage loans with
the remaining $79.1 million representing a variety of adjustable rate
residential loan products. The trend of originations changed significantly
during the year, in the first half of fiscal 1996 fixed rate residential loans
were more popular due to a lower interest rate environment that motivated
borrowers to refinance their existing mortgage loans into lower rate residential
mortgage loans. During the second half of fiscal 1996, as interest rates moved
higher, fixed rate residential mortgage loans declined in popularity and
adjustable rate residential mortgage loans became the product of choice.
Approximately 67% of the fixed rate residential mortgage loans were originated
in the first six months of fiscal 1996, while approximately 63% of the
adjustable rate residential mortgage loans were originated in the last six
months of fiscal 1996.
During the year ended September 30, 1996, Eagle emphasized the
origination of fixed rate bi-weekly residential mortgage loans for a total of
$45.8 million compared to $5.0 million in 1995. The fiscal 1996 amount accounted
for 40% of the total fixed rate residential mortgage loans originated during the
year. The largest category of the adjustable rate residential mortgage loan
originations were 5-1 year product representing $41.7 million, or 52.7%, of the
total adjustable rate originations. Adjustable rate loans that reprice annually
accounted for only $8.0 million of the 1996 originations compared to $17.5
million in 1995.
Eagle makes single-family conventional first mortgage loans with up to
a 95% loan-to-value ratio. In the case of loans with a higher loan-to-value
ratio than 80%, the policy of Eagle is to require private mortgage insurance for
a specified percentage of the amount of the outstanding principal balance of the
loan. Eagle makes multi-family and commercial real estate loans with up to a 75%
loan-to-value ratio. See "Lending Activities -- Purchase and Sale of Loans and
Loan Servicing."
All property securing real estate loans originated by Eagle is
appraised by one of several professionally qualified appraisers who have been
pre-approved by Eagle. For all real estate loans, Eagle requires the borrower to
obtain fire and extended casualty insurance and, where appropriate, flood
insurance and loss of rents coverage. Eagle also requires either title insurance
or a title opinion from an attorney experienced with title matters.
Eagle issues 30 to 90-day commitments to prospective borrowers to make
loans subject to various conditions. Loan commitments generally are issued for
long-term loans to finance residential properties and for construction and
combined construction/permanent loans secured by multi-family residential and
commercial properties. With respect to adjustable rate, single-family
residential loans, it is the practice of Eagle to make commitments to lend at
the rate of interest and the loan origination fee quoted to the borrower at the
time of application. The proportion of the total value of commitments derived
from any particular category of loan varies from time to time and depends on
market conditions. At September 30, 1996 and 1995, loan commitments of $66.9
million and $49.4 million, respectively, were outstanding. These amounts include
approximately $31.9 million and $23.5 million, respectively, in unadvanced home
equity credit lines.
Eagle encounters certain environmental risks in its lending activities.
Under federal and state environmental laws, lenders may become liable for the
costs of cleaning up hazardous materials found on security properties. Certain
states may also impose liens with higher priorities than first mortgages on
properties to recover funds used in such efforts. Although the foregoing
environmental risks are more usually associated with industrial and commercial
loans, environmental risks may be substantial for residential lenders, like
Eagle Federal, since environmental contamination may render the security
property unsuitable for residential use. In addition, the value of residential
8
<PAGE>
properties may become substantially diminished by contamination of nearby
properties. In accordance with the guidelines of FNMA and FHLMC, appraisals for
single-family homes on which Eagle Federal lends include comments on
environmental influences and conditions. Eagle attempts to control its exposure
to environmental risks with respect to loans secured by larger properties by
training its underwriters to recognize the signs of environmental problems when
they inspect properties; by requiring borrowers to represent and warrant that
properties securing loans do not contain hazardous waste, asbestos or other such
substances; by requiring borrowers to indemnify the lending bank, with personal
recourse, against environmental losses and; by obtaining environmental reviews
and tests on all loans secured by nonresidential properties. No assurance can be
given, however, that the value of properties securing loans in Eagle's portfolio
will not be adversely affected by the presence of hazardous materials or that
future changes in federal or state laws will not increase Eagle's exposure to
liability for environmental cleanup.
Purchase and Sale of Loans and Loan Servicing. From time to time Eagle
may purchase mortgage loans and loan participations secured by properties
outside of Connecticut, however no significant activity has occurred in several
years.
In addition to servicing its own loans, Eagle services loans owned by
others, which loans had a balance at September 30, 1996 and 1995 of $242.6
million and $234.8 million, respectively. Servicing fees have not historically
been a significant source of income for Eagle but will become an area of focus
for increasing revenue in the future.
During fiscal 1995, Eagle completed the securitization of $154.2
million of fixed rate loans into FHLMC mortgage-backed securities and
subsequently sold $95 million of the securities. The remainder of the securities
were sold in the first quarter of fiscal 1996. This securitization and sale
allowed the Company to eliminate a portion of the long-term interest rate risk
inherent in the balance sheet by replacing fixed rate assets with adjustable
rate assets. Eagle sold $10.0 million of residential, fixed rate mortgage loans
to FHLMC in fiscal 1994.
During fiscal 1996, Eagle changed its approach to holding fixed rate
residential mortgage loans currently being originated in order to better manage
the interest rate risk inherent in the balance sheet. Prior to 1996, Eagle
retained all fixed rate originations in portfolio, contributing to the Bank's
level of interest rate risk in rising rate environments. In order to eliminate
placing additional risk on the balance sheet, Eagle began identifying the
majority of its newly originated fixed rate residential mortgage loans as held
for sale and then selling the loans into the secondary market. This strategy,
along with the securitization of mortgage loans in fiscal 1995 and resultant
sale of the securities created, has improved and should continue to improve
Eagle's ability to manage its interest rate risk. The servicing created should
also increase other income in the future.
9
<PAGE>
Eagle has selected the following types of fixed rate residential
mortgage originations for identification as held for sale: all 30-year term
loans and 15-year term loans based on monthly pay amortization. Mortgage loans
with 15-year terms but based on bi-weekly pay amortization are retained in
portfolio as the expected life of these loans falls within the tolerance levels
established by the Bank's Asset/Liability Committee (the "ALCO"). The
identification of mortgage loans as held for sale is subject to future change
based on assessments by ALCO regarding the acceptable level of risk that may be
maintained on the balance sheet.
For the year ended September 30, 1996, Eagle sold or securitized a
total of $35.6 million in mortgage loans and transferred $21.9 million of
mortgage loans originally classified as held for sale back into the portfolio.
The mortgage loans were transferred at their estimated market value at the date
of transfer and the transfer was primarily the result of the determination that
the mortgage loans, after initially being classified as held for sale, were not
underwritten to secondary market standards. As a result of the mortgage banking
activities, Eagle recorded a loss of $1.5 million for the year ended September
30, 1996. The loss is principally the result of a decline in the market value of
the loans in the second quarter of fiscal 1996.
10
<PAGE>
The table below shows Eagle's mortgage loan activities for the periods
indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------------------
1996 1995 1994
------------- ------------- -------------
(In thousands)
<S> <C> <C> <C>
MORTGAGE LOAN ORIGINATIONS AND PURCHASES:
Loan originations:
Permanent:
1-4 family units $ 145,515 $ 84,901 $ 138,779
Multi-family units 43 729 316
Commercial real estate 9,889 643 --
Land 4,546 2,502 2,836
------------- ------------- -------------
Total permanent loans 159,993 88,775 141,931
------------- ------------- -------------
Refinancing* 23,748 23,806 42,705
------------- ------------- -------------
Construction:
1-4 family units 32,434 27,086 19,166
Non-Residential -- -- 500
------------- ------------- -------------
Total construction loans 32,434 27,086 19,666
------------- ------------- -------------
Total mortgage loan originations 216,175 139,667 204,302
------------- ------------- -------------
Loan purchases:
Participations -- 130 2,507
Whole loans -- -- --
Loans purchased through acquisition 22,233 -- 60,180
------------- ------------- -------------
Total loan purchases 22,233 130 62,687
------------- ------------- -------------
Total mortgage loan originations and purchases 238,408 139,797 266,989
------------- ------------- -------------
MORTGAGE LOAN SALES, SECURITIZATION AND PRINCIPAL
REPAYMENTS:
Loan sales 18,732 -- 10,009
Loan securitization 16,971 154,194 --
Principal repayments 112,542 82,945 119,576
------------- ------------- -------------
Total mortgage loan sales, securitization and
principal repayments 148,245 237,139 129,585
------------- ------------- -------------
Increase (decrease) in mortgage loans receivable (before
net items) $ 90,163 $ (97,342) $ 137,404
============= ============= =============
</TABLE>
* Consists of loans originated in connection with the refinancing of existing
loans from Eagle. The corresponding pay-off of the original loan is
included in the table under "principal repayments."
11
<PAGE>
The following table shows the consumer loan activities of Eagle for the
periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------------------
1996 1995 1994
------------- ------------- -------------
(In thousands)
<S> <C> <C> <C>
LOAN ORIGINATIONS:
Secured by deposits $ 2,770 $ 3,599 $ 2,219
Home improvement 249 283 236
Home equity 14,874 9,824 11,510
Education -- -- 6
Automobile and personal 2,282 2,351 1,631
------------- ------------- -------------
Total originations 20,175 16,057 15,602
Loan purchases through acquisition 13,169 -- 20,596
------------- ------------- -------------
Total loan originations and purchases 33,344 16,057 36,198
------------- ------------- -------------
LOAN SALES AND PRINCIPAL REPAYMENTS:
Principal repayments 25,761 17,275 18,149
Loan sales 999 -- --
------------- ------------- -------------
Total loan sales and principal repayments 26,760 17,275 18,149
------------- ------------- -------------
Increase (decrease) in consumer loans $ 6,584 $ (1,218) $ 18,049
============= ============= =============
</TABLE>
Fee Income from Lending Activities. Currently, Eagle charges
origination fees ranging from no fee to 2% of the amount of the loan, depending
on the type of loan involved. Higher fees may be charged for construction
financing or for loans secured by properties which are not owner-occupied. Fees
for loan modifications, late payments, changes of property ownership and for
related miscellaneous services are also charged. Income realized from these
activities can vary significantly with the volume and type of loans in the
portfolio and in response to competitive factors.
Loan origination fees and certain direct loan origination costs are
being deferred and the net amount amortized as an adjustment to the related
loan's yield. This amount is generally amortized over the contractual life of
the related loans. At September 30, 1996, Eagle had deferred net loan fees of
$1.3 million.
Usury Limitations. Federal legislation first enacted in 1980 has
preempted all state usury laws concerning residential first mortgage loans
unless the state legislature acted to override the preemption by April 1, 1983.
The Connecticut State Legislature did not act to override the federal
preemption. Connecticut law imposes no ceiling on interest rates on the types of
loans currently originated by Eagle Federal.
NON-PERFORMING ASSETS
All loans generally are placed on a non-accrual basis when a loan is
contractually delinquent for more than three complete calendar months, when full
collection is in doubt or when legal action has been instituted. Management may
elect to continue the accrual of interest when the estimated fair value of
collateral is sufficient to cover the principal balance and accrued interest.
At September 30, 1996, the Company's total non-performing assets,
including non-performing (or non-accrual) loans and real estate owned, was $12.3
million or 0.88% of total assets. This compares to non-performing assets of
$13.6 million, or 1.10% of total assets, at September 30, 1995 and $12.3
million, or 1.15% of total assets, at September 30, 1994.
12
<PAGE>
The following table sets forth information regarding Eagle's
non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Non-performing Loans:
Mortgage loans:
One-to-four family residential $ 6,893 $ 9,419 $ 6,596 $ 5,407 $ 2,801
Multi-family and commercial 1,031 597 169 196 513
Non-mortgage commercial loans 261 - - - -
Home equity lines of credit and
second mortgages 1,047 1,094 1,227 871 633
Other consumer loans 47 20 17 18 49
Real estate owned 3,050 2,439 4,310 5,471 6,403
---------- ---------- --------- --------- ---------
Total $ 12,329 $ 13,569 $ 12,319 $ 11,963 $ 10,399
========== ========== ========= ========= =========
Impaired loans:
Performing $ 4,799 $ - $ - $ - $ -
Non-performing 1,984 - - - -
========== ========== ========= ========= =========
Non-performing assets to loans
receivable, net and real estate owned 1.51% 1.89% 1.51% 1.81% 1.81%
Non-performing assets to total assets 0.88% 1.10% 1.15% 1.51% 1.38%
Net charge-offs to average loans
receivable, net (for the period) 0.35% 0.28% 0.20% 0.11% 0.19%
</TABLE>
Non-performing loans decreased $1.9 million, or 17%, from September 30,
1995 to September 30, 1996. This decrease can be attributed to several factors,
although two primary factors are significant contributors to the decrease. The
primary factors are an increase in foreclosures during the year and a higher
level of charge-offs compared to prior years. Loans foreclosed into real estate
owned totaled $4.3 million for the year ended September 30, 1996 compared to
$2.2 million for fiscal 1995. Loan charge-offs increased 15.6% to $2.9 million
during fiscal 1996 from $2.5 million during fiscal 1995.
As a result of managing non-performing loans, 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 strives to aggressively market properties and has been able
to reduce the level of real estate owned by more then 50% since September 30,
1992.
With respect to mortgage loans, when a borrower fails to make a
required payment by the 15th day after payment is due, Eagle attempts to cause
the deficiency to be cured by corresponding with the borrower. If the deficiency
continues, Eagle corresponds further with the borrower and, through telephone
calls and letters, attempts to determine the reason for and cure the
delinquency. If the deficiency cannot be cured, Eagle generally institutes
appropriate legal action through an approved collection attorney. Real estate
acquired through foreclosure or by deed in lieu of foreclosure is placed on the
books at the lower of the carrying value of the loan or the fair market value of
the real estate based upon a current appraisal, less selling costs. Any
reduction below the value previously recorded on the books is charged against
income or against a valuation reserve. Any loss in excess of the reserve is
charged against income. With respect to consumer loans, the borrower receives
correspondence from Eagle after the loan is 10 to 15 days past due. If it
appears, after further communications with the borrower, that the delinquency
cannot be cured, legal action is instituted. These procedures may be accelerated
further in certain cases, such as chronic delinquencies or unsecured loans.
13
<PAGE>
In addition to non-performing loans, Eagle has $4.0 million of loans at
September 30, 1996 which were classified as restructured loans. Restructured
loans are the result of term modifications with borrowers that meet the
following criteria; loan terms, particularly interest rate, that are consistent
with those terms on newly originated loans, standard underwriting criteria such
as income guidelines and loan-to-value ratios and consistent, on-time monthly
payments. Based on the borrowers meeting the above criteria, management
considers it appropriate to continue the accrual of interest on these loans. The
majority of these borrowers have had short-term financial difficulties and do
not represent chronically delinquent or slow-paying customers. During 1996,
Eagle restructured loans totaling $4.2 million.
Beginning in 1996, Eagle began reporting impaired loans in accordance
with the requirements of SFAS No. 114. Loans are considered impaired when
management has concluded that it is probable that the Bank will be unable to
collect all amounts due in accordance with the contractual terms of the loan
agreement. All amounts due include both principal and interest. In addition all
restructured loans that have been modified have been classified as impaired. At
September 30, 1996, impaired loans totaled $6.8 million, $4.8 million of which
were classified as performing and $2.0 million of which were classified as
non-performing. The non-performing impaired loans are included in the
non-performing loan total of $9.3 million.
The Company's non-performing assets are predominately residential in
nature with $12.4 million secured by one-to-four residential properties,
including $1.1 million of non-performing home equity loans, and $1.2 million
secured by multi-family or commercial real estate.
ALLOWANCE FOR LOAN LOSSES
At September 30, 1996, Eagle's allowance for loan losses totaled $8.6
million, compared to $7.5 million at September 30, 1995, and $8.3 million at
September 30, 1994. Eagle added $2.0 million in provisions for loan losses to
the allowance during fiscal 1996 compared to provisions of $1.5 million and $1.2
million during the years ended September 30, 1995 and 1994, respectively.
14
<PAGE>
The following is a summary of activity in the allowance for loan losses
for the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 7,457 $ 8,311 $ 5,005 $ 4,011 $ 1,544
Charge-offs:
One-to-four family mortgage loans (2,077) (1,729) (1,033) (271) (891)
Multi-family, commercial and
land development loans (491) (381) (405) (521) (249)
Consumer and home equity loans (295) (366) (68) (166) (10)
--------- --------- ---------- ---------- ----------
(2,863) (2,476) (1,506) (958) (1,150)
--------- --------- ---------- ---------- ----------
Recoveries:
One-to-four family mortgage loans 83 92 107 224 192
Multi-family, commercial and land
development loans - 29 3 7 17
Consumer and home equity loans 3 1 2 13 3
--------- --------- ---------- ---------- ----------
86 122 112 244 212
--------- --------- ---------- ---------- ----------
Net charge-offs (2,777) (2,354) (1,394) (714) (938)
Allowance associated with purchases 1,871 - 3,500 - 1,759
Provision for loan losses 2,041 1,500 1,200 1,708 1,646
--------- --------- ---------- ---------- ----------
Balance at end of period $ 8,592 $ 7,457 $ 8,311 $ 5,005 $ 4,011
========= ========= ========== ========== ==========
Ratio of net charge-offs to
average loans outstanding, net 0.35% 0.28% 0.20% 0.11% 0.19%
</TABLE>
At September 30, 1996, Eagle had $8.6 million in loan loss reserves
established for commercial real estate mortgage loans, residential mortgage
loans, commercial loans and consumer loans. This reserve is maintained at a
level believed adequate by management to absorb probable losses in the loan
portfolio. Management's determination of the adequacy of the allowance at a
particular time is based on an evaluation of the portfolio, past loan loss
experience, then-current economic conditions, volume, growth and composition of
the loan portfolio, and other relevant factors. The allowance is increased by
provisions for loan losses charged against income.
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 $1.9 million, $3.5 million and $1.8
million of allowance for loan losses that were recorded as part of
Fleet/Shawmut, 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 of all delinquent
loans as well as the risk of the remaining loans acquired. The additional
allowances were accounted for as purchase accounting adjustments to the premiums
paid by Eagle in the Fleet/Shawmut, Bank of Hartford and Danbury Federal
transactions.
15
<PAGE>
The following table presents an allocation of Eagle's allowance for
loan losses by loan category and presents the percent of each loan category to
the total loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30,
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance at end of period
applicable to: $ 4,915 $ 5,581 $ 6,231 $ 4,234 $ 3,438
1-4 family mortgage loans
82.6% 85.3% 86.7% 87.2% 85.7%
Multi-family, commercial
real estate and land $ 2,345 $ 927 $ 803 $ 492 $ 319
development loans
7.7% 5.3% 4.9% 5.3% 5.7%
Consumer and home equity $ 1,229 $ 890 $ 1,277 $ 279 $ 254
loans
8.9% 9.3% 8.4% 7.5% 8.6%
Commercial loans $ 103 $ 59 - - -
0.8% 0.1% - - -
----------- ----------- ----------- ----------- ------------
Total allowance for loan losses $ 8,592 $ 7,457 $ 8,311 $ 5,005 $ 4,011
=========== =========== =========== =========== ============
</TABLE>
The ratio of allowance for loan losses to non-performing loans was 93%,
67% and 104% at September 30, 1996, September 30, 1995 and September 30, 1994,
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 increase in 1996 in the ratio of allowance for loan losses to
non-performing loans is due to additions to the allowance of $3.9 million.
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.
<TABLE>
<CAPTION>
Years Ended September 30,
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Accruing loans delinquent 60-89 days $ 1,521 $ 1,211 $ 1,480
Nonaccrual loans 9,279 11,130 8,009
---------------- ---------------- ----------------
Total $ 10,800 $ 12,341 $ 9,489
================ ================ ================
Allowance for Loan losses $ 8,592 $ 7,457 $ 8,311
================ ================ ================
Coverage ratio 79.6% 60.4% 87.6%
</TABLE>
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
examination. The OTS completed a regularly scheduled examination of the Bank
during 1995 and no changes to the allowance for loan losses were required at
that time.
At September 30, 1996, Eagle had $6.9 million of potential problem
loans with $3.5 million classified as special mention and $3.4 million
classified as watch. In aggregate the appraised value of the property securing
these loans totaled $7.9 million at September 30, 1996. Commercial real estate
and land loans comprised $2.8 million of the total
16
<PAGE>
INVESTMENT ACTIVITIES
Federally chartered savings institutions have authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of federal agencies, certificates of deposit of federally insured
banks and savings institutions, bankers' acceptances and federal funds. Subject
to various restrictions, federally chartered savings institutions may also
invest a portion of their assets in commercial paper, corporate debt securities,
and mutual funds whose assets conform to the investments that a federally
chartered savings institution is otherwise authorized to make directly. Federal
laws and regulations also require savings institutions to maintain liquid assets
at minimum levels which vary from time to time. See "Regulation -- Savings
Institution Regulation -- Liquidity."
Eagle, as a Delaware corporation, has authority to invest in any type
of investment permitted under Delaware law. As a savings and loan holding
company, however, Eagle's investments are subject to certain regulatory
restrictions described under "Regulation -- Savings and Loan Holding Company
Regulation." Eagle Federal maintains an investment portfolio that provides not
only a source of income but also a source of liquidity to meet lending demands
and fluctuations in deposit flows. The relative mix of investment securities and
loans in these investment portfolios is dependent upon management's judgment
from time to time as to the attractiveness of yields available on loans as
compared to investment securities. Neither Eagle, nor Eagle Federal invest in
below-investment grade corporate bonds and notes.
The Company's total holdings of mortgage-backed and investment
securities increased to $464.6 million at September 30, 1996 from $412.1 million
at September 30, 1995. The Bank's portfolio is almost entirely made up of agency
issued mortgage-backed securities and collateralized mortgage obligations which
collectively total $448.0 million, or 96.4% of the total portfolio. This
represents an increase from $353.1 million at September 30, 1995. Agency issued
mortgage-backed securities decreased from $299.8 million at September 30, 1995
to $225.5 million at September 30, 1996 while collateralized mortgage
obligations increased from $53.3 million at September 30, 1995 to $222.5 million
at September 30, 1996.
The execution of two separate strategies were principally responsible
for the shift in the balances of each respective investment category. The first
strategy, which was implemented during the quarter ended March 31, 1996,
involved the sale of approximately $100 million of the Bank's lowest yielding
securities, of which 67.9% were agency issued mortgage-backed securities and
73.6% were adjustable or floating rate securities. The proceeds were primarily
reinvested in fixed rate, short average life, approximately three to four years,
collateralized mortgage obligations. This transaction was estimated to improve
the yield on the $100 million of securities traded by approximately 150 basis
points on average and resulted in a loss recorded in the consolidated statements
of income of $1.2 million. The second strategy was to supplement balance sheet
growth derived from the loan portfolio with periodic purchases of securities
throughout the year. The majority of these purchases were fixed rate, short
average life collateralized mortgage obligations.
The Company's security portfolio at September 30, 1996 was comprised
primarily of mortgage-backed securities and collateralized mortgage obligations.
Mortgage-backed securities are investments secured by pools of fixed rate or
adjustable rate mortgage loans. Agency issued mortgage-backed securities
represent $225.5, or 48.5%, of the security portfolio with $139.2 million
secured by pools of adjustable rate loans and $86.3 million secured by pools of
fixed rate loans. The payments of interest and principal on such loans are
passed through to the securities holders after deducting a servicing fee. The
collateralized mortgage obligation portion of the investment portfolio, which
totals $222.5 million, contains no derivative investment securities such as
interest only tranches, principal only tranches or strips. There were $38.4
million of adjustable or floating rate collateralized mortgage obligations
outstanding at September 30, 1996. The mortgage-backed securities and
collateralized mortgage obligations held by Eagle are subject to interest rate
and prepayment risks customarily associated with such securities. The weighted
average life of mortgage-backed securities and collateralized mortgage
obligations 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 anticipated 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 differ from the expected
yields based upon prepayment experience.
17
<PAGE>
At September 30, 1996, the following details investments in any issuer
where the aggregate book value exceeded 10% of Eagle's shareholder's equity.
<TABLE>
<CAPTION>
Aggregate Aggregate
Book Value Market Value
---------------------- ----------------------
(in thousands)
<S> <C> <C>
FHLMC $ 133,111 $ 133,114
FNMA 106,242 106,530
GNMA 43,079 42,111
G.E. Capital Mortgage Services, Inc. 40,203 39,824
Prudential Home Mortgage Securities 29,932 29,268
Residential Funding Mortgage Securities, Inc. 25,321 24,888
Structured Mortgage Asset Residential Trust 20,642 20,516
Chemical Mortgage Securities, Inc. 14,988 15,081
Independent National Mortgage Corporation 13,230 13,111
PNC Mortgage Securities Corp. 10,145 10,166
---------------------- ----------------------
$ 436,893 $ 434,609
====================== ======================
</TABLE>
All securities included above represent agency issued mortgage-backed
securities or collateralized mortgage obligations.
18
<PAGE>
The following table sets forth the composition of Eagle's
mortgage-backed and investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
1996 1995 1994
----------------------- ------------------------ -----------------------
Carrying % of Carrying % of Carrying % of
Value Portfolio Value Portfolio Value Portfolio
--------- --------- ---------- ---------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $ 4,960 1.1% $ 6,325 1.5% $ 12,834 7.0%
U.S. Government agency
obligations 7,012 1.5 22,001 5.4 14,018 7.7
Other bonds and notes 2,468 0.5 13,001 3.2 23,040 12.6
Mutual fund and marketable
equity securities - - 14,965 3.6 16,936 9.3
Mortgage-backed securities:
Agency 225,507 48.5 299,758 72.7 68,564 37.4
Other 2,104 0.5 2,704 0.7 142 0.1
Collateralized mortgage
obligations 222,509 47.9 53,323 2.9 47,357 25.9
--------- ------- ---------- ---------- --------- --------
Total carrying value of
portfolio $ 464,560 100% $ 412,077 100% $ 182,891 100%
========= ======= ========== ========== ========= ========
Total market value of portfolio $ 464,480 $ 413,282 $ 179,388
========= ========== =========
</TABLE>
The following table sets forth the maturities of Eagle's
mortgage-backed and investment securities at September 30, 1996 and the weighted
average yields of such securities. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Mortgage-backed
securities and collateralized mortgage obligations are presented in accordance
with date of final maturity without consideration of scheduled amortization or
anticipated prepayments.
<TABLE>
<CAPTION>
Within One Year One to Five Years Five to 10 Years After 10 Years Total
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------- ------- -------- ------- -------- ------- -------- -------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
securities $ - -% $ 4,960 5.03% $ - -% $ - -% $ 4,960 5.03%
U.S. Government
agency obligations - - 7,012 7.30 - - - - 7,012 7.30
Other bonds and notes - - 1,100 6.07 976 7.91 392 6.01 2,468 6.79
Mortgage-backed securities:
Agency 1 8.05 16,445 6.55 9,105 7.95% 199,956 7.05 225,507 7.05
Other - - - - - - 2,104 7.73 2,104 7.73
Collateralized mortgage
obligations - - 1,103 6.52 - - 221,406 7.06 222,509 7.05
-------- ------- ------ ------ ------- -------- ------- -------- -------- ------
Total $ 1 8.05% $ 30,620 6.46% $ 10,081 7.94% $ 423,858 7.05% $ 464,560 7.03%
======== ======= ====== ====== ======= ======== ======= ======== ======== ======
</TABLE>
19
<PAGE>
SOURCES OF FUNDS
General. Deposits are the primary source of funds for use in the
lending and investment activities of Eagle. In addition, funds are derived from
loan payments (including interest, amortization of principal and prepayments),
earnings on investments, amortization of investments, maturing investments and
FHL Bank advances. Historically, Eagle has not relied on sales of loans and
investment securities as sources of funds. Loan and investment repayments
fluctuate significantly based on prevailing interest rates, while deposit
inflows and outflows are significantly influenced by prevailing interest rates
on alternative products and general economic conditions. Borrowings may be used
on a short-term basis to compensate for reductions in normal sources of funds or
on a longer term basis to support expanded lending or investing activities.
Deposits increased to $1.06 billion at September 30, 1996 from $951.8
million at September 30, 1995, an increase of $107.6 million or 11.3%. Total
borrowings increased by $66.2 million to $221.7 million at September 30, 1996.
Approximately $68.2 million, or 63.4%, of the increase in deposits is the net
result of the Fleet/Shawmut and Union transactions. The increase in borrowings
is principally a result of funding purchases of securities as part of Eagle's
balance sheet management strategies.
Deposit Activities. Eagle has developed a variety of deposit products
ranging in maturity from demand-type accounts to certificates with maturities of
up to five years. Deposits are primarily derived from the areas in which the
offices of Eagle Federal are located. Eagle does not actively solicit deposits
outside the State of Connecticut or use brokers to obtain deposits. Eagle does
occasionally use premiums and promotions to attract deposits.
The deregulation of various federal controls on insured deposits has
allowed Eagle to be more competitive in the acquisition and retention of funds,
but has also resulted in a more volatile cost of funds. Federal regulations no
longer require Eagle to impose interest penalties for early withdrawal of
deposits. However, to assist in maintaining the maturity and cost structure of
their deposits, Eagle continues to impose such penalties. The deposit accounts
offered by Eagle are reviewed on a systematic basis in order to determine
whether such accounts continue to meet asset/liability management goals. Eagle
attempts to control the flow of funds in its deposit accounts according to the
need for funds and the cost of alternative sources of funds. The flow of funds
is controlled primarily by the pricing of deposits, which is influenced to a
large extent by competitive factors in the market area. Interest rates paid by
Eagle generally are competitive with the rates offered by other institutions in
its primary market areas. Eagle has maintained a strong liquidity position and
has generally maintained its deposit base, but has not actively competed for
deposits when funds were available from other sources or when its existing funds
were sufficient to meet their liquidity needs.
20
<PAGE>
The following table describes the deposit accounts offered by Eagle at
September 30, 1996.
Minimum Interest
Deposit Rate
-------------------- -----------------
Passbook $ 10 2.00%
NOW 500 .50
Money market accounts 1,000 2.50
Market-rate certificates:
31 day 5,000 2.96
91 day 500 3.93
Six month 500 4.65
Six month liquid 500 4.89
Nine month 500 4.65
Nine month bump 500 5.37
Nine month liquid 500 5.13
One Year 500 5.13
Fifteen month 500 5.13
Fifteen month bump 500 5.60
Eighteen month 500 5.08
Two year 500 5.03
Two and one-half year 500 4.98
Two and one-half year bump 500 5.84
Three year 500 5.37
Three and one-half year 500 4.98
Four year 500 5.84
Five year 500 5.60
IRA certificates:
One and one-half year
(variable rate) 50 4.65
One and one-half year
(fixed rate) 500 5.08
Four and one-half year
(fixed rate) 500 5.84
Eagle prices its deposits to take advantage of opportunities for
profitable investment of the funds through regular lending activities, and to a
lesser amount to encourage deposits in longer term accounts. Interest rates are
primarily based on prevailing market conditions, the need for funds and ability
to pay.
21
<PAGE>
The following table sets forth the deposit flows for Eagle during the periods
indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
(In thousands)
<S> <C> <C> <C>
Deposits acquired through acquisitions $ 253,139 $ -- $ 272,752
Deposits sold through dispositions (184,410) -- --
Deposits 2,048,831 1,893,451 1,455,747
Withdrawals (2,054,769) (1,932,822) (1,513,532)
--------------- ---------------- ----------------
Net cash inflow (outflow) 62,791 (39,371) 214,967
Interest credited 44,813 36,449 27,648
--------------- ---------------- ----------------
Net increase (decrease) in deposits $ 107,604 $ (2,922) $ 242,615
=================== ================== ===================
</TABLE>
The following table provides detail regarding the Bank's deposit accounts for
the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------------------------------------------------------------------
1996 1995 1994
------------------------- ------------------------- -------------------------
Average Average Average
Amount Rate Amount Rate Amount Rate
------------ ------------ ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand accounts $ 117,913 0.58% $ 99,266 .72% $ 79,635 .98%
Passbook accounts 148,593 2.01 151,170 1.98 134,731 2.20
Money market accounts 102,367 2.70 124,260 2.67 144,478 2.72
Certificate accounts 676,598 5.58 566,675 5.19 433,989 4.60
</TABLE>
The following table sets forth the deposit accounts of Eagle in dollar amounts
and as percentages of total deposits at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------------------------------------------
Weighted % of Weighted % of Weighted % of
Average total Average total Average total
Rate Amount deposits Rate Amount deposits Rate Amount deposits
------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance by account type:
Non-interest bearing 0.00% $ 30,260 2.8% 0.00% $ 27,913 2.9% 0.00% $ 22,101 2.3%
Regular savings 2.00 144,728 13.7 1.99 143,271 15.1 1.99 162,344 17.1
NOW accounts 0.98 90,758 8.6 1.04 80,625 8.5 1.05 76,111 8.0
Money market accounts 2.78 94,510 8.9 2.71 104,428 11.0 2.67 151,290 16.0
------------------- ----------------- -----------------
360,256 34.0 356,237 37.5 411,846 43.4
------------------- ----------------- -----------------
Certificate accounts
with
original maturities of:
Six months or less 4.59 83,514 7.9 4.64 57,383 6.0 3.27 107,722 11.4
Over six months to one year 5.14 289,815 27.4 5.69 178,098 18.7 3.77 110,928 11.7
Over one year to two years 5.55 98,986 9.3 5.57 145,895 15.3 4.37 113,970 12.0
Over two years 6.05 226,784 21.4 6.09 214,138 22.5 5.85 204,363 21.5
------------------- ----------------- -----------------
699,099 66.0 595,514 62.5 536,983 56.6
------------------- ----------------- -----------------
$ 1,059,355 100.0% $ 951,751 100.0% $ 948,829 100.0%
=================== ================= =================
</TABLE>
22
<PAGE>
The following table presents, by various interest rate categories, the
amounts of certificate accounts at Eagle as of the dates indicated.
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------
1996 1995 1994
---------------- ----------------- -----------------
(In thousands)
<S> <C> <C> <C>
Less than 4.01% $ 17,077 $ 11,484 $ 228,638
4.01 - 6.00% 570,015 369,885 253,076
6.01 - 10.00% 112,007 214,145 55,629
---------------- ----------------- -----------------
$ 699,099 $ 595,514 $ 537,343
================ ================= =================
</TABLE>
The following table sets forth the amount and remaining maturities by
interest rate of time deposits at September 30, 1996.
<TABLE>
<CAPTION>
Less Than One to Three After Three
Rate One Year Years Years Total
- --------------------------- ------------- ---------------- ----------------- --------------
(In Thousands)
<S> <C> <C> <C> <C>
Less than 4.01% $ 16,957 $ 102 $ 18 $ 17,077
4.01 - 6.00% 422,715 119,604 27,696 570,015
6.01 - 10.00% 37,620 41,728 32,659 112,007
------------- ---------------- ----------------- --------------
Total $ 477,292 $ 161,434 $ 60,373 $ 699,099
============= ================ ================= ==============
</TABLE>
Certain information regarding the deposit accounts at Eagle in amounts
of $100,000 or more at September 30, 1996 is shown in the table below.
<TABLE>
<CAPTION>
Total Deposits Three Months or Over Three Over Six Over One Year % of Total
of $100,000 or Less Months through Months through Deposits
more Six Months One Year
----------------- ----------------- ----------------- ---------------- ---------------- -------------
(in thousands)
<C> <C> <C> <C> <C> <C>
$ 63,300 $ 22,335 $ 10,689 $ 12,681 $ 17,595 5.98%
</TABLE>
Borrowings. The FHL Bank System functions in a reserve credit capacity
for savings institutions and certain other home financing institutions. Members
of the FHL Bank System are required to own capital stock in the FHL Bank.
Members are authorized to apply for advances on the security of such stock and
certain of their home mortgages and other assets (principally securities which
are obligations of, or guaranteed by, the United States) provided certain
creditworthiness standards have been met. See "Regulation -- Federal Home Loan
Bank System." Under its current credit policies, the FHL Bank limits advances
based on the value of a member's qualified collateral that has not been pledged
to outside sources. Historically, Eagle Federal has not relied on FHL Bank
advances and other borrowings to any significant extent as a source of funds. At
September 30, 1996, Eagle Federal had authority to borrow up to $688 million
from the FHL Bank of Boston, and will continue to use this source of funds to
take advantage of lending and investment opportunities. Outstanding FHL Bank
advances at September 30, 1996 totaled $207.0 million compared to $73.2 million
at September 30, 1995 and $31.8 million at September 30, 1994. The weighted
average interest rate on FHL Bank advances outstanding at September 30, 1996,
1995 and 1994 was 5.65%, 5.96% and 5.44% respectively.
23
<PAGE>
On a consolidated basis, Eagle had other borrowed money in the amount
of $14.7 million at September 30, 1996 compared to $82.3 million at September
30, 1995. Repurchase agreements constitute 100.0% and 99.9% of the other
borrowed money total at September 30, 1996 and 1995, respectively. The weighted
average interest rate on other borrowed money at September 30, 1996, 1995, and
1994 was 5.22%, 5.89%, and 5.20%, respectively.
24
<PAGE>
INTEREST RATE SENSITIVITY GAP
A method used to measure the interest rate risk exposure of the
Company's balance sheet is the interest rate sensitivity "gap", which is the
difference between rate sensitive assets and rate sensitive liabilities
repricing or maturing within specific time periods. 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.
The following table shows the estimated maturity/repricing structure of
the interest sensitive assets and interest sensitive liabilities of Eagle at
September 30, 1996:
<TABLE>
<CAPTION>
Repricing Repricing Repricing Repricing
Percent Within Within Within Over 3
Amount of Total 0-3 4-12 1-3 Years Years
Months Months
---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Loans receivable , net (a) $ 815,413 61.9% $ 159,502 $ 222,474 $ 190,071 $ 243,366
Mortgage-backed securities (b) 453,112 34.1 75,915 138,524 73,452 165,221
Investment securities (c) 24,893 1.9 - - 6,077 18,816
Interest-bearing deposits 27,989 2.1 27,989 - - -
---------- ---------- ---------- ---------- ---------- ----------
Total interest sensitive assets $ 1,321,407 100.0% 263,406 360,998 269,600 427,403
========== ========== ---------- ---------- ---------- ----------
Interest sensitive liabilities
Passbook accounts $ 144,728 11.6% 7,511 17,744 40,582 78,891
Certificate accounts 699,099 55.9 194,999 282,288 161,421 60,391
NOW accounts 90,758 7.2 6,149 11,624 20,899 52,086
Money market accounts 94,510 7.6 6,285 11,881 20,072 56,272
FHLB advances 207,008 16.5 86,885 36,245 62,537 21,341
Other borrowings 14,670 1.2 - 14,670 - -
---------- ---------- ---------- ---------- ---------- ----------
Total interest sensitive liabilities $ 1,250,773 100.0% 301,829 374,452 305,511 268,981
========== ========== ---------- ---------- ---------- ----------
Periodic repricing difference $ (38,423) $ (13,454) $ (35,911) $ 158,422
(cumulative gap)
========== ========== ========== ==========
Cumulative repricing difference $ (38,423) $ (51,877) $ (87,788) $ 70,634
(cumulative gap)
========== ========== ========== ==========
Cumulative gap to total assets (2.7)% (3.7)% (6.3)% (5.0)%
</TABLE>
(a) Loans are net of non-performing loans, undisbursed portion of loans
due borrowers and unearned discounts and premiums.
(b) Mortgage-backed securities include mortgage-backed securities held to
maturity and mortgage-backed securities available for sale.
(c) Investment securities include investment securities held to maturity,
investment securities available for sale and FHL Bank stock.
The following assumptions were determined by management in order to prepare the
gap table set forth above. Non-amortizing investment securities are shown in the
period in which they contractually mature. Prepayment rates on loans, amortizing
investment securities and mortgage-backed securities are based upon a
combination of market consensus. Estimated decay rates on all deposit accounts
are based upon the formula derived by the OTS.
The interest rate sensitivity of the Company's assets and liabilities could vary
substantially if different assumptions were used or if actual experience differs
from the assumptions used. For example, if all passbook deposits were assumed to
reprice in one year or less, the Company's one-year cumulative gap to total
assets would be negative 12.2%.
25
<PAGE>
SERVICE CORPORATION ACTIVITIES
Federal regulations permit a federally chartered savings institution to
invest an amount up to 2% of its assets in the stock, paid-in surplus, and
unsecured obligations of subsidiary service corporations engaged in certain
activities, and an additional 1% of its assets when the additional funds are
used primarily for community or inner-city development or investment. In
addition, federal regulations generally authorize such institutions which meet
minimum regulatory capital requirements to invest up to 50% of regulatory
capital in conforming first mortgage loans to service corporations. At September
30, 1996, Eagle Federal's direct investment (capital stock) in its service
corporation, Eagle Service Corp., was $ 1,000. Eagle Service Corp. administers
the securities brokerage and investment services made available to Eagle
Federal's customers.
EMPLOYEES
At September 30, 1996, Eagle had 417 employees (including 115 part-time
employees), all of whom are employed by Eagle Federal. None of these employees
are represented by a collective bargaining group. Employee benefits for
full-time employees include reimbursement of approved, business-related
educational expenses, a pension plan, an ESOP, a 401k plan and life, health and
disability insurance.
MARKET AREA AND COMPETITION
Eagle Federal is headquartered in Bristol, Connecticut and conducts
business from four offices in Bristol, three offices in Hartford, two offices in
West Hartford, and one office each in Bloomfield, Canton, Manchester, Rocky Hill
and Simsbury (all of which are in Hartford County), two offices in Torrington,
one office each in Litchfield, Terryville and Winsted (all of which are in
Litchfield County). Eagle also operates supermarket branch offices in
Bloomfield, East Hartford, Glastonbury and Avon.
Hartford, the capital of Connecticut, has a population of approximately
140,000 and is the governmental and economic center of Central Connecticut.
Bristol, located in central Connecticut 18 miles west of Hartford, is a city of
approximately 60,000 people with a broad-based economy. Over 100 manufacturing
firms of all sizes operate in or near Bristol. The city of Torrington is located
27 miles west of Hartford at the northern end of the Route 8 corridor which runs
from the northwest corner of Connecticut to the New Haven and Bridgeport
metropolitan areas. Torrington has an estimated population of 30,000 and is the
largest city in Litchfield County.
Eagle Federal faces substantial competition for deposits and loans
throughout its market area. The primary factors stressed by Eagle Federal in
competing for deposits are interest rates, personalized services, the quality
and range of financial services, convenience of office locations and office
hours. Competition for deposits comes primarily from other savings institutions,
commercial banks, credit unions, money market funds and other investment
alternatives. The primary factors in competing for loans are interest rates,
loan origination fees, the quality and range of lending services and
personalized service. Competition for origination of first mortgage loans comes
primarily from other savings institutions, mortgage banking firms, commercial
banks and insurance companies.
Connecticut law now permits Connecticut bank holding companies to
engage in stock acquisitions of depository institutions in other New England
states with reciprocal legislation. All New England states currently have some
form of reciprocal legislation. As a result, bank holding companies from any
state in New England can establish non-bank offices (including loan production
offices) in Connecticut on a limited basis. The impact may be to significantly
increase the competition faced by Eagle. The Connecticut legislature also has
enacted legislation which reduces the home office protection enjoyed by
Connecticut-chartered savings institutions and commercial banks. This and other
legislative and regulatory changes may increase the size of the banking
institutions competing in the general market area of Eagle.
26
<PAGE>
Effective September 29, 1995, the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("IBBEA"), amended the Bank Holding Company Act
of 1956 (the "BHCA") to permit a bank holding company to acquire a bank located
in any state, provided that the acquisition does not result in the bank holding
company controlling more than 10% of the deposits in the United States, or 30%
of deposits in the state in which the bank to be acquired is located (unless the
state waives the 30% deposit limitation). Individual states are permitted to
restrict the ability of an out-of-state bank holding company or bank to acquire
an in-state bank that has been in existence for less than five years and to
establish a state concentration limit of less than 30% if such reduced limit
does not discriminate against out-of-state bank holding companies or banks.
Effective June 1, 1997, an "adequately capitalized" bank, with the
approval of the appropriate federal banking agency, may merge with another
adequately capitalized bank in any state that has not opted out of interstate
branching and operate the target's offices as branches if certain conditions are
satisfied. The same national (10%) and state (30%) deposit concentration limits
and any applicable state minimum-existence restrictions (up to a maximum of 5
years) apply to interstate mergers as to interstate acquisitions. The applicant
also must comply with any nondiscriminatory host state filing and notice
requirements and demonstrate a record of compliance with applicable federal and
state community reinvestment laws. A state may opt out of interstate branching
by enacting a law between September 29, 1994 and June 1, 1997 expressly
prohibiting interstate merger transactions.
The resulting bank to an interstate merger may establish or acquire
additional branches at any location in a state where any of the banks involved
in the merger could have established or acquired a branch. A bank also may
acquire one or more branches of an out-of-state bank without acquiring the
target out-of-state bank if the law of the target's home state permits such a
transaction. In addition, a bank may establish a de novo branch in another state
if the host state by statute expressly permits de novo interstate branching.
Furthermore, a bank subsidiary of a bank holding company is permitted
to act as agent for other depository institutions owned by the same holding
company for purposes of receiving deposits, renewing time deposits, closing or
servicing loans, and receiving loan payments effective as of September 29, 1995.
A savings association may perform similar agency services for affiliated banks
to the extent that the savings association was affiliated with a bank on July 1,
1994 and satisfies certain additional requirements.
The OTS also has adopted a statement of policy on branching by
federally chartered savings institutions providing that the OTS will generally
permit such institutions to branch or merge across state lines to the same
extent permitted under state law to a state-chartered provided that the federal
institution continues to meet the domestic building and loan test as set forth
in the Internal Revenue Code. See "Regulation - Savings and Loan Holding Company
Regulation."
The foregoing provisions are expected to further increase competition
within Eagle's existing market area.
REGULATION
GENERAL
The Company, as a savings and loan holding company, and the Bank, as a
federally chartered savings bank, are subject to extensive regulation,
supervision and examination by the OTS as their primary federal regulator. The
Bank also is subject to regulation, supervision and examination by the FDIC and
as to certain matters by the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board"). See "Management's Discussion and Analysis" and
"Notes to Consolidated Financial Statements" as to the impact of certain laws,
rules and regulations on the operations of the Company and the Bank. Set forth
below is a description of certain recent regulatory developments.
27
<PAGE>
In September 1996, legislation (the "1996 legislation") was enacted to
address the undercapitalization of the Savings Association Insurance Fund (the
"SAIF"), of which the Bank is a member. As a result of the 1996 legislation, the
Federal Deposit Insurance Corporation (the "FDIC") imposed a one-time special
assessment of .657% on deposits insured by the SAIF as of March 31, 1995. The
Bank incurred a one-time charge of $4.7 million (before taxes) to pay for the
special assessment based upon on its level of SAIF deposits as of March 31,
1995. After the SAIF was deemed to be recapitalized, the Bank's deposit
insurance premiums to the SAIF were reduced as of September 30, 1996. The Bank
expects that its future deposit insurance premiums will continue to be lower
than the premiums it paid prior to the recapitalization.
The 1996 legislation also contemplates the merger of the SAIF with the
Bank Insurance Fund (the "BIF"), which generally insures deposits in national
and state-chartered banks. The combined deposit insurance fund, to formally be
known as the Depository Insurance Fund (the "DIF"), to be formed no earlier than
January 1, 1999, will insure deposits at all FDIC insured depository
institutions. As a condition to the formation of the DIF, however, no insured
depository institution can be chartered as a savings association. To facilitate
the abolition of the savings association charter, the Secretary of the Treasury
is required to report to the Congress no later than March 31, 1997 with respect
to the development of a common charter for all insured depository institutions
and the abolition of separate and distinct charters between banks and savings
associations. If legislation with respect to the development of a common charter
is enacted, the Bank may be required to convert its federal charter to either a
new federal type of bank charter or to a state depository institution charter.
Future legislation also may result in the Company becoming regulated at the
holding company level by the Federal Reserve Board rather than by the OTS.
Regulation by the Federal Reserve Board could subject the Company to capital
requirements that are not currently applicable to the Company as a holding
company under OTS regulation and may result in statutory limitations on the type
of business activities in which the Company may
28
<PAGE>
engage at the holding company level, which business activities currently are not
restricted. The Company and the Bank are unable to predict whether such
legislation will be enacted.
The 1996 legislation also, contained several provisions that could
impact operations of the Bank, including augmenting the Bank's commercial
lending authority by 10% of assets, provided that any loans in excess of 10% are
used for small business loans. Furthermore, the qualified thrift lender test
that the Bank must comply with was liberalized to provide that small business,
credit card and student loans can be included without any limit, and that the
Bank can qualify as a qualified thrift lender by meeting either the test set
forth in the Home Owner's Loan Act or under the definition of a domestic
building and loan association as defined under the Internal Revenue Code of
1986, as amended.
Separate legislation was enacted in 1996 to repeal most of Section 593
of the Internal Revenue Code pertaining to how qualified savings institutions
calculate their bad debt deduction for federal income tax purposes. This
legislation eliminated the Bank's ability to compute its bad debt deduction
utilizing the percentage-of-taxable-income method or the reserve method based
upon experience. It also suspended the recapture of the pre-1988 tax bad debt
reserves and will require the recapture of these amounts only under very limited
circumstances. It does require the recapture of the post-1987 tax bad debt
reserves over a six year period. The Bank's pre-1988 tax bad debt reserves which
have been suspended are $8.9 million and the amount of the post-1987 reserves
which will be recaptured into income are $90,000.
During 1996, the OTS continued its comprehensive review of its
regulations to eliminate duplicative, unduly burdensome and unnecessary
regulations concerning lending and investments, corporate governance,
subsidiaries and equity investments, conflicts of interest and usurpation of
corporate opportunity. The OTS's revised lending and investments regulation
generally imposes general safety and soundness standards, and also provides that
commercial loans made by a service corporation of a savings association will be
exempted from an institution's overall 10% limit on commercial loans. Such
regulations now allow an institution to use its own cost-of-fund index in
structuring adjustable rate mortgages, and eliminate percentage of assets
limitations on credit card lending.
The OTS's revised subsidiaries and equity investments regulation
consolidated all OTS regulations that apply to various types of subsidiaries of
federal associations and updates the list of pre-approved service corporation
activities to include activities that the OTS has deemed to be reasonably
related to the activities of a federal savings institution, yet not previously
included on OTS's pre-approved list. In general, if an activity is on the
pre-approved list, institutions will merely have to provide the OTS and the FDIC
with 30 days prior notice of such
29
<PAGE>
activity. Activities not on the pre-approved list remain subject to an
application process. The revised corporate governance regulation is intended to
provide greater flexibility with respect to corporate governance of federal
savings institutions, such as the Bank, consistent with safety and soundness and
fairness to shareholders or members. For example, the OTS corporate governance
regulations provide for after-the-fact notice for pre-approved charter and bylaw
amendments and increase the list of pre-approved charter amendments, such as
supermajority voting provisions and the eliminations of cumulative voting. In
addition, institutions that are subsidiaries of holding companies, such as the
Bank, no longer are required to have staggered terms for members of their board
of directors, provide notice of shareholder meetings or compile shareholder
voting lists.
The OTS also converted its policy statement on conflicts of interest to
a regulation that is intended to be based upon common law principles of "duty of
loyalty" and "duty of care." The new conflicts regulation provides that
directors, officers, employees, persons having the power to control the
management or policies of savings associations, and other persons who owe
fiduciary duties to savings institutions will be prohibited from advancing their
own personal or business interests, or those of others, at the expense of the
institutions they serve. The OTS also eliminated its current "appearance of a
conflict of interest" standard from the scope of the revised rule. The OTS also
codified its interpretative position concerning the phrase "person having the
power to control the management or policies of savings associations," to provide
that the phrase includes holding companies, such as the Company. Finally, the
OTS eliminated its corporate opportunity regulations and policy statements and
adopted a standard similar to common law standards governing usurpation of
corporate opportunity. Significantly under the revised regulation, transfer of a
line of business within a holding company structure will not be deemed to be a
usurpation of corporate opportunity if an institution receives fair market
consideration for a line of business transferred to its holding company or its
affiliate. In such transactions, the OTS will generally defer to decisions made
by a holding conpany, subject to compliance with Sections 23A or 23B of the
Federal Reserve Act and general safety and soundness principles.
30
<PAGE>
SAVINGS AND LOAN HOLDING COMPANY REGULATION
Under the Home Owners Loan Act (the "HOLA"), the Director of the OTS
has regulatory jurisdiction over savings and loan holding companies. Eagle, as a
savings and loan holding company within the meaning of the HOLA, is subject to
regulation, supervision and examination by, and the reporting requirements of,
the Director of the OTS.
As a unitary holding company, the Company generally is not restricted
under existing laws as to the types of business activities in which it may
engage, provided that Eagle Federal continues to qualify as a qualified thrift
lender ("QTL"). Eagle could be prohibited from engaging in any activity
(including those otherwise permitted under the HOLA) not allowed for bank
holding companies if Eagle fails to constitute a QTL or if Eagle subsequently
becomes a multiple savings and loan holding company. See "Regulation -- Savings
Institution Regulation -- Qualified Thrift Lender Requirement."
SAVINGS INSTITUTION REGULATION
General. As a federally chartered savings institution, Eagle Federal is
subject to supervision and regulation by the Director of the OTS and by the FDIC
in its capacity as administrator of the SAIF. Under OTS regulations, Eagle
Federal is required to obtain audits by an independent accountant and to be
examined periodically by the Director of the OTS. Examinations must be conducted
no less frequently than every 12 months. Eagle Federal is subject to assessments
by the OTS and FDIC to cover the costs of such examinations. The OTS may revalue
assets of Eagle Federal, based upon appraisals, and require the establishment of
specific reserves in amounts equal to the difference between such revaluation
and the book value of the assets. The Director of the OTS also is authorized to
promulgate regulations to ensure the safe and sound operations of savings
institutions and may impose various requirements and restrictions on the
activities of savings institutions. See "Regulation - Savings Institution
Regulation - Safety and Soundness Guidelines." See "Regulation - Savings
Institution Regulation - Insurance of Deposits".
Capital Requirements. Eagle Federal is subject to the capital adequacy
regulations adopted by the OTS. Eagle Federal's ability to pay dividends to the
Company and expand its business can be restricted if its capital falls below
levels established by the OTS. Pursuant to OTS regulations, savings associations
are required to maintain (i) "leverage capital" in an amount not less than 3% of
total assets, (ii) "tangible capital" in an amount not less than 1.5% of total
assets, and (iii) risk-based capital equal to 8.00% of risk-weighted assets. The
capital standards established by the OTS for savings institutions must generally
be no less stringent than those applicable to national banks of 4.0%.
The following table sets forth the actual and required minimum levels
of regulatory capital for Eagle Federal under applicable OTS regulations as of
September 30, 1996.
<TABLE>
<CAPTION>
ACTUAL ACTUAL REQUIRED REQUIRED EXCESS
AMOUNT PERCENT AMOUNT PERCENT AMOUNT
------------- -------------- --------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Core $ 74,566 5.42% $ 41,283 3.0% $ 33,283
Tangible $ 74,566 5.42% $ 20,641 1.5% $ 53,925
Risk-based $ 81,953 13.89% $ 47,186 8.0% $ 34,767
</TABLE>
31
<PAGE>
The following is a reconciliation of Eagle Federal's equity capital
under GAAP to regulatory capital at September 30, 1996.
<TABLE>
<CAPTION>
Core Tangible Risk-based
----------- ------------ -------------
(in thousands)
<S> <C> <C> <C>
GAAP Capital $ 99,720 $ 99,720 $ 99,720
Less: Goodwill and other intangible assets (26,864) (26,864) (26,864)
Less: Unrealized gain in certain available for sale 1,769 1,769 1,769
securities
Less: Excess qualifying purchased mortgage loan servicing (59) (59) (59)
Add: General loan and lease valuation allowances -- -- 7,387
----------- ------------ -------------
Regulatory capital $ 74,566 $ 74,566 $ 81,953
=========== ============ =============
</TABLE>
Prompt Corrective Action. The federal banking agencies have established
by regulation, for each capital measure, the levels at which an insured
institution is well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized, and to take
prompt corrective action with respect to insured institutions which fall below
minimum capital standards. The degree of regulatory intervention mandated by
FDICIA is tied to an insured institution's capital category, with increasing
scrutiny and more stringent restrictions being imposed as an institution's
capital declines. Any insured depository institution which falls below the
minimum capital standards must submit a capital restoration plan. Any company
that controls an under capitalized institution must, in connection with the
submission of a capital restoration plan by the savings institution, guarantee
that the institution will comply with the plan and provide appropriate
assurances of performance. As of September 30, 1996, Eagle Federal was deemed to
be well-capitalized. See "Regulation - Savings Institution Regulation -
Insurance of Deposits."
Safety and Soundness Regulations. The OTS, along with the other federal
banking agencies, adopted safety and soundness guidelines in July 1995 relating
to (i) internal controls, information systems, and internal audit systems; (ii)
loan documentation; (iii) credit underwriting; (iv) interest rate exposure; (v)
asset growth; and (vi) compensation and benefit standards for officers,
directors, employees and principal shareholders. The HOLA requires that all
regulations and policies of the Director of the OTS for the safe and sound
operations of savings institutions are to be no less stringent than those
established by the OCC for national banks. The foregoing operational, managerial
and compensation issues are set out in the safety and soundness guidelines that
the federal banking agencies issued to identify and address problems at
institutions before capital becomes impaired.
Qualified Thrift Lender Requirement. Eagle Federal must maintain its
status as a "qualified thrift lender" ("QTL") in order to exercise the powers
granted to federally chartered savings institutions and maintain full access to
FHL Bank advances. Eagle Federal will remain a QTL if its qualified thrift
investments continue to equal or exceed 65% of the savings association's
portfolio assets on a monthly average basis in 9 out of every 12 months, as
defined by HOLA and the rules and regulations of the OTS. At September 30, 1996,
qualified thrift investments as a percentage of portfolio assets for Eagle
Federal was 96.6%. The qualified thrift investments of Eagle Federal equaled or
exceeded 65% of its portfolio assets on a monthly average basis for at least 9
months during the fiscal year ended September 30, 1996.
The failure to maintain QTL status would require that Eagle Federal
convert to a bank charter and will result in a limitation in future investments
and activities including branching and payment of dividends. Eagle Federal also
would be required to repay all outstanding FHL Bank advances and dispose of or
discontinue any preexisting investments or activities not permitted for both
savings institutions and national banks. Further, within one year of the loss of
QTL status, the holding company of a savings institution that does not convert
to a bank charter must register as a bank holding company and will be subject to
all statutes applicable to bank holding companies.
Liquidity. Under applicable federal regulations, savings institutions
are required to maintain an average daily balance of liquid assets (including
cash, certain time deposits, certain bankers' acceptances, certain corporate
debt securities and highly rated commercial paper, securities of certain mutual
funds and specified United States government, state or federal agency
obligations) equal to a monthly average of not less than a specified percentage
of the average daily balance of the savings institution's net withdrawable
deposits plus short-term borrowings. Under
32
<PAGE>
the HOLA, this liquidity requirement may be changed from time to time by the
Director of the OTS to any amount within the range of 4% to 10% depending upon
economic conditions and the deposit flows of member institutions, and currently
is 5%. Savings institutions are also required to maintain an average daily
balance of short term liquid assets at a specified percentage (currently 1%) of
the total of the average daily balance of its net withdrawable deposits and
short-term borrowings. At September 30, 1996, Eagle Federal was in compliance
with these liquidity requirements.
Restrictions on Dividends and Other Capital Distributions. Eagle
Federal is subject to limitations an the extent to which it may pay dividends.
Savings institution subsidiaries of holding companies generally are required to
provide their OTS Regional Director with not less than 30 days' advance notice
of any proposed declaration of a dividend on the institution's stock.
Applicable OTS regulations impose limitations on all capital
distributions by savings associations (including dividends, stock repurchases
and cash-out mergers) based upon an institution's level of regulatory capital
both before and after giving effect to a proposed capital distribution. The FDIA
also prohibits an insured depository institution from declaring any dividend,
making any other capital distribution, or paying a management fee to a
controlling person if, following the distribution or payment, the institution
would be classified as undercapitalized, significantly undercapitalized or
critically undercapitalized.
Insurance of Deposits. Deposits in the Bank are insured to a maximum of
$100,000 for each insured depositor by the FDIC. Although the Bank is considered
a SAIF-insured institution, as of September 30, 1996, approximately 47% of its
deposits were BIF-insured.
33
<PAGE>
FEDERAL HOME LOAN BANK SYSTEM
The Federal Home Loan Bank System consists of 12 regional FHL Banks,
each subject to supervision and regulation by the Federal Housing Finance Board
(the "FHFB"). The FHL Banks provide a central credit facility for member savings
institutions. Eagle Federal, as a member of the FHL Bank of Boston, is required
to own shares of capital stock in that FHL Bank in an amount at least equal to
1% of the aggregate principal amount of their unpaid residential mortgage loans,
home purchase contracts and similar obligations at the beginning of each year,
or 1/20 of their advances (borrowings) from the FHL Bank, whichever is greater.
Eagle Federal is in compliance with this requirement. The maximum amount which
the FHL Bank of Boston will advance fluctuates from time to time in accordance
with changes in policies of the FHFB and the FHL Bank of Boston, and the maximum
amount generally is reduced by borrowings from any other source. In addition,
the amount of FHL Bank advances that a savings institution may obtain will be
restricted in the event the institution fails to constitute a QTL. See
"Regulation -- Savings Institution Regulation -- Qualified Thrift Lender
Requirement."
FEDERAL RESERVE SYSTEM
The Federal Reserve Board has adopted regulations that require savings
institutions to maintain nonearning reserves against their transaction accounts
(primarily NOW and regular checking accounts) and nonpersonal time deposits
(those which are transferable or held by a person other than a natural person)
with an original maturity of less than 1 1/2 years. At September 30, 1996, Eagle
Federal was in compliance with these requirements. These reserves may be used to
satisfy liquidity requirements imposed by the Director of the OTS. Because
required reserves must be maintained in the form of vault cash or a
non-interest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce the amount of the institution's
interest-earning assets.
Savings institutions also have the authority to borrow from the Federal
Reserve "discount window." Federal Reserve Board regulations, however, require
savings institutions to exhaust all FHL Bank sources before borrowing from a
Federal Reserve Bank. A Federal Reserve Bank's ability to extend advances to
undercapitalized and critically undercapitalized depository institutions is
limited. A Federal Reserve Bank generally may not have advances outstanding to
an undercapitalized institution for more than 60 days in a 120-day period.
TAXATION
Federal. Eagle, on behalf of itself and its subsidiaries, files a
September 30 tax year consolidated federal income tax return. Eagle and its
subsidiaries report their income and expenses using the accrual method of
accounting.
The Small Business Job Protection Act of 1996, signed into law on
August 20, 1996, repealed the special thrift bad debt deductions provisions.
This legislation eliminates the use of the percentage of taxable income method
as a means of calculating deductions for bad debts, allows banks greater
flexibility in diversifying their loan and investment portfolios and establishes
requirements for the recapture of previously untaxed bad debt reserve
accumulations.
Bad debt reserve accumulations prior to 1988 are exempt from recapture
unless the Bank liquidates, pays a dividend in excess of earnings and profits or
redeems stock. Post 1987 bad debt reserve accumulations will be taxed in equal
amounts over six years beginning in 1996. The Bank may defer the recapture tax
in 1996 or 1997 if it originates the same principal amount of mortgage loans
that it had originated in the six years before 1996. The Bank does not expect
the post 1987 recapture tax to have a material effect on the consolidated
financial statements.
34
<PAGE>
The federal income tax returns for Eagle Federal's predecessor savings
institutions have been examined and audited or closed without audit by the IRS
for tax years through September 30, 1989.
Savings institutions are also entitled to limited special tax treatment
with respect to the deductibility of interest expense relating to certain
tax-exempt obligations. Savings institutions are entitled to deduct 100% of
their interest expense allocable to the purchase or carrying of tax-exempt
obligations acquired before 1983. The deduction is reduced to 80% with respect
to obligations acquired after 1982. For taxable years after 1986, the Tax Reform
Act of 1986 eliminates the deduction entirely for obligations purchased after
August 7, 1986 (except for certain issues by small municipal issuers).
Depending on the composition of its items of income and expense, a
savings institution may be subject to the alternative minimum tax. For tax years
beginning after 1986, a savings institution must pay an alternative minimum tax
equal to the amount (if any) by which 20% of alternative minimum taxable income
("AMTI"), as reduced by an exemption varying with AMTI, exceeds the regular tax
due. AMTI equals regular taxable income increased or decreased by certain
adjustments and increased by certain tax preferences. Adjustments and
preferences include depreciation deductions in excess of those allowable for
alternative minimum tax purposes, tax-exempt interest on most private activity
bonds issued after August 7, 1986 (reduced by any related interest expense
disallowed for regular tax purposes), the amount of the bad debt reserve
deduction claimed in excess of the deduction based on the experience method and,
for 1990 and succeeding years, 75% of the excess of adjusted current earnings
("ACE") over AMTI. ACE equals pre-adjustment AMTI ("PAMTI") increased or
decreased by certain ACE adjustments, which include tax-exempt interest on
municipal bonds for tax purposes, depreciation deductions in excess of those
35
<PAGE>
allowable for ACE purposes and the dividend received deduction. PAMTI equals
AMTI computed with all the preferences and adjustments other than the ACE
adjustment and the alternative minimum tax net operating loss (AMTNOL). AMTI may
be reduced only up to 90% by AMTNOL carryovers. The payment of alternative
minimum tax will give rise to a minimum tax credit which will be available with
an indefinite carry forward period available to reduce federal income taxes of
the institution in future years (but not below the level of alternative minimum
tax arising in each of the carry forward years).
State. State income taxation is in accordance with the corporate income
tax laws of Connecticut. As a thrift, Eagle Federal is required to pay taxes
equal to the larger of $250, 11.25% (scheduled to decrease in increments to 7.5%
by 2001) of the year's taxable income (which, with certain exceptions, is equal
to taxable income for federal purposes) or an amount equal to 4% for each year
of the amount of interest or dividends credited by them on savings accounts of
depositors or account holders during the taxable year preceding that in which
the tax becomes due, provided that, in determining such amount, interest or
dividends credited to the savings account of a depositor or account holder are
deemed to be the lesser of the actual interest or dividends credited or the
interest or dividend that would have been credited if it had been computed and
credited at the rate of one-eighth of 1% per annum.
Item 2. Properties
Eagle's nineteen traditional branch offices and four supermarket branch
offices are located in Hartford and Litchfield counties. Automated teller
machines ("ATM") are located in all of the nineteen traditional offices and all
four supermarket branches. Eagle also operates three free standing ATM
locations. Eagle's ATM's participate in the "NYCE" ATM network which permits
access to funds at approximately 13,200 locations and 57,000 "point-of-sale"
terminals throughout the Northeast. Data processing services for Eagle are
provided by Connecticut On-Line Computer Center, a data processing company
jointly owned by a number of New England savings institutions including Eagle
Federal.
36
<PAGE>
The following table sets forth certain information concerning the
business offices of Eagle at September 30, 1996.
<TABLE>
<CAPTION>
Percent Lease
Year of Total Owned or Expiration Lease Renewal
Opened Deposits Leased Date Option
----------- ------------- ----------------- ------------- -------------------------
<S> <C> <C> <C> <C> <C>
Torrington Main Office 1945 11.5% Owned - -
East Main Street - Torrington 1973 3.9% Owned - -
Litchfield 1976 3.4% Owned - -
Canton 1971 3.3% Leased 2001 One 5-year option
Winsted 1988 3.3% Leased 2006 Seven 5-year options
Land Only
Bristol Main Office 1957 14.4% Owned - -
Commons - Bristol 1972 3.1% Leased 2004 No renewal option
Farms - Bristol 1983 4.5% Leased 1998 One 5-year option
Land Only
Forestville 1992 1.9% Leased 2001 No renewal option
Terryville 1984 2.5% Leased 1999 No renewal option
Hartford Main Office 1994 4.7% Owned - -
Franklin Avenue - Hartford 1994 5.3% Owned - -
State House Square - Hartford 1996 5.6% Leased 1997 -
West Hartford 1994 6.0% Owned - -
Bishops Corner - West Hartford 1996 4.3% Leased 2004 One 10-year option
Rocky Hill 1994 4.9% Leased 2000 One 5-year option
Manchester 1996 4.2% Leased 1997 Three 5-year options
Bloomfield 1996 7.7% Leased 1998 No renewal option
Simsbury 1996 5.1% Leased 1999 Two 5-year options
Avon - Supermarket 1996 0.1% Leased 1999 No renewal option
Bloomfield - Supermarket 1996 0.0% Leased 1999 No renewal option
East Hartford - Supermarket 1996 0.1% Leased 1999 No renewal option
Glastonbury - Supermarket 1996 0.2% Leased 1999 No renewal option
</TABLE>
37
<PAGE>
The total net book value of properties owned and used for offices by Eagle at
September 30, 1996 and the aggregate net book value of leasehold improvements on
properties used for offices was $6.0 million.
Item 3. Legal Proceedings
As of September 30, 1996, there were no material pending legal
proceedings to which Eagle, Eagle Federal or Eagle Service Corp. was a party or
to which any of their property was subject.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of Eagle shareholders during the
fourth quarter of the fiscal year ended September 30, 1996.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters
Information as to the principal market on which the Company's common
stock is traded, the approximate number of holders of record as of September 30,
1996, the Company's dividend policy, and the high and low bid quotations or
sales prices, as applicable, for each calendar quarter during the two most
recent fiscal years is incorporated herein by reference to page 43 of the 1996
Annual Report to Shareholders.
Item 6. Selected Financial Data
Selected consolidated financial data for the five years ended September
30, 1996 is included under separate caption in Part I of this Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results
of Operations on pages 8 to 17 of the 1996 Annual Report to Shareholders is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The information required by this Item is incorporated by reference to
pages 18 to 41 of the 1996 Annual Report to Shareholders.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Reference is made to the information set forth under the captions
"Election of Directors" and "Management -- Executive Officers" appearing in the
Company's definitive proxy statement dated December 22, 1996, which information
is incorporated herein by reference.
38
<PAGE>
Item 11. Executive Compensation
Reference is made to the information set forth under the caption
"Management -- Executive Compensation" appearing in the Company's definitive
proxy statement dated December 22, 1996, which information is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reference is made to the information set forth under the captions
"Stock Owned by Management" and "Principal Holders of Voting Securities of
Eagle" appearing in the Company's definitive proxy statement dated December 22,
1996, which information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Reference is made to the information set forth under the caption
"Management -- Certain Transactions" appearing in the Company's definitive proxy
statement dated December 22, 1996, which information is incorporated herein by
reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a)(1) The following consolidated financial statements of registrant
and its subsidiaries and report of independent auditors are included in Item 8
hereof.
Report of Independent Auditors.
Consolidated Balance Sheets - September 30, 1996 and 1995.
Consolidated Statements of Income - Years Ended September 30, 1996,
1995 and 1994.
Consolidated Statements of Shareholders' Equity - Years Ended September
30, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows - Years Ended September 30, 1996,
1995 and 1994.
Notes to Consolidated Financial Statements.
(a)(2) All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
(a)(3) The following exhibits are either filed with this Report or are
incorporated herein by reference:
3.1 Certificate of Incorporation, as amended, incorporated herein by
reference from Pre-Effective Amendment No. 2 to the Registrant's Registration
Statement on Form S-1 (No. 33-9166), filed with the SEC on December 24, 1986.
3.2 Bylaws of the Company, as amended to date, incorporated by
reference from Eagle's Current Report on Form 8-K dated November 12, 1993.
10.1 Eagle Financial Corp. Stock Option Plan (incorporated herein by
reference from the Company's Annual Report on Form 10-K for the year ended
September 30, 1987 as filed with the SEC on December 22, 1987).
10.2 BFS Bancorp, Inc. Stock Option Plan, (incorporated by reference
from the Company's Registration Statement on Form S-8 (No. 33-28403) filed with
the SEC on April 28, 1989.)
10.3 Eagle Financial Corp. 1988 Stock Option Plan (incorporated by
reference from the Company's definitive Proxy Statement dated December 21, 1988
for the 1989 Annual Meeting of Shareholders, as filed with the SEC on December
22, 1988).
39
<PAGE>
10.4 Employment Agreement dated April 1, 1994 among the Company,
the Bank and Ralph T. Linsley (incorporated by reference from Pre-effective
Amendment No.1 to the Company's Registration Statement on Form S-2 (Reg. No.
33-54981) filed with the SEC on September 12, 1994)
10.5 Consulting Agreement dated August 25, 1988 between the Company
and Ralph T. Linsley (incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended September 30, 1988, as filed with the SEC on
December 29, 1988).
10.6 Employment Agreement dated April 1, 1994 among the Company,
the Bank and Robert J. Britton (incorporated by reference from Pre-effective
Amendment No. 1 to the Company's Registration Statement of Form S-2 (Reg. No.
33-54981) filed with the SEC on September 12, 1994).
10.7 Employment Agreement dated April 1, 1994 among the Company,
the Bank and Ercole J. Labadia (incorporated by reference from the Company's
Registration Statement of Form S-2 (Reg. No. 33-54981) filed with the SEC on
August 9, 1994).
10.8 Employment Agreement dated April 1, 1994 among the Company,
the Bank and Mark J. Blum (incorporated by reference from the Company's
Registration Statement on Form S-2 (Reg. No. 33-54981) filed with the SEC on
August 9, 1994).
10.9 Employment Agreement dated April 1, 1994 among the Company,
the Bank and Irene K. Hricko (incorporated by reference from the Company's
Registration Statement on Form S-2 (Reg. No. 33-54981) filed with the SEC on
August 9, 1994).
10.10 Employment Agreement dated April 1, 1994 among the Company,
the Bank and Barbara S. Mills (incorporated by reference from the Company's
Registration Statement on Form S-2 (Reg. No. 33-54981) filed with the SEC on
August 9, 1994).
10.11 The Bank deferred compensation plan (incorporated by reference
from Pre-Effective Amendment No. 1 to the Company's Registration Statement on
Form S-4 (Reg. No. 33-31122) filed with the SEC on May 17, 1988).
10.12 Deferred Compensation Plan for Non-Employee Directors
(incorporated by reference from the Company's Annual Report on Form 10-K for the
year ended September 30, 1988, as filed with the SEC on December 29, 1988).
10.13 Outside Directors Post Retirement Plan, dated July 26, 1994
(incorporated by reference from the Company's Registration Statement on Form S-2
(Reg. No. 33-54981) filed with the SEC on August 9, 1994).
10.14 Guarantee and Pledge Agreement dated November 1, 1990 between
the Company and Bank of Boston Connecticut (incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended September 30, 1990, as
filed with the SEC on December 28, 1990).
10.15 Annual Incentive Plan (incorporated by reference from the
Company's Registration Statement on Form S-2 (Reg. No. 33-54981) filed with the
SEC on August 9, 1994).
10.16 Amendment to Employment Agreement dated July 26, 1994 among
the Company, the Bank and Ralph T. Linsley (incorporated by reference from
Pre-effective Amendment No. 1 to the Company's Registration Statement on Form
S-2 (Reg. No. 33-54981) filed with the SEC on September 12, 1994).
10.17 Amendment to Employment Agreement dated July 26, 1994 among
the Company, the Bank and Robert J. Britton (incorporated by reference from
Pre-effective Amendment No. 1 to the Company's Registration Statement on Form
S-2 (Reg. No. 33-54981) filed with the SEC on September 12, 1994).
40
<PAGE>
12 Computation of Ratio of Earnings to fixed charges.
13 1996 Annual Report to Shareholders, portions of which have
been incorporated by reference into this Form 10-K.
21 Subsidiaries of the Registrant
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
(b) No current reports on Form 8-K were filed by the
Registrant during the fourth quarter of fiscal 1996.
(c) Exhibits to this Form 10-K are attached or
incorporated by reference as stated above.
(d) Not applicable.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EAGLE FINANCIAL CORP.
-----------------------------------------
Registrant
By: /s/ Ralph T. Linsley
-----------------------------------------
Ralph T. Linsley
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
TITLE
-----------------------------------------------------------
<S> <C>
By: /s/ Ralph T. Linsley Chairman of the Board
- -----------------------------------------
Ralph T. Linsley
By: /s/ Robert J. Britton Chief Executive Officer, President and
- ----------------------------------------- Director (principal executive officer)
Robert J. Britton
By: /s/ Mark J. Blum Vice President, Chief Financial Officer and Secretary
- ----------------------------------------- (principal financial and accounting officer)
Mark J. Blum
By: /s/ Richard H. Alden Director
- -----------------------------------------
Richard H. Alden
By: /s/ George T. Carpenter Director
- -----------------------------------------
George T. Carpenter
By: /s/ Theodore M. Donovan Director
- -----------------------------------------
Theodore M. Donovan
By: /s/ Thomas V. LaPorta Director
- -----------------------------------------
Thomas V. LaPorta
By: /s/ John F. McCarthy Director
- -----------------------------------------
John F. McCarthy
By: /s/ Ernest J. Torizzo Director
- -----------------------------------------
Ernest J. Torizzo
By: /s/ Steven E. Lasewicz Director
- -----------------------------------------
Steven E. Lasewicz
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Exhibit
Number Identity of Exhibit
- ------ -------------------
<S> <C>
3.1 Certificate of Incorporation, amended herein by reference from
Pre-Effective Amendment No. 2 to the Registrant's Registration
Statement on Form S-1 (No. 33-9166), filed with the SEC on
December 24, 1986.
3.2 Bylaws, as amended to date (incorporated by reference from
Eagle's Current Report on Form 8-K dated November 12, 1993).
10.1 Eagle Financial Corp. Stock Option Plan, (incorporated herein by
reference from Eagle's Annual Report on Form 10-K for the year
ended September 30, 1987 as filed with the SEC on December 22,
1987).
10.2 BFS Bancorp, Inc. Stock Option Plan, (incorporated by reference
from Eagle's Registration Statement on Form S-8 (No. 33-28403)
filed with the SEC on April 28, 1989).
10.3 Eagle Financial Corp. 1988 Stock Option Plan, (incorporated by
reference from Eagle's definitive Proxy Statement dated December
21, 1988 for the 1989 Annual Meeting of Shareholders, as filed
with the SEC on December 22, 1988).
10.4 Employment Agreement dated April 1, 1994 among the Company, the
Bank and Ralph T. Linsley, (incorporated by reference from
Pre-effective Amendment No. 1 to the Company's Registration
statement on Form S-2 (No. 33-54981) filed with the SEC on
September 12, 1994).
10.5 Consulting Agreement dated August 25, 1988 between the Company
and Ralph T. Linsley (incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
September 30, 1988, as filed with the SEC on December 29, 1988).
10.6 Employment Agreement dated April 1, 1994 among the Company, the
Bank and Robert J. Britton (incorporated by referenced from
Pre-effective Amendment No. 1 to the Company's Registration
Statement on Form S-2 (Reg. No. 33-54981) filed with the SEC on
September 12, 1994).
10.7 Employment Agreement dated April 1, 1994 among the Company, the
Bank and Ercole J. Labadia (incorporated by reference from the
Company's Registration Statement on Form S-2 (Reg. No. 33-54981)
filed with the SEC on August 9, 1994).
10.8 Employment Agreement dated April 1, 1994 among the Company, the
Bank and Mark J. Blum (incorporated by reference from the
Company's Registration Statement on Form S-2 (Reg. No. 33-54981)
filed with the SEC on August 9, 1994).
10.9 Employment Agreement dated April 1, 1994 among the Company, the
Bank and Irene K. Hricko (incorporated by reference from the
Company's Registration Statement on Form S-2 (Reg. No. 33-54981)
filed with the SEC on August 9, 1994).
10.10 Employment Agreement dated April 1, 1994, among the Company, the
Bank and Barbara S. Mills (incorporated by reference from the
Company's Registration Statement on Form S-2 (Reg. No. 33-54981)
filed with the SEC on August 9, 1994).
10.11 The Bank deferred compensation plan (incorporated by reference
from Pre-Effective Amendment No. 1 to the Company's Registration
Statement on Form S-4 (No. 33-21122) filed with the SEC on May
17, 1988).
10.12 Deferred Compensation Plan for Non-Employee Directors
(incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended September 30, 1988, as filed with
the SEC on December 29, 1988).
<PAGE>
<CAPTION>
Exhibit
Number Identity of Exhibit
- ------ -------------------
10.13 Outside Directors Post Retirement Plan, dated July 26, 1994
(incorporated by reference from the Company's Registration
Statement on Form S-2 (Reg. No. 33-54981), filed with the SEC on
August 9, 1994).
10.14 Guarantee and Pledge Agreement dated November 1, 1990 between
the Company and Bank of Boston Connecticut (incorporated by
reference from the Company's Annual Report on Form 10-K for the
year ended September 30, 1990, as filed with the SEC on December
28, 1990).
10.15 Annual Incentive Plan (incorporated by reference from the
Company's Registration Statement on Form S-2 (Reg. No. 33-54981)
filed with the SEC on August 9, 1994).
10.16 Amendment to Employment Agreement dated July 26, 1994 among the
Company, the Bank and Ralph T. Linsley (incorporated by
reference from Pre-effective Amendment No. 1 to the Company's
Registration Statement on Form S-2 (Reg. No. 33-54981) filed
with the SEC on September 12, 1994).
10.17 Amendment to Employment Agreement dated July 26, 1994 among the
Company, the Bank and Robert J. Britton (incorporated by
reference from Pre-effective Amendment No. 1 to the Company's
Registration Statement on Form S-2 (Reg. No. 33-54981) filed
with the SEC on September 12, 1994).
12 Computation of Ratio of Earnings to fixed charges
13 1996 Annual Report to Shareholders, portions of which have been
incorporated by reference into this Form 10-K.
21 Subsidiaries of the Registrant.
23 Consent of KPMG Peat Marwick.
27 Financial Data Schedule
</TABLE>
Exhibit 12
Computation of Ratio of Earnings to Fixed Charges
(in thousands)
Earnings Calculation:
Pre-tax income $ 22,977
plus: Fixed charges 55,842
------
Total $ 78,819
======
Fixed Charges Calculation:
Interest expense $ 55,842
------
Total $ 55,842
======
Ratio 141%
------
EAGLE FINANCIAL CORP.
1996 ANNUAL REPORT
<PAGE>
TOTAL ASSETS
Dollars in Millions
at September 30,
1996 $1,402,809
1995 $1,237,286
1994 $1,070,276
1993 $792,468
1992 $751,171
NET INCOME PER SHARE
For the Years Ended September 30,
1996 $2.89
1995 $2.38
1994 $2.12
1993 $1.77
1992 $1.53
BOOK VALUE PER SHARE
At September 30,
1996 $22.31
1995 $20.73
1994 $19.24
1993 $17.98
1992 $16.88
RETURN ON AVERAGE
SHAREHOLDERS' EQUITY
For the Years Ended September 30,
1996 13.82%
1995 12.68%
1994 11.99%
1993 10.69%
1992 9.80%
CASH DIVIDENDS
PER SHARE
For the Years Ended September 30,
1996 $.92
1995 $.82
1994 $.69
1993 $.57
1992 $.50
NON-PERFORMING ASSETS
TO TOTAL ASSETS
At September 30,
1996 .88%
1995 1.10%
1994 1.15%
1993 1.51%
1992 1.38%
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Financial Condition Data At September 30,
(in thousands) 1996(a) 1995 1994(b) 1993 1992(b)
------- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C>
Total assets $1,402,809 $1,237,286 $1,070,276 $792,468 $751,171
Investment portfolio (c) 52,877 105,874 76,466 54,701 70,536
Mortgage-backed securities 450,120 355,785 116,063 49,176 71,064
Loans receivable, net 814,488 713,545 810,705 656,344 568,124
Allowance for loan losses 8,592 7,457 8,311 5,005 4,011
Deposits 1,059,355 951,751 948,829 706,214 677,701
FHLB advances and borrowed money 221,678 155,467 39,592 16,252 7,326
Shareholders' equity 101,148 92,460 66,276 60,407 55,004
OPERATING DATA For the Years Ended September 30,
(in thousands, except for per share data) 1996 1995 1994(b) 1993 1992(b)
---- ---- ------- ---- ------
Net interest income $ 39,759 $ 40,017 $ 31,071 $ 27,285 $ 22,186
Net income 13,638 10,972 7,566 6,152 5,166
Loan originations 236,097 155,666 219,904 209,901 163,478
Loans serviced for others 242,600 234,800 95,100 11,800 13,200
Cash dividends declared per share (d) 0.92 0.82 0.69 0.57 0.50
Net income per share: (d)
Primary 2.92 2.41 2.13 1.79 1.55
Fully diluted 2.89 2.38 2.12 1.77 1.53
SIGNIFICANT STATISTICAL DATA 1996 1995 1994(b) 1993 1992(b)
---- ---- ------- ---- -------
For the period:
Return on average assets 1.00% 0.95% 0.85% 0.79% 0.81%
Return on average shareholders' equity 13.82% 12.68% 11.99% 10.69% 9.80%
Average interest rate spread 2.92% 3.43% 3.41% 3.40% 3.26%
Net interest margin 3.08% 3.63% 3.60% 3.64% 3.59%
Operating expenses to average assets 2.12% 2.11% 2.24% 2.10% 2.02%
Operating expenses to average assets 2.04% 2.04% 2.09% 1.97% 1.90%
(excluding real estate owned expense)
Net interest income to operating expenses 1.37x 1.64x 1.55x 1.67x 1.72x
Efficiency ratio 47% 53% 55% 51% 49%
At end of period:
Shareholders' equity to total assets 7.21% 7.47% 6.19% 7.62% 7.32%
Common shares outstanding
(net of treasury) (e) 4,534,067 4,459,824 3,131,911 3,054,481 2,692,305
Book value per share (d) $22.31 $20.73 $19.24 $17.98 $16.88
Non-performing assets to total assets 0.88% 1.10% 1.15% 1.51% 1.38%
Allowance for loan losses to non-
performing loans 93% 67% 104% 77% 100%
Tangible capital ratio 5.42% 6.59% 5.17% 7.26% 6.87%
</TABLE>
(a) Fiscal 1996 data reflect the impact of the Fleet/Shawmut branch acquisition
and the sale of the Danbury area branches.
(b) Fiscal 1994 and 1992 data reflect the impact of government-assisted
acquisitions.
(c) Includes interest-bearing deposits, investment securities held to maturity,
investment securities available for sale and Federal Home Loan Bank stock.
(d) All per share data for all periods and dates prior to September 30, 1995
have been adjusted retroactively to give effect to a 10% stock dividend to
common shareholders of record on February 15, 1995.
(e) 1996, 1995, 1994, 1993 and 1992 common shares outstanding exclude 47,373,
47,373, 43,066, 43,066, and 39,151 shares, respectively, held in treasury at
year end.
<PAGE>
Company Profile
Eagle Financial Corp. is a $1.4 billion unitary savings bank holding company and
parent to Eagle Federal Savings Bank. Eagle Federal operates 19 traditional and
4 supermarket banking offices located in Hartford and Litchfield counties, all
in Connecticut. Historically the Bank has primarily engaged in the business of
accepting deposits from the general public and using such funds in the
origination of first mortgage loans for the purchase, refinance or construction
of 1-4 family homes. Eagle is currently positioning itself as a mid-sized
community bank offering a broader base of services to both consumers and
businesses in its local market.
<PAGE>
To Our Shareholders
I am proud to report that your Company continues to make progress in expanding
its franchise and increasing value for its shareholders. Throughout the year we
realized solid growth in total assets, deposits and loans and reported record
earnings of $13.6 million or $2.89 per share. Shareholders' equity grew by 9.4%,
net of dividends which totaled $4.1 million or $.92 per share.
One major accomplishment this year was our ability to improve our competitive
position in the marketplace by further expansion in our primary market area.
While seven branches in the Danbury area were sold, we purchased five
traditional branches, opened four supermarket branches and installed three
off-site ATMs, all in the Hartford area. This expansion, together with a special
marketing effort, positioned Eagle as a major provider of financial services in
central Connecticut. Eagle Federal Savings now ranks fifth in deposit share in
Hartford county, second in Litchfield county and ninth statewide.
To help diversify our asset base and leverage the branch system, we have
significantly increased our capacity to provide commercial banking services. Our
new commercial lending staff has been working in partnership with all
departments to serve the needs of small businesses in our market.
The fundamental structure of the banking business is changing and the pace of
change continues to accelerate. Customer preferences, competition and the
advanced technology of today's information age are forcing banks to redesign the
way they price, package and deliver products and services.
Supermarket branching is one strategy we are using to enhance our delivery
system. Consumers are looking for easy access to banking, and in-store locations
meet this need plus provide us with an ideal opportunity to sell products and
services. All our branches have been given updated technology and centralized
support for customer service, and are now focused on improved performance
through better productivity and sales efforts.
We continue to take advantage of improved technology to serve customers and
improve efficiency in operations. More advanced software applications, for
example, have been utilized to support loan origination, asset/liability
management and communications. Setting the stage for home banking, we have
established a home page on the internet and have continued to improve home
banking options via the telephone.
1
<PAGE>
To be successful bankers, we must better understand which products and services
are most profitable. The enhancements we have made to our cost center accounting
system will provide the information we need to better allocate resources and to
develop strategies to serve the needs of our customers in the most efficient and
effective manner.
The thrift industry won two major legislative victories in 1996: the Savings
Association Insurance Fund was recapitalized and the special thrift bad debt
provisions were repealed. As a result, our franchise value has been strengthened
and our ability to compete has been enhanced. We are hopeful that progress will
be made during 1997 in revising our bank charter and expanding the Bank's
ability to offer a broader range of services.
After experiencing a lagging recovery over the past few years, Connecticut is
beginning to move more in line with economic growth at the national level.
Economists are now forecasting annual employment growth in the state of 1.2
percent through the turn of the century.
The overall driving force behind our efforts is to remain a profitable and
successful company which creates value for our shareholders. By enhancing value
for our shareholders, we secure our future and create opportunities for our
employees to grow individually and professionally.
Our future goals are to further increase market share through acquisition,
continue to invest in technology and alternative delivery systems, grow revenue
in all business lines, maintain quality service and reduce expenses whenever
possible.
Thank you for your continued confidence in our company.
Robert J. Britton
President and Chief Executive Officer
Eagle Financial Corp.
September 30, 1996
2
<PAGE>
Commercial Banking
Our goal is to ensure that
we remain responsive to
the needs of small and
medium-sized businesses.
- -- Peter J. Melly
Senior Vice President, Commercial Banking
During fiscal 1996, Eagle's Commercial Banking Department greatly benefited from
the acquisition of five branches in greater Hartford. The move not only
increased the base of customers owning small to medium-sized businesses, it also
expanded the number of convenient Eagle locations in the Hartford market. In
addition, by bringing in commercial bankers with many years of experience, Eagle
gained immediate credibility in the marketplace.
Eagle introduced products designed specifically to meet the stated needs of
local businesses. Among these were high-paying money market accounts, sweep
investment vehicles, and a full array of credit products, including access to
all governmental guarantee programs.
The opening of bank branches in supermarkets reinforced our presence in four
greater Hartford communities while increasing our reach to new neighborhoods.
Also, the supermarket branches' longer hours of operation make banking more
convenient, especially for the retail business owners Eagle wants to attract.
The result of all these moves was a significant increase in commercial business.
Eagle made loans up to $2.5 million to a broad array of firms. We also brought
in substantial commercial related deposits. These strategies have strengthened
both sides of the balance sheet.
The number of commercial staff positions has increased in the past year in
response to our growing portfolio. The next fiscal year promises further
expansion with more innovative products to serve commercial customers.
Our goal is to ensure that we remain responsive to the needs of small and
medium-sized businesses, with quick decisions and a focus on attention to
detail. Most importantly we are committed to maintaining asset quality through
sound credit decisions.
3
<PAGE>
Retail Banking
This past fiscal year the emphasis was on new ways of delivering bank products
and services to our customers.
- -- Kenneth F. Burns
Senior Vice President,
Retail Banking and Marketing
In Retail Banking this past fiscal year, the emphasis was on new ways of
delivering bank products and services to our customers. Chief among these were
supermarket banking and off-premise electronic banking.
The supermarket banking initiative resulted in four new in-store branches. This
gave us the opportunity to interact with our customers face-to-face more often,
and helped increase our presence east of the Connecticut River. ATMs and phone
banking also were expanded in fiscal 1996. Three ATMs were opened in non-bank
locations, including one at the Legislative Office Building attached to the
State Capitol.
The Totally Free Checking product, combined with an aggressive direct-mail
initiative, helped Eagle make impressive inroads into the consumer checking
account market - an important accomplishment, because for many people
establishing a checking account is the first step toward using other bank
products. In the past fiscal year, Totally Free Checking attracted more than
5,000 new customers in the Hartford area alone.
This year, the Eagle Excellence initiative, a major program to help employees
better define and improve customer service, was begun. It includes a network of
specially selected customers who "shop" the various branches and report,
candidly and confidentially, on how they were treated.
In the next year, we will expand Eagle Excellence. Delivery of products and
services will continue to be decentralized, with each branch acting as a total
sales and service center. The Bank's ATM network will be further enlarged, and
more supermarket branches are being studied.
Combining old-fashioned helpfulness and service with state-of-the-art technology
will keep Eagle a major player in the retail banking arena.
4
<PAGE>
Residential and Consumer Lending
Residential and consumer loans originated in the branches will be a more
significant part of our total production.
- -- Patrick Macomber
Senior Vice President,
Residential and Consumer Lending
This past year was one of positioning Eagle for long term growth in Residential
and Consumer Lending. We are now prepared to face the challenges and capitalize
on the opportunities in fiscal 1997.
The Bank originated more than $200 million in residential and consumer loans in
our communities during fiscal 1996. We also took steps to revise and realign our
internal operations. Some of these were:
o implementing a secondary market operation to manage interest rate risk while
offering competitively priced mortgage loans,
o streamlining the approval and closing processes and,
o improving our delivery channels.
We know that progress must be gained by strengthening our link with the customer
through our retail branches, so we are realigning our production efforts to
dedicate mortgage loan specialists to serve customers in the branches. We expect
that the number of residential and consumer loans originated in the branches
will be a more significant part of our total production. We will continue to use
external production sources as well.
Technology will play an important role in meeting customers' needs. We are
beginning several initiatives in the residential and consumer areas to allow us
to reach more customers while providing excellent service. We will be able to
efficiently generate and service these assets to meet our balance sheet and
income objectives.
Competition from national and regional companies will continue to have an impact
on our markets. Eagle is positioned to meet these challenges and take advantage
of the opportunities they provide.
5
<PAGE>
DIRECTORS AND OFFICERS
EAGLE FINANCIAL CORP. DIRECTORS
Ralph T. Linsley
Chairman
Eagle Financial Corp.
Robert J. Britton
President and Chief Executive Officer
Eagle Financial Corp.
Richard H. Alden
Attorney
Partner with the Law Firm
Anderson, Alden, Hayes & Ziogas LLC
George T. Carpenter
President
Carpenter Companies
Construction and Real Estate
Theodore M. Donovan
Attorney
Partner with the Law Firm Furey, Donovan, Eddy, Kocsis, Tracy & Daly
Thomas V. LaPorta
President and Chairman
The LaPorta Funeral Home
Steven E. Lasewicz, Jr.
President
SELCO Controls, Inc.
Senior Account Executive
Barber-Colman/Cosentino, Inc. Building Automation and Temperature Controls
John F. McCarthy
President
J & M Sales, Inc.
Beer Distributorship
Ernest J. Torizzo
Executive Vice President
O & G Industries, Inc. Construction
EAGLE FEDERAL SAVINGS BANK OFFICERS
Robert J. Britton
President and
Chief Executive Officer
Ercole J. Labadia
Executive Vice President,
Administration and Operations
Mark J. Blum
Senior Vice President,
Chief Financial Officer,
Secretary
Kenneth F. Burns
Senior Vice President,
Retail Banking and Marketing
Patrick Macomber
Senior Vice President,
Residential and Consumer Lending
6
<PAGE>
Peter J. Melly
Senior Vice President,
Commercial Lending
Mark B. Shaw
Senior Vice President,
Technology and Operations
William Anderson
Vice President,
Residential Lending
John A. Baker
Vice President,
Commercial Lending
Victoria L. Bextel
Vice President,
Lending Servicing Operations
Donald E. Crandall, Jr.
Vice President,
Loan Servicing
Anne P. Fetzner
Vice President,
Secondary Market Lending
Rosellyn G. Giampietro
Vice President,
Marketing Director
Susan J. Laberge
Vice President,
Retail Sales Director
Marc A. Lambert
Vice President,
Finance
Karen Landsberg
Vice President,
Human Resources Director
Donald G. Lorusso
Vice President,
Commercial Lending
Robert L. Messier, Jr.
Vice President,
Commercial Lending
Barbara S. Mills
Vice President,
Treasurer
Janet E. Recidivi
Vice President,
Retail Administration
7
<PAGE>
Louise D. Rohner
Vice President,
Business Development Manager
Joan F. Warkoski
Vice President,
Loan Originations
EAGLE FINANCIAL CORP. EXECUTIVE OFFICERS
Robert J. Britton
President and
Chief Executive Officer
Mark J. Blum
Vice President,
Secretary,
Chief Financial Officer
Kenneth F. Burns
Vice President
Ercole J. Labadia
Vice President,
Administration
Barbara S. Mills
Vice President,
Treasurer
8
<PAGE>
CONTENTS
10. Management's Discussion and Analysis
20. Consolidated Balance Sheets
21. Consolidated Statements of Income
22. Consolidated Statements of Shareholders' Equity
23. Consolidated Statements of Cash Flows
24. Notes to Consolidated Financial Statements
46. Independent Auditors' Report
47. Additional Information
9
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
General
Eagle Financial Corp. (the "Holding Company") is a unitary savings bank holding
company and parent of Eagle Federal Savings Bank ("Eagle Federal" or the "Bank")
(collectively referred to as the "Company"). The Bank is a federally chartered
savings bank headquartered in Bristol, Connecticut, which conducts business from
19 traditional branch offices and 4 supermarket branch offices located in
Hartford and eastern Litchfield counties. Prior to January 1, 1993 the Holding
Company had two bank subsidiaries, Bristol Federal Savings Bank and First
Federal Savings and Loan Association of Torrington. Effective January 1, 1993,
the two bank subsidiaries were combined into a single subsidiary, Eagle Federal
Savings Bank.
The Bank has been an active acquirer of other financial institutions in recent
years including two acquisitions in fiscal 1992 and another in fiscal 1994. That
trend continued in the second quarter of fiscal 1996 when Eagle Federal
purchased five large branch offices in the Hartford county market that were
being divested as part of the merger transaction between Fleet Bank, N.A. and
Shawmut Bank Connecticut, N.A. (the "Fleet/Shawmut transaction") and
simultaneously closed two existing branches that were in close proximity to the
newly acquired offices. The transaction, which increased the Bank's deposit base
by $253 million, allowed Eagle to expand an already established network of
branch offices in the Hartford area.
The Company's strategy to focus on the greater Hartford market was further
emphasized in the same quarter when the Bank sold seven relatively small,
geographically separate branch offices in northern Fairfield county and $184
million of related deposits which resulted in a $15.9 million gain. Later in the
year Eagle Federal added four supermarket branches and three off-site ATMs, all
of which were located in Hartford and its suburbs, to its customer delivery
system. The 1996 events substantially changed the landscape of the Company by
creating a more efficient and geographically concentrated network of branches
located in Hartford and eastern Litchfield counties. In comparing the Bank at
year end to where it was twelve months earlier, Eagle Federal now operates four
fewer full service branch offices but has a higher amount of total deposits in a
more concentrated market area.
Fiscal 1996 also included the long awaited passage of legislation to
recapitalize the Savings Association Insurance Fund ("SAIF"). Although the event
resulted in a one-time charge to Eagle Federal of $4.7 million before income
taxes, it will significantly reduce the Bank's deposit insurance costs in the
future beginning in the first quarter of fiscal 1997, initially through a refund
of amounts previously paid and then, beginning January 1, 1997, from
significantly reduced assessment rates.
While the Company's primary business has historically been and will continue to
be the origination of first mortgage loans on 1-4 family homes, it has
implemented strategies in the last two years that will put more emphasis on
originating commercial real estate and small business loans within its primary
market area. The Company also intends to increase its emphasis on multi-family
and consumer lending products. The marketing of these loans will focus on the
existing customer base, customers acquired as part of the Fleet/Shawmut
transaction, and new relationships within the Company's primary market area.
Eagle Financial Corp. had record net income of $13.6 million, or $2.89 per share
on a fully diluted basis, for the year ended September 30, 1996. The Company has
posted higher annual earnings for eight consecutive years with average earnings
per share growth of 25% during that period. The Company's earnings depend
largely on its net interest income, which is the difference between the interest
earned on its loan and investment portfolios versus the interest paid on its
deposits and borrowed funds. Additional earnings are derived from a variety of
financial services provided to customers and from income related to the
servicing of loans sold.
As of September 30, 1996, the Company had total assets of $1.41 billion compared
to $1.24 billion at the start of the fiscal year. Net growth in the loan
portfolio for the year was just over $100 million, including $36 million of
loans purchased as part of the Fleet/Shawmut transaction. The investment
portfolio increased by $41 million during the year. The majority of the balance
sheet growth was funded by deposits, which increased by $108 million including
approximately $69 million of deposits purchased during the year net of deposits
sold. The remainder of the asset growth was funded with FHLB advances and other
borrowed money, which grew by $66 million in fiscal 1996.
Liquidity and Capital Resources
Eagle Federal's core capital ratio fell from 6.6% at September 30, 1995 to 5.4%
at fiscal year end, reflecting strong balance sheet growth as well as the impact
of the intangible asset created by the Fleet/Shawmut transaction in the second
quarter. The Bank continued to meet the regulatory definition of a "well
capitalized" institution throughout the year.
As a member of the Federal Home Loan Bank ("FHLB") system, the Bank is required
to maintain liquid assets at 5% of its withdrawable deposits plus short-term
borrowings. At September 30, 1996, the Bank was in compliance with Office of
Thrift Supervision ("OTS") liquidity requirements, having a ratio of 6.1%.
10
<PAGE>
The Bank's principal sources of funds include deposits, loan payments (including
interest, scheduled amortization of principal and prepayments), interest and
amortization on investments and mortgage-backed securities, maturing
investments, FHLB advances and other borrowed money. While scheduled loan
amortization, maturing securities, and short-term investments are generally
predictable sources of funds, loan and mortgage-backed securities prepayments
are greatly influenced by interest rates. One of the risks of investing in
mortgage-backed securities is the ability of such instruments to incur
prepayments of principal prior to maturity at prepayment rates different than
those estimated at the time of purchase. This generally occurs because of
changes in market interest rates. For example, in periods of rising interest
rates the level of prepayments on mortgage-backed securities and loans will
typically decline.
Principal uses of funds include the origination of consumer and commercial
loans, investments, payments of interest on deposits and borrowed money, and
payments to meet operating expenses. At September 30, 1996, the Bank had
approximately $67 million in loan commitments outstanding including $32 million
in available home equity credit lines. It is expected that these and future
loans will be funded primarily by deposits, loan repayments and sales,
investment maturities and amortization, and borrowings. The Bank has the
aggregate capacity to borrow up to $688 million in advances from the FHLB of
Boston. At September 30, 1996, FHLB advances and borrowed money totaled $222
million versus $155 million at September 30, 1995.
The Company purchases certain debt securities (including mortgage-backed
securities) with the intent and ability to hold to maturity for the purposes of
earning income and meeting regulatory liquidity requirements. Events which may
be reasonably anticipated are considered when determining the Company's intent
and ability to hold investment securities to maturity. Such securities are
classified as investment securities held to maturity and are stated at cost
adjusted for amortization of premiums and accretion of discounts. Other debt
securities are purchased and classified as available for sale. Management will
sell securities from time to time and use the proceeds to fund loans when
deposit flows are not adequate, the rates offered on borrowed money are not
favorable, and liquidity ratios support such sales. The Company also
occasionally sells available for sale securities to restructure its
asset/liability mix. Securities classified as available for sale are accounted
for in the aggregate at market value with any unrealized gain or loss being
recorded as an adjustment to shareholders' equity, net of income tax effect. At
September 30, 1996, approximately $385 million, or 83%, of the Company's
investment and mortgage-backed securities portfolio was classified as available
for sale and had an after-tax net unrealized loss of $1.8 million.
During the year ended September 30, 1996, the Company sold $198 million of
investment and mortgage-backed securities producing net losses of $463,000 while
maturing investment securities totaled $25 million. Much of the activity
occurred in the second quarter when the Bank sold approximately $100 million of
its lowest yielding securities, incurring a loss of $1.2 million, and reinvested
the proceeds of the sale in securities with an estimated yield improvement of
approximately 150 basis points on average. During fiscal 1995, investment and
mortgage-backed securities sold totaled $101.3 million, producing net gains of
$42,000, while maturing securities totaled $15.2 million.
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 September 30, 1996 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 September 30, 1996 (in thousands):
Actual Percent Required Percent Excess
Core $74,566 5.42% $41,283 3.00% $33,283
Tangible 74,566 5.42% 20,641 1.50% 53,925
Risk-based 81,953 13.89% 47,186 8.00% 34,767
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 September 30, 1996,
the Bank had a core capital ratio of 5.42% and met the requirements for a "well
capitalized" institution.
In August 1993, the OTS issued new regulations, to be effective beginning on
January 1, 1994, which were going to add an interest-rate risk component to a
bank's risk-based capital requirement. The OTS then delayed implementation of
this new regulation pending action on the issue from the other banking agencies.
In early 1996 the other regulators (the Federal Reserve Board, Federal Deposit
Insurance Corp., and Office of the Comptroller of the Currency) announced that
their approach to evaluating a financial institution's interest rate risk would
not include a standard model to calculate a required capital component. While
the OTS will likely review its approach to evaluating a bank's exposure to
interest rate fluctuations as a result of the other regulators' conclusions, the
OTS under any scenario will require that a bank have adequate board and senior
management oversight and a comprehensive process for managing interest rate
risk.
11
The Holding Company's liquidity and ability to pay dividends to its shareholders
is primarily derived from and dependent on the ability of its Bank subsidiary to
pay dividends to the Holding Company. Under current OTS regulations, because the
Bank meets the OTS capital requirements, it may pay out the higher of 100% of
net income to date over the calendar year and 50% of surplus capital existing at
the beginning of the calendar year, or 75% of its net income over the most
recent four-quarter period, without regulatory supervisory approval. In general,
the Bank pays dividends to the Holding Company only to the extent that funds are
needed to cover operating expenses and dividends paid to shareholders. At
September 30, 1996, the Bank had approximately $35 million in excess capital
over the OTS risk-based requirement, one half of which would be available for
declaration of dividends to the Holding Company. The OTS regulations permit the
OTS to prohibit capital distribution under certain circumstances.
Asset/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/liability management
strategies also must accommodate customer demands for particular types of
deposit and loan products.
While much of the Company's asset/liability management efforts involve
strategies which increase the rate sensitivity of its loans and investments,
such as the sale of fixed rate loans, originations of adjustable rate loans and
purchases of adjustable rate mortgage-backed securities or relatively short
average life fixed rate 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.
The amount and composition of the Company's mortgage loan origination activity
will continue to be directly influenced by interest rates. The Company
experienced strong loan origination activity in 1993 and 1994 driven by a
relatively low interest rate environment that resulted in customers refinancing
their existing mortgage loans into lower rate, and generally fixed rate,
products. While loan origination activity declined in fiscal 1995, customer
preference continued for fixed rate loans. That activity resulted in an increase
in the percentage of fixed rate loans in the Company's loan portfolio. During
fiscal 1995, the Company securitized $154 million of long term, fixed rate
mortgage loans. The resultant securities were then sold in the last quarter of
fiscal 1995 and first quarter of fiscal 1996, with most of the proceeds
reinvested in adjustable rate or relatively short term fixed rate, securities.
While the strategy resulted in an expected decline in the Company's net interest
margin, it also improved the rate sensitivity of the Company's interest-earning
assets and strengthened its ability to absorb the impact of future interest rate
volatility, primarily in the event of a sustained rise in interest rates. It is
currently the Company's policy to sell into the secondary market all
originations of long term, fixed rate mortgage loans. It is management's
intention to continue this policy as needed to maintain an acceptable interest
rate risk profile.
During the year ended September 30, 1996, the Company sold approximately $18.7
million of fixed rate mortgage loans into the secondary market and securitized
approximately $16.9 million of fixed rate mortgage loans into FHLMC
mortgage-backed securities. In addition to the loans that were sold or
securitized, the Company transferred approximately $21.9 million of fixed rate
mortgage loans classified as held for sale into the loan portfolio. The loans
were recorded in the portfolio at their estimated market value at the date of
the transfer. The loans were transferred to the portfolio primarily due to the
determination that the loans, after initial classification as held for sale,
were not underwritten to secondary market standards.
The Company measures its exposure to interest 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
the Company's net interest income. The model is run on both a "shock" basis,
under which interest rates are assumed to move up or down immediately, as well
as on the basis of gradual movements in rates based upon prior interest rate
cycles. The Board approved maximum tolerance for decreases in net interest
income is 20%, based upon the model's prediction of the impact of an immediate
200 basis point increase in interest rates. At September 30, 1996, according to
the computer model and using asset/liability repricing assumptions based on the
Company's historical experience and industry data, if interest rates were to
immediately increase by 200 basis points the negative impact on the Company's
net interest income would be well within the Board approved tolerance level.
The Company also monitors other indicators of interest rate risk. Market value
of equity ("MVE") analysis is intended to address the change in equity value
arising from movements in interest rates. The MVE is estimated by valuing the
Company's assets and liabilities. The extent to which assets have gained or lost
value in relation to the gains or losses of liabilities determines the
appreciation or depreciation in equity on a market value basis. MVE analysis can
be a good indicator of long term interest rate risk inherent in a balance sheet.
The Company measures its market value risk on a quarterly basis under a variety
of interest rate environments. The Company has also established
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acceptable tolerances for change in MVE under different interest rate scenarios.
Another 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
same 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 September 30, 1996, the Company's one-year gap was a negative 3.7% of total
assets. The Company's current asset/liability management strategy is to
generally 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, relies less on gap analysis than other tools, such as
simulation analysis, for an accurate measure of interest rate risk. For example,
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. The
ability of many borrowers to service their debt may decrease in the event of an
interest rate increase.
The Company has an Asset/Liability Management Committee (the "ALCO") which meets
regularly and reports at least quarterly to the Board of Directors. The ALCO
sets interest rate risk goals and formulates strategies to achieve those goals.
Effect of Interest Rate Fluctuations
The Company's consolidated results of operations depend to a large extent on the
level of its net interest income, which is the difference between interest
income earned on its loan and investment portfolios versus the interest paid on
deposits and borrowed funds. If the cost of funds increases faster than the
yield on its interest-earning assets, net interest income will be reduced. The
Company measures its interest rate risk primarily using simulation analysis.
While the Company uses various tools to monitor interest rate risk, it is unable
to predict future fluctuations in interest rates or the specific impact thereof.
The market value of most of the Company's financial assets is sensitive to
fluctuations in market interest rates. Fixed rate investments including mortgage
loans and mortgage-backed securities decline in value as interest rates rise.
Adjustable rate loans and securities generally have less market value volatility
than do fixed rate products.
It is the Company's current policy to sell all of its long term, fixed rate loan
originations into the secondary market. The Company retains in its loan
portfolio adjustable rate and shorter term loans including mortgages that adjust
annually (one year ARMs) and loans that are fixed rate for an initial term,
typically three to five years, and then convert to a one year ARM (3-1 and 5-1
ARMs). The majority of the Company's loan origination activity during fiscal
1996 was comprised of 3-1 and 5-1 ARMs which the Company retained in its
portfolio. Such loans, while sensitive to changing rates during most of their
term, would not adjust to declines and increases in rates during the first three
to five years. In addition, since these loans do not impose a prepayment penalty
on the borrower, they are subject to refinancing before they convert to a one
year ARM especially in the event of a meaningful drop in market interest rates
during the initial term.
Changes in interest rates also can affect the amount of loans originated by the
Company and its ability to realize gains on the sale of such assets. The extent
to which borrowers prepay loans also is affected by prevailing interest rates.
When interest rates increase, borrowers are less likely to prepay their loans;
whereas, when interest rates decrease, borrowers are more likely to prepay
loans. Funds generated by prepayments may be invested at a lower rate.
Prepayments may adversely affect the value of mortgage loans, the levels of such
assets that are retained in the portfolio, net interest income and loan
servicing income. Similarly, prepayments on mortgage-backed securities also may
affect adversely the value of these securities and interest income. Increases in
interest rates may cause depositors to shift funds from accounts that have a
comparatively lower cost such as regular savings accounts to accounts with a
higher cost such as certificates of deposit. If the cost of deposits increases
at a rate that is greater than the increase in yields on interest-earnings
assets, the interest rate spread is negatively affected. Changes in the asset
and liability mix also affect the interest rate spread.
Although the Company's average net interest margin has been relatively stable in
recent years, various factors including rapid changes in interest rates and/or
changes in the shape of the treasury yield curve can result in expansion or
compression of the Company's interest rate spread and a corresponding increase
or decrease in
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earnings. For example, the Company's average net interest margin in fiscal 1996
declined to 3.08% from 3.63% in the prior year. This compression was the result
of a number of events. A flat treasury yield curve (i.e. a relatively narrow
difference between short term and long term rates) resulted in a below average
spread between the yield on the Company's loans and investments versus the cost
of its deposits and borrowed funds. The securitization of approximately $154
million of long term, fixed rate mortgage loans and sale of the resultant
securities during the last quarter of fiscal 1995 and first quarter of fiscal
1996 improved the Company's interest rate risk profile, but also resulted in an
expected decline in interest income. The Company had a higher than normal level
of lower yielding investments in the second quarter as cash received from the
Fleet/Shawmut transaction early in the quarter was kept in overnight investments
needed to fund the sale of seven branch offices late in the same quarter. While
more than one half of the Company's strong balance sheet growth in 1996 was
funded with retail deposits, the Company also utilized Federal Home Loan Bank
advances and other borrowed money as part of its growth plan. This strategy
increased earnings per share, but at a higher interest cost than growth funded
using lower cost retail deposits. Finally, the intangible asset created by the
Fleet/Shawmut transaction resulted in a decline in total interest-earning assets
relative to total interest-bearing liabilities. All of these events contributed
to the compression of the Company's net interest margin and a modest decline in
net interest income, primarily during the first half of the year.
Asset Quality
At September 30, 1996, the Company had total non-performing assets in the amount
of $12.3 million, including $9.3 million of non-performing loans and $3.0
million in real estate owned. Loan loss reserves totaled $8.6 million, or 93% of
non-performing loans. This compares with total non-performing assets of $13.6
million at September 30, 1995, including $11.2 million of non-performing loans
and $2.4 million in real estate owned.
The Company's non-performing assets are almost exclusively residential in
nature, comprising approximately 90% of the total at September 30, 1996. Loan
delinquencies (greater than 60 days) totaled $10.7 million, or 1.31% of total
loans, at September 30, 1996 compared to $11.1 million, or 1.55% of total loans,
at September 30, 1995. 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 months to one year and is then subject
to review. The Company restructured $4.2 million of loans during the year ended
September 30, 1996 and has $4.0 million of restructured loans outstanding at
September 30, 1996. Upon restructure, the loans are identified as impaired loans
and represent 59% of the $6.8 million of impaired loans at year end. The entire
$4.0 million of restructured loans at year end were reported as performing loans
due to the borrowers maintaining a current payment status with respect to their
revised loan terms. As with the Company's non-performing assets, the substantial
majority of restructured loans represent loans secured by residential property.
All non-performing assets and restructured loans are reviewed quarterly as part
of the Company's internal review process. The Company's level of troubled assets
continues to compare very favorably with other lenders in Connecticut.
During the year the Company increased its commercial loan portfolio through the
purchase of loans as part of the Fleet/Shawmut transaction and through its own
originations. As a result, the resources in the commercial banking department
and loan review function were expanded to properly monitor and administer the
portfolio. The purchased portfolio was assigned risk ratings in accordance with
the Company's risk rating system and each individual loan was assigned to a
commercial loan officer for monitoring purposes. As of September 30, 1996 four
loans purchased from Fleet/Shawmut, totaling $348,000, were non-performing.
Loans originated by the Company are also assigned to a commercial loan officer
who is responsible for periodically collecting and analyzing current financial
statements for each borrower. The loan review department, which operates
independently of the commercial banking department, re-affirms the quality of
loans and identifies any weakness that may need attention. Loans are reviewed
based on a schedule that considers the relative risk associated with the loan.
The following table represents a breakdown of non-performing assets at September
30, 1996:
Total
Non-Performing Real Estate Non-Performing % of
(in thousands) Loans Owned Assets Total
----- ----- ------ -----
Mortgage loans:
Residential $6,893 $2,731 $9,624 78.0%
Commercial 1,031 -- 1,031 8.4%
Multi-family -- 294 294 2.4%
Land development -- 25 25 0.2%
Non-mortgage commercial loans 261 -- 261 2.1%
Consumer loans 47 -- 47 0.4%
Home equity loans 1,047 -- 1,047 8.5%
------ ------ ------- ------
Total $9,279 $3,050 $12,329 100.0%
====== ====== ======= ======
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The allowance for loan losses increased to $8.6 million at September 30,1996
compared to $7.5 million at the start of the fiscal year. The $1.1 million net
increase in the balance includes $2.0 million of provisions during the year and
a $1.9 million allowance associated with the loans purchased in the
Fleet/Shawmut transaction less $2.8 million of net charge-offs in fiscal 1996.
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
allowance may be necessary based on changes in economic conditions, particularly
in Connecticut. In connection with the determination of the allowances,
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 borrower's ability to repay. Management utilizes a variety of techniques
to value adversely classified loans, including full and drive-by appraisals,
real estate broker estimates and income projection analysis.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the allowances for losses on loans and
real estate owned. Such agencies may require the Company to recognize additions
to the allowance based on their judgments of information available to them at
the time of the examination.
The following table sets forth an analysis of the Company's allowance for loan
losses for the periods indicated:
Years Ended September 30,
(in thousands) 1996 1995 1994
---- ---- ----
Balance at beginning of year $7,457 $8,311 $5,005
Loans charged off:
Residential mortgage loans (2,077) (1,599) (942)
Multi-family, commercial and land
development loans (491) (511) (496)
Consumer and home equity loans (295) (366) (68)
------- ------- ------
Total loans charged off (2,863) (2,476) (1,506)
Recoveries:
Residential mortgage loans 83 116 110
Multi-family, commercial and land
development loans -- 5 --
Consumer and home equity loans 3 1 2
------- ------- ------
Total recoveries 86 122 112
Provision for loan losses 2,041 1,500 1,200
Allowance associated with purchases 1,871 -- 3,500
Balance at end of period $8,592 $7,457 $8,311
Ratio of net charge-offs to average loans 0.35% 0.28% 0.20%
Allowance for loan losses to gross loans
receivable 1.04% 1.03% 1.01%
------- ------- ------
Allowance for loan losses to non-performing
loans 93% 67% 104%
======= ======= ======
Total loan charge-offs increased to $2.9 million for the year ended September
30, 1996 from $2.5 million in the previous year. The increase is entirely
attributable to a 30% increase in residential mortgage loan charge-offs to $2.1
million in fiscal 1996 from $1.6 million in fiscal 1995. The primary factor
contributing to the increase is the continued sluggishness of the 2 to 4 family
and condominium markets where the market remains depressed and demand is low.
Charge-offs related to mortgage loans secured by 2 to 4 family and condominium
properties represented $1.4 million of the total in 1996. The increased trend of
charge-offs, principally those resulting from 2 to 4 family properties, and
higher resulting charge-off to loans ratios were the primary motive for the
decision to boost the provision for loan loss from $1.5 million in 1995 to $2.0
million in 1996.
Impact of Deposit Insurance Funds Act of 1996
On September 30, 1996, President Clinton signed into law the Deposit Insurance
Funds Act of 1996, which included provisions recapitalizing the SAIF, provides
for the eventual merger of the thrift fund with the Bank Insurance Fund ("BIF"),
and reallocates payment of the annual Financing Corp. ("FICO") bond obligation.
As part of the package, the Federal Deposit Insurance Corp. ("FDIC") imposed a
special one-time assessment of 65.7 basis points to be applied against all
SAIF-assessable deposits as of March 31, 1995, which will bring the SAIF up to
the statutorily prescribed 1.25 percent designated reserve ratio. The special
assessment, which will be paid in November 1996, was included as a $4.7 million
pretax charge to Eagle Federal's operations in September 1996. The assessment
reduced the Company's 1996 net income by approximately $2.8 million, or $0.59
per share.
Effective January 1, 1997, SAIF members will have the same risk-based assessment
schedule as BIF members. Eagle Federal, as a healthy bank, will effectively pay
no assessment for deposit insurance coverage beginning on January 1, 1997.
However, all SAIF and BIF institutions including Eagle Federal will be
responsible for sharing the cost of interest payments on the FICO bonds. The
cost will be an annualized charge of 1.3 basis points for BIF deposits and 6.4
basis points for SAIF deposits. The approximate annual cost of interest payments
for Eagle
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Federal is estimated at $450,000.
As a result of the Deposit Insurance Funds Act of 1996, the Secretary of the
Treasury is to review recommendations in 1997 for the establishment of a common
charter for banks and savings associations. Accordingly, Eagle Federal may be
required to convert its federal savings bank charter to either a national bank
charter, a state depository institution charter, or a newly designed charter.
Eagle Federal may also become regulated at the holding company level by the
Board of Governors of the Federal Reserve System ("Federal Reserve") rather than
by the OTS. Regulation by the Federal Reserve could subject Eagle Federal to
capital requirements that are not currently applicable to the Company as a
holding company under OTS regulation and may result in statutory limitations on
the type of business activities in which the Company may engage at the holding
company level, which business activities currently are not restricted. Eagle
Federal is unable to predict whether such initiatives will result in enacted
legislation requiring a charter change and if so whether the charter change
would significantly impact Eagle Federal's operations.
Repeal of Special Thrift Bad Debt Deduction
On August 20, 1996, President Clinton signed into law the Small Business Job
Protection Act of 1996 which included the repeal of the special thrift bad debt
provisions. Although the percentage of taxable income method bad debt deduction
will no longer be available to the Bank, the tax requirement to invest in
certain qualifying types of investments and loans has been eliminated, thus
providing greater freedom to the Bank in structuring its balance sheet to
maximize returns. These tax related changes had no significant impact on the
Bank's 1996 financial position or results of operations.
Financial Accounting Standards Board Releases
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed of," was issued in March 1995 and is effective for fiscal
years beginning after December 15, 1995. SFAS No. 121 requires that long-lived
assets be reviewed for impairment whenever events or changes in circumstances
indicate the carrying amount of an asset may not be recoverable. Management does
not anticipate the adoption of SFAS No. 121 to have a material effect on the
Company's consolidated financial statements.
SFAS No. 122, "Accounting for Mortgage Servicing Rights," was issued in May 1995
and is effective for fiscal years beginning after December 15, 1995. 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 based on the fair value of the rights. The Company adopted SFAS No.
122 effective October 1, 1996. The effect of adoption on the Company will vary
based on the extent of mortgage servicing rights existing upon adoption and
mortgage servicing rights acquired subsequent to adoption, but is not expected
to have a material effect on the Company's consolidated financial statements.
SFAS No. 123, "Accounting for Stock-Based Compensation," was issued in October
1995 and is effective for fiscal years beginning after December 15, 1995. SFAS
No. 123 establishes a fair value based method of accounting for stock-based
compensation plans. This statement also establishes fair value as the
measurement basis for transactions in which an entity acquires goods or services
from non-employees in exchange for equity instruments. The effects on the
consolidated financial statements of this statement will be disclosure only.
Comparison of Years Ended September 30, 1996 and 1995
Net Income -- Net income for the year ended September 30, 1996 was $13.6
million, or $2.89 per fully diluted share, compared to $11.0 million, or $2.38
per fully diluted share, for the year ended September 30, 1995. The change in
net income of $2.7 million represents a 24% increase from the prior fiscal year.
Fully diluted earnings per share increased by 21%. The increase in net income
was primarily a result of a $15.9 million gain recorded upon the sale of the
Danbury region branch offices and related deposits to Union Savings Bank of
Danbury. The gain was partially offset by a $9.4 million increase in
non-interest expense which included a $4.7 million charge related to the FDIC
assessment to recapitalize the SAIF and additional charges of approximately $1.2
million which were largely non-recurring in nature. Fiscal 1996 results were
also impacted by several other charges including a $1.5 million loss on mortgage
banking activities and a $463,000 net loss on the sales of securities.
Interest Income -- Interest income was $95.6 million for the year ended
September 30, 1996 compared to $82.9 million for the year ended September 30,
1995, an increase of $12.7 million, or 15%. The increase in interest income was
due to a $191 million, or 17%, increase in the average balance of
interest-earning assets. A reduction in the yield on interest-earning assets to
7.40% in 1996 from 7.53% in 1995 contributed to reducing the impact of the
increased earning assets. A larger than normal average investment in overnight
investments during the second quarter of fiscal 1996 and an asset/liability
restructuring involving the sale of approximately $154 million of securitized
fixed rate mortgage loans in late fiscal 1995 and early fiscal 1996 worked to
reduce the overall yield on interest-earning assets.
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<PAGE>
Interest Expense -- Interest expense was $55.8 million in fiscal 1996 compared
to $42.9 million in the prior fiscal year, an increase of $12.9 million, or 30%.
The increase was caused by a combination of a 38 basis point increase in the
cost of interest-bearing liabilities from 4.10% in 1995 to 4.48% in 1996 and an
approximately $200 million increase in the average balance of interest-bearing
liabilities. Several factors contributed to the increased cost of funds,
principally, the cost of deposits increasing from 3.87% in 1995 to 4.23% in 1996
along with a $104.1 million increase in the average balance of deposits. The
increase in the cost of deposits is primarily due to a somewhat higher
percentage of certificate accounts to total deposits in fiscal 1996 and a more
competitive deposit rate environment throughout fiscal 1996 versus fiscal 1995.
In addition, the average balance of borrowed funds, FHLB advances and repurchase
agreements increased by $95.9 million.
Net Interest Income -- Net interest income remained very stable when comparing
the years ended September 30, 1996 and 1995, decreasing slightly by $258,000 to
$39.8 million from $40.0 million. Strong growth in interest-earning assets was
more than offset by compression in the Bank's interest rate spread and net
interest margin, which averaged 2.92% and 3.08%, respectively, in fiscal 1996
compared to 3.43% and 3.63%, respectively, in fiscal 1995. The significant
declines are due primarily to higher costs for interest-bearing liabilities. Net
interest income was also reduced due to a decline in total interest-earning
assets relative to total interest-bearing liabilities that resulted from the
intangible asset created from the Fleet/Shawmut transaction.
Provision for Loan Losses -- The provision for loan losses for the year ended
September 30, 1996 increased by $541,000, or 36%, to $2.0 million from $1.5
million for the year ended September 30, 1995. Due to a modest level of increase
in the charge-off to loan balance ratio on mortgage loans secured by 2 to 4
family and condominium properties during the current year, the provision was
increased. The ratio of allowance for loan losses to non-performing loans
increased from 67% at September 30, 1995 to 93% at September 30, 1996 due in
part to additional allowances associated with loans purchased in the
Fleet/Shawmut transaction.
Non-Interest Income -- Non-interest income for the year ended September 30, 1996
was $18.9 million, an increase of $14.5 million from the prior year total of
$4.4 million. The principal cause of the increase was the $15.9 million gain
recorded from the sale of the Danbury region branches and related deposits to
Union Savings Bank of Danbury in March 1996. Approximately $184 million of
deposits were sold in the transaction at a deposit premium of 9%. Offsetting the
gain on sale of deposits were a $1.5 million loss from mortgage banking
activities and a $463,000 loss on the sale of securities.
The primary component of the loss from mortgage banking activities resulted from
a $1.7 million mark-to-market charge recorded in the second quarter of fiscal
1996. The loss on sale of securities was principally generated from an
approximate $100 million restructuring of the investment portfolio during the
second quarter of fiscal 1996 that resulted in a loss of $1.2 million.
Other components of non-interest income increased to $4.9 million in 1996 from
$4.2 million principally due to a $268,000 increase in servicing income and a
$256,000 increase in demand account service fees.
Non-Interest Expense -- Non-interest expense was $33.6 million for the year
ended September 30, 1996. This represents a $9.4 million, or 39%, increase from
the $24.3 million total reported for the year ended September 30, 1995. The
primary component of the increase was the $4.7 million SAIF recapitalization
charge recorded in the fourth quarter of fiscal 1996. The following fluctuations
occurred when comparing the year ended September 30, 1996 to September 30, 1995;
compensation increased $1.4 million, office occupancy increased $845,000,
marketing increased $630,000, federal insurance premiums decreased $667,000, the
amortization of intangible assets increased $862,000 and other non-interest
expenses increased $1.2 million.
Non-interest expense was impacted by $1.2 million of non-recurring charges,
primarily marketing and various consulting charges, recorded in the second
quarter of fiscal 1996. The marketing costs were associated with enhancing the
Company's visibility and image in the Hartford market in conjunction with the
Fleet/Shawmut transaction. The compensation increase is attributable to
operating an expanded branch network for approximately two months between the
Fleet/Shawmut and Danbury transactions, expansion of the Bank's commercial
banking operations and the opening of four supermarket branch locations in the
fourth quarter of the year ended September 30, 1996. Occupancy expenses were
also impacted by the operation of an expanded branch network between the branch
acquisition and disposition transactions and depreciation on premises and
equipment related to the acquired Fleet/Shawmut branches, particularly leasehold
improvements.
The increase in intangible asset amortization and the decrease in federal
insurance premiums are both directly related to the Fleet/Shawmut transaction.
The $19.9 million of goodwill created from the transaction is responsible for
the increased intangible amortization. The deposits assumed in the Fleet/Shawmut
transaction qualified for treatment at lower BIF deposit premium rates while the
deposits disposed of through the Danbury transaction had previously been
assessed at the higher SAIF deposit premium rates.
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<PAGE>
On an overall basis the Company's ratio of operating expenses to average assets
increased only one basis point from 2.11% in 1995 to 2.12% in 1996.
Income Taxes -- The effective tax rate for the year ended September 30, 1996 was
40.6%, down slightly from the 41.2% reported for fiscal 1995. As a result, the
$1.7 million increase in income taxes to $9.3 million for the year ended
September 30, 1996 is substantially attributable to a higher level of taxable
income.
Comparison of Years Ended September 30, 1995 and 1994
Net Income -- Net income was $11.0 million, or $2.38 per share on a fully
diluted basis, for the twelve months ended September 30, 1995 compared to $7.6
million, or $2.12 per share, in fiscal 1994. This represents an increase of $3.4
million, or 45%, in net income and $0.26, or 12%, in earnings per share. Net
interest income increased by $8.9 million, or 29%, in fiscal 1995 while
non-interest income increased by $1.2 million, or 39%. The provision for loan
loss was $300,000, or 25%, higher in fiscal 1995 and non-interest expense
increased by $4.2 million, or 21%. Income taxes were $7.7 million for the year
ended September 30, 1995 versus $5.4 million in fiscal 1994 representing an
increase of $2.3 million, or 44%.
Interest Income -- Interest income increased by $22.8 million, or 38%, in fiscal
1995 as a result of a $237 million, or 27%, increase in average interest-earning
assets in addition to an increase in the average yield on loans receivable,
mortgage-backed and investment securities from 6.96% to 7.53%. The strong growth
in interest-earning assets were primarily driven by the acquisition of the Bank
of Hartford in June 1994. The increase in average interest-earning assets
includes a $116 million increase in average loans receivable and a $121 million
increase in average mortgage-backed and investment securities.
Interest Expense -- Interest expense increased by $13.9 million, or 48%, during
the twelve months ended September 30, 1995. The increase was due to an increase
in the average cost of deposits and borrowed money from 3.55% to 4.10%, along
with a $228 million, or 28%, increase in the average balance of these funds.
Approximately 35% of the average balance increase is attributable to FHLB
advances and other borrowings whose combined average cost for fiscal 1995 was
6.18%. The growth in the average balance was largely attributable to the Bank of
Hartford acquisition.
Net Interest Income -- Net interest income increased $8.9 million, or 29%, in
fiscal 1995 to $40.0 million from $31.1 million for the twelve months ended
September 30, 1994. The increase is attributable to growth in earning assets
whereas the Bank's interest rate spread and net interest margin were relatively
stable in 1995. Eagle's interest rate spread and net interest margin were 3.43%
and 3.63%, respectively, in fiscal 1995 compared to 3.41% and 3.60%,
respectively, in fiscal 1994.
Provision for Loan Losses -- Eagle added provisions of $1.5 million to its
allowance for loan losses during the year ended September 30, 1995. This
compares to $1.2 million in loan loss provisions for the year September 30,
1994. Net loan charge-offs for fiscal 1995 were $2.5 million, or .28% of average
net loans receivable, versus $1.5 million, or .20% of net average loans
receivable, for fiscal 1994. The increased provision in fiscal 1995 reflects
management's analysis of the risk elements of the loan portfolio, current
delinquency and payment trends (including the increased level of loan
charge-offs in 1995) and the adequacy of the allowance for loan losses. At
September 30, 1995, Eagle's allowance for loan losses was $7.5 million, or 67%
of loans receivable, compared to $8.3 million, or 104% of loans receivable, one
year earlier.
Non-interest Income -- Non-interest income increased $1.2 million, or 39%, to
$4.4 million for the year ended September 30, 1995 from $3.2 million for the
same period in 1994. The increase is attributable primarily to increases in
customer service fees, loan servicing fees and other non-interest income. Fiscal
1995 also includes a gain from the securitization of fixed rate loans classified
as held for sale of $244,000 compared to $120,000 recorded from the sale of
loans during the year ended September 30, 1994.
Non-interest Expense -- Non-interest expense for the year ended September 30,
1995 increased $4.2 million, or 21%, to $24.3 million compared to $20.1 million
for the year ended September 30, 1994. Compensation and benefits were higher by
$1.4 million, or 14%, in 1995. The net increase results primarily from higher
expenses in fiscal 1995 related to the cost of staffing the six additional
branch offices acquired as part of the Bank of Hartford acquisition partially
offset by a one-time expense in fiscal 1994 of $740,000 before taxes relating to
the retirement of two senior officers. A $485,000, or 22%, increase in office
occupancy expenses also reflects the impact of the Bank of Hartford transaction
as does the $667,000 increase in the amortization of intangible assets
principally due to the goodwill recorded as a result of the transaction. A
reduction in the Bank's net foreclosed real estate from $4.3 million at
September 30, 1994 to $2.4 million at September 30, 1995 is reflected in a
reduction of $616,000, or 45%, in the cost of real estate owned operations in
fiscal 1995. The Bank of Hartford acquisition also resulted in higher operating
expenses in a number of other areas including federal deposit insurance,
marketing, data processing
18
<PAGE>
expenses, office supplies, postage and telephone.
Income Taxes -- The increase in net income before income taxes and cumulative
effect of accounting changes in fiscal 1995 versus 1994 is reflected in a $2.3
million, or 44%, increase in income taxes for the year ended September 30, 1995
over the year ended September 30, 1994.
Cumulative Effect of Accounting Changes -- Eagle adopted 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 twelve months ended September 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 twelve months ended
September 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.
The following table sets forth certain information relating to the Company's
average interest-earning assets and interest-bearing liabilities and reflects
the average yield on assets and the average cost of liabilities for the periods
and at the dates indicated. During the periods indicated, nonaccrual loans are
included in the net loans receivable category:
<TABLE>
<CAPTION>
Years Ended September 30,
1996 1995 1994
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(in thousands) Balance Expense Cost Balance Expense Cost Balance Expense Cost
- -------------- ------- ------- ---- ------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (a) ...... $ 785,769 $ 61,089 7.77% $827,127 $ 63,227 7.64% $711,302 $ 51,250 7.21%
Mortgage-backed securities:
Available for sale ...... 338,766 23,432 6.92% 69,800 6,132 8.79% -- -- --
Held to maturity ........ 73,381 5,496 7.49% 123,391 8,278 6.71% 66,197 4,288 6.48%
Trading ................. 732 53 7.24% -- -- -- -- -- --
Investment securities:
Available for sale ...... 32,792 2,124 6.48% 55,132 3,342 6.06% 17,197 810 4.71%
Held to maturity (b) .... 10,732 708 6.60% 6,921 833 12.04% 50,875 2,953 5.80%
Overnight investments and
Federal funds sold ...... 50,060 2,699 5.39% 18,645 1,085 5.82% 18,278 786 4.30%
---------- ---------- -------- --------- -------- ----- -------- --------- ------
Total ................... 1,292,232 95,601 7.40% 1,101,016 82,897 7.53% 863,849 60,087 6.96%
---------- ---------- -------- --------- -------- ----- -------- --------- ------
Interest-bearing liabilities:
Deposits (c) 1,045,427 44,256 4.23% 941,371 36,449 3.87% 792,833 27,648 3.49%
FHLB advances ............. 147,641 8,504 5.76% 59,599 3,646 6.12% 21,968 1,266 5.76%
Other borrowings .......... 52,396 3,082 5.88% 44,516 2,785 6.26% 2,450 102 4.16%
---------- ---------- -------- -------- -------- ---- -------- --------- ------
Total ................... $1,245,464 $ 55,842 4.48% $1,045,486 $ 42,880 4.10% $817,251 $ 29,016 3.55%
---------- -------- --------- -------- ---- -------- --------- ------
Net interest income ........ $ 39,759 $ 40,017 $ 31,071
========== ======== =========
Average interest rate spread . 2.92% 3.43% 3.41%
Net interest margin (d) ...... 3.08% 3.63% 3.60%
</TABLE>
(a) Interest income includes fees of $439,000, $284,000 and $937,000 in 1996,
1995, and 1994, respectively.
(b) Investment securities include FHLB stock.
(c) Includes non-interest bearing demand deposits which averaged $27.8 million,
$24.1 million and $17.4 million for fiscal 1996, 1995 and 1994, respectively;
had these demand deposits been excluded above the overall cost of funds would
have been 4.59%, 4.20% and 3.63% for fiscal 1996, 1995 and 1994, respectively.
(d) Net interest income divided by average interest-earning assets.
The following table allocates the period-to-period changes in the Company's
various categories of interest income and interest expense between changes due
to changes in volume (calculated by multiplying the change in average volume of
the related interest-earning asset or interest-bearing liability category by the
prior year's rate), changes due to changes in rate (change in rate multiplied by
prior year's volume) and changes due to changes in rate-volume (changes in rate
multiplied by changes in volume):
<PAGE>
<TABLE>
<CAPTION>
Years Ended September 30,
1996 v. 1995 1995 v. 1994
Rate/ Rate/
(in thousands) Rate Volume Volume Total Rate Volume Volume Total
- -------------- ---- ------ ------ ----- ---- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable ........... $ 1,077 $ (3,161) $(54) $(2,138) $ 3,123 $ 8,345 $ 509 $ 11,977
Mortgage-backed securities:
Available for sale ....... (1,304) 23,629 (5,025) 17,300 -- -- 6,132 6,132
Held to maturity ......... 963 (3,355) (390) (2,782) 153 3,705 132 3,990
Trading .................. -- -- 53 53 -- -- -- --
Investment securities:
Available for sale ....... 229 (1,354) (93) (1,218) 232 1,787 513 2,532
Held to maturity (a) ..... (376) 459 (208) (125) 3,170 (2,551) (2,739) (2,120)
Overnight investments and
Federal funds sold ....... (80) 1,828 (134) 1,614 278 16 5 299
-------- -------- -------- -------- -------- -------- -------- --------
Total .................... 509 18,046 (5,851) 12,704 6,956 11,302 4,552 22,810
-------- -------- -------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Deposits ................... 3,402 4,029 376 7,807 3,050 5,180 571 8,801
FHLB advances .............. (213) 5,386 (315) 4,858 78 2,169 133 2,380
Other borrowings ........... (167) 493 (29) 297 51 1,751 881 2,683
-------- -------- -------- -------- -------- -------- -------- --------
Total .................... 3,022 9,908 32 12,962 3,179 9,100 1,585 13,864
-------- -------- -------- -------- -------- -------- -------- --------
Net change in net
interest income ............ $(2,513) $ 8,138 $(5,883) $ (258) $ 3,777 $2,202 $2,967 $ 8,946
======= ======= ======= ======== ======== ====== ====== =======
</TABLE>
(a) Investment securities include FHLB stock.
19
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
September 30,
(in thousands, except for share data) 1996 1995
---- ----
<S> <C> <C>
Assets
Cash and amounts due from depository institutions $ 20,288 $ 22,670
Interest-bearing deposits 27,989 40,637
------ ------
Cash and cash equivalents 48,277 63,307
Investment securities available for sale
(amortized cost: $13,458 in 1996 and $54,386 in 1995) 13,453 53,816
Investment securities held to maturity
(market value: $1,036 in 1996 and $2,543 in 1995) 987 2,476
Mortgage-backed securities available for sale
(amortized cost: $375,010 in 1996 and $231,145 in 1995) 372,018 232,160
Mortgage-backed securities held to maturity
(market value: $77,973 in 1996 and $124,763 in 1995) 78,102 123,625
Loans held for sale 705 2,467
Loans, net of allowance for loan losses of
$8,592 in 1996 and $7,457 in 1995 814,488 713,545
Accrued interest receivable:
Loans 5,046 4,900
Investment securities 563 775
Mortgage-backed securities 3,280 2,805
Real estate owned, net 3,050 2,439
Stock in Federal Home Loan Bank of Boston, at cost 10,448 8,945
Premises and equipment, net 9,796 8,066
Prepaid expenses and other assets 42,596 17,960
--------- ---------
Total Assets $1,402,809 $1,237,286
---------- ----------
Liabilities and Shareholders' Equity
Liabilities:
Deposits $ 1,059,355 $ 951,751
Federal Home Loan Bank advances 207,008 73,150
Repurchase agreements and other borrowed money 14,670 82,317
Advance payments by borrowers for taxes and insurance 4,973 5,498
Accrued expenses and other liabilities 15,655 32,110
----------- -----------
Total Liabilities 1,301,661 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; 4,581,440 and 4,507,197 shares issued
at September 30, 1996 and 1995, respectively, including
47,373 shares held in treasury 46 45
Additional paid-in capital 60,635 59,514
Retained earnings 42,598 33,092
Cost of common stock in treasury (362) (362)
Employee stock ownership plan debt -- (94)
Net unrealized gain (loss) on available for sale securities (1,769) 265
----------- -----------
Total Shareholders' Equity 101,148 92,460
----------- -----------
Total Liabilities and Shareholders' Equity $ 1,402,809 $ 1,237,286
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended September 30,
(in thousands, except for per share data) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $61,089 $63,227 $51,250
Interest on mortgage-backed securities 28,981 14,410 4,288
Interest on investment securities 1,830 2,738 2,283
Interest on overnight investments 2,694 1,085 676
Dividends on investment securities 1,002 1,437 1,480
Interest on Federal funds sold 5 -- 110
------ -------- --------
Total interest income 95,601 82,897 60,087
------ -------- --------
Interest expense:
Interest on deposits 44,256 36,449 27,648
Interest on Federal Home Loan Bank advances 8,504 3,646 1,266
Interest on repurchase agreements and other borrowed money 3,082 2,785 102
----- ----- ---
Total interest expense 55,842 42,880 29,016
------ ------ ------
Net interest income 39,759 40,017 31,071
Provision for loan losses 2,041 1,500 1,200
----- ----- -----
Net interest income after provision for loan losses 37,718 38,517 29,871
------ ------ ------
Non-interest income:
Net gain (loss) on sale of securities (463) (42) --
Net gain (loss) from mortgage banking activities (1,484) 244 120
Gain on sale of deposits 15,904 -- --
Checking account service fees 2,295 2,039 1,597
Other customer service fees 952 781 588
Other income 1,704 1,379 861
----- ----- ---
Total non-interest income 18,908 4,401 3,166
------ ----- -----
Non-interest expense:
Compensation, taxes and benefits 12,441 11,088 9,703
Office occupancy 3,532 2,687 2,202
Advertising 1,579 949 571
Net cost of real estate owned operations 1,190 744 1,360
Federal insurance premium 1,443 2,110 1,597
Amortization of intangible assets 2,276 1,414 747
Data processing expenses 1,609 1,578 1,257
SAIF Assessment 4,652 -- --
Other 4,927 3,689 2,651
----- ----- -----
Total non-interest expense 33,649 24,259 20,088
------ ------ ------
Income before income taxes and cumulative effect of
accounting changes 22,977 18,659 12,949
Income taxes 9,339 7,687 5,353
----- ----- -----
Income before cumulative effect of accounting changes 13,638 10,972 7,596
Cumulative effect of accounting changes -- -- (30)
------ ------ -----
Net income $13,638 $10,972 $7,566
======= ======= ======
Income per primary share:
Income before cumulative effect of accounting changes $2.92 $2.41 $2.14
Cumulative effect of accounting changes -- -- (0.01)
------ ------ ------
Net income $2.92 $2.41 $2.13
====== ====== ======
Income per fully diluted share:
Income before cumulative effect of accounting changes $2.89 $2.38 $2.13
Cumulative effect of accounting changes -- -- (0.01)
------ ------ ------
Net income $2.89 $2.38 $2.12
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Net Unrealized
Cost of Gain (Loss) Employee
Additional Common on Available Stock
Common Stock Paid-in Retained Stock in for sale Ownership
(in thousands, except for per share data) Shares Amount Capital Earnings Treasury Securities Plan Debt Total
- --------------------- ------ ------ ------- -------- -------- ---------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1993 3,097 $31 $33,562 $27,928 $(362) $ -- $(752) $60,407
Net Income 7,566 7,566
Cash dividends declared, $0.69 per share (2,355) (2,355)
Reduction in debt related to Employee
Stock Ownership Plan 285 285
Exercise of stock options and other 48 1 486 487
Dividend reinvestment plan 30 565 565
Increase in net unrealized loss on
available for sale securities (679) (679)
----- ----- ----- ----- ----- ----- ----- ------
Balance at September 30, 1994 3,175 32 34,613 33,139 (362) (679) (467) 66,276
Net Income 10,972 10,972
Cash dividends declared, $0.82 per share (3,627) (3,627)
Reduction in debt related to Employee
Stock Ownership Plan 373 373
Exercise of stock options and other 37 455 455
Dividend reinvestment plan 28 418 418
Common stock dividend declared -10%,
less fractional shares 405 4 7,380 (7,392) (8)
Common stock offering 862 9 16,648 16,657
Unrealized loss upon adoption of SFAS No.
115 on October 1, 1994 (357) (357)
Change in unrealized gain (loss) on
available for sale securities 1,301 1,301
----- ----- ------ ----- ----- ----- ----- ------
Balance at September 30, 1995 4,507 45 59,514 33,092 (362) 265 (94) 92,460
Net Income 13,638 13,638
Cash dividends declared, $0.92 per share (4,132) (4,132)
Reduction in debt related to Employee
Stock Ownership Plan 94 94
Exercise of stock options and other 48 1 508 509
Dividend reinvestment plan 26 613 613
Unrealized gain on securities transferred
from held to maturity to available for sale 1,323 1,323
Change in unrealized gain (loss) on
available for sale securities (3,357) (3,357)
----- --- ------- ------- ------ -------- ----- ---------
Balance at September 30, 1996 4,581 $46 $60,635 $42,598 $(362) $(1,769) $ -- $101,148
===== === ======= ======= ====== ======== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30,
(in thousands) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Operating Activities:
Net income $13,638 $10,972 $7,566
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Provision for loan losses 2,041 1,500 1,200
Provision for losses on real estate owned 419 333 675
Provision for depreciation and amortization 1,064 775 613
Accretion of discounts and fees on loans (399) (238) (937)
Amortization of premiums (accretion of discounts) on
investment and mortgage-backed securities 897 (812) 45
Amortization of core deposit and other intangibles 2,276 1,414 747
Loss on sale of premises and equipment 42 -- --
Gain on sale of deposits (15,904) -- --
Gain on trading securities (64) -- --
Proceeds from sales of trading securities 16,952 83,909 --
Realized (gain) loss on sale of real estate owned (259) (125) 18
Realized loss on sale of securities, net 527 42 --
Loss (gain) from mortgage banking activities, net 1,484 (244) (120)
Origination of loans held for sale (57,221) (2,467) --
Proceeds from sale of loans held for sale 18,732 -- --
Increase in accrued interest receivable (176) (2,348) (317)
Decrease (increase) in prepaid expenses and other assets (5,703) 8,242 (12,655)
Loan origination fees 582 352 1,016
Increase in accrued expenses and other liabilities 3,187 1,837 1,888
----- ----- -----
Net cash provided (used) by operating activities (17,885) 103,142 (261)
------- ------- ------
Investing Activities:
Proceeds from sales of investment securities available for sale 25,593 2,210 2,800
Proceeds from maturities of investment securities 25,000 15,200 9,300
Principal payments on investment securities available for sale 3,255 6,262 --
Principal payments on investment securities held to maturity -- 4,512 20,530
Purchases of investment securities available for sale (22,017) (5,742) (4,800)
Purchases of investment securities held to maturity -- (7,892) (61,474)
Principal payments on mortgage-backed securities available for sale 94,580 10,768 --
Principal payments on mortgage-backed securities held to maturity 8,970 12,479 11,096
Purchases of mortgage-backed securities available for sale (314,399) (141,850) --
Purchases of mortgage-backed securities held to maturity (54,030) (48,764) (7,135)
Proceeds from sales of mortgage-backed securities available for sale 155,566 11,164 --
Proceeds from sales of mortgage-backed securities held to maturity -- 4,032 --
Principal payments on loans receivable 127,903 95,847 129,877
Loan originations (178,876) (155,666) (219,904)
Loan purchases -- (130) (2,507)
Proceeds from sales of loans 999 152 11,153
Decrease in real estate owned -- 442 1,018
Proceeds from sales of real estate owned 3,551 3,444 2,580
Purchases of premises and equipment (2,374) (1,586) (844)
Proceeds from sales of premises and equipment 713 -- --
Increase in investment in Federal Home Loan Bank stock (1,503) (2,410) (586)
Acquisition of loans, investments and other assets (39,108) -- (155,724)
-------- ----- ---------
Net cash used by investing activities (166,177) (197,528) (264,620)
- ------------------------------------- ---------- --------- ---------
See accompanying notes to consolidated financial statements.
23
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Years Ended September 30,
(in thousands) 1996 1995 1994
---- ---- ----
Financing Activities:
Net increase (decrease) in passbook, NOW and
money market accounts (34,621) (55,609) 8,699
Net increase (decrease) in certificates of deposit 73,496 58,531 (38,836)
Assumption of deposits and liabilities of acquired banks 235,893 -- 275,986
Sale of deposits (168,506) -- --
Borrowings under Federal Home Loan Bank advances 546,238 195,875 53,275
Principal payments under Federal Home Loan Bank advances (412,380) (154,500) (37,000)
Net increase (decrease) in repurchase agreements and
other borrowed money (67,553) 74,873 7,065
Net decrease in advance payments by borrowers for
taxes and insurance (525) (24) (311)
Proceeds from exercise of stock options and dividends reinvested 1,122 873 1,052
Payment of fractional shares from stock dividend -- (8) --
Proceeds from common stock offerings -- 16,657 --
Cash dividends (4,132) (3,627) (2,355)
------- ------- -------
Net cash provided by financing activities 169,032 133,041 267,575
- ----------------------------------------- -------- ------- ------
Increase (decrease) in cash and cash equivalents (15,030) 38,655 2,694
Cash and cash equivalents at beginning of period 63,307 24,652 21,958
- ------------------------------------------------ ------ ------ ------
Cash and cash equivalents at end of period $48,277 $63,307 $24,652
======= ======= =======
Non-cash investing activities:
Transfer of investment securities to investment
securities available for sale $ -- $ 53,124 $ --
Transfer of mortgage backed securities to mortgage-backed
securities available for sale 90,858 18,529 --
Securitization of loans into mortgage-backed securities
available for sale 83 69,455 --
Securitization of loans into trading mortgage-backed securities 16,888 83,909 --
Securities purchased but not yet settled -- 20,216 --
Transfer of loans held for sale to portfolio 21,879 -- --
Transfer of loans to foreclosed real estate 4,322 2,223 3,130
====== ======= =====
Supplemental cash flow information:
Interest paid $55,982 $42,146 $29,159
Income taxes paid $14,448 $8,690 $6,078
See accompanying notes to consolidated financial statements.
</TABLE>
24
<PAGE>
Notes to Consolidated Financial Statements
[1] Accounting Policies
Principles of Consolidation
Eagle Financial Corp. (the "Holding Company") is the savings bank holding
company for Eagle Federal Savings Bank (the "Bank"), a federally chartered
savings bank (collectively known as the "Company"). The Bank is a member of the
Federal Home Loan Bank ("FHLB") of Boston and is principally subject to
supervision, examination and regulation by the Office of Thrift Supervision
("OTS"). The Bank is primarily engaged in the business of attracting deposits
and investing these deposits into loans secured by residential and commercial
real estate property, consumer loans and securities. Approximately 75% of the
Bank's deposits are insured up to applicable limits by Savings Association
Insurance Fund ("SAIF") with the remainder of the deposits insured by the Bank
Insurance Fund ("BIF"). Prior to January 1, 1993, the Holding Company had two
bank subsidiaries, Bristol Federal Savings Bank and First Federal Savings and
Loan Association of Torrington. Effective January 1, 1993, the two bank
subsidiaries were combined into one subsidiary, Eagle Federal Savings Bank. All
significant intercompany balances and transactions have been eliminated.
Basis of Financial Statement Presentation
The financial statements have been prepared in accordance with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to change in the near term
relate to the determination of the allowance for loan losses and the valuation
of real estate owned. In connection with the determination of the allowance for
loan losses and the valuation of real estate owned, management obtains
independent appraisals for significant properties.
While management uses available information to recognize losses on loans and
real estate owned, future additions to the allowance or write-downs may be
necessary based on changes in economic conditions, particularly in Connecticut.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the allowance for loan losses and value
of real estate owned. Such agencies may require the Company to recognize
additions to the allowance or write-downs based on their judgment of information
available to them at the time of their examination.
Investment and Mortgage-Backed Securities
As of October 1, 1994, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." SFAS No. 115 requires the classification of securities into
one of three categories: trading, available for sale, and held to maturity.
Securities for which management has the positive intent and ability to hold
until maturity are classified as held to maturity and are carried at cost,
adjusted for amortization of premiums and accretion of discounts over the
estimated terms of the securities utilizing a method, the result of which
approximates a level yield. Securities that management intends to hold for an
indefinite period of time are classified as available for sale and are carried
at fair value with unrealized gains or losses reported as a separate component
of shareholders' equity, net of income taxes. The underlying cost basis used in
determining the unrealized gains and losses on available for sale securities is
adjusted for amortization of premiums and accretion of discounts over the
estimated terms of the securities utilizing a method, the result of which
approximates a level yield. Included in securities available for sale are
securities created through the securitization of loans held in the Company's
loan portfolio. Securities classified as trading are carried at fair value with
unrealized gains and losses included in income. The Company had no securities
classified as trading as of September 30, 1996.
Prior to 1995, marketable equity securities and mutual funds were classified as
available for sale since they have no stated maturity and were carried at the
lower of aggregate cost or market value. A valuation allowance was established
and charged to shareholders' equity for the amount that the aggregate market
value of the available for sale securities portfolio was less than the book
value of the portfolio. Other securities were stated at cost, adjusted for
amortization of premiums and accretion of discounts over the estimated terms of
the securities utilizing a method, the result of which approximates a level
yield.
Upon adoption of SFAS No. 115, $71.7 million of investment and mortgage-backed
securities were classified as available for sale which resulted in the net
unrealized loss on these securities of $1.1 million, net of an income tax
benefit of $442,000, being shown as a reduction to shareholders' equity.
Gains or losses on the sale of investment and mortgage-backed securities are
computed by the specific identification method. Unrealized losses on investment
securities that are determined to be other than temporary are charged to income.
25
<PAGE>
Revenue Recognition
Interest on loans is accrued and credited to income based upon the principal
amount outstanding. The accrual of interest income is generally discontinued
when a loan becomes 90 days past due as to principal or interest or when, in the
opinion of management, full collection of principal or interest is unlikely.
When a loan is in nonaccrual status, interest income is recognized only to the
extent of cash received and when the full collection of principal is not in
doubt. Management may elect to continue the accrual of interest when the
estimated fair value of collateral is sufficient to cover the principal balance
and accrued interest.
Net premiums on loans purchased are recognized in interest income over the lives
of the loans using a method that approximates a level yield.
Loan origination fees and certain direct loan origination costs are deferred and
the net amount amortized as an adjustment to the related loan's yield using a
method the result of which approximates a level yield. The Company is generally
amortizing these amounts over the contractual life of the related loans.
Amortization of deferred amounts is suspended when a loan becomes nonaccrual and
does not begin again until the loan is returned to accrual status.
Loans Held for Sale
First mortgage loans held for sale in the secondary market are carried at the
lower of aggregate cost or market value. Management estimates the market value
of its portfolio held for sale based on outstanding investor commitments or
current investor yield requirements, whichever is more readily apparent.
Securitization of loans held for sale results in the classification of the
resultant securities as trading securities. In the unusual event it becomes
necessary, loans are transferred to portfolio at the lower of aggregate cost or
market value at the date of the transfer.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by
management to absorb probable losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio, past loan loss experience, current economic conditions, volume,
growth and composition of the loan portfolio, and other relevant factors. The
allowance for loan losses is increased through provisions for loan losses
charged against income. Loans are charged against the allowance when management
has concluded the collectibility of the loan principal is unlikely. Recoveries
of amounts previously charged off are credited to the allowance.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation
computed generally by the straight-line method over the estimated useful lives.
Amortization of leasehold improvements is computed on a straight-line basis over
the terms of related leases or the estimated useful lives, whichever is shorter.
Real Estate Owned
Real estate owned is composed of properties acquired through foreclosure
proceedings or by acceptance of a deed in lieu of foreclosure. At the time these
properties are foreclosed, they are recorded at the lower of cost or fair value
less selling costs through a direct charge against the allowance for loan
losses. Fair value is generally determined by recent appraisals. Losses in value
subsequent to foreclosure are recorded as a provision (charge) against income.
Gains and losses from the sale of real estate owned are recorded in income when
realized.
Goodwill and Identifiable Intangibles
Because of the earning power or other special values of certain acquired banks
or bank branches, the Company paid amounts in excess of fair value of core
deposits assumed and tangible assets purchased. Generally, such amounts are
being amortized by systematic charges to income over a period no greater than
the estimated remaining life of the assets acquired or not exceeding the
estimated average remaining life of the existing deposit base assumed (primarily
for periods from 6 to 15 years). On an ongoing basis, management assesses the
recoverability of the intangible assets. If an assessment of the intangible
asset indicates that its recoverability is impaired, a charge to the statement
of income is recorded for the amount of impairment.
Loan Servicing
Loan servicing fees earned from the servicing of loans for others are recorded
as income when received. Acquisition costs of purchased loan servicing rights
are amortized over the estimated period of servicing revenue. The purchased
servicing right is evaluated periodically for recoverability and should the
evaluation indicate that recoverability is impaired, a charge to the statement
of income is recorded for the amount of impairment. Amortization of loan
servicing rights is recorded as an offset to servicing income received on loans
sold, included in other income.
26
<PAGE>
Income Taxes
The Company files consolidated state and federal income tax returns.
In February 1992, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 109, "Accounting for Income Taxes." SFAS No. 109 required 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 of SFAS No.
109, 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 rates is
recognized in income in the period that includes the enactment date. The Company
adopted SFAS No. 109 on October 1, 1993 and has reported the benefit of the
cumulative effect of $1,273,000 in the statement of income for the year ended
September 30, 1994.
Cash Flows
Cash and cash equivalents include cash and amounts due from depository
institutions and interest-bearing deposits.
Net Income Per Share
Net income per share is computed by dividing net income by the weighted-average
common shares and common stock equivalents, if dilutive, outstanding during the
year based on the treasury stock method. Weighted average common shares
outstanding used to calculate primary earnings per share were 4,671,482,
4,560,104 and 3,551,488 in 1996, 1995 and 1994, respectively. Weighted average
common shares outstanding used to calculate fully diluted earnings per share
were 4,720,240, 4,614,057 and 3,575,733 in 1996, 1995 and 1994, respectively.
All share data for all periods prior to September 30, 1995 have been adjusted
retroactively to give effect to a 10% stock dividend to common shareholders of
record on February 15, 1995.
Reclassification
Certain 1995 and 1994 amounts have been reclassified to conform to the 1996
presentation for comparative purposes. Such reclassifications had no effect on
net income.
[2] Acquisitions and Divestitures
On January 19, 1996, the Bank completed the acquisition and assumption of five
branch offices, related deposits and certain other assets and liabilities from
Fleet Bank, N.A. and Shawmut Bank Connecticut, N.A. (the "Fleet/Shawmut
transaction"). The following assets and liabilities resulting from the
transaction were recorded using the purchase method at fair value:
(in thousands)
Cash and amounts due from banks $196,785
Loans 35,720
Goodwill 19,914
Other assets, including premises and equipment 1,681
--------
Total $254,100
========
Deposits $253,139
Other liabilities 961
--------
Total $254,100
========
The operating results of this acquisition are included in the Company's
statement of income from the date of acquisition.
27
<PAGE>
On June 10, 1994, Eagle Federal acquired certain assets and assumed all insured
deposits of The Bank of Hartford from the Federal Deposit Insurance Corporation
("FDIC"). The acquisition has been accounted for by the purchase method of
accounting and, accordingly, the assets acquired and liabilities assumed were
recorded based on estimated fair values at the date of acquisition. The
estimated fair value of assets acquired and liabilities assumed at the date of
acquisition are summarized as follows:
(in thousands)
Cash and due from banks $4,933
Interest-bearing deposits 25,503
Investment and mortgage-backed securities 72,667
Loans 80,776
Allowance for loan losses (3,500)
Other assets 2,330
Core deposit and other intangibles 11,276
Deposits (272,752)
Other liabilities (3,234)
-------
Cash received from FDIC $82,001
=======
The operating results of this acquisition are included in the Company's
statement of income from the date of acquisition.
In connection with the acquisition, the Company completed a common stock
offering which resulted in the sale of 862,310 shares at a price of $20.75 in
November 1994. Net proceeds to the Company were approximately $16.7 million
after deducting the underwriting discount and offering expenses. Substantially
all of the net proceeds received were contributed to the Bank as additional
capital.
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. The Bank received a premium on the
deposits of 9% that resulted in a gain of $15.9 million. Also included were
loans receivable of $999,000 and premises and equipment of $713,000.
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 during the Fleet/Shawmut transaction. All accounts
related to the closed branches were transferred to the newly acquired branches.
[3] Restrictions on Cash and Amounts Due from Depository Institutions
The Company was required to maintain certain average reserve balances as
established by the Federal Reserve Bank. The actual average reserve balance for
the period that includes September 30, 1996 was $1,727,000.
[4] Investment Securities
The aggregate carrying amounts and market values of investment securities are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
September 30, 1996
Investment securities held to maturity:
Corporate and other securities $987 $49 $ -- $1,036
==== === === ======
Investment securities available for sale:
U.S. Treasury securities $5,014 $-- $ 54 $4,960
U.S. Government agency obligations 7,000 17 5 7,012
Corporate and other securities 1,444 37 -- 1,481
----- -- -- -----
Total $13,458 $54 $59 $13,453
======= === === =======
September 30, 1995
Investment securities held to maturity:
U.S. Government agency obligations $1,500 $2 $ -- $1,502
Corporate and other securities 976 65 -- 1,041
------ -- --- -----
Total $2,476 $67 $ -- $2,543
====== === ======== ======
Investment securities available for sale:
U.S. Treasury securities $6,303 $22 $ -- $6,325
U.S. Government agency obligations 20,478 28 5 20,501
Corporate and other securities 12,296 31 302 12,025
Mutual funds 15,309 -- 344 14,965
------ -- --- ------
Total $54,386 $81 $651 $53,816
======= === ==== =======
</TABLE>
28
<PAGE>
The amortized cost and market value of debt securities at September 30, 1996, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
---------------- ------------------
Amortized Market Amortized Market
(in thousands) Cost Value Cost Value
- -------------- ---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ -- $-- $ -- $ --
Due after one year through five years -- -- 13,078 13,071
Due after five years through ten years 902 951 72 74
Due after ten years 85 85 308 308
---- ----- ------ ------
Total $987 $1,036 $13,458 $13,453
==== ====== ====== ======
</TABLE>
Proceeds from sales of investment securities available for sale were
$25,593,000, $2,210,000 and $2,800,000 in 1996, 1995 and 1994, respectively.
Gross realized gains on sales of investment securities available for sale were
$9,000, $89,000 and $0 in 1996, 1995 and 1994, respectively. Gross realized
losses on investment securities available for sale were $664,000, $194,000 and
$0 in 1996, 1995 and 1994, respectively.
Investment securities with a book value of $3,735,000 and $1,319,000 were
pledged as collateral to secure public deposits at September 30, 1996 and 1995,
respectively.
As required by the Federal Home Loan Bank, the Bank must hold FHLB stock equal
to at least 5% of outstanding advances. As of September 30, 1996 and 1995, the
Bank was in compliance with the Federal Home Loan Bank stock requirement.
[5] Mortgage-backed Securities
The aggregate carrying amounts and market values of mortgage-backed securities
are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
September 30, 1996
Held to maturity:
GNMA $12,797 $ -- $306 $12,491
Collateralized mortgage obligations 65,305 729 552 65,482
------ --- --- ------
Total $78,102 $729 $858 $77,973
======= ==== ==== =======
Available for sale:
FHLMC $105,275 $878 $498 $105,655
FNMA 77,639 255 460 77,434
GNMA 30,282 18 679 29,621
Other 2,065 39 -- 2,104
Collateralized mortgage obligations 159,749 197 2,742 157,204
-------- -------- ------- -------
Total $375,010 $1,387 $4,379 $372,018
======== ====== ====== ========
September 30, 1995
Held to maturity:
FHLMC $ 70,878 $1,655 $ -- $72,533
FNMA 11,750 103 56 11,797
GNMA 388 31 -- 419
Collateralized mortgage obligations 40,609 325 920 40,014
------- --- --- ------
Total $123,625 $2,114 $ 976 $124,763
======== ====== ===== ========
Available for sale:
FHLMC $147,281 $1,513 $ 310 $148,484
FNMA 61,233 250 402 61,081
GNMA 7,034 27 -- 7,061
Other 2,672 32 -- 2,704
Collateralized mortgage obligations 12,925 -- 95 12,830
-------- -- -- --------
Total $231,145 $1,822 $ 807 $232,160
======== ====== ===== ========
</TABLE>
29
<PAGE>
Mortgage-backed securities primarily include participation certificates issued
by the Government National Mortgage Association ("GNMA"), the Federal Home Loan
Mortgage Corporation ("FHLMC") and the Federal National Mortgage Association
("FNMA"), and collateralized mortgage obligations.
Proceeds from sales of mortgage-backed securities classified available for sale
were $155,566,000 and $11,164,000 in 1996 and 1995, respectively. Gross realized
gains on sales of mortgage-backed securities available for sale were $1,190,000
and $309,000 in 1996 and 1995, respectively. Gross realized losses on sales of
mortgage-backed securities available for sale were $1,062,000 and $152,000 in
1996 and 1995, respectively. There were no sales of mortgage-backed securities
during 1994.
Proceeds from sales of mortgage-backed securities classified as trading were
$16,952,000 and $83,909,000 in 1996 and 1995, respectively. Gross realized gains
were $71,000 and gross realized losses were $7,000 in 1996 on sales of
mortgage-backed securities classified as trading. There were no realized gains
or losses in 1995. These securities were created from securitized loans that had
been classified as held for sale prior to securitization.
During 1995, the Company sold a mortgage-backed security classified as held to
maturity resulting in proceeds of $4.0 million and a realized loss of $10,000.
The security was sold due to the discovery of a broker error in identifying the
security's repricing characteristics when purchased. The security's actual
repricing characteristics did not match the asset/liability parameters outlined
by the Company and, as a result, the security was repurchased by the broker.
In November 1995, the Financial Accounting Standards Board ("FASB") issued
"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 $90.9 million
of mortgage-backed securities were reclassified resulting in an unrealized gain
of approximately $1.3 million, net of income tax expense of $882,000, being
recorded as an increase to shareholders' equity.
30
<PAGE>
[6] Loans
Loans consisted of the following:
September 30,
(in thousands) 1996 1995
---- ----
Real estate mortgage loans:
Residential - One-to-four family $ 666,815 $ 604,064
Residential - Multi-family 15,471 16,694
Residential - Construction 14,413 12,014
Commercial real estate 39,510 15,025
Land 8,555 6,804
--------- ---------
744,764 654,601
--------- ---------
Other loans:
Home equity lines of credit 38,375 37,018
Second mortgages 27,526 21,750
Commercial 6,863 883
Consumer 7,182 7,731
--------- ---------
79,946 67,382
--------- ---------
Unearned discounts and premiums (350) 137
Deferred loan origination fees (1,280) (1,118)
Allowance for loan losses (8,592) (7,457)
--------- ---------
Total $ 814,488 $ 713,545
========= =========
During 1996, the Company began an ongoing program to identify and sell newly
originated mortgage loans into the secondary market. This program resulted in
the sale or securitization and subsequent sale of approximately $35.6 million of
mortgage loans during 1996 with a resulting loss of approximately $1.5 million.
The Company also transferred approximately $21.9 million of fixed rate mortgage
loans from held for sale to portfolio at estimated market value at the date of
transfer. The loans were transferred at a discount of approximately $610,000.
The transfer was primarily due to the determination that the loans, after
initial classification as held for sale, were not underwritten to secondary
market standards.
In fiscal 1995, the Company securitized approximately $154.2 million of 30 year
fixed rate loans into FHLMC mortgage-backed securities. Of the total
securitized, $83.9 million were sold immediately upon securitization under a
forward commitment. This transaction resulted in a gain of approximately
$244,000 recorded in income. The securitization was completed in order to
improve the asset/liability position of the Bank by replacing the fixed rate
loans with adjustable rate mortgage-backed securities.
The Company sold $10 million of 30-year fixed rate loans to the FHLMC in fiscal
1994. This transaction resulted in a gain of approximately $120,000.
At September 30, 1996, 1995 and 1994, loans serviced for the benefit of others
approximated $242.6 million, $234.8 million and $95.1 million, respectively.
Changes in the allowance for loan losses were as follows:
Years Ended September 30,
(in thousands) 1996 1995 1994
---- ---- ----
Balance at beginning of year $ 7,457 $ 8,311 $ 5,005
Charge-offs (2,863) (2,476) (1,506)
Recoveries 86 122 112
Provision for loan losses 2,041 1,500 1,200
Allowance associated with purchase 1,871 -- 3,500
------- ------- -------
Balance at end of year $ 8,592 $ 7,457 $ 8,311
======= ======= =======
31
<PAGE>
Non-performing loans approximated $9.3 million and $11.1 million as of September
30, 1996 and 1995, respectively. If these loans had been current, in accordance
with their original terms, additional interest income would have been recorded
in the amounts of $601,000, $577,000 and $503,000 for 1996, 1995 and 1994,
respectively.
As of October 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS 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 collectibility of both
contractual interest and 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. Large groups of small-balance homogenous loans
that are collectively evaluated for impairment such as residential and consumer
loans can be excluded from evaluation as impaired loans. The adoption of these
statements had no impact on the results of operations.
At September 30, 1996, the Company had $6.8 million of impaired loans, of which
$6.2 million had an impairment reserve of $407,000 attributed to them. The
remaining $600,000 of impaired loans did not have an impairment reserve
attributed to them. The average balance of impaired loans was $5.4 million for
the year ended September 30, 1996. The impairment reserve represents an
allocation from the existing allowance for loan losses.
The Company'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 $249,800 for the year ended
September 30, 1996.
At September 30, 1996, the Company had $4.0 million of restructured loans
outstanding. The entire amount of the restructured loans are performing and are
included in the reported amount of impaired loans of $6.8 million.
[7] Loans to Related Parties
The Company has granted loans to officers and directors of the Company and to
their associates. Related party loans are made on substantially the same terms
as those prevailing at the time for comparable transactions with unrelated
persons, except that prior to fiscal year 1991 officers and directors were
granted a 1% discount on the interest rate for mortgage and property improvement
loans. Management believes that these loans do not involve more than normal risk
of collectibility.
The aggregate dollar amount of loans to officers and directors (exclusive of
loans to any such persons which in the aggregate did not exceed $60,000 during
the year) and the activity therein was as follows:
Years Ended September 30,
(in thousands) 1996 1995
---- ----
Balance at beginning of year $ 6,265 $ 5,810
New loans 10 1,417
Repayments (469) (962)
Other changes (590) --
------- -------
Balance at end of year $ 5,216 $ 6,265
======= =======
Other changes represent sales of loans to the secondary market, $310,000, and
the resignation of an officer from the Bank, $280,000.
[8] Real Estate Owned
Real estate owned consisted of the following:
September 30,
(in thousands) 1996 1995
---- ----
Properties acquired through foreclosure $3,109 $2,617
Valuation allowance (59) (178)
---- -----
Total $3,050 $2,439
====== ======
The following summarizes the activity in the valuation allowance for real estate
owned:
Years Ended September 30,
(in thousands) 1996 1995 1994
---- ---- ----
Balance at beginning of year $ 178 $ 465 $ 35
Charge-offs (538) (620) (245)
Provisions for losses 419 333 675
----- ----- -----
Balance at end of year $ 59 $ 178 $ 465
===== ===== =====
32
<PAGE>
The net cost of real estate owned operations was as follows:
Years Ended September 30,
(in thousands) 1996 1995 1994
- -------------- ---- ---- ----
Net loss (gain) from sales $ (259) $ (125) $ 18
Provisions for losses 419 333 675
Expenses of holding real estate
owned, net of rental income 1,030 536 667
------- ------- -------
Total $ 1,190 $ 744 $ 1,360
======= ======= =======
[9] Premises and Equipment
The following is a summary of premises and equipment:
September 30,
(in thousands) 1996 1995
---- ----
Land $ 609 $ 690
Premises and leasehold improvements 8,021 6,939
Furniture, fixtures and equipment 6,639 5,835
-------- --------
15,269 13,464
Less accumulated depreciation and amortization (5,473) (5,398)
------ ------
Total $ 9,796 $ 8,066
====== ======
The Company leases office space and several branch office sites under operating
lease arrangements. Certain of the lease arrangements provide for renewal
options and rent escalation clauses. Rental expense for leased facilities
included in operating expenses was approximately $604,000, $446,000 and $470,000
for 1996, 1995 and 1994, respectively.
In 1992, Bristol Federal Savings Bank entered into two lease agreements for
office space and a branch site with a director-related corporation. The leases
were for an initial term of five years and seven years, respectively, and have
renewal options which extend for an additional five years. Total lease expense
for the office space and branch site was $75,200, $71,700 and $69,017 for 1996,
1995 and 1994, respectively.
The future minimum rental commitments for the leased facilities as of September
30, 1996 were as follows:
(in thousands)
1997 $792
1998 627
1999 438
2000 254
2001 223
thereafter 532
---
Total $2,866
======
[10] Prepaid Expenses and Other Assets
A summary of prepaid expenses and other assets follows:
September 30,
(in thousands) 1996 1995
---- ----
Core deposit intangibles $ 1,460 $ 2,527
Goodwill 25,530 7,342
Mortgage servicing rights 592 716
Deferred tax assets, net 2,636 3,451
Income tax receivable 7,595 --
Other assets 4,783 3,924
------- -------
Total $42,596 $17,960
======= =======
Goodwill increased significantly in 1996 reflecting the Fleet/Shawmut branch
acquisition.
A summary of the activity of mortgage servicing rights was as follows:
Years Ended September 30,
(in thousands) 1996 1995 1994
---- ---- ----
Balance at beginning of year $ 716 $ 839 $ --
Servicing from acquired bank -- -- 880
Amortization (124) (123) (41)
----- ----- -----
Balance at end of year $ 592 $ 716 $ 839
===== ===== =====
33
<PAGE>
The following table shows activity in goodwill and core deposit intangibles:
Total Goodwill
Core Deposit & Core Deposit Accumulated
(in thousands) Goodwill Intangibles Intangibles Amortization
- -------------- -------- ----------- ----------- ------------
Balance at September 30, 1993 $ -- $1,861 $ 1,861 $ 788
Intangible assets recorded 7,995 2,402 10,397
Amortization of intangibles (161) (586) (747) 747
-------- -------- -------- --------
Balance at September 30, 1994 7,834 3,677 11,511 1,535
Amortization of intangibles (492) (922) (1,414) 1,414
Other adjustments -- (228) (228)
-------- -------- -------- --------
Balance at September 30, 1995 7,342 2,527 9,869 2,949
Intangible assets recorded 19,914 -- 19,914
Write-off due to branch sale -- (517) (517)
Amortization of intangibles (1,726) (550) (2,276) 2,276
-------- -------- -------- --------
Balance at September 30, 1996 $ 25,530 $ 1,460 $ 26,990 $ 5,225
======== ======== ======== ========
Other adjustments represent the realization of tax benefits due to changes in
tax law related to amortization of intangibles.
<TABLE>
<CAPTION>
[11] Deposits
Deposit balances consisted of the following:
September 30,
(in thousands) 1996 1995
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Non-interest bearing $ 30,260 --% $ 27,913 --%
Passbook account 144,728 2.00 143,271 1.99
NOW accounts 90,758 0.98 80,625 1.04
Money market accounts 94,510 2.78 104,428 2.71
---------- ---- ---------- ----
360,256 1.78 356,237 1.83
---------- ---- ---------- ----
Certificate accounts with
original maturities of:
Six months or less 83,514 4.59 57,383 4.64
Over six months to one year 289,815 5.14 178,098 5.69
Over one year to two years 98,986 5.55 145,895 5.57
Over two years 226,784 6.05 214,138 6.09
---------- ---- ---------- ----
699,099 5.43 595,514 5.70
---------- ---- ---------- ----
Total $1,059,355 4.19% $ 951,751 4.25%
========== ==== ========== ====
</TABLE>
The interest rates in effect as of September 30, 1996 were 2.00% for passbook
accounts, 0.50% for NOW accounts, 2.50% for money market accounts and ranged
from 2.96% for a one month certificate account to 5.84% for a four year
certificate account.
Interest on deposits is summarized as follows:
Years Ended September 30,
(in thousands) 1996 1995 1994
- -------------- ---- ---- ----
Passbook accounts $ 2,989 $ 2,992 $ 2,966
NOW accounts 802 719 777
Money market accounts 2,766 3,313 3,929
Certificate accounts 37,699 29,425 19,976
------- ------- -------
Total $44,256 $36,449 $27,648
======= ======= =======
Interest forfeitures resulting from early withdrawals from certificate accounts
are credited to interest on deposits. Interest forfeitures reducing the cost of
interest on deposits amounted to $145,000, $198,000 and $95,000 for 1996, 1995
and 1994, respectively.
The total amount of time deposit accounts of $100,000 or more was $63.3 million
at September 30, 1996.
34
<PAGE>
The following table sets forth the maturities of time deposit accounts at
September 30, 1996:
(in thousands) Amount
------
Under one year $477,260
Between one year and two years 102,261
Between two years and three years 59,160
Between three years and four years 44,943
Between four years and five years 13,211
More than five years 2,264
-----
Total $699,099
[12] Federal Home Loan Bank Advances, Repurchase Agreements and Other Borrowed
Money
FHLB advances consisted of the following:
September 30,
(in thousands) 1996 1995
---- ----
Interest Interest
Balance Rate Balance Rate
-------- ----- ------- -----
Short-term advances $ 97,235 5.54% $46,650 5.97%
-------- ----- ------- -----
Long-term advances:
Due 1996 -- -- 7,000 4.89
Due 1997 21,500 5.64 6,000 6.30
Due 1998 46,200 5.57 8,000 6.06
Due 1999 17,427 5.65 2,000 6.10
Due 2000 8,500 5.98 1,000 6.48
Due 2001 4,550 6.76 2,500 7.38
Due 2003 4,762 6.14 -- --
Due 2006 3,881 6.31 -- --
Due 2011 2,953 6.60 -- --
-------- ----- ------- ----
109,773 5.75 26,500 5.94
-------- ---- -------- ----
Total $207,008 5.65% $ 73,150 5.96%
======== ==== ======== ====
Repurchase agreements and other borrowed money consisted of the following:
September 30,
(in thousands) 1996 1995
---- ----
Interest Interest
Balance Rate Balance Rate
------- -------- ------- --------
Repurchase agreements,
due within one year $14,670 5.22% $82,223 5.89%
Employee Stock Ownership
Plan debt -- -- 94 8.68
------- ---- ------- ----
Total $14,670 5.22% $82,317 5.89%
======= ==== ======= ====
The entire amount of repurchase agreements at September 30, 1996 of $14,670,000
represents agreements to repurchase the same securities. The securities
collateralizing the repurchase agreements, which are being held by the
counterparty to the agreement, consisted of the following:
Amortized Accrued Market
(in thousands) Cost Interest Value
---- -------- -----
FHLMC mortgage-backed securities $ 1,661 $ 21 $ 1,677
FNMA mortgage-backed securities 11,693 76 11,715
U.S. Treasury notes 2,682 35 2,654
------- ------- -------
Total $16,036 $ 132 $16,046
======= ======= =======
35
<PAGE>
The following table summarizes information regarding short-term borrowings:
Years Ended September 30,
(in thousands) 1996 1995 1994
---- ---- ----
Short-term FHLB advances:
Maximum amount outstanding at any month-end $98,255 $63,665 $10,650
Average amount outstanding 72,049 35,343 3,900
Weighted average interest rate 5.60% 5.83% 5.26%
Repurchase agreements:
Maximum amount outstanding at any month-end $85,200 $84,200 $13,300
Average amount outstanding 52,300 44,500 2,446
Weighted average interest rate 5.88% 6.26% 4.16%
In accordance with an agreement with the FHLB of Boston, the Bank is required to
maintain qualified collateral, as defined in the FHLB of Boston Statement of
Credit Policy, free and clear of liens, pledges and encumbrances, as collateral
for the advances. The FHLB of Boston Statement of Credit Policy grants members
the ability to borrow up to the value of the member's qualified collateral that
has not been pledged to outside sources. Members whose total indebtedness,
including borrowings from outside sources, exceeds 30% of assets are required to
list and segregate collateral in a sufficient amount to cover the amount of
advances outstanding. Advances are secured by the Bank's investment in FHLB
stock and a blanket security agreement. The Bank has a capacity to borrow an
additional $481 million in advances from the FHLB of Boston as of September 30,
1996. The Bank has a preapproved line of credit up to 2% of total assets.
In connection with its purchase of the Company's common stock during 1987, the
Employee Stock Ownership Plan ( "ESOP") borrowed $1,163,000 under a term note
maturing in 1997 with interest due quarterly at 82.5% of the lender's floating
prime rate. In 1991, the ESOP borrowed $759,000 to purchase additional shares of
the Company's common stock under a term note maturing in 1997 with interest due
quarterly at the lender's floating prime rate plus .25%. The Company reflects
the ESOP debt as borrowed money and as a reduction of shareholders' equity.
During 1996, the Company repaid all amounts due under the aforementioned
borrowings.
[13] Income Taxes
As discussed in note 1, the Company has adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" as of October 1,
1993. The cumulative effect of this change in accounting for income taxes was a
benefit of $1,273,000 and is a component of the amount shown as the cumulative
effect of accounting changes in the statement of income for fiscal 1994.
Charges for income taxes in the Consolidated Statements of Income comprised the
following:
Years Ended September 30,
(in thousands) 1996 1995 1994
---- ---- ----
Current:
Federal $5,554 $5,540 $4,968
State 1,561 1,831 1,708
----- ----- -----
7,115 7,371 6,676
----- ----- -----
Deferred:
Federal 1,666 212 (998)
State 558 104 (325)
--- --- -----
2,224 316 (1,323)
----- --- -------
Total:
Federal 7,220 5,752 3,970
State 2,119 1,935 1,383
----- ----- -----
$9,339 $7,687 $5,353
====== ====== ======
The actual income tax expense for 1996, 1995 and 1994 differs from the
"expected" income tax expense for those years (computed by applying the U.S.
federal statutory corporate tax rate of 35%) as follows:
Years Ended September 30,
(in thousands) 1996 1995 1994
---- ---- ----
Expected income tax on income before income taxes $8,042 $6,531 $4,532
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal income tax benefit 1,377 1,258 898
Other, net (80) (102) (77)
----- ----- ----
Total $9,339 $7,687 $5,353
------ ------ ------
36
<PAGE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
September 30,
(in thousands) 1996 1995
---- ----
Deferred tax assets:
Deferred loan fees $ -- $ 462
Post-retirement benefits 1,484 1,006
Deferred compensation 239 428
Loans receivable, principally due to allowance for
loan losses 2,368 2,738
Intangibles 406 700
Unrealized loss on securities available for sale 1,228 --
Other miscellaneous 320 466
------- -------
Total gross deferred assets 6,045 5,800
------- -------
Deferred tax liabilities:
Premises and equipment, principally due to differences
in depreciation (1,155) (1,156)
Tax discount on acquired loans (1,698) (1,013)
Deferred loan fees (556) --
Unrealized gain on securities available for sale -- (180)
------- -------
Total gross deferred tax liabilities (3,409) (2,349)
------- -------
Net deferred tax asset $ 2,636 $ 3,451
======= =======
The valuation allowance for deferred tax assets as of September 30, 1996 and
1995 was $0. There was no change in the valuation allowance during the years
ended September 30, 1996 and 1995.
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 gross deferred tax assets.
The Company has not provided deferred income taxes for the Bank's tax return
reserve for bad debts that arose in tax years beginning before September 30,
1988 because it is not expected that this difference will reverse in the
foreseeable future. The cumulative net amount of temporary differences related
to the reserve for bad debts for which deferred taxes have not been provided was
approximately $8.9 million at September 30, 1996. If the Company does not meet
the remaining income tax requirements of IRC section 593, as amended by The
Small Business Job Protection Act of 1996, the Bank could incur a tax liability
for the previously deducted tax return loan losses 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 September 30,
1996.
37
<PAGE>
[14] Stock Option Plans
At September 30, 1996, 1995 and 1994, 683,991, 733,171 and 300,587 shares,
respectively, were reserved for issuance in connection with incentive and
non-incentive stock option plans for the benefit of directors, officers and
other full-time employees.
Under the Company's stock option plans, options have been granted for terms up
to ten years at not less than the fair value of the shares at the dates of grant
and are exercisable at date of grant.
Shares under Option price
stock option plan per share
------------ --------------
Outstanding and exercisable at September 30, 1991 270,656 $6.36 -- 10.46
Exercised (37,721) 6.36 -- 10.13
Granted 69,326 10.13 -- 15.38
-------- --------------
Outstanding and exercisable at September 30, 1992 302,261 6.36 -- 15.38
Stock dividend 30,226
Exercised (79,483) 5.78 -- 13.98
Granted 41,953 15.34 -- 18.18
Canceled (10)
-------- --------------
Outstanding and exercisable at September 30, 1993 294,947 5.78 -- 18.18
Exercised (48,226) 5.78 -- 15.34
Granted 46,750 19.375-- 23.00
-------- --------------
Outstanding and exercisable at September 30, 1994 293,471 5.78 -- 23.00
Stock dividend 29,347
Exercised (37,473) 5.25 -- 8.41
Granted 162,800 18.18
-------- --------------
Outstanding and exercisable at September 30, 1995 448,145 5.25 -- 20.91
Exercised (49,180) 5.25 -- 18.41
-------- --------------
Outstanding and exercisable at September 30, 1996 398,965 $5.25 -- 20.91
======== ==============
At September 30, 1996, 40,600 options were outstanding but not yet exercisable
at option prices from $23.00 to $25.75. The options become exercisable as
follows: 2,000 in fiscal 1997, 2,000 in fiscal 1998, 4,200 in fiscal 1999, 2,200
in fiscal 2000 and 30,200 in fiscal 2001.
38
<PAGE>
[15] Restriction on Subsidiary Dividends
The Company's ability to pay dividends to shareholders is substantially
dependent on funds received from the Bank. Regulations governing the payment of
dividends by savings institutions, as set forth by the OTS, establish three
tiers of institutions for purposes of determining the level of dividends that
can be paid. Under these rules, the Bank is able to pay dividends in an amount
equal to one-half of their surplus capital at the beginning of the year plus all
net income for the calendar year. The OTS regulations permit the OTS to prohibit
capital distributions in certain circumstances.
[16] Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's consolidated financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total capital (as defined in the regulations) to risk-weighted assets
(as defined), and tangible and core capital (as defined) to tangible assets (as
defined). Management believes that as of September 30, 1996, the Bank meets all
capital adequacy requirements to which it is subject.
As of September 30, 1996, the most recent notification from the OTS categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Bank must maintain
minimum risk-based, tangible and core capital ratios as set forth in the table.
There are no conditions or events since that notification that management
believes have changed the institution's category.
The Bank's actual capital amounts and ratios are presented in the following
table in addition to the minimum capital requirements and well-capitalized
capital requirements.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
(in thousands) Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1996:
Tangible capital requirement $74,566 5.42% greater than $20,641 greater than 1.5% greater than $68,805 greater than 5.0%
Core capital requirement 74,566 5.42 greater than 41,283 greater than 3.0 greater than 68,805 greater than 5.0
Risk-based capital requirement 81,953 13.89 greater than 47,186 greater than 8.0 greater than 58,982 greater than 10.0
As of September 30, 1995:
Tangible capital requirement $80,751 6.59% greater than $18,385 greater than 1.5% greater than $61,285 greater than 5.0%
Core capital requirement 80,751 6.59 greater than 36,787 greater than 3.0 greater than 61,285 greater than 5.0
Risk-based capital requirement 86,196 15.31 greater than 44,743 greater than 8.0 greater than 55,928 greater than 10.0
</TABLE>
[17] Employee Benefit Plans
The Bank maintains a noncontributory trustee defined benefit pension plan
through the Financial Institutions Retirement Fund (the "Fund") covering all
eligible employees. The plan is part of a multi-employer plan in which details
as to the Bank's relative positions are not readily determinable. Therefore,
information relating to the value of vested and nonvested accumulated plan
benefits and assumed rates of return used in determining such values is not
disclosed. Employer contributions to the Fund in 1996, 1995 and 1994 were
$396,000, $123,000 and $394,000, respectively, and these amounts are expensed to
operations in the year contributed. The 1995 contribution amount is net of a
one-time credit received from the Fund of $221,000.
39
<PAGE>
The Company sponsors an ESOP that covers substantially all full-time employees.
The Company makes annual contributions to the ESOP equal to the ESOP's debt
service. The Company may, from time to time, also contribute funds that allow
for the purchase of shares by the ESOP on the open market. All dividends
received by the ESOP are allocated to employees' accounts. The ESOP shares were
initially pledged as collateral against the debt. As the debt is repaid, shares
are released from collateral and allocated to active employees, based on the
proportion of debt service paid during the year. Accordingly, the debt of the
ESOP is recorded as debt and the shares pledged as collateral are reported as a
reduction of shareholders' equity in the consolidated balance sheets. The ESOP
shares were as follows:
September 30,
1996 1995
---- ----
Allocated shares 229,564 194,734
Shares released for allocation 19,993 35,369
Unreleased shares -- 7,509
------- -------
Total ESOP shares 249,557 237,612
======= =======
A summary of the components of ESOP contribution expense by the Company for
1996, 1995 and 1994 is as follows:
(in thousands) 1996 1995 1994
---- ---- ----
Principal component $ 94 $373 $285
Interest component 10 31 42
Purchase of shares on open market 309 -- --
---- ---- ----
Total contribution expense $413 $404 $327
==== ==== ====
Effective in the first quarter of fiscal 1995, the Bank established an employee
savings plan under Section 401(k) of the Internal Revenue Code. Under the
savings plan, the Bank will match $0.25 for every $1.00 of the employee's
contribution which is not in excess of 4% of the employee's total compensation.
The Bank recorded an expense related to the savings plan in the amount of
$94,000 and $41,000 for the years ended September 30, 1996 and 1995,
respectively. Included in the 1996 expense is an additional match of $0.25 for
every $1.00 of the amount contributed by employees in 1995.
Included in the fiscal 1994 results of operations is a one-time pre-tax charge
of $740,000 related to the retirement of two senior officers.
[18] Other Postretirement Benefit Plans
In addition to the Company's defined benefit pension plan, Eagle provides
medical and dental insurance programs to its retirees. The retiree programs are
first available at age 60 with 25 years of service or at age 65 with 10 years of
service. All covered retirees are required to contribute to the cost of their
coverage and the provisions may be changed at the discretion of the Company.
In fiscal 1994, the Company adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and elected the immediate
recognition of the transition obligation. Upon adoption, the Company recognized
the accumulated postretirement benefit obligation of $2,194,000 which, net of an
income tax benefit of $891,000, decreased 1994 net income by $1,303,000 and is a
component of the amount shown as the cumulative effect of accounting changes in
the consolidated statement of income.
The following table sets forth the plans' funded status and amounts recognized
in the Company's consolidated balance sheets:
<TABLE>
<CAPTION>
September 30,
(in thousands) 1996 1995
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ (988) $ (967)
Fully eligible active plan participants (103) (315)
Other active plan participants (222) (309)
------- -------
Accumulated postretirement benefit obligation (1,313) (1,591)
Plan assets at fair value -- --
------- -------
Accumulated postretirement benefit obligation in excess of
plan assets (1,313) (1,591)
Unrecognized prior service cost (374) (615)
Unrecognized net loss (349) (124)
------- -------
Net postretirement benefit liability included in other liabilities $(2,036) $(2,330)
======== ========
</TABLE>
40
<PAGE>
Assumptions used in determining the actuarial present value of the
postretirement benefit obligation are as follows:
Years Ended September 30,
1996 1995 1994
---- ---- ----
Discount rate 7.75% 7.5% 8%
Rate of increase on health care costs
Initial 9% 10% 13%
Ultimate 5% 6% 6%
==== ==== ===-
The resulting net periodic postretirement benefit expense consisted of the
following components:
Years Ended September 30,
(in thousands) 1996 1995 1994
----- ----- -----
Service cost--
benefits earned during the period $ 33 $ 32 $ 56
Interest cost on accumulated
postretirement benefit obligation 119 115 118
Actual return on plan assets -- -- --
Net amortization (43) (45) (32)
----- ----- -----
Net postretirement benefit expense $ 109 $ 102 $ 142
===== ===== =====
The weighted-average annual assumed rate of increase in the per capita cost of
covered benefits is 9% for 1996 and is assumed to decrease by 1% annually to 5%
in 2001 and remain at that level thereafter. This health care cost trend rate
assumption has a significant effect on the amounts reported. To illustrate,
increasing the assumed health care cost trend rates by one percentage point in
each year would increase the accumulated postretirement benefit obligation as of
September 30, 1996 by 9%, and the aggregate of the service and interest cost
components of net periodic postretirement benefit costs for 1996 by 9%.
[19] Commitments and Contingencies
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These instruments expose the Company to credit risk in excess of the amount
recognized in the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Company uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments. Total credit exposure related to these
items is summarized below:
September 30,
(in thousands) 1996 1995
------- -------
Loan commitments:
Approved loan commitments $20,252 $15,821
Commitments to sell loans 1,843 --
Unadvanced portion of construction loans 9,501 10,048
Unadvanced portion of home equity lines of credit 31,926 23,523
Unadvanced portion of commercial lines of credit 5,240 33
Loan commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract. Loan
commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Company upon extension of credit is based on
management's credit evaluation of the counterparty. Collateral held is primarily
residential property. Interest rates on approved loan commitments and lines of
credit are a combination of fixed and variable. Interest rates on unadvanced
portions of construction loans are adjustable rates which generally mature
within nine to twelve months.
Commitments outstanding at September 30, 1996 consist of adjustable and fixed
rate loans of $13,629,000 and $4,856,000, respectively, at rates ranging from 5%
to 10.25%. An additional $1,767,000 of commitments outstanding are represented
by loans whose interest rates will be determined at a future date at the
discretion of the borrower. Commitments outstanding at September 30, 1995
consist of adjustable and fixed rate loans of $7,281,000 and $8,540,000,
respectively, at rates ranging from 5.75% to 9.00%. Commitments to originate
loans generally expire within 60 days.
41
<PAGE>
[20] Significant Group Concentrations of Credit Risk
The Company primarily grants residential and consumer loans to customers located
within its primary market area in the State of Connecticut. The majority of the
Company's loan portfolio is comprised of residential mortgages. At September 30,
1996, residential mortgage loans, including residential construction loans,
totaled $697 million, excluding off-balance-sheet items. All such loans are
collateralized by real estate, of which approximately 95% is located in
Connecticut.
[21] Fair Value of Financial Investments
The Company is required to provide supplemental financial disclosures on the
estimated fair value of its financial instruments in accordance with SFAS No.
107, "Disclosures about Fair Value of Financial Instruments." Financial
instruments as defined in SFAS No. 107 include cash and cash equivalents,
mortgage-backed securities, loans, deposits, borrowings and certain off-balance
sheet items. Other assets that are not considered financial instruments under
SFAS No. 107 are excluded from fair value disclosures such as real estate owned
and premises and equipment.
Fair value estimates are made at a specific point in time based on market
information, where available, or other more subjective information if a market
for the financial instrument does not exist. These estimates incorporate
assumptions and other matters of judgment and may not reflect the true financial
impact that could result from selling the entire portfolio of a financial
instrument on one date, including any income tax consequences.
The following table presents fair value information on the Company's investment
and mortgage-backed security portfolios:
September 30,
1996 1995
---- ----
Carrying Estimated Carrying Estimated
(in thousands) Amount Fair Value Amount Fair Value
- -------------- ------ ---------- ------ ----------
Investment securities $ 14,440 $ 14,489 $ 56,292 $ 56,359
Mortgage-backed
securities 450,120 449,991 355,785 356,923
-------- -------- -------- --------
Total $464,560 $464,480 $412,077 $413,282
======== ======== ======== ========
The fair value of investment and mortgage-backed securities is based on
available market quotes.
The following table represents fair value information for the Bank's loan
portfolio:
September 30, 1996
Allowance
Principal and Other Carrying Estimated
(in thousands) Value Adjustments Amount Fair Value
- -------------- ----- ----------- ------ ----------
Real estate mortgage loans $744,764 $ 7,763 $737,001 $734,110
Consumer and commercial
loans 79,946 2,459 77,487 78,471
-------- -------- -------- --------
Total $824,710 $ 10,222 $814,488 $812,581
======== ======== ======== ========
September 30, 1995
Allowance
Principal and Other Carrying Estimated
(in thousands) Value Adjustments Amount Fair Value
- -------------- ----- ----------- ------ ----------
Real estate mortgage loans $654,266 $ 7,548 $646,718 $643,241
Consumer and commercial
loans 67,717 890 66,827 67,522
------ --- ------ ------
Total $721,983 $ 8,438 $713,545 $710,763
======== ======== ======== ========
In developing the estimated fair values above, the Bank's loan portfolio was
segregated by type of loan, performing status and interest rate (fixed or
variable). In general, fair value was estimated by discounting contractual cash
flows adjusted for repayment estimates using discount rates developed by the
secondary market.
Assumptions have been made in developing these fair values based on historical
experience and market conditions. Because there is no immediate market for many
of the above loans, there is no basis for determining whether the fair value
presented above would be indicative of the value negotiated in an actual sale.
42
<PAGE>
The estimated fair value of the Bank's deposit portfolio is as follows:
September 30,
1996 1995
Carrying Estimated Carrying Estimated
(in thousands) Amount Fair Value Amount Fair Value
- -------------- ------ ----------- ------ ----------
Non-interest bearing $ 30,260 $ 30,260 $ 27,913 $ 27,913
Passbook accounts 144,728 144,728 143,271 143,271
NOW accounts 90,758 90,758 80,625 80,625
Money market accounts 94,510 94,510 104,428 104,428
Certificate accounts 699,099 701,747 595,514 596,969
---------- ---------- ---------- ----------
Total $1,059,355 $1,062,003 $ 951,751 $ 953,206
========== ========== ========== ==========
The fair value of deposits with no stated maturity, such as passbook, NOW and
money market accounts, is assumed to be equal to the amount payable on demand on
September 30, 1996 and 1995. The fair value of time deposits is based on the
discounted value of contractual cash flows, using rates offered at September 30,
1996 and 1995 for deposits with similar remaining maturities.
The fair value of FHLB advances, estimated using rates available at September
30, 1996 and 1995 for debt of similar terms and remaining maturities was $208
million and $73 million at September 30, 1996 and 1995, respectively. The fair
value of repurchase agreements, estimated using rates available at September 30,
1996 and 1995 for debt of similar terms and maturities, was $15 million and $83
million at September 30, 1996 and 1995, respectively. The fair value of FHLB
stock, accrued interest receivable, accrued interest payable and loan
commitments approximate the carrying value at September 30, 1996 and 1995.
[22] Recent Accounting Pronouncements
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed of," was issued in March 1995 and is effective for fiscal
years beginning after December 15, 1995. SFAS No. 121 requires that long-lived
assets be reviewed for impairment whenever events or changes in circumstances
indicate the carrying amount of an asset may not be recoverable. Management does
not anticipate the adoption of SFAS No. 121 to have a material effect on the
Company's consolidated financial statements.
SFAS No. 122, "Accounting for Mortgage Servicing Rights," was issued in May 1995
and is effective for fiscal years beginning after December 15, 1995. 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 based on the fair value of the rights. The Company adopted SFAS No.
122 effective October 1, 1996. The effect of adoption on the Company will vary
based on the extent of mortgage servicing rights existing upon adoption and
mortgage servicing rights acquired subsequent to adoption, but is not expected
to have a material effect on the Company's consolidated financial statements.
SFAS No. 123, "Accounting for Stock-Based Compensation," was issued in October
1995 and is effective for fiscal years beginning after December 15, 1995. SFAS
No. 123 establishes a fair value based method of accounting for stock-based
compensation plans. This statement also establishes fair value as the
measurement basis for transactions in which an entity acquires goods or services
from non-employees in exchange for equity instruments. The effects on the
consolidated financial statements of this statement will be disclosure only.
43
<PAGE>
[23] Eagle Financial Corp. (Parent Company Only) Condensed Financial Information
Balance Sheets September 30,
(in thousands) 1996 1995
---- ----
Assets:
Cash $ -- $ 87
Interest-bearing deposits 805 954
-------- --------
Cash and cash equivalents 805 1,041
Investment securities held to maturity 85 85
Investment in Bank subsidiary 101,489 90,560
Dividend receivable 900 --
Receivable from Bank subsidiary 347 877
Other assets 178 133
-------- --------
Total assets $103,804 $ 92,696
======== ========
Liabilities and Shareholders' Equity:
Payable to Bank subsidiary $ 638 $ 29
Accrued expenses and other liabilities 249 378
Borrowed money -- 94
Shareholders' equity 102,917 92,195
-------- --------
Total liabilities and shareholders' equity $103,804 $ 92,696
======== ========
<TABLE>
<CAPTION>
Statements of Income Years Ended September 30,
(in thousands) 1996 1995 1994
- -------------- ---- ---- ----
<S> <C> <C> <C>
Interest on investments $ 28 $ 71 $ 31
Dividends from Bank subsidiary 3,200 2,000 1,000
Other expenses (872) (909) (857)
Income before income taxes and
equity in undistributed earnings of
Bank subsidiary 2,356 1,162 174
Income tax benefit 353 364 323
-------- -------- --------
Income before equity in undistributed
earnings of Bank subsidiary 2,709 1,526 497
Equity in undistributed earnings of Bank subsidiary 10,929 9,446 7,069
-------- -------- --------
Net income $ 13,638 $ 10,972 $ 7,566
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Statements of Cash Flows Years Ended September 30,
(in thousands) 1996 1995 1994
- -------------- ---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income $ 13,638 $ 10,972 $ 7,566
Adjustments to reconcile net income
to net cash provided by operating activities:
Equity in undistributed earnings of Bank subsidiary (10,929) (9,446) (7,069)
Decrease (increase) in other assets (945) 103 (136)
Increase (decrease) in accrued expenses
and other liabilities (129) 837 (261)
-------- -------- --------
Net cash provided by operating activities 1,635 2,466 100
-------- -------- --------
Investing activities:
Purchase of investment securities -- -- (1,000)
Proceeds from maturity of investment security -- -- 1,000
Decrease (increase) in receivable from Bank subsidiary 530 (1,081) --
Investment in Bank subsidiary -- (14,700) --
-------- -------- --------
Net cash provided (used) by investing activities 530 (15,781) --
-------- -------- --------
Financing activities:
Cash dividends (4,132) (3,627) (2,355)
Proceeds from exercise of stock options and other 1,122 873 1,052
Payment of fractional shares from stock dividend -- (8) --
Proceeds from sale of common stock -- 16,657 --
Increase in payable to Bank subsidiary 609 2 4
-------- -------- --------
Net cash provided (used) by financing activities (2,401) 13,897 (1,299)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (236) 582 (1,199)
Cash and cash equivalents at beginning of year 1,041 459 1,658
-------- -------- --------
Cash and cash equivalents at end of year $ 805 $ 1,041 $ 459
======== ======== ========
</TABLE>
44
<PAGE>
[24] Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
(in thousands, except per share data) Three Months Ended
Fiscal 1996 12/31/95 3/31/96 6/30/96 9/30/96 Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest income $ 22,149 $ 24,020 $ 24,781 $ 24,651 $ 95,601
Interest expense 12,748 14,579 14,282 14,233 55,842
-------- -------- -------- -------- --------
Net interest income 9,401 9,441 10,499 10,418 39,759
Provision for loan losses 225 1,366 225 225 2,041
Net gain (loss) on sale of securities 631 (1,163) 64 5 (463)
Net gain (loss) from mortgage banking activities 6 (1,740) 255 (5) (1,484)
Gain on sale of deposits -- 15,904 -- -- 15,904
Other income 1,266 1,163 1,270 1,252 4,951
Other expenses 5,982 8,909 6,956 11,802 33,649
-------- -------- -------- -------- --------
Income (loss) before income taxes 5,097 13,330 4,907 (357) 22,977
Income tax provision (benefit) 2,173 5,290 1,989 (113) 9,339
-------- -------- -------- -------- --------
Net income (loss) $ 2,924 $ 8,040 $ 2,918 $ (244) $ 13,638
======== ======== ======== ======== ========
Net income (loss) per share:
Primary $ 0.63 $ 1.72 $ 0.62 $ (0.05) $ 2.92
Fully diluted $ 0.62 $ 1.72 $ 0.62 $ (0.05) $ 2.89
</TABLE>
During the quarter ended March 31, 1996, the Company's operations were effected
by several non-recurring items that resulted in a substantial increase in net
income. The most significant was a $15.9 million gain from the sale of branch
offices and related deposits. Several charges were recorded which partially
offset the gain including: a $1.2 million loss on the sale of securities as a
result of an approximate $100 million restructuring of the security portfolio, a
$1.7 million loss from the valuation of loans held for sale, $1.2 million of
non-recurring expenses principally related to marketing and consulting and an
increased loan loss provision that recognized a recent trend of higher loan
charge-off to loan balance ratios for certain loan categories.
The quarter ended September 30, 1996 includes a $4.7 million charge related to
an assessment to recapitalize the SAIF.
<TABLE>
<CAPTION>
(in thousands, except per share data) Three Months Ended
Fiscal 1995 12/31/94 3/31/95 6/30/95 9/30/95 Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest income $ 18,750 $ 20,342 $ 21,659 $ 22,146 $ 82,897
Interest expense 8,888 10,108 11,551 12,333 42,880
-------- -------- -------- -------- --------
Net interest income 9,862 10,234 10,108 9,813 40,017
Provision for loan losses 225 225 525 525 1,500
Net gain (loss) on sale of securities (104) -- (10) 72 (42)
Net gain from mortgage banking activities -- -- -- 244 244
Other income 1,081 1,016 1,063 1,039 4,199
Other expenses 5,694 6,152 6,393 6,020 24,259
-------- -------- -------- -------- --------
Income before income taxes 4,920 4,873 4,243 4,623 18,659
Income tax provision 2,040 2,027 1,728 1,892 7,687
-------- -------- -------- -------- --------
Net income $ 2,880 $ 2,846 $ 2,515 $ 2,731 $ 10,972
======== ======== ======== ======== ========
Net income per share:
Primary $ 0.64 $ 0.63 $ 0.55 $ 0.59 $ 2.41
Fully diluted $ 0.63 $ 0.62 $ 0.54 $ 0.59 $ 2.38
</TABLE>
Note: All per share data for all periods and dates prior to September 30, 1995
have been adjusted retroactively to give effect to a 10% stock dividend to
common shareholders of record on February 15, 1995.
45
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Eagle Financial Corp.:
We have audited the accompanying consolidated balance sheets of Eagle Financial
Corp. and subsidiaries as of September 30, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the years in the three-year period ended September 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Eagle Financial
Corp. and subsidiaries as of September 30, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 1996 in conformity with generally accepted accounting
principles.
As discussed in the notes to the consolidated financial statements, the Company
changed its method of accounting for investment securities in 1995, and its
methods of accounting for postretirement benefits other than pensions and income
taxes in 1994.
KPMG Peat Marwick LLP
Hartford, Connecticut
October 17, 1996
46
<PAGE>
ADDITIONAL INFORMATION
Annual Meeting
Tuesday, January 28, 1997
11:00 am
Radisson Inn
42 Century Drive
Bristol, CT 06010
Executive Offices
Eagle Financial Corp.
222 Main Street
P.O. Box 1157
Bristol, CT 06010
(860) 314-6400
Independent Auditors
KPMG Peat Marwick LLP
City Place II
Hartford, CT 06103-4103
Registrar and Transfer Agent
Boston EquiServe, L.P
Shareholder Services
Mail Stop: 45-02-64
P.O. Box 8040, Boston, MA 02266-8040
(617) 575-3170
(800) 730-4001 Outside MA
Legal Counsel
Hogan & Hartson
Columbia Square
555 Thirteenth Street NW
Washington, DC 20004-1109
Anderson, Alden, Hayes & Ziogas LLC
238 Main Street
Bristol, CT 06010
Form 10-K
A Copy of Eagle Financial Corp.'s
annual report on Form 10-K (without exhibits)
filed with the Securities and Exchange
Commission for fiscal 1996
may be obtained from the Company
without charge. Please send a written request to:
Mark J. Blum
Vice President, Secretary
Chief Financial Officer
Eagle Financial Corp.
222 Main Street
Bristol, CT 06010
Common Stock Information
Eagle Financial Corp. common stock is listed on the NASDAQ National Market
System under the symbol "EGFC." As of September 30, 1996 there were 4,581,440
shares of common stock outstanding, including 47,373 shares held in treasury,
and approximately 1,800 shareholders of record.
<PAGE>
QUARTERLY STOCK QUOTATIONS AND STOCK INFORMATION
Cash
Dividends
Quarter Paid Per
Ended High Low Share (a)
---- --- ---------
Dec. 31, 1992 $17.375 $15.000 $.140
Mar. 31, 1993 20.250 16.750 .140
Jun. 30, 1993 19.250 16.250 .140
Sep. 30, 1993 19.875 16.625 .155
Dec. 31, 1993 21.625 18.750 .173
Mar. 31, 1994 20.625 19.125 .173
Jun. 30, 1994 23.625 19.125 .173
Sep. 30, 1994 23.625 19.875 .173
Dec. 31, 1994 21.000 18.250 .191
Mar. 31, 1995 21.250 17.750 .210
Jun. 30, 1995 22.250 19.000 .210
Sep. 30, 1995 24.500 21.250 .210
Dec. 31, 1995 27.750 25.250 .230
Mar. 31, 1996 26.250 22.750 .230
Jun. 30, 1996 26.375 22.250 .230
Sep. 30, 1996 27.250 23.750 .230
(a) All cash dividends paid have been adjusted retroactively to give effect to
10% stock dividends paid in September 1993 and March 1995.
Eagle Financial Corp.
222 Main Street
Bristol, CT 06010
860 314-6400
SUBSIDIARIES OF REGISTRANT
Name of Subsidiary Jurisdiction of Incorporation
------------------ -----------------------------
Eagle Federal Savings Bank United States
Eagle Service Corp.(*) Connecticut
(*) Subsidiary of Eagle Federal Savings Bank.
Exhibit 23
Consent of Independent Auditors
-------------------------------
The Board of Directors and Shareholders
Eagle Financial Corp.:
We consent to incorporation by reference in the registration statements on Form
S-8 (No. 33-28403) and Form S-8 (No. 33-46092) of Eagle Financial Corp. of our
report dated October 17, 1996, relating to the consolidated balance sheets of
Eagle Financial Corp. and Subsidiaries as of September 30, 1996 and 1995, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the years in the three-year period ended September 30, 1996,
which appears as an Exhibit to, and is incorporated by reference into, the
September 30, 1996 annual report on Form 10-K of Eagle Financial Corp.
Our report refers to changes in methods of accounting for investment securities
in 1995, and methods of accounting for postretirement benefits other than
pensions and income taxes in 1994.
KPMG PEAT MARWICK LLP
Hartford, Connecticut
December 30, 1996
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<NAME> EAGLE FINANCIAL CORP.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 0
<CASH> 20,288
<INT-BEARING-DEPOSITS> 27,989
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 385,471
<INVESTMENTS-CARRYING> 79,089
<INVESTMENTS-MARKET> 79,009
<LOANS> 815,193
<ALLOWANCE> 8,592
<TOTAL-ASSETS> 1,402,809
<DEPOSITS> 1,059,355
<SHORT-TERM> 111,905
<LIABILITIES-OTHER> 20,628
<LONG-TERM> 109,773
0
0
<COMMON> 46
<OTHER-SE> 101,194
<TOTAL-LIABILITIES-AND-EQUITY> 1,402,809
<INTEREST-LOAN> 61,089
<INTEREST-INVEST> 31,813
<INTEREST-OTHER> 2,699
<INTEREST-TOTAL> 95,601
<INTEREST-DEPOSIT> 44,256
<INTEREST-EXPENSE> 55,842
<INTEREST-INCOME-NET> 39,759
<LOAN-LOSSES> 2,041
<SECURITIES-GAINS> (463)
<EXPENSE-OTHER> 33,649
<INCOME-PRETAX> 22,977
<INCOME-PRE-EXTRAORDINARY> 22,977
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,638
<EPS-PRIMARY> 2.92
<EPS-DILUTED> 2.89
<YIELD-ACTUAL> 7.40
<LOANS-NON> 9,279
<LOANS-PAST> 0
<LOANS-TROUBLED> 4,000
<LOANS-PROBLEM> 6,869
<ALLOWANCE-OPEN> 7,457
<CHARGE-OFFS> 2,863
<RECOVERIES> 86
<ALLOWANCE-CLOSE> 8,592
<ALLOWANCE-DOMESTIC> 8,592
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
