UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
EAGLE FINANCIAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1194047
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
222 MAIN STREET, BRISTOL, CT 06010
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(860) 314-6400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, ADDRESS AND FISCAL YEAR IF CHANGED SINCE LAST REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS TO BE
FILED BY SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
INDICATE THE NUMBER OF SHARES OUTSTANDING FOR THE ISSUER'S CLASSES OF COMMON
STOCK, AS OF THE LATEST PRACTICABLE DATA.
COMMON STOCK (PAR VALUE $0.01) 6,530,944
- --------------------------------------------------------------------------------
(CLASS) (APPROXIMATE NUMBER OF SHARES
OUTSTANDING AT FEBRUARY 11, 1998)
(EXCLUDING TREASURY STOCK)
<PAGE>
EAGLE FINANCIAL CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1997 (UNAUDITED) 2
AND SEPTEMBER 30, 1997
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED
DECEMBER 31, 1997 AND 1996 (UNAUDITED) 3
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
DECEMBER 31, 1997 AND 1996 (UNAUDITED) 4-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6-9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 10-17
PART II - OTHER INFORMATION 18
SIGNATURES 19
EXHIBIT INDEX 20
1
<PAGE>
<TABLE>
<CAPTION>
EAGLE FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)
Assets DECEMBER 31, SEPTEMBER 30,
1997 1997
- ----------------------------------------------------------------- ---------------- ----------------
<S> <C> <C>
Cash and amounts due from depository institutions $ 39,740 $ 29,055
Interest-bearing deposits 44,165 46,600
------------- -------------
Cash and cash equivalents 83,905 75,655
Investment securities available for sale (amortized cost:
$48,375 at December 31, 1997 and $53,604 at September 30, 1997) 48,051 53,061
Mortgage-backed securities available for sale (amortized cost:
$803,633 at December 31, 1997 and $736,150 at September 30, 810,779 743,943
1997)
Loans held for sale 2,137 1,830
Loans receivable, net of allowance for loan losses of $9,745 at
December 31, 1997 and $9,765 at September 30, 1997 1,121,918 1,128,381
Accrued interest receivable:
Loans 6,078 6,332
Investment securities 1,282 1,150
Mortgage-backed securities 4,788 4,421
Real estate owned, net 2,745 3,754
Stock in Federal Home Loan Bank of Boston, at cost 24,405 22,770
Premises and equipment, net 13,709 13,247
Intangible assets 28,845 29,574
Prepaid expenses and other assets 8,529 6,978
------------- -------------
Total Assets $ 2,157,171 $ 2,091,096
============= =============
Liabilities and Shareholders' Equity
Liabilities:
Deposits $ 1,370,188 $ 1,353,274
Federal Home Loan Bank advances 487,311 445,014
Repurchase agreements and other borrowed money 76,108 76,409
Advance payments by borrowers for taxes and insurance 13,047 7,235
Accrued expenses and other liabilities 9,554 15,631
------------- -------------
Total Liabilities 1,956,208 1,897,563
------------- -------------
Corporation obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely junior
subordinated debentures of the Corporation. 48,638 48,627
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; 6,561,039 shares issued at December 31, 1997
and 6,363,410 shares issued at September 30, 1997, including 66 64
47,373 shares held in treasury
Additional paid-in capital 83,376 78,963
Retained earnings 65,270 61,964
Cost of common stock in treasury (362) (362)
Net unrealized gain on available for sale securities 3,975 4,277
------------- -------------
Total Shareholders' Equity 152,325 144,906
------------- -------------
Total Liabilities and Shareholders' Equity $ 2,157,171 $ 2,091,096
============= =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
<PAGE>
EAGLE FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 22,218 $ 21,424
Interest on mortgage-backed securities 13,038 8,236
Interest on investment securities 588 695
Interest on overnight investments 623 549
Dividends on investment securities 560 282
----------- ------------
Total interest income 37,027 31,186
----------- ------------
Interest expense:
Interest on deposits 13,459 13,843
Interest on Federal Home Loan Bank advances 6,604 3,252
Interest on repurchase agreements and other
borrowed money 1,235 227
----------- ------------
Total interest expense 21,298 17,322
---------- ------------
Net interest income 15,729 13,864
Provision for loan losses 300 725
----------- ------------
Net interest income after provision for 15,429 13,139
loan losses ----------- ------------
Non-interest income:
Net gain (loss) on sale of securities -- --
Gain from mortgage banking activities 87 20
Checking account service fees 1,082 865
Other customer service fees 250 211
Other income 523 429
----------- -----------
Total non-interest income 1,942 1,525
----------- -----------
Non-interest expense:
Compensation, taxes and benefits 3,211 3,609
Office occupancy 1,446 1,345
Marketing 460 357
Net cost of real estate owned operations 320 355
Federal deposit insurance premiums 149 252
Data processing expenses 548 497
Amortization of intangible assets 729 757
Cost of Corporation obligated mandatorily
redeemable preferred securities 1,262 --
Other 1,216 1,414
----------- -----------
Total non-interest expense 9,341 8,586
----------- -----------
Income before income taxes 8,030 6,078
Income taxes 3,132 2,497
----------- -----------
Net income $ 4,898 $ 3,581
=========== ===========
Net income per share:
Basic $ 0.76 $ 0.58
Diluted $ 0.74 $ 0.56
============ ===========
Average number of shares and equivalent shares:
Basic 6,402,742 6,207,618
Diluted 6,636,340 6,387,952
Dividends per share $ 0.25 $ 0.23
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
EAGLE FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
--------------------------------------
1997 1996
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 4,898 $ 3,581
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Provision for loan losses 300 725
Provision for losses on real estate owned 195 95
Provision for depreciation and amortization 436 464
Amortization of premiums (accretion of discounts) on loans (55) 64
Amortization of premiums (accretion of discounts) on investment
and mortgage-backed securities 445 319
Amortization of intangible assets 729 757
Accretion of discount on preferred securities 11 --
Realized loss (gain) on sale of real estate owned, net (53) 2
Loss (gain) on disposal of premises and equipment 6 (5)
Gain from mortgage banking activities (87) (20)
Origination of loans held for sale (8,167) (2,178)
Proceeds from sales of loans held for sale 7,947 2,638
Decrease (increase) in accrued interest receivable (245) 123
Increase in prepaid expenses and other assets (1,425) (657)
Loan origination fees (133) (201)
Decrease in accrued expenses and other liabilities (6,077) (1,467)
------------- -------------
Net cash provided (used) by operating activities (1,275) 4,240
------------- -------------
INVESTING ACTIVITIES:
Proceeds from maturities of investment securities available for 5,000 5,000
sale
Proceeds from maturities of investment securities held to maturity -- 750
Principal payments on investment securities available for sale 223 356
Purchases of investment securities available for sale -- (3,200)
Principal payments on mortgage-backed securities available for 40,886 16,257
sale
Principal payments on mortgage-backed securities held to maturity -- 1,607
Purchases of mortgage-backed securities available for sale (108,808) (36,963)
Purchases of mortgage-backed securities held to maturity -- (2,866)
Principal payments on loans receivable 60,205 37,758
Loan originations (54,270) (51,585)
Proceeds from sales of real estate owned 1,283 983
Investment in real estate owned -- (23)
Purchases of premises and equipment (904) (329)
Proceeds from sales of premises and equipment -- 10
Increase in investment in Federal Home Loan Bank stock (1,635) (907)
------------- -------------
Net cash used by investing activities (58,020) (33,152)
------------- -------------
</TABLE>
4
<PAGE>
EAGLE FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
--------------------------------------
1997 1996
------------- -------------
FINANCING ACTIVITIES
<S> <C> <C>
Net increase in Passbook, NOW and Money Market accounts $ 3,444 $ 4,464
Net increase in certificate accounts 13,470 5,962
Borrowings under Federal Home Loan Bank advances 904,698 164,516
Repayment of Federal Home Loan Bank advances (862,401) (144,499)
Net decrease in borrowed money (301) --
Net increase in advance payments by borrowers for taxes and 5,812 5,602
insurance
Proceeds from exercise of stock options and dividends reinvested 4,415 319
Cash dividends (1,592) (1,337)
------------- -------------
67,545 35,027
Net cash provided by financing activities ------------- -------------
8,250 6,115
Increase in cash and cash equivalents 75,655 57,864
Cash and cash equivalents at beginning of period ------------- -------------
$ 83,905 $ 63,979
Cash and cash equivalents at end of period ============= =============
NON-CASH INVESTING ACTIVITIES: -- 20,278
Securities purchased not yet settled 416 1,164
Transfer of loans to real estate owned ============= =============
SUPPLEMENTAL DISCLOSURES: $ 3,247 $ 1,211
Income taxes paid 21,500 17,607
Interest paid ============= =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
EAGLE FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
Eagle Financial Corp. (the "Holding Company") is a unitary savings bank holding
company and parent of Eagle Bank (the "Bank") (collectively known as the
"Company"). The Bank is a federally chartered savings bank headquartered in
Bristol, Connecticut and conducts business from twenty-six traditional branch
offices and four in-store supermarket branch offices located in Hartford and
eastern Litchfield counties.
The accompanying unaudited, consolidated financial statements include all
adjustments of a normal, recurring nature which are, in the opinion of
management, necessary for a fair presentation. The results of operations for the
three month periods ended December 31, 1997 and 1996 are not necessarily
indicative of the results which may be expected for the entire fiscal year. The
accompanying unaudited, consolidated financial statements should be read in
conjunction with the consolidated financial statements contained in the
Company's 1997 Annual Report on Form 10-K.
(2) Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," which
superseded SFAS No. 122 and established the accounting for transfers and
servicing of financial assets and extinguishment of liabilities. This statement
specifies when financial assets and liabilities are to be removed from an
entity's financial statements, specifies the accounting for servicing assets and
liabilities, and specifies the accounting for assets that can be contractually
prepaid in such a way that the holder would not recover substantially all of its
recorded investment.
Under SFAS No. 125, an entity recognizes only assets it controls and liabilities
it has incurred, derecognizes assets only when control has been surrendered, and
derecognizes liabilities only when they have been paid, or the entity is legally
released from being the primary obligor under the liability judicially or by the
creditor. SFAS No. 125 requires that the selling entity continue to carry
retained interests, including servicing assets, relating to assets it has
derecognized. Such retained interests are recorded based on the relative fair
values of the retained interests and derecognized assets at the date of
transfer. Transfers not meeting the criteria for sale recognition are accounted
for as a secured borrowing with pledge of collateral. Under SFAS No. 125 certain
collateralized borrowings may result in asset derecognition when the assets
provided as collateral may be derecognized based on whether the secured party
takes control over the collateral and whether the secured party is: (1)
permitted to repledge or sell the collateral; and (2) the debtor does not have
the right to redeem the collateral on short notice. Extinguishments of
liabilities are recognized only when the debtor pays the creditor and is
relieved of its obligation of the liability or when the debtor is legally
released from being the primary obligor under the liability, either judicially
or by the creditor.
SFAS No. 125 requires an entity to recognize its obligation to service financial
assets that are retained in a transfer of assets in the form of a servicing
asset or liability. The servicing asset or liability is to be amortized in
proportion to and over the period of net servicing income or loss. Servicing
assets and liabilities are to be assessed for impairment based on the fair
value.
6
<PAGE>
SFAS No. 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, except for
those transfers related to secured borrowings, repurchase agreements and similar
transactions which are effective after December 31, 1997. The adoption of these
remaining requirements is not expected to materially effect the Company's
results of operations. As a result of loans sold with servicing rights retained,
the Bank recorded $73,246 in mortgage servicing assets and $4,684 in related
amortization during the quarter ended December 31, 1997, pursuant to SFAS No.
125.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" and SFAS
No. 129, "Disclosure of Financial Information About Capital Structure". SFAS No.
128 simplifies the standards found in Accounting Principles Board Opinion No. 15
("APB 15") for computing earnings per share ("EPS"), and makes them comparable
to international standards.
Under SFAS No. 128, the Company is required to present both basic and diluted
EPS on the face of its statements of operations. Basic EPS, which replaces
primary EPS required by APB 15 for entities with complex capital structures,
excludes common stock equivalents and is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS gives effect to all dilutive potential
common shares that were outstanding during the period. The Company adopted SFAS
No. 128 effective for the quarter ended December 31, 1997 and has restated all
prior period EPS data.
SFAS No. 129 supersedes capital structure disclosure requirements found in
previous accounting pronouncements and consolidates them into one statement for
ease of retrieval and greater visibility for non-public entities. These
disclosures are required for financial statements for periods ending after
December 15, 1997. As SFAS No. 129 makes no changes to previous accounting
pronouncements as those pronouncements applied to the Company, adoption of SFAS
No. 129 will have no impact on the Company's results of operations and financial
condition.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
SFAS No. 130 requires the inclusion of comprehensive income, either in a
separate statement for comprehensive income, or as part of a combined statement
of income and comprehensive income, or as part of a combined statement of
changes in shareholders' equity and comprehensive income in a full-set of
general-purpose financial statements.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances, excluding
those resulting from investments by and distributions to owners. SFAS No. 130
requires that comprehensive income is to be presented beginning with net income,
adding the elements of comprehensive income not included in the determination of
net income, to arrive at comprehensive income. SFAS No. 130 also requires that
an enterprise display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. SFAS No. 130 is effective for the
Bank's fiscal year beginning October 1, 1998. SFAS No. 130 requires the
presentation of information already contained in the Bank's financial statements
and therefore will not have an impact on the Bank's financial position or
results of operation.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures About Segments of
an enterprise and Related Information". SFAS No. 131 establishes standards for
the reporting of information about operating segments by public business
enterprises in their annual and interim financial reports issued to
shareholders.
SFAS No. 131 requires that a public business enterprise report financial and
descriptive information, including profit or loss, certain specific revenue and
expense items, and segment assets, about its reportable operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision-maker in deciding how to allocate resources and in
assessing performance.
7
<PAGE>
SFAS No. 131 is effective for the Bank's financial statements for periods
beginning after December 15, 1997. SFAS No. 131 is a disclosure requirement and
therefore will not have an effect on the Bank's financial position or results of
operations.
(3) Allowance for Loan Losses
The following is a summary of the activity in the allowance for loan losses for
the periods indicated (dollars in thousands):
THREE MONTHS ENDED
DECEMBER 31,
------------------------------
1997 1996
--------- ---------
Balance, beginning of period $ 9,765 $ 10,507
Provisions charged to operations 300 725
Charge-offs (419) (893)
Recoveries 99 1
--------- ---------
Balance, end of period $ 9,745 $ 10,340
========= =========
(4) Net Cost of Real Estate Owned Operations
The net cost of real estate owned operations is summarized as follows for the
periods indicated (dollars in thousands):
THREE MONTHS ENDED
DECEMBER 31,
-----------------------------
1997 1996
---------- ---------
Net (gain) loss on sales of real estate owned $ (53) $ 2
Provision for losses charged to operations 195 95
Expenses of holding real estate owned,
net of rental income 178 258
---------- ---------
$ 320 $ 355
========== =========
(5) Interest Rate Financial Instruments
The Bank has entered into certain interest rate cap and collar contracts. In
June 1997, the Bank entered into a collared floating rate advance with the FHLB
of Boston, which incorporates both an interest rate cap and an interest rate
floor. The collared advance has an $80 million notional amount, a maximum
interest rate of 8.01%, a minimum interest rate of 5.76% and a maturity of June
18, 2004. In August 1997, the Bank purchased a separate interest rate cap
contract with a notional amount of $41 million, a cap rate of 7.00% and a
termination date of August 19, 2002. The cost of the interest rate cap contract
was $713,400. The counterparty to the interest rate cap contract is Morgan
Stanley Capital Services, Inc. The interest rate cap contract is matched against
two fixed rate borrowings with maturities of one and two years, respectively,
and a five year fixed rate borrowing that is callable after three years. The
Company anticipates the need to re-borrow upon the maturity of the one and two
year borrowings as these borrowings are funding longer average-life securities.
8
<PAGE>
(6) Net Income per Share
The following is a reconciliation of net income and average shares outstanding
used in the calculation of basic and diluted net income per share (in thousands
except for share data).
Three months ended December 31, 1997
Average Shares
Net Income Outstanding
---------- -----------
Basic net income per share $ 4,898 6,402,742
Net income adjustment -
Dilutive effect of stock options 233,598
------- -------
Diluted net income per share $ 4,898 6,636,340
Three months ended December 31, 1996
Average Shares
Net Income Outstanding
---------- -----------
Basic net income per share $ 3,581 6,207,618
Net income adjustments -
Dilutive effect of stock options 180,334
------- -------
Diluted net income per share $ 3,581 6,387,952
(7) Business Combination
On October 27, 1997, the Company announced the signing of definitive agreement
to merge with and into Webster Financial Corp. ("Webster"). The merger would be
accomplished by a stock for stock exchange based on a fixed exchange ratio of
0.84 shares of Webster common stock for each share of the Company common stock.
The transaction is expected to close in April 1998. Webster has total assets of
$7.0 billion, total deposits of $4.4 billion, total loans receivable of $3.8
billion and shareholders' equity of $382.2 million as of December 31, 1997.
<PAGE>
EAGLE FINANCIAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL - The Bank conducts business from twenty six traditional banking offices
and four in-store supermarket branch offices located in Hartford and Litchfield
Counties. The Bank primarily invests its funds in first mortgage loans on
one-to-four family residential real estate in Connecticut or, when loan demand
is low, mortgage-backed securities with similar characteristics. The Bank's
major source of funds is deposits from the communities in which its banking
offices are located.
The Bank's earnings depend largely on its net interest income, which is the
difference between interest earned on its loans and investments versus the
interest paid on its deposits and borrowed funds. Additional earnings are
derived from a variety of financial services provided to customers, mainly
deposit and loan products.
On October 27, 1997, the Company announced the signing of definitive agreement
to merge with and into Webster Financial Corp. ("Webster"). The merger would be
accomplished by a stock for stock exchange based on a fixed exchange ratio of
0.84 shares of Webster common stock for each share of the Company common stock.
The transaction is expected to close in April 1998. Webster has total assets of
$7.0 billion, total deposits of $4.4 billion, total loans receivable of $3.8
billion and shareholders' equity of $382.2 million as of December 31, 1997.
At December 31, 1997, the Company had total assets of $2.16 billion compared to
$2.09 billion at September 30, 1997, an increase of $66 million, or 3.2%. Total
outstanding loans, which includes loans receivable, net, and loans held for
sale, decreased $6.2 million to $1.12 billion at December 31, 1997 from $1.13
billion at September 30, 1997. Total securities, including mortgage-backed
securities, were $858.8 million at December 31, 1997 compared to $797.0 million
at September 30, 1997, an increase of $61.8 million, or 7.8%. Total deposits
increased $16.9 million, from $1.35 billion at September 30, 1997 to $1.37
billion at December 31, 1997. Total borrowings were $563.4 million at December
31, 1997, an increase of $42.0 million, or 8.1%, from the September 30, 1997
total of $521.4 million. At December 31, 1997 shareholders' equity represented
7.06% of total assets compared to 6.93% at September 30, 1997.
Net income for the three months ended December 31, 1997 was $4.9 million, or
$0.74 per diluted share, compared to $3.6 million, or $0.56 per diluted share,
for the three months ended December 31, 1996.
LIQUIDITY - 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 Office of
Thrift Supervision ("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 December 31,
1997, the Bank had approximately $97 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.
As a member of the Federal Home Loan Bank ("FHLB") system, the Bank is required
to maintain liquid assets at 4% of its net withdrawable deposits plus short-term
borrowings. At December 31, 1997, the Bank was in compliance with the applicable
liquidity requirements having an average liquidity ratio of 6.63% for the three
months ended December 31, 1997.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
The Bank's principal sources of funds include deposits, loan payments (including
interest, amortization of principal and prepayments), interest and principal
amortization on investment and mortgage-backed securities, maturing investments,
Federal Home Loan Bank advances and other borrowings. Principal uses of funds
include loan originations, investment purchases, payments of interest on
deposits and borrowed money and payments to meet operating expenses. At December
31, 1997, the Bank had approximately $96.4 million of loan commitments
outstanding, including $68.1 million in available lines of credit. It is
expected that these and future loans will be funded by deposits, investment
maturities and amortization, loan repayments and borrowings. The Bank has the
capacity to borrow an additional $812 million in advances from the Federal Home
Loan Bank of Boston and will continue to consider this source of funds for
lending and investment purchases.
During the three months ended December 31, 1997 the Bank originated loans
totaling $62.4 million compared to $53.8 million for the same period in 1996.
Principal repayments on loans totaled $60.2 million and $37.8 million for the
three months ended December 31, 1997 and 1996, respectively. The Bank purchased
$108.8 million and $43.0 million of securities during the three months ended
December 31, 1997 and 1996, respectively. The security purchases were offset by
maturities and principal payments of $46.1 million and $24.0 million for the
three months ended December 31, 1997 and 1996, respectively.
It has been the Company's general policy to purchase debt securities (including
mortgage-backed securities) for purposes of earning interest income and meeting
regulatory liquidity requirements. At date of purchase, a decision is made to
classify debt securities as either held to maturity or available for sale.
Various factors are considered when determining whether debt securities are
classified as either available for sale or held to maturity, including:
repricing characteristics, liquidity needs, expected security life, yield and
overall asset/liability strategies. Events which may be reasonably anticipated
are considered when determining the Company's ability to hold debt securities to
maturity.
Other debt securities are classified as available for sale. When an available
for sale security is sold, the proceeds are generally used to fund loans when
either deposit inflows have not been adequate, the rates offered on Federal Home
Loan Bank advances are not favorable, or liquidity ratios support such sales.
The Bank may also occasionally sell securities available for sale to restructure
an asset/liability mismatch. No sales of securities occured during the three
months ended December 31, 1997 or the three months ended December 31, 1996.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
REGULATORY CAPITAL REQUIREMENTS - Quantitative measures established by the OTS
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
December 31, 1997, the Bank meets all capital adequacy requirements to which it
is subject.
As of December 31, 1997, 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>
For Capital
Actual Adequacy Purposes
-------------------- ------------------------
Amount Ratio Amount Ratio
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
As of December 31, 1997:
Tangible capital $ 162,851 7.65% $ greater than or equal to 31,612 greater than or equal to 1.5%
Core capital 162,851 7.65% greater than or equal to 63,847 greater than or equal to 3.0%
Tier I risk-based capital 162,851 17.40% N/A N/A
Total risk-based capital 171,883 18.37% greater than or equal to 74,863 greater than or equal to 8.0%
</TABLE>
*GREATER THAN OR EQUAL TO
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
-------------------------
Amount Ratio
---------- ---------
<S> <C> <C>
As of December 31, 1997:
Tangible capital N/A N/A
Core capital $ greater than or equal to 106,373 greater than or equal to 5.0%
-
Tier I risk-based capital greater than or equal to 56,148 greater than or equal to 6.0%
-
Total risk-based capital greater than or equal to 93,579 greater than or equal to 10.0%
*GREATER THAN OR EQUAL TO
</TABLE>
ASSET/LIABILITY MANAGEMENT AND MARKET RISK - The Bank's earnings are largely
dependent on its net interest income which is the difference between the yield
on interest-earning assets and the cost of interest-bearing liabilities. The
Company seeks to reduce its exposure to changes in interest rates, or market
risk, through active monitoring and management of its interest rate risk
exposure.
Market risk is the risk of loss from adverse changes in market prices and rates.
The Bank's market risk arises primarily from interest rate risk inherent in its
lending and investment securities activities as well as its deposit taking and
borrowing activities.
The Bank's primary objective in managing interest rate risk is to minimize the
adverse impact of changes in interest rates on the Bank's net interest income
and capital, while adjusting the Bank's asset/liability structure to obtain the
maximum yield-cost spread on that structure. The Bank relies primarily on its
asset/liability structure to control interest rate risk. However, a sudden and
substantial increase in interest rates may adversely impact the Bank's earnings
to the extent that the interest rates borne by assets and liabilities do not
change at the same speed, to the same extent, or on the same basis.
In managing its balance sheet, the Company is presented with certain basic
choices concerning the conduct of its business. On the asset side, it can create
assets through lending activities or purchase approved investment securities. On
the liability side, management can generate funds in the form of deposits or
borrowed money. The Company manages its exposure to interest rate movements
which result from the mismatch of assets and liabilities on the balance sheet by
implementing various strategies incorporating both on and off balance sheet
instruments while remaining within policy limits approved by the Board of
Directors. A report as to the interest rate risk position of the Company is
submitted to the Board of Directors on a quarterly basis.
Interest rates over the past twelve months, especially longer term interest
rates, have trended downward resulting in a flattening of the U.S. treasury rate
yield curve. The 30 year treasury rate declined by over 70 basis points and the
2 year treasury rate declined over 22 basis points over the past year. The
spread, or differential, between the 2 year and 30 year rates also compressed to
28 basis points at December 31, 1997 from 77 basis points a year earlier. This
one year 64% compression is due in part to strong national economic growth, low
national unemployment levels and a low annual inflation rate.
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.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
The following table shows the estimated maturity/repricing structure of the
interest sensitive assets and interest sensitive liabilities of Eagle at
December 31, 1997:
<TABLE>
<CAPTION>
Repricing Repricing Repricing
Within Within Within Repricing
Percent 0-3 4-12 1-3 Over 3
Amount of Total Months Months Years Years
---------- ---------- ---------- ---------- ---------- ----------
(in thousands)
Interest-sensitive assets
<S> <C> <C> <C> <C> <C> <C>
Loans receivable , net (a) $ 1,128,381 55.7% $ 201,322 $ 329,481 $299,649 $297,929
Mortgage-backed securities 803,633 39.7 217,792 157,123 208,935 219,783
Investment securities (b) 48,375 2.4 17,916 45 7,150 23,264
Interest-bearing deposits 44,165 2.2 44,165 -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total interest sensitive assets $ 2,024,554 100.0% 481,195 486,649 515,734 540,976
========== ========== ---------- ---------- ---------- ----------
Interest sensitive liabilities
Passbook accounts $ 223,441 12.0% 11,599 27,400 62,669 121,773
Certificate accounts 862,730 46.2 250,461 368,074 223,899 20,296
NOW accounts 111,255 5.9 7,391 13,972 25,120 64,772
Money market accounts 107,194 5.7 9,530 9,708 22,621 65,335
FHLB advances 487,311 26.1 317,957 93,801 58,571 16,982
Other borrowings 76,108 4.1 76,108 -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total interest sensitive liabilities $ 1,868,039 100.0% 673,046 512,955 392,880 289,158
========== ========== ---------- ---------- ---------- ----------
Periodic repricing difference $ (191,851) $ (26,306) $ 122,854 $ 251,818
(periodic gap) ========== ========== ========== ==========
Cumulative repricing difference $ (191,851) $ (218,157) $ (95,303) $ 156,515
(cumulative gap) ========== ========== ========== ==========
Cumulative gap to total assets (8.9%) (10.1%) (4.4%) 7.3%
</TABLE>
(a) Loans are net of non-performing loans, undisbursed portion of loans due
borrowers and unearned discounts and premiums.
(b) Investment securities include 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 market
consensus. Estimated decay rates on all deposit accounts are based primarily
upon historical experience.
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 18.7%.
Another measure, required to be performed by OTS-regulated institutions, is the
test specified by OTS Thrift Bulletin No. 13 "Interest Rate Risk Exposure:
Guidelines on Director and Officer Responsibilities". Under this regulation,
institutions are require to establish limits on the sensitivity of their net
interest income and net portfolio value to changes in interest rates. Such
changes in interest rates are defined an instantaneous and sustained movements
in interest rates in 100 basis point increments. Following are the estimated
impacts of a parallel shift in interest rates at December 31, 1997, calculated
in a manner consistent with the requirements of Thrift Bulletin No. 13:
Percentage Change In
--------------------------------------
Change In Interest Rates Net Interest Market Value
(In Basis Points) Income (1) Portfolio Equity(2)
- --------------------------------- ------------------ -----------------
+200 -1% -26%
+100 4% -11%
-100 -5% 2%
-200 -8% 7%
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
(1) The percentage change in this column represents Net Interest Income for 12
months in a stable interest rate environment versus the Net Interest Income
in the various rate scenarios.
(2) The percentage change in this column represents Market Value Portfolio
Equity of the Bank in a stable interest rate environment versus the Market
Value Portfolio Equity in the various rate scenarios. The OTS defines
Market Value Portfolio Equity as the present value of expected net cash
flows from existing assets minus the present value of expected net cash
flows from existing liabilities plus the present value of expected net cash
inflows from existing off-balance sheet contracts.
The following table shows the Bank's financial instruments that are sensitive to
changes in interest rates, categorized by expected maturity, and the
instruments' fair values at December 31, 1997. The amounts indicated represent
the expected principal repayments for each instrument. Market risk sensitive
instruments are generally defined as on and off balance sheet derivatives and
other financial instruments.
<TABLE>
<CAPTION>
Expected Maturity Date at December 31, 1997 (1)
1998 1999 2000 2001
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
INTEREST-SENSITIVE
ASSETS:
Loans receivable:
Fixed $ 81,704 $ 66,054 $ 57,645 $ 43,496
Average interest rate 7.94% 7.84% 7.68% 7.67%
Adjustable 124,099 97,175 86,106 72,655
Average interest rate 7.84% 7.91% 7.99% 8.08%
Mortgage-backed
securities:
Fixed 114,649 114,933 92,444 65,661
Average interest rate 7.28% 7.26% 7.26% 7.28%
Adjustable 48,446 30,692 21,056 14,950
Average interest rate 7.52% 7.34% 7.27% 7.18%
Investment securities:
Fixed 3,440 7,072 78 2,060
Average interest rate 7.44% 6.16% 6.13% 7.31%
Adjustable -- -- -- --
Average interest rate -- -- -- --
Interest-bearing deposits 44,165 -- -- --
Average interest rate 5.25% -- -- --
Mortgage servicing
assets 134 109 89 72
------------- ------------- ---------- ----------
Total
interest-sensitive
assets $ 416,637 $ 316,035 $ 257,418 $ 198,894
=========== ============ ========== ===========
INTEREST-SENSITIVE
LIABILITIES:
Deposits:
NOW $ 21,363 $ 13,587 $ 11,533 $ 9,790
Average interest rate 0.70% 0.70% 0.70% 0.70%
Passbook 38,999 34,575 28,094 22,827
Average interest rate 1.98% 1.98% 1.98% 1.98%
Money-market 19,238 12,150 10,471 9,025
Average interest rate 2.54% 2.54% 2.54% 2.54%
Certificates 618,535 148,505 75,394 9,798
Average interest rate 5.17% 5.75% 6.15% 5.57%
Borrowings:
FHLB:
Fixed 326,013 43,080 15,491 8,058
Average interest rate 5.75% 5.90% 6.15% 6.62%
Adjustable 5,745 -- -- --
Average interest rate 5.68% -- -- --
Other - Adjustable 958 -- -- --
----------- ---------- ---------- -----------
Total interest-sensitive
liabilities $ 1,030,851 $ 251,897 $ 140,983 $ 59,498
=========== ========== ========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Total Fair
2002 There-after Balance Value
---------- ----------- --------- ---------
INTEREST-SENSITIVE
ASSETS:
Loans receivable:
<S> <C> <C> <C> <C>
Fixed $ 34,200 $ 161,292 $ 444,391 $ 443,627
Average interest rate 7.68% 7.32% 7.62%
Adjustable 50,220 257,017 687,272 689,135
Average interest rate 8.26% 8.43% 8.14%
Mortgage-backed
securities:
Fixed 45,653 106,707 540,047 542,555
Average interest rate 7.32% 7.28% 7.28%
Adjustable 10,934 137,508 263,586 268,224
Average interest rate 7.07% 6.87% 7.10%
Investment securities:
Fixed 496 20,708 33,854 34,168
Average interest rate 6.31% 5.94% 6.23%
Adjustable -- 14,521 14,521 13,883
Average interest rate -- 5.77% 5.77%
Interest-bearing deposits -- -- 44,165 44,165
Average interest rate -- -- 5.25%
Mortgage servicing assets 58 125 587 591
--------- ----------- ----------- ----------
Total
interest-sensitive assets $ 141,561 $ 697,878 $ 2,028,423 $ 2,036,348
========= =========== =========== ===========
INTEREST-SENSITIVE
LIABILITIES:
Deposits
NOW $ 8,310 $ 46,672 $ 111,255 $ 111,255
Average interest rate 0.70% 0.70% 0.70%
Passbook 18,548 80,398 223,441 223,441
Average interest rate 1.98% 1.98% 1.98%
Money-market 7,778 48,532 107,194 107,194
Average interest rate 2.54% 2.54% 2.54%
Certificates 10,205 293 862,730 863,984
Average interest rate 5.84% 6.78% 5.37%
Borrowings:
FHLB:
Fixed 3,761 5,163 401,566 402,014
Average interest rate 6.63% 6.60% 5.81%
Adjustable -- 80,000 85,745 85,774
Average interest rate -- 6.03% 6.01%
Other - Adjustable 75,150 -- 76,108 76,994
Average interest rate 6.40% -- 6.02%
Total interest-sensitive ---------- --------- --------- -----------
liabilities $ 123,752 $ 261,058 $ 1,868,039 $ 1,870,656
========== ========= ========= ===========
</TABLE>
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
(1) Expected maturities are contractual maturities adjusted for prepayments of
principal. The Bank uses certain assumptions to estimate fair values and
expected maturities. For assets, expected maturities are based upon
contractual maturity, projected repayments and prepayments of principal. The
prepayment experience reflected herein is based on market consensus. For
deposit liabilities, in accordance with standard industry practice and the
Bank's own historical experience, "decay factors", used to estimate deposit
runoff, have been applied. The actual maturities of these instruments could
vary substantially if future prepayments differ from the Bank's historical
experience. Adjustable rates for the time periods indicated are the current
interest rates for the respective assets and liabilities as of December 31,
1997, no estimates reflecting future repricing have been incorporated.
Certain items have been excluded from the tabular presentation above including
loan commitments, unadvanced amounts on construction loans, unused lines of
credit on home equity loans and commercial loans and certain interest rate cap
and collar contracts the Company is a party to.
NON-PERFORMING ASSETS - At December 31, 1997, the Company had total
non-performing assets of $8.2 million, or .38% of total assets, including $5.4
million in non-performing loans and $2.7 million in real estate owned. The
allowance for loan losses totaled $9.7 million, or 180% of total non-performing
loans, at December 31, 1997. Information regarding non-performing assets and
other asset quality data for December 31, 1997 and September 30, 1997 is as
follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
----------------------- -----------------------
<S> <C> <C>
Non-performing loans $ 5,419 $ 4,478
Real estate owned, net 2,745 3,754
------------------ ------------------
Non-performing assets $ 8,164 $ 8,232
================== ==================
Impaired loans:
Non-performing (1) $ 489 $ 433
Performing 2,980 2,917
================== ==================
Allowance for loan losses $ 9,745 $ 9,765
================== ==================
Non-performing assets to total assets 0.38% 0.39%
Non-performing loans to gross loans receivable 0.48% 0.39%
Allowance for loan losses to non-performing
loans 179.83% 218.07%
Allowance for loan losses to gross loans
receivable 0.86% 0.86%
(1) Non-performing impaired loans are included in total non-performing loans.
</TABLE>
The Company's non-performing assets are predominately residential in nature.
Assets secured by residential property account for approximately 84% of the
non-performing assets at December 31, 1997. All non-performing assets and
impaired loans are reviewed quarterly as part of the internal review process.
Non-performing loans increased $941,000 million from $4.5 million at September
30, 1997 to $5.4 million at December 31, 1997
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
The following table represents a breakdown of non-performing assets as of
December 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
Total
Non-performing Real estate non-performing
loans owned, net assets % of Total
--------------- --------------- --------------- -----------
<S> <C> <C> <C> <C>
Mortgage loans:
One to four family residential $ 3,921 1,804 5,725 70.1
Multi-family residential -- -- -- --
Land -- 61 61 0.7
Commercial 317 880 1,197 14.7
Non-mortgage loans:
Commercial 123 -- 123 1.5
Consumer -- -- -- --
Home Equity 1,058 -- 1,058 13.0
--------------- --------------- --------------- -----------
Total $ 5,419 2,745 8,164 100%
=============== =============== =============== ===========
</TABLE>
The allowance for loan losses decreased to $9.7 million at December 31, 1997
from $9.8 million at September 30, 1997. The loan loss provision was $300,000
for the three months ended December 31, 1997, a decrease of $425,000 from the
provision for loan losses a year earlier. The decrease in the loan loss
provision is a reflection of the improved level of asset quality at December 31,
1997 when compared to the three months ended December 31, 1996.
At December 31, 1997, the Bank's ratio of allowance for loan losses to
non-performing loans decreased to 180% from 218% at September 30, 1997 and the
ratio of non-performing assets to total assets declined to 0.38% at December 31,
1997 from 0.39% as of September 30, 1997. The decrease in the ratio of allowance
for loan losses to non-performing loans is the result of a 21% increase in
non-performing loans while the allowance remained essentially unchanged.
The quarterly analysis prepared by management to determine the adequacy of the
allowance for the loan losses incorporates delinquency information, classified
loan detail and other factors on a loan by loan basis and indicates, as of
December 31, 1997, that the allowance for loan losses is adequate to cover the
risk of loss in the loan portfolio.
Management monitors the adequacy of the allowances for loan and real estate
owned losses on a continual basis. While management uses available information
to recognize losses on loans and real estate owned, future additions to the
allowances may be necessary based on changes in economic conditions,
particularly here in Connecticut. In connection with the determination of the
allowances on loans and real estate owned, management reviews and grades all
adversely classified assets as part of its internal loan review process. Each
loan is reviewed to determine loss exposure and the borrower's ability to pay.
Management obtains independent appraisals for significant properties.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowances for losses on
loans and real estate owned. Such agencies may require the Bank to recognize
additions to the allowances based on their judgments of information available to
them at the time of the examination.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
RESULTS OF OPERATIONS
Comparison of the Three Month Periods Ended December 31, 1997 and 1996.
GENERAL
Net income for the quarter ended December 31, 1997 was $4.9 million, a $1.3
million, or 36.8%, increase from the net income reported for the three months
ended December 31, 1996 of $3.6 million. Diluted net income per share grew to
$0.74 for the three months ended December 31, 1997 from $0.56 per share in the
comparable prior year period.
The increase in net income is primarily the result of a $1.9 million increase in
net interest income from $13.9 million during the quarter ended December 31,
1996 to $15.7 million for the three months ended December 31, 1997. A $417,000
increase in non-interest income from the first quarter of fiscal 1997 to the
first quarter of fiscal 1998 contributed to the improvement in net income, but
was offset by a $755,000 increase in non-interest expense during the comparable
periods.
NET INTEREST INCOME
Net interest income was $15.7 million for the quarter ended December 31, 1997,
an increase of $1.9 million, or 13.5%, from net interest income of $13.9 million
for the three months ended December 31, 1996. Interest income increased $5.8
million to $37.0 million for the three months ended December 31, 1997 compared
to $31.2 million for the quarter ended December 31, 1996. Interest expense was
$21.3 million during the three months ended December 31, 1997 compared to $17.3
million for the same period in 1996.
The principal reason for the increases in interest income, interest expense and
net interest income was significant growth in the average balance of both
interest-earning assets and interest-bearing liabilities. Interest-earning
assets increased $333 million, or 19.8%, to $2.0 billion for the three months
ended December 31, 1997 while interest-bearing liabilities grew to $1.8 billion
for the three months ended December 31, 1997, an increase of $265 million from
the $1.6 billion during the quarter ended December 31, 1996.
The increase in the average balance of interest-earning assets was offset by a
decline in the average yield on interest-earning assets to 7.35% for the quarter
ended December 31, 1997 from 7.41% in the comparable 1996 period. This decline
in yield was the result of the majority of the growth in earning assets being
represented by mortgage-backed securities which have a lower yield than the loan
portfolio.
An increase of 23 basis points in the cost of interest-bearing liabilities to
4.61% for the quarter ended December 31, 1997 contributed to the increase in
interest expense. The increase in the cost of interest -bearing liabilities was
driven by growth of $284 million in the average balance of borrowed funds, which
represent a higher cost than deposits.
Interest rate spread and margin declined to 2.74% and 3.12% from 3.03% and 3.30%
for the three months ended December 31, 1997 and 1996, respectively.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
PROVISION FOR LOAN LOSSES
The Company decreased the provision for loan losses by $425,000, or 58.6%, to
$300,000 for the three months ended December 31, 1997 from $725,000 for the
three months ended December 31, 1996. The decrease is due to an improved level
of asset quality that existed as of and during the quarter ended December 31,
1997 when compared to the similar date and period for 1996. The amount of
non-performing loans has declined significantly from $14.8 million at December
31, 1996 to $5.4 million at December 31, 1997 principally due to the sale of
troubled loans in June 1997.
NON-INTEREST INCOME
Non-interest income increased $417,000 to $1.9 million for the quarter ended
December 31, 1997 compared to $1.5 million for the quarter ended December 31,
1996. The 27.3% increase is primarily the result of growth in checking account
and customer service fees during the three months ended December 31, 1997 when
compared to the December 31, 1996 quarter, particularly checking account service
fees.
NON-INTEREST EXPENSE
Non-interest expense was $9.3 million for the three months ended December 31,
1997 compared to $8.6 million for the three months ended December 31, 1996, an
increase of $755,000, or 8.8%. The principal component of the increase in
non-interest expense was the cost of the preferred securities, issued on April
1, 1997, of $1.3 million for the quarter ended December 31, 1997. Increases in
office occupancy of $101,000, due to higher costs related to furniture, fixtures
and equipment maintenance and marketing expenses of $103,000 when comparing the
December 1997 and December 1996 quarters also contributed to the overall
increase in non-interest expense.
Compensation related expenses totaled $3.2 million for the quarter ended
December 31, 1997, a decrease of $398,000 from the $3.6 million recorded during
the three months ended December 31,1996. The decrease is the result of the
complete integration of MidConn Bank and the resultant reduction in staffing.
Declines of $103,000 in Federal deposit insurance premiums and $199,000 in other
expenses between the December 1997 and 1996 quarters also helped in offsetting
the overall increase in non-interest expense.
INCOME TAXES
Income taxes increased to $3.1 million for the quarter ended December 31, 1997
from $2.5 million for the three months ended December 31, 1996. The $635,000
increase is primarily attributable to an increase in pre-tax income but is
partially offset by a decrease in the effective tax rate to 39.0% for the three
months ended December 31, 1997 from 41.1% for the three months ended December
31, 1996. The decrease in the effective rate is due to a larger investment in
securities during the quarter ended December 31, 1997 that qualify for favorable
tax treatment, particularly tax exempt municipal bonds, when compared to the
quarter ended December 31, 1996.
17
<PAGE>
EAGLE FINANCIAL CORP. AND SUBSIDIARIES
PART II
Item 1 - Legal Proceedings
Not applicable
Item 2 - Changes in Securities
Not applicable
Item 3 - Defaults upon Senior Securities
Not applicable
Item 4 - Submission of Matter to a Vote of Securities Holders
Not applicable
Item 5 - Other Information
Not applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K.
On November 6, 1997, the Company filed a report on Form 8-K which reported under
Item 5 - Other Events, an announcement that the Company has suspended its
Dividend Reinvestment and Stock Purchase Plan pending consummation of the
Company's proposed merger with Webster Financial Corporation announced on
October 27, 1997. The suspension was required under the terms of the pending
merger.
On November 7, 1997, the Company filed a report on Form 8-K which reported under
Item 5 - Other Events, an announcement that the Company has entered into an
Agreement and Plan of Merger with Webster Financial Corporation. In accordance
with the terms of the Agreement and Plan of Merger, each share of the Company
common stock will be converted into the right to receive .84 shares of Webster
Financial Corporation common stock.
On December 29, 1997, the Company filed a report on Form 8-K which reported
under Item 5 - Other Events, an announcement that the Company had adjusted its
earnings upward for the last quarter of its 1997 fiscal year which ended on
September 30, 1997. Earnings for the three months ended September 30, 1997 were
adjusted to $4.5 million, or $0.68 per share, compared to previously reported
net income of $4.3 million, or $0.65 per share. Net income for the twelve months
ended September 30, 1997 was $7.3 million, or $1.12 per share, versus previously
reported net income of $7.1 million, or $1.08 per share.
On December 31, 1997, the Company filed a report on Form 8-K which reported
under Item 5 - Other Events, an announcement that the Company would be delaying
its annual shareholders meeting for fiscal 1997 that would normally be held in
January 1998 pending the completion of a special shareholders meeting required
to vote on the acquisition of the Company by Webster Financial Corporation.
18
<PAGE>
EAGLE FINANCIAL CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of The Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EAGLE FINANCIAL CORP.
Date: February 17, 1998 By: /s/ Mark J. Blum
----------------------------------------
Mark J. Blum
Vice President, Chief Financial Officer
Date: February 17, 1998 By: /s/ Barbara S. Mills
----------------------------------------
Barbara S. Mills
Vice President, Treasurer
19
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit No. Exhibit Numbered Page
----------- ------- -------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000792369
<NAME> Eagle Financial Corp.
<MULTIPLIER> 1000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 39,740
<INT-BEARING-DEPOSITS> 44,165
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 858,830
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,124,055
<ALLOWANCE> 9,745
<TOTAL-ASSETS> 2,157,171
<DEPOSITS> 1,370,188
<SHORT-TERM> 265,843
<LIABILITIES-OTHER> 22,601
<LONG-TERM> 297,576
0
0
<COMMON> 66
<OTHER-SE> 152,259
<TOTAL-LIABILITIES-AND-EQUITY> 2,157,171
<INTEREST-LOAN> 22,218
<INTEREST-INVEST> 14,186
<INTEREST-OTHER> 623
<INTEREST-TOTAL> 37,027
<INTEREST-DEPOSIT> 13,459
<INTEREST-EXPENSE> 21,298
<INTEREST-INCOME-NET> 15,729
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,341
<INCOME-PRETAX> 8,030
<INCOME-PRE-EXTRAORDINARY> 8,030
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,898
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0.74
<YIELD-ACTUAL> 7.35
<LOANS-NON> 5,419
<LOANS-PAST> 0
<LOANS-TROUBLED> 5,326
<LOANS-PROBLEM> 19,970
<ALLOWANCE-OPEN> 9,765
<CHARGE-OFFS> 419
<RECOVERIES> 99
<ALLOWANCE-CLOSE> 9,745
<ALLOWANCE-DOMESTIC> 9,203
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 542
</TABLE>
