SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
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.
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(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
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(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 (ss.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.
Based upon the closing price of the registrant's common stock as of
December 9, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant is $246.6 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 9, 1997: 6,501,363 shares.
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* Solely for purposes of this calculation, all executive officers and
directors of the registrant, the registrants' 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
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GENERAL
Eagle Financial Corp. ("Eagle" or the "Company") is the holding company of
Eagle Bank (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. In May 1997, Eagle changed the name of
the Bank from Eagle Federal Savings Bank to Eagle Bank. Unless otherwise stated,
all references herein to Eagle or the Company include the Bank and other
subsidiaries on a consolidated basis.
At September 30, 1997, Eagle had total assets of $2.1 billion, net loans
receivable of $1.1 billion, deposits of $1.4 billion and shareholders' equity of
$144.9 million. Through the Bank, the Company provides consumer banking services
through 26 traditional banking offices and 4 in-store supermarket branch offices
in Connecticut, serving the Torrington, Bristol, New Britain, and Hartford
market regions. As a community oriented savings bank, the Bank focuses on the
financial needs of its customer 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").
The following table indicates selected ratios for the periods indicated:
For the years ended September 30,
---------------------------------
1997 1996 1995
---- ---- ----
Return on average assets 0.39% 0.90% 0.80%
Return on average equity (a) 5.25% 11.62% 9.98%
Dividend payout ratio 81.25% 34.07% 38.60%
Average equity to average assets ratio (b) 7.38% 7.72% 7.97%
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(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 5.11% and 11.59% for the years ended September 30, 1997 and
1996, 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 7.37% and 7.74% for the years ended
September 30, 1997 and 1996, respectively.
Eagle's principal executive office is located at 222 Main Street, Bristol,
Connecticut 06010 and its telephone number is (860) 314-6400.
On October 27, 1997, the Company announced the signing of a 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 Eagle common
stock. The transaction is subject to shareholder and regulatory approval and is
expected to close during the quarter ended March 31, 1998. Webster has total
assets of $6.8 billion, total deposits of $4.3 billion, total loans receivable
of $3.7 billion and shareholders' equity of $363.6 million as of September 30,
1997. Webster conducts its business through 84 banking offices throughout
Connecticut.
2
<PAGE>
MERGERS AND ACQUISITIONS - On May 31, 1997, the Company completed its merger
with MidConn Bank ("MidConn") through a stock for stock exchange and merged the
operations of MidConn into the operations of the Bank. The transaction has been
accounted for as a pooling of interests combination and, accordingly, the
consolidated financial statements for periods prior to the combination have been
restated to include the accounts and results of operations of MidConn. The
acquisition expanded the Company's market area into the New Britain, Berlin and
Newington municipalities. Shortly after completing the merger Eagle closed two
of the ten acquired branch offices that were in close proximity to existing Bank
branches and sold a third geographically separate, smaller office recording a
gain on sale of deposits of $546,000. The merger with MidConn allows Eagle to
serve a broader segment of the Hartford market area.
In past years, Eagle has also significantly expanded its operations through
three federally assisted acquisitions in which the Bank 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 assisted acquisition, the Bank of Hartford, Inc.
("Bank of Hartford") acquisition completed in June 1994, Eagle Bank 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%. Fiscal 1994
also includes the acquisition of The Federal Savings Bank ("FSB") by MidConn in
a stock purchase transaction.
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 Bank recorded goodwill in the amount of $19.9
million. The transaction was completed in January 1996. Shortly thereafter,
Eagle Bank 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 the Bank
to focus its 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, 1997, 89.4%, or $1.0 billion, of the
Bank's $1.1 billion total gross loans receivable was secured by first mortgages
on real estate. The remainder of the Bank's loan portfolio consists of $19.4
million of non-mortgage commercial loans and $101.2 million of consumer and home
equity loans at September 30, 1997.
3
<PAGE>
Eagle has experienced fluctuations in loan originations, with $236.7
million, $303.1 million and $190.4 million of originations in fiscal 1997, 1996
and 1995, respectively, due in part to the volatility occurring in the long-term
interest rate environment over the past few years. Commercial loan originations
of $39.4 million in 1997 compared to $28.3 million in 1996 contributed to the
loan origination activity. Residential mortgage lending has been and will
continue to be the Bank'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 1996, made significant progress in 1997 and
expects to further the expansion of commercial banking in 1998 and into the
future. 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 high asset
quality. Total non-performing assets of Eagle were $19.6 million at September
30, 1995, $17.3 million at September 30, 1996 and $8.2 million at September 30,
1997. At those dates, non-performing assets constituted 1.99%, 1.55%, and 0.72%
respectively, of total loans receivable and real estate owned. At September 30,
1997, Eagle's allowance for loan losses totaled $9.8 million, or 218% of total
non-performing loans.
The Bank's funding strategy is focused primarily on developing core
deposits such as regular savings and checking accounts, and attracting term
certificates of deposit. The Bank supplements its deposits with other borrowed
money, primarily Federal Home Loan Bank advances.
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 Bank, 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 Bank 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, 1997, mortgage loans secured by real estate, aggregated $1.0 billion or
89.4% of Eagle's gross loans receivable portfolio. At September 30, 1996 and
1995, such mortgage loans aggregated $1.0 billion, or 90.4%, and $887.2 million,
or 90.4%, respectively. The Bank's real estate loans at September 30, 1997
included $912.6 million of first mortgage loans secured by 1-4 family
residential real estate (80.1% of total gross loans receivable), $60.8 million
of commercial real estate loans (5.3% of total gross loans receivable) and $45.9
million of multi-family, construction and land loans (4.0% of total gross loans
receivable). The Bank had total non-mortgage commercial loans of $19.4 million,
or 1.7% of total gross loans receivable. The remaining $101.2 million of loans
(9.6% of total gross loans receivable) includes $45.3 million of home equity
lines of credit (4.0% of total gross loans receivable) and $45.4 million of
second mortgage loans (4.0% of total gross loans receivable) with the remainder
of the loans being primarily loans secured by deposits and personal loans.
4
<PAGE>
At September 30, 1997 commercial real estate loans totaled $60.8 million
and are generally secured by a mix of retail and professional office properties.
This represents an increase of 16.6% from the amount outstanding at September
30, 1996 of $52.1 million. The increase was principally the result of the
improved origination activity created from an expanded group of experienced
commercial loan officers. Multi-family loans, secured by properties with 5 units
or more, totaled $15.9 million as o September 30, 1997. This amount is down
slightly from the September 30,1996 total of $18.1 million. Land development
loans decreased to $9.6 million at September 30, 1997 from $10.7 million at
September 30, 1996.
Eagle made significant progress in 1997 in implementing its strategy to
emphasize the origination of commercial real estate and small business loans.
Commercial related originations totaled $39.4 million for the year ended
September 30, 1997 demonstrating strong growth from prior years. Eagle has
continued to expand and improve both its commercial origination 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 often call for
annual, quarterly or monthly rate adjustments.
At September 30, 1997 consumer loans totaled $101.2 million compared to
$96.8 million at September 30, 1995 and $91.4 million at September 30, 1995. The
increase in consumer loans is attributable to the Bank's emphasis on the
origination of home equity lines of credit through various programs. Eagle
intends to continue emphasizing home equity lines of credit (4.0% of total gross
loans receivable at September 30, 1997), using its existing credit programs and
personnel.
At September 30, 1997, the Company's largest loan relationship had an
aggregate outstanding balance of $9.6 million. That relationship represents
eight loans, of which $2.1 million are secured by multi-family apartment
buildings and $7.5 million are secured by commercial office or industrial
properties. At that date, the next largest lending relationship's outstanding
balance was $3.3 million, representing one loan secured by a commercial
property. The Bank has seven other lending relationship which exceed $2.0
million, in aggregate outstanding balance.
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>
September 30,
-------------------------------------------------------------
1997 1996
Amount % Amount %
------------- ------------ ------------- ------------
(in thousands)
<S> <C> <C>
Real estate mortgage loans:
1-4 family residential:
Permanent $ 912,432 80.1% $ 904,331 81.7%
Construction 17,095 1.5 15,950 1.4
Multi-family 15,949 1.4 18,106 1.6
Commercial real estate 60,802 5.3 52,132 4.7
Commercial construction 3,177 0.3 -- --
Land development (a) 9,594 0.8 10,701 1.0
------------- ------------ ------------- ------------
Total conventional loans 1,019,049 89.4 1,001,220 90.4
FHA/VA mortgage loans 214 -- 39 --
------------- ------------ ------------- ------------
Total real estate mortgage 1,019,263 89.4 1,001,259 90.4
------------- ------------ ------------- ------------
Non-mortgage commercial 19,376 1.7 9,422 0.9
------------- ------------ ------------- ------------
Consumer loans:
Second mortgages 45,405 4.0 46,389 4.2
Home equity lines of credit 45,316 4.0 41,992 3.8
Other consumer 10,459 0.9 8,444 0.7
------------- ------------ ------------- ------------
Total consumer loans 101,180 8.9 96,825 8.7
------------- ------------ ------------- ------------
Total loans receivable
(before net items) 1,139,819 100% 1,107,506 100%
============= ============
Add (deduct):
Unearned discounts and premiums (609) (574)
Loans in process -- --
Allowance for loan losses (9,765) (10,507)
Deferred loan origination feees (1,064) (1,769)
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Total loans receivable $ 1,128,381 $ 1,094,656
============= ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------
1995 1994 1993
Amount % Amount % Amount %
--------- ------- --------- ------- --------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans:
1-4 family residential:
Permanent $ 816,754 83.2% $ 932,057 85.8% $ 703,237 84.5%
Construction 14,260 1.5 21,471 2.0 21,578 2.6
Multi-family 20,143 2.1 8,019 0.7 6,713 0.8
Commercial real estate 26,623 2.7 21,702 2.0 20,041 2.4
Commercial construction - - - - - -
Land development (a) 9,298 0.9 7,402 0.7 5,774 0.7
--------- ------- --- --------- ------- --- --------- -------
Total conventional loans 887,078 90.4 990,651 91.2 757,343 91.0
FHA/VA mortgage loans 79 - 133 - 227 -
--------- ------- --- --------- ------- --- --------- -------
Total real estate mortgage 887,157 90.4 990,784 91.2 757,570 91.0
--------- ------- --- --------- ------- --- --------- -------
Non-mortgage commercial 2,677 0.3 2,303 0.2 2,970 0.4
--------- ------- --- --------- ------- --- --------- -------
Consumer loans:
Second mortgages 42,075 4.3 41,053 3.8 16,864 2.0
Home equity lines of credit 37,064 3.8 42,576 3.9 47,899 5.8
Other consumer 12,267 1.2 9,092 0.9 6,462 0.8
--------- ------- --- --------- ------- --- --------- -------
Total consumer loans 91,406 9.3 92,721 8.6 71,225 8.6
--------- ------- --- --------- ------- --- --------- -------
Total loans receivable
(before net items) 981,240 100% 1,085,808 100% 831,765 100%
======= ======= =======
Add (deduct):
Unearned discounts and premiums 90 130 (39)
Loans in process - - (600)
Allowance for loan losses (9,611) (10,305) (6,143)
Deferred loan originationfees (1,595) (2,890) (2,990)
--------- ---------- ----------
Total loans receivable $ 970,124 $1,072,743 $ 821,993
========= ========== ==========
</TABLE>
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(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, 1997
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 loans $ 1,061 $ 5,719 $ 915,460 $ 922,240
Multi-family, commercial construction
and commercial real estate loans 4,779 7,013 68,136 79,928
Residential construction loans 41 - 17,054 17,095
Commercial loans 9,881 7,367 2,128 19,376
Consumer loans 5,915 20,616 74,649 101,180
-------- -------- --------- ---------
Total $ 21,677 $ 40,715 $1,077,427 $ 1,139,819
======== ======== ========= =========
</TABLE>
The following table sets forth as of September 30, 1997 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 or Floating or Floating or
Predetermined Adjustable Predetermined Adjustable Predetermined Adjustable
Rates Rates Rates Rates Rates Rates
------------ --------- ------------- ------------ -------------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential 1-4 family
and land loans $ 4,625 $ 1,094 $295,540 $619,920 $300,165 $ 621,014
Multi-family, commercial
construction and commercial
real estate loans 4,469 2,544 25,062 43,074 29,531 45,618
Residential construction loans - - - 17,054 - 17,054
Commercial loans 3,815 3,552 920 1,208 4,735 4,760
Consumer loans 13,111 7,505 27,120 47,529 40,231 55,034
------- ---------- ---------- ----------- ---------- -----------
Total $ 26,020 $ 14,695 $348,642 $728,785 $374,662 $ 743,480
======= =========== ========== =========== ========== ===========
</TABLE>
One- to Four-Family First Mortgage Loans. At September 30, 1997, first
mortgage loans (including construction loans) secured by one-to four-family
homes comprised 81.6% 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 Bank, 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 7 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 specifi 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, 1997,
multi-family loans totaled $15.9 million, or 1.4% of the gross loan portfolio,
and commercial real estate loans totaled $60.8 million, or 5.3% of gross loans.
Eagle also had $3.2 million of commercial construction loans outstanding of
September 30, 1997. 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 t
a lower maximum loan-to-value ratio and generally lending on the security of
property located within its market areas. On a combined basis at September 30,
1997, multi-family, commercial construction and commercial real estate loans
comprised 7.0% of the total loan portfolio, before net items, compared to 6.3%
at September 30, 1996.
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, 1997,
construction loans totaled $17.1 million or 1.5% of the total loan portfolio of
Eagle, before net items, compared to $16.0 million or 1.4% at September 30,
1996.
7
<PAGE>
Consumer Loans. At September 30, 1997, 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 $101.2 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.
Loan Originations. Residential loan originations principally come from
three separate sources. Originations generated through the retail branch network
account 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 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
$236.7 million for the year ended September 30, 1997 compared to $303.1 million
in fiscal 1996. Residential mortgage loan originations accounted for $151.2
million of the total originations in fiscal 1997. Of the total, $16.9 million or
11.2%, represented originations of fixed rate residential mortgage loans with
the remaining $134.3 million representing a variety of adjustable rate
residential loan products. The composition of originations marked a continuation
of what occurred during the second half of fiscal 1996 when the origination of
fixed rate loans dropped off significantly. This origination activity results
from an interest rate environment which has been prevalent for a majority of
fiscal 1997 that has reduced the incentive for fixed rate mortgage loans.
The largest category of adjustable rate mortgage originations for the year
ended September 30, 1997 was 5-1 year product totaling $62.2 million. A 5-1 year
mortgage loan has a fixed interest rate for the initial five years of the term,
after which it converts to a one year adjustable rate loan. This was the most
popular adjustable rate product for the second consecutive fiscal year.
Originations of 3-1 year and 1 year adjustable rate mortgage products totaled
$47.2 million and $19.6 million, respectively, for the year ended September 30,
1997.
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, 1997 and 1996, loan commitments of $103.4
million and $81.7 million, respectively, were outstanding. These amounts include
approximately $39.5 million and $38.6 million, respectively, in unadvanced home
equity credit lines.
8
<PAGE>
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 secured 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 Bank, since environmental contamination may render the security property
unsuitable for residential use. In addition, the value of residential 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 Bank 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.
Eagle purchased $3.3 million, $36.1 million and $8.1 million during the years
ended September 30, 1997, 1996 and 1995, respectively, of loans secured by
properties in Connecticut.
In addition to servicing its own loans, Eagle services loans owned by
others, which loans had a balance at September 30, 1997, 1996 and 1995 of $246.5
million, $261.4 million and $256.1 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.
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 certain fixed rate 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.
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.
9
<PAGE>
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 identified 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.
Eagle has continued this approach with its fixed rate mortgage loan
originations and sold $13.7 million during fiscal 1997. The mortgage banking
activities resulted in a gain for the year ended September 30, 1997 of $124,000.
The table below shows Eagle's mortgage loan activities for the periods
indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
MORTGAGE LOAN ORIGINATIONS AND PURCHASES:
Loan originations:
Permanent:
1-4 family units $ 100,089 $ 169,985 $ 98,704
Multi-family units 580 43 729
Commercial real estate 10,685 11,961 2,780
Land 5,082 4,546 2,502
-------------- -------------- --------------
Total permanent loans 116,436 186,535 104,715
-------------- -------------- --------------
Refinancing* 16,056 23,748 23,806
-------------- -------------- --------------
Construction:
1-4 family units 34,509 35,019 28,980
Commercial 7,965 - -
-------------- -------------- --------------
Total construction loans 42,474 35,019 28,980
-------------- -------------- --------------
Total mortgage loan originations 174,966 245,302 157,501
-------------- -------------- --------------
Loan purchases:
Participations - - 130
Whole loans 3,263 36,142 7,932
Loans purchased through acquisition - 22,233 -
-------------- -------------- --------------
Total loan purchases 3,263 58,375 8,062
-------------- -------------- --------------
Total mortgage loan originations and purchases 178,229 303,677 165,563
-------------- -------------- --------------
MORTGAGE LOAN SALES, SECURITIZATION AND PRINCIPAL
REPAYMENTS:
Loan sales 28,106 27,532 1,059
Loan securitization - 16,971 154,194
Principal repayments 132,119 145,072 113,577
-------------- -------------- --------------
Total mortgage loan sales, securitization and
principal repayments 160,225 189,575 268,830
-------------- -------------- --------------
Increase (decrease) in mortgage loans receivable
(before net items) $ 18,004 $ 114,102 $ (103,267)
============== ============== ==============
</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."
10
<PAGE>
The table below shows Eagle's non-mortgage commercial loan activities for the
periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------------------
1997 1996 1995
------------- -------------- ------------
(in thousands)
<S> <C> <C> <C>
LOAN ORIGINATIONS AND PURCHASES
Loan originations $ 22,434 $ 14,291 $ 4,150
Loans purchased through acquisition - 2,025 -
------------- -------------- ------------
Total loan originations & purchases 22,434 16,316 4,150
------------- -------------- ------------
LOAN SALES AND PRINCIPAL REPAYMENTS
Principal repayments 9,124 9,571 3,776
Loan sales 3,356 - -
------------- -------------- ------------
Total loan sales & principal repayments 12,480 9,571 3,776
------------- -------------- ------------
Increase in commercial loans $ 9,954 $ 6,745 $ 374
============= ============== ============
</TABLE>
The following table shows the consumer loan activities of Eagle for the
periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------------------------
1997 1996 1995
-------------- -------------- ---------------
(In thousands)
<S> <C> <C> <C>
LOAN ORIGINATIONS AND PURCHASES:
Secured by deposits $ 3,329 $ 3,317 $ 4,565
Home improvement 101 249 283
Home equity 27,754 19,473 10,331
Automobile and personal 8,082 6,906 6,718
-------------- -------------- ---------------
Total originations 39,266 29,945 21,897
Loan purchases through acquisition - 13,169 -
-------------- -------------- ---------------
Total loan originations and purchases 39,266 43,114 21,897
-------------- -------------- ---------------
LOAN SALES AND PRINCIPAL REPAYMENTS:
Principal repayments 34,911 36,696 23,212
Loan sales - 999 -
-------------- -------------- ---------------
Total loan sales and principal
repayments 34,911 37,695 23,212
-------------- -------------- ---------------
Increase (decrease) in consumer loans $ 4,355 $ 5,419 $ (1,315)
============== ============== ===============
</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, 1997, Eagle had deferred net loan fees of $1.1
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
originated by the Bank.
11
<PAGE>
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, 1997, the Company's total non-performing assets, including
non-performing (or non-accrual) loans and real estate owned, was $8.2 million,
or 0.39% of total assets. This compares to non-performing assets of $17.3
million, or 0.98% of total assets, at September 30, 1996 and $19.6 million, or
1.23% of total assets, at September 30, 1995.
The following table sets forth information regarding Eagle's non-performing
assets at the dates indicated.
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Non-performing Loans:
Mortgage loans:
One-to-four family residential $ 2,989 $ 8,508 $10,973 $ 9,545 $ 6,858
Multi-family and commercial 638 1,730 1,012 1,277 196
Non-mortgage commercial loans 28 400 216 219 2
Home equity lines of credit and
second mortgages 815 1,185 1,310 1,487 962
Other consumer loans 8 47 20 17 18
Real estate owned 3,754 5,384 6,105 10,016 9,680
------- ------- ------- ------- -------
Total $ 8,232 $17,254 $19,636 $22,561 $17,716
======= ======= ======= ======= =======
Impaired loans:
Performing $ 2,917 $ 4,799 $ -- $ -- $ --
Non-performing 433 6,134 -- -- --
======= ======= ======= ======= =======
Non-performing assets to loans
receivable, gross and real estate owned 0.72% 1.55% 1.99% 2.06% 2.11%
Non-performing assets to total assets 0.39% 0.98% 1.23% 1.57% 1.73%
</TABLE>
Non-performing loans decreased $9.0 million, or 52.3%, from September 30,
1996 to September 30, 1997. This decrease is primarily attributable to the sale
of $17.7 million of troubled loans, including $9.7 million of non-performing
loans, during fiscal 1997. In this context, troubled loans are considered to be
either non-performing loans, other delinquent loans or loans with poor or
inconsistent payment histories. The remaining troubled loans include $4.6
million of loans delinquent between 30-90 days and $3.4 million of loans with a
current payment status.
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 approximately 61% since September 30, 1993.
12
<PAGE>
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.
In addition to non-performing loans, Eagle has $2.4 million of loans at
September 30, 1997 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 1997,
Eagle restructured loans totaling $3.7 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,
1997, impaired loans totaled $3.4 million, $2.9 million of which were classified
as performing and $433,000 million of which were classified as non-performing.
Performing and non-performing impaired loans were $4.8 million and $6.1 million,
respectively, at September 30, 1996 totaling $10.9 million. The decrease in
impaired loans from 1996 to 1997 is a result of the troubled loan sale. The
non-performing impaired loans are included in total non-performing loans.
At September 30, 1997, the Company's non-performing assets are
predominately residential in nature with $5.6 million secured by one-to-four
residential properties, including $815,000 of non-performing home equity loans,
and $1.8 million secured by multi-family, land or commercial real estate
properties.
ALLOWANCE FOR LOAN LOSSES
At September 30, 1997, Eagle's allowance for loan losses totaled $9.8
million, compared to $10.5 million at September 30, 1996, and $9.6 million at
September 30, 1995. Eagle added $9.0 million in provisions for loan losses to
the allowance during fiscal 1997 compared to provisions of $3.3 million and $4.1
million during the years ended September 30, 1996 and 1995, respectively. The
provision for loan losses of $9.0 million for the year ended September 30, 1997
includes $2.7 million related to the merger with MidConn that was recorded in
order to consistently apply Eagle's loan loss allowance calculation methodology
to the MidConn loan portfolio and $3.4 million taken in order to complete the
sale of troubled loans.
13
<PAGE>
The following is a summary of activity in the allowance for loan losses for
the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 10,507 $ 9,611 $ 10,305 $ 6,143 $ 5,139
Charge-offs:
One-to-four family mortgage loans (6,007) (3,179) (3,247) (1,477) (352)
Multi-family, commercial and
land development loans (2,794) (866) (1,348) (770) (526)
Consumer and home equity loans (1,077) (295) (366) (76) (168)
-------- -------- -------- -------- --------
(9,878) (4,340) (4,961) (2,323) (1,046)
-------- -------- -------- -------- --------
Recoveries:
One-to-four family mortgage loans 136 91 94 109 224
Multi-family, commercial and land
development loans 1 5 34 3 8
Consumer and home equity loans 21 3 1 5 14
-------- -------- -------- -------- --------
158 99 129 117 246
-------- -------- -------- -------- --------
Net charge-offs (9,720) (4,241) (4,832) (2,206) (800)
Allowance associated with purchases - 1,871 - 4,828 -
Provision for loan losses 8,978 3,266 4,138 1,540 1,804
-------- -------- -------- -------- --------
Balance at end of period $ 9,765 $ 10,507 $ 9,611 $ 10,305 $ 6,143
======== ======== ======== ======== ========
Ratio of net charge-offs to
average loans outstanding, net 0.86% 0.41% 0.44% 0.24% 0.10%
</TABLE>
At September 30, 1997, Eagle had $9.8 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 in 1996 and $4.8
million in 1994 of allowance for loan losses that were recorded as part of the
Fleet/Shawmut and Bank of Hartford and The Federal Savings Bank 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 The
Federal Savings Bank transactions.
14
<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,
---------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance at end of period applicable to:
One-to-four family mortgage loans $ 4,713 $ 5,689 $ 6,873 $ 7,464 $ 4,991
81.6% 83.1% 84.7% 87.8% 87.1%
Multi-family, commercial real estate
and land development loans $ 2,448 $ 3,311 $ 1,185 $ 1,010 $ 602
7.9% 7.3% 5.7% 3.4% 3.9%
Consumer and home equity loans $ 1,319 $ 1,235 $ 901 $ 1,287 $ 285
8.9% 8.7% 9.3% 8.6% 8.6%
Non-mortgage commercial loans $ 628 $ 142 $ 113 $ 25 $ 30
1.7% 0.9% 0.3% 0.2% 0.4%
Unallocated $ 657 $ 130 $ 539 $ 519 $ 235
------- ------- ------- ------- -------
Total allowance for loan losses $ 9,765 $10,507 $ 9,611 $10,305 $ 6,143
======= ======= ======= ======= =======
</TABLE>
The ratio of allowance for loan losses to non-performing loans was 218%,
89%, and 71% at September 30, 1997, 1996 and 1995, 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
1997 in the ratio of allowance for loan losses to non-performing loans is due
primarily to the reduction in non-performing loans caused by the sale of
troubled loans during the year.
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.
Years Ended September 30,
------------------------------
1997 1996 1995
------- ------- -------
(in thousands)
Accruing loans delinquent 60-89 days $ 604 $ 5,177 $ 5,379
------- ------- -------
Nonaccrual loans 4,478 11,870 13,531
------- ------- -------
Total $ 5,082 $17,047 $18,910
======= ======= =======
Allowance for Loan losses $ 9,765 $10,507 $ 9,611
======= ======= =======
Coverage ratio 192.1% 61.6% 50.8%
The decrease in accruing loans delinquent 60-89 days and non-accrual loans
from September 30, 1996 to September 30, 1997 is principally the result of the
sale of $17.7 million of troubled loans in 1997.
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 1997 and no changes to the allowance for loan losses were required at
that time.
At September 30, 1997, Eagle had $22.4 million of potential problem loans
with $4.6 million classified as special mention and $17.8 million classified as
watch. Commercial real estate and land loans comprised $18.9 million of the
total.
15
<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 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 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 Bank invest in below-investment grade
corporate bonds and notes.
The Company's total holdings of mortgage-backed and investment securities
increased to $797.0 million at September 30, 1997 from $514.4 million at
September 30, 1997. The Bank's portfolio is almost entirely made up of agency
issued mortgage-backed securities and collateralized mortgage obligations which
collectively total $742.5 million, or 93.2% of the total portfolio. This
represents an increase from $460.2 million at September 30, 1996. Agency issued
mortgage-backed securities increased to $282.2 million at September 30, 1997
from $237.7 million at September 30, 1996 while collateralized mortgage
obligations increased from $222.5 million at September 30, 1996 to $460.3
million at September 30, 1997.
The Company's security portfolio at September 30, 1997 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 35.4% of the security portfolio with $139.9 million secured by pools
of adjustable rate loans and $142.3 million secured by pools of fixed rate
loans. The payments of interest and principa on such loans are passed through to
the securities holders after deducting a servicing fee. The collateralized
mortgage obligation portion of the investment portfolio, 57.8% of the total
portfolio, contains no derivative investment securities such as interest only
tranches, principal only tranches or strips. There were $140.7 million of
adjustable or floating rate collateralized mortgage obligations outstanding at
September 30, 1997. 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.
During fiscal 1997, the Company substantially grew the investment portfolio
through the purchase of both agency and private issue collaterilized mortgage
obligations and, to a lesser extent, the purchase of agency issued
mortgage-backed securities. This growth was done in order to utilize the
proceeds received from the issuance of trust preferred capital securities as
well as to increase Eagle's net interest income. These objectives were
accomplished through the execution of two separate investment programs.
The first program, which was completed during the quarter ended June 30, 1997,
involved the purchase of approximately $180 million of investment securities
needed to cover the dividend cost related to the trust preferred capital
securities. The investment securities, which were funded both with the proceeds
of the trust preferred offering and borrowed money, consisted primarily of a
combination of fixed and adjustable rate collateralized mortgage obligations and
mortgage-backed securities. The borrowed money included long term floating rate
advances and short term fixed rate advances.
The second growth program, which was completed during the quarter ended
September 30, 1997, was implemented to add to the Company's net interest income.
The assets purchased were primarily fixed rate collateralized mortgage
obligations and mortgage-backed securities. The assets were funded using a
combination of short term advances and a long term repurchase agreement. As part
of the program, the Company also purchased an interest rate cap with a five year
term to protect its funding costs in the event of rising rates.
16
<PAGE>
At September 30, 1997, the following details investments in any issuer
where the aggregate book value exceeded 10% of Eagle's shareholder's equity.
Aggregate Aggregate
Book Value Market Value
--------------- ---------------
(in thousands)
FNMA $ 221,167 $ 224,164
FHLMC 208,555 210,814
Residential Funding Mortgage Securities, Inc. 58,280 58,486
GNMA 55,925 55,965
G.E. Capital Mortgage Services, Inc. 46,411 46,966
Norwest Asset Securities Corporation 33,365 34,097
Prudential Home Mortgage Securities 30,723 30,641
PNC Mortgage Securities Corp. 26,409 26,727
Structured Mortgage Asset Residential Trust 17,640 17,605
Countrywide Home Loans 14,627 15,105
------------- --------------
$ 713,102 $ 720,570
============= ==============
All securities included above represent agency issued mortgage-backed
securities, agency issued collateralized mortgage obligations or privately
issued collateralized mortgage obligations.
The following table sets forth the composition of Eagle's mortgage-backed
and investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------------------------
1997 1996 1995
----------------------- ------------------------- -------------------------
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 $ 13,016 1.6% $ 12,013 2.3% $ 16,447 3.4%
U.S. Government agency
obligations 8,019 1.0 24,956 4.8 36,927 7.6
Other bonds and notes 17,945 2.2 6,539 1.3 19,680 4.1
Mutual fund and equity securities 14,081 1.8 8,555 1.7 39,560 8.2
Mortgage-backed securities:
Agency 282,155 35.4 237,695 46.2 313,654 65.0
Other 1,453 0.2 2,104 0.4 2,704 0.6
Collateralized mortgage
obligations 460,335 57.8 222,509 43.3 53,698 11.1
---------- ---------- ---------- ----------- ----------- ----------
Total carrying value of portfolio $ 797,004 100% $ 514,371 100% $ 482,670 100%
========= ========== ========== =========== =========== ==========
Total market value of portfolio $ 797,004 $ 514,217 $ 484,197
========== ========== ==========
</TABLE>
17
<PAGE>
The following table sets forth the maturities of Eagle's mortgage-backed
and investment securities at September 30, 1997 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 $ 7,508 5.55% $ 5,508 5.96% $ - -% $ - -% $ 13,016 5.72%
U.S. Government
agency obligations - - 2,019 7.34 6,000 7.41 - - 8,019 7.39
Other bonds and
notes 878 6.96 2,315 7.06 52 8.82 14,700 5.36 17,945 5.66
Mortgage-backed
securities:
Agency 323 7.00 19,536 6.66 7,273 7.22 255,023 7.59 282,155 7.52
Other - - - - - - 1,453 7.85 1,453 7.85
Collateralized
mortgage
obligations - - 661 6.51 - - 459,674 7.14 460,335 7.13
-------- -------- -------- ---- -------- ---- -------- ---- -------- ----
Total $ 8,709 5.75% $ 30,039 6.60% $ 13,325 7.31% $730,850 7.26% $782,923 7.22%
======== ======== ======== ==== ======== ==== ======== ==== ======== ====
</TABLE>
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 decreased to $1.35 billion at September 30, 1997 from $1.37
billion at September 30, 1996, a decrease of $15.4 million, or 1.1%. Total
borrowings increased by $289.6 million to $521.4 million at September 30, 1997.
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 Bank 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 institution 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.
18
<PAGE>
The following table describes the deposit accounts offered by Eagle at
September 30, 1997.
Minimum
Minimum Deposit to Annual
Deposit to Open Obtain Annual Percentage
Account Percentage Yield Yield
-------------- ----------------- ----------
Passbook $ 10 $ 100 2.00%
NOW 50 500 .25
Money market accounts 1,000 1,000 2.00
Market-rate certificates:
31 day 5,000 5,000 3.00
91 day 500 500 3.75
Six month 500 500 4.30
Six month liquid 500 500 5.00
Seven month 500 500 4.65
Nine month 500 500 4.65
Nine month bump 500 500 5.00
Nine month liquid 500 500 5.00
One Year 500 500 4.75
One Year Bump 500 500 5.30
Fifteen month 500 500 5.00
Fifteen month bump 500 500 5.10
Eighteen month 500 500 5.10
Two year 500 500 5.05
Two and one-half year 500 500 5.70
Two and one-half year bump 500 500 6.00
Three year 500 500 5.40
Three and one-half year 500 500 5.00
Four year 500 500 5.70
Five year 500 500 5.75
IRA certificates:
Eighteen month variable rate 50 50 4.30
Eighteen month fixed rate 500 500 5.10
Four and one-half year
(fixed rate) 500 500 5.70
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. Annual percentage yields
are primarily based on prevailing market conditions, the need for funds and the
ability to pay.
19
<PAGE>
The following table sets forth the deposit flows for Eagle during the
periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------------
1997 1996 1995
----------- ----------- ------------
(In thousands)
<S> <C> <C> <C>
Deposits acquired through acquisitions $ - $ 253,139 $ -
Deposits sold through dispositions - (184,410) -
Net withdrawals (70,417) (18,992) (46,148)
--------- --------- ---------
Net cash inflow (outflow) (70,417) 49,737 (46,148)
Interest credited 54,988 55,856 46,315
--------- --------- ---------
Net increase (decrease) in deposits $ (15,429) $ 105,593 $ 167
========= ========= =========
</TABLE>
The following table provides detail regarding the Bank's deposit accounts
for the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------- ---------------------------
Average Average Average
Amount Rate Amount Rate Amount Rate
------------- ----------- ------------- ----------- ------------- -------------
(In thousands)
<S> <C> <C> <C>
Non interest-bearing
demand accounts $ 53,416 -% $ 49,155 -% $ 38,593 -%
Interest-bearing
demand accounts 94,688 1.11 101,626 0.99 93,016 1.00
Passbook accounts 245,397 1.99 256,625 2.01 269,680 1.98
Money market accounts 111,360 2.31 120,129 2.61 143,881 2.60
Certificate accounts 858,986 5.40 832,222 5.53 710,957 5.11
</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>
September 30,
----------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------- -------------------------------- --------------------------------
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% $ 52,970 3.9% 0.00% $ 41,435 3.0% 0.00% $ 43,089 3.4%
Regular savings 1.98 233,267 17.2 2.00 250,718 18.3 1.99 252,559 20.0
NOW accounts 0.53 110,769 8.2 0.99 112,698 8.3 1.03 97,490 7.7
Money market accounts 2.49 107,008 7.9 2.68 110,756 8.1 2.61 123,433 9.8
---------------------- ------------------ ---------------------
504,014 37.2 515,607 37.7 516,571 40.9
---------------------- ------------------ ---------------------
Certificate accounts with
original maturities of:
Six months or less 4.65 149,411 11.0 4.69 124,073 9.1 4.68 96,374 7.6
Over six months to one year 5.09 283,748 21.0 5.18 362,929 26.5 5.75 247,519 19.6
Over one year to two year 5.33 142,173 10.5 5.54 111,024 8.1 5.53 159,393 12.6
Over two years 5.99 273,928 20.3 6.04 255,070 18.6 6.06 243,253 19.3
---------------------- ------------------ ---------------------
849,260 62.8 853,096 62.3 746,539 59.1
---------------------- ------------------ ---------------------
$1,353,274 100.0% $1,368,703 100.0% $1,263,110 100.0%
====================== ================== =====================
</TABLE>
20
<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,
----------------------------------------
1997 1996 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Less than 4.01% $ 12,239 $ 21,397 $ 20,943
4.01 - 6.00% 746,356 705,252 465,699
Greater than 6.01% 90,665 126,447 259,897
-------- -------- --------
$849,260 $853,096 $746,539
======== ======== ========
</TABLE>
The following table sets forth the amount and remaining maturities by
interest rate of time deposits at September 30, 1997.
Less Than One to Three After Three
One Year Years Years Total
-------- -------- -------- --------
(in thousands)
Less than 4.01% $ 12,239 $ - $ - $ 12,239
4.01 - 6.00% 575,199 162,728 8,429 746,356
Greater than 6.01% 24,047 64,109 2,509 90,665
-------- -------- -------- --------
Total $611,485 $226,837 $ 10,938 $849,260
======== ======== ======== ========
Certain information regarding time deposit accounts at Eagle in amounts of
$100,000 or more at September 30, 1997 is shown in the table below.
<TABLE>
<CAPTION>
Total Time
Deposits of Over Three Over Six Months
$100,000 or Three Months or Months through through One % of Total
more Less Six Months Year Over One Year Deposits
- ---------- ---------------- ---------------- ------------ -------------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
$ 69,329 $ 13,665 $ 22,064 $ 10,521 $ 23,079 5.1%
</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 Bank has not relied on FHL Bank advances
and other borrowings to any significant extent as a source of funds, although in
recent years the Bank has increased the utilization of advances as part of its
balance sheet management strategies. At September 30, 1997, Eagle Bank had
authority to borrow up to $919 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, 1997 totaled
$445.0 million compared to $217.0 million at September 30, 1996 and $83.2
million at September 30, 1995. The weighted average interest rate on FHL Bank
advances outstanding at September 30, 1997, 1996 and 1995 was 5.78%, 5.63% and
5.90%, respectively.
21
<PAGE>
On a consolidated basis, Eagle had other borrowed money in the amount of
$76.4 million at September 30, 1997 compared to $14.8 million at September 30,
1996. Repurchase agreements constitute 99.8% and 99% of the other borrowed money
total at September 30, 1997 and 1996, respectively. The weighted average
interest rate on other borrowed money at September 30, 1997, 1996, and 1995 was
6.01%, 5.21%, and 5.89%, respectively.
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 deposit taking 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.
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, 1997:
<TABLE>
<CAPTION>
Repricing Repricing Repricing Repricing
Percent of Within 0-3 Within 4- Within 1-3 Over 3
Amount Total Months 12 Months Years Years
----------- ---------- ----------- ----------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-sensitive assets
Loans receivable , net (a) $ 1,135,498 57.0% $ 191,337 $ 346,872 $ 250,727 $ 346,562
Mortgage-backed securities 736,150 36.9 215,390 129,551 131,691 259,518
Investment securities (b) 76,374 3.8 19,548 3,463 7,233 46,130
Interest-bearing deposits 46,600 2.3 46,600 - - -
----------- ---------- ----------- ----------- ----------- -----------
Total interest sensitive assets $ 1,994,622 100.0% 472,875 479,886 389,651 652,210
=========== ========== ----------- ----------- ----------- -----------
Interest sensitive liabilities
Passbook accounts $ 233,267 12.8% 12,109 28,605 65,424 127,129
Certificate accounts 849,260 46.6 170,471 441,013 211,906 25,870
NOW accounts 110,769 6.1 7,359 13,911 25,011 64,488
Money market accounts 107,008 5.9 12,329 12,560 22,582 59,537
FHLB advances 445,014 24.4 267,457 85,838 74,921 16,798
Other borrowings 76,409 4.2 76,259 - - 150
----------- ---------- ----------- ----------- ----------- -----------
Total interest sensitive liabilities $ 1,821,727 100.0% 545,984 581,927 399,844 293,972
=========== ========== ----------- ----------- ----------- -----------
Periodic repricing difference (cumulative gap) $ (73,109) $ (102,041) $ (10,193) $ 358,238
=========== =========== =========== ===========
Cumulative repricing difference (cumulative gap) $ (73,109) $ (175,150) $ (185,343) $ 172,895
=========== =========== =========== ===========
Cumulative gap to total assets (3.5%) (8.4%) (8.9%) 8.2%
</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.
22
<PAGE>
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 17.5%.
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 September 30, 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 -2% -31%
+100 4% -14%
-100 -5% 8%
-200 -4% 16%
- ---------------
(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.
23
<PAGE>
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 September 30, 1997. Market risk sensitive
instruments are generally defined as on and off balance sheet derivatives and
other financial instruments.
<TABLE>
<CAPTION>
Expected Maturity Date at September 30, 1997 (1)
There- Total Fair
1998 1999 2000 2001 2002 after Balance Value
--------- --------- --------- -------- --------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS:
Loans receivable:
Real estate mortgage $152,221 $137,664 $120,069 $103,875 $ 73,622 $430,139 $1,017,590 $1,013,324
Average interest rate 7.84% 7.83% 7.67% 7.72% 7.68% 7.75% 7.76%
Consumer and non-mortgage
commercial 65,982 11,638 9,894 7,121 6,117 19,804 120,556 122,255
Average interest rate 9.11% 9.21% 8.92% 9.01% 8.90% 8.22% 8.94%
Mortgage-backed securities 130,926 102,323 79,908 57,067 44,295 321,631 736,150 743,943
Average interest rate 7.43% 7.30% 7.21% 7.20% 7.11% 7.27% 7.28%
Investment securities 8,389 325 6,986 2,000 505 35,399 53,604 53,061
Average interest rate 5.70% 5.91% 6.32% 7.34% 6.00% 5.48% 5.70%
Interest-bearing deposits 46,600 - - - - - 46,600 46,600
Average interest rate 5.25% - - - - - 5.25%
Mortgage servicing assets 133 108 88 71 57 107 564 571
-------- -------- -------- -------- --------- -------- ---------- ----------
Total interest-sensitive assets $404,251 $252,058 $216,945 $170,134 $ 124,596 $867,080 $1,975,084 $1,979,754
======== ======== ======== ======== ========= ======== ========== ==========
INTEREST-SENSITIVE LIABILITIES:
Deposits:
NOW $ 21,270 $ 13,528 $ 11,483 $ 9,747 $ 8,274 $ 46,467 $ 110,769 $ 110,769
Average interest rate .53% .53% .53% .53% .53% .53% .53%
Passbook 40,714 36,095 29,329 23,831 19,364 83,934 233,267 233,267
Average interest rate 1.48% 1.48% 1.48% 1.48% 1.48% 1.48% 1.48%
Money-market 19,205 12,129 10,453 9,009 7,765 48,447 107,008 107,008
Average interest rate 2.49% 2.49% 2.49% 2.49% 2.49% 2.49% 2.49%
Certificates 611,484 131,816 80,090 14,932 10,651 287 849,260 850,532
Average interest rate 5.14% 5.70% 6.21% 5.71% 5.86% 6.49% 5.34%
Borrowings:
FHLB 268,320 56,462 18,150 6,845 2,000 93,237 445,014 445,424
Average interest rate 5.64% 5.77% 6.06% 6.66% 6.87% 6.07% 5.78%
Other 1,259 - - 75,000 150 - 76,409 76,587
Average interest rate 4.50% - - 6.04% 4.00% - 6.01%
-------- -------- --------- --------- -------- -------- ---------- ----------
Total interest-sensitive
liabilities $962,252 $250,030 $ 149,505 $ 139,364 $ 48,204 $272,372 $1,821,727 $1,823,587
======== ======== ========= ========= ======== ======== ========== ==========
</TABLE>
- -------------------
(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.
24
<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, 1997, Eagle Bank'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 Bank's
customers.
EMPLOYEES
At September 30, 1997, Eagle had 458 employees (including 101 part-time
employees), all of whom are employed by Eagle Bank. 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
The Bank is headquartered in Bristol, Connecticut and conducts business
from four offices in Bristol, three offices in Hartford and Berlin, two offices
in West Hartford and New Britain, and one office each in Bloomfield, Canton,
Manchester, Newington, Plainville, 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). The Bank 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.
The Bank faces substantial competition for deposits and loans throughout
its market area. The primary factors stressed by the Bank 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.
25
<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, 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.
26
<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 SAIF as of March 31, 1995. The Bank
incurred a one-time charge of $5.4 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. Several
proposals for abolishing the federal thrift charter were introduced in Congress
during 1997 in bills addressing financial services modernization, including a
proposal from the Treasury Department developed pursuant to requirements of the
1996 legislation. While no legislation was passed in 1997, it is anticipated
that the issue will be taken up again by Congress in 1998. If legislation is
passed abolishing the federal thrift charter, the Bank may be required to
convert its federal charter to either a national bank charter, 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 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.
Various proposals were introduced in Congress in 1997 to permit the payment
of interest on required reserve balances, and to permit savings institutions and
other regulated financial institutions to pay interest on business demand
accounts. While this legislation appears to have strong support from many
constituencies, the Company and the Bank are unable to predict whether such
legislation will be enacted.
27
<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 Bank 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."
28
<PAGE>
SAVINGS INSTITUTION REGULATION
General. As a federally chartered savings institution, the Bank 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, the Bank 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. The Bank is subject to assessments by the OTS
and FDIC to cover the costs of such examinations. The OTS may revalue assets of
the Bank, 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 - Safet and Soundness Guidelines." See "Regulation - Savings
Institution Regulation - Insurance of Deposits".
Capital Requirements. The Bank is subject to the capital adequacy
regulations adopted by the OTS. The Bank'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.
The following is a reconciliation of the Bank's equity capital under GAAP
to regulatory capital at September 30, 1997.
<TABLE>
<CAPTION>
Tier 1 Total
Risk- Risk-
Core Tangible based based
--------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
GAAP Capital $ 190,648 $ 190,648 $ 190,648 $ 190,648
Less: Goodwill and other intangible assets (29,504) (29,504) (29,504) (29,504)
Less: Excess qualifying purchased mortgage loan servicing (57) (57) (57) (57)
Less: Unrealized gain in certain available for sale securities(4,537) (4,537) (4,537) (4,537) (4,537)
Add: General loan and lease valuation allowances - - - 9,118
--------- --------- --------- ---------
Regulatory capital $ 156,550 $ 156,550 $ 156,550 $ 165,668
========= ========= ========= =========
</TABLE>
The Bank's equity capital under GAAP indicated above exceeds the Company's
shareholders' equity reported on the consolidated balance sheet at September 30,
1997 due to the proceeds received by Eagle from the issuance of the trust
preferred securities having been invested by the Holding Company in the Bank.
The resulting invested funds qualify for treatment as capital at the Bank level.
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 federal legislation
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, 1997, the Bank was deemed to be
well-capitalized. See "Regulation - Savings Institution Regulation - Insurance
of Deposits."
29
<PAGE>
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. The Bank 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. The Bank 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, 1997, qualified thrift
investments as a percentage of portfolio assets for the Bank was 94.2%. The
qualified thrift investments of the Bank 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, 1997.
The failure to maintain QTL status would require that the Bank convert to a
bank charter and will result in a limitation in future investments and
activities including branching and payment of dividends. The Bank 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 sufficient liquidity to ensure their safe and sound
operation. The OTS regulations specifically require that a savings institution
maintain a minimum average daily balance of liquid assets (including cash,
certain time deposits, certain bankers' acceptances, certain mortgage-related
securities and mortgage loans, certain corporate debt securities and highly
rated commercial paper, securities of certain mutual funds and specified United
States government, state or federal agency obligations) in each calendar quarter
equal to not less than a specified percentage of either the average daily
balance of the savings institution's net withdrawable accounts plus short-term
borrowings during the preceding quarter or the amount of the institution's net
withdrawable accounts plus short-term borrowings at the end of the preceding
calendar quarter. Under 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%. As of November 24, 1997, the OTS has lowered
the liquidity requirements from 5% to 4%. At September 30, 1997, the Bank was in
compliance with these liquidity requirements.
Restrictions on Dividends and Other Capital Distributions. The Bank is
subject to limitations on 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.
30
<PAGE>
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, 1997, approximately 46% of its
deposits were BIF-insured.
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. The Bank, 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 simila obligations at the beginning of each year, or
1/20 of their advances (borrowings) from the FHL Bank, whichever is greater. The
Bank 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, 1997, the
Bank 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 deduction 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.
31
<PAGE>
The federal income tax returns for the Bank'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
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, the Bank is required to pay taxes equal to the
larger of $250, 10.75% (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 twenty-six traditional branch offices and four supermarket branch
offices are located in Hartford and Litchfield counties. Automated teller
machines ("ATM") are located in all twenty-six 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 the Bank.
32
<PAGE>
The following table sets forth certain information concerning the business
offices of Eagle at September 30, 1997.
<TABLE>
<CAPTION>
Percent Lease
of Total Owned or Expiration Lease Renewal
Deposit Leased Date Option
-------------- ----------------- -------------- --------------------
<S> <C> <C> <C> <C>
Torrington Main
50 Litchfield Street
Torrington, CT 8.6% Owned - -
East Main Street - Torrington
1180 East Main Street
Torrington, CT 3.0% Owned - -
Litchfield
311 West Street
Litchfield, CT 2.5% Owned - -
Canton
Canton Village Route 44
Canton, CT 2.5% Leased 2001 One 5-year option
Winsted
Shops at Ledgebrook Plaza Route 44
Winsted, CT Land Lease
2.6% Only 2006 Seven 5-year options
Bristol Main Office
222 Main Street
Bristol, CT 11.6% Owned - -
Commons - Bristol
99 Farmington Avenue
Bristol, CT 2.5% Leased 2004 No renewal option
Farms - Bristol
1235 Farmington Avenue Land Lease
Bristol, CT 3.7% Only 1998 One 5-year option
Forestville
785 Pine Street
Forestville, CT 1.5% Leased 2001 No renewal option
Terryville
123 Main Street
Plymouth, CT 2.1% Leased 1999 No renewal option
Hartford Main Office
108 Farmington Avenue
Hartford, CT 3.3% Owned - -
Franklin Avenue - Hartford
324 Franklin Avenue
Hartford, CT 4.2% Owned - -
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Percent Lease
of Total Owned or Expiration Lease Renewal
Deposit Leased Date Option
-------------- ----------------- -------------- --------------------
<S> <C> <C> <C> <C>
State House Square - Hartford
50 State House Square
Hartford, CT 4.1% Leased 2002 One 5-year option
West Hartford
75 Park Road
West Hartford, CT 4.9% Owned - -
Bishops Corner - West Hartford
774 North Main Street
West Hartford, CT 3.4% Leased 2012 -
Rocky Hill
53 New Britain Avenue
Rocky Hill, CT 6.2% Leased 2000 One 5-year option
Manchester
Burr Corners
1147 Tolland Turnpike
Manchester, CT 3.3% Leased 2002 Two 5-year options
Bloomfield
782 Park Avenue
Bloomfield, CT 6.0% Leased 1998 No renewal option
Simsbury
530 Bushey Hill Road
Simsbury, CT 3.8% Leased 1999 Two 5-year options
Avon - Supermarket
Big Y, West Main Street
Avon, CT 0.3% Leased 1999 No renewal option
Bloomfield - Supermarket
Super Stop & Shop
20-22 Mountain Avenue
Bloomfield, CT 0.2% Leased 1999 No renewal option
East Hartford - Supermarket
Big Y, 265 Ellington Road
East Hartford, CT 0.3% Leased 1999 No renewal option
Glastonbury - Supermarket
Super Stop & Shop
215 Glastonbury Boulevard
Glastonbury, CT 0.3% Leased 1999 No renewal option
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Percent Lease
of Total Owned or Expiration Lease Renewal
Deposit Leased Date Option
-------------- ----------------- -------------- --------------------
<S> <C> <C> <C> <C>
Kensington Main
346 Main Street
Kensington, CT 5.3% Own - -
Webster Mill
1 Webster Square Road
Berlin, CT 2.5% Own - -
Ferndale Plaza
51 Chamberlin Highway
Kensington, CT 2.6% Lease 2007 No renewal option
Plainville
63 East Main Street
Plainville, CT 1.5% Own - -
Newington
1120 Main Street
Newington, CT 2.5% Own - -
New Britain
747 Farmington Avenue
New Britain, CT 1.6% Lease 1998 Three 5-year options
Liberty Square
1 Liberty Square
New Britain, CT 3.1% Lease 2003 No renewal option
</TABLE>
The total net book value of properties owned and used for offices by Eagle
at September 30, 1997 and the aggregate net book value of leasehold improvements
on properties used for offices was $7.9 million.
Item 3. Legal Proceedings
As of September 30, 1997, there were no material pending legal proceedings
to which Eagle, the Bank, Eagle Financial Capital Trust I, Eagle Funding Corp.
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, 1997.
35
<PAGE>
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters
Eagle Financial Corp. common stock is listed on the NASDAQ National Market
System under the symbol "EGFC." As of September 30, 1997 there were 6,363,410
shares of common stock outstanding, including 47,373 shares held in treasury,
and approximately 1,800 shareholders of record.
QUARTERLY STOCK QUOTATIONS AND STOCK INFORMATION
Cash
Dividends
Quarter Paid Per
Ended High Low Share (a)
- ------------- ---- --- ---------
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 24.250 21.250 .210
Dec. 31, 1995 27.750 22.250 .230
Mar. 31, 1996 26.250 22.750 .230
Jun. 30, 1996 25.750 22.250 .230
Sep. 30, 1996 27.250 23.750 .230
Dec. 31, 1996 30.500 26.500 .230
Mar. 31, 1997 30.750 28.250 .230
Jun. 30, 1997 30.750 26.750 .230
Sep. 30, 1997 40.250 30.750 .250
(a) All cash dividends paid have been adjusted retroactively to give effect to
10% stock dividend paid in March 1995.
36
<PAGE>
Item 6. Selected Financial Data
The following tables summarize the Company's financial condition, operating date
and significant statistical data for the past five fiscal years:
<TABLE>
<CAPTION>
FINANCIAL CONDITION DATA AT SEPTEMBER 30,
(in thousands) 1997 1996(a) 1995 1994(b) 1993
- ------------------------------------------- ------------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Total Assets $2,091,096 $1,761,731 $1,596,165 $1,436,754 $1,022,121
Investment portfolio (c) 122,431 96,686 168,114 182,374 91,102
Mortgage-backed securities 743,943 462,308 370,056 85,684 62,837
Loans receivable, net 1,128,381 1,094,656 970,124 1,072,743 821,994
Allowance for loan losses 9,765 10,507 9,611 10,305 6,143
Deposits 1,353,274 1,368,703 1,263,110 1,262,943 891,495
FHLB advances and borrowed money 521,423 231,828 165,617 54,821 26,252
Shareholders' equity 144,906 135,992 126,211 99,708 92,525
OPERATING DATA FOR THE YEARS ENDED SEPTEMBER 30,
(in thousands, except for per share data) 1997 1996 1995 1994(b) 1993
- ------------------------------------------- ------------- ----------- ------------- ------------- -------------
Net interest income $ 59,125 $ 53,081 $ 53,315 $ 41,488 $ 35,643
Net income 7,315 15,493 12,046 9,548 7,727
Loan originations 236,666 303,125 190,392 281,756 295,158
Cash dividends declared per share (e) 0.94 0.92 0.82 0.69 0.57
Net income per share: (e)
Primary 1.13 2.44 1.94 1.84 1.53
Fully diluted 1.12 2.42 1.92 1.83 1.52
SIGNIFICANT STATISTICAL DATA 1997 1996 1995 1994(b) 1993
- ------------------------------------------- ------------- ----------- ------------- ------------- -------------
For the period:
Return on average assets 0.39% 0.90% 0.80% 0.81% 0.77%
Return on average shareholders' equity 5.25% 11.62% 9.98% 9.95% 8.68%
Average interest rate spread 2.88% 2.97% 3.44% 3.43% 3.42%
Net interest margin 3.28% 3.26% 3.71% 3.70% 3.69%
Operating expenses to average assets 2.28% 2.23% 2.25% 2.36% 2.33%
Operating expenses to average assets 2.18% 2.14% 2.16% 2.19% 2.06%
(excluding real estate owned expense)
Net interest income to operating expenses 1.37x 1.38x 1.56x 1.50x 1.52x
Efficiency ratio 63% 51% 56% 57% 52%
AT END OF PERIOD:
Shareholders' equity to total assets 6.93% 7.72% 7.91% 6.94% 9.05%
Common shares outstanding
(net of treasury) (d) 6,316,037 6,199,029 6,093,446 4,758,004 4,669,079
Book value per share (e) $ 22.94 $ 21.94 $ 20.71 $ 19.66 $ 18.60
Non-performing assets to total assets 0.39% 0.98% 1.23% 1.57% 1.73%
Allowance for loan losses to non-
performing loans 218% 89% 71% 82% 76%
Tangible capital ratio 7.59% 6.01% 6.87% 5.74% 8.75%
</TABLE>
(a) Fiscal 1996 data reflects the impact of the Fleet/Shawmut branch
acquisition and the sale of the Danbury area branches.
(b) Fiscal 1994 data reflects the impact of the government-assisted acquisition
of the Bank of Hartford and the acquisition of The Federal Savings Bank.
(c) Includes interest-bearing deposits, Federal funds sold, investment
securities held to maturity, securities available for sale and FHL Bank
stock.
(d) 1997, 1996, 1995, 1994 and 1993 common shares outstanding exclude 47,373,
47,373, 47,373, 43,066, and 43,066 shares, respectively, held in treasury
at year end.
(e) 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.
37
<PAGE>
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
GENERAL
Eagle Financial Corp. (the "Holding Company") is a unitary savings bank holding
company and parent of Eagle Bank ("Eagle" 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 26
traditional branch offices and 4 supermarket branch offices located in Hartford
and eastern Litchfield counties.
The Company has been an active acquirer of other financial institutions in
recent years beginning with two government assisted acquisitions in the greater
Danbury market in fiscal 1992 and the government assisted acquisition of the
Bank of Hartford in fiscal 1994. A decision in 1996 to focus strategically on
the greater Hartford market resulted in the purchase in January 1996 of five
large branch offices in Hartford county, the simultaneous closing of two
existing Eagle branches that were in close proximity to the newly acquired
offices, and the sale in March 1996 of seven relatively small, geographically
separate branch offices in northern Fairfield county. Later in fiscal 1996 Eagle
added four supermarket branches and three off-site ATM's, 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.
Most recently in May 1997 Eagle added additional market share in Hartford county
when it completed a merger with MidConn Bank, a financial institution with
approximately $300 million of total deposits and ten branch offices located
primarily in Hartford county. The transaction has been accounted for as a
pooling of interests combination and, accordingly, the consolidated financial
statements for periods prior to the combination have been restated to include
the accounts and results of operations of MidConn. Shortly after the MidConn
merger, Eagle closed two of the purchased branches that were located near
existing Eagle branches and sold a third MidConn branch that was small and
outside Eagle's primary market area.
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, Eagle has
implemented strategies in the last several years that have put increased
emphasis on originating commercial real estate and small business loans within
its primary market area. The marketing of these loans has focused on the
existing customer base, customers from recent branch and bank acquisitions, and
new relationships within the Company's primary market area.
On October 27, 1997, the Company announced the signing of a 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 Eagle common stock. The
transaction is subject to shareholder and regulatory approval and is expected to
close during the quarter ended March 31, 1998. Webster has total assets of $6.8
billion, total deposits of $4.3 billion, total loan receivables of $3.7 billion
and shareholders' equity of $363.6 million as of September 30, 1997. Webster
conducts its business through 84 banking offices throughout Connecticut.
Eagle Financial Corp. had net income of $7.3 million, or $1.12 per share on a
fully diluted basis, for the year ended September 30, 1997 compared to net
income of $15.5 million, or $2.42 per share, in fiscal 1996. Results for both
years were impacted by a number of unusual items. Fiscal 1996 results benefited
from a large gain on the sale of branch offices in the Danbury market that more
than offset a one-time Savings Association Insurance Fund ("SAIF") assessment
and several other relatively large non-recurring charges. Results for 1997 were
reduced by charges from a bulk sale of problem loans and one-time expenses
relating to the merger with MidConn Bank.
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<PAGE>
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. Net interest income
grew by $6.0 million, or 11.4%, in fiscal 1997 and has increased by
approximately 14% on average over the past four fiscal years. 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, 1997, the Company had total assets of $2.09 billion compared
to $1.76 billion at the start of the fiscal year. Net growth in the loan
portfolio for the year was $33.7 million, while the investment portfolio
increased by $307.4 million during the year. The balance sheet growth was
largely funded by borrowed money, which increased by $289.6 million.
Like any other company, advances and changes in available technology can
significantly impact the business and operations of the Company. For example, a
challenging problem exists as many computer systems worldwide do not have the
capability of recognizing the year 2000 or years thereafter. No easy
technological "quick fix" has yet been developed for this problem. The Company
is expending resources to assure that its computer systems are reprogrammed in
time to effectively deal with transactions in the year 2000 and beyond. This
"Year 2000 Computer Problem" creates risk for the Company from unforeseen
problems in its own computer systems and from third parties with whom the
Company deals on financial transactions. The Company relies to a significant
degree on a third party to process a majority of its financial transactions and,
as a result, has been in close contact with this third party to monitor their
progress in addressing this challenging problem. Such failures of the Company
and/or third parties' computer systems could have a material impact on the
Company's ability to conduct its business, and especially to process and account
for the transfer of funds electronically.
LIQUIDITY AND CAPITAL RESOURCES
On April 1, 1997 the Company completed a $50 million private placement of 10%
capital securities due March 15, 2027. The securities were issued by the Holding
Company's recently formed subsidiary, Eagle Financial Capital Trust I, and are
fully and unconditionally guaranteed by the Holding Company. Proceeds from the
issue were invested by Eagle Financial Capital Trust I in Junior Subordinated
Debentures issued by the Holding Company and which represent the sole assets of
Eagle Financial Capital Trust I. The Junior Subordinated Debentures have a
principal amount of $50 million, bear interest at 10%, and mature on April 1,
2027. Net proceeds from the sale of debentures will be used for general
corporate purposes, including capital contributions to the Bank. During the year
ended September 30, 1997, the Holding Company contributed $44.5 million of the
proceeds from the debentures to the Bank, as a capital infusion. The capital
contribution served to increase the regulatory capital base of the Bank
The Bank's core capital ratio increased from 6.01% at September 30, 1996 to
7.59% at fiscal year end, reflecting the additional capital contributed by the
Holding Company. 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 4% of its withdrawable deposits plus short-term
borrowings. At September 30, 1997, the Bank was in compliance with Office of
Thrift Supervision ("OTS") liquidity requirements, having a ratio of 6.08%.
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 in 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
39
<PAGE>
30, 1997, the Bank had approximately $103 million in loan commitments
outstanding including $39.5 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 $919 million in advances
from the FHLB of Boston. At September 30, 1997, FHLB advances and borrowed money
totaled $521 million versus $232 million at September 30, 1996. The additional
borrowed money was used to fund the growth in loans and securities.
During fiscal 1997, the Company substantially grew the investment portfolio
through the purchase of both agency and private issue collateralized mortgage
obligations and, to a lesser extent, the purchase of agency issued
mortgage-backed securities. This growth was done in order to utilize the
proceeds received from the issuance of trust preferred capital securities as
well as to increase Eagle's net interest income. These objectives were
accomplished through the execution of two separate investment programs.
The first program, which was completed during the quarter ended June 30, 1997,
involved the purchase of approximately $180 million of investment securities
needed to cover the dividend cost related to the trust preferred capital
securities. The investment securities, which were funded both with the proceeds
of the trust preferred offering and borrowed money, consisted primarily of a
combination of fixed and adjustable rate collateralized mortgage obligations and
mortgage-backed securities. The borrowed money included long term floating rate
advances and short term fixed rate advances.
The second growth program, which was completed during the quarter ended
September 30, 1997, was implemented to add to the Company's net interest income.
The assets purchased were primarily fixed rate collateralized mortgage
obligations and mortgage-backed securities. The assets were funded using a
combination of short term advances and a long term repurchase agreement. As part
of the program, the Company also purchased an interest rate cap with a five year
term to protect its funding costs in the event of rising interest rates.
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<PAGE>
The Company purchases certain debt securities (including mortgage-backed
securities) for the purposes of earning 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 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 intent and ability to hold investment securities to maturity. On June
30, 1997 the Company transferred all mortgage-backed and investment securities
that had previously been classified held to maturity to available for sale due
to a change in intent with respect to holding the securities to maturity
precipitated by changes in the Company's balance sheet following the merger with
MidConn Bank. The Company does not intend to purchase securities in the future
for classification as held to maturity.
From time to time, management will sell securities classified as available for
sale 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 realized gain or
loss being recorded as an adjustment to shareholders' equity, net of income tax
effect. At September 30, 1997, all of the Company's investment and
mortgage-backed securities portfolios were classified as available for sale and
had an after-tax net unrealized gain of $4.3 million.
During the year ended September 30, 1997, Eagle sold $30 million of investment
and mortgage-backed securities producing net losses of $10,000 while maturing
investment securities totaled $26 million. During fiscal 1996, the Company sold
$198 million of investment and mortgage-backed securities producing net losses
of $463,000 while maturing investment securities totaled $54 million. Much of
the 1996 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.
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, 1997 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, 1997 (in thousands):
<TABLE>
<CAPTION>
Actual Percent Required Percent Excess
--------------- ---------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Core $156,550 7.59% $61,881 3.0% $ 94,669
Tangible 156,550 7.59% 30,941 1.5% 125,609
Risk-based 165,668 17.87% 74,186 8.0% 91,482
</TABLE>
The OTS has proposed to increase the minimum required core capital ratio from
the current 3% level to a range of 4% to 5% for all but the most highly rated
financial institutions. While the OTS has not taken final action on such
proposal, it has adopted a prompt corrective action regulation that classifies
any savings institution that maintains a core capital ratio of less than 4% (3%
in the event the institution was assigned a composite 1 rating in its most
recent report of examination) as " undercapitalized." As of September 30, 1997,
the Bank had a core capital ratio of 7.58% and met the requirements for a "well
capitalized" institution.
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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.
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, 1997, the Bank had approximately $91.5 million of 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 distributions 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 or relatively short average life fixed rate
investment and mortgage-backed securities, it also uses certain techniques to
reduce the rate sensitivity of its deposits and borrowed money. Those techniques
include attracting longer term certificates o 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. A customer's
propensity to refinance his loan and consumer preferences for fixed rate
mortgages are typically both higher when interest rates are low. 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, 1997, the Company sold approximately $13.7
million of fixed rate mortgage loans into the secondary market.
During fiscal 1997, management utilized both an interest rate cap and a collared
advance in order to better manage the Bank's exposure to interest rate risk. The
interest rate cap, which has a notional amount of $41 million, will help to
reduce Eagle's funding costs in the event of a rise in interest rates. The Bank
also entered into an $81 million collared advance that will serve to balance
earnings in the event of severe volatility in interest rates.
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<PAGE>
The Company measures its exposure to interest rate fluctuations on a quarterly
basis, primarily by using an in-house computer modeling system designed for
savings institutions such as the Bank. 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 an immediate
"shock" basis, under which interest rates are assumed to move up or down
instantaneously, as well as on the basis of gradual movements in rates based
upon prior interest rate cycles. The Board has an approved maximum tolerance for
decreases in net interest income of 20%, based upon the model's prediction of
the impact of an immediate 200 basis point increase or decrease in interest
rates. At September 30, 1997, according to the computer model and using
asset/liability repricing assumptions based on the Company's historical
experience and industry data, it interest rates were to immediately rise or fall
by 200 basis points, the negative impact on the Company's net interest income in
either case 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 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
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, 1997 the Company's one-year gap was a negative 8.4% 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 liabilitie 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.
Eagle 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.
43
<PAGE>
EFFECTIVE 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 the interest
income earned on its loan and investment portfolios versus the interest paid on
its deposits and borrowed funds. If the cost of funds increases faster than the
yield on 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
1997 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 rate that is greater than the increase in yields on interest-earning assets,
the interest rate spread is negatively affected. Changes in the asset and
liability mix also affect the interest rate spread.
44
<PAGE>
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 net interest spread and a corresponding increase or decrease in
earnings. For example, in fiscal 1996 the Company's average net interest margin
declined to 3.26% from 3.71% 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 later 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
purchase of deposits in 1996 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. In
fiscal 1997, Eagle's average net interest margin was comparable to the average
in fiscal 1996.
ASSET QUALITY
At September 30, 1997, the Company had total non-performing assets in the amount
of $8.2 million, including $4.5 million of non-performing loans and $3.7 million
in real estate owned. Loan loss reserves totaled $9.8 million, or 218% of
non-performing loans. This compares with total non-performing assets of $17.3
million at September 30, 1996, including $11.9 million of non-performing loans
and $5.4 million in real estate owned.
The large decline in non-performing loans and assets in 1997 is primarily due to
the sale in the quarter ended June 30, 1997 of approximately $17.7 million of
troubled loans. Approximately $9.7 million, or 55%, of the total troubled loans
sold were classified as non-performing at time of sale. The remaining troubled
loans include $4.6 million of loans delinquent between 30-90 days and $3.4
million of loans with a current payment status. Troubled loans are considered to
be either non-performing loans, other delinquent loans or loans with poor or
inconsistent payment histories. In connection with the sale, the Bank recorded
charge-offs of approximately $5.8 million, which included approximately $2.4
million of reserves previously allocated to the loans and approximately $3.4
million of reserves established through the additional provision made to reduce
the carrying value of the loans to the sale price.
The Company's non-performing assets are almost exclusively residential in
nature, comprising approximately 78.9% of the total at September 30, 1997. Loan
delinquencies (greater than 60 days) totaled $5.1 million, or 0.45% of total
gross loans, at September 30, 1997 compared to $17.1 million, or 1.54% of total
loans, at September 30, 1996. The Company makes every effort to work with
delinquent borrowers to negotiate an affordable payment schedule. This strategy
has been more prevalent in hardship cases where rates have adjusted upward one
or more times on adjustable rate mortgages. The terms of the restructures were
primarily reductions in interest rates to a rate approximating the current rate
on newly originated one year adjustable rate mortgage loans. The rate reduction
is generally in effect for a period of six months to one year and is then
subject to review. The Company restructured $3.7 million of loans during the
year ended September 30, 1997 and has $2.4 million of restructured loans
outstanding at September 30, 1997. Upon restructure, the loans are identified as
impaired loans and represent 72% of the $3.4 million of impaired loans at year
end. The entire $2.4 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.
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<PAGE>
The Company's total commercial loan portfolio has increased in recent years as a
result of strong origination activity in addition to loans added to the
portfolio from recent acquisitions. As a result, the resources in the commercial
banking department and loan review function have been expanded to properly
monitor and administer the portfolio. Purchased loans have all been assigned
risk ratings in accordance with the Company's risk rating system and each
individual loan has been assigned to a commercial loan officer for monitoring
purposes. 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, 1997 (in thousands):
<TABLE>
<CAPTION>
Non- Total Non-
Performing Real Estate Performing
Loans Owned Assets % of Total
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Mortgage loans:
Residential $2,989 $2,620 $5,609 68.2%
Commercial 632 1,017 1,649 20.0
Multi-family 6 56 62 0.8
Land development -- 61 61 0.7
Non-mortgage commercial loans 28 -- 28 0.3
Consumer loans 8 -- 8 0.1
Home equity loans 815 -- 815 9.9
------ ------ ------ -----
Total $4,478 $3,754 $8,232 100%
====== ====== ====== =====
</TABLE>
The allowance for loan losses decreased to $9.8 million at September 30,1996
compared to $10.5 million at the start of the fiscal year. The $742,000 net
decrease in the balance includes $9.0 million of provisions during the year less
$9.7 million of net chargeoffs in fiscal 1997.
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<PAGE>
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 allowances 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 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR $ 10,507 $ 9,611 $ 10,305
LOANS CHARGED-OFF:
RESIDENTIAL MORTGAGE LOANS (6,007) (3,179) (3,247)
MULTI-FAMILY, COMMERCIAL AND LAND DEVELOPMENT LOANS (2,794) (866) (1,348)
CONSUMER AND HOME EQUITY LOANS (1,077) (295) (366)
-------- -------- --------
TOTAL LOANS CHARGED-OFF (9,878) (4,340) (4,961)
-------- -------- --------
RECOVERIES:
RESIDENTIAL MORTGAGE LOANS 136 91 118
MULTI-FAMILY, COMMERCIAL AND LAND DEVELOPMENT LOANS 1 5 10
CONSUMER AND HOME EQUITY LOANS 21 3 1
-------- -------- ---------
TOTAL RECOVERIES 158 99 129
-------- -------- --------
PROVISION FOR LOAN LOSSES 8,978 3,266 4,138
ALLOWANCE ASSOCIATED WITH PURCHASES -- 1,871(a) --
-------- -------- --------
BALANCE AT END OF PERIOD $ 9,765 $ 10,507 $ 9,611
======== ======== ========
RATIO OF NET CHARGE-OFFS TO AVERAGE LOANS 0.86% 0.41% 0.44%
ALLOWANCE FOR LOAN LOSSES TO GROSS LOANS RECEIVABLE 0.86% 0.95% 0.98%
ALLOWANCE FOR LOAN LOSSES TO NON-PERFORMING LOANS 218% 89% 71%
</TABLE>
(a) Represents an addition to the allowance associated with the loans purchased
in the Fleet/Shawmut transaction.
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 was paid in November 1996, was included as a $5.4 million
pretax charge to operations in September 1996. The assessment reduced the
Company's 1996 net income by approximately $3.2 million, or $0.51 per share.
47
<PAGE>
Since January 1, 1997, SAIF members have had the same risk-based assessment
scheduled as BIF members. The Bank, as a healthy bank, has effectively paid no
assessment for deposit insurance coverage since January 1, 1997. However, all
SAIF and BIF institutions including the Bank 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 the Bank is
estimated at $560,000.
As a result of the Deposit Insurance Funds Act of 1996, the Secretary of the
Treasury was to review recommendations in 1997 for the establishment of a common
charter for banks and savings associations. Several proposals for abolishing the
federal thrift charter were introduced in Congress during 1997 in bills
addressing financial services modernization, including a proposal from the
Treasury Department developed pursuant to requirements of the 1996 legislation.
While no legislation was passed in 1997, it is anticipated that the issue will
be taken up again by Congress in 1998. If legislation is passed abolishing the
federal thrift charter. The Bank 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. The Bank 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 the Bank 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 the Bank'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
In June 1996, the FASB issued SFAS No. 125, 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 al 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 interest 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) permitte
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.
48
<PAGE>
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.
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 $86,000 in mortgage servicing assets and $6,600 in related
amortization during fiscal 1997, pursuant to SFAS No. 125 and SFAS No. 122, an
accounting pronouncement with substantially the same requirements. SFAS No. 122
was applicable to the Bank during the three-month period October 1, 1996 through
December 31, 1996.
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.
SFAS No. 128 is effective for financial statements for both interim and annual
periods ending after December 15, 1997 and earlier application is not permitted.
Upon adoption of SFAS No. 128, all prior-period EPS data will be restated. The
Company will adopt SFAS No. 128 effective December 31, 1997. The Company does
not expect this pronouncement to significantly impact its consolidated financial
statements.
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 result 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 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.
49
<PAGE>
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.
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.
50
<PAGE>
COMPARISON OF YEARS ENDED SEPTEMBER 30, 1997 AND 1996
NET INCOME
Net income for the year ended September 30, 1997 was $7.3 million, or $1.12 per
fully diluted share, a decrease of $8.4 million from the net income recorded for
the year ended September 30, 1996 of $15.5 million, or $2.42 per fully diluted
share. The decrease in net income is attributable to two principal factors, a
$15.4 million decline in the gain on sale of deposits and an increase in the
provision for loan losses of $5.7 million to $9.0 million for the year ended
September 30, 1997. Partially offsetting the above factors was a $6.0 million,
or 11.4%, increase in net interest income to $59.1 million for the year ended
September 30, 1997 from $53.1 million a year earlier. Non-interest expense,
which includes several non-recurring items in both fiscal 1996 and fiscal 1997,
decreased slightly overall by $806,000, or 1.8%, in 1997.
INTEREST INCOME
Interest income increased $12.4 million from $120.6 million for the year ended
September 30, 1996 to $133.0 million for the year ended September 30, 1997. The
increase in interest income was driven by a $174 million increase in the average
balance of total interest-earning assets from fiscal 1996 to fiscal 1997 and
occurred despite a two basis point decline in the yield on interest-earning
assets from 7.40% in 1996 to 7.38% for the year ended September 30, 1997.
Interest income from loans represented 48% of the total increase in interest
income improving $6.0 million to $87.4 million for the year ended September 30,
1997. The average yield on loans declined six basis points to 7.72% in fiscal
1997 from 7.78% in fiscal 1996, but was more than offset by an increase in the
average loan balances of $84.9 million to $1.13 billion for the year ended
September 30, 1997 from $1.05 billion in the prior fiscal year.
Interest income on the securities portfolio and liquidity investments was $45.6
million for the year ended September 30, 1997 compared to $39.2 million for the
year ended September 30, 1996, an increase of $6.4 million, or 16.5%. The
increase in the average balance of the securities portfolio and liquidity
investments of $89.3 million to $671.7 million for the year ended September 30,
1997 was the principal reason for the increase in interest income and resulted
from the Company's growth and leverage strategies implemented during the year.
Additionally, interest income benefited from an increase in the yield on the
securities portfolio and liquidity investments to 6.80% in fiscal 1997 from
6.73% in fiscal 1996. A lower average balance in liquid investments, which have
a lower overall yield, in fiscal 1997 compared to the prior fiscal year
contributed to the improvement in yield.
INTEREST EXPENSE
Interest expense totaled $73.9 million for the year ended September 30, 1997
compared to $67.5 million during fiscal 1996, an increase of $6.4 million, or
9.5%. The increase in interest expense is attributable to a $122.6 million, or
58.3%, increase in the average balance of FHLB advances and other borrowings
from $210.4 million for the year ended September 30, 1996 to $333.0 million
during the year ended September 30, 1997. The increase in borrowings is a result
of funding the asset growth in both loan and securities.
Interest expense on deposits remained relatively stable, decreasing $400,000 to
$54.9 million for the year ended September 30, 1997 compared to $55.3 million
for the year ended September 30, 1996. The slight decrease is almost entirely
attributable to a decline in the cost of deposits of three basis points from
4.22% in fiscal 1996 to 4.19% for the year ended September 30, 1997. The lower
cost of deposits resulted from a general decline in rates offered throughout the
year on the various deposit account types.
51
<PAGE>
NET INTEREST INCOME
Net interest income was $59.1 million for the year ended September 30, 1997, an
increase of $6.0 million from the previous years total. The average interest
rate spread declined eight basis points from 2.96% in fiscal 1996 to 2.88% for
the year ended September 30, 1997 predominantly due to an increase in the cost
of interest-bearing liabilities to 4.50% in fiscal 1997 from 4.44% in fiscal
1996. The increased cost of interest-bearing liabilities in 1997 occurred
despite a decline in the cost of deposits, reflecting a large increase in
borrowed funds, which carry a higher cost than deposits, as a percentage of
total interest-bearing liabilities.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the year ended September 30, 1997 totaled $9.0
million, representing an increase of $5.7 million from the amount provided for
the year ended September 30, 1996 of $3.3 million. There were two principal
reasons for the increase. The first was a $2.7 million provision related to the
merger with MidConn that was made in order to consistently apply Eagle's loan
loss allowance calculation methodology to the MidConn loan portfolio. The second
was a $3.4 million provision resulting from the sale of troubled loans that
occurred in June, 1997.
NON-INTEREST INCOME
Non-interest income totaled $6.3 million for the year ended September 30, 1997,
a $13.6 million decline from the $19.8 million for the year ended September 30,
1996. The principal reason for the decline is the reduction in gain on sale of
deposits from $15.9 million in fiscal 1996 resulting from the sale of seven
Danbury region branch offices compared to a $546,000 gain in fiscal 1997. The
fiscal 1997 gain occurred as a result of the sale of the Middlefield branch
acquired during the MidConn merger. Offsetting the decrease in the gain on sale
of deposits were several items, including a decrease in the loss on sale of
securities of $453,000, a decline in the net gain (loss) from mortgage banking
activities from a loss of $1.4 million for the year ended September 30, 1996 to
a gain of $124,000 during fiscal 1997 and an increase of $698,000 in service
fees and other income.
Also included as a charge to non-interest income during the year ended September
30, 1997 was a loss on disposal of premises and equipment of $915,000. The loss
is made up of $455,000 of charges incurred as a result of the merger with
MidConn and $424,000 of charges related to relocating one of the branch office
facilities.
NON-INTEREST EXPENSE
Non-interest expense decreased $806,000, or 1.8%, to $43.1 million for the year
ended September 30, 1997 from $43.9 million in the prior fiscal year. Each
fiscal year includes non-recurring expenses that significantly impact the total.
The year ended September 30, 1997 includes $2.7 million of merger expenses
incurred as a result of the merger with MidConn and the $2.5 million cost of
corporation obligated mandatorily redeemable preferred securities. The merger
expenses are composed of $800,000 of compensation related expenses, primarily
severance payments made to former MidConn employees, $1.7 million of legal,
accounting and other professional fees and approximately $200,000 of other
miscellaneous expenses.
Non-recurring items in fiscal 1996 non-interest expense include the $5.4 million
SAIF recapitalization charge and $1.2 million of expenses, primarily marketing
and various consulting charges.
52
<PAGE>
Recurring expenses were reasonably consistent from year to year with the
exception of a $616,000, or 12.6%, increase in office occupancy, a $383,000, or
23.2%, increase in the net cost of real estate owned operations and a $1.1
million, or 62.9%, decrease in Federal deposit insurance premiums. The increase
in office occupancy is the result of a full year of operations in fiscal 1997 of
the branch offices acquired in the Fleet/Shawmut transaction and the four
supermarket branch offices. Fiscal 1996 expenses include only partial years
operations for these branch offices. The net cost of real estate owned
operations for the year ended September 30, 1997 include $477,000 of charges
reflecting the Bank's disposition strategy for several properties obtained in
the merger with MidConn. The decrease in Federal deposit insurance premiums was
caused by a lower premium rate in fiscal 1997 resulting from the legislation
enacted in September 1996 that recapitalized the SAIF.
INCOME TAXES
Income tax expense was $6.0 million for the year ended September 30, 1997
compared to $10.2 million for the year ended September 30, 1996, a decrease of
$4.2 million or 41%. The decrease was essentially the result of lower pre-tax
income. The effective rate was 45.0% for fiscal 1997 compared to 39.8% for
fiscal 1996. The higher effective rate is caused by approximately $1.2 million
of merger expenses incurred during the year ended September 30, 1997 that will
not be deductible for income tax purposes.
53
<PAGE>
COMPARISON OF YEARS ENDED SEPTEMBER 30, 1996 AND 1995
NET INCOME
Net income for the year ended September 30, 1996 was $15.5 million, or $2.42 per
fully diluted share, compared to $12.0 million, or $1.92 per fully diluted
share, for the year ended September 30, 1995. The change in net income of $3.5
million represents a 29% increase from the prior fiscal year. Fully diluted
earnings per share increased by 26%. The increase in net income was primarily a
result of a $15.9 million gain on the sale of deposits 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 $9.8 million increase in
non-interest expense which included a $5.4 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 $1.4 million loss on mortgage
banking activities and a $463,000 loss on the sales of securities.
INTEREST INCOME
Interest income was $120.6 million for the year ended September 30, 1996
compared to $106.7 million for the year ended September 30, 1995, an increase of
$13.8 million, or 13%. The increase was due to a $195 million, or 14%, increase
in the average balance of interest earning assets. A reduction in the yield on
interest earning assets to 7.40% in 1996 from 7.44% 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 on 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.
INTEREST EXPENSE
Interest expense was $67.5 million in fiscal 1996 compared to $53.4 million in
the prior fiscal year, an increase of $14.1 million, or 26%. The increase was
caused by a combination of a 43 basis point increase in the cost of
interest-bearing liabilities from 4.01% in 1995 to 4.44% in 1996 and an
approximately $188 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 3.81% in 1995 to 4.22% in 1996
along with a $93 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. In
addition, the average balance of borrowed funds, FHLB advances and repurchase
agreements, all of which generally carry a higher cost than deposits, increased
by $95.4 million.
NET INTEREST INCOME
Net interest income remained very stable when comparing the years ended
September 30, 1996 and 1995 decreasing slightly by $234,000 to $53.1 million
from $53.3 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 2.96% and 3.26%, respectively, in fiscal 1996 compared to
3.44% and 3.72%, 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 decreased by
$872,000, or 21%, to $3.3 million from $4.1 million for the year ended September
30, 1995. The decrease is primarily the result of higher than normal provisions
in fiscal 1995 due to the valuation of two significant loan relationships. The
ratio of allowance for loan losses to non-performing loans increased from 71% at
September 30, 1995 to 89% at September 30, 1996 due in part to additional
allowances associated with loans purchased in the Fleet/Shawmut transaction.
54
<PAGE>
NON-INTEREST INCOME
Non-interest income for the year ended September 30, 1996 was $19.8 million, an
increase of $14.4 million from the prior year total of $5.4 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 $1.4 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 $5.8 million in 1996 from
$5.2 million principally due to a $258,000 increase in servicing income and a
$205,000 increase in checking account service fees.
NON-INTEREST EXPENSE
Non-interest expense was $43.9 million for the year ended September 30, 1996.
This represents a $9.8 million, or 29%, increase from the $34.1 million total
reported for the year ended September 30, 1995. The primary component of the
increase was the $5.4 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 $765,000, marketing increased
$669,000, federal insurance premiums decreased $978,000, the amortization of
intangible assets increased $850,000 and other non-interest expenses increased
$1.4 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
consummation of the Fleet/Shawmut transaction in January 1996 and the Danbury
transaction in March 1996, 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.
On an overall basis the Company's ratio of operating expenses to average assets
decreased two basis points from 2.25% in 1995 to 2.23% in 1996.
INCOME TAXES
The effective tax rate for the year ended September 30, 1996 was 39.8%, down
from the 41.1% reported for fiscal 1995. As a result, the $1.8 million increase
in income taxes to $10.2 million for the year ended September 30, 1996 is
substantially attributable to a higher level of taxable income.
55
<PAGE>
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,
1997 1996
Interest Average Yield/ Interest Average
Average Income/ Cost Average Income/ Yield/
(in thousands) Balance Expense Balance Expense Cost
---------- ---------- ------------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (a) $ 1,131,418 $ 87,358 7.72% $ 1,046,563 $ 81,390 7.78%
Mortgage-backed securities:
Available for sale 504,530 35,115 6.96% 338,766 23,432 6.92%
Held to maturity 66,343 4,488 6.76% 87,376 6,456 7.39%
Trading - - - 732 53 7.24%
Investment securities:
Available for sale 30,324 1,791 5.91% 60,877 3,542 5.82%
Held to maturity (b) 35,503 2,295 6.46% 37,671 2,528 6.71%
Overnight investments and
Federal Funds sold 34,996 1,959 5.60% 56,933 3,167 5.56%
---------- ---------- --------- ----------
Total 1,803,114 133,006 7.38% 1,628,918 120,568 7.40%
---------- ----------
Noninterest-earning assets 85,284 97,867
---------- ---------
Total assets $ 1,888,398 $ 1,726,785
========== =========
Interest-bearing liabilities:
Deposits $ 1,310,431 54,889 4.19% $ 1,310,602 55,289 4.22%
FHLB advances 315,092 18,232 5.79% 157,854 9,043 5.73%
Other borrowings 17,903 760 4.25% 52,540 3,155 6.00%
--------- --------- --------- --------
Total 1,643,426 73,881 4.50% 1,520,996 67,487 4.44%
--------- --------
Noninterest-bearing deposits 53,416 49,155
Other noninterest-
bearing liabilities 52,199 23,314
Stockholders' equity 139,357 133,320
---------- ---------
Total liabilities and
stockholders' equity $ 1,888,398 $ 1,726,785
========== =========
Net interest income $ 59,125 $ 53,081
========== ==========
Average interest rate spread 2.88% 2.96%
Net interest margin (c) 3.28% 3.26%
</TABLE>
<TABLE>
<CAPTION>
1995
Interest Average
Average Income/ Yield/
Balance Expense Cost
---------- ---------- -----------
<S> <C> <C> <C>
(in thousands)
Interest-earning assets:
Loans receivable (a) $ 1,087,923 $ 82,712 7.60%
Mortgage-backed securities:
Available for sale 69,800 6,132 8.79%
Held to maturity 138,886 9,335 6.72%
Trading - - -
Investment securities:
Available for sale 87,602 5,024 5.74%
Held to maturity (b) 27,288 2,134 7.82%
Overnight investments and 22,310 1,393 6.24%
Federal Funds sold ------------- --------
Total 1,433,809 106,730 7.44%
Noninterest-earning assets 80,562 --------
-------------
Total assets $ 1,514,371
=============
Interest-bearing liabilities:
Deposits $ 1,217,534 46,333 3.81%
FHLB advances 70,259 4,223 6.01%
Other borrowings 44,705 2,859 6.40%
------------- -----------
Total 1,332,498 53,415 4.01%
-----------
Noninterest-bearing deposits 38,593
Other noninterest-
bearing liabilities 22,582
Stockholders' equity 120,698
--------------
Total liabilities and
stockholders' equity $ 1,514,371
============== $ 53,315
Net interest income ============
Average interest rate spread 3.44%
Net interest margin (c) 3.72%
</TABLE>
<PAGE>
- -------------------
(a) Interest income includes fees of $117,950, $533,300 and $1,412,100 in 1997,
1996, 1995, respectively.
(b) Investment securities held to maturity include FHLB stock.
(c) 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):
<TABLE>
<CAPTION>
1997 v. 1996 1996 v. 1995
Rate/ Rate/
(in thousands) Volume Rate Volume Total Volume Rate Volume Total
- -------------------------------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 6,599 $ (584) $ (47) $ 5,968 $ (3,144) $ 1,895 $ (73) $ (1,322)
Mortgage-backed securities:
Available for sale 11,466 146 71 11,683 23,629 (1,304) (5,025) 17,300
Held to maturity (1,554) (545) 131 (1,968) (3,462) 927 (344) (2,879)
Trading -- -- (53) (53) -- -- 53 53
Investment securities:
Available for sale (1,778) 54 (27) (1,751) (1,533) 73 (22) (1,482)
Held to maturity (a) (145) (93) 5 (233) 812 (303) (115) 394
Overnight investments and
Federal funds sold (1,220) 20 (8) (1,208) 2,162 (152) (236) 1,774
-------- ------- -------- -------- -------- -------- -------- --------
Total 13,368 (1,002) 72 12,438 18,464 1,136 (5,762) 13,838
-------- -------- -------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Deposits (7) (393) -- (400) 3,542 5,030 384 8,956
FHLB advances 9,008 91 90 9,189 5,265 (198) (247) 4,820
Other borrowings (2,080) (925) 610 (2,395) 501 (174) (31) 296
-------- -------- -------- -------- -------- -------- -------- --------
Total 6,921 (1,227) 700 6,394 9,308 4,658 106 14,072
-------- -------- -------- -------- -------- -------- -------- --------
Net change in net
interest income $ 6,447 $ 225 $ (628) $ 6,044 $ 9,156 $ (3,522) $ (5,868) $ (234)
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- -------------------
(a) Investment securities held to maturity include FHLB stock.
56
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Consolidated Balance Sheets 58
Consolidated Statements of Income 59
Consolidated Statements of Shareholders Equity 60
Consolidated Statements of Cash Flows 61
Notes to Consolidated Financial Statements 63-97
Independent Auditor's Report 98
57
<PAGE>
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and 1996
(dollars in thousands, except for per share data)
<TABLE>
<CAPTION>
Assets 1997 1996
- -------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Cash and amounts due from depository institutions $ 29,055 $ 26,341
Interest-bearing deposits 46,600 31,523
----------- -----------
Cash and cash equivalents 75,655 57,864
Investment securities available for sale (amortized cost: $53,604 in 1997 and
$26,512 in 1996) 53,061 26,519
Investment securities held to maturity (market value: $25,442 in 1996) -- 25,544
Mortgage-backed securities available for sale (amortized cost: $736,150
in 1997 and $375,010 in 1996) 743,943 372,018
Mortgage-backed securities held to maturity (market value: $90,238 in 1996) -- 90,290
Loans held for sale 1,830 705
Loans, net of allowance for loan losses of $9,765 in 1997 and $10,507 in 1996 1,128,381 1,094,656
Accrued interest receivable:
Loans 6,332 6,637
Investment securities 1,150 1,209
Mortgage-backed securities 4,421 3,363
Real estate owned, net 3,754 5,384
Stock in Federal Home Loan Bank of Boston, at cost 22,770 13,100
Premises and equipment, net 13,247 13,897
Intangible assets 29,574 32,488
Prepaid expenses and other assets 6,978 18,057
----------- -----------
Total Assets $ 2,091,096 $ 1,761,731
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Deposits $ 1,353,274 $ 1,368,703
Federal Home Loan Bank advances 445,014 217,008
Repurchase agreements and other borrowed money 76,409 14,820
Advance payments by borrowers for taxes and insurance 7,235 6,631
Accrued expenses and other liabilities 15,631 18,577
----------- -----------
Total Liabilities 1,897,563 1,625,739
----------- -----------
Corporation obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely junior subordinated debentures of the 48,627 --
Corporation
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; 6,363,410
and 6,246,402 shares issued at September 30, 1997 and 1996,
respectively, including 47,373 shares held in treasury 64 62
Additional paid-in capital 78,963 77,628
Retained earnings 61,964 60,426
Cost of common stock in treasury (362) (362)
Net unrealized gain (loss) on available for sale securities 4,277 (1,762)
----------- -----------
Total Shareholders' Equity 144,906 135,992
----------- -----------
Total Liabilities and Shareholders' Equity $ 2,091,096 $ 1,761,731
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
58
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended September 30, 1997, 1996 and 1995
(dollars in thousands, except for per share data)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest Income:
Interest and fees on loans $ 87,358 $ 81,390 $ 82,712
Interest on mortgage-backed securities 39,603 29,941 15,467
Interest on investment securities 2,228 3,880 4,363
Interest on overnight investments 1,959 3,162 1,393
Dividends on investment securities 1,858 2,190 2,795
Interest on Federal funds sold -- 5 --
--------- --------- ---------
Total interest income 133,006 120,568 106,730
--------- --------- ---------
Interest expense:
Interest on deposits 54,889 55,289 46,333
Interest on Federal Home Loan Bank advances 18,232 9,043 4,223
Interest on repurchase agreements and other borrowed money 760 3,155 2,859
--------- --------- ---------
Total interest expense 73,881 67,487 53,415
--------- --------- ---------
Net interest income 59,125 53,081 53,315
Provision for loan losses 8,978 3,266 4,138
--------- --------- ---------
Net interest income after provision for loan losses 50,147 49,815 49,177
--------- --------- ---------
Non-interest income:
Net loss on sale of securities (10) (463) (30)
Net gain (loss) from mortgage banking activities 124 (1,442) 247
Gain on sale of deposits 546 15,904 --
Loss on disposal of premises and equipment (915) -- --
Checking account service fees 3,541 3,207 2,930
Other customer service fees 787 611 518
Other income 2,201 2,013 1,749
--------- --------- ---------
Total non-interest income 6,274 19,830 5,414
--------- --------- ---------
56,421 69,645 54,591
--------- --------- ---------
Non-interest expense:
Compensation, taxes and benefits 16,718 16,974 15,567
Office occupancy 5,491 4,875 4,110
Marketing 1,846 1,840 1,171
Net cost of real estate owned operations 2,034 1,651 1,381
Federal deposit insurance premiums 664 1,789 2,767
Amortization of intangible assets 2,987 2,764 1,914
Data processing expenses 2,154 2,074 2,018
Merger expenses 2,734 -- --
Cost of Corporation obligated mandatorily redeemable preferred securities 2,523 -- --
SAIF Assessment -- 5,398 --
Other 5,965 6,557 5,199
--------- --------- ---------
Total non-interest expense 43,116 43,922 34,127
--------- --------- ---------
Income before income taxes 13,305 25,723 20,464
Income taxes 5,990 10,230 8,418
--------- --------- ---------
Net income $ 7,315 15,493 $ 12,046
========= ========= =========
Net income per share:
Primary $ 1.13 $ 2.44 $ 1.94
Fully diluted 1.12 2.42 1.92
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
59
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended September 30, 1997, 1996 and 1995
(dollars in thousands, except for per share data)
<TABLE>
<CAPTION>
Common Stock Cost of Employee
-------------------- Additional Common Stock
Paid-in Retained Stock in Ownership
Shares Amount Capital Earnings Treasury Plan Debt
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1994 4,802 $ 48 $ 51,115 $ 50,207 $ (362) $ (546)
Net Income 12,046
Cash dividends declared, $0.82 per share (4,650)
Reduction in debt related to Employee
Stock Ownership Plan 452
Exercise of stock options and other 39 478
Dividend reinvestment plan 33 498
Common stock dividend declared - 10%,
less fractional shares 405 4 7,380 (7,392)
Common stock offering 862 9 16,648
Unrealized loss upon adoption of SFAS
115 on October 1, 1994
Change in unrealized gain (loss) on
available for sale securities
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1995 6,141 61 76,119 50,211 (362) (94)
Net Income 15,493
Cash dividends declared, $0.92 per share (5,278)
Reduction in debt related to Employee
Stock Ownership Plan 94
Exercise of stock options and other 76 1 854
Dividend reinvestment plan 29 655
Unrealized gain on securities transferred
from held to maturity to available for sale
Change in unrealized gain (loss) on
available for sale securities
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1996 6,246 62 77,628 60,426 (362) -
Net Income 7,315
Cash dividends declared, $0.94 per share (5,777)
Exercise of stock options and other 61 1 739
Dividend reinvestment plan 21 - 597
Shares issued upon conversion of
outstanding MidConn stock options 35 1 (1)
Unrealized gain on securities transferred
from held to maturity to available for sale
Change in unrealized gain (loss) on
available for sale securities
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1997 6,363 $64 $78,963 $61,964 $(362) $ -
=========== ========== ============ ========== ============= ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss)
on Available
for Sale
Securities Total
- --------------------------------------------------------------------------------
<S> <C> <C>
BALANCE AT SEPTEMBER 30, 1994 $ (754) $ 99,708
Net Income 12,046
Cash dividends declared, $0.82 per share (4,650)
Reduction in debt related to Employee
Stock Ownership Plan 452
Exercise of stock options and other 478
Dividend reinvestment plan 498
Common stock dividend declared - 10%,
less fractional shares (8)
Common stock offering 16,657
Unrealized loss upon adoption of SFAS
115 on October 1, 1994 (435) (435)
Change in unrealized gain (loss) on
available for sale securities 1,465 1,465
- --------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1995 276 126,211
Net Income 15,493
Cash dividends declared, $0.92 per share (5,278)
Reduction in debt related to Employee
Stock Ownership Plan 94
Exercise of stock options and other 855
Dividend reinvestment plan 655
Unrealized gain on securities transferred
from held to maturity to available for sale 1,322 1,322
Change in unrealized gain (loss) on
available for sale securities (3,360) (3,360)
- --------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1996 (1,762) 135,992
Net Income 7,315
Cash dividends declared, $0.94 per share (5,777)
Exercise of stock options and other 740
Dividend reinvestment plan 597
Shares issued upon conversion of
outstanding MidConn stock options -
Unrealized gain on securities transferred
from held to maturity to available for sale 299 299
Change in unrealized gain (loss) on
available for sale securities 5,740 5,740
- --------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1997 $4,277 $144,906
=============== ============
</TABLE>
See accompanying notes to consolidated financial statements
60
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 1997, 1996 and 1995
(dollars in thousands)
<TABLE>
<CAPTION>
OPERATING ACTIVITIES: 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net income $ 7,315 $ 15,493 $ 12,046
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Provision for loan losses 8,978 3,266 4,138
Provision for losses on real estate owned 891 657 1,333
Provision for depreciation and amortization 1,739 1,564 1,299
Amortization (accretion) of discounts and fees on loans 56 (721) (434)
Amortization of premiums (accretion of discounts) on
investment and mortgage-backed securities 1,448 957 (616)
Amortization of core deposit and other intangibles 2,987 2,764 1,914
Loss (gain) on sale of premises and equipment 915 42 (12)
Gain on sale of deposits (546) (15,904) --
Gain on trading securities -- (64) --
Proceeds from sales of trading securities -- 16,592 83,909
Realized gain on sale of real estate owned (34) (296) (981)
Realized loss on sale of securities, net 10 527 30
Loss (gain) from mortgage banking activities (124) 1,442 (247)
Origination of loans held for sale (14,724) (65,859) (2,965)
Proceeds from sale of loans held for sale 13,723 27,532 --
Increase in accrued interest receivable (694) (122) (2,598)
Decrease (increase) in prepaid expenses and other assets 6,718 (5,049) 8,360
Loan origination fees (201) 582 352
Increase (decrease) in accrued expenses and other liabilities (2,854) 4,755 2,116
--------- --------- ---------
Net cash provided (used) by operating activities 25,603 (11,482) 107,650
--------- --------- ---------
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale 18,558 25,593 7,139
Proceeds from maturities of investment securities 25,644 54,200 39,400
Principal payments on investment securities available for sale 973 3,255 6,262
Principal payments on investment securities held to maturity -- -- 4,512
Purchases of investment securities available for sale (46,610) (26,561) (26,929)
Purchases of investment securities held to maturity -- (6,000) (23,692)
Principal payments on mortgage-backed securities available for sale 80,407 94,580 10,768
Principal payments on mortgage-backed securities held to maturity 7,339 13,138 15,154
Purchases of mortgage-backed securities available for sale (368,723) (314,399) (141,390)
Purchases of mortgage-backed securities held to maturity (2,866) (56,138) (49,182)
Proceeds from sales of mortgage-backed securities available for sale 11,422 155,566 11,164
Proceeds from sales of mortgage-backed securities held to maturity -- -- 4,032
Principal payments on loans receivable 167,003 196,949 137,036
Loan originations (221,942) (237,266) (187,427)
Loan purchases (3,263) (36,142) (8,062)
Proceeds from sales of loans 12,150 999 1,059
Additional investment in real estate owned (27) (303) (866)
Proceeds from sales of real estate owned 4,294 5,980 8,166
Purchases of premises and equipment (2,004) (2,629) (1,962)
Proceeds from sales of premises and equipment -- 735 443
Increase in investment in Federal Home Loan Bank stock (9,670) (1,504) (2,422)
Acquisition of loans, investments and other assets -- (39,108) --
--------- --------- ---------
Net cash used by investing activities (327,315) (169,055) (196,797)
--------- --------- ---------
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows, Continued
(dollars in thousands)
FINANCING ACTIVITIES: 1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net decrease in passbook, NOW and money market accounts (7,211) (40,048) (80,421)
Net increase in certificates of deposit 1,507 76,468 80,588
Assumption of deposits and liabilities of acquired banks -- 235,893 --
Sale of deposits (9,179) (168,506) --
Borrowings under Federal Home Loan Bank advances 2,078,255 551,238 215,875
Principal payments under Federal Home Loan Bank advances (1,850,249) (417,380) (179,500)
Net increase (decrease) in repurchase agreements and
other borrowed money 61,589 (67,553) 74,873
Net increase (decrease) in advance payments by borrowers for taxes
and insurance 604 (558) (387)
Proceeds from issuance of Corporation obligated mandatorily
redeemable preferred securities 48,627 -- --
Proceeds from exercise of stock options and dividends reinvested 1,337 1,510 976
Payment of fractional shares from stock dividend -- -- (8)
Proceeds from common stock offerings -- -- 16,657
Cash dividends (5,777) (5,278) (4,650)
----------- ----------- -----------
Net cash provided by financing activities 319,503 165,786 124,003
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 17,791 (14,751) 34,856
Cash and cash equivalents at beginning of period 57,864 72,615 37,759
----------- ----------- -----------
Cash and cash equivalents at end of period $ 75,655 $ 57,864 $ 72,615
=========== =========== ===========
NON-CASH INVESTING ACTIVITIES:
Transfer of investment securities to investment securities available
for sale $ 23,609 $ -- $ 53,124
Transfer of mortgage backed securities to mortgage-backed
securities available for sale 85,720 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 3,494 5,227 3,741
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 72,826 $ 67,602 $ 52,654
Income taxes paid 3,081 15,453 9,902
</TABLE>
See accompanying notes to consolidated financial statements
62
<PAGE>
EAGLE FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997, 1996 and 1995
(1) ACCOUNTING POLICIES
Principles of Consolidation
Eagle Financial Corp. (the "Holding Company") is the savings bank holding
company for Eagle 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 54% of the Bank's deposits are
insured up to applicable limits by the Savings Associations Insurance Fund
("SAIF") with the remainder of the deposits insured by the Bank Insurance Fund
("BIF"). 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. 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 informatio available to them
at the time of their examination.
On May 31, 1997, the Company completed its merger with MidConn Bank ("MidConn")
through a stock for stock exchange and merged the operations of MidConn into the
operations of the Bank. The transaction has been accounted for as a pooling of
interests combination and, accordingly, the consolidated financial statements
for periods prior to the combination have been restated to include the accounts
and results of operations of MidConn.
63
<PAGE>
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 has no securities
classified as trading as of September 30, 1997.
Upon adoption of SFAS 115, $109.7 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 $410,000, 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.
Loans
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 non-accrual 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, the result of which 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 non-accrual
and does not begin again until the loan is returned to accrual status.
64
<PAGE>
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 result 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 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 sales 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.
65
<PAGE>
Loan Servicing and Mortgage Servicing Rights
The Company from time-to-time enters into transactions to acquire the rights to
service pools of loans for others and collect the servicing and related fees.
The amount paid by the Company for these rights is capitalized as mortgage
servicing rights. The Company also sells loans and retains the right to service
the loans for the investors. As of October 1, 1996, the Company adopted SFAS No.
122, " Accounting for Mortgage Servicing Rights". SFAS No. 122 was superseded,
for transactions recorded after December 31, 1996, by SFAS No. 125 "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". Both SFAS No. 122 and SFAS No. 125 require, and the Company
recorded, the recognition of a servicing asset or liability and other retained
interests as an allocation of the carrying amount of the assets sold between the
asset sold and the servicing obligation and other retained interests based on
the relative fair value of the assets sold to the interests retained. SFAS No.
125 also requires that mortgage servicing rights be evaluated for impairment
based on the asset's fair value. The Company estimates fair values by
discounting servicing asset cash flows using discount and prepayment rates that
it believes market participants would use. For purposes of measuring impairment,
mortgage servicing rights are stratified by the Bank based upon the terms of the
loans, whether the loans are fixed or adjustable and the period during which the
loans were originated.
Mortgage servicing rights are amortized in proportion to, and over the period
that the servicing rights generate net servicing fee income.
Stock Compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", which defines a fair value based method of accounting for
employee stock options or similar equity instruments granted after December 31,
1994. SFAS No. 123 is effective for the Company beginning with the fiscal year
ending September 30, 1997. However, SFAS No. 123 also allows an entity to
continue to account for these plans according to Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), provided
pro forma disclosures of net income and earnings per share are made as if the
fair value based method of accounting defined by SFAS No. 123 had been applied.
The Company elects to continue measuring compensation cost related to employee
stock purchase options using APB 25, and provides pro forma disclosures as
required by SFAS No. 123 in Note 15 of the Notes to Consolidated Financial
Statements.
Interest Rate Instruments
The Company utilizes interest rate cap and interest rate floor contracts as part
of its asset/liability management strategy. Interest rate cap and floor
contracts are entered into as hedges against future interest rate fluctuations.
The Company's accounting policy relating to interest rate cap and floor
contracts is to amortize the cost of the contract into interest income or
expense over the expected remaining life of the hedged asset or liability. The
conditions for obtaining and maintaining hedge accounting treatment require
identification of the asset or liability to be hedged and linking the interest
rate cap or floor to the asset or liability being hedged. The Company does not
hold any interest rate cap or floor contracts for trading purposes.
Income Taxes
The Company files consolidated state and federal income tax returns.
66
<PAGE>
The Company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. 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.
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 6,468,437,
6,352,097 and 6,217,274 in 1997, 1996, and 1995, respectively. Weighted average
common shares outstanding used to calculate fully diluted earnings per share
were 6,558,478, 6,413,356, and 6,274,942 in 1997, 1996, and 1995, respectively.
All share data for all periods prior to September 30, 1996 have been adjusted
retroactively to give effect to a 10% stock dividend to common shareholders of
record on February 15, 1995
Reclassification
Certain 1996 and 1995 amounts have been reclassified to conform to the 1997
presentation for comparative purposes. Such reclassifications had no effect on
net income.
(2) ACQUISITIONS AND DIVESTITURES
On May 31, 1997, the Company completed its merger with MidConn through a
tax-free stock for stock exchange. The Company issued approximately 1,708,000
common shares in exchange for all the common shares of MidConn. The transaction
has been accounted for as a pooling of interests combination and, accordingly,
the consolidated financial statements for periods prior to the combination have
been restated to include the accounts and results of operations of MidConn.
The results of operations previously reported by the separate entities and the
combined amounts presented in the accompanying consolidated financial statements
are summarized below:
Years Ended September 30,
1997 1996 1995
------- ------- -------
Net interest income:
Company $49,988 $39,759 $40,017
MidConn 9,137 13,322 13,298
------- ------- -------
Combined $59,125 $53,081 $53,315
======= ======= =======
Net income:
Company $ 6,641 $13,638 $10,972
MidConn 674 1,855 1,074
------- ------- -------
Combined $ 7,315 $15,493 $12,046
======= ======= =======
67
<PAGE>
On June 28, 1997 the Company completed the sale of the Middlefield, Connecticut
branch office, which had been acquired in the MidConn Bank transaction, to
Liberty Bank. As a result of the sale, the Company recorded a gain on the sale
of deposits of approximately $546,000 based on a 6% deposit premium applied to
total deposits of approximately $9.7 million. The deposits sold represent 3.2%
of the deposits assumed in the acquisition of MidConn and 0.7% of total deposits
at June 30, 1997.
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
--------
$254,100
========
Deposits $253,139
Other liabilities 961
--------
$254,100
========
The operating results of this acquisition are included in the Company's
statement of income from the date of acquisition.
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, 1997 was $3,457,000.
68
<PAGE>
(4) INVESTMENT SECURITIES
The aggregate carrying amounts and market values of investment securities are as
follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
------- ------- ------- -------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1997:
Investment securities available for sale:
U.S. Treasury securities $13,015 $ 6 $ 5 $13,016
U.S. Government agency obligations 8,000 19 -- 8,019
Corporate and other securities 18,068 29 152 17,945
Preferred stock 14,521 -- 440 14,081
------- ------- ------- -------
Total $53,604 $ 54 $ 597 $53,061
======= ======= ======= =======
SEPTEMBER 30, 1996:
Investment securities held to maturity:
U.S. Treasury securities $ 2,542 $ 17 $ -- $ 2,559
U.S. Government agency obligations 17,944 -- 218 17,726
Corporate and other securities 5,058 100 1 5,157
------- ------- ------- -------
Total $25,544 $ 117 $ 219 $25,442
======= ======= ======= =======
Investment securities available for sale:
U.S. Treasury securities $ 9,508 $ 19 $ 56 $ 9,471
U.S. Government agency obligations 7,000 17 5 7,012
Corporate and other securities 1,444 37 -- 1,481
Mutual funds 4,860 -- 5 4,855
Equity securities 3,700 -- -- 3,700
------- ------- ------- -------
Total $26,512 $ 73 $ 66 $26,519
======= ======= ======= =======
</TABLE>
The amortized cost and market value of debt securities at September 30, 1997, by
contractual maturity, are shown below (in thousands). 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.
Available for Sale
Amortized Market
cost value
------- -------
Due in one year or less $ 8,389 $ 8,386
Due after one year through five years 9,816 9,842
Due after five years through ten years 6,051 6,052
Due after ten years 14,827 14,700
------- -------
$39,083 $38,980
======= =======
Proceeds from sales of investment securities available for sale were
$18,558,000, $25,593,000, and $7,139,000 in 1997, 1996, and 1995, respectively.
Gross realized gains on sales of investment securities available for sale were
$120,000, $9,000, and $101,000 in 1997, 1996, 1995, respectively. Gross realized
losses on investment securities available for sale were $45,000, $664,000, and
$194,000 in 1997, 1996, and 1995, respectively.
As discussed in note 5 to the consolidated financial statements, the Company
transferred all investment securities from held to maturity to available for
sale in 1997 and ceased using the held to maturity classification.
69
<PAGE>
Investment securities with a book value of $5,345,000 and $4,483,000 were
pledged as collateral to secure public deposits at September 30, 1997 and 1996,
respectively.
As required by the FHLB of Boston, the Bank must hold FHLB stock equal to at
least 5% of outstanding advances. As of September 30, 1997 and 1996, the Bank
was in compliance with the Federal Home Loan Bank stock requirement.
(5) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities primarily includes 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.
The aggregate carrying amounts and market values of mortgage-backed securities
are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1997:
Available for sale:
FHLMC $110,262 $ 1,374 $ 361 $111,275
FNMA 114,058 930 73 114,915
GNMA 55,925 112 72 55,965
Other 1,414 39 -- 1,453
Collateralized mortgage obligations 454,491 6,513 669 460,335
-------- -------- -------- --------
Total $736,150 8,968 1,175 $743,943
======== ======== ======== ========
SEPTEMBER 30, 1996:
Held to maturity:
FHLMC $ 5,830 $ 77 $ 40 $ 5,867
FNMA 5,532 73 38 5,567
GNMA 13,623 11 312 13,322
Collateralized mortgage obligations 65,305 729 552 65,482
-------- -------- -------- --------
Total $ 90,290 $ 890 $ 942 $ 90,238
======== ======== ======== ========
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
======== ======== ======== ========
</TABLE>
70
<PAGE>
Proceeds from sales of mortgage-backed securities available for sale were
$11,422,000, $155,566,000 and $11,164,000 in 1997, 1996 and 1995, respectively.
Gross realized gains on sales of mortgage-backed securities available for sale
were $34,000, $1,190,000 and $309,000 in 1997, 1996 and 1995, respectively.
Gross realized losses on sales of mortgage-backed securities available for sale
were $119,000, $1,062,000 and $152,000 in 1997, 1996 and 1995, respectively.
Proceeds from sales of mortgage-backed securities classified as trading were
$16,952,000 and $83,909,000 in 1996 and 1995, respectively. There were no sales
of mortgage-backed securities classified as trading in 1997. 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.
On June 30, 1997 the Company transferred $85.7 million of mortgage-backed
securities and $23.6 million of investment securities from held to maturity to
available for sale. The transfer resulted in an unrealized gain of approximately
$299,000, which is net of income tax expense of approximately $200,000, being
recorded as an increase to shareholders' equity. The securities were transferred
due to a change in intent with respect to holding the securities to maturity
precipitated by changes in the Company balance sheet following the merger with
MidConn. The Company does not currently intend to purchase securities for
classification as held to maturity.
In November 1995, the FASB issued a "Special Report, A Guide to Implementation
of Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities" that provides additional guidance relating to the application of
SFAS No. 115. In connection with the issuance of this Special Report the FASB
allowed all organizations the ability to review the current portfolio
classification between held to maturity, available for sale and trading and make
a one-time reclassification of securities between categories during the period
from November 15, 1995 to December 31, 1995.
Effective December 1, 1995, the Bank made a one-time reclassification of
securities from the held to maturity classification to the available for sale
classification in accordance with the Special Report. A total of $90.9 million
of mortgage-backed securities and $3.5 million of investment securities were
reclassified resulting in an unrealized gain of approximately $1.3 million,
which is net of income tax expense of $882,000, being recorded as an increase to
shareholders' equity.
71
<PAGE>
(6) LOANS
Loans consisted of the following (in thousands):
September 30,
1997 1996
----------- -----------
Real estate mortgage loans:
Residential - One-to-four family $ 912,646 $ 904,370
Residential - Multi-family 15,949 18,106
Residential - Construction 17,095 15,950
Commercial - Construction 3,177 --
Commercial real estate 60,802 52,132
Land 9,594 10,701
----------- -----------
1,019,263 1,001,259
----------- -----------
Other loans:
Home equity lines of credit 45,316 41,992
Second mortgages 45,405 46,389
Commercial 19,376 9,422
Consumer 10,459 8,444
----------- -----------
120,556 106,247
----------- -----------
Unearned discounts and premiums (609) (574)
Deferred loan origination fees (1,064) (1,769)
Allowance for loan losses (9,765) (10,507)
----------- -----------
$ 1,128,381 $ 1,094,656
=========== ===========
In fiscal 1997, the Company sold $13.7 million of newly originated loans in the
secondary market and, pursuant to SFAS No. 122 and SFAS No. 125, created
mortgage servicing rights totaling $86,000.
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 $1.4 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.
At September 30, 1997, 1996 and 1995, loans serviced for the benefit of others
approximated $246.5 million, $261.4 million and $256.1 million, respectively.
72
<PAGE>
Changes in the allowance for loan losses were as follows (in thousands):
Years ended September 30,
1997 1996 1995
-------- -------- --------
Balance at beginning of year $ 10,507 $ 9,611 $ 10,305
Charge-offs (9,878) (4,340) (4,961)
Recoveries 158 99 129
Provision for loan losses 8,978 3,266 4,138
Allowance associated with
purchases -- 1,871 --
-------- -------- --------
Balance at end of year $ 9,765 $ 10,507 $ 9,611
======== ======== ========
Non-performing loans, approximated $4.5 million and $11.9 million as of
September 30, 1997 and 1996, respectively. If these loans had been current, in
accordance with their original terms, additional interest income would have been
recorded in the amounts of $250,500, $778,700, and $666,800 for 1997, 1996, and
1995, respectively.
During the year ended September 30, 1997, the Bank sold $17.7 million of
non-performing, delinquent or otherwise troubled loans resulting in a provision
of $3.4 million and charge-offs totaling $5.8 million.
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.
The following summarizes the Company's impaired loans (in thousands):
At or for the years ended September 30,
1997 1996
------- -------
Impaired loans $ 3,350 $10,950
Impaired loans with reserve 2,940 10,350
Impaired loans without reserve 410 600
Impaired loan reserve 244 1,037
Impaired loans average balance 8,991 8,672
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 $367,700 and $399,700 for
the years ended September 30, 1997 and 1996, respectively.
At September 30, 1997, the Company had $2.4 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 $3.4 million.
73
<PAGE>
(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 (in thousands):
Years ended September 30
------------------------
1997 1996
------- -------
Balance, beginning of year $ 5,939 $ 7,024
New loans 583 126
Repayments (864) (560)
Other changes (723) (651)
------- -------
Balance, end of year $ 4,935 $ 5,939
======= =======
Other changes in 1997 represent the resignations of former MidConn Bank officers
and directors. Other changes in 1996 represent sales of loans to the secondary
market, $310,000, and the resignations from the Bank, $341,000.
(8) REAL ESTATE OWNED
Real estate owned consisted of the following (in thousands):
September 30
------------
1997 1996
------- -------
Properties acquired through foreclosure $ 4,402 $ 5,463
Valuation allowance (648) (79)
------- -------
Total $ 3,754 $ 5,384
======= =======
74
<PAGE>
The following summarizes the activity in the valuation allowance for real estate
owned (in thousands):
Years ended September 30,
1997 1996 1995
------- ------- -------
Balance at beginning of year $ 79 $ 278 $ 545
Charge-offs (322) (856) (1,600)
Provisions for losses 891 657 1,333
------- ------- -------
Balance at end of year $ 648 $ 79 $ 278
======= ======= =======
The net cost of real estate owned operations was as follows (in thousands):
Years ended September 30,
1997 1996 1995
------- ------- -------
Net gain from sales $ (34) $ (296) $ (981)
Provisions for losses 891 657 1,333
Expenses of holding real estate
owned, net of rental income 1,177 1,290 1,029
------- ------- -------
Total $ 2,034 $ 1,651 $ 1,381
======= ======= =======
75
<PAGE>
(9) PREMISES AND EQUIPMENT
The following is a summary of premises and equipment (in thousands):
September 30
------------
1997 1996
-------- --------
Land $ 1,137 $ 1,137
Premises and leasehold improvements 10,550 11,452
Furniture, fixtures and equipment 9,705 9,536
-------- --------
21,392 22,125
Less accumulated depreciation and amortization (8,145) (8,228)
-------- --------
$ 13,247 $ 13,897
======== ========
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 $1,048,800, $874,000, and
$741,000 for 1997, 1996, and 1995, respectively.
The Company currently has 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 $91,033, 75,200, and $71,700 for 1997, 1996, and 1995,
respectively.
The future minimum rental commitments for the leased facilities as of September
30, 1997 were as follows (in thousands):
1998 $ 974
1999 767
2000 583
2001 548
2002 484
thereafter 2,325
-------------
$ 5,681
=============
76
<PAGE>
(10) PREPAID EXPENSES AND OTHER ASSETS
A summary of prepaid expenses and other assets follows (in thousands):
September 30
------------
1997 1996
------- -------
Mortgage servicing rights $ 564 $ 592
Deferred tax assets, net 233 4,162
Income tax receivable 225 8,088
Other assets 5,956 5,215
------- -------
$ 6,978 $18,057
======= =======
A summary of the activity of mortgage servicing rights was as follows (in
thousands):
Years ended September 30,
1997 1996 1995
----- ----- -----
Balance at beginning of year $ 592 $ 716 $ 839
Originated servicing 86 -- --
Amortization (114) (124) (123)
----- ----- -----
Balance at end of year $ 564 $ 592 $ 716
===== ===== =====
The following table shows activity in goodwill and core deposit intangibles (in
thousands):
<TABLE>
<CAPTION>
Total Goodwill
Core Deposit & Core Deposit Accumulated
Goodwill Intangibles Intangibles Amortization
------------ -------------- ----------------- --------------
<S> <C> <C> <C> <C>
Balance at September 30, 1994 $ 14,610 3,677 18,287 $ 1,744
Amortization of intangibles (992) (922) (1,914) 1,914
Other adjustments (290) (228) (518) --
-------- -------- -------- --------
Balance at September 30, 1995 13,328 2,527 15,855 3,658
Intangible assets acquired 19,914 -- 19,914 --
Write-off due to branch sale -- (517) (517) --
Amortization of intangibles (2,214) (550) (2,764) 2,764
-------- -------- -------- --------
Balance at September 30, 1996 31,028 1,460 32,488 6,422
Amortization of intangibles (2,658) (329) (2,987) 2,987
Other adjustments 73 -- 73 --
-------- -------- -------- --------
Balance at September 30, 1997 $ 28,443 $ 1,131 $ 29,574 $ 9,409
======== ======== ======== ========
</TABLE>
Other adjustments in 1995 represent the realization of tax benefits due to
changes in tax law related to amortization of intangibles.
77
<PAGE>
(11) DEPOSITS
Deposit balances consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
1997 1996
--------- --------
Weighted Weighted
Average Average
Amount Rate Amount Rate
----------- -------- ---------- -------
<S> <C> <C> <C> <C>
Non-interest bearing $ 52,970 -% $ 41,435 -%
Passbook accounts 233,267 1.98 250,718 2.00
NOW accounts 110,769 0.53 112,698 0.99
Money market accounts 107,008 2.49 110,756 2.68
----------- -------- ---------- -------
504,014 1.56 515,607 1.76
----------- -------- ---------- -------
Certificate accounts, with
original maturities of:
Six months or less 149,411 4.65 124,073 4.69
Over six months to one year 283,748 5.09 362,929 5.18
Over one year to two years 142,173 5.33 111,024 5.54
Over two years 273,928 5.99 255,070 6.04
----------- -------- ---------- -------
849,260 5.34 853,096 5.42
----------- -------- ---------- -------
$ 1,353,274 3.94% $ 1,368,703 4.04%
=========== ======== ========== =======
</TABLE>
The interest rates in effect as of September 30, 1997 were 1.98% for passbook
accounts, 0.25% for NOW accounts, 1.98% for money market accounts and ranged
from 2.96% for a one month certificate account to 5.60% for a five year
certificate account.
Interest on deposits is summarized as follows (in thousands):
Years Ended September 30,
1997 1996 1995
------- ------- -------
Passbook accounts $ 4,894 $ 5,162 $ 5,345
NOW accounts 1,053 1,009 927
Money market accounts 2,567 3,135 3,735
Certificate accounts 46,375 45,983 36,326
------- ------- -------
$54,889 $55,289 $46,333
======= ======= =======
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 $222,367, $186,000 and $239,000 for 1997, 1996
and 1995 respectively.
The total amount of time deposit accounts of $100,000 or more was $69.3 million
at September 30, 1997.
78
<PAGE>
The following table sets forth the maturities of time deposit accounts at
September 30, 1997 (in thousands):
Maturity Amount
- -------------------------------------------- ------------
Under one year $ 611,484
Between one year and two years 131,816
Between two years and three years 80,090
Between three years and four years 14,932
Between four years and five years 10,651
More than five years 287
------------
$ 849,260
============
(12) FEDERAL HOME LOAN BANK ADVANCES, REPURCHASE AGREEMENTS AND OTHER BORROWED
MONEY
FHLB advances consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
1997 1996
--------------------- -------------------
Interest Interest
Amount Rate Amount Rate
-------- --------- -------- -------
<S> <C> <C> <C> <C>
Short-term advances: $219,420 5.65% $ 97,235 5.54%
-------- --------- -------- -------
Long-term advances:
Due 1997 -- -- 21,500 5.64
Due 1998 48,900 5.58 51,200 5.51
Due 1999 56,462 5.77 22,427 5.57
Due 2000 18,150 6.06 8,500 5.98
Due 2001 6,845 6.66 4,550 6.76
Due 2002 2,000 6.87 -- --
Due 2003 4,157 6.14 4,762 6.14
Due 2004 80,000 6.01 -- --
Due 2006 3,577 6.31 3,881 6.31
Due 2007 2,675 6.98 -- --
Due 2011 2,828 6.60 2,953 6.60
-------- --------- -------- -------
225,594 5.92 119,773 5.70
-------- --------- -------- -------
$445,014 5.78% $217,008 5.63%
======== ========= ======== =======
</TABLE>
Repurchase agreements and other borrowed money consisted of the following (in
thousands):
<TABLE>
<CAPTION>
September 30,
1997 1996
--------------------- -------------------
Interest Interest
Amount Rate Amount Rate
-------- --------- -------- -------
<S> <C> <C> <C> <C>
Repurchase agreements, due within
one year $ 1,259 4.50% $14,670 5.22%
Repurchase agreements, due 2002 75,000 6.04 -- --
Other borrowings 150 4.00 150 4.00
------- ------- ------- -------
$76,409 6.01% $14,820 5.21%
======= ======= ======= =======
</TABLE>
79
<PAGE>
The repurchase agreements due in 2002 become callable in 2000 and thereafter
until maturity.
The entire amount of repurchase agreements at September 30, 1997 of $76,259,000
represents agreements to repurchase the same securities. The securities
collateralizing the repurchase agreements, which are being held by the counter
party to the agreement, consisted of the following (in thousands):
<TABLE>
<CAPTION>
Amortized Accrued Market
Cost Interest Value
------- ------- -------
<S> <C> <C> <C>
FHLMC mortgage-backed securities $11,597 $ 75 $11,452
FNMA mortgage-backed securities 37,301 230 37,613
GNMA mortgage-backed securities 30,456 201 30,464
U.S. Treasury notes 1,179 5 1,178
------- ------- -------
$80,533 $ 511 $80,707
======= ======= =======
</TABLE>
The following table summarizes information regarding short-term borrowings (in
thousands):
<TABLE>
<CAPTION>
Years Ended September 30,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Short-term FHLB advances:
Maximum amount outstanding at any month-end $268,220 $ 98,255 $ 63,665
Average amount outstanding 165,378 72,049 35,343
Weighted average interest rate 5.60% 5.60% 5.83%
Repurchase agreements:
Maximum amount outstanding at any month-end $ 1,579 $ 85,200 $ 84,200
Average amount outstanding 835 52,300 44,500
Weighted average interest rate 4.45% 5.88% 6.26%
</TABLE>
80
<PAGE>
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
with 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 $474 million in advances from FHLB of Boston as of September 30,
1997. The Bank also has a preapproved line of credit up to 2% of total assets.
In connection with its purchase of the Company's common stock, the Employee
Stock Ownership Plan (the "Plan") borrowed $794,750 in 1986 under a term note
which matured on October 3, 1995 with interest due quarterly at 86.45% of the
lender's floating prime rate and $1,163,000 in 1987 under a term note maturing
in 1997 with interest due quarterly at 82.5% of the lender's floating prime
rate. In 1991, the Plan 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 Plan debt as borrowed money and as a reduction of shareholders' equity.
During 1996, the Company repaid all amounts due under the aforementioned
borrowings.
(13) CAPITAL SECURITIES
On April 1, 1997 the Company completed a $50 million private placement of 10%
capital securities due March 15, 2027. The securities were issued by the Holding
Company's recently formed subsidiary, Eagle Financial Capital Trust 1, and are
fully and unconditionally guaranteed by the Holding Company. Proceeds from the
issue were invested by Eagle Financial Capital Trust I in Junior Subordinated
Debentures issued by the Holding Company which represent the sole assets of
Eagle Financial Capital Trust 1. The Junior Subordinated Debentures have a
principal amount of $50,398,000, bear interest at 10% and mature on April 1,
2027. Net proceeds from the sale of the debentures are being used for general
corporate purposes, including capital contributions to the Bank.
81
<PAGE>
(14) INCOME TAXES
Charges for income taxes in the consolidated statements of income comprised the
following (in thousands):
Years ended September 30,
1997 1996 1995
-------- -------- --------
Current:
Federal $ 4,847 $ 6,200 $ 6,155
State 1,497 1,752 2,005
-------- -------- --------
6,344 7,952 8,160
-------- -------- --------
Deferred:
Federal (236) 1,844 160
State (118) 434 98
-------- -------- --------
(354) 2,278 258
-------- -------- --------
Total:
Federal 4,611 8,044 6,315
State 1,379 2,186 2,103
-------- -------- --------
$ 5,990 $ 10,230 $ 8,418
======== ======== ========
The actual income tax expense for 1997, 1996 and 1995 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 (in thousands):
<TABLE>
<CAPTION>
Years ended September 30,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Expected income tax on income before income taxes $ 4,657 $ 8,975 $ 7,145
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal income tax benefit 896 1,421 1,369
Other, net 437 (166) (96)
-------- -------- --------
$ 5,990 $ 10,230 $ 8,418
======== ======== ========
</TABLE>
82
<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 (in
thousands):
<TABLE>
<CAPTION>
September 30,
-------------
1997 1996
------- -------
Deferred tax assets:
<S> <C> <C>
Post-retirement benefits $ 1,153 $ 1,837
Deferred compensation 223 239
Loans receivable, principally due to allowance for loan losses 4,139 3,163
Intangibles 633 406
Unrealized loss on securities available for sale -- 1,310
Other miscellaneous 374 672
------- -------
Total gross deferred assets 6,522 7,627
------- -------
Deferred tax liabilities:
Premises and equipment, principally due to differences in depreciation (1,309) (1,343)
Tax discount on acquired loans (1,397) (1,698)
Deferred loan fees (610) (424)
Unrealized gain on securities available for sale (2,973) --
------- -------
Total gross deferred tax liabilities (6,289) (3,465)
------- -------
Net deferred tax asset $ 233 $ 4,162
======= =======
</TABLE>
The valuation allowance for deferred tax assets as of September 30, 1997 and
1996 was $0. There was no change in the valuation allowance during the years
ended September 30, 1997 and 1996.
In order to fully realize the gross 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.
83
<PAGE>
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 $13.8 million at September 30, 1997. If the Company does not meet
the remaining income tax requirements of IRC section 593, as amended by The
Small 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 $5.7 million as of September 30,
1997.
(15) STOCK OPTION PLANS
The Company maintains incentive and non-incentive stock option plans for the
benefit of its directors, officers and certain other employees. In October 1995,
the Financial Accounting Standard Board issued SFAS No. 123 "Accounting for
Stock-Based Compensation." This Statement establishes financial accounting and
reporting standards for stock-based employee compensation plans. Under the
provisions of this Statement, the Company has elected to continue to measure
compensation for its option plans using th accounting prescribed by APB Opinion
No. 25 "Accounting for Stock Issued to Employees". Disclosure information
requirements are effective for financial statements for fiscal years beginning
after December 15, 1995, or for an earlier fiscal year for which this statement
is initially adopted for recognizing compensation cost. Pro forma disclosures
required for entities that elect to continue to measure compensation cost using
APB Opinion No. 25 must include the effects of all awards granted in fiscal year
that begin after December 31, 1994.
The Company applies the provisions of APB Opinion No. 25 and related
interpretations in accounting for the plans. Accordingly, no compensation cost
has been recognized for its stock option plans in the Consolidated Statements of
Income. Had compensation cost for the Company's stock option based compensation
plans been determined consistent with SFAS No. 123; the Company's net income and
net income per share would have been reduced to the pro forma amounts indicated
below (in thousands, except share data):
Years Ended September 30,
1997 1996
--------- ----------
Net Income:
As Reported $ 7,315 $ 15,493
Pro Forma $ 6,387 $ 15,305
Primary Net Income Per Share:
As Reported $ 1.13 $ 2.44
Pro Forma $ 0.99 $ 2.41
Fully Diluted Net Income Per Share:
As Reported $ 1.12 $ 2.42
Pro Forma $ 0.97 $ 2.39
The effects of applying this Statement for providing pro forma disclosures are
not likely to be representative of the effects on reported net income and net
income per share for future years. This is due to the fact that awards may vest
over several years and stock options may be granted each year.
At September 30, 1997, 1996 and 1995, 554,991, 895,379 and 973,298 shares,
respectively, were reserved for issuance in connection with incentive and
non-incentive stock option plans for the benefit of directors, officers and
certain other employees. Under the terms of the stock option plans, the exercise
price of each option granted equals the market price of the Company's stock on
the date of grant and each option has a maximum contractual life of ten years.
84
<PAGE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes Option-Pricing Model with the following weighted average
assumptions used for grants issued during 1997 and 1996: expected option term of
ten years, expected dividend yield of 1.85%, expected volatility of 25.22% and
weighted average risk-free interest rate of 5.47%.
A summary of the status of the Company's stock option plans at September 30,
1997, 1996, and 1995 and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- --------------- ---------- ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of year 514,127 $ 14.12 550,156 $ 12.77 387,785 $ 10.27
Granted 140,507 34.58 46,620 23.57 172,888 17.84
Exercised (63,027) 9.99 (77,919) 10.51 (39,864) 8.71
Forfeited/canceled (2,475) 18.18 (4,730) 9.83 -- --
Converted upon MidConn acquisition (69,944) 11.78 -- -- -- --
Stock dividend -- -- -- -- 29,347 --
-------- ----------- -------- ----------- -------- -----------
Options outstanding at end of year 519,188 $ 20.45 514,127 $ 14.12 550,156 $ 12.77
======== =========== ======== =========== ======== ===========
Options Exercisable at Year End 473,688 473,527 548,866
Weighted Average Per Share Fair Value
of Options Granted During the Year $ 11.99 $ 7.71 N/A
</TABLE>
The following table summarizes information about the Company's stock option
plans for options granted that are outstanding at September 30, 1997.
<TABLE>
<CAPTION>
Options Outstanding at Options Exercisable at
September 30, 1997 September 30, 1997
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Life Exercise Number Exercise
Range of Exercise Prices Outstanding (In Years) Price Exercisable Price
- ------------------------------ --------------- ----------------- -------------------- ---------------- ---------------------
<S> <C> <C> <C> <C> <C>
$6.61-$8.64 127,481 2.1 $ 7.88 127,481 $ 7.88
$12.71-$13.95 22,384 5.2 13.95 22,384 13.95
$16.36-$18.41 199,723 7.6 18.07 199,723 18.07
$20.91-$23.00 6,000 8.4 23.00 6,000 23.00
$25.25-$28.50 60,600 8.7 26.88 60,600 26.88
$30.375 - $39.75 103,000 10.0 38.11 57,500 36.82
--------------- ----------------- -------------------- ---------------- ---------------------
Totals 519,188 6.8 20.45 473,688 18.60
=============== ================= ==================== ================ =====================
</TABLE>
85
<PAGE>
(16) 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 its 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.
(17) 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
Company'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, 1997, the Bank meets all
capital adequacy requirements to which it is subject.
As of September 30, 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 September 30, 1997:
Tangible capital $ 156,550 7.59% greater than or equal to $ 30,941 greater than or equal to 1.5%
Core capital 156,550 7.59% greater than or equal to 61,881 greater than or equal to 3.0%
Tier I risk-based capital 156,550 16.88% N/A N/A
Total risk-based capital 165,668 17.87% greater than or equal to 74,186 greater than or equal to 8.0%
As of September 30, 1996:
Tangible capital $ 103,902 6.01% greater than or equal to $ 25,493 greater than or equal to 1.5%
Core capital 103,902 6.01% greater than or equal to 51,885 greater than or equal to 3.0%
Tier I risk-based capital 103,902 13.42% N/A N/A
Total risk-based capital 113,207 14.62% greater than or equal to 61,949 greater than or equal to 8.0%
</TABLE>
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
-----------------------------------------------------------------
Amount Ratio
------------------------------- ----------------------------
<S> <C> <C>
As of September 30, 1997:
Tangible capital N/A N/A
Core capital greater than or equal to $ 103,136 greater than or equal to 5.0%
Tier I risk-based capital greater than or equal to 55,640 greater than or equal to 6.0%
Total risk-based capital greater than or equal to 92,733 greater than or equal to 10.0%
As of September 30, 1996:
Tangible capital N/A N/A
Core capital greater than or equal to $ 86,476 greater than or equal to 5.0%
Tier I risk-based capital greater than or equal to 46,462 greater than or equal to 6.0%
Total risk-based capital greater than or equal to 77,437 greater than or equal to 10.0%
</TABLE>
86
<PAGE>
(18) EMPLOYEE BENEFIT PLANS
The Bank maintains a noncontributory defined benefit pension plan through the
Financial Institutions Retirement Fund (the "Fund") covering all eligible
employees. The plan is part of a multiple 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 1997, 1996 and 1995 were
$118,000, $396,000 and $123,000, respectively, and these amounts are expensed to
operations in the year contributed. The 1997 and 1995 contribution amounts are
net of credits received from the Fund of $292,700 and $221,000, respectively.
The Company also maintains a retirement plan under a non-contributory group
annuity contract for former employees of MidConn Bank who had completed one full
year of service and attained age 21 as of the date of acquisition. At September
30, 1997, all eligible former employees of MidConn Bank were covered under the
plan. The plan assets are invested in a short term fixed income fund. Annual
contributions will be made to the plan in amounts sufficient to meet the minimum
funding requirements set forth in the Employee Retirement Security Act of 1974.
Retirement benefits are based on a percentage of compensation for each year of
service up to 30 years.
The following table sets forth the plan's funded status and amounts recorded in
the Company's consolidated financial statements (in thousands).
<TABLE>
<CAPTION>
September 30,
Actuarial present value of benefit obligations: 1997 1996
- --------------------------------------------------------------------- ------- -------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of
$1,558 in 1997 and $1,869 in 1996 $ 1,580 $ 1,934
------- -------
Projected benefit obligation for service rendered to date $ 1,882 $ 3,222
Plan assets at fair value 2,172 2,424
------- -------
Projected benefit obligation less than (in excess of) plan assets 290 (798)
Unrecognized net asset -- (12)
Unrecognized net loss (gain) -- 303
Unrecognized prior service cost -- 4
------- -------
Prepaid (accrued) pension cost $ 290 $ (503)
======= =======
</TABLE>
<TABLE>
<CAPTION>
Years Ended September 30,
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Net pension cost included the following components:
Service cost - benefits earned during the period $ 268 $ 299 $ 254
Interest cost on projected benefit obligation 234 229 203
Actual return on plan assets (841) (191) (159)
Curtailment gain (765) - -
Net amortization and deferral 621 46 20
----- ----- -----
Net periodic pension cost (benefit) $(483) $ 383 $ 318
===== ===== =====
</TABLE>
The weighted-average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation were 7.5% and 4.0% at September 30, 1997 and 7.75% and 5.5% at
September 30, 1996, respectively. The expected long-term rate of return on plan
assets was 9% in 1997 and 1996.
87
<PAGE>
The Company sponsors an ESOP that covers all full-time employees. The Company
makes annual contributions to the ESOP at the discretion of the Company. The
Company contributes 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 was repaid, shares were released from collateral and allocated to
active employees, based on the proportion of debt service paid during the year.
The debt was fully repaid in 1996. The ESOP shares are as follows:
September 30,
1997 1996
------- -------
Allocated Shares 275,492 229,564
Shares released for allocation -- 19,993
Total ESOP shares 275,492 249,557
======= =======
A summary of the components of ESOP contribution expense by the Company is as
follows (in thousands):
Years Ended September 30,
1997 1996 1995
---- ---- ----
Principal component $ -- $ 94 $452
Interest component -- 10 33
Purchase of shares on
Open Market 375 309 --
---- ---- ----
Total contribution expense $375 $413 $485
==== ==== ====
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 has matched $0.25 in fiscal 1996 and 1995 and $0.50 in
fiscal 1997 for every $1.00 of the employee's contribution which is not in
excess of 4% of the employees total compensation. The Bank recorded an expense
related to the savings plan in the amount of $159,000, $146,000 and $41,000 for
the years ended September 30, 1997, 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.
(19) OTHER POSTRETIREMENT BENEFIT PLANS
In addition to the aforementioned plans, the Company provides medical and dental
insurance programs to its retirees. The retiree programs are first available at
age 60 with 25 years of credited service or at age 65 with 10 years of credited
service. Some retirees are required to contribute to the cost of their coverage
and the provisions may be changed at the discretion of the Company.
88
<PAGE>
The following table sets forth the plans' funded status and amounts recognized
in the Company's consolidated balance sheets (in thousands):
<TABLE>
<CAPTION>
September 30,
-------------
1997 1996
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $(1,357) $(1,286)
Fully eligible active plan participants (113) (108)
Other active plan participants (273) (624)
------- -------
Accumulated Postretirement benefit obligation (1,743) (2,018)
Plan assets at fair value -- --
------- -------
Accumulated Postretirement benefit obligation in excess of
plan assets (1,743) (2,018)
Unrecognized prior service cost (331) (374)
Unrecognized net loss gain (457) (488)
------- -------
Net postretirement benefit liability included in other liabilities $(2,531) $(2,880)
======= =======
</TABLE>
Assumptions used in determining the actuarial present value of the
postretirement benefit obligation are as follows:
Years Ended September 30,
1997 1996 1995
---- ---- ----
Discount rate 7.25% 7.75% 7.5%
Rate of increase on health care costs
Initial 8% 9% 10%
Ultimate 5% 5% 6%
The resulting net periodic postretirement benefit expense consisted of the
following components (in thousands):
Years Ended September 30,
1997 1996 1995
----- ----- -----
Service cost --
benefits earned during the period $ 18 $ 71 $ 64
Interest cost on accumulated
postretirement benefit obligation 109 169 161
Prior service credit (43) -- --
Net amortization (18) (45) (48)
----- ----- -----
Net postretirement benefit expense $ 66 $ 195 $ 177
===== ===== =====
The weighted-average annual assumed rate of increase in the per capita cost of
covered benefits is 8% for 1997 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, 1997 by 9%, and the aggregate of the service and interest cost
components of net periodic postretirement benefit costs for 1997 by 9%.
During fiscal 1997, the Company recorded a gain of $381,100 from a partial
curtailment of the MidConn postretirement benefit plan.
89
<PAGE>
(20) 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 (in thousands):
<TABLE>
<CAPTION>
September 30,
1997 1996
------- -------
<S> <C> <C>
Loan commitments:
Approved loan commitments $30,721 $22,181
Commitments to sell loans 3,817 1,843
Commitments to purchase loans -- 1,200
Unadvanced portion of construction loans 11,117 10,228
Unadvanced portion of home equity lines of credit 39,492 38,640
Unadvanced portion of commercial lines of credit 22,044 10,697
Standby letters of credit 1,457 740
======= =======
</TABLE>
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 construction
loans, which generally mature within nine to twelve months, are adjustable.
Commitments outstanding at September 30, 1997 consist of adjustable and fixed
rate loans of $23,858,500 and $3,905,000, respectively, at rates ranging from
5.25% to 9.99%. An additional $2,957,125 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, 1996
consist of adjustable and fixed rate loans of $14,275,000 and $5,502,000
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 to
originate loans generally expire within 60 days.
Standby letters of credit commit the Bank to make payments on behalf of third
party customers in the event of nonoccurrence of certain specified future
events. Standby letters of credit are subject to the Bank's underwriting and
collateral guidelines for extending credit. The amount of collateral, if any,
supporting outstanding letters of credit is based upon management's credit
analysis of the counterparty. Interest rates are generally variable.
The Bank entered into interest rate cap and collar contracts during the year
ended September 30, 1997. 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.
The Company is party to various legal proceedings normally incident to the kind
of business conducted. Management believes that no material liability will
result from such proceedings.
90
<PAGE>
(21) 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, 1997, residential mortgage loans, including
residential construction loans, totaled $946 million, excluding
off-balance-sheet items. All such loans are collateralized by real estate,
of which a majority are located in Connecticut.
(22) 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 (in thousands):
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996
------------------------------------- -------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Investment Securities $ 53,061 $ 53,061 $ 52,063 $ 51,961
Mortgage-backed Securities 743,943 743,943 462,308 462,256
------------ ---------- ------------- -------------
Total $797,004 $ 797,004 $ 514,371 $ 514,217
============= =========== ============== =============
</TABLE>
The fair value of investment and mortgage-backed securities is based on
available market quotes.
The following table represents fair value in formation for the Bank's loan
portfolio (in thousands):
<TABLE>
<CAPTION>
Allowance
September 30, 1997: Principal and Other Carrying Estimated
Value Adjustments Amount Fair Value
------------ ----------- -------------- -------------
<S> <C> <C> <C> <C>
Real estate mortgage loans $ 1,019,263 $ 7,190 $ 1,012,073 $ 1,013,324
Consumer and non-
mortgage commercial loans 120,556 4,248 116,308 122,255
------------- ---------- ----------- ------------
Total $ 1,139,819 $ 11,438 $ 1,128,381 $ 1,135,579
============= ========== =========== ============
</TABLE>
91
<PAGE>
<TABLE>
<CAPTION>
Allowance
September 30, 1996: Principal and Other Carrying Estimated
Balance Adjustments Amount Fair Value
------------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
Real estate mortgage loans $1,001,259 $ 10,346 $ 990,913 $ 991,491
Consumer and non-
mortgage commercial loans 106,247 2,504 103,743 104,863
-------------- --------------- ------------ ------------
Total $1,107,506 $ 12,850 $ 1,094,656 $ 1,096,354
============== =============== ============ ============
</TABLE>
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.
The estimated fair value of the Bank's deposit portfolio is as follows (in
thousands):
<TABLE>
<CAPTION>
September 30,
1997 1996
---------------------------- --------------------------
Carrying Estimated Carrying Estimated
amount Fair Value amount Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Non-interest bearing $ 52,970 $ 52,970 $ 41,435 $ 41,435
Passbook accounts 233,267 233,267 250,718 250,718
NOW accounts 110,769 110,769 112,698 112,698
Money market accounts 107,008 107,008 110,756 110,756
Certificate accounts 849,260 850,532 853,096 855,691
---------- ---------- ---------- ----------
Total deposits $1,353,274 $1,354,546 $1,368,703 $1,371,298
========== ========== ========== ==========
</TABLE>
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, 1997 and 1996. The fair value of time deposits is
based on the discounted value of contractual cash flows, using rates
offered at September 30, 1997 and 1996 for deposits with similar remaining
maturities.
The fair value of FHLB advances, estimated using rates available at
September 30, 1997 and 1996 for debt of similar terms and remaining
maturities was $445.4 million and $218 million at September 30, 1997 and
1996, respectively. The fair value of repurchase agreements and other
borrowed money, estimated using rates available at September 30, 1997 and
1996 for debt of similar terms and maturities, was $76.6 million and $15
million at September 30, 1997 and 1996, respectively. The fair value of
FHLB stock accrued interest receivable, accrued interest payable and loan
commitments approximate the carrying value at September 30, 1997 and 1996.
The fair value of capitalized mortgage servicing rights was $571,000 at
September 30, 1997. The fair value of the interest rate cap contract was
$569,900 at September 30, 1997.
(23) SUBSEQUENT EVENT
On October 27, 1997, the Company announced the signing of an agreement and
plan of merger whereby the Company would be acquired by Webster Financial
Corp. ("Webster") in a stock-for-stock tax free exchange. Holders of the
Company common stock would receive .84 shares of Webster common stock for
each share of the Company common stock. The transaction, subject to
required regulatory and shareholder approvals, is expected to close in the
quarter ended March 31, 1998.
92
<PAGE>
(24) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued SFAS No. 125, 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 al 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 interest 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.
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 $86,000 in mortgage
servicing assets and $6,600 in related amortization during fiscal 1997,
pursuant to SFAS No. 125 and SFAS No. 122, an accounting pronouncement with
substantially the same requirements. SFAS No. 122 was applicable to the
Bank during the three month period October 1, 1996 through December 31,
1996.
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.
93
<PAGE>
SFAS No. 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997 and earlier application is
not permitted. Upon adoption of SFAS No. 128, all prior-period EPS data
will be restated. The Company will adopt SFAS No. 128 effective December
31, 1997. The Company does not expect this pronouncement to significantly
impact its consolidated financial statements.
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 result 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 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.
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.
94
<PAGE>
(25) EAGLE FINANCIAL CORP. (PARENT COMPANY ONLY) CONDENSED FINANCIAL
INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
Balance Sheets September 30,
-------------------------------------------
1997 1996
-------------- -------------
<S> <C> <C>
Assets:
Cash $ - $ -
Interest-bearing deposits 2,893 805
-------------- -------------
Cash and cash equivalents 2,893 805
Investment securities available for sale 85 -
Investment securities held to maturity - 85
Investment in Bank subsidiary 186,371 136,326
Investment in Eagle Financial Capital Trust
I subsidiary 1,531 -
Dividend receivable 1,800 900
Receivable from Bank subsidiary 151 347
Other assets 191 178
--------------- ------------------
Total assets $ 193,022 $ 138,641
============== ==================
Liabilities and Shareholders' Equity:
Payable to Bank subsidiary $ 38 $ 638
Accrued expenses and other liabilities 2,201 249
Junior subordinated debentures 50,154 -
Shareholders' equity 140,629 137,754
---------------- -----------------
Total liabilities and shareholders' equity $ 193,022 $ 138,641
================ ==================
95
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of Income Years Ended September 30,
--------------------------------------------------------
1997 1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
Interest on investments $ 246 $ 28 $ 71
Dividends from Bank subsidiary 2,900 3,200 2,000
Interest expense (2,508) - -
Other expenses (799) (872) (909)
------------ ------------- -------------
Income before income taxes and
equity in undistributed earnings of (161) 2,356 1,162
subsidiaries
Income tax benefit 1,243 353 364
------------ ------------- -------------
Income before equity in undistributed
earnings of subsidiaries 1,082 2,709 1,526
Equity in undistributed earnings of
Bank subsidiary 6,252 12,784 10,520
Equity in undistributed loss of Eagle Financial
Capital Trust I subsidiary (19) - -
----------- ------------- ------------
Net income $7,315 $ 15,493 $ 12,046
============ ============= ============
</TABLE>
<TABLE>
<CAPTION>
Statements of Cash Flows Years Ended September 30,
------------------------------------------------------
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
Net income $ 7,315 $ 15,493 $ 12,046
Adjustments to reconcile net income
to net cash provided by operating activities:
Equity in undistributed earnings of
Bank subsidiary (6,252) (12,784) (10,520)
Equity is undistributed loss of Eagle Financial Capital
Trust I subsidiary 19 - -
Decrease (increase) in other assets (913) (945) 103
Increase (decrease) in accrued expenses
expenses and other liabilities 1,952 (129) 837
---------- ----------- ----------
Net cash provided by operating activities 2,121 1,635 2,466
---------- ----------- ----------
Investing activities:
Decrease (increase) in receivable from Bank subsidiary 196 530 (1,081)
Investment in Bank subsidiary (43,793) - (14,700)
Investment in Eagle Financial Capital Trust I subsidiary (1,550) - -
---------- ----------- -----------
Net cash provided (used) by investing activities (45,147) 530 (15,781)
---------- ----------- -----------
Financing activities:
Cash dividends (5,777) (4,132) (3,627)
Proceeds from exercise of stock options and
other 1,337 1,122 873
Payment of fractional shares from stock dividend - - (8)
Proceeds from sale of common stock - - 16,657
Proceeds from junior subordinated debentures 50,154 - -
Increase in payable to Bank subsidiary (600) 609 2
---------- ----------- ----------
Net cash provided (used) by financing activities 45,114 (2,401) 13,897
---------- ----------- ----------
Increase (decrease) in cash and cash equivalents 2,088 (236) 582
Cash and cash equivalents at beginning of year 805 1,041 459
---------- ----------- ----------
Cash and cash equivalents at end of year $ 2,893 $ 805 $ 1,041
========== =========== ==========
</TABLE>
96
<PAGE>
(26) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT
PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------------------------
12/31/96 3/31/97 6/30/97 9/30/97 Total
---------- --------- --------- ----------- -----------
Fiscal 1997
<S> <C> <C> <C> <C> <C>
Interest income $ 31,226 $ 31,595 $ 34,420 $ 35,765 $ 133,006
Interest expense 17,322 17,484 18,962 20,113 73,881
---------- --------- --------- ----------- -----------
Net interest income 13,904 14,111 15,458 15,652 59,125
Provision for loan losses 725 675 7,278 300 8,978
Net gain (loss) on sale of
securities - 30 (65) 25 (10)
Gain (loss) from mortgage
banking activities 20 16 16 72 124
Gain on sale of deposits - - 546 - 546
Loss on disposal of premises
and equipment - - (912) (3) (915)
Non-interest income 1,466 1,637 1,593 1,833 6,529
Non-interest expense 8,587 9,075 15,575 9,879 43,116
Income tax provision (benefit) 2,497 2,462 (1,902) 2,933 5,990
---------- --------- --------- ----------- -----------
Net income (loss) $ 3,581 $ 3,582 $ (4,315) $ 4,467 $ 7,315
========== ========= ========= =========== ===========
Net income (loss) per share:
Primary $ 0.56 $ 0.56 $ (0.67) $ 0.68 $ 1.13
Fully diluted $ 0.55 $ 0.56 $ (0.67) $ 0.68 $ 1.12
</TABLE>
The quarter ended June 30, 1997 includes a provision for loan loss $3.4
million related to the sale of troubled loans and several charges related
to the merger with MidConn: a provision for loan losses of $2.7 million, a
loss on disposal of premises and equipment of $455,000 and $3.5 million of
merger expenses. The quarter also includes a gain on sale of deposits of
$546,000 resulting from the sale of a branch office acquired from MidConn.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------
12/31/95 3/31/96 6/30/96 9/30/96 Total
---------- --------- ---------- ----------- ---------
Fiscal 1996
<S> <C> <C> <C> <C> <C>
Interest income $ 28,412 $ 30,354 $ 31,007 $ 30,795 $ 120,568
Interest expense 15,726 17,505 17,151 17,105 67,487
-------- --------- ---------- --------- -----------
Net interest income 12,686 12,849 13,856 13,690 53,081
Provision for loan losses 350 1,532 659 725 3,266
Net gain (loss) on sale of
securities 631 (1,163) 64 5 (463)
Gain from mortgage banking
activities 6 (1,698) 255 (5) (1,442)
Gain on sale of deposits - 15,904 - - 15,904
Non-interest income 1,472 1,391 1,510 1,458 5,831
Non-interest expense 8,319 11,340 9,387 14,876 43,922
Income tax provision (benefit) 2,594 5,721 2,073 (158) 10,230
-------- --------- ---------- --------- -----------
Net income (loss) $ 3,532 8,690 3,566 (295) 15,493
========== ========= ========== ========= ==========
Net income (loss) per share:
Primary $ 0.56 $ 1.38 $ 0.56 $ (0.06) $ 2.44
Fully diluted $ 0.55 $ 1.37 $ 0.56 $ (0.06) $ 2.42
</TABLE>
During the quarter ended March 31, 1996, the Company's operations 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 $5.4 million charge related to an assessment to
recapitalize the SAIF.
97
<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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 1997 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.
KPMG Peat Marwick LLP
Hartford, Connecticut
October 27, 1997
98
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
Pursuant to the Company's Bylaws, the Board of Directors currently is
comprised of ten people which, pursuant to the Company's Restated Certificate of
Incorporation, are divided into three classes, with the number of directors in
each class to be as nearly equal in number as possible. The term of office of
only one class of directors expires each year, and their successors are elected
for terms of three years and until their successors are elected and qualified.
Eagle's Board currently has three directors whose terms of office expire at the
1998 Annual Meeting, Messrs. Alden, Britton and Torrizo. In addition, the Board
has three directors whose terms of office expire at the 1999 Annual Meeting and
four directors whose terms expire at the 2000 Annual Meeting. Eagle's annual
stockholders meeting that would normally be scheduled in January 1998 has been
delayed pending the completion of a special shareholders meeting required to
vote on the acquisition of Eagle by Webster Financial Corp. ("Webster").
On October 27, 1997, the Company announced the signing of a definitive
agreement to merge with and into 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 Eagle common stock. The transaction is
subject to shareholder and regulatory approval. Eagle and Webster will both hold
special meetings of stockholders sometime during the quarter ending March 31,
1998 at which time their respective stockholders will be asked to consider and
vote upon the proposed merger. In the event the acquisition by Webster is
approved by all required parties, it would be unnecessary for Eagle to hold its
regular 1998 Annual Meeting.
Messrs. Alden, Britton and Torrizo are scheduled to be nominated by the
Board of Directors of the Company at the 1998 Annual Meeting to serve for new
three year terms expiring in 2001. There is no cumulative voting for election of
directors. The three nominees receiving the greatest number of votes cast for
the election of directors at the Annual Meeting would become directors at the
conclusion of the tabulation of votes.
Eagle is the holding company for Eagle Bank (the "Bank"), which is the
resulting institution from the merger on January 1, 1993 of Eagle's then two
savings institution subsidiaries, First Federal Savings and Loan Association of
Torrington ("Torrington") and Bristol Federal Savings Bank ("Bristol"). Each
director of Eagle currently also serves as a director of the Bank. There are no
arrangements or understandings between the Company and any person pursuant to
which such person has been nominate or elected as a director.
99
<PAGE>
Information as to Nominees and Continuing Directors. The following table
sets forth the names of the Board of Director's nominees for election as a
director and those directors who will continue to serve after the Annual
Meeting. Also set forth is certain other information with respect to each such
person's age at December 1, 1997, principal occupation or employment during the
past five years, the periods during which he has served as a director of Eagle
and positions currently held with Eagle.
<TABLE>
<CAPTION>
EXPIRATION
DIRECTOR OF CURRENT
AGE SINCE TERM POSITION(S) HELD WITH EAGLE
--- -------- ---------- ---------------------------
NOMINEES FOR 3-YEAR TERM:
<S> <C> <C> <C> <C>
Richard H. Alden 61 1988 1998 Director
Robert J. Britton 45 1992 1998 Chairman of the Board, President and Chief
Executive Officer
Ernest J. Torizzo 57 1990 1998 Director
CONTINUING DIRECTORS:
George T. Carpenter 56 1988 1999 Director
Eugene R. Curcio. 48 1997 2000 Director
Theodore M. Donovan 64 1988 2000 Director
Thomas V. LaPorta 67 1986 1999 Director
Steven E. Lasewicz, Jr. 59 1990 1999 Director
Ralph T. Linsley 63 1988 2000 Director
John F. McCarthy 57 1986 2000 Director
</TABLE>
Richard H. Alden became a director of Bristol in 1977. Upon the merger of
Bristol's holding company with Eagle in 1988, Mr. Alden became a director of
Eagle. Upon the merger of Bristol and Torrington in 1993, he continued as a
director of the Bank. He has been engaged in the private practice of law since
1962 in Bristol, Connecticut.
Robert J. Britton is Chairman of the Board and the President and Chief
Executive Officer of Eagle and the Bank. He joined Torrington in 1978 and became
Vice President and Chief Lending Officer of Torrington in 1983 and Executive
Vice President of Torrington in 1989. He has served as an executive officer of
Eagle since 1991 and as a director of Eagle and the Bank since 1992. Upon the
merger of Bristol and Torrington in 1993, Mr. Britton became the President and
Chief Operating Officer of the Bank. Mr. Britton became President and Chief
Executive Officer of Eagle and Chief Executive Officer of the Bank effective as
of September 30, 1994 and President of the Bank in January 1995. In January 1997
Mr. Britton became Chairman of the Board of Eagle and the Bank.
Ernest J. Torizzo became a director of Torrington in 1984, a director of
Eagle in 1990, and upon the merger of Torrington and Bristol in 1993, became a
director of the Bank. Since 1975, he has been Executive Vice President of O&G
Industries, Inc., a construction company headquartered in Torrington,
Connecticut. Mr. Torizzo is also part owner and a director of Burlington
Construction Company in Torrington, Connecticut.
George T. Carpenter became a director of Bristol in 1972. Upon the merger
of Bristol's holding company with Eagle in 1988, he also became a director of
Eagle. Upon the merger of Bristol with Torrington in 1993, he became a director
of the Bank. Since 1977, Mr. Carpenter has been President and Treasurer of S.
Carpenter Construction Co. and Carpenter Realty Co., which firms are
headquartered in Bristol, Connecticut. Mr. Carpenter is a director of Barnes
Group, Inc., a manufacturer of springs an aircraft parts and distributor of
automobile parts, which is headquartered in Bristol, Connecticut.
Eugene R. Curcio, formerly a director of MidConn Bank, became a director of
Eagle and the Bank in May 1997 following the Bank's acquisition of MidConn Bank.
Mr. Curcio currently works in a consultant capacity for Superior Consultant
Company, Inc., a part of The Kaufman Group.
100
<PAGE>
Theodore M. Donovan became a director of Bristol in 1982 and, upon the
merger of Bristol's holding company with Eagle in 1988, Mr. Donovan became a
director of Eagle. Upon the merger of Bristol and Torrington in 1993, Mr.
Donovan continued as a director of the Bank. Mr. Donovan has been in the private
practice of law in Bristol, Connecticut since 1959.
Thomas V. LaPorta has been a director of Torrington since 1979 and became a
director of Eagle upon its formation in 1986. Upon the merger of Torrington and
Bristol in 1993, he became a director of the Bank. Mr. LaPorta has been
President and Chairman of the Board of The LaPorta Funeral Home in Torrington,
Connecticut since 1956.
Steven E. Lasewicz, Jr. became a director of Bristol in 1986, a director of
Eagle in 1990 and was a director of Torrington between 1990 and 1992. Upon the
merger of Bristol and Torrington in 1993, Mr. Lasewicz became a director of the
Bank. He has been President of SELCO Controls, Inc. since 1977. The firm is
headquartered in Bristol, Connecticut and installs and services temperature
control and building automation systems. Mr. Lasewicz has been a Senior Account
Executive with Barber- Colman/Cosentino, Inc. since 1993. The firm is
headquartered in East Granby, Connecticut and is engaged in similar business
activities as SELCO Controls, Inc.
Ralph T. Linsley is a director of Eagle and the Bank. He was employed by
Bristol in 1956 and became its President in 1971. Mr. Linsley became Chairman of
the Board of Bristol in 1986 and Chairman of the Board of Bristol's holding
company prior to its combination with Eagle in 1988, when he became Vice
Chairman of the Board of Eagle. Upon the merger of Bristol and Torrington in
1993, Mr. Linsley became the Chief Executive Officer of the Bank and continued
as a director of the Bank. In January 1994, he became Chairman of the Board of
the Bank. Mr. Linsley retired as President and Chief Executive Officer of Eagle
and Chief Executive Officer of the Bank effective September 30, 1994 and retired
as an employee of Eagle and the Bank effective December 31, 1994. In January
1995, Mr. Linsley became Chairman of the Board of Eagle. Also, commencing
January 1, 1995, Mr. Linsley became a consultant to Eagle. In January 1997 he
resigned from his position as Chairman of the Board and continued as a director.
John F. McCarthy became a director of Torrington in 1984, a director of
Eagle upon its formation in 1986 and upon the merger of Torrington and Bristol
in 1993, continued as a director of the Bank. Since 1970, he has been the
President of J&M Sales, Inc., a Torrington-based beer distributorship, and since
1979, he has been the President of Thames River Recycling Co. in Newington,
Connecticut.
Board of Directors Committees and Nominations by Shareholders. The Board of
Directors of Eagle acts as a nominating committee for selecting nominees for
election as directors. Eagle's Bylaws also permit shareholders eligible to vote
at the Annual Meeting to make nominations for directors if such nominations are
made pursuant to timely notice in writing to the Secretary of Eagle. To be
timely, such notice must be delivered to, or mailed to and received at, the
principal executive offices of Eagle not less than 30 days nor more than 90 days
prior to the date of the meeting, provided that at least 45 days' notice or
prior public disclosure of the date of the meeting is given or made to
shareholders. If less than 45 days' notice or prior public disclosure of the
date of the Annual Meeting is given or made to shareholders, notice by the
shareholder must be received by Eagle not later than the close of business on
the 15th day following the day on which such notice of the date of the Annual
Meeting was mailed or such public disclosure was made. The Board of Directors
has delayed setting a date for the Annual Meeting pending the outcome of a
special meeting of stockholders to vote on the Agreement and Plan of Merger,
dated October 26, 1997, by and between Eagle and Webster Financial
Corp.("Webster") and the merger provided for therein. Pursuant to the merger,
Eagle will merge with and into Webster, with Webster as the surviving
corporation. Should the annual meeting become necessary, a shareholder's notice
of nomination must also set forth certain information specified in Article III,
Section 13 of Eagle's Bylaws concerning each person the shareholder proposes to
nominate for election and the nominating shareholder. Eagle has not received any
nominations for directors from shareholders.
101
<PAGE>
The Board of Directors of Eagle has appointed a standing Audit Committee
which met four times during the 1997 fiscal year. The members of the Audit
Committee currently are Messrs. Curcio, McCarthy and Linsley. The Audit
Committee reviews the scope and results of the independent annual audit. The
Audit Committee also reviews the scope and results of audits performed by the
Company's internal auditor.
The Compensation Committee of the Board of Directors reviews employee
compensation and makes recommendations to the Board regarding changes in
compensation. In addition, the Board of Directors has appointed a Stock Option
Committee to administer the Company's stock option plans and to make grants of
options thereunder. During the 1997 fiscal year, the Compensation Committee and
Stock Option Committee held three and three meetings, respectively. The members
of the Compensation Committee currently are Messrs. Donovan, LaPorta and
Torizzo. The Stock Option Committee currently consists of the following
non-employee directors: Messrs. LaPorta, Lasewicz, McCarthy and Torizzo.
In October 1994, the Board of Directors of Eagle established a Loan
Oversight Committee which met fourteen times during the 1997 fiscal year. The
members of the Loan Oversight Committee currently are Messrs. Alden, Britton,
Carpenter and Lasewicz. The Loan Oversight Committee reviews commercial loan
applications and monitors the Bank's commercial loan portfolio.
During the 1997 fiscal year, Eagle held eighteen meetings of the Board of
Directors. Each incumbent director attended more than 75% of the aggregate of
the total number of meetings held by the Board and of the total number of
meetings held by all committees of the Board on which he served during the
period that he served.
Compensation of Directors. Each non-employee director of Eagle currently
receives an annual retainer of $9,200 (including amounts paid by the Bank) while
Committee Chairmen receive an additional retainer of $2,800. In addition, each
non-employee director receives $750 (including amounts paid by the Bank) for
each regular or special Board meeting attended, and $700 for each committee
meeting attended.
Under Eagle's deferred compensation plan for non-employee directors of
Eagle and its subsidiaries, non-employee directors are permitted to defer all or
a portion of their director and committee fees until they cease to be directors.
Interest is paid on deferred amounts at a rate determined by the Board of
Directors. During fiscal 1997, interest on deferred amounts was paid at the rate
paid on the Bank's three year certificate of deposit accounts as last set on
December 16, 1997. A director's deferred compensation under the plan generally
will be paid to such director only upon his retirement as a director, but the
director may apply to the Board of Directors to withdraw up to 100% of the value
of his deferred compensation account. During the 1997 fiscal year, none of the
participating directors deferred fees into the plan.
Since January 1, 1994, Eagle has maintained a Post-Retirement
Compensation Plan for Outside Directors (the "Post-Retirement Compensation
Plan") under which participating non-employee directors may receive
post-retirement benefits following their termination of service with Eagle's
Board of Directors due to retirement or removal from service, failure to be
reelected to the Board after accepting the nomination, becoming disabled or
after a "change in control" as defined under the Post-Retirement Compensation
Plan. To be eligible to receive such post-retirement benefits, the director may
not have been an employee or officer of Eagle or its subsidiaries and must have
served five years on Eagle's Board. Following his service with Eagle's Board of
Directors, a participating non-employee director shall continue to receive the
annual retainer fee paid during the last year such director served on the Board
for a period equal to the number of years and partial years served on the Board,
up to a maximum of 10 years. In the event of the death of a participating
director prior to commencement of benefits under the Post-Retirement
Compensation Plan or prior to receiving the total number of payments to which he
is entitled, a payment equal to 100% of the benefit payable under the
Post-Retirement Compensation Plan will be made to the director's beneficiary or
estate. No benefits are payable to a director under the Post-Retirement
Compensation Plan who is removed from service by regulatory authorities or who
is removed from the Board for cause by Eagle's shareholders. No payments were
made to any director under the Post-Retirement Compensation Plan during the 1997
fiscal year.
In April 1994, Mr. Linsley, the then President and Chief Executive
Officer of Eagle and Chief Executive Officer of the Bank, entered into a new
employment agreement with Eagle and the Bank. The agreement was subsequently
102
<PAGE>
amended in July 1994 in connection with Mr. Linsley's notice to Eagle and the
Bank under the agreement that he was retiring as President and Chief Executive
Officer of Eagle and Chief Executive Officer of the Bank effective September 30,
1994 and would remain as an executive employee of Eagle and the Bank through
December 31, 1994, at which time Mr. Linsley's employment agreement was
terminated. Mr. Linsley's employee agreement provided that upon Mr. Linsley's
voluntary termination not related to a "change in control" as defined in the
agreement, Mr. Linsley would receive special retirement payments from the Bank
equal to three times his annual salary (based on his salary at the time of such
retirement). Such special retirement payments are payable in 60 equal monthly
installments and will cease if Mr. Linsley accepts employment with a significant
competitor of the Bank. Based upon his annual salary of $215,000 at time of
retirement, such payments for fiscal 1997 were $129,000.
Mr. Linsley also has a consulting agreement with Eagle which provides
that Mr. Linsley will provide consulting services to Eagle (not to exceed 1,000
hours per year) for a five year period commencing January 1, 1995 following his
retirement as an employee of Eagle at an annual rate of $50,000, with such
amount paid in fiscal 1997. The compensation and other benefits available to Mr.
Linsley thereunder continue for the term of the agreement in the event of his
death prior to reaching age 70. In addition, Mr. Linsley has use of a Company
owned vehicle.
Eagle has four stock option plans (the "Option Plans"), which were
approved by the shareholders of Eagle, or, in the case of the Bristol 1987
Option Plan, by the shareholders of Bristol's holding company prior to its
combination with Eagle. The Option Plans are for the benefit of officers,
directors and directors emeriti of Eagle and its subsidiaries. Under Eagle's
1991 Stock Option Plan, as in effect before the amendment discussed below, new
non-employee directors of Eagle receive options for 8,250 shares (as adjusted
for the Company's subsequent 10% stock dividend) upon the completion of one year
of service as a director, subject to the availability of options. Also under the
1991 Option Plan, pursuant to amendments adopted in November 1994 and approved
by shareholders at the 1995 annual meeting, each outside director of Eagle
serving in November 1994 received a one-time grant of an option to purchase
8,250 shares at an exercise price of $18.18 per share (as adjusted for the
Companies subsequent 10% stock dividend). In November 1994, although Mr. Linsley
had retired as President and Chief Executive Officer, he continued to be an
executive employee and received a grant of options for 8,250 shares (as adjusted
for the Company's subsequent 10% stock dividend). At the meeting of shareholders
on January 28, 1997 it was voted to amend the 1991 Stock Option Plan to allow
for discretionary grants of options, but not more than 2,000 shares per year, to
non-employee directors in consideration of compensation to Board members and to
encourage growth in shareholder value.
In June 1997 Eagle's Stock Option Committee voted to grant 2,000 shares of
non-qualified options from the 1991 Stock Option plan to all non-employee
directors at a price of $30.375, the closing price of Eagle Financial Corp.
Common Stock on the last trading day prior to the date of grant.
103
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
executive officers of Eagle. All executive officers serve pursuant to employment
agreements. See "Management -- Executive Compensation."
AGE AT
DECEMBER 1,
NAME 1997 POSITION(S) HELD WITH EAGLE
- ---- ----------- ---------------------------
Robert J. Britton....... 45 Chairman of the Board, President and
Chief Executive Officer
Mark J. Blum............ 44 Vice President, Chief Financial Officer
and Secretary
Kenneth F. Burns........ 38 Vice President
Ercole J. Labadia....... 62 Vice President
Barbara S. Mills........ 61 Vice President and Treasurer
Information concerning the principal occupation of Mr. Britton is set forth
under "Election of Directors." Information concerning the principal occupation
during the last five years of those executive officers of Eagle who are not
directors of Eagle is set forth below.
Mark J. Blum, Vice President, Chief Financial Officer and Secretary of
Eagle, joined Torrington in 1985 and became Treasurer in 1986. He has held
similar positions with Eagle since its formation in 1986. Upon the merger of
Bristol with Torrington in 1993, Mr. Blum became Senior Vice President and Chief
Financial Officer of the Bank. In November 1996, Mr. Blum became Corporate
Secretary of both Eagle and the Bank. In April 1997, Mr. Blum became Executive
Vice President of the Bank.
Kenneth F. Burns became a Vice President of Eagle in 1996. Prior thereto,
he joined Bristol in 1980, upon the merger of Bristol with Torrington in 1993,
Mr. Burns became Vice President - Marketing of the Bank. In 1994 he became
Senior Vice President - Retail Banking and Marketing. In April 1997, Mr. Burns
became Executive Vice President of the Bank.
Ercole J. Labadia, Vice President -- Administration of Eagle, has served in
such capacity with Eagle since 1988. Upon the merger of Bristol with Torrington
in 1993, Mr. Labadia became Executive Vice President -- Administration and
Operations of the Bank. Prior thereto, he had served as Executive Vice President
of Bristol since 1989. In June 1997 Mr. Labadia retired from Eagle and the Bank.
Barbara S. Mills, Vice President and Treasurer of Eagle, has served in such
positions with Eagle since 1988. Upon the merger of Bristol with Torrington in
1993, Ms. Mills became Vice President and Treasurer of the Bank. Prior thereto,
Ms. Mills had served as Chief Financial Officer of Bristol since 1982.
104
<PAGE>
Item 11. Executive Compensation
Compensation. The following table sets forth the salary compensation, cash
bonus and certain other forms of compensation paid by Eagle and its subsidiaries
for services rendered in all capacities during fiscal 1997, 1996 and 1995 to the
President and Chief Executive Officer of Eagle and to each of the other most
highly compensated executive officers of Eagle whose total annual salary and
bonus for fiscal 1997 exceeded $100,000 (the "named executive officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Long-Term
Compensation Compensation Awards
---------------------- -------------------
Securities All Other
Fiscal Underlying Compensation
Name and Principal Position(s) Year Salary$ Bonus$ Options(b) $ (c)
------------------------------ ----------- ------------ ------- -------------------- ------------
<S> <C> <C> <C> <C> <C>
Robert J. Britton (a) 1997 $236,723 $ - 24,000 $ 29,826
President, Chief Executive 1996 222,577 - 9,000 13,267
Officer and Chairman of the 1995 183,846 20,000 27,500 21,050
Board of Eagle and the Bank
Ercole J. Labadia 1997 116,050 - 6,000 57,383
Vice President - Administration 1996 144,604 - 6,000 15,588
of Eagle and Executive 1995 133,484 14,000 16,500 22,577
Vice President of the Bank
Mark J. Blum 1997 139,500 - 18,000 26,655
Vice President, Chief Financial 1996 127,308 - 5,500 12,573
Officer and Secretary of Eagle 1995 113,269 12,000 16,500 18,410
and Executive Vice President,
Chief Financial Officer, and
Secretary of the Bank
Kenneth F. Burns 1997 108,069 - 15,000 20,505
Vice President of Eagle and 1996 102,308 10,500 5,500 8,051
Executive Vice President - 1995 90,000 9,500 16,500 13,536
Retail Banking and Marketing
of the Bank
</TABLE>
(a) Mr. Britton was elected President and Chief Executive Officer of Eagle and
Chief Executive Officer of the Bank effective upon the retirement of Ralph T.
Linsley as President and Chief Executive Officer of Eagle and Chief Executive
Officer of the Bank effective September 30, 1994. In January 1995, Mr. Britton
became President of the Bank. In January 1997, Mr. Britton became Chairman of
the Board of Eagle and the Bank.
(b) Option awards in fiscal 1995 are adjusted to reflect a ten percent stock
dividend paid on March 1, 1995.
(c) All other compensation includes amounts contributed by the Company to the
non-contributory employee stock ownership plan (the "ESOP") on behalf of each
named executive officer. Participants share proportionately, based on their
annual compensation, in the benefits of the contributions made to the ESOP and
share proportionately, based on the amount credited to their respective accounts
under the ESOP, in the investment earnings or losses of the trust fund. Fleet
Bank, N.A. acts as trustee of the ESOP. For fiscal year 1997, Messrs. Britton,
Labadia, Blum and Burns were allocated 489 shares, 481 shares, 463 shares, and
376 shares, respectively, pursuant to the ESOP, having a value (based on the
market value on September 30, 1997) of $19,560, $19,240, $18,520, and $15,040,
respectively. All other compensation also includes matching contributions made
in fiscal 1996 under the Eagle Financial Corp. Financial Institutions Thrift
Plan, as adopted in October 1994, of $3,609, $2,493, $2,440, an $1,879 for
Messrs. Britton, Labadia, Blum, and Burns, respectively. Additionally, all other
compensation includes premiums paid by the Company for term life insurance and
the lease value of company automobiles.
105
<PAGE>
Option Grants. The following table contains information with respect to
grants of stock options to each of the named executive officers during the
fiscal year ended September 30, 1997. All such grants were made under Eagle's
1991 Option Plan.
OPTION GRANTS IN 1997 FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation for
Individual Grants (a) Option Term (b)
- ------------------------------------------------------------------------------------------------------------------
% of Total
Number of Options Granted
Shares Underlying to Employees Exercise Expiration
Name Options Granted (#) in Fiscal Year Price ($/sh) Date 5%($) 10%($)
- -------------------- -------------------- ---------------- ------------ ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Robert J. Britton 9,000 8% $ 28.50 11-25-06 $ 161,311 $ 408,795
15,000 14% 39.75 9-22-07 374,978 950,269
Ercole J. Labadia 6,000 5% 28.50 11-25-06 107,541 272,530
Mark J. Blum 6,000 5% 28.50 11-25-06 107,541 272,530
12,000 11% 39.75 9-22-07 299,982 760,215
Kenneth F. Burns 5,000 5% 28.50 11-25-06 89,617 227,108
10,000 9% 39.75 9-22-07 249,985 633,513
</TABLE>
- -----------------
(a) 26,000 option grants were made on November 26, 1996 and 85,000 option
grants were made on September 23, 1997. All grants are exercisable in full
as of the date of this Proxy Statement. All option grants were made at fair
market value, as determined by the closing price of the Common Stock on the
day prior to the date of grant.
(b) The dollar amounts under these columns are the result of calculations at
the 5% and 10% assumed annual growth rates mandated by the SEC and,
therefore, are not intended to forecast possible future appreciation, if
any, in Eagle's stock price. The calculations were based on the exercise
price.
Option Exercises and Holdings. The following table sets forth information
with respect to each of the named executive officers concerning the exercise of
stock options during the fiscal year ended September 30, 1997, and the value of
all unexercised options held by such individuals at such date.
AGGREGATED OPTION EXERCISES IN 1997 FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Shares Value of Unexercised
Underlying Unexercised In-the Money Options at
Options at Fiscal Year-End (#) Fiscal Year-End ($)(b)
------------------------------ ----------------------
Shares Acquired Value
Name on Exercise (#) Realized ($)(a) Exercisable Unexercisable Exercisable Unexercisable
- ----------------- ----------------- ---------------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Robert J. Britton 4,070 $ 92,943 76,351 - $ 2,192,033 -
Ercole J. Labadia 3,606 86,003 37,553 - 1,202,329 -
Mark J. Blum 4,770 117,819 46,944 - 1,260,065 -
Kenneth F. Burns 5,886 187,416 39,475 - 1,044,791 -
</TABLE>
(a) Market value of Common Stock at date of exercise, less the exercise price.
(b) Based on the $52.4375 closing price of the Company's Common Stock as
reported on The Nasdaq Stock Market on December 9, 1997, minus the exercise
price.
106
<PAGE>
Pension Plans. The Bank maintains a qualified defined benefit plan under
the Internal Revenue Code of 1986, as amended (the "Code"), which is subject to
the requirements of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"). Retirement benefits are calculated by multiplying 2% of the
average of the five highest years of the employee's salary (including overtime
and bonuses, if any) by years of benefit service partially offset by the
Estimated Primary Social Security Benefit, as defined under the plan. Normal
retirement is age 65. Retirement benefits are fully vested after five years of
service. Provisions in the program allow for benefits to be delayed after age 65
or to be paid to vested participants who terminate employment after they have
attained age 55. Benefits may be received in one of several forms, including a
lump sum cash payment or monthly installments payable to the employee during his
or her life and/or continuing to a contingent annuitant if he or she survives
the employee. Disability benefits under the plan are limited to the vested early
retirement benefit. If a member in active service dies before age 65 after
becoming vested, the beneficiary would be entitled to a lump sum death benefit
equal to the commuted value of 120 monthly installments, which would have been
payable had his or her allowance commenced on the first day of the month in
which the member died.
At September 30, 1997, 293 persons were eligible to participate in the
pension plan, which number includes 255 employee participants, 34 terminated
employees with a deferred interest, and 4 retired participants.
The following table illustrates current annual pension benefits under the
Bank's retirement plan for retirement in fiscal year 1997 at age 65 to a
participant electing to receive the benefit in the standard form of benefit, a
life annuity with ten year certain and continuous. For 1997, pension benefits
are subject to a statutory maximum of $120,000, subject to cost-of-living
adjustments. Additionally, annual compensation in excess of $160,000 (subject to
cost of living increases) may not be used in calculation of retirement benefits.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
ANNUAL YEARS OF SERVICE
-------------------------------------------------------------------------------
COMPENSATION 15 20 25 30 35
------------ -- -- -- -- --
<S> <C> <C> <C> <C> <C>
$100,000 $27,700 $36,900 $46,100 $55,300 $64,600
125,000 35,200 46,900 58,600 70,300 82,100
150,000 42,700 56,900 71,100 85,300 99,600
175,000 50,200 66,900 83,600 100,300 117,100
200,000 57,700 76,900 96,100 115,300 134,600
225,000 65,200 86,900 108,600 130,300 152,100
250,000 72,700 96,900 121,100 145,300 169,600
300,000 87,700 116,900 146,100 175,300 204,600
400,000 117,700 156,900 196,100 235,300 274,600
450,000 132,700 176,900 221,100 265,300 309,600
500,000 147,700 196,900 246,100 295,300 344,600
</TABLE>
As of September 30, 1997, Messrs. Britton, Labadia, Blum and Burns had 19,
39, 11 and 18 years of credited service, respectively, under the pension plan.
In addition, the Bank maintains a qualified defined benefit plan under the
Internal Revenue Code of 1986, as amended (the "Code"), which is subject to the
requirements of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), through its purchase of MidConn Bank in May 1997. Retirement benefits
are calculated by multiplying 2% of the average of the three highest consecutive
years of earnings times years of Credited Service up to a maximum of 30 years.
For employee terminations prior to Normal Retirement, the benefit is
proportionately reduced by the ratio that years of Credited Service at
termination bears to years of Credited Service at Normal Retirement. For
employees formerly of The Federal Savings Bank, which was acquired by MidConn
Bank in 1994, their benefit cannot be less than the benefit they had accrued
under that Plan as of May 31, 1994. Normal Retirement is age 65. Retirement
benefits are fully vested after seven years of service, with a 20% vesting
increase each year beginning with three years of service. Provisions in the
program allow for benefits to be delayed after age 65 or to be paid to vested
participants who terminate employment after they have attained age 55 with
fifteen years of Service. Benefits may be received in one of several forms,
including a lump sum cash payment or monthly installments
107
<PAGE>
payable to the employee during his or her life and/or continuing to a contingent
annuitant if he or she survives the employee.
If a member in active service dies before age 65 after becoming vested, the
beneficiary would be entitled to a benefit equal to 100% of the vested pension
benefit accrued to date of death deferred to the early retirement date of the
deceased Participant and reduced by the appropriate early retirement and
joint-and-survivor factors. After ten years the benefit is reduced by 50%.
As of September 30, 1997, 124 persons were eligible to participate in the
pension plan, which number includes 36 employee participants, 83 terminated
employees with a deferred interest, and 5 retired participants.
The Board of Directors of Eagle has adopted a nonqualified benefits
equalization plan (the "BEP") for certain highly compensated executive officers
who are also participants in the pension plan to provide supplemental retirement
income benefits which are not currently available because annual compensation in
excess of $160,000 (subject to cost of living increases) may not be used in the
calculation of retirement benefits under the Code and because pension benefits
are currently subject to a statutory maximum of $120,000 (subject to cost of
living increases). See "Management - Executive Compensation - Summary
Compensation Table."
Employment and Consulting Agreements.
In April 1994, Mr. Britton entered into a new employment agreement with
Eagle and the Bank. His employment agreement was subsequently amended in July
1994 in connection with the appointment of Mr. Britton as President and Chief
Executive Officer of Eagle and Chief Executive Officer of the Bank effective
September 30, 1994. Mr. Britton's annual salary for the calendar year under the
agreement is $239,200, with such increases as determined by the Boards of
Directors of Eagle and the Bank. Mr. Britton's salary then in effect under the
agreement may not be decreased without his written consent. Mr. Britton's
agreement currently expires on March 31, 2000 and may be renewed by the Bank and
Eagle by written notice for one additional year on March 31, 1998 and each
subsequent March 31 thereafter during the term of the agreement, unless Mr.
Britton gives contrary written notice to Eagle and the Bank prior to the renewal
date.
In April 1994, Mr. Labadia entered into a new employment agreement with
Eagle and the Bank. The agreement was renewable annually by the Bank and Eagle
for an additional one-year period, and was most recently renewed in March 31,
1997 with an expiration date of March 31, 2000. In June 1997, Mr. Labadia
retired from the Bank and Eagle thereby terminating his employment agreement.
In April 1994, Mr. Blum entered into a new employment agreement with Eagle
and the Bank. His employment agreement currently expires on March 31, 2000.
Eagle and the Bank may renew the agreement by written notice for one additional
year on March 31, 1998 and each subsequent March 31 thereafter during the term
of the agreement, unless Mr. Blum gives contrary written notice prior to the
renewal date. The agreement provides for an annual salary for the calendar year
of $143,000, with such annual increases as determined by the Board of Directors
of Eagle and the Bank. Mr. Blum's salary then in effect under the agreement may
not be decreased without Mr. Blum's written consent.
In May 1996, Mr. Burns entered into a new employment agreement with Eagle
and the Bank. His employment agreement currently expires on March 31, 2000.
Eagle and the Bank may renew the agreement by written notice for one additional
year on March 31, 1998 and each subsequent March 31 thereafter during the term
of the agreement, unless Mr. Burns gives contrary written notice prior to the
renewal date. The agreement provides for an annual salary for the calendar year
of $109,200 with such annual increases as determined by the Board of Directors
of Eagle and the Bank. Mr. Burn's salary then in effect under the agreement may
not be decreased without Mr. Burn's written consent.
108
<PAGE>
Each of the active employment agreements with Messrs. Britton, Blum and
Burns also provides for participation in Eagle's and the Bank's retirement and
employee benefit plans. Each of the employment agreements may be terminated by
Eagle or the Bank at any time. The employee is not entitled to any benefits
under the employment agreement if he is terminated for "cause" as defined in the
employment agreement. If the employee is terminated "without cause," the
employee will be entitled to a cash payment equal to the employee's salary for
the remainder of the contract term. Each agreement also provides for a payment
to be made to the employee if the employee's service is terminated in connection
with or within two years after a "change in control" of Eagle or the Bank,
unless such termination occurs by virtue of normal retirement, permanent and
total disability or death; provided, however, that the employee shall not have
any right to receive a payment or benefit under the agreement which would be
considered a "parachute payment" under the Code. If the employee's termination
within two years of a change in control was voluntary with "good reason" or was
involuntary, the employee shall receive a lump-sum payment equal to three times
the employee's average annual compensation (as calculated for federal income tax
reporting purposes) for the five years prior to such change in control less one
dollar. It is currently estimated that, in the event of an involuntary
termination of employment or a voluntary termination with "good reason"
following a change of control, the amount payable to Messrs. Britton, Blum and
Burns would be $1,936,000, $1,185,000, and $1,042,000, respectively. The
severance payments are limited to one year's compensation in the case of a
voluntary termination without "good reason" after a "change in control." In
addition to the foregoing severance payments, in the event of the employee's
termination "without cause" or following a change in control, the employee is
entitled to life, health and disability insurance coverage for the remaining
term of his employment contract and to continued director's and officer's
liability coverage.
109
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
STOCK OWNED BY MANAGEMENT
The following table sets forth information as of December 9, 1997 with
respect to the shares of Eagle Common Stock beneficially owned by each director
and nominee for director of Eagle, each of the named executive officers, and by
all directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENT OF
NAME AND POSITION(S) AMOUNT AND NATURE OF COMMON STOCK
WITH THE COMPANY BENEFICIAL OWNERSHIP (A) OUTSTANDING
-------------------- ------------------------ ------------
<S> <C> <C>
Richard H. Alden
Director..................................... 45,594(b) *
Mark J. Blum
Vice President, Chief Financial Officer
and Secretary................................ 33,382(c) *
Robert J. Britton
Chairman of the Board, President and Chief
Executive Officer........................... 46,492(d) *
Kenneth F. Burns
Vice President............................... 19,349(e) *
George T. Carpenter
Director..................................... 63,761(f) *
Eugene R. Curcio
Director..................................... 2,430 *
Theodore M. Donovan
Director..................................... 33,049 *
Ercole J. Labadia
Vice President .............................. 54,406(g) *
Thomas V. LaPorta
Director..................................... 58,045 *
Steven E. Lasewicz, Jr.
Director..................................... 22,164 *
Ralph T. Linsley
Director..................................... 75,724(h) 1.1%
John F. McCarthy
Director..................................... 41,936(i) *
Ernest J. Torizzo
Director..................................... 28,415(j) *
All directors and executive officers
as a group (14 persons)...................... 534,046(k) 7.8%
</TABLE>
110
<PAGE>
(a) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to
be the beneficial owner, for purposes of this table, of any shares of Eagle
Common Stock (1) over which he has or shares voting or investment power, or
(2) of which he has the right to acquire beneficial ownership at any time
within 60 days from December 9, 1997. As used herein, "voting power" is the
power to vote or direct the voting of shares and "investment power" is the
power to dispose or direct the disposition of shares. All persons shown in
the table above have sole voting and investment power, except as otherwise
indicated. The number of shares reflected for each individual and the group
includes shares subject to options which are exercisable and were adjusted
for the 10% stock dividend of March 1, 1995. The following individuals and
group held such options for the following number of shares as of such date:
Mr. Alden - 19,930; Mr. Blum - 0; Mr. Britton - 0; Mr. Burns - 0; Mr.
Carpenter - 19,930; Mr Curcio - 2,000; Mr. Donovan - 19,930; Mr. Labadia -
37,553; Mr. LaPorta - 19,930; Mr. Lasewicz - 12,050; Mr. Linsley - 41,171;
Mr. McCarthy - 15,880; Mr. Torizzo - 10,250; and all directors and officers
as a group 198,624.
(b) Includes 158 shares as to which Mr. Alden disclaims beneficial ownership.
(c) Includes 8,505 shares allocated to the account of Mr. Blum under the ESOP.
(d) Includes 7,052 shares allocated to the account of Mr. Britton under the
ESOP.
(e) Includes 4,472 shares allocated to the account of Mr. Burns under the ESOP.
(f) Includes 2,232 shares as to which Mr. Carpenter disclaims beneficial
ownership and 30,300 shares held by S. Carpenter Construction Co., of which
Mr. Carpenter is President and Treasurer.
(g) Includes 7,923 shares allocated to the account of Mr. Labadia under the
ESOP.
(h) Includes 11,112 shares allocated to the account of Mr. Linsley under the
ESOP and 4,154 shares as to which Mr. Linsley disclaims beneficial
ownership.
(i) Includes 2,114 shares owned by Mr. McCarthy's wife, 10,915 shares held by
J&M Sales, Inc., of which Mr. McCarthy is President, and 2,902 shares held
for the benefit of Mr. McCarthy under a profit sharing plan maintained by
J&M Sales, Inc.
(j) Includes 8,905 shares owned by Mr. Torizzo's wife.
(k) Includes 44,085 shares allocated to Eagle's current and retired executive
officers of the total 275,492 shares allocated to the accounts of all
participating employees under the ESOP.
111
<PAGE>
PRINCIPAL HOLDERS OF VOTING SECURITIES OF EAGLE
The following table sets forth information at December 9, 1997 with respect
to ownership of Eagle Common Stock by each person believed by management to be
the beneficial owner of more than 5% of the outstanding Eagle Common Stock. The
historical information set forth below is based on beneficial ownership
information contained in the most recent Schedule 13D or 13G filed on behalf of
such person with the SEC.
<TABLE>
<CAPTION>
PERCENT OF
NAME AND ADDRESS OF AMOUNT AND NATURE OF COMMON STOCK
BENEFICIAL OWNER BENEFICIAL OWNERSHIP OUTSTANDING
---------------- -------------------- -----------
<S> <C> <C>
Fleet Financial Group, Inc..................... 255,723 (a) 5.7%
50 Kennedy Plaza
Providence, RI 02903
Beck, Mack & Oliver
330 Main Street
New York, NY 10017........................... 229,235 (b) 5.1%
</TABLE>
- ----------
(a)Fleet Financial Group, Inc. ("Fleet") filed a Schedule 13G, dated February
13, 1997, reporting that 255,723 shares are owned beneficially, as a
fiduciary for the account of others, and that it has shared voting and
dispositive power with respect to such shares. The number of shares listed
above reflects the 10% stock dividend of March 1, 1995. The shares
beneficially owned by Fleet are held by Fleet Bank, N.A. in connection with
the Eagle Bank ESOP Trust. Fleet Bank, N.A., an affiliate of Fleet, is the
trustee of the ESOP. All shares held by the ESOP Trust have been allocated to
the accounts of eligible employees of the Bank. The shares allocated to the
accounts of eligible employees held by the ESOP Trust will be voted at the
Annual Meeting as directed by such employees. The amounts shown are based on
information provided to Eagle.
(b)The Reporting Persons filed a Schedule 13G, dated January 21, 1997 (the
"Beck, Mack Schedule 13G") reporting that the 229,235 are shares beneficially
owned. The securities are owned by investment advisory clients of Beck, Mack
& Oliver. These clients have the right to receive or the power to direct the
receipt of dividends from, or the proceeds from sale of, such securities. No
one of these clients own more than 5% of such class of securities.
SECTION 16(a) COMPLIANCE
Mr. Linsley reported on the Form 4 for the month of August 1997 the 860
shares of Eagle common stock he received in exchanged for 1,000 shares of
MidConn common stock resulting from the merger of Eagle and MidConn in May 1997.
Item 13. Certain Relationships and Related Transactions
CERTAIN TRANSACTIONS
From time to time the Bank makes loans to its directors, officers and other
employees for the financing of their homes, as well as home improvement and
consumer loans. The Bank also will consider other lending relationships with
directors, officers and other employees, and presently has outstanding
participation interests in two loans to a company owned by a director and
secured by commercial real estate. Except for loans made prior to January 1990
at preferential interest rates (as discussed below), it is the belief of Eagle's
management that these loans are currently made in the ordinary course of
business, and neither involve more than normal risk of collectability nor
present other unfavorable features. Except for the preferential rate loans,
loans to such persons were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons. All loans to directors, nominees for director,
and executive officers must be approved by the full Board of Directors of the
Bank, and loans to all other employees are approved by one of two designated
officers. Loans to such individuals are made pursuant to the same underwriting
criteria as apply to loans to the general public. Such loans are written at the
prevailing interest rate for customers of the Bank, except that for certain
loans made prior to January 23, 1990, interest is charged at a preferential rate
as long as the borrower
112
<PAGE>
remains employed by the Bank (other than retired or disabled directors and
employees who continue to receive the preferential rate). Directors, officers
and other employees pay legal fees, appraisal fees and all other direct costs
incurred by the Bank in originating the loan.
Management believes that the loans to directors and officers were in
compliance with federal law and regulations in effect at the time the loans were
made. As a result of federal legislation enacted in August 1989, the Bank is
precluded from making loans to directors and executive officers on terms that
would not be offered to a member of the general public of comparable credit
standing seeking a comparable loan. Such legislation did not apply to
outstanding mortgage loans made by Bristol or Torrington prior thereto.
The following table sets forth certain information with regard to loans
(except deposit account loans) at preferential interest rates to directors,
nominees for director and executive officers of Eagle (and members of their
immediate families) and to any corporation or organization in which any
director, nominee for director or executive officer has a substantial interest,
which were outstanding in amounts greater than $60,000 in the aggregate at any
time since October 1, 1996.
HIGHEST AMOUNT
OUTSTANDING UNPAID BALANCE INTEREST RATE
SINCE AS OF AS OF
NAME/LOAN TYPE OCTOBER 1, 1996 SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
- -------------- --------------- ------------------ ------------------
Ernest J. Torizzo
Mortgage ........ $ 228,389 $ 223,819 7.50%
For a description of certain transactions regarding Messrs. Alden,
Carpenter and Donovan and the Bank, see "Compensation and Stock Option
Committees Interlocks and Insider Participation."
Eagle is unaware of any other transactions to which Eagle or the Bank is
party in which any director or executive officer of Eagle has or will have a
direct or indirect material interest.
COMPENSATION AND STOCK OPTION COMMITTEES INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee for fiscal 1997 is comprised of the three
non-employee directors listed previously. The Stock Option Committee is
comprised of the four disinterested non-employee directors listed previously.
Richard H. Alden, a director of Eagle and the Bank, is a partner in the
law firm of Anderson, Alden, Hayes & Ziogas LLC, located in Bristol,
Connecticut. The Bank retains Mr. Alden's law firm with regard to a variety of
legal matters and has paid such firm legal fees totaling $89,816, a portion of
which was reimbursed to the Bank by third parties, for services rendered from
October 1, 1996 to September 30, 1997.
George T. Carpenter, a director of Eagle and the Bank, is the President
and Treasurer of Carpenter Realty Co. ("CRC"). Mr. Carpenter is also the
President and Treasurer of S. Carpenter Construction Co., headquartered in
Bristol, Connecticut. In addition, CRC and S. Carpenter Construction Co. are a
partner in Bristol Holding LLC (formerly known as Bristol Shopping Plaza, Inc.
prior to September 1995).
CRC has three loans outstanding from the Bank in which the Bank has
participation interests. Eagle believes that the loans, in which the Bank's
interests include (1) an original participation amount of $2,340,000 (with
respect to a loan in the amount of $9 million) which had a participation balance
of $2,109,038 on September 30, 1997, and (2) an original participation amount of
$130,000 (with respect to a loan in the amount of $500,000) which had a
participation balance of $120,744 on September 30, 1997, and (3) an original
participation amount of $455,000 (with respect to a loan in the amount of
$1,750,000) which had a participation balance of $440,499 on September 30, 1997,
were made in the ordinary course of business, and neither involve more than
normal risk of collectability nor present other unfavorable features. In 1992,
Bristol entered into a five year lease for office space with S. Carpenter
Construction Co., CRC, and Bristol Shopping Plaza, Inc. for an annual rent of
$45,000 for the first two years plus maintenance fees, which rent has been
increased by $2,500 annually for each of the three years thereafter. The initial
five year term of this lease expired 10/15/97 and was not renewed. During fiscal
1991, Bristol entered into a five year lease for office space with CRC for an
annual rent of $19,800 plus maintenance fees, which rent was increased by $2,200
annually for the second and third years. On August 31, 1996, Eagle leased an
additional 1,554 square feet of space from CRC adjacent to the existing
premises. The term of the additional space begins on September 1, 1996 and shall
run concurrently with the existing lease for an additional minimum fixed rental
rate of $12,000 annually plus maintenance fees. The Bank entered into a three
year lease effective August 1, 1996 for storage space with CRC at an annual rate
of $6,300 plus maintenance fees. Eagle and its subsidiaries paid such affiliated
entities of Mr. Carpenter an aggregate of $125,966 in rental, taxes and
maintenance fees for the period from October 1, 1996 through September 30, 1997.
In addition, Eagle paid the entities of Mr. Carpenter an aggregate of $20,650
for renovations on other properties of Eagle.
Theodore M. Donovan, a director of Eagle and the Bank, is a partner in the law
firm of Furey, Donovan, Eddy, Kocsis, Tracy & Daly, P.C. located in Bristol,
Connecticut. The Bank has retained Mr. Donovan's law firm with regard to a
variety of legal matters. The Bank paid such firm legal fees totaling $24,047, a
portion of which was reimbursed to the Bank by third parties, for services
rendered from October 1, 1996 to September 30, 1997.
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, 1997 and 1996.
Consolidated Statements of Income - Years Ended September 30, 1997, 1996
and 1995.
Consolidated Statements of Shareholders' Equity - Years Ended September 30,
1997, 1996 and 1995.
Consolidated Statements of Cash Flows - Years Ended September 30, 1997,
1996 and 1995.
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.
113
<PAGE>
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).
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 28, 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 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 (Reg. 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).
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).
114
<PAGE>
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
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 1997.
(c) Exhibits to this Form 10-K are attached or incorporated by reference
as stated above.
(d) Not applicable.
115
<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/ Robert J. Britton
--------------------------------------
Robert J. Britton
Chief Executive Officer, President and
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/ Robert J. Britton Chief Executive Officer, President and
- ----------------------------------------- Chairman of the Board (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/ George T. Carpenter Vice Chairman
- -----------------------------------------
George T. Carpenter
By:/s/ Ralph T. Linsley Director
- -----------------------------------------
Ralph T. Linsley
By:/s/ Richard H. Alden Director
- -----------------------------------------
Richard H. Alden
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
By:/s/ Eugue R. Curcio Director
- -----------------------------------------
Eugene R. Curcio
</TABLE>
116
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER IDENTITY OF EXHIBIT
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).
<PAGE>
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).
12 Computation of Ratio of Earnings to Fixed Charges
21 Subsidiaries of the Registrant.
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in thousands)
Earnings Calculation:
Pre-tax income $ 13,305
plus: Fixed charges 20,041
---------------
Total $ 33,346
===============
Fixed Charges Calculation:
Interest exp. on borrowings $ 18,992
Rent expense 1,049
---------------
Total $ 20,041
===============
Ratio 1.66
---------------
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION
- ------------------ -----------------------------
Eagle Bank United States
Eagle Financial Capital Trust I Delaware
Eagle Service Corp.(*) Connecticut
Eagle Funding Corp.(*) Connecticut
(*) Subsidiary of Eagle Bank.
[KPMG Peat Marwick LLP Letterhead]
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 27, 1997, relating to the consolidated balance sheets of
Eagle Financial Corp. and Subsidiaries as of September 30, 1997 and 1996, 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, 1997,
which report appears in the September 30, 1997 annual report on Form 10-K of
Eagle Financial Corp.
Our report refers to a change in method of accounting for investment securities
in 1995.
KPMG PEAT MARWICK LLP
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
December 29, 1997
<TABLE> <S> <C>
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<LEGEND>
(Replace this text with the legend)
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1997
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<CASH> 29,055
<INT-BEARING-DEPOSITS> 46,600
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<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 797,004
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,130,211
<ALLOWANCE> 9,765
<TOTAL-ASSETS> 2,091,096
<DEPOSITS> 1,353,274
<SHORT-TERM> 220,679
<LIABILITIES-OTHER> 22,866
<LONG-TERM> 300,744
0
0
<COMMON> 64
<OTHER-SE> 144,842
<TOTAL-LIABILITIES-AND-EQUITY> 2,091,096
<INTEREST-LOAN> 87,358
<INTEREST-INVEST> 43,689
<INTEREST-OTHER> 1,959
<INTEREST-TOTAL> 133,006
<INTEREST-DEPOSIT> 54,889
<INTEREST-EXPENSE> 73,881
<INTEREST-INCOME-NET> 59,125
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<SECURITIES-GAINS> (10)
<EXPENSE-OTHER> 43,116
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<MULTIPLIER> 1,000
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<CASH> 28,711
<INT-BEARING-DEPOSITS> 43,904
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<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 314,623
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<INVESTMENTS-MARKET> 169,574
<LOANS> 972,711
<ALLOWANCE> 9,611
<TOTAL-ASSETS> 1,596,165
<DEPOSITS> 1,263,110
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<LIABILITIES-OTHER> 41,227
<LONG-TERM> 36,744
0
0
<COMMON> 61
<OTHER-SE> 126,150
<TOTAL-LIABILITIES-AND-EQUITY> 1,596,165
<INTEREST-LOAN> 82,712
<INTEREST-INVEST> 22,625
<INTEREST-OTHER> 1,393
<INTEREST-TOTAL> 106,730
<INTEREST-DEPOSIT> 46,333
<INTEREST-EXPENSE> 53,415
<INTEREST-INCOME-NET> 53,315
<LOAN-LOSSES> 4,138
<SECURITIES-GAINS> (30)
<EXPENSE-OTHER> 34,127
<INCOME-PRETAX> 20,464
<INCOME-PRE-EXTRAORDINARY> 20,464
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,046
<EPS-PRIMARY> 1.94
<EPS-DILUTED> 1.92
<YIELD-ACTUAL> 7.44
<LOANS-NON> 13,531
<LOANS-PAST> 0
<LOANS-TROUBLED> 2,653
<LOANS-PROBLEM> 3,012
<ALLOWANCE-OPEN> 10,305
<CHARGE-OFFS> 4,961
<RECOVERIES> 129
<ALLOWANCE-CLOSE> 9,611
<ALLOWANCE-DOMESTIC> 9,072
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 539
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(Replace this text with the legend)
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<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 36,060
<INT-BEARING-DEPOSITS> 23,788
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 435,291
<INVESTMENTS-CARRYING> 87,971
<INVESTMENTS-MARKET> 88,328
<LOANS> 1,003,513
<ALLOWANCE> 9,295
<TOTAL-ASSETS> 1,655,712
<DEPOSITS> 1,285,315
<SHORT-TERM> 149,378
<LIABILITIES-OTHER> 54,407
<LONG-TERM> 36,650
0
0
<COMMON> 61
<OTHER-SE> 129,806
<TOTAL-LIABILITIES-AND-EQUITY> 1,655,712
<INTEREST-LOAN> 19,532
<INTEREST-INVEST> 8,313
<INTEREST-OTHER> 567
<INTEREST-TOTAL> 28,412
<INTEREST-DEPOSIT> 13,083
<INTEREST-EXPENSE> 15,726
<INTEREST-INCOME-NET> 12,686
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(Replace this text with the legend)
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<NAME> EAGLE FINANCIAL CORP.
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