<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[xx] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-14853
EASTERN BANCORP, INC.
---------------------
(Exact name of registrant as specified in its charter)
Delaware 03-0304472
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
537 Central Avenue
Dover, New Hampshire 03820
-------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (603) 749-2150.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date is:
Class: Common Stock, par value $.01 per share
Outstanding at August 6, 1996: 3,675,576 shares
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION PAGE
- ------- --------------------- --------
Item 1. Financial Statements
Consolidated Statements of Financial Condition
at June 30, 1996 and September 30, 1995 3
Consolidated Statements of Operations for the Three
and Nine Months Ended June 30, 1996 and June 30, 1995 4
Consolidated Statements of Cash Flows for the Nine 5-6
Months Ended June 30, 1996 and June 30, 1995
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-16
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
2
<PAGE>
Eastern Bancorp, Inc.
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
June 30, September 30,
1996 1995
-------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $33,276 $19,862
Short-term investments 14,805 11,099
Investment and mortgage backed securities available-for-sale
(amortized cost of $1 at June 30, 1996 and $4,443
at September 30, 1995) 9 4,177
Investment securities held-to-maturity (market value of
$49,104 at June 30, 1996 and $42,294 at September 30, 1995) 50,174 42,259
Mortgage backed securities held-to-maturity (market value of
$215,147 at June 30, 1996 and $264,666 at September 30, 1995) 224,601 270,133
FHLB stock 9,283 9,283
Loans (net of allowance for possible loan losses of $3,050
at June 30, 1996 and $3,622 at September 30, 1995) 460,172 443,041
Loans held for sale 12,342 8,212
Accrued interest receivable:
Investment and mortgage backed securities 2,537 2,731
Loans 2,897 2,761
Other real estate owned, net 3,988 8,137
Investment in real estate 493 447
Premises and equipment, net 15,771 14,232
Excess of cost over net assets acquired 3,623 3,908
Deferred income tax asset, net 684 776
Prepaid expenses and other assets 5,879 5,027
-------- --------
Total assets $840,534 $846,085
-------- --------
-------- --------
LIABILITIES
Deposit accounts (including non-interest bearing deposits of
$57,315 at June 30, 1996 and $48,932 at September 30, 1995) $643,057 $616,350
Advances from FHLB 126,146 136,632
Securities sold under agreement to repurchase -- 24,855
Capital lease obligation 305 395
Accrued federal income tax 410 17
Accrued expenses and other liabilities 5,736 6,853
-------- --------
Total liabilities 775,654 785,102
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value: 1,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, $0.01 par value: 5,000,000 shares authorized;
4,095,549 shares issued at June 30, 1996 and 4,095,549
at September 30, 1995 27 27
Additional paid-in capital 36,186 36,196
Retained income (substantially restricted) 31,650 28,629
Unrealized gain (loss) on securities available-for-sale, net 6 (175)
Treasury stock (at cost) 444,015 shares at June 30, 1996 and
522,325 shares at September 30, 1995 (2,989) (3,694)
-------- --------
Total stockholders' equity 64,880 60,983
-------- --------
Total liabilities and stockholders' equity $840,534 $846,085
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Eastern Bancorp, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
June 30, June 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Residential mortgage loans $ 5,079 $ 4,196 $ 14,038 $ 11,746
Other loans 5,387 5,621 16,891 16,555
Investment and mortgage backed securities
available-for-sale -- 58 563 174
Investment securities held-to-maturity 1,073 772 3,026 2,110
Mortgage backed securities held-to-maturity 3,468 4,625 11,142 13,804
----------- ---------- ---------- ----------
Total interest income 15,007 15,272 45,660 44,389
INTEREST EXPENSE:
Deposit accounts 5,890 5,667 18,117 15,604
Borrowings 1,873 2,698 6,222 7,889
----------- ---------- ---------- ----------
Total interest expense 7,763 8,365 24,339 23,493
----------- ---------- ---------- ----------
Net interest income 7,244 6,907 21,321 20,896
Provision for possible loan losses 100 566 835 1,525
----------- ---------- ---------- ----------
Net interest income after provision for
possible loan losses 7,144 6,341 20,486 19,371
NON-INTEREST INCOME:
Gain on sale of investment and mortgage backed
securities, net 32 -- 782 --
Gain on sale of loans and mortgage servicing rights, net 404 219 1,463 1,263
Service fees on loans sold 306 375 825 1,006
Customer service fees 1,376 1,395 4,069 3,882
Miscellaneous 357 378 939 934
----------- ---------- ---------- ----------
Total non-interest income 2,475 2,367 8,078 7,085
----------- ---------- ---------- ----------
Income before non-interest expense and federal
and state taxes 9,619 8,708 28,564 26,456
NON-INTEREST EXPENSE:
Compensation and benefits 2,754 2,840 8,801 8,547
Office occupancy, net 1,558 1,268 4,406 3,729
Marketing 443 384 1,272 1,028
Federal deposit insurance premium 350 357 1,072 1,087
Other real estate owned operations 689 587 905 2,478
Amortization of intangibles 95 95 285 286
Professional fees 251 462 632 1,038
Restructuring -- 985 -- 985
Merger related -- 159 401 159
Other 1,343 1,106 3,934 3,308
----------- ---------- ---------- ----------
Total non-interest expense 7,483 8,243 21,708 22,645
----------- ---------- ---------- ----------
Income before federal and state taxes 2,136 465 6,856 3,811
Federal and state tax expense 827 258 2,554 1,321
----------- ---------- ---------- ----------
Net income $ 1,309 $ 207 $ 4,302 $ 2,490
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Earnings per common and common equivalent share
outstanding $ 0.34 $ 0.06 $ 1.13 $ 0.67
Cash dividends paid per common share 0.12 0.07 0.35 0.16
Weighted average number of common and common
equivalent shares outstanding 3,808,006 3,717,830 3,793,438 3,704,952
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
Eastern Bancorp, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
(Dollars in thousands) 1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,302 $ 2,490
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation, amortization and accretion 2,565 2,766
Provision for possible loan losses 835 1,525
(Gain) on sale of securities (782) --
(Gain) on sale of loans (1,463) (1,263)
(Gain) on sale of real estate owned (67) (230)
Provision for loss on other real estate owned 208 1,582
Loans originated for sale (105,565) (34,846)
Proceeds from sales of loans originated for sale 90,233 33,512
Decrease in accrued interest receivable 58 42
(Increase) in prepaid expenses and other assets (704) (407)
(Increase) decrease in deferred income tax asset (1) 221
(Decrease) in accrued expenses and other liabilities (724) (220)
---------- ---------
Total adjustments (15,407) 2,682
---------- ---------
Net cash provided (used) by operating activities (11,105) 5,172
---------- ---------
Cash flows from investing activities:
Net (increase) in short-term investments (3,706) (5,950)
Net (increase) in FHLB stock -- (360)
Portfolio loans:
Purchases (34,866) (8,673)
Originations net of repayments 11,128 (20,473)
Proceeds from sales 6,277 --
Recoveries on loans previously charged off 169 104
Investment and mortgage backed securities available-for-sale:
Purchases (50) (172)
Proceeds from sales 59,512 --
Proceeds from maturities and returns of principal 1,980 --
Investments held-to-maturity:
Purchases (60,223) (10,234)
Proceeds from sales -- --
Proceeds from maturities and returns of principal 40,351 7,201
Mortgage backed securities held-to-maturity:
Purchases (11,582) (12,350)
Proceeds from sales -- --
Proceeds from maturities and returns of principal 24,885 19,197
Purchases of premises and equipment, net of sales proceeds (2,736) (2,081)
Proceeds from sales of real estate, net 2,830 4,246
Purchase of mortgage servicing rights (94) (1,335)
Proceeds from sale of servicing rights -- 1,798
(Increase) decrease in investments in real estate (46) 624
---------- ---------
Net cash provided (used) by investing activities $ 33,829 $ (28,458)
---------- ---------
</TABLE>
(continued on next page)
5
<PAGE>
Eastern Bancorp, Inc.
Consolidated Statements of Cash Flows
(continued)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
(Dollars in thousands) 1996 1995
-------- --------
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits $ 26,707 $ 21,886
Advances from FHLB:
Proceeds 59,523 178,100
Repayments and extinguishments (70,009) (198,647)
Securities sold under agreement to repurchase:
Proceeds 11,855 40,855
Repayments (36,710) (16,000)
Reduction in capital lease obligation (90) (85)
Net proceeds from exercise of stock options and/or sale
of treasury stock 695 386
Dividends paid (1,281) (574)
---------- ----------
Net cash provided (used) by financing activities (9,310) 25,921
---------- ----------
Net increase in cash 13,414 2,635
Cash and cash equivalents at beginning of period 19,862 20,569
---------- ----------
Cash and cash equivalents at end of period $ 33,276 $ 23,204
---------- ----------
---------- ----------
Cash paid for:
Interest $ 24,546 $ 23,348
Federal and state taxes 1,905 2,244
Supplemental disclosure of non-cash activities:
Increase in unrealized gain on investment and
mortgage backed securities available-for-sale, net 181 32
Loans charged off 1,576 1,548
Loans securitized and sold 12,575 --
Loans foreclosed 1,464 1,833
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
Eastern Bancorp, Inc.
Notes to Consolidated Financial Statements
(1) ACCOUNTING PRINCIPLES
The unaudited consolidated interim financial statements for Eastern
Bancorp, Inc. and subsidiaries presented herein should be read in conjunction
with the consolidated financial statements of Eastern Bancorp, Inc. and
subsidiaries for the fiscal year ended September 30, 1995, included in its
annual report on Form 10-K.
Consolidated financial information as of June 30, 1996, and for the three
months and nine months ended June 30, 1996 and 1995 is unaudited, but in the
opinion of management reflects all adjustments (none of which are other than
normal recurring accruals) necessary for a fair presentation of such
information. Interim results are not necessarily indicative of the results to
be expected for the entire year. Certain information for the three and nine
month periods ended June 30, 1995 and for September 30, 1995, has been
reclassified to conform with the 1996 presentation. All per share information
herein has been adjusted to reflect the Company s June 19, 1996 three-for-two
stock split paid to shareholders of record on June 5, 1996.
The Company adopted SFAS No. 122, "Accounting for Mortgage Servicing
Rights, an Amendment of FASB Statement No. 65" effective October 1, 1994, and
has herein revised the previously reported quarterly operating results for the
three month period ending June 30, 1995 as follows: a net decrease in non-
interest income of $219,000, a decrease in net income of $140,000, and a
decrease in earnings per share of $0.03.
7
<PAGE>
Eastern Bancorp, Inc.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
This discussion and analysis includes material changes affecting the
Company's liquidity, capital resources and results of operations for the period
included in the accompanying consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL:
Eastern Bancorp, Inc. (the "Company") is the nondiversified unitary savings
and loan holding company of Vermont Federal Bank, FSB ("VFB"). VFB is
hereinafter referred to as "the Bank." Effective October 1, 1995 the Company
merged its formerly separate New Hampshire banking subsidiary into VFB. The
Bank's principal business is retail banking, which includes attracting deposits
and making loans. Additionally, the Bank makes investments and borrows funds.
The Company also owns Vermont Service Corporation ("VSC"), a real estate
development company it purchased from VFB in January 1992.
This quarterly report on Form 10-Q contains forward-looking statements.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes," "anticipates," "plans," "expects"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause the Company's actual
results to differ materially from those indicated by such forward-looking
statements. These factors include, without limitation, those set forth below
under the caption "Certain Factors That May Affect Future Results."
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS:
The following important factors, among others, could cause actual results
to differ materially from those indicated by forward-looking statements made in
this quarterly report on Form 10-Q and presented elsewhere by management from
time to time.
A number of uncertainties exist that could affect the Company's future
operating results, including, without limitation, the Bank's continued ability
to originate quality loans (loan originations increased significantly for the
current nine month period compared to the same prior year period), fluctuation
of interest rates, real estate market conditions in the Bank's lending areas,
general and local economic conditions, the Bank's continued ability to attract
and retain deposits, the Company's ability to control costs, new accounting
pronouncements, and changing regulatory requirements.
Of continued concern is the unresolved issues surrounding the Savings
Association Insurance Fund (SAIF) which insures the Bank's deposits. Last year,
the Bank Insurance Fund (BIF) significantly reduced premiums paid on deposits as
the fund reached the required reserve ratio. This potentially creates a
competitive pricing advantage for BIF insured institutions. Legislation under
consideration proposes a one-time special assessment to bring the SAIF reserve
ratio to the required level. In addition, a proposal to merge the BIF and SAIF
funds is under consideration which would result in the Bank's recording tax
expense on previously allowed bad debt reserves.
Revenue generated by the Company is highly dependent on asset/liability
management. While management has considerable experience in asset/liability
management, future changes in the general direction of interest rates and the
overall economy could negatively impact net interest margin. Currently, a 100
basis point increase or decrease would not impact net interest margin by more
than 10 percent.
The Company's operating results are affected by its nonperforming assets.
Management strives to continue reducing nonperforming assets. (This trend was
interrupted during the first quarter of fiscal 1996 due primarily to increased
delinquencies in the Bank s consumer loan portfolio. Nonperforming assets began
to decrease again during the second quarter and continued to decline during the
third quarter). Future changes in the national or local economy, fluctuations
in interest rates, and changes in the real estate market could prevent
nonperforming asset reduction and negatively impact results.
Operating results are affected by the adequacy of the Company's loan loss
reserve to cover potential loan losses. Management has considerable experience
in evaluating the loan portfolio; however, changes in the national or local
economy or fluctuations in interest rates could create the need for additional
provisions, thereby, adversely affecting operating results.
8
<PAGE>
Other significant recurrent sources of income for the Company include gain
on sale of loans, service fees on loans sold, and customer service fees. If the
Company were to fail to maintain or grow these sources of income, the Company's
operating results would be adversely affected.
Because of these and other factors, past financial performance should not
be considered an indicator of future performance. Investors should not use
historical trends to anticipate future results and should be aware that the
trading price of the Company's common stock may be subject to wide fluctuations
in response to quarter-to-quarter variations in operating results, general
conditions in the thrift industry, changes in earnings estimates and
recommendations by analysts or other events.
LIQUIDITY:
The Bank's primary sources of liquidity consist of borrowed funds, deposit
inflows, loan repayments, sales of loans originated for sale, sales of
investments and mortgage backed securities available-for-sale, and maturities of
investment and mortgage backed securities. These sources of liquidity fund
investments in a variety of mortgage and consumer loans and investment and
mortgage backed securities. The Bank also originates a limited number of
commercial loans. The Bank believes it has adequate sources of liquidity to fund
its current activities.
The Office of Thrift Supervision ("OTS") regulations require the Bank to
maintain liquid assets at 5% or more of its net withdrawable deposits plus
short term borrowings. The Bank's liquidity ratios are in compliance with
those regulations for the periods reported.
The Company's primary sources of liquidity consist of dividends received
from its subsidiaries, sales of investment securities available-for-sale,
maturities of investment securities, and borrowed funds. The Company uses its
liquidity to pay cash dividends to shareholders, for general and administrative
expenses and to pay federal and state taxes. The Company also uses its
liquidity to fund cash needs of VSC. At June 30, 1996, the Company had $3.0
million in cash and investment securities. The Company did not have any debt
outstanding at June 30, 1996, nor does it anticipate the need to borrow any
funds during fiscal 1996.
INVESTMENT AND MORTGAGE BACKED SECURITIES:
Investment and mortgage backed securities held-to-maturity at June 30, 1996
totaled $274.8 million with a market value of $264.3 million compared to $312.4
million with a market value of $307.0 million at September 30, 1995. Investment
and mortgage backed securities available-for-sale as of June 30, 1996 totaled
$9,000 with an amortized cost of $1,000 compared to $4.2 million with an
amortized cost of $4.4 million at September 30, 1995. During the first quarter
of fiscal 1996, the FASB's special report on SFAS No. 115 allowed a one-time
reclassification of held-to-maturity securities to the available-for-sale
portfolio. The Company reclassified $43.7 million of securities to the
available-for-sale portfolio. Subsequently, the Company sold a majority of its
available-for-sale portfolio for a net gain of approximately $782,000. The
Company believes cash flow from mortgage backed and investment securities is
adequate to meet liquidity requirements.
The Bank uses mortgage backed securities to supplement loan demand, as an
alternative use of excess liquid funds, and to meet the Bank's "Qualified Thrift
Lender" requirements.
LOANS:
The Company's net loans increased $21.3 million, or 4.7%, from $451.2
million at September 30, 1995, to $472.5 million at June 30, 1996.
9
<PAGE>
The following table compares significant loan activity for the periods
indicated.
Selected Loan Activity
(Dollars in thousands) Nine Months Ended June 30,
(Unaudited)
1996 1995
----------- ----------
Originations:
Residential Mortgage $128,549 $62,058
Consumer 24,366 24,611
Commercial 11,064 19,654
----------- ----------
Total Originations $163,979 $106,323
----------- ----------
----------- ----------
Purchases $34,866 $8,673
Proceeds from sales 90,233 33,512
Loans securitized to mortgage backed securities 12,575 --
The Bank originates fixed and adjustable rate mortgage loans for sale. At
June 30, 1996, the Bank had $12.3 million in mortgage loans held for sale which
required no valuation reserve to adjust their carrying value to the lower of
cost or market. At June 30, 1996, the Bank had $17.2 million in commitments to
sell mortgage loans. During the nine months ended June 30, 1996, the Bank
received proceeds of $90.2 million from the sale of loans and $12.6 million from
loans securitized and sold, all of which had been originated for sale. The
proceeds from these sales combined with other sources of funds were used to
originate $164.0 million in loans, of which $128.5 million were residential
mortgages.
At June 30, 1996, the Bank had commitments to originate loans of $87.6
million which included $17.3 million in residential mortgage loans, $11.6
million in commercial loans (primarily unadvanced funds on equity lines of
credit) and $58.7 million in consumer loans (primarily unadvanced funds on
equity lines of credit).
The following table compares the balances of nonperforming assets at the
dates indicated. There are no loans greater than ninety days past due that are
still accruing.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
June 30, 1996 March 31, 1996 September 30,1995
- ------------------------------------------------------------------------------------------------------------------------------------
% of % of % of
(Dollars in thousands) Amount Assets Amount Assets Amount Assets
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nonaccruing loans:
Commercial $4,294 0.51% $5,857 0.71% $4,326 0.51%
Consumer 2,439 0.29 2,671 0.32 1,782 0.21
Residential mortgage 1,599 0.19 2,002 0.24 2,229 0.26
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 8,332 0.99 10,530 1.27 8,337 0.98
In-substance foreclosures -- -- -- -- 2,739 0.32
Real estate owned, net 3,988 0.47 4,044 0.49 5,398 0.64
Other repossessed assets 395 0.05 336 0.04 310 0.04
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $12,715 1.51% $14,910 1.80% $16,784 1.98%
- ------------------------------------------------------------------------------------------------------------------------------------
Restructured troubled debt:
Performing $5,771 0.69% $4,860 0.59% $4,801 0.57%
Nonperforming (included above) 249 0.03 612 0.07 985 0.11
- ------------------------------------------------------------------------------------------------------------------------------------
Total $6,020 0.72% $5,472 0.66% $5,786 0.68%
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses $3,050 0.36% $3,519 0.43% $3,622 0.43%
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses to:
Nonperforming loans 36.61% 33.42% 43.44%
Total loans 0.64 0.74 0.79
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
The Company's total nonperforming assets decreased $2.2 million to $12.7
million at June 30, 1996 compared to $14.9 million at March 31, 1996 and
decreased $4.1 million compared to $16.8 million at September 30, 1995.
Nonaccruing loans decreased approximately $2.2 million from March 31, 1996 and
remained relatively unchanged from September 30, 1995.
Other real estate owned decreased $56,000 to $4.0 million at June 30, 1996.
The decrease was due to $63,000 in writedowns and $838,000 in net sales, offset
by $845,000 in transfers to other real estate owned. Other real estate owned,
compared to the September 30, 1995 balance of $8.1 million, decreased $4.1
million. The decrease was due to $236,000 in writedowns, $2.6 million of ISF
loans transferred to non-accruing in accordance with SFAS No. 114, and $2.7
million in net sales, offset by $1.4 million in transfers to other real estate
owned.
See "Results of Operations - Provision for Possible Loan Losses" for
information on the allowance for loan losses which totaled $3.0 million at June
30, 1996.
DEPOSITS:
Total deposits have increased $26.7 million during the nine months ended
June 30, 1996. The Bank attributes this increase in deposits to increases in
demand deposit accounts, money market accounts, NOW accounts and time deposits
slightly offset by a decrease in passbook accounts.
BORROWINGS:
Total borrowed funds decreased $35.4 million during the first nine months
of fiscal 1996.
STOCKHOLDERS' EQUITY:
Stockholders' equity increased $3.9 million during the nine month period
ended June 30, 1996, to $64.9 million, or $17.77 per share. The Company
recorded earnings of $4.3 million and paid cash dividends to shareholders of
$1.3 million during the first nine months of fiscal 1996. During the nine
months ended June 30, 1996, the Company received $695,000 for the use of
Treasury shares to fund the exercise of employee and director stock options.
The Company's after tax unrealized gain on investment and mortgage backed
securities was $6,000 compared to a $175,000 unrealized loss at September 30,
1995 due to an increase in the market value of those securities.
The following table reflects actual regulatory capital as calculated at
June 30, 1996 for VFB.
(Dollars in thousands)
VFB ACTUAL
--- -----------------------
Core $57,546 6.89%
Tangible 57,546 6.89
Risk-based 60,530 12.55
At June 30, 1996, VFB had risk-based capital of $60.5 million, or 12.6% of
risk weighted assets on a fully phased-in basis. The Bank's capital ratios
exceed current regulatory requirements.
On July 17, 1996, the Board of Directors of the Company declared a $0.14
quarterly cash dividend per share, payable on August 14, 1996 to stockholders of
record on July 31, 1996. Payment of future cash dividends is subject to, among
other things, Company earnings and tax and regulatory considerations.
The Company, with other financial institutions, is a plaintiff in
litigation brought against the Federal Government arising out of the phasing out
of supervisory goodwill from capitalization in 1989. The U.S. Supreme Court
upheld the right of banking institutions to sue the government for damages
related to the denial of these previously granted benefits. No prediction can
be made at this time as to its outcome or the amount of damages, if any, which
the Company might ultimately recover.
11
<PAGE>
RESULTS OF OPERATIONS:
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
NET INCOME:
Net income for the three months ended June 30, 1996 was $1.3 million or
$0.34 per share, compared to earnings of $207,000, or $0.06 per share, for the
three months ended June 30, 1995. Fiscal 1995 third quarter results included
$1.1 million of expenses related to the merger of the Company's two subsidiary
banks.
NET INTEREST INCOME:
Net interest income was $7.2 million for the three months ended June 30,
1996, compared to $6.9 million for the corresponding period ended June 30, 1995.
Total interest income earned was $15.0 million during the fiscal 1996
quarter, a decrease of $265,000 from the comparable fiscal 1995 quarter. This
resulted from a $914,000 decrease in interest income on investments and mortgage
backed securities due to lower portfolio balances, accounting for approximately
$768,000 of the decrease; and lower yields, accounting for approximately
$170,000 of the decrease; offset slightly by approximately $24,000 due to the
combined rate and balance variances. Interest income on loans increased
approximately $650,000. Of this increase, $845,000 was a result of increased
average balances offset by a $195,000 decrease resulting from lower rates.
ANALYSIS OF AVERAGE RATES AND BALANCES
<TABLE>
<CAPTION>
Quarter ended June 30,
1996 1995
-------------------------------------------------------------------------------------
Interest Rate Interest Rate
Average income/ earned/ Average income/ earned/
(Dollars in thousands) balance expense paid balance expense paid
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans $476,290 $ 10,466 8.79% $438,508 $ 9,817 8.95%
Investment and mortgage backed securities 289,757 4,541 6.27 337,243 5,455 6.49
-------- -------- -------- -------
Total interest-earning assets 766,047 15,007 7.83 775,751 15,272 7.87
Other real estate owned 4,039 9,502
Non-interest-earning assets 55,310 46,797
-------- --------
Total assets $825,396 $832,050
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings $261,206 1,604 2.46 $247,031 1,697 2.75
Time deposits 315,883 4,286 5.43 293,436 3,970 5.41
Borrowings 126,482 1,873 5.92 177,122 2,698 6.09
-------- -------- -------- --------
Total interest-bearing liabilities 703,571 7,763 4.41 717,589 8,365 4.66
-------- -------- -------- --------
Non-interest-bearing deposits 51,995 51,102
Other non-interest-bearing liabilities 5,525 3,622
-------- --------
Total liabilities 761,091 772,313
Stockholders' equity 64,305 59,737
-------- --------
Total liabilities and stockholders' equity $825,396 $832,050
-------- --------
-------- --------
Net interest income $ 7,244 $ 6,907
-------- --------
-------- --------
Net interest spread 3.42 3.21
Net interest margin 3.78 3.56
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Total interest expense incurred was $7.8 million for the fiscal 1996
quarter, a $602,000 decrease from the fiscal 1995 quarter. This resulted from
a $825,000 decrease in borrowings expense due to lower average balances,
accounting for approximately $760,000 of the decrease, and lower average
rates, accounting for approximately
12
<PAGE>
$65,000 of the decrease. Offsetting these decreases, deposit expense increased
by $223,000 due primarily to an increase in average balances accounting for
$383,000 of the increase offset by a decrease in the average rates accounting
for $150,000 and $10,000 due to the combined rate and volume variances.
PROVISION FOR POSSIBLE LOAN LOSSES:
During fiscal 1996's third quarter, the Company provided $100,000 for loan
loss reserves compared to $566,000 during the corresponding 1995 fiscal quarter.
The Company's net charge-offs were $569,000 during fiscal 1996's third quarter
due primarily to commercial loans. Nonperforming loans at June 30, 1996 totaled
$8.3 million compared to $10.5 million at March 31, 1996 and $8.3 million at
September 30, 1995. The Company's total nonperforming assets at June 30, 1996
were $12.7 million compared to $15.0 million at March 31, 1996 and $16.8 million
at September 30, 1995. The $2.2 million decrease from March 31, 1996 was the
result of a decrease in nonperforming loans. During the fiscal 1996 third
quarter, nonperforming loans decreased in each of the nonperforming loan
categories. At June 30, 1996, the Company believes its allowance for loan
losses is adequate to cover potential loan losses in its loan portfolio.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
Three months ended
June 30,
(Dollars in thousands) 1996 1995
----------------------- -------- --------
Beginning of Period $3,519 $3,548
Provision 100 566
Net Charge-offs (569) (315)
-------- --------
End of Period $3,050 $3,799
-------- --------
-------- --------
NON-INTEREST INCOME:
Non-interest income increased $108,000 during the fiscal 1996 quarter
compared to the fiscal 1995 quarter. The fiscal 1996 quarter included a gain on
sale of investments of approximately $32,000 and an increase in gain on sale of
loans and mortgage servicing rights of $185,000.
Service fees on loans sold were $306,000 during the fiscal 1996 quarter
compared to $375,000 during the fiscal 1995 quarter. Average total loans
serviced for other investors for the three months ended June 30, 1996 were
$587.3 million compared to $526.1 million for the three months ended June 30,
1995. Loan service income reflects, and is reduced by, the amortization of
mortgage servicing rights. Servicing rights amortization increased to $157,000
during the 1996 quarter compared to $122,000 during the 1995 quarter due to
increased loan sales during fiscal 1996 therefore creating an increase in
servicing rights being amortized.
NON-INTEREST EXPENSE:
Total non-interest expense was $7.5 million for the fiscal 1996 quarter, a
decrease of $760,000 from the fiscal 1995 quarter. Fiscal 1995 results included
$1.1 million in merger related expenses incurred by the Company for the
consolidation of its two subsidiary banks.
Office occupancy increased $290,000 from the June 1995 quarter due to
increased computer maintenance costs, increased general office building expense,
and increased property insurance. In addition, fiscal 1996 results include
operating expenses of a new branch.
Other non-interest expense increased $237,000 from the June 1995 quarter.
This increase is due to many different expense categories including ATM expense,
telephone expense, outdated supplies, data processing and miscellaneous loss.
Other real estate operations expense increased $102,000 for the quarter
ended June 30, 1996 when compared to the same period last year. This increase
is due primarily to an adjustment relating to the disposition of a nonperforming
asset.
These increases were somewhat offset by a decrease of $211,000 in
professional fees for the quarter ended June 30, 1996. The fiscal 1995's
quarter consulting expenses included fees related to several management projects
and the subsidiary merger.
13
<PAGE>
FEDERAL AND STATE TAXES:
Federal and state tax expense increased to $827,000 based on income before
taxes of $2.1 million during the fiscal 1996 quarter. During the fiscal 1995
quarter, tax expense was $258,000 based on income before taxes of $465,000.
At June 30, 1996, the Company had a net deferred income tax asset of
approximately $684,000 which is supported by recoverable taxes paid during the
last three fiscal years. In addition, management believes the existing net
deductible temporary differences which give rise to the net deferred income tax
asset will reverse during periods in which the Company generates net taxable
income and in which gross taxable temporary differences are expected to reverse.
It should be noted, however, that factors beyond management's control, such as
the general state of the economy and real estate values, can affect future
levels of taxable income and that no assurance can be given that sufficient
taxable income will be generated to fully absorb gross deductible temporary
differences.
COMPARISON OF THE NINE MONTHS ENDED JUNE 30, 1996 AND 1995
NET INCOME:
Net income for the nine months ended June 30, 1996 was $4.3 million, or
$1.13 per share, compared to net income of $2.5 million, or $0.67 per share, for
the nine months ended June 30, 1995. Fiscal 1996 nine month results included a
$782,000 gain on sale of investments and mortgage backed securities and a
$401,000 charge due to additional expenses related to the merger of the
Company's New Hampshire bank subsidiary into VFB.
NET INTEREST INCOME:
Net interest income for the nine months ended June 30, 1996 was $21.3
million, an increase of $425,000 from the nine months ended June 30, 1995.
Total interest income was $45.7 million for the fiscal 1996 period compared
to $44.4 million for the fiscal 1995 period, an increase of $1.3 million. The
change was due to a $2.6 million increase in interest on loans, consisting of a
$1.9 million increase due to higher average balances, a $706,000 increase due to
higher average rates and $47,000 due to the combined rate and balance increases.
Offsetting this was a decrease in investment and mortgage backed securities
interest income of approximately $1.4 million due primarily to lower average
balances.
Total interest expense was $24.3 million for the fiscal 1996 period
compared to $23.5 million for the fiscal 1995 period, a $846,000 increase. This
resulted from a $2.5 million increase in deposit expense due to higher average
rates and balances offset by a $1.7 million decrease in borrowing expense due
primarily to a decrease in average borrowings.
14
<PAGE>
ANALYSIS OF AVERAGE RATES AND BALANCES
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
1996 1995
--------------------------------------------------------------------------------
Interest Rate Interest Rate
Average income/ earned/ Average income/ earned/
(Dollars in thousands) balance expense paid balance expense Paid
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans $459,300 $30,929 8.98% $430,744 $28,301 8.76%
Investment and mortgage backed securities 307,412 14,731 6.39 335,264 16,088 6.41
---------- --------- -------- ---------
Total interest-earning assets 766,712 45,660 7.94 766,008 44,389 7.73
Other real estate owned 4,476 11,096
Non-interest-earning assets 56,160 47,443
---------- --------
Total assets $827,348 $824,547
---------- --------
---------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings $257,317 4,957 2.57 $257,677 5,135 2.66
Time deposits 314,308 13,160 5.58 279,588 10,469 4.99
Borrowings 137,105 6,222 6.05 176,409 7,889 5.96
---------- --------- -------- ---------
Total interest-bearing liabilities 708,730 24,339 4.58 713,674 23,493 4.39
---------- --------- -------- ---------
Non-interest-bearing deposits 50,254 47,161
Other non-interest-bearing liabilities 5,293 5,264
---------- --------
Total liabilities 764,277 766,099
Stockholders' equity 63,071 58,448
---------- --------
Total liabilities and stockholders' equity $827,348 $824,547
---------- --------
---------- --------
Net interest income $21,321 $20,896
--------- ---------
--------- ---------
Net interest spread 3.36 3.34
Net interest margin 3.71 3.64
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PROVISION FOR POSSIBLE LOAN LOSSES:
The Company provided $835,000 in provisions for possible loan losses during
the fiscal 1996 period compared to $1.5 million during the fiscal 1995 period.
During the fiscal 1996 period, the Company had net chargeoffs of $1.4 million.
The Bank analyzes classified loans (including nonperforming loans) on a periodic
basis and provide loan loss reserves in accordance with the level, quality and
collateral value of these loans. In addition, historical loan loss experience,
adjusted for the expected impact of changing market values, is used to assist in
determining total loss reserve requirements.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
Nine months ended
June 30,
(DOLLARS IN THOUSANDS) 1996 1995
---------------------
Beginning of Period $3,622 $3,718
Provision 835 1,525
Net Charge-offs (1,407) (1,444)
---------------------
End of Period $3,050 $3,799
---------------------
---------------------
NON-INTEREST INCOME:
Non-interest income was $8.1 million for the nine months ended June 30,
1996 compared to $7.1 million for the same fiscal 1995 period. The fiscal 1996
period includes a gain on sale of investments of $782,000. Gain on sale of
loans and mortgage servicing rights increased to $1.5 million for the fiscal
1996 nine month period compared to $1.3 million for the same period last year.
This increase is due primarily to an increase in loans sold. Loans sold during
the fiscal 1996 period totaled $103.4 million compared to $31.5 million during
the same period
15
<PAGE>
last year. Fiscal 1995 results included a gain on sale of purchased mortgage
servicing rights of approximately $550,000.
Customer service fees increased $187,000 from the same period last year.
Customer service fees are primarily generated from overdraft and service charges
on demand deposit accounts and other customer transaction fees.
Service fees on loans sold decreased $181,000 when compared to the nine
months ended June 30, 1995. Average total loans serviced for others for the
nine months ended June 30, 1996 were $575.6 million compared to $618.3 million
for the same period last year. Loan service income reflects and is reduced by
the amortization of mortgage servicing rights. Servicing rights amortization
was $540,000 during fiscal 1996 and $558,000 during fiscal 1995.
NON-INTEREST EXPENSE:
Total non-interest expense in the fiscal 1996 nine month period decreased
$937,000 to $21.7 million compared to the fiscal 1995 nine month period. Fiscal
1995's nine month results included $1.1 million of expenses related to the
consolidation of the Company's two subsidiary banks. Fiscal 1996 results
include an additional $401,000 of expenses related to the consolidation of the
two subsidiary banks due primarily to additional staff reductions during the
first quarter.
Other real estate operations expense decreased $1.6 million from the same
nine month period last year. Fiscal 1996 nine month results, when compared to
fiscal 1995, reflect a decrease in provisions for loss on REO property and a
decrease in the costs to carry REO property due to REO property sales.
Professional fees decreased approximately $406,000 in fiscal 1996 compared
to the same nine month period last year. This is primarily due to a $341,000
decrease in consulting fees as fiscal 1995 results included expenses incurred
for specific management projects.
Office occupancy expense increased approximately $677,000 due primarily to
increased computer maintenance contract costs, general office building expense,
property liability insurance and the addition of a new branch.
Other non-interest expense increased approximately $626,000 compared to the
nine month period ended June 30, 1995. This was due to an increase in supplies
expense of approximately $218,000, an increase in telephone expense of
approximately $151,000 as well as increases in expenses such as postage,
mileage, contributions, ATM, and bank service charges.
Marketing expense increased approximately $244,000 from the same nine month
period last year. This is primarily due to additional efforts in marketing new
products primarily in the New Hampshire market areas.
FEDERAL AND STATE TAXES:
Federal and state taxes for the nine months ended June 30, 1996 were $2.6
million based on net income before taxes of $6.9 million. This is compared to
$1.3 million based on income before taxes of $3.8 million during the fiscal 1995
period. Fiscal 1995 expense included a tax credit of approximately $293,000 as
a result of an IRS audit.
16
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of the Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) No Reports on Form 8-K were filed during the quarter ended
June 30, 1996.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EASTERN BANCORP, INC.
DATE: August 6, 1996 /s/ Janine K. Pinel
----------------- --------------------
JANINE K. PINEL
Chief Financial Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0000793169
<NAME> EASTERN BANCORP, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 33,276
<INT-BEARING-DEPOSITS> 585,742
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9
<INVESTMENTS-CARRYING> 284,058
<INVESTMENTS-MARKET> 273,534
<LOANS> 475,564
<ALLOWANCE> 3,050
<TOTAL-ASSETS> 840,534
<DEPOSITS> 643,057
<SHORT-TERM> 92,000
<LIABILITIES-OTHER> 6,146
<LONG-TERM> 34,451
0
0
<COMMON> 27
<OTHER-SE> 64,853
<TOTAL-LIABILITIES-AND-EQUITY> 840,534
<INTEREST-LOAN> 10,466
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<INTEREST-TOTAL> 15,007
<INTEREST-DEPOSIT> 5,890
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<NET-INCOME> 1,309
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
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<LOANS-NON> 8,332
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<ALLOWANCE-CLOSE> 3,050
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</TABLE>
