<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 March 31, 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 May 7, 1996: 2,449,216 shares
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION PAGE
- ------- --------------------- ----
Item 1. Financial Statements
Consolidated Statements of Financial Condition
at March 31, 1996 and September 30, 1995 3
Consolidated Statements of Operations for the Three and Six
Months Ended March 31, 1996 and March 31, 1995 4
Consolidated Statements of Cash Flows for the Six 5-6
Months Ended March 31, 1996 and March 31, 1995
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-17
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
2
<PAGE>
Eastern Bancorp, Inc.
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
March 31, September 30,
ASSETS 1996 1995
---------- --------------
<S> <C> <C>
Cash and due from banks $19,218 $19,862
Short-term investments 16,216 11,099
Investment and mortgage backed securities available-for-sale
(amortized cost of $2 at March 31, 1996 and $4,443
at September 30, 1995) 45 4,177
Investment securities held-to-maturity (market value of
$48,657 at March 31, 1996 and $42,294 at September 30, 1995) 49,010 42,259
Mortgage backed securities held-to-maturity (market value of
$214,735 at March 31, 1996 and $264,666 at September 30, 1995) 221,790 270,133
FHLB stock 9,283 9,283
Loans (net of allowance for possible loan losses of $3,519
at March 31, 1996 and $3,622 at September 30, 1995) 458,440 443,041
Loans held for sale 16,340 8,212
Accrued interest receivable:
Investment and mortgage backed securities 2,169 2,731
Loans 2,878 2,761
Other real estate owned, net 4,044 8,137
Investment in real estate 457 447
Premises and equipment, net 15,667 14,232
Excess of cost over net assets acquired 3,718 3,908
Deferred income tax asset, net 672 776
Prepaid expenses and other assets 4,952 5,027
-------- --------
Total assets $824,899 $846,085
-------- --------
-------- --------
LIABILITIES
Deposit accounts (including non-interest bearing deposits of
$49,454 at March 31, 1996 and $48,932 at September 30, 1995) $626,874 $616,350
Advances from FHLB 124,150 136,632
Securities sold under agreement to repurchase 4,855 24,855
Capital lease obligation 335 395
Accrued expenses and other liabilities 5,180 6,870
-------- --------
Total liabilities 761,394 785,102
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;
2,730,455 shares issued at March 31, 1996 and 2,730,455
at September 30, 1995 27 27
Additional paid-in capital 36,151 36,196
Retained income (substantially restricted) 30,782 28,629
Unrealized gain (loss) on securities available-for-sale, net 28 (175)
Treasury stock (at cost) 332,667 shares at March 31, 1996 and
348,217 shares at September 30, 1995 (3,483) (3,694)
-------- --------
Total stockholders' equity 63,505 60,983
-------- --------
Total liabilities and stockholders' equity $824,899 $846,085
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Eastern Bancorp, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(Dollars in thousands, except per share data) March 31, March 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME:
Residential mortgage loans $4,527 $3,866 $8,959 $7,550
Other loans 5,695 5,592 11,504 10,934
Investment and mortgage backed securities
available-for-sale 191 62 563 116
Investment securities held-to-maturity 1,120 663 1,953 1,338
Mortgage backed securities held-to-maturity 3,644 4,612 7,674 9,179
-------- -------- -------- --------
Total interest income 15,177 14,795 30,653 29,117
INTEREST EXPENSE:
Deposit accounts 5,985 5,137 12,227 9,937
Borrowings 2,017 2,677 4,349 5,191
-------- -------- -------- --------
Total interest expense 8,002 7,814 16,576 15,128
-------- -------- -------- --------
Net interest income 7,175 6,981 14,077 13,989
Provision for possible loan losses 300 699 735 959
-------- -------- -------- --------
Net interest income after provision for
possible loan losses 6,875 6,282 13,342 13,030
NON-INTEREST INCOME:
Gain on sale of investment and mortgage backed
securities, net 229 -- 750 --
Gain on sale of loans and mortgage servicing rights, net 512 753 1,059 1,046
Service fees on loans sold 224 305 519 630
Customer service fees 1,313 1,188 2,693 2,487
Miscellaneous 256 217 582 556
-------- -------- -------- --------
Total non-interest income 2,534 2,463 5,603 4,719
-------- -------- -------- --------
Income before non-interest expense and federal
and state taxes 9,409 8,745 18,945 17,749
NON-INTEREST EXPENSE:
Compensation and benefits 2,890 2,882 6,047 5,707
Office occupancy, net 1,550 1,299 2,848 2,461
Marketing 309 325 829 644
Federal deposit insurance premium 349 356 722 730
Other real estate owned operations 168 1,063 216 1,891
Amortization of intangibles 95 96 190 191
Professional fees 267 169 381 576
Merger related -- -- 401 --
Other 1,404 1,197 2,591 2,202
-------- -------- -------- --------
Total non-interest expense 7,032 7,387 14,225 14,402
-------- -------- -------- --------
Income before federal and state taxes 2,377 1,358 4,720 3,347
Federal and state tax expense 871 275 1,727 1,064
-------- -------- -------- --------
Net income $1,506 $1,083 $2,993 $2,283
-------- -------- -------- --------
-------- -------- -------- --------
Earnings per common and common equivalent share outstanding $0.60 $0.44 $1.19 $0.93
Cash dividends paid per common share 0.18 0.10 0.35 0.14
Weighted average number of common and common
equivalent shares outstanding 2,523,931 2,473,675 2,523,526 2,465,675
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
Eastern Bancorp, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
March 31,
(Dollars in thousands) 1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $2,993 $2,283
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation, amortization and accretion 1,975 1,902
Provision for possible loan losses 735 959
(Gain) on sale of securities (750) --
(Gain) on sale of loans (1,059) (1,044)
(Gain) on sale of real estate owned (121) (213)
Provision for loss on other real estate owned -- 1,150
Loans originated for sale (68,723) (19,876)
Proceeds from sales of loans originated for sale 50,085 23,055
Decrease in accrued interest receivable 445 (227)
(Increase) in federal income tax receivable -- (523)
(Increase) decrease in prepaid expenses and other assets 127 (937)
(Increase) decrease in deferred income tax asset -- 221
Increase (decrease) in accrued expenses and other liabilities (1,690) (2,371)
-------- --------
Total adjustments (18,976) 2,096
-------- --------
Net cash provided (used) by operating activities (15,983) 4,379
-------- --------
Cash flows from investing activities:
Net decrease in short-term investments (5,117) (1,592)
Net (increase) in FHLB stock -- (360)
Portfolio loans:
Purchases (31,458) (5,576)
Originations net of repayments 10,398 (13,805)
Proceeds from sales 6,277 --
Recoveries on loans previously charged off 133 63
Investment and mortgage backed securities available-for-sale:
Purchases (50) (114)
Proceeds from sales 58,382 --
Proceeds from maturities and returns of principal 1,980 --
Investments held-to-maturity:
Purchases (57,023) (2,334)
Proceeds from sales -- --
Proceeds from maturities and returns of principal 38,351 5,950
Mortgage backed securities held-to-maturity:
Purchases -- (12,350)
Proceeds from sales -- --
Proceeds from maturities and returns of principal 16,321 13,271
Purchases of premises and equipment, net of sales proceeds (2,281) (1,174)
Proceeds from sales of real estate, net 2,191 3,157
Purchase of mortgage servicing rights (63) (912)
Proceeds from sale of servicing rights -- 1,798
(Increase) decrease in investments in real estate (10) 488
-------- --------
Net cash provided (used) by investing activities $38,031 $(13,490)
-------- --------
(continued on next page)
</TABLE>
5
<PAGE>
Eastern Bancorp, Inc.
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
(Dollars in thousands) 1996 1995
---- ----
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits $10,524 $ 382
Advances from FHLB:
Proceeds 40,523 126,336
Repayments and extinguishments (53,005) (138,708)
Securities sold under agreement to repurchase:
Proceeds 11,855 21,000
Repayments (31,855) (5,000)
Reduction in capital lease obligation (60) (56)
Net proceeds from exercise of stock options and/or sale
of treasury stock 166 328
Dividends paid (840) (335)
-------- --------
Net cash provided (used) by financing activities (22,692) 3,947
-------- --------
Net increase in cash (644) (5,164)
Cash and cash equivalents at beginning of period 19,862 20,569
------- --------
Cash and cash equivalents at end of period $19,218 $15,405
------- --------
------- --------
Cash paid for:
Interest $16,880 $12,966
Federal and state taxes 1,895 2,229
Supplemental disclosure of non-cash activities:
Increase in unrealized gain (loss) on investment and
mortgage backed securities available-for-sale, net 203 (5)
Loans charged off 971 371
Loans securitized and sold 11,479 --
Loans foreclosed 619 1,061
</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 March 31, 1996, and for the three
months and six months ended March 31, 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
six month periods ended March 31, 1995 and for September 30, 1995, has been
reclassified to conform with the 1996 presentation.
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 and six month periods ending March 31, 1995 as follows: a net
increase in non-interest income of $77,000 and $220,000, respectively, an
increase in net income of $49,000 and $140,000, respectively, and an increase
in earnings per share of $0.02 and $0.06, respectively.
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 six 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 (particularly a recent
trend of increased personal bankruptcies in Vermont), 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. This special assessment
could be approximately 85 basis points per $100 of insured deposits. 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). 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 March 31, 1996, the holding
company had $1.5 million in cash and investment securities. The Company did
not have any debt outstanding at March 31, 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 March 31, 1996
totaled $270.8 million with a market value of $263.4 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 March 31,
1996 totaled $45,000 with an amortized cost of $2,500 compared to $4.2
million with an amortized cost of $4.4 million at September 30, 1995. 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 and as an
alternative use of excess liquid funds. They are also used for the purpose
of meeting the Bank's "Qualified Thrift Lender" requirements.
LOANS:
The Company's net loans increased $23.5 million from $451.3 million at
September 30, 1995, to $474.8 million at March 31, 1996.
The following table compares significant loan activity for the periods
indicated.
Selected Loan Activity
(Dollars in thousands) Six Months Ended March 31,
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Originations:
Residential Mortgage $75,400 $40,029
Consumer 12,408 15,828
Commercial 5,822 12,795
------- -------
Total Originations $93,630 $68,652
------- -------
------- -------
Purchases $31,458 $5,576
Proceed from sales 38,606 23,055
Loans securitized to mortgage backed securities 11,479 --
</TABLE>
9
<PAGE>
The Bank originates fixed and adjustable rate mortgage loans for sale. At
March 31, 1996, the Bank had $16.3 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 March 31, 1996, the Bank had $22.3 million in
commitments to sell mortgage loans. During the six months ended March 31,
1996, the Bank received proceeds of $38.6 million from the sale of loans and
$11.5 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 $93.6 million in loans, of which
$75.4 million were residential mortgages.
At March 31, 1996, the Bank had commitments to originate loans of $91.8
million which included $27.3 million in residential mortgage loans, $9.9
million in commercial loans (primarily unadvanced funds on equity lines of
credit) and $54.6 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>
March 31, 1996 December 31, 1995 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 $5,857 0.71% $7,761 0.93% $4,326 0.51%
Consumer 2,671 0.32 3,129 0.38 1,782 0.21
Residential mortgage 2,002 0.24 2,988 0.36 2,229 0.26
- -------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 10,530 1.27 13,878 1.67 8,337 0.98
In-substance foreclosures -- -- -- -- 2,739 0.32
Real estate owned, net 4,044 0.49 4,696 0.56 5,398 0.64
Other repossessed assets 336 0.04 462 0.06 310 0.04
- -------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $14,910 1.80% $19,036 2.29% $16,784 1.98%
- -------------------------------------------------------------------------------------------------------------------------------
Restructured troubled debt:
Performing $4,860 0.59% $4,907 0.59% $4,801 0.57%
- -------------------------------------------------------------------------------------------------------------------------------
Nonperforming (included above) 612 0.07 618 0.07 985 0.11
- -------------------------------------------------------------------------------------------------------------------------------
Total $5,472 0.66% $5,525 0.66% $5,786 0.68%
- -------------------------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses $3,519 0.43% $4,009 0.48% $3,622 0.43%
Allowance for possible loan losses to:
Nonperforming loans 33.42% 28.89% 43.44%
Total loans 0.74 0.89 0.79
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's total nonperforming assets decreased $4.1 million to $14.9
million at March 31, 1996 compared to $19.0 million at December 31, 1995 and
decreased $1.9 million compared to $16.8 million at September 30, 1995.
Nonaccruing loans decreased approximately $3.3 million from December 31, 1995
and increased $2.2 million from September 30, 1995.
Other real estate owned decreased $652,000 to $4.0 million at March 31, 1996
from the December 31, 1995 balance. The decrease was due to $131,000 in
writedowns and $752,000 in net sales, offset by $231,000 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 $173,000 in writedowns, $2.6 million of ISF loans transferred to
non-accruing in accordance with SFAS No. 114, and $1.9 million in net sales,
offset by $619,000 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 $3.5 million at
March 31, 1996.
10
<PAGE>
DEPOSITS:
Total deposits have increased $10.5 million during the six months ended
March 31, 1996. The Bank attributes this increase in deposits to increases
in demand deposit accounts, money market accounts, and time deposits slightly
offset by a decrease in NOW accounts and passbook accounts.
BORROWINGS:
Total borrowed funds decreased $32.5 million during the first six months of
fiscal 1996.
STOCKHOLDERS' EQUITY:
Stockholders' equity increased $2.5 million during the six month period
ended March 31, 1996, to $63.5 million, or $26.48 per share. The Company
recorded earnings of $3.0 million and paid cash dividends to shareholders of
$840,000 during the first six months of fiscal 1996. During the six months
ended March 31, 1996, the Company received $60,000 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 $28,000 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
March 31, 1996 for VFB.
(Dollars in thousands)
VFB ACTUAL
--- --------------------------
Core $56,732 6.89%
Tangible 56,732 6.89
Risk-based 60,167 12.79
At March 31, 1996, VFB had risk-based capital of $60.2 million, or 12.8% of
risk weighted assets on a fully phased-in basis. The Bank's capital ratios
exceed current regulatory requirements.
On April 17, 1996, the Board of Directors of the Company declared an $0.18
quarterly cash dividend per share, payable on May 15, 1996 to stockholders of
record on May 1, 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. This litigation is
currently pending before the U.S. Supreme Court, and 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.
RESULTS OF OPERATIONS:
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
NET INCOME:
Net income for the three months ended March 31, 1996 was $1.5 million or
$0.60 per share, compared to earnings of $1.1 million, or $0.44 per share,
for the three months ended March 31, 1995. Fiscal 1996 second quarter
results included a $229,000 gain on securities sales.
NET INTEREST INCOME:
Net interest income was $7.2 million for the three months ended March 31,
1996, compared to $7.0 million for the similar period ended March 31, 1995.
Total interest income earned was $15.2 million during the fiscal 1996
quarter, an increase of $382,000 over the comparable fiscal 1995 quarter.
This resulted from a $764,000 increase in interest income on loans due to
higher
11
<PAGE>
yields, accounting for approximately $339,000 of the increase; higher
average balances, accounting for approximately $410,000 of the increase; and
approximately $15,000 due to the combined rate and volume increases.
Offsetting this, interest income on investments and mortgage backed
securities decreased approximately $382,000. Of this decrease, $410,000 was
a result of decreased average balances offset by a $28,000 increase resulting
from higher yields.
12
<PAGE>
ANALYSIS OF AVERAGE RATES AND BALANCES
<TABLE>
<CAPTION>
Quarter ended March 31,
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 $448,753 $10,222 9.11% $430,090 $9,458 8.80%
Investment and mortgage backed securities 309,910 4,955 6.40 335,622 5,337 6.38
------- ------ ------- ------
Total interest-earning assets 758,663 15,177 8.00 765,712 14,795 7.73
Other real estate owned 4,360 11,162
Non interest-earning assets 56,838 48,201
------- -------
Total assets $819,861 $825,075
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings $256,021 1,614 2.52 $255,252 1,675 2.62
Time deposits 314,142 4,371 5.57 280,629 3,462 4.93
Borrowings 132,868 2,017 6.07 180,125 2,677 5.94
------- ----- ------- ------
Total interest-bearing liabilities 703,031 8,002 4.55 716,006 7,814 4.37
------- ----- ------- ------
Non-interest-bearing deposits 48,502 44,664
Other non-interest-bearing liabilities 5,332 5,710
------- -------
Total liabilities 756,865 766,380
Stockholders' equity 62,996 58,695
------- -------
Total liabilities and stockholders' equity $819,861 $825,075
------- -------
------- -------
Net interest income $7,175 $6,981
----- -----
----- -----
Net interest spread 3.45 3.36
Net interest margin 3.78 3.65
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Total interest expense incurred was $8.0 million for the fiscal 1996
quarter, a $188,000 increase from the fiscal 1995 quarter. This resulted from
a $848,000 increase in deposit expense due to higher interest rates paid,
accounting for approximately $488,000 of the increase, higher average deposit
balances, accounting for approximately $329,000 of the increase, and
approximately $31,000 of the increase due to the combined rate and volume
increases. Offsetting these increases, borrowing expense decreased by
$660,000 due primarily to a decrease in average borrowings.
PROVISION FOR POSSIBLE LOAN LOSSES:
During fiscal 1996's second quarter, the Company provided $300,000 for loan
loss reserves compared to $699,000 during the corresponding 1995 fiscal
quarter. The Company's net charge-offs were $790,000 during fiscal 1996's
second quarter due primarily to commercial loans. Nonperforming loans at
March 31, 1996 totaled $10.5 million compared to $13.9 million at December
31, 1995 and $8.3 million at September 30, 1995. The Company's total
nonperforming assets at March 31, 1996 were $15.0 million compared to $19.0
million at December 31, 1995 and $16.8 million at September 30, 1995. The
$4.0 million decrease from December 31, 1995 was the result of a decrease in
each of the nonperforming asset categories. During the fiscal 1996 second
quarter, nonperforming loans decreased approximately $3.3 million due
primarily to decreases in nonperforming commercial and residential mortgage
loans. Real estate owned, during this same time period, decreased
approximately $652,000 due primarily to sales. At March 31, 1996, the
Company believes its allowance for loan losses is adequate to cover potential
loan losses in its loan portfolio.
13
<PAGE>
Allowance for Possible Loan Losses
----------------------------------
Three months ended
March 31,
(Dollars in thousands) 1996 1995
---------------------- ---- ----
Beginning of Period $4,009 $3,760
Provision 300 699
Net Charge-offs (790) (911)
------- ------
End of Period $3,519 $3,548
------- ------
------- ------
NON-INTEREST INCOME:
Non-interest income increased $71,000 during the fiscal 1996 quarter
compared to the fiscal 1995 quarter. The fiscal 1996 quarter included a gain
on sale of investments of approximately $229,000. The fiscal 1995 quarter
included approximately $550,000 of gains on sale of purchased mortgage
servicing rights.
Service fees on loans sold were $224,000 during the fiscal 1996 quarter
compared to $305,000 during the fiscal 1995 quarter. Average total loans
serviced for other investors for the three months ended March 31, 1996 were
$581.5 million compared to $690.0 million for the three months ended March
31, 1995. Loan service income reflects, and is reduced by, the amortization
of mortgage servicing rights. Servicing rights amortization increased to
$235,000 during the 1996 quarter compared to $214,000 during the 1995 quarter
due to increased loan sales during fiscal 1996 therefore creating an increase
in servicing rights being amortized.
Customer service fees increased $125,000 during the fiscal 1996 quarter
compared to the fiscal 1995 quarter. Customer service fees are primarily
generated from overdraft and service charges on demand deposit accounts, and
other customer transaction fees. The Company anticipates it will maintain
this level of customer service fee income in the foreseeable future.
NON-INTEREST EXPENSE:
Total non-interest expense was $7.0 million for the fiscal 1996 quarter, a
decrease of $355,000 from the fiscal 1995 quarter.
Other real estate operations expense decreased $895,000 from fiscal 1995's
March quarter. Fiscal 1996's March quarter included an increase in gain on
sale of REO property, a decrease in provision for REO loss and reduced
carrying costs due to REO property sales. Fiscal 1995's March quarter
included the substantial writedown of a specific asset in recognition of the
Company's desire to target this property for early liquidation.
Other non-interest expense increased $207,000 from fiscal 1995's quarter.
Supplies expense increased approximately $130,000 due primarily to continued
implementation of the new bank logo and a writeoff of outdated supplies.
Telephone expense increased approximately $30,000 and postage increased
approximately $20,000. The remaining increase is due to immaterial increases
in several other expense categories.
Office occupancy increased $251,000 from the March 1995 quarter due to
increased computer maintenance contract costs and increased general office
building expense. In addition, fiscal 1996 results include operating
expenses of a new branch.
Professional fees increased $98,000 from the fiscal 1995's second quarter
due to increased consulting and legal fees.
FEDERAL AND STATE TAXES:
Federal and state tax expense increased to $871,000 based on income before
taxes of $2.4 million during the fiscal 1996 quarter. During the fiscal 1995
quarter, tax expense was $275,000 based on income before taxes of $1.4
million. The fiscal 1995 amount included a tax credit of approximately
$293,000 as a result of an IRS audit.
At March 31, 1996, the Company had a net deferred income tax asset of
approximately $672,000 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.
14
<PAGE>
COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 1996 AND 1995
NET INCOME:
Net income for the six months ended March 31, 1996 was $3.0 million, or
$1.19 per share, compared to net income of $2.3 million, or $0.93 per share,
for the six months ended March 31, 1995. Fiscal 1996 six month results
included a $750,000 gain on sale of investments 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 six months ended March 31, 1996 was $14.1
million, an increase of $88,000 from the six months ended March 31, 1995.
Total interest income was $30.6 million for the fiscal 1996 period
compared to $29.1 million for the fiscal 1995 period, an increase of $1.5
million. The change was due to a $1.9 million increase in interest on loans,
consisting of a $1.0 million increase due to higher average balances, a
$892,000 increase due to higher average rates and $50,000 due to the combined
rate and balance increases. Offsetting this was a decrease in investment and
mortgage backed securities interest income of approximately $443,000 due to
lower average balances, accounting for $524,000 of the decrease and a $4,000
decrease due to the combined rate and volume variances, slightly offset by an
$85,000 increase due to higher average rates.
Total interest expense was $16.6 million for the fiscal 1996 period
compared to $15.1 million for the fiscal 1995 period, a $1.5 million
increase. This resulted from a $2.3 million increase in deposit expense due
to higher average rates and balances offset by a $842,000 decrease in
borrowing expense due primarily to a decrease in average borrowings.
ANALYSIS OF AVERAGE RATES AND BALANCES
<TABLE>
<CAPTION>
Six months ended March 31,
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 $450,806 $20,463 9.08% $426,862 $18,484 8.66%
Investment and mortgage backed securities 317,799 10,190 6.41 334,274 10,633 6.38
------- ------ ------- ------
Total interest-earning assets 768,605 30,653 7.98 761,136 29,117 7.65
Other real estate owned 4,694 11,892
Non interest-earning assets 55,025 47,769
------- -------
Total assets $828,324 $820,797
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings $255,376 3,352 2.63 $263,000 3,437 2.61
Time deposits 313,521 8,875 5.66 272,664 6,500 4.77
Borrowings 142,416 4,349 6.11 176,052 5,191 5.90
------- ------ ------- ------
Total interest-bearing liabilities 711,313 16,576 4.66 711,716 15,128 4.25
------- ------ ------- ------
Non-interest-bearing deposits 49,380 45,191
Other non-interest-bearing liabilities 5,177 6,085
------- ------
Total liabilities 765,870 762,992
Stockholders' equity 62,454 57,805
-------- -------
Total liabilities and stockholders' equity $828,324 $820,797
------- -------
------- -------
Net interest income $14,077 $13,989
------ ------
------ ------
Net interest spread 3.32 3.40
Net interest margin 3.66 3.68
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
PROVISION FOR POSSIBLE LOAN LOSSES:
The Company provided $735,000 in provisions for possible loan losses
during the fiscal 1996 period compared to $959,000 during the fiscal 1995
period. During the fiscal 1996 period, the Company had net chargeoffs of
$838,000. 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
----------------------------------
Six months ended
March 31,
(Dollars in thousands) 1996 1995
- ---------------------- ---- ----
Beginning of Period $3,622 $3,718
Provision 735 959
Net Charge-offs (838) (1,129)
------ ------
End of Period $3,519 $3,548
------ ------
------ ------
NON-INTEREST INCOME:
Non-interest income was $5.6 million for the six months ended March 31,
1996 compared to $4.7 million for the same fiscal 1995 period. The fiscal
1996 period includes a gain on sale of investments of $750,000.
Customer service fees increased $206,000 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 $111,000 when compared to the six
months ended March 31, 1995. Average total loans serviced for others for the
six months ended March 31, 1996 were $569.8 million compared to $664.4
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 $383,000 during fiscal 1996 and $384,000 during fiscal 1995.
NON-INTEREST EXPENSE:
Total non-interest expense in the fiscal 1996 six month period decreased
$177,000 to $14.2 million compared to the fiscal 1995 six month period.
Other real estate operations expense decreased $1.7 million from the
same six month period last year. Fiscal 1996 six 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 $195,000 in fiscal 1996
compared to the same six month period last year. This is primarily due to a
$150,000 decrease in consulting fees as fiscal 1995 results included expenses
incurred for specific management projects.
Other non-interest expense increased approximately $389,000 compared to
the six month period ended March 31, 1995. This was due to an increase in
supplies expense of approximately $194,000, an increase in telephone expense
of approximately $112,000 as well as increases in expenses such as postage,
mileage, contributions, ATM, and bank service charges.
Merger related expense was $401,000 for the six month period ended March
31, 1996 due to additional staff reductions during the first quarter which
were related to the consolidation of the two subsidiary banks.
Office occupancy expense increased approximately $387,000 due primarily
to increased computer maintenance contract costs, general office building
expense, and the addition of a new branch.
Marketing expense increased approximately $185,000 from the same six
month period last year. This is primarily due to additional efforts in
marketing new products primarily in the New Hampshire market areas.
16
<PAGE>
FEDERAL AND STATE TAXES:
Federal and state taxes for the six months ended March 31, 1996 were
$1.7 million based on net income before taxes of $4.7 million. This is
compared to $1.1 million based on income before taxes of $3.3 million during
the fiscal 1995 period. Fiscal 1995 expense included a tax credit of
approximately $293,000 as a result of an IRS audit.
17
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of the Security Holders
At the Company's Annual Meeting of Stockholders held on February 7,
1996, the following proposals were adopted by the vote specified below:
Withhold
Proposal For Authority
1. Election of Directors:
John A. Cobb 2,089,456 7,275
Mary Alice McKenzie 2,090,558 6,173
Ernest A. Pomerleau 2,089,540 7,191
Broker
For Against Abstain Nonvotes(1)
2. Ratification of KPMG Peat
Marwick, LLP as auditors 2,092,167 1,544 3,006 --
(1) Votes counted for quorum purposes, as to which the broker or other
nominee holder was not authorized by the beneficial owner to cast a
vote on this particular proposal but was authorized to cast (and did
cast) a vote on at least one other proposal.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) No reports on Form 8-K were filed during the quarter ended March
31, 1996.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EASTERN BANCORP, INC.
DATE: May 15, 1996 /s/ Janine K. Pinel
------------ -----------------------------
JANINE K. PINEL
Chief Financial Officer
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0000793169
<NAME> EASTERN BANCORP, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> MAR-31-1996
<CASH> 19,218
<INT-BEARING-DEPOSITS> 577,420
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 45
<INVESTMENTS-CARRYING> 270,800
<INVESTMENTS-MARKET> 263,392
<LOANS> 478,299
<ALLOWANCE> 3,519
<TOTAL-ASSETS> 824,899
<DEPOSITS> 626,874
<SHORT-TERM> 89,655
<LIABILITIES-OTHER> 5,180
<LONG-TERM> 39,685
0
0
<COMMON> 27
<OTHER-SE> 63,478
<TOTAL-LIABILITIES-AND-EQUITY> 824,899
<INTEREST-LOAN> 10,222
<INTEREST-INVEST> 4,955
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 15,177
<INTEREST-DEPOSIT> 5,985
<INTEREST-EXPENSE> 8,002
<INTEREST-INCOME-NET> 7,175
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 229
<EXPENSE-OTHER> 7,032
<INCOME-PRETAX> 2,377
<INCOME-PRE-EXTRAORDINARY> 1,506
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,506
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.60
<YIELD-ACTUAL> 8.00
<LOANS-NON> 10,530
<LOANS-PAST> 0
<LOANS-TROUBLED> 4,860
<LOANS-PROBLEM> 1,483
<ALLOWANCE-OPEN> 4,009
<CHARGE-OFFS> 858
<RECOVERIES> 68
<ALLOWANCE-CLOSE> 3,519
<ALLOWANCE-DOMESTIC> 3,519
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
