<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 December 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 February 7, 1997: 3,673,834 shares
<PAGE>
INDEX
Part I. Financial Information Page
- ------- --------------------- ----
Item 1. Financial Statements
Consolidated Statements of Financial Condition
at December 31, 1996 and September 30, 1996 3
Consolidated Statements of Operations for the Three
Months Ended December 31, 1996 and December 31, 1995 4
Consolidated Statements of Cash Flows for the Three 5-6
Months Ended December 31, 1996 and December 31, 1995
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-15
Part II. Other Information
- ------- -----------------
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
<PAGE>
Eastern Bancorp, Inc.
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
<TABLE>
December 31, September 30,
1996 1996
------------ -------------
<S> <C> <C>
ASSETS
Cash and due from banks $30,626 $27,766
Short-term investments 6,598 12,043
Investment and mortgage backed securities
available-for-sale (amortized cost of
$10,000 at December 31, 1996 and $1 at
September 30, 1996) 9,997 9
Investment securities held-to-maturity
(market value of $38,867 at
December 31, 1996 and $47,946 at
September 30,1996) 38,913 48,793
Mortgage backed securities held-to-maturity
(market value of $233,761 at December 31,
1996 and $236,869 at September 30,1996) 237,996 244,856
FHLB stock 9,283 9,283
Loans (net of allowance for loan losses of
$2,906 at December 31, 1996 and $2,858 at
September 30, 1996) 484,503 478,306
Loans held for sale 9,443 10,480
Accrued interest receivable:
Investment and mortgage backed securities 1,995 2,230
Loans 2,821 2,843
Other real estate owned, net 4,951 3,611
Investment in real estate 261 437
Premises and equipment, net 17,185 16,693
Excess of cost over net assets acquired 3,433 3,528
Deferred income tax asset, net 1,350 1,346
Mortgage servicing rights 3,079 3,061
Prepaid expenses and other assets 3,584 3,393
-------- --------
Total assets $866,018 $868,678
-------- --------
-------- --------
LIABILITIES
Deposit accounts (including non-interest
bearing deposits of $52,975 at
December 31, 1996 and $55,986 at
September 30,1996) $627,217 $641,286
Advances from FHLB 168,780 153,636
Capital lease obligation 241 273
Accrued federal income taxes 525 102
Accrued expenses and other liabilities 4,477 9,801
-------- --------
Total liabilities 801,240 805,098
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 December 31, 1996 and
4,095,549 at September 30, 1996 41 41
Additional paid-in capital 36,543 36,384
Retained income (substantially restricted) 31,043 30,138
Unrealized gain (loss) on securities
available-for-sale, net (2) 6
Treasury stock (at cost) 424,315 shares at
December 31, 1996 and 444,015 shares at
September 30, 1996 (2,847) (2,989)
-------- ---------
Total stockholders' equity 64,778 63,580
-------- --------
-------- --------
Total liabilities and stockholders'
equity $866,018 $868,678
-------- --------
-------- --------
</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
December 31,
-------------------------
1996 1995
------- -------
<S> <C> <C>
INTEREST INCOME:
Residential mortgage loans $ 5,338 $ 4,432
Other loans 5,515 5,809
Investment and mortgage backed securities
available-for-sale 117 372
Investment securities held-to-maturity 989 833
Mortgage backed securities held-to-maturity 3,922 4,030
------- -------
Total interest income 15,881 15,476
INTEREST EXPENSE:
Deposit accounts 5,860 6,242
Borrowings 2,293 2,332
------- -------
Total interest expense 8,153 8,574
------- -------
Net interest income 7,728 6,902
Provision for loan losses 145 435
------- -------
Net interest income after provision for
loan losses 7,583 6,467
NON-INTEREST INCOME:
Gain on sale of investment and mortgage backed
securities, net 14 521
Gain on sale of loans and mortgage servicing
rights, net 428 547
Service fees on loans sold 255 295
Customer service fees 1,595 1,380
Miscellaneous 314 326
------- -------
Total non-interest income 2,606 3,069
------- -------
Income before non-interest expense and federal
and state taxes 10,189 9,536
NON-INTEREST EXPENSE:
Compensation and benefits 3,222 3,157
Office occupancy, net 1,571 1,298
Marketing 357 520
Federal deposit insurance premium 286 373
Other real estate owned operations 647 48
Amortization of intangibles 95 95
Professional fees 70 114
Merger related 391 401
Supplies 218 224
Telephone 249 204
Postage 217 186
Other 633 573
------- -------
Total non-interest expense 7,956 7,193
------- -------
Income before federal and state taxes 2,233 2,343
Federal and state tax expense 812 856
------- -------
Net income $ 1,421 $ 1,487
------- -------
Earnings per common and common equivalent
share outstanding $ 0.37 $ 0.39
Cash dividends paid per common share 0.14 0.11
Weighted average number of common
and common equivalent shares outstanding 3,888,890 3,784,731
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
Eastern Bancorp, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
December 31,
---------------------
1996 1995
------- -------
<S> <C> <C>
(Dollars in thousands)
Cash flows from operating activities:
Net income $1,421 $1,487
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation, amortization and accretion 1,065 786
Provision for loan losses 145 435
(Gain) on sale of securities (14) (521)
(Gain) on sale of loans (428) (547)
(Gain) on sale of real estate owned 56 (140)
Provision for loss on other real estate owned 162 --
Loans originated for sale (26,486) (32,469)
Proceeds from sales of loans originated for sale 27,951 31,942
Decrease in accrued interest receivable 257 610
(Increase)in prepaid expenses and other assets (210) (16,337)
(Increase) decrease in deferred income tax asset 1 (1)
(Decrease) in accrued expenses and other
liabilities (5,324) (2,153)
Increase in accrued federal taxes 423 410
------- -------
Total adjustments (2,402) (17,985)
------- -------
Net cash(used) by operating activities (981) (16,498)
------- -------
Cash flows from investing activities:
Net (increase) decrease in short-term investments 5,445 (12,936)
Portfolio loans:
Purchases (3,130) (3,740)
Originations net of repayments (5,542) 1,892
Proceeds from sales -- 6,277
Recoveries on loans previously charged off 49 65
Investment and mortgage backed securities
available-for-sale
Purchases (10,000) (50)
Proceeds from sales -- 34,622
Proceeds from maturities and returns of principal -- 613
Investments held-to-maturity:
Purchases (393) (32,253)
Proceeds from sales 7,014 --
Proceeds from maturities and returns of principal 3,300 37,151
Mortgage backed securities held-to-maturity:
Purchases -- --
Proceeds from sales -- --
Proceeds from maturities and returns of principal 6,818 9,110
Purchases of premises and equipment, net of sales
proceeds (1,167) (977)
Proceeds from sales of real estate, net 475 1,327
Purchase of mortgage servicing rights (31) (31)
(Increase) decrease in investments in real estate 176 (10)
----------- ---------
Net cash provided by investing activities $3,014 $41,060
----------- ---------
</TABLE>
(continued on next page)
5
<PAGE>
Eastern Bancorp, Inc.
Consolidated Statements of Cash Flows
(continued) Three Months Ended
(Dollars in thousands) December 31,
1996 1995
------- ------
Cash flows from financing activities:
Net increase (decrease) in deposits $(14,069) $2,698
Advances from FHLB:
Proceeds 53,032 32,260
Repayments and extinguishments (37,888) (36,003)
Securities sold under agreement to repurchase:
Proceeds -- 11,855
Repayments -- (24,855)
Reduction in capital lease obligation (32) (29)
Net proceeds from exercise of stock options and/or
sale of treasury stock 300 10
Dividends paid (516) (408)
---------- ---------
Net cash provided (used) by financing
activities 827 (14,472)
---------- ---------
Net increase in cash 2,860 10,090
Cash and cash equivalents at beginning
of period 27,766 19,862
----------- ---------
Cash and cash equivalents at end of period $30,626 $29,952
----------- ---------
----------- ---------
Cash paid for:
Interest $8,249 $8,853
Federal and state taxes 310 300
Supplemental disclosure of non-cash activities:
Increase (decrease) in unrealized gain (loss) on
investment and mortgage backed securities
available-for-sale, net (8) 418
Loans charged off 146 113
Loans securitized and sold -- 2,937
Loans foreclosed 2,033 388
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, 1996, included in its
annual report on Form 10-K.
Consolidated financial information as of December 31, 1996, and for the
three months ended December 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 month
period ended December 31, 1995, has been reclassified to conform with the
1996 presentation.
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" or 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.
All per share information contained herein has been adjusted to reflect
the Company's June 19, 1996 three-for-two stock split paid to stockholders of
record on June 5, 1996.
On November 13, 1996, the Company entered into the Merger Agreement
pursuant to which the Company will merge with and into Vermont Financial
Services Corp. ("VFSC") and the Bank will become a wholly-owned subsidiary of
VFSC ("the Merger"). Consummation of the Merger is conditioned, among other
things, upon stockholder approval and regulatory approval.
Preliminary Note In Regard To Forward-Looking Statements:
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
registrant's actual results to differ materially from those contemplated 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 contemplated by forward-looking statements
made in this quarterly report on Form 10-Q or 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, 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.
Another uncertainty involves regulatory and stockholder approval of the
Agreement and Plan of Reorganization ("the Merger Agreement") dated November
13, 1996 by and among the Company, the Bank, and VFSC. While management does
not anticipate a negative response from the regulatory bodies or the
stockholders of the Company or VFSC, failure to approve the agreement could
materially impact the future performance of the Company because of
distraction of management, fees, and restrictions on interim operations.
The Merger Agreement sets forth certain restrictions on activities of the
Company and its subsidiaries which are not in the ordinary and usual course
of business consistent with past practices and must be adhered to until the
effective date of the Merger. These restrictions include, but are not
limited to, (i) the execution of any material contract or incurrence of any
material obligation outside the ordinary course of business, (ii) the
declaration or payment of any dividends or other distributions to
stockholders that are in any way inconsistent with prior practices, (iii) the
amendment, in any material respect of the Company s employee benefit plans or
employment contracts, (iv) the issuance of any shares of its capital stock or
grant of any options except in fulfillment of pre-existing option plans, (v)
the incurrence of any additional debt obligation except in the ordinary
course of business consistent with past practices or to any capital
expenditures above certain monetary
8
<PAGE>
limits, (vi) and the making of any loans or extensions of credit other than
those which are on customary terms, conditions and standards.
As a result of the Deposit Insurance Funds Act of 1996 the Secretary of
the Treasury is to review recommendations in 1997 for the establishment of a
common charter for banks and savings associations. Accordingly, the Bank may
be required to convert its federal savings bank charter to either a national
bank charter, a state depository institution charter, or a newly designed
charter. The Company may also become regulated at the holding company level
by the Board of Governors of the Federal Reserve System (the "Federal Reserve")
rather than by the Office of Thrift Supervision ("OTS"). Regulation by the
Federal Reserve could subject Eastern to capital requirements that are not
currently applicable to the Company as a holding company under OTS regulation
and may result in statutory limitations on the type of business activities in
which the Company may engage at the holding company level, which business
activities currently are not restricted. The Company is unable to predict
whether such initiatives will result in enacted legislation requiring a
charter change and if so whether the charter change would significantly
impact the Company's operations.
Revenue generated by the Company is highly dependent on its
asset/liability management policies. 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 ten percent.
The Company's operating results are negatively affected by its
nonperforming assets. Management strives to reduce nonperforming assets.
Future changes in the national or local economy, fluctuations in interest
rates, and changes in the real estate market could limit or prevent future
nonperforming asset reduction and negatively impact results.
Operating results are affected by the adequacy of the Company's loan loss
reserve to cover 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.
Other significant recurrent sources of income for the Company include
gain on sale of loans, service fees on loans sold, and customer service fees.
Gain on sale of loans and service fees on loans sold are affected by market
conditions. Customer service fees are a function of customer banking
activity. 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
solely 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 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 December 31, 1996, the
Company had $2.8 million in cash and investment securities. The Company did
not have any debt outstanding at December 31, 1996, nor does it anticipate
the need to borrow any funds during fiscal 1997.
9
<PAGE>
Investment and Mortgage Backed Securities:
Investment and mortgage backed securities held-to-maturity at December
31, 1996 totaled $276.9 million with a market value of $272.6 million
compared to $293.6 million with a market value of $284.8 million at September
30, 1996. Investment and mortgage backed securities available-for-sale as of
December 31, 1996 totaled $10.0 million with an amortized cost of $10.0
million compared to $9,000 with an amortized cost of $1,000 at September 30,
1996. During the first quarter of fiscal 1997, the Bank purchased a $10.0
million security and classified it as available-for-sale for future liquidity
purposes. 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 $5.2 million from $488.8 million at
September 30, 1996, to $493.9 million at December 31, 1996.
The following table compares significant loan activity for the periods
indicated.
Selected Loan Activity
(Dollars in thousands) Three Months Ended December 31,
(Unaudited)
1996 1995
------- -------
Originations:
Residential Mortgage $35,220 $32,003
Consumer 11,639 5,870
Commercial 20,765 3,056
------- -------
Total Originations 67,624 40,929
Purchases 3,130 3,740
Sales 27,951 31,395
Loans securitized to mortgage
backed securities -- 2,937
The Bank originates fixed and adjustable rate mortgage loans for sale. At
December 31, 1996, the Bank had $9.4 million in mortgage loans held for sale
that required no valuation reserve to adjust their carrying value to the lower
of cost or market. At December 31, 1996, the Bank had $12.7 million in
commitments to sell mortgage loans. During the three months ended December 31,
1996, the Bank sold $28.0 million in mortgage loans, all of which had been
originated for sale. The proceeds from these sales combined with other sources
of funds were used to originate $67.6 million in loans, of which $35.2 million
were residential mortgages. Early in fiscal 1996, management decided to increase
efforts in commercial lending. The Company is now experiencing the full
benefits of this decision resulting in increased commercial loan originations
during fiscal 1997.
At December 31, 1996,the Bank had commitments to originate loans of $88.7
million which included $11.9 million in residential mortgage loans, $16.6
million in commercial loans (primarily unadvanced funds on equity lines of
credit) and $60.2 million in consumer loans (primarily unadvanced funds on
equity lines of credit).
10
<PAGE>
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.
<TABLE>
<CAPTION>
NONPERFORMING ASSETS
December 31, 1996 September 30, 1996 December 31,1995
- --------------------------------------------------------------------------------------------
% of % of % of
(Dollars in thousands) Amount Assets Amount Assets Amount Assets
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nonaccruing loans:
Commercial $1,682 0.20% $3,693 0.43% $7,761 0.93%
Consumer 2,703 0.31 2,473 0.28 3,129 0.38
Residential mortgage 2,192 0.25 1,779 0.20 2,988 0.36
- -------------------------------------------------------------------------------------------
Total nonperforming loans 6,577 0.76 7,945 0.91 13,878 1.67
Real estate owned, net 4,951 0.57 3,611 0.42 4,696 0.56
Other repossessed assets 470 0.05 448 0.05 462 0.06
- -------------------------------------------------------------------------------------------
Total nonperforming assets $11,998 1.38% $12,004 1.38% $19,036 2.29%
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Restructured troubled debt:
Performing $5,947 0.69% $4,154 0.48% $4,907 0.59%
Nonperforming (included above) 938 0.11 952 0.11 618 0.07
- -------------------------------------------------------------------------------------------
Total $6,885 0.80% $5,106 0.59% $5,525 0.66%
- -------------------------------------------------------------------------------------------
Allowance for loan losses $2,906 0.34% $2,858 0.33% $4,009 0.48%
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Allowance for loan losses to:
Nonperforming loans 44.18% 35.97% 28.89%
Total loans 0.58 0.58 0.89
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
The Company's nonperforming assets of $12.0 million at December 31, 1996,
remained relatively unchanged from the September 30, 1996 balance. Nonaccruing
loans decreased approximately $1.4 million primarily offset by an increase of
approximately $1.3 million in OREO. The decrease in nonaccruing loans and the
increase in OREO was due primarily to the reclassification of one commercial
property from nonaccruing loans to OREO property.
See "Results of Operations - Provision for Loan Losses" for information on
the allowance for loan losses which totaled $2.9 million at December 31, 1996.
Deposits:
Total deposits decreased $14.1 million during the three months ended
December 31, 1996. The Bank attributes this decrease in deposits to decreases
in demand deposit accounts, money market accounts, NOW accounts, and passbook
accounts offset slightly by an increase in time deposit accounts. The decreases
in these accounts are due primarily to seasonal fluctuations.
11
<PAGE>
Borrowings:
Total borrowed funds increased $15.1 million during the first three months
of fiscal 1997 from $153.9 million at September 30, 1996 to $169.0 million at
December 31, 1996.
Stockholders' Equity:
Stockholders' equity increased $1.2 million during the three month period
ended December 31, 1996, to $64.8 million, or $17.64 per share. The Company
recorded earnings of $1.4 million and paid cash dividends to shareholders of
$515,700 during the first three months of fiscal 1997. The Company received
$300,000 for the use of Treasury shares to fund the exercise of employee and
director stock options during the first three months of fiscal 1997. The
Company's after tax unrealized loss on investment and mortgage backed securities
was $2,000 compared to an unrealized gain of $6,000 at September 30, 1996 due to
a decrease in the market value of those securities.
The following table reflects actual regulatory capital as calculated at
December 31, 1996 for VFB.
(Dollars in thousands)
VFB ACTUAL
--- ----------------------
Core $58,059 6.75%
Tangible 58,059 6.75
Risk-based 60,865 12.48
At December 31, 1996, VFB had risk-based capital of $60.9 million, or
12.48% of risk weighted assets on a fully phased-in basis. The Bank's capital
ratios exceed current regulatory requirements.
On January 23, 1997, the Board of Directors of the Company declared a $0.16
quarterly cash dividend per share, payable on February 19, 1997 to stockholders
of record on February 5, 1997. Payment of future cash dividends is subject to,
among other things, Company earnings and tax and regulatory considerations.
12
<PAGE>
RESULTS OF OPERATIONS:
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
Net Income:
Net income for the three months ended December 31, 1996 was $1.4 million or
$0.37 per share, compared to earnings of $1.5 million, or $0.39 per share, for
the three months ended December 31, 1995. Fiscal 1997 first quarter results
included $391,000 of expenses related to the proposed merger with VFSC. Fiscal
1996 first quarter results included the following nonrecurring events: a
$521,000 net gain on securities sales resulting from a reclassification of the
investment portfolio under the FASB Special Report on SFAS No. 115, 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 was $7.7 million for the three months ended December
31, 1996, compared to $6.9 million for the similar period ended December 31,
1995.
Total interest income earned was $15.9 million during the fiscal 1997
quarter, an increase of $405,000 over the comparable fiscal 1996 quarter. This
increase was due primarily to increased interest income on loans due to higher
average balances, accounting for approximately $816,000 of the increase in
interest income. This was partially offset by a decrease in loan yields,
accounting for approximately $204,000, and a decrease in investment income due
to lower yields and average balances, accounting for approximately $207,000.
Total interest expense incurred was $8.2 million for the fiscal 1997
quarter, a $421,000 decrease from the $8.6 million incurred during the fiscal
1996 quarter. This decrease results from a decrease in deposit expense of
$382,000, due primarily to a decrease in rates, and a decrease in borrowing
expense of $39,000, due primarily to a decrease in rates.
<TABLE>
<CAPTION>
ANALYSIS OF AVERAGE RATES AND BALANCES
Quarter ended December 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 $488,961 $10,853 8.88% $452,858 $10,241 9.05%
Investment and mortgage backed securities 309,769 5,028 6.49 318,758 5,235 6.57
-------- ------- -------- -------
Total interest-earning assets 798,730 15,881 7.95 771,616 15,476 8.02
Other real estate owned 4,525 5,027
Non interest-earning assets 60,929 60,142
-------- --------
Total assets $864,184 $836,785
-------- --------
-------- --------
Liabilities and Stockholders' Equity
Savings $110,586 $728 2.63 $117,026 $792 2.71
Interest bearing checking 145,205 824 2.27 137,705 947 2.75
Time deposits 322,854 4,308 5.34 312,899 4,503 5.76
Borrowings 158,854 2,293 5.77 151,964 2,332 6.14
-------- ------ --------- -------
Total interest-bearing liabilities 737,499 8,153 4.42 719,594 8,574 4.76
-------- ------ --------- -------
Non-interest-bearing deposits 54,512 50,259
Other non-interest-bearing liabilities 7,502 5,022
-------- ---------
Total liabilities 799,513 774,875
Stockholders' equity 64,671 61,910
-------- ---------
Total liabilities and stockholders' equity $864,184 $836,785
-------- ---------
-------- ---------
Net interest income $7,728 $6,902
------ ------
Net interest spread 3.53 3.26
Net interest margin 3.87 3.58
- ---------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
Provision for Loan Losses:
During fiscal 1997's first quarter, the Company provided $145,000 for
loan loss reserves compared to $435,000 during the corresponding 1996 fiscal
quarter. The Company had net charge-offs during the fiscal 1996 first
quarter of $97,000 which were primarily consumer loans. Nonperforming loans
at December 31, 1996 totaled $6.6 million compared to $7.9 million at
September 30, 1996 and $13.9 million at December 31, 1995. The Company's
total nonperforming assets at December 31, 1996 were $12.0 million compared
to $12.0 million at September 30, 1996 and $19.0 million at December 31,
1995. At December 31, 1996, the Company believes its allowance for loan
losses is adequate to cover potential loan losses in its loan portfolio. The
Company will continue to examine future economic trends and will make
quarterly provisions for loan losses in accordance with all known factors.
Allowance for Loan Losses
-------------------------
Three months ended
December 31,
(Dollars in thousands) 1996 1995
- ---------------------- ------ ------
Beginning of Period $2,858 $3,622
Provision 145 435
Net Charge-offs (97) (48)
------ --------
End of Period $2,906 $4,009
------ -------
------ -------
Non-interest Income:
Non-interest income decreased $463,000 during the fiscal 1997 quarter
compared to the fiscal 1996 quarter. This decrease reflects a $521,000 gain on
sale of investment and mortgage backed securities during the first quarter of
fiscal 1996. The FASB special report on SFAS No. 115 allowed a one-time
opportunity to reclassify held-to-maturity portfolio securities to the
available-for-sale portfolio. The Bank reclassified approximately $43.7 million
in securities to the available-for-sale portfolio. Subsequently, the Bank sold
a portion of these reclassified securities for a net gain. In addition, gain on
sale of loans decreased $119,000 when compared to the fiscal 1996 first quarter.
This decrease was due primarily to a decrease in loans sold during the first
quarter of fiscal 1997 compared to the fiscal 1996 first quarter.
Service fees on loans sold were $255,000 during the fiscal 1997 first
quarter compared to $295,000 during the fiscal 1996 quarter. Loan service income
reflects, and is reduced by, the amortization of the capitalized mortgage
servicing rights. Capitalized servicing rights amortization was $280,000 during
the first quarter of 1997 compared to $148,000 during the 1996 first quarter.
Loans serviced for other investors at December 31, 1996 were $658.0 million
compared to $579.7 million at December 31, 1995.
Customer service fees increased $215,000 during the first quarter of fiscal
1997 quarter compared to the fiscal 1996 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 $8.0 million for the fiscal 1997 quarter, an
increase of $763,000 from the first quarter of fiscal 1996 non-interest expense
of $7.2 million.
The Company recorded $391,000 in expenses related to the proposed merger
with VFSC during the first quarter of fiscal 1997. The Company recorded
$401,000 in merger related expenses during the first quarter of fiscal 1996 due
to contractual obligations related to the consolidation of the two subsidiary
banks.
Office occupancy expense increased $273,000 during the first quarter of
fiscal 1997. This increase was due primarily to increased depreciation expense
on technology initiatives and increased equipment maintenance contract fees.
OREO expense increased $599,000 during the first quarter of fiscal 1997.
This increase was due primarily to increased foreclosure expense and provision
for losses and a decrease in gain on sale of OREO property.
14
<PAGE>
Federal and State Taxes:
Federal and state tax expense was $812,000 based on income before taxes of
$2.2 million during the fiscal 1997 quarter. During the fiscal 1996 quarter,
tax expense was $856,000 based on income before taxes of $2.3 million.
At December 31, 1996, the Company had a net deferred income tax asset of
approximately $1.4 million 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.
15
<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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a.) Exhibit 11 - Computation of Primary and Fully Diluted
Earnings Per Share.
Exhibit 27.1 - Financial Data Schedule.
(b.) During the quarter ended December 31, 1996, the Company
filed one Form 8-K, dated November 21, 1996, pursuant to
Item 5 of Form 8-K, that announced the Company's plans to
merge with and into Vermont Financial Services Corp.
16
<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.
DATE: February 12, 1997 /s/ Janine K. Pinel
------------------- -------------------------------
JANINE K. PINEL
Chief Financial Officer
17
<PAGE>
Exhibit 11
EASTERN BANCORP, INC.
Computation of Primary and Fully Diluted Earnings Per Share
Three Months Ended
December 31,
(Dollars in thousands, except per share data) 1996 1995
--------- ----------
Net Income $1,421 $1,487
--------- ----------
--------- ----------
PRIMARY:
Shares:
Weighted average number of common
shares outstanding 3,685,212 3,597,711
Dilutive effect of outstanding stock
options 203,678 187,020
--------- ----------
Weighted average number of common
and common equivalent shares 3,888,890 3,784,731
--------- ----------
--------- ----------
Earnings per share $0.37 $0.39
--------- ----------
--------- ----------
ASSUMING FULL DILUTION:
Shares:
Weighted average number of common
shares outstanding 3,685,212 3,597,711
Fully diluted effect of outstanding stock
options 217,468 202,225
--------- ----------
Weighted average number of common
and common equivalent shares 3,902,679 3,799,936
--------- ----------
--------- ----------
Earnings per share $0.36 $0.39
--------- ----------
--------- ----------
18
<TABLE> <S> <C>
<PAGE>
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<CIK> 0000793169
<NAME> EASTERN BANCORP, INC.
<S> <C>
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