-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KNBJX6fnSJJ1oZfA3xjvirKdQ/iJZhg+W12wn8SRWHVZlG+E2H/wElUoKiTFIWoD 9J8e3UowBLW7dI6t2Zfd0Q== 0000912057-96-016869.txt : 19960812 0000912057-96-016869.hdr.sgml : 19960812 ACCESSION NUMBER: 0000912057-96-016869 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960809 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EASTERN BANCORP INC CENTRAL INDEX KEY: 0000793169 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 030304472 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14853 FILM NUMBER: 96607084 BUSINESS ADDRESS: STREET 1: 537 CENRAL AVE STREET 2: PO BOX 700 CITY: DOVER STATE: NH ZIP: 03820 BUSINESS PHONE: 8028799000 MAIL ADDRESS: STREET 1: 282 WILLISTON ROAD STREET 2: P O BOX 700 CITY: WILLISTON STATE: VT ZIP: 05495-0700 10-Q 1 10-Q 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 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 Eastern Bancorp, Inc. Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data) June 30, September 30, 1996 1995 -------- ------------- 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 -------- -------- -------- --------
See accompanying notes to consolidated financial statements. 3 Eastern Bancorp, Inc. Consolidated Statements of Operations
(Dollars in thousands, except per share data) Three Months Ended Nine Months Ended June 30, June 30, 1996 1995 1996 1995 -------- -------- -------- -------- 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
See accompanying notes to consolidated financial statements. 4 Eastern Bancorp, Inc. Consolidated Statements of Cash Flows
Nine Months Ended June 30, (Dollars in thousands) 1996 1995 -------- -------- 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) ---------- ---------
(continued on next page) 5 Eastern Bancorp, Inc. Consolidated Statements of Cash Flows (continued)
Nine Months Ended June 30, (Dollars in thousands) 1996 1995 -------- -------- 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
See accompanying notes to consolidated financial statements. 6 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 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 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 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
June 30, 1996 March 31, 1996 September 30,1995 - ------------------------------------------------------------------------------------------------------------------------------------ % of % of % of (Dollars in thousands) Amount Assets Amount Assets Amount Assets - ------------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------------
10 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 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
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 - --------------------------------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------------------------------
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 $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 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 ANALYSIS OF AVERAGE RATES AND BALANCES
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 - ------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------
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 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 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 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 EX-27 2 EXHIBIT 27 FDS
9 0000793169 EASTERN BANCORP, INC. 3-MOS SEP-30-1996 JUN-30-1996 33,276 585,742 0 0 9 284,058 273,534 475,564 3,050 840,534 643,057 92,000 6,146 34,451 0 0 27 64,853 840,534 10,466 4,541 0 15,007 5,890 7,763 7,244 100 32 7,483 2,136 1,309 0 0 1,309 0.34 0.34 7.83 8,332 0 5,771 0 3,519 605 36 3,050 3,050 0 0
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