-----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, NHo4YGtL/1HcCLfwvQP0W1U4MPZ3Tq83vq9WeFBNlsQIRMxqtr/ZDWYRRtaAHiIv 9Vhjtcdonjm0eR4TUGoTpQ== 0000912057-97-004523.txt : 19970222 0000912057-97-004523.hdr.sgml : 19970222 ACCESSION NUMBER: 0000912057-97-004523 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970212 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: 97526470 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 FORM 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 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 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 Eastern Bancorp, Inc. Consolidated Statements of Financial Condition (Dollars in thousands, except per share data) December 31, September 30, 1996 1996 ------------ ------------- 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 -------- -------- -------- --------
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 December 31, ------------------------- 1996 1995 ------- ------- 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
See accompanying notes to consolidated financial statements. 4 Eastern Bancorp, Inc. Consolidated Statements of Cash Flows
Three Months Ended December 31, --------------------- 1996 1995 ------- ------- (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 ----------- ---------
(continued on next page) 5 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 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 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 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 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 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 December 31, 1996 September 30, 1996 December 31,1995 - -------------------------------------------------------------------------------------------- % of % of % of (Dollars in thousands) Amount Assets Amount Assets Amount Assets - -------------------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------
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 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 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.
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 - ---------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------
13 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 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 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 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 EX-11 2 EXHIBIT 11 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 EX-27 3 EXHIBIT 27
9 0000793169 EASTERN BANCORP, INC. 3-MOS SEP-30-1997 DEC-31-1996 30,626 6,598 0 0 9,997 38,913 38,867 493,946 2,906 866,018 627,217 138,656 5,002 30,365 0 0 41 64,737 866,018 10,853 5,028 0 15,881 5,860 8,153 7,728 145 14 7,956 2,233 1,421 0 0 1,421 0.37 0.36 7.95 6,577 0 6,885 1,017 2,858 146 49 2,906 2,906 0 0
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