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, 1995
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
537 Central Avenue
Dover, New Hampshire 03820
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(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 9, 1996: 2,400,816 shares
INDEX
Part I. Financial Information Page
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Item 1. Financial Statements
Consolidated Statements of Financial Condition
at December 31, 1995 and September 30, 1995 3
Consolidated Statements of Operations for the Three
Months Ended December 31, 1995 and December 31, 1994 4
Consolidated Statements of Cash Flows for the Three 5-6
Months Ended December 31, 1995 and December 31, 1994
Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-15
Part II. Other Information
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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,
1995 1995
------------ -------------
ASSETS
Cash and due from banks $ 53,061 $ 28,474
Short-term investments 926 2,487
Investment and mortgage backed securities available-for-sale
(amortized cost of $16,376 at December 31, 1995 and $4,443
at September 30, 1995) 16,743 4,177
Investment securities held-to-maturity (market value of
$25,552 at December 31, 1995 and $42,294 at September 30, 1995) 25,431 42,259
Mortgage backed securities held-to-maturity (market value of
$226,715 at December 31, 1995 and $264,666 at September 30, 1995) 229,164 270,133
FHLB stock 9,283 9,283
Loans (net of allowance for possible loan losses of $4,009
at December 31, 1995 and $3,622 at September 30, 1995) 440,044 443,041
Loans held for sale 6,259 8,212
Accrued interest receivable:
Investment and mortgage backed securities 2,046 2,731
Loans 2,836 2,761
Other real estate owned, net 4,696 8,137
Investment in real estate 457 447
Premises and equipment,net 14,918 14,232
Excess of cost over net assets acquired 3,814 3,908
Deferred income tax asset, net 562 776
Prepaid expenses and other assets 21,535 5,027
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Total assets $831,775 $846,085
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---------- -----------
LIABILITIES
Deposit accounts (including non-interest bearing deposits of
$51,109 at December 31, 1995 and $48,932 at September 30, 1995) $619,048 $616,350
Advances from FHLB 132,889 136,632
Securities sold under agreement to repurchase 11,855 24,855
Capital lease obligation 366 395
Accrued federal income taxes 427 17
Accrued expenses and other liabilities 4,700 6,853
---------- -----------
Total liabilities 769,285 785,102
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value: 1,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, $0.01 par value: 5,000,000 shares authorized;
2,730,455 shares issued at December 31, 1995 and 2,730,455
at September 30, 1995 27 27
Additional paid-in capital 36,193 36,196
Retained income (substantially restricted) 29,708 28,629
Unrealized gain (loss) on securities available-for-sale, net 243 (175)
Treasury stock (at cost) 347,267 shares at December 31, 1995 and
348,217 shares at September 30, 1995 (3,681) (3,694)
---------- -----------
Total stockholders' equity 62,490 60,983
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Total liabilities and stockholders' equity $831,775 $846,085
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---------- -----------
See accompanying notes to consolidated financial statements.
Eastern Bancorp, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
Three Months Ended
December 31,
1995 1994
-------- --------
INTEREST INCOME:
Residential mortgage loans $ 4,432 $ 3,684
Other loans 5,809 5,342
Investment and mortgage backed securities
available-for-sale 372 54
Investment securities held-to-maturity 833 675
Mortgage backed securities held-to-maturity 4,030 4,567
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Total interest income 15,476 14,322
INTEREST EXPENSE:
Deposit accounts 6,242 4,800
Borrowings 2,332 2,514
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Total interest expense 8,574 7,314
------- -------
Net interest income 6,902 7,008
Provision for possible loan losses 435 260
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Net interest income after provision for
possible loan losses 6,467 6,748
NON-INTEREST INCOME:
Gain on sale of investment and mortgage backed
securities, net 521 --
Gain on sale of loans and mortgage servicing rights, net 547 292
Service fees on loans sold 295 326
Customer service fees 1,380 1,299
Miscellaneous 326 339
------- -------
Total non-interest income 3,069 2,256
------- -------
Income before non-interest expense and federal
and state taxes 9,536 9,004
NON-INTEREST EXPENSE:
Compensation and benefits 3,157 2,825
Office occupancy, net 1,298 1,162
Marketing 520 319
Federal deposit insurance premium 373 374
Other real estate owned operations 48 828
Amortization of intangibles 95 95
Professional fees 114 407
Merger related 401 --
Other 1,282 1,005
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Total non-interest expense 7,288 7,015
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Income before federal and state taxes 2,248 1,989
Federal and state tax expense 761 789
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Net income $1,487 $1,200
------- -------
------- -------
Earnings per common and common equivalent share outstanding $ 0.59 $ 0.49
Cash dividends paid per common share 0.17 0.04
Weighted average number of common and common
equivalent shares outstanding 2,523,154 2,457,675
See accompanying notes to consolidated financial statements.
Eastern Bancorp, Inc.
Consolidated Statements of Cash Flows
Three Months Ended
December 31,
(Dollars in thousands) 1995 1994
-------- --------
Cash flows from operating activities:
Net income $ 1,487 $ 1,200
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation, amortization and accretion 786 706
Provision for possible loan losses 435 260
(Gain) on sale of securities (521) --
(Gain) on sale of loans (547) (292)
(Gain) on sale of real estate owned (140) (312)
Provision for loss on other real estate owned -- 526
Loans originated for sale (32,469) (14,429)
Proceeds from sales of loans originated for sale 31,942 13,518
Decrease in accrued interest receivable 610 109
(Increase) decrease in prepaid expenses and other assets (16,337) 222
(Increase) decrease in deferred income tax asset (1) 1
Increase (decrease) in accrued expenses and other liabilities (2,153) 10
Increase in accrued federal taxes 410 107
-------- --------
Total adjustments (17,985) 426
-------- --------
Net cash provided (used) by operating activities (16,498) 1,626
-------- --------
Cash flows from investing activities:
Net decrease in short-term investments 1,561 1,109
Net (increase) in FHLB stock -- --
Portfolio loans:
Purchases (3,740) (3,001)
Originations net of repayments 1,892 (6,786)
Proceeds from sales 6,277 --
Recoveries on loans previously charged off 65 (65)
Investment and mortgage backed securities available-for-sale:
Purchases (50) (53)
Proceeds from sales 34,622 --
Proceeds from maturities and returns of principal 613 --
Investments held-to-maturity:
Purchases (32,253) (834)
Proceeds from sales -- --
Proceeds from maturities and returns of principal 37,151 3,750
Mortgage backed securities held-to-maturity:
Purchases -- (5,962)
Proceeds from sales -- --
Proceeds from maturities and returns of principal 9,110 6,747
Purchases of premises and equipment, net of sales proceeds (977) (450)
Proceeds from sales of real estate, net 1,327 1,728
Purchase of mortgage servicing rights (31) (867)
(Increase) decrease in investments in real estate (10) 215
-------- --------
Net cash provided (used) by investing activities $ 55,557 $ (4,469)
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(continued on next page)
Eastern Bancorp, Inc.
Consolidated Statements of Cash Flows
(continued)
Three Months Ended
(Dollars in thousands) December 31,
1995 1994
-------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits $ 2,698 $ (4,973)
Advances from FHLB:
Proceeds 32,260 51,787
Repayments and extinguishments (36,003) (62,797)
Securities sold under agreement to repurchase:
Proceeds 11,855 21,000
Repayments (24,855) --
Reduction in capital lease obligation (29) (28)
Net proceeds from exercise of stock options and/or sale
of treasury stock 10 308
Dividends paid (408) (96)
-------- --------
Net cash provided (used) by financing activities (14,472) 5,201
-------- --------
Net increase in cash 24,587 2,358
Cash and cash equivalents at beginning of period 28,474 24,018
-------- --------
Cash and cash equivalents at end of period $ 53,061 $ 26,376
-------- --------
-------- --------
Cash paid for:
Interest $ 8,853 $ 7,198
Federal and state taxes 300 577
Supplemental disclosure of non-cash activities:
Increase in unrealized gain (loss) on investment and
mortgage backed securities available-for-sale, net 418 (33)
Loans charged off 113 152
Loans securitized and sold 2,937 --
Loans foreclosed 388 570
See accompanying notes to consolidated financial statements.
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 December 31, 1995, and for the
three months ended December 31, 1995 and 1994 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, 1994, has been reclassified to conform with the 1995 presentation.
The Company adopted SFAS No. 122, "Accounting for Mortgage Servicing
Rights, an Amendment of FASB Statement No. 65" effective October 1, 1994, and
has herein revised the previously reported quarterly operating results for the
period ending December 31, 1994 as follows: a net increase in non-interest
income of $143,000, an increase in net income of $91,000, and an increase in
earnings per share of $0.04.
(2) STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NO. 114 AND NO. 118
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," that was amended in October 1994 by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosure." The statements, which were adopted by the Company on October 1,
1995, require changes in both the disclosure and impairment measurement of
certain loans. In addition, criteria for classification of a loan as an in-
substance foreclosure were modified in such a way that such classification need
be made only when the lender is in possession of the collateral. At adoption,
the Company reclassified $2.6 million of in-substance foreclosures to loans.
Adoption of these statements had no material impact on the Company's financial
position or results of operations. In accordance with the provisions of SFAS
No. 114 and No. 118, prior year balances were not reclassified since taken as a
whole they were immaterial to the financial statements.
Interest income on loans is recognized on the accrual method. Nonaccrual
loans include impaired loans and are those loans on which the accrual of
interest is discontinued when collectibility of principal or interest is
uncertain or payments of principal or interest have become contractually past
due 90 days. Upon such discontinuance, all unpaid accrued interest is reversed
against the current period's earnings.
Impaired loans are commercial, commercial real estate, and individually
significant mortgage and consumer loans for which it is probable that the
Company will not be able to collect all amounts due according to the contractual
terms of the loan agreement. The definition of "impaired loans" is not the same
as the definition of "nonaccrual loans," although the two categories overlap.
Nonaccrual loans include impaired loans and are those on which the accrual of
interest is discontinued when collectibility of principal or interest is
uncertain or payments of principal or interest have become contractually past
due 90 days. The Company may choose to place a loan on nonaccrual status due to
payment delinquency or uncertain collectibility, while not classifying the loan
as impaired, if (i) it is probable that the Company will collect all amounts due
in accordance with the contractual terms of the loan or (ii) the loan is not a
commercial, commercial real estate or an individually significant mortgage or
consumer loan. Factors considered by management in determining impairment
include payment status and collateral value. The amount of impairment for these
types of impaired loans is determined by the difference between the present
value of the expected cash flows related to the loan, using the original
contractual interest rate, and its recorded value, or as a practical expedient
in the case of collateralized loans, the difference between the fair value of
the collateral and the recorded amount of the loans. When foreclosure is
probable, impairment is measured based on the fair value of the collateral.
Mortgage and consumer loans which are not individually significant are measured
for impairment collectively. Loans that experience insignificant payment delays
and
insignificant shortfalls in payment amounts generally are not classified as
impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Restructured, accruing loans entered into prior to the adoption of these
statements are not required to be reported as impaired unless such loans are not
performing according to the restructured terms at adoption of SFAS No, 114.
Loan restructurings entered into after adoption of SFAS No. 114 are reported as
impaired loans, and impairment is measured as described above using the loan's
pre-modification rate of interest.
At December 31, 1995, total impaired loans were $10.1 million that had
related allowances of $2.9 million. During the period ended December 31, 1995,
the average recorded investment in impaired loans was $10.1 million which
contributed $51,000 to interest income in the first quarter of fiscal 1996.
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.
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 December 31, 1995, the holding company
had $1.6 million in cash and investment securities. The Company did not have
any debt outstanding at December 31, 1995, 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 December 31,
1995 totaled $254.6 million with a market value of $252.3 million compared to
$312.4 million with a market value of $307.0 million at September 30, 1995.
This reflected a one-time reclassification of $43.7 million of held-to-maturity
portfolio securities to the available-for-sale portfolio, resulting from the
implementation of the FASB's special report on SFAS No. 115. Investment and
mortgage backed securities available-for-sale as of December 31, 1995 totaled
$16.7 million with an amortized cost of $16.4 million compared to $4.2 million
with an amortized cost of $4.4 million at September 30, 1995. The Company
believes cash flow from mortgage backed and investment securities is adequate to
meet liquidity requirements.
The Bank uses mortgage backed securities to supplement loan demand and as
an alternative use of excess liquid funds. They are also used for the purpose
of meeting the Bank's "Qualified Thrift Lender" requirements.
LOANS:
The Company's net loans increased $5.0 million from $451.3 million at
September 30, 1995, to $446.3 million at December 31, 1995.
The following table compares significant loan activity for the periods
indicated.
Selected Loan Activity
(Dollars in thousands) Three Months Ended December 31,
(Unaudited)
1995 1994
-------- --------
Originations:
Residential Mortgage $32,003 $22,618
Consumer 5,870 9,376
Commercial 3,056 7,161
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Total Originations 40,929 39,155
Purchases 3,740 3,001
Sales 31,395 13,226
Loans securitized to mortgage backed securities 2,937 --
The Bank originates fixed and adjustable rate mortgage loans for sale. At
December 31, 1995, the Bank had $6.3 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 December 31, 1995, the Bank had $7.4 million in
commitments to sell mortgage loans. During the three months ended December 31,
1995, the Bank sold $31.4 million and securitized and sold $2.9 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 $40.9
million in loans, of which $32.0 million were residential mortgages.
At December 31, 1995, the Bank had commitments to originate loans of $85.6
million which included $13.3 million in residential mortgage loans, $12.0
million in commercial loans (primarily unadvanced funds on equity lines of
credit) and $60.3 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
December 31, 1995 September 30, 1995 December 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------
% of % of % of
(Dollars in thousands) Amount Assets Amount Assets Amount Assets
- ------------------------------------------------------------------------------------------------------------------------------
Nonaccruing loans:
Commercial $ 7,761 0.93% $ 4,326 0.51% $ 2,485 0.30%
Consumer 3,129 0.38 1,782 0.21 1,384 0.17
Residential mortgage 2,988 0.36 2,229 0.26 1,553 0.19
- ------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 13,878 1.67 8,337 0.98 5,422 0.66
In-substance foreclosures -- -- 2,739 0.32 2,691 0.32
Real estate owned, net 4,696 0.56 5,398 0.64 4,982 0.60
Other repossessed assets 462 0.06 310 0.04 217 0.03
- ------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $19,036 2.29% $16,784 1.98% $13,312 1.61%
- ------------------------------------------------------------------------------------------------------------------------------
Restructured troubled debt:
Performing $ 4,907 0.59% $4,801 0.57% $ 5,246 0.64%
Nonperforming (included above) 618 0.07 985 0.11 1,302 0.15
- ------------------------------------------------------------------------------------------------------------------------------
Total $ 5,525 0.66% $5,786 0.68% $ 6,548 0.79%
- ------------------------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses $ 4,009 0.48% $3,622 0.43% $ 3,760 0.46%
- ------------------------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses to:
Nonperforming loans 28.89% 43.44% 69.35%
Total loans 0.89 0.79 0.87
- ------------------------------------------------------------------------------------------------------------------------------
The Company's total nonperforming assets increased $2.2 million to $19.0
million at December 31, 1995 compared to $16.8 million at September 30, 1995.
Nonaccruing loans increased approximately $5.5 million of which $2.6 million
was due to the reclassification of in-substance foreclosure ("ISF") loans to
nonaccruing as a result of SFAS No. 114's modification of the criteria for
classification as ISF. The remaining $2.8 million increase in nonaccruing loans
consisted of a $1.3 million increase in nonaccruing consumer loans due to
continued delinquencies in mobile home loans and equity credit lines, an
$800,000 increase in nonaccruing residential mortgage loans, and a $700,000
increase in nonaccruing commercial loans.
Other real estate owned totaled $4.7 million at December 31, 1995, compared
to $8.1 million at September 30, 1995, a decrease of $3.4 million. The decrease
was due to $42,000 in writedowns, $2.6 million of ISF loans transferred to
nonaccruing loans in accordance with SFAS No. 114, and $1.1 million in net
sales, offset by $388,000 in transfers to other real estate owned.
See "Results of Operations - Provision for Possible Loan Losses" for
information on the allowance for loan losses which totaled $4.0 million at
December 31, 1995.
DEPOSITS:
Total deposits have increased $2.7 million during the three months ended
December 31, 1995. The Bank attributes this increase in deposits to increases
in demand deposit accounts, money market accounts, NOW accounts, and time
deposits offset by a decrease in passbook accounts.
BORROWINGS:
Total borrowed funds decreased $16.8 million during the first three months
of fiscal 1996.
STOCKHOLDERS' EQUITY:
Stockholders' equity increased $1.5 million during the three month period
ended December 31, 1995, to $62.5 million, or $26.22 per share. The Company
recorded earnings of $1.5 million and paid cash dividends to shareholders of
$408,000 during the first three months of fiscal 1996. During the three months
ended December 31, 1995, the Company received $10,000 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 $243,000 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
December 31, 1995 for VFB.
(Dollars in thousands)
VFB ACTUAL
--- -----------------------
Core $56,071 6.78%
Tangible 56,071 6.78
Risk-based 59,987 12.67
At December 31, 1995, VFB had risk-based capital of $60.0 million, or 12.7%
of risk weighted assets on a fully phased-in basis. The Bank's capital ratios
exceed current regulatory requirements.
On January 26, 1996, the Board of Directors of the Company declared an
$0.18 quarterly cash dividend per share, payable on February 14, 1996 to
stockholders of record on January 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. This litigation is
currently pending before the U.S. Supreme Court, and no prediction can be made
at this time as to its outcome or the amount of damages, if any, which the
Company might ultimately recover.
RESULTS OF OPERATIONS:
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 1995 AND 1994
NET INCOME:
Net income for the three months ended December 31, 1995 was $1.5 million or
$0.59 per share, compared to earnings of $1.2 million, or $0.49 per share, for
the three months ended December 31, 1994. 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 $6.9 million for the three months ended
December 31, 1995, compared to $7.0 million for the similar period ended
December 31, 1994.
Total interest income earned was $15.5 million during the fiscal 1996
quarter, an increase of $1.2 million over the comparable fiscal 1995 quarter.
This increase was due primarily to increased interest income on loans due to
higher yields, accounting for approximately $554,000 of the increase in interest
income, and higher average balances, accounting for approximately $623,000 of
the increase in interest income.
Total interest expense incurred was $8.6 million for the fiscal 1996
quarter, a $1.3 million increase from the $7.3 million incurred during the
fiscal 1995 quarter. This increase was primarily due to higher interest rates
paid on deposits, accounting for approximately $853,000 of the increase in
interest expense, and to higher average deposit balances, accounting for
approximately $453,000 of the increase in interest expense.
ANALYSIS OF AVERAGE RATES AND BALANCES
Quarter ended December 31,
1995 1994
-------------------------------------------------------------------------------------
Interest Rate Interest Rate
Average income/ earned/ Average income/ earned/
(Dollars in thousands) balance expense paid balance expense paid
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Loans $452,858 $10,241 9.05% $423,628 $ 9,026 8.52%
Investment and mortgage backed securities 318,758 5,235 6.57 330,813 5,296 6.41
-------- ------- -------- -------
Total interest-earning assets 771,616 15,476 8.02 754,441 14,322 7.59
Other real estate owned 5,027 12,622
Non interest-earning assets 60,142 49,576
-------- --------
Total assets $836,785 $816,639
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings $254,731 1,739 2.73 $270,040 1,764 2.61
Time deposits 312,899 4,503 5.76 264,709 3,036 4.59
Borrowings 151,964 2,332 6.14 171,492 2,514 5.86
-------- ------- -------- -------
Total interest-bearing liabilities 719,594 8,574 4.76 706,241 7,314 4.14
-------- ------- -------- -------
Non-interest-bearing deposits 50,259 46,411
Other non-interest-bearing liabilities 5,022 6,105
-------- --------
Total liabilities 774,875 758,757
Stockholders' equity 61,910 57,882
-------- --------
Total liabilities and stockholders' equity $836,785 $816,639
-------- --------
-------- --------
Net interest income $ 6,902 $ 7,008
------- -------
------- -------
Net interest spread 3.26 3.45
Net interest margin 3.58 3.72
- ----------------------------------------------------------------------------------------------------------------------------------
PROVISION FOR POSSIBLE LOAN LOSSES:
During fiscal 1996's first quarter, the Company provided $435,000 for loan
loss reserves compared to $260,000 during the corresponding 1995 fiscal quarter.
The Company had net charge-offs during the fiscal 1995 first quarter of $48,000
which were primarily consumer loans. Nonperforming loans at December 31, 1995
totaled $13.9 million compared to $8.3 million at September 30, 1995 and $5.4
million at December 31, 1994. The Company's total nonperforming assets at
December 31, 1995 were $19.0 million compared to $16.8 million at September 30,
1995 and $13.3 million at December 31, 1994. At December 31, 1995, the Company
believes its allowance for loan losses is adequate to cover potential loan
losses in its loan portfolio. However, the Company notes that personal
bankruptcies are on the increase in Vermont and that this trend has already had,
and will continue to have, an adverse effect on all consumer loans and
especially mobile home loans. The Company will continue to examine future
economic trends and will make quarterly provisions for possible loan losses in
accordance with all known factors.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
----------------------------------
Three months ended
December 31,
(Dollars in thousands) 1995 1994
---------------------- ------ -------
Beginning of Period $3,622 $3,718
Provision 435 260
Net Charge-offs (48) (218)
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End of Period $4,009 $3,760
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NON-INTEREST INCOME:
Non-interest income increased $813,000 during the fiscal 1996 quarter
compared to the fiscal 1995 quarter. This increase reflects a $521,000 gain on
sale of investment and mortgage backed securities. 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 increased $255,000 when compared to
the fiscal 1995 first quarter. This increase is due primarily to an increase in
mortgage loan originations and sales.
Service fees on loans sold were $295,000 during the fiscal 1996 quarter
compared to $326,000 during the fiscal 1995 quarter, due to the fact that total
loans serviced for other investors at December 31, 1995 were $579.7 million
compared to $725.0 million at December 31, 1994. Loan service income reflects,
and is reduced by, the amortization of the capitalized mortgage servicing
rights. Capitalized servicing rights amortization was $148,000 during the 1996
quarter compared to $208,000 during the 1995 quarter.
Customer service fees increased slightly during the fiscal 1996 quarter
compared to the fiscal 1995 quarter. Customer service fees are primarily
generated from overdraft and service charges on demand deposit accounts, and
other customer transaction fees. The Company anticipates it will maintain this
level of customer service fee income in the foreseeable future.
NON-INTEREST EXPENSE:
Total non-interest expense was $7.3 million for the fiscal 1996 quarter, an
increase of $273,000 from the fiscal 1995 quarter's $7.0 million.
The Company recorded $401,000 in merger related expenses during the first
quarter of fiscal 1996. This expense is due to additional staff reductions
related to the consolidation of the two subsidiary banks.
Compensation and benefits increased $332,000 during the first quarter of
fiscal 1996 when compared to the same quarter of fiscal 1995. This increase is
due primarily to an increase in commissions on mortgage loan originations, a
bankwide bonus, and annual merit increases.
Other non-interest expense increased $277,000 for the quarter ending
December 31,1995 compared to the same quarter last year. This increase was due
to increases in expenses such as telephone and postage.
Marketing expense increased to $520,000 in the first quarter of fiscal 1996
compared to $319,000 in fiscal 1995's first quarter. This increase is due to
additional efforts in marketing new products primarily in the New Hampshire
market areas.
These increases were partially offset by a decrease in OREO expense of
$780,000 when compared to the prior year. The reduction in OREO property from
$11.3 million at December 31, 1994 to $4.7 million at December 31, 1995 resulted
in a substantial reduction in carrying costs. In addition, due to the reduction
of new properties in the OREO balance, no new valuation allowances were required
during the first quarter of fiscal 1996.
Professional fees decrease $293,000 when compared to the same period last
year. Fiscal 1994 first quarter results included additional expenses due to
management projects that required the use of consultants.
FEDERAL AND STATE TAXES:
Federal and state tax expense was $761,000 based on income before taxes of
$2.2 million during the fiscal 1996 quarter. During the fiscal 1995 quarter,
tax expense was $789,000 based on income before taxes of $2.0 million.
At December 31, 1995, the Company had a net deferred income tax asset of
approximately $562,000 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.
Part II. Other Information
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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 - Financial Data Schedule.
(b.) No reports on Form 8-K were filed during the quarter ended
December 31, 1995.
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: February 14, 1996 /s/ Janine K. Pinel
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JANINE K. PINEL
Chief Financial Officer