UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[xx] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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 organization) Identification No.)
537 Central Avenue
Dover, New Hampshire 03820
(Address of principal executive offices) (Zip) Code
Registrant's telephone number, including area code: (603) 749-2150.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date is:
Class: Common Stock, par value $.01 per share
Outstanding at May 7, 1997: 3,709,876 shares
INDEX
PART I. FINANCIAL INFORMATION PAGE
- ------ --------------------- ------
Item 1. Financial Statements
Consolidated Statements of Financial Condition
at March 31, 1997 and September 30, 1996 3
Consolidated Statements of Operations for the Three and Six
Months Ended March 31, 1997 and March 31, 1996 4
Consolidated Statements of Cash Flows for the Six
Months Ended March 31, 1997 and March 31, 1996 5-6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-17
Part II. Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
2
Eastern Bancorp, Inc.
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
MARCH 31, SEPTEMBER 30,
ASSETS 1997 1996
- ------------------------------------------------------------------- ---------- -------------
Cash and due from banks............................................ $ 32,567 $ 27,766
Short-term investments............................................. 12,687 12,043
Investment and mortgage backed securities available-for-sale
(amortized cost of $10,000 at March 31, 1997 and $1 at September
30, 1996)........................................................ 9,901 9
Investment securities held-to-maturity (market value of $36,152 at
March 31, 1997 and $47,946 at September 30, 1996)................ 37,395 48,793
Mortgage backed securities held-to-maturity (market value of
$224,665 at March 31, 1997 and $236,869 at September 30, 1996)... 232,019 244,856
FHLB stock......................................................... 9,283 9,283
Loans (net of allowance for loan losses of $2,828 at March 31, 1997
and $2,858 at September 30, 1996)................................ 484,104 478,306
Loans held for sale................................................ 5,831 10,480
Accrued interest receivable:
Investment and mortgage backed securities.......................... 2,322 2,230
Loans.............................................................. 2,793 2,843
Other real estate owned, net....................................... 5,180 3,611
Investment in real estate.......................................... 336 437
Premises and equipment, net........................................ 18,397 16,693
Excess of cost over net assets acquired............................ 3,338 3,528
Deferred income tax asset, net..................................... 1,383 1,346
Mortgage servicing rights.......................................... 3,025 3,061
Prepaid expenses and other assets.................................. 5,257 3,393
---------- -------------
Total assets....................................................... $ 865,818 $ 868,678
---------- -------------
---------- -------------
LIABILITIES
Deposit accounts (including non-interest bearing deposits of
$58,819 at March 31, 1997 and $55,986 at September 30, 1996)..... $ 639,642 $ 641,286
Advances from FHLB................................................. 153,263 153,636
Capital lease obligation........................................... 209 273
Accrued expenses and other liabilities............................. 6,976 9,903
---------- -------------
Total liabilities.................................................. 800,090 805,098
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 March 31, 1997 and 4,095,549 at
September 30, 1996............................................... 41 41
Additional paid-in capital......................................... 36,610 36,384
Retained income (substantially restricted)......................... 31,934 30,138
Unrealized gain (loss) on securities available-for-sale, net....... (66) 6
Treasury stock (at cost) 414,715 shares at March 31, 1997 and
444,015 shares at September 30, 1996............................. (2,791) (2,989)
---------- -------------
Total stockholders' equity......................................... 65,728 63,580
---------- -------------
Total liabilities and stockholders' equity......................... $ 865,818 $ 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 SIX MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ----------------------
INTEREST INCOME: 1997 1996 1997 1996
- -------------------------------------------------------------- ---------- ---------- ---------- ----------
Residential mortgage loans.................................... $ 5,457 $ 4,527 $ 10,795 $ 8,959
Other loans................................................... 5,543 5,695 11,058 11,504
Investment and mortgage backed securities available-
for-sale.................................................... 176 191 293 563
Investment securities held-to-maturity........................ 899 1,120 1,888 1,953
Mortgage backed securities held-to-maturity................... 3,834 3,644 7,756 7,674
---------- ---------- ---------- ----------
Total interest income........................................ 15,909 15,177 31,790 30,653
INTEREST EXPENSE:
Deposit accounts.............................................. 5,744 5,985 11,604 12,227
Borrowings.................................................... 2,281 2,017 4,574 4,349
---------- ---------- ---------- ----------
Total interest expense....................................... 8,025 8,002 16,178 16,576
---------- ---------- ---------- ----------
Net interest income........................................... 7,884 7,175 15,612 14,077
Provision for loan losses..................................... 50 300 195 735
---------- ---------- ---------- ----------
Net interest income after provision for loan losses.......... 7,834 6,875 15,417 13,342
NON-INTEREST INCOME:
Gain on sale of investment and mortgage backed securities,
net......................................................... -- 229 14 750
Gain on sale of loans and mortgage servicing rights, net...... 394 512 822 1,059
Service fees on loans sold.................................... 232 224 487 519
Customer service fees......................................... 1,418 1,313 3,013 2,693
Miscellaneous................................................. 409 256 723 582
---------- ---------- ---------- ----------
Total non-interest income.................................... 2,453 2,534 5,059 5,603
---------- ---------- ---------- ----------
Income before non-interest expense and federal and state
taxes..................................................... 10,287 9,409 20,476 18,945
NON-INTEREST EXPENSE:
Compensation and benefits..................................... 3,376 2,890 6,598 6,047
Office occupancy, net......................................... 1,706 1,550 3,277 2,848
Marketing..................................................... 354 309 711 829
Federal deposit insurance premium............................. 103 349 389 722
Other real estate owned operations............................ 553 168 1,200 216
Amortization of intangibles................................... 95 95 190 190
Professional fees............................................. 107 267 177 381
Merger related................................................ 138 -- 529 401
Supplies...................................................... 227 335 445 559
Telephone..................................................... 278 203 527 407
Postage....................................................... 281 259 498 445
Other......................................................... 676 607 1,309 1,180
---------- ---------- ---------- ----------
Total non-interest expense................................... 7,894 7,032 15,850 14,225
---------- ---------- ---------- ----------
Income before federal and state taxes........................ 2,393 2,377 4,626 4,720
Federal and state tax expense................................ 910 871 1,722 1,727
---------- ---------- ---------- ----------
Net income.................................................. $ 1,483 $ 1,506 $ 2,904 $ 2,993
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per common and common equivalent share
outstanding................................................. $ 0.38 $ 0.40 $ 0.74 $ 0.79
Cash dividends paid per common share.......................... 0.16 0.12 0.30 0.23
Weighted average number of common and common equivalent shares
outstanding................................................. 3,918,840 3,785,896 3,904,791 3,785,289
See accompanying notes to consolidated financial statements.
4
Eastern Bancorp, Inc.
Consolidated Statements of Cash Flows
SIX MONTHS ENDED
MARCH 31,
--------------------
(DOLLARS IN THOUSANDS) 1997 1996
- ------------------------------------------------------------------------- --------- ---------
Cash flows from operating activities:
Net income.............................................................. $ 2,904 $ 2,993
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Depreciation, amortization and accretion............................... 2,136 1,975
Provision for loan losses.............................................. 195 735
(Gain) on sale of securities........................................... (14) (750)
(Gain) on sale of loans and mortgage servicing rights.................. (822) (1,059)
Loss (gain) on sale of real estate owned............................... 8 (626)
Provision for loss on other real estate owned.......................... 327 ----
Loans originated for sale.............................................. (43,924) (68,723)
Proceeds from sales of loans originated for sale....................... 49,395 50,085
(Increase) decrease in accrued interest receivable..................... (42) 445
(Increase) decrease in prepaid expenses and other assets............... (1,660) 127
Increase (decrease) in accrued expenses and other liabilities.......... (4,169) (1,690)
Increase (decrease) in accrued federal taxes........................... 1,242 ----
--------- ---------
Total adjustments...................................................... 2,672 (19,481)
--------- ---------
Net cash provided (used) by operating activities....................... 5,576 (16,488)
--------- ---------
Cash flows from investing activities:
Net decrease in short-term investments.................................. (644) (5,117)
Portfolio loans:
Purchases.............................................................. (5,556) (31,458)
Originations net of repayments......................................... (3,530) 10,398
Proceeds from sales.................................................... ---- 6,277
Recoveries on loans previously charged off............................. 82 133
Investment and mortgage backed securities available-for-sale:
Purchases.............................................................. (10,000) (50)
Proceeds from sales.................................................... ---- 58,382
Proceeds from maturities and returns of principal...................... ---- 1,980
Investments held-to-maturity:
Purchases.............................................................. (3,249) (57,023)
Proceeds from sales.................................................... 7,014 ----
Proceeds from maturities and returns of principal...................... 7,699 38,351
Mortgage backed securities held-to-maturity:
Purchases.............................................................. ---- ----
Proceeds from sales.................................................... ---- ----
Proceeds from maturities and returns of principal...................... 12,772 16,321
Purchases of premises and equipment, net of sales proceeds.............. (3,085) (2,281)
Proceeds from sales of real estate, net................................. 440 2,696
Purchase of mortgage servicing rights................................... (54) (63)
(Increase) decrease in investments in real estate....................... 101 (10)
--------- ---------
Net cash provided (used) by investing activities...................... $ 1,990 $ 38,536
--------- ---------
(continued on next page)
5
Eastern Bancorp, Inc.
Consolidated Statements of Cash Flows
(continued)
SIX MONTHS ENDED
MARCH 31,
(DOLLARS IN THOUSANDS) 1997 1996
- ------------------------------------------------------------------------- --------- ---------
Cash flows from financing activities:
Net increase (decrease) in deposits..................................... $ (1,644) $ 10,524
Advances from FHLB:
Proceeds............................................................... 74,209 40,523
Repayments............................................................. (74,582) (53,005)
Securities sold under agreement to repurchase:
Proceeds............................................................... ---- 11,855
Repayments............................................................. ---- (31,855)
Reduction in capital lease obligation................................... (64) (60)
Net proceeds from exercise of stock options and/or sale of treasury
stock.................................................................. 423 166
Dividends paid.......................................................... (1,107) (840)
--------- ---------
Net cash provided (used) by financing activities...................... (2,765) (22,692)
--------- ---------
Net increase (decrease) in cash....................................... 4,801 (644)
Cash and cash equivalents at beginning of period...................... 27,766 19,862
--------- ---------
Cash and cash equivalents at end of period............................ $ 32,567 $ 19,218
--------- ---------
--------- ---------
Cash paid for:
Interest................................................................ $ 16,300 $ 16,880
Federal and state taxes................................................. 1,398 1,895
Supplemental disclosure of non-cash activities:
Change in unrealized gain (loss) on investment and mortgage backed
securities available-for-sale, net..................................... (72) 203
Loans charged off........................................................ 306 971
Loans securitized and sold............................................... 572 11,479
Loans foreclosed......................................................... 2,344 619
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
audited 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 March 31, 1997, and for the three
months and six months ended March 31, 1997 and 1996 is unaudited, but in the
opinion of management reflects all adjustments (none of which are other than
normal recurring accruals) necessary for a fair presentation of such
information. Interim results are not necessarily indicative of the results to be
expected for the entire year. Certain information for the three and six month
periods ended March 31, 1996 and for September 30, 1996, has been reclassified
to conform with the 1997 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"). 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 an Agreement and Plan of
Reorganization (the "Merger Agreement"), among the Company, the Bank and Vermont
Financial Services Corporation ("VFSC") pursuant to which the Company will merge
with and into 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 Company'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
Merger Agreement. 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,
8
(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 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, future changes in the general direction of interest rates
and the overall economy could negatively impact net interest margin.
The Company's operating results are negatively affected by its 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. There can be no
assurance that the Company's provision for loan loss reserves will prove
adequate.
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, commercial and consumer loans and
investment and mortgage backed securities. The Bank believes it has adequate
sources of liquidity to fund its current activities.
OTS regulations require the Bank to maintain liquid assets at 5% or more of
its net withdrawable deposits plus short term borrowings. The Bank's liquidity
ratios are in compliance with those regulations for the periods reported.
The Company's primary sources of liquidity consist of dividends received
from its subsidiaries, sales of investment securities available-for-sale,
maturities of investment securities, and borrowed funds. The Company uses its
liquidity to pay cash dividends to shareholders, for general and administrative
expenses and to pay federal and state taxes. The Company also uses its liquidity
to fund cash needs of VSC. At March 31, 1997, the holding company had $2.8
million in cash and investment securities. The Company did not have any debt
outstanding at March 31, 1997, 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 March 31, 1997
totaled $269.4 million with a market value of $260.8 million compared to $293.6
million with a market value of $284.8 million at September 30, 1996. This
decrease was due to maturities and returns of principle. Investment and mortgage
backed securities available-for-sale as of March 31, 1997 totaled $9.9 million
with an amortized cost of $10.0 million compared to $9,000 with an amortized
cost of $1,000 at September 30, 1996. The Bank purchased one security during the
first six months of fiscal 1997 and classified it as available-for-sale to gain
liquidity flexibility. 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 $1.1 million from $488.8 million at
September 30, 1996, to $489.9 million at March 31, 1997.
The following table compares significant loan activity for the periods
indicated.
SELECTED LOAN ACTIVITY
SIX MONTHS ENDED MARCH 31,
(DOLLARS IN THOUSANDS) 1997 1996
- ----------------------------------------------------------------------- ---------- ---------
Originations:
Residential Mortgage.................................................. $ 59,945 $ 75,400
Consumer.............................................................. 21,360 12,408
Commercial............................................................ 33,894 5,822
---------- ---------
Total Originations................................................... $ 115,199 $ 93,630
---------- ---------
---------- ---------
Purchases.............................................................. $ 5,556 $ 31,458
Proceeds from sales.................................................... 48,823 50,085
Loans securitized to mortgage backed securities........................ 572 11,479
The Bank originates fixed and adjustable rate mortgage loans for sale. At
March 31, 1997, the Bank had $5.8 million in mortgage loans held for sale
which required no valuation reserve to adjust their carrying value to the lower
of cost or market. At March 31, 1997, the Bank had $10.5 million in commitments
to sell mortgage loans. During the six months ended March 31, 1997, the Bank
received proceeds of $48.8 million from the sale of loans and $572,000 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 $115.2 million in loans, of which $59.9 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.
On April 3, 1997, after the end of the period reported herein, the Bank sold
substantially all of its mobile home portfolio, $35.4 million, for a net loss of
approximately $141,600.
At March 31, 1997, the Bank had commitments to originate loans of $91.0
million which included $15.4 million in residential mortgage loans, $14.3
million in commercial loans (primarily unadvanced funds on equity lines of
credit) and $61.3 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.
10
NONPERFORMING ASSETS
MARCH 31, 1997 DECEMBER 31, 1996 SEPTEMBER 30, 1996
- ----------------------------------------------------------------------------------------------------------------------------------
% OF % OF % OF
(DOLLARS IN THOUSANDS) AMOUNT ASSETS AMOUNT ASSETS AMOUNT ASSETS
- ---------------------------------------------------------------- --------- --------- --------- --------- --------- ---------
Nonaccruing loans:
Commercial..................................................... $ 857 0.10% $ 1,682 0.20% $ 3,693 0.43%
Consumer....................................................... 2,316 0.27 2,703 0.31 2,473 0.28
Residential mortgage........................................... 2,019 0.23 2,192 0.25 1,779 0.20
--------- --------- --------- --------- --------- ---------
Total nonperforming loans....................................... 5,192 0.60 6,577 0.76 7,945 0.91
Real estate owned, net.......................................... 5,180 0.60 4,951 0.57 3,611 0.42
Other repossessed assets........................................ 593 0.07 470 0.05 448 0.05
--------- --------- --------- --------- --------- ---------
Total nonperforming assets...................................... $ 10,965 1.27% $ 11,998 1.38% $ 12,004 1.38%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Restructured troubled debt:
Performing..................................................... $ 5,484 0.63% $ 5,947 0.69% $ 4,154 0.48%
Nonperforming (included above)................................. 919 0.11 938 0.11 952 0.11
--------- --------- --------- --------- --------- ---------
Total.......................................................... $ 6,403 0.74% $ 6,885 0.80% $ 5,106 0.59%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Allowance for possible loan losses.............................. $ 2,828 0.33% $ 2,906 0.34% $ 2,858 0.33%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Allowance for possible loan losses to:
Nonperforming loans............................................. 54.47% 44.18% 35.97%
Total loans..................................................... 0.57 0.58 0.58
- -----------------------------------------------------------------------------------------------------------------------------------
The Company's total nonperforming assets decreased $1.0 million to $11.0
million at March 31, 1997 compared to $12.0 million at both December 31, 1996
and September 30, 1996 due to a decrease in all of the nonperforming loan
categories, somewhat offset by an increase in OREO and ORA. Nonaccruing loans
decreased approximately $1.4 million from December 31, 1996 and decreased $2.8
million from September 30, 1996. During the first quarter of fiscal 1997, 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 $2.8 million at March 31, 1997.
Deposits:
Total deposits decreased $1.6 million during the six months ended March 31,
1997. This decrease in deposits resulted from decreases in NOW accounts,
passbook accounts and money market accounts slightly offset by increases in
demand deposit accounts and time deposits .
Borrowings:
Total borrowed funds decreased $437,000 during the first six months of
fiscal 1997.
Stockholders' Equity:
Stockholders' equity increased $2.1 million during the six month period
ended March 31, 1997, to $65.7 million, or $17.86 per share. The Company
recorded earnings of $2.9 million and paid cash dividends to shareholders of
$1.1 million during the first six months of fiscal 1997. During the six months
ended March 31, 1997, the Company received $423,000 for the use of Treasury
shares to fund the exercise of employee and director stock options. The
Company's after tax unrealized loss on investment and mortgage backed securities
was $66,000 compared to a $6,000 unrealized gain at September 30, 1996 due to a
decrease in the market value of those securities.
11
The following table reflects regulatory capital for VFB as calculated at
March 31, 1997.
REGULATORY (DOLLARS IN THOUSANDS)
CAPITAL ACTUAL
- -------------- ----------------------
Core................................................... $ 59,941 6.97%
Tangible............................................... 59,941 6.97
Risk-based............................................. 62,650 12.76
At March 31, 1997, VFB had risk-based capital of $62.7 million, or 12.8% of
risk weighted assets on a fully phased-in basis. The Bank's capital ratios
exceed current regulatory requirements.
On April 22, 1997, the Board of Directors of the Company declared a $0.16
quarterly cash dividend per share, payable on May 21, 1997 to stockholders of
record on May 7, 1997. Payment of future cash dividends is subject to, among
other things, Company earnings and tax and regulatory considerations.
RESULTS OF OPERATIONS:
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Net Income:
Net income for the three months ended March 31, 1997 was $1.5 million or
$0.38 per share, compared to earnings of $1.5 million, or $0.40 per share, for
the three months ended March 31, 1996. Net interest income increased $709,000
from the same period last year due primarily to increased mortgage loan income.
The provision for loan losses for the fiscal 1997 quarter was $50,000 compared
to $300,000 for the same period last year. Both quarters provisions were
calculated based upon the results of the Bank's loan loss analyses. Non-interest
income decreased $81,000 from the prior year which included a $229,000 gain on
sale of investment and mortgage backed securities. Non-interest expense
increased $862,000 from the prior year due primarily to increased compensation
and benefits, office occupancy, OREO expense and merger related expenses.
Net Interest Income:
Net interest income was $7.9 million for the three months ended March 31,
1997 compared to $7.2 million for the similar period ended March 31, 1996.
Total interest income earned was $15.9 million during the fiscal 1997
quarter, an increase of $732,000 over the comparable fiscal 1996 quarter. This
resulted from a $778,000 increase in interest income on loans due to higher
average balances, accounting for approximately $970,000, offset by a $192,000
decrease due to lower yields. Offsetting this increase in loan income, interest
income on investments and mortgage backed securities decreased approximately
$46,000. Of this decrease, $150,000 was a result of decreased average balances
offset by a $104,000 increase resulting from higher yields.
12
ANALYSIS OF AVERAGE RATES AND BALANCES
QUARTER ENDED MARCH 31,
----------------------------------------------------------------------
1997 1996
INTEREST RATE INTEREST RATE
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE PAID BALANCE EXPENSE PAID
- ---------------------------------------------------------- ---------- --------- ----------- ---------- --------- -----------
Assets
Loans..................................................... $ 491,348 $ 11,000 8.95% $ 448,753 $ 10,222 9.11%
Investment and mortgage backed securities................. 300,724 4,909 6.53 309,910 4,955 6.40
---------- --------- --- ---------- --------- ---
Total interest-earning assets............................ 792,072 15,909 8.03 758,663 15,177 8.00
Other real estate owned................................... 5,158 4,360
Non-interest-earning assets............................... 63,860 56,838
---------- ----------
Total assets............................................. $ 861,090 $ 819,861
---------- ----------
---------- ----------
Liabilities and Stockholders' Equity
Savings................................................... $ 107,498 690 2.57 $ 124,381 753 2.42
Interest-bearing checking................................. 139,270 794 2.28 131,640 861 2.62
Time deposits............................................. 326,988 4,260 5.21 314,142 4,371 5.57
Borrowings................................................ 162,674 2,281 5.61 132,868 2,017 6.07
---------- --------- ---------- ---------
Total interest-bearing liabilities....................... 736,430 8,025 4.36 703,031 8,002 4.55
---------- --------- --- ----------
Non-interest-bearing deposits............................. 53,646 48,502
Other non-interest-bearing liabilities.................... 5,508 5,332
---------- ----------
Total liabilities........................................ 795,584 756,865
Stockholders' equity...................................... 65,506 62,996
---------- ----------
Total liabilities and stockholders' equity............... $ 861,090 $ 819,861
---------- ----------
---------- ----------
Net interest income....................................... $ 7,884 $ 7,175
--------- ---------
--------- ---------
Net interest spread....................................... 3.67 3.45
Net interest margin....................................... 3.98 3.78
Total interest expense incurred was $8.0 million for the fiscal 1997
quarter, a $23,000 increase from the fiscal 1996 quarter. This resulted from a
$264,000 increase in borrowing expense due to higher average borrowings,
accounting for an increase of approximately $452,000, offset by a $188,000
decrease due to lower average rates paid. Offsetting this increase, deposit
expense decreased by $241,000 due primarily to a decrease in interest rates
paid.
Provision for Loan Losses:
During fiscal 1997's second quarter, the Company provided $50,000 for
loan loss reserves compared to $300,000 during the corresponding 1996 fiscal
quarter. The Bank uses a systematic migration analysis in determining loan
loss provision. The results of this analysis for fiscal 1997 did not require
substantial additions to the reserve. The Company's net charge-offs were
$128,000 during fiscal 1997's second quarter relating primarily to consumer
loans. Nonperforming loans at March 31, 1997 totaled $5.2 million compared to
$6.6 million at December 31, 1996 and $7.9 million at September 30, 1996. The
Company's total nonperforming assets at March 31, 1997 were $11.0 million
compared to $12.0 million at both December 31, 1996 and September 30, 1996.
The $1.0 million decrease from December 31, 1996 was the result of a decrease
in each of the nonperforming loan categories. Real estate owned increased
approximately $229,000 during the fiscal 1997 second quarter. At March 31,
1997, the Company believes its allowance for loan losses is adequate to cover
potential loan losses in its loan portfolio.
13
ALLOWANCE FOR LOAN LOSSES
-------------------------
THREE MONTHS ENDED
MARCH 31,
-------------------------
(DOLLARS IN THOUSANDS) 1997 1996
- --------------------------------------------------- --------- ---------
Beginning of Period................................ $ 2,906 $ 4,009
Provision.......................................... 50 300
Net Charge-offs.................................... (128) (790)
--------- ---------
End of Period...................................... $ 2,828 $ 3,519
--------- ---------
--------- ---------
Non-interest Income:
Non-interest income decreased $81,000 during the fiscal 1997 quarter
compared to the fiscal 1996 quarter which included a gain on sale of investments
of approximately $229,000. The fiscal 1997 quarter included an increase of
$105,000 in customer service fees due primarily to overdraft fees, a $153,000
increase in miscellaneous other income and a decrease of $118,000 in gain on
sale of loans.
Non-interest Expense:
Total non-interest expense was $7.9 million for the fiscal 1997 quarter, an
increase of $862,000 from the fiscal 1996 quarter.
Compensation and benefits increased $486,000 during the fiscal 1997 March
quarter when compared to the same quarter last year. Regular payroll expense
increased approximately $361,000 from the prior year second quarter due to
annual merit increases, additional staff to open seven non-traditional
(supermarket) branches and bonuses. Employee medical insurance increased
approximately $128,000 due to an increase in claims as the Company is self
insured for medical coverage.
Other real estate operations expense increased $385,000 from fiscal 1996's
March quarter. Fiscal 1997's March quarter included, among other things, a
decrease in gain on sale of REO property of $384,000 and an increase in
provision for REO and ORA loss of $99,000 partially offset by a $25,000 increase
in REO income.
Office occupancy increased $156,000 from the March 1996 quarter due to
increased depreciation expense on technology initiatives and rent expense due to
opening seven non-traditional (supermarket) branches, somewhat offset by a
decrease in office building expense.
The Company incurred approximately $138,000 in expense during the fiscal
1997 second quarter relating to the Merger.
These increases were somewhat offset by the decrease of $246,000 in FDIC
insurance premiums due to lower assessment rates.
Federal and State Taxes:
Federal and state tax expense increased to $910,000 based on income before
taxes of $2.4 million during the fiscal 1997 quarter. During the fiscal 1996
quarter, tax expense was $871,000 based on income before taxes of $2.4 million.
At March 31, 1997, 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.
COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 1997 AND 1996
Net Income:
Net income for the six months ended March 31, 1997 was $2.9 million, or
$0.74 per share, compared to net income of $3.0 million, or $0.79 per share,
for the six months ended March 31, 1996. Fiscal 1997 six month results
included, among other things, a $1.8 million increase in residential mortgage
loan income, a $623,000
14
decrease in deposit account expense, a $540,000 decrease in loan loss
provision, a $551,000 increase in compensation and benefits, a $984,000 increase
in OREO expense and $529,000 in expenses related to the proposed merger with
VFSC. Fiscal 1996 six month results included a $750,000 gain on sale of
investments and a $401,000 charge due to additional expenses related to the
merger of the Company's New Hampshire bank subsidiary into VFB.
Net Interest Income:
Net interest income for the six months ended March 31, 1997 was $15.6
million, an increase of $1.5 million from the six months ended March 31, 1996.
Total interest income was $31.8 million for the fiscal 1997 period compared
to $30.7 million for the fiscal 1996 period, an increase of $1.1 million. The
change was due to a $1.4 million increase in interest on loans, consisting of a
$1.8 million increase due to higher average balances somewhat offset by a
$386,000 decrease due to lower average rates. Offsetting this increase in loan
interest was a decrease in investment and mortgage backed securities interest
income of approximately $253,000 due to lower average balances, accounting for a
$408,000 decrease, somewhat offset by a $155,000 increase due to higher average
rates.
Total interest expense was $16.2 million for the fiscal 1997 period compared
to $16.6 million for the fiscal 1996 period, a $398,000 decrease. This resulted
from a $623,000 decrease in deposit expense due primarily to lower average rates
somewhat offset by a $225,000 increase in borrowing expense due primarily to an
increase average borrowings.
ANALYSIS OF AVERAGE RATES AND BALANCES
SIX MONTHS ENDED MARCH 31,
----------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE INTEREST RATE
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE PAID BALANCE EXPENSE PAID
- ---------------------------------------------------------- ---------- --------- ----------- ---------- --------- -----------
Assets
Loans..................................................... $ 490,153 $ 21,853 8.92% $ 450,806 $ 20,463 9.08%
Investment and mortgage backed securities................. 305,241 9,937 6.51 317,799 10,190 6.41
---------- --------- ---------- ---------
Total interest-earning assets............................ 795,394 31,790 7.99 768,605 30,653 7.98
Other real estate owned................................... 4,842 4,694
Non-interest-earning assets............................... 62,401 55,025
---------- ----------
Total assets............................................. $ 862,637 $ 828,324
---------- ----------
---------- ----------
Liabilities and Stockholders' Equity
Savings................................................... $ 109,043 1,417 2.60 $ 124,178 1,544 2.49
Interest-bearing checking................................. 142,238 1,619 2.28 131,198 1,808 2.76
Time deposits............................................. 324,921 8,568 5.27 313,521 8,875 5.66
Borrowings................................................ 160,764 4,574 5.69 142,416 4,349 6.11
---------- --------- ---------- ---------
Total interest-bearing liabilities....................... 736,966 16,178 4.39 711,313 16,576 4.66
---------- --------- ---------- ---------
Non-interest-bearing deposits............................. 54,078 49,380
Other non-interest-bearing liabilities.................... 6,505 5,177
---------- ----------
Total liabilities........................................ 797,549 765,870
Stockholders' equity...................................... 65,088 62,454
---------- ----------
Total liabilities and stockholders' equity............... $ 862,637 $ 828,324
---------- ----------
---------- ----------
Net interest income....................................... $ 15,612 $ 14,077
--------- ---------
--------- ---------
Net interest spread....................................... 3.60 3.32
Net interest margin....................................... 3.93 3.66
15
Provision for Loan Losses:
The Company provided $195,000 in provisions for loan losses during the
fiscal 1997 period compared to $735,000 during the fiscal 1996 period. During
the fiscal 1997 period, the Company had net charge-offs of $225,000. The Bank
analyzes classified loans (including nonperforming loans) on a periodic basis
and provides 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 LOAN LOSSES
-------------------------
SIX MONTHS ENDED
MARCH 31,
-------------------------
(DOLLARS IN THOUSANDS) 1997 1996
- ----------------------------------------------------- --------- ---------
Beginning of Period.................................. $ 2,858 $ 3,622
Provision........................................... 195 735
Net Charge-offs..................................... (225) (838)
--------- ---------
End of Period........................................ $ 2,828 $ 3,519
--------- ---------
--------- ---------
Non-interest Income:
Non-interest income was $5.1 million for the six months ended March 31, 1997
compared to $5.6 million for the same fiscal 1996 period, which included a gain
on sale of investments of $750,000.
Customer service fees increased $320,000 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.
Gain on sale of loans and mortgage servicing rights decreased $237,000
during the first six months of fiscal 1997 when compared to the same period last
year due to a decrease in loan sales volume.
Non-interest Expense:
Total non-interest expense in the fiscal 1997 six month period increased
$1.6 million to $15.8 million compared to the fiscal 1996 six month period.
Other real estate operations expense increased $984,000 from the same six
month period last year. Fiscal 1997 six month results, when compared to fiscal
1996, reflect a decrease of $634,000 in gain on sale of REO property, and a
$408,000 increase in provisions for loss somewhat offset by a $47,000 increase
in REO income.
Compensation and benefits increased $551,000 during the fiscal 1997 six
month period when compared to the same period last year. This increase was due
primarily to an increase of $459,000 in regular payroll and an increase of
$173,000 in medical insurance, somewhat offset by decreases in various other
compensation and benefit accounts. Regular payroll increased due to annual merit
increases, additional staff to open seven non-traditional (supermarket)
branches, and bonuses. The Company is self-insured for medical expenses and has
experienced an increase in claims during fiscal 1997.
Office occupancy expense increased $429,000 during the six months ended
March 31, 1997 when compared to the same period last year. This increase is due
primarily to increased depreciation on technology initiatives and increased
equipment maintenance contract fees and rent expense due to the opening of seven
non-traditional (supermarket) branches.
The Company recorded $529,000 in expenses related to the proposed merger
with VFSC. This compares to $401,000 of expenses recorded during the same period
last year relating to the consolidation of the Company's two subsidiary banks.
FDIC insurance premiums decreased $333,000 during the six months ended March
31, 1997 when compared to the same period last year due to a reduction in
assessment rates.
16
Professional fees decreased $204,000 during Fiscal 1997's six month period
when compared to the same six month period last year. This decrease was due to a
decrease in accounting and consulting fees.
Federal and State Taxes:
Federal and state taxes for the six months ended March 31, 1997 were $1.7
million based on net income before taxes of $4.6 million. This is compared to
$1.7 million based on income before taxes of $4.7 million during the fiscal 1996
period.
17
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 27.1--Financial Data Schedule
(b.) No reports on Form 8-K were filed during the
quarter ended March 31, 1997.
18
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: MAY 14, 1997 /s/ JANINE K. PINEL
------------------------------------------
JANINE K. PINEL
CHIEF FINANCIAL OFFICER
19