SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 8-K
CURRENT REPORT
_________________________
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 11, 1995
SHAWMUT NATIONAL CORPORATION
(Exact Name of Registrant as Specified in Charter)
Delaware 1-10102 06-1212629
(State or Other (Commission File (IRS Employer
Jurisdiction of Number) Identification No.)
Incorporation)
777 Main Street, Hartford, Connecticut 06115
One Federal Street, Boston, Massachusetts 02211
(Address of principal executive offices) (Zip Codes)
Registrant's telephone numbers, including area codes: (203) 986-2000
(617) 292-2000
Not Applicable
(Former name or former address, if changed since last report)
ITEM 5. OTHER EVENTS
Shawmut National Corporation ("SNC") and
Shawmut Bank Connecticut, National Association (the
"Bank), entered into a Purchase and Assumption Agreement,
dated as of November 12, 1994 (the "Asset Purchase
Agreement"), with Barclays Bank PLC ("Barclays") and
Barclays Business Credit Inc. ("Business Credit")
pursuant to which the Bank agreed to purchase
substantially all of the assets and to assume certain
liabilities of the Business Finance Division ("Finance
Division") of Business Credit.
The purchase price is equal to the net book
value of the assets to be acquired and the liabilities to
be assumed plus a premium of $290 million. The book value
of the assets to be acquired, totalling approximately $2.1
billion at September 30, 1994, include all of the business and
operations of Business Credit conducted through the Finance
Division, which includes, among other things, loans and loan
commitments; all property acquired by Business Credit in
connection with foreclosures on the property securing
non-performing loans; the leased office facilities at
which the Finance Division conducts business and
leasehold improvements thereon; all rights and interests
under the contracts relating to the Finance Division to
which Business Credit is a party; certain investments;
all books and records relating to the Finance Division;
and all unearned fees relating to the purchased loans and
loan commitments. The book value of the liabilities to
be assumed was approximately $10.5 million at September
30, 1994. SNC anticipates that the total funding
required for the transaction will be approximately $2.4
billion. The Finance Division, based in Glastonbury,
Connecticut, provides asset-based financing to middle
market companies throughout the United States through its
17 nationwide offices.
The Asset Purchase Agreement may be terminated
by either party if the closing has not taken place by
March 31, 1995. SNC currently anticipates that the acquisition
of the Finance Division will close on or before January 31,
1995, subject to the satisfaction of certain conditions, including
certain regulatory approvals.
SNC entered into an agreement with Northeast Federal
Corp. ("Northeast"), dated as of June 13, 1994, to acquire
Northeast for $172.1 million in SNC common stock (the "Merger
Agreement"). Northeast is a unitary savings and loan holding
company registered under the Home Owners' Loan Act of 1933, as
amended, which provides financial services through its subsidiary,
Northeast Savings, F.A. As of September 30, 1994,
Northeast had assets of $3.3 billion, deposits of $2.4
billion and stockholders' equity of $135.1 million.
Northeast has 33 offices located in Connecticut,
Massachusetts and the capital region of New York. Each
issued and outstanding share of Northeast common stock,
except for certain shares held by affiliates, will be
converted into and exchangeable for a number of shares of
SNC common stock equal to the exchange ratio (the
"Exchange Ratio") determined as follows:
(i) if the SNC Common Stock Average Price is
greater than or equal to $26.235, the
Exchange Ratio will be .415;
(ii) if the SNC Common Stock Average Price is
less than $26.235 but equal to or greater
than $21.465, the Exchange Ratio will be
(a) $10.875 divided by (b) the SNC Common
Stock Average Price; or
(iii) if the SNC Common Stock Average Price
is less than $21.465, the Exchange
Ratio will be .507; provided,
however, that, as described below,
under such circumstances Northeast
has the right to terminate the Merger
Agreement, subject to the right of
SNC to avoid such termination by an
increase in the Exchange Ratio.
The Merger Agreement may be terminated if the
transaction is not closed on or before June 30, 1995. In
addition, if the SNC Common Stock Average Price (defined as the
average daily closing price of SNC common stock as reported
on the New York Stock Exchange Composite Transaction reporting
system for the 15 consecutive full trading days prior to
the date on which the last regulatory approval is obtained
and all statutory waiting periods in respect thereof have
expired) is less than $21.465 (and therefore, based upon the
maximum Exchange Ratio of .507, Northeast stockholders would
receive less than $10.875 of SNC common stock for each share
of Northeast common stock), the Northeast Board of Directors
may terminate the Merger Agreement pursuant to its terms,
whether before or after the approval of the merger by
Northeast's stockholders; provided, however, that SNC
may avoid such termination by increasing the Exchange
Ratio so that the shares of SNC common stock issued in
exchange for each share of Northeast's common stock
have a value (valued at the SNC Common Stock Average Price)
of $10.875. At January 11, 1995, the closing price of SNC's
common stock was $17.50 per share. In addition, the transaction
is subject to the satisfaction of certain conditions, including
certain regulatory approvals and approval by Northeast stockholders.
Northeast has publicly stated that the position of
the Northeast Board of Directors at the time it approved
the Merger Agreement was to terminate the Merger Agreement
after the last regulatory approval was to be received if the
consideration to be received by Northeast stockholders was valued
at less than $10.875 per share and that the Northeast Board of
Directors has not changed that position. If Northeast
terminates the Merger Agreement, SNC's present intention is
not to increase the exchange ratio above .507.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION
AND EXHIBITS.
(c) The following exhibits are filed with this Current
Report on Form 8-K:
EXHIBIT
NUMBER DESCRIPTION
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Deloitte & Touche LLP.
99.1 Financial Statements of Northeast
Federal Corp. as of December 31, 1993.
99.2 Unaudited Financial Information of
Northeast Federal Corp. as of September
30, 1994.
99.3 Shawmut National Corporation and Subsidiaries,
Northeast Federal Corp. and Subsidiaries and
Business Finance Division of Barclays Business
Credit, Inc. Unaudited Pro Forma Condensed
Financial Information.
99.4 Financial Statements of Business
Finance Division of Barclays Business
Credit, Inc. as of December 31, 1993.
99.5 Unaudited Financial Information of
Business Finance Division of Barclays
Business Credit, Inc. as of September
30, 1994.
99.6 Press Release, dated January 11, 1995,
"Shawmut Comments on Agreement to Acquire
Northeast Federal."
SIGNATURES
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 hereunto duly authorized.
SHAWMUT NATIONAL CORPORATION
By:
Joel B. Alvord
Chairman and Chief Executive Officer
Dated: January 11, 1995
EXHIBIT INDEX
Exhibit Page
Number Description Number
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Deloitte & Touche LLP.
99.1 Financial Statements of Northeast
Federal Corp. as of December 31, 1993.
99.2 Unaudited Financial Information of
Northeast Federal Corp. as of September
30, 1994.
99.3 Shawmut National Corporation and
Subsidiaries, Northeast Federal Corp.
and Subsidiaries and Business Finance
Division of Barclays Business Credit, Inc.
Unaudited Pro Forma Condensed Financial
Information.
99.4 Financial Statements of Business Finance Division
of Barclays Business Credit, Inc. as of December 31,
1993.
99.5 Unaudited Financial Information of Business
Finance Division of Barclays Business Credit,
Inc. as of September 30, 1994.
99.6 Press Release, dated January 11, 1995,
"Shawmut Comments on Agreement to Acquire
Northeast Federal."
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the
Prospectuses constituting part of the Registration Statements on
Form S-8 (Nos. 33-17765-02 and 33-20387) and Form S-3 (Nos. 33-
50708, 33-50710 and 33-51311) of Shawmut National Corporation of
our report dated December 16, 1994 relating to the financial
statements of the Business Finance Division of Barclays Business
Credit, Inc., which appears in the Current Report on Form 8-K of
Shawmut National Corporation dated January 11, 1995.
Price Waterhouse LLP
Hartford, Connecticut
January 11, 1995
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use in this Current Report on Form 8-K of
Shawmut National Corporation of our report, dated January 21,
1994 (August 12, 1994 as to Note 26), appearing herein, relating
to the consolidated financial statements of Northeast Federal
Corp. and subsidiary as of December 31, 1993 and for the year
then ended.
Deloitte & Touche
Hartford, Connecticut
January 11, 1995
EXHIBIT 99.1
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of Northeast Federal
Corp.:
We have audited the accompanying consolidated statement of
financial condition of Northeast Federal Corp. and subsidiaries
(the Company) as of December 31, 1993, and the related
consolidated statements of operations, changes in stockholders'
equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Northeast Federal Corp. and subsidiaries at
December 31, 1993 and the consolidated results of their
operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
As described in Note 1, the Company changed its method of
accounting for securities as of December 31, 1993.
DELOITTE & TOUCHE
Hartford, Connecticut
January 21, 1994
(August 12, 1994 as
to Note 26)
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
1993 1992 1992
____________ ____________ _________
Interest income:
Loans $ 145,127 $ 129,038 $ 225,132
Mortgage-backed securities 54,205 37,924 78,175
Investment securities 10,970 15,313 20,786
Rhode Island covered assets 8,989 9,932 -
Other 1,085 4,138 2,853
________ ________ ________
Total interest income 220,376 196,345 326,946
________ ________ ________
Interest expense:
Deposits 121,163 123,924 219,122
Federal Home Loan Bank advances 13,230 3,056 12,572
Other borrowings 13,575 5,930 12,451
________ _______ _______
Total interest expense 147,968 132,910 244,145
________ _______ _______
Net interest income 72,408 63,435 82,801
Provision for loan losses 23,300 16,300 10,200
________ ______ _______
Net interest income after provision
for loan losses 49,108 47,135 72,601
________ ______ _______
Non-interest income:
Fees for services 10,181 7,112 12,815
Gain on sale of securities, net 5,625 4,100 1,991
Gain on sale of loans, net 1,939 1,870 2,532
Other non-interest income (loss) (6) (41) (1,221)
_______ _______ _______
Total non-interest income 17,739 13,041 16,117
_______ ______ _______
Non-interest expenses:
Compensation and benefits 32,324 23,126 27,635
Occupancy and equipment, net 15,399 11,057 14,810
Other general and administrative 19,436 15,872 19,065
Amortization of supervisory goodwill - 2,002 3,971
Supervisory goodwill valuation adjustment - 56,568 -
SAIF insurance fund and OTS assessments 8,414 6,222 8,130
Real estate and other assets acquired
in settlement of loans 17,606 9,652 5,702
______ _______ ______
Total non-interest expenses 93,179 124,499 79,313
______ _______ ______
Income (loss) before income taxes and
extraordinary items (26,332) (64,323) 9,405
Income tax expense (benefit) (12,193) (5,089) 4,915
________ _______ ______
Income (loss) before extraordinary items
and cumulative effect of change in
accounting principle (14,139) (59,234) 4,490
Extraordinary items, net of income taxes - - 95
________ _______ _____
Income (loss) before cumulative effect
of change in accounting principle (14,139) (59,234) 4,585
Cumulative effect of change in accounting
principle - - 1,022
Net income (loss) $(14,139) $ (59,234) $ 5,607
========= ========= ========
Preferred stock dividend requirements $ 4,501 $ 4,652 $ 8,506
Net loss applicable to common stockholders $(18,640) $ (63,886) $ (2,899)
Loss per common share before
extraordinary items:0
Primary and fully diluted $ (1.75) $ (11.16) $ (.70)
Loss per common share before cumulative
effect of change in accounting principle:
Primary and fully diluted $ (1.75) $ (11.16) $ (.69)
Cumulative effect of change in accounting
principle:
Primary and fully diluted $ - $ - $ .18
Net loss per common share:
Primary and fully diluted $ (1.75) $ (11.16) $ (.51)
See accompanying Notes to the Consolidated Financial Statements
NORTHEAST FEDERAL CORP
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
December 31,
___________________
ASSETS 1993 1992
_______ _______
Cash and due from banks . . . . . . . . . . . $ 51,705 $ 57,158
Interest-bearing deposits . . . . . . . . . . - 615
Federal funds sold . . . . . . . . . . . . . 23,510 32,815
Securities purchased under agreements
to resell . . . . . . . . . . . . . . . . . 60,000 -
Investment securities, net (market value of
$42,525 and $116,341) . . . . . . . . . . . 42,612 111,791
Investment securities, available-for-sale,
net (market value of $131,127 at
December 31, 1992) . . . . . . . . . . 162,854 129,899
Mortgage-backed securities, net (market
value of $1,336,970 and $837,681) . . . . . 1,330,886 829,772
Mortgage-backed securities, available-for-sale,
net (market value of $57,684
at December 31, 1992) . . . . . . . . . . 12,886 55,474
Loans, net . . . . . . . . . . . . . . . . 1,876,181 2,278,873
Loans available-for-sale, net . . . . . . . . 46,076 32,237
Rhode Island covered assets . . . . . . . . . 105,625 151,828
Interest and dividends receivable . . . . . . 17,540 21,342
Real estate and other assets acquired in settle-
ment of loans . . . . . . . . . . . . . . 74,962 99,376
Premises and equipment, net . . . . . . . . 32,368 34,201
Prepaid expenses and other assets . . . . . . 82,822 74,723
__________ _________
Total assets . . . . . . . . . . . . . . . $3,920,027 $3,910,104
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Retail deposits . . . . . . . . . . . . . . $2,952,082 $3,205,654
Brokered deposits . . . . . . . . . . . . . 25,135 25,135
Federal Home Loan Bank advances . . . . . . . 373,000 140,000
Securities sold under agreements to repurchase 294,809 291,014
Uncertificated debentures . . . . . . . . . 38,442 34,990
Convertible subordinated debentures . . . . . - 560
Advance payments by borrowers for taxes and
insurance . . . . . . . . . . . . . . . . 28,337 21,734
Other liabilities . . . . . . . . . . . . . . 75,709 53,444
Total liabilities . . . . . . . . . . . . 3,787,514 3,772,531
Commitments and Contingencies
Stockholders' equity:
Serial preferred stock, $.01 par value,
15,000,000 shares authorized:
$2.25 Cumulative Convertible Preferred Stock
Series A, 1,610,000 shares issued and
outstanding at December 31, 1992 . . . . . . - 16
$8.50 Cumulative Preferred Stock, Series B,
394,199 shares at December 31, 1993 and
351,700 shares at December 31, 1992 issued
and outstanding . . . . . . . . . . . . . . 4 4
Common stock, $.01 par value, 25,000,000 shares
authorized: 13,499,078 shares at December 31,
1993 and 5,729,579 shares at December 31, 1992
issued and outstanding . . . . . . . . . . . 135 57
Additional paid-in capital . . . . . . . . . . 185,960 182,804
Net unrealized gains on debt and equity
securities available-for-sale . . . . . . . 9,462 -
Accumulated deficit . . . . . . . . . . . . . . (59,557) (40,330)
Stock dividend distributable . . . . . . . . . 838 -
Unallocated employee stock ownership plan
shares . . . . . . . . . . . . . . . . . . . (4,329) (4,978)
_______ _______
Total stockholders' equity . . . . . . . . . 132,513 137,573
--------- ---------
$ 3,920,027 $ 3,910,104
See accompanying Notes to the Consolidated Financial Statements
<TABLE>
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<CAPTION>
Retained
Earnings Unallocated
Net Unreal- (Accumulated Employee
Serial Additional ized Gain Deficit) Stock Stock Owner-
Preferred Common Paid-In (Loss) on Substantially Dividend ship Plan
Stock Stock Capital Securities* Restricted Distributable Shares Total
_________ _______ __________ ___________ _____________ _____________ ____________ ________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1991 $ 28 $ 57 $ 181,158 $ (1,125) $ 13,297 $ - $ (10,583) $182,832
Net income . . . . . . . - - - - 5,607 - - 5,607
Proceeds from exercise of
stock options . . . . . - - 2 - - - - 2
Unallocated employee stock
ownership plan shares . - - - - - - 1,458 1,458
Net unrealized recovery
on equity securities . - - - 1,125 - - - 1,125
_________ _______ __________ ___________ _____________ _____________ ____________ ________
Balance at March 31, 1992 28 57 181,160 - 18,904 - (9,125) 191,024
Net loss . . . . . . . . - - - - (59,234) - - (59,234)
Issuance of 351,700 shares
of $8.50 Cumulative Pre-
ferred Stock, Series B . 4 - 35,166 - - - - 35,170
Repurchase of 1,202,916
shares of Adjustable
Rate Cumulative Pre-
ferred Stock, Series A . (12) - (33,538) - - - - (33,550)
Proceeds from exercise of
stock options . . . . . . - - 16 - - - - 16
Unallocated employee stock
ownership plan shares . . - - - - - - 4,147 4,147
_________ _______ __________ ___________ _____________ _____________ ____________ ________
Balance at December 31, 1992 20 57 182,804 - (40,330) - (4,978) 137,573
Net loss . . . . . . . . (14,139) - - - (14,139) - - (14,139)
Proceeds from issuance of
shares to 401-K plan . . - - 223 - - - - 223
Proceeds from exercise of
stock options . . . . . . - 1 146 - - - - 147
Conversion of 1,610,000
shares of $2.25 Cumula-
tive Convertible Pre-
ferred Stock, Series A
into 7,647,500 shares
of common stock . . . . . (16) 77 (1,463) - - - - (1,402)
Stock dividend distri-
butable, 50,876 shares
of $8.50 Cumulative Pre-
ferred Stock, Series B. . - - - - (5,088) 5,088 - -
Preferred stock dividend
payment in kind . . . . . . - - 4,250 - - (4,250) - -
Unallocated employee stock
ownership plan shares . . - - - - - - 649 649
Net unrealized gains on
debt and equity secur-
ities available-for-sale. - - - 9,462 - - - 9,462
_________ _______ __________ ___________ _____________ _____________ ____________ ________
Balance at December 31, 1993 $4 $135 $185,960 $9,462 $(59,557) $838 $(4,329) $132,513
<FN>
* Changes during the year ended December 31, 1993 reflect the Company's
implementation of SFAS 115, "Accounting for Certain Investments in Debt
and Equity Securities."
See accompanying Notes to the Consolidated Financial Statements
</TABLE>
<TABLE>
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<CAPTION>
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
1993 1992 1992
____________ _________________ __________
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . $ (14,139) $ (59,234) $ 5,607
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization . . . . 4,860 3,361 4,693
Amortization of fees, discounts,
and premiums, net . . . . . . . . . 1,697 (6,820) 405
Amortization of and other adjustments
to supervisory goodwill . . . . . . . - 59,553 24,867
Provision for loan losses . . . . . . . 23,300 16,300 10,200
Provision for losses on REO . . . . . . 9,493 3,823 -
Gain on sale of securities (5,651) (4,100) (1,991)
Gain on sale of loans . . (1,939) (1,870) (2,532)
(Gain) loss on sale of other assets 466 (253) 674
(Gain) loss on early extinguishment of debt - - (204)
Decrease in interest and dividends
receivable . . . . . . . . . . . . . 3,802 2,792 13,895
Loans available-for-sale originated
and purchased . . . . . . . . . . . (244,950) (148,397) (166,697)
Proceeds from sales of loans
available-for-sale . . . . . . . . . 231,153 184,325 135,063
Decrease in accrued interest payable
on deposits . . . . . . . . . . . . (1,078) (3,185) (8,296)
Increase in prepaid expenses and
other assets . . . . . . . . . . . (8,099) (14,347) (28,236)
Increase (decrease) in other liabilities 19,125 (10,259) 5,401
____________ _________________ __________
Total adjustments . . . . . . 32,179 80,923 (12,758)
____________ _________________ __________
Net cash provided by (used in)
operating activities . . . 18,040 21,689 (7,151)
____________ _________________ __________
Cash flows from investing activities:
Loans originated and purchased (513,239) (461,063) (318,573)
Proceeds from sales of loans . . . . . . . 48,541 8,116 16,680
Principal collected on loans. . . . . 412,166 398,469 480,198
Net decrease in Rhode Island covered assets 46,203 26,308 -
Purchases of mortgage-backed securities. . (361,464) (383,401) -
Proceeds from sales of mortgage-backed . . - - 23,512
Purchases of mortgage-backed securities
available-for-sale . . . . . . . . . . . - - (114,911)
Proceeds from sales of mortgage-backed
securities available-for-sale . . . . . 39,831 44,727 587,225
Principal collected on mortgage-backed
securities . . . . . . . . . . . . . . . 237,339 136,995 211,115
Purchases of investment securities . . . . - (64,667) (51,516)
Proceeds from sales of investment securities 16,347 506 48,332
Proceeds from redemption of FHLB stock . . 554 8,283 1,478
Proceeds from maturities of investment
securities . . . . . . . . . . . . . . . 12,580 19,404 18,371
Purchases of investment securities
available-for-sale . . . . . . . . . . . (239,426) (204,458) (263,160)
Proceeds from sales of investment securities
available-for-sale . . . . . . . . . . . 142,592 158,033 306,979
Proceeds from maturities of investment
securities available-for-sale . . . . . 121,347 71,622 24,799
Proceeds from sales of real estate and other
assets acquired in settlement of loans . 76,549 23,563 16,052
Net increase in deposits due to
acquisition of branches . . . . . . . . - - 404,643
Net purchases of premises and equipment . (3,294) (7,086) (12,157)
____________ _________________ __________
Net cash provided by (used in) investing
activities . . . . . . . . . . . . . . 36,626 (224,649) 1,379,067
____________ _________________ __________
Cash flows from financing activities:
Net decrease in retail deposits . . . . . (252,494) (568,741) (227,021)
Acquisition of Rhode Island deposits - 136,319 -
Net decrease in brokered deposits - - (87,751)
Increase (decrease) in advance payments
by borrowers for taxes and insurance . . 6,603 1,461 (13,327)
Increase (decrease) in securities sold
under agreements to repurchase . . . . . 3,795 278,267 (354,035)
Net increase (decrease) in short-term
FHLB advances . . . . . . . . . . . . . 40,000 99,250 (310,000)
Proceeds from long-term FHLB advances . . 228,000 - -
Repayments of long-term FHLB advances . . (35,000) (2,500) (142,000)
Proceeds from issuance of uncertificated
sinking fund debentures . . . . . . . - 33,450 -
Retirement of convertible subordinated
debentures . . . . . . . . . . . . . . (560) - (266)
Reduction of ESOP debt guarantee . . . . 649 4,147 1,458
Preferred stock conversion costs . . . . (1,402) - -
Retirement of series A adjustable
preferred stock . . . . . . . . . . . - (33,550) -
Proceeds from issuance of Series B
preferred stock . . . . . . . . . . . - 35,170 -
Issuance of 401K stock shares . . . . . 223 - -
Proceeds from exercise of stock options 147 16 2
____________ _________________ __________
Net cash used in financing activities . (10,039) (16,711) (1,132,940)
____________ _________________ __________
Net increase (decrease) in cash and
cash equivalents . . . . . . . . . . 44,627 (219,671) 238,976
Cash and cash equivalents at
beginning of period. . . . . . . . . 90,588 310,259 71,283
____________ _________________ __________
Cash and cash equivalents at
end of period . . . . . . . . . . . $ 135,215 $ 90,588 $ 310,259
============ ========== ==========
<FN>
See accompanying Notes to the Consolidated Financial Statements
</TABLE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Northeast Federal Corp. and its wholly-owned subsidiary,
Northeast Savings, F.A. All significant intercompany balances
and transactions have been eliminated in consolidation. Certain
reclassifications have been made to prior years' financial
statements to conform to the 1993 presentation.
Cash and Cash Equivalents
For purposes of the Consolidated Statement of Cash Flows, cash
and due from banks, interest-bearing deposits with original
maturities of ninety days or less, and federal funds sold are
considered as cash and cash equivalents. Federal Reserve Board
regulations require the Association to maintain non-interest-
bearing reserves against certain of its transaction accounts.
For total transaction account deposits of $51.9 million or less,
regulations require a reserve of 3%. For total transaction
account deposits in excess of $51.9 million, a 10% reserve is
required.
Securities Purchased Under Agreements to Resell
The Association invests in securities purchased under agreements
to resell (repurchase agreements) for short-term cash management.
The Association takes physical possession of the collateral for
these agreements, which normally consists of U.S. Treasury
securities, collateralized mortgage obligations, or mortgage-
backed securities guaranteed by agencies of the U.S. government.
Investment Securities
Investment securities include U.S. Government, agency, and
corporate bonds, collateralized mortgage obligations, and asset-
backed securities. Those securities which management has the
intent and ability to hold until maturity are classified as held-
to-maturity and are carried at amortized cost, adjusted for
amortization of premiums and accretion of discounts into interest
income using the level-yield method. Premiums are amortized to
the earlier of the call or maturity date and discounts are
accreted to the maturity date. Investment securities which have
been identified as assets for which there is not a positive
intent to hold to maturity, including all marketable equity
securities, are classified as available-for-sale. SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities,"
requires that available-for-sale securities be reported at
fair value with unrealized gains and losses excluded from earnings
and reported in a separate component of stockholders' equity.
The Company implemented SFAS 115 as of December 31, 1993.
SFAS 115 may not be applied retroactively.
Gains and losses on sales of investment securities are computed
on a specific identification cost basis. Investment securities
which have experienced an other than temporary decline are
written down to fair value as a new cost basis with the amount of
the writedown included in earnings as a realized loss. The new
cost basis is not changed for subsequent recoveries in fair
value. Factors which management considers in determining whether
an impairment in value of an investment is other than temporary
include the issuer's financial performance and near term pros-
pects, the financial conditions and prospects of the issuer's
geographic region and industry, and recoveries in market value
subsequent to the balance sheet date.
Mortgage-Backed Securities
Mortgage-backed securities which management has the intent and
ability to hold until maturity are classified as held-to-maturi-
ty, and are carried at amortized cost, adjusted for premiums and
discounts which are amortized or accreted into interest income
using the level-yield method over the remaining contractual life
of the securities, adjusted for actual prepayments. Mortgage-
backed securities for which there is not a positive intent to
hold to maturity are classified as available-for-sale . As
indicated above, SFAS 115, implemented by the Company as of the
end of the year ended December 31, 1993, requires that available-
for-sale securities be reported at fair value with unrealized
gains and losses excluded from earnings and reported in a separate
component of stockholders' equity. Gains and losses on
sales of mortgage-backed securities are computed on a specific
identification cost basis.
Loans
Loans are generally recorded at the contractual amounts owed by
borrowers, less unearned discounts, deferred origination fees,
the undisbursed portion of any loans in process, and the allowance
for loan losses. Interest on loans is credited to income as
earned to the extent it is deemed collectible. Discounts on
loans purchased are accreted into interest income using the
level-yield method over the contractual lives of the loans,
adjusted for actual prepayments.
Single-family residential real estate loans that were originated
with the intent to sell in the secondary mortgage market or those
loans which have been identified as assets for which there is not
a positive intent to hold to maturity are classified as avail-
able-for-sale and carried at the lower of cost or fair value.
The amount by which the aggregate cost of loans available-for-
sale exceeds market value is charged to gain (loss) on sale of
loans, net.
The Company adopted SFAS 114, "Accounting by Creditors for
Impairment of a Loan," as of January 1, 1993. Loans which are
identified for evaluation and which are deemed to be impaired
under the guidance of SFAS 114 are measured at the fair value of
the collateral. Substantially all of the Association's loans are
collateral dependent. If the fair value of the collateral is
less than the recorded investment in the loan, the allowance for
loan losses is adjusted with a corresponding charge to the
provision for loan losses. The fair value of the collateral,
based on a current appraisal, often changes from one reporting
period to the next. If the fair value of the collateral decreases,
such decrease is reported as a charge to the provision for
loan losses. If the fair value increases, the provision for loan
losses is reduced. Impaired loans are included in nonperforming
assets as non-accrual loans or troubled debt restructurings, as
appropriate. The Company had previously measured loan impairment
pursuant to the methods prescribed in SFAS 114. As a result, no
additional reserves were required by early adoption of the pronouncement.
Loan Fees
Loan origination fees, commitment fees, and certain direct loan
origination costs are deferred and recognized over the lives of
the related loans as an adjustment of the loans' yields using the
level-yield method. Calculation of the level-yield is based upon
weighted average contractual payment terms which are adjusted for
actual prepayments. Amortization of deferred fees is discontinued
for non-accrual loans.
Loans Serviced for Others
Northeast Savings services real estate and consumer loans for
others which are not included in the accompanying consolidated
financial statements. Fees earned for servicing loans owned by
others are reported as income when the related mortgage loan
payments are collected. Loan servicing costs are charged to
expense as incurred. Costs associated with acquiring the right
to service certain loans are capitalized and amortized in proportion
to and deducted from the estimated future net servicing
income.
Prior to 1986, the Association sold certain loans with limited
recourse requirements. In addition, in the normal course of
business, loans are sold to various agencies which have recourse
on standard documentation representations and warranties. Such
loans are included in loans serviced for others. Estimated
probable loan losses and related costs of collection and repossession
are provided for at the time of such sales and are periodically
reevaluated. The Company evaluates the credit risk of loans sold
with recourse in conjunction with its evaluation of the adequacy
of allowance for loan losses.
Allowance for Loan Losses
The allowance for loan losses is established and maintained
through a periodic review and evaluation of various factors which
affect the loans' collectibility and results in provisions for
loan losses which are charged to expense. Numerous factors are
considered in the evaluation, including a review of certain
borrowers' current financial status, credit standing, available
collateral, management's judgment regarding economic conditions,
the impact of those conditions on property values, historical
loan loss experience in relation to outstanding loans, the
diversification and size of the loan portfolio, the results of
the most recent regulatory examinations available to the Association,
the overall loan portfolio quality, and other relevant factors.
Non-Accrual Loans
Interest accruals on loans are normally discontinued and previously
accrued interest is reversed whenever the payment of
interest or principal is more than 90 days past due, or earlier
when conditions warrant it. A non-accrual loan may be restored
to an accrual basis when principal and interest payments are
current and full payment of principal and interest is expected.
Real Estate and Other Assets Acquired in Settlement of Loans
Real estate and other assets acquired in settlement of loans is
recorded at the lower of the recorded investment in the loan or
fair value minus estimated costs to sell. The lower of the
recorded investment in the loan or fair value less estimated
costs to sell becomes the new cost basis for REO. Any excess of
the recorded investment over the fair value less estimated costs
to sell is charged off. Subsequent valuations of REO are at the
lower of the new cost basis or fair value less estimated costs to
sell.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation is computed using
the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the respective
lease terms or the estimated useful life, whichever is shorter.
Interest Rate Swap Agreements
Northeast Savings is a party to interest rate swap agreements in
managing its interest rate exposure. The net amounts received or
paid in accordance with the interest rate swap agreements are
charged or credited to interest expense on other borrowings.
Generally, gains and losses on terminated interest rate swap
agreements are amortized over the lesser of the remaining terms
of the agreements or the remaining lives of the assets or liabilities
hedged.
Pension Plan
Pension costs are funded on a current basis in compliance with
the requirements of the Employee Retirement Income Security Act
and are accounted for in accordance with Statement of Financial
Accounting Standards No. 87, "Employers' Accounting for Pensions."
Retirement Benefits Other Than Pensions
SFAS 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions," focuses principally on postretirement
health care benefits and significantly changed the practice of
accounting for postretirement benefits on a pay-as-you-go (cash)
basis by requiring accrual of the expected cost of providing
those benefits to an employee and the employee's beneficiaries
and covered dependents during the years that the employee renders
the necessary service. SFAS 106 became effective for the Associ-
ation in 1993. The Company implemented SFAS 106 during the
quarter ended March 31, 1993 and is amortizing the estimated
$444,000 expense over the twelve year life expectancy of the
participants.
Income Taxes
Northeast Federal Corp. and subsidiaries file a federal consoli-
dated income tax return. In February 1992, the FASB issued SFAS
109, "Accounting For Income Taxes," which requires an asset and
liability approach for financial accounting and reporting for
income taxes. One requirement of SFAS 109 is that the tax
benefit related to acquired deductible temporary differences and
pre-acquisition net operating loss carryforwards shall first be
applied to reduce to zero goodwill related to that acquisition.
Accordingly, goodwill has been reduced as a result of the tax
benefits related to these items.
The Company elected to adopt SFAS 109 effective April 1, 1991.
The effect of initially applying the new standard was reported as
the effect of a change in accounting principle. The cumulative
effect of this change is reported separately in the Consolidated
Statement of Operations for the year ended March 31, 1992. As
required, first, second, and third quarters of the year ended
March 31, 1992 were restated for the effect of this change.
Income (Loss) Per Common Share
Income (loss) per common share is based on the weighted average
number of common shares outstanding and (if dilutive) common
stock equivalents (i.e., stock options and warrants) outstanding
in each year. The 8% Convertible Subordinated Debentures do not
meet the criteria for a common stock equivalent. Income (loss)
per common share has been restated to give effect to the two 2%
common stock dividends declared in fiscal 1990. Net income
(loss) applicable to common stockholders and income (loss) per
common share are calculated after deducting preferred stock
dividend requirements which include $4,652,000 and $8,506,000 of
accumulated and unpaid preferred dividends for the nine-month
period ended December 31, 1992 and the year ended March 31, 1992,
respectively. There were no accumulated and unpaid preferred
dividends at December 31, 1993. Accumulated and unpaid dividends
totaled $12,802,000 and $19,364,000 at December 31, 1992 and
March 31, 1992, respectively. On May 8, 1992, $11.2 million of
accumulated and unpaid dividends were eliminated as a result of
the Company's repurchase of its adjustable rate preferred stock
plus accumulated dividends from the FRF administered by the FDIC.
On May 14, 1993, $12.2 million of accumulated and unpaid divi-
dends were eliminated as a result of the conversion of 1,610,000
of $2.25 Cumulative Convertible Preferred Stock, Series A into
7,647,500 shares of common stock.
NOTE 2: CHANGE IN FISCAL YEAR
In July 1992, the Company changed its reporting period from a
fiscal year ended March 31 to a calendar year. Accordingly,
results of operations for the transition period ended December
31, 1992 cover a nine-month period. The following statements of
operations present financial data for the nine months ended
December 31, 1993 and the comparable nine months of the prior
years. These statements are for comparative purposes only.
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Nine Months Ended December 31,
1993 1992 1991
____________ ____________ ____________
(unaudited) (unaudited)
Interest income:
Loans . . . . . . . . . . . . $ 106,574 $ 129,038 $ 175,232
Mortgage-backed securities . . 41,357 37,924 63,484
Investment securities . . . . 7,494 15,313 16,499
Rhode Island covered assets. . 6,743 9,932 -
Other . . . . . . . . . . . 886 4,138 1,762
____________ ____________ ____________
Total interest income . 163,054 196,345 256,977
____________ ____________ ____________
Interest expense:
Deposits . . . . . . . . . . . 88,812 123,924 171,396
Federal Home Loan Bank advances 11,127 3,056 11,613
Other borrowings . . . . . 10,334 5,930 11,831
Total interest expense 110,273 132,910 194,840
Net interest income . 52,781 63,435 62,137
Provision for loan losses . . 18,450 16,300 7,400
Net interest income after
provision for loan losses 34,331 47,135 54,737
Non-interest income:
Fees for services . . . . 7,346 7,112 10,273
Gain on sale of securities, net 1,764 4,100 330
Gain on sale of loans, net 1,617 1,870 1,937
Other non-interest income (loss) (23) (41) (56)
____________ ____________ ____________
Total non-interest income 10,704 13,041 12,484
____________ ____________ ____________
Non-interest expenses:
Compensation and benefits 24,124 23,126 20,290
Occupancy and equipment, net 11,370 11,057 11,309
Other general and administrative 14,519 15,872 13,872
Amortization of supervisory goodwill - 2,002 2,978
Supervisory goodwill valuation
adjustment - 56,568 -
SAIF insurance fund and OTS
assessments 6,631 6,222 6,094
Real estate and other assets acquired
in settlement of loans . . . . . 14,979 9,652 3,650
____________ ____________ ____________
Total non-interest expenses 71,623 124,499 58,193
____________ ____________ ____________
Income (loss) before income taxes
and extraordinary items (26,588) (64,323) 9,028
Income tax expense (benefit) (12,308) (5,089) 4,717
____________ ____________ ____________
Income (loss) before extraordinary
items and cumulative effect of
change in accounting principle (14,280) (59,234) 4,311
Extraordinary items, net
of income taxes - - 77
Income (loss) before cumulative
effect of change in accounting
principle (14,280) (59,234) 4,388
Cumulative effect at April 1, 1991
of change in accounting principle - - 1,022
____________ ____________ ____________
Net income (loss) $ (14,280) $ (59,234) $ 5,410
Preferred stock dividend
requirements $ 2,848 $ 4,652 $ 6,435
Net loss applicable to common
stockholders $ (17,128) $ (63,886) $ (1,025)
Loss per common share before
extraordinary items:
Primary and fully diluted $ (1.40) $ (11.16) $ (.37)
Loss per common share before
cumulative effect of change
in accounting principle:
Primary and fully diluted $ (1.40) $ (11.16) $ (.36)
Cumulative effect of change in
accounting principle:
Primary and fully diluted $ - $ - $ .18
Net loss per common share:
Primary and fully diluted $ (1.40) $ (11.16) $ (.18)
NOTE 3: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For purposes of the Consolidated Statement of Cash Flows, cash
and due from banks, interest-bearing deposits with original
maturities of ninety days or less, and federal funds sold are
considered as cash and cash equivalents.
For the Year For the Nine Months For the Year
Ended Ended Ended
December 31, December 31, March 31,
1993 1992 1992
_____________ ___________________ ____________
(In Thousands)
CASH PAID DURING THE PERIODS FOR:
Interest on retail deposits $119,822 $124,720 $222,182
Interest on brokered deposits 2,419 2,389 2,507
Interest on borrowings 23,695 6,704 32,664
Income taxes 2,180 1,352 3,479
CASH RECEIVED DURING THE PERIODS FOR:
Interest and dividends 224,178 178,862 340,912
NON-CASH ITEMS:
Loans securitized into
mortgage-backed securities 376,551 - 14,504
Loans securitized into
mortgage-backed securities
available-for-sale - 2,564 -
Transfers of loans to
available-for-sale (964) 6,106 11,658
Transfers of mortgage-backed
securities to available-
for-sale 81 97,697 91,306
Transfers of investment securities
to available-for-sale 40,809 112,045 15,139
Real estate and other assets
acquired in settlement of loans 62,086 65,245 55,807
Payment in kind on uncertificated
debentures 3,452 1,540 -
Payment in kind on Series B
preferred stock 4,250 - -
Loans and deposits acquired from
Rhode Island transaction - 178,349 -
Conversion of $2.25 cumulative
convertible preferred stock 38,339 - -
Net unrealized gains on debt
and equity securities
available-for-sale 16,312 - -
NOTE 4: SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The securities purchased under agreements to resell at December
31, 1993 were collateralized by federal agency mortgage-backed
securities. There were no securities purchased under agreements
to resell at December 31, 1992. The following table provides
additional information on the agreements.
December 31, December 31,
1993 1992
___________ ___________
(Dollars in Thousands)
Carrying value of agreements to resell $60,000 $ -
Par value of collateral 61,023 -
Market value of collateral 66,539 -
Maximum amounts of outstanding agreements
at any month-end 60,000 250,000
Average amounts of outstanding agreements 644 92,200
Weighted average interest rate for the year 3.22% 3.75%
Weighted average interest on year-end
balances 3.39% -
Weighted average maturity of
outstanding agreements (days) 6 -
At December 31, 1993, the Association held only securities
purchased under agreements to resell identical securities. The
securities underlying the agreements were physically held by the
Association until the maturity of the agreements.
NOTE 5: INVESTMENT SECURITIES
<TABLE>
Investment securities consisted of the following:
<CAPTION>
At December 31, 1993 At December 31, 1992
________________________________ __________________________________
Amortized Gross Unrealized Fair Amortized Gross Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
_________ ______ ______ ______ _________ ______ ______ ______
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and agency
obligations:
Available-for-sale $ - $ - $ - $ - $ 9,982 $ 1 $ - $ 9,983
Obligations of states and
political subdivisions 432 - 4 428 466 - 12 454
Corporate securities:
Fixed 4,254 56 - 4,310 13,566 32 398 13,200
Available-for-sale 60 2 - 62 120 9 - 129
Bank and finance securities:
Variable - - - - 14,479 - 113 14,366
Asset-backed securities:
Available-for-sale 38,299 - 100 38,199 26,637 1 16 26,622
Collateralized mortgage
obligations:
Fixed 4,784 - 155 4,629 9,526 - 214 9,312
Variable 1,319 16 - 1,335 2,156 69 - 2,225
Available-for-sale 66,915 217 249 66,883 93,160 1,254 21 94,393
Federal Home Loan Bank stock 31,800 - - 31,800 32,354 - - 32,354
Marketable equity securities:
Equity investments 23 - - 23 39,244 5,186 - 44,430
Available-for-sale 42,102 15,608 - 57,710 - - - -
______ ______ _____ _______ _______ ______ ______ ________
Total investment securities $189,988 $15,899 $ 508 $205,379 $241,690 $6,552 $ 774 $247,468
______ ______ _____ _______ _______ ______ ______ ________
</TABLE>
At December 31, 1993, the net unrealized holding gain, net of tax
effect, on available-for-sale securities that was included in the
separate component of stockholders' equity was $8,978,000 exclu-
sive of mortgage-backed securities available-for-sale. Proceeds,
gains, and losses from sales of investment securities were as
follows:
<TABLE>
<CAPTION>
For the Year Ended For the Nine Months Ended For the Year Ended
December 31, December 31, March 31,
1993 1992 1992
__________________ ________________________ ___________________
Gross Realized Gross Realized Gross Realized
______________ ______________ ______________
Proceeds Gains Losses Proceeds Gains Losses Proceeds Gains Losses
________ ____ ______ ________ ______ ______ ________ _____ ______
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment
securities $16,347* $1,629 $146 $ 506* $1,517 $633 $48,332 $ 807 $7,252
Investment
securities
available-for-sale 142,592 2,138 42 158,033 1,395 337 306,979 5,115 1,427
_______ _____ ___ _______ _____ ___ _______ _____ _____
Total $158,939 $3,767 $188 $158,539 $2,912 $970 355,311 $5,922 $8,679
<FN>
* Sales were due to credit concerns.
</TABLE>
For the periods ended December 31, 1993 and 1992, gains and
losses on investment securities which management has the positive
intent and ability to hold until maturity resulted primarily from
the recognition of realized capital gains and losses allocated to
the Association by two limited partnerships in which the Association
has invested. In addition, for the year ended March 31, 1992,
$5.8 million of these losses resulted from sales of corporate
debt securities due to credit concerns.
The weighted average interest yields on investment securities
were 5.13% and 6.09% at December 31, 1993 and 1992, respectively.
Accrued interest and dividends receivable related to investment
securities outstanding at December 31, 1993 and 1992 were
$1,680,000 and $1,718,000, respectively.
The contractual maturities of Northeast Savings' held-to-maturity
investment securities are summarized in the following table.
Actual maturities may differ from contractual maturities because
certain issuers have the right to call or prepay obligations with
or without call premiums.
<TABLE>
<CAPTION>
December 31, 1993 December 31, 1992
___________________________ _____________________________
Percent of Percent of
Total Estimated Total Estimated
Amortized Amortized Market Amortized Amortized Market
Cost Cost Value Cost Cost Value
___________________________ _______________________________
(Dollars In Thousands)
Bonds and collateralized
mortgage obligations:
<S> <C> <C> <C> <C> <C> <C>
1-5 years . . . . . . $ 2,506 5.88% $ 2,530 $ 15,681 14.03% $ 15,571
5-10 years . . . . . 271 .64 274 9,360 8.37 9,094
10-20 years . . . . . 1,909 4.48 1,934 3,469 3.10 3,354
Over 20 years . . . . 6,103 14.32 5,964 11,683 10.45 11,538
Federal Home Loan
Bank stock 31,800 74.63 31,800 32,354 28.94 32,354
Marketable equity
securities 23 .05 23 39,244 35.11 44,430
________ ______ ________ ________ ______ ________
Total held-to-maturity
investment
securities $ 42,612 100.00% $ 42,525 $111,791 100.00% $116,341
________ ______ ________ ________ ______ ________
</TABLE>
The contractual maturities of the Association's available-for-
sale investment securities are summarized below. Actual maturi-
ties may differ from contractual maturities because certain
issues have the right to call or prepay obligations with or
without call premiums.
<TABLE>
<CAPTION>
December 31, 1993 December 31, 1992
___________________________ ___________________________
Percent of Percent of
Total Estimated Total Estimated
Amortized Amortized Market Amortized Amortized Market
Cost Cost Value Cost Cost Value
___________________________ __________________________
(Dollars In Thousands)
Bonds and collateralized
mortgage obligations:
<S> <C> <C> <C> <C> <C> <C>
0-1 year . . . . . . $ 18,038 12.24% $ 18,035 $ 21,982 16.92% $ 21,968
1-5 years . . . . . . 87,236 59.19 87,109 107,917 83.08 109,159
5-10 years . . . . . - - - - - -
10-20 years . . . . . - - - - - -
Over 20 years . . . . - - - - - -
Marketable equity
securities 42,102 28.57 57,710 - - -
________ ______ ________ ________ ______ ________
Total available-for-sale
investment
securities $147,376 100.00% $162,854 $129,899 100.00% $131,127
________ ______ ________ ________ ______ ________
</TABLE>
<TABLE>
NOTE 6: MORTGAGE-BACKED SECURITIES
Mortgage-backed securities consisted of the following:
<CAPTION>
At December 31, 1993 At December 31, 1992
________________________________ __________________________________
Amortized Gross Unrealized Fair Amortized Gross Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
_________ ______ ______ ______ _________ ______ ______ ______
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Government National Mortgage
Association (GNMA):
Fixed . . . . $ - $ - $ - $ - $ 81 $ 13 $ - $ 94
Adjustable . . 33,583 46 188 33,441 19,589 169 63 19,695
Available-for-sale 9,855 744 34 10,565 12,732 844 246 13,330
Federal Home Loan Mortgage
Corporation (FHLMC):
Fixed . . . . 3,184 154 - 3,338 5,810 230 - 6,040
Adjustable . . 171,675 2,142 602 173,215 135,195 1,565 168 136,592
Available-for-sale 2,197 129 5 2,321 42,742 1,612 - 44,354
Federal National Mortgage
Association (FNMA):
Fixed . . . . 29,650 546 - 30,196 23,330 1,286 - 24,616
Adjustable . . 142,904 2,542 1,529 143,917 157,492 3,394 935 159,951
Private Issuers:
Fixed . . . . 8,323 191 - 8,514 14,957 436 - 15,393
Adjustable . . 941,567 5,547 2,765 944,349 473,318 2,506 524 475,300
_________ ______ ______ _______ _______ _______ _____ _______
Total mortgage-
backed secu-
rities $1,342,938 $12,041 $5,123 $1,349,856 $885,246 $12,055 $1,936 $895,365
========== ======= ====== ========== ======== ======= ====== ========
</TABLE>
At December 31, 1993, the net unrealized holding gain on avail-
able-for-sale mortgage-backed securities that was included in the
separate section of stockholders' equity was $484,000, net of tax
effect, exclusive of investment securities available-for-sale.
Proceeds, gains, and losses from sales of mortgage-backed securi-
ties were as follows:
<TABLE>
<CAPTION>
For the Year Ended For the Nine Months Ended For the Year Ended
December 31, December 31, March 31,
1993 1992 1992
__________________ ________________________ ___________________
Gross Realized Gross Realized Gross Realized
______________ ______________ ______________
Proceeds Gains Losses Proceeds Gains Losses Proceeds Gains Losses
________ _____ ______ ________ _____ ______ ________ _____ ______
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed
securities.. $ - $ - $ - $ - $ - $ - $ 23,512 $1,129 $ 392
Mortgage-backed
securities
available-for-
sale........ 39,831 2,046 - 44,727 2,158 - 587,225 6,173 2,162
_______ _____ ____ ______ ______ _____ _______ _____ ______
Total proceeds $39,831 $2,046 $ - $44,727 $2,158 $ - $610,737 $7,302 $2,554
======= ====== ==== ======= ====== ===== ======== ====== ======
</TABLE>
Included in results of operations for the year ended March 31,
1992 are gains of approximately $107,000 on sales of mortgage-
backed securities acquired in savings and loan association
acquisitions accounted for under the purchase method of account-
ing.
The weighted average yields on mortgage-backed securities were
5.30% and 6.27% at December 31, 1993 and 1992, respectively.
Accrued interest receivable related to mortgage-backed securities
outstanding at December 31, 1993 and 1992 was $6,783,000, and
$5,597,000, respectively.
At December 31, 1993, mortgage-backed securities having a carry-
ing value of $306,344,000 and a market value of $308,839,000 were
pledged to collateralize securities sold under agreements to
repurchase and other items.
NOTE 7: LOANS
The Association's primary lending business is the origination of
single-family residential mortgage loans in the northeastern
United States and Colorado. These loans are collateralized by
residential properties and are made with strict adherence to
Association policy which limits the loan-to-value ratio on
residential mortgage loans to 80%, or 95% with private mortgage
insurance. In certain geographic areas of the country, the
Association has limited the loan-to-value ratio to even less than
80%.
Loans consisted of the following:
December 31,
_____________________________
1993 1992
____________ ________
(In Thousands)
Single-family residential real estate loans:
Adjustable rate . . . . . . . . . . . $1,695,527 $2,073,986
Fixed rate . . . . . . . . . . . . . 104,187 96,751
Available-for-sale . . . . . . . . . 46,076 32,237
_________ _________
Total single-family residential
real estate loans. . .. . .. . . .. 1,845,790 2,202,974
_________ _________
Consumer loans:
Equity loans . . . . . . . . . . . . 15,507 26,434
Collateralized by deposits . . . . . 8,709 9,633
Equity lines of credit . . . . . . . 5,886 6,942
Overdraft protection . . . . . . . . 2,110 2,435
Education . . . . . . . . . . . . . . 43 91
Other personal . . . . . . . . . . . 2,424 2,826
Total consumer loans . . . . . . . . 34,679 48,361
________ ________
Income property loans . . . . . . . . . 79,284 90,546
________ ________
Commercial . . . . . . . . . . . . . . 77 266
_________ _________
Total loans, gross . . . . . . . . 1,959,830 2,342,147
_________ _________
Less:
Allowance for loan losses . . . . . . 28,271 21,020
Undisbursed portion of loans in process 6,097 4,779
Unearned discounts . . . . . . . . . 2,822 3,625
Deferred origination fees . . . . . . 383 1,613
______ ______
37,573 31,037
__________ __________
Total loans, net . . . . . . . . . $1,922,257 $2,311,110
========== ==========
Accrued interest receivable related to loans outstanding at
December 31, 1993 and 1992 was $9,076,000 and $12,652,000,
respectively. For the year ended December 31, 1993, the nine
months ended December 31, 1992 and the year ended March 31, 1992,
the Association recognized net gains on sales of loans of
$1,939,000, $1,870,000 and $2,532,000, respectively.
At December 31, 1993, the recorded investment in loans for which
impairment has been recognized under the guidance of SFAS 114
totaled $1.6 million. There was no specific reserve on these
loans at December 31, 1993. However, their impairment was
considered in the allowance for loan losses at December 31, 1993.
Such loans are included in non-accrual loans (see below) or
troubled debt restructurings, as appropriate. At December 31,
1993 and 1992, loans totaling $67,462,000 and $94,989,000,
respectively, were contractually delinquent ninety days or more.
Interest accruals on loans are discontinued whenever the payment
of interest or principal is more than 90 days past due or earlier
when conditions warrant it and any previously accrued interest is
reversed. The total interest income that would have been record-
ed for the year ended December 31, 1993, had these loans been
current in accordance with their original terms, or since the
date of origination if outstanding for only part of the year, was
$4,810,000. The amount of interest income which was included in
net income for the year ended December 31, 1993 on those loans
was $1,341,000.
The following table summarizes the Association's gross loan
portfolio and non-accrual loans as a percentage of gross loans by
state and property type at December 31, 1993:
<TABLE>
<CAPTION>
Single-Family
Residential
Real Estate Consumer Income Property Commercial Total
______________ ______________ ____________________ __________________ _____________
Non- Non- Non- Non- Non-
accrual accrual accrual accrual accrual
Gross Loan Gross Loan Gross Loan Gross Loan Gross Loan
Loans Ratio Loans Ratio Loans Ratio Loans Ratio Loans Ratio
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
California $ 903,540 3.98% $ 1,094 - % $16,584 - % $ - -% $921,218 3.90%
Connecticut 260,947 2.68 5,186 6.27 20,878 1.79 - - 287,011 2.68
New York 221,067 6.05 18,237 3.10 22,111 - - - 261,415 5.33
Massachusetts 158,968 1.64 7,174 .49 12,387 .03 77 - 178,606 1.48
New Jersey 56,915 6.66 308 - - - - - 57,223 6.62
Florida 42,745 2.42 363 - - - - - 43,108 2.40
New Hampshire 3,860 2.27 343 2.11 3,249 - - - 7,452 1.27
Other 197,748 .97 ,974 19.44 4,075 - - - 203,797 1.12
__________ ____ _______ _____ ______ _____ ____ _____ _________ ____
Total $1,845,790 3.56% $34,679 3.79% $79,284 .48% $ 77 -% $1,959,830 3.44%
========== ==== ======= ===== ======= ===== ====== ====== ========== =====
</TABLE>
The level of single-family residential non-accrual loans is due
primarily to continuing poor general economic conditions in the
Association's primary market areas, particularly the recessions
in New England and California.
Loans serviced for others by Northeast Savings totaled approxi-
mately $1,888,863,000 and $1,783,365,000 at December 31, 1993
and 1992, respectively, which includes loans serviced with
recourse to Northeast Savings of $69,124,000 and $6,371,000 at
the same respective dates. In connection with loans serviced for
others, at December 31, 1993 and 1992, respectively, Northeast
Savings had $3,623,000 and $4,389,000 in excess servicing assets
and $5,794,000 and $7,903,000 in capitalized purchased mortgage
servicing. Loan servicing fees totaled $2,627,000, $793,000, and
$4,928,000 for the year ended December 31, 1993, the nine months
ended December 31, 1992 and the year ended March 31, 1992,
respectively.
The following summarizes activity in the allowance for loan
losses.
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
---------------------------------------------
1993 1992 1992
----------- ------------ --------
(In Thousands)
Balance, beginning of period $21,020 $17,084 $14,305
Provision for loan losses . . 23,300 16,300 10,200
Charge-offs:
Single-family residential
real estate loans (14,835) (12,305) (6,264)
Consumer loans . . . . . . (393) (373) (846)
Income property loans . . . (1,395) - (652)
Commercial loans . . . . . - - (389)
Total charge-offs . . . . (16,623) (12,678) (8,151)
Recoveries:
Single-family residential
real estate loans 176 8 29
Consumer loans . . . . . . 398 306 459
Income property loans . . . - - 183
Commercial loans . . . . . - - 59
Total recoveries . . . . 574 314 730
Net charge-offs . . . . . . . (16,049) (12,364) (7,421)
Balance, end of period . . . $28,271 $21,020 $17,084
NOTE 8: RHODE ISLAND COVERED ASSETS
As discussed in Note 23: Acquisitions, on May 8, 1992, the
Association acquired certain assets of four Rhode Island finan-
cial institutions which were in receivership proceedings. The
Association is protected against losses relative to all loans
acquired from the institutions, including loans foreclosed upon
by the Association subsequent to acquisition. Accordingly, as
discussed below, these covered assets have been segregated from
the Association's remaining portfolios of loans and REO. At
December 31, 1993, total Rhode Island covered assets and non-
accrual Rhode Island covered assets as a percentage of gross
covered assets were as follows:
December 31,
__________________________________________
1993 1992
______________________ __________________
Non-Accrual Non-Accrual
Assets Asset Ratio Assets Asset Ratio
______ ___________ ______ ___________
(Dollars in Thousands)
Single-family residential
real estate loans:
Adjustable rate . . $ 12,607 8.00% $ 15,494 3.72%
Fixed rate . . . . 22,112 7.73 31,062 9.97
Total single-family
residential real
estate loans ...... 34,719 7.83 46,556 7.89
Consumer loans:
Equity lines of credit 12,805 4.36 15,913 6.08
Equity loans . . . 7,025 6.23 10,283 8.27
Collateralized by deposits 36 - 82 -
Overdraft protection 168 - 228 1.75
Education . . . . . 8 - 17 -
Other personal . . 1,534 3.19 4,029 5.14
Total consumer loans 21,576 4.84 30,552 6.64
Income property loans 39,135 10.59 71,272 19.45
Commercial . . . . . 893 3.25 2,212 29.48
Total loans, gross 96,323 8.24% 150,592 13.43%
Adjustments:
Contra accounts . . 340 (218)
Interest rate adjustment 1,060 1,645
Unallocated credit adjustment 1,082 (4,423)
Total loans, net 98,805 147,596
Real estate owned . . 6,820 4,232
Total Rhode Island covered
assets $ 105,625 $151,828
In the above table, the principal balance of individual loans for
which a specific credit adjustment has been determined by inde-
pendent valuators has been reduced by the amount of that credit
adjustment. The unallocated credit adjustment represents amounts
applied to pools of loans.
In connection with the acquisition of the Rhode Island assets,
the Association entered into an Acquisition Agreement with the
receivers of the Rhode Island financial institutions. Pursuant
to this agreement, DEPCO was required to pay a balancing consid-
eration to the Association. The balancing consideration was
the amount by which the deposits issued by the Association plus
other assumed liabilities exceeded the fair value of the acquired
assets. The estimate of the fair value of the acquired assets
(the valuation) was determined by independent valuators in
accordance with a detailed methodology outlined in the Acquisi-
tion Agreement. The balancing consideration of $59.0 million was
paid to the Association in the quarter ended December 31, 1992.
As part of the valuation process in determining the balancing
consideration, a credit adjustment was made which was specifical-
ly related to the Rhode Island covered assets and which was
intended to establish the amount by which the value of the loans
must be adjusted in determining their fair value for reasons of
collectibility. This initial credit adjustment was determined by
the valuators pursuant to the methodology for credit adjustments
set forth in the Acquisition Agreement. The methodology required
the reappraisal of underlying collateral and/or an individual
evaluation of loans meeting specific delinquency and/or size
criteria as well as the application of credit adjustment percent-
ages to loans which were not individually reviewed. In general,
for purposes of loan valuation, residential and consumer loans
were valued in pools and commercial loans were valued individual-
ly. With the exception of certain adjustable rate consumer,
commercial, and delinquent loans, all acquired loans were also
subject to an interest rate adjustment in order to adjust the
yield on those loans to a market rate of interest as of the
closing date.
Subsequent to the initial valuation and payment of the balancing
consideration, the credit adjustment account will be adjusted for
all charge-offs and recoveries on acquired loans and gains and
losses from the disposition of assets received in lieu of repay-
ment which occur prior to the seventh anniversary of the closing
date, at which time the remaining balance in the credit adjust-
ment account will be reevaluated for adequacy and adjusted
accordingly, utilizing the same criteria as the initial valuation
methodology. On the seventh anniversary, if there is a negative
balance in the credit adjustment account, the Association can
claim the amount of such balance from an escrow established by
DEPCO. To the extent escrow funds are not available, DEPCO is
required to pay the amount of any negative remaining balance to
the Company. Conversely, if there is a positive balance in the
credit adjustment account, Northeast Savings will be required to
pay that balance to DEPCO.
The terms of the Acquisition Agreement also provide the Associa-
tion with the right to put back loans to DEPCO for a period of
one year from the date of acquisition if the Association deter-
mines that the property securing any loan has an environmentally
hazardous condition. In addition, for a period of seven years,
Northeast Savings is indemnified against losses resulting from
environmentally hazardous materials deposited on the security
property prior to the closing date, as well as against losses
suffered on account of breaches in the representations and
warranties provided by the receivers and DEPCO with regard to the
acquired assets. Northeast Savings is also indemnified against
claims, damages, losses, costs, and expenses that may arise from
a variety of conditions related to the acquisition including
claims against the former institutions, their officers, agents,
or employees. As security for the obligations of DEPCO to pay
the balancing consideration, to repurchase certain loans, and to
indemnify the Association for certain matters, DEPCO placed $59
million in treasury securities in escrow and granted to the
Association a first priority security interest in such funds. Of
such $59 million, $49 million was essentially placed in escrow
for a one-year period to cover the balancing consideration and
the repurchase of loans based on environmentally hazardous
conditions. The remaining $10 million is in a seven-year escrow
to cover the general indemnification obligations and the credit
adjustment obligation. As of December 31, 1992, the $49 million
in the one-year escrow account had been used totally in connec-
tion with payment of the $59 million balancing consideration.
The seven-year escrow retains its $10 million.
NOTE 9: REAL ESTATE AND OTHER ASSETS ACQUIRED IN SETTLEMENT OF
LOANS
The following table presents Northeast Savings' REO by property
type at the dates indicated.
December 31,
----------------------------
1993 1992
---------- ----------
(In Thousands)
Single-family residential . . . $ 57,165 $ 83,605
Hotels . . . . . . . . . . . . 6,453 6,408
Apartment buildings . . . . . . 5,270 4,464
Office, retail, industrial complexes,
land . . . . . . . . . . . . 3,357 2,499
Real estate brokerage operations 1,744 1,544
Residential subdivisions . . . 973 856
REO, net . . . . . . . . . . $ 74,962 $ 99,376
Percent of total assets . . . . 1.91% 2.54%
The activity in the Association's REO is presented in the follow-
ing table:
For the Year For the Year
Ended Ended
December 31, December 31,
1993 1992
____________ _____________
(In Thousands)
Beginning balance . . . . . . $ 99,376 $ 61,208
Foreclosures, net . . . . . . 61,228 66,377
Capitalized expenses . . . . 2,226 1,333
Less:
Sales . . . . . . . . . . . (77,120)* (22,448)
Valuation adjustments . . . (10,082) (3,823)
Mortgage insurance receipts (558) (806)
Other . . . . . . . . . . . (108) (2,465)
Ending balance . . . . . . . $ 74,962 $ 99,376
* During the quarter ended September 30, 1993, $30.3 million of
REO was sold in a single transaction. The total loss on the
sale was $6.8 million, including a provision of $6.0 million
recorded in June in anticipation of the sale. Excluding this
sale, sales of REO for the year ended December 31, 1993
totaled $52.8 million.
NOTE 10: PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
December 31,
1993 1992
(In Thousands)
Land . . . . . . . . . . . . $ 3,371 $ 3,371
Office building and leasehold improvements 37,522 36,365
Furniture, fixtures, and equipment 22,728 21,570
63,621 61,306
Less accumulated depreciation and
amortization. . . . . . . . 31,253 27,105
$32,368 $34,201
At December 31, 1993, Northeast Savings was obligated under
various non-cancelable leases for premises and equipment. The
leases generally contain renewal options and escalation clauses
providing for increased rent expense in future periods. Rent
expense for the year ended December 31, 1993, the nine months
ended December 31, 1992 and the year ended March 31, 1992 was
$7,717,000, $5,440,000 and $6,681,000, respectively.
Northeast Savings leases certain office space for its headquar-
ters and three of its branch banking offices from corporations or
partnerships in which Directors of the Company or their immediate
families are the principal beneficial owners. The leases were
entered into either prior to the nomination and election to the
position of director or with the written approval of the
Association's OTS District Director. Virtually all lease terms
end by 1996 and rents paid for such leases were $3,319,000 for
the year ended December 31, 1993, $2,555,000 for the nine months
ended December 31, 1992, and $3,426,000 for the year ended March
31, 1992.
All future minimum rental payments required under operating
leases that have initial or remaining non-cancelable lease terms
in excess of one year at December 31, 1993 are as follows:
Years Ending December 31: Amount
(In Thousands)
1994 . . . . . . . $ 6,518
1995 . . . . . . . 4,057
1996 . . . . . . . 2,751
1997 . . . . . . . 1,940
1998 . . . . . . . 1,706
Thereafter . . . . 2,733
Total . . . . . . $19,705
In February 1992, the Association purchased an office building
for $9.6 million in cash in Farmington, Connecticut and leased it
back to the previous owners until 1994. Management anticipates
moving a significant portion of the Association's operations to
that facility in 1995.
NOTE 11: DEPOSITS
Deposits consisted of the following:
December 31,
_________________________________________
1993 1992
__________ ___________
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
______ _____________ ______ ______________
(Dollars in Thousands)
Demand deposits . . . . . $35,865 - % $ 35,644 - %
NOW accounts . . . . . . 145,655 1.22 160,821 2.00
Super NOWs . . . . . . . 51,040 1.47 53,758 2.00
Regular savings . . . . . 583,209 2.20 695,674 2.74
Money market savings . . 401,135 2.67 443,692 3.09
Total non-certificate
accounts . . . . . 1,216,904 2.14 1,389,589 2.67
Certificates maturing in the year ending:
1993 . . . . - - 1,034,621 4.70
1994 . . . . 1,218,031 4.37 502,882 5.94
1995 . . . . 193,092 5.00 51,531 7.21
1996 . . . . 46,249 5.85 28,990 6.84
1997 . . . . 56,834 5.80 57,683 5.80
Thereafter . . . . . . . 246,107 6.70 165,493 7.17
Total certificates . . . 1,760,313 4.85 1,841,200 5.40
Total deposits . . . . .$2,977,217 3.74% $3,230,789 4.22%
At both December 31, 1993 and 1992, certificates include brokered
deposits of approximately $25,135,000. Included in deposits is
accrued interest payable of $1,965,000 and $3,043,000 at December
31, 1993 and 1992, respectively. Interest expense on deposits
consisted of the following:
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
___________ _________________ _________
1993 1992 1992
___________ _________________ _________
(In Thousands)
Brokered deposits $ 2,419 $ 1,816 $ 3,296
Retail deposits:
Regular savings . 15,146 18,694 21,985
NOWs, Super NOWs and
money market
savings 15,399 15,356 27,356
Certificates . . 88,199 88,058 166,485
Total interest expense
on deposits $121,163 $123,924 $219,122
NOTE 12: FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
FHLB advances and other borrowings are summarized as follows:
December 31,
_________________________________
1993 1992
_________ _________
(In Thousands)
FHLB advances . . . . . . . $ 373,000 $ 140,000
Securities sold
under agreements to
repurchase 294,809 291,014
Uncertificated debentures . 38,442 34,990
Convertible subordinated
debentures - 560
Total FHLB advances and other
borrowings $ 706,251 $ 466,564
Federal Home Loan Bank Advances
FHLB advances consisted of the following:
December 31,
__________________________________________
1993 1992
___________________ __________________
Weighted Weighted
Due in years Average Average
ending December 31: Amount Interest Rate Amount Interest Rate
(Dollars in Thousands)
1993 . . . . . $ - - % $140,000 5.07%
1994 . . . . . 165,000 3.43 - -
1995 . . . . . 55,000 3.63 - -
1996 . . . . . 98,000 3.53 - -
1997 . . . . . 15,000 3.38 - -
1998 . . . . . 40,000 6.05 - -
$373,000 3.76% $140,000 5.07%
At December 31, 1993, all of the outstanding advances were fixed
rate advances. Accrued interest payable on advances outstanding
at December 31, 1993 and 1992 was $1,135,000 and $485,000,
respectively. At December 31, 1993, Northeast Savings' ability
to borrow from the Federal Home Loan Bank of Boston under its
Advances Program was limited to the value of qualified collateral
that had not been pledged to outside sources. At December 31,
1993, mortgage loans having a carrying value of $568,139,000 and
a collateral value of $426,104,000 were pledged to collateralize
the above advances. Based on the Federal Home Loan Bank of
Boston's Credit Policy, mortgage loans are assigned a collateral
value equal to 75% of the current unpaid principal balance. At
December 31, 1993, the Association's remaining borrowing capacity
from the FHLB totaled $1.8 billion.
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase were wholesale
repurchase agreements and consisted of the following:
December 31,
_________________________________________________
1993 1992
________________________ _______________________
(Dollars in Thousands)
<TABLE>
<CAPTION>
Weighted Weighted
Average Collateral Average Collateral
Repurchase Interest Book Market Repurchase Interest Book Book
Liability Rate Value* Value Liability Rate Value* Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Within 30 days $197,541 3.45% $205,996 $206,046 $233,785 3.43% $242,114 $244,631
31 - 90 days 97,268 3.39 102,475 102,793 57,229 3.59 60,358 60,422
$294,809 3.43% $308,471 $308,839 $291,014 3.46% $302,472 $305,053
</TABLE>
* Book value includes accrued interest of $2,126,000 and
$2,441,000 at December 31, 1993 and 1992, respectively.
Wholesale repurchase agreements mature or reprice on average
every 33 days and were collateralized at December 31, 1993 and
1992 by mortgage-backed securities. All wholesale repurchase
agreements were to repurchase the same securities.
Securities sold under agreements to repurchase are considered
short-term borrowings. The average balance of repurchase agree-
ments outstanding during the year ended December 31, 1993 and the
nine months ended December 31, 1992 was $290,112,000 and
$153,150,000, respectively. The maximum amount outstanding at
any month-end was $311,385,000 for the year ended December 31,
1993 and $330,317,000 for the nine months ended December 31,
1992. Interest expense on repurchase agreements totaled
$9,866,000 for the year ended December 31, 1993, $4,111,000 for
the nine months ended December 31, 1992, and $12,395,000 for the
year ended March 31, 1992, respectively. Accrued interest
payable on repurchase agreements outstanding at December 31, 1993
and 1992 was $3,693,000 and $1,384,000, respectively. The weight-
ed average interest rates during the year ended December 31, 1993
and the nine months ended December 31, 1992 were 3.40% and 3.56%,
respectively.
Uncertificated Debentures
In conjunction with the Association's acquisition of $315.0
million in assets from four Rhode Island financial institutions
and the issuance of deposit accounts in the Association to
depositors in those institutions, the Company issued and sold
$28.95 million of 9% Sinking Fund Uncertificated Debentures, due
in 2012 to the receivers for the four institutions. These
debentures have been transferred from the receivers to certain of
the depositors in the Rhode Island institutions in consideration
of a portion of their deposit claims against the receiverships.
The Company has the right to pay the first five years of interest
on the 9% Debentures by the issuance of additional 9% Debentures
(a payment in kind). For further information on the
Association's acquisition of the Rhode Island institutions, see
Note 23: Acquisitions.
In addition, in connection with the repurchase of its adjustable
rate preferred stock, the Company issued $7.0 million in 9%
Debentures to the FRF. The debentures issued to the FRF have a
market value of $4.5 million, based on the value attributable to
the debentures by the FRF, as determined by its investment
bankers. Implicit in the $4.5 million valuation is a discount
rate of 14.4%, which was consistent with market yields on high-
yield securities at the time. These debentures have the same
terms as those transferred to the depositors in the Rhode Island
institutions. In meeting its interest obligation on all of the
9% Debentures, the Company has issued an additional $5.0 million
of 9% Debentures, which are included in the debentures outstand-
ing at December 31, 1993. For additional information on the
Company's repurchase of its adjustable rate preferred stock, and
the conversion of its convertible preferred stock into common
stock, see Note 13: Stockholders' Equity.
Convertible Subordinated Debentures
The 8% Convertible Subordinated Debentures were due on February
15, 2011, and were convertible at any time into shares of the
Company's common stock at a conversion price of $20.79 per share.
The total Debentures originally issued amounted to $57.5 million,
of which none were outstanding at December 31, 1993 and $560,000
were outstanding at December 31, 1992. Realized gains, net of
income taxes, on the repurchase and retirement of $470,000 of 8%
Debentures for the year ended March 31, 1992 are reflected as
extraordinary items in the Consolidated Statement of Operations.
See Note 17: Extraordinary Items.
Other Borrowings
Other borrowings, when outstanding, consist of Tax Advantaged
Variable Rate ESOP Notes, Series 1987, which were issued by the
Association's ESOP and guaranteed by Northeast Savings. Initial-
ly, the notes were subject to mandatory redemption through the
operation of a sinking fund commencing on the interest payment
date originally beginning September 1988 and on each September
thereafter to 1997. Effective August 31, 1992, the mandatory
redemption of the notes was extended an additional three years.
The notes may be redeemed earlier under certain circumstances.
The interest rate on the notes at December 31, 1993 and 1992 was
3.40% and 3.98%, respectively. The proceeds of this issue were
used by the Association's ESOP to purchase 1,010,326 outstanding
shares of the Company's common stock, adjusted for stock divi-
dends. As of December 31, 1993 and 1992, Northeast Savings had
invested in the ESOP notes at an amount equal to the principal
outstanding, thus acquiring all outstanding notes. Correspond-
ingly, the notes were not reported as other borrowings at either
December 31, 1993 or 1992. Mandatory redemptions of the ESOP
notes in the amounts of $1,110,000 are due each fiscal year from
1994 through 2000.
At December 31, 1993, mortgage-backed securities having a carry-
ing value of $13,846,000 and a market value of $13,800,000 were
pledged to collateralize a Letter of Credit supporting the ESOP
notes, which honors demands for payment by the Note Trustee
presented in accordance with the terms of the Letter of Credit.
Also, the Association had an available, but unused, line of
credit in the amount of $25,000,000 at December 31, 1993.
NOTE 13: STOCKHOLDERS' EQUITY
Regulatory Matters
The Financial Institutions Reform, Recovery and Enforcement Act
of 1989, which was signed into law on August 9, 1989, provided
for a comprehensive reorganization of the regulatory structure of
the thrift industry. Northeast Savings is required to maintain
certain levels of capital in accordance with FIRREA and OTS
regulations. In addition, on November 7, 1991, the United States
Congress passed the Federal Deposit Insurance Corporation Im-
provement Act of 1991, which became effective on December 19,
1991. While the primary focus of the legislation is to recapi-
talize the Bank Insurance Fund, FDICIA also adopted numerous
mandatory measures which affect all depository institutions,
including savings associations such as Northeast Savings, and
which are designed to reduce the cost to the deposit funds of
resolving problems presented by undercapitalized institutions.
The OTS regulations implementing the FIRREA capital standards
established three measures of capital compliance: tangible core
capital, core capital, and risk-based capital. Associations
which failed to meet any of the three capital standards on
December 7, 1989, were subject to certain restrictions which
included growth restrictions and a limitation on capital distri-
butions. These thrifts were also required to develop and submit
to the OTS by January 8, 1990, acceptable capital restoration
plans which demonstrate the strategies to be utilized to meet the
capital standards. At December 7, 1989, Northeast Savings did
not meet the capital standards set forth in FIRREA and the OTS
regulations implementing the FIRREA capital standards. Northeast
Savings filed its capital restoration plan with the OTS, as
required by FIRREA, which was approved and accepted by the OTS on
March 9, 1990. On March 23, 1990, the Association accepted the
conditions imposed upon it by the OTS approval of its capital
plan. Northeast Savings also filed an application to form a
holding company, Northeast Federal Corp., which was approved by
the OTS on April 16, 1990. The holding company reorganization
was completed in July 1990, upon approval of the holders of
voting stock of Northeast Savings. Under this reorganization
Northeast Savings' capital stock was exchanged for capital stock
of Northeast Federal Corp. and the capital of Northeast Federal
Corp. was downstreamed to Northeast Savings in the form of common
stock which qualified as regulatory capital. At such time, the
Association came into compliance with all then-applicable regula-
tory capital requirements. The Association subsequently met all
of the conditions of the capital plan and has been released from
it by the OTS.
Although Northeast Savings is in compliance with all fully
phased-in regulatory capital requirements, the ability of the
Company to make capital distributions is restricted by the
limited cash resources of the Company and the ability of the
Company to receive a dividend from the Association. The
Association's payment of dividends is subject to regulatory
limitations, particularly the prompt corrective action regulation
which prohibits the payment of a dividend if such payment would
cause the Association to become undercapitalized. In addition,
the Company and the OTS entered into a Dividend Limitation
Agreement as part of the holding company approval process which
prohibits the payment of dividends to the holding company without
prior written OTS approval if the Association's capital is below
its fully phased-in capital requirement or if the payment of such
dividends would cause its capital to fall below its fully phased-
in capital requirement. The OTS Capital Distribution Regulation
also restricts the amount of capital distributions that an
association may make without obtaining prior OTS approval.
Consequently, the Company anticipates that it will not pay any
cash dividends on its Series B preferred stock or common stock
for the foreseeable future. Due to the restrictions of the
Dividend Limitation Agreement and the Capital Distribution
Regulation combined with management's decision in 1990 to suspend
cash dividend payments in order to preserve capital, management
considers that essentially all of the Company's net assets are
restricted from dividend payments.
The following table reflects the regulatory capital requirements
and the Association's regulatory capital.
<TABLE>
<CAPTION>
December 31, December 31,
___________________________ __________________________
1993 1992
___________________________ ___________________________
Fully Phased- Fully Phased-
Regulatory Actual in Regulatory Actual in Regulatory
Capital Regulatory Capital Regulatory Capital
Requirement Capital Required Capital Required
____________ __________ _____________ ___________ ______________
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Tangible core capital $167,244 $ 58,750 $170,394 $ 58,607
Percent 4.27% 1.50% 4.36% 1.50%
Core capital $167,795 $156,688 $171,163 $156,317
Percent 4.28% 4.00% 4.38% 4.00%
Risk-based capital $189,330 $137,287 $191,465 $153,208
Percent 11.03% 8.00% 10.00% 8.00%
</TABLE>
Conversion to Stock Association
On September 22, 1983, Northeast Savings converted from a mutual
to a stock association. At the time of the conversion, eligible
deposit account holders were granted priority in the event of
future liquidation by the establishment of a "liquidation ac-
count" equal to net worth at June 30, 1983. No dividends may be
paid to stockholders if such dividends reduce stockholders'
equity below the amount required for the liquidation account,
which was approximately $13.0 million at December 31, 1993.
$2.25 Cumulative Convertible Preferred Stock, Series A
In October 1985, Northeast Savings issued 1,610,000 shares of
$2.25 Cumulative Convertible Preferred Stock, Series A (the
convertible preferred stock) at $25 per share, par value $.01 per
share which generated net proceeds of $38,341,000. Dividends on
the convertible preferred stock were payable quarterly and were
cumulative from the date of issue.
Each share of the convertible preferred stock was convertible
into 1.473 shares of common stock at any time at the conversion
price of $16.97. The convertible preferred stock was redeemable
at any time, at the option of the Company, at $26.35 per share
prior to October 1, 1990 and at prices declining annually there-
after to $25.00 per share on and after October 1, 1995. In
February 1990, the Board of Directors suspended the quarterly
cash dividend on the convertible preferred stock. At January
1, 1993, accumulated and unpaid quarterly dividends on the
convertible preferred stock were $.56 per share or $906,000,
while total dividends were $6.75 per share or $10.9 million in
the aggregate.
On May 7, 1993, at a Special Meeting of Stockholders, the
Company's stockholders approved a reclassification of the con-
vertible preferred stock into common stock at a ratio of 4.75
shares of common stock for each share of convertible preferred
stock. Effective May 14, 1993, the 1,610,000 shares of convert-
ible preferred stock were converted into 7,647,500 shares of
common stock. As a result, all of the powers, privileges and
special and relative rights of the convertible preferred stock
were eliminated including the then accumulated and unpaid divi-
dends, the liquidation priority, the right, at the option of the
holder, to convert each share of convertible preferred stock into
1.473 shares of common stock (and retain the right to receive,
when as, and if, declared and paid by the Company, the accumulat-
ed and unpaid dividends at the time of such conversion on each
such share of convertible preferred stock ) and the right to
elect two directors to the Company's Board so long as six full
quarterly dividends are in arrears.
$8.50 Cumulative Preferred Stock, Series B.
In connection with the Association's acquisition of assets of
four Rhode Island financial institutions, and the issuance of
deposit accounts in the Association to depositors in those
institutions, the Company issued and sold to the Rhode Island
Depositors Economic Protection Corporation, 351,700 shares of a
new class of preferred stock, the $8.50 Cumulative Preferred
Stock, Series B. Accordingly, the Certificate of Incorporation
of the Company was amended by adding a new Certificate of Desig-
nation for the Series B preferred stock. The Certificate of
Designation authorizes the issuance of a total of 540,000 shares
of the Series B preferred stock.
Under the Stock and Warrant Purchase Agreement (the Stock Pur-
chase Agreement) entered into with DEPCO in connection with the
acquisition, DEPCO has the right to transfer its interest in the
Series B preferred stock to another instrumentality or agency of
the State of Rhode Island and such entity would be a "Nominee"
within the meaning of the Stock Purchase Agreement. On June 24,
1992, the Company was advised by DEPCO that it had transferred
its interest in the Series B preferred stock to the Rhode Island
State Investment Commission (RISIC). On September 28, 1993,
RISIC transferred its interest in the Series B preferred stock to
DEPCO.
The Certificate of Designation for the Series B preferred stock
increases the Company's Board of Directors by two and gives DEPCO
or any Nominee as defined in the Stock Purchase Agreement the
right to elect two directors so long as DEPCO or a Nominee holds
at least 211,020 shares of the Series B preferred stock (one
director if DEPCO or the Nominee holds less than that number but
at least 105,510 of the Series B preferred stock). Two directors
were elected by the RISIC and seated at the meeting of the
directors on July 24, 1992. The same two individuals continue to
serve as directors.
So long as DEPCO or its Nominee beneficially owns the requisite
number of shares such that, pursuant to the Series B preferred
stock Certificate of Designation, DEPCO or such Nominee is
entitled to elect one director of the Company, then, in the event
of a change in control of the Company, the Company agrees to and
shall, not less than forty-five days after such change in con-
trol, make an offer to redeem or repurchase all of the shares of
the Series B preferred stock then outstanding at the Redemption
Price plus accumulated and unpaid dividends thereon (whether or
not declared) through the date fixed for such repurchase. Such
repurchase obligation of the Company is limited to the extent the
Company has available funds which, in general, are funds of the
Company which can be obtained by a permissible dividend from the
Association and which are not required for the payment of debt or
senior obligations and the payment of which would not violate
Delaware law or any regulatory obligation. A Change in Control
shall be deemed to have occurred under the terms of the Stock
Purchase Agreement in the event that any person acquires the
right to vote or dispose of 25% or greater of the Company's then-
outstanding common stock or such amount of securities of the
Company as shall enable such person to exercise, or acquire
securities and thereupon exercise rights to vote 25% or greater
of the total outstanding voting rights in the Company or to elect
more than 25% of the directors of the Company.
Dividends on the Series B preferred stock payable on or prior to
July 1, 1997, whether or not paid on or prior to that date shall
be paid at the election of the Company in cash or in shares of
Series B preferred stock. No dividends or other distribution
shall be paid or declared or set aside for the common stock of
the Company nor may any shares of common stock be purchased or
redeemed by the Company or any subsidiary thereof unless all
cumulative dividends on all outstanding shares of the Series B
preferred stock have been paid in full to the holders of the
shares of Series B preferred stock.
On May 21, 1993, the Company's Board of Directors voted to
declare a stock dividend payable on July 1, 1993 on the Series B
preferred stock of one share of Series B Preferred stock for each
$100 of the amount of dividends payable on July 1, 1993 and
accumulated and unpaid as of that date, to holders of record on
June 14, 1993. On July 1, 1993, the Company paid all then
accumulated and payable dividends on the Series B preferred
stock, an aggregate of $3.4 million, through the issuance of
34,296 shares of Series B preferred stock. On September 24,
1993, the Company's Board of Directors voted to declare a quar-
terly stock dividend on the Series B preferred stock payable on
October 1, 1993 to holders of record on September 24, 1993. On
October 1, 1993, the Company paid $820,000 of dividends payable
on the Series B preferred stock through the issuance of an
additional 8,203 shares of Series B preferred stock. On December
17, 1993, the Company's Board of Directors voted to declare a
quarterly stock dividend on the Series B preferred stock payable
on January 1, 1994 to holders of record on December 17, 1993. On
January 1, 1994, the Company paid $838,000 of dividends payable
on the Series B preferred stock through the issuance of an
additional 8,377 shares of Series B preferred stock.
The Company also issued to DEPCO a warrant to purchase 600,000
shares of the Company's common stock exercisable at $2.50 per
share and a warrant to purchase 200,000 shares of the Company's
common stock exercisable at $4.25 per share. These warrants may
be exercised by DEPCO (or by any Rhode Island state agency to
which DEPCO may transfer the warrants) as to all, but not less
than all, of the applicable shares during the period beginning
ninety days from the closing date of May 8, 1992 and ending ten
years from May 8, 1992. Common stock received by DEPCO upon the
exercise of such warrants is restricted as to its sale. During
each twelve month period beginning upon the exercise of the
warrants and expiring on May 8, 1997, DEPCO is entitled to sell
120,000 shares of common stock acquired from the exercise of the
warrants.
Adjustable Rate Cumulative Preferred Stock, Series A
In March 1987, Northeast Savings issued 1,202,916 shares of
Adjustable Rate Cumulative Preferred Stock, Series A, at a stated
value of $50 per share, par value $.01 per share, to the FSLIC in
exchange for the FSLIC's cancellation of a $50,000,000 income
capital certificate and a portion of the related accumulated
income payments, the sum of which totaled $60,145,000. When the
FSLIC was terminated, the adjustable rate preferred stock was
transferred to the FSLIC Resolution Fund which is administered by
the FDIC. Dividends on the adjustable rate preferred stock were
cumulative and payable quarterly based on the highest of the
Treasury Bill Rate, the Ten Year Constant Maturity Rate or the
Thirty Year Constant Maturity Rate. The dividend rate at March
31, 1992 was 7.75%. In February 1990, the Board of Directors
suspended the quarterly cash dividend on the adjustable rate
preferred stock. Thus, the quarterly dividend of $1.2 million or
$.97 per share which normally would have been payable April 1,
1992, was not declared by the Board of Directors of the Company
and was in arrears at March 31, 1992. At March 31, 1992, total
accumulated dividends on the adjustable rate preferred stock were
$9.32 per share or $11.2 million. On May 8, 1992, also in
conjunction with the aforementioned acquisition of assets of the
Rhode Island financial institutions, the Company repurchased the
adjustable rate preferred stock plus accumulated dividends from
the FSLIC Resolution Fund for $28.0 million in cash and $7.0
million in 9% Sinking Fund Uncertificated Debentures, due 2012
for a total fair value of $32.5 million. The 9% Debentures
issued to the FRF had a market value of $4.5 million based on the
value attributable to those debentures by the FRF, as determined
by its investment banker.
Unallocated Employee Stock Ownership Plan Shares
In connection with the funding of the ESOP, stockholders' equity
has been reduced net of tax to reflect the guarantee of Northeast
Savings. See Note 12: Federal Home Loan Bank Advances and Other
Borrowings.
NOTE 14: EMPLOYEE BENEFIT PLANS
Retirement Plan
The Retirement Plan for Employees of Northeast Savings, F.A. and
Subsidiaries (the Plan) is a defined benefit plan which covers
substantially all employees of Northeast Savings. Employees are
vested in the Plan after seven years of service and benefits are
based on a percentage of each year's compensation. Plan assets
are under the control of a trustee and invested in pooled funds.
Net pension expense consisted of the following:
For the
For the Nine Months For the
Year Ended Ended Year Ended
December 31, December 31, March 31,
1993 1992 1992
(In Thousands)
Service cost (benefits
earned during the period) $ 431 $ 235 $ 312
Interest cost on projected
benefit obligation 380 249 290
Actual return on Plan assets (297) (345) (336)
Net amortization and deferrals (80) 88 21
$ 434 $ 227 $ 287
According to the Association's actuary, the following table sets
forth the Plan's funded status at the dates indicated.
December 31, December 31,
1993 1992
(In Thousands)
Actuarial present value of
benefit obligations:
Vested benefits . . . . $4,680 $4,089
Nonvested benefits . . 287 236
Accumulated benefit obligation 4,967 4,325
Effect of future compensation
increases 94 58
Projected benefit obligation 5,061 4,383
Plan assets at fair value 5,215 4,341
Projected benefit obligation
in excess of (less than)
Plan assets . . . . . . (154) 42
Unrecognized net transition
asset 214 230
Unrecognized prior service
cost (130) -
Unrecognized net loss . . (592) (296)
Unfunded accrued (prepaid)
pension costs $ (662) $ (24)
Assumptions used in actuarial computations were:
1993 1992
Discount rate . . . . . . . . . 7.00% 7.75%
Rate of increase in future
compensation levels 5.00 6.00
Expected long-term rate of return
on assets 7.50 8.25
401(k) Thrift and Profit Sharing Plan
Northeast Savings maintains a 401(k) thrift and profit sharing
plan to encourage systematic savings by employees. Substantially
all employees are eligible and can contribute up to 6% of their
base salary, on a tax-deferred basis, 50% of which is matched by
Northeast Savings. Employees are vested in this plan after five
years of service. Thrift plan expense amounted to $524,000,
$318,000 and $396,000 for the year ended December 31, 1993, the
nine months ended December 31, 1992, and the year ended March 31,
1992, respectively.
Employee Stock Ownership Plan
Northeast Savings also maintains an employee stock ownership plan
to provide the opportunity for substantially all employees of
Northeast Savings to also become stockholders. The ESOP was
funded through the issuance of Tax Advantaged Variable Rate ESOP
Notes, Series 1987. The proceeds of the notes were used to
purchase outstanding shares of Northeast Savings' common stock
and the notes are guaranteed by Northeast Savings. When North-
east Savings was reorganized into the holding company, Northeast
Federal Corp., the common stock of the Association was exchanged
for the common stock of the holding company. The ESOP requires
Northeast Savings to contribute the amount necessary for the ESOP
to discharge its current obligations which include principal and
interest payments on the notes. For the year ended December 31,
1993 and the nine months ended December 31, 1992, respectively,
Northeast Savings' contribution to the ESOP amounted to
$1,512,000 and $383,000, of which $267,000 and $260,000 was
interest expense on the ESOP notes. For the year ended March 31,
1992, the contribution totaled $2,108,000 of which $561,000 was
interest expense. Further information regarding these notes may
be found in Note 12: Federal Home Loan Bank Advances and Other
Borrowings.
Stock Option Plans
The stock option plans provide for the granting of options to
Directors, officers, and other key employees to purchase common
stock of Northeast Federal Corp. at a price not less than the
fair market value of the Company's stock on the date of grant.
The stock option plans provide for the option and sale in the
aggregate of 2,250,000 shares of the Company's common stock. The
maximum option term is 10 years. At December 31, 1993 and 1992,
respectively, there were 571,613 and 352,676 shares which were
fully vested and exercisable.
Changes in the status of stock options are summarized as follows:
For the For the
Year Nine Months
Ended Ended
December 31, December 31,
1993 1992
_____________ _____________
Weighted Weighted
Number Average Number Average
of Shares Option Price of Shares Option Price
Balance, beginning
of period .......... 453,317 $ 1.91 447,717 $ 1.84
Issued . . . . . . . 1,006,676 4.86 15,000 3.83
Exercised . . . . . . (81,701) (1.80) (9,400) (1.73)
Canceled . . . . . . (6,000) 1.69 - -
Balance, end of
period . . 1,372,292 $ 4.08 453,317 $ 1.91
Deferred Compensation Plan
The Deferred Compensation Plan allows key executives to defer
receipt of compensation otherwise currently payable to them by
the Association or any subsidiary of the Association for a period
of two to ten years. The Association will match 60% of the first
5% an executive elects to defer. The deferred funds will be
invested during the deferral period in either a Guaranteed Rate
Investment Account or in common stock of Northeast Federal Corp.
at a price not less than the monthly average fair market value of
the Company's stock for the last ten days of each month.
Directors' Deferred Fee Plan
The Deferred Fee Plan provides the members of the Board of
Directors of the Association the opportunity to defer receipt of
fees otherwise currently payable to them by the Association for a
period up to ten years. The deferred fees will be invested
during the deferral period in either the Guaranteed Rate Invest-
ment Account or in common stock of Northeast Federal Corp. at a
price not less than the monthly average fair market value of the
Company's stock.
The Deferred Compensation Plan and the Deferred Fee Plan provide
for a total of 250,000 shares of company stock to be purchased.
NOTE 15: INCOME TAXES
As discussed in Note 1, the Company adopted SFAS 109 as of April
1, 1991. SFAS 109 establishes financial accounting and reporting
standards for the effects of income taxes that result from an
enterprise's activities during the current and preceding years.
It requires an asset and liability approach for financial ac-
counting and reporting for income taxes. In accordance with this
implementation, the Company recorded an additional $1.0 million
in income as the cumulative effect of a change in accounting
principle for the year ended March 31, 1992. In addition, a
valuation allowance of $3.7 million was established which reduced
the deferred tax assets as of April 1, 1991. Due to the
Company's utilization of all net operating loss carryforwards,
the valuation reserve, which was related to those carryforwards,
was eliminated as of December 31, 1992. Also in accordance with
the implementation of SFAS 109, the Company applied $20.9 million
at April 1, 1991 and another $1.0 million at December 31, 1992 to
reduce the balance of its supervisory goodwill. The cumulative
effect of this change is reported separately in the March 31,
1992 Consolidated Statement of Income and prior years' financial
statements have not been restated.
In accordance with SFAS 109, deferred income tax assets and
liabilities at December 31, 1993 and 1992 reflect the impact of
temporary differences between values recorded as assets and
liabilities for financial reporting purposes and values utilized
for remeasurement in accordance with tax laws.
A reconciliation of the statutory income tax rate to the consoli-
dated effective income tax rate as well as a reconciliation of
the recorded income tax expense (benefit) and the amount of
income tax expense (benefit) computed by applying the statutory
federal corporate tax rate to income (loss) before income taxes
and extraordinary items follow:
For the For the For the
Year Nine Months Year
Ended Ended Ended
December 31, December 31, March 31,
1993 1992 1992
____________________________________________
(Dollars In Thousands)
Federal income tax
expense (benefit)
at statutory rate $ (8,953) (34.00)% $(21,870)(34.00)% $ 3,198 34.00%
Increase (decrease)
resulting from:
Supervisory goodwill - - 19,994 31.08 1,350 14.35
State taxes, net of
federal tax benefit (3,290) (12.49) (461) (.72) 1,039 11.05
Other permanent items,
net 50 .19 9 .01 (659) (7.05)
Elimination of valuation
allowance - - (2,752) (4.27) - -
Tax exempt interest
income - - (9) (.01) (13) (.10)
Income tax expense
(benefit) per
financial statements $(12,193) (46.30)% $ (5,089) (7.91)% $ 4,915 52.25%
The components of the income tax expense (benefit) are as fol-
lows:
For the For the
Year Nine Months For the
Ended Ended Year Ended
December 31, December 31 March 31
1993 1992 1992
_____________________________________________
(In Thousands)
Current provision:
State . . . . . . . . $ 184 $ 2,454 $ 466
Net change in valuation
allowances . . . . . 4,000 (2,752) -
Net change in temporary
differences . . . . . (16,377) (4,791) 4,449
Total income tax
expense (benefit) $(12,193) $(5,089) $4,915
The tax effect of the temporary differences giving rise to the
Company's deferred tax assets and liabilities are as follows:
December 31,
_________________________________________
1993 1992
_________________________________________
Asset Liability Asset Liability
__________________________________________
(In Thousands)
Allowance for loan losses $36,075 $ - $20,649 $ -
Reserve for uncollected
interest 2,305 - 4,111 -
Purchase accounting discount 1,339 - 1,984 -
Deferred service fee - 1,522 - 1,844
Other . . . . . . . 2,006 1,670 2,578 1,056
Total deferred income taxes $41,725 $3,192 $29,322 $2,900
In addition, as of December 31, 1993, a valuation allowance of
$4.0 million was established which reduced the deferred tax
assets, since it is more likely than not that a portion of these
assets will not be realized. Also, the Company has recorded
deferred tax assets at December 31, 1993 related to alternative
minimum tax credit carryforwards and the ESOP guarantee of $3.3
million and $3.1 million, respectively.
For federal tax return purposes, Northeast Federal Corp. files a
consolidated tax return with its subsidiaries on a calendar year-
end basis. Northeast Savings, a subsidiary of Northeast Federal
Corp., has been audited by the Internal Revenue Service with
respect to tax returns through 1979.
Under the Internal Revenue Code (the Code), Northeast Savings is
allowed a special bad debt deduction based on a percentage of
taxable income (8%) before such deduction, or based on specified
experience formulas. Through 1979, Northeast Savings consistent-
ly computed its annual addition to the tax bad debt reserve using
the percentage of taxable income method. Subsequent to 1979,
such annual addition has been computed under an experience
formula because of operating losses incurred for federal income
tax purposes.
At December 31, 1993, Northeast Savings' base year tax bad debt
reserve totaled approximately $2.0 million for which a deferred
tax liability is not required to be recognized under SFAS 109.
If in the future, earnings allocated to this bad debt reserve and
deducted for federal income tax purposes are used for payment of
cash dividends or other distributions to stockholders, including
distributions in redemption or in dissolution or liquidation, an
amount up to approximately 1 3/4 times the amount actually
distributed to the stockholders will be includable in Northeast
Federal Corp.'s taxable income and be subject to tax.
Earnings and profits include taxable income net of federal income
taxes and adjustments for items of income which are not taxable
and expenses which are not deductible. For the tax year ended
December 31, 1993, Northeast Federal Corp. and subsidiaries had
current earnings and profits. Any dividends paid with respect to
Northeast Savings, F.A.'s stock in excess of current or accumu-
lated earnings and profits at year-end for federal tax purposes
or any other stockholder distribution will be treated as paid out
of the tax bad debt reserves and will increase taxable income as
noted in the preceding paragraph.
NOTE 16: GAIN (LOSS) ON SALE OF INTEREST-EARNING ASSETS, NET
Gains (losses) are summarized in the following table. For the
year ended December 31, 1993 and the nine months ended December
31, 1992, virtually all sales of investments and mortgage-backed
securities were either from the available-for-sale portfolios or
were due to credit concerns.
For the For the
Year Nine Months For the
Ended Ended Year Ended
December 31, December 31, March 31
1993 1992 1992
____________ ____________ ___________
(In Thousands)
Net gain (loss) on sales of:
Investment securities . $ 3,579 $ 1,942 $ (2,757)
Mortgage-backed securities .... 2,046 2,158 4,748
Loans . . . . . . . . . 1,939 1,870 2,532
Total . . . . . . . . $ 7,564 $ 5,970 $ 4,523
NOTE 17: EXTRAORDINARY ITEMS
A summary of extraordinary items follows:
For the Year
Ended March 31,
1992
_________________
(In Thousands)
Gain (loss) from early extinguishment of debt,
net of income taxes:
8% Convertible Subordinated Debentures $ 95
$ 95
Extraordinary items presented above are net of applicable taxes
of $109,000 for the year ended March 31, 1992. All federal
income taxes were offset by the utilization of existing operating
loss carryforwards.
NOTE 18: SUPPLEMENTARY EARNINGS PER SHARE
As required by Accounting Principles Board Opinion No. 15,
"Earnings Per Share," supplementary earnings per share informa-
tion is presented as if the conversion of the Company's $2.25
Convertible Cumulative Preferred Stock, Series A, into common
stock, which occurred on May 14, 1993, had taken place at the
beginning of the period.
December 31,
_______________________________________
1993 1992
_____________ ___________
(Dollars in Thousands Except Share Amounts)
Net loss . . . . . . . $ (14,139) $ (59,037)
Preferred stock dividend
requirements (3,153) (3,100)
Net loss applicable to
common stockholders . . $ (17,292) $ (62,137)
Average shares outstanding 13,464,163 13,371,372
Net loss per common share $ (1.28) $ (4.65)
The following table shows the computation of the weighted average
shares used in the calculation of supplementary earnings per
share:
Year Ended
December 31,
_________________________________
1993 1992
_____________ ___________
Actual weighted average shares out-
standing excluding conversion shares 5,816,663 5,723,872
Conversion shares (assumed converted at
the beginning of the period) 7,647,500 7,647,500
13,464,163 13,371,372
NOTE 19: COMMITMENTS AND CONTINGENCIES
Outstanding commitments to originate adjustable rate and fixed
rate mortgage loans amounted to $15,429,000 and $33,649,000,
respectively, at December 31, 1993. With respect to residential
mortgage loans, commitments generally expire within 10 to 180
days, depending upon the type and purpose of the loan. Also at
December 31, 1993, commitments of $3,497,000 were outstanding on
existing single-family residential construction loans. In
addition, at December 31, 1993, the Association had outstanding
commitments of $10,125,000 on consumer loans, which consisted
primarily of available lines of credit. At December 31, 1993,
the Association had entered into firm commitments to sell
$44,510,000 of mortgage loans from the available-for-sale portfolio.
Finally, at December 31, 1993, the Association had entered
into firm commitments to purchase $76,689,000 of mortgage-backed
securities.
On December 6, 1989, the Association filed a complaint in the
United States District Court for the District of Columbia against
the FDIC and the OTS, as successor regulatory agencies to the
FSLIC and the Federal Home Loan Bank Board. It was the position
of the Association in the litigation that the denial by the OTS
and the FDIC of core capital treatment to the adjustable rate
preferred stock and the elimination from capital, subject to
limited inclusion during a phase-out period, of supervisory
goodwill, constitutes a breach of contract, as well as a taking
of the Association's property without just compensation or due
process of law in violation of the Fifth Amendment to the United
States Constitution. The Association sought a determination by
the Court to this effect and the Association further sought to
enjoin the defendants and their officers, agents, employees and
attorneys and those persons in active concert or participation
with them from enforcing the provisions of FIRREA and the OTS
regulations or from taking other actions that are inconsistent
with their contractual obligations to Northeast Savings. The
suit sought an injunction requiring the OTS and FDIC to abide by
their contractual agreements to recognize as regulatory capital
the supervisory goodwill booked by Northeast Savings as a result
of its 1982 acquisition from the FSLIC of three insolvent
thrifts. On July 16, 1991, the district court ruled that it
lacked jurisdiction over the action but that Northeast could
bring a damages action against the government in the United
States Claims Court.
On July 8, 1992, the Association moved to voluntarily dismiss its
appeal of the July 16, 1991 district court decision dismissing
its action seeking injunctive relief. This motion was made with
a view toward refiling the Association's lawsuit against the
government in the United States Claims Court, so as to seek
damages against the United States rather than injunctive relief
against the OTS and FDIC. This motion was made for two reasons.
First, by virtue of the Association's improved financial and
regulatory capital condition, including its compliance with all
fully phased-in capital requirements, and its tangible capital
position exceeding four percent, the Association determined that
it was no longer in need of injunctive relief. Rather, the
Association determined that it was now in its best interest to
pursue a damages claim against the United States in the Claims
Court. Second, the Association sought to dismiss its appeal and
refile in the Claims Court because of the adverse decision of the
Court of Appeals for the D.C. Circuit in another "supervisory
goodwill" case, TransOhio Savings Bank, et al. v. Director, OTS,
et al. 967 F.2d 598 (June 12, 1992). Neither the OTS nor the
FDIC opposed the Association's motion. The D.C. Circuit granted
the Association's motion to voluntarily dismiss its appeal on
July 9, 1992. On August 12, 1992, Northeast Savings refiled its
action in the United States Claims Court, Northeast Savings, F.A.
v. United States, No. 92-550c. Note that, effective October 29,
1992, the United States Claims Court was renamed the United
States Court of Federal Claims. Northeast Savings' complaint
seeks monetary relief against the United States on theories of
breach of contract, taking of property without just compensation,
and deprivation of property without due process of law. The
United States has not yet filed an answer to the Complaint. On
May 25, 1993, a three-judge panel of the Federal Circuit Court of
Appeals ruled against the plaintiffs in three other consolidated
"supervisory goodwill" cases, holding that the thrift institutions
had not obtained an "unmistakable" promise from the government
that it would not change the law in such a manner as to
abrogate its contractual obligations and that the plaintiffs
therefore bore the risk of such a change in the law. Winstar
Corp. v. United States, No. 92-5164. On August 18, 1993, however,
the full Federal Circuit, acting in response to a Petition
for Rehearing with Suggestion for Rehearing In Banc filed by two
of the three plaintiffs in these cases, vacated the May 25 panel
decision, ordered the panel opinion withdrawn, and ordered that
the case be reheard by the full Court. Oral argument in the
Winstar case was held on February 10, 1994. On June 3, 1993, the
Court of Federal Claims entered an order staying proceedings in
Northeast Savings' case pending further action by the Federal
Circuit in the Winstar case or any action taken by the Supreme
Court on any petition for a writ of certiorari in that case.
The Association is also involved in litigation arising in the
normal course of business. Although the legal responsibility and
financial impact with respect to such litigation cannot presently
be ascertained, the Association does not anticipate that any of
these matters will result in the payment by the Association of
damages that, in the aggregate, would be material in relation to
the consolidated results of operations or financial position of
the Company.
NOTE 20: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND
CONCENTRATION OF CREDIT RISK
In the normal course of business, Northeast Savings is a party to
various financial instruments with off-balance-sheet risk. These
financial instruments include commitments to extend credit to
meet the financing needs of customers, as well as interest rate
swaps entered into as a means of reducing the Association's
exposure to changes in interest rates.
To varying degrees, these instruments involve elements of credit
and interest rate risk in excess of the amount recognized in the
Consolidated Statement of Financial Condition. The following
table shows the contract or notional amount of these instruments
held by the Association.
December 31,
_________________________________
1993 1992
_____________ ___________
(In Thousands)
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit:
Single-family residential real estate
loans . . . . . . . . . . . . . . . $ 49,078 $ 75,506
Consumer loans . . . . . . . . . . . 10,125 11,517
Income property loans . . . . . . . . 3,497 863
Loans serviced for others with recourse 69,124 6,371
Total commitments to extend credit $131,824 $ 94,257
Financial instruments whose notional or
contract amounts exceed the amount of
credit risk:
Interest rate swap agreements $ 15,739 $ 46,080
Commitments to extend credit are agreements to lend to a customer
and are entered into in accordance with written, nondiscriminatory,
underwriting guidelines established by the Board of Directors.
Prior to extending credit, the Association appraises any
property which will collateralize the loan and determines the
borrower's ability to repay through review of detailed loan
applications and credit reports. These commitments have fixed
expiration dates or other termination clauses and may require
payment of a fee. The total commitment amounts do not necessarily
represent future cash requirements since some commitments may
expire without being drawn upon.
The increase in loans serviced with recourse resulted from
management's decision in 1993 to eliminate pool insurance on
these loans. In reviewing the delinquency history of the loans,
management determined that it was more costly to maintain insurance
than to assume the credit risk directly. The loans are
well-seasoned and generally have a loan-to-value ratio of 65% or
less. At December 31, 1993, $2.1 million were contractually
delinquent. Of that amount, $540,000 were delinquent for over 90
days. The risk of these loans is evaluated in conjunction with
the evaluation of the adequacy of the allowance for loan losses.
At December 31, 1993, the Association's interest rate swap
agreements on a market value basis were in a net loss position of
$231,000. Interest rate swaps involve the exchange of rates on
interest payment obligations without the exchange of the underlying
principal amounts. The primary risk associated with interest
rate swaps is not credit risk but risk associated with movements
in interest rates. While notional principal amounts express the
volume of the interest rate swaps, the amounts potentially
subject to credit risk are much smaller.
At December 31, 1993 and 1992, outstanding interest rate swaps
totaled $15,739,000 and $46,080,000, respectively. During the
year ended March 31, 1992, the Association voluntarily terminated
$275,000,000 of interest rate swap agreements. Interest
payments related to interest rate swaps and caps are charged or
credited to interest expense on other borrowings. Accrued
interest receivable on swaps outstanding at December 31, 1993 and
1992, respectively, was $70,000 and $264,000.
The Association grants residential loans to customers primarily
in the Northeast. In 1992, the Association also began originating
loans through its recently-opened office in Colorado. In
early 1994, the Association closed its loan origination office in
California. Although the Association has a diversified portfolio,
the ability of its borrowers to repay their loans is substantially
dependent upon the general economic conditions of the
region.
NOTE 21: DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments," requires disclosure
of fair value information about financial instruments, whether or
not recognized in the balance sheet, for which it is practicable
to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using present
value or other estimation techniques. Those techniques are
significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Such techniques
and assumptions, as they apply to individual categories of
the Company's financial instruments, are as follows:
* Cash and short-term investments: The carrying amounts for
cash and short-term investments is a reasonable estimate of
those assets' fair value.
* Investment securities, including mortgage-backed securities:
Fair values for these securities are based on quoted market
prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices for
similar securities.
* Loans receivable: For adjustable rate loans that reprice
frequently and with no significant change in credit risk,
fair values are based on the market prices for securities
collateralized by similar loans. For certain homogeneous
categories of loans, such as some residential fixed rate
mortgages, fair value is estimated using the quoted market
price for securities backed by similar loans, adjusted for
differences in loan characteristics. The fair value of
other types of loans is estimated by discounting the future
cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and
for the same remaining maturities. For the income property
loan portfolio, due to its immateriality, i.e. approximately
2.0% of total assets, management concluded that it was not
practicable to estimate its fair value and, accordingly, has
valued it at its carrying amount.
* Rhode Island covered assets: Since, relative to these
assets, the Association is protected against credit losses,
their carrying value is a reasonable estimate of their fair
value.
* Accrued interest receivable: The carrying amount of accrued
interest approximates its fair value.
* Deposit liabilities: The fair value of demand deposits,
savings accounts, and certain money market deposits is the
amount payable on demand at the reporting date, that is, the
carrying value. Fair values for fixed rate certificates of
deposits are estimated using a discounted cash flow calculation
that applies interest rates currently being offered for
deposits of similar remaining maturities. SFAS 107 defines
the fair value of demand deposits as the amount payable on
demand, and prohibits adjusting fair value for any value
derived from retaining those deposits for an expected future
period of time. That component, commonly referred to as a
deposit base intangible, is estimated to be between zero and
4.0% of total demand deposits at December 31, 1993 and is
neither considered in the following fair value amounts nor
recorded as an intangible asset in the balance sheet.
* Federal Home Loan Bank advances: The fair value of these
liabilities is estimated using the rates currently offered
for liabilities of similar remaining maturities or, when
available, quoted market prices.
* Securities sold under agreements to repurchase: Securities
sold under agreements to repurchase generally have an original
term to maturity of less than thirty days and thus are
considered short-term borrowings. Consequently, their
carrying value is a reasonable estimate of fair value.
* Long-term borrowings: The fair values of the Company's
long-term borrowings are estimated using discounted cash
flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
* Interest rate swap agreements: The fair value of the interest
rate swaps is the estimated amount that would be
received or paid to terminate the swap agreements at the
reporting date, taking into account current interest rates
and the current creditworthiness of the swap counterparties.
* Commitments to extend credit consist primarily of commitments
to originate adjustable rate mortgage loans and generally
expire within 10 to 180 days, depending upon the type
and purpose of the loan. Due to the current nature of the
commitments, management concluded that the contractual
amount of the commitments is a reasonable estimate of their
fair value.
The following table presents the Company's assets, liabilities,
and unrecognized financial instruments at both their respective
carrying amounts and fair value. The Company's non-financial
assets and liabilities are presented in both columns at their
carrying amount.
December 31,
1993 1992
Carrying Fair Carrying Fair
Amount Value Amount Value
(In Thousands)
Financial assets:
Cash and due from banks . . . $ 51,705 $ 51,705 $ 57,158 $ 57,158
Interest-bearing deposits . . - - 615 615
Federal funds sold . . . . . 23,510 23,510 32,815 32,815
Securities purchased under
agreements to resell . . . 60,000 60,000 - -
Investment securities, net. . 42,612 42,525 111,791 116,341
Investment securities,
available-for-sale, net . . 162,854 162,854 129,899 131,127
Mortgage-backed securities,
net . . . . . . . . . . . . 1,330,886 1,336,970 829,772 837,681
Mortgage-backed securities,
available-for-sale, net . . 12,886 12,886 55,474 57,684
Loans, net . . . . . . . . . . 1,876,181 1,908,259 2,278,873 2,351,023
Loans available-for-sale, net. 46,076 46,119 32,237 32,844
Rhode Island covered assets. . 105,625 105,625 151,828 151,828
Interest and dividends
receivable . . . . . . . . 17,470(1) 17,540 21,078(1) 21,342
Non-financial assets:
Real estate and other assets
acquired in settlement
of loans . . . . . . . . . . 74,962 74,962 99,376 99,376
Premises and equipment, net . 32,368 32,368 34,201 34,201
Prepaid expenses and
other assets 82,822 81,344 74,723 74,414
Total assets . . . . . . . . . $3,919,957 $3,956,667 $3,909,840 $3,998,449
Financial liabilities:
Retail deposits . . . . . . . $2,952,082 $2,985,050 $3,205,654 $3,222,030
Brokered deposits . . . . . . 25,135 25,414 25,135 26,015
Federal Home Loan Bank advances 373,000 374,340 140,000 140,141
Securities sold under agreements
to repurchase . . . . . . . 294,809 294,809 291,014 291,014
Uncertificated debentures . . 38,442 29,942 34,990 25,414
Convertible subordinated
debentures . . . . . . . . - - 560 378
Non-financial liabilities:
Advance payments by borrowers
for taxes and insurance . . 28,337 28,337 21,734 21,734
Other liabilities . . . . . . 75,709 75,709 53,444 53,444
Total liabilities . . . . . . . $3,787,514 $3,813,601 $3,772,531 $3,780,170
Unrecognized financial instruments:
Interest rate swaps (notional
amount of $46.1 million):
In a net receivable position . $ 70 $ (231) $ 264 $(215)
Commitments to extend credit . . 62,400 62,400 87,886 87,886
Loan servicing rights(2) . . . . 4,980 -*
Total unrecognized financial
instruments . . . . . . . . . . $ 62,470 $ 67,149 $ 88,150 $ 87,671
(1) Excludes $70,000 and $264,000 at December 31, 1993 and 1992,
respectively, of accrued interest receivable on interest
rate swaps.
(2) Represents the fair value of uncapitalized servicing rights on
loans serviced for others by Northeast Savings.
* Fair value at December 31, 1992 is not available.
As discussed earlier, the fair value estimate of financial
instruments for which quoted market prices are unavailable is
dependent upon the assumptions used. Consequently, those
estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate
settlement of the instruments. Accordingly, the aggregate fair
value amounts presented in the above fair value table do not
necessarily represent the underlying value of the Company.
NOTE 22: RECONCILIATION OF REGULATORY REPORTS TO ACCOMPANYING
CONSOLIDATED FINANCIAL STATEMENTS
The following is a reconciliation of stockholders' equity and net
income (loss) from regulatory reports furnished to the OTS to the
accompanying consolidated financial statements:
Net Loss
Stockholders' For the Year For the Nine
Equity Ended Months Ended
December 31, December 31, December 31,
1993 1992 1993 1992
(In Thousands)
Balance reported to the OTS for
Northeast Savings . . . . . . . $169,670 $171,539 $(11,980) $(57,858)
Holding company net loss . . . . (14,139) (59,234) (14,139) (59,234)
Equity in undistributed income
of Northeast Savings . . . . . 11,980 57,858 11,980 57,858
Additional investment in
Northeast Savings . . . . . . . (34,800) (34,800) - -
Retirement of adjustable
rate preferred stock . . . . . - (33,550) - -
Issuance of Series B preferred
stock . . . . . . . . . . . . . - 35,170 - -
Preferred stock conversion cost . (1,402) - - -
Holding company paid-in capital
and retained earnings . . . . . 834 574 - -
Exercised stock options . . . . . 147 16 - -
401K shares issued . . . . . . . 223 - - -
Balance per accompanying consoli-
dated financial statements . . $132,513 $137,573 $(14,139) $(59,234)
NOTE 23: ACQUISITIONS
During fiscal 1982 and fiscal 1983, Northeast Savings acquired
three savings and loan associations in FSLIC-assisted supervisory
mergers accounted for using the purchase method of accounting.
Supervisory goodwill, the excess of cost over net assets
acquired, related to these acquisitions totaled $290,019,000.
In 1988, a portion of the supervisory goodwill related to 17
branch banking offices which were sold was eliminated and all
goodwill related to Northeast Savings' 1987 non-supervisory
acquisitions was eliminated in 1989 as a result of sales. In
fiscal 1990, as a result of an analysis of the value of its
remaining supervisory goodwill, Northeast Savings reduced
supervisory goodwill by $109.4 million. This reduction was
precipitated by several factors that had diminished the value
of the Association's Connecticut and Massachusetts franchises.
The primary factor was the impact of OTS regulations promulgated
pursuant to FIRREA which require the deduction of a substantial
portion of goodwill in calculating regulatory capital. Other
factors included the passage of the Connecticut Interstate
Banking Law which was enacted March 14, 1990 and which greatly
increased the opportunities for out-of-state banks to enter the
state. Accordingly, Northeast Savings hired Kaplan, Smith &
Associates, then a subsidiary of The First Boston Corporation, to
perform an independent valuation of the Association's franchise
rights in Connecticut and Massachusetts. This study was completed
in May 1990 and supported the value of Northeast Savings'
remaining goodwill at March 31, 1990. The reduction in
supervisory goodwill had no effect on Northeast Savings' regulatory
capital or the treatment of the goodwill for regulatory accounting
purposes.
A further analysis of the value of the Company's remaining
supervisory goodwill completed in September 1992, resulted in an
additional $56.6 million reduction of supervisory goodwill. This
reduction was also brought about by factors which had diminished
the value of the Association's Connecticut and Massachusetts
franchises. The principal factor was the adverse effect on the
value of the Association's Connecticut and Massachusetts
franchise rights of OTS regulations promulgated pursuant to FIRREA
and the FDICIA as well as other positions taken by the OTS
regarding regulatory capital requirements. For example, the
prompt corrective action regulation issued by the federal banking
agencies on September 29, 1992 finalized the 4% core capital
requirement for institutions that are not rated MACRO 1, which
thereby reduced prospective earnings which the Association could
expect to realize from its Connecticut and Massachusetts
franchise rights. Moreover, the OTS has verbally informed Northeast
Savings that, inasmuch as Northeast Savings had recently achieved
compliance with its fully phased-in capital standards, under OTS
Regulatory Bulletin 3a-1, "Policy Statement on Growth for Savings
Associations" (RB 3a-1), Northeast Savings may not grow its
assets if such growth would cause it to fall below its fully
phased-in capital requirements, even if the Company continued to
exceed the applicable minimum capital standards previously
established for the duration of the FIRREA phase-in period. This
OTS position regarding the effect of RB 3a-1 further decreased
the prospective earnings that Northeast had expected to realize
from its Connecticut and Massachusetts franchise rights. Another
significant factor included the implementation of the final rule
issued by the OTS which permits federal savings associations to
branch interstate to the full extent permitted by federal statute
and which greatly increased opportunities for out-of-state
institutions to enter these states. Thus, the Company again
hired Kaplan Associates, Inc. to perform an independent valuation
of the Association's franchise rights in Connecticut and
Massachusetts. This study was completed during the quarter ended
September 30, 1992 and supported the value of the Company's
remaining supervisory goodwill at September 30, 1992. The
reduction in supervisory goodwill had no effect on Northeast
Savings' fully phased-in regulatory tangible, core, or risk-based
capital.
The following summarizes transactions relating to the supervisory
goodwill.
For the Nine Months For the Year
Ended December 31, Ended March 31,
1992 1992
(In Thousands)
Balance, beginning of period . . . $ 59,553 $ 84,420
Amortization . . . . . . . . . . (2,002) (3,971)
Reduction for acquired net
operating loss carryforward . (983) (20,896)
Valuation adjustment . . . . . . (56,568) -
Balance, end of period . . . . . . $ - $ 59,553
During the year ended March 31, 1992, the Association acquired a
total of $404.6 million in deposits from the RTC. All of the
acquired deposits were in institutions which had been placed into
receivership by the RTC.
Financial of Hartford
On June 19, 1991, Northeast Savings assumed the deposits of
Financial of Hartford, F.S.B. from the RTC. Northeast Savings
assumed $10.5 million in deposits and accrued interest and
received $7.9 million in cash, $2.6 million in securities, and
$70,000 in passbook secured loans. Northeast Savings closed the
branch and now services the deposits through the eight branches
in the Hartford area.
ComFed Savings Bank
On September 13, 1991, Northeast Savings assumed the insured
deposits of eight branches of ComFed Savings Bank, F.A. from the
RTC. Northeast Savings assumed $210.9 million in deposits and
accrued interest, at a premium of $406,000, and received $209
million in cash and $567,000 in passbook secured loans. The
branches acquired were located in the Springfield, Massachusetts
area and in Pittsfield, Massachusetts. Northeast Savings closed
four of the branches, keeping two open in Springfield and two
open in Pittsfield.
FarWest Savings and Loan
On March 20, 1992, Northeast Savings assumed the insured deposits
of four branches of FarWest Savings and Loan Association, F.A.
from the RTC. Northeast Savings assumed $183.2 million in
deposits and accrued interest, at a premium of $610,000, and
received $182 million in cash and $176,000 in passbook secured
loans. The four branches are in the San Diego, California area.
Northeast Savings now operates the four branches as full service
banking offices.
Rhode Island Acquisition
On May 8, 1992, the Association acquired $315.0 million in assets
of four Rhode Island financial institutions which were in
receivership proceedings under the jurisdiction of the Superior Court
of Providence County, Rhode Island. The following transactions
were completed in conjunction with the acquisition of the assets
of the Rhode Island institutions.
* The Association issued $315.0 million of insured deposit
accounts in the Association to depositors in the Rhode
Island institutions.
* The Company issued and sold to the Rhode Island Depositors
Economic Protection Corporation approximately $35.2 million
of a new class of preferred stock, the $8.50 Cumulative
Preferred Stock, Series B as well as warrants to purchase
600,000 shares of common stock of the Company at $2.50 per
share and 200,000 shares of common stock of the Company at
$4.25 per share. The Company contributed the net proceeds
from this issuance to the Association. The Company has the
right to pay the first five years of dividends on the new
preferred stock by the issuance of additional new preferred
stock (a payment in kind).
* The Company issued and sold $28.95 million of 9% Debentures
to the receivers for the four institutions. These
debentures have been distributed to certain of the depositors
in the Rhode Island institutions in consideration of a portion
of their deposit claims against the receiverships for the
Rhode Island institutions. The Company has the right to pay
the first five years of interest on the 9% Debentures by the
issuance of additional 9% Debentures (a payment in kind).
* The Company repurchased its adjustable rate preferred stock
plus accumulated dividends from the FRF for $28.0 million in
cash and $7.0 million in 9% Debentures, for a total fair
value of $32.5 million. The 9% Debentures had a fair market
value of $4.5 million, which was based on the value attributed
to those debentures by the FRF, as determined by its
investment banker.
NOTE 24: PARENT COMPANY FINANCIAL INFORMATION
The condensed parent company Statement of Operations, Statement
of Financial Condition, and Statement of Cash Flows are as
follows:
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
1993 1992 1992
Interest income . . . . . . . $ 57 $ 43 $ 32
Interest expense . . . . . . (3,503) (2,103) -
Equity in undistributed income
(loss) of Northeast Savings . (11,980) (57,858) 5,726
Total income (loss) . . . . (15,426) (59,918) 5,758
Operating expenses . . . . . . 276 314 254
Income (loss) before income
taxes and extraordinary
items . . . . . . . . . . . (15,702) (60,232) 5,504
Income tax expense (benefit). . (1,563) (998) 103
Net income (loss) . . . . .$(14,139) $(59,234) $ 5,607
STATEMENT OF FINANCIAL CONDITION
(IN THOUSANDS)
December 31,
1993 1992
ASSETS
Cash and interest-bearing deposits . . $ 2,210 $ 2,416
Investment in Northeast Savings . . . 169,670 171,539
Other assets . . . . . . . . . . . . . 685 -
Total assets . . . . . . . . . . . . $172,565 $173,955
LIABILITIES AND STOCKHOLDERS' EQUITY
Uncertificated debentures . . . . . . $ 38,442 $ 34,990
Other liabilities . . . . . . . . . . 1,610 1,392
Stockholders' equity . . . . . . . . 132,513 137,573
Total liabilities and stockholders'
equity . . . . . . . . . . . . $172,565 $173,955
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
Year Ended Nine Months Ended Year Ended
December 31 December 31, March 31,
1993 1992 1992
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . $(14,139) $(59,234) $ 5,607
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Interest accrued and paid in
kind on debentures . . . . . . 3,452 2,103 -
Equity in undistributed (income)
loss of Northeast Savings. . . 11,980 57,858 (5,726)
(Increase) decrease in other
assets . . . . . . . . . . . . (685) 135 (125)
Increase (decrease) in other
liabilities . . . . . . . . 218 802 (5)
Net cash provided by (used in)
operating activities . . . . 826 1,664 (249)
Cash flows from investing activities:
Increase in investment in Northeast
Savings . . . . . . . . . . . . - (34,800) -
Net cash used in investing
activities . . . . . . . . - (34,800) -
Cash flows from financing activities:
Proceeds from exercise of stock
options . . . . . . . . . . . . . 147 16 2
Proceeds from issuance of 401K stock 223 - -
Preferred stock conversion costs . . (1,402) - -
Retirement of Series A adjustable
preferred stock . . . . . . . . . - (33,550) -
Proceeds from issuance of Series B
preferred stock . . . . . . . . . - 35,170 -
Proceeds from issuance of uncerti-
ficated debentures . . . . . . . . - 33,450 -
Net cash provided by (used in)
financing activities . . . . (1,032) 35,086 2
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . (206) 1,950 (247)
Cash and cash equivalents at beginning
of period . . . . . . . . . . . . . 2,416 466 713
Cash and cash equivalents at
end of period . . . . . . . $ 2,210 $ 2,416 $ 466
This information should be read in conjunction with other Notes
to the Consolidated Financial Statements.
NOTE 25: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
December 31, 1993 and for the
year then ended Q1 Q2 Q3 Q4
(In Thousands Except Per Share Amounts)
Total assets . . . . . . . . $3,979,720 $4,006,969 $3,942,721 $3,920,027
Interest income . . . . . . . 57,322 56,676 55,016 51,362
Net interest income . . . . . 19,627 19,312 17,741 15,728
Provision for loan losses . . 4,850 12,000 3,450 3,000
Gain on sale of securities, net 3,861 590 254 920
Gain on sale of loans, net . . 322 376 866 375
Non-interest income . . . . . 2,852 2,321 2,612 2,390
Non-interest expenses . . . . 21,556 27,747 22,453 21,423
Net income (loss) . . . . . . 141 (9,432) (1,904) (2,944)
Preferred stock dividend
requirements . . . . . . . . 1,653 1,190 820 838
Net loss applicable to common
shareholders . . . . . . . . (1,512) (10,622) (2,724) (3,782)
Net loss per common share:
Primary and fully diluted . (0.26) (1.08) (0.20) (0.28)
Market prices of common stock:
High . . . . . . . . . . . 7 1/2 6 3/8 5 5/8 5 7/8
Low . . . . . . . . . . . . 6 4 1/2 3 3/4 4
December 31, 1992 and for the
nine months then ended Q1 Q2 Q3
(In Thousands Except Per Share Amounts)
Total assets . . . . . . . . $3,971,630 $3,891,389 $3,910,104
Interest income . . . . . . . 67,783 66,388 62,174
Net interest income . . . . . 19,674 21,997 21,764
Provision for loan losses . . 2,500 6,300 7,500
Gain on sale of securities,
net . . . . . . . . . . . . 1,470 652 1,978
Gain on sale of loans, net . 352 312 1,206
Non-interest income . . . . . 3,205 1,595 2,271
Non-interest expenses . . . . 21,806 79,064 23,629
Net income (loss) . . . . . . 158 (59,790) 398
Preferred stock dividend
requirements . . . . . . . . 1,346 1,653 1,653
Net loss applicable to common
shareholders . . . . . . . . (1,188) (61,443) (1,255)
Net loss per common share:
Primary and fully diluted . (.21) (10.73) (.22)
Market prices of common stock:
High . . . . . . . . . . . . 6 3/4 5 3/8 7 1/8
Low . . . . . . . . . . . . 5 4 3
NOTE 26: SUBSEQUENT EVENTS
In February 1994, the Company closed its loan origination offices
in California and Colorado. In March 1994, the Company sold
$876.1 million of single-family adjustable rate residential
mortgage loans, $40.5 million of which were non-performing and
93% of which were secured by California properties. Finally, in
a series of transactions during April and May totalling $39.1
million, the Company sold virtually all of its foreclosed assets
in California.
In June 1994, Shawmut National Corp. acquired ten branches of
Northeast Savings. Five of the branches are in eastern
Massachusetts, while the remaining five are in Rhode Island.
Deposits in these branches totaled approximately $410.8 million.
In July and August 1994, the Company also sold, to other
institutions, its four San Diego, California branches and its single
branch on Cape Code with total deposits of $102.0 million.
In June 1994, the Company signed a definitive agreement
for the acquisition of Northeast Federal Corp. and
Northeast Savings by Shawmut National Corp. Shawmut has
agreed to exchange shares of Shawmut common stock having
a stock price of $10 7/8 for each share of outstanding
Northeast Federal Corp.'s stock for a total transaction
price of approximately $172.1 million if Shawmut
National's stock price at the time of closing is between
$21.47 and $26.24. Shawmut has filed applications for
regulatory approval of the merger during the fourth
quarter of 1994. Northeast expects to schedule a
special meeting of stockholders to consider and vote upon
the agreement and plan of merger when the proxy materials
and prospectus have been finalized.
EXHIBIT 99.2
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
Interest Income:
Loan . . . . . . . . . . . . . . . $16,645 $36,141 $60,370 $112,044
Mortgage-Backed securities . . . . . 24,780 13,685 63,526 40,593
Investment securities . . . . . . . 4,388 2,470 10,722 8,625
Rhode Island covered assets . . . . 1,708 2,331 5,010 6,977
Other . . . . . . . . . . . . . . . 472 389 1,626 775
Total interest income . . . . . . 47,993 55,016 141,254 169,014
Interest expense:
Deposits . . . . . . . . . . . . . 23,510 29,899 76,742 92,819
Federal Home Loan Bank advances . . 2,889 3,940 7,735 9,478
Other borrowings . . . . . . . . . 6,691 3,436 13,002 10,037
Total interest expense . . . . . . 33,090 37,275 97,479 112,334
Net interest income . . . . . . . 14,903 17,741 43,775 56,680
Provision for Loan Losses . . . . . . 1,000 3,450 3,800 20,300
Net interest income after
provision for Loan Losses . . . . 13,903 14,291 39,975 36,380
Non-interest income:
Fees for services . . . . . . . . . . 2,747 2,594 5,572 7,732
Gain on sale of securities, net . . . 2,362 254 6,649 4,705
Gain (Loss) on sale of Loans, net . . (56) 866 13,849 1,564
Other non-interest income . . . . . . 470 18 9,566 53
Total non-interest income . . . . . 5,523 3,732 35,636 14,054
Non-interest expenses:
Compensation and benefits . . . . . . 6,320 7,988 20,853 24,582
Occupancy and equipment, net . . . . 3,315 3,898 13,108 11,945
Other general and administrative. . . 4,032 4,862 13,202 14,350
SAIF insurance fund and OTS
assessments . . . . . . . . . . . . 2,073 2,429 6,709 5,985
Real estate and other assets
acquired in settlement of Loans . . 958 3,276 12,917 14,894
Total non-interest expenses . . . . 16,698 22,453 66,789 71,756
Income (Loss) before income taxes . 2,728 (4,430) 8,822 (21,322)
Income tax expenses (benefit) . . . . . 146 (2,526) (295) (10,127)
Net income (Loss) . . . . . . . . .$2,582 $(1,904) $9,117 $(11,195)
Preferred stock dividend requirements .$ 892 $ 820 $2,621 $ 3,663
Net income (Loss) applicable to
common stockholders . . . . . . .$1,690 $(2,724) $6,496 $(14,858)
Net income (Loss) per common share:
Primary and fully diluted . . . . . .$ .12 $ (.20) $ .46 $ (1.53)
See accompanying Notes to the Consolidated Financial Statements
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
September 30, December 31, September 30,
1994 1993 1993
ASSETS
Cash and due from banks . . . . . $ 26,881 $ 51,705 $ 34,920
Interest-bearing deposits . . . . - - 25
Federal funds sold . . . . . . . 4,270 23,510 2,300
Securities purchased under
agreements to resell . . . . . - 60,000 -
Investment securities, net . . . 205,178 42,612 47,949
Investment securities, available
for-sale, net . . . . . . . . . 140,751 162,854 158,028
Mortgage-backed securities, net . 1,756,200 1,330,886 1,056,066
Mortgage-backed securities,
available for sale, net . . . . . 22,964 12,886 13,022
Loans, net . . . . . . . . . . . . 961,755 1,876,181 2,276,087
Loans available-for-sale, net . . . 4,975 46,076 40,263
Rhode Island covered assets . . . . 86,826 105,625 112,030
Interest and dividends receivable . 17,190 17,540 18,262
Real estate and other assets
acquired in settlement of loans . 16,725 74,962 73,172
Premises and equipment, net . . . . 27,279 32,368 32,638
Prepaid expenses and other assets . 78,711 82,222 77,959
Total assets . . . . . . . . . $3,349,705 $3,920,027 $3,942,721
LIABILITIES AND STOCKHOLDERS' EQUITY
Retail deposits . . . . . . . . . . $2,375,460 $2,952,082 $2,988,457
Brokered deposits . . . . . . . . . - 25,135 25,714
Federal Home Loan Bank advances . . 262,892 373,000 388,000
Securities sold under agreements
to repurchase . . . . . . . . . . 468,728 294,809 294,809
Uncertificated debentures . . . . . 40,305 38,442 36,675
Advance payments by borrowers for
taxes and insurance . . . . . . . 22,802 28,337 25,544
Other liabilities . . . . . . . . . 44,386 75,709 57,731
Total liabilities . . . . . . 3,214,573 3,787,514 3,816,930
Commitments and Contingencies
Stockholders' equity:
Serial preferred stock, $.01 par value,
15,000,000 shares authorized:
$8.50 Cumulative Preferred Stock,
Series B, 419,868 shares at
September 30, 1994 and 394,199
shares at December 31, 1993
and 385,996 shares at September
30, 1993 issued and outstanding . 4 4 4
Common Stock, $.01 par value,
25,000,000 shares authorized:
13,553,970 shares at September 30
1994, 13,499,078 shares at
December 31, 1993 and 13,488,025
shares at September 30, 1993
issued and outstanding . . . . . 136 135 135
Additional paid-in capital . . . . 188,673 185,960 185,099
Net unrealized gain on debt and
equity securities . . . . . . . . 2,330 9,462 -
Accumulated deficit . . . . . . . (53,061) (59,557) (55,775)
Stock dividend distributable . . . 892 838 820
Unallocated employee stock
ownership plan shares . . . . . (3,842) (4,329) (4,492)
Total stockholders' equity. . 135,132 132,513 125,791
$3,349,705 $3,920,027 $3,942,721
See accompanying Notes to the Consolidated Financial Statements
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
September 30,
1994 1993
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . $ 9,117 $ (11,195)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization . . . . . 4,352 3,933
Amortization of fees, discounts, and
premiums, net . . . . . . . . . . . . . 6,658 169
Provision for loan losses . . . . . . . 3,800 20,300
Provision for losses on REO . . . . . . 9,579 8,760
Gain on sale of securities . . . . . . . (6,649) (4,731)
Gain on sale of loans . . . . . . . . . (13,849) (1,564)
Loss on sale of other assets . . . . . . 164 255
Loss on early extinguishment of debt . . - 26
Gain on sale of branches . . . . . . . . (9,695) -
Decrease in interest and dividends
receivable . . . . . . . . . . . . . . . 350 3,080
Loans available-for-sale, originated . . (65,547) (153,397)
Proceeds from sales of loans
available-for-sale . . . . . . . . . . . 103,377 148,182
Increase (decrease) in accrued interest
payable on deposits . . . . . . . . . . . (770) 123
(Increase) decrease in prepaid expenses
and other assets . . . . . . . . . . . . 4,111 (3,236)
Increase (decrease) in other liabilities . (24,105) 6,174
Total adjustments . . . . . . . . . . . 11,776 28,074
Net cash provided by operating
activities . . . . . . . . . . . . . . 20,893 16,879
Cash flows from investing activities:
Loans originated . . . . . . . . . . . . (124,726) (427,735)
Net decrease in loans due to sale of
branches . . . . . . . . . . . . . . . . 1,805 -
Proceeds from sales of loans . . . . . . 843,578 11,484
Principal collected on loans . . . . . . 177,859 299,000
Net decrease in Rhode Island covered
assets . . . . . . . . . . . . . . . . . 18,799 39,798
Purchases of mortgage-backed securities . (718,206) (320,017)
Purchases of mortgage-backed securities
available-for-sale . . . . . . . . . . . (14,131) -
Proceeds from sales of mortgaged-backed
securities available-for-sale . . . . . - 39,831
Principal collected on mortgage-backed
securities . . . . . . . . . . . . . . . 309,455 149,251
Purchases of investment securities . . . (167,611) -
Proceeds from sales of investment
securities . . . . . . . . . . . . . . . - 15,015
(Purchases) redemptions of FHLB stock . (487) 554
Proceeds from maturities of investment
securities . . . . . . . . . . . . . . . 5,396 8,805
Purchases of investment securities
available-for-sale . . . . . . . . . . . . (337,649) (200,583)
Proceeds from sales of investment
securities available-for-sale . . . . . . 286,332 126,229
Proceeds from maturities of investment
securities available-for-sale . . . . . . 68,057 87,539
Proceeds from sales of real estate and
other assets acquired in settlement
of Loans . . . . . . . . . . . . . . . . . 58,587 65,484
Net (purchases) sales of premises and
equipment . . . . . . . . . . . . . . . . 367 (2,568)
Net cash provided by (used in) invest-
ing activities . . . . . . . . . . . . . . 407,425 (107,913)
Cash flows from financing activities:
Net decrease in retail deposits . . . . . . (63,366) (216,741)
Sale of deposits . . . . . . . . . . . . . (503,113) -
Net decrease in brokered deposits . . . . . (24,813) -
Increase (decrease) in advance payments
by borrowers for taxes and insurance . . (5,535) 3,810
Increase in securities sold under agree-
ments to repurchase . . . . . . . . . . . 173,919 3,795
Net increase in short-term FHLB advances . 36,492 70,000
Proceeds from Long-term FHLB advances . . 6,400 213,000
Repayments of long-term FHLB advances . . (153,000) (35,000)
Retirement of convertible subordinated
debentures . . . . . . . . . . . . . . . - (586)
Reduction of ESOP debt guarantee . . . . . 384 486
Preferred Stock Conversion costs . . . . . - (1,401)
Issuance of 401-K stock shares . . . . . . 115 188
Proceeds from exercise of stock options . 135 140
Net cash provided by (used) in financ-
ing activities . . . . . . . . . . . . (532,382) 37,691
Net decrease in cash and cash equivalents. (104,064) (53,343)
Cash and cash equivalents at beginning
of period . . . . . . . . . . . . . . . . 135,215 90,588
Cash and cash equivalents at end of pe-
riod . . . . . . . . . . . . . . . . . . . $ 31,151 $ 37,245
See accompanying Notes to the Consolidated Financial Statements
NORTHEAST FEDERAL CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1994
1) Presentation of Financial Information
The unaudited consolidated financial statements presented
herein should be read in conjunction with the consolidated
financial statements of Northeast Federal Corp. for the year
ended December 31, 1993, as presented in the Annual Report
on Form 10-K. In the opinion of management, the accompanying
financial information reflects all adjustments, consisting
only of normal recurring adjustments, necessary for a fair
presentation of the financial condition and results of
operations of Northeast Federal Corp. in conformity with
generally accepted accounting principles. Certain
reclassifications have been made to prior year's financial
statements to conform to the September 30, 1994 presentation.
2) Supplemental Disclosure of Cash Flow Information
For purposes of the consolidated statement of cash flows,
cash and due from banks, interest-bearing deposits, and
federal funds sold, if any, are considered cash and cash
equivalents.
Nine Months Ended
September 30,
1994 1993
(In Thousands)
CASH PAID DURING THE PERIODS FOR:
Interest on retail deposits . . . $ 76,330 $ 91,466
Interest on brokered deposits . . 1,182 1,231
Interest on borrowings . . . . . 20,634 17,730
Income taxes . . . . . . . . . . . 20,634 17,730
633 1,784
CASH RECEIVED DURING THE PERIODS FOR:
Interest and dividends . . . . . . 141,604 172,094
NON-CASH ITEMS:
Loans securitized into mortgage-
backed securities . . . . . . . . 20,402 53,964
Transfers of Loans to (from) avail-
able-for-sale . . . . . . . . . . . (1,839) 1,777
Transfers of mortgage-backed secu-
rities to available-for-sale . . . - 81
Transfers of investment securities
to available-for-sale . . . . . . . - 40,809
Real estate and other assets ac-
quired in settlement of Loans . . . 9,934 48,296
Payment in kind on uncertificated
debentures . . . . . . . . . . . . . 1,843 1,688
Payment in kind on Series B pre-
ferred stock . . . . . . . . . . . . 2,567 3,430
Conversion of $2.25 cumulative con-
vertible preferred stock . . . . . . - 38,339
Net unrealized gains on debt and
equity securities available-for-sale (12,296) -
NORTHEAST FEDERAL CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1994
3) Commitments and Contingencies
At September 30, 1994, outstanding commitments to originate
adjustable rate and fixed rate mortgage loans amounted to
$8.1 million and $3.8 million, respectively. At September
30, 1994, Northeast Savings, F.A. also had commitments
to originate $1.9 million in home equity loans, $1.1 million
in income property loans, and $5.6 million in residential
construction loans, and to fund $17.5 million in unused
consumer credit lines and $8.3 million in undisbursed
residential construction loans. In addition, at September 30,
1994, Northeast Savings, F.A. also had commitments to buy
$26.0 million of mortgage-backed securities and commitments
to sell $3.2 million of loans available-for-sale.
Northeast Savings, F.A. is involved in litigation arising in
the normal course of business. Although the legal responsibility
and financial impact with respect to such litigation
cannot presently be ascertained, management does not anticipate
that any of these matters will result in the payment of
damages by Northeast Savings, F.A. that, in the aggregate,
would be material in relation to the consolidated results of
operation or financial position of Northeast Federal Corp.
4) Significant Transactions
Shawmut National Corporation ("Shawmut") has signed a definitive
agreement for the acquisition of Northeast Federal
Corp. and Northeast Savings by Shawmut National Corporation
("Shawmut"). Shawmut is expected to file applications for
regulatory approval of the merger during the fourth quarter
of 1994. The shareholders' meeting to vote on the merger
most likely will be scheduled in the first quarter of 1995.
EXHIBIT 99.3
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NORTHEAST FEDERAL CORP. AND SUBSIDIARIES
BUSINESS FINANCE DIVISION OF BARCLAYS BUSINESS CREDIT, INC.
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
SEPTEMBER 30, 1994
The following Unaudited Pro Forma Condensed Combining Balance
Sheet presents the combined financial position of Shawmut National
Corporation ("Shawmut") and Northeast Federal Corp. ("Northeast")
as of September 30, 1994, assuming the proposed merger of
Shawmut and Northeast had occurred as of September 30, 1994. The
Unaudited Pro Forma Condensed Combining Balance Sheet also gives
effect to Shawmut's pending acquisition of substantially all of
the assets, and assumption of certain of the liabilities, of the
Business Finance Division of Barclays Business Credit, Inc.
("Barclays") (Pro Forma Pending Acquisition), assuming such
acquisition and assumption also had occurred as of September 30,
1994. Such pro forma information is based on historical balance
sheet data of Shawmut, Northeast and Barclays as of September 30,
1994 and gives effect to the proposed merger of Shawmut and
Northeast and the pending acquisition by Shawmut of Barclays
accounted for under the purchase method of accounting, along with
the assumptions and adjustments in the accompanying notes to the
unaudited pro forma condensed financial information. This
Unaudited Pro Forma Condensed Combining Balance Sheet should be
read in conjunction with the Unaudited Pro Forma Condensed
Combining Statements of Income appearing elsewhere in this
Current Report on Form 8-K and the historical financial
statements and notes thereto of Northeast and Barclays which are
included in this Current Report on Form 8-K. The Unaudited Pro
Forma Condensed Combining Balance Sheet is presented for
informational purposes only and is not necessarily indicative of
the combined financial position that would have occurred if the
proposed merger of Shawmut and Northeast and the pending acquisition
by Shawmut of Barclays had been consummated on September 30,
1994 or at the beginning of the periods indicated or which may be
obtained in the future.
<TABLE>
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NORTHEAST FEDERAL CORP. AND SUBSIDIARIES
BUSINESS FINANCE DIVISION OF BARCLAYS BUSINESS CREDIT, INC.
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
SEPTEMBER 30, 1994
<CAPTION>
Shawmut/
Northeast Pro Forma Aggregate
Historical Pro Forma Pro Forma Pending Pro Forma
Shawmut Northeast Adjustments Combined Acquisition Combined
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 1,675,479 $26,881 $(41,987)(1b) $ 1,620,068 $ 11,206 $ 1,631,274
(40,305)(1c)
Securities
Available for sale, at fair value 2,086,786 163,715 (8,238)(1a) 2,242,263 2,242,263
Held to maturity 8,200,234 1,961,378 (45,023)(1a) 10,116,589 10,116,589
Federal funds sold and securities
purchased under agreement to resell 278,960 4,270 283,230 283,230
Residential mortgages held for sale 99,518 7,003 106,521 106,521
Loans 17,735,885 971,425 (23,717)(1a) 18,683,593 2,226,079 20,909,672
Less: reserve for credit losses 567,805 11,698 579,503 41,366 620,869
Net loans 17,168,080 959,727 (23,717) 18,104,090 2,184,713 20,288,803
Rhode Island covered assets 86,826 86,826 86,826
Trading account securities 41,840 41,840 41,840
Premises and equipment 328,466 27,279 (6,000)(1a) 349,745 3,493 353,238
Intangibles 151,506 145,820 (1a) 297,326 225,000 522,326
Other assets 1,320,796 112,626 37,194 (1a) 1,470,616 3,358 1,473,974
Total assets $31,351,665 $3,349,705 $17,744 $34,719,114 $2,427,770 $37,146,884
LIABILITIES
Deposits $19,519,148 $2,375,460 $5,162 (1a) $21,899,770 $21,899,770
Other borrowings 7,668,611 731,620 (1,191)(1a) 8,399,040 $1,912,305 10,311,345
Notes and debentures 1,633,829 40,305 (40,305)(1c) 1,633,829 400,000 2,033,829
Other liabilities 400,812 67,188 23,640 (1a) 493,640 15,465 509,105
2,000 (1a)
Total liabilities 29,222,400 3,214,573 (10,694) 32,426,279 2,327,770 34,754,049
SHAREHOLDERS' EQUITY
Preferred stock 178,185 4 (4)(1b) 178,185 100,000 278,185
Common stock 1,196 136 (136)(1a) 1,276 1,276
80 (1a)
Surplus 1,270,347 188,673 (146,690)(1a) 1,433,837 1,433,837
163,490 (1a)
(41,983)(1b)
Retained earnings 719,229 (53,061) 53,061 (1a) 719,229 719,229
Net unrealized gain (loss) on
securities available for sale (39,502) 2,330 (2,330)(1a) (39,502) (39,502)
Unallocated ESOP shares (3,842) 3,842 (1a) 0
Stock dividend distributable 892 (892)(1a) 0
Treasury stock (190) (190) (190)
Total shareholders' equity 2,129,265 135,132 28,438 2,292,835 100,000 2,392,835
Total liabilities and shareholders' equity $31,351,665 $3,349,705 $17,744 $34,719,114 $2,427,770 $37,146,884
<FN>
See accompanying notes to unaudited pro forma condensed financial information.
</TABLE>
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NORTHEAST FEDERAL CORP. AND SUBSIDIARIES
BUSINESS FINANCE DIVISION OF BARCLAYS BUSINESS CREDIT, INC.
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME
SEPTEMBER 30, 1994
The following Unaudited Pro Forma Condensed Combining Statement
of Income gives effect to the proposed merger of Shawmut and
Northeast and the pending acquisition by Shawmut of Barclays
by combining the results of operations of the three entities
for the nine months ended September 30, 1994 and the year
ended December 31, 1993, as if the proposed merger of Shawmut
and Northeast and the pending acquisition by Shawmut of
Barclays had been consummated at the beginning of the periods
presented. Income before cumulative effect of accounting changes
per common share and weighted average common shares outstanding
are based on the exchange ratio as specified in the Northeast
merger agreement. The Unaudited Pro Forma Condensed Combining
Statement of Income gives effect to the proposed merger of
Shawmut and Northeast and the pending acquisition by Shawmut of
Barclays accounted for under the purchase method of accounting,
along with the assumptions and adjustments in the accompanying
notes to the unaudited pro forma condensed financial information.
The Unaudited Pro Forma Condensed Combining Statement of Income
should be read in conjunction with the Unaudited Pro Forma
Condensed Combining Balance Sheet appearing elsewhere in this
Current Report on Form 8-K and the historical financial statements
and notes thereto of Northeast and Barclays which are included in
this Current Report on form 8-K. The Unaudited Pro Forma Condensed
Combining Statement of Income does not reflect potential savings
that may result from the consolidation of the operations of Shawmut,
Northeast and Barclays. The Unaudited Pro Forma Condensed Combining
Statement of Income is presented for informational purposes only
and is not necessarily indicative of the combined results of
operations that would have occurred if the proposed merger of
Shawmut and Northeast and the pending acquisition by Shawmut of
Barclays had been consummated on September 30, 1994 or at the
beginning of the periods indicated or which may be obtained in
the future.
<TABLE>
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NORTHEAST FEDERAL CORP. AND SUBSIDIARIES
BUSINESS FINANCE DIVISION OF BARCLAYS BUSINESS CREDIT, INC.
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1994
<CAPTION>
Shawmut/
Northeast Pro Forma Aggregate
Historical Pro Forma Pro Forma Pending Pro Forma
Shawmut Northeast Adjustments Combined Acquisition(s) Combined
(in thousands, except per share data)
INTEREST AND DIVIDEND INCOME
<S> <C> <C> <C> <C> <C> <C>
Loans $952,517 $65,380 $1,186 (1e) $1,019,083 $122,125 $1,141,208
Securities
Available for sale, at fair value 110,606 4,924 1,030 (1d) 116,560 116,560
Held to maturity 325,963 69,324 5,628 (1d) 400,915 400,915
Residential mortgages held for sale 13,598 13,598 13,598
Federal funds sold and securities purchased
under agreements to resell 4,625 1,626 6,251 6,251
Interest-bearing deposits in other banks 7,857 7,857 7,857
Trading account securities 659 659 659
Total 1,415,825 141,254 7,844 1,564,923 122,125 1,687,048
INTEREST EXPENSE
Deposits 283,959 76,742 (1,935)(1h) 358,766 358,766
Other borrowings 264,454 18,016 297 (1i) 282,767 65,850 348,617
Notes and debentures 63,261 2,721 (2,721)(1j) 63,261 63,261
Total 611,674 97,479 (4,359) 704,794 65,850 770,644
NET INTEREST INCOME 804,151 43,775 12,203 860,129 56,275 916,404
Provision for credit losses 3,000 3,800 6,800 3,300 10,100
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 801,151 39,975 12,203 853,329 52,975 906,304
NONINTEREST INCOME
Customer service fees 146,008 5,572 151,580 10,250 161,830
Trust and agency fees 87,002 87,002 87,002
Gain on sale of loans, net 13,849 13,849 13,849
Securities gains, net 6,649 6,649 6,649
Other 41,292 9,566 (2,232)(1g) 48,626 48,626
Total 274,302 35,636 (2,232) 307,706 10,250 317,956
NONINTEREST EXPENSES
Compensation and benefits 367,263 20,853 388,116 22,000 410,116
Occupancy and equipment 115,922 13,108 (450)(1f) 128,580 4,900 133,480
Foreclosed properties provision and expense 10,218 12,917 23,135 23,135
Merger related charges 100,900 100,900 100,900
Restructuring related charges 39,800 39,800 39,800
Other 212,799 19,911 7,291 (1m) 240,001 9,950 249,951
Total 846,902 66,789 6,841 920,532 36,850 957,382
INCOME BEFORE INCOME TAXES 228,551 8,822 3,130 240,503 26,375 266,878
Income taxes (benefit) 84,671 (295) 4,168 (1k) 88,544 10,550 99,094
NET INCOME $143,880 $9,117 $(1,038) $151,959 $15,825 $167,784
NET INCOME APPLICABLE TO
COMMON SHARES $132,304 $6,496 $1,583 (1n) $140,383 $ 8,887 $149,270
COMMON SHARE DATA
Net income $1.12 $0.46 $ 1.11 $ 1.18
Weighted average shares outstanding 118,518 14,039 126,542 126,542
<FN>
See accompanying notes to unaudited pro forma condensed financial information.
</TABLE>
<TABLE>
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NORTHEAST FEDERAL CORP. AND SUBSIDIARIES
BUSINESS FINANCE DIVISION OF BARCLAYS BUSINESS CREDIT, INC.
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1993
<CAPTION>
Shawmut/
Northeast Pro Forma Aggregate
Historical Pro Forma Pro Forma Pending Pro Forma
Shawmut Northeast Adjustments Combined Acquisition(s) Combined
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans $1,242,683 $154,116 $1,581 (1e) $1,398,380 $123,550 $1,521,930
Securities
At lower of aggregate cost or fair value 236,455 1,373 (1d) 237,828 237,828
Held to maturity 303,217 65,175 7,504 (1d) 375,896 375,896
Residential mortgages held for sale 29,636 29,636 29,636
Federal funds sold and securities purchased
under agreements to resell 12,590 1,085 13,675 13,675
Interest-bearing deposits in other banks 839 839 839
Trading account securities 1,562 1,562 1,562
Total 1,826,982 220,376 10,458 2,057,816 123,550 2,181,366
INTEREST EXPENSE
Deposits 420,966 121,163 (2,581)(1h) 539,548 539,548
Other borrowings 262,413 23,345 397 (1i) 286,155 65,000 351,155
Notes and debentures 72,040 3,460 (3,460)(1j) 72,040 72,040
Total 755,419 147,968 (5,644) 897,743 65,000 962,743
NET INTEREST INCOME 1,071,563 72,408 16,102 1,160,073 58,550 1,218,623
Provision for credit losses 55,944 23,300 79,244 4,700 83,944
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 1,015,619 49,108 16,102 1,080,829 53,850 1,134,679
NONINTEREST INCOME
Customer service fees 187,022 10,181 197,203 13,250 210,453
Trust and agency fees 116,845 116,845 116,845
Securities gains, net 12,468 5,625 18,093 18,093
Other 97,471 1,933 (2,975)(1g) 96,429 96,429
Total 413,806 17,739 (2,975) 428,570 13,250 441,820
NONINTEREST EXPENSES
Compensation and benefits 500,254 32,324 532,578 25,500 558,078
Occupancy and equipment 163,792 15,399 (600)(1f) 178,591 6,500 185,091
Foreclosed properties provision and expense 105,173 17,606 122,779 122,779
Restructuring related charges 36,319 36,319 36,319
Other 334,411 27,850 9,721(1m) 371,982 16,100 388,082
Total 1,139,949 93,179 9,121 1,242,249 48,100 1,290,349
INCOME (LOSS) BEFORE INCOME
TAXES AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGES 289,476 (26,332) 4,006 267,150 19,000 286,150
Income taxes (benefit) 6,628 (12,193) 5,491 (1k) (74) 7,600 7,526
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGES $282,848 $(14,139) $(1,485) $267,224 $11,400 $278,624
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGES
APPLICABLE TO COMMON SHARES $267,379 $(18,640) $3,016 (1n) $251,755 $2,150 $253,905
COMMON SHARE DATA
Income (loss) before cumulative effect of
accounting changes $2.35 $(1.75) $2.06 $2.08
Weighted average shares outstanding 113,908 10,649 121,932 121,932
<FN>
See accompanying notes to unaudited pro forma condensed financial information.
</TABLE>
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
NORTHEAST FEDERAL CORP. AND SUBSIDIARIES
BUSINESS FINANCE DIVISION OF BARCLAYS BUSINESS CREDIT, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
NOTE 1:
The pro forma adjustments are based on the best available
preliminary information as of September 30, 1994 and may be different
from the actual adjustments to reflect the fair value of the net
assets purchased as of the date of acquisition. The number of
shares of Shawmut common stock to be issued is based upon the
number of shares of Northeast common stock, stock options and
warrants outstanding at September 30, 1994, adjusted for the
proceeds of the exercise price of stock options and warrants.
1(a) Acquisition of Northeast: (in thousands)
Purchase Price:
8,023,915 shares of Shawmut common stock issued
with a value of $21.465 per share, adjusted for
the exercise price of stock options and warrants $163,570
Estimated direct acquisition expenses 2,000
Total purchase price 165,570
Estimated fair value of net assets purchased:
Historical net assets of Northeast at September 30, 1994
applicable to common equity interests 93,145
Add (deduct) adjustments to reflect fair value:
Securities:
Available for sale (8,238)
Held to maturity (45,023)
Loans (23,717)
Premises and equipment (6,000)
Other assets:
Other real estate owned (254)
Mortgage servicing rights 23,803
Write-off of deferred tax asset (21,171)
Tax effects of purchase adjustments 34,816
Subtotal other assets 37,194
Deposits (5,162)
Other borrowings (FHLB advances) 1,191
Other liabilities (acquisition related charges) (23,640)
Estimated fair value of net assets 19,750
Excess of purchase price over fair value of
identifiable net assets $145,820
For purposes of the unaudited pro forma condensed financial
information, it is assumed that Shawmut will be issuing
approximately 8 million shares of Shawmut common stock as consideration
for Northeast's net assets. The adjustments to fair value for
securities, loans, deposits, mortgaging service rights and
premises and equipment will be amortized in relation to the
expected life or maturity of the related asset or liability. The
excess of purchase price over the fair value of identifiable net
assets will be amortized generally over 15 years.
1(b) Represents the redemption of the Northeast $8.50 Cumulative
Preferred Stock, Series B (the "Series B Preferred Stock"),
assumed to occur upon the consummation of the merger. The
provisions of the purchase agreement pursuant to which the
Depositors Economic Protection Corporation purchased the
Series B Preferred Stock require Northeast to make an offer
to repurchase the Series B Preferred Stock not less than 45
days following a change in control of Northeast. The terms
of the Series B Preferred Stock require 45 days notice prior
to redemption. Shawmut intends to redeem the Series B
Preferred Stock as soon as practicable following consummation
of the merger which is anticipated to be on or close to
45 days following consummation of the merger.
1(c) Represents the redemption of the Northeast Uncertificated
Debentures (the "Debentures"), assumed to occur upon the
consummation of the merger. The Debentures were originally
issued in connection with the acquisition of assets from
four Rhode Island financial institutions and in connection
with the repurchase of adjustable rate preferred stock of
Northeast.
1(d) Represents the accretion of the adjustment to reflect the
fair value of securities, accreted over an estimated remaining
life of six years.
1(e) Represents the accretion of the adjustment to reflect the
fair value of loans, accreted over an estimated remaining
life of fifteen years.
1(f) Represents depreciation expense reduction related to the
adjustment to reflect the fair value of premises and
equipment, over an estimated remaining life of ten years.
1(g) Represents the amortization of the adjustment to reflect the
fair value of purchased mortgage servicing rights, amortized
over an estimated remaining life of eight years.
1(h) Represents the amortization of the adjustment to reflect the
fair value of deposits, amortized over an estimated remaining
life of two years.
1(i) Represents the amortization of the adjustment to reflect the
fair value of other borrowings, amortized over an estimated
remaining life of three years.
1(j) Represents the interest adjustment due to the pro forma
redemption of the Debentures as described in 1(c) above.
1(k) Represents the adjustment of deferred taxes related to the
amortization/accretion of fair value adjustments in items
1(c) through 1(j) above, estimated at a 40 percent combined
effective income tax rate.
1(m) Represents the amortization of the excess of purchase price
over fair value of identifiable net assets over a fifteen
year period.
1(n) Represents the adjustments to net income applicable to
common shares and income (loss) before cumulative effect of
accounting changes applicable to common shares due to the
pro forma redemption of the Series B Preferred Stock as
described in 1(b) above.
NOTE 2:
Certain reclassifications have been made to the accounts of
Northeast and Barclays in the accompanying Unaudited Pro Forma
Condensed Combining Balance Sheet and Unaudited Pro Forma
Condensed Combining Statements of Income to conform to Shawmut
presentation. Pro forma results of operations do not reflect the
following: the cumulative effect of an accounting change due to
the adoption of Statement of Financial Accounting Standards (FAS)
No. 109 of $52,800,000 for Shawmut for the year ended December
31, 1993 and $4,299,000 for Barclays for the year ended December 31,
1993; and the cumulative effect of an accounting change due
to the adoption of FAS No. 112 of $6,600,000 for Shawmut for the
year ended December 31, 1993.
NOTE 3:
The pro forma shareholders' equity accounts of Shawmut and
Northeast have been adjusted in the accompanying Unaudited Pro
Forma Condensed Combining Balance Sheet (see Note 1) to reflect
the issuance of shares of Shawmut common stock in exchange for
all of the outstanding shares of Northeast common stock, stock
options and warrants and the elimination of Northeast's
shareholders' equity accounts in accordance with the purchase
method of accounting.
NOTE 4:
The exchange ratio of .507 (based on a Shawmut common stock
average price of $21.465) reflected in the unaudited pro forma
condensed financial information is the highest exchange ratio
pursuant to the calculation as set forth in the Northeast merger
agreement. If the Shawmut common stock average price is less
than $21.465, the exchange ratio will be .507. In such event,
the Northeast merger agreement provides that Northeast may
terminate the merger agreement, unless Shawmut exercises its
option to increase the consideration to be received by Northeast
shareholders to adjust the exchange ratio to equal a number equal
to $10.875 divided by the Shawmut common stock average price. If
the Shawmut common stock average price were greater or equal to
$26.235 the exchange ratio would be .415, which is the lowest
exchange ratio possible pursuant to the calculation as set forth
in the Northeast merger agreement. If the exchange ratio were
.415 the number of shares of Shawmut common stock assumed to be
issued would be 6,567,899.
NOTE 5:
Shawmut has agreed to acquire certain net assets from Barclays
(see below) totaling $2,112,305,000 for a premium of
$290,000,000. Funding assumptions for this transaction follows:
- Proceeds from the issuance of Shawmut preferred stock of
$100,000,000;
- Proceeds from the issuance of Shawmut Bank Connecticut, N.A.
("SBC") subordinated notes of $200,000,000;
- Proceeds from the issuance of SBC senior bank notes of
$200,000,000; and
- Proceeds from other funding sources (primarily repurchase
agreements, federal funds purchased and FHLB borrowings) of
$1,912,305,000.
Expenses of $5,000,000 relating to the transaction are included
in the amount of estimated goodwill. The excess of purchase
price and acquisition costs over the book value of net assets
acquired ($295,000,000) has been allocated between loan premium
($70,000,000) and goodwill ($225,000,000). The assets and
liabilities of Barclays will be recorded at estimated fair value
upon closing and, as a result, the pro forma amounts of loan
premium and goodwill may be different. A detailed analysis of
the net assets acquired as of September 30, 1994 and pro forma
adjustments follows (000's):
Pro Forma Pro Forma
Barclays Adjustments Barclays
Cash $ 1,206 $ 10,000 $ 11,206
Loans 2,156,079 70,000 2,226,079
Reserve for credit losses (41,366) (41,366)
Premises and equipment 3,493 3,493
Goodwill 225,000 225,000
Other assets 3,358 3,358
Total assets 2,122,770 305,000 2,427,770
Other liabilities 10,465 5,000 15,465
Other borrowings 1,912,305 1,912,305
Notes and debentures 400,000 400,000
Preferred stock 100,000 100,000
Total liabilities and capital 10,465 2,417,305 2,427,770
$2,112,305 $(2,112,305) $0
For purposes of the Unaudited Pro Forma Condensed Combining
Statement of Income, the loan premium is being amortized over an
estimated life of four years and goodwill is being amortized over
an estimated twenty-five year period. Net income applicable to
common shares and income (loss) before cumulative effect of
accounting changes applicable to common shares have been reduced
by the assumed dividend declared on the Shawmut preferred stock
(9.25% estimated annual dividend rate) to be issued. Adjustments
to increase interest expense in the amounts of $15,800,000 and
$11,850,000 for the year ended December 31, 1993 and the nine
months ended September 30, 1994, respectively, have been assumed
to reflect an estimate of the interest expense on $200,000,000 of
SBC subordinated notes (7.90% estimated annual interest rate) to
be issued. Excluded from Barclays financial information are the
results of operations of a leasing division which was sold in
1994 and will not have an ongoing effect on the results of operations
in the future. Further, noninterest income for the year ended
December 31, 1993 does not include approximately $6,300,000 related
to a litigation settlement that will not have an ongoing effect on
the results of operations in the future.
EXHIBIT 99.4
REPORT OF INDEPENDENT ACCOUNTANTS
December 16, 1994
To the Board of Directors of
the Business Finance Division of
Barclays Business Credit, Inc.
In our opinion, the accompanying balance sheet and the related
statements of income and of cash flows present fairly, in all
material respects, the financial position of the Business Finance
Division of Barclays Business Credit, Inc. at December 31, 1993,
and the results of its operations and its cash flows for the year
in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion
on these financial statements based on our audit. We conducted
our audit of these statements in accordance with generally
accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable
basis for the opinion expressed above.
As discussed in Note 1, during 1993 the Company changed its
method of accounting for income taxes and postretirement benefits
other than pensions.
Price Waterhouse LLP
Hartford, Connecticut
Business Finance Division of
Barclays Business Credit, Inc.
Balance Sheet (in thousands)
December 31,
1993
ASSETS
Loans, less allowance for credit losses of $40,657 $1,944,068
Investment 3,099
Premises and equipment, net 3,309
Other assets 1,967
Total assets $1,952,443
LIABILITIES
Affiliate advances $1,675,296
Cash overdraft 1,317
Customer deposits 11,064
Accounts payable and accrued liabilities 17,832
Interdivision and parent company payable 17,802
Deferred income taxes 10,688
Total liabilities 1,733,999
Investment of parent company 218,444
Total liabilities and investment of parent company $1,952,443
The accompanying notes are an integral part of this financial statement.
Business Finance Division of
Barclays Business Credit, Inc.
Statement of Income (in thousands)
DECEMBER 31,
1993
Interest and fee income $ 160,111
Interest expense 60,303
Net interest income 99,808
Provision for credit losses 5,118
Net interest income after provision
for credit losses 94,690
Other income:
Fee income 10,286
Other 11,731
22,017
Other expenses:
Compensation and benefits 27,358
Occupancy 6,793
Other 6,423
40,574
Income before income taxes and cumulative
effect of accounting change 76,133
Income taxes 29,416
Income before cumulative effect of accounting change 46,717
Cumulative effect of accounting change 4,299
Net income $42,418
The accompanying notes are an integral part of this financial statement.
Business Finance Division of
Barclays Business Credit, Inc.
Statement of Cash Flows (in thousands)
DECEMBER 31,
1993
OPERATING ACTIVITIES
Net income $42,418
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for credit losses 5,118
Depreciation and amortization 316
Loss on disposal of premises and equipment 579
Deferred income taxes (7,101)
Loan origination fees received 11,505
Amortization of loan origination fees (8,400)
Decrease in accounts payable and accrued liabilities (3,032)
Increase in interdivision and parent company payable 8,047
Other (201)
Net cash provided by operating activities 49,249
INVESTING ACTIVITIES
Loans originated (561,985)
Loans repaid 329,587
Purchases of premises and equipment (946)
Proceeds from sale of premises and equipment 1,364
Net cash used in investing activities (231,980)
FINANCING ACTIVITIES
Increase in affiliate advances 176,961
Increase in cash overdraft 1,317
Net cash provided by financing activities 178,278
Decrease in cash and cash equivalents (4,453)
Cash and cash equivalents, beginning of year 4,453
Cash and cash equivalents, end of year $ 0
The accompanying notes are an integral part of this financial statement.
Business Finance Division of
Barclays Business Credit, Inc.
Notes to Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On November 12, 1994, Shawmut National Corporation signed a definitive
agreement to acquire certain business operations and related assets
and liabilities of Barclays Bank PLC. The assets acquired and
liabilities assumed include certain accounts of the Business Finance
Division of Barclays Business Credit, Inc. ("BCI"), a wholly-owned
indirect subsidiary of Barclays Bank PLC, certain accounts related to
the vehicle and equipment leasing portfolio of the Barclays Credit
Services Division of BCI and certain accounts related to the
International Services Group of Barclays Bank PLC.
These financial statements include the historical financial position
at December 31, 1993 and the results of operations for the year then
ended of the various divisions of BCI and Barclays Bank PLC being
acquired by Shawmut National Corporation. Collectively, the divisions
acquired by Shawmut National Corporation and included in these financial
statements are hereinafter referred to as "BFD." The Business
Finance Division of BCI represents approximately 89% of both BFD's
total assets at December 31, 1993 and net income for the year then
ended. BFD is engaged principally in the commercial finance business,
providing asset-based loans which are primarily secured by accounts
receivable, inventory and fixed assets. These financial statements
have been prepared in conformity with generally accepted accounting
principles. The following summarizes the significant accounting
policies followed by BFD.
LOANS AND RELATED INTEREST AND FEE INCOME
Loans are stated at the principal amounts outstanding.
Interest income from loans is recognized as earned using the interest
method. When a term loan is contractually delinquent 90 days or more
or the ability of the borrower to repay principal or interest is in
doubt, BFD discontinues the accrual of interest. Recognition of
income is generally resumed when the term loan becomes current, the
borrower has demonstrated the ability to make payments of principal
and interest and doubt as to the collectibility of the loan is not
present.
Fees received for the origination of loans are deferred and amortized
to interest income over the contractual lives of the loans using the
interest method. Unamortized amounts are recognized as income at the
time that loans are paid in full.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained at a level determined by
management to be adequate to provide for probable losses inherent in
the existing loan portfolio. The adequacy of the allowance is
determined based on, among other factors, the adequacy of collateral
supporting the loans, past loss experience, management's determination
of the risk elements in the loan portfolio and off-balance sheet
commitments, factors affecting the credit quality of the borrowers and
factors impacting the overall economic environment in which BFD
operates. By its nature, the determination of the adequacy of this
allowance is based on estimates and other judgments made by management
which may change quickly because of changing economic conditions and
management's perception as to how these factors may affect the
financial condition of debtors.
The allowance for credit losses is maintained through provisions
charged to income. When a loan, or a portion of a loan, is considered
to be uncollectible, the loss is charged to the allowance. Recoveries
of loans previously charged-off are credited to the allowance.
INVESTMENT
Investment consists of a limited partnership interest and is carried
at cost, which approximates the net realizable value of this
investment. The general partner of this limited partnership values the
partnership assets, principally non-marketable equity securities, at
cost less an adjustment for permanent declines in value and does not
disclose the fair market value of the limited partnership assets.
PREMISES AND EQUIPMENT
Premises, leasehold improvements and equipment are carried at
historical cost less accumulated depreciation and amortization computed
primarily on the straight-line method. Depreciation of premises and
equipment is calculated based on the estimated useful lives of the
related assets. Leasehold improvements are amortized over the terms
of the respective leases or the estimated useful lives of the
improvements, whichever is shorter. Maintenance, repair and minor
improvements are charged to other expenses as incurred, while major
improvements are capitalized.
REPOSSESSED ASSETS
Repossessed assets are included in the financial statements at the
lower of cost or fair value. Estimated fair values are based on
management's evaluation of numerous factors, including estimated
holding costs and time to disposition, appraisals, sales of comparable
assets and estimated market conditions. The excess at the time of
repossession, if any, of the loan value over the estimated fair value
of the repossessed property is charged to the allowance for credit
losses. Additional decreases in the carrying value subsequent to
repossession are recognized through provisions charged to operations
and are included in other expenses.
PENSION AND OTHER EMPLOYEE BENEFIT PLANS
Substantially all of BFD's full and part-time employees meeting
certain eligibility criteria are covered under the retirement and
other employee benefit plans of Barclays Bank PLC. Costs of the
plans, which are based on actuarial computations of current and future
benefits for employees, are allocated by Barclays Bank PLC to BFD and
are charged to other expenses. Barclays Bank PLC funds the plans
annually in an amount necessary to satisfy the Internal Revenue
Service's funding standards.
BFD adopted FAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," effective January 1, 1993.
Substantially all of BFD's full-time employees participate in
postretirement health care benefit plans sponsored by Barclays Bank PLC.
Postretirement health care benefits expense is based on an actuarial
computation of current and future benefits for employees and retirees.
See "Note 5 Pension and Other Employee Benefit Plans."
INCOME TAXES
BFD is included in the consolidated federal income tax returns of
Barclays USA, Inc. The Business Finance Division of BCI and the
vehicle and equipment leasing portfolio of the Barclays Credit Services
Division of BCI are included in the state income tax returns of
BCI.
BFD computes its federal and state income tax provisions for financial
statement purposes on a separate entity basis.
BFD adopted FAS 109, "Accounting for Income Taxes," prospectively,
effective January 1, 1993. Income tax expense is based on estimated
taxes payable or refundable on a tax return basis for the current year
and the changes in the amount of deferred tax assets and liabilities
during the year. Deferred tax assets and liabilities are established
for temporary differences between the accounting basis and the tax
basis of BFD's assets and liabilities at enacted tax rates expected to
be in effect when the amounts related to such temporary differences
are realized or settled. See "Note 6 Income Taxes."
STATEMENT OF CASH FLOWS
For the purpose of reporting cash flows, BFD has defined cash
equivalents as those amounts with original maturities when purchased of
three months or less. Changes in cash overdrafts are reported as a
financing activity for the purpose of reporting cash flows. Certain
information presented in the Statement of Cash Flows is dependent on
management's estimates and assumptions concerning the portion of the
total cash flows of BCI and Barclays Bank PLC allocable to BFD.
OTHER INCOME
Other income includes $6.3 million related to the reversal of a
litigation reserve established prior to January 1, 1993. This reserve
was established to provide for management's estimate of losses to be
incurred by BFD in connection with this litigation. This legal matter
was settled during 1993 for an amount less than the reserve
established. Accordingly, management reversed the portion of the
reserve in excess of the settlement amount during 1993.
2. LOANS AND ALLOWANCE FOR CREDIT LOSSES
Substantially all of BFD's loans are secured by accounts receivable,
inventory, fixed assets and other collateral. At December 31, 1993,
loans, net of unearned income of $50,457,800, consisted of the
following (in thousands):
Accounts receivable $ 781,105
Inventory 410,244
Equipment and real estate 550,328
Vehicle and equipment leases 158,975
Other secured 84,073
Total 1,984,725
Less: allowance for credit losses 40,657
Loans, net $1,944,068
At December 31, 1993, the accrual of interest income was suspended on
loans having an outstanding balance of $32,402,678. Interest income
related to nonaccruing loans would have been approximately $2.1
million had these loans been current.
At December 31, 1993, the approximate contractual maturities of loans
were as follows (in thousands):
There-
1994 1995 1996 1997 1998 after Total
Total loans $1,457,384 $228,231 $190,100 $47,260 $35,985 $25,765 $1,984,725
Changes in the allowance for credit losses during the year ended December
31, 1993 were as follows (in thousands):
Balance at beginning of year $ 39,021
Provision for credit losses 5,118
Loans charged-off (3,796)
Recoveries 314
Balance at end of year $ 40,657
In May 1993, the Financial Accounting Standards Board issued Statement
No. 114, "Accounting by Creditors for Impairment of a Loan." This
statement addresses the accounting by creditors for impairment of
certain loans. It requires that values for impaired loans generally
be measured based on the present value of expected future cash flows
discounted at the loan's effective rate or the fair value of the
collateral that supports the loan. This statement is effective for
fiscal years beginning after December 15, 1994. Management does not
expect that the adoption of this statement will have a material impact
on the financial position or results of operations of BFD.
Management's view is based on the adequacy of the allowance for credit
losses, the frequency at which loans in the portfolio reprice, the
adequacy of the appraisal process used by management which provides a
good indication of the appraised value of the collateral and the short
time period required to liquidate collateral when the need arises.
During April 1994, BFD completed a sale of $115.6 million vehicle and
equipment leases resulting in a gain of $7.4 million. Management
expects that the remaining vehicle and equipment leases portfolio will
mature in accordance with the contractual terms of the leases.
3. PREMISES AND EQUIPMENT
The components of premises and equipment at December 31, 1993 are
summarized below (in thousands):
Leasehold improvements $ 1,063
Furniture and fixtures 2,645
Equipment 3,162
Total 6,870
Less: accumulated depreciation and amortization 3,561
Total $3,309
Depreciation and amortization expense for the year ended December 31,
1993 totaled $316,000 and is included in other expenses.
BFD occupies certain premises and rents equipment under leases that
are accounted for as operating leases. Operating lease rentals
aggregated approximated $2,387,000 for the year ended December 31,
1993.
The following schedule presents, by year, future minimum rental
payments required under the terms of operating leases in excess of one
year (in thousands):
1994 $ 2,347
1995 2,252
1996 1,620
1997 1,243
1998 1,074
Thereafter 1,468
$ 10,004
4. AFFILIATE ADVANCES AND TRANSACTIONS WITH PARENT COMPANY AND AFFILIATES
BFD finances substantially all of its lending and other services
through short-term borrowings obtained from an affiliated company.
BFD is also allocated long-term financing from an affiliated company
as an additional source of funding. At December 31, 1993, BFD had
outstanding affiliate advances as follows (in thousands):
Short-term affiliate advances $1,606,663
Senior-term debentures 34,543
Senior subordinated debentures 34,090
$1,675,296
Interest expense incurred by BFD for affiliate advances during the year
ended December 31, 1993 totaled $60.3 million.
Short-term affiliate advances represent funding obtained by BFD from an
affiliated company. The amount of short-term affiliate advances outstanding
fluctuates on a daily basis based on BFD's funding needs. On a daily
basis, BFD borrows additional funds or remits payment to the affiliate,
including interest charges, as considered necessary based on its funding
needs. Interest charges are generally computed based on 30-day LIBOR.
Long-term affiliate advances represent senior-term debentures and senior
subordinated debentures issued by an affiliated company and allocated to
BFD at the time the issues were placed. The senior subordinated debentures
are priced at the prime rate minus 0.1% and mature on August 15, 1998. The
senior-term debentures are multiple advances and bear interest at fixed
rates ranging between 4.11% and 8.67%. Senior-term debentures are allocated
to BFD by the affiliate in order to match-fund fixed-rate loans issued
by BFD. The interest rates on each senior-term debenture represent the
market rates obtained by the affiliate at the time the issues were placed.
At December 31, 1993, maturities of BFD's affiliate advances were as
follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 Total
<S> <C> <C> <C> <C> <C> <C>
Short-term affiliate advances $1,606,663 $1,606,663
Senior-term debentures 20,250 $ 4,874 $ 6,349 $ 3,070 34,543
Senior subordinated debentures $34,090 34,090
Total $1,626,913 $ 4,874 $ 6,349 $ 3,070 $34,090 $1,675,296
</TABLE>
An affiliated company provides BFD certain services including legal,
treasury, tax, human resources, payroll and pension administration. The
costs relating to these services are determined annually based on the
estimated charges expected to be incurred by the affiliate on BFD's behalf
and are agreed to between BFD and the affiliate. These costs are allocated
to BCI based on methods appropriate to the nature of the cost. These costs
are further allocated by BCI to BFD based on BFD's budgeted average loans
in relation to total budgeted average loans of BCI. Management believes
that the allocation methods used are reasonable. Such costs allocated to
BFD for the year ended December 31, 1993 were $982,000.
BCI provides BFD certain services including accounting and other
administrative support and rent. These costs are charged to BFD on a pro
rata allocation based on methods appropriate to the nature of the costs
including headcount, budgeted average loans of BFD in relation to budgeted
average loans of BCI or square footage. Management believes that the
allocation methods used are reasonable. Such costs allocated to BFD for
the year ended December 31, 1993 were $6,666,000 and are included in the
appropriate other expenses caption.
At December 31, 1993, BFD had payables to affiliated companies and BCI of
$17,802,000 and are included in the appropriate other expenses caption.
5. PENSION AND OTHER EMPLOYEE BENEFIT PLANS
Substantially all full and part-time employees of BFD meeting certain
eligibility criteria participate in a noncontributory, qualified defined
benefit pension plan sponsored by an affiliated company. For those vested,
the Plan provides a monthly benefit upon retirement based on compensation
during the five consecutive highest paid years of the last ten years of
employment prior to retirement. It is the affiliate's policy to fund
annually an amount consistent with the funding requirements of federal law
and regulations and not to exceed an amount which would be deductible for
federal income tax purposes.
BFD also participates in supplemental retirement plans sponsored by an
affiliated company that cover certain employees and pay benefits that
supplement any benefits paid under the qualified plan. Benefits under the
supplemental plan are generally based on compensation not included in the
calculation of benefits to be paid under the qualified plan.
Separate information regarding the funded status of the plan as it relates
to BFD's employees is not available. The following table sets forth the
funded status of the affiliated company's pension and supplemental benefit
plans in which BFD's employees participate (in thousands):
Actuarial present value of benefit obligations:
Vested benefit obligation $ (35,058)
Accumulated benefit obligation $ (37,232)
Projected benefit obligation for services to date $(49,316)
Plan assets at fair market value 40,532
Projected benefit obligation in excess of plan assets (8,784)
Unrecognized transition asset (2,549)
Unrecognized prior service cost 657
Unrecognized losses 7,591
Accrued pension cost $ (3,085)
The components of net pension cost for BFD's employees for the year ended
December 31, 1993 were as follows (in thousands):
Service cost $ 552
Interest cost 585
Expected return on assets (611)
Amortization of transition asset (49)
Amortization of prior service cost 14
Amortization of losses 2
Net periodic pension cost $ 493
The expense represents an allocation of costs by the affiliated company to
BCI and was determined based on the actuarial computation of current and
future benefits for employees of BCI. BCI has allocated such costs to BFD
based on headcount and views this allocation method as reasonable. This
expense is included in compensation and benefits.
Significant rate assumptions as of December 31, 1993 used in determining
net periodic pension cost and related pension obligations were as follows:
Discount rate in determining projected benefit obligation 7.5%
Rate of increase in compensation levels 4.5%
Long-term rate of return on plan assets 10.0%
An affiliated company sponsors a postretirement benefit plan in which the
employees of BFD participate. This plan provides health care benefits for
retired employees that have met certain age and service requirements.
BFD adopted FAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," effective January 1, 1993. This new
accounting standard requires the expected cost of these postretirement
health care benefits to be accrued and charged to operations during the
years the employees render the service. The transition obligation
($1,586,000 for the employees of BFD at December 31, 1993) is being
amortized on a straight-line basis over 20 years. BFD charged $388,000
to other expense for postretirement benefits during 1993. Previously,
BFD's postretirement benefits were expensed as claims were paid and were
nil.
At December 31, 1993, the accumulated postretirement benefit obligation
for the employees of BFD was $2,331,000.
The components of the annual postretirement benefit cost for the year
ended December 31, 1993 are summarized below (in thousands):
Service cost $ 164
Interest cost 141
Amortization of transition asset 83
Net periodic postretirement benefit cost $ 388
The expense represents an allocation of costs by the affiliated company to
BCI and was determined based on the actuarial computation of current and
future benefits for employees and retirees of BCI. BCI has allocated such
costs to BFD based on headcount and views this allocation method as
reasonable. This expense is included in compensation and benefits.
The significant rate assumptions as of December 31, 1993 used in determining
1993 postretirement benefit cost and related obligations were as
follows:
Discount rate used in determining accumulated
postretirement benefit obligations 7.5%
Rate of increase in compensation levels 4.5%
Long-term rate of return on plan assets 10.0%
Medical cost trend rate 14.0%
The assumptions for the medical cost trend decreases to 6.0% by the year
2001 and remains constant thereafter.
In November 1992, the Financial Accounting Standards Board issued Statement
No. 112 "Employers' Accounting for Postemployment Benefits." This
new accounting standard requires that the cost of these benefits be
accrued and charged to operations if the obligation is attributable to
services already rendered, rights to such benefits accumulate or vest,
payment of the benefits is probable and the amount of the benefits can be
reasonably estimated. This statement is effective for fiscal years
beginning after December 15, 1993. Management estimates that adoption of
this statement will result in an accumulated postemployment benefit
obligation of $60,000 as of January 1, 1994 and an additional annual cost
of approximately $130,000.
6. INCOME TAXES
BFD adopted FAS No. 109, "Accounting for Income Taxes" prospectively,
effective January 1, 1993. The cumulative effect of this change was an
income tax provision of $4.3 million.
The provision for income taxes consists of the following for the year
ended December 31, 1993 (in thousands):
FEDERAL
Current $ 21,701
Deferred 1,478
23,179
STATE
Current 5,845
Deferred 392
6,237
Total income tax provision $ 29,416
Current taxes payable are settled based on the cash needs of the
parent. Unpaid amounts attributable to current taxes payable are
included in the caption "Interdivision and parent company payable."
Significant temporary differences that give rise to deferred tax
assets and liabilities as of December 31, 1993 are as follows (in
thousands):
Deferred Deferred
Tax Assets Tax Liabilities
Allowance for credit losses $ 14,263
FAS 109 5,506
Basis difference in leased assets $ 36,449
Other 5,992
Total deferred income taxes $ 25,761 $ 36,449
There was no valuation allowance at December 31, 1993 since management
views the recoverability of deferred tax assets to be more likely than
not.
The deferred tax liability attributable to the basis difference in leased
assets relates substantially to the vehicle and equipment leases sold
during April 1994. Refer to Note 2 "Loans and Allowance for Credit
Losses."
A reconciliation of the difference between income tax expense and the
amount computed by applying the federal statutory rate of 35% for the year
ended December 31, 1993 follows (in thousands):
Tax expense at statutory rate $ 26,646
State income tax expense, net of
federal tax benefit 4,055
Tax exempt interest (261)
Other items (1,024)
Total income tax expense $ 29,416
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
As of December 31, 1993, 20.3% of BFD's loans were concentrated among
borrowers located in the State of California. The largest industry
concentration, as a percentage of loans, at December 31, 1993 is metal
products manufacturers (11.8%). There were no other industry or geographic
concentrations in excess of 10% of loans outstanding at December 31,
1993.
In the normal course of business, BFD continually extends unfunded loan
commitments associated with its lending activities. These unfunded
commitments vary on a daily basis and are based on the amount of the
borrowers' eligible collateral. At December 31, 1993, BFD had unfunded
commitments of $406,511,000.
In addition, BFD had approved new loan commitments totaling $94,500,000 at
December 31, 1993. However, funded amounts for these loan commitments are
expected to be less because actual advances will be based on the
borrowers' eligible collateral at the time of funding.
BFD provides trade services products consisting principally of standby
letters of credit. At December 31, 1993, total trade services products
outstanding were $217,083,000.
Interest rate swap agreements are used by BFD to manage its interest rate
risk. As an alternative to match-funding fixed-rate loans, BFD occasionally
enters into interest rate swap agreements with an affiliated company,
whereby the two parties exchange fixed and floating interest rate payments
on a notional principal amount over an agreed upon term; no principal
payments are exchanged. At December 31, 1993, BFD had one interest rate
swap agreement outstanding with an affiliate on a total notional principal
amount of $10.2 million. BFD makes fixed rate payments and, in turn,
receives variable rate payments.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
FAS 107, "Disclosures about Fair Value of Financial Instruments," requires
the disclosures of the fair value of financial instruments. A financial
instrument is defined as cash, evidence of an ownership interest in an
entity or a contract that conveys or imposes the contractual right or
obligation to either receive or deliver cash or another financial instrument.
Fair value is defined as the amount at which a financial instrument
could be exchanged in a current transaction between willing parties, other
than in a forced sale or liquidation, and is best evidenced by a quoted
market price if one exists.
BFD estimated fair value based on discounting future cash flows or other
valuation techniques. Each of these valuation techniques involve utilizing
certain assumptions which are highly subjective and judgmental in
nature. Accordingly, the results may not be precise and modifying the
assumptions may significantly affect the values derived. In addition,
fair values established utilizing these valuation techniques may or
may not be substantiated by comparison with independent markets. Further,
fair values may or may not be realized if a significant portion of the
financial instruments were sold in a bulk sale transaction or a forced
liquidation. Additionally, fair values may be different if the business
operations or related assets and liabilities were acquired by an independent
party. Accordingly, the fair values disclosed should not be interpreted as
the aggregate current value of BFD.
The methodology and assumptions used to estimate fair value of BFD's
financial instruments are described below.
CASH OVERDRAFT
The carrying amount for cash overdraft approximates fair value.
LOANS
The carrying amount of performing variable rate loans was estimated to
approximate fair value due to the short-term and frequent repricing
characteristics of these loans. The fair value of performing fixed rate
loans was estimated by discounting expected future cash flows utilizing
risk-free rates of return, adjusted for credit risk and servicing costs.
The fair value of nonperforming loans was estimated by discounting expected
future cash flows utilizing risk-free rates of return.
INVESTMENT
The carrying amount of BFD's investment approximates fair value.
AFFILIATE ADVANCES
The carrying amount of short-term affiliate advances was estimated to
approximate fair value due to the short-term nature of these advances.
The carrying amount of the seven subordinated debentures, which are priced
at a variable rate, was estimated to approximate fair value. The fair
value of the senior-term debentures was estimated by discounting scheduled
cash flows through contractual maturity using estimated market rates.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of commitments to extend credit and letters of credit was
determined based on the discounted value of fees currently charged for
similar agreements. The fair value of BFD's rate swap agreement was based
on the amount BFD would receive or pay to terminate the agreement as of
the reporting date based on the terms of the agreements, the credit
worthiness of the counterparties and current interest rates.
The estimated fair values of BFD's financial assets and liabilities and
related off-balance sheet financial instruments at December 31, 1993 are
summarized below (in thousands):
Carrying Estimated
Amount Fair Value
Cash overdraft $ 1,317 $ 1,317
Loans, less allowance for credit losses $1,944,068 $1,954,000
Investment $ 3,099 $ 3,099
Affiliate advances $1,675,296 $1,670,000
Commitments to extend credit (Committed amount
at December 31, 1993, $406,511) $ 3,100
Standby letters of credit (Contract amount at
December 31, 1993, $217,083) $ 1,300
Interest rate swap agreement (Notional amount
at December 31, 1993, $10,250) $ (400)
EXHIBIT 99.5
Business Finance Division of
Barclays Business Credit, Inc.
Balance Sheet (in thousands) Unaudited
September 30,
1994
ASSETS
Cash and cash equivalents $ 10,806
Loans, less allowance for credit losses of $41,366 2,114,669
Investment 2,654
Deferred income taxes 23,334
Premises and equipment, net 2,931
Other assets 1,236
Total assets $2,155,630
LIABILITIES
Affiliate advances $1,835,954
Customer deposits 12,163
Accounts payable and accrued liabilities 20,689
Interdivision and parent company payable 20,898
Total liabilities 1,898,704
Investment of parent company 256,926
Total liabilities and investment of parent company $2,155,630
Business Finance Division of
Barclays Business Credit, Inc.
Statement of Income (in thousands) Unaudited
Nine Months Ended
September 30,
1994
Interest and fee income $ 142,273
Interest expense 59,490
Net interest income 82,783
Provision for credit losses 3,292
Net interest income after provision
for credit losses 79,491
Other income:
Fee income 8,269
Other 9,917
18,186
Other expenses:
Compensation and benefits 22,245
Occupancy 5,055
Other 3,545
30,845
Income before income taxes 66,832
Income taxes 26,482
Net income $40,350
Business Finance Division of
Barclays Business Credit, Inc.
Statement of Cash Flows (in thousands) Unaudited
Nine Months Ended
September 30,
1994
OPERATING ACTIVITIES
Net income $40,350
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for credit losses 3,292
Depreciation and amortization 371
Deferred income taxes (34,023)
Loan origination fees received 9,064
Amortization of loan origination fees (6,952)
Increase in accounts payable and accrued liabilities 3,746
Increase in interdivision and parent company payable 10,228
Other 704
Net cash provided by operating activities 26,780
INVESTING ACTIVITIES
Loans originated (496,022)
Loans repaid 320,539
Purchases of premises and equipment (123)
Net cash used in investing activities (175,606)
FINANCING ACTIVITIES
Increase in affiliate advances 160,949
Decrease in cash overdraft (1,317)
Net cash provided by financing activities 159,632
Increase in cash and cash equivalents 10,806
Cash and cash equivalents, beginning of period 0
Cash and cash equivalents, end of period $ 10,806
EXHIBIT 99.6
Contact:
News Media Contact:
Investor Contact:
Vincent Loporchio Thomas R. Rice
(617) 292-3239 (203)986-4872
FOR IMMEDIATE RELEASE
SHAWMUT COMMENTS ON AGREEMENT TO ACQUIRE NORTHEAST
FEDERAL
BOSTON, MASS. AND HARTFORD, CONN., JANUARY 11, 1995 -- In
response to an announcement today by Northeast Federal
Corp. (NYSE: NSB), Shawmut National Corporation (NYSE:
SNC) reiterated its interest in consummating the
previously announced acquisition of Northeast, but said
it does not expect to increase the agreed-upon share
exchange ratio.
Under the terms of the definitive agreement announced
last June, each Northeast share would be exchanged for a
maximum of .507 Shawmut share. If Shawmut's average
closing price for the 15 trading days ending on the day
before the last regulatory approval is received (the
determination date) would result in a value of less than
$10.875 per Northeast share, Northeast may elect to
terminate the agreement unless Shawmut elects to increase
the exchange ratio to produce a value equal to $10.875.
Northeast announced today that if the .507 exchange ratio
produces a value less than $10.875 at the determination
date, it intends to terminate the agreement. If
Northeast terminates the agreement, Shawmut said its
present intention is not to increase the exchange ratio
above .507.
At Shawmut's closing price yesterday, the transaction
would be valued at $9.06 per Northeast share, 1.37 times
Northeast's reported year-end book value of $6.63 per
share.
Susan E. Lester, executive vice president and chief
financial officer, said "Acquiring Northeast remains a
sound strategic and financial step for Shawmut, but our
commitment to maximize shareholder value requires pricing
discipline. In light of present economic conditions --
particularly the increases in interest rates since the
merger agreement -- and today's pricing of thrift
acquisitions, our present intention is not to increase
the exchange ratio above the agreed-upon .507."
Shawmut National Corporation is a superregional bank
holding company with $31 billion in assets. During 1994,
Shawmut announced or closed the acquisition of six other
banks and thrifts, a trust company, a commercial finance
company and a processing company.
