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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to __________
FILE NUMBER: 1-10571
NORTHEAST FEDERAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1288154
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OF ORGANIZATION)
50 STATE HOUSE SQUARE 06103
HARTFORD, CONNECTICUT (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
203/280-1000
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act
Not Applicable
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of February 4, 1994.
Common Stock, $.01 par value--$65,851,232
The number of shares outstanding for each of the registrant's classes of
common stock issued and outstanding as of February 4, 1994.
Common Stock, $.01 par value--13,507,945
DOCUMENTS INCORPORATED BY REFERENCE:
Part III--Portions of Proxy Statement for Annual Meeting of Stockholders,
May 20, 1994
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NORTHEAST FEDERAL CORP.
1993 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
Item 1. Business....................................................... 1
General...................................................... 1
Lending Activities........................................... 5
Investment Activities........................................ 26
Sources of Funds............................................. 31
Subsidiaries................................................. 37
Employees.................................................... 37
Regulations.................................................. 37
Enforcement.................................................. 49
Taxation..................................................... 50
Item 2. Properties..................................................... 50
Item 3. Legal Proceedings.............................................. 52
Item 4. Submission of Matters to a Vote of Security Holders............ 53
Supplementary Item....................................................... 54
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters............................................ 56
Item 6. Selected Financial Data........................................ 58
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition........................................ 59
Item 8. Financial Statements and Supplementary Data.................... 90
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 138
PART III
Item 10. Directors and Executive Officers of the Registrant............. 139
Item 11. Executive Compensation......................................... 139
Item 12. Security Ownership of Certain Beneficial Owners and Management. 139
Item 13. Certain Relationships and Related Transactions................. 139
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K............................................................ 140
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Northeast Federal Corp. (the Company), a Delaware corporation incorporated in
January 1990, is a unitary savings association holding company engaged in the
financial services industry through its wholly-owned subsidiary, Northeast
Savings, F.A. (Northeast Savings or the Association). Northeast Savings, one of
the largest thrift institutions based in New England with total assets of $3.9
billion, is a federally-chartered savings and loan association headquartered in
Hartford, Connecticut with 49 retail branch offices in California, Connecticut,
Massachusetts, New York, and Rhode Island. Through these retail branch offices,
Northeast Savings offers a wide range of mortgage loan and deposit products. In
addition, Northeast Savings operates residential mortgage loan origination
offices in Connecticut and, through a subsidiary, in Colorado. The financial
statements and the related information included in this document reflect the
consolidated balances of Northeast Federal Corp. and its subsidiaries.
Principal Business and Operating Strategy. The business of the Company,
conducted through the Association, is providing traditional thrift banking
services to the general public. These services include a range of deposit
products such as checking accounts, savings accounts, retirement accounts, and
certificates of deposit; a wide range of residential mortgage loan programs
including both fixed and adjustable rate first mortgage loans and home equity
loans and credit lines; and ancillary banking services such as safe deposit
boxes and travelers checks.
The Association's primary source of income is the net interest income
generated through raising deposits from the general public and investing those
deposits in residential mortgage loans. Additional sources of revenue are the
interest earned on securities, the fees earned in connection with loans,
deposits and other banking services, and gains realized on the sales of loans
and securities. Other expenses besides the interest incurred on deposits and
other borrowed funds are the provision for loan losses and other non-interest
expenses including general and administrative costs and expenses on real estate
and other assets acquired in settlement of loans.
Since 1989, the Company has pursued the operating strategy of providing
traditional thrift banking services, namely gathering retail deposits and
investing those deposits in adjustable rate residential mortgages. In 1993,
however, the Company adjusted this strategy in consideration of the prevailing
interest rate and economic environment. The low interest rate environment of
1993 brought with it high prepayments on existing mortgages, extremely
competitive rates on adjustable rate mortgages in some markets, and deposit
disintermediation as bank deposits were transferred into alternative
investments such as mutual funds. The regional recessions in New England and in
California increased the credit costs associated with lending in those regions,
particularly in California.
As a result of these factors, in the third quarter of 1993, the Company
modified its operating strategy both with regard to lending and to balance
sheet structure. For example, adjustable rate mortgages originated in markets
where start rates are extremely low are not retained for portfolio. In place of
this adjustable rate mortgage production that had been retained for portfolio
under the previous operating strategy, the Company is originating 10 and 15
year fixed rate mortgages for portfolio and is purchasing intermediate term
mortgage-backed securities (MBSs). Further, in February 1994, the Company
closed its loan origination office in California. This modified strategy is
intended to reduce the Company's loan concentration in California, to reduce
credit costs, and to increase the net interest margin.
Background. Northeast Savings was formed in March 1982 when The Schenectady
Savings Bank, F.S.B., operating in the Albany-Schenectady area in upstate New
York, acquired Hartford Federal Savings and Loan Association in Connecticut.
Schenectady Savings was organized in 1834 as a New York state-chartered mutual
savings bank. Northeast Savings further expanded into Massachusetts in October
1982
<PAGE>
when it acquired Freedom Federal Savings and Loan Association of Worcester
(Freedom Federal) with branch offices in Springfield, Worcester, Greater
Boston, and Cape Cod, and the First Federal Savings and Loan Association of
Boston.
These acquisitions were Federal Savings and Loan Insurance Corporation
(FSLIC)-assisted supervisory mergers induced by the Federal Home Loan Bank
Board (FHLBB). As an integral part of the Freedom Federal acquisition, the
FSLIC purchased a $50,000,000 income capital certificate from the Association.
In exchange for the Association's agreement to acquire these troubled
institutions, the FSLIC and the FHLBB also agreed that the Association could
account for the mergers under the purchase method of accounting and that the
resultant supervisory goodwill would be included in regulatory capital.
On September 22, 1983, the Association converted from a mutual to a stock
association through the sale of 5,060,765 shares of common stock, which
generated net proceeds of $52,767,000. In October 1985, the Association issued
1,610,000 shares of $2.25 Cumulative Convertible Preferred Stock, Series A (the
convertible preferred stock), which generated net proceeds of $38,341,000.
Additionally, in March 1987, Northeast Savings issued 1,202,916 shares of
Adjustable Rate Cumulative Preferred Stock, Series A (the adjustable rate
preferred stock), valued at $60,145,000 to the FSLIC in exchange for the
FSLIC's cancellation of the income capital certificate and a portion of the
accumulated income payments on the certificate.
On July 6, 1990, at a Special Meeting of Stockholders, the holders of voting
stock of Northeast Savings approved a Plan of Reorganization whereby Northeast
Savings became the wholly-owned subsidiary of a Delaware holding company,
Northeast Federal Corp. Under the reorganization plan, 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 core capital. As a result, on July
6, 1990, Northeast Savings came into compliance with all of the then-applicable
Office of Thrift Supervision (OTS) capital requirements. Since that time,
Northeast Savings has remained in compliance with all current capital
requirements and, as of June 30, 1992, met all of its fully phased-in capital
requirements.
On June 19, 1991, the Association acquired $10.5 million of deposits of
Financial of Hartford, F.S.B. from the Resolution Trust Corporation (RTC). On
September 13, 1991, the Association acquired $210.9 million in insured deposits
of eight branches of ComFed Savings Bank, F.A. (ComFed), from the RTC. In
addition, on March 20, 1992, Northeast Savings acquired approximately $183.2
million in insured deposits of four southern California branches of FarWest
Savings and Loan Association, F.A. from the RTC.
On May 8, 1992, the Association acquired certain assets of four Rhode Island
financial institutions (the Rhode Island acquisition) which were in
receivership proceedings under the jurisdiction of the Superior Court of
Providence County, Rhode Island. In addition, deposits in the Association were
issued to former depositors in the Rhode Island institutions. As a result, the
Association acquired seven branches in Rhode Island which, at the time of
acquisition, had total deposits of $315.0 million.
In conjunction with the Rhode Island acquisition, the Company repurchased
from the FSLIC Resolution Fund (FRF) the Company's adjustable rate preferred
stock for $28.0 million in cash and $7.0 million of the Company's 9% Sinking
Fund Uncertificated Debentures, due 2012 (the 9% Debentures) for a total fair
value of $32.5 million. The 9% Debentures had a fair value of $4.5 million,
based on the value attributable to those debentures by the FRF, as determined
by its investment banker. The cash used for the repurchase of the adjustable
rate preferred stock was obtained by the sale of $28.95 million of 9%
Debentures to the receivers for the Rhode Island institutions, who distributed
those 9% Debentures to certain depositors in those institutions in partial
settlement of their claims against the receiverships. Also, the Company issued
and sold 351,700 shares of a new class of preferred stock, its $8.50 Cumulative
Preferred Stock, Series B, (the Series B preferred stock) plus warrants to
purchase an aggregate of 800,000 shares of the Company's common stock to the
Rhode Island Depositors Economic Protection Corporation (DEPCO) for $35.17
million. The net proceeds from the sale of the Series B preferred stock were
used by the Company to increase the equity capital
2
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of the Association. The Rhode Island acquisition and its impact on the Company
are discussed more thoroughly in Item 7: Management's Discussion and Analysis
of the Results of Operations and Financial Condition.
On May 7, 1993, at a Special Meeting of Stockholders, the Company's
stockholders approved a reclassification of the Company's convertible preferred
stock into common stock at the ratio of 4.75 shares of common stock for each
share of convertible preferred stock. Effective May 14, 1993, the 1,610,000
outstanding shares of convertible preferred stock were converted into an
aggregate of 7,647,500 shares of common stock. At such time, in the aggregate,
$12.2 million of accumulated and unpaid dividends on the convertible preferred
stock were eliminated.
On February 9, 1994, Shawmut National Corporation and the Company signed a
definitive agreement for the acquisition by Shawmut of ten Northeast Savings
branches located in Eastern Massachusetts and in Rhode Island. Five of the
branches to be purchased are in Massachusetts and five are in Rhode Island.
Deposits held in these branches totaled approximately $427 million as of
December 31, 1993. Shawmut will pay a premium of three percent to Northeast
Savings for deposits on hand in these branches at the time of closing. The
transaction is expected to close by the end of the second quarter, and is
subject to regulatory approval. The sale will permit Northeast Savings to focus
its resources on its four significant deposit markets: the capital region of
New York State; Hartford, Connecticut; and Springfield and Worcester,
Massachusetts. The sale of the branches will also strengthen the Company's
financial position and enhance its profitability. When the transaction is
finalized, Northeast Savings will operate thirty-eight branches, thirty-two of
which are in those markets.
Supervisory Goodwill. Management believes that, based on the Association's
constitutional rights and legal rights under its 1982 contracts with the FSLIC
and the FHLBB, the supervisory goodwill generated by the 1982 acquisitions was
includable for purposes of all regulatory capital requirements. However, as
discussed in the Regulations section, current regulatory capital requirements
of the OTS, the successor agency to the FHLBB, exclude supervisory goodwill
from regulatory capital to the extent that such supervisory goodwill is in
excess of a specified allowed amount, which was initially 1.5% of tangible
assets but which declines to zero after December 31, 1994.
As a result of the impact of the OTS regulations on its regulatory capital
position, Northeast Savings asserted its constitutional rights and its
contractual rights to the inclusion in capital of the then remaining balance of
the supervisory goodwill in a complaint filed on December 6, 1989 in the United
States District Court for the District of Columbia (the district court). On
July 16, 1991, the district court dismissed the lawsuit, ruling that it lacked
jurisdiction over the action, but that Northeast Savings 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 district
court's decision. The United States Court of Appeals for the District of
Columbia Circuit granted the Association's motion on July 9, 1992. On August
12, 1992, Northeast Savings refiled its action in the United States Claims
Court. Note that, effective October 29, 1992, the United States Claims Court
was renamed the United States Court of Federal Claims. The complaint is
discussed further in Item 3: Legal Proceedings.
Subsequent to the initial complaint filed in 1989, the Association has
recorded two significant reductions in the value of its supervisory goodwill.
The first reduction of $109.4 million took place in the year ended March 31,
1990. The second reduction occurred in September 1992 and is explained in more
detail in Item 7: Management's Discussion and Analysis of the Results of
Operations and Financial Condition. The reduction in supervisory goodwill
should not affect the Association's claim, described above, pending in the
United States Court of Federal Claims. The Association's remaining supervisory
goodwill was eliminated in the quarter ended December 31, 1992 as a result of
normal amortization and the utilization of net operating loss carryforwards.
3
<PAGE>
Competitive and Regulatory Environment. Northeast Savings faces strong
competition both in attracting retail deposits and in making residential real
estate loans. Its most direct competition for deposits has historically come
from savings banks, other savings and loan associations, commercial banks, and
credit unions. The Association faces additional competition for retail
depositors' funds from financial intermediaries offering money market and
mutual funds and corporate and government securities. Additionally, Northeast
Savings competes with mortgage banking companies, finance companies, and other
institutional lenders for residential real estate loans. The Association
competes by supplying efficient and quality service, offering and charging
competitive interest rates and fees, and providing convenient branch locations
with extended banking hours and 24 hour automated teller service.
Northeast Savings' operations, like those of other financial institutions,
are significantly influenced by general economic conditions. Deposit flows and
the cost of funds to the Association are influenced by interest rates on
competing investments and general market interest rates. The Association's loan
volume, loan yields, and loan prepayments are also impacted by market interest
rates on loans and other factors which affect the supply of and demand for
housing and the availability of funds. In the past several years, a weak
economy and real estate market have impacted the ability of borrowers to repay
their loans which, in turn, affects the Association's overall level of
nonperforming assets. Northeast Savings' operations are further influenced by
the policies and regulations of financial institution regulatory authorities
such as the Board of Governors of the Federal Reserve System (Federal Reserve
Board), the Federal Deposit Insurance Corporation (FDIC), the Office of the
Comptroller of the Currency (OCC), and the OTS, and by the other monetary,
fiscal, legislative, and regulatory policies of the United States government
and various state governments.
Most states have adopted legislation which would permit, subject to various
conditions and restrictions, banking on an interstate basis. The right to
engage in banking on an interstate basis is often restricted to specific states
or regions and often includes reciprocity provisions. The location of the
financial institution's home office is also generally a factor in determining
the extent of the right. In some instances, the legislation applies only to
banks and not to savings institutions. With the advent of regional and
interstate branching, competitors of the Association may be able to conduct
extensive interstate banking operations and thereby gain competitive
advantages. In addition, an OTS regulation, which states that it preempts any
state law purporting to address the subject of branching by a federal savings
institution, generally allows federal savings institutions, including Northeast
Savings, to branch freely throughout the United States to the extent allowed by
federal statutes.
The Association is subject to the supervision and regulation of the OTS and,
secondarily, the FDIC. During the year ended December 31, 1993, the Company and
the Association were examined by both the OTS and FDIC. Management believes
that these examinations were routine in nature and part of the normal
supervisory examination process. Management is not aware of any current
directive by either the OTS or the FDIC, specific to Northeast Federal Corp. or
Northeast Savings that, if implemented, would have a significant material
effect on the Company's liquidity, capital resources, or operations. The
Association's deposits are insured up to applicable limits by the Savings
Association Insurance Fund (SAIF) which is administered by the FDIC, the
successor agency to the FSLIC. Northeast Savings is further subject to
regulations of the Federal Reserve Board with respect to reserves required to
be maintained against deposits and certain other matters. For further
discussion, see the Regulations section.
The Association underwent an OTS consumer compliance examination as of
September 28, 1992. The OTS has a specialized group of examiners that focuses
on consumer regulations, including non-discrimination regulations, such as the
Equal Credit Opportunity Act and the Home Mortgage Disclosure Act; the Truth-
in- Lending Act and the Bank Secrecy Act. The consumer compliance examination
revealed no significant items of concern.
In conjunction with the consumer compliance examination, a separate Community
Reinvestment Act (CRA) evaluation and rating were provided. The CRA evaluation
and rating process assesses and ranks the overall performance of federally
regulated depository institutions in helping to meet community credit needs,
4
<PAGE>
including those of low and moderate income neighborhoods. The evaluation and
ratings are narrative and are public information; institutions are given
ratings as follows: Outstanding, Satisfactory, Needs to Improve, or Substantial
Noncompliance. The Association received a Satisfactory rating. An institution
in this group has a satisfactory record of ascertaining and helping to meet
community credit needs consistent with its resources and capabilities. The
management of the CRA process is satisfactory and includes adequate
documentation of CRA related activities and demonstrates regular involvement by
the Board of Directors and senior management in the institution's CRA planning,
implementation, and monitoring process. An institution's CRA rating is taken
into consideration by the OTS when it reviews applications to open or relocate
a branch facility or to acquire assets and assume liabilities. Generally,
institutions that receive a satisfactory rating are placed on an eighteen month
review cycle by the OTS.
Reregulation, increased competition, and a weakened economy have adversely
impacted the asset quality of a significant number of the institutions in the
thrift industry, including the Association. The effects of the lingering
recession have caused real estate values to continue to decline in many parts
of the country. Until signs of stabilization or improvement are prevalent in
the markets in which the Association operates, future effects of the economy
and industry regulation will continue to impact the asset quality of the
Association.
LENDING ACTIVITIES
Northeast Savings' primary business is receiving deposits from the public and
investing those funds in single-family residential mortgage loans. Prior to
fiscal year 1989, Northeast Savings substantially increased its total assets
primarily through the purchase of mortgage-backed securities and investment
securities in the secondary markets. However, in October 1988, under the
direction of its new chairman and chief executive officer, Northeast Savings
announced its intention to return to more traditional thrift activities and de-
emphasize its wholesale activities. Northeast Savings also announced it would
substantially stop the growth in its balance sheet and more fully utilize its
retail branch network as a low cost delivery system for deposit gathering and
single-family residential mortgage loan origination. A singularly important
element of this strategy was the strengthening of Northeast Savings'
residential mortgage loan origination network within its then-existing three-
state branch market as well as the expansion into selected geographic markets.
Currently, Northeast Savings originates its residential mortgage loans through
its five-state branch system and its residential mortgage loan origination
offices in Connecticut and, through a subsidiary, in Colorado. Previously,
Northeast Savings also operated a loan origination office in California. This
office was closed in early February 1994.
Northeast Savings' primary lending activities consist of originating single-
family residential mortgage loans and, to a small extent, consumer loans such
as equity loans and lines of credit, checking account overdraft protection, and
loans collateralized by deposit accounts, and income property loans secured by
commercial real estate and guaranteed by the United States Small Business
Administration (SBA). Northeast Savings' lending objective is to meet its
customers' needs while managing the amount of credit and interest rate risk
exposure in its loan portfolio. To accomplish this goal, significant attention
is directed toward designing appropriate types of loans to be offered and the
proper pricing of each type of loan.
Northeast Savings reviews its loan volume capacity as compared with its asset
growth projection and capital ratios on a regular basis. Loan volume in excess
of the desired growth capacity is available for sale in public and private
markets either in a securitized or non-securitized form. Loans which are
originated with the intention to sell are carried at the lower of cost or fair
value. The environment for the sale of loans in the secondary market is
dependent upon market conditions. When the market is restricted, the effect is
to reduce loan sales and loans serviced for others. When this occurs, it may be
necessary to restrict loan originations to maintain targeted asset growth and
capital levels.
Single-Family Residential Mortgage Loans. Single-family residential first
mortgage loans were $1.8 billion or 96.0% of Northeast Savings' total loan
portfolio at December 31, 1993 and included $46.1 million
5
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in the available-for-sale portfolio which is carried at the lower of cost or
fair value. The following table shows the geographic distribution of the
Association's single-family residential mortgage loan portfolio at the dates
indicated:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------ -----------------
1993 1992 1992
----------------- ----------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
California............ $ 903,540 48.95% $1,228,381 55.76% $1,142,906 51.29%
Connecticut........... 260,947 14.14 276,429 12.55 283,379 12.72
New York.............. 221,067 11.98 236,224 10.72 263,682 11.83
Massachusetts......... 158,968 8.61 144,727 6.57 177,649 7.98
New Jersey............ 56,915 3.08 71,443 3.24 83,550 3.75
Florida............... 42,745 2.32 54,338 2.47 63,053 2.83
Other................. 201,608 10.92 191,432 8.69 213,962 9.60
---------- ------ ---------- ------ ---------- ------
Total............... $1,845,790 100.00% $2,202,974 100.00% $2,228,181 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
The Association offers a variety of adjustable rate residential mortgage loan
products, all of which conform to secondary mortgage market requirements. The
Association's primary adjustable rate product is a one-year adjustable rate
loan, which is tied to the Weekly Average Yield on U.S. Treasury Securities
adjusted to a constant maturity of one year (One-Year Treasury Constant
Maturity Index). Payments and interest rates change annually with an interest
rate cap of 2%. Northeast Savings also offers a selection of fixed rate
mortgage loans. Generally, both adjustable and fixed rate loans originated by
Association are based on underwriting standards such that the loans may be sold
or securitized in the secondary mortgage market.
Depending upon the underlying index, adjustable rate loans are offered at
terms ranging from 25 to 30 years. All adjustable rate loan products include a
lifetime cap and some contain options to convert to a fixed rate loan. A
lifetime cap on loans is determined by the Association at the inception of a
loan. For borrowers whose initial down payments are less than 20%, Northeast
Savings offers adjustable rate loans covered by private mortgage insurance
which insures that the Association's exposure is no greater than approximately
75% of the appraised value of the property at the time the loan was originated.
Northeast Savings also originates 10, 15, 20, and 30 year, conforming and
non-conforming, fully amortizing fixed rate residential mortgage loans, some of
which are sold in the secondary mortgage market as whole loans or, with
conforming loans, in the form of securities issued by the Federal Home Loan
Mortgage Corporation (FHLMC) or the Federal National Mortgage Association
(FNMA). Single-family residential conforming loans are those loans which are
equal to or less than FNMA or FHLMC loan limits, which was $203,150 as of
January 1, 1994. Generally, when conforming loans are sold to FHLMC or FNMA,
Northeast Savings collects fees for continuing to service the loans. In
addition, the Association originates loans for private investors based on their
underwriting standards and sells these loans to the investors, servicing
released. All residential mortgage loans originated by the Association contain
due-on-sale clauses which provide that the Association may, subject to certain
regulatory restrictions, declare the unpaid principal amount due and payable
upon the resale of the mortgaged property.
The Association also originates a variety of other single-family residential
mortgage loan products including loans with fixed interest rates for the first
three years after origination which convert to adjustable rate mortgages at the
end of the fixed rate period. The adjustable rates are generally tied to the
One-Year Treasury Constant Maturity Index.
6
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Originations of single-family residential mortgage loans by product type and
by geographic area during the year ended December 31, 1993 were as follows:
<TABLE>
<CAPTION>
PERCENT OF
CALIFORNIA CONNECTICUT NEW YORK MASSACHUSETTS COLORADO OTHER TOTAL ORIGINATIONS
---------- ----------- -------- ------------- -------- ------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Adjustable rate loans:
One-Year Treasury
Constant Maturity..... $280,394 $ -- $ -- $ -- $ -- $ 240 $280,634 38.21%
Other adjustable....... 41,685 41,135 18,924 30,714 29,442 30,841 192,741 26.24
Fixed rate loans........ 30,955 60,593 76,497 62,432 16,339 14,273 261,089 35.55
-------- -------- ------- ------- ------- ------- -------- ------
Total.................. $353,034 $101,728 $95,421 $93,146 $45,781 $45,354 $734,464 100.00%
======== ======== ======= ======= ======= ======= ======== ======
</TABLE>
Northeast Savings' single-family residential loan portfolio at December 31,
1993 by product type and geographic area is as follows:
<TABLE>
<CAPTION>
CALIFORNIA CONNECTICUT NEW YORK MASSACHUSETTS NEW JERSEY OTHER TOTAL
---------- ----------- -------- ------------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
One-year adjustable rate
loans:
One-Year Treasury
Constant Maturity..... $400,215 $161,705 $113,395 $113,798 $43,943 $174,123 $1,007,179
Six-month adjustable
rate loans:
One-Year Treasury
Constant Maturity..... 149,728 51,071 44,489 1,935 10,826 4,399 262,448
Six-Month Cost of
Funds................. 104,885 1,316 -- -- -- -- 106,201
Other adjustable........ 223,943 20,338 24,599 16,385 559 40,326 326,150
Fixed rate loans........ 24,086 26,517 38,584 26,849 1,585 26,191 143,812
-------- -------- -------- -------- ------- -------- ----------
Total.................. $902,857 $260,947 $221,067 $158,967 $56,913 $245,039 $1,845,790
======== ======== ======== ======== ======= ======== ==========
</TABLE>
Included in the single-family residential loan portfolio are $226.1 million
of loans which were purchased prior to 1991 in the secondary market and are
serviced by FNMA/FHLMC approved servicers. At the time of purchase, the
underwriting guidelines for purchased loans met or exceeded the credit
standards established by the Board of Directors. Purchased loans cannot exceed
$600,000 and loan-to-value ratios cannot exceed 80% without acceptable private
mortgage insurance. Properties collateralizing purchased loans are
geographically dispersed to limit the Association's exposure to unfavorable
economic changes in any one area of the country.
Under federal regulations, with some limited exceptions, a residential
mortgage loan may not exceed 100% of the appraised value of the collateralized
property at the time of origination. Under policies adopted by its Board of
Directors, Northeast Savings limits the loan-to-value ratio to 80% on single-
family residential mortgage loans, and, with private mortgage insurance, up to
90% on adjustable rate single-family residential mortgage loans and 95% on
fixed rate single-family residential mortgage loans. In certain geographic
areas of the country, Northeast Savings has limited the loan-to-value ratio to
even less than 80%. In certain cases, prior to 1990, the Association's policies
allowed originations of single-family residential mortgage loans with loan-to-
value ratios greater than 80% without private mortgage insurance. Such loans
originated after 1990 were on an exception basis only and required the approval
of the Chairman of the Board or the President.
7
<PAGE>
The following table shows certain information with respect to the original
loan-to-value ratios of single-family residential loans originated during the
periods indicated:
<TABLE>
<CAPTION>
FOR THE YEARS
FOR THE YEAR FOR THE NINE MONTHS ENDED MARCH 31,
ENDED DECEMBER 31, ENDED DECEMBER 31, ----------------------
1993 1992 1992 1991 1990
------------------ ------------------- ------ ------ ------
(PERCENT OF LOANS FUNDED)
<S> <C> <C> <C> <C> <C>
Greater than 90%........ .26% .09% .08% .30% .13%
85% - 90%............... .34 .02 .05 .11 .32
80% - 85%............... .40 .15 .13 .35 .61
75% - 80%............... 25.76 30.71 23.44 9.04 20.18
70% - 75%............... 32.54 28.20 26.13 58.49 49.90
65% - 70%............... 10.64 10.29 14.27 13.10 10.48
60% - 65%............... 7.81 7.21 8.92 6.12 5.60
Under 60%............... 22.25 23.33 26.98 12.49 12.78
------ ------ ------ ------ ------
100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
</TABLE>
The following table shows originations of single-family residential loans
during the year ended December 31, 1993 by state and by original loan-to-value
ratios:
<TABLE>
<CAPTION>
PERCENT OF
CALIFORNIA CONNECTICUT NEW YORK MASSACHUSETTS COLORADO OTHER TOTAL ORIGINATIONS
---------- ----------- -------- ------------- -------- ------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Greater than 90%........ $ -- $ 975 $ 775 $ 143 $ -- $ -- $ 1,893 .26%
85% - 90%............... 1,586 522 62 363 -- -- 2,533 .34
80% - 85%............... 2,745 -- -- -- -- 224 2,969 .40
75% - 80%............... 112,853 20,592 14,481 20,203 10,713 10,329 189,171 25.76
70% - 75%............... 104,488 36,967 28,685 34,227 17,631 16,981 238,979 32.54
65% - 70%............... 35,886 11,471 10,595 10,409 4,879 4,921 78,161 10.64
60% - 65%............... 29,531 5,307 7,882 5,450 4,211 4,968 57,349 7.81
under 60%............... 65,946 25,894 32,941 22,351 8,347 7,930 163,409 22.25
-------- -------- ------- ------- ------- ------- -------- ------
$353,035 $101,728 $95,421 $93,146 $45,781 $45,353 $734,464 100.00%
======== ======== ======= ======= ======= ======= ======== ======
</TABLE>
The following table presents the Association's single-family residential
loans, which are both originated and serviced by the Association, by state at
December 31, 1993 based on original loan-to-value ratios:
<TABLE>
<CAPTION>
NEW
CALIFORNIA CONNECTICUT NEW YORK MASSACHUSETTS JERSEY OTHER TOTAL PERCENT
---------- ----------- -------- ------------- ------- -------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Greater than 90%........ $ 107 $ 1,902 $ 1,837 $ 878 $ -- $ 836 $ 5,560 .35%
85% - 90%............... 5,067 1,736 1,573 2,830 -- 847 12,053 .75
80% - 85%............... 3,926 1,669 3,140 923 -- 730 10,388 .65
75% - 80%............... 335,649 93,483 55,359 38,421 23,209 30,917 577,038 36.02
70% - 75%............... 226,867 66,943 53,658 39,900 11,225 53,120 451,713 28.19
65% - 70%............... 107,015 26,154 22,186 13,916 2,158 11,633 183,062 11.43
60% - 65%............... 69,866 12,285 18,272 8,442 1,833 8,748 119,446 7.46
under 60%............... 110,453 42,520 45,011 24,914 4,879 14,992 242,769 15.15
-------- -------- -------- -------- ------- -------- ---------- ------
$858,950 $246,692 $201,036 $130,224 $43,304 $121,823 $1,602,029 100.00%
======== ======== ======== ======== ======= ======== ========== ======
</TABLE>
The remaining $243.8 million in the Association's single-family residential
loan portfolio consists primarily of purchased loans for which the above
breakdown is not available.
The Association originates, reviews, and approves loans in accordance with
written, nondiscriminatory underwriting guidelines established by the Board of
Directors and requires property appraisals on all real estate loans. Pursuant
to federal regulations, Northeast Savings has developed and adopted a written
appraisal policy that meets certain minimum standards, including guidelines
pertaining to the hiring of the Chief
8
<PAGE>
Appraiser, who reports directly to the Chairman, and the use of other
independent fee appraisers. Licensed or certified independent fee appraisers
must be approved by the Chief Appraiser and reviewed and affirmed by the Board
of Directors and all appraisals must meet FNMA/FHLMC guidelines. Approximately
70% of the Association's appraisals are performed by internal state-certified
staff appraisers. Detailed loan applications and credit reports are obtained to
determine the borrower's ability to repay and the significant items on the
applications are verified through the use of financial statements and deposit
and employment verifications. Since the beginning of calendar year 1992, the
Association has required full or standardized documentation on all portfolio
loans. Northeast Savings requires borrowers to maintain fire and casualty
insurance for the greater of the insurable value of the property or the amount
of the mortgage.
Consumer Loans. Federal laws and regulations permit federally-chartered savings
institutions to make secured and unsecured consumer loans of up to 35% of the
institution's total assets. In addition, federally-chartered savings
institutions have lending authority above the 35% limit for certain consumer
loans such as home equity loans. In the past several years, Northeast Savings'
consumer lending activities have been directed almost exclusively towards loans
associated with deposit products, such as loans collateralized by deposit
accounts and overdraft protection on checking accounts. However, beginning in
late 1993, the Association also began offering equity lines of credit. The
equity lines of credit provide for an interest rate that is 1 1/2% above the
Wall Street Journal prime rate with a corresponding maximum lifetime interest
rate cap of 14.9%. The rate is adjusted monthly, based on changes in the index.
The equity line of credit remains open with a revolving feature for ten years
and requires the payment of interest only during that time, after which the
principal balance fully amortizes over a twenty year period. The maximum amount
on these loans is $100,000 and the maximum combined loan-to-value ratio is 75%.
In addition, the Association originates a small number of fixed rate, closed-
end equity loans. The maximum amount on the fixed rate equity loans is also
$100,000 and the maximum combined loan-to-value ratio is 75%.
Deposit account loans have no set repayment date, are collateralized by
deposit accounts maintained at Northeast Savings, and provide for a rate of
interest that is 3% above the rate on the deposit account collateralizing the
loan. The overdraft protection associated with checking accounts is a revolving
credit line which is currently limited to a maximum of $1,000 and is restricted
to depositors who maintain a household deposit balance of at least $5,000 with
Northeast Savings. This product carries an interest rate of 15.75%.
Consumer loans are approved in accordance with written, non-discriminatory
underwriting guidelines established by the Board of Directors. Consumer loans
were $34.7 million or 1.8% of the total loan portfolio at December 31, 1993.
Consumer loans at December 31, 1993 included $5.9 million in equity credit
lines and $15.5 million in fixed rate equity loans.
Income Property Loans. At December 31, 1993, the income property loan portfolio
totaled $79.3 million or 4.1% of total loans. Income property loans include
loans on income-producing properties and single-family residential
construction. At December 31, 1993, loans on income-producing properties
totaled $69.2 million. Approximately 78.3% of Northeast Savings' income
property loans are located within its primary market areas of New York,
Massachusetts, Connecticut, and California. Of the total income property loan
portfolio, $377,000 or approximately 0.5%, was classified as non-accrual at
December 31, 1993. Income property loans are collateralized by the underlying
real estate, may be supported by additional personal guarantees, and conform to
all federal regulations. Restrictions under the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (FIRREA) limit income property loans to
400% of an institution's capital. This limitation is discussed further in the
Regulations section.
Northeast Savings offers single-family residential construction loans to
stable developers, since the construction of single-family residences is so
closely tied to the Association's primary lending activity. Specific loan
structure and pricing on single-family residential construction loans are
consistent with Association objectives. At December 31, 1993, single-family
residential construction loans totaled $10.1 million or less than 1% of total
loans. None of these loans was classified as non-accrual or delinquent at
December 31, 1993. During the year ended December 31, 1993, the Association
originated $7.1 million in single-family residential construction loans.
9
<PAGE>
Northeast Savings offers loans secured by owner occupied commercial real
estate to established and expanding businesses. Such loans are generally
guaranteed by the SBA. Origination of these loans is consistent with the
objectives of the CRA.
Commercial Loans. The Association had $77,000 of commercial loans outstanding
at December 31, 1993. Northeast Savings does not intend to originate any new
commercial loans during 1994 or future years because these loans do not conform
to the Association's strategy of being a traditional thrift single-family
residential lender.
Federal regulations limit the amount of commercial, corporate, or business
loans a federal savings association may make to 10% of total assets and further
limit the aggregate amount of loans that Northeast Savings may make to any one
borrower. These limitations are discussed further in the Regulations section.
The composition of Northeast Savings' loan portfolio is set forth in the
following table at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------- -------------------------------------------------------
1993 1992 1992 1991 1990
------------------ ----------------- ----------------- ----------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family
residential real
estate loans:
Adjustable rate....... $1,695,527 88.20% $2,073,986 89.74% $2,027,606 85.75% $2,197,358 84.96% $2,411,744 83.87%
Fixed rate............ 104,187 5.42 96,751 4.19 135,868 5.75 175,224 6.77 213,888 7.44
Available-for-sale.... 46,076* 2.40 32,237 1.39 64,707 2.74 21,157 .82 16,546 .57
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total single-family
residential real
estate loans......... 1,845,790 96.02 2,202,974 95.32 2,228,181 94.24 2,393,739 92.55 2,642,178 91.88
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Consumer loans:
Equity loans.......... 15,507 .81 26,434 1.14 38,104 1.61 55,600 2.15 68,258 2.37
Collateralized by
deposits............. 8,709 .45 9,633 .42 10,083 .43 12,308 .48 14,226 .50
Equity lines of
credit............... 5,886 .31 6,942 .30 7,567 .32 8,277 .32 16,380 .57
Overdraft protection.. 2,110 .11 2,435 .11 2,645 .11 3,051 .12 3,509 .12
Education............. 43 -- 91 -- 109 .01 284 .01 735 .03
Other................. 2,424 .13 2,826 .12 4,536 .19 8,498 .33 16,394 .57
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total consumer loans.. 34,679 1.81 48,361 2.09 63,044 2.67 88,018 3.41 119,502 4.16
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Income property loans.. 79,284 4.12 90,546 3.92 99,851 4.22 125,636 4.86 132,928 4.62
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Commercial loans....... 77 -- 266 .01 295 .01 1,662 .06 6,446 .22
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total loans, gross..... 1,959,830 101.95 2,342,147 101.34 2,391,371 101.14 2,609,055 100.88 2,901,054 100.88
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Less:
Allowance for loan
losses............... 28,271 1.47 21,020 .91 17,084 .72 14,305 .55 11,902 .41
Undisbursed portion of
loans in process..... 6,097 .32 4,779 .21 3,734 .16 -- -- -- --
Unearned discounts.... 2,822 .15 3,625 .15 5,055 .21 7,609 .30 12,884 .45
Deferred origination
fees................. 383 .01 1,613 .07 1,055 .05 746 .03 651 .02
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
37,573 1.95 31,037 1.34 26,928 1.14 22,660 .88 25,437 .88
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
$1,922,257 100.00% $2,311,110 100.00% $2,364,443 100.00% $2,586,395 100.00% $2,875,617 100.00%
========== ====== ========== ====== ========== ====== ========== ====== ========== ======
</TABLE>
- --------
* Available-for-sale loans include $39.6 million of fixed rate loans and $6.5
million of adjustable rate loans.
10
<PAGE>
The table below shows the geographic distribution of the Association's gross
loans at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------ -----------------
1993 1992 1992
----------------- ----------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
California............ $ 921,218 47.01% $1,243,905 53.11% $1,160,523 48.53%
Connecticut........... 287,011 14.64 304,871 13.02 313,354 13.10
New York.............. 261,415 13.34 288,802 12.33 328,628 13.74
Massachusetts......... 178,606 9.11 168,658 7.20 206,604 8.64
New Jersey............ 57,223 2.92 71,686 3.06 83,898 3.51
Florida............... 43,108 2.20 54,793 2.34 63,759 2.67
Other................. 211,249 10.78 209,432 8.94 234,605 9.81
---------- ------ ---------- ------ ---------- ------
Total............... $1,959,830 100.00% $2,342,147 100.00% $2,391,371 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
The following table shows the composition of Northeast Savings' gross portfolio
of loans by state and loan type at December 31, 1993:
<TABLE>
<CAPTION>
SINGLE-
FAMILY
RESIDENTIAL INCOME PERCENT OF
REAL ESTATE CONSUMER PROPERTY COMMERCIAL TOTAL PORTFOLIO
----------- -------- -------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
California...... $ 903,540 $ 1,094 $16,584 $ -- $ 921,218 47.01%
Connecticut..... 260,947 5,186 20,878 -- 287,011 14.64
New York........ 221,067 18,237 22,111 -- 261,415 13.34
Massachusetts... 158,968 7,174 12,387 77 178,606 9.11
New Jersey...... 56,915 308 -- -- 57,223 2.92
Florida......... 42,745 363 -- -- 43,108 2.20
Other........... 201,608 2,317 7,324 -- 211,249 10.78
---------- ------- ------- ---- ---------- ------
$1,845,790 $34,679 $79,284 $ 77 $1,959,830 100.00%
========== ======= ======= ==== ========== ======
</TABLE>
11
<PAGE>
The following table shows changes in Northeast Savings' loan portfolio for
the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31, FOR THE YEARS ENDED MARCH 31,
------------------ ------------------- ----------------------------------
1993 1992 1992 1991 1990
------------------ ------------------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans originated:
Single-family
residential real
estate:
Adjustable rate...... $ 460,184 $449,074 $ 288,463 $ 719,237 $ 864,961
Fixed rate........... 33,181 1,632 -- -- --
Available-for-sale... 241,099 141,848 154,026 48,782 149,858
Consumer............... 16,095 14,657 22,920 39,237 170,978
Income property........ 8,033 7,017 8,938 10,817 18,082
Commercial............. -- -- 264 3,229 6,031
--------- -------- --------- --------- ---------
Total originations. 758,592 614,228 474,611 821,302 1,209,910
--------- -------- --------- --------- ---------
Loans purchased:
Single-family
residential real
estate................ -- 60 909 (7) -- 100,858
Available-for-sale..... 3,850 (1) 6,549 12,671 9,073 --
Income property........ 104 (2) -- -- -- --
Consumer............... -- 25 813 (8) -- --
--------- -------- --------- --------- ---------
Total purchases.... 3,954 6,634 14,393 9,073 100,858
--------- -------- --------- --------- ---------
Loans securitized....... (376,551) (2,564) (14,504) (365,643) (402,545)
--------- -------- --------- --------- ---------
Loans sold:
Single-family
residential real
estate:
Adjustable rate...... (41,370)(3) -- -- (26,662) (80,035)
Fixed rate........... (124)(4) (7,488)(6) (70) (9,237) (96,047)
Available-for-sale... (229,850) (183,955) (133,429) (262,194) (137,123)
Consumer............... -- -- -- (12,966) (250,665)
Income property........ (6,004)(5) -- (18,111) -- --
--------- -------- --------- --------- ---------
Total sales........ (277,348) (191,443) (151,610) (311,059) (563,870)
--------- -------- --------- --------- ---------
Principal repayments and
prepayments............ (416,725) (398,342) (476,110) (421,701) (600,713)
Foreclosures............ (74,239) (77,737) (64,464) (23,971) (7,902)
(Increase) decrease in
deferred origination
fees................... 1,230 (558) (290) (95) 4,210
Decrease in unearned
discounts.............. 803 1,430 2,535 5,275 30,415
Increase in undisbursed
portion of loans in
process................ (1,318) (1,045) (3,734) -- --
Increase in allowance
for loan losses........ (7,251) (3,936) (2,779) (2,403) (3,173)
--------- -------- --------- --------- ---------
Decrease in total loans,
net.................... $(388,853) $(53,333) $(221,952) $(289,222) $(232,810)
========= ======== ========= ========= =========
</TABLE>
- --------
(1) Loans repurchased from prior sales. Such loans were adjustable rate loans
which were convertible into fixed rate loans. Upon conversion, the
Association was required to repurchase the loans.
(2) Consists of a purchase from the RTC of a portion of a loan participation
in which the Association was already a co-participant.
(3) Consists primarily of loans which were securitized and simultaneously
sold. In addition, $7.4 million resulted from the sale of California
adjustable rate mortgages.
(4) Sale of a loan participation to the servicer at the request of the
servicer in order to facilitate a pool sale.
(5) Sale of an income property participation loan in which the lead lender
elected to repurchase the Association's share of the loan.
(6) Represents a whole loan participation which was serviced by another
financial institution. This participation was sold because of management's
concerns over the creditworthiness of that servicer.
(7) Loans repurchased from prior sales due to documentation deficiencies.
(8) Acquired as part of the acquisitions of Financial of Hartford, ComFed, and
FarWest from the RTC and consists primarily of loans collateralized by
deposit accounts.
12
<PAGE>
Scheduled fixed rate and adjustable rate loan maturities of the Association's
gross loan portfolio at December 31, 1993 are as follows. Actual maturities may
be significantly shorter due to market conditions on interest rates.
<TABLE>
<CAPTION>
OVER ONE OVER TWO OVER THREE OVER FIVE OVER TEN
WITHIN ONE TO TWO TO THREE TO FIVE TO TEN TO FIFTEEN OVER FIFTEEN
YEAR YEARS YEARS YEARS YEARS YEARS YEARS TOTAL
---------- -------- -------- ---------- --------- ---------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family
residential real estate
loans:
Adjustable rate........ $28,141 $29,860 $31,678 $ 75,143 $214,480 $283,864 $1,032,361 $1,695,527
Fixed rate............. 8,124 8,343 8,591 18,919 30,257 23,547 6,406 104,187
Available-for-sale..... 534 570 609 1,345 4,259 5,939 32,820 46,076
Consumer loans.......... 14,479 3,168 2,223 3,815 5,687 2,798 2,509 34,679
Income property loans... 14,701 4,784 4,438 7,643 16,695 11,490 19,533 79,284
Commercial loans........ 77 -- -- -- -- -- -- 77
------- ------- ------- -------- -------- -------- ---------- ----------
$66,056 $46,725 $47,539 $106,865 $271,378 $327,638 $1,093,629 $1,959,830
======= ======= ======= ======== ======== ======== ========== ==========
</TABLE>
Sales of Loans and Loan Servicing Activities. Northeast Savings sells loans
primarily in order to manage interest rate risk and to maintain targeted asset
growth and capital levels. In addition, other factors such as origination
volume and mix as well as mortgage prepayment rates enter into the
determination of the amount of fixed and adjustable rate loans originated for
sale. Northeast Savings' portfolio of loans originated for sale totaled $46.1
million and $32.2 million at December 31, 1993 and 1992, respectively.
In most cases when loans are sold, Northeast Savings retains the servicing of
the loans. Northeast Savings sells loans and retains the related servicing in
order to increase income while fully utilizing the capacity of its loan
servicing systems. Northeast Savings records gains or losses from the sale of
loans that it continues to service for others by computing the present value of
the difference between the yield on the loans sold and the yield to be paid to
the buyer, reduced by normal servicing and guarantee fees, over the estimated
remaining life of the loans. The present value gain or loss is based upon
market prepayment and discount rate assumptions. An asset, known as excess
servicing, which is equal to the present value gain, is recorded at the time a
loan is sold and is amortized over the estimated remaining life of the loans.
Northeast Savings monitors actual prepayments on the related loans and reduces
the balance of the asset by a charge to earnings if actual and/or projected
prepayments exceed the Association's original estimate. In addition, prior to
fiscal 1990, Northeast Savings purchased rights to service loans.
At December 31, 1993 and 1992, purchased mortgage servicing rights and
deferred excess servicing, as well as the principal balance of loans serviced
for others in connection with those assets, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------
1993 1992
-------------------------------------- --------------------------------------
ASSET BALANCE ASSET BALANCE
ASSET LOANS SERVICED AS A PERCENT OF ASSET LOANS SERVICED AS A PERCENT OF
BALANCE FOR OTHERS LOANS SERVICED BALANCE FOR OTHERS LOANS SERVICED
------- -------------- --------------- ------- -------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Purchased mortgage
servicing rights....... $5,794 $ 349,906 1.66% $ 7,903 $ 529,939 1.49%
Deferred excess
servicing.............. 3,623 501,258 .72 4,389 542,602 .81
Other loans serviced for
others................. -- 1,037,699 -- -- 710,824 --
------ ---------- ------- ----------
$9,417 $1,888,863 .50% $12,292 $1,783,365 .69%
====== ========== ======= ==========
</TABLE>
Current capital regulations which limit the inclusion of purchased mortgage
servicing rights in regulatory capital are discussed in "Regulations--
Regulatory Capital and Other Requirements."
13
<PAGE>
The following table summarizes loans serviced for others, by investor, at the
dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------- --------------------------------
1993 1992 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Federal National
Mortgage Association... $ 664,029 $ 765,682 $ 881,506 $ 945,779 $ 967,316
Federal Home Loan
Mortgage Corporation... 434,715 460,113 517,532 611,674 556,067
Government National
Mortgage Association... 197,219 260,987 302,045 341,895 373,922
Housing and Urban
Development............ 112,329 115,229 119,469 117,775 116,366
Other Investors......... 480,571 181,354 235,635 276,916 301,098
---------- ---------- ---------- ---------- ----------
Total loans serviced for
others................. $1,888,863 $1,783,365 $2,056,187 $2,294,039 $2,314,769
========== ========== ========== ========== ==========
</TABLE>
Northeast Savings earns an annual servicing fee for servicing loans for
others. The servicing fee typically ranges from approximately twenty-five basis
points for fixed rate loans to thirty-eight basis points for adjustable rate
loans. Fees generated from servicing loans for others are included with non-
interest income in the Consolidated Statement of Operations. The following
table details fee income earned by the Association on loans serviced for others
for the periods indicated. Adjustments to value due to prepayments resulted
from the availability of substantially lower interest rates on mortgage loans.
Reflecting the overall level of interest rates in the economy, mortgage rates
were particularly low during the year ended December 31, 1993. Interest losses
on payoffs occur because, although a borrower may pay off a mortgage early in
the month, the Association must still remit an entire month's interest to the
investor.
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE FOR THE YEARS ENDED
ENDED MONTHS ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, --------------------
1993 1992 1992 1991
------------ ------------ --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Gross servicing fees........... $7,326 $6,755 $ 10,030 $ 10,794
Less:
Amortization................. (2,674) (2,316) (3,172) (3,303)
Adjustments to value due to
prepayments................. (993) (2,407) (763) 593
Interest loss on payoffs..... (1,032) (1,239) (1,167) (813)
------ ------ --------- ---------
Net servicing fees............. $2,627 $ 793 $ 4,928 $ 7,271
====== ====== ========= =========
</TABLE>
Securitization. During the fiscal years ended December 31, 1993, the nine
months ended December 31, 1992, and the years ended March 31, 1992, 1991, and
1990 the Association securitized residential mortgage loans totaling $376.6
million, $2.6 million, $14.5 million, $365.6 million and $402.5 million,
respectively. These securitizations were transacted for a number of reasons.
First, the Association needed to enhance its risk-based capital ratios. The
high quality of the mortgage-backed securities received in exchange for the
mortgage loans require a risk-based capital weighting of only 20% whereas the
underlying mortgage loans would have required a risk-based capital weighting of
50%. Second, none of the mortgage-backed securities created have recourse
provisions. As a result, these securities mitigate the credit risk inherent in
the underlying loans. Third, at times the Association securitizes mortgage
loans to balance the diversification of its mortgage loan portfolio, thereby
reducing the concentration of loans in any one state or region of the country.
And finally, mortgage-backed securities are more readily accepted as collateral
for wholesale-type borrowings than whole loans and thus have the effect of
enhancing funding flexibility on a cost-effective basis.
Allowance For Loan Losses. As a result of certain credit, appraisal, and
underwriting risks and uncertainties, potential credit losses are implicit in
the business of originating or investing in single-family residential real
estate, consumer, income property, and commercial loans. Accordingly,
management determines a provision necessary to maintain an allowance for loan
losses which it believes is adequate for potential losses at each period end.
The evaluation of the loan portfolio for potential losses includes a review on
a periodic basis of the financial status and credit standing of certain
individual borrowers and/or, an evaluation of available collateral. In
addition, management's judgment regarding prevailing and anticipated economic
conditions, the impact of those conditions on property values, historical loan
loss experience in
14
<PAGE>
relation to outstanding loans, the diversification and size of the loan
portfolio, the results of the most recent regulatory examinations available to
Northeast Savings, the overall loan portfolio quality and the level of loan
charge-offs are considered in evaluating the adequacy of the allowance for loan
losses. Although management believes that the allowance is adequate, if events
or economic conditions change, there can be no assurance that losses, which
could be substantial in relation to the size of the allowance, will not be
sustained in any given year. Further, no assurance can be given that future
increases to the allowance might not result because of the economy for a
particular region or the financial difficulties of a particular borrower.
Management has established a monitoring system for its loan portfolio to
identify potential problem loans and to permit periodic evaluations of the
adequacy of the allowance for loan losses in a timely manner. The loan
portfolio is comprised of the following major categories: single-family
residential real estate loans, consumer loans, income property loans, and
commercial loans. In analyzing these categories, management has established
specific monitoring policies and procedures which it believes are suitable for
the relative risk profile and other characteristics of the loans within the
various portfolios. The Association's single-family residential real estate and
consumer loans are relatively homogeneous. Therefore, in general, management
reviews its residential and consumer portfolios by analyzing their performance
and the composition of their collateral for the portfolios as a whole. Loans
originated since 1989 which are more than 30 days past due are reviewed on a
monthly basis by a product performance committee comprised of senior officers,
which assesses both the product type and the individual originators for
potential trends. Also on a monthly basis, all residential loans greater than
$1,000,000 are reviewed by the Board of Directors. Additionally, all loans
greater than $1,000,000 which are more than sixty days past due are reviewed
quarterly by the Association's Asset Classification Committee (see below).
Since Northeast Savings originates primarily adjustable rate mortgage loans,
management regularly monitors the status of this portfolio as compared with its
total portfolio and reviews the corresponding loss experience. The impact of
negative amortization type loans is considered in the review as well, although
the Association has not originated any of these loans since July 1991. Trends
are being closely monitored in the current recessionary environment,
particularly in the Northeast and California, the Association's two primary
market areas, to determine if any additional changes need to be made to either
underwriting standards or to the allowance for loan losses.
Northeast Savings' monitoring process for the income property and commercial
portfolios includes an annual review by loan personnel of all loans greater
than $100,000, regardless of performance. In addition, on a monthly basis, the
Board of Directors and senior management review specific loans and detailed
delinquency information, including a review of loans which are less than
$100,000 about which management has particular concerns and a review of loans
to related parties. As a result of this monitoring process, approximately 97%
of the income property loan portfolio is reviewed on a regular basis.
Finally, Northeast Savings has an Asset Classification Committee comprised of
senior executive officers which meets quarterly to determine which loans should
be classified as Pass, Special Mention, Substandard, Doubtful, or Loss. A brief
description of these classifications follows:
A Pass loan is considered of sufficient quality to preclude a Special
Mention or an adverse rating. Pass loans generally are well protected by
the current net worth and paying capacity of the obligor or by the value of
the underlying collateral.
A Special Mention loan does not currently expose the Association to a
sufficient degree of risk to warrant an adverse classification. However, it
does possess potential weaknesses deserving management's close attention.
If left uncorrected, these potential weaknesses may result in a
deterioration of the repayment prospects for the loan or in the
institution's credit position at some future date. Special mention loans
are not adversely classified since they do not expose an institution to
sufficient risk to warrant adverse classification.
A loan classified Substandard is inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged,
if any. Loans so classified have a well-defined weakness or weaknesses.
They are characterized by the distinct possibility that the Association
will sustain some loss if the deficiencies are not corrected. Substandard
loans totaled $76.4 million at December 31, 1993.
15
<PAGE>
Loans classified as Doubtful have the weaknesses of those classified as
Substandard, with the added characteristic that the weaknesses make
collection or liquidation in full highly questionable or improbable, based
on currently existing facts, conditions, and values. The Association views
the Doubtful classification as a temporary category. The Association had no
loans classified as Doubtful at December 31, 1993.
Loans classified as Loss are considered uncollectible and of such little
value that their continuance as assets without establishment of a specific
valuation allowance or charge-off is not warranted. A Loss classification
does not necessarily mean that a loan has absolutely no recovery or salvage
value; rather, it is not practical or desirable to defer writing off a
basically worthless loan even though partial recovery may occur in the
future. The Association had no loans classified as Loss at December 31,
1993.
In addition to the aforementioned procedures, the results of the Asset
Classification Committee are reviewed quarterly by the Audit Committee of the
Board of Directors. See the Regulations section for a further discussion of
classification of loans.
The following table presents a reconciliation of the Association's classified
loans to its non-accrual loans, restructured loans, and real estate and other
assets acquired in settlement of loans (REO) at December 31, 1993 and 1992.
Further information regarding non-accrual loans, restructured loans, and REO
may be found in the following pages.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1993 1992
----------- -----------
SUBSTANDARD SUBSTANDARD
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accrual:
Single-family residential real estate loans.......... $ 65,770 $ 87,949
Consumer loans....................................... 1,315 1,741
Income property loans................................ 377 5,299
-------- --------
Total non-accrual loans.............................. 67,462 94,989
Less non-classified loans*......................... 2,914 4,578
-------- --------
64,548 90,411
-------- --------
Restructured........................................... 1,641 1,100
-------- --------
REO:
Single-family residential............................ 57,165 83,605
Hotels............................................... 6,453 6,408
Apartment building................................... 5,270 4,464
Office and industrial complexes, land................ 3,357 2,499
Real estate brokerage operations..................... 1,744 1,544
Residential subdivisions............................. 973 856
-------- --------
Total REO.......................................... 74,962 99,376
-------- --------
Less real estate brokerage operations not
classified...................................... 1,041 744
-------- --------
Total classified REO............................. 73,921 98,632
-------- --------
Potential problem loans................................ 10,215 2,289
-------- --------
Total classified loans and classified REO.......... $150,325 $192,432
======== ========
Total classified loans and classified REO as a percent
of total gross loans.................................. 7.67% 8.22%
======== ========
Total allowance for loan losses as a percent of total
classified loans...................................... 18.81% 10.92%
======== ========
</TABLE>
- --------
* At December 31, 1993 and 1992, respectively, $2.9 million and $4.6 million of
non-accrual loans were not classified. These loans identified as non-accrual
but not classified were primarily single-family residential loans which were
guaranteed through government programs or which have full recourse against
the servicer.
16
<PAGE>
Potential problem loans amounted to approximately $10.2 million at December
31, 1993. Potential problem loans are currently performing and have not been
restructured but compliance with the present loan repayment terms is doubtful
based on management's assessment of possible credit problems of the borrowers.
These potential problem loans have been included above as substandard loans.
The following table reflects the activity in the allowance for loan losses
for the periods indicated:
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR NINE MONTHS
ENDED ENDED FOR THE YEARS ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -------------------------------
1993 1992 1992 1991 1990
------------ ------------ --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, beginning of
period................. $21,020 $17,084 $ 14,305 $ 11,902 $ 8,729
Provision for loan
losses................. 23,300 16,300 10,200 8,900 6,672
Charge-offs:
Single-family
residential real
estate loans......... (14,835) (12,305) (6,264) (1,902) (1,084)
Consumer loans........ (393) (373) (846) (1,837) (3,609)
Income property loans. (1,395) -- (652) (133) --
Commercial loans...... -- -- (389) (3,860) --
------- ------- --------- --------- ---------
Total charge-offs... (16,623) (12,678) (8,151) (7,732) (4,693)
------- ------- --------- --------- ---------
Recoveries:
Single-family
residential real
estate loans......... 176 8 29 160 330
Consumer loans........ 398 306 459 1,075 864
Income property loans. -- -- 183 -- --
Commercial loans...... -- -- 59 -- --
------- ------- --------- --------- ---------
Total recoveries.... 574 314 730 1,235 1,194
------- ------- --------- --------- ---------
Net charge-offs......... (16,049) (12,364) (7,421) (6,497) (3,499)
------- ------- --------- --------- ---------
Balance, end of period.. $28,271 $21,020 $ 17,084 $ 14,305 $ 11,902
======= ======= ========= ========= =========
Total net charge-
offs during the
period to average
loans outstanding
during the period.. .69% .54% .30% .23% .10%
</TABLE>
The following table summarizes net charge-offs/(recoveries) by state for the
year ended December 31, 1993:
<TABLE>
<CAPTION>
SINGLE-FAMILY
RESIDENTIAL INCOME
STATE REAL ESTATE CONSUMER PROPERTY TOTAL
----- -------------- ---------------- ------------- --------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------- ------ ------ --------- ------ ------ ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California.............. $ 9,773 66.67% $-- --% $ -- --% $ 9,773 60.90%
Massachusetts........... 2,221 15.15 91 (1,820.00) 317 22.72 2,629 16.38
New Hampshire........... 36 .25 -- -- 1,078 77.28 1,114 6.94
New Jersey.............. 1,106 7.55 -- -- -- -- 1,106 6.89
Connecticut............. 990 6.75 (92) 1,840.00 -- -- 898 5.60
New York................ 247 1.68 (4) 80.00 -- -- 243 1.51
Other................... 286 1.95 -- -- -- -- 286 1.78
------- ------ --- --------- ------ ------ ------- ------
Total................ $14,659 100.00% $(5) 100.00% $1,395 100.00% $16,049 100.00%
======= ====== === ========= ====== ====== ======= ======
</TABLE>
17
<PAGE>
The following table summarizes the Association's net charge-offs to average
loans outstanding for the periods indicated.
<TABLE>
<CAPTION>
FOR THE
FOR THE NINE MONTHS FOR THE
YEAR ENDED ENDED YEARS ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ----------------------------------
1993 1992 1992 1991 1990
------------ ------------ ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Single-family
residential real estate
loans:
Average gross loans... $2,193,138 $2,162,684 $2,302,909 $2,636,709 $2,907,581
Net charge-offs....... (14,659) (12,297) (6,235) (1,742) (754)
Net charge-
offs/Average loans... .67% .57% .27% .07% .03%
Consumer loans:
Average gross loans... $ 42,406 $ 57,760 $ 78,078 $ 112,512 $ 307,693
Net charge-offs....... 5 (67) (387) (762) (2,745)
Net charge-
offs/Average loans... .01% .12% .50% .68% .89%
Income property loans:
Average gross loans... $ 78,712 $ 88,769 $ 106,622 $ 119,854 $ 135,886
Net charge-offs....... (1,395) -- (469) (133) --
Net charge-
offs/Average loans... 1.77% -- .44% .11% --
Commercial loans:
Average gross loans... $ 225 $ 862 $ 834 $ 5,884 $ 5,614
Net charge-offs....... -- -- (330) (3,860) --
Net charge-
offs/Average loans... -- -- 39.57% 65.60% --
</TABLE>
The increases in the ratio of single-family residential real estate loan net
charge-offs to average loans for the periods ended December 31, 1993 and 1992,
and March 31, 1992 were due to general economic conditions, particularly the
recessions in New England and California. The lingering recessionary
environment caused high rates of unemployment and reduced family income levels
which resulted in declining real estate values and increased delinquencies and
foreclosures. Net charge-offs due to losses on single-family residential loans
in California totaled $9.8 million, $6.2 million, and $2.2 million for the year
ended December 31, 1993, the nine months ended December 31, 1992, and the year
ended March 31, 1992, respectively. These charge-offs were due largely to the
severity of the recession in California which resulted from several factors,
including the deterioration of the California real estate market. In the
single-family residential sector of this market, existing home sales and
property values have continued to decline, particularly with respect to homes
with original values greater than $500,000. The increase in single-family
residential charge-offs, which began in late 1992 and continued into 1993,
indicated that the risk in the single-family residential loan portfolio was
higher than indicated by previous analysis. As a result, management increased
the provision for loan losses to $23.3 million for the year ended December 31,
1993. Net charge-offs on income property loans for the year ended December 31,
1993 resulted from charge-offs of $1.1 million and $300,000 on two income
property loans in New Hampshire and Massachusetts, respectively. Both loans
were collateralized by office buildings. The increase in net charge-offs on
income property loans for the year ended March 31, 1992 was due primarily to
net charge-offs of $280,000 on two residential subdivision loans originated in
1989 and $220,000 on an industrial warehouse loan. A further discussion of loan
charge-offs may be found in Item 7: Management's Discussion and Analysis of the
Results of Operations and Financial Condition.
The nature of the allowance for loan losses is such that it is not possible
to allocate it to specific loans with a high degree of precision. However, the
allowance has been allocated for the periods indicated in the
18
<PAGE>
following table to broad categories of loans to indicate management's
assessment of the relative risk characteristics of those types of loans and
consideration of other factors. This allocation is based not only on an
evaluation of specifically identified loans, but also includes considerations
of historical loan losses, levels of non-accrual and restructured loans, if
any, and an assessment of local and regional economic conditions and other
factors which may influence risk. Activity in the allowance for loan losses is
also discussed in Item 7: Management's Discussion and Analysis of the Results
of Operations and Financial Condition.
The following table shows the allocation of the allowance for loan losses to
the various loan types at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------- -------------------------------
ALLOWANCE FOR LOAN LOSSES
APPLICABLE TO: 1993 1992 1992 1991 1990
------------------------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Single-family
residential real
estate loans........... $ 25,751 $ 17,611 $ 10,296 $ 7,437 $ 2,627
Consumer loans.......... 300 300 2,000 2,170 4,368
Income property loans... 800 2,108 2,675 3,100 3,696
Commercial loans........ -- -- 87 400 618
Unallocated............. 1,420 1,001 2,026 1,198 593
--------- --------- --------- --------- ---------
$ 28,271 $ 21,020 $ 17,084 $ 14,305 $ 11,902
========= ========= ========= ========= =========
<CAPTION>
PERCENT OF LOANS IN EACH CATEGORY TO TOTAL LOANS
-----------------------------------------------------
DECEMBER 31,* MARCH 31,*
-------------------- -------------------------------
1993 1992 1992 1991 1990
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Single-family
residential real estate
loans.................. 94.49% 94.24% 93.30% 91.77% 90.94%
Consumer loans.......... 1.81 2.13 2.73 3.49 4.32
Income property loans... 3.70 3.62 3.96 4.68 4.52
Commercial loans........ -- . 01 .01 .06 .22
--------- --------- --------- --------- ---------
100.00% 100.00% 100.00% 100.00% 100.00%
========= ========= ========= ========= =========
</TABLE>
- --------
* The gross loan portfolio balances used in the calculations are net of
unearned discounts, deferred origination fees, and the undisbursed portion of
loans in process.
At the dates indicated, the percentage distribution of the allowance for loan
losses was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1993 1992
-------------------- --------------------
AS A% OF AS A% OF
AS A% OF THE TOTAL AS A% OF THE TOTAL
GROSS LOAN ALLOWANCE GROSS LOAN ALLOWANCE
ALLOWANCE FOR LOAN LOSSES PORTFOLIO FOR LOAN PORTFOLIO FOR LOAN
APPLICABLE TO: BALANCE* LOSSES BALANCE* LOSSES
------------------------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Single-family residential real
estate loans.................... 1.47% 91.09% .85% 83.78%
Consumer loans................... .85 1.06 .60 1.43
Income property loans............ 1.11 2.83 2.50 10.03
Commercial loans................. -- -- -- --
Unallocated...................... ** 5.02 ** 4.76
------ ------
Total............................ 1.45% 100.00% .90% 100.00%
====== ======
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------------------------------------
1992 1991 1990
-------------------- -------------------- --------------------
AS A% OF AS A% OF AS A% OF
AS A% OF THE TOTAL AS A% OF THE TOTAL AS A% OF THE TOTAL
GROSS LOAN ALLOWANCE GROSS LOAN ALLOWANCE GROSS LOAN ALLOWANCE
PORTFOLIO FOR LOAN PORTFOLIO FOR LOAN PORTFOLIO FOR LOAN
ALLOWANCE FOR LOAN BALANCE* LOSSES BALANCE* LOSSES BALANCE* LOSSES
LOSSES APPLICABLE TO: ---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Single-family residen-
tial real estate loans. .55% 60.85% .36% 52.09% .12% 22.18%
Consumer loans.......... 3.08 11.71 2.39 15.17 3.53 36.60
Income property loans... 2.84 15.07 2.55 21.57 2.83 31.05
Commercial loans........ 29.49 .51 24.07 2.80 9.59 5.19
Unallocated............. ** 11.86 ** 8.37 ** 4.98
------ ------ ------
Total................... .72% 100.00% .55% 100.00% .41% 100.00%
====== ====== ======
</TABLE>
- --------
* The gross loan portfolio balance is net of unearned discounts, deferred
origination fees, and the undisbursed portion of loans in process.
** For purposes of this analysis, the unallocated portion of the allowance for
loan losses has been included in the single-family residential allocation.
The allowance for loan losses as a percentage of non-accrual loans by loan
category was as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------- ---------------------
1993 1992 1992 1991 1990
------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C>
Single-family residential real estate.... 41.31% 21.16% 11.43% 10.42% 10.57%
Consumer................................. 22.81 17.23 103.57 115.92 88.64
Income property.......................... 212.20 39.78 112.77 25.89 49.74
Commercial............................... * * * 350.88 *
Unallocated.............................. ** ** ** ** **
Total allowance to total non-accrual
loans................................... 41.91% 22.13% 15.24% 14.78% 27.79%
</TABLE>
- --------
* There were no non-accrual commercial loans at the dates indicated.
** For purposes of this analysis, the unallocated portion of the allowance for
loan losses has been included in the single-family residential real estate
allocation.
The ratios of the allowance for loan losses to non-accrual loans since 1990
reflect a change in composition of the allowance which corresponds to the
change in the composition of the Association's non-accrual loans, specifically
the increase in single-family residential non-accrual loans as a percentage of
total non-accrual loans. At December 31, 1993 and 1992, and March 31, 1992 and
1991, single-family residential non-accrual loans were 97.5%, 92.6%, 96.2%, and
85.6%, respectively, of non-accrual loans. At March 31, 1990, the percentage
was only 71.1%.
At December 31, 1993 and 1992, the decreased ratios of the allowance for loan
losses to non-accrual consumer loans reflect significant charge-offs made
during the years ended March 31, 1992 and 1991, which resulted in a portfolio
with generally lower risk. The Association's consumer loans, which totaled 1.8%
of the total loan portfolio at December 31, 1993, consist primarily of well-
seasoned loans collateralized by deposit accounts or real estate. At December
31, 1993, 25.1% of the Association's consumer loans were collateralized by
deposit accounts, while 61.7% consisted of loans collateralized by real estate.
The non-accrual income property loans at December 31, 1993 consist primarily
of loans which have been reserved to their estimated fair values based on
current appraisals. The Association's income property loan portfolio, totaling
4.1% of the total loan portfolio at December 31, 1993, consists of well-
seasoned loans, most of which were originated prior to 1986.
Non-Accrual Loans. Non-accrual loans are loans on which the accrual of interest
has been discontinued. Northeast Savings' policy is to discontinue the accrual
of interest on loans and to reverse previously accrued
20
<PAGE>
interest when there is reasonable doubt as to its collectibility. Interest
accruals on loans are normally discontinued and previously accrued interest is
reversed whenever the payment of interest or principal is more than ninety days
past due, or earlier when conditions warrant it. For example, although a loan
may be current, the Association discontinues accruing interest on that loan
when foreclosure is brought about by other owner defaults. When the interest
accrual on a loan is discontinued, any previously accrued interest is reversed.
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. For all of the periods noted below, Northeast Savings had no loans
more than ninety days past due on which interest was still accruing. The total
interest income that would have been recorded for the year ended December 31,
1993 on non-accrual loans, 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 $4.8 million. The amount of interest income which was
included in net income for the year ended December 31, 1993 on those loans was
$1.3 million. The following is a table of non-accrual loans along with the
percentage to total gross loans and total assets as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------- --------------------------
1993 1992 1992 1991 1990
------- ------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Single-family residential real
estate loans.................... $65,770 $87,949 $107,791 $82,854 $30,465
Consumer loans................... 1,315 1,741 1,931 1,872 4,928
Income property loans............ 377 5,299 2,372 11,975 7,431
Commercial loans................. -- -- -- 114 --
------- ------- -------- ------- -------
$67,462 $94,989 $112,094 $96,815 $42,824
======= ======= ======== ======= =======
As a percentage of total gross
loans........................... 3.44% 4.06% 4.69% 3.71% 1.48%
======= ======= ======== ======= =======
As a percentage of total assets.. 1.72% 2.43% 2.93% 2.13% .86%
======= ======= ======== ======= =======
</TABLE>
The high levels of non-accrual loans as a percentage of total loans in recent
years is primarily a result of general economic conditions in the Association's
primary markets, particularly the recessions in New England and California. The
decreases in non-accrual loans at December 31, 1993 and 1992 from March 31,
1992 were primarily due to increased foreclosures of the underlying collateral
securing the loans. The following table presents the Association's gross non-
accrual loans by state at the dates indicated. Complete state-by-state
information for the year ended March 31, 1990 is not available.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1993 1992
--------------------------- ---------------------------
PERCENT OF PERCENT OF
NON- PERCENT NON- NON- PERCENT NON-
ACCRUAL OF LOANS ACCRUAL ACCRUAL OF LOANS ACCRUAL
LOANS IN STATE LOANS LOANS IN STATE LOANS
------- -------- ---------- ------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
California............. $35,970 3.90% 53.32% $43,671 3.51% 45.98%
New York............... 13,942 5.33 20.67 16,975 5.88 17.87
Connecticut............ 7,691 2.68 11.40 10,227 3.36 10.77
New Jersey............. 3,789 6.62 5.62 7,600 10.60 8.00
Massachusetts.......... 2,647 1.48 3.92 5,190 3.07 5.46
New Hampshire.......... 95 1.27 .14 5,086 35.68 5.35
Other.................. 3,328 1.35 4.93 6,240 2.50 6.57
------- ------ ------- ------
Total................ $67,462 3.44% 100.00% $94,989 4.06% 100.00%
======= ====== ======= ======
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------------------------------
1992 1991
---------------------------- ---------------------------
PERCENT OF PERCENT OF
NON- PERCENT NON- NON- PERCENT NON-
ACCRUAL OF LOANS ACCRUAL ACCRUAL OF LOANS ACCRUAL
LOANS IN STATE LOANS LOANS IN STATE LOANS
-------- -------- ---------- ------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
California............ $ 44,982 3.88% 40.13% $24,703 2.07% 25.52%
New York.............. 20,344 6.19 18.15 13,065 3.80 13.49
Connecticut........... 13,906 4.44 12.41 24,834 7.07 25.65
New Jersey............ 10,952 13.06 9.77 9,602 9.91 9.92
Massachusetts......... 14,250 6.90 12.71 14,077 6.09 14.54
New Hampshire......... 287 1.89 .26 465 2.66 .48
Other................. 7,373 2.60 6.57 10,069 2.68 10.40
-------- ------ ------- ------
Total............... $112,094 4.69% 100.00% $96,815 3.71% 100.00%
======== ====== ======= ======
</TABLE>
The following table presents the Association's non-accrual loans by state and
property type at December 31, 1993:
<TABLE>
<CAPTION>
SINGLE-FAMILY
RESIDENTIAL INCOME
REAL ESTATE CONSUMER PROPERTY TOTAL
------------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
California.............................. $35,970 $ -- $ -- $35,970
New York................................ 13,377 565 -- 13,942
Connecticut............................. 6,993 325 373 7,691
New Jersey.............................. 3,789 -- -- 3,789
Massachusetts........................... 2,608 35 4 2,647
New Hampshire........................... 88 7 -- 95
Other................................... 2,945 383 -- 3,328
------- ------ ---- -------
Total................................. $65,770 $1,315 $377 $67,462
======= ====== ==== =======
</TABLE>
The table which follows shows the loan-to-value ratios based on the original
appraisal and the current loan balance of the Association's single-family
residential non-accrual loans at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1993 1992 1992
------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Greater than 90%..................................... $ 377 $ 764 $ 565
85% - 90%.......................................... 324 196 155
80% - 85%.......................................... 84 201 832
75% - 80%.......................................... 19,339 29,386 32,354
70% - 75%.......................................... 15,239 11,238 18,376
65% - 70%.......................................... 10,038 15,146 21,793
60% - 65%.......................................... 5,599 5,933 2,795
under 60%............................................ 7,816 11,361 11,588
------- ------- -------
$58,816 $74,225 $88,458
======= ======= =======
</TABLE>
The remaining $7.0 million, $13.7 million, and $19.3 million of single-family
residential non-accrual loans at December 31, 1993 and 1992, and March 31,
1992, respectively, was serviced by other servicers. As a result, the above
information is not available for these loans. In addition, information
regarding loan-to-value ratios for years prior to the year ended March 31, 1992
is not available.
22
<PAGE>
Loan-to-value ratios for income property non-accrual loans are based on 1993
appraisals and current loan balances. At December 31, 1993 and 1992, all of the
income property non-accrual loans were in the 85-90% category. At March 31,
1992, all of the income property non-accrual loans were in the 80-85% category.
Non-accrual loans are discussed further in Item 7: Management's Discussion
and Analysis of the Results of Operations and Financial Condition.
Delinquent Loans. While non-accrual loans are generally loans which are more
than ninety days past due, delinquent loans are all loans more than thirty days
past due, including non-accrual loans. The following table presents the
principal amount of the Association's delinquencies by loan types at the dates
indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992
------------------------------------ ------------------------------------
30-59 60-89 90-DAYS 30-59 60-89 90-DAYS
DAYS DAYS AND OVER TOTAL DAYS DAYS AND OVER TOTAL
------- ------- -------- -------- ------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family residen-
tial real estate....... $30,497 $13,139 $ 65,770 $109,406 $45,931 $15,658 $87,949 $149,538
Consumer................ 438 82 1,315 1,835 1,074 150 1,741 2,965
Income property......... 2,825 916 377 4,118 7 932 5,299 6,238
Commercial.............. -- 77 -- 77 -- -- -- --
------- ------- -------- -------- ------- ------- ------- --------
Total.................. $33,760 $14,214 $ 67,462 $115,436 $47,012 $16,740 $94,989 $158,741
======= ======= ======== ======== ======= ======= ======= ========
Percent of total gross
loan portfolio......... 1.72% .73% 3.44% 5.89% 2.01% .71% 4.06% 6.78%
======= ======= ======== ======== ======= ======= ======= ========
Percent of total assets. .86% .36% 1.72% 2.94% 1.20% .43% 2.43% 4.06%
======= ======= ======== ======== ======= ======= ======= ========
<CAPTION>
MARCH 31, 1992 MARCH 31, 1991
------------------------------------ ------------------------------------
30-59 60-89 90 DAYS 30-59 60-89 90 DAYS
DAYS DAYS AND OVER TOTAL DAYS DAYS AND OVER TOTAL
------- ------- -------- -------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family residen-
tial real estate....... $49,741 $15,451 $107,791 $172,983 $62,817 $29,286 $82,854 $174,957
Consumer................ 1,038 307 1,931 3,276 1,965 804 1,872 4,641
Income property......... 36 6,739 2,372 9,147 3,585 187 11,975 15,747
Commercial.............. -- -- -- -- 23 -- 114 137
------- ------- -------- -------- ------- ------- ------- --------
Total.................. $50,815 $22,497 $112,094 $185,406 $68,390 $30,277 $96,815 $195,482
======= ======= ======== ======== ======= ======= ======= ========
Percent of total gross
loan portfolio......... 2.12% .94% 4.69% 7.75% 2.62% 1.16% 3.71% 7.49%
======= ======= ======== ======== ======= ======= ======= ========
Percent of total assets. 1.33% .59% 2.93% 4.85% 1.50% .67% 2.13% 4.30%
======= ======= ======== ======== ======= ======= ======= ========
</TABLE>
The following table presents the principal amount of the Association's loan
delinquencies and delinquency ratios by state as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992 MARCH 31, 1992
------------------------------- ------------------------------- -------------------------------
PERCENT OF PERCENT OF PERCENT OF
DELINQUENT PERCENT TOTAL DELINQUENT PERCENT TOTAL DELINQUENT PERCENT TOTAL
LOANS (OVER OF LOANS DELINQUENT LOANS (OVER OF LOANS DELINQUENT LOANS (OVER OF LOANS DELINQUENT
30 DAYS) IN STATE LOANS 30 DAYS) IN STATE LOANS 30 DAYS) IN STATE LOANS
----------- -------- ---------- ----------- -------- ---------- ----------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
California.............. $ 59,883 6.50% 51.88% $ 72,547 5.83% 45.70% $ 69,502 5.99% 37.48%
New York................ 17,637 6.75 15.28 22,684 7.85 14.29 30,482 9.28 16.44
Connecticut............. 11,831 4.12 10.25 15,834 5.19 9.97 23,019 7.35 12.42
New Jersey.............. 5,371 9.39 4.65 9,187 12.81 5.79 13,347 15.91 7.20
Massachusetts........... 5,624 3.15 4.87 9,753 5.77 6.14 15,581 7.54 8.40
New Hampshire........... 104 1.39 .09 5,185 36.81 3.27 6,303 70.05 3.40
Other*.................. 14,986 6.07 12.98 23,551 9.42 14.84 27,172 9.39 14.66
-------- ------ -------- ------ -------- ------
Total.................. $115,436 5.89% 100.00% $158,741 6.78% 100.00% $185,406 7.75% 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
- --------
* State-by-state information is not available for certain purchased loans
serviced by others which were 30-59 days delinquent at the dates indicated.
These loans, which are included in "other" loans, totaled $9.4 million, $11.7
million, and $17.2 million at December 31, 1993 and 1992, and March 31, 1992,
respectively.
23
<PAGE>
Real Estate and Other Assets Acquired in Settlement of Loans. REO results
when property collateralizing a loan is foreclosed upon or otherwise acquired
in satisfaction of the loan. REO is recorded by the Association at the lower of
the recorded investment in the loan or fair value less estimated costs to sell.
When a borrower fails to make required payments on a loan and does not cure
the delinquency promptly, the Association takes the steps required under
applicable law to foreclose upon the property collateralizing the loan. If a
delinquency is not cured, the property is generally acquired by the Association
in a foreclosure sale or by taking a deed in lieu of foreclosure. If the
applicable period of redemption by the borrower (which varies from state to
state and by method of foreclosure pursued) has expired, the Association is
free to sell the property.
The remedies available to lenders when a residential mortgage borrower is in
default vary from state to state. Certain states have antideficiency and
homeowner provisions which limit the Association's ability to foreclose upon,
or otherwise obtain ownership of, the property collateralizing the loan and
which prevent the Association from recovering from the borrower any deficiency
realized from the sale of such property. In these states the Association
generally has an option to sue on the note in lieu of a judicial foreclosure.
The activity in the Association's REO is presented in the following table:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE FOR THE YEARS ENDED
ENDED MONTHS ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, --------------------------
1993 1992 1992 1991 1990
------------ ------------ -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Beginning balance........ $ 99,376 $ 61,208 $ 22,123 $ 4,879 $ 5,363
Foreclosures, net........ 61,228 66,377 58,259 21,726 6,828
Capitalized expenses..... 2,226 1,333 998 312 5
Less:
Sales.................. (77,120)* (22,448) (16,726) (5,933) (5,872)
Valuation adjustments.. (10,082) (3,823) -- -- --
Mortgage insurance re-
ceipts................ (558) (806) (1,165) (1,082) (740)
Other.................. (108) (2,465) (2,281) 2,221 (705)
-------- -------- -------- ------- -------
Ending balance........... $ 74,962 $ 99,376 $ 61,208 $22,123 $ 4,879
======== ======== ======== ======= =======
</TABLE>
- --------
* 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.
The following table presents Northeast Savings' REO by property type at the
dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------- ------------------------
1993 1992 1992 1991 1990
------- ------- ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Single-family residential.......... $57,165 $83,605 $42,055 $11,484 $4,879
Hotels............................. 6,453 6,408 7,990 7,904 --
Apartment buildings................ 5,270 4,464 4,273 -- --
Office, retail, industrial com-
plexes; land...................... 3,357 2,499 2,789 270 --
Real estate brokerage operations... 1,744 1,544 2,812 2,465 --
Residential subdivisions........... 973 856 1,289 -- --
------- ------- ------- ------- ------
REO, net......................... $74,962 $99,376 $61,208 $22,123 $4,879
======= ======= ======= ======= ======
Percent of total assets............ 1.91% 2.54% 1.60% .49% .10%
======= ======= ======= ======= ======
</TABLE>
24
<PAGE>
The following table shows the detail of Northeast Savings' REO by state:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------- ----------------------
1993 1992 1992 1991 1990
------- ------- ------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
California............................... $47,970 $63,836 $23,992 $ 2,977 $ --
Connecticut.............................. 10,650 14,820 21,817 8,290 69
South Carolina........................... 5,223 5,233 5,290 5,500 35
Massachusetts............................ 4,111 7,847 5,202 883 188
New York................................. 2,992 3,701 619 121 330
New Jersey............................... 2,302 2,500 1,232 1,348 392
Texas.................................... 129 198 532 477 1,546
Arizona.................................. 52 -- 117 613 858
Georgia.................................. -- 528 926 574 550
Other.................................... 1,533 713 1,481 1,340 911
------- ------- ------- ------- ------
REO, net............................... $74,962 $99,376 $61,208 $22,123 $4,879
======= ======= ======= ======= ======
</TABLE>
The following table details the Association's REO by state and property type
at December 31, 1993:
<TABLE>
<CAPTION>
CALIFORNIA NEW YORK CONNECTICUT NEW JERSEY MASSACHUSETTS OTHER TOTAL
---------- -------- ----------- ---------- ------------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Single-family residen-
tial................... $46,452 $2,992 $ 2,394 $2,302 $1,414 $1,611 $57,165
Income property:
Hotels................. -- -- 1,230 -- -- 5,223 6,453
Apartment buildings.... 1,518 -- 3,704 -- -- 48 5,270
Office, retail, indus-
trial complexes, land. -- -- 660 -- 2,697 -- 3,357
Residential subdivi-
sions................. -- -- 918 -- -- 55 973
Other REO............... -- -- 1,744 -- -- -- 1,744
------- ------ ------- ------ ------ ------ -------
Total.................. $47,970 $2,992 $10,650 $2,302 $4,111 $6,937 $74,962
======= ====== ======= ====== ====== ====== =======
</TABLE>
The $24.4 million decrease in REO at December 31, 1993 from a year earlier
was due primarily to the sale in a single transaction of $30.3 million of the
Company's portfolio of single-family residential REO. The turnover of single-
family residential REO has been relatively rapid. Of the $57.2 million of
single-family residential REO at December 31, 1993, only thirty-four properties
totaling $17.3 million were in the portfolio for longer than one year. The
table below presents the aging of foreclosed properties at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------- ----------------------
1993 1992 1992 1991 1990
------- ------- ------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
From 0 to 90 days........................ $15,313 $20,156 $23,710 $14,020 $2,805
From 91 to 180 days...................... 11,745 25,557 11,678 3,082 474
From 181 to 270 days..................... 7,585 17,158 4,689 1,578 898
From 271 to 365 days..................... 7,715 10,508 6,316 166 288
From 1 to 1 1/2 years.................... 11,087 11,894 11,835 637 178
From 1 1/2 years to 2 years.............. 4,338 5,416 168 175 122
Over 2 years............................. 15,435 7,143 -- -- 114
------- ------- ------- ------- ------
Sub-total.............................. 73,218 97,832 58,396 19,658 4,879
Real estate brokerage operations......... 1,744 1,544 2,812 2,465 --
------- ------- ------- ------- ------
Total.................................. $74,962 $99,376 $61,208 $22,123 $4,879
======= ======= ======= ======= ======
</TABLE>
During the year ended December 31, 1993, 281 REO properties with a book value
of $77.1 million, net of a $6.0 million provision on the single transaction
sale noted above, were disposed of. Excluding the total loss of $6.8 million on
the single transaction sale, net gains of $318,000 were recorded on the sale of
all other REO properties. Additional discussion of REO may be found in Item 7:
Management's Discussion and Analysis of the Results of Operations and Financial
Condition.
25
<PAGE>
INVESTMENT ACTIVITIES
Northeast Savings engages in investment activities for both investment and
liquidity purposes. Northeast Savings maintains an investment securities
portfolio, which consists primarily of U.S. government and agency securities,
corporate obligations, bank and finance securities, asset-backed securities,
collateralized mortgage obligations, Federal Home Loan Bank stock, and
marketable equity securities. Other short-term investments held by Northeast
Savings from time-to-time include interest-bearing deposits and federal funds
sold. Northeast Savings also maintains a mortgage-backed securities portfolio
consisting of securities issued and guaranteed by Government National Mortgage
Association (GNMA), FHLMC, and FNMA in addition to publicly traded and rated
mortgage-backed securities issued by private financial intermediaries.
U.S. government and agency securities, corporate obligations, bank and
finance securities, collateralized mortgage obligations, and mortgage-backed
securities, which the Association has the intent and ability to hold until
maturity, are classified as held-to-maturity and are carried at amortized cost;
however, those securities which have been identified as assets which will be
sold prior to maturity or assets for which there is not a positive intent to
hold to maturity are classified as available-for-sale and are carried at fair
value, with unrealized gains and losses excluded from earnings and, reflecting
the adoption of Statement of Financial Accounting Standards (SFAS) 115,
"Accounting for Certain Investments in Debt and Equity Securities," reported as
a separate component of stockholders' equity. In addition, when management
determines that a security has been impaired by a loss which is other than
temporary, the Association writes the security down in accordance with its
accounting policies as outlined in Note 1 to the Consolidated Financial
Statements and ceases to accrue interest on it. At December 31, 1993, the
Association had no investments which were deemed to have been impaired by an
other than temporary loss.
Northeast Savings is required by federal regulations to maintain a specified
minimum amount of liquid assets which must be invested in certain securities.
Management maintains liquidity at a level to assure adequate funds, taking into
account anticipated cash flows and available sources of credit, and to afford
future flexibility to meet deposit withdrawal requests and loan commitments.
Northeast Savings' liquidity portfolio is carried in the available-for-sale
portfolio at fair value. As required by federal regulations, Northeast Savings
maintains its liquidity ratio above 5%, and its short term liquid asset ratio
above 1% of net withdrawable deposits and borrowings payable in one year or
less. For the year ended December 31, 1993, Northeast Savings' liquidity ratio
averaged 5.67%, compared to 9.88% for the nine months ended December 31, 1992
and 5.83% and for the year ended March 31, 1992. For the same respective
periods, the Association's short term liquid asset ratio averaged 2.34%, 5.00%,
and 3.31%.
26
<PAGE>
The following tables reflect the carrying value of the Association's
investment securities and the weighted average yield based on the amortized
cost for each category at the dates indicated. Both the amortized cost and the
fair value of these securities may be found in Note 5 to the Consolidated
Financial Statements.
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------- --------------------------
1993 1992 1992 1991 1990
------------------ -------- -------- -------- --------
CARRYING AMORTIZED
VALUE COST
-------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and
agency obligations:
Fixed.................. $ -- $ -- $ -- $ 322 $ 337 $ 371
Available-for-sale..... -- -- 9,982 -- -- 497
Obligations of states
and political subdivi-
sions.................. 432 432 466 491 525 529
Corporate securities:
Fixed.................. 4,254 4,254 13,566 16,538 21,933 22,871
Available-for-sale..... 62 60 120 -- -- 10,539
Bank and finance securi-
ties:
Fixed.................. -- -- -- 497 493 491
Variable............... -- -- 14,479 14,476 23,361 23,349
Available-for-sale..... -- -- -- -- 4,967 5,204
Asset-backed securities:
Available-for-sale..... 38,199 38,299 26,637 -- -- --
High-yield corporate se-
curities:
Fixed.................. -- -- -- -- -- 3,862
Variable............... -- -- -- -- -- --
Available-for-sale..... -- -- -- -- 1,300 12,194
Collateralized mortgage
obligations:
Fixed.................. 4,784 4,784 9,526 73,105 30,415 32,619
Variable............... 1,319 1,319 2,156 2,815 3,232 4,886
Residual............... -- -- -- -- 65,810 89,514
Available-for-sale..... 66,883 66,915 93,160 42,770 86,317 --
Federal Home Loan Bank
stock.................. 31,800 31,800 32,354 40,637 42,115 54,436
Marketable equity secu-
rities:
Equity investments..... 23 23 39,244 38,225 36,777 40,521
Available-for-sale..... 57,710 42,102 -- -- 23 190
-------- -------- -------- -------- -------- --------
Total investment securi-
ties................... $205,466 $189,988 $241,690 $229,876 $317,605 $302,073
======== ======== ======== ======== ======== ========
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
WEIGHTED AVERAGE YIELD
----------------------------------
DECEMBER 31, MARCH 31,
-------------- ------------------
1993 1992 1992 1991 1990
------ ------ ---- ----- -----
<S> <C> <C> <C> <C> <C>
U.S. Government and agency obligations:
Fixed.................................... --% --% 7.52% 7.52% 7.52%
Available-for-sale....................... -- 3.35 -- -- 10.31
Obligations of states and political subdi-
visions................................... 7.43 7.43 7.42 7.42 7.50
Corporate securities:
Fixed.................................... 6.82 7.17 7.31 6.20 6.13
Available-for-sale....................... 9.88 9.88 -- -- 8.79
Bank and finance securities:
Fixed.................................... -- -- 8.48 8.48 8.48
Variable................................. -- 5.28 5.28 7.28 8.86
Available-for-sale....................... -- -- -- 7.27 8.93
Asset-backed securities:
Available-for-sale....................... 4.14 4.28 -- -- --
High-yield corporate securities:
Fixed.................................... -- -- -- -- 11.92
Variable................................. -- -- -- -- --
Available-for-sale....................... -- -- -- 13.05 20.92
Collateralized mortgage obligations:
Fixed.................................... 10.28 10.28 7.09 10.22 10.24
Variable................................. 5.18 5.89 7.29 9.31 9.72
Residual................................. -- -- -- 6.29 8.11
Available-for-sale....................... 5.42 6.16 7.47 8.65 --
Federal Home Loan Bank stock............... 7.00 7.00 8.20 10.77 9.26
Marketable equity securities............... 3.37 6.00 6.00 6.00 6.00
Total investment securities................ 5.13% 6.09% 7.08% 8.01% 8.80%
</TABLE>
The following table shows the maturity distribution of the amortized cost and
the weighted average yields based on amortized cost of Northeast Savings'
investment securities at December 31, 1993. The carrying value of these
securities may be found in a previous table. Changes in interest rates will
affect the actual maturity.
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION
-----------------------------------------------------------------------------
WITHIN OVER ONE TO OVER FIVE TO
ONE YEAR FIVE YEARS TEN YEARS OVER TEN YEARS TOTAL
------------- -------------- ------------- --------------- --------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ----- -------- ----- ------- ----- -------- ------ -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Obligations of states
and political
subdivisions........... $ -- --% $ 21 6.00% $ 411 7.50% $ -- --% $ 432 7.43%
Corporate securities:
Fixed.................. -- -- 2,505 6.85 250 6.83 1,499 6.76 4,254 6.82
Available-for-sale..... 60 9.88 -- -- -- -- -- -- 60 9.88
Asset-backed securities:
Available-for-sale..... 17,978 3.34 20,321 4.85 -- -- -- -- 38,299 4.14
Collateralized mortgage
obligations:
Fixed.................. -- -- -- -- -- -- 4,784 10.28 4,784 10.28
Variable............... -- -- -- -- -- -- 1,319 5.18 1,319 5.18
Available-for-sale..... -- -- 66,915 5.42 -- -- -- -- 66,915 5.42
Federal Home Loan Bank
stock.................. -- -- -- -- -- -- 31,800 7.00 31,800 7.00
Marketable equity
securities:
Equity investments..... -- -- -- -- -- -- 23 -- 23 --
Available-for-sale..... -- -- 10,608 3.00 31,494 3.50 -- -- 42,102 3.37
------- -------- ------- -------- --------
Total investment
securities............. $18,038 3.36% $100,370 5.08% $32,155 3.58% $ 39,425 7.32% $189,988 5.13%
======= ======== ======= ======== ========
</TABLE>
28
<PAGE>
The following table details the Standard and Poor's ratings for each major
category of the Association's investments at December 31, 1993:
<TABLE>
<CAPTION>
A1+ AAA AA A BBB NOT RATED TOTAL
------- ------- ---- ------ ------ --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Obligations of states
and political
subdivisions........... $ -- $ -- $ -- $ -- $ -- $ 432** $ 432
Corporate securities:
Fixed.................. -- 499 499 1,503 1,753 -- 4,254
Available-for-sale..... -- -- -- 62 -- -- 62
Asset-backed securities:
Available-for-sale..... 15,449 22,750* -- -- -- -- 38,199
Collateralized mortgage
obligations:
Fixed.................. -- 4,784 -- -- -- -- 4,784
Variable............... -- 1,319 -- -- -- -- 1,319
Available-for-sale..... -- 66,883 -- -- -- -- 66,883
Federal Home Loan Bank
stock.................. -- -- -- -- -- 31,800 31,800
Marketable equity
securities............. -- -- -- -- -- 23 23
Available-for-sale..... -- -- -- -- -- 57,710 57,710
------- ------- ---- ------ ------ ------- --------
Total investment
securities............ $15,449 $96,235 $499 $1,565 $1,753 $89,965 $205,466
======= ======= ==== ====== ====== ======= ========
Percent of portfolio... 7.52% 46.84% .24% .76% .85% 43.79% 100.00%
======= ======= ==== ====== ====== ======= ========
</TABLE>
- --------
*Of this amount, $1.6 million has been translated from Moody's rating of Aaa.
**All obligations of states and political subdivisions are current.
The carrying value of the Association's mortgage-backed securities and the
weighted average yield based on amortized cost for each category at the dates
indicated is detailed in the following tables. Both the amortized cost and the
fair value of these mortgage-backed securities may be found in Note 6 and Note
21 to the Consolidated Financial Statements.
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------- ------------------------------
1993 1992 1992 1991 1990
--------------------- --------- -------- ---------- ----------
CARRYING AMORTIZED
VALUE COST
--------------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
GNMA:
Fixed................. $ -- $ -- $ 81 $ 14,762 $ 47,305 $ 129,880
Adjustable............ 33,583 33,583 19,589 -- -- --
Available-for-sale.... 10,565 9,855 12,732 -- 29,070 --
FHLMC:
Fixed................. 3,184 3,184 5,810 82,203 138,080 206,136
Adjustable............ 171,675 171,675 135,195 13,639 -- 134,735
Available-for-sale.... 2,321 2,197 42,742 -- 277,987 --
FNMA:
Fixed................. 29,650 29,650 23,330 54,058 120,397 195,621
Adjustable............ 142,904 142,904 157,492 154,689 197,811 329,921
Available-for-sale.... -- -- -- -- 41,722 182,467
Private issuers:
Fixed................. 8,323 8,323 14,957 24,828 32,215 69,107
Adjustable............ 941,567 941,567 473,318 336,573 447,971 130,975
Available-for-sale.... -- -- -- -- 38,109 --
---------- ---------- -------- -------- ---------- ----------
Total mortgage-backed
securities............. $1,343,772 $1,342,938 $885,246 $680,752 $1,370,667 $1,378,842
========== ========== ======== ======== ========== ==========
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
WEIGHTED AVERAGE YIELD
---------------------------------
DECEMBER 31, MARCH 31,
------------- ------------------
1993 1992 1992 1991 1990
------ ------ ----- ---- -----
<S> <C> <C> <C> <C> <C>
GNMA:
Fixed................. --% 12.39% 9.74% 8.41% 8.34%
Adjustable............ 5.59 5.93 -- -- --
Available-for-sale.... 9.46 9.59 -- 8.14 --
FHLMC:
Fixed................. 9.20 9.20 7.93 8.17 8.32
Adjustable............ 4.98 5.01 7.91 -- 9.49
Available-for-sale.... 8.02 8.20 -- 9.09 --
FNMA:
Fixed................. 7.98 9.66 10.41 9.68 9.43
Adjustable............ 6.01 6.89 8.24 9.19 9.46
Available-for-sale.... -- -- -- 8.80 9.47
Private issuers:
Fixed................. 9.55 9.52 9.53 9.53 9.21
Adjustable............ 5.05 5.87 7.84 9.55 10.01
Available-for-sale.... -- -- -- 8.83 --
Total mortgage-backed
securities............. 5.30% 6.27% 8.25% 9.17% 9.22%
</TABLE>
The following table shows the maturity distribution of the amortized cost and
the weighted average yields of Northeast Savings' mortgage-backed securities at
December 31, 1993. The carrying value of these mortgage-backed securities may
be found in a previous table. Changes in interest rates will affect the actual
maturity.
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION
-----------------------------------------------------------------------------
WITHIN OVER ONE TO OVER FIVE TO
ONE YEAR FIVE YEARS TEN YEARS OVER TEN YEARS TOTAL
------------ ------------ ------------- ---------------- ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------- ----- ---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GNMA:
Adjustable............. $-- --% $ -- --% $ -- --% $ 33,583 5.59% $ 33,583 5.59%
Available-for-sale..... 75 10.32 651 9.67 3,358 6.63 5,771 11.08 9,855 9.46
FHLMC:
Fixed.................. -- -- 123 9.07 3,061 9.21 -- -- 3,184 9.20
Adjustable............. -- -- -- -- -- -- 171,675 4.98 171,675 4.98
Available-for-sale..... -- -- 707 5.85 320 7.85 1,170 9.38 2,197 8.02
FNMA:
Fixed.................. -- -- -- -- 5,422 9.81 24,228 7.57 29,650 7.98
Adjustable............. -- -- -- -- -- -- 142,904 6.01 142,904 6.01
Private issuers:
Fixed.................. -- -- -- -- 6,682 9.34 1,641 10.41 8,323 9.55
Adjustable............. -- -- -- -- -- -- 941,567 5.05 941,567 5.05
--- ------ ------- ---------- ----------
Total mortgage-backed
securities............ $75 10.32% $1,481 7.80% $18,843 8.95% $1,322,539 5.24% $1,342,938 5.30%
=== ====== ======= ========== ==========
</TABLE>
30
<PAGE>
The following table details the Standard and Poor's ratings for each major
category of the Association's mortgage-backed securities at December 31, 1993:
<TABLE>
<CAPTION>
AAA AA A TOTAL
-------- -------- ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GNMA:
Adjustable............................ $ 33,583 $ -- $ -- $ 33,583
Available-for-sale.................... 10,565 -- -- 10,565
FHLMC:
Fixed................................. 3,184 -- -- 3,184
Adjustable............................ 171,675 -- -- 171,675
Available-for-sale.................... 2,321 -- -- 2,321
FNMA:
Fixed................................. 29,650 -- -- 29,650
Adjustable............................ 142,904 -- -- 142,904
Private Issuers:
Fixed................................. -- 6,682 1,641 8,323
Adjustable............................ 403,339* 538,228* -- 941,567
-------- -------- ------ ----------
Total mortgage-backed securities........ $797,221 $544,910 $1,641 $1,343,772
======== ======== ====== ==========
Percent of portfolio.................... 59.33% 40.55% .12% 100.00%
======== ======== ====== ==========
</TABLE>
- --------
* Of these amounts, $317.7 million of AAA-rated securities, and $326.2 million
of AA-rated securities, have been translated from Moody's ratings of Aaa and
Aa2, respectively.
SOURCES OF FUNDS
DEPOSITS. The principal source of funds for the Association is retail
customer deposits. Northeast Savings offers a variety of deposit products
ranging from transaction accounts to certificate and retirement accounts with
maturities from 30 days to seven years. Northeast Savings' deposits are derived
primarily from its five-state branch system area. In previous years, wholesale
funding sources, including brokered deposits and capital market borrowings,
were used to fund the Association's wholesale banking activities in the
secondary markets. However, with the return to more traditional thrift
activities, brokered deposits were reduced to less than 1% of Northeast
Savings' total deposits at December 31, 1993 and 1992 and March 31, 1992.
Brokered deposits totaled $25.1 million at both December 31, 1993 and 1992 and
$25.7 million at March 31, 1992, compared to $113.5 million at March 31, 1991.
However, the decrease in retail deposits over the past several years has caused
management to replace those deposits with increased wholesale borrowings in
order to maintain the asset size of the Association. At December 31, 1993,
Northeast Savings was 81.0% funded by retail deposits, compared to 87.5% at
December 31, 1992 and 97.7% at March 31, 1992.
Northeast Savings' other income from deposit accounts consists primarily of
monthly service charges, charges for insufficient or uncollected funds, stop
payment fees, check printing charges, retirement account fees, and automated
teller machine transaction fees. Fees from deposit accounts totaled $4.9
million for the year ended December 31, 1993, compared to $3.9 million and $4.8
million for the nine months ended December 31, 1992 and the year ended March
31, 1992, respectively.
31
<PAGE>
The following table sets forth information relating to the Association's
deposit flows for each of the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1993 1992 1992
------------ ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total deposits at the beginning of
the period.......................... $3,230,789 $3,488,047 $3,406,472
Interest credited.................... 119,925 124,783 222,801
Deposits purchased................... -- 314,668 404,643
Net retail deposit decrease.......... (379,798) (682,150) (495,174)
Net increase (decrease) in certifi-
cates greater
than $100,000....................... 6,301 (13,986) 37,137
Net brokered deposit decrease........ -- (573) (87,832)
---------- ---------- ----------
Total deposits at the end of the
period............................ $2,977,217 $3,230,789 $3,488,047
========== ========== ==========
</TABLE>
The following tables, which include both retail customer deposits and
brokered deposits, set forth the amounts of deposits in the various types of
accounts offered by Northeast Savings, the amounts of those deposits as a
percentage of total deposits, and the weighted average interest rates at the
dates indicated, as well as the contractual maturities of deposits at December
31, 1993:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------ -------------------------------------------------------
1993* 1992* 1992 1991 1990
----------------- ----------------- ----------------- ----------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposits........ $ 35,865 1.21% $ 35,644 1.10% $ 30,709 .88% $ 30,105 .88% $ 37,146 1.00%
NOW accounts........... 145,655 4.89 160,821 4.98 151,536 4.34 142,635 4.19 149,123 4.03
Super NOWs............. 51,040 1.71 53,758 1.66 51,041 1.46 41,746 1.23 45,264 1.22
Regular savings........ 583,209 19.59 695,674 21.54 566,181 16.23 330,659 9.71 329,656 8.92
Money market savings... 401,135 13.47 443,692 13.73 409,190 11.73 404,013 11.86 445,903 12.06
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total non-certificate
accounts............ 1,216,904 40.87 1,389,589 43.01 1,208,657 34.64 949,158 27.87 1,007,092 27.23
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Certificates maturing
in the year ending
March 31:
1991.................. -- -- -- -- -- -- -- -- 2,097,593 56.74
1992.................. -- -- -- -- -- -- 1,870,961 54.92 289,651 7.84
1993.................. -- -- 1,034,621 32.02 1,585,847 45.47 352,138 10.34 130,555 3.53
1994.................. 1,218,031 40.91 502,882 15.57 389,199 11.16 121,721 3.57 91,867 2.49
1995.................. 193,092 6.49 51,531 1.59 139,712 4.01 78,805 2.31 78,018 2.11
1996.................. 46,249 1.55 28,990 .90 33,378 .96 32,566 .96 2,057 .06
1997.................. 56,834 1.91 57,683 1.79 112,836 3.23 1,123 .03 -- --
Thereafter............ 246,107 8.27 165,493 5.12 18,418 .53 -- -- -- --
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total certificates... 1,760,313 59.13 1,841,200 56.99 2,279,390 65.36 2,457,314 72.13 2,689,741 72.77
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total deposits......... $2,977,217 100.00% $3,230,789 100.00% $3,488,047 100.00% $3,406,472 100.00% $3,696,833 100.00%
========== ====== ========== ====== ========== ====== ========== ====== ========== ======
</TABLE>
- --------
* Certificates mature in the applicable year ending December 31, rather than
March 31.
32
<PAGE>
<TABLE>
<CAPTION>
WEIGHTED AVERAGE INTEREST RATE
----------------------------------------
DECEMBER 31, MARCH 31,
--------------- ----------------------
1993* 1992* 1991 1990 1989
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Demand deposits..................... --% --% --% --% --%
NOW accounts........................ 1.22 2.00 2.53 5.00 5.00
Super NOWs.......................... 1.47 2.00 3.41 5.14 5.57
Regular savings..................... 2.20 2.74 4.29 5.47 5.46
Money market savings................ 2.67 3.09 4.34 5.99 6.76
Total non-certificate accounts.. 2.14 2.67 3.94 5.43 5.77
Certificates maturing in the year
ending March 31:
1991.............................. -- -- -- -- 8.66
1992.............................. -- -- -- 7.83 8.41
1993.............................. -- 4.70 6.00 8.31 8.75
1994.............................. 4.37 5.94 6.57 8.66 8.89
1995.............................. 5.00 7.21 8.12 9.28 9.24
1996.............................. 5.85 6.84 8.12 8.12 9.48
1997.............................. 5.80 5.80 6.52 9.53 --
Thereafter........................ 6.70 7.17 7.33 -- --
Total certificates.............. 4.85 5.40 6.33 7.99 8.67
Total deposits...................... 3.74% 4.22% 5.50% 7.28% 7.88%
</TABLE>
- --------
* Certificates mature in the applicable year ending December 31, rather than
March 31.
The following table, which includes both retail customer and brokered
certificates of deposit, provides information by interest rate ranges at each
of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------- --------------------------------
1993 1992 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Less than 3.01%......... $ 212,838 $ 106,536 $ 100 $ -- $ --
3.01-4.00%.............. 514,545 434,750 90,299 -- 439
4.01-5.00%.............. 352,702 370,493 354,696 -- 2,552
5.01-6.00%.............. 265,552 320,446 760,301 273 5,339
6.01-7.00%.............. 194,731 250,472 400,896 362,823 3,491
7.01-8.00%.............. 87,883 115,000 188,612 810,711 239,728
8.01-9.00%.............. 77,988 189,255 389,804 1,188,310 1,882,968
9.01-10.00%............. 41,805 41,323 77,658 74,632 357,999
Greater than 10.00%..... 12,269 12,925 17,024 20,565 197,225
---------- ---------- ---------- ---------- ----------
Total certificates.... $1,760,313 $1,841,200 $2,279,390 $2,457,314 $2,689,741
========== ========== ========== ========== ==========
</TABLE>
The following table sets forth the weighted average interest rates and amount
of deposits by original term for certificate accounts at December 31, 1993:
<TABLE>
<CAPTION>
ORIGINAL TERM WEIGHTED AVERAGE RATE AMOUNT
------------- --------------------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Less than 3 months...................... 2.43% $ 10,938
3 months to 6 months.................... 2.62 174,881
7 months to 12 months................... 3.32 405,113
13 months to 24 months.................. 4.44 577,541
25 months to 36 months.................. 5.94 124,894
37 months to 48 months.................. 6.36 7,011
49 months to 60 months.................. 7.70 245,869
Over 60 months.......................... 6.85 214,066
----------
Total certificate accounts............ 4.85% $1,760,313
==========
</TABLE>
33
<PAGE>
At December 31, 1993, deposits had the following remaining contractual
maturities:
<TABLE>
<CAPTION>
OVER 3 OVER 6 OVER 12 OVER 24
MONTHS MONTHS MONTHS MONTHS
WITHIN TO 6 TO 12 TO 24 TO 36 OVER 36
3 MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS TOTAL
---------- -------- -------- -------- ------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Demand deposits......... $ 35,865 $ -- $ -- $ -- $ -- $ -- $ 35,865
NOW accounts............ 145,655 -- -- -- -- -- 145,655
Super NOWs.............. 51,040 -- -- -- -- -- 51,040
Regular savings......... 583,209 -- -- -- -- -- 583,209
Money market savings.... 401,135 -- -- -- -- -- 401,135
---------- -------- -------- -------- ------- -------- ----------
Total non-certificate
accounts............ $1,216,904 $ -- $ -- $ -- $ -- $ -- $1,216,904
========== ======== ======== ======== ======= ======== ==========
Certificates:
Less than 3.01%........ $ 116,198 $ 64,767 $ 26,341 $ 5,532 $ -- $ -- $ 212,838
3.01-4.00%............. 139,055 148,688 156,412 63,797 6,565 28 514,545
4.01-5.00%............. 36,955 90,919 133,599 60,524 12,445 18,260 352,702
5.01-6.00%............. 130,252 4,548 3,604 28,200 2,166 96,782 265,552
6.01-7.00%............. 1,027 3,439 48,620 178 11,450 130,017 194,731
7.01-8.00%............. 9,521 2,570 1,033 6,327 13,263 55,169 87,883
8.01-9.00%............. 23,950 7,446 17,850 26,581 275 1,886 77,988
9.01-10.00%............ 14 40,656 22 568 63 482 41,805
Greater than 10.00%.... 1,930 1,175 7,440 1,385 22 317 12,269
---------- -------- -------- -------- ------- -------- ----------
Total certificates... $ 458,902 $364,208 $394,921 $193,092 $46,249 $302,941 $1,760,313
========== ======== ======== ======== ======= ======== ==========
</TABLE>
While non-certificate accounts have no contractual maturities, they are
reported in the above table as though they mature within three months.
Certificates of deposit included above, which are equal to or in excess of
$100,000, had the following remaining contractual maturities at December 31,
1993:
<TABLE>
<CAPTION>
OVER 3 OVER 6 OVER 12 OVER 24
MONTHS MONTHS MONTHS MONTHS
WITHIN TO 6 TO 12 TO 24 TO 36 OVER 36
3 MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS TOTAL
-------- ------- ------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Less than 3.01%...... $32,954 $ 2,666 $ 526 $ 255 $ -- $ -- $ 36,401
3.01-4.00%........... 6,414 7,186 5,522 1,828 623 -- 21,573
4.01-5.00%........... 1,812 3,969 4,756 1,941 406 627 13,511
5.01-6.00%........... 8,324 729 308 948 148 4,322 14,779
6.01-7.00%........... -- 106 2,456 234 686 9,384 12,866
7.01-8.00%........... 493 181 -- -- 204 5,349 6,227
8.01-9.00%........... 1,433 1,495 1,136 677 -- 314 5,055
9.01-10.00%.......... -- 1,278 -- 212 -- -- 1,490
Greater than 10.00%.. 483 125 1,882 200 -- -- 2,690
------- ------- ------- ------ ------ ------- --------
Total............. $51,913 $17,735 $16,586 $6,295 $2,067 $19,996 $114,592
======= ======= ======= ====== ====== ======= ========
</TABLE>
The following table sets forth certain information relating to the
Association's concentration of deposits by state in which the Association's
branches are located:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1993 1992 1993 1992
---------- ---------- -------- --------
TOTAL DEPOSITS NUMBER OF OFFICES
--------------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
New York....................... $1,407,817 $1,567,254 17 17
Massachusetts.................. 876,180 914,176 16 17
Connecticut.................... 484,909 510,272 8 9
Rhode Island................... 148,134 170,069 6 7
California..................... 60,177 69,018 4 4
---------- ---------- -------- --------
$2,977,217 $3,230,789 51 54
========== ========== ======== ========
</TABLE>
34
<PAGE>
Borrowings. Northeast Savings' borrowing sources consist primarily of Federal
Home Loan Bank (FHLB) advances and securities sold under agreements to
repurchase. The Association borrows funds from the FHLB from time to time,
pledging certain of its mortgage loans as collateral. Such borrowings may be
obtained pursuant to several different credit programs, and each credit program
has its own rate and range of maturities up to a maximum of twenty years.
Prepayment fees are charged on fixed rate advances if paid prior to maturity.
The FHLB is required to review its credit programs at least once every six
months and such programs are subject to change. The Federal Housing Finance
Board (FHFB) also has established standards for community investment or service
for members of FHLBs to maintain continued access to long-term advances. Each
member institution must submit to its FHLB a community support statement
evidencing assistance to first-time homebuyers such as special credit programs
or participation in governmental homeownership programs and any additional
evidence of community support. A member institution's access to long term
advances could be restricted if it fails to comply with the FHFB community
support requirements. In addition, the FHLB of Boston limits additional
advances to a member institution that is approaching insolvency on a tangible
capital basis to certain short term advances. The FHLB of Boston also may
determine not to extend new credit to a member institution that is insolvent on
a regulatory capital basis. For further information, see Note 12 of the Notes
to the Consolidated Financial Statements.
Northeast Savings enters into repurchase agreements whereby it sells
marketable mortgage-backed securities with a simultaneous commitment to
repurchase the same securities at a specified price at a specified later date.
Securities sold under agreements to repurchase are subject to risks relating to
the financial strength of the counterparty to the transaction, the nature of
the lien against the securities subject to the transaction, and the disparity
between the book value of the securities sold and the amount of funds obtained.
In order to reduce these risks, the Association deals only with national
investment banking firms which are primary dealers in United States government
securities. For further information, see Note 12 of the Notes to the
Consolidated Financial Statements.
In addition, at December 31, 1993, the Company had outstanding $38.4 million
of 9% Uncertificated Debentures, Due in 2012. These debentures were issued in
May 1992 to the receivers of four failed Rhode Island financial institutions
and the FSLIC Resolution Fund in connection with the aforementioned acquisition
of four Rhode Island financial institutions and the repurchase of the Company's
adjustable rate preferred stock. For further information on the issuance and
terms of the debentures, see Note 12 of the Notes to the Consolidated Financial
Statements.
35
<PAGE>
Selected information relating to borrowings for the dates and periods
indicated is as follows:
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31, FOR THE YEARS ENDED MARCH 31,
------------ ------------ ---------------------------------
1993 1992 1992 1991 1990
------------ ------------ --------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Federal Home Loan Bank
advances:
Balance at the end of
the period............ $373,000 $140,000 $ 43,239 $ 495,177 $ 310,115
Average balance during
the period............ 351,267 54,242 169,079 498,801 399,066
Maximum month-end
balance............... 409,500 140,000 370,183 820,172 460,081
Weighted average rate
during the period..... 3.77% 7.48% 7.44% 8.00% 9.07%
Rate at the end of the
period................ 3.76% 5.07% 8.51% 6.92% 8.56%
Securities sold under
agreements to repur-
chase:
Wholesale:
Balance at the end of
the period.......... $294,809 $291,014 $ 12,747 $ 330,156 $ 446,005
Average balance
during the period... 290,112 152,923 188,839 465,916 1,219,595
Maximum month-end
balance............. 311,385 327,360 326,685 529,006 2,340,056
Weighted average rate
during the period... 3.40% 3.53% 4.15% 8.37% 9.66%
Rate at the end of
the period.......... 3.43% 3.46% 4.00% 7.74% 8.53%
Dollar:
Balance at the end of
the period.......... $ -- $ -- $ -- $ 32,189 $ --
Average balance
during the period... -- 227 8,134 7,877 51,139
Maximum month-end
balance............. -- 2,957 40,417 32,189 241,329
Weighted average rate
during the period... --% .48% 5.34% 6.93% 8.47%
Rate at the end of
the period.......... --% --% --% 5.93% --%
Retail:
Balance at the end of
the period.......... $ -- $ -- $ -- $ 4,437 $ 5,589
Average balance
during the period... -- -- 3,591 4,969 6,967
Maximum month-end
balance............. -- -- 5,890 6,205 8,291
Weighted average rate
during the period... --% --% 5.15% 5.31% 5.25%
Rate at the end of
the period.......... --% --% --% 5.64% 5.25%
Uncertificated deben-
tures:
Balance at the end of
the period............ $ 38,442 $ 34,990 $ -- $ -- $ --
Average balance during
the period............ 36,415 28,924 -- -- --
Maximum month-end
balance............... 38,442 34,991 -- -- --
Weighted average rate
during the period..... 9.65% 9.65% --% --% --%
Rate at the end of the
period................ 9.00% 9.00% --% --% --%
Collateralized floating
rate notes:
Balance at the end of
the period............ $ -- $ -- $ -- $ -- $ 218,240
Average balance during
the period............ -- -- -- 158,150 247,670
Maximum month-end
balance............... -- -- -- 218,040 275,000
Weighted average rate
during the period..... --% --% --% 8.57% 9.48%
Rate at the end of the
period................ --% --% --% --% 8.45%
Preferred stock of fi-
nance subsidiary:
Balance at the end of
the period............ $ -- $ -- $ -- $ -- $ --
Average balance during
the period............ -- -- -- -- 8,851
Maximum month-end
balance............... -- -- -- -- 19,040
Weighted average rate
during the period..... --% --% --% --% 7.98%
Rate at the end of the
period................ --% --% --% --% --%
Convertible subordinated
debentures:
Balance at the end of
the period............ $ -- $ 560 $ 560 $ 1,030 $ 3,150
Average balance during
the period............ 344 560 697 2,474 3,174
Maximum month-end
balance............... 560 560 1,030 3,150 3,215
Weighted average rate
during the period..... 8.00% 8.00% 8.00% 8.00% 8.00%
Rate at the end of the
period................ --% 8.00% 8.00% 8.00% 8.00%
Other borrowings:
Adjustable rate ESOP
notes:
Balance at the end of
the period.......... $ -- $ -- $ -- $ -- $ 12,700
Average balance
during the period... -- -- 4,689 1,532 13,203
Maximum month-end
balance............. -- -- 11,400 12,700 13,900
Weighted average rate
during the period... --% --% 5.24% 7.29% 8.29%
Rate at the end of
the period.......... --% --% 4.00% 6.16% 7.18%
</TABLE>
36
<PAGE>
Additional information regarding the Association's business activities can be
found in Item 7: Management's Discussion and Analysis of the Results of
Operations and Financial Condition and in the Notes to the Consolidated
Financial Statements.
SUBSIDIARIES
Northeast Savings is permitted by current OTS regulations to invest up to 3%
of its assets in service corporations whose operations are authorized by the
OTS, provided that any investment in excess of 2% must serve primarily
community or inner-city purposes. In addition, so long as the OTS continues to
permit any such investments, under its grandfathered savings bank investment
authority, Northeast Savings may invest up to the lesser of 2% of its assets or
20% of its net worth in any type of investment, subject to certain limitations.
Investments in subsidiaries and investments made pursuant to its grandfathered
savings bank authority are subject to review by the FDIC to ensure that such
investments do not pose a serious threat to the SAIF.
OTS regulations also permit federal associations to establish operating
subsidiaries in any geographic location. Unlike a service corporation, an
operating subsidiary may engage only in such activities as a federal savings
association could engage in directly and would not be subject to the percentage
of assets limitation imposed on service corporations. To establish an operating
subsidiary, a federal savings association must either notify or obtain prior
approval of the OTS, depending on the association's capital level and MACRO
rating, the OTS internal rating system used for supervisory and examination
purposes. All of Northeast Savings' subsidiaries have been redesignated as
operating subsidiaries with the exception of: NEMAC Escrow Corp; Hillshire
House, Incorporated; Real Estate Referral, Inc.; First Service Corporation of
New England; First Service Insurance Agency, Inc.; and Family Security Corp.
Northeast Savings has twenty-eight subsidiaries, twenty of which are active.
The businesses in which the twenty active subsidiaries are engaged are as
follows. NEMAC, INC. is the Association's subsidiary which originates
residential loans in Colorado. NFRC VIII, Inc. holds all of the stock of
Northeast Custody Corp., a California corporation engaged in trustee services.
Through Hillshire House, Incorporated, the Association acquired certain assets
of Westledge Real Estate, Inc. and Westledge Real Estate II Corporation in
settlement of loans made by the Association to those two corporations.
Hillshire House, Incorporated continues to operate the real estate brokerage
business under the name Westledge Real Estate. Real Estate Referral, Inc., is a
wholly-owned subsidiary of Hillshire House, Incorporated. NFRC II, Inc. holds
an REO residential subdivision in Tolland, Connecticut. NFRC III, Inc. holds an
REO warehouse in Chelmsford, Massachusetts. NFRC IV, Inc. holds an apartment
building in West Hartford, Connecticut. NFRC V, Inc. holds an REO parcel of
land in Wethersfield, Connecticut. NFRC VI, Inc. holds an REO office building
in Lowell, Massachusetts. NFRC VII, Inc. holds an REO residential subdivision
in East Granby, Connecticut. NFRC IX, Inc. owns all of the stock of Connecticut
Realty Corp., Connecticut Realty Corp. II, Connecticut Realty Corp. III,
Connecticut Realty Corp. IV, Connecticut Realty Corp. V, and Nutmeg Realty
Corp., which are all Rhode Island corporations currently holding several
commercial REO properties. Northeast Charleston Corp. holds a hotel in
Charleston, South Carolina. Northeast New Britain Corp. holds a hotel in New
Britain, Connecticut.
EMPLOYEES
Northeast Savings had 999 employees (901 full-time equivalents) at December
31, 1993, compared to 1,171 (1,036 full-time equivalents) at December 31, 1992.
Management considers its relations with its employees to be good. Northeast
Savings employees are not represented by any collective bargaining group.
Northeast Savings maintains a comprehensive employee benefits program
providing, among other benefits, a retirement plan, medical and dental
insurance, long-term and short-term disability insurance, life insurance, a
thrift and profit sharing plan, an employee stock ownership plan, and
educational assistance.
REGULATIONS
General. The Association is a member of the FHLB System and its deposit
accounts are insured up to applicable limits by the FDIC under the SAIF. The
Association is subject to extensive regulation by the OTS,
37
<PAGE>
as its chartering agency, and the FDIC, as the deposit insurer. The Association
must file reports with the OTS and the FDIC concerning its activities and
financial condition, in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with or acquisitions of
other savings institutions. Periodic examinations by the OTS and the FDIC test
the Association's compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in their supervisory and
enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulation, whether
by the OTS, the FDIC, or the Congress, could have a material adverse impact on
the Company, the Association, and their operations.
The OTS, an agency established pursuant to FIRREA, is the primary regulator
for federally chartered savings associations such as the Association, as well
as savings and loan holding companies. The OTS is an office of the Department
of Treasury under the general oversight of the Secretary of Treasury. Due to
its ownership and control of Northeast Savings, Northeast Federal Corp. is a
savings and loan holding company within the meaning of the Home Owners' Loan
Act of 1933, as amended, and thus is subject to that Act's regulation,
examination, supervision, and reporting requirements imposed on savings
association holding companies.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA),
which was signed into law on December 19, 1991, also included 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. FDICIA significantly increases the supervision and enforcement
powers of bank regulatory agencies, particularly the FDIC. In addition to
recapitalizing the Bank Insurance Fund (BIF), FDICIA includes a number of
provisions relating to annual onsite regulatory examinations of depository
institutions, accounting reforms, prompt regulatory action for institutions
that fail to satisfy capital requirements, least cost resolution for troubled
or failing or failed depository institutions, various truth-in-savings
provisions, limitations on the acceptance of brokered deposits by
undercapitalized depository institutions, risk-based deposit insurance
premiums, limitations on pass-through insurance on qualified retirement
accounts and deposit insurance for certain investment contracts, amendments to
the Qualified Thrift Lender test for thrift institutions, new restrictions on
loans to officers, directors, and controlling shareholders of depository
institutions, and a variety of other provisions including authorizing various
studies by the regulatory agencies of deposit insurance and customer and
consumer issues. As discussed below, the banking agencies have adopted or
proposed various rules pursuant to FDICIA. In addition, the federal regulatory
agencies were also required to adopt and enforce final regulations to be
effective by December 1, 1993 prescribing standards relating to a variety of
operating matters such as internal controls, information systems and external
audit systems, loan documentation and credit underwriting, interest rate
exposure, asset growth and quality, and employee compensation; such standards
were published in proposed form on November 18, 1993. Since they are not yet
final, it is not possible to assess their impact on the Association. Recent
legislation has amended certain FDICIA provisions regarding compensation
standards. Additional legislation could be proposed and enacted. No
representation can be made as to the possible effects of legislation or
regulations which may be adopted in the future.
Insurance of Deposits. The FDIC is the federal deposit insurance
administrator for both banks and savings associations. The FDIC administers
separate insurance funds, the SAIF and the BIF for thrifts and banks
respectively, and assessment rates are set independently. The FDIC has the
specified authority to prescribe and enforce such regulations and issue such
orders as it deems necessary to prevent actions or practices by savings
associations that pose a serious threat to the SAIF. In addition, FDICIA
required that the FDIC establish a risk-based deposit insurance premium system
which would be effective as of January 1, 1994. In establishing such a system,
the FDIC was required by FDICIA to take into consideration the risks
attributable to different categories and concentrations of assets and
liabilities and the revenue needs of the deposit insurance funds.
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On October 1, 1992, the FDIC published final rules increasing the deposit
insurance assessment rate to be paid by BIF and SAIF insured institutions
during two semiannual periods in 1993 and thereafter and adopting a
transitional risk-based deposit insurance assessment system. The transitional
system became effective January 1, 1993 and remained in effect until
implementation of the permanent risk-based assessment system one year later.
Under the transitional rule, the annual assessment rate for each SAIF insured
institution was determined on the basis of capital and supervisory measures.
For the capital measure, institutions were assigned to one of three capital
groups: well-capitalized, adequately capitalized, or undercapitalized. The
first two groups were defined by application of the capital ratio standards
imposed under the prompt corrective action rule (discussed below). The third
group consisted of those institutions not qualifying as well capitalized or
adequately capitalized. Within each group, institutions were assigned to one of
three supervisory subgroups: healthy, supervisory concern, or substantial
supervisory concern. The FDIC assigned institutions to supervisory subgroups on
the basis of supervisory evaluations provided by the institution's primary
federal regulator and such other information as the FDIC determined to be
relevant to the institution's financial condition and the risk posed to the
insurance fund. The supervisory subgroup to which an institution was assigned
by the FDIC is confidential and may not be disclosed. Under the final rule,
there were nine combinations of groups with assessments ranging from 23 cents
for each $100 of insured deposits to 31 cents for each $100 of insured deposits
depending upon the risk group to which a savings association was assigned. A
savings association's capital group was determined on the basis of data
reported in its thrift financial report as of the date closest to June 30 or
December 31 that included the necessary capital data. Northeast Savings is
deemed to be an adequately capitalized association. The impact of this final
rule increased the Association's deposit insurance premium expense between 13%
and 26% for 1993. For the year ended December 31, 1993, SAIF deposit insurance
premium expense for the Association totaled $7.8 million.
On June 17, 1993, the FDIC adopted a final rule establishing a risk-based
deposit insurance premium assessment system which was implemented with the
semi-annual assessment period commencing January 1, 1994. Except for limited
changes, the structure of the permanent system is substantially the same as the
structure of the transitional system it replaced. The FDIC is authorized to
raise insurance premiums for SAIF members in certain circumstances. If the FDIC
determined to increase the assessment rate for all SAIF institutions,
institutions in all risk categories could be affected. Any increase in premiums
could have an adverse effect on the Association's earnings.
The FDIC has authority to terminate the insurance of deposits of savings
associations upon a finding that the institution has engaged in unsafe or
unsound practices, is in an unsafe or unsound condition to continue operations,
or has violated any applicable law, regulation, rule, order or condition
imposed by the FDIC or the OTS. In addition, the FDIC has power to suspend
temporarily a savings association's insurance on deposits received after the
issuance of a suspension order in the event that the savings association has no
tangible capital. Savings associations are allowed to include certain goodwill
in tangible capital for this requirement; however, any savings association with
no tangible capital prior to including goodwill would be considered a "special
supervisory savings association."
Assessments. Savings institutions are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, to be paid on a semiannual basis, is computed upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
the institution's latest quarterly thrift financial report. The Association's
total expense for assessments for the year ended December 31, 1993 was
$590,000.
Federal Home Loan Bank System. The Federal Housing Finance Board was
established by FIRREA as an independent agency to oversee and supervise the
credit functions of the Federal Home Loan Banks. The FHFB ensures that the
Federal Home Loan Banks carry out their housing finance mission, remain
adequately capitalized, and operate in a safe and sound manner. FIRREA also
broadened membership in the Federal Home Loan Banks to include insured banks
and credit unions in addition to savings associations. Financial institutions
which maintain FHLB membership must hold stock in the FHLB within certain
guidelines. As a result of membership, an institution can secure FHLB advances
in accordance with the
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requirements of the FHLB. However, members who do not meet the Qualified Thrift
Lender test discussed below have reduced access to advances.
Northeast Savings is a member of the FHLB of Boston and as such is required
to maintain an investment in capital stock of the FHLB of Boston in an amount
equal to the greater of one percent of its outstanding residential mortgage
loans and similar obligations, one-twentieth of its outstanding advances, or
.3% of total assets. Northeast Savings was in compliance with this requirement
with an investment in the FHLB of Boston stock at December 31, 1993 of $31.8
million. The Association may borrow from the FHLB of Boston pursuant to several
different credit programs upon the security of certain home mortgages and other
assets assuming certain standards of credit worthiness have been met. The FHLB
may limit the uses and amount of borrowings under different programs.
FIRREA requires the FHLB of Boston to contribute a significant amount of its
reserves and annual earnings to fund the principal and a portion of the
interest payable on bonds issued to fund the resolution of failed savings
associations. In addition, the statute provides that each FHLB must transfer a
percentage of its annual net earnings to a specified affordable housing
program. As a result of these requirements, it is anticipated that the FHLB of
Boston may pay reduced dividends on their stock in the future. As of December
31, 1993 and 1992, respectively, Northeast Savings held $31.8 million and $32.4
million of FHLB of Boston stock. During the year ended December 31, 1993 and
the nine months ended December 31, 1992, respectively, Northeast Savings
recorded dividend income on its FHLB investment in an aggregate amount of $2.4
million and $1.9 million for a yield of 7.58% and 7.72%, respectively.
Regulatory Capital and Other Requirements: Current Capital Regulations. The
current OTS regulatory capital regulations require savings associations to meet
three capital standards: (1) tangible core capital of 1.5% of adjusted total
assets, (2) core capital (leverage ratio) of 3% of adjusted total assets, and
(3) risk-based capital of 8% of risk-weighted assets. See "Proposed Leverage
Ratio Requirement," "Final OTS Interest Rate Risk Component," and "Prompt
Corrective Action."
In calculating tangible core capital, a savings association must deduct from
capital most intangible assets. Core capital consists of tangible core capital
plus certain intangible assets such as qualifying purchased mortgage servicing
rights and certain qualifying supervisory goodwill which meets the requirements
of FIRREA. Other than qualifying purchased mortgage servicing rights and
certain qualifying supervisory goodwill as described below, intangible assets
must be deducted from core capital unless they meet a three-part test relating
to identifiability, marketability, and liquidity in which event they may be
included in an amount up to 25% of core capital. On February 2, 1994, the OTS
issued a final rule, effective March 4, 1994, which would permit the inclusion
of purchased mortgage servicing rights in capital provided that those rights,
in the aggregate, do not exceed 50% of core capital. This rule requires that
all other intangibles, including core deposit intangibles with certain limited
exceptions, be deducted from capital. This rule will have minimal impact on the
Association since the Association's purchased mortgage servicing rights
comprise less than 1.8% of core capital. In addition, the OTS will grandfather
core deposit intangibles resulting from prior transactions or transactions
under firm control as of March 4, 1994. As of December 31, 1993, the
Association had only $551,000 of core deposit intangibles which will be so
grandfathered. Supervisory goodwill includable in core capital initially could
be used to satisfy up to one-half of the 3% core capital requirement and is
being phased out over five years, with all goodwill completely excluded from
capital after December 31, 1994. At December 31, 1993, supervisory goodwill
could be used to satisfy one fourth of the three percent core capital
requirement. The allowable percentages of adjusted total assets during the
phaseout period are as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF ADJUSTED
TOTAL ASSETS ALLOWED
----------------------
<S> <C>
Prior to January 1, 1992........................... 1.500%
January 1, 1992 to December 31, 1992............... 1.000%
January 1, 1993 to December 31, 1993............... 0.750%
January 1, 1994 to December 31, 1994............... 0.375%
Thereafter......................................... 0%
</TABLE>
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Since, as discussed in Item 7: Management's Discussion and Analysis of the
Results of Operations and Financial Condition, the Company has eliminated all
of its supervisory goodwill through valuation adjustments and the utilization
of net operating loss carryforwards, the phaseout of supervisory goodwill from
capital will have no impact on the Company in the future.
The risk-based capital requirement for savings associations of 8% of risk-
weighted assets was phased in over three years. Thrifts were required to meet
100% of the requirement, or 8%, on December 31, 1992. The risk-based capital
requirement includes core capital plus supplementary capital to the extent that
supplementary capital does not exceed 100% of core capital. Supplementary
capital includes certain capital instruments which are not included in core
capital and general loan loss allowances. Risk-weighted assets equal total
assets plus consolidated off-balance sheet items where each asset or item is
multiplied by the appropriate risk-weighting applicable to the asset category.
The capital regulations assign each asset held by a savings association to one
of four risk-weighting categories, based upon the credit risk associated with
each asset or item. The risk-weighting categories range from 0% for low-risk
assets (such as U.S. Treasury securities and Government National Mortgage
Association securities) to 100% for assets deemed to be of higher risk (such as
repossessed assets and certain equity investments). Effective December 31,
1993, the OTS requires all savings associations to use fair value for valuation
of foreclosed assets including repossessed assets. Previously, foreclosed
assets could be carried at the lower of cost or net realizable value. Under
this new rule, after foreclosure, foreclosed assets must be carried at the
lower of cost or fair value based on an assumption that such assets are
available for sale. Since 1989, the Association has carried its foreclosed
assets at fair value, rather than at net realizable value. As of December 31,
1992, the OTS also removed the 200 percent risk-weight category which was
previously imposed. As a result, foreclosed assets are assigned a risk-
weighting of 100 percent. On March 19, 1993, the OTS issued a final rule
changing the risk-based capital treatment of certain equity investments to
parallel the capital treatment of those investments under the rules applicable
to national banks. Effective April 13, 1993, savings associations were required
to place these investments in the 100% risk-weight category. The OTS capital
regulation further provides that a savings association will be deemed to be in
compliance with the OTS capital requirements if it is operating under an
approved capital plan and it is not critically undercapitalized as that term is
defined by the prompt corrective action rule.
FDICIA required the federal banking agencies to review their risk-based
capital standards to ensure that those standards take adequate account of: (1)
interest rate risk; (2) concentration of credit risks; and (3) the risks of
nontraditional activities. FDICIA also mandated that the federal banking
agencies publish final regulations no later than 18 months after the enactment
of FDICIA or June 18, 1993, as well as establish reasonable transition rules to
facilitate compliance with those rules. In addition, the OTS is also soliciting
comments on a proposed regulation to take adequate account of credit
concentration risk and the risk of non-traditional activities. Since, with the
exception of the OTS interest rate risk component discussed below, these
proposed rules are not yet final, it is not possible to assess their impact on
the Association.
Proposed Leverage Ratio Requirement. On April 22, 1991, the OTS issued a
notice of proposed rulemaking to establish a new minimum leverage ratio of 3%
of adjusted total assets for savings associations without any supervisory,
financial, or operational deficiencies, that is, associations receiving a
composite rating of 1 on their regulatory examinations under the OTS MACRO
system. The leverage ratio is the ratio of core capital to adjusted total
assets. Higher leverage ratios, generally 100 to 200 basis points higher, would
be required for all other associations, as warranted by particular
circumstances or risk profiles. Thus, for all but the most highly rated
institutions meeting the conditions set forth in the OTS notice, the minimum
leverage ratio would be 3% plus an additional 100 to 200 basis points
determined on a case-by-case basis. In all cases, savings institutions would be
required to hold capital commensurate with the quality of risk management
systems and the level of overall risk in each individual savings association as
determined through the supervisory process on a case-by-case basis. Savings
associations that no longer pass the minimum capital standards because of the
new core capital leverage ratio requirements would be subject to certain
restrictions and a limitation on distributions and would be required to submit
capital plans that detail the steps they will
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take to reach compliance with the fully phased-in capital standards by December
31, 1994. These capital plans would be due within 60 days of the effective date
of the rule. The Association continues to exceed all current capital
requirements including the anticipated increased leverage ratio requirement.
Although the proposed leverage requirement is not yet final, under the prompt
corrective action rules discussed below, which became effective December 19,
1992, an institution must have a leverage ratio of 4% or greater in order to be
considered adequately capitalized.
Final OTS Interest Rate Risk Component. On August 31, 1993, the OTS adopted
final rules adding an interest rate risk component to its risk-based capital
requirement. This rule became effective January 1, 1994. Under the rule,
savings associations are divided into two groups, those with "normal" levels of
interest rate risk and those with greater than "normal" levels of interest rate
risk. Associations with greater than normal levels are subject to a deduction
from total capital for purposes of calculating risk-based capital. Interest
rate risk is measured by the change in Net Portfolio Value under a 2.0% change
in market value of an association's assets less the economic value of its
liabilities adjusted for the economic value of off-balance-sheet contracts. If
an association's change in Net Portfolio Value under a 2.0% change in market
interest rates exceeds 2.0% of the estimated economic value of its assets, it
will be considered to have greater than normal interest rate risk, and its
total capital for risk-based capital purposes will be reduced by one-half of
the difference between its measured interest rate risk and the normal level of
2.0%. The rule adjusts the interest rate risk measurement methodology when
interest rates are low. In the event that the 3-month Treasury rate is below
4.0%, interest rate risk will be measured under a 2.0% increase in interest
rates and under a decrease in interest rates equal to one-half the value of the
3-month Treasury rate. According to the most recent OTS measurements, Northeast
Savings' interest rate risk is within the normal range.
The Association's regulatory capital position at December 31, 1993 is
presented in Item 7: Management's Discussion and Analysis of the Results of
Operations and Financial Condition.
Prompt Corrective Action. Under the prompt corrective action provisions of
FDICIA, regulations were implemented on December 19, 1992 whereby all financial
institutions are placed in one of five capital categories: well-capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized. The federal banking agencies are required to take
certain supervisory actions against undercapitalized institutions. The severity
of such actions depends upon the degree of undercapitalization.
Undercapitalized thrifts will be required to submit a capital restoration plan
for OTS approval. This capital restoration plan may be approved by the OTS only
if the parent holding company of the undercapitalized institution guarantees
that the institution will comply with the plan and provides appropriate
assurances of performance. Aggregate liability for the holding company under
such guarantee is the lesser of five percent (5%) of the institution's assets
at the time it became undercapitalized or the amount necessary to bring the
institution into compliance with all capital standards applicable at the time
the institution fails to comply with the capital restoration plan. In addition,
undercapitalized institutions are subject to increased monitoring and
restrictions on capital distributions, asset growth and acquisitions,
branching, and new activities. Significantly undercapitalized institutions (or
undercapitalized institutions that fail to submit a capital plan) are subject
to a number of additional measures including restrictions on deposit interest
rates, forced sale of stock or merger, changes in management, forced
divestitures of affiliates or subsidiaries by the institution or its holding
company, and restrictions on compensation.
The relevant capital measures for the categories of well-capitalized,
adequately capitalized, undercapitalized, and significantly undercapitalized,
are defined to be the ratio of total capital to risk-weighted assets (i.e., the
OTS risk-based capital requirement), the ratio of core capital to risk-weighted
assets (i.e., the OTS Tier I risk-based capital requirement), and the ratio of
core capital to adjusted total assets (i.e., the OTS core or leverage capital
requirement). Under the rules, an institution will be deemed to be well
capitalized if the institution has a total risk-based capital ratio of 10% or
greater, a core capital to risk-weighted assets capital ratio of 6% or greater
and a ratio of core capital to adjusted total assets of 5% or greater and the
institution is not subject to any order, written agreement or prompt corrective
action directive. An institution
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<PAGE>
is deemed to be adequately capitalized if it has total risk-based capital of 8%
or greater, core capital to risk-weighted assets capital ratio of 4% or greater
and a ratio of core capital to total assets of 4% or greater (unless it has a
composite one MACRO rating). An institution is deemed to be undercapitalized if
it fails to meet any of the relevant capital measures to be considered
adequately capitalized, and significantly undercapitalized if it has a total
risk-based capital ratio of less than 6% or a core capital to risk-weighted
assets capital ratio of less than 3% or a leverage ratio of less than 3%. An
institution with a ratio of tangible equity to total assets of 2% or less is
deemed to be critically undercapitalized.
FDICIA and the prompt corrective action rule require, with very limited
exception, that an insured depository institution that is critically
undercapitalized be placed in conservatorship within 90 days unless the OTS and
the FDIC concur that other action would better achieve the purpose of the
regulation. Such determination to defer placing an institution in receivership
must be reissued every 90 days up to 270 days after the institution becomes
"undercapitalized" and must document the reasons the OTS and FDIC believe
action other than conservatorship would be more appropriate.
In addition to establishing a system of prompt corrective action based on the
capital level of an institution, the prompt corrective action rule also permits
the OTS to reclassify a well-capitalized institution as an adequately
capitalized institution or to require an adequately capitalized institution to
comply with supervisory provisions as if the institution were in the next lower
category based on supervisory information other than capital levels of the
institution. The rules provide that an institution may be reclassified if the
appropriate federal banking agency determines it is in an unsafe and unsound
condition or engages in an unsafe or unsound practice. An institution may be
deemed to be in an unsafe and unsound condition if (1) the institution receives
a less than satisfactory rating in its most recent examination report and (2)
the institution has not corrected the deficiency. The rule provides procedures
for notice and a hearing in connection with a reclassification based on
supervisory information about the institution.
Based on the Association's capital position at December 31, 1993, Northeast
Savings is an adequately capitalized institution and will not be subject to any
of the restrictions imposed by the prompt corrective action rule on
institutions that are less than adequately capitalized. However, should the
Association receive a less than satisfactory rating for asset quality,
earnings, liquidity, or management in a regulatory examination, the OTS could
impose restrictions upon Northeast Savings as if it were a less than adequately
capitalized institution until such time as the less than satisfactory rating is
corrected.
Limitation on Capital Distributions. The ability of the Company to pay
dividends for the foreseeable future is restricted by its receipt of dividends
from the Association and by regulatory and financial limitations on the
Association's payment of dividends. The prompt corrective action regulation
provides that a financial institution may not make a capital distribution if
the institution would be undercapitalized after making the capital
distribution. Also, the Company and the OTS entered into a Dividend Limitation
Agreement as a part of the holding company approval process which prohibited
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 differentiates among savings institutions primarily by their capital
levels. Associations which meet their fully phased-in capital requirements are
considered Tier 1 associations and require only normal OTS supervision. A Tier
1 association may make capital distributions during a calendar year up to the
higher of: (1) 100% of its net income to date during the calendar year plus the
amount that would reduce by one-half its surplus capital ratio of the beginning
of the calendar year; or (2) 75% of its net income over the most recent four-
quarter period. A Tier 1 association would not be permitted to make capital
distributions in excess of the foregoing limit without prior OTS approval.
Capital surplus is defined as the amount of capital over an association's fully
phased-in capital requirement. Tier 2 institutions meet current capital
requirements and are authorized to make some capital distributions without
prior permission. The amount of such capital distribution is limited to between
25% and 75% of current earnings, depending on how close the institution is to
meeting its fully phased-in capital requirement. Tier 3
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institutions do not meet their current capital requirements and are prohibited
from making any capital distributions without OTS permission except where such
distribution is consistent with an approved capital plan. The Association meets
its fully phased-in regulatory capital requirements and is a Tier 1
association. A savings association permitted to make a capital distribution
under the prompt corrective action regulations may do so if the amount and type
of distribution would be permitted under the Capital Distribution Regulation.
New Safety and Soundness Standards. FDICIA also requires the federal banking
agencies to prescribe by regulation certain safety and soundness standards for
insured depository institutions and depository institution holding companies.
Three types of standards must be prescribed: (1) operational and managerial;
(2) asset quality and earnings; and (3) compensation. On November 18, 1993, the
federal banking agencies published proposed safety and soundness standards to
implement this provision of FDICIA. The proposed operational and managerial
standards relate to: (1) internal controls, information systems, and internal
audit systems; (2) loan documentation; (3) credit underwriting; (4) interest
rate exposure; (5) asset growth; (6) compensation, fees, and benefits. In
addition, the proposed standards would establish a maximum ratio of classified
assets to total capital of 1.0. The federal banking agencies have also proposed
minimum earnings standards which require that an institution continue to meet
minimum capital standards assuming that any losses experienced over the past
four quarters were to continue over the next four quarters. Finally, each
federal banking agency is required to prescribe standards for the employment
contracts and other compensation of executive officers, employees, directors,
and principal stockholders of insured institutions that would prohibit
compensation and benefit arrangements that are excessive or that could lead to
material financial loss for the institution. If an insured depository
institution or its holding company fails to meet any of the standards described
above, it would be required to submit a plan describing the steps the
institution will take to correct the deficiency. If an institution fails to
submit or to implement an acceptable plan, the appropriate federal banking
agency may impose restrictions on the institution's holding company including
any of the restrictions applicable under the prompt corrective action provision
of FDICIA.
Liquidity Requirements. OTS regulations require savings associations to
maintain for each calendar month an average daily balance of liquid assets
(including cash and certain time deposits, bankers' acceptances, specified
corporate obligations and specified United States government, state, and
federal agency obligations) of not less than five percent of the average daily
balance of its net withdrawable deposit accounts (the amount of all deposit
accounts less the unpaid balance of all loans made on the security of such
accounts) and borrowings payable on demand or in one year or less. OTS
regulations also require each savings association to maintain for each calendar
month an average daily balance of short-term liquid assets (generally those
having maturities of twelve months or less) at an amount not less than one
percent of the average daily balance of its net withdrawable accounts plus such
short-term debt during the preceding calendar month. The OTS may impose
monetary penalties for failure to meet the liquidity requirement. The average
liquidity and average short-term liquidity ratios of Northeast Savings for the
year ended December 31, 1993, were 5.67% and 2.34%, respectively, which
exceeded the applicable requirements.
Interstate Branching Regulation. Under OTS regulations, federal savings
associations are authorized to branch interstate to the full extent permitted
by federal statute. An institution which makes application to branch interstate
would be required to meet or exceed applicable minimum capital standards,
demonstrate compliance with and commitment to the requirements of the Community
Reinvestment Act and to comply with the remaining statutory limitations on
branching.
Grandfathered Savings Bank Authority. Northeast Savings' predecessor, The
Schenectady Savings Bank was a New York state-chartered savings bank with
investment powers conferred by New York law. The Garn-St Germain Depository
Institutions Act of 1982 and the implementing regulations empower savings and
loan associations such as Northeast Savings to exercise all the powers that the
predecessor state-chartered savings bank possessed under state law, whether or
not such powers had been exercised. These powers are in addition to the powers
the Association possesses as a federally-chartered savings and loan
association.
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These powers allow Northeast Savings to pursue diversified acquisition
opportunities and provide the Association with flexibility in structuring its
investment portfolio. These powers are, however, subject to limitation by both
the OTS and the FDIC. Pursuant to authority granted to it by FIRREA, the FDIC
may determine, by regulation or by order, that an association may not engage in
any specific activity that poses a serious risk to the SAIF.
Qualified Thrift Lender. The Qualified Thrift Lender (QTL) test generally
requires savings associations to concentrate a significant majority of their
assets in housing-related investments. Under the QTL test, qualified thrift
investments must equal 65% of portfolio assets on a monthly basis; a qualified
thrift lender must meet the 65% test in nine out of every twelve months.
Portfolio assets are defined as total assets minus supervisory goodwill and
other intangible assets, premises and equipment, and certain liquid assets up
to 20% of assets. The Association is in compliance with the QTL test. As of
December 31, 1993, 92.3% of the Association's portfolio assets under the OTS
QTL definition consisted of qualified thrift assets.
An institution that fails the QTL test is subject to severe restrictions on
its activities and a holding company of such an institution would also be
subject to restrictions on its activities. Penalties for failure to meet the
QTL test may result in: (1) required conversion of the savings association's
charter to a bank charter; (2) limitation on new investments and activities to
those permissible for national banks; (3) branching restrictions similar to
those imposed on national banks; (4) prohibitions on obtaining new advances
from the savings association's Federal Home Loan Bank; and (5) dividend
restrictions. Non QTL institutions may obtain FHLB advances only to fund
housing finance and only if they meet certain minimum FHLB stock purchase
requirements. Federal Home Loan Banks may not allocate more than 30% of
advances to non QTL institutions and must allocate scarce credit to QTL
institutions first.
Classification of Assets. Insured institutions are required to classify their
own assets on a regular basis and establish prudent valuation allowances in
accordance with generally accepted accounting principles (GAAP). The
classification of assets system provides that certain assets which pose credit
deficiencies or potential or well defined weaknesses be classified as assets
deserving Special Mention, Substandard, Doubtful, or Loss. Please refer to the
earlier section, "Allowance for Loan Losses," for a description of these
classifications. As part of its regulatory oversight, the OTS requires each
savings institution to reflect its self-classification of assets in aggregate
totals in its quarterly reports to the OTS. In addition, the asset
classification regulation requires OTS examiners to consider the institution's
system of internal controls employed in classifying its assets, and to examine
both the assets classified and the allowances for loan losses established by
the institution pursuant to the self-classification procedure. The OTS has the
authority to approve, disapprove, or modify any asset classification and any
amounts established as allowances for loan losses.
Allowance for Loan and Lease Losses. On December 21, 1993, the OCC, the FDIC,
the Federal Reserve Board and the OTS (the agencies) issued an interagency
policy statement on the allowance for loan and lease losses (ALLL). The policy
statement provides guidance for financial institutions on the responsibilities
of management for the assessment and establishment of adequate allowances for
loan and lease losses and also provides guidance for the banking agencies'
examiners to use in determining the adequacy of general valuation allowances.
Generally, the policy statement requires that institutions have effective
systems and controls to identify, monitor and address asset quality problems;
have analyzed all significant factors that affect the collectibility of the
portfolio in a reasonable manner; and have established acceptable allowance
evaluation processes that meet the objectives set forth in the policy
statement.
Loans-to-One Borrower Limitation. With certain limited exceptions, the
statutory provision limiting the ability of national banks to make loans to a
single borrower is applicable to savings associations in the same manner and to
the same extent as it applies to national banks. A savings association may make
loans to one borrower equal to 15% of the savings association's unimpaired
capital and unimpaired surplus, plus an additional 10% of capital for loans
secured by readily marketable collateral. Real estate is not considered readily
marketable collateral. The OTS may impose more stringent requirements on a
savings association to
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protect its safety and soundness. At December 31, 1993, the maximum amount that
Northeast Savings could loan to one borrower and the borrower's related
entities was $29.7 million. At December 31, 1993, the largest aggregate amount
of loans that Northeast Savings had committed and/or outstanding to one
borrower and its related entities was $6.6 million. Hence, Northeast Savings is
in compliance with this limitation.
Loan-to-Value Requirements. On December 31, 1992, the federal banking
agencies, including the OTS, issued final rules establishing loan-to-value
(LTV) ratio limits on real estate lending by insured depository institutions.
As mandated by FDICIA, these rules became effective March 19, 1993. Real estate
loans originated after that date which are in excess of the supervisory LTV
limits for the particular loan type must be identified in the institution's
records and their aggregate amount must be reported to the Board of Directors
at least quarterly. In addition, the aggregate amount of loans in excess of the
supervisory LTV limits may not exceed 100% of total capital. Within the
aggregate limit, total loans for commercial multifamily or other non one-to-
four family residential properties may not exceed 30% of total capital. The
rule excludes from the supervisory LTV limits permanent mortgages on owner-
occupied one-to-four family residential properties provided that residential
mortgage loans originated with an LTV in excess of 90% have mortgage insurance
coverage for the amount of the loan in excess of 80% LTV ratio. The rule also
excludes from the LTV limits loans guaranteed by the federal government or a
state government, loans to facilitate the sale of real estate owned, and loans
that are refinanced without an advancement of new funds. The Association has
reviewed its lending policies and practices for uniformity with the new LTV
limits. The impact of the real estate lending standards on the Association has
been minimal.
Real Estate Appraisal Regulations. The OTS and other federal banking
agencies adopted regulations in 1990 to implement Title XI of FIRREA. These
regulations are applicable to all federally related transactions defined as any
real estate related transaction entered into by a federally regulated
institution which requires an appraiser. The regulations identify which real
estate related transactions require an appraiser, set forth minimum standards
for performing appraisals, and distinguishes those transactions requiring the
services of a state-certified appraiser from those requiring the services of a
state-licensed appraiser. Certain real estate-related transactions are exempt
from the requirements of the regulations including real estate-related
financial transactions that do not require an appraisal including loans of
$100,000 or less. Consistent with the regulation, however, those transactions
that do not receive an appraisal must receive an evaluation of the real estate
collateral that reflects present lending practices and OTS policies and
guidelines. Like appraisals, evaluations are used to validate real estate
values and to determine an appropriate carrying value and probable sales price
for foreclosed properties.
An appraisal contains certain formal elements recognized by industry
practices and must conform to generally accepted appraisal practices endorsed
by the Uniform Standards of Professional Appraisal Practice, developed by the
Appraisal Standards Board of the Appraisal Foundation. An appraisal estimates a
property's value under three approaches (the cost, income, and comparable sales
approaches) and reconciles the values of every approach. An appraisal typically
contains a description of the property, a disclosure of sales history, and an
opinion as to the highest and best use of the property. The appraiser certifies
the appraisal as to content, independence, property inspection, compensation,
and opinions. An evaluation, by contrast, need not meet all of the detailed
requirements of an appraisal. File documentation, however, should support the
estimate of value and include sufficient information for an individual to
understand the evaluation conclusion.
Management, including the Board of Directors, is responsible for developing
written appraisal policies to ensure that adequate appraisals and evaluations
are obtained consistent with OTS regulation and to institute procedures
pertaining to the hiring of qualified appraisers. At a minimum, such policies
should: (1) incorporate prudent standards and procedures for obtaining initial
and subsequent appraisals and evaluations; (2) be appropriate to the size of
the institution and nature of its real estate related activities; (3) establish
a method to monitor the value of real estate collateral securing an
institution's real estate loans; and (4) establish the manner in which an
institution selects, monitors, and renews annually individuals who perform or
review real estate appraisals or evaluations. The Association's appraisal
policy has been prepared
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in accordance with the OTS appraisal regulations and imposes more stringent
requirements for appraisals than are included in the regulation.
Growth Restrictions. The liability growth regulation, which was promulgated
prior to FIRREA but remains in effect until amended or rescinded by the OTS,
requires a savings institution, unless exempted by the regulation, to obtain
the prior approval of its District Director to increase its total liabilities
within any two-quarter period at a rate greater than 12.5%. A savings
institution is exempted from the foregoing requirement (as defined prior to
FIRREA) if it has regulatory capital equal to the greater of (1) its fully
phased-in capital requirement or (2) 6% of total liabilities. If exempted from
the prior approval requirement, an institution is required to notify its
District Director of its intention to grow in excess of 12.5% within any two-
quarter period. In addition, under OTS Regulatory Bulletin 3a-1, "Policy
Statement on Growth for Savings Associations," the District Director has the
authority to impose restrictions on asset growth for associations which have
received a rating of 4 or 5 under the OTS MACRO system or which fail to meet
any one of their minimum regulatory capital requirements. Such associations may
not increase their total assets during any quarter in excess of an amount equal
to net interest credited or deposits during the quarter. On a case-by-case
basis, where appropriate, District Directors retain the authority to impose
more stringent growth restrictions on associations that are required to submit
a capital plan or that are otherwise of supervisory concern. 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, 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.
Brokered Deposits. Brokered deposits include any funds that are obtained
directly or indirectly, by or through any deposit broker for deposit into one
or more deposit accounts. FDICIA imposes certain restrictions on the acceptance
of brokered deposits by savings associations. The FDIC has issued regulations
implementing these restrictions. Under those regulations, "well-capitalized"
institutions may accept brokered deposits without restriction, "adequately
capitalized" institutions may accept brokered deposits with a waiver from the
FDIC, while "undercapitalized" institutions may not accept any brokered
deposits. These capital categories are defined earlier under "Prompt Corrective
Action." Even with the waiver, however, an adequately capitalized institution
is prohibited from paying above market rates on any deposits. These regulations
became effective June 16, 1992. Under the regulations, Northeast Savings is
considered an adequately capitalized institution and has applied for and
received a waiver from the FDIC. In accordance with the waiver, the Association
may accept up to $300.0 million in brokered deposits.
Other Restrictions. Other restrictions under FIRREA limit the permissible
amount of income property loans that a federal association may make to 400% of
an association's capital. Under FIRREA, federal regulations also limit the
amount of commercial, corporate, or business loans a federal savings
association may make to 10% of assets. Effective upon its enactment, the FDICIA
increased the overall percentage of assets limit for consumer loans and high
grade corporate debt from 30% to 35%.
Annual Independent Audits and Reporting Requirements. On June 2, 1993, the
FDIC published final regulations and related guidelines implementing the
management reporting, audit committee, and independent audit requirements of
Section 112 of FDICIA. Under the final regulations and guidelines, all insured
depository institutions with total assets at or above $500 million at the
beginning of the fiscal year after December 31, 1992 must file an annual report
with the FDIC, and the OTS as in the case of a federally chartered savings
association such as Northeast Savings. The annual report would include
financial statements prepared in accordance with generally accepted accounting
principles that are audited by the institution's independent accountant. The
report would also include a statement of management's responsibilities for
establishing and maintaining an adequate internal control structure and
procedures for financial reporting and for complying with laws and regulations
relating to safety and soundness, including capital distribution restrictions
and loans to insiders.
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In addition, insured depository institutions with total assets at or above
$500 million are required to establish an independent audit committee comprised
of outside directors. Further, at least two audit committee members of
institutions with total assets at or above $3 billion must have banking or
related financial management expertise, and its audit committee must have
access to outside counsel. The Association has surveyed the members of the
audit committee and determined that all members are qualified under the rule.
Community Reinvestment Act. The CRA is intended to encourage financial
institutions to help meet the credit needs of their entire communities,
including low and moderate income areas, consistent with safe and sound
operations.
CRA regulations provide for three disclosure obligations. First, each
institution must prepare and make available a CRA Statement for each of its
local communities that includes a delineation of the community served and a
list of specified types of credit offered to the community. Second, each
lending institution must maintain a public comment file for public inspection
that includes written comments from the public on its CRA Statement or its
performance in meeting community credit needs. Third, public disclosure of
written CRA evaluations of financial institutions made by regulatory agencies
is required under the CRA to promote enforcement of CRA requirements by
providing the public with the status of a particular institution's community
reinvestment record. The regulatory agencies are required to include, in the
written evaluation, an institution's record of meeting the credit needs of its
local community including low and moderate income neighborhoods. Each written
evaluation required under CRA is required to have a public and confidential
section addressing the association's CRA performance. In connection with the
CRA examination, the federal banking agencies are required to assess each
institution's record of helping to meet the credit needs of its entire
community. The Association received a satisfactory rating in its written
evaluation as a result of its last CRA examination performed in September 1992.
Evaluations under the Community Reinvestment Act are taken into account in
determining whether to grant branch and merger applications as well as other
regulatory applications.
Transactions with Related Parties. The Association's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls, is controlled by, or is under common control with the Association,
including the Company and its non-savings institution subsidiaries), or to make
loans to certain insiders, is limited by Sections 23A and 23B of the Federal
Reserve Act (FRA). Section 23A limits the aggregate amount of transactions with
any individual affiliate to 10% of the capital and surplus of the savings
institution and also limits the aggregate amount of transactions with all
affiliates to 20% of the savings institution's capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in the FRA and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B provides that
certain transactions with affiliates, including loans and asset purchases, must
be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with nonaffiliated
individuals or entities. In the absence of comparable transactions, such
transactions may only occur under terms and circumstances, including credit
standards, that in good faith would be offered to or would apply to individuals
or entities. Notwithstanding Sections 23A and 23B, savings institutions are
prohibited from lending to any affiliate that is engaged in activities that are
not permissible for bank holding companies under Section 4(c) of the Bank
Holding Company Act. Further, no savings institution may invest in the
securities of any affiliate other than a subsidiary.
In addition, Sections 22(g) and 22(h) of the FRA, which relate to limits on
loans and extensions of credit to executive officers, directors, and 10%
shareholders, as well as companies which such persons control, apply to savings
institutions. Among other things, such loans must be made on terms, including
interest rates, substantially the same as loans to unaffiliated individuals or
entities. Effective November 5, 1992, the OTS amended its regulations governing
extensions of credit to executive officers, directors, and principal
shareholders and to the related interests of such persons. OTS regulations
implementing the provisions of
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22(g) and 22(h) of the FRA which govern extensions of credit to insiders,
incorporate by means of crossreference the provisions of Federal Reserve
Regulation O.
Savings and Loan Holding Company Regulations. As a result of the
reorganization into a holding company form of organization, the Company is
subject to applicable OTS regulations regarding the activities of the savings
and loan holding company and the savings institution. Northeast Federal Corp.
is prohibited, either directly or indirectly, from acquiring control of any
savings association or savings and loan holding company without prior OTS
approval and from acquiring more than 5% of any voting stock of any savings
association or savings and loan holding company which is not a subsidiary of
Northeast Federal Corp. In addition, under the terms of the OTS approval of the
Company's application to reorganize to form a holding company, the Company may
not at any time, absent prior written approval by the Regional Director, engage
in any activity other than activities incident to holding the stock of the
Association.
Federal Reserve System Requirements. The Federal Reserve Board requires
savings institutions to maintain non-interest-earning reserves against certain
of their transaction accounts. The regulations generally require a reserve of
3% against total transaction accounts up to $51.9 million and a reserve of 10%
(subject to adjustment by the Federal Reserve Board to an amount between 8% and
14%) against transaction accounts in excess of $51.9 million. The first $4.0
million of otherwise reservable balances are exempt from the reserve
requirement. As of December 31, 1993, Northeast Savings was in compliance with
all reserve requirements of the Federal Reserve Board. The balances used to
meet these reserve requirements imposed by the Federal Reserve Board may also
be used to satisfy the Association's liquidity requirements discussed above.
As a creditor and a financial institution, Northeast Savings is subject to
various regulations promulgated by the Federal Reserve Board, including, but
not limited to Regulation B (Equal Credit Opportunity); Regulation D (Reserve
Requirements); Regulation E (Electronic Funds Transfers); Regulation Z (Truth-
in-Lending); and Regulation CC (Availability of Funds); and Regulation DD
(Truth-In-Savings). Additionally, as creditors of loans secured by real
property, and as owners of real property, financial institutions, including
Northeast Savings, may be subject to potential liability under various statutes
and regulations applicable to property owners, generally including statutes and
regulations relating to the environmental condition of a property.
Interbank Liabilities. Effective December 19, 1992, the Federal Reserve Board
prescribed standards to limit the risk posed by an insured depository
institution's exposure to a correspondent institution. All insured institutions
were required to have policies in place by June 19, 1993 which set limits on
credit and liquidity risks in dealing with other depository institutions. The
rule includes a regulatory limit for exposure to correspondents that are less
than adequately capitalized.
ENFORCEMENT
The OTS, as primary regulator of savings associations, has primary
responsibility for enforcement actions concerning savings associations and
their affiliates, but the FDIC also has authority to impose enforcement actions
independently after following certain procedures. The sanctions which may be
imposed include cease and desist orders, civil monetary penalties, and also
removal and prohibition orders against an institution's affiliated persons.
FIRREA confers on the OTS oversight authority for all holding company
affiliates, not just savings associations. Among other restrictions, the OTS
may impose: (1) limitations on the payment of dividends by savings associations
and (2) limitations on transactions between a savings association and its
holding company and subsidiaries or affiliates of either. Such limitations
would be issued in the form of a directive having the effect of a cease and
desist order. FIRREA utilizes a three tier system for the imposition of civil
money penalties. For a violation of law, regulation, written condition, or any
final or temporary order, a penalty of $5,000 per day may be assessed for each
violation. A maximum penalty of $25,000 per day may be assessed for an activity
which evidences reckless disregard for the safety or soundness of the
depository institution's fiduciary duty or is part of a pattern of misconduct;
or the activity is likely to
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cause more than a minimal loss to the depository institution. A maximum penalty
of $1,000,000 per violation for each day of violation may be assessed for
knowingly and recklessly causing substantial loss to an institution or for
taking actions that result in a substantial pecuniary gain to an institution-
affiliated person including, in some cases, its attorneys and independent
accountants. In addition, the prompt corrective action rules prescribe a number
of restrictions on depository institutions and individuals. If an institution
fails to meet applicable capital standards or to meet a measure for safety and
soundness, federal regulators could require, among other things, (1) the filing
of a capital plan; (2) the filing of the plan to correct any safety and
soundness violation; (3) restrictions on interest rates; (4) restrictions on
growth; (5) forced sale or merger or divestiture of the institution; (6)
dismissal of directors and executive officers.
Under the FDI Act, the FDIC has the authority to recommend to the Director of
the OTS that enforcement actions be taken with respect to a particular savings
institution. If action is not taken by the Director, the FDIC has authority to
take action under certain circumstances.
TAXATION
For tax purposes, Northeast Federal Corp. files a consolidated tax return
with its subsidiaries on a calendar year-end basis. Northeast Savings, F.A., a
subsidiary of Northeast Federal Corp., conducts its business primarily in
Connecticut, New York, Massachusetts, California, and Rhode Island and,
accordingly, is subject to taxation in those jurisdictions. Taxes paid to such
jurisdictions are deductible in determining federal taxable income. Northeast
Savings has been audited by the Internal Revenue Service with respect to tax
returns through 1979.
Savings and loan associations are generally subject to federal income
taxation in the same manner as regular corporations. However, under applicable
provisions of the Internal Revenue Code, savings and loan associations that
meet certain definitional and other tests are generally permitted to claim a
deduction for additions to their bad debt reserves computed as a percentage of
taxable income before such deduction. Alternatively, a qualifying association
may elect to utilize its own bad debt loss experience to compute its additions
to its bad debt reserves.
At December 31, 1993, Northeast Savings' tax bad debt reserve totaled
approximately $2.0 million. 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 one and three-quarters times the amount actually distributed to
the stockholders will be includable in the consolidated taxable income of
Northeast Federal Corp. and be subject to tax. However, such taxable income
could be reduced by any net operating loss carryforwards available to Northeast
Federal Corp.
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. had current earnings and profits. Any dividends paid with respect to
Northeast Savings' stock in excess of current or accumulated earnings and
profits at year-end for federal tax purposes or any other stockholder
distribution will be treated as made out of the tax bad debt reserves and will
increase taxable income as noted in the preceding paragraph.
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes." See "Results of Operations" in Item 7: Management's Discussion and
Analysis of Results of Operations and Financial Condition for a discussion of
the impact of SFAS 109 on the Company.
ITEM 2. PROPERTIES
Northeast Federal Corp.'s corporate headquarters are located at 50 State
House Square, Hartford, Connecticut 06103. Northeast Savings operates twelve
branch banking offices in the Hartford-Springfield market, seventeen in the
Albany-Schenectady and Pittsfield areas, nine in the Boston-Worcester markets,
one on Cape Cod, four in the San Diego area, and six in the Providence area.
Northeast Savings also operates
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separate residential mortgage loan origination offices in Connecticut and
through the Association's subsidiary, NEMAC, INC., in Colorado.
All of Northeast Savings' facilities are leased except for twelve branch
offices and an office building in Farmington, Connecticut. The aggregate net
book value of office buildings and leasehold improvements at December 31, 1993
was $22.1 million.
Northeast Savings' office locations by state are as follows:
Retail branch banking offices:
Connecticut:
782 Park Avenue Bloomfield
940 Silver Lane East Hartford
1105 New Britain Avenue Elmwood
50 State House Square Hartford (Home Office)
1147 Tolland Turnpike Manchester
530 Bushy Hill Road Simsbury
29 South Main Street West Hartford
38 Wells Road Wethersfield
New York:
900 Central Avenue Albany
Amsterdam Mall Amsterdam
15 Park Avenue Clifton Park
98 Wolf Road Colonie
579 Troy-Schenectady Road Colonie
501 Columbia Turnpike East Greenbush
Route 9W Glenmont
14 La Rose Street Glens Falls
200 Saratoga Road Glenville
475 Albany Shaker Road Loudonville
211 Park Avenue Mechanicville
420 Balltown Road Niskayuna
189 Ballston Avenue Saratoga Springs
500 State Street Schenectady
2525 Broadway Schenectady
13 Maple Road Voorheesville
Massachusetts:
56 Auburn Street Auburn
50 Franklin Street Boston
160 Reservoir Street Holden
31 Austin Street Newtonville
609 Merrill Road Pittsfield
101 Memorial Parkway Randolph
110 Boston Turnpike Shrewsbury
1029 Route 28 South Yarmouth
1724 Boston Road Springfield
1243 Main Street Springfield
560 Sumner Avenue Springfield
87-95 Sharon Street Stoughton
75 Main Street Watertown
453 East Main Street Westfield
22 Elm Street Worcester
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California:
2570-B El Camino Real Carlsbad
353 Felicita Road Escondido
4250 Executive Square La Jolla
9025 Mira Mesa Boulevard Mira Mesa
Rhode Island:
1047 Park Avenue Cranston
383 Atwood Avenue Cranston
999 South Broadway East Providence
1926 Smith Street North Providence
3 Crescent View Avenue Riverside
1062 Centreville Road Warwick
Mortgage origination offices:
Connecticut:
1111 East Putnam Avenue Greenwich
Colorado (through a
subsidiary of the
Association, NEMAC, INC.):
101 University Boulevard
Denver
ITEM 3. LEGAL PROCEEDINGS
On December 6, 1989, Northeast Savings 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 FHLBB. It was the position
of the Association in the litigation that the denial by the OTS and the FDIC of
core capital treatment of the adjustable rate preferred stock and the
elimination from capital, subject to limited inclusion during a phaseout
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 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 Savings
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 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 greatly 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
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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.
In connection with the formation of Northeast Federal Corp. as the holding
company of the Association, the Association sought the consent of the FDIC to
exchange the Adjustable Rate Preferred Stock, Series A, of the Association,
then owned by the FDIC as administrator of the FSLIC Resolution Fund, for
Adjustable Rate Preferred Stock, Series A of Northeast Federal Corp. As a
condition to its consent of the exchange of the adjustable rate preferred
stock, the FDIC required Northeast Savings to agree not to seek monetary
damages or any other form of monetary relief from the FDIC arising out of or
relating to the claims asserted in the complaint for declaratory judgment and
injunctive relief filed against the FDIC and the OTS and to moot certain issues
related to the adjustable rate preferred stock. The release of the FDIC,
however, does not restrict Northeast Savings' ability to pursue its claim for
injunctive relief in the action or to seek any other equitable remedy in
connection with the claims asserted in the litigation, provided that such
remedy would not involve the payment of money by the FDIC. Further, the
execution of the release did not alter or otherwise affect the positions that
the parties to the litigation have taken or may take. Issues related to the
adjustable rate preferred stock issued by Northeast Savings to the FSLIC
Resolution Fund are mooted, as provided in a Mootness Agreement executed
concurrently with the release. The release is exclusive to the FDIC and is not
extended to any other governmental agency, including but not limited to the
OTS. The execution of the release does not prejudice any new claims that may
arise with respect to the FDIC or the OTS regarding the capital treatment of
Northeast Savings' equity. Finally, the release is null and void in the event
that the OTS refuses to permit Northeast Federal Corp.'s Adjustable Rate
Preferred Stock, Series A, to be treated as core capital by Northeast Savings.
As discussed previously, in conjunction with the acquisition of four Rhode
Island financial institutions, on May 8, 1992, the Company repurchased all of
the adjustable rate preferred stock from the FSLIC Resolution Fund,
administered by the FDIC. Nothing in the agreement to repurchase the adjustable
rate preferred stock alters, impairs, or otherwise affects the validity or
enforceability of the Mootness Agreement or the Release and the parties have
agreed that the Mootness Agreement and the Release remain in full force and
effect.
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 financial position or operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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SUPPLEMENTARY ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
At December 31, 1993, the following persons were executive officers of the
Company as defined by Rule 405 of Regulation C of the Securities and Exchange
Commission. Effective January 1, 1994, Kirk W. Walters assumed the positions of
Chief Executive Officer of the Company and the Association from George P.
Rutland.
GEORGE P. RUTLAND, Director, Chairman of the Board and Chief Executive
Officer
KIRK W. WALTERS, Director, President, Chief Operating Officer, and Chief
Financial Officer
LYNNE M. CARCIA, Senior Vice President, Controller and Principal
Accounting Officer of the Company and the Association
JOANN DOLAN, Executive Vice President--Loan Administration and Operations
of the Association
TAMI W. KASCHULUK, Executive Vice President and Chief Appraiser of the
Association
DANIEL J. STEINMETZ, Executive Vice President--Commercial Lending of the
Association
VICTOR VRIGIAN, Executive Vice President--Marketing and Retail Banking of
the Association
The following information concerns the executive officers of the Company:
GEORGE P. RUTLAND (age 61), was elected to the positions of Chairman of
the Board, President, and Chief Executive Officer of the Company in April
1990 in connection with the holding company reorganization. He joined
Northeast Savings as Chairman, President, and Chief Executive Officer in
July 1988. He held the positions of President of both Northeast Federal
Corp. and Northeast Savings until Mr. Walters was elected to those
positions in September 1991. He held the position of Chief Executive
Officer until Mr. Walters was elected to that position in November 1993,
effective January 1, 1994. Mr. Rutland was President and Chief Executive
Officer of Calfed, Inc. in California from 1985 to May 1988. Prior to that,
he had served as President and Chief Operating Officer at Calfed, and
before that as Executive Vice President. He joined Calfed, Inc. in 1982
from Crocker Bank, where he had served as Senior Executive Vice President.
He entered the financial services industry in 1954 at Citibank, where he
held a variety of positions, including Executive Vice President of their
Advance Mortgage Company and Senior Vice President of Corporate Services.
KIRK W. WALTERS (age 38), was elected Chief Executive Officer in November
1993, effective January 1, 1994 and President and Chief Operating Officer
of the Company in September 1991. In connection with the holding company
reorganization in April 1990, he was elected Senior Executive Vice
President and Chief Financial Officer of the Company. He joined Northeast
Savings in April 1989 as Executive Vice President and Controller. He was
elected Senior Executive Vice President and Chief Financial Officer of
Northeast Savings in September 1989, and was elected to the position of
President and Chief Operating Officer of Northeast Savings in September
1991 and Chief Executive Officer of Northeast Savings in November 1993,
effective January 1, 1994. He joined Northeast Savings from California
Federal Bank, a subsidiary of Calfed, Inc., where he was Senior Vice
President and Controller. Prior to that, he worked for Atlantic Richfield
Company (ARCO) and prior to that, he served on the audit staff of Coopers &
Lybrand. He was elected to the Board of Directors in 1990.
LYNNE M. CARCIA (age 31), was elected Senior Vice President, Controller
and Principal Accounting Officer of the Company and the Association in
April 1993. She was formerly Senior Vice President and Controller and Vice
President--Loan Accounting, of the Association. She joined the Association
in 1989. Previously, she was an audit manager with Ernst & Young.
JOANN DOLAN (age 42) was elected Executive Vice President--Loan
Administration and Operations of the Association in May 1993. She joined
the Association in 1987 as Vice President of Planning Administration and
was elected to the position of Senior Vice President of Consumer Lending in
October of 1989. She was elected to the position of Executive Vice
President, Consumer Lending and Loan Administration in March of 1990.
54
<PAGE>
TAMI W. KASCHULUK (age 36) was elected Executive Vice President & Chief
Appraiser for the Association in December 1992. Formerly, she was Senior
Vice President and Chief Appraiser of the Association. Prior to joining the
Association in April 1989, she was manager of the Appraisal Division at
Cushman and Wakefield.
DANIEL J. STEINMETZ (age 41) was elected Executive Vice President--
Commercial Lending of the Association in December 1993. He formerly served
as Senior Vice President of Commercial Lending. He joined the Association
in November 1988. Prior to that time, he was Vice President and Regional
Manager at Bank of Boston, Connecticut.
VICTOR VRIGIAN (age 37) was elected Executive Vice President--Marketing
and Retail Banking of the Association in April 1993. He served as Vice
President of Deposit Products from February of 1987 through June of 1990,
at which time he was elected Senior Vice President of Marketing.
55
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Northeast Federal Corp.'s common stock is traded on the New York Stock
Exchange under the symbol NSB. Information concerning the prices paid per
common share of Northeast Federal Corp.'s common stock appears in Note 25 of
the Notes to the Consolidated Financial Statements. On February 4, 1994,
13,507,945 shares of Northeast Federal Corp.'s common stock were issued and
outstanding and held by approximately 5,100 holders of record. See item 6:
Selected Financial Data for market prices of the Company's common stock.
In June 1987, Northeast Savings declared a quarterly dividend of $.15 per
common share, its first dividend since becoming a stock association in
September 1983. During fiscal 1988, Northeast Savings declared four cash
dividends of $.15 per share. In fiscal 1989, Northeast Savings declared two
cash dividends of $.15 per share and two 2% stock dividends. In fiscal 1990,
Northeast Savings declared two 2% stock dividends. The last dividend was
payable November 16, 1989. No further common stock dividends have been
declared. The Board of Directors considers the declaration of dividends
quarterly, based on the financial condition and capital position of the
Company, its results of operations, current economic conditions and industry
standards, tax considerations and other factors, including the restrictions
regarding dividends as discussed in Item 7: Management's Discussion and
Analysis of Results of Operations and Financial Condition and in Notes 13 and
15 of the Notes to Consolidated Financial Statements, as well as in the
Regulatory Capital and Other Requirements section of Item 1: Business.
Northeast Savings declared and paid dividends on its $2.25 Cumulative
Convertible Preferred Stock, Series A and its Adjustable Rate Preferred Stock,
Series A, from the date of issuance through January 1, 1990. However, in
February 1990, believing that it was both necessary and appropriate to conserve
the capital of the Association, the Board of Directors suspended the quarterly
cash dividend on both issues of the Company's then-outstanding preferred stock.
Several factors contributed to this decision. Under the dividend limitation
agreement discussed in the Regulations section of Item 1: Business, Northeast
Savings is prohibited from paying dividends to the holding company, Northeast
Federal Corp., without prior written OTS approval if the capital of Northeast
Savings is below its fully phased-in capital requirement or if the payment of
such dividend would cause its capital to fall below its fully phased-in capital
requirement. In addition, FDICIA and the prompt corrective action rules provide
that, as a general rule, a financial institution may not make a capital
distribution if it would be undercapitalized after making the capital
distribution. The prompt corrective action rule also imposes a minimum 4% core
capital requirement on all depository institutions that are not rated in the
highest category of the ranking system adopted for internal use by the
respective federal banking agencies. The Association is not rated in the
highest category of the ranking system. Although the Association meets its
fully phased-in capital requirements, the increase in the required level of
core capital requires Northeast Savings to maintain a higher level of capital
than was previously mandated.
On May 8, 1992, in conjunction with the Association's acquisition of certain
assets of four Rhode Island financial institutions and the issuance of deposits
in the Association to depositors in those institutions, the Company repurchased
from the FSLIC Resolution Fund administered by the FDIC the Adjustable Rate
Preferred Stock, Series A, plus accumulated dividends, for $28.0 million in
cash and $7.0 million of 9% Debentures for a total fair value of $32.5 million.
The 9% Debentures had a fair value of $4.5 million which was based on the value
attributable to those debentures by the FRF, as determined by its investment
banker. Also in conjunction with the aforementioned Rhode Island acquisition,
the Company issued and sold for $35.17 million 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, plus warrants to
purchase an aggregate of 800,000 shares of the Company's common stock.
Accordingly, the Certificate of Incorporation of the Company was amended by
adding a new Certificate of Designation for the Series B preferred stock (the
Certificate of Designation). The Certificate of Designation authorizes the
issuance of a total of 540,000 shares of the Series B preferred stock.
56
<PAGE>
On May 7, 1993, at a Special Meeting of Stockholders, the Company
stockholders approved a reclassification of the Company's convertible preferred
stock into common stock at the ratio of 4.75 shares of common stock for each
share of convertible preferred stock. Effective May 14, 1993, the 1,610,000
outstanding shares of convertible preferred stock were converted into an
aggregate of 7,647,500 shares of common stock. At such time, in the aggregate,
$12.2 million of accumulated and unpaid dividends on the convertible preferred
stock were eliminated.
On May 21, 1993, the Company's Board of Directors voted to declare a stock
dividend payable on July 1, 1993 on the Company's $8.50 Cumulative Preferred
Stock, Series B 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 an additional
34,296 shares of Series B preferred stock. On September 24, 1993, the Company's
Board of Directors voted to declare a stock dividend payable on October 1, 1993
on the Company's $8.50 Cumulative Preferred Stock, Series B of one share of
Series B preferred stock for each $100 of the amount of dividends payable on
October 1, 1993 and accumulated and unpaid as of that date, to holders of
record on September 24, 1993. On October 1, 1993, the Company paid the $820,000
of dividends then 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 of one share of Series B preferred
stock for each $100 of the amount of dividends payable 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.
57
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31, FOR THE YEARS ENDED MARCH 31,
------------ ------------ -----------------------------------
1993 1992 1992 1991 1990
------------ ------------ ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS (1))
<S> <C> <C> <C> <C> <C>
Interest income......... $ 220,376 $ 196,345 $ 326,946 $ 449,077 $ 608,662
Interest expense........ 147,968 132,910 244,145 364,882 530,105
Net interest income..... 72,408 63,435 82,801 84,195 78,557
Provision for loan
losses................. 23,300 16,300 10,200 8,900 6,672
Gain (loss) on sale of
securities, net........ 5,625 4,100 1,991 (2,728) (13,446)
Gain on sale of loans,
net.................... 1,939 1,870 2,532 4,999 17,211
General and
administrative
expenses............... 67,159 50,055 61,510 65,763 67,742
Supervisory goodwill
amortization and
valuation adjustments.. -- 58,570 3,971 5,294 120,972
SAIF insurance and OTS
assessments............ 8,414 6,222 8,130 8,464 8,607
Expenses for real estate
and other assets
acquired in settlement
of loans............... 17,606 9,652 5,702 1,491 676
Income (loss) before
extraordinary items.... (14,139) (59,234) 4,490 7,149 (107,227)
Extraordinary items, net
of income taxes........ -- -- 95 4,579 91
Cumulative effect of
change in accounting
principle.............. -- -- 1,022 -- --
Net income (loss)....... (14,139) (59,234) 5,607 11,728 (107,136)
Preferred stock dividend
requirements........... 4,501 4,652 8,506 8,765 8,682
Loss per common share
before extraordinary
items:
Primary................ (1.75) (11.16) (.70) (.28) (20.28)
Fully diluted.......... * * * * *
Income (loss) per common
share before cumulative
effect of change in
accounting principle:
Primary................ (1.75) (11.16) (.69) .52 (20.27)
Fully diluted.......... * * * * *
Net income (loss) per
common share:
Primary................ (1.75) (11.16) (.51) .52 (20.27)
Fully diluted.......... * * * * *
Weighted average yield
on interest-earning
assets................. 5.88% 7.16% 8.69% 9.58% 9.90%
Weighted average yield
on interest-bearing
liabilities............ 3.91% 4.78% 6.48% 7.79% 8.59%
Net interest rate
spread................. 1.97% 2.38% 2.21% 1.79% 1.31%
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------- -----------------------------------
1993 1992 1992 1991 1990
------------ ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total assets............ $3,920,027 $3,910,104 $3,821,342 $4,546,223 $4,974,259
Investments............. 288,976 275,120 511,361 318,390 466,273
Mortgage-backed
securities............. 1,343,772 885,246 680,752 1,370,667 1,378,842
Loans................... 1,922,257 2,311,110 2,364,443 2,586,395 2,875,617
Rhode Island covered
assets................. 105,625 151,828 -- -- --
Supervisory goodwill.... -- -- 59,553 84,420 90,000
Retail deposits......... 2,952,082 3,205,654 3,462,339 3,292,932 3,392,404
Brokered deposits....... 25,135 25,135 25,708 113,540 304,429
FHLB advances........... 373,000 140,000 43,239 495,177 310,115
Securities sold under
agreements to
repurchase............. 294,809 291,014 12,747 366,782 451,644
Other borrowings........ 38,442 35,550 560 1,030 234,090
Stockholders' equity.... 132,513 137,573 191,024 182,832 171,022
SELECTED RATIOS:(2)
Return on average
assets................. (.36)% (2.03)% .14 % .24% (1.65)%
Return on average common
equity................. (24.51)% (88.48)% (3.28)% 3.96% (64.86)%
Average equity to
average assets ratio... 3.36 % 4.41 % 4.74 % 3.58% 4.30 %
Book value per common
share.................. $ 6.83 $ 8.42 $ 12.21 $ 12.20 $ 11.61
OTHER DATA:
Branch offices at period
end.................... 51 54 45 38 39
Number of employees
(full-time
equivalents)........... 901 1,036 956 879 946
Market prices of common
stock:
High................... $ 7 1/2 $ 7 1/8 $ 7 1/2 $ 6 3/8 $ 7 7/8
Low.................... 3 3/4 3 1 3/4 1 1/4 2 5/8
At period end.......... 4 3/8 6 5/8 6 5/8 3 3/8 4 5/8
</TABLE>
- --------
* Antidilutive
(1) Per share amounts have been restated to give effect to the two 2% stock
dividends declared in fiscal 1990.
(2) For comparative purposes, ratios for the nine months ended December 31,
1992 have been annualized to reflect twelve months of activity.
58
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
Northeast Federal Corp. reported a net loss of $14.1 million for 1993. The
year was a difficult one for the Company as the continuing recessions in New
England and California increased credit costs through higher loan loss
provisions and higher REO operations expenses while low interest rates reduced
the Company's net interest margin. Higher credit costs and a lower net interest
margin resulted in the substantial operating loss for the year.
The economies of Connecticut, Massachusetts, and New York, which began to
contract in early 1989, continued to contract throughout 1993. California
entered its recession later, in 1990, and its economy also continued to
contract throughout 1993. As a consequence, the Company's provision for loan
losses totaled $23.3 million in 1993 compared to $16.3 million for the nine
months ended December 31, 1992 and $10.2 million for the twelve months ended
March 31, 1992. REO operations expenses totalled $17.6 million for the twelve
months ended December 31, 1993 compared to $9.7 million for the nine months
ended December 31, 1992 and $5.7 million for the twelve months ended March 31,
1992.
Interest rates reached their lowest level in thirty years in 1993, prompting
many borrowers to refinance their loans and leading to exceptionally high
prepayments of existing mortgage loans. At the same time, the Company's
portfolio of adjustable rate mortgage loans was repricing to lower rates. As a
consequence, the Company's interest rate spread was 1.97% for 1993 compared to
2.38% for the nine months ended December 31, 1992 and 2.21% for the twelve
months ended March 31, 1992.
Despite the continuing recessions, however, asset quality improved throughout
1993 as delinquencies and non-performing assets both decreased throughout the
year. Total non-performing assets were 3.63% of total assets at December 31,
1993, compared to 4.97% at December 31, 1992, and 4.54% at March 31, 1992. In
August, the Company accelerated the reduction in non-performing assets by
selling $30.3 million of REO in a single transaction. The Company recorded a
$6.0 million provision for loss during the quarter ended June 30, 1993 in
anticipation of the sale. That provision and an adjustment of $777,000 are
included in REO operations expense for 1993. Total REO at December 31, 1993 was
$75.0 million compared to $99.4 million at December 31, 1992 and $61.2 million
at March 31, 1992. Non-accrual loans were $67.5 million at December 31, 1993
compared to $95.0 million at December 31, 1992 and $112.1 million at March 31,
1992.
The Company also took significant steps during 1993 to reduce its
concentration of loans in California. The Company securitized approximately
$350 million of California mortgage loans in 1993, effectively eliminating the
credit risk on those loans while retaining the loans in portfolio in
securitized form.
The Company changed its capital structure in May of 1993. On May 7, 1993, at
a Special Meeting of Stockholders, the Company's stockholders approved a
reclassification of the Company's $2.25 Cumulative Convertible Preferred Stock,
Series A into common stock at the ratio of 4.75 shares of common stock for each
share of convertible preferred stock. Effective May 14, 1993, the 1,610,000
outstanding shares of convertible preferred stock were converted into an
aggregate of 7,647,500 shares of common stock. At such time, in the aggregate,
$12.2 million of accumulated and unpaid dividends on the convertible preferred
stock were eliminated. Although the reclassification did not change the
regulatory capital of the Association, it eliminated a possible future need for
the Company to seek dividends from the Association for the purpose of paying
dividends on the convertible preferred stock.
The results of operations for 1993 and changes in the Company's financial
condition in 1993 are discussed in more detail in the sections that follow.
On February 9, 1994, Shawmut National Corporation and the Company signed a
definitive agreement for the acquisition by Shawmut of ten Northeast Savings
branches located in Eastern Massachusetts and in
59
<PAGE>
Rhode Island. Five of the branches to be purchased are in Massachusetts and
five are in Rhode Island. Deposits held in these branches totaled approximately
$427 million as of December 31, 1993. Shawmut will pay a premium of three
percent to Northeast Savings for deposits on hand in these branches at the time
of closing. The transaction is expected to close by the end of the second
quarter, and is subject to regulatory approval. The sale will permit Northeast
Savings to focus its resources on its four significant deposit markets: the
capital region of New York State; Hartford, Connecticut; and Springfield and
Worcester, Massachusetts. The sale of the branches will also strengthen the
Company's financial position and enhance its profitability. When the
transaction is finalized, Northeast Savings will operate thirty-eight branches,
thirty-two of which are in those markets.
At the July 24, 1992 meetings of the Boards of Directors of Northeast Federal
Corp. and Northeast Savings, the Boards voted to change the fiscal year end of
the Company and the Association from March 31 to December 31. In general, the
discussions which follow compare the year ended December 31, 1993 to the nine
months ended December 31, 1992 and to the year ended March 31, 1992. Also, for
certain areas of income and expense, comparisons are made between the fiscal
year ended December 31, 1993, the twelve month period ended December 31, 1992
(unaudited), and the fiscal year ended March 31, 1992. A further comparison
which presents the unaudited statement of operations for the nine months ended
December 31, 1993 compared to statements of operations for the same nine months
in 1992 (audited) and 1991 (unaudited) may be found in Note 2 to the
Consolidated Financial Statements: Change in Fiscal Year.
RESULTS OF OPERATIONS
Northeast Federal Corp. and consolidated subsidiaries reported a net loss of
$14.1 million for the year ended December 31, 1993 and a primary and fully
diluted net loss per common share of $1.75 after preferred stock dividend
requirements. For the nine months ended December 31, 1992, the Company reported
a net loss of $59.2 million and a primary and fully diluted net loss per common
share of $11.16 after preferred stock dividend requirements, which compared to
net income of $5.6 million and a primary and fully diluted net loss per common
share of $.51 after preferred stock dividend requirements for the year ended
March 31, 1992. The net loss of $59.2 million for the nine months ended
December 31, 1992 was substantially due to the Company's $56.6 million
reduction in the value of its supervisory goodwill. For the periods ended
December 31, 1993 and 1992 other factors contributing to the losses include
decreases in average earning assets, and substantially higher expenses on real
estate and other assets acquired in settlement of loans. The loss for the nine-
month period ended December 31, 1992 was also affected by decreased mortgage
servicing fees attributable to a high level of prepayments and proportionately
higher general and administrative expenses due principally to a twelve branch
increase in the Association's branching network between March 20, 1992 and
December 31, 1992.
Interest Income and Expense
Northeast Savings' principal source of earnings is its net interest income.
Net interest income depends primarily upon the difference, or interest rate
spread, between the combined weighted average yield the Association earns from
its net loans, mortgage-backed securities, and investment portfolio (together,
the interest-earning assets) and the combined weighted average rate paid on
deposits and borrowings (together, the interest-bearing liabilities). Interest
rate spread is affected by changes in the level of non-performing loans and
foreclosed real estate, as well as by various external factors, including
national and regional economic trends governing general interest rates, changes
in accounting rules, changes in federal legislation, loan demand, deposit
flows, and competition for deposit funds and mortgage loans. When the balance
of interest-earning assets equals or exceeds the balance of interest-bearing
liabilities, net interest income as a percent of interest-earning assets will
equal or exceed the interest rate spread. When the balance of the interest-
earning assets is less than the balance of the interest-bearing liabilities,
net interest income as a percentage of interest-earning assets will be less
than the interest rate spread. For the year ended December 31, 1993, the nine
months ended December 31, 1992, and the year ended March 31, 1992, average
interest-bearing liabilities exceeded average interest-earning assets by $42.9
million, $34.7 million, and $6.4 million, respectively.
60
<PAGE>
Total interest income was $220.4 million, $266.3 million, and $326.9 million
for the years ended December 31, 1993 and 1992 and March 31, 1992,
respectively. For the nine-month periods ended December 31, 1993 and 1992,
respectively, total interest income was $163.1 million and $196.3 million. The
increase in total interest income for the year ended December 31, 1993 when
compared to the nine months ended December 31, 1992, was due primarily to a
longer reporting period, which increased total interest income by $65.4
million. However, primarily as a result of a 128 basis point decrease in the
weighted average yield on interest-earning assets, total interest income
increased by only $24.0 million. Weighted average yields were 5.88% and 7.16%
for the year ended December 31, 1993 and the nine months ended December 31,
1992, respectively.
The $130.6 million decrease in total interest income for the nine months
ended December 31, 1992 when compared to the year ended March 31, 1992, was due
primarily to a shorter reporting period, which decreased total interest income
by $62.1 million, and to lower yields on interest-earning assets. Primarily as
a result of a 153 basis point decrease in the weighted average yield on
interest-earning assets, total interest income decreased $53.3 million.
Weighted average yields were 7.16% and 8.69% for the nine months ended December
31, 1992 and the year ended March 31, 1992, respectively. In addition, the
decrease in total interest income for the nine months ended December 31, 1992
was also impacted by a $104.3 million decrease in average interest-earning
assets, which reduced interest income by $15.2 million.
The weighted average yields on the Association's principal categories of
interest-earning assets were as follows for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE FOR THE YEAR
ENDED MONTHS ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1993 1992 1992
------------ ------------ ------------
(ANNUALIZED)
<S> <C> <C> <C>
Investment securities, net............ 4.91% 5.40% 6.96%
Mortgage-backed securities, net....... 5.15% 6.70% 8.40%
Loans, net............................ 6.27% 7.45% 9.05%
</TABLE>
The table below presents the Association's loans, before consideration of
allowances for losses, deferred fees, discounts, and other items, and mortgage-
backed securities at December 31, 1993 and the primary indexes which dictate
their repricing:
<TABLE>
<CAPTION>
LOANS MORTGAGE-BACKED SECURITIES
-------------------------------- --------------------------------
BALANCE AT BALANCE AT
DECEMBER 31, 1993 % OF PORTFOLIO DECEMBER 31, 1993 % OF PORTFOLIO
----------------- -------------- ----------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Adjustable rate:
One-Year Treasury
Constant Maturity.... $1,001,512 51.10% $1,070,964 79.75%
Eleventh District Cost
of funds............. 290,029 14.80 79,965 5.95
Other................. 457,570 23.35 138,800 10.34
Fixed rate.............. 164,643 8.40 41,157 3.06
Available-for-sale...... 46,076 2.35 12,052 .90
---------- ------ ---------- ------
$1,959,830 100.00% $1,342,938 100.00%
========== ====== ========== ======
</TABLE>
61
<PAGE>
A portion of the Association's loans and mortgage-backed securities are tied
to indexes other than the primary ones noted above. However, no significant
portion of the Association's portfolios is tied to any one of these other
individual indexes. The following table presents the primary indexes to which
the Association's loans are tied and the corresponding interest rates of those
indexes at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1993 1992 1992
------------ ------------ ---------
<S> <C> <C> <C>
One-Year Treasury Constant Maturity......... 3.61 3.62 4.64
Eleventh District Cost of Funds............. 3.82 4.51 5.80
</TABLE>
The lower yields earned by the Association on its interest-earning assets
were due to several factors. First, the Association has experienced a high
level of prepayments on its loans and mortgage-backed securities. Such
prepayments have resulted from low interest rates due to extremely poor
economic conditions and the continuing recession. In this current low interest
rate environment, many borrowers are refinancing their existing mortgage loans
in order to reduce their payment obligations through lower mortgage interest
rates. This increase in prepayments, coupled with the fact that approximately
84.6% of Northeast Savings' interest-earning assets are either short-term in
nature or tied to an adjustable rate index, has resulted in an overall lower
level of interest rates earned by the Association. Finally, lower yields have
resulted from the Association's recent high levels of non-performing assets
which consist of non-accrual loans and REO. Average non-performing assets were
$172.1 million, $215.7 million, and $149.7 million for the year ended December
31, 1993, the nine months ended December 31, 1992, and the year ended March 31,
1992, respectively. Non-performing assets totaled $142.4 million, or 3.6% of
total assets at December 31, 1993, compared to $194.4 million, or 5.0% of
assets at December 31, 1992, and $173.3 million or 4.5% of assets at March 31,
1992. The level of non-performing assets has negatively impacted the Company's
net interest income and operating results. Management believes that the high
level of non-performing assets will continue to negatively impact net interest
income in 1994.
As a result of an overall lower level of interest rates, both total interest
expense and the Association's cost of funds were lower in the year ended
December 31, 1993 and the nine months ended December 31, 1992 than for the
previous comparable periods. In addition, total interest expense was higher for
the year ended December 31, 1993 versus the nine months ended December 31, 1992
due to the difference in the length of the reporting period. Total interest
expense was $148.0 million, $182.2 million, and $244.1 million for the years
ended December 31, 1993 and 1992 and March 31, 1992, respectively. For the nine
months ended December 31, 1993 and 1992, respectively, total interest expense
was $110.3 million and $132.9 million. During the year ended December 31, 1993,
the cost of funds decreased 87 basis points to 3.91%, while during the nine
months ended December 31, 1992, the cost of funds decreased to 4.78%, 170 basis
points lower than in the year ended March 31, 1992. Average interest-bearing
liabilities were $3.8 billion, $3.7 billion and $3.8 billion for the year ended
December 31, 1993, the nine months ended December 31, 1992, and the year ended
March 31, 1992, respectively.
62
<PAGE>
Net interest income totaled $72.4 million, $84.1 million, and $82.8 million
for the years ended December 31, 1993 and 1992, and March 31, 1992,
respectively. For the nine months ended December 31, 1993 and 1992,
respectively, net interest income was $52.8 million and $63.4 million. The
following table presents the primary determinants of the Company's net interest
income for the periods presented:
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED NINE MONTHS ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1993 1992 1992
------------------ ----------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average interest earning
assets................. $3,745,278 $3,656,916 $3,761,203
Average interest bearing
liabilities............ 3,788,210 3,691,602 3,767,578
---------- ---------- ----------
Excess of average
interest-bearing
liabilities over
average interest-
earning assets......... $ 42,932 $ 34,686 $ 6,375
========== ========== ==========
Yield earned on average
interest-earning
assets................. 5.88% 7.16% 8.69%
Rate paid on average
interest-bearing
liabilities............ 3.91 4.78 6.48
---------- ---------- ----------
Net interest rate
spread................. 1.97% 2.38% 2.21%
========== ========== ==========
Net interest rate
margin................. 1.93% 2.34% 2.20%
========== ========== ==========
Total interest income... $ 220,376 $ 196,345 $ 326,946
Total interest expense.. 147,968 132,910 244,145
---------- ---------- ----------
Net interest income..... $ 72,408 $ 63,435 $ 82,801
========== ========== ==========
</TABLE>
The decreases in the interest rate spread and margin were due primarily to
the recent high level of refinancing in the current low interest rate
environment. As refinanced loans with relatively higher rates were replaced by
loans whose initial coupon rate was often lower than 4%, the Association's
yield on interest-earning assets decreased. For the year ended December 31,
1993, the average rate on single-family residential real estate loans was
6.15%, compared to 7.33% for the nine months ended December 31, 1992.
For the nine months ended December 31, 1992, the interest rate spread
increased to 2.38%, compared to 2.21% for the year ended March 31, 1992. The
net interest rate margins for the same respective periods were 2.34% and 2.20%.
The increase in the interest rate spread for the nine months ended December 31,
1992 resulted because the decrease in the cost of funds for the period was more
rapid than the decrease in the yields earned. The interest rate spread is
calculated by subtracting the average rate paid for average total interest-
bearing liabilities from the average rate earned on average total earning
assets. The interest rate margin is calculated by dividing annualized net
interest income by average total earning assets.
In addition, the high average level of non-performing loans during recent
years has had a negative impact on the interest spread, lowering the spread by
14 basis points for the year ended December 31, 1993, and 26 basis points for
both the nine months ended December 31, 1992 and the year ended March 31, 1992.
63
<PAGE>
The table below summarizes the degree to which changes in the Association's
interest income, interest expense, and net interest income are due to changes
in interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1993 VERSUS
NINE MONTHS ENDED
DECEMBER 31, 1992
-----------------------------------------------
AMOUNT OF INCREASE
(DECREASE) DUE TO CHANGE IN:
-----------------------------------------------
RATE/
VOLUME RATE TIMING VOLUME TOTAL
-------- -------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans receivable............ $ (110) $(26,553) $ (260) $ 43,012 $ 16,089
Other interest-earning
assets..................... 6,289 (18,642) (2,139) 22,434 7,942
-------- -------- ------- -------- --------
Total interest income..... 6,179 (45,195) (2,399) 65,446 24,031
-------- -------- ------- -------- --------
Interest expense:
Deposits.................... (17,712) (28,662) 3,057 40,556 (2,761)
Borrowings.................. 27,674 (1,688) (11,108) 2,941 17,819
-------- -------- ------- -------- --------
Total interest expense.... 9,962 (30,350) (8,051) 43,497 15,058
-------- -------- ------- -------- --------
Change in net interest income. $ (3,783) $(14,845) $ 5,652 $ 21,949 $ 8,973
======== ======== ======= ======== ========
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, 1992 VERSUS
YEAR ENDED
MARCH 31, 1992
-----------------------------------------------
AMOUNT OF INCREASE
(DECREASE) DUE TO CHANGE IN:
-----------------------------------------------
RATE/
VOLUME RATE TIMING VOLUME TOTAL
-------- -------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans receivable............ $(16,388) $(39,290) $ 2,596 $(43,012) $(96,094)
Other interest-earning
assets..................... 1,191 (18,655) 2,084 (19,127) (34,507)
-------- -------- ------- -------- --------
Total interest income..... (15,197) (57,945) 4,680 (62,139) (130,601)
-------- -------- ------- -------- --------
Interest expense:
Deposits.................... (3,981) (47,820) (2,840) (40,557) (95,198)
Borrowings.................. (11,430) (3,815) 2,149 (2,941) (16,037)
-------- -------- ------- -------- --------
Total interest expense.... (15,411) (51,635) (691) (43,498) (111,235)
-------- -------- ------- -------- --------
Change in net interest income. $ 214 $ (6,310) $ 5,371 $(18,641) $(19,366)
======== ======== ======= ======== ========
</TABLE>
The tables above indicate that total interest income during the year ended
December 31, 1993 versus the nine months ended December 31, 1992 was positively
affected by $6.2 million from the increase in the average level of interest-
earning assets, primarily mortgage-backed securities, and negatively impacted
by $45.2 million from the reduction in the average yield realized on interest-
earning assets. Total interest expense was negatively impacted by $10.0 million
from the increases in the level of average interest-bearing liabilities,
particularly the increase in FHLB advances, and favorably impacted by $30.4
million from a reduction in the average cost of interest-bearing liabilities.
Net interest income was negatively impacted by $3.8 million due to changes in
the levels of interest-earning assets and interest-bearing liabilities and by
$14.8 million from a decline in market rates that continued throughout 1993
versus 1992.
64
<PAGE>
Provision for Loan Losses
The provision for loan losses for the year ended December 31, 1993 was $23.3
million compared to $16.3 million for the nine months ended December 31, 1992
and $10.2 million for the year ended March 31, 1992. The continuing high levels
of provisions reflect the effects of the ongoing recessions in New England and
California and the impact of such recessions on borrowers' abilities to repay
loans and the value of homes collateralizing these loans.
The allowance for loan losses at December 31, 1993 was $7.3 million higher
than at December 31, 1992,
while the Association's net loan portfolio was $388.9 million lower. The
factors considered in determining the adequacy of the allowance for loan losses
on the Association's loan portfolio are management's judgment regarding
prevailing and anticipated economic conditions, 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 the level of loan
charge-offs. The most recent examination of the Association by the OTS was
completed in the fourth quarter of 1993. The activity in the allowance for loan
losses for the year ended December 31, 1993, the nine months ended December 31,
1992, and the year ended March 31, 1992 can be found in Note 7 to the
Consolidated Financial Statements. Although management believes that the
allowance for loan losses is adequate at December 31, 1993, based on the
quality of the loan portfolio at that date, further additions to the allowance
may be necessary if market conditions continue to deteriorate.
Net charge-offs for the periods indicated by type of loan were:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE MONTHS FOR THE YEAR
ENDED DECEMBER 31, ENDED DECEMBER 31, ENDED MARCH 31,
1993 1992 1992
------------------ ------------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Single-family
residential real estate
loans.................. $(14,659) $(12,297) $(6,235)
Consumer loans.......... 5 (67) (387)
Income property loans... (1,395) -- (469)
Commercial loans........ -- -- (330)
-------- -------- -------
Total net charge-offs. $(16,049) $(12,364) $(7,421)
======== ======== =======
As a percent of average
loans.................. .69% .54% .30%
======== ======== =======
</TABLE>
The increases in single-family residential real estate loan net charge-offs
were due to general economic conditions, particularly the recessions in New
England and California which continued into 1993. The lingering recessionary
environment has caused high rates of unemployment and reduced family income
levels and has resulted in declining real estate values, increased
delinquencies, and foreclosures. The increase in residential charge-offs, which
began in late 1992 and continued into 1993, indicated that the risk in the
residential loan portfolio was higher than indicated by previous analysis. As a
result, management increased the provision for loan losses to $23.3 million for
the year ended December 31, 1993. The increase in charge-offs on income
property loans for the year ended December 31, 1993 resulted from the sale in
April 1993 of the Association's portion of an income property loan
participation. The Association's portion of this participation had been
included in non-accrual loans since March 15, 1992.
Non-performing assets. The risks and uncertainties involved in originating
loans may result in loans becoming non-performing assets. Non-performing assets
include non-accrual loans and real estate and other assets acquired in
settlement of loans.
65
<PAGE>
The following table presents the Association's non-performing assets and
restructured loans at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1993 1992 1992
-------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Non-accrual loans:
Single-family residential real estate.......... $ 65,770 $ 87,949 $107,791
Consumer....................................... 1,315 1,741 1,931
Income property................................ 377 5,299 2,372
-------- -------- --------
Total non-accrual loans...................... 67,462 94,989 112,094
-------- -------- --------
REO:
Single-family residential...................... 57,165 83,605 42,055
Hotels......................................... 6,453 6,408 7,990
Apartment building............................. 5,270 4,464 4,273
Real estate brokerage operations............... 1,744 1,544 2,812
Office, retail, industrial, complexes; land ... 3,357 2,499 2,789
Residential subdivisions....................... 973 856 1,289
-------- -------- --------
Total REO.................................... 74,962 99,376 61,208
-------- -------- --------
Total non-performing assets.................. $142,424 $194,365 $173,302
======== ======== ========
Restructured loans............................... $ 1,641 $ 1,100 $ 1,300
======== ======== ========
Total non-accrual loans as a percent of total
gross loans receivable.......................... 3.44% 4.06% 4.69%
======== ======== ========
Total non-performing assets as a percent of total
assets.......................................... 3.63% 4.97% 4.54%
======== ======== ========
</TABLE>
Activity within the non-performing asset portfolio was as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1993
------------------
(IN THOUSANDS)
<S> <C>
LOANS
Beginning balance............................................ $94,989
New non-performing loans..................................... 39,215
Net recoveries............................................... 5
Returned to accrual status................................... (2,621)
Payoffs...................................................... (2,898)
Transfers to REO through foreclosure......................... (61,228)
-------
Ending balance............................................... $67,462
=======
REAL ESTATE OWNED
Beginning balance............................................ $99,376
Acquisitions of properties through foreclosure............... 61,228
Writedowns................................................... (10,082)
Sales, dispositions and other................................ (75,560)
-------
Ending balance............................................... $74,962
=======
</TABLE>
The above information is not available for the nine months ended December 31,
1992 or the year ended March 31, 1992.
66
<PAGE>
The following table sets forth the effect of non-performing and restructured
loans on interest income for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1993 1992 1992
-------------------- ----------------------------- ---------------------
NON- NON- NON-
ACCRUAL RESTRUCTURED ACCRUAL RESTRUCTURED ACCRUAL RESTRUCTURED
------- ------------ ------------- --------------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Principal............... $67,462 $1,641 $ 94,989 $ 1,100 $112,094 $1,300
======= ====== ============= ============ ======== ======
Gross amount of interest
that would have been
recorded during the
period at the original
rate................... $ 4,810 $ 59 $ 5,580 $ 172 $ 10,386 $ 172
Interest recorded in
income................. 1,341 41 1,297 68 3,449 52
------- ------ ------------- ------------ -------- ------
Interest income not
recognized............. $ 3,469 $ 18 $ 4,283 $ 104 $ 6,937 $ 120
======= ====== ============= ============ ======== ======
</TABLE>
As the level of non-performing assets has risen, the Association has
increased its efforts to reduce the amount of such assets. The Association
seeks to reduce nonperforming assets by aggressively pursuing loan
delinquencies through collection and foreclosure processes and, if foreclosed,
disposing rapidly of the acquired real estate. Management believes that
disposal of REO is handled most efficiently through its area managers who have
greater knowledge of their neighborhoods than do the personnel at Company
headquarters. Thus, California REO is generally disposed of through the
Association's West Coast offices.
In August 1993, as part of its efforts to dispose of foreclosed real estate
more rapidly, the Association sold fifty-seven single-family residential REO
properties in a single transaction. The sale is discussed further in "Real
estate and other assets acquired in settlement of loans." Including this sale,
the Association sold approximately $76.7 million in foreclosed single-family
residential real estate in 1993, compared to $22.2 million for the nine months
ended December 31, 1992.
Another key to reducing the level of non-performing assets is the continuing
goal to improve underwriting standards. For example, in certain cases prior to
1990, the Association's policies allowed originations of single-family
residential mortgages with loan-to-value ratios greater than 80% without
private mortgage insurance. Such loans originated after 1990 were on an
exception basis only and required the approval of the Chairman of the Board or
the President. Also in 1989, the average loan-to-value ratio on loans
originated that year was 74.6%. By 1993, the average loan-to-value ratio had
decreased to 66.0%.
Non-accrual loans. Non-accrual loans are loans on which the accrual of
interest has been discontinued. The Association's policy is to discontinue the
accrual of interest on loans when there is reasonable doubt as to its
collectibility. Interest accruals on loans are normally discontinued whenever
the payment of interest or principal is more than ninety days past due, or
earlier when conditions warrant it. For example, although a loan may be
current, the Association discontinues accruing interest on that loan when a
foreclosure is brought about by other owner defaults. When interest accrual on
a loan is discontinued, any previously accrued interest is reversed. 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.
Non-accrual loans at December 31, 1993 were $67.5 million, compared to $95.0
million and $112.1 million at December 31, 1992 and March 31, 1992,
respectively. At December 31, 1993 and 1992 and March 31, 1992, the Association
had no loans more than ninety days past due on which it was accruing interest.
The decreases in non-accrual loans were due to foreclosures of the underlying
collateral securing the loans, which resulted in transfers to the REO balance,
and to payoffs and reinstatements of non-accrual loans.
67
<PAGE>
Below is a table which summarizes Northeast Savings' 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 1,974 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>
Although Northeast Savings' single-family residential non-accrual loans have
decreased by approximately 25.2% since December 31, 1992, they remain at a high
level due to continuing weak economic conditions, particularly the recessions
in New England and California. Virtually all of these residential mortgage non-
accrual loans are collateralized by properties with an original loan-to-value
ratio of 80% or less. At December 31, 1993 and 1992 and March 31, 1992, single-
family residential non-accrual loans were 97.5%, 92.6%, and 96.2%,
respectively, of non-accrual loans. The ratio of the allowance, including the
unallocated portion, attributed to single-family residential loans as a
percentage of total single-family residential non-accrual loans was 41.3%,
21.2%, and 11.4%, at December 31, 1993 and 1992 and March 31, 1992,
respectively.
The low levels in the allowance for loan losses as a percentage of non-
accrual consumer loans reflect significant charge-offs made during the years
ended March 31, 1992 and 1991, which resulted in a portfolio with substantially
lower risk. The Association's consumer loans, which totaled only 1.8% of the
total loan portfolio at December 31, 1993, consist primarily of well-seasoned
loans collateralized by deposits or real estate. At December 31, 1993, 25.1% of
the Association's consumer loans were collateralized by deposits, while 61.7%
consisted of loans collateralized by real estate.
The non-accrual income property loans at December 31, 1993 primarily
represent three loans which have been reserved to their estimated fair values
based on current appraisals. The Association's income property loan portfolio,
totaling 4.1% of the total loan portfolio at December 31, 1993, consists of
well-seasoned loans, most of which were originated prior to 1986.
Real estate and other assets acquired in settlement of loans. The $24.4
million decrease in REO at December 31, 1993 from December 31, 1992 was due
primarily to the August 27, 1993 sale in a single transaction of a portion of
the Company's portfolio of single-family residential REO. The fifty-seven REO
properties sold had a book value of $30.3 million at the time of the sale. Of
the fifty-seven properties, thirty-four properties, totaling 88.9% of the book
value of the sale, were in California and thirty of the properties, with a
total book value of $18.3 million, were in the REO portfolio for greater than
one year. The Company recorded a $6.0 million provision for loss during the
quarter ended June 30, 1993 in anticipation of the sale. An adjustment of
$777,000, which is included in expense on REO on the statement of operations,
was recorded at the time the properties were sold. After giving effect to the
sale, the Company's REO at December 31, 1993 was $21.5 million lower than at
June 30, 1993. The turnover of single-family residential REO has been
relatively rapid. Of the $57.2 million of single-family residential REO at
December 31, 1993, only 34 properties totaling $17.3 million were in the
portfolio for longer than one year. Included in income property
68
<PAGE>
REO of $16.0 million at December 31, 1993 were two hotels, an industrial
building, one retail office, two single-family residential subdivisions, two
apartment buildings, and one property zoned for residential development. Also
included in income property REO were a residential subdivision and an apartment
building purchased as part of the Rhode Island acquisition.
If the recessions in New England and California continue, the amount of non-
accrual loans and real estate owned may increase. Management believes that the
single-family residential real estate market has stabilized in New England.
However, management also expects that California single-family residential non-
accrual loans could increase due to the poor economic environment.
Non-Interest Income
Non-interest income, which is comprised primarily of fees for services and
net gains or losses on the sales of securities and loans, totaled $17.7
million, $16.7 million, and $16.1 million for the years ended December 31, 1993
and 1992 and March 31, 1992, respectively, compared to $10.7 million and $13.0
million for the nine months ended December 31, 1993 and 1992, respectively.
Fees for services result principally from fees received for servicing loans
and fees charged to customers. When compared to prior periods, fee income was
lower for the years ended December 31, 1993 and 1992 than for the year ended
March 31, 1992. Fees for services totaled $10.2 million, $9.7 million, and
$12.8 million for the years ended December 31, 1993 and 1992, and March 31,
1992, respectively, and $7.3 million and $7.1 million for the nine months ended
December 31, 1993 and 1992, respectively. Total fees for services are affected
by the level of loans serviced for others and by the level of savings deposits.
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED NINE MONTHS ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1993 1992 1992
------------------ ----------------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Loan servicing fees..... $ 2,627 $ 793 $ 4,928
Fees charged to
customers.............. 7,554 6,319 7,887
------- ------ -------
Total fees for services. $10,181 $7,112 $12,815
======= ====== =======
</TABLE>
For the year ended December 31, 1993 and the nine months ended December 31,
1992, loan servicing fees were impacted by higher adjustments to value and to
increased amortization of the Association's purchased mortgage servicing rights
and deferred excess servicing resulting from higher prepayments on underlying
mortgage loans. Such prepayments have occurred primarily as a result of the low
interest rate levels which have been experienced in the economy over recent
months. The following table details fee income earned by the Association on
loans serviced for others for the periods indicated. Adjustments to value due
to prepayments resulted from the availability of substantially lower interest
rates on mortgage loans. Reflecting the overall level of interest rates in the
economy, mortgage rates were particularly low during the year ended December
31, 1993. Interest losses on payoffs occur because, although a borrower may pay
off a mortgage early in the month, the Association must still remit an entire
month's interest to the investor.
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED NINE MONTHS ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1993 1992 1992
------------------ ----------------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross servicing fees.... $ 7,326 $ 6,755 $10,030
Less:
Amortization.......... (2,674) (2,316) (3,172)
Adjustments to value
due to prepayments... (993) (2,407) (763)
Interest loss on
payoffs.............. (1,032) (1,239) (1,167)
------- ------- -------
Net servicing fees.... $ 2,627 $ 793 $ 4,928
======= ======= =======
</TABLE>
69
<PAGE>
Fees charged to customers were $7.6 million, $8.4 million, and $7.9 million
for the years ended December 31, 1993 and 1992 and March 31, 1992,
respectively. For the nine months ended December 31, 1993 and 1992, fees
charged to customers totaled $5.7 million and $6.3 million.
Non-interest income for the year ended December 31, 1993, the nine months
ended December 31, 1992 and the year ended March 31, 1992 included net gains of
$5.6 million, $4.1 million and $2.0 million, respectively, on sales of
securities. For the year ended December 31, 1993 and nine months ended December
31, 1992 net gains included $3.6 million and $1.9 million, respectively, on
investment securities and $2.0 million and $2.2 million, respectively, on
mortgage-backed securities. For the year ended March 31, 1992, net losses of
$2.8 million on investment securities were offset by net gains of $4.7 million
on mortgage-backed securities. Sales of the investment securities and the
mortgage-backed securities for the year ended March 31, 1992 were made in
accordance with the Association's objectives of downsizing and of remaining in
compliance with anticipated higher core capital requirements.
Net gains on sales of securities for the year ended December 31, 1993, the
nine month period ended December 31, 1992, and the year ended March 31, 1992
included $2.9 million, $880,000, and $566,000, respectively, of realized
capital gains allocated to the Association by two limited partnerships in which
the Association invested and which, during the quarter ended June 30, 1993,
were transferred from the held-to-maturity portfolio to the available-for-sale
portfolio in anticipation of compliance with Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The remaining net gains on investment securities for the
same respective periods resulted primarily from the sale of fixed-rate
securities from the available-for-sale portfolio.
Included in net losses on investment securities for the year ended March 31,
1992 were net realized losses of $2.8 million which included losses of $371,000
on the FIRREA-mandated sale of the Association's last non-investment grade
corporate debt security, $572,000 on the sale of all of the Association's
remaining collateralized mortgage obligation residuals, and $6.2 million on the
sales of corporate debt securities. These losses were partly offset by gains on
sales of other investment securities from the available-for-sale portfolio. For
further information related to sales of investment securities and mortgage-
backed securities, see Notes 5 and 6 to the Consolidated Financial Statements.
Non-interest income for the year ended December 31, 1993, the nine months
ended December 31, 1992, and the year ended March 31, 1992, respectively, also
included net gains on sales of loans of $1.9 million, $1.9 million, and $2.5
million. For the year ended December 31, 1993, total proceeds from sales of
loans totaled $279.7 million, $231.2 million of which was due to sales of loans
from the available-for-sale portfolio. In addition, $33.7 million resulted from
the securitization of loans into mortgage-backed securities and their
simultaneous sale. The remaining proceeds resulted primarily from the sale of
seasoned California adjustable rate mortgages. For the nine months ended
December 31, 1992, proceeds from sales of loans totaled $192.4 million, $184.3
million of which was from the available-for-sale portfolio. The remaining $8.1
million in proceeds resulted from the sale of a whole loan participation which
was serviced by another financial institution. The participation was sold
because of management's concern over the creditworthiness of that servicer. For
the year ended March 31, 1992, proceeds from sales of loans totaled $151.7
million. Of the total proceeds for the year ended March 31, 1992, $135.1
million resulted from sales of loans from the available-for-sale portfolio,
while the remaining proceeds were due principally to the sale of a fixed rate
commercial mortgage loan participation. The sale of this participation resulted
in a gain of $856,000.
Non-Interest Expense
Total non-interest expense totaled $93.2 million, $145.6 million, and $79.3
million for the years ended December 31, 1993 and 1992 and March 31, 1992,
respectively, compared to $71.6 million and $124.5 million for the nine months
ended December 31, 1993 and 1992, respectively. As discussed below, the
substantial increase in non-interest expense for the nine months ended December
31, 1992 was due to a $56.6 million reduction of supervisory goodwill.
70
<PAGE>
As a result of an analysis of the value of its remaining supervisory
goodwill, Northeast Savings reduced supervisory goodwill by $56.6 million in
the quarter ended September 30, 1992. This reduction was precipitated by
several factors that had diminished the value of the Association's Connecticut
and Massachusetts franchises. Accordingly, the Company 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.
General and administrative expenses (compensation and benefits, occupancy and
equipment, and other general and administrative expenses) have increased
slightly, totaling $67.2 million, $65.6 million and $61.5 million for the years
ended December 31, 1993 and 1992 and March 31, 1992, respectively. General and
administrative expenses were $50.0 million and $50.1 million for the nine
months ended December 31, 1993 and 1992, respectively. Although management has
streamlined operations over the last several years, the cost benefits resulting
from this streamlining have been offset by expenses related to the
Association's increased number of branches as well as other management costs
due to the acquisitions of financial institutions and higher costs related to
delinquent loans and REO.
The following table summarizes general and administrative expense for the
periods indicated:
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED NINE MONTHS ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1993 1992 1992
------------------ ----------------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Compensation and
benefits............... $38,748 $28,798 $31,453
Occupancy and equipment. 15,399 11,057 14,810
Other general and
administrative......... 21,654 17,203 19,942
------- ------- -------
Gross general and
administrative
expenses............. 75,801 57,058 66,205
Less capitalized direct
costs of loan
originations*.......... 8,642 7,003 4,695
------- ------- -------
Net general and
administrative
expenses............. $67,159 $50,055 $61,510
======= ======= =======
Annualized net general
and administrative
expenses as a percent
of average total
assets................. 1.70% 1.72% 1.55%
======= ======= =======
</TABLE>
- --------
* In accordance with generally accepted accounting principles, certain loan
origination costs are deferred and amortized as an adjustment of yield over
the life of the loans closed.
As a result of the previously discussed $56.6 million reduction of
supervisory goodwill, amortization of supervisory goodwill was zero for the
year ended December 31, 1993 and was proportionately lower for the nine months
ended December 31, 1992 than for the year ended March 31, 1992. Expenses
relating to real estate and other assets acquired in settlement of loans
increased to $17.6 million for the year ended December 31, 1993, compared to
$11.7 million and $5.7 million for the years ended December 31, 1992 and March
31, 1992, respectively. These expenses totaled $15.0 million and $9.7 million
for the nine months ended December 31, 1993 and 1992, respectively. REO
expenses increased in the year ended December 31, 1993 due primarily to a loss
of $6.8 million on the sale in a single transaction of a portion of the
Company's residential REO portfolio. The increased expenses for the periods
ended December 31 and March 31, 1992 were primarily a result of increased
foreclosures on residential real estate. Also included in REO expense for the
nine months ended December 31, 1992 were writedowns of $1.0 million on a real
estate brokerage operation and $1.5 million on a hotel in Connecticut. Total
REO expenses may remain at a high level in the coming year since, based on
present economic conditions, management anticipates that the portfolio of real
estate and other assets acquired in settlement of loans may increase.
71
<PAGE>
Income Taxes/Cumulative Effect of a Change in Accounting for Income Taxes
Income tax benefit for the year ended December 31, 1993 and the nine months
ended December 31, 1992 and income tax expense for the year ended March 31,
1992 represent federal and state taxes or benefits. For the December 31 and
March 31, 1992 periods, respectively, the effective tax rates of (7.9)% and
52.25% differ from the combined federal and state statutory rates primarily as
a result of permanent differences, such as the amortization of supervisory
goodwill (See Note 15: Income Taxes).
In February 1992, the FASB issued SFAS 109, "Accounting for Income Taxes,"
which established 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
accounting and reporting for income taxes.
The Company implemented SFAS 109 for the fiscal year ended March 31, 1992. In
accordance with this implementation, the Company recorded $21.1 million in
deferred tax assets and $3.6 million in deferred tax liabilities, as well as an
additional $1.0 million in income. The additional income is reported separately
in the Consolidated Statement of Operations as the cumulative effect of a
change in accounting principle. In addition, a valuation allowance was
established which reduced the deferred tax assets as of April 1, 1991. Due to
the Company's utilization of all remaining net operating loss carryforwards,
the valuation reserve was eliminated as of December 31, 1992. Also in
accordance with SFAS 109, the Company applied tax benefits of approximately
$20.9 million at April 1, 1991 and another $1.0 million at December 31, 1992 to
reduce its supervisory goodwill. At December 31, 1993, the Company's deferred
tax asset totaled $41.7 million and the deferred tax liability was $3.2
million. Also recorded was a valuation allowance of $4.0 million.
On January 20, 1993, the OTS issued Thrift Bulletin No. 56 (TB 56) entitled
"Regulatory Reporting of Net Deferred Tax Assets." In TB 56, the OTS adopted
the Federal Financial Institutions Examination Council (FFIEC) recommendations
with respect to SFAS No. 109 and the resulting deferred tax assets that may be
included in regulatory capital. Deferred tax assets that are unlimited in the
computation of regulatory capital are those tax assets that can be realized
from taxes paid in prior carryback years and future reversal of existing
taxable temporary differences. Conversely, to the extent that the realization
of deferred tax assets depends on an institution's future taxable income or its
tax planning strategies, such deferred tax assets are limited for regulatory
capital purposes to the lesser of: (1) the amount of future taxable income that
can be realized within one year of the quarter-end report date, or (2) ten
percent (10%) of core capital.
In addition, TB 56 adopted transitional provisions which allow regulatory
capital to include deferred tax assets that would be reportable under
Accounting Principle Board Opinion No. 11 (APB 11) or SFAS No. 96 as of
December 31, 1992. Accordingly, at December 31, 1993 and 1992, the deferred tax
assets included in the Association's regulatory capital ratios were calculated
in accordance with this transitional guidance.
Extraordinary Items
There were no extraordinary items for the year ended December 31, 1993 or the
nine months ended December 31, 1992. Extraordinary items for the fiscal year
ended March 31, 1992 included realized gains of $95,000, net of income taxes,
on the early retirement of the Association's 8% Convertible Subordinated
Debentures, due 2011 (the convertible subordinated debentures).
Quarter Ended December 31, 1993
The net loss for the quarter ended December 31, 1993 totaled $2.9 million,
which resulted in a primary and fully diluted net loss per common share of $.28
after preferred stock dividend requirements. This compares with net income of
$398,000 for the quarter ended December 31, 1992, which resulted in a primary
and fully diluted net loss per common share of $.22 after preferred stock
dividend requirements.
72
<PAGE>
Net interest income totaled $15.7 million, compared with $21.8 million for
the quarter ended December 31, 1992. Reflecting the low interest rate
environment which led to an exceptionally high volume of prepayments of
existing mortgages, the interest rate spread decreased to 1.75% for the quarter
ended December 31, 1993 from 2.48% for the same quarter last year.
During the quarter ended December 31, 1993, the Association securitized
approximately $350 million of mortgage loans originated in California. By
securitizing these loans, the Association improved the geographic distribution
of its loan portfolio, reduced its credit risk by exchanging the loans for high
quality mortgage-backed securities, and increased its risk-based capital ratio.
Loan charge-offs for the quarter ended December 31, 1993 were $3.0 million,
down from $6.4 million for the quarter ended December 31, 1992. The quarterly
provision for loan losses was also down, $3.0 million for the quarter ended
December 31, 1993, compared to $7.5 million for the same quarter last year.
However, although the loan portfolio was $388.9 million lower, management
increased the allowance for loan losses at December 31, 1993 to $28.3 million,
compared to $21.0 million at December 31, 1992, reflecting the effects of the
ongoing recession in New England and California.
REGULATORY CAPITAL
The OTS capital requirements have three separate measures of capital
adequacy: the first is a tangible core capital requirement of 1.5% of tangible
assets; the second is a core capital requirement of 3% of adjusted total
assets; and the third is a risk-based capital requirement that is 8% of risk-
weighted assets.
On April 22, 1991, the OTS issued a notice of proposed rulemaking which would
establish a minimum leverage ratio of 3% of adjusted total assets, plus an
additional 100 to 200 basis points, determined on a case-by-case basis for all
but the most highly-rated thrift institutions. The OTS has proposed this
requirement in order to fulfill its obligation pursuant to FIRREA to adopt
capital requirements no less stringent than those required for national banks
by the OCC, which adopted a similar increased leverage requirement effective
December 31, 1990. Although the April 22, 1991 proposed leverage requirement is
not yet final, under the prompt corrective action rule which was issued by the
federal banking agencies on September 29, 1992 and which became final on
December 19, 1992, an institution must have a leverage ratio of 4% or greater
in order to be considered adequately capitalized.
The OTS final rule adding an interest rate risk component to its risk-based
capital rule became effective January 1, 1994. Under the rule, savings
associations are divided into two groups, those with "normal" levels of
interest rate risk and those with greater than "normal" levels of interest rate
risk. Associations with greater than normal levels are subject to a deduction
from total capital for purposes of calculating risk-based capital. Interest
rate risk is measured by the change in Net Portfolio Value under a 2.0% change
in market value of an association's assets less the economic value of its
liabilities adjusted for the economic value of off-balance-sheet contracts. If
an association's change in Net Portfolio Value under a 2.0% change in market
interest rates exceeds 2.0% of the estimated economic value of its assets, it
will be considered to have greater than normal interest rate risk, and its
total capital for risk-based capital purposes will be reduced by one-half of
the difference between its measured interest rate risk and the normal level of
2.0%. The rule adjusts the interest rate risk measurement methodology when
interest rates are low. In the event that the 3-month Treasury rate is below
4.0%, interest rate risk will be measured under a 2.0% increase in interest
rates and under a decrease in interest rates equal to one-half the value of the
3-month Treasury rate. According to the most recent OTS measurements, Northeast
Savings' interest rate risk is within the normal range.
73
<PAGE>
The following table reflects the regulatory capital position of the
Association as well as the current regulatory capital requirements at December
31, 1993 and 1992:
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992
----------------------------------- -----------------------------------
FULLY PHASED-IN FULLY PHASED-IN
REGULATORY CAPITAL ACTUAL REGULATORY ACTUAL REGULATORY
REQUIREMENT REGULATORY CAPITAL CAPITAL REQUIRED REGULATORY CAPITAL 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>
The following table reconciles the Association's capital as calculated in
accordance with generally accepted accounting principles to tangible, core, and
risk-based capital as calculated in accordance with OTS regulations in effect
at December 31, 1993.
<TABLE>
<CAPTION>
DECEMBER 31, 1993
----------------------------------------------------
CAPITAL-TO- REQUIRED
ASSETS* CAPITAL ASSETS RATIO CAPITAL EXCESS
---------- -------- ------------ -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Assets/capital............ $3,919,082 $169,670
Adjustments to tangible
assets/capital:
Core deposit
intangibles............ (551) (551)
Nonincludable purchased
mortgage servicing
rights................. (1,875) (1,875)
---------- --------
Tangible assets/capital... 3,916,656 167,244 4.27% $ 58,750 $108,494
Adjustments to core
assets/capital:
Core deposit
intangibles............ 551 551
---------- --------
Core assets/capital....... $3,917,207 167,795 4.28% $156,688 $ 11,107
========== --------
Adjustments to risk-based
capital:
General valuation
allowances**........... 21,535
--------
Risk-based assets/capital. $1,716,084 $189,330 11.03% $137,287 $ 52,043
========== ========
</TABLE>
- --------
* Total assets as reported to the OTS
** Subject to risk-based capital limitations of 1.25% of risk-based assets
before general valuation allowance adjustment
FINANCIAL CONDITION
Total assets were $3.9 billion at both December 31, 1993 and 1992 and $3.8
billion at March 31, 1992. When compared to earlier years, the reduced asset
size at these dates is consistent with the Association's business plan to meet
the current and anticipated capital requirements mandated by FIRREA and
subsequent proposed regulations. During the year ended March 31, 1990, the
Association reduced its mortgage-backed securities portfolio, its high-yield
corporate debt securities portfolio, and other investment securities. The
Association continued downsizing during 1991 primarily by reducing its
portfolio of purchased loans. In the year ended March 31, 1992, the Association
also continued its downsizing by reducing its loan portfolio by $222.0 million
to $2.4 billion, its mortgage-backed securities portfolio by $689.9 million to
$680.8 million and its investment portfolio by $87.7 million to $229.9 million.
As a part of its dispositions during the year ended March 31, 1992, the
Association sold the last of its high-yield corporate debt securities and its
CMO residuals from the available-for-sale portfolios. Principal reductions
resulting from the normal amortization and payoffs on loans and mortgage-backed
securities were approximately $649.5 million, $535.5 million, and
74
<PAGE>
$691.3 million during the year ended December 31, 1993, the nine months ended
December 31, 1992, and the year ended March 31, 1992, respectively.
Funds received from the disposition of assets as well as from the
acquisitions of branches of other financial institutions were used to reduce
wholesale liabilities which include all borrowed and brokered funds. These
liabilities are generally more rate-sensitive and a more costly source of funds
for the Association than retail deposits. Wholesale liabilities were $4.1
billion or 53% of total liabilities at March 31, 1989. In the years that
followed, the Association reduced these liabilities to $731.4 million or 19.3%
of total liabilities at December 31, 1993. At December 31, 1992, wholesale
liabilities comprised 13.0% of total liabilities. The increase in wholesale
liabilities at December 31, 1993 was necessary for the Association to offset
the decrease in retail deposits, as discussed below.
During the year ended March 31, 1990, the Association reduced its brokered
deposits by $693.2 million. Since then, brokered deposits have been reduced to
only $25.1 million at December 31, 1993. Securities sold under agreements to
repurchase also experienced a decline, totaling $294.8 million at December 31,
1993, down from approximately $2.3 billion at March 31, 1989.
In spite of the recent acquisitions of financial institutions, retail
deposits, the Association's least expensive source of funds, decreased to $3.0
billion at December 31, 1993, compared to $3.2 billion and $3.5 billion at
December 31, and March 31, 1992, respectively. Following the trend of low
interest rates in the economy due to the continuing recession, the Association
has experienced a significant reduction in its cost of retail deposits. These
lower rates have caused some depositors who are struggling to preserve their
former level of income to seek higher yields through alternative investments,
and others to reduce their outstanding high interest rate liabilities. Others
have withdrawn funds to meet their financial obligations due to a loss in
personal income. Another large component of the deposit decrease relates to the
Rhode Island acquisition. The depositors in this acquisition had been blocked
from accessing their funds for over 16 months. Once the funds were made
available to them, many of these depositors withdrew a portion of their
deposits to meet financial obligations they incurred while their funds were
frozen.
The following table shows the components of change in customer account
balances:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1992 MARCH 31, 1992
----------------- ----------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Brokered deposits........... $ -- $ (573) $(87,832)
Regular savings............. (67,513) 22,934 201,318
NOWs, Super NOWs and money
market savings............. (51,409) 22,588 (14,431)
Certificates................ (100,067) (322,834) (348,655)
--------- --------- --------
(218,989) (277,885) (249,600)
Acquisitions of deposits.... -- 314,668 404,643
Withdrawals of accounts
included in acquisitions... (34,583) (294,041) (73,468)
--------- --------- --------
$(253,572) $(257,258) $ 81,575
========= ========= ========
</TABLE>
Transaction accounts (regular savings, NOWs, Super NOWs and money market
savings) comprised 40.9% of total customer account balances at December 31,
1993, compared to 43.0% at December 31, 1992 and 34.6% at March 31, 1992. In
the current low interest-rate environment, transaction accounts tend to be more
popular than certificates of deposit.
CAPITAL RESOURCES AND LIQUIDITY
The primary source of funds for the Association is retail deposits, while
secondary sources include FHLB advances, repurchase agreements, debentures, and
internally-generated cash flows resulting from the maturity, amortization, and
prepayment of assets as well as sales of loans and securities from the
available-for-sale portfolios.
75
<PAGE>
The Association's ongoing principal use of capital resources remains the
origination of single-family residential mortgage loans. The following table
sets forth the composition of the Association's single-family residential
mortgage loan originations for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1992 MARCH 31,1992
------------------- ------------------- -------------------
TYPE AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL
---- -------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Adjustable......... $473,375 64.45% $449,074 75.79% $288,463 65.19%
Fixed.............. 261,089 35.55 143,480 24.21 154,026 34.81
-------- ------ -------- ------ -------- ------
Total.............. $734,464 100.00% $592,554 100.00% $442,489 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
The composition of the Association's residential mortgage loan portfolio at
December 31, 1993 and 1992 was as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992
--------------------- ---------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Adjustable.......................... $1,701,978 92.21% $2,073,986 94.14%
Fixed............................... 143,812 7.79 128,988 5.86
---------- ------ ---------- ------
Total............................... $1,845,790 100.00% $2,202,974 100.00%
========== ====== ========== ======
</TABLE>
Total loans originated during the year ended December 31, 1993 were $758.6
million compared to $614.2 million and $474.6 million for the nine months ended
December 31, 1992 and the year ended March 31, 1992, respectively. At December
31, 1993, the Association was committed to fund mortgage loans totaling $49.1
million, including $15.4 million in adjustable rate mortgages. The Association
expects to fund such loans from its liquidity sources in 1994.
Net cash provided by operations during the year ended December 31, 1993
totaled $18.0 million. Adjustments to the net loss of $14.1 million provided
$32.2 million of net cash, including proceeds from sales of loans available-
for-sale of $231.2 million. These proceeds resulted principally from the sale
of fixed rate loans which were originated by the Association with the intent to
sell in the secondary market.
Net cash provided by investing activities during the year totaled $36.6
million. Loans originated and purchased used $513.2 million of cash, while
purchases of mortgage-backed securities and investment securities used cash of
$361.5 million and $239.4 million, respectively. Principal collected on loans
and mortgage-backed securities generated cash of $412.2 million and $237.3
million, respectively, while maturities of investment securities provided
$133.9 million in cash. Proceeds from sales of loans were $48.5 million, while
proceeds from sales of investment securities and mortgage-backed securities
available-for-sale totaled $158.9 million and $39.8 million, respectively.
Included in proceeds on the sale of investment securities was $16.3 million
which resulted from the sale of two bonds due to credit concerns. These bonds
had been classified as held-to-maturity. Proceeds from REO sales generated
$76.5 million in cash. All other investing activities provided net cash of
$43.6 million.
Net cash used in financing activities during the years ended December 31,
1993 totaled $10.0 million and resulted primarily from a decrease of $252.5
million in retail deposits. As noted previously, this decrease in deposits was
a consequence of the low interest rates in the economy due to the continuing
recession. Net increases in FHLB advances generated $233.0 million in cash.
Remaining financing activities provided $9.5 million in cash.
76
<PAGE>
The Association has pledged certain of its assets as collateral for certain
borrowings. By utilizing collateralized funding sources, the Association is
able to access a variety of cost effective sources of funds. The assets pledged
consist of investment securities, mortgage-backed securities, and loans.
Management monitors its liquidity requirements by assessing assets pledged, the
level of assets available for sale, additional borrowing capacity and other
factors. Management does not anticipate any negative impact to its liquidity
from its pledging activities. Assets pledged totaled $902.7 million at December
31, 1993, compared to $903.0 million and $785.8 million at December 31 and
March 31, 1992, respectively. The following table details assets pledged by the
Association at December 31, 1993:
<TABLE>
<CAPTION>
SUMMARY OF PLEDGED COLLATERAL
------------------------------
MORTGAGE-
BACKED TOTAL
SECURITIES LOANS COLLATERAL
---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Borrowings:
FHLB advances................................. $ -- $568,139 $568,139
Securities sold under agreements to
repurchase................................... 306,344 -- 306,344
Other obligations:
ESOP letter of credit......................... 13,846 -- 13,846
Other miscellaneous obligations............... 14,404 -- 14,404
-------- -------- --------
Total pledged collateral.................... $334,594 $568,139 $902,733
======== ======== ========
</TABLE>
The liquidity of the Association is measured by the ratio of its liquid
assets to the net withdrawable deposits and borrowings payable in one year or
less. A portion of these liquid assets are in the form of non-interest bearing
reserves required by Federal Reserve Board regulations. 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. The Federal Reserve Board may adjust the latter reserve
percentage within a range of 8-14%. The Association is also subject to OTS
regulations which require the maintenance of a daily average balance of liquid
assets equal to 5%. The ratio averaged 5.67% for the year ended December 31,
1993, compared to 9.88% for the nine months ended December 31, 1992 and 5.83%
for the year ended March 31, 1992. In addition to the regulatory requirements,
the average liquidity ratio reflects management's expectations of future loan
fundings, operating needs, and the general economic and regulatory climate. In
addition, the Association is required by OTS regulations to maintain a daily
average balance of short-term liquid assets of 1%. The ratio averaged 2.34%,
5.00%, and 3.31% for the year ended December 31, 1993, the nine months ended
December 31, 1992, and the year ended March 31, 1992, respectively.
Each of the Company's sources of liquidity is vulnerable to various
uncertainties beyond the control of the Company. Scheduled loan payments are a
relatively stable source of funds, while loan prepayments and deposit flows
vary widely in reaction to market conditions, primarily prevailing interest
rates. Asset sales are influenced by general market interest rates and other
unforeseen market conditions. The Company's ability to borrow at attractive
rates is affected by its credit rating and other market conditions.
Increased capital remains a significant focus for the Association because,
notwithstanding that it has achieved compliance with its fully phased in
regulatory capital requirements, the Association does not meet the standards
for a well-capitalized institution promulgated pursuant to FDICIA. 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 dividends
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. Also, the Company and the OTS entered
into a Dividend Limitation Agreement as a part of the holding company approval
process which prohibited 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.
77
<PAGE>
On May 21, 1993, the Company's Board of Directors voted to declare a stock
dividend payable on July 1, 1993 on the Company's 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 an additional 34, 296 shares of Series
B preferred stock. On September 24, 1993, the Company's Board of Directors
voted to declare a stock dividend payable on October 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 October 1, 1993, and accumulated and unpaid as
of that date, to holders of record on September 24, 1993. On October 1, 1993,
the Company paid the $820,000 of dividends then 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 stock dividend payable on January 1, 1994 on the Series B
preferred stock of one share of Series B preferred stock for each $100 of the
amount of dividends payable on January 1, 1994 and accumulated and unpaid as of
that date, to holders of record on December 17, 1993. On January 1, 1994, the
Company paid $838,000 of dividends then payable on the Series B preferred stock
through the issuance of an additional 8,377 shares of Series B preferred stock.
In addition, the interest and principal repayment obligations on the 9%
Debentures constitute an impediment to the Company's ability to pay cash
dividends. The $38.4 million net balance of 9% Debentures at December 31, 1993
require annual interest payments of $3.7 million. In addition, the Company is
required to repurchase 6 2/3% of the 9% Debentures outstanding as of March 1,
1998 in each year commencing on May 1, 1998. Prior to May 1, 1997, the Company
may fulfill its interest payment obligation by the issuance of additional 9%
Debentures. In meeting this interest obligation, the Company has issued an
additional $5.0 million in 9% Debentures, which are included in the outstanding
principal at December 31, 1993. Any such issuance, however, increases the
aggregate annual interest obligation and also the amount of 9% Debentures
required to be repurchased annually commencing May 1, 1998.
INTEREST RATE RISK MANAGEMENT
Northeast Savings' net interest income is the difference between interest
earned on its loans and investment securities and interest paid on its deposits
and borrowings. Net interest income is subject to fluctuations due to changes
in interest rates. Such changes can affect the Association's net interest
income in several ways.
First, the cost of interest-bearing liabilities may respond more or less
quickly than the yield on earning assets to changes in interest rates if the
volume of liabilities maturing or repricing in any period is greater or less
than the volume of earning assets maturing or repricing in the same period. To
the extent that the volume of liabilities maturing or repricing in any period
is not matched by a corresponding volume of assets, the Association has a
repricing gap or mismatch, and net interest income is subject to change as
interest rates change. The Association's maturity and repricing mismatches are
measured by the asset/liability gap report. Unlike the traditional position of
many thrift institutions which have a larger volume of liabilities maturing or
repricing within one year than assets maturing or repricing, Northeast Savings
has a larger volume of assets maturing or repricing than liabilities for all
time frames from one to ten years on a cumulative basis. As a consequence,
excluding all other factors, the Association's interest-earning assets can be
expected to respond more quickly to changes in interest rates than its
interest-bearing liabilities resulting in an increase in net interest income
when interest rates rise and a decrease when interest rates fall.
78
<PAGE>
The Company's gap results at December 31, 1993, are reported in the following
table. The one year gap as a percentage of total assets was a positive 13.06%
at December 31, 1993, compared to a positive 10.54% and 10.72% at December 31
and March 31, 1992, respectively.
<TABLE>
<CAPTION>
INTEREST SENSITIVITY PERIOD
---------------------------------------------------------------------
WITHIN 6 MONTHS- OVER 1- OVER 5- OVER 10
6 MONTHS 1 YEAR 5 YEARS 10 YEARS YEARS TOTAL
---------- ---------- --------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1993
Interest-earning assets:
Interest-bearing
deposits, federal
funds sold and
investment securities,
net................... $ 106,395 $ 18,784 $ 86,595 $ 43,880 $ 33,322 $ 288,976
Mortgage-backed
securities, net....... 800,562 503,491 29,241 7,414 3,064 1,343,772
Loans, net:
Single-family
residential real
estate loans:
Adjustable rate....... 1,040,800 509,963 93,731 -- -- 1,644,494
Fixed rate............ 48,953 10,271 49,477 13,216 10,903 132,820
Consumer loans......... 11,410 3,055 17,134 2,443 -- 34,042
Income property loans.. 39,937 3,887 22,573 5,193 43 71,633
Commercial loans....... 77 -- -- -- -- 77
Rhode Island covered
assets................ 49,794 10,944 23,444 6,843 -- 91,025
---------- ---------- --------- --------- --------- ----------
Total interest-earning
assets................. $2,097,928 $1,060,395 $ 322,195 $ 78,989 $ 47,332 $3,606,839
========== ========== ========= ========= ========= ==========
Interest-bearing
liabilities:
Deposits:
NOW and Super NOW
accounts.............. $ 54,728 $ 3,595 $ 25,667 $ 25,496 $ 87,209 $ 196,695
Money market deposit
accounts.............. 401,135 -- -- -- -- 401,135
Regular savings........ 295,475 7,286 52,022 51,674 176,752 583,209
Certificates of
deposit............... 958,227 308,112 297,521 194,488 -- 1,758,348
---------- ---------- --------- --------- --------- ----------
Total deposits........ 1,709,565 318,993 375,210 271,658 263,961 2,939,387
---------- ---------- --------- --------- --------- ----------
Borrowings:
FHLB advances.......... 323,000 -- 50,000 -- -- 373,000
Securities sold under
agreements to
repurchase............ 283,732 11,077 -- -- -- 294,809
Long term borrowings... -- -- -- -- 38,442 38,442
Advance payment by
borrowers for taxes
and insurance......... -- -- -- -- 28,337 28,337
---------- ---------- --------- --------- --------- ----------
Total borrowings...... 606,732 11,077 50,000 -- 66,779 734,588
---------- ---------- --------- --------- --------- ----------
Total interest-bearing
liabilities............ $2,316,297 $ 330,070 $ 425,210 $ 271,658 $ 330,740 $3,673,975
========== ========== ========= ========= ========= ==========
Total interest-earning
assets less interest-
bearing liabilities for
the period............. $ (218,369) $ 730,325 $(103,015) $(192,669) $(283,408) $ (67,136)
Cumulative total
interest-earning assets
less interest-bearing
liabilities............ $ (218,369) $ 511,956 $ 408,941 $ 216,272 $ (67,136) $ (67,136)
Cumulative total
interest-earning assets
less interest-bearing
liabilities as a
percent of total
assets................. (5.57)% 13.06% 10.43% 5.52% (1.71)% (1.71)%
</TABLE>
- --------
For purposes of the above Interest Rate Sensitivity Analysis:
. Fixed rate assets are scheduled by contractual maturity; adjustable rate
assets are scheduled by the next repricing date; in both cases, assets
that have prepayment options are adjusted for the Company's estimate of
prepayments.
. NOW accounts are assumed to decay at a rate of 5% per year.
. Regular savings account decay assumptions used have the effect of
repricing $288.0 million funds in excess of the historical average
balance within six months. The historical average balance is assumed to
decay at a rate of 5% per year.
. Loans do not include the allowance for loan loss of $28.3 million.
. Loans do not include non-accrual loans of $67.5 million.
79
<PAGE>
Second, net interest income is also subject to fluctuations due to changes in
interest rates if asset yields and liability costs are tied to different
indexes and the relationship or basis between the indexes changes. Since the
large majority of the Association's earning assets are indexed to United States
treasury rates, the Association relies predominantly on retail deposits for a
funding source and minimizes its reliance on wholesale funding sources tied to
the London Interbank Offered Rate in order to minimize basis risk. Although
retail deposit costs are not directly tied to treasury rates, retail deposit
costs bear a generally predictable relationship to treasury rates. The
proportion of total funding provided by retail deposits was 81.0% at December
31, 1993 compared to 87.5% and 97.7% at December 31 and March 31, 1992,
respectively.
Third, net interest income may also fluctuate if asset yields and liability
costs are not equally responsive to changes in interest rates as a result of
pricing by competitors. Competition for deposits and loans from other financial
institutions may require the Association to respond more quickly to changes in
interest rates on new loans and more slowly to changes in interest rates on new
deposits or vice versa. Typically, market competition has been slow to respond
to changing rates on deposit products and fast to respond to changing rates on
loan products. This difference in responsiveness can cause an expansion or
contraction of the interest rate spread between loans and deposits and a change
in net interest income.
During 1993, competitors in several markets lowered the initial rate on one
year adjustable rate mortgages to levels that represented discounts relative to
the fully indexed rate on such loans larger than had been offered in the past
five years. The effect of such aggressive pricing on some new loans adversely
impacted the Association's net interest income in 1993 and increased the
Association's exposure to interest rate increases due to the effect of the
annual interest rate caps on loans with larger initial rate discounts than has
been typical.
In addition to maturity/repricing mismatch risk, basis risk, and competitive
pricing risk, Northeast Savings' net interest income is also subject to
fluctuations due to changes in asset and liability cash flows resulting from
changes in interest rates. Significant increases or decreases in interest rates
will change the rate at which current borrowers prepay their loans which will
result in higher rate loans prepaying more rapidly in low rate environments and
lower rate loans prepaying more slowly in high rate environments. These changes
in prepayments will generally affect the Association's net interest income in
an adverse fashion. Deposit cash flows may also be affected by changes in
interest rates. Significant increases in interest rates can induce depositors
to make premature withdrawals from certificates of deposit in order to receive
the higher current interest rate. Higher interest rates can also induce
depositors to shift funds from more liquid core deposit accounts into higher
paying alternatives. These changes in deposit cash flows when interest rates
increase generally have an adverse effect on the Association's net interest
income although the magnitude of the impact can be wholly or partially offset
by premature withdrawal penalties.
Since 1992, deposit cash flows have been impacted by the lowest level of
market interest rates in thirty years. Depositors who had been accustomed to
receiving a higher level of interest income than has been available on
Northeast Savings' deposit products have withdrawn their funds and sought
higher yields in alternative investments such as mutual funds. The outflow of
depositor funds has been made up by borrowings, although retail deposits still
provided 81.0% of total funding at December 31, 1993 as noted above. The
disintermediation resulting from the unusually low level of interest rates has
not had a material impact on the Association's interest rate risk exposure.
Significant changes in interest rates can also affect the Association's net
interest income due to the effect of interest rate caps on adjustable rate
loans. Interest rate caps which may be either period caps (such as annual or
semiannual) or lifetime caps limit the amount by which the interest rate may
change on a loan. If interest rates change in such a way that interest rate
caps prevent a loan from repricing to the fully indexed rate, net interest
income may be favorably or unfavorably impacted depending upon whether interest
rates have declined or increased.
80
<PAGE>
In order to measure the effects of changes in cash flows and the impact of
interest rate caps and also to measure the full effects of all of the other
factors on net interest income, the Association performs a set of simulations
each quarter in order to quantify the effects of a wide range of interest rate
changes on the Association's net interest income. The effect of instantaneous
and sustained rate shocks of +/-1%, +/-2%, +/-3%, and +/-4% are simulated along
with the effects of quarterly rate changes of +/-0.25%, +/-0.50%, +/-0.75%, +/-
1.00% and the effects of changes in the slope of the yield curve of +/-1.50%.
The results of these simulations at December 31, 1993 show that the
Association's net interest income decreases when rates decrease, increases
marginally when rates increase modestly, and decreases when rates increase
significantly. In general, the Association's interest rate risk exposure is
asset sensitive. The decreases in net interest income under rate shocks of two
percent or more is due to the combined effect of annual rate caps on adjustable
rate mortgages and the potential impact of premature withdrawals from
certificates of deposit and the transfer of those funds into higher rate
certificates. Since the simulations on which these results are based assume
instantaneous and sustained rate changes, the results exaggerate the impact of
rate changes on net interest income since interest rates do not typically
increase or decrease by such magnitudes instantaneously.
A comparison of these results at December 31, 1993 with the results of
simulations at December 31 and March 31, 1992 (see the table that follows)
shows that the Association's interest rate risk exposure has shifted from being
significantly asset sensitive at March 31, 1992 to being marginally asset
sensitive at December 31, 1993. There was little change in the Association's
interest rate risk exposure between December 31, 1992 and December 31, 1993.
This overall reduction in asset sensitivity from March 31, 1992 has been due to
the effects of the sustained low interest rates which have prevailed since
1992. The sustained low interest rate environment has caused deposit
disintermediation and a decrease in funding sources. The sustained low rate
environment has also reduced the volume of loans with above market rates
through the repricing or refinancing of existing loans and has thereby
exacerbated the effect of periodic interest rate caps in a sharply rising
interest rate environment.
NORTHEAST SAVINGS, F.A.
SIMULATED CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
FOR A TWELVE MONTH PERIOD FROM
-----------------------------------
RATE DECEMBER 31, DECEMBER 31, MARCH 31,
SHOCK 1993 1992 1992
----- ------------ ------------ ---------
<S> <C> <C> <C>
4.0%............ (36.5)% (27.2)% (5.9)%
3.0............. (16.8) (10.8) 7.0
2.0............. 4.2 .5 10.7
1.0............. 0.9 1.3 7.5
(1.0)........... 4.1 (2.4) (4.3)
(2.0)........... (5.7) (9.5) (8.4)
(3.0)........... N/A* N/A* (13.8)
(4.0)........... N/A* N/A* (17.5)
</TABLE>
- --------
* Rate changes of this magnitude result in negative short term rates and
simulated results that are not meaningful.
The Association also performs an analysis of the sensitivity of its portfolio
equity to changes in interest rates. Simulations on the effect of instantaneous
rate shocks of +/-1%, +/-2%, +/-3%, and +/-4% are performed and the results are
used to evaluate the long-term impact of interest rate changes on the
theoretical market value of the Association and its financial performance. The
results of the portfolio equity analyses indicate that the Association is more
asset sensitive than indicated by the net interest income analysis. Since the
portfolio equity analyses are static analyses and do not take into account the
effect of projected changes in the balance sheet such as some continued deposit
disintermediation, the portfolio equity analyses indicate that Northeast
Savings' interest rate risk exposure is more strongly asset sensitive.
The results of the simulations just noted are also used to measure compliance
with Northeast Savings' stated interest rate risk management policy. The
Association has a stated policy of limiting its exposure to
81
<PAGE>
interest rate changes. Should the Association's exposure to plausible changes
in interest rates exceed the limits set by policy, the Association would be
required to hedge its exposure in such a way as to reduce it to less than the
stated limits. In general, the Association has relied on the implementation of
its overall strategy to manage interest rate risk rather than relying on the
use of financial hedging vehicles. The Association's investment and interest
rate risk management policies do permit the use of vehicles such as standard
interest rate swaps and interest rate caps to manage its interest rate risk
exposure.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1990, the FASB issued SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." SFAS 106 focuses principally on
postretirement health care benefits and significantly changes the prevalent
current 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. SFAS 106 is effective for fiscal years beginning after December 15,
1992. The impact of the adoption of SFAS 106 on the financial condition and
results of operations of the Company is approximately $444,000. The Company
implemented SFAS 106 during the quarter ended March 31, 1993 and is amortizing
the expense over the twelve year life expectancy of the participants.
In November 1992, the FASB issued SFAS 112, "Employers' Accounting for
Postemployment Benefits." SFAS 112 establishes accounting standards for
employers who provide benefits to former or inactive employees after employment
but before retirement (postemployment benefits). Postemployment benefits are
all types of benefits provided to former or inactive employees, their
beneficiaries, and covered dependents. Those benefits include, but are not
limited to, salary continuation, supplemental unemployment benefits, severance
benefits, disability-related benefits (including worker's compensation), job
training and counseling, and continuation of benefits such as health care
benefits and life insurance coverage.
SFAS 112 requires employers to recognize the obligation to provide
postemployment benefits in accordance with SFAS 43, "Accounting for Compensated
Absences," if the obligation is attributable to employees' services already
rendered, employees' rights to those benefits accumulate or vest, payment of
the benefits is probable, and the amount of the benefits can be reasonably
estimated. If those four conditions are not met, the employer should account
for postemployment benefits when it is probable that a liability has been
incurred and the amount can be reasonably estimated in accordance with SFAS 5,
"Accounting for Contingencies." If an obligation for postemployment benefits is
not accrued in accordance with SFAS 5 or 43 only because the amount cannot be
reasonably estimated, the financial statements shall disclose that fact.
SFAS 112 is effective for fiscal years beginning after December 15, 1993.
Generally, the Association does not provide benefits to its former or inactive
employees after employment but before retirement. Therefore, SFAS 112 is
expected to have minimal impact on the Company.
At the urging of the auditing profession, the Securities and Exchange
Commission, bank regulators, and some preparers of financial statements, in
1986, the FASB added the financial instruments project to its agenda in order
to address numerous questions resulting from the use of innovative financial
instruments. Thus far, the project has resulted in the issuance of four
Statements of Financial Accounting Standards: SFAS 105, "Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk," issued in March
1990, SFAS 107, "Disclosures about Fair Value of Financial Instruments," issued
in December 1991, SFAS 114, "Accounting by Creditors for Impairment of a Loan,"
and SFAS 115, "Accounting for Certain Investments in Debt and Equity
Securities." Both SFAS 114 and SFAS 115, issued in May 1993, are discussed
below. The Company has previously implemented SFAS 105 and SFAS 107. As a part
of this project, the FASB has also issued two Discussion Memorandums,
"Distinguishing between Liability and Equity Instruments and Accounting for
Instruments with Characteristics of Both" in August 1990 and "Recognition and
Measurement of Financial Instruments" in November 1991.
82
<PAGE>
SFAS 114 addresses the accounting by creditors for impairment of certain
loans. It is applicable to all creditors and to all loans, uncollateralized as
well as collateralized, except large groups of smaller-balance homogeneous
loans that are collectively evaluated for impairment, loans that are measured
at fair value or at the lower of cost or fair value, leases, and debt
securities as defined in SFAS 115. It applies to all loans that are
restructured in a troubled debt restructuring involving a modification of
terms.
SFAS 114 requires that impaired loans that are within its scope be measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent.
SFAS 114 amends SFAS 5, "Accounting for Contingencies," to clarify that a
creditor should evaluate the collectibility of both contractual interest and
contractual principal of all receivables when assessing the need for a loss
accrual. SFAS 114 also amends SFAS 15, "Accounting by Debtors and Creditors for
Troubled Debt Restructurings," to require a creditor to measure all loans that
are restructured in a troubled debt restructuring involving a modification of
terms in accordance with SFAS 114.
SFAS 114 applies to financial statements for fiscal years beginning after
December 15, 1994. Earlier application is encouraged. Management implemented
SFAS 114 for the year ended December 31, 1993. Since the Company was previously
in compliance with SFAS 114, the statement did not impact the Company's results
of operations or financial condition.
SFAS 115 addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments
in debt securities. Those investments are to be classified in three categories
and accounted for as follows:
. Debt securities that the enterprise has the positive intent and ability
to hold to maturity are classified as held-to-maturity securities and
reported at amortized cost.
. Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings.
. Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of
shareholders' equity.
SFAS 115 does not apply to unsecuritized loans. However, after mortgage loans
are converted to mortgage-backed securities, they are subject to its
provisions. SFAS 115 supersedes SFAS 12, "Accounting for Certain Marketable
Securities," and related Interpretations and amends SFAS 65, "Accounting for
Certain Mortgage Banking Activities," to eliminate mortgage-backed securities
from its scope.
SFAS 115 is effective for fiscal years beginning after December 15, 1993. It
is to be initially applied as of the beginning of an enterprise's fiscal year
and cannot be applied retroactively to prior years' financial statements.
However, an enterprise may elect to initially apply SFAS 115 as of the end of
an earlier fiscal year for which annual financial statements have not
previously been issued. Correspondingly, the Company adopted SFAS 115 as of the
end of the year ended December 31, 1993. As a result, unrealized gains of $9.5
million, net of tax effect, were recognized in stockholders' equity and
increased the Association's core capital by 22 basis points.
On June 30, 1993, the FASB issued a proposed Statement of Financial
Accounting Standards, "Accounting for Stock-based Compensation" (the proposed
Statement). The proposed Statement would establish financial accounting and
reporting standards for stock-based compensation paid to employees. It would
supersede APB Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees." The proposed requirements also would apply to other transactions in
which equity instruments are issued to suppliers of goods or services.
83
<PAGE>
The proposed Statement would require recognition of compensation cost for the
fair value of stock-based compensation paid to employees for their services.
Although this proposed Statement would apply to all forms of stock-based
compensation, its most notable effect would be to significantly reduce the
anomalous results of the current accounting for fixed and performance stock
options under APB 25. Performance stock options usually are less valuable than
fixed stock options, but application of the requirements of APB 25 typically
results in recognition of compensation cost for performance stock options and
none for fixed stock options.
The proposed Statement would recognize the fair value of an award of equity
instruments to employees as additional equity at the date the award is granted.
Amounts attributable to future service would be recognized as an asset, prepaid
compensation, and would be amortized ratably over the period(s) that the
related employee services are rendered. If an award is for past services, the
related compensation cost would be recognized in the period in which the award
is granted.
The final measurement date for equity instruments granted to employees as
compensation is the date at which the stock price that enters into the
measurement of the transaction is fixed. Stock price changes after that date
have no effect on measuring the value of the equity instrument issued or the
related compensation cost. This proposed Statement would require that
restricted stock, stock options, and other equity instruments issued to
employees as compensation, and the related compensation cost, be measured based
on the stock price at the date an award is granted.
Accounting for the cost of employees services is based on the value of
compensation paid, which is presumed to be a measure of the value of services
received. Accordingly, the compensation cost stemming from employee stock
options is measured based on the fair value of stock options granted. This
proposed Statement would require that the fair value of a stock option (or its
equivalent) granted by a public entity be estimated using a pricing model, such
as the Black-Scholes or binomial option-pricing models, that takes into account
the exercise price and expected term of the option, the current price of the
underlying stock, its expected volatility, the expected dividend yield on the
stock, and the risk-free interest rate during the expected term of the option.
The proposed requirements provide for reducing the estimated value of employees
stock options below that produced by an option-pricing model for
nonforfeitable, tradable options issued to third parties. Under this proposed
Statement, the value of an employee stock option that does not vest is zero,
and the value of an employee stock option that does vest is based on the length
of time it remains outstanding rather than on the maximum term of the option,
which may be considerably longer.
The proposed Statement has two effective dates. Its disclosure provisions
would be effective for years beginning after December 31, 1993. Pro forma
disclosure of the effects on net income and earnings per share of recognizing
compensation cost for awards granted after December 31, 1993 would be required.
The recognition provisions would be effective for awards granted after December
31, 1996. Until the FASB has issued a final Statement, management cannot
determine the impact that implementation of such final Statement would have on
the results of operations or financial condition of the Company.
On November 22, 1993, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 93-6 (SOP 93-6), "Employers' Accounting
for Employee Stock Ownership Plans." This SOP supersedes AICPA SOP 76-3,
"Accounting Practices for Certain Employee Stock Ownership Plans," which was
issued in December 1976. SOP 93-6 applies to all employers with ESOPs, both
leveraged and nonleveraged and requires the following:
. Employers should report the issuance of new shares or the sale of
treasury shares to the ESOP when the issuance or sale occurs and should
report a corresponding charge to unearned ESOP shares, a contra-equity
account.
. For ESOP shares committed to be released in a period to compensate
employees directly, employers should recognize compensation cost equal to
the fair value of the shares committed to be released.
84
<PAGE>
. For ESOP shares committed to be released in a period to settle or fund
liabilities for other employee benefits, such as an employer's match of
employees' 401(k) contributions or an employer's obligation under a
formula profit-sharing plan, employers should report satisfaction of the
liabilities when the shares are committed to be released to settle the
liabilities. Compensation cost and liabilities associated with providing
such benefits to employees should be recognized the way they would be if
an ESOP had not been used to fund the benefit.
. For ESOP shares committed to be released to replace dividends on
allocated shares used for debt service, employers should report
satisfaction of the liability to pay dividends when the shares are
committed to be released for that purpose.
. Employers should credit unearned ESOP shares as the shares are committed
to be released based on the cost of the shares to the ESOP. The
difference between the fair value of the shares committed to be released
and the cost of those shares to the ESOP should be charged or credited to
additional paid-in capital.
. Employers should charge dividends on allocated ESOP shares to retained
earnings. Employers should report dividends on unallocated shares as a
reduction of debt or accrued interest or as compensation cost, depending
on whether the dividends are used for debt service or paid to
participants.
. Employers should report redemptions of ESOP shares as purchases of
treasury stock.
. Employers should report loans from outside lenders to ESOPs as
liabilities in their balance sheets and should report interest cost on
the debt. Employers with internally leveraged ESOPs should not report the
loan receivable from the ESOP as an asset and should not report the
ESOP's debt from the employer as a liability.
. For earnings-per-share (EPS) computations, ESOP shares that have been
committed to be released should be considered outstanding. ESOP shares
that have not been committed to be released should not be considered
outstanding.
SOP 93-6, although it does not change the existing accounting for
nonleveraged ESOPs, contains guidance for nonleveraged ESOPs. SOP 93-6 also
addresses issues concerning pension reversion ESOPs, ESOPs that hold
convertible preferred stock, and terminations, as well as issues related to
accounting for income taxes. SOP 93-6 also contains disclosure requirements for
all employers with ESOPs, including those that account for ESOP shares under
the grandfathering provisions.
SOP 93-6 is effective for fiscal years beginning after December 15, 1993.
Employers are required to apply the provisions of SOP 93-6 to shares purchased
by ESOPs after December 31, 1992, that have not been committed to be released
as of the beginning of the year of adoption. Employers are permitted, but not
required, to apply the provisions of ESOP 93-6 to shares purchased by ESOPs on
or before December 31, 1992, that have not been committed to be released as of
the beginning of the year of adoption. The Company adopted SOP 93-6 as of
January 1, 1994.
On March 31, 1993, the Accounting Standards Executive Committee of the AICPA
issued a proposed statement of position (SOP) which would require all reporting
entities (including business enterprises, non-for-profit organizations, and
state and local governments) that prepare financial statements in conformity
with generally accepted accounting principles to include in their financial
statements disclosures about the nature of their operations and use of
estimates in the preparation of financial statements. In addition, if specified
disclosure criteria are met, it would require such entities to include in their
financial statements disclosures about certain significant estimates, current
vulnerability due to concentrations, and financial flexibility.
The provisions of this proposed SOP would be effective for financial
statements issued for fiscal years ending after December 15, 1994, and for
financial statements for interim periods in fiscal years subsequent to the year
for which the proposed SOP is first applied. Early application is encouraged
but not required. Since the proposed SOP is a disclosure document only, the
final SOP, if issued as proposed, would have no impact on the Company's results
of operations or financial position.
85
<PAGE>
CONSOLIDATED AVERAGE BALANCE SHEETS
The following tables reflect the Company's consolidated average balance
sheets for the periods indicated as well as interest income and expense and
average rates earned and paid on each major category of interest-earning assets
and interest-bearing liabilities. Average balances are calculated predominantly
on a daily basis. Average balances of loans include non-accrual loans. The
interest rate spread is calculated as the average rate earned on total
interest-earning assets less the average rate paid on total interest-bearing
liabilities. The interest rate margin is calculated by dividing net interest
income by total interest-earning assets.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, FOR THE YEAR ENDED
------------------------------------------------------- MARCH 31,
1993 1992 1992
--------------------------- --------------------------- ---------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ RATE AVERAGE INCOME/ RATE AVERAGE INCOME/ RATE
BALANCE EXPENSE % BALANCE EXPENSE % BALANCE EXPENSE %
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Interest-bearing
deposits and federal
funds sold............ $ 32,608 $ 1,085 3.33% $ 59,865 $ 5,229 8.73% $ 43,995 $ 2,853 6.48%
Investment securities,
net................... 223,303 10,970 4.91 347,624 19,600 5.54 298,575 20,786 6.96
Mortgage-backed
securities, net....... 1,052,528 54,205 5.15 752,035 52,615 7.00 930,190 78,175 8.40
Loans, net:
Single-family
residential real
estate................ 2,193,138 134,814 6.15 2,175,297 164,602 7.57 2,302,909 206,785 8.98
Consumer............... 42,406 3,719 8.77 60,511 5,618 9.28 78,078 7,907 10.13
Income property........ 78,712 6,571 8.35 90,634 8,689 9.59 106,622 10,350 9.71
Commercial............. 225 23 10.22 722 29 4.02 834 90 10.79
---------- ------- ---------- ------- ---------- -------
Total loans........... 2,314,481 145,127 6.27 2,327,164 178,938 7.69 2,488,443 225,132 9.05
---------- ------- ---------- ------- ---------- -------
Rhode Island covered
assets................ 122,358 8,989 7.35 122,317 9,932 8.12 -- -- --
---------- ------- ---------- ------- ---------- -------
Total interest-earning
assets................. 3,745,278 220,376 5.88% 3,609,005 266,314 7.38% 3,761,203 326,946 8.69%
------- ------- -------
All other assets........ 216,192 236,515 218,974
---------- ---------- ----------
Total Assets.......... $3,961,470 $3,845,520 $3,980,177
========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Brokered deposits...... $ 25,301 2,419 9.56% $ 25,302 2,419 9.56% $ 39,267 3,296 8.39%
Retail deposits:
Regular savings........ 637,835 15,146 2.37 683,041 24,666 3.61 427,360 21,985 5.14
NOWs, Super NOWs and
money market savings.. 656,134 15,399 2.35 659,364 21,334 3.24 577,225 27,356 4.74
Certificates........... 1,762,078 88,199 5.01 2,045,941 123,231 6.02 2,323,114 166,485 7.17
---------- ------- ---------- ------- ---------- -------
Total deposits........ 3,081,348 121,163 3.93 3,413,648 171,650 5.03 3,366,966 219,122 6.51
---------- ------- ---------- ------- ---------- -------
Borrowings:
FHLB advances.......... 351,267 13,230 3.77 51,740 4,015 7.76 169,079 12,572 7.44
Securities sold under
agreements to
repurchase............ 290,112 9,866 3.40 132,713 4,866 3.67 200,564 12,395 6.18
Other borrowings....... 65,483 3,709 5.66 44,363 1,684 3.80 30,969 56 .18
---------- ------- ---------- ------- ---------- -------
Total borrowings...... 706,862 26,805 3.79 228,816 10,565 4.62 400,612 25,023 6.25
---------- ------- ---------- ------- ---------- -------
Total interest-bearing
liabilities............ 3,788,210 147,968 3.91% 3,642,464 182,215 5.00% 3,767,578 244,145 6.48%
------- ------- -------
All other liabilities... 40,095 26,615 23,909
Stockholders' Equity.... 133,165 176,441 188,690
---------- ---------- ----------
Total Liabilities and
Stockholders' Equity. $3,961,470 $3,845,520 $3,980,177
========== ========== ==========
Deficiency of interest-
earning assets over
interest-bearing
liabilities............ $ 42,932 $ 33,459 $ 6,375
========== ========== ==========
Net Interest Income..... $72,408 $84,099 $82,801
======= ======= =======
Interest Rate Spread.... 1.97% 2.38% 2.21%
===== ===== =====
Interest Rate Margin.... 1.93% 2.33% 2.20%
===== ===== =====
Ratio of average
interest-earning assets
to interest-bearing
liabilities............ 98.87% 99.08% 99.83%
===== ===== =====
</TABLE>
86
<PAGE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- ---------------------------
1993 1992
--------------------------- ---------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ RATE AVERAGE INCOME/ RATE
BALANCE EXPENSE % BALANCE EXPENSE %
---------- -------- ------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Interest-bearing
deposits and federal
funds sold............ $ 35,729 $ 886 3.31% $ 51,858 $ 4,138 10.64%
Investment securities,
net................... 213,591 7,494 4.68 377,806 15,313 5.40
Mortgage-backed
securities, net....... 1,101,863 41,357 5.00 754,475 37,924 6.70
Loans, net:
Single-family
residential real
estate................ 2,185,860 99,103 6.05 2,162,684 118,844 7.33
Consumer............... 40,650 2,688 8.82 57,670 3,883 8.98
Income property........ 77,167 4,767 8.24 88,769 6,290 9.45
Commercial............. 212 16 10.06 862 21 3.25
---------- ------- ---------- -------
Total loans........... 2,303,889 106,574 6.17 2,309,985 129,038 7.45
---------- ------- ---------- -------
Rhode Island covered
assets................ 117,089 6,743 7.68 162,792 9,932 8.13
---------- ------- ---------- -------
Total interest-earning
assets................. 3,772,161 163,054 5.76% 3,656,916 196,345 7.16%
------- -------
All other assets........ 210,347 233,508
---------- ----------
Total Assets.......... $3,982,508 $3,890,424
========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Brokered deposits...... $ 25,292 1,822 9.56% $ 25,292 1,816 9.53%
Retail deposits:
Regular savings........ 623,761 10,750 2.29 732,331 18,694 3.39
NOWs, Super NOWs and
money market savings.. 651,884 11,121 2.26 670,556 15,356 3.04
Certificates........... 1,750,696 65,119 4.94 2,003,288 88,058 5.83
---------- ------- ---------- -------
Total deposits........ 3,051,633 88,812 3.86 3,431,467 123,924 4.79
---------- ------- ---------- -------
Borrowings:
FHLB advances.......... 397,727 11,127 3.71 54,242 3,056 7.48
Securities sold under
agreements to
repurchase............ 292,811 7,506 3.40 153,149 4,111 3.56
Other borrowings....... 66,865 2,828 5.61 52,744 1,819 4.58
---------- ------- ---------- -------
Total borrowings...... 757,403 21,461 3.76 260,135 8,986 4.58
---------- ------- ---------- -------
Total interest-bearing
liabilities............ 3,809,036 110,273 3.84% 3,691,602 132,910 4.78%
------- -------
All other liabilities... 41,808 27,072
Stockholders' Equity.... 131,664 171,750
---------- ----------
Total Liabilities and
Stockholders' Equity. $3,982,508 $3,890,424
========== ==========
Deficiency of interest-
earning assets
over interest-bearing
liabilities............ $ 36,875 $ 34,686
========== ==========
Net Interest Income..... $52,781 $63,435
======= =======
Interest Rate Spread.... 1.92% 2.38%
===== =====
Interest Rate Margin.... 1.88% 2.34%
===== =====
Ratio of average
interest-earning assets
to interest-bearing
liabilities............ 99.03% 99.06%
===== =====
</TABLE>
87
<PAGE>
CONSOLIDATED RATE/VOLUME TABLES
The following tables present the degree to which changes in the Association's
interest income, interest expense, and net interest income are due to changes
in interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities. The change due to average balance or volume is
computed by multiplying the change in the average balance of funds employed in
the current period by the interest rate for the prior period. The change due to
average rate is computed by multiplying the change in interest rates by the
average balance of funds in the prior period. The change due to rate/volume is
computed by multiplying the change in the average balance by the change in the
interest rate. The change due to timing results from the difference in the
length of the reporting periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993 VERSUS
NINE MONTHS ENDED DECEMBER 31, 1992
------------------------------------------------
AMOUNT OF INCREASE
(DECREASE) DUE TO CHANGE IN:
------------------------------------------------
VOLUME RATE RATE/VOLUME TIMING TOTAL
-------- -------- ----------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income:
Interest-bearing deposits
and federal funds sold..... $ (2,048) $ (3,792) $ 1,408 $ 1,379 $ (3,053)
Investment securities, net.. (8,350) (1,857) 760 5,104 (4,343)
Mortgage-backed securities,
net........................ 19,976 (11,710) (4,626) 12,641 16,281
Loans, net:
Single-family residential
real estate................ 2,231 (25,517) (359) 39,615 15,970
Consumer.................... (1,370) (120) 32 1,294 (164)
Income property............. (950) (976) 111 2,096 281
Commercial.................. (21) 60 (44) 7 2
-------- -------- ------- ------- --------
Total loans............... (110) (26,553) (260) 43,012 16,089
-------- -------- ------- ------- --------
Rhode Island covered assets. (3,289) (1,283) 319 3,310 (943)
-------- -------- ------- ------- --------
Total interest income..... 6,179 (45,195) (2,399) 65,446 24,031
-------- -------- ------- ------- --------
Interest expense:
Deposits:
Brokered deposits........... 1 8 -- 594 603
Retail deposits:
Regular savings............ (3,202) (7,422) 958 6,118 (3,548)
NOWs, Super NOWs and money
market savings............ (438) (4,644) 100 5,025 43
Certificates............... (14,073) (16,604) 1,999 28,819 141
-------- -------- ------- ------- --------
Total deposits............ (17,712) (28,662) 3,057 40,556 (2,761)
-------- -------- ------- ------- --------
Borrowings:
FHLB advances............... 22,211 (2,013) (11,024) 1,000 10,174
Securities sold under
agreements to repurchase... 4,880 (248) (222) 1,345 5,755
Other borrowings............ 583 573 138 596 1,890
-------- -------- ------- ------- --------
Total borrowings.......... 27,674 (1,688) (11,108) 2,941 17,819
-------- -------- ------- ------- --------
Total interest expense... 9,962 (30,350) (8,051) 43,497 15,058
-------- -------- ------- ------- --------
Change in net interest
income...................... $ (3,783) $(14,845) $ 5,652 $21,949 $ 8,973
======== ======== ======= ======= ========
</TABLE>
88
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31, 1992 VERSUS
YEAR ENDED MARCH 31, 1992
---------------------------------------------------
AMOUNT OF INCREASE
(DECREASE) DUE TO CHANGE IN:
---------------------------------------------------
VOLUME RATE RATE/VOLUME TIMING TOTAL
-------- -------- ----------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income:
Interest-bearing deposits
and federal funds sold.. $ 510 $ 1,828 $ 327 $ (1,380) $ 1,285
Investment securities,
net..................... 5,516 (4,650) (1,234) (5,105) (5,473)
Mortgage-backed
securities, net......... (14,767) (15,833) 2,991 (12,642) (40,251)
Loans, net:
Single-family
residential real
estate.................. (12,591) (38,052) 2,317 (39,615) (87,941)
Consumer................. (2,067) (898) 235 (1,294) (4,024)
Income property.......... (1,733) (277) 46 (2,096) (4,060)
Commercial............... 3 (63) (2) (7) (69)
-------- -------- ------- -------- ---------
Total loans............. (16,388) (39,290) 2,596 (43,012) (96,094)
-------- -------- ------- -------- ---------
Rhode Island covered
assets.................. 9,932 -- -- -- 9,932
-------- -------- ------- -------- ---------
Total interest income.. (15,197) (57,945) 4,680 (62,139) (130,601)
-------- -------- ------- -------- ---------
Interest expense:
Deposits:
Brokered deposits........ (1,173) 446 (159) (594) (1,480)
Retail deposits:
Regular savings......... 15,689 (7,506) (5,356) (6,118) (3,291)
NOWs, Super NOWs and
money market savings... 4,423 (9,811) (1,586) (5,026) (12,000)
Certificates............ (22,920) (30,949) 4,261 (28,819) (78,427)
-------- -------- ------- -------- ---------
Total deposits......... (3,981) (47,820) (2,840) (40,557) (95,198)
-------- -------- ------- -------- ---------
Borrowings:
FHLB advances............ (8,539) 72 (49) (1,000) (9,516)
Securities sold under
agreements to
repurchase.............. (2,930) (5,249) 1,241 (1,346) (8,284)
Other borrowings......... 39 1,362 957 (595) 1,763
-------- -------- ------- -------- ---------
Total borrowings....... (11,430) (3,815) 2,149 (2,941) (16,037)
-------- -------- ------- -------- ---------
Total interest
expense.............. (15,411) (51,635) (691) (43,498) (111,235)
-------- -------- ------- -------- ---------
Change in net interest
income................... $ 214 $ (6,310) $ 5,371 $(18,641) $ (19,366)
======== ======== ======= ======== =========
</TABLE>
89
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management's Report........................................................ 91
Reports of Independent Accountants......................................... 93
Consolidated Statement of Operations....................................... 95
Consolidated Statement of Financial Condition.............................. 96
Consolidated Statement of Changes in Stockholders' Equity.................. 97
Consolidated Statement of Cash Flows....................................... 98
Notes to the Consolidated Financial Statements............................. 99
</TABLE>
90
<PAGE>
MANAGEMENT'S REPORT
To the Stockholders:
Financial Statements
The management of Northeast Federal Corp. (the Company) is responsible for
the preparation, integrity, and fair presentation of its published financial
statements and all other information presented in this annual report. The
financial statements have been prepared in accordance with generally accepted
accounting principles and, as such, include amounts based on informed judgments
and estimates made by management.
The financial statements have been audited by an independent accounting firm,
which was given unrestricted access to all financial records and related data,
including minutes of all meetings of stockholders, the board of directors and
committees of the board. Management believes that all representations made to
the independent auditors during their audit were valid and appropriate. The
independent auditors' report is presented on page 93.
Internal Control
Management is responsible for establishing and maintaining an effective
internal control structure over financial reporting presented in conformity
with both generally accepted accounting principles and, as pertaining to
Northeast Savings, F.A., the Office of Thrift Supervision Instructions for
Thrift Financial Reports (TFR instructions). The structure contains monitoring
mechanisms, and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any structure of
internal control, including the possibility of human error and the
circumvention or overriding of controls. Accordingly, even an effective
internal control structure can provide only reasonable assurance with respect
to financial statement preparation. Further, because of changes in conditions,
the effectiveness of an internal control structure may vary over time.
Management assessed the institution's internal control structure over
financial reporting presented in conformity with both generally accepted
accounting principles and TFR instructions as of December 31, 1993. This
assessment was based on criteria for effective internal control over financial
reporting described in "Internal Control-Integrated Framework," issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management believes that the Company maintained an effective
internal control structure over financial reporting presented in conformity
with both generally accepted accounting principles and TFR instructions, as of
December 31, 1993.
The Audit Committee of the Board of Directors is comprised entirely of
outside directors who are independent of the Company's management; it includes
members with banking or related management experience, has access to its own
outside counsel, and does not include any large customers of the institution.
The Audit Committee is responsible for recommending to the Board of Directors
the selection of independent auditors. It meets periodically with management,
the independent auditors, and the internal auditors to ensure that they are
carrying out their responsibilities. The Committee is also responsible for
performing an oversight role by reviewing and monitoring the financial
accounting and auditing procedures of the Company in addition to reviewing the
Company's financial reports. The independent auditors and the internal auditors
have full and free access to the Audit Committee, with or without the presence
of management, to discuss the adequacy of the internal control structure for
financial reporting and any other matters which they believe should be brought
to the attention of the Committee.
91
<PAGE>
MANAGEMENT'S REPORT
(CONTINUED)
Compliance with Laws and Regulations
Management is also responsible for ensuring compliance with the federal laws
and regulations concerning loans to insiders and the federal and state laws and
regulations concerning dividend restrictions, both of which are designated by
the FDIC as safety and soundness standards.
Management assessed its compliance with the designated safety and soundness
laws and regulations and has maintained records of its determinations and
assessments as required by the FDIC. Based on this assessment, management
believes that the Company has complied, in all material respects, with the
designated safety and soundness laws and regulations for the year ended
December 31, 1993.
/s/ Kirk W. Walters
- ------------------------------------- January 21, 1994
Kirk W. Walters
President and Chief Executive
Officer
/s/ Lynne M. Carcia
- ------------------------------------- January 21, 1994
Lynne M. Carcia
Controller and Chief Accounting
Officer
92
<PAGE>
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
(February 9, 1994 as to Note 26)
93
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
Northeast Federal Corp.
We have audited the accompanying consolidated statements of financial
condition of Northeast Federal Corp. as of December 31 and March 31, 1992, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the nine months ended December 31, 1992 and each of
the two years in the period ended March 31, 1992. 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 audits.
We conducted our audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Northeast Federal
Corp. as of December 31 and March 31, 1992 and the consolidated results of its
operations and its cash flows for the nine months ended December 31, 1992 and
each of the two years in the period ended March 31, 1992 in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the Consolidated Financial Statements, the Company
changed its method of accounting for income taxes for the fiscal year ended
March 31, 1992.
Coopers & Lybrand
Hartford, Connecticut
January 18, 1993
94
<PAGE>
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1993 1992 1992
------------ ----------------- ----------
<S> <C> <C> <C>
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 provi-
sion 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 good-
will............................... -- 2,002 3,971
Supervisory goodwill valuation ad-
justment........................... -- 56,568 --
SAIF insurance fund and OTS assess-
ments.............................. 8,414 6,222 8,130
Real estate and other assets ac-
quired 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 extraordi-
nary items and cumulative ef-
fect 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 ac-
counting principle.................. -- -- 1,022
-------- -------- --------
Net income (loss)............... $(14,139) $(59,234) $ 5,607
======== ======== ========
Preferred stock dividend require-
ments............................... $ 4,501 $ 4,652 $ 8,506
Net loss applicable to common stock-
holders............................. $(18,640) $(63,886) $ (2,899)
Loss per common share before extraor-
dinary items:
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 ac-
counting principle:
Primary and fully diluted........... $ -- $ -- $ .18
Net loss per common share:
Primary and fully diluted........... $ (1.75) $ (11.16) $ (.51)
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
95
<PAGE>
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1992 1993
---------- ----------
<S> <C> <C>
ASSETS
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 settlement 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 De-
cember 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
========== ==========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
96
<PAGE>
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<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 Cumu-
lative Preferred
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)
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 Cumu-
lative Convertible
Preferred Stock, Se-
ries A into 7,647,500
shares of common
stock................. (16) 77 (1,463) -- -- -- -- (1,402)
Stock dividend distrib-
utable, 50,876 shares
of $8.50 Cumulative
Preferred Stock, Se-
ries B................ -- -- -- -- (5,088) 5,088 -- --
Preferred stock divi-
dend payment in kind.. -- -- 4,250 -- -- (4,250) -- --
Unallocated employee
stock ownership plan
shares................ -- -- -- -- -- -- 649 649
Net unrealized gains on
debt and equity secu-
rities 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
=== ==== ======== ======= ======== ====== ======== ========
</TABLE>
*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
97
<PAGE>
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<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 securities................. -- -- 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
========= ========= ==========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
98
<PAGE>
NORTHEAST FEDERAL CORP.
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 prospects, 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-maturity, and are carried at
amortized cost, adjusted for premiums and discounts which
99
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 available-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.
100
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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."
101
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Association 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 consolidated 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 dividends 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.
102
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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)
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
---------------------------------
1993 1992 1991
----------- -------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
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)
</TABLE>
103
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE MONTHS FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1993 1992 1992
------------ ------------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
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 -- --
</TABLE>
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.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1993 1992
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
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 --
</TABLE>
104
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
Investment securities consisted of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1993 AT DECEMBER 31, 1992
------------------------------------ -------------------------------------
GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED ------------------ FAIR AMORTIZED ------------------ 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 exclusive 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
======== ======== ====== ========== ======== ====== ======== ======= =======
</TABLE>
- --------
* Sales were due to credit concerns.
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
105
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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)
<S> <C> <C> <C> <C> <C> <C>
Bonds and collateralized
mortgage obligations:
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 maturities 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)
<S> <C> <C> <C> <C> <C> <C>
Bonds and collateralized
mortgage obligations:
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>
106
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6: MORTGAGE-BACKED SECURITIES
Mortgage-backed securities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992
-------------------------------------- -----------------------------------
GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED ----------------- FAIR AMORTIZED ----------------- 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
securities............. $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 available-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 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>
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 accounting.
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 carrying 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.
107
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1993 1992
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
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
========== ==========
</TABLE>
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 recorded 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.
108
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 1,974 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 approximately
$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.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1993 1992 1992
------------ ----------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
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
======== ======== =======
</TABLE>
109
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 financial 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:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1993 1992
-------------------- ---------------------
NON-ACCRUAL NON-ACCRUAL
ASSETS ASSET RATIO ASSETS ASSET RATIO
-------- ----------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
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
======== ========
</TABLE>
In the above table, the principal balance of individual loans for which a
specific credit adjustment has been determined by independent 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 consideration to the Association. The balancing
consideration was the amount by which the deposits issued by the Association
plus other assumed liabilities
110
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Acquisition
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 specifically 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 percentages 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 individually. 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 repayment which occur prior to the seventh
anniversary of the closing date, at which time the remaining balance in the
credit adjustment 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 Association with the
right to put back loans to DEPCO for a period of one year from the date of
acquisition if the Association determines 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 connection with payment of the $59 million balancing consideration.
The seven-year escrow retains its $10 million.
111
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1993 1992
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
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%
=========== ===========
</TABLE>
The activity in the Association's REO is presented in the following table:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE
ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1993 1992
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
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
======== ========
</TABLE>
- --------
* 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.
112
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10: PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1993 1992
------- -------
(IN THOUSANDS)
<S> <C> <C>
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
======= =======
</TABLE>
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 headquarters 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:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
YEARS ENDING DECEMBER 31:
-------------------------
<S> <C>
1994.......................................................... $ 6,518
1995.......................................................... 4,057
1996.......................................................... 2,751
1997.......................................................... 1,940
1998.......................................................... 1,706
Thereafter.................................................... 2,733
-------
Total....................................................... $19,705
=======
</TABLE>
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.
113
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11: DEPOSITS
Deposits consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1993 1992
------------------------ ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT INTEREST RATE AMOUNT INTEREST RATE
---------- ------------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
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%
========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1993 1992 1992
------------ ----------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
114
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12: FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
FHLB advances and other borrowings are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1993 1992
-------- --------
(IN THOUSANDS)
<S> <C> <C>
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
======== ========
</TABLE>
Federal Home Loan Bank Advances
FHLB advances consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1993 1992
---------------------- ----------------------
WEIGHTED WEIGHTED
DUE IN YEARS ENDING AVERAGE AVERAGE
DECEMBER 31: AMOUNT INTEREST RATE AMOUNT INTEREST RATE
- ------------------- -------- ------------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
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%
======== ========
</TABLE>
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.
115
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase were wholesale repurchase
agreements and consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------
1993 1992
------------------------------------- -------------------------------------
(DOLLARS IN THOUSANDS)
WEIGHTED COLLATERAL WEIGHTED COLLATERAL
AVERAGE ----------------- AVERAGE -----------------
REPURCHASE INTEREST BOOK MARKET REPURCHASE INTERST BOOK MARKET
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 agreements 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 weighted 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,
116
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the Company has issued an additional $5.0 million of 9% Debentures, which are
included in the debentures outstanding 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. Initially, 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 dividends. 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.
Correspondingly, 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 carrying 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 Improvement Act of
1991, which became effective on December 19, 1991. While the primary focus of
the legislation is to recapitalize 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
117
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of the three capital standards on December 7, 1989, were subject to certain
restrictions which included growth restrictions and a limitation on capital
distributions. 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 regulatory 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, 1993 DECEMBER 31, 1992
----------------------------------- -----------------------------------
FULLY PHASED-IN FULLY PHASED-IN
REGULATORY CAPITAL ACTUAL REGULATORY ACTUAL REGULATORY
REQUIREMENT REGULATORY CAPITAL CAPITAL REQUIRED REGULATORY CAPITAL 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>
118
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 account" 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 thereafter 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 convertible 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
convertible 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 dividends, 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 accumulated 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 Designation 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 Purchase 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.
119
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
control, 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
quarterly 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
120
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1992 MARCH 31, 1992
----------------- ----------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost (benefits
earned during the period).. $ 431 $ 235 $ 312
Interest cost on projected
benefit obligation......... 380 249 290
Actual return on Plan as-
sets....................... (297) (345) (336)
Net amortization and defer-
rals....................... (80) 88 21
----- ----- -----
$ 434 $ 227 $ 287
===== ===== =====
</TABLE>
121
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
According to the Association's actuary, the following table sets forth the
Plan's funded status at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1993 1992
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
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)
====== ======
</TABLE>
Assumptions used in actuarial computations were:
<TABLE>
<CAPTION>
1993 1992
---- ----
<S> <C> <C>
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
</TABLE>
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 Northeast 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.
122
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
FOR THE
FOR THE NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
1993 1992
----------------------- ----------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF SHARES OPTION PRICE OF SHARES OPTION PRICE
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
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
========= =======
</TABLE>
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
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.
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 accounting 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
123
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 consolidated
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:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1992 MARCH 31, 1992
------------------- ------------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Federal income tax
expense (benefit) at
statutory rate......... $ (8,953) (34.00)% $ (21,870) (34.00)% $ 3,198 34.00%
Increase (decrease) re-
sulting 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 valua-
tion 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%
========= ======= ========= ======= ======= ======
</TABLE>
The components of the income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1992 MARCH 31, 1992
----------------- ----------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current provision:
State..................... $ 184 $ 2,454 $ 466
Net change in valuation
allowances............... 4,000 (2,752) --
Net change in temporary dif-
ferences................... (16,377) (4,791) 4,449
-------- ------- ------
Total income tax expense
(benefit).............. $(12,193) $(5,089) $4,915
======== ======= ======
</TABLE>
124
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effect of the temporary differences giving rise to the Company's
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992
----------------- -----------------
ASSET LIABILITY ASSET LIABILITY
------- --------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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
======= ====== ======= ======
</TABLE>
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 consistently 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
accumulated 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.
125
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1992 MARCH 31, 1992
----------------- ----------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net gain (loss) on sales
of:
Investment securities.. $3,579 $1,942 $(2,757)
Mortgage-backed securi-
ties.................. 2,046 2,158 4,748
Loans.................. 1,939 1,870 2,532
------ ------ -------
Total................ $7,564 $5,970 $ 4,523
====== ====== =======
</TABLE>
NOTE 17: EXTRAORDINARY ITEMS
A summary of extraordinary items follows:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
MARCH 31, 1992
--------------
(IN THOUSANDS)
<S> <C>
Gain (loss) from early extinguishment of debt, net of in-
come taxes:
8% Convertible Subordinated Debentures................. $95
---
$95
===
</TABLE>
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 information 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1993 1992
----------- -----------
(DOLLARS IN THOUSANDS
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
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)
=========== ===========
</TABLE>
126
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table shows the computation of the weighted average shares used
in the calculation of supplementary earnings per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1992
----------- -----------
<S> <C> <C>
Actual weighted average shares outstanding
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
=========== ===========
</TABLE>
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"
127
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1993 1992
-------- -------
(IN THOUSANDS)
<S> <C> <C>
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
======== =======
</TABLE>
128
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
129
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
. 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.
130
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992
--------------------------- ---------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
--------------- ---------- --------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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
========== ========== ========== ==========
</TABLE>
- --------
(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.
131
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY NET LOSS
---------------------- -----------------------------------
DECEMBER 31, FOR THE FOR THE NINE
---------------------- YEAR ENDED MONTHS ENDED
1993 1992 DECEMBER 31, 1993 DECEMBER 31, 1992
---------- ---------- ----------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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 costs....... (1,402) -- -- --
Holding company paid-in
capital and retained
earnings............... 834 574 -- --
Exercised stock options. 147 16 -- --
401K shares issued...... 223 -- -- --
---------- ---------- -------- --------
Balance per accompanying
consolidated financial
statements............. $ 132,513 $ 137,573 $(14,139) $(59,234)
========== ========== ======== ========
</TABLE>
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.
132
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE YEAR
ENDED DECEMBER 31, ENDED MARCH 31,
1992 1992
------------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
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
======= =======
</TABLE>
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.
133
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
134
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1992 MARCH 31, 1992
----------------- ----------------- --------------
<S> <C> <C> <C>
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
======== ======== ======
</TABLE>
STATEMENT OF FINANCIAL CONDITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1993 1992
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
135
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<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:
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
uncertificated 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
======== ======== ======
</TABLE>
This information should be read in conjunction with other Notes to the
Consolidated Financial Statements.
136
<PAGE>
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 25: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, 1993 AND FOR
THE YEAR THEN ENDED Q1 Q2 Q3 Q4
- ------------------------- ------------- ------------- ------------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
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
<CAPTION>
DECEMBER 31, 1992 AND FOR
THE NINE MONTHS THEN ENDED Q1 Q2 Q3
- -------------------------- ------------- ------------- -------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
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
</TABLE>
NOTE 26: SUBSEQUENT EVENT
On February 9, 1994, the Company and another financial institution signed a
definitive agreement for the sale by the Company of ten Northeast Savings
branches located in eastern Massachusetts and in Rhode Island. Deposits held in
these branches totaled approximately $427 million as of December 31, 1993. The
purchasing institution will pay a premium of three percent to Northeast Savings
for deposits on hand at the time of closing. The transaction is expected to
close by the end of the second quarter, and is subject to regulatory approval.
137
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Northeast Federal Corp. has engaged Deloitte & Touche as its new independent
accountants. Deloitte & Touche will serve as the independent accountants for
both Northeast Federal and its savings and loan association subsidiary,
Northeast Savings, F.A. The decision to hire new independent accountants was
recommended by the Audit Committees of both Northeast Federal and Northeast
Savings and approved by the Board of Directors on September 24, 1993. Coopers &
Lybrand, who previously served as the independent accountants for Northeast
Federal and Northeast Savings, were dismissed on the same day.
On September 24, 1993, the date on which the Board of Directors approved the
hiring of Deloitte & Touche as the new independent accountants for Northeast
Federal and Northeast Savings, F.A., subject to compliance with requisite
regulatory requirements, Northeast Savings, the Rhode Island Depositors
Economic Protection Corporation and the trustees of certain Rhode Island
financial institutions had an outstanding balance due to Deloitte & Touche for
professional services performed in conjunction with the 1992 acquisition of
certain assets of four Rhode Island institutions by Northeast Savings, F.A.
Fees for the services rendered were paid prior to the commencement of the
current audit engagement.
In connection with the audits of the two fiscal years ended March 31, 1992
and December 31, 1992 and the subsequent interim period through September 24,
1993, there were no disagreements with Coopers & Lybrand on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures, which disagreements if not resolved to their satisfaction
would have caused them to make reference in connection with their opinion to
the subject matter of the disagreement.
In accordance with Item 304(a)(1)(v) of Regulation S-K, during the two most
recent fiscal years and the subsequent interim period, Northeast Federal has
not been advised by Coopers & Lybrand of any of the reportable events listed in
Item 304(a)(1)(v) (A) through (D).
The audit reports of Coopers & Lybrand on the consolidated financial
statements of Northeast Savings, F.A. and subsidiaries as of and for the fiscal
years ended December 31, 1992 and March 31, 1992 did not contain any adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope, or accounting principles, except for an explanatory
paragraph noting the Company changed its method of accounting for income taxes
for the fiscal year ended March 31, 1992.
138
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company will appear in the Proxy
Statement for the Annual Meeting of Stockholders, May 20, 1994, and is
incorporated herein by this reference. In addition, information required by
Item 405 of Regulation S-K disclosing any delinquent filing required under
Section 16(a) of the Securities Exchange Act of 1934 by any of the Company's
directors, executive officers or any person holding ten percent or more of the
Company's common or convertible preferred stock will appear in the Proxy
Statement for the Annual Meeting of Stockholders and is incorporated herein by
reference. The Proxy Statement will be filed with the SEC within 120 days of
December 31, 1993. As required by Instruction 3 to Item 401(b) of Regulation S-
K, information regarding executive officers of the Company is contained in Part
I of this report under Supplementary Item, Executive Officers of the
Registrant.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will appear in the Proxy
Statement for the Annual Meeting of Stockholders, May 20, 1994, and is
incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management will appear in the Proxy Statement for the Annual Meeting of
Stockholders, May 20, 1994, and is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relations and related transactions will appear
in the Proxy Statement for the Annual Meeting of Stockholders, May 20, 1994,
and is incorporated herein by this reference.
139
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. FINANCIAL STATEMENTS
These documents are listed in the Index to Consolidated Financial
Statements under Item 8.
2. FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated
Financial Statements or Notes thereto.
(b)REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDED DECEMBER 31, 1993
None
(c)EXHIBITS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION REGULATION S-K
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
3 Certificate of Incorporation and Bylaws
4 Instruments evidencing Northeast Savings' long-term debt to the
Federal Home Loan Bank of Boston are not filed as an exhibit hereto
pursuant to Regulation S-K, Item 601(b)(4)(iii). Instruments
evidencing Northeast Savings' long-term debt are not filed as an
exhibit hereto pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K.
Northeast Savings will furnish a copy of these instruments to the SEC
upon its request.
4.1 Indenture dated May 8, 1992 between Northeast Federal Corp. and
Manufacturers Hanover Trust Company for 9% Sinking Fund
Uncertificated Debentures, Due May 8, 2012. See (a) below.
4.2 Acquisition agreement dated April 21, 1992 by and among Northeast
Savings, F.A. and Maurice C. Paradis as Receiver for East Providence
Credit Union, Providence Teachers Credit Union and Columbian Credit
Union, and Edward D. Pare, Jr., as Receiver for Greater Providence
Deposit Corporation, Greater Providence Trust Company and Community
Loan & Investment Bank and the Rhode Island Depositors Economic
Protection Corporation and the State of Rhode Island and Providence
Plantation without exhibits and schedules. Northeast Federal will
furnish a copy of exhibits and schedules to the SEC upon its request.
See (a) below.
4.3 Stock and Warrant Purchase Agreement dated April 21, 1992 by and
between the Rhode Island Depositors Economic Protection Corporation
and Northeast Federal Corp. See (a) below.
4.4 Certificate of Designation Governing the $8.50 Cumulative Preferred
Stock, Series B (See Exhibit 3 above). See (a) below.
4.5 Warrants to Purchase Common Stock Issued to the Rhode Island
Depositors Economic Protection Corporation. See (a) below.
4.6 Debenture Purchase Agreement dated April 21, 1992 by and between
Maurice C. Paradis as Receiver for East Providence Credit Union,
Providence Teachers Credit Union, and Columbian Credit Union, and
Edward D. Pare, Jr., as Receiver for Greater Providence Deposit
Corporation, Greater Providence Deposit and Trust Company and
Community Loan & Investment Bank and Northeast Federal Corp. See (a)
below.
4.7 Stock Repurchase and Debenture Purchase Agreement dated as of April
22, 1992 among Northeast Federal Corp., Northeast Savings, F.A., and
the Federal Deposit Insurance Corporation as Manager of the FSLIC
Resolution Fund. See (a) below.
10.1 1983 Stock Option Plan of Northeast Federal Corp. See (b) below.
10.2 The 1986 Stock Option Plan of Northeast Federal Corp. See (c) below.
</TABLE>
140
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
10.3 Northeast Federal Corp. 1993 Stock Option Plan. See (d) below.
10.4 Northeast Federal Corp. 1993 Stock Option Plan for Three-Year Term
Outside Directors. See (e) below.
10.5 Employment Agreement entered into by Northeast Savings and Northeast
Federal Corp. and its Chairman of the Board.
10.6 Employment Agreement entered into by Northeast Savings and Northeast
Federal Corp. and its Chief Executive Officer, President, Chief
Operating Officer, and Chief Financial Officer.
10.7 Amendments to Change of Control Agreement entered into by Northeast
Savings and Northeast Federal Corp. and its Chairman of the Board.
10.8 Amendments to Change of Control Agreement entered into by Northeast
Savings and by Northeast Federal Corp. and its Chief Executive
Officer, President, Chief Operating Officer, and Chief Financial
Officer.
10.9 Amendments to Supplemental Executive Retirement Plan entered into by
Northeast Savings and its Chief Executive Officer, President, Chief
Operating Officer and Chief Financial Officer.
10.10 Executive Disability Plan established for senior officers of
Northeast Savings and Principal Subsidiaries. See (a) below.
10.11 Executive Life Insurance Plan established for senior officers of
Northeast Savings and Principal Subsidiaries. See (a) below.
10.12 Executive Supplemental Medical Reimbursement Plan for senior officers
of Northeast Savings and Principal Subsidiaries. See (a) below.
11.1 Computation of loss per common share before extraordinary items.
11.2 Computation of net loss per common share before cumulative effect of
change in accounting principle.
11.3 Computation of net loss per common share.
21 Subsidiaries of Northeast Savings, F.A.
23.1 Consent of Independent Accountants, Deloitte & Touche
23.2 Consent of Independent Accountants, Coopers & Lybrand
24 Powers of Attorney
99.1 Calculation of Book Value and Tangible Book Value per Common Share
</TABLE>
- --------
(a) Incorporated by reference to Northeast Federal Corp. Annual Report on Form
10-K for the fiscal year ended March 31, 1992.
(b) Incorporated herein by reference to such plan in Exhibit 4.3 of Form S-8
Registration as filed with the SEC on September 19, 1990, Registration
Number 33-36907.
(c) Incorporated herein by reference to such plan in Exhibit 4.4 of Form S-8
Registration Statement as filed with the SEC on September 19, 1990,
Registration Number 33-36907.
(d) Incorporated by reference to such plan in Exhibit 4.3 of Form S-8
Registration Statement as filed with the SEC on December 21, 1993,
Registration Number 33-51641.
(e) Incorporated by reference to such plan in Exhibit 4.3 of Form S-8
Registration Statement as filed with the SEC on December 21, 1993,
Registration Number 33-51643.
141
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
NORTHEAST FEDERAL CORP.
-------------------------------------
(Registrant)
March 4, 1994 By: /s/ George P. Rutland
---------------------------------
George P. Rutland
Chairman of the Board
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON FEBRUARY 25, 1993.
By: /s/ George P. Rutland
---------------------------------
George P. Rutland
Chairman of the Board
By: /s/ Kirk W. Walters
---------------------------------
Kirk W. Walters
Chief Executive Officer,
President, Chief Operating
Officer, and Chief Financial
Officer
By: /s/ Lynne M. Carcia
---------------------------------
Lynne M. Carcia
Senior Vice President,
Controller, and Principal
Accounting Officer
DIRECTORS
Gerald P. Carmen
David W. Clark, Jr.
George J. Fantini, Jr.
Richard H. Gaskill
Richard H. Gordon
Beverly L. Hamilton
Barbara C. Lawrence
Thomas P. O'Neill, III
George P. Rutland
George W. Sarney
Raymond T. Schuler
John R. Silber
Kirk W. Walters
Jerome F. Williams
Frederick W. Zuckerman
By: /s/ George P. Rutland
---------------------------------
George P. Rutland
Attorney-in-Fact
<PAGE>
Certificate of Incorporation and Bylaws
of
Northeast Federal Corp.
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 04:15 PM 05/14/1993
931345387 - 2218304
CERTIFICATE OF AMENDMENT
TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
NORTHEAST FEDERAL CORP.
(Pursuant to 8 Del. C. Section 242)
Northeast Federal Corp., a corporation organized and existing under and by
virtue of the Delaware General Corporation Law (the "Corporation") does hereby
certify that:
FIRST, an Amended Certificate of Designation of the $2.25 Cumulative
Convertible Preferred Stock, Series A of the Corporation was filed by the
Corporation on July 6, 1990, with the Office of the Secretary of State of the
State of Delaware.
SECOND, that the Board of Directors of the Corporation in accordance with
the provisions of Section 242 of the Delaware General Corporation Law, duly
adopted the following resolution setting forth a proposed amendment to the
Amended Certificate of Designation of the $2.25 Cumulative Convertible
Preferred Stock, Series A of the Corporation, declaring said amendment to be
advisable and calling a meeting of stockholders of the Corporation for
consideration thereof:
BE IT RESOLVED, that the amendment to the Amended Certificate of
Designation governing the $2.25 Cumulative Convertible Preferred Stock,
Series A, in the form attached hereto as Exhibit A, is declared to be
advisable for adoption by the Corporation and shall be submitted to the
Corporation's stockholders entitled to vote in respect thereof for their
consideration.
THIRD, that thereafter, a Special Meeting of the Stockholders of the
Corporation was duly called and held, upon notice and in accordance with
Section 222 of the Delaware General Corporation Law, at which meeting the
necessary number of shares as required by the Delaware General Corporation Law
were voted in favor of the amendment substantially in the form attached hereto
as Exhibit A.
FOURTH, the amendment was duly adopted in accordance with the provisions of
Section 242 of the Delaware General Corporation Law.
<PAGE>
Exhibit A
The following sections refer to sections of the Amended Certificate of
Designation of the $2.25 Cumulative Convertible Preferred Stock, Series A:
I. Section 1. Designation shall be amended to delete the period at the
end of Section 1 and to add thereto the following:
"then outstanding."
II. Section 3. Preference on Liquidation shall be amended by the following
change to the first sentence of the third paragraph of Section 3:
delete the period at the end of such sentence and add thereto:
"or conversion pursuant to Section 7 below."
III. Section 6. Convertibility shall be amended as follows:
(i) The caption "6. Convertibility" shall be deleted and in its place
the following caption shall be inserted:
"6. Convertibility at the Option of the Holder."
(ii) There shall be inserted in the first sentence of Section 6 after
"Common Stock" and before "on the following terms" the following:
"at the option of the holder of such Shares"
(iii) Subsection 6(E) shall be revised to read in its entirety as
follows:
"E. No fractional shares or scrip representing fractional shares
shall be issued upon the conversion pursuant to this Section 6 of any
Shares. If more than one Share shall be surrendered for conversion
pursuant to this Section 6 at one time by the same holder, the number
of full shares issuable upon conversion thereof shall be computed on
the basis of the aggregate number of such Shares so surrendered. If
the conversion pursuant to Section 6 of any Shares results in a
fraction, an amount equal to such fraction multiplied by the closing
price (determined as provided in the last sentence of subsection
(D)(5) of this Section 6 of the Common Stock on the business day next
preceding the date of conversion shall be paid to such holder in cash
by the Corporation.
IV. A new section 7 shall be added to read as follows:
"7. Automatic Conversion. Shares of the Series A Preferred Stock
(hereinafter in this Section 7 called the "Series A Shares") shall be
converted into shares of Common Stock on the following terms and
conditions:
(A) Upon the Effective Date as defined below and subject to and
upon compliance with the provisions of this Section 7. Series A Shares
shall cease to be Series A Shares and shall represent the right to
receive fully paid and non-assessable shares of Common Stock, at the
rate (the "Company Conversion Rate" for purposes of this Section 7),
of 4.75 shares of Common Stock for each outstanding Series A Share
(the "Conversion"). No allowance of adjustment shall be made for
accumulated or accrued and unpaid dividends on the Series A Shares
converted or for dividends on the Common Stock that shall be issuable
upon the Conversion of the Series A Shares. Any accumulated or accrued
and unpaid dividends on the Series A Shares shall be eliminated and
any right to payment of dividends shall cease upon the Effective Date
as defined in subsection (B).
(B) The Effective Date shall be the date upon which this
Certificate of Amendment is filed with the Secretary of State of the
State of Delaware.
<PAGE>
(C) Upon the Effective Date, the right of any holder of the Series A
Shares to convert such Series A Shares pursuant to Section 6 hereof shall
terminate and be of no further force and effect, notwithstanding anything to the
contrary in Section 6. The Series A shall be converted automatically into
the right to receive the number of shares of Common Stock determined by the
Company Conversion Rate on the Effective Date. All Series A Shares shall cease
to be outstanding on the Effective Date. The Corporation will send before or
promptly after the Effective Date transmittal forms to holders of the Series A
Shares to be used in forwarding certificates formerly representing Series A
Shares for surrender and exchange for certificates representing the number of
shares of Common Stock into which such Series A Shares have been converted,
and thereafter will distribute, to the holders of record of the Series A Shares
on the close of business on the Effective Date, the certificates representing
the number of shares of Common Stock into which such Series A Shares have been
converted.
(D) Until a certificate representing Series A Shares is presented and
surrendered, such certificate on and after the Effective Date shall, except as
provided in the following sentence, be deemed for all purposes to evidence the
ownership of a number of whole shares of Common Stock into which such Series A
Shares shall have been converted pursuant to the provisions of paragraph (A)
hereof. Until surrender of such certificate representing Series A Shares in
exchange for a certificate representing shares of Common Stock, the holder
thereof shall not be entitled to receive any dividends or other distributions,
if any, payable on the shares of Common Stock which such holder is entitled to
receive from the Company upon surrender of such certificate, provided that upon
surrender of such certificate, there shall be paid to such holder the amount of
dividends or other distributions (without interest) which became payable and
were not paid to such holder with respect to the shares of Common Stock issued
upon such surrender.
(E) If more than one certificate representing Series A Shares at the
Effective Date shall be surrendered at one time for the account of the same
stockholder, the number of whole shares of Common Stock for which certificates
shall be issued shall be computed on the basis of the aggregate number of
shares represented by the certificates representing Series A Shares so
surrendered. In the event that the Company (or its transfer agent) determines
that a holder of Series A Shares has not tendered all his certificates for
exchange, the Company (or its transfer agent) shall carry forward any
fractional share until all certificates of that holder have been presented for
exchange, such that fractional shares to any one person shall not exceed the
value (as determined pursuant to paragraph (G))of one share. If any
certificate representing shares of Common Stock is to be issued in a name
other than that in which the certificate representing Series A Shares
surrendered for exchange is issued, the certificate representing Series A
Shares so surrendered shall be properly endorsed and otherwise in proper form
for transfer, and the person or persons requesting such exchange shall affix
any requisite stock transfer tax stamps to such certificate, or provide funds
for their purchase, or establish to the satisfaction of the Company (or its
transfer agent) that such taxes are not payable.
(F) Fractional shares or scrip representing fractional shares may be
issued upon the Conversion pursuant to Section 7 of the Series A Shares. The
number of full shares of Common Stock issuable upon Conversion pursuant to
Section 7 to any one holder of Series A Shares shall be computed on the basis
of the aggregate number of such Series A Shares held of record by such holder
as of the close of business on the day immediately prior to the Effective
Date. If the Conversion pursuant to Section 7 of any Series A Shares results
in a fraction of a share of Common Stock to be issued upon the Conversion,
appropriate consideration, as determined by the Board of Directors of the
Corporation and which without limitation may include a fractional share or
scrip, the issuance of a whole share of Common Stock, in lieu of a fractional
share, or cash, shall be issued to such holder.
(G) The Corporation shall pay any and all issuance and transfer taxes which
may be imposed with respect to the issuance and delivery of Common Stock upon
the Conversion of the Series A
<PAGE>
Shares as herein provided. The Corporation shall not, however, be
required, in any event, to pay any transfer or other taxes by reason
of the issuance of Common Stock in a name or names other than that
of the holder of the Series A Shares surrendered for Conversion, and
the Corporation shall not be required to issue or deliver any such
stock certificate unless and until the person or persons requesting
the issuance thereof shall have paid to the Corporation the amount
of any such tax or shall have established to the satisfaction of the
Corporation that such tax has been paid.
(H) If in any case a state of facts occurs wherein in the
opinion of the Board of Directors the other provisions of this Section
7 are not strictly applicable, or if strictly applicable, would not
fairly protect the conversion rights of the Series A Shares in
accordance with the essential intent and principles of such
provisions, then the Board of Directors shall make an adjustment in
the application of such provisions in accordance with such essential
intent and principles so as to protect such conversion rights as
aforesaid.
(I) The Corporation shall at all times reserve and keep
available out of its authorized Common Stock the full number of shares
of Common Stock deliverable upon the Conversion of all outstanding
Series A Shares and shall take all such corporate action as may be
required from time to time in order that it may validly and legally
issue fully paid and non-assessable shares of Common Stock upon
Conversion pursuant to Section 7 of all the outstanding Series A
Shares.
(J) Series A Shares converted pursuant to Section 7 shall not be
reissued as Series A Shares but shall assume the status of authorized
but unissued shares of preferred stock of the Corporation.
V. Section 7 shall be renumbered as Section 8.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by its Chief Executive Officer and attested to be its Secretary on this
14th day of May, 1993.
NORTHEAST FEDERAL CORP.
By /s/ George P. Rutland
------------------------------------
George P. Rutland
Chairman and Chief Executive Officer
ATTEST:
By /s/ Craig W. Smith
------------------------
Craig W. Smith
Secretary
<PAGE>
July 1990
Certificate of Incorporation
of Northeast Federal Corp.
FIRST: The name of the Corporation is Northeast Federal Corp. (hereinafter
sometimes referred to as the "Corporation").
SECOND: The address of the registered office of the Corporation in the State
of Delaware is 1209 Orange Street, Wilmington, New Castle County, Delaware
19801. The registered agent of the Corporation at that address is The
Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the Delaware General
Corporation Law.
FOURTH:
A. The total number of shares of all classes of stock which the Corporation
shall have authority to issue is forty million (40,000,000), consisting of:
(a) fifteen million (15,000,000) shares of Preferred Stock, par value one
cent ($.01) per share (the "Preferred Stock"); and
(b) twenty five million (25,000,000) shares of Common Stock, par value one
cent ($.01) per share (the "Common Stock").
B. The Board of Directors is authorized, subject to any limitation prescribed
by law, to provide for the issuance of the shares of Preferred Stock in
series, and by filing a certificate pursuant to the applicable law of the
State of Delaware (such certificate being hereinafter referred to as a
"Preferred Stock Designation"), to establish from time to time the number of
shares to be included in each such series, and to fix the designation, powers,
voting powers, preferences, and rights of shares of each such series, and any
qualifications, limitations or restrictions thereof. The number of authorized
shares of Preferred Stock may be increased or decreased (but not below the
number of shares thereof then outstanding) by the affirmative vote of the
holders of a majority of the Common Stock, without a vote of the holders of
the Preferred Stock, or any series thereof, unless a vote of any such holders
is required pursuant to the terms of any Preferred Stock Designation.
FIFTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
(a) The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. In addition to the powers
and authority expressly conferred upon them by Statute or by this
Certificate of Incorporation or the Bylaws of the Corporation, the
directors are hereby empowered to exercise all such powers and do all such
acts and things as may be exercised or done by the Corporation.
(b) The directors of the Corporation need not be elected by written ballot
unless the Bylaws so provide.
(c) Subject to the rights of holders of any class or series of Preferred
Stock, any action required or permitted to be taken by the stockholders of
the Corporation must be effected at a duly called annual or special
meeting of stockholders of the Corporation and may not be effected by any
consent in writing by such stockholders.
C-1
<PAGE>
SIXTH:
A. The Corporation shall be under the direction of a Board of Directors. The
authorized number of directors is stated in Article Eighth D of this
Certificate of Incorporation. The directors shall be divided into three
classes, with the term of office of the first class to expire at the first
annual meeting of stockholders, the term of office of the second class to
expire at the annual meeting of stockholders one (1) year thereafter and the
term of office of the third class to expire at the annual meeting of
stockholders two (2) years thereafter. At each annual meeting of stockholders
following such initial classification and election, directors elected to
succeed those directors whose terms expire shall be elected for a term of
office to expire at the third succeeding annual meeting of stockholders after
their election.
B. At all elections of directors of the Corporation commencing with the first
annual meeting of stockholders, a holder of stock of any class or series then
entitled to vote in such election shall be entitled to as many votes as shall
equal the number of votes which (except for this provision as to cumulative
voting) such holder would be entitled to cast for election of directors with
respect to his shares of stock multiplied by the number of directors to be
elected in the election in which his class or series is entitled to vote, and
a stockholder may cast all such votes for a single director or may distribute
them among the number to be voted for, or for any two (2) or more of them, as
he may see fit.
C. Subject to the rights of the holders of any series of Preferred Stock the
outstanding, and unless the Board of Directors otherwise determines, newly
created directorships resulting from any increase in the authorized number of
directors or vacancies in the Board of Directors resulting from death,
resignation, retirement, disqualification, removal from office or other cause
may be filled only by a majority vote of the directors then in office, though
less than a quorum, and directors so chosen shall hold office for a term
expiring at the annual meeting of stockholders at which the term of office of
the class to which they have been elected expires. No decrease in the number
of directors constituting the Board of Directors shall shorten the term of any
incumbent director.
D. Advance notice of stockholder nominations for the election of directors and
of business to be brought by stockholders before any meeting of the
stockholders of the Corporation shall be given in the manner provided in the
Bylaws of the Corporation.
E. Subject to the rights of the holders of any series of Preferred Stock then
outstanding, any director, or the entire Board of Directors, may be removed
from office at any time, but only for cause and only by the affirmative vote
of the holders of a majority of the voting power of all of the then outstanding
shares of capital stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class.
SEVENTH: The Board of Directors is generally expressly empowered to adopt,
amend or repeal Bylaws of the Corporation. Any adoption, amendment, or repeal
of the Bylaws of the Corporation by the Board of Directors shall require the
approval of a majority of the Directors then in Office. The stockholders
shall also have power to adopt, amend or repeal the Bylaws of the Corporation;
provided, however, that any such alteration, amendment or repeal must be
approved by the affirmative vote of the holders of a majority of the voting
power of all of the then outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class; provided, however, that none of the provisions of the Bylaws
relating or referring to directors named by the FDIC pursuant to the
Adjustable Rate Cumulative Preferred Stock, Series A Certificate of
Designation may be amended while the FDIC holds any Adjustable Rate Cumulative
Preferred Stock, Series A of the Corporation without the prior written consent
of the FDIC.
EIGHT: The following provisions are inserted for further definition,
limitation and regulation of the powers of the Corporation and of its
directors and stockholders in connection with certain business combinations:
C-2
<PAGE>
A. Definitions and Related Matters.
(1) The term "Business Combination" shall mean (a) any merger or consolidation
of this Corporation with or into a Related Person, (b) any sale, lease,
exchange, transfer or other disposition, including without limitation, a
mortgage or any other security device, of all or any Substantial Part of the
assets of this Corporation (including without limitation any voting securities
of a Subsidiary) or of a Subsidiary, to a Related Person, (c) any merger or
consolidation of a Related Person with or into this Corporation or a
Subsidiary of this Corporation, (d) any sale, lease, exchange, transfer or
other disposition of all or any Substantial part of the assets of a Related
Person to the Corporation or a Subsidiary of this Corporation, (e) the
issuance of any securities of this Corporation to a Related Person, (f) the
acquisition by this Corporation or a Subsidiary of this Corporation of any
securities of a Related Person, (g) any reclassification of Common Stock of
this Corporation, or any recapitalization involving Common Stock of this
Corporation, consummated within five years after a Related Person becomes a
Related Person, and (h) any agreement, contract or other arrangement providing
for any of the transactions described in this definition of Business
Combination;
(2) The term "Related Person" shall mean and include any individual,
corporation, partnership or other Person or entity which, together with their
"affiliates" and "associates" (defined below), "beneficially" owns (as this
term is defined in Rule 13d-3 of the General Rules and Regulations under the
Securities Exchange Act of 1934) in the aggregate five percent or more of the
outstanding shares of the Common Stock of this Corporation, and any
"affiliate" or "associate" (as those terms are defined in Rule 12B-2 under the
Securities and Exchange Act of 1934) of any such individual, corporation,
partnership or other Person or entity;
(3) A Related Person shall be deemed to have acquired a share of the
Corporation at the time when such Related Person became the beneficial owner
thereof. With respect to shares owned by affiliates, associates or other
Persons whose ownership is attributed to a Related Person under the foregoing
definition of Related Person, if the price paid by such Related Person for
such shares is not determinable, the price so paid shall be deemed to be the
higher of (i) the price paid upon acquisition thereof by the affiliate,
associate or other Person or (ii) the market price of the shares in question
(as determined by a majority of the Continuing Directors) at the time when the
Related Person became the beneficial owner thereof;
(4) The term "Person" shall have the same meaning as defined by section 2(2)
of the Securities Act of 1933;
(5) Without limitation, any shares of Common Stock of this Corporation which
any Related Person has the right to acquire pursuant to any agreement, or upon
exercise of conversion rights, warrants or options, or otherwise, shall be
deemed beneficially owned by such Related Person;
(6) For the purposes of subparagraph (2)(A) of Paragraph B of this Article
Eighth, the term "other consideration to be received" shall include, without
limitation, Common Stock of this Corporation retained by its existing public
shareholders in the event of a Business Combination with such Related Person
in which this Corporation is the surviving Corporation; and
(7) With respect to any proposed Business Combination, the term "Continuing
Director" shall mean a director who was a member of the Board of Directors in
this Corporation immediately prior to the time that any Related Person
involved in the proposed Business Combination acquired 5% or more of the
outstanding shares of Common Stock of the Corporation, the term "Outside
Director" shall mean a director who is not (a) an officer or employee of this
Corporation or any relative of any officer or employee, (b) a Related Person
or an officer, director, employee, associate or affiliate of a Related Person,
or a relative of any of the foregoing or (c) a Person having a direct or
indirect material business relationship with this Corporation;
(8) The term "Subsidiary" shall mean any Corporation or other entity of which
the Person in question owns not less than 50% of any class of equity
securities, directly or indirectly;
(9) The term "Substantial Part" shall mean more than ten percent of the total
assets of the Corporation
C-3
<PAGE>
in question, as of the end of its most recent fiscal year ending prior to
the time the determination is being made;
(10) The term "Whole Board or Directors" shall mean the total number of
directors which the Corporation would have if there were no vacancies.
B. Approval of Business Combinations. The affirmative vote of the holders
of not less than eighty percent (80%) of each class of stock of the
Corporation shall be required for the approval or authorization of any
Business Combination; provided, however, that such 80% voting requirements
shall not be applicable if either:
(1) The Business Combination was approved by the Board of Directors of the
Corporation by the affirmative vote of at least two thirds of the Continuing
Directors, or
(2) All of the following conditions are satisfied;
(a) The aggregate amount of cash and the fair market value of the
property, securities or other consideration to be received per share of capital
stock (as defined in Section 5 hereof) of the Corporation in the Business
Combination by the holders of capital stock of the Corporation, other than
the Related Person involved in the Business Combination, is not less than
the highest per share price (including brokerage commissions, soliciting
dealers' fees, dealer-management compensation, and other expenses, including,
but not limited to, costs of newspaper advertisements, printing expenses and
attorneys' fees) paid by such Related Person in acquiring any of its
holdings of the Corporation's capital stock;
(b) The consideration to be received in such Business Combination
by holders of capital stock other than the Related Person involved shall,
except to the extent that a shareholder agrees otherwise as to all or
part of the shares which he or she owns, be in the same form and of the same
kind as the consideration paid by the Related Person in acquiring capital
stock already owned by it; provided, however, if the Related Person has
paid for shares of capital stock with varying forms of consideration,
the form of consideration for shares of capital stock acquired in the Business
Combination by the Related Person shall be either cash or the form used to
acquire the largest number of shares of capital stock previously acquired by
it;
(c) A proxy statement responsive to the requirements of the
Securities Exchange Act of 1934, whether or not this Corporation is then
subject to such requirements, shall be mailed to the public shareholders of
this Corporation for the purpose of soliciting shareholder approval of such
Business Combination, but need not be filed with the Securities and
Exchange Commission unless required under provisions of the Securities
Exchange Act of 1934, and shall contain at the front thereof, in a
prominent place (i) any recommendations as to the advisability (or
inadvisability) of the Business Combination which the Continuing Directors
may choose to state, and (ii) the opinion of a reputable national investment
banking firm as to the fairness (or not) of the terms of such Business
Combination, from the point of view of the remaining public shareholders
of this Corporation (such investment banking firm to be engaged solely on
behalf of the remaining public shareholders, to be paid a reasonable fee for
their services by this Corporation upon receipt of such opinion, to be one of
the so-called major bracket investment banking firms which has not previously
been associated with such Related Person and, if there are at the time any
such directors, to be selected by a majority of the Continuing Directors);
and
(d) The Business Combination is approved by the affirmative vote of the
holders of not less than two thirds of each class of stock of the Corporation.
C. Standard for Board of Directors Evaluation of Offers. The Board of
Directors of the Corporation, when evaluating any offer of another Person to
(A) make a tender or exchange offer for any equity security of the
Corporation, (B) merge or consolidate the Corporation with another corporation
or entity or (C) purchase or otherwise acquire all or substantially all of the
properties and assets of the Corporation, may, in connection with the exercise
of its judgment in determining what is in the best interest of the Corporation
and its stockholders, give due consideration to all relevant factors,
including, without limitation, the social
C-4
<PAGE>
and economic effect of acceptance of such offer on the Corporation's present
and future customers and employees and those of its subsidiaries; on the
communities in which the Corporation and its subsidiaries operate or are
located; on the ability of the Corporation to fulfill its corporate objectives
as a savings and loan holding company; and on the ability of its subsidiary
savings association to fulfill the objectives of a savings association under
applicable statutes and regulations.
D. The authorized number of directors shall be set forth in the Corporation's
Bylaws and shall not be fewer than seven nor more than fifteen subject to the
rights of the holders of any series of Preferred Stock to increase the number
of directors.
E. Amendment and Repeal of this Article. Notwithstanding any other provision
of this Certificate of Incorporation or the Bylaws of the Corporation (and
notwithstanding the fact that a lesser percentage may be specified by law) any
amendment, change or repeal of this Article Eighth, or any other amendment of
this Certificate of Incorporation or Bylaws of the Corporation which will have
the effect of modifying or permitting circumvention of Article Eighth shall
not be effective, unless such is first proposed by the Board of Directors of
the Corporation and thereafter approved by the Affirmative vote of the holders
of at least 80% of each class of stock of the Corporation, voting separately
as a class, which shall include the affirmative vote of at least 50% of the
outstanding vote of Common Stock held by shareholders other than a Related
Person; provided, however, that this Paragraph E of Article Eighth shall not
apply to and such 80% vote shall not be required for, any such amendment,
change or repeal recommended to shareholders of the Corporation by the
affirmative vote of not less than two thirds of the Continuing Directors and
such amendment, change or repeal so recommended shall require only the vote,
if any, required under the applicable provisions of law. For the purposes of
this Paragraph E of Article Eighth only, if at the time when any such
amendment, change or repeal is under consideration there is no proposed
Business Combination, the term "Continuing Director" shall be deemed to mean
the whole Board of Directors.
NINTH:
A. Each person who was or is made a party or is threatened to be made a party
to or is otherwise involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she is or was a director or an officer of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to an employee benefit plan (hereinafter an "Indemnitee"), whether the
basis of such proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as
a director, officer, employee or agent, shall be indemnified and held harmless
by the Corporation to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to prove broader indemnification rights than such law permitted
the Corporation to provide prior to such amendment), against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid in settlement) reasonably incurred or
suffered by such Indemnitee in connection therewith; provided, however, that
except as provided in Section C hereof with respect to proceedings to enforce
rights to indemnification, the Corporation shall indemnify any such Indemnitee
in connection with a proceeding (or part thereof) initiated by such Indemnitee
only if such proceeding (or part thereof) was authorized by the Board of
Directors of the Corporation. For all purposes of this Article NINTH, the
directors of Northeast Savings, F.A., and all officers thereof (as elected or
appointed in the manner provided in the Bylaws of Northeast Savings F.A.)
shall be deemed to be serving at the request of the Corporation as such
directors and officers.
B. The right to indemnification conferred in Section A of this Article shall
include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition (hereinafter
an "advancement of expenses"); provided, however, that, if the Delaware
General Corporation
C-5
<PAGE>
Law requires, an advancement of expenses incurred by an Indemnitee in his or
her capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such Indemnitee, including, without limitation,
service to an employee benefit plan) shall be made only upon delivery to the
Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf
of such Indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal (hereinafter a "final adjudication") that such Indemnitee is not
entitled to be indemnified for such expenses under this Section or otherwise.
The right to indemnification and to the advancement of expenses conferred in
Sections A and B of this Article shall be contract rights and such rights
shall continue as to an Indemnitee who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the Indemnitee's heirs,
executors and administrators.
C. If a claim under Section A or B of this Article is not paid in full by the
Corporation within sixty (60) days after a written claim has been received by
the Corporation, except in the case of a claim for an advancement of expenses,
in which case the applicable period shall be twenty (20) days, the Indemnitee
may at any time thereafter bring suit against the Corporation to recover the
unpaid amount of the claim. If successful in whole or in part in any such
suit, or in a suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the Indemnitee shall be
entitled to be paid also the expense of prosecuting or defending such suit. In
(i) any suit brought by the Indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the Indemnitee to enforce a right to
an advancement of expenses) it shall be a defense that, and (ii) in any suit
by the Corporation to recover an advancement of expenses pursuant to the terms
of an undertaking the Corporation shall be entitled to recover such expenses
upon a final adjudication that, the Indemnitee has not met any applicable
standard for indemnification set forth in the Delaware General Corporation
Law. Neither the failure of the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) to have made a determination
prior to the commencement of such suit that indemnification of the Indemnitee
is proper in the circumstances because the Indemnitee has met the applicable
standard of conduct set forth in the Delaware General Corporation Law, nor an
actual determination by the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) that the Indemnitee has not
met such applicable standard of conduct, shall create a presumption that the
Indemnitee has not met the applicable standard of conduct, or in the case of
such a suit brought by the Indemnitee, be a defense to such suit. In any suit
brought by the Indemnitee to enforce a right to indemnification or to an
advancement of expenses hereunder, or by the Corporation to recover an
advancement or expenses pursuant to the terms of an undertaking, the burden of
proving that the Indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Article or otherwise shall be on the
Corporation.
D. The rights to indemnification and to the advancement of expenses conferred
in this Article shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute, the Corporation's Certificate of
Incorporation, Bylaw, agreement, vote of stockholders or disinterested
directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect itself
and any director, officer, employee or agent of the Corporation or another
corporation, partnership, joint venture, trust or other enterprise against
any expense, liability or loss, whether or not the Corporation would have the
power to indemnify such person against such expense, liability or loss under
the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article with respect to the indemnification and
advancement of expenses of directors and officers of the Corporation.
TENTH: A director of this Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith
C-6
<PAGE>
or which involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which the director derived an improper personal benefit. If
the Delaware General Corporation Law is amended to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director of the Corporation shall be eliminated or limited to
the fullest extent permitted by the Delaware General Corporation Law, as so
amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or
modification.
ELEVENTH: The Corporation reserves the right to amend or repeal any provision
contained in this Certificate of Incorporation in the manner prescribed by the
laws of the State of Delaware and all rights conferred upon stockholders are
granted subject to this reservation.
TWELFTH: The names and mailing addresses and the year of the expiration of
their terms of the persons who are to serve as directors until the expiration
of their terms or until their successors are elected and qualify are as
follows:
NAME YEAR OF EXPIRATION OF TERM MAILING ADDRESS
Richard H. Gordon 1991 50 State House Square
Hartford, Connecticut 06103
George P. Rutland 1991 50 State House Square
Hartford, Connecticut 06103
John R. Silber 1991 50 State House Square
Hartford, Connecticut 06103
Beverly Lannquist Hamilton 1992 50 State House Square
Hartford, Connecticut 06103
Thomas P. O'Neill III 1992 50 State House Square
Hartford, Connecticut 06103
George W. Sarney 1992 50 State House Square
Hartford, Connecticut 06103
David W. Clark, Jr. 1993 50 State House Square
Hartford, Connecticut 06103
Abraham D. Gosman 1993 50 State House Square
Hartford, Connecticut 06103
Raymond T. Schuler 1993 50 State House Square
Hartford, Connecticut 06103
C-7
<PAGE>
July 1990
Certificate of Designation of
$2.25 Cumulative Convertible Preferred Stock, Series A
of Northeast Federal Corp.
(Pursuant to Section 151 of the General Corporation Law of the State of
Delaware)
1. Designation.
1,610,000 shares of the Preferred Stock of the Corporation are hereby
constituted as a class of Preferred Stock with a par value of $0.01 per share,
designated as $2.25 Cumulative Convertible Preferred Stock, Series A
(hereinafter called "Series A Preferred Stock"). The number of shares of
Series A Preferred Stock may not be increased but may be decreased by a
resolution duly adopted by the Board of Directors, but not below the number of
shares of Series A Preferred Stock.
2. Dividends.
The holders of the Series A Preferred Stock shall be entitled to receive,
when, as, and if declared by the Board of Directors and out of the assets of the
Corporation which are by law available for the payment of dividends, cash
dividends cumulative to the extent not paid, from the date of the last dividend
paid or declared and set apart for payment, on the $2.25 Cumulative Convertible
Preferred Stock, Series A of Northeast Savings, F.A. (the "Northeast Savings
Convertible Preferred Stock"), which Northeast Savings Convertible Preferred
Stock is replaced by the Series A Preferred Stock pursuant to the Plan of
Reorganization dated June 1, 1990, as amended July 6, 1990, involving the
Corporation and Northeast Savings, F.A., and in each case payable quarterly on
the first day of January, April, July and October of each year unless such day
is a nonbusiness day, in which event on the next business day, commencing
October 1, 1990, at the fixed annual rate of $2.25 per share and no more. The
amount of the dividends payable on the Series A Preferred Stock for any period
less than a full dividend period shall be computed on the basis of a 360-day
year of twelve 30-day months. Dividends shall be paid, as and when declared
by the Board of Directors, to holders of Series A Preferred Stock of record on
such dates, not exceeding 60 days preceding such respective dividend payment
dates, as shall be fixed for the purpose by the Board of Directors in advance
of payment of each particular dividend. So long as any Series A Preferred
Stock remains outstanding:
(a) no dividend whatsoever shall be declared or paid upon or set apart for
payment, and no distribution shall be ordered or made in respect of: (i)
the Corporation's $.01 par value common stock or any other outstanding
common stock of the Corporation (the "Common Stock"); or (ii) any other
class of stock or series thereof ranking junior to the Series A Preferred
Stock in the payment of dividends; and
(b) no shares of Common Stock and no shares of any other class of stock
series thereof ranking junior to the Series A Preferred Stock in the
payment or dividends shall be redeemed or purchased by the Corporation or
any subsidiary thereof; and
(c) no moneys, funds or other assets shall be paid to or made available for
a sinking fund for the redemption or purchase of any shares of: (i) Common
Stock; or (ii) any other class of stock or series thereof ranking junior
to the Series A Preferred Stock in the payment of dividends:
Unless, in each instance, full dividends on all outstanding shares of
Series A Preferred Stock: (i) for all past dividend periods shall have been
paid; and (ii) for the then current calendar quarter shall have been paid or
declared and set aside for payment.
In addition, so long as any Series A Preferred Stock remains outstanding,
no dividend whatsoever shall be declared or paid upon or set apart for
payment, and no distribution shall be ordered or made in respect
D-1
<PAGE>
of, any share or shares of Series A Preferred Stock or any class of stock or
series thereof ranking on a parity with the Series A Preferred Stock in the
payment of dividends, unless, for the applicable fiscal quarter:
(a) full dividends shall be paid and set apart for payment on all
shares of:(i) the Series A Preferred Stock; and (ii) any class of stock or
series thereof ranking on a parity with the Series A Preferred Stock in the
payment of dividends; or
(b) in the event all such dividends for the applicable calendar
quarter are not or cannot be paid or declared and set apart for payment
in full, a pro rata portion of the full dividends shall be paid or declared
and set apart for payment on all shares of: (i) Series A Preferred Stock; and
(ii) any class of stock or series thereof ranking on a parity with the Series
A Preferred Stock in the payment of dividends. Such pro rata portion shall be
calculated upon the ratio that the total amount available for the payment of
all required dividends on the Series A Preferred Stock and such parity stock
for the applicable fiscal quarter bears to the total required dividends on
the Series A Preferred Stock and such parity stock for such calendar quarter.
Cash dividends upon shares of Series A Preferred Stock shall commence to
accrue from day to day regardless of whether or not the Corporation shall have
funds or assets available for the payment of such dividends, but the
accumulation of dividends on shares of Series A Preferred Stock shall not bear
interest.
3. Preference on Liquidation.
In the event of any dissolution, liquidation or winding up of the affairs
of the Corporation, after payment or provision for payment of any remaining
conversion or liquidation accounts together with the debts and other
liabilities of the Corporation, the holders of the Series A Preferred Stock
shall be entitled to receive the applicable redemption price on each
outstanding share of Series A Preferred Stock, out of the net assets of
the Corporation and before any distribution shall be made to the holders of
the Common Stock or to the holders of any other class of stock or series
thereof ranking junior to the Series A Preferred Stock in the distribution
of assets, plus, in the event of either voluntary or involuntary dissolution,
liquidation or winding up, an amount equal to all dividends accrued and unpaid
on each share of Series A Preferred Stock to the date fixed for distribution,
computed without interest, and no more. If upon such voluntary or involuntary
dissolution, liquidation or winding up of the affairs of the Corporation, the
net assets of the Corporation shall be insufficient to permit payment in full
of the amounts required to be paid to the holders of Series A Preferred Stock
and to the holders of any class of stock or series thereof ranking on a parity
with the Series A Preferred Stock in respect of the distribution of assets,
then the holders of Series A Preferred Stock and the holders of any class of
stock or series thereof ranking on a parity with the Series A Preferred Stock
in respect of the distribution of assets shall share ratably, without priority
of one over the other, in payment of dividends, including accumulations, if any,
in the proportion that the amount of dividends, including accumulations, if
any then payable on each share bears to the aggregate of such amounts then
payable on all shares of Preferred Stock, and in any distribution of assets
other than by way of dividends in the proportion that the sum payable on each
share bears to the aggregate of the amounts so payable on all shares of
Preferred Stock.
After such amount is paid in full, no further distributions or payments
shall be made in respect of the Series A Preferred Stock, such Preferred Stock
shall no longer be deemed to be outstanding or be entitled to any privilege
of exchange or conversion or to any other preferences, rights or privileges,
and such Preferred Stock shall be surrendered for cancellation to any transfer
agent for such Preferred Stock or to the Corporation. Once any portion (less
than all) of such distribution or payment is made to any holder of the Series
A Preferred Stock, there shall not be any conversion rights in respect of such
Preferred Stock pursuant to Paragraph 6, below unless the full amount of such
distributions and payments in respect of such Preferred Stock being converted
is remitted to the Corporation, without interest, prior to or
contemporaneously with the conversion of such Preferred Stock.
D-2
<PAGE>
Nothing herein contained shall be deemed to prevent redemption of Series A
Preferred Stock by the Corporation in the manner provided in Paragraph 4,
below. Neither the merger nor consolidation of the Corporation into or with
any other corporation, nor the merger or consolidation of any other
corporation into or with the Corporation, nor a sale, transfer or lease of all
or part of the assets of the Corporation, shall be deemed to be a dissolution,
liquidation or winding up of the Corporation within the meaning of this
Paragraph 3.
Written notice of any voluntary or involuntary dissolution, liquidation or
winding up of the affairs of the Corporation, stating a payment date and the
place where the distribution amounts shall be payable and containing a
statement of or reference to the conversion right set forth in Paragraph 6
below, shall be given by mail, postage prepaid, at least thirty (30) days but
not more than (60) days prior to the payment date stated therein, to the
holders of record of the Series A Preferred Stock at their respective
addresses as the same shall appear on the books of the Corporation.
4. Redemption.
The Corporation shall have the right, at its option and by resolution of its
Board of Directors, to redeem at any time or from time to time any of the
outstanding Series A Preferred Stock, in whole or in part, upon notice given
as hereinafter specified and upon payment in cash in respect of each share
redeemed at the then applicable redemption price set forth below, plus, in
each case, an amount equal to all dividends accrued and unpaid thereon to the
date fixed for redemption if redeemed during the twelve month period ending
prior to October 1, of the year indicated:
<TABLE>
<CAPTION>
Year Redemption Price
<S> <C>
1990.......................................... 26.350
1991.......................................... 26.125
1992.......................................... 25.90
1993.......................................... 25.675
1994.......................................... 25.45
1995.......................................... 25.225
If redeemed on or after October 1, 1995 ...... 25.00
</TABLE>
If less than all of the outstanding shares of the Series A Preferred Stock
shall be redeemed, the particular shares to be redeemed shall be allocated
among the respective holders of Series A Preferred Stock pro rata or by lot,
as the Board of Directors may determine.
Notice of any redemption specifying the date fixed for said redemption and
the place where the amount to be paid upon redemption is payable and
containing a statement of or reference to the conversion right set forth in
Paragraph 6 below shall be mailed, postage prepaid, at least thirty (30) days
but not more than sixty (60) days prior to said redemption date to the holders
of record of the Series A Preferred Stock to be redeemed at their respective
addresses as the same shall appear on the books of the Corporation. If such
notice of redemption shall have been so mailed, and if on or before the
redemption date specified in such notice all funds necessary for such
redemption shall have been set aside by the Corporation separate and apart
from its other funds, in trust for the benefit of the holders of the shares
so to be redeemed, so as to be and continue notwithstanding that any
certificate for shares of the Series A Preferred Stock so called for
redemption shall not have been surrendered for cancellation, the shares
represented thereby so called for redemption shall be deemed to be no longer
outstanding, or if such notice of redemption shall have been so mailed, and if
prior to the date of redemption specified in such notice said fund shall be
deposited in trust, for the benefit of the holders of the shares of Series A
Preferred Stock to be redeemed (and so as to be and continue to be available
therefore), with a bank or trust company organized in good standing under the
laws of the United States of America
D-3
<PAGE>
or any state thereof, named in such notice having capital, surplus and
undivided profits of at least $5,000,000 according to its last published
Statement of Condition (doing business directly or through an agent in the
Borough of Manhattan, the City of New York), thereupon and without awaiting
the redemption date of all shares of Series A Preferred Stock with respect to
which such notice shall have been so mailed and such deposit shall have been
so made shall be deemed to be no longer outstanding, and all rights with
respect to such shares of Series A Preferred Stock shall forthwith upon such
separation or deposit in trust cease and terminate, except only the right of
the holders thereof to convert such shares in accordance with the provisions
of Paragraph 6 below at any time prior to the close of business on the
business day next preceding the redemption date, and the right of the holders
thereof on or after the redemption date to receive from such deposit the
amount payable on the redemption thereof, but without interest. Any funds so
separated or deposited by the Corporation which shall not be required for such
redemption because of the exercise of any right of conversion or exchange
subsequent to the date of such deposit shall be released or repaid to the
Corporation. In the event the holders of shares of Series A Preferred Stock
which shall have been redeemed shall not within six years after the redemption
date claim any amount so deposited in trust for the redemption of such shares,
such bank or trust company shall upon demand pay over to the Corporation any
such unclaimed amount so deposited with it, and shall thereupon be relieved of
all responsibility in respect thereof, and thereafter the holders of such
shares shall look only to the Corporation for payment of the redemption price
thereof, but without interest. Any interest accrued on such funds shall be
paid to the Corporation from time to time.
Any provision of this Paragraph 4 to the contrary notwithstanding, if any
quarterly dividend due on the Series A Preferred Stock or any series of
preferred stock ranking prior thereto or to a parity therewith shall be in
default, and until all such defaults shall have been cured, the Corporation
shall not redeem any shares of Series A Preferred Stock unless all outstanding
shares of Series A Preferred Stock are simultaneously redeemed in accordance
with the provision of this Paragraph 4 and the Corporation shall not purchase
or otherwise acquire any shares of Series A Preferred Stock except in
accordance with a purchase offer made by the Corporation on the same terms to
all holders of record of Series A Preferred Stock.
Shares of Series A Preferred Stock redeemed or otherwise purchased or
acquired by the Corporation shall not be reissued as shares of Series A
Preferred Stock but shall assume the status of authorized but unissued shares
of preferred stock of the Corporation.
5. Voting Rights.
The holders of the Series A Preferred Stock shall have no voting power
except as set forth in this Paragraph 5.
A. If at any time the equivalent of six or more full quarterly dividends
(whether or not consecutive) payable on any series of preferred stock of the
Corporation (hereinafter in this Paragraph 5 called the "preferred stock")
shall be in default, the number of directors constituting the Board of
Directors of the Corporation shall be increased by two, and the holders of all
outstanding preferred stock (whether or not the payment of quarterly dividends
shall be in default on all preferred stock outstanding) shall have the
exclusive right, voting together as one class, to elect two directors to fill
such newly created directorships. This right shall remain vested until all
dividends in default on all outstanding preferred stock have been paid, or
declared and set apart for payment, at which time: (1) the right shall
terminate (subject to revesting in the case of any subsequent default of the
kind described above); (ii) the term of the directors then in office elected
by the holders of all outstanding preferred stock as a class shall terminate;
and (iii) the number of directors constituting the Board of Directors of the
Corporation shall be reduced by two. Any director to be elected by the holders
of preferred stock shall agree, prior to such director's election to office,
to resign upon any termination of the right of the holders of preferred stock
to vote as a class for directors as herein provided, and upon any such
termination of the directors then in office elected by the holders of
preferred stock shall forthwith resign.
D-4
<PAGE>
Whenever such right shall vest, it may be exercised initally either at a
special meeting of the holders of preferred stock or at any stockholders'
meeting, but thereafter it shall be exercised only at annual stockholders'
meetings. If the annual meeting of stockholders' of the Corporation is not,
for any reason, held on the date fixed in the Bylaws at a time when the
holders of preferred stock, voting separately and as a class, shall be
entitled to elect directors, or if vacancies shall exist in both of the two
offices of directors elected by the holders of preferred stock, a proper
officer of the Corporation shall, upon the written request of the holders of
record of ten percent of the preferred stock then outstanding addressed to the
Secretary of the Corporation, call a special meeting in lieu of the annual
meeting of stockholders, or, in the event of such vacancies, a special meeting
of the holders of preferred stock, for the purpose of electing directors. Any
director who shall have been elected by the holders of preferred stock as a
class pursuant to this Subparagraph (A) shall hold office for a term expiring
(subject to the earlier termination of the default in dividends) at the next
annual meeting of stockholders, and during such term may be removed at any
time, either for or without cause, by, and only by, the affirmative votes of
the holders of record of a majority of the outstanding shares of preferred
stock given at a special meeting of such stockholders called for such purpose,
and any vacancy created by such removal may also be filled at such meeting.
Any vacancy caused by the death or resignation of a director who shall have
been elected by the holders of preferred stock as a class pursuant to this
Subparagraph (A) may be filled only by the holders of all outstanding
preferred stock at a meeting called for such purpose.
Whenever a meeting of the holders of preferred stock is permitted or
required to be held pursuant to this Subparagraph (A), such meeting shall be
held at the earliest practicable date and the Secretary of the Corporation shall
call such meeting, providing written notice to all holders of record of
preferred stock in accordance with law, upon the earlier of the following:
(a) as soon as reasonably practicable following the occurrence of the event
or events permitting or requiring such meeting hereunder; or
(b) within twenty (20) days following receipt by said Secretary of a
written request for such a meeting, signed by the holders of record of at
least twenty percent (20%) of the shares of preferred stock then
outstanding.
If such meeting shall not be called by the proper corporate officer within
twenty (20) days after the receipt of such request by the Secretary of the
Corporation, or within twenty-five (25) days after the mailing of the same
within the United States of America by registered mail addressed to the
Secretary of the Corporation at its principal office, then the holders of record
of at least twenty percent (20%) of the shares of preferred stock then
outstanding may designate one of the their number to call such a meeting at the
expense of the Corporation, and such meeting may be called by such person in the
manner and at the place provided in this Paragraph 5. Any holder of preferred
stock so designated to call such meeting shall have access to the stock books of
the Corporation for the purpose of causing a meeting of such shareholders to be
so called.
Any provision of this Subparagraph (A) to the contrary notwithstanding, no
special meeting of the holders of shares of preferred stock: (i) shall be held
during the ninety (90) day period next preceding the date fixed for the annual
meeting of stockholders of the Corporation; or (ii) shall be required to be
called or held in violation of any law, rule or regulation.
Any meeting of the holders of all outstanding preferred stock entitled to
vote as a class for the election of directors shall be held at the place at
which the last annual meeting of stockholders was held. At such meeting, the
presence in person or by proxy of the holders of a majority of the outstanding
shares of all outstanding preferred stock shall be required to constitute a
quorum; in the absence of a quorum, a majority of the holders present in person
or by proxy shall have the power to adjourn the meeting from time to time
without notice, other than an announcement at the meeting, until a quorum shall
be present.
D-5
<PAGE>
B. So long as any shares of any series of preferred stock are outstanding,
the Corporation shall not:
(i) without the consent of the holders of at least two-thirds (2/3) of
the number of shares of preferred stock at the time outstanding:
(a) create or authorize an additional class of stock ranking prior to
the preferred stock in respect of dividends or distribution of assets on
liquidation; or;
(b) increase the authorized amount of any additional class of stock
ranking prior to the preferred stock in respect of dividends of
distribution of assets on liquidation;or
(c) create or authorize any obligation or security convertible into or
evidencing the right to purchase shares of stock of any additional class
ranking prior to the preferred stock in respect of dividends or
distribution of assets on liquidation; or
(ii) without the consent of the holders of at least two-thirds (2/3) of
the number of shares of Series A Preferred Stock at the time outstanding:
(a) amend, alter or repeal any of the provisions of Article Fourth of
the Certificate of the Corporation or of this resolution so as to affect
adversely the rights, powers or preferences of the Series A Preferred
Stock; or
(b) authorize any merger or consolidation of the Corporation is not
the surviving corporation, unless the terms of the merger or consolidation
require that the holders of the Series A Preferred Stock receive
securities of the surviving corporation having the same terms and
preferences as the Series A Preferred Stock; except in instances required
by the Federal Home Loan Bank Board or the Federal Savings and Loan
Insurance Corporation (or any successor thereto); or
(c) authorize the sale, lease or conveyance (other than by mortgage or
pledge) of all or substantially all of the Corporation's properties or
business in exchange for securities of another corporation unless the
terms of the sale, lease or conveyance require that the holders of the
Series A Preferred Stock receive securities of the surviving corporation
having the same terms and preferences as the Series A Preferred Stock.
Any vote or consent required or permitted by this Subparagraph (B) may be
given in person or by proxy, either in writing or by vote at an annual or
special meeting called therefore.
C. Any action specified in this Paragraph 5 as requiring the consent of the
specified proportion of the votes of the shares of the preferred stock at the
time outstanding or represented at a meeting may be taken with such consent
and with such additional vote or consent, if any, of stockholders as may be
from time to time required by law.
D. For the purposes of the voting rights set forth in this Paragraph 5, the
holders of the Series A Preferred Stock shall be entitled to one vote for each
share held.
6. Convertibility.
Shares of the Series A Preferred Stock (hereinafter in this Paragraph 6
called "Shares") shall be convertible into Common Stock on the following terms
and conditions:
A. Subject to and upon compliance with the provisions of this Paragraph 6,
the holder of any Shares may at such holder's option convert any such Shares
into such number of fully paid and non-assessable shares of Common Stock as
are issuable pursuant to the formula set forth in Subparagraphs (C) and (D) of
this Paragraph 6. No allowance or adjustments shall be made for dividends
accrued on any Shares that shall be converted or for dividends on any Common
Stock that shall be issuable upon the conversion of such Shares, but all
dividends accrued and unpaid on any Shares up to and including the dividend
payment date immediately preceding the date of conversion shall constitute a
debt of the Corporation payable to the converting holders, and no dividend
shall be paid upon any shares of Common Stock or any other class of stock or
series thereof ranking junior to the Shares until such debt
D-6
<PAGE>
shall be paid or sufficient fund set aside for payment thereof.
B. The surrender of any Shares for conversion shall be made by the holder
thereof to the Corporation at the office of the Conversion Agent for the Series
A Preferred Stock, and such holder shall give written notice to the Corporation
at said office that such holder elects to convert such Shares in accordance
with the provisions thereof and of this Paragraph 6. Such notice also shall
state the name or names (with addresses) in which the certificate or
certificates for Common Stock which shall be issuable on such conversion shall
be issued. Subject to the provisions of Subparagraph (A) of this Paragraph 6,
every such notice of election to convert shall constitute a contract between
the holder of such Shares and the Corporation, whereby such holders shall be
deemed to subscribe for the number of shares of Common Stock which such holder
will be entitled to receive upon such conversion and, in payment and
satisfaction of such subscription, to surrender such Shares and to release the
Corporation from all obligations thereof, and whereby the Corporation shall be
deemed to agree that the surrender of such Shares and the extinguishment of
its obligations thereon shall constitute full payment for the Common Stock
subscribed for and to be issued upon such conversion.
As soon as practicable after the receipt of such notice and Shares, the
Corporation shall issue and shall deliver at said office of the Conversion
Agent to the person for whose account such Shares were so surrendered, or on
such holder's written order, a certificate or certificates for the number of
full shares of Common Stock issuable upon the conversion of such Shares and a
check or cash for the payment (if any) to which such person is entitled
pursuant to Subparagraph (E) of the Paragraph 6, together with a certificate
or certificates representing the Shares, if any, which are not to be
converted, but which constituted part of the Shares represented by the
certificate or certificates surrendered by such person. Such conversion shall
be deemed to have been effected on the date on which the Corporation shall
have received such notice and such Shares, and the person or persons in whose
name or names any certificate or certificates for Common Stock shall be
issuable upon such conversion shall be deemed to have become on said date the
holder or holders of record of the shares represented thereby.
C. The initial Conversion Rate shall be a price of $18.375 per share of
Common Stock (approximately 1.36 shares of Common Stock for each Share
surrendered for conversion). The effective conversion price per share as of
any date shall be $25.00 per share plus accrued and unpaid dividends as of
such date, divided by the number of shares of Common Stock into which such
share of preferred stock is then convertible.
D. The Conversion Rate shall be subject to adjustment from time to time as
follows:
(1) If the Corporation shall (i) pay a dividend on its Common Stock in
shares of the Corporation or distribute shares of the Corporation, (ii)
subdivide its outstanding shares of Common Stock into a greater number of
shares, (iii) combine its outstanding shares of Common Stock into a
smaller number of shares, or (iv) issue by reclassification of its shares
of Common Stock (whether pursuant to a merger or consolidation or
otherwise) any shares of its capital stock, then the Conversion Rate in
effect immediately prior thereto shall be adjusted so that the holder of a
Share surrendered for conversion after the record date fixing stockholders
to be affected by such event shall be entitled to receive upon conversion
the number of such shares of the Corporation which such holder would have
been entitled to receive after the happening of such event had such Shares
been converted immediately prior to such record date. Such adjustment
shall be made whenever any of such events shall happen, and shall also be
effective retroactively as to Shares converted between such record date
and the date of the happening of any such event.
(2) If the Corporation shall issue rights or warrants to the holders of
its Common Stock entitling them to subscribe for or purchase shares of
Common Stock at a price per share less than the then Current Market Price
per share of Common Stock (as defined in subsection (D)(5) of this
Paragraph 6) on the record date for the determination of shareholders
entitled to receive such rights or warrants, the number of shares of
Common Stock into which each Share shall thereafter be convertible shall
be determined by multiplying the number of shares of Common Stock into
which such Shares were theretofore convertible by a fraction, the
numerator
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<PAGE>
of which shall be the number of shares of Common Stock outstanding on the date
of the issuance of such rights or warrants plus the number of additional
shares of Common Stock offered for subscription or purchase, and the
denominator of which shall be the number of shares of Common Stock
outstanding on the date of issuance of such rights or warrants plus the number
of shares of Common Stock which the aggregate offering price of the total
number of Shares so offered would purchase at such Current Market Price (as
defined in subsection (D)(5) of this Paragraph 6). For the purposes of this
subdivision (2), the issuance of rights or warrants to subscribe for or
purchase shares or securities convertible into Common Stock shall be deemed to
be the issuance of rights or warrants to purchase the Common Stock into which
such Shares or securities are convertible at an aggregate offering price equal
to the aggregate offering price of such shares or securities plus the minimum
aggregate amount (if any) payable upon conversion of such Shares or securities
into Common Stock. Such adjustment shall be made whenever such rights or
warrants are issued and shall also be effective retroactively as to Shares
converted between the record date for determination of stockholders entitled
to receive such rights or warrants and the date such rights or warrants are
issued.
(3) If the Corporation shall distribute to the holders of its Common Stock
(whether pursuant to a merger or consolidation or otherwise) evidence of its
indebtedness or assets (excluding cash dividends or distributions made out of
current or retained earnings), capital stock other than Common Stock or rights
or warrants to subscribe other than as referred to in subsection (D)(2) of
this Paragraph 6, then in each such case the number of shares of Common Stock
into which each Share shall thereafter be convertible shall be determined by
multiplying the number of shares of Common Stock into which such Share was
theretofore convertible by a fraction, the numerator of which shall be the
Current Market Price per share of Common Stock (as defined in subsection
(D)(5) of this Paragraph 6) on the date of such distribution, and the
denominator of which shall be such Current Market Price per share of the
Common Stock, less the then fair market value (as determined by the Board of
Directors of the Corporation, whose determination shall be conclusive and
described in a statement filed with the Conversion Agent maintained by the
Corporation pursuant to Subparagraph (B) of the Paragraph 6) of the portion of
assets, or capital stock or cash or evidence of indebtedness, subscription
rights or warrants so distributed applicable to one share of the Common Stock.
Such adjustment shall be made whenever any such distribution is made, and
shall also be effective retroactively as to the Shares converted between the
record date for the determination of stockholders entitled to receive such
distribution and the date such distribution is made.
(4) Notwithstanding the foregoing, in the event of any consolidation or
merger of the Corporation (including, without limitation, a merger in which
the Corporation is the surviving corporation), or in the event of any sale,
conveyance, lease, exchange or transfer (for cash, shares of stock, securities
or other consideration) of all or substantially all of the property or assets
of the Corporation to another corporation, or in the case of any
reorganization of the Corporation, or reclassifications or changes of the
shares of Common Stock, the holder of each Share then outstanding upon
exercise of the conversion privilege thereof shall have the right thereafter
to convert such Share into the kind and amount of shares of stock and other
securities and property, including cash, which would have been deliverable to
such holder upon such consolidation, merger, sale, conveyance, exchange,
transfer or reorganization if such holder had converted such holder's Shares
into Common Stock immediately prior to such consolidation, merger, sale,
conveyance, exchange, transfer or reorganization. In any such event,
effective provision shall be made in the instrument effecting or providing for
such consolidation, merger, sale, conveyance, exchange, transfer or
reorganization so that the provisions set forth herein for the protection of
the conversion rights of the Shares shall thereafter be applicable, as nearly
as may be practicable, in relation to any shares of stock or other securities
or property including cash, deliverable after such consolidation, merger,
sale, conveyance, exchange, transfer or reorganization upon the conversion of
the Series A Preferred Stock, or such other securities as shall have been
issued to the holders thereof in lieu thereof or in exchange therefor. The
provisions of this subsection (D)(4) shall similarly apply to successive
consolidations, mergers, sales, leases, conveyances, exchanges, transfers and
reorganizations.
(5) For the purpose of any computation under Paragraph 4 above and subsection
(D)(2) and (D)(3) of this Paragraph 6, (i) the "Current Market Price" per
share of Common Stock at any date shall be deemed to be the average of the
daily closing prices for 30 consecutive trading days commencing 45 business
days before such date. The closing
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price for each day shall be the last reported sale price as reported on
NASDAQ or any successor thereto on such day, or, if listed or admitted to
trading on any securities exchange, as reported regular way on the
consolidated transactions reporting service for securities listed on the
principal securities exchange on which the Common Stock is then listed, or,
in the case no such reported sale takes place on such day, the average of
the last reported bid and asked prices regular way on the composite
quotations service for securities listed on the principal securities
exchange on which the Common Stock is then listed, or, if not so reported
or listed or admitted to trading on any securities exchange, the average of
the highest reported bid and the lowest reported asked prices on such day
as furnished by the National Quotation Bureau Incorporated or such other
nationally recognized quotation services as may be selected by the
Corporation for the purpose if said Bureau is not at the time furnishing
quotations.
(6) No adjustment in the Conversion Rate shall be required unless such
adjustment would require an increase or decrease of at least one percent
(1%) in such Rate, subject to an adjustment in the event the Corporation
issues a stock dividend in Common Stock or subdivides or combines the
outstanding shares of Common Stock; provided, however, that any adjustments
which by reason of this subsection (D)(6) are not required to be, and are
not, made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this subsection (D)(6) shall be made to
the nearest cent or one-hundredth of a share, as the case may be.
(7) Whenever the Conversion Rate shall be adjusted as provided in this
Paragraph 6, the Corporation shall forthwith file at the office of the
Conversion Agent maintained by the Corporation pursuant to Subparagraph (B)
of this Paragraph 6, a statement signed by the Chairman of the Board or the
President of the Corporation and by its Chief Financial Officer stating the
adjusted Conversion Rate determined as provided herein. Such statement
shall show in detail the adjustment and the method of calculation used and
the facts requiring such adjustment. Whenever the Conversion Rate is
adjusted, the Corporation shall cause a notice stating the adjustment and
the new Conversion Rate to be mailed to each holder of record of Shares as
of the effective date of such adjustment.
(8) For purposes of this Paragraph 6(D) the term "Corporation" shall be
deemed to include, in addition to the Corporation, Northeast Savings, F.A.
during the period from the date of issuance by Northeast Savings, F.A. of
its Northeast Savings Convertible Preferred Stock until the date such stock
was replaced by the Series A Preferred Stock pursuant to the Plan of
Reorganization dated June 1, 1990, as amended July 6, 1990, involving the
Corporation and Northeast Savings, F.A.
E. No fractional shares or scrip representing fractional shares shall be
issued upon the conversion of any Shares. If more than one Share shall be
surrendered for conversion at one time by the same holder, the number of full
shares issuable upon conversion thereof shall be computed on the basis of the
aggregate number of such shares so surrendered. If the conversion of any
Shares results in a fraction, an amount equal to such fraction multiplied by
the closing price (determined as provided in the last sentence of subsection
(D)(5) of this Paragraph 6) of the Common Stock on the business day next
preceding the date of conversion shall be paid to such holder in cash by the
Corporation.
F. If any Share shall be called for redemption, the right to convert such
Share shall terminate and expire at the close of business on the business day
next preceding the date fixed for said redemption, unless the Corporation
shall default in the payment of the redemption price determined as provided in
Paragraph 4 above, provided, that if such day shall not be a business day in
New York, the right to convert such shares may be exercised on the next
succeeding business day.
G. The Shares shall be deemed to have been converted and the person converting
the same to have become the holder of record of Common Stock, for the purpose
of receiving dividends and for all other purposes whatever, as of the date
when a certificate or certificates for such Shares are surrendered to the
Corporation as aforesaid. The Corporation shall not be required to make any
such conversion, and no surrender of the Shares shall be effective
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for such purpose, while the books for the transfer of either the Shares or the
Common Stock are closed for any purpose or during the 15 days preceding any
selection of Shares to be redeemed or thereafter until the mailing of the
redemption notice, but the surrender of such Shares for conversion during any
such period shall become effective for all purposes of conversion immediately
upon the reopening of such books as if the conversion had been made on the
date such Shares were surrendered.
H. The Corporation shall pay any and all taxes which may be imposed upon it
with respect to the issuance and delivery of Common Stock upon the conversion
of the Shares as herein provided. The Corporation shall not, however, be
required to pay any transfer or other taxes which may be payable in respect of
any transfer involved in the issue and delivery of stock in a name other than
that of the holder of the Shares converted, and the Corporation shall not be
required to issue or deliver any such stock certificate unless and until the
person or persons requesting the issuance thereof shall have paid to the
Corporation the amount of any such tax or shall have established to the
satisfaction of the Corporation that such tax has been paid.
I. If in any case a state of facts occurs wherein in the opinion of the Board
of Directors the other provisions of this Paragraph 6 are not strictly
applicable, or if strictly applicable, would not fairly protect the conversion
rights of the Shares in accordance with the essential intent and principles of
such provisions, then the Board of Directors shall make an adjustment in the
application of such provisions in accordance with such essential intent and
principles so as to protect such conversion rights as aforesaid.
J. The Corporation shall at all times reserve and keep available out of its
authorized Common Stock the full number of shares of Common Stock deliverable
upon the conversion of all outstanding Shares and shall take all such
corporate action as may be required from time to time in order that it may
validly and legally issue fully paid and non-assessable shares of Common Stock
upon conversion of all the outstanding Shares.
K. Shares converted shall not be reissued as Shares but shall assume the
status of authorized but unissued shares of preferred stock of the
Corporation.
L. For purposes of this Paragraph 6:
(1) "Conversion Rate" at any time shall mean the amount of Common Stock
of the Corporation into which at such time one Share shall be convertible
in accordance with the provisions of this Paragraph 6.
(2) "Common Stock" shall mean stock of the Corporation of any class,
whether now or hereafter authorized, which has the right to participate in
the distribution of either earnings or assets of the Corporation without
limit or preference as to the amount or percentage. If by reason of the
operation of subsection (D)(4) of this Paragraph 6, the Shares shall be
convertible into any other shares of stock or other securities or property
of the Corporation or of any other corporation, any reference herein to the
conversion of Shares will be a reference to a conversion into such other
shares of stock or other securities or property.
(3) "Conversion Agent" shall mean an agent of the Corporation located in
the Borough of Manhattan, City and State of New York. So long as the
shares of Series A Preferred Stock remain outstanding, the Corporation
shall maintain such an agency for the purposes contemplated by this Para-
graph 6.
7. Sinking Fund.
No sinking funds shall be established for the retirement or redemption of
the Series A Preferred Stock.
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<PAGE>
Certificate of Designation of
$8.50 Cumulative Preferred Stock, Series B
of Northeast Federal Corp.
(Pursuant to Section 151 of the General Corporation Law of the State of
Delaware)
Northeast Federal Corp., a corporation organized and existing under the General
Corporation Law of the State of Delaware (the "Corporation"), in accordance
with the provision of Section 151(g) thereof.
HEREBY CERTIFIES:
That pursuant to the authority conferred upon the Board of Directors by the
Certificate of Incorporation of the Corporation (the "Certificate"), the Board
of Directors on May 5, 1992, adopted the following resolution creating a fourth
series of 540,000 shares of preferred stock designated as $8.50 Cumulative
Preferred Stock, Series B:
RESOLVED, that pursuant to the authority granted to the Board of Directors by
Article Fourth, Paragraph B of the Certificate, there is hereby created and the
Corporation be, and it hereby is, authorized to issue 540,000 shares of the
preferred stock, designated "$8.50 Cumulative Preferred Stock, Series B" (the
"Series B Preferred Stock"), which fourth series of preferred stock shall rank
junior, as to dividends and the distribution of assets upon liquidation,
dissolution or winding up of the Corporation, to the $2.25 Cumulative
Convertible Preferred Stock, Series A (the "Convertible Preferred Stock"), the
Adjustable Rate Cumulative Preferred Stock, Series A (the "Series A Adjustable
Preferred Stock"), and the Adjustable Rate Cumulative Preferred Stock, Series B
(the "Series B Adjustable Preferred Stock"), and shall have the following
terms, conditions, designation, preferences and privileges, relative,
participating, optional and other special rights, and qualifications,
limitations and restrictions:
1. Designation.
540,000 shares of authorized serial preferred stock of the Corporation are
hereby constituted as a series of preferred stock, having a par value of $0.01
per share, designated as $8.50 Cumulative Preferred Stock, Series B
(hereinafter called "Series B Preferred Stock"). In accordance with the terms
hereof, each share of Series B Preferred Stock shall have the same relative
rights as and be identical in all respects with each other share of Series B
Preferred Stock. The number of shares of Series B Preferred Stock may not be
increased but may b decreased by a resolution duly adopted by the Board of
Directors, but not below the number of shares of Series B Preferred Stock then
outstanding.
2. Dividends.
The holders of the shares of Series B Preferred Stock shall be entitled to
receive dividends, when, as, and if declared by the Board of Directors out of
funds legally available for payment of dividends, cumulative to the extent not
paid in the annual amount of $8.50, per share and no more, payable quarterly on
the first day of January, April, July and October of each year, unless such day
is a nonbusiness day, in which event the next business day each such date being
hereinafter referred to as a "Payment Date"), commencing on the first Payment
Date after the issuance of the Series B Preferred Stock, to holders of record on
the date not exceeding 60 days preceding the Payment Date as may be determined
by the Board of Directors in advance of payment of each particular dividend.
Dividends payable on the Series B Preferred Stock for any period less than a
full quarter shall be computed on the basis of a 360-day year of twelve 30-day
months.
Dividends 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 Corporation, in cash or
in shares of Series B Preferred Stock (which may include
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<PAGE>
fractional shares if necessary) at the rate of one share for each $100 of the
amount of the dividend payable. Dividends payable after July 1, 1997 shall be
paid in cash out of funds legally available therefor.
No dividends shall be declared and paid in cash on the shares of Series B
Preferred Stock in respect of any quarterly dividend period unless there shall
likewise be or have been declared and set apart for payment, on all shares of
Convertible Preferred Stock, Series A Adjustable Preferred Stock and Series B
Adjustable Preferred Stock and any other Series of preferred stock ranking, as
to dividends, prior to the Series B Preferred Stock then outstanding,
dividends for all quarterly periods coinciding with or ending before such
quarterly period. No dividends shall be declared and paid on the shares of
the Series B Preferred Stock in respect of any quarterly dividend period if
such payment is prohibited by the terms of preferred stock then outstanding
ranking, as to dividends, prior to the Series B Preferred Stock. No dividends
shall be declared on any other series or class or classes of stock ranking on
a parity with the Series B Preferred Stock as to dividends in respect of any
quarterly dividend period unless there shall likewise be or have been declared
and set apart for payment, on all shares of Series B Preferred Stock at the
time outstanding, dividends for all quarterly periods coinciding with or
ending before such quarterly period, ratably in proportion to the respective
annual dividend rates per annum fixed therefor. No interest, or sum of money
in lieu of interest, shall be payable in respect of any dividend payment or
payments which may be in arrears.
Unless all cumulative dividends on all outstanding shares of Series B
Preferred Stock which are payable or in arrears have been paid in full to the
holders of shares of Series B Preferred Stock:
(i) no dividends or other distributions shall be paid or declared and set
aside for payment with respect to (i) shares of $0.01 par value common stock
of the Corporation (hereinafter referred to as the "Common Stock") or (ii)
shares of any class or series of stock ranking junior as to dividends to the
Series B Preferred Stock (hereinafter referred to as the "Junior Stock"); and
(ii) no shares of Common Stock, Junior Stock, or any class or series of
stock on a parity as to dividends with the Series B Preferred Stock
(hereinafter referred to as "Parity Stock") shall be purchased or redeemed by
the Corporation or any subsidiary thereof;
provided, however, that the foregoing prohibitions shall not prevent the
Corporation from declaring a stock dividend of Common Stock on such Common
Stock, or of any class or series of Junior Stock on such class or series of
Junior Stock. No dividends shall be paid or declared and set aside for
payment to holders of Parity Stock unless such dividends are also
simultaneously paid or declared and an amount set aside sufficient for
payment to the holders of the Series B Preferred Stock.
3. Voting.
(a) Except as expressly provided hereinafter in this Section 3 or as
otherwise from time to time required by Delaware law, the Series B Preferred
Stock shall have no voting rights.
(b) Notwithstanding any provisions in the Amended Certificate of
Designation of the $2.25 Cumulative Convertible Preferred Stock, Series A (the
"Convertible Preferred Stock Certificate") to the contrary, the Series B
Preferred Stock shall have no right to vote on any election of directors or on
any other matters pursuant to the provisions set forth in the Convertible
Preferred Stock Certificate.
(c) Except as otherwise set forth herein, any amendment to the provisions
of this Certificate of Designation of the Series B Preferred Stock which
requires the approval of the holders of the Series B Preferred Stock may be
approved by such holders by the written consent or the affirmative vote, at a
meeting of the holders of the Series B Preferred Stock called for such
purpose, by the holders of at least a majority of the aggregate number of
shares of Series B Preferred Stock at the time outstanding.
(d) Without either the written consent or the affirmative vote at a
meeting of the holders of at least two-thirds of the aggregate number of
Series B Preferred Stock shares at the time outstanding, consenting or
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<PAGE>
voting (as the case may be) separately as a single class, the Corporation
shall not create, authorize or issue a new series of preferred stock (or
increase the authorized amount of an existing series of preferred stock) or a
class of other stock after the date hereof with preference or priority over
or on a parity with the Series B Preferred Stock shares as to the right to
receive either dividends or amounts distributable upon liquidation,
dissolution or winding up of the Corporation.
(e) (i) Upon the issuance of at least 211,020 shares of Series B
Preferred Stock to the Rhode Island Depositors Economic Protection
Corporation or any Nominee as defined in the Stock and Warrant Purchase
Agreement between the Rhode Island Depositors Economic Protection Corporation
and the Corporation dated as of April 21, 1992 (the "Purchase Agreement")
(collectively,"DEPCO"), the number of directors constituting the Board of
Directors of the Corporation shall be increased by two and one directorship
shall be known as the 211,020 share position ("211,020 Position") and the
other directorship shall be known as the 105,510 share position ("105,510
Position"). DEPCO shall have the right to elect a director of the Corporation
to each one of the specified positions provided above as long as DEPCO shall
hold 211,020 or more shares of the Series B Preferred Stock. However , if
DEPCO shall hold less than 211,020 but 105,510 shares or more of Series B
Preferred Stock, the right to elect one director to the 211,020 Position
shall terminate, the term of the director in the 211,020 Position shall
terminate, and the number of directors constituting the Board of Directors
shall be reduced by one. In such event, DEPCO shall continue to have the
right to elect one director to the 105,510 Position. If DEPCO shall hold less
than 105,510 shares of Series B Preferred Stock, the right to elect one
director shall terminate, the term of the director in the 105,510 Position
shall terminate and the number of directors constituting the Board of
Directors of the Corporation shall be reduced by one.
In either case, (so long as DEPCO continues to have a right to elect one
or two directors) DEPCO shall have the right to fill any vacancies (created
by the death, resignation, removal or departure from the Board for any other
reason) of a director originally elected by DEPCO pursuant to this Section
3(e)(i): provided, however, (A) that any director elected by DEPCO shall be
acceptable to the Board of Directors of the Corporation in its reasonable
prudent judgment, and (B) that such director shall not be objected to by the
Office of Thrift Supervision (the "OTS"), after 20 days prior written notice
and, if required, shall have been approved prior to election by the OTS. For
purposes of this Section, the OTS shall be deemed to include any successor
federal agency regulating financial institutions and having jurisdiction over
the Corporation.
(ii) Any nomination and election pursuant to this Section 3(e) shall
be by written notice signed by the chairman of DEPCO and attested to by its
Secretary.
(f) If DEPCO has sold and transferred sufficient shares of Series B
Preferred Stock so that DEPCO is no longer entitled to elect a director
pursuant to Section 3(e) hereof, and if at any such time the equivalent of
six or more full quarterly dividends (whether or not consecutive and whether
or not declared) payable on the Series B Preferred Stock shall be in default,
the number of directors of the Corporation shall be increased by two and the
holders of the Series B Preferred Stock, shall have the right, voting together
as one class, to elect two directors to fill such newly created directorships.
Notwithstanding the foregoing provisions of this Section 3(f), to the extent
at any time the holders of Series B Preferred Stock otherwise would have the
right to elect two directors pursuant to the foregoing provisions of this
Section 3(f), and any other series of preferred stock of the Corporation
outstanding shall have an equivalent right, which may be or permits such right
to be exercisable upon a vote not only by the holders of such other series of
preferred stock but also of the holders of the Series B Preferred Stock, then
the number of directors shall be increased by a total of two for any and all
of such series of preferred stock (including the Series B Preferred Stock),
and the holders of all shares of such preferred stock, voting as a single
class, shall have the right to elect such directors, each share of preferred
stock so voting being entitled to one vote per share. The holders of the
Series B Preferred Stock shall have no right to cumulate votes for the
election of directors. The right to
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<PAGE>
elect directors conferred by this Section 3(f) shall remain vested until all
accumulated dividends on the Series B Preferred Stock have been paid, or
declared and set apart for payment, at which time: (i) the right shall
terminate (subject to revesting in the case of any subsequent default of the
kind described above): (ii) the term of the directors then in office elected
by the holders of the Series B Preferred Stock as a class shall terminate,
(except that if such directors were also elected by holders of another series
of preferred stock, and such other series still retains the right to elect two
directors, such directors shall remain in office): and (iii) (subject to the
aforesaid exception), the number of directors constituting the Board of
Directors of the Corporation shall be reduced by two. Any director to be
elected by the holders of the Series B Preferred Stock (or, if applicable, by
the holders of all outstanding preferred stock with such right) shall agree,
prior to such director's election to office, to resign upon any termination of
the right of the holders of preferred stock to vote as a class for directors
as herein provided, and upon termination of any such right, the directors then
in office elected by the holders of preferred stock shall forthwith resign.
Whenever such right to elect directors as set forth in Section 3(f) shall
vest, it may be exercised initially either at a special meeting of the holders
of Series B Preferred Stock (or, if applicable, of the holders of all
outstanding preferred stock with such right) or at any annual stockholders'
meeting, but thereafter it shall be exercised only at annual stockholders'
meetings. If the annual meeting of stockholders of the Corporation is not,
for any reason, held on the date fixed in the Bylaws at a time when the
holders of Series B Preferred Stock (or, if applicable, the holders of all
outstanding preferred stock with such right), voting as a class, shall be
entitled to elect directors, or if vacancies shall exist in both of the two
offices of directors elected by the holders of Series B Preferred Stock (or,
if applicable, by the holders of all outstanding preferred stock with such
right), a proper officer of the Corporation shall, upon the written request of
the holders of record of ten percent of the Series B Preferred Stock (or, if
applicable, the holders of 10% of all outstanding preferred stock with such
right), then outstanding, addressed to the Secretary of the Corporation, call
a meeting of stockholders, or, in the event of such vacancies, a special
meeting of the holders of Series B Preferred Stock (or, if applicable, of the
holders of all outstanding preferred stock with such right), for the purpose
of electing directors. Any director who shall have been elected by the
holders of Series B Preferred Stock (or, if applicable, by the holders of any
other outstanding preferred stock with such right) as a class pursuant to this
Section 3(f) shall hold office for a term expiring (subject to the earlier
termination of the default in dividends) at the next annual meeting of the
stockholders, and during such term may be removed at any time, either for or
without cause, by, and only by, the affirmative votes of the holders of record
representing a majority of the outstanding shares of Series B Preferred Stock
(or, if applicable, of the holders representing a majority of all outstanding
preferred stock with such right) given at a special meeting of such
stockholders called for such purpose, and any vacancy created by such removal
may also filled at such meeting. Any vacancy caused by the death or
resignation of a director who shall have been elected by the holders of Series
B Preferred Stock (or, if applicable, by the holders of all outstanding
preferred stock with such right) as a class pursuant to this Section 3(f) may
be filled only by the holders representing a majority of all the Series B
Preferred Stock (or, if applicable, by the holders representing a majority of
all outstanding preferred stock with such right) at a meeting called for such
purpose. The holders of Series B Preferred Stock may act by written consent.
Whenever, a meeting of the holders of Series B Preferred Stock (or, if
applicable, of the holders of all outstanding preferred stock with such right)
is permitted or required to be held pursuant to this Section 3(f), such
meeting shall be held at the earliest practicable date and the Secretary of
the Corporation shall call such meeting, providing written notice to all
holders of record of Series B Preferred Stock (or, if applicable, to the
holders of all outstanding preferred stock with such right) in accordance with
law, upon the earlier of the following:
(a) as soon as reasonably practicable following the occurrence of the
event or events permitting or requiring such meeting hereunder; or
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(b) within twenty (20) days following receipt by said Secretary of a
written request for such a meeting, signed by the holders of record of at
least twenty percent (20%) of the shares of Series B Preferred Stock (or,
if applicable, by the holders of record of at least 20% of all
outstanding preferred stock with such right) then outstanding.
If such meeting required by Subsection (b) above shall not be called by
the proper corporate officer within twenty (20) days after the receipt of such
request by the Secretary of the Corporation, or within twenty-five (25) days
after the mailing of the same within the United States of America by
registered mail addressed to the Secretary of the Corporation at its principal
office, then the holders of record representing at least twenty percent (20%)
of the shares of Series B Preferred Stock (or, if applicable, the holders of
at least 20% of all outstanding preferred stock with such right) then
outstanding may designate one of their number to call such a meeting at the
expense of the Corporation, and such meeting may be called by such person in
the manner and at the place provided in this Section 3. Any holder of Series B
Preferred Stock so designated (or, if applicable, any holders of any other
outstanding preferred stock so designated) to call such meeting shall have
access to the stock books of the Corporation for the purpose of causing a
meeting of such shareholders to be so called.
Any provision of this Section 3(f) to the contrary notwithstanding, no
special meeting of the holders of shares of Series B Preferred Stock (or, if
applicable, of the holders of all outstanding preferred stock with such right):
(i) shall be required to be held during the ninety (90) day period next
preceding the date fixed for the annual meeting of stockholders of the
Corporation; or (ii) shall be required to be called or held in violation of
any law, rule or regulation.
At such meeting, the presence in person or by proxy of the holders
representing a majority of all outstanding shares of Series B Preferred Stock
(or, if applicable, of the holders of all outstanding preferred stock with
such right) shall be required to constitute a quorum for the purpose of
electing directors; in the absence of a quorum, such holders representing a
majority of those shares of preferred stock entitled to vote as provided herein
and present in person or by proxy shall have the power to adjourn the meeting
from time to time without notice, other than an announcement at the meeting,
until a quorum shall be present.
4. Redemption At Option of Corporation.
Share of Series B Preferred Stock may be redeemed, at the option of the
Corporation, in whole or in part, at any time at the redemption price of $100
per share (the "Redemption Price") plus accumulated and unpaid dividends
(whether or not declared) to the date fixed for redemption (the "Redemption
Date").
If at any time less than all of the outstanding shares of Series B
Preferred Stock shall be called for redemption, the shares to be redeemed
shall be selected by lot or in such other reasonable manner as the Board of
Directors shall determine. Not less than forty-five (45) days prior to the
Redemption Date of any Series B Preferred Stock pursuant to this Section 4,
notice specifying the time and place thereof shall be sent by mail, postage
prepaid, to the holders of record of the Series B Preferred Stock selected for
redemption, at their respective addresses appearing on the stock register.
5. Redemption Procedure.
Notice of any redemption specifying the Redemption Date and the place
where the Redemption Price plus accumulated and unpaid dividends (whether or
not declared) to the Redemption Date is payable shall be mailed, postage
prepaid, at least thirty (30) days but not more than sixty (60) days prior to
said Redemption Date to the holders of record of Series B Preferred Stock to
be redeemed at their respective addresses as the same shall appear on the
books of the Corporation. If (i) such notice of redemption shall have been so
mailed, and if on or before the Redemption Date specified in such notice all
funds necessary for such redemption shall have been set aside by the
Corporation separate and apart from its other funds, in trust for the benefit
of the holders of the shares so to be redeemed, so as to be and continue to be
available therefor
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notwithstanding that any certificate for shares of the Series B Preferred
Stock so called for redemption shall not have been surrendered for
cancellation, or (ii) if such notice of redemption shall have been so mailed,
and if prior to the Redemption Date specified in such notice said funds shall
be deposited in trust, for the benefit of the holders of the shares of Series
B Preferred Stock to be redeemed (and so as to be and continue to be available
therefor), with a bank or trust company organized in good standing under the
laws of the United States of America or any state thereof, named in such
notice having capital, surplus and undivided profits of at least $5,000,000
according to its last published Statement of Condition (doing business
directly or through an agent in the Borough of Manhattan, the City of New
York): thereupon and without awaiting the Redemption Date of all shares of
Series B Preferred Stock with respect to which such notice shall have been so
mailed and such set aside or deposit shall have been so made shall be deemed
to be no longer outstanding, and all rights with respect to such shares of
Series B Preferred Stock shall forthwith upon such separation or deposit in
trust cease and terminate, except the right of the holders thereof on or after
the Redemption Date to receive from such deposit the amount payable on the
redemption thereof including any dividends accrued on or before the Redemption
Date, but without interest. Any interest accrued on such funds shall be paid
to the Corporation from time to time. In the event the holders of shares of
Series B Preferred Stock which shall have been redeemed shall not within five
years after the Redemption Date claim any amount so deposited in trust for the
redemption of such shares, such bank or trust company shall upon demand pay
over to the Corporation any such unclaimed amount so deposited with it, and
shall thereupon be relieved of all responsibility in respect thereof, and
thereafter the holders of such shares shall look only to the Corporation for
payment of the redemption price thereof, but without interest. Any interest
accrued on such funds shall be paid to the Corporation from time to time.
Any provision of Sections 4 and 5 to the contrary notwithstanding, if any
quarterly dividend due on the Series B Preferred Stock or any series of
preferred stock ranking prior thereto or on a parity therewith shall be in
default, and until all such defaults shall have been cured, the Corporation
shall not redeem any shares of Series B Preferred Stock unless all outstanding
shares of Series B Preferred Stock are simultaneously redeemed in accordance
with the provisions of Sections 4 and 5 and the Corporation shall not purchase
or otherwise acquire any shares of Series B Preferred Stock except in
accordance with a purchase offer made by the Corporation on the same terms to
all holders of record of Series B Preferred Stock.
Shares of Series B Preferred Stock redeemed or otherwise purchased or
acquired by the Corporation shall not be reissued as shares of Series B
Preferred Stock but shall assume the status of authorized but unissued shares
of preferred stock of the Corporation.
6. Liquidation Preference.
In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, before any payment or
distribution of the assets of the Corporation (whether capital or surplus)
shall be made to or set apart for the holders of any series or class or
classes of stock of or other securities having an equity interest in the
Corporation ranking junior to the Series B Preferred Stock upon liquidation,
dissolution or winding up and after any such payment or distribution to the
holders of the shares of the Convertible Preferred Stock, Series A Adjustable
Preferred Stock, Series B Adjustable Preferred Stock, and any other series of
preferred stock ranking prior, upon liquidation, dissolution or winding up, to
the Series B Preferred Stock, the holders of the shares of Series B Preferred
Stock shall be entitled to receive $100 per share plus an amount equal to all
dividends (whether or not earned or declared) accumulated and unpaid thereon
to the date of final distribution to such holders; but such holders shall not
be entitled to any further payment. If, upon any liquidation, dissolution or
winding up of the Corporation, the assets of the Corporation, or proceeds
thereof, distributable among the holders of the shares of the Series B
Preferred Stock shall be insufficient to pay in full the preferential amount
aforesaid and liquidating payments on any other capital stock ranking as to
liquidation, dissolution or winding up, on a parity with the Series B
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Preferred Stock, then such assets or the proceeds thereof, should be
distributed among the holders of Series B Preferred Stock and any such other
capital stock ratably in accordance with the respective amounts which would be
payable upon liquidation, dissolution or winding up on such shares of Series B
Preferred Stock and any such other capital stock if all amounts payable
thereon were paid in full.
After such amount is paid in full, no further distributions or payments
shall be made in respect of the Series B Preferred Stock, such Series B
Preferred Stock shall no longer be deemed to be outstanding or be entitled to
any privilege of exchange or conversion or to any other preferences, rights or
privileges, and such Series B Preferred Stock shall be surrendered for
cancellation to any transfer agent for such Series B Preferred Stock or to the
Corporation.
Nothing herein contained shall be deemed to prevent redemption of Series B
Preferred Stock by the Corporation in the manner provided in Section 4, above.
Neither the merger nor consolidation of the Corporation into or with any
other corporation, nor the merger or consolidation of any other corporation
into or with the Corporation, nor a sale, transfer or lease of all or any part
of the assets of the Corporation, shall be deemed to be a dissolution,
liquidation or winding up of the Corporation within the meaning of this
Section 6.
Written notice of any voluntary or involuntary dissolution, liquidation or
winding up of the affairs of the Corporation, stating a payment date and the
place where the distribution shall be paid shall be given by mail, postage
prepaid, at least thirty (30) days but not more than sixty (60) days prior to
the payment date stated therein, to the holders of record of the Series B
Preferred Stock at their respective addresses as the same shall appear on the
books of the Corporation.
7. No Preemptive Rights.
The holders of Series B Preferred Stock shares shall not have any
preemptive right (i) to subscribe for or to acquire any unissued or treasury
shares of any class of stock of the Corporation or (ii) to subscribe for or
acquire any bonds, certificates or indebtedness, debentures or other
securities convertible into, or carrying options or warrants to purchase or
acquire any stock or other securities of the Corporation, except as otherwise
provided by resolution of the Board of Directors.
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Bylaws of Northeast Federal Corp.
Article I
Stockholders
Section 1. The annual meeting of the stockholders of the Corporation shall be
held on such date and time and at such place within or without the State of
Delaware, as may be fixed by the Board of Directors, for the purpose of
electing directors and for the transaction of such other business as may be
properly brought before the meeting.
Section 2. Special meetings of the stockholders may be held at such time and
at such place within or without the State of Delaware as may be stated in the
notice of the meeting.
Section 3. Notice of the time and place of every meeting of stockholders
shall be delivered personally or mailed at least ten days and not more than
sixty days prior thereto to each stockholder of record entitled to vote at his
address as it appears on the records of the Corporation. Such further notice
shall be given as may be required by law. Business transacted at any special
meeting shall be confined to the purpose or purposes stated in the notice of
such special meeting. Meetings may be held without notice if all stockholders
entitled to vote are present or if notice is waived by those not present.
Section 4. At all meetings of stockholders any stockholder entitled to vote
may vote in person or by proxy. Such proxy or any revocation or amendment
thereof shall be in writing, but need not be sealed, witnessed or
acknowledged, and shall be filed with the Secretary at or before the meeting.
Section 5. Except as otherwise provided by law or by the Certificate of
Incorporation, the presence, in person or by proxy, of the holders of record
of shares of capital stock of the Corporation entitling the holders thereof to
cast a majority of the votes entitled to be cast by the holders of shares of
capital stock of the Corporation entitled to vote shall constitute a quorum at
all meetings of the stockholders. Where a separate vote by a class or classes
is required, a majority of the shares of such class or classes present in
person or represented by proxy shall constitute a quorum entitled to take
action with respect to that vote on that matter. The chairman of the meeting
or the holders of record of a majority of such shares present or represented
may adjourn the meeting from time to time, whether or not there is such a
quorum. No notice of the time and place of adjourned meetings need be given
except as required by law.
Section 6. Election of directors at all meetings of the stockholders at which
directors are to be elected shall be by ballot, and except as otherwise set
forth in any Preferred Stock Designation with respect to the right of the
holders of any class or series of Preferred Stock to elect additional
directors under specified circumstances, a plurality of the votes cast thereat
shall elect. Except as otherwise provided by law, the Certificate of
Incorporation, any Preferred Stock Designation, these Bylaws or any resolution
adopted by a majority of the total number of directors which the corporation
would have if there were no vacancies on the Board of Directors (hereinafter
the "Whole Board"), all matters other than the election of directors submitted
to the stockholders at any meeting shall be decided by the vote of a majority
of the shares present in person or represented by proxy and entitled to vote
with respect thereto.
Section 7. (a) At any annual meeting of the stockholders, only such business
shall be conducted as shall have been brought before the meeting (i) by or at
the direction of the Board of Directors or (ii) by any stockholder of the
Corporation who is entitled to vote with respect thereto and who complies with
the notice
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procedures set forth in this Section 7(a). For business to be properly brought
before an annual meeting by a stockholder, the stockholder must have given
timely notice thereof in writing to the Secretary of the Corporation. To be
timely, a stockholder's notice must be delivered or mailed to and received at
the principal executive offices of the Corporation not less than 60 days prior
to the date of the annual meeting; provided, however that in the event that
less than 70 days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholder to be
timely must be received not later than the close of business on the 10th
day following the day on which such notice of the date of the annual meeting
was mailed or such public disclosure was made. A stockholder's notice to the
Secretary shall set forth as to each matter such stockholder proposes to bring
before the annual meeting (i) a brief description of the business desired to
be brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (ii) the name and address, as they appear on
the Corporation's books, of the stockholder proposing such business, (iii) the
class and number of shares of the Corporation's capital stock that are
beneficially owned by such stockkholder and (iv) any material interest of such
stockholder in such business. Notwithstanding anything in these Bylaws to the
contrary, no business shall be brought before or conducted at an annual
meeting except in accordance with the provisions of this Section 7(a). The
officer of the Corporation or other person presiding over the annual meeting
shall, if the facts so warrant, determine and declare to the meeting that
business was not properly brought before the meeting in accordance with the
provisions of this Section 7(a) and, if he should so determine, he shall so
declare to the meeting and any such business so determined to be not properly
brought before the meeting shall not be transacted.
At any special meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting by or at the direction
of the Board of Directors.
(b) Only persons who are nominated in accordance with the procedures
set forth in these Bylaws shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the
Corporation may be made at a meeting of stockholders at which directors are to
be elected only (i) by or at the direction of the Board of Directors or (ii)
by any stockholder of the Corporation entitled to vote for the election of
directors at the meeting who complies with the notice procedures set forth in
this Section 7(b). Such nominations, other than those made by or at the
direction of the Board of Directors, shall be made by timely notice in writing
to the Secretary of the Corporation. To be timely, a stockholder's notice
shall be delivered or mailed to and received at the principal executive
offices of the Corporation not less than 60 days prior to the date of the
meeting; provided, however, that in the event that less than 70 days' notice
or prior public disclosure of the date of the meeting is given or made to the
stockholders, notice by the stockholder to be timely must be received not
later than the close of business on the 10th day on which such notice of the
date of the meeting was mailed or such public disclosure was made. Such
stockholder's notice shall set forth (i) as to each person whom such
stockholder proposes to nominate for election or re-election as a director,
all information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required,
in each case pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected);
and a description of all arrangements or understandings among the stockholder
making the nomination and the nominee and any other person or persons (naming
such person or persons) pursuant to which such nomination is made and (ii) as
to the stockholder giving the notice (x) the name and address, as they appear
on the Corporation's books, of such stockholder and (y) the class and number
of shares of the Corporation's capital stock that are beneficially owned by
such stockholder. At the request of the Board of Directors any person
nominated by the Board of Directors for election as a director shall furnish
to the Secretary of the Corporation that information required to be set forth
in a stockholder's notice of nomination which pertains to the nominee. No
person shall be eligible for election as a director of the Corporation unless
nominated in accordance with the provisions of this Section 7(b). The officer
of the Corporation or other person presiding at the meeting
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shall, if the facts so warrant, determine that a nomination was not made in
accordance with such provisions and, if he should so determine, he shall so
declare to the meeting and the defective nomination shall be disregarded.
Section 8. There shall be appointed, for all meetings of the stockholders,
two inspectors of the vote. Such inspectors shall first take and subscribe an
oath of affirmation faithfully to execute the duties of inspector at such
meeting with strict impartiality and in accordance to the best of their
ability. Unless appointed in advance of any such meeting by the Board of
Directors, such inspectors shall be appointed for the meeting by the person
presiding thereat. No director or candidate for the office of director shall
be appointed as such inspector. Such inspectors shall receive, examine and
tabulate all ballots and proxies, including proxies filed with the Secretary,
shall determine the presence or absence of a quorum and shall be responsible
for tallying and certifying the vote taken on any matter at each meeting which
is required to be tallied and certified by them in the resolution of the Board
of Directors appointing them or the appointment of the person presiding at
such meeting, as the case may be.
Article II
Directors
Section 1. (a) Subject to the rights of the holders of any class or series of
Preferred Stock to elect directors under specified circumstances, the number
of directors shall consist of thirteen members. The directors, other than
those who may be elected by the holders of any class or series of Preferred
Stock, shall be divided, with respect to the time of which they severally
hold office, into three classes, with the term of office of the first class to
expire at the first annual meeting of stockholders, the term of office of the
second class to expire at the annual meeting of stockholders one year
thereafter and the term of office of the third class to expire at the annual
meeting of the stockholders two years thereafter, with each director to hold
office until his or her successor shall have been duly elected and qualified.
At each annual meeting of stockholders, directors elected to succeed those
directors whose terms then expire shall be elected for a term of office to
expire at the third succeeding annual meeting of stockholders after their
election, with each director to hold office until his or her successor have
been duly elected and qualified.
(b) A whole number of directors equal to at least one half of the
Whole Board shall constitute a quorum for the transaction of business, but if
at any meeting of the Board of Directors there shall be less than a quorum
present a majority of those present may adjourn the meeting from time to time
until a quorum shall have been obtained.
(c) Subject to the rights of the holders of any class or series of
Preferred Stock, and unless the Board of Directors otherwise determines, newly
created directorships resulting from any increase in the authorized number of
directors or any vacancies in the Board of Directors resulting from death,
resignation, retirement, disqualification, removal from office of other cause
may be filled only by a majority vote of the directors then in office, though
less than a quorum, and a director so chosen shall hold office for a term
expiring at the annual meeting of stockholders at which the term of office of
the class to which they have been elected expires and until such director's
successor shall have been duly elected and qualified. No decrease in the
number of authorized directors constituting the Whole Board shall shorten the
term of any incumbent director.
(d) Subject to the rights of the holders of any class or series of
Preferred Stock, any director, or the entire Board of Directors, may be
removed from office at any time, but only for cause and only by the
affirmative vote of the holders of a majority of the voting power of all the
then-outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (the "Voting Stock") voting together as
a single class.
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Section 2. Meetings of the Board of Directors shall be held at such place
within or without the State of Delaware as may from time to time be fixed by,
or determined in the manner provided by, resolution of the Board or as may be
specified in the notice of any meeting. Regular meetings of the Board of
Directors shall be held at such times as may from time to time be fixed by, or
determined in the manner provided by, resolution of the Board of Directors,
and special meetings may be held at any time upon the call of a majority of
the directors or of the Chairman of the Board of Directors by oral,
telegraphic or written notice, duly served on or sent or mailed to each
director not less than two days before such meeting. A meeting of the Board
of Directors may be held without further notice immediately after the annual
meeting of stockholders at the same place at which such meeting was held.
Notice need not be given of regular meetings of the Board of Directors held at
times and places fixed by resolution of the Board of Directors. A meeting may
be held at any time without notice if all directors are present or if those
not present waive notice of the meeting in writing, either before or after
such meeting.
Members of the Board of Directors may participate in meetings by means of
conference telephone or similar communications equipment by which all persons
participating in the meeting can hear each other. Such participation shall
constitute presence in person but shall not constitute attendance for purposes
of compensation.
Section 3. The Board of Directors, may in its discretion, by resolution
passed by a majority of the Whole Board, designate an Executive Committee to
consist of the Chief Executive Officer of the Corporation and such number of
other directors as a majority of the Whole Board may from time to time
determine (not less than three), which Committee, to the extent provided in
said resolution, shall have, and may exercise when the Board of Directors is
not in session, the powers of the Board of Directors in the management of the
business and affairs of the Corporation, except the power to change the
members or to fill vacancies in the Board of Directors of said Committee and
except as limited by applicable law. The Board of Directors shall have the
power at any time to change the membership of the said Committee (subject to
the requirement that the Chief Executive Officer be a member thereof), to fill
vacancies in it, or to dissolve it. The Executive Committee may make rules
for the conduct of its business and may appoint such committees as it shall
from time to time deem necessary. One-half of the members of such Committee
shall deem a quorum.
Section 4. The Board of Directors, by a vote of a majority of the Whole
Board, may from time to time designate committees of the Board of Directors,
with such lawfully delegable powers and duties as it thereby confers, to serve
at the pleasure of the Board of Directors and shall, for those committees and
others provided for herein, elect a director or directors to serve as the
member or members, designating, if it desires, other directors as alternate
members who may replace any absent or disqualified member at any meeting of
the committee. In the absence or disqualification of any member of any
committee and any alternate member in his place, the member or members of the
committee present at the meeting and not disqualified from voting, whether or
not he or she or they constitute a quorum, may by unanimous vote appoint
another member of the Board of Directors to act at the meeting in the place of
the absent or disqualified member.
Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be
made for notice to members of all meetings: one-third of the members shall
constitute a quorum unless the committee shall consist of one or two members,
in which event one member shall constitute a quorum: and all matters shall be
determined by a majority vote of the members present. Action may be taken by
any committee without a meeting if all members thereof consent thereto in
writing, and the writing or writings are filed with the minutes of the
proceedings of such committee.
Section 5. The Executive Committee, and any other committee, if the
resolution which designates such committee or a supplemental resolution of the
Board of Directors shall so provide, may exercise the power
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and authority of the Board of Directors to declare a dividend, to authorize
the issuance of stock or adopt a certificate of ownership and merger pursuant
to Section 253 of the Delaware General Corporation Law.
Article III
Officers
Section 1. The Board of Directors as soon as may be practicable after the
annual meeting of stockholders shall choose a Chief Executive Officer of the
Corporation, a President, who may also be the Chairman of the Board of
Directors and Chief Executive Officer, a Secretary and a Chief Financial
Officer, and from time to time may choose such other officers as it may deem
proper. The Chairman of the Board of Directors shall be chosen from the
directors.
Section 2. The term of office of all officers shall be until the next annual
election of officers and until their respective successors are chosen but any
officer may be removed from office at any time by the affirmative vote of a
majority of the members of the Whole Board.
Section 3. Officers chosen by the Board of Directors shall have such powers
and duties as generally pertain to their respective offices, subject to the
specific provisions of this ARTICLE III. Such officers shall also have such
powers and duties as from time to time may be conferred by the Board of
Directors or by any committee thereof.
Section 4. The Chief Executive Officer of the Corporation shall, subject to
the control of the Board of Directors, have general power over the management
and oversight of the administration and operation of the Corporation's
business and general supervisory power and authority over its policies and
affairs. He shall see that all orders and resolutions of the Board of
Directors and of any committee thereof are carried into effect.
Section 5. The President shall act in a general executive capacity and shall
assist the Chief Executive Officer of the Corporation in the administration
and operation of the Corporation's business and in the supervision of its
policies and affairs. During the absence or disability of the Chief Executive
Officer, the President shall have and exercise all the powers of the Chief
Executive Officer.
Each meeting of the stockholders and the Board of Directors shall be
presided over by the Chief Executive Officer or, in his absence, the President
or, in his absence, by such officer as has been designated by the Board of
Directors or, in his absence, by such officer or other person as is chosen at
the meeting. The Secretary or, in his absence, the General Counsel of the
Corporation or such officer as has been designated by the Board of Directors
or, in his absence, such officer or other person as is chosen by the person
presiding, shall act as secretary of each such meeting.
Section 6. The Secretary or an Assistant Secretary shall issue notices of
meetings, shall keep their minutes, shall have charge of the seal and the
corporate books, shall perform such other duties and exercise such other
powers as are usually incident to such offices and/or such other duties and
powers as are properly assigned thereto by the Board of Directors, the Chief
Executive Officer or the President.
Section 7. The Chief Financial Officer shall have charge of all monies and
securities of the Corporation, other than monies and securities of any
division of the Corporation which has a treasurer or financial officer
appointed by the Board of Directors, and shall keep regular books of account.
The funds of the Corporation shall be deposited in the name of the
Corporation by the Chief Financial Officer with such banks or trust companies
as the Board of Directors or the Executive Committee from time to time shall
designate. He shall sign or countersign such instruments as require his
signature, shall perform all such duties and have all such powers as are
usually incident to such office and/or such duties and powers as are properly
assigned to him by the Board of Directors, the Chief Executive Officer or the
President, and may be required to give bond
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for the faithful performance of his duties in such sum and with such surety as
may be required by the Board of Directors.
Section 8. The Board of Directors may appoint one or more vice presidents, a
secretary, a treasurer, one or more assistant secretaries and one or more
assistant treasurers, or one appointee to both such positions, which officers
shall have such powers and shall perform such duties as are provided in the
Bylaws or as may be assigned to them by the Board of Directors, the Chief
Executive Officer or the President.
Article IV
Certificates of Stock
Section 1. The interest of each stockholder of the Corporation shall be
evidenced by certificate(s) for shares of stock in such form as the Board of
Directors may from time to time prescribe. The shares of the stock of the
Corporation shall be transferred on the books of the Corporation by the holder
thereof in person or by his attorney, upon surrender for cancellation of
certificates for the same number of shares, with an assignment and power of
transfer endorsed thereon or attached thereto, duly executed, with such proof
of the authenticity of the signature as the Corporation or its agents may
reasonably require.
Section 2. The certificates of stock shall be signed, countersigned and
registered in such manner as the Board of Directors may by resolution
prescribe, which resolution may permit all or any of the signatures on such
certificates to be in facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate has ceased to be such officer, transfer agent or registrar before
such certificate is issued, such certificate may be issued by the Corporation
with the same effect as if he were such officer, transfer agent or registrar
at the date of issue.
Section 3. In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders, or to receive
payment of any dividend or other distribution or allotment of any rights or to
exercise any rights in respect of any change, conversion or exchange of stock
or for the purpose of any other lawful action, the Board of Directors may fix
a record date, which record date shall not precede the date on which the
resolution fixing the record date is adopted and which record date shall not
be more than sixty nor less than ten days before the date of any meeting of
stockholders, nor more than sixty days prior to the time for such other action
as hereinbefore described; provided, however, that if no record date is fixed
by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given
or, if notice is waived, at the close of business on the day next preceding
the day on which the meeting is held, and, for determining stockholders
entitled to receive payment of any dividend or other distribution or allotment
of rights or to exercise any rights of change, conversion or exchange of stock
or for any other purpose, the record date shall be at the close of business on
the day on which the Board of Directors adopts a resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for
the adjourned meeting.
Section 4. The Board of Directors may determine the conditions upon which a
new certificate of stock will be issued to replace a certificate which is
alleged to have been lost, stolen, mutilated or destroyed, and the Board of
Directors may delegate to any officer of the Corporation the power to make
such determinations and to cause such replacement certificates to be issued.
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Article V
Checks, Notes, Etc.
All checks on the Corporation's bank accounts and all drafts, bills of
exchange and promissory notes, and all acceptances, obligations and other
instruments for the payment of money, shall be signed by such person or
persons as shall be thereunto authorized from time to time by the Board of
Directors or by the Committee or officer or officers of the Corporation to
whom the Board shall have delegated the power to authorize such signing;
provided, however, that the signature of any person authorized on checks and
drafts drawn on the Corporation's dividend and special accounts may be in
facsimile if the Board of Directors or the Committee or officer or officers,
whichever shall have authorized such person to sign such checks or drafts,
shall have authorized such person to sign in facsimile; and provided further
that in case notes or other instruments for the payment of money (other than
notes, bonds or debentures issued under a trust instrument of the Corporation)
are required to be signed by two persons, the signature thereon of only one of
the persons signing any such note or other instrument may be in facsimile, and
that in the case of notes, bonds or debentures issued under a trust instrument
of the Corporation and required to be signed by two officers of the
Corporation, the signatures of both such officers may be in facsimile if
specifically authorized and directed by the Board of Directors of the
Corporation and if such notes, bonds or debentures are required to be
authenticated by a corporate trustee which is a party to the trust instrument;
and provided further that in case any person or person who shall have signed
any such note or other instrument, either manually or in facsimile, shall have
ceased to be a person or persons so authorized to sign any such note or other
instrument, whether because of death or by reason of any other fact or
circumstance, before such note or other instrument shall have been delivered
by the Corporation, such note or other instrument may, nevertheless, be
adopted by the Corporation and be issued and delivered as though the person or
persons who so signed such a note or other instrument had not ceased to be such
a person or persons.
Article VI
Offices
The Corporation may have offices outside of the State of Delaware at such
places as shall be determined from time to time by the Board of Directors.
Article VII
Amendments
These Bylaws may be amended, added to, rescinded or repealed at any
meeting of the Board of Directors, provided notice of the proposed change was
given in the notice of the meeting given not less than two days prior to the
meeting, or by the stockholders by the affirmative vote of the holders of at
least a majority of the voting power of all the then-outstanding shares of
Voting Stock voting together as a single class.
B-7
<PAGE>
(LOGO OF NORTHEAST SAVINGS APPEARS HERE)
January 1, 1994
Mr. George P. Rutland
83 Stagecoach Road
Avon, CT 06001
Dear Mr. Rutland:
The Boards of Directors (collectively, the "Board") of Northeast Federal
Corp. and Northeast Savings, F.A. (collectively, "Northeast") desire to enter
into an agreement with you concerning certain of the terms and conditions of
your continued employment with Northeast.
Northeast agrees to employ you, and you hereby agree to serve in the
capacity and with the titles set forth below until December 31, 1997 (the
"employment term"), provided your employment is not terminated due to your
death, or for Cause or due to your Disability or Retirement (as such capitalized
terms are hereinafter defined).
You shall serve as Chairman of the Board and a Director of Northeast
through December 31, 1994. Thereafter, commencing January 1, 1995 and for the
remainder of the employment term, you shall serve as an Officer in charge of
West Coast operations, the title of such position to be mutually determined
prior to your assuming such position. Any terms and conditions of employment
not specifically mentioned in this letter agreement will be governed by the
usual personnel policies and practices as they relate to other senior officers
of Northeast, and you shall be eligible for such fringe benefits as are such
other senior officers. During the employment term, you shall be eligible to
participate in the stock option plans listed in the attached Exhibit A in
accordance with the terms of such plans. In addition, you shall be entitled to
the benefits outlined in Exhibit A; provided that, throughout the employment
term, the levels of such benefits provided to you thereunder (other than any
such benefits provided pursuant to a tax-qualified retirement plan, which shall
be governed by such plan) shall be commensurate with the levels in effect as of
December 31, 1993 based on your salary and position as of such date.
During the employment term, your base salary shall be as follows: for the
1994 calendar year, $350,000; for the 1995 calendar year, $250,000; for the 1996
calendar year, $200,000; and for the 1997 calendar year, $150,000.
Additionally, your base salary in 1994 and 1995 shall be increased to include an
additional amount which, after providing for all applicable income taxes, will
provide $31,994 to pay the annual premium cost of a special life insurance
policy. In addition to paying your base salary and other compensation and
providing you with employee and fringe benefits, Northeast shall provide you
with a leased automobile of your choosing, at its expense, during the employment
term.
If during the employment term your employment with Northeast is terminated
by Northeast other than for Cause or due to your Disability, you shall be
provided with (1) a lump sum severance payment equal to the greater of (i) the
payments due pursuant to this Agreement for the remaining employment term, or
(ii) one (1) year's base salary, at the rate in effect on the date of your
termination pursuant to this paragraph; (2) life, disability, accident, medical
and dental insurance benefits substantially similar to those which you are
receiving immediately prior to your receipt of the Notice of Termination as the
same are set forth in the attached Exhibit A, and continuing for a period of the
greater of one (1) year or the
<PAGE>
Mr. George P. Rutland
January 1, 1994
Page 2
remainder of the employment term; and (3) directors' and officers' liability
insurance, specifically naming you as an insured, with coverage (including
deductibles) at least as favorable as that in effect immediately prior to your
receipt of the Notice of Termination and comparable prior acts ("tail") coverage
for a period of ten (10) years following your date of termination, or such
lesser period as you shall agree to in writing. The benefit specified in (3)
hereof shall also apply in the event of your Retirement upon completion of your
employment term or prior thereto with the consent of Northeast. In addition,
subsequent to your termination pursuant to this paragraph, Northeast shall
arrange to provide you and your spouse with medical, dental and supplemental
medical benefits substantially similar to those which you and your spouse are
receiving immediately prior to such termination, such medical, dental and
supplemental medical benefits to be provided until the later of you and your
spouse's death or December 31, 1997. Any such medical or dental benefits
provided under this Agreement shall be secondary to any benefits to which you or
your spouse may be entitled under the federal Social Security Act.
For purposes of this Agreement, Disability shall occur if, as a result of
your incapacity due to physical or mental illness, you shall have been absent
from your duties with Northeast on a full-time basis for six (6) consecutive
months and a finding is made by the Board that you are unable to perform the
essential functions or material duties of your position with Northeast, with or
without reasonable accommodation. Termination for Disability shall occur if,
within thirty (30) days after written notice of such finding and Northeast's
decision to terminate your employment (the "Notice of Termination", as defined
below) is given, you shall not have returned to the full-time performance of
your duties. "Retirement" shall mean termination in accordance with Northeast's
retirement policy, including early retirement, generally applicable to its
salaried employees or in accordance with any retirement arrangement established
with your consent with respect to you.
Termination for Cause shall mean termination because of your engaging
willfully in conduct which is demonstrably and materially injurious to
Northeast, monetarily or otherwise, your dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, willful failure
to perform stated duties (other than such failure resulting from your incapacity
due to physical or mental illness or any such actual or anticipated failure
resulting from your termination for Good Reason), violation of any law, rule, or
regulation (other than traffic violations or similar offenses) or a final cease-
and-desist order of the Office of Thrift Supervision or the Federal Deposit
Insurance Corporation. For purposes of this Agreement, no act, or failure to
act, on your part shall be considered "willful" unless done, or omitted to be
done, by you not in good faith and without reasonable belief that your action or
omission was in the best interest of Northeast. Notwithstanding the foregoing,
you shall not be deemed to have been terminated for Cause unless and until there
shall have been delivered to you a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters of the entire membership of the
Board at a meeting of the Board called and held for that purpose (after
reasonable notice to you and an opportunity for you, together with your counsel,
to be heard before the Board), finding that in the good faith opinion of the
Board you engaged in conduct set forth above and specifying the particulars
thereof in detail.
<PAGE>
Mr. George P. Rutland
January 1, 1994
Page 3
Your termination of your employment for "Good Reason" as hereinafter set
forth shall be deemed termination by Northeast other than for Cause under this
Agreement. "Good Reason" shall, without your express written consent, mean:
1. the assignment to you of any duties inconsistent with your position
with Northeast during the employment term, as more particularly
described above, or a substantial alteration in the nature or status
of your responsibilities other than any such alterations primarily
attributable to the fact that Northeast may no longer be a public
company;
2. a reduction by Northeast in your annual base salary, as specified
above in this Agreement, except for across-to-board salary reductions
similarly affecting all executives of Northeast and all executives of
any person in control of Northeast;
3. the failure by Northeast to continue in effect, or to continue your
participation in, any stock option plan in which you may be
participating at the time of execution of this Agreement, as such
plans are more particularly described in the attached Exhibit A,
unless an equitable arrangement (embodied in an ongoing substitute or
alternative plan) has been made with respect to you under such plan;
4. the failure by Northeast to continue to provide you with benefits
substantially similar to those enjoyed by you under any of Northeast's
pension, life insurance, medical, health and accident, or disability
plans in which you may be participating at the time of execution of
this Agreement, as such benefits are listed in the attached Exhibit A,
the taking of any action by Northeast which would directly or
indirectly materially reduce any of such benefits or deprive you of
any material fringe benefit enjoyed by you, or the failure by
Northeast to provide you with the four (4) weeks of paid vacation to
which you are entitled; or
5. any purported termination of your employment which is not effected
pursuant to a Notice of Termination satisfying the requirements as set
forth above. For purposes of this Agreement, no such purported
termination shall be effective.
Your right to terminate your employment for Good Reason shall not be
affected by your incapacity due to physical or mental illness.
During the employment term, any purported termination of your employment
hereunder by Northeast or by you shall be communicated by written Notice of
Termination to the other party hereto. For purposes of this Agreement, a
"Notice of Termination" shall mean a notice given within the appropriate period
specified below which shall indicate the specific termination provision in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of your employment
under the provision so indicated. The required period for Notice of Termination
shall be as follows: (A) if your employment is terminated due to Disability or
for Cause, thirty (30) days; (B) if your employment is terminated for Good
Reason, sixty (60) days; and (C) if your employment is terminated for any other
reason, the time period specified in the Notice of Termination.
<PAGE>
Mr. George P. Rutland
January 1, 1994
Page 4
For purposes of this Agreement, notices and all other communications
provided for in this Agreement shall be in writing and shall be deemed to have
been duly given when delivered or mailed by United States registered mail,
return receipt requested, postage prepaid, addressed to the respective addresses
set forth on the first page of this Agreement, provided that all notices to
Northeast shall be directed to the attention of the Board with a copy to the
Secretary of Northeast, or to such other address as either party may have
furnished to the other in writing in accordance herewith, except that notice of
change of address shall be effective only upon receipt.
If within thirty (30) days after any Notice of Termination is given, the
party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination and if such notice is given in good
faith and the party giving such notice pursues the resolution of such dispute
with reasonable diligence, Northeast will continue to pay your compensation as
provided for in this Agreement (including, but not limited to, base salary) and
will continue you as a participant in all compensation, benefit and insurance
plans in which you were participating when the notice giving rise to the dispute
was given, until the earlier of (1) the end of the employment term, or (2) the
date the dispute is finally resolved, either by mutual written agreement of the
parties, by a binding arbitration award, or by a final judgment, order or decree
of a court of competent jurisdiction (the time for appeal therefrom having
expired and no appeal having been perfected).
After the employment term, you may terminate your employment upon
reasonable notice, and Northeast may terminate your employment for Cause or for
reasons other than for Cause upon reasonable notice. In addition to any other
benefits you are entitled to after the employment term, Northeast shall arrange
to provide you and your spouse with medical, dental and supplemental medical
benefits substantially similar to those you and your spouse are receiving on
January 1, 1994, such medical, dental and supplemental medical benefits to be
provided until the later of you and your spouse's deaths. Any such medical,
dental or supplemental medical benefits provided under this Agreement shall be
secondary to any benefits to which you or your spouse may be entitled under the
Federal Social Security Act.
Acceptance of severance payments pursuant to this Agreement shall release
and forever discharge Northeast and its subsidiaries from each and every claim,
demand, action, cause of action, damage award, expense, cost, claim for
attorneys' fees, or liability of any kind whatsoever, whether known or unknown,
vested or contingent, in law, equity or otherwise, which you then have, have
ever had or may thereafter have against Northeast or any of its subsidiaries.
As a condition to Northeast's obligation to make severance payments to you
hereunder, you agree to execute and deliver to Northeast such additional release
as Northeast shall request at such time.
Should you be entitled to and elect to accept payments from Northeast
pursuant to rights acquired by you which follow a "change in control of
Northeast" as defined in the Agreement between Northeast and you dated January
1, 1994 (the "Change in Control Agreement") granting such rights, such payments
shall be in lieu of payments required pursuant to this Agreement and any and all
rights granted you under this Agreement shall terminate and this Agreement shall
be null and void. When and if you are entitled to rights under this and any
other agreement requiring severance payments to you by Northeast, Northeast may
require you to terminate such other agreement as a condition to its obligation
to make any payments or any further payments under this Agreement.
Should you become entitled to a severance payment under this Agreement or
to any other payments or benefits received or to be received by you under any
other plan, arrangement or agreement
<PAGE>
Mr. George P. Rutland
January 1, 1994
Page 5
(the "Total Payments") and should any part or all of the Total Payments be
deemed contingent on a change in ownership or control of Northeast, as
determined under Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code"), you shall be entitled to be paid by Northeast an additional amount
such that the net amount retained by you, after deduction of any federal excise
tax imposed pursuant to Section 4999 of the Code (the "Excise Tax") on the Total
Payments and any federal or state income tax and Excise Tax upon the payment
provided for by this paragraph shall be equal to the Total Payments. The
parties agree that the applicability of said Section 280G hereunder and any
calculations to be made pursuant to this paragraph shall be made by an
independent tax advisor chosen by Northeast which may include Northeast's
independent accountants or benefits consultants, and shall be at Northeast's
expense. The parties further agree that they shall reasonably cooperate with
each other in connection with any administrative or judicial proceedings
concerning the existence or amount of liability for Excise Tax with respect to
the severance payments payable hereunder.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in Hartford, Connecticut
in accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction; provided, however, that you shall be entitled to seek specific
performance of your right to be paid following the date of termination during
the pendency of any dispute or controversy arising under or in connection with
this Agreement. Any arbitrator or arbitrators selected to resolve a dispute or
controversy hereunder shall have at least five (5) years of experience as an
attorney or benefits consultant specializing in employment or benefits matters.
The Board expects to include you in any annual Incentive Compensation Plan
which may be available to other senior officers.
This Agreement shall inure to the benefit of and be enforceable by your
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If you should die while any amount would
still be payable to you hereunder if you had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to your devisee, legatee or other designee or if there
is no such designee, to your estate.
No provision of this Agreement may be modified, waived or discharged unless
such waiver, modification or discharge is agreed to in writing and signed by you
and such officer as may be specifically designated by the Board. No waiver by
either party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, have been made by either party which are not
expressly set forth in this Agreement. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of Connecticut.
This Agreement shall be subject to and be deemed to include all of the
provisions of 12 C.F.R. Section 563.39 as amended from time to time, a copy of
which is enclosed as if the same were fully set forth herein. In addition, any
payments made to you pursuant to the terms of this Agreement, or otherwise, are
subject to and conditioned upon compliance with 12 U.S.C. Section 1828(k) and
any regulation promulgated thereunder.
<PAGE>
Mr. George P. Rutland
January 1, 1994
Page 6
The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
This Agreement may be executed in several counterparts, each of which shall
be deemed to be an original but all of which together will constitute one and
the same instrument.
This Agreement supersedes the Employment Agreement between Northeast and
you dated as of March 1, 1992, as amended by an Addendum dated as of July 9,
1993, which shall be void and of no effect on and after the date of execution of
this Agreement.
If this letter correctly sets forth our agreement on the subject matter
hereof, kindly sign and return to Northeast the enclosed copy of this letter
which will then constitute our agreement on this subject.
Sincerely,
NORTHEAST SAVINGS, F.A.
By /s/ Kirk W. Walters
---------------------------------------
Kirk W. Walters
Chief Executive Officer, President, Chief
Operating Officer, and Chief Financial
Officer
NORTHEAST FEDERAL CORP.
By /s/ Kirk W. Walters
---------------------------------------
Kirk W. Walters
Chief Executive Officer, President, Chief
Operating Officer, and Chief Financial
Officer
ACCEPTED AND AGREED TO
THIS 1st DAY OF
January, 1994:
/s/ George P. Rutland
- ---------------------
George P. Rutland
<PAGE>
Exhibit A
---------
George P. Rutland
<TABLE>
<CAPTION>
Option Plans
- ------------
<S>
1. 1993 Stock Option Plan
2. 1986 Stock Option Plan
3. 1983 Stock Option Plan
<CAPTION>
Benefits
- --------
<S>
1. Long Term Disability Income Plan
2. Executive Disability Plan
3. Group Life, Accidental Death and
Dismemberment
4. Executive Life Insurance
5. Optional Life Insurance
6. Supplemental Medical Reimbursement Plan
7. 1993 Deferred Compensation Plan
for Key Executives
8. Thrift and Profit Sharing Plan
9. Employee Stock Ownership Plan
10. Cash Balance Retirement Plan
11. Medical Insurance Plan
12. Dental Insurance Plan
</TABLE>
<PAGE>
(LOGO OF NORTHEAST SAVINGS APPEARS HERE)
January 1, 1994
Mr. Kirk W. Walters
56 Henley Way
Avon, CT 06001
Dear Mr. Walters:
The Boards of Directors (collectively, the "Board") of Northeast Federal
Corp. and Northeast Savings, F.A. (collectively, "Northeast") desire to enter
into an agreement with you concerning certain of the terms and conditions of
your continued employment with Northeast as its Chief Executive Officer,
President, Chief Operating Officer and Chief Financial Officer. Any terms and
conditions of employment not specifically mentioned in this letter agreement
will be governed by the usual personnel policies and practices as they relate to
other senior officers of Northeast, and you shall be eligible for such fringe
benefits as are such other senior officers. You also shall be eligible to
participate in the stock option plans listed in the attached Exhibit A in
accordance with the terms of such plans and to receive the benefits outlined in
Exhibit A.
Northeast agrees to employ you, and you hereby agree to serve in the
capacity and with the titles set forth above until December 31, 1997 (the
"employment term"), provided your employment is not terminated due to your
death, or for Cause, or due to your Disability or Retirement (as such
capitalized terms are hereinafter defined).
During the employment term, your base salary will be that amount determined
annually by the Board, which amount in no event shall be less than $350,000.
If during the employment term your employment with Northeast is terminated
by Northeast other than for Cause or due to your Disability, you shall be
provided with (1) a lump sum severance payment equal to the greater of (i) the
payments due pursuant to this Agreement for the remaining employment term, or
(ii) one (1) year's base salary, at the rate in effect on the date of your
termination pursuant to this paragraph; provided, however, that the payments due
under this paragraph (1) shall in no event exceed 2.99 times base salary at the
rate in effect on the date of your termination; (2) life, disability, accident,
medical and dental insurance benefits substantially similar to those which you
are receiving immediately prior to your receipt of the Notice of Termination as
the same are set forth in the attached Exhibit A, and continuing for a period of
the greater of one (1) year or the remainder of the employment term; and (3)
directors' and officers' liability insurance, specifically naming you as an
insured, with coverage (including deductibles) at least as favorable as that in
effect immediately prior to your receipt of the Notice of Termination and
comparable prior acts ("tail") coverage for a period of ten (10) years following
your date of termination, or such lesser period as you shall agree to in
writing.
For purposes of this Agreement, Disability shall occur if, as a result of
your incapacity due to physical or mental illness, you shall have been absent
from your duties with Northeast on a full-time basis for six (6) consecutive
months and a finding is made by the Board that you are unable to perform the
essential functions or material duties of your position with Northeast, with or
without reasonable
<PAGE>
Mr. Kirk W. Walters
January 1, 1994
Page 2
accommodation. Termination for Disability shall occur if, within thirty (30)
days after written notice of such finding and Northeast's decision to terminate
your employment (the "Notice of Termination", as defined below) is given, you
shall not have returned to the full-time performance of your duties.
"Retirement" shall mean termination in accordance with Northeast's retirement
policy, including early retirement, generally applicable to its salaried
employees or in accordance with any retirement arrangement established with your
consent with respect to you.
Termination for Cause shall mean termination because of your engaging
willfully in conduct which is demonstrably and materially injurious to
Northeast, monetarily or otherwise, your dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, willful failure
to perform stated duties (other than such failure resulting from your incapacity
due to physical or mental illness or any such actual or anticipated failure
resulting from your termination for Good Reason), violation of any law, rule, or
regulation (other than traffic violations or similar offenses) or a final cease-
and-desist order of the Office of Thrift Supervision or the Federal Deposit
Insurance Corporation. For purposes of this Agreement, no act, or failure to
act, on your part shall be considered "willful" unless done, or omitted to be
done, by you not in good faith and without reasonable belief that your action or
omission was in the best interest of Northeast. Notwithstanding the foregoing,
you shall not be deemed to have been terminated for Cause unless and until there
shall have been delivered to you a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters of the entire membership of the
Board at a meeting of the Board called and held for that purpose (after
reasonable notice to you and an opportunity for you, together with your counsel,
to be heard before the Board), finding that in the good faith opinion of the
Board you engaged in conduct set forth above and specifying the particulars
thereof in detail.
Your termination of your employment for "Good Reason" as hereinafter set
forth shall be deemed termination by Northeast other than for Cause under this
Agreement. "Good Reason" shall, without your express written consent, mean:
1. the assignment to you of any duties inconsistent with your position
with Northeast during the employment term, as more particularly
described above, or a substantial alteration in the nature or status
of your responsibilities other than any such alterations primarily
attributable to the fact that Northeast may no longer be a public
company;
2. a reduction by Northeast in your annual base salary as specified above
in this Agreement, except for across-the-board salary reductions
similarly affecting all executives of Northeast and all executives of
any person in control of Northeast;
3. the failure by Northeast to continue in effect, or to continue your
participation in, any stock option plan in which you may be
participating at the time of execution of this Agreement, as such
plans are more particularly described in the attached Exhibit A,
unless an equitable arrangement (embodied in an ongoing substitute or
alternative plan) has been made with respect to you under such plan;
4. the failure by Northeast to continue to provide you with benefits
substantially similar to those enjoyed by you under any of Northeast's
pension, life insurance, medical, health and accident, or disability
plans in which you may be participating at the time of execution of
this Agreement, as such benefits are listed in the attached Exhibit A,
the taking of any action by Northeast which would directly or
indirectly materially reduce any of such benefits or deprive you of
any material fringe benefit enjoyed by you, or the failure by
Northeast to provide you with the four (4) weeks of paid vacation to
which you are entitled; or
<PAGE>
Mr. Kirk W. Walters
January 1, 1994
Page 3
5. any purported termination of your employment which is not effected
pursuant to a Notice of Termination satisfying the requirements as set forth
above. For purposes of this Agreement, no such purported termination shall be
effective.
Your right to terminate your employment for Good Reason shall not be
affected by your incapacity due to physical or mental illness.
During the employment term, any purported termination of your employment
hereunder by Northeast or by you shall be communicated by written Notice of
Termination to the other party hereto. For purposes of this Agreement, a
"Notice of Termination" shall mean a notice given within the appropriate period
specified below which shall indicate the specific termination provision in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of your employment
under the provision so indicated. The required period for Notice of Termination
shall be as follows: (A) if your employment is terminated due to Disability or
for Cause, thirty (30) days; (B) if your employment is terminated for Good
Reason, sixty (60) days; and (C) if your employment is terminated for any other
reason, the time period specified in the Notice of Termination.
For purposes of this Agreement, notices and all other communications
provided for in this Agreement shall be in writing and shall be deemed to have
been duly given when delivered or mailed by United States registered mail,
return receipt requested, postage prepaid, addressed to the respective addresses
set forth on the first page of this Agreement, provided that all notices to
Northeast shall be directed to the attention of the Board with a copy to the
Secretary of Northeast, or to such other address as either party may have
furnished to the other in writing in accordance herewith, except that notice of
change of address shall be effective only upon receipt.
If within thirty (30) days after any Notice of Termination is given, the
party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination and if such notice is given in good
faith and the party giving such notice pursues the resolution of such dispute
with reasonable diligence, Northeast will continue to pay your compensation as
provided for in this Agreement (including, but not limited to, base salary) and
will continue you as a participant in all compensation, benefit and insurance
plans in which you were participating when the notice giving rise to the dispute
was given, until the earlier of (1) the end of the employment term, or (2) the
date the dispute is finally resolved, either by mutual written agreement of the
parties, by a binding arbitration award, or by a final judgment, order or decree
of a court of competent jurisdiction (the time for appeal therefrom having
expired and no appeal having been perfected).
After the employment term, you may terminate your employment upon
reasonable notice, and Northeast may terminate your employment for Cause or for
reasons other than for Cause upon reasonable notice.
Acceptance of severance payments pursuant to this Agreement shall release
and forever discharge Northeast and its subsidiaries from each and every claim,
demand, action, cause of action, damage award, expense, cost, claim for
attorneys' fees, or liability of any kind whatsoever, whether known or unknown,
vested or contingent, in law, equity or otherwise, which you then have, have
ever had or may thereafter have against Northeast or any of its subsidiaries.
As a condition to Northeast's obligation to make severance payments to you
hereunder, you agree to execute and deliver to Northeast such additional release
as Northeast shall request at such time.
<PAGE>
Mr. Kirk W. Walters
January 1, 1994
Page 4
Should you be entitled to and elect to accept payments from Northeast
pursuant to rights acquired by you which follow a "change in control of
Northeast" as defined in the Agreement between Northeast and you dated January
1, 1994 (the "Change in Control Agreement") granting such rights, such payments
shall be in lieu of payments required pursuant to this Agreement and any and all
rights granted you under this Agreement shall terminate and this Agreement shall
be null and void. When and if you are entitled to rights under this and any
other agreement requiring severance payments to you by Northeast, Northeast may
require you to terminate such other agreement as a condition to its obligation
to make any payments or any further payments under this Agreement.
Should you become entitled to a severance payment under this Agreement or
to any other payments or benefits received or to be received by you under any
other plan, arrangement or agreement (the "Total Payments") and should any part
or all of the Total Payments be deemed contingent on a change in ownership or
control of Northeast, as determined under Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code"), you shall be entitled to be paid by
Northeast an additional amount such that the net amount retained by you, after
deduction of any federal excise tax imposed pursuant to Section 4999 of the Code
(the "Excise Tax") on the Total Payments and any federal or state income tax and
Excise Tax upon the payment provided for by this paragraph shall be equal to the
Total Payments. The parties agree that the applicability of said Section 280G
hereunder and any calculations to be made pursuant to this paragraph shall be
made by an independent tax advisor chosen by Northeast which may include
Northeast's independent accountants or benefits consultants, and shall be at
Northeast's expense. The parties further agree that they shall reasonably
cooperate with each other in connection with any administrative or judicial
proceedings concerning the existence or amount of liability for Excise Tax with
respect to the severance payments payable hereunder.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in Hartford, Connecticut
in accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction; provided, however, that you shall be entitled to seek specific
performance of your right to be paid following the date of termination during
the pendency of any dispute or controversy arising under or in connection with
this Agreement. Any arbitrator or arbitrators selected to resolve a dispute or
controversy hereunder shall have at least five (5) years of experience as an
attorney or benefits consultant specializing in employment or benefits matters.
The Board expects to include you in any annual Incentive Compensation Plan
which may be available to other senior officers.
This Agreement shall inure to the benefit of and be enforceable by your
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If you should die while any amount would
still be payable to you hereunder if you had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to your devisee, legatee or other designee or if there
is no such designee, to your estate.
No provision of this Agreement may be modified, waived or discharged unless
such waiver, modification or discharge is agreed to in writing and signed by you
and such officer as may be specifically designated by the Board. No waiver by
either party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, have been made by either party which are not
expressly set forth in this Agreement. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of Connecticut.
<PAGE>
Mr. Kirk W. Walters
January 1, 1994
Page 5
This Agreement shall be subject to and be deemed to include all of the
provisions of 12 C.F.R. Section 563.39 as amended from time to time, a copy of
which is enclosed as if the same were fully set forth herein. In addition, any
payments made to you pursuant to the terms of this Agreement, or otherwise, are
subject to and conditioned upon compliance with 12 U.S.C. Section 1828(k) and
any regulation promulgated thereunder.
The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
This Agreement may be executed in several counterparts, each of which shall
be deemed to be an original but all of which together will constitute one and
the same instrument.
This Agreement supersedes the Employment Agreement between Northeast and
you dated as of March 1, 1992, as amended by an Addendum dated as of July 9,
1993, which shall be void and of no effect on and after the date of execution of
this Agreement.
If this letter correctly sets forth our agreement on the subject matter
hereof, kindly sign and return to Northeast the enclosed copy of this letter
which will then constitute our agreement on this subject.
Sincerely,
NORTHEAST SAVINGS, N.A.
By /s/ George P. Rutland
----------------------------
George P. Rutland
Chairman of the Board
NORTHEAST FEDERAL CORP.
By /s/ George P. Rutland
----------------------------
George P. Rutland
Chairman of the Board
ACCEPTED AND AGREED TO
THIS 1st DAY OF
---
January, 1994:
- -------
/s/ Kirk W. Walters
- -----------------------------
Kirk W. Walters
<PAGE>
Exhibit A
---------
Kirk W. Walters
<TABLE>
<CAPTION>
Compensation Plans
- ------------------
<S>
1. 1993 Stock Option Plan
2. 1986 Stock Option Plan
3. 1983 Stock Option Plan
<CAPTION>
Benefits
- --------
<S>
1. Long Term Disability Income Plan
2. Executive Disability Plan
3. Group Life, Accidental Death and
Dismemberment
4. Executive Life Insurance
5. Optional Life Insurance
6. Supplemental Medical Reimbursement Plan
7. 1993 Deferred Compensation Plan
for Key Executives
8. Supplemental Executive Retirement Plan
9. Thrift and Profit Sharing Plan
10. Employee Stock Ownership Plan
11. Cash Balance Retirement Plan
12. Medical Insurance Plan
13. Dental Insurance Plan
</TABLE>
<PAGE>
ADDENDUM TO CHANGE IN CONTROL AGREEMENT
The Letter Agreement (the "Agreement") entered into on the 1st day of March,
1992 by Northeast Federal Corp, Northeast Savings, F.A. ("Northeast") and
George P. Rutland, a copy of which is attached hereto, concerning termination
of employment in the event of a change in control of Northeast is hereby
modified, altered and changed in accordance with the terms of Resolutions
93-56 and 93-24 passed by the respective Board of Directors of Northeast
Savings, F.A. and Northeast Federal Corp. in the following manner:
Paragraph 1 of the Agreement titled, "Term of Agreement" is hereby amended by
striking the date of "December 31, 1994" and inserting the date of "July 1,
1995" in substitution thereof.
Paragraph 4 of the Agreement titled, "Compensation Upon Termination or During
Disability" is hereby modified to add a new subsection (vii) which states as
follows: "Any payments made to you pursuant to the terms of this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 USC Section
1828(k) and any regulation promulgated thereunder."
IN WITNESS WHEREOF, the parties executed this amended Letter Agreement on this
9th day of July, 1993.
NORTHEAST SAVINGS, F.A.
By: /s/ Kirk W. Walters
-----------------------------
NORTHEAST FEDERAL CORP.
By: /s/ Kirk W. Walters
-----------------------------
/s/ George P. Rutland
-----------------------------
George P. Rutland
<PAGE>
[LOGO OF NORTHEAST SAVINGS APPEARS HERE]
January 1, 1994
Mr. George P. Rutland
83 Stagecoach Road
Avon, CT 06001
Dear Mr. Rutland:
This letter agreement (the "Agreement") is an amendment and restatement of
that certain Change in Control Agreement entered into between Northeast and you
dated as of March 1, 1992, as amended by Addendum dated as of July 9, 1993 (the
"Change in Control Agreement"). The purpose of this Agreement is to extend the
term of the Change in Control Agreement and to modify the provisions thereof to
the extent necessary to embody the present intention of the parties with regard
to the subject matter stated herein.
The Boards of Directors (collectively, the "Board") of Northeast Federal
Corp. and Northeast Savings, F. A. (collectively, "Northeast") continue to
consider it essential to the best interests of its stockholders to foster the
continuous employment of key management personnel. In this connection, the
Board of Northeast recognizes that, as is the case with many publicly held
corporations, the possibility of a change in control may exist and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of Northeast and its stockholders.
The Board has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of members of
Northeast's management, including yourself, to their assigned duties without
distraction in the face of potentially disturbing circumstances arising from the
possibility of a change in control of Northeast, although no such change is now
contemplated.
In order to induce you to remain in the employ of Northeast in the position
set forth in a certain Employment Agreement between Northeast and you of even
date herewith, and in consideration of your agreement set forth in Section 2(ii)
hereof, Northeast agrees that you shall receive the severance benefits set forth
in this letter agreement in the event your employment with Northeast is
terminated subsequent to a "change in control of Northeast" (as defined in
Section 2 hereof) under the circumstances described below.
To the extent that any provision of this Agreement shall conflict with any
law governing Northeast or any rule or regulation duly promulgated pursuant to
law by any governmental regulatory agency having jurisdiction over Northeast,
specifically including, but not limited to, 12 C.F.R. Section 563.39, as amended
from time to time, such law or regulation shall govern this Agreement and such
conflicting provision of this Agreement shall be null and void and shall not be
enforceable by either party. The provisions of 12 C.F.R. Section 563.39 are
incorporated by reference and made a part hereof.
1. Term of Agreement. This amended and restated Agreement shall continue
-----------------
in effect through December 31, 1997.
<PAGE>
Mr. George P. Rutland
January 1, 1994
Page 2
2. Change in Control. (i) No benefits shall be payable hereunder unless
-----------------
there shall have been a change in control of Northeast, as set forth below, and
your employment by Northeast shall thereafter have been terminated in accordance
with Section 3 below. For purposes of this Agreement, a "change in control of
Northeast" shall mean a change in control of a nature that would be required to
be reported in response to Item 1 of Form 8-K promulgated under the Securities
Exchange Act of 1934, as amended ("Exchange Act"); provided that, without
limitation, such a change in control shall be deemed to have occurred if (A) any
"person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act)
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of Northeast representing
25% or more of the combined voting power of Northeast's then outstanding
securities; (B) during any period of twelve consecutive months, individuals who
at the beginning of such period constitute the Board cease for any reason to
constitute a majority thereof, unless the election, or the nomination for
election by Northeast's shareholders, of each new director was approved by a
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period; (C) the business of Northeast for
which your services are principally performed is disposed of by Northeast
pursuant to a partial or complete liquidation of Northeast, a sale of assets
(including stock of a subsidiary) of Northeast, or otherwise; (D) any "person"
is or becomes the "beneficial owner," directly or indirectly, of securities of
Northeast representing 19.9% or more of the combined voting power of Northeast's
then outstanding securities and one or more designees of such "person" is then a
member of or is thereafter elected to the Board of Northeast; (E) any "person"
is or becomes the "beneficial owner," directly or indirectly, of securities of
Northeast representing 10% or more of the combined voting power of Northeast's
then outstanding securities and two or more designees of such "person" are then
members of or are thereafter elected to the Board of Northeast; or (F) Northeast
makes a public announcement of or enters into a definitive agreement to (i)
merge with another entity or (ii) to sell all of its assets to another entity.
(ii) For purposes of this Agreement, a "potential change in control of
Northeast" shall be deemed to have occurred if (A) Northeast enters into an
agreement, the consummation of which would result in the occurrence of a change
in control of Northeast; (B) any person (including Northeast) publicly announces
an intention to take or to consider taking actions which if consummated would
constitute a change in control of Northeast; (C) any person becomes the
beneficial owner, directly or indirectly, of securities of Northeast
representing 9.5% or more of the combined voting power of Northeast's then
outstanding securities; or (D) the Board adopts a resolution to the effect that
a potential change in control of Northeast for purposes of this Agreement has
occurred. You agree that, subject to the terms and conditions of this
Agreement, in the event of a potential change in control of Northeast, you will
remain in the employ of Northeast for a period of six (6) months from the
occurrence of any such potential change in control of Northeast.
3. Termination Following Change in Control. If any of the events
---------------------------------------
described in Section 2 hereof constituting a change in control of Northeast
shall have occurred, you shall be entitled to the benefits provided in Section 4
hereof upon the subsequent termination of your employment during the term of
this Agreement, unless such termination is (A) because of your death or
Retirement, (B) by Northeast for Cause or Disability or (C) by you other than
for Good Reason.
(i) Disability; Retirement. For purposes of this Agreement, Disability
----------------------
shall occur if, as a result of your incapacity due to physical or mental
illness, you shall have been absent from your duties with Northeast on a full-
time basis for six (6) consecutive months and a finding is made by the Board
that you are unable to perform the essential functions or material duties of
your position with Northeast, with or
<PAGE>
Mr. George P. Rutland
January 1, 1994
Page 3
without reasonable accommodation. Termination for Disability shall occur if,
within thirty (30) days after written notice of such finding and of Northeast's
decision to terminate your employment (the "Notice of Termination," as defined
in Section 3(iv) below) is given you shall not have returned to the full-time
performance of your duties. Termination of your employment by Northeast or you
based on "Retirement" shall mean termination in accordance with Northeast's
retirement policy, including early retirement, generally applicable to its
salaried employees or in accordance with any retirement arrangement established
with your consent with respect to you.
(ii) Cause. Termination by Northeast of your employment for "Cause"
-----
shall mean termination upon (A) your willful and continued failure to
substantially perform your duties with Northeast (other than such failure
resulting from your incapacity due to physical or mental illness or any such
actual or anticipated failure resulting from your termination for Good Reason),
after a demand for substantial performance is delivered to you by the Board
which specifically identifies the manner in which the Board believes that you
have not substantially performed your duties; (B) your engaging willfully in
conduct which is demonstrably and materially injurious to Northeast, monetarily
or otherwise; (C) your personal dishonesty, incompetence, willful misconduct,
breach of fiduciary duty involving personal profit, violation of any law, rule
or regulation (other than traffic violations or similar offenses) or final
cease-and-desist order of the Office of Thrift Supervision or the Federal
Deposit Insurance Corporation; or (D) your material breach of any provision of
this Agreement. For purposes of this Subsection, no act, or failure to act, on
your part shall be considered "willful" unless done, or omitted to be done, by
you not in good faith and without reasonable belief that your action or omission
was in the best interest of Northeast. Notwithstanding the foregoing, you shall
not be deemed to have been terminated for Cause unless and until there shall
have been delivered to you a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters of the entire membership of the
Board at a meeting of the Board called and held for that purpose (after
reasonable notice to you and an opportunity for you, together with counsel, to
be heard before the Board), finding that in the good faith opinion of the Board
you engaged in conduct set forth above in clauses (A), (B), (C) or (D) of the
first sentence of this Subsection and specifying the particulars thereof in
detail.
(iii) Good Reason. You shall be entitled to terminate your employment for
-----------
Good Reason. For purposes of this Agreement, "Good Reason" shall, without your
express written consent, mean:
(A) the assignment to you of any duties inconsistent with your position
with Northeast as set forth in your Employment Agreement with Northeast of even
date herewith, or a substantial alteration in the nature or status of your
responsibilities from those in effect immediately prior to a change in control
of Northeast other than any such alteration primarily attributable to the fact
that Northeast may no longer be a public company;
(B) a reduction by Northeast in your annual base salary as set forth in
your Employment Agreement with Northeast of even date herewith, except for
across-the-board salary reductions similarly affecting all executives of
Northeast and all executives of any person in control of Northeast;
(C) the relocation of your principal employment location at the time of
a change in control to a location greater than thirty (30) miles from such
principal employment location;
<PAGE>
Mr. George P. Rutland
January 1, 1994
Page 4
(D) the failure by Northeast to continue in effect, or to continue your
participation in, any stock option plan in which you participate at the time of
a change in control of Northeast, as such plans are more particularly described
in the attached Exhibit A, unless an equitable arrangement (embodied in an
ongoing substitute or alternative plan) has been made with respect to you under
such plan in connection with the change in control of Northeast;
(E) the failure by Northeast to continue to provide you with benefits
substantially similar to those enjoyed by you under any of Northeast's pension,
life insurance, medical, health and accident, or disability plans in which you
participate at the time of a change in control of Northeast, as such benefits
are listed in the attached Exhibit A, the taking of any action by Northeast
which would directly or indirectly materially reduce any of such benefits or
deprive you of any material fringe benefit enjoyed by you at the time of the
change in control of Northeast, or the failure by Northeast to provide you with
the four (4) weeks of paid vacation to which you are entitled;
(F) the failure of Northeast to obtain a satisfactory agreement from any
successor to assume and agree to perform this Agreement, as contemplated in
Section 6 hereof; or
(G) any purported termination of your employment which is not effected
pursuant to a Notice of Termination satisfying the requirements of Subsection
(iv) below (and, if applicable, Subsection (ii) above). For purposes of this
Agreement, no such purported termination shall be effective.
Your right to terminate your employment pursuant to this Subsection shall
not be affected by your incapacity due to physical or mental illness.
(iv) Notice of Termination. Any purported termination by Northeast or by
---------------------
you shall be communicated by written Notice of Termination to the other party
hereto in accordance with Section 7 hereof. For purposes of this Agreement, a
"Notice of Termination" shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of your employment under the provision so indicated.
(v) Date of Termination, Etc. "Date of Termination" shall mean (A) if
-------------------------
your employment is terminated for Disability, thirty (30) days after Notice of
Termination is given (provided that you shall not have returned to the
performance of your duties on a full-time basis during such thirty (30) day
period), and (B) if your employment is terminated pursuant to Subsection (ii) or
(iii) above or for any other reason, the date specified in the Notice of
Termination (which, in the case of a termination pursuant to Subsection (ii)
above shall not be less than thirty (30) days, and in the case of a termination
pursuant to Subsection (iii) above shall not be more than sixty (60) days from
the date such Notice of Termination is given). If within thirty (30) days after
any Notice of Termination is given, the party receiving such Notice of
Termination notifies the other party that a dispute exists concerning the
termination, and if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence,
Northeast will continue to pay your full compensation in effect when the notice
giving rise to the dispute was given (including, but not limited to, base
salary) and will continue you as a participant in all compensation, benefit and
insurance plans in which you were participating when the notice giving rise to
the dispute was given, until the dispute is finally resolved, either by mutual
written agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been
<PAGE>
Mr. George P. Rutland
January 1, 1994
Page 5
perfected). The pendency of a dispute shall not extend the Date of Termination
hereunder as the same has been specified above. Amounts paid under this Section
are in addition to all other amounts due under this Agreement and shall not be
offset against or reduce any other amounts due under this Agreement.
4. Compensation Upon Termination or During Disability. The benefits
--------------------------------------------------
provided under circumstances described in Sections 2 and 3 hereof shall be as
follows:
(i) During any period that you fail to perform your duties hereunder as a
result of incapacity due to physical or mental illness, you shall continue to
receive your full base salary at the rate specified in your Employment Agreement
with Northeast of even date herewith and all compensation, including annual
incentive pay, if any, paid during the period until this Agreement is terminated
pursuant to Section 3(i) hereof. Thereafter, your benefits shall be determined
in accordance with Northeast's insurance and retirement programs then in effect.
(ii) If your employment shall be terminated for Cause, Northeast shall pay
you your full base salary through the Date of Termination, or, if applicable,
through any period during which a dispute exists concerning termination as
provided in Section 3(v) above, at the rate hereinafter specified, and Northeast
shall have no further obligations to you under this Agreement. Base salary is
defined as follows: for the 1994 calendar year, $350,000; for the 1995 calendar
year, $250,000; for the 1996 calendar year, $200,000; and for the 1997 calendar
year, $150,000. Additionally, your base salary in 1994 and 1995 shall be
increased to include an additional amount which, after providing for all
applicable income taxes, will provide $31,994 to pay the annual premium cost of
a special life insurance policy.
(iii) If your employment by Northeast shall be terminated (a) by Northeast
other than for Cause, Retirement or Disability or (b) by you for Good Reason,
then you shall be entitled to the benefits provided below:
(A) Northeast shall pay you your full base salary through the
Date of Termination, or, if applicable, through any period during
which a dispute exists concerning termination as provided in Section
3(v) above, at the rate in effect at the time Notice of Termination
is given, and any incentives earned prior to the Date of
Termination but as yet not paid.
(B) In lieu of any further salary payments to you for periods
subsequent to the period described in (A) above, Northeast shall pay
to you, not later than the fifth (5th) day following the Date of
Termination, or, if applicable, the date of the final resolution of
any dispute concerning termination as provided in Section 3(v) above,
a lump sum severance payment equal to the greater of (1) all salary
payments due pursuant to this Agreement for the remaining employment
term, or (2) one (1) year's base salary, at the rate in effect on the
date of your Date of Termination.
(C) Northeast shall arrange to provide you and your spouse with
medical, dental and supplemental medical benefits substantially
similar to those which you and your spouse are receiving immediately
prior to the Notice of Termination, such medical and dental benefits
to be provided until the later of you and your spouse's death or
December 31, 1997. Any such medical or dental benefits provided
under this Agreement shall be secondary to any benefits to which
you or your spouse may be entitled under the federal Social
Security Act.
<PAGE>
Mr. George P. Rutland
January 1, 1994
Page 6
(D) Should you become entitled to a severance payment under this
Agreement or to any other payments or benefits received or to be
received by you under any other plan, arrangement or agreement (the
"Total Payments") and should any part or all of the Total Payments be
deemed contingent on a change in ownership or control of Northeast, as
determined under Section 280G of the Internal Revenue Code of 1986, as
amended (the "Code"), you shall be entitled to be paid by Northeast an
additional amount such that the net amount retained by you, after
deduction of any federal excise tax imposed pursuant to Section 4999
of the Code (the "Excise Tax") on the Total Payments and any federal
or state income tax and Excise Tax upon the payment provided for by
this Section 4(iii)(D) shall be equal to the Total Payments. The
parties agree that the applicability of said Section 280G hereunder
and any calculations to be made pursuant to this Section 4(iii)(D)
shall be made by an independent tax advisor chosen by Northeast, which
may include Northeast's independent accountants or benefits
consultants, and shall be at Northeast's expense. The parties further
agree that they shall reasonably cooperate with each other in
connection with any administrative or judicial proceedings concerning
the existence or amount of liability for Excise Tax with respect to
the severance payments payable hereunder.
(iv) For a period of the greater of one (1) year or the remaining
term of the Agreement as specified in Section 1 above after any termination
hereunder other than termination by Northeast for Cause, Northeast shall
arrange toprovide you with (1) life, disability, accident insurance benefits
and, if notprovided for in Section 4 (iii)(C) above, medical, dental and
supplemental medical benefits, substantially similar to those which you are
receiving immediately prior to your receipt of the Notice of Termination as
the same are set forth in the attached Exhibit A, and (2) directors' and
officers' liability insurance, specifically naming you as an insured, with
coverage (including deductibles) at least as favorable as that in effect
immediately prior to the change in control of Northeast and comparable prior
acts ("tail") coverage for a period of ten (10) years following your Date of
Termination, or such lesser period as you shall agree to in writing.
(v) You shall not be required to mitigate the amount of any payment
provided for in this Section 4 by seeking other employment or otherwise, nor
shall the amount of any payment or benefit provided for in this Section 4 be
reduced by any compensation earned by you as the result of employment by another
employer.
(vi) In addition to all other amounts payable to you under this
Section 4,you shall be entitled to receive all benefits payable to you under
any agreementrelating to retirement benefits.
(vii) Any payments made to you pursuant to the terms of this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C. Section
1828(k) and any regulation promulgated thereunder.
5. Successive Changes in Control. If during the term of this Agreement,
-----------------------------
more than one event constituting a change in control shall occur, the latest of
the events to occur shall be deemed the change in control for purposes of
determining your entitlement to benefits hereunder.
<PAGE>
Mr. George P. Rutland
January 1, 1994
Page 7
6. Successors; Binding Agreement. (i) Northeast will require any
-----------------------------
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of
Northeast to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that Northeast would be required to perform it if
no such succession had taken place. Failure of Northeast to obtain such
assumption and agreement prior to the effectiveness of any such succession shall
be a breach of this Agreement and shall entitle you to terms as you would be
entitled hereunder if you terminated your employment for Good Reason, except
that for purposes of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of Termination. As used
in this Agreement, "Northeast" shall mean Northeast as hereinbefore defined and
any successor to its business and/or assets as aforesaid which assumes and
agrees to perform this Agreement by operation of law, or otherwise.
(ii) This Agreement shall inure to the benefit of and be enforceable by
your personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. If you should die while any amount
would still be payable to you hereunder if you had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to your devisee, legatee or other designee or if there
is no such designee, to your estate.
7. Notice. For the purposes of this Agreement, notices and all other
------
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth on the first page of this Agreement, provided
that all notices to Northeast shall be directed to the attention of the Board
with a copy to the Secretary of Northeast, or to such other address as either
party may have furnished to the other in writing in accordance herewith, except
that notice of change of address shall be effective only upon receipt.
8. Miscellaneous. No provision of this Agreement may be modified, waived
-------------
or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by you and such officer as may be specifically designated by
the Board. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, have been
made by either party which are not expressly set forth in this Agreement. The
validity, interpretation, construction and performance of this Agreement shall
be governed by the laws of the State of Connecticut.
9. Validity. The invalidity or unenforceability of any provision of this
--------
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
10. Counterparts. This Agreement may be executed in several counterparts,
------------
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
<PAGE>
Mr. George P. Rutland
January 1, 1994
Page 8
11. Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by arbitration in
Hartford, Connecticut in accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's award
in any court having jurisdiction; provided, however, that you shall be entitled
to seek specific performance of your right to be paid following the Date of
Termination during the pendency of any dispute or controversy arising under or
in connection with this Agreement. Any arbitrator or arbitrators selected to
resolve a dispute or controversy hereunder shall have at least five (5) years of
experience as an attorney or benefits consultant specializing in employment or
benefits matters.
12. Exclusivity. It is understood that if payments are due and made to
-----------
the Officer named herein under this Agreement, no payments will be required to
be made under the Employment Agreement executed on the same date as this
Agreement.
Kindly sign and return to Northeast the enclosed copy of this letter which
will then constitute our agreement on this subject.
Sincerely,
NORTHEAST SAVINGS, F.A.
By /s/ Kirk W. Walters
----------------------------
Kirk W. Walters
Chief Executive Officer, President,
Chief Operating Officer, and Chief
Financial Officer
NORTHEAST FEDERAL CORP.
By /s/ Kirk W. Walters
----------------------------
Kirk W. Walters
Chief Executive Officer, President,
Chief Operating Officer, and Chief
Financial Officer
ACCEPTED AND AGREED TO
THIS 8th DAY OF
January , 1994:
/s/ George P. Rutland
- ----------------------
George P. Rutland
<PAGE>
Exhibit A
---------
George P. Rutland
Option Plans
- ------------
1. 1993 Stock Option Plan
2. 1986 Stock Option Plan
3. 1983 Stock Option Plan
Benefits
- --------
1. Long Term Disability Income Plan
2. Executive Disability Plan
3. Group Life, Accidental Death and
Dismemberment
4. Executive Life Insurance
5. Optional Life Insurance
6. Supplemental Medical Reimbursement Plan
7. 1993 Deferred Compensation Plan
for Key Executives
8. Thrift and Profit Sharing Plan
9. Employee Stock Ownership Plan
10. Cash Balance Retirement Plan
11. Medical Insurance Plan
12. Dental Insurance Plan
<PAGE>
ADDENDUM TO CHANGE IN CONTROL AGREEMENT
The Letter Agreement (the "Agreement") entered into on the 1st day of March,
1992 by Northeast Federal Corp, Northeast Savings, F.A. ("Northeast") and Kirk
W. Walters, a copy of which is attached hereto, concerning termination of
employment in the event of a change in control of Northeast is hereby
modified, altered and changed in accordance with the terms of Resolutions
93-56 and 93-24 passed by the respective Board of Directors of Northeast
Savings, F.A. and Northeast Federal Corp. in the following manner:
Paragraph 1 of the Agreement titled, "Term of Agreement" is hereby amended by
striking the date of "December 31, 1994" and inserting the date of "July 1,
1995" in substitution thereof.
Paragraph 4 of the Agreement titled, "Compensation Upon Termination or During
Disability" is hereby modified by striking the amount of "$225,000" in
subsection (ii) and inserting the amount of "$250,000" in substitution thereof
and by adding a new subsection (viii) which states as follows: "Any payments
made to you pursuant to the terms of this Agreement, or otherwise, are subject
to and conditioned upon compliance with 12 USC Section 1828(k) and any
regulation promulgated thereunder."
IN WITNESS WHEREOF, the parties executed this amended Letter Agreement on this
9th day of July, 1993.
NORTHEAST SAVINGS, F.A.
By: /s/ George P. Rutland
--------------------------------
NORTHEAST FEDERAL CORP.
By: /s/ George P. Rutland
--------------------------------
/s/ Kirk W. Walters
--------------------------------
Kirk W. Walters
<PAGE>
[LOGO OF NORTHEAST SAVINGS APPEARS HERE]
January 1, 1994
Mr. Kirk W. Walters
56 Henley Way
Avon, CT 06001
Dear Mr. Walters:
This letter agreement (the "Agreement") is an amendment and restatement of
that certain Change in Control Agreement entered into between Northeast and you
dated as of March 1, 1992, as amended by Addendum dated as of July 9, 1993 (the
"Change in Control Agreement"). The purpose of this Agreement is to extend the
term of the Change in Control Agreement and to modify the provisions thereof to
the extent necessary to embody the present intention of the parties with regard
to the subject matter stated herein.
The Boards of Directors (collectively, the "Board") of Northeast Federal
Corp. and Northeast Savings, F.A. (collectively, "Northeast") continue to
consider it essential to the best interests of its stockholders to foster the
continuous employment of key management personnel. In this connection, the
Board of Northeast recognizes that, as is the case with many publicly held
corporations, the possibility of a change in control may exist and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of Northeast and its stockholders.
The Board has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of members of
Northeast's management, including yourself, to their assigned duties without
distraction in the face of potentially disturbing circumstances arising from the
possibility of a change in control of Northeast, although no such change is now
contemplated.
In order to induce you to remain in the employ of Northeast in the position
set forth in a certain Employment Agreement between Northeast and you of even
date herewith, and in consideration of your agreement set forth in Section 2(ii)
hereof, Northeast agrees that you shall receive the severance benefits set forth
in this Agreement in the event your employment with Northeast is terminated
subsequent to a "change in control of Northeast" (as defined in Section 2
hereof) under the circumstances described below.
To the extent that any provision of this Agreement shall conflict with any
law governing Northeast or any rule or regulation duly promulgated pursuant to
law by any governmental regulatory agency having jurisdiction over Northeast,
specifically including, but not limited to, 12 C.F.R. Section 563.39, as amended
from time to time, such law or regulation shall govern this Agreement and such
conflicting provision of this Agreement shall be null and void and shall not be
enforceable by either party. The provisions of 12 C.F.R. Section 563.39 are
incorporated by reference and made a part hereof.
1. Term of Agreement. This amended and restated Agreement shall continue
-----------------
in effect through December 31, 1997.
<PAGE>
Mr. Kirk W. Walters
January 1, 1994
Page 2
2. Change in Control. (i) No benefits shall be payable hereunder unless
-----------------
there shall have been a change in control of Northeast, as set forth below, and
your employment by Northeast shall thereafter have been terminated in accordance
with Section 3 below. For purposes of this Agreement, a "change in control of
Northeast" shall mean a change in control of a nature that would be required to
be reported in response to Item 1 of Form 8-K promulgated under the Securities
Exchange Act of 1934, as amended ("Exchange Act"); provided that, without
limitation, such a change in control shall be deemed to have occurred if (A) any
"person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act)
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of Northeast representing
25% or more of the combined voting power of Northeast's then outstanding
securities; (B) during any period of twelve consecutive months, individuals who
at the beginning of such period constitute the Board cease for any reason to
constitute a majority thereof, unless the election, or the nomination for
election by Northeast's shareholders, of each new director was approved by a
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period; (C) the business of Northeast for
which your services are principally performed is disposed of by Northeast
pursuant to a partial or complete liquidation of Northeast, a sale of assets
(including stock of a subsidiary) of Northeast, or otherwise; (D) any "person"
is or becomes the "beneficial owner," directly or indirectly, of securities of
Northeast representing 19.9% or more of the combined voting power of Northeast's
then outstanding securities and one or more designees of such "person" is then a
member of or is thereafter elected to the Board of Northeast; (E) any "person"
is or becomes the "beneficial owner," directly or indirectly, of securities of
Northeast representing 10% or more of the combined voting power of Northeast's
then outstanding securities and two or more designees of such "person" are then
members of or are thereafter elected to the Board of Northeast; or (F) Northeast
makes a public announcement of or enters into a definitive agreement to (i)
merge with another entity or (ii) to sell all of its assets to another entity.
(ii) For purposes of this Agreement, a "potential change in control of
Northeast" shall be deemed to have occurred if (A) Northeast enters into an
agreement, the consummation of which would result in the occurrence of a change
in control of Northeast; (B) any person (including Northeast) publicly announces
an intention to take or to consider taking actions which if consummated would
constitute a change in control of Northeast; (C) any person becomes the
beneficial owner, directly or indirectly, of securities of Northeast
representing 9.5% or more of the combined voting power of Northeast's then
outstanding securities; or (D) the Board adopts a resolution to the effect that
a potential change in control of Northeast for purposes of this Agreement has
occurred. You agree that, subject to the terms and conditions of this
Agreement, in the event of a potential change in control of Northeast, you will
remain in the employ of Northeast for a period of six (6) months from the
occurrence of any such potential change in control of Northeast.
3. Termination Following Change in Control. If any of the events
---------------------------------------
described in Section 2 hereof constituting a change in control of Northeast
shall have occurred, you shall be entitled to the benefits provided in Section 4
hereof upon the subsequent termination of your employment during the term of
this Agreement, unless such termination is (A) because of your death or
Retirement, (B) by Northeast for Cause or Disability or (C) by you other than
for Good Reason.
(i) Disability; Retirement. For purposes of this Agreement, Disability
----------------------
shall occur if, as a result of your incapacity due to physical or mental
illness, you shall have been absent from your duties with Northeast on a full-
time basis for six (6) consecutive months and a finding is made by the Board
that you are unable to perform the essential functions or material duties of
your position with Northeast, with or without reasonable accommodation.
Termination for Disability shall occur if, within thirty (30) days after written
notice of such finding and of Northeast's decision to terminate your employment
(the "Notice of Termination," as defined in Section 3(iv) below) is given you
shall not have returned to the full-time
<PAGE>
Mr. Kirk W. Walters
January 1, 1994
Page 3
performance of your duties. Termination of your employment by Northeast or you
based on "Retirement" shall mean termination in accordance with Northeast's
retirement policy, including early retirement, generally applicable to its
salaried employees or in accordance with any retirement arrangement established
with your consent with respect to you.
(ii) Cause. Termination by Northeast of your employment for "Cause" shall
-----
mean termination upon (A) your willful and continued failure to substantially
perform your duties with Northeast (other than such failure resulting from your
incapacity due to physical or mental illness or any such actual or anticipated
failure resulting from your termination for Good Reason), after a demand for
substantial performance is delivered to you by the Board which specifically
identifies the manner in which the Board believes that you have not
substantially performed your duties; (B) your engaging willfully in conduct
which is demonstrably and materially injurious to Northeast, monetarily or
otherwise; (C) your personal dishonesty, incompetence, willful misconduct,
breach of fiduciary duty involving personal profit, violation of any law, rule
or regulation (other than traffic violations or similar offenses) or final
cease-and-desist order of the Office of Thrift Supervision or the Federal
Deposit Insurance Corporation; or (D) your material breach of any provision of
this Agreement. For purposes of this Subsection, no act, or failure to act, on
your part shall be considered "willful" unless done, or omitted to be done, by
you not in good faith and without reasonable belief that your action or omission
was in the best interest of Northeast. Notwithstanding the foregoing, you shall
not be deemed to have been terminated for Cause unless and until there shall
have been delivered to you a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters of the entire membership of the
Board at a meeting of the Board called and held for that purpose (after
reasonable notice to you and an opportunity for you, together with counsel, to
be heard before the Board), finding that in the good faith opinion of the Board
you engaged in conduct set forth above in clauses (A), (B), (C) or (D) of the
first sentence of this Subsection and specifying the particulars thereof in
detail.
(iii) Good Reason. You shall be entitled to terminate your employment
-----------
for Good Reason. For purposes of this Agreement, "Good Reason" shall, without
your express written consent, mean:
(A) the assignment to you of any duties inconsistent with your position
with Northeast as set forth in your Employment Agreement with Northeast of even
date herewith, or a substantial alteration in the nature or status of your
responsibilities from those in effect immediately prior to a change in control
of Northeast other than any such alteration primarily attributable to the fact
that Northeast may no longer be a public company;
(B) a reduction by Northeast in your annual base salary as set forth in
your Employment Agreement with Northeast of even date herewith, except for
across-the-board salary reductions similarly affecting all executives of
Northeast and all executives of any person in control of Northeast;
(C) the relocation of your principal employment location at the time of a
change in control to a location greater than thirty (30) miles from such
principal employment location;
(D) the failure by Northeast to continue in effect, or to continue your
participation in, any stock option plan in which you participate at the time of
a change in control of Northeast, as such plans are more particularly described
in the attached Exhibit A, unless an equitable arrangement (embodied in an
ongoing substitute or alternative plan) has been made with respect to you under
such plan in connection with the change in control of Northeast;
(E) the failure by Northeast to continue to provide you with benefits
substantially similar to those enjoyed by you under any of Northeast's pension,
life insurance, medical, health and accident, or
<PAGE>
Mr. Kirk W. Walters
January 1, 1994
Page 4
disability plans in which you participate at the time of a change in control of
Northeast, as such benefits are listed in the attached Exhibit A, the taking of
any action by Northeast which would directly or indirectly materially reduce any
of such benefits or deprive you of any material fringe benefit enjoyed by you at
the time of the change in control of Northeast, or the failure by Northeast to
provide you with the four (4) weeks of paid vacation to which you are entitled;
(F) the failure of Northeast to obtain a satisfactory agreement from any
successor to assume and agree to perform this Agreement, as contemplated in
Section 6 hereof; or
(G) any purported termination of your employment which is not effected
pursuant to a Notice of Termination satisfying the requirements of Subsection
(iv) below (and, if applicable, Subsection (ii) above). For purposes of this
Agreement, no such purported termination shall be effective.
Your right to terminate your employment pursuant to this Subsection shall
not be affected by your incapacity due to physical or mental illness.
(iv) Notice of Termination. Any purported termination by Northeast or by
---------------------
you shall be communicated by written Notice of Termination to the other party
hereto in accordance with Section 7 hereof. For purposes of this Agreement, a
"Notice of Termination" shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of your employment under the provision so indicated.
(v) Date of Termination, Etc. "Date of Termination" shall mean (A) if
-------------------------
your employment is terminated for Disability, thirty (30) days after Notice of
Termination is given (provided that you shall not have returned to the
performance of your duties on a full-time basis during such thirty (30) day
period), and (B) if your employment is terminated pursuant to Subsection (ii) or
(iii) above or for any other reason, the date specified in the Notice of
Termination (which, in the case of a termination pursuant to Subsection (ii)
above shall not be less than thirty (30) days, and in the case of a termination
pursuant to Subsection (iii) above shall not be more than sixty (60) days from
the date such Notice of Termination is given). If within thirty (30) days after
any Notice of Termination is given, the party receiving such Notice of
Termination notifies the other party that a dispute exists concerning the
termination, and if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence,
Northeast will continue to pay your full compensation in effect when the notice
giving rise to the dispute was given (including, but not limited to, base
salary) and will continue you as a participant in all compensation, benefit and
insurance plans in which you were participating when the notice giving rise to
the dispute was given, until the dispute is finally resolved, either by mutual
written agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected). The
pendency of a dispute shall not extend the Date of Termination hereunder as the
same has been specified above. Amounts paid under this Section are in addition
to all other amounts due under this Agreement and shall not be offset against or
reduce any other amounts due under this Agreement.
4. Compensation Upon Termination or During Disability. The benefits
--------------------------------------------------
provided under circumstances described in Sections 2 and 3 hereof shall be as
follows:
(i) During any period that you fail to perform your duties hereunder as a
result of incapacity due to physical or mental illness, you shall continue to
receive your full base salary at the rate specified in your
<PAGE>
Mr. Kirk W. Walters
January 1, 1994
Page 5
Employment Agreement with Northeast of even date herewith and all compensation,
including annual incentive pay, if any, paid during the period until this
Agreement is terminated pursuant to Section 3(i) hereof. Thereafter, your
benefits shall be determined in accordance with Northeast's insurance and
retirement programs then in effect.
(ii) If your employment shall be terminated for Cause, Northeast shall pay
you your full base salary through the Date of Termination, or, if applicable,
through any period during which a dispute exists concerning termination as
provided in Section 3(v) above, at the rate in effect at the time Notice of
Termination is given, and Northeast shall have no further obligations to you
under this Agreement. Base salary is presently defined as $350,000.
(iii) If your employment by Northeast shall be terminated (a) by Northeast
other than for Cause, Retirement or Disability or (b) by you for Good Reason,
then you shall be entitled to the benefits provided below:
(A) Northeast shall pay you your full base salary through the Date of
Termination, or, if applicable, through any period during which a dispute
exists concerning termination as provided in Section 3(v) above, at the
rate in effect at the time Notice of Termination is given, and any
incentives earned prior to the Date of Termination but as yet not paid.
(B) In lieu of any further salary payments to you for periods
subsequent to the period described in (A) above, Northeast shall pay to
you, not later than the fifth (5th) day following the Date of Termination,
or, if applicable, the date of the final resolution of any dispute
concerning termination as provided in Section 3(v) above, a lump sum
severance payment in accordance with the schedule set forth below:
If the Date of Termination occurs 2.99 times base salary
within one year following change in at the Date of Termination
control
If the Date of Termination occurs 2 times base salary
more than one but within two at the Date of Termination
years following change in control
If the Date of Termination occurs base salary
more than two years following change at the Date of Termination
in control
(C) If you receive a severance payment pursuant to Section 4(iii)(B)
above, then for purposes of determining the average of your highest three
(3) years of compensation during employment pursuant to Section 4.2 of the
Northeast Savings, F.A. Supplemental Executive Retirement Plan dated as of
February 1, 1991, as amended from time to time, you shall be deemed to have
received base salary at the rate in effect on the Date of Termination for
the following additional period following your Date of Termination:
If the Date of Termination occurs 36 months
within one year following change in
control
<PAGE>
Mr. Kirk W. Walters
January 1, 1994
Page 6
If the Date of Termination occurs 24 months
more than one but within two
years following change in control
If the Date of Termination occurs 12 months
more than two years following change
in control
(D) In addition to (A), (B) and (C) above, (i) you shall be entitled
to receive outplacement services with a firm of your choosing at the
expense of Northeast, and (ii) should you become entitled to a severance
payment under this Agreement or to any other payments or benefits received
or to be received by you under any other plan, arrangement or agreement
(the "Total Payments") and should any part or all of the Total Payments be
deemed contingent on a change in ownership or control of Northeast, as
determined under Section 280G of the Internal Revenue Code of 1986, as
amended (the "Code"), you shall be entitled to be paid by Northeast an
additional amount such that the net amount retained by you, after deduction
of any federal excise tax imposed pursuant to Section 4999 of the Code (the
"Excise Tax") on the Total Payments and any federal or state income tax and
Excise Tax upon the payment provided for by this Section 4(iii)(D)(ii)
shall be equal to the Total Payments. The parties agree that the
applicability of said Section 280G hereunder and any calculations to be
made pursuant to this Section 4(iii)(D)(ii) shall be made by an independent
tax advisor chosen by Northeast, which may include Northeast's independent
accountants or benefits consultants, and shall be at Northeast's expense.
The parties further agree that they shall reasonably cooperate with each
other in connection with any administrative or judicial proceedings
concerning the existence or amount of liability for Excise Tax with respect
to the severance payments payable hereunder.
(iv) For a period of the greater of one (1) year or the remaining term of
the Agreement as specified in Section 1 above after any termination hereunder
other than termination by Northeast for Cause, Northeast shall arrange to
provide you with (1) life, disability, accident, medical and dental insurance
benefits substantially similar to those which you are receiving immediately
prior to your receipt of the Notice of Termination as the same are set forth in
the attached Exhibit A, and (2) directors' and officers' liability insurance,
specifically naming you as an insured, with coverage (including deductibles) at
least as favorable as that in effect immediately prior to the change in control
of Northeast and comparable prior acts ("tail") coverage for a period of ten
(10) years following your Date of Termination, or such lesser period as you
shall agree to in writing.
(v) You shall not be required to mitigate the amount of any payment
provided for in this Section 4 by seeking other employment or otherwise, nor
shall the amount of any payment or benefit provided for in this Section 4 be
reduced by any compensation earned by you as the result of employment by another
employer.
(vi) In addition to all other amounts payable to you under this Section 4,
you shall be entitled to receive all benefits payable to you under any agreement
relating to retirement benefits.
(vii) Any payments made to you pursuant to the terms of this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C. Section
1828(k) and any regulation promulgated thereunder.
<PAGE>
Mr. Kirk W. Walters
January 1, 1994
Page 7
5. Successive Changes in Control. If during the term of this Agreement,
-----------------------------
more than one event constituting a change in control shall occur, the latest of
the events to occur shall be deemed the change in control for purposes of
determining your entitlement to benefits hereunder.
6. Successors; Binding Agreement. (i) Northeast will require any
-----------------------------
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of
Northeast to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that Northeast would be required to perform it if
no such succession had taken place. Failure of Northeast to obtain such
assumption and agreement prior to the effectiveness of any such succession shall
be a breach of this Agreement and shall entitle you to terms as you would be
entitled hereunder if you terminated your employment for Good Reason, except
that for purposes of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of Termination. As used
in this Agreement, "Northeast" shall mean Northeast as hereinbefore defined and
any successor to its business and/or assets as aforesaid which assumes and
agrees to perform this Agreement by operation of law, or otherwise.
(ii) This Agreement shall inure to the benefit of and be enforceable by
your personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. If you should die while any amount
would still be payable to you hereunder if you had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to your devisee, legatee or other designee or if there
is no such designee, to your estate.
7. Notice. For the purposes of this Agreement, notices and all other
------
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth on the first page of this Agreement, provided
that all notices to Northeast shall be directed to the attention of the Board
with a copy to the Secretary of Northeast, or to such other address as either
party may have furnished to the other in writing in accordance herewith, except
that notice of change of address shall be effective only upon receipt.
8. Miscellaneous. No provision of this Agreement may be modified, waived
-------------
or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by you and such officer as may be specifically designated by
the Board. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, have been
made by either party which are not expressly set forth in this Agreement. The
validity, interpretation, construction and performance of this Agreement shall
be governed by the laws of the State of Connecticut.
9. Validity. The invalidity or unenforceability of any provision of this
--------
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
10. Counterparts. This Agreement may be executed in several counterparts,
------------
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
11. Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by arbitration in
Hartford, Connecticut in accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's award
<PAGE>
Mr. Kirk W. Walters
January 1, 1994
Page 8
in any court having jurisdiction; provided, however, that you shall be entitled
to seek specific performance of your right to be paid following the Date of
Termination during the pendency of any dispute or controversy arising under or
in connection with this Agreement. Any arbitrator or arbitrators selected to
resolve a dispute or controversy hereunder shall have at least five (5) years of
experience as an attorney or benefits consultant specializing in employment or
benefits matters.
12. Exclusivity. It is understood that if payments are due and made to
-----------
the Officer named herein under this Agreement, no payments will be required to
be made under the Employment Agreement executed on the same date as this
Agreement.
Kindly sign and return to Northeast the enclosed copy of this letter which
will then constitute our agreement on this subject.
Sincerely,
NORTHEAST SAVINGS, N.A.
By /s/ George P. Rutland
-------------------------
George P. Rutland
Chairman of the Board
NORTHEAST FEDERAL CORP.
By /s/ George P. Rutland
-------------------------
George P. Rutland
Chairman of the Board
ACCEPTED AND AGREED TO
THIS 1st DAY OF
January, 1994:
/s/ Kirk W. Walters
- ---------------------
Kirk W. Walters
<PAGE>
Exhibit A
---------
Kirk W. Walters
Option Plans
- ------------
1. 1993 Stock Option Plan
2. 1986 Stock Option Plan
3. 1983 Stock Option Plan
Benefits
- --------
1. Long Term Disability Income Plan
2. Executive Disability Plan
3. Group Life, Accidental Death and
Dismemberment
4. Executive Life Insurance
5. Optional Life Insurance
6. Supplemental Medical Reimbursement Plan
7. 1993 Deferred Compensation Plan
for Key Executives
8. Supplemental Executive Retirement Plan
9. Thrift and Profit Sharing Plan
10. Employee Stock Ownership Plan
11. Cash Balance Retirement Plan
12. Medical Insurance Plan
13. Dental Insurance Plan
<PAGE>
4.9 Change in Control. Amendment is made this date to the provisions under
-----------------
Section 4.8 of the Supplemental Executive Retirement Plan of Kirk W. Walters,
dated February 1, 1991. The amended is as follows:
In the event of a change in control, the participant shall become
fully (100%) vested in all normal retirement benefits. The
employer shall pay to the participant the applicable amount of
these fully vested benefits (including earnings at the SERP Rate
from the date of full vesting to date of notification of payment)
under the Plan at the date of the participants termination of
employment either by death, disability, or separation of service
for whatever reason. This payment shall occur within 30 days of
death, disability, or separation of service. In the event that
subsequent to this amendment, the Internal Revenue Service
determines that this amendment causes the participant to incur
constructive receipt of the vested benefit due under the Plan,
the participant at his discretion and in writing, may request a
distribution of funds sufficient to cover any potential income
tax as a result of the IRS determination of constructive receipt,
not to exceed to total amount of vested benefit.
6/29/92 /s/ Kirk W. Walters
------------------- ---------------------------
Date Kirk W. Walters
6/29/92 /s/ John Penwell
------------------- ---------------------------
Date John Penwell
Trustee
<PAGE>
SECOND AMENDMENT TO
THE NORTHEAST SAVINGS, F.A.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
KIRK W. WALTERS
1. Section 4.2 of the Supplemental Executive Retirement Plan is hereby
deleted, and the following Section 4.2 is substituted in its stead:
"4.2 Normal Retirement Benefit. If a Participant retires on or after
-------------------------
Normal Retirement Date, the Employer shall pay the Participant a
Normal Retirement Benefit payable in the form of a lump sum equal to the
present value (using a rate equal to the Pension Benefit Guaranty
Corporation immediate annuity interest rate ("PBGC Rate"), at the time of
retirement) of 60% of the average of the highest three years of
compensation (taxable income) of the Participant during employment payable
for life, 15 years certain based on 100% of the 1983 Group Annuity
Mortality Table less the sum of the following:
(i) The Participant's cash value in Confederation Life policy
number 5170250 under the split dollar agreement dated February
1, 1991;
(ii) Present value of benefit of the Employer's contribution
from Employer's qualified plans, assuming the Participant
participates to the maximum allowed whether or not the Participant
elects to participate;
(iii) Present value of projected Social Security benefit; and
(iv) Present value of the maximum amount the Participant would be
entitled to defer under the Northeast Savings, F.A. 1993 Deferred
Compensation Plan For Key Executives (the "Deferred Compensation
Plan") which would entitle him to a Matching Contribution thereunder,
assuming the Participant participates only to the extent that he
receives the maximum Matching Contribution allowable under the
Deferred Compensation Plan whether or not the Participant elects to
participate.
The corporation may purchase a lifetime annuity with a 15 year certain
benefit or pay Participant this benefit in a lump sum at retirement at the
direction of the Participant."
<PAGE>
EXHIBIT 11.1
NORTHEAST FEDERAL CORP.
COMPUTATION OF LOSS PER COMMON SHARE BEFORE EXTRAORDINARY ITEMS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1993 1992 1992
------------ ----------------- ----------
<S> <C> <C> <C>
PRIMARY LOSS PER COMMON SHARE
BEFORE EXTRAORDINARY ITEMS:
Income (loss) before
extraordinary items............. $ (14,139) $ (59,234) $ 4,490
Preferred stock dividend
requirements.................... (4,501) (4,652) (8,506)
----------- ---------- ----------
Loss before extraordinary items
applicable to common
stockholders for the calculation
of primary loss before
extraordinary items............. $ (18,640) $ (63,886) $ (4,016)
=========== ========== ==========
Weighted average shares
outstanding....................... 10,648,874 5,725,103 5,720,154
Dilutive effect of outstanding
stock options..................... * * *
Dilutive effect of outstanding
stock warrants.................... * * *
----------- ---------- ----------
Weighted average shares, as
adjusted, for the calculation of
primary loss before extraordinary
items............................. 10,648,874 5,725,103 5,720,154
=========== ========== ==========
Primary loss per common share
before extraordinary items...... $ (1.75) $ (11.16) $ (.70)
=========== ========== ==========
FULLY DILUTED LOSS PER COMMON SHARE
BEFORE EXTRAORDINARY ITEMS:
Income (loss) before
extraordinary items............. $ (14,139) $ (59,234) $ 4,490
Preferred stock dividend
requirements.................... (4,501) (4,652) (8,506)
Interest expense on convertible
subordinated debentures, net of
tax............................. * * *
----------- ---------- ----------
Loss before extraordinary items
applicable to common
stockholders for the calculation
of fully diluted loss before
extraordinary items............. $ (18,640) $ (63,886) $ (4,016)
=========== ========== ==========
Weighted average shares
outstanding....................... 10,648,874 5,725,103 5,720,154
Dilutive effect of outstanding
stock options..................... * * *
Dilutive effect of outstanding
stock warrants.................... * * *
Dilutive effect of shares issuable
from assumed conversions of
convertible preferred stock and
convertible subordinated
debentures........................ * * *
----------- ---------- ----------
Weighted average shares, as
adjusted, for the calculation of
fully diluted loss before
extraordinary items............... 10,648,874 5,725,103 5,720,154
=========== ========== ==========
FULLY DILUTED LOSS PER COMMON SHARE
BEFORE EXTRAORDINARY ITEMS........ $ (1.75) $ (11.16) $ (.70)
=========== ========== ==========
- -------
- -
* The outstanding common stock equivalents (stock options), stock warrants, and
the assumed conversions of the convertible preferred stock and convertible
subordinated debentures did not have a dilutive effect on the computation of
loss per common share before extraordinary items. The following table shows
the computation of the adjusted weighted average shares for use in analysis
of fully diluted earnings per share under the treasury stock repurchase
method:
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1993 1992 1992
------------ ----------------- ----------
<S> <C> <C> <C>
Weighted average shares
outstanding....................... 13,464,163** 5,725,103 5,720,154
Dilutive effect of outstanding
stock options..................... 234,208 234,478 125,958
Dilutive effect of outstanding
stock warrants.................... 358,318 183,010 --
Dilutive effect of shares issuable
from assumed:
Conversions of convertible
preferred stock................. -- 2,371,039 2,371,039
Convertible subordinated
debentures...................... -- 26,940 33,485
----------- ---------- ----------
Weighted average shares, as
adjusted........................ 14,056,689 8,540,570 8,250,636
=========== ========== ==========
</TABLE>
- --------
** Reflects the actual conversion of convertible preferred stock as if it had
occurred at the beginning of the period.
142
<PAGE>
EXHIBIT 11.2
NORTHEAST FEDERAL CORP.
COMPUTATION OF NET LOSS PER COMMON SHARE
BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1993 1992 1992
------------ ----------------- ----------
<S> <C> <C> <C>
PRIMARY LOSS PER COMMON SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN AC-
COUNTING PRINCIPLE:
Net income (loss) before
cumulative effect of change in
accounting principle............. $ (14,139) $ (59,234) $ 4,585
Preferred stock dividend require-
ments............................ (4,501) (4,652) (8,506)
----------- ---------- ----------
Loss before cumulative effect of
change in accounting principle
applicable to common stockholders
for the calculation of primary
loss............................. $ (18,640) $ (63,886) $ (3,921)
=========== ========== ==========
Weighted average shares outstanding. 10,648,874 5,725,103 5,720,154
Dilutive effect of outstanding stock
options............................ * * *
Dilutive effect of outstanding stock
warrants........................... * * *
----------- ---------- ----------
Weighted average shares, as adjust-
ed, for the calculation of loss.... 10,648,874 5,725,103 5,720,154
=========== ========== ==========
Primary loss per common share
before cumulative effect of
change in accounting principle... $ (1.75) $ (11.16) $ (.69)
=========== ========== ==========
FULLY DILUTED LOSS PER COMMON SHARE
BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE:
Net income (loss) before
cumulative effect of change in
accounting principle............. $ (14,139) $ (59,234) $ 4,585
Preferred stock dividend require-
ments............................ (4,501) (4,652) (8,506)
Interest expense on convertible
subordinated debentures, net of
tax.............................. * * *
----------- ---------- ----------
Loss before cumulative effect of
change in accounting principle
applicable to common stockholders
for the calculation of fully
diluted loss..................... $ (18,640) $ (63,886) $ (3,921)
=========== ========== ==========
Weighted average shares outstanding. 10,648,874 5,725,103 5,720,154
Dilutive effect of outstanding stock
options............................ * * *
Dilutive effect of outstanding stock
warrants........................... * * *
Dilutive effect of shares issuable
from assumed conversions of
convertible preferred stock and
convertible subordinated
debentures......................... * * *
----------- ---------- ----------
Weighted average shares, as
adjusted, for the calculation of
fully diluted loss................. 10,648,874 5,725,103 5,720,154
=========== ========== ==========
FULLY DILUTED LOSS PER COMMON SHARE
BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE............ $ (1.75) $ (11.16) $ (.69)
=========== ========== ==========
</TABLE>
- --------
* The outstanding common stock equivalents (stock options), stock warrants, and
the assumed conversions of the convertible preferred stock and convertible
subordinated debentures did not have a dilutive effect on the computation of
loss per common share before cumulative effect of change in accounting
principle. See table following Exhibit 11.1.
143
<PAGE>
EXHIBIT 11.3
NORTHEAST FEDERAL CORP.
COMPUTATION OF NET LOSS PER COMMON SHARE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1993 1992 1992
------------ ----------------- ----------
<S> <C> <C> <C>
PRIMARY LOSS PER COMMON SHARE:
Net income (loss)................. $ (14,139) $ (59,234) $ 5,607
Preferred stock dividend require-
ments............................ (4,501) (4,652) (8,506)
----------- ---------- ----------
Net loss applicable to common
stockholders for the calculation
of primary loss.................. $ (18,640) $ (63,886) $ (2,899)
=========== ========== ==========
Weighted average shares outstanding. 10,648,874 5,725,103 5,720,154
Dilutive effect of outstanding stock
options............................ * * *
Dilutive effect of outstanding stock
warrants........................... * * *
----------- ---------- ----------
Weighted average shares, as
adjusted, for the calculation of
primary loss....................... 10,648,874 5,725,103 5,720,154
=========== ========== ==========
Primary loss per common share..... $ (1.75) $ (11.16) $ (.51)
=========== ========== ==========
FULLY DILUTED LOSS PER COMMON SHARE:
Net income (loss)................. $ (14,139) $ (59,234) $ 5,607
Preferred stock dividend require-
ments............................ (4,501) (4,652) (8,506)
Interest expense on convertible
subordinated debentures, net of
tax.............................. * * *
----------- ---------- ----------
Net loss applicable to common
stockholders for the calculation
of fully diluted loss............ $ (18,640) $ (63,886) $ (2,899)
=========== ========== ==========
Weighted average shares outstanding. 10,648,874 5,725,103 5,720,154
Dilutive effect of outstanding stock
options............................ * * *
Dilutive effect of outstanding stock
warrants........................... * * *
Dilutive effect of shares issuable
from assumed conversions of
convertible preferred stock and
convertible subordinated
debentures......................... * * *
----------- ---------- ----------
Weighted average shares, as
adjusted, for the calculation of
fully diluted loss................. 10,648,874 5,725,103 5,720,154
=========== ========== ==========
FULLY DILUTED LOSS PER COMMON SHARE. $ (1.75) $ (11.16) $ (.51)
=========== ========== ==========
</TABLE>
* The outstanding common stock equivalents (stock options), stock warrants, and
the assumed conversions of the convertible preferred stock and convertible
subordinated debentures did not have a dilutive effect on the computation of
loss per common share. See table following Exhibit 11.1.
144
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF NORTHEAST SAVINGS, F.A.
<TABLE>
<S> <C>
Connecticut Realty Corp. Rhode Island
Connecticut Realty Corp. II Rhode Island
Connecticut Realty Corp. III Rhode Island
Connecticut Realty Corp. IV Rhode Island
Connecticut Realty Corp. V Rhode Island
Family Security Corporation New York
First Service Corporation of New England, Inc. Massachusetts
First Service Insurance Agency, Incorporated Massachusetts
Hillshire House, Incorporated Connecticut
NEMAC Escrow Corp. Connecticut
NEMAC, INC. Connecticut
NEMAC II, Inc. Connecticut
NFRC I, Inc. Connecticut
NFRC II, Inc. Connecticut
NFRC III, Inc. Connecticut
NFRC IV, Inc. Connecticut
NFRC V, Inc. Connecticut
NFRC VI, Inc. Connecticut
NFRC VII, Inc. Connecticut
NFRC VIII, Inc. Connecticut
NFRC IX, Inc. Connecticut
NFRC X, Inc. Connecticut
Northeast Charleston Corp. Connecticut
Northeast Custody Corp. California
Northeast Federal Realty Corp. Connecticut
Northeast New Britain Corp. Connecticut
Nutmeg Realty Corp. Rhode Island
Real Estate Referral, Inc. Connecticut
</TABLE>
145
<PAGE>
Exhibit 23.1
INDEPENDENT ACCOUNTANTS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos.
33-51643, 33-51641, 33-53490 and 1-10571 of Northeast Federal Corp. on Forms
S-8 of our report dated January 21, 1994 (February 9, 1994 as to Note 26),
which expresses an unqualified opinion and includes an explanatory paragraph
relating to the Company's change in its method of accounting for securities,
appearing in the Annual Report on Form 10-K of Northeast Federal Corp. for the
year ended December 31, 1993.
[SIGNATURE FOR DELOITTE & TOUCHE APPEARS HERE]
Hartford, Connecticut
March 4, 1994
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the incorporation by reference in the Registration Statements of
Northeast Federal Corp. on Form S-8 (File No.'s 1-10571, 33-53490, 33-51641
and 33-51643) of our report, which includes an explanatory paragraph regarding
the Company's change in its method of accounting for income taxes, dated
January 18, 1993, except for Note 30, as to which the date is January 27,
1993, on our audits of the consolidated financial statements of Northeast
Federal Corp. as of December 31 and March 31, 1992 and for the nine months
ended December 31, 1992 and each of the two years in the period ended March
31, 1992, which report is included in this Annual Report on Form 10-K.
[SIGNATURE FOR COOPERS & LYBRAND APPEARS HERE]
Hartford, Connecticut
March 4, 1994
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
George P. Rutland and Kirk W. Walters, and each of them singly, each person's
true and lawful attorneys, with full power to each such attorney to sign for
such person in such person's name and capacity indicated below, the Annual
Report for the year ended December 31, 1993, filed by Northeast Federal Corp.
with the Securities and Exchange Commission on Form 10-K under the Securities
Exchange Act of 1934, IRS Employer Identification No. 06-1288154, hereby
ratifying and confirming such person's signature as it may be signed by said
attorney to said documents.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ George P. Rutland Director February 25, 1994
_______________________________
George P. Rutland
/s/ Gerald P. Carmen Director February 25, 1994
_______________________________
Gerald P. Carmen
/s/ David W. Clark, Jr. Director February 25, 1994
_______________________________
David W. Clark, Jr.
/s/ George J. Fantini, Jr. Director February 25, 1994
_______________________________
George J. Fantini, Jr.
/s/ Richard H. Gaskill Director February 25, 1994
_______________________________
Richard H. Gaskill
/s/ Richard H. Gordon Director February 25, 1994
_______________________________
Richard H. Gordon
/s/ Beverly Lannquist Hamilton Director February 25, 1994
_______________________________
Beverly Lannquist Hamilton
/s/ Barbara C. Lawrence Director February 25, 1994
_______________________________
Barbara C. Lawrence
/s/ Thomas P. O'Neill, III Director February 25, 1994
_______________________________
Thomas P. O'Neill, III
146
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ George W. Sarney Director February 25, 1994
- ------------------------------------
George W. Sarney
/s/ Raymond T. Schuler Director February 25, 1994
- ------------------------------------
Raymond T. Schuler
/s/ John R. Silber Director February 25, 1994
- ------------------------------------
John R. Silber
/s/ Kirk W. Walters Director February 25, 1994
- ------------------------------------
Kirk W. Walters
/s/ Jerome F. Williams Director February 25, 1994
- ------------------------------------
Jerome F. Williams
/s/ Frederick W. Zuckerman Director February 25, 1994
- ------------------------------------
Frederick W. Zuckerman
</TABLE>
147
<PAGE>
EXHIBIT 99.1
NORTHEAST FEDERAL
CALCULATION OF BOOK VALUE AND TANGIBLE BOOK VALUE
PER COMMON SHARE
<TABLE>
<CAPTION>
BOOK VALUE AND
TANGIBLE BOOK VALUE
-----------------------
DECEMBER 31,
-----------------------
1993 1992
----------- ----------
(DOLLARS IN THOUSANDS
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
Total stockholders' equity............................. $ 132,513 $ 137,573
Less preferred equity:
Convertible preferred stock, Series A................ -- (41,337)
Series B preferred stock............................. (39,420) (35,170)
Less dividends in arrears.............................. (838) (12,802)
----------- ----------
Total common equity.................................... $ 92,255 $ 48,264
=========== ==========
Common shares outstanding at date...................... 13,499,078 5,729,579
=========== ==========
$ 6.83 $ 8.42
=========== ==========
Fully Diluted:
Total common equity.................................. $ 92,255 $ 48,264
Plus:
Proceeds from options.............................. 1,693 631
Proceeds from warrants............................. 2,350 2,350
----------- ----------
Adjusted common equity................................. $ 96,298 $ 51,245
=========== ==========
Common shares outstanding.............................. 13,499,078 5,729,579
Options outstanding (exercisable)...................... 571,613 352,676
Warrants outstanding................................... 800,000 800,000
----------- ----------
Common stock equivalents............................... 14,870,691 6,882,255
=========== ==========
$ 6.48 $ 7.45
=========== ==========
</TABLE>
148
