SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
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
organization) Number)
50 State House Square
Hartford, Connecticut 06103
- - ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 203/280-1000
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
----- -----
The number of shares outstanding for each of the registrant's classes of
common stock issued and outstanding as of July 8, 1994.
Common Stock, $.01 par value -- 13,533,970<PAGE>
<PAGE>
NORTHEAST FEDERAL CORP.
FORM 10-Q
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statement of Operations
for the three and six months ended
June 30, 1994 and 1993......................... 1
Consolidated Statement of Financial Condition
at June 30, 1994, December 31, 1993, and
June 30, 1993.................................. 2
Consolidated Statement of Cash Flows
for the six months ended June 30, 1994 and
1993........................................... 3
Notes to the Consolidated Financial Statements...... 4
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition for the Fiscal
Quarter Ended June 30, 1994......................... 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................... 40
Item 2. Changes in Securities............................... 41
Item 3. Defaults Upon Senior Securities..................... 41
Item 4. Submission of Matters to a Vote of Security Holders. 42
Item 5. Other Information................................... 42
Item 6. Unaudited Exhibits and Reports on Form 8-K.......... 43
<PAGE>
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
<TABLE>
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands Except Per Share Amounts)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------- ---------- -----------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income:
Loans............................................ $ 16,342 $ 37,350 $ 43,725 $ 75,903
Mortgage-backed securities....................... 21,921 14,060 38,746 26,908
Investment securities............................ 4,118 2,679 6,334 6,155
Rhode Island covered assets...................... 1,578 2,400 3,302 4,646
Other............................................ 612 187 1,154 386
--------- --------- --------- ---------
Total interest income......................... 44,571 56,676 93,261 113,998
--------- --------- --------- ---------
Interest expense:
Deposits......................................... 26,369 30,569 53,232 62,920
Federal Home Loan Bank advances.................. 1,737 3,435 4,846 5,538
Other borrowings................................. 2,805 3,360 6,311 6,601
--------- --------- --------- ---------
Total interest expense........................ 30,911 37,364 64,389 75,059
--------- --------- --------- ---------
Net interest income......................... 13,660 19,312 28,872 38,939
Provision for loan losses........................... 600 12,000 2,800 16,850
--------- --------- --------- ---------
Net interest income after provision
for loan losses............................ 13,060 7,312 26,072 22,089
--------- --------- --------- ---------
Non-interest income:
Fees for services................................ 3,316 2,303 2,825 5,138
Gain (loss) on sale of securities, net........... (77) 590 4,287 4,451
Gain on sale of loans, net....................... 356 376 13,905 698
Other non-interest income........................ 9,239 18 9,096 35
--------- --------- --------- ---------
Total non-interest income..................... 12,834 3,287 30,113 10,322
--------- --------- --------- ---------
Non-interest expenses:
Compensation and benefits........................ 6,850 8,395 14,533 16,594
Occupancy and equipment, net..................... 3,615 4,018 9,793 8,047
Other general and administrative................. 4,586 4,570 9,170 9,488
SAIF insurance fund and OTS assessments.......... 2,280 1,773 4,636 3,556
Real estate and other assets acquired in settle-
ment of loans.................................. 1,619 8,991 11,959 11,618
--------- --------- --------- ---------
Total non-interest expenses................... 18,950 27,747 50,091 49,303
--------- --------- --------- ---------
Income (loss) before income taxes.......... 6,944 (17,148) 6,094 (16,892)
Income tax expense (benefit)........................ 1,416 (7,716) (441) (7,601)
--------- --------- --------- ---------
Net income (loss).......................... $ 5,528 $ (9,432) $ 6,535 $ (9,291)
========= ========= ========= =========
Preferred stock dividend requirements............... $ 874 $ 1,190 $ 1,729 $ 2,843
Net income (loss) applicable to common stockholders $ 4,654 $ (10,622) $ 4,806 $ (12,134)
Net income (loss) per common share:
Primary and fully diluted........................ $ .33 $ (1.08) $ .35 $ (1.55)
<FN>
See accompanying Notes to the Consolidated Financial Statements
</TABLE>
1<PAGE>
<PAGE>
<TABLE>
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(In Thousands Except Share Amounts)
<CAPTION>
June 30, December 31, June 30,
------------ ------------ ------------
1994 1993 1993
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks........................... $ 26,393 $ 51,705 $ 34,548
Interest-bearing deposits......................... - - 55
Federal funds sold................................ 10,710 23,510 22,345
Securities purchased under agreements to resell... - 60,000 -
Investment securities, net........................ 187,725 42,612 50,336
Investment securities, available-for-sale, net.... 150,233 162,854 127,029
Mortgage-backed securities, net................... 1,709,197 1,330,886 1,084,178
Mortgage-backed securities, available-for-sale, net. 10,035 12,886 14,084
Loans, net........................................ 968,003 1,876,181 2,299,223
Loans available-for-sale, net........................ 7,923 46,076 32,788
Rhode Island covered assets....................... 92,407 105,625 120,869
Interest and dividends receivable................. 16,033 17,540 19,064
Real estate and other assets acquired in settle-
ment of loans................................... 26,568 74,962 96,423
Premises and equipment, net....................... 28,748 32,368 33,307
Prepaid expenses and other assets................. 77,041 82,822 72,720
--------- --------- ---------
Total assets............................... $3,311,016 $3,920,027 $4,006,969
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Retail deposits................................... $2,491,917 $2,952,082 $3,048,623
Brokered deposits................................. - 25,135 25,135
Federal Home Loan Bank advances................... 294,492 373,000 399,500
Securities sold under agreements to repurchase.... 271,626 294,809 267,756
Uncertificated debentures......................... 40,296 38,442 36,674
Convertible subordinated debentures............... - - 560
Advance payments by borrowers for taxes and
insurance....................................... 30,474 28,337 35,033
Other liabilities................................. 46,978 75,709 66,160
--------- --------- ---------
Total liabilities.......................... 3,175,783 3,787,514 3,879,441
--------- --------- ---------
Commitments and Contingencies
Stockholders' equity:
Serial preferred stock, $.01 par value,
15,000,000 shares authorized:
$8.50 Cumulative Preferred Stock, Series B,
411,131 shares at June 30, 1994, 394,199
shares at December 31, 1993, and 351,700
shares at June 30,1993 issued and
outstanding.................................. 4 4 4
Common stock, $.01 par value, 25,000,000 shares
authorized: 13,533,970 shares at June 30,
1994, 13,499,078 shares at December 31,
1993 and 13,474,515 shares at June 30, 1993
issued and outstanding......................... 135 135 135
Additional paid-in capital....................... 187,747 185,960 181,664
Net unrealized gain on debt & equity securities.. 5,228 9,462 -
Accumulated deficit.............................. (54,751) (59,557) (53,051)
Stock dividend distributable..................... 874 838 3,430
Unallocated employee stock ownership plan
shares......................................... (4,004) (4,329) (4,654)
--------- --------- ---------
Total stockholders' equity................. 135,233 132,513 127,528
--------- --------- ---------
$3,311,016 $3,920,027 $4,006,969
========= ========= =========
<FN>
See accompanying Notes to the Consolidated Financial Statements
</TABLE>
2<PAGE>
<PAGE>
<TABLE>
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<CAPTION>
Six Months Ended
June 30,
----------------------------
1994 1993
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................... $ 6,535 $ (9,291)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization.................................... 3,188 2,612
Amortization of fees, discounts, and premiums, net............... 4,903 (522)
Provision for loan losses........................................ 2,800 16,850
Provision for losses on REO...................................... 9,162 7,829
Gain on sale of securities....................................... (4,287) (4,451)
Gain on sale of loans............................................ (13,905) (698)
(Gain) loss on sale of other assets.............................. 192 (324)
Gain on sale of branches......................................... (9,228) -
Decrease in interest and dividends receivable.................... 1,507 2,278
Loans available-for-sale, originated............................. (59,194) (90,228)
Proceeds from sales of loans available-for-sale.................. 94,949 89,147
Decrease in accrued interest payable on deposits................. (704) (543)
Decrease in prepaid expenses and other assets.................... 5,781 2,003
Increase (decrease) in other liabilities......................... (23,632) 14,543
---------- ----------
Total adjustments............................................. 11,532 38,496
---------- ----------
Net cash provided by operating activities................... 18,067 29,205
---------- ----------
Cash flows from investing activities:
Loans originated................................................. (81,647) (305,999)
Net decrease in loans due to sale of branches.................... 1,609 -
Proceeds from sales of loans..................................... 843,593 4,277
Principal collected on loans..................................... 128,781 193,298
Net decrease in Rhode Island covered assets...................... 13,218 30,959
Purchases of mortgage-backed securities.......................... (586,947) (296,040)
Proceeds from sales of mortgage-backed securities available-for-
sale........................................................... - 39,860
Principal collected on mortgage-backed securities................ 226,051 83,873
Purchases of investment securities............................... (147,915) -
Proceeds from sales of investment securities..................... - 15,015
Proceeds from redemption of FHLB stock........................... (487) 554
Proceeds from maturities of investment securities................ 3,181 6,512
Purchases of investment securities available-for-sale............ (325,051) (137,204)
Proceeds from sales of investment securities available-for-sale.. 286,351 126,229
Proceeds from maturities of investment securities
available-for-sale............................................ 48,525 55,073
Proceeds from sales of real estate and other assets
acquired in settlement of loans............................... 48,976 30,307
Net (purchases) sale of premises and equipment................... 86 (1,858)
---------- ----------
Net cash provided by (used in) investing activities......... 458,324 (155,144)
---------- ----------
Cash flows from financing activities:
Net decrease in retail deposits.................................. (49,671) (156,488)
Sale of deposits................................................. (400,884) -
Net decrease in brokered deposits................................ (24,813) -
Increase in advance payments by borrowers for
taxes and insurance........................................... 2,137 13,299
Decrease in securities sold under agreements to repurchase....... (23,183) (23,258)
Net increase in short-term FHLB advances......................... 74,492 81,500
Proceeds from long-term FHLB advances............................ - 213,000
Repayments of long-term FHLB advances............................ (153,000) (35,000)
Reduction of ESOP debt guarantee................................. 256 324
Preferred stock conversion costs................................. - (1,352)
Issuance of 401-K stock shares................................... 115 150
Proceeds from exercise of stock options.......................... 48 124
---------- ----------
Net cash provided by (used) in financing activities......... (574,503) 92,299
---------- ----------
Net decrease in cash and cash equivalents........................ (98,112) (33,640)
Cash and cash equivalents at beginning of period................. 135,215 90,588
---------- ----------
Cash and cash equivalents at end of period....................... $ 37,103 $ 56,948
========== ==========
<FN>
See accompanying Notes to the Consolidated Financial Statements
</TABLE>
3<PAGE>
<PAGE>
NORTHEAST FEDERAL CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1994
1) Presentation of Financial Information
-------------------------------------
The unaudited consolidated financial statements presented
herein should be read in conjunction with the consolidated
financial statements of Northeast Federal Corp. for the year
ended December 31, 1993, as presented in the Annual Report on
Form 10-K. In the opinion of management, the accompanying
financial information reflects all adjustments, consisting
only of normal recurring adjustments, necessary for a fair
presentation of the financial condition and results of
operations of Northeast Federal Corp. in conformity with
generally accepted accounting principles. Certain reclassi
fications have been made to prior periods's financial
statements to conform to the June 30, 1994 presentation.
2) Supplemental Disclosure of Cash Flow Information
------------------------------------------------
For purposes of the consolidated statement of cash flows, cash
and due from banks, interest-bearing deposits, and federal
funds sold, if any, are considered cash and cash equivalents.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1994 1993
------------ -----------
(In Thousands)
<S> <C> <C>
Cash paid during the periods for:
Interest on retail deposits............................... $ 52,755 $ 62,264
Interest on brokered deposits............................. 1,182 1,200
Interest on borrowings.................................... 14,350 10,397
Income taxes.............................................. 588 947
Cash received during the periods for:
Interest and dividends.................................... 94,767 116,541
Non-cash items:
Loans securitized into mortgage-backed securities......... 20,402 40,246
Transfers of loans from available-for-sale................ (1,031) (955)
Transfers of mortgage-backed securities to available-
for-sale................................................ - 81
Transfers of investment securities to available-for-sale.. - 40,809
Real estate and other assets acquired in settlement
of loans................................................ 9,781 34,858
Payment in kind on uncertificated debentures.............. 1,843 1,688
Payment in kind on Series B preferred stock............... 1,693 -
Conversion of $2.25 cumulative convertible
preferred stock......................................... - 38,339
Net unrealized gains on debt and equity securities
available-for-sale...................................... (7,300) -
</TABLE>
4<PAGE>
<PAGE>
NORTHEAST FEDERAL CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1994
3) Commitments and Contingencies
-----------------------------
At June 30, 1994, outstanding commitments to originate
adjustable rate and fixed rate mortgage loans amounted to
$12.7 million and $5.7 million, respectively. At
June 30, 1994, Northeast Savings, F.A. also had commitments to
originate $5.7 million in residential construction loans. In
addition, at June 30, 1994, Northeast Savings, F.A. also had
commitments to buy $61.2 million of mortgage-backed securities
and to sell $5.7 million of loans available-for-sale.
Northeast Savings, F.A. is involved in litigation arising in
the normal course of business. Although the legal
responsibility and financial impact with respect to such
litigation cannot presently be ascertained, management does
not anticipate that any of these matters will result in the
payment of damages by Northeast Savings, F.A. that, in the
aggregate, would be material in relation to the consolidated
results of operation or financial position of Northeast
Federal Corp.
4) Significant Transactions
------------------------
The Company has signed a definitive agreement for the
acquisition of Northeast Federal Corp. and Northeast Savings
by Shawmut National Corp. Shawmut has agreed to exchange
shares of Shawmut common stock having a stock price of $10 7/8
for each share of outstanding Northeast Federal Corp. stock
for a total transaction price of approximately $172.1 million
if Shawmut National's stock price at the time of closing is
between $21.47 and $26.24. The acquisition must be approved
by regulatory agencies for both Shawmut and Northeast and by
the stockholders of Northeast. The acquisition is expected to
occur in the fourth quarter of 1994. The agreements are
discussed further in Management's Discussion and Analysis of
Results of Operations and Financial Condition.
5<PAGE>
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION FOR THE FISCAL QUARTER ENDED
JUNE 30, 1994
GENERAL
- - -------
Northeast Federal Corp. is a unitary savings association holding
company engaged in the financial services industry only through its
wholly-owned subsidiary, Northeast Savings, F.A. Throughout the
following discussion, the terms "Northeast Federal" or "Company"
refer to the consolidated entity, including Northeast Federal
Corp., Northeast Savings, F.A. and its subsidiaries. The terms
"Association" and "Northeast Savings" refer to Northeast Savings,
F. A. and its subsidiaries.
In a series of transactions during April and May 1994, Northeast
Savings sold virtually all of its foreclosed properties in
California, in addition to certain other foreclosed properties.
These transactions, which were fully reserved for during the first
fiscal quarter, helped to reduce the Company's non-performing
assets to $58.5 million at June 30, 1994, compared to $142.4
million at December 31, 1993 and $178.3 million at June 30, 1993.
In June 1994, Shawmut National Corp. acquired ten branches of
Northeast Savings. Five of the branches are in eastern
Massachusetts, while the remaining five are in Rhode Island.
Deposits in these branches totaled approximately $410.8 million.
In July 1994, the Company also sold its four San Diego, California
branches. The sale of Northeast Savings' single branch on Cape Cod
is expected to close in August 1994.
In addition, for several years, a primary focus of Northeast
Savings' business plan has been to meet and exceed all regulatory
capital requirements. During the quarter ended June 30, 1994,
Northeast Savings met the definition of a well-capitalized thrift.
During the quarter, the company's core capital ratio improved to
5.24% at June 30, 1994, from 4.05% at June 30, 1993. Tangible core
capital and risk-based capital have improved to 5.22% and 15.10%
from 4.03% and 10.28% for the same respective periods. Risk-based
capital includes core (Tier 1) capital plus supplementary capital
to the extent that supplementary capital does not exceed 100% of
core capital.
Finally, as stated in the Notes to the Consolidated Financial
Statement, the Company has signed a definitive agreement for the
acquisition of Northeast Federal Corp. and Northeast Savings by
Shawmut National Corp. Shawmut has agreed to exchange shares of
Shawmut common stock having a stock price of $10 7/8 for each share
of outstanding Northeast Federal Corp.'s stock for a total
transaction price of approximately $172.1 million if Shawmut
National's stock price at the time of closing is between $21.47 and
6<PAGE>
<PAGE>
$26.24. The acquisition must be approved by regulatory agencies
for both Shawmut and Northeast and by the stockholders of
Northeast. The acquisition is expected to occur in the fourth
quarter of 1994. With the signing of the agreement, virtually all
of Northeast Federal Corp.'s stock options became fully vested and
exercisable and were considered outstanding in the calculation of
earnings per share.
RESULTS OF OPERATIONS
- - ---------------------
Northeast Federal had net income of $5.5 million for the three
months ended June 30, 1994, resulting in primary and fully diluted
net income per common share of $.33 after preferred stock dividend
requirements. For the same quarter in 1993, the Company reported
a net loss of $9.4 million or a primary and fully diluted net loss
per common share of $1.08 after preferred stock dividend
requirements. Net income for the current quarter resulted from a
$9.2 million pre-tax gain on the previously noted sale of ten of
the Association's branches to Shawmut National Corp. The net loss
for the June 30, 1993 quarter resulted from a $12.0 million
provision for loan losses as well as a $6.0 million provision for
loss in anticipation of a sale in a single transaction of a portion
of the Company's portfolio of residential real estate acquired in
settlement of loans.
Interest Income and Expense
- - ---------------------------
Total interest income was $44.6 million and $56.7 million for the
quarters ended June 30, 1994 and 1993, respectively. The decrease
in total interest income was due primarily to a decrease of 41
basis points in the weighted average yield earned on interest-
earning assets, to 5.56% for the quarter ended June 30, 1994 from
5.97% for the same quarter in 1993. The lower interest earned was
also due to lower average assets accompanied by a shift in the
composition of the Company's assets. For the quarter ended
June 30, 1993, single-family residential real estate loans earning
an average rate of 6.22% comprised 58.8% of average earning assets,
while mortgage-backed securities earning an average rate of 5.35%
made up only 27.7% of average earning assets. However, in late
1993 in order to mitigate credit risk and to enhance its risk-based
capital ratios, the Company converted over $300 million of loans
into mortgage-backed securities. In addition, a large portion of
the proceeds from the March 1994 sale of $876.1 million of
primarily California residential loans was invested in mortgage-
backed securities. As a consequence, for the quarter ended June
30, 1994, single-family residential real estate loans earning an
average rate of 6.26% comprised only 28.0% of average earning
assets, while mortgage-backed securities earning an average of
5.06% totaled 54.1% of average earning assets. Of the total
decrease in interest income, 94%, or $11.4 million, was due to the
lower average assets and the shift in asset composition from loans
7<PAGE>
<PAGE>
to mortgage-backed securities. The remaining 6% of the decrease in
interest income resulted from rate and rate/volume decreases.
Total interest expense and the Association's cost of funds were
also lower in the quarter ended June 30, 1994 than in the
comparable quarter of the previous year. Total interest expense
totaled $30.9 million for the three months ended June 30, 1994,
compared to $37.4 million for the same three months in the previous
year. Total interest expense was lower due primarily to lower
average balances. In addition, for the quarter ended June 30,
1994, the cost of funds decreased 6 basis points to 3.84% from
3.90% for the quarter ended June 30, 1993.
Net interest income totaled $13.7 million for the quarter ended
June 30, 1994, $5.6 million lower than the $19.3 million reported
for the same quarter of the previous year. The interest rate
spread also decreased, averaging 1.72% for the three months ended
June 30, 1994, compared to 2.07% for the three months ended
June 30, 1993. Net interest rate margins for the three-month
periods ended June 30, 1994 and 1993 were 1.69% and 2.02%,
respectively. 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
interest-earning assets. The interest rate margin is calculated by
dividing annualized net interest income by average total interest-
earning assets.
Provision for Loan Losses
- - -------------------------
The provision for loan losses for the quarter ended June 30, 1994
was $600,000, compared to $12.0 million for the quarter ended June
30, 1993. The decrease in the provision was due primarily to the
March 1994 sale of $876.1 million of adjustable rate single-family
residential real estate loans, $40.5 million of which were non-
performing. As a result of this sale, virtually all of the
Company's California loans were sold and the single-family
residential loan portfolio decreased to $880.9 million at June 30,
1994. In addition, the $12.0 million provision for the quarter
ended June 30, 1993 was due to the then-higher risk in the
residential loan portfolio. At December 31 and June 30, 1993, the
single-family residential loan portfolio totaled $1.8 billion and
$2.2 billion, respectively. At the same respective dates, non-
accrual loans totaled $31.9 million, $67.5 million, and $81.9
million.
8<PAGE>
<PAGE>
The allowance for loan losses was $11.6 million at June 30, 1994,
compared to $28.3 million and $28.0 million at December 31 and June
30, 1993, respectively. The activity in the allowance for loan
losses for the three months ended June 30, 1994 and 1993 was as
follows:
<TABLE>
<CAPTION>
Three Months
Ended June 30,
------------------------
1994 1993
---------- ----------
(Dollars in Thousands)
<S> <C> <C>
Balance, beginning of period...................... $11,476 $21,370
Provision for loan losses......................... 600 12,000
Charge-offs:
Single-family residential real estate loans..... (522) (4,229)
Consumer loans.................................. (81) (153)
Income property loans........................... - (1,094)
------ ------
Total charge-offs............................. (603) (5,476)
------ ------
Recoveries:
Single-family residential real estate loans..... 41 10
Consumer loans.................................. 89 115
------ ------
Total recoveries.............................. 130 125
------ ------
Net charge-offs................................... (473) (5,351)
------ ------
Balance, end of period............................ $11,603 $28,019
====== ======
Ratio of net charge-offs during the period to
average loans outstanding during the period:
Single-family residential real estate loans..... .05% .19%
Consumer loans.................................. (.02) .09
Income property loans........................... - 1.40
Total net charge-offs during the period to
average loans outstanding during the
period...................................... .05% .23%
</TABLE>
In addition to the impact of the $876.1 million loan sale,
management believes that the decrease in single-family residential
loan net charge-offs is indicative of a declining level of non-
performing assets and a stabilization of housing values in the
Company's primary market areas. However, reduced family income
levels and rising interest rates may still result in increased
delinquencies and foreclosures in the future.
9<PAGE>
<PAGE>
Other factors considered in determining the adequacy of the
allowance for loan losses were 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. Although management believes that the allowance for loan
losses was adequate at June 30, 1994, based on the quality of the
loan portfolio at that date, further additions to the allowance may
be necessary if market conditions deteriorate.
The following table shows the allocation of the allowance for loan
losses to the various types of loans and the allowance as a percent
of such loans.
<TABLE>
<CAPTION>
June 30, December 31, June 30,
--------------- --------------- ----------------
1994 1993 1993
--------------- --------------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Single-family residential real estate
loans................................. $ 8,704 1.05% $25,751 1.47% $25,186 1.19%
Consumer loans.......................... 300 .85 300 .85 300 .71
Income property loans................... 2,066 2.82 800 1.11 1,000 1.25
Unallocated............................. 533 * 1,420 * 1,533 *
------ ------ ------
Total allowance..................... $11,603 1.17% $28,271 1.45% $28,019 1.19%
====== ====== ======
<FN>
* 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.
</TABLE>
10<PAGE>
<PAGE>
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 (REO). The following table
presents the Association's non-performing assets and restructured
loans at the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31, June 30
------------ ------------ ----------
1994 1993 1993
------------ ------------ ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accrual loans:
Single-family residential real estate. $ 28,885 $ 65,770 $ 78,185
Consumer.............................. 1,074 1,315 1,508
Income property....................... 1,926 377 2,189
---------- ---------- --------
Total non-accrual loans............. 31,885 67,462 81,882
---------- ---------- --------
REO:
Single-family residential............. 15,015 57,165 80,642
Hotels................................ 6,087 6,453 6,408
Apartment building.................... - 5,270 4,490
Office and industrial
complexes, land..................... 3,053 3,357 2,469
Real estate brokerage operations...... 1,611 1,744 1,747
Residential subdivisions.............. 802 973 667
---------- ---------- ---------
Total REO........................... 26,568 74,962 96,423
---------- ---------- ---------
Total non-performing assets......... $ 58,453 $ 142,424 $ 178,305
========== ========== =========
Restructured loans...................... $ - $ 1,641 $ 1,100
========== ========== =========
Total non-accrual loans as a percent of
total gross loans receivable.......... 3.19% 3.44% 3.45%
==== ==== ====
Total non-performing assets as a
percent of total assets............... 1.77% 3.63% 4.45%
==== ==== ====
</TABLE>
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 in payments, the Association discontinues accruing interest
on that loan when a 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.
At June 30, 1994 and December 31 and June 30, 1993, the Association
had no loans more than ninety days past due on which it was
accruing interest.
At June 30, 1994 and December 31 and June 30, 1993, non-accrual
loans were $31.9 million, $67.5 million, and $81.9 million,
respectively. The decrease in non-accrual loans between
December 31, 1993 and June 30, 1994 was due primarily to the March
1994 loan sale. The decrease in non-accrual loans between June 30,
11<PAGE>
<PAGE>
1993 and December 31, 1993 was due primarily 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. Virtually all residential mortgage non-accrual
loans are collateralized by properties with an original loan-to-
value ratio of 80% or less. At June 30, 1994 and December 31 and
June 30, 1993 single-family residential non-accrual loans were
90.6%, 97.5%, and 95.5%, respectively, of total non-accrual loans.
<TABLE>
Activity within the non-accrual loan portfolio was as follows:
<CAPTION>
Three Months Ended June 30,
-----------------------------------------
1994 1993
------------------ ------------------
(In Thousands)
<S> <C> <C>
Beginning balance..................... $ 32,266 $ 92,999
New non-performing loans.............. 6,337 28,690
Net charge-offs....................... (76) (27)
Returned to accrual status............ (2,601) (9,350)
Loan sales............................ - (2,326)
Payoffs............................... (1,882) (11,180)
Transfers to REO through foreclosure.. (2,159) (16,924)
------- -------
Ending balance........................ $ 31,885 $ 81,882
======= =======
</TABLE>
The allowance for loan losses as a percentage of non-accrual loans by loan
category is as follows:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
--------- ------------ ---------
1994 1993 1993
--------- ------------ ---------
<S> <C> <C> <C>
Single-family residential real estate*........... 31.98% 41.31% 34.17%
Consumer......................................... 27.93 22.81 19.89
Income property.................................. 107.27 212.20 45.68
Unallocated...................................... * * *
Total allowance to total non-accrual loans..... 36.39% 41.91% 34.22%
<FN>
* 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.
</TABLE>
The decrease in the ratio for single-family residential real estate
from December 31, 1993 to June 30, 1994 was due to the
aforementioned loan sale which included $40.5 million of non-
accrual loans and which reduced the allowance by $16.0 million.
While the portion of the allowance allocated to income property
loans increased from $800,000 at December 31, 1993 to $2.1 million
at June 30, 1994, the ratio related to income property decreased
due to a $1.6 million loan which went into non-accrual status
during the first quarter.
12<PAGE>
<PAGE>
Real estate and other assets acquired in settlement of loans. REO
- - ------------------------------------------------------------
was $26.6 million, $75.0 million, and $96.4 million at
June 30, 1994 and December 31 and June 30, 1993, respectively. The
$48.4 million decrease in REO from December 31, 1993 to
June 30, 1994 was due to sales of California single-family
residential REO totaling $39.1 million, including three single
transaction sales totaling $27.2 million, as well as to other
increased REO sales, and a decrease in the level of foreclosures.
The decrease in REO at December 31, 1993 from June 30, 1993 was due
primarily to the August 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. Included in income property REO
of $9.9 million at June 30, 1994 were two hotels, an industrial
building, one retail office, two single-family residential
subdivisions, and one property zoned for residential development.
Also included in income property REO was a residential subdivision
purchased as part of the Rhode Island acquisition.
The activity in the Association's REO is presented in the following
table:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
---------------------
1994 1993
-------- --------
(In Thousands)
<S> <C> <C>
Beginning balance.............. $ 58,595 $103,002
Foreclosures, net.............. 2,159 16,924
Capitalized expenses........... 429 669
Less:
Sales........................ (33,657) (16,828)
Valuation adjustments........ (340) (7,061)*
Mortgage insurance receipts.. (159) (150)
Other........................ (459) (133)
------- -------
Ending balance................. $ 26,568 $ 96,423
======= =======
<FN>
* Includes the $6.0 million provision for loss in anticipation of the sale in a single transaction of
a portion of the Company's residential REO portfolio.
</TABLE>
13<PAGE>
<PAGE>
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>
June 30, 1994 December 31, 1993
--------------------------------------- ---------------------------------------
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.... $ 18,858 $ 3,853 $ 28,885 $ 51,596 $ 30,497 $ 13,139 $ 65,770 $109,406
Consumer.............. 474 258 1,074 1,806 438 82 1,315 1,835
Income property....... - 908 1,926 2,834 2,825 993 377 4,195
------- ------- ------- ------- ------- ------- ------- -------
Total.............. $ 19,332 $ 5,019 $ 31,885 $ 56,236 $ 33,760 $ 14,214 $ 67,462 $115,436
======= ======= ======= ======= ======= ======= ======= =======
Percent of total gross
loan portfolio...... 1.94% .50% 3.19% 5.63% 1.72% .73% 3.44% 5.89%
======= ======= ======= ======= ======= ======= ======= =======
Percent of total
assets.............. .58% .15% .96% 1.70% .86% .36% 1.72% 2.94%
======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
June 30, 1993
---------------------------------------
30-59 60-89 90-days
days days and over Total
------- ------ -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Single-family residen-
tial real estate.... $ 40,528 $ 9,806 $ 78,185 $128,519
Consumer.............. 491 218 1,508 2,217
Income property....... 365 924 2,189 3,478
------- ------- ------- -------
Total.............. $ 41,384 $ 10,948 $ 81,882 $134,214
======= ======= ======= =======
Percent of total gross
loan portfolio...... 1.75% .46% 3.45% 5.66%
======= ======= ======= =======
Percent of total
assets.............. 1.03% .27% 2.04% 3.35%
======= ======= ======= =======
</TABLE>
Non-interest Income
- - -------------------
Non-interest income totaled $12.8 million and $3.3 million for the
quarters ended June 30, 1994 and 1993, respectively. For the same
respective quarters, fee income totaled $3.3 million and $2.3
million. The increase in non-interest income for the quarter ended
June 30, 1994 resulted primarily from a pre-tax gain of $9.2
million recorded on the previously mentioned sale of ten branches
of the Association.
Non-interest Expense
- - --------------------
Total non-interest expense was $19.0 million and $27.7 million for
the quarters ended June 30, 1994 and 1993, respectively. General
and administrative expenses (compensation and benefits, occupancy
and equipment, and other general and administrative expenses)
decreased to $15.1 million from $17.0 million. However, due to
lower average assets, the Association's ratio of general and
administrative expenses to average total assets increased to 1.78%
14<PAGE>
<PAGE>
from 1.69% for the same quarter in the prior year. Expenses
relating to REO decreased significantly in the June 30, 1994
quarter to $1.6 million from $9.0 million for the same quarter in
the prior year. Expenses for last year included a $6.0 million
provision for loss in anticipation of the August 1993 sale in a
single transaction of a portion of the Company's residential REO
portfolio. In addition, the level of REO decreased to $26.6
million at June 30, 1994 from $96.4 million a year earlier. The
decrease in REO resulted from the August 1993 sale totaling $30.3
million in REO, higher REO sales in the second quarter of 1994, and
a significantly lower level of foreclosures.
Income Taxes and Extraordinary Items
- - ------------------------------------
Income tax expense totaled $1.4 million for the three-month period
ended June 30, 1994 and represents federal and state tax expense.
Included in total income tax expense is the tax benefit of a $1.5
million reversal of the deferred tax valuation allowance. For the
same period last year, income tax benefit totaled $7.7 million, and
represented state and federal income tax benefit.
The Company recorded no extraordinary items for the three month
periods ended June 30, 1994 or 1993.
SIX MONTHS 1994 COMPARED TO SIX MONTHS 1993
- - -------------------------------------------
For the six months ended June 30, 1994, the Company reported net
income of $6.5 million which resulted in primary and fully diluted
net income per common share of $.35 after preferred stock dividend
requirements. For the same six-month period in 1993, the Company
reported a net loss of $9.3 million or a primary and fully diluted
net loss per common share of $1.55 after preferred stock dividend
requirements. As discussed in the quarterly Results of Operations,
net income for the six months ended June 30, 1994 was due primarily
to a $9.2 million pre-tax gain on the June 1994 sale of ten
Northeast Savings branches. The net loss for the six months ended
June 30, 1993 was due to a $12.0 million provision for loan losses,
resulting from the then-higher risk in the residential loan
portfolio and the $6.0 million provision for loss in anticipation
of the sale in a single transaction of a portion of the Company's
residential REO portfolio.
Total interest income for the six months ended June 30, 1994 and
1993 was $93.3 million and $114.0 million, respectively. The
decrease in interest income was due partly to a decline of 64 basis
points in the average yield on interest-earning assets, as well as
to the factors discussed previously in the quarterly Results of
Operations.
Total interest expense was also lower, $64.4 million for the six-
month period ended June 30, 1994, compared to $75.1 million for the
15<PAGE>
<PAGE>
same six months in 1993. The decrease was due to both lower
average balances on interest-bearing liabilities and a lower
average cost of funds. The cost of funds, which averaged 3.78% and
4.00% for the six-month periods ended June 30, 1994 and 1993,
respectively. The lower average cost of funds resulted principally
from lower average rates paid on retail deposits.
Net interest income totaled $28.9 million for the six months ended
June 30, 1994, a $10 million reduction from the $38.9 million
reported for the same six months last year. The interest rate
spread averaged 1.69% and 2.11% for the six months ended
June 30, 1994 and 1993, respectively. For the same respective
periods, the interest rate margins were 1.66% and 2.05%.
The activity in the allowance for loan losses for the six months
ended June 30, 1994 and 1993 was as follows:
<TABLE>
<CAPTION>
Six Months
Ended June 30,
------------------------
1994 1993
---------- ----------
(Dollars in Thousands)
<S> <C> <C>
Balance, beginning of period...................... $28,271 $21,020
Provision for loan losses......................... 2,800 16,850
Charge-offs:
Single-family residential real estate loans..... (3,564) (8,735)
Consumer loans.................................. (184) (248)
Income property loans........................... (85) (1,094)
------- -------
Total charge-offs............................. (3,833) (10.077)
------- -------
Recoveries:
Single-family residential real estate loans..... 210 10
Consumer loans.................................. 155 216
------- ------
Total recoveries.............................. 365 226
------- ------
Net charge-offs................................... (3,468) (9,851)
------- ------
Other............................................. (16,000)* -
------- ------
Balance, end of period............................ $ 11,603 $28,019
======= ======
<FN>
* Represents reduction of allowance allocated to loans sold.
<S> <C> <C>
Ratio of net charge-offs during the period to
average loans outstanding during the period:
Single-family residential real estate loans..... .26% .39%
Consumer loans.................................. .08 .07
Income property loans........................... .12 1.36
Total net charge-offs during the period to
average loans outstanding during the
period...................................... .25% .42%
</TABLE>
Decreases in charge-offs on single-family residential loans and
income property loans were discussed previously in the quarterly
Results of Operations.
Total non-interest income totaled $30.1 million and $10.3 million
for the six-months ended June 30, 1994 and 1993, respectively. The
increase in non-interest income resulted principally from the March
1994 sale of $876.1 million of adjustable rate single-family
residential real estate loans and the aforementioned branch sale,
partially offset by a first quarter valuation adjustment to the
16<PAGE>
<PAGE>
Association's purchased mortgage servicing rights, which was
recorded in anticipation of selling a portion of such rights due to
the high cost of servicing the portfolio. This adjustment reduced
fee income by $3.5 million.
Non-interest expense totaled $50.1 million and $49.3 million for
the six-month periods ended June 30, 1994 and 1993. Included in
REO expense for the six months ended June 30, 1994 was a $7.0
million valuation adjustment recorded to facilitate an accelerated
sale of California single-family residential REO and $2.2 million
in writedowns of REO. For the same six months last year, REO
expense included a $6.0 million provision for loss in anticipation
of the sale in a single transaction of a portion of the Company's
residential REO portfolio. Other factors affecting non-interest
expense were discussed previously in the quarterly Results of
Operations. For the six-month periods ended June 30, 1994 and
1993, respectively, the Company's ratio of annualized general and
administrative expenses was 1.86% and 1.72%.
Income tax benefit totaled $441,000 for the six-month period ended
June 30, 1994. Included in the tax benefit is a reversal of $3.0
million of the deferred tax valuation allowance. The reversal was
based on a re-evaluation of the realizability of the Company's
deferred tax asset. Management believes that it is more likely
than not that the Company will realize this tax benefit. Income tax
benefit for the six months ended June 30, 1993 represents federal
and state benefits.
There were no extraordinary items for the six-month periods ended
June 30, 1994 and 1993.
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
total risk-based capital requirement that is 8% of risk-weighted
assets. Total risk-based capital includes core (Tier 1) capital
plus supplementary capital to the extent that supplementary capital
does not exceed 100% of core capital. As discussed further in
"Regulations", an institution must have a leverage (core) ratio of
4% or greater (unless it has a composite one CAMEL rating) in order
to be considered adequately capitalized under the Prompt Corrective
Action rules. For additional regulations impacting the
Association's regulatory capital, please see "Regulations".
17<PAGE>
<PAGE>
The following table reflects the regulatory capital position of the
Association as well as the current regulatory capital requirements
at June 30, 1994 and 1993:
<TABLE>
<CAPTION>
June 30, 1994 June 30, 1993
------------------------------------ ------------------------------------
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 $172,831 $ 49,624 $161,731 $ 60,157
Percent 5.22% 1.50% 4.03% 1.50%
Core capital $173,287 $132,348 $162,387 $160,446
Percent 5.24% 4.00% 4.05% 4.00%
Risk-based capital $184,890 $ 97,969 $185,587 $144,484
Percent 15.10% 8.00% 10.28% 8.00%
</TABLE>
RHODE ISLAND COVERED ASSETS
- - ---------------------------
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. Transactions completed
in conjunction with the acquisition of the assets of the financial
institutions are described in detail in the Company's Form 10-K.
Since, as described in the Company's December 31, 1993 Form 10-K,
the Association is protected against losses relative to the
contractual provisions of the loans acquired from the Rhode Island
institutions, including loans foreclosed upon by the Association
subsequent to acquisition (the Rhode Island covered assets), the
Association maintains these assets separately. At June 30, 1994,
the Association's portfolio of Rhode Island covered assets was as
follows:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
-------------- -------------- --------------
1994* 1993* 1993*
-------------- -------------- --------------
(In Thousands)
<S> <C> <C> <C>
Loans:
Single-family residential real estate loans.... $ 32,635 $ 38,821 $ 39,436
Consumer loans................................. 17,535 20,394 24,239
Income property loans.......................... 37,127 38,256 46,409
Commercial loans............................... 1,193 1,335 1,443
--------- --------- ---------
Total loans................................ 88,490 98,806 111,527
REO.............................................. 3,917 6,819 9,342
--------- --------- ---------
Total covered assets....................... $ 92,407 $ 105,625 $ 120,869
========= ========= =========
<FN>
* Net of credit and interest adjustments
</TABLE>
18<PAGE>
<PAGE>
The Rhode Island loans have delinquency rates which are generally higher than
those previously experienced by the Association on its other lending
activities. Since the Association is protected against losses on these
loans, based on contractual provisions, the Rhode Island non-accrual loans
are also segregated from the Association's other non-accrual loans.
Following is a table of Rhode Island non-accrual loans:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
-------------- -------------- --------------
1994 1993 1993
-------------- -------------- --------------
(In Thousands)
<S> <C> <C> <C>
Loans:
Single-family residential real estate loans.... $ 2,012 $ 2,718 $ 3,501
Consumer loans................................. 956 1,045 1,772
Income property loans.......................... 4,366 4,145 6,265
Commercial loans............................... 15 30 15
--------- --------- ---------
Total...................................... $ 7,349 $ 7,938 $ 11,553
========= ========= =========
</TABLE>
FINANCIAL CONDITION
- - -------------------
Total assets at June 30, 1994 were $3.3 billion, compared to $3.9
billion and $4.0 billion at December 31 and June 30, 1993,
respectively. Asset size and composition have generally been
determined by seeking the optimal balance among regulatory capital
requirements, liquidity, yield, and risk.
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.
As a result of these factors, beginning in the third quarter of
1993, the Company modified its operating strategy both with regard
to lending and to balance sheet structure. This modified strategy
was intended to reduce the Company's loan concentration in
California, to reduce credit costs, and to increase the net
interest margin. In September of 1993, the Association changed its
strategy by sharply reducing the volume of adjustable rate
mortgages (ARMs) originated for portfolio in California and by
replacing the California ARM originations with 10 and 15 year fixed
rate mortgages originated in the Northeast and with the purchase of
both adjustable rate and 15 year fixed rate mortgage-backed
securities. California portfolio production was sharply curtailed
in order to lower the concentration of California loans in the loan
portfolio due to the fact that initial discounts on ARM rates in
California exceeded the Association's pricing guidelines. Fixed
19<PAGE>
<PAGE>
rate mortgages with terms of 15 years or less were added to the
portfolio in order to increase the net interest spread and to
reduce the degree to which the Association's interest rate risk
profile had become asset sensitive. MBSs were added to meet the
remaining asset generation needs of the Company. Displacing whole
loans, particularly those originated in California, with MBSs
reduced credit risk and increased the risk-based capital ratio. In
February 1994, the Company closed its loan origination offices in
California and Colorado. In March 1994, the Company sold $876.1
million of single-family adjustable rate residential mortgage
loans, $40.5 million of which were non-performing and 93% of which
were secured by California properties. Finally, in a series of
transactions during April and May 1994, three of which were single
transactions totaling $27.2 million, the Company sold virtually all
of its foreclosed assets in California.
Retail deposits, the Association's least expensive source of funds,
decreased to $2.5 billion at June 30, 1994, compared to $3.0
billion at December 31 and June 30, 1993. The decrease in deposits
was due primarily to the aforementioned sale of ten of the
Association's branches to Shawmut National Corp. In addition,
following the trend of low interest rates in the economy, 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.
CAPITAL RESOURCES AND LIQUIDITY
- - -------------------------------
The primary source of funds for the Association is retail deposits,
while secondary sources include FHLB advances; other collateralized
borrowings including 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.
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>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------- -------------------------------------------
1994 1993 1994 1993
-------------------- -------------------- -------------------- --------------------
Amount % of Total Amount % of Total Amount % of Total Amount % of Total
-------- ---------- -------- ---------- -------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Adjustable.... $ 9,496 71.10% $144,026 69.57% $ 37,860 34.08% $298,219 77.30%
Fixed......... 3,860 28.90 63,008 30.43 73,245 65.92 87,579 22.70
------- ------ ------- ------ ------- ------ ------- ------
Total..... $ 13,356 100.00% $207,034 100.00% $111,105 100.00% $385,798 100.00%
======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
20<PAGE>
<PAGE>
The composition of the Association's residential mortgage loan portfolio at
June 30, 1994, December 31, 1993, and June 30, 1993 was as follows:
<TABLE>
<CAPTION>
June 30, 1994 December 31, 1993 June 30, 1993
---------------------- ---------------------- ----------------------
Amount % of Total Amount % of Total Amount % of Total
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Adjustable....... $ 766,441 87.01% $1,701,978 92.21% $2,124,664 94.76%
Fixed............ 114,419 12.99 143,812 7.79 117,598 5.24
--------- ------ --------- ------ --------- ------
Total........ $ 880,860 100.00% $1,845,790 100.00% $2,242,262 100.00%
========= ====== ========= ====== ========= ======
</TABLE>
Total loans originated during the three months ended June 30, 1994
and 1993 were $28.5 million and $214.2 million, respectively.
Total loan originations for the six-month periods ended
June 30, 1994 and 1993 were $134.8 million and $397.3 million,
respectively. At June 30, 1994, the Association was committed to
fund mortgage loans totaling $18.4 million, including $12.7 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 six months ended
June 30, 1994 totaled $18.1 million. Adjustments to net income of
$6.5 million provided $11.5 million of net cash, including proceeds
from sales of loans available-for-sale of $95.0 million. The
proceeds from sale of loans resulted principally from the sale of
fixed rate loans which were originated by the Association with the
intent to sell in the secondary market. In addition, loans
originated for the available-for-sale portfolio utilized $59.2
million in cash. Remaining adjustments to net income utilized
$24.2 million in cash.
Net cash provided by investing activities during the six months
ended June 30, 1994 totaled $458.3 million. Proceeds from sales of
loans totaled $843.6 million. Principal collected on loans and
mortgage-backed securities generated cash of $128.8 million and
$226.0 million, respectively, while maturities of investment
securities provided $51.7 million in cash. Proceeds from sales of
investment securities available-for-sale totaled $286.3 million.
Sales of REO generated $49.0 million in cash. Loans originated
used $81.6 million of cash, while purchases of mortgage-backed
securities and investment securities used cash of $586.9 million
and $473.0 million, respectively. All other investing activities
provided net cash of $14.4 million.
Net cash used in financing activities during the six months ended
June 30, 1994 totaled $574.5 million and resulted primarily from
$400.9 million on the sale of deposits. Other decreases in retail
deposits from December 31, 1993 used $49.7 million in cash. A net
21<PAGE>
<PAGE>
decrease in brokered deposits used $24.8 million in cash while
decreased securities sold under agreements to repurchase utilized
$23.2 million in cash. All other financing activities utilized net
cash of $75.9 million.
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 $46.8 million or less, regulations require a reserve of 3%. For
total transaction account deposits in excess of $46.8 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 6.10% for the three months ended June 30, 1994, compared
to 5.87% for the three months ended June 30, 1993. 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 3.53% and 2.26% for the three months ended June 30, 1994
and 1993, 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
in continuing to meet the standards for a well-capitalized
institution promulgated pursuant to the Federal Deposit Insurance
Corporation Improvement Act of 1991 (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
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requirement or if the payment of such dividends would cause its
capital to fall below its fully phased-in capital requirement.
On June 17, 1994, the Company's Board of Directors voted to declare
a stock dividend payable on July 1, 1994 on the Company's $8.50
Cumulative Preferred Stock, Series B (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, 1994, and accumulated and
unpaid as of that date, to holders of record on June 17, 1994. On
July 1, 1994, the Company paid the $873,653 of dividends then
payable on the Series B preferred stock through the issuance of an
additional 8,737 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 $40.3 million net balance of 9%
Debentures at June 30, 1994 require annual interest payments of
$3.9 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 $6.8 million in 9% Debentures,
which are included in the outstanding principal at June 30, 1994.
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
- - -----------------------------
From the quarter ended June 30, 1993 through the quarter ended
June 30, 1994, the Association's interest rate spread decreased 35
basis points, averaging 1.72% and 2.07% for the quarters ended
June 30, 1994 and 1993, respectively. The Association continually
monitors the repricing characteristics of its interest-earning
assets and interest-bearing liabilities. The Association's one-
year gap at June 30, 1994 was a positive $159.5 million, or 4.82%
of assets, compared to a positive $583.8 million, or 14.57% of
assets, at June 30, 1993. The Association's interest rate
sensitivity analysis (Exhibit 99.1) shows that the Association has
little interest rate risk resulting from the traditional thrift
institution mismatch between asset and liability repricing. This
diminished risk is a result of the Association's historic emphasis
on the origination of adjustable rate single-family residential
mortgages and its reliance on retail deposits as its primary
funding source.
Exhibit 99.1 does not indicate, however, the interest rate risk
resulting from the several options which borrowers and depositors
have nor does it indicate the risks resulting from assets and
liabilities being tied to different interest rate indices.
Borrowers have the option to prepay loans at any time and to have
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changes in rates on adjustable rate loans be constrained by
periodic and lifetime caps. Depositors have the option to withdraw
funds from certificates of deposit prior to maturity upon the
payment of a penalty. The Association's interest rate risk is due
to the effects of options, since the Association has little
interest rate risk resulting from repricing mismatches. Basis
risk, or the risk from assets and liabilities being tied to
different interest rate indices, is not a material source of
interest rate risk for the Association.
REGULATIONS
- - -----------
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) total risk-based capital of 8% of risk-weighted
assets. 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 permits 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 has
minimal impact on the Association since the Association's purchased
mortgage servicing rights comprise less than 1.0% of core capital
at June 30, 1994. In addition, the OTS will grandfather core
deposit intangibles resulting from prior transactions or
transactions under firm contract as of March 4, 1994. As of June
30, 1994, the Association had only $456,000 of core deposit
intangibles which are so grandfathered. Supervisory goodwill
includable in core capital is being phased out over five years,
with all goodwill completely excluded from capital after December
31, 1994. Since 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 total 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
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core (Tier 1) 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). 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 19, 1993, savings associations were required to
place these investments in the 100% risk-weight category.
FDICIA requires 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 mandates 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, on
February 22, 1994, the OTS published proposed rules to take
adequate account of credit concentration risk and the risk of non-
traditional activities. The OTS has not published final rules
implementing this provision of FDICIA. Since these proposed rules
are not yet final, it is not possible to assess their impact on the
Association.
Final OTS Interest Rate Risk Component. The OTS final rule adding
- - --------------------------------------
an interest rate risk component to its risk-based capital rule was
adopted on August 31, 1993 and 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 will be 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 interest rates. Net Portfolio Value
is essentially the economic 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
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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.
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 CAMEL 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 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 (unless it has a composite one
CAMEL rating) in order to be considered adequately capitalized.
The OTS has indicated that it plans to propose regulatory changes
and to reduce the minimum leverage ratio requirement from 4.0% to
3.0% on July 1, 1994, presumably to reduce the level required to be
adequately capitalized under the Prompt Corrective Action
Regulation. No notice of such proposed rulemaking has been issued
by the OTS. Under the requirements of FIRREA, the OTS' capital
standards can be no less stringent than those applicable to
national banks. A change in the minimum leverage requirement for
savings associations, therefore, may require a change in the
minimum leverage requirements for national banks.
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Prompt Corrective Action. Under the Prompt Corrective Action
provision 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 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 CAMEL
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
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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 Federal Deposit Insurance Corporation
(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 June 30, 1994,
Northeast Savings is a well-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 an adequately
capitalized institution until such time as the less than
satisfactory rating is corrected.
New Safety and Soundness Standards. FDICIA also requires that the
regulatory agencies, including the OTS and the FDIC, prescribe
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
28 <PAGE>
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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.
Limitation on Capital Distributions. The Prompt Corrective Action
regulation provides that a financial institution may not make a
capital distribution if it 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.
Further, the OTS has a Capital Distribution Regulation which also
governs capital distributions. The OTS 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 as 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
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requirement. The Association meets its fully phased-in regulatory
capital requirements and is a Tier 1 association.
Insurance of Deposits. The FDIC is the federal deposit insurance
administrator for both banks and savings associations. The FDIC
administers separate insurance funds, the Savings Association
Insurance Fund (SAIF) and the Bank Insurance Fund (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 requires that the FDIC
establish a risk-based deposit insurance premium system which was
effective as of January 1, 1994. In establishing such a system,
the FDIC is 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.
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 is determined on the basis of capital and supervisory
measures. For the capital measure, institutions are assigned to
one of three capital groups: well-capitalized, adequately
capitalized or undercapitalized. The first two groups are defined
by application of the capital ratio standards imposed under the
Prompt Corrective Action rule (discussed above). The third group
consists of those institutions not qualifying as well capitalized
or adequately capitalized. Within each group, institutions are
assigned to one of three supervisory subgroups: healthy,
supervisory concern, or substantial supervisory concern. The FDIC
assigns 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 determines
to be relevant to the institution's financial condition and the
risk posed to the insurance fund. The supervisory subgroup to
which an institution is assigned by the FDIC is confidential and
may not be disclosed. Under the rule, there are 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 is
assigned. A savings association's capital group is determined on
the basis of data reported in its thrift financial report as of the
date closest to June 30 or December 31 that includes the necessary
capital data. Northeast Savings is deemed to be a well-capitalized
association.
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On June 17, 1993, the FDIC adopted a final rule establishing a
risk-based deposit insurance premium assessment system to be
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. In the three months ended
June 30, 1994, SAIF deposit insurance premiums increased to $2.1
million from $1.6 million for the same three months last year.
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."
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.
In addition, insured depository institutions with total assets at
or above $500 million will also be 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
31<PAGE>
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access to outside counsel. The Association has surveyed the
members of the audit committee and determined that all members are
qualified under the rule.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
- - ----------------------------------------------
In November 1992, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (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. Based on the Company's analysis, the impact of SFAS
112 on the Company is not material.
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
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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, and two
Exposure Drafts of Proposed Statements of Financial Accounting
Standards, "Accounting by Creditors for Impairment of a Loan-Income
Recognition" and "Disclosure about Derivative Financial Instruments
and Fair Value of Financial Instruments."
SFAS 114 addresses the accounting by creditors for impairment of
certain loans and 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 was 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
33<PAGE>
<PAGE>
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, at June 30, 1994 and December 31, 1993, unrealized gains of
$5.2 million and $9.5 million, respectively, net of tax effect,
were recognized in stockholders' equity and increased the
Association's core capital by 16 basis points and 22 basis points,
respectively.
In March 1994, the FASB issued a proposed Statement of Financial
Accounting Standards, "Accounting by Creditors for Impairment of a
Loan-Income Recognition: An Amendment of FASB Statement 114" (the
proposed amendment). This proposed amendment would amend SFAS 114
to allow a creditor to use existing methods for recognizing
interest income on an impaired loan. It would accomplish that by
eliminating the provisions in SFAS 114 that describe how a creditor
should report income on an impaired loan.
This proposed amendment would not change the provisions in SFAS 114
that require a creditor to measure impairment 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
observable market price of the loan or the fair value of the
collateral if the loan is collateral dependent. As a result, this
proposed amendment generally would affect only the classification
of income (or expense) that results from changes in the net
carrying amount of the loan, not the total amount of income (or
expense) recognized.
This proposed amendment also would acknowledge that a creditor's
policies for recognizing interest income and for charging off loans
may result in a recorded investment in an impaired loan that is
less than the present value of expected future cash flows
discounted at the loan's effective interest rate (or the observable
market price of the loan or the fair value of the collateral). In
those cases, this proposed amendment would affect both the
classification and the total amount of income (or expense)
recognized.
This proposed amendment would amend the disclosure requirements in
SFAS 114 to require information about how a creditor recognizes
interest income related to impaired loans. This proposed
amendment, effective upon issuance, would have no impact on the
financial position or results of operation of the Company.
In April 1994, the FASB issued a proposed Statement of Financial
Accounting Standards, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments" (the proposed
Derivative Statement). This proposed Derivative Statement would
require improved disclosures about derivative financial instruments
34<PAGE>
<PAGE>
- - - futures, forward, swap, or option contracts, or other financial
instruments with similar characteristics. It also would amend
existing requirements of SFAS 105, "Disclosure of Information about
Financial Instruments with Off-Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk," and SFAS 107,
"Disclosures about Fair Value of Financial Instruments."
This proposed Derivative Statement would require disclosures about
amounts, nature, and terms of derivative financial instruments that
are not subject to SFAS 105 because they do not result in off-
balance-sheet risk of accounting loss. It would require that a
distinction be made between financial instruments held or issued
for the purpose of trading (including dealing or other activities
reported in a trading account and measured at fair value) and
financial instruments held or issued for purposes other than
trading. It also would amend SFAS 105 and 107 to require that
distinction in certain disclosures required by those Statements.
For derivative financial instruments held or issued for trading,
this proposed Derivative Statement would require disclosure of
average, maximum, and minimum aggregate fair values and of net
trading gains or losses. For derivative financial instruments held
or issued for purposes other than trading it would require
disclosure about those purposes, about how the instruments are
reported in financial statements, and - if the purpose is hedging
anticipated transactions - about the anticipated transactions, the
amounts of hedging gains and losses deferred, and the transactions
or other events that result in recognition of the deferred gains or
losses in income. This proposed Derivative Statement also would
encourage, but not require, quantitative information about interest
rate or other market risks of derivative financial instruments, and
also of other assets and liabilities, that is consistent with the
way the entity manages or adjusts risks and that is useful for
comparing the results of applying the entity's strategies to its
objectives for holding or issuing the derivative financial
instruments.
This proposed Derivative Statement would amend SFAS 107 to require
that fair value information be presented without combining,
aggregating, or netting the fair value of separate financial
instruments of a different class and be presented in one location,
together with the related carrying amounts, in a form that makes it
clear whether the amounts are favorable (assets) or unfavorable
(liabilities).
This proposed Derivative Statement would be effective for financial
statements issued for fiscal years ending after December 15, 1994,
except for entities with less than $150 million in total assets.
For those entities, the effective date would be for financial
statements issued for fiscal years ending after December 15, 1995.
Since the proposed Derivative Statements is a disclosure document
35<PAGE>
<PAGE>
only, it would have no impact on the financial position or results
of operation of the Company.
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 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.
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,
36<PAGE>
<PAGE>
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
a 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.
* 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.
37<PAGE>
<PAGE>
* 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 was 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. The adoption did not have
38<PAGE>
<PAGE>
a material effect on the results of operation or the financial
condition of the Company.
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,
not-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.
SELECTED RATIOS AND STATISTICS
- - ------------------------------
The Company's annualized return on average assets was .65% for the
quarter ended June 30, 1994, compared to (.94)% for the quarter
ended June 30, 1993. The annualized return on stockholders' equity
was 20.88% for the three months ended June 30, 1994, versus
(53.08)% for the same period in 1993.
For the six-month periods ended June 30, 1994 and 1993, the
Company's annualized return on average assets was .36% and (.47)%,
respectively. The annualized return on average stockholders'
equity for the same respective periods was 10.62% and (34.07)%.
39<PAGE>
<PAGE>
PART II
ITEM 1 - 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 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
40<PAGE>
<PAGE>
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 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 estimated with certainty, management does not anticipate that
any of these matters will result in the payment of damages by the
Association that, in the aggregate, would be material in relation
to the consolidated results of operations or financial position of
the Company.
ITEM 2 - CHANGES IN SECURITIES
- - ------------------------------
The ability of the Company to make capital distributions is
restricted by the OTS Capital Distribution Regulation, the Prompt
Corrective Action Regulation, and the Dividend Limitation Agreement
entered into in connection with the OTS approval of the holding
company reorganization. In general, the payment of dividends to
the holding company without prior OTS approval is prohibited 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 and
otherwise is subject to additional limitations as discussed more
fully in Management's Discussion and Analysis - "Regulations".
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
- - ----------------------------------------
None.
41<PAGE>
<PAGE>
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - ------------------------------------------------------------
At its annual meeting of stockholders held on May 20, 1994, the Company's
common stockholders voted to elect four directors to serve three-year terms.
The votes cast for each director nominee were as follows:
George J. Fantini, Jr. For 11,605,385 Withheld 301,359
Richard H. Gordon For 11,723,147 Withheld 183,359
George P. Rutland For 11,708,731 Withheld 198,013
John R. Silber For 11,702,120 Withheld 204,624
ITEM 5 - OTHER INFORMATION
- - --------------------------
None.
42<PAGE>
<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- - -----------------------------------------
(a) Exhibits required by Securities and Exchange Commission
Regulation S-K.
Exhibit
No.
- - -------
10. - Retirement Plan for Three-Year Term Outside Directors
11.1 - Computation of net income (loss) per common share
99.1 - Interest rate sensitivity analysis at June 30, 1994
99.2 - Average balance sheet for the three months ended
June 30, 1994 and 1993
99.3 - Rate/Volume analysis for the three months ended
June 30, 1994 and 1993
(b) Reports on Form 8-K
On June 15, the Company filed a Form 8-K announcing that
its Board of Directors has approved a definitive merger
agreement with Shawmut National Corp.
43<PAGE>
<PAGE>
Exhibit 10
NORTHEAST SAVINGS, F.A.
OUTSIDE DIRECTORS' RETIREMENT PLAN
----------------------------------
Section 1 - Purpose
- - -------------------
The purpose of the Director's Retirement Plan (the "Plan") is to
recognize the valuable services provided to Northeast Savings, F.A. (the
"Company") by its non-employee directors and to assist in retaining present
non-employee members and attracting new members to the board of directors,
by providing such directors with retirement benefits under the terms and
conditions set forth in this plan.
Section 2 - Eligibility
- - -----------------------
Any director shall be eligible to participate in the Plan who is
not an active employee of the Company upon termination of Board service
("active employee" shall mean an employee of the Company as determined for
purposes of the Company's qualified pension plan), and (i) is an active,
elected three-year term member of the Board on the effective date of the
Plan, or (ii) has completed at least two elected three year terms as a
Director.
Section 3 - Amount of Benefit
- - -----------------------------
(a) Each eligible Director shall be entitled to receive an
annual retirement benefit equal to $15,000 payable in
accordance with subsection 4(a).
(b) The term of such benefit shall be equal to the lesser
of (i) the cumulative period of full and partial years
of Board service determined in full calendar quarters,
or (ii) ten years.
Section 4 - Manner of Payment
- - -----------------------------
(a) The retirement benefit shall consist of a lump sum
payment pursuant to Section 3 payable upon the first
of the calendar quarter next following the Company's
first annual shareholder meeting subsequent to said
Director's attainment of age seventy (70).
(b) In the case of an eligible Director's death prior to
the commencement of benefit payments under subsection
4(a), the surviving spouse will be entitled to a lump
sum payment determined using the immediate rate
published by the Pension Benefit Guaranty Corporation
on January 1, for calculating lump sum benefits for
terminating plans (as outlined in the Company's
qualified pension plan) and with no mortality
assumption, equivalent to the payments specified under
44<PAGE>
<PAGE>
Exhibit 10 (cont.)
page 2
subsection 4(a) to be paid within thirty (30) days of
the Director's death. If the Director has no
surviving spouse, said lump sum payment will be
distributed to the Director's estate in accordance
with the laws of will and descent.
(c) The obligations of the Company hereunder constitute
merely the promise of the Company to make the payments
provided for in this Plan. No Director, his or her
spouse, or the estate of either of them shall have, by
reason of this Plan, any right, title, or interest of
any kind in or to any property of the Company. To the
extent any Director or surviving spouse has a right to
receive payments under this Plan, such right shall be
no greater than the right of any unsecured general
creditor of the Company.
Section 5 - Change of Control
- - -----------------------------
(a) In the case of a Change of Control, each eligible and
active Director as of the date of the Change of
Control shall be credited with additional calendar
quarters of Board service under subsection 3(b), with
this supplemental service credit determined as the
number of calendar quarters between the Change of
Control and the 30th of June next following the date
the Director is projected to attain age seventy (70).
This supplemental service credit is intended to
represent the period that each Director would have
served on the Board had there been no Change of
Control and the Director had been reelected and served
on the Board up to the mandatory retirement date for
Board service.
(b) In the case of a Change of Control, each eligible
Director shall receive, within ten (10) days prior to
the completion of the transaction a lump sum payment
equal to the actuarial present value of the benefit
specified under subsection 4(b) including any
applicable service credit under subsection 5(a). In
addition, any remaining benefit obligation under the
Plan, as determined under this subsection, that has
commenced distribution as of the Change of Control
shall also be paid to the applicable Director as a
lump sum payment of actuarial present value equal to
the remaining balance of the benefit due.
45<PAGE>
<PAGE>
Exhibit 10 (cont.)
page 3
(c) The Company or successor entity shall assume the
obligation for all payments specified under subsection
5(b) and any other obligations then in effect under
the Plan.
(d) A "Change of Control" shall mean an occurrence of
either (i) passage of a resolution of the Board
authorizing the Company to enter into an agreement
providing for the merger or consolidation of the
Company with or into another entity where the Company
is not the surviving entity, or providing for a sale
of substantially all of the assets of the Company, or
(ii) a single entity or individual becomes the
beneficial owner, directly or indirectly, or
securities of the Company which represent a percentage
of the voting power of the Company's then outstanding
securities sufficient to elect two or more designees
of such entity to the Board of the Company.
Section 6 - General Provisions
- - ------------------------------
(a) The right to receive any payment under the Plan shall
not be transferable or assignable.
(b) Benefit payments under the Plan shall be made from the
general assets of the Company, and the Company shall
not be required to set aside funds for the payment of
its obligations under the Plan.
(c) The actuarial assumptions for interest rate and
mortality tables to be applied in calculating lump sum
present value payments under the Plan shall be the
same as then specified in the Company's qualified
pension plan and such lump sum payment shall represent
full satisfaction of all obligations of the Company or
its successor(s) under the Plan.
(d) The Board may at any time preceding a Change of
Control amend or terminate the Plan, provided that no
amendment or termination shall impair the rights of an
eligible Director to receive the payments which would
have been made to such Director had the Plan not been
amended or terminated (based upon such Director's
service as a member of the Board to the date of such
Plan amendment or termination).
46<PAGE>
<PAGE>
Exhibit 10 (cont.)
page 3
(e) Nothing in the Plan shall be deemed to create any
obligations on the part of the Board to nominate any
Director for reelection by the Company.
(f) Any questions involving entitlement to payments under
the Plan shall be referred to the Board for
resolution. The determination of the Board shall be
conclusive as to any such questions. The Board may
obtain such advice or assistance as they deem
appropriate from persons not serving on the Board.
(g) As used in the Plan, "termination from Board service"
shall include any termination of service upon
attaining the mandatory retirement age of 70 or as
provided under Section 5(c) hereof, except for a
termination which the Board determines to have
involved Gross Cause. "Gross Cause" shall include
fraud, misappropriate of or other intentional
misconduct damaging to the property or business of the
Company or any of its subsidiaries or commission of a
felony. In the case of termination involving Gross
Cause, all benefits otherwise payable under the Plan
shall be forfeited.
Section 7 - Effective Date
- - --------------------------
The effective date of the Plan is June 1, 1994.
47<PAGE>
<PAGE>
<TABLE> Exhibit 11.1
NORTHEAST FEDERAL CORP.
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
(Dollars in Thousands, Except Per Share Amounts)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Primary income (loss) per common share:
Net income (loss)........................... $ 5,528 $ (9,432) $ 6,535 $ (9,291)
Preferred stock dividend requirements....... (874) (1,190) (1,729) (2,843)
---------- --------- ---------- ---------
Net income (loss) applicable to common
stockholders for the calculation of
primary income (loss)..................... $ 4,654 $ (10,622) $ 4,806 $ (12,134)
========== ========= ========== =========
Weighted average shares outstanding............. 13,526,567 9,847,146 13,518,088 7,810,480
Unallocated ESOP shares......................... (497,196) - (497,196) -
Dilutive effect of outstanding stock options.... 504,699 * 380,578 *
Dilutive effect of outstanding stock warrants... 513,041 * 436,372 *
---------- --------- ---------- ---------
Weighted average shares, as adjusted, for
the calculation of primary income (loss)...... 14,047,111 9,847,146 13,837,842 7,810,480
========== ========= ========== =========
Primary income (loss) per common share... $ .33 $ (1.08) $ .35 $ (1.55)
========== ========= ========== =========
Fully diluted income (loss) per common share:
Net income (loss)........................... $ 5,528 $ (9,432) $ 6,535 $ (9,291)
Preferred stock dividend requirements....... (874) (1,190) (1,729) (2,843)
Interest expense on convertible
subordinated debentures, net of tax....... - * - *
---------- --------- ---------- ---------
Net income (loss) applicable to common
stockholders for the calculation of
fully diluted income (loss)............... $ 4,654 $ (10,622) $ 4,806 $ (12,134)
========== ========= ========== =========
Weighted average shares outstanding............. 13,526,567 9,847,146 13,518,088 7,810,480
Unallocated ESOP shares......................... (497,196) - (497,196) -
Dilutive effect of outstanding stock options.... 515,677 * 390,767 *
Dilutive effect of outstanding stock warrants... 529,074 * 452,454 *
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 income (loss) 14,074,122 9,847,146 13,864,113 7,810,480
========== ========= ========== =========
Fully diluted income (loss) per common share.... $ .33 $ (1.08) $ .35 $ (1.55)
========== ========= ========= =========
<FN>
* The outstanding common stock equivalents (stock options) and the assumed conversions of
the convertible preferred stock and convertible subordinated debentures did not have a
dilutive effect on the computation of income (loss) per common share.
</TABLE>
The following table shows the computation of the adjusted weighted average
shares for use in analysis of fully diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding.............. 13,526,567 9,847,146 13,518,088 7,810,480
Unallocated ESOP shares.......................... (497,196) - (497,196) -
Dilutive effect of outstanding stock options..... 515,677 218,398 390,767 228,778
Dilutive effect of outstanding stock warrants.... 529,074 363,779 452,454 400,309
Dilutive effect of shares issuable from assumed:
Conversions of convertible preferred stock..... - 1,120,381 - 1,745,710
Convertible subordinated debentures............ - 26,940 - 26,940
---------- ---------- ---------- ----------
Weighted average shares, as adjusted............. 14,074,122 11,576,644 13,864,113 10,212,217
========== ========== ========== ==========
</TABLE>
48<PAGE>
<PAGE>
<TABLE> Exhibit 99.1
NORTHEAST FEDERAL CORP.
INTEREST RATE SENSITIVITY ANALYSIS
(Dollars in Thousands)
<CAPTION>
Interest Sensitivity Period
--------------------------------------------------------------------------------
Within 6 Months- Over 1- Over 5- Over 10
6 Months 1 Year 5 Years 10 Years Years Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1994
Interest-earning assets:
Interest-bearing deposits, federal funds
sold and investment securities, net.. $ 59,182 $ 37,133 $ 174,494 $ 44,073 $ 33,786 $ 348,668
Mortgage-backed securities, net........ 751,770 636,613 220,972 104,751 5,126 1,719,232
Loans, net:
Single-family residential real estate
loans:
Adjustable rate.................... 440,940 269,594 33,233 - - 743,767
Fixed rate......................... 16,124 9,290 47,993 23,495 9,263 106,165
Consumer loans ...................... 14,477 2,555 14,614 2,665 - 34,311
Income property loans................ 39,771 2,052 14,702 14,826 50 71,401
Rhode Island covered assets.......... 52,539 8,208 14,266 6,257 - 81,270
--------- --------- --------- --------- --------- ---------
Total interest-earning assets............ $1,374,803 $ 965,445 $ 520,274 $ 196,067 $ 48,225 $3,104,814
========= ========= ========= ========= ========= =========
Interest-bearing liabilities:
Deposits:
NOW and Super NOW accounts........... $ 47,567 $ 2,958 $ 21,117 $ 20,976 $ 71,748 $ 164,366
Money market deposit accounts........ 330,347 - - - - 330,347
Regular savings ..................... 170,790 6,150 43,912 43,620 149,200 413,672
Certificates of deposit.............. 918,665 178,199 361,722 93,727 - 1,552,313
--------- --------- --------- --------- --------- ---------
Total deposits 1,467,369 187,307 426,751 158,323 220,948 2,460,698
--------- --------- --------- --------- --------- ---------
Borrowings:
FHLB advances....................... 254,492 - 40,000 - - 294,492
Securities sold under agreements
to repurchase..................... 271,626 - - - - 271,626
Long term borrowings................ - - - - 40,296 40,296
Advance payment by borrowers for
taxes and insurance.................. - - - - 30,474 30,474
--------- --------- --------- --------- --------- ---------
Total borrowings................. 526,118 - 40,000 - 70,770 636,888
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities....... $1,993,487 $ 187,307 $ 466,751 $ 158,323 $ 291,718 $3,097,586
========= ========= ========= ========= ========= =========
Total interest-earning assets less
interest-bearing liabilities for
the period........................... $ (618,684) $ 778,138 $ 53,523 $ 37,744 $ (243,493) $ 7,228
Cumulative total interest-earning
assets less interest-bearing
liabilities.......................... $ (618,684) $ 159,454 $ 212,977 $ 250,721 $ 7,228 $ 7,228
Cumulative total interest-earning assets
less interest-bearing liabilities as
a percent of total assets............ (18.69)% 4.82% 6.43% 7.57% .22% .22%
<FN>
For purposes of the above Interest Rate Sensitivity Analysis:
* Fixed rate assets are scheduled by actual 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 accounts decay assumptions used have the effect of repricing $164.5 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 $11.6 million.
* Loans do not include non-accrual loans of $31.9 million.
* Retail deposits have been adjusted for the branch sales to occur in July for $62.1 million and in August for $41.4 million.
</TABLE>
50<PAGE>
<PAGE>
<TABLE> Exhibit 99.2
NORTHEAST FEDERAL CORP.
AVERAGE BALANCE SHEET
<CAPTION>
Three Months Ended June 30,
------------------------------------------------------------------
1994 1993
----------------------------- -----------------------------
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.......... $ 45,476 $ 612 5.38% $ 24,611 $ 187 3.04%
Investment securities, net........ 325,790 4,118 5.06 238,626 2,679 4.49
Mortgage-backed securities, net... 1,734,188 21,921 5.06 1,052,031 14,060 5.35
Loans, net:
Real estate..................... 896,351 14,035 6.26 2,231,473 34,672 6.22
Consumer........................ 35,210 766 8.70 44,306 1,003 9.06
Income property................. 73,210 1,541 8.42 78,195 1,675 8.57
--------- ------ --------- ------
Total loans................... 1,004,771 16,342 6.51 2,353,974 37,350 6.35
--------- ------ --------- ------
Rhode Island covered assets....... 96,549 1,578 6.54 125,777 2,400 7.63
--------- ------ --------- ------
Total interest-earning assets....... 3,206,774 44,571 5.56 3,795,019 56,676 5.97%
------ ------
All other assets.................... 184,345 228,235
--------- ---------
Total Assets.................. $3,391,119 $4,023,254
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
Interest-bearing liabilities:
Brokered deposits................. $ 11,233 $ 263 9.39% $ 25,269 $ 603 9.57%
Retail deposits:
Regular savings................. 511,131 2,643 2.07 655,184 3,848 2.36
NOWs, Super NOWs
and money market savings...... 588,481 3,053 2.08 669,075 3,995 2.39
Certificates.................... 1,735,398 20,410 4.72 1,754,393 22,123 5.06
--------- ------- --------- ------
Total deposits................ 2,846,243 26,369 3.72 3,103,921 30,569 3.95
--------- ------- --------- ------
Borrowings:
FHLB advances................... 148,005 1,737 4.71 372,643 3,435 3.70
Securities sold under
agreements to repurchase...... 171,219 1,760 4.12 293,905 2,429 3.31
Other borrowings................ 66,891 1,045 6.27 68,034 931 5.49
--------- ------- --------- ------
Total borrowings.............. 386,115 4,542 4.72 734,582 6,795 3.71
--------- ------- --------- ------
Total interest-bearing
liabilities..................... 3,232,358 30,911 3.84 3,838,503 37,364 3.90%
------- ------
All other liabilities............... 28,474 48,977
Stockholders' Equity................ 130,287 135,774
--------- ---------
Total Liabilities and
Stockholders' Equity........ $3,391,119 $4,023,254
========= =========
Net Interest Income................. $13,660 $19,312
====== ======
Interest Rate Spread................ 1.72% 2.07%
===== =====
Interest Rate Margin................ 1.69% 2.02%
===== =====
</TABLE>
51<PAGE>
<PAGE>
<TABLE> Exhibit 99.3
NORTHEAST FEDERAL CORP.
AVERAGE BALANCE SHEET
<CAPTION>
Six Months Ended June 30,
------------------------------------------------------------------
1994 1993
----------------------------- -----------------------------
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.......... $ 50,016 $ 1,154 4.61% $ 23,846 $ 386 3.24%
Investment securities, net........ 268,083 6,334 4.73 245,762 6,155 5.01
Mortgage-backed securities, net... 1,580,049 38,746 4.90 977,322 26,908 5.51
Loans, net:
Real estate..................... 1,302,329 39,215 6.02 2,223,470 70,383 6.33
Consumer........................ 35,114 1,519 8.65 46,030 2,034 8.84
Income property................. 72,331 2,991 8.27 80,931 3,486 8.61
--------- ------- --------- -------
Total loans................... 1,409,774 43,725 6.20 2,350,431 75,903 6.46
--------- ------- --------- -------
Rhode Island covered assets....... 99,684 3,302 6.62 132,083 4,646 7.03
--------- ------- --------- -------
Total interest-earning assets....... 3,407,606 93,261 5.47% 3,729,444 113,998 6.11%
------- -------
All other assets.................... 197,750 231,125
--------- ---------
Total Assets.................. $3,605,356 $3,960,569
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
Interest-bearing liabilities:
Brokered deposits................. $ 18,243 $ 860 9.51% $ 25,300 $ 1,200 9.56%
Retail deposits:
Regular savings................. 539,615 5,701 2.13 667,942 8,244 2.49
NOWs, Super NOWs
and money market savings...... 603,302 6,246 2.09 669,098 8,273 2.49
Certificates.................... 1,737,178 40,425 4.69 1,775,506 45,203 5.13
--------- ------- --------- -------
Total deposits................ 2,898,338 53,232 3.70 3,137,846 62,920 4.04
--------- ------- --------- -------
Borrowings:
FHLB advances................... 240,579 4,846 4.06 291,425 5,538 3.83
Securities sold under
agreements to repurchase...... 234,968 4,293 3.68 287,918 4,789 3.35
Other borrowings................ 64,664 2,018 6.29 64,665 1,812 5.65
--------- ------- --------- -------
Total borrowings.............. 540,211 11,157 4.16 644,008 12,139 3.80
--------- ------- --------- -------
Total interest-bearing
liabilities..................... 3,438,549 64,389 3.78 3,781,854 75,059 4.00%
------- -------
All other liabilities............... 35,635 41,959
Stockholders' Equity................ 131,172 136,756
--------- ---------
Total Liabilities and
Stockholders' Equity........ $3,605,356 $3,960,569
========= =========
Net Interest Income................. $ 28,872 $ 38,939
======= =======
Interest Rate Spread................ 1.69% 2.11%
===== =====
Interest Rate Margin................ 1.66% 2.05%
===== =====
</TABLE>
52<PAGE>
<TABLE>
Exhibit 99.4
NORTHEAST FEDERAL CORP.
RATE/VOLUME ANALYSIS
<CAPTION>
Three Months Ended
------------------------------------------------
June 30, 1994 vs. June 30, 1993
------------------------------------------------
Amount of Increase
(Decrease) Due to Change in:
------------------------------------------------
Volume Rate Rate/Volume Total
---------- --------- ----------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Interest income:
Interest-bearing deposits
and federal funds sold............... $ 159 $ 144 $ 122 $ 425
Investment securities, net............. 979 337 123 1,439
Mortgage-backed securities, net........ 9,117 (762) (494) 7,861
Loans, net:
Single-family residential real
estate............................. (20,745) 268 (160) (20,637)
Consumer............................. (206) (39) 8 (237)
Income property...................... (107) (29) 2 (134)
-------- ------- ------ --------
Total loans...................... (21,058) 200 (150) (21,008)
-------- ------- ------ --------
Rhode Island covered assets.......... (558) (344) 80 (822)
-------- ------- ------ --------
Total interest income.......... (11,361) (425) (319) (12,105)
-------- ------- ------ --------
Interest expense:
Deposits:
Brokered deposits.................... (335) (11) 6 (340)
Retail deposits:
Regular savings.................... (846) (460) 101 (1,205)
NOWs, Super NOWs and money
market savings................... (481) (524) 63 (942)
Certificates....................... (240) (1,490) 17 (1,713)
-------- ------- ------ --------
Total deposits................... (1,902) (2,485) 187 (4,200)
-------- ------- ------ --------
Borrowings:
FHLB advances........................ (2,071) 938 (565) (1,698)
Securities sold under
agreements to repurchase........... (1,014) 592 (247) (669)
Other borrowings..................... (16) 132 (2) 114
-------- ------- ------ --------
Total borrowings................... (3,101) 1,662 (814) (2,253)
-------- ------- ------ --------
Total interest expense......... (5,003) (823) (627) (6,453)
-------- ------- ------ --------
Change in net interest income............ $ (6,358) $ 398 $ 308 $ (5,652)
======== ======= ======= =======
</TABLE>
53<PAGE>
<PAGE>
<TABLE>
Exhibit 99.5
NORTHEAST FEDERAL CORP.
RATE/VOLUME ANALYSIS
<CAPTION>
Six Months Ended
------------------------------------------------
June 30, 1994 vs. June 30, 1993
------------------------------------------------
Amount of Increase
(Decrease) Due to Change in:
------------------------------------------------
Volume Rate Rate/Volume Total
---------- --------- ----------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Interest income:
Interest-bearing deposits
and federal funds sold............... $ 424 $ 164 $ 180 $ 768
Investment securities, net............. 559 (348) (32) 179
Mortgage-backed securities, net........ 16,595 (2,942) (1,815) 11,838
Loans, net:
Single-family residential real
estate............................. (29,158) (3,431) 1,421 (31,168)
Consumer............................. (482) (43) 10 (515)
Income property...................... (370) (139) 14 (495)
-------- ------- ------ --------
Total loans...................... (30,010) (3,613) 1,445 (32,178)
-------- ------- ------ --------
Rhode Island covered assets.......... (1,140) (271) 67 (1,344)
-------- ------- ------ --------
Total interest income.......... (13,572) (7,010) (155) (20,737)
-------- ------- ------ --------
Interest expense:
Deposits:
Brokered deposits.................... (335) (7) 2 (340)
Retail deposits:
Regular savings.................... (1,584) (1,187) 228 (2,543)
NOWs, Super NOWs and money
market savings................... (814) (1,346) 133 (2,027)
Certificates....................... (976) (3,886) 84 (4,778)
-------- ------- ------ --------
Total deposits................... (3,709) (6,426) 447 (9,688)
-------- ------- ------ --------
Borrowings:
FHLB advances........................ (966) 332 (58) (692)
Securities sold under
agreements to repurchase........... (881) 471 (86) (496)
Other borrowings..................... - 206 - 206
-------- ------- ------ --------
Total borrowings................... (1,847) 1,009 (144) (982)
-------- ------- ------ --------
Total interest expense......... (5,556) (5,417) 303 (10,670)
-------- ------- ------ --------
Change in net interest income............ $ (8,016) $ (1,593) $ (458) $(10,067)
======== ======= ======= =======
</TABLE>
53<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHEAST FEDERAL CORP.
-----------------------------------
Registrant
July 25, 1994 /s/ LYNNE M. CARCIA
------------------------------------
Lynne M. Carcia
Senior Vice President and Controller
(Principal Accounting Officer)
54
