<PAGE>
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 September 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 October 21, 1994.
Common Stock, $.01 par value -- 13,553,970
<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 nine months ended
September 30, 1994 and 1993.................... 1
Consolidated Statement of Financial Condition
at September 30, 1994, December 31, 1993, and
September 30, 1993............................. 2
Consolidated Statement of Cash Flows
for the nine months ended September 30, 1994
and 1993....................................... 3
Notes to the Consolidated Financial Statements...... 4-5
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition for the Fiscal
Quarter Ended September 30, 1994.................... 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................... 27
Item 2. Changes in Securities............................... 29
Item 3. Defaults Upon Senior Securities..................... 29
Item 4. Submission of Matters to a Vote of Security Holders. 29
Item 5. Other Information................................... 29
Item 6. Unaudited Exhibits and Reports on Form 8-K.......... 30
<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 Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income:
Loans........................................... $ 16,645 $ 36,141 $ 60,370 $ 112,044
Mortgage-backed securities...................... 24,780 13,685 63,526 40,593
Investment securities........................... 4,388 2,470 10,722 8,625
Rhode Island covered assets..................... 1,708 2,331 5,010 6,977
Other........................................... 472 389 1,626 775
--------- --------- --------- ---------
Total interest income........................ 47,993 55,016 141,254 169,014
--------- --------- --------- ---------
Interest expense:
Deposits........................................ 23,510 29,899 76,742 92,819
Federal Home Loan Bank advances................. 2,889 3,940 7,735 9,478
Other borrowings................................ 6,691 3,436 13,002 10,037
--------- --------- --------- ---------
Total interest expense....................... 33,090 37,275 97,479 112,334
--------- --------- --------- ---------
Net interest income........................ 14,903 17,741 43,775 56,680
Provision for loan losses.......................... 1,000 3,450 3,800 20,300
--------- --------- --------- ---------
Net interest income after provision
for loan losses........................... 13,903 14,291 39,975 36,380
--------- --------- --------- ---------
Non-interest income:
Fees for services............................... 2,747 2,594 5,572 7,732
Gain on sale of securities, net................. 2,362 254 6,649 4,705
Gain (loss) on sale of loans, net............... (56) 866 13,849 1,564
Other non-interest income....................... 470 18 9,566 53
--------- --------- --------- ---------
Total non-interest income.................... 5,523 3,732 35,636 14,054
--------- --------- --------- ---------
Non-interest expenses:
Compensation and benefits....................... 6,320 7,988 20,853 24,582
Occupancy and equipment, net.................... 3,315 3,898 13,108 11,945
Other general and administrative................ 4,032 4,862 13,202 14,350
SAIF insurance fund and OTS assessments......... 2,073 2,429 6,709 5,985
Real estate and other assets acquired in settle-
ment of loans................................. 958 3,276 12,917 14,894
--------- --------- --------- ---------
Total non-interest expenses.................. 16,698 22,453 66,789 71,756
--------- --------- --------- ---------
Income (loss) before income taxes......... 2,728 (4,430) 8,822 (21,322)
Income tax expense (benefit)....................... 146 (2,526) (295) (10,127)
--------- --------- --------- ---------
Net income (loss)......................... $ 2,582 $ (1,904) $ 9,117 $ (11,195)
========= ========= ========= =========
Preferred stock dividend requirements.............. $ 892 $ 820 $ 2,621 $ 3,663
Net income (loss) applicable to common stockholders $ 1,690 $ (2,724) $ 6,496 $ (14,858)
Net income (loss) per common share:
Primary and fully diluted....................... $ .12 $ (.20) $ .46 $ (1.53)
<FN>
See accompanying Notes to the Consolidated Financial Statements
/TABLE
<PAGE>
<PAGE>
<TABLE>
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(In Thousands Except Share Amounts)
<CAPTION>
September 30, December 31, September 30,
------------- ------------ -------------
1994 1993 1993
------------- ------------ -------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks........................... $ 26,881 $ 51,705 $ 34,920
Interest-bearing deposits......................... - - 25
Federal funds sold................................ 4,270 23,510 2,300
Securities purchased under agreements to resell... - 60,000 -
Investment securities, net........................ 205,178 42,612 47,949
Investment securities, available-for-sale, net.... 140,751 162,854 158,028
Mortgage-backed securities, net................... 1,756,200 1,330,886 1,056,066
Mortgage-backed securities, available for sale,
net............................................. 22,964 12,886 13,022
Loans, net........................................ 961,755 1,876,181 2,276,087
Loans available-for-sale, net..................... 4,975 46,076 40,263
Rhode Island covered assets....................... 86,826 105,625 112,030
Interest and dividends receivable................. 17,190 17,540 18,262
Real estate and other assets acquired in settle-
ment of loans................................... 16,725 74,962 73,172
Premises and equipment, net....................... 27,279 32,368 32,638
Prepaid expenses and other assets................. 78,711 82,822 77,959
--------- --------- ---------
Total assets............................... $3,349,705 $3,920,027 $3,942,721
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Retail deposits................................... $2,375,460 $2,952,082 $2,988,457
Brokered deposits................................. - 25,135 25,714
Federal Home Loan Bank advances................... 262,892 373,000 388,000
Securities sold under agreements to repurchase.... 468,728 294,809 294,809
Uncertificated debentures......................... 40,305 38,442 36,675
Advance payments by borrowers for taxes and
insurance....................................... 22,802 28,337 25,544
Other liabilities................................. 44,386 75,709 57,731
--------- --------- ---------
Total liabilities.......................... 3,214,573 3,787,514 3,816,930
--------- --------- ---------
Commitments and Contingencies
Stockholders' equity:
Serial preferred stock, $.01 par value,
15,000,000 shares authorized:
$8.50 Cumulative Preferred Stock, Series B,
419,868 shares at September 30, 1994 and
394,199 shares at December 31, 1993 and
385,996 shares at September 30, 1993
issued and outstanding....................... 4 4 4
Common stock, $.01 par value, 25,000,000 shares
authorized: 13,553,970 shares at September 30,
1994, 13,499,078 shares at December 31, 1993
and 13,488,025 shares at September 30, 1993
issued and outstanding......................... 136 135 135
Additional paid-in capital....................... 188,673 185,960 185,099
Net unrealized gain on debt and equity securities 2,330 9,462 -
Accumulated deficit.............................. (53,061) (59,557) (55,775)
Stock dividend distributable..................... 892 838 820
Unallocated employee stock ownership plan
shares......................................... (3,842) (4,329) (4,492)
--------- --------- ---------
Total stockholders' equity................. 135,132 132,513 125,791
--------- --------- ---------
$3,349,705 $3,920,027 $3,942,721
========= ========= =========
<FN>
See accompanying Notes to the Consolidated Financial Statements
/TABLE
<PAGE>
<PAGE>
<TABLE>
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1994 1993
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).............................................. $ 9,117 $ (11,195)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.............................. 4,352 3,933
Amortization of fees, discounts, and premiums, net......... 6,658 169
Provision for loan losses.................................. 3,800 20,300
Provision for losses on REO................................ 9,579 8,760
Gain on sale of securities................................. (6,649) (4,731)
Gain on sale of loans...................................... (13,849) (1,564)
Loss on sale of other assets............................... 164 255
Loss on early extinguishment of debt....................... - 26
Gain on sale of branches................................... (9,695) -
Decrease in interest and dividends receivable.............. 350 3,080
Loans available-for-sale, originated....................... (65,547) (153,397)
Proceeds from sales of loans available-for-sale............ 103,377 148,182
Increase (decrease) in accrued interest payable on deposits (770) 123
(Increase) decrease in prepaid expenses and other assets... 4,111 (3,236)
Increase (decrease) in other liabilities................... (24,105) 6,174
---------- ----------
Total adjustments....................................... 11,776 28,074
---------- ----------
Net cash provided by operating activities............. 20,893 16,879
---------- ----------
Cash flows from investing activities:
Loans originated........................................... (124,726) (427,735)
Net decrease in loans due to sale of branches.............. 1,805 -
Proceeds from sales of loans............................... 843,578 11,484
Principal collected on loans............................... 177,859 299,000
Net decrease in Rhode Island covered assets................ 18,799 39,798
Purchases of mortgage-backed securities.................... (718,206) (320,017)
Purchases of mortgage-backed securities available-for-sale. (14,131) -
Proceeds from sales of mortgage-backed securities
available-for-sale....................................... - 39,831
Principal collected on mortgage-backed securities.......... 309,455 149,251
Purchases of investment securities......................... (167,611) -
Proceeds from sales of investment securities............... - 15,015
(Purchases) redemptions of FHLB stock...................... (487) 554
Proceeds from maturities of investment securities.......... 5,396 8,805
Purchases of investment securities available-for-sale...... (337,649) (200,583)
Proceeds from sales of investment securities
available-for-sale....................................... 286,332 126,229
Proceeds from maturities of investment securities
available-for-sale...................................... 68,057 87,539
Proceeds from sales of real estate and other assets
acquired in settlement of loans......................... 58,587 65,484
Net (purchases) sales of premises and equipment............ 367 (2,568)
---------- ----------
Net cash provided by (used in) investing activities... 407,425 (107,913)
---------- ----------
Cash flows from financing activities:
Net decrease in retail deposits............................ (63,366) (216,741)
Sale of deposits........................................... (503,113) -
Net decrease in brokered deposits.......................... (24,813) -
Increase (decrease) in advance payments by borrowers for
taxes and insurance..................................... (5,535) 3,810
Increase in securities sold under agreements to repurchase. 173,919 3,795
Net increase in short-term FHLB advances................... 36,492 70,000
Proceeds from long-term FHLB advances...................... 6,400 213,000
Repayments of long-term FHLB advances...................... (153,000) (35,000)
Retirement of convertible subordinated debentures.......... - (586)
Reduction of ESOP debt guarantee........................... 384 486
Preferred Stock Conversion costs........................... - (1,401)
Issuance of 401-K stock shares............................. 115 188
Proceeds from exercise of stock options.................... 135 140
---------- ----------
Net cash provided by (used) in financing activities... (532,382) 37,691
---------- ----------
Net decrease in cash and cash equivalents.................. (104,064) (53,343)
Cash and cash equivalents at beginning of period........... 135,215 90,588
---------- ----------
Cash and cash equivalents at end of period................. $ 31,151 $ 37,245
========== ==========
<FN>
See accompanying Notes to the Consolidated Financial Statements
/TABLE
<PAGE>
<PAGE>
NORTHEAST FEDERAL CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1994
1) Presentation of Financial Information
-------------------------------------
The unaudited consolidated financial statements presented
herein should be read in conjunction with the consolidated
financial statements of Northeast Federal Corp. for the year
ended December 31, 1993, as presented in the Annual Report on
Form 10-K. In the opinion of management, the accompanying
financial information reflects all adjustments, consisting
only of normal recurring adjustments, necessary for a fair
presentation of the financial condition and results of
operations of Northeast Federal Corp. in conformity with
generally accepted accounting principles. Certain reclassi
fications have been made to prior year's financial statements
to conform to the September 30, 1994 presentation.
2) Supplemental Disclosure of Cash Flow Information
------------------------------------------------
For purposes of the consolidated statement of cash flows, cash
and due from banks, interest-bearing deposits, and federal
funds sold, if any, are considered cash and cash equivalents.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1994 1993
------------ -----------
(In Thousands)
<S> <C> <C>
Cash paid during the periods for:
Interest on retail deposits........................ $ 76,330 $ 91,466
Interest on brokered deposits...................... 1,182 1,231
Interest on borrowings............................. 20,634 17,730
Income taxes....................................... 633 1,784
Cash received during the periods for:
Interest and dividends............................. 141,604 172,094
Non-cash items:
Loans securitized into mortgage-backed securities... 20,402 53,964
Transfers of loans to (from) available-for-sale..... (1,839) 1,777
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.......................................... 9,934 48,296
Payment in kind on uncertificated debentures........ 1,843 1,688
Payment in kind on Series B preferred stock......... 2,567 3,430
Conversion of $2.25 cumulative convertible
preferred stock................................... - 38,339
Net unrealized gains on debt and equity securities
available-for-sale................................ (12,296) -
</TABLE>
<PAGE>
<PAGE>
NORTHEAST FEDERAL CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1994
3) Commitments and Contingencies
-----------------------------
At September 30, 1994, outstanding commitments to originate
adjustable rate and fixed rate mortgage loans amounted to
$8.1 million and $3.8 million, respectively. At
September 30, 1994, Northeast Savings, F.A. also had
commitments to originate $1.9 million in home equity loans,
$1.1 million in income property loans, and $5.6 million in
residential construction loans, and to fund $17.5 million in
unused consumer credit lines and $8.3 million in undisbursed
residential construction loans. In addition, at September 30,
1994, Northeast Savings, F.A. also had commitments to buy
$26.0 million of mortgage-backed securities and commitments to
sell $3.2 million of loans available-for-sale.
Northeast Savings, F.A. is involved in litigation arising in
the normal course of business. Although the legal
responsibility and financial impact with respect to such
litigation cannot presently be ascertained, management does
not anticipate that any of these matters will result in the
payment of damages by Northeast Savings, F.A. that, in the
aggregate, would be material in relation to the consolidated
results of operation or financial position of Northeast
Federal Corp.
4) Significant Transactions
------------------------
As previously mentioned, the Company has signed a definitive
agreement for the acquisition of Northeast Federal Corp. and
Northeast Savings by Shawmut National Corp. Shawmut is
expected to file applications for regulatory approval of the
merger during the fourth quarter of 1994. The shareholders'
meeting to vote on the merger most likely will be scheduled in
the first quarter of 1995. The agreements are discussed
further in Management's Discussion and Analysis of Results of
Operations and Financial Condition.
<PAGE>
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION FOR THE FISCAL QUARTER ENDED
SEPTEMBER 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.
As previously announced, 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 $26.24. Shawmut is expected to file applications for
regulatory approval of the merger during the fourth quarter of
1994. Northeast now anticipates that shareholders will receive
proxy materials relating to its acquisition in the fourth quarter.
The shareholders' meeting to vote on the merger most likely will be
scheduled in the first quarter of 1995. 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.
As previously announced, in July and August 1994, the Company also
sold its four San Diego, California branches and its single branch
on Cape Cod with total deposits of $102.0 million.
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
and remained well-capitalized at September 30, 1994. During the
quarter, the Company's core capital ratio improved to 5.18% at
September 30, 1994, compared to 4.07% at September 30, 1993.
Tangible core capital and risk-based capital have improved to 5.18%
and 15.23% at September 30, 1994 compared to 4.06% and 10.22% at
September 30, 1993.
RESULTS OF OPERATIONS
- ---------------------
Northeast Federal had a net income of $2.6 million for the three
months ended September 30, 1994, resulting in a primary and fully
diluted net income per common share of $0.12 after preferred stock
<PAGE>
dividend requirements. For the same quarter in 1993, the Company
reported a net loss of $1.9 million or a primary and fully diluted
net loss per common share of $0.20 after preferred stock dividend
requirements.
Northeast Federal had net income of $9.1 million for the nine
months ended September 30, 1994, resulting in a primary and fully
diluted net income per common share of $0.46 after preferred stock
dividend requirements. This net income for the first three
quarters of 1994 compares to projections made by the Company in May
1994 that it would earn between $9 and $11 million in 1994 or $0.40
to $0.50 per common share after preferred stock dividend
requirements. The Company has not revised its earnings projection
for 1994 and expects results for the twelve months ended
December 31, 1994 to be within the high end of the range previously
announced.
Interest Income and Expense
- ---------------------------
Total interest income was $48.0 million and $55.0 million for the
quarters ended September 30, 1994 and 1993, respectively. The
decrease in total interest income was due primarily to a decrease
in average interest-earning assets to $3.2 billion from $3.8
billion for the quarters ended September 30, 1994 and 1993,
respectively, offset by an increase of 22 basis points in the
weighted average yield earned on interest-earning assets, to 6.02%
for the quarter ended September 30, 1994 from 5.80% for the same
quarter in 1993. In addition, the decrease in total interest
income was impacted by a shift in the composition of the Company's
assets. For the quarter ended September 30, 1993, single-family
residential real estate loans earning an average rate of 6.01%,
comprised 58.8% of average earning assets, while mortgage-backed
securities, earning an average rate of 5.02%, made up only 28.7% 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 September 30, 1994, single-
family residential real estate loans earning an average rate of
6.51% comprised only 27.4% of average earning assets, while
mortgage-backed securities earning an average of 5.64% totaled
55.0% of average earning assets.
Total interest expense was $33.1 million for the three months ended
September 30, 1994, compared to $37.3 million for the same three
months in the previous year. Total interest expense was lower due
primarily from a decrease in average interest-bearing liabilities
to $3.2 billion from $3.8 billion for the quarters ended September
30, 1994 and 1993, respectively, offset by an increase of 28 basis
<PAGE>
points in the cost of funds to 4.13% for the quarter ended
September 30, 1994 from 3.85% for the same quarter in 1993.
Net interest income totaled $14.9 million for the quarter ended
September 30, 1994, $2.8 million lower than the $17.7 million
reported for the same quarter of the previous year. The interest
rate spread also decreased, averaging 1.89% for the three months
ended September 30, 1994, compared to 1.95% for the three months
ended September 30, 1993. Net interest rate margins for the three-
month periods ended September 30, 1994 and 1993 were 1.91% and
1.90%, 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
September 30, 1994 was $1.0 million, compared to $3.5 million for
the quarter ended September 30, 1993. The decrease in the
provision was due primarily to a securitization of $337 million in
single-family residential loans in November 1993 and 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 these transactions, virtually all of
the Company's California loans were sold and the single-family
residential loan portfolio decreased to $865.0 million at September
30, 1994. Net charge-offs for the quarter ended September 30, 1994
were $905,000 compared to $3.2 million for the quarter ended
September 30, 1993, due primarily to the reduced risk in the
portfolio. At September 30, 1994 and December 31 and September 30,
1993, non-accrual loans totaled $30.5 million, $67.5 million, and
$72.7 million.
<PAGE>
The allowance for loan losses at September 30, 1994 was $11.7
million, compared to $28.2 million at September 30, 1993. The
activity in the allowance for loan losses for the three months
ended September 30, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
Three Months
Ended September 30,
------------------------
1994 1993
---------- ----------
(Dollars in Thousands)
<S> <C> <C>
Balance, beginning of period...................... $11,603 $28,019
Provision for loan losses......................... 1,000 3,450
Charge-offs:
Single-family residential real estate loans..... (926) (3,239)
Consumer loans.................................. (39) (86)
Income property loans........................... (20) -
------ ------
Total charge-offs............................. (985) (3,325)
------ ------
Recoveries:
Single-family residential real estate loans..... - -
Consumer loans.................................. 77 83
Income property loans........................... 3 -
------ ------
Total recoveries.............................. 80 83
------ ------
Net charge-offs................................... (905) (3,242)
------ ------
Balance, end of period............................ $11,698 $28,227
====== ======
Ratio of net charge-offs during the period to
average loans outstanding during the period:
Single-family residential real estate loans..... .11% .15%
Consumer loans.................................. (.11) .01
Income property loans........................... .02 -
----- -----
Total net charge-offs during the period to
average loans outstanding during the
period...................................... .09% .14%
===== =====
</TABLE>
In addition to the impact of the $337 million securitization and
$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.
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 September 30, 1994, based on the quality of the loan portfolio
at that date, further additions to the allowance may be necessary
if a change in market conditions were to occur.
<PAGE>
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>
September 30, December 31, September 30,
--------------- --------------- ----------------
1994 1993 1993
--------------- --------------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Single-family residential real estate
loans................................. $ 8,844 1.08% $25,751 1.47% $25,319 1.21%
Consumer loans.......................... 300 0.80 300 .85 300 .77
Income property loans................... 2,066 2.65 800 1.11 1,000 1.27
Unallocated............................. 488 * 1,420 * 1,608 *
------ ---- ------ ---- ------ -----
Total allowance..................... $11,698 1.20% $28,271 1.45% $28,227 1.20%
====== ==== ====== ==== ====== =====
<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.
</FN>
</TABLE>
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>
September 30, December 31, September 30,
------------- ------------ -------------
1994 1993 1993
------------- ------------ -------------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accrual loans:
Single-family residential real estate. $ 28,227 $ 65,770 $ 69,159
Consumer.............................. 1,070 1,315 1,381
Income property....................... 1,184 377 2,189
---------- ---------- --------
Total non-accrual loans............. 30,481 67,462 72,729
---------- ---------- --------
REO:
Single-family residential............. 11,420 57,165 57,281
Hotels................................ - 6,453 6,398
Apartment building.................... - 5,270 4,468
Office and industrial
complexes, land..................... 3,088 3,357 2,441
Real estate brokerage operations...... 1,413 1,744 1,957
Residential subdivisions.............. 804 973 627
---------- ---------- ---------
Total REO........................... 16,725 74,962 73,172
---------- ---------- ---------
Total non-performing assets......... $ 47,206 $ 142,424 $ 145,901
========== ========== =========
Restructured loans...................... $ - $ 1,641 $ 2,749
========== ========== =========
Total non-accrual loans as a percent of
total gross loans receivable.......... 3.08% 3.44% 3.09%
==== ==== ====
Total non-performing assets as a
percent of total assets............... 1.41% 3.63% 3.70%
==== ==== ====
</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.
<PAGE>
At September 30, 1994 and December 31 and September 30, 1993, the
Association had no loans more than ninety days past due on which it
was accruing interest.
At September 30, 1994, December 31 and September 30, 1993, non-
accrual loans were $30.5 million, $67.5 million, and $72.7 million,
respectively. The decrease in non-accrual loans between
December 31, 1993 and September 30, 1994 was due primarily to the
March 1994 loan sale as well as an overall decline in
delinquencies. The decreases in non-accrual loans between
September 30, 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 September 30, 1994
and December 31 and September 30, 1993, single-family residential
non-accrual loans were 92.6%, 97.5%, and 95.1%, respectively, of
total non-accrual loans.
Activity within the non-accrual loan portfolio was as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------------
1994 1993
------------------ ------------------
(In Thousands)
<S> <C> <C>
Beginning balance..................... $ 31,885 $ 81,882
New non-performing loans.............. 5,203 17,715
Net charge-offs....................... (10) (67)
Returned to accrual status............ (1,127) (4,293)
Loan sales............................ - (3,870)
Payoffs............................... (4,595) (5,499)
Transfers to REO through foreclosure.. (875) (13,139)
------- -------
Ending balance........................ $ 30,481 $ 72,729
======= =======
</TABLE>
The allowance for loan losses as a percentage of non-accrual loans
by loan category is as follows:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
------------- ------------ -------------
1994 1993 1993
------------- ------------ -------------
<S> <C> <C> <C>
Single-family residential real estate*........ 33.06% 41.31% 38.93%
Consumer...................................... 28.04 22.81 21.72
Income property............................... 174.49 212.20 45.68
------ ------ ------
Total allowance to total non-accrual loans.. 38.38% 41.91% 38.81%
====== ====== ======
<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.
</FN>
</TABLE>
The decrease in the ratio for single-family residential real estate
from December 31, 1993 to September 30, 1994 was due to the lower
credit risk in the portfolio, resulting from the aforementioned
securitization and loan sale which included $40.5 million of non-
accrual loans. While the portion of the allowance allocated to
income property loans increased from $800,000 at December 31, 1993
to $2.1 million at September 30, 1994, the ratio related to income
property loans decreased due to a $900,000 loan which went into
non-accrual status during the quarter ended September 30, 1994.
<PAGE>
Real estate and other assets acquired in settlement of loans. REO
- ------------------------------------------------------------
was $16.7 million, $75.0 million, and $73.2 million at
September 30, 1994 and December 31 and September 30, 1993,
respectively. The $58.2 million decrease in REO from
December 31, 1993 to September 30, 1994 was due to sales of
California single-family residential REO totaling $41.1 million,
including three single transaction sales totaling $27.2 million,
the sale of two hotels included in income property REO totaling
$6.0 million, as well as to other REO sales, and a decrease in the
level of foreclosures. Included in income property REO of $3.9
million at September 30, 1994 were an industrial building, one
retail/commercial office, one single-family residential
subdivision, 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
September 30,
---------------------
1994 1993
-------- --------
<S> <C> <C>
Beginning balance.............. $ 26,568 $ 96,423
Foreclosures, net.............. 875 13,139
Capitalized expenses........... 397 375
Less:
Sales........................ (10,030) (35,743)*
Valuation adjustments........ (496) (1,058)
Mortgage insurance receipts.. (48) (124)
Other........................ (541) 160
------- -------
Ending balance................. $ 16,725 $ 73,172
======= =======
<FN>
* During the quarter ended September 30, 1993, $30.3
million of REO was sold in a single transaction. The
total loss on the sale was $6.8 million, which was
partially offset by a provision of $6.0 million record-
ed in June in anticipation of the sale. Excluding this
sale, sales of REO for the quarter ended September 30,
1993 totaled $11.4 million.
</FN>
</TABLE>
<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>
September 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.... $ 17,184 $ 3,778 $ 28,227 $ 49,189 $ 30,497 $ 13,139 $ 65,770 $109,406
Consumer.............. 590 73 1,070 1,733 438 82 1,315 1,835
Income property....... - - 1,184 1,184 2,825 993 377 4,195
------- ------- ------- ------- ------- ------- ------- -------
Total.............. $ 17,774 $ 3,851 $ 30,481 $ 52,106 $ 33,760 $ 14,214 $ 67,462 $115,436
======= ======= ======= ======= ======= ======= ======= =======
Percent of total gross
loan portfolio...... 1.80% .39% 3.08% 5.27% 1.72% .73% 3.44% 5.89%
======= ======= ======= ======= ======= ======= ======= =======
Percent of total
assets.............. .53% .11% .91% 1.56% .86% .36% 1.72% 2.94%
======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
September 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.... $ 39,343 $ 11,749 $ 69,159 $120,251
Consumer.............. 345 234 1,381 1,960
Income property....... 37 920 2,189 3,146
------- ------- ------- -------
Total.............. $ 39,725 $ 12,903 $ 72,729 $125,357
======= ======= ======= =======
Percent of total gross
loan portfolio...... 1.69% .55% 3.09% 5.32%
======= ======= ======= =======
Percent of total
assets.............. 1.01% .33% 1.84% 3.18%
======= ======= ======= =======
</TABLE>
Non-interest Income
- -------------------
Non-interest income totaled $5.5 million and $3.7 million for the
quarters ended September 30, 1994 and 1993, respectively. For the
same respective quarters, net gains on sales of securities totaled
$2.4 million and $254,000. The $2.1 million increase in net gains
on sales of securities resulted from realized capital gains
allocated to the Association by two limited partnerships in which
the Association invested and which are held in the available-for-
sale portfolio. Fee income remained relatively unchanged, totaling
$2.7 million and $2.6 million for the quarters ended September 30,
1994 and 1993, respectively.
Non-interest Expense
- --------------------
Total non-interest expense was $16.7 million and $22.5 million for
the quarters ended September 30, 1994 and 1993, respectively.
General and administrative expenses (compensation and benefits,
occupancy and equipment, and other general and administrative
expenses), were $13.7 million and $16.7 million for the quarters
ended September 30, 1994 and 1993, respectively. The decrease of
$3.0 million was due to lower general and administrative expenses
as a result of the aforementioned sale of ten of the Association's
<PAGE>
branches during the second quarter and five branches during this
quarter, and the closing of the California and Colorado mortgage
offices during the first quarter. The Association's ratio of
general and administrative expenses to average total assets
decreased to 1.63% from 1.67% from the same quarter in the prior
year. Expenses relating to REO decreased significantly in the
September 30, 1994 quarter to $958,000 from $3.3 million for the
same quarter in the prior year. In addition, the level of REO
decreased to $16.7 million at September 30, 1994 from $73.2 million
a year earlier.
Income Taxes and Extraordinary Items
- ------------------------------------
Income tax expense totaled $146,000 for the three-month period
ended September 30, 1994 and represents federal and state tax
expense. In the tax benefit at September 30, 1993 is a settlement
with the State of New York for the years ended December 31, 1984
through December 31, 1990 which resulted in a one-time benefit of
$660,000, net of Federal tax expense. In the tax expense recorded
for the quarter ended September 30, 1994 is a $1.0 million reversal
of the deferred tax valuation allowance.
The Company recorded no extraordinary items for the three-month
periods ended September 30, 1994 and 1993.
NINE MONTHS 1993 COMPARED TO NINE MONTHS 1992
- ---------------------------------------------
For the nine months ended September 30, 1994, the Company reported
net income of $9.1 million, which resulted in a primary and fully
diluted net income per common share of $0.46 after preferred stock
dividend requirements. For the same nine-month period in 1993, the
Company reported a net loss of $11.2 million, or a primary and
fully diluted net loss per common share of $1.53 after preferred
stock dividend requirements.
Total interest income for the nine months ended September 30, 1994
and 1993 was $141.3 million and $169.0 million, respectively. The
decrease in interest income was due partly to a decline of 36
basis points from 6.01 at September 30, 1993 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, $97.5 million for the nine-
month period ended September 30, 1994, compared to $112.3 million
for the same nine 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 averaged 3.89% and 3.95%
for the nine-month periods ended September 30, 1994 and 1993,
respectively. The lower average cost of funds resulted principally
from lower average rates paid on retail deposits.
<PAGE>
Net interest income totaled $43.8 million for the nine months ended
September 30, 1994, a $12.9 million reduction due to volume from
the $56.7 million reported for the same nine months last year. The
interest rate spread averaged 1.76% and 2.06% for the nine months
ended September 30, 1994 and 1993, respectively. For the same
respective periods, the interest rate margins were 1.74% and 2.00%.
The activity in the allowance for loan losses for the nine months
ended September 30, 1994 and 1993 was as follows:
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
------------------------
1994 1993
---------- ----------
(Dollars in Thousands)
<S> <C> <C>
Balance, beginning of period...................... $28,271 $ 21,020
Provision for loan losses......................... 3,800 20,300
Charge-offs:
Single-family residential real estate loans..... (4,490) (11,974)
Consumer loans.................................. (223) (334)
Income property loans........................... (105) (1,094)
------- -------
Total charge-offs............................. (4,818) (13,402)
------- -------
Recoveries:
Single-family residential real estate loans..... 210 10
Consumer loans.................................. 232 299
Income property loans........................... 3 -
------- -------
Total recoveries.............................. 445 309
------- -------
Net charge-offs................................... (4,373) (13,093)
------- -------
Other............................................. (16,000)* -
------- -------
Balance, end of period............................ $ 11,698 $ 28,227
======= =======
Ratio of net charge-offs during the period to
average loans outstanding during the period:
Single-family residential real estate loans..... .37% .54%
Consumer loans.................................. (.03) .08
Income property loans........................... .14 1.36
----- ------
Total net charge-offs during the period to
average loans outstanding during the
period...................................... .35% .56%
===== ======
<FN>
* Represents reduction of allowance allocated to loans sold.
</FN>
</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 $35.6 million and $14.1 million
for the nine-months ended September 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 of $3.5 million to the 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.
Non-interest expense totaled $66.8 million and $71.8 million for
the nine-month periods ended September 30, 1994 and 1993. Included
in REO expense for the nine months ended September 30, 1994 was a
$7.0 million valuation adjustment recorded to facilitate an
<PAGE>
accelerated sale of California single-family residential REO and
$2.5 million in writedowns of REO. For the same nine 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. Even though non-interest expense for the
nine-month period ended September 30, 1994 decreased from the same
period last year, the Company's ratio of annualized general and
administrative expenses increased to 1.79% from 1.71% at
September 30, 1994 and 1993, respectively, due to lower average
asset balances.
Income tax benefit totaled $295,000 for the nine-month period ended
September 30, 1994. Included in the tax benefit is a reversal of
$4.0 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. Included
in the tax benefit at September 30, 1993 is a settlement with the
State of New York for the years ended December 31, 1984 through
December 31, 1990 which resulted in a one-time benefit of $660,000,
net of Federal tax expense.
There were no extraordinary items for the nine month periods ended
September 30, 1994.
REGULATORY CAPITAL
- ------------------
The OTS capital requirements have three separate measures of
capital adequacy: the first is a tangible core capital requirement
of 1.5% of tangible assets; the second is a core capital
requirement of 3% of adjusted total assets; and the third is a
risk-based capital requirement that is 8% of risk-weighted assets.
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. Northeast Savings met the definition of a well-
capitalized thrift during the quarter ended June 30, 1994 and
remains well-capitalized at September 30, 1994.
<PAGE>
The following table reflects the regulatory capital position of the
Association as well as the current regulatory capital requirements
at September 30, 1994 and 1993:
<TABLE>
<CAPTION>
September 30, 1994 September 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 $173,497 $ 50,238 $160,326 $ 59,230
Percent 5.18% 1.50% 4.06% 1.50%
Core capital $173,639 $133,975 $160,928 $157,970
Percent 5.18% 4.00% 4.07% 4.00%
Risk-based capital $185,337 $ 97,347 $183,442 $143,651
Percent 15.23% 8.00% 10.22% 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
September 30, 1994, the Association's portfolio of Rhode Island
covered assets was as follows:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
-------------- -------------- --------------
1994* 1993* 1993*
-------------- -------------- --------------
(In Thousands)
<S> <C> <C> <C>
Loans:
Single-family residential real estate loans.... $ 31,253 $ 37,101 $ 37,268
Consumer loans................................. 15,873 20,393 21,929
Income property loans.......................... 34,043 39,976 42,082
Commercial loans............................... 1,087 1,335 1,369
--------- --------- ---------
Total loans................................ 82,256 98,805 102,648
REO.............................................. 4,570 6,820 9,382
--------- --------- ---------
Total covered assets....................... $ 86,826 $ 105,625 $ 112,030
========= ========= =========
<FN>
* Net of credit and interest adjustments
</FN>
</TABLE>
<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>
September 30, December 31, September 30,
-------------- -------------- --------------
1994 1993 1993
-------------- -------------- --------------
(In Thousands)
<S> <C> <C> <C>
Loans:
Single-family residential real estate loans.... $ 2,224 $ 2,718 $ 3,124
Consumer loans................................. 878 1,045 1,348
Income property loans.......................... 2,346 4,145 4,489
Commercial loans............................... - 30 29
--------- --------- ---------
Total...................................... $ 5,448 $ 7,938 $ 8,990
========= =========
=========
</TABLE>
FINANCIAL CONDITION
- -------------------
Total assets were $3.3 billion at September 30, 1994 compared to
$3.9 billion at December 31 and September 30, 1993. 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 (MBSs). 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 rate mortgages with terms of 15 years or less were added to
<PAGE>
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 $2.4 billion at September 30, 1994, compared to $3.0
billion at December 31 and September 30, 1993. The decrease in
deposits was due primarily to the aforementioned sale of ten of the
Association's branches in the second quarter and 5 branches during
this quarter, a total of $513 million in deposits. 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 Nine Months Ended
September 30, September 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.... $ 17,601 69.57% $115,970 64.79% $ 55,461 40.66% $414,189 73.33%
Fixed......... 7,699 30.43 63.029 35.21 80,944 59.34 150,608 26.67
------- ------ ------- ------ ------- ------ ------- ------
Total..... $ 25,300 100.00% $178,999 100.00% $136,405 100.00% $564,797 100.00%
======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
<PAGE>
The composition of the Association's residential mortgage loan
portfolio at September 30, 1994, December 31, 1993, and
September 30, 1993 was as follows:
<TABLE>
<CAPTION>
September 30, 1994 December 31, 1993 September 30, 1993
---------------------- ---------------------- ----------------------
Amount % of Total Amount % of Total Amount % of Total
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Adjustable....... $ 755,380 87.33% $1,701,978 92.21% $2,113,286 94.70%
Fixed............ 109,603 12.67 143,812 7.79 118,161 5.30
--------- ------ --------- ------ --------- ------
Total........ $ 864,983 100.00% $1,845,790 100.00% $2,231,447 100.00%
========= ====== ========= ====== ========= ======
</TABLE>
Total loans originated during the three months ended
September 30, 1994 and 1993 were $49.6 million and $185.1 million,
respectively. Total loan originations for the nine-month periods
ended September 30, 1994 and 1993 were $184.4 million and $582.4
million, respectively. At September 30, 1994, the Association was
committed to fund mortgage loans totaling $11.9 million, including
$8.1 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 nine months ended
September 30, 1994 totaled $20.9 million. Adjustments to net
income of $9.1 million provided $11.8 million of net cash,
including proceeds from sales of loans available-for-sale of $103.4
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 $65.6 million in cash. Remaining adjustments to net
income utilized $26.0 million in cash.
Net cash provided by investing activities during the nine months
ended September 30, 1994 totaled $407.4 million. Proceeds from
sales of loans totaled $843.6 million. Principal collected on
loans and mortgage-backed securities generated cash of $177.9
million and $309.5 million, respectively, while maturities of
investment securities provided $73.5 million in cash. Proceeds
from sales of investment securities available-for-sale totaled
$286.3 million. Sales of REO generated $58.6 million in cash.
Loans originated used $124.7 million of cash, while purchases of
mortgage-backed securities and investment securities used cash of
$732.3 million and $505.3 million, respectively. All other
investing activities provided net cash of $20.5 million.
Net cash used in financing activities during the nine months ended
September 30, 1994 totaled $532.4 million and resulted primarily
from $503.1 million on the sale of deposits, other decreases in
retail deposits from December 31, 1993 used $63.4 million in cash
and include a $24.8 million reduction in brokered deposits. All
other financing activities provided net cash of $58.9 million.
<PAGE>
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 5.13% for the three months ended September 30, 1994,
compared to 5.23% for the three months ended September 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 2.19% and 2.55% for the three months ended
September 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
requirement or if the payment of such dividends would cause its
capital to fall below its fully phased-in capital requirement.
On September 16, 1994, the Company's Board of Directors voted to
declare a stock dividend payable on October 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
<PAGE>
$100 of the amount of dividends payable on October 1, 1994, and
accumulated and unpaid as of that date, to holders of record on
September 16, 1994. On October 1, 1994, the Company paid the
$892,220 of dividends then payable on the Series B Preferred Stock
through the issuance of an additional 8,923 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 September 30, 1994 require annual interest payments
of $3.6 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
September 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
- -----------------------------
For the quarter ended September 30, 1993 through the quarter ended
September 30, 1994, the Company's interest rate spread (Exhibit
99.3) decreased 6 basis points, averaging 1.89% and 1.95% for the
quarters ended September 30, 1994 and 1993, respectively. However,
for these same time frames, the Company's interest rate margin
increased to 1.91% from 1.90%. The Company continually monitors
the repricing characteristics of its interest-earning assets and
interest-bearing liabilities. The Company's one-year gap (Exhibit
99.1) at September 30, 1994 was a positive $81.9 million, or 2.44%
of assets, compared to a positive $557.7 million or 14.15% of
assets at September 30, 1993. The Company's interest rate
sensitivity analysis shows that the Company has little interest
rate risk resulting from mismatches between asset and liability
repricings beyond one year. Within one year, an excess of
liability maturities and repricings in the first six months is
offset by an excess of asset maturities and repricings in months
seven through twelve.
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
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 Company's interest rate risk is due
primarily to the effect of these options, and particularly the
<PAGE>
impact of periodic caps on adjustable rate loans. The Company is
also subject to basis risk to the extent that borrowings indexed to
the London Interbank Offered Rate (LIBOR) are used to fund assets
not indexed to LIBOR. As of September 30, 1994, the Company had
$36.4 million of borrowings indexed to LIBOR and $468.7 million of
fixed rate borrowings, the rates on which were set initially off
LIBOR. As of September 30, 1994, the Company had $9.5 million of
earning assets indexed to LIBOR.
REGULATIONS
- -----------
Proposed Amendment to Minimum Regulatory Capital Regulations. The
OTS recently proposed to amend its minimum regulatory capital
regulations by revising the definition of the term "stockholders'
equity" to incorporate a change in generally accepted accounting
principles required by the Financial Accounting Standards Board
(FASB). SFAS No. 115, "Accounting for Certain Debt and Equity
Securities", which is effective for fiscal years beginning after
December 15, 1993, and requires that most debt and equity
securities be reported at fair value, rather than at amortized
cost. With the implementation of SFAS No. 115, unrealized gains
and losses on available-for-sale securities will be included in
stockholders' equity under generally accepted accounting principles
and therefore the value of stockholders' equity will fluctuate.
Under the proposed rule, these unrealized gains and losses would be
included in core capital for purposes of calculating a savings
institution's leverage capital requirement and the OTS measures for
prompt corrective action and could cause an institution's capital
ratios to fluctuate based on changes in the value of the
institution's debt and equity securities which are held-for-sale.
Interstate Banking. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the Interstate Act), which was
recently passed by Congress, authorizes (1) interstate acquisitions
of banks by bank holding companies without geographic limitation
beginning one year after enactment of the Interstate Act, (2)
interstate mergers between insured banks with different home
states, subject to the ability of states to opt-out, and (3) any
state to enact laws permitting de novo branching by banks with a
home state other than such state. Specifically, beginning June 1,
1997, a bank may merge with a bank with a different home state as
long as neither of the home states have opted out of interstate
branching between the date of enactment of the Interstate Act and
May 31, 1997. Once a bank has established branches in a state
through an interstate merger transaction, such bank may establish
and acquire additional branches at any location in that state where
any bank involved in the interstate merger transaction could have
established or acquired branches under applicable Federal or state
law. The Interstate Act further provides that states may enact
laws permitting interstate merger transactions prior to June 1,
1997. If a state opts out of interstate branching within the
specified time period, no bank in any other state may establish a
branch in that state, either through an acquisition or de novo.
<PAGE>
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
- ----------------------------------------------
In October 1994, the FASB issued Statement of Financial Accounting
Standards No. 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures" (SFAS 118). This amends
SFAS 114 to allow a creditor to use existing methods for
recognizing interest income on an impaired loan by eliminating the
provisions in SFAS 114 that describe how a creditor should report
income on an impaired loan.
SFAS 118 does 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, SFAS 118 affects 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.
SFAS 118 also acknowledges 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 statement affects both the classification and the total amount
of income (or expense) recognized.
SFAS 118 amends 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, has no impact on the financial position or results of
operation of the Company.
In October 1994, the FASB issued Statement of Financial Accounting
Standards No. 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments" (SFAS 119).
SFAS 119 requires improved disclosures about derivative financial
instruments - futures, forward, swap, or option contracts, or other
financial instruments with similar characteristics. It also amends
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."
SFAS 119 requires 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 requires 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
<PAGE>
for purposes other than trading. It also amends SFAS 105 and 107
to require that distinction in certain disclosures required by
those Statements.
For derivative financial instruments held or issued for trading,
SFAS 119 requires disclosure of average, maximum, and minimum
aggregate fair values and 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. SFAS 119
also encourages, but does 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.
SFAS 119 also amends 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).
SFAS 119 is 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 only, it would have
no impact on the financial position or results of operation of the
Company.
Selected Ratios and Statistics
- ------------------------------
The Company's annualized return on average assets was .31% for the
quarter ended September 30, 1994, compared to (0.19)% for the
quarter ended September 30, 1993. The annualized return on average
common equity was 7.33% for the three months ended
September 30, 1994, versus (12.38)% for the same period in 1993.
For the nine-month periods ended September 30, 1994 and 1993, the
Company's annualized return on average assets was .35% and (.38)%
respectively. The return on average common equity for the same
respective periods was 9.51% and (25.76)%.<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. 92-550. Note that, effective October 29, 1992, the
- ------
<PAGE>
United States Claims Court was renamed the United States Court of
Federal Claims. Northeast Savings' complaint seeks monetary relief
against the United States on theories of breach of contract, taking
of property without just compensation, and deprivation of property
without due process of law. The United States has not yet filed an
answer to the Complaint. On May 25, 1993, a three-judge panel of
the Federal Circuit Court of Appeals ruled against the plaintiffs
in three other consolidated "supervisory goodwill" cases, holding
that the thrift institutions had not obtained an "unmistakable"
promise from the government that it would not change the law in
such a manner as to abrogate its contractual obligations and that
the plaintiffs therefore bore the risk of such a change in the law.
Winstar Corp. v. United States, No. 92-5164. On August 18, 1993,
- ------------------------------
however, the full Federal Circuit, acting in response to a Petition
for Rehearing with Suggestion for Rehearing In Banc filed by two of
the three plaintiffs in these cases, vacated the May 25 panel
decision, ordered the panel opinion withdrawn, and ordered that the
case be reheard by the full Court. Oral argument in the Winstar
-------
case was held on February 10, 1994. On June 3, 1993, the Court of
Federal Claims entered an order staying proceedings in Northeast
Savings' case pending further action by the Federal Circuit in the
Winstar case or any action taken by the Supreme Court on any
- -------
petition for a writ of certiorari in that case.
Another supervisory goodwill case, Resolution Trust Corporation v.
----------------------------
FSLIC (the Resolution Trust Corporation), was recently decided by
- -----
the Court of Appeals of the 10th Circuit (the 10th Circuit Court of
Appeals) in favor of the purchasers of Security Federal from the
FSLIC, whose purchase was made prior to FIRREA. Pursuant to an
arrangement with the FSLIC, the purchasers infused $6 million into
Security Federal, an insolvent institution, and thereby saved the
FSLIC the cost of liquidating Security Federal. Even with such
capital infusion, were it not for the treatment of supervisory
goodwill as capital, Security Federal would have remained
significantly under-capitalized at the time, and thereby would have
had to have been liquidated by the FSLIC.
As a result of the restriction on the use of supervisory goodwill
as capital pursuant to FIRREA and resulting OTS regulations, the
OTS determined that Security Federal was insolvent and in February
1990 ordered the purchasers to infuse additional capital into it.
In March of 1990, the purchasers notified the OTS that they were
rescinding the agreement to acquire the institution, tendered their
stock to the OTS, and requested the return of their capital
contribution. The OTS refused the tender, and the purchasers filed
suit seeking rescission and restitution for breach of contract. In
Resolution Trust Corporation, the FDIC and the OTS appealed a
- ----------------------------
district court's summary judgment ruling in favor of the purchasers
for breach of contract, holding that the treatment of goodwill as
regulatory capital was an express term of the overall contractual
agreement. The 10th Circuit Court of Appeals affirmed the lower
court's ruling and stated that "[b]ecause the Agencies breached
their agreement to treat supervisory goodwill...as assets for
<PAGE>
regulatory purposes, we [the Court] agree that the investors [i.e.
purchasers] properly rescinded the agreement and thus are entitled
to restitution."
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.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
ITEM 5 - OTHER INFORMATION
- --------------------------
None.
<PAGE>
<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits required by Securities and Exchange Commission
Regulation S-K.
Exhibit
No.
- -------
11.1 - Computation of net income (loss) per common share
27.0 - Financial Data Schedule
99.1 - Interest rate sensitivity analysis at September 30, 1994
99.2 - Average balance sheet for the three months ended
September 30, 1994 and 1993
99.3 - Average balance sheet for the nine months ended
September 30, 1994 and 1993.
99.4 - Rate/Volume analysis for the three months ended
September 30, 1994 and 1993
99.5 - Rate/Volume analysis for the nine months ended
September 30, 1994 and 1993.
(b) Reports on Form 8-K
None.
<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 Nine Months Ended
September 30, September 30,
------------------------- ------------------------
1994 1993 1994 1993
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Primary income (loss) per common share:
Net income (loss).......................... $ 2,582 $ (1,904) $ 9,117 $ (11,195)
Preferred stock dividend requirements...... (892) (820) (2,621) (3,663)
---------- ---------- ---------- ---------
Net income (loss) applicable to common
stockholders for the calculation of
primary income (loss).................... $ 1,690 $ (2,724) $ 6,496 $ (14,858
========== ========== ========== =========
Weighted average shares outstanding............ 13,546,796 13,481,012 13,527,657 9,700,657
Unallocated ESOP shares........................ (497,196) - (497,196) -
Dilutive effect of outstanding stock options... 831,596 * 530,917 *
Dilutive effect of outstanding stock warrants.. 560,044 * 477,596 *
---------- ---------- ---------- ---------
Weighted average shares, as adjusted, for
the calculation of primary income (loss)..... 14,441,240 13,481,012 14,038,974 9,700,657
========== ========== ========== =========
Primary income (loss) per common share.. $ .12 $ (0.20) $ .46 $ (1.53)
========== ========== ========== =========
Fully diluted income (loss) per common share:
Net income (loss).......................... $ 2,582 $ (1,904) $ 9,117 $ (11,195)
Preferred stock dividend requirements...... (892) (820) (2,621) (3,663)
Interest expense on convertible
subordinated debentures, net of tax...... - * - *
---------- ---------- ---------- ---------
Net income (loss) applicable to common
stockholders for the calculation of
fully diluted income (loss).............. $ 1,690 $ (2,724) $ 6,496 $ (14,858)
========== ========== ========== =========
Weighted average shares outstanding............ 13,546,796 13,481,012 13,527,657 9,700,657
Unallocated ESOP shares........................ (497,196) - (497,196) -
Dilutive effect of outstanding stock options... 840,488 * 540,674 *
Dilutive effect of outstanding stock warrants.. 563,333 * 489,413 *
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)....................................... 14,453,421 13,481,012 14,060,548 9,700,657
========== ========== ========== =========
Fully diluted income (loss) per common share .. $ .12 $ (0.20) $ .46 $ (1.53)
========== ========== ========== =========
<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 fully diluted loss per common share.
</FN>
</TABLE>
The following table shows the computation of the adjusted weighted
average shares for use in analysis of fully diluted earnings per
share, assuming that all options, warrants and convertible
securities qualify as common stock equivalents regardless of their
dilutive effect on earnings:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding.............. 13,546,796 13,481,012 13,527,657 13,454,375**
Unallocated ESOP shares.......................... (497,196) - (497,196) -
Dilutive effect of outstanding stock options 840,488 246,413 540,674 234,656
Dilutive effect of outstanding stock warrants 563,333 328,011 489,413 371,386
Dilutive effect of shares issuable from assumed:
Conversions of convertible preferred stock..... - - - -
Convertible subordinated debentures............ - - - -
---------- ---------- ---------- ----------
Weighted average shares, as adjusted............. 14,453,421 14,055,436 14,060,548 14,060,417
========== ========== ========== ==========
<FN>
** Reflects the actual conversion of convertible preferred stock as if it had occurred at the beginning of
the period.
</FN>
/TABLE
<PAGE>
<PAGE>
<TABLE>
Exhibit 27.0
NORTHEAST FEDERAL CORP.
ARTICLE 9 FINANCIAL DATA SCHEDULE
(Dollars in Thousands, Except Per Share and Yield Amounts)
<S> <C>
FISCAL-YEAR-END............................ DEC-31-1993
PERIOD END................................. SEPT-30-1994
CASH....................................... 26,881
INTEREST-BEARING DEPOSITS.................. -
FED FUNDS SOLD............................. 4,270
TRADING ACCOUNT ASSETS..................... -
INVESTMENTS HELD-FOR-SALE.................. 163,715
INVESTMENTS AT CARRYING VALUE.............. 1,961,378
INVESTMENTS AT MARKET VALUE................ 1,961,378
LOANS...................................... 966,730
ALLOWANCE FOR LOSSES....................... 11,698
TOTAL ASSETS............................... 3,349,705
DEPOSITS................................... 2,375,460
SHORT-TERM BORROWINGS...................... 731,620
OTHER LIABILITIES.......................... 67,188
LONG-TERM DEBT............................. 40,305
COMMON STOCK............................... 136
PREFERRED STOCK - MANDATORY REDEMPTION..... -
PREFERRED STOCK - NO MANDATORY REDEMPTION.. 4
OTHER STOCKHOLDERS' EQUITY................. 134,992
TOTAL LIABILITIES AND EQUITY............... 3,349,705
INTEREST INCOME - LOANS.................... 60,370
INTEREST INCOME - INVESTMENTS.............. 74,248
INTEREST INCOME - OTHER.................... 6,636
TOTAL INTEREST INCOME...................... 141,254
INTEREST EXPENSE - DEPOSITS................ 76,742
TOTAL INTEREST EXPENSE..................... 97,479
NET INTEREST INCOME........................ 43,775
PROVISION FOR LOAN LOSSES.................. 3,800
GAINS ON INVESTMENT SECURITIES............. 6,649
TOTAL OTHER EXPENSES....................... 66,789
INCOME BEFORE INCOME TAX................... 8,822
INCOME BEFORE EXTRAORDINARY ITEMS.......... 9,117
EXTRAORDINARY ITEMS........................ -
CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLES. -
NET INCOME................................. 9,117
EPS-PRIMARY................................ .46
EPS-DILUTED................................ .46
INTEREST RATE SPREAD....................... 1.76%
LOANS - NON-ACCRUAL........................ 30,481
LOANS - PAST DUE........................... -
LOANS - TROUBLED DEBT RESTRUCTURING........ -
LOANS - POTENTIAL PROBLEM.................. -
ALLOWANCE FOR LOAN LOSS - OPENING BALANCE.. 28,271
CHARGE-OFFS................................ 4,818
RECOVERIES................................. 445
ALLOWANCE FOR LOAN LOSS - CLOSING BALANCE.. 11,698
ALLOWANCE FOR LOAN LOSS - DOMESTIC......... -
ALLOWANCE FOR LOAN LOSS - FOREIGN.......... -
ALLOWANCE FOR LOAN LOSS - UNALLOCATED...... 11,698
/TABLE
<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
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
September 30, 1993
Interest-earning assets:
Interest-bearing deposits, federal funds
sold and investment securities, net.. $ 57,837 $ 37,695 $ 179,786 $ 41,097 $ 33,784 $ 350,199
Mortgage-backed securities, net........ 829,626 587,998 242,058 110,327 9,155 1,779,164
Loans, net:
Single-family residential real estate
loans:
Adjustable rate.................... 414,818 278,987 38,897 - - 732,702
Fixed rate......................... 14,110 9,582 57,445 13,970 7,107 102,214
Consumer loans ...................... 17,859 2,371 13,625 2,500 - 36,355
Income property loans................ 44,188 2,107 15,130 15,169 81 76,675
Commercial loans..................... - - - - - -
Rhode Island covered assets.......... 49,729 8,084 13,769 5,371 - 76,953
--------- --------- --------- --------- --------- ---------
Total interest-earning assets............ $1,428,167 $ 926,824 $ 560,710 $ 188,434 $ 50,127 $3,154,262
========= ========= ========= ========= ========= =========
Interest-bearing liabilities:
Deposits:
NOW and Super NOW accounts........... $ 43,731 2,998 $ 21,404 $ 21,262 $ 72,725 $ 162,120
Money market deposit accounts........ 300,175 - - - - 300,175
Regular savings ..................... 158,643 5,863 41,860 41,581 142,227 390,174
Certificates of deposit.............. 771,133 298,930 354,793 69,217 - 1,494,073
--------- --------- --------- --------- --------- ---------
Total deposits 1,273,682 307,791 418,057 132,060 214,952 2,346,542
--------- --------- --------- --------- --------- ---------
Borrowings:
FHLB advances....................... 222,892 - 40,000 - - 262,892
Securities sold under agreements
to repurchase..................... 468,728 - - - - 468,728
Long term borrowings................ - - - - 40,305 40,305
Advance payment by borrowers for
taxes and insurance.................. - - - - 22,802 22,802
--------- --------- --------- --------- --------- ---------
Total borrowings................. 691,620 - 40,000 - 63,107 794,727
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities....... $1,965,302 $ 307,791 $ 458,057 $ 132,060 $ 278,059 $3,141,269
========= ========= ========= ========= ========= =========
Total interest-earning assets less
interest-bearing liabilities for
the period........................... $ (537,135) 619,033 $ 102,653 $ 56,374 $ (227,932) $ 12,993
Cumulative total interest-earning
assets less interest-bearing
liabilities.......................... $ (537,135) 81,898 $ 184,551 $ 240,925 $ 12,993 $ 12,993
Cumulative total interest-earning assets
less interest-bearing liabilities as
a percent of total assets............ (16.04)% 2.44% 5.51% 7.19% (0.39)% (0.39)%
<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 $152.6 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 $11.7 million.
* Loans do not include non-accrual loans of $30.5 million.
</FN>
/TABLE
<PAGE>
<PAGE>
<TABLE>
Exhibit 99.2
NORTHEAST FEDERAL CORP.
AVERAGE BALANCE SHEET
<CAPTION>
Three Months Ended September 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.......... $ 25,856 $ 472 7.30% $ 45,554 $ 389 3.42%
Investment securities, net........ 334,870 4,388 5.24 190,765 2,470 5.18
Mortgage-backed securities, net... 1,756,439 24,780 5.64 1,090,916 13,685 5.02
Loans, net:
Real estate..................... 872,883 14,213 6.51 2,233,069 33,566 6.01
Consumer........................ 36,166 799 8.84 40,681 895 8.80
Income property................. 75,052 1,633 8.70 79,480 1,680 8.45
--------- ------ --------- -------
Total loans................... 984,101 16,645 6.77 2,353,230 36,141 6.14
--------- ------ --------- -------
Rhode Island covered assets....... 89,562 1,708 7.63 116,363 2,331 8.01
--------- ------ --------- -------
Total interest-earning assets....... 3,190,828 47,993 6.02% 3,796,828 55,016 5.80%
------ -------
All other assets.................... 154,765 205,171
--------- ---------
Total Assets.................. $3,345,593 $4,001,999
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Interest-bearing liabilities:
Brokered deposits................. $ - $ - - % $ 25,335 $ 609 9.54%
Retail deposits:
Regular savings................. 402,116 2,208 2.18 621,518 3,545 2.26
NOWs, Super NOWs
and money market savings...... 507,941 2,718 2.12 652,675 3,712 2.26
Certificates.................... 1,512,899 18,584 4.87 1,759,179 22,033 4.97
--------- ------ --------- -------
Total deposits................ 2,422,956 23,510 3.85 3,058,707 29,899 3.88
--------- ------ --------- -------
Borrowings:
FHLB advances................... 226,610 2,889 5.06 423,408 3,940 3.69
Securities sold under
agreements to repurchase...... 459,747 5,620 4.85 289,731 2,496 3.42
Other borrowings................ 69,008 1,071 6.16 68,896 940 5.41
--------- ------ --------- -------
Total borrowings.............. 755,365 9,580 5.03 782,035 7,376 3.74
--------- ------ --------- -------
Total interest-bearing
liabilities..................... 3,178,321 33,090 4.13% 3,840,742 37,275 3.85%
------ -------
All other liabilities............... 33,057 34,612
Stockholders' Equity................ 134,215 126,645
--------- ---------
Total Liabilities and
Stockholders' Equity........ $3,345,593 $4,001,999
========= =========
Net Interest Income................. $14,903 $ 17,741
====== =======
Interest Rate Spread................ 1.89% 1.95%
Interest Rate Margin................ 1.91% 1.90%
/TABLE
<PAGE>
<PAGE>
<TABLE>
Exhibit 99.3
NORTHEAST FEDERAL CORP.
AVERAGE BALANCE SHEET
<CAPTION>
Nine Months Ended September 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.......... $ 41,874 $ 1,626 5.18% $ 31,161 $ 775 3.32%
Investment securities, net........ 290,590 10,722 4.92 227,229 8,625 5.06
Mortgage-backed securities, net... 1,639,492 63,526 5.17 1,015,603 40,593 5.33
Loans, net:
Real estate..................... 1,157,607 53,428 6.15 2,226,705 103,949 6.22
Consumer........................ 35,468 2,318 8.71 44,227 2,929 8.83
Income property................. 73,247 4,624 8.42 80,442 5,166 8.56
--------- ------- --------- -------
Total loans................... 1,266,322 60,370 6.36 2,351,374 112,044 6.35
--------- ------- --------- -------
Rhode Island covered assets....... 96,273 5,010 6.94 126,785 6,977 7.34
--------- ------- --------- -------
Total interest-earning assets....... 3,334,551 141,254 5.65% 3,752,152 169,014 6.01%
------- -------
All other assets.................... 183,263 222,379
--------- ---------
Total Assets.................. $3,517,814 $3,974,531
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Interest-bearing liabilities:
Brokered deposits................. $ 12,095 $ 860 9.51% $ 25,312 $ 1,809 9.56%
Retail deposits:
Regular savings................. 493,278 7,909 2.14 652,297 11,789 2.42
NOWs, Super NOWs
and money market savings...... 571,166 8,964 2.10 663,564 11,985 2.41
Certificates.................... 1,661,596 59,009 4.75 1,770,004 67,236 5.08
--------- ------- --------- -------
Total deposits................ 2,738,135 76,742 3.75 3,111,177 92,819 3.99
--------- ------- --------- -------
Borrowings:
FHLB advances................... 235,871 7,735 4.38 335,903 9,478 3.77
Securities sold under
agreements to repurchase...... 310,718 9,919 4.27 288,529 7,285 3.38
Other borrowings................ 66,129 3,083 6.23 66,092 2,752 5.57
--------- ------- --------- -------
Total borrowings.............. 612,718 20,737 4.52 690,524 19,515 3.78
--------- ------- --------- -------
Total interest-bearing
liabilities..................... 3,350,853 97,479 3.89% 3,801,701 112,334 3.95%
------- -------
All other liabilities............... 34,763 39,481
Stockholders' Equity................ 132,198 133,349
--------- ---------
Total Liabilities and
Stockholders' Equity........ $3,517,814 $3,974,531
========= =========
Net Interest Income................. $43,775 $ 56,680
====== =======
Interest Rate Spread................ 1.76% 2.06%
Interest Rate Margin................ 1.74% 2.00%
/TABLE
<PAGE>
<PAGE>
<TABLE> Exhibit 99.4
NORTHEAST FEDERAL CORP.
RATE/VOLUME ANALYSIS
<CAPTION>
Three Months Ended
------------------------------------------------
September 30, 1994 vs. September 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............... $ (168) $ 443 $ (192) $ 83
Investment securities, net............. 1,866 30 22 1,918
Mortgage-backed securities, net........ 8,349 1,706 1,040 11,095
Loans, net:
Single-family residential real
estate............................. (20,445) 2,795 (1,703) (19,353)
Consumer............................. (99) 4 (1) (96)
Income property...................... (94) 49 (2) (47)
-------- ------- ------ --------
Total loans...................... (20,638) 2,848 (1,706) (19,496)
-------- ------- ------ --------
Rhode Island covered assets.......... (537) (112) 26 (623)
-------- ------- ------ --------
Total interest income.......... (11,128) 4,915 (810) (7,023)
-------- ------- ------ --------
Interest expense:
Deposits:
Brokered deposits.................... (609) - - (609)
Retail deposits:
Regular savings.................... (1,251) (132) 46 (1,337)
NOWs, Super NOWs and money
market savings................... (823) (220) 49 (994)
Certificates....................... (3,085) (424) 60 (3,449)
-------- ------- ------ --------
Total deposits................... (5,768) (776) 155 (6,389)
-------- ------- ------ --------
Borrowings:
FHLB advances........................ (1,831) 1,458 (678) (1,051)
Securities sold under
agreements to repurchase........... 1,465 1,046 613 3,124
Other borrowings..................... 2 129 - 131
-------- ------- ------ --------
Total borrowings................... (364) 2,633 (65) 2,204
-------- ------- ------ --------
Total interest expense......... (6,132) 1,857 90 (4,185)
-------- ------- ------ --------
Change in net interest income............ $ (4,996) $ 3,058 $ (900) $ (2,838)
======== ======= ======= =======
/TABLE
<PAGE>
<PAGE>
<TABLE>
Exhibit 99.5
NORTHEAST FEDERAL CORP.
RATE/VOLUME ANALYSIS
<CAPTION>
Nine months Ended
------------------------------------------------
September 30, 1994 vs. September 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..................... $ 266 $ 435 $ 150 $ 851
Investment securities, net................... 2,405 (241) (67) 2,097
Mortgage-backed securities, net.............. 24,936 (1,241) (762) 22,933
Loans, net:
Single-family residential real
estate................................... (49,909) (1,178) 566 (50,521)
Consumer................................... (580) (39) 8 (611)
Income property............................ (462) (88) 8 (542)
-------- ------- ------- --------
Total loans............................ (50,951) (1,305) 582 (51,674)
-------- ------- ------- --------
Rhode Island covered assets................ (1,679) (379) 91 (1,967)
-------- ------- ------- --------
Total interest income................ (25,023) (2,731) (6) (27,760)
-------- ------- ------- --------
Interest expense:
Deposits:
Brokered deposits.......................... (945) (9) 5 (949)
Retail deposits:
Regular savings.......................... (2,874) (1,330) 324 (3,880)
NOWs, Super NOWs and money
market savings......................... (1,669) (1,571) 219 (3,021)
Certificates............................. (4,118) (4,377) 268 (8,227)
-------- ------- ------- --------
Total deposits......................... (9,606) (7,287) 816 (16,077)
-------- ------- ------- --------
Borrowings:
FHLB advances.............................. (2,823) 1,537 (457) (1,743)
Securities sold under
agreements to repurchase................. 560 1,926 148 2,634
Other borrowings........................... 2 329 - 331
-------- ------- ------- --------
Total borrowings......................... (2,261) 3,792 (309) 1,222
-------- ------- ------- --------
Total interest expense............... (11,867) (3,495) 507 (14,855)
-------- ------- ------- --------
Change in net interest income.................. $ (13,156) $ 764 $ (513) $(12,905)
======== ======= ======= =======
/TABLE
<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
October 21, 1994 /s/ LYNNE M. CARCIA
------------------------------------
Lynne M. Carcia
Senior Vice President and Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(Dollars in Thousands, Except Per Share and Yield Amounts)
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1993
<PERIOD-END> SEP-30-1994
<CASH> 26,881
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,270
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 163,715
<INVESTMENTS-CARRYING> 1,961,378
<INVESTMENTS-MARKET> 1,961,378
<LOANS> 966,730
<ALLOWANCE> 11,698
<TOTAL-ASSETS> 3,349,705
<DEPOSITS> 2,375,460
<SHORT-TERM> 731,620
<LIABILITIES-OTHER> 67,188
<LONG-TERM> 40,305
<COMMON> 136
0
4
<OTHER-SE> 134,992
<TOTAL-LIABILITIES-AND-EQUITY> 3,349,705
<INTEREST-LOAN> 60,370
<INTEREST-INVEST> 74,248
<INTEREST-OTHER> 6,636
<INTEREST-TOTAL> 141,254
<INTEREST-DEPOSIT> 76,742
<INTEREST-EXPENSE> 97,479
<INTEREST-INCOME-NET> 43,775
<LOAN-LOSSES> 3,800
<SECURITIES-GAINS> 6,649
<EXPENSE-OTHER> 66,789
<INCOME-PRETAX> 8,822
<INCOME-PRE-EXTRAORDINARY> 9,117
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,117
<EPS-PRIMARY> $0.46
<EPS-DILUTED> $0.46
<YIELD-ACTUAL> 1.76
<LOANS-NON> 30,481
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 28,271
<CHARGE-OFFS> 4,818
<RECOVERIES> 445
<ALLOWANCE-CLOSE> 11,698
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 11,698
</TABLE>
