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 March 31, 1995
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)
70 Batterson Park Road
Farmington, Connecticut 06034
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 203/679-0500
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 May 2, 1995.
Common Stock, $.01 par value -- 15,506,289<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 months ended March 31, 1995
and 1994....................................... 1
Consolidated Statement of Financial Condition
at March 31, 1995, December 31, 1994, and
March 31, 1994................................. 2
Consolidated Statement of Cash Flows
for the three months ended March 31, 1995 and
1994........................................... 3
Notes to the Consolidated Financial Statements...... 4
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition for the Fiscal
Quarter Ended March 31, 1995........................ 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................... 24
Item 2. Changes in Securities............................... 24
Item 3. Defaults Upon Senior Securities..................... 24
Item 4. Submission of Matters to a Vote of Security Holders. 24
Item 5. Other Information................................... 24
Item 6. Unaudited Exhibits and Reports on Form 8-K.......... 25
<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
March 31,
---------------------------
1995 1994
---------- ----------
<S> <C> <C>
Interest income:
Loans............................................ $ 17,659 $ 27,383
Mortgage-backed securities....................... 28,601 16,825
Investment securities............................ 5,059 2,216
Rhode Island covered assets...................... 1,589 1,724
Other............................................ 497 542
--------- ---------
Total interest income......................... 53,405 48,690
--------- ---------
Interest expense:
Deposits......................................... 27,097 26,863
Federal Home Loan Bank advances.................. 3,072 3,109
Other borrowings................................. 8,678 3,506
--------- ---------
Total interest expense........................ 38,847 33,478
--------- ---------
Net interest income......................... 14,558 15,212
Provision for loan losses........................... 750 2,200
--------- ---------
Net interest income after provision
for loan losses............................ 13,808 13,012
--------- ---------
Non-interest income:
Fees for services, net........................... 2,275 (491)
Gain on sale of securities, net.................. 2,703 4,364
Gain (loss) on sale of loans, net................ (46) 13,549
Other non-interest income, net................... 12 (143)
--------- ---------
Total non-interest income..................... 4,944 17,279
--------- ---------
Non-interest expenses:
Compensation and benefits........................ 5,113 7,683
Occupancy and equipment, net..................... 3,338 6,178
Other general and administrative................. 3,694 4,584
SAIF insurance fund and OTS assessments.......... 1,687 2,356
Real estate and other assets acquired in settle-
ment of loans.................................. 580 10,340
--------- ---------
Total non-interest expenses................... 14,412 31,141
--------- ---------
Income (loss) before income taxes.......... 4,340 (850)
Income tax expense (benefit)........................ 1,823 (1,857)
--------- ---------
Net income................................. $ 2,517 $ 1,007
========= =========
Preferred stock dividend requirements............... $ 930 $ 855
Net income applicable to common stockholders........ $ 1,587 $ 152
Net income per common share:
Primary and fully diluted........................ $ .11 $ .01
See accompanying Notes to the Consolidated Financial Statements
</TABLE>
1<PAGE>
<TABLE>
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(In Thousands Except Share Amounts)
<CAPTION>
March 31, December 31, March 31,
------------ ------------ ------------
1995 1994 1994
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks......................... $ 37,546 $ 34,145 $ 34,939
Federal funds sold.............................. 22,065 22,725 22,210
Investment securities, net...................... 199,362 202,376 146,675
Investment securities available-for-sale, net... 134,887 142,735 423,380
Mortgage-backed securities, net................. 1,768,024 1,758,179 1,703,991
Mortgage-backed securities available-for-sale,
net........................................... 55,084 21,358 11,323
Loans, net...................................... 932,038 947,902 978,643
Loans available-for-sale, net................... 1,466 4,812 18,389
Rhode Island covered assets..................... 79,431 82,236 99,859
Interest and dividends receivable............... 18,957 17,828 17,632
Real estate and other assets acquired in settle-
ment of loans................................. 15,855 13,192 58,595
Premises and equipment, net..................... 27,349 27,401 31,046
Prepaid expenses and other assets............... 71,698 70,683 81,760
--------- --------- ---------
Total assets............................. $3,363,762 $3,345,572 $3,628,442
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Retail deposits................................. $2,472,215 $2,393,084 $2,922,451
Brokered deposits............................... - - 25,701
Federal Home Loan Bank advances................. 172,800 203,527 228,000
Securities sold under agreements to repurchase.. 480,693 504,245 197,158
Uncertificated debentures....................... 42,257 42,243 38,446
Advance payments by borrowers for taxes and
insurance..................................... 17,871 22,586 23,870
Other liabilities............................... 31,707 40,987 61,105
--------- ---------- ---------
Total liabilities........................ 3,217,543 3,206,672 3,496,731
--------- ---------- ---------
Commitments and Contingencies
Stockholders' equity:
Serial preferred stock, $.01 par value,
15,000,000 shares authorized:
$8.50 Cumulative Preferred Stock, Series B,
437,903 shares at March 31, 1995, 428,791
shares at December 31, 1994 and 402,576
shares at March 31, 1994 issued and
outstanding................................ 4 4 4
Common stock, $.01 par value, 25,000,000 shares
authorized: 15,471,289 shares at March 31,
1995, 14,353,996 shares at December 31, 1994
and 13,519,193 shares at March 31, 1994
issued and outstanding....................... 155 144 135
Additional paid-in capital..................... 197,278 191,756 186,799
Net unrealized gains on debt and equity
securities available-for-sale................ 1,995 1,888 7,489
Accumulated deficit............................ (50,536) (52,123) (59,405)
Stock dividend distributable................... 930 911 855
Unallocated employee stock ownership plan
shares....................................... (3,607) (3,680) (4,166)
--------- --------- ---------
Total stockholders' equity............... 146,219 138,900 131,711
--------- --------- ---------
$3,363,762 $3,345,572 $3,628,442
========= ========= =========
See accompanying Notes to the Consolidated Financial Statements
</TABLE>
2<PAGE>
<TABLE>
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<CAPTION>
Three Months Ended
March 31,
----------------------------
1995 1994
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income..................................................... $ 2,517 $ 1,007
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.............................. 1,010 2,101
Amortization of fees, discounts, and premiums, net......... 1,142 2,881
Provision for loan losses.................................. 750 2,200
Provision for losses on REO................................ 294 8,847
Gain on sale of securities................................. (2,703) (4,364)
Loss (gain) on sale of loans............................... 46 (13,549)
Loss on sale of other assets............................... 11 194
Increase in interest and dividends receivable.............. (1,129) (92)
Loans available-for-sale originated and purchased.......... (2,564) (42,173)
Proceeds from sales of loans available-for-sale............ 3,826 69,192
Increase in accrued interest payable on deposits........... 665 1,482
Decrease (increase) in prepaid expenses and other assets... (1,015) 1,062
Decrease in other liabilities.............................. (9,356) (13,117)
---------- ----------
Total adjustments....................................... (9,023) 14,664
---------- ----------
Net cash (used in) provided by operating activities... (6,506) 15,671
---------- ----------
Cash flows from investing activities:
Loans originated and purchased............................. (20,109) (45,809)
Proceeds from sales of loans............................... - 870,653
Principal collected on loans............................... 32,243 77,158
Net decrease in Rhode Island covered assets................ 2,805 5,766
Purchases of mortgage-backed securities.................... (75,441) (479,977)
Purchases of mortgage-backed securities available-for-sale. (34,725) -
Principal collected on mortgage-backed securities.......... 66,026 105,513
Purchases of investment securities......................... - (105,236)
Proceeds from redemption of FHLB stock..................... - (487)
Proceeds from maturities of investment securities.......... 2,991 1,565
Purchases of investment securities available-for-sale...... - (291,373)
Proceeds from sales of investment securities available-for
-sale.................................................... - 5,005
Proceeds from maturities of investment securities
available-for-sale...................................... 10,050 27,052
Proceeds from sales of real estate and other assets
acquired in settlement of loans......................... 2,192 14,926
Net purchases of premises and equipment.................... (952) (992)
---------- ----------
Net cash (used in) provided by investing activities.... (14,920) 183,764
---------- ----------
Cash flows from financing activities:
Net increase (decrease) in retail deposits................. 78,466 (30,547)
Decrease in advance payments by borrowers for taxes and
insurance............................................... (4,715) (4,467)
Decrease in securities sold under agreements to repurchase. (23,552) (97,651)
Net decrease in short-term FHLB advances................... (30,727) (47,000)
Repayments of long-term FHLB advances...................... - (98,000)
Reduction of ESOP debt guarantee........................... 40 82
Issuance of 401-K stock shares............................. - 63
Proceeds from exercise of stock options.................... 4,655 19
---------- ----------
Net cash provided by (used in) financing activities... 24,167 (277,501)
---------- ----------
Net increase (decrease) in cash and cash equivalents....... 2,741 (78,066)
Cash and cash equivalents at beginning of period........... 56,870 135,215
---------- ----------
Cash and cash equivalents at end of period................. $ 59,611 $ 57,149
========== ==========
See accompanying Notes to the Consolidated Financial Statements
</TABLE>
3<PAGE>
NORTHEAST FEDERAL CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1995
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, 1994, 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 consolidated financial condition and
results of operations of Northeast Federal Corp. in conformity
with generally accepted accounting principles. Certain
reclassifications have been made to prior year's financial
statements to conform to the March 31, 1995 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>
Three Months Ended
March 31,
--------------------------
1995 1994
------------ -----------
(In Thousands)
<S> <C> <C>
Cash paid during the periods for:
Interest on retail deposits........................... $ 26,432 $ 25,343
Interest paid on brokered deposits.................... - 31
Interest on borrowings................................ 13,423 9,687
Income taxes.......................................... 104 222
Cash received during the periods for:
Interest and dividends................................ 52,276 48,598
Non-cash items:
Transfers of loans from available-for-sale............ 2,031 777
Real estate and other assets acquired in settlement
of loans............................................ 5,167 7,447
Payment in kind on Series B preferred stock........... 911 838
Net unrealized gains (losses) on debt and equity
securities available-for-sale....................... 184 (3,400)
</TABLE>
3) Commitments and Contingencies
-----------------------------
At March 31, 1995, Northeast Savings, F.A. had outstanding
commitments to originate $10.3 million and $4.9 million in
adjustable rate and fixed rate mortgage loans, respectively,
$24.5 million in home equity loans, $2.9 million in income
property loans, and $300,000 in residential construction
loans. At March 31, 1995, Northeast Savings, F.A. also had
commitments to fund $13.8 million in unused home equity lines,
$8.4 million in unused consumer credit lines and $15.4 million
4<PAGE>
NORTHEAST FEDERAL CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1995
3) Commitments and Contingencies (continued)
-----------------------------
in undisbursed residential construction loans. In addition,
at March 31, 1995, Northeast Savings, F.A. also had
commitments to sell $874,000 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 announced, on June 11, 1994, Northeast Federal
reached a definitive agreement for its acquisition by Shawmut
National Corporation. In February 1995, Shawmut entered into
an agreement and plan of merger with Fleet Financial Group,
Inc., and additional information regarding the Shawmut/Fleet
transaction must be disseminated to Northeast shareholders
before a vote on the agreement and plan of merger with Shawmut
can be held. Shawmut has made the additional information
available for distribution, therefore a special meeting will
take place on May 26, 1995 at 9:00 a.m. for such vote. The
agreements are discussed further in Management's Discussion
and Analysis of Results of Operations and Financial Condition.
5<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION FOR THE QUARTER ENDED
MARCH 31, 1995
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 "the
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, on June 11, 1994, Northeast Federal
reached a definitive agreement for its acquisition by Shawmut
National Corporation. A special meeting of stockholders to
consider and vote upon the agreement and plan of merger will take
place on May 26, 1995. The special meeting was originally
scheduled to be held on March 17, 1995 but was adjourned to April
14 and then to May 11, 1995. On that date, the special meeting was
adjourned to May 26, 1995
These adjournments were required because Shawmut entered into an
agreement and plan of merger with Fleet Financial Group, Inc., and
additional information regarding the Shawmut/Fleet transaction must
be disseminated to Northeast shareholders. Shawmut filed on May 4,
1995 the amendment to its Registration Statement under the
Securities and Exchange Act of 1933 relating to agreement and plan
of merger which included information regarding the Shawmut/Fleet
proposed merger and other updated information.
In addition, for the fourth consecutive quarter, capital levels
have improved and Northeast Savings continued to meet the
definition of a well-capitalized thrift. The Association's core
capital ratio improved to 5.38% at March 31, 1995, from 4.67% at
March 31, 1994. Tangible core capital and risk-based capital
improved to 5.38% and 15.95% at March 31, 1995 compared to 4.65%
and 13.44% at March 31, 1994, respectively.
RESULTS OF OPERATIONS
- ---------------------
Northeast Federal had net income of $2.5 million for the three
months ended March 31, 1995, resulting in primary and fully diluted
net income per common share of $.11 after preferred stock dividend
requirements. For the same quarter in 1994, the Company reported
net income of $1.0 million or a primary and fully diluted net
income per common share of $.01 after preferred stock dividend
requirements. The increase in net income for the quarter ended
March 31, 1995 resulted primarily from (1) a decrease in the
provision for loan losses of $1.5 million due to the sharp
6<PAGE>
reduction in non-performing assets and a significant reduction in
credit risk exposure in the residential mortgage loan portfolio
during 1994 as a result of the sale of $876.1 million of primarily
California adjustable rate single-family residential loans; (2) a
reduction in general and administrative expenses of $6.3 million
due to the sale of fifteen branches and the closing of the mortgage
lending offices in San Diego, California and Denver, Colorado
during 1994; and (3) a reduction in expenses related to real estate
and other assets acquired in settlement of loans (REO) due to an
overall reduction of REO and a $7.0 million valuation adjustment in
the quarter ended March 31, 1994, which was recorded to facilitate
an accelerated sale of single-family residential REO. Offsetting
these increases, non-interest income decreased by $12.3 million in
the quarter ended March 31, 1995 from the same quarter last year
due to a gain of $13.6 million on the aforementioned sale of $876.1
million of adjustable rate single-family residential loans during
March 1994.
Interest Income and Expense
- ---------------------------
Total interest income was $53.4 million and $48.7 million for the
quarters ended March 31, 1995 and 1994, respectively. The increase
in total interest income was due primarily to an increase of 124
basis points in the weighted average yield earned on interest-
earning assets, to 6.63% for the quarter ended March 31, 1995 from
5.39% for the same quarter in 1994. This increase was offset by a
decrease of $389.8 million in average interest-earning assets for
the quarter ended March 31, 1995 from the same quarter last year.
As a result of the overall higher level of interest rates, both
total interest expense and the Association's cost of funds were
higher in the quarter ended March 31, 1995 than in the comparable
quarter of the previous year. Total interest expense was $38.8
million for the three months ended March 31, 1995, compared to
$33.5 million for the same three months in the previous year. For
the quarter ended March 31, 1995, the cost of funds increased 121
basis points to 4.93% from 3.72% for the quarter ended
March 31, 1994.
Net interest income totaled $14.6 million and $15.2 million for the
quarters ended March 31, 1995 and 1994, respectively. The decrease
in interest income is primarily due to the decrease of $389.8
million in average interest-earning assets to $3.2 billion for the
quarter ended March 31, 1995 from $3.6 billion for the same quarter
last year. The decrease is mainly due to the closing of the loan
origination offices in California and Colorado and the
aforementioned sale of primarily California adjustable rate single-
family residential loans during the first quarter of 1994 and the
sale of the fifteen branch offices during the second and third
quarters of 1994. The interest rate spread for the quarter ended
March 31, 1995 slightly increased to 1.70% from 1.67% for the same
quarter last year and the interest rate margin increased to 1.74%
7<PAGE>
from 1.63% for the quarters ended March 31, 1995 and 1994,
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 March 31, 1995
was $750,000, compared to $2.2 million for the quarter ended March
31, 1994. The decrease in the provision was due primarily to a
reduction in non-performing assets and a significant reduction in
credit risk exposure in the residential mortgage loan portfolio
which resulted from the aforementioned sale of $876.1 million of
adjustable rate single-family real estate loans in March 1994.
Also, due to the reduced risk in the portfolio, net charge-offs for
the quarter ended March 31, 1995 were $978,000 compared to $3.0
million for the quarter ended March 31, 1994. At March 31, 1995
and December 31, and March 31, 1994, non-accrual loans totaled
$27.9 million, $29.3 million, and $32.3 million, respectively.
8<PAGE>
The allowance for loan losses was $11.5 million, at both March 31,
1995 and March 31, 1994. The activity in the allowance for loan
losses for the three months ended March 31, 1995 and 1994 was as
follows:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------------
1995 1994
---------- ----------
(Dollars in Thousands)
<S> <C> <C>
Balance, beginning of period...................... $11,746 $28,271
Provision for loan losses......................... 750 2,200
Charge-offs:
Single-family residential real estate loans..... (1,046) (3,042)
Consumer loans.................................. (26) (103)
Income property loans........................... - (85)
------ ------
Total charge-offs............................. (1,072) (3,230)
------ ------
Recoveries:
Single-family residential real estate loans..... 1 169
Consumer loans.................................. 93 66
------ ------
Total recoveries.............................. 94 235
------ ------
Net charge-offs................................... (978) (2,995)
------ ------
Other............................................. - (16,000)*
------ ------
Balance, end of period............................ $11,518 $11,476
====== ======
* Represents reduction of allowance allocated to loans sold.
Ratio of net charge-offs during the period to
average loans outstanding during the period:
Single-family residential real estate loans....... .13 % .17%
Consumer loans.................................... (.17)% .11
Income property loans............................. - .12
Total net charge-offs during the period to
average loans outstanding during the
period........................................ .10% .16%
Proforma ratio of net charge-offs during the period
to average loans outstanding during the period,
excluding the portion of the portfolio sold and
related charge-offs............................... .10 .08
</TABLE>
In addition to the impact of the $876.1 million loan sale,
management believes that the decrease in single-family residential
loan net charge-offs is indicative of a declining level of non-
performing assets and a stabilization of housing values in the
Company's primary market areas.
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 March 31, 1995, 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.
9<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 gross loans.
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1995 1994 1994
---------------- ---------------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Single-family residential real estate
loans................................. $ 8,608 1.12% $ 8,883 1.11% $ 8,622 1.01%
Consumer loans.......................... 300 .75 300 .77 300 .86
Residential construction loans.......... 100 1.01 100 1.15 100 2.10
Income property loans................... 1,966 2.65 1,966 2.62 1,966 2.95
Unallocated loans....................... 544 * 497 * 488 *
------ ------ ------
Total allowance................... $11,518 1.14% $11,746 1.22% $11,476 1.14%
====== ====== ======
<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 REO. The following table
presents the Association's non-performing assets and restructured
loans at the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1995 1994 1994
------------ ------------ ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accrual loans:
Single-family residential real estate. $23,581 $ 27,259 $ 29,078
Consumer.............................. 806 902 1,251
Income property....................... 3,540 1,170 1,937
------ ------- -------
Total non-accrual loans............. 27,927 29,331 32,266
------ ------- -------
REO:
Single-family residential............. 13,362 11,196 42,960
Hotels................................ - - 6,035
Apartment building.................... 320 - 3,704
Real estate brokerage operations...... - - 1,787
Office, industrial complexes; land.... 1,374 1,376 3,317
Residential subdivisions.............. 799 620 792
------ ------- -------
Total REO........................... 15,855 13,192 58,595
------ ------- -------
Total non-performing assets......... $47,782 $ 42,523 $ 90,861
====== ======= =======
Restructured loans........................ $ - $ - $ -
====== ======= =======
Total non-accrual loans as a percent of
total gross loans receivable.......... 2.90% 3.00% 3.17%
==== ==== ====
Total non-performing assets as a
percent of total assets............... 1.30% 1.27% 2.50%
==== ==== ====
</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
10<PAGE>
on that loan when a foreclosure is brought about by other owner
defaults. When the interest accrual on a loan is discontinued, any
previously accrued interest is reversed. A non-accrual loan may be
restored to an accrual basis when principal and interest payments
are current and full payment of principal and interest is expected.
At March 31, 1995 and December 31 and March 31, 1994, the
Association had no loans more than ninety days past due on which
interest was still accruing.
At March 31, 1995 and December 31 and March 31, 1994, non-accrual
loans were $27.9 million, $29.3 million, and $32.3 million,
respectively. The decrease in non-accrual loans between March 31,
1995 and December 31, 1994 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.
Activity within the non-accrual loan portfolio was as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1995 March 31, 1994
------------------ ------------------
(In Thousands) (In Thousands)
<S> <C> <C>
Beginning balance..................... $ 29,331 $ 67,462
New non-performing loans.............. 7,177 13,358
Net charge-offs....................... (25) (97)
Returned to accrual status............ (1,498) (327)
Loan sales............................ - (40,500)
Payoffs............................... (1,700) (285)
Transfers to REO through foreclosure.. (5,358) (7,345)
------- -------
Ending balance........................ $ 27,927 $ 32,266
======= =======
</TABLE>
The allowance for loan losses as a percentage of non-accrual loans
by loan category is as follows:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1995 1994 1994
--------- ------------ ---------
<S> <C> <C> <C>
Single-family residential real estate............ 38.81% 34.41% 31.33%
Consumer......................................... 37.22 33.26 23.98
Residential construction......................... - - -
Income property.................................. 55.54 168.03 101.50
Unallocated...................................... * * *
Total allowance to total non-accrual loans..... 41.24% 40.05% 35.57%
<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 increased ratios for single-family residential real estate and
consumer loans reflect an overall improvement in delinquencies in
these portfolios since March 31, 1994. The decrease in the ratio
for income property loans from December 31, 1994 to March 31, 1995
was due to a $1.4 million loan which went into non-accrual status
during the current quarter. This ratio is expected to increase in
11<PAGE>
the second quarter of 1995 due to a $860,000 loan in non-accrual
status being paid in full. The increase in the ratio for income
property loans from March 31, 1994 to December 31, 1994 was in
response to a decrease in non-accrual income property loans during
this period.
At March 31, 1995 and December 31 and March 31, 1994, single-family
residential non-accrual loans were 84.4%, 92.9%, and 90.1%,
respectively, of total non-accrual loans.
Real estate and other assets acquired in settlement of loans. REO
- ------------------------------------------------------------
was $15.9 million, $13.2 million, and $58.6 million at
March 31, 1995 and December 31 and March 31, 1994, respectively.
The significant decrease in REO at December 31, 1994 from March 31,
1994 was due to the sale of REO in 1994, of which $27.2 million was
sold in a series of three transactions.
The activity in the Association's REO is presented in the following
table:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1995 1994
-------- --------
(In Thousands)
<S> <C> <C>
Beginning balance.............. $ 13,192 $ 74,962
Foreclosures, net.............. 4,933 7,345
Capitalized expenses........... 490 283
Less:
Sales........................ (2,160) (15,131)
Valuation adjustments........ (548) (8,647)*
Mortgage insurance receipts.. (49) (67)
Other........................ (3) (150)
------- -------
Ending balance................. $ 15,855 $ 58,595
======= =======
<FN>
*Valuation adjustments include a $7.0 million adjustment recorded
to facilitate an accelerated sale of California single-family
residential REO.
</FN>
</TABLE>
12<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>
March 31, 1995 December 31, 1994
--------------------------------------- ---------------------------------------
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....... $ 15,720 $ 4,655 $ 23,581 $ 43,956 $ 15,968 $ 6,590 $ 27,259 $ 49,817
Consumer................. 200 61 806 1,067 347 103 902 1,352
Residential construction. - - - - - - - -
Income property.......... 1,376 - 3,540 4,916 320 861 1,170 2,351
------- ------- ------- ------- ------- ------- ------- -------
Total................. $ 17,296 $ 4,716 $ 27,927 $ 49,939 $ 16,635 $ 7,554 $ 29,331 $ 53,520
======= ======= ======= ======= ======= ======= ======= =======
Percent of total gross
loan portfolio......... 1.80% .49% 2.90% 5.19% 1.70% .77% 3.00% 5.47%
======= ======= ======= ======= ======= ======= ======= =======
Percent of total
assets................. .51% .14% .83% 1.48% .50% .23% .88% 1.60%
======= ======= ======= ======= ======= ======= ======= =======
March 31, 1994
---------------------------------------
30-59 60-89 90-days
days days and over Total
------- ------ -------- -------
(Dollars in Thousands)
Single-family residen-
tial real estate....... $ 18,816 $ 8,854 $ 29,078 $ 56,748
Consumer................. 414 162 1,251 1,827
Residential construction. - - - -
Income property.......... 45 914 1,937 2,896
------- ------- ------- -------
Total................. $ 19,275 $ 9,930 $ 32,266 $ 61,471
======= ======= ======= =======
Percent of total gross
loan portfolio......... 1.89% 0.98% 3.17% 6.04%
======= ======= ======= =======
Percent of total
assets................. .53% 0.27% 0.89% 1.69%
======= ======= ======= =======
</TABLE>
Non-interest Income
- -------------------
Non-interest income totaled $4.9 million and $17.3 million for the
quarters ended March 31, 1995 and 1994, respectively. Included in
non-interest income for the quarter ended March 31, 1994 is a gain
of $13.6 million on the sale of $876.1 million of adjustable rate
single-family residential real estate loans. This transaction,
which was completed in March 1994, included $835.6 million in
performing loans and $40.5 million of non-performing loans. Of the
total loans sold, approximately 93% or $812 million were secured by
properties located in California.
Fee income was $2.8 million higher for the quarter ended March 31,
1995 than for the same quarter last year. In the quarter ended
March 31, 1994, fee income was impacted by a $3.5 million valuation
adjustment to the Association's purchased mortgage servicing
rights, which was recorded in anticipation of selling a portion of
such rights.
13<PAGE>
Non-interest income for the quarters ended March 31, 1995 and 1994
included $2.7 million and $4.3 million, respectively, of realized
capital gains allocated to the Association by two limited
partnerships in which the Association has invested. The remaining
net gains on investment securities for the quarter ended March 31,
1994 resulted primarily from the sale of fixed rate securities from
the available-for-sale portfolio.
Non-interest Expense
- --------------------
Total non-interest expense was $14.4 million and $31.1 million for
the quarters ended March 31, 1995 and 1994, respectively. General
and administrative expenses (compensation and benefits, occupancy
and equipment, and other general and administrative expenses) were
$12.1 million and $18.4 million for the quarters ended March 31,
1995 and 1994, respectively. The decrease of $6.3 million was due
to lower general and administrative expenses as a result of the
closing of the California and Colorado mortgage offices during the
first quarter of 1994 and the sale of fifteen branches during the
second and third quarters of 1994. As a result of this decrease,
the Association's annualized ratio of general and administrative
expenses to average total assets was 1.52% for the three months
ended March 31, 1995, compared to 1.93% for the same three months
in 1994. Finally, consistent with the Company's goal of reducing
its geographic exposure, REO expense decreased by $9.8 million to
$580,000 due primarily to: (1) a $7.0 million valuation adjustment
recorded in the first quarter of 1994 to facilitate an accelerated
sale of California single-family residential REO; (2) $600,000 in
writedowns of commercial REO in 1994; and (3) the sale of $15.1
million of REO in the normal course of business during 1994.
Primarily as a result of these sales of REO in 1994, the level of
REO decreased to $15.9 million at March 31, 1995 from $58.6 million
a year earlier.
Income Taxes
- ------------
Income tax expense totaled $1.8 million for the three-month period
ended March 31, 1995 compared to a benefit of $1.9 million for the
three-month period ended March 31, 1994. Included in the tax
benefit at March 31, 1994 is a reversal of $1.5 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.
14<PAGE>
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. For the fourth consecutive quarter, Northeast
Savings met the definition of a well-capitalized thrift.
The following table reflects the regulatory capital position of the
Association as well as the current regulatory capital requirements
at March 31, 1995 and 1994:
<TABLE>
<CAPTION>
March 31, 1995 March 31, 1994
------------------------------------ -----------------------------------
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 $180,520 $ 50,341 $168,809 $ 54,409
Percent 5.38% 1.50% 4.65% 1.50%
Core capital (leverage) $180,633 $134,247 $169,311 $145,110
Percent 5.38% 4.00% 4.67% 4.00%
Risk-based capital $192,151 $ 96,379 $180,787 $107,608
Percent 15.95% 8.00% 13.44% 8.00%
</TABLE>
RHODE ISLAND COVERED ASSETS
- ---------------------------
At the dates indicated, the Association's portfolio of Rhode Island
covered assets was as follows:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1995* 1994* 1994*
--------- ------------ ---------
(In Thousands)
<S> <C> <C> <C>
Loans:
Single-family residential real estate loans....... $ 29,220 $ 30,573 $ 36,502
Consumer loans.................................... 13,870 14,701 19,003
Income property loans............................. 32,798 33,116 36,522
Commercial loans.................................. 956 1,032 1,269
------- ------- -------
Total loans................................... 76,844 79,422 93,296
REO................................................. 2,587 2,814 6,563
------- ------- -------
Total covered assets.......................... $ 79,431 $ 82,236 $ 99,859
======= ======= =======
<FN>
* Net of credit and interest adjustments
</FN>
</TABLE>
15<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>
March 31, 1995 December 31, 1994 March 31, 1994
-------------- ----------------- --------------
(In Thousands)
<S> <C> <C> <C>
Single-family residential real
estate loans........................ $1,666 $1,859 $ 2,157
Consumer loans........................ 636 682 1,146
Income property loans................. 1,921 2,874 3,628
Commercial loans...................... - 1 31
----- ----- ------
Total................................. $4,223 $5,416 $ 6,962
===== ===== ======
</TABLE>
FINANCIAL CONDITION
- -------------------
Total assets at March 31, 1995 were $3.4 billion, compared to $3.3
billion and $3.6 billion at December 31 and March 31, 1994,
respectively. Asset size and composition have generally been
determined by seeking the optimal balance among regulatory capital
requirements, liquidity, yield, and risk.
Since 1989, the Company has pursued the operating strategy of
providing traditional thrift banking services, namely gathering
retail deposits and investing those deposits in adjustable rate
residential mortgages and mortgage-backed securities. The decrease
in total assets from March 31, 1994 to December 31, 1994 was
primarily due to the aforementioned sales of primarily California
single-family residential loans and fifteen branch offices during
1994.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
The primary source of funds for the Association is retail deposits,
while secondary sources include FHLB advances; repurchase
agreements; debentures; and internally-generated cash flows
resulting from the maturity, amortization, and prepayment of assets
as well as sales of loans and securities from the available-for-
sale portfolios.
Retail deposits, the Association's least expensive source of funds,
totaled $2.5 billion at March 31, 1995, compared to $2.4 billion
and $2.9 billion at December 31 and March 31, 1994, respectively.
The decrease in retail deposits from March 31, 1994 to December 31,
1994 was mainly due to the sale of fifteen branch offices when the
Company refocused its franchise. These sales were consistent with
Northeast Savings' intention to concentrate on the four primary
markets in which it has its greatest presence and potential for
16<PAGE>
growth: the capital region of New York State; Hartford,
Connecticut; and Springfield and Worcester, Massachusetts. The
increase in retail deposits at March 31, 1995 from December 31,
1994 is due mainly from an increase in certificate of deposits
which have been paying competitive rates in response to the overall
increase in interest rates.
The Association's ongoing principal use of capital resources
remains the origination of single-family residential mortgage
loans. However, with a reduction in loan originations due to
market conditions and change in the Association's operating
strategy, capital resources were also used to purchase mortgage-
backed securities. 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
March 31,
-------------------------------------------
1995 1994
-------------------- --------------------
Amount % of Total Amount % of Total
-------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Adjustable.... $ 7,462 73.68% $ 18,658 25.81%
Fixed......... 2,666 26.32% 53,621 74.19
------- ------ ------- ------
Total..... $ 10,128 100.00% $ 72,279 100.00%
======= ====== ======= ======
</TABLE>
The composition of the Association's residential mortgage loan
portfolio at March 31, 1995, December 31, 1994, and March 31, 1994
was as follows:
<TABLE>
<CAPTION>
March 31, 1995 December 31, 1994 March 31, 1994
---------------------- ---------------------- ----------------------
Amount % of Total Amount % of Total Amount % of Total
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Adjustable....... $ 719,003 87.47% $ 737,807 87.47% $ 773,847 85.56%
Fixed............ 103,013 12.53 105,670 12.53 130,633 14.44
--------- ------ --------- ------ --------- ------
Total........ $ 822,016 100.00% $ 843,477 100.00% $ 904,480 100.00%
========= ====== ========= ====== ========= ======
</TABLE>
Total loans originated and funded during the three months ended
March 31, 1995 and 1994 were $18.1 million and $80.8 million,
respectively. The decrease in loan originations resulted primarily
from a competitive market of single-family residential loan
applications due to the increase in interest rates and from the
February 1994 closings of the Association's mortgage lending
operations in California and Colorado. At March 31, 1995, the
Association was committed to fund mortgage loans totaling $15.2
million, including $10.3 million in adjustable rate mortgages,
$13.8 million in unused home equity credit lines, $8.4 million in
unused consumer credit lines and $15.4 million in undisbursed
residential construction loans. The Association expects to fund
such loans from its liquidity sources.
Net cash used in operations during the three months ended
March 31, 1995 totaled $6.5 million. Adjustments to net income of
17<PAGE>
$2.5 million utilized $9.0 million of net cash, including loans
originated and purchased for the available-for-sale portfolio of
$2.6 million and a decrease in other liabilities of $9.4 million in
cash, proceeds from sales of loans available-for-sale generated
cash of $3.8 million. Remaining adjustments to net income used
$929,000 in cash.
Net cash used in investing activities during the three months ended
March 31, 1995 totaled $14.9 million. Loans originated and
purchased used $20.1 million of cash, while purchases of mortgage-
backed securities used cash of $110.2 million. Principal collected
on loans and mortgage-backed securities generated cash of $32.2
million and $66.0 million, respectively, while maturities of
investment securities provided $13.0 million in cash. All other
investing activities provided net cash of $4.2 million.
Net cash provided by financing activities during the three months
ended March 31, 1995 totaled $24.2 million and resulted primarily
from a $78.5 million net increase in retail deposits. Decreases in
FHLB advances and securities sold under agreements to repurchase
used $30.7 million and $23.6 million in cash, respectively.
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 $54.0 million or less, regulations require a reserve of 3%. For
total transaction account deposits in excess of $54.0 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 5.71% for the three months ended March 31, 1995, compared
to 5.97% for the three months ended March 31, 1994. 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 1.93% and 3.57% for the three months ended March 31, 1995
and 1994, 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. The Company's
ability to borrow at attractive rates is affected by its credit
rating and other market conditions.
18<PAGE>
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.
On March 17, 1995, the Company's Board of Directors voted to
declare a stock dividend payable on April 1, 1995 on the Company's
$8.50 Cumulative Preferred Stock, Series B (the Series B preferred
stock) of one share of Series B preferred stock for each $100 of
the amount of dividends payable on April 1, 1995, and accumulated
and unpaid as of that date, to holders of record on March 17, 1995.
On April 1, 1995, the Company paid the $930,544 of dividends then
payable on the Series B preferred stock through the issuance of an
additional 9,306 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 $42.3 million net balance of 9%
Debentures at March 31, 1994 require annual interest payments of
$3.8 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 $8.8 million in 9% Debentures,
which are included in the outstanding principal at March 31, 1995.
Any such issuance, however, increases the aggregate annual interest
obligation and also the amount of 9% Debentures required to be
repurchased annually commencing May 1, 1998.
INTEREST RATE RISK MANAGEMENT
- -----------------------------
From the quarter ended March 31, 1994 through the quarter ended
March 31, 1995, the Association's interest rate spread (Exhibit
99.2) increased 3 basis points, averaging 1.70% and 1.67% for the
quarters ended March 31, 1995 and 1994, respectively. 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 March 31, 1995 was a positive $5.8
million, or .17% of assets, compared to a positive $313.7 million,
or 8.65% of assets, at March 31, 1994. 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.
19<PAGE>
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 effects of these options, and particularly the
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 March 31, 1995, the Company has $36.4
million of borrowings indexed to LIBOR and $480.7 million of fixed
rate borrowings, the rates on which were set initially off LIBOR.
As of March 31, 1995, the Company had $57.7 million of earning
assets indexed to LIBOR.
REGULATIONS
- -----------
OTS Interest Rate Risk Component. The OTS also has adopted an
interest rate risk component for its regulatory capital
requirements. Under the rule, savings associations are divided
into two groups, those with "normal" levels of interest rate risk
and those with greater than "normal" levels of interest rate risk.
Associations with greater than normal levels will be subject to a
deduction from total capital for purposes of calculating risk-based
capital. Interest rate risk is measured by the change in Net
Portfolio Value under a 2.0% change in market interest rates. The
Net Portfolio Value is the economic value of an association's
assets less the economic value of its liabilities adjusted for the
economic value of off-balance-sheet contracts. If an association's
change in Net Portfolio Value under a 2.0% change in market
interest rates exceeds 2.0% of the estimated economic value of its
assets, it will be considered to have greater than normal interest
rate risk, and its total capital for risk-based capital purposes
will be reduced by one-half of the difference between its measured
interest rate risk and the normal level of 2.0%. The rule adjusts
the interest rate risk measurement methodology when interest rates
are low. In the event that the 3-month Treasury rate is below
4.0%, interest rate risk will be measured under a 2.0% increase in
interest rates and under a decrease in interest rates equal to one-
half the value of the 3-month Treasury rate. On March 20, 1995 the
OTS waived the interest rate deduction until they have published
guidelines under which institutions may appeal such a deduction.
Insurance of Deposits. The FDIC has adopted a risk-based deposit
insurance premium assessment system which was implemented with the
semi-annual assessment period commencing January 1, 1994. An
institution's risk category is based partly upon whether the
institution is well-capitalized, adequately capitalized, or less
than adequately capitalized. Since June 30, 1994, Northeast
20<PAGE>
Savings has been deemed to be a well-capitalized thrift. The first
two groups are defined by application of the capital ratio
standards imposed under the prompt corrective action rule
(discussed above). The third group consists of those institutions
not qualifying as well capitalized or adequately capitalized.
Within each group, institutions are assigned to one of three
supervisory subgroups: financially sound institutions with only a
few minor weaknesses; institutions that demonstrate weaknesses
which, if not corrected, could result in significant deterioration;
and institutions for which there is a substantial probability that
the FDIC will suffer a loss in connection with the institution
unless effective action is taken to correct the areas of weakness.
The FDIC assigns institutions to supervisory subgroups on the basis
of supervisory evaluations provided by the institution's primary
federal regulator and such other information as the FDIC determined
to be relevant to the institution's financial condition and the
risk posed to the insurance fund. The supervisory subgroup to
which an institution was assigned by the FDIC is confidential and
may not be disclosed. Based upon its capital and supervisory
subgroups, each member institution is assigned an FDIC assessment
rate ranging from 23 cents for each $100 of insured deposits to 31
cents for each $100 of insured deposits. A savings association's
capital group is determined on the basis of data reported in its
thrift financial report as of the date closest to June 30 or
December 31 that included capital data. Northeast Savings is
deemed to be a well capitalized association. For the three months
ended March 31, 1995, the Savings Association Insurance Fund (SAIF)
deposit insurance premium expense for the Association totaled $1.6
million, compared to $2.2 million for the same three months last
year. The FDIC is authorized to raise insurance premiums for SAIF
members in certain circumstances. If the FDIC determined to
increase the assessment rate for all SAIF institutions,
institutions in all risk categories could be affected. Any
increase in premiums could have an adverse effect on the
Association's earnings.
Both the SAIF and the Bank Insurance Fund (BIF) are statutorily
required to be recapitalized to a 1.25% of insured reserve deposits
ratio. It is presently projected by the FDIC that the BIF will
reach the required reserve ratio by mid-1995, whereas the SAIF is
not expected by the FDIC to be recapitalized until 2002 at the
earliest. The Resolution Trust Corporation Completion Act (the RTC
Completion Act) authorizes $8 billion in funding for the SAIF;
however, such funds only become available to the SAIF if the FDIC
determines that the funds are needed to cover losses of the SAIF
and several other stringent criteria are met.
The FDIC recently proposed to establish a new assessment rate
schedule of 4 to 31 basis points for BIF members beginning in the
third quarter of 1995. Under that proposal, approximately 91% of
BIF members would pay the lowest assessment rate of 4 basis points.
The FDIC proposed to retain the existing assessment rate schedule
of 23 to 31 basis points applicable to SAIF member institutions.
22<PAGE>
In announcing this proposed rule, the FDIC noted that the premium
differential may have adverse consequences for SAIF members,
including reduced earnings and an impaired ability to raise funds
in the capital markets.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
- ----------------------------------------------
In March 1995, the Board issued FASB Statement No. 121 (SFAS 121),
Accounting for Long-Lived Assets and for Long-Lived Assets to Be
- ----------------------------------------------------------------
Disposed Of which establishes accounting standards for the
- -----------
impairment of long-lived assets, certain identifiable intangibles,
and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be
disposed of.
SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. In
performing the review for recoverability, the entity should
estimate the future cash flows expected to result from the use of
the asset and its eventual disposition. If the sum of the expected
future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset, an impairment loss is
recognized. Otherwise, an impairment loss is not recognized.
Measurement of an impairment loss for long-lived assets and
identifiable intangibles that an entity expects to hold and use
should be based on the fair value of the asset.
SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell, except for assets that are
covered by APB Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." Assets that are covered by Opinion 30
will continue to be reported at the lower of carrying amount or net
realizable value.
SFAS 121 is effective for financial statements for fiscal years
beginning after December 15, 1995. Earlier application is
encouraged. Restatement of previously issued financial statements
is not permitted. Impairment losses resulting from the application
of this Statement should be reported in the period in which the
recognition criteria are first applied and met. The initial
application of this Statement to assets that are being held for
disposal at the date of adoption should be reported as the
cumulative effects of a change in accounting principle. Management
does not expect the adoption of SFAS 121 to have a material impact
on the financial condition of the Company.
22<PAGE>
SELECTED RATIOS AND STATISTICS
- ------------------------------
The Company's annualized return on average assets was .30% for the
quarter ended March 31, 1995, compared to .11% for the quarter
ended March 31, 1994. The annualized return on stockholders'
equity was 6.48% for the three months ended March 31, 1995, versus
.66% for the same period in 1994.
23<PAGE>
PART II
ITEM 1 - LEGAL PROCEEDINGS
- --------------------------
In addition to the suit Northeast Savings filed against the United
States of America concerning the denial of full regulatory capital
treatment for supervisory goodwill acquired by Northeast Savings as
a result of its 1982 acquisitions from the Federal Savings and Loan
Insurance Corporation, which has been fully disclosed in Part I of
its Form 10-K for the fiscal year ended December 31, 1994, the
Association is also involved in litigation arising in the normal
course of business. Although the legal responsibility and
financial impact with respect to such litigation cannot presently
be ascertained, the Association does not anticipate that any of
these matters will result in the payment by the Association of
damages that, in the aggregate, would be material in relation to
the consolidated financial position or operations of the Company.
ITEM 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.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
ITEM 5 - OTHER INFORMATION
- --------------------------
None.
24<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 per common share
27.0 - Financial Data Schedule
99.1 - Interest rate sensitivity analysis at March 31, 1995
99.2 - Average balance sheet for the three months ended
March 31, 1995 and 1994
99.3 - Rate/Volume analysis for the three months ended
March 31, 1995 and 1994
(b) Reports on Form 8-K
None.
25<PAGE>
<TABLE>
Exhibit 11.1
NORTHEAST FEDERAL CORP.
COMPUTATION OF NET INCOME PER COMMON SHARE
(Dollars in Thousands, Except Per Share Amounts)
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1995 1994
---------- ----------
<S> <C> <C>
Primary income per common share:
Net income...................................... $ 2,517 $ 1,007
Preferred stock dividend requirements........... (930) (855)
---------- ----------
Net income applicable to common stockholders
for the calculation of primary income......... $ 1,587 $ 152
========== ==========
Weighted average shares outstanding................. 14,771,159 13,509,609
Unallocated ESOP shares............................. (402,196) (497,196)
Dilutive effect of outstanding stock options........ 554,599 256,456
Dilutive effect of outstanding stock warrants....... - 359,702
---------- ----------
Weighted average shares, as adjusted, for
the calculation of primary income................. 14,923,562 13,628,571
========== ==========
Primary income per common share.............. $ .11 $ .01
========== ==========
Fully diluted income per common share:
Net income...................................... $ 2,517 $ 1,007
Preferred stock dividend requirements........... (930) (855)
---------- ----------
Net income applicable to common stockholders
for the calculation of fully diluted income... $ 1,587 $ 152
========== ==========
Weighted average shares outstanding................. 14,771,159 13,509,609
Unallocated ESOP shares............................. (402,196) (497,196)
Dilutive effect of outstanding stock options........ 631,429 265,856
Dilutive effect of outstanding stock warrants....... - 375,833
---------- ----------
Weighted average shares, as adjusted, for
the calculation of fully diluted income........... 15,000,392 13,654,102
========== ==========
Fully diluted income per common share............... $ .11 $ .01
========== ==========
</TABLE>
26<PAGE>
<TABLE>
Exhibit 27.0
NORTHEAST FEDERAL CORP.
ARTICLE 9 FINANCIAL DATA SCHEDULE
(Dollars in Thousands, Except Per Share and Yield Amounts)
<S> <C>
PERIOD-TYPE QUARTER
FISCAL-YEAR-END............................ DEC-31-1995
PERIOD END................................. MAR-31-1995
CASH....................................... 37,546
INTEREST-BEARING DEPOSITS.................. -
FED FUNDS SOLD............................. 22,065
TRADING ACCOUNT ASSETS..................... -
INVESTMENTS HELD-FOR-SALE.................. 189,971
INVESTMENTS AT CARRYING VALUE.............. 1,967,386
INVESTMENTS AT MARKET VALUE................ 1,918,071
LOANS...................................... 945,022
ALLOWANCE FOR LOSSES....................... 11,518
TOTAL ASSETS............................... 3,363,762
DEPOSITS................................... 2,472,215
SHORT-TERM BORROWINGS...................... 653,493
OTHER LIABILITIES.......................... 49,578
LONG-TERM DEBT............................. 42,257
COMMON STOCK............................... 155
PREFERRED STOCK - MANDATORY REDEMPTION..... -
PREFERRED STOCK - NO MANDATORY REDEMPTION.. 4
OTHER STOCKHOLDERS' EQUITY................. 146,060
TOTAL LIABILITIES AND EQUITY............... 3,363,762
INTEREST INCOME - LOANS.................... 17,659
INTEREST INCOME - INVESTMENTS.............. 33,660
INTEREST INCOME - OTHER.................... 2,086
TOTAL INTEREST INCOME...................... 53,405
INTEREST EXPENSE - DEPOSITS................ 27,097
TOTAL INTEREST EXPENSE..................... 38,847
NET INTEREST INCOME........................ 14,558
PROVISION FOR LOAN LOSSES.................. 750
GAINS ON INVESTMENT SECURITIES............. 2,703
TOTAL OTHER EXPENSES....................... 14,412
INCOME BEFORE INCOME TAX................... 4,340
INCOME BEFORE EXTRAORDINARY ITEMS.......... 4,340
EXTRAORDINARY ITEMS........................ -
CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLES. -
NET INCOME................................. 2,517
EPS-PRIMARY................................ .11
EPS-DILUTED................................ .11
INTEREST RATE SPREAD....................... 1.70%
LOANS - NON-ACCRUAL........................ 27,927
LOANS - PAST DUE........................... -
LOANS - TROUBLED DEBT RESTRUCTURING........ -
LOANS - POTENTIAL PROBLEM.................. 1,363
ALLOWANCE FOR LOAN LOSS - OPENING BALANCE.. 11,746
CHARGE-OFFS................................ 1,072
RECOVERIES................................. 94
ALLOWANCE FOR LOAN LOSS - CLOSING BALANCE.. 11,518
ALLOWANCE FOR LOAN LOSS - DOMESTIC......... 10,974
ALLOWANCE FOR LOAN LOSS - FOREIGN.......... -
ALLOWANCE FOR LOAN LOSS - UNALLOCATED...... 544
</TABLE>
27<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>
March 31, 1995
Interest-earning assets:
Interest-bearing deposits,
federal funds sold and
investment securities, net..... $ 66,940 $ 31,913 $ 219,774 $ 3,901 $ 33,786 $ 356,314
Mortgage-backed securities, net.. 846,741 546,513 184,710 230,010 15,134 1,823,108
Loans, net:
Single-family residential real
estate loans:
Adjustable rate.............. 393,761 272,045 33,574 1,218 - 700,598
Fixed rate................... 5,856 4,518 30,690 40,033 15,343 96,440
Consumer loans ................ 21,622 2,241 12,968 2,512 - 39,343
Residential construction loans. 9,945 - - - - 9,945
Income property loans.......... 42,423 1,889 13,730 12,646 81 70,769
Rhode Island covered assets.... 47,905 6,920 11,029 7,193 - 73,047
--------- --------- --------- --------- --------- ---------
Total interest-earning assets...... $1,435,193 $ 866,039 $ 506,475 $ 297,513 $ 64,344 $3,169,564
========= ========= ========= ========= ========= =========
Interest-bearing liabilities:
Deposits:
NOW and Super NOW accounts..... $ 38,949 $ 2,801 $ 19,999 $ 19,866 $ 67,951 $ 149,566
Money market deposit accounts.. 245,331 - - - - 245,331
Regular savings ............... 78,918 6,097 43,537 43,247 147,926 319,725
Certificates of deposit........ 940,542 370,746 364,404 54,044 - 1,729,736
--------- --------- --------- --------- --------- ---------
Total deposits............. 1,303,740 379,644 427,940 117,157 215,877 2,444,358
--------- --------- --------- --------- --------- ---------
Borrowings:
FHLB advances................. 131,400 - 40,000 1,400 - 172,800
Securities sold under agree-
ments to repurchase......... 480,693 - - - - 480,693
Long term borrowings.......... - - - 42,257 42,257
Advance payment by borrowers for
taxes and insurance............ - - - - 17,871 17,871
--------- --------- --------- --------- --------- ---------
Total borrowings........... 612,093 - 40,000 1,400 60,128 713,621
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities. $1,915,833 $ 379,644 $ 467,940 $ 118,557 $ 276,005 $3,157,979
========= ========= ========= ========= ========= =========
Total interest-earning assets less
interest-bearing liabilities for
the period..................... $ (480,640) $ 486,395 $ 38,535 $ 178,956 $ (211,661) $ 11,585
Cumulative total interest-earning
assets less interest-bearing
liabilities.................... $ (480,640) $ 5,755 $ 44,290 $ 233,246 $ 11,585 $ 11,585
Cumulative total interest-earning
assets less interest-bearing
liabilities as a percent of
total assets................... (14.29)% 0.17% 1.32% 6.64% 0.34% 0.34%
<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 $72.7 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 $11.5 million.
* Loans do not include non-accrual loans of $27.9 million.
</FN>
</TABLE>
29<PAGE>
<TABLE>
Exhibit 99.2
NORTHEAST FEDERAL CORP.
AVERAGE BALANCE SHEET
<CAPTION>
Three Months Ended March 31,
------------------------------------------------------------------
1995 1994
----------------------------- -----------------------------
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.......... $ 27,594 $ 497 7.20% $ 54,606 $ 542 3.97%
Investment securities, net........ 338,581 5,059 5.98 209,735 2,216 4.23
Mortgage-backed securities, net... 1,816,279 28,601 6.30 1,424,198 16,825 4.73
Loans, net:
Real estate..................... 834,902 14,946 7.16 1,712,818 25,180 5.88
Consumer........................ 39,215 887 9.05 35,017 753 8.60
Residential construction........ 9,336 246 10.54 4,477 93 8.31
Income property................. 74,481 1,580 8.49 66,964 1,357 8.11
--------- ------ --------- ------
Total loans................... 957,934 17,659 7.37 1,819,276 27,383 6.02
--------- ------ --------- ------
Rhode Island covered assets....... 80,526 1,589 7.89 102,853 1,724 6.70
--------- ------ --------- ------
Total interest-earning assets....... 3,220,914 53,405 6.63% 3,610,668 48,690 5.39%
------ ------
All other assets.................... 131,056 211,300
--------- ---------
Total Assets.................. $3,351,970 $3,821,968
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Interest-bearing liabilities:
Brokered deposits................. $ - $ - - % $ 25,330 $ 597 9.56%
Retail deposits:
Regular savings................. 335,099 2,002 2.42 568,415 3,058 2.18
NOWs, Super NOWs
and money market savings...... 434,843 2,476 2.31 618,288 3,193 2.09
Certificates.................... 1,655,465 22,619 5.54 1,738,977 20,015 4.67
--------- ------ --------- ------
Total deposits................ 2,425,407 27,097 4.53 2,951,010 26,863 3.69
--------- ------ --------- ------
Borrowings:
FHLB advances................... 200,739 3,072 6.21 334,181 3,109 3.77
Securities sold under
agreements to repurchase...... 506,580 7,572 6.06 299,426 2,533 3.43
Other borrowings................ 60,486 1,106 7.42 62,414 973 6.32
--------- ------ --------- ------
Total borrowings.............. 767,805 11,750 6.21 696,021 6,615 3.85
--------- ------ --------- ------
Total interest-bearing
liabilities..................... 3,193,212 38,847 4.93% 3,647,031 33,478 3.72%
------ ------
All other liabilities............... 16,544 42,870
Stockholders' Equity................ 142,214 132,067
--------- ---------
Total Liabilities and
Stockholders' Equity........ $3,351,970 $3,821,968
========= =========
Net Interest Income................. $14,558 $15,212
====== ======
Interest Rate Spread................ 1.70% 1.67%
===== =====
Interest Rate Margin................ 1.74% 1.63%
</TABLE>
29<PAGE>
<TABLE>
Exhibit 99.3
NORTHEAST FEDERAL CORP.
RATE/VOLUME ANALYSIS
<CAPTION>
1995 versus 1994
------------------------------------------------
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............... $ (268) $ 442 $ (219) $ (45)
Investment securities, net............. 1,361 918 564 2,843
Mortgage-backed securities, net........ 4,632 5,602 1,542 11,776
Loans, net:
Single-family residential real
estate............................. (12,906) 5,482 (2,810) (10,234)
Consumer............................. 90 39 5 134
Residential construction............. 101 25 27 153
Income property...................... 152 64 7 223
-------- ------- ------ --------
Total loans...................... (12,563) 5,610 (2,771) (9,724)
-------- ------- ------ --------
Rhode Island covered assets.......... (374) 306 (67) (135)
-------- ------- ------ --------
Total interest income.......... (7,212) 12,878 (951) 4,715
-------- ------- ------ --------
Interest expense:
Deposits:
Brokered deposits.................... (597) - - (597)
Retail deposits:
Regular savings.................... (1,255) 338 (139) (1,056)
NOWs, Super NOWs and money
market savings................... (947) 328 (98) (717)
Certificates....................... (961) 3,745 (180) 2,604
-------- ------- ------ --------
Total deposits................... (3,760) 4,411 (417) 234
-------- ------- ------ --------
Borrowings:
FHLB advances........................ (1,241) 2,005 (801) (37)
Securities sold under
agreements to repurchase........... 1,752 1,943 1,344 5,039
Other borrowings..................... (30) 168 (5) 133
-------- ------- ------ --------
Total borrowings................... 481 4,116 538 5,135
-------- ------- ------ --------
Total interest expense......... (3,279) 8,527 121 5,369
-------- ------- ------ --------
Change in net interest income............ $ (3,933) $ 4,351 $(1,072) $ (654)
======== ======= ====== =======
</TABLE>
30<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
May 12, 1995 /s/ LYNNE C. WILSON
-----------------------------------
Lynne C. Wilson
Senior Vice President and Controller
(Principal Accounting Officer)
31
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 37,546
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 22,065
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 189,971
<INVESTMENTS-CARRYING> 1,967,386
<INVESTMENTS-MARKET> 1,918,071
<LOANS> 945,022
<ALLOWANCE> 11,518
<TOTAL-ASSETS> 3,363,762
<DEPOSITS> 2,472,215
<SHORT-TERM> 653,493
<LIABILITIES-OTHER> 49,578
<LONG-TERM> 42,257
<COMMON> 155
0
4
<OTHER-SE> 146,060
<TOTAL-LIABILITIES-AND-EQUITY> 3,363,762
<INTEREST-LOAN> 17,659
<INTEREST-INVEST> 33,660
<INTEREST-OTHER> 2,086
<INTEREST-TOTAL> 53,405
<INTEREST-DEPOSIT> 27,097
<INTEREST-EXPENSE> 38,847
<INTEREST-INCOME-NET> 14,558
<LOAN-LOSSES> 750
<SECURITIES-GAINS> 2,703
<EXPENSE-OTHER> 14,412
<INCOME-PRETAX> 4,340
<INCOME-PRE-EXTRAORDINARY> 4,340
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,517
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
<YIELD-ACTUAL> 1.70
<LOANS-NON> 27,927
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,363
<ALLOWANCE-OPEN> 11,746
<CHARGE-OFFS> 1,072
<RECOVERIES> 94
<ALLOWANCE-CLOSE> 11,518
<ALLOWANCE-DOMESTIC> 10,974
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 544
</TABLE>
