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, 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 April 8, 1994.
Common Stock, $.01 par value -- 13,521,591
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, 1994
and 1993....................................... 1
Consolidated Statement of Financial Condition
at March 31, 1994, December 31, 1993, and
March 31, 1993................................. 2
Consolidated Statement of Cash Flows
for the three months ended March 31, 1994 and
1993........................................... 3
Notes to the Consolidated Financial Statements...... 4
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition for the Fiscal
Quarter Ended March 31, 1994........................ 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................... 35
Item 2. Changes in Securities............................... 36
Item 3. Defaults Upon Senior Securities..................... 36
Item 4. Submission of Matters to a Vote of Security Holders. 36
Item 5. Other Information................................... 36
Item 6. Unaudited Exhibits and Reports on Form 8-K.......... 37
PART I
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands Except Per Share Amounts)
Three Months Ended
March 31,
---------------------------
1994 1993
---------- ----------
Interest income:
Loans............................................ $ 27,383 $ 38,553
Mortgage-backed securities....................... 16,825 12,848
Investment securities............................ 2,216 3,476
Rhode Island covered assets...................... 1,724 2,246
Other............................................ 542 199
--------- ---------
Total interest income......................... 48,690 57,322
--------- ---------
Interest expense:
Deposits......................................... 26,863 32,351
Federal Home Loan Bank advances.................. 3,109 2,103
Other borrowings................................. 3,506 3,241
--------- ---------
Total interest expense........................ 33,478 37,695
--------- ---------
Net interest income......................... 15,212 19,627
Provision for loan losses........................... 2,200 4,850
--------- ---------
Net interest income after provision
for loan losses............................ 13,012 14,777
--------- ---------
Non-interest income:
Fees for services................................ (491) 2,835
Gain on sale of securities, net.................. 4,364 3,861
Gain on sale of loans, net....................... 13,549 322
Other non-interest income........................ (143) 17
--------- ---------
Total non-interest income..................... 17,279 7,035
--------- ---------
Non-interest expenses:
Compensation and benefits........................ 7,683 8,199
Occupancy and equipment, net..................... 6,178 4,029
Other general and administrative................. 4,584 4,918
SAIF insurance fund and OTS assessments.......... 2,356 1,783
Real estate and other assets acquired in settle-
ment of loans.................................. 10,340 2,627
--------- ---------
Total non-interest expenses................... 31,141 21,556
--------- ---------
Income (loss) before income taxes.......... (850) 256
Income tax expense (benefit)........................ (1,857) 115
--------- ---------
Net income................................. $ 1,007 $ 141
========= =========
Preferred stock dividend requirements............... $ 855 $ 1,653
Net income (loss) applicable to common stockholders. $ 152 $ (1,512)
Net income (loss) per common share:
Primary and fully diluted........................ $ .01 $ (.26)
<FN>
See accompanying Notes to the Consolidated Financial Statements
1
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(In Thousands Except Share Amounts)
March 31, December 31, March 31,
------------ ------------ ------------
1994 1993 1993
------------ ------------ ------------
ASSETS
Cash and due from banks......................... $ 34,939 $ 51,705 $ 36,840
Interest-bearing deposits....................... - - 170
Federal funds sold.............................. 22,210 23,510 23,110
Securities purchased under agreements to resell. - 60,000 -
Investment securities, net...................... 146,698 42,612 109,716
Investment securities available-for-sale, net... 423,357 162,854 125,677
Mortgage-backed securities, net................. 1,703,991 1,330,886 983,667
Mortgage-backed securities available-for-sale,
net........................................... 11,323 12,886 15,236
Loans, net...................................... 978,643 1,876,181 2,299,630
Loans available-for-sale, net................... 18,389 46,076 18,273
Rhode Island covered assets..................... 99,859 105,625 130,109
Interest and dividends receivable............... 17,632 17,540 22,237
Real estate and other assets acquired in settle-
ment of loans................................. 58,595 74,962 103,002
Premises and equipment, net..................... 31,046 32,368 34,059
Prepaid expenses and other assets............... 81,760 82,822 77,994
--------- --------- ---------
Total assets............................. $3,628,442 $3,920,027 $3,979,720
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Retail deposits................................. $2,922,451 $2,952,082 $3,109,909
Brokered deposits............................... 25,701 25,135 25,701
Federal Home Loan Bank advances................. 228,000 373,000 313,000
Securities sold under agreements to repurchase.. 197,158 294,809 271,719
Uncertificated debentures....................... 38,446 38,442 34,987
Convertible subordinated debentures............. - - 560
Advance payments by borrowers for taxes and
insurance..................................... 23,870 28,337 29,236
Other liabilities............................... 61,105 75,709 56,585
--------- ---------- ---------
Total liabilities........................ 3,496,731 3,787,514 3,841,697
--------- ---------- ---------
Commitments and Contingencies
Stockholders' equity:
Serial preferred stock, $.01 par value,
15,000,000 shares authorized:
$2.25 Cumulative Convertible Preferred Stock
Series A, 1,610,000 shares issued and
outstanding at March 31, 1993.............. - - 16
$8.50 Cumulative Preferred Stock, Series B,
402,576 shares at March 31, 1994, 394,199
shares at December 31, 1993 and 351,700
shares at March 31, 1993 issued and
outstanding................................ 4 4 4
Common stock, $.01 par value, 25,000,000 shares
authorized: 13,519,193 shares at March 31,
1994, 13,499,078 shares at December 31,
1993 and 5,794,373 shares at March 31, 1993
issued and outstanding....................... 135 135 58
Additional paid-in capital..................... 186,799 185,960 182,950
Net unrealized gains on debt and equity
securities available-for-sale................ 7,489 9,462 -
Accumulated deficit............................ (59,405) (59,557) (40,189)
Stock dividend distributable................... 855 838 -
Unallocated employee stock ownership plan
shares....................................... (4,166) (4,329) (4,816)
--------- --------- ---------
Total stockholders' equity............... 131,711 132,513 138,023
--------- --------- ---------
$3,628,442 $3,920,027 $3,979,720
========= ========= =========
<FN>
See accompanying Notes to the Consolidated Financial Statements
2
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Three Months Ended
March 31,
----------------------------
1994 1993
------------ -------------
Cash flows from operating activities:
Net income..................................................... $ 1,007 $ 141
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.............................. 2,101 1,272
Amortization of fees, discounts, and premiums, net......... 2,881 (434)
Provision for loan losses.................................. 2,200 4,850
Provision for losses on REO................................ 8,847 730
Gain on sale of securities................................. (4,364) (3,861)
Gain on sale of loans...................................... (13,549) (322)
(Gain) loss on sale of other assets........................ 194 (7)
Increase in interest and dividends receivable.............. (92) (895)
Loans available-for-sale originated and purchased.......... (42,173) (25,964)
Proceeds from sales of loans available-for-sale............ 69,192 40,763
Increase in accrued interest payable on deposits........... 1,482 1,156
Decrease (increase) in prepaid expenses and other assets... 1,062 (3,271)
Increase (decrease) in other liabilities................... (13,117) 3,211
---------- ----------
Total adjustments....................................... 14,664 17,228
---------- ----------
Net cash provided by operating activities............. 15,671 17,369
---------- ----------
Cash flows from investing activities:
Loans originated and purchased............................. (45,809) (157,911)
Proceeds from sales of loans............................... 870,653 1,588
Principal collected on loans............................... 77,158 85,137
Net decrease in Rhode Island covered assets................ 5,766 21,613
Purchases of mortgage-backed securities.................... (479,977) (166,304)
Proceeds from sales of mortgage-backed securities
available-for-sale....................................... - 39,831
Principal collected on mortgage-backed securities.......... 105,513 43,259
Purchases of investment securities......................... (105,236) -
Proceeds from redemption of FHLB stock..................... (487) -
Proceeds from sales of investment securities............... - 508
Proceeds from maturities of investment securities.......... 1,565 2,570
Purchases of investment securities available-for-sale...... (291,373) (65,893)
Proceeds from sales of investment securities available-for
-sale.................................................... 5,005 44,220
Proceeds from maturities of investment securities
available-for-sale...................................... 27,052 26,411
Proceeds from sales of real estate and other assets
acquired in settlement of loans......................... 14,926 13,153
Net purchases of premises and equipment.................... (992) (1,200)
---------- ----------
Net cash provided by (used in) investing activities... 183,764 (113,018)
---------- ----------
Cash flows from financing activities:
Net decrease in retail deposits............................ (30,547) (96,335)
Increase (decrease) in advance payments by borrowers for
taxes and insurance..................................... (4,467) 7,502
Decrease in securities sold under agreements to repurchase. (97,651) (19,295)
Net increase (decrease) in short-term FHLB advances........ (47,000) 35,000
Proceeds from long-term FHLB advances...................... - 173,000
Repayments of long-term FHLB advances...................... (98,000) (35,000)
Reduction of ESOP debt guarantee........................... 82 162
Issuance of 401-K stock shares............................. 63 48
Proceeds from exercise of stock options.................... 19 99
---------- ----------
Net cash provided by (used) in financing activities... (277,501) 65,181
---------- ----------
Net decrease in cash and cash equivalents.................. (78,066) (30,468)
Cash and cash equivalents at beginning of period........... 135,215 90,588
---------- ----------
Cash and cash equivalents at end of period................. $ 57,149 $ 60,120
========== ==========
See accompanying Notes to the Consolidated Financial Statements
3
NORTHEAST FEDERAL CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 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, 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.
Three Months Ended
March 31,
--------------------------
1994 1993
------------ -----------
(In Thousands)
Cash paid during the periods for:
Interest on retail deposits........................... $ 25,343 $ 31,165
Interest paid on brokered deposits.................... 31 31
Interest on borrowings................................ 9,687 4,129
Income taxes.......................................... 222 567
Cash received during the periods for:
Interest and dividends................................ 48,598 56,552
Non-cash items:
Loans securitized into mortgage-backed securities..... - 29,033
Transfers of loans to available-for-sale.............. (777) 601
Transfers of mortgage-backed securities to available-
for-sale............................................ - 81
Real estate and other assets acquired in settlement
of loans............................................ 7,447 17,501
Payment in kind on Series B preferred stock........... 838 -
Net unrealized losses on debt and equity securities
available-for-sale.................................. (3,400) -
3) Commitments and Contingencies
-----------------------------
At March 31, 1994, outstanding commitments to originate
adjustable rate and fixed rate mortgage loans amounted to
$5.7 million and $14.7 million, respectively. At
March 31, 1994, Northeast Savings, F.A. also had commitments
4
NORTHEAST FEDERAL CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1994
3) Commitments and Contingencies (continued)
-----------------------------
to originate $2.7 million in residential construction loans.
At March 31, 1994, Northeast Savings, F.A. also had the
following commitments:
To Buy To Sell
------ -------
(In Thousands)
Investment securities............. $42,230 $ -
Investment securities available-
for-sale........................ 10,025 281,375
Mortgage-backed securities........ 69,957 -
Loans available-for-sale.......... - 18,183
Northeast Savings, F.A. is involved in litigation arising in
the normal course of business. Although the legal
responsibility and financial impact with respect to such
litigation cannot presently be ascertained, management does
not anticipate that any of these matters will result in the
payment of damages by Northeast Savings, F.A. that, in the
aggregate, would be material in relation to the consolidated
results of operation or financial position of Northeast
Federal Corp.
4) Significant Transactions
------------------------
The Company has signed definitive agreements for sales of
fifteen of its branches. The sales are pending and no loss
is anticipated on the completion of the transactions. The
agreements are discussed further in Management's Discussion
and Analysis of Results of Operations and Financial
Condition.
5
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION FOR THE QUARTER ENDED
MARCH 31, 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 "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.
First quarter results show increasingly strong performance and
reflect a concerted effort to concentrate in markets and geographic
areas that comprise the Association's greatest market presence.
During the first quarter, the Company took a number of steps to
strengthen its financial position, to reduce its level of non-
performing assets, and to focus on the areas where the
Association has a significant market share. First, the
Association restructured its mortgage portfolio and reduced its
exposure to the California real estate market. In February, the
Association closed its mortgage lending operations in San Diego
and Denver and discontinued the origination of new loans in
California and Colorado. In March, the Company completed the
sale of $876.1 million of single-family residential loans, of
which $40.5 million were non-performing. Of the total sale, 93%
of the loans were secured by California properties. At March 31,
1994, the Association's California single-family residential
loans totaled $46.7 million, or 5.2% of total single-family
residential loans.
The Association intends to concentrate its future activity in
four primary retail markets: the capital region of New York
state (Schenectady/Albany); Hartford, Connecticut; and
Springfield and Worcester, Massachusetts. As a result, in
February, the Company signed a definitive agreement for the sale
of ten Northeast branches located in Eastern Massachusetts and
Rhode Island. In March, the Company signed a second definitive
agreement for the sale of its four San Diego, California branches.
Also in March, the Company signed a definitive agreement for the
sale of its single branch on Cape Cod. As of March 31, 1994,
deposits in the fifteen branches being sold totaled $532.8 million.
Purchasers will pay premiums on deposits at the time of closing of
3% for the Rhode Island and Massachusetts branches, 3.5% for the
Cape Cod branch, and 1.5% for two of the four California branches.
All sales are subject to regulatory approval. When these
transactions are completed, thirty-two of the Company's remaining
thirty-three branches will be located within the four markets noted above.
6
RESULTS OF OPERATIONS
- ---------------------
Northeast Federal had net income of $1.0 million for the three
months ended March 31, 1994, resulting in primary and fully
diluted net income per common share of $.01 after preferred stock
dividend requirements. For the same quarter in 1993, the Company
reported net income of $141,000 or a primary and fully diluted
net loss per common share of $.26 after preferred stock dividend
requirements. The increase in net income for the quarter ended
March 31, 1994 resulted primarily from a gain of $13.6 million on
the aforementioned sale of $876.1 million of adjustable rate
single-family residential loans. This increase in income was
significantly offset by a $3.5 million valuation adjustment to
the Association's purchased mortgage servicing rights, a $1.3
million increase in general and administrative expenses resulting
from accelerated rental expense recorded in connection with the
anticipated move of corporate headquarters in early 1995, and a
$7.6 million adjustment to real estate and other assets acquired
in settlement of loans (REO), $7.0 million of which was recorded
to facilitate an anticipated accelerated sale of single-family
residential REO.
Interest Income and Expense
- ---------------------------
Total interest income was $48.7 million and $57.3 million for the
quarters ended March 31, 1994 and 1993, respectively. The
decrease in total interest income was due primarily to a decrease
of 87 basis points in the weighted average yield earned on
interest-earning assets, to 5.39% for the quarter ended March 31,
1994 from 6.26% for the same quarter in 1993. The decrease in
earning asset yield was due primarily to a decrease of 57 basis
points in the yield on real estate loans and a decrease of 97
basis points in the yield on mortgage-backed securities. The
yield on real estate loans declined due to the repricing of
adjustable rate mortgages, a high rate of prepayments on loans
with rates above those available in the low interest rate
environment of 1993, and the origination of adjustable rate loans
through the second and third quarters of 1993 at starting
interest rates that were substantially discounted from their
fully indexed yield. The yield on mortgage-backed securities
declined due to repricing of the underlying adjustable rate loans
on adjustable rate mortgage-backed securities and due to a high
rate of prepayments on the securities prompted by the low
interest rate environment. The decline in mortgage rates in
October, 1993, to a thirty year low increased prepayments from
November 1993 through the first quarter of 1994 and resulted in
an acceleration of the amortization of premiums associated with
some mortgage-backed securities. The acceleration of premiums
reduced the income from mortgage-backed securities by $1.9
million in the first quarter of 1994 and reduced the yield on
mortgage-backed securities by 54 basis points. Had the prepay-
ments on mortgage-backed securities not occurred, the weighted
7
average yield on interest-earning assets would have been 5.60%
for the quarter ended March 31, 1994, 21 basis points higher
than the 5.39% reported.
As a result of the overall lower level of interest rates, both
total interest expense and the Association's cost of funds were
lower in the quarter ended March 31, 1994 than in the comparable
quarter of the previous year. Total interest expense was $33.5
million for the three months ended March 31, 1994, compared to
$37.7 million for the same three months in the previous year.
For the quarter ended March 31, 1994, the cost of funds decreased
38 basis points to 3.72% from 4.10% for the quarter ended
March 31, 1993.
Net interest income totaled $15.2 million for the quarter ended
March 31, 1994, $4.4 million lower than the $19.6 million
reported for the same quarter of the previous year.
Approximately $1.4 million of the decrease in net interest income
was due to a decrease in average asset size from the quarter
ended March 31, 1993 to the current quarter. The balance of the
net interest income decrease was due to a decrease in the
interest rate spread to 1.67% for the three months ended March
31, 1994, from 2.16% for the three months ended March 31, 1993.
As noted above, the low interest rate environment throughout 1993
led to a decrease of 38 basis points in the Company's cost of
funds for the quarter ended March 31, 1994 from the same quarter
last year. The yield on earning assets, however, decreased 87
basis points in the first quarter of 1993 from the first quarter
of 1994. Reasons for this decrease are discussed above. Net
interest rate margins for the three-month periods ended March 31,
1994 and 1993 were 1.63% and 2.09%, respectively. If the prepay-
ments on mortgage-backed securities had not occurred, the interest
rate spread would have been 1.88% and the interest rate margin
would have been 1.84% for the first quarter in 1994. 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,
1994 was $2.2 million, compared to $4.9 million for the quarter
ended March 31, 1993. The decrease in the provision was due
primarily to the aforementioned sale of $876.1 million of
adjustable rate single-family residential real estate loans,
$40.5 million of which were non-performing. As a result of this
sale, the single-family residential loan portfolio decreased to
$904.5 million at March 31, 1994 from $1.8 billion at December
31, 1993. During the same period, non-accrual loans decreased to
$32.3 million from $67.5 million. Other factors considered in
determining the adequacy of the allowance for loan losses were
8
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,
1994, based on the quality of the loan portfolio at that date,
additions to the allowance may be necessary if market conditions
deteriorate.
The allowance for loan losses at March 31, 1994 was $11.5
million, compared to $21.4 million at March 31, 1993. The
activity in the allowance for loan losses for the three months
ended March 31, 1994 and 1993 was as follows:
Three Months
Ended March 31,
------------------------
1994 1993
---------- ----------
(Dollars in Thousands)
Balance, beginning of period...................... $28,271 $21,020
Provision for loan losses......................... 2,200 4,850
Charge-offs:
Single-family residential real estate loans..... (3,042) (4,506)
Consumer loans.................................. (103) (95)
Income property loans........................... (85) -
------ ------
Total charge-offs............................. (3,230) (4,601)
------ ------
Recoveries:
Single-family residential real estate loans..... 169 -
Consumer loans.................................. 66 101
------ ------
Total recoveries.............................. 235 101
------ ------
Net charge-offs................................... (2,995) (4,500)
------ ------
Other............................................. (16,000)* -
------ ------
Balance, end of period............................ $11,476 $21,370
====== ======
* 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....... .17% .20%
Consumer loans.................................... .11 .01
Income property loans............................. .12 -
Total net charge-offs during the period to
average loans outstanding during the
period........................................ .16% .19%
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............................... .08 -
9
In addition to the impact of the $876.1 million loan sale,
management believes that the decrease in single-family residential
loan net charge-offs is indicative of a declining level of non-
performing assets and a stabilization of housing values in the
Company's primary market areas. However, the continuing
recessionary environment in Connecticut, which has caused high
rates of unemployment and reduced family income levels, may still
result in increased delinquencies and foreclosures in the future.
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.
March 31, December 31, March 31,
1994 1993 1993
---------------- ---------------- ----------------
(Dollars in Thousands)
Single-family residential real estate
loans................................. $ 8,622 1.01% $25,751 1.47% $17,483 .86%
Consumer loans.......................... 300 .86 300 .85 300 .66
Income property loans................... 2,066 2.89 800 1.11 2,108 2.52
Unallocated loans....................... 488 * 1,420 * 1,479 *
------ ------ ------
Total allowance................... $11,476 1.14% $28,271 1.45% $21,370 .91%
====== ====== ======
<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.
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.
March 31, December 31, March 31,
1994 1993 1993
------------ ------------ ----------
(Dollars in Thousands)
Non-accrual loans:
Single-family residential real estate. $29,078 $ 65,770 $ 86,014
Consumer.............................. 1,251 1,315 1,686
Income property....................... 1,937 377 5,299
------ ------- -------
Total non-accrual loans............. 32,266 67,462 92,999
------ ------- -------
REO:
Single-family residential............. 42,960 57,165 87,146
Hotels................................ 6,035 6,453 6,408
Apartment building.................... 3,704 5,270 4,390
Real estate brokerage operations...... 1,787 1,744 1,714
Office, retail, industrial
complexes; land..................... 3,317 3,357 2,618
Residential subdivisions.............. 792 973 726
------ ------- -------
Total REO........................... 58,595 74,962 103,002
------ ------- -------
Total non-performing assets......... $90,861 $142,424 $196,001
====== ======= =======
Restructured loans...................... $ - $ 1,641 $ 1,100
====== ======= =======
Total non-accrual loans as a percent of
total gross loans receivable.......... 3.17% 3.44% 3.96%
==== ==== ====
Total non-performing assets as a
percent of total assets............... 2.50% 3.63% 4.92%
==== ==== ====
10
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 and to
reverse previously accrued interest when there is reasonable
doubt as to its collectibility. Interest accruals on loans are
normally discontinued whenever the payment of interest or
principal is more than ninety days past due, or earlier when
conditions warrant it. For example, although a loan may be
current, the Association discontinues accruing interest on that
loan when a foreclosure is brought about by other owner defaults.
When 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, 1994 and December 31 and March 31,
1993, the Association had no loans more than ninety days past due
on which interest was still accruing.
At March 31, 1994 and December 31 and March 31, 1993, non-accrual
loans were $32.3 million, $67.5 million, and $93.0 million,
respectively. The decrease in non-accrual loans between
December 31, 1993 and March 31, 1994 was due primarily to the
March 1994 loan sale which included $40.5 million of adjustable
rate, single-family residential non-accrual loans. The decrease
in non-accrual loans between March 31, 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.
Activity within the non-accrual loan portfolio was as follows:
Three Months Ended
March 31, 1994
------------------
(In Thousands)
Beginning balance..................... $ 67,462
New non-performing loans.............. 13,358
Net charge-offs....................... (97)
Returned to accrual status............ (327)
Loan sales............................ (40,500)
Payoffs............................... (285)
Transfers to REO through foreclosure.. (7,345)
-------
Ending balance........................ $ 32,266
=======
The above information is not available for the three months ended
March 31, 1993.
11
The allowance for loan losses as a percentage of non-accrual loans
by loan category is as follows:
March 31, December 31, March 31,
1994 1993 1993
--------- ------------ ---------
Single-family residential real estate............ 31.33% 41.31% 22.05%
Consumer......................................... 23.98 22.81 17.79
Income property.................................. 106.66 212.20 39.78
Unallocated...................................... * * *
Total allowance to total non-accrual loans..... 35.57% 41.91% 22.98%
<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.
The decrease in the ratio for single-family residential real estate
from December 31, 1993 to March 31, 1994 was due to the
aforementioned loan sale which included $40.5 million of non-
accrual loans and which reduced the allowance by $16.0 million.
While the portion of the allowance allocated to income property
loans increased from $800,000 at December 31, 1993 to $2.1 million
at March 31, 1994, the ratio related to income property decreased
due to a $1.6 million loan which went into non-accrual status
during the current quarter.
At March 31, 1994 and December 31 and March 31, 1993, single-family
residential non-accrual loans were 90.1%, 97.5%, and 92.5%,
respectively, of total non-accrual loans.
Real estate and other assets acquired in settlement of loans.
- ------------------------------------------------------------
REO was $58.6 million, $75.0 million, and $103.0 million at
March 31, 1994 and December 31 and March 31, 1993, respectively.
The $16.4 million decrease in REO from December 31, 1993 to March
31, 1994 was due to a $7.0 million valuation adjustment recorded to
facilitate an accelerated sale of California single-family
residential REO, as well as to increased REO sales, and a decrease
in the level of foreclosures. The decrease in REO at December 31,
1993 from March 31, 1993 was due primarily to the August 1993 sale
in a single transaction of a portion of the Company's portfolio of
single-family residential REO. The fifty-seven REO properties sold
had a book value of $30.3 million at the time of the sale.
Included in income property REO of $13.8 million at March 31, 1994
were two hotels, an industrial building, one retail office, two
single-family residential subdivisions, one apartment building, 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.
12
The activity in the Association's REO is presented in the following
table:
Three Months Ended
March 31,
-------- --------
1994 1993
-------- --------
(In Thousands)
Beginning balance.............. $ 74,962 $ 99,376
Foreclosures, net.............. 7,345 16,841
Capitalized expenses........... 283 381
Less:
Sales........................ (15,131) (13,028)
Valuation adjustments........ (8,647)* (635)
Mortgage insurance receipts.. (67) (117)
Other........................ (150) 184
------- -------
Ending balance................. $ 58,595 $103,002
======= =======
<FN>
* Valuation adjustments include a $7.0 million adjustment
recorded to facilitate an accelerated sale of California
single-family residential REO.
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:
March 31, 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)
Single-family residen-
tial real estate.... $ 18,816 $ 8,854 $ 29,078 $ 56,748 $ 30,497 $ 13,139 $ 65,770 $109,406
Consumer.............. 414 162 1,251 1,827 438 82 1,315 1,835
Income property....... 45 914 1,937 2,896 2,825 993 377 4,195
------- ------- ------- ------- ------- ------- ------- -------
Total.............. $ 19,275 $ 9,930 $ 32,266 $ 61,471 $ 33,760 $ 14,214 $ 67,462 $115,436
======= ======= ======= ======= ======= ======= ======= =======
Percent of total gross
loan portfolio...... 1.89% 0.98% 3.17% 6.04% 1.72% .73% 3.44% 5.89%
======= ======= ======= ======= ======= ======= ======= =======
Percent of total
assets.............. 0.53% 0.27% 0.89% 1.69% .86% .36% 1.72% 2.94%
======= ======= ======= ======= ======= ======= ======= =======
March 31, 1993
---------------------------------------
30-59 60-89 90-days
days days and over Total
------- ------ -------- -------
(Dollars in Thousands)
Single-family residen-
tial real estate.... $ 42,634 $ 16,173 $ 86,014 $144,821
Consumer.............. 895 124 1,686 2,705
Income property....... 12 928 5,299 6,239
------- ------- ------- -------
Total.............. $ 43,541 $ 17,225 $ 92,999 $153,765
======= ======= ======= =======
Percent of total gross
loan portfolio...... 1.85% 0.73% 3.96% 6.55%
======= ======= ======= =======
Percent of total
assets.............. 1.09% 0.43% 2.34% 3.86%
======= ======= ======= =======
13
Non-interest Income
- -------------------
Non-interest income totaled $17.3 million and $7.0 million for
the quarters ended March 31, 1994 and 1993, respectively. The
increase in non-interest income for the quarter ended March 31,
1994 resulted primarily from 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 $3.3 million lower for the quarter ended March 31,
1994 than for the same quarter last year. In the current
quarter, 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 due to the high costs of servicing the portfolio.
Non-interest income for the quarter ended March 31, 1994 included
$4.4 million in gains on the sales of securities, including $4.3
million of realized capital gains allocated to the Association by
two limited partnerships in which the Association has invested.
For the same quarter in 1993, such capital gains totaled $1.1
million of the $3.9 million gain on investment securities. The
remaining net gains on investment securities for the quarter
ended March 31, 1993 resulted primarily from the sale of fixed
rate securities from the available-for-sale portfolio.
Non-interest Expense
- --------------------
Total non-interest expense was $31.1 million and $21.6 million
for the quarters ended March 31, 1994 and 1993, respectively.
General and administrative expenses (compensation and benefits,
occupancy and equipment, and other general and administrative
expenses) increased $1.3 million, due to an acceleration of
rental expense in anticipation of moving the corporate
headquarters to Farmington, Connecticut in early 1995. As a
result of this increase and lower average assets, the
Association's annualized ratio of general and administrative
expenses to average total assets was 1.93% for the three months
ended March 31, 1994, compared to 1.76% for the same three months
in 1993. Had average assets remained at 1993 levels during the
first quarter of 1994, the annualized ratio of general and
administrative expenses to average total assets would have been
1.89%. Finally, consistent with the Company's goal of reducing
its geographic exposure, REO expense increased by $7.7 million to
$10.3 million due primarily to a $7.0 million valuation
adjustment recorded to facilitate an accelerated sale of
California single-family residential REO and to $600,000 in
writedowns of commercial REO.
14
Income Taxes
- ------------
Income tax benefit totaled $1.9 million for the three-month
period ended March 31, 1994 and $115,000 expense for the three-
month period ended March 31, 1993. 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.
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. As discussed further in the Regulations section, an
institution must have a leverage ratio of 4% or greater in order
to be considered adequately capitalized. For additional
regulations impacting the Association's regulatory capital,
please see the Regulations section.
The following table reflects the regulatory capital position of
the Association as well as the current regulatory capital
requirements at March 31, 1994 and 1993:
March 31, 1994 March 31, 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)
Tangible core capital $168,809 $ 54,409 $170,852 $ 59,640
Percent 4.65% 1.50% 4.30% 1.50%
Core capital (leverage) $169,311 $145,110 $171,563 $159,068
Percent 4.67% 4.00% 4.31%* 4.00%
Risk-based capital $180,787 $107,608 $191,479 $150,415
Percent 13.44% 8.00% 10.18%* 8.00%
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 the Company's Form 10-K.
15
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
the dates indicated, the Association's portfolio of Rhode Island
covered assets was as follows:
March 31, December 31, March 31,
1994* 1993* 1993*
--------- ------------ ---------
(In Thousands)
Loans:
Single-family residential real estate loans....... $ 36,502 $ 38,821 $ 42,674
Consumer loans.................................... 19,003 20,394 27,117
Income property loans............................. 36,522 38,256 52,569
Commercial loans.................................. 1,269 1,335 1,217
------- ------- -------
Total loans................................... 93,296 98,806 123,577
REO................................................. 6,563 6,819 6,532
------- ------- -------
Total covered assets.......................... $ 99,859 $105,625 $130,109
======= ======= =======
<FN>
* Net of credit and interest adjustments
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:
March 31, 1994 December 31, 1993 March 31, 1993
-------------- ----------------- --------------
(In Thousands)
Single-family residential real
estate loans........................ $2,157 $2,718 $ 3,945
Consumer loans........................ 1,146 1,045 1,881
Income property loans................. 3,628 4,145 10,605
Commercial loans...................... 31 30 120
----- ----- ------
Total................................. $6,962 $7,938 $16,551
===== ===== ======
FINANCIAL CONDITION
- -------------------
Total assets at March 31, 1994 were $3.6 billion, compared to
$3.9 billion and $4.0 billion at December 31 and March 31, 1993,
respectively. Asset size and composition have generally been
determined by seeking the optimal balance among regulatory
capital requirements, liquidity, yield, and risk.
Since 1989, the Company has pursued the operating strategy of
providing traditional thrift banking services, namely gathering
retail deposits and investing those deposits in adjustable rate
residential mortgages. In 1993, however, the Company adjusted
16
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 is intended to reduce the Company's loan concentration
in California, to reduce credit costs, and to increase the net
interest margin. In September of 1993, the Association changed
its strategy by sharply reducing the volume of adjustable rate
mortgages (ARMs) originated for portfolio in California and by
replacing the California ARM originations with 10 and 15 year
fixed rate mortgages originated in the Northeast and with the
purchase of both adjustable rate and 15 year fixed rate mortgage-
backed securities. California portfolio production was sharply
curtailed in order to lower the concentration of California loans
in the loan portfolio due to the fact that initial discounts on
ARM rates in California exceeded the Association's pricing
guidelines. Fixed rate mortgages with terms of 15 years or less
were added to the portfolio in order to increase the net interest
spread and to reduce the degree to which the Association's
interest rate risk profile had become asset sensitive. MBSs were
added to meet the remaining asset generation needs of the
Company. Displacing whole loans, particularly those originated
in California, with MBSs reduced credit risk and increased the
risk-based capital ratio. In February 1994, the Company closed
its loan origination offices in California and Colorado.
Finally, 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.
Retail deposits, the Association's least expensive source of
funds, decreased to $2.9 billion at March 31, 1994, compared to
$3.0 billion and $3.1 billion at December 31 and March 31, 1993,
respectively. 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;
17
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:
Three Months Ended
March 31,
-------------------------------------------
1994 1993
-------------------- --------------------
Amount % of Total Amount % of Total
-------- ---------- -------- ----------
(Dollars in Thousands)
Adjustable.... $ 18,658 25.81% $154,193 86.26%
Fixed......... 53,621 74.19 24,571 13.74
------- ------ ------- ------
Total..... $ 72,279 100.00% $178,764 100.00%
======= ====== ======= ======
The composition of the Association's residential mortgage loan
portfolio at March 31, 1994, December 31, 1993, and
March 31, 1993 was as follows:
March 31, 1994 December 31, 1993 March 31, 1993
---------------------- ---------------------- ----------------------
Amount % of Total Amount % of Total Amount % of Total
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Adjustable....... $ 773,847 85.56% $1,701,978 92.21% $2,107,208 95.15%
Fixed............ 130,633 14.44 143,812 7.79 107,462 4.85
--------- ------ --------- ------ --------- ------
Total........ $ 904,480 100.00% $1,845,790 100.00% $2,214,670 100.00%
========= ====== ========= ====== ========= ======
Total loans originated during the three months ended March 31, 1994
and 1993 were $80.8 million and $183.1 million, respectively. The
decrease in loan originations resulted primarily from the February
1994 closings of the Association's mortgage lending operations in
California and Colorado. At March 31, 1994, the Association was
committed to fund mortgage loans totaling $20.4 million, including
$5.7 million in adjustable rate mortgages. The Association expects
to fund such loans from its liquidity sources.
As noted previously, the Company has signed agreements for the sale
of fifteen of its branches. These sales are expected to be funded
primarily with wholesale borrowings, either repurchase agreements
or FHLB advances of varying maturities. However, depending upon
the depository environment at or about the time of the closings,
additional funds may be raised by increasing deposits at the
remaining branches.
Net cash provided by operations during the three months ended
March 31, 1994 totaled $15.7 million. Adjustments to net income of
$1.0 million provided $14.7 million of net cash, including proceeds
from sales of loans available-for-sale of $69.2 million. In
addition, loans originated and purchased for the available-for-sale
18
portfolio utilized $42.2 million in cash. Remaining adjustments to
net income used $12.3 million in cash.
Net cash provided by investing activities during the three months
ended March 31, 1994 totaled $183.8 million. Loans originated and
purchased used $45.8 million of cash, while purchases of mortgage-
backed securities and investment securities used cash of $480.0
million and $396.6 million, respectively. Principal collected on
loans and mortgage-backed securities generated cash of $77.2
million and $105.5 million, respectively, while maturities of
investment securities provided $28.6 million in cash. Proceeds
from sales of loans totaled $870.6 million. Sales of REO generated
$14.9 million in cash. All other investing activities provided net
cash of $9.4 million.
Net cash used in financing activities during the three months ended
March 31, 1994 totaled $277.5 million and resulted primarily from a
$145.0 million net decrease in FHLB advances and a $97.7 million
decrease in securities sold under agreements to repurchase.
Decreases in retail deposits from December 31, 1993 used $30.5
million in cash. As noted previously, this decrease in deposits
was a consequence of the low interest rates in the economy due to
the continuing recession. All other financing activities used net
cash of $4.3 million.
The liquidity of the Association is measured by the ratio of its
liquid assets to the net withdrawable deposits and borrowings
payable in one year or less. A portion of these liquid assets are
in the form of non-interest bearing reserves required by Federal
Reserve Board regulations. For total transaction account deposits
of $46.8 million or less, regulations require a reserve of 3%. For
total transaction account deposits in excess of $46.8 million, a
10% reserve is required. The Federal Reserve Board may adjust the
latter reserve percentage within a range of 8-14%. The Association
is also subject to OTS regulations which require the maintenance of
a daily average balance of liquid assets equal to 5%. The ratio
averaged 5.97% for the three months ended March 31, 1994, compared
to 5.91% for the three months ended March 31, 1993. In addition to
the regulatory requirements, the average liquidity ratio reflects
management's expectations of future loan fundings, operating needs,
and the general economic and regulatory climate. In addition, the
Association is required by OTS regulations to maintain a daily
average balance of short-term liquid assets of 1%. The ratio
averaged 3.57% and 1.94% for the three months ended March 31, 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. The Company's
19
ability to borrow at attractive rates is affected by its credit
rating and other market conditions.
Increased capital remains a significant focus for the Association
because, notwithstanding that it has achieved compliance with its
fully phased-in regulatory capital requirements, the Association
does not meet the standards for a well-capitalized institution
promulgated pursuant to 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 March 18, 1994, the Company's Board of Directors voted to
declare a stock dividend payable on April 1, 1994 on the Company's
$8.50 Cumulative Preferred Stock, Series B (the Series B preferred
stock) of one share of Series B preferred stock for each $100 of
the amount of dividends payable on April 1, 1994, and accumulated
and unpaid as of that date, to holders of record on March 18, 1994.
On April 1, 1994, the Company paid the $855,474 of dividends then
payable on the Series B preferred stock through the issuance of an
additional 8,555 shares of Series B preferred stock.
In addition, the interest and principal repayment obligations on
the 9% Debentures constitute an impediment to the Company's ability
to pay cash dividends. The $38.4 million net balance of 9%
Debentures at March 31, 1994 require annual interest payments of
$3.7 million. In addition, the Company is required to repurchase 6
2/3% of the 9% Debentures outstanding as of March 1, 1998 in each
year commencing on May 1, 1998. Prior to May 1, 1997, the Company
may fulfill its interest payment obligation by the issuance of
additional 9% Debentures. In meeting this interest obligation, the
Company has issued an additional $5.0 million in 9% Debentures,
which are included in the outstanding principal at March 31, 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.
20
INTEREST RATE RISK MANAGEMENT
- -----------------------------
From the quarter ended March 31, 1993 through the quarter ended
March 31, 1994, the Association's interest rate spread decreased 49
basis points, averaging 1.67% and 2.16% for the quarters ended
March 31, 1994 and 1993, respectively. Had prepayments on the
Association's mortgage-backed securities not occurred, the interest
rate spread for the quarter ended March 31, 1994 would have been
1.88%. The Association continually monitors the repricing
characteristics of its interest-earning assets and interest-bearing
liabilities. The Association's one-year gap at March 31, 1994 was
a positive $313.7 million, or 8.65% of assets, compared to a
positive $498.0 million, or 12.51% of assets, at March 31, 1993.
The Association's interest rate sensitivity analysis (Exhibit 99.1)
shows that the Association has little interest rate risk resulting
from the traditional thrift institution mismatch between asset and
liability repricing. This diminished risk is a result of the
Association's historic emphasis on the origination of adjustable
rate single-family residential mortgages and its reliance on retail
deposits as its primary source.
Exhibit 99.1 does not indicate, however, the interest rate risk
resulting from the several options which borrowers and depositors
have nor does it indicate the risks resulting from assets and
liabilities being tied to different interest rate indices.
Borrowers have the option to prepay loans at any time and to have
changes in rates on adjustable rate loans be constrained by
periodic and lifetime caps. Depositors have the option to withdraw
funds from certificates of deposit prior to maturity upon the
payment of a penalty. The Association's interest rate risk is due
to the effects of options, since the Association has little
interest rate risk resulting from repricing mismatches. Basis
risk, or the risk from assets and liabilities being tied to
different interest rate indices, is not a material source of
interest rate risk for the Association.
REGULATIONS
- -----------
Current Capital Regulations. The current OTS regulatory capital
regulations require savings associations to meet three capital
standards: (1) tangible core capital of 1.5% of adjusted total
assets, (2) core capital (leverage ratio) of 3% of adjusted total
assets, and (3) risk-based capital of 8% of risk-weighted assets.
In calculating tangible core capital, a savings association must
deduct from capital most intangible assets. Core capital consists
of tangible core capital plus certain intangible assets such as
qualifying purchased mortgage servicing rights and certain
qualifying supervisory goodwill which meets the requirements of
FIRREA. Other than qualifying purchased mortgage servicing rights
and certain qualifying supervisory goodwill as described below,
intangible assets must be deducted from core capital unless they
meet a three-part test relating to identifiability, marketability,
and liquidity in which event they may be included in an amount up
21
to 25% of core capital. On February 2, 1994, the OTS issued a
final rule, effective March 4, 1994, which permits the inclusion of
purchased mortgage servicing rights in capital provided that those
rights, in the aggregate, do not exceed 50% of core capital. This
rule requires that all other intangibles, including core deposit
intangibles with certain limited exceptions, be deducted from
capital. This rule has minimal impact on the Association since the
Association's purchased mortgage servicing rights comprise less
than 1.0% of core capital at March 31, 1994. In addition, the OTS
will grandfather core deposit intangibles resulting from prior
transactions or transactions under firm contract as of March 4,
1994. As of March 31, 1994, the Association had only $501,475 of
core deposit intangibles which are so grandfathered. Supervisory
goodwill includable in core capital is being phased out over five
years, with all goodwill completely excluded from capital after
December 31, 1994. Since the Company has eliminated all of its
supervisory goodwill through valuation adjustments and the
utilization of net operating loss carryforwards, the phaseout of
supervisory goodwill from capital will have no impact on the
Company in the future.
The risk-based capital requirement for savings associations of 8%
of risk-weighted assets was phased in over three years. Thrifts
were required to meet 100% of the requirement, or 8%, on December
31, 1992. The risk-based capital requirement includes core capital
plus supplementary capital to the extent that supplementary capital
does not exceed 100% of core capital. Supplementary capital
includes certain capital instruments which are not included in core
capital and general loan loss allowances. Risk-weighted assets
equal total assets plus consolidated off-balance sheet items where
each asset or item is multiplied by the appropriate risk-weighting
applicable to the asset category. The capital regulations assign
each asset held by a savings association to one of four risk-
weighting categories, based upon the credit risk associated with
each asset or item. The risk-weighting categories range from 0%
for low-risk assets (such as U.S. Treasury securities and
Government National Mortgage Association securities) to 100% for
assets deemed to be of higher risk (such as repossessed assets and
certain equity investments). On March 19, 1993, the OTS issued a
final rule changing the risk-based capital treatment of certain
equity investments to parallel the capital treatment of those
investments under the rules applicable to national banks.
Effective April 19, 1993, savings associations were required to
place these investments in the 100% risk-weight category.
FDICIA requires the federal banking agencies to review their risk-
based capital standards to ensure that those standards take
adequate account of: (1) interest rate risk; (2) concentration of
credit risks; and (3) the risks of nontraditional activities.
FDICIA also mandates that the federal banking agencies publish
final regulations no later than 18 months after the enactment of
FDICIA or June 18, 1993, as well as establish reasonable transition
rules to facilitate compliance with those rules. In addition, on
22
February 22, 1994, the OTS published proposed rules to take
adequate account of credit concentration risk and the risk of non-
traditional activities. The OTS has not published final rules
implementing this provision of FDICIA. Since these proposed rules
are not yet final, it is not possible to assess their impact on the
Association.
Final OTS Interest Rate Risk Component.
- --------------------------------------
The OTS final rule adding an interest rate risk component to its
risk-based capital rule was adopted on August 31, 1993 and became
effective January 1, 1994. Under the rule, savings associations
are divided into two groups, those with "normal" levels of interest
rate risk and those with greater than "normal" levels of interest
rate risk. Associations with greater than normal levels will be
subject to a deduction from total capital for purposes of
calculating risk-based capital. Interest rate risk is measured by
the change in Net Portfolio Value under a 2.0% change in market
interest rates. Net Portfolio Value is essentially the economic
value of an association's assets less the economic value of its
liabilities adjusted for the economic value of off-balance-sheet
contracts. If an association's change in Net Portfolio Value under
a 2.0% change in market interest rates exceeds 2.0% of the
estimated economic value of its assets, it will be considered to
have greater than normal interest rate risk, and its total capital
for risk-based capital purposes will be reduced by one-half of the
difference between its measured interest rate risk and the normal
level of 2.0%. The rule adjusts the interest rate risk measurement
methodology when interest rates are low. In the event that the 3-
month Treasury rate is below 4.0%, interest rate risk will be
measured under a 2.0% increase in interest rates and under a
decrease in interest rates equal to one-half the value of the 3-
month Treasury rate. According to the most recent OTS
measurements, Northeast Savings' interest rate risk is within the
normal range.
Proposed Leverage Ratio Requirement.
- -----------------------------------
On April 22, 1991, the OTS issued a notice of proposed rulemaking
to establish a new minimum leverage ratio of 3% of adjusted total
assets for savings associations without any supervisory, financial,
or operational deficiencies, that is, associations receiving a
composite rating of 1 on their regulatory examinations under the
OTS MACRO system. The leverage ratio is the ratio of core capital
to adjusted total assets. Higher leverage ratios, generally 100 to
200 basis points higher, would be required for all other
associations, as warranted by particular circumstances or risk
profiles. Thus, for all but the most highly rated institutions
meeting the conditions set forth in the OTS notice, the minimum
leverage ratio would be 3% plus an additional 100 to 200 basis
points determined on a case-by-case basis. In all cases, savings
institutions would be required to hold capital commensurate with
the quality of risk management systems and the level of overall
risk in each individual savings association as determined through
the supervisory process on a case-by-case basis. Savings
associations that no longer pass the minimum capital standards
because of the new core capital leverage ratio requirements would
23
be subject to certain restrictions and a limitation on
distributions and would be required to submit capital plans that
detail the steps they will take to reach compliance with the fully
phased-in capital standards by December 31, 1994. These capital
plans would be due within 60 days of the effective date of the
rule. The Association continues to exceed all current capital
requirements including the anticipated increased leverage ratio
requirement. Although the proposed leverage requirement is not yet
final, under the Prompt Corrective Action rules discussed below,
which became effective December 19, 1992, an institution must have
a leverage ratio of 4% or greater (unless it has a composite one
MACRO rating) in order to be considered adequately capitalized.
The OTS has indicated that it plans to propose regulatory changes
and to reduce the minimum leverage ratio requirement from 4.0% to
3.0% on July 1, 1994, presumably to reduce the level required to be
adequately capitalized under the Prompt Corrective Action
Regulation. No notice of such proposed rulemaking has been issued
by the OTS. Under the requirements of FIRREA, the OTS' capital
standards can be no less stringent than those applicable to
national banks. A change in the minimum leverage requirement for
savings associations, therefore, may require a change in the
minimum leverage requirements for national banks.
Prompt Corrective Action. Under the Prompt Corrective Action
provision of FDICIA, regulations were implemented on
December 19, 1992 whereby all financial institutions are placed in
one of five capital categories: well-capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized. The federal banking agencies are
required to take certain supervisory actions against
undercapitalized institutions. The severity of such actions
depends upon the degree of undercapitalization. Undercapitalized
thrifts will be required to submit a capital restoration plan for
OTS approval. This capital restoration plan may be approved by the
OTS only if the parent holding company of the undercapitalized
institution guarantees that the institution will comply with the
plan and provides appropriate assurances of performance. Aggregate
liability for the holding company under such guarantee is the
lesser of five percent (5%) of the institution's assets at the time
it became undercapitalized or the amount necessary to bring the
institution into compliance with all capital standards applicable
at the time the institution fails to comply with the capital
restoration plan. In addition, undercapitalized institutions are
subject to increased monitoring and restrictions on capital
distributions, asset growth and acquisitions, branching and new
activities. Significantly undercapitalized institutions (or
undercapitalized institutions that fail to submit a capital plan)
are subject to a number of additional measures including
restrictions on deposit interest rates, forced sale of stock or
merger, changes in management, forced divestitures of affiliates or
subsidiaries by the institution or its holding company, and
restrictions on compensation.
24
The relevant capital measures for the categories of well-
capitalized, adequately capitalized, undercapitalized and
significantly undercapitalized, are defined to be the ratio of
total capital to risk-weighted assets (i.e., the OTS risk-based
capital requirement), the ratio of core capital to risk-weighted
assets (i.e., the OTS Tier I risk-based capital requirement) and
the ratio of core capital to adjusted total assets (i.e., the OTS
core or leverage capital requirement). Under the rules, an
institution will be deemed to be well capitalized if the
institution has a total risk-based capital ratio of 10% or greater,
a core capital to risk-weighted assets capital ratio of 6% or
greater and a ratio of core capital to adjusted total assets of 5%
or greater and the institution is not subject to any order, written
agreement or Prompt Corrective Action directive. An institution is
deemed to be adequately capitalized if it has total risk-based
capital of 8% or greater, core capital to risk-weighted assets
capital ratio of 4% or greater and a ratio of core capital to total
assets of 4% or greater (unless it has a composite one MACRO
rating). An institution is deemed to be undercapitalized if it
fails to meet any of the relevant capital measures to be considered
adequately capitalized, and significantly undercapitalized if it
has a total risk-based capital ratio of less than 6% or a core
capital to risk-weighted assets capital ratio of less than 3% or a
leverage ratio of less than 3%. An institution with a ratio of
tangible equity to total assets of 2% or less is deemed to be
critically undercapitalized.
FDICIA and the Prompt Corrective Action rule require, with very
limited exception, that an insured depository institution that is
critically undercapitalized be placed in conservatorship within 90
days unless the OTS and the Federal Deposit Insurance Corporation
(FDIC) concur that other action would better achieve the purpose of
the regulation. Such determination to defer placing an institution
in receivership must be reissued every 90 days up to 270 days after
the institution becomes "undercapitalized" and must document the
reasons the OTS and FDIC believe action other than conservatorship
would be more appropriate.
In addition to establishing a system of prompt corrective action
based on the capital level of an institution, the Prompt Corrective
Action rule also permits the OTS to reclassify a well-capitalized
institution as an adequately capitalized institution or to require
an adequately capitalized institution to comply with supervisory
provisions as if the institution were in the next lower category
based on supervisory information other than capital levels of the
institution. The rules provide that an institution may be
reclassified if the appropriate federal banking agency determines
it is in an unsafe and unsound condition or engages in an unsafe or
unsound practice. An institution may be deemed to be in an unsafe
and unsound condition if (1) the institution receives a less than
satisfactory rating in its most recent examination report and (2)
the institution has not corrected the deficiency. The rule
provides procedures for notice and a hearing in connection with a
25
reclassification based on supervisory information about the
institution.
Based on the Association's capital position at March 31, 1994,
Northeast Savings is an adequately capitalized institution and will
not be subject to any of the restrictions imposed by the Prompt
Corrective Action rule on institutions that are less than
adequately capitalized. However, should the Association receive a
less than satisfactory rating for asset quality, earnings,
liquidity or management in a regulatory examination, the OTS could
impose restrictions upon Northeast Savings as if it were a less
than adequately capitalized institution until such time as the less
than satisfactory rating is corrected.
New Safety and Soundness Standards. FDICIA also requires that the
regulatory agencies, including the OTS and the FDIC, prescribe
certain safety and soundness standards for insured depository
institutions and depository institution holding companies. Three
types of standards must be prescribed: (1) operational and
managerial; (2) asset quality and earnings; and (3) compensation.
On November 18, 1993, the federal banking agencies published
proposed safety and soundness standards to implement this provision
of FDICIA. The proposed operational and managerial standards
relate to: (1) internal controls, information systems, and
internal audit systems; (2) loan documentation; (3) credit
underwriting; (4) interest rate exposure; (5) asset growth; (6)
compensation, fees, and benefits. In addition, the proposed
standards would establish a maximum ratio of classified assets to
total capital of 1.0. The federal banking agencies have also
proposed minimum earnings standards which require that an
institution continue to meet minimum capital standards assuming
that any losses experienced over the past four quarters were to
continue over the next four quarters. Finally, each federal
banking agency is required to prescribe standards for the
employment contracts and other compensation of executive officers,
employees, directors, and principal stockholders of insured
institutions that would prohibit compensation and benefit
arrangements that are excessive or that could lead to material
financial loss for the institution. If an insured depository
institution or its holding company fails to meet any of the
standards described above, it would be required to submit a plan
describing the steps the institution will take to correct the
deficiency. If an institution fails to submit or to implement an
acceptable plan, the appropriate federal banking agency may impose
restrictions on the institution's holding company including any of
the restrictions applicable under the prompt corrective action
provision of FDICIA.
Limitation on Capital Distributions. The Prompt Corrective Action
regulation provides that a financial institution may not make a
capital distribution if it would be undercapitalized after making
the capital distribution. Also, the Company and the OTS entered
into a Dividend Limitation Agreement as a part of the holding
26
company approval process which prohibited the payment of dividends
to the holding company without prior written OTS approval if the
Association's capital is below its fully phased-in capital
requirement or if the payment of such dividends would cause its
capital to fall below its fully phased-in capital requirement.
Further, the OTS has a Capital Distribution Regulation which also
governs capital distributions. The OTS regulation differentiates
among savings institutions primarily by their capital levels.
Associations which meet their fully phased-in capital requirements
are considered Tier 1 associations and require only normal OTS
supervision. A Tier 1 association may make capital distributions
during a calendar year up to the higher of: (1) 100% of its net
income to date during the calendar year plus the amount that would
reduce by one-half its surplus capital ratio of the beginning of
the calendar year; or (2) 75% of its net income over the most
recent four-quarter period. A Tier 1 association would not be
permitted to make capital distributions in excess of the foregoing
limit without prior OTS approval. Capital surplus is defined as
the amount of capital over an association's fully phased-in capital
requirement. The Association meets its fully phased-in regulatory
capital requirements and is a Tier 1 association.
Insurance of Deposits. The FDIC is the federal deposit insurance
administrator for both banks and savings associations. The FDIC
administers separate insurance funds, the Savings Association
Insurance Fund (SAIF) and the Bank Insurance Fund (BIF) for thrifts
and banks respectively, and assessment rates are set independently.
The FDIC has the specified authority to prescribe and enforce such
regulations and issue such orders as it deems necessary to prevent
actions or practices by savings associations that pose a serious
threat to the SAIF. In addition, FDICIA requires that the FDIC
establish a risk-based deposit insurance premium system which was
effective as of January 1, 1994. In establishing such a system,
the FDIC is required by FDICIA to take into consideration the risks
attributable to different categories and concentrations of assets
and liabilities and the revenue needs of the deposit insurance
funds.
On October 1, 1992, the FDIC published final rules increasing the
deposit insurance assessment rate to be paid by BIF and SAIF
insured institutions during two semiannual periods in 1993 and
thereafter and adopting a transitional risk-based deposit insurance
assessment system. The transitional system became effective
January 1, 1993 and remained in effect until implementation of the
permanent risk-based assessment system one year later. Under the
transitional rule, the annual assessment rate for each SAIF insured
institution is determined on the basis of capital and supervisory
measures. For the capital measure, institutions are assigned to
one of three capital groups: well-capitalized, adequately
capitalized or undercapitalized. The first two groups are defined
by application of the capital ratio standards imposed under the
Prompt Corrective Action rule (discussed above). The third group
27
consists of those institutions not qualifying as well capitalized
or adequately capitalized. Within each group, institutions are
assigned to one of three supervisory subgroups: healthy,
supervisory concern, or substantial supervisory concern. The FDIC
assigns institutions to supervisory subgroups on the basis of
supervisory evaluations provided by the institution's primary
federal regulator and such other information as the FDIC determines
to be relevant to the institution's financial condition and the
risk posed to the insurance fund. The supervisory subgroup to
which an institution is assigned by the FDIC is confidential and
may not be disclosed. Under the rule, there are nine combinations
of groups with assessments ranging from 23 cents for each $100 of
insured deposits to 31 cents for each $100 of insured deposits
depending upon the risk group to which a savings association is
assigned. A savings association's capital group is determined on
the basis of data reported in its thrift financial report as of the
date closest to June 30 or December 31 that includes the necessary
capital data. Northeast Savings is deemed to be an adequately
capitalized association.
On June 17, 1993, the FDIC adopted a final rule establishing a
risk-based deposit insurance premium assessment system to be
implemented with the semi-annual assessment period commencing
January 1, 1994. Except for limited changes, the structure of the
permanent system is substantially the same as the structure of the
transitional system it replaced. The FDIC is authorized to raise
insurance premiums for SAIF members in certain circumstances. If
the FDIC determined to increase the assessment rate for all SAIF
institutions, institutions in all risk categories could be
affected. Any increase in premiums could have an adverse effect on
the Association's earnings. In the three months ended
March 31, 1994, SAIF deposit insurance premiums increased to $2.2
million from $1.6 million for the same three months last year.
The FDIC has authority to terminate the insurance of deposits of
savings associations upon a finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable
law, regulation, rule, order or condition imposed by the FDIC or
the OTS. In addition, the FDIC has power to suspend temporarily a
savings association's insurance on deposits received after the
issuance of a suspension order in the event that the savings
association has no tangible capital. Savings associations are
allowed to include certain goodwill in tangible capital for this
requirement; however, any savings association with no tangible
capital prior to including goodwill would be considered a "special
supervisory savings association."
Annual Independent Audits and Reporting Requirements. On June 2,
1993, the FDIC published final regulations and related guidelines
implementing the management reporting, audit committee, and
independent audit requirements of Section 112 of FDICIA. Under the
final regulations and guidelines, all insured depository
28
institutions with total assets at or above $500 million at the
beginning of the fiscal year after December 31, 1992 must file an
annual report with the FDIC, and the OTS as in the case of a
federally chartered savings association such as Northeast Savings.
The annual report would include financial statements prepared in
accordance with generally accepted accounting principles that are
audited by the institution's independent accountant. The report
would also include a statement of management's responsibilities for
establishing and maintaining an adequate internal control structure
and procedures for financial reporting and for complying with laws
and regulations relating to safety and soundness, including capital
distribution restrictions and loans to insiders.
In addition, insured depository institutions with total assets at
or above $500 million will also be required to establish an
independent audit committee comprised of outside directors.
Further, at least two audit committee members of institutions with
total assets at or above $3 billion must have banking or related
financial management expertise, and its audit committee must have
access to outside counsel. The Association has surveyed the
members of the audit committee and determined that all members are
qualified under the rule.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
- ----------------------------------------------
In November 1992, the FASB issued SFAS 112, "Employers' Accounting
for Postemployment Benefits." SFAS 112 establishes accounting
standards for employers who provide benefits to former or inactive
employees after employment but before retirement (postemployment
benefits). Postemployment benefits are all types of benefits
provided to former or inactive employees, their beneficiaries, and
covered dependents. Those benefits include, but are not limited
to, salary continuation, supplemental unemployment benefits,
severance benefits, disability-related benefits (including worker's
compensation), job training and counseling, and continuation of
benefits such as health care benefits and life insurance coverage.
SFAS 112 requires employers to recognize the obligation to provide
postemployment benefits in accordance with SFAS 43, "Accounting for
Compensated Absences," if the obligation is attributable to
employees' services already rendered, employees' rights to those
benefits accumulate or vest, payment of the benefits is probable,
and the amount of the benefits can be reasonably estimated. If
those four conditions are not met, the employer should account for
postemployment benefits when it is probable that a liability has
been incurred and the amount can be reasonably estimated in
accordance with SFAS 5, "Accounting for Contingencies." If an
obligation for postemployment benefits is not accrued in accordance
with SFAS 5 or 43 only because the amount cannot be reasonably
estimated, the financial statements shall disclose that fact.
SFAS 112 is effective for fiscal years beginning after December 15,
1993. Generally, the Association does not provide benefits to its
29
former or inactive employees after employment but before
retirement. Based on the Company's analysis, SFAS 112 has
virtually no impact on the Company.
At the urging of the auditing profession, the Securities and
Exchange Commission, bank regulators, and some preparers of
financial statements, in 1986, the FASB added the financial
instruments project to its agenda in order to address numerous
questions resulting from the use of innovative financial
instruments. Thus far, the project has resulted in the issuance of
four Statements of Financial Accounting Standards: SFAS 105,
"Disclosure of Information about Financial Instruments with Off-
Balance-Sheet Risk and Financial Instruments with Concentrations of
Credit Risk," issued in March 1990, SFAS 107, "Disclosures about
Fair Value of Financial Instruments," issued in December 1991, SFAS
114, "Accounting by Creditors for Impairment of a Loan," and SFAS
115, "Accounting for Certain Investments in Debt and Equity
Securities." Both SFAS 114 and SFAS 115, issued in May 1993, are
discussed below. The Company has previously implemented SFAS 105
and SFAS 107. As a part of this project, the FASB has also issued
two Discussion Memorandums, "Distinguishing between Liability and
Equity Instruments and Accounting for Instruments with
Characteristics of Both" in August 1990 and "Recognition and
Measurement of Financial Instruments" in November 1991.
SFAS 114 addresses the accounting by creditors for impairment of
certain loans and applies to financial statements for fiscal years
beginning after December 15, 1994. Earlier application is
encouraged. Management implemented SFAS 114 for the year ended
December 31, 1993. Since the Company was previously in compliance
with SFAS 114, the statement did not impact the Company's results
of operations or financial condition.
SFAS 115 addresses the accounting and reporting for investments in
equity securities that have readily determinable fair values and
for all investments in debt securities. Those investments are to
be classified in three categories and accounted for as follows:
* Debt securities that the enterprise has the positive intent and
ability to hold to maturity are classified as held-to-maturity
securities and reported at amortized cost.
* Debt and equity securities that are bought and held principally
for the purpose of selling them in the near term are classified
as trading securities and reported at fair value, with
unrealized gains and losses included in earnings.
* Debt and equity securities not classified as either held-to-
maturity securities or trading securities are classified as
available-for-sale securities and reported at fair value, with
unrealized gains and losses excluded from earnings and reported
in a separate component of shareholders' equity.
30
SFAS 115 does not apply to unsecuritized loans. However, after
mortgage loans are converted to mortgage-backed securities, they
are subject to its provisions. SFAS 115 supersedes SFAS 12,
"Accounting for Certain Marketable Securities," and related
Interpretations and amends SFAS 65, "Accounting for Certain
Mortgage Banking Activities," to eliminate mortgage-backed
securities from its scope.
SFAS 115 was effective for fiscal years beginning after
December 15, 1993. It is to be initially applied as of the
beginning of an enterprise's fiscal year and cannot be applied
retroactively to prior years' financial statements. However, an
enterprise may elect to initially apply SFAS 115 as of the end of
an earlier fiscal year for which annual financial statements have
not previously been issued. Correspondingly, the Company adopted
SFAS 115 as of the end of the year ended December 31, 1993. As a
result, at March 31, 1994 and December 31, 1993, unrealized gains
of $7.5 million and $9.5 million, respectively, net of tax effect,
were recognized in stockholders' equity and increased the
Association's core capital by 21 basis points and 22 basis points,
respectively.
On June 30, 1993, the FASB issued a proposed Statement of Financial
Accounting Standards, "Accounting for Stock-based Compensation"
(the proposed Statement). The proposed Statement would establish
financial accounting and reporting standards for stock-based
compensation paid to employees. It would supersede APB 25,
"Accounting for Stock Issued to Employees." The proposed
requirements also would apply to other transactions in which equity
instruments are issued to suppliers of goods or services.
The proposed Statement would require recognition of compensation
cost for the fair value of stock-based compensation paid to
employees for their services. Although this proposed Statement
would apply to all forms of stock-based compensation, its most
notable effect would be to significantly reduce the anomalous
results of the current accounting for fixed and performance stock
options under APB 25. Performance stock options usually are less
valuable than fixed stock options, but application of the
requirements of APB 25 typically results in recognition of
compensation cost for performance stock options and none for fixed
stock options.
The proposed Statement would recognize the fair value of an award
of equity instruments to employees as additional equity at the date
the award is granted. Amounts attributable to future service would
be recognized as an asset, prepaid compensation, and would be
amortized ratably over the period(s) that the related employee
services are rendered. If an award is for past services, the
related compensation cost would be recognized in the period in
which the award is granted.
31
The final measurement date for equity instruments granted to
employees as compensation is the date at which the stock price that
enters into the measurement of the transaction is fixed. Stock
price changes after that date have no effect on measuring the value
of the equity instrument issued or the related compensation cost.
This proposed Statement would require that restricted stock, stock
options, and other equity instruments issued to employees as
compensation, and the related compensation cost, be measured based
on the stock price at the date an award is granted.
Accounting for the cost of employees services is based on the value
of compensation paid, which is presumed to be a measure of the
value of services received. Accordingly, the compensation cost
stemming from employee stock options is measured based on the fair
value of stock options granted. This proposed Statement would
require that the fair value of a stock option (or its equivalent)
granted by a public entity be estimated using a pricing model, such
as the Black-Scholes or binomial option-pricing models, that takes
into account the exercise price and expected term of the option,
the current price of the underlying stock, its expected volatility,
the expected dividend yield on the stock, and the risk-free
interest rate during the expected term of the option. The proposed
requirements provide for reducing the estimated value of employees
stock options below that produced by an option-pricing model for
nonforfeitable, tradable options issued to third parties. Under
this proposed Statement, the value of an employee stock option that
does not vest is zero, and the value of an employee stock option
that does vest is based on the length of time it remains
outstanding rather than on the maximum term of the option, which
may be considerably longer.
The proposed Statement has two effective dates. Its disclosure
provisions would be effective for years beginning after December
31, 1993. Pro forma disclosure of the effects on net income and
earnings per share of recognizing compensation cost for awards
granted after December 31, 1993 would be required. The recognition
provisions would be effective for awards granted after December 31,
1996. Until the FASB has issued a final Statement, management
cannot determine the impact that implementation of such final
Statement would have on the results of operations or financial
condition of the Company.
On November 22, 1993, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position 93-6 (SOP 93-6),
"Employers' Accounting for Employee Stock Ownership Plans." This
SOP supersedes AICPA SOP 76-3, "Accounting Practices for Certain
Employee Stock Ownership Plans," which was issued in December 1976.
SOP 93-6 applies to all employers with ESOPs, both leveraged and
nonleveraged and requires the following:
* Employers should report the issuance of new shares or the sale
of treasury shares to the ESOP when the issuance or sale occurs
32
and should report a corresponding charge to unearned ESOP
shares, a contra-equity account.
* For ESOP shares committed to be released in a period to
compensate employees directly, employers should recognize
compensation cost equal to the fair value of the shares
committed to be released.
* For ESOP shares committed to be released in a period to settle
or fund liabilities for other employee benefits, such as an
employer's match of employees' 401(k) contributions or an
employer's obligation under a formula profit-sharing plan,
employers should report satisfaction of the liabilities when the
shares are committed to be released to settle the liabilities.
Compensation cost and liabilities associated with providing such
benefits to employees should be recognized the way they would be
if an ESOP had not been used to fund the benefit.
* For ESOP shares committed to be released to replace dividends on
allocated shares used for debt service, employers should report
satisfaction of the liability to pay dividends when the shares
are committed to be released for that purpose.
* Employers should credit unearned ESOP shares as the shares are
committed to be released based on the cost of the shares to the
ESOP. The difference between the fair value of the shares
committed to be released and the cost of those shares to the
ESOP should be charged or credited to additional paid-in
capital.
* Employers should charge dividends on allocated ESOP shares to
retained earnings. Employers should report dividends on
unallocated shares as a reduction of debt or accrued interest or
as compensation cost, depending on whether the dividends are
used for debt service or paid to participants.
* Employers should report redemptions of ESOP shares as purchases
of treasury stock.
* Employers should report loans from outside lenders to ESOPs as
liabilities in their balance sheets and should report interest
cost on the debt. Employers with internally leveraged ESOPs
should not report the loan receivable from the ESOP as an asset
and should not report the ESOP's debt from the employer as a
liability.
* For earnings-per-share (EPS) computations, ESOP shares that have
been committed to be released should be considered outstanding.
ESOP shares that have not been committed to be released should
not be considered outstanding.
SOP 93-6, although it does not change the existing accounting for
nonleveraged ESOPs, contains guidance for nonleveraged ESOPs. SOP
33
93-6 also addresses issues concerning pension reversion ESOPs,
ESOPs that hold convertible preferred stock, and terminations, as
well as issues related to accounting for income taxes. SOP 93-6
also contains disclosure requirements for all employers with ESOPs,
including those that account for ESOP shares under the
grandfathering provisions.
SOP 93-6 was effective for fiscal years beginning after
December 15, 1993. Employers are required to apply the provisions
of SOP 93-6 to shares purchased by ESOPs after December 31, 1992,
that have not been committed to be released as of the beginning of
the year of adoption. Employers are permitted, but not required,
to apply the provisions of ESOP 93-6 to shares purchased by ESOPs
on or before December 31, 1992, that have not been committed to be
released as of the beginning of the year of adoption. The Company
adopted SOP 93-6 as of January 1, 1994. The adoption had no
significant effect on the results of operation or the financial
condition of the Company.
On March 31, 1993, the Accounting Standards Executive Committee of
the AICPA issued a proposed statement of position (SOP) which would
require all reporting entities (including business enterprises,
non-for-profit organizations, and state and local governments) that
prepare financial statements in conformity with generally accepted
accounting principles to include in their financial statements
disclosures about the nature of their operations and use of
estimates in the preparation of financial statements. In addition,
if specified disclosure criteria are met, it would require such
entities to include in their financial statements disclosures about
certain significant estimates, current vulnerability due to
concentrations, and financial flexibility.
The provisions of this proposed SOP would be effective for
financial statements issued for fiscal years ending after
December 15, 1994, and for financial statements for interim periods
in fiscal years subsequent to the year for which the proposed SOP
is first applied. Early application is encouraged but not
required. Since the proposed SOP is a disclosure document only,
the final SOP, if issued as proposed, would have no impact on the
Company's results of operations or financial position.
SELECTED RATIOS AND STATISTICS
- ------------------------------
The Company's annualized return on average assets was .11% for the
quarter ended March 31, 1994, compared to .01% for the quarter
ended March 31, 1993. The annualized return on stockholders'
equity was .66% for the three months ended March 31, 1994, versus
(9.70)% for the same period in 1993.
34
PART II
ITEM 1 - LEGAL PROCEEDINGS
- --------------------------
On December 6, 1989, Northeast Savings filed a complaint in the
United States District Court for the District of Columbia against
the FDIC and the OTS, as successor regulatory agencies to the FSLIC
and the FHLBB. It was the position of the Association in the
litigation that the denial by the OTS and the FDIC of core capital
treatment of the adjustable rate preferred stock and the
elimination from capital, subject to limited inclusion during a
phaseout period, of supervisory goodwill constitutes a breach of
contract, as well as a taking of the Association's property without
just compensation or due process of law in violation of the Fifth
Amendment to the United States Constitution. The Association
sought a determination by the court to this effect and to enjoin
the defendants and their officers, agents, employees and attorneys,
and those persons in active concert or participation with them,
from enforcing the provisions of FIRREA and the OTS regulations or
from taking other actions that are inconsistent with their
contractual obligations to Northeast Savings. The suit sought an
injunction requiring the OTS and FDIC to abide by their contractual
agreements to recognize as regulatory capital the supervisory
goodwill booked by Northeast Savings as a result of its 1982
acquisition from the FSLIC of three insolvent thrifts. On July 16,
1991, the district court ruled that it lacked jurisdiction over the
action but that Northeast Savings could bring a damages action
against the government in the United States Claims Court. On July
8, 1992, the Association moved to voluntarily dismiss its appeal of
the district court decision dismissing its action seeking
injunctive relief. This motion was made with a view toward
refiling the Association's lawsuit against the government in the
United States Claims Court, so as to seek damages against the
United States rather than injunctive relief against the OTS and
FDIC. This motion was made for two reasons. First, by virtue of
the Association's greatly improved financial and regulatory capital
condition, including its compliance with all fully phased-in
capital requirements, and its tangible capital position exceeding
four percent, the Association determined that it was no longer in
need of injunctive relief. Rather, the Association determined that
it was now in its best interest to pursue a damages claim against
the United States in the Claims Court. Second, the Association
sought to dismiss its appeal and refile in the Claims Court because
of the adverse decision of the Court of Appeals for the D.C.
Circuit in another "supervisory goodwill" case, TransOhio Savings
-----------------
Bank, et al. v. Director, OTS, et al., 967 F.2d 598 (June 12,
- -------------------------------------
1992). Neither the OTS nor the FDIC opposed the Association's
motion. The D.C. Circuit granted the Association's motion to
voluntarily dismiss its appeal on July 9, 1992. On August 12,
1992, Northeast Savings refiled its action in the United States
Claims Court, Northeast Savings, F.A. v. United States, No. 92-
----------------------------------------
550c. Note that, effective October 29, 1992, the United States
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
35
process of law. The United States has not yet filed an answer to
the Complaint. On May 25, 1993, a three-judge panel of the Federal
Circuit Court of Appeals ruled against the plaintiffs in three
other consolidated "supervisory goodwill" cases, holding that the
thrift institutions had not obtained an "unmistakable" promise from
the government that it would not change the law in such a manner as
to abrogate its contractual obligations and that the plaintiffs
therefore bore the risk of such a change in the law. Winstar Corp.
-------------
v. United States, No. 92-5164. On August 18, 1993, however, the
- ----------------
full Federal Circuit, acting in response to a Petition for
Rehearing with Suggestion for Rehearing In Banc filed by two of the
three plaintiffs in these cases, vacated the May 25 panel decision,
ordered the panel opinion withdrawn, and ordered that the case be
reheard by the full Court. Oral argument in the Winstar case was
-------
held on February 10, 1994. On June 3, 1993, the Court of Federal
Claims entered an order staying proceedings in Northeast Savings'
case pending further action by the Federal Circuit in the Winstar
-------
case or any action taken by the Supreme Court on any petition for a
writ of certiorari in that case.
The Association is involved in litigation arising in the normal
course of business. Although the legal responsibility and
financial impact with respect to such litigation cannot presently
be estimated with certainty, management does not anticipate that
any of these matters will result in the payment of damages by the
Association that, in the aggregate, would be material in relation
to the consolidated results of operations or financial position of
the Company.
ITEM 2 - CHANGES IN SECURITIES
- ------------------------------
The ability of the Company to make capital distributions is
restricted by the OTS Capital Distribution Regulation, the Prompt
Corrective Action Regulation, and the Dividend Limitation Agreement
entered into in connection with the OTS approval of the holding
company reorganization. In general, the payment of dividends to
the holding company without prior OTS approval is prohibited if the
Association's capital is below its fully phased-in capital
requirement or if the payment of such dividends would cause its
capital to fall below its fully phased-in capital requirement and
otherwise is subject to additional limitations as discussed more
fully in Management's Discussion and Analysis - "Regulations".
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
ITEM 5 - OTHER INFORMATION
- --------------------------
None.
36
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
99.1 - Interest rate sensitivity analysis at March 31, 1994
99.2 - Average balance sheet for the three months ended
March 31, 1994 and 1993
99.3 - Rate/Volume analysis for the three months ended
March 31, 1994 and 1993
(b) Reports on Form 8-K
None.
37
Exhibit 11.1
NORTHEAST FEDERAL CORP.
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
(Dollars in Thousands, Except Per Share Amounts)
Three Months Ended
March 31,
-------------------------------
1994 1993
---------- ----------
Primary income (loss) per common share:
Net income...................................... $ 1,007 $ 141
Preferred stock dividend requirements........... (855) (1,653)
---------- ---------
Net income (loss) applicable to common stock-
holders for the calculation of primary loss... $ 152 $ (1,512)
========== =========
Weighted average shares outstanding................. 13,509,609 5,773,813
Dilutive effect of outstanding stock options........ 256,456 *
Dilutive effect of outstanding stock warrants....... 359,702 *
---------- ---------
Weighted average shares, as adjusted, for
the calculation of primary income (loss).......... 14,125,767 5,773,813
========== =========
Primary income (loss) per common share....... $ .01 $ (.26)
========== =========
Fully diluted income (loss) per common share:
Net income...................................... $ 1,007 $ 141
Preferred stock dividend requirements........... (855) (1,653)
Interest expense on convertible subordinated
debentures, net of tax........................ - *
---------- ---------
Net income (loss) applicable to common stock-
holders for the calculation of fully diluted
income (loss)................................. $ 152 $ (1,512)
========== =========
Weighted average shares outstanding................. 13,509,609 5,773,813
Dilutive effect of outstanding stock options........ 265,856 *
Dilutive effect of outstanding stock warrants....... 375,833 *
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).... 14,151,298 5,773,813
========== =========
Fully diluted income (loss) per common share........ $ .01 $ (.26)
========== =========
<FN>
* The outstanding common stock equivalents (stock options) and the assumed conversions of
the convertible preferred stock and convertible subordinated debentures did not have a
dilutive effect on the computation of income (loss) per common share.
The following table shows the computation of the adjusted
weighted average shares for use in analysis of fully diluted
earnings per share:
Three Months Ended
March 31,
----------------------------
1994 1993
---------- ----------
Weighted average shares outstanding................. 13,509,609 5,773,813
Dilutive effect of outstanding stock options........ 265,856 239,157
Dilutive effect of outstanding stock warrants....... 375,833 436,838
Dilutive effect of shares issuable from assumed:
Conversions of convertible preferred stock........ - 2,371,039
Convertible subordinated debentures............... - 26,940
---------- ---------
Weighted average shares, as adjusted................ 14,151,298 8,847,787
========== =========
38
Exhibit 99.1
NORTHEAST FEDERAL CORP.
INTEREST RATE SENSITIVITY ANALYSIS
(Dollars in Thousands)
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)
March 31, 1994
Interest-earning assets:
Interest-bearing deposits,
federal funds sold and
investment securities, net..... $ 331,223 $ 24,767 $ 87,564 $ 114,902 $ 33,809 $ 592,265
Mortgage-backed securities, net.. 848,011 570,838 213,188 80,213 3,064 1,715,314
Loans, net:
Single-family residential real
estate loans:
Adjustable rate.............. 428,251 286,304 38,603 - - 753,158
Fixed rate................... 27,588 12,164 48,538 20,632 10,895 119,817
Consumer loans ................ 12,088 2,805 15,684 3,131 - 33,708
Income property loans.......... 37,099 1,246 8,334 22,833 47 69,559
Commercial loans............... - - - - - -
Rhode Island covered assets.... 52,782 10,098 17,946 5,671 - 86,497
--------- --------- --------- --------- --------- ---------
Total interest-earning assets...... $1,737,042 $ 908,222 $ 429,857 $ 247,382 $ 47,815 $3,370,318
========= ========= ========= ========= ========= =========
Interest-bearing liabilities:
Deposits:
NOW and Super NOW accounts..... $ 52,811 $ 3,441 $ 24,569 $ 24,405 $ 83,476 $ 188,702
Money market deposit accounts.. 379,802 - - - - 379,802
Regular savings ............... 260,617 7,206 51,454 51,111 174,825 545,213
Certificates of deposit........ 763,225 479,289 389,030 162,813 - 1,794,357
--------- --------- --------- --------- --------- ---------
Total deposits............. 1,456,455 489,936 465,053 238,329 258,301 2,908,074
--------- --------- --------- --------- --------- ---------
Borrowings:
FHLB advances................. 188,000 - 40,000 - - 228,000
Securities sold under agree-
ments to repurchase......... 197,158 - - - - 197,158
Long term borrowings.......... - - - - 38,446 38,446
Advance payment by borrowers for
taxes and insurance............ - - - - 23,870 23,870
--------- --------- --------- --------- --------- ---------
Total borrowings........... 385,158 - 40,000 - 62,316 487,474
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities. $1,841,613 $ 489,936 $ 505,053 $ 238,329 $ 320,617 $3,395,548
========= ========= ========= ========= ========= =========
Total interest-earning assets less
interest-bearing liabilities for
the period..................... $ (104,571) $ 418,286 $ (75,196) $ 9,053 $ (272,802) $ (25,230)
Cumulative total interest-earning
assets less interest-bearing
liabilities.................... $ (104,571) $ 313,715 $ 238,519 $ 247,572 $ (25,230) $ (25,230)
Cumulative total interest-earning
assets less interest-bearing
liabilities as a percent of
total assets................... (2.88)% 8.65% 6.57% 6.82% (0.70)% (0.70)%
<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 $253.2 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 $32.3 million.
39
Exhibit 99.2
NORTHEAST FEDERAL CORP.
AVERAGE BALANCE SHEET
Three Months Ended March 31,
------------------------------------------------------------------
1994 1993
----------------------------- -----------------------------
Interest Average Interest Average
Average Income/ Rate Average Income/ Rate
Balance Expense % Balance Expense %
---------- -------- ------- ---------- -------- -------
(Dollars in Thousands)
ASSETS
- ------
Interest-earning assets:
Interest-bearing deposits
and federal funds sold.......... $ 54,606 $ 542 3.97% $ 23,072 $ 199 3.45%
Investment securities, net........ 209,735 2,216 4.23 252,978 3,476 5.50
Mortgage-backed securities, net... 1,424,198 16,825 4.73 901,783 12,848 5.70
Loans, net:
Real estate..................... 1,712,818 25,180 5.88 2,215,377 35,711 6.45
Consumer........................ 35,017 753 8.60 47,773 1,031 8.63
Income property................. 71,441 1,450 8.12 83,698 1,811 8.65
--------- ------ --------- ------
Total loans................... 1,819,276 27,383 6.02 2,346,848 38,553 6.57
--------- ------ --------- ------
Rhode Island covered assets....... 102,853 1,724 6.70 138,459 2,246 6.49
--------- ------ --------- ------
Total interest-earning assets....... 3,610,668 48,690 5.39% 3,663,140 57,322 6.26%
------ ------
All other assets.................... 211,300 234,047
--------- ---------
Total Assets.................. $3,821,968 $3,897,187
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Interest-bearing liabilities:
Brokered deposits................. $ 25,330 597 9.56% $ 25,330 597 9.56%
Retail deposits:
Regular savings................. 568,415 3,058 2.18 680,841 4,396 2.62
NOWs, Super NOWs
and money market savings...... 618,288 3,193 2.09 669,121 4,278 2.59
Certificates.................... 1,738,977 20,015 4.67 1,796,853 23,080 5.21
--------- ------ --------- ------
Total deposits................ 2,951,010 26,863 3.69 3,172,145 32,351 4.14
--------- ------ --------- ------
Borrowings:
FHLB advances................... 334,181 3,109 3.77 209,305 2,103 4.07
Securities sold under
agreements to repurchase...... 299,426 2,533 3.43 281,864 2,360 3.40
Other borrowings................ 62,414 973 6.32 61,260 881 5.83
--------- ------ --------- ------
Total borrowings.............. 696,021 6,615 3.85 552,429 5,344 3.92
--------- ------ --------- ------
Total interest-bearing
liabilities..................... 3,647,031 33,478 3.72% 3,724,574 37,695 4.10%
------ ------
All other liabilities............... 42,870 34,864
Stockholders' Equity................ 132,067 137,749
--------- ---------
Total Liabilities and
Stockholders' Equity........ $3,821,968 $3,897,187
========= =========
Net Interest Income................. $15,212 $19,627
====== ======
Interest Rate Spread................ 1.67% 2.16%
===== =====
Interest Rate Margin................ 1.63% 2.09%
===== =====
40
Exhibit 99.3
NORTHEAST FEDERAL CORP.
RATE/VOLUME ANALYSIS
1994 versus 1993
------------------------------------------------
Amount of Increase
(Decrease) Due to Change in:
------------------------------------------------
Volume Rate Rate/Volume Total
---------- --------- ----------- ---------
(In Thousands)
Interest income:
Interest-bearing deposits
and federal funds sold............... $ 272 $ 30 $ 41 $ 343
Investment securities, net............. (594) (803) 137 (1,260)
Mortgage-backed securities, net........ 7,443 (2,195) (1,271) 3,977
Loans, net:
Single-family residential real
estate............................. (8,101) (3,143) 713 (10,531)
Consumer............................. (275) (4) 1 (278)
Income property...................... (265) (112) 16 (361)
-------- ------- ------ --------
Total loans...................... (8,641) (3,259) 730 (11,170)
-------- ------- ------ --------
Rhode Island covered assets.......... (578) 75 (19) (522)
-------- ------- ------ --------
Total interest income.......... (2,098) (6,152) (382) (8,632)
-------- ------- ------ --------
Interest expense:
Deposits:
Brokered deposits.................... - - - -
Retail deposits:
Regular savings.................... (726) (733) 121 (1,338)
NOWs, Super NOWs and money
market savings................... (325) (822) 62 (1,085)
Certificates....................... (743) (2,399) 77 (3,065)
-------- ------- ------ --------
Total deposits................... (1,794) (3,954) 260 (5,488)
-------- ------- ------ --------
Borrowings:
FHLB advances........................ 1,255 (156) (93) 1,006
Securities sold under
agreements to repurchase........... 147 24 2 173
Other borrowings..................... 17 74 1 92
-------- ------- ------ --------
Total borrowings................... 1,419 (58) (90) 1,271
-------- ------- ------ --------
Total interest expense......... (375) (4,012) 170 (4,217)
-------- ------- ------ --------
Change in net interest income............ $ (1,723) $ (2,140) $ (552) $ (4,415)
======== ======= ======= =======
41
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
April 15, 1994 /s/ LYNNE M. CARCIA
-----------------------------------
Lynne M. Carcia
Senior Vice President and Controller
(Principal Accounting Officer)
42