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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to __________
FILE NUMBER: 1-10571
NORTHEAST FEDERAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1288154
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OF ORGANIZATION)
50 STATE HOUSE SQUARE 06103
HARTFORD, CONNECTICUT (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
203/280-1000
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act
Not Applicable
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of February 4, 1994.
Common Stock, $.01 par value--$65,851,232
The number of shares outstanding for each of the registrant's classes of
common stock issued and outstanding as of February 4, 1994.
Common Stock, $.01 par value--13,507,945
DOCUMENTS INCORPORATED BY REFERENCE:
Part III--Portions of Proxy Statement for Annual Meeting of Stockholders,
May 20, 1994
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This amendment to Form 10-K is being filed in order to properly align the
columns in the Consolidated Statement of Financial Condition. Item 8 of
Form 10-K is being refiled in its entirety.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Management's Report........................................................ 91
Report of Independent Accountants.......................................... 93
Consolidated Statement of Operations....................................... 95
Consolidated Statement of Financial Condition.............................. 96
Consolidated Statement of Changes in Stockholders' Equity.................. 97
Consolidated Statement of Cash Flows....................................... 98
Notes to the Consolidated Financial Statements............................. 99
90
MANAGEMENT'S REPORT
To the Stockholders:
Financial Statements
The management of Northeast Federal Corp. (the Company) is responsible for
the preparation, integrity, and fair presentation of its published financial
statements and all other information presented in this annual report. The
financial statements have been prepared in accordance with generally accepted
accounting principles and, as such, include amounts based on informed judgments
and estimates made by management.
The financial statements have been audited by an independent accounting firm,
which was given unrestricted access to all financial records and related data,
including minutes of all meetings of stockholders, the board of directors and
committees of the board. Management believes that all representations made to
the independent auditors during their audit were valid and appropriate. The
independent auditors' report is presented on page 93.
Internal Control
Management is responsible for establishing and maintaining an effective
internal control structure over financial reporting presented in conformity
with both generally accepted accounting principles and, as pertaining to
Northeast Savings, F.A., the Office of Thrift Supervision Instructions for
Thrift Financial Reports (TFR instructions). The structure contains monitoring
mechanisms, and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any structure of
internal control, including the possibility of human error and the
circumvention or overriding of controls. Accordingly, even an effective
internal control structure can provide only reasonable assurance with respect
to financial statement preparation. Further, because of changes in conditions,
the effectiveness of an internal control structure may vary over time.
Management assessed the institution's internal control structure over
financial reporting presented in conformity with both generally accepted
accounting principles and TFR instructions as of December 31, 1993. This
assessment was based on criteria for effective internal control over financial
reporting described in "Internal Control-Integrated Framework," issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management believes that the Company maintained an effective
internal control structure over financial reporting presented in conformity
with both generally accepted accounting principles and TFR instructions, as of
December 31, 1993.
The Audit Committee of the Board of Directors is comprised entirely of
outside directors who are independent of the Company's management; it includes
members with banking or related management experience, has access to its own
outside counsel, and does not include any large customers of the institution.
The Audit Committee is responsible for recommending to the Board of Directors
the selection of independent auditors. It meets periodically with management,
the independent auditors, and the internal auditors to ensure that they are
carrying out their responsibilities. The Committee is also responsible for
performing an oversight role by reviewing and monitoring the financial
accounting and auditing procedures of the Company in addition to reviewing the
Company's financial reports. The independent auditors and the internal auditors
have full and free access to the Audit Committee, with or without the presence
of management, to discuss the adequacy of the internal control structure for
financial reporting and any other matters which they believe should be brought
to the attention of the Committee.
91
MANAGEMENT'S REPORT
(CONTINUED)
Compliance with Laws and Regulations
Management is also responsible for ensuring compliance with the federal laws
and regulations concerning loans to insiders and the federal and state laws and
regulations concerning dividend restrictions, both of which are designated by
the FDIC as safety and soundness standards.
Management assessed its compliance with the designated safety and soundness
laws and regulations and has maintained records of its determinations and
assessments as required by the FDIC. Based on this assessment, management
believes that the Company has complied, in all material respects, with the
designated safety and soundness laws and regulations for the year ended
December 31, 1993.
/s/ Kirk W. Walters
- ------------------------------------- January 21, 1994
Kirk W. Walters
President and Chief Executive
Officer
/s/ Lynne M. Carcia
- ------------------------------------- January 21, 1994
Lynne M. Carcia
Controller and Chief Accounting
Officer
92
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of Northeast Federal Corp.:
We have audited the accompanying consolidated statement of financial
condition of Northeast Federal Corp. and subsidiaries (the Company) as of
December 31, 1993, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Northeast Federal Corp. and subsidiaries at December 31, 1993 and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
As described in Note 1, the Company changed its method of accounting for
securities as of December 31, 1993.
Deloitte & Touche
Hartford, Connecticut
January 21, 1994
(February 9, 1994 as to Note 26)
93
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
Northeast Federal Corp.
We have audited the accompanying consolidated statements of financial
condition of Northeast Federal Corp. as of December 31 and March 31, 1992, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the nine months ended December 31, 1992 and each of
the two years in the period ended March 31, 1992. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Northeast Federal
Corp. as of December 31 and March 31, 1992 and the consolidated results of its
operations and its cash flows for the nine months ended December 31, 1992 and
each of the two years in the period ended March 31, 1992 in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the Consolidated Financial Statements, the Company
changed its method of accounting for income taxes for the fiscal year ended
March 31, 1992.
Coopers & Lybrand
Hartford, Connecticut
January 18, 1993
94
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1993 1992 1992
------------ ----------------- ----------
Interest income:
Loans............................... $145,127 $129,038 $225,132
Mortgage-backed securities.......... 54,205 37,924 78,175
Investment securities............... 10,970 15,313 20,786
Rhode Island covered assets......... 8,989 9,932 --
Other............................... 1,085 4,138 2,853
-------- -------- --------
Total interest income............. 220,376 196,345 326,946
-------- -------- --------
Interest expense:
Deposits............................ 121,163 123,924 219,122
Federal Home Loan Bank advances..... 13,230 3,056 12,572
Other borrowings.................... 13,575 5,930 12,451
-------- -------- --------
Total interest expense............ 147,968 132,910 244,145
-------- -------- --------
Net interest income............. 72,408 63,435 82,801
Provision for loan losses............ 23,300 16,300 10,200
-------- -------- --------
Net interest income after provi-
sion for loan losses........... 49,108 47,135 72,601
-------- -------- --------
Non-interest income:
Fees for services................... 10,181 7,112 12,815
Gain on sale of securities, net..... 5,625 4,100 1,991
Gain on sale of loans, net.......... 1,939 1,870 2,532
Other non-interest income (loss).... (6) (41) (1,221)
-------- -------- --------
Total non-interest income......... 17,739 13,041 16,117
-------- -------- --------
Non-interest expenses:
Compensation and benefits........... 32,324 23,126 27,635
Occupancy and equipment, net........ 15,399 11,057 14,810
Other general and administrative.... 19,436 15,872 19,065
Amortization of supervisory good-
will............................... -- 2,002 3,971
Supervisory goodwill valuation ad-
justment........................... -- 56,568 --
SAIF insurance fund and OTS assess-
ments.............................. 8,414 6,222 8,130
Real estate and other assets ac-
quired in settlement of loans...... 17,606 9,652 5,702
-------- -------- --------
Total non-interest expenses....... 93,179 124,499 79,313
-------- -------- --------
Income (loss) before income
taxes and extraordinary items.. (26,332) (64,323) 9,405
Income tax expense (benefit)......... (12,193) (5,089) 4,915
-------- -------- --------
Income (loss) before extraordi-
nary items and cumulative ef-
fect of change in accounting
principle...................... (14,139) (59,234) 4,490
Extraordinary items, net of income
taxes............................... -- -- 95
-------- -------- --------
Income (loss) before cumulative
effect of change in accounting
principle...................... (14,139) (59,234) 4,585
Cumulative effect of change in ac-
counting principle.................. -- -- 1,022
-------- -------- --------
Net income (loss)............... $(14,139) $(59,234) $ 5,607
======== ======== ========
Preferred stock dividend require-
ments............................... $ 4,501 $ 4,652 $ 8,506
Net loss applicable to common stock-
holders............................. $(18,640) $(63,886) $ (2,899)
Loss per common share before extraor-
dinary items:
Primary and fully diluted........... $ (1.75) $ (11.16) $ (.70)
Loss per common share before
cumulative effect of change in
accounting principle:
Primary and fully diluted........... $ (1.75) $ (11.16) $ (.69)
Cumulative effect of change in ac-
counting principle:
Primary and fully diluted........... $ -- $ -- $ .18
Net loss per common share:
Primary and fully diluted........... $ (1.75) $ (11.16) $ (.51)
See accompanying Notes to the Consolidated Financial Statements
95
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
DECEMBER 31,
----------------------
1993 1992
---------- ----------
ASSETS
Cash and due from banks................................ $ 51,705 $ 57,158
Interest-bearing deposits.............................. -- 615
Federal funds sold..................................... 23,510 32,815
Securities purchased under agreements to resell........ 60,000 --
Investment securities, net (market value of $42,525 and
$116,341)............................................. 42,612 111,791
Investment securities, available-for-sale, net (market
value of $131,127 at December 31, 1992)............... 162,854 129,899
Mortgage-backed securities, net (market value of
$1,336,970 and $837,681).............................. 1,330,886 829,772
Mortgage-backed securities, available-for-sale, net
(market value of $57,684 at December 31, 1992)........ 12,886 55,474
Loans, net............................................. 1,876,181 2,278,873
Loans available-for-sale, net.......................... 46,076 32,237
Rhode Island covered assets............................ 105,625 151,828
Interest and dividends receivable...................... 17,540 21,342
Real estate and other assets acquired in settlement of
loans................................................. 74,962 99,376
Premises and equipment, net............................ 32,368 34,201
Prepaid expenses and other assets...................... 82,822 74,723
---------- ----------
Total assets....................................... $3,920,027 $3,910,104
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Retail deposits........................................ $2,952,082 $3,205,654
Brokered deposits...................................... 25,135 25,135
Federal Home Loan Bank advances........................ 373,000 140,000
Securities sold under agreements to repurchase......... 294,809 291,014
Uncertificated debentures.............................. 38,442 34,990
Convertible subordinated debentures.................... -- 560
Advance payments by borrowers for taxes and insurance.. 28,337 21,734
Other liabilities...................................... 75,709 53,444
---------- ----------
Total liabilities.................................. 3,787,514 3,772,531
---------- ----------
Commitments and Contingencies
Stockholders' equity:
Serial preferred stock, $.01 par value, 15,000,000
shares authorized:
$2.25 Cumulative Convertible Preferred Stock Series
A, 1,610,000 shares issued and outstanding at De-
cember 31, 1992................................... -- 16
$8.50 Cumulative Preferred Stock, Series B, 394,199
shares at December 31, 1993 and 351,700 shares at
December 31, 1992 issued and outstanding.......... 4 4
Common stock, $.01 par value, 25,000,000 shares
authorized: 13,499,078 shares at December 31, 1993 and
5,729,579 shares at December 31, 1992 issued and
outstanding........................................... 135 57
Additional paid-in capital............................. 185,960 182,804
Net unrealized gains on debt and equity securities
available-for-sale.................................... 9,462 --
Accumulated deficit.................................... (59,557) (40,330)
Stock dividend distributable........................... 838 --
Unallocated employee stock ownership plan shares....... (4,329) (4,978)
---------- ----------
Total stockholders' equity......................... 132,513 137,573
---------- ----------
$3,920,027 $3,910,104
========== ==========
See accompanying Notes to the Consolidated Financial Statements
96
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
RETAINED
EARNINGS UNALLOCATED
NET UNREAL- (ACCUMULATED EMPLOYEE
SERIAL ADDITIONAL IZED GAIN DEFICIT) STOCK STOCK OWNER-
PREFERRED COMMON PAID-IN (LOSS) ON SUBSTANTIALLY DIVIDEND SHIP PLAN
STOCK STOCK CAPITAL SECURITIES* RESTRICTED DISTRIBUTABLE SHARES TOTAL
--------- ------ ---------- ----------- ------------- ------------- ------------ --------
Balance at March 31,
1991................... $28 $ 57 $181,158 $(1,125) $ 13,297 $ -- $(10,583) $182,832
Net income............. -- -- -- -- 5,607 -- -- 5,607
Proceeds from exercise
of stock options...... -- -- 2 -- -- -- -- 2
Unallocated employee
stock ownership plan
shares................ -- -- -- -- -- -- 1,458 1,458
Net unrealized recovery
on equity securities.. -- -- -- 1,125 -- -- 1,125
--- ---- -------- ------- -------- ------ -------- --------
Balance at March 31,
1992................... 28 57 181,160 -- 18,904 -- (9,125) 191,024
Net loss............... -- -- -- -- (59,234) -- -- (59,234)
Issuance of 351,700
shares of $8.50 Cumu-
lative Preferred
Stock, Series B....... 4 -- 35,166 -- -- -- -- 35,170
Repurchase of 1,202,916
shares of Adjustable
Rate Cumulative Pre-
ferred Stock, Series
A..................... (12) -- (33,538) -- -- -- -- (33,550)
Proceeds from exercise
of stock options...... -- -- 16 -- -- -- -- 16
Unallocated employee
stock ownership plan
shares................ -- -- -- -- -- -- 4,147 4,147
--- ---- -------- ------- -------- ------ -------- --------
Balance at December 31,
1992................... 20 57 182,804 -- (40,330) -- (4,978) 137,573
Net loss............... -- -- -- -- (14,139) -- -- (14,139)
Proceeds from issuance
of shares to 401-K
plan.................. -- -- 223 -- -- -- -- 223
Proceeds from exercise
of stock options...... -- 1 146 -- -- -- -- 147
Conversion of 1,610,000
shares of $2.25 Cumu-
lative Convertible
Preferred Stock, Se-
ries A into 7,647,500
shares of common
stock................. (16) 77 (1,463) -- -- -- -- (1,402)
Stock dividend distrib-
utable, 50,876 shares
of $8.50 Cumulative
Preferred Stock, Se-
ries B................ -- -- -- -- (5,088) 5,088 -- --
Preferred stock divi-
dend payment in kind.. -- -- 4,250 -- -- (4,250) -- --
Unallocated employee
stock ownership plan
shares................ -- -- -- -- -- -- 649 649
Net unrealized gains on
debt and equity secu-
rities available-for-
sale.................. -- -- -- 9,462 -- -- -- 9,462
--- ---- -------- ------- -------- ------ -------- --------
Balance at December 31,
1993................... $ 4 $135 $185,960 $ 9,462 $(59,557) $ 838 $ (4,329) $132,513
=== ==== ======== ======= ======== ====== ======== ========
*Changes during the year ended December 31, 1993 reflect the Company's
implementation of SFAS 115, "Accounting for Certain Investments in Debt and
Equity Securities."
See accompanying Notes to the Consolidated Financial Statements
97
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1993 1992 1992
------------ ----------------- ----------
Cash flows from operating
activities:
Net income (loss)................... $ (14,139) $ (59,234) $ 5,607
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization...... 4,860 3,361 4,693
Amortization of fees, discounts,
and premiums, net................. 1,697 (6,820) 405
Amortization of and other
adjustments to supervisory
goodwill.......................... -- 59,553 24,867
Provision for loan losses.......... 23,300 16,300 10,200
Provision for losses on REO........ 9,493 3,823 --
Gain on sale of securities......... (5,651) (4,100) (1,991)
Gain on sale of loans.............. (1,939) (1,870) (2,532)
(Gain) loss on sale of other
assets............................ 466 (253) 674
(Gain) loss on early
extinguishment of debt............ -- -- (204)
Decrease in interest and dividends
receivable........................ 3,802 2,792 13,895
Loans available-for-sale
originated and purchased.......... (244,950) (148,397) (166,697)
Proceeds from sales of loans
available-for-sale................ 231,153 184,325 135,063
Decrease in accrued interest
payable on deposits............... (1,078) (3,185) (8,296)
Increase in prepaid expenses and
other assets...................... (8,099) (14,347) (28,236)
Increase (decrease) in other
liabilities....................... 19,125 (10,259) 5,401
--------- --------- ----------
Total adjustments................ 32,179 80,923 (12,758)
--------- --------- ----------
Net cash provided by (used in)
operating activities.......... 18,040 21,689 (7,151)
--------- --------- ----------
Cash flows from investing
activities:
Loans originated and purchased..... (513,239) (461,063) (318,573)
Proceeds from sales of loans....... 48,541 8,116 16,680
Principal collected on loans....... 412,166 398,469 480,198
Net decrease in Rhode Island
covered assets.................... 46,203 26,308 --
Purchases of mortgage-backed
securities........................ (361,464) (383,401) --
Proceeds from sales of mortgage-
backed securities................. -- -- 23,512
Purchases of mortgage-backed
securities available-for-sale..... -- -- (114,911)
Proceeds from sales of mortgage-
backed securities available-for-
sale.............................. 39,831 44,727 587,225
Principal collected on mortgage-
backed securities................. 237,339 136,995 211,115
Purchases of investment
securities........................ -- (64,667) (51,516)
Proceeds from sales of investment
securities........................ 16,347 506 48,332
Proceeds from redemption of FHLB
stock............................. 554 8,283 1,478
Proceeds from maturities of
investment securities............. 12,580 19,404 18,371
Purchases of investment securities
available-for-sale................ (239,426) (204,458) (263,160)
Proceeds from sales of investment
securities available-for-sale..... 142,592 158,033 306,979
Proceeds from maturities of
investment securities available-
for-sale.......................... 121,347 71,622 24,799
Proceeds from sales of real estate
and other assets acquired in
settlement of loans............... 76,549 23,563 16,052
Net increase in deposits due to
acquisition of branches........... -- -- 404,643
Net purchases of premises and
equipment......................... (3,294) (7,086) (12,157)
--------- --------- ----------
Net cash provided by (used in)
investing activities.......... 36,626 (224,649) 1,379,067
--------- --------- ----------
Cash flows from financing
activities:
Net decrease in retail deposits.... (252,494) (568,741) (227,021)
Acquisition of Rhode Island
deposits.......................... -- 136,319 --
Net decrease in brokered deposits.. -- -- (87,751)
Increase (decrease) in advance
payments by borrowers for taxes
and insurance..................... 6,603 1,461 (13,327)
Increase (decrease) in securities
sold under agreements to
repurchase........................ 3,795 278,267 (354,035)
Net increase (decrease) in short-
term FHLB advances................ 40,000 99,250 (310,000)
Proceeds from long-term FHLB
advances.......................... 228,000 -- --
Repayments of long-term FHLB
advances.......................... (35,000) (2,500) (142,000)
Proceeds from issuance of
uncertificated sinking fund
debentures........................ -- 33,450 --
Retirement of convertible
subordinated debentures........... (560) -- (266)
Reduction of ESOP debt guarantee... 649 4,147 1,458
Preferred stock conversion costs... (1,402) -- --
Retirement of series A adjustable
preferred stock................... -- (33,550) --
Proceeds from issuance of Series B
preferred stock................... -- 35,170 --
Issuance of 401K stock shares...... 223 -- --
Proceeds from exercise of stock
options........................... 147 16 2
--------- --------- ----------
Net cash used in financing
activities.................... (10,039) (16,711) (1,132,940)
--------- --------- ----------
Net increase (decrease) in cash and
cash equivalents................... 44,627 (219,671) 238,976
Cash and cash equivalents at
beginning of period................ 90,588 310,259 71,283
--------- --------- ----------
Cash and cash equivalents at end of
period............................. $ 135,215 $ 90,588 $ 310,259
========= ========= ==========
See accompanying Notes to the Consolidated Financial Statements
98
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Northeast Federal Corp. and its wholly-owned subsidiary, Northeast Savings,
F.A. All significant intercompany balances and transactions have been
eliminated in consolidation. Certain reclassifications have been made to prior
years' financial statements to conform to the 1993 presentation.
Cash and Cash Equivalents
For purposes of the Consolidated Statement of Cash Flows, cash and due from
banks, interest-bearing deposits with original maturities of ninety days or
less, and federal funds sold are considered as cash and cash equivalents.
Federal Reserve Board regulations require the Association to maintain non-
interest-bearing reserves against certain of its transaction accounts. For
total transaction account deposits of $51.9 million or less, regulations
require a reserve of 3%. For total transaction account deposits in excess of
$51.9 million, a 10% reserve is required.
Securities Purchased Under Agreements to Resell
The Association invests in securities purchased under agreements to resell
(repurchase agreements) for short-term cash management. The Association takes
physical possession of the collateral for these agreements, which normally
consists of U.S. Treasury securities, collateralized mortgage obligations, or
mortgage-backed securities guaranteed by agencies of the U.S. government.
Investment Securities
Investment securities include U.S. Government, agency, and corporate bonds,
collateralized mortgage obligations, and asset-backed securities. Those
securities which management has the intent and ability to hold until maturity
are classified as held-to-maturity and are carried at amortized cost, adjusted
for amortization of premiums and accretion of discounts into interest income
using the level-yield method. Premiums are amortized to the earlier of the call
or maturity date and discounts are accreted to the maturity date. Investment
securities which have been identified as assets for which there is not a
positive intent to hold to maturity, including all marketable equity
securities, are classified as available-for-sale. SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities," requires that available-
for-sale securities be reported at fair value with unrealized gains and losses
excluded from earnings and reported in a separate component of stockholders'
equity. The Company implemented SFAS 115 as of December 31, 1993. SFAS 115 may
not be applied retroactively.
Gains and losses on sales of investment securities are computed on a specific
identification cost basis. Investment securities which have experienced an
other than temporary decline are written down to fair value as a new cost basis
with the amount of the writedown included in earnings as a realized loss. The
new cost basis is not changed for subsequent recoveries in fair value. Factors
which management considers in determining whether an impairment in value of an
investment is other than temporary include the issuer's financial performance
and near term prospects, the financial conditions and prospects of the issuer's
geographic region and industry, and recoveries in market value subsequent to
the balance sheet date.
Mortgage-Backed Securities
Mortgage-backed securities which management has the intent and ability to
hold until maturity are classified as held-to-maturity, and are carried at
amortized cost, adjusted for premiums and discounts which
99
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
are amortized or accreted into interest income using the level-yield method
over the remaining contractual life of the securities, adjusted for actual
prepayments. Mortgage-backed securities for which there is not a positive
intent to hold to maturity are classified as available-for-sale. As indicated
above, SFAS 115, implemented by the Company as of the end of the year ended
December 31, 1993, requires that available-for-sale securities be reported at
fair value with unrealized gains and losses excluded from earnings and reported
in a separate component of stockholders' equity. Gains and losses on sales of
mortgage-backed securities are computed on a specific identification cost
basis.
Loans
Loans are generally recorded at the contractual amounts owed by borrowers,
less unearned discounts, deferred origination fees, the undisbursed portion of
any loans in process, and the allowance for loan losses. Interest on loans is
credited to income as earned to the extent it is deemed collectible. Discounts
on loans purchased are accreted into interest income using the level-yield
method over the contractual lives of the loans, adjusted for actual
prepayments.
Single-family residential real estate loans that were originated with the
intent to sell in the secondary mortgage market or those loans which have been
identified as assets for which there is not a positive intent to hold to
maturity are classified as available-for-sale and carried at the lower of cost
or fair value. The amount by which the aggregate cost of loans available-for-
sale exceeds market value is charged to gain (loss) on sale of loans, net.
The Company adopted SFAS 114, "Accounting by Creditors for Impairment of a
Loan," as of January 1, 1993. Loans which are identified for evaluation and
which are deemed to be impaired under the guidance of SFAS 114 are measured at
the fair value of the collateral. Substantially all of the Association's loans
are collateral dependent. If the fair value of the collateral is less than the
recorded investment in the loan, the allowance for loan losses is adjusted with
a corresponding charge to the provision for loan losses. The fair value of the
collateral, based on a current appraisal, often changes from one reporting
period to the next. If the fair value of the collateral decreases, such
decrease is reported as a charge to the provision for loan losses. If the fair
value increases, the provision for loan losses is reduced. Impaired loans are
included in nonperforming assets as non-accrual loans or troubled debt
restructurings, as appropriate. The Company had previously measured loan
impairment pursuant to the methods prescribed in SFAS 114. As a result, no
additional reserves were required by early adoption of the pronouncement.
Loan Fees
Loan origination fees, commitment fees, and certain direct loan origination
costs are deferred and recognized over the lives of the related loans as an
adjustment of the loans' yields using the level-yield method. Calculation of
the level-yield is based upon weighted average contractual payment terms which
are adjusted for actual prepayments. Amortization of deferred fees is
discontinued for non-accrual loans.
Loans Serviced for Others
Northeast Savings services real estate and consumer loans for others which
are not included in the accompanying consolidated financial statements. Fees
earned for servicing loans owned by others are reported as income when the
related mortgage loan payments are collected. Loan servicing costs are charged
to expense as incurred. Costs associated with acquiring the right to service
certain loans are capitalized and amortized in proportion to and deducted from
the estimated future net servicing income.
100
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Prior to 1986, the Association sold certain loans with limited recourse
requirements. In addition, in the normal course of business, loans are sold to
various agencies which have recourse on standard documentation representations
and warranties. Such loans are included in loans serviced for others. Estimated
probable loan losses and related costs of collection and repossession are
provided for at the time of such sales and are periodically reevaluated. The
Company evaluates the credit risk of loans sold with recourse in conjunction
with its evaluation of the adequacy of allowance for loan losses.
Allowance for Loan Losses
The allowance for loan losses is established and maintained through a
periodic review and evaluation of various factors which affect the loans'
collectibility and results in provisions for loan losses which are charged to
expense. Numerous factors are considered in the evaluation, including a review
of certain borrowers' current financial status, credit standing, available
collateral, management's judgment regarding economic conditions, the impact of
those conditions on property values, historical loan loss experience in
relation to outstanding loans, the diversification and size of the loan
portfolio, the results of the most recent regulatory examinations available to
the Association, the overall loan portfolio quality, and other relevant
factors.
Non-Accrual Loans
Interest accruals on loans are normally discontinued and previously accrued
interest is reversed whenever the payment of interest or principal is more than
90 days past due, or earlier when conditions warrant it. A non-accrual loan may
be restored to an accrual basis when principal and interest payments are
current and full payment of principal and interest is expected.
Real Estate and Other Assets Acquired in Settlement of Loans
Real estate and other assets acquired in settlement of loans is recorded at
the lower of the recorded investment in the loan or fair value minus estimated
costs to sell. The lower of the recorded investment in the loan or fair value
less estimated costs to sell becomes the new cost basis for REO. Any excess of
the recorded investment over the fair value less estimated costs to sell is
charged off. Subsequent valuations of REO are at the lower of the new cost
basis or fair value less estimated costs to sell.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized over
the respective lease terms or the estimated useful life, whichever is shorter.
Interest Rate Swap Agreements
Northeast Savings is a party to interest rate swap agreements in managing its
interest rate exposure. The net amounts received or paid in accordance with the
interest rate swap agreements are charged or credited to interest expense on
other borrowings. Generally, gains and losses on terminated interest rate swap
agreements are amortized over the lesser of the remaining terms of the
agreements or the remaining lives of the assets or liabilities hedged.
Pension Plan
Pension costs are funded on a current basis in compliance with the
requirements of the Employee Retirement Income Security Act and are accounted
for in accordance with Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions."
101
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Retirement Benefits Other Than Pensions
SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," focuses principally on postretirement health care benefits and
significantly changed the practice of accounting for postretirement benefits on
a pay-as-you-go (cash) basis by requiring accrual of the expected cost of
providing those benefits to an employee and the employee's beneficiaries and
covered dependents during the years that the employee renders the necessary
service. SFAS 106 became effective for the Association in 1993. The Company
implemented SFAS 106 during the quarter ended March 31, 1993 and is amortizing
the estimated $444,000 expense over the twelve year life expectancy of the
participants.
Income Taxes
Northeast Federal Corp. and subsidiaries file a federal consolidated income
tax return. In February 1992, the FASB issued SFAS 109, "Accounting For Income
Taxes," which requires an asset and liability approach for financial accounting
and reporting for income taxes. One requirement of SFAS 109 is that the tax
benefit related to acquired deductible temporary differences and pre-
acquisition net operating loss carryforwards shall first be applied to reduce
to zero goodwill related to that acquisition. Accordingly, goodwill has been
reduced as a result of the tax benefits related to these items.
The Company elected to adopt SFAS 109 effective April 1, 1991. The effect of
initially applying the new standard was reported as the effect of a change in
accounting principle. The cumulative effect of this change is reported
separately in the Consolidated Statement of Operations for the year ended March
31, 1992. As required, first, second, and third quarters of the year ended
March 31, 1992 were restated for the effect of this change.
Income (Loss) Per Common Share
Income (loss) per common share is based on the weighted average number of
common shares outstanding and (if dilutive) common stock equivalents (i.e.,
stock options and warrants) outstanding in each year. The 8% Convertible
Subordinated Debentures do not meet the criteria for a common stock equivalent.
Income (loss) per common share has been restated to give effect to the two 2%
common stock dividends declared in fiscal 1990. Net income (loss) applicable to
common stockholders and income (loss) per common share are calculated after
deducting preferred stock dividend requirements which include $4,652,000 and
$8,506,000 of accumulated and unpaid preferred dividends for the nine-month
period ended December 31, 1992 and the year ended March 31, 1992, respectively.
There were no accumulated and unpaid preferred dividends at December 31, 1993.
Accumulated and unpaid dividends totaled $12,802,000 and $19,364,000 at
December 31, 1992 and March 31, 1992, respectively. On May 8, 1992, $11.2
million of accumulated and unpaid dividends were eliminated as a result of the
Company's repurchase of its adjustable rate preferred stock plus accumulated
dividends from the FRF administered by the FDIC. On May 14, 1993, $12.2 million
of accumulated and unpaid dividends were eliminated as a result of the
conversion of 1,610,000 of $2.25 Cumulative Convertible Preferred Stock, Series
A into 7,647,500 shares of common stock.
102
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2: CHANGE IN FISCAL YEAR
In July 1992, the Company changed its reporting period from a fiscal year
ended March 31 to a calendar year. Accordingly, results of operations for the
transition period ended December 31, 1992 cover a nine-month period. The
following statements of operations present financial data for the nine months
ended December 31, 1993 and the comparable nine months of the prior years.
These statements are for comparative purposes only.
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED DECEMBER 31,
---------------------------------
1993 1992 1991
----------- -------- -----------
(UNAUDITED) (UNAUDITED)
Interest income:
Loans....................................... $106,574 $129,038 $175,232
Mortgage-backed securities.................. 41,357 37,924 63,484
Investment securities....................... 7,494 15,313 16,499
Rhode Island covered assets................. 6,743 9,932 --
Other....................................... 886 4,138 1,762
-------- -------- --------
Total interest income..................... 163,054 196,345 256,977
-------- -------- --------
Interest expense:
Deposits.................................... 88,812 123,924 171,396
Federal Home Loan Bank advances............. 11,127 3,056 11,613
Other borrowings............................ 10,334 5,930 11,831
-------- -------- --------
Total interest expense.................... 110,273 132,910 194,840
-------- -------- --------
Net interest income..................... 52,781 63,435 62,137
Provision for loan losses.................... 18,450 16,300 7,400
-------- -------- --------
Net interest income after provision for
loan losses............................ 34,331 47,135 54,737
-------- -------- --------
Non-interest income:
Fees for services........................... 7,346 7,112 10,273
Gain on sale of securities, net............. 1,764 4,100 330
Gain on sale of loans, net.................. 1,617 1,870 1,937
Other non-interest income (loss)............ (23) (41) (56)
-------- -------- --------
Total non-interest income................. 10,704 13,041 12,484
-------- -------- --------
Non-interest expenses:
Compensation and benefits................... 24,124 23,126 20,290
Occupancy and equipment, net................ 11,370 11,057 11,309
Other general and administrative............ 14,519 15,872 13,872
Amortization of supervisory goodwill........ -- 2,002 2,978
Supervisory goodwill valuation adjustment... -- 56,568 --
SAIF insurance fund and OTS assessments..... 6,631 6,222 6,094
Real estate and other assets acquired in
settlement of loans........................ 14,979 9,652 3,650
-------- -------- --------
Total non-interest expenses............... 71,623 124,499 58,193
-------- -------- --------
Income (loss) before income taxes and
extraordinary items.................... (26,588) (64,323) 9,028
Income tax expense (benefit)................. (12,308) (5,089) 4,717
-------- -------- --------
Income (loss) before extraordinary items
and cumulative effect of change in
accounting principle................... (14,280) (59,234) 4,311
Extraordinary items, net of income taxes..... -- -- 77
-------- -------- --------
Income (loss) before cumulative effect
of change in accounting principle...... (14,280) (59,234) 4,388
Cumulative effect at April 1, 1991 of change
in accounting principle..................... -- -- 1,022
-------- -------- --------
Net income (loss)....................... $(14,280) $(59,234) $ 5,410
======== ======== ========
Preferred stock dividend requirements........ $ 2,848 $ 4,652 $ 6,435
Net loss applicable to common stockholders... $(17,128) $(63,886) $ (1,025)
Loss per common share before extraordinary
items:
Primary and fully diluted................... $ (1.40) $ (11.16) $ (.37)
Loss per common share before cumulative
effect of change in accounting principle:
Primary and fully diluted................... $ (1.40) $ (11.16) $ (.36)
Cumulative effect of change in accounting
principle:
Primary and fully diluted................... $ -- $ -- $ .18
Net loss per common share:
Primary and fully diluted................... $ (1.40) $ (11.16) $ (.18)
103
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For purposes of the Consolidated Statement of Cash Flows, cash and due from
banks, interest-bearing deposits with original maturities of ninety days or
less, and federal funds sold are considered as cash and cash equivalents.
FOR THE YEAR FOR THE NINE MONTHS FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1993 1992 1992
------------ ------------------- ------------
(IN THOUSANDS)
CASH PAID DURING THE PERIODS FOR:
Interest on retail deposits.... $119,822 $124,720 $222,182
Interest on brokered deposits.. 2,419 2,389 2,507
Interest on borrowings......... 23,695 6,704 32,664
Income taxes................... 2,180 1,352 3,479
CASH RECEIVED DURING THE PERIODS
FOR:
Interest and dividends......... 224,178 178,862 340,912
NON-CASH ITEMS:
Loans securitized into
mortgage-backed securities.... 376,551 -- 14,504
Loans securitized into
mortgage-backed securities
available-for-sale............ -- 2,564 --
Transfers of loans to
available-for-sale............ (964) 6,106 11,658
Transfers of mortgage-backed
securities to available-for-
sale.......................... 81 97,697 91,306
Transfers of investment
securities to available-for-
sale.......................... 40,809 112,045 15,139
Real estate and other assets
acquired in settlement of
loans......................... 62,086 65,245 55,807
Payment in kind on
uncertificated debentures..... 3,452 1,540 --
Payment in kind on Series B
preferred stock............... 4,250 -- --
Loans and deposits acquired
from Rhode Island transaction. -- 178,349 --
Conversion of $2.25 cumulative
convertible preferred stock... 38,339 -- --
Net unrealized gains on debt
and equity securities
available-for-sale............ 16,312 -- --
NOTE 4: SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The securities purchased under agreements to resell at December 31, 1993 were
collateralized by federal agency mortgage-backed securities. There were no
securities purchased under agreements to resell at December 31, 1992. The
following table provides additional information on the agreements.
DECEMBER 31, DECEMBER 31,
1993 1992
------------ ------------
(DOLLARS IN THOUSANDS)
Carrying value of agreements to resell............... $60,000 $ --
Par value of collateral.............................. 61,023 --
Market value of collateral........................... 66,539 --
Maximum amounts of outstanding agreements at any
month-end........................................... 60,000 250,000
Average amounts of outstanding agreements............ 644 92,200
Weighted average interest rate for the year.......... 3.22% 3.75%
Weighted average interest on year-end balances....... 3.39% --
Weighted average maturity of outstanding agreements
(days).............................................. 6 --
104
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1993, the Association held only securities purchased under
agreements to resell identical securities. The securities underlying the
agreements were physically held by the Association until the maturity of the
agreements.
NOTE 5: INVESTMENT SECURITIES
Investment securities consisted of the following:
AT DECEMBER 31, 1993 AT DECEMBER 31, 1992
------------------------------------ -------------------------------------
GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED ------------------ FAIR AMORTIZED ------------------ FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- --------- ---------------- --------- --------- -------- --------
(IN THOUSANDS)
U.S. Government and
agency obligations:
Available-for-sale..... $ -- $ -- $ -- $ -- $ 9,982 $ 1 $ -- $ 9,983
Obligations of states
and political
subdivisions........... 432 -- 4 428 466 -- 12 454
Corporate securities:
Fixed.................. 4,254 56 -- 4,310 13,566 32 398 13,200
Available-for-sale..... 60 2 -- 62 120 9 -- 129
Bank and finance
securities:
Variable............... -- -- -- -- 14,479 -- 113 14,366
Asset-backed securities:
Available-for-sale..... 38,299 -- 100 38,199 26,637 1 16 26,622
Collateralized mortgage
obligations:
Fixed.................. 4,784 -- 155 4,629 9,526 -- 214 9,312
Variable............... 1,319 16 -- 1,335 2,156 69 -- 2,225
Available-for-sale..... 66,915 217 249 66,883 93,160 1,254 21 94,393
Federal Home Loan Bank
stock.................. 31,800 -- -- 31,800 32,354 -- -- 32,354
Marketable equity
securities:
Equity investments..... 23 -- -- 23 39,244 5,186 -- 44,430
Available-for-sale..... 42,102 15,608 -- 57,710 -- -- -- --
-------- --------- ------ -------- -------- --------- ------- --------
Total investment
securities............. $189,988 $ 15,899 $ 508 $205,379 $241,690 $ 6,552 $ 774 $247,468
======== ========= ====== ======== ======== ========= ======= ========
At December 31, 1993, the net unrealized holding gain, net of tax effect, on
available-for-sale securities that was included in the separate component of
stockholders' equity was $8,978,000 exclusive of mortgage-backed securities
available-for-sale. Proceeds, gains, and losses from sales of investment
securities were as follows:
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1993 1992 1992
-------------------------- -----------------------------------------------------
GROSS REALIZED GROSS REALIZED GROSS REALIZED
---------------- ----------------- ---------------
PROCEEDS GAINS LOSSES PROCEEDS GAINS LOSSES PROCEEDS GAINS LOSSES
-------- -------- ------- ---------- -------- ---------------- ------- -------
(IN THOUSANDS)
Investment securities... $ 16,347* $ 1,629 $ 146 $ 506* $ 1,517 $ 633 $ 48,332 $ 807 $ 7,252
Investment securities
available-for-sale..... 142,592 2,138 42 158,033 1,395 337 306,979 5,115 1,427
-------- -------- ------ ---------- -------- ------ -------- ------- -------
Total................... $158,939 $ 3,767 $ 188 $ 158,539 $ 2,912 $ 970 $355,311 $ 5,922 $ 8,679
======== ======== ====== ========== ======== ====== ======== ======= =======
- --------
* Sales were due to credit concerns.
For the periods ended December 31, 1993 and 1992, gains and losses on
investment securities which management has the positive intent and ability to
hold until maturity resulted primarily from the recognition
105
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of realized capital gains and losses allocated to the Association by two
limited partnerships in which the Association has invested. In addition, for
the year ended March 31, 1992, $5.8 million of these losses resulted from sales
of corporate debt securities due to credit concerns.
The weighted average interest yields on investment securities were 5.13% and
6.09% at December 31, 1993 and 1992, respectively. Accrued interest and
dividends receivable related to investment securities outstanding at December
31, 1993 and 1992 were $1,680,000 and $1,718,000, respectively.
The contractual maturities of Northeast Savings' held-to-maturity investment
securities are summarized in the following table. Actual maturities may differ
from contractual maturities because certain issuers have the right to call or
prepay obligations with or without call premiums.
DECEMBER 31, 1993 DECEMBER 31, 1992
------------------------------ ------------------------------
PERCENT OF PERCENT OF
TOTAL ESTIMATED TOTAL ESTIMATED
AMORTIZED AMORTIZED MARKET AMORTIZED AMORTIZED MARKET
COST COST VALUE COST COST VALUE
--------- ---------- --------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
Bonds and collateralized
mortgage obligations:
1-5 years.............. $ 2,506 5.88% $ 2,530 $ 15,681 14.03% $ 15,571
5-10 years............. 271 .64 274 9,360 8.37 9,094
10-20 years............ 1,909 4.48 1,934 3,469 3.10 3,354
Over 20 years.......... 6,103 14.32 5,964 11,683 10.45 11,538
Federal Home Loan Bank
stock.................. 31,800 74.63 31,800 32,354 28.94 32,354
Marketable equity
securities............. 23 .05 23 39,244 35.11 44,430
------- ------ ------- -------- ------ --------
Total held-to-maturity
investment securities.. $42,612 100.00% $42,525 $111,791 100.00% $116,341
======= ====== ======= ======== ====== ========
The contractual maturities of the Association's available-for-sale investment
securities are summarized below. Actual maturities may differ from contractual
maturities because certain issues have the right to call or prepay obligations
with or without call premiums.
DECEMBER 31, 1993 DECEMBER 31, 1992
------------------------------ ------------------------------
PERCENT OF PERCENT OF
TOTAL ESTIMATED TOTAL ESTIMATED
AMORTIZED AMORTIZED MARKET AMORTIZED AMORTIZED MARKET
COST COST VALUE COST COST VALUE
--------- ---------- --------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
Bonds and collateralized
mortgage obligations:
0-1 year............... $ 18,038 12.24% $ 18,035 $ 21,982 16.92% $ 21,968
1-5 years.............. 87,236 59.19 87,109 107,917 83.08 109,159
5-10 years............. -- -- -- -- -- --
10-20 years............ -- -- -- -- -- --
Over 20 years.......... -- -- -- -- -- --
Marketable equity
securities............. 42,102 28.57 57,710 -- -- --
-------- ------ -------- -------- ------ --------
Total available-for-sale
investment securities.. $147,376 100.00% $162,854 $129,899 100.00% $131,127
======== ====== ======== ======== ====== ========
106
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6: MORTGAGE-BACKED SECURITIES
Mortgage-backed securities consisted of the following:
DECEMBER 31, 1993 DECEMBER 31, 1992
-------------------------------------- -----------------------------------
GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED ----------------- FAIR AMORTIZED ----------------- FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
---------- -------- ------------------ --------- -------- ----------------
(IN THOUSANDS)
Government National
Mortgage Association
(GNMA):
Fixed.................. $ -- $ -- $ -- $ -- $ 81 $ 13 $ -- $ 94
Adjustable............. 33,583 46 188 33,441 19,589 169 63 19,695
Available-for-sale..... 9,855 744 34 10,565 12,732 844 246 13,330
Federal Home Loan
Mortgage Corporation
(FHLMC):
Fixed.................. 3,184 154 -- 3,338 5,810 230 -- 6,040
Adjustable............. 171,675 2,142 602 173,215 135,195 1,565 168 136,592
Available-for-sale..... 2,197 129 5 2,321 42,742 1,612 -- 44,354
Federal National
Mortgage Association
(FNMA):
Fixed.................. 29,650 546 -- 30,196 23,330 1,286 -- 24,616
Adjustable............. 142,904 2,542 1,529 143,917 157,492 3,394 935 159,951
Private Issuers:
Fixed.................. 8,323 191 -- 8,514 14,957 436 -- 15,393
Adjustable............. 941,567 5,547 2,765 944,349 473,318 2,506 524 475,300
---------- -------- ------- ---------- -------- -------- ------- --------
Total mortgage-backed
securities............. $1,342,938 $ 12,041 $ 5,123 $1,349,856 $885,246 $ 12,055 $ 1,936 $895,365
========== ======== ======= ========== ======== ======== ======= ========
At December 31, 1993, the net unrealized holding gain on available-for-sale
mortgage-backed securities that was included in the separate section of
stockholders' equity was $484,000, net of tax effect, exclusive of investment
securities available-for-sale. Proceeds, gains, and losses from sales of
mortgage-backed securities were as follows:
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1993 1992 1992
------------------------- ------------------------------ ------------------------
GROSS REALIZED GROSS REALIZED GROSS REALIZED
---------------- ------------------ ---------------
PROCEEDS GAINS LOSSES PROCEEDS GAINS LOSSES PROCEEDS GAINS LOSSES
-------- -------- ------- ---------- --------- -------- -------- ------- -------
(IN THOUSANDS)
Mortgage-backed
securities............. $ -- $ -- $ -- $ -- $ -- $ -- $ 23,512 $ 1,129 $ 392
Mortgage-backed
securities available-
for-sale............... 39,831 2,046 -- 44,727 2,158 -- 587,225 6,173 2,162
------- -------- ----- ---------- --------- ------ -------- ------- -------
Total proceeds.......... $39,831 $ 2,046 $ -- $ 44,727 $ 2,158 $ -- $610,737 $ 7,302 $ 2,554
======= ======== ===== ========== ========= ====== ======== ======= =======
Included in results of operations for the year ended March 31, 1992 are gains
of approximately $107,000 on sales of mortgage-backed securities acquired in
savings and loan association acquisitions accounted for under the purchase
method of accounting.
The weighted average yields on mortgage-backed securities were 5.30% and
6.27% at December 31, 1993 and 1992, respectively. Accrued interest receivable
related to mortgage-backed securities outstanding at December 31, 1993 and 1992
was $6,783,000, and $5,597,000, respectively.
At December 31, 1993, mortgage-backed securities having a carrying value of
$306,344,000 and a market value of $308,839,000 were pledged to collateralize
securities sold under agreements to repurchase and other items.
107
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7: LOANS
The Association's primary lending business is the origination of single-
family residential mortgage loans in the northeastern United States and
Colorado. These loans are collateralized by residential properties and are made
with strict adherence to Association policy which limits the loan-to-value
ratio on residential mortgage loans to 80%, or 95% with private mortgage
insurance. In certain geographic areas of the country, the Association has
limited the loan-to-value ratio to even less than 80%.
Loans consisted of the following:
DECEMBER 31,
---------------------
1993 1992
---------- ----------
(IN THOUSANDS)
Single-family residential real estate loans:
Adjustable rate.......................................... $1,695,527 $2,073,986
Fixed rate............................................... 104,187 96,751
Available-for-sale....................................... 46,076 32,237
---------- ----------
Total single-family residential real estate loans...... 1,845,790 2,202,974
---------- ----------
Consumer loans:
Equity loans............................................. 15,507 26,434
Collateralized by deposits............................... 8,709 9,633
Equity lines of credit................................... 5,886 6,942
Overdraft protection..................................... 2,110 2,435
Education................................................ 43 91
Other personal........................................... 2,424 2,826
---------- ----------
Total consumer loans................................... 34,679 48,361
---------- ----------
Income property loans..................................... 79,284 90,546
---------- ----------
Commercial................................................ 77 266
---------- ----------
Total loans, gross..................................... 1,959,830 2,342,147
---------- ----------
Less:
Allowance for loan losses................................ 28,271 21,020
Undisbursed portion of loans in process.................. 6,097 4,779
Unearned discounts....................................... 2,822 3,625
Deferred origination fees................................ 383 1,613
---------- ----------
37,573 31,037
---------- ----------
Total loans, net....................................... $1,922,257 $2,311,110
========== ==========
Accrued interest receivable related to loans outstanding at December 31, 1993
and 1992 was $9,076,000 and $12,652,000, respectively. For the year ended
December 31, 1993, the nine months ended December 31, 1992 and the year ended
March 31, 1992, the Association recognized net gains on sales of loans of
$1,939,000, $1,870,000 and $2,532,000, respectively.
At December 31, 1993, the recorded investment in loans for which impairment
has been recognized under the guidance of SFAS 114 totaled $1.6 million. There
was no specific reserve on these loans at December 31, 1993. However, their
impairment was considered in the allowance for loan losses at December 31,
1993. Such loans are included in non-accrual loans (see below) or troubled debt
restructurings, as appropriate. At December 31, 1993 and 1992, loans totaling
$67,462,000 and $94,989,000, respectively, were contractually delinquent ninety
days or more. Interest accruals on loans are discontinued whenever the payment
of interest or principal is more than 90 days past due or earlier when
conditions warrant it and any previously accrued interest is reversed. The
total interest income that would have been recorded for the year ended December
31, 1993, had these loans been current in accordance with their original terms,
or since the date of origination if outstanding for only part of the year, was
$4,810,000. The amount of interest income which was included in net income for
the year ended December 31, 1993 on those loans was $1,341,000.
108
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the Association's gross loan portfolio and
non-accrual loans as a percentage of gross loans by state and property type at
December 31, 1993:
SINGLE-FAMILY
RESIDENTIAL
REAL ESTATE CONSUMER INCOME PROPERTY COMMERCIAL TOTAL
------------------ --------------- --------------- ------------- ------------------
NON- NON- NON- NON- NON-
ACCRUAL ACCRUAL ACCRUAL ACCRUAL ACCRUAL
GROSS LOAN GROSS LOAN GROSS LOAN GROSS LOAN GROSS LOAN
LOANS RATIO LOANS RATIO LOANS RATIO LOANS RATIO LOANS RATIO
---------- ------- ------- ------- ------- ------- ----- ------- ---------- -------
(DOLLARS IN THOUSANDS)
California.............. $ 903,540 3.98% $ 1,094 --% $16,584 --% $ -- --% $ 921,218 3.90%
Connecticut............. 260,947 2.68 5,186 6.27 20,878 1.79 -- -- 287,011 2.68
New York................ 221,067 6.05 18,237 3.10 22,111 -- -- -- 261,415 5.33
Massachusetts........... 158,968 1.64 7,174 .49 12,387 .03 77 -- 178,606 1.48
New Jersey.............. 56,915 6.66 308 -- -- -- -- -- 57,223 6.62
Florida................. 42,745 2.42 363 -- -- -- -- -- 43,108 2.40
New Hampshire........... 3,860 2.27 343 2.11 3,249 -- -- -- 7,452 1.27
Other................... 197,748 .97 1,974 19.44 4,075 -- -- -- 203,797 1.12
---------- ------- ------- ---- ----------
Total.................. $1,845,790 3.56% $34,679 3.79% $79,284 .48% $ 77 --% $1,959,830 3.44%
========== ======= ======= ==== ==========
The level of single-family residential non-accrual loans is due primarily to
continuing poor general economic conditions in the Association's primary market
areas, particularly the recessions in New England and California.
Loans serviced for others by Northeast Savings totaled approximately
$1,888,863,000 and $1,783,365,000 at December 31, 1993 and 1992, respectively,
which includes loans serviced with recourse to Northeast Savings of $69,124,000
and $6,371,000 at the same respective dates. In connection with loans serviced
for others, at December 31, 1993 and 1992, respectively, Northeast Savings had
$3,623,000 and $4,389,000 in excess servicing assets and $5,794,000 and
$7,903,000 in capitalized purchased mortgage servicing. Loan servicing fees
totaled $2,627,000, $793,000, and $4,928,000 for the year ended December 31,
1993, the nine months ended December 31, 1992 and the year ended March 31,
1992, respectively.
The following summarizes activity in the allowance for loan losses.
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1993 1992 1992
------------ ----------------- ----------
(IN THOUSANDS)
Balance, beginning of period......... $ 21,020 $ 17,084 $14,305
Provision for loan losses............ 23,300 16,300 10,200
Charge-offs:
Single-family residential real
estate loans....................... (14,835) (12,305) (6,264)
Consumer loans...................... (393) (373) (846)
Income property loans............... (1,395) -- (652)
Commercial loans.................... -- -- (389)
-------- -------- -------
Total charge-offs................. (16,623) (12,678) (8,151)
-------- -------- -------
Recoveries:
Single-family residential real
estate loans....................... 176 8 29
Consumer loans...................... 398 306 459
Income property loans............... -- -- 183
Commercial loans.................... -- -- 59
-------- -------- -------
Total recoveries.................. 574 314 730
-------- -------- -------
Net charge-offs...................... (16,049) (12,364) (7,421)
-------- -------- -------
Balance, end of period............... $ 28,271 $ 21,020 $17,084
======== ======== =======
109
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8: RHODE ISLAND COVERED ASSETS
As discussed in Note 23: Acquisitions, on May 8, 1992, the Association
acquired certain assets of four Rhode Island financial institutions which were
in receivership proceedings. The Association is protected against losses
relative to all loans acquired from the institutions, including loans
foreclosed upon by the Association subsequent to acquisition. Accordingly, as
discussed below, these covered assets have been segregated from the
Association's remaining portfolios of loans and REO. At December 31, 1993,
total Rhode Island covered assets and non-accrual Rhode Island covered assets
as a percentage of gross covered assets were as follows:
DECEMBER 31,
------------------------------------------
1993 1992
-------------------- ---------------------
NON-ACCRUAL NON-ACCRUAL
ASSETS ASSET RATIO ASSETS ASSET RATIO
-------- ----------- -------- -----------
(DOLLARS IN THOUSANDS)
Single-family residential real
estate loans:
Adjustable rate................... $ 12,607 8.00% $ 15,494 3.72%
Fixed rate........................ 22,112 7.73 31,062 9.97
-------- --------
Total single-family residential
real estate loans.............. 34,719 7.83 46,556 7.89
-------- --------
Consumer loans:
Equity lines of credit............ 12,805 4.36 15,913 6.08
Equity loans...................... 7,025 6.23 10,283 8.27
Collateralized by deposits........ 36 -- 82 --
Overdraft protection.............. 168 -- 228 1.75
Education......................... 8 -- 17 --
Other personal.................... 1,534 3.19 4,029 5.14
-------- --------
Total consumer loans............ 21,576 4.84 30,552 6.64
-------- --------
Income property loans............... 39,135 10.59 71,272 19.45
-------- --------
Commercial.......................... 893 3.25 2,212 29.48
-------- --------
Total loans, gross.............. 96,323 8.24% 150,592 13.43%
-------- --------
Adjustments:
Contra accounts................... 340 (218)
Interest rate adjustment.......... 1,060 1,645
Unallocated credit adjustment..... 1,082 (4,423)
-------- --------
Total loans, net................ 98,805 147,596
-------- --------
Real estate owned................... 6,820 4,232
-------- --------
Total Rhode Island covered
assets......................... $105,625 $151,828
======== ========
In the above table, the principal balance of individual loans for which a
specific credit adjustment has been determined by independent valuators has
been reduced by the amount of that credit adjustment. The unallocated credit
adjustment represents amounts applied to pools of loans.
In connection with the acquisition of the Rhode Island assets, the
Association entered into an Acquisition Agreement with the receivers of the
Rhode Island financial institutions. Pursuant to this agreement, DEPCO was
required to pay a balancing consideration to the Association. The balancing
consideration was the amount by which the deposits issued by the Association
plus other assumed liabilities
110
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
exceeded the fair value of the acquired assets. The estimate of the fair value
of the acquired assets (the valuation) was determined by independent valuators
in accordance with a detailed methodology outlined in the Acquisition
Agreement. The balancing consideration of $59.0 million was paid to the
Association in the quarter ended December 31, 1992.
As part of the valuation process in determining the balancing consideration,
a credit adjustment was made which was specifically related to the Rhode Island
covered assets and which was intended to establish the amount by which the
value of the loans must be adjusted in determining their fair value for reasons
of collectibility. This initial credit adjustment was determined by the
valuators pursuant to the methodology for credit adjustments set forth in the
Acquisition Agreement. The methodology required the reappraisal of underlying
collateral and/or an individual evaluation of loans meeting specific
delinquency and/or size criteria as well as the application of credit
adjustment percentages to loans which were not individually reviewed. In
general, for purposes of loan valuation, residential and consumer loans were
valued in pools and commercial loans were valued individually. With the
exception of certain adjustable rate consumer, commercial, and delinquent
loans, all acquired loans were also subject to an interest rate adjustment in
order to adjust the yield on those loans to a market rate of interest as of the
closing date.
Subsequent to the initial valuation and payment of the balancing
consideration, the credit adjustment account will be adjusted for all charge-
offs and recoveries on acquired loans and gains and losses from the disposition
of assets received in lieu of repayment which occur prior to the seventh
anniversary of the closing date, at which time the remaining balance in the
credit adjustment account will be reevaluated for adequacy and adjusted
accordingly, utilizing the same criteria as the initial valuation methodology.
On the seventh anniversary, if there is a negative balance in the credit
adjustment account, the Association can claim the amount of such balance from
an escrow established by DEPCO. To the extent escrow funds are not available,
DEPCO is required to pay the amount of any negative remaining balance to the
Company. Conversely, if there is a positive balance in the credit adjustment
account, Northeast Savings will be required to pay that balance to DEPCO.
The terms of the Acquisition Agreement also provide the Association with the
right to put back loans to DEPCO for a period of one year from the date of
acquisition if the Association determines that the property securing any loan
has an environmentally hazardous condition. In addition, for a period of seven
years, Northeast Savings is indemnified against losses resulting from
environmentally hazardous materials deposited on the security property prior to
the closing date, as well as against losses suffered on account of breaches in
the representations and warranties provided by the receivers and DEPCO with
regard to the acquired assets. Northeast Savings is also indemnified against
claims, damages, losses, costs, and expenses that may arise from a variety of
conditions related to the acquisition including claims against the former
institutions, their officers, agents, or employees. As security for the
obligations of DEPCO to pay the balancing consideration, to repurchase certain
loans, and to indemnify the Association for certain matters, DEPCO placed $59
million in treasury securities in escrow and granted to the Association a first
priority security interest in such funds. Of such $59 million, $49 million was
essentially placed in escrow for a one-year period to cover the balancing
consideration and the repurchase of loans based on environmentally hazardous
conditions. The remaining $10 million is in a seven-year escrow to cover the
general indemnification obligations and the credit adjustment obligation. As of
December 31, 1992, the $49 million in the one-year escrow account had been used
totally in connection with payment of the $59 million balancing consideration.
The seven-year escrow retains its $10 million.
111
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9: REAL ESTATE AND OTHER ASSETS ACQUIRED IN SETTLEMENT OF LOANS
The following table presents Northeast Savings' REO by property type at the
dates indicated.
DECEMBER 31,
------------------------
1993 1992
----------- -----------
(DOLLARS IN THOUSANDS)
Single-family residential........................ $ 57,165 $ 83,605
Hotels........................................... 6,453 6,408
Apartment buildings.............................. 5,270 4,464
Office, retail, industrial complexes; land....... 3,357 2,499
Real estate brokerage operations................. 1,744 1,544
Residential subdivisions......................... 973 856
----------- -----------
REO, net......................................... $ 74,962 $ 99,376
=========== ===========
Percent of total assets.......................... 1.91% 2.54%
=========== ===========
The activity in the Association's REO is presented in the following table:
FOR THE YEAR FOR THE NINE
ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1993 1992
------------ ------------
(IN THOUSANDS)
Beginning balance..................................... $ 99,376 $ 61,208
Foreclosures, net..................................... 61,228 66,377
Capitalized expenses.................................. 2,226 1,333
Less:
Sales............................................... (77,120)* (22,448)
Valuation adjustments............................... (10,082) (3,823)
Mortgage insurance receipts......................... (558) (806)
Other............................................... (108) (2,465)
-------- --------
Ending balance........................................ $ 74,962 $ 99,376
======== ========
- --------
* During the quarter ended September 30, 1993, $30.3 million of REO was sold
in a single transaction. The total loss on the sale was $6.8 million,
including a provision of $6.0 million recorded in June in anticipation of
the sale. Excluding this sale, sales of REO for the year ended December 31,
1993 totaled $52.8 million.
112
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10: PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
DECEMBER 31,
---------------
1993 1992
------- -------
(IN THOUSANDS)
Land........................................................ $ 3,371 $ 3,371
Office building and leasehold improvements.................. 37,522 36,365
Furniture, fixtures, and equipment.......................... 22,728 21,570
------- -------
63,621 61,306
Less accumulated depreciation and amortization.............. 31,253 27,105
------- -------
$32,368 $34,201
======= =======
At December 31, 1993, Northeast Savings was obligated under various non-
cancelable leases for premises and equipment. The leases generally contain
renewal options and escalation clauses providing for increased rent expense in
future periods. Rent expense for the year ended December 31, 1993, the nine
months ended December 31, 1992 and the year ended March 31, 1992 was
$7,717,000, $5,440,000 and $6,681,000, respectively.
Northeast Savings leases certain office space for its headquarters and three
of its branch banking offices from corporations or partnerships in which
Directors of the Company or their immediate families are the principal
beneficial owners. The leases were entered into either prior to the nomination
and election to the position of director or with the written approval of the
Association's OTS District Director. Virtually all lease terms end by 1996 and
rents paid for such leases were $3,319,000 for the year ended December 31,
1993, $2,555,000 for the nine months ended December 31, 1992, and $3,426,000
for the year ended March 31, 1992.
All future minimum rental payments required under operating leases that have
initial or remaining non-cancelable lease terms in excess of one year at
December 31, 1993 are as follows:
AMOUNT
--------------
(IN THOUSANDS)
YEARS ENDING DECEMBER 31:
-------------------------
1994.......................................................... $ 6,518
1995.......................................................... 4,057
1996.......................................................... 2,751
1997.......................................................... 1,940
1998.......................................................... 1,706
Thereafter.................................................... 2,733
-------
Total....................................................... $19,705
=======
In February 1992, the Association purchased an office building for $9.6
million in cash in Farmington, Connecticut and leased it back to the previous
owners until 1994. Management anticipates moving a significant portion of the
Association's operations to that facility in 1995.
113
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11: DEPOSITS
Deposits consisted of the following:
DECEMBER 31,
-------------------------------------------------
1993 1992
------------------------ ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT INTEREST RATE AMOUNT INTEREST RATE
---------- ------------- ---------- -------------
(DOLLARS IN THOUSANDS)
Demand deposits............. $ 35,865 -- % $ 35,644 -- %
NOW accounts................ 145,655 1.22 160,821 2.00
Super NOWs.................. 51,040 1.47 53,758 2.00
Regular savings............. 583,209 2.20 695,674 2.74
Money market savings........ 401,135 2.67 443,692 3.09
---------- ----------
Total non-certificate
accounts................. 1,216,904 2.14 1,389,589 2.67
---------- ----------
Certificates maturing in the
year ending:
1993...................... -- -- 1,034,621 4.70
1994...................... 1,218,031 4.37 502,882 5.94
1995...................... 193,092 5.00 51,531 7.21
1996...................... 46,249 5.85 28,990 6.84
1997...................... 56,834 5.80 57,683 5.80
Thereafter................ 246,107 6.70 165,493 7.17
---------- ----------
Total certificates...... 1,760,313 4.85 1,841,200 5.40
---------- ----------
Total deposits.......... $2,977,217 3.74% $3,230,789 4.22%
========== ==========
At both December 31, 1993 and 1992, certificates include brokered deposits of
approximately $25,135,000. Included in deposits is accrued interest payable of
$1,965,000 and $3,043,000 at December 31, 1993 and 1992, respectively. Interest
expense on deposits consisted of the following:
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1993 1992 1992
------------ ----------------- ----------
(IN THOUSANDS)
Brokered deposits................. $ 2,419 $ 1,816 $ 3,296
Retail deposits:
Regular savings................. 15,146 18,694 21,985
NOWs, Super NOWs and money
market savings................. 15,399 15,356 27,356
Certificates.................... 88,199 88,058 166,485
-------- -------- --------
Total interest expense on
deposits..................... $121,163 $123,924 $219,122
======== ======== ========
114
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12: FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
FHLB advances and other borrowings are summarized as follows:
DECEMBER 31,
-----------------
1993 1992
-------- --------
(IN THOUSANDS)
FHLB advances............................................. $373,000 $140,000
Securities sold under agreements to repurchase............ 294,809 291,014
Uncertificated debentures................................. 38,442 34,990
Convertible subordinated debentures....................... -- 560
-------- --------
Total FHLB advances and other borrowings.................. $706,251 $466,564
======== ========
Federal Home Loan Bank Advances
FHLB advances consisted of the following:
DECEMBER 31,
---------------------------------------------
1993 1992
---------------------- ----------------------
WEIGHTED WEIGHTED
DUE IN YEARS ENDING AVERAGE AVERAGE
DECEMBER 31: AMOUNT INTEREST RATE AMOUNT INTEREST RATE
- ------------------- -------- ------------- -------- -------------
(DOLLARS IN THOUSANDS)
1993.............................. $ -- -- % $140,000 5.07%
1994.............................. 165,000 3.43 -- --
1995.............................. 55,000 3.63 -- --
1996.............................. 98,000 3.53 -- --
1997.............................. 15,000 3.38 -- --
1998.............................. 40,000 6.05 -- --
-------- --------
$373,000 3.76% $140,000 5.07%
======== ========
At December 31, 1993, all of the outstanding advances were fixed rate
advances. Accrued interest payable on advances outstanding at December 31, 1993
and 1992 was $1,135,000 and $485,000, respectively. At December 31, 1993,
Northeast Savings' ability to borrow from the Federal Home Loan Bank of Boston
under its Advances Program was limited to the value of qualified collateral
that had not been pledged to outside sources. At December 31, 1993, mortgage
loans having a carrying value of $568,139,000 and a collateral value of
$426,104,000 were pledged to collateralize the above advances. Based on the
Federal Home Loan Bank of Boston's Credit Policy, mortgage loans are assigned a
collateral value equal to 75% of the current unpaid principal balance. At
December 31, 1993, the Association's remaining borrowing capacity from the FHLB
totaled $1.8 billion.
115
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase were wholesale repurchase
agreements and consisted of the following:
DECEMBER 31,
---------------------------------------------------------------------------
1993 1992
------------------------------------- -------------------------------------
(DOLLARS IN THOUSANDS)
WEIGHTED COLLATERAL WEIGHTED COLLATERAL
AVERAGE ----------------- AVERAGE -----------------
REPURCHASE INTEREST BOOK MARKET REPURCHASE INTERST BOOK MARKET
LIABILITY RATE VALUE VALUE LIABILITY RATE VALUE VALUE
---------- -------- -------- -------- ---------- -------- -------- --------
Within 30 days.......... $197,541 3.45% $205,996 $206,046 $233,785 3.43% $242,114 $244,631
31--90 days............. 97,268 3.39 102,475 102,793 57,229 3.59 60,358 60,422
-------- -------- -------- -------- -------- --------
$294,809 3.43% $308,471 $308,839 $291,014 3.46% $302,472 $305,053
======== ======== ======== ======== ======== ========
* Book value includes accrued interest of $2,126,000 and $2,441,000 at
December 31, 1993 and 1992, respectively.
Wholesale repurchase agreements mature or reprice on average every 33 days
and were collateralized at December 31, 1993 and 1992 by mortgage-backed
securities. All wholesale repurchase agreements were to repurchase the same
securities.
Securities sold under agreements to repurchase are considered short-term
borrowings. The average balance of repurchase agreements outstanding during the
year ended December 31, 1993 and the nine months ended December 31, 1992 was
$290,112,000 and $153,150,000, respectively. The maximum amount outstanding at
any month-end was $311,385,000 for the year ended December 31, 1993 and
$330,317,000 for the nine months ended December 31, 1992. Interest expense on
repurchase agreements totaled $9,866,000 for the year ended December 31, 1993,
$4,111,000 for the nine months ended December 31, 1992, and $12,395,000 for the
year ended March 31, 1992, respectively. Accrued interest payable on repurchase
agreements outstanding at December 31, 1993 and 1992 was $3,693,000 and
$1,384,000, respectively. The weighted average interest rates during the year
ended December 31, 1993 and the nine months ended December 31, 1992 were 3.40%
and 3.56%, respectively.
Uncertificated Debentures
In conjunction with the Association's acquisition of $315.0 million in assets
from four Rhode Island financial institutions and the issuance of deposit
accounts in the Association to depositors in those institutions, the Company
issued and sold $28.95 million of 9% Sinking Fund Uncertificated Debentures,
due in 2012 to the receivers for the four institutions. These debentures have
been transferred from the receivers to certain of the depositors in the Rhode
Island institutions in consideration of a portion of their deposit claims
against the receiverships. The Company has the right to pay the first five
years of interest on the 9% Debentures by the issuance of additional 9%
Debentures (a payment in kind). For further information on the Association's
acquisition of the Rhode Island institutions, see Note 23: Acquisitions.
In addition, in connection with the repurchase of its adjustable rate
preferred stock, the Company issued $7.0 million in 9% Debentures to the FRF.
The debentures issued to the FRF have a market value of $4.5 million, based on
the value attributable to the debentures by the FRF, as determined by its
investment bankers. Implicit in the $4.5 million valuation is a discount rate
of 14.4%, which was consistent with market yields on high-yield securities at
the time. These debentures have the same terms as those transferred to the
depositors in the Rhode Island institutions. In meeting its interest obligation
on all of the 9% Debentures,
116
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the Company has issued an additional $5.0 million of 9% Debentures, which are
included in the debentures outstanding at December 31, 1993. For additional
information on the Company's repurchase of its adjustable rate preferred stock,
and the conversion of its convertible preferred stock into common stock, see
Note 13: Stockholders' Equity.
Convertible Subordinated Debentures
The 8% Convertible Subordinated Debentures were due on February 15, 2011, and
were convertible at any time into shares of the Company's common stock at a
conversion price of $20.79 per share. The total Debentures originally issued
amounted to $57.5 million, of which none were outstanding at December 31, 1993
and $560,000 were outstanding at December 31, 1992. Realized gains, net of
income taxes, on the repurchase and retirement of $470,000 of 8% Debentures for
the year ended March 31, 1992 are reflected as extraordinary items in the
Consolidated Statement of Operations. See Note 17: Extraordinary Items.
Other Borrowings
Other borrowings, when outstanding, consist of Tax Advantaged Variable Rate
ESOP Notes, Series 1987, which were issued by the Association's ESOP and
guaranteed by Northeast Savings. Initially, the notes were subject to mandatory
redemption through the operation of a sinking fund commencing on the interest
payment date originally beginning September 1988 and on each September
thereafter to 1997. Effective August 31, 1992, the mandatory redemption of the
notes was extended an additional three years. The notes may be redeemed earlier
under certain circumstances. The interest rate on the notes at December 31,
1993 and 1992 was 3.40% and 3.98%, respectively. The proceeds of this issue
were used by the Association's ESOP to purchase 1,010,326 outstanding shares of
the Company's common stock, adjusted for stock dividends. As of December 31,
1993 and 1992, Northeast Savings had invested in the ESOP notes at an amount
equal to the principal outstanding, thus acquiring all outstanding notes.
Correspondingly, the notes were not reported as other borrowings at either
December 31, 1993 or 1992. Mandatory redemptions of the ESOP notes in the
amounts of $1,110,000 are due each fiscal year from 1994 through 2000.
At December 31, 1993, mortgage-backed securities having a carrying value of
$13,846,000 and a market value of $13,800,000 were pledged to collateralize a
Letter of Credit supporting the ESOP notes, which honors demands for payment by
the Note Trustee presented in accordance with the terms of the Letter of
Credit. Also, the Association had an available, but unused, line of credit in
the amount of $25,000,000 at December 31, 1993.
NOTE 13: STOCKHOLDERS' EQUITY
Regulatory Matters
The Financial Institutions Reform, Recovery and Enforcement Act of 1989,
which was signed into law on August 9, 1989, provided for a comprehensive
reorganization of the regulatory structure of the thrift industry. Northeast
Savings is required to maintain certain levels of capital in accordance with
FIRREA and OTS regulations. In addition, on November 7, 1991, the United States
Congress passed the Federal Deposit Insurance Corporation Improvement Act of
1991, which became effective on December 19, 1991. While the primary focus of
the legislation is to recapitalize the Bank Insurance Fund, FDICIA also adopted
numerous mandatory measures which affect all depository institutions, including
savings associations such as Northeast Savings, and which are designed to
reduce the cost to the deposit funds of resolving problems presented by
undercapitalized institutions.
The OTS regulations implementing the FIRREA capital standards established
three measures of capital compliance: tangible core capital, core capital, and
risk-based capital. Associations which failed to meet any
117
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of the three capital standards on December 7, 1989, were subject to certain
restrictions which included growth restrictions and a limitation on capital
distributions. These thrifts were also required to develop and submit to the
OTS by January 8, 1990, acceptable capital restoration plans which demonstrate
the strategies to be utilized to meet the capital standards. At December 7,
1989, Northeast Savings did not meet the capital standards set forth in FIRREA
and the OTS regulations implementing the FIRREA capital standards. Northeast
Savings filed its capital restoration plan with the OTS, as required by FIRREA,
which was approved and accepted by the OTS on March 9, 1990. On March 23, 1990,
the Association accepted the conditions imposed upon it by the OTS approval of
its capital plan. Northeast Savings also filed an application to form a holding
company, Northeast Federal Corp., which was approved by the OTS on April 16,
1990. The holding company reorganization was completed in July 1990, upon
approval of the holders of voting stock of Northeast Savings. Under this
reorganization Northeast Savings' capital stock was exchanged for capital stock
of Northeast Federal Corp. and the capital of Northeast Federal Corp. was
downstreamed to Northeast Savings in the form of common stock which qualified
as regulatory capital. At such time, the Association came into compliance with
all then-applicable regulatory capital requirements. The Association
subsequently met all of the conditions of the capital plan and has been
released from it by the OTS.
Although Northeast Savings is in compliance with all fully phased-in
regulatory capital requirements, the ability of the Company to make capital
distributions is restricted by the limited cash resources of the Company and
the ability of the Company to receive a dividend from the Association. The
Association's payment of dividends is subject to regulatory limitations,
particularly the prompt corrective action regulation which prohibits the
payment of a dividend if such payment would cause the Association to become
undercapitalized. In addition, the Company and the OTS entered into a Dividend
Limitation Agreement as part of the holding company approval process which
prohibits the payment of dividends to the holding company without prior written
OTS approval if the Association's capital is below its fully phased-in capital
requirement or if the payment of such dividends would cause its capital to fall
below its fully phased-in capital requirement. The OTS Capital Distribution
Regulation also restricts the amount of capital distributions that an
association may make without obtaining prior OTS approval. Consequently, the
Company anticipates that it will not pay any cash dividends on its Series B
preferred stock or common stock for the foreseeable future. Due to the
restrictions of the Dividend Limitation Agreement and the Capital Distribution
Regulation combined with management's decision in 1990 to suspend cash dividend
payments in order to preserve capital, management considers that essentially
all of the Company's net assets are restricted from dividend payments.
The following table reflects the regulatory capital requirements and the
Association's regulatory capital.
DECEMBER 31, 1993 DECEMBER 31, 1992
----------------------------------- -----------------------------------
FULLY PHASED-IN FULLY PHASED-IN
REGULATORY CAPITAL ACTUAL REGULATORY ACTUAL REGULATORY
REQUIREMENT REGULATORY CAPITAL CAPITAL REQUIRED REGULATORY CAPITAL CAPITAL REQUIRED
------------------ ------------------ ---------------- ------------------ ----------------
(DOLLARS IN THOUSANDS)
Tangible core capital... $167,244 $ 58,750 $170,394 $ 58,607
Percent............... 4.27% 1.50% 4.36% 1.50%
Core capital............ $167,795 $156,688 $171,163 $156,317
Percent............... 4.28% 4.00% 4.38% 4.00%
Risk-based capital...... $189,330 $137,287 $191,465 $153,208
Percent............... 11.03% 8.00% 10.00% 8.00%
118
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Conversion to Stock Association
On September 22, 1983, Northeast Savings converted from a mutual to a stock
association. At the time of the conversion, eligible deposit account holders
were granted priority in the event of future liquidation by the establishment
of a "liquidation account" equal to net worth at June 30, 1983. No dividends
may be paid to stockholders if such dividends reduce stockholders' equity below
the amount required for the liquidation account, which was approximately $13.0
million at December 31, 1993.
$2.25 Cumulative Convertible Preferred Stock, Series A
In October 1985, Northeast Savings issued 1,610,000 shares of $2.25
Cumulative Convertible Preferred Stock, Series A (the convertible preferred
stock) at $25 per share, par value $.01 per share which generated net proceeds
of $38,341,000. Dividends on the convertible preferred stock were payable
quarterly and were cumulative from the date of issue.
Each share of the convertible preferred stock was convertible into 1.473
shares of common stock at any time at the conversion price of $16.97. The
convertible preferred stock was redeemable at any time, at the option of the
Company, at $26.35 per share prior to October 1, 1990 and at prices declining
annually thereafter to $25.00 per share on and after October 1, 1995. In
February 1990, the Board of Directors suspended the quarterly cash dividend on
the convertible preferred stock. At January 1, 1993, accumulated and unpaid
quarterly dividends on the convertible preferred stock were $.56 per share or
$906,000, while total dividends were $6.75 per share or $10.9 million in the
aggregate.
On May 7, 1993, at a Special Meeting of Stockholders, the Company's
stockholders approved a reclassification of the convertible preferred stock
into common stock at a ratio of 4.75 shares of common stock for each share of
convertible preferred stock. Effective May 14, 1993, the 1,610,000 shares of
convertible preferred stock were converted into 7,647,500 shares of common
stock. As a result, all of the powers, privileges and special and relative
rights of the convertible preferred stock were eliminated including the then
accumulated and unpaid dividends, the liquidation priority, the right, at the
option of the holder, to convert each share of convertible preferred stock into
1.473 shares of common stock (and retain the right to receive, when as, and if,
declared and paid by the Company, the accumulated and unpaid dividends at the
time of such conversion on each such share of convertible preferred stock) and
the right to elect two directors to the Company's Board so long as six full
quarterly dividends are in arrears.
$8.50 Cumulative Preferred Stock, Series B.
In connection with the Association's acquisition of assets of four Rhode
Island financial institutions, and the issuance of deposit accounts in the
Association to depositors in those institutions, the Company issued and sold to
the Rhode Island Depositors Economic Protection Corporation, 351,700 shares of
a new class of preferred stock, the $8.50 Cumulative Preferred Stock, Series B.
Accordingly, the Certificate of Incorporation of the Company was amended by
adding a new Certificate of Designation for the Series B preferred stock. The
Certificate of Designation authorizes the issuance of a total of 540,000 shares
of the Series B preferred stock.
Under the Stock and Warrant Purchase Agreement (the Stock Purchase Agreement)
entered into with DEPCO in connection with the acquisition, DEPCO has the right
to transfer its interest in the Series B preferred stock to another
instrumentality or agency of the State of Rhode Island and such entity would be
a "Nominee" within the meaning of the Stock Purchase Agreement. On June 24,
1992, the Company was advised by DEPCO that it had transferred its interest in
the Series B preferred stock to the Rhode Island State Investment Commission
(RISIC). On September 28, 1993, RISIC transferred its interest in the Series B
preferred stock to DEPCO.
119
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Certificate of Designation for the Series B preferred stock increases the
Company's Board of Directors by two and gives DEPCO or any Nominee as defined
in the Stock Purchase Agreement the right to elect two directors so long as
DEPCO or a Nominee holds at least 211,020 shares of the Series B preferred
stock (one director if DEPCO or the Nominee holds less than that number but at
least 105,510 of the Series B preferred stock). Two directors were elected by
the RISIC and seated at the meeting of the directors on July 24, 1992. The same
two individuals continue to serve as directors.
So long as DEPCO or its Nominee beneficially owns the requisite number of
shares such that, pursuant to the Series B preferred stock Certificate of
Designation, DEPCO or such Nominee is entitled to elect one director of the
Company, then, in the event of a change in control of the Company, the Company
agrees to and shall, not less than forty-five days after such change in
control, make an offer to redeem or repurchase all of the shares of the Series
B preferred stock then outstanding at the Redemption Price plus accumulated and
unpaid dividends thereon (whether or not declared) through the date fixed for
such repurchase. Such repurchase obligation of the Company is limited to the
extent the Company has available funds which, in general, are funds of the
Company which can be obtained by a permissible dividend from the Association
and which are not required for the payment of debt or senior obligations and
the payment of which would not violate Delaware law or any regulatory
obligation. A Change in Control shall be deemed to have occurred under the
terms of the Stock Purchase Agreement in the event that any person acquires the
right to vote or dispose of 25% or greater of the Company's then-outstanding
common stock or such amount of securities of the Company as shall enable such
person to exercise, or acquire securities and thereupon exercise rights to vote
25% or greater of the total outstanding voting rights in the Company or to
elect more than 25% of the directors of the Company.
Dividends on the Series B preferred stock payable on or prior to July 1,
1997, whether or not paid on or prior to that date shall be paid at the
election of the Company in cash or in shares of Series B preferred stock. No
dividends or other distribution shall be paid or declared or set aside for the
common stock of the Company nor may any shares of common stock be purchased or
redeemed by the Company or any subsidiary thereof unless all cumulative
dividends on all outstanding shares of the Series B preferred stock have been
paid in full to the holders of the shares of Series B preferred stock.
On May 21, 1993, the Company's Board of Directors voted to declare a stock
dividend payable on July 1, 1993 on the Series B preferred stock of one share
of Series B Preferred stock for each $100 of the amount of dividends payable on
July 1, 1993 and accumulated and unpaid as of that date, to holders of record
on June 14, 1993. On July 1, 1993, the Company paid all then accumulated and
payable dividends on the Series B preferred stock, an aggregate of $3.4
million, through the issuance of 34,296 shares of Series B preferred stock. On
September 24, 1993, the Company's Board of Directors voted to declare a
quarterly stock dividend on the Series B preferred stock payable on October 1,
1993 to holders of record on September 24, 1993. On October 1, 1993, the
Company paid $820,000 of dividends payable on the Series B preferred stock
through the issuance of an additional 8,203 shares of Series B preferred stock.
On December 17, 1993, the Company's Board of Directors voted to declare a
quarterly stock dividend on the Series B preferred stock payable on January 1,
1994 to holders of record on December 17, 1993. On January 1, 1994, the Company
paid $838,000 of dividends payable on the Series B preferred stock through the
issuance of an additional 8,377 shares of Series B preferred stock.
The Company also issued to DEPCO a warrant to purchase 600,000 shares of the
Company's common stock exercisable at $2.50 per share and a warrant to purchase
200,000 shares of the Company's common stock exercisable at $4.25 per share.
These warrants may be exercised by DEPCO (or by any Rhode Island state agency
to which DEPCO may transfer the warrants) as to all, but not less than all, of
the applicable shares during the period beginning ninety days from the closing
date of May 8, 1992 and ending ten years
120
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
from May 8, 1992. Common stock received by DEPCO upon the exercise of such
warrants is restricted as to its sale. During each twelve month period
beginning upon the exercise of the warrants and expiring on May 8, 1997, DEPCO
is entitled to sell 120,000 shares of common stock acquired from the exercise
of the warrants.
Adjustable Rate Cumulative Preferred Stock, Series A
In March 1987, Northeast Savings issued 1,202,916 shares of Adjustable Rate
Cumulative Preferred Stock, Series A, at a stated value of $50 per share, par
value $.01 per share, to the FSLIC in exchange for the FSLIC's cancellation of
a $50,000,000 income capital certificate and a portion of the related
accumulated income payments, the sum of which totaled $60,145,000. When the
FSLIC was terminated, the adjustable rate preferred stock was transferred to
the FSLIC Resolution Fund which is administered by the FDIC. Dividends on the
adjustable rate preferred stock were cumulative and payable quarterly based on
the highest of the Treasury Bill Rate, the Ten Year Constant Maturity Rate or
the Thirty Year Constant Maturity Rate. The dividend rate at March 31, 1992 was
7.75%. In February 1990, the Board of Directors suspended the quarterly cash
dividend on the adjustable rate preferred stock. Thus, the quarterly dividend
of $1.2 million or $.97 per share which normally would have been payable April
1, 1992, was not declared by the Board of Directors of the Company and was in
arrears at March 31, 1992. At March 31, 1992, total accumulated dividends on
the adjustable rate preferred stock were $9.32 per share or $11.2 million. On
May 8, 1992, also in conjunction with the aforementioned acquisition of assets
of the Rhode Island financial institutions, the Company repurchased the
adjustable rate preferred stock plus accumulated dividends from the FSLIC
Resolution Fund for $28.0 million in cash and $7.0 million in 9% Sinking Fund
Uncertificated Debentures, due 2012 for a total fair value of $32.5 million.
The 9% Debentures issued to the FRF had a market value of $4.5 million based on
the value attributable to those debentures by the FRF, as determined by its
investment banker.
Unallocated Employee Stock Ownership Plan Shares
In connection with the funding of the ESOP, stockholders' equity has been
reduced net of tax to reflect the guarantee of Northeast Savings. See Note 12:
Federal Home Loan Bank Advances and Other Borrowings.
NOTE 14: EMPLOYEE BENEFIT PLANS
Retirement Plan
The Retirement Plan for Employees of Northeast Savings, F.A. and Subsidiaries
(the Plan) is a defined benefit plan which covers substantially all employees
of Northeast Savings. Employees are vested in the Plan after seven years of
service and benefits are based on a percentage of each year's compensation.
Plan assets are under the control of a trustee and invested in pooled funds.
Net pension expense consisted of the following:
FOR THE FOR THE FOR THE
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1992 MARCH 31, 1992
----------------- ----------------- --------------
(IN THOUSANDS)
Service cost (benefits
earned during the period).. $ 431 $ 235 $ 312
Interest cost on projected
benefit obligation......... 380 249 290
Actual return on Plan as-
sets....................... (297) (345) (336)
Net amortization and defer-
rals....................... (80) 88 21
----- ----- -----
$ 434 $ 227 $ 287
===== ===== =====
121
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
According to the Association's actuary, the following table sets forth the
Plan's funded status at the dates indicated.
DECEMBER 31, DECEMBER 31,
1993 1992
------------ ------------
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Vested benefits................................. $4,680 $4,089
Nonvested benefits.............................. 287 236
------ ------
Accumulated benefit obligation.................... 4,967 4,325
Effect of future compensation increases........... 94 58
------ ------
Projected benefit obligation...................... 5,061 4,383
Plan assets at fair value......................... 5,215 4,341
------ ------
Projected benefit obligation in excess of (less
than) Plan assets................................ (154) 42
Unrecognized net transition asset................. 214 230
Unrecognized prior service cost................... (130) --
Unrecognized net loss............................. (592) (296)
------ ------
Unfunded accrued (prepaid) pension costs...... $ (662) $ (24)
====== ======
Assumptions used in actuarial computations were:
1993 1992
---- ----
Discount rate.................................................... 7.00% 7.75%
Rate of increase in future compensation levels................... 5.00 6.00
Expected long-term rate of return on assets...................... 7.50 8.25
401(k) Thrift and Profit Sharing Plan
Northeast Savings maintains a 401(k) thrift and profit sharing plan to
encourage systematic savings by employees. Substantially all employees are
eligible and can contribute up to 6% of their base salary, on a tax-deferred
basis, 50% of which is matched by Northeast Savings. Employees are vested in
this plan after five years of service. Thrift plan expense amounted to
$524,000, $318,000 and $396,000 for the year ended December 31, 1993, the nine
months ended December 31, 1992, and the year ended March 31, 1992,
respectively.
Employee Stock Ownership Plan
Northeast Savings also maintains an employee stock ownership plan to provide
the opportunity for substantially all employees of Northeast Savings to also
become stockholders. The ESOP was funded through the issuance of Tax
Advantaged Variable Rate ESOP Notes, Series 1987. The proceeds of the notes
were used to purchase outstanding shares of Northeast Savings' common stock
and the notes are guaranteed by Northeast Savings. When Northeast Savings was
reorganized into the holding company, Northeast Federal Corp., the common
stock of the Association was exchanged for the common stock of the holding
company. The ESOP requires Northeast Savings to contribute the amount
necessary for the ESOP to discharge its current obligations which include
principal and interest payments on the notes. For the year ended December 31,
1993 and the nine months ended December 31, 1992, respectively, Northeast
Savings' contribution to the ESOP amounted to $1,512,000 and $383,000, of
which $267,000 and $260,000 was interest expense on the ESOP notes. For the
year ended March 31, 1992, the contribution totaled $2,108,000 of which
$561,000 was interest expense. Further information regarding these notes may
be found in Note 12: Federal Home Loan Bank Advances and Other Borrowings.
122
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock Option Plans
The stock option plans provide for the granting of options to Directors,
officers, and other key employees to purchase common stock of Northeast
Federal Corp. at a price not less than the fair market value of the Company's
stock on the date of grant. The stock option plans provide for the option and
sale in the aggregate of 2,250,000 shares of the Company's common stock. The
maximum option term is 10 years. At December 31, 1993 and 1992, respectively,
there were 571,613 and 352,676 shares which were fully vested and exercisable.
Changes in the status of stock options are summarized as follows:
FOR THE
FOR THE NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
1993 1992
----------------------- ----------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF SHARES OPTION PRICE OF SHARES OPTION PRICE
--------- ------------ --------- ------------
Balance, beginning of period..... 453,317 $ 1.91 447,717 $ 1.84
Issued......................... 1,006,676 4.86 15,000 3.83
Exercised...................... (81,701) (1.80) (9,400) (1.73)
Canceled....................... (6,000) 1.69 -- --
--------- -------
Balance, end of period........... 1,372,292 $ 4.08 453,317 $ 1.91
========= =======
Deferred Compensation Plan
The Deferred Compensation Plan allows key executives to defer receipt of
compensation otherwise currently payable to them by the Association or any
subsidiary of the Association for a period of two to ten years. The
Association will match 60% of the first 5% an executive elects to defer. The
deferred funds will be invested during the deferral period in either a
Guaranteed Rate Investment Account or in common stock of Northeast Federal
Corp. at a price not less than the monthly average fair market value of the
Company's stock for the last ten days of each month.
Directors' Deferred Fee Plan
The Deferred Fee Plan provides the members of the Board of Directors of the
Association the opportunity to defer receipt of fees otherwise currently
payable to them by the Association for a period up to ten years. The deferred
fees will be invested during the deferral period in either the Guaranteed Rate
Investment Account or in common stock of Northeast Federal Corp. at a price
not less than the monthly average fair market value of the Company's stock.
The Deferred Compensation Plan and the Deferred Fee Plan provide for a total
of 250,000 shares of company stock to be purchased.
NOTE 15: INCOME TAXES
As discussed in Note 1, the Company adopted SFAS 109 as of April 1, 1991.
SFAS 109 establishes financial accounting and reporting standards for the
effects of income taxes that result from an enterprise's activities during the
current and preceding years. It requires an asset and liability approach for
financial accounting and reporting for income taxes. In accordance with this
implementation, the Company recorded an additional $1.0 million in income as
the cumulative effect of a change in accounting principle for the year ended
March 31, 1992. In addition, a valuation allowance of $3.7 million was
established which reduced the deferred tax assets as of April 1, 1991. Due to
the Company's utilization of all net operating loss
123
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
carryforwards, the valuation reserve, which was related to those carryforwards,
was eliminated as of December 31, 1992. Also in accordance with the
implementation of SFAS 109, the Company applied $20.9 million at April 1, 1991
and another $1.0 million at December 31, 1992 to reduce the balance of its
supervisory goodwill. The cumulative effect of this change is reported
separately in the March 31, 1992 Consolidated Statement of Income and prior
years' financial statements have not been restated.
In accordance with SFAS 109, deferred income tax assets and liabilities at
December 31, 1993 and 1992 reflect the impact of temporary differences between
values recorded as assets and liabilities for financial reporting purposes and
values utilized for remeasurement in accordance with tax laws.
A reconciliation of the statutory income tax rate to the consolidated
effective income tax rate as well as a reconciliation of the recorded income
tax expense (benefit) and the amount of income tax expense (benefit) computed
by applying the statutory federal corporate tax rate to income (loss) before
income taxes and extraordinary items follow:
FOR THE FOR THE FOR THE
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1992 MARCH 31, 1992
------------------- ------------------- ----------------
(DOLLARS IN THOUSANDS)
Federal income tax
expense (benefit) at
statutory rate......... $ (8,953) (34.00)% $ (21,870) (34.00)% $ 3,198 34.00%
Increase (decrease) re-
sulting from:
Supervisory goodwill.. -- -- 19,994 31.08 1,350 14.35
State taxes, net of
federal tax benefit.. (3,290) (12.49) (461) (.72) 1,039 11.05
Other permanent items,
net.................. 50 .19 9 .01 (659) (7.05)
Elimination of valua-
tion allowance....... -- -- (2,752) (4.27) -- --
Tax exempt interest
income............... -- -- (9) (.01) (13) (.10)
--------- ------- --------- ------- ------- ------
Income tax expense
(benefit) per financial
statements............. $ (12,193) (46.30)% $ (5,089) (7.91)% $ 4,915 52.25%
========= ======= ========= ======= ======= ======
The components of the income tax expense (benefit) are as follows:
FOR THE FOR THE FOR THE
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1992 MARCH 31, 1992
----------------- ----------------- --------------
(IN THOUSANDS)
Current provision:
State..................... $ 184 $ 2,454 $ 466
Net change in valuation
allowances............... 4,000 (2,752) --
Net change in temporary dif-
ferences................... (16,377) (4,791) 4,449
-------- ------- ------
Total income tax expense
(benefit).............. $(12,193) $(5,089) $4,915
======== ======= ======
124
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effect of the temporary differences giving rise to the Company's
deferred tax assets and liabilities are as follows:
DECEMBER 31, 1993 DECEMBER 31, 1992
----------------- -----------------
ASSET LIABILITY ASSET LIABILITY
------- --------- ------- ---------
(IN THOUSANDS)
Allowance for loan losses................... $36,075 $ -- $20,649 $ --
Reserve for uncollected interest............ 2,305 -- 4,111 --
Purchase accounting discount................ 1,339 -- 1,984 --
Deferred service fee........................ -- 1,522 -- 1,844
Other....................................... 2,006 1,670 2,578 1,056
------- ------ ------- ------
Total deferred income taxes............... $41,725 $3,192 $29,322 $2,900
======= ====== ======= ======
In addition, as of December 31, 1993, a valuation allowance of $4.0 million
was established which reduced the deferred tax assets, since it is more likely
than not that a portion of these assets will not be realized. Also, the Company
has recorded deferred tax assets at December 31, 1993 related to alternative
minimum tax credit carryforwards and the ESOP guarantee of $3.3 million and
$3.1 million, respectively.
For federal tax return purposes, Northeast Federal Corp. files a consolidated
tax return with its subsidiaries on a calendar year-end basis. Northeast
Savings, a subsidiary of Northeast Federal Corp., has been audited by the
Internal Revenue Service with respect to tax returns through 1979.
Under the Internal Revenue Code (the Code), Northeast Savings is allowed a
special bad debt deduction based on a percentage of taxable income (8%) before
such deduction, or based on specified experience formulas. Through 1979,
Northeast Savings consistently computed its annual addition to the tax bad debt
reserve using the percentage of taxable income method. Subsequent to 1979, such
annual addition has been computed under an experience formula because of
operating losses incurred for federal income tax purposes.
At December 31, 1993, Northeast Savings' base year tax bad debt reserve
totaled approximately $2.0 million for which a deferred tax liability is not
required to be recognized under SFAS 109. If in the future, earnings allocated
to this bad debt reserve and deducted for federal income tax purposes are used
for payment of cash dividends or other distributions to stockholders, including
distributions in redemption or in dissolution or liquidation, an amount up to
approximately 1 3/4 times the amount actually distributed to the stockholders
will be includable in Northeast Federal Corp.'s taxable income and be subject
to tax.
Earnings and profits include taxable income net of federal income taxes and
adjustments for items of income which are not taxable and expenses which are
not deductible. For the tax year ended December 31, 1993, Northeast Federal
Corp. and subsidiaries had current earnings and profits. Any dividends paid
with respect to Northeast Savings, F.A.'s stock in excess of current or
accumulated earnings and profits at year-end for federal tax purposes or any
other stockholder distribution will be treated as paid out of the tax bad debt
reserves and will increase taxable income as noted in the preceding paragraph.
125
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16: GAIN (LOSS) ON SALE OF INTEREST-EARNING ASSETS, NET
Gains (losses) are summarized in the following table. For the year ended
December 31, 1993 and the nine months ended December 31, 1992, virtually all
sales of investments and mortgage-backed securities were either from the
available-for-sale portfolios or were due to credit concerns.
FOR THE FOR THE FOR THE
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1992 MARCH 31, 1992
----------------- ----------------- --------------
(IN THOUSANDS)
Net gain (loss) on sales
of:
Investment securities.. $3,579 $1,942 $(2,757)
Mortgage-backed securi-
ties.................. 2,046 2,158 4,748
Loans.................. 1,939 1,870 2,532
------ ------ -------
Total................ $7,564 $5,970 $ 4,523
====== ====== =======
NOTE 17: EXTRAORDINARY ITEMS
A summary of extraordinary items follows:
FOR THE
YEAR ENDED
MARCH 31, 1992
--------------
(IN THOUSANDS)
Gain (loss) from early extinguishment of debt, net of in-
come taxes:
8% Convertible Subordinated Debentures................. $95
---
$95
===
Extraordinary items presented above are net of applicable taxes of $109,000
for the year ended March 31, 1992. All federal income taxes were offset by the
utilization of existing operating loss carryforwards.
NOTE 18: SUPPLEMENTARY EARNINGS PER SHARE
As required by Accounting Principles Board Opinion No. 15, "Earnings Per
Share," supplementary earnings per share information is presented as if the
conversion of the Company's $2.25 Convertible Cumulative Preferred Stock,
Series A, into common stock, which occurred on May 14, 1993, had taken place at
the beginning of the period.
YEAR ENDED DECEMBER 31,
------------------------
1993 1992
----------- -----------
(DOLLARS IN THOUSANDS
EXCEPT SHARE AMOUNTS)
Net loss.......................................... $ (14,139) $ (59,037)
Preferred stock dividend requirements............. (3,153) (3,100)
----------- -----------
Net loss applicable to common stockholders........ $ (17,292) $ (62,137)
=========== ===========
Average shares outstanding........................ 13,464,163 13,371,372
Net loss per common share......................... $ (1.28) $ (4.65)
=========== ===========
126
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table shows the computation of the weighted average shares used
in the calculation of supplementary earnings per share:
YEAR ENDED DECEMBER 31,
-----------------------
1993 1992
----------- -----------
Actual weighted average shares outstanding
excluding conversion shares....................... 5,816,663 5,723,872
Conversion shares (assumed converted at the
beginning of the period).......................... 7,647,500 7,647,500
----------- -----------
13,464,163 13,371,372
=========== ===========
NOTE 19: COMMITMENTS AND CONTINGENCIES
Outstanding commitments to originate adjustable rate and fixed rate mortgage
loans amounted to $15,429,000 and $33,649,000, respectively, at December 31,
1993. With respect to residential mortgage loans, commitments generally expire
within 10 to 180 days, depending upon the type and purpose of the loan. Also at
December 31, 1993, commitments of $3,497,000 were outstanding on existing
single-family residential construction loans. In addition, at December 31,
1993, the Association had outstanding commitments of $10,125,000 on consumer
loans, which consisted primarily of available lines of credit. At December 31,
1993, the Association had entered into firm commitments to sell $44,510,000 of
mortgage loans from the available-for-sale portfolio. Finally, at December 31,
1993, the Association had entered into firm commitments to purchase $76,689,000
of mortgage-backed securities.
On December 6, 1989, the Association filed a complaint in the United States
District Court for the District of Columbia against the FDIC and the OTS, as
successor regulatory agencies to the FSLIC and the Federal Home Loan Bank
Board. It was the position of the Association in the litigation that the denial
by the OTS and the FDIC of core capital treatment to the adjustable rate
preferred stock and the elimination from capital, subject to limited inclusion
during a phase-out period, of supervisory goodwill, constitutes a breach of
contract, as well as a taking of the Association's property without just
compensation or due process of law in violation of the Fifth Amendment to the
United States Constitution. The Association sought a determination by the Court
to this effect and the Association further sought to enjoin the defendants and
their officers, agents, employees and attorneys and those persons in active
concert or participation with them from enforcing the provisions of FIRREA and
the OTS regulations or from taking other actions that are inconsistent with
their contractual obligations to Northeast Savings. The suit sought an
injunction requiring the OTS and FDIC to abide by their contractual agreements
to recognize as regulatory capital the supervisory goodwill booked by Northeast
Savings as a result of its 1982 acquisition from the FSLIC of three insolvent
thrifts. On July 16, 1991, the district court ruled that it lacked jurisdiction
over the action but that Northeast could bring a damages action against the
government in the United States Claims Court.
On July 8, 1992, the Association moved to voluntarily dismiss its appeal of
the July 16, 1991 district court decision dismissing its action seeking
injunctive relief. This motion was made with a view toward refiling the
Association's lawsuit against the government in the United States Claims Court,
so as to seek damages against the United States rather than injunctive relief
against the OTS and FDIC. This motion was made for two reasons. First, by
virtue of the Association's improved financial and regulatory capital
condition, including its compliance with all fully phased-in capital
requirements, and its tangible capital position exceeding four percent, the
Association determined that it was no longer in need of injunctive relief.
Rather, the Association determined that it was now in its best interest to
pursue a damages claim against the United States in the Claims Court. Second,
the Association sought to dismiss its appeal and refile in the Claims Court
because of the adverse decision of the Court of Appeals for the D.C. Circuit in
another "supervisory goodwill"
127
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
case, TransOhio Savings Bank, et al. v. Director, OTS, et al. 967 F.2d 598
(June 12, 1992). Neither the OTS nor the FDIC opposed the Association's motion.
The D.C. Circuit granted the Association's motion to voluntarily dismiss its
appeal on July 9, 1992. On August 12, 1992, Northeast Savings refiled its
action in the United States Claims Court, Northeast Savings, F.A. v. United
States, No. 92-550c. Note that, effective October 29, 1992, the United States
Claims Court was renamed the United States Court of Federal Claims. Northeast
Savings' complaint seeks monetary relief against the United States on theories
of breach of contract, taking of property without just compensation, and
deprivation of property without due process of law. The United States has not
yet filed an answer to the Complaint. On May 25, 1993, a three-judge panel of
the Federal Circuit Court of Appeals ruled against the plaintiffs in three
other consolidated "supervisory goodwill" cases, holding that the thrift
institutions had not obtained an "unmistakable" promise from the government
that it would not change the law in such a manner as to abrogate its
contractual obligations and that the plaintiffs therefore bore the risk of such
a change in the law. Winstar Corp. v. United States, No. 92-5164. On August 18,
1993, however, the full Federal Circuit, acting in response to a Petition for
Rehearing with Suggestion for Rehearing In Banc filed by two of the three
plaintiffs in these cases, vacated the May 25 panel decision, ordered the panel
opinion withdrawn, and ordered that the case be reheard by the full Court. Oral
argument in the Winstar case was held on February 10, 1994. On June 3, 1993,
the Court of Federal Claims entered an order staying proceedings in Northeast
Savings' case pending further action by the Federal Circuit in the Winstar case
or any action taken by the Supreme Court on any petition for a writ of
certiorari in that case.
The Association is also involved in litigation arising in the normal course
of business. Although the legal responsibility and financial impact with
respect to such litigation cannot presently be ascertained, the Association
does not anticipate that any of these matters will result in the payment by the
Association of damages that, in the aggregate, would be material in relation to
the consolidated results of operations or financial position of the Company.
NOTE 20: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATION OF
CREDIT RISK
In the normal course of business, Northeast Savings is a party to various
financial instruments with off-balance-sheet risk. These financial instruments
include commitments to extend credit to meet the financing needs of customers,
as well as interest rate swaps entered into as a means of reducing the
Association's exposure to changes in interest rates.
To varying degrees, these instruments involve elements of credit and interest
rate risk in excess of the amount recognized in the Consolidated Statement of
Financial Condition. The following table shows the contract or notional amount
of these instruments held by the Association.
DECEMBER 31,
----------------
1993 1992
-------- -------
(IN THOUSANDS)
Financial instruments whose contract amounts represent
credit risk:
Commitments to extend credit:
Single-family residential real estate loans........... $ 49,078 $75,506
Consumer loans........................................ 10,125 11,517
Income property loans................................. 3,497 863
Loans serviced for others with recourse................. 69,124 6,371
-------- -------
Total commitments to extend credit.................. $131,824 $94,257
-------- -------
Financial instruments whose notional or contract amounts
exceed the amount of credit risk:
Interest rate swap agreements........................... $ 15,739 $46,080
======== =======
128
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Commitments to extend credit are agreements to lend to a customer and are
entered into in accordance with written, nondiscriminatory, underwriting
guidelines established by the Board of Directors. Prior to extending credit,
the Association appraises any property which will collateralize the loan and
determines the borrower's ability to repay through review of detailed loan
applications and credit reports. These commitments have fixed expiration dates
or other termination clauses and may require payment of a fee. The total
commitment amounts do not necessarily represent future cash requirements since
some commitments may expire without being drawn upon.
The increase in loans serviced with recourse resulted from management's
decision in 1993 to eliminate pool insurance on these loans. In reviewing the
delinquency history of the loans, management determined that it was more costly
to maintain insurance than to assume the credit risk directly. The loans are
well-seasoned and generally have a loan-to-value ratio of 65% or less. At
December 31, 1993, $2.1 million were contractually delinquent. Of that amount,
$540,000 were delinquent for over 90 days. The risk of these loans is evaluated
in conjunction with the evaluation of the adequacy of the allowance for loan
losses.
At December 31, 1993, the Association's interest rate swap agreements on a
market value basis were in a net loss position of $231,000. Interest rate swaps
involve the exchange of rates on interest payment obligations without the
exchange of the underlying principal amounts. The primary risk associated with
interest rate swaps is not credit risk but risk associated with movements in
interest rates. While notional principal amounts express the volume of the
interest rate swaps, the amounts potentially subject to credit risk are much
smaller.
At December 31, 1993 and 1992, outstanding interest rate swaps totaled
$15,739,000 and $46,080,000, respectively. During the year ended March 31,
1992, the Association voluntarily terminated $275,000,000 of interest rate swap
agreements. Interest payments related to interest rate swaps and caps are
charged or credited to interest expense on other borrowings. Accrued interest
receivable on swaps outstanding at December 31, 1993 and 1992, respectively,
was $70,000 and $264,000.
The Association grants residential loans to customers primarily in the
Northeast. In 1992, the Association also began originating loans through its
recently-opened office in Colorado. In early 1994, the Association closed its
loan origination office in California. Although the Association has a
diversified portfolio, the ability of its borrowers to repay their loans is
substantially dependent upon the general economic conditions of the region.
NOTE 21: DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet,
for which it is practicable to estimate that value. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other estimation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. Such techniques and assumptions, as they apply
to individual categories of the Company's financial instruments, are as
follows:
. Cash and short-term investments: The carrying amounts for cash and short-
term investments is a reasonable estimate of those assets' fair value.
. Investment securities, including mortgage-backed securities: Fair values
for these securities are based on quoted market prices, where available.
If quoted market prices are not available, fair values are based on
quoted market prices for similar securities.
129
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
. Loans receivable: For adjustable rate loans that reprice frequently and
with no significant change in credit risk, fair values are based on the
market prices for securities collateralized by similar loans. For certain
homogeneous categories of loans, such as some residential fixed rate
mortgages, fair value is estimated using the quoted market price for
securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other types of loans is estimated by
discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturities. For the income property loan
portfolio, due to its immateriality, i.e. approximately 2.0% of total
assets, management concluded that it was not practicable to estimate its
fair value and, accordingly, has valued it at its carrying amount.
. Rhode Island covered assets: Since, relative to these assets, the
Association is protected against credit losses, their carrying value is a
reasonable estimate of their fair value.
. Accrued interest receivable: The carrying amount of accrued interest
approximates its fair value.
. Deposit liabilities: The fair value of demand deposits, savings accounts,
and certain money market deposits is the amount payable on demand at the
reporting date, that is, the carrying value. Fair values for fixed rate
certificates of deposits are estimated using a discounted cash flow
calculation that applies interest rates currently being offered for
deposits of similar remaining maturities. SFAS 107 defines the fair value
of demand deposits as the amount payable on demand, and prohibits
adjusting fair value for any value derived from retaining those deposits
for an expected future period of time. That component, commonly referred
to as a deposit base intangible, is estimated to be between zero and 4.0%
of total demand deposits at December 31, 1993 and is neither considered
in the following fair value amounts nor recorded as an intangible asset
in the balance sheet.
. Federal Home Loan Bank advances: The fair value of these liabilities is
estimated using the rates currently offered for liabilities of similar
remaining maturities or, when available, quoted market prices.
. Securities sold under agreements to repurchase: Securities sold under
agreements to repurchase generally have an original term to maturity of
less than thirty days and thus are considered short-term borrowings.
Consequently, their carrying value is a reasonable estimate of fair
value.
. Long-term borrowings: The fair values of the Company's long-term
borrowings are estimated using discounted cash flow analyses, based on
the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
. Interest rate swap agreements: The fair value of the interest rate swaps
is the estimated amount that would be received or paid to terminate the
swap agreements at the reporting date, taking into account current
interest rates and the current creditworthiness of the swap
counterparties.
. Commitments to extend credit consist primarily of commitments to
originate adjustable rate mortgage loans and generally expire within 10
to 180 days, depending upon the type and purpose of the loan. Due to the
current nature of the commitments, management concluded that the
contractual amount of the commitments is a reasonable estimate of their
fair value.
130
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents the Company's assets, liabilities, and
unrecognized financial instruments at both their respective carrying amounts
and fair value. The Company's non-financial assets and liabilities are
presented in both columns at their carrying amount.
DECEMBER 31, 1993 DECEMBER 31, 1992
--------------------------- ---------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
--------------- ---------- --------------- ----------
(IN THOUSANDS)
Financial assets:
Cash and due from
banks................ $ 51,705 $ 51,705 $ 57,158 $ 57,158
Interest-bearing
deposits............. -- -- 615 615
Federal funds sold.... 23,510 23,510 32,815 32,815
Securities purchased
under agreements to
resell............... 60,000 60,000 -- --
Investment securities,
net.................. 42,612 42,525 111,791 116,341
Investment securities,
available-for-sale,
net.................. 162,854 162,854 129,899 131,127
Mortgage-backed
securities, net...... 1,330,886 1,336,970 829,772 837,681
Mortgage-backed
securities,
available-for-sale,
net.................. 12,886 12,886 55,474 57,684
Loans, net............ 1,876,181 1,908,259 2,278,873 2,351,023
Loans available-for-
sale, net............ 46,076 46,119 32,237 32,844
Rhode Island covered
assets............... 105,625 105,625 151,828 151,828
Interest and dividends
receivable........... 17,470(1) 17,540 21,078(1) 21,342
Non-financial assets:
Real estate and other
assets acquired in
settlement of loans.. 74,962 74,962 99,376 99,376
Premises and
equipment, net....... 32,368 32,368 34,201 34,201
Prepaid expenses and
other assets......... 82,822 81,344 74,723 74,414
---------- ---------- ---------- ----------
Total assets........ $3,919,957 $3,956,667 $3,909,840 $3,998,449
========== ========== ========== ==========
Financial liabilities:
Retail deposits....... $2,952,082 $2,985,050 $3,205,654 $3,222,030
Brokered deposits..... 25,135 25,414 25,135 26,015
Federal Home Loan Bank
advances............. 373,000 374,340 140,000 140,141
Securities sold under
agreements to
repurchase........... 294,809 294,809 291,014 291,014
Uncertificated
debentures........... 38,442 29,942 34,990 25,414
Convertible
subordinated
debentures........... -- -- 560 378
Non-financial
liabilities:
Advance payments by
borrowers for taxes
and insurance........ 28,337 28,337 21,734 21,734
Other liabilities..... 75,709 75,709 53,444 53,444
---------- ---------- ---------- ----------
Total liabilities... $3,787,514 $3,813,601 $3,772,531 $3,780,170
========== ========== ========== ==========
Unrecognized financial
instruments:
Interest rate swaps
(notional amount of
$46.1 million):
In a net receivable
position........... $ 70 $ (231) $ 264 $ (215)
Commitments to extend
credit............... 62,400 62,400 87,886 87,886
Loan servicing
rights(2)............ -- 4,980 -- *
---------- ---------- ---------- ----------
Total unrecognized
financial
instruments........ $ 62,470 $ 67,149 $ 88,150 $ 87,671
========== ========== ========== ==========
- --------
(1) Excludes $70,000 and $264,000 at December 31, 1993 and 1992, respectively,
of accrued interest receivable on interest rate swaps.
(2) Represents the fair value of uncapitalized servicing rights on loans
serviced for others by Northeast Savings.
* Fair value at December 31, 1992 is not available.
131
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As discussed earlier, the fair value estimate of financial instruments for
which quoted market prices are unavailable is dependent upon the assumptions
used. Consequently, those estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. Accordingly, the aggregate fair value amounts
presented in the above fair value table do not necessarily represent the
underlying value of the Company.
NOTE 22: RECONCILIATION OF REGULATORY REPORTS TO ACCOMPANYING CONSOLIDATED
FINANCIAL STATEMENTS
The following is a reconciliation of stockholders' equity and net income
(loss) from regulatory reports furnished to the OTS to the accompanying
consolidated financial statements:
STOCKHOLDERS' EQUITY NET LOSS
---------------------- -----------------------------------
DECEMBER 31, FOR THE FOR THE NINE
---------------------- YEAR ENDED MONTHS ENDED
1993 1992 DECEMBER 31, 1993 DECEMBER 31, 1992
---------- ---------- ----------------- -----------------
(IN THOUSANDS)
Balance reported to the
OTS for Northeast
Savings................ $ 169,670 $ 171,539 $(11,980) $(57,858)
Holding company net
loss................... (14,139) (59,234) (14,139) (59,234)
Equity in undistributed
income of Northeast
Savings................ 11,980 57,858 11,980 57,858
Additional investment in
Northeast Savings...... (34,800) (34,800) -- --
Retirement of adjustable
rate preferred stock... -- (33,550) -- --
Issuance of Series B
preferred stock........ -- 35,170 -- --
Preferred stock
conversion costs....... (1,402) -- -- --
Holding company paid-in
capital and retained
earnings............... 834 574 -- --
Exercised stock options. 147 16 -- --
401K shares issued...... 223 -- -- --
---------- ---------- -------- --------
Balance per accompanying
consolidated financial
statements............. $ 132,513 $ 137,573 $(14,139) $(59,234)
========== ========== ======== ========
NOTE 23: ACQUISITIONS
During fiscal 1982 and fiscal 1983, Northeast Savings acquired three savings
and loan associations in FSLIC-assisted supervisory mergers accounted for using
the purchase method of accounting. Supervisory goodwill, the excess of cost
over net assets acquired, related to these acquisitions totaled $290,019,000.
In 1988, a portion of the supervisory goodwill related to 17 branch banking
offices which were sold was eliminated and all goodwill related to Northeast
Savings' 1987 non-supervisory acquisitions was eliminated in 1989 as a result
of sales. In fiscal 1990, as a result of an analysis of the value of its
remaining supervisory goodwill, Northeast Savings reduced supervisory goodwill
by $109.4 million. This reduction was precipitated by several factors that had
diminished the value of the Association's Connecticut and Massachusetts
franchises. The primary factor was the impact of OTS regulations promulgated
pursuant to FIRREA which require the deduction of a substantial portion of
goodwill in calculating regulatory capital. Other factors included the passage
of the Connecticut Interstate Banking Law which was enacted March 14, 1990 and
which greatly increased the opportunities for out-of-state banks to enter the
state. Accordingly, Northeast Savings hired Kaplan, Smith & Associates, then a
subsidiary of The First Boston Corporation, to perform an independent valuation
of the Association's franchise rights in Connecticut and Massachusetts. This
study was completed in May 1990 and supported the value of Northeast Savings'
remaining goodwill at March 31, 1990.
132
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The reduction in supervisory goodwill had no effect on Northeast Savings'
regulatory capital or the treatment of the goodwill for regulatory accounting
purposes.
A further analysis of the value of the Company's remaining supervisory
goodwill completed in September 1992, resulted in an additional $56.6 million
reduction of supervisory goodwill. This reduction was also brought about by
factors which had diminished the value of the Association's Connecticut and
Massachusetts franchises. The principal factor was the adverse effect on the
value of the Association's Connecticut and Massachusetts franchise rights of
OTS regulations promulgated pursuant to FIRREA and the FDICIA as well as other
positions taken by the OTS regarding regulatory capital requirements. For
example, the prompt corrective action regulation issued by the federal banking
agencies on September 29, 1992 finalized the 4% core capital requirement for
institutions that are not rated MACRO 1, which thereby reduced prospective
earnings which the Association could expect to realize from its Connecticut and
Massachusetts franchise rights. Moreover, the OTS has verbally informed
Northeast Savings that, inasmuch as Northeast Savings had recently achieved
compliance with its fully phased-in capital standards, under OTS Regulatory
Bulletin 3a-1, "Policy Statement on Growth for Savings Associations" (RB 3a-1),
Northeast Savings may not grow its assets if such growth would cause it to fall
below its fully phased-in capital requirements, even if the Company continued
to exceed the applicable minimum capital standards previously established for
the duration of the FIRREA phase-in period. This OTS position regarding the
effect of RB 3a-1 further decreased the prospective earnings that Northeast had
expected to realize from its Connecticut and Massachusetts franchise rights.
Another significant factor included the implementation of the final rule issued
by the OTS which permits federal savings associations to branch interstate to
the full extent permitted by federal statute and which greatly increased
opportunities for out-of-state institutions to enter these states. Thus, the
Company again hired Kaplan Associates, Inc. to perform an independent valuation
of the Association's franchise rights in Connecticut and Massachusetts. This
study was completed during the quarter ended September 30, 1992 and supported
the value of the Company's remaining supervisory goodwill at September 30,
1992. The reduction in supervisory goodwill had no effect on Northeast Savings'
fully phased-in regulatory tangible, core, or risk-based capital.
The following summarizes transactions relating to the supervisory goodwill.
FOR THE NINE MONTHS FOR THE YEAR
ENDED DECEMBER 31, ENDED MARCH 31,
1992 1992
------------------- ---------------
(IN THOUSANDS)
Balance, beginning of period............... $59,553 $84,420
Amortization............................. (2,002) (3,971)
Reduction for acquired net operating loss
carryforward............................ (983) (20,896)
Valuation adjustment..................... (56,568) --
------- -------
Balance, end of period..................... $ -- $59,553
======= =======
During the year ended March 31, 1992, the Association acquired a total of
$404.6 million in deposits from the RTC. All of the acquired deposits were in
institutions which had been placed into receivership by the RTC.
Financial of Hartford
On June 19, 1991, Northeast Savings assumed the deposits of Financial of
Hartford, F.S.B. from the RTC. Northeast Savings assumed $10.5 million in
deposits and accrued interest and received $7.9 million in cash, $2.6 million
in securities, and $70,000 in passbook secured loans. Northeast Savings closed
the branch and now services the deposits through the eight branches in the
Hartford area.
133
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ComFed Savings Bank
On September 13, 1991, Northeast Savings assumed the insured deposits of
eight branches of ComFed Savings Bank, F.A. from the RTC. Northeast Savings
assumed $210.9 million in deposits and accrued interest, at a premium of
$406,000, and received $209 million in cash and $567,000 in passbook secured
loans. The branches acquired were located in the Springfield, Massachusetts
area and in Pittsfield, Massachusetts. Northeast Savings closed four of the
branches, keeping two open in Springfield and two open in Pittsfield.
FarWest Savings and Loan
On March 20, 1992, Northeast Savings assumed the insured deposits of four
branches of FarWest Savings and Loan Association, F.A. from the RTC. Northeast
Savings assumed $183.2 million in deposits and accrued interest, at a premium
of $610,000, and received $182 million in cash and $176,000 in passbook secured
loans. The four branches are in the San Diego, California area. Northeast
Savings now operates the four branches as full service banking offices.
Rhode Island Acquisition
On May 8, 1992, the Association acquired $315.0 million in assets of four
Rhode Island financial institutions which were in receivership proceedings
under the jurisdiction of the Superior Court of Providence County, Rhode
Island. The following transactions were completed in conjunction with the
acquisition of the assets of the Rhode Island institutions.
. The Association issued $315.0 million of insured deposit accounts in the
Association to depositors in the Rhode Island institutions.
. The Company issued and sold to the Rhode Island Depositors Economic
Protection Corporation approximately $35.2 million of a new class of
preferred stock, the $8.50 Cumulative Preferred Stock, Series B as well
as warrants to purchase 600,000 shares of common stock of the Company at
$2.50 per share and 200,000 shares of common stock of the Company at
$4.25 per share. The Company contributed the net proceeds from this
issuance to the Association. The Company has the right to pay the first
five years of dividends on the new preferred stock by the issuance of
additional new preferred stock (a payment in kind).
. The Company issued and sold $28.95 million of 9% Debentures to the
receivers for the four institutions. These debentures have been
distributed to certain of the depositors in the Rhode Island institutions
in consideration of a portion of their deposit claims against the
receiverships for the Rhode Island institutions. The Company has the
right to pay the first five years of interest on the 9% Debentures by the
issuance of additional 9% Debentures (a payment in kind).
. The Company repurchased its adjustable rate preferred stock plus
accumulated dividends from the FRF for $28.0 million in cash and $7.0
million in 9% Debentures, for a total fair value of $32.5 million. The 9%
Debentures had a fair market value of $4.5 million, which was based on
the value attributed to those debentures by the FRF, as determined by its
investment banker.
134
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 24: PARENT COMPANY FINANCIAL INFORMATION
The condensed parent company Statement of Operations, Statement of Financial
Condition, and Statement of Cash Flows are as follows:
STATEMENT OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1992 MARCH 31, 1992
----------------- ----------------- --------------
Interest income............. $ 57 $ 43 $ 32
Interest expense............ (3,503) (2,103) --
Equity in undistributed
income (loss) of Northeast
Savings.................... (11,980) (57,858) 5,726
-------- -------- ------
Total income (loss)..... (15,426) (59,918) 5,758
Operating expenses.......... 276 314 254
-------- -------- ------
Income (loss) before income
taxes and extraordinary
items...................... (15,702) (60,232) 5,504
Income tax expense
(benefit).................. (1,563) (998) 103
-------- -------- ------
Net income (loss)....... $(14,139) $(59,234) $5,607
======== ======== ======
STATEMENT OF FINANCIAL CONDITION
(IN THOUSANDS)
DECEMBER 31,
-----------------
1993 1992
-------- --------
ASSETS
Cash and interest-bearing deposits........................... $ 2,210 $ 2,416
Investment in Northeast Savings.............................. 169,670 171,539
Other assets................................................. 685 --
-------- --------
Total assets............................................. $172,565 $173,955
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Uncertificated debentures.................................... $ 38,442 $ 34,990
Other liabilities............................................ 1,610 1,392
Stockholders' equity......................................... 132,513 137,573
-------- --------
Total liabilities and stockholders' equity............... $172,565 $173,955
======== ========
135
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1993 1992 1992
------------ ----------------- ----------
Cash flows from operating activities:
Net income (loss).................. $(14,139) $(59,234) $5,607
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Interest accrued and paid in kind
on debentures................... 3,452 2,103 --
Equity in undistributed (income)
loss of Northeast Savings....... 11,980 57,858 (5,726)
(Increase) decrease in other
assets.......................... (685) 135 (125)
Increase (decrease) in other
liabilities..................... 218 802 (5)
-------- -------- ------
Net cash provided by (used in)
operating activities.......... 826 1,664 (249)
-------- -------- ------
Cash flows from investing activities:
Increase in investment in Northeast
Savings........................... -- (34,800) --
-------- -------- ------
Net cash used in investing
activities.................... -- (34,800) --
-------- -------- ------
Cash flows from financing activities:
Proceeds from exercise of stock
options........................... 147 16 2
Proceeds from issuance of 401K
stock............................. 223 -- --
Preferred stock conversion costs... (1,402) -- --
Retirement of Series A adjustable
preferred stock................... -- (33,550) --
Proceeds from issuance of Series B
preferred stock................... -- 35,170 --
Proceeds from issuance of
uncertificated debentures......... -- 33,450 --
-------- -------- ------
Net cash provided by (used in)
financing activities.......... (1,032) 35,086 2
-------- -------- ------
Net increase (decrease) in cash and
cash equivalents.................... (206) 1,950 (247)
Cash and cash equivalents at
beginning of period................. 2,416 466 713
-------- -------- ------
Cash and cash equivalents at end of
period.............................. $ 2,210 $ 2,416 $ 466
======== ======== ======
This information should be read in conjunction with other Notes to the
Consolidated Financial Statements.
136
NORTHEAST FEDERAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 25: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
DECEMBER 31, 1993 AND FOR
THE YEAR THEN ENDED Q1 Q2 Q3 Q4
- ------------------------- ------------- ------------- ------------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Total assets.............. $ 3,979,720 $ 4,006,969 $ 3,942,721 $3,920,027
Interest income........... 57,322 56,676 55,016 51,362
Net interest income....... 19,627 19,312 17,741 15,728
Provision for loan losses. 4,850 12,000 3,450 3,000
Gain on sale of
securities, net.......... 3,861 590 254 920
Gain on sale of loans,
net...................... 322 376 866 375
Non-interest income....... 2,852 2,321 2,612 2,390
Non-interest expenses..... 21,556 27,747 22,453 21,423
Net income (loss)......... 141 (9,432) (1,904) (2,944)
Preferred stock dividend
requirements............. 1,653 1,190 820 838
Net loss applicable to
common shareholders...... (1,512) (10,622) (2,724) (3,782)
Net loss per common share:
Primary and fully
diluted................ (0.26) (1.08) (0.20) (0.28)
Market prices of common
stock:
High.................... 7 1/2 6 3/8 5 5/8 5 7/8
Low..................... 6 4 1/2 3 3/4 4
DECEMBER 31, 1992 AND FOR
THE NINE MONTHS THEN ENDED Q1 Q2 Q3
- -------------------------- ------------- ------------- -------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Total assets.............. $ 3,971,630 $ 3,891,389 $ 3,910,104
Interest income........... 67,783 66,388 62,174
Net interest income....... 19,674 21,997 21,764
Provision for loan losses. 2,500 6,300 7,500
Gain on sale of
securities, net.......... 1,470 652 1,978
Gain on sale of loans,
net...................... 352 312 1,206
Non-interest income....... 3,205 1,595 2,271
Non-interest expenses..... 21,806 79,064 23,629
Net income (loss)......... 158 (59,790) 398
Preferred stock dividend
requirements............. 1,346 1,653 1,653
Net loss applicable to
common shareholders...... (1,188) (61,443) (1,255)
Net loss per common share:
Primary and fully
diluted................ (.21) (10.73) (.22)
Market prices of common
stock:
High.................... 6 3/4 5 3/8 7 1/8
Low..................... 5 4 3
NOTE 26: SUBSEQUENT EVENT
On February 9, 1994, the Company and another financial institution signed a
definitive agreement for the sale by the Company of ten Northeast Savings
branches located in eastern Massachusetts and in Rhode Island. Deposits held in
these branches totaled approximately $427 million as of December 31, 1993. The
purchasing institution will pay a premium of three percent to Northeast Savings
for deposits on hand at the time of closing. The transaction is expected to
close by the end of the second quarter, and is subject to regulatory approval.
137
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
NORTHEAST FEDERAL CORP.
-------------------------------------
(Registrant)
March 14, 1994 By: /s/ George P. Rutland
---------------------------------
George P. Rutland
Chairman of the Board
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON FEBRUARY 25, 1994.
By: /s/ George P. Rutland
---------------------------------
George P. Rutland
Chairman of the Board
By: /s/ Kirk W. Walters
---------------------------------
Kirk W. Walters
Chief Executive Officer,
President, Chief Operating
Officer, and Chief Financial
Officer
By: /s/ Lynne M. Carcia
---------------------------------
Lynne M. Carcia
Senior Vice President,
Controller, and Principal
Accounting Officer
DIRECTORS
Gerald P. Carmen
David W. Clark, Jr.
George J. Fantini, Jr.
Richard H. Gaskill
Richard H. Gordon
Beverly L. Hamilton
Barbara C. Lawrence
Thomas P. O'Neill, III
George P. Rutland
George W. Sarney
Raymond T. Schuler
John R. Silber
Kirk W. Walters
Jerome F. Williams
Frederick W. Zuckerman
By: /s/ George P. Rutland
---------------------------------
George P. Rutland
Attorney-in-Fact